Huntington Ingalls Industries, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. HII builds naval ships through Ingalls and Newport News and provides defense, engineering, and technology services through Mission Technologies. Its business is primarily with the U.S. Government, principally the Department of Defense.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales and service revenues | $2.674 billion | $2.576 billion |
| Operating income | $141 million | $138 million |
| Net earnings | $129 million | $140 million |
| Diluted EPS | $3.23 | $3.50 |
| Operating cash flow | $(9) million | $(83) million |
| Free cash flow | $(49) million | $(126) million |
- Revenue increased 4%; product sales rose 6% to $1.829 billion, while service revenues declined 1% to $845 million.
- Operating margin was approximately 5.3%, versus 5.4%; net margin was approximately 4.8%, versus 5.4%.
- Cash and cash equivalents were $318 million at March 31, down from $467 million at year-end 2022. Current assets were $2.752 billion and current liabilities $2.867 billion.
- Total debt, including current maturities, was $2.897 billion ($399 million current and $2.498 billion long term), compared with $2.905 billion at year-end. Interest expense was $24 million. The company reported $215 million outstanding on its term loan and no borrowings under its revolver or commercial paper program.
- Capital expenditures were $43 million; dividends paid were $49 million and share repurchases under the program were $9 million. Dividends declared were $1.24 per share, up from $1.18.
Changes versus the prior-year quarter
- Revenue growth reflected higher volumes at Newport News and Mission Technologies, partly offset by lower Ingalls volumes.
- Segment operating income fell 11% to $156 million. Ingalls declined to $55 million from $86 million; Newport News increased to $84 million from $81 million; Mission Technologies increased to $17 million from $9 million.
- Net earnings declined 8%, primarily reflecting lower non-operating retirement benefit income ($37 million versus $71 million), partly offset by higher other income. Operating income rose 2%, helped by favorable FAS/CAS and state-tax effects despite lower segment operating income.
- Operating cash outflow improved by $74 million year over year, mainly from a smaller working-capital outflow, particularly the timing of accounts-receivable collections. Cash flow remained negative.
- Net cumulative catch-up revenue adjustments contributed $9 million to operating income, compared with $45 million in Q1 2022.
Backlog, outlook, and risks
- Total backlog was approximately $47.0 billion at March 31, 2023, nearly unchanged from $47.1 billion at year-end; $21.2 billion was unfunded. Remaining performance obligations were also reported at $47.0 billion. HII expects to recognize about 40% through 2024 and a further 25% through 2026.
- Management expects approximately 21% of year-end 2022 backlog to convert to 2023 sales. The filing does not provide specific full-year revenue or earnings guidance. HII expects 2023 maintenance and sustainment capital expenditures of about 1.0% of annual revenue and discretionary capital expenditures of about 2.0%.
- Management said operating cash, existing cash, and borrowing facilities should be sufficient for debt service, retiree benefits, contractual obligations, and capital expenditures for at least the next 12 months. It also anticipates no further significant qualified pension-plan contributions in 2023.
- Business conditions include labor shortages, supplier and supply-chain challenges, inflation, and economic and geopolitical uncertainty. Management cautioned that persistent inflation could exceed cost estimates or affect resource availability.
- The Coast Guard’s objection to remediation of corroded steel plates on Friedman (NSC 11) remains unresolved; scope and cost recovery could adversely affect results. HII also recorded a non-material contract-loss provision for manufacturing issues under a Mission Technologies contract.
- Other disclosed matters include a False Claims Act case on appeal, insurance-coverage disputes, asbestos litigation, and a dispute with the Navy over workers’ compensation cost allocation. The filing provides no clear quantified aggregate exposure for these matters. Environmental remediation estimates were described as not material.
- In April 2023, HII amended its $1.5 billion revolving facility and $650 million term loan to replace LIBOR with SOFR; management did not expect a material financial impact.
Important facts for investors to verify
- Whether backlog converts to funded work and revenue on the expected schedule, particularly given its substantial unfunded portion.
- Whether working-capital timing improves and HII returns to positive operating and free cash flow.
- Progress on Ingalls execution and the NSC 11 steel-plate issue, including potential remediation costs and customer recovery.
- Effects of labor availability, supplier constraints, and inflation on contract costs and estimated margins.
- Updates on significant legal, insurance, and Navy contract matters, and any change in their potential financial exposure.