HUNTINGTON INGALLS INDUSTRIES, INC. OVERVIEW
Our Business
Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") 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 inMississippi andNewport News segment inVirginia have built more ships in more ship classes than any otherU.S. naval shipbuilder. Our Technical Solutions segment provides a range of services to government and commercial customers. Headquartered inNewport News, Virginia , HII employs approximately 41,000 people both domestically and internationally. We conduct most of our business with theU.S. Government , primarily theDoD . As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priorityU.S. defense 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 and products, including defense and federal solutions ("DFS"), nuclear and environmental services, and unmanned systems. The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Business Environment COVID-19 Pandemic - The COVID-19 global pandemic has had wide ranging effects on the global health environment and disrupted the global andU.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 theU.S. Government's and our other customers' abilities to perform their obligations, and impact on pension assets and other investment performance. We have aggressively managed our response to the uncertainties regarding COVID-19 Events and we have incurred costs to respond to COVID-19 Events, including paid leave, quarantining employees, and recurring facility cleaning. Our shipyards and other facilities remained open and productive, but we experienced temporary decreases in workforce attendance, which impacted our operations due to delay and disruption from a shortage of critical skills and out-of-sequence work. As ofJune 30, 2021 , our workforce was operating at normal attendance rates. Under Section 3610 of 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 theDoD for Ingalls and Newport News Shipbuilding. We 23 -------------------------------------------------------------------------------- Table of Contents 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 mostDoD contracting officers are awaiting supplemental appropriations fromCongress before approving such reimbursement requests. We have no assurance thatCongress will appropriate sufficient funds to cover the reimbursement of costs contemplated by the CARES Act. While costs related to COVID-19 Events are allowable underU.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 fixed price incentive contracts, or may not be adequately covered by insurance. Our reinsurers have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court inVermont 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. Although we believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 13: Investigations, Claims, and Litigation. We have also focused on actively supporting our customers, suppliers, and communities. We have been proactive in engaging with ourU.S. 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. 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 2022.U.S. Government Contracts - Long-term uncertainty exists with respect to overall levels of defense spending across the future years' defense plan, and it is likely thatU.S. Government discretionary spending levels will continue to be subject to significant pressure. The Congressional markup process for fiscal year 2022 began following release of the President's Budget Request inMay 2021 . The budget request continued recapitalization of the nation's strategic ballistic missile submarine fleet and supported funding for Enterprise (CVN 80) andDoris Miller (CVN 81), twoVirginia class (SSN 774) submarines, oneArleigh Burke (DDG 51) class destroyer, and LHA 9 (unnamed). While a bundled procurement of LHA 9 (unnamed), LPD 32 (unnamed) and LPD 33 (unnamed) was authorized and appropriated by fiscal year 2021 legislation, the President's fiscal year 2022 budget request did not include funding to enable a bundled award. TheDoD included a secondArleigh Burke (DDG 51) class destroyer in its fiscal year 2022 unfunded priority list, which was submitted to theCongress shortly after the release of the budget request. 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 theU.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 theU.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 budget environment 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 will have serious implications for defense discretionary spending, the defense industrial base, including 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 ourU.S. Government contracts. It is likely budget and program decisions made in this environment will have long-term impacts on HII and the entire defense industry. 24 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies, Estimates, and Judgments As discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , we consider our policies relating to the following matters to be critical accounting policies: •Revenue recognition;
•Purchase accounting, goodwill, and intangible assets;
•Litigation, commitments, and contingencies;
•Retirement related benefit plans; and
•Workers' compensation.
As of
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: Basis of Presentation. Contracts We generate most of our revenues from long-termU.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 theU.S. Government are treated as allowable and allocable costs under the Federal Acquisition Regulation ("FAR") and theU.S. Cost Accounting Standards ("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 most 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, theDefense Contract Audit Agency routinely audits the costs we incur that are allocated to contracts with theU.S. Government .
Our contracts typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials. See Note 7: Revenue.
•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 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.
•Time and Materials - Time and materials contracts specify a fixed hourly billing rate for each direct labor hour expended and reimbursement for allowable material costs and expenses.
Contract Fees - Negotiated contract fee structures include: fixed fee amounts,
cost sharing arrangements to reward or penalize contractors for under or over
cost target performance, respectively, positive award fees, and negative
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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. We 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 limited to the extent of funding
allotted by the customer and available for performance and those amounts for
which a significant reversal of revenue is not probable.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Quarterly Report on Form 10-Q is included in the "Glossary of Programs" in this section.
CONSOLIDATED OPERATING RESULTS
The following table presents selected financial highlights:
Three Months Ended Six Months Ended
June 30 2021 over 2020 June 30 2021 over 2020($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent Sales and service revenues$ 2,231 $ 2,027 $ 204 10 %$ 4,509 $ 4,290 $ 219 5 % Cost of product sales and service revenues 1,909 1,763 146 8 % 3,845 3,603 242 7 % Income from operating investments, net 12 7 5 71 % 20 13 7 54 % Other income and gains (2) - (2) - % 1 - 1 - % General and administrative expenses 204 214 (10) (5) % 410 428 (18) (4) % Operating income 128 57 71 125 % 275 272 3 1 % Other income (expense) Interest expense (18) (25) 7 28 % (39) (41) 2 5 % Non-operating retirement benefit 44 30 14 47 % 90 60 30 50 % Other, net 7 3 4 133 % 8 (10) 18 180 % Federal and foreign income taxes 32 12 20 167 % 57 56 1 2 % Net earnings$ 129 $ 53 $ 76 143 %$ 277 $ 225 $ 52 23 %
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 theU.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, 26 -------------------------------------------------------------------------------- Table of Contents 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:
Three Months Ended Six Months Ended
June 30 2021 over 2020 June 30 2021 over 2020
($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent Product sales$ 1,763 $ 1,420 $ 343 24 %$ 3,484 $ 3,044 $ 440 14 % Service revenues 468 607 (139) (23) % 1,025 1,246 (221) (18) % Sales and service revenues$ 2,231 $ 2,027 $ 204 10 %$ 4,509 $ 4,290 $ 219 5 % Product sales for the three months endedJune 30, 2021 , increased$343 million , or 24%, compared with the same period in 2020. Product sales for the six months endedJune 30, 2021 , increased$440 million , or 14%, compared with the same period in 2020. Ingalls product sales increased$60 million and$86 million for the three and six months endedJune 30, 2021 , respectively, primarily as a result of higher volumes in surface combatants and amphibious assault ships, partially offset by lower volume in the Legend class NSC program.Newport News product sales increased$285 million for the three months endedJune 30, 2021 , primarily as a result of higher volumes in submarines and aircraft carriers.Newport News product sales increased$340 million for the six months endedJune 30, 2021 , primarily as a result of higher volumes in aircraft carriers and submarines. Technical Solutions product sales decreased$2 million for the three months endedJune 30, 2021 , primarily as a result of lower volume in unmanned systems, partially offset by higher volumes in DFS. Technical Solutions product sales increased$14 million for the six months endedJune 30, 2021 , primarily as a result of higher volumes in DFS and unmanned systems. Service revenues for the three months endedJune 30, 2021 , decreased$139 million , or 23%, compared with the same period in 2020. Service revenues for the six months endedJune 30, 2021 , decreased$221 million , or 18%, compared with the same period in 2020. Ingalls service revenues decreased$16 million and$24 million for the three and six months endedJune 30, 2021 , respectively, primarily as a result of lower volumes in surface combatant and amphibious assault ship services.Newport News service revenues decreased$46 million for the three months endedJune 30, 2021 , primarily as a result of lower volumes in submarine and naval nuclear support services.Newport News service revenues decreased$35 million for the six months endedJune 30, 2021 , primarily as a result of lower volumes in submarine and naval nuclear support services, partially offset by higher volumes in aircraft carrier services. Technical Solutions service revenues decreased$77 million for the three months endedJune 30, 2021 , primarily as a result of the divestiture of our oil and gas business and contribution of ourSan Diego Shipyard to a joint venture, partially offset by higher volumes in DFS services. Technical Solutions service revenues decreased$162 million for the six months endedJune 30, 2021 , primarily as a result of the divestiture of our oil and gas business and contribution of ourSan Diego Shipyard to a joint venture, as well as lower volumes in DFS services. 27 -------------------------------------------------------------------------------- Table of Contents Cost of Sales and Service Revenues
Cost of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows:
Three Months Ended Six Months Ended
June 30 2021 over 2020 June 30 2021 over 2020
($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent
Cost of product sales $ 1,495 $ 1,253 $ 242 19 % $ 2,949 $ 2,543 $ 406 16 %
% of product sales 84.8 % 88.2 % 84.6 % 83.5 %
Cost of service revenues 414 510 (96) (19) % 896 1,060 (164) (15) %
% of service revenues 88.5 % 84.0 % 87.4 % 85.1 %
Income from operating
investments, net 12 7 5 71 % 20 13 7 54 %
Other income and gains (2) - (2) - % 1 - 1 - %
General and administrative
expenses 204 214 (10) (5) % 410 428 (18) (4) %
% of sales and service
revenues 9.1 % 10.6 % 9.1 % 10.0 %
Cost of sales and service
revenues $ 2,103 $ 1,970 $ 133 7 % $ 4,234 $ 4,018 $ 216 5 %
Cost of Product Sales
Cost of product sales for the three months ended June 30, 2021 , increased $242
million , or 19%, compared with the same period in 2020. Cost of product sales
for the six months ended June 30, 2021 , increased $406 million , or 16%, compared
with the same period in 2020. Ingalls cost of product sales increased $29
million for the three months ended June 30, 2021 , primarily as a result of the
higher volumes described above, partially offset by higher risk retirement on
the San Antonio class (LPD 17) program. Ingalls cost of product sales increased
$30 million for the six months ended June 30, 2021 , primarily as a result of the
higher volumes described above, partially offset by higher risk retirement on
Bougainville (LHA 8) and the San Antonio class (LPD 17) program. Newport News
cost of product sales increased $129 million and $193 million for the three and
six months ended June 30, 2021 , respectively, primarily as a result of volume
increases described above. Technical Solutions cost of product sales increased
$2 million for the three months ended June 30, 2021 , primarily as a result of
the volume increases in DFS, partially offset by lower volume in unmanned
systems and year-to-year variances in contract mix. Technical Solutions cost of
product sales increased $17 million for the six months ended June 30, 2021 ,
primarily as a result of the volume increases described above. Cost of product
sales related to the Operating FAS/CAS Adjustment increased $82 million and $166
million for the three and six months ended June 30, 2021 , respectively, as
described below.
Cost of product sales as a percentage of product sales decreased from 88.2% for
the three months ended June 30, 2020 , to 84.8% for the three months ended June
30, 2021 . The decrease was primarily due to impacts related to performance on
the 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
the San Antonio class (LPD 17) program, and a contract incentive on Jack H.
Lucas (DDG 125), partially offset by an unfavorable change in the Operating
FAS/CAS Adjustment and lower risk retirement on USS Delbert D. Black (DDG 119)
following its delivery. Cost of product sales as a percentage of product sales
increased from 83.5% for the six months ended June 30, 2020 , to 84.6% for the
six months ended June 30, 2021 . The increase was due to impacts related to
performance on the Block IV boats of the Virginia class (SSN 774) submarine
program and delay and disruption from discrete COVID-19 Events in 2020, an
unfavorable change in the Operating FAS/CAS Adjustment, and higher risk
retirement on Bougainville (LHA 8) and the San Antonio class (LPD 17) program.
Cost of Service Revenues
Cost of service revenues for the three months endedJune 30, 2021 , decreased$96 million , or 19%, compared with the same period in 2020. Cost of service revenues for the six months endedJune 30, 2021 , decreased$164 million , or 15%, compared with the same period in 2020. Ingalls cost of service revenues decreased$12 million and$19 million for the three and six months endedJune 30, 2021 , respectively, primarily as a result of lower volumes described above.Newport News cost of service revenues decreased$24 million and$10 million for the three and 28 -------------------------------------------------------------------------------- Table of Contents six months endedJune 30, 2021 , respectively, due to lower volumes described above. Technical Solutions cost of service revenues decreased$78 million and$172 million for the three and six months endedJune 30, 2021 , respectively, primarily as a result of the divestiture of our oil and gas business and contribution of ourSan Diego Shipyard to a joint venture, lower volumes in nuclear and environmental services, and year-to-year variances in contract mix. Cost of service revenues related to the Operating FAS/CAS Adjustment increased$18 million and$37 million for the three and six months endedJune 30, 2021 , respectively, as described below. Cost of service revenues as a percentage of service revenues increased from 84.0% for the three months endedJune 30, 2020 , to 88.5% for the three months endedJune 30, 2021 , primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, partially offset by improved performance on DFS services and year-to-year variances in contract mix. Cost of service revenues as a percentage of service revenues increased from 85.1% for the six months endedJune 30, 2020 , to 87.4% for the six months endedJune 30, 2021 , primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, partially offset by improved performance on DFS and nuclear and environmental services and year-to-year variances in contract mix.
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.
Income from operating investments, net for the three and six months endedJune 30, 2021 , increased$5 million and$7 million , respectively, from the same periods in 2020, primarily due to higher equity income from our ship repair and specialty fabrication joint venture and nuclear and environmental joint ventures.
Other Income and Gains
For the three months endedJune 30, 2021 , we recognized a loss of$2 million , primarily due to final purchase price adjustment to a gain on the sale of our oil and gas business. For the six months endedJune 30, 2021 , we recognized a gain of$1 million , primarily due to the sale of our oil and gas business.
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. General and administrative expenses for the three and six months endedJune 30, 2021 , decreased$10 million and$18 million , respectively, from the same periods in 2020, primarily driven by favorable changes in current state income tax expense and lower overhead costs.
Operating Income
We consider operating income to be an important measure for evaluating our operating performance, and, consistent with industry practice, we define operating income as revenues less the related cost of producing the revenues and general and administrative expenses.
We internally manage our operations by reference to "segment operating income,"
which is defined as operating income before the Operating FAS/CAS Adjustment and
non-current state income taxes, neither of which affects segment performance.
Segment operating income is not a recognized measure under GAAP. When analyzing
our operating performance, investors should use segment operating income in
addition to, and not as an alternative for, operating income or any other
performance measure presented in accordance with GAAP. It is a measure we use to
evaluate our core operating performance. We believe segment operating income
reflects an additional way of viewing aspects of our operations that, when
viewed with our GAAP results, provides a more complete understanding of factors
and trends affecting our business. We believe the measure is used by investors
and is a useful indicator to measure our performance. Because not all companies
use identical calculations, our presentation of segment operating income may not
be comparable to similarly titled measures of other companies.
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The following table reconciles operating income to segment operating income:
Three Months Ended Six Months Ended
June 30 2021 over 2020 June 30 2021 over 2020
($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent
Operating income $ 128 $ 57 $ 71 125 % $ 275 $ 272 $ 3 1 %
Operating FAS/CAS Adjustment 37 (63) 100 159 % 77 (126) 203 161 %
Non-current state income taxes 4 1 3 300 % 8 5 3 60 %
Segment operating income $ 169 $ (5) $ 174 3,480 % $ 360 $ 151 $ 209 138 %
Segment Operating Income
Segment operating income for the three months ended June 30, 2021 , was $169
million , compared with a segment operating loss of $5 million for the same
period in 2020. The increase was primarily due to impacts related to performance
on the Block IV boats of the Virginia class (SSN 774) submarine program and
delay and disruption from discrete COVID-19 Events in 2020, a contract incentive
on Jack H. Lucas (DDG 125), higher risk retirement on Richard M. McCool Jr . (LPD
29) and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on
USS Delbert D. Black (DDG 119) following its delivery. Segment operating income
for the six months ended June 30, 2021 , was $360 million , compared with segment
operating income of $151 million for the same period in 2020. The increase was
primarily due to impacts related to performance on the Block IV boats of the
Virginia class (SSN 774) submarine program and delay and disruption from
discrete COVID-19 Events in 2020, higher risk retirement on Bougainville (LHA
8), a contract incentive on Jack H. Lucas (DDG 125), and higher risk retirement
on Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS
Delbert D. Black (DDG 119) following its delivery.
Activity within each segment is discussed in Segment Operating Results below.
FAS/CAS Adjustment and Operating FAS/CAS Adjustment
The FAS/CAS Adjustment reflects the difference between expenses for pension and
other postretirement benefits determined in accordance with GAAP ("FAS") and the
expenses for these items included in segment operating income in accordance with
U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment
excludes the following components of net periodic benefit costs: interest cost,
expected return on plan assets, amortization of prior service cost (credit) and
actuarial loss (gain), and settlement and curtailment effects.
Effective
The components of the Operating FAS/CAS Adjustment were as follows:
Three Months Ended Six Months Ended
June 30 2021 over 2020 June 30 2021 over 2020
($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent
FAS expense $ (7) $ (18) $ 11 61 % $ (14) $ (35) $ 21 60 %
CAS cost 14 111 (97) (87) % 27 221 (194) (88) %
FAS/CAS Adjustment 7 93 (86) (92) % 13 186 (173) (93) %
Non-operating retirement benefit (44) (30) (14) (47) % (90) (60) (30) (50) %
Operating FAS/CAS Adjustment $ (37) $ 63 $ (100) (159) % $ (77) $ 126 $ (203) (161) %
The Operating FAS/CAS Adjustment was a net expense of $37 million and a net
benefit of $63 million for the three months ended June 30, 2021 and 2020,
respectively. The Operating FAS/CAS Adjustment was a net expense of $77 million
and a net benefit of $126 million for the six months ended June 30, 2021 and
2020, respectively. The unfavorable changes in the Operating FAS/CAS Adjustment
of $100 million and $203 million for the three and six
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months ended
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 unrecognized tax benefits 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. Non-current state income tax expense for the three months endedJune 30, 2021 , was$4 million , compared to non-current state income tax expense of$1 million for the same period in 2020. 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. Non-current state income tax expense for the six months endedJune 30, 2021 , was$8 million , compared to non-current state income tax expense of$5 million for the same period in 2020. 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. Interest Expense Interest expense for the three and six months endedJune 30, 2021 , decreased$7 million and$2 million , respectively, compared with the same periods in 2020, primarily due to the early redemption of our senior notes in the fourth quarter of 2020.
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. For the three and six months endedJune 30, 2021 , the favorable changes in the non-operating retirement benefit of$14 million and$30 million , respectively, were primarily driven by higher 2020 returns on plan assets.
Other, Net
Other, net income increased$4 million for the three months endedJune 30, 2021 , compared with the same period in 2020, primarily driven by an impairment of a loan receivable in 2020, partially offset by a decrease in gains on investments in marketable securities. Other, net income increased$18 million for the six months endedJune 30, 2021 , compared with the same period in 2020, primarily driven by gains on investments in marketable securities and an impairment of a loan receivable in the second quarter of 2020.
Federal and Foreign Income Taxes
Our effective income tax rates on earnings from operations for the three months endedJune 30, 2021 and 2020, were 19.9% and 18.5%, respectively. Our effective income tax rates on earnings from operations for the six months endedJune 30, 2021 and 2020, were 17.1% and 19.9%, respectively. The higher effective tax rate for the three months endedJune 30, 2021 , was primarily attributable to research and development tax credits for prior periods recorded in 2020. The lower effective tax rate for the six months endedJune 30, 2021 , was primarily attributable to a tax loss associated with the sale of our oil and gas business. For the three months endedJune 30, 2021 , our effective tax rate differed from the federal statutory tax rate primarily as a result of the research and development tax credit. For the six months endedJune 30, 2021 , our effective tax rate differed from the federal statutory tax rate primarily as a result of the tax loss associated with the sale of our oil and gas business. For the three and six months endedJune 30, 2020 , our effective tax rates differed from the federal statutory tax rate primarily as a result of research and development tax credits for prior periods. See Note 11: Income Taxes. 31 --------------------------------------------------------------------------------
Table of Contents SEGMENT OPERATING RESULTS Basis of Presentation
We are aligned into three reportable segments: Ingalls,
The following table presents segment operating results:
Three Months Ended Six Months Ended
June 30 2021 over 2020 June 30 2021 over 2020
($ in millions) 2021 2020
Dollars Percent 2021 2020
Dollars Percent
Sales and Service Revenues
Ingalls $ 670 $ 622 $ 48 8 % $ 1,319 $ 1,251 $ 68 5 %
Newport News 1,363 1,122 241 21 % 2,770 2,463 307 12 %
Technical Solutions 237 320 (83) (26) % 496 637 (141) (22) %
Intersegment eliminations (39) (37) (2) (5) % (76) (61) (15) (25) %
Sales and service revenues $ 2,231 $ 2,027 $ 204 10 % $ 4,509 $ 4,290 $ 219 5 %
Operating Income
Ingalls $ 80 $ 55 $ 25 45 % $ 171 $ 123 $ 48 39 %
Newport News 76 (69) 145 210 % 169 26 143 550 %
Technical Solutions 13 9 4 44 % 20 2 18 900 %
Segment operating income
(loss) 169 (5) 174 3,480 % 360 151 209 138 %
Non-segment factors affecting
operating income (loss)
Operating FAS/CAS Adjustment (37) 63 (100) (159) % (77) 126 (203) (161) %
Non-current state income
taxes (4) (1) (3) (300) % (8) (5) (3) (60) %
Operating income $ 128 $ 57 $ 71 125 % $ 275 $ 272 $ 3 1 %
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 (Loss)
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 estimated 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.
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Cumulative Adjustments
For the three and six months ended
Three Months Ended Six Months Ended
June 30 June 30
($ in millions) 2021 2020 2021 2020
Gross favorable adjustments $ 62 $ 56 $ 148 $ 117
Gross unfavorable adjustments (27) (167) (63) (196)
Net adjustments $ 35 $ (111) $ 85 $ (79) For the three months ended
For the six months endedJune 30, 2021 , favorable cumulative catch-up adjustments included risk retirement on Bougainville (LHA 8), a contract incentive onJack H. Lucas (DDG 125), and risk retirement on Block IV of theVirginia class (SSN 774) submarine program andFort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant. For the three months endedJune 30, 2020 , favorable cumulative catch-up adjustments included risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, and other individually insignificant adjustments. During the same period, unfavorable cumulative catch-up adjustments were primarily driven by$111 million on the Block IV boats of theVirginia 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 theVirginia class (SSN 774) submarine program also included$16 million from delay and disruption directly attributable to COVID-19 Events due to lower employee attendance, shortage 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$16 million in relation to the Block IV boats of theVirginia class (SSN 774) submarine program, discussed above. For the six months endedJune 30, 2020 , favorable cumulative catch-up adjustments included risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, and risk retirement on theSan Antonio class (LPD 17) program. During the same period, unfavorable cumulative catch-up adjustments were primarily driven by the Block IV boats of theVirginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events, discussed above for the three months endedJune 30, 2020 . Ingalls Three Months Ended Six Months Ended June 30 2021 over 2020 June 30 2021 over 2020 ($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent Sales and service revenues$ 670 $ 622 $ 48 8 %$ 1,319 $ 1,251 $ 68 5 % Segment operating income 80 55 25 45 % 171 123 48 39 % As a percentage of segment sales 11.9 % 8.8 % 13.0 % 9.8 % Sales and Service Revenues
Ingalls revenues for the three months ended
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on Jack H. Lucas (DDG 125), Jeremiah Denton (DDG 129) and Ted Stevens (DDG 128),
partially offset by lower volumes on USS Delbert D. Black (DDG 119) following
its delivery and USS Fitzgerald (DDG 62) restoration and modernization following
its redelivery. Amphibious assault ship revenues increased due to higher volumes
on Pittsburgh (LPD 31), LHA 9 (unnamed), and Bougainville (LHA 8), partially
offset by lower volume on Fort Lauderdale (LPD 28). Revenues on the Legend class
NSC program decreased due to lower volumes on Stone (NSC 9) following its
delivery and Calhoun (NSC 10).
Ingalls revenues for the six months ended June 30, 2021 , increased $68 million ,
or 5%, from the same period in 2020, primarily driven by higher revenues in
surface combatants and amphibious assault ships, partially offset by lower
revenues in the Legend class NSC program. Surface combatant revenues increased
due to higher volumes on Jack H. Lucas (DDG 125), Jeremiah Denton (DDG 129), and
George M. Neal (DDG 131), partially offset by lower volumes on USS Fitzgerald
(DDG 62) restoration and modernization following its redelivery and USS Delbert
D. Black (DDG 119) following its delivery. Amphibious assault ship revenues
increased due to higher volumes on Pittsburgh (LPD 31), Bougainville (LHA 8),
and LHA 9 (unnamed), partially offset by lower volumes on Fort Lauderdale (LPD
28) and Richard M. McCool Jr . (LPD 29). Revenues on the Legend class NSC program
decreased due to lower volumes on Stone (NSC 9) following its delivery and
Calhoun (NSC 10).
Segment Operating Income
Ingalls segment operating income for the three months endedJune 30, 2021 , was$80 million , compared with$55 million for the same period in 2020. The increase was primarily driven by a contract incentive onJack H. Lucas (DDG 125), and higher risk retirement on Bougainville (LHA 8),Richard M. McCool Jr . (LPD 29), andFort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery. Ingalls segment operating income for the six months endedJune 30, 2021 , was$171 million , compared with$123 million for the same period in 2020. The increase was primarily driven by higher risk retirement on Bougainville (LHA 8), a contract incentive onJack H. Lucas (DDG 125), and higher risk retirement onFort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery.Newport News Three Months Ended Six Months Ended June 30 2021 over 2020 June 30 2021 over 2020 ($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent
Sales and service revenues
241 21 % $ 2,770 $ 2,463 $ 307 12 %
Segment operating income
(loss) 76 (69) 145 210 % 169 26 143 550 %As a percentage of segment sales 5.6 % (6.1) % 6.1 % 1.1 % Sales and Service RevenuesNewport News revenues for the three months endedJune 30, 2021 , increased$241 million , or 21%, from the same period in 2020, primarily driven by higher revenues in submarines and aircraft carriers. Submarine revenues increased primarily as a result of higher volumes on Block IV and Block V boats of theVirginia class (SSN 774) submarine program and theColumbia class submarine program. Aircraft carrier revenues increased primarily as a result of higher volumes on Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74), andDoris Miller (CVN 81), partially offset by lower volumes onJohn F. Kennedy (CVN 79) and the RCOH of USS George Washington (CVN 73).Newport News revenues for the six months endedJune 30, 2021 , increased$307 million , or 12%, from the same period in 2020, primarily driven by higher revenues in submarines and aircraft carriers. Submarine revenues increased primarily as a result of higher volumes on theColumbia class submarine program and theVirginia class (SSN 774) submarine program. The higher volume on theVirginia class (SSN 774) and theColumbia class submarine program was due to higher volumes on Block IV and Block V boats. Aircraft carrier revenues increased primarily as a result of higher volumes on Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74), andDoris Miller (CVN 81), partially offset by lower volumes onJohn F. Kennedy (CVN 79) and the RCOH of USS GeorgeWashington (CVN 73). 34
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Segment Operating Income
Newport News segment operating income for the three months endedJune 30, 2021 , was$76 million , compared with a segment operating loss of$69 million for the same period in 2020. The increase was primarily due to impacts related to performance on the Block IV boats of theVirginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020.Newport News segment operating income for the six months endedJune 30, 2021 , was$169 million , compared with segment operating income of$26 million for the same period in 2020. The increase was primarily due to impacts related to performance on the Block IV boats of theVirginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020. Technical Solutions Three Months Ended Six Months Ended June 30 2021 over 2020 June 30 2021 over 2020 ($ in millions) 2021 2020 Dollars Percent 2021 2020 Dollars Percent Sales and service revenues$ 237 $ 320 $ (83) (26) %$ 496 $ 637 $ (141) (22) % Segment operating income 13 9 4 44 % 20 2 18 900 % As a percentage of segment sales 5.5 % 2.8 % 4.0 % 0.3 % Sales and Service Revenues
Technical Solutions revenues for the three months ended
Technical Solutions revenues for the six months endedJune 30, 2021 , decreased$141 million , or 22%, from the same period in 2020, primarily due to the divestiture of our oil and gas business and contribution of ourSan Diego Shipyard to a joint venture, partially offset by the acquisition of Hydroid inMarch 2020 and higher volumes in DFS.
Segment Operating Income
Technical Solutions segment operating income for the three months endedJune 30, 2021 , was$13 million , compared with segment operating income of$9 million for the same period in 2020. The increase was primarily driven by higher equity income in our ship repair and specialty fabrication joint venture and improved performance on DFS services and nuclear and environmental services, partially offset by lower volume in unmanned systems. Technical Solutions segment operating income for the six months endedJune 30, 2021 , was$20 million , compared with segment operating income of$2 million for the same period in 2020. The increase was primarily driven by higher equity income in our ship repair and specialty fabrication joint venture and improved performance in DFS services and nuclear and environmental services, partially offset by lower volume in unmanned systems. BACKLOG Total backlog as ofJune 30, 2021 , andDecember 31, 2020 , was approximately$47.7 billion and$46.0 billion , respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded IDIQ orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer. 35 -------------------------------------------------------------------------------- Table of Contents The following table presents funded and unfunded backlog by segment as ofJune 30, 2021 , andDecember 31, 2020 :June 30, 2021
Total Total
($ in millions) Funded Unfunded Backlog Funded Unfunded Backlog
Ingalls $ 11,077 $ 660 $ 11,737 $ 10,443 $ 1,758 $ 12,201
Newport News 12,330 22,649 34,979 9,536 23,132 32,668
Technical Solutions 592 432 1,024 502 646 1,148
Total backlog $ 23,999 $ 23,741 $ 47,740 $ 20,481 $ 25,536 $ 46,017
Approximately 16% of the $46.0 billion total backlog as of December 31, 2020 , is
expected to be converted into sales in 2021. U.S. Government orders comprised
substantially all of the backlog as of June 30, 2021 , and December 31, 2020 .
Awards
The value of new contract awards during the six months endedJune 30, 2021 , was approximately$6.5 billion , comprised primarily of awards for the RCOH of the USS John C. Stennis (CVN 74), construction of a 10th boat of theVirginia class (SSN 774) submarine program, and construction ofJohn F. Lehman (DDG 137) andThad Cochran (DDG 135).
LIQUIDITY AND CAPITAL RESOURCES
We seek to efficiently convert operating results into cash for deployment in
operating our businesses, implementing our business strategy, and maximizing
stockholder value. We use various financial measures to assist in capital
deployment decision making, including net cash provided by operating activities
and free cash flow. We believe these measures are useful to investors in
assessing our financial performance.
The following table summarizes key components of cash flow provided by operating
activities:
Six Months Ended 2021 over
June 30 2020
($ in millions) 2021 2020 Dollars
Net earnings $ 277 $ 225 $ 52
Depreciation and amortization 131 121 10
Provision for doubtful accounts - 6 (6)
Stock-based compensation 12 13 (1)
Deferred income taxes 31 21 10
Loss (gain) on investments in marketable securities (12) 5 (17)
Retiree benefit funding less than (in excess of) expense (70) (50) (20)
Trade working capital decrease (increase) (230) (72) (158)
Net cash provided by operating activities $ 139 $ 269 $ (130)
Cash Flows
We discuss below our significant operating, investing, and financing activities
affecting cash flows for the six months ended
Operating Activities
Cash provided by operating activities for the six months endedJune 30, 2021 , was$139 million , compared with$269 million provided by operating activities for the same period in 2020. The unfavorable change in operating cash flow was primarily due to changes in trade working capital. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable and payments of accounts payable. 36
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For the six months endedJune 30, 2021 , we made discretionary contributions to our qualified defined benefit pension plans totaling$60 million , compared with$65 million of discretionary contributions for the same period in 2020. As ofJune 30, 2021 , we anticipate no further significant cash contributions to our qualified defined benefit pension plans in 2021. We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the next 12 months.
Investing Activities
Cash used in investing activities for the six months endedJune 30, 2021 , was$134 million , compared with$519 million used in investing activities for the same period in 2020. The change in investing cash was driven by the acquisition of Hydroid in 2020, disposition of our oil and gas business in 2021, and lower capital expenditures in 2021, partially offset by the acquisition of a non-controlling interest in Titan in 2021. For 2021, we expect our capital expenditures for maintenance and sustainment to be approximately 1.0% of annual revenues and our discretionary capital expenditures to be approximately 2.0 % to 3.0% of annual revenues. Financing Activities Cash used in financing activities for the six months endedJune 30, 2021 , was$169 million , compared with$806 million provided by financing activities for the same period in 2020. The change in financing cash was primarily due to receipt of net proceeds from the issuance of$1 billion of long-term debt in 2020 and an$8 million increase in cash dividend payments, partially offset by a decrease of$14 million from common stock repurchases and a decrease of$6 million in employee taxes on certain share-based payment arrangements.
Free Cash Flow
Free cash flow represents cash provided by (used in) operating activities less
capital expenditures net of related grant proceeds. Free cash flow is not a
measure recognized under GAAP. Free cash flow has limitations as an analytical
tool and should not be considered in isolation from, or as a substitute for,
analysis of our results as reported under GAAP. We believe free cash flow is an
important liquidity measure for our investors because it provides them insight
into our current and period-to-period performance and our ability to generate
cash from continuing operations. We also use free cash flow as a key operating
metric in assessing the performance of our business and as a key performance
measure in evaluating management performance and determining incentive
compensation. Free cash flow may not be comparable to similarly titled measures
of other companies.
The following table reconciles net cash provided by operating activities to free
cash flow:
Six Months Ended
June 30 2021 over 2020
($ in millions) 2021 2020 Dollars
Net cash provided by operating activities $ 139 $ 269 $ (130)
Less capital expenditures:
Capital expenditure additions (134) (150) 16
Grant proceeds for capital expenditures 2 9 (7)
Free cash flow $ 7 $ 128 $ (121)
Free cash flow for the six months ended June 30, 2021 , decreased $121 million
from the same period in 2020, primarily due to higher contributions to retiree
benefit plans and changes in trade working capital, partially offset by lower
capital expenditures.
Governmental Regulation and Supervision
TheU.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies exist in one or more such systems. As of June 37 -------------------------------------------------------------------------------- Table of Contents 30, 2021 and 2020, the cumulative amounts of payments withheld by theU.S. Government under our contracts subject to these regulations were not material to our liquidity or cash flows.
Other Sources and Uses of Capital
InAugust 2021 , we entered into a$400 million 364-day delayed draw term loan and a$650 million 3-year delayed draw term loan to finance a portion of the purchase price for Alion. Commitments under the 364-day facility, but not the 3-year facility, are subject to mandatory reduction upon the occurrence of certain events specified in the term loan credit agreement, including certain debt and equity issuances. Neither term loan requires principal amortization payments and each must be repaid prior to or at maturity, which is 364 days and 36 months, respectively, from the date of the initial draw. Each 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%. The current interest rate on drawn amounts would be 1.375% based on our current credit rating. The term loans also have a commitment fee rate on unutilized amounts, currently 0.20%, which will begin accruing onSeptember 2, 2021 . InAugust 2021 , we also amended and restated our existing$1.25 billion Credit Facility, increasing the capacity thereunder to$1.5 billion and extending the maturity date to five years from signing. The amended and restated revolving credit facility 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%. The current interest on drawn amounts would be 1.375% based on our current credit rating. The amended and restated revolving credit facility also has a commitment fee rate on unutilized amounts, currently 0.20%.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use 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 ofJune 30, 2021 ,$15 million in letters of credit were issued but undrawn and$276 million of surety bonds were outstanding. As ofJune 30, 2021 , we had no other significant off-balance sheet arrangements.
ACCOUNTING STANDARDS UPDATES
See Note 3: Accounting Standards Updates in Part I, Item 1 for information related to accounting standards updates.
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
Statements in this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include: •Changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans); •Our ability to estimate our future contract costs and perform our contracts effectively; •Changes in procurement processes and government regulations and our ability to comply with such requirements; •Our ability to deliver our products and services at an affordable life cycle cost and compete within our markets; •Natural and environmental disasters and political instability; •Our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions; •Adverse economic conditions inthe United States and globally; •Health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic; •Our ability to complete the acquisition of Alion Science and Technology and integrate its operations into our business; •Changes in key estimates and assumptions regarding our pension and retiree health care costs; 38 -------------------------------------------------------------------------------- Table of Contents •Security threats, including cyber security threats, and related disruptions; and •Other risk factors discussed herein and in our other filings with theSEC . There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements. You should not place undue reliance on any forward looking statements that we may make. 39
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GLOSSARY OF PROGRAMS Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q. ProgramName Program Description America class (LHA 6) amphibious Design and build large deck amphibious assault ships 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 decommissionedTarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. We delivered USS Tripoli (LHA 7) inFebruary 2020 , and we are currently constructing Bougainville (LHA 8).Arleigh Burke class (DDG 51) Build guided missile destroyers designed for conducting destroyers anti-air, anti-submarine,
anti-surface, and strike
operations. The
Aegis-equipped
51) destroyers are the U.S. Navy's primary surface
combatant, and have been constructed in variants,
allowing technologicaladvances during construction. In
2019 we delivered USS Paul Ignatius (DDG 117), and in
2020 we delivered USS Delbert
have contracts to construct
the following
class (DDG 51) destroyers:
121), Lenah H. Sutcliffe Higbee (DDG 123), Jack H.
Lucas (DDG 125), Ted Stevens (DDG 128),
(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 aircraftcarriers, which is required at
the mid-point of their 50-year life cycle. USS George
Washington (CVN 73) arrived atNewport News for the start of its RCOH inAugust 2017 and USS John C. Stennis (CVN 74) arrived atNewport News for the start of its RCOH inMay 2021 .
class submarine as a replacement for the current aging
Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. TheOhio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. TheColumbia class program plan of record is to construct 12 new ballistic missile submarines. TheU.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, theDOD signed the acquisition decision
memorandum approving the
class program's Milestone B, which formally authorizes
the program's entry into the engineering and
manufacturing development phase. We perform design work
as a subcontractor to Electric Boat, and we have
entered into a teamingagreement with Electric Boat to
build modules for the entire
submarine program that
leverages our
(SSN 774) experience. We have been awarded contracts
from Electric Boat for integrated product and process
development, providing long-lead-time material and
advance construction, and construction of the first two
boats of the Columbia class (SSBN 826) program.
Construction of the first Columbia class (SSBN 826)
submarine began in 2020.
Defense 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's
expertise includes intelligence, surveillance, and
reconnaissance; cyber operations; secure enterprise
information technology engineering and operations;
advanced modeling,simulation, and training; logistics
management and maritime fleet sustainment.
40-------------------------------------------------------------------------------- Table of Contents USS Gerald R.Ford class (CVN 78) Design and construction for theFord class program, aircraft carriers 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
we were awarded a contract for the detail design and
construction of John F. Kennedy (CVN 79), following
several years ofengineering, advance construction, and
purchase of long-lead time components and material. In
addition, we have received awards for detail design and
construction of Enterprise (CVN 80) and Doris Miller
(CVN 81). This category also includes the class'
non-recurring engineering. The class is expected to
bring improved warfightingcapability, quality of life
improvements for sailors, and reduced life cycle costs.
Legend class National Security Cutter Design and build theU.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in theU.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 11 ships, of which the first nine ships have been delivered.Calhoun (NSC 10) and
Friedman (NSC 11) are currently
under construction.
Naval nuclear support services Provide services to and in
support of the
ranging from services
supporting the
submarine fleets to
maintenance services at
training facilities. Naval nuclear support services
include design, construction, maintenance, and disposal
activities for in 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,
including site management, nuclear and industrial
facilities operations and maintenance, decontamination
and decommissioning,radiological and hazardous waste
management services, and technical engineering services.
We participate in several joint ventures, including
Newport News Nuclear BWXT Los Alamos, LLC (" N3B"),
Mission Support and Test Services, LLC ("MSTS"), and
Savannah River Nuclear
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's
Savannah River Site near Aiken, South Carolina . Triad
provides site management and operations at the DoE's Los
Alamos National Laboratory .
San Antonio class (LPD 17) amphibious Design and build amphibious transport dock ships, which
transport dock ships 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 forAmphibious Readiness Groups. The
San Antonio class (LPD 17) is the newest addition to theU.S. Navy's 21st century amphibious assault force, and these ships are a key
element of the
transformation. We are currently constructing Fort
Lauderdale (LPD 28), Richard M. McCool Jr . (LPD 29), and
Harrisburg (LPD 30). In 2020 we were awarded a contract
to construct Pittsburgh (LPD 31).
Unmanned systems Our unmanned systems products and services create
advanced unmanned maritime solutions for defense, marine
research, and commercialapplications. 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.
41-------------------------------------------------------------------------------- Table of ContentsVirginia class (SSN 774) fast attack Construct attack submarines as the principal submarines subcontractor to Electric
Boat. The
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.
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