OREANDA-NEWS. Huntington Ingalls Industries (NYSE:HII) reported second quarter 2016 revenues of $1.7 billion, down 2.6 percent from the same period last year. Diluted earnings per share in the quarter was $2.80, compared to $3.20 in the same period of 2015. Diluted earnings per share in the second quarter of 2015 included a favorable insurance litigation settlement of $1.80 per share and a goodwill impairment charge of $0.96 per share.

Operating income in the quarter was $217 million, compared to $269 million in the same period last year. Operating margin in the quarter was 12.8 percent, compared to 15.4 percent in the same period last year. Operating income and margin in the second quarter of 2015 included a favorable insurance litigation settlement of $136 million and a goodwill impairment charge of $59 million. Adjusting for these items, adjusted operating income in the quarter increased $25 million to $217 million from $192 million in the second quarter of last year, and adjusted operating margin in the quarter increased 184 basis points to 12.8 percent, from 10.9 percent in the second quarter of 2015. These increases were primarily driven by strong operating performance at Ingalls Shipbuilding and the favorable FAS/CAS Adjustment.

New business awards for the quarter were approximately $900 million, bringing total backlog to $20.5 billion as of June 30, 2016.

“We delivered another quarter of solid operating results driven by strong program execution at Ingalls,” said Mike Petters, HII’s president and CEO. “We had a very strong first half of the year. However, the second half will be challenging at Newport News as we continue to work through the test program on CVN-78 Gerald R. Ford and get the ship ready for sea trials and delivery, while Ingalls focuses on delivering DDG-113 John Finn and NSC-6 Munro.”

Results of Operations

  Three Months Ended     Six Months Ended  
  June 30     June 30  
(in millions, except per share amounts) 2016 2015 % Change   2016 2015 % Change
Sales and service revenues $ 1,700   $ 1,745   (2.6 )%   $ 3,463   $ 3,315   4.5 %
Operating income 217   269   (19.3 )%   415   425   (2.4 )%
  Operating margin % 12.8 % 15.4 % (265) bps     12.0 % 12.8 % (84) bps  
Segment operating income1 184   243   (24.3 )%   350   371   (5.7 )%
  Segment operating margin %1 10.8 % 13.9 % (310) bps     10.1 % 11.2 % (108) bps  
Net earnings 133   156   (14.7 )%   269   243   10.7 %
Diluted earnings per share $ 2.80   $ 3.20   (12.5 )%   $ 5.68   $ 4.99   13.8 %
               
Weighted-average diluted shares outstanding 47.5   48.8       47.4   48.7    
               
               
Adjusted sales and service revenues2 $ 1,700   $ 1,758   (3.3 )%   $ 3,463   $ 3,328   4.1 %
Adjusted operating income2,3 217   192   13.0 %   415   348   19.3 %
  Adjusted operating margin %2,3 12.8 % 10.9 % 184 bps     12.0 % 10.5 % 153 bps  
Adjusted segment operating income1,2,3 184   166   10.8 %   350   294   19.0 %
  Adjusted segment operating margin %1,2,3 10.8 % 9.4 % 138 bps     10.1 % 8.8 % 127 bps  
Adjusted net earnings4 110   97   13.4 %   224   166   34.9 %
Adjusted diluted earnings per share4 $ 2.32   $ 1.99   16.6 %   $ 4.73   $ 3.41   38.7 %
1 Non-GAAP measures that exclude non-segment factors affecting operating income.  See Exhibit B for reconciliations.
2 Non-GAAP measures that exclude the impact of an insurance litigation settlement at the Ingalls segment in second quarter 2015.  See Exhibit B for reconciliations.
3 Non-GAAP measures that exclude the impact of a goodwill impairment charge at the Other segment in second quarter 2015.  See Exhibit B for reconciliations.
4 Non-GAAP measures that exclude the after-tax impacts of the FAS/CAS Adjustment in 2016 and 2015 and the after-tax impacts of the insurance litigation settlement at the Ingalls segment and the goodwill impairment charge at the Other segment in second quarter 2015.  See Exhibit B for reconciliations.
 

Segment Operating Results

Ingalls Shipbuilding

  Three Months Ended     Six Months Ended  
  June 30     June 30  
($ in millions) 2016 2015 % Change   2016 2015 % Change
Revenues $ 585   $ 546   7.1 %   $ 1,171   $ 1,015   15.4 %
Segment operating income1 88   198   (55.6 )%   170   243   (30.0 )%
Segment operating margin %1 15.0 % 36.3 % NM3     14.5 % 23.9 % NM3  
Adjusted revenues1,2 585   559   4.7 %   1,171   1,028   13.9 %
Adjusted segment operating income1,2 88   62   41.9 %   170   107   58.9 %
Adjusted segment operating margin %1,2 15.0 % 11.1 % 395 bps     14.5 % 10.4 % 411 bps  
1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.
2 Non-GAAP measures that exclude the impact of the insurance litigation settlement in second quarter 2015. See Exhibit B for reconciliations.
3 NM means the % change is "not meaningful".
 

Ingalls revenues for the second quarter increased $39 million, or 7.1 percent, from the same period in 2015, due to higher revenues in Surface Combatants and Amphibious Assault Ships, partially offset by lower revenues in the Legend-class National Security Cutter (NSC) program and an unfavorable $13 million impact in second quarter 2015 from an insurance litigation settlement. Adjusting for the insurance litigation settlement, Ingalls adjusted revenues in the second quarter of 2016 of $585 million increased $26 million, or 4.7 percent, from the same period last year. Higher Surface Combatant revenues were primarily due to increased volumes on DDG-121 Frank E. Petersen Jr., DDG-123 Lenah H. Sutcliffe Higbee and planning yard services, partially offset by lower volume on DDG-113 John Finn. Higher Amphibious Assault Ships revenues were primarily due to increased volumes on LPD-28 Ft. Lauderdale and LHA-7 Tripoli, partially offset by decreased volume on LPD-27 Portland. Lower NSC program revenues were primarily due to the delivery of NSC-5 USCGC James in 2015 and decreased volume on NSC-6 Munro, partially offset by increased volume on NSC-8 Midgett.

Ingalls segment operating income for the second quarter was $88 million, a decrease of $110 million from the same period last year. Segment operating margin in the quarter was 15.0 percent, compared to 36.3 percent in the same period last year. Segment operating income and margin in the second quarter of 2015 included an insurance litigation settlement of $136 million. Adjusting for the insurance litigation settlement, Ingalls adjusted segment operating income in second quarter 2016 of $88 million increased $26 million from the second quarter of 2015, and segment operating margin of 15.0 percent increased 395 basis points from the same period last year. These increases were primarily due to higher risk retirement on the LPD program, partially offset by lower risk retirement on the NSC program.

Key Ingalls milestones for the quarter:

  • Awarded a $272 million planning, advanced engineering and long-lead material contract for the construction of the amphibious assault ship LHA-8
  • Awarded the majority of the manhours to perform contract design work for the U.S. Navy's amphibious warfare ship replacement LX(R)
  • Delivered LPD-26 John P. Murtha to the U.S. Navy
  • Christened LPD-27 Portland and DDG-114 Ralph Johnson
  • Authenticated the keel on DDG-119 Delbert D. Black

Newport News Shipbuilding

  Three Months Ended     Six Months Ended  
  June 30     June 30  
($ in millions) 2016 2015   % Change
   2016 2015   % Change
Revenues $ 1,090   $ 1,166     (6.5 )%   $ 2,243   $ 2,227     0.7 %
Segment operating income1 102   109     (6.4 )%   191   202     (5.4 )%
Segment operating margin %1 9.4 % 9.3 %   NM2     8.5 % 9.1 %   (56) bps  
1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.
2 NM means the % change is "not meaningful".
 

Newport News revenues for the second quarter decreased $76 million, or 6.5 percent, from the same period in 2015, primarily driven by lower revenues in Aircraft Carriers, Submarines and Energy. Lower Aircraft Carriers revenues were due to decreased volumes on the construction contract for CVN-78 Gerald R. Ford and the execution contract for the CVN-72 USS Abraham Lincoln refueling and complex overhaul (RCOH), partially offset by increased volumes on the construction contract for CVN-79 John F. Kennedy and the advanced planning contract for the CVN-73 USS George Washington RCOH. Lower Submarines revenues related to the SSN-774 Virginia-class submarine (VCS) program were due to decreased volumes on Block III boats, partially offset by increased volumes on Block IV boats. Lower Energy revenues were due to decreased volumes associated with environmental remediation programs.

Newport News segment operating income for the second quarter was $102 million, a decrease of $7 million from the same period last year. The decrease was primarily due to lower risk retirement on the VCS program and lower volumes on the execution contract for the CVN-72 USS Abraham Lincoln RCOH and CVN-78 Gerald R. Ford, partially offset by higher volume on CVN-79 John F. Kennedy. Segment operating margin was 9.4 percent for the quarter, compared to 9.3 percent in the same period last year.

Key Newport News milestones for the quarter:

  • Performed a turn ship for CVN-78 Gerald R. Ford, rotating the ship 180 degrees and docking it back to the pier
  • Awarded a $152 million advanced planning contract for the construction of CVN-80 Enterprise
  • Hosted keel-laying ceremony for Virginia-class submarine SSN-791 Delaware
  • Placed a 965-ton superlift into the dry dock, continuing construction of CVN-79 Kennedy. The superlift was built with more than twice the amount of the outfitting accomplished on CVN-78 Gerald R. Ford.

Other

  Three Months Ended     Six Months Ended  
  June 30     June 30  
($ in millions) 2016 2015 % Change   2016 2015 % Change
Revenues $ 27   $ 35   (22.9 )%   $ 51   $ 75   (32.0 )%
Segment operating (loss)1 (6 ) (64 ) (90.6 )%   (11 ) (74 ) (85.1 )%
Segment operating margin %1 (22.2 )% (182.9 )% NM3     (21.6 )% (98.7 )% NM3  
Adjusted segment operating (loss)1,2 (6 ) (5 ) 20.0 %   (11 ) (15 ) (26.7 )%
Adjusted segment operating margin %1,2 (22.2 )% (14.3 )% NM3     (21.6 )% (20.0 )% (157) bps  
1 Non-GAAP measures. See Exhibit B for definitions and reconciliations.
2 Non-GAAP measures that exclude the impact of a goodwill impairment charge in second quarter 2015.  See Exhibit B for reconciliation.
3 NM means the % change is "not meaningful".
 

Revenues in the Other segment for the second quarter decreased $8 million, or 22.9 percent, from the same period last year, primarily due to lower volumes in oil and gas services and contract mix. The segment operating loss for the quarter was $6 million, compared to a segment operating loss of $64 million in the same period last year. The segment operating loss in the second quarter of 2015 included a goodwill impairment charge of $59 million. Adjusting for the goodwill impairment charge, the adjusted segment operating loss in the second quarter of 2015 was $5 million.

About Huntington Ingalls Industries

Huntington Ingalls Industries is America’s largest military shipbuilding company and a provider of engineering, manufacturing and management services to the nuclear energy, oil and gas markets. For more than a century, HII’s Newport News and Ingalls shipbuilding divisions in Virginia and Mississippi have built more ships in more ship classes than any other U.S. naval shipbuilder. Headquartered in Newport News, Virginia, HII employs nearly 35,000 people operating both domestically and internationally.

Exhibit A: Financial Statements

HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
         
    Three Months Ended
June 30		   Six Months Ended
June 30
(in millions, except per share amounts)   2016   2015   2016   2015
Sales and service revenues                
Product sales   $ 1,364     $ 1,426     $ 2,793     $ 2,676  
Service revenues   336     319     670     639  
Sales and service revenues   1,700     1,745     3,463     3,315  
Cost of sales and service revenues                
Cost of product sales   1,043     972     2,182     1,957  
Cost of service revenues   290     274     579     554  
Income (loss) from operating investments, net   1     2     1     3  
General and administrative expenses   151     173     288     323  
Goodwill impairment   —     59     —     59  
Operating income (loss)   217     269     415     425  
Other income (expense)                
Interest expense   (18 )   (25 )   (37 )   (48 )
Other, net   —     —     (2 )   —  
Earnings (loss) before income taxes   199     244     376     377  
Federal income taxes   66     88     107     134  
Net earnings (loss)   $ 133     $ 156     $ 269     $ 243  
                 
Basic earnings (loss) per share   $ 2.83     $ 3.22     $ 5.72     $ 5.02  
Weighted-average common shares outstanding   47.0     48.5     47.0     48.4  
                 
Diluted earnings (loss) per share   $ 2.80     $ 3.20     $ 5.68     $ 4.99  
Weighted-average diluted shares outstanding   47.5     48.8     47.4     48.7  
                 
Dividends declared per share   $ 0.50     $ 0.40     $ 1.00     $ 0.80  
                 
Net earnings (loss) from above   $ 133     $ 156     $ 269     $ 243  
Other comprehensive income (loss)                
Change in unamortized benefit plan costs   19     22     39     44  
Other   —     2     —     —  
Tax benefit (expense) for items of other comprehensive income   (7 )   (11 )   (15 )   (18 )
Other comprehensive income (loss), net of tax   12     13     24     26  
Comprehensive income (loss)   $ 145     $ 169     $ 293     $ 269  
                                 
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
         
($ in millions)   June 30, 2016   December 31, 2015
Assets        
Current Assets        
Cash and cash equivalents   $ 852     $ 894  
Accounts receivable, net   1,022     1,074  
Inventoried costs, net   280     285  
Prepaid expenses and other current assets   43     31  
Total current assets   2,197     2,284  
Property, plant, and equipment, net of accumulated depreciation of $1,555 million as of 2016 and $1,489 million as of 2015   1,813     1,827  
Goodwill   956     956  
Other intangible assets, net of accumulated amortization of $476 million as of 2016 and $465 million as of 2015   484     495  
Deferred tax asset   282     336  
Miscellaneous other assets   127     126  
Total assets   $ 5,859     $ 6,024  
Liabilities and Stockholders' Equity        
Current Liabilities        
Trade accounts payable   $ 252     $ 317  
Accrued employees’ compensation   197     215  
Current portion of postretirement plan liabilities   142     143  
Current portion of workers’ compensation liabilities   228     227  
Advance payments and billings in excess of revenues   100     125  
Other current liabilities   222     247  
Total current liabilities   1,141     1,274  
Long-term debt   1,276     1,273  
Pension plan liabilities   856     1,001  
Other postretirement plan liabilities   424     423  
Workers’ compensation liabilities   462     460  
Other long-term liabilities   88     103  
Total liabilities   4,247     4,534  
Commitments and Contingencies        
Stockholders’ Equity        
Common stock, $0.01 par value; 150 million shares authorized; 52.6 million shares issued and 46.9 million shares outstanding as of June 30, 2016, and 52.0 million shares issued and 46.9 million shares outstanding as of December 31, 2015   1     1  
Additional paid-in capital   1,939     1,978  
Retained earnings (deficit)   1,069     848  
Treasury stock   (576 )   (492 )
Accumulated other comprehensive income (loss)   (821 )   (845 )
Total stockholders’ equity   1,612     1,490  
Total liabilities and stockholders’ equity   $ 5,859     $ 6,024  
                 
HUNTINGTON INGALLS INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
     
    Six Months Ended
June 30
($ in millions)   2016   2015
Operating Activities        
Net earnings (loss)   $ 269     $ 243  
Adjustments to reconcile to net cash provided by (used in) operating activities        
Depreciation   83     77  
Amortization of purchased intangibles   11     13  
Amortization of debt issuance costs   3     5  
Stock-based compensation   11     21  
Deferred income taxes   39     (12 )
Proceeds from insurance settlement related to investing activities   —     (21 )
Goodwill impairment   —     59  
Change in        
Accounts receivable   52     (211 )
Inventoried costs   5     20  
Prepaid expenses and other assets   (13 )   (9 )
Accounts payable and accruals   (130 )   25  
Retiree benefits   (106 )   (33 )
Other non-cash transactions, net   (1 )   (1 )
Net cash provided by (used in) operating activities   223     176  
Investing Activities        
Additions to property, plant, and equipment   (85 )   (49 )
Acquisitions of businesses, net of cash received   —     (6 )
Proceeds from disposition of assets   4     32  
Proceeds from insurance settlement related to investing activities   —     21  
Net cash provided by (used in) investing activities   (81 )   (2 )
Financing Activities        
Repayment of long-term debt   —     (21 )
Dividends paid   (48 )   (39 )
Repurchases of common stock   (86 )   (90 )
Employee taxes on certain share-based payment arrangements   (50 )   (54 )
Net cash provided by (used in) financing activities   (184 )   (204 )
Change in cash and cash equivalents   (42 )   (30 )
Cash and cash equivalents, beginning of period   894     990  
Cash and cash equivalents, end of period   $ 852     $ 960  
Supplemental Cash Flow Disclosure        
Cash paid for income taxes   $ 123     $ 131  
Cash paid for interest   $ 36     $ 45  
Non-Cash Investing and Financing Activities        
Capital expenditures accrued in accounts payable   $ 2     $ 3  
                 

Exhibit B: Non-GAAP Measures Definitions & Reconciliations

We make reference to “segment operating income (loss),” “segment operating margin,” “adjusted sales and service revenues,” “adjusted segment operating income (loss),” “adjusted segment operating margin,” “adjusted operating income,” “adjusted operating margin,” “adjusted net earnings,” and “adjusted diluted earnings per share."

We internally manage our operations by reference to "segment operating income (loss)" and "segment operating margin," which are not recognized measures under GAAP. When analyzing our operating performance, investors should use segment operating income (loss) and segment operating margin in addition to, and not as alternatives for, operating income and operating margin or any other performance measure presented in accordance with GAAP. They are measures that we use to evaluate our core operating performance. We believe that segment operating income (loss) and segment operating margin reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. We believe these measures are used by investors and are a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income (loss) and segment operating margin may not be comparable to similarly titled measures of other companies.

Adjusted sales and service revenues, adjusted operating income, adjusted operating margin, adjusted segment operating income (loss), adjusted segment operating margin, adjusted net earnings and adjusted diluted earnings per share are not measures recognized under GAAP. They should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. We believe these measures are useful to investors because they exclude items that do not reflect our core operating performance. They may not be comparable to similarly titled measures of other companies.

Segment operating income (loss) is defined as operating income (loss) for the relevant segment(s) before the FAS/CAS Adjustment and deferred state income taxes.

Segment operating margin is defined as segment operating income (loss) as a percentage of sales and service revenues.

Adjusted sales and service revenues is defined as sales and service revenues adjusted for the impact of the insurance litigation settlement at the Ingalls segment in second quarter 2015.

Adjusted segment operating income (loss) is defined as segment operating income (loss) adjusted for the impacts of the insurance litigation settlement at the Ingalls segment and the goodwill impairment charge at the Other segment in second quarter 2015.

Adjusted segment operating margin is defined as adjusted segment operating income (loss) as a percentage of adjusted sales and service revenues.

Adjusted operating income is defined as operating income adjusted for the impacts of the insurance litigation settlement at the Ingalls segment and the goodwill impairment charge at the Other segment in second quarter 2015.

Adjusted operating margin is defined as adjusted operating income as a percentage of adjusted sales and service revenues.

Adjusted net earnings is defined as net earnings adjusted for the after-tax impacts of the insurance litigation settlement at the Ingalls segment and the goodwill impairment charge at the Other segment in second quarter 2015 and the FAS/CAS Adjustment.

Adjusted diluted earnings per share is defined as adjusted net earnings divided by the weighted-average diluted common shares outstanding.

FAS/CAS Adjustment is defined as the difference between our pension and postretirement plan expense under GAAP Financial Accounting Standards and the same expense under U.S. Cost Accounting Standards (CAS). Our pension and postretirement plan expense is charged to our contracts under CAS.

Deferred state income taxes are defined as 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 expenses are charged to contract costs and included in segment operating income.

We present financial measures adjusted for the FAS/CAS Adjustment and deferred state income tax to reflect the company’s performance based upon the pension costs and state tax expense charged to our contracts under CAS. We use these adjusted measures as internal measures of operating performance and for performance-based compensation decisions.

Reconciliation of Segment Operating Income and Segment Operating Margin
         
    Three Months Ended
June 30		   Six Months Ended
June 30
($ in millions)   2016   2015   2016   2015
Sales and Service Revenues                
Ingalls revenues   $ 585     $ 546     $ 1,171     $ 1,015  
Newport News revenues   1,090     1,166     2,243     2,227  
Other revenues   27     35     51     75  
Intersegment eliminations   (2 )   (2 )   (2 )   (2 )
Sales and Service Revenues   1,700     1,745     3,463     3,315  
Segment Operating Income                
Ingalls   88     198     170     243  
  As a percentage of Ingalls revenues   15.0 %   36.3 %   14.5 %   23.9 %
Newport News   102     109     191     202  
  As a percentage of Newport News revenues   9.4 %   9.3 %   8.5 %   9.1 %
Other   (6 )   (64 )   (11 )   (74 )
  As a percentage of Other revenues   (22.2 )%   (182.9 )%   (21.6 )%   (98.7 )%
Segment Operating Income   184     243     350     371  
  As a percentage of sales and service revenues   10.8 %   13.9 %   10.1 %   11.2 %
Non-segment factors affecting operating income:                
FAS/CAS Adjustment   35     28     70     55  
Deferred state income taxes   (2 )   (2 )   (5 )   (1 )
Operating Income   217     269     415     425  
Interest expense   (18 )   (25 )   (37 )   (48 )
Other, net   —     —     (2 )   —  
Federal income taxes   (66 )   (88 )   (107 )   (134 )
Net Earnings   $ 133     $ 156     $ 269     $ 243  
                                 
Reconciliation of Adjusted Sales and Service Revenues, Adjusted Segment Operating 
Income, Adjusted Segment Operating Margin, Adjusted Operating Income and Adjusted 
Operating Margin
         
    Three Months Ended   Six Months Ended
    June 30   June 30
($ in millions)   2016   2015   2016   2015
Adjusted Sales and Service Revenues                
Ingalls revenues   $ 585     $ 546     $ 1,171     $ 1,015  
Adjustment for insurance litigation settlement   —     13     —     13  
Ingalls adjusted revenues   585     559     1,171     1,028  
Newport News revenues   1,090     1,166     2,243     2,227  
Other revenues   27     35     51     75  
Intersegment eliminations   (2 )   (2 )   (2 )   (2 )
Adjusted Sales and Service Revenues   $ 1,700     $ 1,758     $ 3,463     $ 3,328  
                 
Adjusted Segment Operating Income                
Operating Income   $ 217     $ 269     $ 415     $ 425  
As a percentage of sales and service revenues   12.8 %   15.4 %   12.0 %   12.8 %
Non-segment factors affecting operating income:                
FAS/CAS Adjustment   (35 )   (28 )   (70 )   (55 )
Deferred state income taxes   2     2     5     1  
Unadjusted Segment Operating Income   $ 184     $ 243     $ 350     $ 371  
As a percentage of sales and service revenues   10.8 %   13.9 %   10.1 %   11.2 %
                 
Adjustments affecting segment operating income (loss):                
Ingalls segment operating income   $ 88     $ 198     $ 170     $ 243  
Adjustment for insurance litigation settlement   —     (136 )   —     (136 )
Ingalls adjusted segment operating income   88     62     170     107  
As a percentage of Ingalls adjusted revenues   15.0 %   11.1 %   14.5 %   10.4 %
Newport News segment operating income   102     109     191     202  
As a percentage of Newport News revenues   9.4 %   9.3 %   8.5 %   9.1 %
Other segment operating (loss)   (6 )   (64 )   (11 )   (74 )
Adjustment for goodwill impairment   —     59     —     59  
Other adjusted segment operating (loss)   (6 )   (5 )   (11 )   (15 )
As a percentage of Other revenues   (22.2 )%   (14.3 )%   (21.6 )%   (20.0 )%
Adjusted Segment Operating Income   $ 184     $ 166     $ 350     $ 294  
As a percentage of adjusted sales and service revenues   10.8 %   9.4 %   10.1 %   8.8 %
                 
Adjusted Operating Income                
Operating Income   $ 217     $ 269     $ 415     $ 425  
As a percentage of sales and service revenues   12.8 %   15.4 %   12.0 %   12.8 %
Adjustment for insurance litigation settlement   —     (136 )   —     (136 )
Adjustment for goodwill impairment   —     59     —     59  
Adjusted Operating Income   $ 217     $ 192     $ 415     $ 348  
As a percentage of adjusted sales and service revenues   12.8 %   10.9 %   12.0 %   10.5 %
                         
Reconciliation of Adjusted Net Earnings
         
    Three Months Ended   Six Months Ended
    June 30   June 30
($ in millions)   2016   2015   2016   2015
Adjusted Net Earnings                
Net Earnings   $ 133     $ 156     $ 269     $ 243  
After-tax adjustment for insurance litigation settlement (1)   —     (88 )   —     (88 )
After-tax adjustment for goodwill impairment charge (2)   —     47     —     47  
After-tax adjustment for FAS/CAS Adjustment (3)   (23 )   (18 )   (45 )   (36 )
Adjusted Net Earnings   $ 110     $ 97     $ 224     $ 166  
Reconciliation of Adjusted Diluted Earnings per Share
         
    Three Months Ended   Six Months Ended
    June 30   June 30
(in millions, except for per share amounts)   2016   2015   2016   2015
Adjusted Diluted EPS                
Diluted earnings per share   $ 2.80     $ 3.20     $ 5.68     $ 4.99    
After-tax insurance litigation settlement per share (1)   —     (1.80 )   —     (1.81 )
After-tax impairment of goodwill per share (2)   —     0.96     —     0.97  
After-tax FAS/CAS Adjustment per share (3)   (0.48 )   (0.37 )   (0.95 )   (0.74 )
Adjusted Diluted EPS   $ 2.32     $ 1.99     $ 4.73     $ 3.41    
                 
(1) Insurance litigation settlement   —     (136 )   —     (136 )
Tax effect at 35% statutory rate*   —     48     —     48  
After-tax effect   —     (88 )   —     (88 )
Weighted-Average Diluted Shares Outstanding   47.5     48.8     47.4     48.7  
Per share impact**   —     (1.80 )   —     (1.81 )
                 
(2) Goodwill impairment charge   —     59     —     59  
Discrete federal tax impact*   —     (12 )   —     (12 )
After-tax effect   —     47     —     47  
Weighted-Average Diluted Shares Outstanding   47.5     48.8     47.4     48.7  
Per share impact**   —     0.96     —     0.97  
                 
(3) FAS/CAS Adjustment   (35 )   (28 )   (70 )   (55 )
Tax effect at 35% statutory rate*   12     10     25     19  
After-tax effect   (23 )   (18 )   (45 )   (36 )
Weighted-Average Diluted Shares Outstanding   47.5     48.8     47.4     48.7  
Per share impact**   (0.48 )   (0.37 )   (0.95 )   (0.74 )
*The income tax impact is calculated using the tax rate in effect for the relevant non-GAAP adjustment.
**Amounts may not recalculate exactly due to rounding.