DEF 14A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant                               Filed by a Party other than the Registrant  

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material under Rule 14a-12

HUNTINGTON INGALLS INDUSTRIES, INC.

(Name of registrant as specified in its charter)

(Name of person(s) filing proxy statement, if other than the registrant)

Payment of Filing Fee (Check the appropriate box):

 

  No fee required.

  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)   Title of each class of securities to which transaction applies:
   

 

  (2)   Aggregate number of securities to which transaction applies:
   

 

  (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
   

 

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  (5)  

Total fee paid:

     

  Fee paid previously with preliminary materials.
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)   Amount Previously Paid:
   

 

  (2)   Form, Schedule or Registration Statement No.:
   

 

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  (4)   Date Filed:
   

 

 

 

 


Table of Contents

 

            LOGO

 

 

 

    

Notice of

Annual Meeting

And Proxy Statement

 



Table of Contents

Letter to Our Stockholders

 

March 20, 2018

Dear Fellow Stockholders:

On behalf of the Board of Directors and management team of Huntington Ingalls Industries, I would like to invite you to attend the 2018 Annual Meeting of Stockholders. We will meet on Wednesday, May 2, 2018, at 11:00 a.m. Eastern Daylight Time, at our corporate headquarters located at the Herbert H. Bateman Virginia Advanced Shipbuilding and Carrier Integration Center (VASCIC), 2401 West Avenue, Newport News, Virginia 23607. We are looking forward to your responses on the proposals included in the accompanying proxy statement.

The accompanying Notice of 2018 Annual Meeting and Proxy Statement describe the matters on which you, as a stockholder, may vote at the annual meeting, and include details of the business to be conducted at the meeting.

As a way to conserve natural resources and reduce annual meeting costs, we are electronically distributing proxy materials as permitted under rules of the Securities and Exchange Commission. Many of you will receive a Notice of Internet Availability of Proxy Materials containing instructions on how to access the proxy materials via the Internet. You can also request mailed paper copies if preferred. You can expedite delivery and reduce our mailing expenses by confirming in advance your preference for electronic delivery of future proxy materials. For more information on how to take advantage of this cost-saving service, please see page 13 of the proxy statement.

Your vote is very important. Whether or not you plan to attend the annual meeting, I encourage you to vote your shares in advance. Stockholders can submit their votes over the Internet at the web address included in the Notice of Internet Availability of Proxy Materials. If you received a proxy card, you can submit your votes over the Internet at the web address included in the proxy card, by telephone through the number included in the proxy card, or by signing and dating your proxy card and mailing it in the prepaid and addressed envelope.

Thank you for your support of Huntington Ingalls Industries. I look forward to seeing you at the annual meeting.

Sincerely,

 

 

LOGO

ADM Thomas B. Fargo

U.S. Navy (Ret.)

Chairman of the Board


Table of Contents

Notice of 2018 Annual Meeting of Stockholders

 

Huntington Ingalls Industries, Inc.

4101 Washington Avenue

Newport News, Virginia 23607

 

 

  DATE AND TIME

  

 

Wednesday, May 2, 2018, at 11:00 a.m. Eastern Daylight Time

  PLACE    Herbert H. Bateman Virginia Advanced Shipbuilding and Carrier Integration Center (VASCIC), 2401 West Avenue, Newport News, Virginia 23607
  ITEMS OF BUSINESS         Elect ten directors
      Approve the company’s executive compensation on an advisory basis
      Select the frequency of future advisory approvals of executive compensation on an advisory basis
      Ratify the appointment of Deloitte & Touche LLP as our independent auditors for 2018
      Consider a stockholder proposal to enable stockholders to take action by written consent, if properly presented at the meeting
        Transact any other business that properly comes before the annual meeting
  RECORD DATE

 

   Stockholders of record at the close of business on March 8, 2018, are entitled to vote at the annual meeting.
  PROXY VOTING    It is important you vote your shares so they are counted at the annual meeting. You can vote your shares over the Internet at the web address included in the Notice of Internet Availability of Proxy Materials and included in the proxy card (if you received a proxy card), by telephone through the number included in the proxy card (if you received a proxy card), or by signing and dating your proxy card (if you received a proxy card) and mailing it in the prepaid and addressed envelope.

 

 

LOGO

Charles R. Monroe, Jr.

Corporate Vice President,

Associate General Counsel and Secretary

March 20, 2018

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 2, 2018: The Notice of 2018 Annual Meeting and Proxy Statement and 2017 Annual Report are available as of today’s date, March 20, 2018, at www.envisionreports.com/HII.


Table of Contents

Proxy Statement—Table of Contents

 

 

2018 Proxy Statement Summary

     1  
General Information About the Annual Meeting and Voting      9  

Items of Business to be Considered at the Annual Meeting

     9  

Appointment of Proxy Holders

     9  

Notice of Internet Availability of Proxy Materials

     9  

Record Date and Voting

     10  

Quorum, Vote Required and Method of Counting

     11  

Item 1—Proposal to Elect Directors

     12  

Item 2—Proposal to Approve Executive Compensation on an Advisory Basis

     12  

Item 3—Proposal to Select the Frequency of Future Advisory Approvals of Executive Compensation on an Advisory Basis

     12  

Item 4—Proposal to Ratify Appointment of Our Independent Auditors

     12  

Item  5—Stockholder Proposal to Enable Stockholders to Take Action by Written Consent

     12  

Important Reminder of Effect of Not Casting Your Vote if You Are a Street Name Stockholder

     13  

Soliciting and Tabulating Votes

     13  

Electronic Access to Proxy Statement and Annual Report

     13  

Householding Information

     13  

Governance of the Company

     15  

Overview of Corporate Governance

     15  

Responsibilities of the Board of Directors

     15  

Criteria for Board Membership

     15  

Director Nomination Process

     17  

Majority Vote Director Resignation Policy

     18  

Stockholders Right to Nominate Proxy Access Nominees

     19  

Director Independence

     20  

Board Leadership Structure

     20  

Board Committee Functions and Membership

     21  

Board Structure

     22  

Executive Sessions of Non-Employee Directors

     22  

The Board’s Role in Risk Oversight

     23  

Board and Committee Evaluations

     24  

Policy Against Hedging and Pledging Company Securities

     24  

Code of Ethics and Business Conduct

     24  

Compensation Committee Interlocks and Insider Participation

     25  

Meetings and Attendance

     25  

Indemnification

     25  

Communications and Company Documents

     26  

Communications and Company Documents

     26  

Future Stockholder Proposals and Nominations of Directors

     26  

The Board of Directors

     28  

Director Compensation

     34  

Director Compensation Program

     34  

2017 Director Compensation Table

     35  

Executive Compensation

     36  

Introduction

     36  

Named Executive Officer Biographies

     36  

Compensation Discussion and Analysis

     38  

Compensation Committee Report

     58  

Executive Compensation Tables

     59  

Audit Committee Matters

     78  

Audit Committee Report

     78  

Principal Accountant Fees and Services

     79  

Audit Committee Pre-Approval Policies and Procedures

     79  

Stock Ownership Information

     80  

Stock Ownership of Officers and Directors

     80  

Stock Ownership of Certain Beneficial Owners

     81  
Item 1—Proposal to Elect Ten Directors      82  
Item 2—Proposal to Approve Executive Compensation on an Advisory Basis      83  
Item 3—Proposal to Select the Frequency of Future Advisory Approvals of Executive Compensation on an Advisory Basis      84  
Item 4—Proposal to Ratify the Appointment of Independent Auditors      85  
Item 5—Stockholder Proposal to Enable Stockholders to Take Action by Written Consent      86  

Other Information for Stockholders

     89  

Section 16(a) Beneficial Ownership Reporting Compliance

     89  

Attending the Annual Meeting

     89  

Related Party Transactions

     89  
Annex A—Definitions of Non-GAAP Financial Measures and Reconciliations to GAAP Financial Measures      92  
 

 

i


Table of Contents

 

2018 Proxy Statement Summary

 

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all the information you should consider, and you should read the entire proxy statement carefully before voting.

 

 

 

  Annual Meeting Information

 

 

 

  Date and Time:  

 

  

 

May 2, 2018, at 11:00 a.m. Eastern Daylight Time

 

  Place:

  

 

Herbert H. Bateman Virginia Advanced Shipbuilding and Carrier Integration Center

(VASCIC)

2401 West Avenue

Newport News, Virginia 23607

 

 

  Record Date:

 

  

 

March 8, 2018

 

 

  Voting:

 

  

 

Holders of our common stock are entitled to one vote per share

 

  Admission:

 

  

 

To attend the meeting in person, you will need to follow the instructions included on page 89

 

 

  Items to be Voted at the Annual Meeting

 

 

         

Board Vote

Recommendation

 

Page Reference

(for more information)

 

  1.

 

 

 

Elect ten directors

 

 

 

FOR

 

 

 

82

 

 

  2.

 

 

 

Approve the company’s executive compensation on an advisory basis

 

 

 

FOR

 

 

 

83

 

 

  3.

 

 

 

Select the frequency of future advisory approvals of executive compensation on an advisory basis

 

 

 

FOR ONE YEAR

 

 

 

84

 

 

  4.

 

 

 

Ratify the appointment of our independent auditors

 

 

 

FOR

 

 

 

85

 

 

  5.

 

 

 

Consider a stockholder proposal to enable stockholders to take action by written consent, if properly presented at the meeting

 

 

 

AGAINST

 

 

 

86

 

 

2018 Notice and Proxy Statement    1

 


Table of Contents

 

2018 Proxy Statement Summary

 

 

  Corporate Governance Highlights

 

Huntington Ingalls Industries, Inc. (“HII,” the “company,” “we,” “us” or “our”) is committed to high standards of corporate governance, which we believe promote the long-term interests of stockholders, strengthen accountability of the Board of Directors (the “Board”) and management and build public trust in the company. Highlights of our corporate governance practices include:

 

Board

  Structure and  

Governance

      Board comprised entirely of independent directors, except for our Chief Executive Officer
      All standing Board committees comprised of independent directors
      Executive session of independent directors at each regularly scheduled Board meeting
      Independent non-executive Chairman of the Board
      Annual Board and committee self-assessment process
      Director term limits
      Mandatory director retirement age
      Limits on outside public company board service by directors to prevent overboarding
     

Stockholder

Rights

      Annual election of all directors
      Director resignation policy if more votes are withheld than cast for any director
      Ability of eligible stockholders to include their own director nominees in our proxy materials (proxy access)
      Ability of stockholders to call a special meeting of stockholders
      No stockholder rights plan (poison pill)
     

Stock

Ownership

      Stock ownership guidelines and holding requirements for non-employee directors and executives
      Clawback policy for all performance-based compensation
      Prohibition on directors and executives hedging or pledging our common stock

 

 

  Stockholder Engagement

 

We believe that stockholder engagement is an essential element of strong corporate governance. Accordingly, management actively engages with our investors through telephonic meetings, in-person meetings and email to understand their perspectives on our company, including our strategy, performance, corporate governance matters and executive compensation. During 2017, management requested meetings with the corporate governance teams of our largest institutional stockholders and other interested stockholders and met with stockholders representing approximately 18% of our outstanding shares. We are committed to understanding the perspectives of our stockholders and responding as appropriate.

 

2    Huntington Ingalls Industries, Inc.

 


Table of Contents

 

2018 Proxy Statement Summary

 

The following sections of this proxy statement summary describe the matters on which our stockholders will vote at the 2018 annual meeting of stockholders.

 

 

  ELECT TEN DIRECTOR NOMINEES

 

Director Nominees

The Board is asking you to elect, for one-year terms ending in 2019, the ten nominees for director named below, each of whom is currently serving as a member of the Board. The following table provides summary information about the nominees for director, including their names, ages and occupations, whether they are independent directors under the corporate governance listing standards of the New York Stock Exchange (“NYSE”), and the Board committees on which they currently serve. The directors will be elected by a plurality vote, but any director who receives a greater number of votes “withheld” from his or her election than votes “for” such election must tender to the Board his or her offer of resignation.

 

               

 

Board Committees

  Name   Age   Occupation   Independent
Director
  A   C   F   GP

  Philip M. Bilden

  53  

Retired Co-Founding Member of HarbourVest Partners, LLC

 

  Yes       l   l    

  Augustus L. Collins

 

  60

 

 

Chief Executive Officer of MINACT Incorporated

 

  Yes

 

  l

 

          l

 

  Kirkland H. Donald

 

  64

 

 

Independent Business Consultant

 

  Yes

 

      l

 

  l

 

   

  Thomas B. Fargo

  69  

Chairman of the Board of Directors of Huntington Ingalls Industries, Inc.

 

  Yes               l

  Victoria D. Harker

  53  

Executive Officer and Chief Financial Officer of Tegna, Inc.

 

  Yes       CH   l    

  Anastasia D. Kelly

 

  68

 

 

Co-Managing Partner of DLA Piper Americas

 

  Yes

 

      l

 

      CH

 

  C. Michael Petters

  58  

President and Chief Executive Officer of Huntington Ingalls Industries, Inc.

 

  No                

  Thomas C. Schievelbein

  64  

Retired Chairman and Chief Executive Officer of The Brink’s Company

 

  Yes   l       CH    

  John K. Welch

  68  

Retired President and Chief Executive Officer of Centrus Energy Corp.

 

  Yes   l           l

  Stephen R. Wilson

  71  

Independent Business Consultant and Retired Executive Vice President and Chief Financial Officer of RJR Nabisco, Inc.

 

  Yes   CH            
       

 

CH = Chair

 

A = Audit Committee

C = Compensation Committee

F = Finance Committee

GP = Governance and Policy Committee

 

2018 Notice and Proxy Statement    3

 


Table of Contents

 

2018 Proxy Statement Summary

 

Board Composition, Qualifications and Diversity

We believe the Board is comprised of an effective mix of experience, skills and perspectives. The following charts and graphs highlight the current composition of our Board.

 

    Director Independence          

 

 

              LOGO

 

  

              Director Diversity          

 

 

LOGO

 

 

      Director Age Mix

 

 

 

LOGO

Director Experience and Skills

 

LOGO

 

 

4    Huntington Ingalls Industries, Inc.

VSenior Leadership Experience Finance, Accounting and Capital Markets Experience Industry Experience Manufacturing and Operations Experience Human Resources Experience Military and Government Experience Government Relations and Regulatory Experience Legal, Regulatory and Compliance Experience Technology Experience Risk Management Experience Corporate Development and Strategy Experience Global Experience

 


Table of Contents

 

2018 Proxy Statement Summary

 

The Board, through the Governance and Policy Committee, considers Board succession on a continuous basis. The committee’s process includes evaluation of director attributes, including professional experience, skills, diversity, independence, tenure and age, to create a balanced Board that can effectively oversee the company’s business and execution of its business strategy.

 

 

  APPROVE EXECUTIVE COMPENSATION ON AN ADVISORY BASIS

 

The Board is asking you to approve, on an advisory basis, the compensation of our named executive officers for 2017.

Our stockholders have voted on our executive compensation, on an advisory basis, since 2012. We have consistently received exceptionally strong stockholder support, as reflected in the following table:

 

  Annual Meeting

 

  

2017

 

    

2016

 

    

2015

 

    

2014

 

    

2013

 

    

2012

 

 

 

  Votes Cast “FOR” Say-On-Pay Proposal

 

  

 

 

 

 

98

 

 

 

  

 

 

 

 

99

 

 

 

  

 

 

 

 

99

 

 

 

  

 

 

 

 

99

 

 

 

  

 

 

 

 

99

 

 

 

  

 

 

 

 

84

 

 

 

Executive Compensation

We have designed our executive compensation program to attract, motivate and retain highly qualified executives, incentivize our executives to achieve business objectives, reward performance and align the interests of our executives with the interests of our stockholders and customers. The fundamental philosophy of our executive compensation program, set by the Compensation Committee of the Board, is pay-for-performance. We describe below our financial performance and stockholder returns in 2017.

2017 Financial Performance

Strong operating performance in 2017 delivered solid financial performance. The following table includes several of our 2017 financial highlights:

 

  2017 Financial Highlights

 

  

2017 Results

($ in millions,
except per share data)  

 

  Revenues

   $7,441

  Operating Income

   $   865

  Operating Margin

          11.6%

  Segment Operating Income*

   $   688

  Cash from Operations

   $   814

  Free Cash Flow*

   $   453

  Net Earnings

   $   479

  Adjusted Net Earnings*

   $   556

  Diluted Earnings Per Share

   $10.46

  Adjusted Diluted Earnings Per Share*

   $12.14

  Contract Awards

 

   $8,073

 

 

* Segment operating income, free cash flow, adjusted net earnings and adjusted diluted earnings per share are non-GAAP financial measures. See Annex A for definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures.

Our full year revenues of $7.4 billion in 2017 increased 5.3% over 2016. Operating income was $865 million and operating margin was 11.6%, compared to $858 million and 12.1%, respectively, in 2016. New contract awards in 2017 totaled $8.1 billion, resulting in a backlog of $21.4 billion at the end of the year.

 

2018 Notice and Proxy Statement    5

 


Table of Contents

 

2018 Proxy Statement Summary

 

2017 Stockholder Returns

Our operating performance continues to drive significant returns for our stockholders. Adjusted diluted earnings per share remained constant at $12.14 per share from 2016 to 2017. We also increased dividends by 20%, from $2.10 per share in 2016 to $2.52 per share in 2017, and repurchased 1.4 million shares during 2017, continuing to deliver on our commitment to return cash to stockholders.

The following graph and chart show total stockholder return for HII in 2017 compared to several benchmarks and total cash returned to stockholders in 2017, respectively.

 

               1-YEAR TOTAL STOCKHOLDER RETURN

 

RETURNED $403 MILLION TO                        

STOCKHOLDERS IN 2017                        

 

LOGO           

 

 

LOGO

 

Elements of Our Executive Compensation Program

Our named executive officers (“NEOs”) for 2017 are our Chief Executive Officer, our Chief Financial Officer, our three other most highly-compensated executive officers in 2017 who were serving as executive officers at the end of the year and another individual who was one of our three other most highly-compensated executive officers in 2017 but was not serving as an executive officer at the end of the year. Our compensation program for our NEOs consisted primarily of the following direct compensation elements in 2017:

 

  Base salary, to provide a minimum fixed level of compensation.

 

  Annual incentive awards, generally paid in cash, under our Annual Incentive Plan (“AIP”), to motivate our executives to achieve pre-determined annual financial and operational targets that are aligned with our strategic goals.

 

  Long-term equity-based incentive awards, paid under our Long-Term Incentive Plan (“LTIP”), to promote achievement of pre-determined three-year performance goals aligned with long-term stockholder interests.

Our executive compensation program is rounded out with certain perquisites and other executive benefits.

A significant portion of the potential compensation of our executives is at risk, and that risk increases with each executive’s level of responsibility. We have designed our compensation program to balance performance-based compensation over the short- and long-term to incentivize decisions and actions that promote stockholder value and focus our executives on performance that benefits our stockholders and customers, while discouraging inappropriate risk-taking behaviors.

 

6    Huntington Ingalls Industries, Inc.

*Includes $2 million subject to settlement as of December 31, 2017.

 


Table of Contents

 

2018 Proxy Statement Summary

 

2017 Total Direct Compensation Mix

The pay-for-performance philosophy of our executive compensation program is demonstrated by the compensation mix of our NEOs. Of the three primary elements of total direct compensation, our executive compensation is heavily weighted toward the variable, performance-based elements and toward the long-term and equity-based elements, as reflected in the following graphs, which set forth the percentage of total compensation corresponding to each compensation element received by our CEO and by our other NEOs in the aggregate in 2017.

 

CEO Compensation Mix1

 

 

LOGO          

  

Other NEO Compensation Mix2                              

 

 

 

        LOGO

 

(1) Total direct compensation does not include perquisites and other benefits.

 

(2) Average allocation for the NEOs other than the CEO. Total direct compensation does not include perquisites and other benefits.

Compensation Best Practices

We believe our compensation practices are aligned with and reinforce our pay-for-performance philosophy and our related executive compensation principles.

 

 

What We Do

 

Consideration of annual stockholder “say-on-pay” advisory vote on executive compensation.
Pay for performance compensation program heavily weighted toward variable, performance-based elements and toward long-term and equity-based elements.
Annual assessment of potential risk posed by our compensation programs.
Executive compensation “clawback” policy.
Targeted external compensation benchmarking.
Independent compensation consultant engaged by Compensation Committee.
Executive stock ownership guidelines based upon multiple of executive’s base salary.
Executive stock holding requirements, which require executives to hold one-half of their equity awards for three additional years after they vest.

What We Don’t Do

 

No employment agreements for executives.
No change-in-control agreements for executives or related executive tax gross-up benefits.
Prohibitions against speculative transactions in our securities, pledging our securities as collateral and hedging transactions involving our securities.
No dividends or dividend equivalents paid on restricted performance stock rights during performance period.
 

 

2018 Notice and Proxy Statement    7

 


Table of Contents

 

2018 Proxy Statement Summary

 

 

SELECT THE FREQUENCY OF FUTURE ADVISORY APPROVALS OF EXECUTIVE COMPENSATION ON AN ADVISORY BASIS

 

The Board is asking you to select the frequency of your future advisory votes on the company’s executive compensation on an advisory basis. The Board is recommending a vote in favor of future advisory approvals of executive compensation every year.

 

 

  RATIFY THE APPOINTMENT OF INDEPENDENT AUDITORS

 

The Board is asking you to ratify the selection of Deloitte & Touche LLP as our independent auditors for 2018. The following table contains summary information with respect to fees billed to us in 2017 by Deloitte & Touche for professional services.

 

 ($ in thousands)

     2017  

 Fees Billed:

  

    Audit Fees

     6,929  

    Audit-Related Fees

     325  

    Tax Fees

     36  

    All Other Fees

     3  

 Total

     7,293  

 

 

CONSIDER A STOCKHOLDER PROPOSAL TO ENABLE STOCKHOLDERS TO TAKE ACTION BY WRITTEN CONSENT, IF PROPERLY PRESENTED AT THE MEETING

 

You are being asked to consider a stockholder proposal requesting that the Board undertake steps to enable the company’s stockholders to take action by written consent of the stockholders. The Board is recommending a vote against this proposal.

 

8    Huntington Ingalls Industries, Inc.

 


Table of Contents

General Information About the Annual Meeting and Voting

 

The Board is providing you with these proxy materials in connection with its solicitation of proxies to be voted at our 2018 Annual Meeting of Stockholders and at any postponement or adjournment of the annual meeting. In this proxy statement, Huntington Ingalls Industries, Inc. may also be referred to as “we,” “our,” “us,” “HII” or “the company.”

ITEMS OF BUSINESS TO BE CONSIDERED AT THE ANNUAL MEETING

The Board is asking you to vote on the following items at the annual meeting:

 

  elect ten directors;

 

  approve the company’s executive compensation on an advisory basis;

 

  select the frequency of future advisory approvals of executive compensation on an advisory basis;

 

  ratify the appointment of our independent auditors; and

 

  consider a stockholder proposal to enable stockholders to take action by written consent, if properly presented at the meeting.

APPOINTMENT OF PROXY HOLDERS

The Board asks you to appoint Kellye L. Walker and Charles R. Monroe, Jr. as your proxy holders to vote your shares at the annual meeting. You make this appointment by submitting your proxy using one of the voting methods described below.

If appointed by you, the proxy holders will vote your shares as you direct on the matters described in this proxy statement. If you received a proxy card and you complete and return the proxy card but do not provide voting directions, they will vote your shares as recommended by the Board on all of the matters described in this proxy statement that are brought before the annual meeting.

The Board is not aware of any business that may properly be brought before the annual meeting other than those matters described in this proxy statement. If any other matters are properly brought before the annual meeting, your proxy gives discretionary authority to the proxy holders to vote the shares in their best judgment.

NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS

Pursuant to rules adopted by the Securities and Exchange Commission (“SEC”), we are permitted to furnish our proxy materials to our stockholders over the Internet by delivering a Notice of Internet Availability of Proxy Materials. The Notice of Internet Availability of Proxy Materials instructs you on how to access and review the proxy statement and 2017 Annual Report over the Internet. The Notice of Internet Availability of Proxy Materials also instructs you on how you may submit your proxy over the Internet. We believe this e-proxy process expedites receipt of proxy materials by stockholders, while also lowering our costs and reducing the environmental impact of our annual meeting. We have used this e-proxy process to furnish proxy materials to certain of our stockholders over the Internet.

If you received a Notice of Internet Availability of Proxy Materials in the mail and would like to receive a printed copy of our proxy materials, you should follow the instructions for requesting these materials provided in the Notice of Internet Availability of Proxy Materials.

 

2018 Notice and Proxy Statement    9


Table of Contents

General Information About the Annual Meeting and Voting

 

RECORD DATE AND VOTING

Stockholders owning our common stock at the close of business on March 8, 2018, the record date, or their legal proxy holders, are entitled to vote at the annual meeting. The Board strongly encourages you to vote. Your vote is important. Voting early helps ensure we receive a quorum of shares necessary to hold the annual meeting. Many stockholders do not vote, meaning the stockholders who do vote influence the outcome of the matters on which they vote in greater proportion than their percentage ownership of HII shares.

We have two types of stockholders: stockholders of record and “street name” stockholders. Stockholders of record are stockholders who own their shares in their own names on the company’s books. Street name stockholders are stockholders who own their shares through a bank, broker or other holder of record.

Voting by Stockholders of Record. If you are a stockholder of record, you have four voting options. You may vote:

 

  over the Internet at www.envisionreports.com/HII, the web address included in the Notice of Internet Availability of Proxy Materials and in the proxy card (if you received a proxy card);

 

  by telephone through the number included in the proxy card (if you received a proxy card);

 

  by signing and dating your proxy card (if you received a proxy card) and mailing it in the prepaid and addressed envelope; or

 

  by attending the annual meeting and voting in person.

If you have Internet access, we encourage you to vote over the Internet. It is convenient, and it saves us significant postage and processing costs. In addition, when you vote by proxy over the Internet or by telephone prior to the meeting date, your proxy vote is recorded immediately and there is no risk that postal delays will cause your proxy vote to arrive late and therefore not be counted.

Internet and telephone voting facilities for stockholders of record are available 24 hours a day and will close at 11:59 p.m. Eastern Daylight Time on Tuesday, May 1, 2018. The Internet and telephone voting procedures verify you are a stockholder of record by use of a control number and enable you to confirm your voting instructions have been properly recorded. If you vote by Internet or telephone, you do not need to return your proxy card (if you received a proxy card).

Whether or not you plan to attend the annual meeting and vote in person, we urge you to have your proxy vote recorded in advance of the meeting. If you attend the annual meeting and vote at the annual meeting, any prior proxy votes you submitted, whether by Internet, telephone or mail, will be superseded by the vote you cast at the annual meeting. Because it is not practical for most stockholders to attend the annual meeting, the Board recommends you vote using one of the other voting methods. In any event, the method by which you vote your proxy will not limit your right to vote at the annual meeting if you decide to attend in person.

Revoking Your Proxy for Stockholders of Record. If you are a stockholder of record and you vote by proxy using any method, you may later revoke your proxy and change your vote at any time before the polls close at the annual meeting. You may do this by:

 

  sending a written statement to that effect to Huntington Ingalls Industries, Inc., Attn: Corporate Secretary, 4101 Washington Avenue, Newport News, Virginia 23607, provided we receive your written statement before the annual meeting date; or

 

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  voting again over the Internet or by telephone prior to 11:59 p.m. Eastern Daylight Time on Tuesday, May 1, 2018; or

 

  signing and returning another proxy card with a later date, provided we receive the later proxy card before the annual meeting date; or

 

  voting in person at the annual meeting.

Only the most recent proxy vote will be counted, and all others will be discarded regardless of the method of voting.

Voting by Street Name Stockholders. If your shares are held in “street name” through a broker, bank or other nominee, please refer to the instructions they provide regarding how to vote your shares or to revoke your voting instructions. The availability of telephone and Internet voting depends upon the voting processes of the broker, bank or other nominee. If you are a street name stockholder and would like to vote in person at the annual meeting, you must obtain a proxy, executed in your favor, from the bank, broker or other holder of record through which you hold your shares. Because it is not practical for most stockholders to attend the annual meeting, the Board recommends you vote using one of the other voting methods. In any event, the method by which you vote your proxy will not limit your right to vote at the annual meeting if you decide to attend in person.

Confidential Voting. We treat your vote as confidential to protect the privacy of our stockholders’ votes. Proxies and voting instructions provided to banks, brokers and other holders of record are kept confidential. Only the proxy solicitor, the proxy tabulator and the inspector of elections have access to the proxies and voting instructions.

QUORUM, VOTE REQUIRED AND METHOD OF COUNTING

At the close of business on the record date, 44,767,119 shares of our common stock were outstanding and entitled to vote at the annual meeting. Each outstanding share is entitled to one vote.

A quorum must be present to transact business at the annual meeting. A quorum will be present if a majority of the outstanding shares entitled to vote as of the record date are present, in person or by proxy. If you indicate an abstention as your voting preference on all matters, your shares will be counted toward a quorum but will not be voted on any matter. If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record may vote your shares on the proposal to ratify the appointment of our independent auditors, which is known as a routine matter. Votes by a bank, broker or other holder of record on any routine matter will count for purposes of determining a quorum. In the absence of a quorum, the chairperson of the meeting may adjourn the meeting, and, at any reconvened meeting following such an adjournment at which a quorum is present, any business may be transacted which might have been transacted at the original meeting.

If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record can vote your shares in its discretion only on Item 4 described in this proxy statement. If you do not give your bank, broker or other holder of record instructions on how to vote your shares on Items 1, 2, 3 and 5 described in this proxy statement, your shares will not be voted on those matters.

If you have shares in an employee benefit plan and do not vote those shares, your trustee will vote your shares in accordance with the terms of the relevant plan. Accordingly, your trustee may vote your shares in the same proportion as shares held by the plan for which voting instructions have been received, unless contrary to ERISA.

 

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The required vote and method of calculation for the matters to be considered at the annual meeting are as follows:

Item 1—Proposal to Elect Directors

Directors will be elected by a plurality of the shares present in person or by proxy at the annual meeting or any adjournment thereof and entitled to vote on the election of directors. Plurality voting means the ten director nominees receiving the most votes will be elected to the Board. If you do not want your shares to be voted with respect to a particular director nominee, you may “withhold” your vote with respect to that nominee. If a director nominee receives a greater number of votes “withheld” for his or her election than votes cast “for” his or her election, such nominee will be required under the majority vote director resignation policy included in our Corporate Governance Guidelines to submit an offer of resignation to the Board for its consideration. If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record cannot vote your shares on this item, and broker non-votes will have no effect on the outcome of the vote.

Item 2—Proposal to Approve Executive Compensation on an Advisory Basis

The executive compensation of our NEOs will be approved as an advisory recommendation to the Board if the number of shares voted in favor exceeds the number of shares voted against. Abstentions will have no effect on the results of the vote. If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record cannot vote your shares on this item, and broker non-votes will have no effect on the outcome of the vote. Although the vote on this item is non-binding, the Compensation Committee will review the results of the vote and consider it in making future decisions concerning executive compensation.

Item 3—Proposal to Select Frequency of Future Advisory Approvals of Executive Compensation on an Advisory Basis

The frequency of future stockholder advisory approvals (every year, every two years, or every three years) receiving the greatest number of votes will be considered the frequency recommended by stockholders. Abstentions will have no effect on the results of the vote. If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record cannot vote your shares on this item, and broker non-votes will have no effect on the outcome of the vote. Although the vote on this item is non-binding, the Board will review the results of the vote and consider the vote in adopting a policy concerning the frequency of such advisory votes in the future.

Item 4—Proposal to Ratify Appointment of Our Independent Auditors

Ratification of appointment of our independent auditors will be approved if the number of shares voted in favor exceeds the number of shares voted against. Abstentions will have no effect on the results of the vote. If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record can vote your shares at its discretion on this item.

Item 5—Stockholder Proposal to Enable Stockholders to Take Action by Written Consent

The stockholder proposal to enable stockholders to take action by written consent will be approved if the number of shares voted in favor exceeds the number of shares voted against the proposal. Abstentions will have no effect on the results of the vote. If you are a street name stockholder and do not vote your shares, your bank, broker or other holder of record cannot vote your shares on this item, and broker non-votes will have no effect on the outcome of the vote.

 

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IMPORTANT REMINDER OF EFFECT OF NOT CASTING YOUR VOTE IF YOU ARE A STREET NAME STOCKHOLDER

If you are a street name stockholder, it is critical you vote your shares if you want your vote to count on Items 1, 2, 3 and 5. Your bank, broker or other holder of record is not permitted to vote your shares on Items 1, 2, 3 or 5, unless you instruct them how you wish to vote. Such “broker non-votes” will have no impact on the results of the vote on Items 1, 2, 3 or 5.

SOLICITING AND TABULATING VOTES

The Board has made these materials available to you in connection with its solicitation of proxies for use at our annual meeting. We will bear the costs of soliciting and tabulating your votes. Our employees, personally, by telephone, by email or otherwise, may solicit your votes without additional compensation. In addition, we have retained MacKenzie Partners, Inc. to assist in the solicitation of proxies for the 2018 annual meeting for a fee of $12,500, plus associated costs and expenses.

We will reimburse banks, brokers and other holders of record for reasonable, out-of-pocket expenses for forwarding these proxy materials to you, according to certain regulatory fee schedules. See “Electronic Access to Proxy Statement and Annual Report” below for information on how you can help reduce printing and mailing costs.

ELECTRONIC ACCESS TO PROXY STATEMENT AND ANNUAL REPORT

You can elect in advance to receive future proxy materials by email. If you choose to receive future proxy materials by email, you will receive an email with instructions containing a link to the website where those materials are available, as well as a link to the proxy voting website.

If you are a stockholder of record, you may enroll in the electronic delivery service by going directly to www.envisionreports.com/HII. You may revoke your electronic delivery election at this site at any time and request a paper copy of the proxy statement and annual report.

If you are a street name stockholder, you may also have the opportunity to receive copies of the proxy statement and annual report electronically. Please check the information provided in the proxy materials you received from your bank, broker or other holder of record concerning the availability of this service.

HOUSEHOLDING INFORMATION

We have adopted a procedure called “householding.” Under this procedure, stockholders of record who have the same address and last name and do not participate in electronic delivery of proxy materials will receive only one copy of the Notice of Internet Availability of Proxy Materials or the printed proxy materials, unless we have received contrary instructions from one or both such stockholders. This procedure reduces our printing costs and postage fees and is environmentally friendly.

If you and another stockholder of record with whom you share an address are receiving multiple copies of the Notice of Internet Availability of Proxy Materials or the printed proxy materials, you can request to receive a single copy of the printed proxy materials in the future by calling our transfer agent, Computershare, at 1-888-665-9610, or writing to us at Investor Relations, 4101 Washington Avenue, Newport News, VA 23607. If you and another stockholder of record with whom you share an address wish to receive a separate Notice of Internet Availability of Proxy Materials or separate printed proxy materials, we will promptly deliver them to you if you request them by contacting Computershare by phone or Investor Relations in writing in the same manner as described above.

 

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Stockholders who participate in householding and who receive printed proxy materials will continue to receive separate proxy cards. If you are a street name stockholder, you can request householding by contacting your bank, broker or other holder of record through which you hold your shares.

 

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OVERVIEW OF CORPORATE GOVERNANCE

Corporate governance addresses the relationships among the Board, company management and the company’s stockholders, with the objectives of promoting the company’s long-term success, improving corporate performance, strengthening Board and management accountability and promoting the long-term interests of our stockholders. The Board and senior management are committed to high standards of corporate governance. We believe those high standards are important not only to our stockholders, but also to our customers, employees, suppliers and other stakeholders.

The following sections provide an overview of our corporate governance model and practices. Among other topics, we describe the responsibilities of the Board, how directors are selected and certain key aspects of Board operations.

RESPONSIBILITIES OF THE BOARD OF DIRECTORS

We believe the foundation for good corporate governance starts with a board of directors whose independence, skills, experience and judgment will enable the board to effectively oversee management of the company and to provide constructive advice and counsel to management. The Board and its committees perform a number of important functions for the company and its stockholders, including:

 

  providing advice on and overseeing the company’s strategic plan developed by management;

 

  assessing the significant enterprise risks to which the company is subject and overseeing management of those enterprise risks;

 

  selecting our chief executive officer and evaluating the performance of the chief executive officer and other senior executive officers;

 

  overseeing development and succession plans for our senior executives;

 

  monitoring the company’s financial performance and reviewing and approving significant corporate actions;

 

  overseeing processes that protect the integrity of the company, including the integrity of the company’s financial statements and compliance with legal requirements and the company’s ethics and business conduct standards; and

 

  evaluating the effectiveness of the Board and its committees.

The Board’s oversight role is also effected through the Board’s four standing committees—the Audit Committee, the Compensation Committee, the Governance and Policy Committee and the Finance Committee. Each of these committees operates under a separate written charter to promote clarity in their responsibilities and to ensure the committees function in coordination with each other and with the full Board. Our committees are discussed in greater detail beginning on page 21 of this proxy statement.

CRITERIA FOR BOARD MEMBERSHIP

The Board believes all director candidates must possess certain basic qualifications and that specialized skills and experiences should be contributed to the Board by individual directors. The

 

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Board and the Governance and Policy Committee consider the qualifications of directors and director candidates individually and in the broader context of the Board’s collective skills and experiences measured against the current and future needs of the Board.

Qualifications for All Directors. The Board believes all its members must possess the following basic qualifications:

 

  high personal and professional integrity and ethical standards;

 

  substantial educational, business, military or professional accomplishments in leading organizations;

 

  ability to represent the best interests of all stockholders; and

 

  demonstrated leadership ability and sound judgment.

Prospective directors must also be willing to submit to a background check necessary for obtaining a security clearance.

Selection of Individual Candidates. In addition to the qualifications applicable to all director candidates, the Board and the Governance and Policy Committee consider, among other matters, a candidate’s knowledge of and experience in such areas as:

 

  finance, accounting and capital markets

 

  the industries in which the company competes

 

  manufacturing and operations

 

  human resources

 

  military and government

 

  government relations

 

  legal, regulatory and compliance matters

 

  technology

 

  risk management

 

  corporate development and strategy

We also consider whether a candidate can commit sufficient time and attention to Board activities and any potential conflicts with the company’s interests. Our objective is to have the collective skills, experiences and perspectives that create an outstanding, dynamic and effective Board and strengthen the Board’s ability to oversee the company’s business, enhance its performance and represent the long-term interests of stockholders. All of our non-employee directors are expected to serve on Board committees, supporting the Board’s mission by providing expertise to those committees, and the needs of those committees are considered when evaluating director candidates. The Board and the Governance and Policy Committee also consider diversity factors when selecting director nominees, seeking representation of a range of experiences, backgrounds and perspectives.

Service on Other Boards. In accordance with our Corporate Governance Guidelines, the Board considers the number of boards of other public companies and audit committees of those boards on which a director candidate serves. Under our Corporate Governance Guidelines, directors should not

 

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serve on more than four boards of publicly-traded companies in addition to our Board, and our directors who also serve as chief executive officers or in equivalent positions of other companies should not serve on more than two other boards of publicly-traded companies, in each case without the approval of the chairman of our Governance and Policy Committee. A director who is a full-time employee of our company may not serve on the board of directors of more than two other publicly-traded companies, unless approved by the Board. No member of our Audit Committee may serve on the audit committees of more than three publicly-traded companies (including our company) without the approval of the Board, which must determine annually that such simultaneous service would not impair the ability of the member to effectively serve on our Audit Committee.

Retirement Policy. Under the retirement policy of our Corporate Governance Guidelines, a director will not be re-nominated at the annual meeting following the earlier of his or her 76th birthday or 15 years of service on the Board. Upon the recommendation of the Governance and Policy Committee, the Board may waive either of these requirements as to any director, if the Board deems waiver to be in the best interests of the company. In addition to our retirement policy, when a director’s principal occupation or business association changes substantially during his or her tenure as a director, the Board expects the affected director will tender his or her resignation for consideration by the Governance and Policy Committee and the Board, as provided in our Corporate Governance Guidelines.

Conclusion. Satisfaction of the foregoing criteria for Board membership is implemented and assessed through continuous consideration of director succession by the Governance and Policy Committee and the Board, as well as through the Board’s self-evaluation process. The Board and the Governance and Policy Committee believe that, individually and collectively, the company’s current directors possess the necessary qualifications to provide effective oversight of the company’s business and contribute constructive advice and counsel to the company’s management.

DIRECTOR NOMINATION PROCESS

The Governance and Policy Committee is responsible under its charter for recommending to the full Board director nominees for election by our stockholders and for identifying and recommending candidates to fill any vacancies that may occur on the Board. The Governance and Policy Committee may use a variety of sources to identify candidates. Candidates may be identified through recommendations from independent directors or members of management, search firms, discussions with other persons who may know of suitable candidates to serve on the Board and stockholder recommendations.

Evaluations of director candidates who would be new to the Board (other than nominees recommended by our stockholders, as described below) include consideration of the candidate’s background and qualifications by the Governance and Policy Committee, interviews with the Chairman of the Board, members of the Governance and Policy Committee and one or more other Board members who desire to interview a candidate, and deliberations of the Governance and Policy Committee and the full Board. The Governance and Policy Committee then recommends the candidate(s) to the full Board, with the full Board selecting the candidate(s) to be nominated for election by our stockholders or to be elected by the Board to fill a vacancy.

In connection with its recommendations to the Board of director nominees for election at each annual meeting, the Governance and Policy Committee considers the size of the Board and the criteria set forth above to recommend nominees who, individually and as a group and collectively with directors who will continue to serve on the Board, the Governance and Policy Committee believes satisfy the qualifications the Board needs. Accordingly, the Governance and Policy Committee annually reviews the composition of the Board as a whole and makes recommendations, if necessary, to improve the Board to achieve what it believes is the optimal mix of experience, expertise, skills, specialized knowledge, diversity and other factors.

 

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Stockholders who wish to recommend director candidates for consideration by the Governance and Policy Committee must submit the name and relevant information about the candidate in writing to the Corporate Secretary. All director candidates recommended by stockholders are required to meet the criteria for directors described above, and candidates who meet the criteria described above will be evaluated by the Governance and Policy Committee. In accordance with our Corporate Governance Guidelines, the Governance and Policy Committee will evaluate director candidates recommended by stockholders in the same manner as candidates identified through other means.

Stockholders who wish to nominate a person for election as a director at an annual meeting must follow the procedures set forth in our bylaws and described beginning on page 26 of this proxy statement. Additionally, our bylaws include a proxy access right, which enables a stockholder or a group of up to 20 stockholders owning continuously for at least three years an amount of shares that constitutes 3% or more of our outstanding common stock as of the date of nomination to nominate and include in our proxy materials director candidates constituting up to the greater of 25% of the number of directors then in office or two directors, subject to the requirements specified in our bylaws. Stockholders who wish to nominate director candidates for inclusion in our proxy materials under our proxy access bylaw provisions must satisfy the requirements in our bylaws, as described under the heading “Communications and Company Documents—Future Stockholder Proposals and Nominations of Directors” of this proxy statement. The Board expects to evaluate any director candidates nominated through the proxy access process in a manner similar to that for other director candidates.

MAJORITY VOTE DIRECTOR RESIGNATION POLICY

Our Corporate Governance Guidelines include a majority vote director resignation policy. Under such policy, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election (a “Majority Withhold Vote”) in an uncontested election of directors must tender to the Board his or her offer of resignation within five days following certification of the stockholder vote. The Governance and Policy Committee will promptly consider the resignation offer and make a recommendation to the Board to accept or reject the tendered offer of resignation. The Board will act on the Governance and Policy Committee’s recommendation within 90 days following certification of the stockholder vote. The Board will then promptly disclose its decision to accept or reject the director’s resignation offer, including its rationale, in a report furnished to or filed with the SEC.

The Governance and Policy Committee in making its recommendation, and the Board in making its decision, will consider the best interests of the company and our stockholders and may consider any other factors or other information that it considers appropriate and relevant, including but not limited to:

 

  the stated reasons, if any, why stockholders withheld their votes;

 

  possible alternatives for curing the underlying cause of the withheld votes;

 

  the director’s tenure;

 

  the director’s qualifications;

 

  the director’s past and expected future contributions to the company; and

 

  the overall composition of the Board and its committees, including whether, if the offer of resignation is accepted, the company will no longer be in compliance with any applicable law, rule, regulation or governing document.

Any director who tenders his or her offer of resignation under our majority vote director resignation policy will not participate in the Governance and Policy Committee deliberation or recommendation or

 

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Board deliberation or action to accept or reject the resignation offer. If a majority of the Governance and Policy Committee received a Majority Withhold Vote at the same election, then the independent directors (other than those who received a Majority Withhold Vote in that election) will instead appoint a committee among themselves to consider the resignation offers and recommend to the Board whether to accept them. If, however, the independent directors who did not receive a Majority Withhold Vote constitute two or fewer directors, all independent directors may participate in the action to accept or reject the resignation offers, except that each director who has tendered his or her offer of resignation will recuse himself or herself from the deliberations and voting with respect to his or her individual offer to resign.

If a director’s resignation offer is not accepted by the Board, that director will continue to serve for the term for which he or she was elected and until his or her successor is duly elected, or his or her earlier resignation or removal. If a director’s resignation offer is accepted by the Board, then the Board, in its sole discretion in accordance with our bylaws, may fill any resulting vacancy or may decrease the size of the Board.

STOCKHOLDERS RIGHT TO NOMINATE PROXY ACCESS NOMINEES

Our bylaws provide our stockholders proxy access rights. Under Section 2.15 of our bylaws, we are required to include in our proxy materials for an annual meeting any stockholder nominee who is nominated by an “Eligible Stockholder.” An “Eligible Stockholder” is any stockholder or group of up to 20 stockholders that has beneficially owned continuously for at least three years an amount of shares that constitutes 3% or more of our outstanding common stock as of the date of nomination. Eligible Stockholders must provide proof of ownership of the requisite amount of stock for the three-year time period and represent that the shares were acquired in the ordinary course of business and not to change or influence control of the company. Eligible Stockholders must also provide certain other written representations, warranties and agreements to the company, including an agreement to assume liability from any legal or regulatory violation arising out of the Eligible Stockholder’s communication with our stockholders and to comply with all applicable laws and regulations, as described in more detail in Section 2.15 of the bylaws.

The maximum number of directors who can be nominated by Eligible Stockholders, referred to as “Stockholder Nominees,” at any annual meeting is the greater of 25% of the number of directors then in office or two directors. Section 2.15 of our bylaws includes procedures to prioritize nominations if the number of Stockholder Nominees exceeds the maximum number of Stockholder Nominees we are required to include in our proxy materials for any annual meeting. Stockholder Nominees must provide written notice to the company, which must include specific information, including information similar to the information required from stockholders to propose business and director nominations through the advance notice provisions included in Section 2.08 of our bylaws. As described in Section 2.15 of our bylaws, this notice must include an express consent to be named as a director nominee in our proxy materials and to serve as a director if elected, as well as required disclosures and information about, and representations, undertakings and consents by, the Stockholder Nominee to enable the Board to determine whether the Stockholder Nominee meets the independence and other general requirements for directors set forth in our bylaws and corporate governance guidelines.

Stockholders who would like to nominate candidates using proxy access should refer to Section 2.15 of our bylaws, which sets forth all the requirements for proxy access nominations. The Board may exclude any Stockholder Nominee from our proxy materials if the Stockholder Nominee or Eligible Stockholder(s) fail to meet the requirements or provide the undertakings set forth in our bylaws or corporate governance guidelines and for other reasons set forth in our bylaws. See “Communications and Company Documents—Future Stockholder Proposals and Nominations of Directors.”

 

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DIRECTOR INDEPENDENCE

The Board makes determinations regarding the independence of our directors on an annual basis, based upon the Governance and Policy Committee’s evaluation of director independence and related recommendations to the Board. Under our Corporate Governance Guidelines, to be considered independent: (i) a director must be independent as determined under Section 303(A).02(b) of the NYSE Listed Company Manual and (ii) in the Board’s judgment, the director must not have a material relationship with the company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).

The Board has considered relevant relationships between the company and each non-employee director to determine compliance with NYSE independence requirements. Based upon its review, the Board has determined that Mr. Bilden, Gen. Collins, ADM Donald, ADM Fargo, Ms. Harker, Ms. Kelly, Mr. Schievelbein, Mr. Welch and Mr. Wilson, who comprise the Board’s non-employee directors, are independent. The Board has also determined that each current member of the Audit Committee satisfies the additional independence requirements of the SEC and that each current member of the Compensation Committee satisfies the enhanced independence requirements of the NYSE listing standards.

The Board also considered in 2017 relevant relationships between the company and ADM Paul D. Miller, who retired from the Board effective May 3, 2017. Based upon its review, the Board determined that ADM Miller was independent for purposes of serving on the Board and that ADM Miller satisfied the additional independence requirements for Compensation Committee members.

BOARD LEADERSHIP STRUCTURE

The Board understands that one of its primary responsibilities is to evaluate and determine the optimal leadership structure for the Board from time to time to facilitate effective oversight of the company. Our bylaws establish the position of Chairman, and our Corporate Governance Guidelines state that the Board believes it is in the best interests of the company and its stockholders for the Board to have the flexibility to determine the best director to serve as Chairman. The independent directors consider this matter on at least an annual basis. This consideration includes the advantages and disadvantages of a combined chairman and chief executive officer role and separate chairman and chief executive officer roles in the context of our operating and governance environment over time, with the goal of achieving the optimal model for the Board’s effective oversight of the company’s affairs.

Non-Executive Chairman. The Board has considered the Board leadership matter and determined an independent, non-executive chairman is the optimal model for the company at this time. This structure provides the Board with independent leadership and allows the chief executive officer to focus on the company’s business operations. The independent directors appointed ADM Fargo as our non-executive Chairman of the Board at the time the company was spun off in 2011, and he has served as Chairman since that time.

Our non-executive Chairman has the following responsibilities under our Corporate Governance Guidelines:

 

  chair all Board and stockholder meetings, including executive sessions of the independent directors;

 

  serve as a liaison between the chief executive officer and the independent directors;

 

  ensure the quality, quantity and timeliness of the flow of information from management to the Board; although management is responsible for the preparation of materials for the Board, the non-executive Chairman may specifically request the inclusion of certain materials;

 

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  prepare the agendas of the Board meetings and assist the chairman of each standing committee with preparation of agendas for the respective committee meetings, taking into account the requests of other Board and committee members;

 

  set an appropriate schedule for Board meetings to assure there is sufficient time for discussion of all agenda items;

 

  along with the chairman of the Governance and Policy Committee, interview all Board candidates and make recommendations to the Governance and Policy Committee and the Board;

 

  have the authority to call meetings of the Board and meetings of the independent directors; and

 

  if requested by the chief executive officer, be available for consultation and direct communication with stockholders.

Conclusion. All of our directors play an active role in overseeing the company’s business at both the Board and committee levels. The Board is currently comprised of one non-independent director who serves as our Chief Executive Officer and nine independent directors. Our independent directors are skilled and experienced leaders in industry and the military. Our independent directors are effective in collaborating with management and thoroughly considering proposals made by management, and an independent Board leader supports this relationship. We therefore believe a non-executive Chairman of the Board, along with eight other strong independent directors, is an appropriate and effective structure at this time to oversee the company’s affairs and to provide advice and counsel to the Chief Executive Officer and other senior management of the company.

BOARD COMMITTEE FUNCTIONS AND MEMBERSHIP

The Board has four standing committees: Audit, Compensation, Governance and Policy and Finance. Each of the Audit, Compensation and Governance and Policy Committees is constituted and operated in accordance with SEC requirements and the NYSE’s corporate governance listing standards; the Finance Company is not subject to any such requirements or standards. Each Board committee is governed by a written charter, which sets forth the responsibilities of the committee, including the responsibilities described in this section. Each charter can be viewed on our website at www.huntingtoningalls.com and is available in print to any stockholder requesting a copy. All members of each Board committee are independent, as determined under the corporate governance listing standards of the NYSE.

Audit Committee. The Audit Committee’s responsibilities include meeting periodically with management and with each of our independent auditor and our Vice President of Internal Audit to review audit results and the adequacy of and compliance with our system of internal controls. In addition, the Audit Committee appoints and discharges our independent auditor, evaluates proposed audit and permissible non-audit services from the independent auditor for their impact on the independence of the auditor and, if appropriate, approves such services.

The members of the Audit Committee are Mr. Wilson (chair), Gen. Collins, Mr. Schievelbein and Mr. Welch. The Board has determined, in accordance with NYSE requirements, that each member of the Audit Committee is financially literate and that Mr. Wilson possesses accounting or related financial management expertise. The Board has also determined that Mr. Wilson qualifies as an “audit committee financial expert,” as defined under applicable SEC rules.

Compensation Committee. The Compensation Committee oversees all compensation and benefit programs and makes compensation decisions that affect our elected officers. The Compensation Committee also provides strategic direction for our overall compensation structure, policies and programs and reviews senior management succession plans. The Compensation Committee considers and makes recommendations to the Board regarding the compensation of directors.

 

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The members of the Compensation Committee are Ms. Harker (chair), Mr. Bilden, ADM Donald and Ms. Kelly. Ms. Kelly and Mr. Bilden were appointed to the Compensation Committee in May 2017 and November 2017, respectively. The Board has determined that each member of the Compensation Committee qualifies as a non-employee director under SEC Rule 16b-3 and as an outside director for purposes of Section 162(m) (“Section 162(m)”) of the Internal Revenue Code of 1986 (“IRC”). None of our executive officers served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or our Compensation Committee. Accordingly, no interlocks with other companies, within the meaning of the SEC’s proxy rules, existed during 2017.

Governance and Policy Committee. The Governance and Policy Committee is responsible for developing and recommending to the Board criteria for Board membership; identifying, and reviewing the qualifications of, director candidates; and assessing the contributions and independence of incumbent directors in determining whether to recommend them for reelection to the Board. The Governance and Policy Committee also considers and makes recommendations to the Board regarding transactions with related persons and corporate governance matters generally and oversees the evaluation of the Board. The members of the Governance and Policy Committee are Ms. Kelly (chair), Gen. Collins, ADM Fargo and Mr. Welch.

Finance Committee. The Finance Committee oversees and reviews our financial affairs, strategies and policies. The Finance Committee is responsible for reviewing and making recommendations to the Board regarding: our financial policies and strategies, capital structure and financial condition, our issuances of debt and equity securities and significant borrowing transactions, strategic transactions, our dividend policy and stock repurchase programs and significant capital expenditures. The Finance Committee also provides oversight to ensure that our financial policies and strategies are consistent with our capital budget, annual operating plan and strategic plan. The members of the Finance Committee are Mr. Schievelbein (chair), Mr. Bilden, ADM Donald and Ms. Harker. Mr. Bilden was appointed to the Finance Committee in November 2017.

BOARD STRUCTURE

We amended our certificate of incorporation in 2015 to phase out the classification of the Board, beginning with our annual meeting held in 2016 and ending with our annual meeting held in 2018. With the phase-out of the Board classification complete, all ten of our directors will be voted upon at our 2018 annual meeting to serve one-year terms.

EXECUTIVE SESSIONS OF NON-EMPLOYEE DIRECTORS

In accordance with our Corporate Governance Guidelines, our directors, with no members of management present (including directors who are also officers of the company), have the opportunity to meet in executive session at each regularly scheduled Board meeting. In addition, our Corporate Governance Guidelines provide that at least one executive session of independent directors will be held each year. In 2017, all of our directors, other than our Chief Executive Officer, were independent under NYSE corporate governance listing standards. The independent directors met in executive session at each of the six regular Board meetings during the year. The non-executive Chairman presides over the executive sessions.

The Audit Committee routinely meets in separate executive sessions with management, our independent auditor, our Vice President of Internal Audit and committee members only. The Compensation Committee, the Governance and Policy Committee and the Finance Committee also meet in executive session on a routine basis, with only members of the committee present.

 

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THE BOARD’S ROLE IN RISK OVERSIGHT

The Board’s responsibilities include oversight of risk management, which includes overseeing our system of financial and operational internal controls, our compliance with applicable laws and regulations, data and cyber security risks and our processes for identifying, assessing and mitigating other significant risks that may affect the company. The full Board oversees our enterprise risk associated with data and cyber security, and the Governance and Policy Committee oversees the internal governance of data and cyber security.

To discharge its risk oversight responsibilities, the Board must understand the significant risks to which the company is subject. Risks are inherent in virtually every business decision, and our business strategy creates risks. The Board understands it is neither possible nor prudent to eliminate all risk. Indeed, purposeful, appropriate and managed risk-taking is essential for the company to be competitive and profitable and successfully execute its business strategy. The Board’s objective in overseeing risk management is to satisfy itself that management is identifying and appropriately assessing and mitigating our significant risks.

Management has implemented a robust enterprise risk management (“ERM”) program, which includes annual risk assessments, risk analyses, development of risk plans for enterprise risks, which include risk mitigation activities, monitoring of enterprise risks and routine reports on enterprise risks and ERM program activities to senior management and the Board. Our ERM process is managed by an Enterprise Risk Committee, comprised of management from across business units and programmatic and functional disciplines within the company. The Enterprise Risk Committee is responsible for developing enterprise risk assessments, developing and monitoring risk mitigation plans for our enterprise risks, monitoring emerging and evolving risks and generating data and reports to facilitate management decision making and the Board’s risk oversight function. While the Board and its committees oversee risk management, management is responsible for identifying, assessing and mitigating risks.

The Board and its committees are responsible for understanding and evaluating the company’s ERM processes and determining whether they are achieving their objectives. Management briefs the Board on an annual basis on the company’s overall ERM program, which includes a report on the results of the company’s annual enterprise risk assessment, a review of the company’s latest roster of enterprise risks, assessments of the probabilities of such risks occurring and their potential severity and assessments of management’s capability of mitigating individual enterprise risks. Management also briefs the Board or a Board committee on a periodic basis on significant individual risks, which includes a report on the risk by management’s risk owner and the related risk mitigation plan. The Board is updated on an interim basis on any changes to the company’s enterprise risk roster and any other material developments affecting the company’s ERM program.

The Governance and Policy Committee is responsible under its charter for developing and recommending to the full Board a methodology for the Board’s oversight of risk management and for monitoring the Board’s oversight of risk management. In connection with this responsibility, the Governance and Policy Committee evaluates the enterprise risk roster developed by company management, allocates oversight responsibilities among the full Board and individual standing Board committees and develops a risk briefing schedule, based upon management’s relative prioritization of enterprise risks.

Oversight of risk management is a continuous process and inherent in the company’s strategic decisions. The Board and its committees facilitate open communication between management and the directors and foster an appropriate culture of integrity and risk awareness. The Board and its committees engage in communications throughout the year with management regarding risk assessment and risk management, and directors are encouraged to and do communicate directly with senior management.

 

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Governance of the Company

 

While the full Board has ultimate responsibility for the oversight of risk management, Board committees oversee certain individual enterprise risks relating to matters within the scopes of their responsibilities and report to the full Board with respect to this oversight. All standing Board committees play significant roles in the risk management oversight function.

The Audit Committee oversees risks relating to the company’s financial statements, the financial reporting process and accounting and legal matters. The Audit Committee also oversees the internal and external audit functions and compliance with our Code of Ethics and Business Conduct. The Audit Committee meets in executive sessions with our Vice President of Internal Audit and with representatives of our independent auditing firm to discuss our significant financial exposures and management’s processes for monitoring and managing such exposures.

The Compensation Committee evaluates the risks associated with our compensation principles and practices. As discussed in more detail under Compensation Discussion and Analysis beginning on page 38 of this proxy statement, the Compensation Committee evaluates and approves compensation programs designed to discourage inappropriate risk taking without diminishing the incentive elements of our compensation programs. The Compensation Committee also considers management’s processes for identifying and mitigating potential compensation risks. In addition, the Compensation Committee oversees our senior management succession planning process.

The Governance and Policy Committee monitors potential risks to the effectiveness of the Board, including director succession and committee composition, and the principal policies that guide the company’s governance. The Governance and Policy Committee also considers risks relating to the company’s policies and practices with respect to significant public policy and corporate responsibility matters.

The Finance Committee oversees management of risks associated with proposed strategic transactions. The Finance Committee also monitors our financial policies and strategies to ensure their consistency with our capital budget, annual operating plan and strategic plan. In addition, the Finance Committee is responsible for monitoring and overseeing management of risks relating to our capital structure and financial condition, securities issuances, significant borrowing transactions and significant capital expenditures.

BOARD AND COMMITTEE EVALUATIONS

In accordance with our Corporate Governance Guidelines, the Board (under the oversight of the Governance and Policy Committee) conducts an annual assessment of the performance of the full Board and individual committees. The Board evaluation results are reviewed by the Board, and the respective committee evaluation results are reviewed by the related committee.

POLICY AGAINST HEDGING AND PLEDGING COMPANY SECURITIES

Our insider trading policy prohibits officers, directors and certain employees from engaging in any of the following transactions for their own account: speculative transactions in company securities, pledges of company securities as collateral for a loan or other transaction or hedging transactions involving company securities, including zero cost collar transactions and forward sale contracts.

CODE OF ETHICS AND BUSINESS CONDUCT

Our Board of Directors has adopted a Code of Ethics and Business Conduct, which applies to our directors, officers and employees. This code provides officers, directors and employees with guidelines for making ethical decisions while conducting business on behalf of HII and includes the commitments the company has made to its employees, customers, stockholders, communities and suppliers. The

 

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Governance of the Company

 

code provides guidance on, among other matters, conflicts of interest, corporate opportunities, trading in company securities, political contributions and confidential information. Employees are required to report any conduct they believe in good faith is an actual or apparent violation of the code. The Code of Ethics and Business Conduct includes provisions applicable to our senior financial officers, as required by SEC rules.

Our Code of Ethics and Business Conduct is available on our website at www.huntingtoningalls.com and is available in print to any stockholder requesting a copy. We will post any amendments to our Code of Ethics and Business Conduct on our website. If we waive a provision of the Code of Ethics and Business Conduct with respect to our chief executive officer, chief financial officer or principal accounting officer, we will post information about the waiver at the same location on our website.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers served as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board or our Compensation Committee. Accordingly, no interlocks with other companies, within the meaning of the SEC’s proxy rules, existed during 2017.

MEETINGS AND ATTENDANCE

The Board held six meetings in 2017, and each of the meetings included an executive session of independent directors. In addition, the Board held 21 committee meetings, comprised of six Audit Committee, five Compensation Committee, five Governance and Policy Committee and five Finance Committee meetings. Each director attended 75% or more of the meetings of the Board and the committees on which he or she served during 2017.

Our Corporate Governance Guidelines establish an expectation that all directors will attend our annual meetings of stockholders. All of our directors who were directors or nominees at the time of the 2017 annual meeting of stockholders attended the annual meeting, except for Ms. Harker, who had a scheduling conflict.

INDEMNIFICATION

We indemnify our directors and our elected officers to the fullest extent permitted by law, so they can be free from undue concern about personal liability in connection with their service to HII. Our bylaws require this indemnification, and we have also entered into agreements with each director and elected officer contractually obligating us to provide this indemnification to him or her.

 

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Communications and Company Documents

 

We welcome communications from our stockholders and other interested parties, and we make information we believe is important to our stockholders and interested parties available on our website. The following sections describe: how stockholders and other interested parties can communicate with the Board; the information we make available to our stockholders and other interested parties and where you can find that information; and the procedures that stockholders must follow to propose matters for consideration at our annual meetings or to nominate persons for election as directors at our annual meetings.

COMMUNICATIONS AND COMPANY DOCUMENTS

Stockholders and other interested parties can communicate with the Board, our non-executive Chairman, our independent directors as a group, individual directors or any of the standing Board committees in care of the Corporate Secretary, Huntington Ingalls Industries, Inc., 4101 Washington Avenue, Newport News, Virginia 23607. At the direction of the Board, all mail received may be opened and screened for security purposes.

Communications from stockholders and other interested parties are distributed to the Board, a committee or an individual director or directors, as appropriate, depending on the facts and circumstances of the communication. The Board has requested that certain items unrelated to the duties and responsibilities of the Board be excluded or redirected, as appropriate, such as: business solicitations or advertisements; junk mail and mass mailings; resumes and other forms of job inquiries; and surveys. In addition, communications that are unduly hostile, threatening or similarly unsuitable will be excluded. Notwithstanding the foregoing, any communication will be made available to any director upon his or her request.

Our website contains our Restated Certificate of Incorporation, Certificates of Amendment of Restated Certificate of Incorporation, Restated Bylaws, Corporate Governance Guidelines, standing Board committee charters and Code of Ethics and Business Conduct. To view these documents, go to www.huntingtoningalls.com, click on “Investor Relations,” the “Company Information” drop-down box and then “Leadership & Governance.” We will post any amendments to our Code of Ethics and Business Conduct on our website. If we waive a provision of the Code of Ethics and Business Conduct with respect to our chief executive officer, chief financial officer or principal accounting officer, we will post information about the waiver at the same location on our website. To view our SEC filings and Forms 3, 4 and 5 filed by our directors and executive officers, go to www.huntingtoningalls.com, click on “Investor Relations,” the “Financial Information” drop-down box and then “SEC Filings.”

We will promptly deliver free of charge to any requesting stockholder a copy of our Annual Report on Form 10-K for the year ended December 31, 2017 (without exhibits), Corporate Governance Guidelines, standing Board committee charters and Code of Ethics and Business Conduct. Requests should be directed to: Corporate Secretary, Huntington Ingalls Industries, Inc., 4101 Washington Avenue, Newport News, Virginia 23607.

You can also print copies of these documents from our website at www.huntingtoningalls.com. The information on our website is not a part of this proxy statement.

FUTURE STOCKHOLDER PROPOSALS AND NOMINATIONS OF DIRECTORS

Stockholders may present proposals for consideration at a future meeting of stockholders only if they comply with the requirements of the proxy rules established by the SEC and the requirements of our bylaws.

 

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Under SEC Rule 14a-8, if a stockholder wants us to include a proposal in our proxy statement and form of proxy for presentation at our 2019 annual meeting of stockholders, the proposal must be received by us by November 20, 2018, at our principal executive offices located at Huntington Ingalls Industries, Inc., 4101 Washington Avenue, Newport News, Virginia 23607. The proposal should be sent to the attention of the Corporate Secretary.

Article II, Section 2.08 of our bylaws contains the procedures that a stockholder must follow to nominate persons for election as directors or to introduce an item of business at an annual meeting of stockholders outside of SEC Rule 14a-8. Assuming that our 2019 annual meeting is held within 30 days before or after the anniversary of the 2018 annual meeting (May 2, 2018), we must receive the notice of your intention to introduce a nomination or to propose an item of business at our 2019 annual meeting not less than 90 days nor more than 120 days in advance of the anniversary of the date on which we first mailed the proxy materials for our 2018 annual meeting (March 20, 2018), or between November 20, 2018 and December 20, 2018.

The notice must be submitted in writing to our principal executive offices located at Huntington Ingalls Industries, Inc., 4101 Washington Avenue, Newport News, Virginia 23607. The notice should be sent to the attention of the Corporate Secretary. Our bylaws specify the information that must be contained in the notice. Our bylaws are posted on our website, www.huntingtoningalls.com, and can be accessed by clicking “Investor Relations,” the “Company Information” drop-down box and then “Leadership & Governance.”

Article II, Section 2.15 of our bylaws contains the procedures eligible stockholders must follow to nominate persons for election as directors and to have those candidates included in our proxy materials (proxy access). Assuming that our 2019 annual meeting of stockholders is held within 30 days before or after the anniversary of the 2018 annual meeting (May 2, 2018), we must receive the notice of your intention to make a proxy access nomination not less than 120 days nor more than 150 days in advance of the anniversary of the date on which we first mailed the proxy materials for our 2018 annual meeting (March 20, 2018), or between October 21, 2018 and November 20, 2018.

 

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The Board of Directors

 

We believe the qualifications, skills and experiences of our directors are consistent with our criteria for the selection of directors and that, collectively, our directors have functioned effectively overseeing the business of the company over the last year.

Mr. Bilden was elected by the Board on November 7, 2017, to fill a vacancy created when the Board increased its size to ten directors. He was recommended as a candidate for director by a non-management director. The remaining nine directors have served on the Board since our last annual meeting.

We amended our certificate of incorporation in 2015 to phase out the classification of the Board beginning at our annual meeting held in 2016 and ending at our annual meeting held in 2018. With phase-out of the Board classification complete, all ten of our directors will be voted upon at our 2018 annual meeting, and all directors elected at our 2018 annual meeting will serve one-year terms.

2018 DIRECTOR NOMINEES

 

 

 

PHILIP M. BILDEN

Director since November 2017

 

 

Mr. Bilden, age 53, is a private equity investor and recently retired co-founding member of HarbourVest Partners, LLC.

 

Positions Held: Mr. Bilden retired in June 2016 as a co-founding member of the private equity firm HarbourVest Partners, a leading global private equity investment management firm with institutional assets under management in excess of $42 billion. He began his career in Boston in 1991 and relocated to Hong Kong in 1996 to establish the firm’s Asian subsidiary. Mr. Bilden was responsible for the firm’s investment strategy and execution, capital-raising and client service activities throughout the Asia Pacific region, managing personnel and partnerships in multiple countries and cultures. Throughout his 25-year tenure at HarbourVest Partners, he served in senior leadership roles in the firm’s global management, including the firm’s six-person executive committee responsible for governance. Mr. Bilden served ten years in the U.S. Army Reserve as a Military Intelligence Officer from 1986 to 1996.

 

Other Directorships and Memberships and Education: Mr. Bilden currently serves on the Chief of Naval Operations Executive Panel; the board of directors of the United States Naval Academy Foundation; the Board of Visitors, Georgetown University, School of Foreign Service; the Dean’s Board of Advisors and Asia Pacific Advisory Board, Harvard Business School; and the Board of Trustees and Executive Committee as Vice Chairman of the Naval War College Foundation. He is also serving as the inaugural Chairman of the Center for Cyber Conflict Studies Task Force at the Naval War College Foundation and serves on the Advisory Board of Contrast Capital Management, LLC.

 

Mr. Bilden graduated with a B.S. in Foreign Service (magna cum laude) in 1986 from Georgetown University as a Distinguished Military Graduate, Army Reserve Officer Training Corps. He received his M.B.A. from Harvard Business School in 1991.

 

 

Qualifications, Experience, Attributes and Skills: We believe Mr. Bilden is qualified to serve as a director based upon his significant experience founding and building a private equity firm, including his experience serving in senior leadership roles in the firm’s global management. In particular, we believe his international experience and the skills he developed through his responsibility for the firm’s investment strategy, capital-raising and client services activities in the Asia Pacific region will serve the Board well.

 

 

 

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The Board of Directors

 

 

AUGUSTUS L. COLLINS

Director since November 2016

 

 

Gen. Collins, age 60, has served as Chief Executive Officer of MINACT, Inc. since September 2016.

 

Positions Held: From January 2012 to August 2016, Gen. Collins was a Major General in the Mississippi National Guard, serving as Adjutant General of both the Mississippi Army National Guard and the Mississippi Air National Guard. From July 2010 to January 2012, Gen. Collins served as Executive Vice President for Strategic Planning of MINACT. From August 2007 to July 2010, he served on Mississippi’s Workers’ Compensation Commission as the commission’s representative of labor. Gen. Collins served more than 35 years in the U.S. Army and Mississippi National Guard, which included command of the 155th Brigade Combat Team of the Mississippi National Guard, deploying to Iraq, where he was responsible for security operations in the southern and western provinces.

 

Other Directorships and Memberships and Education: Gen. Collins serves on the board of directors of MINACT, Inc., a privately-owned corporation in Mississippi, and the Friends of Mississippi Veterans, a nonprofit entity serving veterans in Mississippi. He is the President-Elect of the University of Mississippi Alumni Association. Gen. Collins received a B.S. in Business Administration from the University of Mississippi, an M.B.A. from Jackson State University and a Master’s Degree in strategic studies from the U.S. Army War College.

 

 

Qualifications, Experience, Attributes and Skills: We believe Gen. Collins is qualified to serve as a director based upon his 35 years of senior military experience with the U.S. Army and Mississippi National Guard and his experience as a senior executive and then chief executive officer of a company that contracts with the U.S. government, as well as private sector customers.

 

 

 

 

 

 

KIRKLAND H. DONALD

Director since January 2017

 

 

ADM Donald, age 64, has served as an independent business consultant since January 2013.

 

Positions Held: Since January 2013, ADM Donald has worked as a business consultant and served on the executive advisory board of Moelis Capital Partners LLC/NexPhase Capital, LP. He serves as a technical advisory board member for NuScale Power, LLC, a CFIUS Security Monitor for LANXESS AG, a voting trustee for Brocade Communications Systems, Inc. and a member of the Submarine Advisory Committee for the Government of Australia. From January 2014 to October 2015, ADM Donald served as chief executive officer, and from June 2013 to January 2014 as chief operating officer, of Systems Planning and Analysis, Inc. Prior to that, ADM Donald served 37 years in the U.S. Navy. In his last assignment, he served as director of the naval nuclear propulsion program from November 2004 to November 2012.

 

Current Public Company Directorships: ADM Donald has served on the board of directors of Entergy Corporation since June 2013, and serves on its Finance Committee and Nuclear Committee.

 

Other Directorships and Memberships and Education: ADM Donald currently serves on the boards of directors of Battelle Memorial Institute, Cybercore Technologies, LLC and the Naval Submarine League. He is a graduate of the U.S. Naval Academy, holding a B.S. in Ocean Engineering. ADM Donald also received an M.B.A. from the University of Phoenix and completed Harvard University’s John F. Kennedy School of Government Senior Executive Fellows Program.

 

 

Qualifications, Experience, Attributes and Skills: We believe ADM Donald is qualified to serve as a director based upon his 37 years of senior military experience with the U.S. Navy, the last eight years of which he served as director of the naval nuclear propulsion program, his experience serving on the boards of directors of other public and private companies and his experience serving as a senior operating officer and chief executive officer of a private company that provides services primarily to the U.S. Department of Defense and U.S. Department of Homeland Security.

 

 

 

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The Board of Directors

 

 

THOMAS B. FARGO

Director since March 2011

 

 

ADM Fargo, age 69, is Chairman of the Board of Directors of Huntington Ingalls Industries, Inc. and has served in that capacity since March 2011.

 

Positions Held: ADM Fargo has led companies in both the transportation and research and development sectors. He served as Commander of the U.S. Pacific Command, leading the largest unified command while directing the joint operations of the Army, Navy, Marine Corps and Air Force from May 2002 until his retirement from the U.S. Navy in March 2005. His 35 years of service included six tours in Washington, D.C. and five commands in the Pacific, Indian Ocean and Middle East, which included Commander-in-Chief of the U.S. Pacific Fleet, Commander Fifth Fleet and Naval Forces of the Central Command.

 

Current Public Company Directorships: ADM Fargo serves as a director and Chair of the Audit Committee of Matson, Inc. and serves on the boards of directors of The Greenbrier Companies, Inc. and Hawaiian Electric Industries, Inc.

 

Prior Public Company Directorships (within the last five years): ADM Fargo served on the board of directors of Northrop Grumman Corporation, Alexander & Baldwin, Inc. and Hawaiian Holdings, Inc. (Hawaiian Airlines, Inc.), including as Chairman of its Compensation Committee.

 

Other Directorships and Memberships and Education: ADM Fargo serves on the boards of directors of United Services Automobile Association (USAA), the U.S. Naval Academy Foundation, the Japan-America Society of Hawaii, the Iolani School Board of Governors and the Friends of Hawaii Charities. He is a graduate of the U.S. Naval Academy.

 

 

Qualifications, Experience, Attributes and Skills: We believe ADM Fargo is qualified to serve as a director based upon his service as Commander of the largest military command in the world and his senior military, government and operations expertise. His public company board experience has given him expertise in corporate governance, aerospace and defense, transportation and finance. ADM Fargo has received formal training in board service at Harvard University and Stanford University. He also possesses specialized knowledge in both national and homeland security that is directly relevant to our core business and customers.

 

 

 

 

 

VICTORIA D. HARKER

Director since August 2012

 

 

Ms. Harker, age 53, is an Executive Vice President and the Chief Financial Officer of Tegna, Inc.

 

Positions Held: Ms. Harker began serving in her current position in June 2015, when Tegna separated from Gannett Co., Inc. Prior to that and from July 2012, she served as Chief Financial Officer of Gannett. Ms. Harker served as Chief Financial Officer from 2006 to 2012 and as President of Global Business Services from 2011 to 2012 of The AES Corporation, a multinational power company. Before joining AES, she was the acting Chief Financial Officer and Treasurer of MCI, Inc. from November 2002 through January 2006, and Chief Financial Officer of MCI Group, a unit of Worldcom, Inc., from 1998 to 2002.

 

Current Public Company Directorships: Ms. Harker serves on the board of directors of Xylem, Inc. (formerly ITT), a global water infrastructure company, and as Chair of its Audit Committee and a member of its Leadership Development and Compensation Committee.

 

Prior Public Company Directorships (within the last five years): Ms. Harker served on the board of directors and as a member of the Finance and Audit Committees of the Board of Darden Restaurants, Inc. from 2009 to 2014.

 

Other Directorships and Memberships and Education: Ms. Harker is a member of the University of Virginia’s Board of Visitors, where she chairs the Finance Committee and serves as a member of the Executive Committee, the Special Committee on Governance and the Committee on the University of Virginia’s College at Wise. She is a trustee of the University of Virginia Alumni Association’s $250M Jefferson Trust and participates as an emeritus society member of the Board of Wolf Trap Foundation for the Performing Arts. Ms. Harker received a B.A. from the University of Virginia and an M.B.A. from American University.

 

 

Qualifications, Experience, Attributes and Skills: We believe Ms. Harker is qualified to serve as a director based upon the significant experience in business and finance she has accumulated serving as chief financial officer and in other senior management positions with large publicly-traded companies, as well as her experience serving on boards and board committees of other publicly-traded companies.

 

 

 

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The Board of Directors

 

 

ANASTASIA D. KELLY

Director since March 2011

 

 

Ms. Kelly, age 68, is a Co-Managing Partner of DLA Piper Americas.

 

Positions Held: Ms. Kelly has served as Co-Managing Partner of DLA Piper since 2013 and as a partner since 2010. Prior to joining DLA Piper, Ms. Kelly was an executive officer of American International Group, Inc. from 2006 to 2010, serving as Executive Vice President and General Counsel from 2006 to January 2009 and as Vice Chairman until December 2009, positions for which she was responsible for addressing legal, regulatory, corporate governance and risk management issues. Prior to joining American International Group, Ms. Kelly was an executive and general counsel of several large, publicly-traded companies, including MCI WorldCom, Sears, Roebuck and Co. and Fannie Mae.

 

Current Public Company Directorships: Ms. Kelly serves as a director and Chair of the Governance and Nominating Committee and member of the Risk Committee of Owens-Illinois, Inc., the world’s largest manufacturer of glass containers.

 

Other Directorships and Memberships and Education: Ms. Kelly serves on the boards of numerous philanthropic organizations. She serves as a director of the Cardiovascular Institute at George Washington University Hospital, and is a member of the Rock Center for Corporate Governance at Stanford University Law School. Ms. Kelly is also past Chair of Equal Justice Works and a director of Lawyers for Children America. She was a director of Saxon Capital from 2005 to 2007. Ms. Kelly received a B.A., cum laude, from Trinity University and a J.D., magna cum laude, from George Washington University Law School. She is a member of the Texas Bar and the District of Columbia Bar and a Fellow of the American Bar Foundation.

 

 

 

Qualifications, Experience, Attributes and Skills: We believe Ms. Kelly is qualified to serve as a director based upon her many years of experience as a senior executive and general counsel of several large, publicly traded companies, her experience as a director of another public company, and her varied business and legal experience.

 

 

 

C. MICHAEL PETTERS

Director since March 2011

 

 

Mr. Petters, age 58, is President and Chief Executive Officer of Huntington Ingalls Industries, Inc. and has served in such capacity since March 2011.

 

Positions Held: Mr. Petters served as President of Northrop Grumman Shipbuilding from 2008, when it was formed, until 2011, when it was spun off to form HII. Prior to that, he was President of Northrop Grumman Newport News beginning in 2004. Since joining Newport News Shipbuilding and Dry Dock Company in 1987, his responsibilities have included oversight of the Virginia-class submarine program, the nuclear-powered aircraft carrier programs, aircraft carrier overhaul and refueling, submarine fleet maintenance, commercial and naval ship repair, human resources and business and technology development. During his service in the U.S. Navy, Mr. Petters served aboard the nuclear-powered submarine USS Bancroft, and he spent five years in the Naval Reserve.

 

Other Directorships and Memberships and Education: Mr. Petters serves on the board of directors of the U.S. Naval Academy Foundation, the National Bureau of Asian Research and the Virginia Community College Foundation. He serves on the Board of Advisors to the Center for a New American Security and The Executive Committee of the Aerospace Industries Association, and is Chairman of the Virginia Business Council. He received a B.S. in Physics from the U.S. Naval Academy and an M.B.A. from the College of William and Mary.

 

 

 

Qualifications, Experience, Attributes and Skills: We believe Mr. Petters is qualified to serve as a director based upon his experience as our President and Chief Executive Officer, his experience as President of our predecessor companies, his experience in operations and other senior management positions of our predecessor companies and his military experience as a naval officer.

 

 

 

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The Board of Directors

 

 

THOMAS C. SCHIEVELBEIN

Director since March 2011

 

 

Mr. Schievelbein, age 64, served as Chairman, President and Chief Executive Officer of The Brink’s Company from June 2012 until his retirement in May 2016.

 

Positions Held: Mr. Schievelbein served as President of Northrop Grumman Newport News and was a member of the Northrop Grumman Corporate Policy Council from November 2001 until November 2004. He served as Chief Operating Officer of Newport News Shipbuilding Inc. from 1995 until 2001 and was responsible for the design, construction and maintenance of nuclear-powered aircraft carriers and submarines. His experience includes the Virginia-class submarine program, CVN-76, CVN-77 and CVN-21 aircraft carrier programs, aircraft carrier overhaul and refueling, submarine fleet maintenance, commercial and naval ship repair and business development.

 

Current Public Company Directorships: Mr. Schievelbein has served on the board of directors of New York Life Insurance Co. since 2006 and currently serves as Chairman of the Compensation Committee and a member of the Investment Committee and Governance and Policy Committee.

 

Prior Public Company Directorships (within the last five years): Mr. Schievelbein previously served on the board of directors of The Brink’s Company from March 2009 until his retirement in May 2016, serving as Chairman of that board from June 2012. Before serving as Chairman, he served as a member of its Audit and Compensation Committees. Mr. Schievelbein served on the board of directors of McDermott International Inc. from 2004 to 2012.

 

Other Directorships and Memberships and Education: Mr. Schievelbein is a past member of the Secretary of the Navy’s Advisory Panel and was a director of the U.S. Naval Academy Foundation from 2004 through 2012. He received a B.S. in Marine Engineering from the U.S. Naval Academy and a Master’s Degree in Nuclear Engineering from the University of Virginia.

 

 

Qualifications, Experience, Attributes and Skills: We believe Mr. Schievelbein is qualified to serve as a director based upon his experience as the President and Chief Operating Officer of Northrop Grumman Newport News and Chief Operating Officer of Newport News Shipbuilding Inc., his prior experience as Chairman, President and Chief Executive Officer of a public company and his experience serving as a director of other public companies.

 

 

 

 

JOHN K. WELCH

Director since February 2015

 

 

Mr. Welch, age 68, was President and Chief Executive Officer of Centrus Energy Corp. (formerly USEC Inc.) from October 2005 until his retirement in October 2014.

 

Positions Held: He was previously a senior executive with General Dynamics Corporation, retiring from the company in 2003 as Executive Vice President for the Marine Systems Group, which included Bath Iron Works, Electric Boat and National Steel and Shipbuilding Company (NASSCO). During his career with General Dynamics, which began in 1989, Mr. Welch also served as President of Electric Boat, Vice President of Programs for Electric Boat, with responsibility for new construction, overhaul and repair programs, material acquisition and information technology, and Vice President for Program Development at Electric Boat, with responsibility for strategic planning, program and product marketing and high-technology program acquisition and management. Mr. Welch served over seven years on active duty with the U.S. Navy as a nuclear submarine officer and retired from the Naval Reserve.

 

Prior Public Company Directorships (within the last five years): Mr. Welch served on the board of directors of Centrus Energy Corp. and its predecessor, USEC Inc., from 2005 until 2013.

 

Other Directorships and Memberships and Education: Mr. Welch is Chairman of the Board of Battelle Memorial Institute and serves on the boards of Novawall Systems Incorporated and Mount St. Joseph High School. He received a B.S. in Aerospace Engineering from the U.S. Naval Academy, a Master’s Degree in Aeronautical Engineering from the Naval Postgraduate School and an M.B.A. from Loyola College.

 

 

Qualifications, Experience, Attributes and Skills: We believe Mr. Welch is qualified to serve as a director based upon his senior executive experience at other public companies in the shipbuilding and energy markets, including his experience as executive vice president of the primary competitor to our core shipbuilding business. Mr. Welch also brings experience as a director of other public and private companies and not-for-profit entities.

 

 

Additional Information. Mr. Welch is the retired President and Chief Executive Officer of Centrus Energy Corp. (formerly USEC Inc.). Centrus Energy filed a voluntary petition under Chapter 11 of the federal bankruptcy code on March 5, 2014. On September 30, 2014, Centrus Energy emerged from Chapter 11, prior to Mr. Welch’s retirement from the company.

 

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The Board of Directors

 

 

STEPHEN R. WILSON

Director since October 2015

 

 

Mr. Wilson, age 71, is an independent business consultant and retired Executive Vice President and Chief Financial Officer of RJR Nabisco, Inc.

 

Positions Held: Mr. Wilson has served in general management, finance and planning capacities at major companies for nearly 30 years. Since 2015, he has served as an independent consultant at Arthur J. Gallagher & Co., a global insurance brokerage and risk management services firm. Prior to that, Mr. Wilson was an independent consultant at Brock Capital Group LLC, an investment bank, from 2010 until 2014. He was a partner at Camelot Equity Partners from 2007 until 2010. Mr. Wilson has also served in various executive roles, including as: Executive Vice President and Chief Financial Officer of RJR Nabisco, Inc.; Chief Financial Officer of Pepsi Cola USA; Chief Financial Officer of Frito-Lay International and President of Frito-Lay Brazil; Senior Vice President and Chief Financial Officer and, later, President of Cadbury Beverages North America; and Executive Vice President, Finance and Administration and Chief Financial Officer and, later, Chief Administrative Officer of Footstar, Inc.

 

Prior Public Company Directorships: Mr. Wilson served on the board of directors of Newport News Shipbuilding, Inc. from 1996 until the company was acquired by Northrop Grumman Corporation in 2002. He also served as chairman of the Audit Committee and as a member of the Compensation and Executive Committees. Mr. Wilson served on the board of directors of Majesco Entertainment Company from 2006 through 2015 and as chairman of the Nominating and Governance Committee and the Audit Committee.

 

Other Directorships and Memberships and Education: Mr. Wilson currently serves on the board of directors of Blue Man Productions. He previously served: as Finance Director and on the board of directors of Reckitt & Colman PLC; on the statutory board of Natwest Bancorp North America; on the board of directors of Middlesex Mutual Assurance; on the national advisory board of LEK Consulting; on the national advisory board of Chase Bank; on the national advisory board of Parson Consulting; and on the board of directors of Knobias, Inc. Mr. Wilson currently serves on the board of directors of Blue School and previously served on the boards of the South Bronx Educational Foundation and the Manhattan Theatre Club. He graduated from the U.S. Naval Academy, served as a Lieutenant in the U.S. Navy and received an M.B.A. from the Harvard Business School.

 

 

Qualifications, Experience, Attributes and Skills: We believe Mr. Wilson is qualified to serve as a director based upon his experience as chief financial officer, and chief executive officer of significant operating units, of several large public companies and his prior service on the board of directors of Newport News Shipbuilding, prior to its acquisition by Northrop Grumman, and more recently on the board of another public company.

 

 

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Director Compensation

 

Compensation elements for the Board of Directors are designed to:

 

  promote alignment with long-term stockholder interests;

 

  enable us to attract and retain outstanding directors who meet the criteria described under “Governance of the Company” above;

 

  recognize the substantial time commitments necessary to oversee the business of our company; and

 

  support the independence of thought and action expected of directors.

Non-employee director compensation is evaluated annually by the Compensation Committee, which makes recommendations to the full Board for consideration and approval. In its 2017 assessment of the competitive market with respect to outside director compensation, the Compensation Committee’s independent compensation consultant, Exequity LLP (“Exequity”), considered the following director compensation elements: board-related pay, committee-related pay, equity pay, total director compensation and chairman of the board compensation. Based upon an analysis of the 15 companies that comprise the peer group for our 2017 NEO compensation analysis, as well as supplemental general industry data gathered from Fortune 500 companies, Exequity concluded that HII’s outside director total compensation trailed the median of our peer group.

In response to the results of the director compensation analysis, Exequity proposed increasing the equity compensation of Board members and cash retainers for chairs and members of the standing Board committees, to align HII’s director compensation with the median of our compensation peer group. The Compensation Committee accepted the recommendations of Exequity and recommended that the Board approve an amended and restated directors’ compensation policy, which the Board approved. The following section sets forth the director compensation under the amended and restated policy. Our CEO is not paid additional compensation for his service on our Board.

DIRECTOR COMPENSATION PROGRAM

Our director compensation program for non-employee directors is comprised of both cash retainers and equity awards in the form of either restricted stock units or shares of our common stock, in each case granted under our 2012 Long-Term Incentive Stock Plan.

Non-employee directors receive an annual cash retainer of $100,000. Our non-executive Chairman of the Board receives an additional annual cash retainer of $250,000. The additional annual cash retainers for serving as chairs of our standing Board committees are: $25,000 for Audit; $20,000 for Compensation; $20,000 for Governance and Policy; and $20,000 for Finance. The additional annual cash retainers for serving as members (but not as chairs) of the Board committees are: $17,500 for Audit; $7,500 for Compensation; $7,500 for Governance and Policy; and $7,500 for Finance. Cash retainers are paid on a quarterly basis at the end of each quarter in arrears.

Non-employee directors receive an annual equity award of restricted stock units or shares of our common stock, valued at $130,000. On the first trading day of each quarter, each non-employee director is granted a number of restricted stock units or shares determined by dividing $32,500 by the per share closing price of our common stock on the NYSE on the date of grant, rounded down to the nearest whole unit or share.

Restricted stock unit awards are fully vested at date of grant but do not generally become payable until 30 days following the date a non-employee director ceases to serve on the Board. Non-employee

 

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directors receive dividend equivalents on their outstanding and unpaid restricted stock units. Dividend equivalents are paid in the form of a credit of additional restricted stock units and are subject to the same vesting, payment and other provisions as the underlying restricted stock units.

If a non-employee director owns shares of our common stock having a value at least five times the director’s annual cash retainer, the director may elect to receive his or her annual equity award in the form of either shares of our common stock or stock units that are payable in the fifth calendar year after the year in which the annual equity award is earned (or, if earlier, upon termination of the director’s board service). The common stock or stock units are fully vested on the date of grant.

2017 DIRECTOR COMPENSATION TABLE

The following table sets forth the compensation for the year ended December 31, 2017, of our non-employee directors who served during any part of 2017.

 

  Name

 

  

 

Fees
Earned or
Paid in
Cash ($)

 

    

Stock
Awards
($)(1)

 

    

All Other
Compensation
($)

 

  

Total ($)

 

 

 

  Philip M. Bilden*

 

  

 

 

 

 

17,187

 

 

 

 

  

 

 

 

 

 

 

 

 

  

 

 

  

 

 

 

 

17,187

 

 

 

 

 

  Augustus L. Collins

 

  

 

 

 

 

120,747

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

220,261

 

 

 

 

 

  Kirkland H. Donald**

 

  

 

 

 

 

110,747

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

210,261

 

 

 

 

 

  Thomas B. Fargo

 

  

 

 

 

 

350,000

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

449,514

 

 

 

 

 

  Victoria D. Harker

 

  

 

 

 

 

117,714

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

217,228

 

 

 

 

 

  Anastasia D. Kelly

 

  

 

 

 

 

119,417

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

218,931

 

 

 

 

 

  Paul D. Miller***

 

  

 

 

 

 

40,879

 

 

 

 

  

 

 

 

 

49,781

 

 

 

 

  

 

 

  

 

 

 

 

90,660

 

 

 

 

 

  Thomas C. Schievelbein

 

  

 

 

 

 

131,120

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

230,634

 

 

 

 

 

  John K. Welch

 

  

 

 

 

 

120,747

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

220,261

 

 

 

 

 

  Stephen R. Wilson

 

  

 

 

 

 

120,747

 

 

 

 

  

 

 

 

 

99,514

 

 

 

 

  

 

 

  

 

 

 

 

220,261

 

 

 

 

 

* Mr. Bilden was elected to the Board on November 7, 2017.
** ADM Donald was elected to the Board effective January 1, 2017.
*** ADM Miller retired from the Board effective May 3, 2017.
(1) The values for stock awards represent the grant date fair values of restricted stock units or shares of common stock granted in 2017, computed in accordance with FASB ASC Topic 718. Information about the assumptions used to value these awards can be found in Note 19 of the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. As of December 31, 2017, our non-employee directors serving as directors as of December 31, 2017, held the following number of restricted stock units: Bilden—0, Collins—497, Donald—497, Fargo—16,011, Harker—5,230, Kelly—15,048, Schievelbein—15,544, Welch—1,855 and Wilson—1,203; and the following number of shares of common stock: Bilden—2,200, Fargo—1,781, Harker—493, Kelly—493, Schievelbein—481 and Welch—1,000.

 

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Executive Compensation

 

INTRODUCTION

This section provides information about our executive compensation program with respect to the 2017 compensation of our Principal Executive Officer, our Chief Financial Officer, our three other most highly-compensated executive officers who were serving as executive officers at the end of 2017 and another individual who was one of our three other most highly-compensated executive officers but was not serving as an executive officer at the end of 2017 (our “NEOs”). This section includes biographies of our NEOs, the Compensation Discussion and Analysis, which explains how and why the Compensation Committee made its compensation decisions for the NEOs, the Report of our Compensation Committee, and the detailed executive compensation tables required by the SEC, with related narrative disclosure.

NAMED EXECUTIVE OFFICER BIOGRAPHIES

The following biographies provide information regarding the experience and education of our NEOs.

C. Michael Petters, President and Chief Executive Officer

Mr. Petters is President and Chief Executive Officer of HII. He assumed this role on March 31, 2011, when Northrop Grumman Shipbuilding began operating as the newly-formed and publicly-owned Huntington Ingalls Industries following a spin-off from Northrop Grumman Corporation. Mr. Petters is also a member of our Board.

Mr. Petters is responsible for leading the design, construction and overhaul of conventionally-powered surface combatants, amphibious and auxiliary ships and nuclear-powered submarines and aircraft carriers, as well as business opportunities in adjacent markets. From 2008 until he assumed his current position, he served as president of Northrop Grumman Shipbuilding. Prior to that, he served as president of the Newport News sector of Northrop Grumman Corporation.

Mr. Petters joined Newport News Shipbuilding in 1987 in the Los Angeles-class submarine construction division. He subsequently held a number of positions of increasing responsibility throughout the organization, including production supervisor for submarines, marketing manager for submarines and carriers, vice president for aircraft carrier programs, vice president for contracts and pricing, and vice president for human resources.

A native of Florida, Mr. Petters earned a B.S. in Physics from the U.S. Naval Academy in 1982, served aboard the nuclear-powered submarine USS George Bancroft and spent five years in the Naval Reserve. He earned an M.B.A. from the College of William and Mary.

Mr. Petters serves on the board of directors of the U.S. Naval Academy Foundation, the National Bureau of Asian Research and the Virginia Community College Foundation. He serves on the Board of Advisors to the Center for a New American Security and The Executive Committee of the Aerospace Industries Association, and is Chairman of the Virginia Business Council.

Christopher D. Kastner, Executive Vice President, Business Management and Chief Financial Officer

Mr. Kastner was elected Executive Vice President, Business Management and Chief Financial Officer effective March 2016. In this role, he is responsible for directing the business strategy and processes in support of business growth and profitability goals. Mr. Kastner also has responsibility for corporate business management functions, including investor relations, treasury, internal audit, contracts,

 

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accounting, financial reporting, planning and analysis, rates and budgets and mergers and acquisitions. He also provides oversight for segment business management, contracts and estimating and pricing.

From August 2012 until he assumed his current position, Mr. Kastner served as Corporate Vice President and General Manager, Corporate Development, responsible for strategy and development activities, including the development and integration of strategic planning efforts, as well as the analysis and entrance into new adjacent markets. Prior to that and from March 2011, he served as Vice President and Chief Financial Officer of our Ingalls Shipbuilding segment. Before that and from 2008, Mr. Kastner served as Vice President, Business Management and Chief Financial Officer of Northrop Grumman Shipbuilding, Gulf Coast, and served as Vice President, Contracts and Risk Management of Northrop Grumman Ship Systems from 2006 to 2008. Prior to that, he held several positions at other Northrop Grumman businesses, including Corporate Director of Strategic Transactions.

Mr. Kastner holds a B.A. in Political Science from the University of California at Santa Barbara and an M.B.A from Pepperdine University. He serves on the board of directors of WHRO, the only public broadcasting station in the United States owned by a collaboration of 19 local public school districts, and on the board of trustees for Eastern Virginia Medical School.

Kellye L. Walker, Executive Vice President and Chief Legal Officer

Ms. Walker has served as Executive Vice President and Chief Legal Officer since joining HII in January 2015. In this position, she has overall leadership responsibility for our law department and outside counsel, which provide a broad range of legal advice and support for the company’s business activities.

Prior to joining us, Ms. Walker was with American Water Works Company, Inc., the country’s largest investor-owned water and wastewater utility company, where she served as Senior Vice President, General Counsel and Secretary from January 2010 to January 2015. During her tenure at American Water, she also served as Chief Administrative Officer from September 2010 through May 2014. From February 2007 to June 2009, Ms. Walker served as Senior Vice President and General Counsel of Diageo North America, Inc., the largest operating company of Diageo plc. From February 2003 to December 2006, she served as Senior Vice President, General Counsel and Secretary of BJ’s Wholesale Club, Inc., a leading warehouse club operator. Prior to that, Ms. Walker served as a corporate partner in major law firms in Boston, Massachusetts and in New Orleans, Louisiana.

Ms. Walker’s professional affiliations include the American Bar Association, the Association of Corporate Counsel (former board member) and the Executive Leadership Council. She also serves on the Board of Visitors of Christopher Newport University. Ms. Walker received a B.S. in Business Administration, Marketing from Louisiana Tech University and a J.D. from Emory University School of Law.

Brian J. Cuccias, Executive Vice President and President, Ingalls Shipbuilding

Mr. Cuccias has served as Executive Vice President and President of Ingalls Shipbuilding since April 2014. He is responsible for all programs and operations at Ingalls, including U.S. Navy destroyers, amphibious assault and surface combatant programs, and the U.S. Coast Guard cutter program.

Prior to his current position and from February 2011, Mr. Cuccias served in several different positions at our Ingalls Shipbuilding segment, including vice president, program management, vice president, amphibious ship programs, and vice president, large deck amphibious ships. From 2008 to February 2011, he was vice president, surface combatants for Northrop Grumman Shipbuilding. After joining a

 

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predecessor of Northrop Grumman in 1979, he held a variety of positions, including assistant to the group vice president of Avondale Industries, sector vice president, material, for Northrop Grumman Ship Systems, and DDG(X) and DDG 1000 program manager and vice president.

Mr. Cuccias earned a B.S. in Accounting from the University of South Alabama and has attended executive education programs at Harvard Business School and the University of Pennsylvania’s Wharton School. He is a member of the Executive Committee of the Mississippi Gulf Coast Business Council and serves on the boards of directors of the Mississippi Economic Council (the state’s chamber of commerce), the Jackson County Economic Development Foundation and the Salvation Army of Mobile.

Edgar A. Green III, Executive Vice President and President, Technical Solutions

Mr. Green was appointed Executive Vice President and President, Technical Solutions in December 2016. He is responsible for HII’s services businesses, which include training systems, logistics support, information technology, fleet maintenance and modernization, unmanned undersea systems, nuclear engineering and fabrication, and oil and gas engineering.

Prior to assuming his current position and from January 2015, Mr. Green served as Corporate Vice President, Corporate Development, responsible for all of HII’s corporate development activities related to shipbuilding and marine technical services. From January 2013 to January 2015, he served as Vice President, Component Manufacturing, for Newport News Shipbuilding, where he directed the manufacture of major components used in the construction of U.S. Navy aircraft carriers and submarines. From March 2011 to January 2013, Mr. Green served as Corporate Vice President, Investor Relations, of HII, where he was primarily responsible for the company’s relationships and communications with Wall Street research analysts and shareholders. Prior to joining HII in 2011, Mr. Green served as Vice President of Investor Relations at Celanese Corp. Before that he was an investment banker and research analyst at Wells Fargo, where he covered the defense and aerospace industry, and a manufacturing plant engineer and maintenance manager at Eaton Corp.’s Truck Components Division.

Mr. Green is a former U.S. Navy nuclear submarine officer. During his naval service, he successfully completed the U.S. Navy’s nuclear power program, including prototype training at the S1C reactor, and served as an officer aboard the ballistic missile submarine USS Tecumseh (SSBN 628), qualifying submarines, Poseidon C3 strategic weapons systems officer and S5W engineer. Mr. Green holds a B.S. in Systems Engineering from the U.S. Naval Academy and an M.B.A. from Duke University.

Matthew J. Mulherin, Executive Vice President and President, Newport News Shipbuilding (Retired)

Mr. Mulherin served as Executive Vice President and President of Newport News Shipbuilding from March 2011 through June  30, 2017, preceding his retirement from the company.

COMPENSATION DISCUSSION AND ANALYSIS

The following Compensation Discussion and Analysis, or CD&A, provides information relevant to understanding the 2017 compensation of our Named Executive Officers.

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 segments in Virginia and Mississippi have built more ships in more ship classes than any other U.S. naval shipbuilder. HII’s Technical Solutions segment provides a wide range of professional services through its Fleet Support, Integrated Missions Solutions, Nuclear and Environmental, and Oil and Gas groups. Headquartered in Newport News, Virginia, HII employs nearly

 

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Executive Compensation

 

38,000 people operating both domestically and internationally. The goal of our executive compensation program is to support a pay-for-performance culture by implementing compensation programs that are market competitive, customer-focused and fair to our stockholders.

Our 2017 Named Executive Officers (“NEOs”) are:

 

C. Michael Petters  

President and Chief Executive Officer

Christopher D. Kastner  

Executive Vice President, Business Management and Chief Financial Officer

Brian J. Cuccias  

Executive Vice President and President, Ingalls Shipbuilding

Kellye L. Walker  

Executive Vice President and Chief Legal Officer

Edgar A. Green III  

Executive Vice President and President, Technical Solutions

Matthew J. Mulherin*  

Executive Vice President and President, Newport News Shipbuilding (retired)

 

* Mr. Mulherin served as Executive Vice President and President, Newport News Shipbuilding, until July 1, 2017, preceding his retirement from the company on August 1, 2017.

Executive Summary

Our executive compensation program and practices are described in detail over the following pages. We have designed our executive compensation program to attract, motivate and retain highly qualified executives, incentivize our executives to achieve business objectives, reward performance and align the interests of our executives with the interests of our stockholders and customers. The fundamental philosophy of our executive compensation program, set by the Compensation Committee of the Board, is pay for performance. We have also designed our compensation program to balance performance-based compensation over the short- and long-term to incentivize decisions and actions that promote stockholder value and focus our executives on performance that benefits our stockholders and customers, while discouraging inappropriate risk-taking behaviors.

The pay-for-performance philosophy of our executive compensation program is demonstrated by the compensation mix of our NEOs. Of the three primary elements of total direct compensation, our executive compensation is heavily weighted toward the variable, performance-based elements, and toward the long-term and equity-based elements, as reflected in the following graphs, which set forth the percentage of total compensation corresponding to each compensation element received by our CEO and by our other NEOs in the aggregate in 2017.

 

                                       CEO1

 

 

LOGO

  

                              Other NEOs2

 

 

LOGO

 

(1) Total direct compensation does not include perquisites and other benefits.

 

(2) Average allocation for the NEOs other than the CEO. Total direct compensation does not include perquisites and other benefits.

100% of Mr. Petters’ total direct compensation in 2017 was directly linked to our performance through his annual and long-term incentive awards. Approximately 84% of the total direct compensation of our other NEOs was comprised of performance-based incentive awards.

 

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Our underlying philosophy of pay for performance focuses us consistently on achieving our financial and operational goals. Above all, these goals are customer-focused, rewarding safety, quality, cost and schedule performance, and stockholder-friendly, rewarding consistent achievement of strong financial results and increasing stockholder value.

2017 Business Highlights

2017 was another successful year for HII and our employees as we continued to achieve performance objectives consistent with our strategic plan. Our financial accomplishments in 2017 included:

 

  $8.1 billion in new contract awards.

 

  $7.4 billion in revenues, a 5.3% increase over the prior year.

 

  $865 million in operating income, compared to $858 million the prior year.

 

  $10.46 diluted earnings per share.

 

  $12.14 adjusted diluted earnings per share*, unchanged from the prior year.

 

  $288 million of common stock repurchases and quarterly cash dividend increase of 20% to $0.72 per share in the fourth quarter.

 

  Credit rating upgraded to investment grade by Moody’s, S&P and Fitch.

 

  Added to Standard & Poor’s 500 index.

 

  * Non-GAAP financial measure. See Annex A for definition and reconciliation to comparable GAAP financial measure.

Our operational accomplishments in 2017 included:

 

  Delivery of the aircraft carrier USS Gerald R. Ford (CVN 78).

 

  Achievement of 50% structural completion on the aircraft carrier John F. Kennedy (CVN 79).

 

  Completion of first cut of steel on the aircraft carrier Enterprise (CVN 80).

 

  Delivery of the Virginia-class submarine USS Washington (SSN 787).

 

  Launching and christening of the Virginia-class submarine Indiana (SSN 789).

 

  Redelivery of the aircraft carrier USS Abraham Lincoln (CVN 72).

 

  Commencement of the refueling and complex overhaul of the aircraft carrier USS George Washington (CVN 73).

 

  Delivery of the amphibious transport dock USS Portland (LPD 27).

 

  Delivery of the guided missile destroyer Ralph Johnson (DDG 114).

 

  Completion of overhaul and modification of the guided missile destroyer USS Ramage (DDG 61).

 

  Christening of the National Security Cutter Kimball (NSC 7).

 

  Keel authentication, launching and christening of the National Security Cutter Midgett (NSC 8).

 

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  Christening of the guided missile destroyer Paul Ignatius (DDG 117).

 

  Launching and christening of the guided missile destroyer Delbert D. Black (DDG 119).

 

  Selection to repair the guided missile destroyer USS Fitzgerald (DDG 62).

 

  Authentication of keel of the guided missile destroyer Frank E. Petersen Jr. (DDG 121).

 

  Launching and christening of the amphibious assault ship Tripoli (LHA 7).

 

  Integration of Technical Solutions segment operations.

 

  Completion of unmanned missions testing of dual-mode undersea vehicle Proteus.

 

  Commencement of management and operating services at the Nevada National Security Site by Technical Solutions joint venture.

Commitment to Compensation Best Practices

We highlight below certain executive compensation practices we have implemented to drive performance, as well as certain practices we have avoided, in the belief they would not serve our customers’ or stockholders’ long-term interests.

 

 

 

WHAT WE DO

 

 

Consideration of Annual “Say-on-Pay” Advisory Vote

 

  

 

The Compensation Committee considers the results of the annual stockholder “Say-on-Pay” advisory vote on executive compensation.

 

 

Pay for Performance

 

  

 

Our executive compensation program is heavily weighted toward variable, performance-based elements, and toward long-term and equity-based elements. Variable compensation is tied to the achievement of performance goals and includes annual incentive awards and restricted performance stock rights, which are described in detail in this CD&A.

 

 

Compensation Risk
Assessment

 

  

 

We assess the risk of our compensation programs on an annual basis both internally and with the engagement of the Compensation Committee’s independent compensation consultant. The Compensation Committee agreed with the consultant’s conclusion that there was no undue risk associated with the design or delivery of the programs in 2017.

 

 

Executive Compensation
Recoupment (Clawback)
Policy

 

  

 

Our executive compensation recoupment, or clawback, policy allows us to seek reimbursement in certain circumstances of all or a portion of any performance-based short- or long-term cash or equity incentive compensation paid or awarded to executive officers.

 

 

Targeted Compensation Benchmarking

 

  

 

HII is a unique business with few direct competitors. The Compensation Committee therefore strikes a balance between internal equity and external benchmarking when setting executive pay levels.

 

 

Independent Compensation Consultant

 

  

 

The Compensation Committee engages an independent compensation consultant to assess the market for the determination of our executive compensation elements and targets on an annual and ongoing basis.

 

 

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Executive Compensation

 

 

 

WHAT WE DO

 

 

Executive Stock Ownership
Guidelines and Holding
Requirements

 

  

 

Our stock ownership guidelines provide that each NEO must own a multiple of his or her annual base salary in our common stock, and we have instituted holding requirements prohibiting our NEOs from selling HII common stock received as compensation until their stock ownership requirements have been met. The holding requirements also require our NEOs to continue to hold one-half of their long-term incentive awards for three additional years after they vest.

 

 

Director Stock Ownership
Guidelines and Holding
Requirements

 

  

 

Although our directors do not have specific stock ownership guidelines, the restricted stock units our non-employee directors receive do not become payable until a director ceases to serve on the Board. Non-employee directors who own shares of our common stock having a value at least five times the amount of their annual cash retainer may elect, on an annual basis, to receive their annual equity award directly in shares of our common stock or stock units that are payable in the fifth calendar year after the year in which the annual equity award is earned (or, if earlier, upon termination of the director’s board service).

 

 

 

 

WHAT WE DON’T DO

 

 

No Employment
Agreements for Executives

 

  

 

None of our NEOs have employment agreements, so each NEO is employed by the company “at will.” We maintain a severance plan that provides for the payment of severance benefits in limited termination circumstances.

 

 

No Change-in-Control
Agreements for Executives

 

  

 

We have no change-in-control agreements or related executive tax gross-up benefits. The only change-in-control provision in our compensation plans, which applies to all employees who hold equity awards, is the possible acceleration of equity vesting in certain limited circumstances within the parameters of a change-in-control transaction, as defined in the related plans.

 

 

No Hedging or Pledging by
Officers or Directors

 

  

 

Officers, directors and certain other employees are prohibited from engaging in speculative transactions in our securities, pledging our securities as collateral for a loan or other transaction or engaging in any hedging transactions involving our securities.

 

 

No Dividends or Dividend
Equivalents on Unearned
RPSRs

 

  

 

No dividends or dividend equivalents are paid out on restricted performance stock rights during the performance period. Dividend equivalent units are paid only at the time and to the extent that the underlying shares vest and are paid.

 

 

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Executive Compensation Principles

The Compensation Committee of the Board (which we refer to as the “Committee” in this CD&A) is comprised exclusively of independent directors, as determined under NYSE corporate governance listing standards, including the enhanced independence considerations applicable to members of the Committee. The Committee oversees all of our compensation and benefit programs that affect our NEOs, as well as other officers elected by the Board. The Committee also provides strategic direction for our overall compensation and benefits structure and oversees CEO and senior executive succession plans. In conducting oversight of these programs, the Committee is guided by the following compensation principles it has approved.

 

  Our compensation programs will be primarily customer-focused, rewarding safety, quality, cost and schedule performance, and stockholder friendly, rewarding consistent achievement of strong financial results and increasing stockholder value.

 

  Compensation programs will be designed to influence outcomes and will provide a balance between short- and long-term performances.

 

  Compensation programs will be based on achievement of clear and measurable financial results and accountabilities, with an emphasis on performance-based compensation, and will be formula-based with appropriate levels of discretion for adjustments.

 

  Compensation and benefits will be competitive within the market. Alignment with peer companies will be considered when developing programs and goals, but measures oriented to promoting strong improvements in our own business results will be the predominant factor.

 

  Compensation will be disclosed and explained in a transparent and understandable manner. Clear and concise goals will be established to enable the assessment of performance by the Committee and by stockholders through the CD&A.

 

  Achievement of business goals through both annual operating performance and increased stockholder value will produce significant individual rewards; failure to achieve business goals will negatively affect the pay of our executives.

 

  To promote alignment of management and stockholder interests, elected officers will meet stock ownership guidelines in the following multiples of base salary: CEO and President, seven times; all other elected officers reporting to the CEO, three times. The Committee will monitor attainment of the ownership guidelines on an annual basis. The restricted stock units our non-employee directors receive do not become payable until a director ceases to serve on the Board. Non-employee directors who own shares of our common stock having a value at least five times the amount of their annual cash retainer may elect, on an annual basis, to receive their annual equity award directly in shares of our common stock or stock units that are payable in the fifth calendar year after the year in which the annual equity award is earned (or, if earlier, upon termination of the director’s board service).

 

  The mix of long-term awards, selection of performance criteria and oversight of compensation programs, together with other features, such as our stock ownership guidelines and holding requirements, will be designed to discourage excessive risk taking by emphasizing a long-term focus on compensation and financial performance.

 

  Our NEO compensation strategy will be consistently applied for all incentive plan participants to promote proper alignment, accountability and line-of-sight regarding commitments and priorities.

 

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Pay for Performance

The fundamental philosophy of our executive compensation program is pay for performance. Our pay-for-performance philosophy and compensation principles are designed to attract, motivate and retain highly-qualified executives, incentivize our executives to achieve business objectives, reward performance and align the interests of our executives with the interests of our stockholders and customers. As such, we provide significant reward opportunities to our NEOs linked to achievement of our financial and operational goals. Above all, these goals are customer-focused, rewarding achievement of safety, quality, cost and schedule goals, and stockholder-friendly, rewarding consistent achievement of strong financial results and building or increasing stockholder value. Performance-based compensation is balanced over the short- and long-term to incentivize decisions and actions that promote stockholder value and focus our executives on performance that benefits our stockholders and customers, while discouraging inappropriate risk taking behaviors.

This focus on performance is demonstrated in the compensation mix of our NEOs. Our executive compensation is heavily weighted toward the variable, performance-based elements, and toward the long-term and equity-based elements, as reflected in the following charts, which set forth the percentage of total target compensation corresponding to each compensation element for each of our NEOs who was employed for all of 2017.

 

 

LOGO

The design of our incentive compensation plans also supports our pay-for-performance philosophy. A significant portion of the potential compensation of our executives is at risk, and that risk increases with each executive’s level of responsibility. Exceeding our financial and operational targets can result in a payout of up to 200% of the original award target, while failure to meet our targets can result in no payouts of incentive compensation to NEOs under our plans.

2017 “Say-on-Pay” Advisory Vote on Executive Compensation

Consistent with our goal of supporting a pay-for-performance philosophy by implementing compensation programs that reward performance, are market competitive and align the interests of our executives with the interests of our stockholders and customers, we seek the views of our stockholders annually on the design, effectiveness and results of our executive compensation program.

At our 2017 Annual Meeting of Stockholders, our stockholders approved our executive compensation on an advisory basis with 98% of the votes cast. This strong support, among other factors, resulted in the Committee not making significant changes to our executive compensation program.

Retention of Independent Compensation Consultant

The Committee continued in 2017 to engage an independent compensation consultant, Exequity LLP (“Exequity”), to assist the Committee in carrying out its responsibilities under its charter. Under the

 

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terms of the agreement between the Committee and the consultant, the Committee has the exclusive right to select, retain and terminate Exequity, as well as to approve any fees, terms or other conditions of Exequity’s service. Exequity reports directly to the Committee. When directed to do so by the Committee, the consultant also works collaboratively with company management to develop analyses and proposals for presentations to the Committee. The Committee reviews the performance of the independent consultant on an annual basis and determines whether to continue the engagement.

Exequity attended several Committee meetings during 2017 and presented analyses and key recommendations for Committee consideration, discussed emerging trends and technical issues and reviewed and commented on management proposals, as appropriate. In addition, the consultant responded to miscellaneous Committee requests.

Compensation Consultant Independence Assessment

In accordance with SEC rules and NYSE listing standards, the Committee requested and received information from Exequity relating to the consultant’s independence and potential conflicts of interest, including information regarding the following: (1) other services provided to us by the consultant; (2) fees paid by us as a percentage of the consulting firm’s total revenue; (3) policies or procedures maintained by the consulting firm designed to prevent a conflict of interest; (4) any business or personal relationships between the individual consultants involved in the engagement and a member of the Committee; (5) any company stock owned by the individual consultants involved in the engagement; and (6) any business or personal relationships between our executive officers and the consulting firm or the individual consultants involved in the engagement.

Based upon an assessment of these factors, including information gathered from our directors and executive officers relating to business or personal relationships with the consulting firm or the individual consultants, the Committee concluded that the consultant is independent and that the work of the consultant did not raise any conflict of interest.

Peer Group Development

The Committee believes our total compensation program (base salary, target annual cash incentive awards, target long-term incentive awards and benefits) should provide aggregate compensation at approximately the 50th percentile of the relevant market. Based upon an analysis conducted by Exequity and reviewed with the Committee, the Committee determined that our NEO base pay generally falls at or below the median and long-term incentive compensation is generally in the third or fourth quartile among the peer companies. This compensation mix is consistent with both management’s and the Committee’s philosophy that a significant portion of an executive’s overall compensation package should be based on the performance of the company and therefore at risk.

 

2018 Notice and Proxy Statement    45


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HII is a unique business with few directly comparable peer companies. As such, our current peer group is comprised of heavy manufacturing, engineering and defense companies, with annual revenues generally between $1 billion and $10 billion, that most closely match our company in terms of market cap, strategic interest, workforce similarities and/or business type. The median annual revenues for peer group companies was $5.8 billion, compared to our 2017 revenues of $7.4 billion. The targeted peer group for our 2017 NEO compensation analysis consisted of the following 16 companies:

 

  BWX Enterprises, Inc.   Orbital ATK Inc.                                
  Chicago Bridge & Iron Company   Oshkosh Corporation                                
  Federal-Mogul Corporation   Rockwell Collins, Inc.                                
  Harris Corporation   Spirit AeroSystems Holdings, Inc.                                
  KBR Inc.   Teledyne Technologies Incorporated                                
  L-3 Technologies, Inc.   Textron Inc.                                
  Moog Inc.   TransDigm Group                                
  NRG Energy, Inc.   Triumph Group, Inc.                                

Federal-Mogul was acquired by Icahn Enterprises Holdings in 2017. We expect all other peer companies to remain the same for 2018.

Compensation Risk Assessment

The Board actively oversees our overall risk profile, including the potential risk posed by our compensation programs. During the third quarter of 2017, a risk assessment and analysis of our executive compensation programs was conducted by Exequity. Their findings confirmed that our executive compensation programs are designed to drive a pay-for-performance philosophy and do not create risks that are likely to have a material adverse impact on the company. The Committee reviewed and discussed the risk analysis with Exequity and agreed with the consultant’s conclusions.

The following factors are key components of our executive compensation risk mitigation efforts:

 

  Our stock ownership guidelines and additional stock holding requirement of three years from the date of payout, including any payout that occurs within one year of retirement, provide a strong risk mitigation tool;

 

  Our clawback policy applies to all employees at the level of vice president and above, allowing us to recoup incentive payments in the event of restated financial results;

 

  Our lack of employment agreements discourages management entrenchment and increases our flexibility to make management changes when appropriate;

 

  Long-term incentive compensation payouts are capped at 200%, preventing possible windfall awards resulting from unforeseen circumstances; and

 

  Long-term incentive compensation awards are earned over a three-year performance period and reduce any incentive to engage in business tactics that improve short-term performance at the expense of long-term success.

2017 Compensation Elements

The direct compensation elements for executives under our compensation program consist primarily of base salaries, annual incentive awards and long-term incentive awards. Annual base salary provides a fixed minimum level of compensation that is competitive within the relevant market and helps us attract and retain highly qualified executives. Annual incentive awards are generally paid in cash and intended

 

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to motivate executives to achieve pre-determined financial and operational goals that are aligned with our strategic goals. Long-term incentive awards are generally equity-based and intended to promote achievement of pre-determined three-year performance goals aligned with stockholder interests.

2017 Key Compensation Decisions

Key compensation decisions for our NEOs for 2017 included the following:

 

  Base salaries for Messrs. Cuccias and Kastner and Ms. Walker were increased as a result of market adjustments or merit adjustments.

 

  Targets as a percentage of base salary for annual incentive awards under our AIP were not increased in 2017. Based on our performance for 2017, as well as the individual performances of our NEOs, payout awards were approved at levels that ranged from 100% to 184% of targets.

 

  Targets as a percentage of base salary for long-term incentive awards were not increased in 2017. All long-term incentive awards were in the form of restricted performance stock rights, which vest only upon achievement of performance metrics consisting of pension adjusted return on invested capital (“ROIC”) and earnings before interest, taxes, depreciation, amortization and pension (“EBITDAP”) over the performance period from January 1, 2017 through December 31, 2019.

ROIC is a measure of our ability to use cash flows to generate returns. ROIC is calculated as Adjusted Free Cash Flow divided by Invested Capital. Adjusted Free Cash Flow represents cash flow available to HII’s equity and debt stakeholders, calculated as Free Cash Flow (cash from operations less capital expenditures net of related grant proceeds) plus after-tax interest. Invested Capital is equal to total debt, plus equity, less goodwill and the impact of any Accumulated Other Comprehensive Income/Loss.

EBITDAP is a key indicator of our financial performance. EBITDAP is calculated as Net Earnings, plus interest, taxes, depreciation and amortization, less Net Pension/Post Retirement Benefit Expense.

Base Salaries

The base salaries of Messrs. Cuccias and Kastner and Ms. Walker increased in 2017, and the base salaries for our other NEOs were unchanged, effectively maintaining market competitiveness. Increases for Messrs. Cuccias and Kastner were based on management’s recommendation and an analysis of market and peer company data conducted by our independent compensation consultant. The increase for Ms. Walker was based on individual performance in the form of a merit increase.

 

2018 Notice and Proxy Statement    47


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Base salaries for our NEOs for 2017 were as follows:

 

 

Name

 

  

 

Title

 

  

 

2017 Annual

Salary

($)

 

 

 

C. Michael Petters*

 

  

 

President and Chief Executive Officer

 

  

 

 

 

 

1

 

 

 

 

 

Christopher D. Kastner

 

  

 

Executive Vice President, Business Management and Chief Financial Officer

 

  

 

 

 

 

525,000

 

 

 

 

 

Brian J. Cuccias

 

  

 

Executive Vice President and President, Ingalls Shipbuilding

 

  

 

 

 

 

550,000

 

 

 

 

 

Kellye L. Walker

 

  

 

Executive Vice President and Chief Legal Officer

 

  

 

 

 

 

527,875

 

 

 

 

 

Edgar A. Green III

 

  

 

Executive Vice President and President, Technical Solutions

 

  

 

 

 

 

400,000

 

 

 

 

 

Matthew J. Mulherin, retired

 

  

 

Executive Vice President and President, Newport News Shipbuilding

 

  

 

 

 

 

515,000

 

 

 

 

 

* At his request, Mr. Petters receives an annual base salary of $1. His primary compensation comes from performance-based equity compensation, and, as a significant stockholder, his personal wealth is tied directly to sustained performance and HII stock price appreciation, which directly aligns with stockholder interests. Mr. Petters will continue to receive equity and non-equity performance-based compensation reflected as a percentage of his 2015 base salary. The Committee will continue to review compensation opportunities for Mr. Petters on an ongoing basis and recommend changes, if needed, to maintain alignment with business objectives.

Creation of Annual Incentive Plan (AIP) and Long-Term Incentive Stock Plan (LTIP) Goals

The Committee approved financial metric goals under our AIP for the corporate office, as well as a combination of financial and operational metric goals for each of our three operating divisions. The guiding principle behind all of our performance metrics is that they drive the desired outcomes to promote customer satisfaction and increase stockholder value.

Division operational goals based on clear and measurable results were developed collaboratively between division management and corporate management. Operational goals fall into the categories of safety, quality, cost and schedule, with a fifth category oriented to goals focused on division-specific challenges and opportunities, which may change from year to year.

The Committee approved goals for the LTIP to reward performance in three-year increments. The performance metrics for all participants under the LTIP for 2017 were ROIC and EBITDAP.

Annual Incentive Compensation Awards

The Committee approves annual incentive compensation targets for each NEO position. Targets vary with relevant benchmark market levels, individual job level, job scope and overall influence on our business results. The Committee considers both the recommendations of its compensation consultant and those of management in determining appropriate annual incentive target levels for our NEOs. The target incentive award (“Target Bonus”) is based on a percentage of each NEO’s base salary and provides a basis upon which a final award amount is determined by the Committee based upon its assessment of performance against pre-determined performance criteria after the year has ended. The annual incentive compensation targets for our NEOs expressed as a percentage of base salary tend to fall into the third quartile of the relevant market data.

2017 Annual Incentive Plan

Annual incentive awards for Mr. Petters, Mr. Kastner and Ms. Walker for 2017 were evaluated based upon Operating Margin (“OM”) and Free Cash Flow (“FCF”) for the entire enterprise and revenue for

 

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the Technical Solutions division to arrive at a company performance factor (“CPF”), as well as an individual performance factor (“IPF”). OM is equal to segment operating income as a percentage of total revenues. Segment operating income is equal to operating income before the FAS/CAS Adjustment and non-current state income taxes. FCF represents cash from operating activities less capital expenditures net of related grant proceeds.

Achievement of the maximum performance criteria results in a CPF factor of 2.0. If the CPF is less than 0.5, no annual incentive award is paid. The IPF can range from 0 to 1.5. No annual incentive award can exceed 200% of an individual’s Target Bonus. The annual incentive award formula for the corporate office for the 2017 performance period was:

Base Salary x Target % = Target Bonus

Target Bonus x CPF x IPF = Final Bonus Award

2017 annual incentive awards for Messrs. Cuccias and Mulherin were evaluated based on their respective division performance factors (“DPF”), which include division financial metric goals, consisting of OM and FCF for their respective divisions, and their respective division non-financial goals, which include safety, quality, cost and schedule, as well as their individual IPFs. The 2017 annual incentive award for Mr. Green was evaluated based on the Technical Solutions DPF of OM, FCF and revenue, as well as his individual IPF. Achievement of the maximum performance criteria results in a factor of 2.0. No annual incentive award is paid if the CPF with reference to the corporate metrics is less than 0.5. The IPF can range from 0 to 1.5. No annual incentive award can exceed 200% of an individual’s Target Bonus. The annual incentive award formula for the operating divisions for the 2017 performance period was:

Base Salary x Target % = Target Bonus

Target Bonus x DPF x IPF = Final Bonus Award

At the conclusion of each calendar year, our CEO conducts an annual performance evaluation for each NEO in order to recommend an IPF for each NEO. These evaluations are reviewed with the Committee. Each NEO’s individual performance is evaluated based upon consideration of the following factors:

 

  Financial performance of our company as a whole and the division(s) (where applicable);

 

  Performance on non-financial goals, including company-level goals and division-specific operating goals;

 

  Strategic leadership and vision;

 

  Program execution and performance;

 

  Customer relationships; and

 

  Peer and employee relationships/engagement.

The Committee reviews and considers the recommendations from the CEO and all performance information, including a comparison to the 2017 peer group data. The Committee then approves annual incentive compensation awards for all NEOs, subject to ratification by the independent members of the Board with respect to the CEO’s compensation.

 

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Target Bonus Amounts

Based on analyses of relevant market benchmarks and peer group data, we did not increase annual incentive compensation targets as a percentage of base salary for our NEOs from 2016 to 2017. The 2017 Target Bonus amounts were as follows:

 

 

Name

 

  

 

Incentive Target as %
of Base Salary (%)

 

  

 

2017 Target Bonus  
($)  

 

 

C. Michael Petters (1)

 

    

 

 

 

 

125

 

 

 

    

 

 

 

 

1,187,500

 

 

 

 

Christopher D. Kastner

 

    

 

 

 

 

70

 

 

 

    

 

 

 

 

367,500

 

 

 

 

Brian J. Cuccias

 

    

 

 

 

 

70

 

 

 

    

 

 

 

 

385,000

 

 

 

 

Kellye L. Walker

 

    

 

 

 

 

70

 

 

 

    

 

 

 

 

369,513

 

 

 

 

Edgar A. Green III

 

    

 

 

 

 

70

 

 

 

    

 

 

 

 

280,000

 

 

 

 

Matthew J. Mulherin, retired (2)

 

    

 

 

 

 

70

 

 

 

    

 

 

 

 

385,000

 

 

 

(1) At his request, Mr. Petters receives an annual base salary of $1, but his performance-based compensation is computed as a percentage of his 2015 base salary ($950,000).
(2) Although Mr. Mulherin’s base salary for 2017 remained at $515,000 until his retirement, we used $550,000, the amount of Mr. Cuccias’ base salary, for incentive compensation purposes to ensure equitable compensation between the division presidents based upon the respective division performance achievements.

Plan Funding

Our AIP was designed to comply with the performance-based compensation exception under Section 162(m) of the Internal Revenue Code (“IRC”). Effective January 1, 2018, the performance-based compensation exception to the $1 million deduction limitation of 162(m) was repealed as a result of enactment of the Tax Cuts and Jobs Act (“Tax Act”) on December 22, 2017. Because our 2017 AIP awards paid out in 2018 and were not grandfathered under the Tax Act, the performance-based compensation exception does not apply to the awards.

Prior to repeal of the performance-based compensation exception under IRC Section 162(m), the Committee established performance-based parameters for the payment of annual incentive compensation awards with approval of a bonus pool that appropriates an amount (“Tentative Appropriated Incentive Compensation”) not to exceed 2.5% of our Economic Earnings for the performance year. “Economic Earnings” is defined as income from continuing operations before federal and foreign income taxes and the cumulative effect of accounting changes and extraordinary items, less pension income (or plus pension expense) plus amortization and impairment of goodwill and other purchased intangible assets plus restructuring or similar charges to the extent they are separately disclosed in the annual report. Our performance-based compensation policy provides that the maximum potential individual incentive compensation award for a performance year for an officer subject to IRC Section 162(m) will be limited to no more than 40% of the Tentative Appropriated Incentive Compensation for the CEO and 20% for each of the other covered NEOs other than our CFO.

2017 Annual Incentive Plan Goals and Results

For Mr. Petters, Mr. Kastner and Ms. Walker, 2017 annual incentive compensation awards were based 80% upon overall company performance and 20% upon the performance of Technical Solutions. For Messrs. Cuccias, Green and Mulherin, 2017 annual incentive compensation awards were based upon the performance of the Ingalls division, the Technical Solutions division and the Newport News division, respectively.

The corporate AIP score is based 80% upon our overall financial score and 20% upon Technical Solutions revenue, as described below.

 

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The respective Ingalls Shipbuilding division and Newport News Shipbuilding division performance scores are based 50% on the respective division operational score and 50% on the respective division financial score. In determining the division performance factors for AIP awards for Messrs. Cuccias and Mulherin, the performance criteria are weighted as follows:

 

  50% based on achievement of the respective division operational criteria.

The division operational criteria consist of the following five performance metrics, which are weighted equally (i.e., each sub-metric comprises 20% of the division operational criteria). These criteria, which are specific to the respective divisions, are recommended by our CEO and approved by the Committee at the beginning of the performance year.

 

    Safety—Measured by a combination of elements, including total case rate, lost total case rate and lost work days rate;

 

    Quality—Measured by integrating elements such as defect rates, process quality, planning quality and other appropriate criteria for program type and phase;

 

    Schedule—Measured using program-specific objectives related to achievement of quarterly schedule targets;

 

    Cost—Measured using program-specific objectives related to achievement of cost factors that include Cost Performance Index and overhead rates; and

 

    Division Management—May be focused on operational or financial goals or goals focused on environmental, human capital or any other area in which our CEO desires to drive performance. Goals recommended by our CEO and approved by the Committee at the beginning of the performance year are specific to each division’s opportunities and challenges.

 

  25% based on achievement of the respective division return on sales (“ROS”) performance criteria

 

    ROS performance criteria—Measured as division OM before other post-employment benefits and FAS/CAS net pension expense.

 

  25% based on achievement of the respective division FCF performance criteria

 

    FCF performance criteria—Measured as division FCF before discretionary pension contributions and excess cash flow.

The Technical Solutions division performance score is based 100% on the division financial score. In determining the division performance factors for the AIP award for Mr. Green, the performance criteria are weighted as follows:

 

  30% based on achievement of the division revenue performance criteria

 

  35% based on achievement of the division OM performance criteria

 

    OM performance criteria—Measured as division OM before other post-employment benefits and FAS/CAS net pension expense.

 

  35% based on achievement of the division FCF performance criteria

 

    FCF performance criteria—Measured as division FCF before discretionary pension contributions and excess cash flow.

 

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All of the AIP goals for our NEOs are recommended by our CEO and then approved by the Committee.

AIP goals are plan-based, with minimum and maximum limits based on clear targets connected to our strategic goals. The AIP goals are based upon metrics that are customer focused and stockholder friendly with clear line-of-sight financial and operational metrics. Final AIP performance metrics for 2017, as determined by the Committee, were as follows:

Corporate 2017 Metrics for Mr. Petters, Mr. Kastner and Ms. Walker

 

 

Corporate 2017 Metrics

 

 

 

Goals @
0%

 

   

 

Goals @
100%

 

   

 

Goals @
200%

 

   

 

Actual

 

   

 

Points

 

   

 

Weighting

 

   

 

Final AIP
Points

 

 

 

OM—Performance (%)

 

 

 

 

 

 

7.69  

 

 

 

 

 

 

 

 

 

8.13  

 

 

 

 

   

 

8.66 

 

 

 

   

 

901 

 

 

 

 

 

 

 

 

200  

 

 

 

 

 

 

 

 

 

40%  

 

 

 

 

 

 

 

 

 

80  

 

 

 

 

 

FCF—Performance ($M)

 

 

 

 

 

 

491  

 

 

 

 

 

 

 

 

 

548  

 

 

 

 

   

 

618 

 

 

 

   

 

636 

 

 

 

 

 

 

 

 

200  

 

 

 

 

 

 

 

 

 

40%  

 

 

 

 

 

 

 

 

 

80  

 

 

 

 

 

TS Revenue ($M)

 

 

 

 

 

 

892  

 

 

 

 

 

 

 

 

 

992  

 

 

 

 

   

 

1,091 

 

 

 

   

 

952 

 

 

 

 

 

 

 

 

60  

 

 

 

 

 

 

 

 

 

20%  

 

 

 

 

 

 

 

 

 

12  

 

 

 

 

 

Total Performance (CPF)

 

                         

 

 

 

 

Total AIP Score

 

 

 

 

 

 

 

 

 

172  

 

 

 

 

Ingalls Shipbuilding 2017 Metrics for Mr. Cuccias

 

 

Ingalls 2017 Metrics

 

 

 

Goals @
0%

 

   

 

Goals @
100%

 

   

 

Goals @
200%

 

   

 

Actual

 

   

 

Points

 

   

 

Weighting

 

   

 

Final AIP
Points

 

 

 

Operational Metrics

 

             

 

Operational Performance (Safety, Quality, Cost, Schedule, Site President Specific)

 

 

 

 

 

 

0  

 

 

 

 

 

 

 

 

 

100  

 

 

 

 

 

 

 

 

 

200  

 

 

 

 

 

 

 

 

 

167  

 

 

 

 

 

 

 

 

 

167  

 

 

 

 

 

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

84    

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Financial Metrics

 

             

 

OM—Performance (%)

 

 

 

 

 

 

8.40  

 

 

 

 

 

 

 

 

 

9.20  

 

 

 

 

 

 

 

 

 

10.20  

 

 

 

 

 

 

 

 

 

12.60  

 

 

 

 

 

 

 

 

 

100  

 

 

 

 

 

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

50    

 

 

 

 

 

FCF—Performance ($M)

 

 

 

 

 

 

138  

 

 

 

 

 

 

 

 

 

174  

 

 

 

 

 

 

 

 

 

223  

 

 

 

 

 

 

 

 

 

373  

 

 

 

 

 

 

 

 

 

100  

 

 

 

 

 

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

50    

 

 

 

 

           

 

 

   

 

 

 

 

Financial Performance

 

           

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

100    

 

 

 

 

           

 

 

   

 

 

 

 

Total Performance

 

                         

 

 

 

 

Total AIP Score

 

 

 

 

 

 

 

 

 

184    

 

 

 

 

Technical Solutions 2017 Metrics for Mr. Green

 

 

TS 2017 Metrics

 

 

 

Goals @
0%

 

   

 

Goals @
100%

 

   

 

Goals @
200%

 

   

 

Actual

 

   

 

Points

 

   

 

Weighting

 

   

 

Final AIP
Points

 

 

 

Revenue ($M)

 

 

 

 

 

 

892  

 

 

 

 

 

 

 

 

 

992  

 

 

 

 

 

 

 

 

 

1,091  

 

 

 

 

 

 

 

 

 

952  

 

 

 

 

 

 

 

 

 

18    

 

 

 

 

 

 

 

 

 

30%  

 

 

 

 

 

 

 

 

 

18    

 

 

 

 

 

OM—Performance (%)

 

 

 

 

 

 

2.30  

 

 

 

 

 

 

 

 

 

2.60  

 

 

 

 

 

 

 

 

 

2.90  

 

 

 

 

 

 

 

 

 

2.21  

 

 

 

 

 

 

 

 

 

35    

 

 

 

 

 

 

 

 

 

35%  

 

 

 

 

 

 

 

 

 

0    

 

 

 

 

 

FCF—Performance ($M)

 

 

 

 

 

 

9  

 

 

 

 

 

 

 

 

 

10  

 

 

 

 

 

 

 

 

 

11  

 

 

 

 

 

 

 

 

 

44  

 

 

 

 

 

 

 

 

 

70    

 

 

 

 

 

 

 

 

 

35%  

 

 

 

 

 

 

 

 

 

70    

 

 

 

 

 

Total Performance

 

                         

 

 

 

 

Total AIP Score

 

 

 

 

 

 

 

 

 

88    

 

 

 

 

 

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Newport News Shipbuilding 2017 Metrics for Mr. Mulherin

 

 

NNS 2017 Metrics

 

 

 

Goals @
0%

 

   

 

Goals @
100%

 

   

 

Goals @
200%

 

   

 

Actual

 

   

 

Points

 

   

 

Weighting

 

   

 

Final AIP
Points

 

 

 

Operational Metrics

 

             

 

Operational Performance (Safety, Quality, Cost, Schedule, Site President Specific)

 

 

 

 

 

 

0  

 

 

 

 

 

 

 

 

 

100  

 

 

 

 

 

 

 

 

 

200  

 

 

 

 

 

 

 

 

 

119  

 

 

 

 

 

 

 

 

 

119  

 

 

 

 

 

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

59    

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Financial Metrics

 

             

 

OM—Performance (%)

 

 

 

 

 

 

8.40  

 

 

 

 

 

 

 

 

 

8.80  

 

 

 

 

 

 

 

 

 

9.25  

 

 

 

 

 

 

 

 

 

8.50  

 

 

 

 

 

 

 

 

 

11  

 

 

 

 

 

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

6    

 

 

 

 

 

FCF—Performance ($M)

 

 

 

 

 

 

344  

 

 

 

 

 

 

 

 

 

364  

 

 

 

 

 

 

 

 

 

384  

 

 

 

 

 

 

 

 

 

219  

 

 

 

 

 

 

 

 

 

0  

 

 

 

 

 

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

0    

 

 

 

 

           

 

 

   

 

 

 

 

Financial Performance

 

           

 

 

 

 

50%  

 

 

 

 

 

 

 

 

 

6    

 

 

 

 

           

 

 

   

 

 

 

 

Total Performance

 

                         

 

 

 

 

Total AIP Score

 

 

 

 

 

 

 

 

 

65    

 

 

 

 

Payouts to NEOs under the AIP could have ranged from 0% to 200% of each NEO’s Target Bonus. For 2017, the Committee exercised discretion to adjust the DPF for both the Technical Solutions and Newport News Shipbuilding divisions, based upon certain non-recurring items. The adjustments for Newport News Shipbuilding were based upon strategic business decisions made after the 2017 goals were approved, as well as continuing significant support provided to Technical Solutions to facilitate its business growth. For Technical Solutions, adjustments were based upon the net impact on Technical Solutions of the bankruptcy of Westinghouse, a significant customer.

Based upon these adjustments and a review of overall financial and operational performance, the Committee approved final DPFs of 135%, 100% and 176% for Technical Solutions, Newport News Shipbuilding and corporate, respectively.

2018 Technical Solutions Annual Incentive Plan Goals

For 2018, we have added an additional metric to measure performance for the Technical Solutions division under our AIP. The performance score will be based upon the Technical Solutions division financial metrics described above, as well as division management goals to drive performance on non-financial division objectives.

Long-Term Incentive Compensation Awards

Our long-term incentive compensation goals are intended to reward three-year performance increments based primarily on the achievement of financial metrics. Long-term incentive compensation for our NEOs is provided in the form of Restricted Performance Stock Rights (“RPSRs”). Each RPSR represents the right to receive one share of our common stock, or cash of equivalent value, subject to vesting as provided in the award. Vesting occurs once the Committee determines that the applicable performance criteria for the performance period have been satisfied. Earned RPSRs may be paid out in shares of our common stock or, at the discretion of the Committee, cash. RPSRs include dividend equivalent units, or DEUs, that are credited to the RPSRs following payment by the company of a cash dividend on our common stock. These DEUs remain subject to the terms and conditions of the underlying RPSR grants and are paid only to the extent the underlying RPSRs vest upon satisfaction of the applicable performance criteria.

The Committee determines long-term incentive compensation target values for our NEOs based upon a peer group analysis, applying value-based guidelines that focus on the award value, rather than the

 

2018 Notice and Proxy Statement    53


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number of shares granted (share-based guidelines). The Committee believes value-based guidelines more effectively deliver long-term incentive compensation awards that are consistent with awards given to individuals holding comparable positions at peer companies.

2017 Long-Term Incentive Compensation Awards

Long-term incentive compensation awards in 2017 were granted under our stockholder-approved Huntington Ingalls Industries, Inc. 2012 Long Term Incentive Stock Plan (the “2012 Plan”). All long-term incentive compensation awards granted to our NEOs in 2017 were in the form of RPSRs and covered the performance period from 2017 through 2019. The Committee and management review and evaluate RPSR performance goals to ensure they are aligned with our long-term objectives. For the 2017 grants, the Committee and management determined that performance for long-term incentive compensation awards to our NEOs would be measured solely in terms of overall company financial metrics: pension adjusted ROIC and EBITDAP. The number of shares that ultimately vest and are issued to an NEO under an RPSR award can vary from 0% to 200% of the original number of shares granted.

Long-term incentive compensation targets as a percentage of base salary for our NEOs for 2017 were unchanged from the 2016 targets and were approved by the Committee as follows:

 

Name

 

  

 

Incentive Target as
% of Base Salary
(%)

 

  

 

2017 Long-Term

Incentive Target

($)

 

  

 

Actual

Award

($)

 

 

 

C. Michael Petters (1)

 

  

 

400

 

  

 

3,800,000

 

  

 

 

 

 

3,799,904

 

 

 

 

 

Christopher D. Kastner

 

  

 

220

 

  

 

1,045,000

 

  

 

 

 

 

1,044,897

 

 

 

 

 

Brian J. Cuccias

 

  

 

210

 

  

 

1,081,500

 

  

 

 

 

 

1,081,329

 

 

 

 

 

Kellye L. Walker

 

  

 

175

 

  

 

901,250

 

  

 

 

 

 

901,144

 

 

 

 

 

Edgar A. Green III

 

  

 

210

 

  

 

840,000

 

  

 

 

 

 

839,912

 

 

 

 

 

Matthew J. Mulherin, retired

 

  

 

210

 

  

 

1,081,500

 

  

 

 

 

 

1,081,329

 

 

 

 

(1) At his request, Mr. Petters receives an annual base salary of $1, but his performance-based compensation is computed as a percentage of his 2015 base salary ($950,000).

The target dollar amounts are grant date theoretical values and not based upon any actual calculation or estimate of payout. An NEO is not guaranteed to receive any payout as a result of the 2017 grants.

2015-2017 Long-Term Incentive Plan Goals and Results

During the first quarter of each year, the Committee reviews our financial performance over the prior three years against approved long-term incentive compensation goals to determine payout multiples for RPSRs with a performance period that ended December 31 of the prior year.

At the February 2018 meeting, the Committee reviewed performance for the January 1, 2015 through December 31, 2017 performance period. Payouts for the 2015 LTIP equity grants, based upon actual performance, were approved as follows:

 

    

 

HII 2015-2017 Goals

    

 

Actual Performance (Adj.)

 
    

 

@ 0%

 

    

 

@ 100%

 

    

 

@ 200%

 

    

 

Actual

 

    

 

Score

 

    

 

Weighting

 

  

 

CPF

 

 

 

EBITDAP ($M) (1)

 

  

 

 

 

 

2,304

 

 

 

 

  

 

 

 

 

2,484

 

 

 

 

  

 

 

 

 

2,709

 

 

 

 

  

 

 

 

 

2,565

 

 

 

 

  

 

 

 

 

136

 

 

 

 

  

 

50%

 

  

 

 

 

 

68

 

 

 

 

ROIC (%) (2)

 

  

 

 

 

 

37.60

 

 

 

 

  

 

 

 

 

40.60

 

 

 

 

  

 

 

 

 

44.40

 

 

 

 

  

 

 

 

 

63.00

 

 

 

 

  

 

 

 

 

200

 

 

 

 

  

 

50%

 

  

 

 

 

 

100

 

 

 

 

Total

 

                             

 

 

 

 

Total LTIP Score            

 

  

 

 

 

 

168

 

 

 

(1) Net Earnings before interest, taxes, depreciation, amortization and Net Pension/Post Retirement Expense.

 

(2) Cumulative FCF divided by average invested capital, adjusted for the net impact of the bankruptcy of Westinghouse, a significant customer of Technical Solutions.

 

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The 2015 LTIP awards were earned at 168% of target value, and the earned RPSRs were issued on February 27, 2018.

Additional Benefits

We provide additional benefits to our NEOs through various plans that are also available to some or all of our other employees. Although these plans are not directly overseen by the Committee, the Committee considers benefits under these plans when considering an executive’s total annual compensation and determining the annual and long-term compensation components. These benefits are not performance-related and are designed to provide a market competitive package to attract, motivate and retain the executive talent we need to achieve our business objectives. The plans include broad-based retirement plans, as well as additional supplemental executive benefits we provide. These supplemental benefits include supplemental pension plans, enhanced health and welfare benefits (dental, life, AD&D and disability) and the Special Officers Retiree Medical Plan (“SORMP”) for our CEO upon retirement.

Defined Benefit Retirement Plans. We maintain tax-qualified defined benefit pension plans that cover all but two of our NEOs and the majority of our workforce. These plans are structured to retain and reward employees for long service and to recognize higher performance levels through annual pay increases. Compensation, age and service factor into the amount of the benefits provided under the plans.

We also maintain non-tax-qualified supplemental defined benefit pension plans that cover all but two of our NEOs. These plans provide benefits that would have been provided under the tax-qualified plans if no limits applied to such plans under the Internal Revenue Code. These types of benefits are common in our industry.

Defined Contribution Savings Plans. We maintain tax-qualified defined contribution savings plans that cover our NEOs and the majority of our workforce. Participating employees contribute portions of their pay to the plans, and the company generally provides a matching contribution.

We also maintain two non-tax-qualified supplemental savings plans that cover all eligible employees, including our NEOs. The Savings Excess Plan (“SEP”) allows eligible employees to defer compensation beyond the limits of the tax-qualified plans and receive a matching company contribution. Eligibility begins when annual income, including base pay and bonuses, equals or exceeds $270,000, the plan compensation limit under the Internal Revenue Code. Eligible employees may participate in the plan in the calendar year after their total cash income meets or exceeds this limit.

The Officers Retirement Account Contribution Plan (“ORAC”) covers the company’s elected and appointed officers hired on or after July 1, 2008, who are not eligible for defined benefit pension plans. Enrollment is automatic, and the company contributes an amount equal to 4% of the officer’s eligible compensation. Because they were hired after June 30, 2008, Mr. Green and Ms. Walker are not eligible to participate in the company’s qualified and nonqualified defined benefit pension plans, but they receive the SEP and ORAC benefits described above. Our other NEOs do not receive ORAC benefits. Additional information about the SEP and the ORAC is provided in the Nonqualified Deferred Compensation table.

Special Officer Retiree Medical Plan. Our President and Chief Executive Officer is a participant in the SORMP and entitled to retiree medical benefits under the terms of the SORMP. Coverage under the SORMP is essentially a continuation of medical benefits into retirement, plus retiree life insurance. Additional information about the SORMP is provided below in the Retiree Medical Arrangement section of the Potential Payments upon Termination or Change of Control section and related tables.

 

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Perquisites. Our NEOs are eligible for certain executive perquisites, which include financial planning, dental coverage, physical exams, personal liability insurance and relocation benefits. These perquisites are common within our industry and comprise an important component of our total compensation package. Management and the Committee review perquisites and benefits on an annual basis to ensure they are appropriate.

Severance Benefits. Management and the Committee believe severance benefits are appropriate for a reasonable amount of time following certain terminations of employment, including a termination without cause. In addition to providing a severance plan for all employees, we maintain The Severance Plan for Elected and Appointed Officers of Huntington Ingalls Industries. Benefits under this plan for our NEOs include the following:

 

  Lump Sum Cash Severance Payment—A lump sum equal to one and one half (1.5) times the sum of annual base salary and Target Bonus;

 

  Extension of Medical and Dental Benefits—The employer portion of medical and dental insurance premiums for a period of 18 months following the date of termination (concurrent with COBRA);

 

  Financial Planning Reimbursement—Eligible expenses incurred prior to the date of termination and eligible expenses incurred in the year in which the date of termination occurs up to a maximum of $15,000, and any fees incurred in the year following the year in which the date of termination occurs up to a maximum of $15,000; and

 

  Outplacement Services Reimbursement—Fees incurred within one year after the date of termination (limited to 15% of base salary as of the date of termination).

Additional Compensation Policies

Total Compensation—Tally Sheet

Management provides the Committee with a total compensation and benefits perspective for each NEO, which includes a tally sheet that captures each element of total compensation and benefits. In conjunction with the Committee’s consideration of NEO compensation compared to the company’s peer group, this tally sheet ensures that compensation decisions are made within a total compensation framework. The tally sheet provides a broad perspective that covers basic annual compensation components, as well as an annualized value of the benefits and perquisites each NEO receives. Accordingly, the values of nonqualified deferred compensation, outstanding equity awards, health and welfare benefits, pension benefits and perquisites are included.

Tax Deductibility of Pay—Section 162(m)

Prior to January 1, 2018, Section 162(m) of the Internal Revenue Code generally limited the deductibility of non-performance based compensation to $1 million each for a public company’s CEO and next three highest-paid executive officers (other than the CFO). Among the provisions included in the Tax Act are changes to Section 162(m). Effective January 1, 2018, the performance-based compensation exception to the $1 million deduction limitation was repealed and the employees subject to the $1 million limitation are revised to include the CEO, CFO and next three highest-paid executive officers. The only exception to this rule is for compensation that is paid pursuant to a binding contract in effect on November 2, 2017 that would otherwise have been deductible under prior Section 162(m) rules. Accordingly, any compensation paid in the future pursuant to new compensation arrangements entered into after November 2, 2017, even if performance-based, will count toward the $1 million annual deduction limit if paid to an executive subject to 162(m). We have not yet completed an analysis of the binding contract requirements on our various compensation plans to determine the impact of the law change.

 

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Grant Date for Equity Compensation Awards

Our annual grant cycle for long-term incentive compensation equity awards occurs simultaneously with salary increases and annual incentive compensation awards. We expect this to occur in the first two and one-half months of each year. This timing allows management and the Committee to make decisions on all three compensation elements at the same time to promote a total compensation review.

Stock Ownership Guidelines

To promote ownership of our common stock by our executives and alignment of management and stockholder interests, we have adopted stock ownership guidelines that prescribe pre-determined stock ownership levels for certain executives, expressed as a multiple of the executive’s base salary. The stock ownership guidelines prescribe the following ownership levels:

 

  President and CEO—7 times base salary;

 

  Elected officers reporting directly to the President and CEO—3 times base salary; and

 

  Other elected, appointed and other officers—1.5 times base salary.

The ownership guidelines may be satisfied in one or more of the following ways:

 

  Direct ownership of our common stock;

 

  Restricted Stock Rights (“RSRs”) (vested or unvested) granted in the form of restricted stock units and issued as part of a long-term incentive compensation award; or

 

  Equivalent shares held in our savings plan (401(k) plan).

As of February 28, 2018, the percentage of stock ownership target attained by each NEO was as follows:

 

Name

 

  

Target

 

  

 

% of Target
Attained

 

 

 

C. Michael Petters

 

  

 

7 x salary

 

  

 

2,673%

 

 

Christopher D. Kastner

 

  

 

3 x salary

 

  

 

   753%

 

 

Brian J. Cuccias

 

  

 

3 x salary

 

  

 

   867%

 

 

Kellye L. Walker

 

  

 

3 x salary

 

  

 

   143%

 

 

Edgar A. Green III

 

  

 

3 x salary

 

  

 

   186%

 

 

Matthew J. Mulherin, retired

 

  

 

n/a

 

  

 

    n/a

 

Stock Holding Requirement

To supplement our stock ownership guidelines, we adopted stock holding requirements for our NEOs. Under the holding requirements, our NEOs must hold at least 50% of the total number of shares of our common stock received as compensation until the earlier of (a) the third anniversary of the date such shares are issued or (b) the date that employment terminates due to death or disability. The holding requirement continues upon termination or retirement for a one-year period after separation from the company and applies to any equity compensation award vesting in that one-year period. Any equity compensation award vesting or stock options exercised after the one-year anniversary of retirement or termination are not subject to the holding requirement.

 

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Executive Compensation Recoupment

The Committee has adopted the Policy Regarding the Recoupment of Certain Performance-Based Compensation Payments (“clawback policy”), which requires reimbursement of all or a portion of any performance-based short- or long-term cash or equity incentive compensation payments to an employee at the vice president or more senior position level, when (i) restatement of financial results is necessitated by noncompliance with any financial reporting requirement under the securities laws and (ii) payment of such amounts was received by the employee during the 12-month period following the first public issuance or filing of the financial results that were subsequently restated. The clawback policy is in addition to any rights to repayment we may have under Section 304 of the Sarbanes Oxley Act and other applicable laws and does not limit other available remedies, including dismissing an employee or initiating other disciplinary actions.

Trading Restrictions and Policy Against Hedging and Pledging

Our insider trading policy prohibits directors, officers and employees from buying or selling securities of any company while aware of material non-public information about that company, subject to certain limited exceptions involving pre-arranged trading plans, and from providing such material non-public information to any person who may trade on the basis of such information. This policy also prohibits officers, directors and certain employees from engaging in speculative transactions in company securities, pledging company securities as collateral for a loan or other transaction or engaging in any hedging transactions involving company securities, including zero cost collar transactions and forward sale contracts. Directors, officers and certain employees may engage in permitted transactions in our securities only during certain specified periods and after receiving authorization from our Office of the Chief Legal Officer.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management this Compensation Discussion and Analysis and, based on such review and discussion, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement and incorporated by reference into the Annual Report on Form 10-K for the year ended December 31, 2017.

Submitted by members of the Compensation Committee:

Victoria D. Harker, Chair

Philip M. Bilden

Kirkland H. Donald

Anastasia D. Kelly

 

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EXECUTIVE COMPENSATION TABLES

2017 Summary Compensation Table

The following table summarizes the compensation for our 2017 NEOs over the last three years.

Summary Compensation Table

 

Name & Principal Position

 

 

Year

 

 

Salary

($) (1)

 

 

Bonus

($) (2)

 

 

Stock
Awards

($) (3)

 

 

 

Non-Equity
Incentive Plan
Compensation
($) (4)

 

 

Change in
Pension
Value

($) (5)

 

 

All Other
Compensation
($) (6)

 

 

Total ($)

 

 

C. Michael Petters,

President and Chief
Executive Officer

 

   

 

 

 

2017

 

   

 

 

 

1

 

       

 

 

 

3,799,904

 

   

 

 

 

1,922,800

 

   

 

 

 

2,194,062

 

   

 

 

 

57,412

 

   

 

 

 

7,974,179

 

      2016       328,847           3,799,960       2,018,750       1,000,696       57,983       7,206,236
     

 

2015

 

 

     

 

986,538

 

 

         

 

3,799,926

 

 

     

 

2,102,736

 

 

     

 

1,239,275

 

 

     

 

30,483

 

 

     

 

8,158,958

 

 

 

Christopher D. Kastner,

Executive Vice President,
Business Management
and Chief Financial
Officer (7)

   

 

 

 

2017

 

   

 

 

 

517,308

 

       

 

 

 

1,044,897

 

   

 

 

 

646,800

 

   

 

 

 

1,565,930

 

   

 

 

 

57,286

 

   

 

 

 

3,832,220

 

     

 

2016

 

 

     

 

463,462

 

 

         

 

1,044,949

 

 

     

 

565,250

 

 

     

 

1,065,316

 

 

     

 

56,323

 

 

     

 

3,195,300

 

 

                               
                               

 

Brian Cuccias,

Executive Vice President
and President, Ingalls
Shipbuilding division

 

   

 

 

 

2017

 

   

 

 

 

545,290

 

       

 

 

 

1,081,329

 

   

 

 

 

708,400

 

   

 

 

 

1,803,460

 

   

 

 

 

51,231

 

   

 

 

 

4,189,710

 

      2016       514,906           944,943       630,877       1,511,713       50,322       3,652,761
      2015       442,309           839,934       613,463       826,841       42,907       2,765,454
                               

 

Kellye L. Walker,

Executive Vice President
and Chief Legal Officer

 

   

 

 

 

2017

 

   

 

 

 

525,894

 

       

 

 

 

901,144

 

   

 

 

 

650,342

 

   

 

 

 

 

   

 

 

 

168,475

 

   

 

 

 

2,245,855

 

      2016       505,096           901,249       612,850             151,352       2,170,547
     

 

2015

 

 

     

 

491,231

 

 

     

 

220,000

 

 

     

 

1,251,251

 

 

     

 

721,000

 

 

     

 

 

 

     

 

166,630

 

 

     

 

2,850,112

 

 

 

Edgar Green III,

Executive Vice President
and President, Technical
Solutions division (8)

 

   

 

 

 

2017

 

   

 

 

 

400,000

 

       

 

 

 

839,912

 

   

 

 

 

378,000

 

   

 

 

 

 

   

 

 

 

88,498

 

   

 

 

 

1,706,410

 

 

Matthew J. Mulherin,

Executive Vice President
and President, Newport
News Shipbuilding,
retired (9)

   

 

 

 

2017

 

   

 

 

 

309,000

 

       

 

 

 

1,081,329

 

   

 

 

 

224,671

 

   

 

 

 

1,503,791

 

   

 

 

 

43,098

 

   

 

 

 

3,161,889

 

      2016       515,000           1,081,472       540,750       163,722       32,012       2,332,956
     

 

2015

 

 

     

 

534,808

 

 

         

 

1,081,462

 

 

     

 

470,453

 

 

     

 

(486,616

 

)

 

     

 

59,643

 

 

     

 

1,659,749

 

 

                                                                               

 

(1) The amounts in this column represent salary earned during the year and include amounts deferred under the savings and nonqualified deferred compensation plans.

 

(2) The amount in this column represents a discretionary sign-on bonus awarded to Ms. Walker when she was hired in 2015.

 

(3) The dollar values shown in this column are equal to the grant date fair values of equity awards made during the year, computed in accordance with FASB ASC Topic 718. Information about the assumptions used to value these awards can be found in Note 19 of the financial statements included in our 2017 Annual Report on Form 10-K.

 

     The grant date values of 2017 RPSRs for each NEO, assuming maximum performance, were:

 

 

C. Michael Petters

 

  

 

$

 

 

7,599,807

 

 

 

 

 

Christopher D. Kastner

 

  

 

$

 

 

2,089,793

 

 

 

 

 

Brian J. Cuccias

 

  

 

$

 

 

2,162,657

 

 

 

 

 

Kellye L. Walker

 

  

 

$

 

 

1,802,288

 

 

 

 

 

Edgar A. Green III

 

  

 

$

 

 

1,679,823

 

 

 

 

 

Matthew J. Mulherin, retired

 

 

  

 

$

 

 

2,162,657

 

 

 

 

 

(4) The amounts reported in this column are attributable to the AIP awards earned for 2015, 2016 and 2017, but paid in 2016, 2017 and 2018, respectively. See the Grants of Plan-Based Awards table for more information regarding the range of AIP awards that could have been earned for 2017.

 

2018 Notice and Proxy Statement    59


Table of Contents

Executive Compensation

 

(5) The amounts reported in this column represent the changes in actuarial present values of the accumulated benefits under defined benefit pension plans, determined by comparing the prior completed year-end amount to the covered year-end amount. We do not have any deferred compensation plans that provide for above market or preferential earnings.

 

(6) Detailed information on the amounts reported in this column is included in the All Other Compensation table below.

 

(7) Mr. Kastner was elected Executive Vice President, Business Management and Chief Financial Officer effective March 1, 2016. Under SEC rules, we are only required to provide 2016 and 2017 information for Mr. Kastner, since he first became an NEO in 2016.

 

(8) Mr. Green was elected Executive Vice President and President of Technical Solutions effective December 1, 2016. Under SEC rules, we are only required to provide 2017 information for Mr. Green, since he first became an NEO in 2017.

 

(9) Mr. Mulherin retired from the company effective August 1, 2017.

2017 CEO Pay Ratio

As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 402(u) of Regulation S-K promulgated under the Securities and Exchange Act of 1934, we are providing the following information about the relationship of the annual total compensation of our employees and the annual total compensation of our CEO. The pay ratio included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. There are a variety of different methodologies, assumptions, adjustments and estimates that companies may apply in compliance with Item 402(u) of Regulation S-K; as such, the information provided should not be used as a basis for comparison between different companies.

For 2017, the annual total compensation of the median employee of our company was $132,546, and the annual total compensation of our CEO, as reported in the Summary Compensation Table above, was $7,974,179. Based on this information, the ratio of the annual total compensation of our CEO, Mr. Petters, to the median of the annual total compensation of all employees was 60 to 1.

 

Summary Total

Compensation and
Pay Ratio

  

 

CEO

  

 

Median       

Employee       

  

 

Pay       
Ratio       

  

 

     $7,974,179     

 

  

 

$132,546       

 

  

 

60       

 

In order to identify the median of the annual total compensation of all our employees, as well as to determine the annual total compensation of our median employee and our CEO, we took the following steps:

We determined that, as of December 31, 2017, our employee population consisted of approximately 38,929 individuals. For purposes of determining our median employee, we excluded 73 employees in Canada, 9 employees in Trinidad and 14 employees in the U.K. for a remaining workforce of 38,832 (excluding our CEO). This population consisted of our full-time, part-time, temporary and seasonal employees. December 31, 2017, was selected as the date upon which we would identify the “median employee,” because it allowed us to identify our median employee in a reasonably efficient and economical manner.

To identify the median employee, we compared 2017 W-2 taxable Medicare wages (Box 5) as reported to the Internal Revenue Service. This compensation measure was consistently applied to all employees included in the calculation.

Once the median employee was identified, we calculated annual total compensation for such employee using the same methodology we use for our NEOs as reported in the 2017 Summary Compensation Table above. With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of the table.

 

60    Huntington Ingalls Industries, Inc.


Table of Contents

Executive Compensation

 

All Other Compensation

 

Name

 

     

 

Non-

Qualified
Plans
Company
Match ($)

 

 

Qualified
Plans
Company
Match ($)

 

 

Health and
Welfare
Contributions
($)

 

 

Executive
Physical
($)

 

 

Financial
Planning
($)

 

 

Personal
Liability
($)

 

 

Total All Other 
Compensation 

($) 

 

 

C. Michael Petters

 

   

 

 

 

 

2017

 

 

 

       

 

 

 

 

10,800

 

 

 

   

 

 

 

 

13,247

 

 

 

   

 

 

 

 

2,000

 

 

 

   

 

 

 

 

30,000

 

 

 

   

 

 

 

 

1,365

 

 

 

   

 

 

 

 

57,412

 

 

 

 

Christopher D. Kastner

 

   

 

 

 

 

2017

 

 

 

   

 

 

 

 

32,502

 

 

 

   

 

 

 

 

10,800

 

 

 

   

 

 

 

 

12,775

 

 

 

       

 

 

 

 

545

 

 

 

   

 

 

 

 

664

 

 

 

   

 

 

 

 

57,286

 

 

 

 

Brian J. Cuccias

 

   

 

 

 

 

2017

 

 

 

   

 

 

 

 

29,450

 

 

 

   

 

 

 

 

8,100

 

 

 

   

 

 

 

 

13,016

 

 

 

           

 

 

 

 

664

 

 

 

   

 

 

 

 

51,231

 

 

 

 

Kellye L. Walker

 

   

 

 

 

 

2017

 

 

 

   

 

 

 

 

121,565

 

 

 

   

 

 

 

 

24,300

 

 

 

   

 

 

 

 

12,855

 

 

 

   

 

 

 

 

2,000

 

 

 

   

 

 

 

 

7,092

 

 

 

   

 

 

 

 

664

 

 

 

   

 

 

 

 

168,475

 

 

 

 

Edgar A. Green III

 

   

 

 

 

 

2017

 

 

 

   

 

 

 

 

55,777

 

 

 

   

 

 

 

 

20,303

 

 

 

   

 

 

 

 

11,755

 

 

 

           

 

 

 

 

664

 

 

 

   

 

 

 

 

88,498

 

 

 

 

Matthew J. Mulherin, ret.

 

   

 

 

 

 

2017

 

 

 

   

 

 

 

 

23,190

 

 

 

   

 

 

 

 

10,800

 

 

 

   

 

 

 

 

6,953

 

 

 

             

 

 

 

 

1,750

 

 

 

   

 

 

 

 

405

 

 

 

   

 

 

 

 

43,098

 

 

 

2017 Grants of Plan Based Awards

The following table provides additional information about equity and non-equity incentive compensation awards we granted to our NEOs during the year ended December 31, 2017.

2017 Grants of Plan Based Awards

 

                                   

 

Grant Date  

Fair Value  

of Stock  

and Option  

Awards  

($) (3)  

 

            Estimated Potential Payouts Under
Non Equity Incentive Plan Awards (1)
  Estimated Future Payouts Under
Equity Incentive Plan Awards (2)
 

Name

 

 

Grant Type

 

 

Grant
Date

 

 

Threshold
($)

 

 

Target

($)

 

 

Maximum
($)

 

 

Threshold
(#)

 

 

Target
(#)

 

 

Maximum
(#)

 

 

 

C. Michael Petters

 

 

Annual Incentive Plan

       

 

 

 

0

 

   

 

 

 

1,187,500

 

   

 

 

 

2,375,000

 

               
  Long-term Incentive (RPSR)

 

     

 

3/1/2017

 

 

                 

 

0

 

 

     

 

17,314

 

 

     

 

34,628

 

 

     

 

3,799,904  

 

 

 

Christopher D. Kastner

 

 

Annual Incentive Plan

       

 

 

 

0

 

   

 

 

 

367,500

 

   

 

 

 

735,000

 

               
  Long-term Incentive (RPSR)

 

     

 

3/1/2017

 

 

                 

 

0

 

 

     

 

4,761

 

 

     

 

9,522

 

 

     

 

1,044,897  

 

 

 

Brian J. Cuccias

 

 

Annual Incentive Plan

       

 

 

 

0

 

   

 

 

 

385,000

 

   

 

 

 

770,000

 

               
  Long-term Incentive (RPSR)

 

     

 

3/1/2017

 

 

                 

 

0

 

 

     

 

4,927

 

 

     

 

9,854

 

 

     

 

1,081,329  

 

 

 

Kellye L. Walker

 

 

Annual Incentive Plan

       

 

 

 

0

 

   

 

 

 

369,513

 

   

 

 

 

739,026

 

               
  Long-term Incentive (RPSR)

 

     

 

3/1/2017

 

 

                 

 

0

 

 

     

 

4,106

 

 

     

 

8,212

 

 

     

 

901,144  

 

 

 

Edgar Green III

 

 

Annual Incentive Plan

       

 

 

 

0

 

   

 

 

 

280,000

 

   

 

 

 

560,000

 

               
  Long-term Incentive (RPSR)

 

     

 

3/1/2017

 

 

                 

 

0

 

 

     

 

3,827

 

 

     

 

7,654

 

 

     

 

839,912  

 

 

 

Matthew J. Mulherin, ret.

 

 

Annual Incentive Plan

       

 

 

 

0

 

   

 

 

 

224,671

 

   

 

 

 

449,342

 

               
    Long-term Incentive (RPSR)

 

     

 

3/1/2017

 

 

                                   

 

0

 

 

     

 

4,927

 

 

     

 

9,854

 

 

     

 

1,081,329  

 

 

 

(1) Amounts in these columns show the range of payouts that was possible under our Annual Incentive Plan based on performance during 2017, as described in the Compensation Discussion and Analysis. The amounts actually earned for 2017 are included in the Summary Compensation Table.

 

(2) These amounts reflect RPSRs granted in 2017 under the 2012 Plan. Each RPSR represents the right to receive a share of our common stock upon vesting of the RPSR. These RPSRs and accrued DEUs are earned based upon ROIC and EBITDAP performance over a three-year performance period commencing January 1, 2017 and ending December 31, 2019, with payout occurring in early 2020, ranging from 0% to 200% of the rights awarded. Accrued DEUs will be paid only to the extent the underlying shares vest based upon achievement of performance goals. Generally, an executive must remain employed through the performance period to earn an award, although vesting will be prorated if employment terminates earlier due to retirement, death or disability.

 

(3) The amounts reported in this column represent the full grant date fair values of the equity awards computed in accordance with FASB ASC Topic 718. In connection with the amendment of the terms and conditions of Mr. Mulherin’s RPSRs in July 2017 to provide for accelerated vesting at the time of his retirement from the company, subject to continuation of the performance periods through the respective remaining terms of the performance periods (2017, 2018 and 2019), the service period for recognition of expense under ASC 718 was shortened. The RPSR amendment did not result in a change to the fair value of the award.

 

2018 Notice and Proxy Statement    61


Table of Contents

Executive Compensation

 

Outstanding Equity Awards at 2017 Year-End

The following table summarizes the equity compensation awards made to our NEOs that were outstanding as of December 31, 2017.

Outstanding Equity Awards at 2017 Year-End

 

Name

 

 

Number of

Securities

Underlying

Unexercised

Options

Exercisable (#)

 

   

Grant

Date

 

   

Option

Exercise

Price ($)

 

   

Option

Expiration

Date

 

   

Number of
Shares or

Units of

Stock

that Have
Not

Vested (#)

 

   

Market

Value

of
Shares
or

Units of

Stock

that
Have
Not

Vested
($)

 

   

Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
that Have
Not
Vested
(#) (1)

 

   

 

Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
that Have
Not
Vested
($) (2)

 

 

 

C. Michael Petters

   

 

 

 

3/1/2017

 

 

         

 

 

 

17,520

 

 

 

 

 

 

4,129,379

 

 

      3/1/2016               29,335       6,914,254  
     

 

2/23/2015

 

 

 

           

 

27,733

 

 

 

   

 

6,536,690

 

 

 

 

Christopher D. Kastner

   

 

 

 

3/1/2017

 

 

         

 

 

 

4,818

 

 

 

 

 

 

1,135,496

 

 

      3/1/2016               8,067       1,901,347  
     

 

2/23/2015

 

 

 

           

 

6,130

 

 

 

   

 

1,444,867

 

 

 

 

Brian J. Cuccias

   

 

 

 

3/1/2017

 

 

         

 

 

 

4,986

 

 

 

 

 

 

1,175,087

 

 

      3/1/2016               7,295       1,719,380  
     

 

2/23/2015

 

 

 

           

 

6,130

 

 

 

   

 

1,444,867

 

 

 

 

Kellye L. Walker

   

 

 

 

3/1/2017

 

 

         

 

 

 

4,155

 

 

 

 

 

 

979,279

 

 

      3/1/2016               6,957       1,639,876  
     

 

2/23/2015

 

 

 

           

 

6,577

 

 

 

   

 

1,550,207

 

 

 

 

Edgar A. Green III

   

 

 

 

3/1/2017

 

 

         

 

 

 

3,872

 

 

 

 

 

 

912,737

 

 

      12/1/2016               2,311       544,733  
      3/1/2016               1,932       455,279  
     

 

2/23/2015

 

 

 

           

 

1,773

 

 

 

   

 

417,929

 

 

 

 

Matthew J. Mulherin, retired

   

 

 

 

3/1/2017

 

 

         

 

 

 

4,986

 

 

 

 

 

 

1,175,087

 

 

      3/1/2016               8,349       1,967,802  
             

 

2/23/2015

 

 

 

                                   

 

7,893

 

 

 

   

 

1,860,346

 

 

 

 

(1) The numbers in this column assume target performance levels for RPSRs. The RPSR award granted in March 2017, if earned, will vest based on performance for the three-year period ending on December 31, 2019. The RPSR award granted in March 2016, if earned, will vest based on performance for the three-year period ending on December 31, 2018. The RPSR award granted in February 2015 vested based upon performance for the three-year period that ended on December 31, 2017. See “2015-2017 Long-Term Incentive Plan Goals and Results” for actual vesting amounts. The number of shares reflected in the table for the 2017, 2016 and 2015 awards also includes DEUs accrued through December 31, 2017. DEUs vest only to the extent the underlying performance award vests.

 

(2) The market values are based on the closing price of our common stock on December 31, 2017, of $235.70.

 

     In connection with Mr. Mulherin’s retirement from the company, the terms and conditions of his RPSRs were amended to provide for immediate vesting of the 2015, 2016 and 2017 RPSRs at the time of his retirement, subject to continuation of the performance periods through the respective remaining terms of the performance periods (2017, 2018 and 2019), as set forth in the terms and conditions of the RPSRs. The RPSR amendment did not result in a change to the fair value of the award.

 

62    Huntington Ingalls Industries, Inc.


Table of Contents

Executive Compensation

 

Option Exercises and Stock Vested in 2017

The following table provides additional information about the value realized by our NEOs on exercises of option awards and vesting of stock awards during the year ended December 31, 2017.

2017 Option Exercises and Stock Vested

 

    

 

Option Awards

    

 

Stock Awards

 

Name

 

  

Number of
Shares
Acquired on
Exercise (#)

 

    

Value
Realized on
Exercise (1)
($)

 

    

 

Number of
Shares
Acquired on
Vesting (2)
(#)

 

    

Value
Realized on
Vesting (3)
($)

 

 

 

C. Michael Petters

 

  

 

 

 

 

262,294

 

 

 

 

  

 

 

 

 

42,791,247

 

 

 

 

  

 

 

 

 

70,716

 

 

 

 

  

 

 

 

 

15,520,040

 

 

 

 

 

Christopher D. Kastner

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

15,631

 

 

 

 

  

 

 

 

 

3,430,536

 

 

 

 

 

Brian J. Cuccias

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

15,631

 

 

 

 

  

 

 

 

 

3,430,536

 

 

 

 

 

Kellye L. Walker

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

 

Edgar A. Green III

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

4,424

 

 

 

 

  

 

 

 

 

970,935

 

 

 

 

 

Matthew J. Mulherin, retired

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

0

 

 

 

 

  

 

 

 

 

19,539

 

 

 

 

  

 

 

 

 

4,288,224

 

 

 

 

 

(1) The values in this column are calculated by subtracting the exercise price of the options from the price of our common stock on the date of exercise and multiplying the result by the number of shares underlying the options. Amounts in the column may not represent amounts that were actually realized.

 

(2) The numbers in this column represent RPSRs that were received in 2017 based on the achievement of performance goals for the three-year period from 2014 through 2016.

 

(3) The values in this column are calculated by multiplying the number of RPSRs vested by the closing price of our common stock on the NYSE on the date of vesting.

 

2018 Notice and Proxy Statement    63


Table of Contents

Executive Compensation

 

2017 Pension Benefits

The following table shows the present value of accumulated benefits payable to each of our NEOs under the qualified defined benefit pension plans and nonqualified defined benefit pension plans that we sponsor.

2017 Pension Benefits

 

Name

 

 

Plan Name

 

 

 

Number of

Years

Credited

Service

 

   

 

Present Value of

Accumulated

Benefit

($) (1)

 

   

 

Payments

During Last

Fiscal Year

($)

 

 

 

C. Michael Petters (2)

 

 

 

Special Officer SERP

 

 

 

 

 

 

13.167

 

 

 

 

 

 

 

 

 

11,336,079

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HII NNS Inc. Retirement Benefit Restoration Plan

 

   

 

29.500

 

 

 

   

 

13,253,047

 

 

 

   

 

 

 

 

 

HII NNS Inc. Retirement Plan

 

   

 

29.500

 

 

 

   

 

1,254,805

 

 

 

   

 

 

 

 

 

Christopher D. Kastner (2)

 

 

 

OSERP

 

 

 

 

 

 

26.917

 

 

 

 

 

 

 

 

 

737,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HII Supplemental Plan 2—ERISA 2

 

   

 

26.917

 

 

 

   

 

3,920,855

 

 

 

   

 

 

 

 

 

HII Retirement Plan “B”

 

   

 

26.917

 

 

 

   

 

1,620,323

 

 

 

   

 

 

 

 

 

Brian J. Cuccias (2)

 

 

 

OSERP

 

 

 

 

 

 

31.750

 

 

 

 

 

 

 

 

 

2,341,263

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Avondale Supp Pension Plan

 

   

 

31.750

 

 

 

   

 

1,510,581

 

 

 

   

 

 

 

 

 

HII Litton Restoration Plan

 

   

 

31.750

 

 

 

   

 

2,614,915

 

 

 

   

 

 

 

 

 

HII Retirement Plan “B”

 

   

 

31.750

 

 

 

   

 

820,953

 

 

 

   

 

 

 

 

 

Kellye L. Walker (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edgar A. Green III (4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Matthew J. Mulherin, retired (2)(5)

 

 

OSERP

 

 

 

 

 

 

36.583

 

 

 

 

 

 

 

 

 

1,610,835

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HII NNS Inc. Retirement Benefit Restoration Plan

 

   

 

35.083

 

 

 

   

 

5,792,976

 

 

 

   

 

10,743

 

 

 

   

HII NNS Inc. Retirement Plan

 

   

 

35.083

 

 

 

   

 

1,793,052

 

 

 

   

 

39,642

 

 

 

 

(1) While benefits may be spread over different plans, it is our policy that an executive’s total benefit under these plans is essentially limited to 60% of such executive’s final average pay. The pension benefits for Mr. Petters under the Special Officer Supplemental Executive Retirement Plan are based on an alternate formula that includes total HII service.

 

(2) The following plans in which these executives participate were consolidated as of December 31, 2014 to form the Huntington Ingalls Industries Omnibus Supplemental Retirement Plan: HII Newport News Shipbuilding Inc. Retirement Benefit Restoration Plan, HII Electronic Systems Executive Pension Plan, Avondale Industries, Inc. Restated Supplemental Pension Plan, HII Litton Industries, Inc. Restoration Plan, and Special Officer Supplemental Executive Retirement Plan.

 

(3) Ms. Walker was hired in January 2015 and was, therefore, not eligible to participate in any historical defined benefit pension plans, which were closed to new participants in 2008. Ms. Walker does, however, participate in company sponsored defined contribution plans.

 

(4) Mr. Green was hired in March 2011 and was, therefore, not eligible to participate in any historical defined benefit pension plans, which were closed to new participants in 2008. Mr. Green does, however, participate in company sponsored defined contribution plans.

 

(5) Mr. Mulherin retired on August 1, 2017, and elected the joint and 100% to surviving spouse option for his pension benefits payable under the HII Newport News Shipbuilding Inc. Retirement Plan, HII Newport News Shipbuilding Inc. Retirement Benefit Restoration Plan and OSERP.

 

64    Huntington Ingalls Industries, Inc.


Table of Contents

Executive Compensation

 

The pension values represent the present values of the benefits expected to be paid in the future. They do not represent actual lump sum values that may be paid from a plan. The amount of future payments is based on the current accrued pension benefit as of December 31, 2017. Pursuant to SEC disclosure rules, (i) the actuarial assumptions used to calculate amounts for this table are the same as those used for our financial statements, and (ii) all pension values are determined assuming the NEO works until the specified retirement age, which is the earliest unreduced retirement age (as defined in each plan).

General Explanation of the Pension Benefits Table

Individual employees may be covered by several different pension plans as a result of our history as a division of Northrop Grumman. However, an executive’s total benefit under the pension plans is essentially limited to 60% of his or her final average pay. The accrued tax qualified pension benefit cannot be reduced or taken away under applicable law, so all historical pension plans have been maintained.

Pension plans provide income during retirement, as well as benefits in special circumstances, including death and disability. In general, the plans are structured to reward and retain employees of long service and recognize higher achievement levels through increases in annual pay. The term “qualified plan” generally means a plan that qualifies for favorable tax treatment under Internal Revenue Code (“IRC”) Section 401. Savings plans (also known as 401(k) plans) and traditional pension plans are examples of qualified plans. Qualified plans apply to a broad base of employees. The term “nonqualified plan” generally means a plan that is limited to a specified group of management personnel. Our nonqualified plans supplement our qualified plans and (1) provide benefits that would be provided under our qualified plans if there were no limitations imposed by the IRC and (2) provide a minimum level of pension benefits to our executives in recognition of their higher levels of responsibility.

The amounts in the table are based on the specific provisions of each plan, which are described in more detail below. Two basic types of pension benefits are reflected in the Pension Benefits table: traditional benefits and cash balance benefits. For purposes of computing amounts in the table, traditional benefits are determined based on the annual pension earned as of December 31, 2017, and include any supplemental payments. Cash balance benefits are based upon the account balance as of December 31, 2017, plus a future interest credit, converted to an annuity using the applicable conversion factors.

Mr. Kastner participates in the Huntington Ingalls Industries Retirement Plan “B” and the Huntington Ingalls Industries Supplemental Plan 2—ERISA Supplemental Program 2. Messrs. Petters and Mulherin participate in the HII Newport News Shipbuilding Inc. Retirement Plan and the HII Newport News Shipbuilding Inc. Retirement Benefit Restoration Plan. Mr. Cuccias participates in the Huntington Ingalls Industries Retirement Plan “B”, the Avondale Industries, Inc. Restated Supplemental Pension Plan and the HII Litton Industries, Inc. Restoration Plan. Ms. Walker and Mr. Green participate in the Huntington Ingalls Industries Officers Retirement Account Contribution Plan (“ORAC”). Each NEO, except Mr. Petters, Ms. Walker and Mr. Green, also participates in the Officers Supplemental Executive Retirement Program (“OSERP”). Mr. Petters participates in the Special Officer Supplemental Executive Retirement Plan.

Effective December 31, 2014, the following plans were consolidated to form the Huntington Ingalls Industries Omnibus Supplemental Retirement Plan: HII Newport News Shipbuilding Inc. Retirement Benefit Restoration Plan, HII Electronic Systems Executive Pension Plan, Avondale Industries, Inc. Restated Supplemental Pension Plan, HII Litton Industries, Inc. Restoration Plan and Special Officer Supplemental Executive Retirement Plan. The consolidation does n