HUNTINGTON INGALLS INDUSTRIES REPORTS SECOND QUARTER 2020 RESULTS, PROVIDES COVID-19 UPDATE AND UPDATES 2020 OUTLOOK

• Revenues were $2.0 billion in the quarter
• Operating margin was 2.8%
• Diluted earnings per share was $1.30
• Cash from operations was $201 million, and free cash flow1 was $126 million
• Backlog of $46.1 billion

NEWPORT NEWS, Va., Aug. 06, 2020 (GLOBE NEWSWIRE) -- Huntington Ingalls Industries (NYSE: HII) reported second quarter 2020 revenues of $2.0 billion, down 7.4% from the second quarter of 2019. Operating income in the quarter was $57 million and operating margin was 2.8%, compared to $175 million and 8.0%, respectively, in the second quarter of 2019.

The decreases in the quarter were primarily driven by unfavorable cumulative catch-up adjustments totaling $167 million resulting from updated cost and schedule assumptions across all programs. This includes $61 million resulting from discrete COVID-19 related delay and disruption estimates across all programs, including impacts from lower employee attendance, availability of critical skills, and out-of-sequence work, attributable to, among other things, orders of civil authorities associated with COVID-19 and steps taken to mitigate the effects of COVID-19.

The majority of the unfavorable adjustments were related to Block IV boats of the Virginia-class submarine program, totaling $111 million, for unfavorable cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends, and includes impacts of COVID-19 delay and disruption totaling $16 million.

Net earnings in the quarter were $53 million, compared to $128 million in the second quarter of 2019. The decrease in net earnings for the quarter was the result of lower operating income, partially offset by a more favorable operating FAS/CAS adjustment and FAS (non-service) pension benefit.

Diluted earnings per share in the quarter was $1.30, compared to $3.07 in the same period of 2019.

Second quarter cash from operations was $201 million and free cash flow1 was $126 million, compared to negative $44 million and negative $135 million, respectively, in the second quarter of 2019.

New contract awards in the quarter were approximately $2.9 billion, bringing total backlog to approximately $46.1 billion as of June 30, 2020.

COVID-19 Update

"We continue to aggressively manage our response to the ongoing COVID-19 pandemic. The health and safety of our employees remains paramount as we continue our important work to support the nation’s defense,” said Mike Petters, HII president and CEO. "As we discussed when we provided our first quarter results, staffing at our shipyards has been significantly impacted by the pandemic as we worked to preserve the significant investments in human capital that we have made over the past five years. As a result of the pandemic and our response, hourly production workforce attendance at our shipyards averaged approximately 65% during the second quarter." Petters continued, "The delay and disruption from lower attendance, availability of critical skills, and out-of-sequence work caused by COVID-19 has impacted our ability to complete work as efficiently as initially planned and has added incremental program cost and pushed schedules and milestones to the right, which is incorporated in our results and updated outlook for 2020."

Virginia-class Submarine Program Update

"Our assumptions on Block IV of the Virginia-class submarine program called for boat-to-boat cost and schedule improvements as we worked down the learning curve," said Petters. "As we conducted our regular quarterly program status reviews, it became clear that performance trends, exacerbated by the COVID-19 pandemic environment, now make those improvements less likely to occur. As a result, we are resetting our risk registers to reflect the performance trends we experienced in the quarter, including the impacts of COVID-19."

In the quarter, the $111 million unfavorable cumulative catch-up adjustments on the Block IV boats of the Virginia-class submarine program included $95 million for cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends, as well as $16 million from delay and disruption directly attributable to COVID-19.

“There is no doubt that this quarter was challenging,” said Petters. “However, when I look at the leadership team we have in place, the workforce we have hired, trained and certified over the past few years and the record backlog of work we have in front of us, I am very excited about the future of the shipbuilding business.”

Updated Financial Outlook

“We have revised our 2020 outlook for updated cost and schedule assumptions across our programs,” said Chris Kastner, HII chief financial officer. "Regarding COVID-19, we have assumed limited relief for costs directly related to our pandemic response but have made no assumption for equitable adjustments for the delay and disruption caused by COVID-19. Our guidance also assumes an orderly recovery to normalized attendance levels at both shipyards."

• Expect shipbuilding revenue between $7.6 and $7.9 billion; shipbuilding operating margin1 between 5.5% and 6.5%
• Expect Technical Solutions revenue between $1.2 and $1.25 billion and operating margin between 2.0% and 2.4%
  ° Assumes San Diego Shipyard closing occurs in Q3 2020, and UPI closing occurs in Q4 2020
• Expect 2020 free cash flow1 in excess of $500 million

1Non-GAAP measure. See Exhibit B for definition and reconciliation

Results of Operations

Three Months Ended Six Months Ended June 30 June 30 ($ in millions, except per share amounts)20202019$ Change% Change20202019$ Change% ChangeSales and service revenues$2,027 $2,188 $(161)(7.4)% $4,290 $4,268 $22 0.5%Operating income57 175 (118)(67.4)% 272 336 (64)(19.0)%Operating margin %2.8%8.0% (519) bps 6.3%7.9% (153) bpsSegment operating income (loss)1(5)138 (143)(103.6)% 151 267 (116)(43.4)%Segment operating margin %1(0.2)%6.3% (655) bps 3.5%6.3% (274) bpsNet earnings53 128 (75)(58.6)% 225 246 (21)(8.5)%Diluted earnings per share$1.30 $3.07 $(1.77)(57.7)% $5.54 $5.91 $(0.37)(6.3)% Pension Adjusted Figures Net earnings2(20)97 (117)(120.6)% 78 186 (108)(58.1)%Diluted earnings per share2$(0.49)$2.33 $(2.82)(121.0)% $1.92 $4.47 $(2.55)(57.0)%1 Non-GAAP measures that exclude non-segment factors affecting operating income. See Exhibit B for definitions and reconciliations.2 Non-GAAP measures that exclude the impacts of the FAS/CAS Adjustment. See Exhibit B for reconciliation.

Segment Operating Results

Ingalls Shipbuilding

Three Months Ended Six Months Ended June 30 June 30 ($ in millions)20202019$ Change% Change20202019$ Change% ChangeRevenues$622 $622 $— —% $1,251 $1,206 $45 3.7%Segment operating income155 69 (14)(20.3)% 123 115 8 7.0%Segment operating margin %18.8%11.1% (225) bps 9.8%9.5% 30 bps1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Ingalls Shipbuilding revenues for the second quarter of 2020 were $622 million, flat from the same period in 2019, driven by higher revenues on the Legend-class National Security Cutter (NSC) program, the San Antonio-class LPD program and the America-class LHA program, offset by lower revenues on the Arleigh Burke-class DDG program. Higher NSC program revenues were primarily due to higher volumes on Calhoun (NSC 10) and Friedman (NSC 11), partially offset by lower volume on Midgett (NSC 8). Higher LPD and LHA program revenues were primarily due to higher volumes on Harrisburg (LPD 30), Richard M. McCool Jr. (LPD 29), and LHA 9 (unnamed), partially offset by lower volumes on Tripoli (LHA 7) and Bougainville (LHA 8). Lower DDG program revenues were primarily due to lower volumes on USS Fitzgerald (DDG 62) restoration and modernization, Jack H. Lucas (DDG 125), and Frank E. Petersen Jr. (DDG 121), partially offset by higher volumes on Ted Stevens (DDG 128), Delbert D. Black (DDG 119), and Sam Nunn (DDG 133).

Ingalls Shipbuilding segment operating income for the second quarter was $55 million, a decrease of $14 million from the same period last year. Segment operating margin in the quarter was 8.8%, compared to 11.1% in the same period last year. The decrease was primarily driven by unfavorable adjustments, including delay and disruption from COVID-19 and lower risk retirement on the Legend-class NSC program, partially offset by higher risk retirement on Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive.

Key Ingalls Shipbuilding milestones for the quarter:

• Delivered guided missile destroyer Delbert D. Black (DDG 119) to the U.S. Navy
• Redelivered USS Fitzgerald (DDG 62) after completion of restoration and modernization
• Awarded a $1.5 billion contract for the construction of amphibious transport dock LPD 31
• Awarded a $936 million contract for the construction of an additional Arleigh Burke-class (DDG 51) Flight III destroyer
• Awarded advance procurement contracts for amphibious assault ship LHA 9 totaling $332 million
• Awarded LCS planning yard contract worth a potential $108 million

Newport News Shipbuilding

Three Months Ended Six Months Ended June 30 June 30 ($ in millions)20202019$ Change% Change20202019$ Change% ChangeRevenues$1,122 $1,279 $(157)(12.3)% $2,463 $2,558 $(95)(3.7)%Segment operating income (loss)1(69)71 (140)(197.2)% 26 152 (126)(82.9)%Segment operating margin %1(6.1)%5.6% (1170) bps 1.1%5.9% (489) bps1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Newport News Shipbuilding revenues for the second quarter of 2020 were $1.1 billion, a decrease of $157 million, or 12.3%, from the same period in 2019, driven by lower revenues in aircraft carriers and submarine construction, partially offset by higher revenues in submarine and carrier fleet support services. Aircraft carrier revenues decreased primarily as a result of lower volumes on the refueling and complex overhaul (RCOH) of USS George Washington (CVN 73), USS Gerald R. Ford (CVN 78), and Kennedy (CVN 79), partially offset by higher volumes on the advance planning contract for the RCOH of USS John C. Stennis (CVN 74) and Enterprise (CVN 80). Submarine revenues decreased primarily as a result of lower volumes on the Virginia-class submarine program, partially offset by higher volume on the Columbia-class submarine program. The lower volume on the Virginia-class submarine program was due to lower volumes on Block IV and Block III boats, partially offset by higher volumes on Block V boats.

Newport News Shipbuilding segment operating loss for the second quarter was $69 million, compared to operating income of $71 million from the same period last year. Segment operating margin was (6.1)% for the quarter, compared to 5.6% in the same period last year. These decreases were primarily due to unfavorable cumulative catch-up adjustments on Block IV boats of the Virginia-class submarine program for unfavorable cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends, as well as the impact of discrete COVID-19 delay and disruption.

Key Newport News Shipbuilding milestones for the quarter:

• John F. Kennedy (CVN 79) is approximately 74% complete
• The RCOH of USS George Washington (CVN 73) is approximately 78% complete

Technical Solutions

Three Months Ended Six Months Ended June 30 June 30 ($ in millions)20202019$ Change% Change20202019$ Change% ChangeRevenues$320 $321 $(1)(0.3)% $637 $561 76 13.5%Segment operating income (loss)19 (2)$11 550.0% 2 — 2 —%Segment operating margin %12.8%(0.6)% 344 bps 0.3%— % 31 bps1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.

Technical Solutions revenues for the second quarter of 2020 were $320 million, a decrease of $1 million from the same period in 2019, primarily driven by lower mission driven innovative solutions (MDIS), fleet support and nuclear and environmental services revenues, partially offset by the acquisition of Hydroid in 2020 and higher revenues on oil and gas services.

Technical Solutions segment operating income for the second quarter was $9 million, compared to segment operating loss of $2 million in second quarter 2019. The increase was primarily driven by the loss on a fleet support contract in the prior year period.

Key Technical Solutions milestones for the quarter:

• Awarded a contract to provide analytical support services to the U.S. Special Operations Command’s Intelligence Directorate
• One of five companies awarded an indefinite delivery/indefinite quantity contract with the U.S. Postal Service Office of Inspector General to provide support services to the Office of the Chief Information Officer

2020 Outlook