2013 Annual Report
2013
Annual
Report
Huntington Ingalls Industries (HII) designs, builds and maintains nuclear and
non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services
for military ships around the globe. For more than a century, HII has built more ships in more
ship classes than any other U.S. naval shipbuilder at its Newport News Shipbuilding and
Ingalls Shipbuilding divisions. Employing more than 38,000 in Virginia, Mississippi, Louisiana
and California, HII also provides a wide variety of products and services to the commercial
energy industry and government customers, including the Department of Energy.
OUr DIVISIONS
OUr SUbSIDIArIES
Cover Photo: Amphibious assault ship America (LHA 6)
Inside Cover Photo: Aircraft carrier Gerald R. Ford (CVN 78)
ADJUSTED SEGMENT OPERATING MARGIN (% OF SALES)1
8.3%
6.3%
6.8%
10.0%
8.0
6.0
4.0
2.0
4.4%
0
Financial Highlights
2010
2011
2012
2013
OPERATING RESULTS ($ in millions, except per share amounts)
Sales and Service Revenues
Adjusted Segment Operating Income(1)
Adjusted Segment Operating Margin(1)
Adjusted Total Operating Income(1)
Adjusted Total Operating Margin(1)
Adjusted Diluted EPS(1,2)
Net Cash Provided by Operating Activities
2013
2012
2011
2010
$6,820
567
8.3%
573
8.4%
5.97
236
$6,708
457
6.8%
438
6.5%
3.95
332
$6,575
412
6.3%
413
6.3%
4.15
528
$6,723
294
4.4%
297
4.4%
3.42
359
(1) Adjusted Segment Operating Income, Adjusted Segment Operating Margin, Adjusted Total Operating Income, Adjusted Total Operating Margin and Adjusted Diluted
EPS are non-GAAP financial measures excluding goodwill impairment and the FAS/CAS Adjustment. Please see the page that precedes the back cover of this report
for information on excluded items and a reconciliation of these measures to GAAP.
(2)Excludes FAS/CAS Adjustment tax effected at 35% federal statutory tax rate.
ADJUSTED DILUTED EPS1,2
$5.97
$4.15
$3.95
$3.42
$7.00
5.25
3.50
1.75
0
2010
2011
2012
2013
(1) Adjusted Diluted EPS is a non-GAAP financial measure excluding goodwill impairment and the tax effected FAS/CAS Adjustment. Please see the page that
precedes the back cover of this report for information on excluded items and reconciliation of these measures to GAAP.
(2) Excludes FAS/CAS adjustment tax effected at 35% federal statutory tax rate.
ADJUSTED SEGMENT OPERATING MARGIN (% OF SALES)1
8.3%
6.3%
6.8%
4.4%
10.0%
8.0
6.0
4.0
2.0
0
2010
2011
2012
2013
(1) Segment Operating Margin was adjusted in 2011 to exclude goodwill impairment charges of $290 million. Including the goodwill impairment in 2011,
the segment margin would be 1.9%.
10
8
6
4
2
0
7.00
5.25
3.50
1.75
0.00
10
8
6
4
2
0
2013 Annual Report 1
2013 Annual Report 1
$7.00
5.25
3.50
1.75
0
ADJUSTED DILUTED EPS1,2
$5.97
$4.15
$3.95
$3.42
2010
2011
2012
2013
7.00
5.25
3.50
1.75
0.00
Meeting Our
Commitments
TO OUR cUSTOmERS, EmPLOyEES ANd ShAREhOLdERS:
We have a straightforward business philosophy at Huntington Ingalls Industries: We do what we say and we say
what we do. While that includes designing, manufacturing and maintaining the best military ships in the world for
our U.S. Navy and U.S. Coast Guard customers, it also applies to creating value for our shareholders. Since we
spun off as an independent, publicly traded company in 2011, we have consistently communicated our goal of
reaching 9-plus percent operating margins in 2015. In 2013, we achieved steady progress toward that goal, with
improvement in our total operating margin in each quarter. We also doubled our quarterly cash dividend to $0.20
per share and doubled our stock repurchase program to $300 million, further demonstrating our commitment to
maximizing long-term value for all of our stakeholders.
Importantly, we’re achieving this success in spite of the uncertainty surrounding the federal budget and defense
spending. Here is a brief review of what Huntington Ingalls Industries’ world-class team of more than 38,000
employees did last year and what we plan to accomplish in 2014 and beyond:
ShIPBUILdING
Huntington Ingalls Industries met two major ship delivery milestones in 2013: Our Newport News Shipbuilding
division delivered the submarine Minnesota (SSN 783) 11 months early, and our Ingalls Shipbuilding division delivered
the amphibious transport dock Somerset (LPD 25), the last Navy ship to be built at our Avondale shipyard. The
Somerset delivery was a critical step in retiring risk at Ingalls and reaching our financial goals. Newport News
also redelivered the aircraft carrier USS Theodore Roosevelt (CVN 71) following its midlife refueling and complex
overhaul (RCOH).
We continue to make significant progress in our other shipbuilding programs:
• Newport News christened the first-of-class aircraft carrier Gerald R. Ford (CVN 78) and has moved to the final
outfitting phase, with delivery scheduled in 2016.
• Ingalls successfully completed builder’s sea trials for the amphibious assault ship America (LHA 6) in November.
The ship is scheduled for delivery in the spring of this year.
• Ingalls won a competitive bid and signed a $3.3 billion contract to build five more Arleigh Burke-class destroyers,
ensuring work in that program for the next 10 years.
• Ingalls christened the fourth National Security Cutter, Hamilton (WMSL 753), is under contract for the fifth and
sixth, and has secured the advanced procurement contract for the seventh.
• 2013 also saw the return of the first-ever nuclear-powered aircraft carrier, USS Enterprise (CVN 65), to Newport
News and the beginning of a new line of business for Huntington Ingalls Industries: aircraft carrier inactivation.
The year was not without its challenges. Because of the continuing resolution at the beginning of the year, there
was a delay in the arrival of USS Abraham Lincoln (CVN 72) for its refueling and overhaul. And due to the Navy’s
decision to no longer use composites for the deckhouses on the Zumwalt-class destroyer (DDG 1000) program,
2 Huntington Ingalls Industries
we made the difficult but necessary decision to close our Gulfport Composite Center of Excellence once work
on Michael Monsoor (DDG 1001) has been completed. This closure and the reduced workforce at Avondale
significantly reduce our footprint on the Gulf Coast. We also weathered a brief government shutdown and the
continuing uncertainty surrounding the specter of sequestration.
WORKFORcE dEVELOPmENT & GIVING BAcK
In 2013, Huntington Ingalls Industries opened brand-new, state-of-the-art apprentice facilities in Virginia and
Mississippi. These schools, both built through public/private partnerships, are a critical element of our workforce
development investment strategy and our commitment to improving educational opportunities in the communities
where we do business. As a company, we also have a long history of supporting the United Way and other
important service providers, including the American Red Cross, Habitat for Humanity, Special Olympics, the USO
and local food banks. Also in 2013, Huntington Ingalls Industries employees showed generous support for the
Washington Navy Yard Survivors Fund and the victims of Typhoon Haiyan in the Philippines. This doesn’t even
begin to account for the volunteer efforts of our employees who, as individual citizens, enthusiastically support
many organizations, causes and activities.
AdJAcENT INdUSTRIES & LOOKING AhEAd
While Navy shipbuilding remains the foundation of our business portfolio, we continue to take steps to create
value in adjacent markets where we can leverage our unique expertise, facilities and highly trained workforce.
In 2013, we opened an office in Houston to pursue engineering and modular construction work in the energy
industry. We also began 2014 with the acquisition of The S.M. Stoller Corp., a leading provider of technical, envi-
ronmental, ecological, waste management, remediation and consultation services to private sector companies
and the U.S. government. Most recently, Newport News opened a business development office in Aiken, S.C.,
where a company joint venture already manages the Savannah River Nuclear Site (SRNS), to pursue additional
work in the Department of Energy and commercial nuclear markets.
For 2014, our objective is to continue on course toward 9-plus percent margins by 2015 by optimizing our Navy
and Coast Guard business, executing on our contracts and retiring risk. We will continue to engage with Navy,
Coast Guard and Congressional leadership to protect the future of all HII programs, and we will pursue critical
construction contracts for the aircraft carrier John F. Kennedy (CVN 79), the amphibious assault ship LHA 8, the
construction contract for the seventh National Security Cutter (NSC) and Block 4 of the Virginia-Class Submarine
(VCS) Program. We will continue our relentless focus on safety, quality, cost and schedule—the basic elements
that enable us to deliver the highest-quality products and services at the most affordable cost on or ahead of
schedule. Lastly, we will continue to live our company values—Integrity, Honesty, Engagement, Responsibility and
Performance—and we will persist in shaping our culture of ethics and compliance.
We are very excited about our future, and we are delighted to have you as a partner on the journey. Thank you, as
always, for your interest and investment in Huntington Ingalls Industries and for your confidence in our commitment
to “Hard stuff, done right.”
Sincerely,
Adm. Thomas B. Fargo
U.S. Navy (Ret.)
Chairman of the Board
c. michael Petters
President and CEO
OUR
VALUES
IntEgRIty HOnESty EngAgEmEnt RESpOnSIbILIty pERfORmAncE
2013 Annual Report 3
Delivering Value to
Our Customers
USS Minnesota (SSN 783)
delivered to the U.S. Navy
11 months ahead
of contract delivery date
delivering Excellence
to Our Customers
We are intently focused on meeting or exceeding our commitments to our customers,
and we measure our performance in terms of safety, quality, cost and schedule. We
are committed to continuous improvement and, more importantly, to doing business the
right way: by living our company values and adhering to the highest ethical standards at
all times. In 2013, we delivered the submarine Minnesota (SSN 783) and the amphibious
transport dock Somerset (LPD 25). We also redelivered the aircraft carrier USS
Theodore Roosevelt (CVN 71) following its midlife refueling and complex overhaul, and
we christened two ships: the first-of-class aircraft carrier Gerald R. Ford (CVN 78) and
the fourth National Security Cutter, Hamilton (WMSL 753).
Photos:
Top left: Amphibious transport dock USS Somerset
(LPD 25); Top right: Aircraft carrier USS Theodore
Roosevelt (CVN 71); center: Virginia-class subma-
rine USS Minnesota (SSN 783); Bottom center:
Arleigh Burke-class destroyer William P. Lawrence
(DDG 110); Bottom right: National Security Cutter
Hamilton (WMSL 753).
4 Huntington Ingalls Industries
Huntington Ingalls Industries
has employees in
25 states
plus Washington, d.c.
Photos:
Top: A crane sets carbon beds in place for an above-ground treatment system
at the Paducah Gaseous Diffusion Plant, where HII’s S.M. Stoller Corp. subsid-
iary performs support work.
Left: Jeff Gowers and Daniel Lassiter, mechanical engineers at Newport News
Industrial, review a technical drawing.
creating Value
in Adjacent Markets
While Navy and Coast Guard shipbuilding remains the foun dation
of our business portfolio, we continue to take steps to create value
in adjacent markets where we can leverage our unique expertise,
facilities and highly trained workforce. In addition to the ongoing
work at our Newport News Energy, Newport News Industrial and
Newport News Nuclear subsidiaries, we opened an office in
Houston in 2013 to pursue engineering and modular construction
work in the energy industry. We also began 2014 with the acquisi-
tion of The S.M. Stoller Corp., a leading provider of environmental,
nuclear, and technical consulting and engineering services. Most
recently, we opened a business development office in Aiken, S.C.,
where a company joint venture already manages the Department
of Energy’s Savannah River Nuclear Site.
2013 Annual Report 5
Huntington Ingalls Industries’
shipbuilding divisions produced
266 apprentice graduates in 2013
Investing
in Our Workforce
Huntington Ingalls Industries’ greatest asset is the skilled work-
force of more than 38,000 who daily demonstrate a high level
of commitment to excellence in their jobs. We invest about $80
million per year in training, leadership development and work-
force development to ensure we maintain this very capable
workforce. In 2013, we opened state-of-the-art campuses for
our legacy apprentice schools in Virginia and Mississippi. These
new facilities, both built through public/private partnerships, are
a critical element of our workforce development investment
strategy and our commitment to improving educational oppor-
tunities in the communities where we live and do business.
Photos:
Top left: Newport News Apprentice School in Newport News, Va. Top right: Haley
Reeves Barbour Maritime Training Academy in Pascagoula, Miss. Bottom left:
Katherine Allison, a metrology technician at Newport News Shipbuilding. Right
middle: Ingalls Shipbuilding employees Barry Crump and Walter Probst check
the propeller installation on Hamilton (WMSL 753). Bottom right: Newport News
Shipbuilding employees James Bragg, Joseph Bowles and LaJuan Powell use a
torque wrench to tighten a stud on a propeller hub shaft.
6 Huntington Ingalls Industries
Huntington Ingalls
Industries’ shipbuilding
divisions produced 266
apprentice graduates in
2013.
2013
Portfolio
Aircraft Carrier Construction
Aircraft Carrier Refueling and Complex Overhaul
Aircraft Carrier Inactivation
Surface Combatant Construction
Amphibious Transport Dock Construction
Amphibious Assault Ship Construction
Virginia-Class Submarine Construction
Carrier and Submarine Fleet Support
Military and Commercial Ship Repair
Engineering and Design
Commercial/Government Nuclear Operations
and Program Management
Commercial Engineering and Manufacturing
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 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
(State or other jurisdiction of incorporation or organization)
90-0607005
(I.R.S. Employer Identification No.)
4101 Washington Avenue
Newport News, VA 23607
(Address of principal executive offices)
(757) 380-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
_____________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
No
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
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 during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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. (Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
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
As of June 30, 2013, the aggregate market value of the common stock (based upon the closing price of the stock on the New York
Stock Exchange) of the registrant held by non-affiliates was approximately $2,814 million.
As of February 21, 2014, 48,722,305 shares of the registrant's common stock were outstanding.
_____________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Rule 14A for the
registrant's 2014 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFTEY DISCLOSURES
Item 4A.
EXECUTIVE OFFICERS OF THE REGISTRANT
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART II
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
PART III
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
SIGNATURES
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i
PART I
ITEM 1. BUSINESS
History and Organization
For more than a century, Huntington Ingalls Industries, Inc. (herein referred to as "HII", the "Company", "we", "us",
or "our" and, as the context requires, including our predecessor business as a subsidiary of Northrop Grumman
Corporation ("Northrop Grumman")) has been designing, building, overhauling and repairing ships primarily for the
U.S. Navy and the U.S. Coast Guard. We are the nation's sole designer, builder and refueler of nuclear-powered
aircraft carriers, the builder of amphibious assault and expeditionary warfare ships for the U.S. Navy, the sole
builder of National Security Cutters for the U.S. Coast Guard, one of only two companies currently designing and
building nuclear-powered submarines for the U.S. Navy and one of only two companies that builds the Navy's
current fleet of DDG-51 Arleigh Burke-class destroyers. We are the exclusive provider of Refueling and Complex
Overhaul services for nuclear-powered aircraft carriers, a full-service systems provider for the design, engineering,
construction and life cycle support of major programs for surface ships and a provider of fleet support and
maintenance services for the U.S. Navy.
Our primary areas of business include the design, construction, repair and maintenance of nuclear-powered ships,
such as aircraft carriers and submarines, and non-nuclear ships, such as surface combatants, expeditionary
warfare/amphibious assault, and coastal defense surface ships, as well as the refueling and overhaul and the
inactivation of nuclear-powered ships. We operate our shipbuilding business through our Huntington Ingalls
Incorporated subsidiary, which is organized into two segments: Ingalls Shipbuilding ("Ingalls"), which includes our
non-nuclear ship design, construction, repair and maintenance businesses; and Newport News Shipbuilding
("Newport News"), which includes all of our nuclear ship design, construction, overhaul, refueling and repair and
maintenance businesses.
Our three major shipyards are currently located in Pascagoula, Mississippi, Avondale, Louisiana, and Newport
News, Virginia. We intend to wind down military shipbuilding at our Avondale shipyard in 2014 and consolidate
those activities into our Pascagoula shipyard. We are exploring the potential for alternative uses of the Avondale
facility, including alternative opportunities for the workforce there. For a more detailed discussion of the costs that
we expect to incur in connection with the wind down of military shipbuilding at Avondale, see Risk Factors in Item
1A.
We conduct substantially all of our business with the U.S. Government, principally the Department of Defense
("DoD"). As prime contractor, principal subcontractor, team member or partner, we participate in many high-priority
U.S. defense technology programs. We believe our product capabilities, heavy industrial facilities, and a workforce
of approximately 38,000 employees position us well to continue to support the long-term objectives of the U.S. Navy
and U.S. Coast Guard to adapt and respond to a complex, uncertain and rapidly changing national security
environment.
We became an independent, publicly-owned company on March 31, 2011, when we were spun off from Northrop
Grumman. We have owned and operated the legacy Northrop Grumman shipbuilding business since the spin-off.
Ingalls
Through our Ingalls operations, we design and construct non-nuclear ships for the U.S. Navy and U.S. Coast
Guard, including amphibious assault ships, surface combatants and National Security Cutters ("NSCs"). We are the
supplier of amphibious assault ships to the U.S. Navy and built 28 of the 62 DDG-51 Arleigh Burke-class of Aegis
guided missile destroyers in active service. We are also the sole builder of the large multi-mission National Security
Cutters for the U.S. Coast Guard. Our Ingalls shipbuilding sites are located in Pascagoula, Mississippi, Gulfport,
Mississippi, and Avondale, Louisiana. These facilities offer a collection of manufacturing capabilities that include a
660-ton gantry crane and a Land Based Test Facility.
1
We are winding down military shipbuilding at Avondale and consolidating that activity at our Pascagoula,
Mississippi, facility, which we believe will decrease our fixed overhead expenses, provide improved facility utilization
and a more cost-efficient construction process, centralize our shipbuilding learning and increase the benefits of
serial production, and reduce program costs, thereby enhancing our competitive position. In September 2013, we
announced the closing of our Gulfport Composite Center of Excellence (the "Gulfport facility") in Gulfport,
Mississippi, due to limited demand from the U.S. Navy for composite products provided by our Gulfport facility. We
expect to complete outstanding work and close the Gulfport facility by the end of the second quarter of 2014.
Amphibious Assault Ships
We are the supplier to the U.S. Navy of amphibious assault and expeditionary warfare ships, which include the U.S.
Navy large deck amphibious ships ("LHA"), amphibious transport dock ships ("LPD") and multi-purpose amphibious
assault ships ("LHD"). The LHA is a key component of the U.S. Navy-Marine Corps requirement for 11
Expeditionary Strike Groups/Amphibious Readiness Groups, and design, construction and modernization of LHAs
are core to our Ingalls operations. Construction of LHD-1 Wasp-class multipurpose amphibious assault ships
concluded with our delivery of LHD-8 USS Makin Island in 2009. In 2007, we were awarded the construction
contract for LHA-6 America, the first in a new class of enhanced amphibious assault ships designed from the keel
up to be an aviation optimized Marine assault platform. We expect to deliver LHA-6 America in the second quarter
of 2014 and are currently constructing LHA-7 Tripoli, scheduled for delivery in 2018.
The LPD program is a long-running production program where we have an opportunity to take advantage of cost
reductions resulting from ship-over-ship learning. We are currently constructing two LPD-17 San Antonio-class
amphibious transport dock ships, LPD-26 John P. Murtha scheduled for delivery in 2016 and LPD-27 Portland
scheduled for delivery in 2017, in our Pascagoula shipyard. We delivered LPD-25 Somerset in 2013, LPD-23
Anchorage and LPD-24 Arlington in 2012, and LPD-22 USS San Diego in 2011.
Surface Combatants
We are a design agent for and one of only two companies that constructs the DDG-51 Arleigh Burke-class guided
missile destroyers. We have delivered 28 DDG-51 Arleigh Burke-class destroyers to the U.S. Navy, including
DDG-110 USS William P. Lawrence in February 2011. We are currently constructing DDG-113 John Finn and
DDG-114 Ralph Johnson, scheduled for delivery in 2016 and 2017, respectively. In 2013, we were awarded a multi-
year contract totaling $3.3 billion for construction of five additional DDG-51 Arleigh Burke-class destroyers as a part
of a larger U.S. Navy order for nine DDG-51 Arleigh Burke-class destroyers.
In 2008, the U.S. Navy truncated the DDG-1000 Zumwalt-class program when it restarted the DDG-51 Arleigh
Burke-class destroyer production line. Our participation in the DDG-1000 Zumwalt-class destroyers program has
included detailed design and construction of the ships' integrated composite deckhouses and hangars, as well as
portions of the ships' aft peripheral vertical launch systems. We expect to complete our participation in this program
with the delivery of the composite deckhouse of DDG-1001 Michael Monsoor in 2014. The U.S. Navy has decided
to acquire a steel deckhouse structure for the third and final ship of the class.
National Security Cutter
The U.S. Coast Guard's recapitalization program is designed to replace aging and operationally expensive ships
and aircraft used to conduct missions in excess of 50 miles from the shoreline. The flagship of this program is the
Legend-class NSC, a multi-mission platform we designed and built. The U.S. Coast Guard ordered the first three
NSC vessels from Integrated Coast Guard Systems ("ICGS"), a joint venture between Lockheed Martin and us,
pursuant to an Indefinite Delivery/Indefinite Quantity ("IDIQ") contract for the Deepwater Modernization Program.
The first National Security Cutter, NSC-1 USCGC Bertholf, was delivered to the U.S. Coast Guard in 2008, followed
by NSC-2 USCGC Waesche in 2009 and NSC-3 USCGC Stratton in 2011. Beginning in 2010 with the construction
contract for NSC-4 Hamilton, the NSC contracts have been awarded directly to Ingalls. NSC-4 Hamilton and NSC-5
James are currently under construction. Ingalls was awarded a construction contract for NSC-6 Munro in 2013.
2
Fleet Support: AMSEC and Continental Maritime of San Diego ("CMSD")
Fleet Support provides comprehensive life cycle services, including depot maintenance, modernization, repairs,
logistics and technical support and planning yard services for naval and commercial vessels through our AMSEC
and CMSD subsidiaries. We have ship repair facilities in Newport News, Virginia, and San Diego, California, which
are near the U.S. Navy's largest homeports of Norfolk, Virginia, and San Diego, respectively. AMSEC provides
naval architecture and marine engineering, ship system assessments, maintenance engineering and logistics
services to the U.S. Navy and commercial maritime industry from 27 locations across the globe. On any given day,
over 600 of our AMSEC employees are on board U.S. Navy ships, assessing equipment conditions, modernizing
systems and training sailors. Through CMSD, a Master Ship Repair contractor, we provide ship repair, regular
overhaul and selected restricted availability services (pier side or in customers' dry docks) for the U.S. Navy. We
also perform emergent repair for the U.S. Navy on all classes of ships. Beginning in 2014, Fleet Support, including
AMSEC and CMSD, was reorganized as part of our Newport News operating segment.
Newport News
The capabilities of our Newport News operations extend from our core business of designing and constructing
nuclear-powered ships, such as aircraft carriers and submarines, and the refueling and overhaul and the
inactivation of such ships, to our secondary businesses that are focused on the construction of heavy
manufacturing equipment for commercial nuclear power facilities and the operation, management and cleanup of
environmental hazard sites through Department of Energy ("DoE") programs. Our Newport News shipyard is one of
the largest shipyards in the United States, located on approximately 550 acres near the mouth of the James River,
which adjoins the Chesapeake Bay. The shipyard has two miles of waterfront property and heavy industrial facilities
that include seven graving docks, a floating dry dock, two outfitting berths, five outfitting piers, module outfitting
facilities and various other workshops. Our Newport News shipyard also has a 2,170-foot dry dock and a 1,050-ton
gantry crane capable of servicing two aircraft carriers at one time.
Design, Construction and Refueling and Complex Overhaul of Aircraft Carriers
Engineering, design and construction of U.S. Navy nuclear aircraft carriers are core to our operations. Aircraft
carriers are the largest ships in the U.S. Navy's fleet, with a displacement of over 90,000 tons. Newport News has
delivered 30 aircraft carriers to the U.S. Navy since 1933, including all ten ships currently in active service.
We delivered the U.S. Navy's newest carrier and the last of the CVN-68 Nimitz-class, CVN-77 USS George H.W.
Bush, in 2009. We have been engaged in design work on the next generation aircraft carrier, the CVN-78 Gerald R.
Ford-class, for over ten years. In 2008, we were awarded a $5.1 billion contract for detail design and construction of
the first ship of the class, CVN-78 Gerald R. Ford, which is scheduled for delivery in 2016. We also received awards
in 2009 through 2013 totaling $2.0 billion under a construction preparation contract for the second CVN-78 Gerald
R. Ford-class aircraft carrier, CVN-79 John F. Kennedy. This contract includes design, planning, procurement of
long-lead-time materials and limited fabrication, as well as continued research and development with key suppliers.
We continue to be the exclusive prime contractor for nuclear aircraft carrier Refueling and Complex Overhaul
("RCOH"). Each RCOH takes over three years to complete, and the work accounts for approximately 35% of all
maintenance and modernization during an aircraft carrier's 50 year service life. RCOH services include propulsion
work (refueling of reactors; propulsion plant modernization; and propulsion plant repairs), restoration of service life
(dry docking, tank and void maintenance; hull, shafting, propellers and rudders; launch and recovery system; piping
repairs; and component refurbishment), and modernization (electrical systems; aviation support systems; warfare;
interoperability; and environmental compliance). We provide ongoing maintenance services for the U.S. Navy
aircraft carrier fleet through both RCOH and on-site fleet repair work.
We completed the RCOH for CVN-71 USS Theodore Roosevelt and redelivered it to the U.S. Navy in 2013. We
have also received awards totaling $2.6 billion under an execution contract for the RCOH of CVN-72 USS Abraham
Lincoln. We believe our position as the exclusive designer and builder of nuclear-powered aircraft carriers, as well
as the fact that RCOH work requires a highly trained workforce, is capital-intensive and has high barriers to entry
due to its nuclear component, strongly positions us for the award of future RCOH contracts on the current and
future U.S. Navy aircraft carrier fleet.
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Aircraft Carrier Inactivation
The U.S. Navy awarded us a $745 million contract in 2013 to inactivate CVN-65 USS Enterprise, the world's first
nuclear-powered aircraft carrier, which was built by us and commissioned in 1961, with a scheduled redelivery date
in 2016. Aircraft carriers have a lifespan of approximately 50 years, and we believe the ten carriers delivered by us
that are currently in active service, as well as those we will deliver in the future, present a significant opportunity for
us with respect to their inactivation. We believe that the U.S. Navy will require inactivation of aircraft carriers in the
naval fleet as they reach the end of their lifespans, and we intend to be positioned as the best choice to be awarded
that work.
Design and Construction of Nuclear-Powered Submarines
We are one of only two companies in the United States capable of designing and building nuclear-powered
submarines for the U.S. Navy. Newport News has delivered 58 submarines to the U.S. Navy since 1960, comprised
of 44 fast attack and 14 ballistic missile submarines. Of the 54 nuclear-powered fast attack submarines currently in
active service, 26 were delivered by Newport News. Our nuclear submarine program, located at our Newport News
shipyard, includes construction, engineering, design, research and integrated planning.
In February 1997, we executed a teaming agreement with Electric Boat, a division of General Dynamics
Corporation ("General Dynamics"), to build SSN-774 Virginia-class fast attack nuclear submarines cooperatively.
Under the present arrangement, we build the stern, habitability and machinery spaces, torpedo room, sail and bow,
while Electric Boat builds the engine room, control room and pressure hull structure. Work on the reactor plant and
the final assembly, test, outfit and delivery of the submarines alternate between Electric Boat and us.
The four submarines of the first block and the six submarines of the second block of SSN-774 Virginia-class
submarines have been delivered. In December 2008, the team was awarded a construction contract for the third
block of eight SSN-774 Virginia-class submarines. The multi-year contract increased construction from one
submarine per year to two submarines per year from 2011 through 2013. The eighth submarine to be procured
under this contract is scheduled for delivery in 2019.
SSBN(X) Ohio-Class Replacement Program
The U.S. Navy's shipbuilding plan for Fiscal Year 2013 states the U.S. Navy's intention to focus on the design and
construction of replacement boats for the current aging Ohio-class nuclear ballistic and cruise missile submarines.
The U.S. Navy has committed to designing a replacement class for the SSBN Ohio-class nuclear ballistic missile
submarines ("SSBN"), which were first introduced into service in 1981. We are currently participating in the design
effort, and our experience and specialized workforce position us for a potential role in the construction effort, but no
decisions have been made regarding that aspect of the program. The SSBN Ohio-class includes 14 nuclear ballistic
missile submarines and four nuclear cruise missile submarines ("SSGN"). The Ohio Replacement Program
currently anticipates 12 new ballistic missile submarines over a 15-year period at a cost of approximately $4 billion
to $7 billion each. The U.S. Navy has initiated the design process for the new class of submarine, and we have
begun design work as a subcontractor to Electric Boat. Congress has delayed the start of the first Ohio replacement
submarine by two years and construction is now expected to begin in 2021, with procurement of long-lead-time
materials in 2017 and delivery in 2030. The first Ohio-class ballistic missile submarine is expected to be retired in
2027 with an additional submarine being retired each year thereafter. By 2030 the Ohio-class ballistic missile
submarine fleet is expected to be down to ten. The current fiscal environment and uncertainty in defense budgets
may cause additional delay to the start of construction or result in a reduction in the number of ships being
procured, but we believe the Ohio Replacement Program may represent a significant opportunity for us in the
future.
Energy
Our DoE and commercial nuclear programs leverage our core competencies in nuclear operations, program
management and heavy manufacturing. We selectively partner with experienced industry leaders, and we are a
participant in one active joint venture. We are also able, through our subsidiary Newport News Industrial
Corporation ("NNI"), to provide a range of services to the energy industry, as well as government customers.
4
Savannah River Nuclear Solutions, LLC ("SRNS")
In January 2008, SRNS, our joint venture with Fluor Federal Services, Inc. and Honeywell International Inc., was
awarded a five-year $4 billion contract for site management and operations at the DoE's Savannah River Site
located 12 miles south of Aiken, South Carolina. Work at the site includes management of a national laboratory and
the cleanup of nuclear waste, both newly generated and backlogged, and legacy wastes that exist at various
facilities throughout the Savannah River Site. As part of the American Recovery and Reinvestment Act of 2009,
SRNS was awarded a $1.4 billion contract to deactivate and remediate several reactors and sites at the Savannah
River Site. In September 2012, the DoE exercised its option to extend the original contract for another three years,
bringing the total contract value to approximately $8 billion. We have a 34% ownership stake in SRNS.
Newport News Industrial Corporation
NNI provides a range of support services to operating commercial nuclear power plants. Since it was founded in
1965, NNI has expanded its capabilities, continuing to provide support for nuclear energy facilities, as well as for
fossil power plants and other industrial facilities. NNI focuses on fabrication services, construction services,
equipment services, technical services and product sales to its customers, which include both private industry and
government entities such as the DoE and the DoD.
Corporate
Huntington Ingalls Industries, Inc. was incorporated in Delaware on August 4, 2010. Our principal executive offices
are located at 4101 Washington Avenue, Newport News, Virginia 23607. Our telephone number is (757) 380-2000,
and our home page on the Internet is www.huntingtoningalls.com. References to our website in this report are
provided as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the
information contained on, or available through, the website. Accordingly, such information should not be considered
part of this report.
Summary Segment Financial Data
For a more complete understanding of our segment financial information, see Segment Operating Results in Item 7
and Note 8: Segment Information in Item 8.
Customers
Revenues from the U.S. Government accounted for substantially all of our revenues in 2013, 2012 and 2011. In
2013, 2012 and 2011, approximately 94%, 96% and 97%, respectively, of our revenues were generated from the
U.S. Navy and approximately 6%, 4% and 3%, respectively, were generated from the U.S. Coast Guard.
Intellectual Property
With approximately 5,000 engineers and designers, we develop and incorporate into our vessels new technologies,
manufacturing processes and systems-integration practices. In addition to owning a large portfolio of proprietary
intellectual property, we license intellectual property rights to and from others. The U.S. Government holds licenses
to our patents developed in the performance of U.S. Government contracts and unlimited license rights in technical
data developed under our U.S. Government contracts when such data is developed entirely at government
expense. The U.S. Government may use or authorize others to use the technology covered by our patents licensed
to the government. While our intellectual property rights are important to our operations, we do not believe that any
existing patent, license or other intellectual property right is of such importance that its loss or termination would
have a material impact on our business.
Seasonality
No material portion of our business is seasonal. The timing of our revenue recognition is based on several factors,
including the timing of contract awards, the incurrence of contract costs, contract cost estimation, and unit
deliveries. See Critical Accounting Policies, Estimates, and Judgments - Revenue Recognition in Item 7.
5
Backlog
As of December 31, 2013 and 2012, our total backlog was approximately $18 billion and $16 billion, respectively.
Approximately 32% of backlog at December 31, 2013, is expected to be converted into sales in 2014.
Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the
customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the
customer). Unfunded backlog excludes unexercised contract options and unfunded IDIQ orders. For contracts
having no stated contract values, backlog includes only the amounts committed by the customer. Backlog is
converted into sales as work is performed or deliveries are made. For backlog by segment, see Backlog in Item 7.
Raw Materials
The most significant material we use is steel. Other materials used in large quantities include paint, aluminum, pipe,
electrical cable and fittings. All of these materials are currently available in adequate supply. In connection with our
government contracts, we are required to procure certain materials and component parts from supply sources
approved by the U.S. Government. Generally, for long-term contracts, we obtain price quotations for many of our
materials requirements from multiple suppliers to ensure competitive pricing. We have not generally been
dependent upon any one supply source; however, due largely to the consolidation of the defense industry, we
currently have only one supplier for certain component parts. We believe that these single source suppliers, as well
as our overall supplier base, are adequate to meet our future needs. We have mitigated some supply risk by
negotiating long-term agreements with certain raw material suppliers. In addition, we have mitigated price risk
related to raw material purchases through certain contractual arrangements with customers.
Research and Development
To foster innovative product development and evolution, we conduct research and development activities as part of
our normal business operations. Our research and development activities primarily include Independent Research
and Development ("IR&D") efforts related to government programs. We recover a significant portion of our IR&D
expenditures through overhead charges to U.S. Government contracts, consistent with U.S. Government
regulations. We include IR&D expenses in general and administrative expenses. Company-sponsored IR&D
expenses totaled $22 million, $21 million and $24 million for the years ended December 31, 2013, 2012 and 2011,
respectively.
At our Virginia Advanced Shipbuilding and Carrier Integration Center ("VASCIC"), located in Newport News,
Virginia, we conduct on-site warfare systems testing, training and laboratory research for the next generation of
aircraft carriers, submarines and other ships. VASCIC serves as the focal point for the integration of ship systems
and the application of new technologies. It has a classified facility and an integration area that facilitates research
and development related to setup and testing of electronics as well as hull, mechanical and electrical systems prior
to introducing new equipment on board a ship. It also has modeling and simulation capability allowing for
visualization using 3-D displays. We believe VASCIC benefits the U.S. Navy and represents a competitive
advantage for us by developing future naval capabilities, reducing total ownership cost and facilitating technology
transfer.
Governmental Regulation and Supervision
Our business is affected by a variety of laws and regulations relating to the award, administration and performance
of U.S. Government contracts. See Risks Related to Our Business in Item 1A.
We operate in a heavily regulated environment and are routinely audited and reviewed by the U.S. Government and
its agencies, such as the U.S. Navy's Supervisor of Shipbuilding, the Defense Contract Audit Agency ("DCAA") and
the Defense Contract Management Agency ("DCMA"). These agencies review our contract performance, cost
structures and compliance with applicable laws, regulations and standards, as well as the adequacy of, and our
compliance with, our internal control systems and policies. Systems subject to audit or review include our
accounting systems, purchasing systems, billing systems, property management and control systems, cost
estimating systems, earned value management systems, compensation systems and management information
systems. Any costs we incur that are determined to be unallowable or improperly allocated to a specific contract will
not be reimbursed by a government customer or must be refunded if already reimbursed. If an audit uncovers
improper or illegal activities, we may be subject to civil and criminal penalties as well as administrative sanctions,
6
which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspension, and
prohibition from doing business with the U.S. Government.
The U.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease
or withhold contract payments if it determines significant deficiencies exist in one or more such systems. The U.S.
Government has, in certain instances, withheld payments on contracts subject to these regulations upon its
assessment that deficiencies exist with one or more of our business systems. We are modifying our affected
business systems to address the U.S. Government's concerns.
In addition, the U.S. Government generally has the ability to terminate contracts, in whole or in part, with little to no
prior notice, for convenience or for default based on performance. In the event of termination for the government's
convenience, contractors are normally protected by provisions that provide for reimbursement of costs incurred on
the contracts and profit on those costs but not for the anticipated profit that would have been earned had the
contract been completed. Termination resulting from our default could expose us to various liabilities, including
excess reprocurement costs, and could have a material effect on our ability to compete for future contracts.
In 2009, Congress passed legislation to improve the organization and procedures of the DoD for the acquisition of
major weapons systems, including shipbuilding and maritime systems. This legislation, the Weapon System
Acquisition Reform Act of 2009, requires the DoD to develop mechanisms to address cost, schedule and
performance in establishing program requirements. As acquisition reform progresses, we will continue to monitor
the actions of the Pentagon and Congress to determine their impact on our operations and respond appropriately.
Government contractors must comply with a significant volume of procurement regulations and other requirements.
Contracting with the U.S. Government may result in our filing of Requests for Equitable Adjustments ("REAs"),
which represent requests for the U.S. Government to make appropriate adjustments to terms of a contract,
including pricing, delivery schedule, technical requirements or other affected terms, due to changes in the original
contract requirements and resulting delays and disruption in contract performance for which the U.S. Government is
responsible. REAs are prepared, submitted and negotiated in the ordinary course of business, and large REAs are
not uncommon at the conclusion of both new construction and RCOH activities. Such REAs are not considered
claims under the Contract Disputes Act of 1978, although they may be converted to such claims if good faith
negotiations to resolve the REAs are not satisfactory.
In cases where there are multiple suppliers, contracts for the construction and conversion of U.S. Navy ships and
submarines are generally subject to competitive bidding. In evaluating proposed prices, the U.S. Navy sometimes
requires that each bidder submit information on pricing, estimated costs of completion and anticipated profit
margins in order to assess cost realism. The U.S. Navy uses this information and other data to determine an
estimated cost for each bidder. Under U.S. Government regulations, certain costs, including certain financing costs
and marketing expenses, are not allowable contract costs and, therefore, are not recoverable. The U.S.
Government also regulates the methods by which all costs, including overhead, are allocated to government
contracts.
Our contracts with various agencies of the U.S. Government and our subcontracts with other prime contractors are
subject to additional procurement regulations that include, but are not limited to, the Truth in Negotiations Act, the
Procurement Integrity Act, the False Claims Act, Cost Accounting Standards, the International Traffic in Arms
Regulations promulgated under the Arms Export Control Act, the Close the Contractor Fraud Loophole Act and the
Foreign Corrupt Practices Act. A noncompliance determination by any one agency may result in fines, penalties, or
debarment or suspension from contracting with all U.S. Government agencies.
Competition
We primarily compete with General Dynamics and, to a lesser extent, smaller shipyards, one or more of which may
team with a large defense contractor. Intense competition related to programs, resources and funding, and long
operating cycles are key characteristics of both our business and the shipbuilding defense industry in general. It is
common industry practice to share work on major programs among a number of companies. A company competing
to be a prime contractor may, upon ultimate award of the contract to another party, become a subcontractor for the
prime contracting party. It is not uncommon to compete for a contract award with a peer company and,
simultaneously, perform as a supplier to or a customer of such competitor on other contracts. The nature of major
defense programs, conducted under binding contracts, allows companies that perform well to benefit from a level of
program continuity not common in many industries.
7
We believe we are well-positioned in the market. Because we are the only company currently capable of building,
refueling and defueling the U.S. Navy's nuclear-powered aircraft carriers, we believe we are in a strong competitive
position to be awarded each contract to perform such activities. Even so, the government periodically revisits
whether refueling of nuclear-powered aircraft carriers should be performed in private or public facilities. In this
regard, the National Defense Authorization Act for Fiscal Year 2012 ("2012 Act") required DoD to develop a core
depot level maintenance capability to refuel nuclear aircraft carriers. The National Defense Authorization Act for
Fiscal Year 2013 ("2013 Act") modified the 2012 Act by restoring an exception for the nuclear refueling of an aircraft
carrier from the definition of core depot level maintenance. The 2013 Act also amended and clarified the exception
to cover the concurrent refueling and overhaul of an aircraft carrier, as well as the defueling of an aircraft carrier.
Similarly, the 2013 Act restored an exclusion for nuclear aircraft carrier programs from the definition of core logistics
capabilities that was found in previous law.
We are currently the only builder of large deck amphibious assault and expeditionary warfare ships for the
U.S. Navy, including LHAs and LPDs, and are positioned to be awarded future contracts for these types of vessels.
We are also the sole supplier of NSCs for the U.S. Coast Guard, and are positioned to be awarded future contracts
for these types of vessels. We are one of only two companies currently designing and building nuclear-powered
submarines for the U.S. Navy and one of only two companies that builds the U.S. Navy's current fleet of DDG-51
Arleigh Burke-class destroyers. We are positioned to be awarded future contracts for these types of ships as well.
Our success in the shipbuilding defense industry depends upon our ability to develop, market and produce our
products and services at a cost consistent with the U.S. Navy's budget, as well as our ability to provide the
workforce, technologies, facilities, equipment and financial capacity needed to deliver those products and services
with maximum efficiency.
Environmental, Health and Safety
Our manufacturing operations are subject to and affected by federal, state and local laws and regulations relating to
the protection of the environment. We accrue the estimated costs to complete environmental remediation when we
determine it is probable we will incur expenses in the future, in amounts we can reasonably estimate, to address
environmental conditions at currently or formerly owned or leased operating facilities, or at sites where we are
named a Potentially Responsible Party ("PRP") by the U.S. Environmental Protection Agency ("EPA") or similarly
designated by another environmental agency. The inherent difficulties in estimating future environmental
remediation costs, resulting from uncertainties regarding the extent of required remediation, determination of legally
responsible parties and the status of laws and regulations and their interpretations, can cause our estimated costs
to change.
We assess the potential impact on our financial statements of future environmental remediation costs by estimating,
on a site-by-site basis, the range of reasonably possible remediation costs that we could incur, taking into account
currently available information at each site, the current state of technology and our prior experience in remediating
contaminated sites. We review our estimates periodically and adjust them to reflect changes in facts, technology
and legal circumstances. We record accruals for environmental remediation costs on an undiscounted basis in the
accounting period in which it becomes probable we have incurred a liability and the costs can be reasonably
estimated. We record related insurance recoveries only when we determine that collection is probable, and we do
not include any litigation costs related to environmental matters in our environmental remediation accrual.
We expense or capitalize environmental expenditures as appropriate. Capitalized expenditures relate to long-lived
improvements in current operating facilities. We record environmental remediation accruals at sites involving
multiple parties based upon our expected share of liability, taking into account the financial viability of other jointly
liable parties. We may incur remediation costs exceeding our accrued amount if other PRPs do not pay their
allocable share of remediation costs, which could have a material effect on our business, financial position, results
of operations or cash flows.
As of December 31, 2013, our probable future costs for environmental remediation were approximately $2 million,
which is accrued in other current liabilities in the consolidated statement of financial position. Although information
gained as projects progress may materially affect our accrued liability, we do not anticipate that future remediation
expenditures will have a material effect on our financial position, results of operations or cash flows.
8
We may incur environmental costs in the future related to our wind down of military shipbuilding at Avondale. These
costs are not reasonably estimable at this time, however, due to insufficient information about the nature, timing and
extent of any potential environmental remediation we may be required to perform or the related costs that we may
incur. Accordingly, potential environmental costs associated with the wind down of Avondale are not included in our
$2 million accrual for environmental remediation costs or our $256 million estimate of Avondale asset write-downs
and restructuring costs, or otherwise reflected in our consolidated financial statements. We expect that a significant
portion of any future environmental remediation costs we incur at Avondale would be recoverable, consistent with
government accounting practices, under the Federal Acquisition Regulation ("FAR").
We believe that we are in material compliance with all applicable environmental laws and regulations, and historical
environmental compliance costs have not been material to our business. We could be affected by new
environmental laws or regulations, including any enacted in response to climate change concerns and other actions
known as "green initiatives." We have made the investments we believe are necessary to comply with
environmental laws. We expect, however, to incur capital and operating costs in the future to comply with current
and future environmental laws and regulations. At this time, however, we do not believe such costs will have a
material effect on our financial position, results of operations or cash flows.
With regard to occupational health and safety, the shipbuilding and ship repair industry involves work with
hazardous materials and processes, and remains one of the most hazardous industry segments. According to the
Bureau of Labor Statistics, the shipbuilding and ship repair industry (NAICS 336611) ranks among the highest in
several injury metrics. We have experienced three industrial related fatalities in the past seven years. We strive to
keep our Occupational Safety & Health Administration ("OSHA") compliance programs strong. In 1995, our Newport
News shipyard became the first shipyard to be awarded the Star Award from OSHA's Voluntary Protection Program
("OSHA VPP"). To earn this award, we joined efforts with our unions and supported participation in the OSHA VPP,
in which all parties assist each other to make our shipyard a safer place to work. Since then, our Gulfport,
Mississippi, and CMSD facilities have also been certified as OSHA VPP Star Sites.
The U.S. Navy, Nuclear Regulatory Commission and DoE regulate and control various matters relating to nuclear
materials we handle. Subject to certain requirements and limitations, our contracts with the U.S. Navy and DoE
generally provide for indemnity by the U.S. Government for losses resulting from our nuclear operations. For our
commercial nuclear operations, we rely primarily on insurance carried by nuclear facility operators for risk
mitigation, and we maintain limited insurance coverage for losses in excess of the coverage of facility operators.
Employees
We have approximately 38,000 employees. We are the largest industrial employer in Virginia and the largest private
employer in Mississippi. Our workforce contains many third-, fourth- and fifth-generation shipbuilding employees.
We employ individuals specializing in 19 crafts and trades, approximately 5,000 engineers and designers and
approximately 2,400 employees with advanced degrees. Employees who have been with us or our predecessor
companies for over 40 years achieve the title of Master Shipbuilder. As of December 31, 2013, we had
approximately 1,100 Master Shipbuilders, approximately 850 at Newport News and approximately 250 at Ingalls.
We employ more than 5,500 veterans.
Our Newport News Apprentice School trains approximately 800 apprentices each year in 19 crafts and trades and
several advanced programs. Our Ingalls Apprentice School currently has approximately 300 registered apprentices
in its programs. Apprentices are paid as full-time employees for the duration of their studies and usually continue to
work with us upon graduation. From nuclear pipe welders to senior executives, approximately 2,900 alumni of the
Apprentice School at Newport News and approximately 1,900 alumni of our Ingalls Apprentice School continue to
work with us.
Approximately 50% of our approximately 38,000 employees are covered by a total of nine collective bargaining
agreements. Newport News has three collective bargaining agreements covering represented employees, which
expire in April 2014, June 2014 and July 2017. Ingalls has six collective bargaining agreements covering
represented employees, five of which cover Pascagoula and Gulfport employees and one of which covers Avondale
employees. The five Pascagoula/Gulfport collective bargaining agreements expire in March 2015. The Avondale
collective bargaining agreement was indefinitely extended upon its last expiration. We believe that our relationship
with our employees is satisfactory.
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Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as
any amendments to those reports, are available free of charge through our website as soon as reasonably
practicable after we file them with the Securities and Exchange Commission ("SEC"). You can learn more about us
by reviewing our SEC filings on the investor relations page on our website at www.huntingtoningalls.com.
Our SEC filings are also available at the Public Reference Room of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling 1-800-
SEC-0330.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information
about SEC registrants, including us.
Executive Officers of the Registrant
See Executive Officers of the Registrant in Item 4A for information about our executive officers.
Forward-Looking Statements
Statements in this Annual Report on Form 10-K and in our other filings with the SEC, as well as other statements
we may make from time to time, other than statements of historical fact, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks
and uncertainties that could cause our actual results to differ materially from those expressed in these statements.
Factors that may cause such differences include:
•
•
•
•
•
•
•
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changes in government and customer priorities and requirements (including government budgetary
constraints, shifts in defense spending, and changes in customer short-range and long-range plans);
our ability to obtain new contracts, estimate our future contract costs and perform our contracts effectively;
changes in government regulations and procurement processes and our ability to comply with such
requirements;
our ability to realize the expected benefits from consolidation of our Ingalls facilities;
natural disasters;
adverse economic conditions in the United States and globally;
risks related to our indebtedness and leverage; and
other risk factors discussed herein and in our filings with the SEC.
There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not
expect to have a material adverse effect on our business, and we undertake no obligation to update any forward-
looking statements. You should not place undue reliance on any forward looking statements that we may make.
10
Item 1A. Risk Factors
An investment in our common stock or debt securities involves risks and uncertainties. We seek to identify,
manage, and mitigate risks to our business, but risk and uncertainty cannot be eliminated or necessarily predicted.
You should consider the following factors carefully, in addition to the other information contained in this Annual
Report on Form 10-K, before deciding to purchase our securities.
Risks Related to Our Business
We depend heavily on a single customer, the U.S. Government, for substantially all of our business, and
changes affecting this customer's ability to do business with us could have a material adverse effect on our
financial position, results of operations or cash flows.
Our business is primarily dependent upon the design, construction, repair, maintenance, fleet support and life cycle
services of nuclear-powered ships, such as aircraft carriers and submarines, and non-nuclear ships, such as
surface combatants and expeditionary warfare and amphibious assault ships, for the U.S. Navy and coastal
defense surface ships for the U.S. Coast Guard, as well as the refueling and overhaul and inactivation of nuclear-
powered ships for the U.S. Navy. Substantially all of our revenues in 2013 were derived from products and services
ultimately sold to the U.S. Government, and we expect this to continue in the foreseeable future. In addition,
substantially all of our backlog was U.S. Government related as of December 31, 2013. We are a supplier, either
directly or as a subcontractor or team member, to the U.S. Government and its agencies. The related contracts are
subject to various risks, including our customers' political and budgetary constraints and processes, changes in
customers' short-range and long-range strategic plans, the timing of contract awards, significant changes in
contract scheduling, intense contract and funding competition, difficulty in forecasting costs and schedules for bids
on developmental and highly sophisticated technical work, delays in the timing of contract approval, and contractor
suspension or debarment in the event of certain violations of legal or regulatory requirements. Any of these factors
could affect our ability to do business with the U.S. Government, which would have a material adverse effect on our
financial position, results of operations or cash flows.
Contracts with the U.S. Government are subject to uncertain levels of funding, modification due to changes
in customer priorities and potential termination.
We are directly dependent upon congressional allocation of defense funds to the U.S. Navy and the U.S. Coast
Guard. The funding of U.S. Government programs is subject to congressional budget authorization and
appropriation processes. For certain programs, Congress appropriates funds on a fiscal year basis even though a
program may be performed over several fiscal years. Consequently, programs are often partially funded initially and
may receive additional funding only as Congress makes further appropriations. If we incur costs in excess of
existing funding on a contract, we may be at risk for reimbursement of those costs until additional funds are
appropriated. We cannot predict the extent to which total funding or funding for individual programs will be included,
increased or reduced as part of the annual budget process, in continuing resolutions, or in individual supplemental
appropriations.
The impact of Congressional actions to reduce the federal debt and resulting pressures on federal spending could
adversely affect the total funding of individual ships or funding for individual programs and delay purchasing or
payment decisions by our customers. In August 2011, the Budget Control Act (the "BCA") reduced the DoD top-line
budget by $487 billion from fiscal year 2012 through 2021, representing approximately 8% of planned defense
spending. Additionally, because Congress did not identify savings to reduce the U.S. deficit by up to $1.2 trillion
prior to March 1, 2013, budgetary sequestration was implemented under the BCA. Sequestration requires an
additional reduction from fiscal year 2012 through 2021 of $500 billion for defense spending, representing
approximately 9% of planned defense spending, and $500 billion for non-defense discretionary spending, including
the U.S. Coast Guard.
On December 26, 2013, the President signed into law the Bipartisan Budget Act of 2013 (the "Bipartisan Budget
Act"), which provided $63 billion in sequestration relief over two years, split evenly between defense and non-
defense programs, and set overall discretionary spending at $1.012 trillion for fiscal year 2014 and $1.013 trillion for
fiscal year 2015. Sequestration remains in effect under the BCA for fiscal years 2016 through 2021. Enactment of
the Bipartisan Budget Act enabled the House and Senate Appropriations Committees to agree upon appropriations
levels across all 12 Appropriations Committees, including Defense Appropriations and Homeland Security
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Appropriations, and to subsequently pass the Consolidated Appropriations Act for Fiscal Year 2014 (the "FY 2014
Act").
The FY 2014 Act specifically provided funding for the advance construction of CVN-79 John F. Kennedy,
construction of two SSN-774 Virginia-class submarines, continuation of the CVN-72 USS Abraham Lincoln RCOH,
continuation of DDG-51 Arleigh Burke-class destroyer production, and cost to complete for LHA-6 America. The FY
2014 Act also fully funded construction of NSC-7 Kimball, and provided funding for NSC-8 Midgett long-lead-time
material.
While the Bipartisan Budget Act eliminated the implementation of sequestration reductions for fiscal years 2014 and
2015, significant uncertainty exists regarding the specific effects of sequestration in fiscal years 2016 through 2021,
and related funding reductions that could result in the cancellation of or decreased funding for our existing programs
and/or a lack of funding for future programs.
Delivery of the Fiscal Year 2015 President's Budget Request has been deferred until early March 2014. The impact
of the continuing federal fiscal debates remains uncertain, and we cannot predict the impact that the sequestration
cuts, other defense spending cuts, or the prospective lack of a fiscal year 2015 defense appropriations bill may
have on funding for our individual programs. Long-term funding for certain programs in which we participate may be
reduced, delayed, or cancelled. In addition, defense spending cuts and delays could adversely affect the viability of
our suppliers and subcontractors. Our contracts or subcontracts under programs in which we participate may be
terminated or adjusted by the U.S. Government or the prime contractor as a result of lack of government funding or
reductions or delays in government funding, which would adversely affect our future sales under such programs
and could have a material adverse effect on our financial position, results of operations or cash flows.
Demand for our products and services can also be affected by potential changes in customer priorities due to
military transformation and planning or the nature of war related activity. We cannot predict the impact of such
changes on existing, follow-on or replacement programs. A shift of government priorities to programs in which we
do not participate and/or reductions in funding for or the termination of programs in which we do participate could
have a material adverse effect on our financial position, results of operations or cash flows.
The U.S. Government generally has the ability to terminate contracts, in whole or in part, with little to no prior notice,
for convenience or for default based on performance. In the event of termination for the U.S. Government's
convenience, contractors are normally protected by provisions covering reimbursement of costs already incurred on
the contracts and profit related to those costs but not the anticipated profit that would have been earned had the
contract been completed. Such a termination could also result in the cancellation of future work on the related
program. Termination resulting from our default can expose us to various liabilities, including excess re-procurement
costs, and could negatively affect our ability to compete for future contracts. Any contract termination could have a
material adverse effect on our financial condition, results of operations or cash flows.
Cost growth on fixed price and other contracts that cannot be justified as increases in contract value due
from customers exposes us to reduced profitability and to the potential loss of future business.
Our operating income is adversely affected when we incur certain contract costs or certain increases in contract
costs that cannot be billed to customers. Cost growth can occur if expenses to complete a contract increase due to
technical challenges, manufacturing difficulties, delays, workforce-related issues or inaccurate initial estimates used
for calculating contract costs. Reasons may include unavailability or reduced productivity of labor, the nature and
complexity of the work to be performed, the timeliness and availability of materials, major subcontractor
performance or product quality issues, performance delays, availability and timing of funding from the customer and
natural disasters. The process of estimating contract costs requires significant judgment and expertise. A significant
increase in contract costs from our original cost estimates on one or more programs could have a material adverse
effect on our financial position, results of operations or cash flows.
Our ability to recover the costs we incur and realize profits on contracts with our U.S. Government customers
depends on the type of contract under which we are performing. Our U.S. Government business is currently
performed under firm fixed price ("FFP"), fixed price incentive ("FPI"), cost plus incentive fee ("CPIF"), cost plus
fixed fee ("CPFF") and cost plus award fee ("CPAF") contracts. Under FFP contracts, we retain all cost savings on
completed contracts but are responsible for the full amount of all expenditures in excess of the contract price. FPI
contracts, on the other hand, are flexibly priced agreements under which overruns and underruns to an agreed
target cost are shared between the U.S. Government and us. The U.S. Government is liable for its share of
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allowable costs up to a ceiling price, and we are responsible for all costs incurred in excess of such ceiling price,
typically 125-135% of target cost. Our profit on FPI contracts varies according to a formula set forth in the contract
that generally compares the amount of costs incurred to the contract target cost. Under CPIF, CPFF and CPAF
contracts, we are generally required to perform the contract only to the extent the U.S. Government makes funds
available, and we recover all allowable costs incurred in the performance of the contract. Under CPIF contracts, our
profit is determined by a contractually specified formula that compares allowable incurred costs to the contract
target cost, subject in some instances to a maximum or minimum fee percentage. Under CPFF contracts, the dollar
amount of profit received is the same without regard to the amount of costs incurred. Under CPAF contracts, the
dollar amount of profit received is determined by the award fee provisions in the contract.
Of Ingalls' revenues in 2013, approximately 79% were generated from FPI contracts, approximately 10% were
generated from CPAF contracts, approximately 8% were generated from CPFF contracts, and approximately 3%
were generated from FFP contracts. Of Newport News' 2013 revenues, approximately 45% were generated from
CPIF contracts, which primarily included aircraft carrier construction and RCOH contracts, approximately 31% were
generated from CPFF contracts, approximately 23% were generated from FPI contracts, consisting primarily of
submarine construction contracts, and approximately 1% were generated from FFP contracts. To the extent our mix
of contract types change in the future, our ability to recover our costs and realize profits on our contracts can be
negatively affected.
Our earnings and margins depend on our ability to perform under contracts.
When agreeing to contract terms, we make assumptions and projections about future conditions and events, many
of which extend over long periods. These projections assess the productivity and availability of labor, the complexity
of the work to be performed, the cost and availability of materials, the impact of delayed performance and the timing
of product deliveries. We may experience significant variances from our assumptions and projections, delays in our
contract performance and variances in the timing of our product deliveries. If actual events differ significantly from
one or more of our assumptions or projections, or, if we incur unanticipated contract costs, the profitability of the
related contracts may be adversely affected.
Our earnings and margins depend, in part, on subcontractor performance and raw material and component
availability and pricing.
We rely on other companies to provide raw materials, major components and sub-systems for our products, and we
rely on subcontractors to produce hardware elements and sub-assemblies and perform certain services that we
provide to our customers. We are subject to potential delivery disruptions and performance problems caused by our
suppliers and subcontractors. Our ability to perform our obligations as a prime contractor could be adversely
affected if one or more of our suppliers or subcontractors are unable to provide the agreed-upon products or
materials or perform the agreed-upon services in a timely and cost-effective manner.
Our costs to manufacture our products can increase over the terms of our contracts. We may be protected from
increases in material costs through cost escalation provisions contained in some of our U.S. Government contracts,
to the extent that such increases are consistent with industry indices. Even with these provisions, however, the
difference in basis between our actual material costs and these indices may expose us to cost uncertainty. In
addition, significant delays in deliveries of key raw materials, which may occur as a result of availability or price,
could have a material adverse effect on our financial position, results of operations or cash flows.
In connection with our government contracts, we are required to procure certain raw materials, components and
parts from supply sources approved by the U.S. Government. Due largely to the consolidation of the defense
industry, there are currently certain components for which only one supplier exists. The inability of a sole source
supplier to provide a necessary component in a timely or cost-effective manner could have a material adverse effect
on our financial position, results of operations or cash flows.
Our results of operations depend on awards of new contracts.
The prospects of U.S. shipyards, including ours, are materially affected by their success in securing significant
U.S. Navy contract awards. In February 2006, the U.S. Navy presented to Congress a goal of achieving and
maintaining a fleet of 313 ships. Each year, the U.S. Navy presents to Congress the Navy's Annual Report to
Congress on Long-Range Plan for Construction of Naval Vessels (the "Shipbuilding Plan"), which includes the
Navy's shipbuilding plan for the next five years and a long-range projection of new ship construction for the
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following 25 years. The U.S. Navy's Shipbuilding Plan for fiscal year 2013 (the "2013 Shipbuilding Plan") included a
fleet goal of 310 to 316 ships, down from the fleet goal of 328 ships included in the Navy's Shipbuilding Plan for
fiscal year 2012 (the "2012 Shipbuilding Plan"), and the procurement of 268 ships over the next 30 years, down
from the 275-ship procurement included in the 2012 Shipbuilding Plan.
The DoD released in January 2012 the Defense Strategic Guidance, a new set of strategic military priorities and
guidance. In May 2013, the U.S. Navy released its Annual Long Range Plan for the Construction of Naval Vessels
for 2014 (the "2014 Long Range Plan"). The 2014 Long Range Plan anticipates a fleet of 306 ships comprised of 12
ballistic missile submarines, 11 nuclear-powered aircraft carriers, 48 nuclear-powered attack submarines, 88 large
multi-mission surface combatants, 52 small multi-role surface combatants, 33 amphibious landing ships, 29 combat
logistics force ships, and 33 support vessels. The 2014 Long Range Plan also notes that the four SSGN currently in
service will retire in the mid-2020s, and the U.S. Navy is exploring the possibility of inserting a quad-pack of large
diameter payload tubes in Block V SSN-774 Virginia-class submarines to offset the loss of the SSGN strike
capability. The 2014 Long Range Plan also acknowledges that the DoD will encounter several challenges in
executing the plan, particularly with regard to funding new submarines to replace the Ohio-class nuclear ballistic
submarines. Significant reductions in the number of ships procured by the U.S. Navy would have a material adverse
effect on our financial position, results of operations or cash flows.
We believe our shipbuilding programs are a high priority for national defense, but, under federal budgetary
pressures, one or more of our programs may be reduced, extended or terminated by our U.S. Government
customers. Specific actions that could negatively affect us include the deferral of production of new amphibious
ships, the reduction in the number of planned large surface combatants, an increase in the procurement interval for
aircraft carriers beyond five years, and postponement or cancellation of the RCOH for CVN-73 USS George
Washington. In response to the need for cheaper alternatives and the proliferation of "smart weapons," future
strategy reassessments by the DoD may result in a decreased need for our shipbuilding programs, including our
aircraft carrier programs. For the year ended December 31, 2013, our aircraft carrier programs accounted for
approximately 41% of our consolidated revenue. Significant reductions in Congressional appropriations for our
shipbuilding programs or significant delays in such appropriations could have a material adverse effect on our
financial position, results of operations or cash flows.
The Department of Defense has announced plans for significant changes to its business practices that
could have a material effect on its overall procurement process and adversely impact our current programs
and potential new awards.
In November 2010, the DoD announced certain initiatives designed to gain efficiencies, refocus priorities and
enhance business practices used by the DoD, including those used to procure goods and services from defense
contractors. These initiatives are organized into five major areas: Affordability and Cost Growth; Productivity and
Innovation; Competition; Services Acquisition; and Processes and Bureaucracy. Our understanding is that these
initiatives are intended to reduce costs and enhance efficiencies and productivity.
In November 2012, the DoD expanded its focus on business process improvements by introducing Better Buying
Power 2.0 ("BBP 2.0"), which established higher standards and stronger professional qualification requirements for
key leadership positions in the acquisition workforce and increased the cost consciousness of the acquisition
workforce. BBP 2.0 also includes initiatives focused on enforcing affordability caps, controlling costs through cost
performance measures, encouraging stronger partnerships with the requirements community and incentivizing
industry by aligning profitability more tightly with DoD goals and employing appropriate contract types. In April 2013,
the DoD issued an implementation directive for BBP 2.0, which contained several of the key overarching principles
that underlie BBP 2.0, including effective incentives to industry, especially competitive pressures; insistence on
demonstrated progress before major commitments; and use of the right contract type for the job. In November
2013, the DoD also embarked upon an assessment to perform a cost-benefit analysis of regulatory and statutory
requirements that might be implemented more effectively, changed, or eliminated.
We expect DoD's focus on business practices to impact the contracting environment in which we operate as we and
others in the industry adjust our practices to address the new initiatives and the reduced level of spending by the
DoD. We are taking steps internally to assess how we can respond to and support these changes, including how
we can further reduce costs and increase productivity, modify how we respond to proposals and revise our areas of
focus. Depending on how these initiatives are implemented, they could have an impact on current programs, as well
as new business opportunities.
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Our future success depends, in part, on our ability to deliver our products and services at an affordable life
cycle cost, requiring us to develop and maintain technologies, facilities, equipment and a qualified
workforce to meet the needs of current and future customers.
Shipbuilding is a long cycle business, and our success depends on quality, cost and schedule performance on our
contracts. We must develop and sustain the workforce, technologies, facilities, equipment and financial capacity
needed to deliver our products and services at an affordable life cycle cost. If we fail to maintain our competitive
position, we could lose future contracts to our competitors, which could have a material adverse effect on our
financial position, results of operations or cash flows.
Our operating results are heavily dependent upon our ability to attract and retain a sufficient number of engineers
and skilled workers at competitive costs and with the necessary skills and/or security clearances. At the same time,
stable future revenues and costs are important for us to maintain a qualified workforce. Development and
maintenance of the necessary nuclear expertise and the challenges of hiring and training a qualified workforce can
be a limitation on our business. If qualified personnel become scarce, we could experience higher labor, recruiting
or training costs to attract and retain qualified employees, or, if we fail to attract and retain qualified personnel, we
could incur difficulties in performing our contracts and attracting new business.
Competition within our markets or an increase in bid protests may reduce our revenues and market share.
U.S. defense spending levels are uncertain and difficult to predict. While the U.S. Navy's 2014 Long Range Plan
anticipates a fleet size of 306 ships, the plan does not include enough ships to fully support all elements of the
Navy's ships goal over the 30-year period. The U.S. Navy currently projects that shortfalls would occur at various
points during this 30-year period in ballistic missile submarines, cruisers-destroyers, attack submarines, and
amphibious ships. Declines in U.S. defense spending that reduce the demand for the types of ships we build and
services we provide increase our risk exposure to market competition. We compete with another large defense
contractor for construction contracts to build surface combatants, and we may in the future compete with the same
and other defense contractors to build other of our products. If we are unable to continue to compete successfully
against our current or future competitors, we may experience declines in revenues and market share, which could
negatively impact our financial condition, results of operations or cash flows.
Although we are the only company currently capable of refueling nuclear-powered aircraft carriers, we believe that
two existing U.S. Government-owned shipyards could refuel nuclear-powered aircraft carriers if substantial
investments in facilities, personnel and training were made. U.S. Government-owned shipyards engage in the
refueling, overhaul and inactivation of SSN-688 Los Angeles-class submarines and are capable of repairing and
overhauling non-nuclear ships. The 2012 National Defense Authorization Act required DoD to develop a core depot
level maintenance capability to refuel nuclear aircraft carriers. The 2013 Defense Authorization Act, however,
modified the 2012 Act by restoring an exception for the nuclear refueling of an aircraft carrier from the definition of
core depot level maintenance. The 2013 Act also amended and clarified the exception to cover the concurrent
refueling and overhaul of an aircraft carrier, as well as the defueling of an aircraft carrier. Similarly, the 2013 Act
restored an exclusion for nuclear aircraft carrier programs from the definition of core logistics capabilities that was
contained in previous law. If a U.S. Government-owned shipyard were to become capable and engaged in the
business of refueling nuclear-powered aircraft carriers, our financial position, results of operations or cash flows
could be adversely affected.
We also compete in the engineering, planning and design market with other companies that provide engineering
support services. Such competition increases the risk that we may not be the successful bidder on future U.S. Navy
engineering proposals, including aircraft carrier research and development, submarine design and future surface
combatant and amphibious assault ship program contracts.
Our competitive environment is also affected by bid protests from unsuccessful bidders on new program awards. As
the competitive environment intensifies, the number of bid protests may increase. Bid protests can result in an
award decision being overturned, requiring a re-bid of the contract. Even when a bid protest does not result in a re-
bid, resolution of the matter typically extends the time until contract performance can begin, which may reduce our
earnings in the period in which the contract would otherwise have performed.
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Overcapacity in the U.S. shipbuilding market may reduce our market share or our ability to secure contract
awards at profitable prices.
The reduced level of shipbuilding activity by the U.S. Navy, evidenced by the reduction in fleet size from 566 ships
in 1989 to 283 ships as of December 31, 2013, has resulted in workforce reductions in the industry but little
infrastructure consolidation. The general result has been fewer contracts awarded to the same fixed number of
shipyards. Six major private United States shipyards, three of which we own, plus numerous other smaller private
shipyards compete for contracts to construct, overhaul, repair and convert naval vessels. We intend to cease all
military shipbuilding operations in our Louisiana facilities in 2014. Competition for future shipbuilding programs is
expected to be intense. Additionally, our products, such as aircraft carriers, submarines, amphibious assault ships,
surface combatants and other ships, compete for funding with each other, as well as with other defense products
and services. Future rationalization of shipyard capacity in the United States might occur, and we could be affected
by shipyard consolidation or closures as a result of the reduced level of U.S. Navy spending on ship construction.
Any further reduction could have a significant effect on our business, financial condition, results of operations or
cash flows.
As a U.S. Government contractor, we are heavily regulated and could be adversely affected by changes in
regulations or any negative findings from a U.S. Government audit or investigation.
U.S. Government contractors must comply with significant regulatory requirements, including procurement, nuclear
and other requirements. Government contracting requirements increase our contract performance and compliance
costs. Our nuclear operations are subject to an enhanced regulatory environment, which results in increased
performance and compliance efforts and costs. Changes in regulations and related requirements can increase our
compliance costs and reduce our profit margins.
We operate in a heavily regulated environment and are routinely audited and reviewed by the U.S. Government and
its various agencies, such as the U.S. Navy's Supervisor of Shipbuilding, the DCAA and the DCMA. These agencies
review our contract performance, cost structures and compliance with applicable laws, regulations and standards,
as well as the adequacy of, and our compliance with, our internal control systems and internal policies. Systems
subject to audit or review include our accounting systems, purchasing systems, billing systems, property
management and control systems, cost estimating systems, earned value management systems, compensation
systems and management information systems. Any costs we incur that are found to be unallowable or improperly
allocated to a specific contract will not be reimbursed or must be refunded if previously reimbursed. If an audit
uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative
sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and
suspension and prohibition from doing business with the U.S. Government. Allegations of impropriety can also
cause us significant reputational harm.
Whether or not illegal activities are alleged, the U.S. Government has the ability, pursuant to regulations relating to
contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies
exist in one or more such systems. The U.S. Government has, in certain instances, withheld payments on certain of
our contracts subject to these regulations upon its assessment that deficiencies exist with one or more of our
business systems. We are modifying our affected business systems to address the U.S. Government's concerns.
As with other government contractors, the U.S. Government has, from time to time, recommended that certain of
our contract prices be reduced, or that certain costs allocated to our contracts be disallowed. These
recommendations sometimes involve substantial dollar amounts. In response to U.S. Government audits,
investigations and inquiries, we have also in the past made adjustments to our contract prices and the costs
allocated to our government contracts. Such audits, investigations and inquiries may result in future reductions of
our contract prices.
We must comply with a variety of federal laws, including the Truth in Negotiations Act, the False Claims Act, the
Procurement Integrity Act, the International Traffic in Arms Regulations promulgated under the Arms Export Control
Act, the Close the Contractor Fraud Loophole Act, the Foreign Corrupt Practices Act and Cost Accounting
Standards, and we are subject, from time to time, to U.S. Government investigations relating to our operations. If
we are convicted or otherwise found to have violated the law, or are found not to have acted responsibly as defined
by the law, we may be subject to reductions in the value of contracts, contract modifications or terminations, the
assessment of penalties and fines or compensatory or treble damages, which could have a material adverse effect
on our financial position, results of operations or cash flows. Such findings or convictions could also result in
16
suspension or debarment from government contracting. Any suspension or debarment would likely have a material
adverse effect on our financial position, results of operations or cash flows.
Many of our contracts contain performance obligations that require innovative design capabilities, are
technologically complex, require certain manufacturing expertise or are dependent upon factors not wholly
within our control, and failure to meet these obligations could adversely affect our profitability and future
prospects.
We design, develop and manufacture products and provide services applied by our customers in a variety of
environments. Problems and delays in product development or with delivery of subcontractor components or
services as a result of issues with respect to design, technology, licensing and intellectual property rights, labor,
learning curve assumptions or materials and components could prevent us from satisfying contractual
requirements.
First-in-class ships, also known as lead ships, usually have new technology that is supplied by the U.S. Navy, other
contractors, or us. Problems in developing these new technologies or design changes in the construction process
can lead to delays in maintaining the design schedule needed for construction. The risk associated with new
technology or mid-construction design changes can both increase the cost of a ship and delay delivery. Late
delivery of information can also cause inefficiencies in the construction process, increase costs and put the delivery
schedule at risk, which could adversely affect our profitability and future prospects.
Our products cannot always be tested and proven and are otherwise subject to unforeseen problems, including
premature failure of products that cannot be accessed for repair or replacement, substandard quality or
workmanship and unplanned degradation of product performance. These failures could result in loss of life or
property and could negatively affect our results of operations by causing unanticipated expenses not covered by
insurance or indemnification from the customer, diversion of management focus in responding to unforeseen
problems, loss of follow-on work and, in the case of certain contracts, repayment to the government customer of
contract cost and fee payments previously received.
We have experienced quality issues in the past with respect to products and services that we sell to our U.S.
Government customers. These issues have required significant resources to analyze the source of the deficiencies
and implement corrective actions. We may discover quality issues in the future related to our products and services
that require analysis and corrective action. Such issues and our responses and corrective actions could have a
material adverse effect on our financial position, results of operations or cash flows.
We may not realize the anticipated benefits or may incur additional costs related to the wind down of
military shipbuilding at our Louisiana facilities and the consolidation of all Ingalls construction into our
Pascagoula shipyard.
We intend to wind down military shipbuilding at our Louisiana facilities, including Avondale, our Louisiana shipyard,
in 2014 and consolidate all Ingalls military shipbuilding into our Pascagoula shipyard. We are shifting construction of
future LPD-class ships to a single production line at our Pascagoula shipyard to reduce costs, increase efficiency
and address shipbuilding overcapacity. Shifting Avondale's military shipbuilding to our Pascagoula shipyard may not
result in our realization of anticipated benefits from serial production at that facility. In connection with the increased
utilization of our employees and facilities in our Pascagoula shipyard, we may encounter difficulties adhering to
back-to-back production schedules. Any such difficulties could have an adverse effect on our ability to timely
perform our existing contracts and our ability to obtain new contracts in the future. Moreover, the concentration of
our Ingalls workforce in Pascagoula may inhibit our ability to attract and retain a sufficient number of skilled and
trained employees to perform the increased workload. Any failure to attract and retain the necessary workforce, or
to effectively manage and control third-party contractors, could adversely affect our ability to perform our contracts
and have a material adverse effect on our financial position, results of operations or cash flows.
We anticipate that we will incur substantial restructuring costs and asset write-downs, currently estimated at $256
million, related to the wind down of our operations at Avondale. We believe that substantially all such expenses will
be recoverable under existing flexibly-priced contracts or future negotiated contracts in accordance with FAR
provisions governing the treatment of restructuring and shutdown related costs. The DCAA prepared an initial audit
report on our July 30, 2010, cost recovery proposal 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 included in the proposal. We then submitted a revised proposal dated October 12, 2011 to address the
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concerns of the DCAA and to reflect a revised estimated total cost of $271 million. We received a supplemental
DCAA audit report, which again stated that the proposal was not sufficiently supported to allow the DCAA to reach a
conclusion. The amount and percentage of questioned costs were materially unchanged from the previous audit
report. We submitted another revised proposal that addresses the DCAA concerns and supports our current
restructuring cost estimate of $256 million.
Although closure is still the baseline assumption for Avondale, we are pursuing other opportunities to utilize this
facility. If we are successful in pursuing such opportunities, and Avondale remains open, we would submit a revised
restructuring proposal to the U.S. Navy consistent with this change. In such event, we expect that our 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.
Whether we close Avondale entirely or keep the facility open in a new line of business, we currently do not have an
agreement with the U.S. Navy regarding the government contract accounting and pricing treatment of the
restructuring and shutdown costs associated with our wind down at Avondale. We may also incur environmental
costs in connection with the wind down. Such costs, which we cannot reasonably estimate at this time, could be
significant. The actual restructuring expenses we incur in connection with our wind down of Avondale, including
potential environmental costs, may be greater than our current estimate, and any inability to recover such costs
could result in a material adverse effect on our financial position, results of operations or cash flows.
We use estimates when accounting for contracts. Changes in estimates could affect our profitability and
our overall financial position.
Contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and
making assumptions for schedule and technical issues. The size and nature of many of our contracts make the
estimation of total revenues and costs at completion complicated and subject to many variables. For new
shipbuilding programs, we estimate, negotiate and contract for construction of ships that are not completely
designed. Assessing risks, estimating contract revenues and costs and making assumptions for schedule and
technical issues for these ships are subject to the variability of the final ship design and evolving scope of work. Our
assumptions on ship contracts include the length of time to complete the contract, because total costs include
expected increases in wages and material prices. Similarly, our assumptions include the future impact of our
efficiency initiatives and cost reduction efforts. We consider incentives, awards and penalties related to contract
performance in estimating revenues and profit rates, and we record them when sufficient information exists to
assess anticipated contract performance.
The judgment and estimation processes described above are significant to our contract accounting, and materially
different amounts can be generated if different assumptions are used or if actual events differ from our
assumptions. Future changes in underlying assumptions, circumstances or estimates may have a material adverse
effect on our future financial position, results of operations or cash flows. See Critical Accounting Policies,
Estimates, and Judgments in Item 7.
Our business is subject to disruption caused by natural disasters, environmental disasters and other
factors that could have a material adverse effect on our financial position, results of operations or cash
flows.
We have significant operations located in regions of the United States that have been and may be exposed to
damaging storms, such as hurricanes, floods and environmental disasters, such as oil spills. Although preventative
measures may help to mitigate damage, the damage and disruption resulting from natural and environmental
disasters may be significant. Natural disasters can disrupt our facilities, systems or projects, which can interrupt
operational processes and performance on our contracts. In addition, should insurance or other risk transfer
mechanisms be unavailable or insufficient to recover material costs associated with natural or environmental
disasters, we could experience a material adverse effect on our financial position, results of operations or cash
flows. See Our insurance coverage may be inadequate to cover all of our significant risks or our insurers may deny
coverage of material losses we incur, which could adversely affect our profitability and financial position in this
section.
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Natural disasters can disrupt our workforce, electrical and other power distribution networks, including computer
and internet operations and accessibility and the critical industrial infrastructure needed for normal business
operations. These disruptions could adversely affect our contract performance and financial results. Environmental
disasters, particularly oil spills in waterways and bodies of water used for the transport and testing of our ships, can
disrupt the timing of performance under our contracts with the U.S. Navy and the U.S. Coast Guard.
Our suppliers and subcontractors are also subject to natural and environmental disasters that could affect their
ability to deliver products or services or otherwise perform their contracts. Performance failures by our
subcontractors due to natural or environmental disasters may adversely affect our ability to perform our obligations
on a contract, which could reduce our profitability in the event damages or other costs are not recoverable from the
subcontractor, the customer or insurers. Such events could also result in a termination of the prime contract and
have an adverse effect on our ability to compete for future contracts.
Our insurance coverage may be inadequate to cover all of our significant risks or our insurers may deny
coverage of material losses we incur, which could adversely affect our profitability and financial position.
We seek to identify and obtain, in established markets, insurance agreements to cover our significant risks and
potential liabilities, including, among others, natural disasters, product liability and business interruption resulting
from an insured property loss. In some circumstances, we may be indemnified for losses by the U.S. Government,
subject to the availability of appropriated funds. Not every risk or liability can be protected by insurance, and, for
insurable risks, the limits of coverage reasonably obtainable in the market may not be sufficient to cover the full
amount of actual losses or liabilities incurred, including, for example, in the case of a catastrophic hurricane. In
addition, the nature of our business makes it difficult to quantify the disruptive impact of such events. Such
limitations on the availability of insurance coverage may result in us bearing substantial costs for uninsured losses
that could have a material adverse effect on our financial position, results of operations or cash flows. Even in
cases where we have insurance coverage, disputes with insurance carriers over coverage may affect the timing of
cash flows, and, if litigation with the insurance carrier becomes necessary, an outcome unfavorable to us may have
a material adverse effect on our financial position, results of operations or cash flows.
Our business could suffer if we are unsuccessful in negotiating new collective bargaining agreements.
Approximately 50% of our approximately 38,000 employees are covered by a total of nine collective bargaining
agreements. Newport News has three collective bargaining agreements covering represented employees, which
expire in April 2014, June 2014 and July 2017. Ingalls has six collective bargaining agreements covering
represented employees, five of which cover Pascagoula and Gulfport employees and one of which covers Avondale
employees. The five Pascagoula/Gulfport collective bargaining agreements expire in March 2015. The Avondale
collective bargaining agreement was indefinitely extended upon its last expiration.
Collective bargaining agreements generally expire after three to five years, and we must negotiate successor
agreements as each of our collective bargaining agreements expires. While we believe we maintain good
relationships with our represented workers, it is possible that we may experience difficulties with renegotiating
expiring collective bargaining agreements. We have, in the past, experienced work stoppages, strikes and other
labor disruptions associated with the collective bargaining of new labor agreements. If we experience such events
in the future, we could incur additional expenses or work delays that could adversely affect programs served by
employees who are covered by collective bargaining agreements.
Significant changes in key estimates and assumptions, such as discount rates and assumed long-term
returns on assets, actual investment returns on our pension plan assets, and legislative and regulatory
actions could affect our earnings, equity and contributions to our pension and retiree health care plans in
future periods.
Our pension and retiree health care costs are dependent on significant judgment in the use of various estimates
and assumptions, particularly with respect to the discount rate and expected long-term rates of return on plan
assets. Changes to these estimates and assumptions could have a material adverse effect on our financial position,
results of operations or cash flows. Differences between actual investment returns and our assumed long-term
returns on assets will result in changes in future pension expense and the funded status of our plans, and could
increase future funding of the plans.
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Timing differences exist between the accrual of pension costs under accounting principles generally accepted in the
United States of America ("GAAP"), pension funding requirements and the recovery of pension costs that are
allowable under our government contracts. Such timing differences could have a material adverse effect on our
financial position, results of operations or cash flows. On December 27, 2011, the U.S. Cost Accounting Standards
("CAS") Board issued its final CAS Harmonization Rule. The new rule impacts pension costs on contracts beginning
in 2013 and is effective for forward pricing purposes for contracts negotiated on or after February 27, 2012.
Although we believe that contractors are entitled to an equitable adjustment on CAS-covered contracts awarded
prior to the February 27, 2012 effective date, the application of this rule could have a material adverse effect on our
financial position, results of operations or cash flows if we are unable to successfully recover such equitable
adjustment.
For a complete discussion regarding how our consolidated financial statements can be affected by pension plan
accounting policies and regulatory changes, see Critical Accounting Policies, Estimates, and Judgments in Item 7.
Unforeseen environmental costs could have a material adverse effect on our financial position, results of
operations or cash flows.
Our operations are subject to and affected by a variety of existing federal, state and local environmental protection
laws and regulations. In addition, we could be affected by future laws or regulations, including those imposed in
response to climate change concerns or other actions commonly referred to as "green initiatives." We expect to
incur future capital and operating costs to comply with current and future environmental laws and regulations, and
such costs could be substantial, depending on the future proliferation of environmental rules and regulations and
the extent to which we discover currently unknown environmental conditions.
The nature of shipbuilding operations requires the use of hazardous materials. Our shipyards also generate
significant quantities of wastewater, which we treat before discharging pursuant to various permits. To handle these
materials, our shipyards have an extensive network of aboveground and underground storage tanks, some of which
have leaked and required remediation in the past. In addition, handling of these materials sometimes results in
spills in our shipyards and occasionally in adjacent rivers and waterways where we operate. Our shipyards maintain
extensive waste handling programs that we periodically modify, consistent with changes in applicable laws and
regulations. See Environmental, Health and Safety in Item 1.
Various federal, state and local environmental laws and regulations impose restrictions on the discharge of
pollutants into the environment and establish standards for the transportation, storage and disposal of toxic and
hazardous wastes. Stringent fines and penalties may be imposed for noncompliance, and certain environmental
laws impose joint and several "strict liability" for remediation of spills and releases of oil and hazardous substances.
Such laws and regulations render a party liable for environmental cleanup and remediation costs and damage
without regard to negligence or fault on the part of such party, and may expose us to liability for the conduct of or
conditions caused by third parties.
Environmental laws and regulations also impose substantial fines and criminal sanctions for violations, and may
require the installation of costly pollution control equipment or operational changes to limit pollution emissions or
discharges and/or to decrease the likelihood of accidental hazardous substance releases. We incur, and expect to
continue to incur, costs to comply with federal and state environmental laws and regulations related to the cleanup
of pollutants previously released into the environment. In addition, if we are found to be in violation of the Clean Air
Act or the Clean Water Act, the facility or facilities involved in the violation could be placed by the EPA on the
"Excluded Parties List" maintained by the General Services Administration, which would continue until the EPA
concluded that the cause of the violation was cured. Facilities on the "Excluded Parties List" are prohibited from
working on any U.S. Government contract.
The adoption of new environmental laws and regulations, stricter enforcement of existing laws and regulations,
imposition of new cleanup requirements, discovery of previously unknown or more extensive contamination,
litigation involving environmental impacts, our inability to recover related costs under our government contracts or
the financial insolvency of other responsible parties could cause us to incur costs that could have a material
adverse effect on our financial position, results of operations or cash flows.
We are winding down military shipbuilding at our Louisiana facilities, which we anticipate will be completed in 2014.
Our wind down of operations at these facilities may result in environmental costs, the amount of which we cannot
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currently estimate. Such costs could be significant and could have a material adverse effect on our financial
position, results of operations or cash flows.
Market volatility and adverse capital or credit market conditions may affect our ability to access cost-
effective sources of funding and may expose us to risks associated with the financial viability of suppliers
and the ability of counterparties to perform on financial instruments.
The financial markets can experience high levels of volatility and disruption, reducing the availability of credit for
certain issuers. We sometimes access these markets to support certain business activities, including acquisitions
and capital expansion projects, obtaining credit support for our workers' compensation self-insurance program,
refinancing existing indebtedness, and arranging for letters of credit. Depending on the condition of the capital or
credit markets existing at the time, we may be unable in the future to obtain capital market financing or bank
financing on favorable terms, or at all, which could have a material adverse effect on our financial position, results
of operations or cash flows.
Tightening credit markets could also adversely affect our suppliers' ability to obtain financing. Delays in suppliers'
ability to obtain financing, or the unavailability of financing, could negatively affect their ability to perform their
contracts with us and cause our inability to meet our contract obligations. The inability of our suppliers to obtain
financing could also result in the need for us to transition to alternate suppliers, which could result in significant
incremental costs and delays.
We have existing agreements with counterparties in the financial markets, including brokers and dealers,
commercial banks, investment banks and other institutional parties, and may in the future enter into agreements
with such parties. These transactions expose us to potential credit risk in the event of default of a counterparty. In
addition, our credit risk may be increased when collateral held by us to secure performance of a counterparty
cannot be realized upon a sale or is liquidated at prices not sufficient to recover the full amount due us.
Our reputation and our ability to do business may be impacted by the improper conduct of employees,
agents or business partners.
Our compliance program includes detailed compliance plans and extensive compliance controls, policies and
procedures designed to prevent and detect reckless or criminal acts committed by employees, agents or business
partners that would violate the laws of the jurisdictions in which we operate, including laws governing payments to
government officials, security clearance breaches, cost accounting and billing, competition and data privacy. We
may not, however, prevent all such reckless or criminal acts committed by our employees, agents or business
partners. Any improper actions could subject us to civil and criminal investigations and monetary and non-monetary
penalties, including suspension or debarment from contracting with the U.S. Government, which could have a
material adverse effect on our reputation, financial position, results of operations or cash flows.
In January 2013, we 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 we had initiated an internal investigation regarding
whether certain employees at Ingalls mischarged time or misstated progress on U.S. Navy and U.S. Coast Guard
contracts. We conducted an internal investigation, led by external counsel, and have taken remedial actions,
including the termination of employees in instances where we believed grounds for termination existed. We are
providing information regarding our investigation to the relevant government agencies. We 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 our 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 us that it would be premature for the Coast Guard to reduce its
$5.8 million portion of the withhold. Based on the results of our internal investigation, we estimate that the maximum
amount of the mischarging is approximately $4 million. We are in discussions with our U.S. Government customers
regarding the potential release of an additional portion of the withheld funds, but we 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, we could be subject to significant civil penalties, criminal fines, and suspension or
debarment from U.S. Government contracting. Although we do not currently believe that this matter will have a
material effect on our financial condition, results of operations or cash flows, we 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.
21
Our business could be negatively impacted by security threats, including cyber security threats, and
related disruptions.
As a defense contractor, we rely on our information technology infrastructure to process, transmit and store
electronic information, including classified and other sensitive information of the U.S. Government. While we
maintain stringent information security policies and protocols, we face cyber security and other security threats to
our information technology infrastructure, including threats to our and the U.S. Government's proprietary and
classified information. We face unauthorized and unlawful attempts to gain access to our information technology
infrastructure, including coordinated attacks from groups of hackers, and we could also face attempts to gain
physical access to classified and other sensitive information located at our facilities. Our information technology
infrastructure is critical to the efficient operation of our business and essential to our ability to perform day-to-day
operations. Breaches of our information technology infrastructure or physical facilities or other disruptions could
expose us to reputational damage, potential liability or the loss of current or future contracts, including work on
sensitive or classified systems for the U.S. Government, which could have a material adverse effect on our
operations, financial position, results of operations or cash flows.
Our nuclear operations subject us to various environmental, regulatory, financial and other risks.
The design, construction, refueling and overhaul, repair and inactivation of nuclear-powered aircraft carriers and
nuclear-powered submarines, our nuclear facilities used to support such activities and our other nuclear operations
at DoE sites and commercial nuclear power plants subject us to various risks, including:
• Potential liabilities relating to harmful effects on the environment and human health resulting from nuclear
operations and the storage, handling and disposal of radioactive materials, including nuclear assemblies
and their components;
• Unplanned expenditures relating to maintenance, operation, security and repair, including repairs required
by the U.S. Navy, the Nuclear Regulatory Commission or the DoE;
• Reputational harm;
• Potential liabilities arising out of a nuclear incident whether or not it is within our control; and
• Regulatory noncompliance and loss of authorizations or indemnifications necessary for our operations.
Failure to properly handle nuclear materials could pose a health risk to humans or wildlife and could cause personal
injury and property damage, including environmental contamination. If a nuclear accident were to occur, its severity
could be significantly affected by the volume of the materials and the speed of corrective action taken by us and
emergency response personnel, as well as other factors beyond our control, such as weather and wind conditions.
Actions we might take in response to an accident could result in significant costs.
Our nuclear operations are subject to various safety related requirements imposed by the U.S. Navy, DoE and
Nuclear Regulatory Commission. In the event of noncompliance, these agencies may increase regulatory oversight,
impose fines or shut down our operations, depending on their assessment of the severity of the situation. In
addition, new or revised security and safety requirements imposed by the U.S. Navy, DoE and Nuclear Regulatory
Commission could necessitate substantial capital and other expenditures.
Subject to certain requirements and limitations, our contracts with the U.S. Navy and DoE generally provide for
indemnity by the U.S. Government for costs arising out of or resulting from our nuclear operations. We may not,
however, be indemnified for all liabilities that we may incur in connection with our nuclear operations. To mitigate
risks related to our commercial nuclear operations, we rely primarily on insurance carried by nuclear facility
operators and our own limited insurance for losses in excess of the coverage of facility operators. Such insurance,
however, may not be sufficient to cover our costs in the event of an accident or business interruption relating to our
commercial nuclear operations, which could have a material adverse effect on our financial position, results of
operations or cash flows.
22
Changes in future business conditions could cause business investments, recorded goodwill and/or
purchased intangible assets to become impaired, resulting in substantial losses and write-downs that
would reduce our operating income.
As part of our business strategy, we acquire non-controlling and controlling interests in businesses. Acquisitions and
investments are made following careful analysis and due diligence processes designed to achieve a desired return
or strategic objective. Business acquisitions generally involve estimates, assumptions and judgments in determining
acquisition prices, which prices must be allocated among acquired assets, including goodwill, based upon fair
market values. Notwithstanding our analyses, due diligence processes and business integration efforts, actual
operating results of acquired businesses may vary significantly from initial estimates. In such events, we may be
required to write down our carrying value of the related goodwill and/or purchased intangible assets. In addition,
declines in the trading price of our common equity can result in goodwill and/or purchased intangible asset
impairment charges.
As of December 31, 2013, goodwill and purchased intangible assets generated from prior business acquisitions
accounted for approximately 14% and 8%, respectively, of our recorded total assets. We evaluate goodwill values
for impairment annually on November 30, or when evidence of potential impairment exists. We evaluate purchased
intangibles when evidence of potential impairment exists. The impairment test is based on several factors requiring
judgment. As a general matter, a significant decrease in expected cash flows or changes in market conditions may
indicate potential impairment of recorded goodwill or purchased intangibles. Adverse equity market conditions that
result in a decline in market multiples and our common stock price can also result in an impairment of goodwill and/
or other intangible assets.
Future declines in equity market multiples or the trading price of our common stock, or other factors such as
reductions in future contract awards or significant adverse changes in our operating margins at Ingalls could lead to
future impairments of goodwill. Any such impairments that result in us recording additional goodwill impairment
charges could have a material adverse effect on our financial position or results of operations.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our
profitability and cash flow.
We are subject to income taxes in the United States. Significant judgment is required in determining our provision
for income taxes. In the ordinary course of business, there are many transactions and calculations where the
ultimate tax determination is uncertain. In addition, timing differences in the recognition of contract income for
financial statement purposes and for income tax purposes can cause uncertainty with respect to the timing of
income tax payments, which can have a significant impact on cash flow in a particular period. Changes in
applicable income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates or
changes in the taxability of certain sales or the deductibility of certain expenses, thereby affecting our income tax
expense and profitability. In addition, the final results of any tax audits or related litigation could be materially
different from our related historical income tax provisions and accruals. Additionally, changes in our tax rate as a
result of changes in our overall profitability, changes in tax legislation, changes in the valuation of deferred tax
assets and liabilities, changes in differences between financial reporting income and taxable income, the
examination of previously filed tax returns by taxing authorities and continuing assessments of our tax exposures
can also impact our tax liabilities and affect our income tax expense, profitability and cash flow.
As of December 31, 2013, the estimated value of our uncertain tax positions was a potential liability of $14 million,
which includes accrued interest and penalties. If our positions are sustained by the taxing authority in our favor, the
reversal of the liability would reduce our income tax provision and cost of sales and service revenues. Such tax
positions may not, however, be sustained in our favor.
We conduct a portion of our operations through joint ventures and strategic alliances. We may have limited
control over such arrangements and have returns that are not proportional to the risks and resources we
contribute.
We conduct some of our operations through joint ventures with business partners. In any joint venture arrangement,
differences in views among the joint venture participants may result in delayed decisions or in failures to reach
agreement on major issues. We and our joint venture partners may, in certain instances, fail to reach agreement on
significant decisions on a timely basis, or at all. We also cannot control the actions of our joint venture partners,
including any non-performance, default by or bankruptcy of our joint venture partners, and we typically share liability
23
or have joint and/or several liability with our joint venture partners for joint venture matters. Any of these factors
could potentially have a material adverse effect on our joint venture operations and the profitability of our joint
ventures.
In joint ventures in which we hold a minority interest, we have limited control over many decisions relating to joint
venture projects and internal controls relating to such projects. These joint ventures may not be subject to the same
requirements regarding internal controls and internal control reporting that apply to us. As a result, internal control
issues may arise that could have a material adverse effect on the joint venture. In addition, in order to establish or
preserve relationships with our joint venture partners, we may agree to assume risks and contribute resources that
are proportionately greater than the returns we expect to receive in the related joint venture. Such agreements may
reduce our income and returns on these investments compared to what we would have received if our assumed
risks and contributed resources were proportionate to our returns.
Strategic acquisitions and investments we expect to pursue involve risks and uncertainties.
In pursuing our business strategies, we review, evaluate and consider potential acquisitions and investments. In
evaluating such transactions, we have to make difficult judgments regarding the value of business opportunities,
technologies and other assets, and the risks and costs of potential liabilities. In addition, acquisitions and
investments involve other risks and uncertainties, including the difficulty of integrating newly-acquired businesses,
challenges in achieving strategic objectives and other benefits anticipated from acquisitions or investments, the
diversion of management attention and resources from our existing operations and other initiatives, the potential
impairment of acquired assets and the potential loss of key employees of acquired businesses. If we fail to manage
acquisitions, investments and other strategic transactions successfully, our financial results, business and future
prospects could be harmed.
We are subject to various claims and litigation that could ultimately be resolved against us, requiring
material future cash payments and/or future material charges against our operating income, materially
impairing our financial position.
The size, type and complexity of our business make it highly susceptible to claims and litigation. We are currently,
and may in the future become, subject to various claims and litigation, including environmental claims, which, if not
resolved for amounts within accrued reserves, could have a material adverse effect on our financial position, results
of operations or cash flows. Claims and litigation, even if fully indemnified or insured, could negatively impact our
reputation among our customers and the public, and make it more difficult for us to compete effectively or obtain
adequate insurance in the future. The following paragraphs describe pending claims and litigation that, if
determined adversely for amounts that exceed accrued reserves, could have a material adverse effect on our
financial position, results of operations or cash flows:
We and our 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, in which former and current employees and various third
parties allege exposure to asbestos-containing materials while on, or associated with, our premises or while
working on vessels constructed or repaired by us. 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 our former executive officers are also named as defendants. Although we believe the ultimate
resolution of these cases will not have a material adverse effect on our consolidated financial position, results of
operations or cash flows, we cannot predict what new or revised claims or litigation might be asserted or what
information might come to light and cannot, therefore, give any assurances regarding the ultimate outcome of
asbestos-related litigation.
In January 2011, the U.S. Department of Justice first informed us, 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 we received alleges that, through largely unspecified fraudulent means, we 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 Hurricane Katrina
and for which Northrop Grumman and we 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.
24
In July 2012, the District Court entered an order permitting us to disclose certain information not included in the
redacted copy of the Complaint we received, including the date the Complaint was filed, the decision of the U.S.
Department of Justice 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 Department of Justice 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. We have 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 us, we believe that we have 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 our 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. We intend to defend this matter vigorously. While we believe that the claims
as set forth in the Complaint will not result in a material effect on our consolidated financial position, results of
operations or cash flows, we 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.
We may be unable to adequately protect our intellectual property rights, which could affect our ability to
compete.
We own or have the right to use certain patents, trademarks, copyrights and other forms of intellectual property. The
U.S. Government has rights to use certain intellectual property we develop in performance of government contracts,
and it may authorize others to use such intellectual property. Our intellectual property is subject to challenge,
invalidation, misappropriation or circumvention by third parties.
We also rely upon proprietary technology, information, processes and know-how that are not protected by patents.
We seek to protect this information through trade secret or confidentiality agreements with our employees,
consultants, subcontractors and other parties, as well as through other security measures. These agreements may
not, however, provide meaningful protection for our unpatented proprietary information.
In the event our intellectual property rights are infringed, we may not have adequate legal remedies to maintain our
rights in our intellectual property. Litigation to determine the scope of our rights, even if successful, could be costly
and a diversion of management's attention from other aspects of our business. In addition, trade secrets may
otherwise become known or be independently developed by competitors.
We have the right to use certain intellectual property licensed to us by third parties. In instances where third parties
have licensed to us the right to use their intellectual property, we may be unable in the future to secure the
necessary licenses to use such intellectual property on commercially reasonable terms.
Our debt exposes us to certain risks.
As of December 31, 2013, we had $1,779 million of debt and $650 million of additional borrowing and letter of credit
capacity under our credit facility ("Credit Facility"). Our current level of debt could have important consequences,
including:
•
Increasing our vulnerability to adverse economic or industry conditions;
• Requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures, strategic
initiatives and general corporate purposes;
•
Increasing our vulnerability to, and limiting our flexibility in planning for, or reacting to, changes in our
business or the industry in which we operate;
• Exposing us to the risk of higher interest rates, to the extent borrowings under our Credit Facility are subject
to variable rates of interest;
• Placing us at a competitive disadvantage compared to our competitors that have less debt; and
25
•
Limiting our ability to borrow additional funds.
Because we use a substantial portion of our cash flow from operations to service our debt, we could fail to generate
sufficient cash to fund our liquidity needs or fail to satisfy the restrictive covenants and borrowing limitations to
which we are subject under our debt. Moreover, despite our current level of debt, we may be able to incur significant
additional debt in the future. To the extent new debt is added to our current debt levels, the related risks that we
face could be increased.
Restrictive covenants in the indenture governing our senior notes and our Credit Facility may restrict our
ability to pursue our business strategies.
The indenture governing our senior notes and the terms of our Credit Facility limit our ability, among other things, to:
•
Incur additional debt;
• Pay dividends or make other distributions on, or repurchase or redeem, our stock;
• Prepay, redeem or repurchase certain of our debt;
• Make investments;
• Sell assets;
• Enter into agreements restricting our subsidiaries' ability to pay dividends;
• Consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
• Enter into transactions with our affiliates; and
•
Incur liens.
In addition, the indenture governing our senior notes and the terms of our Credit Facility limit the amount of our
capital expenditures and require us to maintain certain financial ratios, including a minimum interest coverage ratio
and a maximum leverage ratio, among others. These covenants may restrict our financial flexibility, limit our
strategic initiatives, restrict our ability to grow or limit our ability to respond to competitive changes. These
covenants limit how we may conduct our business, and we may be unable to engage in favorable business
activities or finance future operations or capital needs. These covenants may, therefore, limit our ability to
successfully execute our business strategy and operate our business.
Our spin-off from Northrop Grumman exposes us to potential liabilities, including U.S. federal income tax
liabilities.
Our spin-off from Northrop Grumman was structured to minimize the likelihood that Northrop Grumman, Northrop
Grumman's stockholders and we would be required to recognize any taxable income, gain or loss for U.S. federal
income tax purposes as a result of the spin-off, except with respect to cash received by Northrop Grumman's
stockholders in lieu of fractional shares. If all or a portion of the spin-off does not qualify as a tax-free transaction,
Northrop Grumman would recognize a substantial gain for U.S. federal income tax purposes. In such case, under
IRS regulations, each member of Northrop Grumman's consolidated group at the time of the spin-off, including us
and our subsidiaries, would be severally liable for the resulting U.S. federal income tax liability.
In connection with the spin-off, Northrop Grumman and we agreed that each of us would be responsible for the
debts, liabilities and other obligations related to the respective business or businesses that we own and operate
following the spin-off. Although we do not expect to be liable for any such obligations not expressly assumed by us,
it is possible that a court would disregard the agreed allocation and require that we assume responsibility for
obligations allocated to Northrop Grumman, such as certain tax and/or environmental liabilities, particularly if
Northrop Grumman were to refuse or be unable to pay or perform its allocated obligations.
Risks Related to Our Common Stock
Our indebtedness could limit our future ability to pay dividends on our common stock.
Our dividend policy is established by our board of directors based upon our financial condition, results of operations
and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business
26
considerations that our board of directors considers relevant. The terms of the agreements governing our existing
debt limit the amount of dividends we may pay, and debt that we may incur in the future may limit or prohibit
payments of dividends. In addition, the amount of our existing and any additional future debt may limit our ability to
pay dividends. If we cannot generate sufficient cash flow from operations to meet our debt payment obligations,
then our ability to pay dividends, even if declared by our board of directors, may be impaired. There can be no
assurance that we will continue to pay a dividend on our common stock.
Anti-takeover provisions in our organizational documents and Delaware law, as well as regulatory
requirements, could delay or prevent a change in control.
Certain provisions of our Restated Certificate of Incorporation and Restated Bylaws may delay or prevent a merger
or acquisition that a stockholder may consider favorable. For example, our Restated Certificate of Incorporation and
Restated Bylaws provide for a classified board of directors, require advance notice for stockholder proposals and
director nominations, place limitations on convening stockholder meetings and authorize our board of directors to
issue one or more series of preferred stock. These provisions may discourage acquisition proposals or delay or
prevent a change in control, which could harm our stock price. Delaware law also imposes restrictions on mergers
and other business combinations between any holder of 15% or more of our outstanding common stock and us.
Our nuclear shipbuilding operations are considered vitally important to the U.S. Navy. Consequently, the U.S. Navy
has required us to include in our contracts with the Navy provisions regarding notice and approval rights in the
event of change of control of our nuclear shipbuilding operations and regarding the Navy's obligations to indemnify
us for losses relating to our nuclear work for the Navy. Such provisions require us to provide the U.S. Navy with
notice of any potential change of control of our nuclear shipbuilding operations and obtain the Navy's consent for
transferring certain related licenses to facilitate the Navy's ability to ensure that a potential buyer would continue to
conduct our operations in a satisfactory manner. We have included such provisions in solicitations for future U.S.
Navy nuclear work, and we expect them to be included in future contracts with the Navy for nuclear work.
Provisions of our Restated Certificate of Incorporation and our Restated Bylaws, our obligations to Northrop
Grumman relating to the spin-off and our existing contracts with the U.S. Navy may have the effect of discouraging,
delaying or preventing a change of control of our company that may be beneficial to our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There were no unresolved staff comments.
ITEM 2. PROPERTIES
Our principal properties are located in San Diego, California; Avondale (New Orleans), Louisiana; Gulfport and
Pascagoula, Mississippi; Hampton, Newport News, Suffolk and Virginia Beach, Virginia; and Washington, D.C.
Ingalls - The properties comprising our Ingalls operations are located in Pascagoula and Gulfport, Mississippi, and
Avondale, Louisiana. We also have a facility in Waggaman, Louisiana, but we ceased significant operations there in
2011. Our CMSD facilities in San Diego, California, and our AMSEC facilities in Virginia Beach, Virginia, were part
of our Ingalls operations until January 1, 2014, when they became part of our Newport News operating segment.
Our Pascagoula shipyard is a primary builder of major surface warships for the U.S. Navy and has modernized
dozens of other naval ships. It is the only U.S. shipyard in recent years to be developing and building six different
classes of ships for the U.S. Navy and U.S. Coast Guard. Our facilities in Pascagoula are located on approximately
800 acres on the banks of the Pascagoula River where it flows into the Mississippi Sound. We lease the west bank
of our Pascagoula shipyard from the State of Mississippi pursuant to a 99-year lease, consisting of a 40-year base
term plus six optional terms. We anticipate continued use of this facility for the remaining 53 years of the lease and
beyond.
Our Gulfport Composite Center of Excellence in Gulfport, Mississippi, sits on approximately 120 acres and focuses
on composite research and engineering. The facility is currently building the DDG-1001 Michael Monsoor composite
deckhouse and LPD composite masts. In September 2013, we announced the closing of our Gulfport facility, which
we intend to complete by the end of the second quarter of 2014.
27
Our Avondale shipyard is located on approximately 268 acres on the banks of the Mississippi River, approximately
12 miles upriver from downtown New Orleans. Approximately 20% of the Avondale shipyard is leased from several
third parties. The leases have varying expiration dates and typically contain renewal rights. The Avondale shipyard
site has the capacity to manufacture large amphibious assault and military and commercial transport vessels, and
includes three outfitting docks totaling more than 6,000 linear feet. In addition to the shipyard, the Avondale facilities
include the Maritime Technology Center of Excellence. We intend to wind down military shipbuilding at Avondale in
2014 and consolidate all such activities in our Pascagoula shipyard. We are exploring alternative uses for our
Avondale facility.
Newport News - The properties comprising our Newport News operating segment are located in Newport News,
Virginia.
Our facilities in Newport News, Virginia, are located on approximately 550 acres that we own near the mouth of the
James River, which adjoins the Chesapeake Bay, the premier deep-water harbor on the east coast of the United
States. Our Newport News shipyard is one of the largest in the United States. It is the sole designer, builder and
refueler of nuclear-powered aircraft carriers and one of only two shipyards capable of designing and building
nuclear-powered submarines for the U.S. Navy. The shipyard also provides services for naval and commercial
vessels.
Our Newport News shipyard includes seven graving docks, a floating dry dock, two outfitting berths, five outfitting
piers, module outfitting facilities and various other shops. It also has a variety of other facilities, including an 18-acre
all-weather steel fabrication shop, accessible by both rail and transporter, module outfitting facilities that enable us
to assemble a ship's basic structural modules indoors and on land, machine shops totaling 300,000 square feet,
and an apprentice school, which provides a four-year accredited apprenticeship program to train shipbuilders.
Our CMSD facilities in San Diego, California, and our AMSEC facilities in Virginia Beach, Virginia, became part of
our Newport News operating segment on January 1, 2014, and provide fleet support services.
We believe that substantially all of our plants and equipment are, in general, well maintained and in good operating
condition. We believe they are adequate for present needs and, as supplemented by planned construction, are
expected to remain adequate for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
U.S. Government Investigations and Claims - Departments and agencies of the U.S. Government have the
authority to investigate various transactions and operations of our 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 a division or subdivision. Any suspension or debarment would likely have a material
effect on us because of our reliance on government contracts.
In January 2013, we 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 we had initiated an internal investigation regarding
whether certain employees at Ingalls mischarged time or misstated progress on U.S. Navy and U.S. Coast Guard
contracts. We conducted an internal investigation, led by external counsel, and have taken remedial actions,
including the termination of employees in instances where we believed grounds for termination existed. We are
providing information regarding our investigation to the relevant government agencies. We 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 our 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 us that it would be premature for the Coast Guard to reduce its
$5.8 million portion of the withhold. Based on the results of our internal investigation, we estimate that the maximum
amount of the mischarging is approximately $4 million. We are in discussions with our U.S. Government customers
regarding the potential release of an additional portion of the withheld funds, but we 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, we could be subject to significant civil penalties, criminal fines, and suspension or
debarment from U.S. Government contracting. Although we do not currently believe that this matter will have a
material effect on our financial condition, results of operations or cash flows, we cannot predict what new
28
information might come to light in the future and can therefore give no assurances regarding the ultimate outcome
of this matter.
Litigation - We are party to various claims and legal proceedings that arise in the ordinary course of our business.
Although we believe that the resolution of these various claims and legal proceedings will not have a material effect
on our consolidated financial position, results of operations or cash flows, we 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.
In 2013, we resolved litigation against an insurance provider, Factory Mutual Insurance Company ("FM Global"),
arising out of a disagreement concerning the coverage of certain losses related to Hurricane Katrina. In January
2011, we, 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 our predecessor-in-interest in connection with the insurance
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, we amended our 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 our
consolidated financial position, results of operations and cash flows would be favorable.
In January 2011, the U.S. Department of Justice ("DoJ") first informed us, 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 we received alleges that, through largely unspecified fraudulent
means, Northrop Grumman and we 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
Hurricane Katrina and for which Northrop Grumman and we 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. We have 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 us, we believe that we have 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 our 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. We, therefore, believe that the claims as set forth in the Complaint will not
result in a material effect on our consolidated financial position, results of operations or cash flows. We intend to
defend the matter vigorously, but we 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.
We and our 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, in which former and current employees and various third
parties allege exposure to asbestos-containing materials while on, or associated with, our premises or while
working on vessels constructed or repaired by us. 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 our former executive officers are also named as defendants. In some instances, partial or full
insurance coverage is available to us for our liability and that of our former executive officers. Although we believe
the ultimate resolution of these cases will not have a material effect on our consolidated financial position, results of
operations or cash flows, we 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.
29
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of February 21, 2014, concerning our executive officers,
including a five-year employment history.
Name
C. Michael Petters
Jerri F. Dickseski
Irwin F. Edenzon
William R. Ermatinger
Douglass L. Fontaine II
Bruce N. Hawthorne
Christopher D. Kastner
Matthew J. Mulherin
Barbara A. Niland
Mitchell B. Waldman
D. R. Wyatt
Age Position(s)
54
51
60
50
52
64
50
54
55
53
55
President and Chief Executive Officer
Corporate Vice President, Communications
Corporate Vice President and President, Ingalls Shipbuilding
Corporate Vice President and Chief Human Resources Officer
Corporate Vice President, Controller and Chief Accounting Officer
Corporate Vice President, General Counsel and Secretary
Corporate Vice President and General Manager, Corporate Development
Corporate Vice President and President, Newport News Shipbuilding
Corporate Vice President, Business Management and Chief Financial Officer
Corporate Vice President, Government and Customer Relations
Corporate Vice President and Treasurer
C. Michael Petters, President and Chief Executive Officer - Mr. Petters has been our President and Chief Executive
Officer since the spin-off. Prior to the spin-off, Mr. Petters had been President of Northrop Grumman Shipbuilding
("NGSB") since 2008, when NGSB was formed, and before that had been President of Northrop Grumman Newport
News since 2004. Since joining Newport News Shipbuilding and Dry Dock Company in 1987, his responsibilities
have included oversight of the Virginia-class submarine program, the nuclear-powered aircraft carrier programs,
aircraft carrier refueling and overhaul, submarine fleet maintenance, commercial and naval ship repair, human
resources and business and technology development. Mr. Petters holds a B.S. in Physics from the United States
Naval Academy and an M.B.A. from the College of William and Mary.
Jerri F. Dickseski, Corporate Vice President, Communications - Ms. Dickseski has been our Corporate Vice
President, Communications since the spin-off. In this position, she is responsible for our communications strategy
and execution. Prior to her current position and since 2008, Ms. Dickseski served as Sector Vice President of
Communications for NGSB. Prior to that and since 2001, she was Director of Communications at Northrop
Grumman Newport News. She joined Newport News Shipbuilding Inc. in 1991. Ms. Dickseski holds both a B.A. and
an M.A. in English from Old Dominion University.
Irwin F. Edenzon, Corporate Vice President and President, Ingalls Shipbuilding - Mr. Edenzon has been our
Corporate Vice President and President, Ingalls Shipbuilding since 2011. From 2008 until he assumed his current
position, Mr. Edenzon was Sector Vice President and General Manager, Gulf Coast for NGSB. Since Mr. Edenzon
joined Newport News Shipbuilding and Dry Dock Company in 1997, his responsibilities have included overseeing
Newport News' Technical Engineering Division, Advanced Programs and Internal Research, as well as serving as
Vice President for Business and Technology Development, and Vice President for Technology Development and
Fleet Support of Northrop Grumman Newport News. Mr. Edenzon holds a B.S. in Criminal Justice, magna cum
laude, from Rutgers University and an M.B.A. from Florida Atlantic University. Mr. Edenzon will step down as
President of Ingalls Shipbuilding effective April 1, 2014 and will retire from the company on December 1, 2014.
William R. Ermatinger, Corporate Vice President and Chief Human Resources Officer - Mr. Ermatinger has been
our Corporate Vice President and Chief Human Resources Officer since the spin-off. Prior to the spin-off,
Mr. Ermatinger had been Sector Vice President of Human Resources and Administration for NGSB since 2008,
when NGSB was formed. In that position, he was responsible for all NGSB human resources and administration
activities. Since joining a predecessor of Northrop Grumman in 1987, Mr. Ermatinger has held several human
resources management positions with increasing responsibility, including Vice President of Human Resources and
30
Administration of Northrop Grumman Newport News. Mr. Ermatinger holds a B.A. in Political Science from the
University of Maryland Baltimore County.
Douglass L. Fontaine II, Corporate Vice President, Controller and Chief Accounting Officer - Mr. Fontaine has been
our Corporate Vice President, Controller and Chief Accounting Officer since the spin-off. Prior to the spin-off,
Mr. Fontaine had been Vice President and Controller of NGSB since 2008, when NGSB was formed. In that
position, he was responsible for all NGSB accounting activities. Since joining a predecessor of Northrop Grumman
in 1988, Mr. Fontaine held several positions with increasing responsibility at Northrop Grumman Ship Systems,
including Vice President of Finance. Mr. Fontaine is a certified public accountant and holds a B.B.A. from the
University of Mississippi.
Bruce N. Hawthorne, Corporate Vice President, General Counsel and Secretary - Mr. Hawthorne has been our
Corporate Vice President, General Counsel and Secretary since the spin-off. In this position, he is our chief legal
officer and has overall leadership responsibility for our law department and outside counsel. Prior to joining us,
Mr. Hawthorne served as a partner and Practice Development Chairman for the law firm of Arnall Golden Gregory
("AGG") LLP. From 2008 until joining AGG, he served as co-founder and Managing Director of Consigliere Group
LLC, a consulting and technology services firm. Mr. Hawthorne's corporate career includes serving as Executive
Vice President, General Counsel and Secretary of Electronic Data Systems, a global information technology
services company, now part of Hewlett-Packard. Prior to that, he served as Executive Vice President and Chief
Staff Officer of Sprint Corp. Until 2003, Mr. Hawthorne was a senior partner of the law firm King & Spalding LLP. He
holds a B.B.A. from the University of Michigan, an M.B.A. from the University of Detroit and a J.D. from Vanderbilt
University.
Christopher D. Kastner, Corporate Vice President and General Manager, Corporate Development - Mr. Kastner was
appointed Corporate Vice President and General Manager, Corporate Development in August of 2012. Prior to that
and following the spin-off, he served as Vice President and Chief Financial Officer of our Ingalls Shipbuilding
segment. Prior to the spin-off, Mr. Kastner had served as Vice President, Business Management, and Chief
Financial Officer of NGSB, Gulf Coast since 2008 and served as Vice President, Contracts and Risk Management
of Northrop Grumman Ship Systems from 2006 to 2008. Prior to that, he held several positions at other Northrop
Grumman businesses, including Corporate Director of Strategic Transactions. Mr. Kastner holds a B.A. in Political
Science from the University of California at Santa Barbara and an M.B.A from Pepperdine University.
Matthew J. Mulherin, Corporate Vice President and President, Newport News Shipbuilding - Mr. Mulherin has been
our Corporate Vice President and President, Newport News Shipbuilding since 2011. From 2008 until he assumed
his current position, Mr. Mulherin was Sector Vice President and General Manager, Newport News for NGSB. Since
joining Newport News Shipbuilding and Dry Dock Company in 1981, Mr. Mulherin has had a variety of
responsibilities, including serving as Vice President of the CVNX program, Vice President of the CVN-21 program,
and Vice President of Programs for the Newport News operations, where he successfully led the aircraft carrier
design and construction programs, carrier refueling and overhaul programs and the submarine program.
Mr. Mulherin holds a B.S. in Civil Engineering from Virginia Polytechnic Institute and State University.
Barbara A. Niland, Corporate Vice President, Business Management and Chief Financial Officer - Ms. Niland has
been our Corporate Vice President, Business Management and Chief Financial Officer since the spin-off. Prior to
the spin-off, Ms. Niland had been Sector Vice President, Business Management and Chief Financial Officer for
NGSB since 2008, when NGSB was formed. In these positions, she has been responsible for strategy and
processes supporting growth and profitability goals, as well as business management functions. Since joining a
predecessor of Northrop Grumman in 1979, Ms. Niland held a variety of positions, including Vice President of
Business Management and Chief Financial Officer of Northrop Grumman Newport News. Ms. Niland holds a B.S. in
Finance from Towson State University and a Master's Degree from the University of Maryland University College.
Mitchell B. Waldman, Corporate Vice President, Government and Customer Relations - Mr. Waldman has been our
Corporate Vice President, Government and Customer Relations since the spin-off. In this position, he is responsible
for the development and management of our government and customer affairs programs. Prior to that and since
2009, Mr. Waldman served as Vice President of Business Development of Advanced Programs and Technology for
Northrop Grumman's Aerospace Systems sector. Prior to that position, he served as Northrop Grumman's
Corporate Director for Acquisition Policy from 2008. Prior to that position and since 2003, Mr. Waldman served as
National Security Advisor for former Sen. Trent Lott. He holds a B.S. in Mechanical Engineering from the University
of Florida and a J.D. from Catholic University.
31
D. R. Wyatt, Corporate Vice President and Treasurer - Mr. Wyatt has been our Corporate Vice President and
Treasurer since the spin-off. Prior to that, he had been Director of Business Management at NGSB where he was
responsible for aircraft carriers, carrier fleet support and energy business. Prior to his appointment as Director of
Business Management, Mr. Wyatt served as Treasurer of Newport News Shipbuilding Inc., Assistant Treasurer and
Manager of Finance, and has held various positions in the financial area, including cost estimating, cost control,
accounting, financial analysis, and government accounting. He has extensive Treasury experience, including
responsibility for corporate finance, cash management, risk management and all financings, capital structure,
capital market interface, rating agency relationships, cash and financial forecasting, working capital management,
short term investments, pension asset management, and insurance and loss control. Mr. Wyatt holds a B.S. in
Economics from Hampden-Sydney College and an M.B.A. from Old Dominion University.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the New York Stock Exchange under the symbol "HII".
The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as
reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions:
January through March
April through June
July through September
October through December
Stockholders
2013
2012
High
Low
High
Low
$
$
$
$
54.08
57.64
69.49
90.01
$
$
$
$
43.17
50.11
56.60
67.31
$
$
$
$
40.46
40.33
42.27
44.96
$
$
$
$
31.80
35.84
38.17
39.87
The approximate number of common stockholders was 21,901 as of February 21, 2014.
Dividends
Quarterly cash dividends per common share for the most recent two years are as follows:
January through March
April through June
July through September
October through December
2013
2012
$
$
$
$
0.10
0.10
0.10
0.20
$
$
$
$
—
—
—
0.10
The terms of the Credit Facility and senior notes limit our ability to pay dividends. See Note 14: Debt in Item 8.
Annual Meeting of Stockholders
Our Annual Meeting of Stockholders will be held on April 30,2014, in Newport News, Virginia.
33
Stock Performance Graph
The following graph compares the total return on a cumulative basis of $100 invested in our common stock on
March 22, 2011, to the Standard & Poor's ("S&P") 500 Index and the S&P Aerospace and Defense Index.
(1) The cumulative total return assumes reinvestment of dividends.
(2) The total return is weighted according to market capitalization of each company at the beginning of
each year.
(3) Our common stock first began trading on the New York Stock Exchange on March 22, 2011.
(4) The S&P Aerospace & Defense Index is comprised of The Boeing Company, General Dynamics
Corporation, Honeywell International Inc., L-3 Communications, Lockheed Martin Corporation, Northrop
Grumman Corporation, Precision Castparts Corporation, Raytheon Company, Rockwell Collins, Inc.,
Textron, Inc. and United Technologies Corporation.
34
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On October 31, 2012, our board of directors authorized management to repurchase up to $150 million of the
Company's outstanding shares of common stock, prior to October 31, 2015, as part of a balanced cash deployment
strategy. On October 30, 2013, our board of directors authorized an increase in the stock repurchase program from
$150 million to $300 million and an extension of the term of the program to October 31, 2017. Repurchases are
made from time to time at management's discretion in accordance with applicable federal securities laws. All
repurchases of HII common stock have been recorded as treasury stock. The following table summarizes
information relating to purchases made by or on behalf of the Company of shares of the Company's common stock
during the quarter ended December 31, 2013.
Period
October 1, 2013 through October 31, 2013
November 1, 2013 through November 30, 2013
December 1, 2013 through December 31, 2013
Total
Total Number of
Shares Purchased
Average Price
Paid per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Program
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Program
(in millions)
105,119
$
244,936
453,070
803,125
$
67.72
80.35
81.43
79.31
105,119
$
244,936
453,070
803,125
$
236.2
216.5
179.6
179.6
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Note 19:
Stock Compensation Plans in Item 8 and Equity Compensation Plan Information in Item 12.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected financial data. The table should be read in conjunction with Item 7 and
Item 8 of this Report.
($ in millions, except per share amounts)
Sales and service revenues
Goodwill impairment
Operating income (loss)
Net earnings (loss)
Total assets
Long-term debt (1)
Total long-term obligations
Free cash flow (2)
Dividends declared per share
Basic earnings (loss) per share (3)
Diluted earnings (loss) per share (3)
Year Ended December 31
2010
2011
2012
2013
2009
$ 6,820
$ 6,708
$ 6,575
$ 6,723
$ 6,292
—
512
261
6,225
1,700
3,312
97
0.50
5.25
5.18
—
358
146
6,392
1,779
4,341
170
0.10
2.96
2.91
$
$
$
$
$
$
290
100
(100)
6,069
1,830
3,838
331
—
241
131
5,270
105
1,637
168
$
$
$
— $
— $
(2.05) $
(2.05) $
2.68
2.68
$
$
—
203
119
5,097
283
1,708
(269)
—
2.44
2.44
(1) Long-term debt does not include amounts payable to our former parent as of and before December 31, 2010, as
these amounts were due upon demand and included in current liabilities.
(2) Free cash flow is a non-GAAP financial measure and represents cash from operating activities less capital
expenditures. See Liquidity and Capital Resources in Item 7 for more information on this measure.
(3) On March 30, 2011, the record date of the stock distribution associated with the spin-off from Northrop Grumman,
approximately 48.8 million shares of $0.01 par value HII common stock were distributed to Northrop Grumman
stockholders. This share amount was utilized for the calculation of basic and diluted earnings (loss) per share for
the three months ended March 31, 2011, and all prior periods, as no common stock of the Company existed prior to
35
March 30, 2011, and the impact of dilutive securities in the three month period ended March 31, 2011, was not
material.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Our Business
For more than a century, we have designed, built, overhauled and repaired 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 represent our
reportable segments. Through our Ingalls segment, we are the builder of amphibious assault and expeditionary
warfare 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 our
Newport News segment, we are 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. We
are 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. We conduct substantially all of our business with the U.S.
Government, principally the DoD. As prime contractor, principal subcontractor, team member or partner, we
participate in many high-priority U.S. defense technology programs.
The following discussion should be read along with the audited consolidated financial statements included in this
Annual Report on Form 10-K.
Business Environment
In August 2011, the Budget Control Act reduced the DoD top line budget by $487 billion from fiscal year 2012
through 2021. Additionally, because Congress did not identify savings to reduce the U.S. deficit by up to $1.2 trillion
prior to March 1, 2013, budgetary sequestration was implemented under the BCA. Sequestration requires an
additional reduction from fiscal year 2012 through 2021 of $500 billion for defense spending and $500 billion for
non-defense discretionary spending, including the U.S. Coast Guard. On December 26, 2013, the President signed
into law the Bipartisan Budget Act, which provided $63 billion in sequestration relief over two years, split evenly
between defense and non-defense programs, and set overall discretionary spending at $1.012 trillion for fiscal year
2014 and $1.013 trillion for fiscal year 2015. Sequestration remains in effect under the BCA for fiscal years 2016
through 2021. Significant uncertainty exists regarding the specific effects of sequestration in 2016 and beyond, and
the resulting funding reductions could have material consequences for our business, employee base, facilities and
suppliers.
U.S. Government operations, including appropriations for DoD and Department of Homeland Security ("Homeland
Security") programs, were funded for the balance of fiscal year 2014 under the Consolidated Appropriations Act for
Fiscal Year 2014. The FY 2014 Act specifically provided funding for the advance construction of CVN-79 John F.
Kennedy, construction of two SSN-774 Virginia-class submarines, continuation of the CVN-72 USS Abraham
Lincoln RCOH, continuation of DDG-51 Arleigh Burke-class destroyer production, and cost to complete for LHA-6
America. The FY 2014 Act also fully funded construction of NSC-7 Kimball, and provided funding for NSC-8 Midgett
long-lead-time material. The Fiscal Year 2015 President's Budget Request is expected to be delivered to Congress
in March 2014.
Defense Industry Overview
The United States faces a complex, uncertain and rapidly changing national security environment. The defense of
the United States and its allies requires the ability to respond to constantly evolving threats, terrorist acts, regional
conflicts and cyber attacks, responses to which are increasingly dependent on early threat identification. National
responses to such threats can require unilateral or cooperative initiatives that include dissuasion, deterrence, active
defense, security and stability operations, and peacekeeping. We believe the U.S. Government will continue to
place a high priority on the protection of its engaged forces and citizenry and on minimizing collateral damage when
force must be applied in pursuit of national objectives.
36
The United States' engagement in combating terrorism around the world, coupled with the need to modernize
U.S. military forces, has driven DoD funding levels since 2001. In February 2010, the DoD released its Report of the
Quadrennial Defense Review ("QDR"), a legislatively-mandated review of military strategy and priorities that shapes
defense funding over the ensuing four years. The QDR emphasized four key strategic priorities: prevailing in today's
wars, preventing and deterring conflict, preparing to defeat adversaries in a wide range of contingencies, and
preserving and enhancing the All-Volunteer Force. The DoD is currently conducting the 2014 QDR, and the results
are expected to be released concurrent with submission of the Fiscal Year 2015 President's Budget Request to the
Congress.
We expect that the nation's engagement in a multi-front, multi-decade struggle will require an affordable balance
between investments in current missions and investments in new capabilities to meet future challenges. The DoD
faces the additional challenge of recapitalizing equipment and rebuilding readiness at a time when the DoD is
pursuing modernization of its capabilities, while facing additional major budget cuts that began in 2013. While the
Bipartisan Budget Act established new budget caps and provided sequestration relief for fiscal years 2014 and 2015
defense and non-defense discretionary programs, the Administration continues to consider how sequestration could
impact programs for 2016 and beyond, and the outcome of that assessment could have a significant impact on
future defense spending plans.
In May 2013, the U.S. Navy released its 2014 Long Range Plan. The 2014 Long Range Plan anticipates a fleet of
306 ships comprised of 12 ballistic missile submarines, 11 nuclear-powered aircraft carriers, 48 nuclear-powered
attack submarines, 88 large multi-mission surface combatants, 52 small multi-role surface combatants, 33
amphibious landing ships, 29 combat logistics force ships, and 33 support vessels. The 2014 Long Range Plan also
notes that the four SSGN currently in service will retire in the mid-2020s, and the U.S. Navy is exploring the
possibility of inserting a quad-pack of large diameter payload tubes in Block V SSN-774 Virginia-class submarines
to offset the loss of the SSGN strike capability. The 2014 Long Range Plan also acknowledges that the DoD will
encounter several challenges in executing the plan, particularly with regard to funding new submarines to replace
the Ohio-class nuclear ballistic submarines. Significant reductions in the number of ships procured by the U.S. Navy
would have a material adverse effect on our financial position, results of operations or cash flows.
It is anticipated that the U.S. Navy will submit a shipbuilding plan to Congress, concurrent with the Fiscal Year 2015
President's Budget Request, which will provide additional details regarding the force structure of 306 ships.
The shipbuilding defense industry, as characterized by its competitors, customers, suppliers, potential entrants and
substitutes, is unique in many ways. It is heavily capital and skilled labor intensive. The U.S. Navy, a large single
customer with many needs and requirements, dominates the industry's customer base and is served by a supplier
base that has trended toward exclusive providers. Smaller shipyards, however, have entered the market to build the
U.S. Navy's new LCS. The U.S. Navy must compete with other national priorities, including other defense activities
and entitlement programs, for a share of federal budget funding.
The DoD announced various initiatives designed to gain efficiencies, refocus priorities and enhance business
practices used by the DoD, including those used to procure goods and services from defense contractors. The most
recent initiatives are organized into five major areas: Affordability and Cost Growth; Productivity and Innovation;
Competition; Services Acquisition; and Processes and Bureaucracy. These initiatives are relatively new, and the
specific impacts on our industry will be understood better as the DoD implements them further. See Risks Related
to Our Business in Item 1A.
Program Descriptions
For convenience, a brief description of certain programs discussed in this Annual Report on Form 10-K is included
in the Glossary of Programs.
CONTRACTS
We generate the majority of our revenues from long-term government contracts for design, production and support
activities. Government contracts typically include the following cost elements: direct material, labor and
subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Unless
otherwise specified in a contract, costs billed to contracts with the U.S. Government are determined under the
requirements of the FAR and CAS regulations as allowable and allocable costs. Examples of costs incurred by us
37
that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable
donations, interest expense and advertising costs.
We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent
application under similar terms and conditions as well as compliance with all applicable government regulations. In
addition, the DCAA routinely audits the costs we incur that are allocated to contracts with the U.S. Government.
Our long-term contracts typically fall into one of two broad categories:
• Flexibly-Priced Contracts - Includes both cost-type and fixed-price incentive contracts. Cost-type contracts
provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type
contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the
work within some specified time and some stated dollar limitation. Fixed-price incentive contracts also
provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that
affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the
cost-share limit is reached. Approximately 98%, 98% and 99% of our revenues for the years ended
December 31, 2013, 2012 and 2011, respectively, were generated from flexibly-priced contracts, including
certain fixed-price incentive contracts that have exceeded their cost-share limit.
• Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is
agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment
regardless of costs incurred by the contractor. Time and materials contracts, which specify a fixed hourly
rate for each labor hour charged, are considered firm fixed-price contracts. Approximately 2%, 2% and 1%
of our revenues for the years ended December 31, 2013, 2012 and 2011, respectively, were generated
from firm fixed-price arrangements.
Contract Fees - Negotiated contract fee structures for both flexibly-priced and firm fixed-price contracts include:
fixed fee amounts, cost sharing arrangements to reward or penalize contractors for under or over cost target
performance, respectively, positive award fees and negative penalty arrangements. Profit margins may vary
materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract, the
achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly
under incentive and award fee contracts, is finally determined.
Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality
and technical performance. Award fees are determined and earned based on an evaluation by the customer of our
performance against such negotiated criteria. Fees that we are reasonably assured of collecting and that can be
reasonably estimated are recorded over the performance period of the contract.
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make
estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements
and the accompanying notes. Management considers an accounting policy to be critical if it is important to our
financial condition and results of operations, and if it requires significant judgment and estimates by management in
its application. The development and selection of these critical accounting policies have been determined by our
management. We have reviewed our critical accounting policies and estimates with the audit committee of our
board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these
areas, it is possible that different parties could choose different assumptions and reach different conclusions. We
consider the policies relating to the following matters to be critical accounting policies:
• Revenue recognition;
• Purchase accounting and goodwill;
•
Litigation, commitments and contingencies;
• Retirement related plans; and
• Workers' compensation.
38
Revenue Recognition
Overview - We derive the majority of our revenues from long-term contracts for the production of goods and
services provided to the federal government, which are accounted for in conformity with GAAP for construction-type
and production-type contracts and federal government contractors. We classify contract revenues as product sales
or service revenues depending on the predominant attributes of the relevant underlying contracts. We consider the
nature of these contracts and the types of products and services provided when determining the proper accounting
method for a particular contract.
Percentage-of-Completion Accounting - We generally recognize revenues from our long-term contracts under the
cost-to-cost measure of the percentage-of-completion method of accounting. The percentage-of-completion method
recognizes income as work on a contract progresses. For most contracts, we calculate sales based on the
percentage of costs incurred in relation to total Estimated Costs at Completion of the Contract ("EAC"). For certain
contracts with large up-front purchases of material, sales are calculated based on the percentage that direct labor
costs incurred bear to total estimated direct labor costs at completion. For certain contracts that provide for
deliveries of a substantial number of similar units, sales are accounted for using units of delivery as the basis to
measure progress toward completion.
The use of the percentage-of-completion method depends on our ability to make reasonably dependable cost
estimates for the design, manufacture, and delivery of our products and services. Such costs are typically incurred
over a period of several years, and estimation of these costs requires the use of judgment. We record sales under
cost-type contracts as costs are incurred.
Many contracts contain positive and negative profit incentives based upon performance relative to predetermined
targets that may occur during or subsequent to delivery of the product. These incentives take the form of potential
additional fees to be earned or penalties to be incurred. Incentives and award fees that we are reasonably assured
of collecting and can be reasonably estimated are recorded over the performance period of the contract. Incentives
and award fees that we are not reasonably assured of collecting or cannot be reasonably estimated are recorded
when awarded or at such time as a reasonable estimate can be made.
At the start of each contract, we estimate an initial profit-booking rate that considers risks related to technical
requirements and feasibility, schedule and contract costs. Management then performs periodic reviews of our
contracts in order to evaluate technical matters, schedule and contract costs. During the life of a contract, the profit-
booking rate may increase as we are able to retire risks in connection with technical matters, schedule and contract
costs. Conversely, if we are not able to retire these risks, our EAC may increase, resulting in a lower profit-booking
rate.
Changes in estimates of contract sales, costs and profits are recognized 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 in future periods of contract performance is recognized as if the revised
estimate had been the original estimate. A significant change in an estimate on one or more contracts in a period
could have a material effect on our consolidated financial position or results of operations for that period.
For the years ended December 31, 2013, 2012 and 2011, favorable and unfavorable cumulative catch-up
adjustments were as follows:
($ in millions)
Gross favorable adjustments
Gross unfavorable adjustments
Net adjustments
Year Ended December 31
2012
2011
2013
$
$
220
(107)
113
$
$
194
(132)
62
$
$
188
(134)
54
For the year ended December 31, 2013, favorable cumulative catch-up adjustments were primarily related to the
SSN-774 Virginia-class submarine program, driven by risk retirement, performance improvement and the favorable
resolution of outstanding contract changes, risk retirement on the execution contract for the CVN-71 USS Theodore
Roosevelt RCOH, and risk retirement on the Legend-class NSC program. For the same period, unfavorable
cumulative catch-up adjustments were primarily related to the closing of our Gulfport facility, costs and delays on
39
LHA-6 America associated with the remediation of mechanical issues identified during testing, as well as
unfavorable performance on LPD-25 Somerset, including costs and delays associated with repairing damages
caused by underwater debris during preparation for sea trials.
For the year ended December 31, 2012, favorable cumulative catch-up adjustments were primarily the result of risk
retirement on the SSN-774 Virginia-class submarine program and the execution contract for the CVN-71 USS
Theodore Roosevelt RCOH, the favorable resolution of outstanding contract changes on the CVN-65 USS
Enterprise EDSRA, as well as the receipt of $7 million in resolution of a contract dispute with a private party. For the
same period, unfavorable cumulative catch-up adjustments were primarily related to higher than expected costs to
complete LPD-24 USS Arlington, as well as increased workers' compensation expense driven by discount rates.
For the year ended December 31, 2011, favorable cumulative catch-up adjustments were primarily the result of risk
retirement on the SSN-774 Virginia-class submarine program and LPD-23 Anchorage. Unfavorable cumulative
catch-up adjustments in 2011 were primarily related to lower performance on LPD-22 USS San Diego and LPD-24
USS Arlington.
Cost Estimation - The cost estimation process requires significant judgment and is based upon the professional
knowledge and experience of our engineers, program managers and financial professionals. Factors we consider in
estimating the work to be completed and ultimate contract recovery include the availability, productivity and cost of
labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of
materials, the effect of any delays in performance, the availability and timing of funding from the customer, and the
recoverability of any claims included in the estimates to complete. A significant change in an estimate on one or
more contracts in a period could have a material effect on our consolidated financial position or results of operations
for that period, and, where such changes occur, separate disclosure is made of the nature, underlying conditions
and financial impact of the change. We update our contract cost estimates at least annually and more frequently as
determined by events or circumstances. We review and assess our cost and revenue estimates for each significant
contract on a quarterly basis.
We record a provision for the entire loss on a contract in the period the loss is determined when estimates of total
costs to be incurred on the contract exceed estimates of total revenues to be earned. We offset loss provisions first
against costs that are included in unbilled accounts receivable or inventoried costs, with any remaining amount
reflected in other current liabilities.
Other Considerations - Defined benefit pension and other postretirement plan ("retirement related benefit plans")
benefit costs are allocated to our contracts as allowed costs based upon CAS. The CAS requirements for retirement
related benefit plans costs differ from the Financial Accounting Standards ("FAS") requirements. Given the inability
to match with reasonable certainty individual expense and income items between the CAS and FAS requirements to
determine specific recoverability, we have not estimated the incremental FAS income or expense recoverable under
our expected future contract activity, and therefore did not defer any FAS expense for retirement related benefit
plans. Therefore the difference between FAS and CAS is recorded as period income or expense within general
administrative expenses. This resulted in a FAS expense in excess of CAS cost of $61 million, $80 million, and $23
million for the years ended December 31, 2013, 2012 and 2011, respectively.
Purchase Accounting and Goodwill
Overview - Goodwill represents the purchase price paid in excess of the fair value of identifiable net tangible and
intangible assets acquired in a business combination. The amount of our goodwill at both December 31, 2013 and
2012, was $881 million.
Tests for Impairment - We perform impairment tests for goodwill as of November 30 of each year, or when evidence
of potential impairment exists. When testing goodwill, we first compare the fair value of the reporting unit to its
carrying value. If the fair value of the reporting unit is determined to be less than the carrying value, we perform a
second step to estimate the fair value of goodwill, based in part on the fair value of the underlying operations. We
record a charge to operations when we determine that the recorded amount of goodwill exceeds its fair value during
this second step.
We estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market
based valuation methodologies. Determining fair value requires the exercise of significant judgment, including
40
judgments about projected revenues, operating expenses, working capital investment, capital expenditures and
cash flows over a multi-year period. The discount rate applied to our forecasts of future cash flows is based on our
estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we
evaluate our results against our market capitalization. Changes in these estimates and assumptions could
materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
November 30, 2013 Impairment Test - We performed our annual goodwill impairment testing as of November 30,
2013, and determined that the estimated fair value of each of our reporting units significantly exceeded its
corresponding carrying value.
Litigation, Commitments and Contingencies
Overview - We are subject to a range of claims, lawsuits, environmental and income tax matters and administrative
proceedings that arise in the ordinary course of business. Estimating liabilities and costs associated with these
matters requires judgment and assessment based upon professional knowledge and the experience of
management and our internal and external legal counsel. In accordance with our practices relating to accounting for
contingencies, we record amounts as charges to earnings when we determine, after taking into consideration the
facts and circumstances of each matter, including any settlement offers, that it is probable a liability has been
incurred and the amount of the loss can be reasonably estimated. The ultimate resolution of any such exposure
may vary from earlier estimates as further facts and circumstances become known.
Environmental Accruals - We are subject to the environmental laws and regulations of the jurisdictions in which we
conduct operations. We record a liability for the costs of expected environmental remediation obligations when we
determine that it is probable we will incur such costs and the amount of the liability can be reasonably estimated.
When a range of costs is possible and no amount within that range is a better estimate than another, we record the
minimum amount of the range.
Factors that could result in changes to the assessment of probability, range of estimated costs and environmental
accruals include: modification of planned remedial actions, increase or decrease in the estimated time required to
remediate, discovery of more extensive contamination than anticipated, results of efforts to involve other legally
responsible parties, financial insolvency of other responsible parties, changes in laws and regulations or contractual
obligations affecting remediation requirements and improvements in remediation technology. Although we cannot
predict whether new information gained as remediation projects progress will materially affect the accrued liability,
we do not believe that future remediation expenditures will have a material effect on our financial position, results of
operations or cash flows.
Asset Retirement Obligations - We record all known asset retirement obligations for which the liability's fair value
can be reasonably estimated, including certain asbestos removal, asset decommissioning and contractual lease
restoration obligations. Recorded amounts as of both December 31, 2013 and 2012, were $25 million, and consist
primarily of obligations associated with the wind down of military shipbuilding operations at our Avondale facility.
See Note 2: Summary of Significant Accounting Policies in Item 8.
We also have known conditional asset retirement obligations related to assets currently in use, such as certain
asbestos remediation and asset decommissioning activities to be performed in the future, that were not reasonably
estimable as of December 31, 2013, due to insufficient information about the timing and method of settlement of the
obligation. Accordingly, the fair value of these obligations has not been recorded in the consolidated financial
statements. Environmental remediation and/or asset decommissioning of these facilities may be required when we
cease to utilize these facilities. In addition, there may be conditional environmental asset retirement obligations that
we have not yet discovered (for example, asbestos of which we have not become aware through normal business
operations may exist in certain buildings), and these obligations have, therefore, not been included in our
consolidated financial statements.
Litigation Accruals - Litigation accruals are recorded as charges to earnings when management has determined,
after taking into consideration the facts and circumstances of each matter, including any settlement offers, that it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The ultimate
resolution of any exposure may vary from earlier estimates as further facts and circumstances become known.
Based upon the information available, we believe that the resolution of any of these various claims and legal
41
proceedings will not have a material effect on our consolidated financial position, results of operations or cash
flows.
Uncertain Tax Positions - Uncertain tax positions meeting the more-likely-than-not recognition threshold, based on
the merits of the position, are recognized in the financial statements. We recognize the amount of tax benefit that is
greater than 50% likely to be realized upon ultimate settlement with the related tax authority. If a tax position does
not meet the minimum statutory threshold to avoid payment of penalties, we recognize an expense for the amount
of the penalty in the period the tax position is claimed or expected to be claimed in our tax return. Penalties and
accrued interest related to uncertain tax positions are recognized as a component of income tax expense. See Note
13: Income Taxes in Item 8. Changes in accruals associated with uncertain tax positions are recorded in earnings in
the period they are determined.
Retirement Related Plans
We recognize, on a plan-by-plan basis, the funded status of our retirement related plans as an asset or liability on
our balance sheet, with corresponding adjustments to after-tax accumulated other comprehensive income, and
deferred tax assets or liabilities. The funded status represents the difference between the benefit obligation and the
fair value of plan assets. See Note 18: Employee Pension and Other Postretirement Benefits in Item 8.
We calculate our retirement related benefit plan costs under both CAS and FAS. The calculations under CAS and
FAS require significant judgment. CAS prescribes the determination, allocation, and recovery of retirement related
benefit plan costs on U.S. Government contracts through the pricing of products and services. FAS outlines the
methodology used to determine retirement related benefit plan expense or income, as well as the liability, for
financial reporting purposes. The CAS requirements for these costs and their calculation methodologies differ from
FAS. As a result, while both CAS and FAS use assumptions in their calculation methodologies, each method results
in different calculated amounts of retirement related benefit plan costs.
The cash funding requirements for our qualified pension plans are determined under the Employee Retirement
Income Security Act of 1974 ("ERISA"), which is primarily based on the year's expected service cost and
amortization of other previously unfunded liabilities. Effective January 1, 2011, we were subject to the funding
requirements under the Pension Protection Act of 2006 ("PPA"), which amended ERISA. Under the PPA, we are
required to fully fund our pension plans over a rolling seven-year period as determined annually based upon the
funded status at the beginning of each year. PPA also introduced a variety of benefit restrictions that apply if a plan
falls below different funded percentages, as defined by the Internal Revenue Code. Among various items, we
consider both the minimum funding requirements and the funded status of each plan from the perspective of
potential benefit restrictions in developing our contribution schedule in a given year, and we may make additional
discretionary contributions beyond minimum funding requirements.
During 2012, the Moving Ahead for Progress in the 21st Century Act ("MAP-21") was enacted. MAP-21 includes
provisions for potential relief to plan sponsors in the form of higher interest rate assumptions that are used to
determine minimum funding requirements. The relief derived from these provisions will be phased out to lower
levels over the next few years. We consider the effects of legislation such as MAP-21 in the context of current year
and future projected funded status levels in deciding on the level of contributions to make to our plans each year.
We record CAS retirement related benefits cost in the results of our business segments, and we include the FAS
expense for these benefits in total operating income under GAAP. Due to the differences between FAS and CAS
amounts, we also present the difference between FAS expense and CAS cost, referred to as our FAS/CAS
Adjustment, to reconcile segment operating income to total operating income on a consolidated basis under GAAP.
Due to the foregoing differences in requirements and calculation methodologies, our FAS pension expense is not
necessarily indicative of the funding requirements under PPA or the amounts we recover from the U.S. Government
under CAS.
When PPA was enacted, it was anticipated that the amounts required to be funded would exceed government
contractors' recovery of those costs under CAS. To remedy this cash flow misalignment, on December 27, 2011, the
U.S. Cost Accounting Standards Board issued its final CAS Harmonization Rule ("Harmonization"). Harmonization
is intended to improve the alignment of the pension cost recovered through contract pricing under CAS and the
pension funding requirements under the PPA. Harmonization became effective for forward pricing purposes for
contracts negotiated on or after February 27, 2012. Under Harmonization, only contracts entered into before the
effective date qualify for an equitable adjustment. Price proposals for CAS covered contracts awarded on or after
42
the effective date of February 27, 2012, reflect the effects of the rule. Harmonization affects pension costs on
contracts, with initial effects beginning in 2013. We expect it will result in increased recoverable CAS pension costs
allocable to our contracts, with greater impacts beginning to phase in during 2014.
Assumptions - We account for our retirement related benefit plans on the accrual basis under FAS. The
measurements of obligations, costs, assets and liabilities require significant judgment. The key assumptions in
these measurements are the interest rate used to discount future benefit payments and the expected long-term rate
of return on plan assets.
Discount Rate - The assumed discount rate under FAS is used to determine the current retirement related benefit
plan expense and obligations, and represents the hypothetical rate at which the plans' benefit obligations could be
effectively settled at the measurement date. Consequently, the discount rate can be volatile from year to year. The
discount rate assumption is determined for each plan by constructing a portfolio of high quality bonds with cash
flows that match the estimated outflows for future benefit payments to determine a single equivalent discount rate.
Benefit payments are not only contingent on the terms of a plan, but also on the underlying participant
demographics, including current age and assumed mortality. We use only bonds that are denominated in U.S.
Dollars, are rated Aa or better by nationally recognized statistical rating agencies, have a minimum outstanding
issue of $100 million as of the measurement date, and are not callable, convertible or index-linked. Since bond
yields are generally unavailable beyond 30 years, we assume those rates will remain constant beyond that point.
Taking into consideration the factors noted above, our weighted average discount rate for pensions was 5.27% and
4.24% as of December 31, 2013 and 2012, respectively. Our weighted average discount rate for other
postretirement benefits was 5.03% and 4.04% as of December 31, 2013 and 2012, respectively.
Expected Long-Term Rate of Return - The expected long-term rate of return on assets is used to calculate net
periodic expense, and is based on such factors as historical returns, targeted asset allocations, investment policy,
duration, expected future long-term performance of individual asset classes, interest rates, inflation, portfolio
volatility, investment management and administrative fees, and risk management strategies. While studies are
helpful in understanding past and current trends and performance, the assumption is based more on longer term
and prospective views to avoid short-term market influences. Historical plan asset performance alone has inherent
limitations in predicting future returns. In order to reflect expected lower future market returns, we reduced the
expected long-term rate of return assumption from 8.00%, used to record 2012 expense, to 7.50% for 2013. The
decrease in the expected return on assets assumption was primarily related to lower asset class returns for long
bonds and to a lesser extent for equities. Unless plan assets and benefit obligations are subject to remeasurement
during the year, the expected return on pension assets is based on the fair value of plan assets at the beginning of
the year. We will continue to use this 7.50% assumption for recording 2014 FAS pension expense. We assess this
assumption at least annually.
Differences arising from actual experience or changes in assumptions might materially affect retirement related
benefit plan obligations and the funded status. Actuarial gains and losses arising from differences from actual
experience or changes in assumptions are deferred in accumulated other comprehensive income. This
unrecognized amount is amortized as a component of net expense to the extent it exceeds 10% of the greater of
the plan's benefit obligation or plan assets. The amortization period for actuarial gains and losses is the estimated
average remaining service life of the plan participants, which is approximately 10 years. In 2013, the actual return
on assets was approximately 10.5%, which was higher than the expected return assumption of 7.50%. For the year
ended December 31, 2013, the weighted average discount rates for our pension and other postretirement benefit
plans increased by 103 and 99 basis points, respectively. These differences in asset returns and discount rates
resulted in a combined net actuarial gain of approximately $949 million.
43
An increase or decrease of 25 basis points in the discount rate and the expected long-term rate of return
assumptions would have had the following approximate impacts on pensions:
($ in millions)
25 basis point decrease in discount rate
25 basis point increase in discount rate
25 basis point decrease in expected return on assets
25 basis point increase in expected return on assets
Increase (Decrease) in
2014 Expense
Increase (Decrease) in
December 31, 2013
Obligations
$
19
$
(16)
11
(11)
174
(165)
A $50 million pension contribution is generally expected to favorably impact the current year expected return on
assets by approximately $2 million, depending on the timing of the contribution.
CAS Cost - In addition to providing the methodology for calculating retirement related benefit plan costs, CAS also
prescribes the method for assigning those costs to specific periods. While the ultimate liability for such costs under
FAS and CAS is similar, the pattern of cost recognition is different. The key drivers of CAS pension cost include the
funded status and the method used to calculate CAS reimbursement for each of our plans, as well as our expected
long-term rate of return on assets assumption. A plan’s CAS pension cost can only be allocated until the plan is fully
funded as defined under the CAS requirements.
Through 2013, CAS required the discount rate to be consistent with the expected long-term rate of return on assets
assumption, which changed infrequently given its long-term nature. As a result, short-term changes in bond or other
interest rates generally did not impact CAS costs. Under Harmonization the liability used to determine CAS cost is
developed by comparing the liability under the previous CAS methodology and assumptions to a liability based on a
discount rate derived from yields on high quality bonds. When Harmonization is fully phased in, the greater of the
two liabilities will be used for CAS cost calculations. Generally, liabilities based on a discount rate of high quality
bonds will be higher than liabilities calculated prior to Harmonization. The four year phase in period commencing in
2014 requires the use of a blend of the pre and post Harmonization liabilities. We expect our allocable CAS costs to
increase under Harmonization as the regulation was intended.
Other FAS and CAS Considerations - A key driver of the difference between FAS expense and CAS cost (and
consequently the FAS/CAS Adjustment) is the pattern of earnings and expense recognition for gains and losses that
arise when our asset and liability experiences differ from our assumptions under each set of requirements. Under
FAS, our net gains and losses exceeding the 10% corridor are amortized over the employee's average future
service life of approximately 10 years. Under CAS, net gains and losses were amortized over a 15-year period
without regard to a corridor approach. Under Harmonization, the amortization period for CAS changed to 10 years
for gains and losses experienced beginning in 2013. Both FAS and CAS use a "market-related value" of plan assets
approach to calculate the amount of deferred asset gains or losses to be amortized. Under CAS actual asset gains
and losses are systematically spread over five years, subject to certain limitations. For FAS, we do not use this
spreading method, and instead use fair value in determining our FAS expenses. Accordingly, FAS expense
generally reflects recent gains and losses faster than CAS.
Additionally, CAS cost is only recognized for plans that are not fully funded as defined under CAS. If a plan
becomes or ceases to be fully funded due to our asset or liability experience, our CAS cost will change accordingly.
We update our estimates of future FAS expense and CAS cost at least annually based on factors such as actual
calendar year plan asset returns, actual census data, and other actual and projected experience.
The FAS/CAS Adjustment in 2013 was a net expense of $61 million, compared to a net expense of $80 million in
2012. The favorable change was driven by increased CAS cost, partially offset by increased FAS expense. The
increase in FAS expense was due primarily to commencing the amortization in 2013 of the net actuarial losses
incurred in 2012, partially offset by the impact of the remeasurement in 2013 of our postretirement benefit plans.
The FAS/CAS Adjustment in 2012 was a net expense of $80 million, compared to a net expense of $23 million in
2011. The unfavorable change was driven by an increase in our FAS expense, due primarily to a reduction in the
discount rate assumption. Our projection of the 2014 FAS/CAS Adjustment is discussed in Consolidated Operating
Results - Operating Income.
44
Retirement Plan Assets - Retirement plan assets are stated at fair value. Investments in equity securities (common
and preferred) are valued at the last reported sales price when an active market exists. Investments in fixed-income
securities are generally valued based on market transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders. Investments in hedge funds and real estate
investments are generally valued at their Net Asset Values ("NAV") or equivalent.
Management reviews independently appraised values, audited financial statements and additional pricing
information to evaluate the NAV. For the very limited group of investments for which market quotations are not
readily available or for which the above valuation procedures are deemed not to reflect fair value, additional
information is obtained from the investment manager and evaluated internally to determine whether any
adjustments are required to reflect fair value.
Accumulated Other Comprehensive Income - We record in accumulated other comprehensive income
unrecognized gains and losses, as well as unrecognized prior service costs and credits, arising from our retirement
related plans. As disclosed in Note 18: Employee Pension and Other Postretirement Benefits in Item 8, net pre-tax
unrecognized losses as of December 31, 2013 and 2012 were $897 million and $1,980 million, respectively. These
net deferred losses primarily originated from changes in the discount rate, differences between estimated and
expected asset returns, and changes in demographic experience. The decrease in these deferred losses in 2013
was primarily driven by an increase in the discount rates for $833 million, 2013 actual asset returns being $116
million greater than expected, and $134 million of amortization of previously recognized losses.
Net pre-tax unrecognized prior service costs (credits) as of December 31, 2013 and 2012 were $(28) million and
$48 million, respectively. These net deferred costs (credits) primarily originated from plan amendments, including
those resulting from collective bargaining agreements. The decrease in unrecognized prior service costs (credits) in
2013 primarily resulted from a favorable other postretirement benefits plan amendment of $145 million, partially
offset by an unfavorable pension plan amendment of $66 million, and $3 million of amortization of previously
accumulated prior service costs (credits).
The amortization period for qualifying unrecognized prior service costs and credits and unrecognized gains/losses
is the estimated remaining service lives of our employees, which is approximately 10 years.
Workers' Compensation
Our operations are subject to federal and state workers' compensation laws. We maintain self-insured workers'
compensation plans, in addition to participating in federally administered second injury workers' compensation
funds. We estimate the required liability for such claims and funding requirements on a discounted basis utilizing
actuarial methods based on various assumptions, which include our historical loss experience and projected loss
development factors. We periodically, and at least annually, update our assumptions based on an actuarial analysis.
Related self-insurance accruals include the liability for reported claims and an estimated accrual for claims incurred
but not reported. During the year ended December 31, 2012, we recorded $34 million in workers' compensation
expense due to a lower discount rate of 1.59%. Our workers' compensation liability was discounted at 2.16% and
1.59% as of December 31, 2013 and 2012, respectively, based on future payment streams and a risk-free rate. We
estimate a one percent increase or decrease in the discount rate would change our workers' compensation liability
by $(50) million and $61 million, respectively. The workers' compensation benefit obligation on an undiscounted
basis was $792 million and $719 million as of December 31, 2013 and 2012, respectively.
Accounting Standards Updates
See Note 3: Accounting Standards Updates in Item 8 for information related to accounting standards updates.
45
CONSOLIDATED OPERATING RESULTS
Selected financial highlights are presented in the following table:
($ in millions)
Sales and service revenues
Year Ended December 31
2013 over 2012
2012 over 2011
2013
2012
2011
Dollars
Percent
Dollars
Percent
$
6,820
$
6,708
$
6,575
$
Cost of product sales and service revenues
5,583
5,629
5,571
Income (loss) from operating investments, net
General and administrative expenses
Goodwill impairment
Operating income (loss)
Interest expense
Federal and foreign income taxes
Net earnings (loss)
14
739
—
512
118
133
261
$
18
739
—
358
117
95
20
634
290
100
104
96
112
(46)
(4)
—
—
154
1
38
2 % $
133
(1)%
(22)%
— %
— %
43 %
1 %
40 %
58
(2)
105
(290)
258
13
(1)
2 %
1 %
(10)%
17 %
(100)%
258 %
13 %
(1)%
246 %
$
146
$
(100) $
115
79 % $
246
Operating Performance Assessment and Reporting
We manage and assess the performance of our business based on our performance on individual contracts and
programs using the financial measures referred to below, with consideration given to the Critical Accounting
Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-
priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with
operating income being a critical measure of operating performance. Under FAR rules that govern our business,
most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or
general and administrative expenses, as much as we do on total contract costs, which are a key factor in
determining contract operating income. As a result, in evaluating our operating performance, we look primarily at
changes in sales and service revenues, as well as operating income, including the effects of significant changes in
operating income as a result of changes in contract estimates and the use of the cumulative catch-up method of
accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts, as
management assesses the bidding of each contract by focusing on net sales and operating profit and monitors
performance in a similar manner through contract completion. Consequently, our discussion of business segment
performance focuses on net sales and operating profit, consistent with our approach for managing our business.
Cost of sales for both product sales and service revenues consist of materials, labor and subcontracting costs, as
well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level,
which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating
performance driven by changes in a specific cost element across multiple contracts are described in our analysis.
Sales and Service Revenues
Sales and service revenues consist of the following:
($ in millions)
Product sales
Service revenues
Sales and service revenues
Year Ended December 31
2013 over 2012
2012 over 2011
2013
2012
2011
Dollars
Percent
Dollars
Percent
$
$
5,801
1,019
6,820
$
$
5,755
953
6,708
$
$
5,676
899
6,575
$
$
46
66
112
1% $
7%
79
54
2% $
133
1%
6%
2%
2013 - Product sales in 2013 increased $46 million, or 1%, from 2012. Product sales at our Ingalls segment
decreased $80 million in 2013, primarily due to lower volumes in Amphibious Assault Ships, partially offset by
higher volumes in the Legend-class NSC program and Surface Combatants. Newport News product sales
increased $126 million in 2013, as a result of higher volumes in Aircraft Carriers and Submarines.
Service revenues in 2013 increased $66 million, or 7%, from 2012. Service revenues at our Ingalls segment
decreased $7 million in 2013, as lower volumes in Surface Combatants services were partially offset by higher
46
volumes in Fleet Support services. Service revenues at our Newport News segment increased $73 million in 2013,
primarily due to higher volumes in Fleet Support and Aircraft Carrier related services.
2012 - Product sales in 2012 increased $79 million, or 1%, from 2011. Product sales at our Ingalls segment
decreased by $10 million in 2012, as a result of lower sales volumes in Amphibious Assault Ships, partially offset by
higher sales volumes in Surface Combatants and the Legend-class NSC program. Newport News product sales
increased by $89 million in 2012, due to higher sales volumes in Aircraft Carrier programs, partially offset by lower
sales volumes in Submarine programs.
Service revenues in 2012 increased $54 million, or 6%, from 2011. Service revenues at our Ingalls segment
decreased by $31 million in 2012, primarily as a result of lower volumes in Surface Combatant support services.
Service revenues at our Newport News segment increased by $85 million in 2012, due to the favorable resolution of
outstanding contract changes on the CVN-65 USS Enterprise Extended Drydocking Selected Restricted Availability
("EDSRA"), and higher volumes in Energy services, Aircraft Carrier and Submarine related engineering services,
and Fleet Support services.
Cost of Sales and Service Revenues
Cost of product sales, cost of service revenues, income from operating investments, net, and general and
administrative expenses were as follows:
($ in millions)
Cost of product sales
% of product sales
Cost of service revenues
% of service revenues
Income (loss) from operating investments, net
General and administrative expenses
% of total sales and service revenues
Goodwill impairment
Cost of sales and service revenues
Cost of Product Sales
Year Ended December 31
2013 over 2012
2012 over 2011
2013
$ 4,695
80.9%
888
87.1%
14
739
10.8%
—
$ 6,308
2012
2011
Dollars
Percent
Dollars
Percent
$ 4,827
$ 4,794
$
(132)
(3)% $
83.9%
802
84.2%
18
739
11.0%
—
84.5%
777
86.4%
20
634
9.6%
290
—
86
—
(4)
—
—
—
$ 6,350
$ 6,475
$
(42)
11 %
(22)%
— %
— %
(1)% $
33
—
25
—
(2)
105
—
(290)
(125)
1 %
3 %
(10)%
17 %
(100)%
(2)%
2013 - Cost of product sales in 2013 decreased $132 million, or 3%, as compared to 2012. Cost of product sales at
our Ingalls segment decreased $174 million in 2013, primarily due to the impact of hurricane insurance recoveries
and lower volumes in Amphibious Assault Ships, partially offset by higher volumes in the Legend-class NSC
program and Surface Combatants. Cost of product sales at our Newport News segment increased $42 million in
2013, primarily due to higher volumes in Aircraft Carriers, partially offset by lower costs on the SSN-774 Virginia-
class submarine program driven by performance improvement, and the absence in 2013 of the workers'
compensation expense adjustment recorded in 2012. Cost of product sales as a percentage of product sales
declined from 83.9% in 2012 to 80.9% in 2013, primarily due to the impact of hurricane insurance recoveries, the
SSN-774 Virginia-class submarine program, driven by risk retirement, performance improvement and the favorable
resolution of outstanding contract changes, as well as risk retirement on the execution contract for the CVN-71 USS
Theodore Roosevelt RCOH and the absence in 2013 of the workers' compensation expense adjustment recorded
in 2012.
2012 - Cost of product sales in 2012 increased $33 million, or 1%, as compared to 2011. Cost of product sales at
our Ingalls segment decreased $26 million in 2012, primarily as a result of the lower sales volumes described
above, improved performance on the LPD-17 San Antonio-class program, as well as receipt of $7 million in
resolution of a contract dispute with a private party, partially offset by increased workers' compensation expense.
Cost of product sales at our Newport News segment increased $59 million in 2012, primarily due to the higher sales
volumes described above and increased workers' compensation expense. Cost of product sales as a percentage of
product sales declined from 84.5% in 2011 to 83.9% in 2012, primarily due to improved overall performance at our
Ingalls segment.
47
Cost of Service Revenues
2013 - Cost of service revenues in 2013 increased $86 million, or 11%, as compared to 2012. Cost of service
revenues at our Ingalls segment decreased $5 million in 2013 as a result of the lower volumes described above.
Cost of service revenues at our Newport News segment increased $91 million in 2013, primarily as a result of the
higher volumes described above. Cost of service revenues as a percentage of service revenues increased from
84.2% in 2012 to 87.1% in 2013, primarily due to the favorable resolution in 2012 of outstanding contract changes,
as well as normal year-to-year variances in contract mix.
2012 - Cost of service revenues in 2012 increased $25 million, or 3%, as compared to 2011. Cost of service
revenues at our Ingalls segment decreased $24 million in 2012, as a result of the lower volumes described above.
Cost of service revenues at our Newport News segment increased $49 million in 2012, as a result of the higher
volumes described above. Cost of service revenues as a percentage of service revenues declined from 86.4% in
2011 to 84.2% in 2012, primarily due to the favorable resolution of outstanding contract changes on the CVN-65
USS Enterprise EDSRA, as well as normal year-to-year variances in contract mix.
Income (Loss) from Operating Investments, Net
The activities of our operating investments are closely aligned with the operations of the segments holding the
investments. We therefore record income related to earnings from equity method investments in our operating
income.
2013 - Income from operating investments, net decreased $4 million, or 22%, to $14 million in 2013 from $18 million
in 2012. The decrease was a result of reduced work funded by the American Reinvestment and Recovery Act at our
Savannah River Nuclear Solutions, LLC investment.
2012 - Income from operating investments, net decreased by $2 million, or 10%, to $18 million in 2012 from $20
million in 2011. The decrease was primarily driven by reduced work in 2012 funded by the American Reinvestment
and Recovery Act at our Savannah River Nuclear Solutions, LLC investment.
General and Administrative Expenses
In accordance with industry practice and the regulations that govern the cost accounting requirements for
government contracts, most general and administrative expenses are considered allowable and allocable costs on
government contracts. These costs are allocated to contracts in progress on a systematic basis and contract
performance factors include this cost component as an element of cost.
2013 - General and administrative expenses remained constant in 2013 compared to 2012. This was primarily the
result of favorable variances in deferred state tax expense and the FAS/CAS Adjustment offsetting increases in
current state tax expense, legal expenses, and bid and proposal efforts.
2012 - General and administrative expenses in 2012 increased $105 million, or 17%, from 2011. This increase was
primarily the result of increases in the FAS/CAS Adjustment and deferred state income tax expenses.
Goodwill Impairment
As discussed above in Critical Accounting Policies, Estimates and Judgments, we perform impairment tests for
goodwill as of November 30 each year, or when evidence of potential impairment exists. We record a charge to
operations when we determine that an impairment has occurred.
2013 - We did not record any goodwill impairment charge during 2013.
2012 - We did not record any goodwill impairment charge during 2012. We recorded a net goodwill impairment
charge in 2011 of $290 million in our Ingalls segment. See Note 11: Goodwill and Other Purchased Intangible
Assets in Item 8.
48
Operating Income
We consider operating income to be an important measure for evaluating our operating performance and, as is
typical in the industry, we define operating income as revenues less the related cost of producing the revenues and
general and administrative expenses.
We internally manage our operations by reference to "segment operating income." Segment operating income is
defined as operating income before the FAS/CAS Adjustment and deferred state income taxes, neither of which
affects segment performance. Segment operating income is one of the key metrics we use to evaluate operating
performance. Segment operating income is not, however, a measure of financial performance under GAAP and
may not be defined and calculated by other companies in the same manner. We believe investors consider
segment operating income to be a useful measure of the performance of our operating segments.
The following table reconciles segment operating income to total operating income:
($ in millions)
Segment operating income (loss)
FAS/CAS Adjustment
Deferred state income taxes
Total operating income (loss)
Segment Operating Income
Year Ended December 31
2013 over 2012
2012 over 2011
2013
2012
2011
Dollars
Percent
Dollars
Percent
$
$
567
$
457
$
122
$
110
24% $
(61)
6
(80)
(19)
(23)
1
19
25
24%
132%
512
$
358
$
100
$
154
43% $
335
(57)
(20)
258
275 %
(248)%
(2,000)%
258 %
2013 - Segment operating income in 2013 was $567 million, as compared to $457 million in 2012. The increase
was primarily due to the impact of hurricane insurance recoveries, the SSN-774 Virginia-class submarine program,
driven by risk retirement, performance improvement and the favorable resolution of outstanding contract changes,
as well as risk retirement on the execution contract for the CVN-71 USS Theodore Roosevelt RCOH and the
absence in 2013 of the workers' compensation expense adjustment recorded in 2012, partially offset by the impact
of closing our Gulfport facility and the favorable resolution in 2012 of outstanding contract changes.
2012 - Segment operating income in 2012 was $457 million, as compared to $122 million in 2011. The increase
was primarily the result of the absence in 2012 of the goodwill impairment charge recorded in 2011, improved
overall performance at our Ingalls segment and the favorable resolution of outstanding contract changes on the
CVN-65 USS Enterprise EDSRA, partially offset by increased workers' compensation expense.
Activity within each segment is discussed in Segment Operating Results below.
FAS/CAS Adjustment
The FAS/CAS Adjustment represents the difference between our pension and postretirement plan expense under
FAS and under CAS.
($ in millions)
FAS expense
CAS cost
FAS/CAS Adjustment
Year Ended December 31
2013 over 2012
2012 over 2011
2013
2012
2011
Dollars
Percent
Dollars
Percent
$
$
(257) $
(228) $
(167) $
(29)
(13)% $
196
148
144
(61) $
(80) $
(23) $
48
19
32 %
24 % $
(61)
4
(57)
(37)%
3 %
(248)%
2013 - The FAS/CAS Adjustment in 2013 was a net expense of $61 million, compared to a net expense of $80
million in 2012. The favorable change was driven by increased CAS cost, partially offset by increased FAS
expense. The increase in FAS expense was due primarily to commencing the amortization in 2013 of the net
actuarial losses incurred in 2012, partially offset by the impact of the remeasurement in 2013 of our postretirement
benefit plans
49
2012 - The FAS/CAS Adjustment in 2012 was a net expense of $80 million, compared to a net expense of $23
million in 2011. The unfavorable change was driven by an increase in our FAS expense, due primarily to a reduction
in the discount rate assumption.
We expect the FAS/CAS Adjustment in 2014 to be a net benefit of approximately $92 million, driven by higher FAS
discount rates, the effect of second quarter 2013 amendments to our postretirement health care plans, and the
initial 25% phase in of Harmonization. The expected FAS/CAS Adjustment is subject to update during 2014, when
we remeasure our actuarial estimate of the unfunded benefit obligation for CAS with final 2013 asset returns and
census data and possibly for any potential amendments to our plans that might be subject to remeasurement during
2014.
Deferred State Income Taxes
Deferred state income taxes reflect the change in deferred state tax 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.
2013 - The deferred state income taxes benefit in 2013 was $6 million, compared to an expense of $19 million in
2012. This change was primarily attributable to the recognition of previously deferred tax losses on contracts, which
increased 2012 deferred state tax expense. Deferred state taxes in 2013 were favorably impacted by pension
related changes and increases in reserves.
2012 - The deferred state income taxes expense in 2012 was $19 million, compared to a benefit of $1 million in
2011. The increase was primarily due to the timing of contract related income, spin-off related adjustments, and
pension related deductions.
Interest Expense
2013 - Interest expense remained relatively constant in 2013 at $118 million, compared to $117 million in 2012.
2012 - Interest expense in 2012 was $117 million, compared to $104 million in 2011. The increase was primarily
due to a full year of interest in 2012 on our senior notes and indebtedness under the Credit Facility, partially offset
by the elimination of intercompany indebtedness to Northrop Grumman in connection with the spin-off.
Federal Income Taxes
2013 - Our effective tax rate on earnings from continuing operations was 33.8% in 2013, compared to 39.4% in
2012. The 2012 tax rate included the impact of an $8 million unfavorable non-cash tax adjustment arising under the
Tax Matters Agreement with Northrop Grumman, which requires indemnification between us and Northrop
Grumman for aggregate tax adjustments exceeding a certain threshold for periods prior to the spin-off. See Note
13: Income Taxes in Item 8. Excluding this adjustment, the effective tax rate for 2012 was 36.1%. The decrease in
our effective tax rate for 2013 was primarily attributable to an increase in the domestic manufacturing deduction and
enactment of the American Taxpayer Relief Act in January 2013, which retroactively extended the research and
development tax credit through the end of 2013. Our effective tax rate for 2013 reflects the entire 2012 income tax
benefit for the research and development tax credit, which expired at the end of 2011.
2012 - Our effective tax rate on earnings from continuing operations was 39.4% in 2012, compared to 33.6% in
2011, excluding the 2011 non-cash goodwill impairment charge of $290 million, which is non-deductible for income
tax purposes. The increase in our effective tax rate for 2012 compared to 2011 was primarily the result of $8 million
in non-cash tax adjustments arising under our Tax Matters Agreement with Northrop Grumman, which requires
indemnification between us and Northrop Grumman for aggregate tax adjustments exceeding a certain threshold for
periods prior to the spin-off. See Note 13: Income Taxes in Item 8. Our effective tax rate can also differ from the
federal statutory rate as a result of nondeductible expenditures, the research and development tax credit and the
domestic manufacturing deduction. Our effective tax rate for 2012 does not reflect the income tax benefit for the
research and development tax credit, which expired at the end of 2011. The American Taxpayer Relief Act, which
was signed into law on January 2, 2013, retroactively extends the research and development tax credit through the
end of 2013.
50
SEGMENT OPERATING RESULTS
Basis of Presentation
We are aligned into two reportable segments: Ingalls and Newport News.
($ in millions)
Sales and Service Revenues
Ingalls
Newport News
Intersegment eliminations
Total sales and service revenues
Operating Income (Loss)
Ingalls
Newport News
Total Segment Operating Income (Loss)
Non-segment factors affecting operating income
(loss)
FAS/CAS Adjustment
Deferred state income taxes
Year Ended December 31
2013 over 2012
2012 over 2011
2013
2012
2011
Dollars
Percent
Dollars
Percent
$
2,757
$
2,840
$
2,885
$
$
$
$
$
4,139
(76)
6,820
175
392
567
(61)
6
3,940
(72)
6,708
97
360
457
(80)
(19)
$
$
3,766
(76)
6,575
$
(220) $
342
122
(83)
199
(4)
112
78
32
110
(3)% $
5 %
(6)%
2 % $
80 % $
9 %
24 %
(23)
1
19
25
24 %
132 %
(45)
174
4
133
317
18
335
(57)
(20)
258
(2)%
5 %
5 %
2 %
144 %
5 %
275 %
(248)%
(2,000)%
258 %
Total operating income (loss)
$
512
$
358
$
100
$
154
43 % $
KEY SEGMENT FINANCIAL MEASURES
Sales and Service Revenues
Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service
revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to
increases (or decreases) in reported revenues due to varying production activity levels, delivery rates or service
levels on individual contracts. Volume changes will typically carry a corresponding income change based on the
margin rate for a particular contract.
Segment Operating Income
Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from
this measure are certain costs not directly associated with contract performance, including the FAS/CAS Adjustment
and deferred state income taxes. Changes in segment operating income are typically expressed in terms of volume,
as discussed above, or performance. Performance refers to changes in contract margin rates. These changes
typically relate to profit recognition associated with revisions to EAC that reflect improved (or deteriorated) operating
performance on a particular contract. Operating income changes are accounted for on a cumulative to date basis at
the time an EAC change is recorded. Segment operating income may also be affected by, among other things,
contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes,
resolution of disputed items with the customer, recovery of insurance proceeds and other discrete events. At the
completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as
warranty reserves, could also impact contract earnings. Where such items have occurred and the effects are
material, a separate description is provided.
51
Ingalls
($ in millions)
Sales and service revenues
Segment operating income (loss)
As a percentage of segment sales
Sales and Service Revenues
Year Ended December 31
2013 over 2012
2012 over 2011
2013
$ 2,757
175
6.3%
2012
2011
Dollars
Percent
Dollars
Percent
$ 2,840
$ 2,885
$
97
3.4%
(220)
(7.6)%
(83)
78
(3)% $
80 %
(45)
317
(2)%
144 %
2013 - Ingalls revenues, including intersegment sales, decreased $83 million, or 3%, in 2013 compared to 2012,
driven by lower revenues in Amphibious Assault Ships, partially offset by higher revenues in the Legend-class NSC
program and Surface Combatants. The decrease in Amphibious Assault Ships revenues was due to lower volumes
on LPD-24 USS Arlington, LPD-23 USS Anchorage, LHA-6 America, and LPD-25 Somerset, partially offset by
higher volumes on LPD-27 Portland and LHA-7 Tripoli. Revenues on the Legend-class NSC program increased
primarily due to higher volumes on the construction contracts of NSC-6 Munro and NSC-5 James. Surface
Combatants revenues increased due to higher volumes on DDG-117 Paul Ignatius and DDG-113 John Finn,
partially offset by lower volumes on the DDG-1000 Zumwalt-class destroyer program.
2012 - Ingalls revenues, including intersegment sales, decreased $45 million, or 2%, in 2012 compared to 2011, as
a result of lower sales volumes in Amphibious Assault Ships, partially offset by higher sales volumes in the Legend-
class NSC program. The decrease in Amphibious Assault Ships revenues was due to lower sales following the
deliveries of LPD-23 USS Anchorage and LPD-24 USS Arlington in 2012 and following the delivery of LPD-22 USS
San Diego in 2011, partially offset by higher sales volume on LHA-7 Tripoli, LPD-27 Portland, LPD-26 John P.
Murtha and LPD-25 Somerset. The increase in revenues on the Legend-class NSC program was the result of
higher sales volume on the construction of NSC-4 Hamilton and NSC-5 James and the advance procurement
contract on NSC-6 Munro, partially offset by lower sales resulting from the delivery of NSC-3 USCGC Stratton in
2011. Surface Combatants revenues remained stable as higher sales on the DDG-51 Arleigh Burke-class destroyer
construction program, driven by higher sales on DDG-114 Ralph Johnson partially offset by lower sales on
DDG-110 USS William P. Lawrence delivered in 2011, as well as higher sales on the DDG-1000 Zumwalt-class
destroyer program were offset by lower revenues in Surface Combatants support services.
Segment Operating Income
2013 - Ingalls operating income in 2013 was $175 million, compared to income of $97 million in 2012. The increase
was primarily due to the impact of hurricane insurance recoveries, risk retirement and higher volumes on the
Legend-class NSC program, as well as the absence in 2013 of the workers' compensation expense adjustment
recorded in 2012, partially offset by the impact of closing our Gulfport facility.
2012 - Ingalls operating income in 2012 was $97 million, compared to a loss of $220 million in 2011. The increase
was primarily due to the absence in 2012 of the goodwill impairment charge recorded in 2011, improved overall
performance and the receipt of $7 million in resolution of a contract dispute with a private party, partially offset by
increased workers' compensation expense.
Newport News
($ in millions)
Sales and service revenues
Segment operating income (loss)
As a percentage of segment sales
Year Ended December 31
2013 over 2012
2012 over 2011
2013
$ 4,139
392
9.5%
2012
2011
Dollars
Percent
Dollars
Percent
$ 3,940
$ 3,766
$
360
9.1%
342
9.1%
199
32
5% $
9%
174
18
5%
5%
52
Sales and Service Revenues
2013 - Newport News revenues, including intersegment sales, increased $199 million, or 5%, in 2013 compared to
2012, primarily driven by higher revenues in Aircraft Carriers, Fleet Support services and Submarines. Higher
revenues in Aircraft Carriers were primarily due to increased volumes on the execution contract for the CVN-72
USS Abraham Lincoln RCOH, the construction preparation contract for CVN-79 John F. Kennedy and the
inactivation contract for CVN-65 USS Enterprise, partially offset by lower volumes on the execution contract for the
CVN-71 USS Theodore Roosevelt RCOH and the construction and engineering contracts for CVN-78 Gerald R.
Ford. Higher revenues in Fleet Support services were primarily the result of volumes associated with repair work on
SSN-765 USS Montpelier. Increased Submarines revenues were related to the SSN-774 Virginia-class submarine
program, primarily driven by higher volumes on Block III boats and the advance procurement contract on Block IV
boats, partially offset by lower volumes on Block II boats following the delivery of SSN-783 USS Minnesota.
2012 - Newport News revenues, including intersegment sales, increased $174 million, or 5%, in 2012 compared to
2011, primarily driven by higher sales volumes in Aircraft Carrier programs, Energy and Fleet Support services,
partially offset by lower sales volumes in Submarine programs. The increase in Aircraft Carriers was primarily due
to higher revenues on the construction contract for CVN-78 Gerald R. Ford, the advance construction contract for
CVN-79 John F. Kennedy, the advance planning contract for the CVN-72 USS Abraham Lincoln RCOH, and the
favorable resolution of outstanding contract changes on the CVN-65 USS Enterprise EDSRA, partially offset by
lower revenues on the execution contract for the CVN-71 USS Theodore Roosevelt RCOH and an engineering
contract for CVN-78 Gerald R. Ford. Energy services revenues were higher due to maintenance services at the
Kesselring site. Fleet support revenues increased due primarily to increased maintenance work on in-service
Aircraft Carriers. The decrease in Submarine program revenues was the result of lower sales volumes on the
SSN-774 Virginia-class submarine construction program due to the timing of procurement of production materials.
Segment Operating Income
2013 - Newport News operating income in 2013 was $392 million, compared to income of $360 million in 2012. The
increase was primarily related to the SSN-774 Virginia-class submarine program, driven by risk retirement,
performance improvement and the favorable resolution of outstanding contract changes, as well as risk retirement
on the execution contract for the CVN-71 USS Theodore Roosevelt RCOH and the absence in 2013 of the workers'
compensation expense adjustment recorded in 2012, partially offset by the favorable resolution in 2012 of
outstanding contract changes on the CVN-65 USS Enterprise EDSRA.
2012 - Newport News operating income in 2012 was $360 million, compared to income of $342 million in 2011. The
increase was due primarily to the increased sales volumes described above, favorable performance on the
execution contract for the CVN-71 USS Theodore Roosevelt RCOH, and the favorable resolution of outstanding
contract changes on the CVN-65 USS Enterprise EDSRA, partially offset by higher workers' compensation
expense.
BACKLOG
Total backlog as of December 31, 2013, was approximately $18 billion. Total backlog includes both funded backlog
(firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for
which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract
options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values,
backlog includes only the amounts committed by the customer.
The following table presents funded and unfunded backlog by segment as of December 31, 2013 and 2012:
($ in millions)
Ingalls
Newport News
Total backlog
December 31, 2013
December 31, 2012
Funded
$
$
6,514
5,316
11,830
Unfunded
2,624
$
3,584
6,208
$
$
$
Total
Backlog
Funded
Unfunded
Total
Backlog
9,138
8,900
18,038
$
$
7,120
5,637
12,757
$
$
95
2,654
2,749
$
$
7,215
8,291
15,506
53
We expect approximately 32% of the $18 billion total backlog as of December 31, 2013, to be converted into sales
in 2014. U.S. Government orders comprised substantially all of the backlog as of December 31, 2013 and 2012.
Awards
2013 - The value of new contract awards during the year ended December 31, 2013, was approximately $9.4
billion. Significant new awards in 2013 included contracts for the construction of five DDG-51 Arleigh Burke-class
destroyers, the CVN-72 USS Abraham Lincoln RCOH, inactivation of CVN-65 USS Enterprise, construction of
NSC-6 Munro and continued construction preparation for CVN-79 John F. Kennedy.
2012 - The value of new contract awards during the year ended December 31, 2012, was approximately $6.0
billion. Significant new awards in 2012 included contracts for the detail design and construction of LHA-7 Tripoli,
detail design and construction of LPD-27 Portland, planning efforts for the CVN-72 USS Abraham Lincoln RCOH,
and continued long-lead time procurement and construction preparation for CVN-79 John F. Kennedy.
LIQUIDITY AND CAPITAL RESOURCES
We endeavor to ensure the most efficient conversion of operating results into cash for deployment in operating our
businesses and maximizing stockholder value. We use various financial measures to assist in capital deployment
decision making, including net cash provided by operating activities and free cash flow. We believe these measures
are useful to investors in assessing our financial performance.
The following table summarizes key components of cash flow provided by (used in) operating activities:
($ in millions)
Net earnings (loss)
Goodwill impairment
Deferred income taxes
Depreciation and amortization
Stock-based compensation
Excess tax benefit related to stock-based
compensation
Retiree benefit funding less than (in excess of)
expense
Insurance proceeds for investing purposes
Trade working capital decrease (increase)
Net cash provided by (used in) operating
activities
Cash Flows
Year Ended December 31
2013 over 2012
2012 over 2011
2013
2012
2011
Dollars
Percent
Dollars
Percent
115
—
79 % $
— %
246
(290)
$
261
$
146
$
(100) $
—
(28)
235
44
(24)
(86)
(58)
(108)
—
79
193
41
—
(43)
—
(84)
290
23
190
42
—
132
—
(49)
(107)
(135)%
42
3
(24)
(43)
(58)
(24)
22 %
7 %
— %
(100)%
— %
(29)%
246 %
(100)%
243 %
2 %
(2)%
— %
56
3
(1)
—
(175)
(133)%
—
(35)
— %
(71)%
$
236
$
332
$
528
$
(96)
(29)% $
(196)
(37)%
We discuss below our major operating, investing and financing activities for each of the three years in the period
ended December 31, 2013, as classified on our consolidated statements of cash flows.
Operating Activities
2013 - Cash provided by operating activities was $236 million in 2013, compared to $332 million in 2012. The
decrease of $96 million was due primarily to increases in income tax payments and retirement benefit funding.
Within trade working capital, higher inventoried costs and accounts receivable were offset by higher income taxes
payable and accounts payable and accruals. In 2013, we paid net cash of $154 million for federal and state income
taxes.
We expect cash generated from operations in 2014, in combination with our current cash and cash equivalents, as
well as existing credit facilities, to be more than sufficient to service debt, meet contractual obligations and finance
capital expenditures for at least the next 12 months.
54
2012 - Cash provided by operating activities was $332 million in 2012, compared to $528 million in 2011. The
decrease of $196 million was due primarily to increases in retirement benefit funding and trade working capital,
offset by a decrease in deferred income taxes. The change in trade working capital was driven primarily by
accounts receivable and inventoried costs. In 2012, we paid net cash of $28 million for federal and state income
taxes.
Investing Activities
2013 - Cash used in investing activities was $81 million in 2013, a decrease of $81 million from 2012. This
decrease was driven by proceeds from hurricane insurance recoveries and lower capital expenditures in 2013. We
expect our capital expenditures in 2014 to be approximately 3% of annual revenues.
2012 - Cash used in investing activities was $162 million in 2012, consisting entirely of capital expenditures, a
decrease of $35 million from 2011. This decrease resulted primarily from a one-time reimbursement to the State of
Louisiana in 2011 related to the Avondale wind down.
Financing Activities
2013 - Cash used in financing activities in 2013 was $169 million, compared to $28 million used in 2012. The
increase was primarily due to an additional $118 million of repurchases of common stock, $22 million of debt
repayments and $20 million of cash dividend payments, partially offset by $24 million of excess tax benefit related
to stock-based compensation in 2013 compared to 2012.
2012 - Cash used in financing activities in 2012 was $28 million, which resulted from $29 million of debt repayments
and $6 million of stockholder distributions, offset by $7 million in proceeds from the exercise of stock options. Cash
provided by financing activities in 2011 was $584 million. Our cash flow from financing activities resulted primarily
from the issuance of $1,775 million of debt, of which $22 million was repaid in 2011, a $1,266 million net transfer
from our former parent and $2 million in proceeds from the exercise of stock options, offset by $54 million of debt
issuance costs, repayment of $954 million of notes to our former parent and a contribution of $1,429 million to
Northrop Grumman as a result of the spin-off.
Free Cash Flow
Free cash flow represents cash provided by (used in) operating activities less capital expenditures. We believe
investors consider free cash flow to be a useful measure of our performance because it indicates the total cash
available for redeployment. We also use free cash flow as a key operating metric in assessing the performance of
our business and as a key performance measure in evaluating management performance and determining
incentive compensation.
Free cash flow is not a measure of financial performance under GAAP, and may not be defined and calculated by
other companies in the same manner. This measure should not be considered in isolation, as a measure of residual
cash flow available for discretionary purposes, or as an alternative to operating results presented in accordance
with GAAP as an indicator of performance.
The following table reconciles net cash provided by operating activities to free cash flow:
($ in millions)
Net cash provided by (used in) operating activities
Less:
Capital expenditures
Free cash flow
Year Ended December 31
2012
2011
2013
236
$
332
$
528
(139)
97
$
(162)
170
$
(197)
331
$
$
2013 - Free cash flow decreased $73 million from 2012, due primarily to increases in income tax payments and
retirement benefit funding, partially offset by lower capital expenditures in 2013.
55
2012 - Free cash flow decreased $161 million from 2011, due primarily to increases in retirement benefit funding
and trade working capital, offset by decreases in deferred income taxes and capital expenditures.
Retirement Related Plan Contributions
ERISA, including amendments under the PPA and MAP-21, defines the minimum amount that must be contributed
to our qualified defined benefit pension plans. In determining whether to make discretionary contributions to these
plans above the minimum required amounts, we consider various factors, including attainment of the funded
percentage needed to avoid benefit restrictions and other adverse consequences, minimum CAS funding
requirements, and the current and anticipated future funding levels of each plan. The contributions to our qualified
defined benefit pension plans are affected by a number of factors including published IRS interest rates, the actual
return on plan assets, actuarial assumptions, and demographic experience. These factors and our resulting
contributions also impact the plans' funded status. We made the following minimum and discretionary contributions
to our pension and other postretirement plans in the years ended December 31, 2013, 2012 and 2011:
($ in millions)
Pension plans
Qualified minimum
Discretionary
Qualified
Non-qualified
Other benefit plans
Total contributions
Year Ended December 31
2013
2012
2011
$
$
— $
64
$
301
4
38
172
3
31
343
$
270
$
—
—
3
33
36
We made minimum and discretionary contributions to our qualified defined benefit pension plans totaling $301
million and $236 million in the years ended December 31, 2013 and 2012, respectively. We were not required to
make minimum contributions to our qualified pension plans in 2011 and made no discretionary contributions.
As of December 31, 2013 and 2012, our qualified pension plans were funded 93% and 76%, respectively, on a FAS
basis. As of December 31, 2013 and 2012, these plans were considered at least 90% funded on an ERISA basis
so as not to be subject to benefit payment restrictions. The funded percentages under ERISA and FAS vary due to
inherent differences in the assumptions and methodologies used to develop respective obligations for these two
different purposes. We expect our 2014 cash contributions to our qualified defined benefit pension plans to be $123
million, all of which we anticipate will be discretionary and are exclusive of CAS cost recoveries in our contracts.
Due to the differences in calculation methodologies, our FAS expense is not necessarily representative of our
funding requirements or CAS cost recoveries.
Other postretirement benefit contributions were $38 million, $31 million and $33 million in 2013, 2012 and 2011,
respectively. We expect our 2014 contributions to our other postretirement benefit plans to be approximately $35
million, which are exclusive of CAS cost recoveries in our contracts. Contributions for postretirement benefits are
not required to be funded in advance, and are paid on an as-incurred basis.
Other Sources and Uses of Capital
Stockholder Distributions - In October 2013, our board of directors authorized an increase in our quarterly cash
dividend from $0.10 to $0.20 per share. We paid cash dividends totaling $25 million ($0.50 per share) and $5
million ($0.10 per share) in the years ended December 31, 2013 and 2012, respectively.
In 2012, our board of directors authorized management to repurchase up to $150 million of our outstanding shares
of common stock, prior to October 31, 2015. On October 30, 2013, our board of directors authorized an increase in
the 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
56
accordance with applicable federal securities laws. For the years ended December 31, 2013 and 2012, we
repurchased 1,722,991 and 31,008 shares, respectively, at a cost of $119 million and $1 million, respectively.
Additional Capital - In 2011, we issued $1,200 million of senior notes (consisting of $600 million of 6.875% senior
notes due in 2018 and $600 million of 7.125% senior notes due in 2021). We also entered into the Credit Facility
with third-party lenders in an amount of $1,225 million, comprised of a $575 million term loan (due in 2016 with a
variable interest rate based on the London Interbank Offered Rate ("LIBOR") plus a spread based on our leverage
ratio; the current spread, as of December 31, 2013, was 2.00% and may vary between 1.5% and 2.5%) and a
$650 million revolving credit facility (maturing in 2016 with a variable interest rate on drawn borrowings based on
LIBOR plus a spread based upon our leverage ratio; the current spread, as of December 31, 2013, was 2.00% and
may vary between 1.5% and 2.5%; and with a commitment fee rate on the unutilized balance based on our
leverage ratio, which fee rate at our current leverage ratio, as of December 31, 2013, was 0.35% and may vary
between 0.25% and 0.45%), of which approximately $28 million in letters of credit were issued but undrawn as of
December 31, 2013, and the remaining $622 million of which was unutilized at that time. 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.
We made scheduled term loan payments of $51 million during the year ended December 31, 2013, using cash
generated from operations.
For a description of our outstanding debt amounts and related restrictive covenants, see Note 14: Debt in Item 8.
We were in compliance with all debt-related covenants as of and during the year ended December 31, 2013.
CONTRACTUAL OBLIGATIONS
In 2011, we issued $1,200 million of senior notes and entered into the Credit Facility with third-party lenders in the
amount of $1,225 million. As of December 31, 2013, total outstanding long-term debt was $1,779 million, consisting
of senior notes, amounts outstanding under the Credit Facility and $105 million of third-party debt that remained
outstanding subsequent to the spin-off.
In connection with the spin-off, we entered into a Tax Matters Agreement with Northrop Grumman (the "Tax Matters
Agreement") that governs the respective rights, responsibilities and obligations of Northrop Grumman and us after
the spin-off with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding
U.S. federal, state, local and foreign income taxes, other taxes and related tax returns. We have several liabilities
with Northrop Grumman to the Internal Revenue Service ("IRS") for the consolidated U.S. federal income taxes of
the Northrop Grumman consolidated group relating to the taxable periods in which we were part of that group. The
Tax Matters Agreement specifies the portion of this tax liability for which we will bear responsibility, and Northrop
Grumman has agreed to indemnify us against any amounts for which we are not responsible. The Tax Matters
Agreement also provides special rules for allocating tax liabilities in the event that the spin-off, together with certain
related transactions, is not tax-free.
57
The following table presents our contractual obligations as of December 31, 2013, and the related estimated timing
of future cash payments:
($ in millions)
Long-term debt
Interest payments on long-term debt (1)
Operating leases
Purchase obligations (2)
Other long-term liabilities (3)
Total
2014
2015 - 2016
2017 - 2018
$
1,779
$
79
$
624
136
1,334
669
105
27
763
71
$
395
198
42
452
105
$
600
164
26
101
79
Total contractual obligations
$
4,542
$
1,045
$
1,192
$
970
$
2019 and
beyond
705
157
41
18
414
1,335
(1) Interest payments include interest on $474 million of variable interest rate debt calculated based on interest
rates as of December 31, 2013.
(2) A "purchase obligation" is defined as an agreement to purchase goods or services that is enforceable and
legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These
amounts are primarily comprised of open purchase order commitments to vendors and subcontractors
pertaining to funded contracts.
(3) Other long-term liabilities primarily consist of total accrued workers' compensation reserves, deferred
compensation and other miscellaneous liabilities, of which $230 million is the current portion of workers'
compensation liabilities. It excludes obligations for uncertain tax positions of $14 million, for which the timing of
the payments, if any, cannot be reasonably estimated.
The above table excludes retirement related contributions. Amounts for retirement related contributions depend on
plan provisions, actuarial assumptions, actual plan asset performance, and other factors described under retirement
related plans in Critical Accounting Policies, Estimates and Judgments.
Further details regarding long-term debt and operating leases can be found in Note 14: Debt and Note 16:
Commitments and Contingencies in Item 8.
Off-Balance Sheet Arrangements
In the ordinary course of business, we use standby letters of credit issued by commercial banks and surety bonds
issued by insurance companies principally to support our self-insured workers' compensation plans. As of
December 31, 2013, $28 million in standby letters of credit were issued but undrawn and $352 million of surety
bonds were outstanding.
As of December 31, 2013, we had no other significant off-balance sheet arrangements other than operating leases.
For a description of our operating leases, see Note 2: Summary of Significant Accounting Policies and Note 16:
Commitments and Contingencies in Item 8.
58
GLOSSARY OF PROGRAMS
Included below are brief descriptions of some of the programs discussed in this Annual Report on Form 10-K.
Program Name
Carrier RCOH
CVN-65 USS Enterprise
CVN-68 Nimitz-class aircraft carriers
CVN-78 Gerald R. Ford-class aircraft
carriers
DDG-51 Arleigh Burke-class destroyers
DDG-1000 Zumwalt-class destroyers
Energy services
Fleet Support services
Program Description
Perform refueling and complex overhaul ("RCOH") of nuclear-
powered aircraft carriers, which is required at the mid-point of
their 50-year life cycle. CVN-72 USS Abraham Lincoln is currently
undergoing RCOH.
Defuel and inactivate the world's first nuclear-powered aircraft
carrier, which began in 2013.
Refuel, maintain and repair the CVN-68 Nimitz-class aircraft
carriers, which are the largest warships in the world. Each Nimitz-
class carrier is designed for an approximately 50-year service life,
with one mid-life refueling. The 10th and final Nimitz-class carrier
constructed, CVN-77 USS George H.W. Bush, was
commissioned in 2009.
Design and construction for the Ford-class program, which is the
future aircraft carrier replacement program for CVN-65 USS
Enterprise and CVN-68 Nimitz-class aircraft carriers. CVN-78
Gerald R. Ford, the first ship of the Ford-class, is currently under
construction. CVN-79 John F. Kennedy is under contract for
engineering, advance construction, and purchase of long-lead-
time components and material. This category also includes the
class' non-recurring engineering. The class is expected to bring
improved warfighting capability, quality of life improvements for
sailors, and reduced life cycle costs.
Build guided missile destroyers designed for conducting anti-air,
anti-submarine, anti-surface and strike operations. The Aegis-
equipped DDG-51 Arleigh Burke-class destroyers are the U.S.
Navy's primary surface combatant, and have been constructed in
variants, allowing technological advances during construction.
DDG-113 John Finn and DDG-114 Ralph Johnson are currently
under construction. In June 2013, we were awarded a multi-year
contract for construction of five additional DDG-51 Arleigh Burke-
class destroyers.
Design and build multi-mission surface combatants in conjunction
with Bath Iron Works and construct the ships' integrated
composite deckhouses, as well as portions of the ships' aft
peripheral vertical launch systems. In 2012, we delivered the
composite superstructure of DDG-1000 Zumwalt. We are
currently constructing the composite deckhouse of DDG-1001
Michael Monsoor. This deckhouse will complete our participation
in this program as the Navy has decided on a steel deckhouse for
the third and final ship of the class.
Leverage our core competencies in nuclear operations, program
management and heavy manufacturing for DoE and commercial
nuclear programs. We also provide a range of services to the
energy and petrochemical industries as well as government
customers.
Fleet Support provides comprehensive life cycle services,
including depot maintenance, modernization, repairs, logistics
and technical support and planning yard services for naval and
commercial vessels. We have ship repair facilities in Newport
News, Virginia, and San Diego, California, which are near the
U.S. Navy's largest homeports of Norfolk, Virginia, and San
Diego, respectively. We also perform emergent repair for the U.S.
Navy on all classes of ships.
59
Legend-class National Security Cutter
Design and build the U.S. Coast Guard's National Security
LHA-6 America-class amphibious assault
ships
LPD-17 San Antonio-class amphibious
transport dock ships
Cutters, the largest and most technically advanced class of cutter
in the U.S. Coast Guard. The NSC is equipped to carry out
maritime homeland security, maritime safety, protection of natural
resources, maritime mobility and national defense missions. The
plan is for a total of eight ships, of which the first three ships have
been delivered. NSC-4 Hamilton and NSC-5 James are under
construction, and, in 2013, we were awarded the construction
contract for NSC-6 Munro and a long-lead-time material contract
for NSC-7 Kimball.
Design and build amphibious assault ships that provide forward
presence and power projection as an integral part of joint,
interagency and multinational maritime expeditionary forces. The
LHA-6 America-class ships, together with the LHD-1 Wasp-class
ships, are the successors to the aging LHA-1 Tarawa-class ships.
Three of the original five Tarawa-class ships have been recently
decommissioned, and the remainder of the class is scheduled to
be decommissioned by 2015. The LHA-6 America-class ships
optimize aviation operations and support capabilities. We expect
to deliver LHA-6 America in 2014 and LHA-7 Tripoli is currently
under construction.
Design and build amphibious transport dock ships, which are
warships that embark, transport and land elements of a landing
force for a variety of expeditionary warfare missions, and also
serve as the secondary aviation platform for Amphibious
Readiness Groups. The LPD-17 San Antonio-class is the newest
addition to the U.S. Navy's 21st century amphibious assault force,
and these ships are a key element of the U.S. Navy's seabase
transformation. In October 2013, we delivered LPD-25 Somerset,
and we are currently constructing LPD-26 John P. Murtha and
LPD-27 Portland. The LPD-17 San Antonio-class currently
includes a total of 11 ships.
Savannah River Nuclear Solutions, LLC
Participate, as a minority member in a joint venture, in the
SSBN(X) Ohio-class Submarine
Replacement Program
management and operation of DoE nuclear sites, currently at the
Savannah River Site near Aiken, South Carolina, and potentially
at other DoE sites. Our joint venture partners at the Savannah
River Site include Fluor Federal Services, Inc. and Honeywell
International Inc.
Perform, through an agreement with Electric Boat, as design
subcontractor for the SSBN(X) Ohio-class replacement boats.
The U.S. Navy has committed to designing a replacement class
for the SSBN Ohio-class ballistic missile submarines, which were
first introduced into service in 1981. We are currently participating
in the design effort and our experience and well-qualified
workforce position us for a potential role in the construction effort
but no decisions have been made regarding that aspect of the
program. The SSBN Ohio-class includes 14 ballistic missile
submarines ("SSBN") and four cruise missile submarines
("SSGN"). The Ohio Replacement Program currently anticipates
12 new ballistic missile submarines over a 15-year period at a
cost of approximately $4 billion to $7 billion each. The U.S. Navy
has initiated the design process for the new class of submarine,
and we have begun design work as a subcontractor to Electric
Boat. Congress has delayed the start of the first Ohio
replacement submarine by two years and construction is now
expected to begin in 2021, with procurement of long-lead-time
materials in 2017 and delivery in 2030. The first Ohio-class
ballistic missile submarine is expected to be retired in 2027 with
an additional submarine being retired each year thereafter. By
2030 the Ohio-class ballistic missile submarine fleet is expected
to be ten. The current fiscal environment and uncertainty in
defense budgets may cause additional delay to the start of
construction or result in a reduction in the number of ships being
procured, but we believe the Ohio Replacement Program may
represent a significant opportunity for us in the future.
60
SSN-774 Virginia-class fast attack
submarines
Construct the newest attack submarines as the principal
subcontractor to Electric Boat. The SSN-774 Virginia-class is a
post-Cold War design tailored to excel in a wide range of
warfighting missions, including anti-submarine and surface ship
warfare; special operation forces; strike; intelligence, surveillance,
and reconnaissance; carrier and expeditionary strike group
support; and mine warfare.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, primarily related to interest rates and foreign currency exchange rates.
Interest Rates - Our financial instruments subject to interest rate risk include floating rate borrowings under our
Credit Facility. As of December 31, 2013, we had $474 million in floating rate debt outstanding under our Credit
Facility's term loan. Our $650 million revolver remained undrawn as of December 31, 2013. Based on the amounts
outstanding under our Credit Facility as of December 31, 2013, an increase of 1% in interest rates would increase
the interest expense on our debt by approximately $5 million on an annual basis.
Foreign Currency - We currently have, and in the future may enter into, foreign currency forward contracts to
manage foreign currency exchange rate risk related to payments to suppliers denominated in foreign currencies. As
of December 31, 2013, our outstanding foreign currency forward contracts were not significant.
61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Huntington Ingalls Industries, Inc.
Newport News, Virginia
We have audited the accompanying consolidated statements of financial position of Huntington Ingalls Industries,
Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements
of operations and comprehensive income, changes in equity, and cash flows for each of the three years in the
period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of
the Huntington Ingalls Industries, Inc. and subsidiaries at December 31, 2013 and 2012, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity
with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As described in Note 2, the accompanying consolidated financial statements have been derived from the
consolidated financial statements and accounting records of the Company’s former parent for periods as of and
prior to March 30, 2011. The consolidated financial statements also include expense allocations for certain
corporate functions historically provided by the Company’s former parent through March 30, 2011 and does not
necessarily reflect the results of operations and cash flows if the Company had been a separate, stand-alone entity
during the periods prior to March 31, 2011. These allocations may not be reflective of the actual expense which
would have been incurred had the Company operated as a separate entity apart from the Company’s former parent.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2013, based on the
criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 27, 2014 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
February 27, 2014
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Huntington Ingalls Industries, Inc.
Newport News, Virginia
We have audited the internal control over financial reporting of Huntington Ingalls Industries, Inc. and subsidiaries
(the "Company") as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected
by the company's board of directors, management, and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and financial statement schedule as of and for the year
ended December 31, 2013 of the Company and our report dated February 27, 2014 expressed an unqualified
opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
February 27, 2014
63
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share amounts)
Sales and service revenues
Product sales
Service revenues
Total sales and service revenues
Cost of sales and service revenues
Cost of product sales
Cost of service revenues
Income (loss) from operating investments, net
General and administrative expenses
Goodwill impairment
Operating income (loss)
Other income (expense)
Interest expense
Earnings (loss) before income taxes
Federal income taxes
Net earnings (loss)
Basic earnings (loss) per share
Weighted-average common shares outstanding
Diluted earnings (loss) per share
Weighted-average diluted shares outstanding
Net earnings (loss) from above
Other comprehensive income (loss)
Change in unamortized benefit plan costs
Other
Tax benefit (expense) for items of other comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Year Ended December 31
2012
2011
2013
5,801
1,019
6,820
4,695
888
14
739
—
512
(118)
394
133
261
5.25
49.7
5.18
50.4
$
5,755
$
953
6,708
4,827
802
18
739
—
358
(117)
241
95
146
2.96
49.4
2.91
50.1
$
$
$
$
$
$
5,676
899
6,575
4,794
777
20
634
290
100
(104)
(4)
96
(100)
(2.05)
48.8
(2.05)
48.8
261
$
146
$
(100)
1,159
4
(458)
705
966
$
(605)
—
241
(364)
(218) $
(538)
—
208
(330)
(430)
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
64
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in millions)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventoried costs, net
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, Plant, and Equipment
Land and land improvements
Buildings and leasehold improvements
Machinery and other equipment
Capitalized software costs
Accumulated depreciation and amortization
Property, plant, and equipment, net
Other Assets
Goodwill
Other purchased intangibles, net
Pension plan assets
Long-term deferred tax assets
Miscellaneous other assets
Total other assets
Total assets
December 31
2013
2012
$
$
1,043
1,123
311
170
29
2,676
319
1,531
1,235
216
3,301
(1,404)
1,897
881
528
124
—
119
1,652
6,225
$
$
1,057
905
288
213
21
2,484
314
1,486
1,339
208
3,347
(1,313)
2,034
881
548
—
329
116
1,874
6,392
The accompanying notes are an integral part of these consolidated financial statements.
65
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - CONTINUED
($ in millions)
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable
Accrued employees’ compensation
Current portion of long-term debt
Current portion of postretirement plan liabilities
Current portion of workers’ compensation liabilities
Advance payments and billings in excess of revenues
Other current liabilities
Total current liabilities
Long-term debt
Pension plan liabilities
Other postretirement plan liabilities
Workers’ compensation liabilities
Deferred tax liabilities
Other long-term liabilities
Total liabilities
Commitments and Contingencies (Note 16)
Stockholders’ Equity
Common stock, $0.01 par value; 150 million shares authorized; 50.5 million issued and 48.7
million outstanding as of December 31, 2013, and 49.6 million issued and outstanding as of
December 31, 2012
Additional paid-in capital
Retained earnings (deficit)
Treasury stock
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31
2013
2012
$
337
230
79
139
230
115
262
1,392
1,700
529
477
419
83
104
4,704
1
1,925
236
(120)
(521)
1,521
6,225
$
377
235
51
166
216
134
205
1,384
1,779
1,301
799
403
—
59
5,725
—
1,894
—
(1)
(1,226)
667
6,392
$
$
The accompanying notes are an integral part of these consolidated financial statements.
66
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Operating Activities
Net earnings (loss)
Adjustments to reconcile to net cash provided by (used in) operating activities
Depreciation
Amortization of purchased intangibles
Amortization of debt issuance costs
Stock-based compensation
Excess tax benefit related to stock-based compensation
Deferred income taxes
Proceeds from insurance settlement related to investing activities
Goodwill impairment
Change in
Accounts receivable
Inventoried costs
Prepaid expenses and other assets
Accounts payable and accruals
Retiree benefits
Other non-cash transactions, net
Net cash provided by (used in) operating activities
Investing Activities
Additions to property, plant, and equipment
Proceeds from insurance settlement related to investing activities
Net cash provided by (used in) investing activities
Financing Activities
Proceeds from issuance of long-term debt
Repayment of long-term debt
Debt issuance costs
Dividends paid
Repurchases of common stock
Proceeds from stock option exercises
Excess tax benefit related to stock-based compensation
Repayment of notes payable to former parent and accrued interest
Dividend to former parent in connection with spin-off
Net transfers from (to) former parent
Net cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental Cash Flow Disclosure
Cash paid for income taxes
Cash paid for interest
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable
Year Ended December 31
2012
2011
2013
$
261
$
146
$
(100)
206
20
9
44
(24)
(28)
(58)
—
(218)
51
(15)
69
(86)
5
236
(139)
58
(81)
—
(51)
(5)
(25)
(119)
7
24
—
—
—
(169)
(14)
1,057
1,043
154
109
12
$
$
$
$
165
19
9
41
—
79
—
—
(194)
116
6
(14)
(43)
2
332
(162)
—
(162)
—
(29)
—
(5)
(1)
7
—
—
—
—
(28)
142
915
1,057
28
111
20
$
$
$
$
164
20
6
42
—
23
—
290
17
(87)
(30)
50
132
1
528
(197)
—
(197)
1,775
(22)
(54)
—
—
2
—
(954)
(1,429)
1,266
584
915
—
915
46
64
48
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
67
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
($ in millions)
Balance as of January 1, 2011
Net earnings (loss)
Dividend to former parent
Contributed surplus
Net transfers from (to) former parent
Additional paid-in capital
Other comprehensive income (loss), net of
tax
Balance as of December 31, 2011
Net earnings (loss)
Dividends declared ($0.10 per share)
Additional paid-in capital
Other comprehensive income (loss), net of
tax
Treasury stock activity
Balance as of December 31, 2012
Net earnings (loss)
Dividends declared ($0.50 per share)
Additional paid-in capital
Other comprehensive income (loss), net of
tax
Common stock
Treasury stock activity
Balance as of December 31, 2013
$
Former
Parent's
Equity
in Unit
$ 1,939
46
(1,429)
(1,822)
1,266
—
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
(Deficit)
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
$
— $
—
—
—
—
—
— $
—
—
1,822
—
45
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
1
—
1
$
—
1,867
—
(5)
32
—
—
1,894
—
—
31
—
—
—
1,925
$
— $
(146)
—
—
—
—
—
(146)
146
—
—
—
—
—
261
(25)
—
—
—
—
236
— $
—
—
—
—
—
—
—
—
—
—
—
(1)
(1)
—
—
—
(532) $
—
—
—
—
—
(330)
(862)
—
—
—
(364)
—
(1,226)
—
—
—
—
—
(119)
(120) $
$
705
—
—
(521) $
1,407
(100)
(1,429)
—
1,266
45
(330)
859
146
(5)
32
(364)
(1)
667
261
(25)
31
705
1
(119)
1,521
The accompanying notes are an integral part of these consolidated financial statements.
68
HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the 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 (the "Separation 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.
Pursuant to the terms of the Separation Agreement, (i) Northrop Grumman completed a corporate reorganization to
create a new holding company structure, (ii) HII and Northrop Grumman effected certain transfers of assets and
assumed certain liabilities so that each of HII and Northrop Grumman retained both the assets of and liabilities
associated with their respective businesses, (iii) subject to certain exceptions, all agreements, arrangements,
commitments and undertakings, including all intercompany accounts payable or accounts receivable, including
intercompany indebtedness and intercompany work orders between HII and Northrop Grumman, were terminated
or otherwise satisfied, effective no later than March 31, 2011 (the "Distribution Date"), (iv) HII and Northrop
Grumman agreed to share certain gains and liabilities and (v) on the Distribution Date, Northrop Grumman
distributed, on a pro rata basis, all of the issued and outstanding shares of common stock of HII to Northrop
Grumman's stockholders via a pro rata dividend (the "spin-off"). One share of HII common stock was distributed for
every six shares of Northrop Grumman common stock held by a holder of Northrop Grumman common stock as of
the record date for the distribution, March 30, 2011. The shares of common stock of HII began regular way trading
on the New York Stock Exchange on March 31, 2011, under the ticker symbol "HII."
Following the spin-off, HII and Northrop Grumman began operating independently of each other, and neither has
any ownership interest in the other. In order to govern certain ongoing relationships between HII and Northrop
Grumman following the spin-off and to provide mechanisms for an orderly transition, HII and Northrop Grumman
entered into agreements pursuant to which certain services were provided and certain post spin-off rights and
obligations were addressed. The material agreements entered into with Northrop Grumman in connection with the
spin-off include the following: the Separation and Distribution Agreement; Employee Matters Agreement; Insurance
Matters Agreement; Intellectual Property License Agreement; Tax Matters Agreement; Transition Services
Agreement; and Ingalls Guaranty Performance, Indemnity and Termination Agreement.
In connection with the spin-off, HII entered into new borrowing arrangements designed 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, which
includes a $650 million revolver and a $575 million term loan. See Note 14: 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.
69
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The 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-K 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. The consolidated financial statements have been derived from the
consolidated financial statements and accounting records of Northrop Grumman for periods through the date of the
spin-off. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.
Transactions with Former Parent - Through the date of the spin-off, the consolidated statements of operations
include expense allocations for certain corporate functions historically provided to HII by Northrop Grumman,
including, but not limited to, human resources, employee benefits administration, treasury, risk management, audit,
finance, tax, legal, information technology support, procurement, and other shared services. These allocations are
reflected in the consolidated statements of operations within the expense categories to which they relate. The
allocations were made on a direct usage basis when identifiable, with the remainder allocated on various bases that
are further discussed in Note 20: Related Party Transactions and Former Parent Company Equity.
Transactions between HII and Northrop Grumman through the date of the spin-off are reflected as effectively settled
for cash at the time of the transaction and are included in financing activities in the consolidated statements of cash
flows. The net effect of these transactions is reflected in the Former Parent's Equity in Unit section in the
consolidated statements of changes in equity.
The HII consolidated financial statements may not be indicative of HII's future performance and, for periods prior to
the spin-off, do not necessarily reflect what the results of operations, financial position, and cash flows would have
been had HII operated as a stand-alone company.
Accounting Estimates - The preparation of the Company's 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.
Revenue Recognition - The majority of the Company's business is derived from long-term contracts for the
construction of naval vessels, production of goods, and services provided to the federal government, principally the
U.S. Navy. In accounting for these contracts, the Company extensively utilizes the cost-to-cost measure of the
percentage-of-completion method of accounting, principally based upon direct labor dollars or total costs incurred.
Under this method, sales, including estimated earned fees or profits, are recorded as costs are incurred. Contract
sales are generally calculated based on either the percentage that direct labor costs incurred bear to total estimated
direct labor costs at completion or the percentage that total costs incurred bear to total estimated costs at
completion. For certain contracts that provide for deliveries of a substantial number of similar units, sales are
accounted for using units of delivery as the basis to measure progress toward completion. Certain contracts contain
provisions for price redetermination or for cost and/or performance incentives. Such redetermined amounts or
incentives are included in sales when the amounts can reasonably be determined and estimated. Amounts
representing contract change orders, claims, requests for equitable adjustment, or limitations in funding are
included in sales only when they can be reliably estimated and realization is probable. The Company estimates
profit as the difference between total estimated revenues and total estimated cost of a contract and recognizes that
profit over the life of the contract based on progress toward completion. If the Company estimates a contract will
result in a loss, the full amount of the estimated loss is recognized against income in the period in which the loss is
identified.
The Company classifies contract revenues as product sales or service revenues depending upon the predominant
attributes of the relevant underlying contracts. In the period in which it is determined that a loss will result from the
performance of a contract, the entire amount of the estimated ultimate loss is charged against income. Loss
provisions are first offset against costs that are included in unbilled accounts receivable or inventoried costs, with
70
any remaining amount reflected in other current liabilities. 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 years ended December 31, 2013, 2012 and 2011, net cumulative catch-up adjustments increased
operating income by $113 million, $62 million and $54 million, respectively, and increased diluted earnings per
share by $1.46, $0.80 and $1.10, respectively.
General and Administrative Expenses - In accordance with industry practice and regulations that govern the cost
accounting requirements for government contracts, most general corporate expenses incurred at both the segment
and corporate locations are considered allowable and allocable costs on government contracts. These costs are
allocated to contracts in progress on a systematic basis, and contract performance factors include this as an
element of cost.
General and administrative expenses also include certain other costs that are not allocable to government
contracts, primarily consisting of the FAS/CAS Adjustment and the provision for deferred state income taxes. The
FAS/CAS Adjustment reflects the difference between pension and postretirement benefits expenses determined in
accordance with U.S. Financial Accounting Standards ("FAS") and pension and postretirement benefit expenses
allocated to individual contracts determined in accordance with U.S. Cost Accounting Standards ("CAS"). Deferred
state income taxes reflect the change in deferred state tax assets and liabilities in the period.
Research and Development - Company-sponsored research and development activities primarily include
independent research and development ("IR&D") efforts related to experimentation, design, development and test
activities for government programs. IR&D expenses are included in general and administrative expenses and are
generally allocated to government contracts. Company-sponsored IR&D expenses totaled $22 million, $21 million
and $24 million for the years ended December 31, 2013, 2012 and 2011, respectively. Expenses for research and
development sponsored by the customer are charged directly to the related contracts.
Product Warranty Costs - The Company provides certain product warranties that require repair or replacement of
non-conforming items for a specified period of time often subject to a specified monetary coverage limit. The
Company's product warranties are provided under government contracts, the costs of which are immaterial and are
included in contract costs for purposes of using the percentage-of-completion method of accounting.
Environmental Costs - Environmental liabilities are accrued when the Company determines remediation costs are
probable and such amounts are reasonably estimable. When only a range of amounts is established and no
amount within the range is more probable than another, the minimum amount in the range is recorded.
Environmental liabilities are recorded on an undiscounted basis. Environmental expenditures are expensed or
capitalized as appropriate. Capitalized expenditures, if any, relate to long-lived improvements in currently operating
facilities. The Company does not record insurance recoveries before collection is probable and, as of December 31,
2013 and 2012, did not have any accrued receivables related to insurance reimbursements or recoveries for
environmental matters.
Fair Value of Financial Instruments - The accounting standard for fair value measurements provides a framework
for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is
defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in
the principal or most advantageous market in an orderly transaction between market participants on the
measurement date. The accounting standard provides a fair value hierarchy, which requires an entity to maximize
the use of observable inputs, where available. The three levels of inputs consist of:
Level 1: Quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs, other than Level 1 prices, such as: quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or that the Company corroborates
with observable market data for substantially the full term of the related assets or liabilities.
Level 3: Unobservable inputs supported by little or no market activity that are significant to the fair value of the
assets and liabilities.
71
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 $40 million and $33 million as of December 31, 2013 and 2012, respectively, and are presented within
miscellaneous other assets within the Consolidated Statements of Financial Position.
Asset Retirement Obligations - Environmental remediation and/or asset decommissioning may be required when
the Company ceases to utilize certain facilities. The Company records, within other current liabilities, all known
asset retirement obligations for which the liability's fair value can be reasonably estimated, including certain
asbestos removal, asset decommissioning and lease restoration obligations. The changes in the asset retirement
obligation carrying amounts for the years ended December 31, 2013, 2012 and 2011, were as follows:
($ in millions)
Balance as of January 1, 2011
Obligation relating to the future retirement of a facility
Balance as of December 31, 2011
Obligation relating to the future retirement of a facility
Revision of estimate
Accretion expense
Balance as of December 31, 2012
Balance as of December 31, 2013
Asset
Retirement
Obligations
20
5
25
1
(3)
2
25
25
$
$
The Company also has known conditional asset retirement obligations related to assets currently in use, such as
certain asbestos remediation and asset decommissioning activities to be performed in the future, that were not
reasonably estimable as of December 31, 2013, due to insufficient information about the timing and method of
settlement of the obligation. Accordingly, the fair value of these obligations has not been recorded in the
consolidated financial statements. In addition, there may be conditional environmental asset retirement obligations
that the Company has not yet discovered.
Income Taxes - Income tax expense and other income tax related information contained in the financial statements
for periods before the spin-off are presented as if the Company filed its own tax returns on a stand-alone basis,
while similar information for periods after the spin-off reflect the Company's positions as filed in its own tax returns.
Income tax expense and other related information are based on the prevailing statutory rates for U.S. federal
income taxes and the composite state income tax rate for the Company for each period presented. State and local
income and franchise tax provisions are allocable to contracts in process and, accordingly, are included in general
and administrative expenses.
Deferred income taxes are recorded when revenues and expenses are recognized in different periods for financial
statement purposes than for tax return purposes. Deferred tax asset or liability account balances are calculated at
the balance sheet date using current tax laws and rates expected to be in effect when the deferred tax items
reverse in future periods. Determinations of the expected realizability of deferred tax assets and the need for any
valuation allowances against these deferred tax assets were evaluated based upon the stand-alone tax attributes of
the Company, and valuation allowances of $12 million and $21 million were deemed necessary as of December 31,
2013 and 2012, respectively.
Uncertain tax positions meeting the more-likely-than-not recognition threshold, based on the merits of the position,
are recognized in the financial statements. We recognize the amount of tax benefit that is greater than 50% likely to
be realized upon ultimate settlement with the related tax authority. If a tax position does not meet the minimum
statutory threshold to avoid payment of penalties, we recognize an expense for the amount of the penalty in the
period the tax position is claimed or expected to be claimed in our tax return. Penalties and accrued interest related
72
to uncertain tax positions are recognized as a component of income tax expense. Changes in accruals associated
with uncertain tax positions are recorded in earnings in the period they are determined.
Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents approximate fair value due to the
short-term nature of these assets, having original maturity dates of 90 days or less.
Accounts Receivable - Accounts receivable include amounts billed and currently due from customers, amounts
currently due but unbilled, certain estimated contract change amounts, claims or requests for equitable adjustment
in negotiation that are probable of recovery, and amounts retained by the customer pending contract completion.
Inventoried Costs - Inventoried costs primarily relate to work in process under contracts that recognize revenues
using labor dollars or units of delivery as the basis of the percentage-of-completion calculation. These costs
represent accumulated contract costs less cost of sales as calculated using the percentage-of-completion method,
not in excess of recoverable value. Accumulated contract costs include direct production costs, factory and
engineering overhead, production tooling costs, and, for government contracts, allowable general and
administrative expenses. Under the Company's U.S. Government contracts, the customer asserts title to, or a
security interest in, inventories related to such contracts as a result of contract advances, performance-based
payments, and progress payments. In accordance with industry practice, inventoried costs are classified as a
current asset and include amounts related to contracts having production cycles longer than one year. Inventoried
costs also include company owned raw materials, which are stated at the lower of cost or market, generally using
the average cost method.
Advance Payments and Billings in Excess of Revenues - Payments received in excess of inventoried costs and
revenues are recorded as advance payment liabilities.
Property, Plant, and Equipment - Depreciable properties owned by the Company are recorded at cost and
depreciated over the estimated useful lives of individual assets. Major improvements are capitalized while
expenditures for maintenance, repairs and minor improvements are expensed. Costs incurred for computer
software developed or obtained for internal use are capitalized and amortized over the expected useful life of the
software, not to exceed nine years. Leasehold improvements are amortized over the shorter of their useful lives or
the term of the lease.
The remaining assets are depreciated using the straight-line method, with the following lives:
Land improvements
Buildings and improvements
Capitalized software costs
Machinery and other equipment
Years
3
3
3
2
-
-
-
-
40
60
9
45
The Company evaluates the recoverability of its property, plant, and equipment when there are changes in
economic circumstances or business objectives that indicate the carrying value may not be recoverable. The
Company's evaluations include estimated future cash flows, profitability, and other factors in determining fair value.
As these assumptions and estimates may change over time, it may or may not be necessary to record impairment
charges.
Leases - The Company uses its incremental borrowing rate in the assessment of lease classification as capital or
operating and defines the initial lease term to include renewal options determined to be reasonably assured. The
Company conducts operations primarily under operating leases.
Many of the Company's real property lease agreements contain incentives for tenant improvements, rent holidays,
or rent escalation clauses. For incentives for tenant improvements, the Company records a deferred rent liability
and amortizes the deferred rent over the term of the lease as a reduction to rent expense. For rent holidays and
rent escalation clauses during the lease term, the Company records minimum rental expenses on a straight-line
basis over the term of the lease. For purposes of recognizing lease incentives, the Company uses the date of initial
possession as the commencement date, which is generally the date on which the Company is given the right of
access to the space and begins to make improvements in preparation for the intended use.
73
Goodwill and Other Purchased Intangible Assets - The Company performs impairment tests for goodwill as of
November 30 of each year, or when evidence of potential impairment exists, by first comparing the carrying value of
net assets to the fair value of the related operations. If the fair value is determined to be less than the carrying
value, a second step is performed to determine if goodwill is impaired by comparing the estimated fair value of
goodwill to its carrying value. Purchased intangible assets are amortized on a straight-line basis over their
estimated useful lives, and the carrying value of these assets is reviewed for impairment when events indicate that
a potential impairment may have occurred.
Equity Method Investments - Investments in which the Company has the ability to exercise significant influence over
the investee but does not own a majority interest or otherwise control are accounted for under the equity method of
accounting and are included in other assets in its consolidated statements of financial position. The Company's
equity investments align strategically and are integrated with the Company's operations, and therefore the
Company's share of the net earnings or losses of the investee is included in operating income (loss). The Company
evaluates its equity investments for other than temporary impairment whenever events or changes in business
circumstances indicate that the carrying amounts of such investments may not be fully recoverable. If a decline in
the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in
the current period.
Self-Insured Group Medical Insurance - The Company maintains a self-insured group medical insurance plan. The
plan is designed to provide a specified level of coverage for employees and their dependents. Estimated liabilities
for incurred but not paid claims utilize actuarial methods based on various assumptions, which include, but are not
limited to, HII's historical loss experience and projected loss development factors.
Self-Insured Workers' Compensation Plan - The operations of the Company are subject to federal and state
workers' compensation laws. The Company maintains self-insured workers' compensation plans, in addition to
participating in federally administered second injury workers' compensation funds. The Company estimates the
required liability of claims and funding requirements on a discounted basis utilizing actuarial methods based on
various assumptions, which include, but are not limited to, the Company's historical loss experience and projected
loss development factors as compiled in an annual actuarial study. Related self-insurance accruals include amounts
related to the liability for reported claims and an estimated accrual for claims incurred but not reported. The
Company's workers' compensation liability was discounted at 2.16% and 1.59% as of December 31, 2013 and
2012, respectively. These discount rates were determined using a risk-free rate based on future payment streams.
Workers' compensation benefit obligations on an undiscounted basis were $792 million and $719 million as of
December 31, 2013 and 2012, respectively.
Litigation, Commitments, and Contingencies - Amounts associated with litigation, commitments, and contingencies
are recorded as charges to earnings when management, after taking into consideration the facts and circumstances
of each matter, including any settlement offers, has determined that it is probable that a liability has been incurred
and the amount of the loss can be reasonably estimated.
Restructuring - The Company has recorded accruals in conjunction with its restructuring activities in other current
liabilities. These accruals include estimates primarily related to facility consolidations and closures, asset retirement
obligations, long-lived asset write-downs, employment reductions and contract termination costs. Actual costs may
vary from these estimates. Restructuring related accruals are reviewed and adjusted when circumstances require
such a change.
Deferred Contract Costs - Pension and other postretirement benefit costs are allocated to the Company's contracts
as allowed costs based upon CAS. The CAS requirements for these retirement related benefit costs differ from
FAS. Given the inability to match with reasonable certainty individual expense and income items between the CAS
and FAS requirements to determine specific recoverability, the Company has not estimated the incremental FAS
income or expense recoverable under its expected future contract activity and therefore did not defer any FAS
expense for pension and other postretirement benefit plans in 2013, 2012 or 2011.
Retirement Related Benefit Costs - The Company accounts for its retirement related benefit plans on the accrual
basis. The measurements of obligations, costs, assets, and liabilities require significant judgment. The costs of
benefits provided by defined benefit pension plans are recorded in the period participating employees provide
service. The costs of benefits provided by other postretirement benefit plans are recorded in the period participating
employees attain full eligibility. The discount rate assumption is defined under GAAP as the rate at which the plan's
74
obligation could be effectively settled. The discount rate is established for each of the retirement related benefit
plans at its respective measurement date.
The expected return on plan assets component of retirement related costs is used to calculate net periodic
expense. Unless plan assets and benefit obligations are subject to remeasurement during the year, the expected
return on assets is based on the fair value of plan assets at the beginning of the year. The costs of plan
amendments that provide benefits already earned by plan participants (prior service costs and credits) are deferred
in accumulated other comprehensive income and amortized over the expected period the employees provide
service, which is approximately 10 years. Actuarial gains and losses arising from differences from actual experience
or changes in assumptions are deferred in accumulated other comprehensive income. This unrecognized amount is
amortized to the extent it exceeds 10% of the greater of the plan's benefit obligation or plan assets. The
amortization period for actuarial gains and losses is the estimated average remaining service life of the plan
participants, which is approximately 10 years.
The Company recognizes the funded status of each retirement related benefit plan as an asset or liability in its
consolidated statements of financial position. The funded status represents the difference between the plan's
benefit obligation and the fair value of the plan's assets. Unrecognized deferred amounts such as demographic or
asset gains or losses and the impacts of plan amendments are included in accumulated other comprehensive
income and amortized as previously described.
Stock Compensation - Stock-based compensation value is determined based on the closing market price of the
Company's common stock on grant date and the expense is recognized over the vesting period. At each reporting
date, the number of shares is adjusted, based on the achievement of performance-based targets, to equal the
number ultimately expected to vest.
3. ACCOUNTING STANDARDS UPDATES
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No.
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 Company's consolidated financial statements. See Note 6: Stockholders' Equity.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11 "Income Taxes (Topic 740): Presentation
of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit
Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-11"). The amendments in
ASU 2013-11 provide guidance on the financial statement presentation of an unrecognized tax benefit when a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an
unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar
tax loss, or a tax credit carryforward exists and certain criteria are met. This update will become effective for the
interim period beginning January 1, 2014, applied prospectively. Based upon its evaluation, the Company has
determined that the standard update will not have a material impact on its consolidated financial statements.
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 intends to utilize the Avondale facility into 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 $256 million. Such costs are expected to be recoverable under existing flexibly-priced
75
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 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 in February 2013 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 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. On September 26, 2013, the New Orleans Metals Trades ratified a new labor agreement in connection
with the Company's pursuit of other opportunities at Avondale. In addition, the Company intends to utilize the facility
into 2014 to complete construction of 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, 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 December 31, 2013 and 2012, these costs were
comprised primarily of employee severance and retention payments, as well as incentive bonuses. These amounts
were capitalized in inventoried costs, and will be expensed as part of cost of product sales beginning in 2014.
($ in millions)
Balance as of January 1, 2011
Payments
Adjustments
Balance as of December 31, 2011
Payments
Adjustments
Balance as of December 31, 2012
Payments
Adjustments
Balance as of December 31, 2013
Compensation
Other Accruals
Total
27
(24)
47
50
(50)
24
24
(27)
17
14
$
$
$
39
(36)
(3)
—
—
—
—
—
—
— $
66
(60)
44
50
(50)
24
24
(27)
17
14
$
$
76
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 primarily of approximately $52 million in accelerated depreciation of fixed assets and $5 million in
personnel, facility shutdown, and other related costs. These costs reduced operating income for the year ended
December 31, 2013, by $16 million, net of recoveries under the Company's contracts. The Company anticipates no
material impact on operating income in subsequent periods. 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. STOCKHOLDERS' EQUITY
Common Stock - As of December 31, 2013, the Company had 50.5 million shares of common stock issued and
48.7 million shares of common stock outstanding. As of December 31, 2012, the Company had 49.6 million shares
of common stock issued and outstanding. Changes in the Company's number of outstanding shares for the year
ended December 31, 2013 resulted from shares purchased in the open market under the Company's stock
repurchase program and share activity under its stock compensation plans. See Note 19: Stock Compensation
Plans.
Treasury Stock - During 2012, the Company's board of directors authorized a program to repurchase up to $150
million of the Company's common stock prior to October 31, 2015, as part of a balanced cash deployment strategy.
In 2013, the Company's board of directors authorized an increase in the 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 years ended December 31, 2013 and 2012, the Company repurchased 1,722,991 and
31,008 shares, respectively, at a cost of $119 million and $1 million, respectively. The cost of purchased shares is
recorded as treasury stock in the consolidated statements of financial position.
Dividends - In October 2013, the Company's board of directors authorized an increase in the Company's quarterly
cash dividend to $0.20 from the $0.10 per share quarterly cash dividend the board of directors authorized in
November 2012. The Company paid dividends totaling $25 million ($0.50 per share) and $5 million ($0.10 per
share) in the years ended December 31, 2013 and 2012, respectively.
77
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 December 31, 2013 and 2012, was comprised of unamortized benefit plan costs of $523
million and $1,226 million, respectively, and other comprehensive income items of $2 million and less than $1
million, respectively. The changes in accumulated other comprehensive income (loss) by component for the years
ended December 31, 2013, 2012 and 2011, were as follows:
Benefit Plans
Other
Total
($ in millions)
Balance as of December 31, 2010
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of prior service cost (credit)1
Amortization of net actuarial loss (gain)1
Tax benefit (expense) for items of other comprehensive income
Net current period other comprehensive income (loss)
Balance as of December 31, 2011
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of prior service cost (credit)1
Amortization of net actuarial loss (gain)1
Tax benefit (expense) for items of other comprehensive income
Net current period other comprehensive income (loss)
Balance as of December 31, 2012
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Amortization of prior service cost (credit)1
Amortization of net actuarial loss (gain)1
Tax benefit (expense) for items of other comprehensive income
Net current period other comprehensive income (loss)
$
(532) $
(588)
5
45
208
(330)
(862)
(700)
5
90
241
(364)
(1,226)
1,028
(3)
134
(456)
703
Balance as of December 31, 2013
$
(523) $
— $
—
—
—
—
—
—
—
—
—
—
—
—
4
—
—
(2)
2
2
$
(532)
(588)
5
45
208
(330)
(862)
(700)
5
90
241
(364)
(1,226)
1,032
(3)
134
(458)
705
(521)
1 These accumulated comprehensive income (loss) components are included in the computation of net periodic
benefit cost. See Note 18: Employee Pension and Other Postretirement Benefits. The tax expense associated with
amounts reclassified from accumulated other comprehensive income (loss) for the years ended December 31,
2013, 2012 and 2011, was $46 million, $33 million, and $18 million, respectively.
Former Parent's Equity in Unit - Former Parent's Equity in Unit in the consolidated statements of changes in equity
represents Northrop Grumman's historical investment in its shipbuilding operations, the net effect of cost allocations
from and transactions with Northrop Grumman, net cash activity, and HII's accumulated earnings prior to the spin-
off.
After the spin-off from Northrop Grumman, HII had 48,765,841 shares of common stock outstanding. The remaining
Former Parent's Equity in Unit balance, after the separation adjustments were recorded, was transferred to
additional paid-in capital. Retained earnings reflected in the consolidated statements of financial position represent
net earnings after separation, as all prior earnings were transferred to additional paid-in capital.
78
7. EARNINGS PER SHARE
The calculation of basic and diluted earnings per common share was as follows:
(in millions, except per share amounts)
Net earnings (loss)
Weighted-average common shares outstanding
Net effect of dilutive stock options
Net effect of dilutive restricted stock rights
Net effect of dilutive restricted performance stock rights
Dilutive weighted-average common shares outstanding
Year Ended December 31
2012
2011
2013
$
261
$
146
$
(100)
49.7
0.3
0.3
0.1
50.4
49.4
0.2
0.2
0.3
50.1
48.8
—
—
—
48.8
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
$
$
5.25
5.18
$
$
2.96
2.91
$
$
(2.05)
(2.05)
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
1.0 million Restricted Performance Stock Rights ("RPSRs") from the diluted share amounts presented above for the
year ended December 31, 2013.
The amounts presented above for the year ended December 31, 2012, exclude the impact of 0.9 million stock
options, 0.4 million RSRs and 1.3 million RPSRs under the treasury stock method.
On March 30, 2011, the record date of the stock distribution associated with the spin-off, approximately 48.8 million
shares of $0.01 par value HII common stock were distributed to Northrop Grumman stockholders. This share
amount was utilized for the calculation of basic and diluted earnings (loss) per common share for the three months
ended March 31, 2011, and all prior periods, as no common stock of the Company existed prior to March 30, 2011,
and the impact of dilutive securities in the three month period ended March 31, 2011, was not meaningful.
8. SEGMENT INFORMATION
The Company is organized into two reportable segments, Ingalls and Newport News, consistent with how
management makes operating decisions and assesses performance.
U.S. Government Sales - Revenues from the U.S. Government include revenues from contracts for which HII is the
prime contractor as well as contracts for which the Company is a subcontractor and the ultimate customer is the
U.S. Government. The Company derives substantially all of its revenues from the U.S. Government.
Assets - Substantially all of the Company's assets are located or maintained in the United States.
79
Results of Operations by Segment
($ in millions)
Sales and Service Revenues
Ingalls
Newport News
Intersegment eliminations
Total sales and service revenues
Operating Income (Loss)
Ingalls
Newport News
Total segment operating income (loss)
Non-segment factors affecting operating income (loss)
FAS/CAS Adjustment
Deferred state income taxes
Total operating income (loss)
Year Ended December 31
2012
2011
2013
$
$
$
$
$
$
2,757
4,139
(76)
6,820
175
392
567
(61)
6
$
$
$
2,840
3,940
(72)
6,708
97
360
457
(80)
(19)
$
512
$
358
$
2,885
3,766
(76)
6,575
(220)
342
122
(23)
1
100
Sales transactions between segments are generally recorded at cost.
Goodwill Impairment Charge - The operating loss at Ingalls for the year ended December 31, 2011, reflects a
goodwill impairment charge of $290 million.
Other Financial Information
The following tables present, by segment, the Company's assets, capital expenditures, and depreciation and
amortization.
($ in millions)
Assets
Ingalls
Newport News
Corporate
Total assets
($ in millions)
Capital Expenditures
Ingalls
Newport News
Corporate
Total capital expenditures
December 31
2013
2012
2011
1,753
3,021
1,451
6,225
$
$
1,706
2,982
1,704
6,392
$
1,754
2,843
1,472
6,069
Year Ended December 31
2013
2012
2011
$
45
92
2
$
42
120
—
139
$
162
$
61
133
3
197
$
$
$
$
80
($ in millions)
Depreciation and Amortization
Ingalls
Newport News
Corporate
Total depreciation and amortization
9. ACCOUNTS RECEIVABLE, NET
Year Ended December 31
2013
2012
2011
$
$
127
$
98
1
$
90
94
—
226
$
184
$
92
92
—
184
Unbilled amounts represent sales for which billings have not been presented to customers at year-end. These
amounts are usually billed and collected within one year. Accounts receivable at December 31, 2013, are expected
to be collected in 2014, except for approximately $261 million due in 2015 and $151 million due in or after 2016.
Because the Company's accounts receivable are primarily with the U.S. Government or with companies acting as a
contractor to the U.S. Government, the Company does not have material exposure to accounts receivable credit
risk.
Accounts receivable were composed of the following:
($ in millions)
Due From U.S. Government
Amounts billed
Recoverable costs and accrued profit on progress completed - unbilled
Due From Other Customers
Amounts billed
Recoverable costs and accrued profit on progress completed - unbilled
Total accounts receivable
Allowances for doubtful accounts
Total accounts receivable, net
10. INVENTORIED COSTS, NET
Inventoried costs were composed of the following:
($ in millions)
Production costs of contracts in process
General and administrative expenses
Progress payments received
Raw material inventory
Total inventoried costs, net
81
December 31
2013
2012
$
$
143
944
1,087
28
15
43
1,130
(7)
$
1,123
$
December 31
2013
2012
$
$
218
2
220
—
220
91
311
$
$
158
701
859
33
17
50
909
(4)
905
198
3
201
(1)
200
88
288
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. Reporting units are aligned with shipbuilding and ship repair activities.
The Company determined that the estimated fair value of each reporting unit exceeded its corresponding carrying
value as of November 30, 2013 and 2012.
The Company recorded a $290 million non-cash goodwill impairment charge in its Ingalls segment in the year
ended December 31, 2011, in light of the adverse equity market conditions that began in the second quarter of 2011
and the resultant decline in industry market multiples and the Company's market capitalization. Due to the
complexities involved in determining the implied fair value of the goodwill of each reporting unit, the Company
initially recorded a preliminary goodwill impairment charge of $300 million in the third quarter of 2011, which
represented its best estimate of the impairment amount at the time of the filing of the Company's third quarter
report. The goodwill impairment charge was later adjusted to $290 million in the fourth quarter of 2011, based on
the final impairment analysis. The goodwill at the Ingalls segment has no tax basis, and, accordingly, there was no
tax benefit associated with recording the impairment charge. No goodwill impairment was recognized at the
Newport News segment, as the Company's analysis indicated its fair value was in excess of its carrying value as of
September 30, 2011.
Prior to completing the second step related to the goodwill impairment charge in 2011, HII tested its purchased
intangible assets and other long-lived assets for impairment, and the carrying values of these assets were
determined not to be impaired.
Accumulated goodwill impairment losses as of both December 31, 2013 and 2012, were $2,755 million. The
accumulated goodwill impairment losses for Ingalls as of both December 31, 2013, and 2012, were $1,568 million.
The accumulated goodwill impairment losses for Newport News as of both December 31, 2013, and 2012, were
$1,187 million.
There were no changes in the carrying amounts of goodwill during 2013 and 2012.
($ in millions)
Balance as of January 1, 2012
Balance as of December 31, 2012
Balance as of December 31, 2013
Purchased Intangible Assets
Ingalls
Newport News
Total
$
$
198
198
198
$
$
683
683
683
$
$
881
881
881
The following table summarizes the Company's aggregate purchased intangible assets, all of which are program
related intangible assets.
($ in millions)
Gross carrying amount
Accumulated amortization
Net carrying amount
December 31
2013
2012
$
$
939
(411)
528
$
$
939
(391)
548
The Company's purchased intangible assets are being amortized on a straight-line basis 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. Amortization expense for the years ended December 31, 2013, 2012 and
2011, was $20 million, $19 million and $20 million, respectively.
The Company expects amortization for purchased intangibles of approximately $20 million annually for the next five
years.
82
12. 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 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 December 31, 2013 and 2012, the Company's ownership interest was approximately
34%, with carrying amounts of $6 million and $4 million, respectively. The investment in SRNS is being accounted
for using the equity method under the Company's Newport News operating segment, and the total investment is
classified as miscellaneous other assets in the Company's consolidated statements of financial position. During the
years ended December 31, 2013, 2012 and 2011, the Company received cash dividends from SRNS in the
amounts of $13 million, $17 million and $20 million, respectively, which were recorded as reductions in the
Company's investment in SRNS.
The following table presents summarized financial information for the Company's equity method investments:
Assets and Liabilities
($ in millions)
Current assets
Current liabilities
Long-term liabilities
Results of Operations
($ in millions)
Sales and services revenues
Operating income
Net earnings
13. INCOME TAXES
December 31
2013
2012
$
$
62
35
8
43
21
8
Year Ended December 31
2013
2012
2011
$
1,032
$
1,316
$
1,474
42
42
50
50
23
23
The Company's earnings are entirely domestic and its effective tax rate on earnings from operations for the year
ended December 31, 2013, was 33.8%, compared with 39.4% and 33.6% (excluding the goodwill impairment
charge) in 2012 and 2011, respectively. The goodwill impairment charge of $290 million at Ingalls in 2011 was non-
cash and non-deductible for income tax purposes.The 2012 tax rate includes the impact of an $8 million
unfavorable non-cash tax adjustment arising under the Tax Matters Agreement with Northrop Grumman.
For the year ended December 31, 2013, the Company's effective tax rate differed from the federal statutory rate
primarily as a result of the domestic manufacturing deduction and enactment of the American Taxpayer Relief Act in
January 2013, which retroactively extended the research and development tax credit through the end of 2013. The
Company's effective tax rate for the year ended December 31, 2013, reflects the entire 2012 income tax benefit for
the research and development tax credit, which expired at the end of 2011. For the year ended December 31, 2012,
83
the Company's effective tax rate differed from the federal statutory tax rate primarily as a result of an $8 million non-
cash tax adjustment arising under the Tax Matters Agreement with Northrop Grumman. The Company's effective
tax rate can also differ from the federal statutory rate as a result of nondeductible expenditures.
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.
In connection with the spin-off, HII entered into a Tax Matters Agreement with Northrop Grumman that governs the
respective rights, responsibilities, and obligations of Northrop Grumman and the Company with respect to tax
liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. federal, state, local, and
foreign income taxes, other taxes, and related tax returns. The Company is severally liable with Northrop Grumman
for its income taxes for periods before the spin-off. HII is obligated to indemnify Northrop Grumman for tax
adjustments that increase the Company's taxable income for periods before the spin-off and are of a nature that
could result in a correlative reduction in HII's taxable income for periods after the spin-off. Northrop Grumman is
obligated to indemnify HII for tax adjustments that decrease the Company's taxable income for periods before the
spin-off and are of a nature that could result in a correlative increase in HII's taxable income for periods after the
spin-off. These payment obligations only apply once the aggregate tax liability related to tax adjustments exceeds
$5 million. Once the aggregate amount is exceeded, only the amount in excess of $5 million is ultimately required to
be paid. In 2013 and 2012, HII incurred non-cash federal and state tax adjustments for items governed by the Tax
Matters Agreement. The federal tax expense (benefit) adjustment is reported as a component of the tax expense,
while the state tax expense (benefit) adjustment is treated as an allowable cost in the applicable period under the
terms of the Company's existing contracts and is included in general and administrative expenses. See Note 20:
Related Party Transactions and Former Parent Company Equity.
Federal income tax expense for the years ended December 31, 2013, 2012 and 2011, consisted of the following:
($ in millions)
Income Taxes on Operations
Federal income taxes currently payable
Change in deferred federal income taxes
Total federal income taxes
Year Ended December 31
2013
2012
2011
$
$
150
(17)
133
$
$
49
46
95
$
$
72
24
96
Income tax expense differs from the amount expected using the statutory federal income tax rate applied to
earnings (loss) before income taxes due to the following:
($ in millions)
Year Ended December 31
2013
2012
2011
Income tax expense (benefit) on operations at statutory rate
$
138
$
Goodwill impairment
Manufacturing deduction
Research tax credit
Wage credit
Tax Matters Agreement adjustment
Other, Net
Total federal income taxes
—
(7)
(2)
—
—
4
$
84
—
(3)
—
—
8
6
(2)
101
(3)
(4)
(1)
(3)
8
96
$
133
$
95
$
84
Unrecognized Tax Benefits - Unrecognized tax benefits represent the gross value of the Company's uncertain tax
positions that have not been reflected in the consolidated statements of operations. If the income tax benefits from
federal tax positions are ultimately realized, such realization would affect the Company's income tax expense,
whereas the realization of state tax benefits would be recorded in general and administrative expenses. The
changes in unrecognized tax benefits (exclusive of interest and penalties) during the years ended December 31,
2013, 2012 and 2011 are summarized in the following table:
($ in millions)
December 31
2013
2012
2011
Unrecognized tax benefits at beginning of the year
$
19
$
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reductions based on tax positions of prior years
Settlements
Spin-off
Net change in unrecognized tax benefits
Unrecognized tax benefits at end of the year
5
1
(14)
—
—
(8)
11
$
$
6
7
19
(12)
(1)
—
13
19
$
$
14
2
—
—
—
(10)
(8)
6
As of December 31, 2013 and 2012, the estimated amount of the Company's uncertain tax positions, excluding
interest and penalties, were liabilities of $11 million and $19 million, respectively. Assuming sustainment of these
positions, as of December 31, 2013 and 2012, the reversal of $5 million and $1 million, respectively, of the amounts
accrued would favorably affect the Company's effective federal income tax rate in future periods. Accrued interest
and penalties with respect to unrecognized tax benefits were $3 million and $2 million as of December 31, 2013 and
2012, respectively.
During 2013, the Company recorded a reduction of $14 million related to a change approved by the IRS for the
allocation of interest costs to long term construction contracts at Ingalls. This change is made on a prospective
basis only and does not impact the tax returns filed for years prior to 2013. During 2011, the Company recorded a
reduction of $10 million to its liability for uncertain tax positions relating to tax periods prior to the spin-off for which
Northrop Grumman is the primary obligor.
The following table summarizes the tax years that are either currently under examination or remain open under the
statute of limitations and subject to examination by the major tax jurisdictions in which the Company operates:
Jurisdiction
United States
California
Louisiana
Mississippi
Virginia
Years
2007
2007
2009
2009
2010
-
-
-
-
-
2012
2012
2012
2012
2012
Although the Company believes it has adequately provided for all uncertain tax positions, amounts asserted by
taxing authorities could be greater than the Company's accrued position. Accordingly, additional provisions for
federal and state income tax related matters could be recorded in the future as revised estimates are made or the
underlying matters are effectively settled or otherwise resolved. Conversely, the Company could settle positions
with the tax authorities for amounts lower than have been accrued. The Company believes it is reasonably possible
that during the next 12 months the Company's liability for uncertain tax positions may decrease by approximately $3
million.
The Company recognizes accrued interest and penalties related to uncertain tax positions in income tax expense.
The IRS is currently conducting an examination of Northrop Grumman's consolidated tax returns, of which HII was
part, for the years 2007 through the spin-off. During 2013 the Company entered into the pre-Compliance Assurance
Process with the IRS for years 2011 and 2012. Open tax years related to state jurisdictions remain subject to
examination. As of March 31, 2011, the date of the spin-off, the Company's liability for uncertain tax positions was
approximately $4 million, net of federal benefit, which related solely to state income tax positions. Under the terms
85
of the Separation Agreement, Northrop Grumman is obligated to reimburse HII for any settlement liabilities paid by
HII to any government authority for tax periods prior to the spin-off, which include state income taxes. Accordingly,
the Company has recorded in other assets a reimbursement receivable of approximately $4 million, net of federal
benefit, related to uncertain tax positions for state income taxes as of the date of the spin-off.
On September 13, 2013, the Treasury Department and the Internal Revenue Service issued final regulations
regarding the deduction and capitalization of amounts paid to acquire, produce, improve, or dispose of tangible
personal property. These regulations are generally effective for tax years beginning on or after January 1, 2014.
The application of these regulations will not have a material impact on our consolidated financial statements.
Deferred Income Taxes - Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. Such
amounts are classified in the consolidated statements of financial position as current or non-current assets or
liabilities based upon the classification of the related assets and liabilities.
The tax effects of significant temporary differences and carry-forwards that gave rise to year-end deferred federal
and state tax balances, as presented in the consolidated statements of financial position, were as follows:
($ in millions)
Deferred Tax Assets
Retirement benefits
Workers' compensation
Contract accounting differences
Provisions for accrued liabilities
Stock-based compensation
Other
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred Tax Liabilities
Depreciation and amortization
Contract accounting differences
Purchased intangibles
Gross deferred tax liabilities
Total net deferred tax assets
December 31
2013
2012
366
248
—
36
20
16
686
12
674
337
45
205
587
87
$
$
794
239
26
27
18
37
1,141
21
1,120
366
—
212
578
542
$
$
As of December 31, 2013, the Company had gross state income tax credit carry-forwards of approximately $22
million, which expire from 2014 through 2016. A deferred tax asset of approximately $15 million (net of federal
benefit) has been established related to these state income tax credit carry-forwards, with a valuation allowance of
$12 million against such deferred tax asset as of December 31, 2013.
Net deferred tax assets (liabilities) as presented in the consolidated statements of financial position were as follows:
($ in millions)
Net current deferred tax assets
Net non-current deferred tax assets
Net non-current deferred tax liabilities
Total net deferred tax assets
December 31
2013
2012
$
$
170
$
—
(83)
87
$
213
329
—
542
86
14. DEBT
Long-term debt consisted of the following:
($ in millions)
Term loan due March 30, 2016
Senior notes due March 15, 2018, 6.875%
Senior notes due March 15, 2021, 7.125%
Mississippi economic development revenue bonds due May 1, 2024, 7.81%
Gulf opportunity zone industrial development revenue bonds due December 1, 2028, 4.55%
Total long-term debt
Less current portion
December 31
2013
2012
$
$
474
600
600
84
21
1,779
79
Long-term debt, net of current portion
$
1,700
$
525
600
600
84
21
1,830
51
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. 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 December 31, 2013, was 2.0% 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 December 31, 2013, was 0.35% and may vary between 0.25% and 0.45%. As of December 31, 2013,
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.
Each of the Company's existing and future domestic 100% owned subsidiaries, except for those that are specifically
designated as unrestricted subsidiaries, are and will be guarantors under the Credit Facility and senior notes.
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.
The terms of the Credit Facility and senior notes limit the Company's ability and the ability of certain of HII's
subsidiaries to: incur additional indebtedness, create liens, pay dividends or make distributions in respect of capital
stock, purchase or redeem capital stock, make investments or certain other restricted payments, sell assets, enter
into transactions with stockholders or affiliates and effect a consolidation or merger. As of December 31, 2013, the
Company was limited to a total of $108 million for additional dividend payments and stock repurchases. The terms
of the Credit Facility provide for periodic increases to these limits.
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
87
"Subsidiary Guarantors"). The guarantees rank equally with all other unsecured and unsubordinated indebtedness
of the guarantors. The Subsidiary Guarantors are each directly or indirectly 100% owned by HII. There are no
significant restrictions on the ability of HII or any Subsidiary Guarantor to obtain funds from their respective
subsidiaries by dividend or loan.
Mississippi Economic Development Revenue Bonds - As of December 31, 2013 and 2012, 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. While
repayment of principal and interest is guaranteed by Northrop Grumman Systems Corporation, HII has agreed to
indemnify Northrop Grumman Systems Corporation for any losses related to the guaranty. In accordance with the
terms of the bonds, the proceeds have been used to finance the construction, reconstruction, and renovation of the
Company's interest in certain ship manufacturing and repair facilities, or portions thereof, located in the state of
Mississippi.
Gulf Opportunity Zone Industrial Development Revenue Bonds - As of December 31, 2013 and 2012, the Company
had $21 million outstanding under Gulf Opportunity Zone Industrial Development Revenue Bonds ("GO Zone
IRBs") 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. In accordance with the terms of the bonds, the
proceeds have been used to finance the construction, reconstruction, and renovation of the Company's interest in
certain ship manufacturing and repair facilities, or portions thereof, located in the state of Mississippi.
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 year ended December 31, 2013.
The estimated fair value of the Company's total long-term debt, including current portions, at December 31, 2013
and December 31, 2012, was $1,897 million and $1,974 million, respectively. The fair value of the Company's long-
term debt was calculated based on either recent trades of the Company's debt instruments in inactive markets or
yields available on debt with substantially similar risks, terms, and maturities, which fall within Level 2 under the fair
value hierarchy.
The aggregate amounts of principal payments due on long-term debt for each of the next five years and thereafter
are:
($ in millions)
2014
2015
2016
2017
2018
Thereafter
Total long-term debt
$
$
79
108
287
—
600
705
1,779
15. 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
88
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.
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 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 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
89
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.
16. 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 December 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 12: 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's obligations and, in such
cases, generally obtains cross-indemnification from the other members of the arrangement. As of December 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 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 December 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
90
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 December 31, 2013, the Company had $28 million in standby letters of credit issued but
undrawn as noted in Note 14: 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.
Collective Bargaining Agreements - Of the Company's 38,000 employees, approximately 50% are covered by a
total of nine collective bargaining agreements. Three collective bargaining agreements covering represented
employees in Newport News expire in April 2014, June 2014 and July 2017, and five collective bargaining
agreements covering represented employees in Pascagoula and Gulfport expire in March 2015. The collective
bargaining agreement covering Avondale represented employees was indefinitely extended upon its last expiration.
Collective bargaining agreements generally expire after three to five years and are subject to renegotiation at that
time. The Company does not expect the results of these negotiations, either individually or in the aggregate, to have
a material effect on the Company's consolidated results of operations.
Purchase Obligations - Periodically the Company enters into agreements to purchase goods or services that are
enforceable and legally binding on it and that specify all significant terms, including: fixed or minimum quantities to
be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These
amounts are primarily comprised of open purchase order commitments to vendors and subcontractors pertaining to
funded contracts.
Operating Leases - Rental expense for operating leases for the years ended December 31, 2013, 2012 and 2011,
was $46 million, $45 million and $44 million, respectively. These amounts are net of immaterial amounts of
sublease rental income. Minimum rental commitments under long-term non-cancellable operating leases for each of
the years 2014 through 2018 and thereafter are:
($ in millions)
2014
2015
2016
2017
2018
Thereafter
Total
$
$
27
23
19
14
12
41
136
17. 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
91
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, 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.
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.
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. 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. The Company recorded a net $64 million favorable impact to operating income for the year ended
December 31, 2013, for hurricane insurance recoveries and customer direction on disallowances and
apportionment of Katrina related insurance recoveries discussed above.
18. 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. Plan obligations are measured based on the present value of projected future
benefit payments to participants for services rendered to date. The measurement of projected future benefits is
dependent on the terms of each individual plan, demographics, and valuation assumptions. No assumption is made
regarding any potential changes to the benefit provisions beyond those to which the Company is currently
committed, for example under existing collective bargaining agreements.
Benefits accruing under the traditional years of service and compensation formula were grandfathered and, since
2009, have been replaced with a cash balance feature. Except for major collectively bargained plans, our qualified
defined benefit pension plans are frozen to new entrants. The Company's policy is to fund its qualified defined
benefit pension plans at least to the minimum amounts required under U.S. Government regulations.
The Company sponsors 401(k) defined contribution plans in which most employees, including certain union
employees, are eligible to participate. Company contributions for most defined contribution plans are based on the
matching of employee contributions up to 4% of eligible compensation. Certain hourly employees are covered
under a target benefit plan. In addition to the 401(k) defined contribution benefit formula, non-union represented
employees hired after June 30, 2008, are eligible to participate in a defined contribution program in lieu of a defined
benefit pension plan. The Company's contributions to the qualified defined contribution plans for the years ended
December 31, 2013, 2012 and 2011, were $61 million, $56 million and $55 million, respectively.
The Company provides supplemental pension plans for certain officers. The related liability was $104 million and
$113 million as of December 31, 2013 and 2012, respectively. Certain of these plans are funded through rabbi
trusts.
The Company provides contributory postretirement health care and life insurance benefits to a dominantly closed
group of eligible employees, retirees, and their qualifying dependents. Covered employees achieve eligibility to
participate in these contributory plans upon retirement from active service if they meet specified age, years of
service, and grandfathered requirements. Benefits are not guaranteed, and the Company reserves the right to
amend or terminate coverage at any time. The Company's contributions for health care benefits are subject to caps,
which limit Company contributions when spending thresholds are reached.
92
The measurement date for all of the Company's retirement plans is December 31. The cost of the Company's
defined benefit plans and other postretirement plans for the years ended December 31, 2013, 2012 and 2011, was
as follows:
($ in millions)
Components of Net Periodic Benefit Cost
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of net actuarial loss (gain)
Curtailments
Net periodic benefit cost
Pension Benefits
Year Ended December 31
2011
2012
2013
Other Benefits
Year Ended December 31
2011
2012
2013
$
$
147
215
(289)
18
118
(1)
208
$
$
133
212
(267)
12
77
—
167
$
$
125
199
(266)
12
33
—
103
$
$
21
33
—
(21)
16
—
49
$
$
15
40
—
(7)
13
—
61
$
$
15
44
—
(7)
12
—
64
93
The funded status of the Company's plans as of December 31, 2013 and 2012, was as follows:
($ in millions)
Change in Benefit Obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants' contributions
Plan amendments
Actuarial loss (gain)
Benefits paid
Curtailments
Medicare Part D subsidy
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
Gain on plan assets
Employer contributions
Plan participants' contributions
Benefits paid
Transfers
Medicare Part D subsidy
Fair value of plan assets at end of year
Funded status
Amounts Recognized in the Consolidated Statements of Financial Position:
Pension plan assets
Current liability (1)
Non-current liability (2)
Accumulated other comprehensive loss (income) (pre-tax) related to:
Prior service costs (credits)
Net actuarial loss (gain)
Pension Benefits
Other Benefits
December 31
December 31
2013
2012
2013
2012
$
5,061
$
4,123
$
965
$
835
147
215
9
66
(600)
(154)
(14)
—
133
212
8
—
728
(138)
(5)
—
4,730
5,061
3,745
3,238
405
305
9
396
239
8
21
33
18
(145)
(220)
(59)
—
3
616
—
—
38
18
15
40
18
(11)
118
(55)
—
5
965
1
—
31
18
(154)
(138)
(59)
(55)
—
—
2
—
4,310
3,745
—
3
—
—
5
—
$
(420) $ (1,316) $
(616) $
(965)
$
124
$
— $
— $
(15)
(529)
(15)
(1,301)
124
847
75
1,694
(139)
(477)
(152)
50
—
(166)
(799)
(27)
286
Included in other current liabilities and current portion of postretirement plan liabilities, respectively.
(1)
(2) Included in pension plan liabilities and other postretirement plan liabilities, respectively.
The Projected Benefit Obligation ("PBO"), Accumulated Benefit Obligation ("ABO"), and asset values for the
Company's qualified pension plans were $4,626 million, $4,202 million, and $4,310 million, respectively, as of
December 31, 2013, and $4,948 million, $4,431 million, and $3,745 million, respectively, as of December 31, 2012.
The PBO represents the present value of pension benefits earned through the end of the year, with allowance for
future salary increases. The ABO is similar to the PBO, but does not provide for future salary increases.
The PBO and fair value of plan assets for all qualified and non-qualified pension plans with PBOs in excess of plan
assets were $3,633 million and $3,088 million, respectively, as of December 31, 2013, and $5,061 million and
$3,745 million, respectively, as of December 31, 2012.
The ABO and fair value of plan assets for all qualified and non-qualified pension plans with ABOs in excess of plan
assets were $1,581 million and $1,444 million, respectively, as of December 31, 2013, and $3,616 million and
94
$2,802 million, respectively, as of December 31, 2012. The ABO for all pension plans was $4,294 million and
$4,529 million as of December 31, 2013 and 2012, respectively.
The changes in amounts recorded in accumulated other comprehensive income (loss) are as follows:
($ in millions)
Prior service cost (credit)
Amortization of prior service cost (credit)
Net actuarial loss (gain)
Amortization of net actuarial loss (gain)
Other
Pension Benefits
Year Ended December 31
2011
2012
2013
Other Benefits
Year Ended December 31
2011
2012
2013
$
(66) $
18
716
118
12
— $
12
(599)
77
— $
12
(573)
33
7
1
$
145
(21)
220
16
1
$
11
(7)
(118)
13
(1)
—
(7)
(16)
12
—
Total changes in accumulated other comprehensive income
(loss)
$
798
$
(503) $
(527) $
361
$
(102) $
(11)
The amounts in accumulated other comprehensive income (loss) as of December 31, 2013, expected to be
recognized as components of net periodic expense in 2014 are as follows:
($ in millions)
Prior service cost (credit)
Net loss
Total
Pension
Benefits
Other
Benefits
$
$
19
40
59
$
$
(26)
—
(26)
Health Care Cost Trend Rate - The health care cost trend rate represents the annual rates of change in the cost of
health care benefits based on estimates of health care inflation, changes in health care utilization or delivery
patterns, technological advances, government mandated benefits, and other considerations. Using a combination of
market expectations and economic projections, including the effect of health care reform, on December 31, 2013,
the Company selected an expected initial health care cost trend rate of 7.33% and an ultimate health care cost
trend rate of 5.00% reached in 2022. On December 31, 2012, the Company assumed an expected initial health
care cost trend rate of 7.67% and an ultimate health care cost trend rate of 5.00% reached in 2021.
The weighted average assumptions used to determine the net periodic benefit costs were as follows:
($ in millions)
Assumptions Used to Determine Benefit Cost for the Year Ended December 31:
Discount rate
Expected long-term rate on plan assets
Rate of compensation increase
($ in millions)
Assumptions Used to Determine Benefit Cost for the Year Ended December 31:
Discount rate
Initial health care cost trend rate assumed for next year
Gradually declining to a rate of
Year in which the rate reaches the ultimate rate
Pension Benefits
2012
2013
2011
4.27%
7.50%
3.66%
5.23%
8.00%
3.64%
5.84%
8.50%
3.43%
2013
Other Benefits
2012
2011
4.02%
7.67%
5.00%
2021
4.94%
8.00%
5.00%
2018
5.58%
8.00%
5.00%
2017
95
The weighted average assumptions used to determine the benefit obligations were as follows:
($ in millions)
Assumptions Used to Determine Benefit Obligations at December 31:
Discount rate
Rate of compensation increase
Initial health care cost trend rate assumed for next year
Gradually declining to a rate of
Year in which the rate reaches the ultimate rate
Pension Benefits
December 31
Other Benefits
December 31
2013
2012
2013
2012
5.27%
3.69%
4.24%
3.66%
5.03%
4.04%
7.33%
5.00%
2022
7.67%
5.00%
2021
A one percent change in the assumed health care cost trend rates would have the following effects on 2013 results:
($ in millions)
Effect on postretirement benefit expense
Effect on postretirement benefit obligations
1 Percentage Point
Increase
Decrease
$
$
2
25
(2)
(24)
The Employee Retirement Income Security Act of 1974 ("ERISA"), including amendments under the Pension
Protection Act of 2006 and the Moving Ahead for Progress in the 21st Century Act, defines the minimum amount
that must be contributed to the Company's qualified defined benefit pension plans. In determining whether to make
discretionary contributions to these plans above the minimum required amounts, the Company considers various
factors, including attainment of the funded percentage needed to avoid benefit restrictions and other adverse
consequences, minimum CAS funding requirements, and the current and anticipated future funding levels of each
plan. The Company's contributions to its qualified defined benefit pension plans are affected by a number of factors,
including published IRS interest rates, the actual return on plan assets, actuarial assumptions, and demographic
experience. These factors and the Company's resulting contributions also impact the plans' funded status. The
Company made the following minimum and discretionary contributions to its pension and other postretirement plans
in the years ended December 31, 2013, 2012 and 2011:
($ in millions)
Pension plans
Qualified minimum
Discretionary
Qualified
Non-qualified
Other benefit plans
Total contributions
Year Ended December 31
2013
2012
2011
$
$
— $
64
$
301
4
38
172
3
31
343
$
270
$
—
—
3
33
36
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. For the year ending December 31, 2014, the
Company expects its cash contributions to its postretirement benefit pension plans to be approximately $35 million.
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.
In May 2013, the Company amended its postretirement benefit plans for salaried post-65 participants, which
replaced a Company-sponsored indemnity plan with coverage offered through a third-party vendor and permanently
capped the Company's contributions. As a result of the amendment, the remeasurement of the plans decreased
the postretirement liability and pre-tax accumulated other comprehensive loss by approximately $177 million.
96
The following table presents estimated future benefit payments, using the same assumptions used in determining
the Company's benefit obligations as of December 31, 2013. Benefit payments depend on future employment and
compensation levels, years of service, and mortality. Changes in any of these factors could significantly affect these
estimated amounts.
($ in millions)
2014
2015
2016
2017
2018
Years 2019 to 2023
Pension Plan Assets
Other Benefits
Pension
Benefits
Benefit
Payments
Subsidy
Receipts
$
$
163
178
194
212
231
$
35
37
40
42
46
$
1,464
$
262
$
—
—
—
—
—
2
Pension assets include public equities, government and corporate bonds, cash and cash equivalents, private real
estate funds, hedge funds, and other assets. Plan assets are held in a master trust and overseen by the Company's
Investment Committee. All assets are externally managed through a combination of active and passive strategies.
Managers may only invest in the asset classes for which they have been appointed.
The Investment Committee is responsible for setting the policy that provides the framework for management of the
plan assets. The plans' Investment Committee has set the minimum and maximum permitted values for each asset
class in the Company's pension plan master trust for the year ended December 31, 2013, as follows:
U.S. equities
International equities
Long bonds
Alternative investments
Range
27
13
25
5
-
-
-
-
43%
27%
50%
15%
The general objectives of the Company's pension asset strategy are to earn a rate of return over time to satisfy the
benefit obligations of the plans, meet minimum ERISA funding requirements, and maintain sufficient liquidity to pay
benefits and address other cash requirements within the master trust. Specific investment objectives include
reducing the volatility of pension assets relative to benefit obligations, achieving a competitive, total investment
return, achieving diversification between and within asset classes, and managing other risks. Investment objectives
for each asset class are determined based on specific risks and investment opportunities identified. Decisions
regarding investment policies and asset allocation are made with the understanding of the historical and
prospective return and risk characteristics of various asset classes, the effect of asset allocations on funded status,
future Company contributions, and projected expenditures, including benefits. The Company updates its asset
allocations periodically. The Company uses various analytics to determine the optimal asset mix and considers plan
obligation characteristics, duration, liquidity characteristics, funding requirements, expected rates of return, regular
rebalancing, and the distribution of returns. Actual allocations to each asset class could vary from target allocations
due to periodic investment strategy changes, short-term market value fluctuations, the length of time it takes to fully
implement investment allocation positions, such as real estate and other alternative investments, and the timing of
benefit payments and Company contributions.
Taking into account the asset allocation ranges, the investment fiduciary determines the specific allocation of the
master trust's investments within various asset classes. The master trust utilizes select investment strategies, which
are executed through separate account or fund structures with external investment managers who demonstrate
experience and expertise in the appropriate asset classes and styles. The selection of investment managers is
done with careful evaluation of all aspects of performance and risk, demonstrated fiduciary responsibility,
investment management experience, and a review of the investment managers' policies and processes. Investment
97
performance is monitored frequently against appropriate benchmarks and tracked to compliance guidelines with the
assistance of third party consultants and performance evaluation tools and metrics.
Plan assets are stated at fair value. The Company employs a variety of pricing sources to estimate the fair value of
its pension plan assets, including independent pricing vendors, dealer or counterparty-supplied valuations, third-
party appraisals, appraisals prepared by the Company's investment managers, or other experts.
Investments in equity securities, common and preferred, are valued at the last reported sales price when an active
market exists. Securities for which official or last trade pricing on an active exchange is available are classified as
Level 1. If closing prices are not available, securities are valued at the last trade price, if deemed reasonable, or a
broker's quote in a non-active market, and are typically categorized as Level 2.
Investments in fixed-income securities are generally valued by independent pricing services or dealers who make
markets in such securities. Pricing methods are based upon market transactions for comparable securities and
various relationships between securities that are generally recognized by institutional traders and typically are
categorized as Level 2. Fixed-income securities categorized as Level 3 typically are priced by dealers and pricing
services that use pricing models that incorporate unobservable inputs.
Investments in hedge funds generally do not have readily available market quotations and are estimated at fair
value, which primarily utilizes Net Asset Values ("NAV") or the equivalent, as a practical expedient, as reported by
the investment manager. Hedge funds usually have restrictions on redemptions that might affect the ability to sell
the investment at NAV in the short term, and valuations might lag by up to three months. Accordingly, these
investments are typically classified as Level 3.
Real estate funds are typically valued through updated independent third-party appraisals, which are adjusted for
changes in cash flows, market conditions, property performance, and leasing status. Since real estate funds do not
have readily available market quotations, they are generally valued at NAV or its equivalent, as a practical
expedient, as reported by the asset manager. Redemptions from real estate funds are also subject to various
restrictions. Accordingly, these investments are classified as Level 3.
Management reviews independently appraised values, audited financial statements, and additional pricing
information to evaluate the net asset values. For the very limited group of investments for which market quotations
are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional
information is obtained from the investment manager and evaluated internally to determine whether any
adjustments are required to reflect fair value.
The Company might be unable to quickly liquidate some assets at amounts close or equal to fair value in order to
meet the plans' liquidity requirements or respond to specific events such as the creditworthiness of any particular
issuer or counterparty. Illiquid assets are generally long-term investments that complement the long-term nature of
the Company's pension obligations and are generally not used to fund benefit payments in the short term.
Management monitors liquidity risk on an ongoing basis and has procedures designed to maintain flexibility in
troubled markets.
The master trust has considerable investments in fixed income securities for which changes in the relevant interest
rate of a particular instrument might result in the inability to secure similar returns upon the maturity or sale.
Changes in prevailing interest rates might result in an increase or decrease in fair value of the instrument.
Investment managers are permitted to use interest rate swaps and other financial derivatives to manage interest
rate risk.
Counterparty risk is the risk that a counterparty to a financial instrument held by the master trust will default on its
commitment. Counterparty risk is generally related to over-the-counter derivative instruments used to manage risk
exposure to interest rates on long-term debt securities. Certain agreements with counterparties employ set-off
agreements, collateral support arrangements, and other risk mitigation practices designed to reduce the net credit
risk exposure in the event of a counterparty default. Credit policies and processes are in place to manage
concentrations of risk by seeking to undertake transactions with large well-capitalized counterparties and by
monitoring the creditworthiness of these counterparties.
98
The fair value of the Company's retirement plan assets by asset category and by valuation hierarchy Level as
described in Note 2: Summary of Significant Accounting Policies were as follows:
($ in millions)
Asset Category
Equity
U.S. equities (1)
International equities (1)
Fixed Income
U.S. government
U.S. agency
Non-U.S. government
Investment grade (2)
Asset backed
Non-investment grade (3)
Cash and cash equivalents (4)
Hedge funds
Real estate fund
Other (5)
Total assets at fair value
December 31, 2013
Total
Level 1
Level 2
Level 3
$
1,546
$
860
156
180
66
871
65
39
75
257
188
7
249
382
—
—
—
—
—
—
2
—
—
—
$
1,297
$
478
156
180
66
871
65
39
73
—
—
7
$
4,310
$
633
$
3,232
$
—
—
—
—
—
—
—
—
—
257
188
—
445
(1) U.S. and international equity securities include investments in small, medium, and large capitalization stocks of
public companies held in separately managed accounts or commingled trust funds.
(2) Investment grade fixed income securities include corporate bonds rated Baa3/BBB- or higher by one or more
rating agencies.
(3) Non-investment grade fixed income securities include corporate bonds consistently rated below Baa3/BBB- by
one or more rating agencies and a high yield commingled fund.
(4) Cash and cash equivalents are highly liquid short-term investment funds and include net receivables and
payables of the trust. These funds are available for immediate use to fund daily operations, execute investment
policies, and serve as a temporary investment vehicle. The Company's plan asset allocation policy does not
include cash.
(5) Other investments include swaps, options, collateral, and insurance contracts.
99
($ in millions)
Asset Category
Equity
U.S. equities (1)
International equities (1)
Fixed Income
U.S. government
U.S. agency
Non-U.S. government
Investment grade (2)
Asset backed
Non-investment grade (3)
Cash and cash equivalents (4)
Hedge funds
Real estate fund
Other (5)
Total assets at fair value
December 31, 2012
Total
Level 1
Level 2
Level 3
$
1,222
$
694
368
186
57
692
74
33
73
181
162
3
192
306
—
—
—
—
—
—
18
—
—
—
$
1,030
$
388
368
186
57
692
74
33
55
—
—
3
$
3,745
$
516
$
2,886
$
—
—
—
—
—
—
—
—
—
181
162
—
343
(1) U.S. and international equity securities include investments in small, medium, and large capitalization stocks of
public companies held in separately managed accounts or commingled trust funds.
(2) Investment grade fixed income securities include corporate bonds rated Baa3/BBB- or higher by one or more
rating agencies.
(3) Non-investment grade fixed income securities include corporate bonds consistently rated below Baa3/BBB- by
one or more rating agencies and a high yield commingled fund.
(4) Cash and cash equivalents are highly liquid short-term investment funds. These funds are available for
immediate use to fund daily operations, execute investment policies, and serve as a temporary investment
vehicle. The Company's plan asset allocation policy does not include cash.
(5) Other investments include futures, swaps, options, and insurance contracts.
The master trust limits the use of derivatives through direct or separate account investments, such that the
derivatives used are liquid and able to be readily valued in the market. Derivative usage in separate account
structures is limited to hedging purposes or to gain market exposure in a non-speculative manner. The net fair
market value of the master trust's derivatives through direct or separate account investments was $4 million and
less than $1 million as of December 31, 2013 and 2012, respectively.
The following tables summarize the changes in Level 3 retirement plan assets measured at fair value for the years
ended December 31, 2013 and 2012.
Return on plan assets
Fair Value
at
December
31, 2012
Attributable
to Assets
Held at
December
31, 2013
Attributable
to Assets
Sold
Transfers
Purchases
Sales
Level 3
Into
(Out) of
Level 3
Fair Value
at
December
31, 2013
$
$
181
162
343
$
$
16
26
42
$
$
— $
—
— $
60
—
60
$ — $
— $
— $
—
—
—
$ — $
— $
— $
257
188
445
($ in millions)
Asset Category:
Hedge funds
Real estate fund
Total Level 3 fair value
100
Return on plan assets
Fair Value
at
December
31, 2011
Attributable
to Assets
Held at
December
31, 2012
Attributable
to Assets
Sold
Transfers
Into
Purchases
Sales
Level 3
Fair Value
at
December
31, 2012
(Out) of
Level 3
$
$
149
—
149
$
$
12
12
24
$
$
— $
—
— $
20
$ — $
— $
— $
150
170
—
—
—
$ — $
— $
— $
181
162
343
($ in millions)
Asset Category:
Hedge funds
Real estate fund
Total Level 3 fair value
19. STOCK COMPENSATION PLANS
As of December 31, 2013, HII had stock-based compensation awards outstanding under the following plans: the
Huntington Ingalls Industries, Inc. 2011 Long-Term Incentive Stock Plan (the "2011 Plan") and the Huntington
Ingalls Industries, Inc. 2012 Long-Term Incentive Stock Plan (the "2012 Plan").
Stock Compensation Plans
On March 23, 2012, the Company's board of directors adopted the 2012 Plan, subject to stockholder approval, and
the Company's stockholders approved the 2012 Plan on May 2, 2012. The 2012 award grants made on or after
May 2, 2012, were made under the 2012 Plan. The 2012 award grants made prior to May 2, 2012, were made
under the 2011 Plan. No future grants will be made under the 2011 Plan.
The 2012 Plan permits awards of stock options, stock appreciation rights, and other stock awards. Each stock
option grant is made with an exercise price of not less than 100% of the closing price of HII's common stock on the
date of grant. Stock awards, in the form of RPSRs and RSRs, are granted to key employees and members of the
board of directors without payment to the Company. The fair value of the performance-based stock awards is
determined based on the closing market price of HII's common stock on the grant date. For purposes of measuring
compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based
on management's expectations regarding the relevant performance and/or service criteria. The 2012 Plan
authorized (i) 3.4 million new shares; plus (ii) any shares subject to outstanding awards under the 2011 Plan that
are subsequently forfeited to the Company; plus (iii) any shares subject to outstanding awards under the 2011 Plan
that are subsequently exchanged by the participant as full or partial payment to the Company in connection with
any such award or exchanged by a participant or withheld by the Company to satisfy the tax withholding obligations
related to any such award. As of December 31, 2013, the remaining aggregate number of shares of the Company's
common stock authorized for issuance under the 2012 Plan was 2.8 million.
The 2011 Plan permitted the awards of stock options, stock appreciation rights, and other stock awards. Each stock
option grant was made with an exercise price of not less than 100% of the closing price of HII's common stock on
the date of grant, with the exception of options issued at the time of the spin-off in exchange for Northrop Grumman
stock options. Stock awards, in the form of RPSRs and RSRs, were granted to key employees and members of the
board of directors without payment to the Company. The fair value of the performance-based stock awards was
determined based on the closing market price of HII's common stock on the grant date. For purposes of measuring
compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based
on management's expectations regarding the relevant performance and/or service criteria.
In addition to the grants resulting from the conversion of Northrop Grumman awards discussed below, the Company
issued the following awards in the years ended December 31, 2013, 2012 and 2011:
Restricted Performance Stock Rights - For the year ended December 31, 2013, the Company granted
approximately 0.4 million RPSRs at a weighted average share price of $44.67. These rights are subject to cliff
vesting on December 31, 2015. For the year ended December 31, 2012, the Company granted approximately 0.6
million RPSRs at a weighted average share price of $34.71. These rights are subject to cliff vesting on December
31, 2014. For the year ended December 31, 2011, the Company granted approximately 0.5 million RPSRs at a
weighted average share price of $41.45. These rights were fully vested as of December 31, 2013. All of the RPSRs
are subject to the achievement of performance-based targets at the end of the respective vesting periods. Based
101
upon the Company's results measured against such targets, between 0% and 200% of the original stated grant are
expected to ultimately vest.
Restricted Stock Rights - In connection with the spin-off, retention stock awards were granted to key employees to
ensure a successful transition and business continuity. On March 31, 2011, the Company granted 0.7 million
restricted stock rights at a share price of $41.50, with cliff vesting three years from the grant date. As of
December 31, 2013, 0.6 million restricted stock rights were outstanding.
Stock Rights - The Company granted stock rights to its non-employee directors on January 2, 2013, April 1, 2013,
July 1, 2013, and October 1, 2013, with each grant less than 10,000 shares. The Company granted stock rights to
its non-employee directors on January 2, 2012, April 2, 2012, July 2, 2012, and October 2, 2012, with each grant
less than 10,000 shares. In connection with the spin off, the Company granted 36,000 stock rights to its non-
employee directors. Additional grants of stock rights were made to non-employee directors on April 1, 2011, July 2,
2011, and October 3, 2011, with each grant less than 10,000 shares. All stock rights granted to non-employee
directors are fully vested on the grant date, but shares to settle such vested stock rights are not issued until the end
of a non-employee director's service on the board.
Effect of the Spin-Off
Prior to the spin-off, HII's current and former employees participated in certain of Northrop Grumman's stock-based
award plans (the "Northrop Grumman Plan"). As of the date of the spin-off, the shares, options, and rights under the
Northrop Grumman Plan were converted to shares, options, and rights under the 2011 Plan. The conversion was
effected so that the outstanding stock-based awards held by the Company's current and former employees on the
distribution date were adjusted to reflect the value of the distribution, such that the intrinsic value of the awards was
not diluted at the time of, and due to, the separation. This was achieved using the conversion rate included in the
spin-off agreement. Unless otherwise stated, share amounts and share prices detailed below were retroactively
adjusted to reflect the impact of the conversion. The Company measured the fair value of the awards immediately
before and after the conversion, and there was no incremental compensation expense associated with the
conversion.
The following is a description of the Northrop Grumman Plan awards, which were converted into awards under the
2011 Plan.
Converted Stock Options - As of the date of the spin-off, outstanding options held by HII's current and former
employees under the Northrop Grumman Plan were converted to options of HII under the 2011 Plan. Based on the
conversion factor of 1.65, included in the spin-off agreement, approximately 1.0 million options in the Northrop
Grumman Plan were converted into approximately 1.6 million options under the 2011 Plan, approximately 1.4
million of which were fully vested at the time of conversion. Outstanding stock options granted prior to 2008
generally vest in 25% increments over four years from the grant date and expire ten years after the grant date.
Stock options granted in 2008 and later vest in 33% increments over three years from the grant date and expire
seven years after the grant date. The cumulative intrinsic value of the options at conversion was maintained in the
conversion, and totaled $15 million at March 31, 2011.
Converted Restricted Performance Stock Rights - As of the date of the spin-off, outstanding RPSRs in the Northrop
Grumman Plan were converted to 1.2 million RPSRs of HII under the 2011 Plan. Under the Northrop Grumman
Plan, those rights were subject to performance criteria, which impact the ultimate number of shares that vest. Upon
conversion, a portion of the performance factors for these converted RPSRs were fixed based on the achievement
of pre-spin-off targets under the Northrop Grumman Plan and continued to vest subject to continued service. The
remaining portion of the performance factors for these converted RPSRs were subject to continued performance
targets established by the Company. All converted RPSRs were fully vested as of December 31, 2013.
Compensation Expense
The Company recorded $44 million, $41 million and $46 million of expense related to stock-based compensation in
the years ended December 31, 2013, 2012 and 2011, respectively, of which $44 million, $40 million and $45 million,
respectively, related to stock awards and $1 million in each of the years ended December 31, 2012 and 2011,
related to stock options. The Company recorded $17 million, $16 million and $16 million as a tax benefit related to
stock-based compensation in the years ended December 31, 2013, 2012 and 2011, respectively.
102
The Company recognized tax benefits in the years ended December 31, 2013, 2012 and 2011, of $32 million, $14
million and $10 million, respectively, from the issuance of stock in settlement of RPSRs and RSRs, and $4 million,
$1 million and $2 million in the years ended December 31, 2013, 2012 and 2011, respectively, from the exercise of
stock options.
Unrecognized Compensation Expense
As of December 31, 2013, the Company had no unrecognized compensation expense related to stock option
awards. Compensation expense for stock options was fully recognized as of December 31, 2013.
In addition, as of December 31, 2013, the Company had $2 million of unrecognized compensation expense
associated with the RSRs granted in 2011, which will be recognized over a period of 0.3 years, and $21 million of
unrecognized expense associated with the RPSRs granted in 2013, 2012 and 2011, which will be recognized over a
weighted average period of 1.5 years.
Stock Options
Compensation expense for the outstanding converted stock options was determined at the time of grant by
Northrop Grumman. No options were granted during the years ended December 31, 2013, 2012 and 2011. The fair
value of the stock option awards is expensed on a straight-line basis over the vesting period of the options. The fair
value of each of the stock option awards was estimated on the date of grant using a Black-Scholes option pricing
model.
The stock option activity for the years ended December 31, 2013, 2012 and 2011, was as follows:
Outstanding at March 31, 2011
Exercised
Outstanding at December 31, 2011
Exercised
Canceled and Forfeited
Outstanding at December 31, 2012
Exercised
Canceled and Forfeited
Outstanding at December 31, 2013
Vested at December 31, 2013
Shares Under
Option
(in thousands)
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
($ in millions)
1,647
$
(64)
1,583
(405)
(12)
1,166
(346)
(1)
819
819
$
$
34.05
28.10
33.27
33.04
34.01
34.67
29.66
28.51
35.01
35.01
3.6 years
$
2.9 years
2.6 years
2.1 years
2.1 years
$
$
—
(3)
12
45
45
The intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011, was $11
million, $3 million and less than $1 million, respectively. Intrinsic value is measured using the fair market value at
the date of exercise for options exercised or at period end for outstanding options, less the applicable exercise
price. The Company issued new shares to satisfy exercised options.
Stock Awards
Stock awards include RPSRs, RSRs, and stock rights. The fair value of stock awards is determined based on the
closing market price of the Company's common stock on the grant date. Compensation expense for stock awards is
measured based on the grant date fair value and recognized over the vesting period, generally three years.
For purposes of measuring compensation expense, the amount of shares ultimately expected to vest is estimated
at each reporting date based on management's expectations regarding the relevant service or performance criteria.
103
The stock award activity for the years ended December 31, 2013, 2012 and 2011, was as follows:
Outstanding at March 31, 2011
Granted
Adjustment due to performance
Vested
Forfeited
Outstanding at December 31, 2011
Granted
Adjustment due to performance
Vested
Forfeited
Outstanding at December 31, 2012
Granted
Adjustment due to performance
Vested
Forfeited
Outstanding at December 31, 2013
Stock Awards
(in thousands)
Weighted-Average
Grant Date Fair
Value
$
1,237
1,213
483
(827)
(16)
2,090
581
164
(881)
(53)
1,901
456
315
(931)
(68)
1,673
$
31.89
41.38
35.91
27.23
39.67
39.69
36.04
37.25
37.27
40.01
39.92
46.51
41.41
41.41
40.23
40.92
Weighted
Average
Remaining
Contractual Term
1.3 years
1.8 years
1.4 years
1.0 year
Vested awards include stock awards that fully vest during the year based on the level of achievement of the
relevant performance goals. The performance goals for outstanding RPSRs granted in 2013 are based on two
metrics as defined in the grant agreements: earnings before interest, taxes, depreciation, amortization, and pension
weighted at 50% and pension-adjusted return on invested capital weighted at 50%. The performance goals for
outstanding RPSRs granted in 2012 and 2011 are based on two metrics as defined in the grant agreements:
cumulative operating margin weighted at 50% and cumulative free cash flow weighted at 50%.
20. RELATED PARTY TRANSACTIONS AND FORMER PARENT COMPANY EQUITY
Northrop Grumman Transitional Services - Post-Spin-Off
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 at cost with certain enterprise shared services
(including information technology, resource planning, financial, procurement, and human resource services),
benefits support services, and other specified services. The term of the Transition Services Agreement ended on
October 9, 2012. For the years ended December 31, 2012 and 2011, costs incurred for these services under the
Transition Services Agreement were approximately $20 million and $75 million, respectively.
Allocation of General Corporate Expenses - Pre-Spin-Off
The consolidated financial statements for the period from January 1, 2011, to March 30, 2011, the date of the spin-
off, reflect an allocation of general corporate expenses from Northrop Grumman. These costs were historically
allocated to HII's contracts, unless prohibited by the FAR, and generally fall into one of the following categories:
Northrop Grumman management and support services - This category includes costs for functions such as human
resources, treasury, risk management, internal audit, finance, tax, legal, executive office, and other administrative
support. Human resources, employee benefits administration, treasury, and risk management were generally
allocated to the Company based on relative gross payroll dollars; internal audit was generally allocated based on
audit hours incurred related to the Company; and the remaining costs were generally allocated using a three-factor-
formula that considered the Company's relative amounts of revenues, payroll, and average asset balances as
compared with the total value of these factors for all Northrop Grumman entities utilizing these support services (the
104
"Three Factor Formula"). The consolidated financial statements include Northrop Grumman management and
support services allocations totaling $32 million for the year ended December 31, 2011.
Shared services and infrastructure costs - This category includes costs for functions such as information technology
support, systems maintenance, telecommunications, procurement and other shared services while HII was a
subsidiary of Northrop Grumman. These costs were generally allocated to the Company using the Three Factor
Formula or based on usage. The consolidated financial statements reflect shared services and infrastructure costs
allocations totaling $80 million for the year ended December 31, 2011.
Northrop Grumman-provided benefits - This category includes costs for group medical, dental and vision insurance,
401(k) savings plan, pension and postretirement benefits, incentive compensation and other benefits. These costs
were generally allocated to the Company based on specific identification of the benefits provided to Company
employees participating in these benefit plans. The consolidated financial statements include Northrop Grumman-
provided benefits allocations totaling $169 million for the year ended December 31, 2011.
Management believes that the methods of allocating these costs are reasonable, consistent with past practices, and
in conformity with cost allocation requirements of CAS or the FAR.
Related Party Sales and Cost of Sales
Prior to the spin-off, HII purchased and sold certain products and services from and to other Northrop Grumman
entities. Purchases of products and services from these affiliated entities, which were recorded at cost, were $44
million for the year ended December 31, 2011. Sales of products and services to these entities were $1 million for
the year ended December 31, 2011.
Former Parent's Equity in Unit
Transactions between HII and Northrop Grumman prior to the spin-off have been included in the consolidated
financial statements and were effectively settled for cash at the time the transaction was recorded. The net effect of
the settlement of these transactions is reflected as Former Parent's Equity in Unit in the consolidated statement of
changes in equity.
21. UNAUDITED SELECTED QUARTERLY DATA
Unaudited quarterly financial results for the years ended December 31, 2013 and 2012, are set forth in the following
tables:
($ in millions, except per share amounts)
Sales and service revenues
Operating income (loss)
Earnings (loss) before income taxes
Net earnings (loss)
Dividends declared per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Year Ended December 31, 2013
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
$
1,562
$
1,683
$
1,637
$
1,938
95
65
44
0.10
0.88
0.87
$
$
$
116
87
57
0.10
1.14
1.12
$
$
$
127
99
69
0.10
1.38
1.36
$
$
$
174
143
91
0.20
1.86
1.82
$
$
$
105
($ in millions, except per share amounts)
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Year Ended December 31, 2012
Sales and service revenues
Operating income (loss)
Earnings (loss) before income taxes
Net earnings (loss)
Dividends declared per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
22. SUBSIDIARY GUARANTORS
$
1,568
$
1,721
$
1,596
$
80
50
33
$
$
$
— $
0.67
0.67
$
$
106
77
50
— $
1.01
1.00
$
$
66
37
13
— $
0.26
0.26
$
$
1,823
106
77
50
0.10
1.01
0.98
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
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 condensed consolidating statements of operations and comprehensive income for the years
ended December 31, 2013 and 2012, condensed consolidating statements of financial position as of December 31,
2013, and December 31, 2012, and the condensed consolidating statements of cash flows for the years ended
December 31, 2013 and 2012, for HII, its aggregated subsidiary guarantors and its aggregated non-guarantor
subsidiaries:
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in millions)
Sales and service revenues
Product sales
Service revenues
Total sales and service revenues
Cost of sales and service revenues
Cost of product sales
Cost of service revenues
Income (loss) from operating investments, net
General and administrative expenses
Operating income (loss)
Interest expense
Other income, net
Equity in earnings (loss) of subsidiaries
Earnings (loss) before income taxes
Federal income taxes
Net earnings (loss)
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Year Ended December 31, 2013
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
5,801
$
— $
— $
1,019
6,820
4,695
888
14
739
512
(8)
—
—
504
170
334
705
24
24
—
24
—
—
—
—
—
—
—
—
(24)
(24)
—
(24)
—
—
—
—
—
(334)
(334)
—
$
— $
(334) $
—
(705)
1,039
$
— $
(1,039) $
—
—
—
—
—
—
—
(110)
—
334
224
(37)
261
705
966
$
$
$
$
106
5,801
1,019
6,820
4,695
888
14
739
512
(118)
—
—
394
133
261
705
966
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in millions)
Sales and service revenues
Product sales
Service revenues
Total sales and service revenues
Cost of sales and service revenues
Cost of product sales
Cost of service revenues
Income (loss) from operating investments, net
General and administrative expenses
Operating income (loss)
Interest expense
Equity in earnings (loss) of subsidiaries
Earnings (loss) before income taxes
Federal income taxes
Net earnings (loss)
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Year Ended December 31, 2012
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
5,755
$
— $
— $
—
—
—
—
—
—
—
(111)
213
102
(44)
146
$
(364)
953
6,708
4,827
802
18
739
358
(6)
—
352
139
213
(364)
19
19
—
19
—
—
—
—
—
—
—
(19)
(19)
—
(19)
—
—
—
—
(213)
(213)
—
$
— $
(213) $
—
— $
364
151
$
(218) $
(151) $
$
$
5,755
953
6,708
4,827
802
18
739
358
(117)
—
241
95
146
(364)
(218)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ in millions)
Sales and service revenues
Product sales
Service revenues
Total sales and service revenues
Cost of sales and service revenues
Cost of product sales
Cost of service revenues
Income (loss) from operating investments, net
General and administrative expenses
Goodwill impairment
Operating income (loss)
Interest expense
Equity in earnings (loss) of subsidiaries
Earnings (loss) before income taxes
Federal income taxes
Net earnings (loss)
Other comprehensive income (loss), net of tax
Comprehensive income (loss)
Year Ended December 31, 2011
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
— $
5,676
$
— $
— $
—
—
—
—
—
—
—
—
(89)
(42)
(131)
(31)
899
6,575
4,794
777
20
634
290
100
(15)
—
85
127
—
—
—
—
—
—
—
—
—
—
—
—
$
$
(100) $
(42) $
(330)
(330)
(430) $
(372) $
— $
—
— $
107
—
—
—
—
—
—
—
—
—
42
42
—
42
330
372
$
$
5,676
899
6,575
4,794
777
20
634
290
100
(104)
—
(4)
96
(100)
(330)
(430)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
($ in millions)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventoried costs, net
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Other Assets
Goodwill
Other purchased intangibles, net of accumulated amortization
Pension plan asset
Miscellaneous other assets
Investment in subsidiaries
Intercompany receivables
Total other assets
Total assets
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable
Accrued employees’ compensation
Current portion of long-term debt
Current portion of workers’ compensation liabilities
Current portion of postretirement plan liabilities
Advance payments and billings in excess of revenues
Other current liabilities
Total current liabilities
Long-term debt
Other postretirement plan liabilities
Pension plan liabilities
Workers’ compensation liabilities
Deferred tax liabilities
Other long-term liabilities
Intercompany liabilities
Total liabilities
Stockholders’ equity
December 31, 2013
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
$
$
— $
1,042
—
—
—
—
1,042
—
—
—
—
35
3,295
—
3,330
4,372
$
— $
—
79
—
—
—
25
104
1,595
—
—
—
—
—
1,152
2,851
1,521
4,372
$
1,123
311
170
30
1,634
1,897
881
528
124
84
—
1,152
2,769
6,300
337
230
—
230
139
115
237
1,288
105
477
529
419
83
104
—
3,005
3,295
6,300
$
$
$
1
—
—
—
5
6
—
—
—
—
—
—
—
—
6
$
$
— $
—
—
—
—
—
6
6
—
—
—
—
—
—
—
6
—
6
$
— $
—
—
—
(6)
(6)
—
—
—
—
—
(3,295)
(1,152)
(4,447)
(4,453) $
— $
—
—
—
—
—
(6)
(6)
—
—
—
—
—
—
(1,152)
(1,158)
(3,295)
(4,453) $
1,043
1,123
311
170
29
2,676
1,897
881
528
124
119
—
—
1,652
6,225
337
230
79
230
139
115
262
1,392
1,700
477
529
419
83
104
—
4,704
1,521
6,225
Total liabilities and stockholders’ equity
$
108
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
($ in millions)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventoried costs, net
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Other Assets
Goodwill
Other purchased intangibles, net of accumulated amortization
Miscellaneous other assets
Investment in subsidiaries
Intercompany receivables
Total other assets
Total assets
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable
Accrued employees’ compensation
Current portion of long-term debt
Current portion of workers’ compensation liabilities
Current portion of postretirement plan liabilities
Advance payments and billings in excess of revenues
Other current liabilities
Total current liabilities
Long-term debt
Other postretirement plan liabilities
Pension plan liabilities
Workers’ compensation liabilities
Other long-term liabilities
Intercompany liabilities
Total liabilities
Stockholders’ equity
December 31, 2012
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
$
$
$
$
— $
1,056
—
—
—
—
1,056
—
—
—
39
2,282
—
2,321
3,377
$
— $
—
51
—
—
—
25
76
1,674
—
—
—
—
960
2,710
667
3,377
$
905
288
213
22
1,428
2,034
881
548
406
—
960
2,795
6,257
377
235
—
216
166
134
180
1,308
105
799
1,301
403
59
—
3,975
2,282
6,257
$
$
$
1
—
—
—
4
5
—
—
—
—
—
—
—
5
$
$
— $
—
—
—
—
—
5
5
—
—
—
—
—
—
5
—
5
$
— $
—
—
—
(5)
(5)
—
—
—
—
(2,282)
(960)
(3,242)
(3,247) $
— $
—
—
—
—
—
(5)
(5)
—
—
—
—
—
(960)
(965)
(2,282)
(3,247) $
1,057
905
288
213
21
2,484
2,034
881
548
445
—
—
1,874
6,392
377
235
51
216
166
134
205
1,384
1,779
799
1,301
403
59
—
5,725
667
6,392
Total liabilities and stockholders’ equity
$
109
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ in millions)
Year Ended December 31, 2013
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
Net cash provided by (used in) operating activities
$
(72) $
308
$
— $
— $
236
Investing Activities
Additions to property, plant, and equipment
Proceeds from insurance settlement
Net cash provided by (used in) investing activities
Financing Activities
Repayment of long-term debt
Debt issuance costs
Repurchases of common stock
Dividends paid
Proceeds from stock option exercises
Excess tax benefit related to stock-based compensation
Cash sweep/funding by parent
Net cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
—
—
—
(51)
(5)
(119)
(25)
7
—
251
58
(14)
1,056
(139)
58
(81)
—
—
—
—
—
24
(251)
(227)
—
—
Cash and cash equivalents, end of period
$
1,042
$
— $
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
—
—
—
—
—
—
—
—
—
—
—
—
1
1
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
(139)
58
(81)
(51)
(5)
(119)
(25)
7
24
—
(169)
(14)
1,057
1,043
($ in millions)
Year Ended December 31, 2012
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Net cash provided by (used in) operating activities
$
(62) $
393
$
1
$
— $
332
Investing Activities
Additions to property, plant, and equipment
Net cash provided by (used in) investing activities
Financing Activities
Repayment of long-term debt
Repurchases of common stock
Dividends paid
Proceeds from stock option exercises
Cash sweep/funding by parent
Net cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
—
—
(29)
(1)
(5)
7
231
203
141
915
(162)
(162)
—
—
—
—
(231)
(231)
—
—
Cash and cash equivalents, end of period
$
1,056
$
— $
—
—
—
—
—
—
—
—
1
—
1
—
—
—
—
—
—
—
—
—
—
(162)
(162)
(29)
(1)
(5)
7
—
(28)
142
915
$
— $
1,057
110
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
($ in millions)
Year Ended December 31, 2011
Huntington
Ingalls
Industries,
Inc.
Subsidiary
Guarantors
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Net cash provided by (used in) operating activities
$
(47) $
575
$
— $
— $
528
Investing Activities
Additions to property, plant, and equipment
Net cash provided by (used in) investing activities
Financing Activities
Proceeds from issuance of long-term debt
Repayment of long-term debt
Debt issuance costs
Repayment of notes payable to former parent and accrued interest
Dividend to former parent in connection with spin-off
Proceeds from stock option exercises
Net transfers from (to) former parent
Cash sweep/funding by parent
Net cash provided by (used in) financing activities
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
—
—
1,775
(22)
(54)
—
(1,429)
2
—
690
962
915
—
(197)
(197)
—
—
—
(954)
—
—
1,266
(690)
(378)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cash and cash equivalents, end of period
$
915
$
— $
— $
— $
(197)
(197)
1,775
(22)
(54)
(954)
(1,429)
2
1,266
—
584
915
—
915
111
23. SUBSEQUENT EVENT
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 the private sector. The acquisition is consistent with the
Company's strategy to utilize its nuclear and energy related expertise developed through its shipbuilding activities to
expand our position in the energy marketplace.
The Company funded the acquisition with cash on hand. The initial aggregate purchase price of $53.7 million may
increase or decrease subject to a net working capital adjustment, and did not include any contingent consideration.
An aggregate of $7.7 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 are included within general and administrative expenses in the Consolidated Statements of
Operations and Comprehensive Income for the year ended December 31, 2013.
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 Company anticipates that the majority of the purchase price will be allocated
to goodwill and other intangible assets.
112
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of
December 31, 2013. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2013, the Company's disclosure controls and procedures were effective to
ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is
(i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii)
accumulated and communicated to management to allow their timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended December 31, 2013, no change occurred in the Company's internal control over
financial reporting that materially affected, or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
113
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for
the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the
criteria in Internal Control – Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO"). The Company’s system of internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States
of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based on its assessment, management has concluded that the Company maintained effective internal control over
financial reporting as of December 31, 2013, based on criteria in Internal Control – Integrated Framework (1992),
issued by the COSO. The effectiveness of the Company’s internal control over financial reporting as of December
31, 2013, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated
in their report, which is included in Item 8.
/s/ C. Michael Petters
C. Michael Petters
President and Chief Executive Officer
ITEM 9B. OTHER INFORMATION
None.
/s/ Barbara A. Niland
Barbara A. Niland
Corporate Vice President, Business
Management and Chief Financial Officer
114
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
PART III
Directors
Information regarding our directors will be incorporated herein by reference to the Proxy Statement for our 2014
Annual Meeting of Stockholders, to be filed with the SEC within 120 days after the end of the Company's fiscal year.
Executive Officers
Information regarding our executive officers may be found under Item 4A.
Audit Committee Financial Expert
Information as to the Audit Committee and the Audit Committee Financial Expert will be incorporated herein by
reference to the Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed within 120 days after the
end of the Company’s fiscal year.
Code of Ethics
We have adopted a Code of Ethics and Business Conduct for all of our employees, including the principal executive
officer, principal financial officer and principal accounting officer. The Code of Ethics and Business Conduct can be
found on our internet website at www.huntingtoningalls.com under "Investor Relations—Corporate Governance—
Highlights." A copy of the Code of Ethics and Business Conduct is available to any stockholder who requests it by
writing to: Huntington Ingalls Industries, Inc., c/o Office of the Secretary, 4101 Washington Avenue, Newport News,
VA 23607. If we make any substantive amendments to the Code of Ethics and Business Conduct or grant any
waivers, including any implicit waiver, from a provision of the Code of Ethics and Business Conduct to our Chief
Executive Officer, Chief Financial Officer or Chief Accounting Officer, we will disclose the nature of the amendment
or waiver on our website.
Our website and information contained on it or incorporated in it are not intended to be incorporated in this report on
Form 10-K or other filings with the SEC.
Other Disclosures
Other disclosures required by this Item will be incorporated herein by reference to the Proxy Statement for our 2014
Annual Meeting of Stockholders to be filed within 120 days after the end of the Company’s fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation, including information concerning compensation committee
interlocks, insider participation and the compensation committee report, will be incorporated herein by reference to
the Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed within 120 days after the end of the
Company’s fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information as to security ownership of certain beneficial owners and management and related stockholder matters
will be incorporated herein by reference to the Proxy Statement for our 2014 Annual Meeting of Stockholders to be
filed within 120 days after the end of the Company’s fiscal year.
115
Equity Compensation Plan Information
The following table presents the equity securities available for issuance under our equity compensation plans as of
December 31, 2013.
Equity Compensation Plan Information
Number of Securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights(1)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights(2)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities
Reflected in Column (a))
Plan category
Equity compensation plans approved by security
holders
2,956,907
$35.01
2,786,760
(a)
(b)
(c)
—
2,956,907
Equity compensation plans not approved by
security holders(3)
Total
(1) Includes grants made under the Huntington Ingalls Industries, Inc. 2012 Long-Term Incentive Stock Plan (the
"2012 Plan"), which was approved by our stockholders on May 2, 2012, and the Huntington Ingalls Industries, Inc.
2011 Long-Term Incentive Stock Plan (the "2011 Plan"), which was approved by the sole stockholder of HII prior to
its spin-off from Northrop Grumman Corporation. Of these shares, 818,723 were subject to stock options, 1,002,217
were subject to outstanding restricted performance stock rights, 602,400 were restricted stock rights, and 63,022
were stock rights granted under the 2011 Plan. In addition, this number includes 24,428 stock rights and 446,117
restricted performance stock rights granted under the 2012 Plan, assuming target performance achievement.
(2) This is the weighted average exercise price of the 818,723 outstanding stock options only.
(3) There are no awards made under plans not approved by security holders.
—
2,786,760
—
$35.01
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information as to certain relationships and related transactions and director independence will be incorporated
herein by reference to the Proxy Statement for our 2014 Annual Meeting of Stockholders to be filed within 120 days
after the end of the Company’s fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information as to principal accountant fees and services will be incorporated herein by reference to the Proxy
Statement for our 2014 Annual Meeting of Stockholders to be filed within 120 days after the end of the Company’s
fiscal year.
116
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Report of Independent Registered Public Accounting Firm
PART IV
Financial Statements
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, not required, or the information has
been otherwise supplied in the financial statements or notes to the financial statements.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Beginning
of Period
(Benefits)/Charges
to Income
Other
Balance at End
of Period
Year Ended December 31, 2011
Valuation allowance for deferred tax assets
Year Ended December 31, 2012
Valuation allowance for deferred tax assets
Year Ended December 31, 2013
Valuation allowance for deferred tax assets
3. Exhibits
$
$
— $
18
$
— $
18
21
$
3
—
(9) $
— $
18
21
12
2.1
3.1
3.2
4.1
4.2
Separation and Distribution Agreement, dated as of March 29, 2011, among Titan II Inc. (formerly
Northrop Grumman Corporation), Northrop Grumman Corporation (formerly New P, Inc.), Huntington
Ingalls Industries, Inc., Northrop Grumman Shipbuilding, Inc. and Northrop Grumman Systems
Corporation (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on April 4, 2011).
Restated Certificate of Incorporation of Huntington Ingalls Industries, Inc. (incorporated by reference
to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on April 4, 2011).
Restated Bylaws of Huntington Ingalls Industries, Inc. (incorporated by reference to Exhibit 3(ii) to the
Company's Current Report on Form 8-K filed on May 6, 2013).
Indenture, dated as of March 11, 2011, between Huntington Ingalls Industries, Inc. and
The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the Company's
Amendment No. 8 to Registration Statement on Form 10 filed on March 15, 2011).
Supplemental Indenture, dated as of March 30, 2011, among Huntington Ingalls Industries, Inc., the
Guarantors party thereto and The Bank of New York Mellon, as trustee (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-4 filed on December 15, 2011).
117
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Amended and Restated Credit Agreement, dated as of November 6, 2013, among Huntington Ingalls
Industries, Inc., as borrower, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative
agent, an issuing bank and a swingline lender, and Wells Fargo Bank, N.A., as a swingline lender
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on
November 12, 2013).
Form of Indemnification Agreement and Schedule of directors and officers who have entered into
such agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed on November 8, 2012).
Employee Matters Agreement, dated as of March 29, 2011, among Titan II Inc. (formerly Northrop
Grumman Corporation), Northrop Grumman Corporation (formerly New P, Inc.) and Huntington Ingalls
Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form
8-K filed on April 4, 2011).
Insurance Matters Agreement, dated as of March 29, 2011, among Titan II Inc. (formerly Northrop
Grumman Corporation), Northrop Grumman Corporation (formerly New P, Inc.) and Huntington Ingalls
Industries, Inc. (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form
8-K filed on April 4, 2011).
Intellectual Property License Agreement, dated as of March 29, 2011, between Northrop Grumman
Systems Corporation and Northrop Grumman Shipbuilding, Inc. (incorporated by reference to Exhibit
10.4 to the Company's Current Report on Form 8-K filed on April 4, 2011).
Tax Matters Agreement, dated as of March 29, 2011, among Northrop Grumman Corporation
(formerly New P, Inc.), Huntington Ingalls Industries, Inc. and Titan II Inc. (formerly Northrop
Grumman Corporation) (incorporated by reference to Exhibit 10.5 to the Company's Current Report
on Form 8-K filed on April 4, 2011).
Transition Services Agreement, dated as of March 29, 2011, among Northrop Grumman Systems
Corporation, Northrop Grumman Shipbuilding, Inc., Northrop Grumman Corporation (formerly New P,
Inc.) and Huntington Ingalls Industries, Inc. (incorporated by reference to Exhibit 10.6 to the
Company's Current Report on Form 8-K filed on April 4, 2011).
Loan Agreement, dated as of May 1, 1999, between Ingalls Shipbuilding, Inc. and the Mississippi
Business Finance Corporation relating to the Economic Development Revenue Bonds (Ingalls
Shipbuilding, Inc. Project) Taxable Series 1999A due 2024 (incorporated by reference to Exhibit 10.6
to the Company's Amendment No. 1 to Registration Statement on Form 10 filed on November 24,
2010).
Indenture of Trust, dated as of May 1, 1999, between the Mississippi Business Finance Corporation
and the First National Bank of Chicago, as Trustee, relating to the Economic Development Revenue
Bonds (Ingalls Shipbuilding, Inc. Project) Taxable Series 1999A due 2024 (incorporated by reference
to Exhibit 10.7 to the Company's Amendment No. 1 to Registration Statement on Form 10 filed on
November 24, 2010).
Loan Agreement, dated as of December 1, 2006, between Northrop Grumman Ship Systems, Inc. and
the Mississippi Business Finance Corporation relating to the Gulf Opportunity Zone Industrial
Development Revenue Bonds (Northrop Grumman Ship Systems, Inc. Project), Series 2006 due
2028 (incorporated by reference to Exhibit 10.8 to the Company's Amendment No. 1 to Registration
Statement on Form 10 filed on November 24, 2010).
Trust Indenture, dated as of December 1, 2006, between the Mississippi Business Finance
Corporation and The Bank of New York Trust Company, N.A., as Trustee, relating to the Gulf
Opportunity Zone Industrial Development Revenue Bonds (Northrop Grumman Ship Systems, Inc.
Project), Series 2006 due 2028 (incorporated by reference to Exhibit 10.9 to the Company's
Amendment No. 1 to Registration Statement on Form 10 filed on November 24, 2010).
10.12 Guaranty Agreement, dated as of May 1, 1999, between Litton Industries, Inc. and The First National
Bank of Chicago, as Trustee (incorporated by reference to Exhibit 10.10 to the Company's
Amendment No. 2 to Registration Statement on Form 10 filed on December 21, 2010).
118
10.13
Assumption of Guaranty of Litton Industries, Inc., dated as of January 1, 2003, by Northrop Grumman
Systems Corporation (incorporated by reference to Exhibit 10.11 to the Company's Amendment No. 2
to Registration Statement on Form 10 filed on December 21, 2010).
10.14 Guaranty Agreement, dated as of December 1, 2006, between Northrop Grumman Corporation and
The Bank of New York Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 10.12 to
the Company's Amendment No. 2 to Registration Statement on Form 10 filed on December 21, 2010).
10.15
10.16
10.17
Performance and Indemnity Agreement, dated as of March 30, 2011, between Huntington Ingalls
Industries, Inc. and Titan II Inc. (formerly Northrop Grumman Corporation) relating to the Gulf
Opportunity Zone Industrial Development Revenue Bonds (incorporated by reference to Exhibit 10.6
to the Company's Quarterly Report on Form 10-Q filed on May 11, 2011).
Performance and Indemnity Agreement, dated as of March 30, 2011, between Huntington Ingalls
Industries, Inc. and Titan II Inc. (formerly Northrop Grumman Corporation) relating to certain
performance guarantees associated with certain U.S. Navy shipbuilding contracts (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on May 11, 2011).
Ingalls Guaranty Performance, Indemnity and Termination Agreement, dated as of March 29, 2011,
among Huntington Ingalls Industries, Inc., Northrop Grumman Systems Corporation and Northrop
Grumman Shipbuilding, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q filed on May 11, 2011).
10.18*
Huntington Ingalls Industries Supplemental Plan 2 (incorporated by reference to Exhibit 10.16 to the
Company's Amendment No. 4 to Registration Statement on Form 10 filed on January 18, 2011) and
Amendment to Appendix G to the plan.
10.19*
Huntington Ingalls Industries ERISA Supplemental Plan (incorporated by reference to Exhibit 10.17 to
the Company's Amendment No. 4 to Registration Statement on Form 10 filed on January 18, 2011).
10.20*
Severance Plan for Elected and Appointed Officers of Huntington Ingalls Industries (incorporated by
reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed on May 9, 2012).
10.21*
First Amendment to Severance Plan for Elected and Appointed Officers of Huntington Ingalls
Industries As Amended and Restated (effective March 31, 2012) (incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q filed on November 8, 2012).
10.22*
Huntington Ingalls Industries Deferred Compensation Plan (incorporated by reference to Exhibit 10.19
to the Company's Amendment No. 4 to Registration Statement on Form 10 filed on January 18, 2011).
10.23*
Huntington Ingalls Industries Savings Excess Plan (incorporated by reference to Exhibit 10.20 to the
Company's Amendment No. 4 to Registration Statement on Form 10 filed on January 18, 2011).
10.24*
Huntington Ingalls Industries Officers Retirement Account Contribution Plan (incorporated by
reference to Exhibit 10.21 to the Company's Amendment No. 4 to Registration Statement on Form 10
filed on January 18, 2011).
10.25*
HII Newport News Shipbuilding Inc. Retirement Benefit Restoration Plan (incorporated by reference to
Exhibit 10.22 to the Company's Amendment No. 4 to Registration Statement on Form 10 filed on
January 18, 2011).
10.26*
Huntington Ingalls Industries Electronic Systems Executive Pension Plan (incorporated by reference
to Exhibit 10.23 to the Company's Amendment No. 4 to Registration Statement on Form 10 filed on
January 18, 2011).
10.27*
Huntington Ingalls Industries, Inc. Special Officer Retiree Medical Plan (incorporated by reference to
Exhibit 10.24 to the Company's Amendment No. 4 to Registration Statement on Form 10 filed on
January 18, 2011).
119
10.28*
Huntington Ingalls Industries, Inc. 2011 Long-Term Incentive Stock Plan (incorporated by reference to
Exhibit 10.25 to the Company's Amendment No. 8 to Registration Statement on Form 10 filed on
March 15, 2011).
10.29*
The 2011 Incentive Compensation Plan of Huntington Ingalls Industries, Inc. (incorporated by
reference to Exhibit 10.26 to the Company's Amendment No. 4 to Registration Statement on Form 10
filed on January 18, 2011).
10.30*
Form of Award Certificate applicable to Non-Employee Director Stock Units Granted Under the 2011
and 2012 Long-Term Incentive Stock Plans (incorporated by reference to Exhibit 10.30 to the
Company's Annual Report on Form 10-K filed on February 27, 2013).
10.31*
Form of Award Certificate applicable to Restricted Performance Stock Rights Granted Under the 2011
and 2012 Long-Term Incentive Stock Plans.
10.32*
Form of Award Certificate applicable to Restricted Stock Rights Granted Under the 2011 and 2012
Long-Term Incentive Stock Plans.
10.33*
Form of Award Certificate applicable to Stock Options Granted Under the 2011 and 2012 Long-Term
Incentive Stock Plans.
10.34*
Amendment to Terms and Conditions Applicable to 2012, 2013 and 2014 Restricted Performance
Stock Rights of Irwin F. Edenzon (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on December 17, 2013).
10.35*
Huntington Ingalls Industries, Inc. 2012 Long-Term Incentive Stock Plan (incorporated by reference to
Annex A to the Proxy Statement filed on April 3, 2012).
10.36*
Performance-based Compensation Policy of Huntington Ingalls Industries, Inc (incorporated by
reference to Annex B to the Proxy Statement filed on April 3, 2012).
11
Computation of Per Share Earnings (provided in Note 7 of the Notes to Consolidated Financial
Statements under the caption “Earnings Per Share”).
12.1
Ratio of Earnings to Fixed Charges.
21.1
List of subsidiaries of Huntington Ingalls Industries, Inc.
23.1
Consent of Deloitte & Touche LLP.
31.1
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial information for the company, formatted in XBRL (Extensible Business
Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive
Income, (ii) the Condensed Consolidated Statements of Financial Position, (iii) the Condensed
Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Changes in
Shareholders’ Equity, and (v) the Notes to Condensed Consolidated Financial Statements.
*Indicates management contract or compensatory plan or arrangement.
120
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of
February, 2014.
SIGNATURES
Huntington Ingalls Industries, Inc.
/s/ C. Michael Petters
C. Michael Petters
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ C. Michael Petters
C. Michael Petters
/s/ Barbara A. Niland
Barbara A. Niland
/s/ Douglass L. Fontaine II
Douglass L. Fontaine II
/s/ Thomas B. Fargo
Thomas B. Fargo
/s/ Robert F. Bruner
Robert F. Bruner
/s/ Artur G. Davis
Artur G. Davis
/s/ Victoria D. Harker
Victoria D. Harker
/s/ Anastasia D. Kelly
Anastasia D. Kelly
/s/ Paul D. Miller
Paul D. Miller
/s/ Thomas C. Schievelbein
Thomas C. Schievelbein
/s/ Karl M. von der Heyden
Karl M. von der Heyden
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2014
Corporate Vice President, Business
Management and Chief Financial Officer
(Principal Financial Officer)
Corporate Vice President, Controller
and Chief Accounting Officer
(Principal Accounting Officer)
February 27, 2014
February 27, 2014
Chairman
February 27, 2014
Director
Director
Director
Director
Director
Director
Director
121
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
Corporate Information
Corporate Headquarters
Huntington Ingalls Industries, Inc.
4101 Washington Avenue
Newport News, VA 23607
Tel: 757-380-2000
Stock Exchange Listing
Huntington Ingalls Industries Common Stock is listed
on the New York Stock Exchange
Ticker Symbol: HII
Transfer Agent/Shareholder Inquiries
Computershare Trust Company
P.O. Box 43078
Providence, RI 02940
Tel: 888-665-9610
www.computershare.com/investor
Investor Relations
757-380-2104 or 757-380-7911
e-mail: investor.relations@hii-co.com
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
901 East Byrd Street
Suite 820
Richmond, VA 23219
Tel: 804-697-1500
Fax: 804-697-1825
For reporting complaints about Huntington Ingalls accounting, internal
accounting controls or auditing matters or any other concerns to
the Board of Directors or the Audit Committee, you may write to:
Board of Directors
Huntington Ingalls Industries, Inc.
c/o Bruce N. Hawthorne, Corporate Secretary
4101 Washington Avenue
Newport News, VA 23607
e-mail: OfficeoftheGeneralCounsel@hii-co.com
Adjusted Segment Operating Income, Adjusted Total Operating
Income and Adjusted Diluted EPS Reconciliation
Year Ended December 31
($ in millions, except per share amounts)
2013
2012
2011
2010
Sales and Service Revenues
$6,820
$6,708
$6,575
$6,723
Segment Operating Income
Adjustment for non-cash goodwill impairment1
Adjusted Segment Operating Income
Adjusted Segment Operating Margin
Operating Income
Adjustment for non-cash goodwill impairment1
FAS/CAS Adjustment
Adjusted Total Operating Income
Adjusted Total Operating Margin
Net Earnings (Loss)
Adjustment for non-cash goodwill impairment1
FAS/CAS Adjustment2
Adjusted Net Earnings
Diluted Earnings (Loss) Per Share
Non-cash goodwill impairment per share
FAS/CAS Adjustment per share
Dilutive impact excluded due to net loss position3
Adjusted Diluted Earnings Per Share
567
—
567
8.3%
512
—
61
573
8.4%
261
—
40
301
5.18
—
0.79
—
5.97
457
—
457
6.8%
358
—
80
438
6.5%
146
—
52
198
2.91
—
1.04
—
3.95
122
290
412
6.3%
100
290
23
413
6.3%
(100)
290
15
205
(2.05)
5.94
0.31
(0.05)
4.15
294
—
294
4.4%
241
—
56
297
4.4%
131
—
36
167
2.68
—
0.74
—
3.42
1) Non-cash goodwill impairment charge recorded at the Ingalls segment as a result of adverse equity market conditions
that began in the second quarter of 2011 and the resultant decline in industry market multiples and HII’s market
capitalization.
2) Tax effected at 35% federal statutory rate.
3) This reflects the dilutive effect of stock awards excluded from the reported weighted-average diluted shares out-
standing due to the net loss position in 2011.
Adjusted Segment Operating Income, Adjusted Segment Operating Margin, Adjusted Total Operating Income, Adjusted
Operating Margin, Adjusted Net Earnings and Adjusted Diluted EPS are not measures of financial performance under U.S.
generally accepted accounting principles (GAAP) and may not be defined and calculated by other companies in the same
manner. These measures should be considered supplemental to and not a substitute for financial information prepared in
accordance with GAAP. We are providing these measures because management uses them for the purposes of evaluating
and forecasting the Company’s financial performance and believes that they provide additional insights into the Company’s
underlying business performance. We also believe that they allow investors to benefit from being able to assess our
operating performance in the context of how our principal customer, the U.S. Government, allows us to recover pension
and other post-retirement benefits costs and to better compare our operating performance to others in the industry on
that same basis.
Forward-Looking Statements
Statements in this annual report to stockholders, other than statements of historical fact,
constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could
cause our actual results to differ materially from those expressed in these statements. Factors
that may cause such differences include: changes in government and customer priorities
and requirements (including government budgetary constraints, shifts in defense spending,
and changes in customer short-range and long-range plans); our ability to obtain new con-
tracts, estimate our future contract costs and perform our contracts effectively; changes in
government regulations and procurement processes and our ability to comply with such
requirements; our ability to realize the expected benefits from consolidation of our Ingalls
facilities; natural disasters; adverse economic conditions in the United States and globally;
risks related to our indebtedness and leverage; and other risk factors discussed in our filings
with the U.S. Securities and Exchange Commission. There may be other risks and uncer-
tainties that we are unable to predict at this time or that we currently do not expect to have
a material adverse effect on our business, and we undertake no obligation to update any
forward-looking statements. You should not place undue reliance on any forward-looking
statements that we may make.
Our Annual Report on Form 10-K for the year ended December 31, 2013 forms a part of this 2013 Annual Report. If you would like an additional copy of our Form 10-K,
you can access it through the Investor Relations page of our website (www.huntingtoningalls.com) or at the Securities and Exchange Commission website (www.sec.gov).
The Form 10-K is also available free of charge by writing to us at: Corporate Secretary, Huntington Ingalls Industries, Inc., 4101 Washington Avenue, Newport News, Virginia
23607. Exhibits to the Form 10-K are also available if requested.
BoARd of diRectoRs
Thomas b. Fargo
Chairman of the board
Huntington Ingalls Industries
C. Michael Petters
President and Chief Executive Officer
Huntington Ingalls Industries
robert F. bruner
Dean, Darden Graduate School
of business Administration,
University of Virginia
Artur G. Davis
Speaker and Commentator on
Public Affairs
Victoria D. Harker
Chief Financial Officer,
Gannett Co., Inc.
Anastasia D. Kelly
Co-Managing Partner,
DLA Piper Americas
Chairman of Governance
and Policy Committee
Paul D. Miller
retired Chairman and
Chief Executive Officer,
Alliant Techsystems, Inc.
Chairman of Compensation
Committee
Thomas C. Schievelbein
Chairman, President and
Chief Executive Officer,
The brink’s Company
Chairman of Finance Committee
Karl M. von der Heyden
retired Vice Chairman, PepsiCo, Inc.
Chairman of Audit Committee
senioR LeAdeRship And eLected officeRs
C. Michael Petters
President and
Chief Executive Officer
barbara A. Niland
Corporate Vice President
business Management and
Chief Financial Officer
Irwin F. Edenzon
Corporate Vice President
and President,
Ingalls Shipbuilding
Matthew J. Mulherin
Corporate Vice President
and President,
Newport News Shipbuilding
bruce N. Hawthorne
Corporate Vice President
General Counsel and
Secretary
Jerri Fuller Dickseski
Corporate Vice President
Communications
William r. Ermatinger
Corporate Vice President
and Chief Human resources
Officer
Christopher D. Kastner
Corporate Vice President and
General Manager, Corporate
Development
Mitchell b. Waldman
Corporate Vice President
Government and Customer
relations
Douglass L. Fontaine II
Corporate Vice President
Controller and
Chief Accounting Officer
D. r. Wyatt
Corporate Vice President
and Treasurer
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Huntington Ingalls Industries
4101 Washington Avenue
Newport News, VA 23607
757 380 2000
www.huntingtoningalls.com