NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
three
reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Technical Solutions. For more than a century, the Company's Ingalls and Newport News segments in Mississippi and Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. The Technical Solutions segment provides a wide range of professional services, including fleet support, integrated mission solutions, and nuclear and environmental and oil and gas services.
HII conducts most of its business with the U.S. Government, principally 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 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, established in the fourth quarter of 2016, provides a range of services to the governmental, energy, and oil and gas markets.
2. BASIS OF PRESENTATION
Principles of Consolidation
- The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). All intercompany transactions and balances are eliminated in consolidation. For classification of current assets and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation. See Note 9: Segment Information.
These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
.
The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management's long-standing practice to establish interim closing dates using a "fiscal" calendar, which requires the businesses to close their books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. The effects of this practice only exist for interim periods within a reporting year.
Accounting Estimates
- The preparation of the Company's unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, and actual results could differ materially from those estimates.
The Bipartisan Budget Act of 2015 established limits on U.S. Government discretionary spending, including defense spending, and provided sequestration relief for 2016 and 2017. Sequestration remains in effect for 2018 through 2021 and could result in significant decreases in DoD spending that could negatively impact the Company's revenues and its estimated recovery of goodwill and other long-lived assets.
Revenue Recognition
- The majority of the Company's business is derived from long-term contracts for the construction of naval vessels, production of goods, and provision of services, principally for the U.S. Government. In
accounting for these contracts, the Company extensively utilizes the cost-to-cost measure of the percentage-of-completion method of accounting, principally based upon total costs incurred. Under this method, sales, including estimated earned fees or profits, are recorded as costs are incurred, generally based on the percentage that total costs incurred bear to total estimated costs at completion. Certain contracts contain provisions for price redetermination or for cost and/or performance incentives. Such redetermined amounts or incentives are included in sales when the amounts can reasonably be determined and estimated. Amounts representing contract change orders, claims, requests for equitable adjustment, or limitations in funding are included in sales only when they can be reliably estimated and realization is probable. The Company estimates profit as the difference between total estimated revenues and total estimated cost of a contract and recognizes that profit over the life of the contract based on progress toward completion. If the Company estimates a contract will result in a loss, the full amount of the estimated loss is recognized against income in the period in which the loss is identified. The Company classifies contract revenues as product sales or service revenues depending upon the predominant attributes of the relevant underlying contracts.
The Company recognizes changes in estimates of contract sales, costs, and profits using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. Accordingly, the effect of the changes on future periods of contract performance is recognized as if the revised estimate had been the original estimate. For the
three months ended
June 30, 2017
and
2016
, net cumulative catch-up adjustments increased operating income by
$60 million
and
$74 million
, respectively, and increased diluted earnings per share by
$0.85
and
$1.02
, respectively. For the
six months ended
June 30, 2017
and
2016
, net cumulative catch-up adjustments increased operating income by
$86 million
and
$143 million
, respectively, and increased diluted earnings per share by
$1.21
and
$1.97
, respectively. Cumulative catch-up adjustments for the
three and six months ended
June 30, 2017
, included favorable adjustments of
$30 million
on a contract at the Ingalls segment, which increased diluted earnings per share by
$0.42
in both periods. Cumulative catch-up adjustments for the
three and six months ended
June 30, 2016
, included favorable adjustments of
$38 million
and
$60 million
, respectively, on a contract at the Ingalls segment, which increased diluted earnings per share by
$0.52
and
$0.82
, respectively. Cumulative catch-up adjustments for the
three and six months ended
June 30, 2016
, included favorable adjustments of
$23 million
and
$26 million
, respectively, on a contract at the Newport News segment, which increased diluted earnings per share by
$0.31
and
$0.36
, respectively.
For services contracts not associated with the design, development, manufacture, or modification of complex equipment, revenues are recognized upon delivery or as services are rendered once persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. Costs related to these contracts are expensed as incurred.
Fair Value of Financial Instruments
- Except for 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 established to fund certain non-qualified pension plans. These trusts were valued at
$87 million
and
$82 million
as of
June 30, 2017
, and
December 31, 2016
, respectively, and are presented within miscellaneous other assets within the unaudited condensed 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.
Accounts Receivable
- The Company has limited exposure to credit losses and maintains an allowance 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. As of
June 30, 2017
, and
December 31, 2016
, the Company had an allowance for doubtful accounts of
$28 million
and
$4 million
, respectively. During the
three months ended
March 31, 2017, the Company recorded
$29 million
in allowance for doubtful accounts within the Technical Solutions segment related to a commercial customer’s petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. During the
three months ended
June 30, 2017
, the Company released
$7 million
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 if any such payment is determined to have been a preferential payment or similar transaction under applicable bankruptcy laws.
Related Party Transactions
- On March 29, 2011, HII entered into a Separation and Distribution 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. As of
June 30, 2017
, and
December 31, 2016
, the Company was due
$9 million
and
$33 million
, respectively, from Northrop Grumman under spin-off related agreements. As of each of
June 30, 2017
, and
December 31, 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, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which will replace existing requirements in U.S. GAAP, including industry-specific requirements, significantly expand the disclosure requirements, 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 recognized at the date of initial application. In July 2015, the FASB approved the deferral of the new standard's effective date by one year. 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 is planning to 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. Based on the results of the assessment performed to date, the impact of adopting the new standard on the Company's 2018 total sales and service revenues and operating income is not expected to be material. 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.
Additionally, the Company has made progress in redefining its accounting policies affected by this standard and the enhancement of internal controls over financial reporting related to the standard, as well as evaluating the expanded disclosure requirements. The Company expects to complete the evaluation of the impact of the accounting and disclosure changes on its business processes, controls and systems during the second half of 2017, and implement any changes to such business processes, controls and systems over the remainder of 2017.
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, including interim periods within those reporting periods. Early adoption is permitted and should be applied using a modified retrospective approach. The Company is in the process of evaluating the potential impacts of ASU 2016-02 on its consolidated financial statements 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 standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on the Company’s consolidated financial statements and disclosures, accounting processes, or internal controls.
In March 2017, the FASB issued ASU 2017-07, “Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. 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 is currently evaluating the impact of ASU 2017-07 on its consolidated financial statements and disclosures, accounting processes, and relevant 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 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. The Company is currently evaluating the impact of ASU 2017-10 on its consolidated financial statements and disclosures, accounting processes, and relevant internal controls.
Other pronouncements issued but not effective until after December 31, 2017, are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.
4. AVONDALE
In 2010, plans were announced to consolidate the Company's Ingalls shipbuilding operations by winding down shipbuilding at the Avondale, Louisiana facility in 2013 after completion of LPD-class ships that were under construction at this facility. In October 2014, the Company ceased shipbuilding construction operations at the Avondale facility. 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.
In connection with and as a result of the decision to wind down shipbuilding at the Avondale facility, the Company began incurring and paying related costs, including, but not limited to, severance expense, relocation expense, and asset write-downs related to the Avondale facilities. The Company’s current estimated net restructuring and shutdown costs are
$276 million
, comprised of
$308 million
of restructuring and shutdown costs, partially offset by
$32 million
from the anticipated disposition of assets. As of
June 30, 2017
, and
December 31, 2016
, the Company
had incurred restructuring and shutdown related costs of
$289 million
and
$287 million
, respectively. Substantially all of these costs were incurred from 2010 through 2014. None of the recoverable costs related to the wind down of the Avondale facility have been included in billings to the U.S. Government. These recoverable costs are recorded in contract working capital within inventoried costs, accounts receivable and advance payments and billings in excess of revenues. The Company believes such costs are recoverable under existing flexibly-priced contracts or future negotiated contracts in accordance with applicable provisions of the Federal Acquisition Regulation ("FAR") and Cost Accounting Standards for the treatment of restructuring and shutdown related costs, which permit contractors to defer such costs and amortize the amounts over a period not to exceed
five years
. 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 has engaged in communications and negotiations with the U.S. Navy since 2010 regarding the amount and recovery of the Company's restructuring and shutdown costs, including submitting revised proposals to address the concerns of the Defense Contract Audit Agency in 2011 and 2014. In June 2016, the Company submitted to the contracting officer a request for a final decision regarding the Avondale facility restructuring costs. In December 2016, the contracting officer denied the Company’s claim, on the purported basis that the Company had not adequately shown savings and other benefits that would accrue to the U.S. Government from the closing of Avondale and consolidation of Ingalls shipbuilding to the Pascagoula facility. While the Company is continuing to engage in negotiations with the U.S. Navy, the Company is pursuing its claim through the Civilian and Armed Services Boards of Contract Appeals, seeking recovery of the Avondale restructuring costs pursuant to the Contract Disputes Act. The Company continues to believe its claim is reasonably based and supported by law. Accordingly, the Company anticipates an ultimate resolution that is substantially in accordance with management's cost recovery expectations. Any subsequent inability to recover costs substantially in accordance with management’s cost recovery expectations could result in a material effect on the Company's consolidated financial position, results of operations, or cash flows.
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, the Company acquired, for approximately
$369 million
in cash, net of
$27 million
of cash acquired, Camber Holding Corporation ("Camber"), a provider of mission-based and information technology solutions to the U.S. Government. The acquisition was consistent with the Company's strategy to optimize and expand its services portfolio. For the
three and six months ended
June 30, 2017
, Camber contributed revenues of
$85 million
and
$165 million
, respectively, and operating income of
$2 million
and
$4 million
, respectively. In connection with this acquisition, the Company recorded
$262 million
of goodwill, all of which was allocated to its Technical Solutions segment, primarily related to the value of Camber's workforce, and
$76 million
of intangible assets related to existing contract backlog. See Note 11: Goodwill and Other Intangible Assets. During the
three months ended
June 30, 2017
, the Company recorded a goodwill adjustment of
$16 million
, primarily driven by the refinement of fair value calculations for certain assets and liabilities and the finalization of the net working capital adjustment. The Company has not completed the purchase price allocation due to potential adjustments upon
finalization of the fair values of certain assets and liabilities. The assets, liabilities, and results of operations of Camber are not material to the Company’s consolidated financial position, results of operations, or cash flows.
7. STOCKHOLDERS' EQUITY
Treasury Stock
-
In October 2015, the Company's board of directors authorized an increase in the Company's stock repurchase program from
$600 million
to
$1,200 million
.
Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the
six months ended
June 30, 2017
, the Company repurchased
1,065,737
shares at an aggregate cost of
$210 million
, of which approximately
$3 million
was not yet settled for cash as of
June 30, 2017
. During the
six months ended
June 30, 2016
, the Company repurchased
606,027
shares at an aggregate cost of
$84 million
. For the
six months ended
June 30, 2016
, the Company also settled for cash
$2 million
of shares repurchased in the prior year. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.
Dividends
- The Company declared cash dividends per share of
$0.60
and
$0.50
for the
three months ended
June 30, 2017
and
2016
, respectively. The Company declared cash dividends per share of
$1.20
and
$1.00
for the
six months ended
June 30, 2017
and
2016
, respectively. The Company paid cash dividends totaling
$55 million
and
$48 million
for
the
six months ended
June 30, 2017
and
2016
, respectively.
Accumulated Other Comprehensive Income (Loss)
- Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings (loss). The accumulated other comprehensive loss as of
June 30, 2017
, was comprised of unamortized benefit plan costs of
$921 million
and other comprehensive income items of
$2 million
. The accumulated other comprehensive loss as of
December 31, 2016
, was comprised of unamortized benefit plan costs of
$948 million
and other comprehensive loss items of
$3 million
.
The changes in accumulated other comprehensive income (loss) by component for the
three and six months ended
June 30, 2017
and
2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Benefit Plans
|
|
Other
|
|
Total
|
Balance as of March 31, 2016
|
|
$
|
(831
|
)
|
|
$
|
(2
|
)
|
|
$
|
(833
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain)
1
|
|
19
|
|
|
—
|
|
|
19
|
|
Tax benefit (expense) for items of other comprehensive income
|
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
Net current period other comprehensive income (loss)
|
|
12
|
|
|
—
|
|
|
12
|
|
Balance as of June 30, 2016
|
|
(819
|
)
|
|
(2
|
)
|
|
(821
|
)
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
(935
|
)
|
|
—
|
|
|
(935
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
—
|
|
|
3
|
|
|
3
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain)
1
|
|
23
|
|
|
—
|
|
|
23
|
|
Tax benefit (expense) for items of other comprehensive income
|
|
(9
|
)
|
|
(1
|
)
|
|
(10
|
)
|
Net current period other comprehensive income (loss)
|
|
14
|
|
|
2
|
|
|
16
|
|
Balance as of June 30, 2017
|
|
$
|
(921
|
)
|
|
$
|
2
|
|
|
$
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Benefit Plans
|
|
Other
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
(843
|
)
|
|
$
|
(2
|
)
|
|
$
|
(845
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
Amortization of net actuarial loss (gain)
1
|
|
39
|
|
|
—
|
|
|
39
|
|
Tax benefit (expense) for items of other comprehensive income
|
|
(15
|
)
|
|
—
|
|
|
(15
|
)
|
Net current period other comprehensive income (loss)
|
|
24
|
|
|
—
|
|
|
24
|
|
Balance as of June 30, 2016
|
|
(819
|
)
|
|
(2
|
)
|
|
(821
|
)
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
(948
|
)
|
|
(3
|
)
|
|
(951
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
—
|
|
|
7
|
|
|
7
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
Amortization of prior service cost (credit)
1
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Amortization of net actuarial loss (gain)
1
|
|
46
|
|
|
—
|
|
|
46
|
|
Tax benefit (expense) for items of other comprehensive income
|
|
(18
|
)
|
|
(2
|
)
|
|
(20
|
)
|
Net current period other comprehensive income (loss)
|
|
27
|
|
|
5
|
|
|
32
|
|
Balance as of June 30, 2017
|
|
$
|
(921
|
)
|
|
$
|
2
|
|
|
$
|
(919
|
)
|
1
These accumulated comprehensive income (loss) components are included in the computation of net periodic benefit cost. See Note 16: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive income (loss) for the
three months ended
June 30, 2017
and
2016
, was
$9 million
and
$7 million
, respectively. The tax benefit associated with amounts reclassified from accumulated other comprehensive income (loss) for the
six months ended
June 30, 2017
and
2016
, was
$18 million
and
$15 million
, respectively.
8. EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
(in millions, except per share amounts)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net earnings (loss)
|
|
$
|
147
|
|
|
$
|
133
|
|
|
$
|
266
|
|
|
$
|
269
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
45.7
|
|
|
47.0
|
|
|
46.0
|
|
|
47.0
|
|
Net dilutive effect of stock options and awards
|
|
0.1
|
|
|
0.5
|
|
|
0.1
|
|
|
0.4
|
|
Dilutive weighted-average common shares outstanding
|
|
45.8
|
|
|
47.5
|
|
|
46.1
|
|
|
47.4
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - basic
|
|
$
|
3.22
|
|
|
$
|
2.83
|
|
|
$
|
5.78
|
|
|
$
|
5.72
|
|
Earnings (loss) per share - diluted
|
|
$
|
3.21
|
|
|
$
|
2.80
|
|
|
$
|
5.77
|
|
|
$
|
5.68
|
|
Under the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of
0.3 million
and
0.4 million
Restricted Performance Stock Rights
("RPSRs") for the
three and six months ended
June 30, 2017
, respectively. The amounts presented above exclude the impact of
0.1 million
stock options and
0.3 million
RPSRs for the
three months ended
June 30, 2016
, and
0.1 million
stock options and
0.4 million
RPSRs for the
six months ended
June 30, 2016
, under the treasury stock method.
9. SEGMENT INFORMATION
The Company is organized into
three
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 to enhance strategic and operational alignment among the Company's
services businesses. 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.
The following table presents segment results for the
three and six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
($ in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Sales and Service Revenues
|
|
|
|
|
|
|
|
|
Ingalls
|
|
$
|
639
|
|
|
$
|
585
|
|
|
$
|
1,189
|
|
|
$
|
1,171
|
|
Newport News
|
|
1,001
|
|
|
999
|
|
|
1,972
|
|
|
1,992
|
|
Technical Solutions
|
|
244
|
|
|
143
|
|
|
469
|
|
|
351
|
|
Intersegment eliminations
|
|
(26
|
)
|
|
(27
|
)
|
|
(48
|
)
|
|
(51
|
)
|
Sales and service revenues
|
|
$
|
1,858
|
|
|
$
|
1,700
|
|
|
$
|
3,582
|
|
|
$
|
3,463
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
Ingalls
|
|
$
|
98
|
|
|
$
|
88
|
|
|
$
|
164
|
|
|
$
|
170
|
|
Newport News
|
|
80
|
|
|
98
|
|
|
152
|
|
|
179
|
|
Technical Solutions
|
|
9
|
|
|
(2
|
)
|
|
(9
|
)
|
|
1
|
|
Segment operating income (loss)
|
|
187
|
|
|
184
|
|
|
307
|
|
|
350
|
|
Non-segment factors affecting operating income (loss)
|
|
|
|
|
|
|
|
|
FAS/CAS Adjustment
|
|
49
|
|
|
35
|
|
|
98
|
|
|
70
|
|
Non-current state income taxes
|
|
1
|
|
|
(2
|
)
|
|
(4
|
)
|
|
(5
|
)
|
Operating income (loss)
|
|
$
|
237
|
|
|
$
|
217
|
|
|
$
|
401
|
|
|
$
|
415
|
|
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 following table presents the Company's assets by segment.
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30
2017
|
|
December 31
2016
|
Assets
|
|
|
|
|
Ingalls
|
|
$
|
1,364
|
|
|
$
|
1,362
|
|
Newport News
|
|
3,238
|
|
|
3,169
|
|
Technical Solutions
|
|
656
|
|
|
692
|
|
Corporate
|
|
932
|
|
|
1,129
|
|
Total assets
|
|
$
|
6,190
|
|
|
$
|
6,352
|
|
10. INVENTORIED COSTS, NET
Inventoried costs were comprised of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30
2017
|
|
December 31
2016
|
Production costs of contracts in process
|
|
$
|
107
|
|
|
$
|
116
|
|
Raw material inventory
|
|
97
|
|
|
94
|
|
Total inventoried costs, net
|
|
$
|
204
|
|
|
$
|
210
|
|
As of
June 30, 2017
, and
December 31, 2016
,
$76 million
and
$94 million
, respectively, of costs related to the wind down of the Avondale facility were capitalized in production costs of contracts in process within inventoried costs. See Note 4: Avondale.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
HII performs impairment tests for goodwill as of November 30 of each year and between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair values of the Company's reporting units below their carrying values.
Accumulated goodwill impairment losses as of each of
June 30, 2017
, and
December 31, 2016
, were
$2,877 million
. The accumulated goodwill impairment losses for Ingalls as of each of
June 30, 2017
, and
December 31, 2016
, were
$1,568 million
. The accumulated goodwill impairment losses for Newport News as of each of
June 30, 2017
, and
December 31, 2016
, were
$1,187 million
. The accumulated goodwill impairment losses for Technical Solutions as of each of
June 30, 2017
, and
December 31, 2016
, were
$122 million
.
For the
six months ended
June 30, 2017
, the carrying amounts of goodwill changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Ingalls
|
|
Newport News
|
|
Technical Solutions
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
175
|
|
|
$
|
721
|
|
|
$
|
338
|
|
|
$
|
1,234
|
|
Adjustments
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
(16
|
)
|
Balance as of June 30, 2017
|
|
$
|
175
|
|
|
$
|
721
|
|
|
$
|
322
|
|
|
$
|
1,218
|
|
During the
three months ended
June 30, 2017
, the Company recorded a goodwill adjustment of
$16 million
in the Technical Solutions segment, primarily driven by the refinement of fair value calculations for certain assets and liabilities and the finalization of the net working capital adjustment related to the acquisition of Camber.
Other Intangible Assets
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 principally of amounts pertaining to nuclear-powered aircraft carrier and submarine program intangible assets, with an aggregate weighted-average useful life of
40 years
based on the long life cycle of the related programs. Aggregate amortization expense was
$9 million
and
$6 million
for the
three months ended
June 30, 2017
and
2016
, respectively, and
$20 million
and
$11 million
for the
six months ended
June 30, 2017
and
2016
, respectively.
In connection with the Camber acquisition in
2016
, the Company recorded
$76 million
of intangible assets pertaining to existing contract backlog and customer relationships, to be amortized using the pattern of benefits method over a weighted-average life of
10 years
.
The Company expects amortization expense for purchased intangible assets of approximately
$40 million
in 2017,
$36 million
in 2018,
$32 million
in 2019,
$28 million
in 2020, and
$26 million
in 2021.
12. INCOME TAXES
The Company's earnings are principally domestic, and its effective tax rates on earnings from operations for the
three months ended
June 30, 2017
and
2016
, were
32.6%
and
33.2%
, respectively. For the
six months ended
June 30, 2017
and
2016
, the Company's effective tax rates on earnings from operations were
27.1%
and
28.5%
, respectively. The lower effective tax rate for the
three months ended
June 30, 2017
, was primarily attributable to an increase in the domestic manufacturing deduction. The lower effective tax rate for the
six months ended
June 30, 2017
, was primarily attributable to an increase in the domestic manufacturing deduction and an increase in income tax benefits associated with stock award settlement activity.
For the
three and six months ended
June 30, 2017
, the Company's effective tax rates differed from the federal statutory rate primarily as a result of the income tax benefits resulting from stock award settlement activity and the domestic manufacturing deduction. For the
three and six months ended
June 30, 2016
, the Company's effective tax rates differed from the federal statutory rate primarily as a result of the adoption of ASU 2016-09, which reduced income tax expense by the income tax benefits resulting from stock award settlement activity, and the domestic manufacturing deduction.
The Company’s unrecognized tax benefits decreased by
$2 million
during the
three months ended
June 30, 2017
, as a result of the expiration of applicable statutes of limitation. The remaining unrecognized tax benefits are immaterial and will likely be recognized in the next 12 months as a result of expiration of applicable statutes of limitation.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state uncertain tax positions in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.
13. DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30
2017
|
|
December 31
2016
|
Senior notes due December 15, 2021, 5.000%
|
|
$
|
600
|
|
|
$
|
600
|
|
Senior notes due November 15, 2025, 5.000%
|
|
600
|
|
|
600
|
|
Mississippi economic development revenue bonds due May 1, 2024, 7.81%
|
|
84
|
|
|
84
|
|
Gulf opportunity zone industrial development revenue bonds due December 1, 2028, 4.55%
|
|
21
|
|
|
21
|
|
Less unamortized debt issuance costs
|
|
(24
|
)
|
|
(27
|
)
|
Total long-term debt
|
|
$
|
1,281
|
|
|
$
|
1,278
|
|
Credit Facility
- In July 2015, the Company entered into a Second Amended and Restated Credit Agreement (the “Amended Credit Facility”) with third-party lenders. The Amended Credit Facility includes a revolving credit facility of
$1,250 million
, which may be drawn upon during a period of five years from July 2015. The revolving credit facility includes a letter of credit subfacility of
$500 million
. The revolving credit facility has a variable interest rate on outstanding borrowings based on the London Interbank Offered Rate ("LIBOR") plus a spread based upon the Company's leverage ratio, which may vary between
1.25%
and
2.0%
. The revolving credit facility also has a commitment fee rate on the unutilized balance based on the Company’s leverage ratio. The commitment fee rate as of
June 30, 2017
, was
0.25%
and may vary between
0.25%
and
0.35%
.
The Amended Credit Facility contains customary affirmative and negative covenants, as well as a financial covenant based on a maximum leverage ratio, which could limit the amount of dividends the Company may pay and shares the Company may repurchase. Each of the Company's existing and future material wholly owned domestic subsidiaries, except those that are specifically designated as unrestricted subsidiaries, are and will be guarantors under the Amended Credit Facility. Substantially all tangible and intangible material assets of the Company and domestic subsidiaries are pledged as collateral under the Amended Credit Facility.
As of
June 30, 2017
, approximately
$15 million
in standby letters of credit were issued but undrawn, and the remaining
$1,235 million
of the revolving credit facility was unutilized. The Company had unamortized debt issuance costs associated with its credit facilities of
$7 million
and
$8 million
as of
June 30, 2017
, and
December 31, 2016
, respectively.
Senior Notes
- In December 2014, the Company issued
$600 million
aggregate principal amount of unregistered
5.000%
senior notes due December 2021. In November 2015, the Company issued
$600 million
aggregate principal amount of unregistered
5.000%
senior notes due November 2025. Interest on the Company's senior notes is payable semi-annually.
The terms of the senior notes limit the Company’s ability and the ability of certain of its subsidiaries to create liens, enter into sale and leaseback transactions, sell assets, and effect consolidations or mergers. The Company had unamortized debt issuance costs associated with the senior notes of
$17 million
and
$19 million
as of
June 30, 2017
, and
December 31, 2016
, respectively.
Mississippi Economic Development Revenue Bonds
- As of each of
June 30, 2017
, and
December 31, 2016
, the Company had
$84 million
outstanding under Industrial Revenue Bonds issued by the Mississippi Business Finance
Corporation. These bonds accrue interest at a fixed rate of
7.81%
per annum (payable semi-annually) and mature in 2024.
Gulf Opportunity Zone Industrial Development Revenue Bonds
- As of each of
June 30, 2017
, and
December 31, 2016
, the Company had
$21 million
outstanding under Gulf Opportunity Zone Industrial Development Revenue Bonds issued by the Mississippi Business Finance Corporation. These bonds accrue interest at a fixed rate of
4.55%
per annum (payable semi-annually) and mature in 2028.
The Company's debt arrangements contain customary affirmative and negative covenants, including a maximum leverage ratio. The Company was in compliance with all debt covenants during the
six months ended
June 30, 2017
.
The estimated fair values of the Company's total long-term debt as of
June 30, 2017
, and
December 31, 2016
, were
$1,385 million
and
$1,372 million
, respectively. The fair values of the Company's long-term debt were calculated based on either recent trades of the Company's debt instruments in inactive markets or yields available on debt with substantially similar risks, terms and maturities, which fall within Level 2 under the fair value hierarchy.
The Company has
$600 million
in principal payments due on long-term debt in 2021.
14. INVESTIGATIONS, CLAIMS, AND LITIGATION
The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB Accounting Standards Codification 450
Contingencies,
the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. For matters where a material loss is probable or reasonably possible and the amount of loss cannot be reasonably estimated, but the Company is able to reasonably estimate a range of possible losses, the Company will disclose such estimated range in these notes. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Any estimated range of possible loss does not represent the Company's maximum possible loss exposure. For matters as to which the Company is not able to reasonably estimate a possible loss or range of loss, the Company will indicate the reasons why it is unable to estimate the possible loss or range of loss. For matters not specifically described in these notes, the Company does not believe, based on information currently available to it, that it is reasonably possible that the liabilities, if any, arising from such investigations, claims, and litigation will have a material effect on its consolidated financial position, results of operations, or cash flows. The Company has, in certain cases, provided disclosure regarding certain matters for which the Company believes at this time that the likelihood of material loss is remote.
False Claims Act Complaint
- In 2015, the Company received a Civil Investigative Demand from the DoJ relating to an investigation of certain allegedly non-conforming parts the Company purchased from one of its suppliers for use in connection with U.S. Government contracts. The Company has cooperated with the DoJ in connection with its investigation. In 2016, the Company was made aware that it is a defendant in a False Claims Act lawsuit filed under seal in the U.S. District Court for the Middle District of Florida related to the Company’s purchases of the allegedly non-conforming parts from the supplier. Depending upon the outcome of this matter, the Company could be subject to civil penalties, damages, and/or suspension or debarment from future U.S. Government contracts, which could have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The matter remains sealed and given the current posture of the matter, the Company is unable to estimate an amount or range of reasonably possible loss or to express an opinion regarding the ultimate outcome.
U.S. Government Investigations and Claims
- Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.
In January 2013, the Company disclosed to the DoD, including the U.S. Navy, and the U.S. Department of Homeland Security, including the U.S. Coast Guard, pursuant to the FAR, that it had initiated an internal investigation regarding whether certain employees at Ingalls mischarged time or misstated progress on Navy and Coast Guard contracts. The Company conducted an internal investigation, led by external counsel, and has taken remedial actions, including the termination of employees in instances where the Company believed grounds for termination existed. The Company provided information regarding its investigation to the relevant government agencies. The Company agreed with the U.S. Navy and U.S. Coast Guard that they would initially withhold
$24 million
in payments on existing contracts pending receipt of additional information from the Company's internal investigation. The U.S. Navy has reduced its portion of the withhold from
$18.2 million
to
$4.7 million
, while expressing its view that the gross amount of potential mischarging incurred by the Navy will likely not exceed
$3.1 million
. The U.S. Coast Guard informed the Company in June 2014 that it was provisionally reducing its withhold from
$5.8 million
to
$3.6 million
. Based on the results of its internal investigation, the Company estimates that the maximum amount of U.S. Navy and Coast Guard mischarging is approximately
$4 million
. The Company is continuing discussions with its U.S. Government customers regarding the potential release of an additional portion of the withheld funds, but the Company cannot predict whether or when these customers will agree to any additional release of the withhold amounts.
In June 2015, the DoJ informed the Company that it is investigating the matters disclosed by the Company to the DoD in January 2013. In July 2015, the DoJ requested information from the Company, and the Company is cooperating with the DoJ’s requests and has provided certain information to the DoJ. Depending upon the outcome of this matter, the Company could be subject to civil penalties, damages, and/or suspension or debarment from future U.S. Government contracts, which could have a material effect on its consolidated financial position, results of operations, or cash flows. Given the current stage of the Company’s discussions with the DoJ, the Company is currently unable to estimate the ultimate outcome of this matter.
Asbestos Related Claims
- HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. The cases allege various injuries, including those associated with pleural plaque disease, asbestosis, cancer, mesothelioma, and other alleged asbestos related conditions. In some cases, several of HII's former executive officers are also named as defendants. In some instances, partial or full insurance coverage is available to the Company for its liability and that of its former executive officers. The average cost per case to resolve cases during the
six months ended
June 30, 2017
and
2016
, was immaterial individually and in the aggregate. The Company’s estimate of asbestos-related liabilities is subject to uncertainty because liabilities are influenced by numerous variables that are inherently difficult to predict. Key variables include the number and type of new claims, the litigation process from jurisdiction to jurisdiction and from case to case, reforms made by state and federal courts, and the passage of state or federal tort reform legislation. Although the Company believes the ultimate resolution of current cases will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.
Other Litigation
- The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the “Republic”) since 2002 over a contract for the repair, refurbishment, and modernization at Ingalls of two foreign-built frigates. The case proceeded towards arbitration, then appeared to settle favorably, but the settlement was overturned in court and the matter returned to litigation. In March 2014, the Company filed an arbitral statement of claim asserting breaches of the contract and
$173 million
in damages plus substantial interest and litigation expenses. In July 2014, the Republic filed in the arbitration a statement of defense denying all the Company’s allegations and a counterclaim alleging late redelivery of the frigates, unfinished work, and breach of warranty and asserting damages of
$61 million
plus interest. An arbitration hearing was held in January 2015, and the Company cannot predict when the arbitration panel will render a decision. No assurances can be provided regarding the ultimate outcome of this matter.
The Company is party to various claims and legal proceedings that arise in the ordinary course of business. Although the Company believes that the resolution of any of these various claims and legal proceedings will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.
15. COMMITMENTS AND CONTINGENCIES
Contract Performance Contingencies
- Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances, and are included in determining contract profit margins to the extent of expected recovery based on contractual entitlements and the probability of successful negotiation with the customer. In June 2016, the Company submitted to the contracting officer a request for a final decision regarding the Avondale restructuring costs the Company has incurred, and in December 2016, the contracting officer denied the Company’s claim. The Company is pursuing its claim through the Civilian and Armed Services Boards of Contract Appeals, seeking recovery of the Avondale restructuring costs pursuant to the Contract Disputes Act. See Note 4: Avondale. As of
June 30, 2017
, the recognized amounts related to other claims and requests for equitable adjustment were not material individually or in the aggregate.
Guarantees of Performance Obligations -
From time to time in the ordinary course of business, HII may enter into joint ventures, teaming, and other business arrangements to support the Company's products and services. The Company generally strives to limit its exposure under these arrangements to its investment in the arrangement, or to the extent of obligations under the applicable contract. In some cases, however, HII may be required to guarantee performance of the arrangement's obligations and, in such cases, generally obtains cross-indemnification from the other members of the arrangement.
In the ordinary course of business, the Company may guarantee obligations of its subsidiaries under certain contracts. Generally, the Company is liable under such an arrangement only if its subsidiary is unable to perform under its contract. Historically, the Company has not incurred any substantial liabilities resulting from these guarantees. As of
June 30, 2017
, the Company was not aware of any existing event of default that would require it to satisfy any of these guarantees.
Environmental Matters
-The estimated cost to complete environmental remediation has been accrued where it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party ("PRP") by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. To assess the potential impact on the Company's consolidated financial statements, management estimates the range of reasonably possible remediation costs that could be incurred by the Company, taking into account currently available facts on each site, as well as the current state of technology and prior experience in remediating contaminated sites. These estimates are reviewed periodically and adjusted to reflect changes in facts and technical and legal circumstances. Management estimates that as of
June 30, 2017
, the probable future cost for environmental remediation was
$1 million
, which is accrued in other current liabilities. Factors that could result in changes to the Company's estimates include: modification of planned remedial actions, increases or decreases in the estimated time required to remediate, changes to the determination of legally responsible parties, discovery of more extensive contamination than anticipated, changes in laws and regulations affecting remediation requirements, and improvements in remediation technology. Should other PRPs not pay their allocable share of remediation costs, the Company may incur costs exceeding those already estimated and accrued. In addition, there are certain potential remediation sites where the costs of remediation cannot be reasonably estimated. Although management cannot predict whether new information gained as projects progress will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.
Financial Arrangements
- In the ordinary course of business, HII uses standby letters of credit issued by commercial banks and surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of
June 30, 2017
, the Company had
$15 million
in standby letters of credit issued but undrawn, as indicated in Note 13: Debt, and
$258 million
of surety bonds outstanding.
U.S. Government Claims
- From time to time, the U.S. Government communicates to the Company potential claims, disallowed costs, and penalties concerning prior costs incurred by the Company with which the U.S. Government disagrees. When such preliminary findings are presented, the Company and U.S. Government representatives engage in discussions, from which HII evaluates the merits of the claims and assesses the amounts being
questioned. Although the Company believes that the resolution of any of these matters will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict the ultimate outcome of these matters.
Collective Bargaining Agreements
- Of the Company's approximately
37,000
employees, approximately
50%
are covered by a total of
nine
collective bargaining agreements. Newport News has
four
collective bargaining agreements covering represented employees. On July 13, 2017, Newport News employees represented by the United Steelworkers ratified a new collective bargaining agreement with Newport News. The agreement which expires in November 2021, covers approximately
50%
of Newport News employees. On May 15, 2017, Newport News reached agreement with the International Association of Machinists on a new collective bargaining agreement expiring in November 2020. The remaining two collective bargaining agreements at Newport News expire August 2018 and December 2018. Newport News craft workers employed at the Kesselring Site near Saratoga Springs, New York are represented under an indefinite Department of Energy ("DoE") site agreement. Ingalls has
five
collective bargaining agreements covering represented employees, all of which expire in March 2018. Approximately
35
Technical Solutions craft employees at the Hanford Site near Richland, Washington are represented under an indefinite DoE site stabilization agreement.
Collective bargaining agreements generally expire after
three
to
five
years and are subject to renegotiation at that time. The Company does not expect the results of these negotiations, either individually or in the aggregate, to have a material effect on the Company's consolidated results of operations.
16. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company provides defined benefit pension plans and postretirement benefit plans, and defined contribution pension plans to eligible employees.
The costs of the Company's defined benefit pension plans and other postretirement plans for the
three and six months ended
June 30, 2017
and
2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30
|
|
Six Months Ended
June 30
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Pension Benefits
|
|
Other Benefits
|
($ in millions)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
36
|
|
|
$
|
33
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
71
|
|
|
$
|
66
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Interest cost
|
|
66
|
|
|
66
|
|
|
6
|
|
|
7
|
|
|
133
|
|
|
131
|
|
|
12
|
|
|
13
|
|
Expected return on plan assets
|
|
(91
|
)
|
|
(86
|
)
|
|
—
|
|
|
—
|
|
|
(182
|
)
|
|
(173
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost (credit)
|
|
4
|
|
|
4
|
|
|
(4
|
)
|
|
(4
|
)
|
|
8
|
|
|
9
|
|
|
(9
|
)
|
|
(9
|
)
|
Amortization of net actuarial loss (gain)
|
|
24
|
|
|
21
|
|
|
(1
|
)
|
|
(2
|
)
|
|
48
|
|
|
42
|
|
|
(2
|
)
|
|
(3
|
)
|
Net periodic benefit cost
|
|
$
|
39
|
|
|
$
|
38
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
78
|
|
|
$
|
75
|
|
|
$
|
6
|
|
|
$
|
6
|
|
The Company made the following contributions to its pension and other postretirement plans for the
six months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30
|
($ in millions)
|
|
2017
|
|
2016
|
Pension plans
|
|
|
|
|
Qualified minimum
|
|
$
|
—
|
|
|
$
|
—
|
|
Discretionary
|
|
|
|
|
Qualified
|
|
91
|
|
|
167
|
|
Non-qualified
|
|
3
|
|
|
3
|
|
Other benefit plans
|
|
17
|
|
|
17
|
|
Total contributions
|
|
$
|
111
|
|
|
$
|
187
|
|
For the year ending
December 31, 2017
, the Company expects cash contributions to its qualified defined benefit pension plans to be
$294 million
, substantially all of which will be discretionary.
17. STOCK COMPENSATION PLANS
During the
six months ended
June 30, 2017
and
2016
, the Company issued new stock awards as follows:
Restricted Performance Stock Rights
- For the
six months ended
June 30, 2017
, the Company granted approximately
0.1 million
RPSRs at a weighted average share price of
$219.47
. These rights are subject to cliff vesting on December 31, 2019. For the
six months ended
June 30, 2016
, the Company granted approximately
0.2 million
RPSRs at a weighted average share price of
$131.77
. These rights are subject to cliff vesting on December 31, 2018. The RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods. Based upon the Company's results measured against such targets, between
0%
and
200%
of the original stated grants are expected to ultimately vest.
For the
six months ended
June 30, 2017
and
2016
,
0.4 million
and
0.8 million
stock awards vested, respectively, of which approximately
0.2 million
and
0.3 million
, respectively, were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.
The following table summarizes the status of the Company's outstanding stock awards as of
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
(in thousands)
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
Total stock awards
|
|
443
|
|
|
$
|
146.30
|
|
|
1.2
|
Compensation Expense
The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors for the
three months ended
June 30, 2017
and
2016
, of
$14 million
and
$6 million
, respectively. The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors for the
six months ended
June 30, 2017
and
2016
, of
$20 million
and
$11 million
, respectively.
The Company recognized total tax benefits for stock-based compensation in the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the
three months ended
June 30, 2017
and
2016
, of
$6 million
and
$7 million
, respectively. The Company recognized total tax benefits for stock-based compensation in the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the
six months ended
June 30, 2017
and
2016
, of
$32 million
and
$27 million
, respectively.
Unrecognized Compensation Expense
As of
June 30, 2017
, the Company had less than
$1 million
of unrecognized compensation expense associated with Restricted Stock Rights granted in 2017 and 2014, which will be recognized over a weighted average period of
1.3 years
, and
$38 million
of unrecognized compensation expense associated with RPSRs granted in 2017, 2016, and 2015, which will be recognized over a weighted average period of
1.4 years
.