HII 2013 Q1 10-Q 3.31
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
 _____________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34910
 _____________________________________
HUNTINGTON INGALLS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 _____________________________________
DELAWARE
 
90-0607005
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
4101 Washington Avenue, Newport News, Virginia 23607
(Address of principal executive offices and zip code)
(757) 380-2000
(Registrant’s telephone number, including area code)
_____________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
 
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 3, 2013, 50,146,225 shares of common stock were outstanding.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
PART I – FINANCIAL INFORMATION
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 
 
 
 



Table of Contents

HUNTINGTON INGALLS INDUSTRIES, INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
 
 
Three Months Ended March 31
(in millions, except per share amounts)
 
2013
 
2012
Sales and service revenues
 
 
 
 
Product sales
 
$
1,321

 
$
1,353

Service revenues
 
241

 
215

Total sales and service revenues
 
1,562

 
1,568

Cost of sales and service revenues
 
 
 
 
Cost of product sales
 
1,086

 
1,152

Cost of service revenues
 
213

 
189

Income (loss) from operating investments, net
 
2

 
3

General and administrative expenses
 
170

 
150

Operating income (loss)
 
95

 
80

Other income (expense)
 
 
 
 
Interest expense
 
(30
)
 
(30
)
Earnings (loss) before income taxes
 
65

 
50

Federal income taxes
 
21

 
17

Net earnings (loss)
 
$
44

 
$
33

 
 
 
 
 
Basic earnings (loss) per share
 
$
0.88

 
$
0.67

Weighted-average common shares outstanding
 
49.8

 
49.0

 
 
 
 
 
Diluted earnings (loss) per share
 
$
0.87

 
$
0.67

Weighted-average diluted shares outstanding
 
50.3

 
49.5

 
 
 
 
 
Net earnings (loss) from above
 
$
44

 
$
33

Other comprehensive income (loss)
 
 
 
 
Change in unamortized benefit plan costs
 
5

 
24

Other
 
2

 

Tax benefit (expense) for items of other comprehensive income
 
(5
)
 
(9
)
Other comprehensive income (loss), net of tax
 
2

 
15

Comprehensive income (loss)
 
$
46

 
$
48


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
($ in millions)
 
March 31
2013
 
December 31
2012
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
652

 
$
1,057

Accounts receivable, net
 
1,199

 
905

Inventoried costs, net
 
310

 
288

Deferred income taxes
 
209

 
213

Prepaid expenses and other current assets
 
21

 
21

Total current assets
 
2,391

 
2,484

Property, plant, and equipment, net
 
2,004

 
2,034

Goodwill
 
881

 
881

Other purchased intangibles, net
 
542

 
548

Long-term deferred tax asset
 
317

 
329

Miscellaneous other assets
 
116

 
116

Total assets
 
$
6,251

 
$
6,392

Liabilities and Stockholders' Equity
 
 
 
 
Current Liabilities
 
 
 
 
Trade accounts payable
 
$
247

 
$
377

Accrued employees’ compensation
 
199

 
235

Current portion of long-term debt
 
38

 
51

Current portion of postretirement plan liabilities
 
166

 
166

Current portion of workers’ compensation liabilities
 
222

 
216

Advance payments and billings in excess of revenues
 
114

 
134

Other current liabilities
 
191

 
205

Total current liabilities
 
1,177

 
1,384

Long-term debt
 
1,779

 
1,779

Pension plan liabilities
 
1,316

 
1,301

Other postretirement plan liabilities
 
807

 
799

Workers’ compensation liabilities
 
404

 
403

Other long-term liabilities
 
61

 
59

Total liabilities
 
5,544

 
5,725

Commitments and Contingencies (Note 13)
 

 

Stockholders’ Equity
 
 
 
 
Common stock, $0.01 par value; 150 million shares authorized; 50.2 million and 49.6 million issued and outstanding as of March 31, 2013, and December 31, 2012, respectively
 
1

 

Additional paid-in capital
 
1,892

 
1,894

Retained earnings (deficit)
 
39

 

Treasury stock
 
(1
)
 
(1
)
Accumulated other comprehensive income (loss)
 
(1,224
)
 
(1,226
)
Total stockholders’ equity
 
707

 
667

Total liabilities and stockholders’ equity
 
$
6,251

 
$
6,392


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended March 31
($ in millions)
 
2013
 
2012
Operating Activities
 
 
 
 
Net earnings (loss)
 
$
44

 
$
33

Adjustments to reconcile to net cash provided by (used in) operating activities
 
 
 
 
Depreciation
 
43

 
42

Amortization of purchased intangibles
 
6

 
5

Amortization of debt issuance costs
 
2

 
2

Stock-based compensation
 
9

 
8

Excess tax benefit related to stock-based compensation
 
(3
)
 

Deferred income taxes
 
14

 
17

Change in
 
 
 
 
Accounts receivable
 
(294
)
 
(243
)
Inventoried costs
 
(17
)
 
5

Prepaid expenses and other assets
 

 
2

Accounts payable and accruals
 
(194
)
 
(125
)
Retiree benefits
 
28

 
(75
)
Net cash provided by (used in) operating activities
 
(362
)
 
(329
)
Investing Activities
 
 
 
 
Additions to property, plant, and equipment
 
(30
)
 
(27
)
Net cash provided by (used in) investing activities
 
(30
)
 
(27
)
Financing Activities
 
 
 
 
Repayment of long-term debt
 
(13
)
 
(8
)
Dividends paid
 
(5
)
 

Proceeds from stock option exercises
 
2

 

Excess tax benefit related to stock-based compensation
 
3

 

Net cash provided by (used in) financing activities
 
(13
)
 
(8
)
Change in cash and cash equivalents
 
(405
)
 
(364
)
Cash and cash equivalents, beginning of period
 
1,057

 
915

Cash and cash equivalents, end of period
 
$
652

 
$
551

Supplemental Cash Flow Disclosure
 
 
 
 
Cash paid for income taxes
 
$
13

 
$
4

Cash paid for interest
 
$
46

 
$
47

Non-Cash Investing and Financing Activities
 
 
 
 
Capital expenditures accrued in accounts payable
 
$
2

 
$
3



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) 
Three Months Ended March 31, 2013 and 2012
($ in millions)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Treasury Stock
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
Balance as of December 31, 2011
 
$

 
$
1,862

 
$
(141
)
 
$

 
$
(849
)
 
$
872

Net earnings (loss)
 

 

 
33

 

 

 
33

Additional paid-in capital
 

 
(2
)
 

 

 

 
(2
)
Other comprehensive income (loss), net of tax
 

 

 

 

 
15

 
15

Balance as of March 31, 2012
 
$

 
$
1,860

 
$
(108
)
 
$

 
$
(834
)
 
$
918

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2012
 
$

 
$
1,894

 
$

 
$
(1
)
 
$
(1,226
)
 
$
667

Net earnings (loss)
 

 

 
44

 

 

 
44

Dividends declared
 

 

 
(5
)
 

 

 
(5
)
Additional paid-in capital
 

 
(2
)
 

 

 

 
(2
)
Other comprehensive income (loss), net of tax
 

 

 

 

 
2

 
2

Common stock
 
1

 

 

 

 

 
1

Balance as of March 31, 2013
 
$
1

 
$
1,892

 
$
39

 
$
(1
)
 
$
(1,224
)
 
$
707


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



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HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

For more than a century, Huntington Ingalls Industries, Inc. ("HII" or the "Company") has been designing, building, overhauling and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard. HII is organized into two operating segments, Ingalls and Newport News, which also represent its reportable segments. 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 DDG-51 Arleigh Burke-class 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. HII is one of the nation's leading full-service providers for the design, engineering, construction and life cycle support of major surface ship programs for the U.S. Navy. As prime contractor, principal subcontractor, team member or partner, HII participates in many high-priority U.S. defense technology programs. The Company conducts substantially all of its business with the U.S. Government, principally the Department of Defense ("DoD").

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.

In connection with the spin-off, HII entered into a Transition Services Agreement with Northrop Grumman, under which Northrop Grumman or certain of its subsidiaries provided HII with certain enterprise shared services (including information technology, resource planning, financial, procurement and human resource services), benefits support services and other specified services to HII at cost. The term of the Transition Services Agreement ended on October 9, 2012. For the three months ended March 31, 2012, costs incurred for services under the Transition Services Agreement were approximately $11 million.

In connection with the spin-off, HII entered into new borrowing arrangements to provide the Company with adequate liquidity and to fund a $1,429 million contribution to Northrop Grumman. Specifically, HII issued $1,200 million in senior notes and entered into the HII Credit Facility ("Credit Facility") with third-party lenders that includes a $650 million revolver and a $575 million term loan. See Note 10: Debt.

The spin-off from Northrop Grumman was a transaction under common control; therefore, no change in the historical basis of HII's assets or liabilities was recorded as part of the spin-off.

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.

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. These unaudited condensed consolidated financial statements 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, 2012.

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

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disruptive effects of quarterly closings on business processes. The effects of this practice only exist for interim periods within a reporting year.

Equity - On March 15, 2013, the Company paid a quarterly cash dividend of $0.10 per share, which totaled $5 million. During 2012, the Company's board of directors authorized a program to repurchase up to $150 million of the Company's common stock over the next three years. Purchases under the stock repurchase program may be made from time to time in the discretion of management in the open market, through privately negotiated transactions or through other means, are subject to prevailing market conditions and other factors, and may be suspended or discontinued at any time. For the three months ended March 31, 2013, the Company repurchased 4,303 shares at a cost of less than $1 million, which is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.

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 Budget Control Act of 2011 will result in significant decreases in DoD spending starting in 2013, which could negatively impact the Company's revenues and its estimated recovery of goodwill and other long-lived assets.
As it relates to the DDG-1002 Lyndon B. Johnson integrated deckhouse contract, the U.S. Navy is considering alternatives to the composite structure, which is the plan of record. A decision by the U.S. Navy to proceed with an alternative to the composite structure could affect the Company's future utilization of the Gulfport, Mississippi facility.

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. Hence, 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 March 31, 2013 and 2012, net cumulative catch-up adjustments increased operating income by $30 million and $14 million, respectively, and increased diluted earnings per share by $0.39 and $0.18, respectively.

3. ACCOUNTING STANDARDS UPDATES

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-02 "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income (loss) by component, and their corresponding effects on net income if required under GAAP to be reclassified to net income in their entirety in the same reporting period; otherwise, cross-reference to other disclosures is required. ASU 2013-02 is effective for all reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 as of January 1, 2013 without material impact on the unaudited condensed consolidated financial statements. See Note 15: Employee Pension and Other Postretirement Benefits.

4. AVONDALE

In July 2010, plans were announced to consolidate the Company's Ingalls operations by winding down and subsequently closing the Avondale, Louisiana facility in 2013 after completing LPD-class ships that were under construction at this facility. The Company intends to build future LPD-class ships at the Company's Pascagoula, Mississippi facility, although the Company may continue to utilize the Avondale facility beyond 2013 to construct certain LPD assemblies. The consolidation is intended to reduce costs, increase efficiency, and address shipbuilding overcapacity.

In connection with and as a result of the decision to wind down military shipbuilding at the Avondale, Louisiana 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. Management's current estimate of these expenditures is $256 million. Such costs are expected to be recoverable under existing flexibly-priced contracts or future negotiated contracts in accordance with Federal Acquisition Regulation ("FAR") provisions for the

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treatment of restructuring and shutdown related costs. The Company is currently in discussions with the U.S. Navy regarding its cost submission to support the recoverability of these costs under the FAR and applicable contracts.

The Defense Contract Audit Agency ("DCAA"), a DoD agency, prepared an initial audit report on the Company's July 30, 2010 cost proposal for restructuring and shutdown related costs of $310 million, which stated that the proposal was not adequately supported for the DCAA to reach a conclusion and questioned approximately $25 million, or 8%, of the costs submitted by the Company. The Company then submitted a revised proposal dated October 12, 2011 to address the concerns of the DCAA and to reflect a revised estimated total cost of $271 million. The Company received a supplemental audit report, which again stated that the proposal was not sufficiently supported to allow the DCAA to reach a conclusion. However, the report, while qualified and not final, supports the Company's position that, in general, most of the categories of costs incorporated in the proposal are allowable as restructuring activities. The amount and percentage of questioned costs are materially unchanged from the previous audit report. The Company submitted another revised proposal further addressing the DCAA concerns and supporting management's current restructuring cost estimate of $256 million.

Ultimately, the Company anticipates agreement with the U.S. Navy that is substantially in accordance with management's cost recovery expectations. Accordingly, HII has treated these costs as allowable costs in determining the earnings performance on its contracts in process. The actual restructuring expenses related to the wind down may be greater than the Company's current estimate, and any inability to recover such costs could result in a material effect on the Company's consolidated financial position, results of operations or cash flows.

The Company also evaluated the effect that the wind down of the Avondale facilities might have on the benefit plans in which HII employees participate. HII determined that the potential impact of a curtailment in these plans was not material to its consolidated financial position, results of operations or cash flows.

Although closure is still the baseline assumption for Avondale, the Company is pursuing engineering and manufacturing opportunities in the energy infrastructure market as well as other industrial manufacturing opportunities. In addition, in the event that Avondale remains open beyond the end of 2013, the Company may continue to utilize the facility beyond 2013 to construct certain LPD assemblies. Ultimately, if the Company is successful in pursuing such opportunities, and Avondale were to remain open, the Company would submit a revised restructuring proposal to the U.S. Navy consistent with this change. In such event, the Company expects the total estimated restructuring costs would decrease. While the restructuring costs that are currently capitalized as incurred, consisting primarily of severance and retention payments, should remain recoverable under existing or future U.S. Navy contracts, other costs would remain as part of the Avondale cost structure associated with Avondale's new line of business.

The table below summarizes the changes in the Company's liability for restructuring and shutdown related costs associated with winding down the Avondale facility. As of March 31, 2013 and 2012, these costs are comprised primarily of employee severance and retention payments as well as incentive bonuses. These amounts were capitalized in inventoried costs, and will be recognized as expenses in cost of product sales beginning in 2014.
($ in millions)
 
 
Balance at December 31, 2011
 
$
50

Payments
 
(4
)
Adjustments
 
9

Balance as of March 31, 2012
 
$
55

 
 
 
Balance as of December 31, 2012
 
$
24

Payments
 
(4
)
Adjustments
 
5

Balance as of March 31, 2013
 
$
25



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5. EARNINGS PER SHARE

The calculation of basic and diluted earnings per common share was as follows:
 
 
Three Months Ended March 31
(in millions, except per share amounts)
 
2013
 
2012
Net earnings (loss)
 
$
44

 
$
33

 
 
 
 
 
Weighted-average common shares outstanding
 
49.8

 
49.0

Net effect of dilutive stock options
 
0.3

 
0.2

Net effect of dilutive restricted stock rights
 
0.2

 
0.1

Net effect of dilutive restricted performance stock rights
 

 
0.2

Dilutive weighted-average common shares outstanding
 
50.3

 
49.5

 
 
 
 
 
Earnings (loss) per share - basic
 
$
0.88

 
$
0.67

Earnings (loss) per share - diluted
 
$
0.87

 
$
0.67


The Company's calculation of diluted earnings per common share includes the dilutive effects of the assumed exercise of stock options and vesting of restricted stock based on the treasury stock method. Under this method, the Company has excluded the effects of 0.8 million stock options, 0.4 million Restricted Stock Rights ("RSRs"), and 1.4 million Restricted Performance Stock Rights ("RPSRs") from the diluted share amounts presented above for the three months ended March 31, 2013. The amounts presented above for the three months ended March 31, 2012, exclude the impact of 1.3 million shares related to stock options, 0.6 million shares related to RSRs and 1.3 million shares related to RPSRs under the treasury stock method.

6. SEGMENT INFORMATION

The Company is organized into two reportable segments: Ingalls and Newport News. The following table presents segment results for the three months ended March 31, 2013 and 2012:
 
 
Three Months Ended March 31
($ in millions)
 
2013
 
2012
Sales and Service Revenues
 
 
 
 
Ingalls
 
$
631

 
$
692

Newport News
 
950

 
895

Intersegment eliminations
 
(19
)
 
(19
)
Total sales and service revenues
 
$
1,562

 
$
1,568

Operating Income (Loss)
 
 
 
 
Ingalls
 
$
26

 
$
20

Newport News
 
94

 
81

Total segment operating income (loss)
 
120

 
101

Non-segment factors affecting operating income (loss)
 
 
 
 
FAS/CAS Adjustment
 
(23
)
 
(17
)
Deferred state income taxes
 
(2
)
 
(4
)
Total operating income (loss)
 
$
95

 
$
80


FAS/CAS Adjustment - The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS").


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7. INVENTORIED COSTS, NET
Inventoried costs were composed of the following:
($ in millions)
 
March 31
2013
 
December 31
2012
Production costs of contracts in process
 
$
220

 
$
198

General and administrative expenses
 
2

 
3

 
 
222

 
201

Progress payments received
 
(1
)
 
(1
)
 
 
221

 
200

Raw material inventory
 
89

 
88

Total inventoried costs, net
 
$
310

 
$
288


8. GOODWILL AND OTHER PURCHASED 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 value of the Company's reporting units below their carrying value.

Accumulated goodwill impairment losses as of both March 31, 2013, and December 31, 2012, were $2,755 million. The accumulated goodwill impairment losses for Ingalls as of both March 31, 2013, and December 31, 2012, were $1,568 million. The accumulated goodwill impairment losses for Newport News as of both March 31, 2013, and December 31, 2012, were $1,187 million.

Purchased Intangible Assets

The following table summarizes the Company's aggregate purchased intangible assets, all of which are contract or program related intangible assets.
($ in millions)
 
March 31
2013
 
December 31
2012
Gross carrying amount
 
$
939

 
$
939

Accumulated amortization
 
(397
)
 
(391
)
Net carrying amount
 
$
542

 
$
548


The Company's remaining purchased intangible assets are being amortized on a straight-line basis over an aggregate weighted-average period of 40 years. Remaining unamortized intangible assets consist principally of amounts pertaining to nuclear-powered aircraft carrier and submarine contract intangibles whose useful lives have been estimated based on the long life cycle of the related programs. Aggregate amortization expense was $6 million and $5 million for the three months ended March 31, 2013 and 2012, respectively.

The Company expects amortization for purchased intangibles of approximately $20 million annually for the next five years.

9. INCOME TAXES

The Company's earnings are entirely domestic and its effective tax rates on earnings from operations for the three months ended March 31, 2013 and 2012, were 32.3% and 34.0%, respectively.

In the three months ended March 31, 2013, the Company's effective tax rate differed from the federal statutory rate primarily as a result of the enactment of the American Taxpayer Relief Act in January 2013. The Company's effective tax rate for the three months ended March 31, 2013, reflects the entire 2012 income tax benefit for the research and development tax credit, which expired at the end of 2011. The American Taxpayer Relief Act retroactively extended the research and development tax credit through the end of 2013. Due to the timing of enactment, the impact on the Company's effective tax rate for the 2012 credit is reflected in the first quarter of 2013.

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The Company's effective tax rate can also differ from the federal statutory rate as a result of nondeductible expenditures, the domestic manufacturing deduction and its Tax Matters Agreement with Northrop Grumman.

For current state income tax purposes, the stand-alone tax amounts have been computed as if they were allowable costs under the terms of the Company's existing contracts in the applicable period and are included in general and administrative expenses.

Net deferred tax assets as presented in the unaudited condensed consolidated statements of financial position are as follows:
($ in millions)
 
March 31
2013
 
December 31
2012
Net current deferred tax assets
 
$
209

 
$
213

Net non-current deferred tax assets
 
317

 
329

Total net deferred tax assets
 
$
526

 
$
542


10. DEBT

Long-term debt consisted of the following:
($ in millions)
 
March 31
2013
 
December 31
2012
Term loan due March 30, 2016
 
$
512

 
$
525

Senior notes due March 15, 2018, 6.875%
 
600

 
600

Senior notes due March 15, 2021, 7.125%
 
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

Total long-term debt
 
1,817

 
1,830

Less current portion
 
38

 
51

Long-term debt, net of current portion
 
$
1,779

 
$
1,779


Credit Facility - In connection with the spin-off, the Company entered into the Credit Facility with third-party lenders. The Credit Facility is comprised of a five-year term loan facility of $575 million, which was funded on March 30, 2011, and a revolving credit facility of $650 million, which may be drawn upon during a period of five years from the date of the funding. The revolving credit facility includes a letter of credit subfacility of $350 million, and a swingline loan subfacility of $100 million. The term loan and revolving credit facility have 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. The current spread as of March 31, 2013, was 2.5% and may vary between 2.0% and 3.0%. The revolving credit facility also has a commitment fee rate on the unutilized balance based on the Company's leverage ratio. The current fee rate as of March 31, 2013, was 0.5% and may vary between 0.35% and 0.5%. As of March 31, 2013, approximately $46 million in letters of credit were issued but undrawn, and the remaining $604 million was unutilized.

The term loan facility is subject to amortization in three-month intervals from the funding date, expected to be in an aggregate amount equal to 5% during each of the first year and the second year, 10% during the third year, 15% during the fourth year, and 65% during the fifth year, of which 5% is payable on each of the first three quarterly payment dates during such year, and the balance is payable on the term maturity date.

Senior Notes - In connection with the spin-off, the Company issued $600 million aggregate principal amount of 6.875% senior notes due March 15, 2018, and $600 million aggregate principal amount of 7.125% senior notes due March 15, 2021, in a private offering, at par, under an indenture dated March 11, 2011, between HII and The Bank of New York Mellon, as trustee. Pursuant to the terms of the registration rights agreement entered into in connection with the issuance of these senior notes, the Company completed on February 3, 2012, an exchange of $600 million aggregate principal amount of 6.875% senior notes due March 15, 2018, and $600 million aggregate principal amount of 7.125% senior notes due March 15, 2021, that are registered under the Securities Act of 1933, as amended, for all of the then outstanding unregistered senior notes.

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Mississippi Economic Development Revenue Bonds - As of March 31, 2013, 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 March 31, 2013, 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 total leverage ratio and a minimum interest coverage ratio. The Company was in compliance with all debt covenants during the three months ended March 31, 2013.

The estimated fair value of the Company's total long-term debt, including current portions, as of March 31, 2013 and December 31, 2012, was $1,963 million and $1,974 million, respectively. The fair value of the Company's long-term debt was 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.

11. BUSINESS ARRANGEMENTS

HII periodically enters into business arrangements with non-affiliated entities. These arrangements generally consist of business ventures designed to deliver collective capabilities that would not have been available to the venture's participants individually, and provide a single point of contact during contract performance to the entity's principal customer. In some arrangements, each equity participant receives a subcontract from the business venture for a pre-determined scope of work. In other cases, the arrangements rely primarily on the assignment of key personnel to the venture from each equity participant rather than subcontracts for a specific work scope. Based on the terms of these arrangements and the relevant GAAP related to consolidation accounting for such entities, the Company does not consolidate the financial position, results of operations or cash flows of these entities into its unaudited condensed consolidated financial statements, but accounts for them under the equity method. To the extent HII acts as a subcontractor in these arrangements, HII's subcontract activities are recorded in the same manner as sales to non-affiliated entities.

In May 2007, the Company signed a joint venture agreement with Fluor Federal Services, Inc. and Honeywell International Inc. for a nominal initial investment, whereby Savannah River Nuclear Solutions, LLC ("SRNS") was formed to manage and operate the Savannah River Site for the Department of Energy and the National Nuclear Security Administration. As of March 31, 2013, and December 31, 2012, the Company's ownership interest was approximately 34%, with carrying amounts of $4 million. The investment in SRNS is being accounted for using the equity method and the total investment is classified as miscellaneous other assets in the Company's unaudited condensed consolidated statements of financial position. During the three months ended March 31, 2013 and 2012, the Company received cash dividends from SRNS in the amounts of $2 million and $3 million, respectively, which were recorded as reductions in the Company's investment in SRNS.

The following table presents summarized financial information for the Company's equity method investments:

Results of Operations
 
 
Three Months Ended March 31
($ in millions)
 
2013
 
2012
Sales and services revenues
 
$
246

 
$
321

Operating income
 
5

 
8

Net earnings
 
5

 
8



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12. 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, we will disclose such estimated range in these notes. This estimated range would be based on information currently available to the Company and would involve elements of judgment and significant uncertainties. This estimated range of possible loss would 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 is required to 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 January 2011, the U.S. Department of Justice ("DoJ") first informed the Company through Northrop Grumman of a False Claims Act complaint (the "Complaint") that was filed under seal in the U.S. District Court for the District of Columbia. The redacted copy of the Complaint the Company received alleges that, through largely unspecified fraudulent means, the Company and Northrop Grumman obtained federal funds that were restricted by law for the consequences of Hurricane Katrina, and used those funds to cover costs under certain shipbuilding contracts that were unrelated to Katrina and for which Northrop Grumman and the Company were not entitled to recovery under the contracts. The Complaint seeks monetary damages of at least $835 million, plus penalties, attorneys' fees and other costs of suit. Damages under the False Claims Act may be trebled upon a finding of liability.

In July 2012, the District Court entered an order permitting the Company to disclose certain information not included in the redacted copy of the Complaint received by the Company, including the date the Complaint was filed, the decision of the DoJ to decline intervention in the case, and the principal parties involved in the case. The Complaint was filed on June 2, 2010, by relators Gerald M. Fisher and Donald C. Holmes. On December 8, 2011, the DoJ filed a Notice of Election to Decline Intervention in the case. As of August 29, 2012, Gerald M. Fisher was no longer a relator in or party to this case. On February 28, 2013, the U.S. District Court for the District of Columbia granted the defendants' motion to transfer venue and the case was transferred to the U.S. District Court for the Southern District of Mississippi. 
Based upon a review to date of the information available to the Company, the Company believes that it has substantive defenses to the allegations in the Complaint, that the claims as set forth in the Complaint evidence a fundamental lack of understanding of the terms and conditions in the Company's shipbuilding contracts, including the post-Katrina modifications to those contracts, and the manner in which the parties performed in connection with the contracts, and that the claims as set forth in the Complaint lack merit. The Company, therefore, believes that the claims as set forth in the Complaint will not result in a material effect on its consolidated financial position, results of operations or cash flows. The Company intends to defend the matter vigorously, but the Company cannot predict what new or revised claims might be asserted or what information might come to light and can, therefore, give no assurances 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 or treble damages. U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company or an operating division or subdivision. Any suspension or debarment would likely 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

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investigation regarding whether certain employees at Ingalls mischarged time or misstated progress on U.S. Navy and U.S. 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 is providing information regarding its investigation to the relevant government agencies. The Company agreed with the U.S. Navy and U.S. Coast Guard to initially withhold $24 million in payments on existing contracts pending additional information from the Company's internal investigation. Based on the results of the internal investigation, the Company estimates that the upper limit of the potential financial impact on its customers is approximately $4 million. The Company therefore intends to discuss with its U.S. Government customers the potential release of some or all of the withheld funds. Depending upon the U.S. Government's assessment of the matters under investigation, the Company could be subject to significant civil penalties, criminal fines, and suspension or debarment from U.S. Government contracting. Although the Company does not currently believe that this matter will have a material effect on its financial condition, results of operations or cash flows, the Company cannot predict what new information might come to light in the future and can therefore give no assurances regarding the ultimate outcome of this matter.

In the second quarter of 2007, the U.S. Coast Guard issued a revocation of acceptance under the Deepwater Modernization Program for eight converted 123-foot patrol boats (the "vessels") based on alleged "hull buckling and shaft alignment problems" and alleged "nonconforming topside equipment" on the vessels. The Company submitted a written response that argued that the revocation of acceptance was improper. The U.S. Coast Guard advised Integrated Coast Guard Systems, LLC ("ICGS"), which was formed by the Company and Lockheed Martin to perform the Deepwater Modernization Program, that it was seeking $96 million from ICGS as a result of the revocation of acceptance. The majority of the costs associated with the conversion effort are associated with the alleged structural deficiencies of the vessels, which were converted under contracts with the Company and one of its subcontractors. In 2008, the U.S. Coast Guard advised ICGS that the U.S. Coast Guard would support an investigation by the DoJ of ICGS and its subcontractors, instead of pursuing its $96 million claim independently. The DoJ conducted an investigation of ICGS under a sealed False Claims Act complaint filed in the U.S. District Court for the Northern District of Texas and decided in early 2009 not to intervene at that time. In February 2009, the District Court unsealed the complaint filed by Michael J. DeKort, a former Lockheed Martin employee, against the Company, ICGS, and Lockheed Martin relating to the vessel conversion effort. Damages under the False Claims Act may be trebled upon a finding of liability. Following the resolution of certain claims between the relator and a co-defendant, the District Court entered a final judgment in March 2011 dismissing the relator's remaining claims. The relator appealed the dismissal of the remaining claims to the U.S. Court of Appeals for the Fifth Circuit, and, in July 2012, the Fifth Circuit issued a per curiam decision affirming the judgment of the District Court dismissing the relator's remaining claims. Following dismissal of the relator's claims, the Company does not believe that remaining issues relating to its conversion of the vessels will have a material effect on its consolidated financial position, results of operations or cash flows, but the Company 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.

Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding series of cases filed in numerous jurisdictions around the country, wherein former and current employees and various third-party persons 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. Although the Company believes the ultimate resolution of these 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.

Litigation - 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.


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13. COMMITMENTS AND CONTINGENCIES

Contract Performance Contingencies - Contract profit margins may include estimates of revenues not contractually agreed to between the customer and the Company for matters such as settlements in the process of negotiation, contract changes, claims and requests for equitable adjustment for previously 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. As of March 31, 2013, the recognized amounts related to claims and requests for equitable adjustment are not material individually or in 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 as described in Note 11: Business Arrangements. 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 and, in such cases, generally obtains cross-indemnification from the other members of the arrangement. As of March 31, 2013, the Company was not aware of any existing event of default that would require HII 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 these 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 March 31, 2013, the probable future cost for environmental remediation is $2 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 have to 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 March 31, 2013, the Company had $46 million in standby letters of credit issued but undrawn and $351 million of surety bonds outstanding.

U.S. Government Claims - From time to time, the U.S. Government advises the Company of claims and penalties concerning certain potential disallowed costs. When such findings are presented, the Company and U.S. Government representatives engage in discussions to enable HII to evaluate the merits of these claims as well as to assess the amounts being claimed. The Company does not believe that the outcome of any such matters will have a material effect on its consolidated financial position, results of operations, or cash flows.


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14. IMPACTS FROM HURRICANES

In August 2005, the Company's Ingalls operations were significantly impacted by Hurricane Katrina, and the Company's shipyards in Louisiana and Mississippi sustained significant windstorm damage from the hurricane. As a result of the storm, the Company incurred costs to replace or repair destroyed or damaged assets, suffered losses under its contracts, and incurred substantial costs to clean up and recover its operations. At the time of the storm, the Company had a comprehensive insurance program that provided coverage for, among other things, property damage, business interruption impact on net profitability, and costs associated with clean-up and recovery. The Company has recovered a portion of its Hurricane Katrina claim, including $62 million in recovery of lost profits in 2007. In November 2011, the Company recovered an additional $18.8 million from Munich-American Risk Partners, one of its two remaining insurers with which a resolution had not been reached, in connection with settlement of an arbitration proceeding.

The Company is pursuing legal action against its remaining insurer, Factory Mutual Insurance Company ("FM Global"). The case was commenced against FM Global on November 4, 2005, and is now pending in the U.S. District Court for the Central District of California, Western Division. In an interlocutory appeal, the U.S. Court of Appeals for the Ninth Circuit held that the FM Global excess policy unambiguously excludes damage from the storm
surge caused by Hurricane Katrina under its "Flood" exclusion and remanded the case to the U.S. District Court to determine whether the California efficient proximate cause doctrine afforded coverage under the policy, even if the Flood exclusion of the policy is unambiguous. In August 2010, the U.S. District Court granted FM Global's motion for summary judgment based upon California's doctrine of efficient proximate cause and denied FM Global's motion for summary judgment based upon breach of contract, finding that triable issues of fact remained as to whether and to what extent the Company sustained wind damage apart from the hurricane storm surge. In September 2011, the U.S. District Court granted FM Global's motion for summary judgment to dismiss the claims for bad faith damages and for contract reformation. The Company intends to continue to pursue the breach of contract action against FM Global, and trial on the merits is currently scheduled to start in October 2013. In addition, in January 2011, Northrop Grumman, as the Company's predecessor-in-interest, filed suit against Aon, which acted as the Company's broker in connection with the policy with FM Global, in Superior Court in California, seeking damages for breach of contract, professional negligence and negligent misrepresentation, as well as for declaratory relief. No assurances can be provided as to the ultimate outcome of these matters. If, however, either of these claims is successful, the potential impact to the Company's consolidated financial position, results of operations and cash flows would be favorable.

The Company has full entitlement to any insurance recoveries related to business interruption impacts on net profitability resulting from hurricanes. However, because of uncertainties concerning the ultimate determination of recoveries related to business interruption claims, in accordance with Company policy no such amounts are recognized until the underlying claims are resolved with the insurers. Furthermore, due to the uncertainties with respect to the Company's disagreement with FM Global in relation to the Hurricane Katrina claim, no receivables for insurance recoveries from FM Global have been recognized by the Company in its unaudited condensed consolidated financial statements.

In accordance with U.S. Government cost accounting regulations affecting the majority of the Company's contracts, the cost of insurance premiums for property damage and business interruption coverage, other than "coverage of profit," is an allowable expense that may be charged to contracts. Because a substantial portion of the Company's long-term contracts is flexibly-priced, the U.S. Government customer would benefit from a portion of insurance recoveries in excess of the net book value of damaged assets and clean-up and restoration costs paid by the Company. When such insurance recoveries occur, the Company is obligated to return a portion of these amounts to the U.S. Government.

The Company believes that all of the replacement costs associated with damage caused by Hurricane Katrina are recoverable under its insurance coverage, and the amounts in question are included in the insurance claim. In the event HII is unsuccessful in its insurance recovery, the Company believes there are specific rules in the CAS and FAR that would still render the depreciation on those assets allowable and recoverable through its contracts with the U.S. Navy. The U.S. Navy has, however, expressed its intention to challenge the allowability of certain post-Katrina depreciation costs charged or expected to be charged on contracts under construction in the Ingalls shipyards. The Company believes that its depreciation practices are in conformity with the FAR, and, if the U.S. Navy were to challenge the allowability of such costs, the Company will be able to successfully resolve this matter with no material impact to its consolidated financial position, results of operations or cash flows. In February 2013,

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the Company submitted a certified claim requesting a final decision on the allowability and allocability of the post-Katrina depreciation and other Katrina-related expenses and on the apportionment of insurance proceeds.

15. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company provides defined benefit pension and postretirement benefit plans and defined contribution pension benefit plans to eligible employees.

The cost of the Company's defined benefit plans and other postretirement plans for the three months ended March 31, 2013 and 2012, was as follows:
 
 
Three Months Ended March 31
 
 
Pension Benefits
 
Other Benefits
($ in millions)
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
37

 
$
33

 
$
5

 
$
4

Interest cost
 
53

 
53

 
10

 
9

Expected return on plan assets
 
(72
)
 
(67
)
 

 

Amortization of prior service cost (credit)
 
4

 
3

 
(2
)
 
(2
)
Amortization of net actuarial loss (gain)
 
30

 
20

 
4

 
2

Net periodic benefit cost
 
$
52

 
$
42

 
$
17

 
$
13


The Company's cash contributions for the three months ended March 31, 2013 and 2012, were as follows:
 
 
Three Months Ended March 31
($ in millions)
 
2013
 
2012
Pension plans
 
 
 
 
Qualified minimum
 
$

 
$
80

Discretionary
 
 
 
 
Qualified
 
32

 
41

Non-qualified
 
1

 
1

Other benefit plans
 
7

 
5

Total contributions
 
$
40

 
$
127


For the year ending December 31, 2013, the Company expects its cash contributions to its qualified defined benefit pension plans to be $301 million, all of which will be discretionary.

In March 2013, the Company concluded negotiations on one of its collective bargaining agreements, which required an amendment to one of the Company's pension plans. As a result of the amendment, the remeasurement of the plan increased the pension liability and pre-tax accumulated other comprehensive loss by approximately $30 million.


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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 March 31, 2013, and December 31, 2012, was comprised of unamortized benefit plan costs of $1,225 million and $1 million of other items (net of tax benefits of $797 million) and unamortized benefit plan costs of $1,226 million (net of tax benefits of $802 million), respectively. The changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2013, were as follows:
($ in millions)
 
Benefit Plans
 
Other
 
Total
Balance as of December 31, 2012
 
$
(1,226
)
 
$

 
$
(1,226
)
Other comprehensive income before reclassifications
 
(21
)
 
1

 
(20
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 
 
 

Amortization of prior service credit (cost)
 
1

 

 
1

Amortization of actuarial gain (loss)
 
21

 

 
21

Net current period other comprehensive income (loss)
 
1

 
1

 
2

Balance as of March 31, 2013
 
$
(1,225
)
 
$
1

 
$
(1,224
)

16. STOCK COMPENSATION PLANS
 
The following table summarizes the status of the Company's stock option awards as of March 31, 2013:
 
 
Shares Under
Option
(in thousands)
 
Weighted-
Average
Exercise Price
 
Weighted- Average
Remaining
Contractual Term
(in years)
 
Aggregate
Intrinsic
Value
($ in millions)
Outstanding and exercisable at March 31, 2013
 
1,093

 
$
34.98

 
2.4
 
$
21


In the three months ended March 31, 2013, the Company issued new equity awards as follows:

Restricted Performance Stock Rights - On February 19, 2013, the Company granted approximately 0.4 million RPSRs at a share price of $45.54. These rights are subject to cliff vesting based on service over two years, ten months from the date of grant. The RPSRs are subject to the achievement of performance-based targets at the end of the vesting period. Based upon the Company's results measured against such targets, between 0% and 200% of the original stated grants are expected to ultimately vest.

The following table summarizes the status of the Company's outstanding stock awards as of March 31, 2013:
 
 
Stock Awards
(in thousands)
 
Weighted-Average
Grant Date Fair
Value
 
Weighted-Average Remaining Contractual Term
(in years)
Total stock awards
 
2,104

 
$
41.07

 
1.6

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 during the three months ended March 31, 2013 and 2012, of $9 million and $8 million, respectively.

The Company recognized tax benefits for stock-based compensation in the unaudited condensed consolidated statements of operations during the three months ended March 31, 2013 and 2012, of $3 million and $4 million, respectively.


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Unrecognized Compensation Expense

As of March 31, 2013, the Company had $8 million of unrecognized compensation expense associated with the 2011 RSRs, which will be recognized over a period of 1.0 year, and $45 million of unrecognized expense associated with the 2013, 2012 and 2011 RPSRs, which will be recognized over a weighted average period of 1.8 years.

17. SUBSIDIARY GUARANTORS
Performance of the Company's obligations under the senior notes, including any repurchase obligations resulting from a change of control, is unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of HII's existing and future domestic restricted subsidiaries that guarantees debt under the Credit Facility (the "Subsidiary Guarantors"). The guarantees rank equally with all other unsecured and unsubordinated indebtedness of the Subsidiary Guarantors. The Subsidiary Guarantors are each directly or indirectly 100% owned by HII.
Set forth below are the unaudited condensed consolidating statements of operations and comprehensive income for the three months ended March 31, 2013 and 2012, unaudited condensed consolidating statements of financial position as of March 31, 2013, and December 31, 2012, and the unaudited condensed consolidating statements of cash flows for the three months ended March 31, 2013 and 2012, for HII, its aggregated subsidiary guarantors and its aggregated non-guarantor subsidiaries:

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
 
Three Months Ended March 31, 2013
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales and service revenues
 
 
 
 
 
 
 
 
 
 
Product sales
 
$

 
$
1,321

 
$

 
$

 
$
1,321

Service revenues
 

 
241

 
6

 
(6
)
 
241

Total sales and service revenues
 

 
1,562

 
6

 
(6
)
 
1,562

Cost of sales and service revenues
 
 
 
 
 
 
 
 
 
 
Cost of product sales
 

 
1,086

 

 

 
1,086

Cost of service revenues
 

 
213

 
6

 
(6
)
 
213

Income (loss) from operating investments, net
 

 
2

 

 

 
2

General and administrative expenses
 

 
170

 

 

 
170

Operating income (loss)
 

 
95

 

 

 
95

Interest expense
 
(28
)
 
(2
)
 

 

 
(30
)
Equity in earnings (loss) of subsidiaries
 
63

 

 

 
(63
)
 

Earnings (loss) before income taxes
 
35

 
93

 

 
(63
)
 
65

Federal income taxes
 
(9
)
 
30

 

 

 
21

Net earnings (loss)
 
$
44

 
$
63

 
$

 
$
(63
)
 
$
44

Other comprehensive income (loss), net of tax
 
2

 
2

 

 
(2
)
 
2

Comprehensive income (loss)
 
$
46

 
$
65

 
$

 
$
(65
)
 
$
46


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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
 
Three Months Ended March 31, 2012
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales and service revenues
 
 
 
 
 
 
 
 
 
 
Product sales
 
$

 
$
1,353

 
$

 
$

 
$
1,353

Service revenues
 

 
215

 
1

 
(1
)
 
215

Total sales and service revenues
 

 
1,568

 
1

 
(1
)
 
1,568

Cost of sales and service revenues
 
 
 
 
 
 
 
 
 
 
Cost of product sales
 

 
1,152

 

 

 
1,152

Cost of service revenues
 

 
189

 
1

 
(1
)
 
189

Income (loss) from operating investments, net
 

 
3

 

 

 
3

General and administrative expenses
 

 
150

 

 

 
150

Operating income (loss)
 

 
80

 

 

 
80

Interest expense
 
(28
)
 
(2
)
 

 

 
(30
)
Equity in earnings (loss) of subsidiaries
 
51

 

 

 
(51
)
 

Earnings (loss) before income taxes
 
23

 
78

 

 
(51
)
 
50

Federal income taxes
 
(10
)
 
27

 

 

 
17

Net earnings (loss)
 
$
33

 
$
51

 
$

 
$
(51
)
 
$
33

Other comprehensive income (loss), net of tax
 

 
15

 

 

 
15

Comprehensive income (loss)
 
$
33

 
$
66

 
$

 
$
(51
)
 
$
48


19

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
 
 
March 31, 2013
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
628

 
$

 
$
24

 
$

 
$
652

Accounts receivable, net
 

 
1,199

 

 

 
1,199

Inventoried costs, net
 

 
310

 

 

 
310

Deferred income taxes
 

 
209

 

 

 
209

Prepaid expenses and other current assets
 

 
45

 

 
(24
)
 
21

Total current assets
 
628

 
1,763

 
24

 
(24
)
 
2,391

Property, plant, and equipment, net
 

 
2,004

 

 

 
2,004

Goodwill
 

 
881

 

 

 
881

Other purchased intangibles, net
 

 
542

 

 

 
542

Miscellaneous other assets
 
37

 
396

 

 

 
433

Investment in subsidiaries
 
1,228

 

 

 
(1,228
)
 

Intercompany receivables
 

 
(531
)
 

 
531

 

Total assets
 
$
1,893

 
$
5,055

 
$
24

 
$
(721
)
 
$
6,251

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Trade accounts payable
 
$

 
$
247

 
$

 
$

 
$
247

Accrued employees’ compensation
 

 
199

 

 

 
199

Current portion of long-term debt
 
38

 

 

 

 
38

Current portion of postretirement plan liabilities
 

 
166

 

 

 
166

Current portion of workers’ compensation liabilities
 

 
222

 

 

 
222

Advance payments and billings in excess of revenues
 

 
114

 

 

 
114

Other current liabilities
 
5

 
186

 
24

 
(24
)
 
191

Total current liabilities
 
43

 
1,134

 
24

 
(24
)
 
1,177

Long-term debt
 
1,674

 
105

 

 

 
1,779

Pension plan liabilities
 

 
1,316

 

 

 
1,316

Other postretirement plan liabilities
 

 
807

 

 

 
807

Workers’ compensation liabilities
 

 
404

 

 

 
404

Other long-term liabilities
 

 
61

 

 

 
61

Intercompany liabilities
 
(531
)
 

 

 
531

 

Total liabilities
 
1,186

 
3,827

 
24

 
507

 
5,544

Stockholders’ equity
 
707

 
1,228

 

 
(1,228
)
 
707

Total liabilities and stockholders’ equity
 
$
1,893

 
$
5,055

 
$
24

 
$
(721
)
 
$
6,251


20

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
 
 
December 31, 2012
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,056

 
$

 
$
1

 
$

 
$
1,057

Accounts receivable, net
 

 
905

 

 

 
905

Inventoried costs, net
 

 
288

 

 

 
288

Deferred income taxes
 

 
213

 

 

 
213

Prepaid expenses and other current assets
 

 
22

 
4

 
(5
)
 
21

Total current assets
 
1,056

 
1,428

 
5

 
(5
)
 
2,484

Property, plant, and equipment, net
 

 
2,034

 

 

 
2,034

Goodwill
 

 
881

 

 

 
881

Other purchased intangibles, net
 

 
548

 

 

 
548

Miscellaneous other assets
 
39

 
406

 

 

 
445

Investment in subsidiaries
 
2,282

 

 

 
(2,282
)
 

Intercompany receivables
 

 
960

 

 
(960
)
 

Total assets
 
$
3,377

 
$
6,257

 
$
5

 
$
(3,247
)
 
$
6,392

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Trade accounts payable
 
$

 
$
377

 
$

 
$

 
$
377

Accrued employees’ compensation
 

 
235

 

 

 
235

Current portion of long-term debt
 
51

 

 

 

 
51

Current portion of postretirement plan liabilities
 

 
166

 

 

 
166

Current portion of workers’ compensation liabilities
 

 
216

 

 

 
216

Advance payments and billings in excess of revenues
 

 
134

 

 

 
134

Other current liabilities
 
25

 
180

 
5

 
(5
)
 
205

Total current liabilities
 
76

 
1,308

 
5

 
(5
)
 
1,384

Long-term debt
 
1,674

 
105

 

 

 
1,779

Pension plan liabilities
 

 
1,301

 

 

 
1,301

Other postretirement plan liabilities
 

 
799

 

 

 
799

Workers’ compensation liabilities
 

 
403

 

 

 
403

Other long-term liabilities
 

 
59

 

 

 
59

Intercompany liabilities
 
960

 

 

 
(960
)
 

Total liabilities
 
2,710

 
3,975

 
5

 
(965
)
 
5,725

Stockholders’ equity
 
667

 
2,282

 

 
(2,282
)
 
667

Total liabilities and stockholders’ equity
 
$
3,377

 
$
6,257

 
$
5

 
$
(3,247
)
 
$
6,392



21

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31, 2013
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
(44
)
 
$
(341
)
 
$
23

 
$

 
$
(362
)
Investing Activities
 

 

 

 

 
 
Additions to property, plant, and equipment
 

 
(30
)
 

 

 
(30
)
Net cash provided by (used in) investing activities
 

 
(30
)
 

 

 
(30
)
Financing Activities
 

 

 

 

 
 
Repayment of long-term debt
 
(13
)
 

 

 

 
(13
)
Dividends paid
 
(5
)
 

 

 

 
(5
)
Proceeds from stock option exercises
 
2

 

 

 

 
2

Excess tax benefit related to stock-based compensation
 

 
3

 

 

 
3

Cash sweep/funding by parent
 
(368
)
 
368

 

 

 

Net cash provided by (used in) financing activities
 
(384
)
 
371

 

 

 
(13
)
Change in cash and cash equivalents
 
(428
)
 

 
23

 

 
(405
)
Cash and cash equivalents, beginning of period
 
1,056

 

 
1

 

 
1,057

Cash and cash equivalents, end of period
 
$
628

 
$

 
$
24

 
$

 
$
652


<
 
 
Three Months Ended March 31, 2012
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
(43
)
 
$
(310
)
 
$
24

 
$

 
$
(329
)
Investing Activities
 

 

 

 

 
 
Additions to property, plant, and equipment
 

 
(27
)
 

 

 
(27
)
Net cash provided by (used in) investing activities