- Revenues were $1.87 billion
- Operating margin was 10.2%
- Diluted earnings per share was $3.48
- Cash from operations was $120 million and free cash flow1 was $47 million
NEWPORT NEWS, Va., May 03, 2018 (GLOBE NEWSWIRE) — Huntington Ingalls Industries (NYSE:HII) reported first quarter 2018 revenues of $1.87 billion, up 8.7 percent from the first quarter of 2017. The increase was driven primarily by higher volume at HII’s Newport News and Ingalls shipbuilding divisions.
Operating income in the quarter was $191 million and operating margin was 10.2 percent, compared to $168 million and 9.7 percent, respectively, in the first quarter of 2017. The increases in operating income and operating margin were mainly the result of a higher Operating FAS/CAS Adjustment compared to the prior year.
Diluted earnings per share in the quarter was $3.48, compared to $2.56 in the same period of 2017. The increase was predominantly due to higher operating income and the non-operating portion of retirement benefit expense.
First quarter cash from operations was $120 million and free cash flow1 was $47 million, compared to $98 million and $40 million, respectively, in the first quarter of 2017.
New contract awards in the quarter were approximately $2.6 billion, primarily driven by an award for the detail design and construction of the amphibious transport dock LPD 29, bringing total backlog to approximately $22 billion as of March 31.
“The first quarter was highlighted by revenue growth in all three business segments,” said Mike Petters, HII’s president and CEO. “With the Navy’s commitment to achieve its goal of 355 ships and Congress providing the necessary funding, HII stands ready to support construction of a larger fleet.”
Results of Operations
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| (in millions, except per share amounts) | 2018 | 2017 | $ Change | % Change | |||||||
| Sales and service revenues | $ | 1,874 | $ | 1,724 | $ | 150 | 8.7 | % | |||
| Operating income (loss) | 191 | 168 | 23 | 13.7 | % | ||||||
| Operating margin % | 10.2 | % | 9.7 | % | 45 bps | ||||||
| Segment operating income (loss)1 | 117 | 120 | (3 | ) | (2.5 | )% | |||||
| Segment operating margin %1 | 6.2 | % | 7.0 | % | (72) bps | ||||||
| Net earnings (loss) | 156 | 119 | 37 | 31.1 | % | ||||||
| Diluted earnings (loss) per share | $ | 3.48 | $ | 2.56 | $ | 0.92 | 35.9 | % | |||
| Weighted-average diluted shares outstanding | 44.8 | 46.4 | |||||||||
| 1 Non-GAAP measures that exclude non-segment factors affecting operating income. See Exhibit B for definitions and reconciliations. | |||||||||||
Segment Operating Results
Ingalls Shipbuilding
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| ($ in millions) | 2018 | 2017 | $ Change | % Change | |||||||
| Revenues | $ | 585 | $ | 550 | $ | 35 | 6.4 | % | |||
| Segment operating income (loss)1 | 64 | 66 | (2 | ) | (3.0 | )% | |||||
| Segment operating margin %1 | 10.9 | % | 12.0 | % | (106) bps | ||||||
| 1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. | |||||||||||
Ingalls Shipbuilding revenues for the first quarter were $585 million, an increase of $35 million, or 6.4 percent, from the same period in 2017, due to increased revenues in amphibious assault ships, partially offset by decreased revenues in the Legend-class National Security Cutter (NSC) program. Higher amphibious assault ship revenues were the result of increased volumes on LPD 29 (unnamed), Fort Lauderdale (LPD 28) and Bougainville (LHA 8), partially offset by decreased volume on the delivered USS Portland (LPD 27). Lower NSC program revenues were primarily the result of decreased volume on Kimball (NSC 7), partially offset by increased volume on Stone (NSC 9) in the quarter.
Ingalls Shipbuilding segment operating income for the first quarter was $64 million, a decrease of $2 million from the same period last year. Segment operating margin in the quarter was 10.9 percent, compared to 12.0 percent in the same period last year. These decreases were primarily due to lower risk retirement on the NSC program, partially offset by higher risk retirement on the San Antonio-class (LPD 17) program.
Key Ingalls Shipbuilding milestones for the quarter:
- Awarded $1.4 billion contract for LPD 29 construction
- Awarded $94 million advanced procurement contract for a 10th National Security Cutter
Newport News Shipbuilding
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| ($ in millions) | 2018 | 2017 | $ Change | % Change | |||||||
| Revenues | $ | 1,082 | $ | 971 | $ | 111 | 11.4 | % | |||
| Segment operating income (loss)1 | 51 | 72 | (21 | ) | (29.2 | )% | |||||
| Segment operating margin %1 | 4.7 | % | 7.4 | % | (270) bps | ||||||
| 1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. | |||||||||||
Newport News Shipbuilding revenues for the first quarter were $1.1 billion, an increase of $111 million, or 11.4 percent, from the same period in 2017, mainly due to higher revenues in aircraft carriers and naval nuclear support services. Higher aircraft carrier revenues were primarily the result of increased volumes on the execution contract for the refueling and complex overhaul (RCOH) of USS George Washington (CVN 73), the construction contract for John F. Kennedy (CVN 79) and the advance planning contract for Enterprise (CVN 80), partially offset by decreased volumes on the execution contract for the RCOH of the redelivered USS Abraham Lincoln (CVN 72), the construction contract for the delivered USS Gerald R. Ford (CVN 78) and the inactivation of the decommissioned aircraft carrier USS Enterprise (CVN 65). The increase in naval nuclear support services revenues was primarily the result of higher volumes in submarine support and facility maintenance services, partially offset by lower aircraft carrier support volume.
Newport News Shipbuilding segment operating income for the first quarter was $51 million, a decrease of $21 million from the same period last year. Segment operating margin was 4.7 percent for the quarter, compared to 7.4 percent in the same period last year. These decreases were primarily due to one-time bonus payments in 2018 related to recently enacted federal tax reform, as well as year-to-year variances in contract mix.
Key Newport News Shipbuilding milestones for the quarter:
- Installed a 400-metric ton fixture in the Joint Manufacturing Assembly Facility to revolutionize submarine construction and drive efficiencies in the Virginia- and Columbia-class submarine programs
- Achieved approximately 75% structural completion on the aircraft carrier John F. Kennedy (CVN 79)
Technical Solutions
| Three Months Ended | |||||||||||
| March 31 | |||||||||||
| ($ in millions) | 2018 | 2017 | $ Change | % Change | |||||||
| Revenues | $ | 233 | $ | 225 | $ | 8 | 3.6 | % | |||
| Segment operating income (loss)1 | 2 | (18 | ) | $ | 20 | 111.1 | % | ||||
| Segment operating margin %1 | 0.9 | % | (8.0 | )% | 886 bps | ||||||
| 1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. | |||||||||||
Technical Solutions revenues for the first quarter were $233 million, an increase of $8 million, or 3.6 percent, from the same period in 2017, primarily due to higher revenues in oil and gas and fleet support services, partially offset by lower nuclear and environmental and integrated mission solutions revenues.
Technical Solutions segment operating income for the first quarter was $2 million, compared to an operating loss of $18 million in the first quarter of 2017. The increase was primarily a result of the establishment of an allowance for accounts receivable on a nuclear and environmental commercial contract in 2017, partially offset by one-time bonus payments in 2018 related to recently enacted federal tax reform.
Key Technical Solutions milestones for the quarter:
- Received a notice to proceed from the Department of Energy to transition the Los Alamos Legacy Cleanup Contract to N3B, a joint venture led by SN3, part of HII’s Technical Solutions division, with partner BWXT Technical Services Group, Inc.
- Australia’s Department of Defence awarded a contract to Naval Shipbuilding Institute (NSI), a joint venture between HII’s Technical Solutions division and Kellogg Brown and Root’s (KBR) Government Services division, to establish and manage Australia’s new Naval Shipbuilding College.
About Huntington Ingalls Industries
Huntington Ingalls Industries is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry. For more than a century, HII’s Newport News and Ingalls shipbuilding divisions in Virginia and Mississippi have built more ships in more ship classes than any other U.S. naval shipbuilder. HII’s Technical Solutions division provides a wide range of professional services through its Fleet Support, Integrated Missions Solutions, Nuclear and Environmental, and Oil and Gas operations. Headquartered in Newport News, Virginia, HII employs nearly 39,000 people operating both domestically and internationally. For more information, please visit www.huntingtoningalls.com.
Conference Call Information
Huntington Ingalls Industries will webcast its earnings conference call at 9 a.m. ET 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.huntingtoningalls.com. A telephone replay of the conference call will be available from noon today through Thursday, May 10 by calling toll-free (855) 859-2056 or (404) 537-3406 and using conference ID 6589087.
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. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include: 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 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; 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.
Exhibit A: Financial Statements
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
| Three Months Ended March 31 | ||||||||
| (in millions, except per share amounts) | 2018 | 2017 | ||||||
| Sales and service revenues | ||||||||
| Product sales | $ | 1,370 | $ | 1,300 | ||||
| Service revenues | 504 | 424 | ||||||
| Sales and service revenues | 1,874 | 1,724 | ||||||
| Cost of sales and service revenues | ||||||||
| Cost of product sales | 1,063 | 1,027 | ||||||
| Cost of service revenues | 432 | 353 | ||||||
| Income (loss) from operating investments, net | 2 | 2 | ||||||
| Other income and gains | 2 | — | ||||||
| General and administrative expenses | 192 | 178 | ||||||
| Operating income (loss) | 191 | 168 | ||||||
| Other income (expense) | ||||||||
| Interest expense | (15 | ) | (18 | ) | ||||
| Non-operating retirement expense | 18 | (4 | ) | |||||
| Other, net | 1 | 1 | ||||||
| Earnings (loss) before income taxes | 195 | 147 | ||||||
| Federal and foreign income taxes | 39 | 28 | ||||||
| Net earnings (loss) | $ | 156 | $ | 119 | ||||
| Basic earnings (loss) per share | $ | 3.48 | $ | 2.57 | ||||
| Weighted-average common shares outstanding | 44.8 | 46.3 | ||||||
| Diluted earnings (loss) per share | $ | 3.48 | $ | 2.56 | ||||
| Weighted-average diluted shares outstanding | 44.8 | 46.4 | ||||||
| Dividends declared per share | $ | 0.72 | $ | 0.60 | ||||
| Net earnings (loss) from above | $ | 156 | $ | 119 | ||||
| Other comprehensive income (loss) | ||||||||
| Change in unamortized benefit plan costs | 20 | 22 | ||||||
| Other | — | 4 | ||||||
| Tax benefit (expense) for items of other comprehensive income | (5 | ) | (10 | ) | ||||
| Other comprehensive income (loss), net of tax | 15 | 16 | ||||||
| Comprehensive income (loss) | $ | 171 | $ | 135 | ||||
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
| ($ in millions) | March 31 2018 | December 31 2017 | ||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 528 | $ | 701 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $13 million as of each of 2018 and 2017 | 343 | 429 | ||||||
| Contract assets | 1,064 | 759 | ||||||
| Inventoried costs, net | 188 | 183 | ||||||
| Prepaid expenses and other current assets | 87 | 123 | ||||||
| Total current assets | 2,210 | 2,195 | ||||||
| Property, plant, and equipment, net of accumulated depreciation of $1,806 million as of 2018 and $1,770 million as of 2017 | 2,219 | 2,215 | ||||||
| Goodwill | 1,217 | 1,217 | ||||||
| Other intangible assets, net of accumulated amortization of $537 million as of 2018 and $528 million as of 2017 | 499 | 508 | ||||||
| Deferred tax assets | 102 | 114 | ||||||
| Miscellaneous other assets | 129 | 125 | ||||||
| Total assets | $ | 6,376 | $ | 6,374 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Trade accounts payable | $ | 344 | $ | 375 | ||||
| Accrued employees’ compensation | 244 | 245 | ||||||
| Current portion of postretirement plan liabilities | 139 | 139 | ||||||
| Current portion of workers’ compensation liabilities | 252 | 250 | ||||||
| Contract liabilities | 190 | 146 | ||||||
| Other current liabilities | 294 | 236 | ||||||
| Total current liabilities | 1,463 | 1,391 | ||||||
| Long-term debt | 1,280 | 1,279 | ||||||
| Pension plan liabilities | 887 | 922 | ||||||
| Other postretirement plan liabilities | 414 | 414 | ||||||
| Workers’ compensation liabilities | 512 | 509 | ||||||
| Other long-term liabilities | 102 | 101 | ||||||
| Total liabilities | 4,658 | 4,616 | ||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ Equity | ||||||||
| Common stock, $0.01 par value; 150 million shares authorized; 53.1 million shares issued and 44.6 million shares outstanding as of March 31, 2018, and 53.0 million shares issued and 45.1 million shares outstanding as of December 31, 2017 | 1 | 1 | ||||||
| Additional paid-in capital | 1,924 | 1,942 | ||||||
| Retained earnings (deficit) | 2,029 | 1,687 | ||||||
| Treasury stock | (1,138 | ) | (972 | ) | ||||
| Accumulated other comprehensive income (loss) | (1,098 | ) | (900 | ) | ||||
| Total stockholders’ equity | 1,718 | 1,758 | ||||||
| Total liabilities and stockholders’ equity | $ | 6,376 | $ | 6,374 | ||||
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended March 31 | ||||||||
| ($ in millions) | 2018 | 2017 | ||||||
| Operating Activities | ||||||||
| Net earnings (loss) | $ | 156 | $ | 119 | ||||
| Adjustments to reconcile to net cash provided by (used in) operating activities | ||||||||
| Depreciation | 41 | 41 | ||||||
| Amortization of purchased intangibles | 9 | 11 | ||||||
| Amortization of debt issuance costs | 1 | 2 | ||||||
| Provision for doubtful accounts | — | 29 | ||||||
| Stock-based compensation | 7 | 6 | ||||||
| Deferred income taxes | 5 | 12 | ||||||
| Change in | ||||||||
| Contract balances | (169 | ) | (121 | ) | ||||
| Inventoried costs | (5 | ) | (20 | ) | ||||
| Prepaid expenses and other assets | 38 | 11 | ||||||
| Accounts payable and accruals | 56 | 22 | ||||||
| Retiree benefits | (20 | ) | (14 | ) | ||||
| Other non-cash transactions, net | 1 | — | ||||||
| Net cash provided by (used in) operating activities | 120 | 98 | ||||||
| Investing Activities | ||||||||
| Capital expenditures | ||||||||
| Capital expenditure additions | (75 | ) | (58 | ) | ||||
| Grant proceeds for capital expenditures | 2 | — | ||||||
| Proceeds from disposition of assets | 3 | — | ||||||
| Net cash provided by (used in) investing activities | (70 | ) | (58 | ) | ||||
| Financing Activities | ||||||||
| Dividends paid | (32 | ) | (28 | ) | ||||
| Repurchases of common stock | (166 | ) | (68 | ) | ||||
| Employee taxes on certain share-based payment arrangements | (25 | ) | (56 | ) | ||||
| Net cash provided by (used in) financing activities | (223 | ) | (152 | ) | ||||
| Change in cash and cash equivalents | (173 | ) | (112 | ) | ||||
| Cash and cash equivalents, beginning of period | 701 | 720 | ||||||
| Cash and cash equivalents, end of period | $ | 528 | $ | 608 | ||||
| Supplemental Cash Flow Disclosure | ||||||||
| Cash paid for income taxes | $ | 1 | $ | 4 | ||||
| Cash paid for interest | $ | 1 | $ | 1 | ||||
| Non-Cash Investing and Financing Activities | ||||||||
| Capital expenditures accrued in accounts payable | $ | 4 | $ | 5 | ||||
Exhibit B: Non-GAAP Measures Definitions & Reconciliations
We make reference to “segment operating income (loss),” “segment operating margin,” and “free cash flow.”
We internally manage our operations by reference to “segment operating income (loss)” and “segment operating margin,” which are not recognized measures under GAAP. When analyzing our operating performance, investors should use segment operating income (loss) 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 (loss) 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 (loss) and segment operating margin may not be comparable to similarly titled measures of other companies.
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, analysis of our results as reported under GAAP. 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.
Segment operating income (loss) is defined as operating income (loss) 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 (loss) as a percentage of sales and service revenues.
Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures, net of related grant proceeds.
FAS/CAS Adjustment is defined as 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).
Operating FAS/CAS Adjustment is defined as the FAS/CAS Adjustment less 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.
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.
Reconciliation of Segment Operating Income (Loss) and Segment Operating Margin
| Three Months Ended | ||||||||
| March 31 | ||||||||
| ($ in millions) | 2018 | 2017 | ||||||
| Ingalls revenues | $ | 585 | $ | 550 | ||||
| Newport News revenues | 1,082 | 971 | ||||||
| Technical Solutions revenues | 233 | 225 | ||||||
| Intersegment eliminations | (26 | ) | (22 | ) | ||||
| Sales and Service Revenues | 1,874 | 1,724 | ||||||
| Segment Operating Income (Loss) | ||||||||
| Ingalls | 64 | 66 | ||||||
| As a percentage of Ingalls revenues | 10.9 | % | 12.0 | % | ||||
| Newport News | 51 | 72 | ||||||
| As a percentage of Newport News revenues | 4.7 | % | 7.4 | % | ||||
| Technical Solutions | 2 | (18 | ) | |||||
| As a percentage of Technical Solutions revenues | 0.9 | % | (8.0 | )% | ||||
| Segment Operating Income (Loss) | 117 | 120 | ||||||
| As a percentage of sales and service revenues | 6.2 | % | 7.0 | % | ||||
| Non-segment factors affecting operating income (loss): | ||||||||
| Operating FAS/CAS Adjustment | 72 | 53 | ||||||
| Non-current state income taxes | 2 | (5 | ) | |||||
| Operating Income | 191 | 168 | ||||||
| Interest expense | (15 | ) | (18 | ) | ||||
| Non-operating retirement expense | 18 | (4 | ) | |||||
| Other, net | 1 | 1 | ||||||
| Federal and foreign income taxes | (39 | ) | (28 | ) | ||||
| Net Earnings | $ | 156 | $ | 119 | ||||
Reconciliation of Free Cash Flow
| Three Months Ended March 31 | ||||||
| ($ in millions) | 2018 | 2017 | ||||
| Net cash provided by (used in) operating activities | 120 | 98 | ||||
| Less capital expenditures: | ||||||
| Capital expenditure additions | (75 | ) | (58 | ) | ||
| Grant proceeds for capital expenditures | 2 | — | ||||
| Free cash flow | 47 | 40 | ||||
