Huntington Ingalls Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. HII builds naval ships and provides defense technology and services through Ingalls, Newport News, and Mission Technologies. Most revenue is from U.S. Government contracts.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2.816B | $2.626B | $8.277B | $7.864B |
| Operating income | $172M | $131M | $469M | $460M |
| Net earnings | $148M | $138M | $407M | $456M |
| Diluted EPS | $3.70 | $3.44 | $10.18 | $11.37 |
- Revenue rose 7% in Q3 and 5% year to date. Q3 operating margin was approximately 6.1%, versus 5.0% a year earlier; nine-month margin was approximately 5.7%, versus 5.8%.
- Q3 segment operating income increased 13% to $187M. Year-to-date segment operating income fell 10% to $512M, including lower results at Ingalls and Newport News.
- Net earnings for the first nine months declined 11%, despite higher revenue and operating income. Lower non-operating retirement benefit income and higher taxes were significant factors.
- Operating cash flow was $408M for the first nine months, compared with $165M in 2022. Free cash flow, a non-GAAP measure, was $258M versus negative $14M. Improved working capital helped; management cited receipt timing for accounts receivable. Cash ended at $109M, down from $467M at year-end 2022.
- Total debt was approximately $2.47B at September 30, compared with $2.91B at December 31, 2022. The company repaid $455M of long-term debt during the nine-month period. Current assets were $2.59B and current liabilities $2.82B.
Changes and operating drivers
- Q3 revenue growth was led by Mission Technologies and Ingalls. For the first nine months, growth was led by Newport News and Mission Technologies.
- Q3 segment operating income increased at Ingalls and Mission Technologies, but declined at Newport News. Year-to-date Ingalls operating income fell 20%, primarily reflecting lower risk retirement on LPD 28 and LPD 30; Newport News declined 3%, while Mission Technologies rose 4%.
- Net cumulative catch-up revenue adjustments added $21M to operating income in Q3 and $50M for the first nine months, compared with $27M and $140M in the prior-year periods. Management said no individual 2023 adjustment was material.
- Backlog was $49.4B at September 30, up from $47.1B at year-end 2022; approximately $26.9B was funded. Remaining performance obligations were also $49.4B. HII expects to recognize approximately 30% as revenue through 2024, another 30% through 2026, and the rest thereafter.
Outlook, risks and notable items
- The filing provides no consolidated earnings or revenue guidance. Management expects 2023 maintenance and sustainment capital expenditures of approximately 1.0% of annual revenue and discretionary capital expenditures of approximately 2.0%.
- Management said cash, operating cash generation, and available borrowing facilities should cover debt service, retiree benefits, contractual obligations, and capital expenditures for at least the next 12 months.
- Fiscal 2024 federal appropriations had not been enacted; a continuing resolution funded the government through November 17, 2023. Management could not predict the budget outcome. Defense authorization bills supported key shipbuilding programs, but funding remained subject to the appropriations process.
- Management cited labor shortages, supply-chain challenges, inflation, and economic and geopolitical uncertainty. Inflation may raise contract costs, and cost assumptions may not cover all escalation.
- An antitrust class action filed October 6, 2023 alleges an agreement restricting recruitment of naval engineers. HII could not estimate reasonably possible losses or predict the outcome. Other matters include insurance recovery litigation and a manufacturing-contract dispute for which additional losses are possible but recorded provisions were not material.
- HII sold its Titan joint-venture interest in June for $61M, recognizing an immaterial loss. The sale contributed to changes in investment cash flows and affected the year-to-date tax comparison.
Important facts for investors to verify
- Progress on fiscal 2024 appropriations and the potential effects of funding delays on contract awards and cash receipts.
- Whether shipbuilding and Mission Technologies growth converts into improved segment margins, given lower year-to-date segment operating income.
- Backlog funding, schedule execution, contract cost estimates, and the persistence of labor, supplier, and inflation pressures.
- Whether working-capital-driven cash flow and free cash flow are sustainable beyond the reported period.
- Developments in the antitrust case, insurance disputes, and manufacturing-contract negotiations, including any change in potential exposure.