Form 10-Q HUNTINGTON INGALLS INDUS For: Jun 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-Q
______________________________________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________ to ________
Commission file number 001-34910
______________________________________________________________
(Exact name of registrant as specified in its charter)
______________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices and zip code)
(757 ) 380-2000
(Registrant’s telephone number, including area code)
______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated Filer | ☐ | |||||||||||||||||||||
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | |||||||||||||||||||||
| Emerging Growth Company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 29, 2022, 39,947,745 shares of the registrant's common stock were outstanding.
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | Page | ||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II – OTHER INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
HUNTINGTON INGALLS INDUSTRIES, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
| (in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Sales and service revenues | ||||||||||||||||||||||||||
| Product sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Service revenues | ||||||||||||||||||||||||||
| Sales and service revenues | ||||||||||||||||||||||||||
| Cost of sales and service revenues | ||||||||||||||||||||||||||
| Cost of product sales | ||||||||||||||||||||||||||
| Cost of service revenues | ||||||||||||||||||||||||||
| Income from operating investments, net | ||||||||||||||||||||||||||
| Other income and gains (losses), net | ( | — | ||||||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | ||||||||||||||||||||||
| Non-operating retirement benefit | ||||||||||||||||||||||||||
| Other, net | ( | ( | ||||||||||||||||||||||||
| Earnings before income taxes | ||||||||||||||||||||||||||
| Federal and foreign income tax expense | ||||||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-average diluted shares outstanding | ||||||||||||||||||||||||||
| Dividends declared per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Net earnings from above | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||||||||
| Change in unamortized benefit plan costs | ( | |||||||||||||||||||||||||
| Other | ( | — | ( | |||||||||||||||||||||||
| Tax benefit (expense) for items of other comprehensive income | ( | ( | ( | |||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | |||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
| ($ in millions) | June 30, 2022 | December 31, 2021 | ||||||||||||
| Assets | ||||||||||||||
| Current Assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||||||||
| Contract assets | ||||||||||||||
| Inventoried costs | ||||||||||||||
| Income taxes receivable | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
Property, plant, and equipment, net of accumulated depreciation of $ | ||||||||||||||
| Operating lease assets | ||||||||||||||
| Goodwill | ||||||||||||||
Other intangible assets, net of accumulated amortization of $ | ||||||||||||||
| Pension plan assets | ||||||||||||||
| Miscellaneous other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||
| Current Liabilities | ||||||||||||||
| Trade accounts payable | $ | $ | ||||||||||||
| Accrued employees’ compensation | ||||||||||||||
| Current portion of postretirement plan liabilities | ||||||||||||||
| Current portion of workers’ compensation liabilities | ||||||||||||||
| Contract liabilities | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Pension plan liabilities | ||||||||||||||
| Other postretirement plan liabilities | ||||||||||||||
| Workers’ compensation liabilities | ||||||||||||||
| Long-term operating lease liabilities | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and Contingencies (Note 11) | ||||||||||||||
| Stockholders’ Equity | ||||||||||||||
Common stock, $0.01 par value; 150 million shares authorized; | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Treasury stock | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six Months Ended June 30 | ||||||||||||||
| ($ in millions) | 2022 | 2021 | ||||||||||||
| Operating Activities | ||||||||||||||
| Net earnings | $ | $ | ||||||||||||
| Adjustments to reconcile to net cash provided by (used in) operating activities | ||||||||||||||
| Depreciation | ||||||||||||||
| Amortization of purchased intangibles | ||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||
| Provision for doubtful accounts | ( | — | ||||||||||||
| Stock-based compensation | ||||||||||||||
| Deferred income taxes | ( | |||||||||||||
| Loss (gain) on investments in marketable securities | ( | |||||||||||||
| Change in | ||||||||||||||
| Accounts receivable | ( | ( | ||||||||||||
| Contract assets | ( | ( | ||||||||||||
| Inventoried costs | ( | ( | ||||||||||||
| Prepaid expenses and other assets | ( | |||||||||||||
| Accounts payable and accruals | ( | |||||||||||||
| Retiree benefits | ( | ( | ||||||||||||
| Other non-cash transactions, net | ( | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Investing Activities | ||||||||||||||
| Capital expenditures | ||||||||||||||
| Capital expenditure additions | ( | ( | ||||||||||||
| Grant proceeds for capital expenditures | — | |||||||||||||
| Investment in affiliates | ( | ( | ||||||||||||
| Proceeds from disposition of business | — | |||||||||||||
| Other investing activities, net | — | |||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Financing Activities | ||||||||||||||
| Repayment of long-term debt | ( | — | ||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Repurchases of common stock | ( | ( | ||||||||||||
| Employee taxes on certain share-based payment arrangements | ( | ( | ||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Change in cash and cash equivalents | ( | ( | ||||||||||||
| Cash and cash equivalents, beginning of period | ||||||||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||||||||
| Supplemental Cash Flow Disclosure | ||||||||||||||
| Cash paid for income taxes (net of refunds) | $ | $ | ||||||||||||
| Cash paid for interest | $ | $ | ||||||||||||
| Non-Cash Investing and Financing Activities | ||||||||||||||
| Capital expenditures accrued in accounts payable | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
| Three Months Ended June 30, 2022 and 2021 ($ in millions) | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($1.14 per share) | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($1.18 per share) | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2022 and 2021 ($ in millions) | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($2.28 per share) | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Dividends declared ($2.36 per share) | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||
| Stock-based compensation | — | ( | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Treasury stock activity | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS
Huntington Ingalls Industries, Inc. ("HII" or the "Company") is an all-domain defense and technologies partner, recognized worldwide as America’s largest shipbuilder. HII is organized into three reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Mission Technologies (formerly named Technical Solutions). For more than a century, the Company's Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. The Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial services markets.
HII conducts most of its business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, the Company participates in many high-priority U.S. defense programs. Through its Ingalls segment, HII is a builder of amphibious assault and expeditionary warfare ships for the U.S. Navy, the sole builder of National Security Cutters for the U.S. Coast Guard, and one of only two companies that builds the Navy's current fleet of Arleigh Burke class (DDG 51) destroyers. Through its Newport News segment, HII is the nation's sole designer, builder, and refueler of nuclear-powered aircraft carriers, and one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy. The Mission Technologies segment provides a wide range of services and products, including C5ISR systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defensive and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive solutions; platform modernization; and critical nuclear operations.
2. BASIS OF PRESENTATION
Principles of Consolidation - The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). All intercompany transactions and balances are eliminated in consolidation. For classification of current assets and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year.
These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Fair Value of Financial Instruments - Except for the Company's long-term debt, the carrying amounts of the Company's financial instruments are recorded at historical cost approximate fair value due to the short-term nature of the instruments and low credit risk associated with the respective counterparties.
The Company maintains multiple grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $201 million and $220 million as of June 30, 2022, and December 31, 2021, respectively, and are
5
presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position. These trusts consist primarily of investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.
The estimated fair values of the Company's total long-term debt as of June 30, 2022, and December 31, 2021, were $2,954 million and $3,449 million, respectively. The fair values of the Company's long-term debt were calculated based on recent trades of the Company's debt instruments in inactive markets, which fall within Level 2 under the fair value hierarchy.
3. ACCOUNTING STANDARDS UPDATES
4. ACQUISITIONS
On August 19, 2021, the Company acquired all of the outstanding common stock of Alion Holding Corp., the parent company of Alion Science and Technology Corporation (“Alion”), a technology-driven solutions provider. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805 Business Combinations. The preliminary purchase price was $1.79 billion, including $148 million of cash received in the acquisition. In connection with the acquisition, the Company originally recorded $1,024 million of goodwill, which included the value of Alion's workforce, and $720 million of intangible assets related to customer relationships and existing contract backlog. The goodwill is attributable to operational synergies and growth opportunities and was allocated to the Company's Mission Technologies segment. For the six months ended June 30, 2022, the Company recorded an increase to goodwill of $6 million, resulting from an adjustment to contingent liabilities for potential information reporting penalties. None of the goodwill resulting from this acquisition is expected to be amortizable for tax purposes.
Alion provides advanced engineering and research and development services in the areas of intelligence, surveillance, and reconnaissance, military training and simulation, cyber, data analytics, and other next-generation technology based solutions to the DoD and intelligence community customers, with the U.S. Navy representing about one-third of current annual revenues.
Pro Forma Financial Information
The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the acquisition of Alion as if it had occurred on January 1, 2021.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
| ($ in millions, except per share amounts) | 2022 | Pro Forma 2021 | 2022 | Pro Forma 2021 | ||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||||||||||||
These unaudited pro forma results include adjustments associated with the acquisition, such as the amortization of acquired intangible assets and interest expense on debt financing.
The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
6
5. STOCKHOLDERS' EQUITY
Treasury Stock - In November 2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $2.2 billion to $3.2 billion and an extension of the term of the program to October 31, 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the six months ended June 30, 2022, the Company repurchased 131,006 shares at an aggregate cost of $27 million. For the six months ended June 30, 2021, the Company repurchased 386,463 shares at an aggregate cost of $70 million. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.
Dividends - The Company paid cash dividends totaling $94 million and $92 million for the six months ended June 30, 2022 and 2021, respectively.
Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss as of June 30, 2022, was comprised of unamortized benefit plan costs of $977 million and other comprehensive loss of $1 million. The accumulated other comprehensive loss as of December 31, 2021, was comprised of unamortized benefit plan costs of $923 million.
The changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2022 and 2021, were as follows:
| ($ in millions) | Benefit Plans | Other | Total | |||||||||||||||||
| Balance as of March 31, 2021 | $ | ( | $ | $ | ( | |||||||||||||||
| Other comprehensive income before reclassifications | — | — | — | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||||||||||||||
Amortization of prior service cost1 | — | |||||||||||||||||||
Amortization of net actuarial loss1 | — | |||||||||||||||||||
| Tax expense for items of other comprehensive income | ( | — | ( | |||||||||||||||||
| Net current period other comprehensive income | — | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | ( | $ | $ | ( | |||||||||||||||
| Balance as of March 31, 2022 | $ | ( | $ | — | $ | ( | ||||||||||||||
| Other comprehensive loss before reclassifications | — | ( | ( | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||||||||||||||
Amortization of prior service cost1 | — | |||||||||||||||||||
Amortization of net actuarial loss1 | — | |||||||||||||||||||
| Tax benefit for items of other comprehensive (loss) income | ( | — | ( | |||||||||||||||||
| Net current period other comprehensive loss | ( | |||||||||||||||||||
| Balance as of June 30, 2022 | $ | ( | $ | ( | $ | ( | ||||||||||||||
7
| ($ in millions) | Benefit Plans | Other | Total | |||||||||||||||||
| Balance as of December 31, 2020 | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Other comprehensive income before reclassifications | — | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||||||||||||||
Amortization of prior service cost1 | — | |||||||||||||||||||
Amortization of net actuarial loss1 | — | |||||||||||||||||||
| Tax expense for items of other comprehensive income | ( | — | ( | |||||||||||||||||
| Net current period other comprehensive income | ||||||||||||||||||||
| Balance as of June 30, 2021 | $ | ( | $ | $ | ( | |||||||||||||||
| Balance as of December 31, 2021 | $ | ( | $ | — | $ | ( | ||||||||||||||
| Other comprehensive income before reclassifications | ( | ( | ( | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ||||||||||||||||||||
Amortization of prior service cost1 | — | |||||||||||||||||||
Amortization of net actuarial loss1 | — | |||||||||||||||||||
| Tax expense for items of other comprehensive income | — | |||||||||||||||||||
| Net current period other comprehensive income | ( | ( | ( | |||||||||||||||||
| Balance as of June 30, 2022 | $ | ( | $ | ( | $ | ( | ||||||||||||||
1 These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 12: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the three months ended June 30, 2022 and 2021, was $3 million and $8 million, respectively. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the six months ended June 30, 2022 and 2021, was $6 million and $15 million, respectively.
6. EARNINGS PER SHARE
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
| (in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted-average common shares outstanding | ||||||||||||||||||||||||||
| Net dilutive effect of stock awards | — | — | — | — | ||||||||||||||||||||||
| Dilutive weighted-average common shares outstanding | ||||||||||||||||||||||||||
| Earnings per share - basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Earnings per share - diluted | $ | $ | $ | $ | ||||||||||||||||||||||
Under the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of 0.4 million Restricted Performance Stock Rights ("RPSRs") for each of the three and six months ended June 30, 2022 and 2021.
8
7. REVENUE
Disaggregation of Revenue
The Company's contracts with customers typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials.
•Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.
•Fixed-Price Incentive Contracts - Fixed-price incentive contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.
•Cost-Type Contracts - Cost-type contracts provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the work within some specified time and some stated dollar limitation.
•Time and Materials - Time and materials contracts specify a fixed hourly billing rate for each direct labor hour expended and reimbursement for allowable material costs and expenses.
The following tables present revenues on a disaggregated basis:
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||||||||||||||||||||||||
| Revenue Type | ||||||||||||||||||||||||||||||||
| Product sales | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Service revenues | — | |||||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Customer Type | ||||||||||||||||||||||||||||||||
| Federal | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Commercial | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Contract Type | ||||||||||||||||||||||||||||||||
| Firm fixed-price | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Fixed-price incentive | — | — | ||||||||||||||||||||||||||||||
| Cost-type | — | |||||||||||||||||||||||||||||||
| Time and materials | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
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| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||||||||||||||||||||||||
| Revenue Type | ||||||||||||||||||||||||||||||||
| Product sales | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Service revenues | — | |||||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Customer Type | ||||||||||||||||||||||||||||||||
| Federal | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Commercial | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Contract Type | ||||||||||||||||||||||||||||||||
| Firm fixed-price | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Fixed-price incentive | — | — | ||||||||||||||||||||||||||||||
| Cost-type | — | |||||||||||||||||||||||||||||||
| Time and materials | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||||||||||||||||||||||||
| Revenue Type | ||||||||||||||||||||||||||||||||
| Product sales | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Service revenues | — | |||||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Customer Type | ||||||||||||||||||||||||||||||||
| Federal | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Commercial | — | — | ||||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Contract Type | ||||||||||||||||||||||||||||||||
| Firm fixed-price | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Fixed-price incentive | — | — | ||||||||||||||||||||||||||||||
| Cost-type | — | |||||||||||||||||||||||||||||||
| Time and materials | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
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| Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||||||||||||||||||||||||
| Revenue Type | ||||||||||||||||||||||||||||||||
| Product sales | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Service revenues | — | |||||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Customer Type | ||||||||||||||||||||||||||||||||
| Federal | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Commercial | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Contract Type | ||||||||||||||||||||||||||||||||
| Firm fixed-price | $ | $ | $ | $ | — | $ | ||||||||||||||||||||||||||
| Fixed-price incentive | — | |||||||||||||||||||||||||||||||
| Cost-type | — | |||||||||||||||||||||||||||||||
| Time and materials | — | — | — | |||||||||||||||||||||||||||||
| Intersegment | ( | — | ||||||||||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Major Programs | ||||||||||||||||||||||||||
| Amphibious assault ships | $ | $ | $ | $ | ||||||||||||||||||||||
| Surface combatants and coast guard cutters | ||||||||||||||||||||||||||
| Other | ( | |||||||||||||||||||||||||
| Total Ingalls | ||||||||||||||||||||||||||
| Aircraft carriers | ||||||||||||||||||||||||||
| Submarines | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total Newport News | ||||||||||||||||||||||||||
| Government and energy services | ||||||||||||||||||||||||||
| Oil and gas services | — | — | — | |||||||||||||||||||||||
| Total Mission Technologies | ||||||||||||||||||||||||||
| Intersegment eliminations | ( | ( | ( | ( | ||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ||||||||||||||||||||||
As of June 30, 2022, the Company had $47.2 billion of remaining performance obligations. The Company expects to recognize approximately 30 % of its remaining performance obligations as revenue through 2023, an additional 30 % through 2025, and the balance thereafter.
Cumulative Catch-up Adjustments
For the three months ended June 30, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $68 million and $1.34 , respectively. For the three months ended June 30, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $35 million and $0.68 , respectively. For the six months ended June 30, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $113 million and $2.22 , respectively. For the six months ended June 30, 2021, net cumulative catch-up adjustments increased operating income and
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increased diluted earnings per share by $85 million and $1.66 , respectively.
Cumulative catch-up adjustments for the three months ended June 30, 2022, included a favorable adjustment of $20 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.40 . Cumulative catch-up adjustments for the three months ended June 30, 2021, included a favorable adjustment of $14 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.28 .
For the six months ended June 30, 2022 and 2021, no individual favorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.
For the three and six months ended June 30, 2022, no individual unfavorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income. For the three and six months ended June 30, 2021, no individual unfavorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.
Contract Balances
The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. The Company’s net contract assets decreased $50 million from December 31, 2021, to June 30, 2022, primarily resulting from advance billings on certain U.S. Navy contracts. For the three and six months ended June 30, 2022, the Company recognized revenue of $152 million and $531 million, respectively, related to its contract liabilities as of December 31, 2021. For the three and six months ended June 30, 2021, the Company recognized revenue of $56 million and $453 million, respectively, related to its contract liabilities as of December 31, 2020.
8. SEGMENT INFORMATION
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Sales and Service Revenues | ||||||||||||||||||||||||||
| Ingalls | $ | $ | $ | $ | ||||||||||||||||||||||
| Newport News | ||||||||||||||||||||||||||
| Mission Technologies | ||||||||||||||||||||||||||
| Intersegment eliminations | ( | ( | ( | ( | ||||||||||||||||||||||
| Sales and service revenues | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||
| Ingalls | $ | $ | $ | $ | ||||||||||||||||||||||
| Newport News | ||||||||||||||||||||||||||
| Mission Technologies | ||||||||||||||||||||||||||
| Segment operating income | ||||||||||||||||||||||||||
| Non-segment factors affecting operating income | ||||||||||||||||||||||||||
| Operating FAS/CAS Adjustment | ( | ( | ( | ( | ||||||||||||||||||||||
| Non-current state income taxes | ( | — | ( | |||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | ||||||||||||||||||||||
Operating FAS/CAS Adjustment - The Operating FAS/CAS Adjustment represents the difference between the service cost component of our pension and other postretirement benefit plan expense determined in accordance with GAAP ("FAS") and our pension and other postretirement expense under CAS.
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| ($ in millions) | June 30, 2022 | December 31, 2021 | ||||||||||||
| Assets | ||||||||||||||
| Ingalls | $ | $ | ||||||||||||
| Newport News | ||||||||||||||
| Mission Technologies | ||||||||||||||
| Corporate | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
9. INCOME TAXES
The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended June 30, 2022 and 2021, were 19.8 % and 19.9 %, respectively. For the six months ended June 30, 2022 and 2021, the Company's effective income tax rates on earnings from operations were 20.1 % and 17.1 %, respectively. The effective tax rate for the three months ended June 30, 2022, was generally flat compared to the prior year. The higher effective tax rate for the six months ended June 30, 2022, was primarily attributable to a tax loss associated with the sale of the Company’s oil and gas business recorded in 2021.
For the three months ended June 30, 2022, the Company’s effective tax rate differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2022, the Company’s effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21 %. For the three months ended June 30, 2021, the Company’s effective tax rate differed from the federal statutory tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2021, the Company’s effective tax rate differed from the federal statutory tax rate primarily as a result of a tax loss associated with the sale of its oil and gas business.
The Company's unrecognized tax benefits increased by $3 million and $5 million during the three and six months ended June 30, 2022, respectively. As of June 30, 2022, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $86 million. Assuming a sustainment of these tax positions, a reversal of $65 million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. For the three and six months ended June 30, 2022, interest resulting from the unrecognized tax benefits noted above increased income tax expense by less than $1 million.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in unrecognized state tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
10. INVESTIGATIONS, CLAIMS, AND LITIGATION
The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB ASC 450 Contingencies, the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. The Company has, in certain cases, provided disclosure regarding certain matters for which the Company believes at this time that the likelihood of material loss is remote.
False Claims Act Complaint - In 2016, the Company was made aware that it is a defendant in a qui tam False Claims Act lawsuit pending in the U.S. District Court for the Middle District of Florida related to the Company’s purchases of allegedly non-conforming parts from a supplier for use in connection with U.S. Government contracts. In August 2019, the Department of Justice (“DoJ”) declined to intervene in the lawsuit, and the lawsuit was unsealed. The court dismissed the complaint in September 2021, and the plaintiff has appealed the dismissal to the United States Court of Appeals for the 11th Circuit.
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Insurance Claims - In September 2020, the Company filed a complaint against 32 reinsurers in the Superior Court, State of Vermont, Franklin Unit, seeking a judgment declaring that the Company's business interruption and other losses associated with COVID-19 are covered by the Company's property insurance program. The Company also initiated arbitration proceedings against six other reinsurers seeking similar relief. In July 2021, the Vermont court granted the reinsurers’ motion for judgment on the pleadings, and the Company has appealed the decision to the Vermont Supreme Court. Although the Company still believes its position is well-founded, no assurances can be provided regarding the ultimate resolution of this matter.
In September 2021, the Company filed a complaint in the Superior Court of Delaware, seeking a judgment against certain insurers for breach of contract and breach of the implied covenant of good faith and fair dealing under three representations and warranties insurance policies purchased in connection with the Company’s acquisition of Hydroid. The policies insure the Company against losses relating to the seller’s breach of certain representations and warranties in the Hydroid acquisition agreement. The coverage limit under the insurance policies is $70 million, and the Company believes it has incurred losses equal to at least that amount as a result of breaches of the acquisition agreement. No assurances can be provided regarding the ultimate resolution of this matter.
U.S. Government Investigations and Claims - Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil, or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.
Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. In some instances, partial or full insurance coverage is available for the Company's liabilities. The costs to resolve cases during the six months ended June 30, 2022 and 2021, were immaterial individually and in the aggregate. The Company’s estimate of asbestos-related liabilities is subject to uncertainty because liabilities are influenced by many variables that are inherently difficult to predict. Although the Company believes the ultimate resolution of current cases will not have a material effect on its consolidated financial position, results of operations, and cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.
Other Litigation - The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the "Republic") since 2002 over a contract for the repair, refurbishment, and modernization at Ingalls of two foreign-built frigates. Following an arbitration proceeding between the parties, in February 2018, the arbitral tribunal awarded the Company approximately $151 million on its claims and awarded the Republic approximately $22 million on its counterclaims. The Company is seeking to enforce and execute upon the award in multiple jurisdictions. No assurances can be provided regarding the ultimate resolution of this matter.
The Company is party to various other claims, legal proceedings, and investigations that arise in the ordinary course of business, including U.S. Government investigations that could result in administrative, civil, or criminal proceedings involving the Company. The Company is a contractor with the U.S. Government, and such proceedings can therefore include False Claims Act allegations against the Company. Although the Company believes that the resolution of these other claims, legal proceedings, and investigations will not have a material effect on its consolidated financial position, results of operations, and cash flows, the Company cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.
11. COMMITMENTS AND CONTINGENCIES
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recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. As of June 30, 2022, amounts recognized in connection with claims and requests for equitable adjustment were not material individually or in the aggregate.
Environmental Matters - The estimated cost to complete environmental remediation has been accrued when it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. Management estimates that as of June 30, 2022, the probable estimable future cost for environmental remediation was immaterial. Although management cannot predict whether new information gained as remediation progresses or the Company incurs additional remediation obligations will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, and cash flows.
Financial Arrangements - In the ordinary course of business, HII uses letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of June 30, 2022, the Company had $15 million in issued but undrawn letters of credit and $276 million of surety bonds outstanding.
U.S. Government Claims - From time to time, the U.S. Government communicates to the Company potential claims, disallowed costs, and penalties concerning prior costs incurred by the Company with which the U.S. Government disagrees. When such preliminary findings are presented, the Company and U.S. Government representatives engage in discussions, from which the Company evaluates the merits of the claims and assesses the amounts being questioned. Although the Company believes that the resolution of any of these matters will not have a material effect on its consolidated financial position, results of operations, and cash flows, it cannot predict the ultimate outcome of these matters.
Other Matters - In 1985, the Company and the U.S. Navy entered into a settlement agreement to resolve disputes associated with billing and allocating to contracts the cost of workers’ compensation self-insurance, among other matters. Consistent with the 1985 settlement agreement, the Company has not recovered cumulative billable costs resulting from the different treatment of workers' compensation costs between CAS and U.S. GAAP Financial Accounting Standards ("FAS"). Under the 1985 settlement agreement, these costs would be recovered in future periods. In December 2020, a U.S. Navy Contracting Officer issued a determination that the 1985 settlement agreement did not comply with CAS and directed the Company to develop and implement a different process to bill and allocate the cost of workers’ compensation self-insurance. In July 2022, the Contracting Officer reiterated its direction that the Company submit a cost accounting practice change from the 1985 settlement agreement for Government review and concurrence. Although the Company believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, the Company is seeking to negotiate a resolution of the matter with the Contracting Officer.
In January 2022, a U.S. Navy Contracting Officer issued a written determination that the Ingalls Shipbuilding Material Management and Accounting System (“MMAS”) had three significant deficiencies (as defined in the Defense Federal Acquisition Regulation Supplement provision relating to MMASs), resulting in a 5 % withhold of payments on certain invoices issued under one contract. Ingalls subsequently submitted a corrective action plan, which was approved in February 2022, and the withhold was reduced to 2 %. On May 27, 2022, the Contracting Officer determined that Ingalls had corrected the significant deficiencies, and the Contracting Officer terminated the remaining 2 % withhold and approved the MMAS system.
Collective Bargaining Agreements - Of the Company's approximately 44,000 employees, approximately 45 % are covered by a total of nine collective bargaining agreements and one site stabilization agreement. Newport News has three collective bargaining agreements covering represented employees, including one with United Steelworkers Local 8888 (Newport News) (the “USWs”), which covers approximately 50 % of Newport News employees. The collective bargaining agreement with the USWs expired in November 2021, and the Company reached a tentative agreement with representatives of the USWs in February 2022. The members of the USWs bargaining unit ratified the contract in March 2022. The Company believes its relationship with its employees is satisfactory.
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12. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company provides eligible employees defined benefit pension plans, other postretirement benefit plans, and defined contribution pension plans.
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||
| Components of Net Periodic Benefit Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | — | — | ( | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of net actuarial loss (gain) | ( | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Net periodic benefit (income) cost | $ | ( | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30 | ||||||||||||||
| ($ in millions) | 2022 | 2021 | ||||||||||||
| Pension plans | ||||||||||||||
| Discretionary | ||||||||||||||
| Qualified | $ | — | $ | |||||||||||
| Non-qualified | ||||||||||||||
| Other benefit plans | ||||||||||||||
| Total contributions | $ | $ | ||||||||||||
As of June 30, 2022, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2022.
In March 2022, the Company concluded negotiations on one of its collective bargaining agreements, which required an amendment to one of the Company's pension plans. As a result of the amendment, the remeasurement of the plan increased the pension liability and pre-tax accumulated other comprehensive loss by approximately $97 million.
13. STOCK COMPENSATION PLANS
During the six months ended June 30, 2022 and 2021, the Company issued new stock awards as follows:
Restricted Performance Stock Rights - For the six months ended June 30, 2022, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $204.10 . These rights are subject to cliff vesting on December 31, 2024. For the six months ended June 30, 2021, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $179.21 . These rights are subject to cliff vesting on December 31, 2023. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between 0 % and 200 % of grant date value.
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For the six months ended June 30, 2022 and 2021, awards of approximately 0.2 million and 0.1 million shares of stock vested, respectively, of which less than 0.1 million each period were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.
| Stock Awards (in thousands) | Weighted-Average Grant Date Fair Value | Weighted-Average Remaining Contractual Term (in years) | ||||||||||||||||||
| Total stock awards | $ | |||||||||||||||||||
Compensation Expense
The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $7 million and $3 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $16 million and $12 million for the six months ended June 30, 2022 and 2021, respectively.
The Company recorded tax benefits related to stock awards of $1 million and less than $1 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded tax benefits related to stock awards of $2 million for each of the six months ended June 30, 2022 and 2021. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of less than $1 million for each of the three months ended June 30, 2022 and 2021. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $4 million and $2 million for the six months ended June 30, 2022 and 2021, respectively.
Unrecognized Compensation Expense
As of June 30, 2022, the Company had $3 million of unrecognized compensation expense associated with Restricted Stock Rights granted in 2022 and 2021, which will be recognized over a weighted average period of 1.2 years, and $44 million of unrecognized compensation expense associated with RPSRs granted in 2022, 2021, and 2020, which will be recognized over a weighted average period of 1.6 years.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Our Business
Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is an all-domain defense and technologies partner, recognized worldwide as America’s largest shipbuilder. For more than a century, our Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. Our Mission Technologies (formerly named Technical Solutions) segment provides a range of services and products to government and commercial customers. Headquartered in Newport News, Virginia, HII employs approximately 44,000 people domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Mission Technologies segment provides a wide range of services and products, including C5ISR systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive solutions; platform modernization; and critical nuclear operations.
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The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2021.
Business Environment
We continue to see uncertainty in the economy, our industry, and our company, with challenges for customers and suppliers, labor shortages, supply chain challenges, and increasing inflation, among other impacts.
U.S. Government Contracts - Long-term uncertainty exists with respect to overall levels of defense spending across the future years' defense plan, and it is likely that U.S. Government discretionary spending levels will continue to be subject to significant pressure.
Congressional consideration of the fiscal year 2023 President’s Budget Request began following its release in March 2022 and is ongoing. The House Appropriations Committee voted out a defense appropriations measure that broadly supports our shipbuilding and unmanned programs and awaits floor consideration. The Senate Appropriations Committee has yet to conduct markups, and the timing of committee action remains uncertain. The House and Senate Armed Services Committees have each acted on their respective National Defense Authorization bills for fiscal year 2023, both of which broadly support our shipbuilding programs, including increased funding authority for Arleigh Burke class destroyers (DDG-51) and LHA and LPD Flight II amphibious ships. The full House has approved its authorization bill and awaits Senate floor consideration of its version before the two bills can be reconciled to produce a final measure. We cannot predict the outcome of the fiscal year 2023 budget process or whether short-term funding will be required in the event annual appropriations measures are not finalized by the start of the October 1 fiscal year.
Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled. In addition, spending cuts and/or reprioritization of defense investment could adversely affect the viability of our suppliers, subcontractors, and employee base. Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by the U.S. Government or the prime contractor due to lack of government funding or reductions or delays in government funding. Significant reductions in the number of ships procured by the U.S. Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, and cash flows.
The federal budget environment remains a significant long-term risk. Considerable uncertainty exists regarding how future budget and program decisions will develop and what challenges budget changes will present for the defense industry. We believe continued budget pressures could have serious implications for defense discretionary spending, the defense industrial base, including HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget environment may result in fewer contract awards and lower revenues, profits, and cash flows from our U.S. Government contracts. It is likely budget and program decisions made in this environment will have long-term impacts on HII and the entire defense industry.
Political and Economic Environment – The global geopolitical and economic environment continues to be impacted by uncertainty, heightened tensions, and instability. Geopolitical relationships have changed, and are continuing to change, and the U.S. and its allies face a global security environment that includes threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns, and political instability. These global threats persist across all domains, from undersea to space to cyber, and the global market for defense products, services, and solutions is driven by these complex and evolving security challenges. Our current operating environment exists in the broader context of political and socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding geopolitical tensions, financial market volatility, inflation, and the COVID-19 pandemic.
In February 2022, Russian forces invaded Ukraine. In response, the United States and other countries imposed economic and trade sanctions, export controls, and other restrictions. The conflict and these sanctions have caused disruptions to global economies and global business, including heightened cybersecurity risks, supply chain challenges, increased energy costs, and an exacerbation of existing inflationary pressures. Additionally, and more broadly, economic tensions with China and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could impact the global market for defense products, services, and solutions.
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In addition to price surges in energy, food, and aluminum as a result of the Russian invasion of Ukraine, rising inflation has led to higher costs of various commodities and supplier products. Inflation has also increased interest rates, raising the cost of borrowing for the federal government, which could impact other spending priorities. In an era of unanticipated cost increases, the inclusion of mitigation mechanisms, such as Economic Price Adjustment clauses, in our contracts help reduce risks from negative price adjustments. Our bids for longer-term firm fixed-price contracts typically include assumptions for labor and other contract costs that historically have been sufficient to cover cost increases over the period of performance. If, however, recent inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover potential contract cost growth or may impact the availability of resources to execute the respective contracts. Management is closely monitoring possible cost impacts with our customers.
COVID-19 Pandemic - The COVID-19 pandemic has dramatically impacted the global economic environment, including labor shortages and supply chain challenges. The COVID-19 crisis initially had a significant impact on the U.S. labor market, and the resulting challenges and uncertainty have exacerbated already existing workforce trends. Talent attraction and retention and the ability to maintain a qualified workforce affects not only industry prime contractors but suppliers as well. Challenges incurred by our suppliers relative to their workforces, access to necessary components, materials, and other supplies at reasonable prices, and access to support services, such as shipping and transportation, may impact the ability of suppliers to provide agreed-upon goods and services in a timely, compliant, and cost-effective manner. We may in the future incur additional costs and performance challenges, including as a result of higher prices, schedule delays, or the need to identify and develop alternative suppliers.
The COVID-19 pandemic has impacted our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”). While costs related to COVID-19 Events are allowable under U.S. Government contracts, our contract estimates reflect profit margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and fixed-price incentive contracts, or may not be adequately covered by insurance. Reinsurers under our property insurance have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision. Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 10: Investigations, Claims, and Litigation.
Critical Accounting Policies, Estimates, and Judgments
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, we consider our policies relating to the following matters to be critical accounting policies and estimates:
•Revenue recognition;
•Purchase accounting, goodwill, and intangible assets;
•Litigation, commitments, and contingencies;
•Retirement related benefit plans; and
•Workers' compensation.
As of June 30, 2022, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2021.
We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units.
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Contracts
We generate most of our revenues from multi-year contracts with the U.S. Government for design, production, and support activities. Due to the size, duration, and nature of many of our multi-year contracts, the estimation of sales and services revenues and costs through completion is complicated and subject to many variables. Sales and service revenue estimates are based on negotiated contract prices, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with schedule, technical performance, and price adjustment clauses (such as inflation or index-based clauses). These multi-year contracts generally have a transaction price that is based on estimated cost to produce the product or service plus margin. Product and service cost estimates are based on negotiated or estimated contract terms, historical performance trends, and other economic projections. Government contracts typically include the following cost elements: direct material, labor and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Factors that influence our cost estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, COVID-19 disruptions, and capital costs.
Unless otherwise specified in a contract, costs billed to contracts with the U.S. Government are treated as allowable and allocable costs under the FAR and CAS regulations. Examples of costs incurred by us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including certain merger and acquisition costs, and advertising costs.
Contract Fees - Negotiated contract fee structures include: fixed fee amounts, cost sharing arrangements to reward or penalize contractors for under- or over-cost target performance, respectively, positive award fees, and negative penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract, the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.
Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality, and technical performance. Award fees are determined and earned based on an evaluation by the customer of our performance against such negotiated criteria. We consider award fees to be variable consideration and generally include these fees in the transaction price using a most likely amount approach. Award fees are limited to the extent of funding allotted by the customer and available for performance and those amounts for which a significant reversal of revenue is not probable.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Quarterly Report on Form 10-Q is included in the "Glossary of Programs" in this section.
CONSOLIDATED OPERATING RESULTS
The following table presents selected financial highlights:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Sales and service revenues | $ | 2,662 | $ | 2,231 | $ | 431 | 19 | % | $ | 5,238 | $ | 4,509 | $ | 729 | 16 | % | ||||||||||||||||||||||||||||||||||
| Cost of product sales and service revenues | 2,272 | 1,909 | 363 | 19 | % | 4,499 | 3,845 | 654 | 17 | % | ||||||||||||||||||||||||||||||||||||||||
| Income from operating investments, net | 27 | 12 | 15 | 125 | % | 34 | 20 | 14 | 70 | % | ||||||||||||||||||||||||||||||||||||||||
| Other income and gains (losses), net | 1 | (2) | 3 | 150 | % | — | 1 | (1) | (100) | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 227 | 204 | 23 | 11 | % | 444 | 410 | 34 | 8 | % | ||||||||||||||||||||||||||||||||||||||||
| Operating income | 191 | 128 | 63 | 49 | % | 329 | 275 | 54 | 20 | % | ||||||||||||||||||||||||||||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (26) | (18) | (8) | (44) | % | (52) | (39) | (13) | (33) | % | ||||||||||||||||||||||||||||||||||||||||
| Non-operating retirement benefit | 67 | 44 | 23 | 52 | % | 138 | 90 | 48 | 53 | % | ||||||||||||||||||||||||||||||||||||||||
| Other, net | (10) | 7 | (17) | (243) | % | (17) | 8 | (25) | (313) | % | ||||||||||||||||||||||||||||||||||||||||
| Federal and foreign income taxes | 44 | 32 | 12 | 38 | % | 80 | 57 | 23 | 40 | % | ||||||||||||||||||||||||||||||||||||||||
| Net earnings | $ | 178 | $ | 129 | $ | 49 | 38 | % | $ | 318 | $ | 277 | $ | 41 | 15 | % | ||||||||||||||||||||||||||||||||||
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Operating Performance Assessment and Reporting
We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance. Under FAR rules that govern our business with the U.S. Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.
Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.
Sales and Service Revenues
Sales and service revenues were comprised as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Product sales | $ | 1,829 | $ | 1,763 | $ | 66 | 4 | % | $ | 3,553 | $ | 3,484 | $ | 69 | 2 | % | ||||||||||||||||||||||||||||||||||
| Service revenues | 833 | 468 | 365 | 78 | % | 1,685 | 1,025 | 660 | 64 | % | ||||||||||||||||||||||||||||||||||||||||
| Sales and service revenues | $ | 2,662 | $ | 2,231 | $ | 431 | 19 | % | $ | 5,238 | $ | 4,509 | $ | 729 | 16 | % | ||||||||||||||||||||||||||||||||||
Product sales for the three months ended June 30, 2022, increased $66 million, or 4%, from the same period in 2021. Product sales for the six months ended June 30, 2022, increased $69 million, or 2%, from the same period in 2021. Ingalls product sales decreased $13 million and $39 million for the three and six months ended June 30, 2022, respectively, primarily as a result of lower volumes in surface combatants, partially offset by higher volumes in amphibious assault ships. Newport News product sales increased $79 million for the three months ended June 30, 2022, primarily as a result of higher volumes in aircraft carriers, partially offset by lower volumes in submarines. Newport News product sales increased $99 million for the six months ended June 30, 2022, primarily as a result of higher volumes in aircraft carriers. Mission Technologies product sales were flat for the three months ended June 30, 2022. Mission Technologies product sales increased $9 million for the six months ended June 30, 2022, primarily as a result of higher volumes in defense and federal solutions ("DFS").
Service revenues for the three months ended June 30, 2022, increased $365 million, or 78%, compared with the same period in 2021. Service revenues for the six months ended June 30, 2022, increased $660 million, or 64%, compared with the same period in 2021. Ingalls service revenues increased $4 million and $12 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes in amphibious assault ship services, partially offset by lower volumes in surface combatant services. Newport News service revenues decreased $6 million for the three months ended June 30, 2022, primarily as a result of lower volumes in naval nuclear support services and aircraft carrier services, partially offset by higher volumes in submarine services. Newport News service revenues decreased $43 million for the six months ended June 30, 2022, primarily as a result of lower volumes in aircraft carrier services and naval nuclear support services. Mission Technologies service revenues increased $367 million and $691 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes in DFS services.
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Cost of Sales and Service Revenues
Cost of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Cost of product sales | $ | 1,526 | $ | 1,495 | $ | 31 | 2 | % | $ | 2,994 | $ | 2,949 | $ | 45 | 2 | % | ||||||||||||||||||||||||||||||||||
| % of product sales | 83.4 | % | 84.8 | % | 84.3 | % | 84.6 | % | ||||||||||||||||||||||||||||||||||||||||||
| Cost of service revenues | 746 | 414 | 332 | 80 | % | 1,505 | 896 | 609 | 68 | % | ||||||||||||||||||||||||||||||||||||||||
| % of service revenues | 89.6 | % | 88.5 | % | 89.3 | % | 87.4 | % | ||||||||||||||||||||||||||||||||||||||||||
| Income from operating investments, net | 27 | 12 | 15 | 125 | % | 34 | 20 | 14 | 70 | % | ||||||||||||||||||||||||||||||||||||||||
| Other income and gains (losses), net | 1 | (2) | 3 | 150 | % | — | 1 | (1) | (100) | % | ||||||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 227 | 204 | 23 | 11 | % | 444 | 410 | 34 | 8 | % | ||||||||||||||||||||||||||||||||||||||||
| % of sales and service revenues | 8.5 | % | 9.1 | % | 8.5 | % | 9.1 | % | ||||||||||||||||||||||||||||||||||||||||||
| Cost of sales and service revenues | $ | 2,471 | $ | 2,103 | $ | 368 | 17 | % | $ | 4,909 | $ | 4,234 | $ | 675 | 16 | % | ||||||||||||||||||||||||||||||||||
Cost of Product Sales
Cost of product sales for the three months ended June 30, 2022, increased $31 million, or 2%, compared with the same period in 2021. Cost of product sales for the six months ended June 30, 2022, increased $45 million, or 2%, compared with the same period in 2021. Ingalls cost of product sales decreased $28 million and $38 million for the three and six months ended June 30, 2022, respectively, primarily as a result of volume decreases described above, partially offset by higher risk retirement on Harrisburg (LPD 30). Newport News cost of product sales increased $56 million and $76 million for the three and six months ended June 30, 2022, respectively, primarily as a result of volume increases described above. Mission Technologies cost of product sales increased $5 million for the three months ended June 30, 2022, driven by year-to-year variances in contract mix. Mission Technologies cost of product sales increased $11 million for the six months ended June 30, 2022, driven by volume increases described above. Cost of product sales related to the Operating FAS/CAS Adjustment decreased $2 million and $4 million for the three and six months ended June 30, 2022, respectively, as described below.
Cost of product sales as a percentage of product sales decreased from 84.8% for the three months ended June 30, 2021, to 83.4% for the three months ended June 30, 2022. The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), as well as a favorable change in the Operating FAS/CAS Adjustment, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program and receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021. Cost of product sales as a percentage of product sales decreased from 84.6% for the six months ended June 30, 2021, to 84.3% for the six months ended June 30, 2022. The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), USS Gerald R. Ford (CVN 78), Fort Lauderdale (LPD 28) following its delivery, and Frank E. Petersen Jr. (DDG 121), as well as a favorable change in the Operating FAS/CAS Adjustment, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program, receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021, and lower risk retirement on Bougainville (LHA 8).
Cost of Service Revenues
Cost of service revenues for the three months ended June 30, 2022, increased $332 million, or 80%, compared with the same period in 2021. Cost of service revenues for the six months ended June 30, 2022, increased $609 million, or 68%, compared with the same period in 2021. Ingalls cost of service revenues increased $5 million and $12 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes described above. Newport News cost of service revenues decreased $15 million and $50 million for the three and six months ended June 30, 2022, respectively, primarily as a result of lower volumes described above. Mission Technologies cost of service revenues increased $342 million and $648 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes described above. Cost of service revenues
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related to the Operating FAS/CAS Adjustment was flat for the three months ended June 30, 2022 and decreased $1 million for the six months ended June 30, 2022, as described below.
Cost of service revenues as a percentage of service revenues increased from 88.5% for the three months ended June 30, 2021, to 89.6% for the three months ended June 30, 2022, primarily driven by higher amortization of purchased intangible assets and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021. and a favorable change in the Operating FAS/CAS Adjustment. Cost of service revenues as a percentage of service revenues increased from 87.4% for the six months ended June 30, 2021, to 89.3% for the six months ended June 30, 2022, primarily driven by higher amortization of purchased intangible assets and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, as well as a favorable change in the Operating FAS/CAS Adjustment.
Income (Loss) from Operating Investments, Net
The activities of our operating investments are closely aligned with the operations of the segments holding the investments. We therefore record income related to earnings from equity method investments in our operating income.
Income from operating investments, net for the three and six months ended June 30, 2022, increased $15 million and $14 million, respectively, from the same periods in 2021, primarily due to higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, partially offset by lower equity income from our nuclear and environmental joint ventures.
Other Income and Gains (Losses), Net
Other income and gains (losses), net was a net gain of $1 million and a net loss of $2 million for the three months ended June 30, 2022 and 2021, respectively. The favorable change of $3 million was primarily due to a loss recognized in the second quarter of 2021 as a result of the final purchase price adjustment to a gain on the sale of our oil and gas business. Other income and gains (losses), net were flat for the six months ended June 30, 2022, compared to the same period in 2021.
General and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.
General and administrative expenses for the three and six months ended June 30, 2022, increased $23 million and $34 million, respectively, from the same periods in 2021, primarily due to higher overhead costs as a result of the acquisition of Alion in the third quarter of 2021 and current state income tax expense, partially offset by favorable changes in non-current state income taxes.
Operating Income
We consider operating income to be an important measure for evaluating our operating performance, and, consistent with industry practice, we define operating income as revenues less the related costs of producing the revenues and general and administrative expenses.
We internally manage our operations by reference to "segment operating income," which is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects segment performance. Segment operating income is not a recognized measure under GAAP. When analyzing our operating performance, investors should use segment operating income in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to evaluate our core operating performance. We believe segment operating income reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a
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useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies.
The following table reconciles operating income to segment operating income:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 191 | $ | 128 | $ | 63 | 49 | % | $ | 329 | $ | 275 | $ | 54 | 20 | % | ||||||||||||||||||||||||||||||||||
| Operating FAS/CAS Adjustment | 35 | 37 | (2) | (5) | % | 72 | 77 | (5) | (6) | % | ||||||||||||||||||||||||||||||||||||||||
| Non-current state income taxes | (1) | 4 | (5) | (125) | % | — | 8 | (8) | (100) | % | ||||||||||||||||||||||||||||||||||||||||
| Segment operating income | $ | 225 | $ | 169 | $ | 56 | 33 | % | $ | 401 | $ | 360 | $ | 41 | 11 | % | ||||||||||||||||||||||||||||||||||
Segment Operating Income
Segment operating income for the three months ended June 30, 2022, was $225 million, compared with segment operating income of $169 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), as well as improved performance in DFS services and higher equity income, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program and receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021, as well as higher amortization of purchased intangible assets.
Segment operating income for the six months ended June 30, 2022, was $401 million, compared with segment operating income of $360 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), USS Gerald R. Ford (CVN 78), Fort Lauderdale (LPD 28) following its delivery, and Frank E. Petersen Jr. (DDG 121), as well as improved performance in DFS services and higher equity income, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program, receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021, and lower risk retirement on Bougainville (LHA 8), as well as higher amortization of purchased intangible assets.
Activity within each segment is discussed in Segment Operating Results below.
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
The components of the Operating FAS/CAS Adjustment were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| FAS benefit (expense) | $ | 19 | $ | (7) | $ | 26 | 371 | % | $ | 43 | $ | (14) | $ | 57 | 407 | % | ||||||||||||||||||||||||||||||||||
| CAS cost | 13 | 14 | (1) | (7) | % | 23 | 27 | (4) | (15) | % | ||||||||||||||||||||||||||||||||||||||||
| FAS/CAS Adjustment | 32 | 7 | 25 | 357 | % | 66 | 13 | 53 | 408 | % | ||||||||||||||||||||||||||||||||||||||||
| Non-operating retirement benefit | (67) | (44) | (23) | (52) | % | (138) | (90) | (48) | (53) | % | ||||||||||||||||||||||||||||||||||||||||
| Operating FAS/CAS Adjustment | $ | (35) | $ | (37) | $ | 2 | 5 | % | $ | (72) | $ | (77) | $ | 5 | 6 | % | ||||||||||||||||||||||||||||||||||
The Operating FAS/CAS Adjustment was a net expense of $35 million and $37 million for the three months ended June 30, 2022 and 2021, respectively. The Operating FAS/CAS Adjustment was a net expense of $72 million and $77 million for the six months ended June 30, 2022 and 2021, respectively. The favorable changes in the Operating FAS/CAS Adjustment of $2 million and $5 million for the three and six months ended June 30, 2022, respectively, were primarily driven by the more immediate recognition of higher interest rates under FAS.
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Non-current State Income Taxes
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
Non-current state income tax benefit for the three months ended June 30, 2022, was $1 million, compared to non-current state income tax expense of $4 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes. Non-current state income tax benefit for the six months ended June 30, 2022, was less than $1 million, compared to non-current state income tax expense of $8 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes.
Interest Expense
Interest expense for the three and six months ended June 30, 2022, increased $8 million and $13 million, respectively, compared with the same periods in 2021, primarily due to the issuance of senior notes and borrowing under the Term Loan in the third quarter of 2021.
Non-Operating Retirement Benefit
The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects. For the three and six months ended June 30, 2022, the favorable change in the non-operating retirement benefit of $23 million and $48 million was primarily driven by higher 2021 returns on plan assets.
Other, Net
Other, net expense increased $17 million and $25 million for the three and six months ended June 30, 2022, respectively, compared with the same periods in 2021, primarily driven by losses on investments in marketable securities.
Federal and Foreign Income Taxes
Our effective income tax rates on earnings from operations for the three months ended June 30, 2022 and 2021, were 19.8% and 19.9%, respectively. Our effective income tax rates on earnings from operations for the six months ended June 30, 2022 and 2021, were 20.1% and 17.1%, respectively. The effective tax rate for the three months ended June 30, 2022, was generally flat compared to the prior year. The higher effective tax rate for the six months ended June 30, 2022, was primarily attributable to a tax loss associated with the sale of our oil and gas business recorded in 2021.
For the three months ended June 30, 2022, our effective tax rate differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2022, our effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%. For the three months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of a tax loss associated with the sale of our oil and gas business. See Note 9: Income Taxes.
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SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.
The following table presents segment operating results:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Sales and Service Revenues | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Ingalls | $ | 658 | $ | 670 | $ | (12) | (2) | % | $ | 1,289 | $ | 1,319 | $ | (30) | (2) | % | ||||||||||||||||||||||||||||||||||
| Newport News | 1,433 | 1,363 | 70 | 5 | % | 2,823 | 2,770 | 53 | 2 | % | ||||||||||||||||||||||||||||||||||||||||
Mission Technologies | 600 | 237 | 363 | 153 | % | 1,190 | 496 | 694 | 140 | % | ||||||||||||||||||||||||||||||||||||||||
| Intersegment eliminations | (29) | (39) | 10 | 26 | % | (64) | (76) | 12 | 16 | % | ||||||||||||||||||||||||||||||||||||||||
| Sales and service revenues | $ | 2,662 | $ | 2,231 | $ | 431 | 19 | % | $ | 5,238 | $ | 4,509 | $ | 729 | 16 | % | ||||||||||||||||||||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Ingalls | $ | 106 | $ | 80 | $ | 26 | 33 | % | $ | 192 | $ | 171 | $ | 21 | 12 | % | ||||||||||||||||||||||||||||||||||
| Newport News | 94 | 76 | 18 | 24 | % | 175 | 169 | 6 | 4 | % | ||||||||||||||||||||||||||||||||||||||||
Mission Technologies | 25 | 13 | 12 | 92 | % | 34 | 20 | 14 | 70 | % | ||||||||||||||||||||||||||||||||||||||||
| Segment operating income | 225 | 169 | 56 | 33 | % | 401 | 360 | 41 | 11 | % | ||||||||||||||||||||||||||||||||||||||||
| Non-segment factors affecting operating income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating FAS/CAS Adjustment | (35) | (37) | 2 | 5 | % | (72) | (77) | 5 | 6 | % | ||||||||||||||||||||||||||||||||||||||||
| Non-current state income taxes | 1 | (4) | 5 | 125 | % | — | (8) | 8 | 100 | % | ||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 191 | $ | 128 | $ | 63 | 49 | % | $ | 329 | $ | 275 | $ | 54 | 20 | % | ||||||||||||||||||||||||||||||||||
KEY SEGMENT FINANCIAL MEASURES
Sales and Service Revenues
Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts. Volume changes will typically carry a corresponding income change based on the margin rate for a particular contract.
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract margin rates. These changes typically relate to profit recognition associated with revisions to estimated costs at completion ("EAC") that reflect improved or deteriorated operating performance on that contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded. Segment operating income may also be affected by, among other things, contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as warranty reserves, could also impact contract earnings. Where such items have occurred and the effects are material, a separate description is provided.
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Cumulative Adjustments
For the three and six months ended June 30, 2022 and 2021, favorable and unfavorable cumulative catch-up margin adjustments were as follows:
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Gross favorable adjustments | $ | 106 | $ | 62 | $ | 213 | $ | 148 | ||||||||||||||||||
| Gross unfavorable adjustments | (38) | (27) | (100) | (63) | ||||||||||||||||||||||
| Net adjustments | $ | 68 | $ | 35 | $ | 113 | $ | 85 | ||||||||||||||||||
For the three months ended June 30, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Harrisburg (LPD 30). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
For the six months ended June 30, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Harrisburg (LPD 30) and Fort Lauderdale (LPD 28) following its delivery. During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
For the three months ended June 30, 2021, favorable cumulative margin catch-up adjustments included a contract incentive on Jack H. Lucas (DDG 125) and risk retirement on Richard M. McCool Jr. (LPD 29) and Fort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
For the six months ended June 30, 2021, favorable cumulative margin catch-up adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on Jack H. Lucas (DDG 125), and risk retirement on Block IV of the Virginia class (SSN 774) submarine program and Fort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.
Ingalls
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Sales and service revenues | $ | 658 | $ | 670 | $ | (12) | (2) | % | $ | 1,289 | $ | 1,319 | $ | (30) | (2) | % | ||||||||||||||||||||||||||||||||||
| Segment operating income | 106 | 80 | 26 | 33 | % | 192 | 171 | 21 | 12 | % | ||||||||||||||||||||||||||||||||||||||||
| As a percentage of segment sales | 16.1 | % | 11.9 | % | 14.9 | % | 13.0 | % | ||||||||||||||||||||||||||||||||||||||||||
Sales and Service Revenues
Ingalls revenues for the three months ended June 30, 2022, decreased $12 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships. Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129) and USS Jack H Lucas (DDG 125), partially offset by higher volumes on Thad Cochran (DDG 135). Revenues on amphibious assault ships increased due to higher volumes on Pittsburgh (LPD 31), Harrisburg (LPD 30), LHA 9 (unnamed), and L-Class planning yard services contract, partially offset by lower volumes on Fort Lauderdale (LPD 28).
Ingalls revenues for the six months ended June 30, 2022, decreased $30 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships. Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129), USS Jack H. Lucas (DDG 125), and Frank E. Petersen Jr. (DDG 121), partially offset by higher volumes on Thad Cochran (DDG 135). Revenues on amphibious assault ships increased due to higher volumes on LHA 9 (unnamed), Pittsburgh (LPD 31), and L-Class planning yard services contract and higher volumes on Harrisburg (LPD 30), partially offset by lower volumes on Fort Lauderdale (LPD 28) and Bougainville (LHA 8).
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Segment Operating Income
Ingalls segment operating income for the three months ended June 30, 2022, was $106 million, compared with segment operating income of $80 million for the same period in 2021. The increase was primarily driven by favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), partially offset by receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021.
Ingalls segment operating income for the six months ended June 30, 2022, was $192 million, compared with segment operating income of $171 million for the same period in 2021. The increase was primarily driven by favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), Fort Lauderdale (LPD 28) following its delivery, and Frank E. Petersen Jr. (DDG 121), partially offset by receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021 and lower risk retirement on Bougainville (LHA 8).
Newport News
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Sales and service revenues | $ | 1,433 | $ | 1,363 | $ | 70 | 5 | % | $ | 2,823 | $ | 2,770 | $ | 53 | 2 | % | ||||||||||||||||||||||||||||||||||
| Segment operating income | 94 | 76 | 18 | 24 | % | 175 | 169 | 6 | 4 | % | ||||||||||||||||||||||||||||||||||||||||
| As a percentage of segment sales | 6.6 | % | 5.6 | % | 6.2 | % | 6.1 | % | ||||||||||||||||||||||||||||||||||||||||||
Sales and Service Revenues
Newport News revenues for the three months ended June 30, 2022, increased $70 million, or 5%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers, partially offset by lower volumes in naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), the construction of Doris Miller (CVN 81), the construction of John F. Kennedy (CVN 79), and Enterprise (CVN 80), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73). Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.
Newport News revenues for the six months ended June 30, 2022, increased $53 million, or 2%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers and submarines, partially offset by lower revenues in naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73). Submarine revenues increased due to higher volumes on Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class (SSBN 826) program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program. Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.
Segment Operating Income
Newport News segment operating income for the three months ended June 30, 2022, was $94 million, compared with segment operating income of $76 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program.
Newport News segment operating income for the six months ended June 30, 2022, was $175 million, compared with segment operating income of $169 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on USS Gerald R. Ford (CVN 78), partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program.
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Mission Technologies
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | ||||||||||||||||||||||||||||||||||||||||||
| Sales and service revenues | $ | 600 | $ | 237 | $ | 363 | 153 | % | $ | 1,190 | $ | 496 | $ | 694 | 140 | % | ||||||||||||||||||||||||||||||||||
| Segment operating income | 25 | 13 | 12 | 92 | % | 34 | 20 | 14 | 70 | % | ||||||||||||||||||||||||||||||||||||||||
| As a percentage of segment sales | 4.2 | % | 5.5 | % | 2.9 | % | 4.0 | % | ||||||||||||||||||||||||||||||||||||||||||
Sales and Service Revenues
Mission Technologies revenues for the three months ended June 30, 2022, increased $363 million, or 153%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021.
Mission Technologies revenues for the six months ended June 30, 2022, increased $694 million, or 140%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021.
Segment Operating Income
Mission Technologies segment operating income for the three months ended June 30, 2022, was $25 million, compared with segment operating income of $13 million for the same period in 2021. The increase was primarily driven by the acquisition of Alion in the third quarter of 2021 and higher equity income, partially offset by higher amortization of purchased intangible assets.
Mission Technologies segment operating income for the six months ended June 30, 2022, was $34 million, compared with segment operating income of $20 million for the same period in 2021. The increase was primarily driven by the acquisition of Alion in the third quarter of 2021 and higher equity income, partially offset by higher amortization of purchased intangible assets.
BACKLOG
Total backlog as of June 30, 2022, and December 31, 2021, was approximately $47.2 billion and $48.5 billion, respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.
The following table presents funded and unfunded backlog by segment as of June 30, 2022, and December 31, 2021:
| June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| Total | Total | |||||||||||||||||||||||||||||||||||||
| ($ in millions) | Funded | Unfunded | Backlog | Funded | Unfunded | Backlog | ||||||||||||||||||||||||||||||||
| Ingalls | $ | 10,208 | $ | 940 | $ | 11,148 | $ | 10,216 | $ | 792 | $ | 11,008 | ||||||||||||||||||||||||||
| Newport News | 13,025 | 18,386 | 31,411 | 11,121 | 21,198 | 32,319 | ||||||||||||||||||||||||||||||||
Mission Technologies | 1,361 | 3,289 | 4,650 | 1,334 | 3,789 | 5,123 | ||||||||||||||||||||||||||||||||
| Total backlog | $ | 24,594 | $ | 22,615 | $ | 47,209 | $ | 22,671 | $ | 25,779 | $ | 48,450 | ||||||||||||||||||||||||||
Approximately 18% of the $48.5 billion total backlog as of December 31, 2021, is expected to be converted into sales in 2022. U.S. Government orders comprised substantially all of the backlog as of June 30, 2022, and December 31, 2021.
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Awards
The value of new contract awards during the six months ended June 30, 2022, was approximately $4 billion, including an award for the construction of DDG 139 (unnamed).
LIQUIDITY AND CAPITAL RESOURCES
We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value. We use various financial measures to assist in capital deployment decision making, including net cash provided by operating activities and free cash flow. We believe these measures are useful to investors in assessing our financial performance.
The following table summarizes key components of cash flow provided by operating activities:
| Six Months Ended June 30 | 2022 vs. 2021 | |||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | |||||||||||||||||
| Net earnings | $ | 318 | $ | 277 | $ | 41 | ||||||||||||||
| Depreciation and amortization | 178 | 131 | 47 | |||||||||||||||||
| Provision for doubtful accounts | (7) | — | (7) | |||||||||||||||||
| Stock-based compensation | 16 | 12 | 4 | |||||||||||||||||
| Deferred income taxes | (1) | 31 | (32) | |||||||||||||||||
| Loss (gain) on investments in marketable securities | 26 | (12) | 38 | |||||||||||||||||
| Retiree benefits | (65) | (70) | 5 | |||||||||||||||||
| Trade working capital increase | (281) | (230) | (51) | |||||||||||||||||
| Net cash provided by operating activities | $ | 184 | $ | 139 | $ | 45 | ||||||||||||||
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our
leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt
obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
Cash Flows
We discuss below our significant operating, investing, and financing activities affecting cash flows for the six months ended June 30, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.
Operating Activities
Cash provided by operating activities for the six months ended June 30, 2022, was $184 million, compared with $139 million provided by operating activities for the same period in 2021. The favorable change in operating cash flow was primarily due to higher earnings, lower contributions to retiree benefit plans, and lower income tax payments, partially offset by changes in trade working capital and higher interest payments. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable and payments of accounts payable.
We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the 12 months beginning July 1, 2022, and beyond such 12-month period based on our current business plan.
Investing Activities
Cash used in investing activities for the six months ended June 30, 2022, was $101 million, compared with $134 million used in investing activities for the same period in 2021. The change in investing cash was driven by lower capital expenditures in 2022 and contribution of our San Diego Shipyard to a joint venture in 2021, partially offset by
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the disposition of our oil and gas business in 2021. For 2022, we expect our capital expenditures for maintenance and sustainment to be approximately 1.0% of annual revenues and our discretionary capital expenditures to be approximately 1.5% to 2.0% of annual revenues.
Financing Activities
Cash used in financing activities for the six months ended June 30, 2022, was $335 million, compared with $169 million used in financing activities for the same period in 2021. The change in financing cash was primarily due to an increase in the repayment of long-term debt of $200 million, an increase of $7 million in employee taxes on certain share-based payment arrangements, and a $2 million increase in cash dividend payments, partially offset by a decrease of $43 million in common stock repurchases.
Free Cash Flow
Free cash flow represents cash provided by operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, net earnings as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. We believe free cash flow is an important liquidity measure for our investors because it provides insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.
The following table reconciles net cash provided by operating activities to free cash flow:
| Six Months Ended June 30 | 2022 vs. 2021 | |||||||||||||||||||
| ($ in millions) | 2022 | 2021 | Dollars | |||||||||||||||||
| Net cash provided by operating activities | $ | 184 | $ | 139 | $ | 45 | ||||||||||||||
| Less capital expenditures: | ||||||||||||||||||||
| Capital expenditure additions | (102) | (134) | 32 | |||||||||||||||||
| Grant proceeds for capital expenditures | — | 2 | (2) | |||||||||||||||||
| Free cash flow | $ | 82 | $ | 7 | $ | 75 | ||||||||||||||
Free cash flow for the six months ended June 30, 2022, increased $75 million from the same period in 2021, primarily due to higher earnings, lower capital expenditures, lower contributions to retiree benefit plans, and lower income tax payments, partially offset by changes in trade working capital and higher interest payments.
Governmental Regulation and Supervision
The U.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies exist in one or more such systems. As of June 30, 2022 and 2021, the cumulative amounts of payments withheld by the U.S. Government under our contracts subject to these regulations were not material to our liquidity or cash flows.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans. As of June 30, 2022, $15 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding. As of June 30, 2022, we had no other significant off-balance sheet arrangements.
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ACCOUNTING STANDARDS UPDATES
See Note 3: Accounting Standards Updates in Part I, Item 1 for information related to accounting standards updates.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Statements in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can generally identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and similar words or phrases or the negative of these words or phrases. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable when made, we cannot guarantee future results, levels of activity, performance, or achievements. There are a number of important factors that could cause our actual results to differ materially from the results anticipated by our forward-looking statements, which include, but are not limited to:
•Changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans);
•Our ability to estimate our future contract costs, including cost increases due to inflation, and perform our contracts effectively;
•Changes in procurement processes and government regulations and our ability to comply with such requirements;
•Our ability to deliver our products and services at an affordable life cycle cost and compete within our markets;
•Natural and environmental disasters and political instability;
•Our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions;
•Adverse economic conditions in the United States and globally;
•Health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic, and the impacts of vaccination mandates on our workforce;
•Our ability to effectively integrate the operations of Alion into our business;
•Disruptions impacting global supply, including those attributable to the ongoing COVID-19 pandemic and those resulting from the ongoing conflict between Russia and Ukraine;
•Changes in key estimates and assumptions regarding our pension and retiree health care costs;
•Security threats, including cyber security threats, and related disruptions; and
•Other risk factors discussed herein and in our other filings with the SEC.
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements. You should not place undue reliance on any forward looking statements that we may make.
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GLOSSARY OF PROGRAMS
Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q.
| Program Name | Program Description | |||||||
America class (LHA 6) amphibious assault ships | Design and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. In 2020, we delivered USS Tripoli (LHA 7), and we were awarded a long-lead-time material and construction contract for LHA 9 (unnamed). We are currently constructing Bougainville (LHA 8). | |||||||
Arleigh Burke class (DDG 51) destroyers | Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. We delivered USS Paul Ignatius (DDG 117), USS Delbert D. Black (DDG 119), and Frank E. Petersen Jr. (DDG121) in 2019, 2020, and 2021, respectively. We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: Lenah H. Sutcliffe Higbee (DDG 123), Jack H. Lucas (DDG 125), Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), John F. Lehman (DDG 137), and DDG 139 (unnamed). | |||||||
| Carrier RCOH | Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS George Washington (CVN 73) arrived at Newport News for the start of its RCOH in August 2017, and USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021. | |||||||
Columbia class (SSBN 826) submarines | Newport News is participating in designing the Columbia class submarine as a replacement for the current aging Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. The Ohio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. The Columbia class program plan of record is to construct 12 new ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, the DoD signed the acquisition decision memorandum approving the Columbia class program’s Milestone B, which formally authorizes the program’s entry into the engineering and manufacturing development phase. We perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) program. Construction of the first Columbia class (SSBN 826) submarine began in 2020. | |||||||
| Defense and federal solutions ("DFS") | Develops integrated solutions that enable today's connected, all–domain force. Capabilities include: C5ISR systems and operations; the application of artificial intelligence ("AI") and machine learning to battlefield decisions; defensive and offensive cyberspace strategies and electronic warfare ("EW"); and live, virtual, and constructive ("LVC") solutions. | |||||||
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| Fleet sustainment | Maintains and modernizes a significant majority of the U.S. Navy fleet, from small watercraft to submarines, combatants, and aircraft carriers, our systems and maintenance experts help the Navy maintain a high state of readiness. Ensures effective system operation and sustainment by actively supporting design and decision–making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products. | |||||||
USS Gerald R. Ford class (CVN 78) aircraft carriers | Design and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead-time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs. | |||||||
Legend class National Security Cutter | Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of 11 ships, of which the first nine ships have been delivered. Calhoun (NSC 10) and Friedman (NSC 11) are currently under construction. | |||||||
| Naval nuclear support services | Provide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes. | |||||||
| Nuclear and environmental services | Supports the national security mission of the Department of Energy ("DoE") through the management and operation of its sites, as well as the safe cleanup of legacy waste across the country. We meet our clients' toughest nuclear and environmental challenges and are positioned to serve the growing commercial nuclear power plant decommissioning market. We participate in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE’s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE’s Los Alamos National Laboratory. | |||||||
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San Antonio class (LPD 17) amphibious transport dock ships | Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. In 2022, we delivered Fort Lauderdale (LPD 28). We are currently constructing Richard M. McCool Jr. (LPD 29) and Harrisburg (LPD 30). In 2020, we were awarded a contract to construct Pittsburgh (LPD 31). | |||||||
| Unmanned systems | Creates advanced unmanned maritime solutions for defense, marine research, and commercial applications. Serving customers in more than 30 countries, unmanned systems provides design, autonomy, manufacturing, testing, operations, and sustainment of unmanned systems, including unmanned underwater vehicles and unmanned surface vessels. | |||||||
Virginia class (SSN 774) fast attack submarines | Construct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare. | |||||||
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk, primarily related to interest rates and foreign currency exchange rates.
Interest Rates - Our floating rate financial instruments subject to interest rate risk include a $650 million Term Loan, a $1.5 billion Revolving Credit Facility, and a $1 billion commercial paper program. As of June 30, 2022, we had $425 million outstanding on the Term Loan and no indebtedness outstanding under our Revolving Credit Facility or our commercial paper program. Based on the amounts outstanding under our Term Loan as of June 30, 2022, an increase of 1% in interest rates would increase the interest expense on our debt by approximately $4 million on an annual basis.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30, 2022. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
On August 19, 2021, the Company completed the acquisition of Alion. The Company is in the process of implementing its internal control structure over Alion operations, and the process must be completed within one year of the acquisition.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We have provided information about legal proceedings in which we are involved in the unaudited condensed consolidated financial statements in Part I, Item 1, which is incorporated herein by reference. In addition to the matters disclosed in Part I, Item 1, we are a party to various investigations, lawsuits, claims, and other legal proceedings that arise in the ordinary course of our business. Based on information available to us, we do not believe at this time that any of such other matters will individually, or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows. For further information on the risks we face from existing and future investigations, lawsuits, claims, and other legal proceedings, please see "Risk Factors" in Item 1A below.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10–Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2021 Form 10–K, which could materially affect our business, financial condition, or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases under our stock repurchase program are made from time to time at management's discretion in accordance with applicable federal securities laws. All repurchases of HII common stock have been recorded as treasury stock. The following table summarizes information relating to purchases made by or on behalf of the Company of shares of the Company's common stock during the quarter ended June 30, 2022.
| Period | Total Number of Shares Purchased1 | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)2, 3 | ||||||||||||||||||||||
| April 1, 2022 to April 30, 2022 | 9,754 | $ | 208.87 | 9,050 | $ | 1,029.2 | ||||||||||||||||||||
| May 1, 2022 to May 31, 2022 | 14,084 | 205.83 | 14,084 | 1,026.3 | ||||||||||||||||||||||
| June 1, 2022 to June 30, 2022 | 57,558 | 211.96 | 57,323 | 1,014.2 | ||||||||||||||||||||||
| Total | 81,396 | $ | 210.53 | 80,457 | $ | 1,014.2 | ||||||||||||||||||||
1We purchased an aggregate of 80,457 shares of our common stock in the open market pursuant to our repurchase program and 939 shares were transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted performance stock rights during the period.
2 From the stock repurchase program's inception through June 30, 2022, we have purchased 13,526,306 shares at an average price of $161.60 per share for a total of $2.2 billion.
3 In October 2012, we commenced our stock repurchase program. In November 2019, we announced an increase in the stock repurchase program to $3.2 billion and an extension of the term to October 31, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 3.5 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | The following financial information for the Company, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) the Condensed Consolidated Statements of Financial Position, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Changes in Equity, and (v) the Notes to Condensed Consolidated Financial Statements. | |||||||
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | August 4, 2022 | Huntington Ingalls Industries, Inc. | |||||||||
| (Registrant) | |||||||||||
| By: | /s/ Nicolas Schuck | ||||||||||
| Nicolas Schuck | |||||||||||
| Corporate Vice President, Controller and Chief Accounting Officer | |||||||||||
| (Duly Authorized Officer and Principal Accounting Officer) | |||||||||||
39
Exhibit 10.2 HUNTINGTON INGALLS INDUSTRIES, INC. TERMS AND CONDITIONS APPLICABLE TO 20_ RESTRICTED PERFORMANCE STOCK RIGHTS GRANTED UNDER THE 2022 LONG-TERM INCENTIVE STOCK PLAN ("PLAN") These Terms and Conditions ("Terms") apply to certain "Restricted Performance Stock Rights" ("RPSRs") granted by Huntington Ingalls Industries, Inc. (the "Company") in 20 _. If you were granted an RPSR award by the Company in 2021, the date of grant of your RPSR award and the target number ofRPSRs applicable to your award are set forth in the letter from the Company announcing your RPSR award grant (your "Grant Letter") and are also reflected in the electronic stock plan award recordkeeping system ("Stock Plan System") maintained by the Company or its designee. These Terms apply only with respect to your 20 _ RPSR award. If you were granted an RPSR award, you are referred to as the "Grantee" with respect to your award. Capitalized terms are generally defined in the Plan, unless defined in Section 9 below or elsewhere defined herein. Each RPSR represents a right to receive one Share of the Company's common stock, or cash of equivalent value as provided herein, subject to vesting as provided herein. The performance period applicable to your award is January I, 20_ to December 31, 20_ 4 (the "Performance Period"). The target number ofRPSRs subject to your award is subject to adjustment as provided herein. The RPSR award is subject to all of the terms and conditions set forth in these Terms, and is forther subject to all of the terms and conditions of the Plan, as it may be amended from time to time, and any rules adopted by the Committee, as such rules are in effect from time to time. 1. Vesting; Payment of RPSRs. The RPSRs are subject to the vesting and payment provisions established ( or to be established, as the case may be) by the Committee with respect to the Performance Period. RPSRs that vest based on such provisions will be paid as provided below. No fractional shares will be issued. 1.1 Performance-Based Vesting of RPSRs. At the conclusion of the Performance Period, the Committee shall determine whether and the extent to which the applicable performance criteria have been achieved for purposes of determining earnouts and RPSR payments. Based on its determination, the Committee shall determine the percentage of target RPSRs subject to the award (if any) that have vested for the Performance Period in accordance with the earnout schedule established (or to be established, as the case may be) by the Committee with respect to the Performance Period (the "Earnout Percentage"). Any RPSRs subject to the award that are not vested as of the conclusion of the Performance Period after giving effect to the Committee's determinations under this Section 1.1 shall terminate and become null and void immediately following such determinations. 1.2 Payment of RPSRs. The number of RPS Rs payable at the conclusion of the Performance Period ("Earned RPSRs") shall be determined by multiplying the Earnout Percentage by the target number ofRPSRs subject to the award. The Earned RPSRs may be paid out in either an equivalent number of Shares of common stock, or, in the discretion of the Committee, in cash or in a combination of Shares of common stock and cash. In the event of a cash payment, the amount of the payment for each Earned RPSR to be paid in cash will equal the Fair Market Value of a Share of common stock as of the date the Committee determines the extent to which the applicable RPSR performance criteria have been achieved. RPSRs will be paid in the calendar year following the calendar year containing the last day of the Performance Period (and generally will be paid on or before March 15 of such year). 2. Early Termination of Award; Termination of Employment. 2.1 General. The RPSRs subject to the award shall terminate and become null and void prior to the conclusion of the Performance Period if and when (a) the award terminates in connection with a Change in Control pursuant to Section 5 below, or (b) except as provided below in this Section 2 and in Section 5, the Grantee ceases for any reason to be an employee of the Company or one of its subsidiaries. 2.2 Termination of Employment Due to Retirement, Death, Disability, or Layoff. The number of RPSRs subject to the award shall vest on a prorated basis as provided herein if the Grantee's
Exhibit 10.3 HUNTINGTON INGALLS INDUSTRIES, INC. TERMS AND CONDITIONS APPLICABLE TO 20_ RESTRICTED STOCK RIGHTS GRANTED UNDER THE 2022 LONG-TERM INCENTIVE STOCK PLAN ("PLAN") These Terms and Conditions ("Terms") apply to certain "Restricted Stock Rights" ("RSRs") granted by Huntington Ingalls Industries, Inc. (the "Company") in 20 _. If you were granted an RSR award by the Company in 20 � the date of grant ofyonr RSR award (the "Grant Date") and the nnrnber ofRSRs applicable to your award are set forth in the letter from the Company announcing your RSR award grant (your "Grant Letter") and are also reflected in the electronic stock plan award recordkeeping system ("Stock Plan System") maintained by the Company or its designee. These Terms apply only with respect to the 20 _ RSR award. If you were granted an RSR award, you are referred to as the "Grantee" with respect to your award. Capitalized terms are generally defined in the Plan, unless defined in Section 9 below or elsewhere defined herein. Each RSR represents a right to receive one Share of the Company's common stock, or cash of equivalent value as provided herein, subject to vesting as provided herein. The number of RSRs subject to your award is subject to adjustment as provided herein. The RSR award is subject to all of the terms and conditions set forth in these Terms, and is further subject to all of the terms and conditions of the Plan, as it may be amended from time to time, and any rules adopted by the Committee, as such rules are in effect from time to time. 1. Vesting; Issuance of Shares. Subject to Sections 2 and 5 below, one hundred percent (100%) of the nnrnber ofRSRs subject to your award (subject to adjustment as provided in Section 5.1) shall vest upon the first anniversary of the Grant Date. Except as otherwise provided below, the Company shall pay a vested RSR within 2.5 months following the vesting of the RSR on the first anniversary of the Grant Date. The Company shall pay such vested RSRs in either an equivalent number of Shares of common stock, or, in the discretion of the Committee, in cash or in a combination of Shares of common stock and cash. In the event ofa cash payment, the amount of the payment for a vested RSR to be paid in cash (subject to tax withholding as provided in Section 6 below) will equal the Fair Market Value ofa Share of common stock as of the date that such RSR became vested. No fractional shares will be issued. 2. Early Termination of Award; Termination of Employment. 2.1 General. The RSRs subject to the award, to the extent not previously vested, shall terminate and become null and void if and when (a) the award terminates in connection with a Change in Control pursuant to Section 5 below, or (b) except as provided in Section 2.6 and in Section 5, the Grantee ceases for any reason to be an employee of the Company or one ofits subsidiaries. 2.2 Leave of Absence. Unless the Committee otherwise provides ( at the time of the leave or otherwise), if the Grantee is granted a leave of absence by the Company, the Grantee (a) shall not be deemed to have incurred a termination of employment at the time such leave commences for purposes of the award, and (b) shall be deemed to be employed by the Company for the duration of such approved leave of absence for purposes of the award. A termination of employment shall be deemed to have occurred if the Grantee does not timely return to active employment upon the expiration of such approved leave or if the Grantee commences a leave that is not approved by the Company. 2.3 Salary Continuation. Subject to Section 2.2 above, the term "employment" as used herein means active employment by the Company and salary continuation without active employment (other than a leave of absence approved by the Company that is covered by Section 2.2) will not, in and of itself, constitute "employment" for purposes hereof (in the case of salary continuation without active employment, the Grantee's cessation of active employee status shall, subject to Section 2.2, be deemed to be a termination of "employment" for purposes hereof). Furthermore, salary continuation will not, in and of itself, constitute a leave of absence approved by the Company for purposes of the award. 2.4 Sale or Spinoff of Subsidiary or Business Unit. For purposes of the RSRs subject to the award, a termination of employment of the Grantee shall be deemed to have occurred if the Grantee is employed by a subsidiary or business unit and that subsidiary or business unit is sold, spun off, or otherwise divested, the Grantee does not otherwise continue to be employed by the Company after such event, and the divested entity or business (or its successor or a parent company) does not assume the award in connection with such transaction.
Exhibit 10.4 HUNTINGTON INGALLS INDUSTRIES, INC. TERMS AND CONDITIONS APPLICABLE TO 20_ RESTRICTED STOCK RIGHTS GRANTED UNDER THE 2022 LONG-TERM INCENTIVE STOCK PLAN ("PLAN") These Terms and Conditions ("Terms") apply to certain "Restricted Stock rughts" ("RSRs") granted by Huntington Ingalls Industries, Inc. (the "Company") in 20 _. If you were granted an RSR award by the Company in 20 � the date of grant of your RSR award (the "Grant Date") and the number ofRSRs applicable to your award are set forth in the letter from the Company announcing your RSR award grant (your "Grant Letter") and are also reflected in the electronic stock plan award recordkeeping system ("Stock Plan System") maintained by the Company or its designee. These Terms apply only with respect to the 20 _ RSR award. If you were granted an RSR award, you are referred to as the "Grantee" with respect to your award. Capitalized terms are generally defined in the Plan, unless defined in Section 9 below orelsewhere herein. Each RSR represents a right to receive one Share of the Company's common stock, or cash of equivalent value as provided herein, subject to vesting as provided herein. The number of RSRs subject to your award is subject to adjustment as provided herein. The RSR award is subject to all of the terms and conditions set forth in these Terms, and is further subject to all of the terms and conditions of the Plan, as it may be amended from time to time, and any rules adopted by the Committee, as such rules are in effect from time to time. 1. Vesting; Issuance of Shares. Subject to Sections 2 and 5 below, one hundred percent (100%) of the number ofRSRs subject to your award (subject to adjustment as provided in Section 5.1) shall vest upon the second anniversary of the Grant Date. Except as otherwise provided below, the Company shall pay a vested RSR within 2.5 months following the vesting of the RSR on the second anniversary of the Grant Date. The Company shall pay such vested RSRs in either an equivalent number of Shares of common stock, or, in the discretion of the Committee, in cash or in a combination of Shares of common stock and cash. In the event ofa cash payment, the amount of the payment for a vested RSR to be paid in cash (subject to tax withholding as provided in Section 6 below) will equal the Fair Market Value of a Share of common stock as of the date that such RSR became vested. No fractional shares will be issued. 2. Early Termination of Award; Termination of Employment. 2.1 General. The RSRs subject to the award, to the extent not previously vested, shall terminate and become null and void if and when ( a) the award terminates in connection with a Change in Control pursuant to Section 5 below, or (b) except as provided in Section 2.6 and in Section 5, the Grantee ceases for any reason to be an employee of the Company or one ofits subsidiaries. 2.2 Leave of Absence. Unless the Committee otherwise provides ( at the time of the leave or otherwise), if the Grantee is granted a leave of absence by the Company, the Grantee (a) shall not be deemed to have incurred a termination of employment at the time such leave commences for purposes of the award, and (b) shall be deemed to be employed by the Company for the duration of such approved leave of absence for purposes of the award. A termination of employment shall be deemed to have occurred if the Grantee does not timely return to active employment upon the expiration of such approved leave or if the Grantee commences a leave that is not approved by the Company. 2.3 Salary Continuation. Subject to Section 2.2 above, the term "employment" as used herein means active employment by the Company and salary continuation without active employment (other than a leave of absence approved by the Company that is covered by Section 2.2) will not, in and of itself, constitute "employment" for purposes hereof (in the case of salary continuation without active employment, the Grantee's cessation of active employee status shall, subject to Section 2.2, be deemed to be a termination of "employment" for purposes hereof). Furthermore, salary continuation will not, in and of itself, constitute a leave of absence approved by the Company for purposes of the award. 2.4 Sale or Spino ff of Subsidiary or Business Unit. For purposes of the RS Rs subject to the award, a termination of employment of the Grantee shall be deemed to have occurred if the Grantee is employed by a subsidiary or business unit and that subsidiary or business unit is sold, spun off, or otherwise divested, the Grantee does not otherwise continue to be employed by the Company after such event, and the divested entity or business (or its successor or a parent company) does not assume the award in connection with such transaction.
Exhibit 10.5 HUNTINGTON INGALLS INDUSTRIES, INC. TERMS AND CONDITIONS APPLICABLE TO 20 RESTRICTED STOCK RIGHTS GRANTED UNDER THE 2022 LONG-TERM INCENTIVE STOCK PLAN ("PLAN") These Terms and Conditions (''Terms") apply to certain "Restricted Stock Rights" ("RSRs") granted by Huntington Ingalls Industries, Inc. (the "Company") in 20 _. If you were granted an RSR award by the Company in 20 � the date of grant of your RSR award (the "Grant Date") and the number ofRSRs applicable to your award are set forth in the letter from the Company armouncing your RSR award grant (your "Grant Letter") and are also reflected in the electronic stock plan award recordkeeping system ("Stock Plan System") maintained by the Company or its designee. These Terms apply only with respect to the 20_ RSR award. If you were granted an RSR award, you are referred to as the "Grantee" with respect to your award. Capitalized terms are generally defined in the Plan, unless defined in Section 9 below or elsewhere defined herein. Each RSR represents a right to receive one Share of the Company's common stock, or cash of equivalent value as provided herein, subject to vesting as provided herein. The number of RSRs subject to your award is subject to adjustment as provided herein. The RSR award is subject to all of the terms and conditions set forth in these Terms, and is further subject to all of the terms and conditions of the Plan, as it may be amended from time to time, and any rules adopted by the Committee, as such rules are in effect from time to time. 1. Vesting; Issuance of Shares. Subject to Sections 2 and 5 below, one hundred percent (100%) of the number ofRSRs subject to your award (subject to adjustment as provided in Section 5.1) shall vest upon the third anniversary of the Grant Date. Except as otherwise provided below, the Company shall pay a vested RSR within 2.5 months following the vesting of the RSR on the third anniversary of the Grant Date. The Company shall pay such vested RSRs in either an equivalent number of Shares of common stock, or, in the discretion of the Committee, in cash or in a combination of Shares of common stock and cash. In the event of a cash payment, the amount of the payment for a vested RSR to be paid in cash (subject to tax withholding as provided in Section 6 below) will equal the Fair Market Value of a Share of common stock as of the date that such RSR became vested. No fractional shares will be issued. 2. Early Termination of Award; Termination of Employment. 2.1 General. The RSRs subject to the award, to the extent not previously vested, shall terminate and become null and void if and when (a) the award terminates in connection with a Change in Control pursuant to Section 5 below, or (b) except as provided in Section 2.6 and in Section 5, the Grantee ceases for any reason to be an employee of the Company or one of its subsidiaries. 2.2 Leave of Absence. Unless the Committee otherwise provides ( at the time of the leave or otherwise), if the Grantee is granted a leave of absence by the Company, the Grantee (a) shall not be deemed to have incurred a termination of employment at the time such leave commences for purposes of the award, and (b) shall be deemed to be employed by the Company for the duration of such approved leave of absence for purposes of the award. A termination of employment shall be deemed to have occurred if the Grantee does not timely return to active employment upon the expiration of such approved leave or if the Grantee commences a leave that is not approved by the Company. 2.3 Salary Continuation. Subject to Section 2.2 above, the term "employment" as used herein means active employment by the Company and salary continuation without active employment (other than a leave of absence approved by the Company that is covered by Section 2.2) will not, in and of itself, constitute "employment" for purposes hereof (in the case of salary continuation without active employment, the Grantee's cessation of active employee status shall, subject to Section 2.2, be deemed to be a termination of "employment'' for purposes hereof). Furthermore, salary continuation will not, in and of itself, constitute a leave of absence approved by the Company for purposes of the award. 2.4 Sale or Spinoff of Subsidiary or Business Unit. For purposes of the RSRs subject to the award, a termination of employment of the Grantee shall be deemed to have occurred if the Grantee is employed by a subsidiary or business unit and that subsidiary or business unit is sold, spun off, or otherwise divested, the Grantee does not otherwise continue to be employed by the Company after such event, and the divested entity or business (or its successor or a parent company) does not assume the award in connection with such transaction.
Exhibit 10.6 HUNTINGTON INGALLS INDUSTRIES, INC. TERMS AND CONDITIONS APPLICABLE TO NON-EMPLOYEE DIRECTOR STOCK GRANT UNDER THE 2022 LONG-TERM INCENTIVE STOCK PLAN ("Plan") These Terms and Conditions ("Terms") apply to Shares of the Company's common stock granted by Huntington Ingalls Industries, Inc. (the "Company'') to its directors who are not employed by the Company or one of its subsidiaries. The grants are made pursuant to the terms of the Directors' Compensation Policy. The date of grant of the Shares of common stock (the "Grant Date") and the number of shares applicable to your award are set forth in the electronic stock plan award recordkeeping system ("Stock Plan System") maintained by the Company or its designee. These Terms apply only with respect to the Shares of common stock referred to above that is granted pursuant to the Directors' Compensation Policy. If you are entitled to grants of such Shares of common stock, you are referred to as the "Director" with respect to your award. Capitalized terms are generally defined in the Plan, unless defined in Section 7 below or otherwise defined herein. The Share award is subject to all of the terms and conditions set forth in these Terms, and is further subject to all of the terms and conditions of the Plan, as it may be amended from time to time, and any rules adopted by the Board, as such rules are in effect from time to time. 1. Vested Status; Payment of Shares. The Shares subject to your award shall be one hundred percent (100%) vested as of the Grant Date. The Shares shall be paid to the Director on or after each quarterly Grant Date under the Directors' Compensation Policy. 2. Transferability. The award is non-transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge. The foregoing transfer restrictions shall not apply to: (a) transfers to the Company; or (b) transfers pursuant to a qualified domestic relations order ( as defined in the Code). Notwithstanding the foregoing, the Company may honor any transfer required pursuant to the terms of a court order in a divorce or similar domestic relations matter to the extent that such transfer does not adversely affect the Company's ability to register the offer and sale of the underlying shares on a Form S-8 Registration Statement and such transfer is otherwise in compliance with all applicable legal, regulatory and listing requirements. Upon issuance, the Shares shall not be subject to any restrictions on transferability, other than compliance with the ownership guidelines under the Directors' Compensation Policy. 3. Compliance with Laws; No Stockholder Rights Prior to Issuance; Dividend Rights. 3.1 Compliance with Laws. The Company's obligation to issue any shares with respect to the award is subject to full compliance with all then applicable requirements oflaw, the Securities and Exchange Commission or other regulatory agencies having jurisdiction over the Company and its shares, and of any exchange upon which stock of the Company may be listed. 3.2 Rights Associated with Shares. The Director shall have all the rights and privileges of a stockholder, including without limitation the right to vote or receive dividends, for any shares upon issuance. 4. Adjustments. The Shares are subject to adjustment upon the occurrence of events such as stock splits, stock dividends and other changes in capitalization consistent with all other issued and outstanding shares of common stock, as specified in the Plan. 5. Tax Matters. 5.1 Tax Withholding. The Company shall be entitled to require, as a condition of making any payments or issuing any shares upon payment of the Stock Units, that the Director or other person entitled to such shares or other payment pay any sums required to be withheld by federal, state, local or other applicable tax law with respect to such payment. Alternatively, the Company, in its discretion, may make such provisions for the withholding of taxes (if any such withholding is required) as it deems appropriate (including, without limitation, withholding the taxes due from compensation otherwise payable to the Director or reducing the number of shares otherwise deliverable with respect to the award (valued at their then Fair Market Value) by the amount necessary to satisfy any such withholding obligations at the flat percentage rates applicable to supplemental wages). 5.2 Transfer Taxes. The Company will pay all federal and state transfer taxes, if any, and other fees and
Exhibit 31.1
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher D. Kastner, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Huntington Ingalls Industries, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 4, 2022
| /s/ Christopher D. Kastner | |||||
| Christopher D. Kastner | |||||
| President and Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13A-14(A)/15D-14(A)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas E. Stiehle, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Huntington Ingalls Industries, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 4, 2022
| /s/ Thomas E. Stiehle | |||||
Thomas E. Stiehle | |||||
| Executive Vice President and Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Huntington Ingalls Industries, Inc. (the “company”) on Form 10-Q for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Christopher D. Kastner, the President and Chief Executive Officer of the company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
Date: August 4, 2022
| /s/ Christopher D. Kastner | |||||
| Christopher D. Kastner | |||||
| President and Chief Executive Officer | |||||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Huntington Ingalls Industries, Inc. (the “company”) on Form 10-Q for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas E. Stiehle, Executive Vice President and Chief Financial Officer of the company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the company.
Date: August 4, 2022
| /s/ Thomas E. Stiehle | |||||
Thomas E. Stiehle | |||||
| Executive Vice President and Chief Financial Officer | |||||
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