HII 2014 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, 2014
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 2, 2014, 49,107,797 shares of the registrant's 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)
 
2014
 
2013
Sales and service revenues
 
 
 
 
Product sales
 
$
1,332

 
$
1,321

Service revenues
 
262

 
241

Total sales and service revenues
 
1,594

 
1,562

Cost of sales and service revenues
 
 
 
 
Cost of product sales
 
1,060

 
1,086

Cost of service revenues
 
227

 
213

Income (loss) from operating investments, net
 
2

 
2

General and administrative expenses
 
150

 
170

Operating income (loss)
 
159

 
95

Other income (expense)
 


 


Interest expense
 
(27
)
 
(30
)
Earnings (loss) before income taxes
 
132

 
65

Federal income taxes
 
42

 
21

Net earnings (loss)
 
$
90

 
$
44

 
 
 
 
 
Basic earnings (loss) per share
 
$
1.83

 
$
0.88

Weighted-average common shares outstanding
 
49.1

 
49.8

 
 
 
 
 
Diluted earnings (loss) per share
 
$
1.81

 
$
0.87

Weighted-average diluted shares outstanding
 
49.7

 
50.3

 
 
 
 
 
Dividends declared per share
 
$
0.20

 
$
0.10

 
 
 
 
 
Net earnings (loss) from above
 
$
90

 
$
44

Other comprehensive income (loss)
 
 
 
 
Change in unamortized benefit plan costs
 
8

 
5

Other
 
1

 
2

Tax benefit (expense) for items of other comprehensive income
 
(3
)
 
(5
)
Other comprehensive income (loss), net of tax
 
6

 
2

Comprehensive income (loss)
 
$
96

 
$
46


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
2014
 
December 31
2013
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
742

 
$
1,043

Accounts receivable, net
 
1,299

 
1,123

Inventoried costs, net
 
315

 
311

Deferred income taxes
 
163

 
170

Prepaid expenses and other current assets
 
25

 
29

Total current assets
 
2,544

 
2,676

Property, plant, and equipment, net of accumulated depreciation of $1,456 million as of 2014 and $1,404 million as of 2013
 
1,856

 
1,897

Goodwill
 
922

 
881

Other purchased intangibles, net
 
528

 
528

Pension plan assets
 
126

 
124

Miscellaneous other assets
 
131

 
119

Total assets
 
$
6,107

 
$
6,225

Liabilities and Stockholders' Equity
 
 
 
 
Current Liabilities
 
 
 
 
Trade accounts payable
 
$
263

 
$
337

Accrued employees’ compensation
 
194

 
230

Current portion of long-term debt
 
79

 
79

Current portion of postretirement plan liabilities
 
139

 
139

Current portion of workers’ compensation liabilities
 
232

 
230

Advance payments and billings in excess of revenues
 
78

 
115

Other current liabilities
 
255

 
262

Total current liabilities
 
1,240

 
1,392

Long-term debt
 
1,700

 
1,700

Pension plan liabilities
 
506

 
529

Other postretirement plan liabilities
 
480

 
477

Workers’ compensation liabilities
 
422

 
419

Deferred tax liabilities
 
92

 
83

Other long-term liabilities
 
106

 
104

Total liabilities
 
4,546

 
4,704

Commitments and Contingencies (Note 15)
 

 

Stockholders’ Equity
 
 
 
 
Common stock, $0.01 par value; 150 million shares authorized; 51.1 million issued and 49.2 million outstanding as of March 31, 2014, and 50.5 million issued and 48.7 million outstanding as of December 31, 2013
 
1

 
1

Additional paid-in capital
 
1,904

 
1,925

Retained earnings (deficit)
 
316

 
236

Treasury stock
 
(145
)
 
(120
)
Accumulated other comprehensive income (loss)
 
(515
)
 
(521
)
Total stockholders’ equity
 
1,561

 
1,521

Total liabilities and stockholders’ equity
 
$
6,107

 
$
6,225

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)
 
2014
 
2013
Operating Activities
 
 
 
 
Net earnings (loss)
 
$
90

 
$
44

Adjustments to reconcile to net cash provided by (used in) operating activities
 
 
 
 
Depreciation
 
54

 
43

Amortization of purchased intangibles
 
6

 
6

Amortization of debt issuance costs
 
3

 
2

Stock-based compensation
 
5

 
9

Excess tax benefit related to stock-based compensation
 
(2
)
 
(3
)
Deferred income taxes
 
8

 
14

Change in
 
 
 
 
Accounts receivable
 
(162
)
 
(294
)
Inventoried costs
 
(2
)
 
(17
)
Prepaid expenses and other assets
 
(4
)
 

Accounts payable and accruals
 
(197
)
 
(194
)
Retiree benefits
 
(13
)
 
28

Net cash provided by (used in) operating activities
 
(214
)
 
(362
)
Investing Activities
 
 
 
 
Additions to property, plant, and equipment
 
(24
)
 
(30
)
Acquisitions of businesses, net of cash received
 
(46
)
 

Net cash provided by (used in) investing activities
 
(70
)
 
(30
)
Financing Activities
 
 
 
 
Repayment of long-term debt
 

 
(13
)
Dividends paid
 
(10
)
 
(5
)
Repurchases of common stock
 
(10
)
 

Proceeds from stock option exercises
 
1

 
2

Excess tax benefit related to stock-based compensation
 
2

 
3

Net cash provided by (used in) financing activities
 
(17
)
 
(13
)
Change in cash and cash equivalents
 
(301
)
 
(405
)
Cash and cash equivalents, beginning of period
 
1,043

 
1,057

Cash and cash equivalents, end of period
 
$
742

 
$
652

Supplemental Cash Flow Disclosure
 
 
 
 
Cash paid for income taxes
 
$
30

 
$
13

Cash paid for interest
 
$
45

 
$
46

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

 
$
2


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, 2014 and 2013 ($ 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, 2012
 
$

 
$
1,894

 
$

 
$
(1
)
 
$
(1,226
)
 
$
667

Net earnings (loss)
 

 

 
44

 

 

 
44

Dividends declared ($0.10 per share)
 

 

 
(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

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2013
 
$
1

 
$
1,925

 
$
236

 
$
(120
)
 
$
(521
)
 
$
1,521

Net earnings (loss)
 

 

 
90

 

 

 
90

Dividends declared ($0.20 per share)
 

 

 
(10
)
 

 

 
(10
)
Additional paid-in capital
 

 
(21
)
 

 

 

 
(21
)
Other comprehensive income (loss), net of tax
 

 

 

 

 
6

 
6

Treasury stock activity
 

 

 

 
(25
)
 

 
(25
)
Balance as of March 31, 2014
 
$
1

 
$
1,904

 
$
316

 
$
(145
)
 
$
(515
)
 
$
1,561


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").

In 2014, the Company realigned its segments in order to optimize its operating structure. Reclassifications of prior year financial information have been made to conform to the current year presentation. None of the changes impacted the Company's previously reported consolidated financial position, results of operations or cash flows. See Note 9: Segment Information for a full description of the segment realignments.

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, 2013.

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 2013 established budget top lines and provided sequestration relief for 2014 and 2015. Sequestration remains in effect for 2016 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.

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

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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, 2014 and 2013, net cumulative catch-up adjustments increased operating income by $44 million and $30 million, respectively, and increased diluted earnings per share by $0.58 and $0.39, respectively.

Fair Value of Financial Instruments - Except for long-term debt and available-for-sale securities held in trust, 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.

The Company maintains multiple rabbi trusts established to fund certain non-qualified pension plans. These trusts consist of available-for-sale investments primarily in marketable securities. The assets are held at fair value, and nearly all investments held in the trusts are valued within Level 1 of the fair value hierarchy. The rabbi trusts were valued at $41 million and $40 million as of March 31, 2014 and December 31, 2013, respectively, and are presented within miscellaneous other assets within the Consolidated Statements of Financial Position.

3. ACCOUNTING STANDARDS UPDATES

Accounting standards updates issued but not effective until after March 31, 2014, are not expected to have a significant effect 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 military shipbuilding operations by winding down military shipbuilding at the Avondale, Louisiana facility in 2013 after completion of 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 is utilizing the Avondale facility in 2014 to complete construction of 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 $284 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 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 submitted a revised proposal in March 2014 to address the concerns of the DCAA and to reflect a revised estimated total cost of $284 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 impact of a curtailment and other resulting adjustments 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 other opportunities to utilize this facility. In April 2014, the Company announced it would conduct a study with Kinder Morgan Energy Partners, L.P. to explore and evaluate best-use opportunities for the facility. In September 2013, the New Orleans Metals Trades ratified a new labor agreement in connection with the Company's pursuit of other opportunities at Avondale. 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

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event, the Company expects the total estimated restructuring costs would decrease. While the restructuring costs that are currently capitalized, consisting primarily of severance and retention payments as well as retired fixed assets, 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 following table 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, 2014 and 2013, these costs were comprised primarily of employee severance and retention payments as well as incentive bonuses. As of March 31, 2014, and December 31, 2013, $169 million and $180 million, respectively, of restructuring and shutdown related costs were capitalized in inventoried costs. For the three months ended March 31, 2014, the Company expensed $14 million of these costs as part of cost of product sales.
($ in millions)
 
 
Balance as of December 31, 2012
 
$
24

Payments
 
(4
)
Adjustments
 
5

Balance as of March 31, 2013
 
$
25

 
 
 
Balance as of December 31, 2013
 
$
14

Payments
 
(8
)
Adjustments
 
2

Balance as of March 31, 2014
 
$
8


5. GULFPORT

On September 3, 2013, the Company announced the closing of its Gulfport Composite Center of Excellence in Gulfport, Mississippi, part of the Ingalls reportable segment, which it intends to complete by the end of the second quarter of 2014. In connection with this closure, the Company expects to incur total costs of approximately $57 million, consisting of approximately $52 million in accelerated depreciation of fixed assets and $5 million in personnel, facility shutdown, and other related costs. In January 2014, the Company received a contracting officer letter taking exception to the Company's timing of recognition of the Gulfport closure costs. The Company believes the ultimate resolution of this matter will not result in a material effect on its consolidated financial position, results of operations or cash flows.

6. ACQUISITIONS

On January 2, 2014, the Company completed the acquisition of the outstanding equity of The S.M. Stoller Corporation ("Stoller"), a privately held company, pursuant to a stock purchase agreement ("Purchase Agreement") between Huntington Ingalls Industries Energy and Environmental Services, Inc., a newly formed Delaware corporation and wholly owned subsidiary of HII, and Stoller Holdings, LLC (“Stoller Holdings”), the sole stockholder of Stoller. Stoller is a provider of environmental, nuclear, and technical consulting and engineering services to the Department of Energy, Department of Defense, and private sector. Stoller's post-acquisition results of operations, financial position, and cash flows are reported within the Company's Newport News segment. The acquisition is consistent with the Company's strategy to utilize its nuclear and energy related expertise developed through its shipbuilding activities to expand its position in the energy marketplace.

The Company funded the acquisition with cash on hand, and the preliminary aggregate purchase price of $52 million, which included $6 million of cash received, did not include any contingent consideration. An aggregate of $8 million of the purchase price was placed into escrow to satisfy potential indemnification obligations of Stoller Holdings. The escrowed funds will be released in varying amounts periodically over 45 months following the closing date. The Company incurred approximately $0.6 million of acquisition costs in connection with the transaction, which were included within general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2013.

The purchase price allocation to the underlying assets and liabilities was based on their fair values at the date of acquisition. The preliminary purchase price allocation includes $69 million in total assets and $17 million in total liabilities. Included in total assets, the Company has allocated $6 million to acquired purchased intangibles relating

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to Stoller’s existing contract backlog, trademarks, and trade names, and $41 million to goodwill, attributed to Stoller’s specialized and skilled employees. See Note: 11: Goodwill and Other Purchased Intangible Assets. The Company has not completed the purchase price allocation to the underlying assets and liabilities due to potential adjustments upon finalization of the net working capital adjustment and the fair value of the assets acquired and liabilities assumed. The assets, liabilities, and results of operations of Stoller were not significant to the Company’s consolidated financial position or results of operations.

7. STOCKHOLDERS' EQUITY

Treasury Stock - In 2013, the Company's board of directors authorized an increase in the Company's stock repurchase program from $150 million to $300 million and an extension of the term of the program from October 31, 2015, to October 31, 2017. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the three months ended March 31, 2014, the Company repurchased 247,551 shares at a cost of $25 million, of which approximately $15 million was not yet settled for cash as of March 31, 2014. For the three months ended March 31, 2013, the Company repurchased 4,303 shares at a cost of less than $1 million. The cost of purchased shares is recorded as treasury stock in the consolidated statements of financial position.

Dividends - The Company declared cash dividends per share of $0.20 and $0.10 for the three months ended March 31, 2014 and 2013, respectively. The Company paid cash dividends totaling $10 million and $5 million for the three months ended March 31, 2014 and 2013, respectively.

Accumulated Other Comprehensive Income - 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, 2014 and December 31, 2013, was comprised of unamortized benefit plan costs of $518 million and $523 million, respectively, and other comprehensive income items of $3 million and $2 million, respectively. The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2014 and 2013, were as follows:

($ in millions)
 
Benefit Plans
 
Other
 
Total
Balance as of December 31, 2012
 
$
(1,226
)
 
$

 
$
(1,226
)
Other comprehensive income (loss) before reclassifications
 
(31
)
 
2

 
(29
)
Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 
 
 
 
Amortization of prior service cost (credit)1
 
2

 

 
2

Amortization of net actuarial loss (gain)1
 
34

 

 
34

Tax benefit (expense) for items of other comprehensive income
 
(4
)
 
(1
)
 
(5
)
Net current period other comprehensive income (loss)
 
1

 
1

 
2

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

 
$
(1,224
)
 
 
 
 
 
 
 
Balance as of December 31, 2013
 
$
(523
)
 
$
2

 
$
(521
)
Other comprehensive income (loss) before reclassifications
 

 
1

 
1

Amounts reclassified from accumulated other comprehensive income (loss)
 
 
 
 
 
 
Amortization of prior service cost (credit)1
 
(2
)
 

 
(2
)
Amortization of net actuarial loss (gain)1
 
10

 

 
10

Tax benefit (expense) for items of other comprehensive income
 
(3
)
 

 
(3
)
Net current period other comprehensive income (loss)
 
5

 
1

 
6

Balance as of March 31, 2014
 
$
(518
)
 
$
3

 
$
(515
)
1 These accumulated comprehensive income (loss) components are included in the computation of net periodic benefit cost. See Note 17: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive income (loss) for the three months ended March 31, 2014 and 2013, was $3 million and $13 million, respectively.


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8. 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)
 
2014
 
2013
Net earnings (loss)
 
$
90

 
$
44

 
 
 
 
 
Weighted-average common shares outstanding
 
49.1

 
49.8

Net dilutive effect of stock options and awards
 
0.6

 
0.5

Dilutive weighted-average common shares outstanding
 
49.7

 
50.3

 
 
 
 
 
Earnings (loss) per share - basic
 
$
1.83

 
$
0.88

Earnings (loss) per share - diluted
 
$
1.81

 
$
0.87


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 0.5 million stock options, 0.3 million Restricted Stock Rights ("RSRs") and 1.2 million Restricted Performance Stock Rights ("RPSRs") from the diluted share amounts presented above for the three months ended March 31, 2014. The amounts presented above for the three months ended March 31, 2013, exclude the impact of 0.8 million stock options, 0.4 million RSRs and 1.4 million RPSRs under the treasury stock method.

9. SEGMENT INFORMATION

The Company is organized into two reportable segments: Ingalls and Newport News, consistent with how management makes operating decisions and assesses performance. In 2014, the Company realigned its segments in order to optimize its operating structure. As a result of this realignment, the Company's AMSEC and Continental Maritime of San Diego ("CMSD") businesses were transferred from the Ingalls segment to the Newport News segment. The Company has reflected the 2014 realignment in prior financial reporting periods on an as-if basis, which has resulted in the transfer of revenue, operating profit, assets, and liabilities between the Ingalls and Newport News segments. 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 months ended March 31, 2014 and 2013:
 
 
Three Months Ended
March 31
($ in millions)
 
2014
 
2013
Sales and Service Revenues
 
 
 
 
Ingalls
 
$
547

 
$
550

Newport News
 
1,047

 
1,012

Total sales and service revenues
 
$
1,594

 
$
1,562

Operating Income (Loss)
 
 
 
 
Ingalls
 
$
43

 
$
24

Newport News
 
94

 
96

Total segment operating income (loss)
 
137

 
120

Non-segment factors affecting operating income (loss)
 
 
 
 
FAS/CAS Adjustment
 
22

 
(23
)
Deferred state income taxes
 

 
(2
)
Total operating income (loss)
 
$
159

 
$
95



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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").

Other Financial Information

The following table presents the Company's assets by segment.
($ in millions)
 
March 31
2014
 
December 31
2013
Assets
 
 
 
 
Ingalls
 
$
1,700

 
$
1,663

Newport News
 
3,269

 
3,111

Corporate
 
1,138

 
1,451

Total assets
 
$
6,107

 
$
6,225


10. INVENTORIED COSTS, NET
Inventoried costs were composed of the following:
($ in millions)
 
March 31
2014
 
December 31
2013
Production costs of contracts in process
 
$
219

 
$
218

General and administrative expenses
 
2

 
2

 
 
221

 
220

Raw material inventory
 
94

 
91

Total inventoried costs, net
 
$
315

 
$
311


11. 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, 2014, and December 31, 2013, were $2,755 million. The accumulated goodwill impairment losses for Ingalls as of both March 31, 2014, and December 31, 2013, were $1,568 million. The accumulated goodwill impairment losses for Newport News as of both March 31, 2014, and December 31, 2013, were $1,187 million.

In the first quarter of 2014, the Company recorded $41 million of goodwill related to its acquisition of Stoller.

For the three months ended March 31, 2014, the carrying amounts of goodwill changed as follows:
($ in millions)
 
Ingalls
 
Newport News
 
Total
Balance as of December 31, 2013
 
$
175

 
$
706

 
$
881

Acquisitions
 

 
41

 
41

Balance as of March 31, 2014
 
$
175

 
$
747

 
$
922


In 2014, the Company realigned its segments in order to optimize its operating structure. As a result, the net goodwill balance as of December 31, 2013, includes the reclassification of $23 million of goodwill from the Company's Ingalls segment to its Newport News segment. See Note 9: Segment Information for a full description of the segment realignments. None of these changes impacted the previously reported goodwill within each of the Company's reporting units.


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Purchased Intangible Assets

In connection with the Stoller purchase, the Company recognized $6 million of intangible assets pertaining to existing contract backlog, trademarks and trade names to be amortized using the pattern of benefits method over a weighted-average life of five years.

The following table summarizes the Company's aggregate purchased intangible assets, which are primarily program related intangible assets.
($ in millions)
 
March 31
2014
 
December 31
2013
Gross carrying amount
 
$
945

 
$
939

Accumulated amortization
 
(417
)
 
(411
)
Net carrying amount
 
$
528

 
$
528


The Company's purchased intangible assets are being amortized on a straight-line basis or a method based on the pattern of benefits over an aggregate weighted-average period of 40 years. Net intangible assets consist principally of amounts pertaining to nuclear-powered aircraft carrier and submarine program intangibles, whose useful lives have been estimated based on the long life cycle of the related programs. Aggregate amortization expense was $6 million for each of the three months ended March 31, 2014 and 2013, respectively.

The Company expects amortization for purchased intangibles of approximately $23 million in 2014 and $21 million in each of the years 2015 through 2018.

12. 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, 2014 and 2013, were 31.8% and 32.3%, respectively. The decrease in effective tax rate for the three months ended March 31, 2014, was primarily attributable to an increase in the domestic manufacturing deduction and a non-recurring tax benefit resulting from the release of uncertain tax positions due to expiration of the statute of limitations.

For the three months ended March 31, 2014, the Company's effective tax rate differed from the federal statutory rate primarily as a result of the domestic manufacturing deduction and a non-recurring tax benefit resulting from the release of uncertain tax positions due to expiration of the statute of limitations. For 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, reflected the entire 2012 income tax benefit for the research and development ("R&D") tax credit, which expired at the end of 2011. The American Taxpayer Relief Act retroactively extended the R&D 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 was reflected in the first quarter of 2013. The R&D tax credit expired December 31, 2013, and the Company will not recognize any tax benefit unless and until legislation is enacted. The unfavorable impact of the expiration of this credit on the first quarter 2014 tax rate is offset by the increase in the projected manufacturing deduction and the non-recurring tax benefit associated with the release of uncertain tax positions due to expiration of the statute of limitations.

Deferred state income taxes reflect the change in deferred state assets and liabilities in the relevant period. These amounts are recorded within operating income, while the current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

Net deferred tax assets (liabilities) as presented in the unaudited condensed consolidated statements of financial position were as follows:
($ in millions)
 
March 31
2014
 
December 31
2013
Net current deferred tax assets
 
$
163

 
$
170

Net non-current deferred tax liabilities
 
(92
)
 
(83
)
Total net deferred tax assets
 
$
71


$
87


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13. DEBT

Long-term debt consisted of the following:
($ in millions)
 
March 31
2014
 
December 31
2013
Term loan due March 30, 2016
 
$
474

 
$
474

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
 
1,779

 
1,779

Less current portion
 
79

 
79

Long-term debt, net of current portion
 
$
1,700

 
$
1,700


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. In November 2013, the Company amended and restated its existing Credit Facility to provide more favorable pricing terms and more flexibility under the Credit Facility’s restricted payment covenants. 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, 2014, was 1.75% and may vary between 1.5% and 2.5%. 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, 2014, was 0.30% and may vary between 0.25% and 0.45%. As of March 31, 2014, approximately $28 million in letters of credit were issued but undrawn, and the remaining $622 million was unutilized.

The term loan facility requires principal payments 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.

Mississippi Economic Development Revenue Bonds - As of March 31, 2014, 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% and mature in 2024.

Gulf Opportunity Zone Industrial Development Revenue Bonds - As of March 31, 2014, 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% 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, 2014.

The estimated fair value of the Company's total long-term debt, including current portions, as of March 31, 2014 and December 31, 2013, was $1,910 million and $1,897 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.


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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. This 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 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. The Company has filed a motion to dismiss the case and a motion to disqualify relator Holmes, and all other matters are stayed pending resolution of the motion to dismiss.
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 also 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.


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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 is providing 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 $9.4 million, while expressing its view that the gross amount of potential mischarging may be $5.1 million. The U.S. Coast Guard informed the Company that it would be premature for the Coast Guard to reduce its $5.8 million portion of the withhold. Based on the results of its internal investigation, the Company estimates that the maximum amount of the mischarging is approximately $4 million. The Company is in discussions with its U.S. Government customers regarding the potential release of an additional portion of the withheld funds, but it cannot predict whether these customers will agree to a lower withhold amount. 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.

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. 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.

15. 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, 2014, 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. 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. As of March 31, 2014, 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

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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 March 31, 2014, 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 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, 2014, the Company had $28 million in standby letters of credit issued but undrawn as noted in Note 13: Debt and $352 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.

16. 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 an 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 recovered a portion of its Hurricane Katrina claim from certain of its participating program insurers in prior periods. In 2013, the Company resolved litigation against its remaining insurer, Factory Mutual Insurance Company ("FM Global"), arising out of a disagreement concerning the coverage of certain losses related to Hurricane Katrina. Under the settlement agreement with FM Global, in the third quarter of 2013 FM Global made a cash payment of $180 million to the Company and the Company agreed to release its claim against FM Global, resulting in a total recovery from the Company's insurers of $677.5 million for its Hurricane Katrina claim. The $180 million was recorded as an insurance recovery gain in operating income in the third quarter of 2013.

In February 2013, the Company submitted a certified claim requesting a final decision on the allowability and allocability of certain post-Katrina depreciation and other Katrina-related expenses and on the apportionment of insurance proceeds. In October 2013, the Company received a Contracting Officer's Final Decision ("COFD") disallowing certain post-Katrina depreciation costs and other Katrina-related expenses, as well as providing direction on the apportionment of Katrina-related insurance recoveries. Impacted by this decision, the Company’s accounting for hurricane insurance related matters resulted in a reduction in operating income of $116 million. The Company has the right to appeal the COFD and is currently evaluating its options; however, the 2013 financial results reflect disallowances as indicated in the COFD.

For the year ended December 31, 2013, the Company’s accounting for hurricane related matters, including the insurance recovery gain of $180 million and the $116 million reduction in operating income related to its contracts with the U.S. Government, resulted in a net favorable impact to operating income of $64 million.

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In January 2011, the Company, through a predecessor-in-interest, filed suit in Superior Court in California against Aon Risk Insurance Services West, Inc. ("Aon"), which acted as broker to the predecessor-in-interest in connection with the policy with FM Global, seeking damages for breach of contract, professional negligence and negligent misrepresentation, as well as declaratory relief. Those damages include over $200 million in damages unrecovered from FM Global plus costs, legal fees and expenses incurred in the lawsuit against FM Global, as well as interest. In January 2014, the Company amended its complaint to allege fraud and seek punitive damages. No assurances can be provided as to the ultimate outcome of the matter. If, however, the claims are successful, the potential impact to the Company's consolidated financial position, results of operations and cash flows would be favorable.

17. 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, 2014 and 2013, was as follows:
 
 
Three Months Ended
March 31
 
 
Pension Benefits
 
Other Benefits
($ in millions)
 
2014
 
2013
 
2014
 
2013
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
Service cost
 
$
34

 
$
37

 
$
3

 
$
5

Interest cost
 
61

 
53

 
8

 
10

Expected return on plan assets
 
(80
)
 
(72
)
 

 

Amortization of prior service cost (credit)
 
5

 
4

 
(7
)
 
(2
)
Amortization of net actuarial loss (gain)
 
10

 
30

 

 
4

Net periodic benefit cost
 
$
30


$
52


$
4


$
17


The Company made the following contributions to its pension and other postretirement plans for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended
March 31
($ in millions)
 
2014
 
2013
Pension plans
 
 
 
 
Qualified minimum
 
$

 
$

Discretionary
 
 
 
 
Qualified
 
39

 
32

Non-qualified
 

 
1

Other benefit plans
 
8

 
7

Total contributions
 
$
47

 
$
40


For the year ending December 31, 2014, the Company expects its cash contributions to its qualified defined benefit pension plans to be $123 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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18. STOCK COMPENSATION PLANS
 
The following table summarizes the status of the Company's stock option awards as of March 31, 2014:
 
 
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, 2014
 
760

 
$
35.30

 
1.9
 
$
49


During the three months ended March 31, 2014 and 2013, the Company issued new stock awards as follows:

Restricted Performance Stock Rights - For the three months ended March 31, 2014, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $98.09. These rights are subject to cliff vesting on December 31, 2016. For the three months ended March 31, 2013, the Company granted approximately 0.4 million RPSRs at a weighted average share price of $45.54. These rights are subject to cliff vesting on December 31, 2015. 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.

The following table summarizes the status of the Company's outstanding stock awards as of March 31, 2014:
 
 
Stock Awards
(in thousands)
 
Weighted-Average
Grant Date Fair
Value
 
Weighted-Average Remaining Contractual Term
(in years)
Total stock awards
 
1,895

 
$
47.45

 
0.9

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 March 31, 2014 and 2013, of $5 million and $9 million, respectively.

The Company recognized tax benefits for stock-based compensation in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2014 and 2013, of $2 million and $3 million, respectively.

Unrecognized Compensation Expense

As of March 31, 2014, the Company had $0.5 million of unrecognized compensation expense associated with the RSRs granted in 2011, which will be recognized over a period of 0.1 years, and $37 million of unrecognized expense associated with the RPSRs granted in 2014, 2013, and 2012, which will be recognized over a weighted average period of 1.5 years.

19. SUBSIDIARY GUARANTORS
Performance of the Company's obligations under the senior notes, including any repurchase obligations resulting from a change of control, is fully and 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"). See Note 13: Debt. The guarantees rank equally with all other unsecured and unsubordinated indebtedness of the Subsidiary Guarantors and are subject to customary release provisions contingent on changes in ownership and restricted status. 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, 2014 and 2013, unaudited condensed consolidating statements of financial

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position as of March 31, 2014, and December 31, 2013, and the unaudited condensed consolidating statements of cash flows for the three months ended March 31, 2014 and 2013, for HII, its aggregated subsidiary guarantors and its aggregated non-guarantor subsidiaries. The Subsidiary Guarantors' net cash funding with HII has been corrected from its previous classification as net cash provided by (used in) financing activities to net cash provided by (used in) investing activities in the prior year condensed consolidating statements of cash flows.


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
 
Three Months Ended March 31, 2014
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Sales and service revenues
 
 
 
 
 
 
 
 
 
 
Product sales
 
$

 
$
1,332

 
$

 
$

 
$
1,332

Service revenues
 

 
262

 
2

 
(2
)
 
262

Total sales and service revenues
 

 
1,594

 
2

 
(2
)
 
1,594

Cost of sales and service revenues
 
 
 
 
 
 
 
 
 
 
Cost of product sales
 

 
1,060

 

 

 
1,060

Cost of service revenues
 

 
227

 
2

 
(2
)
 
227

Income (loss) from operating investments, net
 

 
2

 

 

 
2

General and administrative expenses
 

 
150

 

 

 
150

Operating income (loss)
 

 
159

 

 

 
159

Interest expense
 
(25
)
 
(2
)
 

 

 
(27
)
Equity in earnings (loss) of subsidiaries
 
107

 

 

 
(107
)
 

Earnings (loss) before income taxes
 
82

 
157

 

 
(107
)
 
132

Federal income taxes
 
(8
)
 
50

 

 

 
42

Net earnings (loss)
 
$
90

 
$
107

 
$

 
$
(107
)
 
$
90

Other comprehensive income (loss), net of tax
 
6

 
6

 

 
(6
)
 
6

Comprehensive income (loss)
 
$
96

 
$
113

 
$

 
$
(113
)
 
$
96







18

Table of Contents

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



19

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
 
 
March 31, 2014
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
722

 
$
1

 
$
19

 
$

 
$
742

Accounts receivable, net
 

 
1,299

 

 

 
1,299

Inventoried costs, net
 

 
315

 

 

 
315

Deferred income taxes
 

 
163

 

 

 
163

Prepaid expenses and other current assets
 

 
44

 

 
(19
)
 
25

Total current assets
 
722

 
1,822

 
19

 
(19
)
 
2,544

Property, plant, and equipment, net
 

 
1,856

 

 

 
1,856

Goodwill
 

 
922

 

 

 
922

Other purchased intangibles, net
 

 
528

 

 

 
528

Pension plan asset
 

 
126

 

 

 
126

Miscellaneous other assets
 
32

 
99

 

 

 
131

Investment in subsidiaries
 
3,388

 

 

 
(3,388
)
 

Intercompany receivables
 

 
888

 

 
(888
)
 

Total assets
 
$
4,142

 
$
6,241

 
$
19

 
$
(4,295
)
 
$
6,107

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Trade accounts payable
 
$

 
$
263

 
$

 
$

 
$
263

Accrued employees’ compensation
 

 
194

 

 

 
194

Current portion of long-term debt
 
79

 

 

 

 
79

Current portion of postretirement plan liabilities
 

 
139

 

 

 
139

Current portion of workers’ compensation liabilities
 

 
232

 

 

 
232

Advance payments and billings in excess of revenues
 

 
78

 

 

 
78

Other current liabilities
 
19

 
236

 
19

 
(19
)
 
255

Total current liabilities
 
98

 
1,142

 
19

 
(19
)
 
1,240

Long-term debt
 
1,595

 
105

 

 

 
1,700

Pension plan liabilities
 

 
506

 

 

 
506

Other postretirement plan liabilities
 

 
480

 

 

 
480

Workers’ compensation liabilities
 

 
422

 

 

 
422

Deferred tax liabilities
 

 
92

 

 

 
92

Other long-term liabilities
 

 
106

 

 

 
106

Intercompany liabilities
 
888

 

 

 
(888
)
 

Total liabilities
 
2,581

 
2,853

 
19

 
(907
)
 
4,546

Stockholders’ equity
 
1,561

 
3,388

 

 
(3,388
)
 
1,561

Total liabilities and stockholders’ equity
 
$
4,142

 
$
6,241

 
$
19

 
$
(4,295
)
 
$
6,107


20

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
 
 
December 31, 2013
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,042

 
$

 
$
1

 
$

 
$
1,043

Accounts receivable, net
 

 
1,123

 

 

 
1,123

Inventoried costs, net
 

 
311

 

 

 
311

Deferred income taxes
 

 
170

 

 

 
170

Prepaid expenses and other current assets
 

 
30

 
5

 
(6
)
 
29

Total current assets
 
1,042

 
1,634

 
6

 
(6
)
 
2,676

Property, plant, and equipment, net
 

 
1,897

 

 

 
1,897

Goodwill
 

 
881

 

 

 
881

Other purchased intangibles, net
 

 
528

 

 

 
528

Pension plan asset
 

 
124

 

 

 
124

Miscellaneous other assets
 
35

 
84

 

 

 
119

Investment in subsidiaries
 
3,295

 

 

 
(3,295
)
 

Intercompany receivables
 

 
1,152

 

 
(1,152
)
 

Total assets
 
$
4,372

 
$
6,300

 
$
6

 
$
(4,453
)
 
$
6,225

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
 
Trade accounts payable
 
$

 
$
337

 
$

 
$

 
$
337

Accrued employees’ compensation
 

 
230

 

 

 
230

Current portion of long-term debt
 
79

 

 

 

 
79

Current portion of postretirement plan liabilities
 

 
139

 

 

 
139

Current portion of workers’ compensation liabilities
 

 
230

 

 

 
230

Advance payments and billings in excess of revenues
 

 
115

 

 

 
115

Other current liabilities
 
25

 
237

 
6

 
(6
)
 
262

Total current liabilities
 
104

 
1,288

 
6

 
(6
)
 
1,392

Long-term debt
 
1,595

 
105

 

 

 
1,700

Pension plan liabilities
 

 
529

 

 

 
529

Other postretirement plan liabilities
 

 
477

 

 

 
477

Workers’ compensation liabilities
 

 
419

 

 

 
419

Deferred tax liabilities
 

 
83

 

 

 
83

Other long-term liabilities
 

 
104

 

 

 
104

Intercompany liabilities
 
1,152

 

 

 
(1,152
)
 

Total liabilities
 
2,851

 
3,005

 
6

 
(1,158
)
 
4,704

Stockholders’ equity
 
1,521

 
3,295

 

 
(3,295
)
 
1,521

Total liabilities and stockholders’ equity
 
$
4,372

 
$
6,300

 
$
6

 
$
(4,453
)
 
$
6,225



21

Table of Contents

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31, 2014
($ in millions)
 
Huntington Ingalls Industries, Inc.
 
Subsidiary Guarantors
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$
</