Huntington Ingalls Industries Reports Third Quarter 2020 Results
Huntington Ingalls Industries (HII) reported a 4.3% increase in third-quarter 2020 revenues, totaling $2.3 billion, with diluted earnings per share rising to $5.45 from $3.74 in Q3 2019. Operating income was $222 million, maintaining a steady operating margin of 9.6%. The company’s cash flow showed a decline, with free cash flow falling to $160 million from $250 million year-over-year. HII's backlog reached $45.3 billion, bolstered by new contract awards of approximately $1.6 billion. The CEO emphasized ongoing COVID-19 management and successful shipbuilding milestones.
- 4.3% increase in revenues to $2.3 billion compared to Q3 2019.
- Diluted earnings per share increased to $5.45, up 45.7% from $3.74.
- Backlog improved to $45.3 billion, a positive indicator for future revenue.
- Successful integration of acquisitions driving performance in Technical Solutions segment.
- Free cash flow decreased to $160 million, down from $250 million year-over-year.
- Operating income declined by 10.2% year-to-date compared to the same period in 2019.
- Newport News Shipbuilding segment operating income and margin dropped significantly.
- Revenues were
$2.3 billion in the quarter - Operating margin was
9.6% - Diluted earnings per share was
$5.45 - Cash from operations was
$222 million , and free cash flow1 was$160 million - Backlog of
$45.3 billion
NEWPORT NEWS, Va., Nov. 05, 2020 (GLOBE NEWSWIRE) -- Huntington Ingalls Industries (NYSE:HII) reported third quarter 2020 revenues of
Operating income in the quarter was
Net earnings in the quarter were
Third quarter cash from operations was
New contract awards in the quarter were approximately
“We are very pleased with shipbuilding program execution in the quarter, particularly as we continue to navigate our way through the challenges posed by COVID-19,” said Mike Petters, HII’s president and CEO. “In addition to achieving a number of key shipbuilding program milestones during the quarter, we also broke ground on our Unmanned Systems Center of Excellence, a facility purpose-built for unmanned systems prototyping, production and testing as we continue to invest in and expand our unmanned capabilities."
COVID-19 Update
"We continue to aggressively manage our response to the ongoing COVID-19 pandemic. The health and safety of our employees remains paramount as we continue our important work to support the nation’s defense,” said Petters. "The rate of new cases has stabilized in our shipyards, and we are maintaining a sustainable and manageable level of attendance. This has been driven by our ability to start rapid testing of employees and move them out of quarantine and back to work in a prudent way. While this has proven to be successful, the dynamic nature of this virus will force us to continue refining our policies to adapt to changing circumstances."
Financial Outlook
- Expect FY20 shipbuilding revenue of approximately
$7.9 billion ; shipbuilding operating margin1 between5.5% and6.5% - Expect FY20 Technical Solutions revenue of approximately
$1.25 billion and segment operating margin1 of approximately2.6% - Expect FY20 free cash flow1 of >
$500 million - Expect cumulative FY20 and FY21 free cash flow1 of approximately
$900 million - Expect cumulative FY20-FY24 free cash flow1 of approximately
$3 billion
1Non-GAAP measures. See Exhibit B for definitions and reconciliations.
Results of Operations
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
September 30 | September 30 | ||||||||||||||||||||||||||
($ in millions, except per share amounts) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||
Sales and service revenues | $ | 2,314 | $ | 2,219 | $ | 95 | $ | 6,604 | $ | 6,487 | $ | 117 | |||||||||||||||
Operating income | 222 | 214 | 8 | 494 | 550 | (56 | ) | (10.2)% | |||||||||||||||||||
Operating margin % | 9.6 | % | 9.6 | % | (5) bps | 7.5 | % | 8.5 | % | (100) bps | |||||||||||||||||
Segment operating income1 | 162 | 191 | (29 | ) | (15.2)% | 313 | 458 | (145 | ) | (31.7)% | |||||||||||||||||
Segment operating margin %1 | 7.0 | % | 8.6 | % | (161) bps | 4.7 | % | 7.1 | % | (232) bps | |||||||||||||||||
Net earnings | 222 | 154 | 68 | 447 | 400 | 47 | |||||||||||||||||||||
Diluted earnings per share | $ | 5.45 | $ | 3.74 | $ | 1.71 | $ | 10.98 | $ | 9.66 | $ | 1.32 | |||||||||||||||
Pension Adjusted Figures | |||||||||||||||||||||||||||
Net earnings2 | 152 | 133 | 19 | 230 | 319 | (89 | ) | (27.9)% | |||||||||||||||||||
Diluted earnings per share2 | $ | 3.73 | $ | 3.23 | $ | 0.50 | $ | 5.65 | $ | 7.71 | $ | (2.06 | ) | (26.7)% | |||||||||||||
1 Non-GAAP measures that exclude non-segment factors affecting operating income. See Exhibit B for definitions and reconciliations. | |||||||||||||||||||||||||||
2 Non-GAAP measures that exclude the impacts of the FAS/CAS Adjustment. See Exhibit B for reconciliation. | |||||||||||||||||||||||||||
Segment Operating Results
Ingalls Shipbuilding
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
September 30 | September 30 | ||||||||||||||||||||||
($ in millions) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||
Revenues | $ | 675 | $ | 647 | $ | 28 | $ | 1,926 | $ | 1,853 | $ | 73 | |||||||||||
Segment operating income1 | 62 | 61 | 1 | 185 | 176 | 9 | |||||||||||||||||
Segment operating margin %1 | 9.2 | % | 9.4 | % | (24) bps | 9.6 | % | 9.5 | % | 11 bps | |||||||||||||
1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. | |||||||||||||||||||||||
Ingalls Shipbuilding revenues for the third quarter of 2020 were
Ingalls Shipbuilding segment operating income for the third quarter was
Key Ingalls Shipbuilding milestones for the quarter:
- Completed sea trials for Legend-class National Security Cutter Stone (NSC 9)
- Achieved electronic systems light-off for Fort Lauderdale (LPD 28)
Newport News Shipbuilding
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
September 30 | September 30 | ||||||||||||||||||||||||||
($ in millions) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||
Revenues | $ | 1,358 | $ | 1,274 | $ | 84 | $ | 3,821 | $ | 3,832 | $ | (11 | ) | (0.3)% | |||||||||||||
Segment operating income1 | 79 | 121 | (42 | ) | (34.7)% | 105 | 273 | (168 | ) | (61.5)% | |||||||||||||||||
Segment operating margin %1 | 5.8 | % | 9.5 | % | (368) bps | 2.7 | % | 7.1 | % | (438) bps | |||||||||||||||||
1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. | |||||||||||||||||||||||||||
Newport News Shipbuilding revenues for the third quarter of 2020 were
Newport News Shipbuilding segment operating income for the third quarter was
Key Newport News Shipbuilding milestones for the quarter:
- John F. Kennedy (CVN 79) is approximately
76% complete - Commencement of shore steam testing on USS George Washington (CVN 73) RCOH, which is approximately
81% complete - Christened the Virginia-class submarine Montana (SSN 794)
Technical Solutions
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30 | September 30 | |||||||||||||||||||||||
($ in millions) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | ||||||||||||||||
Revenues | $ | 320 | $ | 326 | $ | (6 | ) | (1.8)% | $ | 957 | $ | 887 | 70 | |||||||||||
Segment operating income1 | 21 | 9 | $ | 12 | 23 | 9 | 14 | |||||||||||||||||
Segment operating margin %1 | 6.6 | % | 2.8 | % | 380 bps | 2.4 | % | 1.0 | % | 139 bps | ||||||||||||||
1 Non-GAAP measures. See Exhibit B for definitions and reconciliations. | ||||||||||||||||||||||||
Technical Solutions revenues for the third quarter of 2020 were
Technical Solutions segment operating income for the third quarter was
Key Technical Solutions milestones for the quarter:
- Nationwide Remediation Partners, a joint venture led by HII Nuclear, was awarded a contract to provide nationwide deactivation, decommissioning and removal services at excess DOE facilities. The multiple award contract has a 10-year ordering period, with a maximum ordering ceiling of
$3 billion - Awarded a contract by the U.S. Navy to continue providing logistics support products and services to the Naval Expeditionary Logistics Support Group
- Broke ground on a new Unmanned Systems Center of Excellence in Hampton, Virginia, which will be purpose-built for unmanned systems prototyping, production and testing
- Completed a strategic equity investment in Sea Machines Robotics, Inc., a Boston-based autonomous technology company that specializes in advanced software for unmanned surface vessels
2020 Outlook
The financial outlook, expectations and other forward looking statements provided by the company for 2020 and beyond, reflect the company's judgment based on the information available at the time of this release.
The COVID-19 global pandemic has had wide ranging effects on the global health environment and disrupted the global and U.S. economies and financial markets, including impacts to our employees, customers, suppliers, and communities. The pandemic is also impacting our operations, and the full impacts of COVID-19 on our fiscal year 2020 financial results and beyond are uncertain. We believe that the most significant elements of uncertainty are the intensity and duration of the impact on our employees’ ability to work effectively, disruption in our supply chain, disruption of the U.S. Government's and our other customers' abilities to perform their obligations, and impact on pension assets and other investment performance.
We have incurred and expect to continue incurring costs related to our COVID-19 response, including paid leave, quarantining employees and recurring facility cleaning. While our shipyards and other facilities remain open and productive, we have experienced a decrease in workforce attendance, which has impacted our operations with delay and disruption from the lack of availability of critical skills and out-of-sequence work. Continued lower staffing levels and lower employee productivity could impact our ability to achieve anticipated milestones and further affect our 2020 financial results and beyond.
Our employees, suppliers, customers, and communities are facing significant challenges, and we cannot predict how the COVID-19 environment will evolve or the impact it will have. For further information on the potential impact of COVID-19 to the company, see “Risk Factors” in our third quarter Form 10-Q.
2020 Prior Outlook (Aug. 2020) | 2020 Revised Outlook (Nov. 2020) | ||
Shipbuilding Revenue1 | ~ | ||
Shipbuilding Operating Margin1 | |||
Technical Solutions Revenue2 Technical Solutions Revenue (Ex. UPI & SDSY) | ~ ~ | ||
Technical Solutions Segment Operating Margin2 Technical Solutions Segment Operating Margin (Ex. UPI & SDSY) | ~ ~ | ||
Technical Solutions EBITDA Margin1,2 Technical Solutions EBITDA Margin (Ex. UPI & SDSY)1 | ~ ~ | ||
Operating FAS/CAS Adjustment | |||
Non-current State Income Tax Expense | |||
Interest Expense3 | |||
Non-operating Retirement Benefit | |||
Effective Tax Rate | ~ | ~ | |
Depreciation & Amortization | ~ | ~ | |
Capital Expenditures | ~ | ~ | |
Free Cash Flow1 | > | > |
1 Non-GAAP measures. See Exhibit B for definitions.
2 Includes results from San Diego Shipyard and Universal Pegasus International through Dec. 2020.
3 Includes a
About Huntington Ingalls Industries
Huntington Ingalls Industries is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry. For more than a century, HII’s Newport News and Ingalls shipbuilding divisions in Virginia and Mississippi have built more ships in more ship classes than any other U.S. naval shipbuilder. HII’s Technical Solutions division supports national security missions around the globe with unmanned systems, defense and federal solutions, and nuclear and environmental services. Headquartered in Newport News, Virginia, HII employs more than 42,000 people operating both domestically and internationally. For more information, please visit www.huntingtoningalls.com.
Conference Call Information
Huntington Ingalls Industries will webcast its earnings conference call at 9 a.m. Eastern time today. A live audio broadcast of the conference call and supplemental presentation will be available on the investor relations page of the company’s website: www.huntingtoningalls.com. A telephone replay of the conference call will be available from noon today through Thursday, November 12 by calling toll-free (877) 344-7529 or (412) 317-0088 and using conference ID 10148472.
Forward-Looking Statements
Statements in this release, other than statements of historical fact, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include: changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans); our ability to estimate our future contract costs and perform our contracts effectively; changes in procurement processes and government regulations and our ability to comply with such requirements; our ability to deliver our products and services at an affordable life cycle cost and compete within our markets; natural and environmental disasters and political instability; our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures and strategic acquisitions; adverse economic conditions in the United States and globally; health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; changes in key estimates and assumptions regarding our pension and retiree health care costs; security threats, including cyber security threats, and related disruptions; and other risk factors discussed in our filings with the U.S. Securities and Exchange Commission. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make. This release also contains non-GAAP financial measures and includes a GAAP reconciliation of these financial measures. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures.
Exhibit A: Financial Statements
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||
(in millions, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
Sales and service revenues | ||||||||||||||||||||
Product sales | $ | 1,699 | $ | 1,545 | $ | 4,743 | $ | 4,555 | ||||||||||||
Service revenues | 615 | 674 | 1,861 | 1,932 | ||||||||||||||||
Sales and service revenues | 2,314 | 2,219 | 6,604 | 6,487 | ||||||||||||||||
Cost of sales and service revenues | ||||||||||||||||||||
Cost of product sales | 1,388 | 1,246 | 3,931 | 3,754 | ||||||||||||||||
Cost of service revenues | 490 | 556 | 1,550 | 1,634 | ||||||||||||||||
Income from operating investments, net | 6 | 6 | 19 | 15 | ||||||||||||||||
General and administrative expenses | 220 | 209 | 648 | 564 | ||||||||||||||||
Operating income | 222 | 214 | 494 | 550 | ||||||||||||||||
Other income (expense) | ||||||||||||||||||||
Interest expense | (27 | ) | (18 | ) | (68 | ) | (52 | ) | ||||||||||||
Non-operating retirement benefit | 29 | 3 | 89 | 8 | ||||||||||||||||
Other, net | 2 | (1 | ) | (8 | ) | 5 | ||||||||||||||
Earnings before income taxes | 226 | 198 | 507 | 511 | ||||||||||||||||
Federal and foreign income taxes | 4 | 44 | 60 | 111 | ||||||||||||||||
Net earnings | $ | 222 | $ | 154 | $ | 447 | $ | 400 | ||||||||||||
Basic earnings per share | $ | 5.47 | $ | 3.74 | $ | 11.01 | $ | 9.66 | ||||||||||||
Weighted-average common shares outstanding | 40.6 | 41.2 | 40.6 | 41.4 | ||||||||||||||||
Diluted earnings per share | $ | 5.45 | $ | 3.74 | $ | 10.98 | $ | 9.66 | ||||||||||||
Weighted-average diluted shares outstanding | 40.7 | 41.2 | 40.7 | 41.4 | ||||||||||||||||
Dividends declared per share | $ | 1.03 | $ | 0.86 | $ | 3.09 | $ | 2.58 | ||||||||||||
Net earnings from above | $ | 222 | $ | 154 | $ | 447 | $ | 400 | ||||||||||||
Other comprehensive income | ||||||||||||||||||||
Change in unamortized benefit plan costs | 24 | 25 | 70 | 74 | ||||||||||||||||
Other | 1 | 1 | — | 1 | ||||||||||||||||
Tax expense for items of other comprehensive income | (6 | ) | (7 | ) | (18 | ) | (19 | ) | ||||||||||||
Other comprehensive income (loss), net of tax | 19 | 19 | 52 | 56 | ||||||||||||||||
Comprehensive income | $ | 241 | $ | 173 | $ | 499 | $ | 456 | ||||||||||||
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions) | September 30, 2020 | December 31, 2019 | ||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 744 | $ | 75 | ||||
Accounts receivable, net of allowance for doubtful accounts of | 492 | 318 | ||||||
Contract assets | 1,134 | 989 | ||||||
Inventoried costs, net | 152 | 136 | ||||||
Income taxes receivable | 163 | 148 | ||||||
Assets held for sale | 154 | 95 | ||||||
Prepaid expenses and other current assets | 42 | 24 | ||||||
Total current assets | 2,881 | 1,785 | ||||||
Property, plant, and equipment, net of accumulated depreciation of | 2,907 | 2,832 | ||||||
Other Assets | ||||||||
Operating lease assets | 187 | 201 | ||||||
Goodwill | 1,577 | 1,373 | ||||||
Other intangible assets, net of accumulated amortization of | 527 | 492 | ||||||
Deferred tax assets | 97 | 108 | ||||||
Miscellaneous other assets | 269 | 240 | ||||||
Total assets | $ | 8,445 | $ | 7,031 | ||||
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
($ in millions) | September 30, 2020 | December 31, 2019 | ||||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities | ||||||||
Trade accounts payable | $ | 429 | $ | 497 | ||||
Accrued employees’ compensation | 320 | 265 | ||||||
Current portion of postretirement plan liabilities | 130 | 130 | ||||||
Current portion of workers’ compensation liabilities | 233 | 225 | ||||||
Contract liabilities | 604 | 373 | ||||||
Liabilities held for sale | 86 | 77 | ||||||
Other current liabilities | 431 | 323 | ||||||
Total current liabilities | 2,233 | 1,890 | ||||||
Long-term debt | 2,278 | 1,286 | ||||||
Pension plan liabilities | 728 | 975 | ||||||
Other postretirement plan liabilities | 374 | 380 | ||||||
Workers’ compensation liabilities | 470 | 457 | ||||||
Long-term operating lease liabilities | 153 | 164 | ||||||
Other long-term liabilities | 329 | 291 | ||||||
Total liabilities | 6,565 | 5,443 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Equity | ||||||||
Common stock, | 1 | 1 | ||||||
Additional paid-in capital | 1,964 | 1,961 | ||||||
Retained earnings | 3,330 | 3,009 | ||||||
Treasury stock | (2,058 | ) | (1,974 | ) | ||||
Accumulated other comprehensive loss | (1,357 | ) | (1,409 | ) | ||||
Total stockholders’ equity | 1,880 | 1,588 | ||||||
Total liabilities and stockholders’ equity | $ | 8,445 | $ | 7,031 | ||||
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS | Nine Months Ended September 30 | |||||||
($ in millions) | 2020 | 2019 | ||||||
Operating Activities | ||||||||
Net earnings | $ | 447 | $ | 400 | ||||
Adjustments to reconcile to net cash provided by (used in) operating activities | ||||||||
Depreciation | 136 | 126 | ||||||
Amortization of purchased intangibles | 41 | 35 | ||||||
Amortization of debt issuance costs | 5 | 2 | ||||||
Provision for doubtful accounts | (2 | ) | (5 | ) | ||||
Stock-based compensation | 16 | 19 | ||||||
Deferred income taxes | (7 | ) | 42 | |||||
Loss (gain) on investments in marketable securities | (3 | ) | (6 | ) | ||||
Asset impairments | 13 | — | ||||||
Change in | ||||||||
Accounts receivable | (164 | ) | (223 | ) | ||||
Contract assets | (63 | ) | (197 | ) | ||||
Inventoried costs | (5 | ) | (14 | ) | ||||
Prepaid expenses and other assets | (60 | ) | (56 | ) | ||||
Accounts payable and accruals | 315 | 147 | ||||||
Retiree benefits | (183 | ) | 56 | |||||
Other non-cash transactions, net | 5 | 4 | ||||||
Net cash provided by operating activities | 491 | 330 | ||||||
Investing Activities | ||||||||
Capital expenditures | ||||||||
Capital expenditure additions | (220 | ) | (349 | ) | ||||
Grant proceeds for capital expenditures | 17 | 71 | ||||||
Acquisitions of businesses, net of cash received | (377 | ) | (195 | ) | ||||
Other investing activities, net | (6 | ) | 3 | |||||
Net cash used in investing activities | (586 | ) | (470 | ) | ||||
Financing Activities | ||||||||
Proceeds from issuance of long-term debt | 1,000 | — | ||||||
Proceeds from revolving credit facility borrowings | 385 | 5,048 | ||||||
Repayment of revolving credit facility borrowings | (385 | ) | (4,784 | ) | ||||
Debt issuance costs | (13 | ) | — | |||||
Dividends paid | (126 | ) | (107 | ) | ||||
Repurchases of common stock | (84 | ) | (202 | ) | ||||
Employee taxes on certain share-based payment arrangements | (13 | ) | (23 | ) | ||||
Net cash provided by (used in) financing activities | 764 | (68 | ) | |||||
Change in cash and cash equivalents | 669 | (208 | ) | |||||
Cash and cash equivalents, beginning of period | 75 | 240 | ||||||
Cash and cash equivalents, end of period | $ | 744 | $ | 32 | ||||
Supplemental Cash Flow Disclosure | ||||||||
Cash paid for income taxes | $ | 106 | $ | 124 | ||||
Cash paid for interest | $ | 33 | $ | 40 | ||||
Non-Cash Investing and Financing Activities | ||||||||
Capital expenditures accrued in accounts payable | $ | 8 | $ | 12 | ||||
Accrued repurchases of common stock | $ | — | $ | 2 | ||||
Exhibit B: Non-GAAP Measures Definitions & Reconciliations
We make reference to "segment operating income," "segment operating margin," "shipbuilding revenue," "shipbuilding operating margin," "Technical Solutions EBITDA margin," "adjusted net earnings," "adjusted diluted earnings per share" and "free cash flow."
We internally manage our operations by reference to segment operating income and segment operating margin, which are not recognized measures under GAAP. When analyzing our operating performance, investors should use segment operating income and segment operating margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. They are measures that we use to evaluate our core operating performance. We believe that segment operating income, segment operating margin and shipbuilding operating margin reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We believe these measures are used by investors and are a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income and segment operating margin may not be comparable to similarly titled measures of other companies.
Adjusted net earnings and adjusted diluted earnings per share are not measures recognized under GAAP. They should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. We believe these measures are useful to investors because they exclude items that do not reflect our core operating performance. They may not be comparable to similarly titled measures of other companies.
Shipbuilding revenue, shipbuilding operating margin and Technical Solutions EBITDA margin are not measures recognized under GAAP. They should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. They may not be comparable to similarly titled measures of other companies.
Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. We believe free cash flow is an important measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.
Segment operating income (loss) is defined as operating income (loss) for the relevant segment(s) before the Operating FAS/CAS Adjustment and non-current state income taxes.
Segment operating margin is defined as segment operating income (loss) as a percentage of sales and service revenues.
Shipbuilding revenue is defined as the combined sales and service revenues from our Newport News Shipbuilding segment and Ingalls Shipbuilding segment.
Shipbuilding operating margin is defined as the combined segment operating margin of our Newport News Shipbuilding segment and Ingalls Shipbuilding segment as a percentage of combined sales and service revenues from our Newport News Shipbuilding segment and Ingalls Shipbuilding segment.
Technical Solutions EBITDA margin is defined as Technical Solutions segment operating income before interest expense, income taxes, depreciation, and amortization as a percentage of revenues.
Adjusted net earnings is defined as net earnings adjusted for the after-tax impact of the FAS/CAS Adjustment.
Adjusted diluted earnings per share is defined as adjusted net earnings divided by the weighted-average diluted common shares outstanding.
Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures net of related grant proceeds.
FAS/CAS Adjustment is defined as the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP (FAS) and the expenses determined in accordance with U.S. Cost Accounting Standards (CAS).
Operating FAS/CAS Adjustment is defined as the difference between the service cost component of our pension and other postretirement expense determined in accordance with GAAP (FAS) and our pension and other postretirement expense under U.S. Cost Accounting Standards (CAS).
Non-current state income taxes are defined as deferred state income taxes, which reflect the change in deferred state tax assets and liabilities and the tax expense or benefit associated with changes in state uncertain tax positions in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
We present financial measures adjusted for the Operating FAS/CAS Adjustment and non-current state income taxes to reflect the company’s performance based upon the pension costs and state tax expense charged to our contracts under CAS. We use these adjusted measures as internal measures of operating performance and for performance-based compensation decisions.
Reconciliations of Segment Operating Income and Segment Operating Margin
Three Months Ended | Nine Months Ended | ||||||||||||||||||
September 30 | September 30 | ||||||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Ingalls revenues | $ | 675 | $ | 647 | $ | 1,926 | $ | 1,853 | |||||||||||
Newport News revenues | 1,358 | 1,274 | 3,821 | 3,832 | |||||||||||||||
Technical Solutions revenues | 320 | 326 | 957 | 887 | |||||||||||||||
Intersegment eliminations | (39 | ) | (28 | ) | (100 | ) | (85 | ) | |||||||||||
Sales and Service Revenues | 2,314 | 2,219 | 6,604 | 6,487 | |||||||||||||||
Operating Income | 222 | 214 | 494 | 550 | |||||||||||||||
Operating FAS/CAS Adjustment | (60 | ) | (23 | ) | (186 | ) | (94 | ) | |||||||||||
Non-current state income taxes | — | — | 5 | 2 | |||||||||||||||
Segment Operating Income | 162 | 191 | 313 | 458 | |||||||||||||||
As a percentage of sales and service revenues | 7.0 | % | 8.6 | % | 4.7 | % | 7.1 | % | |||||||||||
Ingalls operating income | 62 | 61 | 185 | 176 | |||||||||||||||
As a percentage of Ingalls revenues | 9.2 | % | 9.4 | % | 9.6 | % | 9.5 | % | |||||||||||
Newport News operating income | 79 | 121 | 105 | 273 | |||||||||||||||
As a percentage of Newport News revenues | 5.8 | % | 9.5 | % | 2.7 | % | 7.1 | % | |||||||||||
Technical Solutions operating income | 21 | 9 | 23 | 9 | |||||||||||||||
As a percentage of Technical Solutions revenues | 6.6 | % | 2.8 | % | 2.4 | % | 1.0 | % | |||||||||||
Reconciliation of Adjusted Net Earnings and Adjusted Diluted Earnings Per Share
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(in millions, except per share amounts) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net earnings | $ | 222 | $ | 154 | $ | 447 | $ | 400 | ||||||||
After-tax FAS/CAS adjustment(1) | (70 | ) | (21 | ) | (217 | ) | (81 | ) | ||||||||
Adjusted Net Earnings | $ | 152 | $ | 133 | $ | 230 | $ | 319 | ||||||||
Diluted earnings per share | $ | 5.45 | $ | 3.74 | $ | 10.98 | $ | 9.66 | ||||||||
After-tax FAS/CAS adjustment per share(1) | (1.72 | ) | (0.51 | ) | (5.33 | ) | (1.95 | ) | ||||||||
Adjusted Diluted EPS** | $ | 3.73 | $ | 3.23 | $ | 5.65 | $ | 7.71 | ||||||||
(1) FAS/CAS Adjustment | $ | (89 | ) | $ | (26 | ) | $ | (275 | ) | $ | (102 | ) | ||||
Tax effect* | (19 | ) | (5 | ) | (58 | ) | (21 | ) | ||||||||
After-tax impact | (70 | ) | (21 | ) | $ | (217 | ) | $ | (81 | ) | ||||||
Weighted-average diluted shares outstanding | 40.7 | 41.2 | 40.7 | 41.4 | ||||||||||||
Per share impact** | $ | (1.72 | ) | $ | (0.51 | ) | $ | (5.33 | ) | $ | (1.95 | ) | ||||
*The income tax impact is calculated using the tax rate in effect for the relevant non-GAAP adjustment. | ||||||||||||||||
**Amounts may not recalculate exactly due to rounding. | ||||||||||||||||
Reconciliation of Free Cash Flow
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30 | September 30 | |||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Net cash provided by operating activities | $ | 222 | $ | 363 | $ | 491 | $ | 330 | ||||||||
Less capital expenditures: | ||||||||||||||||
Capital expenditure additions | (70 | ) | (115 | ) | (220 | ) | (349 | ) | ||||||||
Grant proceeds for capital expenditures | 8 | 2 | 17 | 71 | ||||||||||||
Free cash flow | $ | 160 | $ | 250 | $ | 288 | $ | 52 | ||||||||
Contacts:
Jerri Fuller Dickseski (Media)
jerri.dickseski@hii-co.com
757-380-2341
Dwayne Blake (Investors)
dwayne.blake@hii-co.com
757-380-2104
FAQ
What were Huntington Ingalls Industries' Q3 2020 revenues?
How did HII's earnings per share change in Q3 2020?
What is HII's backlog as of September 30, 2020?
What are the new contract awards reported by HII for Q3 2020?