Huntington Ingalls Industries, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in millions of dollars unless noted. HII builds ships through Ingalls and Newport News and provides government and commercial services through Mission Technologies; most business is with the U.S. Government, primarily the Department of Defense.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales and service revenues | $2,662 | $2,231 | $5,238 | $4,509 |
| Operating income | $191 | $128 | $329 | $275 |
| Net earnings | $178 | $129 | $318 | $277 |
| Diluted EPS | $4.44 | $3.20 | $7.93 | $6.87 |
- Q2 revenue increased 19% and net earnings increased 38%; first-half revenue increased 16% and net earnings increased 15% year over year.
- Q2 operating margin was approximately 7.2%, compared with 5.7% a year earlier; first-half operating margin was approximately 6.3%, versus 6.1%. These ratios are calculated from reported revenue and operating income.
- Q2 segment operating income was $106 at Ingalls, $94 at Newport News, and $25 at Mission Technologies. First-half amounts were $192, $175, and $34, respectively.
- Q2 service revenue rose 78%, largely due to Mission Technologies and the Alion acquisition completed in August 2021. Mission Technologies revenue grew 153% in Q2 and 140% in the first half; this makes reported comparisons partly acquisition-driven.
- Operating cash flow for the first half was $184, versus $139 in 2021. Capital expenditures were $102; reported free cash flow was $82, versus $7. HII attributed the cash-flow improvement to higher earnings, lower retiree-plan contributions and lower income-tax payments, partly offset by working-capital movements and higher interest payments.
- At June 30, cash was $375, long-term debt was $3,102, and total current assets and liabilities were $2,820 and $2,447. Debt declined from $3,298 at year-end 2021; first-half financing included $200 of debt repayment. The Term Loan balance was $425, after $225 of prepayments; no revolving-credit or commercial-paper borrowings were outstanding.
- HII paid $94 in dividends and repurchased $27 of stock in the first half. Dividends declared were $1.18 per share in Q2, compared with $1.14 a year earlier.
Material changes and business position
- Total backlog was $47.2 billion at June 30, down from $48.5 billion at December 31, 2021; $24.6 billion was funded and $22.6 billion unfunded. New awards in the first half were approximately $4 billion.
- Remaining performance obligations were $47.2 billion. HII expects to recognize approximately 30% as revenue through 2023, another 30% through 2025, and the balance thereafter.
- Ingalls first-half revenue fell 2%, while Newport News revenue rose 2%. Favorable contract estimate changes and risk retirement supported segment income growth; lower Virginia-class submarine risk retirement and other contract effects partly offset improvements.
- Net cumulative catch-up adjustments increased operating income by $68 in Q2 and $113 in the first half, versus $35 and $85 in the comparable 2021 periods. These adjustments increased first-half diluted EPS by $2.22. Favorable estimates included risk retirement on the Harrisburg and Fort Lauderdale programs.
- Cash and cash equivalents declined from $627 at December 31, 2021, to $375 at June 30, 2022, reflecting cash used in financing, including debt repayment, dividends, and repurchases.
Outlook, risks and unusual items
- HII did not provide a consolidated revenue or earnings forecast in the supplied filing text. It expects 2022 maintenance and sustainment capital expenditures of approximately 1.0% of annual revenue and discretionary capital expenditures of approximately 1.5% to 2.0%.
- Management said cash from operations, existing cash and credit facilities should be sufficient to meet obligations and fund capital expenditures for at least the 12 months beginning July 1, 2022, and beyond under its current business plan.
- Management cited labor shortages, supply-chain constraints, inflation, higher energy and material costs, COVID-19 effects, and Russia’s invasion of Ukraine as sources of uncertainty. Inflation may increase costs, and contract protections may not fully offset cost growth, particularly on fixed-price work.
- Long-term U.S. defense-budget and procurement uncertainty could delay, reduce, or cancel programs and affect awards, revenue, profit, and cash flow. HII noted that fiscal 2023 budget decisions were still in process.
- A March 2022 pension-plan remeasurement following a labor agreement amendment increased pension liability and pretax accumulated other comprehensive loss by approximately $97. HII anticipated no further significant qualified pension-plan cash contributions in 2022.
- Contingencies include appeals concerning a False Claims Act case and COVID-19 insurance coverage, and litigation over insurance recovery related to the Hydroid acquisition. The filing provides no assurance of outcomes. HII also described a U.S. Navy dispute over its 1985 workers’ compensation cost-allocation agreement; it was seeking a negotiated resolution.
- Ingalls’ material-management system deficiencies and related payment withhold were resolved: the Navy terminated the remaining 2% withhold and approved the system in May 2022. The USW collective bargaining agreement at Newport News was ratified in March 2022.
- HII reported effective disclosure controls as of June 30, 2022. Integration of Alion’s internal controls was still underway and was to be completed within one year of the acquisition.
Most important facts for investors to verify
- How much of earnings growth reflects sustainable contract execution versus favorable cumulative catch-up adjustments, which contributed $2.22 to first-half diluted EPS.
- Whether Alion integration, acquired intangible amortization, and Mission Technologies margins develop as expected; the segment’s first-half operating margin was 2.9%, versus 4.0% a year earlier.
- Whether inflation, labor availability, supplier performance, and schedule risks affect fixed-price contract costs and shipbuilding execution.
- Backlog conversion and funding: a substantial portion of the $22.6 billion unfunded backlog depends on future customer funding and program execution.
- Cash generation, working-capital movements, debt repayments, and the company’s capacity to sustain dividends and repurchases.
- Progress and potential financial effects of the Navy workers’ compensation cost-allocation dispute and other disclosed legal and insurance matters.