Huntington Ingalls Industries, Inc. — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022. HII builds naval ships and provides government and commercial technology services through Ingalls, Newport News, and Mission Technologies. Most business is with the U.S. Government, primarily the Department of Defense.
Financial performance and liquidity
- Revenue: $2.576 billion, up 13% from $2.278 billion. Product sales were essentially flat at $1.724 billion; service revenue rose 53% to $852 million, primarily reflecting Alion-related growth in Mission Technologies.
- Profit: Operating income was $138 million, down 6%; net earnings were $140 million, down 5%. Diluted EPS was $3.50 versus $3.68. Operating margin was approximately 5.4%, compared with 6.5% a year earlier.
- Segment results: Ingalls revenue was $631 million and operating income $86 million; Newport News revenue was $1.390 billion and operating income $81 million. Mission Technologies revenue increased 128% to $590 million, while operating income was $9 million. Segment operating income overall fell 8% to $176 million.
- Costs and margins: Product cost was 85.2% of product sales versus 84.5%; service cost was 89.1% of service revenue versus 86.5%. Management cited lower risk retirement on certain ship programs and higher acquired-intangible amortization, partly offset by stronger performance in some programs and services.
- Cash flow: Operating cash flow was negative $83 million versus positive $43 million. Free cash flow, a non-GAAP measure, was negative $126 million versus negative $16 million. Management attributed the deterioration primarily to working-capital timing and prior-year tax refunds. Capital expenditures were $43 million.
- Balance sheet and debt: Cash was $330 million, down from $627 million at year-end 2021. Long-term debt was $3.2 billion, after $100 million of Term Loan prepayment; $525 million remained outstanding on the Term Loan. Current assets were $2.786 billion and current liabilities $2.421 billion.
- Shareholder returns: HII declared dividends of $1.18 per share, up from $1.14, and repurchased 50,549 shares for $10 million.
Material changes versus Q1 2021
- Revenue growth was concentrated in Mission Technologies, reflecting the August 2021 Alion acquisition; shipbuilding revenue was slightly lower at both Ingalls and Newport News.
- Operating and net income declined despite higher revenue, with segment operating income down 8%. Interest expense increased to $26 million from $21 million, and the effective tax rate rose to 20.5% from 14.5%.
- Net favorable cumulative contract catch-up adjustments contributed $45 million to operating income and $0.89 to diluted EPS, versus $50 million and $0.98 in Q1 2021.
- Total backlog was approximately $47.9 billion, down from $48.5 billion at December 31, 2021. Remaining performance obligations were $47.9 billion; HII expects to recognize about 35% as revenue through 2023 and another 30% through 2025.
Outlook, risks, and unusual items
- Management said cash from operations, existing cash, and credit facilities are expected to cover debt service, retiree benefits, contractual obligations, and capital spending for at least the 12 months beginning April 1, 2022. The filing provides no specific earnings or revenue guidance. Expected 2022 capital spending was approximately 1.0% of annual revenue for maintenance and sustainment and 1.5%–2.0% for discretionary projects.
- Management cited hiring and critical-skills shortages, supply-chain disruption and delayed material deliveries, and continuing COVID-19 effects as operational challenges. It also identified uncertainty around future defense budgets, program funding, and supply disruptions, including those related to the Russia-Ukraine conflict.
- A March 2022 pension-plan amendment increased pension liabilities and pretax accumulated other comprehensive loss by approximately $97 million. The company anticipates no further significant 2022 contributions to qualified defined-benefit pension plans.
- A U.S. Navy contracting officer’s determination concerning workers’ compensation cost allocation could affect recovery of approximately $120 million in costs not yet billed. Separately, a Navy payment withhold tied to Ingalls’ material-management system was reduced from 5% to 2% after corrective action-plan approval; withheld funds are to be released when deficiencies are deemed corrected.
- Other disclosed matters include appeals involving COVID-19 insurance coverage and a False Claims Act case, asbestos claims, and enforcement of a $151 million arbitral award against Venezuela. HII provided no assurance on outcomes; it said environmental remediation estimates were immaterial and other claims were not expected to have a material effect based on information available.
Important facts for investors to verify
- Whether Mission Technologies’ Alion-driven revenue growth translates into improved segment profitability, given its 1.5% segment operating margin in the quarter.
- Whether working-capital timing reverses and operating cash flow recovers after the negative $83 million quarter.
- How much reported earnings benefited from the $45 million of favorable contract catch-up adjustments and whether future contract estimates change.
- Progress on workforce and supplier constraints, the Ingalls payment withhold, and resolution of the workers’ compensation cost-allocation dispute.
- Funding and award developments for major Navy programs, and the outcomes of material litigation and insurance claims.