10-Q 1 hii-20220331.htm 10-Q hii-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________
FORM 10-Q
 ______________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-34910
  ______________________________________________________________
HUNTINGTON INGALLS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________
Delaware90-0607005
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4101 Washington Avenue Newport News, Virginia 23607
(Address of principal executive offices and zip code)
(757380-2000
(Registrant’s telephone number, including area code)
 ______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockHIINew York Stock Exchange
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 April 29, 2022, 40,047,195 shares of the registrant's common stock were outstanding.



Table of Contents                                        
TABLE OF CONTENTS
 
  
PART I – FINANCIAL INFORMATIONPage
Item 1.
Item 2.
Item 3.
Item 4.
PART II – OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Table of Contents                                        
HUNTINGTON INGALLS INDUSTRIES, INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
 Three Months Ended
March 31
(in millions, except per share amounts)20222021
Sales and service revenues
Product sales$1,724 $1,721 
Service revenues852 557 
Sales and service revenues2,576 2,278 
Cost of sales and service revenues
Cost of product sales1,468 1,454 
Cost of service revenues759 482 
Income from operating investments, net7 8 
Other income and gains (losses), net(1)3 
General and administrative expenses217 206 
Operating income138 147 
Other income (expense)
Interest expense(26)(21)
Non-operating retirement benefit71 46 
Other, net(7)1 
Earnings before income taxes176 173 
Federal and foreign income tax expense36 25 
Net earnings$140 $148 
Basic earnings per share$3.50 $3.68 
Weighted-average common shares outstanding40.0 40.2 
Diluted earnings per share$3.50 $3.68 
Weighted-average diluted shares outstanding40.0 40.2 
Dividends declared per share$1.18 $1.14 
Net earnings from above$140 $148 
Other comprehensive income
Change in unamortized benefit plan costs(86)29 
Other 2 
Tax benefit (expense) for items of other comprehensive income22 (7)
Other comprehensive (loss) income, net of tax(64)24 
Comprehensive income$76 $172 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1

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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
($ in millions)March 31, 2022December 31, 2021
Assets
Current Assets
Cash and cash equivalents$330 $627 
Accounts receivable, net of allowance for doubtful accounts of $2 million as of 2022 and $9 million as of 2021
671 433 
Contract assets1,349 1,310 
Inventoried costs, net188 161 
Income taxes receivable171 209 
Prepaid expenses and other current assets77 50 
Total current assets2,786 2,790 
Property, plant, and equipment, net of accumulated depreciation of $2,193 million as of 2022 and $2,149 million as of 2021
3,094 3,107 
Operating lease assets235 241 
Goodwill2,628 2,628 
Other intangible assets, net of accumulated amortization of $776 million as of 2022 and $741 million as of 2021
1,124 1,159 
Pension plan assets275 281 
Miscellaneous other assets415 421 
Total assets$10,557 $10,627 
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable$544 $603 
Accrued employees’ compensation336 361 
Current portion of postretirement plan liabilities137 137 
Current portion of workers’ compensation liabilities254 252 
Contract liabilities685 651 
Other current liabilities465 423 
Total current liabilities2,421 2,427 
Long-term debt3,200 3,298 
Pension plan liabilities398 351 
Other postretirement plan liabilities365 368 
Workers’ compensation liabilities509 506 
Long-term operating lease liabilities189 194 
Deferred tax liabilities293 313 
Other long-term liabilities360 362 
Total liabilities7,735 7,819 
Commitments and Contingencies (Note 14)
Stockholders’ Equity
Common stock, $0.01 par value; 150 million shares authorized; 53.5 million shares issued and 40.1 million shares outstanding as of March 31, 2022, and 53.4 million shares issued and 40.0 million shares outstanding as of December 31, 2021
1 1 
Additional paid-in capital1,995 1,998 
Retained earnings3,982 3,891 
Treasury stock(2,169)(2,159)
Accumulated other comprehensive loss(987)(923)
Total stockholders’ equity2,822 2,808 
Total liabilities and stockholders’ equity$10,557 $10,627 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2

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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended
March 31
($ in millions)20222021
Operating Activities
Net earnings$140 $148 
Adjustments to reconcile to net cash provided by (used in) operating activities
Depreciation52 52 
Amortization of purchased intangibles35 13 
Amortization of debt issuance costs2 2 
Provision for doubtful accounts(7)— 
Stock-based compensation9 9 
Deferred income taxes2 31 
Gain on disposition of business (3)
Loss (gain) on investments in marketable securities9 (4)
Change in
Accounts receivable(231)(10)
Contract assets(39)(239)
Inventoried costs(27)(5)
Prepaid expenses and other assets7 (6)
Accounts payable and accruals 116 
Retiree benefits(34)(65)
Other non-cash transactions, net(1)4 
Net cash (used in) provided by operating activities(83)43 
Investing Activities
Capital expenditures
Capital expenditure additions(43)(60)
Grant proceeds for capital expenditures 1 
Investment in affiliates (12)
Proceeds from disposition of business 25 
Net cash used in investing activities(43)(46)
Financing Activities
Repayment of long-term debt(100)— 
Dividends paid(47)(46)
Repurchases of common stock(10)(49)
Employee taxes on certain share-based payment arrangements(14)(7)
Net cash used in financing activities(171)(102)
Change in cash and cash equivalents(297)(105)
Cash and cash equivalents, beginning of period627 512 
Cash and cash equivalents, end of period$330 $407 
Supplemental Cash Flow Disclosure
Cash paid for income taxes (net of refunds)$ $(42)
Cash paid for interest$11 $1 
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable$1 $12 
Accrued repurchases of common stock$ $1 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3

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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) 
Three Months Ended March 31, 2022 and 2021
($ in millions)
Common StockAdditional Paid-in CapitalRetained Earnings (Deficit)Treasury StockAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Balance as of December 31, 2020$1 $1,972 $3,533 $(2,058)$(1,547)$1,901 
Net earnings— — 148 — — 148 
Dividends declared ($1.14 per share)— — (46)— — (46)
Stock-based compensation— 2 — — — 2 
Other comprehensive income, net of tax— — — — 24 24 
Treasury stock activity— — — (50)— (50)
Balance as of March 31, 2021$1 $1,974 $3,635 $(2,108)$(1,523)$1,979 
Balance as of December 31, 2021$1 $1,998 $3,891 $(2,159)$(923)$2,808 
Net earnings  140   140 
Dividends declared ($1.18 per share)  (47)  (47)
Stock-based compensation (3)(2)  (5)
Other comprehensive loss, net of tax    (64)(64)
Treasury stock activity   (10) (10)
Balance as of March 31, 2022$1 $1,995 $3,982 $(2,169)$(987)$2,822 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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

1. DESCRIPTION OF BUSINESS

Huntington Ingalls Industries, Inc. ("HII" or the "Company") is an all-domain defense and technologies partner, recognized worldwide as America’s largest shipbuilder. HII is organized into three reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Mission Technologies (formerly named Technical Solutions). For more than a century, the Company's Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. The Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial services marketplace.

HII conducts most of its business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, the Company participates in many high-priority U.S. defense programs. Through its Ingalls segment, HII is a 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 Arleigh Burke class (DDG 51) destroyers. Through its Newport News segment, HII is the nation's sole designer, builder, and refueler of nuclear-powered aircraft carriers, and one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy. The Mission Technologies segment provides a wide range of services and products, including C5ISR systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive solutions; platform modernization; and critical nuclear operations.

2. BASIS OF PRESENTATION

Principles of Consolidation - The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). All intercompany transactions and balances are eliminated in consolidation. For classification of current assets and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year.

These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management's long-standing practice to establish interim closing dates using a "fiscal" calendar, which requires the businesses to close their books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. The effects of this practice only exist for interim periods within a reporting year.

Accounting Estimates - The preparation of the Company's unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, and actual results could differ materially from those estimates.

Fair Value of Financial Instruments - Except for the Company's long-term debt, the carrying amounts of the Company's financial instruments recorded at historical cost approximate fair value due to the short-term nature of the instruments and low credit risk associated with the respective counterparties.

The Company maintains multiple grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $216 million and $220 million as of March 31, 2022, and December 31, 2021, respectively, and are
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presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position. These trusts consist primarily of investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.

The estimated fair values of the Company's total long-term debt as of March 31, 2022, and December 31, 2021, were $3,184 million and $3,449 million, respectively. The fair values of the Company's long-term debt were calculated based on recent trades of the Company's debt instruments in inactive markets, which fall within Level 2 under the fair value hierarchy.

Debt Prepayment - For the three months ended March 31, 2022, the Company prepaid $100 million of long-term debt related to its Term Loan due August 19, 2024.

3. ACCOUNTING STANDARDS UPDATES

Accounting pronouncements issued but not effective until after December 31, 2022, are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.

4. ACQUISITIONS

On August 19, 2021, the Company acquired all of the outstanding common stock of Alion Holding Corp., the parent company of Alion Science and Technology Corporation (“Alion”), a technology-driven solutions provider. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805 Business Combinations. The preliminary purchase price was $1.79 billion, including $148 million of cash received in the acquisition. In connection with the acquisition, the Company recorded $1,024 million of goodwill, which included the value of Alion's workforce, and $720 million of intangible assets related to customer relationships and existing contract backlog. The goodwill is attributable to operational synergies and growth opportunities and was allocated to the Company's Mission Technologies segment. None of the goodwill resulting from this acquisition is expected to be amortizable for tax purposes.

Alion provides advanced engineering and research and development services in the areas of intelligence, surveillance, and reconnaissance, military training and simulation, cyber, data analytics, and other next-generation technology based solutions to the DoD and intelligence community customers, with the U.S. Navy representing about one-third of current annual revenues.

Pro Forma Financial Information

The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the acquisition of Alion as if it had occurred on January 1, 2021.
Three Months Ended
March 31
 
($ in millions, except per share amounts)2022Pro Forma (Unaudited) 2021
Sales and service revenues$2,576 $2,593 
Net earnings$140 $160 
Basic earnings per share$3.50 $3.98 
Diluted earnings per share$3.50 $3.98 

These unaudited pro forma results include adjustments associated with the acquisition, such as the amortization of acquired intangible assets and interest expense on debt financing.

The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These
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results also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.

5. STOCKHOLDERS' EQUITY

Treasury Stock - In November 2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $2.2 billion to $3.2 billion and an extension of the term of the program to October 31, 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the three months ended March 31, 2022, the Company repurchased 50,549 shares at an aggregate cost of $10 million. For the three months ended March 31, 2021, the Company repurchased 291,581 shares at an aggregate cost of $50 million, of which approximately $1 million was not yet settled for cash as of March 31, 2021. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.

Dividends - The Company declared cash dividends per share of $1.18 and $1.14 for the three months ended March 31, 2022 and 2021, respectively. The Company paid cash dividends totaling $47 million and $46 million for the three months ended March 31, 2022 and 2021, respectively.

Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss as of March 31, 2022, was comprised of unamortized benefit plan costs of $987 million. The accumulated other comprehensive loss as of December 31, 2021, was comprised of unamortized benefit plan costs of $923 million.

The changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2022 and 2021, were as follows:
($ in millions)Benefit PlansOtherTotal
Balance as of December 31, 2020$(1,546)$(1)$(1,547)
Other comprehensive income before reclassifications— 2 2 
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service credit1
3 — 3 
Amortization of net actuarial loss1
26 — 26 
Tax expense for items of other comprehensive income(7)— (7)
Net current period other comprehensive income22 2 24 
Balance as of March 31, 2021$(1,524)$1 $(1,523)
Balance as of December 31, 2021$(923)$— $(923)
Other comprehensive loss before reclassifications(97) (97)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
3  3 
Amortization of net actuarial loss1
8  8 
Tax benefit for items of other comprehensive (loss) income22  22 
Net current period other comprehensive loss(64) (64)
Balance as of March 31, 2022$(987)$ $(987)
1
These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 14: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021, was $3 million and $7 million, respectively.

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6. EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows:
 Three Months Ended
March 31
(in millions, except per share amounts)20222021
Net earnings$140 $148 
Weighted-average common shares outstanding40.0 40.2 
Net dilutive effect of stock awards — 
Dilutive weighted-average common shares outstanding40.0 40.2 
Earnings per share - basic$3.50 $3.68 
Earnings per share - diluted$3.50 $3.68 

Under the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of 0.4 million Restricted Performance Stock Rights ("RPSRs") for each of the three months ended March 31, 2022 and 2021.

7. REVENUE

Disaggregation of Revenue

The Company's contracts with customers typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials.

Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.

Fixed-Price Incentive Contracts - Fixed-price incentive contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.

Cost-Type Contracts - Cost-type contracts provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the work within some specified time and some stated dollar limitation.

Time and Materials - Time and materials contracts specify a fixed hourly billing rate for each direct labor hour expended and reimbursement for allowable material costs and expenses.

The Company monitors its policies and procedures with respect to its 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 Defense Contract Audit Agency ("DCAA") routinely audits the costs the Company incurs that are allocated to U.S. Government contracts.

The following tables present revenues on a disaggregated basis, in a manner that reconciles with the Company's reportable segment disclosures, for the following categories: product versus service type, customer type, contract type, and major program. The Company believes that this level of disaggregation provides investors with information to evaluate the Company’s financial performance and provides the Company with information to make capital allocation decisions in the most appropriate manner.



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Three Months Ended March 31, 2022
($ in millions)IngallsNewport NewsMission TechnologiesIntersegment EliminationsTotal
Revenue Type
Product sales$578 $1,121 $25 $— $1,724 
Service revenues50 267 535 — 852 
Intersegment3 2 30 (35)— 
Sales and service revenues$631 $1,390 $590 $(35)$2,576 
Customer Type
Federal$628 $1,388 $547 $— $2,563 
Commercial— — 13 — 13 
Intersegment3 2 30 (35)— 
Sales and service revenues$631 $1,390 $590 $(35)$2,576 
Contract Type
Firm fixed-price$2 $8 $64 $— $74 
Fixed-price incentive576 703 — — 1,279 
Cost-type50 677 425 — 1,152 
Time and materials— — 71 — 71 
Intersegment3 2 30 (35)— 
Sales and service revenues$631 $1,390 $590 $(35)$2,576 

Three Months Ended March 31, 2021
($ in millions)IngallsNewport NewsMission TechnologiesIntersegment EliminationsTotal
Revenue Type
Product sales$604 $1,101 $16 $— $1,721 
Service revenues42 304 211 — 557 
Intersegment3 2 32 (37)— 
Sales and service revenues$649 $1,407 $259 $(37)$2,278 
Customer Type
Federal$646 $1,405 $206 $— $2,257 
Commercial— — 21 — 21 
Intersegment3 2 32 (37)— 
Sales and service revenues$649 $1,407 $259 $(37)$2,278 
Contract Type
Firm fixed-price$11 $8 $39 $— $58 
Fixed-price incentive595 722 3 — 1,320 
Cost-type40 675 120 — 835 
Time and materials— — 65 — 65 
Intersegment3 2 32 (37)— 
Sales and service revenues$649 $1,407 $259 $(37)$2,278 


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Three Months Ended
March 31
Three Months Ended
March 31
($ in millions)20222021
Major Programs
Amphibious assault ships$363 $357 
Surface combatants and coast guard cutters265 287 
Other3 5 
Total Ingalls631 649 
Aircraft carriers742 758 
Submarines470 457 
Other178 192 
Total Newport News1,390 1,407 
Government and energy services590 245 
Oil and gas services— 14 
Total Mission Technologies590 259 
Intersegment eliminations(35)(37)
Sales and service revenues$2,576 $2,278 

As of March 31, 2022, the Company had $47.9 billion of remaining performance obligations. The Company expects to recognize approximately 35% of its remaining performance obligations as revenue through 2023, an additional 30% through 2025, and the balance thereafter.
Cumulative Catch-up Adjustments

For the three months ended March 31, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $45 million and $0.89, respectively. For the three months ended March 31, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $50 million and $0.98, respectively.

Cumulative catch-up adjustments for the three months ended March 31, 2022, included a favorable adjustment of $17 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.34. Cumulative catch-up adjustments for the three months ended March 31, 2021, included a favorable adjustment of $25 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.50.

Contract Balances

The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. The Company’s net contract assets increased $5 million from December 31, 2021, to March 31, 2022, primarily resulting from an increase in contract assets related to revenue on certain U.S. Navy contracts. For the three months ended March 31, 2022, the Company recognized revenue of $379 million related to its contract liabilities as of December 31, 2021. For the three months ended March 31, 2021, the Company recognized revenue of $397 million related to its contract liabilities as of December 31, 2020.

8. SEGMENT INFORMATION

The Company is organized into three reportable segments: Ingalls, Newport News, and Mission Technologies, consistent with how management makes operating decisions and assesses performance.

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The following table presents segment results for the three months ended March 31, 2022 and 2021:
 Three Months Ended
March 31
($ in millions)20222021
Sales and Service Revenues
Ingalls$631 $649 
Newport News1,390 1,407 
Mission Technologies590 259 
Intersegment eliminations(35)(37)
Sales and service revenues$2,576 $2,278 
Operating Income
Ingalls$86 $91 
Newport News81 93 
Mission Technologies9 7 
Segment operating income176 191 
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment(37)(40)
Non-current state income taxes(1)(4)
Operating income $138 $147 

Operating FAS/CAS Adjustment - The Operating FAS/CAS Adjustment represents the difference between the service cost component of our pension and other postretirement benefit plan expense determined in accordance with GAAP ("FAS") and our pension and other postretirement expense under CAS.

The following table presents the Company's assets by segment:
($ in millions)March 31, 2022December 31, 2021
Assets
Ingalls$1,707 $1,659 
Newport News4,389 4,179 
Mission Technologies3,473 3,553 
Corporate988 1,236 
Total assets$10,557 $10,627 

9. INVENTORIED COSTS, NET
Inventoried costs were comprised of the following:
($ in millions)March 31, 2022December 31, 2021
Production costs of contracts in process1
$68 $37 
Raw material inventory120 124 
Total inventoried costs, net$188 $161 
1 Includes amounts capitalized pursuant to applicable provisions of the FAR and CAS.

10. INTANGIBLE ASSETS

The Company's intangible assets are being amortized on a straight-line basis or a method based on the pattern of benefits over their estimated useful lives. Net intangible assets consist primarily of amounts relating to customer relationships and existing contract backlog within Mission Technologies, as well as nuclear-powered aircraft carrier and submarine program intangible assets, with an aggregate weighted-average useful life of 29 years based on the long life cycle of the related programs. Aggregate amortization expense was $35 million and $13 million for the three months ended March 31, 2022 and 2021, respectively.

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In connection with the Alion purchase in 2021, the Company recorded $720 million of intangible assets pertaining to customer relationships and existing contract backlog, which is being amortized using the pattern of benefits method over a weighted-average life of 15 years.

11. INCOME TAXES

The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended March 31, 2022 and 2021, were 20.5% and 14.5%, respectively. The higher effective tax rate for the three months ended March 31, 2022, was primarily attributable to a tax loss associated with the sale of the Company’s oil and gas business recorded in 2021.

For the three months ended March 31, 2022, the Company’s effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%. For the three months ended March 31, 2021, the Company’s effective tax rate differed from the federal statutory tax rate primarily as a result of the loss associated with the sale of its oil and gas business.

The Company's unrecognized tax benefits increased by $2 million during the three months ended March 31, 2022. As of March 31, 2022, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $83 million. Assuming a sustainment of these tax positions, the reversal of $64 million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. For the three months ended March 31, 2022, interest resulting from the unrecognized tax benefits noted above increased income tax expense by $1 million.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in unrecognized state tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

12. INVESTIGATIONS, CLAIMS, AND LITIGATION

The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB ASC 450 Contingencies, the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. For matters where a material loss is probable or reasonably possible and the amount of loss cannot be reasonably estimated, but the Company is able to reasonably estimate a range of possible losses, the Company will disclose such estimated range in these notes. This estimated range is based on information currently available to the Company and involves elements of judgment and significant uncertainties. Any estimated range of possible loss does not represent the Company's maximum possible loss exposure. For matters as to which the Company is not able to reasonably estimate a possible loss or range of loss, the Company will indicate the reasons why it is unable to estimate the possible loss or range of loss. For matters not specifically described in these notes, the Company does not believe, based on information currently available to it, that it is reasonably possible that the liabilities, if any, arising from such investigations, claims, and litigation will have a material effect on its consolidated financial position, results of operations, or cash flows. The Company has, in certain cases, provided disclosure regarding certain matters for which the Company believes at this time that the likelihood of material loss is remote.

False Claims Act Complaint - In 2016, the Company was made aware that it is a defendant in a qui tam False Claims Act lawsuit pending in the U.S. District Court for the Middle District of Florida related to the Company’s purchases of allegedly non-conforming parts from a supplier for use in connection with U.S. Government contracts. In August 2019, the Department of Justice (“DoJ”) declined to intervene in the lawsuit, and the lawsuit was unsealed. The court dismissed the complaint in September 2021, and the plaintiff has appealed the dismissal to the United States Court of Appeals for the 11th Circuit.

Insurance Claims - In September 2020, the Company filed a complaint in the Superior Court, State of Vermont, Franklin Unit, seeking a judgment declaring that the Company's business interruption and other losses associated with COVID-19 are covered by the Company's property insurance program. A total of 32 reinsurers are named as
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defendants in the complaint. The Company also has initiated arbitration proceedings against six other reinsurers seeking similar relief. Prior to filing the complaint and initiating the arbitration proceedings, the Company provided a notice of loss to the reinsurers, but, to date, none of the reinsurers have acknowledged coverage. The full extent of the Company's losses resulting from COVID-19 have not yet been determined. In July 2021, the Vermont court granted the reinsurers’ motion for judgment on the pleadings, finding that, because the Company continued to operate through the pandemic, the Company’s reduction of business not accompanied by a complete loss of use fell short of the required “direct physical loss or damage to property.” The Company has appealed the decision to the Vermont Supreme Court. Although the Company still believes its position is well-founded, no assurances can be provided regarding the ultimate resolution of this matter.
In September 2021, the Company filed a complaint in the Superior Court of Delaware, seeking a judgment against certain insurers for breach of contract and breach of the implied covenant of good faith and fair dealing under three representations and warranties insurance policies purchased in connection with the Company’s acquisition of Hydroid. The policies insure the Company against losses relating to the seller’s breach of certain representations and warranties in the Hydroid acquisition agreement. The coverage limit under the insurance policies is $70 million, and the Company believes it has incurred losses equal to at least that amount as a result of breaches of the acquisition agreement. No assurances can be provided regarding the ultimate resolution of this matter.

U.S. Government Investigations and Claims - Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil, or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.

Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. The cases allege various injuries, including those associated with pleural plaque disease, asbestosis, cancer, mesothelioma, and other alleged asbestos related conditions. In some cases, several of HII's former executive officers are also named as defendants. In some instances, partial or full insurance coverage is available to the Company for its liability and that of its former executive officers. The costs to resolve cases during the three months ended March 31, 2022 and 2021, were immaterial individually and in the aggregate. The Company’s estimate of asbestos-related liabilities is subject to uncertainty because liabilities are influenced by numerous variables that are inherently difficult to predict. Key variables include the number and type of new claims, the litigation process from jurisdiction to jurisdiction and from case to case, reforms made by state and federal courts, and the passage of state or federal tort reform legislation. Although the Company believes the ultimate resolution of current cases will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.

Other Litigation - The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the "Republic") since 2002 over a contract for the repair, refurbishment, and modernization at Ingalls of two foreign-built frigates. In March 2014, the Company filed an arbitral statement of claim asserting breaches of the contract. The Republic denied the Company’s allegations and asserted counterclaims. In February 2018, the arbitral tribunal awarded the Company approximately $151 million on its claims and awarded the Republic approximately $22 million on its counterclaims. The Company is seeking to enforce and execute upon the award in multiple jurisdictions. No assurances can be provided regarding the ultimate resolution of this matter.
The Company is party to various other claims, legal proceedings, and investigations that arise in the ordinary course of business, including U.S. Government investigations that could result in administrative, civil, or criminal proceedings involving the Company. The Company is a contractor with the U.S. Government, and such proceedings can therefore include False Claims Act allegations against the Company. Although the Company believes that the resolution of these other claims, legal proceedings, and investigations will not have a material effect on its consolidated financial position, results of operations, or cash flows, the Company cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.
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13. COMMITMENTS AND CONTINGENCIES

Contract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances and recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. As of March 31, 2022, amounts recognized in connection with claims and requests for equitable adjustment were not material individually or in the aggregate.

Guarantees of Performance Obligations - From time to time in the ordinary course of business, HII enters into joint ventures, teaming agreements, and other business arrangements in connection with the Company's products and services or to pursue strategic objectives. The Company attempts to limit its exposure under these arrangements to its investment or the extent of obligations under the applicable contract. In some cases, however, HII may be required to guarantee performance of the arrangement's obligations and, in such cases, generally obtains cross-indemnification from the other members of the arrangement.

In the ordinary course of business, the Company may guarantee obligations of its subsidiaries under certain contracts. Generally, the Company is liable under such guarantees only if its subsidiary is unable to perform its obligations. Historically, the Company has not incurred any substantial liabilities resulting from these guarantees. As of March 31, 2022, the Company was not aware of any existing event of default that would require it to satisfy any of these guarantees.

Environmental Matters - The estimated cost to complete environmental remediation has been accrued when 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 remediating contaminated sites. These estimates are reviewed periodically and adjusted to reflect changes in facts and technical and legal circumstances. Management estimates that as of March 31, 2022, the probable estimable future cost for environmental remediation was immaterial. Factors that could result in changes to the Company's estimates include: modification of planned remedial actions, increases or decreases in the estimated time required to remediate, changes to the determination of legally responsible parties, discovery of more extensive contamination than anticipated, changes in laws and regulations affecting remediation requirements, and improvements in remediation technology. Should other PRPs not pay their allocable share of remediation costs, the Company may incur costs exceeding those already estimated and accrued. In addition, there are certain potential remediation sites where the costs of remediation cannot be reasonably estimated. Although management cannot predict whether new information gained as remediation progresses or the Company incurs additional remediation obligations 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 letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of March 31, 2022, the Company had $15 million in issued but undrawn letters of credit and $276 million of surety bonds outstanding.

U.S. Government Claims - From time to time, the U.S. Government communicates to the Company potential claims, disallowed costs, and penalties concerning prior costs incurred by the Company with which the U.S. Government disagrees. When such preliminary findings are presented, the Company and U.S. Government representatives engage in discussions, from which the Company evaluates the merits of the claims and assesses the amounts being questioned. Although the Company believes that the resolution of any of these matters will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict the ultimate outcome of these matters.
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Other Matters - In 1985, the Company and the U.S. Navy entered into a settlement agreement to resolve disputes associated with billing and allocating to contracts the cost of workers’ compensation self-insurance, among other matters. In 2016, the DCAA opined that the 1985 settlement agreement did not comply with certain CAS standards and referred the matter to a U.S. Navy Contracting Officer. In December 2020, the Contracting Officer issued a determination that the 1985 settlement agreement did not comply with CAS and directed the Company to develop and implement a different process to bill and allocate the cost of workers’ compensation self-insurance. Under the 1985 settlement agreement, the Company has not recognized as allowable cumulative billable costs of approximately $120 million resulting from the difference between CAS and U.S. GAAP Financial Accounting Standards ("FAS") treatment of workers’ compensation cost. Under the 1985 settlement agreement, these costs would be recognized as allowable billable costs in future periods. Though the Company believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, the Company will seek to negotiate a resolution of the matter with the Contracting Officer. If a resolution results in the use of a different treatment or billing methodology that does not provide for the Company to recognize as allowable the CAS to FAS difference, the resolution could have a material effect on the Company’s consolidated financial position, results of operations, or cash flows, including an inability to recover any or all of the $120 million of costs not yet billed to the customer.

In January 2022, the Navy Contracting Officer issued a written determination that the Ingalls Shipbuilding Material Management and Accounting System had three significant deficiencies, resulting in a 5% withhold of payments on certain invoices issued under one contract. Ingalls Shipbuilding subsequently submitted a corrective action plan, which was approved in February 2022, and the withhold was reduced to 2%. The withhold will terminate and withheld funds returned to the Company when the Contracting Officer determines that the significant deficiencies have been corrected. Although the Company believes the ultimate resolution of this matter will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict or give assurances regarding the ultimate outcome of this matter.

Collective Bargaining Agreements - Of the Company's approximately 44,000 employees, approximately 45% are covered by a total of nine collective bargaining agreements and one site stabilization agreement. Newport News has three collective bargaining agreements covering represented employees, including one with United Steelworkers Local 8888 (Newport News) (the “USWs”), which covers approximately 50% of Newport News employees. The collective bargaining agreement with the USWs expired in November 2021, and the Company reached a tentative agreement with representatives of the USWs in February 2022. The members of the USWs bargaining unit ratified the contract in March 2022. The Company believes its relationship with its employees is satisfactory.

Purchase Obligations - Periodically the Company enters into agreements to purchase goods or services that are enforceable and legally binding on the Company and 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 obligations are primarily comprised of open purchase order commitments to vendors and subcontractors pertaining to funded contracts.

14. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS

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

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The costs of the Company's defined benefit pension plans and other postretirement benefit plans for the three months ended March 31, 2022 and 2021, were as follows:
 Three Months Ended
March 31
Pension BenefitsOther Benefits
($ in millions)2022202120222021
Components of Net Periodic Benefit Cost
Service cost$45 $50 $2 $3 
Interest cost64 60 4 3 
Expected return on plan assets(150)(138) — 
Amortization of prior service cost (credit)4 4 (1)(1)
Amortization of net actuarial loss (gain)9 27 (1)(1)
Net periodic benefit (income) cost$(28)$3 $4 $4 

The Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the three months ended March 31, 2022 and 2021:
 Three Months Ended
March 31
($ in millions)20222021
Pension plans
Discretionary
Qualified$ $60 
Non-qualified3 2 
Other benefit plans7 10 
Total contributions$10 $72 

As of March 31, 2022, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2022.

In March 2022, 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 $97 million.

15. STOCK COMPENSATION PLANS

During the three months ended March 31, 2022 and 2021, the Company issued new stock awards as follows:

Restricted Performance Stock Rights - For the three months ended March 31, 2022, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $204.10. These rights are subject to cliff vesting on December 31, 2024. For the three months ended March 31, 2021, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $178.41. These rights are subject to cliff vesting on December 31, 2023. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between 0% and 200% of grant date value.

For the three months ended March 31, 2022 and 2021, awards of approximately 0.2 million and