Huntington Ingalls Industries(HII) - 2024 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Financial statements reveal a Q3 earnings decline, sharply reduced cash balances, and a severe drop in year-to-date operating cash flow Condensed Consolidated Statements of Operations and Comprehensive Income Q3 & Nine Months 2024 vs 2023 Operating Results (in millions, except per share amounts) | Metric | Q3 2024 | Q3 2023 | YTD 2024 | YTD 2023 | | :--- | :--- | :--- | :--- | :--- | | Sales and service revenues | $2,749 | $2,816 | $8,531 | $8,277 | | Operating income | $82 | $172 | $425 | $469 | | Net earnings | $101 | $148 | $427 | $407 | | Diluted earnings per share | $2.56 | $3.70 | $10.81 | $10.18 | - For the third quarter of 2024, sales and service revenues decreased by 2.4% YoY, and operating income fell sharply by 52.3% YoY[5] - For the nine months ended September 30, 2024, sales and service revenues increased by 3.1% YoY, while net earnings grew by 4.9% YoY[5] Condensed Consolidated Statements of Financial Position Financial Position as of Sept 30, 2024 vs Dec 31, 2023 (in millions) | Account | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $10 | $430 | | Total current assets | $2,629 | $2,880 | | Total assets | $11,082 | $11,215 | | Liabilities & Equity | | | | Total current liabilities | $3,336 | $3,032 | | Long-term debt | $1,709 | $2,214 | | Total liabilities | $6,879 | $7,122 | | Total stockholders' equity | $4,203 | $4,093 | - Cash and cash equivalents decreased significantly to $10 million as of September 30, 2024, from $430 million at the end of 2023[6] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended Sept 30 (in millions) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2 | $408 | | Net cash used in investing activities | ($238) | ($111) | | Net cash used in financing activities | ($184) | ($655) | | Change in cash and cash equivalents | ($420) | ($358) | - Net cash from operating activities plummeted to $2 million for the first nine months of 2024, a sharp decline from $408 million in the same period of 2023[9] - Financing activities included $162 million in common stock repurchases and $154 million in dividend payments during the first nine months of 2024[9] Notes to Condensed Consolidated Financial Statements - The company operates in three reportable segments: Ingalls Shipbuilding, Newport News Shipbuilding, and Mission Technologies, serving as America's largest shipbuilder[12] - In September 2024, the company amended its credit facility, increasing capacity from $1.5 billion to $1.7 billion and extending the maturity[20][23] - The board of directors increased the stock repurchase program authorization to $3.8 billion and extended it to December 31, 2028[27] - As of September 30, 2024, the company had $49.4 billion of remaining performance obligations, with approximately 30% expected to be recognized as revenue through 2025[41] - During the third quarter, the company identified quality issues involving noncompliance with welding procedures at Newport News and has commenced an investigation, disclosing the matter to the U.S. Government[61] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Q3 operating income fell 52% due to shipbuilding performance issues, while free cash flow turned negative amid working capital pressures Consolidated Operating Results Consolidated Operating Results Summary (in millions) | Metric | Q3 2024 | Q3 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales and service revenues | $2,749 | $2,816 | $(67) | (2)% | | Operating income | $82 | $172 | $(90) | (52)% | | Net earnings | $101 | $148 | $(47) | (32)% | - Q3 2024 sales decreased 2% YoY, primarily due to lower volumes at Ingalls and Newport News, partially offset by growth at Mission Technologies[97] - The significant 52% drop in Q3 operating income was primarily due to unfavorable performance and cumulative catch-up adjustments in the shipbuilding segments[93][107] Segment Operating Results Segment Operating Income (in millions) | Segment | Q3 2024 | Q3 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Ingalls | $49 | $73 | $(24) | (33)% | | Newport News | $15 | $90 | $(75) | (83)% | | Mission Technologies | $33 | $24 | $9 | 38% | | Total Segment Operating Income | $97 | $187 | $(90) | (48)% | - Newport News' operating income plummeted 83% in Q3 2024, driven by lower performance on the Virginia class submarine program and aircraft carriers[127] - Ingalls' operating income decreased 33% in Q3 2024 due to lower performance on amphibious assault ships and surface combatants[122] - Mission Technologies' operating income grew 38% in Q3 2024, driven by higher volumes in CEW&S and higher equity income from joint ventures[131] Backlog - Total backlog increased to $49.4 billion as of September 30, 2024, up from $48.1 billion at the end of 2023[151] Backlog by Segment (in billions) | Segment | Sep 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Ingalls | $16.4 | $15.7 | | Newport News | $27.3 | $27.2 | | Mission Technologies | $5.8 | $5.1 | | Total | $49.4 | $48.1 | - New contract awards during the first nine months of 2024 totaled $9.8 billion[153] Liquidity and Capital Resources Cash Flow and Free Cash Flow for Nine Months Ended Sept 30 (in millions) | Metric | 2024 | 2023 | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2 | $408 | $(406) | | Capital expenditures, net | ($239) | ($150) | $(89) | | Free cash flow | ($237) | $258 | $(495) | - Operating cash flow for the first nine months of 2024 was severely impacted, falling to $2 million from $408 million in the prior-year period, primarily due to unfavorable changes in trade working capital[157] - Free cash flow was negative $237 million for the first nine months of 2024, a $495 million decrease from the same period in 2023, reflecting the drop in operating cash and higher capital expenditures[162] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from interest rates on its floating-rate debt and from inflation impacting material and labor costs - The company has interest rate risk on its floating rate debt, including $396 million outstanding under its commercial paper program as of September 30, 2024[174] - Persistent cost inflation for raw materials, components, and labor may adversely impact financial position and results if not fully mitigated through long-term agreements and price escalation clauses[175] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that as of September 30, 2024, the company's disclosure controls and procedures were effective[176] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[177] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, which are not expected to have a material adverse financial impact - Information on legal proceedings is provided in Note 9 of the financial statements and is incorporated by reference[179] Item 1A. Risk Factors This report references the risk factors disclosed in the 2023 Annual Report, with no material changes noted for the quarter - The report directs investors to consider the risk factors discussed in the 2023 Annual Report on Form 10-K[181] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased $35.4 million of its common stock in Q3 2024, with $1.35 billion remaining under its extended repurchase program Share Repurchases for Q3 2024 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2024 | 46,258 | $266.08 | | August 2024 | 88,145 | $261.37 | | September 2024 | 0 | — | | Total | 134,403 | $262.99 | - As of September 30, 2024, approximately $1.35 billion remained available for purchase under the company's stock repurchase program[183]