8-K
HUNTINGTON INGALLS INDUSTRIES, INC. (HII)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 8-K
_____________________________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
November 3, 2022
_____________________________________
HUNTINGTON INGALLS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
_____________________________________
| Delaware | 001-34910 | 90-0607005 |
|---|---|---|
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
| 4101 Washington Avenue | ||
| Newport News | Virginia | 23607 |
| (Address of principal executive offices) | (Zip Code) |
(757) 380-2000
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common Stock | HII | New York Stock Exchange |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | |||
|---|---|---|---|---|
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | |||
| --- | --- | ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | |
| --- | --- | ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | |
| --- | --- |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. ☐
| Item 2.02. | Results of Operations and Financial Condition. |
|---|
On November 3, 2022, Huntington Ingalls Industries, Inc. issued a press release announcing its financial results for the quarter ended September 30, 2022. A copy of the press release is furnished as Exhibit 99.1 hereto. Also furnished as Exhibit 99.2 is the corporation’s earnings presentation for the third quarter 2022 earnings release conference call.
| Item 9.01. | Financial Statements and Exhibits. |
|---|---|
| (d) | Exhibits. |
| Exhibit No. | Description |
| --- | --- |
| 99.1 | Press Release datedNovember 3, 2022. |
| 99.2 | Earnings Presentation datedNovember 3, 2022. |
| 104 | Cover Page Interactive Data File (embedded within Inline XBRL document) |
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 hereunto duly authorized.
| HUNTINGTON INGALLS INDUSTRIES, INC. | ||
|---|---|---|
| November 3, 2022 | By: | /s/ Thomas E. Stiehle |
| Thomas E. Stiehle | ||
| Executive Vice President and Chief Financial Officer |
Document
| Exhibit 99.1<br><br><br><br>News Release |
|---|
Contacts:
Brooke Hart (Media)
brooke.hart@hii-co.com
202-264-7108
Christie Thomas (Investors)
christie.thomas@hii-co.com
757-380-2104
HII Reports Third Quarter 2022 Results
•Revenues were $2.6 billion in the quarter
•Net earnings of $138 million or $3.44 diluted earnings per share
•Narrows FY22 revenue guidance ranges
•Reaffirms shipbuilding operating margin1 guidance, revises Mission Technologies operating margin guidance
•Increases FY22 free cash flow1 guidance and updates for current R&D tax treatment
NEWPORT NEWS, Va. (November 3, 2022) - HII (NYSE:HII) reported third quarter 2022 revenues of $2.6 billion, up 12.3% from the third quarter of 2021, primarily driven by revenue attributable to the acquisition of Alion Science and Technology (Alion) in the third quarter of 2021, as well as revenue growth at Newport News Shipbuilding.
Operating income in the third quarter of 2022 was $131 million and operating margin was 5.0%, compared to $118 million and 5.0%, respectively, in the third quarter of 2021. The increase in operating income was primarily driven by favorable changes to non-current state income taxes and operating FAS/CAS adjustment compared to the prior year, as well as higher segment operating income1.
Segment operating income1 in the third quarter of 2022 was $166 million and segment operating margin1 was 6.3%, compared to $163 million and 7.0%, respectively, in the third quarter of 2021. The increase in segment operating income1 was driven primarily by improved results at Newport News Shipbuilding.
Net earnings in the quarter were $138 million, compared to $147 million in the third quarter of 2021. Diluted earnings per share in the quarter was $3.44, compared to $3.65 in the third quarter of 2021. The decrease in diluted earnings per share was driven by a significant tax benefit in the prior year, as well as negative impacts related to equity investments in the current quarter, partially offset by a more favorable non-operating retirement benefit in the current quarter.
Net cash used in operating activities in the quarter was $19 million and free cash flow1 was negative $96 million, compared to cash provided by operating activities of $350 million and free cash flow1 of $277 million in the third quarter of 2021.
New contract awards in the third quarter of 2022 were approximately $2.1 billion, bringing total backlog to approximately $46.7 billion as of September 30, 2022.
“Notwithstanding a continued challenging economic environment, we remain focused on consistent shipbuilding program execution and capturing contract awards at our Mission Technologies division,” said Chris Kastner, HII’s president and CEO. "We are confident in the positioning of the business for long-term value creation given the tremendous volume of shipbuilding work we have secured in backlog and a Mission Technologies division that is poised for growth in markets of critical importance to our customers."
1Non-GAAP measures. See Exhibit B for definitions and reconciliations.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 1 of 12
Results of Operations
| Three Months Ended | Nine Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||||||||||||
| ($ in millions, except per share amounts) | 2022 | 2021 | Change | % Change | 2022 | 2021 | Change | % Change | ||||||||||
| Sales and service revenues | $ | 2,626 | $ | 2,338 | 12.3 | % | $ | 7,864 | $ | 6,847 | 14.9 | % | ||||||
| Operating income | 131 | 118 | 13 | 11.0 | % | 460 | 393 | 67 | 17.0 | % | ||||||||
| Operating margin % | 5.0 | % | 5.0 | % | (6) bps | 5.8 | % | 5.7 | % | 11 bps | ||||||||
| Segment operating income1 | 166 | 163 | 3 | 1.8 | % | 567 | 523 | 44 | 8.4 | % | ||||||||
| Segment operating margin %1 | 6.3 | % | 7.0 | % | (65) bps | 7.2 | % | 7.6 | % | (43) bps | ||||||||
| Net earnings | 138 | 147 | (9) | (6.1) | % | 456 | 424 | 32 | 7.5 | % | ||||||||
| Diluted earnings per share | $ | 3.44 | $ | 3.65 | (5.8) | % | $ | 11.37 | $ | 10.52 | 8.1 | % | ||||||
| 1 Non-GAAP measures that exclude non-segment factors affecting operating income. See Exhibit B for definitions and reconciliations. |
All values are in US Dollars.
Segment Operating Results
Ingalls Shipbuilding
| Three Months Ended | Nine Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||||||||||||
| ($ in millions) | 2022 | 2021 | Change | % Change | 2022 | 2021 | Change | % Change | ||||||||||
| Revenues | $ | 623 | $ | 628 | (0.8) | % | $ | 1,912 | $ | 1,947 | (1.8) | % | ||||||
| Segment operating income1 | 50 | 62 | (12) | (19.4) | % | 242 | 233 | 9 | 3.9 | % | ||||||||
| Segment operating margin %1 | 8.0 | % | 9.9 | % | (185) bps | 12.7 | % | 12.0 | % | 69 bps | ||||||||
| 1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. |
All values are in US Dollars.
Ingalls Shipbuilding revenues for the third quarter of 2022 were $623 million, a decrease of $5 million, or 0.8%, from the same period in 2021, primarily driven by lower revenues in the Legend-class National Security Cutter (NSC) program and amphibious assault ships, partially offset by higher revenues in surface combatants. Revenues on the NSC program decreased due to lower volumes on Friedman (NSC 11) and Calhoun (NSC 10). Revenues on amphibious assault ships decreased due to lower volumes on USS Fort Lauderdale (LPD 28), partially offset by higher volumes on LHA 9 (unnamed). Revenues on surface combatants increased due to higher volumes on Thad Cochran (DDG 135) and Telesforo Trinidad (DDG 139), partially offset by lower volumes on Frank E. Petersen Jr. (DDG 121), Jeremiah Denton (DDG 129) and Ted Stevens (DDG 128).
Ingalls Shipbuilding segment operating income1 for the third quarter of 2022 was $50 million, a decrease of $12 million from the same period in 2021. Segment operating margin1 in the third quarter of 2022 was 8.0%, compared to 9.9% in the same period last year. The decreases were primarily driven by lower risk retirement on Ted Stevens (DDG 128) and USS Delbert D. Black (DDG 119) related to a capital expenditure incentive received in the third quarter of 2021, partially offset by higher risk retirement on USS Portland (LPD 27).
Key Ingalls Shipbuilding milestones for the quarter:
•Awarded a design engineering contract for the next-generation guided-missile destroyer - DDG(X)
•Authenticated the keel of guided-missile destroyer Jeremiah Denton (DDG 129)
•Awarded a contract to begin combat systems availability for the Zumwalt-class destroyer, Lyndon B. Johnson (DDG 1002)
•Began fabrication of amphibious transport dock Pittsburgh (LPD 31)
1Non-GAAP measures. See Exhibit B for definitions and reconciliations.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 2 of 12
Newport News Shipbuilding
| Three Months Ended | Nine Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||||||||||||
| ($ in millions) | 2022 | 2021 | Change | % Change | 2022 | 2021 | Change | % Change | ||||||||||
| Revenues | $ | 1,445 | $ | 1,354 | 6.7 | % | $ | 4,268 | $ | 4,124 | 3.5 | % | ||||||
| Segment operating income1 | 102 | 88 | 14 | 15.9 | % | 277 | 257 | 20 | 7.8 | % | ||||||||
| Segment operating margin %1 | 7.1 | % | 6.5 | % | 56 bps | 6.5 | % | 6.2 | % | 26 bps | ||||||||
| 1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. |
All values are in US Dollars.
Newport News Shipbuilding revenues for the third quarter of 2022 were $1.4 billion, an increase of $91 million, or 6.7%, from the same period in 2021, primarily driven by higher revenues in naval nuclear support services, submarines and aircraft carriers. Naval nuclear support services revenues increased primarily as a result of higher volumes in submarine and carrier fleet support services. Submarine revenues increased due to higher volumes on the Columbia-class submarine program and Block V boats of the Virginia-class submarine (VCS) program, partially offset by lower volumes on submarine services and Block IV boats of the VCS program. Aircraft carrier revenues increased primarily as a result of higher volumes on the refueling and complex overhaul (RCOH) of USS John C. Stennis (CVN 74), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73).
Newport News Shipbuilding segment operating income1 for the third quarter of 2022 was $102 million, an increase of $14 million from the same period in 2021. Segment operating margin1 in the third quarter of 2022 was 7.1%, compared to 6.5% in the same period last year. The increases were primarily due to contract incentives on the Columbia-class submarine program, partially offset by lower risk retirement on the VCS program.
Key Newport News Shipbuilding milestones for the quarter:
•Achieved pressure hull complete on Virginia-class submarine Massachusetts (SSN 798)
•Celebrated the ceremonial keel laying of aircraft carrier Enterprise (CVN 80)
•Reached approximate 98% completion of the RCOH of USS George Washington (CVN 73)
•Reached approximate 87% completion of John F. Kennedy (CVN 79)
•Turned over the 1,000th compartment of 2,615 total spaces to the crew of John F. Kennedy (CVN 79)
Mission Technologies
| Three Months Ended | Nine Months Ended | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||||||||||||
| ($ in millions) | 2022 | 2021 | Change | % Change | 2022 | 2021 | Change | % Change | ||||||||||
| Revenues | $ | 595 | $ | 394 | 51.0 | % | $ | 1,785 | $ | 890 | 100.6 | % | ||||||
| Segment operating income1 | 14 | 13 | 1 | 7.7 | % | 48 | 33 | 15 | 45.5 | % | ||||||||
| Segment operating margin %1 | 2.4 | % | 3.3 | % | (95) bps | 2.7 | % | 3.7 | % | (102) bps | ||||||||
| 1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. |
All values are in US Dollars.
Mission Technologies revenues for the third quarter of 2022 were $595 million, an increase of $201 million from the same period in 2021. The increase was primarily due to higher volumes in Defense & Federal Solutions (DFS) attributable to the acquisition of Alion, which was completed on August 19, 2021.
Mission Technologies segment operating income1 for the third quarter of 2022 was $14 million, compared to $13 million in the third quarter of 2021. Segment operating margin1 in the third quarter of 2022 was 2.4%, compared to 3.3% in the same period last year. The increase in segment operating income1 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 in 2022.
The decrease in segment operating margin1 was primarily driven by approximately $24 million of amortization of Alion related purchased intangible assets in the third quarter of 2022, compared to approximately $8 million in the same period last year. Mission Technologies EBITDA margin1 in the third quarter of 2022 was 8.4%.
1Non-GAAP measures. See Exhibit B for definitions and reconciliations.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 3 of 12
Key Mission Technologies milestones for the quarter:
•Awarded a task order to provide spectrum assessments across technical, policy and strategy areas for the U.S. DoD Chief Information Officer
•Awarded an $826 million task order to provide Decisive Mission Actions and Technology Services (DMATS) to U.S. DoD
•Awarded a $127 million task order to support the Defense Security Cooperation Agency (DSCA) to perform research, development, test and evaluation of emerging technologies
1Non-GAAP measures. See Exhibit B for definitions and reconciliations.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 4 of 12
2022 Financial Outlook1
•Expect FY22 revenue at lower end of previous guidance ranges given challenging labor environment and timing of material delivery
•Expect FY22 shipbuilding revenue2 between $8.2 and $8.3 billion, shipbuilding operating margin2 between 8.0% and 8.1%
•Expect FY22 Mission Technologies revenue of approximately $2.4 billion, segment operating margin2 of approximately 2.3%; and Mission Technologies EBITDA margin2 of approximately 8.3%
•Expect FY22 free cash flow2 of approximately $350 million4 based on current tax law
•Expect cumulative FY20-FY24 free cash flow2 of approximately $2.9 billion4
| Prior <br>Outlook | Current Outlook | |
|---|---|---|
| Shipbuilding Revenue2 | $8.2B - $8.5B | $8.2B - $8.3B |
| Shipbuilding Operating Margin2 | 8.0% - 8.1% | 8.0% - 8.1% |
| Mission Technologies Revenue | $2.4B - $2.6B | ~$2.4B |
| Mission Technologies Segment Operating Margin2 | ~2.5% | ~2.3% |
| Mission Technologies EBITDA Margin2 | 8.0% - 8.5% | ~8.3% |
| Operating FAS/CAS Adjustment | ($143M) | ($143M) |
| Non-current State Income Tax Expense3 | ($5M) | ($5M) |
| Interest Expense | ($102M) | ($106M) |
| Non-operating Retirement Benefit | $273M | $276M |
| Effective Tax Rate | ~21% | ~19% |
| Depreciation & Amortization | $365M | $365M |
| Capital Expenditures | 2.5% - 3.0% <br>of Sales | 2.5% - 3.0% <br>of Sales |
| Free Cash Flow2 based on current tax law4 | $200M - $250M | ~$350M |
1The financial outlook, expectations and other forward looking statements provided by the company for 2022 and beyond reflect the company's judgment based on the information available at the time of this release.
2 Non-GAAP measures. See Exhibit B for definitions. Reconciliations of forward–looking GAAP and non–GAAP measures are not provided because we are unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the future occurrence and financial impact of certain elements of GAAP and non-GAAP measures.
3 Outlook is based on current tax law. Repeal or deferral of provisions requiring capitalization of R&D expenditures would result in elevated non-current state income tax expense.
4 Outlook is based on current tax law and assumes the provisions requiring capitalization of R&D expenditures for tax purposes is not deferred or repealed.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 5 of 12
About Huntington Ingalls Industries
HII is a global, all-domain defense partner, building and delivering the world’s most powerful, survivable naval ships and technologies that safeguard our seas, sky, land, space and cyber. As America’s largest shipbuilder and with a more than 135-year history of advancing U.S. national defense, we are united by our mission in service of the heroes who protect our freedom. HII’s diverse workforce includes skilled tradespeople; artificial intelligence, machine learning (AI/ML) experts; engineers; technologists; scientists; logistics experts; and business professionals. Headquartered in Virginia, HII’s workforce is 43,000 strong. For more information, please visit www.HII.com.
Conference Call Information
HII will webcast its earnings conference call at 9 a.m. Eastern time today. A live audio broadcast of the conference call and supplemental presentation will be available on the investor relations page of the company’s website: www.HII.com. A telephone replay of the conference call will be available from noon today through Thursday, November 10th by calling (866) 813-9403 or (929) 458-6194 and using access code 083595.
Cautionary Statement Regarding Forward-Looking Statements
Statements in this release, 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 attract and retain a qualified workforce; disruptions impacting the global supply, including those attributable to the ongoing COVID-19 pandemic and the ongoing conflict between Russia and Ukraine; our ability to effectively integrate the operations of Alion Science and Technology into our business; 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 in our filings with the U.S. Securities and Exchange Commission. 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 any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make. This release also contains non-GAAP financial measures and includes a GAAP reconciliation of these financial measures. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 6 of 12
Exhibit A: Financial Statements
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
|---|---|---|---|---|---|---|---|---|
| (in millions, except per share amounts) | 2022 | 2021 | 2022 | 2021 | ||||
| Sales and service revenues | ||||||||
| Product sales | $ | 1,774 | $ | 1,701 | $ | 5,327 | $ | 5,185 |
| Service revenues | 852 | 637 | 2,537 | 1,662 | ||||
| Sales and service revenues | 2,626 | 2,338 | 7,864 | 6,847 | ||||
| Cost of sales and service revenues | ||||||||
| Cost of product sales | 1,517 | 1,453 | 4,511 | 4,402 | ||||
| Cost of service revenues | 747 | 554 | 2,252 | 1,450 | ||||
| Income from operating investments, net | 13 | 11 | 47 | 31 | ||||
| Other income and gains, net | — | 2 | — | 3 | ||||
| General and administrative expenses | 244 | 226 | 688 | 636 | ||||
| Operating income | 131 | 118 | 460 | 393 | ||||
| Other income (expense) | ||||||||
| Interest expense | (27) | (24) | (79) | (63) | ||||
| Non-operating retirement benefit | 71 | 45 | 209 | 135 | ||||
| Other, net | (13) | 2 | (30) | 10 | ||||
| Earnings before income taxes | 162 | 141 | 560 | 475 | ||||
| Federal and foreign income tax expense (benefit) | 24 | (6) | 104 | 51 | ||||
| Net earnings | $ | 138 | $ | 147 | $ | 456 | $ | 424 |
| Basic earnings per share | $ | 3.44 | $ | 3.65 | $ | 11.37 | $ | 10.52 |
| Weighted-average common shares outstanding | 40.1 | 40.3 | 40.1 | 40.3 | ||||
| Diluted earnings per share | $ | 3.44 | $ | 3.65 | $ | 11.37 | $ | 10.52 |
| Weighted-average diluted shares outstanding | 40.1 | 40.3 | 40.1 | 40.3 | ||||
| Dividends declared per share | $ | 1.18 | $ | 1.14 | $ | 3.54 | $ | 3.42 |
| Net earnings from above | $ | 138 | $ | 147 | $ | 456 | $ | 424 |
| Other comprehensive income (loss) | ||||||||
| Change in unamortized benefit plan costs | 12 | 43 | (61) | 102 | ||||
| Other | (1) | (1) | (2) | 1 | ||||
| Tax benefit (expense) for items of other comprehensive income | (3) | (11) | 16 | (26) | ||||
| Other comprehensive income (loss), net of tax | 8 | 31 | (47) | 77 | ||||
| Comprehensive income | $ | 146 | $ | 178 | $ | 409 | $ | 501 |
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 7 of 12
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
| ($ in millions) | September 30, 2022 | December 31,<br>2021 | ||
|---|---|---|---|---|
| Assets | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ | 117 | $ | 627 |
| Accounts receivable, net of allowance for doubtful accounts of $2 million as of 2022 and $9 million as of 2021 | 721 | 433 | ||
| Contract assets | 1,564 | 1,310 | ||
| Inventoried costs | 174 | 161 | ||
| Income taxes receivable | 180 | 209 | ||
| Prepaid expenses and other current assets | 61 | 50 | ||
| Total current assets | 2,817 | 2,790 | ||
| Property, Plant, and Equipment, net of accumulated depreciation of $2,283 million as of 2022 and $2,149 million as of 2021 | 3,136 | 3,107 | ||
| Other Assets | ||||
| Operating lease assets | 236 | 241 | ||
| Goodwill | 2,618 | 2,628 | ||
| Other intangible assets, net of accumulated amortization of $846 million as of 2022 and $741 million as of 2021 | 1,054 | 1,159 | ||
| Pension plan assets | 355 | 281 | ||
| Miscellaneous other assets | 399 | 421 | ||
| Total other assets | 4,662 | 4,730 | ||
| Total assets | $ | 10,615 | $ | 10,627 |
| Liabilities and Stockholders' Equity | ||||
| Current Liabilities | ||||
| Trade accounts payable | 539 | 603 | ||
| Accrued employees’ compensation | 355 | 361 | ||
| Current portion of long-term debt | 399 | — | ||
| Current portion of postretirement plan liabilities | 137 | 137 | ||
| Current portion of workers’ compensation liabilities | 241 | 252 | ||
| Contract liabilities | 768 | 651 | ||
| Other current liabilities | 453 | 423 | ||
| Total current liabilities | 2,892 | 2,427 | ||
| Long-term debt | 2,605 | 3,298 | ||
| Pension plan liabilities | 394 | 351 | ||
| Other postretirement plan liabilities | 360 | 368 | ||
| Workers’ compensation liabilities | 486 | 506 | ||
| Long-term operating lease liabilities | 202 | 194 | ||
| Deferred tax liabilities | 274 | 313 | ||
| Other long-term liabilities | 354 | 362 | ||
| Total liabilities | 7,567 | 7,819 | ||
| Commitments and Contingencies | ||||
| Stockholders’ Equity | ||||
| Common stock, $0.01 par value; 150 million shares authorized; 53.5 million shares issued and 39.9 million shares outstanding as of September 30, 2022, and 53.4 million shares issued and 40 million shares outstanding as of December 31, 2021 | 1 | 1 | ||
| Additional paid-in capital | 2,014 | 1,998 | ||
| Retained earnings | 4,203 | 3,891 | ||
| Treasury stock | (2,200) | (2,159) | ||
| Accumulated other comprehensive loss | (970) | (923) | ||
| Total stockholders’ equity | 3,048 | 2,808 | ||
| Total liabilities and stockholders’ equity | $ | 10,615 | $ | 10,627 |
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 8 of 12
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| ( in millions) | 2022 | 2021 | ||
| Operating Activities | ||||
| Net earnings | $ | 456 | $ | 424 |
| Adjustments to reconcile to net cash provided by (used in) operating activities | ||||
| Depreciation | 158 | 154 | ||
| Amortization of purchased intangibles | 105 | 48 | ||
| Amortization of debt issuance costs | 6 | 6 | ||
| Provision for doubtful accounts | (7) | — | ||
| Stock-based compensation | 28 | 19 | ||
| Deferred income taxes | (14) | 74 | ||
| Loss (gain) on investments in marketable securities | 34 | (12) | ||
| Change in | ||||
| Accounts receivable | (281) | 52 | ||
| Contract assets | (254) | (179) | ||
| Inventoried costs | (13) | (7) | ||
| Prepaid expenses and other assets | (4) | (116) | ||
| Accounts payable and accruals | 48 | 93 | ||
| Retiree benefits | (99) | (73) | ||
| Other non-cash transactions, net | 2 | 6 | ||
| Net cash provided by operating activities | 165 | 489 | ||
| Investing Activities | ||||
| Capital expenditures | ||||
| Capital expenditure additions | (179) | (216) | ||
| Grant proceeds for capital expenditures | — | 11 | ||
| Acquisitions of businesses, net of cash received | — | (1,636) | ||
| Investment in affiliates | (5) | (22) | ||
| Proceeds from disposition of business | — | 20 | ||
| Other investing activities, net | 6 | 1 | ||
| Net cash used in investing activities | (178) | (1,842) | ||
| Financing Activities | ||||
| Proceeds from issuance of long-term debt | — | 1,650 | ||
| Repayment of long-term debt | (300) | — | ||
| Debt issuance costs | — | (22) | ||
| Dividends paid | (142) | (138) | ||
| Repurchases of common stock | (41) | (87) | ||
| Employee taxes on certain share-based payment arrangements | (14) | (7) | ||
| Net cash (used in) provided by financing activities | (497) | 1,396 | ||
| Change in cash and cash equivalents | (510) | 43 | ||
| Cash and cash equivalents, beginning of period | 627 | 512 | ||
| Cash and cash equivalents, end of period | $ | 117 | $ | 555 |
| Supplemental Cash Flow Disclosure | ||||
| Cash paid for income taxes (net of refunds) | $ | 107 | $ | 31 |
| Cash paid for interest | $ | 61 | $ | 39 |
| Non-Cash Investing and Financing Activities | ||||
| Capital expenditures accrued in accounts payable | $ | 5 | $ | 4 |
All values are in US Dollars.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 9 of 12
Exhibit B: Non-GAAP Measures Definitions & Reconciliations
We make reference to “segment operating income,” “segment operating margin,” “shipbuilding revenue,” “shipbuilding operating margin,” “Mission Technologies EBITDA margin” and “free cash flow.”
We internally manage our operations by reference to segment operating income and segment operating margin, which are not recognized measures under GAAP. When analyzing our operating performance, investors should use segment operating income and segment operating margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. They are measures that we use to evaluate our core operating performance. We believe that segment operating income and segment operating margin reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We believe these measures are used by investors and are a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income and segment operating margin may not be comparable to similarly titled measures of other companies.
Shipbuilding revenue, shipbuilding operating margin and Mission Technologies EBITDA margin are not measures recognized under GAAP. They are measures that we use to evaluate our core operating performance. When analyzing our operating performance, investors should use shipbuilding revenue, shipbuilding operating margin and Mission Technologies EBITDA margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. We believe that shipbuilding revenue, shipbuilding operating margin and Mission Technologies EBITDA margin reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We believe these measures are used by investors and are a useful indicator to measure our performance.
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 or used by operating activities as a measure of our liquidity. We believe free cash flow is an important measure for our investors because it provides them 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.
Reconciliations of forward-looking GAAP and non-GAAP measures are not provided because we are unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the future occurrence and financial impact of certain elements of GAAP and non-GAAP measures.
Segment operating income is defined as operating income for the relevant segment(s) before the Operating FAS/CAS Adjustment and non-current state income taxes.
Segment operating margin is defined as segment operating income as a percentage of sales and service revenues.
Shipbuilding revenue is defined as the combined sales and service revenues from our Newport News Shipbuilding segment and Ingalls Shipbuilding segment.
Shipbuilding operating margin is defined as the combined segment operating income of our Newport News Shipbuilding segment and Ingalls Shipbuilding segment as a percentage of shipbuilding revenue.
Mission Technologies EBITDA margin is defined as Mission Technologies segment operating income before interest expense, income taxes, depreciation, and amortization as a percentage of Mission Technologies revenues.
Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures net of related grant proceeds.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 10 of 12
Operating FAS/CAS Adjustment is defined as the difference between the service cost component of our pension and other postretirement expense determined in accordance with GAAP (FAS) and our pension and other postretirement expense under U.S. Cost Accounting Standards (CAS).
Non-current state income taxes are defined as 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 uncertain tax positions 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.
We present financial measures adjusted for the Operating FAS/CAS Adjustment and non-current state income taxes to reflect the company’s performance based upon the pension costs and state tax expense charged to our contracts under CAS. We use these adjusted measures as internal measures of operating performance and for performance-based compensation decisions.
Reconciliations of Segment Operating Income and Segment Operating Margin
| Three Months Ended | Nine Months Ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||
| Ingalls revenues | $ | 623 | $ | 628 | $ | 1,912 | $ | 1,947 | ||||
| Newport News revenues | 1,445 | 1,354 | 4,268 | 4,124 | ||||||||
| Mission Technologies revenues | 595 | 394 | 1,785 | 890 | ||||||||
| Intersegment eliminations | (37) | (38) | (101) | (114) | ||||||||
| Sales and Service Revenues | 2,626 | 2,338 | 7,864 | 6,847 | ||||||||
| Operating Income | 131 | 118 | 460 | 393 | ||||||||
| Operating FAS/CAS Adjustment | 36 | 41 | 108 | 118 | ||||||||
| Non-current state income taxes | (1) | 4 | (1) | 12 | ||||||||
| Segment Operating Income | 166 | 163 | 567 | 523 | ||||||||
| As a percentage of sales and service revenues | 6.3 | % | 7.0 | % | 7.2 | % | 7.6 | % | ||||
| Ingalls segment operating income | 50 | 62 | 242 | 233 | ||||||||
| As a percentage of Ingalls revenues | 8.0 | % | 9.9 | % | 12.7 | % | 12.0 | % | ||||
| Newport News segment operating income | 102 | 88 | 277 | 257 | ||||||||
| As a percentage of Newport News revenues | 7.1 | % | 6.5 | % | 6.5 | % | 6.2 | % | ||||
| Mission Technologies operating income | 14 | 13 | 48 | 33 | ||||||||
| As a percentage of Mission Technologies revenues | 2.4 | % | 3.3 | % | 2.7 | % | 3.7 | % |
Reconciliation of Free Cash Flow
| Three Months Ended | Nine Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| September 30 | September 30 | |||||||
| ($ in millions) | 2022 | 2021 | 2022 | 2021 | ||||
| Net cash provided by operating activities | $ | (19) | $ | 350 | $ | 165 | $ | 489 |
| Less capital expenditures: | ||||||||
| Capital expenditure additions | (77) | (82) | (179) | (216) | ||||
| Grant proceeds for capital expenditures | — | 9 | — | 11 | ||||
| Free cash flow | $ | (96) | $ | 277 | $ | (14) | $ | 284 |
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 11 of 12
Reconciliation of Mission Technologies EBITDA and EBITDA Margin
| Nine Months Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| September 30 | ||||||||||||
| ( in millions) | 2022 | 2021 | 2022 | 2021 | ||||||||
| Mission Technologies sales and service revenues | $ | 595 | $ | 394 | $ | 1,785 | $ | 890 | ||||
| Mission Technologies segment operating income | $ | 14 | $ | 13 | $ | 48 | $ | 33 | ||||
| Mission Technologies depreciation expense | 3 | 2 | 8 | 4 | ||||||||
| Mission Technologies amortization expense | 30 | 16 | 90 | 32 | ||||||||
| Mission Technologies state tax expense | 3 | (1) | 9 | 5 | ||||||||
| Mission Technologies EBITDA | $ | 50 | $ | 30 | $ | 155 | $ | 74 | ||||
| Mission Technologies EBITDA margin | 8.4 | % | 7.6 | % | 8.7 | % | 8.3 | % |
All values are in US Dollars.
HII
4101 Washington Ave. • Newport News, VA 23607
www.HII.com
Page 12 of 12
hiiq32022earningspresent
HII Q3 2022 Earnings November 3, 2022 Chris Kastner President and Chief Executive Officer Tom Stiehle Executive Vice President and Chief Financial Officer
Cautionary Statement Regarding Forward-looking Statements 2 Statements in this presentation, 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 wordsor 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 activ ity, performance, or achievements to be materially different from any future results, levels of activ ity, 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 activ ity, 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 increases in costs 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 serv ices 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, div idends, 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 attract and retain a qualified workforce; disruptions impacting the global supply, including those attributable to the ongoing COVID-19 pandemic and the ongoing conflict between Russia and Ukraine; our ability to effectively integrate the operations of Alion Science and Technology into our business; 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 in our filings with the U.S. Securities and Exchange Commission. 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 any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make. This presentation also contains non-GAAP financial measures. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures.
3 HII Q3 2022 Highlights • Revenues were ~$2.6 billion in the quarter • Diluted EPS was $3.44 in the quarter • Total backlog of ~$47 billion Ingalls Shipbuilding • Awarded a design engineering contract for the next-generation guided-missile destroyer • Authenticated the keel of guided-missile destroyer Jeremiah Dent on (DDG 129) • Awarded a contract to begin combat systems availability for the Zumwalt -class destroyer, Lyndon B. Johnson (DDG 1002) • Began fabrication of amphibious t ransport dock Pittsburgh (LPD 31) Newport News Shipbuilding • Turned over the 1,000th compartment of aircraft carrier John F. Kennedy (CVN 79) • Achieved pressure hull complete on Virginia-class submarine Massachuset t s (SSN 798) • Celebrated the ceremonial keel laying of aircraft carrier Ent erprise (CVN 80) Mission Technologies • Awarded a task order to provide spectrum assessments across technical, policy and strategy areas for the DoD Chief Information Officer • Awarded a $826 million task order to provide Decisive Mission Actions and Technology Services (DMATS) to the DoD • Awarded a $127 million task order to support the Defense Security Cooperation Agency (DSCA) to perform research, development, test and evaluation of emerging technologies San Antonio-class amphibious transport dock Fort Lauderdale (LPD 28) departed Ingalls Shipbuilding in July, following delivery earlier in the year Newport News Shipbuilding achieved pressure hull complete on Virginia-class submarine Massachusetts (SSN 798)
Q3 22 Book to Bill: 2.2x Recent Mission Technologies Highlights • Secured $1.3B in contract awards in Q3 • Significant DoE wins for Savannah River and Nevada National Security Site teams • Expanding presence with key customers: • Awarded Decisive Mission Actions and Technology Services (DMATS) task order for critical integrated technology services across the DoD ($826M) • Defense Security Cooperation Agency for research, development, test and evaluation of emerging technologies ($127M) • Air Force Life Cycle Management Center for electronic warfare (EW) and electromagnetic spectrum (EMS) capabilities development ($76.7M) • Air Force Test Center for supplemental and core support 4 Mission Technologies is well positioned with key capabilities and talent in areas of critical importance to our customers Mission Technologies Robust ~$60B Pipeline ~$10B in Decisions Over Next Twelve Months ~$4B in Active Proposals or Submitted & Awaiting Eval.
$23 $46 $46 $49 $0 $10 $20 $30 $40 $50 $60 2018 2019 2020 2021 2022-2026 • Expect current backlog of ~$47B to be replenished by anticipated future awards Ingalls Shipbuilding • DDG mult i-year procurement • 10 -15 ships total / 5-8 ships for Ingalls • LPD 32 Detail Design & Construct ion (DD&C) • LPD 33 Long Lead Time Material (LLTM) & DD&C • LHA 9 DD&C • LHA 10 LLTM & DD&C • DDG 1002 Combat System Activation (CSA) awarded Q3 2022 • DDG 1000/1001 anticipated Newport News Shipbuilding • Virginia-class submarine Block V - 2 addit ional boats • Virginia-class submarine Block VI • Columbia-class submarines • CVN 82 & 83 bundle • CVN 75 (USS Harry S. Truman) Refueling and Complex Overhaul (RCOH) 5 Strong Shipbuilding Demand Supports Backlog Stability Strong Shipbuilding Demand BACKLOG ($B) Expect Stable Backlog of $40B-$50B
6 HII Q3 2022 Consolidated Results • Revenue grew 12% YoY due primarily to growth at Mission Technologies (+51%) driven by the acquisition of Alion in Q3 21, as well as growth at Newport News Shipbuilding (+6.7%) $2,338 $2,626 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Q3 21 Q3 22 CONSOLIDATED REVENUE ($M) OPERATING INCOME ($M) & MARGIN $118 $131 $0 $20 $40 $60 $80 $100 $120 $140 Q3 21 Q3 22 5.0% 5.0% • Operating income grew 11% YoY due to more favorable non- current state income taxes and operating FAS/CAS adjustment, as well as improved results at Newport News Shipbuilding
7 HII Q3 2022 Segment Results YoY Revenue - NSC & LPD + DDG Operating Income - DDG risk retirement (prior year incentive) + LPD risk retirement Newport News Shipbuilding Ingalls Shipbuilding Mission Technologies REVENUE ($M) SEGMENT OPERATING INCOME ($M) & MARGIN1 REVENUE ($M) Revenue + Sub & carrier fleet support + Columbia-class submarine program + RCOH of USS John C. Stennis (CVN 74) Operating Income + Columbia-class incentives - VCS risk retirement REVENUE ($M) Revenue + Acquisition of Alion in Q3 21 (closed 8/19/21) Operating Margin - ~$24M of PI amortization related to Alion acquisition $628 $623 $0 $200 $400 $600 $800 Q3 21 Q3 22 $1,354 $1,445 $0 $500 $1,000 $1,500 $2,000 Q3 21 Q3 22 $394 $595 $0 $200 $400 $600 $800 Q3 21 Q3 22 $62 $50 $0 $20 $40 $60 $80 Q3 21 Q3 22 $88 $102 $0 $50 $100 $150 Q3 21 Q3 22 $13 $14 $0 $5 $10 $15 Q3 21 Q3 22 1 Non-GAAP measures. See appendix for definitions and reconciliations. 9.9% 8.0% 6.5% 7.1% 3.3% 2.4% SEGMENT OPERATING INCOME ($M) & MARGIN1 SEGMENT OPERATING INCOME ($M) & MARGIN1
$46 $48 $17 $14 $0 $10 $20 $30 $40 $50 $60 $70 $80 Q3 21 Q3 22 Dividends Share Repurchases (at cost) $350 ($19) ($73) ($77) $277 ($96) ($150) ($100) ($50) $0 $50 $100 $150 $200 $250 $300 $350 $400 Cash from Ops. CAPEX Free Cash Flow 8 HII Q3 2022 Capital Deployment • Cash balance of $117 million and liquidity of $1.6 billion at quarter-end • Capital expenditures were 2.9% of revenues • Cash contributions to pension and other postretirement benefit plans were $11 million • $62 million distributed to shareholders in the quarter • Repurchased 66 thousand shares at a cost of $14 million • Paid dividends of $48 million Q3 21 Q3 22 CASH FLOW GENERATION ($M) SHAREHOLDER DISTRIBUTIONS ($M) TOTAL $63 TOTAL $62 1 Non-GAAP measure. See appendix for definition and reconciliation. 1
9 Pension Outlook ($ in millions) 2021 (Actual) 20221 20231 Pension Discount Rate 2.80% N 3.00% Change from prior est. N/A 4.90% Change from prior est. +190bps Expected Long-Term Return on Assets 7.25% N 7.25% N/A 8.00% +75bps Actual Return on Assets 12.7% (15.0%) N/A CAS Recoveries Over/(Under) Cash Contributions2,3 ($54) N $3 $0 $4 $2 FAS Benefit/(Expense)3 ($28) N $86 $0 $18 ($106) CAS Expense3 $52 N $47 $0 $50 $2 FAS/CAS Adjustment3 $24 N $133 $0 $68 ($104) Operating FAS/CAS Adjustment3 ($157) N ($143) $0 ($81) $57 Non-Operating Retirement (Expense)/Income3 $181 N $276 $3 $149 ($161) Pension and Postretirement Benefits Cash Contributions2 $106 N $44 $0 $46 ($0) 1 Projected and subject to change. 2 2022 projected cash contributions of $44 million include $10 million of discretionary pension contributions ($<1 million qualified; $10 million non-qualified) and $34 million of postretirement benefits contributions. 2023 projected cash contributions of $46 million include $11 million of discretionary pension contributions ($<1 million qualified; $11 million non-qualified) and $35 million of postretirement benefits contributions. 3 Includes pension & other postretirement benefits.
10 Outlook Prior Outlook Current Outlook Shipbuilding Revenue2 $8.2B - $8.5B $8.2B - $8.3B Shipbuilding Operating Margin2 8.0% - 8.1% 8.0% - 8.1% Mission Technologies Revenue $2.4B - $2.6B ~$2.4B Mission Technologies Segment Operating Margin2 ~2.5% ~2.3% Mission Technologies EBITDA Margin2 8.0% - 8.5% ~8.3% Operating FAS/CAS Adjustment ($143M) ($143M) Non-current State Income Tax Expense3 ($5M) ($5M) Interest Expense ($102M) ($106M) Non-operating Retirement Benefit $273M $276M Effective Tax Rate ~21% ~19% Depreciation & Amortization $365M $365M Capital Expenditures 2.5% - 3.0% of Sales 2.5% - 3.0% of Sales Free Cash Flow2 based on current law4 $200M - $250M ~$350M FY22 OUTLOOK1 • Narrowing revenue expectations to lower end of previous guidance ranges given challenging labor environment • Reaffirming shipbuilding operating margin2 guidance • Revising Mission Technologies segment operating margin2 guidance • Increasing free cash flow2,4 guidance Q4 2022 Expectations • Timing of material will determine if shipbuilding revenue is at the lower or higher end of guidance range • Lack of material shipbuilding milestones results in shipbuilding operating margin2 of ~7% for 2H 22 1 The financial outlook, expectations and other forward looking statements prov ided by the company for 2022 and beyond reflect the company's judgment based on the information av ailable at the time of this presentation. 2 Non-GAAP measures. See appendix for definitions. Reconciliations of forward-looking GAAP and non-GAAP measures are not prov ided because we are unable to prov ide such reconciliat ions without unreasonable effort due to the uncertainty and inherent difficulty of predicting the future occurrence and financial impact of certain elements of GAAP and non-GAAP measures. 3 Outlook is based on current tax law. Repeal or deferral of requirement to capitalize R&D expenditures would result in elev ated non-current state income tax expense. 4 Outlook is based on current tax law and assumes the requirement to capitalize R&D expenditures for tax purposes is not deferred or repealed. See appendix for additional information.
11 Free Cash Flow1,2 & Capital Allocation3 FY22 ~$350M FY23 $545M- $595M FY24 $730M- $830M • Committed to investment grade rating; Targeting ≤2x Debt/EBITDA1 by year-end 2024 • Continued dividend growth at low to mid single digit growth rate • Balanced share repurchases; $1.0B authorization remaining through 2024 • Continue to evaluate targeted M&A; No significant capability gaps today • Target ~$300M cash balance • Committed to return substantially all 2022 - 2024 free cash flow1, after planned debt repayment, to shareholders 1 Non-GAAP measure. See appendix for definition. 2 Free cash flow outlook assumes the requirement to capitalize R&D expenditures for tax purposes is not deferred or repealed. See appendix for additional information. 3The financial outlook, expectations and other forward looking statements prov ided by the company for 2022 and beyond reflect the company's judgment based on the information av ailable at the time of this presentation. FREE CASH FLOW1 WALK FY22-24 (assumes Sec. 174 is not deferred or repealed, ~$250M impact FY22-24) COVID-19 repayment impact moves from FY22 to FY23 ~$250M opportunity over FY23-24 if Sec. 174 is repealed
12 Sustainability at HII Ingalls Shipbuilding is testing a fleet of electric vehicles Newport News Shipbuilding converted a steam barge from liquid fuel to natural gas, significantly reducing emissions • Appointed HII’s first Chief Sustainability Officer • Ongoing work to develop program and future reporting • Recognized as one of America’s best large employers • Sustainability program aligned with our core values and our commitment to the communities in which we work Newport News Shipbuilding partnered with Habitat for Humanity to start construction on the 20t h and 21st houses built by shipyard volunteers Mission Technologies employees support arriving service members and families at USO Korea Our first, detailed sustainability report will be published later this month
INVESTMENT THESIS POSITIONED FOR SUCCESS; FOCUSED ON EXECUTION Historic backlog and positioning provide strong visibility Consistent long-term shipbuilding growth profile Reshaped Mission Technologies portfolio to address evolving customer needs in high growth markets 13 Nearing sustainable free cash flow inflection point Commitment to return substantially all free cash flow, after planned debt repayment, to shareholders 2022 - 2024
Appendix 14
Non-GAAP Information 15 We make reference to “segment operating income,” “segment operating margin,” “shipbuilding revenue,” “shipbuilding operating margin,” “Mission Technologies EBITDA margin,” “Debt/EBITDA” and “free cash flow.” We internally manage our operations by reference to segment operating income and segment operating margin, which are not recognized measures under GAAP. When analyzing our operating performance, investors should use segment operating income and segment operating margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. They are measures that we use to evaluate our core operating performance. We believe that segment operating income and segment operating margin reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We believe these measures are used by investors and are a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income and segment operating margin may not be comparable to similarly titled measures of other companies. Shipbuilding revenue, shipbuilding operating margin and Mission Technologies EBITDA margin are not measures recognized under GAAP. They are measures that we use to evaluate our core operating performance. We believe that shipbuilding revenue, shipbuilding operating margin and Mission Technologies EBITDA margin reflect additional ways of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. When analyzing our operating performance, investors should use shipbuilding revenue, shipbuilding operating margin and Mission Technologies EBITDA margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. We believe these measures are used by investors and are a useful indicator to measure our performance. 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 or used by operating activities as a measure of our liquidity. We believe free cash flow is an important measure for our investors because it provides them 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 Debt/EBITDA ratio is not a measure recognized under GAAP. We believe the Debt/EBITDA ratio is useful to management, investors and other users of our financial information in evaluating the total amount of leverage in our capital structure. Reconciliations of forward-looking GAAP and non-GAAP measures are not provided because we are unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the future occurrence and financial impact of certain elements of GAAP and non-GAAP measures.
Non-GAAP Measures Definitions 16 Debt/EBITDA is defined as gross debt divided by net earnings before interest expense, income taxes, depreciation and amortization. Segment operating income is defined as operating income for the relevant segment(s) before the Operating FAS/CAS Adjustment and non-current state income taxes. Segment operating margin is defined as segment operating income as a percentage of sales and service revenues. Shipbuilding revenue is defined as the combined sales and service revenues from our Newport News Shipbuilding segment and Ingalls Shipbuilding segment. Shipbuilding operating margin is defined as the combined segment operating income of our Newport News Shipbuilding segment and Ingalls Shipbuilding segment as a percentage of shipbuilding revenue. Mission Technologies EBITDA margin is defined as Mission Technologies segment operating income before interest expense, income taxes, depreciation, and amortization as a percentage of Mission Technologies revenues. Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Operating FAS/CAS Adjustment is defined as the difference between the service cost component of our pension and other postretirement expense determined in accordance with GAAP (FAS) and our pension and other postretirement expense under U.S. Cost Accounting Standards (CAS). Non-current state income taxes are defined as 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 uncertain tax positions 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 op erating income. We present financial measures adjusted for the Operating FAS/CAS Adjustment and non-current state income taxes to reflect the company’s performance based upon the pension costs and state tax expense charged to our contracts under CAS. We use these adjusted measures as internal measures of operating performance and for performance-based compensation decisions.
Non-GAAP Reconciliations Segment Operating Income & Segment Operating Margin 17 ($ in millions) 2022 2021 2022 2021 Ingalls revenues 623 628 1,912 1,947 Newport News revenues 1,445 1,354 4,268 4,124 Mission Technologies revenues 595 394 1,785 890 Intersegment eliminations (37) (38) (101) (114) Sales and Service Revenues 2,626 2,338 7,864 6,847 Operating Income 131 118 460 393 Operating FAS/CAS Adjustment 36 41 108 118 Non-current state income taxes (1) 4 (1) 12 Segment Operating Income 166 163 567 523 As a percentage of sales and service revenues 6.3 % 7.0 % 7.2 % 7.6 % Ingalls segment operating income 50 62 242 233 As a percentage of Ingalls revenues 8.0 % 9.9 % 12.7 % 12.0 % Newport News segment operating income 102 88 277 257 As a percentage of Newport News revenues 7.1 % 6.5 % 6.5 % 6.2 % Mission Technologies operating income 14 13 48 33 As a percentage of Mission Technologies revenues 2.4 % 3.3 % 2.7 % 3.7 % Three Months Ended September 30 September 30 Nine Months Ended
Non-GAAP Reconciliations Shipbuilding Revenues & Operating Margin 18 ($ in millions) 2022 2021 2022 2021 Sales and service revenues 2,626 2,338 7,864 6,847 Mission Technologies (595) (394) (1,785) (890) Intersegment eliminations 37 38 101 114 Shipbuilding Revenues 2,068 1,982 6,180 6,071 Operating Income 131 118 460 393 Operating FAS/CAS Adjustment 36 41 108 118 Non-current state income taxes (1) 4 (1) 12 Segment Operating Income 166 163 567 523 Mission Technologies (14) (13) (48) (33) Shipbuilding Operating Income 152 150 519 490 As a percentage of Shipbuilding Revenues 7.4 % 7.6 % 8.4 % 8.1 % Three Months Ended September 30 September 30 Nine Months Ended
NON-GAAP Reconciliations Free Cash Flow 19 ($ in millions) 2022 2021 2022 2021 Net cash provided by (used in) operating activities (19) 350 165 489 Less capital expenditures: Capital expenditure additions (77) (82) (179) (216) Grant proceeds for capital expenditures — 9 — 11 Free cash flow (96) 277 (14) 284 Three Months Ended September 30 Nine Months Ended September 30
20 Non-GAAP Reconciliations Mission Technologies EBITDA Margin (in millions) 2022 2021 2022 2021 Mission Technologies sales and service revenues 595 394 1,785 890 Mission Technologies segment operating income 14 13 48 33 Mission Technologies depreciation expense 3 2 8 4 Mission Technologies amortization expense 30 16 90 32 Mission Technologies state tax expense 3 (1) 9 5 Mission Technologies EBITDA 50 30 155 74 Mission Technologies EBITDA margin 8.4 % 7.6 % 8.7 % 8.3 % Nine Months Ended September 30September 30 Three Months Ended
21