10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-34910
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HUNTINGTON INGALLS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE | | 90-0607005 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
4101 Washington Avenue, Newport News, Virginia 23607
(Address of principal executive offices and zip code)
(757) 380-2000
(Registrant’s telephone number, including area code)
_____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ý | | | Accelerated filer | | ¨ |
Non-accelerated filer | | ¨ | (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 30, 2015, 46,975,996 shares of the registrant's common stock were outstanding.
TABLE OF CONTENTS
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| PART I – FINANCIAL INFORMATION | | Page |
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Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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| PART II – OTHER INFORMATION | | |
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Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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HUNTINGTON INGALLS INDUSTRIES, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions, except per share amounts) | | 2015 | | 2014 | | 2015 | | 2014 |
Sales and service revenues | | | | | | | | |
Product sales | | $ | 1,461 |
| | $ | 1,385 |
| | $ | 4,137 |
| | $ | 4,150 |
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Service revenues | | 339 |
| | 332 |
| | 978 |
| | 880 |
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Total sales and service revenues | | 1,800 |
| | 1,717 |
| | 5,115 |
| | 5,030 |
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Cost of sales and service revenues | | | | | | | | |
Cost of product sales | | 1,164 |
| | 1,086 |
| | 3,121 |
| | 3,277 |
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Cost of service revenues | | 292 |
| | 278 |
| | 846 |
| | 743 |
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Income (loss) from operating investments, net | | 6 |
| | 7 |
| | 9 |
| | 10 |
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General and administrative expenses | | 150 |
| | 189 |
| | 473 |
| | 509 |
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Goodwill impairment | | — |
| | — |
| | 59 |
| | — |
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Operating income (loss) | | 200 |
| | 171 |
| | 625 |
| | 511 |
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Other income (expense) | | | | | |
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Interest expense | | (25 | ) | | (27 | ) | | (73 | ) | | (83 | ) |
Earnings (loss) before income taxes | | 175 |
| | 144 |
| | 552 |
| | 428 |
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Federal income taxes | | 64 |
| | 48 |
| | 198 |
| | 142 |
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Net earnings (loss) | | $ | 111 |
| | $ | 96 |
| | $ | 354 |
| | $ | 286 |
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Basic earnings (loss) per share | | $ | 2.31 |
| | $ | 1.97 |
| | $ | 7.33 |
| | $ | 5.85 |
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Weighted-average common shares outstanding | | 48.0 |
| | 48.7 |
| | 48.3 |
| | 48.9 |
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| | | | | | | | |
Diluted earnings (loss) per share | | $ | 2.29 |
| | $ | 1.96 |
| | $ | 7.28 |
| | $ | 5.80 |
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Weighted-average diluted shares outstanding | | 48.4 |
| | 49.0 |
| | 48.6 |
| | 49.3 |
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Dividends declared per share | | $ | 0.40 |
| | $ | 0.20 |
| | $ | 1.20 |
| | $ | 0.60 |
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Net earnings (loss) from above | | $ | 111 |
| | $ | 96 |
| | $ | 354 |
| | $ | 286 |
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Other comprehensive income (loss) | | | | | | | | |
Change in unamortized benefit plan costs | | 21 |
| | 8 |
| | 65 |
| | 24 |
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Other | | (7 | ) | | (2 | ) | | (7 | ) | | — |
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Tax benefit (expense) for items of other comprehensive income | | (4 | ) | | (3 | ) | | (22 | ) | | (9 | ) |
Other comprehensive income (loss), net of tax | | 10 |
| | 3 |
| | 36 |
| | 15 |
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Comprehensive income (loss) | | $ | 121 |
| | $ | 99 |
| | $ | 390 |
| | $ | 301 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
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($ in millions) | | September 30 2015 | | December 31 2014 |
Assets | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 671 |
| | $ | 990 |
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Accounts receivable, net | | 1,278 |
| | 1,038 |
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Inventoried costs, net | | 308 |
| | 339 |
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Deferred income taxes | | 126 |
| | 129 |
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Prepaid expenses and other current assets | | 36 |
| | 50 |
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Total current assets | | 2,419 |
| | 2,546 |
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Property, plant, and equipment, net of accumulated depreciation of $1,453 million as of 2015 and $1,351 million as of 2014 | | 1,750 |
| | 1,792 |
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Goodwill | | 973 |
| | 1,026 |
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Other purchased intangibles, net | | 528 |
| | 547 |
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Pension plan assets | | 28 |
| | 17 |
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Long-term deferred tax asset | | 188 |
| | 212 |
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Miscellaneous other assets | | 156 |
| | 129 |
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Total assets | | $ | 6,042 |
| | $ | 6,269 |
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Liabilities and Stockholders' Equity | | | | |
Current Liabilities | | | | |
Trade accounts payable | | $ | 296 |
| | $ | 269 |
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Accrued employees’ compensation | | 216 |
| | 248 |
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Current portion of long-term debt | | — |
| | 108 |
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Current portion of postretirement plan liabilities | | 143 |
| | 143 |
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Current portion of workers’ compensation liabilities | | 226 |
| | 221 |
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Advance payments and billings in excess of revenues | | 141 |
| | 74 |
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Other current liabilities | | 272 |
| | 249 |
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Total current liabilities | | 1,294 |
| | 1,312 |
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Long-term debt | | 1,305 |
| | 1,592 |
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Pension plan liabilities | | 879 |
| | 939 |
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Other postretirement plan liabilities | | 513 |
| | 507 |
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Workers’ compensation liabilities | | 458 |
| | 449 |
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Other long-term liabilities | | 103 |
| | 105 |
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Total liabilities | | 4,552 |
| | 4,904 |
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Commitments and Contingencies (Note 15) | | — |
| | — |
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Stockholders’ Equity | | | | |
Common stock, $0.01 par value; 150 million shares authorized; 52.0 million issued and 47.2 million outstanding as of September 30, 2015, and 51.5 million issued and 48.3 million outstanding as of December 31, 2014 | | 1 |
| | 1 |
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Additional paid-in capital | | 1,948 |
| | 1,959 |
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Retained earnings (deficit) | | 821 |
| | 525 |
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Treasury stock | | (454 | ) | | (258 | ) |
Accumulated other comprehensive income (loss) | | (826 | ) | | (862 | ) |
Total stockholders’ equity | | 1,490 |
| | 1,365 |
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Total liabilities and stockholders’ equity | | $ | 6,042 |
| | $ | 6,269 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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| | | | | | | | |
| | Nine Months Ended September 30 |
($ in millions) | | 2015 | | 2014 |
Operating Activities | | | | |
Net earnings (loss) | | $ | 354 |
| | $ | 286 |
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Adjustments to reconcile to net cash provided by (used in) operating activities | | | | |
Depreciation | | 116 |
| | 136 |
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Amortization of purchased intangibles | | 19 |
| | 20 |
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Amortization of debt issuance costs | | 6 |
| | 8 |
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Stock-based compensation | | 29 |
| | 22 |
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Excess tax benefit related to stock-based compensation | | (11 | ) | | (15 | ) |
Deferred income taxes | | 5 |
| | 11 |
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Proceeds from insurance settlement related to investing activities | | (21 | ) | | — |
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Goodwill impairment | | 59 |
| | — |
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Loss on early extinguishment of debt | | 4 |
| | — |
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Change in | | | | |
Accounts receivable | | (245 | ) | | 34 |
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Inventoried costs | | 31 |
| | 41 |
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Prepaid expenses and other assets | | (39 | ) | | 4 |
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Accounts payable and accruals | | 108 |
| | (186 | ) |
Retiree benefits | | (1 | ) | | (48 | ) |
Other non-cash transactions, net | | 3 |
| | 1 |
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Net cash provided by (used in) operating activities | | 417 |
| | 314 |
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Investing Activities | | | | |
Additions to property, plant, and equipment | | (86 | ) | | (91 | ) |
Acquisitions of businesses, net of cash received | | (6 | ) | | (272 | ) |
Proceeds from disposition of assets | | 32 |
| | — |
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Proceeds from insurance settlement related to investing activities | | 21 |
| | — |
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Net cash provided by (used in) investing activities | | (39 | ) | | (363 | ) |
Financing Activities | | | | |
Repayment of long-term debt | | (395 | ) | | (36 | ) |
Debt issuance costs | | (9 | ) | | — |
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Dividends paid | | (58 | ) | | (30 | ) |
Repurchases of common stock | | (192 | ) | | (112 | ) |
Employee taxes on certain share-based payment arrangements | | (54 | ) | | (64 | ) |
Proceeds from stock option exercises | | — |
| | 2 |
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Excess tax benefit related to stock-based compensation | | 11 |
| | 15 |
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Net cash provided by (used in) financing activities | | (697 | ) | | (225 | ) |
Change in cash and cash equivalents | | (319 | ) | | (274 | ) |
Cash and cash equivalents, beginning of period | | 990 |
| | 1,043 |
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Cash and cash equivalents, end of period | | $ | 671 |
| | $ | 769 |
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Supplemental Cash Flow Disclosure | | | | |
Cash paid for income taxes | | $ | 210 |
| | $ | 132 |
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Cash paid for interest | | $ | 68 |
| | $ | 96 |
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Non-Cash Investing and Financing Activities | | | | |
Capital expenditures accrued in accounts payable | | $ | 3 |
| | $ | 4 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
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Nine Months Ended September 30, 2015 and 2014 ($ in millions) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Deficit) | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
Balance as of December 31, 2013 | | $ | 1 |
| | $ | 1,925 |
| | $ | 236 |
| | $ | (120 | ) | | $ | (521 | ) | | $ | 1,521 |
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Net earnings (loss) | | — |
| | — |
| | 286 |
| | — |
| | — |
| | 286 |
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Dividends declared ($0.60 per share) | | — |
| | — |
| | (30 | ) | | — |
| | — |
| | (30 | ) |
Additional paid-in capital | | — |
| | (18 | ) | | — |
| | — |
| | — |
| | (18 | ) |
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | 15 |
| | 15 |
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Treasury stock activity | | — |
| | — |
| | — |
| | (112 | ) | | — |
| | (112 | ) |
Balance as of September 30, 2014 | | $ | 1 |
| | $ | 1,907 |
| | $ | 492 |
| | $ | (232 | ) | | $ | (506 | ) | | $ | 1,662 |
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| | | | | | | | | | | | |
Balance as of December 31, 2014 | | $ | 1 |
| | $ | 1,959 |
| | $ | 525 |
| | $ | (258 | ) | | $ | (862 | ) | | $ | 1,365 |
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Net earnings (loss) | | — |
| | — |
| | 354 |
| | — |
| | — |
| | 354 |
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Dividends declared ($1.20 per share) | | — |
| | — |
| | (58 | ) | | — |
| | — |
| | (58 | ) |
Additional paid-in capital | | — |
| | (11 | ) | | — |
| | — |
| | — |
| | (11 | ) |
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | 36 |
| | 36 |
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Treasury stock activity | | — |
| | — |
| | — |
| | (196 | ) | | — |
| | (196 | ) |
Balance as of September 30, 2015 | | $ | 1 |
| | $ | 1,948 |
| | $ | 821 |
| | $ | (454 | ) | | $ | (826 | ) | | $ | 1,490 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS
For more than a century, Huntington Ingalls Industries, Inc. ("HII" or the "Company") has been designing, building, overhauling, and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard. The Company conducts business primarily with the U.S. Government, principally the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member or partner, HII participates in many high-priority U.S. defense technology programs. HII is organized into three reportable segments: Ingalls, Newport News, and Other. Through its Ingalls segment, HII is a builder of amphibious assault and expeditionary ships for the U.S. Navy, the sole builder of National Security Cutters for the U.S. Coast Guard, and one of only two companies that builds the Navy's current fleet of DDG-51 Arleigh Burke-class destroyers. Through its Newport News segment, HII is the nation's sole designer, builder, and refueler of nuclear-powered aircraft carriers, and one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy. The Other segment was established in the second quarter of 2014 to account for certain of the Company's non-shipbuilding commercial activities.
2. BASIS OF PRESENTATION
Principles of Consolidation - The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). All intercompany transactions and balances are eliminated in consolidation. For classification of current assets and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year.
These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management's long-standing practice to establish interim closing dates using a "fiscal" calendar, which requires the businesses to close their books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. The effects of this practice only exist for interim periods within a reporting year.
Accounting Estimates - The preparation of the Company's unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ materially from those estimates.
The Bipartisan Budget Act of 2013 established budget top lines and provided sequestration relief for 2014 and 2015. Sequestration remains in effect for 2016 through 2021 and could result in significant decreases in DoD spending that could negatively impact the Company's revenues and its estimated recovery of goodwill and other long-lived assets.
Revenue Recognition - The majority of the Company's business is derived from long-term contracts for the construction of naval vessels, production of goods, and provision of services to the federal government, principally the U.S. Navy. In accounting for these contracts, the Company extensively utilizes the cost-to-cost measure of the percentage-of-completion method of accounting, principally based upon total costs incurred. Under this method, sales, including estimated earned fees or profits, are recorded as costs are incurred, generally based on the percentage that total costs incurred bear to total estimated costs at completion. For certain contracts that provide for deliveries of a substantial number of similar units, sales are accounted for using units of delivery as the basis to measure progress toward completion. Certain contracts contain provisions for price redetermination or for cost and/or performance incentives. Such redetermined amounts or incentives are included in sales when the amounts can
reasonably be determined and estimated. Amounts representing contract change orders, claims, requests for equitable adjustment, or limitations in funding are included in sales only when they can be reliably estimated and realization is probable. The Company is accounting for one of its contracts under the percentage-of-completion method based on a zero profit margin and will continue such accounting until results can be estimated more precisely. Revenues related to this contract represent less than 1% of the Company's total revenues for the three and nine months ended September 30, 2015. The Company estimates profit as the difference between total estimated revenues and total estimated cost of a contract and recognizes that profit over the life of the contract based on progress toward completion. If the Company estimates a contract will result in a loss, the full amount of the estimated loss is recognized against income in the period in which the loss is identified. The Company classifies contract revenues as product sales or service revenues depending upon the predominant attributes of the relevant underlying contracts.
The Company recognizes changes in estimates of contract sales, costs, and profits using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. Accordingly, the effect of the changes on future periods of contract performance is recognized as if the revised estimate had been the original estimate. For the three months ended September 30, 2015 and 2014, net cumulative catch-up adjustments increased operating income by $62 million and $46 million, respectively, and increased diluted earnings per share by $0.84 and $0.61, respectively. For the nine months ended September 30, 2015 and 2014, net cumulative catch-up adjustments increased operating income by $188 million and $154 million, respectively, and increased diluted earnings per share by $2.51 and $2.03, respectively. No individual adjustment was material to the Company's consolidated statements of operations and comprehensive income in any of these periods.
The Company also enters into other types of contracts, including certain services or commercial arrangements. For such contracts not associated with the design, development, manufacture, or modification of complex equipment, revenues are recognized upon delivery or as services are rendered once persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. Costs related to these contracts are expensed as incurred.
Fair Value of Financial Instruments - Except for long-term debt and available-for-sale securities held in trust, the carrying amounts of the Company's financial instruments recorded at historical cost approximate fair value due to the short-term nature of the instruments and low credit risk associated with the respective counterparties.
The Company maintains multiple rabbi trusts established to fund certain non-qualified pension plans. These trusts consist of available-for-sale investments primarily in marketable securities. The assets are held at fair value, a significant majority of investments held in the trusts are valued within Level 1 of the fair value hierarchy, and no material amounts are valued within Level 3 of the fair value hierarchy. The rabbi trusts were valued at $70 million and $45 million as of September 30, 2015, and December 31, 2014, respectively, and are presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position.
3. ACCOUNTING STANDARDS UPDATES
On July 22, 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330)." The update requires entities to measure inventory "at the lower of cost and net realizable value," simplifying previous guidance under which inventory must be measured at the lower of cost or market. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within those periods. The Company is currently evaluating the impact implementation of ASU 2015-11 will have on its financial statements and disclosures, processes, internal controls, and information technology systems.
On April 7, 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." The update requires the presentation of capitalized debt issuance costs as a direct reduction of the related debt liability, consistent with the current required presentation of debt discounts. The standard is effective for public entities for annual reporting periods beginning after December 15, 2015, and interim periods within those periods. On August 16, 2015, the FASB issued ASU 2015-15, which addresses the lack of guidance regarding line-of-credit arrangements in ASU 2015-03. The update clarifies the SEC staff's position, indicating that for line-of-credit arrangements, it would "not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of
the line-of-credit arrangement." The Company does not expect the adoption of ASU 2015-03 or ASU 2015-15 to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
On May 28, 2014, the FASB issued the final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the standard is that "an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The standard provides a five-step analysis of transactions to determine when and how revenue should be recognized. The five steps are: Identify the contract with the customer; Identify the performance obligations in the contract; Determine the transaction price; Allocate the transaction price to the performance obligations; and Recognize revenue when or as each performance obligation is satisfied. The standard also includes disclosure requirements to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts, as well as quantitative and qualitative information about significant judgments and changes in the judgments that management made to determine revenue that is recorded. The guidance permits the use of either a retrospective or cumulative effect transition method. On August 12, 2015, the FASB issued ASU 2015-14, which defers the effective date of the new revenue recognition standard by one year. Based on ASU 2015-14, public entities will apply the new revenue standard to annual reporting periods beginning after December 15, 2017, but early adoption for annual reporting periods beginning after December 31, 2016, will be permitted. The Company is currently evaluating the impact that will result from the implementation of ASU 2014-09 on its financial statements and disclosures, contracting and accounting processes, internal controls, and information technology systems.
4. AVONDALE
In 2010, plans were announced to consolidate the Company's Ingalls shipbuilding operations by winding down shipbuilding at the Avondale, Louisiana facility in 2013 after completion of LPD-class ships that were under construction at this facility. In October 2014, the Company ceased shipbuilding construction operations at the Avondale facility. The consolidation is intended to reduce costs, increase efficiency, and address shipbuilding overcapacity.
In connection with and as a result of the decision to wind down shipbuilding at the Avondale facility, the Company began incurring and paying related costs, including, but not limited to, severance expense, relocation expense, and asset write-downs related to the Avondale facilities. The Company believes such costs should be recoverable under existing flexibly-priced contracts or future negotiated contracts in accordance with Federal Acquisition Regulation ("FAR") provisions for the treatment of restructuring and shutdown related costs. The Company is currently in discussions with the U.S. Navy regarding its cost submission to support the recoverability of these costs under the FAR and applicable contracts.
The Defense Contract Audit Agency ("DCAA"), a DoD agency, prepared an initial audit report on the Company's July 2010 cost proposal for restructuring and shutdown related costs of $310 million, which stated that the proposal was not adequately supported for the DCAA to reach a conclusion and questioned approximately $25 million, or 8%, of the costs submitted by the Company. In July 2014, the Company received a letter from the Supervisor of Shipbuilding requesting that the Company revise its restructuring proposal to address certain documentation issues identified by the DCAA in order for the Government to make an adequate evaluation of the restructuring proposal. In August 2014, the Company received a letter from the Supervisor of Shipbuilding proposing a joint meeting regarding the treatment of specific costs included in the restructuring proposal and acknowledging that the allowability and allocability of costs will be determined by the Government in an Advanced Agreement in accordance with FAR. The Company submitted a revised proposal in March 2015 to address the concerns of the DCAA and to reflect a revised estimated total cost of $287 million. In July 2015, the Company received a letter from the Supervisor of Shipbuilding requesting that the Company either provide cost estimates to address the Company’s positions related to restructure or file a dispute. The Company responded in July 2015 by addressing the matters raised by the Supervisor of Shipbuilding and recommending the parties continue efforts to seek a mutual resolution. In August 2015, the Company received a letter from the Supervisor of Shipbuilding's Contracting Officer ("Contracting Officer"), with a preliminary determination that the Company’s method of allocating certain retention and incentive costs as indirect costs did not comply with cost accounting allocation regulations. The Company responded in September 2015 with its bases supporting its cost allocation positions and seeking a determination that supports the Company’s method of cost allocation.
Although the Company cannot predict what the Contracting Officer will determine, the Company anticipates a resolution that is substantially in accordance with management's cost recovery expectations. Accordingly, HII has treated these costs as allowable costs in determining the earnings performance on its contracts in process. The Contracting Officer may, however, disagree with the Company’s cost allocation method, and any subsequent inability to recover costs substantially in accordance with management’s cost recovery expectations could result in a material effect on the Company's consolidated financial position, results of operations, or cash flows.
In 2014, the Company also evaluated the effect that the wind down of the Avondale facilities might have on the benefit plans in which HII employees participate. HII determined that the impact of a curtailment and other resulting adjustments in these plans was not material to its consolidated financial position, results of operations, or cash flows.
As of September 30, 2015, and December 31, 2014, $180 million and $212 million, respectively, of restructuring and shutdown related costs were capitalized in inventoried costs. As of September 30, 2015, and December 31, 2014, $72 million and $48 million, respectively, of accounts receivable was related to restructuring and shutdown related costs. For the three months ended September 30, 2015 and 2014, the Company expensed $13 million and $15 million, respectively, of these costs as part of general and administrative expenses. For the nine months ended September 30, 2015 and 2014, the Company expensed $41 million and $43 million, respectively, of these costs as part of general and administrative expenses.
As of September 30, 2015, and December 31, 2014, there were no accrued liabilities for restructuring and shutdown related costs associated with winding down the Avondale facility, and no payments or adjustments were made for the three and nine months ended September 30, 2015. The following table summarizes the changes in the Company's liability for restructuring and shutdown related costs associated with winding down the Avondale facility for the nine months ended September 30, 2014.
|
| | | | |
($ in millions) | | |
Balance as of December 31, 2013 | | $ | 14 |
|
Payments | | (13 | ) |
Adjustments | | 3 |
|
Balance as of September 30, 2014 | | $ | 4 |
|
5. GULFPORT
In September 2013, the Company announced the closure of its Gulfport Composite Center of Excellence in Gulfport, Mississippi, part of the Ingalls reportable segment, which it completed in August 2014. In connection with this closure, the Company incurred total costs of $54 million, consisting of $52 million in accelerated depreciation of fixed assets and $2 million in personnel, facility shutdown, and other related costs. In July 2014, the Company received a letter from the Supervisor of Shipbuilding taking exception to the Company's treatment of the Gulfport closure costs. On April 10, 2015, the Company submitted recommended accounting alternatives, which the Government is currently evaluating. The inability to recover Gulfport closure costs could result in a material effect on the Company's consolidated financial position, results of operations, or cash flows. As of September 30, 2015, and December 31, 2014, $35 million and $37 million, respectively, of accounts receivable was related to Gulfport closure costs. In March 2015, the Company sold the Gulfport Composite Center of Excellence to the Mississippi State Port Authority for $32 million, resulting in a gain on disposition of $9 million, recorded as a reduction to contract costs in accordance with the terms of the Company’s contracts with the U.S. Government.
6. ACQUISITIONS
On January 30, 2015, the Company acquired, for approximately $6 million in cash, the assets of the Engineering Solutions Division ("ESD") of The Columbia Group. ESD, a leading designer and builder of unmanned underwater vehicles for domestic and international customers, is operating as the Undersea Solutions Group ("USG"). As the U.S. Navy increases employment of unmanned vehicles in both the surface and undersea domains, this acquisition enhances the Company's ability to compete in these markets. In connection with this acquisition, the Company recorded $5 million of goodwill, all of which was allocated to its Newport News segment, primarily attributed to USG's specialized and skilled employees. See Note 11: Goodwill and Other Purchased Intangible Assets. The assets, liabilities, and results of operations of USG are not material to the Company’s consolidated financial
position, results of operations, or cash flows. The Company has not completed the purchase price allocation due to the recent acquisition date and potential adjustments upon finalization of the fair value of purchased intangible assets.
On May 30, 2014, the Company acquired, for approximately $225 million in cash, net of $5 million of cash acquired, UniversalPegasus International Holdings, Inc. ("UPI"), a provider of project management, engineering and construction management services to the oil and gas industry. The acquisition was consistent with the Company's strategy to utilize its engineering and energy related expertise to expand its position in energy infrastructure markets. In connection with this acquisition, the Company recorded $150 million of goodwill, all of which was allocated to its Other segment, primarily related to the value of UPI’s workforce, and $41 million of intangible assets related to contractual relationships and trade names. See Note 11: Goodwill and Other Purchased Intangible Assets. Adjustments to the fair value of assets acquired and liabilities assumed since the acquisition date were not material and were primarily driven by the finalization of the net working capital adjustment and refinement of fair value calculations for certain assets and liabilities. The assets, liabilities, and results of operations of UPI are not material to the Company’s consolidated financial position, results of operations, or cash flows.
On January 2, 2014, the Company acquired, for approximately $47 million in cash, net of $6 million of cash acquired, The S.M. Stoller Corporation, renamed as Stoller Newport News Nuclear, Inc. ("SN3"), a provider of environmental, nuclear, and technical consulting and engineering services to the Department of Energy, Department of Defense, and private sector. The acquisition was consistent with the Company's strategy to utilize its nuclear and energy related expertise developed through its shipbuilding activities to expand its position in the energy marketplace. In connection with this acquisition, the Company recorded $42 million of goodwill, all of which was allocated to its Newport News segment, primarily attributed to SN3's specialized and skilled employees, and $6 million of intangible assets, primarily related to existing contract backlog and trade names. See Note 11: Goodwill and Other Purchased Intangible Assets. The assets, liabilities, and results of operations of SN3 are not material to the Company’s consolidated financial position, results of operations, or cash flows.
The Company funded each of these acquisitions using cash on hand. The acquisition costs incurred in connection with these acquisitions were not material. The operating results of these businesses have been included in the Company’s consolidated results as of the respective closing dates of the acquisitions. In allocating the purchase price of these businesses, the Company considered the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill. The total amount of goodwill resulting from these acquisitions expected to be deductible for tax purposes was $96 million. These acquisitions are not material either individually or in the aggregate, and pro forma revenues and results of operations have therefore not been provided.
7. STOCKHOLDERS' EQUITY
Treasury Stock - In 2014, the Company's board of directors authorized an increase in the Company's stock repurchase program from $300 million to $600 million and an extension of the term of the program to October 31, 2019. On October 29, 2015, the Company's board of directors authorized an increase in the Company's stock repurchase program from $600 million to $1,200 million. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the nine months ended September 30, 2015, the Company repurchased 1,654,854 shares at a cost of $196 million, of which approximately $4 million was not yet settled for cash as of September 30, 2015. For the nine months ended September 30, 2014, the Company repurchased 1,136,170 shares at a cost of $112 million. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.
Dividends - The Company declared cash dividends per share of $0.40 and $0.20 for the three months ended September 30, 2015 and 2014, respectively. The Company declared cash dividends per share of $1.20 and $0.60 for the nine months ended September 30, 2015 and 2014, respectively. The Company paid cash dividends totaling $58 million and $30 million for the nine months ended September 30, 2015 and 2014, respectively.
Accumulated Other Comprehensive Income - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings (loss). The accumulated other comprehensive loss as of September 30, 2015 and December 31, 2014, was comprised of unamortized benefit plan costs of $824 million and $864 million, respectively, and other comprehensive income (loss) items of $(2) million and $2 million, respectively. The changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2015 and 2014, were as follows:
|
| | | | | | | | | | | | |
($ in millions) | | Benefit Plans | | Other | | Total |
Balance as of June 30, 2014 | | $ | (513 | ) | | $ | 4 |
| | $ | (509 | ) |
Other comprehensive income (loss) before reclassifications | | — |
| | (2 | ) | | (2 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of prior service cost (credit)1 | | (2 | ) | | — |
| | (2 | ) |
Amortization of net actuarial loss (gain)1 | | 10 |
| | — |
| | 10 |
|
Tax benefit (expense) for items of other comprehensive income | | (3 | ) | | — |
| | (3 | ) |
Net current period other comprehensive income (loss) | | 5 |
| | (2 | ) | | 3 |
|
Balance as of September 30, 2014 | | (508 | ) | | 2 |
| | (506 | ) |
| | | | | | |
Balance as of June 30, 2015 | | (838 | ) | | 2 |
| | (836 | ) |
Other comprehensive income (loss) before reclassifications | | — |
| | (7 | ) | | (7 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of prior service cost (credit)1 | | (1 | ) | | — |
| | (1 | ) |
Amortization of net actuarial loss (gain)1 | | 22 |
| | — |
| | 22 |
|
Tax benefit (expense) for items of other comprehensive income | | (7 | ) | | 3 |
| | (4 | ) |
Net current period other comprehensive income (loss) | | 14 |
| | (4 | ) | | 10 |
|
Balance as of September 30, 2015 | | $ | (824 | ) | | $ | (2 | ) | | $ | (826 | ) |
|
| | | | | | | | | | | | |
($ in millions) | | Benefit Plans | | Other | | Total |
Balance as of December 31, 2013 | | $ | (523 | ) | | $ | 2 |
| | $ | (521 | ) |
Other comprehensive income (loss) before reclassifications | | — |
| | — |
| | — |
|
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of prior service cost (credit)1 | | (6 | ) | | — |
| | (6 | ) |
Amortization of net actuarial loss (gain)1 | | 30 |
| | — |
| | 30 |
|
Tax benefit (expense) for items of other comprehensive income | | (9 | ) | | — |
| | (9 | ) |
Net current period other comprehensive income (loss) | | 15 |
| | — |
| | 15 |
|
Balance as of September 30, 2014 | | $ | (508 | ) | | $ | 2 |
| | $ | (506 | ) |
| | | | | | |
Balance as of December 31, 2014 | | $ | (864 | ) | | $ | 2 |
| | $ | (862 | ) |
Other comprehensive income (loss) before reclassifications | | — |
| | (7 | ) | | (7 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of prior service cost (credit)1 | | (1 | ) | | — |
| | (1 | ) |
Amortization of net actuarial loss (gain)1 | | 66 |
| | — |
| | 66 |
|
Tax benefit (expense) for items of other comprehensive income | | (25 | ) | | 3 |
| | (22 | ) |
Net current period other comprehensive income (loss) | | 40 |
| | (4 | ) | | 36 |
|
Balance as of September 30, 2015 | | $ | (824 | ) | | $ | (2 | ) | | $ | (826 | ) |
1 These accumulated comprehensive income (loss) components are included in the computation of net periodic benefit cost. See Note 17: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2015 and 2014, was $7 million and $3 million, respectively. The tax benefit associated with amounts
reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2015 and 2014, was $25 million and $8 million, respectively.
8. EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
(in millions, except per share amounts) | | 2015 | | 2014 | | 2015 | | 2014 |
Net earnings (loss) | | $ | 111 |
| | $ | 96 |
| | $ | 354 |
| | $ | 286 |
|
| | | | | | | | |
Weighted-average common shares outstanding | | 48.0 |
| | 48.7 |
| | 48.3 |
| | 48.9 |
|
Net dilutive effect of stock options and awards | | 0.4 |
| | 0.3 |
| | 0.3 |
| | 0.4 |
|
Dilutive weighted-average common shares outstanding | | 48.4 |
| | 49.0 |
| | 48.6 |
| | 49.3 |
|
| | | | | | | | |
Earnings (loss) per share - basic | | $ | 2.31 |
| | $ | 1.97 |
| | $ | 7.33 |
| | $ | 5.85 |
|
Earnings (loss) per share - diluted | | $ | 2.29 |
| | $ | 1.96 |
| | $ | 7.28 |
| | $ | 5.80 |
|
The Company's calculation of diluted earnings per common share includes the dilutive effects of the assumed exercise of stock options and vesting of restricted stock based on the treasury stock method. Under this method, the Company has excluded from the diluted share amounts presented above the effects of 0.3 million stock options and 0.6 million Restricted Performance Stock Rights ("RPSRs") for the three months ended September 30, 2015, and 0.3 million stock options and 0.7 million RPSRs from the diluted share amounts presented above for the nine months ended September 30, 2015. The amounts presented above for the three months ended September 30, 2014, exclude the impact of 0.4 million stock options and 1.1 million RPSRs under the treasury stock method. The amounts presented above for the nine months ended September 30, 2014, exclude the impact of 0.4 million stock options and 1.2 million RPSRs under the treasury stock method.
9. SEGMENT INFORMATION
The Company is organized into three reportable segments: Ingalls, Newport News, and Other, consistent with how management makes operating decisions and assesses performance. The Other segment was established in the second quarter of 2014 to account for certain of the Company's non-shipbuilding commercial activities.
The following table presents segment results for the three and nine months ended September 30, 2015 and 2014:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
($ in millions) | | 2015 | | 2014 | | 2015 | | 2014 |
Sales and Service Revenues | | | | | | | | |
Ingalls | | $ | 593 |
| | $ | 559 |
| | $ | 1,608 |
| | $ | 1,678 |
|
Newport News | | 1,177 |
| | 1,097 |
| | 3,404 |
| | 3,273 |
|
Other | | 30 |
| | 61 |
| | 105 |
| | 81 |
|
Intersegment eliminations | | — |
| | — |
| | (2 | ) | | (2 | ) |
Total sales and service revenues | | $ | 1,800 |
| | $ | 1,717 |
| | $ | 5,115 |
| | $ | 5,030 |
|
Operating Income (Loss) | | | | | | | | |
Ingalls | | $ | 77 |
| | $ | 55 |
| | $ | 320 |
| | $ | 157 |
|
Newport News | | 100 |
| | 101 |
| | 302 |
| | 299 |
|
Other | | (5 | ) | | (5 | ) | | (79 | ) | | (5 | ) |
Total segment operating income (loss) | | 172 |
| | 151 |
| | 543 |
| | 451 |
|
Non-segment factors affecting operating income (loss) | | | | | | | | |
FAS/CAS Adjustment | | 27 |
| | 21 |
| | 82 |
| | 64 |
|
Deferred state income taxes | | 1 |
| | (1 | ) | | — |
| | (4 | ) |
Total operating income (loss) | | $ | 200 |
| | $ | 171 |
| | $ | 625 |
| | $ | 511 |
|
Goodwill Impairment Charge - The operating loss at the Other segment for the nine months ended September 30, 2015, reflects a goodwill impairment charge of $59 million.
FAS/CAS Adjustment - The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS").
The following table presents the Company's assets by segment.
|
| | | | | | | | |
($ in millions) | | September 30 2015 | | December 31 2014 |
Assets | | | | |
Ingalls | | $ | 1,422 |
| | $ | 1,452 |
|
Newport News | | 3,346 |
| | 3,155 |
|
Other | | 131 |
| | 210 |
|
Corporate | | 1,143 |
| | 1,452 |
|
Total assets | | $ | 6,042 |
| | $ | 6,269 |
|
10. INVENTORIED COSTS, NET
Inventoried costs were composed of the following:
|
| | | | | | | | |
($ in millions) | | September 30 2015 | | December 31 2014 |
Production costs of contracts in process | | $ | 217 |
| | $ | 248 |
|
Raw material inventory | | 91 |
| | 91 |
|
Total inventoried costs, net | | $ | 308 |
| | $ | 339 |
|
11. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill
HII performs impairment tests for goodwill as of November 30 of each year and between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company's reporting units below their carrying value.
The Other segment, established in the second quarter of 2014 following the acquisition of UPI, is sensitive to
developments in the oil and gas industry. In response to the continued deterioration of the market fundamentals in the oil and gas industry, including the further decline in projected oil and gas prices, significant cutbacks in customers' capital spending plans, and additional project delays by customers, management determined that an impairment test needed to be performed as of May 31, 2015. The Company’s testing approach utilizes a combination of discounted cash flow analysis and comparative market multiples to determine the fair values of its businesses for comparison to their corresponding book values. After conducting this test, the Company recorded a $59 million goodwill impairment charge at its Other segment in the second quarter of 2015. The Company determined that no events occurred and no circumstances changed that would more likely than not reduce the fair value of the Company's reporting units below their carrying value as of September 30, 2015.
Accumulated goodwill impairment losses as of September 30, 2015, and December 31, 2014, were $2,861 million and $2,802 million, respectively. The accumulated goodwill impairment losses for Ingalls as of September 30, 2015, and December 31, 2014, were $1,568 million. The accumulated goodwill impairment losses for Newport News as of September 30, 2015, and December 31, 2014, were $1,187 million. The accumulated goodwill impairment losses for the Other segment as of September 30, 2015, and December 31, 2014, were $106 million and $47 million, respectively.
For the nine months ended September 30, 2015, the Company recorded $5 million of goodwill related to its acquisition of USG. The Company recorded $150 million and $42 million of goodwill related to its acquisitions of UPI and SN3, respectively, in 2014.
For the nine months ended September 30, 2015, the carrying amounts of goodwill changed as follows:
|
| | | | | | | | | | | | | | | | |
($ in millions) | | Ingalls | | Newport News | | Other | | Total |
Balance as of December 31, 2014 | | $ | 175 |
| | $ | 748 |
| | $ | 103 |
| | $ | 1,026 |
|
Goodwill impairment | | — |
| | — |
| | (59 | ) | | (59 | ) |
Acquisitions | | — |
| | 5 |
| | — |
| | 5 |
|
Adjustments | | — |
| | — |
| | 1 |
| | 1 |
|
Balance as of September 30, 2015 | | $ | 175 |
| | $ | 753 |
| | $ | 45 |
| | $ | 973 |
|
Purchased Intangible Assets
In connection with the UPI purchase in 2014, the Company recorded $41 million of intangible assets pertaining to existing contracts, trademarks, and trade names, which are being amortized using the pattern of benefits method over a weighted-average life of 11 years. In connection with the SN3 purchase in 2014, the Company recorded $6 million of intangible assets pertaining to existing contract backlog, trademarks, and trade names, which are being amortized using the pattern of benefits method over a weighted-average life of five years.
The following table summarizes the Company's aggregate purchased intangible assets, which are primarily program related intangible assets.
|
| | | | | | | | |
($ in millions) | | September 30 2015 | | December 31 2014 |
Gross carrying amount | | $ | 986 |
| | $ | 986 |
|
Accumulated amortization | | (458 | ) | | (439 | ) |
Net carrying amount | | $ | 528 |
| | $ | 547 |
|
The Company's purchased intangible assets are being amortized on a straight-line basis or a method based on the pattern of benefits. Net intangible assets consist principally of amounts pertaining to nuclear-powered aircraft carrier and submarine program intangibles, with an aggregate weighted-average useful life of 40 years based on the long life cycle of the related programs. Aggregate amortization expense was $6 million and $8 million for the three months ended September 30, 2015 and 2014, respectively. Aggregate amortization expense was $19 million and $20 million for the nine months ended September 30, 2015 and 2014, respectively.
The Company expects amortization expense for purchased intangible assets of approximately $26 million in 2015, $25 million in each of the years 2016 and 2017, and $24 million in each of the years 2018 and 2019.
12. INCOME TAXES
The Company's earnings are principally domestic and its effective tax rates on earnings from operations for the three months ended September 30, 2015 and 2014, were 36.6% and 33.3%, respectively. For the nine months ended September 30, 2015 and 2014, the Company's effective tax rates were 35.9% and 33.2%, respectively. The higher effective tax rate for the three months ended September 30, 2015, was primarily attributable to changes in true-ups of estimated taxes to actual filed tax returns. The higher effective tax rate for the nine months ended September 30, 2015, was primarily attributable to the amount of the goodwill impairment that is not amortizable for income tax purposes and changes in true-ups of estimated taxes to actual filed tax returns.
For the three and nine months ended September 30, 2015, the Company's effective tax rate differed from the federal statutory rate primarily as a result of the amount of the goodwill impairment that is not amortizable for tax purposes, partially offset by the domestic manufacturing deduction. For the three and nine months ended September 30, 2014, the Company's effective tax rate differed from the federal statutory rate primarily as a result of the domestic manufacturing deduction.
Deferred state income taxes reflect the change in deferred state tax assets and liabilities in the relevant period. These amounts are recorded within operating income, while the current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
Net deferred tax assets (liabilities) as presented in the unaudited condensed consolidated statements of financial position were as follows:
|
| | | | | | | | |
($ in millions) | | September 30 2015 | | December 31 2014 |
Net current deferred tax assets | | $ | 126 |
| | $ | 129 |
|
Net non-current deferred tax assets | | 188 |
| | 212 |
|
Total net deferred tax assets | | $ | 314 |
|
| $ | 341 |
|
13. DEBT
Long-term debt consisted of the following:
|
| | | | | | | | |
($ in millions) | | September 30 2015 | | December 31 2014 |
Term loan due March 30, 2016 | | $ | — |
| | $ | 395 |
|
Senior notes due March 15, 2021, 7.125% | | 600 |
| | 600 |
|
Senior notes due December 15, 2021, 5.000% | | 600 |
| | 600 |
|
Mississippi economic development revenue bonds due May 1, 2024, 7.81% | | 84 |
| | 84 |
|
Gulf opportunity zone industrial development revenue bonds due December 1, 2028, 4.55% | | 21 |
| | 21 |
|
Total long-term debt | | 1,305 |
| | 1,700 |
|
Less current portion | | — |
| | 108 |
|
Long-term debt, net of current portion | | $ | 1,305 |
| | $ | 1,592 |
|
Credit Facility - In March 2011, the Company entered into a Credit Facility with third-party lenders. On July 13, 2015, the Company entered into a Second Amended and Restated Credit Agreement (the “Amended Credit
Facility”) with third-party lenders. The Amended Credit Facility includes a revolving credit facility of $1,250 million, which may be drawn upon during a period of five years from July 13, 2015. The revolving credit facility includes a letter of credit subfacility of $500 million. The revolving credit facility has a variable interest rate on outstanding borrowings based on the London Interbank Offered Rate ("LIBOR") plus a spread based upon the Company's leverage ratio, which may vary between 1.25% and 2.0%. The revolving credit facility also has a commitment fee rate on the unutilized balance based on the Company’s leverage ratio. The commitment fee rate as of September 30, 2015, was 0.25% and may vary between 0.25% and 0.35%. As of September 30, 2015, approximately $29 million in letters of credit were issued but undrawn, and the remaining $1,221 million of the revolving credit facility was unutilized. The Amended Credit Facility contains customary affirmative and negative covenants, as well as a financial covenant based on a maximum total leverage ratio. Each of the Company's existing and future material wholly owned domestic subsidiaries, except those that are specifically designated as unrestricted subsidiaries, are and will be guarantors under the Amended Credit Facility. Substantially all tangible and intangible material assets of the Company and domestic subsidiaries are pledged as collateral under the Amended Credit Facility.
On July 13, 2015, the Company used cash on hand to repay all amounts outstanding under the prior credit facility, including $345 million in principal amount of outstanding term loans. For the three and nine months ended September 30, 2015, the Company recognized a loss of $4 million in connection with the early extinguishment of debt, which was classified in interest expense.
Senior Notes - In March 2011, the Company issued $600 million aggregate principal amount of 6.875% senior notes due March 15, 2018, and $600 million aggregate principal amount of 7.125% senior notes due March 15, 2021. In December 2014, the Company issued $600 million aggregate principal amount of 5.000% senior notes due December 15, 2021. The net proceeds from the issuance of these senior notes were used to repurchase the Company's 6.875% senior notes due March 15, 2018.
Mississippi Economic Development Revenue Bonds - As of September 30, 2015, the Company had $84 million outstanding under Industrial Revenue Bonds issued by the Mississippi Business Finance Corporation. These bonds accrue interest at a fixed rate of 7.81% and mature in 2024.
Gulf Opportunity Zone Industrial Development Revenue Bonds - As of September 30, 2015, the Company had $21 million outstanding under Gulf Opportunity Zone Industrial Development Revenue Bonds issued by the Mississippi Business Finance Corporation. These bonds accrue interest at a fixed rate of 4.55% and mature in 2028.
The Company's debt arrangements contain customary affirmative and negative covenants, including a maximum total leverage ratio and a minimum interest coverage ratio. The Company was in compliance with all debt covenants during the nine months ended September 30, 2015.
The estimated fair value of the Company's total long-term debt, including current portions, as of September 30, 2015, and December 31, 2014, was $1,374 million and $1,779 million, respectively. The fair value of the Company's long-term debt was calculated based on either recent trades of the Company's debt instruments in inactive markets or yields available on debt with substantially similar risks, terms and maturities, which fall within Level 2 under the fair value hierarchy.
14. INVESTIGATIONS, CLAIMS, AND LITIGATION
The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB Accounting Standards Codification 450 Contingencies, the Company has accrued for losses associated with investigations, claims and litigation when, and to the extent that, loss amounts related to the investigations, claims and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims and litigation may be higher or lower than the amounts accrued. For matters where a material loss is probable or reasonably possible and the amount of loss cannot be reasonably estimated, but the Company is able to reasonably estimate a range of possible losses, the Company will disclose such estimated range in these notes. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Any estimated range of possible loss does not represent the Company's maximum possible loss exposure. For matters as to which the Company is not able to reasonably estimate a possible loss or range of loss, the Company will indicate the reasons why it is unable to estimate the possible loss
or range of loss. For matters not specifically described in these notes, the Company does not believe, based on information currently available to it, that it is reasonably possible that the liabilities, if any, arising from such investigations, claims and litigation will have a material effect on its consolidated financial position, results of operations, or cash flows. The Company has, in certain cases, provided disclosure regarding certain matters for which the Company believes at this time that the likelihood of material loss is remote.
False Claims Act Complaint - In January 2011, the U.S. Department of Justice ("DoJ") first informed the Company through Northrop Grumman of a False Claims Act complaint (the "Complaint") that was filed under seal in the U.S. District Court for the District of Columbia. The redacted copy of the Complaint the Company received alleges that, through largely unspecified fraudulent means, the Company and Northrop Grumman obtained federal funds that were restricted by law for the consequences of Hurricane Katrina, and used those funds to cover costs under certain shipbuilding contracts that were unrelated to Katrina and for which Northrop Grumman and the Company were not entitled to recovery under the contracts. The Complaint seeks monetary damages of at least $835 million, plus penalties, attorneys' fees and other costs of suit. Damages under the False Claims Act may be trebled upon a finding of liability.
In July 2012, the District Court entered an order permitting the Company to disclose certain information not included in the redacted copy of the Complaint received by the Company, including the date the Complaint was filed, the decision of the DoJ to decline intervention in the case, and the principal parties involved in the case. The Complaint was filed on June 2, 2010, by relators Gerald M. Fisher and Donald C. Holmes. In December 2011, the DoJ filed a Notice of Election to Decline Intervention in the case. As of August 29, 2012, Gerald M. Fisher was no longer a relator in or party to this case. In February 2013, the U.S. District Court for the District of Columbia granted the defendants' motion to transfer venue, and the case was transferred to the U.S. District Court for the Southern District of Mississippi. The Company filed a motion to dismiss the case and a motion to disqualify relator Holmes, and all other matters were stayed pending resolution of those motions. On June 3, 2015, the District Court granted the Company’s motion to disqualify Holmes as relator, dismissed the case, and entered final judgment in favor of the Company. Holmes has appealed the District Court's decision to the U.S. Court of Appeals for the Fifth Circuit.
Based upon a review to date of the information available to the Company, the Company believes that it has substantive defenses to the allegations in the Complaint, that the claims as set forth in the Complaint evidence a fundamental lack of understanding of the terms and conditions in the Company's shipbuilding contracts, including the post-Katrina modifications to those contracts, and the manner in which the parties performed in connection with the contracts, and that the claims as set forth in the Complaint lack merit. The Company, therefore, believes that the claims as set forth in the Complaint will not result in a material effect on its consolidated financial position, results of operations, or cash flows. The Company intends to defend the matter vigorously, but the Company cannot predict what new or revised claims might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome.
U.S. Government Investigations and Claims - Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.
In January 2013, the Company disclosed to the DoD, including the U.S. Navy, and the U.S. Department of Homeland Security, including the U.S. Coast Guard, pursuant to the FAR, that it had initiated an internal investigation regarding whether certain employees at Ingalls mischarged time or misstated progress on Navy and Coast Guard contracts. The Company conducted an internal investigation, led by external counsel, and has taken remedial actions, including the termination of employees in instances where the Company believed grounds for termination existed. The Company is providing information regarding its investigation to the relevant government agencies. The Company agreed with the U.S. Navy and U.S. Coast Guard that they would initially withhold $24 million in payments on existing contracts pending receipt of additional information from the Company's internal investigation. The U.S. Navy has reduced its portion of the withhold from $18.2 million to $4.7 million, while expressing its view that the gross amount of potential mischarging incurred by the Navy will likely not exceed $3.1 million. The U.S. Coast Guard informed the Company in June 2014 that it was provisionally reducing its withhold from $5.8 million to $3.6 million. Based on the results of its internal investigation, the Company estimates that the maximum amount of U.S. Navy and Coast Guard mischarging is approximately $4 million. The Company is
continuing discussions with its U.S. Government customers regarding the potential release of an additional portion of the withheld funds, but the Company cannot predict whether or when these customers will agree to any additional release of the withhold amount.
In June 2015, the DoJ informed the Company that it is investigating the matters disclosed by the Company to the DoD in January 2013. In July 2015, the DoJ requested information from the Company, and the Company is cooperating with the DoJ’s requests and has provided certain information to the DoJ. Depending upon the outcome of this matter, which could result in litigation by the DoJ against the Company, the Company could be subject to civil penalties, damages, and/or suspension or debarment from future U.S. Government contracts, which could have a material effect on its consolidated financial position, results of operations, or cash flows. Given the early stage of the Company’s discussions with the DoJ, the Company is currently unable to estimate an amount or range of reasonably possible loss or to express an opinion regarding the ultimate outcome of this matter.
Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. The cases allege various injuries, including those associated with pleural plaque disease, asbestosis, cancer, mesothelioma and other alleged asbestos related conditions. In some cases, several of HII's former executive officers are also named as defendants. In some instances, partial or full insurance coverage is available to the Company for its liability and that of its former executive officers. Although the Company believes the ultimate resolution of these cases will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.
Other Litigation - The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the “Republic”) since 2002 over a contract for the repair, refurbishment and modernization at Ingalls of two foreign-built frigates. The case proceeded towards arbitration, then appeared to settle favorably, but the settlement was overturned in court and the matter returned to litigation. In March 2014, the Company filed an arbitral statement of claim asserting breaches of the contract and $173 million in damages plus substantial interest and litigation expenses. In July 2014, the Republic filed in the arbitration a statement of defense denying all the Company’s allegations and a counterclaim alleging late redelivery of the frigates, unfinished work and breach of warranty and asserting damages of $61 million plus interest. An arbitration hearing was held in January 2015, and the Company cannot predict when the arbitration panel will render a decision. No assurances can be provided regarding the ultimate outcome of this matter.
The Company is party to various claims and legal proceedings that arise in the ordinary course of business. Although the Company believes that the resolution of any of these various claims and legal proceedings will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.
15. COMMITMENTS AND CONTINGENCIES
Contract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims and requests for equitable adjustment for previously unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances, and are included in determining contract profit margins to the extent of expected recovery based on contractual entitlements and the probability of successful negotiation with the customer. As of September 30, 2015, the recognized amounts related to claims and requests for equitable adjustment were not material individually or in aggregate.
Guarantees of Performance Obligations - From time to time in the ordinary course of business, HII may enter into joint ventures, teaming and other business arrangements to support the Company's products and services. The Company generally strives to limit its exposure under these arrangements to its investment in the arrangement, or to the extent of obligations under the applicable contract. In some cases, however, HII may be required to guarantee performance of the arrangement's obligations and, in such cases, generally obtains cross-indemnification from the other members of the arrangement.
In the ordinary course of business, the Company may guarantee obligations of its subsidiaries under certain contracts. Generally, the Company is liable under such an arrangement only if its subsidiary is unable to perform under its contract. Historically, the Company has not incurred any substantial liabilities resulting from these guarantees. As of September 30, 2015, the Company was not aware of any existing event of default that would require it to satisfy any of these guarantees.
Environmental Matters -The estimated cost to complete environmental remediation has been accrued where it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party ("PRP") by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. To assess the potential impact on the Company's consolidated financial statements, management estimates the range of reasonably possible remediation costs that could be incurred by the Company, taking into account currently available facts on each site, as well as the current state of technology and prior experience in remediating contaminated sites. These estimates are reviewed periodically and adjusted to reflect changes in facts and technical and legal circumstances. Management estimates that as of September 30, 2015, the probable future cost for environmental remediation was $1 million, which is accrued in other current liabilities. Factors that could result in changes to the Company's estimates include: modification of planned remedial actions, increases or decreases in the estimated time required to remediate, changes to the determination of legally responsible parties, discovery of more extensive contamination than anticipated, changes in laws and regulations affecting remediation requirements, and improvements in remediation technology. Should other PRPs not pay their allocable share of remediation costs, the Company may incur costs exceeding those already estimated and accrued. In addition, there are certain potential remediation sites where the costs of remediation cannot be reasonably estimated. Although management cannot predict whether new information gained as projects progress will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.
Financial Arrangements - In the ordinary course of business, HII uses standby letters of credit issued by commercial banks and surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of September 30, 2015, the Company had $29 million in standby letters of credit issued but undrawn, as indicated in Note 13: Debt, and $356 million of surety bonds outstanding.
U.S. Government Claims - From time to time, the U.S. Government advises the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, the Company and U.S. Government representatives engage in discussions to enable HII to evaluate the merits of these claims as well as to assess the amounts being claimed. The Company does not believe that the outcome of any such matters will have a material effect on its consolidated financial position, results of operations, or cash flows.
16. IMPACTS FROM HURRICANES
In August 2005, the Company's Ingalls operations were significantly impacted by Hurricane Katrina, and the Company's shipyards in Louisiana and Mississippi sustained significant windstorm damage from the hurricane. As a result of the storm, the Company incurred costs to replace or repair destroyed or damaged assets, suffered losses under its contracts, and incurred substantial costs to clean up and recover its operations. At the time of the storm, the Company had an insurance program that provided coverage for, among other things, property damage, business interruption impact on net profitability, and costs associated with clean-up and recovery. The Company recovered a portion of its Hurricane Katrina claim from certain of its participating program insurers in prior periods. In 2013, the Company resolved litigation against its remaining insurer, Factory Mutual Insurance Company ("FM Global"), arising out of a disagreement concerning the coverage of certain losses related to Hurricane Katrina. Under the settlement agreement with FM Global, in the third quarter of 2013 FM Global made a cash payment of $180 million to the Company and the Company released its claim against FM Global, resulting in a total recovery from the Company's insurers of $677.5 million for its Hurricane Katrina claim. The $180 million was recorded as an insurance recovery gain in operating income in the third quarter of 2013.
In February 2013, the Company submitted a certified claim requesting a final decision on the allowability and allocability of certain post-Katrina depreciation and other Katrina-related expenses and on the apportionment of insurance proceeds. In October 2013, the Company received a Contracting Officer's Final Decision ("COFD")
disallowing certain post-Katrina depreciation costs and other Katrina-related expenses, as well as providing direction on the apportionment of Katrina-related insurance recoveries. Impacted by this decision, the Company’s accounting for hurricane insurance related matters resulted in a reduction in operating income of $116 million. The 2013 financial results reflect disallowances as indicated in the COFD.
For the year ended December 31, 2013, the Company’s accounting for hurricane related matters, including the insurance recovery gain of $180 million and the $116 million reduction in operating income related to its contracts with the U.S. Government, resulted in a net favorable impact to operating income of $64 million.
In October 2014, the Company executed a Memorandum of Understanding ("MOU") with the U.S. Navy and U.S. Coast Guard acknowledging the requirements set forth in the COFD. The MOU did not have a material impact on the Company's accounting for hurricane related matters.
In January 2011, the Company, through a predecessor-in-interest, filed suit in Superior Court in California against Aon Risk Insurance Services West, Inc. ("Aon"), which acted as broker to the predecessor-in-interest in connection with the policy with FM Global, seeking damages for breach of contract, professional negligence and negligent misrepresentation, as well as declaratory relief. Those included damages unrecovered from FM Global plus costs, legal fees and expenses incurred in the lawsuit against FM Global, as well as interest. In January 2014, the Company amended its complaint to allege fraud and seek punitive damages.
On May 29, 2015, the Company and Aon entered into a settlement agreement, pursuant to which Aon made a cash payment of $150 million to the Company and the Company released its claim against Aon. The $150 million settlement was recorded as a gain in operating income in the second quarter of 2015. Based on the previously executed MOU and COFD, the Company has recorded a credit to the U.S. Government, which resulted in a reduction in operating income of $14 million in the second quarter of 2015. Should the U.S. Government disagree with the Company’s allocation of proceeds, the Company may be required to allocate additional amounts to the U.S. Government. The $150 million gain and allowable cost credit resulted in a net favorable impact to operating income for the nine months ended September 30, 2015, of $136 million.
17. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company provides defined benefit pension and postretirement benefit plans and defined contribution pension benefit plans to eligible employees.
The cost of the Company's defined benefit pension plans and other postretirement plans for the three and nine months ended September 30, 2015 and 2014, was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30 | | Nine Months Ended September 30 |
| | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits |
($ in millions) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Components of Net Periodic Benefit Cost | | | | | | | | | | | | | | | | |
Service cost | | $ | 38 |
| | $ | 34 |
| | $ | 3 |
| | $ | 4 |
| | $ | 112 |
| | $ | 102 |
| | $ | 10 |
| | $ | 10 |
|
Interest cost | | 61 |
| | 61 |
| | 7 |
| | 8 |
| | 182 |
| | 184 |
| | 20 |
| | 23 |
|
Expected return on plan assets | | (88 | ) | | (81 | ) | | — |
| | — |
| | (263 | ) | | (242 | ) | | — |
| | — |
|
Amortization of prior service cost (credit) | | 4 |
| | 5 |
| | (5 | ) | | (7 | ) | | 14 |
| | 14 |
| | (15 | ) | | (20 | ) |
Amortization of net actuarial loss (gain) | | 21 |
| | 10 |
| | 1 |
| | — |
| | 64 |
| | 30 |
| | 2 |
| | — |
|
Net periodic benefit cost | | $ | 36 |
| | $ | 29 |
| | $ | 6 |
| | $ | 5 |
| | $ | 109 |
|
| $ | 88 |
|
| $ | 17 |
|
| $ | 13 |
|
The Company made the following contributions to its pension and other postretirement plans for the nine months ended September 30, 2015 and 2014:
|
| | | | | | | | |
| | Nine Months Ended September 30 |
($ in millions) | | 2015 | | 2014 |
Pension plans | | | | |
Qualified minimum | | $ | — |
| | $ | — |
|
Discretionary | | | | |
Qualified | | 99 |
| | 123 |
|
Non-qualified | | 3 |
| | 2 |
|
Other benefit plans | | 25 |
| | 24 |
|
Total contributions | | $ | 127 |
| | $ | 149 |
|
As of September 30, 2015, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2015.
18. STOCK COMPENSATION PLANS
During the nine months ended September 30, 2015 and 2014, the Company issued new stock awards as follows:
Restricted Performance Stock Rights - For the nine months ended September 30, 2015, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $142.02. These rights are subject to cliff vesting on December 31, 2017. For the nine months ended September 30, 2014, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $98.09. These rights are subject to cliff vesting on December 31, 2016. The RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods. Based upon the Company's results measured against such targets, between 0% and 200% of the original stated grants are expected to ultimately vest.
For the nine months ended September 30, 2015 and 2014, 0.8 million and 1.5 million stock awards, respectively, vested, of which approximately 0.3 million and 0.6 million, respectively, were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.
The following table summarizes the status of the Company's outstanding stock awards as of September 30, 2015:
|
| | | | | | | | | |
| | Stock Awards (in thousands) | | Weighted-Average Grant Date Fair Value | | Weighted-Average Remaining Contractual Term (in years) |
Total stock awards | | 889 |
| | $ | 75.76 |
| | 0.8 |
The following table summarizes the status of the Company's stock option awards as of September 30, 2015:
|
| | | | | | | | | | | | | |
| | Shares Under Option (in thousands) | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value ($ in millions) |
Outstanding and exercisable at September 30, 2015 | | 536 |
| | $ | 33.87 |
| | 0.9 | | $ | 39 |
|
Compensation Expense
The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors for the three months ended September 30, 2015 and 2014, of $8 million and $11 million, respectively. The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors for the nine months ended September 30, 2015 and 2014, of $29 million and $22 million, respectively.
The Company recognized tax benefits for stock-based compensation in the unaudited condensed consolidated statements of operations for the three months ended September 30, 2015 and 2014, of $3 million and $4 million, respectively. Tax benefits for stock-based compensation recognized for the nine months ended September 30, 2015 and 2014, were $11 million and $8 million, respectively.
Unrecognized Compensation Expense
As of September 30, 2015, the Company had $1 million of unrecognized compensation expense associated with the Restricted Stock Rights ("RSRs") granted in 2015 and 2014, which will be recognized over a weighted average period of 1.4 years, and $30 million of unrecognized expense associated with the RPSRs granted in 2015, 2014, and 2013, which will be recognized over a weighted average period of 0.9 years.
19. SUBSIDIARY GUARANTORS
Performance of the Company's obligations under the senior notes, including any repurchase obligations resulting from a change of control, is fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of HII's existing and future domestic subsidiaries that guarantees debt under the Credit Facility (the "Subsidiary Guarantors"). See Note 13: Debt. The guarantees rank equally with all other unsecured and unsubordinated indebtedness of the Subsidiary Guarantors. The Subsidiary Guarantors are each directly or indirectly 100% owned by HII.
Set forth below are the unaudited condensed consolidating statements of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014, unaudited condensed consolidating statements of financial position as of September 30, 2015, and December 31, 2014, and the unaudited condensed consolidating statements of cash flows for the nine months ended September 30, 2015 and 2014, for HII, its aggregated subsidiary guarantors and its aggregated non-guarantor subsidiaries.
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2015 |
($ in millions) | | Huntington Ingalls Industries, Inc. | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Sales and service revenues | | | | | | | | | | |
Product sales | | $ | — |
| | $ | 1,461 |
| | $ | — |
| | $ | — |
| | $ | 1,461 |
|
Service revenues | | — |
| | 334 |
| | 9 |
| | (4 | ) | | 339 |
|
Total sales and service revenues | | — |
| | 1,795 |
| | 9 |
| | (4 | ) | | 1,800 |
|
Cost of sales and service revenues | | | | | | | | | | |
Cost of product sales | | — |
| | 1,164 |
| | — |
| | — |
| | 1,164 |
|
Cost of service revenues | | — |
| | 287 |
| | 9 |
| | (4 | ) | | 292 |
|
Income (loss) from operating investments, net | | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
General and administrative expenses | | — |
| | 149 |
| | 1 |
| | — |
| | 150 |
|
Operating income (loss) | | — |
| | 201 |
| | (1 | ) | | — |
| | 200 |
|
Interest expense | | (24 | ) | | (1 | ) | | — |
| | — |
| | (25 | ) |
Equity in earnings (loss) of subsidiaries | | 126 |
| | — |
| | — |
| | (126 | ) | | — |
|
Earnings (loss) before income taxes | | 102 |
| | 200 |
| | (1 | ) | | (126 | ) | | 175 |
|
Federal income taxes | | (9 | ) | | 73 |
| | — |
| | — |
| | 64 |
|
Net earnings (loss) | | $ | 111 |
| | $ | 127 |
| | $ | (1 | ) | | $ | (126 | ) | | $ | 111 |
|
Other comprehensive income (loss), net of tax | | 10 |
| | 10 |
| | — |
| | (10 | ) | | 10 |
|
Comprehensive income (loss) | | $ | 121 |
| | $ | 137 |
| | $ | (1 | ) | | $ | (136 | ) | | $ | 121 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2014 |
($ in millions) | | Huntington Ingalls Industries, Inc. | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Sales and service revenues | | | | | | | | | | |
Product sales | | $ | — |
| | $ | 1,385 |
| | $ | — |
| | $ | — |
| | $ | 1,385 |
|
Service revenues | | — |
| | 311 |
| | 26 |
| | (5 | ) | | 332 |
|
Total sales and service revenues | | — |
| | 1,696 |
| | 26 |
| | (5 | ) | | 1,717 |
|
Cost of sales and service revenues | | | | | | | | | | |
Cost of product sales | | — |
| | 1,086 |
| | — |
| | — |
| | 1,086 |
|
Cost of service revenues | | — |
| | 262 |
| | 21 |
| | (5 | ) | | 278 |
|
Income (loss) from operating investments, net | | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
General and administrative expenses | | — |
| | 187 |
| | 2 |
| | — |
| | 189 |
|
Operating income (loss) | | — |
| | 168 |
| | 3 |
| | — |
| | 171 |
|
Interest expense | | (26 | ) | | (1 | ) | | — |
| | — |
| | (27 | ) |
Equity in earnings (loss) of subsidiaries | | 113 |
| | — |
| | — |
| | (113 | ) | | — |
|
Earnings (loss) before income taxes | | 87 |
| | 167 |
| | 3 |
| | (113 | ) | | 144 |
|
Federal income taxes | | (9 | ) | | 57 |
| | — |
| | — |
| | 48 |
|
Net earnings (loss) | | $ | 96 |
| | $ | 110 |
| | $ | 3 |
| | $ | (113 | ) | | $ | 96 |
|
Other comprehensive income (loss), net of tax | | 3 |
| | 3 |
| | — |
| | (3 | ) | | 3 |
|
Comprehensive income (loss) | | $ | 99 |
| | $ | 113 |
| | $ | 3 |
| | $ | (116 | ) | | $ | 99 |
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2015 |
($ in millions) | | Huntington Ingalls Industries, Inc. | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Sales and service revenues | | | | | | | | | | |
Product sales | | $ | — |
| | $ | 4,137 |
| | $ | — |
| | $ | — |
| | $ | 4,137 |
|
Service revenues | | — |
| | 953 |
| | 38 |
| | (13 | ) | | 978 |
|
Total sales and service revenues | | — |
| | 5,090 |
| | 38 |
| | (13 | ) | | 5,115 |
|
Cost of sales and service revenues | | | | | | | | | | |
Cost of product sales | | — |
| | 3,121 |
| | — |
| | — |
| | 3,121 |
|
Cost of service revenues | | — |
| | 824 |
| | 35 |
| | (13 | ) | | 846 |
|
Income (loss) from operating investments, net | | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
General and administrative expenses | | — |
| | 467 |
| | 6 |
| | — |
| | 473 |
|
Goodwill impairment | | — |
| | 59 |
| | — |
| | — |
| | 59 |
|
Operating income (loss) | | — |
| | 628 |
| | (3 | ) | | — |
| | 625 |
|
Interest expense | | (69 | ) | | (4 | ) | | — |
| | — |
| | (73 | ) |
Equity in earnings (loss) of subsidiaries | | 398 |
| | — |
| | — |
| | (398 | ) | | — |
|
Earnings (loss) before income taxes | | 329 |
| | 624 |
| | (3 | ) | | (398 | ) | | 552 |
|
Federal income taxes | | (25 | ) | | 223 |
| | — |
| | — |
| | 198 |
|
Net earnings (loss) | | $ | 354 |
| | $ | 401 |
| | $ | (3 | ) | | $ | (398 | ) | | $ | 354 |
|
Other comprehensive income (loss), net of tax | | 36 |
| | 37 |
| | (1 | ) | | (36 | ) | | 36 |
|
Comprehensive income (loss) | | $ | 390 |
| | $ | 438 |
| | $ | (4 | ) | | $ | (434 | ) | | $ | 390 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2014 |
($ in millions) | | Huntington Ingalls Industries, Inc. | | Subsidiary Guarantors | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated |
Sales and service revenues | | | | | | | | | | |
Product sales | | $ | — |
| < |