ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol "HII".
The following graph compares the total return on a cumulative basis of $100 invested in our common stock on January 1, 2013,2017, to the Standard & Poor's ("S&P") 500 Index and the S&P Aerospace and Defense Select Index.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In November 2017, our board of directors authorized an increase inRepurchases under our stock repurchase program from $1.2 billion to $2.2 billion and an extension of the term of the program from October 31, 2019, to October 31, 2022. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. All repurchases of HII common stock have been recorded as treasury stock. The following table summarizes information by month relating to purchases made by or on behalf of the Company of shares of the Company's common stock during the quarter ended December 31, 2017.2021.
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions) |
October 1, 2017 through October 31, 2017 | | 26,833 |
| | $ | 234.05 |
| | 26,833 |
| | $ | 1,263.0 |
|
November 1, 2017 through November 30, 2017 | | 28,271 |
| | 235.30 |
| | 28,271 |
| | 1,256.3 |
|
December 1, 2017 through December 31, 2017 | | 118,599 |
| | 236.86 |
| | 118,599 |
| | 1,228.3 |
|
Total | | 173,703 |
| | $ | 236.17 |
| | 173,703 |
| | $ | 1,228.3 |
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)1,2 |
October 1, 2021 to October 31, 2021 | | 22,551 | | | $ | 205.84 | | | 22,551 | | | $ | 1,050.8 | |
November 1, 2021 to November 30, 2021 | | 22,253 | | | 190.40 | | | 22,253 | | | 1,046.5 | |
December 1, 2021 to December 31, 2021 | | 30,200 | | | 183.50 | | | 30,200 | | | 1,041.0 | |
Total | | 75,004 | | | $ | 192.26 | | | 75,004 | | | $ | 1,041.0 | |
1 From the stock repurchase program's inception through December 31, 2021, we purchased 13,395,300 shares at an average price of $161.18 per share for a total of $2.2 billion.
2 In October 2012, we commenced our stock repurchase program. In November 2019, we announced an increase in the stock repurchase program to $3.2 billion and an extension of the term to October 31, 2024.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Note 19:18: Stock Compensation Plans in Item 8 and Equity Compensation Plan Information in Item 12.
Unregistered Sales of Equity Securities and Use of Proceeds
The Huntington Ingalls Industries Savings Plan, Huntington Ingalls Industries Financial Security and Savings Program, and Huntington Ingalls Industries, Inc. Newport News Operations Savings (401(k)) Plan for Union Eligible Employees (collectively, the “Plans”) include shares of our common stock as an investment choice for participants. The trustees of the Plans manage HII stock funds, which purchase shares of our common stock on the open market, and interests in the stock funds are allocated to participant Plan accounts at the election of participants. In 2017, we became aware that participants in the Plans purchased more shares of our common stock than were registered under the Securities Act of 1933, as amended. We did not receive any consideration in connection with such purchases, which were funded with participant and employer contributions to the Plan.
ITEM 6. SELECTED FINANCIAL DATA[RESERVED]
The following table sets forth our selected financial data. The table should be read in conjunction with Item 7 and Item 8 of this Annual Report on Form 10-K.
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| | Year Ended December 31 |
($ in millions, except per share amounts) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Sales and service revenues | | $ | 7,441 |
| | $ | 7,068 |
| | $ | 7,020 |
| | $ | 6,957 |
| | $ | 6,820 |
|
Goodwill impairment | | — |
| | — |
| | 75 |
| | 47 |
| | — |
|
Operating income (loss) | | 865 |
| | 858 |
| | 769 |
| | 655 |
| | 512 |
|
Net earnings (loss) | | 479 |
| | 573 |
| | 404 |
| | 338 |
| | 261 |
|
Total assets | | 6,374 |
| | 6,352 |
| | 6,024 |
| | 6,239 |
| | 6,190 |
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Long-term debt (1) | | 1,279 |
| | 1,278 |
| | 1,273 |
| | 1,562 |
| | 1,665 |
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Total long-term obligations | | 3,225 |
| | 3,356 |
| | 3,260 |
| | 3,562 |
| | 3,277 |
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Net cash provided by (used in) operating activities | | 814 |
| | 822 |
| | 861 |
| | 755 |
| | 260 |
|
Free cash flow (2) | | 453 |
| | 537 |
| | 673 |
| | 590 |
| | 121 |
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Dividends declared per share | | $ | 2.52 |
| | $ | 2.10 |
| | $ | 1.70 |
| | $ | 1.00 |
| | $ | 0.50 |
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Basic earnings (loss) per share | | $ | 10.48 |
| | $ | 12.24 |
| | $ | 8.43 |
| | $ | 6.93 |
| | $ | 5.25 |
|
Diluted earnings (loss) per share | | $ | 10.46 |
| | $ | 12.14 |
| | $ | 8.36 |
| | $ | 6.86 |
| | $ | 5.18 |
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(1) Long-term debt does not include the current portion of long-term debt, which is included in current liabilities.
(2) Free cash flow is a non-GAAP financial measure and represents cash from operating activities less capital expenditures net of related grant proceeds. See Liquidity and Capital Resources in Item 7 for more information on this measure.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our Business
Huntington Ingalls Industries, Inc. is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry. For more than a century, our Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. We also provideOur Technical Solutions segment provides a range of services to the governmental, energy,government and oil and gas markets through our Technical Solutions segment.commercial customers. Headquartered in Newport News, Virginia, HII employs approximately 38,00044,000 people operating both domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the DoD. As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense technology programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Technical Solutions segment provides a wide range of professional services, including fleet support, integrated missions solutions,DFS, nuclear and environmental services, and oil and gas services.unmanned systems.
The following discussion should be read along with the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Business Environment
COVID-19 Pandemic - The COVID-19 global pandemic has had wide-ranging effects on the global health environment and disrupted the global and U.S. economies and financial markets, including impacts to our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”). COVID-19 Events have also
impacted our operations, and the extent of future impacts are uncertain. The most significant areas of impact have been the disruption of our employees’ ability to work effectively, disruption in our supply chain, disruption of the U.S. Government's and our other customers' abilities to perform their obligations, and impact on pension assets and other investment performance.
In August 2011, the BCA established limits onSeptember 2021, President Biden issued an executive order requiring certain employers with U.S. Government discretionary spending,contracts to ensure that their U.S.-based employees, contractors, and subcontractors that work on or in support of U.S. Government contracts are fully vaccinated in accordance with the guidelines of the Safer Federal Workforce Task Force. In November 2021, OSHA issued an Emergency Temporary Standard (“ETS”) requiring that all employers with 100 or more employees mandate vaccines for covered employees or, in the alternative, weekly testing and masks. The U.S. federal contractor mandate was preliminarily enjoined by several U.S. federal district courts, the U.S. Supreme Court preliminarily stayed the OSHA ETS in January 2022, and OSHA subsequently withdrew the ETS.
While we are not currently subject to any vaccine mandate, it continues to be our policy to encourage each of our employees to be fully vaccinated against COVID-19. To the extent we become subject to a vaccine mandate in the future, our implementation of the mandate could result in employee attrition, including attrition of critical skilled labor, and difficulty meeting future labor requirements.
See Risk Factors in Item 1A for a reductiondiscussion of defense spending by approximately $487 billion for fiscal years 2012 through 2021. The BCA also provided that the defense budget would face “sequestration” cuts of up to an additional $500 billion during that same period,COVID-19-related risks.
We have aggressively managed our response to the extentuncertainties regarding COVID-19 Events, and we have incurred costs to respond to COVID-19 Events, including paid leave, quarantining employees, vaccinations, and recurring facility cleaning. Our shipyards and other facilities have remained open and productive, but we continue to experience decreases in workforce attendance and challenges meeting our hiring requirements, which has impacted our operations due to delay and disruption from a shortage of critical skills and out-of-sequence work.
Under Section 3610 of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), contractors may submit claims for employee paid time off caused by restrictions from COVID-19 Events in circumstances where the employee could not work remotely. Such instances may include paid time off for employees to allow for plant decontamination, idle time due to social distancing restrictions, paid time off to take care of dependents impacted by government-ordered school or day care closures, paid time for employee vaccinations or responding to side effects from vaccination, and employee quarantines due to travel restrictions or coming into contact, being diagnosed, or taking care of someone diagnosed with COVID-19. We have taken steps to preserve our rights to pursue such claims for HII and our subcontractors, and we submitted an initial Section 3610 Reimbursement Request to the DoD for Ingalls and Newport News Shipbuilding. Section 3610 under the CARES Act was not extended past September 30, 2021. We anticipate submitting supplemental requests for Section 3610 reimbursement for HII and our subcontractors into 2022. Reimbursements of our requests are contingent upon contracting officers making funding available, and most DoD contracting officers are awaiting supplemental appropriations from Congress before approving such reimbursement requests. We have no assurance that discretionary spending limitsCongress will appropriate sufficient funds to cover the reimbursement of costs contemplated by the CARES Act.
While costs related to COVID-19 Events are exceeded,allowable under U.S. Government contracts, our contract estimates reflect margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and $500 billionfixed-price incentive contracts, or may not be adequately covered by insurance. Our reinsurers have failed to acknowledge coverage for non-defense discretionary spending, includingvarious losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision. Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 14: Investigations, Claims, and Litigation in Item 8.
We have also focused on actively supporting our customers, suppliers, and communities. We have been proactive in engaging with our U.S. Coast Guard.Government customers regarding future contract adjustments. While there has been no change in contract terms or substantial degradation in timely payments from customers, we have experienced delays in decisions on certain contract awards. We are unable to predict how our customers will allocate resources in the future as they react to the evolving demands of the COVID-19 response. We also accelerated payments to small business suppliers in an effort to minimize supply chain disruption.
The BBA 2018 provided sequestration relief for fiscal years 2018
We temporarily halted stock repurchases in the first quarter of 2020, but we resumed share repurchases during the first quarter of 2021. We also deferred certain payroll taxes in 2020 pursuant to the CARES Act, which increased our cash from operations in 2020, but will reduce cash from operations in 2021 and 2019 and raised the budget topline for defense and non-defense discretionary spending. However, sequestration remains in effect for fiscal years 2020 and 2021.2022.
U.S. Government Contracts - Long-term uncertainty remainsexists with respect to overall levels of defense spending across the future yearsyears' defense plan, and it is likely that U.S. Government discretionary spending levels will continue to be subject to significant pressure.
WeThe National Defense Authorization Act for Fiscal Year 2022 was enacted in December 2021 and broadly supports our shipbuilding programs, including increased funding authority for Arleigh Burke-class destroyers (DDG-51), LHA and LPD Flight II amphibious ships, and submarine supplier development assistance. However, more than one quarter into the fiscal year, Congressional appropriations for the federal government have yet to be finalized. Consequently, the U.S. Government is currently operating under a Continuing Resolution ("CR") that funds government operations through February 18, 2022. It remains uncertain at this point whether fiscal year 2022 government operations will require additional short-term funding or annual appropriations measures will be finalized prior to the expiration of the CR. Appropriations measures must be passed by Congress and enacted by the President, and we cannot predict the impact that sequestration cuts or reprioritizationoutcome of readiness and modernization investment may have on funding for our individual programs. the fiscal year 2022 budget process.
Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled. In addition, spending cuts and/or reprioritization of defense investment could adversely affect the viability of our suppliers, subcontractors, and employee base. Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by the U.S. Government or the prime contractor as a result of lack of government funding or reductions or delays in government funding. Significant reductions in the number of ships procured by the U.S. Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, or cash flows.
The federal budget environment including sequestration as currently mandated, remains a significant long-term risk. Considerable uncertainty exists regarding how future budget and program decisions will develop and what challenges budget changes will present for the defense industry. We believe continued budget pressures that result from sequestration and other budget priorities will have serious implications for defense discretionary spending, the defense industrial base, including us,HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget environment may result in fewer contract awards and lower revenues, profits, and cash flows from our U.S. Government contracts. Congress and the new Administration continue to discuss various options to address sequestration in future budget planning, but we cannot predict the outcome of these efforts. It is likely budget and program decisions made in this environment will have long-term impacts on usHII and the entire defense industry.
Defense Industry Overview
The United States faces a complex, uncertain, and rapidly changing national security environment. Upon assuming office in 2021, the Biden Administration released a broad interim National Security Strategy that lays out the contours of U.S. foreign policy over the next four years. Under this strategy, the Indo-Pacific region remains at the heart of U.S. defense planning. While the United States continues to face security challenges from Russia, North Korea, and non-state extremism, other ‘non-traditional’ threats such as pandemic disease and climate change, are now part of the national security dialogue.
The 2018 National Defense Strategy acknowledges an increasingly complex global security environment, characterized by overt challenges to the free and open international order and the re-emergence of long-term, strategic competition between nations. AmericaU.S. also faces an evera more lethal and disruptive battlefield, combined across domains and conducted at increasing speed and reach. The security environment is also affected by rapid technological advancements and the changing character of war. The drive to develop new technologiescapabilities and enhance lethality is relentless, expanding to moreaddress emerging threats from peer-competitors as well as actors with lower barriers of entry, and moving at accelerating speed. New technologies include advanced computing, “big data” analytics, artificial intelligence, autonomy, robotics, directed energy, hypersonics, and biotechnology.
States areTo address these rapidly-evolving threats, the principal actors on the global stage, but non-state actors also threaten the security environment with increasingly sophisticated capabilities. Terrorists, trans-national criminal organizations, cyber hackers, and other malicious non-state actors have increased capabilities of mass disruption. Terrorism remains a persistent condition driven by ideology and unstable political and economic structures.
We expect that the DoD execution of its strategy will require an affordable balance between investments in restoring the readiness of the current force with investmentsU.S. is investing in new capabilities technologies, and capacity to meet future challenges. The DoD faces the additional challenge of recapitalizing equipmentlethality enhancements, including unmanned and rebuilding readiness at a time when the DoD is pursuing modernization of its capabilities, while still facing additional budget cuts from sequestration. While the BBA 2018 provided relief for fiscal years 2018autonomous systems and 2019, it is unclear how sequestration could impact programs forplatforms; artificial intelligence; hypersonics; directed energy; resilient networks; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; and targeting requirements and microelectronics. Technologies are being prioritized that can penetrate and operate inside highly-contested and highly-defended territory, both physical and cyber.
In late December 2020, and beyond. BCA spending caps, coupled with other budget priorities, could have a significant impact on future spending plans for defense and non-defense discretionary programs. Decreases in the proposed funding levels for our programs could negatively impact our financial position, results of operations, or cash flows, including revenues, goodwill, and long-lived assets.
In December 2016, the U.S. Navy, Marine Corps, and Coast Guard released a Tri-Service Maritime Strategy titled Advantage at Sea. The document provides strategic guidance on how the findingssea services will prevail in day-to-day competition, crisis, and conflict over the next decade. The strategy directs the services to pursue an agile and aggressive approach to force modernization and experimentation by combining legacy assets with new capabilities
to understand faster, decide faster, and act faster. The strategy also emphasizes the need to develop new operational concepts for fielded capabilities, employ resilient and integrated networks across the force, leverage the strengths of regional partners, and expand the use of optionally manned and unmanned platforms.
In January 2021, the Chief of Naval Operations released a year-longNavigation Plan to the Fleet that nests under the Tri-Service Maritime Strategy and outlines how the U.S. Navy will grow its naval power to control the seas and project power across all domains. It lays out what must be done this decade to deliver the naval power America needs to compete and win, characterized as a ready fleet, a more lethal and better-connected fleet, and a larger more hybrid fleet. To this end, the Marine Corps is also reshaping its force under the Commandant’s Force Design 2030 guidance to become optimized for modern operations by 2030. The Marine Corps has already taken action to eliminate legacy capabilities, such as battle tanks, and a future force may feature an expanded assortment of smaller platforms, landing craft, and connectors that are manned, minimally manned, and unmanned, and exploit autonomy and artificial intelligence.
We anticipate the U.S. Navy’s force projection strategy will continue to emphasize sea control and sea denial, enabling power projection against adversaries with long-range weapons and full-spectrum joint domain capabilities. The Navy will likely continue to employ the evolving concept of Distributed Maritime Operations ("DMO"), which features multiple sensors and shooters that are widely dispersed across a broad range of manned and unmanned platforms and linked through resilient networks. Naval forces are participating in a larger DoD-wide objective to modernize command and control architecture, the concept to connect sensors from all of the military services into a single network known as Joint All-Domain Command and Control ("JADC2"). Future conflicts may require leaders to analyze the operating environment and make decisions rapidly. With JADC2, DoD envisions creating an “internet of things” network that would connect numerous sensors with weapons systems, using artificial intelligence algorithms to help improve decision-making. Project Overmatch is the Navy’s effort to develop the networks, infrastructure, data architecture, and analytics to participate in this larger, networked military operating environment. The end-state for the “Future Navy” envisions a fleet designed to ensure the wholeness of combat capability and lethal forces maximizing the benefits of DMO, expeditionary advanced base operations, and littoral operations in a contested environment. Manned and unmanned technology will be used to expand reach, lethality, and warfighter awareness.
The Navy’s force structure goal of 355 ships, identified in the December 2016 Force Structure Assessment developed to determineand codified in the right balance of existing forces, the ships currently under construction, and the future procurement plans needed to address the ever-evolving and increasingly complex threats that the Navy is required to counter. Notably, the Force Structure Assessment did not present a desired force size the U.S. Navy would pursue if resources were not constrained; it reflected a force level that balances warfighting risk to equipment and personnel against available resources and recommends a force size that can reasonably achieve success. Accordingly, the Force Structure Assessment reflects an objective force of 355 ships, comprised of 12 aircraft carriers, 104 large surface combatants, 52 small surface combatants, 38 amphibious warfare ships, 66 attack submarines, 12 ballistic missile submarines, 32 combat logistics ships, 10 expeditionary/high speed transports, 6 expeditionary support bases, and 23 command and support ships. Additionally, thefiscal year 2018 National Defense Authorization Act, includedhas remained the SHIPS Act, which made itfleet objective for five years. The Navy and the policy of our nationDoD have been working to achievedevelop a fleet size of 355 ships. It remains unclear, however, whethersuccessor for the 2016 Force Structure Assessment or355-ship force-level goal. In December 2020, the requirementsoutgoing Administration released its vision for the Navy’s future force structure in a fiscal year 2022 30-year Navy shipbuilding plan. The plan envisioned achievement of the SHIPS Act will have any bearing on budget outcomes forNavy’s force-level goal through a distributed fleet architecture, including 382 to 446 manned ships and 143 to 242 large unmanned vehicles by 2045. The new Administration did not submit a new force structure goal or shipbuilding plan in 2021, but is expected to do so with the delivery of the fiscal year 20192023 budget in spring 2022.
The Defense Department and beyond.
Navy not only face difficult tradeoffs between modernization priorities, but also tradeoffs about where to take risk across time. The shipbuilding defense industry as characterized by its competitors, customers, suppliers, potential entrants, and substitutes, is unique in many ways. It is heavily capital heavy and skilled labor intensive. The U.S. Navy, a large single customer with many needs and requirements, dominates the industry's customer base and is served by aan increasingly fragile supplier base that has trended toward exclusive providers. SmallerInconsistent shipbuilding plans and annual funding uncertainty severely degrade the ability of shipyards however, have enteredto conduct long-term planning and respond to near-term changes in requirements. This ultimately results in longer construction times and increased costs. For example, the markethigh operational tempo of the Navy in recent years has resulted in a backlog of repair work across the fleet. Coupled with the impacts of COVID-19 and increases in new ship construction, many suppliers are experiencing a shortfall in their capacity to buildperform work and manufacture products. This increased demand is applying stress to already-aging production equipment. The combination of limited suppliers and an increase in workload could increase cost and potentially create schedule slips, impacting American warfighting capability.
Ultimately, a balance will need to be achieved between the U.S. Navy's littoral combat ship. Thecompeting priorities of upgrading legacy systems for the near-term, developing and procuring the next generation of systems for the mid-term, and investing in emerging technologies that could drive game-changing capabilities in the long-term. Additionally, the U.S. Navy must compete with other nationalbudget priorities, including other defense activities, non-defense discretionary spending, supplemental spending for COVID-19 relief, and entitlement programsfor a share of federal budget funding.
The Administration has focused on regulatory reform in order to manage the costs associated with the governmental imposition of private expenditures required to comply with federal regulations. Additionally, an Executive Order issued in February 2017 requires that for every new regulation issued, at least two prior regulations must be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process. The DoD continues to adjust its procurement practices and streamline acquisition organizations and processes in an ongoing effort to reduce costs, gain efficiencies, and enhance program management and control. While the impact to our business resulting from these initiativesdevelopments remains uncertain, they could have a material impact on current programs, as well as new business opportunities with the DoD. See Risk Factors in Item 1A.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Annual Report on Form 10-K is included in the Glossary of Programs.
CONTRACTS
We generate most of our revenues from long-term U.S. Government contracts for design, production, and support activities. Government contracts typically include the following cost elements: direct material, labor and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Unless otherwise specified in a contract, costs billed to contracts with the U.S. Government are treated as allowable and allocable costs under the FAR and CAS regulations. Examples of costs incurred by us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including certain merger and acquisition costs, and advertising costs.
We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions, as well as compliance with all applicable government regulations. In addition, the DCAA routinely audits the costs we incur that are allocated to contracts with the U.S. Government.Government contracts.
Our long-term contracts typically fall into one of two broadfour categories:
Flexibly-Priced Contracts - Includes both firm fixed-price, fixed-price incentive, cost-type, and time and materials. See Note 7: Revenue in Item 8.
•Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.
•Fixed-Price Incentive Contracts - Fixed-price incentive contracts.contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.
•Cost-Type Contracts - Cost-type contracts provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the work within some specified time and some stated dollar limitation. Fixed-price incentive contracts also provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached. Approximately 92%, 94%,
•Time and 95% of our revenues for the years endedDecember 31, 2017, 2016, and 2015, respectively, were generated from flexibly-priced contracts, including certain fixed-price incentive contracts that have exceeded their cost-share limit.
Firm Fixed-Price Contracts Materials - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor. Time and materials contracts which specify a fixed hourly billing rate for each direct labor hour charged, are considered firm fixed-price contracts. Approximately 8%, 6%,expended and 5% of our revenuesreimbursement for the years endedDecember 31, 2017, 2016,allowable material costs and 2015, respectively, were generated from firm fixed-price arrangements.
expenses.
Contract Fees - Negotiated contract fee structures for both flexibly-priced and firm fixed-price contracts include: fixed fee amounts, cost sharing arrangements to reward or penalize contractors for underunder- or over costover-cost target performance, respectively, positive award fees, and negative penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract, the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.
Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality, and technical performance. Award fees are determined and earned based on an evaluation by the customer of our performance against such negotiated criteria. Fees that weWe consider award fees to be variable consideration and generally include these fees in the transaction price using a most likely amount approach. Award fees are reasonably assuredlimited to the extent of collectingfunding allotted by the customer and can be reasonably estimated are recorded over theavailable for performance periodand those amounts for which a significant reversal of the contract.revenue is not probable.
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgment and estimates by management in its application. The development and selection of these critical accounting policies have been determined by our management. We have reviewed our critical accounting policies and estimates with the audit committee of our
board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these
policies, it is possible that different parties could choose different assumptions and reach different conclusions. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. We consider theour policies relating to the following matters to beinvolve our most critical accounting policies:policies and estimates:
•Revenue recognition;
•Purchase accounting, goodwill, and intangible assets;
•Litigation, commitments, and contingencies;
•Retirement related benefit plans; and
•Workers' compensation.
We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units. See Note 2: Summary of Significant Accounting Policies in Item 8.
Revenue Recognition
Overview - Most of our revenues are derived from long-term contracts for the production of goods and services provided to the federal government,U.S. Government, which are generally accounted for in conformity with GAAP for construction-type and production-type contracts and federal government contractors. We have other types of contracts, such as services and commercial arrangements, for whichby recognizing 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. We classify contract revenues as product sales or service revenues depending on the predominant attributes of the relevant underlying contracts. We consider the nature of these contracts and the types of products and services provided when determining the proper accounting method forover time using a particular contract.
Percentage-of-Completion Accounting - We generally recognize revenues from our long-term contracts under the cost-to-cost measure of the percentage-of-completion method of accounting. The percentage-of-completion method recognizes income as work onprogress. In estimating contract costs, we utilize a contract progresses. For most contracts, we calculate sales based on the percentage of costs incurred in relation to total Estimated Costs at Completion of the contract ("EAC"). For certain contracts with large up-front purchases of material, sales are calculated based on the percentage that direct labor costs incurred bear to total estimated direct labor 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.
The use of the percentage-of-completion method depends on our ability to make reasonably dependable cost estimates for the design, manufacture, and delivery of our products and services. Such costs are typically incurred over a period of several years, and estimation of these costs requires the use of judgment. We record sales under cost-type contracts as costs are incurred.
Many contracts contain positive and negative profit incentivesprofit-booking rate based upon performance relative to predetermined targetsexpectations that may occur during or subsequent to deliverytakes into consideration a number of the product. These incentives take the form of potential additional fees to be earned or penalties to be incurred. Incentivesassumptions and award fees that we are reasonably assured of collecting and can be reasonably estimated are recorded over the performance period of the contract. Incentives and award fees that we are not reasonably assured of collecting or cannot be reasonably estimated are recorded when awarded or at such time as a reasonable estimate can be made.
At the start of each contract, we estimate an initial profit-booking rate that considersestimates regarding risks related to technical requirements, and feasibility, schedule, and contract costs. Management then performs periodic reviews of ourthe contracts in order to evaluate technical matters, schedule, and contract costs. During the life of a contract,underlying risks, which may increase the profit-booking rate may increase as we are able to mitigate and retire risks in connection with technical matters, schedule, and contract costs. Conversely, if we are not able to retire these risks, our EAC may increase, resulting in a lower profit-booking rate.
Changessuch risks. For the impacts of changes in estimates of contract sales, costs, and profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes in current and prior periods. Hence, the effect of the changes in future periods of contract performance is recognized as if the revised estimate had been the original estimate. A significant change in an estimate on one or more contracts in a period could have a material effect on our consolidated financial position or resultsstatements of operations for that period.and comprehensive income, see Note 8: Segment Information in Item 8.
For the years endedDecember 31, 2017, 2016, and 2015, favorable and unfavorable cumulative catch-up adjustments were as follows:
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Gross favorable adjustments | | $ | 309 |
| | $ | 297 |
| | $ | 304 |
|
Gross unfavorable adjustments | | (105 | ) | | (73 | ) | | (65 | ) |
Net adjustments | | $ | 204 |
| | $ | 224 |
| | $ | 239 |
|
For the year ended December 31, 2017, favorable cumulative catch-up adjustments were primarily related to risk retirement on the Legend class NSC program, Tripoli (LHA 7), Portland (LPD 27), and the delivered USS John Finn (DDG 113), the resolution of outstanding contract changes on the inactivation of the decommissioned Enterprise (CVN 65) and the RCOH of the redelivered USS Abraham Lincoln (CVN 72), and other individually insignificant adjustments. During the same period, none of the unfavorable cumulative catch-up adjustments were individually significant.
For the year ended December 31, 2016, favorable cumulative catch-up adjustments were primarily related to risk retirement on USS John P. Murtha (LPD 26), the Virginia class (SSN 774) submarine program, Portland (LPD 27), the Legend class NSC program, and the Arleigh Burke class (DDG 51) destroyer program. During the same period, unfavorable cumulative catch-up adjustments included lower performance on the RCOH of USS Abraham Lincoln (CVN 72) and construction of Gerald R. Ford (CVN 78), as well as other individually insignificant adjustments.
For the year endedDecember 31, 2015, favorable cumulative catch-up adjustments were primarily related to risk retirement on the Virginia class (SSN 774) submarine program, the Legend class NSC program, and the San Antonio class (LPD 17) program, including delivered ships, the resolution of outstanding contract changes on the America class (LHA 6) program and the RCOH of USS Theodore Roosevelt (CVN 71), and contract impacts of the Aon litigation settlement. During the same period, unfavorable cumulative catch-up adjustments included lower performance on Gerald R. Ford (CVN 78), as well as other individually insignificant adjustments.
Cost Estimation - The cost estimation process requires significant judgment and is based upon the professional knowledge and experience of our engineers, program managers, and financial professionals. Factors we consider in estimating the work to be completed and ultimate contract recovery include the availability, productivity, and cost of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, the availability and timing of funding from the customer, and the recoverability of any claims included in the estimates to complete. A significant change in an estimate on one or more contracts in a period could have a material effect on our consolidated financial position or results of operations for that period, and, where such changes occur, separate disclosure is made of the nature, underlying conditions, and financial impact of the change. We update our contract cost estimates at least annually and more frequently as determined by events or circumstances. We review and assess our cost and revenue estimates for each significant contract on a quarterly basis.
We record a provision for the entire loss on a contract in the period the loss is determined when estimates of total costs to be incurred on the contract exceed estimates of total revenues to be earned. We offset loss provisions first against costs that are included in unbilled accounts receivable or inventoried costs, with any remaining amount reflected in other current liabilities.
Purchase Accounting, Goodwill, and Intangible Assets
Purchase Accounting and Goodwill - Goodwill representsWe allocate the purchase price paid in excess of acquired businesses to the fair value of identifiable netunderlying tangible and intangible assets acquired and liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. We recognize purchased intangible assets in aconnection with our business combination.acquisitions at fair value on the acquisition date. The most significant purchased intangible assets recognized from our acquisitions are generally related to customer contracts, including backlog and recompeted contracts. We determine the fair values of those customer related intangible assets based on estimates and judgments, including the amount and timing of expected future cash flows, long-term growth rates, and discount rates.
Goodwill is tested for impairment on an annual basis at each of our goodwill as of December 31, 2017 and 2016, was $1,217 million and $1,234 million, respectively. During the year ended December 31, 2017, we recorded a goodwill adjustment of $17 million in the Technical Solutions segment, primarily drivenreporting units by the finalization of fair value calculations for certain assets and liabilities, as well as the net working capital adjustment, related to the acquisition of Camber.
Tests for Impairment - We perform impairment tests for goodwill as of November 30 of each year, or when evidence of potential impairment exists. When testing goodwill, we comparecomparing the fair value of the reporting unit to its carrying
value. If the fair value of the reporting unit is determined to be less than the carrying value, we record a charge to operations.
We estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market basedmarket-based valuation methodologies. Determining fair value requires the exercise of significant judgment, including judgments about projected revenues, operating expenses, working capital investment, capital expenditures, and cash flows over a multi-year period. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Impairment assessment inherently involves management judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Changes in theseour estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
November 30, 2017 Impairment Test - In connection with our annual goodwill impairment test, we tested goodwill for each of our four reporting units. As a result of our annual goodwill impairment test, we determined that the estimated fair value of each reporting unit exceeded by more than 10% its corresponding carrying value as of November 30, 2017.
November 30, 2016 Impairment Test - In connection with our annual goodwill impairment test, we tested goodwill for each of our four reporting units. As a result of our annual goodwill impairment test, we determined that the estimated fair value of each reporting unit exceeded by more than 10% its corresponding carrying value as of November 30, 2016.
In conjunction with the realignment of our operations on December 1, 2016, we allocated goodwill among new and realigned reporting units based on the relative fair values of the reporting units being realigned. As a result, during the fourth quarter of 2016, we performed a quantitative assessment of goodwill immediately after the realignment for each of the reporting units impacted by our realignment. Based on this quantitative assessment, no impairment charge was necessary as a result of the realignment.
November 30, 2015 and December 31, 2015 Impairment Tests - We performed our annual goodwill impairment test as of November 30, 2015, and, while the annual impairment test did not result in an impairment, considering the limited excess fair value of goodwill over its carrying value in our oil and gas reporting unit and the continued decline in oil prices and related industry activity levels, we performed an interim assessment of goodwill as of December 31, 2015. Our determination of fair value as of December 31, 2015, considered industry events that occurred in the period since our annual goodwill impairment test, as well as the updated long term outlook for this reporting unit. Those events included continued deterioration in the oil and gas markets, numerous industry-wide project deferrals, and capital spending cuts announced by industry leaders. The analysis concluded the fair value of this reporting unit was less than its carrying value as of December 31, 2015, and we recorded a goodwill impairment charge of $16 million at our oil and gas reporting unit in our Technical Solutions segment in the fourth quarter of 2015. We determined that the estimated fair values of our remaining reporting units significantly exceeded their corresponding carrying values as of November 30, 2015.
May 31, 2015 Impairment Test - We continuously monitor industry events and changes in circumstances in the industries in which our reporting units conduct business. In consideration of the oil and gas reporting unit’s sensitivity to developments within its industry, the continued decline in crude oil prices, significant reductions in its customer capital spending plans, and project delays, we concluded an interim goodwill impairment test was necessary to determine whether it was more likely than not that the fair value of our oil and gas reporting unit was still higher than its carrying value as of May 31, 2015. Our assessment considered the aforementioned changes to expectations that were considered as part of our annual goodwill impairment test as of November 30, 2014. As a result of our analysis, we recorded a $59 million goodwill impairment charge at our Oil and Gas reporting unit in our Technical Solutions segment in the second quarter of 2015.
Other Intangible Assets - We perform tests for impairment of amortizable intangible assets whenever events or
circumstances suggest that amortizable intangible assets may be impaired.
December 31, 2015 Impairment Test - We performed an impairment test asDue to the many variables inherent in the estimation of December 31, 2015,the fair values of our business and the relative size of our recorded goodwill and other purchased intangible assets, differences in assumptions may have a material effect on the amortizableresults of our impairment analysis.
For further information on purchase accounting, goodwill, and intangible assets, that arose from the UPI acquisition, which residesee Risk Factors in our oilItem 1A and gas reporting unit within our Technical Solutions segment. The oilNote 2: Summary of Significant Accounting Policies, Note 4: Acquisitions and gas asset group’s long-lived intangible assets consist primarily of customer relationshipsDivestitures, and to a lesser degree, trade nameNote 11: Goodwill and developed technology. We performed our impairment test considering the latest market conditions and expectations, as well as lower anticipated revenue and profitability. Based on the nature of UPI's intangible assets, we performed the recoverability test at the reporting unitOther Intangible Assets in Item 8.
level. In connection with the recoverability test, we reevaluated the remaining useful lives of the intangible assets and determined the total undiscounted pretax cash flows generated by the reporting unit over the remaining useful life of the primary asset, customer relationships. The carrying amount of the reporting unit was greater than the total undiscounted pretax cash flows, and, as a result, the intangible assets were written down by $27 million, charged against cost of sales and service revenues within income from operations at our oil and gas reporting unit in our Technical Solutions segment.
Litigation, Commitments, and Contingencies
Overview - We are subject to a range of legal proceedings before various courts and administrative agencies and are periodically subject to government examinations,audits, inquiries, and investigations that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment and assessment based upon professional knowledge and the experience of management and our internal and external legal counsel. In accordance with our practices relating to accounting for contingencies, we record amounts as charges to earnings when we determine, after taking into consideration the facts and circumstances of each matter, including any settlement offers, that it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. The ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstances become known.
Environmental Accruals - We are subject to the environmental laws and regulations of the jurisdictions in which we conduct operations. We record a liability for the costs of expected environmental remediation obligations when we determine that it is probable we will incur such costs and the amount of the liability can be reasonably estimated. When a range of costs is possible and no amount within that range is a better estimate than another, we record the minimum amount of the range.
Factors that could result in changes to the assessment of probability, range of estimated costs, and environmental liability accruals include: modification of planned remedial actions, increase or decrease in the estimated time required to remediate, discovery of more extensive contamination than anticipated, results of efforts to involve other legally responsible parties, financial insolvency of other responsible parties, changes in laws and regulations or contractual obligations affecting remediation requirements, and improvements in remediation technology. Although we cannot predict whether new information gained as remediation projects progress will materially affect the accrued liability, we do not believe that future remediation expenditures will have a material effect on our financial position, results of operations, or cash flows.
Asset Retirement Obligations Income Tax Matters - We record all known asset retirement obligations for which the liability's fair value can be reasonably estimated, including certain asbestos removal, asset decommissioning, and contractual lease restoration obligations. Recorded amounts asThe evaluation of each of December 31, 2017 and 2016, were $19 million and consist primarily of obligations associated with the wind down of shipbuilding operations at our Avondale facility. See Note 2: Summary of Significant Accounting Policiestax positions taken in Item 8.
We also have known conditional asset retirement obligations related to assets currently in use, such as certain asbestos remediation and asset decommissioning activitiesa filed tax return, or planned to be performedtaken in thea future that were not reasonably estimable as of December 31, 2017, due to insufficient information about the timing and method of settlement of the obligation. Accordingly, the fair value of these obligations has not been recorded in the consolidated financial statements. Environmental remediation and/tax return or asset decommissioning of these facilities may be required when we cease to utilize these facilities. In addition, there may be conditional environmental asset retirement obligations that we have not yet discovered (for example, asbestos of which we have not become aware through normal business operations may exist in certain buildings), and these obligations have therefore not been included in our consolidated financial statements.
Litigation Accruals - Litigation accruals are recorded as charges to earnings when management has determined, after taking into consideration the facts and circumstances of each matter, including any settlement offers, that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The ultimate resolution of any exposure may vary from earlier estimates as further facts and circumstances become known. Based upon the information available, we believe that the resolution of any of these various legal proceedings will not have a material effect on our consolidated financial position, results of operations, or cash flows.
Uncertain Tax Positions - Uncertainclaim, requires judgment. We establish reserves for uncertain tax positions meetingthat do not meet the more-likely-than-not recognition threshold, based on the merits of the position, are recognized in the financial statements.position. We recognize the amount of a tax benefit that is
greater than 50% likely to be realized upon ultimate settlement with the related tax authority. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, we recognize an expense for the amount of the penalty in the period the tax position is claimed or expected to be claimed in our tax return. Penalties and accrued interest related to uncertainunrecognized tax positionsbenefits are recognized as a component of income tax expense. See Note 13:12: Income Taxes in Item 8. Changes in accruals associated with uncertainunrecognized tax positionsbenefits are recorded in earnings in the period they are determined.
For further information on litigation, commitments, and contingencies, see Risk Factors in Item 1A and Note 2: Summary of Significant Accounting Policies, Note 4: Acquisitions and Divestitures, Note 12: Income Taxes, Note 14: Investigations, Claims, and Litigation, and Note 16: Commitments and Contingencies in Item 8.
Retirement Related Benefit Plans
We recognize, on a plan-by-plan basis, the funded status of our retirement related benefit plans as an asset or liability on our balance sheet, with corresponding adjustments to after-tax accumulated other comprehensive incomeloss and deferred tax assets or liabilities. The funded status represents the difference between the benefit obligation and the fair value of plan assets. See Note 18:17: Employee Pension and Other Postretirement Benefits in Item 8.
We calculate our retirement related benefit plan costs under both CAS and U.S. GAAP Financial Accounting Standards ("FAS"). The calculations under CAS and FAS require significant judgment. CAS prescribes the determination, allocation, and recovery of retirement related benefit plan costs on U.S. Government contracts through the pricing of products and services. FAS prescribes the methodology used to determine retirement related benefit plan expense or income, as well as the liability, for financial reporting purposes. The CAS requirements for
these costs and their calculation methodologies differ from FAS. As a result, while both CAS and FAS use assumptions in their calculation methodologies, each method results in different calculated amounts of retirement related benefit plan costs.
Retirement related benefit plan costs are allocated to our U.S. Government contracts as allowable costs based upon CAS. We recover our CAS costs through the pricing of products and services on U.S. Government contracts, so that the CAS cost is recognized in segment product sales and service revenues and in the costs of those product sales and service revenues. In order to present our consolidated financial statements in accordance with FAS, we record the difference between our FAS expense and CAS cost (“FAS/CAS Adjustment”) as operating income (loss) within generalsegment operating income and administrative expenses. For the years ended December 31, 2017, 2016, and 2015, our CAS costs in excess of FAS expenses were $189 million, $145 million, and $104 million, respectively.non-operating retirement benefit (expense).
The minimum funding requirements for our qualified pension plans are determined under the Employee Retirement Income Security Act of 1974 ("ERISA"), which is primarily based on the year's expected service cost and amortization of other previously unfunded liabilities. Effective January 1, 2011, we were subject to the funding requirements under the Pension Protection Act of 2006 ("PPA"), which amended ERISA. Under the PPA, we are required to fully fund our pension plans over a rolling seven-year period as determined annually based upon the funded status at the beginning of each year. PPA also introduced a variety of benefit restrictions that apply if a plan falls below certain funded percentages, as defined by the Internal Revenue Code. In funding our plans, we consider various factors, including the minimum funding requirements, maintaining the funded status needed to avoid potential benefit restrictions and other adverse consequences, maintaining minimum CAS funding requirements, and the current and anticipated funding levels of each plan.
During 2012,Effective January 1, 2021, we adopted the Safe Harbor methodology used in determining CAS pension costs. The interest rates used to calculate pension liabilities under CAS are consistent with those used in the determination of minimum funding requirements under ERISA.
Pension funding requirements under ERISA are subject to pension relief for plan sponsors in the form of higher interest rate assumptions introduced by the Moving Ahead for Progress in the 21st Century Act ("MAP-21") was enacted. MAP-21 included provisions for potential pension relief to plan sponsors inand subsequently extended by the formAmerican Rescue Plan Act of higher interest rate assumptions that were used to determine2021. Using these minimum funding requirements. The relief derived from these provisions was to be phased out to lower levels over the next few years. The enactment of the Highway and Transportation Funding Act (“HATFA”) in 2014 and BBA 2015 successively providedinterest rates for the continuationpurposes of determining pension costs under CAS reduces volatility in CAS costs year-over-year and provides more predictable costs for our customers, while better aligning reimbursements of pension relief and higher interest rate assumptions used to determine minimum funding requirements and extended thecosts under our contracts with our required pension relief phase-out period. We consider the effects of pension relief legislation in the context of current year and future projected funded status levels in deciding the level ofplan contributions to make to our plans each year.under ERISA.
Due to the differences in requirements and calculation methodologies between FAS and CAS, our FAS pension expense is not necessarily indicative of the funding requirements under PPA or the amounts we recover from the U.S. Government under CAS.
When PPA was enacted, it was anticipated that the amounts required to be funded would exceed government contractors' recovery of those costs under CAS. To remedy this cash flow misalignment, on December 27, 2011, the U.S. Cost Accounting Standards Board issued its final CAS Harmonization Rule ("Harmonization"). Harmonization
was intended to improve the alignment of the pension cost recovered through contract pricing under CAS and the pension funding requirements under the PPA. Harmonization became effective for forward pricing purposes for contracts negotiated on or after February 27, 2012. Under Harmonization, only contracts entered into before the effective date qualifed for an equitable adjustment. Price proposals for CAS covered contracts awarded on or after the effective date of February 27, 2012, reflected the effects of the rule. Harmonization affected pension costs on contracts over a phase-in period that ended in 2017. Our CAS pension cost recoveries are expected to remain unaffected by the pension relief provisions noted above because of the method permitted under Harmonization we use to determine the CAS interest rate, which is a current market rate.
Assumptions - We account for our retirement related benefit plans on the accrual basis under FAS. The measurements of obligations, costs, assets, and liabilities require significant judgment. We annually review our assumptions, which are set at each year end and are generally not changed during the following year unless there is a major plan event occurs, such as an amendment, curtailment,, or settlement that would trigger a remeasurement. The key assumptions in these measurements are the interest rate used to discount future benefit payments and the expected long-term rate of return on plan assets.
Discount Rate - The assumed discount rate under FAS is used to determine the retirement related benefit plan obligations and expense, and represents the hypothetical rate at which the plans'plan benefit obligations could be effectively settled at the measurement date. Consequently, the discount rate can be volatile from year to year. The discount rate assumption is determined for each plan by constructing a hypothetical portfolio of high qualityhigh-quality bonds with cash flows that match the estimated outflows for future benefit payments to determine a single equivalent discount rate. Benefit payments are not only contingent on the terms of a plan but also on the underlying participant demographics, including current age and assumed mortality. We use only bonds that are denominated in U.S. Dollars, are rated Aa or better by nationally recognized statistical rating agencies, have a minimum outstanding issue of $100 million as of the measurement date, and are not callable, convertible, or index-linked.
Taking into consideration the factors noted above, our weighted average discount rate for pensions was 3.82% and 4.47% as of December 31, 2017 and 2016, respectively. Our weighted average discount rate for other postretirement benefits was 3.85% and 4.38% as of December 31, 2017 and 2016, respectively.
Expected Long-Term Rate of Return - The expected long-term rate of return on assets is used to calculate net periodic expense, and is based on such factors as historical returns, targeted asset allocations, investment policy, duration, expected future long-term performance of individual asset classes, interest rates, inflation, portfolio volatility, investment management and administrative fees, and risk management strategies. Historical plan asset performance alone has inherent limitations in predicting future returns. While studies are helpful in understanding past and current trends and performance, the rate of return assumption is based more on long-term prospective
views to avoid short-term market influences. Unless plan assets and benefit obligations are subject to remeasurementre-measurement during the year, the expected return on pension assets is based on the fair value of plan assets at the beginning of the year. We used a 7.25% expected long-term rate of return assumption to record 2017 pension expense, and we anticipate retaining that assumption throughout 2018.
Mortality - Mortality assumptions are used to determine the retirement related benefit obligations and expense, and represent the likelihood and duration of benefit payments to plan participants based on historical experience and projected longevity.We periodically update our mortality assumptions as circumstances warrant.
Differences arising from actual experience or changes in assumptions might materially affect retirement related benefit plan obligations and the funded status. Actuarial gains and losses arising from differences between assumptions and actual experience or changes in assumptions are deferred in accumulated other comprehensive income.loss. This unrecognized amount is amortized as a component of net expense to the extent it exceeds 10% of the greater of the plan's benefit obligation or plan assets. The amortization period for actuarial gains and losses is the estimated average remaining service life of the plan participants. In 2017,2021, the actual return on assets was approximately 17.0%12.7%, which was greatermore than the expected return assumption of 7.25%. For the year ended December 31, 2017,2021, the weighted average discount rates for our pension and other postretirement benefit plans decreasedincreased by 6520 and 5319 basis points, respectively. These differences in asset returns updated mortality assumptions, and discount rates resulted in actuarial gains of $473$412 million and $68 million and an actuarial loss of $625$289 million, respectively, as offor the year ended December 31, 2017.2021.
An increase or decrease of 25 basis points in the discount rate and the expected long-term rate of return assumptions would have had the following approximate impacts on pensions:pension expense and obligations: | | | | | | | | | | | | | | |
($ in millions) | | Increase (Decrease) in 2022 Expense | | Increase (Decrease) in December 31, 2021 Obligations |
25 basis point decrease in discount rate | | $ | 29 | | | $ | 329 | |
25 basis point increase in discount rate | | (15) | | | (310) | |
25 basis point decrease in expected return on assets | | 21 | | | |
25 basis point increase in expected return on assets | | (21) | | | |
|
| | | | | | | | |
($ in millions) | | Increase (Decrease) in 2018 Expense | | Increase (Decrease) in December 31, 2017 Obligations |
25 basis point decrease in discount rate | | $ | 23 |
| | $ | 261 |
|
25 basis point increase in discount rate | | (22 | ) | | (246 | ) |
25 basis point decrease in expected return on assets | | 15 |
| |
|
|
25 basis point increase in expected return on assets | | (15 | ) | |
|
|
Assuming a 7.25% expected return on assetassets assumption, a $50 million pension plan contribution is generally expected to favorably impact the current year expected return on assets by approximately $1$2 million, depending on the timing of the contribution.
Sensitivities to assumptions are not necessarily linear and are specific to the time periods noted.
CAS Cost - In addition to providing the methodology for calculating retirement related benefit plan costs, CAS also prescribes the method for assigning those costs to specific periods. While the ultimate liability for such costs under FAS and CAS is similar, the pattern of cost recognition is different. The key drivers of CAS pension cost include the funded status and the method used to calculate CAS reimbursement for each of our plans. A plan’s CAS pension cost can only be allocated until the plan is fully funded as defined under the CAS requirements.
Through 2013, CAS required the pension interest rate to be consistent with the expected long-term rate of return on assets assumption, which changed infrequently given its long-term nature. As a result, short-term changes in bond yields or other interest rates generally did not impact CAS costs. Under Harmonization the liability used to determine CAS cost is developed by comparing the liability under the previous CAS methodology and assumptions to a liability based on a discount rate derived from yields on high quality corporate bonds. Since Harmonization became fully phased in during 2017, the greater of the two liabilities is used for CAS cost calculations. Generally, liabilities based on a discount rate of high quality corporate bonds will be higher than liabilities calculated prior to Harmonization. Prior to the full phasing in of Harmonization the use of a blend of the pre and post Harmonization liabilities was required.
Other FAS and CAS Pension Considerations - A key driver of the difference between FAS expense and CAS cost (and consequently the FAS/CAS Adjustment) is the pattern of earnings and expense recognition for actuarial gains and losses that arise when our asset and liability experiences differ from our assumptions under each set of requirements. Under FAS, our net actuarial gains and losses exceeding the 10% corridor are amortized over the estimated average remaining service life of the plan participants. Under CAS Harmonization, the amortization period changed from 15 tois 10 years for actuarial gains and losses beginning in 2013.losses. Both FAS and CAS use a "market-related value" of plan assets approach to calculate the amount of deferred asset gains or losses to be amortized. Under CAS, actual asset gains and losses are systematically smoothed over five years, subject to certain limitations. For FAS, we do not use this smoothing method, and instead use fair value in determining our FAS expense. Accordingly, FAS expense generally reflects recent asset gains and losses sooner than CAS.
Additionally, CAS cost is only recognized for plans that are not fully funded as defined under CAS. If a plan becomes or ceases to be fully funded due to our asset or liability experience, our CAS cost will change accordingly.
The FAS/CAS Adjustment in 2017 and 2016 was a net benefit of $189 million and $145 million, respectively. The favorable change from 2016 to 2017 was primarily driven by the continued phase-in of Harmonization. The FAS/CAS Adjustment in 2015 was a net benefit of $104 million. The favorable change from 2015 to 2016 was driven by the continued phase-in of Harmonization. Our projected 2018 FAS/CAS Adjustment is discussed in Consolidated Operating Results - Operating Income.
Retirement Plan Assets - Retirement plan assets are stated at fair value. Investments in equity securities (common and preferred) are valued at the last reported sales price when an active market exists. Investments in fixed-income
securities are generally valued based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders. Investments in hedge funds, real estate
investment funds, private partnerships, collective trust funds, and commingled funds are generally valued at their Net Asset Values ("NAV") or equivalent, which are based on the current fair valuevalues of the fund's underlying assets.
Management reviews independently appraised values, audited financial statements, and additional pricing information to evaluate the NAV or its equivalent.
For the limited group of investments for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional information is obtained from the investment manager and evaluated internally to determine whether any adjustments are required to reflect fair value. See Note 18:17: Employee Pension and Other Postretirement Benefits in Item 8.
Accumulated Other Comprehensive IncomeLoss - Changes in assumptions and changes to plan assets and benefit obligations due to differences between actuarial assumptions and actual results are reported as actuarial gains and losses and recorded in accumulated other comprehensive incomeloss, along with unrecognized prior service costs arising from plan amendments. As disclosed in Note 18:17: Employee Pension and Other Postretirement Benefits in Item 8, net pre-tax unrecognized actuarial losses as of December 31, 20172021 and 20162020 were $1,459$1,194 million and $1,583$2,007 million, respectively. The decrease in these actuarial losses in 20172021 was primarily driven by actual asset returns which were $473 million aboveexceeding expected returns $93by $412 million, lower benefit obligations of $289 million resulting from higher discount rates, and $107 million of amortization of previously unrecognized actuarial losses, $68 million actuarial gain from updated mortality assumptions, and a $625 million actuarial loss due to the decrease in the discount rates used to determine benefit obligations.losses.
Net pre-tax unrecognized prior service costs (credits) as of December 31, 20172021 and 20162020 were $47$60 million and $(18)$85 million, respectively. These net deferred costs (credits) primarily originated from plan amendments, including those resulting from collective bargaining agreements. The change in unrecognized prior service costs (credits) in 2017 primarily2021 resulted from plan amendments within a collective bargaining agreement, offset byand the amortization of previously accumulated prior service costs (credits).
Workers' Compensation
Our operations are subject to federal and state workers' compensation laws. We maintain self-insured workers' compensation plans and participate in federally administered second injury workers' compensation funds. We estimate the liability for such claims and funding requirements on a discounted basis utilizing actuarial methods based on various assumptions, which include our historical loss experience and projected loss development factors. We periodically, and at least annually, update our assumptions based on an actuarial analysis. Related self-insurance accruals include the liability for reported claimsFor further information on workers’ compensation, see Environmental, Health & Safety in Item 1 and an estimated accrual for claims incurred but not reported. Our workers' compensation liability was discounted at 2.35%Note 16: Commitments and 2.54% as of December 31, 2017 and 2016, respectively, based on future payment streams and a risk-free rate. We estimate a 100 basis points increase or decreaseContingencies in the discount rate would change our workers' compensation liability by $(48) million and $58 million, respectively. The workers' compensation benefit obligation on an undiscounted basis was $925 million and $835 million as of December 31, 2017 and 2016, respectively.Item 8.
Accounting Standards Updates
See Note 3: Accounting Standards Updates in Item 8 for further information.
CONSOLIDATED OPERATING RESULTS
SelectedThe following table presents selected financial highlights are presented in the following table:highlights: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 9,524 | | | $ | 9,361 | | | $ | 8,899 | | | $ | 163 | | | 2 | % | | $ | 462 | | | 5 | % |
Cost of product sales and service revenues | | 8,156 | | | 7,691 | | | 7,368 | | | 465 | | | 6 | % | | 323 | | | 4 | % |
Income from operating investments, net | | 41 | | | 32 | | | 22 | | | 9 | | | 28 | % | | 10 | | | 45 | % |
Other income and gains, net | | 2 | | | 1 | | | — | | | 1 | | | 100 | % | | 1 | | | — | % |
General and administrative expenses | | 898 | | | 904 | | | 788 | | | (6) | | | (1) | % | | 116 | | | 15 | % |
Goodwill impairment | | — | | | — | | | 29 | | | — | | | — | % | | (29) | | | (100) | % |
Operating income | | 513 | | | 799 | | | 736 | | | (286) | | | (36) | % | | 63 | | | 9 | % |
Interest expense | | (89) | | | (114) | | | (70) | | | 25 | | | 22 | % | | (44) | | | (63) | % |
Non-operating retirement benefit | | 181 | | | 119 | | | 12 | | | 62 | | | 52 | % | | 107 | | | 892 | % |
Other, net | | 17 | | | 6 | | | 5 | | | 11 | | | 183 | % | | 1 | | | 20 | % |
Federal and foreign income taxes | | 78 | | | 114 | | | 134 | | | (36) | | | (32) | % | | (20) | | | (15) | % |
Net earnings | | $ | 544 | | | $ | 696 | | | $ | 549 | | | $ | (152) | | | (22) | % | | $ | 147 | | | 27 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 7,441 |
| | $ | 7,068 |
| | $ | 7,020 |
| | $ | 373 |
| | 5 | % | | $ | 48 |
| | 1 | % |
Cost of product sales and service revenues | | 6,018 |
| | 5,608 |
| | 5,517 |
| | 410 |
| | 7 | % | | 91 |
| | 2 | % |
Income (loss) from operating investments, net | | 12 |
| | 6 |
| | 10 |
| | 6 |
| | 100 | % | | (4 | ) | | (40 | )% |
Other income and gains | | — |
| | 15 |
| | — |
| | (15 | ) | | (100 | )% | | 15 |
| | — | % |
General and administrative expenses | | 570 |
| | 623 |
| | 669 |
| | (53 | ) | | (9 | )% | | (46 | ) | | (7 | )% |
Goodwill impairment | | — |
| | — |
| | 75 |
| | — |
| | — | % | | (75 | ) | | (100 | )% |
Operating income (loss) | | 865 |
| | 858 |
| | 769 |
| | 7 |
| | 1 | % | | 89 |
| | 12 | % |
Interest expense | | 94 |
| | 74 |
| | 137 |
| | 20 |
| | 27 | % | | (63 | ) | | (46 | )% |
Federal and foreign income taxes | | 293 |
| | 211 |
| | 228 |
| | 82 |
| | 39 | % | | (17 | ) | | (7 | )% |
Net earnings (loss) | | $ | 479 |
| | $ | 573 |
| | $ | 404 |
| | $ | (94 | ) | | (16 | )% | | $ | 169 |
| | 42 | % |
Operating Performance Assessment and Reporting
We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance. Under FAR rules that govern our business with the U.S. Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.
Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.
Sales and Service Revenues
Sales and service revenues were comprised as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Product sales | | $ | 7,000 | | | $ | 6,850 | | | $ | 6,265 | | | $ | 150 | | | 2 | % | | $ | 585 | | | 9 | % |
Service revenues | | 2,524 | | | 2,511 | | | 2,634 | | | 13 | | | 1 | % | | (123) | | | (5) | % |
Sales and service revenues | | $ | 9,524 | | | $ | 9,361 | | | $ | 8,899 | | | $ | 163 | | | 2 | % | | $ | 462 | | | 5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Product sales | | $ | 5,573 |
| | $ | 5,631 |
| | $ | 5,665 |
| | $ | (58 | ) | | (1 | )% | | $ | (34 | ) | | (1 | )% |
Service revenues | | 1,868 |
| | 1,437 |
| | 1,355 |
| | 431 |
| | 30 | % | | 82 |
| | 6 | % |
Sales and service revenues | | $ | 7,441 |
| | $ | 7,068 |
| | $ | 7,020 |
| | $ | 373 |
| | 5 | % | | $ | 48 |
| | 1 | % |
20172021 - Product sales in 2017 decreased $582021 increased $150 million, or 1%2%, from 2016.2020. Product sales at our Ingalls segment decreased $10$105 million in 2017,2021, primarily as a result of lower volumes in the Legend class NSC program and amphibious assault ships, partially offset by higher volumes in surface combatants. Newport News product sales
increased $231 million in 2021, primarily as a result of higher volumes in submarines and aircraft carriers. Technical Solutions product sales increased $24 million in 2021, primarily as a result of higher volumes in DFS, partially offset by lower volumes in unmanned systems.
Service revenues in 2021 increased $13 million, or 1%, from 2020. Service revenues at our Ingalls segment decreased $56 million in 2021, primarily as a result of lower volumes in surface combatants, partially offset by higher volumes incombatant and amphibious assault ships. Newport News product sales increased $20 million in 2017, primarily as a result of higher volumes in aircraft carriers, partially offset by lower volumes in submarines. Technical Solutions
product sales decreased $68 million in 2017, primarily as a result of higher volumes in 2016 from the resolution of outstanding contract changes on a nuclear and environmental commercial contract.
Service revenues in 2017 increased $431 million, or 30%, from 2016. Service revenues at our Ingalls segment increased $41 million in 2017, as a result of higher volumes in surface combatantsship services. Service revenues at our Newport News segment increased $57 million in 2017, primarily as a result of higher volumes in naval nuclear support services and submarines services, partially offset by lower volumes in aircraft carriers services. Service revenues at our Technical Solutions segment increased $333 million in 2017, primarily as a result of higher volumes in integrated missions solutions services following the December 2016 acquisition of Camber and higher volumes in fleet support and oil and gas services.
2016 - Product sales in 2016 decreased $34 million, or 1%, from 2015. Product sales at our Ingalls segment increased $138 million in 2016, primarily as a result of higher volumes in surface combatants, partially offset by lower volumes in the Legend class NSC program. Newport News product sales decreased $275 million in 2016,2021, primarily as a result of lower volumes in aircraft carriers. Technical Solutions product sales increased $103 million in 2016, primarily as a result of higher volumes in nuclear and environmental products.
Service revenues in 2016 increased $82 million, or 6%, from 2015. Service revenues at our Ingalls segment increased $63 million in 2016, as a result of higher volumes in surface combatants and amphibious assault ships services. Service revenues at our Newport News segment increased $65 million in 2016, primarily as a result of higher volumes in submarines and naval nuclear support services. Service revenues at our Technical Solutions segment decreased $46increased $207 million in 2016,2021, primarily as a result of higher volumes in DFS services due to the acquisition of Alion, partially offset by the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture.
2020 - Product sales in 2020 increased $585 million, or 9%, from 2019. Product sales at our Ingalls segment increased $143 million in 2020, primarily as a result of higher volumes in amphibious assault ships and surface combatants, partially offset by lower volume in the Legend class NSC program. Newport News product sales increased $366 million in 2020, primarily as a result of higher volumes in aircraft carriers and submarines, partially offset by lower volume on commercial nuclear products. Technical Solutions product sales increased $76 million in 2020, primarily as a result of the acquisition of Hydroid, Inc. ("Hydroid") in March 2020.
Service revenues in 2020 decreased $123 million, or 5%, from 2019. Service revenues at our Ingalls segment decreased $21 million in 2020, as a result of lower volumes in nuclear and environmental, fleet support, and oil and gasamphibious assault ship services. Service revenues at our Newport News segment decreased $30 million in 2020, primarily as a result of lower volumes in aircraft carrier services, partially offset by higher volumes in integrated missions solutionsnaval nuclear support and submarine services. Service revenues at our Technical Solutions segment decreased $72 million in 2020, primarily as a result of lower volumes at our San Diego Shipyard and on DFS, oil and gas, and nuclear and environmental services, followingpartially offset by the acquisition of Camber.Hydroid in March 2020.
Cost of Sales and Service Revenues
Cost of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Cost of product sales | | $ | 5,958 | | | $ | 5,621 | | | $ | 5,158 | | | $ | 337 | | | 6 | % | | $ | 463 | | | 9 | % |
% of product sales | | 85.1 | % | | 82.1 | % | | 82.3 | % | | | | | | | | |
Cost of service revenues | | 2,198 | | | 2,070 | | | 2,210 | | | 128 | | | 6 | % | | (140) | | | (6) | % |
% of service revenues | | 87.1 | % | | 82.4 | % | | 83.9 | % | | | | | | | | |
Income from operating investments, net | | 41 | | | 32 | | | 22 | | | 9 | | | 28 | % | | 10 | | | 45 | % |
Other income and gains, net | | 2 | | | 1 | | | — | | | 1 | | | 100 | % | | 1 | | | — | % |
General and administrative expenses | | 898 | | | 904 | | | 788 | | | (6) | | | (1) | % | | 116 | | | 15 | % |
% of total sales and service revenues | | 9.4 | % | | 9.7 | % | | 8.9 | % | | | | | | | | |
Goodwill impairment | | — | | | — | | | 29 | | | — | | | — | % | | (29) | | | (100) | % |
Cost of sales and service revenues | | $ | 9,011 | | | $ | 8,562 | | | $ | 8,163 | | | $ | 449 | | | 5 | % | | $ | 399 | | | 5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Cost of product sales | | $ | 4,444 |
| | $ | 4,380 |
| | $ | 4,319 |
| | $ | 64 |
| | 1 | % | | $ | 61 |
| | 1 | % |
% of product sales | | 79.7 | % | | 77.8 | % | | 76.2 | % | | — |
| | | | — |
| | |
Cost of service revenues | | 1,574 |
| | 1,228 |
| | 1,198 |
| | 346 |
| | 28 | % | | 30 |
| | 3 | % |
% of service revenues | | 84.3 | % | | 85.5 | % | | 88.4 | % | | — |
| | | | — |
| | |
Income (loss) from operating investments, net | | 12 |
| | 6 |
| | 10 |
| | 6 |
| | 100 | % | | (4 | ) | | (40 | )% |
Other income and gains | | — |
| | 15 |
| | — |
| | (15 | ) | | (100 | )% | | 15 |
| | — | % |
General and administrative expenses | | 570 |
| | 623 |
| | 669 |
| | (53 | ) | | (9 | )% | | (46 | ) | | (7 | )% |
% of total sales and service revenues | | 7.7 | % | | 8.8 | % | | 9.5 | % | | — |
| | | | — |
| | |
Goodwill impairment | | — |
| | — |
| | 75 |
| | — |
| | — | % | | (75 | ) | | (100 | )% |
Cost of sales and service revenues | | $ | 6,576 |
| | $ | 6,210 |
|
| $ | 6,251 |
| | $ | 366 |
| | 6 | % | | $ | (41 | ) | | (1 | )% |
Cost of Product Sales
20172021 - Cost of product sales in 20172021 increased $64$337 million, or 1%6%, compared to 2016.2020. Cost of product sales at our Ingalls segment decreased $82 million in 2021, primarily as a result of volume decreases described above. Cost of product sales at our Newport News segment increased $65 million in 2021, primarily as a result of submarine volume increases described above, partially offset by impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020. Cost of product sales at our Technical Solutions segment increased $20 million in 2021, primarily due to the higher volumes described above. Cost of product sales related to the Operating FAS/CAS Adjustment increased $334 million from 2020 to 2021.
Cost of product sales as a percentage of product sales increased from 82.1% in 2020 to 85.1% in 2021, primarily due to an unfavorable change in the Operating FAS/CAS Adjustment, lower risk retirement on Delbert D. Black (DDG 119), and year-to-year variances in contract mix, partially offset by impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, higher risk retirement on Bougainville (LHA 8), and a contract incentive on Jack H. Lucas (DDG 125).
2020 - Cost of product sales in 2020 increased $463 million, or 9%, compared to 2019. Cost of product sales at our Ingalls segment increased $64$22 million in 2017,2020, primarily as a result of lower risk retirement in the San Antonio class (LPD 17) program, following delivery of USS John P. Murtha (LPD 26) in 2016, as well as the volume changes described above, partially offset by higher risk retirement on Tripoli (LHA 7).Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive. Cost of product sales at our Newport News segment increased $56$480 million in 2017,2020, primarily as a result of program cost growth and the volume increases described above. Cost of product sales at our Technical Solutions segment increased $65 million in 2020, primarily due to the higher volumes described above. Cost of product sales related to the Operating FAS/CAS Adjustment decreased $104 million from 2019 to 2020.
Cost of product sales as a percentage of product sales decreased from 82.3% in 2019 to 82.1% in 2020, primarily due to a favorable change in the Operating FAS/CAS Adjustment and higher risk retirement on Delbert D. Black (DDG 119), USS Tripoli (LHA 7), and Richard M. McCool Jr. (LPD 29), as well as year-to-year variances in contract mix, partially offset by unfavorable cumulative catch-up adjustments in the second quarter of 2020 of $111 million on Block IV boats of the Virginia class (SSN 774) submarine program, including $95 million for cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends, as well as $16 million from delay and disruption directly attributable to COVID-19 Events. The decrease in cost of product sales as a percentage of product sales was also offset by unfavorable cumulative catch-up adjustments in the second quarter of 2020 aggregating $61 million across all programs, resulting from cost estimates for delay and disruption from discrete COVID-19 Events, including $16 million in relation to the Block IV boats of the Virginia class (SSN 774) submarine program discussed above.
Cost of Service Revenues
2021 - Cost of service revenues in 2021 increased $128 million, or 6%, compared to 2020. Cost of service revenues at our Ingalls segment decreased $46 million in 2021, primarily as a result of lower volumes described above. Cost of service revenues at our Newport News segment decreased $74 million in 2021, primarily as a result of lower volumes described above. Cost of service revenues at our Technical Solutions segment increased $177 million in 2021, primarily as a result of higher volumes described above. Cost of service revenues related to the Operating FAS/CAS Adjustment increased $71 million from 2020 to 2021.
Cost of service revenues as a percentage of service revenues increased from 82.4% in 2020 to 87.1% in 2021, primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, lower risk retirement on submarine support services, and year-to-year variances in contract mix.
2020 - Cost of service revenues in 2020 decreased $140 million, or 6%, compared to 2019. Cost of service revenues at our Ingalls segment decreased $10 million in 2020, primarily as a result of the volume changes described above, and the resolution of outstanding contract changes on the RCOH of the redelivered USS Abraham Lincoln (CVN 72), partially offset by lower risk retirementrecovery of losses on a long-term design contract in the Virginia class (SSN 774) submarine program.2019. Cost of product sales at our Technical Solutions segment decreased $56 million in 2017, primarily due to the resolution in 2016 of outstanding contract changes on a nuclear and environmental commercial contract, partially offset by the establishment of an allowance for accounts receivable on a nuclear and environmental commercial contract in 2017. Cost of product sales as a percentage of product sales increased from 77.8% in 2016 to 79.7% in 2017,
primarily driven by lower risk retirement in the San Antonio class (LPD 17) program, following delivery of USS John P. Murtha (LPD 26) in 2016, the Virginia class (SSN 774) submarine program, and Arleigh Burke class (DDG 51) destroyers, as well as the establishment of an allowance for accounts receivable on a nuclear and environmental commercial contract, partially offset by higher risk retirement on Tripoli (LHA 7) and the resolution of outstanding contract changes on the RCOH of the redelivered USS Abraham Lincoln (CVN 72).
2016 - Cost of product sales in 2016 increased $61 million, or 1%, compared to 2015. Cost of product sales at our Ingalls segment increased $194 million in 2016, primarily as a result of the impact in 2015 of the settlement of the Aon litigation and the volume changes described above, partially offset by higher risk retirement in the San Antonio class (LPD 17) program. Cost of product salesservice revenues at our Newport News segment decreased $220$12 million in 2016,2020, primarily as a result of the volume changes described above, partially offset by lower risk retirement in the Virginia class (SSN 774) submarine program. Cost of product sales at our Technical Solutions segment increased $87 million in 2016, primarily due to the higher volumes described above. Cost of product sales as a percentage of product sales increased from 76.2% in 2015 to 77.8% in 2016, primarily driven by the impact in 2015 of the settlement of the Aon litigation and lower risk retirement in the Virginia class (SSN 774) submarine program, partially offset by higher risk retirement in the San Antonio class (LPD 17) program.
Cost of Service Revenues
2017 - Cost of service revenues in 2017 increased $346 million, or 28%, compared to 2016. Cost of service revenues at our Ingalls segment increased $23 million in 2017, primarily as a result of the higher sales volumes described above. Cost of service revenues at our Newport News segment increased $30 million in 2017, primarily as a result of the higher sales volumes described above. Cost of service revenues at our Technical Solutions segment increased $293 million in 2017, primarily as a result of the higher volumes described above. Cost of service revenues as a percentage of service revenues declined from 85.5% in 2016 to 84.3% in 2017, primarily driven by the resolution of outstanding contract changes on the inactivation of the decommissioned Enterprise (CVN 65), improved performance in oil and gas services, and year-to-year variances in contract mix.
2016 - Cost of service revenues in 2016 increased $30 million, or 3%, compared to 2015. Cost of service revenues at our Ingalls segment increased $66 million in 2016, primarily as a result of the higher sales volumes described above. Cost of service revenues at our Newport News segment increased $32 million in 2016, primarily as a result of the higher sales volumes described above.naval nuclear support services. Cost of service revenues at our Technical Solutions segment decreased $68$98 million in 2016,2020, primarily as a result of the intangible asset impairment chargevolume changes described above, partially offset by a loss on a fleet support services contract in 2015 and lower sales volumes described above. 2019. Cost of service revenues related to the Operating FAS/CAS Adjustment decreased $20 million from 2019 to 2020.
Cost of service revenues as a percentage of service revenues decreased from 88.4%83.9% in 20152019 to 85.5%82.4% in 2016,2020, primarily driven by a favorable change in the intangible asset impairment charge in 2015, improved performance inOperating FAS/CAS Adjustment, a loss on a fleet support services contract in 2016,2019, and year-to-year variances in contract mix.mix, partially offset by lower risk retirement on naval nuclear support services.
Income (Loss) from Operating Investments, Net
The activities of our operating investments are closely aligned with the operations of the segments holding the investments. We therefore record income related to earnings from equity method investments in our operating income.
20172021 - Income from operating investments, net increased $6$9 million, or 100%28%, to $12$41 million in 20172021 from $6$32 million in 2016.2020. The increase resulted from higher equity income from our Savannah River Nuclear Solutions, LLC investment.ship repair and specialty fabrication joint venture and nuclear and environmental joint ventures.
2016 2020 - Income from operating investments, net decreased $4increased $10 million, or 40%45%, to $6$32 million in 20162020 from $10$22 million in 2015.2019. The decreaseincrease resulted from lowerhigher equity income from our Savannah River Nuclear Solutions, LLC investment.SRNS and MSTS investments.
Other Income and Gains, Net
20172021 - Other income and gains, decreased $15 millionnet in 20172021 were flat compared to 2016. The decrease resulted from state2020.
2020 - Other income and local government grants at our Newport News segmentgains, net in 2016.2020 were flat compared to 2019.
General and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.
20172021 - General and administrative expenses in 20172021 decreased $53$6 million, or 9%1%, compared to 2016.2020. This decrease was primarily driven by favorable changes in current state income tax expense, partially offset by unfavorable changes in non-current state income tax expense and higher overhead costs driven by the FAS/CAS Adjustment.acquisition of Alion.
20162020 - General and administrative expenses in 2016 decreased $462020 increased $116 million, or 7%15%, compared to 2015.2019. This decreaseincrease was primarily driven by the acquisition of Hydroid and higher overhead costs and current state income tax expense, partially offset by favorable changes in the FAS/CAS Adjustment and lower currentnon-current state income tax expense.
Goodwill Impairment of Goodwill
As discussed above underin Critical Accounting Policies, Estimates and Judgments, we perform impairment tests for
goodwill as of November 30 each year, or when evidence of potential impairment exists. We record a charge to operations when we determine that an impairment has occurred.
We recorded goodwill impairment charges in 2015 of $75 million in our Technical Solutions segment. See Note 12: Goodwill and Other Purchased Intangible Assets in Item 8.
Operating Income
We consider operating income to be an important measure for evaluating our operating performance, and, as is typical in theconsistent with industry practice, we define operating income as revenues less the related costcosts of producing the revenues and general and administrative expenses.
We internally manage our operations by reference to "segment operating income," which is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects segment performance. Segment operating income is not a recognized measure under GAAP. When analyzing our operating performance, investors should use segment operating income in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to evaluate our core operating performance. We believe segment operating income reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies.
The following table reconciles segment operating income to segment operating income:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Segment operating income (loss) | | $ | 688 |
| | $ | 715 |
| | $ | 667 |
| | $ | (27 | ) | | (4 | )% | | $ | 48 |
| | 7 | % |
FAS/CAS Adjustment | | 189 |
| | 145 |
| | 104 |
| | 44 |
| | 30 | % | | 41 |
| | 39 | % |
Non-current state income taxes | | (12 | ) | | (2 | ) | | (2 | ) | | (10 | ) | | (500 | )% | | — |
| | — | % |
Operating income (loss) | | $ | 865 |
| | $ | 858 |
| | $ | 769 |
| | $ | 7 |
| | 1 | % | | $ | 89 |
| | 12 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Operating income | | $ | 513 | | | $ | 799 | | | $ | 736 | | | $ | (286) | | | (36) | % | | $ | 63 | | | 9 | % |
Operating FAS/CAS Adjustment | | 157 | | | (248) | | | (124) | | | 405 | | | 163 | % | | (124) | | | (100) | % |
Non-current state income taxes | | 13 | | | 4 | | | 19 | | | 9 | | | 225 | % | | (15) | | | (79) | % |
Segment operating income | | $ | 683 | | | $ | 555 | | | $ | 631 | | | $ | 128 | | | 23 | % | | $ | (76) | | | (12) | % |
Segment Operating Income
20172021 - Segment operating income in 20172021 was $688$683 million, compared to $715$555 million in 2016.2020. The decreaseincrease was primarily duedriven by impacts related to lower risk retirementperformance on Block IV boats of the delivered USS John P. Murtha (LPD 26), lower volume and risk retirement in the Virginiaclass (SSN 774) submarine program and Arleigh Burkedelay and disruption from discrete COVID-19 Events in 2020.
2020 - Segment operating income in 2020 was $555 million, compared to $631 million in 2019. The decrease was driven by unfavorable cumulative catch-up adjustments in the second quarter of 2020 totaling $167 million from updated cost and schedule assumptions across all programs.
Included in the $167 million of unfavorable adjustments was $111 million related to Block IV boats of the Virginia class (DDG 51) destroyers, favorable changes(SSN 774) submarine program for unfavorable cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends. Our risk retirement assumptions on Block IV boats anticipated boat-to-boat cost and schedule improvements working down the learning curve, but performance trends, exacerbated by COVID-19 Events, made those improvements less likely to occur. Also included in overhead coststhe $167 million of unfavorable adjustments was $61 million for the margin impact of delay and disruption cost estimates across all programs from discrete COVID-19 Events, including $16 million relating to Block IV boats of the Virginia class (SSN 774) submarine program, which was included in 2016, the receipt in 2016 of a local government incentive grant, and the establishment of an allowance for accounts receivable on a nuclear and environmental commercial contract in 2017,$111 million unfavorable adjustments noted above. These unfavorable margin adjustments were partially offset by higher risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, higher risk retirement and improved performance on USS Tripoli (LHA 7) and PortlandRichard M. McCool Jr. (LPD 27), the resolution of
outstanding contract changes on the inactivation of the decommissioned Enterprise (CVN 65) and the RCOH of the redelivered USS Abraham Lincoln (CVN 72)29), and improved performancea loss on a fleet support services contract in oil and gas services.2019.
2016 - Segment operating income in 2016 was $715 million, compared to $667 million in 2015. The increase was primarily due to the goodwill and intangible asset impairment charges in the Technical Solutions segment in 2015, higher risk retirement on the San Antonio class (LPD 17) program, favorable changes in overhead cost, and the receipt of a local government incentive grant, partially offset by the impact in 2015 of the settlement of the Aon litigation, lower risk retirement in the Virginia class (SSN 774) submarine program, and lower volume and lower risk retirement on the execution contract for the RCOH of USS Abraham Lincoln (CVN 72).
Activity within each segment is discussed under Segment Operating Results below.
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment representsreflects the difference between ourexpenses for pension and other postretirement benefits determined in accordance with GAAP and the expenses for these items included in segment operating income in accordance with CAS. The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan expenseassets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
Effective January 1, 2021, we adopted the Safe Harbor methodology for determining CAS pension costs. Under the new methodology, the interest rates used to calculate pension liabilities under FAS andCAS are consistent with those used in the determination of minimum funding requirements under CAS.the Employee Retirement Income Security Act of 1974 ("ERISA").
The components of the Operating FAS/CAS Adjustment were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
FAS expense | | $ | (28) | | | $ | (70) | | | $ | (139) | | | $ | 42 | | | 60 | % | | $ | 69 | | | 50 | % |
CAS cost | | 52 | | | 437 | | | 275 | | | (385) | | | (88) | % | | 162 | | | 59 | % |
FAS/CAS Adjustment | | 24 | | | 367 | | | 136 | | | (343) | | | (93) | % | | 231 | | | 170 | % |
Non-operating retirement benefit | | (181) | | | (119) | | | (12) | | | (62) | | | (52) | % | | (107) | | | (892) | % |
Operating FAS/CAS Adjustment (expense) benefit | | $ | (157) | | | $ | 248 | | | $ | 124 | | | $ | (405) | | | (163) | % | | $ | 124 | | | 100 | % |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
FAS expense | | $ | (172 | ) | | $ | (161 | ) | | $ | (168 | ) | | $ | (11 | ) | | (7 | )% | | $ | 7 |
| | 4 | % |
CAS cost | | 361 |
| | 306 |
| | 272 |
| | 55 |
| | 18 | % | | 34 |
| | 13 | % |
FAS/CAS Adjustment | | $ | 189 |
| | $ | 145 |
| | $ | 104 |
| | $ | 44 |
| | 30 | % | | $ | 41 |
| | 39 | % |
20172021 - The Operating FAS/CAS Adjustment in 20172021 was a net benefitexpense of $189$157 million, compared to a net benefit of $145$248 million in 2016.2020. The unfavorable change was primarily driven by the more immediate recognition of higher interest rates under CAS.
2020 - The Operating FAS/CAS Adjustment in 2020 was a net benefit of $248 million, compared to a net benefit of $124 million in 2019. The favorable change was primarily driven by the continued phase-inmore immediate recognition of Harmonization.lower interest rates under CAS.
2016 - The FAS/CAS Adjustment in 2016 was a net benefit of $145 million, compared to a net benefit of $104 million in 2015. The favorable change was primarily driven by the continued phase-in of Harmonization.
We expect the FAS/CAS Adjustment in 20182022 to be a net benefit of approximately $369$152 million ($91(($105) million FAS and $460$47 million CAS), primarily driven by the more immediate recognition of the 20172021 asset gainsreturns under FAS.
We expect the Operating FAS/CAS Adjustment in 2022 to be a net expense of approximately $142 million ($189 million FAS and the impacts of lower discount and interest rates and other experience gains and losses and assumption changes (e.g., mortality)$47 million CAS). The expected FAS/CAS Adjustment is subject to change during 2018,2022, when we remeasure our actuarial estimate of the unfunded benefit obligation for CAS with updated census data and other items later in the year.
Non-current State Income Taxes
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state uncertainunrecognized tax positionsbenefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
20172021 - Non-current state income tax expense in 20172021 was $12$13 million, compared to $2$4 million in 2016. Deferred2020. The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily attributable to a decrease in expenses not currently deductible for income tax purposes.
2020 - Non-current state income tax expense in 20172020 was $12$4 million, compared to $19 million in 2019. The decrease in non-current state income tax expense was driven by a decrease in deferred state income tax expense of $8 million in 2016.expense. The increasedecrease in deferred state income tax expense was primarily attributable to changesan increase in pension related adjustments. In 2017, the decrease in state uncertain tax positions resulted in a net tax benefit of less than $1 million, compared to a tax benefit of $6 million in 2016. In 2016, a state uncertain tax position was settled through agreement with the applicable taxing authority and was partially offset by the recognition of a non-current state tax expense in a different jurisdiction impacted by the results of the settlement. See Note 13: Income Taxes in Item 8.
2016 - Non-current stateexpenses that are not currently deductible for income tax expense remained constant at $2 million in 2016 and 2015. Deferred state income tax expense in 2016 was $8 million as compared to deferred state income tax expense of less than $1 million in 2015. The increase in deferred state income tax expense was primarily attributable to changes in the timing of contract taxable incomepurposes and pension related adjustments. In 2016, the decrease in state uncertain tax positions resulted in a net tax benefit of $6 million, as compared to $2 million of tax expense in 2015. The state uncertain tax position was settled through agreement with the applicable taxing authority and was partially offset by
the recognition of a non-current state tax expense in a different jurisdiction impacted by the results of the settlement. See Note 13: Income Taxes in Item 8.
Interest Expense
20172021 - Interest expense in 20172021 was $94$89 million, compared to $74$114 million in 2016.2020. The decrease was primarily a result of costs associated with the early redemption in 2020 of $600 million aggregate principal amount of our 5.000% senior notes due in 2025, partially offset by increased borrowing to fund the acquisition of Alion with the issuance of $400 million aggregate principal amount of 0.670% senior notes due 2023, $600 million aggregate principal amount of 2.043% senior notes due 2028, and a $650 million three-year Term Loan.
2020 - Interest expense in 2020 was $114 million, compared to $70 million in 2019. The increase was primarily a result of a loss oncosts associated with the early extinguishmentredemption of debt$600 million aggregate principal amount of our 5.000% senior notes due 2025 and the issuance in 2020 of $500 million aggregate principal amount of 3.844% senior notes due 2025 and $500 million aggregate principal amount of 4.200% senior notes due 2030, partially offset by reduced borrowing on our credit facilities.
Non-Operating Retirement Benefit
The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.
2021 - A favorable change in the fourth quarternon-operating retirement benefit of 2017. See Note 14: Debt$62 million from 2020 to 2021 was primarily driven by higher 2020 returns on plan assets.
2020 - A favorable change in Item 8.the non-operating retirement benefit of $107 million from 2019 to 2020 was primarily driven by higher 2019 returns on plan assets.
Other, Net
2021 - Interest expenseOther, net income in 20162021 was $74$17 million, compared to $137$6 million in 2015.2020. The decreaseincrease was primarily driven by an impairment of a result of refinancing $600 million principal amount of 7.125% senior notesloan receivable in 2020.
2020 - Other, net income in 2020 was consistent with 5.000% senior notes and repayment in 2015 of credit facility term loans, as well as the loss on early extinguishment of debt in 2015. See Note 14: Debt in Item 8.2019.
Federal and Foreign Income Taxes
2017 2021 - Our effective tax rate on earnings from continuing operations was 38.0%12.5% in 2017,2021, compared to 26.9%14.1% in 2016.2020. The increasedecrease in our effective tax rate for 20172021 was primarily attributable to the revaluation of net deferred tax assets resulting from the decrease in the federal tax rate included in the Tax Act and a decrease in the domestic manufacturing deduction primarily resulting from an increase in research and development tax credits for prior periods and a tax loss associated with the Company’s 2018 expected discretionary pre-tax pension contributions. See Note 13: Income Taxessale of our oil and gas business, partially offset by an increase in Item 8.unrecognized tax benefits.
20162020 - Our effective tax rate on earnings from continuing operations was 26.9%14.1% in 2016,2020, compared to 36.1%19.6% in 2015.2019. The decrease in our effective tax rate for 20162020 was primarily attributable to the adoption of ASU 2016-09, which reduced incomefavorable adjustments related to research and development tax expense by the incomecredits for prior tax benefits resulting from stock award settlement activity, a re-measurement of uncertain tax positions that resulted in a decrease in cumulative unrecognized tax benefits, and the goodwill impairment that was recorded in 2015. See Note 13: Income Taxes in Item 8.years.
In December 2017, the U.S. enacted the Tax Act, which made significant changes to U.S. federal income tax law, including a reduction of the statutory federal corporate income tax rate from 35.0% to 21.0% and changes or limitations to certain deductions. As a result of the corporate income tax reduction effective January 1, 2018, we revalued our net deferred tax assets as of December 31, 2017. This reduced our net deferred tax assets by $56 million, which was recorded as additional income tax expense for the year ended December 31, 2017. In future periods, we expect that Tax Act changes will positively impact our after-tax earnings primarily due to the lower corporate income tax rate.
SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned into three reportable segments: Ingalls, Newport News, and Technical Solutions. We established the Technical Solutions
The following table presents segment in the fourth quarter of 2016 in conjunction with our acquisition of Camber and realignment of management oversight of operations to enhance strategic and operational alignment among our services businesses. As a result of this realignment, our non-nuclear fleet support and nuclear and environmental services were transferred from our Newport News segment to our Technical Solutions segment. Our oil and gas services were transferred from our Other segment to our Technical Solutions segment, and our Other segment was dissolved.operating results: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Sales and Service Revenues | | | | | | | | | | | | | | |
Ingalls | | $ | 2,528 | | | $ | 2,678 | | | $ | 2,555 | | | $ | (150) | | | (6) | % | | $ | 123 | | | 5 | % |
Newport News | | 5,663 | | | 5,571 | | | 5,231 | | | 92 | | | 2 | % | | 340 | | | 6 | % |
Technical Solutions | | 1,476 | | | 1,268 | | | 1,237 | | | 208 | | | 16 | % | | 31 | | | 3 | % |
Intersegment eliminations | | (143) | | | (156) | | | (124) | | | 13 | | | 8 | % | | (32) | | | (26) | % |
Sales and service revenues | | $ | 9,524 | | | $ | 9,361 | | | $ | 8,899 | | | $ | 163 | | | 2 | % | | $ | 462 | | | 5 | % |
Operating Income | | | | | | | | | | | | | | |
Ingalls | | $ | 281 | | | $ | 281 | | | $ | 235 | | | $ | — | | | — | % | | $ | 46 | | | 20 | % |
Newport News | | 352 | | | 233 | | | 410 | | | 119 | | | 51 | % | | (177) | | | (43) | % |
Technical Solutions | | 50 | | | 41 | | | (14) | | | 9 | | | 22 | % | | 55 | | | 393 | % |
| | | | | | | | | | | | | | |
Segment operating income | | 683 | | | 555 | | | 631 | | | 128 | | | 23 | % | | (76) | | | (12) | % |
Non-segment factors affecting operating income | | | | | | | | | | | | | | |
Operating FAS/CAS Adjustment | | (157) | | | 248 | | | 124 | | | (405) | | | (163) | % | | 124 | | | 100 | % |
Non-current state income taxes | | (13) | | | (4) | | | (19) | | | (9) | | | (225) | % | | 15 | | | 79 | % |
Operating income | | $ | 513 | | | $ | 799 | | | $ | 736 | | | $ | (286) | | | (36) | % | | $ | 63 | | | 9 | % |
In December 2016, we completed the acquisition of Camber, and, in 2015, we completed the acquisition of USC. We report the post-acquisition results of operations, financial position, and cash flows of Camber and USC as part of our Technical Solutions segment.
Segment operating results are presented in the following table:
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| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Sales and Service Revenues | | | | | | | |
|
| |
|
| |
|
| |
|
|
Ingalls | | $ | 2,420 |
| | $ | 2,389 |
| | $ | 2,188 |
| | $ | 31 |
| | 1 | % | | $ | 201 |
| | 9 | % |
Newport News | | 4,164 |
| | 4,089 |
| | 4,298 |
| | 75 |
| | 2 | % | | (209 | ) | | (5 | )% |
Technical Solutions | | 952 |
| | 691 |
| | 616 |
| | 261 |
| | 38 | % | | 75 |
| | 12 | % |
Intersegment eliminations | | (95 | ) | | (101 | ) | | (82 | ) | | 6 |
| | 6 | % | | (19 | ) | | (23 | )% |
Sales and service revenues | | $ | 7,441 |
| | $ | 7,068 |
| | $ | 7,020 |
| | $ | 373 |
| | 5 | % | | $ | 48 |
| | 1 | % |
Operating Income (Loss) | |
|
| |
|
| | | |
|
| | | |
|
| | |
Ingalls | | $ | 313 |
| | $ | 321 |
| | $ | 379 |
| | $ | (8 | ) | | (2 | )% | | $ | (58 | ) | | (15 | )% |
Newport News | | 354 |
| | 386 |
| | 401 |
| | (32 | ) | | (8 | )% | | (15 | ) | | (4 | )% |
Technical Solutions | | 21 |
| | 8 |
| | (113 | ) | | 13 |
| | 163 | % | | 121 |
| | 107 | % |
Segment operating income (loss) | | 688 |
| | 715 |
| | 667 |
| | (27 | ) | | (4 | )% | | 48 |
| | 7 | % |
Non-segment factors affecting operating income (loss) | | | | | | | | | | | | | | |
FAS/CAS Adjustment | | 189 |
| | 145 |
| | 104 |
| | 44 |
| | 30 | % | | 41 |
| | 39 | % |
Non-current state income taxes | | (12 | ) | | (2 | ) | | (2 | ) | | (10 | ) | | (500 | )% | | — |
| | — | % |
Operating income (loss) | | $ | 865 |
| | $ | 858 |
| | $ | 769 |
| | $ | 7 |
| | 1 | % | | $ | 89 |
| | 12 | % |
KEY SEGMENT FINANCIAL MEASURES
Sales and Service Revenues
Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts. Volume changes will typically carry a corresponding income change based on the margin rate for a particular contract.
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract margin rates. These changes typically relate to profit recognition associated with revisions to EACestimated costs at completion ("EAC") that reflect improved or deteriorated operating performance on that contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded. Segment operating income may also be affected by, among other things, contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as warranty reserves, could also impact contract earnings. Where such items have occurred and the effects are material, a separate description is provided.
Ingalls
For the years ended December 31, 2021, 2020, and 2019, favorable and unfavorable cumulative catch-up adjustments were as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Gross favorable adjustments | | $ | 244 | | | $ | 244 | | | $ | 247 | |
Gross unfavorable adjustments | | (129) | | | (273) | | | (151) | |
Net adjustments | | $ | 115 | | | $ | (29) | | | $ | 96 | |
For the year ended December 31, 2021, favorable cumulative catch-up adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on Jack H. Lucas (DDG 125) and risk retirement on Fort Lauderdale (LPD 28). During the same period, no unfavorable cumulative catch-up margin adjustments were individually significant.
For the year ended December 31, 2020, favorable cumulative catch-up adjustments included risk retirement on Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, naval nuclear support services, the San Antonio class (LPD 17) program, and other individually insignificant adjustments.
During the same period, unfavorable cumulative catch-up adjustments were primarily driven by $111 million in the second quarter of 2020 on the Block IV boats of the Virginia class (SSN 774) submarine program, including $95 million for cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends. Our risk retirement assumptions on Block IV boats anticipated boat-to-boat cost and schedule improvements working down the learning curve, but performance trends, exacerbated by the COVID-19 Events, made those improvements less likely to occur. Unfavorable cumulative catch-up adjustments on the Block IV boats of the Virginia class (SSN 774) submarine program also included $16 million from delay and disruption directly attributable to COVID-19 Events due to lower employee attendance, decreased availability of critical skills, and out-of-sequence work. Unfavorable cumulative catch-up adjustments across all programs resulting from delay and disruption cost estimates for discrete COVID-19 Events were $61 million, including $16 million in relation to the Block IV boats of the Virginia class (SSN 774) submarine program discussed above.
For the year ended December 31, 2019, favorable cumulative catch-up adjustments were related to contract changes on submarine support services, risk retirement on the Legend class NSC program, surface combatants, and the RCOH of USS George Washington (CVN 73), as well as other individually insignificant adjustments. During the same period, unfavorable cumulative catch-up adjustments included recognition of a forward loss on a fleet support services contract and schedule delays on USS Tripoli (LHA 7), as well as other individually insignificant adjustments.
When estimates of total costs to be incurred exceed estimates of total revenue to be earned on a performance obligation related to a complex, construction-type contract, we recognize the entire loss on the performance obligation in the period the loss is determined.
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| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 2,420 |
| | $ | 2,389 |
| | $ | 2,188 |
| | $ | 31 |
| | 1 | % | | $ | 201 |
| | 9 | % |
Segment operating income (loss) | | 313 |
| | 321 |
| | 379 |
| | (8 | ) | | (2 | )% | | (58 | ) | | (15 | )% |
As a percentage of segment sales | | 12.9 | % | | 13.4 | % | | 17.3 | % | | | | | | | | |
Ingalls | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 2,528 | | | $ | 2,678 | | | $ | 2,555 | | | $ | (150) | | | (6) | % | | $ | 123 | | | 5 | % |
Segment operating income | | 281 | | | 281 | | | 235 | | | — | | | — | % | | 46 | | | 20 | % |
As a percentage of segment sales | | 11.1 | % | | 10.5 | % | | 9.2 | % | | | | | | | | |
Sales and Service Revenues
20172021 - Ingalls revenues, including intersegment sales, decreased $150 million, or 6%, in 2021 compared to 2020, primarily driven by lower revenues in the Legend class NSC program and amphibious assault ships, partially offset by higher revenues in surface combatants. Revenues on the Legend class NSC program decreased due to lower volumes on USCGC Stone (NSC 9) following its delivery. Amphibious assault ship revenues decreased due to lower volumes on Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29), Harrisburg (LPD 30), and USS Tripoli (LHA 7), partially offset by higher volumes on Pittsburgh (LPD 31) and LHA 9 (unnamed). Surface combatant revenues increased due to higher volumes on Jack H. Lucas (DDG 125), George M. Neal (DDG 131), Jeremiah Denton (DDG 129), and Sam Nunn (DDG 133), partially offset by lower volumes on USS Delbert D. Black (DDG 119) following its delivery and USS Fitzgerald (DDG 62) following its redelivery.
2020 - Ingalls revenues, including intersegment sales, increased $31$123 million, or 1%5%, in 20172020 compared to 2016, primarily driven by higher revenues in amphibious assault ships, partially offset by lower revenues in surface combatants and the Legend class NSC program. Amphibious assault ships revenues increased as a result of higher volumes on Bougainville (LHA 8) and Fort Lauderdale (LPD 28), partially offset by lower volume on the delivered USS John P. Murtha (LPD 26) and Portland (LPD 27). Surface combatants revenues decreased due to lower volumes on the delivered USS John Finn (DDG 113), Ralph Johnson (DDG 114), Frank E. Petersen Jr. (DDG 121), Paul Ignatius (DDG 117), and Delbert D. Black (DDG 119), partially offset by higher volumes on Lenah H. Sutcliffe Higbee (DDG 123), Jack H. Lucas (DDG 125), and the extended selected restricted availability contract for USS Ramage (DDG 61). Revenues on the Legend class NSC program decreased due to lower volume on the delivered USCGC Munro (NSC 6), partially offset by higher volumes on Stone (NSC 9) and Midgett (NSC 8).
2016 - Ingalls revenues, including intersegment sales, increased$201 million, or 9%, in 2016 compared to 2015,2019, primarily driven by higher revenues in surface combatants and amphibious assault ships, partially offset by lower revenues in the Legendclass NSC program. Surface combatantscombatant revenues increased due to higher volumes onFrank E. Petersen Jr. Ted Stevens (DDG 121)128), Lenah H. Sutcliffe HigbeeJeremiah Denton (DDG 123)129), and planning yard services, partially offset by lower volume on John FinnUSS Delbert D. Black (DDG 113) in connection with its delivery in 2016. The increase in amphibious assault ships revenues was due to higher volumes on Fort Lauderdale (LPD 28)119), Tripoli (LHA 7)Sam Nunn (DDG 133), George M. Neal (DDG 131), and Bougainville (LHA 8)Thad Cochran (DDG 135), partially offset by lower volumes on PortlandUSS Fitzgerald (DDG 62) restoration and modernization, USS Paul Ignatius (DDG 117), Frank E. Petersen Jr. (DDG 121), and Jack H. Lucas (DDG 125). Amphibious assault ship revenues increased as a result of higher volumes on Harrisburg (LPD 27)30), Pittsburgh (LPD 31), LHA 9 (unnamed), Fort Lauderdale (LPD 28), and Richard M. McCool Jr. (LPD 29), partially offset by lower volumes on USS John P. Murtha (LPD 26) following its delivery in 2016Tripoli (LHA 7), LPD life cycle services, and Bougainville (LHA 8). Revenues on the Legendclass NSC program decreased due to delivery oflower volumes on USCGC James Midgett (NSC 8) and Friedman (NSC 5)in 2015 and lower volume on Munro (NSC 6)11), partially offset by higher volume on Midgett (NSC 8)Calhoun (NSC 10).
Segment Operating Income
20172021 - Ingalls segment operating income in 20172021 was $313flat compared to 2020.
2020 - Ingalls segment operating income in 2020 was $281 million, compared to segment operating income of $321$235 million in 2016.2019. The decreaseincrease was primarily due to lower risk retirement on the delivered USS John P. Murtha (LPD 26) and Arleigh Burke class (DDG 51) destroyers, partially offset by higher risk retirement on Tripoli (LHA 7) and Portland (LPD 27).
2016 - Ingalls operating income in 2016 was $321 million, compared to income of $379 million in 2015. The decrease was primarily due to the impact in 2015 of the settlement of the Aon litigation and lower risk retirement on the America class (LHA 6) program, partially offsetdriven by higher risk retirement on USS John P. MurthaDelbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, as well as higher risk retirement and improved performance on USS Tripoli (LHA 7) and Richard M. McCool Jr. (LPD 26)29), Portland (LPD 27),partially offset by unfavorable adjustments across programs, including delay and Ralph Johnson (DDG 114).disruption from COVID-19 Events.
Newport News | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 5,663 | | | $ | 5,571 | | | $ | 5,231 | | | $ | 92 | | | 2 | % | | $ | 340 | | | 6 | % |
Segment operating income | | 352 | | | 233 | | | 410 | | | 119 | | | 51 | % | | (177) | | | (43) | % |
As a percentage of segment sales | | 6.2 | % | | 4.2 | % | | 7.8 | % | | | | | | | | |
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| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 4,164 |
| | $ | 4,089 |
| | $ | 4,298 |
| | $ | 75 |
| | 2 | % | | $ | (209 | ) | | (5 | )% |
Segment operating income (loss) | | 354 |
| | 386 |
| | 401 |
| | (32 | ) | | (8 | )% | | (15 | ) | | (4 | )% |
As a percentage of segment sales | | 8.5 | % | | 9.4 | % | | 9.3 | % | | | | | | | | |
Sales and Service Revenues
20172021 - Newport News revenues, including intersegment sales, increased $75$92 million, or 2%, in 20172021 compared to 2016,2020, primarily driven by higher revenues in submarines and aircraft carriers, and naval nuclear support services, partially offset by lower revenues in submarines.naval nuclear support services. Submarine revenues increased primarily as a result of higher volumes on Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class (SSBN 826) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program. Aircraft carriers
carrier revenues increased primarily as a result of higher volumes on the advance planning and execution contract for the RCOH of USS George Washington John C. Stennis (CVN 73)74), the construction contract for John F. Kennedy (CVN 79)of Enterprise (CVN 80), and the advance planning contract for Enterpriseconstruction of Doris Miller (CVN 80)81), partially offset by lower volumes on the execution contract forconstruction of John F. Kennedy (CVN 79) and the RCOH of the redelivered USS Abraham Lincoln (CVN 72), the construction contract for the delivered USS Gerald R. Ford (CVN 78), and the inactivation of the decommissioned Enterprise (CVN 65)George Washington (CVN 73). Naval nuclear support service revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.
2020 - Newport News revenues, including intersegment sales, increased $340 million, or 6%, in 2020 compared to 2019, primarily driven by higher revenues in aircraft carriers, submarines, and naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the construction of Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74), and Doris Miller (CVN 81), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73), John F. Kennedy (CVN 79), and USS Gerald R. Ford (CVN 78). Submarine revenues increased primarily as a result of higher volumes on the Columbia class (SSBN 826) submarine program and the Virginia class (SSN 774) submarine program. The higher volumes on the Virginia class (SSN 774) submarine program were due to higher volumes on Block V boats, partially offset by lower volumes on Block III and Block IV boats. Naval nuclear support service revenues increased primarily as a result of higher volumes in submarinecarrier fleet support and facility maintenance services, partially offset by lower volumesservices.
Segment Operating Income
2021 - Newport News segment operating income in aircraft carrier support services. Submarines revenues2021 was $352 million, compared to segment operating income of $233 million in 2020. The increase was primarily due to impacts related to performance on Block IV boats of the Virginiaclass (SSN 774) submarine program decreased due to lower volumes on Block III boats, partially offset by higher volumes on Block IV boats.and delay and disruption from discrete COVID-19 Events in 2020.
20162020 - Newport News revenues, including intersegment sales, decreased $209 million, or 5%, in 2016 compared to 2015, primarily driven by lower revenues in aircraft carriers. Aircraft carriers revenues decreased primarily as a
result of lower volumes on USS Gerald R. Ford (CVN 78) and the execution contract for the RCOH of USS Abraham Lincoln (CVN 72),partially offset by higher volumes on John F. Kennedy (CVN 79) and the advance planning contract for the RCOH of USS George Washington (CVN 73). Submarines revenues related to the Virginia class (SSN 774) submarine program were relatively constant in 2016 compared to 2015 due to higher volumes on Block IV boats and USS John Warner (SSN 785) post-shakedown availability services, offset by lower volumes on Block III boats.
Segment Operating Income
2017 - Newport Newssegment operating income in 20172020 was $354$233 million, compared to segment operating income of $386$410 million in 2016.2019. The decrease was primarily due to lower volume and risk retirementunfavorable cumulative catch-up adjustments in the second quarter on Block IV boats of the Virginiaclass (SSN 774) submarine program favorable changesfor the reasons described above in overhead costs in 2016,"Segment Operating Results - Cumulative Adjustments” and the receipt in 2016 of a local government incentive grant, partially offset by the resolution of outstanding2019 contract changes on the inactivation of the decommissioned Enterprise (CVN 65) and the RCOH of the redelivered USS Abraham Lincoln (CVN 72).submarine support services.
2016 - Newport News operating income in 2016 was $386 million, compared to income of $401 million in 2015. The decrease was primarily due to lower risk retirement in the Virginia class (SSN 774) submarine program, lower volume and lower risk retirement on the execution contract for the RCOH of USS Abraham Lincoln (CVN 72) and lower volume on USS Gerald R. Ford (CVN 78), partially offset by favorable changes in overhead cost, and higher volumes on John F. Kennedy (CVN 79) and the RCOH of USS George Washington (CVN 73), as well as the receipt of a local government incentive grant.
Technical Solutions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 1,476 | | | $ | 1,268 | | | $ | 1,237 | | | $ | 208 | | | 16 | % | | $ | 31 | | | 3 | % |
Segment operating income (loss) | | 50 | | | 41 | | | (14) | | | 9 | | | 22 | % | | 55 | | | 393 | % |
As a percentage of segment sales | | 3.4 | % | | 3.2 | % | | (1.1) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Sales and service revenues | | $ | 952 |
| | $ | 691 |
| | $ | 616 |
| | $ | 261 |
| | 38 | % | | $ | 75 |
| | 12 | % |
Segment operating income (loss) | | 21 |
| | 8 |
| | (113 | ) | | 13 |
| | 163 | % | | 121 |
| | 107 | % |
As a percentage of segment sales | | 2.2 | % | | 1.2 | % | | (18.3 | )% | | | | | | | | |
Sales and Service Revenues
20172021 - Technical Solutions revenues, including intersegment sales, for the year ended December 31, 2017,2021, increased $261$208 million, or 38%16%, compared to 2016,2020, primarily due to higher volumevolumes in integrated missions solutions services followingDFS from the December 2016 acquisition of Camber and higher volumes in fleet support andAlion, partially offset by the divestiture of our oil and gas services, partially offset by lower nuclearbusiness and environmental volumes duecontribution of our San Diego Shipyard to the resolution in 2016 of outstanding contract changes on a nuclear and environmental commercial contract.joint venture.
20162020 - Technical Solutions revenues, including intersegment sales, for the year ended December 31, 2016,2020, increased $75$31 million, or 12%3%, compared to 2015,2019, primarily due to higher nuclear and environmental and fleet support revenues, as well as the acquisition of Camber,Hydroid in 2020, partially offset by lower revenues in oil and gas services. Nuclear and environmental revenues increased due to higher volumes andvolume at our San Diego Shipyard following the resolutionconclusion of outstanding contract changes on a commercial contract, partially offset by lower volumes associated with environmental remediation programs.several repair contracts.
Segment Operating Income
20172021 - Operating income in the Technical Solutions segment operating income for the year ended December 31, 2017,2021, was $21$50 million, compared to operating segment operating income of $8$41 million in 2016.2020. The increase was primarily driven by the acquisition of Alion and equity income from nuclear and environmental joint ventures, partially offset by lower performance in unmanned systems and the amortization of Alion purchased intangible assets.
2020 - Technical Solutions segment operating income for the year ended December 31, 2020, was $41 million, compared to a segment operating loss of $14 million in 2019. The increase was primarily due to improved performance ina goodwill
impairment at our oil and gas servicesreporting unit and higher volume in integrated missions solutions services following the December 2016 acquisition of Camber, partially offset by the establishment of an allowance for accounts receivablea loss on a fleet support services contract in 2019, as well as higher equity income from our nuclear and environmental commercial contract in 2017joint ventures and the resolution in 2016 of outstanding contract changesimproved performance on a nuclear and environmental commercial contract.DFS services.
2016 - Operating income in the Technical Solutions segment for the year ended December 31, 2016, was $8 million, compared to an operating loss of $113 million in 2015. The increase was primarily due to goodwill and
intangible asset impairment charges in 2015 and the resolution of outstanding contract changes on a nuclear and environmental commercial contract.
BACKLOG
Total backlog as of December 31, 2017,2021, was approximately $21$48.5 billion. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.
The following table presents funded and unfunded backlog by segment as of December 31, 20172021 and 2016: 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | | | | | Total | | | | | | Total |
($ in millions) | | Funded | | Unfunded | | Backlog | | Funded | | Unfunded | | Backlog |
Ingalls | | $ | 10,216 | | | $ | 792 | | | $ | 11,008 | | | $ | 10,443 | | | $ | 1,758 | | | $ | 12,201 | |
Newport News | | 11,121 | | | 21,198 | | | 32,319 | | | 9,536 | | | 23,132 | | | 32,668 | |
Technical Solutions | | 1,334 | | | 3,789 | | | 5,123 | | | 502 | | | 646 | | | 1,148 | |
Total backlog | | $ | 22,671 | | | $ | 25,779 | | | $ | 48,450 | | | $ | 20,481 | | | $ | 25,536 | | | $ | 46,017 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | | | | | Total | | | | | | Total |
($ in millions) | | Funded | | Unfunded | | Backlog | | Funded | | Unfunded | | Backlog |
Ingalls | | $ | 5,920 |
| | $ | 2,071 |
| | $ | 7,991 |
| | $ | 6,033 |
| | $ | 692 |
| | $ | 6,725 |
|
Newport News | | 6,976 |
| | 5,608 |
| | 12,584 |
| | 5,799 |
| | 7,127 |
| | 12,926 |
|
Technical Solutions | | 478 |
| | 314 |
| | 792 |
| | 712 |
| | 372 |
| | 1,084 |
|
Total backlog | | $ | 13,374 |
| | $ | 7,993 |
| | $ | 21,367 |
| | $ | 12,544 |
| | $ | 8,191 |
| | $ | 20,735 |
|
As a resultWe expect approximately 19% of integration efforts following the acquisition of Camber, the Company corrected the Technical Solutions segment's$48.5 billion total backlog and unfunded backlog as of December 31, 2016, reducing the balances by $289 million.
We expect approximately 31% of the $21 billion total backlog as of December 31, 2017,2021, to be converted into sales in 2018.2022. U.S. Government orders comprised substantially all of the backlog as of December 31, 20172021 and 2016.2020.
Awards
20172021 - The value of new contract awards during the year ended December 31, 2017,2021, was approximately $8.1 billion. Significant newbillion, comprised primarily of awards during this period included the detailed design and construction contract for Bougainville (LHA 8) and the execution contract for the RCOH of USS George Washington (CVN 73)John C. Stennis (CVN 74), construction of a 10th boat of the Virginia class (SSN 774) submarine program, and construction of John F. Lehman (DDG 137).
20162020 - The value of new contract awards during the year endedDecember 31, 2016,2020, was approximately $5.2 billion. Significant new awards during this period included$8.9 billion, comprised primarily of construction contracts for Pittsburgh (LPD 31), module sections for each of the detail design and construction of Fort Lauderdale (LPD 28), the construction of NSC 9 (unnamed), planning, advanced engineering, and procurement of long-lead material for Bougainville (LHA 8)first two Columbia class (SSBN 826) submarines, Sam Nunn (DDG 133), and additional advance planning for the RCOH of USS George Washington (CVN 73)Thad Cochran (DDG 135).
LIQUIDITY AND CAPITAL RESOURCES
We endeavorseek to ensure the most efficient conversion ofefficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value. We use various financial measures to assist in capital deployment decision making, including net cash provided by operating activities and free cash flow. We believe these measures are useful to investors in assessing our financial performance.
The following table summarizes key components of cash flow provided by (used in) operating activities:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2017 over 2016 | | 2016 over 2015 |
($ in millions) | | 2017 | | 2016 | | 2015 | | Dollars | | Percent | | Dollars | | Percent |
Net earnings (loss) | | $ | 479 |
| | $ | 573 |
| | $ | 404 |
| | $ | (94 | ) | | (16 | )% | | $ | 169 |
| | 42 | % |
Depreciation and amortization | | 211 |
| | 191 |
| | 188 |
| | 20 |
| | 10 | % | | 3 |
| | 2 | % |
Provision for doubtful accounts | | 10 |
| | — |
| | — |
| | 10 |
| | — | % | | — |
| | — | % |
Stock-based compensation | | 34 |
| | 36 |
| | 43 |
| | (2 | ) | | (6 | )% | | (7 | ) | | (16 | )% |
Deferred income taxes | | 184 |
| | 85 |
| | (15 | ) | | 99 |
| | 116 | % | | 100 |
| | 667 | % |
Retiree benefit funding less than (in excess of) expense | | (163 | ) | | (44 | ) | | 32 |
| | (119 | ) | | (270 | )% | | (76 | ) | | (238 | )% |
Insurance proceeds for investing purposes | | — |
| | — |
| | (21 | ) | | — |
| | — | % | | 21 |
| | 100 | % |
Impairment of goodwill and intangible assets | | — |
| | — |
| | 102 |
| | — |
| | — | % | | (102 | ) | | (100 | )% |
Loss on early extinguishment of debt | | 22 |
| | — |
| | 44 |
| | 22 |
| | — | % | | (44 | ) | | (100 | )% |
Trade working capital decrease (increase) | | 37 |
| | (19 | ) | | 84 |
| | 56 |
| | 295 | % | | (103 | ) | | (123 | )% |
Net cash provided by (used in) operating activities | | $ | 814 |
| | $ | 822 |
| | $ | 861 |
| | $ | (8 | ) | | (1 | )% | | $ | (39 | ) | | (5 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | 2021 over 2020 | | 2020 over 2019 |
($ in millions) | | 2021 | | 2020 | | 2019 | | Dollars | | Percent | | Dollars | | Percent |
Net earnings | | $ | 544 | | | $ | 696 | | | $ | 549 | | | $ | (152) | | | (22) | % | | $ | 147 | | | 27 | % |
Depreciation and amortization | | 301 | | | 254 | | | 230 | | | 47 | | | 19 | % | | 24 | | | 10 | % |
Provision for doubtful accounts | | 7 | | | (1) | | | (6) | | | 8 | | | 800 | % | | 5 | | | 83 | % |
Stock-based compensation | | 33 | | | 23 | | | 30 | | | 10 | | | 43 | % | | (7) | | | (23) | % |
Deferred income taxes | | 98 | | | 23 | | | 97 | | | 75 | | | 326 | % | | (74) | | | (76) | % |
Loss (gain) on investments in marketable securities | | (19) | | | (17) | | | (11) | | | (2) | | | (12) | % | | (6) | | | (55) | % |
Asset impairments | | — | | | 13 | | | 6 | | | (13) | | | (100) | % | | 7 | | | 117 | % |
Retiree benefit funding in excess of expense | | (78) | | | (176) | | | 80 | | | 98 | | | 56 | % | | (256) | | | (320) | % |
| | | | | | | | | | | | | | |
Goodwill impairment | | — | | | — | | | 29 | | | — | | | — | % | | (29) | | | (100) | % |
Loss on early extinguishment of debt | | — | | | 21 | | | — | | | (21) | | | (100) | % | | 21 | | | — | % |
Trade working capital decrease (increase) | | (126) | | | 257 | | | (108) | | | (383) | | | (149) | % | | 365 | | | 338 | % |
Net cash provided by operating activities | | $ | 760 | | | $ | 1,093 | | | $ | 896 | | | $ | (333) | | | (30) | % | | $ | 197 | | | 22 | % |
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
Cash Flows
We discuss below our majorsignificant operating, investing, and financing activities affecting cash flows for each of the three years in the period ended December 31, 2017,2021, as classified in our consolidated statements of cash flows.
Operating Activities
20172021 - Cash provided by operating activities was $814$760 million in 2017,2021, compared to $822$1,093 million in 2016.2020. The decreaseunfavorable change of $8$333 million in operating cash flow was primarily due to increased funding of retiree benefit plans and the changechanges in deferred income taxes,trade working capital, partially offset by a change in trade working capital.lower income tax payments and lower contributions to retiree benefit plans. The change in trade working capital was primarily driven by the timing of payments of accounts payable.payable and receipts of accounts receivable.
We expect cash generated from operations in 2018,2022, in combination with our current cash and cash equivalents, as well as existing creditborrowing facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and financefund capital expenditures for at least the next 12 months.calendar months beginning January 1, 2022 and beyond such 12-month period based on our current business plans.
20162020 - Cash provided by operating activities was $822$1,093 million in 2016,2020, compared to $861$896 million in 2015.2019. The decreasefavorable change of $39$197 million in operating cash flow was primarily due to higher funding of retiree benefit plans, a changechanges in trade working capital, partially offset by higher contributions to retiree benefit plans, higher income tax payments, and the impact in 2015 of the settlement of the Aon litigation.higher interest payments. The change in trade working capital was primarily driven by deferred payroll tax payments under the CARES Act, as well as the timing of receipts of accounts receivable and payments of accounts payable due to timing of receipts and payments, respectively.payable.
Investing Activities
20172021 - Cash used in investing activities was $349$1,954 million in 2017, a decrease2021, an increase of $304$1,195 million from 2016.2020. The change in investing cash flow was primarily driven by the acquisitions of Alion and a non-controlling interest in a specialty fabrication and ship repair joint venture in 2021, partially offset by the acquisition of CamberHydroid in 2016, partially offset by higher2020 and lower capital expenditures and the disposition of our oil and gas business in 2017.2021.
For 2018,2022, we expect our capital expenditures for maintenance and sustainment to be approximately 2.0% to 2.5%1.0% of annual revenues and our discretionary capital expenditures to be approximately 3.0%1.5% to 3.5%2.0% of annual revenues.
20162020 - Cash used in investing activities was $653$759 million in 2016,2020, an increase of $512$132 million from 2015.2019. The change in investing cash flow was driven by business acquisitions, including Hydroid, partially offset by lower capital expenditures in 2020 and the acquisition of CamberFulcrum in 2016, higher capital expenditures in 2016, the sale of the Gulfport Composite Center of Excellence in March 2015, and proceeds in 2015 from the Aon litigation settlement.2019.
Financing Activities
20172021 - Cash provided by financing activities in 2021 was $1,309 million, compared to $103 million provided by financing activities in 2020. The change in financing cash was primarily due to an increase of $1,225 million in net proceeds from long-term debt, a decrease of $15 million in premiums related to the 2020 early extinguishment of debt, and a decrease of $6 million in employee taxes on share-based payment arrangements, partially offset by an increase of $17 million in common stock repurchases, an increase of $14 million in cash dividend payments, and an increase of $9 million in debt issuance costs.
2020 - Cash provided by financing activities in 2020 was $103 million, compared to $434 million used in financing activities in 2017 was $484 million, compared to $343 million used2019. The change in 2016. The changefinancing cash was primarily due to increases$1 billion of $92proceeds from the issuance of senior notes, a decrease of $178 million of common stock repurchases, $27 million of debt related expenditures, $17 million of cash dividend payments, and $5 million in employee tax withholdings on share-based payment arrangements.
2016 - Cash used in financing activities in 2016 was $343 million, compared to $816 million used in 2015. The change was primarily due to decreases of $449 million of debt related expenditures, $38 million offrom common stock repurchases, and $3a decrease of $10 million in employee tax withholdings on share-based payment arrangements, partially offset by an additional $17a $600 million increase in repayment of long-term debt, a $23 million increase in cash dividend payments, an increase of $15 million in 2016 comparedpremiums related to 2015.early extinguishment of debt, and an increase of $13 million in debt issuance costs.
Free Cash Flow
Free cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysisnet earnings as a measure of our resultsperformance or net cash provided by operating activities as reported under GAAP.a measure of our liquidity. We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.
The following table reconciles net cash provided by operating activities to free cash flow: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Net cash provided by operating activities | | $ | 760 | | | $ | 1,093 | | | $ | 896 | |
Less capital expenditures: | | | | | | |
Capital expenditure additions | | (331) | | | (353) | | | (530) | |
Grant proceeds for capital expenditures | | 20 | | | 17 | | | 94 | |
Free cash flow | | $ | 449 | | | $ | 757 | | | $ | 460 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Net cash provided by (used in) operating activities | | $ | 814 |
| | $ | 822 |
| | $ | 861 |
|
Less capital expenditures: | | | | | | |
Capital expenditure additions | | (382 | ) | | (285 | ) | | (188 | ) |
Grant proceeds for capital expenditures | | 21 |
| | — |
| | — |
|
Free cash flow | | $ | 453 |
| | $ | 537 |
| | $ | 673 |
|
20172021 - Free cash flow decreased $84$308 million from 2016,2020, primarily due to increased funding ofchanges in trade working capital, partially offset by lower income tax payments, lower contributions to retiree benefit plans, higherand lower capital expenditures, and a change in trade working capital.expenditures.
20162020 - Free cash flow decreased $136increased $297 million from 2015,2019, primarily due to capital expenditures, higher funding of retiree benefit plans, a change in trade working capital and the impact in 2015 of the settlement of the Aon litigation.lower capital expenditures, partially offset by higher contributions to retiree benefit plans and higher income tax payments.
Retirement Related Benefit Plan Contributions
ERISA, including amendments under pension relief, defines the minimum amount that must be contributed to our qualified defined benefit pension plans. In determining whether to make discretionary contributions to these plans above the minimum required amounts, we consider various factors, including maintaining the funded status needed to avoid potential benefit restrictions and other adverse consequences, maintaining minimum CAS funding requirements, and the current and anticipated future funding levels of each plan. The contributions to our qualified defined benefit pension plans are affected by a number of factors, including published IRS interest rates, the actual return on plan assets, actuarial assumptions, and demographic experience. These factors and our resulting contributions also impact the plans' funded statuses.status of the plans. We made the following minimum and discretionary contributions to our pension and other postretirement benefit plans in the years ended December 31, 2017, 20162021, 2020, and 2015:2019: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Pension plans | | | | | | |
| | | | | | |
Discretionary | | | | | | |
Qualified | | $ | 60 | | | $ | 205 | | | $ | 21 | |
Non-qualified | | 9 | | | 8 | | | 7 | |
Other benefit plans | | 37 | | | 33 | | | 31 | |
Total contributions | | $ | 106 | | | $ | 246 | | | $ | 59 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Pension plans | | | | | | |
Discretionary | | | | | | |
Qualified | | $ | 294 |
| | $ | 167 |
| | $ | 99 |
|
Non-qualified | | 7 |
| | 6 |
| | 4 |
|
Other benefit plans | | 34 |
| | 32 |
| | 33 |
|
Total contributions | | $ | 335 |
| | $ | 205 |
| | $ | 136 |
|
We made discretionary contributions to our qualified defined benefit pension plans totaling $294$60 million, $167$205 million, and $99$21 million in the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, respectively.
As of December 31, 20172021 and 2016,2020, our qualified pension plans were funded 89%102% and 83%91%, respectively, on a FAS basis. As of December 31, 20172021 and 2016,2020, these plans were sufficiently funded on an ERISA basis so as not to be subject to benefit payment restrictions. The funded percentages under ERISA and FAS vary due to inherent differences in the assumptions and methodologies used to calculate the respective obligations. We expect our 20182022 cash contributions to our qualified defined benefit pension plans to be $508less than $1 million, all of which we anticipate will be discretionary and which are exclusive of CAS cost recoveries inunder our contracts. Due to the differences in calculation methodologies, our FAS expense is not necessarily representative of our funding requirements or CAS cost recoveries.
Other postretirement benefit plan contributions were $34$37 million, $32$33 million, and $33$31 million in 2017, 2016,2021, 2020, and 2015,2019, respectively. We expect our 20182022 contributions to our other postretirement benefit plans to be approximately $35$34 million, which are exclusive of CAS cost recoveries inunder our contracts. Contributions for other postretirement benefitsbenefit plans are not required to be funded in advance and are paid on an as-incurred basis.
Other Sources and Uses of Capital
Stockholder Distributions - In November 2017,2021, our board of directors authorized an increase in our quarterly cash dividend to $0.72$1.18 per share. The board previously increased the quarterly cash dividend to $0.60$1.14 per share in November 20162020 and $0.50$1.03 per share in October 2015.November 2019. We paid cash dividends totaling $115$186 million ($2.524.60 per share), $98$172 million ($2.10($4.23 per share), and $81$149 million ($1.703.61 per share) in the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, respectively.
In November 2017,2019, our board of directors authorized an increase into our stock repurchase program from $1.2$2.2 billion to $2.2$3.2 billion and an extension of the term of the program from October 31, 2019, to October 31, 2022.2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the year ended December 31, 2017,2021, we repurchased 1,417,808544,440 shares at an aggregate cost of $288 million, of which $2 million was not yet settled for cash as of December 31, 2017.$101 million. For the years ended December 31, 20162020 and 2015,2019, we repurchased 1,266,192390,904 and 1,987,5501,005,762 shares, respectively, at aggregate costs of $192$84 million and $234$214 million, respectively,respectively. The cost of which $2 million was not yet settled for cashrepurchased shares is recorded as treasury stock in the consolidated statements of December 31, 2015.financial position.
Additional Capital - In December 2017,In 2021, we issued $400 million aggregate principal amount of callable unregistered 0.670% senior notes due 2023 and $600 million aggregate principal amount of unregistered 3.483%2.043% senior notes due 2028, both with registration rights due December 2027, therights. The net proceeds of which were used to repurchase our 5.000% senior notes due in 2021. In November 2015, we issued $600 million aggregate principal amountfund a portion of unregistered 5.000% senior notes due November 2025, the net proceedspurchase price for the acquisition of which were used to repurchase our 7.125% senior notes due in 2021.Alion. Interest on ourthese senior notes is payable semi-annually.semiannually.
In November 2017,2021, we terminatedamended and restated our Second Amended and Restated Credit Agreement with third-party lenders and entered into a new Credit Agreement (the "Credit Facility") with third-party lenders. The Credit Facility includes a revolvingexisting $1.25 billion credit facility, of $1,250 million, which may be drawn upon during a period ofincreasing the capacity thereunder to $1.5 billion and extending the maturity date to five years from November 22, 2017.signing (the "Revolving Credit Facility"). The revolving credit facilityRevolving Credit Facility includes a letter of credit subfacility of $500$300 million. The revolving credit facilityRevolving Credit Facility has a variable interest rate on outstanding borrowings based on the London Interbank Offered Rate ("LIBOR"), plus a spread based upon our credit rating, which may vary between 1.125% and 1.500%2.000%. As of December 31, 2021, the interest rate spread on drawn amounts was 1.375% based on our current credit rating. The revolving credit facility
Revolving Credit Facility also has a commitment fee rate on the unutilized balance based on our leverage ratio.credit ratings. The commitment fee rate as of December 31, 20172021 was 0.25%0.200% and may vary between 0.20%0.125% and 0.30%0.300%.
We madeAs of December 31, 2021, we had $15 million in issued but undrawn letters of credit and $1,485 million unutilized under the Revolving Credit Facility.
In 2021, we entered into a $650 million 3-year delayed draw term loan payments(the “Term Loan”) to finance a portion of $395 million during the year endedpurchase price for Alion. The Term Loan must be repaid prior to or at maturity, which is 36 months from the date of the initial draw. The Term Loan has a variable interest rate on outstanding borrowings based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and 2.000%. As of December 31, 2015, using cash generated from operations.2021, the annual interest rate spread was 1.375% based on our current credit rating, and the outstanding balance was $625 million.
In 2020, we issued $500 million aggregate principal amount of 3.844% senior notes due 2025 and $500 million aggregate principal amount of 4.200% senior notes due 2030. The net proceeds were intended to be used for general corporate purposes, including debt repayments and working capital. Interest on these senior notes is payable semiannually.
In 2020, we redeemed $600 million aggregate principal amount of our outstanding 5.000% senior notes due 2025 in accordance with the terms of the indenture governing the notes.
In 2019, we established an unsecured commercial paper note program, under which we may issue up to $1 billion of unsecured commercial paper notes. As of December 31, 2021, we had no outstanding debt under the commercial paper program.
We were in compliance with all debt-related covenants as of and during the year ended December 31, 2017.2021. For a description of our outstanding debt amounts and related restrictive covenants, see Note 14:13: Debt in Item 8.
CONTRACTUAL OBLIGATIONS
Contractual obligations - Our future contractual obligations are related to debt, leases, pension liabilities, unrecognized tax benefits, workers compensation, and purchase obligations. See Note 13: Debt, Note 15: Leases, Note 17: Employee Pension and Other Postretirement Benefits, Note 12: Income Taxes, and Note 2: Summary of Significant Accounting Policies in Item 8 for information about those obligations. Our purchase obligations as of December 31, 2021, were approximately $5,384 million, with approximately $2,333 million expected to be paid in 2022 and $3,051 million thereafter. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. As of December 31, 2017,2021, future scheduled periodic interest payments on our total outstanding long-term debt, was $1,279 million, consisting of senior notes and other third-party debt. For a description of our outstanding debt amounts and related restrictive covenants, see Note 14: Debt in Item 8.
In connection with the spin-off from Northrop Grumman, we entered into a Tax Matters Agreement with Northrop Grumman (the "Tax Matters Agreement"), which governs the respective rights, responsibilities, and obligations of Northrop Grumman and us after the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests, and other tax sharing regarding U.S. federal, state, local, and foreign income taxes, other taxes, and related tax returns. We have several liabilities with Northrop Grumman to the Internal Revenue Service ("IRS") for the consolidated U.S. federal income taxes of the Northrop Grumman consolidated group relating to the taxable periods in which we were part ofincluding commitment fees that group. The Tax Matters Agreement specifies the portion of this tax liability for which we will bear responsibility, and Northrop Grumman has agreed to indemnify us against any amounts for which we are not responsible.obligated to pay on our Revolving Credit Facility, were approximately $527 million, with approximately $97 million expected to be paid in 2022 and $430 million thereafter.
The following table presents our contractual obligations as of December 31, 2017, and the estimated timing of related future cash payments:
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Total | | 2018 | | 2019 - 2020 | | 2021 - 2022 | | 2023 and beyond |
Long-term debt | | $ | 1,305 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,305 |
|
Interest payments on long-term debt | | 523 |
| | 62 |
| | 124 |
| | 124 |
| | 213 |
|
Operating leases | | 194 |
| | 39 |
| | 63 |
| | 41 |
| | 51 |
|
Purchase obligations (1) | | 2,728 |
| | 1,494 |
| | 1,005 |
| | 161 |
| | 68 |
|
Other long-term liabilities (2) | | 860 |
| | 126 |
| | 143 |
| | 82 |
| | 509 |
|
Total contractual obligations | | $ | 5,610 |
| | $ | 1,721 |
| | $ | 1,335 |
| | $ | 408 |
| | $ | 2,146 |
|
| |
(1)
| A "purchase obligation" is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. These amounts are primarily comprised of open purchase order commitments to vendors and subcontractors pertaining to funded contracts. |
| |
(2)
| Other long-term liabilities primarily consist of total accrued workers' compensation reserves, deferred compensation, and other miscellaneous liabilities, of which $250 million is the current portion of workers' compensation liabilities. It excludes obligations for uncertain tax positions of less than $1 million, for which the timing of the payments, if any, cannot be reasonably estimated. |
The above table excludes retirement related contributions. Amounts for retirement related contributions depend on plan provisions, actuarial assumptions, actual plan asset performance, and other factors described above under Retirement Related Benefit Plans under Critical Accounting Policies, Estimates and Judgments and under Liquidity and Capital Resources.
Further details regarding long-term debt and operating leases can be found in Note 14: Debt and Note 16: Commitments and Contingencies in Item 8.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use standby letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans. As of December 31, 2017,2021, $15 million in standby letters of credit were issued but undrawn and $258$276 million of surety bonds were outstanding.
As of December 31, 2017,2021, we had no other significant off-balance sheet arrangements other than operating leases. For a description of our operating leases, see Note 2: Summary of Significant Accounting Policies and Note 16: Commitments and Contingencies in Item 8.arrangements.
GLOSSARY OF PROGRAMS
Included below are brief descriptions of some of the programs discussed in this Annual Report on Form 10-K.
| | | | | | | | |
Program Name | | Program Description |
| | |
Program Name | | Program Description |
| | |
America class (LHA 6) amphibious assault ships | | Design and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. WeIn 2020, we delivered USS AmericaTripoli (LHA 6) in April 2014, Tripoli (LHA 7) is scheduled for delivery in fourth quarter 2018,, and we were awarded a long-lead-time material and construction contract for LHA 9 (unnamed). We are currently constructing Bougainville (LHA 8) in 2017.. |
| | |
Arleigh Burke class (DDG 51) destroyers | | Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. In 2016 weWe delivered USS John FinnPaul Ignatius (DDG 113)117), USS Delbert D. Black (DDG 119), and Frank E. Petersen Jr. (DDG 121) in 2017 we delivered Ralph Johnson (DDG 114). In June 2013, we were awarded a multi-year contract for construction of five additional 2019, 2020, and 2021, respectively. We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: Paul Ignatius (DDG 117), Delbert D. Black (DDG 119), Frank E. Petersen Jr. (DDG 121), Lenah H. Sutcliffe Higbee (DDG 123), and Jack H. Lucas (DDG 125), Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), and John F. Lehman (DDG 137). |
| | |
Carrier RCOH
| | Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS Abraham Lincoln (CVN 72) was redelivered to the U.S. Navy in the second quarter of 2017 and USS George Washington (CVN 73) arrived at Newport News for the start of its RCOH in August 2017.2017, and USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021. |
| | |
Columbia class (SSBN 826) submarines
| | Newport News is participating in designing the Columbia class submarine as a replacement for the current aging Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. The Ohio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. The Columbia class program plan of record is to construct 12 new ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, the DODDoD signed the acquisition decision memorandum approving the Columbia class program’s Milestone B, which formally authorizes the program’s entry into the engineering and manufacturing development phase. We continue to perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbiaclass (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. The teaming agreement is subject to the U.S. Navy's concurrence. Newport News wasWe have been awarded a contractcontracts from Electric Boat in 2017 to beginfor integrated product and process development, forproviding long–lead–time material and advance construction, and construction of the first two boats of the Columbia class. class (SSBN 826) program. Construction of the first Columbia class (SSBN 826) submarine is expected to beginbegan in 2021, with procurement of long-lead-time materials and advance construction beginning prior to that time.2020. |
| | |
|
| | |
Fleet supportDefense and federal solutions | | DFS is focused on solving tough national security challenges for the DoD, the intelligence community, and federal civilian agencies around the globe. The group provides a wide range of professional services | | Provide comprehensive life-cycle and products, including fleet sustainment, services to the U.S. Navy fleetcyber and other DoDelectronic warfare, intelligence, surveillance, and commercial maritime customers. We provide services including maintenance, modernization,reconnaissance, and repair on all ship classes; naval architecture, marine engineering,live, virtual, and design; integrated logistics support; technical documentation development; warehousing, asset management, and material readiness; operational and maintenance training development and delivery; software design and development; IT infrastructure support and data delivery and management; and cyber security and information assurance. We provide undersea vehicle and specialized craft development and prototyping services.constructive solutions. |
| | |
| | | | | | | | |
USS Gerald R. Ford class (CVN 78) aircraft carriers | | Design and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead timelong-lead-time components and material. In February 2017,addition, we were awarded a contracthave received awards for advance planningdetail design and construction of Enterprise (CVN(CVN 80), the third Ford class aircraft carrier. and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs. |
| | |
Integrated missions solutions services | | Provide services including high-end information technology and mission-based solutions to DoD, intelligence, and federal civilian customers. Services include agile software engineering, development, and integration; Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance ("C4ISR") engineering and software integration; mobile application development and network engineering; modeling, simulation, and training; force protection and emergency management training and exercises; unmanned systems development, integration, operations, and maintenance; and mission-oriented intelligence, surveillance, and reconnaissance analytics. |
| | |
Legend class National Security Cutter | | Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of nine11 ships, of which the first sixnine ships have been delivered. Kimball (NSC 7), Midgett (NSC 8),Calhoun (NSC 10) and StoneFriedman (NSC 9)11) are currently under construction. |
| | |
Naval nuclear support services | | Provide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in servicein-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes. |
| | |
|
| | |
Nuclear and environmental services | | Provide services in nuclear management and operations, and nuclear and non-nuclear fabrication and repair. We provideincluding site management, nuclear and industrial facilities operations and maintenance, decontamination and decommissioning, and radiological and hazardous waste management services. We provide services, including fabrication, equipment repair, and technical engineering services. We participate in several joint ventures, including N3B, MSTS,Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and SRNS.Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE'sDoE’s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE’s Los Alamos National Laboratory. |
| | |
Oil and gas services | | Deliver engineering, procurement, and construction management services to the oil and gas industry for major pipeline, production, and treatment facilities. These services include full life-cycle services for domestic and international projects, from concept identification through detail design, execution and construction, and decommissioning. Related field services include survey, inspection, commissioning and start-up, operations and maintenance, and optimization and debottlenecking. |
| | |
San Antonio class (LPD 17) amphibious transport dock ships | | Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. In 2013, we delivered USS Somerset (LPD 25), in 2016, we delivered USS John P. Murtha (LPD 26), and, in 2017, we delivered Portland (LPD 27). We are currently constructing Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29), and Harrisburg (LPD 30). The San Antonio classIn 2020 we were awarded a contract to construct Pittsburgh (LPD 17) currently includes a total of 11 ships.31). |
| | |
Unmanned systems | | Our unmanned systems products and services create advanced unmanned maritime solutions for defense, marine research, and commercial applications. Serving customers in more than 30 countries, unmanned systems provides design, autonomy, manufacturing, testing, operations, and sustainment of unmanned systems, including unmanned underwater vehicles and unmanned surface vessels. |
| | | | | | | | |
| | |
The decommissioned Enterprise (CVN 65)
| | Defuel and inactivate the world's first nuclear-powered aircraft carrier, which began in 2013. |
| | |
Virginia class (SSN 774) fast attack submarines | | Construct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare. |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks, primarily related to interest rates and foreign currency exchange rates.
Interest Rates - Our floating rate financial instruments potentially subject to interest rate risk include floating rate borrowingsa $650 million Term Loan, a $1.5 billion Revolving Credit Facility, and a $1 billion commercial paper program. As of December 31, 2021, we had $625 million outstanding on the Term Loan and no indebtedness outstanding under our Revolving Credit Facility. Our $1,250 million revolving facilityFacility or our commercial paper program. Based on the amounts outstanding under our Credit Facility was undrawnTerm Loan as of December 31, 2017.2021, an increase of 1% in interest rates would increase the interest expense on our debt by approximately $6 million on an annual basis.
Foreign Currency - We currently have, and in the future may enter into, foreign currency forward contracts to manage foreign currency exchange rate risk related to payments to suppliers denominated in foreign currencies. As of December 31, 2017,2021, the fair values of our outstanding foreign currency forward contracts were not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersShareholders and the Board of Directors of
Huntington Ingalls Industries, Inc.
Newport News, Virginia
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsstatements of financial position of Huntington Ingalls Industries, Inc. and subsidiaries (the “Company”) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations and comprehensive income, (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2017,2021, the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2021, in conformity with the accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2018,10, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue – Long Term Contracts — Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue on long-term contracts with U.S. Government customers over time as the work progresses, either as products are produced or as services are rendered, because transfer of control to the customer is continuous. Ordinarily the Company’s contracts represent a single distinct performance obligation due to the highly interdependent and interrelated nature of the underlying goods, services, or both. The use of the cost-to-cost method to measure performance progress over time is supported by clauses in the related contracts that
allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process. The accounting for these contracts involves judgment, particularly as it relates to the process of estimating total material costs, labor costs, and profit for the performance obligation. Cost of sales is recognized as incurred, and revenues are determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. For the year ended December 31, 2021, revenue was $9.5 billion, most of which was derived from long-term contracts.
Given the judgments necessary to estimate total material costs, labor costs, and profit in order to recognize revenue for certain long-term contracts, auditing such estimates required extensive audit effort due to the complexity of long-term contracts and a high degree of auditor judgment, especially given the limited historical data for certain contracts, when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of total material costs, labor costs, and profit in order to recognize revenue for certain long-term contracts included the following, among others:
•We tested the effectiveness of controls over long-term contract revenue, including management’s controls over the estimates of total material costs, labor costs, and profit for performance obligations.
•We developed independent estimates of revenue based on historical profit margins and current year recorded costs. We compared those estimates to revenue recognized by the Company.
•We obtained the population of active contracts during 2021 and assessed the financial and performance risk of the contracts based on our knowledge gained through prior year audits of the Company, industry experience, and ongoing conversations with members of program management regarding the contract performance to identify contracts that we believe were riskier. For those contracts selected, we performed further audit procedures that were tailored to address the specific characteristics of audit interest identified. Procedures performed, among others, included:
◦Read the relevant portions of contracts to understand contract terms, including incentives, fee arrangement, scope of work, and other unusual contract terms.
◦Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers.
◦Tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated.
◦Tested the accuracy and completeness of the costs incurred to date for the performance obligation.
◦Evaluated the estimates of total materials costs, labor costs, and profit for the performance obligation by:
▪Evaluating management’s ability to achieve the estimates of total material costs, labor costs and profit by 1) performing inquiries with the business managers and corroborating the information gained from these inquiries with other parties who have detailed knowledge of the contract’s progress, issues being encountered, and overall production status, 2) considering management’s historical performance against estimates, 3) detail testing the appropriateness of the timing of changes in estimates, and 4) considering any contradictory information.
▪Comparing materials cost estimates to purchase orders, supplier contracts, or other source documents.
▪Comparing management’s estimates for the selected contracts to costs and profits of similar performance obligations, when applicable.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
Richmond, Virginia
February 15, 201810, 2022
We have served as the Company'sCompany’s auditor since 20112011.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersShareholders and the Board of Directors of
Huntington Ingalls Industries, Inc.
Newport News, Virginia
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Huntington Ingalls Industries, Inc. and subsidiaries (the "Company") as of December 31, 2017,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017,2021, of the Company and our report dated February 15, 2018,10, 2022, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Alion, which was acquired on August 19, 2021, and whose financial statements constitute 5% of total assets, 5% of revenues, and 2% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2021. Accordingly, our audit did not include the internal control over financial reporting at Alion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
Richmond, Virginia
February 15, 201810, 2022
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
(in millions, except per share amounts) | | 2017 | | 2016 | | 2015 |
Sales and service revenues | | | | | | |
Product sales | | $ | 5,573 |
| | $ | 5,631 |
| | $ | 5,665 |
|
Service revenues | | 1,868 |
| | 1,437 |
| | 1,355 |
|
Sales and service revenues | | 7,441 |
| | 7,068 |
| | 7,020 |
|
Cost of sales and service revenues | | | | | | |
Cost of product sales | | 4,444 |
| | 4,380 |
| | 4,319 |
|
Cost of service revenues | | 1,574 |
| | 1,228 |
| | 1,198 |
|
Income (loss) from operating investments, net | | 12 |
| | 6 |
| | 10 |
|
Other income and gains | | — |
| | 15 |
| | — |
|
General and administrative expenses | | 570 |
| | 623 |
| | 669 |
|
Goodwill impairment | | — |
| | — |
| | 75 |
|
Operating income (loss) | | 865 |
| | 858 |
| | 769 |
|
Other income (expense) | | | | | |
|
|
Interest expense | | (94 | ) | | (74 | ) | | (137 | ) |
Other, net | | 1 |
| | — |
| | — |
|
Earnings (loss) before income taxes | | 772 |
| | 784 |
| | 632 |
|
Federal and foreign income taxes | | 293 |
| | 211 |
| | 228 |
|
Net earnings (loss) | | $ | 479 |
| | $ | 573 |
| | $ | 404 |
|
| | | | | | |
Basic earnings (loss) per share | | $ | 10.48 |
| | $ | 12.24 |
| | $ | 8.43 |
|
Weighted-average common shares outstanding | | 45.7 |
| | 46.8 |
| | 47.9 |
|
| | | | | | |
Diluted earnings (loss) per share | | $ | 10.46 |
| | $ | 12.14 |
| | $ | 8.36 |
|
Weighted-average diluted shares outstanding | | 45.8 |
| | 47.2 |
| | 48.3 |
|
| | | | | | |
Net earnings (loss) from above | | $ | 479 |
| | $ | 573 |
| | $ | 404 |
|
Other comprehensive income (loss) | | | | | | |
Change in unamortized benefit plan costs | | 59 |
| | (172 | ) | | 34 |
|
Other | | 14 |
| | (1 | ) | | (5 | ) |
Tax benefit (expense) for items of other comprehensive income | | (22 | ) | | 67 |
| | (12 | ) |
Other comprehensive income (loss), net of tax | | 51 |
| | (106 | ) | | 17 |
|
Comprehensive income (loss) | | $ | 530 |
| | $ | 467 |
| | $ | 421 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
(in millions, except per share amounts) | | 2021 | | 2020 | | 2019 |
Sales and service revenues | | | | | | |
Product sales | | $ | 7,000 | | | $ | 6,850 | | | $ | 6,265 | |
Service revenues | | 2,524 | | | 2,511 | | | 2,634 | |
Sales and service revenues | | 9,524 | | | 9,361 | | | 8,899 | |
Cost of sales and service revenues | | | | | | |
Cost of product sales | | 5,958 | | | 5,621 | | | 5,158 | |
Cost of service revenues | | 2,198 | | | 2,070 | | | 2,210 | |
Income from operating investments, net | | 41 | | | 32 | | | 22 | |
Other income and gains, net | | 2 | | | 1 | | | — | |
General and administrative expenses | | 898 | | | 904 | | | 788 | |
Goodwill impairment | | — | | | — | | | 29 | |
Operating income | | 513 | | | 799 | | | 736 | |
Other income (expense) | | | | | | |
Interest expense | | (89) | | | (114) | | | (70) | |
Non-operating retirement benefit | | 181 | | | 119 | | | 12 | |
Other, net | | 17 | | | 6 | | | 5 | |
Earnings before income taxes | | 622 | | | 810 | | | 683 | |
Federal and foreign income taxes | | 78 | | | 114 | | | 134 | |
Net earnings | | $ | 544 | | | $ | 696 | | | $ | 549 | |
| | | | | | |
Basic earnings per share | | $ | 13.50 | | | $ | 17.14 | | | $ | 13.26 | |
Weighted-average common shares outstanding | | 40.3 | | | 40.6 | | | 41.4 | |
| | | | | | |
Diluted earnings per share | | $ | 13.50 | | | $ | 17.14 | | | $ | 13.26 | |
Weighted-average diluted shares outstanding | | 40.3 | | | 40.6 | | | 41.4 | |
| | | | | | |
Net earnings from above | | $ | 544 | | | $ | 696 | | | $ | 549 | |
Other comprehensive income (loss) | | | | | | |
Change in unamortized benefit plan costs | | 838 | | | (187) | | | (167) | |
Other | | — | | | 2 | | | 3 | |
Tax benefit (expense) for items of other comprehensive income | | (214) | | | 47 | | | 43 | |
Other comprehensive income (loss), net of tax | | 624 | | | (138) | | | (121) | |
Comprehensive income | | $ | 1,168 | | | $ | 558 | | | $ | 428 | |
The accompanying notes are an integral part of these consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
| | | | | | | | |
| | December 31 |
($ in millions) | | 2017 | | 2016 |
Assets | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 701 |
| | $ | 720 |
|
Accounts receivable, net of allowance for doubtful accounts of $15 million as of 2017 and $4 million as of 2016 | | 1,188 |
| | 1,164 |
|
Inventoried costs, net | | 183 |
| | 210 |
|
Prepaid expenses and other current assets | | 123 |
| | 48 |
|
Total current assets | | 2,195 |
| | 2,142 |
|
Property, Plant, and Equipment | | | | |
Land and land improvements | | 292 |
| | 252 |
|
Buildings and leasehold improvements | | 1,923 |
| | 1,752 |
|
Machinery and other equipment | | 1,559 |
| | 1,410 |
|
Capitalized software costs | | 211 |
| | 199 |
|
| | 3,985 |
| | 3,613 |
|
Accumulated depreciation and amortization | | (1,770 | ) | | (1,627 | ) |
Property, plant, and equipment, net | | 2,215 |
| | 1,986 |
|
Other Assets | | | | |
Goodwill | | 1,217 |
| | 1,234 |
|
Other intangible assets, net of accumulated amortization of $528 million as of 2017 and $488 million as of 2016 | | 508 |
| | 548 |
|
Long-term deferred tax assets | | 114 |
| | 314 |
|
Miscellaneous other assets | | 125 |
| | 128 |
|
Total other assets | | 1,964 |
| | 2,224 |
|
Total assets | | $ | 6,374 |
| | $ | 6,352 |
|
| | | | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2021 | | 2020 |
Assets | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 627 | | | $ | 512 | |
Accounts receivable, net of allowance for doubtful accounts of $9 million as of 2021 and $2 million as of 2020 | | 433 | | | 397 | |
Contract assets | | 1,310 | | | 1,049 | |
Inventoried costs, net | | 161 | | | 137 | |
Income taxes receivable | | 209 | | | 171 | |
Assets held for sale | | — | | | 133 | |
| | | | |
Prepaid expenses and other current assets | | 50 | | | 45 | |
Total current assets | | 2,790 | | | 2,444 | |
Property, Plant, and Equipment | | | | |
Land and land improvements | | 329 | | | 309 | |
Buildings and leasehold improvements | | 2,643 | | | 2,442 | |
Machinery and other equipment | | 2,058 | | | 2,017 | |
Capitalized software costs | | 226 | | | 234 | |
| | 5,256 | | | 5,002 | |
Accumulated depreciation and amortization | | (2,149) | | | (2,024) | |
Property, plant, and equipment, net | | 3,107 | | | 2,978 | |
Other Assets | | | | |
Operating lease assets | | 241 | | | 192 | |
Goodwill | | 2,628 | | | 1,617 | |
Other intangible assets, net of accumulated amortization of $741 million as of 2021 and $655 million as of 2020 | | 1,159 | | | 512 | |
Pension plan assets | | 281 | | | — | |
Long-term deferred tax assets | | — | | | 133 | |
Miscellaneous other assets | | 421 | | | 281 | |
Total other assets | | 4,730 | | | 2,735 | |
Total assets | | $ | 10,627 | | | $ | 8,157 | |
The accompanying notes are an integral part of these consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - CONTINUED
|
| | | | | | | | |
| | December 31 |
($ in millions) | | 2017 | | 2016 |
Liabilities and Stockholders' Equity | | | | |
Current Liabilities | | | | |
Trade accounts payable | | $ | 375 |
| | $ | 316 |
|
Accrued employees’ compensation | | 245 |
| | 241 |
|
Current portion of postretirement plan liabilities | | 139 |
| | 147 |
|
Current portion of workers’ compensation liabilities | | 250 |
| | 217 |
|
Advance payments and billings in excess of revenues | | 146 |
| | 166 |
|
Other current liabilities | | 236 |
| | 256 |
|
Total current liabilities | | 1,391 |
| | 1,343 |
|
Long-term debt | | 1,279 |
| | 1,278 |
|
Pension plan liabilities | | 922 |
| | 1,116 |
|
Other postretirement plan liabilities | | 414 |
| | 431 |
|
Workers’ compensation liabilities | | 509 |
| | 441 |
|
Other long-term liabilities | | 101 |
| | 90 |
|
Total liabilities | | 4,616 |
| | 4,699 |
|
Commitments and Contingencies (Note 16) | |
|
| |
|
|
Stockholders’ Equity | | | | |
Common stock, $0.01 par value; 150 million shares authorized; 53.0 million issued and 45.1 million outstanding as of December 31, 2017, and 52.6 million issued and 46.2 million outstanding as of December 31, 2016 | | 1 |
| | 1 |
|
Additional paid-in capital | | 1,942 |
| | 1,964 |
|
Retained earnings (deficit) | | 1,687 |
| | 1,323 |
|
Treasury stock | | (972 | ) | | (684 | ) |
Accumulated other comprehensive income (loss) | | (900 | ) | | (951 | ) |
Total stockholders’ equity | | 1,758 |
| | 1,653 |
|
Total liabilities and stockholders’ equity | | $ | 6,374 |
| | $ | 6,352 |
|
| | | | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2021 | | 2020 |
Liabilities and Stockholders' Equity | | | | |
Current Liabilities | | | | |
Trade accounts payable | | $ | 603 | | | $ | 460 | |
Accrued employees’ compensation | | 361 | | | 293 | |
| | | | |
Current portion of postretirement plan liabilities | | 137 | | | 133 | |
Current portion of workers’ compensation liabilities | | 252 | | | 225 | |
Contract liabilities | | 651 | | | 585 | |
Liabilities held for sale | | — | | | 68 | |
| | | | |
Other current liabilities | | 423 | | | 462 | |
Total current liabilities | | 2,427 | | | 2,226 | |
Long-term debt | | 3,298 | | | 1,686 | |
Pension plan liabilities | | 351 | | | 960 | |
Other postretirement plan liabilities | | 368 | | | 401 | |
Workers’ compensation liabilities | | 506 | | | 511 | |
Long-term operating lease liabilities | | 194 | | | 157 | |
Deferred tax liabilities | | 313 | | | — | |
Other long-term liabilities | | 362 | | | 315 | |
Total liabilities | | 7,819 | | | 6,256 | |
Commitments and Contingencies (Note 16) | | 0 | | 0 |
Stockholders’ Equity | | | | |
Common stock, $0.01 par value; 150 million shares authorized; 53.4 million issued and 40.0 million outstanding as of December 31, 2021, and 53.3 million issued and 40.5 million outstanding as of December 31, 2020 | | 1 | | | 1 | |
Additional paid-in capital | | 1,998 | | | 1,972 | |
Retained earnings | | 3,891 | | | 3,533 | |
Treasury stock | | (2,159) | | | (2,058) | |
Accumulated other comprehensive loss | | (923) | | | (1,547) | |
Total stockholders’ equity | | 2,808 | | | 1,901 | |
Total liabilities and stockholders’ equity | | $ | 10,627 | | | $ | 8,157 | |
The accompanying notes are an integral part of these consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Operating Activities | | | | | | |
Net earnings (loss) | | $ | 479 |
| | $ | 573 |
| | $ | 404 |
|
Adjustments to reconcile to net cash provided by (used in) operating activities | | | | | | |
Depreciation | | 165 |
| | 163 |
| | 154 |
|
Amortization of purchased intangibles | | 40 |
| | 23 |
| | 26 |
|
Amortization of debt issuance costs | | 6 |
| | 5 |
| | 8 |
|
Provision for doubtful accounts | | 10 |
| | — |
| | — |
|
Stock-based compensation | | 34 |
| | 36 |
| | 43 |
|
Deferred income taxes | | 184 |
| | 85 |
| | (15 | ) |
Proceeds from insurance settlement related to investing activities | | — |
| | — |
| | (21 | ) |
Impairment of goodwill and intangible assets | | — |
| | — |
| | 102 |
|
Loss on early extinguishment of debt | | 22 |
| | — |
| | 44 |
|
Change in | | | | | | |
Accounts receivable | | (35 | ) | | (22 | ) | | (41 | ) |
Inventoried costs | | 18 |
| | 75 |
| | 54 |
|
Prepaid expenses and other assets | | (52 | ) | | (17 | ) | | (31 | ) |
Accounts payable and accruals | | 102 |
| | (41 | ) | | 97 |
|
Retiree benefits | | (163 | ) | | (44 | ) | | 32 |
|
Other non-cash transactions, net | | 4 |
| | (14 | ) | | 5 |
|
Net cash provided by (used in) operating activities | | 814 |
| | 822 |
| | 861 |
|
Investing Activities | | | | | | |
Capital expenditures | | | | | | |
Capital expenditure additions | | (382 | ) | | (285 | ) | | (188 | ) |
Grant proceeds for capital expenditures | | 21 |
| | — |
| | — |
|
Proceeds from disposition of assets | | 9 |
| | 4 |
| | 32 |
|
Acquisitions of businesses, net of cash received | | 3 |
| | (372 | ) | | (6 | ) |
Proceeds from insurance settlement related to investing activities | | — |
| | — |
| | 21 |
|
Net cash provided by (used in) investing activities | | (349 | ) | | (653 | ) | | (141 | ) |
Financing Activities | | | | | | |
Proceeds from issuance of long-term debt | | 600 |
| | — |
| | 600 |
|
Repayment of long-term debt | | (600 | ) | | — |
| | (995 | ) |
Debt issuance costs | | (12 | ) | | — |
| | (21 | ) |
Premiums and fees related to early extinguishment of debt | | (15 | ) | | — |
| | (33 | ) |
Dividends paid | | (115 | ) | | (98 | ) | | (81 | ) |
Repurchases of common stock | | (286 | ) | | (194 | ) | | (232 | ) |
Employee taxes on certain share-based payment arrangements | | (56 | ) | | (51 | ) | | (54 | ) |
Net cash provided by (used in) financing activities | | (484 | ) | | (343 | ) | | (816 | ) |
Change in cash and cash equivalents | | (19 | ) | | (174 | ) | | (96 | ) |
Cash and cash equivalents, beginning of period | | 720 |
| | 894 |
| | 990 |
|
Cash and cash equivalents, end of period | | $ | 701 |
| | $ | 720 |
| | $ | 894 |
|
Supplemental Cash Flow Disclosure | | | | | | |
Cash paid for income taxes | | $ | 223 |
| | $ | 229 |
| | $ | 242 |
|
Cash paid for interest | | $ | 72 |
| | $ | 71 |
| | $ | 96 |
|
Non-Cash Investing and Financing Activities | | | | | | |
Capital expenditures accrued in accounts payable | | $ | 33 |
| | $ | 24 |
| | $ | 17 |
|
Capital assets received from government grants | | $ | — |
| | $ | 30 |
|
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | |
($ 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, 2014 | | $ | 1 |
| | $ | 1,959 |
| | $ | 525 |
| | $ | (258 | ) | | $ | (862 | ) | | $ | 1,365 |
|
Net earnings (loss) | | — |
| | — |
| | 404 |
| | — |
| | — |
| | 404 |
|
Dividends declared ($1.70 per share) | | — |
| | — |
| | (81 | ) | | — |
| | — |
| | (81 | ) |
Additional paid-in capital | | — |
| | 19 |
| | — |
| | — |
| | — |
| | 19 |
|
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | 17 |
| | 17 |
|
Treasury stock activity | | — |
| | — |
| | — |
| | (234 | ) | | — |
| | (234 | ) |
Balance as of December 31, 2015 | | 1 |
| | 1,978 |
| | 848 |
| | (492 | ) | | (845 | ) | | 1,490 |
|
Net earnings (loss) | | — |
| | — |
| | 573 |
| | — |
| | — |
| | 573 |
|
Dividends declared ($2.10 per share) | | — |
| | — |
| | (98 | ) | | — |
| | — |
| | (98 | ) |
Additional paid-in capital | | — |
| | (14 | ) | | — |
| | — |
| | — |
| | (14 | ) |
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | (106 | ) | | (106 | ) |
Treasury stock activity | | — |
| | — |
| | — |
| | (192 | ) | | — |
| | (192 | ) |
Balance as of December 31, 2016 | | 1 |
| | 1,964 |
| | 1,323 |
| | (684 | ) | | (951 | ) | | 1,653 |
|
Net earnings (loss) | | — |
| | — |
| | 479 |
| | — |
| | — |
| | 479 |
|
Dividends declared ($2.52 per share) | | — |
| | — |
| | (115 | ) | | — |
| | — |
| | (115 | ) |
Additional paid-in capital | | — |
| | (22 | ) | | — |
| | — |
| | — |
| | (22 | ) |
Other comprehensive income (loss), net of tax | | — |
| | — |
| | — |
| | — |
| | 51 |
| | 51 |
|
Treasury stock activity | | — |
| | — |
| | — |
| | (288 | ) | | — |
| | (288 | ) |
Balance as of December 31, 2017 | | $ | 1 |
| | $ | 1,942 |
| | $ | 1,687 |
| | $ | (972 | ) | | $ | (900 | ) | | $ | 1,758 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Operating Activities | | | | | | |
Net earnings | | $ | 544 | | | $ | 696 | | | $ | 549 | |
Adjustments to reconcile to net cash provided by (used in) operating activities | | | | | | |
Depreciation | | 207 | | | 191 | | | 180 | |
Amortization of purchased intangibles | | 86 | | | 56 | | | 47 | |
Amortization of debt issuance costs | | 8 | | | 7 | | | 3 | |
Provision for doubtful accounts | | 7 | | | (1) | | | (6) | |
Stock-based compensation | | 33 | | | 23 | | | 30 | |
Deferred income taxes | | 98 | | | 23 | | | 97 | |
| | | | | | |
Goodwill impairment | | — | | | — | | | 29 | |
Loss on early extinguishment of debt | | — | | | 21 | | | — | |
Loss (gain) on investments in marketable securities | | (19) | | | (17) | | | (11) | |
Asset impairments | | — | | | 13 | | | 6 | |
Change in | | | | | | |
Accounts receivable | | 58 | | | (70) | | | (51) | |
Contract assets | | (126) | | | 22 | | | 32 | |
Inventoried costs | | (25) | | | 11 | | | (11) | |
Prepaid expenses and other assets | | (88) | | | (62) | | | (93) | |
Accounts payable and accruals | | 45 | | | 344 | | | 4 | |
Retiree benefits | | (78) | | | (176) | | | 80 | |
Other non-cash transactions, net | | 10 | | | 12 | | | 11 | |
Net cash provided by operating activities | | 760 | | | 1,093 | | | 896 | |
Investing Activities | | | | | | |
Capital expenditures | | | | | | |
Capital expenditure additions | | (331) | | | (353) | | | (530) | |
Grant proceeds for capital expenditures | | 20 | | | 17 | | | 94 | |
Acquisitions of businesses, net of cash received | | (1,643) | | | (417) | | | (195) | |
Investment in affiliates | | (22) | | | — | | | — | |
Proceeds from disposition of business | | 20 | | | — | | | — | |
| | | | | | |
Other investing activities, net | | 2 | | | (6) | | | 4 | |
Net cash used in investing activities | | (1,954) | | | (759) | | | (627) | |
Financing Activities | | | | | | |
Proceeds from issuance of long-term debt | | 1,650 | | | 1,000 | | | — | |
Repayment of long-term debt | | (25) | | | (600) | | | — | |
Proceeds from line of credit borrowings | | — | | | 385 | | | 5,119 | |
Repayment of line of credit borrowings | | — | | | (385) | | | (5,119) | |
Debt issuance costs | | (22) | | | (13) | | | — | |
Premiums and fees related to early extinguishment of debt | | — | | | (15) | | | — | |
Dividends paid | | (186) | | | (172) | | | (149) | |
Repurchases of common stock | | (101) | | | (84) | | | (262) | |
Employee taxes on certain share-based payment arrangements | | (7) | | | (13) | | | (23) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net cash provided by (used in) financing activities | | 1,309 | | | 103 | | | (434) | |
Change in cash and cash equivalents | | 115 | | | 437 | | | (165) | |
Cash and cash equivalents, beginning of period | | 512 | | | 75 | | | 240 | |
Cash and cash equivalents, end of period | | $ | 627 | | | $ | 512 | | | $ | 75 | |
Supplemental Cash Flow Disclosure | | | | | | |
Cash paid for income taxes (net of refunds) | | $ | 33 | | | $ | 155 | | | $ | 137 | |
Cash paid for interest | | $ | 76 | | | $ | 89 | | | $ | 75 | |
Non-Cash Investing and Financing Activities | | | | | | |
Capital expenditures accrued in accounts payable | | $ | 6 | | | $ | 7 | | | $ | 22 | |
| | | | | | |
| | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ 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, 2018 | | | | $ | 1 | | | $ | 1,954 | | | $ | 2,609 | | | $ | (1,760) | | | $ | (1,288) | | | $ | 1,516 | |
Net earnings | | | | — | | | — | | | 549 | | | — | | | — | | | 549 | |
Dividends declared ($3.61 per share) | | | | — | | | — | | | (149) | | | — | | | — | | | (149) | |
Stock compensation | | | | — | | | 7 | | | — | | | — | | | — | | | 7 | |
Other comprehensive loss, net of tax | | | | — | | | — | | | — | | | — | | | (121) | | | (121) | |
| | | | | | | | | | | | | | |
Treasury stock activity | | | | — | | | — | | | — | | | (214) | | | — | | | (214) | |
Balance as of December 31, 2019 | | | | 1 | | | 1,961 | | | 3,009 | | | (1,974) | | | (1,409) | | | 1,588 | |
Net earnings | | | | — | | | — | | | 696 | | | — | | | — | | | 696 | |
Dividends declared ($4.23 per share) | | | | — | | | — | | | (172) | | | — | | | — | | | (172) | |
Stock compensation | | | | — | | | 11 | | | — | | | — | | | — | | | 11 | |
Other comprehensive income, net of tax | | | | — | | | — | | | — | | | — | | | (138) | | | (138) | |
| | | | | | | | | | | | | | |
Treasury stock activity | | | | — | | | — | | | — | | | (84) | | | — | | | (84) | |
Balance as of December 31, 2020 | | | | 1 | | | 1,972 | | | 3,533 | | | (2,058) | | | (1,547) | | | 1,901 | |
Net earnings | | | | — | | | — | | | 544 | | | — | | | — | | | 544 | |
Dividends declared ($4.60 per share) | | | | — | | | — | | | (186) | | | — | | | — | | | (186) | |
Stock compensation | | | | — | | | 26 | | | — | | | — | | | — | | | 26 | |
Other comprehensive income, net of tax | | | | — | | | — | | | — | | | — | | | 624 | | | 624 | |
| | | | | | | | | | | | | | |
Treasury stock activity | | | | — | | | — | | | — | | | (101) | | | — | | | (101) | |
Balance as of December 31, 2021 | | | | $ | 1 | | | $ | 1,998 | | | $ | 3,891 | | | $ | (2,159) | | | $ | (923) | | | $ | 2,808 | |
The accompanying notes are an integral part of these consolidated financial statements.
HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Huntington Ingalls Industries, Inc. ("HII" or the "Company") is one of America’s largest military shipbuilding companies and a provider of professional services to partners in government and industry. HII is organized into three3 reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Technical Solutions. For more than a century, the Company's Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. The Technical Solutions segment established in the fourth quarter of 2016, provides a range of services to the governmental, energy,government and oil and gas markets.commercial customers.
HII conducts most of its business with the U.S. Government, principallyprimarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, the Company participates in many high-priority U.S. defense technology programs. Through its Ingalls segment, HII is a builder of amphibious assault and expeditionary warfare 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 Arleigh Burke class (DDG 51) 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 Technical Solutions segment provides a wide range of professional services and products, including fleet support, integrated missionsdefense and federal solutions ("DFS"), nuclear and environmental services, and oil and gas services.unmanned systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The 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-K 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.
Accounting Estimates - The preparation of the Company's 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 ActAdditionally, the Company has incorporated realized and estimated future effects of 2015 established limitsthe global outbreak of coronavirus disease 2019 (“COVID-19”), including, among other things, impacts from orders of civil authorities associated with COVID-19 and steps taken to mitigate the effects of COVID-19 (collectively, “COVID-19 Events”), with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of the Company’s long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units. For the year ended December 31, 2020, the Company recognized across all programs an aggregate unfavorable impact on operating margin of $61 million for delay and disruption from lower employee attendance, limited availability of critical skills, and out-of-sequence work directly attributable to COVID-19 Events. While costs related to COVID-19 Events are allowable under U.S. Government discretionary spending, including defense spending,contracts, the Company's estimates of the effects of COVID-19 Events reflect uncertainty regarding the Company's ability to recover the full costs related to COVID-19 Events under government relief actions such as the Coronavirus Aid, Relief, and provided sequestration relief for 2016Economic Security Act (the "CARES Act") and 2017. Sequestration remains in effect for 2018 throughU.S. Department of Defense ("DoD") guidance. For the year ended December 31, 2021, and could result in significant decreases in DoD spending that could negativelythe Company did not have a material impact on its operating margin directly attributable to COVID-19 Events.
Revenue Recognition - Most of the Company's revenues and its estimated recovery of goodwill and other long-lived assets.
Revenue Recognition - The majority of the Company's business isare derived from long-term contracts for the construction of naval vessels, production of goods and provisionservices provided to its U.S. Government customers. The Company generally recognizes revenues on contracts with U.S. Government customers over time using a cost-to-cost measure of services, primarilyprogress. The use of the cost-to-cost method to measure performance progress over time is supported by clauses in the U.S. Government. In accountingrelated contracts that allow the customer to unilaterally terminate the contract for these contracts,convenience, pay the Company extensivelyfor costs incurred plus a reasonable profit, and take control of any work in process. The Company utilizes the cost-to-cost method to
measure performance progress, because it best reflects the continuous transfer of control over the related goods and services to the customer as the Company satisfies its performance obligations.
When the customer is not a U.S. Government entity, the Company may recognize revenue over time or at a point in time when control transfers upon delivery, depending upon the facts and circumstances of the related arrangement. When the Company determines that revenue should be recognized over time, the Company utilizes a measure of progress that best depicts the percentage-of-completiontransfer of control of the relevant goods and services to the customer. Generally, the terms and conditions of the contracts result in a transfer of control over the related goods and services as the Company satisfies its performance obligations. Accordingly, the Company recognizes revenue over time using the cost-to-cost method to measure performance progress. The Company may, however, utilize a measure of accounting, primarilyprogress other than cost-to-cost, such as a labor-based measure of progress, if the terms and conditions of the arrangement require such accounting.
When using the cost-to-cost method to measure performance progress, certain contracts may include costs that are not representative of performance progress, such as large upfront purchases of uninstalled materials, unexpected waste, or inefficiencies. In these cases, the Company adjusts its measure of progress to exclude such costs, with the goal of better reflecting the transfer of control over the related goods or services to the customer and recognizing revenue only to the extent of the costs incurred that reflect the Company's performance under the contract.
In addition, for time and material arrangements, the Company often utilizes the practical expedient allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the Company is entitled to payment for performance to date.
A performance obligation is a promise to transfer a distinct good or service to the customer and is the unit of account for which revenue is recognized. To determine the proper revenue recognition method, consideration is given to whether two or more contracts should be combined and accounted for as one contract and whether a single contract consists of more than one performance obligation. For contracts with multiple performance obligations, the contract transaction price is allocated to each performance obligation using an estimate of the standalone selling price based upon total costs incurred. Under this method, sales, including estimated earned fees or profits,expected cost plus a margin at contract inception, which is generally the price disclosed in the contract. Contracts are recordedoften modified to account for changes in contract specifications and requirements. In the majority of circumstances, modifications do not result in additional performance obligations that are distinct from the existing performance obligations in the contract, and the effects of the modifications are recognized as costsan adjustment to revenue on a cumulative catch-up basis. Alternatively, in instances in which the performance obligations in the modifications are incurred, generally based on the percentage that total costs incurred bear to total estimated costs at completion. Certain contracts contain provisionsdeemed distinct, contract modifications are accounted 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. prospectively.
The Company estimates profitamount of revenue recognized as the difference between total estimated revenuesCompany satisfies performance obligations associated with contracts with customers is based upon the determination of transaction price. Transaction price reflects the amount of consideration to which the Company expects to be entitled for performance under the terms and total estimated costconditions of athe relevant contract and recognizes that profit overmay reflect fixed and variable components, including shareline incentive fees whereby the lifevalue of the contract is variable based on progress toward completion. Ifupon the amount of costs incurred, as well as other incentive fees based upon achievement of contractual schedule commitments or other specified criteria in the contract. Shareline incentive fees are determined based upon the formula under the relevant contract using the Company’s estimated cost to complete for each period. The Company generally utilizes a most likely amount approach to estimate variable consideration. In all such instances, the estimated revenues represent those amounts for which the Company believes a significant reversal of revenue is not probable.
Contract Estimates - In estimating contract costs, the Company utilizes a profit-booking rate based upon performance expectations that takes into consideration a number of assumptions and estimates aregarding risks related to technical requirements, feasibility, schedule, and contract will resultcosts. Management performs periodic reviews of the contracts to evaluate the underlying risks, which may increase the profit-booking rate as the Company is able to mitigate and retire such risks. Conversely, if the Company is not able to retire these risks, cost estimates may increase, resulting in a loss,lower profit-booking rate.
The cost estimation process requires significant judgment based upon the full amountprofessional knowledge and experience of the estimated loss is recognized against incomeCompany’s engineers, program managers, and financial professionals. Factors considered in estimating the work to be completed and ultimate contract recovery include the availability, productivity, and cost of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of
materials, the effect of any performance delays, the availability and timing of funding from the customer, and the recoverability of any claims included in the period in which the loss is identified.estimates to complete.
The Company classifies contract revenues as product sales or service revenues depending upon the predominant attributes of the relevant underlying contracts. The Company recognizes changesChanges in estimates of contract sales, costs, and profits on a performance obligation are recognized using the cumulative catch-up method of accounting. This methodaccounting, which recognizes in the current period the cumulative effect of the changes onin current and prior periods. Accordingly, theA significant change in an estimate on one or more contracts in a period could have a material effect of the changes on future periods of contract performance is recognized as if the revised estimate had been the original estimate.For the years ended December 31, 2017, 2016, and 2015, net cumulative catch-up adjustments increased operating income by $204 million, $224 million, and $239 million, respectively, and increased diluted earnings per share by $2.90, $3.08, and $3.21, respectively. Cumulative catch-up adjustments for the year ended December 31, 2016, included favorable adjustments of $74 million on a contract at the Ingalls segment, which increased diluted earnings per share by $1.02. No individual adjustment was material to the Company's consolidated statementsfinancial position or results of operations and comprehensive income (loss)for that period.
When estimates of total costs to be incurred exceed estimates of total revenue to be earned on a performance obligation related to a complex, construction-type contract, a provision for the years ended December 31, 2017entire loss on the performance obligation is recognized in the period the loss is determined.
Accounts Receivable - Accounts receivable include amounts related to any unconditional Company right to receive consideration and 2015.
For services contracts not associatedare presented as receivables in the consolidated statement of financial position, separate from other contract balances. Accounts receivable are comprised of amounts billed and currently due from customers. The Company reports accounts receivable net of an allowance for doubtful accounts. Because the Company's accounts receivable are primarily with the design, development, manufacture,U.S. Government or modificationwith companies acting as a contractor to the U.S. Government, the Company does not have material exposure to accounts receivable credit risk.
Contract Assets - Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed as of complex equipment,the reporting date when the right to payment is not just subject to the passage of time, including retention amounts. Contract assets are classified as current assets and, in accordance with industry practice, include amounts that may be billed and collected beyond one year due to the long-term nature of many of the Company's contracts. Contract assets are transferred to accounts receivable when the right to consideration becomes unconditional.
Contract Liabilities - Contract liabilities are comprised of advance payments, billings in excess of revenues, and deferred revenue amounts. Such advances are generally not considered a significant financing component, because they are utilized to pay for contract costs within a one-year period. Contract liability amounts are recognized upon deliveryas revenue once the requisite performance progress has occurred.
Inventoried Costs - Inventoried costs primarily relate to company-owned raw materials, which are stated at the lower of cost or as services are rendered once persuasive evidencenet realizable value, generally using the average-cost method, and costs capitalized pursuant to applicable provisions of an arrangement exists, the price is fixedFederal Acquisition Regulation ("FAR") and U.S. Cost Accounting Standards ("CAS"). Under the Company's U.S. Government contracts, the customer asserts title to, or determinable, and collectibility is reasonably assured. Costsa security interest in, inventories related to thesesuch contracts as a result of contract advances, performance-based payments, and progress payments. In accordance with industry practice, inventoried costs are expensedclassified as incurred.current assets and include amounts related to contracts having production cycles longer than one year.
Warranty Costs - Certain of the Company’s contracts contain assurance-type warranty provisions, which generally promise that the service or vessel will comply with agreed upon specifications. In such instances, the Company accrues the estimated loss by a charge to income in the relevant period. In limited circumstances, the Company's complex construction type contracts may provide the customer with an option to purchase a warranty or provide an extended assurance service coupled with the primary assurance warranty. In such cases, the Company accounts for the warranty as a separate performance obligation to the extent it is material within the context of the contract. Warranty liabilities are reported within other current liabilities and are not material.
Government Grants - The Company recognizes incentive grants, inclusive of transfers of depreciable assets, from federal, state, and local governments at fair value upon compliance with the conditions of their receipt and reasonable assurance that the grants will be received or the depreciable assets will be transferred. Grants in recognition of specific expenses are recognized in the same period as an offset to those related expenses. Grants related to depreciable assets are recognized over the periods and in the proportions in which depreciation expense on those assets is recognized.
For the yearyears ended December 31, 2017,2021, 2020, and 2019, the Company recognized cash grant benefits of approximately $21$20 million, $17 million, and $94 million, respectively, in other long-term liabilities in the consolidated statements of financial position. For the year ended December 31, 2016, the Company recognized grant benefits of approximately $30 million in depreciable assets. The Company recognized approximately $15 million in other income and gains within the consolidated statements of operations and comprehensive income (loss), and approximately $15 million in grant benefits in other long-term liabilities in the consolidated statements of financial position. For the year ended December 31, 2015, the Company recognized no grant benefits.
General and Administrative Expenses - In accordance with industry practice and regulations that govern the cost accounting requirements for government contracts, most general corporate expenses incurred at both the segment and corporate locations are allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this as an element of cost.
General and administrative expenses also include certain other costs that do not affect segment operating income, primarily consisting of the FAS/CAS Adjustment and the provision for non-current state income taxes. The FAS/CAS Adjustment reflects the difference between pension and postretirement benefits expenses determined in accordance with U.S. Financial Accounting Standards ("FAS") and pension and postretirement benefit expenses allocated to individual contracts in accordance with U.S. Cost Accounting Standards ("CAS"). Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state uncertainunrecognized tax positionsbenefits in the relevant period.
Research and Development - Company-sponsored research and development activities primarily include independent research and development ("IR&D") related to experimentation, design, development, and test activities for government programs. IR&D expenses are included in general and administrative expenses and are generally allocable to government contracts. Company-sponsored IR&D expenses totaled $17$34 million, $19$31 million, and $19$23 million for the years endedDecember 31, 2017, 2016,2021, 2020, and 2015,2019, respectively. Expenses for research and development sponsored by the customer are charged directly to the related contracts.
Product Warranty Costs - The Company provides certain product warranties that require repair or replacement of non-conforming items for a specified period of time often subject to a specified monetary coverage limit. The Company's product warranties are provided under government contracts, the costs of which are immaterial and are included in contract costs for purposes of using the percentage-of-completion method of accounting.
Environmental Costs - Environmental liabilities are accrued when the Company determines remediation costs are probable and such amountscosts are reasonably estimable. When only a range of amountscosts is established and no amount within the range is more probable than another, the minimum amount in the range is recorded.accrued. Environmental liabilities are recorded on an undiscounted basis and are not material. Environmental expenditures are expensed or capitalized as appropriate. Capitalized expenditures, if any, relate to long-lived improvements in currently operating facilities. The Company does not record insurance recoveries before collection is probable and, asprobable. As of December 31, 20172021 and 2016,2020, the Company did not have any accrued receivables related to insurance reimbursements or recoveries for environmental matters.
Fair Value of Financial Instruments - The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The accounting standard provides a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The three levels of inputs consist of:
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Level 1: | Quoted prices in active markets for identical assets and liabilities. |
Level 1: Quoted prices in active markets for identical assets and liabilities.
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Level 2: | Observable inputs, other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or that the Company corroborates with observable market data for substantially the full term of the related assets or liabilities. |
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Level 3: | Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets and liabilities. |
Level 2: Observable inputs, other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or that the Company corroborates with observable market data for substantially the full term of the related assets or liabilities.
Level 3: Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets and liabilities.
Except for the Company's long-term debt, 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 grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $94$220 million and $82$182 million as of December 31, 20172021 and 2016,2020, respectively, and are presented within miscellaneous other assets within the consolidated statements of financial position. These trusts consist primarily of available-for-sale investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.
Foreign Currency Translation - The Company's international subsidiaries that do not have the U.S. dollar as their functional currency translate assets and liabilities at current rates of exchange in effect at the balance sheet date. Revenues and expenses from these international subsidiaries are translated using the monthly average exchange rates in effect for the periods in which the items occur. The cumulative foreign currency translation gains and losses are included as a component of accumulated other comprehensive income (loss)loss in stockholders’ equity. Gains and losses from foreign currency transactions are included in other income (expense) in the consolidated statements of operations and comprehensive income (loss).income. Such amounts are not material.
Asset Retirement Obligations - Environmental remediation and/or asset decommissioning may be required when the Company ceases to utilize certain facilities. The Company records, within other current liabilities or other long-term liabilities as appropriate, all known asset retirement obligations for which the liability's fair value can be reasonably estimated, including certain asbestos removal, asset decommissioning, and lease restoration obligations.
The changes in Asset retirement obligations for which the asset retirement obligation carrying amounts for the years ended liability's fair value can be reasonably estimated were immaterial as of December 31, 2017, 2016,2021 and 2015, were as follows:2020.
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($ in millions) | | Asset Retirement Obligations |
Balance as of December 31, 2014 | | $ | 22 |
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Liabilities settled | | (4 | ) |
Revision of estimate | | (1 | ) |
Accretion expense | | 1 |
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Balance as of December 31, 2015 | | 18 |
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Accretion expense | | 1 |
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Balance as of December 31, 2016 | | 19 |
|
Liabilities settled | | (1 | ) |
Accretion expense | | 1 |
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Balance as of December 31, 2017 | | $ | 19 |
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The Company also has known conditional asset retirement obligations related to assets currently in use, including certain asbestos remediation and asset decommissioning activities to be performed in the future, that were not reasonably estimable as of December 31, 2017,2021, due to insufficient information about the timing and method of settlement of the obligation. Accordingly, the fair value of these obligations has not been recorded in the consolidated financial statements. A liability for these obligations is recorded in the period in which sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability's fair value. In addition, there may be conditional environmental asset retirement obligations that the Company has not yet discovered.
Income Taxes - Income tax expense and other related information are based on the prevailing statutory rates for U.S. federal income taxes and the composite state income tax rate for the Company for each period presented. Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state uncertainunrecognized tax positionsbenefits in the relevant period. These amounts are recorded within operating income, while the current period state income tax expense, which is generally considered allowable and allocable to contracts, is charged to contract costs and included in cost of sales and service revenues in segment operating income.
Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial statement purposes and for tax return purposes. Deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates expected to be in effect when the deferred tax items reverse in future periods. As a result of the reduction in the corporate income tax rate from 35% to 21% effective January 1, 2018, under the Tax Cuts and Jobs Act (the "Tax Act"), the Company revalued its net deferred tax assets as of December 31, 2017. This reduced the Company's net deferred tax assets by $56 million, which was recorded as additional income tax expense for the year ended December 31, 2017.
The Company recognizes deferred tax assets to the extent it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. Based on the Company's evaluation of these deferred tax assets, valuation allowances of $12 million and $11$22 million were deemed necessaryrecognized as of each of December 31, 20172021 and 2016, respectively.2020.
Uncertain tax positions meeting the more-likely-than-not recognition threshold, based on the merits of the position, are recognized in the financial statements. The Company recognizes the amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. If a tax position does not meet the minimum statutory threshold to avoid payment of penalties, the Company recognizes an expense for the amount of the penalty in the period the tax position is claimed or expected to be claimed in its tax return. Penalties and accrued interest related to uncertainunrecognized tax positionsbenefits are recognized as a component of income tax expense. Changes in accruals associated with uncertainunrecognized tax positionsbenefits are recorded in earnings in the period in which they are determined.
Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents approximate fair value due to the short-term nature of these assets, which have original maturity dates of 90 days or less.
Concentration Risk - The Company’s assets that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash and cash equivalents with reputable financial institutions and limits the amount of credit exposure with any one of them. The Company regularly evaluates the creditworthiness of these financial institutions and minimizes this credit risk by entering into transactions with high-quality counterparties, limiting the exposure to each counterparty, and monitoring the financial condition of its counterparties.
In connection with its U.S. Government contracts, the Company is required to procure certain raw materials, components, and parts from supply sources approved by the U.S. Government. Only one supplier may exist for certain components and parts required to manufacture the Company's products.
Accounts Receivable - Accounts receivable include amounts billed and currently due from customers, amounts currently due but unbilled, certain estimated contract change amounts, claims or requests for equitable adjustment in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion.
Inventoried Costs - Inventoried costs primarily relate to production costs of contracts in process and company owned raw materials, which are stated at the lower of cost or net realizable value, generally using the average cost method. Under the Company's U.S. Government contracts, the customer asserts title to, or a security interest in, inventories related to such contracts as a result of contract advances, performance-based payments, and progress payments. In accordance with industry practice, inventoried costs are classified as a current asset and include amounts related to contracts having production cycles longer than one year. Inventoried costs also include work in process under contracts that recognize revenues using labor dollars as the basis of the percentage-of-completion calculation. These costs represent accumulated contract costs less cost of sales as calculated using the percentage-of-completion method, not in excess of recoverable value.
Advance Payments and Billings in Excess of Revenues - Payments received in excess of inventoried costs and revenues are recorded as advance payment liabilities.
Property, Plant, and Equipment - Depreciable properties owned by the Company are recorded at cost and depreciated over the estimated useful lives of individual assets. Major improvements are capitalized while expenditures for maintenance, repairs, and minor improvements are expensed. Costs incurred for computer software developed or obtainedpurchased for internal use are capitalized and amortized over the expected useful life of the software, not to exceed nine years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease.
The remaining assets are depreciated using the straight-line method, with the following lives: | | | | | | | | | | | | | | | | | | | | |
| | Years |
Land improvements | | 2 | | - | | 40 |
Buildings and improvements | | 2 | | - | | 60 |
Capitalized software costs | | 3 | | - | | 9 |
Machinery and other equipment | | 2 | | - | | 40 |
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| | Years |
Land improvements | | 2 | | - | | 40 |
Buildings and improvements | | 2 | | - | | 60 |
Capitalized software costs | | 2 | | - | | 9 |
Machinery and other equipment | | 2 | | - | | 45 |
The Company evaluates the recoverability of its property, plant, and equipment when there are changes in economic circumstances or business objectives that indicate the carrying value may not be recoverable. The Company's evaluations include estimated future cash flows, profitability, and other factors affecting fair value. As these assumptions and estimates may change over time, it may or may not be necessary to record impairment charges.
Leases - The Company uses its incremental borrowingdetermines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to a party the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company recognizes a lease liability at the lease commencement date, as the present value of future lease payments, using an estimated rate of interest that the Company would pay to borrow equivalent funds over an equivalent term on a collateralized basis. A lease asset is recognized based on the lease liability value and adjusted for any prepaid lease payments, initial direct costs, or lease incentive amounts. The lease term at the commencement date includes any renewal options or termination options when it is reasonably certain that the Company will exercise or not exercise those options, respectively.
Right of use assets associated with operating leases are recognized in operating lease assets in the assessmentconsolidated statements of financial position. Lease liabilities associated with operating leases are recognized in long-term operating lease classification as capital orliabilities, with short-term lease liability amounts included in other current liabilities in the consolidated statements of financial position.
Rent expense for operating and defines the initial lease term to include renewal options determined to be reasonably assured. The Company conducts operations primarily under operating leases.
Many of the Company's real property lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For incentives for tenant improvements, the Company records a deferred rent liability and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and rent escalation clauses during the lease term, the Company records minimum rental expensesleases is recognized on a straight-line basis over the lease term and included in cost of sales and service revenues in the consolidated statements of operations and comprehensive income. Variable lease payments are recognized as incurred and include lease operating expenses, which are based on contractual lease terms.
The Company elected for all asset classes to exclude from its consolidated statements of financial position leases having terms of 12 months or less (short-term leases) and elected not to separate lease and non-lease components in the determination of lease payment obligations for its long-term lease contracts.
Assets and Liabilities Held for Sale - Assets and liabilities held for sale represent land, buildings, and other assets and liabilities that have met the criteria of “held for sale” accounting at the lower of carrying value or fair value less costs to sell. Fair value is based on the estimated proceeds from the sale of the lease. For purposes of recognizing lease incentives, the Company uses the date of initial possession as the commencement date, which is generally the date on which the Company is given the right of access to the spaceassets utilizing recent purchase offers, market comparables, and begins to make improvements in preparation for the intended use.reliable third-party data.
Goodwill and Other Intangible Assets - The Company performs impairment tests for goodwill as of November 30 of each year and between annual impairment tests if evidence of potential impairment exists, by comparing the carrying value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the carrying value, the Company records an impairment charge to the reporting unit. Purchased intangible assets are amortized on a straight-line basis or a method based on the pattern of benefits over their estimated useful lives, and the carrying value of these assets is reviewed for impairment when events indicate that a potential impairment may have occurred.
Equity Method Investments - Investments in which the Company has the ability to exercise significant influence over the investee but does not own a majority interest or otherwise control are accounted for under the equity method of accounting and included in other assets in its consolidated statements of financial position. The Company's equity investments align strategically and are integrated with the Company's operations. Accordingly, the Company's share of the net earnings or losses of the investee is included in operating income (loss).income. The Company evaluates its equity investments for other than temporary impairment whenever events or changes in business circumstances indicate that the carrying amounts of such investments may not be fully recoverable. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period.
Self-Insured Group Medical Insurance - The Company maintains a self-insured group medical insurance plan. The plan is designed to provide a specified level of coverage for employees and their dependents. Estimated liabilities for incurred but not paid claims utilize actuarial methods based on various assumptions, which include, but are not limited to, HII's historical loss experience and projected loss development factors. These liabilities are recorded in other current liabilities and account for less than 5% of the total current liabilities balance.were immaterial.
Self-Insured Workers' Compensation Plan - The operations of the Company are subject to federal and state workers' compensation laws. The Company maintains self-insured workers' compensation plans and participates in federally administered second injury workers' compensation funds. The Company estimates the liability for claims and funding requirements on a discounted basis utilizing actuarial methods based on various assumptions, which include, but are not limited to, the Company's historical loss experience and projected loss development factors as compiled in an annual actuarial study. Self-insurance accruals include amounts related to the liability for reported claims and an estimated accrual for claims incurred but not reported. The Company's workers' compensation liability was discounted at 2.35%1.47% and 2.54%0.92% as of December 31, 20172021 and 2016,2020, respectively. These discount rates were determined using a risk-free rate based on future payment streams. Workers' compensation benefit obligations on an undiscounted basis were $925$785 million and $835$752 million as of December 31, 20172021 and 2016,2020, respectively.
Other Current Liabilities - Other current liabilities were $423 million as of December 31, 2021, and $462 million as of December 31, 2020. Payroll taxes payable, which is a component of other current liabilities, was $125 million as of December 31, 2020. No other component of other current liabilities was more than 5% of total current liabilities.
Litigation, Commitments, and Contingencies - Amounts associated with litigation, commitments, and contingencies are recorded as charges to earnings when management, after taking into consideration the facts and circumstances of each matter, including any settlement offers and projected loss or claim development factors, has determined it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Restructuring -The Company has recorded Restructuring related accruals are reviewed and adjusted when circumstances require. Accruals for restructuring activities in other current liabilities. These accruals include estimates primarily related to facility consolidations and closures, asset retirement obligations, long-lived asset write-downs, employment reductions, and contract termination costs. Actual costs may vary from these estimates. Restructuring relatedThere were no restructuring accruals are reviewedor activity as of and adjusted when circumstances require suchfor the years ended December 31, 2021, 2020, and 2019.
Loan Receivable - The Company holds a change.loan receivable in connection with the financing of the sale of its previously owned Avondale Shipyard facility. The receivable was carried at amortized cost of $36 million, net of $13 million of loan discount, as of December 31, 2021, and at amortized cost of $34 million, net of $15 million loan discount, as of December 31, 2020. The loan receivable approximates fair value and is recorded in miscellaneous other assets on the consolidated statements of financial position. Interest income is recognized on an accrual basis using the effective yield method. The discount is accreted into income using the effective yield method over the estimated life of the loan receivable.
Retirement Related Benefit Costs - The Company accounts for its retirement related benefit plans on the accrual basis. The measurements of obligations, costs, assets, and liabilities require significant judgment. The costs of benefits provided by defined benefit pension plans are recorded in the period participating employees provide service. The costs of benefits provided by other postretirement benefit plans are recorded in the period participating
employees attain full eligibility. The discount rate assumption is defined under GAAP as the rate at which a plan's obligation could be effectively settled. The discount rate is established for each of the retirement related benefit plans at its respective measurement date.
The expected return on plan assets component of retirement related costs is used to calculate net periodic expense. Unless plan assets and benefit obligations are subject to remeasurementre-measurement during the year, the expected return on assets is based on the fair value of plan assets at the beginning of the year. The costs of plan amendments that
provide benefits already earned by plan participants (prior service costs and credits) are deferred in accumulated other comprehensive incomeloss and amortized over the expected future service period of active participants as of the date of amendment. Actuarial gains and losses arising from differences between assumptions and actual experience or changes in assumptions are deferred in accumulated other comprehensive income.loss. This unrecognized amount is amortized to the extent it exceeds 10% of the greater of the plan's benefit obligation or plan assets. The amortization period for actuarial gains and losses is the estimated remaining service life of the plan participants.
The Company recognizes the funded status of each retirement related benefit plan as an asset or liability in its consolidated statements of financial position. The funded status represents the difference between the plan's benefit obligation and the fair value of the plan's assets. Unrecognized deferred amounts, such as demographic or asset gains or losses and the impacts of plan amendments, are included in accumulated other comprehensive incomeloss and amortized as described above.
Stock Compensation - Stock-based compensation value is determined based on the closing market price of the Company's common stock on grant date, and the expense is recognized over the vesting period. At each reporting date, the number of shares is adjusted to equal the number ultimately expected to vest based on the Company's expectations regarding the relevant performance and service criteria.
Related Party Transactions - On March 29, 2011, HII entered into a Separation and Distribution Agreement (the "Separation Agreement") with its former parent company, Northrop Grumman Corporation ("Northrop Grumman"), and Northrop Grumman's subsidiaries (Northrop Grumman Shipbuilding, Inc. and Northrop Grumman Systems Corporation), pursuant to which HII was legally and structurally separated from Northrop Grumman. In connection with the spin-off, HII also entered into a Tax Matters Agreement with Northrop Grumman related to taxes prior to the spin-off as described in Note 13: Income Taxes. Under all spin-off related agreements, the Company was due $8 million and $33 million from Northrop Grumman as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, the Company had $84 million outstanding under Industrial Revenue Bonds issued by the Mississippi Business Finance Corporation. Prior to the spin-off, repayment of principal and interest was guaranteed by Northrop Grumman Systems Corporation. The guaranty remains in effect, and the Company has agreed to indemnify Northrop Grumman Systems Corporation for any losses related to the guaranty.
3. ACCOUNTING STANDARDS UPDATES
In May 2014,August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which reduces disclosure requirements of Subtopic 715-20 and requires additional disclosure related to weighted-average interest crediting rates and significant gains and losses related to changes in the benefit obligation for the reporting period. The update was effective on a retrospective basis for fiscal years ending after December 15, 2020, with early adoption allowed. The adoption did not result in a material impact to the Company's financial results or disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting Standards Update ("ASU"for Income Taxes, which amends and simplifies the requirements for income taxes. The ASU was effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The adoption did not result in a material impact to the Company's financial results or disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional exceptions to GAAP for certain transactions related to the transition away from The London Interbank Offered Rate (“LIBOR”). The amended guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by the reference rate reform. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by the reference rate reform. Application of the guidance in the amendment is optional, is only available in certain situations, and is only available for companies to apply until December 31, 2022. The Company is currently evaluating the impacts of reference rate reform and the new guidance on its consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The update requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASU 2014-09, “RevenueRevenue from Contracts with Customers (Topic 606)”, which. Generally, this new guidance will replace existing requirementsresult in U.S. GAAP, including industry-specific requirements, significantly expand the disclosure requirements,acquirer recognizing contract assets and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognizedcontract liabilities at the date of initial application. In July 2015,same amounts recorded by the FASB approvedacquiree. Historically, such amounts were recognized by the deferral of the new standard's effective date by one year.acquirer at fair value in accordance with acquisition accounting. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB permitted companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.
As part of the Company's corporate governance structure, the Company established an implementation team comprised of key stakeholders across the Company's businesses. The Company developed a plan to identify and implement applicable changes to its business processes, systems, and controls. These changes are necessary to support recognition and disclosure under the new standard. In the first quarter of 2017, the Company reached a point in its assessment to support a transition decision based on information obtained to date. Based on its
evaluation, the Company will adopt the requirements of the new standard in the first quarter of 2018 utilizing the modified retrospective method. As a result, the Company will present the cumulative effect of applying the standard at the date of initial application, January 1, 2018.
The Company has completed its evaluation of the impact of the accounting and disclosure changes on its business processes, controls, and systems and, as a result, has redefined its accounting policies affected by this standard and enhanced internal controls over financial reporting related to the standard. The assessment of the majority of the Company's contracts under the new standard supports the recognition of revenue over time using the cost-to-cost measurement under the percentage of completion method, which is consistent with the Company's current revenue recognition practices. As such, the revenue on the majority of the Company's contracts will continue to be recognized over time considering the continuous transfer of control to the customer. Under U.S. Government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process. ASU 2014-09 also requires expanded disclosures regarding the nature, timing, and uncertainty of revenue and customer contract balances, including how and when the Company satisfies its performance obligations and the relationship between revenue recognized and changes in contract balances during a reporting period. The Company has evaluated these disclosure requirements and is incorporating the collection of relevant data into its business processes. The Company does not expect the new standard to have a material effect on its consolidated financial position, results of operations, or cash flows.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which establishes a right-of-use model that requires a lessee to record the right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations and comprehensive income. This guidance is effective for fiscal years beginning after December 15, 2018,2022, including interim periods within those reporting periods. Earlyfiscal years, with early adoption is permitted and should be applied using a modified retrospective approach.permitted. The Company isearly adopted this standard in the process of evaluating the potential impacts of ASU 2016-02 on its consolidated financial statementsfiscal year 2021, and disclosures, contracting and accounting processes, internal controls, and information technology systems.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which eliminates the performance of Step 2 from the goodwill impairment test. In performing its annual or interim impairment testing, an entity will instead compare the fair value of the reporting unit with its carrying amount and recognize any impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. The Company elected to adopt ASU 2017-04 as of November 30, 2017. The adoption of ASU 2017-04it did not have a material impact on the Company's consolidated financial statements and disclosures, accounting processes, or internal controls.statements.
In March 2017,November 2021, the FASB issued ASU 2017-07, “Retirement Benefits2021-10, Government Assistance (Topic 715): Improving832), which requires business entities to disclose information about transactions with a government that are accounted for by applying a grant or contribution model by analogy (“ASU 2021-10”). For transactions within scope, the Presentationnew standard requires the
disclosure of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The update requires employers to presentinformation about the service cost componentnature of the net periodic benefit cost intransaction, including significant terms and conditions, as well as the same incomeamounts and specific financial statement line item as other employee compensation costs arising from services rendered duringitems affected by the period.transaction. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted.
The Company expects the adoption of ASU 2017-07 will change the net FAS/CAS pension adjustment within operating income, which will be offset by a corresponding change in Other income (expense), as a result of reclassifying interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects of net periodic benefit expense from operating income to Other income (expense). Additionally, the remaining FAS/CAS Adjustment within operating income will be reclassified from General and administrative expenses to Cost of product sales and service revenues. The Company adopted ASU 2017-07 on January 1, 2018 using the retrospective method and does not expect the impact to 2017 and 2016 operating income to be material when it is recast to reflect the new standard. The Company does not expect ASU 2017-07 to have a material impact on its consolidated statements of financial position, cash flows, accounting processes, or internal controls.
In May 2017, the FASB issued ASU 2017-10, "Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services", which addresses how an operating entity should determine the customer for operations under a service concession arrangement. The update clarifies that the grantor is the customer of the operation services in all cases for these arrangements. This standardguidance is effective for annual reporting periods beginning after December 15, 2017. The FASB permitted companies to adopt the new standard2021, with early but not before the original effective date of annual reporting periods beginning after December 15, 2016.adoption permitted. The Company is currently evaluating the impactimpacts of ASU 2017-10the new guidance on its consolidated financial statements and disclosures, accounting processes, or internal controls.statements.
Other accounting pronouncements issued but not effective until after December 31, 2017,2021, are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
4. AVONDALEACQUISITIONS AND DIVESTITURES
In 2010, plans were announcedAcquisition of Alion
On August 19, 2021, the Company acquired all of the outstanding common stock of Alion Holding Corp., the parent company of Alion Science and Technology Corporation (“Alion”), a technology-driven solutions provider. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with ASC 805 – “Business Combinations.” The preliminary purchase price was $1.79 billion, including $148 million of cash received in the acquisition. The purchase price was paid in cash and funded through the net proceeds of the Company’s issuance of $400 million aggregate principal amount of 0.670% Senior Notes due 2023 and $600 million aggregate principal amount of 2.043% Senior Notes due 2028, together with the proceeds of a $650 million term loan. See Note 13: Debt. The preliminary purchase price is subject to consolidatecustomary adjustments as provided in the purchase agreement.
Alion provides advanced engineering and R&D services in the areas of intelligence, surveillance, and reconnaissance, military training and simulation, cyber, data analytics and other next-generation technology based solutions to the DoD and intelligence community customers, with the U.S. Navy representing about one-third of current annual revenues.
The table below summarizes the preliminary fair value estimates of identifiable assets acquired and liabilities assumed in the acquisition. These estimates are subject to revisions, which may result in an adjustment to the preliminary values presented below.
| | | | | | | | |
($ in millions) | | Preliminary 8/19/2021 |
Cash and cash equivalents | | $ | 148 | |
Accounts receivable | | 91 | |
Contract assets | | 137 | |
Operating lease assets | | 46 | |
Intangible assets | | 720 | |
Other identifiable assets acquired | | 20 | |
Total identifiable assets acquired | | 1,162 | |
| | |
Trade accounts payable | | 95 |
Accrued employees' compensation | | 52 |
Deferred tax liabilities - noncurrent | | 131 |
Operating lease liabilities | | 49 |
Other identifiable liabilities assumed | | 68 |
Total identifiable liabilities assumed | | 395 |
| | |
Net identifiable assets acquired | | 767 |
Transaction price | | 1,791 |
Goodwill | | $ | 1,024 | |
The Company is in various phases of valuing the assets acquired and liabilities assumed in the acquisition, including intangible assets and tax balances, and its estimate of these values was still preliminary as of December 31, 2021. These provisional amounts are therefore subject to change as the Company continues to
evaluate information required to complete the valuations through the measurement period, which will not exceed one year from the acquisition date.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The recognized goodwill is attributable to operational synergies and growth opportunities and was allocated to the Company's Ingalls shipbuildingTechnical Solutions segment. None of the goodwill resulting from this acquisition is expected to be amortizable for tax purposes.
Approximately $16 million of one-time acquisition-related costs was included in general and administrative expenses in the consolidated statements of operations and comprehensive income for the year ended December 31, 2021.
The Company identified Alion’s contract backlog and customer relationships as finite-lived assets with estimated fair values as of the acquisition date of $240 million and $480 million, respectively. The finite-lived assets are subject to amortization under the pattern of benefits method over six years for backlog and 20 years for customer relationships.
Total revenue and operating income for Alion for the period from August 19, 2021, through December 31, 2021, were as follows:
| | | | | | | | |
($ in millions) | | Period from 8/19/2021-12/31/2021 |
Sales and service revenues | | $ | 506 | |
Operating income | | $ | 10 | |
Pro Forma Financial Information
The following unaudited consolidated pro forma summary has been prepared by winding down shipbuilding atadjusting the Avondale, Louisiana facilityCompany's historical data to give effect to the acquisition of Alion as if it had occurred on January 1, 2020.
| | | | | | | | | | | | | | |
| | Pro Forma (Unaudited) |
| | Year Ended December 31 |
($ in millions, except per share amounts) | | 2021 | | 2020 |
Sales and service revenues | | $ | 10,364 | | | $ | 10,453 | |
Net earnings | | $ | 539 | | | $ | 648 | |
Basic earnings per share | | $ | 13.37 | | | $ | 15.96 | |
Diluted earnings per share | | $ | 13.37 | | | $ | 15.96 | |
These unaudited pro forma results include adjustments, such as the amortization of acquired intangible assets and interest expense on debt financing, 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.
In connection with the acquisition.
The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and as a resultis not necessarily indicative of the decision to wind down shipbuilding atresults of operations that would have occurred if the Avondale facility,acquisition had been completed on the Company began incurring and paying related costs,date indicated, nor is it indicative of the future operating results of the Company.
The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, severance expense, relocation expense, and asset write-downs relatedthe anticipated realization of operating synergies in subsequent periods. These results also do not give effect to the Avondale facilities. Pursuant to applicable provisions of the Federal Acquisition Regulation ("FAR") and Cost Accounting Standards for the treatment of restructuring and shutdown related costs,certain charges that the Company has been amortizing the deferred costs over a five year period since 2014, when the Company ceased shipbuilding construction operations at the Avondale facility.
The Company engagedexpects to incur in communications and negotiationsconnection with the U.S. Government beginning in 2010 regarding the amountacquisition, including, but not limited to, additional professional fees and recovery of the Company's restructuring and shutdown costs. On November 16, 2017, the U.S. Government and the Company reached a settlement of the Company’s claim for restructuring costs. Under the terms of the settlement, $251 million is being treated as allowable costs. Any future gain or loss associated with disposition of the land, facilities, and capital assets located at Avondale was excluded from the settlement and will be recorded by the Company at the time of disposition. The settlement was consistent with management’s cost recovery expectations and did not have a material effect on the Company's consolidated financial position or results of operations. The Company anticipates that a majority of these restructuring and shutdown related costs will be billed to the U.S. Government and collected by the end of 2018.employee integration.
Effective July 31, 2017, the Company entered into a Purchase and Sale Agreement with a potential buyer of the Avondale facility. After conducting due diligence on the property, the potential buyer has the right to determine whether or not to proceed to closing. As of December 31, 2017, the assets related to the Avondale facility were recorded at $23 million in land within property, plant, and equipment, net and $124 million in contract working capital within inventoried costs, accounts receivable and advance payments and billings in excess of revenues in the consolidated statements of financial position.Other Acquisitions
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 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.
The Company has received communications from the Supervisor of Shipbuilding questioning the Company's treatment and proposed allocation of the Gulfport closure costs. The Company has responded to such communications with the position that its proposed accounting and allocation of the closure costs complies with applicable law, and the Company and the U.S. Government remain in discussions about the proper accounting and allocation of such costs. While the Company anticipates a resolution that is substantially in accordance with
management's cost recovery expectations, any inability to recover such costs substantially in accordance with the Company's cost recovery expectations could result in a material effect on the Company’s consolidated financial position, results of operations, or cash flows.
6. ACQUISITIONS
On December 1, 2016,2020, the Company acquired for approximately $369 million in cash, netthe autonomy business of $27 million of cash acquired, Camber Holding CorporationSpatial Integrated Systems, Inc. ("Camber"SIS"), a leading provider of mission-based and informationautonomous technology, solutions to the U.S. Government.for approximately $40 million in cash. The acquisition was consistent withfurther expanded the Company's strategy to optimize and expand its services portfolio. For the year ended December 31, 2017, Camber contributed revenues of $309 million and operating income of $8 million.unmanned systems capabilities. In connection with this acquisition, the Company preliminarily recorded $261$40 million of goodwill, which included the value of SIS's workforce, all of which was allocated to itsthe Company's Technical Solutions segment, primarily relatedsegment. For the year ended December 31, 2021, the Company recorded a
decrease in goodwill of $13 million, due to the valuea reallocation of Camber's workforce, and $76 million ofpurchase price to intangible assets related to technology and existing contract backlog. See Note 11: Goodwill and Other Intangible Assets. For the year ended December 31, 2017, the Company recorded a goodwill adjustment of $17 million, primarily driven by the finalization of fair value calculations for certain assets and liabilities, as well as the net working capital adjustment. The assets, liabilities, and results of operations of CamberSIS are not material to the Company’s consolidated financial position, results of operations, or cash flows.
On January 30, 2015,In March 2020, the Company acquired Hydroid, Inc. ("Hydroid"), a leading provider of advanced marine robotics to the defense and maritime markets, for approximately $6$377 million in cash, the assetsnet of the Engineering Solutions Division ("ESD")$2 million of acquired cash. The Columbia Group. ESD, a leading designer and builder of unmanned underwater vehicles for domestic and international customers, is operating as the Undersea Solutions Corporation ("USC"). As the U.S. Navy increases employment of unmanned vehicles in both the surface and undersea domains, this acquisition enhancesexpanded the Company's ability to competecapabilities in these markets.the strategically important and rapidly growing autonomous and unmanned maritime systems market. In connection with this acquisition, the Company recorded $4$239 million of goodwill, allwhich included the value of which was allocated to its Newport News segment, primarily attributed to USC's specializedHydroid's workforce, and skilled employees, and $1$76 million of intangible assets primarily related to technology.technology and existing contract backlog. See Note 12:11: Goodwill and Other Intangible Assets. The assets, liabilities, and results of operations of USCHydroid are not material to the Company’s consolidated financial position, results of operations, or cash flows.
The Company funded each of thesethe SIS and Hydroid acquisitions using cash on hand.hand, issuances of commercial paper, and borrowings on its revolving credit facility. 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 prices of these businesses, the Company considered the estimated fair valuevalues of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill. The total amount of goodwill resulting from these acquisitions is expected to be deductibleamortizable for tax purposes was $155 million.purposes. 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.
In February 2021, the Company contributed its San Diego Shipyard (“SDSY”) business to a joint venture, Titan Acquisition Holdings, L.P. ("Titan"), in exchange for a 10% non-controlling interest. Titan is a leading provider of ship repair and specialty fabrication services to government and commercial customers. The joint venture contribution was completed as part of the Company’s operating strategy. The Company recognized its interest in Titan at fair value, which approximated $83 million. No gain or loss was recognized in the transaction. The contributed assets and liabilities were previously reported in assets and liabilities held for sale. The Company transferred $22 million to Titan as part of the exchange. As of December 31, 2021, the Company's investment in Titan of $87 million, inclusive of equity earnings, is recorded in miscellaneous other assets in the consolidated statements of financial position.
In February 2021, the Company completed the sale of its oil and gas business. The divestiture was completed as part of the Company’s plan to exit this part of the oil and gas industry and focus on its core services and customers. The divested assets and liabilities were previously reported in assets and liabilities held for sale. In connection with the sale, the Company received $25 million net cash and recorded a net pre-tax gain of $1 million in other income and gains, net within operating income in the consolidated statements of operations.
5. STOCKHOLDERS' EQUITY
Common Stock - Changes in the Company's number of outstanding shares for the year ended December 31, 2017,2021, resulted from shares purchased in the open market under the Company's stock repurchase program and share activity under its stock compensation plans. See Note 19:18: Stock Compensation Plans.
Treasury Stock - In October 2015, the Company's board of directors authorized an increase in the stock repurchase program from $600 million to $1.2 billion. In November 2017,2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $1.2$2.2 billion to $2.2$3.2 billion and an extension of the term of the program from October 31, 2019, to October 31, 2022. 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the year ended December 31, 2017,2021, the Company repurchased 1,417,808544,440 shares at an aggregate cost of $288 million, of which $2 million was not yet settled for cash as of December 31, 2017.$101 million. For the years ended December 31, 20162020 and 2015,2019, the Company repurchased 1,266,192390,904 and 1,987,5501,005,762 shares, respectively, at aggregate costs of $192$84 million and $234$214 million, respectively, of which $2 million was not yet settled for cash as of December 31, 2015.respectively. The cost of purchased shares is recorded as treasury stock in the consolidated statements of financial position.
Dividends - In November 2017,2021, the Company's board of directors authorized an increase in the Company's quarterly cash dividend from $0.60$1.14 per share to $0.72$1.18 per share. In November 2016,2020, the Company's board of directors authorized an increase in the Company's quarterly cash dividend from $0.50$1.03 per share to $0.60$1.14 per share. In October 2015,November 2019, the Company's board of directors authorized an increase in the Company's quarterly cash dividend from $0.40$0.86 per share to $0.50$1.03 per share. The Company paid cash dividends totaling $115$186 million ($2.52
4.60 per share), $98
$172 million ($2.104.23 per share), and $81$149 million ($1.703.61 per share) in the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, respectively.
Accumulated Other Comprehensive IncomeLoss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings (loss).earnings. The accumulated other comprehensive loss as of December 31, 2017 and 2016, was comprised of unamortized benefit plan costs of $906$923 million as of December 31, 2021, and $948unamortized benefit plan costs of $1,546 million respectively, and other comprehensive income (loss)loss items of $6$1 million and $(3) million, respectively.as of December 31, 2020.
The changes in accumulated other comprehensive income (loss)loss by component for the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, were as follows: | | | | | | | | | | | | | | | | | | | | |
($ in millions) | | Benefit Plans | | Other | | Total |
Balance as of December 31, 2018 | | $ | (1,283) | | | $ | (5) | | | $ | (1,288) | |
Other comprehensive income (loss) before reclassifications | | (265) | | | 3 | | | (262) | |
Amounts reclassified from accumulated other comprehensive loss | | | | | | |
Amortization of prior service (credit)1 | | (4) | | | — | | | (4) | |
Amortization of net actuarial loss1 | | 102 | | | — | | | 102 | |
| | | | | | |
| | | | | | |
Tax expense for items of other comprehensive income | | 43 | | | — | | | 43 | |
Net current period other comprehensive income (loss) | | (124) | | | 3 | | | (121) | |
Balance as of December 31, 2019 | | (1,407) | | | (2) | | | (1,409) | |
Other comprehensive income (loss) before reclassifications | | (279) | | | 2 | | | (277) | |
Amounts reclassified from accumulated other comprehensive loss | | | | | | |
Amortization of prior service (credit)1 | | (10) | | | — | | | (10) | |
Amortization of net actuarial loss1 | | 102 | | | — | | | 102 | |
| | | | | | |
| | | | | | |
Tax expense (benefit) for items of other comprehensive income | | 48 | | | (1) | | | 47 | |
Net current period other comprehensive income (loss) | | (139) | | | 1 | | | (138) | |
Balance as of December 31, 2020 | | (1,546) | | | (1) | | | (1,547) | |
Other comprehensive income before reclassifications | | 720 | | | — | | | 720 | |
Amounts reclassified from accumulated other comprehensive loss | | | | | | |
Amortization of prior service cost1 | | 11 | | | — | | | 11 | |
Amortization of net actuarial loss1 | | 107 | | | — | | | 107 | |
| | | | | | |
| | | | | | |
Tax expense (benefit) for items of other comprehensive income | | (215) | | | 1 | | | (214) | |
Net current period other comprehensive income | | 623 | | | 1 | | | 624 | |
Balance as of December 31, 2021 | | $ | (923) | | | $ | — | | | $ | (923) | |
|
| | | | | | | | | | | | |
($ in millions) | | Benefit Plans | | Other | | Total |
Balance as of December 31, 2014 | | $ | (864 | ) | | $ | 2 |
| | $ | (862 | ) |
Other comprehensive income (loss) before reclassifications | | (53 | ) | | (5 | ) | | (58 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of prior service cost (credit)1 | | (1 | ) | | — |
| | (1 | ) |
Amortization of net actuarial loss (gain)1 | | 88 |
| | — |
| | 88 |
|
Tax benefit (expense) for items of other comprehensive income | | (13 | ) | | 1 |
| | (12 | ) |
Net current period other comprehensive income (loss) | | 21 |
| | (4 | ) | | 17 |
|
Balance as of December 31, 2015 | | (843 | ) | | (2 | ) | | (845 | ) |
Other comprehensive income (loss) before reclassifications | | (249 | ) | | (1 | ) | | (250 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of prior service cost (credit)1 | | (1 | ) | | — |
| | (1 | ) |
Amortization of net actuarial loss (gain)1 | | 78 |
| | — |
| | 78 |
|
Tax benefit (expense) for items of other comprehensive income | | 67 |
| | — |
| | 67 |
|
Net current period other comprehensive income (loss) | | (105 | ) | | (1 | ) | | (106 | ) |
Balance as of December 31, 2016 | | (948 | ) | | (3 | ) | | (951 | ) |
Other comprehensive income (loss) before reclassifications | | (34 | ) | | 14 |
| | (20 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | | | | | | |
Amortization of net actuarial loss (gain)1 | | 93 |
| | — |
| | 93 |
|
Tax benefit (expense) for items of other comprehensive income | | (17 | ) | | (5 | ) | | (22 | ) |
Net current period other comprehensive income (loss) | | 42 |
| | 9 |
| | 51 |
|
Balance as of December 31, 2017 | | $ | (906 | ) | | $ | 6 |
| | $ | (900 | ) |
1 These accumulated comprehensive income (loss)loss components are included in the computation of net periodic benefit cost. See Note 18:17: Employee Pension and Other Postretirement Benefits. The tax expense associated with amounts reclassified from accumulated other comprehensive income (loss)loss for the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, was $36$30 million, $27$23 million, and $30$25 million, respectively.
6. EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
(in millions, except per share amounts) | | 2021 | | 2020 | | 2019 |
Net earnings | | $ | 544 | | | $ | 696 | | | $ | 549 | |
| | | | | | |
Weighted-average common shares outstanding | | 40.3 | | | 40.6 | | | 41.4 | |
Net effect of dilutive stock options and awards | | — | | | — | | | — | |
| | | | | | |
| | | | | | |
Dilutive weighted-average common shares outstanding | | 40.3 | | | 40.6 | | | 41.4 | |
| | | | | | |
Earnings per share - basic | | $ | 13.50 | | | $ | 17.14 | | | $ | 13.26 | |
Earnings per share - diluted | | $ | 13.50 | | | $ | 17.14 | | | $ | 13.26 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
(in millions, except per share amounts) | | 2017 | | 2016 | | 2015 |
Net earnings (loss) | | $ | 479 |
| | $ | 573 |
| | $ | 404 |
|
| | | | | | |
Weighted-average common shares outstanding | | 45.7 |
| | 46.8 |
| | 47.9 |
|
Net effect of dilutive stock options and awards | | 0.1 |
| | 0.4 |
| | 0.4 |
|
Dilutive weighted-average common shares outstanding | | 45.8 |
| | 47.2 |
| | 48.3 |
|
| | | | | | |
Earnings (loss) per share - basic | | $ | 10.48 |
| | $ | 12.24 |
| | $ | 8.43 |
|
Earnings (loss) per share - diluted | | $ | 10.46 |
| | $ | 12.14 |
| | $ | 8.36 |
|
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 the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects 0.3of 0.4 million Restricted Performance Stock Rights ("RPSRs") for the year endedDecember 31, 2017. 2021, and 0.3 million RPSRs for each of the years ended December 31, 2020 and 2019.
7. REVENUE
The following is a description of principal activities from which the Company generates its revenues. For more detailed information regarding reportable segments, see Note 8: Segment Information. For more detailed information regarding the Company's significant accounting policy for revenue, see Note 2: Summary of Significant Accounting Policies.
U.S. Government Contracts
The Ingalls and Newport News segments generate revenue primarily from performance under multi-year contracts with the U.S. Government, generally the U.S. Navy and U.S. Coast Guard, or prime contractors to contracts with the U.S. Government, relating to the advance planning, design, construction, repair, maintenance, refueling, overhaul, or inactivation of nuclear-powered ships and non-nuclear ships. The period over which the Company performs may extend past five years. The Technical Solutions segment also generates the majority of its revenue from contracts with the U.S. Government, including U.S. Government agencies. The Company generally invoices and receives related payments based upon performance progress no less frequently than monthly.
Shipbuilding - For most of the Company's shipbuilding contracts, the customer contracts with the Company to provide a comprehensive service of designing, procuring long-lead-time materials, manufacturing, and integrating complex equipment and technologies into a single ship or project, often resulting in a single performance obligation. Contract modifications to account for changes in specifications and requirements are recognized when approved by the customer. In the majority of circumstances, modifications do not result in additional performance obligations that are distinct from the existing performance obligations in the contract, and the effects of the modifications are recognized as an adjustment to revenue on a cumulative catch-up basis. Alternatively, in instances where the performance obligations in the modifications are deemed distinct, contract modifications are accounted for prospectively.
The Company considers incentive and award fees to be variable consideration and includes in the transaction price at inception the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. Transaction price is limited to the extent of funding allotted by the customer and available for performance, and estimated revenues represent those amounts presented abovefor which the Company believes a significant reversal of revenue is not probable.
The Company recognizes revenues related to shipbuilding contracts as it satisfies the related performance obligations over time using a cost-to-cost input method to measure performance progress, which best reflects the transfer of control to the customer.
Services - The Technical Solutions segment generates revenue primarily under U.S. Government contracts. Contracts generally are structured using either an Indefinite Delivery/Indefinite Quantity ("IDIQ") vehicle, under which orders are issued, or a standalone contract. Contracts may be fixed-price or cost-type, include variable consideration such as incentives and awards, and structured as task orders under an IDIQ contract vehicle or requirements contract vehicle. In either case, the Company generally performs services over a shorter duration and may continue to perform upon exercise of related period of performance options that are also shorter in duration. The Company’s performance obligations vary in nature and may be stand-ready, in which case the Company responds to the customer’s needs on the basis of its demand, a recurring service, typically recurring maintenance services, or a single performance obligation that does not comprise a series of distinct services.
In determining transaction price, the Company considers incentives and other contingencies to be variable consideration and includes in the initial transaction price the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. Transaction price is limited to the extent of funding allotted by the customer and available for performance, and estimated revenues represent those amounts for which the Company believes a significant reversal of revenue is not probable. Where a series of distinct services has been identified, the Company generally allocates variable consideration to distinct time increments of service.
The Company generally recognizes revenue as it satisfies the related performance obligations over time using a cost-to-cost input method to measure performance progress, because, even where the Company has identified a series of services, its cost incurrence pattern generally is not ratable given the complex nature of the services the Company provides. Invoices are issued and related payments are received, on the basis of performance progress, no less frequently than monthly. In addition, many of the Company's U.S. Government services contracts are time and material arrangements. As a result, the Company often utilizes the practical expedient of allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the Company is entitled to payment for performance to date.
Non-U.S. Government Contracts
Revenues generated under commercial and state and local government agency contracts are primarily derived from the provision of nuclear and environmental services. Non-U.S. Government contracts typically are one or two years in duration.
In determining transaction price, the Company considers incentives and other contingencies to be variable consideration and includes in the initial transaction price the consideration to which the Company expects to be entitled under the terms and conditions of the contract, generally estimated using a most likely amount approach. In the context of variable consideration, the Company limits the transaction price to amounts for which the Company believes a significant reversal of revenue is not probable. Such amounts may relate to transaction price in excess of funding, a lack of history with the customer, a lack of history with the goods or services being provided, or other items.
Revenue generally is recognized over time given the terms and conditions of the related contracts. The Company generally utilizes a cost-to-cost input method to measure performance progress, which best reflects the transfer of control to the customer. The Company’s non-U.S. Government contract portfolio is comprised of a large number of time and material arrangements. As a result, the Company often utilizes the practical expedient allowing the recognition of revenue in the amount the Company invoices, which corresponds with the value provided to the customer and to which the Company is entitled to payment for performance to date.
Disaggregation of Revenue
The following tables present revenues on a disaggregated basis, in a manner that reconciles with the Company's reportable segment disclosures, for the year endedfollowing categories: product versus service type, customer type, contract type, and major program. See Note 8: Segment Information. The Company believes that this level of disaggregation provides investors with information to evaluate the Company’s financial performance and provides the Company with information to make capital allocation decisions in the most appropriate manner.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
($ in millions) | | Ingalls | | Newport News | | Technical Solutions | | Intersegment Eliminations | | Total |
Revenue Type | | | | | | | | | | |
Product sales | | $ | 2,357 | | | $ | 4,543 | | | $ | 100 | | | $ | — | | | $ | 7,000 | |
Service revenues | | 156 | | | 1,109 | | | 1,259 | | | — | | | 2,524 | |
Intersegment | | 15 | | | 11 | | | 117 | | | (143) | | | — | |
Sales and service revenues | | $ | 2,528 | | | $ | 5,663 | | | $ | 1,476 | | | $ | (143) | | | $ | 9,524 | |
Customer Type | | | | | | | | | | |
Federal | | $ | 2,513 | | | $ | 5,652 | | | $ | 1,310 | | | $ | — | | | $ | 9,475 | |
Commercial | | — | | | — | | | 48 | | | — | | | 48 | |
State and local government agencies | | — | | | — | | | 1 | | | — | | | 1 | |
Intersegment | | 15 | | | 11 | | | 117 | | | (143) | | | — | |
Sales and service revenues | | $ | 2,528 | | | $ | 5,663 | | | $ | 1,476 | | | $ | (143) | | | $ | 9,524 | |
Contract Type | | | | | | | | | | |
Firm fixed-price | | $ | 33 | | | $ | 41 | | | $ | 205 | | | $ | — | | | $ | 279 | |
Fixed-price incentive | | 2,329 | | | 2,913 | | | 5 | | | — | | | 5,247 | |
Cost-type | | 151 | | | 2,698 | | | 894 | | | — | | | 3,743 | |
Time and materials | | — | | | — | | | 255 | | | — | | | 255 | |
Intersegment | | 15 | | | 11 | | | 117 | | | (143) | | | — | |
Sales and service revenues | | $ | 2,528 | | | $ | 5,663 | | | $ | 1,476 | | | $ | (143) | | | $ | 9,524 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
($ in millions) | | Ingalls | | Newport News | | Technical Solutions | | Intersegment Eliminations | | Total |
Revenue Type | | | | | | | | | | |
Product sales | | $ | 2,462 | | | $ | 4,312 | | | $ | 76 | | | $ | — | | | $ | 6,850 | |
Service revenues | | 212 | | | 1,247 | | | 1,052 | | | — | | | 2,511 | |
Intersegment | | 4 | | | 12 | | | 140 | | | (156) | | | — | |
Sales and service revenues | | $ | 2,678 | | | $ | 5,571 | | | $ | 1,268 | | | $ | (156) | | | $ | 9,361 | |
Customer Type | | | | | | | | | | |
Federal | | $ | 2,674 | | | $ | 5,558 | | | $ | 882 | | | $ | — | | | $ | 9,114 | |
Commercial | | — | | | 1 | | | 245 | | | — | | | 246 | |
State and local government agencies | | — | | | — | | | 1 | | | — | | | 1 | |
Intersegment | | 4 | | | 12 | | | 140 | | | (156) | | | — | |
Sales and service revenues | | $ | 2,678 | | | $ | 5,571 | | | $ | 1,268 | | | $ | (156) | | | $ | 9,361 | |
Contract Type | | | | | | | | | | |
Firm fixed-price | | $ | 50 | | | $ | 15 | | | $ | 222 | | | $ | — | | | $ | 287 | |
Fixed-price incentive | | 2,347 | | | 2,719 | | | 29 | | | — | | | 5,095 | |
Cost-type | | 277 | | | 2,825 | | | 465 | | | — | | | 3,567 | |
Time and materials | | — | | | — | | | 412 | | | — | | | 412 | |
Intersegment | | 4 | | | 12 | | | 140 | | | (156) | | | — | |
Sales and service revenues | | $ | 2,678 | | | $ | 5,571 | | | $ | 1,268 | | | $ | (156) | | | $ | 9,361 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
($ in millions) | | Ingalls | | Newport News | | Technical Solutions | | Intersegment Eliminations | | Total |
Revenue Type | | | | | | | | | | |
Product sales | | $ | 2,319 | | | $ | 3,946 | | | $ | — | | | $ | — | | | $ | 6,265 | |
Service revenues | | 233 | | | 1,277 | | | 1,124 | | | — | | | 2,634 | |
Intersegment | | 3 | | | 8 | | | 113 | | | (124) | | | — | |
Sales and service revenues | | $ | 2,555 | | | $ | 5,231 | | | $ | 1,237 | | | $ | (124) | | | $ | 8,899 | |
Customer Type | | | | | | | | | | |
Federal | | $ | 2,552 | | | $ | 5,179 | | | $ | 878 | | | $ | — | | | $ | 8,609 | |
Commercial | | — | | | 43 | | | 245 | | | — | | | 288 | |
State and local government agencies | | — | | | 1 | | | 1 | | | — | | | 2 | |
Intersegment | | 3 | | | 8 | | | 113 | | | (124) | | | — | |
Sales and service revenues | | $ | 2,555 | | | $ | 5,231 | | | $ | 1,237 | | | $ | (124) | | | $ | 8,899 | |
Contract Type | | | | | | | | | | |
Firm fixed-price | | $ | 91 | | | $ | 11 | | | $ | 240 | | | $ | — | | | $ | 342 | |
Fixed-price incentive | | 2,060 | | | 2,359 | | | 1 | | | — | | | 4,420 | |
Cost-type | | 401 | | | 2,853 | | | 454 | | | — | | | 3,708 | |
Time and materials | | — | | | — | | | 429 | | | — | | | 429 | |
Intersegment | | 3 | | | 8 | | | 113 | | | (124) | | | — | |
Sales and service revenues | | $ | 2,555 | | | $ | 5,231 | | | $ | 1,237 | | | $ | (124) | | | $ | 8,899 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | |
($ in millions) | | 2021 | | 2020 | | 2019 | | |
Major Programs | | | | | | | | |
Amphibious assault ships | | $ | 1,328 | | | $ | 1,403 | | | $ | 1,336 | | | |
Surface combatants and coast guard cutters | | 1,179 | | | 1,267 | | | 1,209 | | | |
Other | | 21 | | | 8 | | | 10 | | | |
Total Ingalls | | 2,528 | | | 2,678 | | | 2,555 | | | |
Aircraft carriers | | 3,073 | | | 3,056 | | | 2,878 | | | |
Submarines | | 1,917 | | | 1,727 | | | 1,595 | | | |
Other | | 673 | | | 788 | | | 758 | | | |
Total Newport News | | 5,663 | | | 5,571 | | | 5,231 | | | |
Government and energy services | | 1,462 | | | 1,033 | | | 996 | | | |
Oil and gas services | | 14 | | | 235 | | | 241 | | | |
Total Technical Solutions | | 1,476 | | | 1,268 | | | 1,237 | | | |
Intersegment eliminations | | (143) | | | (156) | | | (124) | | | |
Sales and service revenues | | $ | 9,524 | | | $ | 9,361 | | | $ | 8,899 | | | |
As of December 31, 2016, exclude2021, the impactCompany had $48.5 billion of 0.1remaining performance obligations. The Company expects to recognize approximately 19% of its remaining performance obligations as revenue through 2022, an additional 35% through 2024, and the balance thereafter.
Cumulative Catch-up Adjustments
For the year ended December 31, 2021, net cumulative catch-up adjustments increased operating income by $115 million stock options and 0.3increased diluted earnings per share by $2.26. For the year ended December 31, 2020, net cumulative catch-up adjustments decreased operating income by $29 million RPSRs under and decreased diluted earnings per share by $0.56. For the treasury stock method. The amounts presented aboveyear ended December 31, 2019, net cumulative catch-up adjustments increased operating income by $96 million and increased diluted earnings per share by $1.84.
No individual adjustment was material to the Company's consolidated statements of operations and comprehensive income for the year ended December 31, 2015, exclude2021.
Cumulative catch-up adjustments for the impactyear ended December 31, 2020, included unfavorable adjustments of 0.3$148 million, stock optionsrelating to Block IV of the Virginia class (SSN 774) submarine program at the Company's Newport News segment, which decreased diluted earnings per share by $2.88. While other unfavorable cumulative catch-up adjustments for the year ended December 31, 2020, were not individually material, cost estimates for discrete delay and 0.7disruption from COVID-19 Events drove $61 million RPSRs underof unfavorable cumulative catch-up adjustments across our contracts, including $16 million relating to Block IV of the treasury stock method.Virginia class (SSN 774) submarine program, which is included in the $148 million unfavorable adjustments discussed above. For the year ended December 31, 2020, no individual favorable cumulative catch-up adjustment was material to the Company's consolidated statements of operations and comprehensive income.
No individual adjustment was material to the Company's consolidated statements of operations and comprehensive income for the year ended December 31, 2019. 9.
Contract Balances
Contract balances include accounts receivable, contract assets, and contract liabilities from contracts with customers. Accounts receivable represent an unconditional right to consideration and include amounts billed and currently due from customers. Contract assets primarily relate to the Company's rights to consideration for work completed but not billed as of the reporting date when the right to payment is not just subject to the passage of time. Fixed-price contracts are generally billed to the customer using either progress payments, whereby amounts are billed monthly as costs are incurred or work is completed, or performance-based payments, which are based upon
the achievement of specific, measurable events or accomplishments defined and valued at contract inception. Cost-type contracts are typically billed to the customer on a monthly or semi-monthly basis. Contract liabilities relate to advance payments, billings in excess of revenues, and deferred revenue amounts.
The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. The Company’s net contract assets increased $195 million from December 31, 2020 to December 31, 2021, primarily resulting from favorable cumulative catch-up adjustments and revenue on certain U.S. Navy contracts. For the year ended December 31, 2021, the Company recognized revenue of $382 million related to its contract liabilities as of December 31, 2020. For the year ended December 31, 2020, the Company recognized revenue of $266 million related to its contract liabilities as of December 31, 2019. For the year ended December 31, 2019, the Company recognized revenue of $279 million related to its contract liabilities as of December 31, 2018.
8. SEGMENT INFORMATION
The Company is organized into three3 reportable segments: Ingalls, Newport News, and Technical Solutions, consistent with how management makes operating decisions and assesses performance. The Technical Solutions segment was established in the fourth quarter of 2016 in conjunction with the Company's acquisition of Camber and realignment of management oversight of operations to enhance strategic and operational alignment among its services businesses. As a result of this realignment, the Company's non-nuclear fleet support and nuclear and environmental services were transferred from its Newport News segment to its Technical Solutions segment. The Company's oil and gas services were transferred from its Other segment to its Technical Solutions segment, and its Other segment was dissolved. The Company has reflected the 2016 segment realignment in prior reporting periods on a retrospective basis. None of these changes impacted the Company's previously reported consolidated financial position, results of operations, or cash flows.
U.S. Government Sales - Revenues from the U.S. Government include revenues from contracts for which HII is the prime contractor, as well as contracts for which the Company is a subcontractor and the ultimate customer is the U.S. Government. The Company derived over 95% of its revenues from the U.S. Government for each of the years ended December 31, 2017, 2016,2021, 2020, and 2015, respectively.2019.
Assets - Substantially all of the Company's assets are located or maintained in the United States.
Results of Operations by Segment
The following table presents the Company's operating results by segment.segment: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Sales and Service Revenues | | | | | | |
Ingalls | | $ | 2,528 | | | $ | 2,678 | | | $ | 2,555 | |
Newport News | | 5,663 | | | 5,571 | | | 5,231 | |
Technical Solutions | | 1,476 | | | 1,268 | | | 1,237 | |
Intersegment eliminations | | (143) | | | (156) | | | (124) | |
Total sales and service revenues | | $ | 9,524 | | | $ | 9,361 | | | $ | 8,899 | |
Operating Income (Loss) | | | | | | |
Ingalls | | $ | 281 | | | $ | 281 | | | $ | 235 | |
Newport News | | 352 | | | 233 | | | 410 | |
Technical Solutions | | 50 | | | 41 | | | (14) | |
| | | | | | |
Total segment operating income | | 683 | | | 555 | | | 631 | |
Non-segment factors affecting operating income | | | | | | |
Operating FAS/CAS Adjustment | | (157) | | | 248 | | | 124 | |
Non-current state income taxes | | (13) | | | (4) | | | (19) | |
Total operating income | | $ | 513 | | | $ | 799 | | | $ | 736 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Sales and Service Revenues | | | | | | |
Ingalls | | $ | 2,420 |
| | $ | 2,389 |
| | $ | 2,188 |
|
Newport News | | 4,164 |
| | 4,089 |
| | 4,298 |
|
Technical Solutions | | 952 |
| | 691 |
| | 616 |
|
Intersegment eliminations | | (95 | ) | | (101 | ) | | (82 | ) |
Total sales and service revenues | | $ | 7,441 |
| | $ | 7,068 |
| | $ | 7,020 |
|
Operating Income (Loss) | | | | | | |
Ingalls | | $ | 313 |
| | $ | 321 |
| | $ | 379 |
|
Newport News | | 354 |
| | 386 |
| | 401 |
|
Technical Solutions | | 21 |
| | 8 |
| | (113 | ) |
Total segment operating income (loss) | | 688 |
| | 715 |
| | 667 |
|
Non-segment factors affecting operating income (loss) | | | | | | |
FAS/CAS Adjustment | | 189 |
| | 145 |
| | 104 |
|
Non-current state income taxes | | (12 | ) | | (2 | ) | | (2 | ) |
Total operating income (loss) | | $ | 865 |
| | $ | 858 |
| | $ | 769 |
|
Sales transactions between segments are generally recorded at cost.
Goodwill and Intangible Asset Impairment Charges - The operating loss at the Technical Solutions segment for the year ended December 31, 2015, reflects goodwill impairment charges of $75 million and intangible asset impairment charges of $27 million.
Other Financial Information
The following tables present the Company's assets, capital expenditures, and depreciation and amortization by segment.segment: | | | | | | | | | | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Assets | | | | | | |
Ingalls | | $ | 1,659 | | | $ | 1,612 | | | 1,618 | |
Newport News | | 4,179 | | | 4,124 | | | 3,886 | |
Technical Solutions | | 3,553 | | | 1,379 | | | 1,022 | |
Corporate | | 1,236 | | | 1,042 | | | 505 | |
Total assets | | $ | 10,627 | | | $ | 8,157 | | | $ | 7,031 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Capital Expenditures(1) | | | | | | |
Ingalls | | $ | 72 | | | $ | 104 | | | $ | 182 | |
Newport News | | 201 | | | 212 | | | 244 | |
Technical Solutions | | 38 | | | 20 | | | 9 | |
Corporate | | — | | | — | | | 1 | |
Total capital expenditures | | $ | 311 | | | $ | 336 | | | $ | 436 | |
|
| | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Assets | | | | | | |
Ingalls | | $ | 1,385 |
| | $ | 1,362 |
| | 1,324 |
|
Newport News | | 3,350 |
| | 3,169 |
| | 3,061 |
|
Technical Solutions | | 642 |
| | 692 |
| | 303 |
|
Corporate | | 997 |
| | 1,129 |
| | 1,336 |
|
Total assets | | $ | 6,374 |
| | $ | 6,352 |
| | $ | 6,024 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Capital Expenditures(1) | | | | | | |
Ingalls | | $ | 131 |
| | $ | 97 |
| | $ | 53 |
|
Newport News | | 224 |
| | 176 |
| | 130 |
|
Technical Solutions | | 6 |
| | 8 |
| | 5 |
|
Corporate | | — |
| | 4 |
| | — |
|
Total capital expenditures | | $ | 361 |
| | $ | 285 |
| | $ | 188 |
|
(1) Net of grant proceeds for capital expenditures
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2021 | | 2020 | | 2019 |
Depreciation and Amortization(1) | | | | | | |
Ingalls | | $ | 74 | | | $ | 73 | | | $ | 70 | |
Newport News | | 146 | | | 133 | | | 124 | |
Technical Solutions | | 72 | | | 40 | | | 32 | |
Corporate | | 1 | | | 1 | | | 1 | |
Total depreciation and amortization | | $ | 293 | | | $ | 247 | | | $ | 227 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31 |
($ in millions) | | 2017 | | 2016 | | 2015 |
Depreciation and Amortization(1) | | | | | | |
Ingalls | | $ | 73 |
| | $ | 68 |
| | $ | 65 |
|
Newport News | | 107 |
| | 109 |
| | 102 |
|
Technical Solutions | | 25 |
| | 9 |
| | 13 |
|
Total depreciation and amortization | | $ | 205 |
| | $ | 186 |
| | $ | 180 |
|
(1) Excluding amortization of debt issuance costs
10.9. ACCOUNTS RECEIVABLE NETAND CONTRACT ASSETS
Accounts Receivable
Accounts receivable includes unbilledinclude amounts that represent sales for which billings have not been presentedrelated to customers at year-end. Theseany unconditional Company right to receive consideration. Substantially all amounts are usually billed and collected within one year. Accountsincluded in accounts receivable billed but not paid by customers under retainage provisions in long-term contracts were $64 million and $46 million as of December 31, 2017 and 2016, respectively, substantially all of which were under U.S. Government contracts. Accounts receivable at December 31, 2017,2021, are expected to be collected in 2018, except for approximately $77 million due in 2019 and $65 million due in or after 2020.
2022. Because the Company's accounts receivable are primarily with the U.S. Government or with companies acting as a contractor to the U.S. Government, the Company does not have material exposure to accounts receivable credit risk.
Accounts receivable were comprised of the following: | | | | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2021 | | 2020 |
Due from U.S. Government | | $ | 425 | | | $ | 396 | |
Due from other customers | | 17 | | | 3 | |
Total accounts receivable | | 442 | | | 399 | |
Allowances for doubtful accounts | | (9) | | | (2) | |
Total accounts receivable, net | | $ | 433 | | | $ | 397 | |
|
| | | | | | | | |
| | December 31 |
($ in millions) | | 2017 | | 2016 |
Due From U.S. Government | | | | |
Amounts billed | | $ | 277 |
| | $ | 249 |
|
Recoverable costs and accrued profit on progress completed - unbilled | | 733 |
| | 830 |
|
| | 1,010 |
| | 1,079 |
|
Due From Other Customers | | | | |
Amounts billed | | 167 |
| | 69 |
|
Recoverable costs and accrued profit on progress completed - unbilled | | 26 |
| | 20 |
|
| | 193 |
| | 89 |
|
Total accounts receivable | | 1,203 |
| | 1,168 |
|
Allowances for doubtful accounts | | (15 | ) | | (4 | ) |
Total accounts receivable, net | | $ | 1,188 |
| | $ | 1,164 |
|
Contract Assets
The Company has limited exposure
Contract assets primarily relate to credit losses and maintains an allowancethe Company’s rights to consideration for anticipated losses considered necessary under the circumstances based on historical experience with uncollected customer accounts and a review of its currently outstanding accounts receivable. For the three months ended March 31, 2017, the Company
recorded a $29 million allowance for doubtful accounts within the Technical Solutions segment related to a commercial customer’s petition for bankruptcy protection under Chapter 11work completed but not billed as of the reporting date when the right to payment is not subject solely to the passage of time. Contract assets include retention amounts, substantially all of which were under U.S. Bankruptcy Code. For the three months ended June 30, 2017, and September 30, 2017, the Company released $7 million and $13 million, respectively,Government contracts.
Contract assets were comprised of the allowance for doubtful accounts following its receipt of bankruptcy related payments from its commercial customer. Additionally, certain payments totaling $28 million received from this customer may be reclaimed by the bankruptcy trustee if any such payments are determined to have been a preferential payment or similar transaction under applicable bankruptcy laws.following: | | | | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2021 | | 2020 |
Due from U.S. Government | | $ | 1,218 | | | $ | 964 | |
Due from other customers | | 92 | | | 85 | |
Total contract assets | | $ | 1,310 | | | $ | 1,049 | |
11.10. INVENTORIED COSTS, NET
Inventoried costs were comprised of the following: | | | | | | | | | | | | | | |
| | December 31 |
($ in millions) | | 2021 | | 2020 |
| | | | |
| | | | |
| | | | |
| | | | |
Production costs of contracts in process(1) | | $ | 37 | | | $ | 17 | |
Raw material inventory | | 124 | | | 120 | |
Total inventoried costs, net | | $ | 161 | | | $ | 137 | |
(1) Includes amounts capitalized pursuant to applicable provisions of the FAR and CAS.
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 values of the Company's reporting units below their carrying values. Reporting units are aligned with the Company's businesses. 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.
In connection with the Company’s annual goodwill impairment test as of November 30, 2017,2021, management tested goodwill for each of its four3 reporting units.units with goodwill balances. As a result of itsthe Company's annual goodwill impairment test,analysis, it estimated that the fair value of the Government Services reporting unit within the Technical Solutions segment exceeded carrying value by less than 10%. The Company determined that the estimated fair valuevalues of eachits remaining reporting unitunits exceeded by more than 10% itstheir corresponding carrying valuevalues as of November 30, 2017.2021.
The Company performs tests for impairment of long-lived assets whenever events or circumstances suggest that long-lived assets may be impaired. In December 2015,connection with the Alion purchase in 2021, the Company performed an impairment test on the amortizablerecorded $720 million of intangible assets that arose from the UPI acquisition, which reside in the Company’s Oil and Gas reporting unit within the Technical Solutions segment. The Oil and Gas asset group’s long lived intangible assets consist primarily ofpertaining to customer relationships and to a lesser degree, trade name and developed technology. The Company performed its impairment test considering the latest market conditions and expectations, as well as lower anticipated revenue and profitability. Based on the nature of UPI's intangible assets, the Company performed the recoverability test at the reporting unit level. In connection with the recoverability test, the Company reevaluated the remaining useful lives of the intangible assets and determined the total undiscounted pretax cash flows generated by the reporting unit over the remaining useful life of the primary asset, customer relationships. The carrying amount of the reporting unit was greater than the total undiscounted pretax cash flows, and, as a result, the intangible assets were written down by $27 million, charged against cost of sales and service revenues within income from operations at the Technical Solutions segment, and the new carrying value was adjusted to beexisting contract backlog, which is being amortized using the pattern of benefits method over a weighted-average life of seven15 years.
The Company's purchased intangible assets are being amortized on a straight-line basis or a method based on the pattern of benefits over their estimated useful lives. Net intangible assets consist primarily of amounts pertainingrelating to customer relationships and existing contract backlog within Technical Solutions, as well as nuclear-powered aircraft carrier and submarine program intangible assets, with an aggregate weighted-average useful life of 4029 years based on the long life cycle of the related programs. Aggregate amortization expense for the years ended December 31, 2017, 2016,2021, 2020, and 2015,2019, was $40$86 million, $23$56 million, and $26$47 million, respectively.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state uncertainunrecognized tax positionsbenefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. Related toAs a result of the unrecognized tax benefits noted above, income tax expense increased by $1 million in 2021 for interest and penalties, resulting in a liability of $3 million for interest and penalties as of December 31, 2021. In 2020, there was a net decrease in income tax expense of less than $1 million in 2017 for interest and penalties, resulting in no material liability for interest and penalties as of December 31, 2017. The 2017 changes in interest and penalties related to statute of limitation expirations. In 2016, there was a net decrease in income tax expense of $2 million for interest and penalties, resulting in a total liability of $1$2 million for interest and penalties as of December 31, 2016.2020. The 20162020 changes in interest expense related to a
During 2013 the Company entered into the pre-Compliance Assurance Process with the IRS for years 2011 and 2012. Tax years 2014 and 2015 have been closed with the IRS. The Company is part of the IRS Compliance Assurance Process program for the 2014 through 20182021 tax years. Open tax years related to state jurisdictions remain subject to examination.
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.
16. COMMITMENTS AND CONTINGENCIES
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 arrangementguarantees only if its subsidiary is unable to perform its obligations. Historically, the Company has not incurred any substantial liabilities resulting from these guarantees. As of December 31, 2017,2021, the Company was not aware of any existing event of default that would require it to satisfy any of these guarantees.
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. In addition, there are certain potential remediation sites where the costs of remediation cannot be reasonably estimated.
17. IMPACTS FROM HURRICANES
Plan obligations are measured based on the present value of projected future benefit payments to participants for services rendered to date. The measurement of projected future benefits is dependent on the terms of each individual plan, demographics, and valuation assumptions. No assumption is made regarding any potential changes to the benefit provisions beyond those to which the Company is currently committed, for example under existing collective bargaining agreements.
eligible to participate in a defined contribution benefit program in lieu of a defined benefit pension plan. The Company's contributions to the qualified defined contribution pension plans for the years endedDecember 31, 2017, 2016,2021, 2020, and 2015,2019, were $78$140 million, $71$130 million, and $73$120 million, respectively.
The Company provides contributory postretirement health care and life insurance benefits to a dominantly closed group of eligible employees, retirees, and their qualifying dependents. Covered employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age, years of service, and grandfathered requirements. Benefits are not guaranteed, and the Company reserves the right to
amend or terminate coverage at any time. The Company's contributions for retiree health care benefits are subject to caps, which limit Company contributions when spending thresholds are reached.
Pension assets include public equities, government and corporate bonds, cash and cash equivalents, private real estate funds, private partnerships, hedge funds, and other assets. Plan assets are held in a master trust and overseen by the Company's Investment Committee. All assets are externally managed through a combination of active and passive strategies. Managers may only invest in the asset classes for which they have been appointed.
The general objectives of the Company's pension asset strategy are to earn a rate of return over time to satisfy the benefit obligations of the plans, meet minimum ERISA funding requirements, and maintain sufficient liquidity to pay benefits and address other cash requirements within the master trust. Specific investment objectives include reducing the volatility of pension assets relative to benefit obligations, achieving a competitive total investment return, achieving diversification between and within asset classes, and managing other risks. Investment objectives for each asset class are determined based on specific risks and investment opportunities identified. Decisions regarding investment policies and asset allocationallocations are made with the understanding of the historical and
prospective return and risk characteristics of various asset classes, the effect of asset allocations on funded status, future Company contributions, and projected expenditures, including benefits.benefit payments. The Company updates its asset allocations periodically. The Company uses various analytics to determine the optimal asset mix and considers plan obligation characteristics, duration, liquidity characteristics, funding requirements, expected rates of return, regular rebalancing, and the distribution of returns. Actual allocations to each asset class could vary from target allocations due to periodic investment strategy changes, short-term market value fluctuations, the length of time it takes to fully implement investment allocation positions, such as real estate and other alternative investments, and the timing of benefit payments and Company contributions.
Taking into account the asset allocation ranges, the Company determines the specific allocation of the master trust's investments within various asset classes. The master trust utilizes select investment strategies, which are executed through separate account or fund structures with external investment managers who demonstrate experience and expertise in the appropriate asset classes and styles. The selection of investment managers is
done with careful evaluation of all aspects of performance and risk, demonstrated fiduciary responsibility, investment management experience, and a review of the investment managers' policies and processes. Investment performance is monitored frequently against appropriate benchmarks and tracked to compliance guidelines with the assistance of third partythird-party consultants and performance evaluation tools and metrics.
Plan assets are stated at fair value. The Company employs a variety of pricing sources to estimate the fair value of its pension plan assets, including independent pricing vendors, dealer or counterparty-supplied valuations, third-party appraisals, and appraisals prepared by the Company's investment managers or other experts.
Investments in equity securities, common and preferred, are valued at the last reported sales price when an active market exists. Securities for which official or last trade pricing on an active exchange is available are classified as Level 1. If closing prices are not available, securities are valued at the last trade price, if deemed reasonable, or a broker's quote in a non-active market, and are typically categorized as Level 2.
Investments in fixed-income securities are generally valued by independent pricing services or dealers who make markets in such securities. Pricing methods are based upon market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders, and fixed-income securities typically are categorized as Level 2.
Investments in hedge funds generally do not have readily available market quotations and are estimated at fair value, which primarily utilizes NAV or the equivalent, as a practical expedient, as reported by the investment manager. Hedge funds usually have restrictions on redemptions that might affect the ability to sell the investment at NAV in the short term.
Real estate funds are typically valued through updated independent third-party appraisals, which are adjusted for changes in cash flows, market conditions, property performance, and leasing status. Since real estate funds do not have readily available market quotations, they are generally valued at NAV or its equivalent, as a practical expedient, as reported by the asset manager. Redemptions from real estate funds are also subject to various restrictions.
Private partnership interests include debt and equity investments. These investments are valued based on NAVs or their equivalents, adjusted for capital calls and distributions, fromreported by the respective general partners. The terms of the partnerships range from seven to ten or more years, and investors do not have the option to redeem their interests in these partnerships. As of December 31, 2017,2021, unfunded commitments to private partnerships were $112$563 million.
Management reviews independently appraised values, audited financial statements, and additional pricing information to evaluate the net asset values. For the very limited group of investments for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional information is obtained from the investment manager and evaluated internally to determine whether any adjustments are required to reflect fair value.
The Company might be unable to quickly liquidate some assets at amounts close or equal to fair value in order to meet the plans'plan liquidity requirements or respond to specific events, such as the creditworthiness of any particular issuer or counterparty. Illiquid assets are generally long-term investments that complement the long-term nature of the Company's pension obligations and are generally not used to fund benefit payments in the short term. Management monitors liquidity risk on an ongoing basis and has procedures designed to maintain adequate liquidity for plan requirements.
The master trust has considerable investments in fixed income securities for which changes in the relevant interest rate of a particular instrument might result in the inability to secure similar returns upon the maturity or sale.sale of the instrument. Changes in prevailing interest rates might result in an increase or decrease in fair value of the instrument. Investment managers are permitted to use interest rate swaps and other financial derivatives to manage interest rate and credit risks.
Counterparty risk is the risk that a counterparty to a financial instrument held by the master trust will default on its commitment. Counterparty risk is generally related to over-the-counter derivative instruments used to manage risk exposure to interest rates on long-term debt securities. Certain agreements with counterparties employ set-off agreements, collateral support arrangements, and other risk mitigation practices designed to reduce the net credit risk exposure in the event of a counterparty default. CreditThe Company has credit policies and processes are in place tothat manage concentrations of risk by seeking to undertake transactions with large well-capitalized counterparties and by monitoring the creditworthiness of these counterparties.
There was no activity attributable to Level 3 retirement plan assets during the years ended December 31, 20172021 and 2016.2020.
On March 23, 2012, the Company's board of directors adopted the 2012 Plan, subject to stockholder approval, and the Company's stockholders approved the 2012 Plan on May 2, 2012. Award grants made on or after May 2, 2012, were made under the 2012 Plan. Award grants made prior to May 2, 2012, were made under the 2011 Plan. No future grants will be made under the 2011 Plan.
The 2012 Plan permits awards of stock options, stock appreciation rights, and other stock awards. Each stock option grant is made with an exercise price of not less than 100% of the closing price of HII's common stock on the date of grant. Stock awards, in the form of RPSRs, restricted stock rights ("RSRs"), and stock rights, are granted to key employees and members of the board of directors without payment to the Company. The 2012 Plan authorized (i) 3.4 million new shares; plus (ii) any shares subject to outstanding awards under the 2011 Plan that were subsequently forfeited to the Company; plus (iii) any shares subject to outstanding awards under the 2011 Plan that were subsequently exchanged by the participant as full or partial payment to the Company in connection with any such award or exchanged by a participant or withheld by the Company to satisfy the tax withholding obligations
related to any such award. As of December 31, 2017,2021, the remaining aggregate number of shares of the Company's common stock authorized for issuance under the 2012 Plan was 4.13.6 million.
The 2011 Plan permitted the awards of stock options and other stock awards. Each stock option grant was made with an exercise price of not less than 100% of the closing price of HII's common stock on the date of grant, with the exception of stock options issued at the time of the spin-off in exchange for Northrop Grumman stock options. Stock awards, in the form of stock rights, were granted to members of the board of directors without payment to the Company.
Stock awards include RPSRs, RSRs, and stock rights. The fair value of stock awards is determined based on the closing market price of the Company's common stock on the grant date. Compensation expense for stock awards is measured based on the grant date fair value and recognized over the vesting period, generally three years.
For purposes of measuring compensation expense, the amount of shares ultimately expected to vest is estimated at each reporting date based on management's expectations regarding the relevant service or performance criteria.
Vested awards include stock awards that fully vested during the year based on the level of achievement of the relevant performance goals. The performance goals for outstanding RPSRs granted in 2017, 2016,2021, 2020, and 2015 are2019 were based on twothree metrics as defined in the grant agreements: earnings before interest, taxes, depreciation, amortization, and pension ("EBITDAP"), weighted at 50%40%, and pension-adjusted return on invested capital ("ROIC"), weighted at 50%40%, and relative EBITDAP growth, weighted at 20%.