Huntington Ingalls Industries, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied filing text does not provide a clear standalone fourth-quarter income statement.
Business context
HII builds and supports military ships through Ingalls and Newport News, and provides government-focused technical services through Technical Solutions. The U.S. Government accounted for more than 95% of 2021 revenue; approximately 90% came from the U.S. Navy. HII acquired Alion in August 2021, expanding Technical Solutions.
Key financial results
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $9.524 billion | $9.361 billion | +2% |
| Operating income | $513 million | $799 million | -36% |
| Operating margin | 5.4% | 8.5% | Down 3.1 percentage points |
| Net earnings | $544 million | $696 million | -22% |
| Diluted EPS | $13.50 | $17.14 | -21% |
| Operating cash flow | $760 million | $1.093 billion | -30% |
| Free cash flow | $449 million | $757 million | -41% |
Revenue growth reflected higher submarine and aircraft-carrier activity at Newport News and Alion-related growth in Technical Solutions, partly offset by lower Ingalls revenue. Net earnings and GAAP operating income fell despite higher segment operating income: segment operating income rose 23% to $683 million. A $405 million adverse year-over-year swing in the operating FAS/CAS pension adjustment was a major driver of the GAAP decline. The 2021 effective tax rate was 12.5%, versus 14.1%.
Operating cash flow declined mainly because of trade working-capital timing, partly offset by lower tax payments and retiree-benefit contributions. Capital expenditures, net of grants, were $311 million. Cash and cash equivalents were $627 million at year-end, compared with $512 million. Current assets were $2.790 billion and current liabilities $2.427 billion (current ratio approximately 1.15).
Long-term debt was $3.298 billion, up from $1.686 billion; cash less reported long-term debt was approximately negative $2.671 billion. HII ended 2021 with $1.485 billion available under its revolving facility and no commercial-paper borrowings. The company reported compliance with debt covenants. The 2021 Alion acquisition was funded partly with new notes and a $625 million term-loan balance.
Material changes and business developments
- Technical Solutions revenue increased 16% to $1.476 billion, substantially reflecting Alion; segment operating income was $50 million.
- Newport News revenue rose 2% to $5.663 billion and segment operating income increased to $352 million from $233 million, with improvement related in part to Virginia-class Block IV performance and COVID-related disruption in 2020.
- Ingalls revenue declined 6% to $2.528 billion; segment operating income was unchanged at $281 million.
- Total backlog rose to $48.5 billion from $46.0 billion, including $22.7 billion funded and $25.8 billion unfunded. New awards were approximately $8.1 billion, versus $8.9 billion in 2020.
- HII contributed its San Diego Shipyard to a joint venture and sold its oil and gas business in February 2021.
Outlook, risks, and unusual items
- Management expects approximately 19% of year-end backlog to convert to revenue in 2022. It forecast 2022 maintenance and sustainment capital expenditures of about 1.0% of revenue and discretionary capital expenditures of 1.5%–2.0%.
- Management stated that cash, operating cash generation, and available borrowing facilities were expected to cover debt service, benefit plans, contractual obligations, and capital expenditures for at least the next 12 months. It expected 2022 qualified pension contributions below $1 million and other postretirement contributions of about $34 million.
- Management estimated a roughly $100 million reduction to 2022 operating cash flow from tax-law-required capitalization and amortization of research and development costs if the provision remained in effect.
- COVID-19 continued to affect attendance, hiring, supplier performance, and work sequencing; management reported no material 2021 operating-margin impact directly attributable to COVID-19. Recovery of certain COVID-related costs and insurance claims remained uncertain.
- Major risks include dependence on U.S. Government appropriations and the Navy, contract cost and schedule execution, workforce availability, supply-chain constraints, cyber threats, and potential labor disruption. A Newport News union tentative agreement remained subject to ratification; a strike or lockout was possible on 48 hours’ notice.
- In January 2022, the Navy found significant deficiencies in Ingalls’ material management and accounting system and imposed a 5% payment withhold on certain invoices under one contract, potentially reducible to 2% after effective corrective action.
- Other matters to monitor include a dispute over approximately $120 million in workers’ compensation costs potentially billable under a 1985 Navy settlement; COVID-related insurance litigation on appeal; and a False Claims Act case dismissed in 2021 with an appeal pending.
Most important facts for investors to verify
- Whether backlog—particularly the unfunded portion—is funded and converted on expected schedules, and whether new awards keep pace with revenue.
- Whether contract cost estimates, ship delivery schedules, and margins remain on track, including submarine program performance and the effects of cumulative catch-up adjustments.
- How the FAS/CAS pension accounting adjustment affects reported GAAP operating income relative to segment performance; management expected a 2022 operating FAS/CAS net expense of approximately $142 million.
- Integration, returns, and final purchase accounting for Alion, including the preliminary acquisition values and goodwill.
- Resolution of the Ingalls payment withhold, labor negotiations, COVID-related recovery and insurance claims, and the workers’ compensation billing dispute.
- Debt repayment and refinancing capacity, variable-rate exposure and LIBOR transition, and actual 2022 cash flow and capital spending versus management expectations.