Huntington Ingalls Industries(HII) - 2022 Q4 - Annual Report

Financial Performance and Backlog - Total backlog as of December 31, 2022 was $47.1 billion, including $22.2 billion in funded backlog[90] - The company's cash from operations was reduced by $102 million in 2022 due to changes in the Tax Cuts and Jobs Act of 2017, which eliminated the immediate deduction of research and development expenditures[154] - The company estimates a further reduction of $82 million in 2023 cash from operations due to the same tax law changes[154] Debt and Borrowing Capacity - The company had $2.6 billion of debt under senior notes, $225 million under a 3-year term loan, $105 million in revenue bonds, and $1.5 billion of additional borrowing capacity under a revolving credit facility as of December 31, 2022[101] - The company has a $650 million Term Loan, $1.5 billion Revolving Credit Facility, and a $1 billion commercial paper program, with $225 million outstanding on the Term Loan as of December 31, 2022[357] - A 1% increase in interest rates would increase the company's annual interest expense by approximately $2 million based on the Term Loan's outstanding amount[357] Contract Types and Revenue Distribution - Approximately 50% of 2022 revenues were generated under fixed-price incentive contracts, 44% under cost-type contracts, 3% under time and material contracts, and 3% under firm fixed-price contracts[106] Competition and Market Position - The U.S. Navy fleet size decreased from 566 ships in 1989 to 293 ships as of December 31, 2022, leading to increased competition in shipbuilding[94] - The company faces competition from five major private U.S. shipyards, two of which it owns, and smaller shipyards for naval vessel contracts[94] - The company is the only current provider of nuclear-powered aircraft carrier refueling, but U.S. Government shipyards could potentially enter this market with significant investments[96] - The company competes with major defense contractors like Lockheed Martin, General Dynamics, Northrop Grumman, Raytheon, and Boeing in certain contracts[98] Interest Rate and Inflation Risks - The company's variable rate indebtedness is transitioning from LIBOR to SOFR, which may potentially increase borrowing costs[103] - The company faces inflation risks, particularly in raw materials, components, and supplies, which could impact long-term cost assumptions and financial performance[358] - The company mitigates inflation risks through long-term supplier agreements and price escalation provisions in customer contracts[358] Supply Chain and Subcontractor Risks - The company relies on third-party suppliers and subcontractors for raw materials, components, and services, with potential risks from supplier disruptions or performance issues[109] - Dependence on sole-source suppliers for certain components could lead to increased contract costs and impact the ability to meet obligations[111] - Subcontractors and suppliers sometimes provide non-compliant or deficient materials, increasing contract costs and affecting performance[112] Labor and Workforce Challenges - The company faces challenges in recruiting and retaining skilled personnel, particularly in specialized fields like engineering and cybersecurity[113][114] - Approximately 45% of employees are covered by collective bargaining agreements, with potential risks of labor disruptions during renegotiations[129][130] Contract Performance and Cost Risks - Cost growth on flexibly priced contracts that does not result in higher contract prices reduces profitability and exposes the company to potential loss of future business[104] - Manufacturing costs may increase due to rising material costs and wages, potentially exposing the company to cost recovery risks if inflationary conditions persist[110] - New technologies and innovative designs in contracts may lead to delays, increased costs, and potential profitability risks[115][116] Quality and Compliance Issues - Quality issues with products and services could require significant resources for corrective actions, impacting financial performance[118][119] - A 2% withhold of payments on certain invoices was imposed due to a significant deficiency in the Ingalls Shipbuilding Property Management System, as determined by a Navy Contracting Officer in August 2022[141] - The company is subject to various environmental laws and regulations, which could result in substantial capital and operating costs for compliance and remediation[144] - The company's nuclear operations are subject to increased regulatory oversight, potential fines, or shutdowns in the event of noncompliance with safety requirements[152] Pension and Retiree Healthcare Costs - Pension and retiree healthcare costs are sensitive to changes in discount rates and investment returns, potentially affecting financial results[120][121] Natural Disasters and Health Epidemics - Natural disasters and environmental events could disrupt operations, supply chains, and contract performance, leading to financial impacts[122][123][124] - Health epidemics like COVID-19 have caused workforce disruptions, increased costs, and supplier challenges, with potential future impacts[125][126][127] Legal and Regulatory Risks - The company relies on indemnity from the U.S. Government for costs arising from nuclear operations, but this may not cover all liabilities[153] - The company faces potential liabilities and reputational damage from improper conduct by employees, agents, or business partners, which could lead to administrative, civil, or criminal investigations[149] - The company's intellectual property rights are subject to challenge, invalidation, or misappropriation by third parties, which could adversely affect its business[160] - The company's contracts with the U.S. Navy include notice and approval rights for the Navy in the event of a change of control of its nuclear shipbuilding operations[163] - The company's organizational documents and Delaware law contain anti-takeover provisions that could delay or prevent a change of control[162] Insurance and Capital Market Risks - The company's insurance coverage may be insufficient to cover significant risks, potentially resulting in substantial uninsured losses[168] - Market volatility and adverse capital market conditions may increase borrowing costs and limit access to funding, affecting operations and acquisitions[169] - Tightening capital markets could negatively impact suppliers and subcontractors, potentially leading to delays and increased costs for the company[170] Dividends and Share Repurchases - The company's ability to pay dividends or repurchase shares is subject to limitations under Delaware law and depends on financial performance and capital requirements[174] Acquisitions and Joint Ventures - Acquisitions and joint ventures carry risks, including potential liabilities, integration challenges, and unanticipated costs[172] - Joint ventures may expose the company to additional risks due to shared control and potential conflicts of interest with partners[173]