Ingalls Reports Third Quarter Results

Huntington Ingalls Industries (HII), a company that 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, reported third quarter 2013 revenues of $1.64 billion, up 2.6% from the same period last year. Third quarter diluted earnings per share was $1.36, compared to $0.26 in the same period of 2012.

Segment operating income in the third quarter was $142 million, compared to $89 million in the same period last year. Total operating income for the quarter was $127 million, compared to $66 million in the same period of 2012. The increases were primarily attributable to the impact of hurricane insurance recoveries and the absence in 2013 of the workers' compensation expense adjustment, partially offset by the impact of closing the Gulfport Composite Center of Excellence and the favorable resolution last year of outstanding contract changes. Total operating margin was 7.8% for the quarter compared to 4.1% in the third quarter of 2012.

Cash provided by operating activities in the third quarter was $281 million, up $144 million from the same period last year. New business awards for the quarter were $200 million, bringing total backlog to $19.3 billion as of the end of the quarter, of which $12.8 billion is funded.

"During this uncertain budget environment, our healthy backlog continues to support our programs, and we remain confident in our ability to deliver 9 plus% operating margin by 2015," said Mike Petters, HII's president and chief executive officer. "Despite challenges encountered during the test programs for the last two underperforming ships, we delivered LPD-25 Somerset shortly after the quarter end and are on a path to deliver LHA-6 America at the end of the first quarter of 2014."

During the third quarter of 2013, the company settled hurricane-related insurance claims for its Ingalls segment and received $180 million in cash. This settlement decreased Ingalls revenues by $37 million due to lower overhead costs and increased Ingalls operating income by $46 million, reflecting the economic position of the customer's recent direction for the treatment of the insurance-related cost and recoveries. Also during the quarter, the company announced its plan to close the Gulfport facility as a result of the Navy's decision to proceed with a steel deckhouse on DDG-1002 Lyndon B. Johnson, instead of a composite deckhouse. Ingalls revenues increased by $9 million due to the overhead impact of this decision, and the resulting Gulfport closure charge decreased Ingalls operating income by $17 million.

Reported revenues for the third quarter were $1.6 billion, a 2.6% increase over the same period prior year. Adjusted for the hurricane insurance recoveries and the Gulfport closure impact in 2013, third quarter revenues were $1.7 billion, an increase of $69 million or 4.3% over Q3 2012.

Adjusted for the hurricane insurance recoveries and the Gulfport closure impact in 2013, and the non-cash workers' compensation charge in 2012, segment operating income was $113 million in Q3 2013, flat compared to Q3 2012 on an adjusted basis. Adjusted segment operating margin was 6.8% in the third quarter, compared to 7.1% in the same period in 2012 on an adjusted basis.

Total operating income in Q3 2013 was $127 million, whereas adjusted total operating income was $98 million, an increase of $8 million, or 8.9%, from the same period of 2012 on an adjusted basis, primarily as a result of a lower FAS/CAS Adjustment. Operating margin in the third quarter was 7.8%, while adjusted operating margin was 5.9%, up 25 basis points from Q3 2012 on an adjusted basis.

Reported diluted earnings per share was $1.36 in the third quarter, compared to $0.26 in the same period prior year. Adjusted diluted earnings per share was $1.17 in the third quarter, compared to $0.98 in the same period of 2012 on an adjusted basis, which also excludes the after-tax FAS/CAS Adjustment of $0.18 per share in 2013 and $0.24 per share in 2012.

Ingalls revenues for the third quarter decreased $31 million, or 4.6%, from the same period in 2012. Adjusting for $37 million of hurricane insurance recoveries and $9 million of Gulfport closure impact in 2013, Ingalls revenues for the third quarter were $667 million, a decrease of $3 million or 0.4% from the same period prior year, driven by lower sales in amphibious assault ships and surface combatants. The decrease in amphibious assault ship revenues was due to lower sales on LPD-23 USS Anchorage, LPD-24 USS Arlington, LPD-25 Somerset, LPD-26 John P. Murtha and LHA-6 America, partially offset by higher sales on LPD-27 Portland and LHA-7 Tripoli. Surface combatant revenues decreased due to lower volumes on the DDG-1000 Zumwalt-class destroyer program and DDG-114 Ralph Johnson, partially offset by higher volumes on DDG-117 Paul Ignatius.

Ingalls operating income for the third quarter was $49 million, up $48 million over the same period last year. Adjusting for $46 million of hurricane insurance recoveries and $17 million of Gulfport closure impact in 2013 and the $9 million non-cash workers' compensation charge in 2012, Ingalls operating income for the third quarter of 2013 was $20 million, compared to $10 million in the same period of 2012. Ingalls adjusted operating margin was 3.0% for the quarter, an increase of 151 basis points from the same period last year on an adjusted basis. These increases were primarily attributable to risk retirement on the National Security Cutter (NSC) program.

Key Ingalls program milestones for the quarter:

• Delivered the final aft peripheral vertical launch system (PVLS) assemblies and the composite hangar for DDG-1001 Michael Monsoor
• Launched the fourth U.S. Coast Guard NSC, WMSL-753 Hamilton
• Completed successful builder's sea trials for LPD-25 Somerset, the ninth San Antonio-class ship
• Started fabrication of DDG-114 Ralph Johnson, Ingalls' 30th Arleigh Burke-class destroyer
• Approved a new collective bargaining agreement between the company's Avondale subsidiary and the New Orleans Metal Trades Council (NOMTC) and the Metal Trades Department (MTD)

Newport News Shipbuilding

Newport News revenues for the third quarter increased $74 million, or 7.8%, from the same period in 2012, primarily driven by higher sales in aircraft carriers and fleet support services, partially offset by lower sales in submarines. The increase in aircraft carriers sales was primarily driven by higher volumes on the execution contract for the CVN-72 USS Abraham Lincoln refueling and complex overhaul (RCOH), the construction preparation 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. Higher revenues in fleet support services were primarily the result of volumes associated with the repair work on SSN-765 USS Montpelier. Decreased submarine sales were related to the SSN-774 Virginia-class submarine program, primarily driven by lower volumes on Block II boats following the delivery of SSN-783 USS Minnesota, partially offset by higher volumes on Block III boats.

Newport News operating income for the third quarter was $93 million, compared with $88 million in the same period of 2012. Adjusting for the $15 million non-cash workers' compensation charge in 2012, operating income decreased $10 million from Q3 2012. The decline from the prior year adjusted amount was primarily related to the favorable resolution last year of outstanding contract changes on the CVN-65 USS Enterprise Extended Drydocking Selected Restricted Availability (EDSRA). Newport News operating margin was 9.1% in Q3 2013, down 178 basis points from the same period last year on an adjusted basis.

Key Newport News program milestones for the quarter:

• Installed the third and final aircraft elevator on CVN-78 Gerald R. Ford
• Redelivered CVN-71 USS Theodore Roosevelt following successful sea trials that tested the ship's systems after its RCOH

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