Huntington Ingalls Industries Inc.
10/31/2024 | Press release | Distributed by Public on 10/31/2024 09:02
Quarterly Report for Quarter Ending 09/30/2024 (Form 10-Q)
hii-20240930
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-Q
______________________________________________________________
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☒
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission file number 001-34910
______________________________________________________________
HUNTINGTON INGALLS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________
| Delaware | 90-0607005 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
4101 Washington AvenueNewport News, Virginia23607
(Address of principal executive offices and zip code)
(757) 380-2000
(Registrant's telephone number, including area code)
______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | HII | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer |
☒
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Accelerated Filer | ☐ |
| Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| Emerging Growth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
As of October 25, 2024, 39,129,347 shares of the registrant's common stock were outstanding.
Table of Contents
TABLE OF CONTENTS
| PART I - FINANCIAL INFORMATION | Page | |
| Item 1. |
Financial Statements (Unaudited)
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Condensed Consolidated Statements of Operations and Comprehensive Income
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1
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Condensed Consolidated Statements of Financial Position
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2
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Condensed Consolidated Statements of Cash Flows
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3
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Condensed Consolidated Statements of Changes in Equity
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4
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Notes to Condensed Consolidated Financial Statements
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5
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| 1. |
Description of Business
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5
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| 2. |
Basis of Presentation
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5
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| 3. |
Accounting Standards Updates
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6
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| 4. |
Stockholders' Equity
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6
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| 5. |
Earnings Per Share
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8
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| 6. |
Revenue
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8
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| 7. |
Segment Information
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12
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| 8. |
Income Taxes
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12
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| 9. |
Investigations, Claims, and Litigation
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13
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| 10. |
Commitments and Contingencies
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14
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| 11. |
Employee Pension and Other Postretirement Benefits
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15
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| 12. |
Stock Compensation Plans
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16
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| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations
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16
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| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk
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32
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| Item 4. |
Controls and Procedures
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32
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| PART II - OTHER INFORMATION | ||
| Item 1. |
Legal Proceedings
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33
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| Item 1A. |
Risk Factors
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33
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
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33
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| Item 3. |
Defaults Upon Senior Securities
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33
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| Item 4. |
Mine Safety Disclosures
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33
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| Item 5. |
Other Information
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34
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| Item 6. |
Exhibits
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34
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Signatures
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35
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Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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) | 2024 | 2023 | 2024 | 2023 | ||||
| Sales and service revenues | ||||||||
| Product sales | $ | 1,761 | $ | 1,835 | $ | 5,474 | $ | 5,543 |
| Service revenues | 988 | 981 | 3,057 | 2,734 | ||||
| Sales and service revenues | 2,749 | 2,816 | 8,531 | 8,277 | ||||
| Cost of sales and service revenues | ||||||||
| Cost of product sales | 1,556 | 1,541 | 4,720 | 4,711 | ||||
| Cost of service revenues | 871 | 859 | 2,682 | 2,411 | ||||
| Income from operating investments, net | 12 | 9 | 35 | 25 | ||||
| General and administrative expenses | 252 | 253 | 739 | 711 | ||||
| Operating income | 82 | 172 | 425 | 469 | ||||
| Other income (expense) | ||||||||
| Interest expense | (23) | (22) | (68) | (70) | ||||
| Non-operating retirement benefit | 44 | 37 | 134 | 111 | ||||
| Other, net | 9 | 2 | 21 | 11 | ||||
| Earnings before income taxes | 112 | 189 | 512 | 521 | ||||
| Federal and foreign income tax expense | 11 | 41 | 85 | 114 | ||||
| Net earnings | $ | 101 | $ | 148 | $ | 427 | $ | 407 |
| Basic earnings per share | $ | 2.56 | $ | 3.70 | $ | 10.81 | $ | 10.18 |
| Weighted-average common shares outstanding | 39.5 | 40.0 | 39.5 | 40.0 | ||||
| Diluted earnings per share | $ | 2.56 | $ | 3.70 | $ | 10.81 | $ | 10.18 |
| Weighted-average diluted shares outstanding | 39.5 | 40.0 | 39.5 | 40.0 | ||||
| Dividends declared per share | $ | 1.30 | $ | 1.24 | $ | 3.90 | $ | 3.72 |
| Net earnings from above | $ | 101 | $ | 148 | $ | 427 | $ | 407 |
| Other comprehensive income | ||||||||
| Change in unamortized benefit plan costs | 5 | 4 | 14 | 13 | ||||
| Tax expense for items of other comprehensive income | (2) | (2) | (4) | (4) | ||||
| Other comprehensive income, net of tax | 3 | 2 | 10 | 9 | ||||
| Comprehensive income | $ | 104 | $ | 150 | $ | 437 | $ | 416 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
| ($ in millions) | September 30, 2024 | December 31, 2023 | ||
| Assets | ||||
| Current Assets | ||||
| Cash and cash equivalents | $ | 10 | $ | 430 |
|
Accounts receivable, net of allowance for expected credit losses of $2 million as of 2024 and $8 million as of 2023
|
436 | 461 | ||
| Contract assets | 1,714 | 1,537 | ||
| Inventoried costs | 205 | 186 | ||
| Income taxes receivable | 173 | 183 | ||
| Prepaid expenses and other current assets | 91 | 83 | ||
| Total current assets | 2,629 | 2,880 | ||
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Property, plant, and equipment, net of accumulated depreciation of $2,544 million as of 2024 and $2,467 million as of 2023
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3,384 | 3,296 | ||
| Operating lease assets | 249 | 262 | ||
| Goodwill | 2,618 | 2,618 | ||
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Other intangible assets, net of accumulated amortization of $1,091 million as of 2024 and $1,009 million as of 2023
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809 | 891 | ||
| Pension plan assets | 985 | 888 | ||
| Miscellaneous other assets | 408 | 380 | ||
| Total assets | $ | 11,082 | $ | 11,215 |
| Liabilities and Stockholders' Equity | ||||
| Current Liabilities | ||||
| Trade accounts payable | $ | 579 | $ | 554 |
| Accrued employees' compensation | 345 | 382 | ||
| Short-term debt and current portion of long-term debt | 898 | 231 | ||
| Current portion of postretirement plan liabilities | 129 | 129 | ||
| Current portion of workers' compensation liabilities | 224 | 224 | ||
| Contract liabilities | 743 | 1,063 | ||
| Other current liabilities | 418 | 449 | ||
| Total current liabilities | 3,336 | 3,032 | ||
| Long-term debt | 1,709 | 2,214 | ||
| Pension plan liabilities | 219 | 212 | ||
| Other postretirement plan liabilities | 232 | 241 | ||
| Workers' compensation liabilities | 448 | 449 | ||
| Long-term operating lease liabilities | 213 | 228 | ||
| Deferred tax liabilities | 316 | 367 | ||
| Other long-term liabilities | 406 | 379 | ||
| Total liabilities | 6,879 | 7,122 | ||
| Commitments and Contingencies (Note 10) | ||||
| Stockholders' Equity | ||||
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Common stock, $0.01 par value; 150,000,000 shares authorized; 53,713,746 shares issued and 39,129,037 shares outstanding as of 2024, and 53,595,748 shares issued and 39,618,880 shares outstanding as of 2023
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1 | 1 | ||
| Additional paid-in capital | 2,037 | 2,045 | ||
| Retained earnings | 5,026 | 4,755 | ||
| Treasury stock | (2,449) | (2,286) | ||
| Accumulated other comprehensive loss | (412) | (422) | ||
| Total stockholders' equity | 4,203 | 4,093 | ||
| Total liabilities and stockholders' equity | $ | 11,082 | $ | 11,215 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30 | ||||
| ($ in millions) | 2024 | 2023 | ||
| Operating Activities: | ||||
| Net earnings | $ | 427 | $ | 407 |
| Adjustments to reconcile net cash provided by operating activities: | ||||
| Depreciation | 160 | 163 | ||
| Amortization of purchased intangibles | 82 | 96 | ||
| Other non-cash transactions, net | 7 | 16 | ||
| Stock-based compensation | 15 | 27 | ||
| Deferred income taxes | (55) | (81) | ||
| Gain on investments in marketable securities | (22) | (10) | ||
| Change in | ||||
| Accounts receivable | 31 | (62) | ||
| Contract assets | (177) | (60) | ||
| Inventoried costs | (19) | (12) | ||
| Prepaid expenses and other assets | (9) | (66) | ||
| Accounts payable and accruals | (354) | 45 | ||
| Retiree benefits | (84) | (55) | ||
| Net cash provided by operating activities | 2 | 408 | ||
| Investing Activities: | ||||
| Capital expenditures | ||||
| Capital expenditure additions | (253) | (164) | ||
| Grant proceeds for capital expenditures | 14 | 14 | ||
| Investment in affiliates | - | (24) | ||
| Proceeds from equity method investments | - | 61 | ||
| Other investing activities, net | 1 | 2 | ||
| Net cash used in investing activities | (238) | (111) | ||
| Financing Activities: | ||||
| Repayment of long-term debt | (229) | (455) | ||
| Proceeds from revolving credit facility borrowings | 42 | - | ||
| Repayment of revolving credit facility borrowings | (42) | - | ||
| Net borrowings on commercial paper | 396 | - | ||
| Debt issuance costs | (7) | - | ||
| Dividends paid | (154) | (149) | ||
| Repurchases of common stock | (162) | (37) | ||
| Employee taxes on certain share-based payment arrangements | (25) | (13) | ||
| Other financing activities, net | (3) | (1) | ||
| Net cash used in financing activities | (184) | (655) | ||
| Change in cash and cash equivalents | (420) | (358) | ||
| Cash and cash equivalents, beginning of period | 430 | 467 | ||
| Cash and cash equivalents, end of period | $ | 10 | $ | 109 |
| Supplemental Cash Flow Disclosure | ||||
| Cash paid for income taxes (net of refunds) | $ | 170 | $ | 227 |
| Cash paid for interest | $ | 66 | $ | 63 |
| Non-Cash Investing and Financing Activities | ||||
| Capital expenditures accrued in accounts payable | $ | 12 | $ | 6 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
|
Three Months Ended September 30, 2024 and 2023 ($ in millions) |
Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||
| Balance as of June 30, 2023 | $ | 1 | $ | 2,030 | $ | 4,434 | $ | (2,227) | $ | (592) | $ | 3,646 |
| Net earnings | - | - | 148 | - | - | 148 | ||||||
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Dividends declared ($1.24 per share)
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- | - | (50) | - | - | (50) | ||||||
| Stock-based compensation | - | 8 | - | - | - | 8 | ||||||
| Other comprehensive income, net of tax | - | - | - | - | 2 | 2 | ||||||
| Treasury stock activity | - | - | - | (21) | - | (21) | ||||||
| Balance as of September 30, 2023 | $ | 1 | $ | 2,038 | $ | 4,532 | $ | (2,248) | $ | (590) | $ | 3,733 |
| Balance as of June 30, 2024 | $ | 1 | $ | 2,029 | $ | 4,977 | $ | (2,414) | $ | (415) | $ | 4,178 |
| Net earnings | - | - | 101 | - | - | 101 | ||||||
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Dividends declared ($1.30 per share)
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- | - | (52) | - | - | (52) | ||||||
| Stock-based compensation | - | 8 | - | - | - | 8 | ||||||
| Other comprehensive income, net of tax | - | - | - | - | 3 | 3 | ||||||
| Treasury stock activity | - | - | - | (35) | - | (35) | ||||||
| Balance as of September 30, 2024 | $ | 1 | $ | 2,037 | $ | 5,026 | $ | (2,449) | $ | (412) | $ | 4,203 |
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Nine Months Ended September 30, 2024 and 2023 ($ in millions) |
Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||
| Balance as of December 31, 2022 | $ | 1 | $ | 2,022 | $ | 4,276 | $ | (2,211) | $ | (599) | $ | 3,489 |
| Net earnings | - | - | 407 | - | - | 407 | ||||||
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Dividends declared ($3.72 per share)
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- | - | (149) | - | - | (149) | ||||||
| Stock-based compensation | - | 16 | (2) | - | - | 14 | ||||||
| Other comprehensive income, net of tax | - | - | - | - | 9 | 9 | ||||||
| Treasury stock activity | - | - | - | (37) | - | (37) | ||||||
| Balance as of September 30, 2023 | $ | 1 | $ | 2,038 | $ | 4,532 | $ | (2,248) | $ | (590) | $ | 3,733 |
| Balance as of December 31, 2023 | $ | 1 | $ | 2,045 | $ | 4,755 | $ | (2,286) | $ | (422) | $ | 4,093 |
| Net earnings | - | - | 427 | - | - | 427 | ||||||
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Dividends declared ($3.90 per share)
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- | - | (154) | - | - | (154) | ||||||
| Stock-based compensation | - | (8) | (2) | - | - | (10) | ||||||
| Other comprehensive income, net of tax | - | - | - | - | 10 | 10 | ||||||
| Treasury stock activity | - | - | - | (163) | - | (163) | ||||||
| Balance as of September 30, 2024 | $ | 1 | $ | 2,037 | $ | 5,026 | $ | (2,449) | $ | (412) | $ | 4,203 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS
Huntington Ingalls Industries, Inc. ("HII" or the "Company") is a global, all-domain defense partner, building and delivering the world's most powerful, survivable naval ships and technologies that safeguard America's seas, sky, land, space, and cyber. HII is organized into three reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Mission Technologies. For more than a century, the Company's Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder, making HII America's largest shipbuilder. The Mission Technologies segment develops integrated solutions that enable today's connected, all-domain force.
2. BASIS OF PRESENTATION
Principles of Consolidation- The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). As used in the Notes to the Condensed Consolidated Financial Statements (Unaudited), the terms "HII" and "the Company" refer to HII and its subsidiaries. All intercompany transactions and balances are eliminated in consolidation. For classification of current assets and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.
These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Annual Report on Form 10-K").
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management's long-standing practice to establish interim closing dates using a "fiscal" calendar, which requires the businesses to close their books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. This practice only exists for interim periods within a reporting year.
Accounting Estimates- The preparation of the Company's unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, and actual results could differ materially from those estimates.
Fair Value of Financial Instruments - Except for the Company's long-term debt, the carrying amounts of the Company's financial instruments that are recorded at historical cost approximate fair value due to the short-term nature of the instruments and low credit risk associated with the respective counterparties.
The Company maintains multiple grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $235 million and $220 million as of September 30, 2024, and December 31, 2023, respectively, and are presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position. These trusts consist primarily of investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.
The estimated fair values of the Company's total long-term debt (including current portion), excluding finance lease liabilities, as of September 30, 2024, and December 31, 2023, were $2,146 million and $2,309 million, respectively. The estimated fair values of the current portion of the Company's long-term debt, excluding finance lease liabilities, were $496 million and $229 million as of September 30, 2024, and December 31, 2023, respectively. The fair values of the Company's long-term debt were calculated based on recent trades of the Company's debt instruments in inactive markets, which fall within Level 2 of the fair value hierarchy.
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Debt- In September 2024, the Company amended and restated its existing $1.5 billion credit facility, increasing the capacity thereunder to $1.7 billion and extending the maturity date for five years from signing (the "Second Amended and Restated Revolving Credit Facility"). The Second Amended and Restated Revolving Credit Facility has a variable interest rate on outstanding borrowings based on the Secured Overnight Financing Rate ("SOFR") plus an interest spread based upon the Company's credit rating, which may vary between 1.225%and 2.100%. The Second Amended and Restated Revolving Credit Facility also has a commitment fee on unutilized amounts based on the Company's credit rating, which may vary between 0.125%and 0.300%. The Second Amended and Restated Revolving Credit Facility includes a letter of credit sub-facility of $300 million.
As of September 30, 2024, the Company had notdrawn on the Second Amended and Restated Revolving Credit Facility. Based on the Company's current credit rating, the interest rate spread on drawn amounts would be 1.475%and the commitment fee would be 0.200%.
The Second Amended and Restated Revolving Credit Facility contains customary affirmative and negative covenants and events of default, as well as a financial covenant based on a maximum total leverage ratio. Each of the Company's existing and future material wholly owned domestic subsidiaries, except those that are specifically designated as unrestricted subsidiaries, are and will be guarantors under the Second Amended and Restated Revolving Credit Facility.
Additionally, in September 2024, the Company's borrowing capacity under its commercial paper program increased from $1 billion to $1.7 billion.
3. ACCOUNTING STANDARDS UPDATES
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance requires, among other things, segment disclosures of significant expenses that are regularly reported to the chief operating decision maker and the nature of segment expense information used to manage operations. The new guidance is effective on a retrospective basis for annual reporting periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company does not expect the new guidance to have a material impact on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The new guidance requires disaggregated information about the effective tax rate reconciliation and additional information on taxes paid that meet a quantitative threshold. The new guidance is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted. The Company plans to early adopt the new guidance on a retrospective basis for the annual reporting period ending December 31, 2024, and does not expect the new guidance to have a material impact on its consolidated financial statements.
Other accounting pronouncements issued but not effective until after December 31, 2024, are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
4. STOCKHOLDERS' EQUITY
Treasury Stock- In January 2024, the Company's board of directors authorized an increase in the Company's stock repurchase program from $3.2 billion to $3.8 billion and an extension of the term of the program to December 31, 2028. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the nine months ended September 30, 2024, the Company repurchased 607,841 shares at an aggregate cost of $163 million, including $1 million of accrued excise tax. For the nine months ended September 30, 2023, the Company repurchased 175,555 shares at an aggregate cost of $37 million. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.
Dividends- The Company paid cash dividends totaling $154 million and $149 million for thenine months ended September 30, 2024 and 2023, respectively.
Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss was comprised of unamortized benefit plan costs of $412 million and $422 million as of September 30, 2024, and December 31, 2023, respectively.
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The changes in accumulated other comprehensive loss by component for the three and nine months ended September 30, 2024 and 2023, were as follows:
| ($ in millions) | Benefit Plans | Other | Total | |||
| Balance as of June 30, 2023 | $ | (592) | $ | - | $ | (592) |
| Amounts reclassified from accumulated other comprehensive loss | ||||||
|
Amortization of prior service cost1
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3 | - | 3 | |||
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Amortization of net actuarial loss1
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1 | - | 1 | |||
| Tax expense for items of other comprehensive income | (2) | - | (2) | |||
| Net current period other comprehensive income | 2 | - | 2 | |||
| Balance as of September 30, 2023 | $ | (590) | $ | - | $ | (590) |
| Balance as of June 30, 2024 | $ | (415) | $ | - | $ | (415) |
| Amounts reclassified from accumulated other comprehensive loss | ||||||
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Amortization of prior service cost1
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4 | - | 4 | |||
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Amortization of net actuarial loss1
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1 | - | 1 | |||
| Tax expense for items of other comprehensive income | (2) | - | (2) | |||
| Net current period other comprehensive income | 3 | - | 3 | |||
| Balance as of September 30, 2024 | $ | (412) | $ | - | $ | (412) |
| ($ in millions) | Benefit Plans | Other | Total | |||
| Balance as of December 31, 2022 | $ | (599) | $ | - | $ | (599) |
| Amounts reclassified from accumulated other comprehensive loss | ||||||
|
Amortization of prior service cost1
|
11 | - | 11 | |||
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Amortization of net actuarial loss1
|
2 | - | 2 | |||
| Tax expense for items of other comprehensive income | (4) | - | (4) | |||
| Net current period other comprehensive income | 9 | - | 9 | |||
| Balance as of September 30, 2023 | $ | (590) | $ | - | $ | (590) |
| Balance as of December 31, 2023 | $ | (422) | $ | - | $ | (422) |
| Amounts reclassified from accumulated other comprehensive loss | ||||||
|
Amortization of prior service cost1
|
11 | - | 11 | |||
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Amortization of net actuarial loss1
|
3 | - | 3 | |||
| Tax expense for items of other comprehensive income | (4) | - | (4) | |||
| Net current period other comprehensive income | 10 | - | 10 | |||
| Balance as of September 30, 2024 | $ | (412) | $ | - | $ | (412) |
1These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 11: Employee Pension and Other Postretirement Benefits. The tax expense recorded in stockholders' equity for the amounts reclassified from accumulated other comprehensive loss for each of the three months ended September 30, 2024 and 2023, was $2 million. The tax expense recorded in stockholders' equity for the amounts reclassified from accumulated other comprehensive loss for each of the nine months ended September 30, 2024 and 2023, was $4 million.
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5. EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
| (in millions, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||
| Net earnings | $ | 101 | $ | 148 | $ | 427 | $ | 407 |
| Weighted-average common shares outstanding | 39.5 | 40.0 | 39.5 | 40.0 | ||||
| Net dilutive effect of stock awards | - | - | - | - | ||||
| Dilutive weighted-average common shares outstanding | 39.5 | 40.0 | 39.5 | 40.0 | ||||
| Earnings per share - basic | $ | 2.56 | $ | 3.70 | $ | 10.81 | $ | 10.18 |
| Earnings per share - diluted | $ | 2.56 | $ | 3.70 | $ | 10.81 | $ | 10.18 |
Under the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of 0.4 million Restricted Performance Stock Rights ("RPSRs") and 0.1 million Restricted Stock Rights ("RSRs") for each of the three and nine months endedSeptember 30, 2024, and 0.4 million RPSRs foreach ofthe three and nine months ended September 30, 2023.
6. REVENUE
Disaggregation of Revenue
The following tables present revenues on a disaggregated basis, in a manner that reconciles with the Company's reportable segment disclosures, for the following categories: product versus service type, customer type, contract type, and major program. The Company believes that this level of disaggregation provides investors with information to evaluate the Company's financial performance and provides the Company with information to make capital allocation decisions in the most appropriate manner. For more information on the Company's contracts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's 2023 Annual Report on Form 10-K.
The following tables present revenues on a disaggregated basis:
| Three Months Ended September 30, 2024 | ||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||
| Revenue Type | ||||||||||
| Product sales | $ | 569 | $ | 1,163 | $ | 29 | $ | - | $ | 1,761 |
| Service revenues | 93 | 249 | 646 | - | 988 | |||||
| Intersegment | 2 | - | 34 | (36) | - | |||||
| Sales and service revenues | $ | 664 | $ | 1,412 | $ | 709 | $ | (36) | $ | 2,749 |
| Customer Type | ||||||||||
| Federal | $ | 662 | $ | 1,412 | $ | 673 | $ | - | $ | 2,747 |
| Commercial | - | - | 2 | - | 2 | |||||
| Intersegment | 2 | - | 34 | (36) | - | |||||
| Sales and service revenues | $ | 664 | $ | 1,412 | $ | 709 | $ | (36) | $ | 2,749 |
| Contract Type | ||||||||||
| Firm fixed-price | $ | - | $ | 1 | $ | 83 | $ | - | $ | 84 |
| Fixed-price incentive | 568 | 753 | 3 | - | 1,324 | |||||
| Cost-type | 94 | 658 | 543 | - | 1,295 | |||||
| Time and materials | - | - | 46 | - | 46 | |||||
| Intersegment | 2 | - | 34 | (36) | - | |||||
| Sales and service revenues | $ | 664 | $ | 1,412 | $ | 709 | $ | (36) | $ | 2,749 |
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| Three Months Ended September 30, 2023 | ||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||
| Revenue Type | ||||||||||
| Product sales | $ | 637 | $ | 1,170 | $ | 28 | $ | - | $ | 1,835 |
| Service revenues | 73 | 281 | 627 | - | 981 | |||||
| Intersegment | 1 | 2 | 30 | (33) | - | |||||
| Sales and service revenues | $ | 711 | $ | 1,453 | $ | 685 | $ | (33) | $ | 2,816 |
| Customer Type | ||||||||||
| Federal | $ | 710 | $ | 1,451 | $ | 647 | $ | - | $ | 2,808 |
| Commercial | - | - | 7 | - | 7 | |||||
| State and local government agencies | - | - | 1 | - | 1 | |||||
| Intersegment | 1 | 2 | 30 | (33) | - | |||||
| Sales and service revenues | $ | 711 | $ | 1,453 | $ | 685 | $ | (33) | $ | 2,816 |
| Contract Type | ||||||||||
| Firm fixed-price | $ | - | $ | 1 | $ | 77 | $ | - | $ | 78 |
| Fixed-price incentive | 637 | 779 | 3 | - | 1,419 | |||||
| Cost-type | 73 | 671 | 521 | - | 1,265 | |||||
| Time and materials | - | - | 54 | - | 54 | |||||
| Intersegment | 1 | 2 | 30 | (33) | - | |||||
| Sales and service revenues | $ | 711 | $ | 1,453 | $ | 685 | $ | (33) | $ | 2,816 |
| Nine Months Ended September 30, 2024 | ||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||
| Revenue Type | ||||||||||
| Product sales | $ | 1,786 | $ | 3,602 | $ | 86 | $ | - | $ | 5,474 |
| Service revenues | 240 | 777 | 2,040 | - | 3,057 | |||||
| Intersegment | 5 | 2 | 98 | (105) | - | |||||
| Sales and service revenues | $ | 2,031 | $ | 4,381 | $ | 2,224 | $ | (105) | $ | 8,531 |
| Customer Type | ||||||||||
| Federal | $ | 2,026 | $ | 4,378 | $ | 2,120 | $ | - | $ | 8,524 |
| Commercial | - | 1 | 5 | - | 6 | |||||
| State and local government agencies | - | - | 1 | - | 1 | |||||
| Intersegment | 5 | 2 | 98 | (105) | - | |||||
| Sales and service revenues | $ | 2,031 | $ | 4,381 | $ | 2,224 | $ | (105) | $ | 8,531 |
| Contract Type | ||||||||||
| Firm fixed-price | $ | 2 | $ | 5 | $ | 250 | $ | - | $ | 257 |
| Fixed-price incentive | 1,784 | 2,353 | 8 | - | 4,145 | |||||
| Cost-type | 240 | 2,021 | 1,735 | - | 3,996 | |||||
| Time and materials | - | - | 133 | - | 133 | |||||
| Intersegment | 5 | 2 | 98 | (105) | - | |||||
| Sales and service revenues | $ | 2,031 | $ | 4,381 | $ | 2,224 | $ | (105) | $ | 8,531 |
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| Nine Months Ended September 30, 2023 | ||||||||||
| ($ in millions) | Ingalls | Newport News | Mission Technologies | Intersegment Eliminations | Total | |||||
| Revenue Type | ||||||||||
| Product sales | $ | 1,775 | $ | 3,688 | $ | 80 | $ | - | $ | 5,543 |
| Service revenues | 171 | 777 | 1,786 | - | 2,734 | |||||
| Intersegment | 6 | 3 | 88 | (97) | - | |||||
| Sales and service revenues | $ | 1,952 | $ | 4,468 | $ | 1,954 | $ | (97) | $ | 8,277 |
| Customer Type | ||||||||||
| Federal | $ | 1,946 | $ | 4,465 | $ | 1,836 | $ | - | $ | 8,247 |
| Commercial | - | - | 29 | - | 29 | |||||
| State and local government agencies | - | - | 1 | - | 1 | |||||
| Intersegment | 6 | 3 | 88 | (97) | - | |||||
| Sales and service revenues | $ | 1,952 | $ | 4,468 | $ | 1,954 | $ | (97) | $ | 8,277 |
| Contract Type | ||||||||||
| Firm fixed-price | $ | 2 | $ | 3 | $ | 236 | $ | - | $ | 241 |
| Fixed-price incentive | 1,776 | 2,432 | 4 | - | 4,212 | |||||
| Cost-type | 168 | 2,030 | 1,464 | - | 3,662 | |||||
| Time and materials | - | - | 162 | - | 162 | |||||
| Intersegment | 6 | 3 | 88 | (97) | - | |||||
| Sales and service revenues | $ | 1,952 | $ | 4,468 | $ | 1,954 | $ | (97) | $ | 8,277 |
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | ||||
| Major Programs | ||||||||
| Amphibious assault ships | $ | 358 | $ | 396 | $ | 1,123 | $ | 1,093 |
| Surface combatants and coast guard cutters | 304 | 313 | 901 | 853 | ||||
| Other | 2 | 2 | 7 | 6 | ||||
| Total Ingalls | 664 | 711 | 2,031 | 1,952 | ||||
| Aircraft carriers | 768 | 782 | 2,391 | 2,447 | ||||
| Submarines | 522 | 515 | 1,601 | 1,592 | ||||
| Other | 122 | 156 | 389 | 429 | ||||
| Total Newport News | 1,412 | 1,453 | 4,381 | 4,468 | ||||
| C5ISR, CEW&S, LVC | 593 | 567 | 1,857 | 1,609 | ||||
| Other | 116 | 118 | 367 | 345 | ||||
| Total Mission Technologies | 709 | 685 | 2,224 | 1,954 | ||||
| Intersegment eliminations | (36) | (33) | (105) | (97) | ||||
| Sales and service revenues | $ | 2,749 | $ | 2,816 | $ | 8,531 | $ | 8,277 |
As of September 30, 2024, the Company had $49.4 billion of remaining performance obligations. The Company expects to recognize approximately 30% of its remaining performance obligations as revenue through 2025, an additional 30% through 2027, and the balance thereafter.
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Cumulative Catch-up Revenue Adjustments
The following table presents the effect of net cumulative catch-up revenue adjustments on operating income and diluted earnings per share:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
| ($ in millions, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||
| Effect on operating income | $ | (72) | $ | 21 | $ | (46) | $ | 50 |
| Effect on diluted earnings per share | $ | (1.42) | $ | 0.41 | $ | (0.91) | $ | 0.99 |
The Company's multi-year shipbuilding contracts with the U.S. Government are routinely modified as the result of unpriced change orders arising in the ordinary course of business. These anticipated changes are accounted for as contract modifications when the scope of the work has been approved and it is probable that the price will be approved. The Company recognizes variable consideration included in the transaction price for a modified contract to the extent the Company believes a significant reversal of revenue is not probable.
For the three and nine months ended September 30, 2024, no individual favorable cumulative catch-up revenue adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.
For the three months ended September 30, 2024, cumulative catch-up revenue adjustments included unfavorable adjustments of $34 million on Block IV of the Virginiaclass (SSN 774) submarine program, $14 million on the refueling and complex overhaul ("RCOH") of USSJohn C. Stennis(CVN 74), and $16 million on the construction of Enterprise (CVN 80) and Doris Miller (CVN 81) at the Company's Newport News segment. For the nine months ended September 30, 2024, no individual unfavorable cumulative catch-up revenue adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.
For the three and nine months ended September 30, 2023, no individual favorable cumulative catch-up revenue adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2023, no individual unfavorable cumulative catch-up revenue adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.
Contract Balances
The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. Net contract assets were comprised as follows:
| ($ in millions) | September 30, 2024 | December 31, 2023 | ||
| Contract assets | $ | 1,714 | $ | 1,537 |
| Contract liabilities | 743 | 1,063 | ||
| Net contract assets | $ | 971 | $ | 474 |
The Company's net contract assets increased $497 million from December 31, 2023, to September 30, 2024, primarily as a result of the timing of billings across programs on certain U.S. Navy contracts. For the three and nine months ended September 30, 2024, the Company recognized revenue of $6 million and $930 million, respectively, related to its contract liabilities as of December 31, 2023. For the three and nine months ended September 30, 2023, the Company recognized revenue of $5 million and $678 million, respectively, related to its contract liabilities as of December 31, 2022.
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7. SEGMENT INFORMATION
The following table presents segment results for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | ||||
| Sales and Service Revenues | ||||||||
| Ingalls | $ | 664 | $ | 711 | $ | 2,031 | $ | 1,952 |
| Newport News | 1,412 | 1,453 | 4,381 | 4,468 | ||||
| Mission Technologies | 709 | 685 | 2,224 | 1,954 | ||||
| Intersegment eliminations | (36) | (33) | (105) | (97) | ||||
| Sales and service revenues | $ | 2,749 | $ | 2,816 | $ | 8,531 | $ | 8,277 |
| Operating Income | ||||||||
| Ingalls | $ | 49 | $ | 73 | $ | 165 | $ | 193 |
| Newport News | 15 | 90 | 208 | 269 | ||||
| Mission Technologies | 33 | 24 | 97 | 50 | ||||
| Segment operating income | 97 | 187 | 470 | 512 | ||||
| Non-segment factors affecting operating income | ||||||||
| Operating FAS/CAS Adjustment | (16) | (19) | (48) | (55) | ||||
| Non-current state income taxes | 1 | 4 | 3 | 12 | ||||
| Operating income | $ | 82 | $ | 172 | $ | 425 | $ | 469 |
Operating FAS/CAS Adjustment- The Operating FAS/CAS Adjustment represents the difference between the service cost component of our pension and other postretirement benefit plan expense determined in accordance with U.S. GAAP Financial Accounting Standards ("FAS") and our pension and other postretirement expense under U.S. Government Cost Accounting Standards ("CAS").
The following table presents the Company's assets by segment:
| ($ in millions) | September 30, 2024 | December 31, 2023 | ||
| Assets | ||||
| Ingalls | $ | 1,652 | $ | 1,619 |
| Newport News | 4,779 | 4,612 | ||
| Mission Technologies | 3,122 | 3,161 | ||
| Corporate | 1,529 | 1,823 | ||
| Total assets | $ | 11,082 | $ | 11,215 |
8. INCOME TAXES
The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended September 30, 2024 and 2023, were 9.8% and 21.7%, respectively. For the nine months ended September 30, 2024 and 2023, the Company's effective income tax rates on earnings from operations were 16.6% and 21.9%, respectively. The lower effective tax rate for the three months ended September 30, 2024, was primarily attributable to current and prior period research and development tax credits recorded in the current period. The lower effective tax rate for the nine months ended September 30, 2024, was primarily attributable to current and prior period research and development tax credits recorded in the current period and to a taxable gain associated with the sale of the Company's interest in an unconsolidated ship repair and specialty fabrication joint venture recorded in 2023.
For each of the three and nine months endedSeptember 30, 2024, the Company's effective tax rate differed from the federal statutory corporate income tax rate of 21% primarily due to research and development tax credits for the current and prior periods.
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The Company's unrecognized tax benefits increased by $5 million and $9 million during the three and nine months ended September 30, 2024, respectively. As of September 30, 2024, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $107 million. Assuming a sustainment of these tax positions, a reversal of $83 million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. For the three and nine months ended September 30, 2024, interest resulting from the unrecognized tax benefits noted above increased income tax expense by $1 million and $4 million, respectively.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities and the tax expense or benefit associated with changes in unrecognized state tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
9. INVESTIGATIONS, CLAIMS, AND LITIGATION
The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB Accounting Standards Codification 450 - "Contingencies," the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. The Company has also provided footnote disclosure for matters for which a material loss is reasonably possible but a reserve has not been accrued because the likelihood of a material loss is not probable.
Antitrust Complaint -In October 2023, a class action antitrust lawsuit was filed against the Company and other defendants in the U.S. District Court for the Eastern District of Virginia. The lawsuit names several HII companies, among other companies, as defendants. The named plaintiffs generally allege that the defendant companies have adhered to a "gentlemen's agreement" that prohibits any defendant from actively recruiting naval engineers from other defendants. The complaint seeks class certification, treble damages, and any other relief to which the plaintiffs are entitled. The District Court dismissed the lawsuit against all defendants in April 2024, and the plaintiffs have appealed the District Court dismissal to the Fourth Circuit Court of Appeals.
COVID Insurance Claim - In September 2020, the Company filed a complaint against 32 reinsurers in the Superior Court, State of Vermont, Franklin Unit, seeking a judgment declaring that the Company's business interruption and other losses associated with COVID-19 are covered by the Company's property insurance program. The Company also initiated arbitration proceedings against six other reinsurers seeking similar relief. In July 2021, the Vermont court granted the reinsurers' motion for judgment on the pleadings, which would have ended the Company's claim. The Company appealed the decision to the Vermont Supreme Court, which reversed and remanded the lower court's decision in September 2022, allowing the Company's claim to proceed. No assurances can be provided regarding the ultimate resolution of this matter.
U.S. Government Investigations and Claims- Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil, or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.
During the third quarter, the Company identified certain quality issues involving noncompliance with welding procedures at Newport News. The Company has commenced an investigation and disclosed the matter to the U.S. Government. The Company is working with its U.S. Navy customer to evaluate the full extent of the matter and its potential impact on operations. Based upon the early stage of the Company's investigation, the Company cannot at this time predict or reasonably estimate the outcome of this matter, including its financial impact.
Asbestos Related Claims- HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current
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employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. In some instances, partial or full insurance coverage is available for the Company's liabilities. The costs to resolve these cases during the nine months ended September 30, 2024 and 2023, were not material individually or in the aggregate. The Company's estimate of asbestos-related liabilities is subject to uncertainty because such liabilities are influenced by many variables that are inherently difficult to predict. Although the Company believes the ultimate resolution of current cases will not have a material effect on its condensed consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.
The Company is party to various other claims, legal proceedings, and investigations that arise in the ordinary course of business, including U.S. Government investigations that could result in administrative, civil, or criminal proceedings involving the Company. The Company is a contractor with the U.S. Government, and such proceedings can therefore include False Claims Act allegations against the Company. Although the Company believes that the resolution of these other claims, legal proceedings, and investigations will not have a material effect on its condensed consolidated financial position, results of operations, or cash flows, the Company cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.
10. COMMITMENTS AND CONTINGENCIES
Contract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements and contract modifications in the process of negotiation, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances and recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. The Company believes its outstanding customer settlements, claims, and requests for equitable adjustment will be resolved without material negative impact to its financial position, results of operations, or cash flows.
Environmental Matters - The estimated cost to complete environmental remediation is accrued when it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. Management estimates that as of September 30, 2024, the probable estimable future cost for environmental remediation was not material. Although management cannot predict whether new information gained as remediation progresses or the Company incurs additional remediation obligations will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.
Financial Arrangements - In the ordinary course of business, HII uses letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of September 30, 2024, the Company had $11 million in issued but undrawn letters of credit and $360 million of surety bonds outstanding.
U.S. Government Claims- From time to time, the U.S. Government communicates to the Company potential claims, disallowed costs, and penalties concerning prior costs incurred by the Company with which the U.S. Government disagrees. When such preliminary findings are presented, the Company and U.S. Government representatives engage in discussions, from which the Company evaluates the merits of the claims and assesses the amounts being questioned. Although the Company believes that the resolution of any of these matters will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict the ultimate outcome of these matters.
Other Matters - The Company began negotiations with a Mission Technologies customer in January 2023 to address issues related to a manufacturing contract, and the parties settled the matter in May 2024. The Company
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has recorded losses relating to the contract that were not material to the Company's consolidated financial position, results of operations, or cash flows.
The Company previously disclosed an issue regarding the degree of corrosion of certain steel plates used to fabricate Friedman(NSC 11). The Company's expectation regarding the resolution of the matter with the customer is included in contract cost and profit estimates. Those estimates include management's best assessment of the underlying causal events, contractual entitlements, and the probability of successful resolution with the customer. The Company does not expect the final resolution of the matter to have a material impact to the Company's consolidated financial position, results of operations, or cash flows.
Collective Bargaining Agreements- Of the Company's more than 44,000 employees, approximately 45% are covered by a total of nine collective bargaining agreements and one site stabilization agreement. The Company believes its relationship with its employees is satisfactory.
11. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company provides eligible employees defined benefit pension plans, defined contribution benefit plans, and other postretirement benefit plans.
The costs of the Company's defined benefit pension plans and other postretirement benefit plans for the three and nine months ended September 30, 2024 and 2023, were as follows:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | ||||||||
| Components of net periodic benefit cost | ||||||||||||||||
| Service cost | $ | 28 | $ | 28 | $ | 1 | $ | 1 | $ | 82 | $ | 84 | $ | 4 | $ | 4 |
| Interest cost | 80 | 85 | 5 | 6 | 241 | 257 | 14 | 16 | ||||||||
| Expected return on plan assets | (134) | (132) | - | - | (403) | (397) | - | - | ||||||||
| Amortization of prior service cost (credit) | 4 | 4 | - | (1) | 12 | 13 | (1) | (2) | ||||||||
| Amortization of net actuarial loss (gain) | 4 | 5 | (3) | (4) | 13 | 13 | (10) | (11) | ||||||||
| Net periodic benefit (income) cost | $ | (18) | $ | (10) | $ | 3 | $ | 2 | $ | (55) | $ | (30) | $ | 7 | $ | 7 |
The Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the nine months ended September 30, 2024 and 2023:
| Nine Months Ended September 30 | ||||
| ($ in millions) | 2024 | 2023 | ||
| Pension plans | ||||
| Discretionary | ||||
| Qualified | $ | - | $ | - |
| Non-qualified | 9 | 9 | ||
| Other benefit plans | 27 | 23 | ||
| Total contributions | $ | 36 | $ | 32 |
As of September 30, 2024, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2024.
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12. STOCK COMPENSATION PLANS
During the nine months ended September 30, 2024 and 2023, the Company issued new stock awards as follows:
Restricted Performance Stock Rights - For the nine months ended September 30, 2024, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $288.26. These rights are subject to cliff vesting on December 31, 2026. For the nine months ended September 30, 2023, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $215.13. These rights are subject to cliff vesting on December 31, 2025. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between 0% and 200% of grant date value.
Compensation Restricted Stock Rights - For the nine months ended September 30, 2024, the Company granted approximately 0.1 million compensation RSRs at a weighted average share price of $287.91. These rights vest 33 1/3% upon each of the first, second, and third anniversaries of the grant date. No compensation RSRs were granted for the nine months ended September 30, 2023.
Retention Restricted Stock Rights - Retention stock awards are granted to key employees primarily to incentivize continued employment with the Company. For the nine months ended September 30, 2024, the Company granted approximately 2,200 retention RSRs at a weighted average share price of $281.01, with cliff vesting oneto two years from the grant date. For the nine months ended September 30, 2023, the Company granted approximately 9,400 retention RSRs at a weighted average share price of $213.37, with cliff vesting twoto three years from the grant date.
The Company also received transfers of stock awards from employees in satisfaction of tax withholding obligations associated with the vesting of stock awards during the period. Because the stock awards are surrendered in lieu of payments of cash to settle tax obligations and the stock is not issued, the Company does not account for these transfers as treasury stock.
The following table summarizes the status of the Company's outstanding stock awards as of September 30, 2024:
|
Stock Awards (in thousands) |
Weighted-Average Grant Date Fair Value |
Weighted-Average Remaining Contractual Term (in years) |
||
| Total stock awards | 546 | $ | 221.91 | 1.0 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Our Business
Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is a global, all-domain defense partner, building and delivering the world's most powerful, survivable naval ships and technologies that safeguard America's seas, sky, land, space, and cyber. For more than a century, our Ingalls Shipbuilding segment ("Ingalls") in Mississippi and Newport News Shipbuilding segment ("Newport News") in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder, making us America's largest shipbuilder. Our Mission Technologies segment develops integrated technology solutions and products that enable today's connected, all-domain force. Headquartered in Newport News, Virginia, we employ over 44,000 people domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Mission Technologies segment provides a wide range of services and products, including command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions;
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defensive and offensive cyberspace strategies and electronic warfare ("CEW&S"); unmanned autonomous systems; live, virtual, and constructive training solutions ("LVC"); fleet sustainment; and critical nuclear operations.
The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2023 (our "2023 Annual Report on Form 10-K").
Business Environment
We continue to see uncertainty in the economy, our industry, and our company. Our customers and suppliers continue to face challenges, and our results for the three months ended September 30, 2024, have been adversely affected as we continue to experience significant challenges relating to labor availability, our supply chain, and inflation, among other challenges. We cannot clearly predict how long these challenges will continue, whether these challenges will change over time, or whether our actions to address these challenges will be successful.
Defense Spending Environment - The President submitted the fiscal year 2025 Budget Request on March 11, 2024, which is under consideration by Congress. The budget request reflects continued investment in shipbuilding, funding two Arleigh Burkeclass (DDG 51) surface combatants, one San Antonioclass (LPD 17) amphibious warship, and the lead Block VI Virginiaclass (SSN 774) submarine, which is proposed to be executed as a multiyear procurement. Additionally, the budget request continues funding for Fordclass (CVN 78) nuclear aircraft carriers and the first of three years of full funding for the refueling and complex overhaul of USS Harry S. Truman(CVN 75). The budget request continues investment in the submarine industrial base and research and development on next generation large surface combatants (DDG(X)) and nuclear submarines (SSN(X)).
Congressional consideration of the fiscal year 2025 President's Budget Request began following its release in March 2024 and is continuing. The House and Senate Armed Services Committees have acted on their respective National Defense Authorization bills for fiscal year 2025. The full House approved its authorization bill, and the full Senate has not yet completed floor consideration of the Senate version. It is expected that the two bills will be reconciled to produce a final authorization measure. The full House also approved the fiscal year 2025 defense appropriations bill. The Senate Appropriations Committee advanced its defense appropriations measure out of committee and awaits further consideration by the full Senate.
Appropriations for the Federal government for fiscal year 2025 have yet to be finalized, and the U.S. Government is therefore currently operating under a Continuing Resolution ("CR"), which funds government operations through December 20, 2024. We cannot predict the outcome of the fiscal year 2025 budget process, and it remains uncertain at this point whether fiscal year 2025 government operations will require additional short-term funding or if annual appropriations measures will be finalized by the expiration of the CR.
Global Geopolitical and Economic Environment -The global geopolitical and economic environment continues to be impacted by uncertainty, heightened geopolitical tensions, and instability. Geopolitical relationships continue to change, and the U.S. and its allies face a global security environment that includes threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns, and political instability. These global threats persist across all domains, from undersea to space to cyber, and the global market for defense products, services, and solutions is driven by these complex and evolving security challenges. Our current operating environment exists in the broader context of political and socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding geopolitical tensions, financial market volatility, inflation, and a challenging labor market.
For further information on our business environment, see the discussion under Business Environment under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our 2023 Annual Report on Form 10-K.
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Critical Accounting Policies, Estimates, and Judgments
As discussed in our 2023 Annual Report on Form 10-K, we consider our policies relating to the following matters to be critical accounting policies and estimates:
•Revenue recognition;
•Retirement related benefit plans; and
•Workers' compensation.
As of September 30, 2024, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2023.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Quarterly Report on Form 10-Q is included in the "Glossary of Programs" in this section.
CONSOLIDATED OPERATING RESULTS
The following table presents selected financial highlights:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Sales and service revenues | $ | 2,749 | $ | 2,816 | $ | (67) | (2) | % | $ | 8,531 | $ | 8,277 | $ | 254 | 3 | % |
| Cost of product sales and service revenues | 2,427 | 2,400 | 27 | 1 | % | 7,402 | 7,122 | 280 | 4 | % | ||||||
| Income from operating investments, net | 12 | 9 | 3 | 33 | % | 35 | 25 | 10 | 40 | % | ||||||
| General and administrative expenses | 252 | 253 | (1) | - | % | 739 | 711 | 28 | 4 | % | ||||||
| Operating income | 82 | 172 | (90) | (52) | % | 425 | 469 | (44) | (9) | % | ||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (23) | (22) | (1) | (5) | % | (68) | (70) | 2 | 3 | % | ||||||
| Non-operating retirement benefit | 44 | 37 | 7 | 19 | % | 134 | 111 | 23 | 21 | % | ||||||
| Other, net | 9 | 2 | 7 | 350 | % | 21 | 11 | 10 | 91 | % | ||||||
| Federal and foreign income taxes | 11 | 41 | (30) | (73) | % | 85 | 114 | (29) | (25) | % | ||||||
| Net earnings | $ | 101 | $ | 148 | $ | (47) | (32) | % | $ | 427 | $ | 407 | $ | 20 | 5 | % |
Operating Performance Assessment and Reporting
We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance. Under FAR rules that govern our business with the U.S. Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract financial estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.
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Sales and Service Revenues
Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts. Volume changes will typically carry a corresponding income change based on the profit margin rate for a particular contract.
Sales and service revenues for the three months ended September 30, 2024, decreased $67 million, or 2%, compared to the same period in 2023, primarily due to lower volumes at Ingalls and Newport News, partially offset by higher volumes at Mission Technologies.
Sales and service revenues for the nine months ended September 30, 2024, increased $254 million, or 3%, compared to the same period in 2023, primarily due to higher volumes at Mission Technologies and Ingalls, partially offset by lower volumes at Newport News.
Cost of Sales and Service Revenues
Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.
Refer to "Segment Operating Results" and "Product and Service Revenues and Cost Analysis" in this section for details related to cost of sales for both product sales and service revenues.
Income from Operating Investments, Net
The activities of our operating investments are closely aligned with the operations of the segments holding the investments. We therefore record income related to earnings from equity method investments in our operating income.
Refer to "Segment Operating Results" in this section for details related to income from operating investments.
General and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.
General and administrative expenses for the three months ended September 30, 2024, decreased $1 million from the same period in 2023. General and administrative expenses for the nine months ended September 30, 2024, increased $28 million from the same period in 2023, primarily due to higher overhead costs.
Operating Income
We consider operating income an important measure for evaluating our operating performance, and, consistent with industry practice, we define operating income as revenues less the related costs of producing the revenues and general and administrative expenses.
We internally manage our operations by reference to "segment operating income," which is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects contract performance. Segment operating income is not a recognized measure under GAAP. When analyzing our operating performance, investors should use segment operating income in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to evaluate our core operating performance. We believe segment operating income reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a
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useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies. Refer to
"Segment Operating Results" in this section for details related to segment operating income, as well as activity within each segment.
The following table reconciles operating income to segment operating income:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Operating income | $ | 82 | $ | 172 | $ | (90) | (52) | % | $ | 425 | $ | 469 | $ | (44) | (9) | % |
| Operating FAS/CAS Adjustment | 16 | 19 | (3) | (16) | % | 48 | 55 | (7) | (13) | % | ||||||
| Non-current state income taxes | (1) | (4) | 3 | 75 | % | (3) | (12) | 9 | 75 | % | ||||||
| Segment operating income | $ | 97 | $ | 187 | $ | (90) | (48) | % | $ | 470 | $ | 512 | $ | (42) | (8) | % |
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with U.S. GAAP Financial Accounting Standards ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Government Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
The components of the Operating FAS/CAS Adjustment were as follows:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| FAS benefit | $ | 15 | $ | 8 | $ | 7 | 88 | % | $ | 48 | $ | 23 | $ | 25 | 109 | % |
| CAS cost | 13 | 10 | 3 | 30 | % | 38 | 33 | 5 | 15 | % | ||||||
| FAS/CAS Adjustment | 28 | 18 | 10 | 56 | % | 86 | 56 | 30 | 54 | % | ||||||
| Non-operating retirement benefit | (44) | (37) | (7) | (19) | % | (134) | (111) | (23) | (21) | % | ||||||
| Operating FAS/CAS Adjustment expense | $ | (16) | $ | (19) | $ | 3 | 16 | % | $ | (48) | $ | (55) | $ | 7 | 13 | % |
The Operating FAS/CAS Adjustment was a net expense of $16 million and $19 million for the three months ended September 30, 2024 and 2023, respectively. The Operating FAS/CAS Adjustment was a net expense of $48 million and $55 million for the nine months ended September 30, 2024 and 2023, respectively. The favorable change in the Operating FAS/CAS Adjustment for each period was primarily driven by demographic assumptions, partially offset by lower interest rates under FAS.
Non-current State Income Taxes
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
Non-current state income tax benefit was $1 million and $4 million for the three months ended September 30, 2024 and 2023, respectively. Non-current state income tax benefit was $3 million and $12 million for the nine months ended September 30, 2024 and 2023, respectively. The unfavorable change in non-current state income taxes for the three months ended September 30, 2024, was driven by an increase in deferred state income tax expense, primarily attributable to a change in the timing of long-term contract income for tax purposes. The unfavorable change in non-current state income taxes for the nine months ended September 30, 2024, was driven by an increase in deferred state income tax expense, primarily attributable to a change in net capitalized research and development expenditures and the timing of long-term contract income for tax purposes.
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SEGMENT OPERATING RESULTS
Our discussion of business segment performance focuses on sales and service revenues and operating income, consistent with our approach for managing our business. We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.
The following table presents segment operating results:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Sales and Service Revenues | ||||||||||||||||
| Ingalls | $ | 664 | $ | 711 | $ | (47) | (7) | % | $ | 2,031 | $ | 1,952 | $ | 79 | 4 | % |
| Newport News | 1,412 | 1,453 | (41) | (3) | % | 4,381 | 4,468 | (87) | (2) | % | ||||||
|
Mission Technologies
|
709 | 685 | 24 | 4 | % | 2,224 | 1,954 | 270 | 14 | % | ||||||
| Intersegment eliminations | (36) | (33) | (3) | (9) | % | (105) | (97) | (8) | (8) | % | ||||||
| Sales and service revenues | $ | 2,749 | $ | 2,816 | $ | (67) | (2) | % | $ | 8,531 | $ | 8,277 | $ | 254 | 3 | % |
| Operating Income | ||||||||||||||||
| Ingalls | $ | 49 | $ | 73 | $ | (24) | (33) | % | $ | 165 | $ | 193 | $ | (28) | (15) | % |
| Newport News | 15 | 90 | (75) | (83) | % | 208 | 269 | (61) | (23) | % | ||||||
|
Mission Technologies
|
33 | 24 | 9 | 38 | % | 97 | 50 | 47 | 94 | % | ||||||
| Segment operating income | 97 | 187 | (90) | (48) | % | 470 | 512 | (42) | (8) | % | ||||||
| Non-segment factors affecting operating income | ||||||||||||||||
| Operating FAS/CAS Adjustment | (16) | (19) | 3 | 16 | % | (48) | (55) | 7 | 13 | % | ||||||
| Non-current state income taxes | 1 | 4 | (3) | (75) | % | 3 | 12 | (9) | (75) | % | ||||||
| Operating income | $ | 82 | $ | 172 | $ | (90) | (52) | % | $ | 425 | $ | 469 | $ | (44) | (9) | % |
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract profit margin rates. These changes typically relate to profit recognition associated with revisions to estimated costs at completion ("EAC") on a contract, which reflect improved or deteriorated operating performance on that contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded. Segment operating income may also be affected by, among other things, contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as warranty reserves, could also impact contract earnings. Where such items have occurred and the effects are material, a separate description is provided.
Net Cumulative Catch-up Revenue Adjustments
For the three and nine months ended September 30, 2024 and 2023, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | ||||
| Gross favorable adjustments | $ | 36 | $ | 62 | $ | 174 | $ | 198 |
| Gross unfavorable adjustments | (108) | (41) | (220) | (148) | ||||
| Net adjustments | $ | (72) | $ | 21 | $ | (46) | $ | 50 |
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For the three and nine months ended September 30, 2024 and 2023, net cumulative catch-up revenue adjustments by segment were as follows:
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||
| ($ in millions) | 2024 | 2023 | 2024 | 2023 | ||||
| Ingalls | $ | 1 | $ | 23 | $ | 20 | $ | 54 |
| Newport News | (78) | (6) | (80) | (15) | ||||
| Mission Technologies | 5 | 4 | 14 | 11 | ||||
| Net adjustments | $ | (72) | $ | 21 | $ | (46) | $ | 50 |
See Note 6: Revenue for additional information on our net cumulative catch-up revenue adjustments.
Ingalls
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Sales and service revenues | $ | 664 | $ | 711 | $ | (47) | (7) | % | $ | 2,031 | $ | 1,952 | $ | 79 | 4 | % |
| Segment operating income | 49 | 73 | (24) | (33) | % | 165 | 193 | (28) | (15) | % | ||||||
| As a percentage of segment sales | 7.4 | % | 10.3 | % | 8.1 | % | 9.9 | % |
Sales and Service Revenues
Ingalls revenues, including intersegment sales, for the three months ended September 30, 2024, decreased $47 million, or 7%, from the same period in 2023, primarily driven by lower volumes in amphibious assault ships and the Legend class National Security Cutter ("NSC") program, partially offset by higher volumes in surface combatants.
Ingalls revenues, including intersegment sales, for the nine months ended September 30, 2024, increased $79 million, or 4%, from the same period in 2023, primarily driven by higher volumes in surface combatants and amphibious assault ships, partially offset by lower volumes in the NSC program.
Segment Operating Income
Ingalls segment operating income for the three months ended September 30, 2024, was $49 million, compared to segment operating income of $73 million for the same period in 2023. The decrease was primarily driven by lower performance on amphibious assault ships and surface combatants.
Ingalls segment operating income for the nine months ended September 30, 2024, was $165 million, compared to segment operating income of $193 million for the same period in 2023. The decrease was primarily driven by lower performance on surface combatants and amphibious assault ships, partially offset by a delivery contract incentive on USSRichard M. McCool Jr.(LPD29).
Newport News
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Sales and service revenues | $ | 1,412 | $ | 1,453 | $ | (41) | (3) | % | $ | 4,381 | $ | 4,468 | $ | (87) | (2) | % |
| Segment operating income | 15 | 90 | (75) | (83) | % | 208 | 269 | (61) | (23) | % | ||||||
| As a percentage of segment sales | 1.1 | % | 6.2 | % | 4.7 | % | 6.0 | % |
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Sales and Service Revenues
Newport News revenues, including intersegment sales, for the three months ended September 30, 2024, decreased $41 million, or 3%, from the same period in 2023, primarily driven by lower volumes in naval nuclear support services and cumulative catch-up adjustments on the Virginiaclass (SSN 774) submarine program and aircraft carriers, partially offset by higher volumes in the Columbiaclass (SSBN 826) submarine program.
Newport News revenues, including intersegment sales, for the nine months ended September 30, 2024, decreased $87 million, or 2%, from the same period in 2023, primarily driven by cumulative catch-up adjustments on the Virginiaclass (SSN 774) submarine program and lower volumes on aircraft carriers and naval nuclear support services, partially offset by higher volumes in the Columbiaclass (SSBN 826) program.
Segment Operating Income
Newport News segment operating income for the three months ended September 30, 2024, was $15 million, compared to segment operating income of $90 million for the same period in 2023. The decrease was primarily driven by lower performance on the Virginiaclass (SSN 774) submarine program and aircraft carriers.
Newport News segment operating income for the nine months ended September 30, 2024, was $208 million, compared to segment operating income of $269 million for the same period in 2023. The decrease was primarily driven by lower performance on the Virginiaclass (SSN 774) submarine program and aircraft carriers, partially offset by contract adjustments and incentives on the RCOH program.
Mission Technologies
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
| 2024 vs. 2023 | 2024 vs. 2023 | |||||||||||||||
| ($ in millions) | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Sales and service revenues | $ | 709 | $ | 685 | $ | 24 | 4 | % | $ | 2,224 | $ | 1,954 | $ | 270 | 14 | % |
| Segment operating income | 33 | 24 | 9 | 38 | % | 97 | 50 | 47 | 94 | % | ||||||
| As a percentage of segment sales | 4.7 | % | 3.5 | % | 4.4 | % | 2.6 | % |
Sales and Service Revenues
Mission Technologies revenues, including intersegment sales, for the three months ended September 30, 2024, increased $24 million, or 4%, from the same period in 2023, primarily due to higher volumes in CEW&S.
Mission Technologies revenues, including intersegment sales, for the nine months ended September 30, 2024, increased $270 million, or 14%, from the same period in 2023, primarily due to higher volumes in C5ISR and CEW&S.
Segment Operating Income
Mission Technologies segment operating income for the three months ended September 30, 2024, was $33 million, compared to segment operating income of $24 million for the same period in 2023. The increase was primarily driven by higher volumes described above and higher equity income from nuclear and environmental joint ventures.
Mission Technologies segment operating income for the nine months ended September 30, 2024, was $97 million, compared to segment operating income of $50 million for the same period in 2023. The increase was primarily driven by the higher volumes described above and higher performance in fleet sustainment.
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PRODUCT AND SERVICE REVENUES AND COST ANALYSIS
The following tables present segment sales and service revenues and segment cost of sales and service revenues by both product and service:
| Sales and Service Revenues | Segment Cost of Product Sales and Service Revenues | |||||||||||||||
| ($ in millions) | Three Months Ended September 30 | 2024 vs. 2023 | Three Months Ended September 30 | 2024 vs. 2023 | ||||||||||||
| Segment Information | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Ingalls | ||||||||||||||||
| Product | $ | 569 | $ | 637 | $ | (68) | (11) | % | $ | 485 | $ | 514 | $ | (29) | (6) | % |
| Service | 93 | 73 | 20 | 27 | % | 83 | 62 | 21 | 34 | % | ||||||
| Intersegment | 2 | 1 | 1 | 100 | % | 2 | 1 | 1 | 100 | % | ||||||
| Total Ingalls | 664 | 711 | (47) | (7) | % | 570 | 577 | (7) | (1) | % | ||||||
| Newport News | ||||||||||||||||
| Product | 1,163 | 1,170 | (7) | (1) | % | 1,036 | 987 | 49 | 5 | % | ||||||
| Service | 249 | 281 | (32) | (11) | % | 208 | 231 | (23) | (10) | % | ||||||
| Intersegment | - | 2 | (2) | (100) | % | - | 2 | (2) | (100) | % | ||||||
| Total Newport News | 1,412 | 1,453 | (41) | (3) | % | 1,244 | 1,220 | 24 | 2 | % | ||||||
| Mission Technologies | ||||||||||||||||
| Product | 29 | 28 | 1 | 4 | % | 22 | 24 | (2) | (8) | % | ||||||
| Service | 646 | 627 | 19 | 3 | % | 577 | 563 | 14 | 2 | % | ||||||
| Intersegment | 34 | 30 | 4 | 13 | % | 34 | 30 | 4 | 13 | % | ||||||
| Total Mission Technologies | 709 | 685 | 24 | 4 | % | 633 | 617 | 16 | 3 | % | ||||||
| Segment Totals | ||||||||||||||||
| Product | $ | 1,761 | $ | 1,835 | $ | (74) | (4) | % | $ | 1,543 | $ | 1,525 | $ | 18 | 1 | % |
| Service | 988 | 981 | 7 | 1 | % | 868 | 856 | 12 | 1 | % | ||||||
|
Total Segment1
|
$ | 2,749 | $ | 2,816 | $ | (67) | (2) | % | $ | 2,411 | $ | 2,381 | $ | 30 | 1 | % |
1Operating FAS/CAS Adjustment is excluded from segment cost of product sales and service revenues.
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| Sales and Service Revenues | Segment Cost of Product Sales and Service Revenues | |||||||||||||||
| ($ in millions) | Nine Months Ended September 30 | 2024 vs. 2023 | Nine Months Ended September 30 | 2024 vs. 2023 | ||||||||||||
| Segment Information | 2024 | 2023 | Dollars | Percent | 2024 | 2023 | Dollars | Percent | ||||||||
| Ingalls | ||||||||||||||||
| Product | $ | 1,786 | $ | 1,775 | $ | 11 | 1 | % | $ | 1,509 | $ | 1,450 | $ | 59 | 4 | % |
| Service | 240 | 171 | 69 | 40 | % | 208 | 145 | 63 | 43 | % | ||||||
| Intersegment | 5 | 6 | (1) | (17) | % | 5 | 6 | (1) | (17) | % | ||||||
| Total Ingalls | 2,031 | 1,952 | 79 | 4 | % | 1,722 | 1,601 | 121 | 8 | % | ||||||
| Newport News | ||||||||||||||||
| Product | 3,602 | 3,688 | (86) | (2) | % | 3,091 | 3,135 | (44) | (1) | % | ||||||
| Service | 777 | 777 | - | - | % | 645 | 651 | (6) | (1) | % | ||||||
| Intersegment | 2 | 3 | (1) | (33) | % | 2 | 3 | (1) | (33) | % | ||||||
| Total Newport News | 4,381 | 4,468 | (87) | (2) | % | 3,738 | 3,789 | (51) | (1) | % | ||||||
| Mission Technologies | ||||||||||||||||
| Product | 86 | 80 | 6 | 8 | % | 80 | 79 | 1 | 1 | % | ||||||
| Service | 2,040 | 1,786 | 254 | 14 | % | 1,821 | 1,607 | 214 | 13 | % | ||||||
| Intersegment | 98 | 88 | 10 | 11 | % | 98 | 88 | 10 | 11 | % | ||||||
| Total Mission Technologies | 2,224 | 1,954 | 270 | 14 | % | 1,999 | 1,774 | 225 | 13 | % | ||||||
| Segment Totals | ||||||||||||||||
| Product | $ | 5,474 | $ | 5,543 | $ | (69) | (1) | % | $ | 4,680 | $ | 4,664 | $ | 16 | - | % |
| Service | 3,057 | 2,734 | 323 | 12 | % | 2,674 | 2,403 | 271 | 11 | % | ||||||
|
Total Segment1
|
$ | 8,531 | $ | 8,277 | $ | 254 | 3 | % | $ | 7,354 | $ | 7,067 | $ | 287 | 4 | % |
1Operating FAS/CAS Adjustment is excluded from segment cost of product sales and service revenues.
Product Sales and Segment Cost of Product Sales
Product sales for the three months ended September 30, 2024, decreased $74 million, or 4%, from the same period in 2023, primarily due to lower volumes at Ingalls in amphibious assault ships and the Legend class NSC program.
Segment cost of product sales for the three months ended September 30, 2024, increased $18 million, or 1%, compared with the same period in 2023, primarily due to higher volumes in the Columbiaclass (SSBN 826) program and the Virginiaclass (SSN 774) submarine program at Newport News, partially offset by the lower volumes described above.
Product sales for the nine months ended September 30, 2024, decreased $69 million, from the same period in 2023, primarily due to lower volumes on aircraft carriers and cumulative catch-up adjustments on the Virginiaclass (SSN 774) submarine program at Newport News, partially offset by higher volumes in the Columbiaclass (SSBN 826) program at Newport News and higher volumes at Ingalls in surface combatants and amphibious assault ships.
Segment cost of product sales for the nine months ended September 30, 2024, increased $16 million from the same period in 2023, primarily due to higher volumes in the Columbiaclass (SSBN 826) program at Newport News and higher volumes at Ingalls in surface combatants and amphibious assault ships, partially offset by lower volumes on aircraft carriers at Newport News.
Service Revenues and Segment Cost of Service Revenues
Service revenues for the three months ended September 30, 2024, increased $7 million, or 1%, from the same period in 2023, primarily as a result of higher volumes at Ingalls in surface combatant services and at Mission Technologies in CEW&S, partially offset by lower volumes at Newport News in naval nuclear support services.
Segment cost of service revenues for the three months ended September 30, 2024, increased $12 million, or 1%, compared with the same period in 2023, consistent with the service volumes described above.
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Service revenues for the nine months ended September 30, 2024, increased $323 million, or 12%, from the same period in 2023, primarily as a result of higher volumes at Mission Technologies in C5ISR and CEW&S.
Segment cost of service revenues for the nine months ended September 30, 2024, increased $271 million, or 11%, compared with the same period in 2023, consistent with the higher service volumes described above.
OTHER FINANCIAL INFORMATION
Interest Expense
Interest expense for the three months ended September 30, 2024, was $23 million, compared with $22 million for the same period in 2023.
Interest expense for the nine months ended September 30, 2024, was $68 million, compared with $70 million for the same period in 2023.
Non-Operating Retirement Benefit
The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
For the three months ended September 30, 2024, the non-operating retirement benefit was $44 million, compared with $37 million for the same period in 2023. For the nine months ended September 30, 2024, the non-operating retirement benefit was $134 million, compared with $111 million for the same period in 2023. The increases in the non-operating retirement benefit for the three and nine months ended September 30, 2024, were primarily driven by higher 2023 returns on plan assets.
Other, Net
Other, net income for the three months ended September 30, 2024, was $9 million, compared with other, net income of $2 million for the same period in 2023. Other, net income for the nine months ended September 30, 2024, was $21 million, compared with other, net income of $11 million for the same period in 2023. The increases in other, net income for the three and nine months ended September 30, 2024, were primarily driven by higher unrealized net gains on investments.
Federal and Foreign Income Taxes
Our effective income tax rates on earnings from operations for the three months ended September 30, 2024 and 2023, were 9.8% and 21.7%, respectively. Our effective income tax rates on earnings from operations for the nine months ended September 30, 2024 and 2023, were 16.6% and 21.9%, respectively. The lower effective tax rate for the three months ended September 30, 2024, was primarily attributable to current and prior period research and development tax credits recorded in the current period. The lower effective tax rate for the nine months ended September 30, 2024, was primarily attributable to current and prior period research and development tax credits recorded in the current period and to a taxable gain associated with the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture recorded in 2023.
For each of the three and nine months ended September 30, 2024, our effective tax rate differed from the federal statutory corporate income tax rate of 21% primarily due to research and development tax credits for the current and prior periods.
BACKLOG
Total backlog as of September 30, 2024, and December 31, 2023, was $49.4 billion and $48.1 billion, respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.
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The following table presents funded and unfunded backlog by segment as of September 30, 2024, and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||||||
| ($ in millions) | Funded | Unfunded | Total Backlog | Funded | Unfunded | Total Backlog | ||||||
| Ingalls | $ | 14,143 | $ | 2,244 | $ | 16,387 | $ | 12,546 | $ | 3,201 | $ | 15,747 |
| Newport News | 11,636 | 15,627 | 27,263 | 11,890 | 15,349 | 27,239 | ||||||
|
Mission Technologies
|
1,887 | 3,882 | 5,769 | 1,545 | 3,590 | 5,135 | ||||||
| Total backlog | $ | 27,666 | $ | 21,753 | $ | 49,419 | $ | 25,981 | $ | 22,140 | $ | 48,121 |
We expect approximately 22% of the $48.1 billion total backlog as of December 31, 2023, to be converted into sales in 2024. U.S. Government orders comprised substantially all of the backlog as of September 30, 2024, and December 31, 2023.
Contract Awards
The value of new contract awards during the nine months ended September 30, 2024, was $9.8 billion, including an award for the maintenance and overhaul of USS Boise(SSN 764), an award for an advanced planning contract for the RCOH of USS Harry S. Truman(CVN 75) and an award for construction of USS Richard J. Danzig (DDG 143).
LIQUIDITY AND CAPITAL RESOURCES
We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value. We use various financial measures to inform our capital deployment strategy, including net cash provided by operating activities and free cash flow. We believe these measures are useful to investors in assessing our financial performance.
The following table summarizes key components of cash flow provided by operating activities:
| Nine Months Ended September 30 | 2024 vs. 2023 | |||||
| ($ in millions) | 2024 | 2023 | Dollars | |||
| Net earnings | $ | 427 | $ | 407 | $ | 20 |
| Depreciation and amortization of purchased intangible assets | 242 | 259 | (17) | |||
| Other non-cash transactions, net | 7 | 16 | (9) | |||
| Stock-based compensation | 15 | 27 | (12) | |||
| Deferred income taxes | (55) | (81) | 26 | |||
| Gain on investments in marketable securities | (22) | (10) | (12) | |||
| Retiree benefits | (84) | (55) | (29) | |||
| Trade working capital increase | (528) | (155) | (373) | |||
| Net cash provided by operating activities | $ | 2 | $ | 408 | $ | (406) |
We have historically maintained a capital structure comprised of a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations, existing borrowing facilities, and/or through refinancing in the debt markets prior to the maturity dates of our debt.
Cash Flows
We discuss below our significant operating, investing, and financing activities affecting cash flows for the nine months ended September 30, 2024 and 2023, as classified in our unaudited condensed consolidated statements of cash flows.
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Operating Activities
Cash provided by operating activities for the nine months ended September 30, 2024, was $2 million, compared with cash provided by operating activities of $408 million for the same period in 2023. The unfavorable change in operating cash flow was primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs, partially offset by lower payments for income taxes.
We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing borrowing facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and fund capital expenditures for at least the next 12 calendar months beginning October 1, 2024, and beyond such 12-month period based on our current business plans.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2024, was $238 million, compared to $111 million used in investing activities for the same period in 2023. The change in investing cash was primarily driven by the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture in 2023 and an increase in capital expenditures, partially offset by additional investment in one of our unconsolidated nuclear and environmental joint ventures in 2023.
For 2024, we expect our capital expenditures for maintenance and sustainment to be approximately 1.0% to 1.5% of annual revenues and our discretionary capital expenditures to be approximately 2.0% to 2.5% of annual revenues. Our capital expenditures are increasing compared to the past few years due to investments to expand our shipbuilding capacity.
Financing Activities
Cash used in financing activities for the nine months ended September 30, 2024, was $184 million, compared with $655 million used in financing activities for the same period in 2023. The change in cash used in financing activities was primarily due to a $396 million increase in proceeds from our commercial paper program and lower repayment of debt in the current year, partially offset by a $125 million increase in common stock repurchases.
Free Cash Flow
Free cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, net earnings as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.
The following table reconciles net cash provided by operating activities to free cash flow:
| Nine Months Ended September 30 | 2024 vs. 2023 | |||||
| ($ in millions) | 2024 | 2023 | Dollars | |||
| Net cash provided by operating activities | $ | 2 | $ | 408 | $ | (406) |
| Less capital expenditures: | ||||||
| Capital expenditure additions | (253) | (164) | (89) | |||
| Grant proceeds for capital expenditures | 14 | 14 | - | |||
| Free cash flow | $ | (237) | $ | 258 | $ | (495) |
Free cash flow for the nine months ended September 30, 2024, decreased $495 million from the same period in 2023, primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs and higher capital expenditures, partially offset by lower payments for income taxes.
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Governmental Regulation and Supervision
The U.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies exist in one or more such systems. As of September 30, 2024 and 2023, the cumulative amounts of payments withheld by the U.S. Government under our contracts subject to these regulations were not material to our liquidity or cash flows.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans. As of September 30, 2024, $11 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding. As of September 30, 2024, we had no other significant off-balance sheet arrangements.
ACCOUNTING STANDARDS UPDATES
See Note 3: Accounting Standards Updates in Part I, Item 1 for information related to accounting standards updates.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Statements in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "guidance," "outlook," "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, labor challenges, or other factors and our efforts to recover or offset such costs and/or changes in estimated 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;
•health epidemics, pandemics, and similar outbreaks;
•our ability to attract, retain, and train a qualified workforce;
•disruptions impacting global supply, including those resulting from the ongoing conflict between Russia and Ukraine and in the Middle East;
•investigations, claims, disputes, enforcement actions, litigation (including criminal, civil, and administrative), and/or other legal proceedings, and improper conduct of employees, agents, subcontractors, suppliers, business partners, or joint ventures in which we participate, including the impact on our reputation or ability to do 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 herein and in our other filings with the SEC.
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Additional factors include those described in our 2023 Annual Report on Form 10-K, including under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," in our subsequent quarterly reports on Form 10-Q, including under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and in our subsequent filings with the SEC.
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make.
GLOSSARY OF PROGRAMS
Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q.
| Program Name | Program Description | |
|
Aircraft carrier RCOH |
Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS John C. Stennis(CVN 74) arrived at Newport News for the start of its RCOH in May 2021, and USS George Washington(CVN 73) was redelivered to the U.S. Navy in May 2023.
|
|
|
Americaclass (LHA 6) amphibious assault ships
|
Design and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The Americaclass (LHA 6) ships, together with the Waspclass (LHD 1) ships, are the successors to the decommissioned Tarawaclass (LHA 1) ships. The Americaclass (LHA 6) ships optimize aviation operations and support capabilities. In 2023, we were awarded a long-lead-time material contract for Helmand Province(LHA 10), and in 2024, we were awarded a contract modification for the detail design and construction of Helmand Province(LHA 10). We are currently constructing Bougainville(LHA 8) and Fallujah(LHA 9).
|
|
|
Arleigh Burkeclass (DDG 51) destroyers
|
Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burkeclass (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. We delivered USS Frank E. Petersen Jr.(DDG 121), USS Lenah H. Sutcliffe Higbee (DDG 123), and USS Jack H. Lucas(DDG 125) in 2021, 2022, and 2023, respectively. We have contracts to construct the following Arleigh Burkeclass (DDG 51) destroyers: Ted Stevens(DDG 128), Jeremiah Denton(DDG 129), George M. Neal(DDG 131),Sam Nunn(DDG 133), Thad Cochran(DDG 135),John F. Lehman (DDG 137), Telesforo Trinidad(DDG 139), Ernest E. Evans(DDG 141), Charles J. French(DDG 142), and Richard J. Danzig(DDG 143).
|
|
|
Columbia class (SSBN 826) submarines
|
Design and construct modules for Columbiaclass (SSBN 826) nuclear ballistic missile submarines ("SSBNs") as a subcontractor to Electric Boat. SSBNs are the most secure and survivable of our nation's nuclear deterrent triad. Columbiaclass SSBNs will carry approximately 70 percent of the nation's nuclear arsenal. The Columbiaclass (SSBN 826) program plan of record is to construct 12 new SSBNs to replace the current aging Ohioclass. We have a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long-lead-time material and advance construction, and construction of the first two boats of the Columbiaclass (SSBN 826) submarine program. Construction of the first Columbiaclass (SSBN 826) submarine began in 2020. In 2023, we received an award modification for long-lead-time material and advance construction for the next five boats.
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|
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|
USS Gerald R. Fordclass (CVN 78) aircraft carriers
|
Design and construction for the Fordclass program, which is the aircraft carrier replacement program for the decommissioned Enterprise(CVN 65) and Nimitzclass (CVN 68) aircraft carriers. USS Gerald R. Ford(CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy(CVN 79), following several years of engineering, advance construction, and purchase of long-lead-time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs.
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|
|
Legendclass National Security Cutter
|
Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. There were 11 ships planned for this program, of which the first ten ships have been delivered, and Friedman(NSC 11) is currently under construction.
|
|
| Naval nuclear support services | Provide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes. | |
| Nuclear and environmental services |
Supports the national security mission of the Department of Energy ("DoE") through the management and operation of DoE sites, as well as the safe cleanup of legacy waste across the country. We meet our clients' toughest nuclear and environmental challenges and are positioned to serve the growing commercial nuclear power plant decommissioning market. We participate in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration's Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE's Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE's Los Alamos National Laboratory.
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San Antonio class (LPD 17) amphibious transport dock ships
|
Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. TheSan Antonioclass (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. In 2022, we delivered USS Fort Lauderdale(LPD 28), and we were awarded a long-lead-time material contract for Philadelphia(LPD 32). In 2023, we received an award modification for the detail design and construction of Philadelphia (LPD 32). In 2024, we delivered USS Richard M. McCool Jr.(LPD 29), and we were awarded a multi-ship procurement contract for the construction of LPD 33 (unnamed), LPD 34 (unnamed), and LPD 35 (unnamed). We are currently constructing Harrisburg(LPD 30), Pittsburgh(LPD 31), and Philadelphia(LPD 32).
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Virginia class (SSN 774) fast attack submarines
|
Construct attack submarines as the principal subcontractor to Electric Boat. The Virginiaclass (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain market risks, including those relating to interest rates and inflation.
Interest Rates - Our floating rate financial instruments subject to interest rate risk include a $1.7 billion revolving credit facility and a $1.7 billion commercial paper program. As of September 30, 2024, we had no indebtedness outstanding under our revolving credit facility. An increase of 1% in interest rates on the $396 million outstanding under our commercial paper program as of September 30, 2024, would increase the interest expense on our debt by approximately $4 million on an annual basis.
Inflation- Macroeconomic factors have contributed, and we expect will continue to contribute, to increasing cost inflation for raw materials, components, supplies, and labor. We mitigate some cost inflation risk by negotiating long-term agreements with certain raw material suppliers and incorporating price escalation provisions in customer contracts to the extent possible. We include assumptions of anticipated cost growth in the development of our contract cost of completion estimates, but if inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover all cost escalation or may impact the availability of resources to execute the respective contracts. Persistent cost inflation over the long-term may have an adverse impact on our financial position, results of operations, or cash flows.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30, 2024. Based on that evaluation, the Company's Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) concluded that, as of September 30, 2024, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that occurred in the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We have provided information about legal proceedings in which we are involved in the unaudited condensed consolidated financial statements in Part I, Item 1, which is incorporated herein by reference. In addition to the matters disclosed in Part I, Item 1, we are a party to various investigations, lawsuits, claims, and other legal proceedings that arise in the ordinary course of our business. Based on information available to us, we do not believe at this time that any of such other matters will individually, or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows. For further information on the risks we face from existing and future investigations, lawsuits, claims, and other legal proceedings, please see "Risk Factors" in Item 1A below.
Consistent with the requirements of SEC Regulation S-K, Item 103, our threshold for disclosing any environmental legal proceeding involving a governmental authority is potential monetary sanctions, exclusive of interest and costs, that our management believes will exceed $1 million.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2023Annual Report on Form 10-K, which could materially affect our business, financial condition, or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases under our stock repurchase program are made from time to time at management's discretion in accordance with applicable federal securities laws. All repurchases of HII common stock have been recorded as treasury stock. The following table summarizes information relating to purchases made by or on behalf of the Company of shares of the Company's common stock during the quarter ended September 30, 2024.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)1,2
|
||
| July 1, 2024 to July 31, 2024 | 46,258 | $ | 266.08 | 46,258 | $ | 1,375.4 |
| August 1, 2024 to August 31, 2024 | 88,145 | 261.37 | 88,145 | 1,352.3 | ||
| September 1, 2024 to September 30, 2024 | - | - | - | 1,352.3 | ||
| Total | 134,403 | $ | 262.99 | 134,403 | $ | 1,352.3 |
1 From the stock repurchase program's inception through September 30, 2024, we have purchased 14,584,709
shares at an average price of $167.82 per share for a total of $2.4 billion.
2 In November 2012, we announced the establishment of our stock repurchase program. In January 2024, our board
of directors authorized an increase in the stock repurchase program to $3.8 billionand an extension of the term to December 31, 2028.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
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Item 5. Other Information
(c) Adoption or Termination of Trading Arrangements
None of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarterly period covered by this report.
Item 6. Exhibits
| 3.1 | ||
| 3.2 | ||
| 3.3 | ||
| 3.4 | ||
| 3.5 | ||
| 10.1 | ||
| 31.1 |
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
| 31.2 |
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
| 32.1 |
Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
| 32.2 |
Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
| 101 | The following financial information for the Company, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) the Condensed Consolidated Statements of Financial Position, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Changes in Equity, and (v) the Notes to Condensed Consolidated Financial Statements. | |
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: | October 31, 2024 | Huntington Ingalls Industries, Inc. |
| (Registrant) | ||
| By: | /s/ Nicolas Schuck | |
| Nicolas Schuck | ||
| Corporate Vice President, Controller and Chief Accounting Officer | ||
| (Duly Authorized Officer and Principal Accounting Officer) |
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