Huntington Ingalls Industries, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; filed August 5, 2021. HII builds military ships and provides technical services, with Ingalls, Newport News, and Technical Solutions segments. Most business is with the U.S. Government, primarily the Department of Defense.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.231 billion | $2.027 billion | $4.509 billion | $4.290 billion |
| Operating income | $128 million | $57 million | $275 million | $272 million |
| Net earnings | $129 million | $53 million | $277 million | $225 million |
| Diluted EPS | $3.20 | $1.30 | $6.87 | $5.54 |
| Operating margin | 5.7% | 2.8% | 6.1% | 6.3% |
- Q2 revenue rose 10%; product sales increased 24% while service revenues declined 23%. First-half revenue rose 5%, as product growth offset lower service revenue.
- Q2 operating income increased 125%, while first-half operating income was nearly flat. Net earnings increased 143% in Q2 and 23% for the first half.
- First-half segment operating income was $360 million versus $151 million. Ingalls earned $171 million versus $123 million; Newport News earned $169 million versus $26 million; Technical Solutions earned $20 million versus $2 million. These segment figures exclude the Operating FAS/CAS adjustment and non-current state income taxes.
- Q2 net cumulative contract estimate adjustments added $35 million to operating income and $0.68 to diluted EPS; first-half adjustments added $85 million and $1.66 per diluted share. In the comparable 2020 periods, they reduced operating income by $111 million and $79 million, respectively. The 2020 Q2 reduction included $111 million on the Virginia-class submarine program.
- Operating cash flow was $139 million for the first half, down from $269 million. Free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures net of grants, was $7 million versus $128 million. Management attributed the decline principally to working-capital timing and retiree-benefit funding.
- Cash and cash equivalents were $348 million at June 30, down from $512 million at year-end 2020. Long-term debt was $1.689 billion; the company reported no commercial paper debt and an undrawn $1.25 billion revolving facility, with $1.235 billion available after letters of credit. Current assets were $2.317 billion and current liabilities $2.123 billion. HII reported compliance with debt covenants.
- HII declared $2.28 per share in dividends for the first half and paid $92 million; it repurchased $70 million of stock. Total backlog was $47.7 billion, up from $46.0 billion at year-end, including $24.0 billion funded and $23.7 billion unfunded. Remaining performance obligations were also reported as $47.7 billion.
Changes, outlook, and material developments
- Revenue growth was led by Newport News, where first-half sales rose 12%, mainly on submarine and aircraft-carrier programs. Technical Solutions revenue fell 22%, partly reflecting the oil and gas business sale and San Diego Shipyard contribution to a joint venture. Ingalls revenue increased 5%.
- HII reported workforce attendance at normal levels by June 30, after pandemic-related attendance, supply-chain, skill-shortage, and out-of-sequence-work disruptions. COVID-19 cost recovery remains uncertain: reimbursement requests under the CARES Act depend on funding and government approval, and fixed-price contracts may not allow full recovery.
- Management expected operating cash, existing cash, and credit facilities to cover debt service, retiree plans, contractual obligations, and capital spending for at least 12 months. For 2021, it expected maintenance and sustainment capital expenditures of about 1.0% of annual revenue and discretionary capital expenditures of about 2.0%–3.0%. No specific earnings or revenue guidance is provided in the supplied filing text.
- Backlog conversion estimate: approximately 30% of remaining performance obligations expected to be recognized as revenue through 2022, another 30% through 2024, and the balance thereafter. First-half contract awards were approximately $6.5 billion.
- After quarter-end, HII agreed to acquire Alion Science and Technology for $1.65 billion in cash, with closing expected in the second half of 2021 subject to conditions. On August 2, HII arranged $1.05 billion of delayed-draw term-loan commitments and expanded its revolving credit facility to $1.5 billion. The term loans had not been drawn as described in the filing.
- Other matters to monitor include a July 30 court ruling against HII in its COVID-19 insurance coverage case, which HII appealed; a government contracting dispute involving approximately $120 million of unbilled workers’ compensation costs; and Newport News collective bargaining agreements, including one covering about half its employees that expires in November 2021.
- HII cited long-term U.S. defense-budget uncertainty, contract cost-estimation and execution, supply-chain and pandemic effects, pension assumptions, cyber threats, and completing and integrating the Alion acquisition among its risks. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the Q2 and first-half earnings improvement is sustainable, given the favorable contract estimate adjustments and prior-year Virginia-class submarine charges?
- Whether cash conversion improves from the unusually low first-half free cash flow and how working capital and pension contributions affect the full year.
- Alion acquisition closing, final funding mix, resulting leverage, integration costs, and expected contribution to results.
- Backlog funding and execution, especially the substantial unfunded portion and the effect of future U.S. defense budget decisions.
- Recovery of COVID-19-related costs through government reimbursement or insurance, and the outcome of the appealed insurance ruling.
- Resolution of the workers’ compensation cost-allocation dispute and upcoming Newport News labor negotiations.