Huntington Ingalls Industries' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Huntington Ingalls Industries Inc. (HII)

Q2 2012 Earnings Call

August 8, 2012 9:00 am ET

Executives

Mike Petters – President, Chief Executive Officer

Barb Niland – Chief Financial Officer

Andy Green – Vice President, Investor Relations

Analysts

Sam Pearlstein – Wells Fargo

Robert Spingarn – Credit Suisse

Doug Harned – Sanford Bernstein

George Shapiro – Shapiro Research

Pete Skibitski – Drexel Hamilton

John – Citi

Myles Walton – Deutsche Bank

Brian Ruttenbur – CRT Capital

Mayur Manmohansingh - Barclays

Presentation

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2012 Huntington Ingalls Industries Earnings conference call. My name is Chantele and I will be your facilitator for today’s call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference, at which time you may press star, one to enter into the question queue. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Andy Green, Vice President of Investor Relations. Please proceed.

Andy Green

Thanks Chantele. Good morning and welcome to the Huntington Ingalls Industries Second Quarter 2012 Earnings conference call. With us today are Mike Petters, President and Chief Executive Officer, and Barb Niland, Corporate Vice President, Business Management and Chief Financial Officer.

As a reminder, statements made in today’s call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Also in their remarks today, Mike and Barb will refer to non-GAAP measures, including segment operating income and segment operating income. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website.

We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at www.huntingtoningalls.com and click on the Investor Relations link to view the presentation, as well as our earnings release.

With that, I’d like to turn the call over to Mike.

Mike Petters

Thanks Andy. Good morning everyone and thanks for joining us on today’s call. I am pleased to report Huntington Ingalls Industries’ results for the second quarter of 2012. Today we reported sales of $1.72 billion, up 10.1% from the same period last year, and diluted earnings per share of $1.00, up from $0.80 in the second quarter of 2011. Second quarter segment operating margin was 7.4%, a significant improvement from 6.3% last year, and we ended the quarter with $669 million of cash on the balance sheet. Total backlog was $16.2 billion, of which $12.6 billion is funded.

During the second quarter, we continued to execute well on all major programs at both Ingalls and Newport News, including achieving several milestones. At Ingalls, we launched two ships – the amphibious assault ship LHA-6 America, and LPD-25 Somerset. We successfully completed acceptance trials for LPD-23 Anchorage, a ship that will be delivered to the Navy next month, and we announced the construction contract for the newest amphibious assault ship, LHA-7 Tripoli. Subsequent to quarter-end, we announced the $1.5 billion construction contract for LPD-27, the 11 th ship in the San Antonio class of LPDs.

At Newport News, the submarine and carrier programs continued to perform well and our outlook for these programs remains positive. In fact, we are in the preparation phase for a significant amount of new business, including the next block buy of submarines, the inactivation of CVN-65 Enterprise, the refueling of CVN-72 Lincoln, and the construction of CVN-79 Kennedy.

Overall, our programs continue to perform in line with our expectations and we remain confident that we can deliver 9%-plus total operating margin by 2015. In the near term for the second half of 2012, we expect segment revenue and margins to be similar to the first half.

Regarding the threat of sequestration, I don’t have much more to say on the subject as the potential negative impacts it will have on the industry, our workforce and our supply chain have been well-publicized, and while we hope that an alternative is found to avoid the automatic and indiscriminate spending cuts triggered sequestration, it is the law of the land. What we are doing is communicating to members of Congress and other leaders, along with our industry partners, about how this could impact us and we’re telling them that our supply chain – nearly 5,000 companies that span all 50 states – is at risk. They are likely to feel the impacts of sequestration much more rapidly than HII because their contracts and orders tend to cover much shorter periods than our longer term contracts.

Our formula for success is continuing to perform well on our contracts and meeting all of our commitments on safety, quality, cost and schedule; and that’s what we focus on each and every day.

Now to hit a few highlights of our major programs at Ingalls. As I mentioned earlier, LPD-23 Anchorage, constructed at our Avondale shipyard, has successfully completed acceptance trials and delivery should occur in September, about one month later than previously planned. The delay is due to the insulation of non-compliant bolts associated with certain propulsion system components. Although I am disappointed with the delay, I am proud that one of our own people identified the issue and that we are correcting it ourselves. We estimate the total cost of inspection and replacement to be less than $1 million.

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