Huntington Ingalls Industries, Inc. — Q2 2023 Form 10-Q
Business context and period. HII is a defense contractor and shipbuilder with three segments: Ingalls Shipbuilding, Newport News Shipbuilding, and Mission Technologies. This unaudited report covers the quarter and six months ended June 30, 2023; comparisons are with the same 2022 periods. Most business is with the U.S. Government, primarily the Department of Defense.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.787B | $2.662B | $5.461B | $5.238B |
| Operating income | $156M | $191M | $297M | $329M |
| Net earnings | $130M | $178M | $259M | $318M |
| Diluted EPS | $3.27 | $4.44 | $6.49 | $7.93 |
| Operating cash flow | Not separately reported for the quarter | $73M | $184M | |
| Free cash flow | Not separately reported for the quarter | $(35)M | $82M |
Q2 revenue rose 5%, while operating income fell 18% and net earnings fell 27%. Approximate consolidated operating margin was 5.6% in Q2 versus 7.2% a year earlier, and 5.4% for the first half versus 6.3% in 2022. For the six-month period, operating cash flow decreased $111M and free cash flow decreased $117M, with higher income-tax payments and capital spending among the cited drivers.
Segment trends. Q2 revenue increased 1% at Ingalls, 5% at Newport News, and 8% at Mission Technologies. Segment operating income was $65M, $95M, and $9M, respectively, compared with $106M, $94M, and $25M in Q2 2022. For the first half, Ingalls revenue declined 4% and segment operating income fell 38%; Newport News revenue increased 7% and operating income 2%; Mission Technologies revenue increased 7% while operating income declined 24%. Ingalls and Mission Technologies were the main sources of lower segment earnings.
Balance sheet and liquidity. At June 30, 2023, cash was $313M, total assets $10.859B, and stockholders’ equity $3.646B. Current assets of $2.817B compared with current liabilities of $2.927B. Debt was approximately $2.880B, comprising $484M current and $2.396B long-term, versus $2.905B at December 31, 2022. HII reported no borrowings under its $1.5B revolving credit facility or commercial paper program; $195M was outstanding under its term loan. Management expects cash, operating cash generation, and borrowing facilities to cover obligations and planned needs for at least the next 12 months.
Six-month capital expenditures were $111M, partly offset by $3M of grant proceeds. The company paid $99M in dividends and repaid $30M of long-term debt. Its declared dividend was $1.24 per share for Q2. The company repurchased 75,849 shares for $16M during the first half; $972.8M remained available under the repurchase authorization at quarter-end.
Material changes and notable items
- Revenue growth was driven mainly by higher volumes at Newport News and Mission Technologies; lower Ingalls volume partly offset first-half growth.
- Net cumulative catch-up revenue adjustments contributed $20M to operating income in Q2 2023, compared with $68M in Q2 2022; first-half contributions were $29M and $113M, respectively.
- Backlog was $46.9B at June 30, 2023, down from $47.1B at year-end 2022. It included $24.4B funded and $22.4B unfunded backlog. Remaining performance obligations were also reported as $46.9B; HII expects approximately 35% to be recognized through 2024 and a further 30% through 2026.
- HII sold its Titan joint-venture investment in June for $61M. The filing’s notes describe the sale loss as immaterial, while MD&A attributes a $6M loss to the sale; investors may wish to reconcile this presentation.
- The April 2023 credit-agreement amendments transitioned benchmark rates from LIBOR to SOFR. HII said it did not expect a material financial impact.
Outlook, risks, and contingencies
For 2023, HII expects maintenance and sustainment capital expenditures of approximately 1.0% of annual revenue and discretionary capital expenditures of approximately 2.0%. It expects about 21% of year-end 2022 backlog to convert to sales in 2023. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
Management cited labor shortages, supply-chain challenges, inflation, economic uncertainty, and geopolitical instability. The fiscal 2024 federal budget process remained ongoing, and the company could not predict whether temporary funding would be needed if appropriations were delayed. HII noted that persistent inflation may affect contract cost estimates, resource availability, results, and cash flows. Other stated risks include government budget and procurement changes, contract execution and cost-estimation risk, workforce retention, cyber threats, and supply disruptions.
Contingencies include an appealed False Claims Act case, disputes over insurance coverage for COVID-related losses and Hydroid acquisition policies, asbestos-related claims, and other government and commercial matters. The company also disclosed negotiations with a Mission Technologies customer over a manufacturing contract that could result in additional losses, and an unresolved U.S. Navy dispute over workers’ compensation cost allocation. Management said it could not assure the outcomes of these matters. HII reported $14M of issued but undrawn letters of credit and $360M of surety bonds outstanding.
Important facts for investors to verify
- Whether weaker Ingalls and Mission Technologies segment profitability persists, and how labor, supply constraints, inflation, and contract execution affect margins.
- Whether operating cash flow and free cash flow recover after the first-half decline, including the timing of tax payments, working-capital needs, and capital expenditures.
- The quality and timing of backlog conversion, particularly the $22.4B unfunded portion and the assumptions behind remaining-performance-obligation schedules.
- The amount and potential impact of further losses on the Mission Technologies manufacturing contract, and clarification of the Titan sale-loss disclosures.
- Developments in federal appropriations and the disclosed legal, insurance, government-claims, and workers’ compensation matters.