Newswires
HUNTINGTON INGALLS INDUSTRIES, INC. – 10-Q – 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 segment inMississippi andNewport News segment inVirginia have built more ships in more ship classes than any otherU.S. naval shipbuilder. Our Mission Technologies (formerly named Technical Solutions) segment provides a range of services and products to government and commercial customers. Headquartered inNewport News, Virginia , HII employs approximately 43,000 people domestically and internationally. 17 -------------------------------------------------------------------------------- Table of Contents We conduct most of our business with theU.S. Government , primarily theDepartment of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priorityU.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; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive training solutions; platform modernization; 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
2021
Business Environment
We continue to see uncertainty in the economy, our industry, and our company,
with challenges for customers and suppliers, labor shortages, supply chain
challenges, and increasing inflation, among other impacts.
U.S. Government Contracts - Long-term uncertainty exists with respect to overall levels of defense spending across the future years' defense plan, and it is likely thatU.S. Government discretionary spending levels will continue to be subject to significant pressure. Congressional consideration of the fiscal year 2023 President's Budget Request began following its release inMarch 2022 , and appropriations for the Federal government have yet to be finalized. Consequently, theU.S. Government is currently operating under a Continuing Resolution ("CR") that funds government operations throughDecember 16, 2022 . TheHouse Appropriations Committee voted out a defense appropriations measure earlier this year, and theSenate Appropriations Committee released the text of its defense appropriations measure, but a traditional markup process remains uncertain.The House and Senate Armed Services Committees have acted on their respective National Defense Authorization bills for fiscal year 2023, both of which broadly support our shipbuilding programs. The full House has approved its authorization bill and awaitsSenate floor consideration of its version before the two bills are reconciled to produce a final measure. It remains uncertain at this point whether fiscal year 2023 government operations will require additional short-term funding or, alternatively, annual appropriations measures will be finalized by the expiration of the CR. Appropriations measures must be passed byCongress and enacted by the President, and we cannot predict the outcome of the fiscal year 2023 budget process. Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled. In addition, spending cuts and/or reprioritization of defense investment could adversely affect the viability of our suppliers, subcontractors, and employee base. Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by theU.S. Government or the prime contractor due to lack of government funding or reductions or delays in government funding. Significant reductions in the number of ships procured by theU.S. Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, and cash flows. The federal budget environment remains a significant long-term risk. Considerable uncertainty exists regarding how future budget and program decisions will develop and what challenges budget changes will present for the defense industry. We believe continued budget pressures could have serious implications for defense discretionary spending, the defense industrial base, including HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget environment may result in fewer contract awards and lower revenues, profits, and cash flows from ourU.S. Government contracts. It is likely budget and program decisions made in this environment will have long-term impacts on HII and the entire defense industry. Political and Economic Environment - The global geopolitical and economic environment continues to be impacted by uncertainty, heightened tensions, and instability. Geopolitical relationships have changed, and are continuing to change, and theU.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 18 -------------------------------------------------------------------------------- Table of Contents 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, a challenging labor market, and the COVID-19 pandemic. InFebruary 2022 , Russian forces invadedUkraine . In response,the United States and other countries imposed economic and trade sanctions, export controls, and other restrictions. The conflict and these sanctions have caused disruptions to global economies and global business, including heightened cybersecurity risks, supply chain challenges, higher energy costs, and an exacerbation of existing inflationary pressures. Additionally, and more broadly, tensions withChina and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could impact the global market for defense products, services, and solutions. In addition to price surges in energy, food, and aluminum, rising inflation has led to higher costs of various commodities and supplier products. Inflation has also resulted in rising interest rates, raising the cost of borrowing for the federal government, which could impact other spending priorities. In an era of unanticipated cost increases, the inclusion of mitigation mechanisms, such as Economic Price Adjustment clauses, in our contracts help reduce risks from negative price adjustments. Our bids for longer-term firm fixed-price contracts typically include assumptions for labor and other contract costs that historically have been sufficient to cover cost increases over the period of performance. If, however, recent inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover potential contract cost growth or may impact the availability of resources to execute the respective contracts. Management is closely monitoring possible cost impacts with our customers. The macro labor market continues to present significant challenges, and those challenges are continuing to impact our operations and our financial performance. We are aggressively responding to the labor market challenges, including utilizing outside leased labor and overtime to mitigate the short-term deficit of employees and implementing aggressive hiring and retention programs. Labor shortages are also impacting our supply chain, resulting in longer lead times for materials and inflationary pressure. Our longer term ability to meet contract requirements, as well as our financial performance, are dependent on our ability to attract and retain a stable skilled workforce. The Inflation Reduction Act of 2022 was signed into law during the third quarter of 2022 and included, among other things, provisions for an alternative minimum tax and a one percent excise tax on share repurchases. We anticipate being subject to the excise tax beginning in 2023 and continue to evaluate other provisions of the Act for their impact on our business. COVID-19 Pandemic - The COVID-19 pandemic has dramatically impacted the global economic environment, including labor shortages and supply chain challenges. The COVID-19 crisis initially had a significant impact on theU.S. labor market, and the resulting challenges and uncertainty have exacerbated already existing workforce trends. Talent attraction and retention and the ability to maintain a qualified workforce affects not only industry prime contractors but suppliers as well. Challenges incurred by our suppliers relative to their workforces, access to necessary components, materials, and other supplies at reasonable prices, and access to support services, such as shipping and transportation, may impact the ability of suppliers to provide agreed-upon goods and services in a timely, compliant, and cost-effective manner. We may in the future incur additional costs and performance challenges, including as a result of higher prices, schedule delays, or the need to identify and develop alternative suppliers. The COVID-19 pandemic has impacted our employees, customers, suppliers, and communities (collectively, "COVID-19 Events"). While costs related to COVID-19 Events are allowable underU.S. Government contracts, our contract financial estimates reflect profit margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and fixed-price incentive contracts, or may not be adequately covered by insurance. Reinsurers under our property insurance have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court inVermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. TheVermont court dismissed our complaint, and we appealed the decision to theVermont Supreme Court . That court reversed and remanded the lower court's decision inSeptember 2022 , allowing our claim to proceed. No assurance can be provided regarding the ultimate resolution of this matter. See Note 11: Investigations, Claims, and Litigation. 19 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies, Estimates, and Judgments As discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , we consider our policies relating to the following matters to be critical accounting policies and estimates:
•Revenue recognition;
•Purchase accounting, goodwill, and intangible assets;
•Litigation, commitments, and contingencies;
•Retirement related benefit plans; and
•Workers' compensation.
As of
critical accounting policies, estimates, and judgments since
We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units.
Contracts
We generate most of our revenues from multi-year contracts with theU.S. Government for design, production, and support activities. Due to the size, duration, and nature of many of our multi-year contracts, the estimation of sales and services revenues and costs through completion is complicated and subject to many variables. Sales and service revenue estimates are based on negotiated contract prices, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with schedule, technical performance, and price adjustment clauses (such as inflation or index-based clauses). These multi-year contracts generally have a transaction price that is based on estimated cost to produce the product or service plus margin. Product and service cost estimates are based on negotiated or estimated contract terms, historical performance trends, and other economic projections. Government contracts typically include the following cost elements: direct material, labor and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Factors that influence our cost estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, COVID-19 disruptions, and capital costs. Unless otherwise specified in a contract, costs billed to contracts with theU.S. Government are treated as allowable and allocable costs under the FAR and CAS regulations. Examples of costs incurred by us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including certain merger and acquisition costs, and advertising costs. Contract Fees - Negotiated contract fee structures include: fixed fee amounts, cost sharing arrangements to reward or penalize contractors for under- or over-cost target performance, respectively, positive award fees, and negative penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract, the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined. Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality, and technical performance. Award fees are determined and earned based on an evaluation by the customer of our performance against such negotiated criteria. We consider award fees to be variable consideration and generally include these fees in the transaction price using a most likely amount approach. Award fees are limited to the extent of funding allotted by the customer and available for performance and those amounts for which a significant reversal of revenue is not probable. 20 -------------------------------------------------------------------------------- Table of Contents 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 Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent Sales and service revenues$ 2,626 $ 2,338 $ 288 12 %$ 7,864 $ 6,847 $ 1,017 15 % Cost of product sales and service revenues 2,264 2,007 257 13 % 6,763 5,852 911 16 % Income from operating investments, net 13 11 2 18 % 47 31 16 52 % Other income and gains, net - 2 (2) (100) % - 3 (3) (100) % General and administrative expenses 244 226 18 8 % 688 636 52 8 % Operating income 131 118 13 11 % 460 393 67 17 % Other income (expense) Interest expense (27) (24) (3) (13) % (79) (63) (16) (25) % Non-operating retirement benefit 71 45 26 58 % 209 135 74 55 % Other, net (13) 2 (15) (750) % (30) 10 (40) (400) % Federal and foreign income taxes 24 (6) 30 500 % 104 51 53 104 % Net earnings$ 138 $ 147 $ (9) (6) %$ 456 $ 424 $ 32 8 %
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 theU.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. 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. 21 -------------------------------------------------------------------------------- Table of Contents Sales and Service Revenues
Sales and service revenues were comprised as follows:
Three Months Ended Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Product sales $ 1,774 $ 1,701 $ 73 4 % $ 5,327 $ 5,185 $ 142 3 %
Service revenues 852 637 215 34 % 2,537 1,662 875 53 %
Sales and service
revenues $ 2,626 $ 2,338 $ 288 12 % $ 7,864 $ 6,847 $ 1,017 15 %
Product sales for the three months ended September 30, 2022 , increased $73
million , or 4%, from the same period in 2021. Product sales for the nine months
ended September 30, 2022 , increased $142 million , or 3%, from the same period in
2021. Ingalls product sales decreased $9 million for the three months ended
September 30, 2022 , primarily driven by lower volumes in the Legend class
National Security Cutter ("NSC") program and amphibious assault ships, partially
offset by higher volumes in surface combatants. Ingalls product sales decreased
$48 million for the nine months ended September 30, 2022 , primarily as a result
of lower volumes in surface combatants and the Legend class NSC program,
partially offset by higher volumes in amphibious assault ships. Newport News
product sales increased $97 million for the three months ended September 30,
2022 , primarily as a result of higher volumes in submarines and aircraft
carriers. Newport News product sales increased $196 million for the nine months
ended September 30, 2022 , primarily as a result of higher volumes in aircraft
carriers and submarines. Mission Technologies product sales decreased $15
million for the three months ended September 30, 2022 , primarily as a result of
lower volumes in Unmanned Systems, partially offset by higher volumes in Fleet
Sustainment. Mission Technologies product sales decreased $6 million for the
nine months ended September 30, 2022 , primarily as a result of lower volumes in
Unmanned Systems, partially offset by higher volumes in Defense and Federal
Solutions ("DFS") and Fleet Sustainment.
Service revenues for the three months ended September 30, 2022 , increased $215
million , or 34%, compared with the same period in 2021. Service revenues for the
nine months ended September 30, 2022 , increased $875 million , or 53%, compared
with the same period in 2021. Ingalls service revenues increased $3 million for
the three months ended September 30, 2022 , primarily as a result of higher
volumes in surface combatant services. Ingalls service revenues increased $15
million for the nine months ended September 30, 2022 , primarily as a result of
higher volumes in amphibious assault ship services, partially offset by lower
volumes in surface combatant services. Newport News service revenues decreased
$4 million for the three months ended September 30, 2022 , primarily as a result
of lower volumes in submarine services, partially offset by higher volumes in
naval nuclear support services. Newport News service revenues decreased $47
million for the nine months ended September 30, 2022 , primarily as a result of
lower volumes in submarine and aircraft carrier services, partially offset by
higher volumes in naval nuclear support services. Mission Technologies service
revenues increased $216 million and $907 million for the three and nine months
ended September 30, 2022 , respectively, primarily as a result of higher volumes
in DFS services due to the acquisition of Alion in the third quarter of 2021.
22
--------------------------------------------------------------------------------
Table of Contents
Cost of Sales and Service Revenues
Cost of product sales, cost of service revenues, income from operating
investments, net, and general and administrative expenses were as follows:
Three Months Ended Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Cost of product sales $ 1,517 $ 1,453 $ 64 4 % $ 4,511 $ 4,402 $ 109 2 %
% of product sales 85.5 % 85.4 % 84.7 % 84.9 %
Cost of service revenues 747 554 193 35 % 2,252 1,450 802 55 %
% of service revenues 87.7 % 87.0 % 88.8 % 87.2 %
Income from operating
investments, net 13 11 2 18 % 47 31 16 52 %
Other income and gains, net - 2 (2) (100) % - 3 (3) (100) %
General and administrative
expenses 244 226 18 8 % 688 636 52 8 %
% of sales and service revenues 9.3 % 9.7 % 8.7 % 9.3 %
Cost of sales and service
revenues $ 2,495 $ 2,220 $ 275 12 % $ 7,404 $ 6,454 $ 950 15 %
Cost of Product Sales
Cost of product sales for the three months ended September 30, 2022 , increased
$64 million , or 4%, compared with the same period in 2021. Cost of product sales
for the nine months ended September 30, 2022 , increased $109 million , or 2%,
compared with the same period in 2021. Ingalls cost of product sales increased
$8 million for the three months ended September 30, 2022 , primarily as a result
of lower risk retirement on Arleigh Burke class (DDG 51) destroyers, partially
offset by volume decreases described above. Ingalls cost of product sales
decreased $30 million for the nine months ended September 30, 2022 , primarily as
a result of volume decreases described above, partially offset by higher risk
retirement on Harrisburg (LPD 30). Newport News cost of product sales increased
$70 million and $146 million for the three and nine months ended September 30,
2022 , respectively, primarily as a result of volume increases described above.
Mission Technologies cost of product sales decreased $11 million for the three
months ended September 30, 2022 , driven by volume changes described above.
Mission Technologies cost of product sales remained flat for the nine months
ended September 30, 2022 . Cost of product sales related to the Operating FAS/CAS
Adjustment decreased $3 million and $7 million for the three and nine months
ended September 30, 2022 , respectively, as described below.
Cost of product sales as a percentage of product sales increased from 85.4% for
the three months ended September 30, 2021 , to 85.5% for the three months ended
September 30, 2022 . The increase was primarily due to lower risk retirement on
the Virginia class (SSN 774) submarine program, higher amortization of purchased
intangible assets in 2022 due to the Alion acquisition, and lower risk
retirement on Ted Stevens (DDG 128) and Delbert D. Black (DDG 119), partially
offset by contract incentives on the Columbia class (SSBN 826) submarine
program, higher risk retirement on USS Portland (LPD 27), as well as a favorable
change in the Operating FAS/CAS Adjustment. Cost of product sales as a
percentage of product sales decreased from 84.9% for the nine months ended
September 30, 2021 , to 84.7% for the nine months ended September 30, 2022 . The
decrease was primarily due to favorable changes in contract estimates from
facilities capital and price adjustment clauses, contract incentives on the
Columbia class (SSBN 826) submarine program, higher risk retirement on
Harrisburg (LPD 30) and USS Fort Lauderdale (LPD 28) following its delivery, as
well as a favorable change in the Operating FAS/CAS Adjustment, partially offset
by lower risk retirement on the Virginia class (SSN 774) submarine program, and
receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021.
Cost of Service Revenues
Cost of service revenues for the three months endedSeptember 30, 2022 , increased$193 million , or 35%, compared with the same period in 2021. Cost of service revenues for the nine months endedSeptember 30, 2022 , increased$802 million , or 55%, compared with the same period in 2021. Ingalls cost of service revenues increased$6 million and$18 million for the three and nine months endedSeptember 30, 2022 , respectively, primarily as a result of higher volumes described above.Newport News cost of service revenues decreased$8 million and$58 23 -------------------------------------------------------------------------------- Table of Contents million for the three and nine months endedSeptember 30, 2022 , respectively, primarily as a result of lower volumes described above. Mission Technologies cost of service revenues increased$197 million and$845 million for the three and nine months endedSeptember 30, 2022 , respectively, primarily as a result of higher volumes described above. Cost of service revenues related to the Operating FAS/CAS Adjustment decreased$2 million and$3 million for the three and nine months endedSeptember 30, 2022 , respectively, as described below. Cost of service revenues as a percentage of service revenues increased from 87.0% for the three months endedSeptember 30, 2021 , to 87.7% for the three months endedSeptember 30, 2022 . The increase was primarily driven by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, as well as a favorable change in the Operating FAS/CAS Adjustment. Cost of service revenues as a percentage of service revenues increased from 87.2% for the nine months endedSeptember 30, 2021 , to 88.8% for the nine months endedSeptember 30, 2022 . The increase was primarily driven by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, as well as a favorable change in the Operating FAS/CAS Adjustment.
Income from Operating Investments, Net
The activities of our operating investments are closely aligned with the
operations of the segments holding the investments. We therefore record income
related to earnings from equity method investments in our operating income.
Income from operating investments, net for the three and nine months endedSeptember 30, 2022 , increased$2 million and$16 million , respectively, from the same periods in 2021, primarily due to higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture and from our nuclear and environmental joint ventures.
Other Income and Gains, Net
Other income and gains, net for the three months endedSeptember 30, 2022 , was$2 million less than the same period in 2021, primarily due to a gain recognized in the third quarter of 2021 as a result of a favorable claim resolution. Other income and gains, net for the nine months endedSeptember 30, 2022 , was$3 million less than the prior year period, primarily due to gains recognized as a result of a favorable claim resolution and the sale of our oil and gas business in 2021.
General and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost. General and administrative expenses for the three and nine months endedSeptember 30, 2022 , increased$18 million and$52 million , respectively, from the same periods in 2021, primarily due to higher overhead costs as a result of the acquisition of Alion in the third quarter of 2021 and current state income tax expense, partially offset by favorable changes in non-current state income taxes. Operating Income
We consider operating income to be an important measure for evaluating our
operating performance, and, consistent with industry practice, we define
operating income as revenues less the related costs of producing the revenues
and general and administrative expenses.
We internally manage our operations by reference to "segment operating income,"
which is defined as operating income before the Operating FAS/CAS Adjustment and
non-current state income taxes, neither of which affects segment performance.
Segment operating income is not a recognized measure under GAAP. When analyzing
our operating performance, investors should use segment operating income in
addition to, and not as an alternative for, operating income or any other
performance measure presented in accordance with GAAP. It is a measure we use to
24
--------------------------------------------------------------------------------
Table of Contents
evaluate our core operating performance. We believe segment operating income
reflects an additional way of viewing aspects of our operations that, when
viewed with our GAAP results, provides a more complete understanding of factors
and trends affecting our business. We believe the measure is used by investors
and is a useful indicator to measure our performance. Because not all companies
use identical calculations, our presentation of segment operating income may not
be comparable to similarly titled measures of other companies.
The following table reconciles operating income to segment operating income:
Three Months Ended Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Operating income $ 131 $ 118 $ 13 11 % $ 460 $ 393 $ 67 17 %
Operating FAS/CAS Adjustment 36 41 (5) (12) % 108 118 (10) (8) %
Non-current state income taxes (1) 4 (5) (125) % (1) 12 (13) (108) %
Segment operating income $ 166 $ 163 $ 3 2 % $ 567 $ 523 $ 44 8 %
Segment Operating Income
Segment operating income for the three months endedSeptember 30, 2022 , was$166 million , compared with segment operating income of$163 million for the same period in 2021. The increase was primarily due to contract incentives on theColumbia class (SSBN 826) submarine program, improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, higher equity income, and higher risk retirement on the USS Portland (LPD 27), partially offset by lower risk retirement on theVirginia class (SSN 774) submarine program, higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, and lower risk retirement onTed Stevens (DDG 128) andDelbert D. Black (DDG 119). Segment operating income for the nine months endedSeptember 30, 2022 , was$567 million , compared with segment operating income of$523 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses, contract incentives on theColumbia class (SSBN 826) submarine program, higher risk retirement onHarrisburg (LPD 30) and USS Fort Lauderdale (LPD 28), improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, and higher equity income, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, lower risk retirement on theVirginia class (SSN 774) submarine program, and receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021.
Activity within each segment is discussed in Segment Operating Results below.
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment reflects the difference between expenses for pension and
other postretirement benefits determined in accordance with GAAP ("FAS") and the
expenses for these items included in segment operating income in accordance with
U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment
excludes the following components of net periodic benefit costs: interest cost,
expected return on plan assets, amortization of prior service cost (credit) and
actuarial loss (gain), and settlement and curtailment effects.
The components of the Operating FAS/CAS Adjustment were as follows:
Three Months Ended Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021
Dollars Percent FAS benefit (expense)$ 24 $ (7) $ 31 443 %$ 67 $ (21) $ 88 419 % CAS cost 11 11 - - % 34 38 (4) (11) % FAS/CAS Adjustment 35 4 31 775 % 101 17 84 494 % Non-operating retirement benefit (71) (45) (26) (58) % (209) (135) (74) (55) % Operating FAS/CAS Adjustment$ (36) $ (41) $ 5 12 %$ (108) $ (118) $ 10 8 %
The Operating FAS/CAS Adjustment was a net expense of
million
The Operating FAS/CAS Adjustment was a net expense of
25 -------------------------------------------------------------------------------- Table of Contents and$118 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The favorable changes in the Operating FAS/CAS Adjustment of$5 million and$10 million for the three and nine months endedSeptember 30, 2022 , respectively, were primarily driven by the more immediate recognition of higher 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 for the three months endedSeptember 30, 2022 , was$1 million , compared to non-current state income tax expense of$4 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes. Non-current state income tax benefit for the nine months endedSeptember 30, 2022 , was$1 million , compared to non-current state income tax expense of$12 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes.
Interest Expense
Interest expense for the three and nine months ended
increased
periods in 2021, primarily due to the issuance of senior notes and borrowing
under the Term Loan in the third quarter of 2021.
Non-Operating Retirement Benefit
The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects. For the three and nine months endedSeptember 30, 2022 , the favorable change in the non-operating retirement benefit of$26 million and$74 million was primarily driven by higher 2021 returns on plan assets. Other, Net Other, net expense increased$15 million and$40 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with the same periods in 2021, primarily driven by realized and unrealized net losses in investments.
Federal and Foreign Income Taxes
Our effective income tax rates on earnings from operations for the three months endedSeptember 30, 2022 and 2021, were 14.8% and (4.3)%, respectively. Our effective income tax rates on earnings from operations for the nine months endedSeptember 30, 2022 and 2021, were 18.6% and 10.7%, respectively. The higher effective tax rates for the three and nine months endedSeptember 30, 2022 , were primarily attributable to research and development tax credits for prior periods recorded in 2021. For each of the three and nine months endedSeptember 30, 2022 and 2021, our effective tax rates differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits for prior periods. See Note 10: Income Taxes. 26 --------------------------------------------------------------------------------
Table of Contents SEGMENT OPERATING RESULTS Basis of Presentation
We are aligned into three reportable segments: Ingalls,
Mission Technologies.
The following table presents segment operating results:
Three Months Ended Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021
Dollars Percent 2022 2021
Dollars Percent Sales and Service Revenues Ingalls$ 623 $ 628 $ (5) (1) %$ 1,912 $ 1,947 $ (35) (2) % Newport News 1,445 1,354 91 7 % 4,268 4,124 144 3 % Mission Technologies 595 394 201 51 % 1,785 890 895 101 % Intersegment eliminations (37) (38) 1 3 % (101) (114) 13 11 % Sales and service revenues$ 2,626 $ 2,338 $ 288 12 %$ 7,864 $ 6,847 $ 1,017 15 % Operating Income Ingalls$ 50 $ 62 $ (12) (19) %$ 242 $ 233 $ 9 4 % Newport News 102 88 14 16 % 277 257 20 8 % Mission Technologies 14 13 1 8 % 48 33 15 45 % Segment operating income 166 163 3 2 % 567 523 44 8 % Non-segment factors affecting operating income Operating FAS/CAS Adjustment (36) (41) 5 12 % (108) (118) 10 8 % Non-current state income taxes 1 (4) 5 125 % 1 (12) 13 108 % Operating income$ 131 $ 118 $ 13 11 %$ 460 $ 393 $ 67 17 %
KEY SEGMENT FINANCIAL MEASURES
Sales and Service Revenues
Period-to-period revenues reflect performance under new and ongoing contracts.
Changes in sales and service revenues are typically expressed in terms of
volume. Unless otherwise described, volume generally refers to increases (or
decreases) in reported revenues due to varying production activity levels,
delivery rates, or service levels on individual contracts. Volume changes will
typically carry a corresponding income change based on the profit margin rate
for a particular contract.
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts
within a segment. Excluded from this measure are certain costs not directly
associated with contract performance, such as the Operating FAS/CAS Adjustment
and non-current state income taxes. Changes in segment operating income are
typically expressed in terms of volume, as discussed above, or performance.
Performance refers to changes in contract profit margin rates. These changes
typically relate to profit recognition associated with revisions to estimated
costs at completion ("EAC") that reflect improved or deteriorated operating
performance on that contract. Operating income changes are accounted for on a
cumulative to date basis at the time an EAC change is recorded. Segment
operating income may also be affected by, among other things, contract
performance, the effects of workforce stoppages, the effects of natural
disasters such as hurricanes, resolution of disputed items with the customer,
recovery of insurance proceeds, and other discrete events. At the completion of
a long-term contract, any originally estimated costs not incurred or reserves
not fully utilized, such as warranty reserves, could also impact contract
earnings. Where such items have occurred and the effects are material, a
separate description is provided.
27
--------------------------------------------------------------------------------
Table of Contents
Cumulative Adjustments
For the three and nine months ended
unfavorable cumulative catch-up margin adjustments were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
($ in millions) 2022 2021 2022 2021
Gross favorable adjustments $ 84 $ 51 $ 297 $ 199
Gross unfavorable adjustments (57) (30) (157) (93)
Net adjustments $ 27 $ 21 $ 140 $ 106
For the three months ended September 30, 2022 , favorable cumulative catch-up
margin adjustments were related to contract incentives on the Columbia class
(SSBN 826) submarine program. During the same period, the unfavorable cumulative
catch-up margin adjustments were related to lower risk retirement on the
Virginia class (SSN 774) submarine program.
For the nine months ended September 30, 2022 , favorable cumulative catch-up
margin adjustments were related to contract incentives on the Columbia class
(SSBN 826) submarine program and higher risk retirement on USS Fort Lauderdale
(LPD 28), Bougainville (LHA 8), and Harrisburg (LPD 30). During the same period,
the unfavorable cumulative catch-up margin adjustments were related to lower
risk retirement on the RCOH of USS George Washington (CVN 73).
For the three months ended
cumulative catch-up margin adjustments were individually significant.
For the nine months endedSeptember 30, 2021 , favorable cumulative catch-up margin adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on USS Jack H. Lucas (DDG 125), and risk retirement on USS Fort Lauderdale (LPD 28). During the same period, no unfavorable cumulative catch-up margin adjustments were individually significant. Ingalls Three Months Ended Nine Months Ended September 30 2022 vs. 2021 September 30 2022 vs. 2021 ($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent Sales and service revenues$ 623 $ 628 $ (5) (1) %$ 1,912 $ 1,947 $ (35) (2) % Segment operating income 50 62 (12) (19) % 242 233 9 4 % As a percentage of segment sales 8.0 % 9.9 % 12.7 % 12.0 % Sales and Service Revenues Ingalls revenues for the three months endedSeptember 30, 2022 , decreased$5 million , or 1%, from the same period in 2021, primarily driven by lower revenues in the Legend class NSC program and amphibious assault ships, partially offset by higher revenues in surface combatants. Revenues on the Legend class NSC program decreased due to lower volumes on Friedman (NSC 11) andCalhoun (NSC 10). Revenues on amphibious assault ships decreased due to lower volumes on USS Fort Lauderdale (LPD 28), partially offset by higher volumes on LHA 9 (unnamed). Revenues on surface combatants increased due to higher volumes onThad Cochran (DDG 135) andTelesforo Trinidad (DDG 139), partially offset by lower volumes onFrank E. Petersen Jr . (DDG 121),Jeremiah Denton (DDG 129), andTed Stevens (DDG 128). Ingalls revenues for the nine months endedSeptember 30, 2022 , decreased$35 million , or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants and the Legend class NSC program, partially offset by higher revenues in amphibious assault ships. Revenues on surface combatants decreased due to lower volumes onJeremiah Denton (DDG 129),Frank E. Petersen Jr . (DDG 121), and USS Jack H. Lucas (DDG 125), partially offset by higher volume onThad Cochran (DDG 135). Revenues on the Legend class NSC program decreased due to lower volumes on Friedman (NSC 11) andCalhoun (NSC 10). Revenues on amphibious assault 28 -------------------------------------------------------------------------------- Table of Contents ships increased due to higher volumes on LHA 9 (unnamed), partially offset by lower volumes on USS Fort Lauderdale (LPD 28) and Bougainville (LHA 8).
Segment Operating Income
Ingalls segment operating income for the three months endedSeptember 30, 2022 , was$50 million , compared with segment operating income of$62 million for the same period in 2021. The decrease was primarily driven by lower risk retirement onTed Stevens (DDG 128) andDelbert D. Black (DDG 119), partially offset by higher risk retirement on USS Portland (LPD 27). Ingalls segment operating income for the nine months endedSeptember 30, 2022 , was$242 million , compared with segment operating income of$233 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement onHarrisburg (LPD 30) and USS Fort Lauderdale (LPD 28), partially offset by receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021.Newport News Three Months Ended Nine Months Ended September 30 2022 vs. 2021 September 30 2022 vs. 2021 ($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and service revenues
91 7 %$ 4,268 $ 4,124 $ 144 3 % Segment operating income 102 88 14 16 % 277 257 20 8 % As a percentage of segment sales 7.1 % 6.5 % 6.5 % 6.2 %
Sales and Service Revenues
Newport News revenues for the three months endedSeptember 30, 2022 , increased$91 million , or 7%, from the same period in 2021, primarily driven by higher revenues in naval nuclear support services, submarines, and aircraft carriers. Naval nuclear support services revenues increased primarily as a result of higher volumes in submarine and carrier fleet support services. Submarine revenues increased due to higher volumes on theColumbia class (SSBN 826) submarine program and Block V boats of theVirginia class (SSN 774) submarine program, partially offset by lower volumes on submarine services and Block IV boats of theVirginia class (SSN 774) submarine program. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73).Newport News revenues for the nine months endedSeptember 30, 2022 , increased$144 million , or 3%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers, submarines, and naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73). Submarine revenues increased due to higher volumes on theColumbia class (SSBN 826) submarine program and Block V boats of theVirginia class (SSN 774) submarine program, partially offset by lower volumes on Block IV boats of theVirginia class (SSN 774) submarine program. Naval nuclear support services revenues increased primarily as a result of higher volumes in carrier fleet support services, partially offset by lower volumes in facility maintenance services.
Segment Operating Income
Newport News segment operating income for the three months endedSeptember 30, 2022 , was$102 million , compared with segment operating income of$88 million for the same period in 2021. The increase was primarily due to contract incentives on theColumbia class (SSBN 826) submarine program, partially offset by lower risk retirement on theVirginia class (SSN 774) submarine program.Newport News segment operating income for the nine months endedSeptember 30, 2022 , was$277 million , compared with segment operating income of$257 million for the same period in 2021. The increase was primarily due to contract incentives on theColumbia class (SSBN 826) submarine program and favorable changes in contract estimates from facilities capital and price adjustment clauses, partially offset by lower risk retirement on theVirginia class (SSN 774) submarine program. 29 --------------------------------------------------------------------------------
Table of Contents
Mission Technologies
Three Months Ended Nine Months Ended
September 30 2022 vs. 2021 September 30 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and service revenues $ 595 $ 394 $ 201 51 % $ 1,785 $ 890 $ 895 101 %
Segment operating income 14 13 1 8 % 48 33 15 45 %
As a percentage of segment
sales 2.4 % 3.3 % 2.7 % 3.7 %
Sales and Service Revenues
Mission Technologies revenues for the three months ended September 30, 2022 ,
increased $201 million , or 51%, from the same period in 2021, primarily due to
higher volumes in DFS attributable to the acquisition of Alion in the third
quarter of 2021.
Mission Technologies revenues for the nine months ended
increased
higher volumes in DFS attributable to the acquisition of Alion in the third
quarter of 2021.
Segment Operating Income
Mission Technologies segment operating income for the three months endedSeptember 30, 2022 , was$14 million , compared with segment operating income of$13 million for the same period in 2021. The increase was primarily driven by improved performance in DFS due to the acquisition of Alion in the third quarter of 2021, as well as higher equity income, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition. Mission Technologies segment operating income for the nine months endedSeptember 30, 2022 , was$48 million , compared with segment operating income of$33 million for the same period in 2021. The increase was primarily driven by improved performance in DFS due to the acquisition of Alion in the third quarter of 2021, as well as higher equity income, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition.
BACKLOG
Total backlog as ofSeptember 30, 2022 , andDecember 31, 2021 , was approximately$46.7 billion and$48.5 billion , respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.
The following table presents funded and unfunded backlog by segment as of
September 30, 2022
Total Total
($ in millions) Funded Unfunded Backlog Funded Unfunded Backlog
Ingalls $ 9,698 $ 1,028 $ 10,726 $ 10,216 $ 792 $ 11,008
Newport News 11,914 18,675 30,589 11,121 21,198 32,319
Mission Technologies 1,600 3,746 5,346 1,334 3,789 5,123
Total backlog $ 23,212 $ 23,449 $ 46,661 $ 22,671 $ 25,779 $ 48,450
Approximately 18% of the $48.5 billion total backlog as of December 31, 2021 , is
expected to be converted into sales in 2022. U.S. Government orders comprised
substantially all of the backlog as of September 30, 2022 , and December 31,
2021 .
30
--------------------------------------------------------------------------------
Table of Contents
Awards
The value of new contract awards during the nine months ended
2022
LIQUIDITY AND CAPITAL RESOURCES
We seek to efficiently convert operating results into cash for deployment in
operating our businesses, implementing our business strategy, and maximizing
stockholder value. We use various financial measures to assist in capital
deployment decision making, including net cash provided by operating activities
and free cash flow. We believe these measures are useful to investors in
assessing our financial performance.
The following table summarizes key components of cash flow provided by operating
activities:
Nine Months Ended 2022 vs.
September 30 2021
($ in millions) 2022 2021 Dollars
Net earnings $ 456 $ 424 $ 32
Depreciation and amortization 269 208 61
Provision for doubtful accounts (7) - (7)
Stock-based compensation 28 19 9
Deferred income taxes (14) 74 (88)
Loss (gain) on investments in marketable securities 34 (12) 46
Retiree benefits (99) (73) (26)
Trade working capital increase (502) (151) (351)
Net cash provided by operating activities $
165
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt. Cash Flows We discuss below our significant operating, investing, and financing activities affecting cash flows for the nine months endedSeptember 30, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.
Operating Activities
Cash provided by operating activities for the nine months endedSeptember 30, 2022 , was$165 million , compared with$489 million provided by operating activities for the same period in 2021. The unfavorable change in operating cash flow was primarily due to an unfavorable change in trade working capital, as well as higher payments for income taxes and interest, partially offset by lower contributions to retiree benefit plans. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable. We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the 12 months beginningOctober 1, 2022 , and beyond such 12-month period based on our current business plan.
Investing Activities
Cash used in investing activities for the nine months endedSeptember 30, 2022 , was$178 million , compared with$1,842 million used in investing activities for the same period in 2021.The change in investing cash was driven by the acquisition of Alion in 2021. For 2022, we expect our capital expenditures for maintenance and sustainment to 31
--------------------------------------------------------------------------------
Table of Contents
be approximately 1.0% of annual revenues and our discretionary capital
expenditures to be approximately 1.5% to 2.0% of annual revenues.
Financing Activities
Cash used in financing activities for the nine months endedSeptember 30, 2022 , was$497 million , compared with$1,396 million provided by financing activities for the same period in 2021. The change in financing cash was primarily due to$1,650 million of proceeds from the incurrence of long term debt in 2021, an increase in the repayment of long-term debt of$300 million , an increase of$7 million in employee taxes on certain share-based payment arrangements, and a$4 million increase in cash dividend payments, partially offset by a decrease of$46 million in common stock repurchases and a decrease of$22 million in debt issuance costs. Free Cash Flow Free cash flow represents cash provided by operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, net earnings as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. We believe free cash flow is an important liquidity measure for our investors because it provides insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies. The following table reconciles net cash provided by operating activities to free cash flow: Nine Months Ended September 30 2022 vs. 2021 ($ in millions) 2022 2021 Dollars Net cash provided by operating activities$ 165 $ 489 $ (324) Less capital expenditures: Capital expenditure additions (179) (216) 37 Grant proceeds for capital expenditures - 11 (11) Free cash flow$ (14) $ 284 $ (298) Free cash flow for the nine months endedSeptember 30, 2022 , decreased$298 million from the same period in 2021, primarily due to an unfavorable change in trade working capital, as well as higher payments for income taxes and interest, partially offset by lower contributions to retiree benefit plans and lower capital expenditures.
Governmental Regulation and Supervision
TheU.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 ofSeptember 30, 2022 and 2021, the cumulative amounts of payments withheld by theU.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 ofSeptember 30, 2022 ,$14 million in letters of credit were issued but undrawn and$360 million of surety bonds were outstanding. As ofSeptember 30, 2022 , 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.
32
--------------------------------------------------------------------------------
Table of Contents
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Statements in this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can generally identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and similar words or phrases or the negative of these words or phrases. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable when made, we cannot guarantee future results, levels of activity, performance, or achievements. There are a number of important factors that could cause our actual results to differ materially from the results anticipated by our forward-looking statements, which include, but are not limited to: •Changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans); •Our ability to estimate our future contract costs, including cost increases due to inflation, and perform our contracts effectively; •Changes in procurement processes and government regulations and our ability to comply with such requirements; •Our ability to deliver our products and services at an affordable life cycle cost and compete within our markets; •Natural and environmental disasters and political instability; •Our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions; •Adverse economic conditions inthe United States and globally; •Health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic, and the impacts of vaccination mandates on our workforce; •Our ability to attract and retain a qualified workforce; •Disruptions impacting global supply, including those attributable to the ongoing COVID-19 pandemic and those resulting from the ongoing conflict betweenRussia andUkraine ; •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 theSEC . 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. 33
--------------------------------------------------------------------------------
Table of Contents
GLOSSARY OF PROGRAMS Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q. ProgramName Program Description America class (LHA 6) amphibious Design and build large deck amphibious assault ships assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissionedTarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. In
2020, we delivered USS Tripoli
(LHA 7), and we were awarded a long-lead-time material
and construction contract for LHA 9 (unnamed). We are
currently constructing Bougainville (LHA 8).
Arleigh Burke class (DDG 51) Build guided missile destroyers designed for conducting
destroyers anti-air, anti-submarine,
anti-surface, and strike
operations. The
Aegis-equipped
51) destroyers are theU.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological
advances during construction. We
delivered USS Paul Ignatius (DDG 117), USS Delbert D.
Black (DDG 119), and Frank E. Petersen Jr . (DDG121) in
2019, 2020, and 2021,
respectively. We have contracts
to construct the following
destroyers: Lenah H.
Jack H. Lucas (DDG 125), Ted
Stevens (DDG 128),
Jeremiah Denton (DDG 129),
Sam Nunn (DDG 133), Thad
Cochran (DDG 135), John F.
Lehman (DDG 137), and
Carrier RCOH Perform refueling and complex
overhaul ("RCOH") of
nuclear-powered aircraft
carriers, which is required at
the mid-point of their
50-year life cycle. USS George
Washington (CVN 73) arrived atNewport News for the start of its RCOH inAugust 2017 , and USS John C. Stennis (CVN 74) arrived atNewport News for the start of its RCOH inMay 2021 .
class submarine as a
replacement for the current aging
Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. TheOhio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. TheColumbia class program plan of record is to construct 12 new ballistic missile submarines. TheU.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, theDoD signed the acquisition decision
memorandum approving the
class program's Milestone B, which formally authorizes
the program's entry into the engineering and
manufacturing development phase. We perform design work
as a subcontractor to Electric Boat, and we have
entered into a teaming
agreement with Electric Boat to
build modules for the entire
submarine program that
leverages our
(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 theColumbia class (SSBN 826) submarine program. Construction of the firstColumbia class (SSBN 826) submarine began in 2020. Defense and federal solutions ("DFS") Develops integrated solutions that enable today's connected, all-domain force. Capabilities include: command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and
operations; the application of
artificial intelligence
("AI") and machine learning to
battlefield decisions; defensive and offensive
cyberspace strategies and electronic warfare ("EW");
and live, virtual, and
constructive ("LVC") solutions.
34 --------------------------------------------------------------------------------
Table of Contents
Fleet sustainment Maintains and modernizes a significant majority of the
U.S. Navy fleet, from small watercraft to submarines,
combatants, and aircraft carriers, our systems and
maintenance experts help
the
of readiness. Ensures
effective system operation and
sustainment by actively
supporting design and
decision-making processes
through studies, analyses, and
reviews of program
documents, and provides a wide range
of logistics products.
USS Gerald R. Ford class (CVN 78) Design and construction for the Ford class program,
aircraft carriers which is the aircraft
carrier replacement program for
the decommissioned
Enterprise (CVN 65) and Nimitz class
(CVN 68) aircraft carriers. USS Gerald R.Ford (CVN 78), the first ship of theFord class, was delivered to theU.S. Navy in the second
quarter of 2017. In
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) andDoris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting
capability, quality of life
improvements for sailors,
and reduced life cycle costs.
Legend class National Security Cutter Design and build theU.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in theU.S. Coast Guard . The NSC is equipped to carry out maritimehomeland security , maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of 11 ships, of which the first nine ships have been delivered.Calhoun (NSC 10) and
Friedman (NSC 11) are currently
under construction.
Naval nuclear support services Provide services to and in
support of the
ranging from services
supporting the
submarine fleets to
maintenance services at
training facilities. Naval
nuclear support services
include design,
construction, maintenance, and disposal
activities for in-serviceU.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include
maintenance services on nuclear reactor
prototypes.
Nuclear and environmental services Supports the national
security mission of the Department
of Energy ("DoE") through
the management and operation
of its sites, as well as
the safe cleanup of legacy
waste across the country.
We meet our clients' toughest
nuclear and environmental
challenges and are positioned
to serve the growing
commercial nuclear power plant
decommissioning market. We participate in several joint
ventures, including Newport News Nuclear BWXT Los
Alamos, LLC (" N3B"),
Mission Support and Test Services,
LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC
("SRNS"), and we are an integrated subcontractor to
Triad National Security.
N3B was awarded the Los Alamos
Legacy Cleanup Contract at theDoE/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
South Carolina . Triad provides site management and operations at theDoE's Los Alamos National Laboratory .San Antonio class (LPD 17) amphibious Design and build amphibious transport dock ships, which transport dock ships are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for
Amphibious Readiness Groups. The
San Antonio class (LPD 17) is the newest addition to theU.S. Navy's 21st century amphibious assault force, and these ships are a key
element of the
transformation. In 2022, we delivered USS Fort
Lauderdale (LPD 28). We are currently constructing
Richard M. McCool Jr . (LPD 29), Harrisburg (LPD 30), and
Pittsburgh (LPD 31).
35
--------------------------------------------------------------------------------
Table of Contents
Unmanned systems Creates advanced unmanned maritime solutions for
defense, marine research, and commercial applications.
Serving customers in more than 30 countries, unmanned
systems provides design, autonomy, manufacturing,
testing, operations, and sustainment of unmanned
systems, including unmanned underwater vehicles and
unmanned surface vessels.
submarines
subcontractor to Electric
Boat. The
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.
36
--------------------------------------------------------------------------------
Table of Contents
CIGNA CORP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Progressive Celebrates 10 Years of the Keys to Progress® program with more than 900 Vehicles Donated to Military Families
Advisor News
- IRI pitches retirement agenda to Jeffries as democrats shape affordability platform
- Help child-free clients plan for their later years
- When new investment trends emerge, Gen Z is most likely generation to be first in
- Could ‘plain English’ become an advisor’s secret weapon?
- IRI urges Senate action on 403(b) parity legislation
More Advisor NewsAnnuity News
- Guidance, bulletin or reg? NAIC debates form of annuity illustration update
- Nationwide adds mutual fund-linked strategy to New Heights Select FIA
- NUNN INTRODUCES BILL TO CUT RED TAPE, GIVE IOWANS CLEARER INSURANCE INFORMATION
- NAIC working group pressed to accelerate annuity illustration overhaul
- State Auditor James Brown Kicks Off Life Insurance Awareness Month With Policy Locator Tool
More Annuity NewsHealth/Employee Benefits News
Life Insurance News