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Huntington Ingalls Industries Reports Second Quarter Results

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  • Revenues were $1.72 billion for the second quarter of 2014
  • Segment operating margin was 9.5 percent, a 140 bps improvement over Q2 2013
  • Total operating margin was 10.5 percent, up from 6.9 percent in the same period last year
  • Diluted earnings per share was $2.04 for the quarter
  • Pension-adjusted diluted earnings per share was $1.75 for the quarter
  • Cash and cash equivalents at the end of the quarter were $592 million

NEWPORT NEWS, Va., Aug. 7, 2014 (GLOBE NEWSWIRE) -- Huntington Ingalls Industries (NYSE:HII) reported second quarter 2014 revenues of $1.72 billion, up 2.1 percent compared to the same period last year. Second quarter diluted earnings per share was $2.04, compared to diluted earnings per share of $1.12 in the same period of 2013. Pension-adjusted diluted earnings per share for the quarter was $1.75, compared to $1.36 in the same period of 2013.

Segment operating income for the second quarter was $163 million, compared to $136 million in the same period last year. Total operating income for the quarter was $181 million, compared to $116 million in the same period last year. The increase in operating income was primarily attributable to risk retirement at Ingalls on the National Security Cutter (NSC) program and ships delivered under the LPD-17 San Antonio-class (LPD) program, a $6 million favorable overhead adjustment at Ingalls resulting from a change in non-income based tax liabilities, as well as the favorable FAS/CAS Adjustment.

New business awards for the quarter were approximately $7.0 billion, consisting primarily of the contract for Block IV of the SSN-774 Virginia-class submarine (VCS) program. Total backlog at the end of Q2 2014 was $24.2 billion, of which $14.4 billion was funded.

On May 30, 2014, HII completed the acquisition of UniversalPegasus International Holdings (UPI). HII reported the post-acquisition results of UPI as part of its newly created Other segment. Revenues of the Other segment were $20 million, and Other operating income was less than $1 million for the quarter, primarily due to the acquisition of UPI.

"With the acquisition of UniversalPegasus, HII is leveraging its engineering and program management core competencies in the energy market, while remaining focused on our Navy program execution to reach 9-plus percent margins in 2015," said Mike Petters, HII's president and chief executive officer.

Second Quarter 2014 Highlights
Three Months Ended
June 30
(In millions, except per share amounts) 2014 2013 $ Change % Change
Revenues $ 1,719 $ 1,683 $ 36 2.1%
Segment operating income1 163 136 27 19.9%
Segment operating margin %1 9.5% 8.1% 140 bps
Total operating income 181 116 65 56.0%
Total operating margin % 10.5% 6.9% 364 bps
Net earnings 100 57 43 75.4%
Diluted earnings per share $ 2.04 $ 1.12 $ 0.92 82.1%
Weighted-average diluted shares outstanding 49.1 50.7
Pension-adjusted Operating Highlights
Total operating income 181 116 65 56.0%
FAS/CAS Adjustment (21) 18 (39) (216.7)%
Pension-adjusted operating income2 160 134 26 19.4%
Pension-adjusted operating margin %2 9.3% 8.0% 135 bps
Pension-adjusted Net Earnings
Net earnings 100 57 43 75.4%
After-tax FAS/CAS Adjustment3 (14) 12 (26) (216.7)%
Pension-adjusted net earnings2 86 69 17 24.6%
Weighted-average diluted shares outstanding 49.1 50.7
Pension-adjusted diluted earnings per share2 $ 1.75 $ 1.36 $ 0.39 28.7%
1 Non-GAAP metric that excludes non-segment factors affecting operating income. See Exhibit B for definition and reconciliation.
2 Non-GAAP metric - see Exhibit B for definition.
3 Tax effected at 35% federal statutory tax rate.
Operating Segment Results
Ingalls Shipbuilding
Three Months Ended
June 30
($ in millions) 2014 2013 $ Change % Change
Revenues $ 572 $ 592 $ (20) (3.4)%
Operating income (loss) 59 31 28 90.3%
Operating margin % 10.3% 5.2% 508 bps

Ingalls revenues for the second quarter decreased $20 million, or 3.4 percent, from the same period in 2013, driven by lower sales in amphibious assault ships, partially offset by higher sales in the NSC program and surface combatants. The decrease in amphibious assault ships revenues was due to lower volumes on LHA-6 America and LPD-25 USS Somerset, partially offset by higher volumes on LHA-7 Tripoli. Revenues on the NSC program were higher due to higher volumes on NSC-6 Munro, NSC-7 Kimball, NSC-5 James and NSC-4 Hamilton construction contracts. Surface combatants revenues were higher due to higher volumes on DDG-117 Paul Ignatius, DDG-119 (unnamed) and DDG-114 Ralph Johnson construction contracts, partially offset by lower volumes on the DDG-1000 Zumwalt-class program.

Ingalls operating income for the quarter was $59 million, an increase of $28 million over the same period in 2013. Ingalls operating margin was 10.3 percent for the quarter, compared to 5.2 percent in Q2 2013. These increases were primarily due to risk retirement on the NSC program and ships delivered under the LPD program, as well as a $6 million favorable overhead adjustment resulting from a change in non-income based tax liabilities.

Key Ingalls highlights for the quarter:

  • Delivered LHA-6 America to the U.S. Navy
  • Launched NSC-5 James
  • Authenticated the keel for LHA-7 Tripoli
  • Received a $76.5 million fixed-price contract to purchase long-lead materials for NSC-8 Midgett

Newport News Shipbuilding
Three Months Ended
June 30
($ in millions) 2014 2013 $ Change % Change
Revenues $ 1,129 $ 1,092 $ 37 3.4%
Operating income (loss) 104 105 (1) (1.0)%
Operating margin % 9.2% 9.6% -40 bps

Newport News revenues for the second quarter increased $37 million, or 3.4 percent, from the same period in 2013, primarily driven by the acquisition of The S.M. Stoller Corp., which was completed in January 2014, and higher revenues in submarines and energy, offset by lower revenues in fleet support services. Submarines revenues related to the SSN-774 Virginia-class submarine program were higher due to higher volumes on Block III construction and Block IV advance procurement contracts, partially offset by lower volumes on Block II boats following the delivery of SSN-783 USS Minnesota, the last ship of the block. Higher energy revenues were primarily driven by commercial volumes. Lower revenues in fleet support services were primarily due to the redelivery of SSN-765 USS Montpelier.

Newport News operating income for the quarter was $104 million, a $1 million decrease from the same period in 2013. Newport News operating margin was 9.2 percent for the quarter, down from 9.6 percent in Q2 2013. These decreases were mainly related to lower risk retirement on the VCS program and the execution contract for the CVN-71 USS Theodore Roosevelt refueling and complex overhaul (RCOH), partially offset by higher risk retirement on the construction contract for CVN-78 Gerald R. Ford.

Key Newport News highlights for the quarter:

  • Reached pressure hull complete construction milestone on SSN-785 John Warner
  • AMSEC received an indefinite-delivery/indefinite-quantity, cost-plus-fixed-fee contract to provide engineering, technical, repair and logistics support to the U.S. Navy's Carrier Engineering Maintenance Assist Team (CEMAT) and Surface Ship Engineering Maintenance Assist Team (SEMAT) programs. The cumulative value of the contract, if all options are exercised, is $187 million.
  • Placed the new upper-level structure on CVN-72 USS Abraham Lincoln's island

The Company

Huntington Ingalls Industries designs, builds and manages the life-cycle of the most complex nuclear and conventionally-powered ships for the U.S. Navy and Coast Guard. 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. HII also provides engineering and project management services expertise to the commercial energy industry, the Department of Energy and other government customers. Headquartered in Newport News, Virginia, HII employs more than 39,000 people operating both domestically and internationally. For more information, please visit: www.huntingtoningalls.com.

Huntington Ingalls Industries will webcast its earnings conference call at 9 a.m. ET on August 7. A live audio broadcast of the conference call and supplemental presentation will be available on the investor relations page of the company's website: www.huntingtoningalls.com.

Statements in this release, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include: changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans); our ability to obtain new contracts, estimate our future contract costs and perform our contracts effectively; changes in government regulations and procurement processes and our ability to comply with such requirements; our ability to realize the expected benefits from consolidation of our Ingalls facilities; natural disasters; adverse economic conditions in the United States and globally; risks related to our indebtedness and leverage; and other risk factors discussed in our filings with the U.S. Securities and Exchange Commission. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligations to update any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make.

Exhibit A: Financial Statements
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30
(in millions, except per share amounts) 2014 2013 2014 2013
Sales and service revenues
Product sales $ 1,433 $ 1,423 $ 2,765 $ 2,744
Service revenues 286 260 548 501
Total sales and service revenues 1,719 1,683 3,313 3,245
Cost of sales and service revenues
Cost of product sales 1,131 1,157 2,191 2,243
Cost of service revenues 238 227 465 440
Income (loss) from operating investments, net 1 2 3 4
General and administrative expenses 170 185 320 355
Operating income (loss) 181 116 340 211
Other income (expense)
Interest expense (29) (29) (56) (59)
Earnings (loss) before income taxes 152 87 284 152
Federal income taxes 52 30 94 51
Net earnings (loss) $ 100 $ 57 $ 190 $ 101
Basic earnings (loss) per share $ 2.05 $ 1.14 $ 3.88 $ 2.02
Weighted-average common shares outstanding 48.8 50.2 49.0 50.0
Diluted earnings (loss) per share $ 2.04 $ 1.12 $ 3.84 $ 2.00
Weighted-average diluted shares outstanding 49.1 50.7 49.5 50.5
Dividends declared per share $ 0.20 $ 0.10 $ 0.40 $ 0.20
Net earnings (loss) from above $ 100 $ 57 $ 190 $ 101
Other comprehensive income (loss)
Change in unamortized benefit plan costs 8 210 16 215
Other 1 (1) 2 1
Tax benefit (expense) for items of other comprehensive income (3) (81) (6) (86)
Other comprehensive income (loss), net of tax 6 128 12 130
Comprehensive income (loss) $ 106 $ 185 $ 202 $ 231
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
June 30 December 31
($ in millions) 2014 2013
Assets
Current Assets
Cash and cash equivalents $ 592 $ 1,043
Accounts receivable, net 1,216 1,123
Inventoried costs, net 294 311
Deferred income taxes 179 170
Prepaid expenses and other current assets 46 29
Total current assets 2,327 2,676
Property, plant, and equipment, net of accumulated depreciation of $1,492 million as of 2014 and $1,404 million as of 2013 1,850 1,897
Goodwill 1,089 881
Other purchased intangibles, net 557 528
Pension plan assets 127 124
Miscellaneous other assets 130 119
Total assets $ 6,080 $ 6,225
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable $ 297 $ 337
Accrued employees' compensation 210 230
Current portion of long-term debt 86 79
Current portion of postretirement plan liabilities 139 139
Current portion of workers' compensation liabilities 233 230
Advance payments and billings in excess of revenues 58 115
Other current liabilities 244 262
Total current liabilities 1,267 1,392
Long-term debt 1,679 1,700
Pension plan liabilities 437 529
Other postretirement plan liabilities 482 477
Workers' compensation liabilities 424 419
Deferred tax liabilities 112 83
Other long-term liabilities 110 104
Total liabilities 4,511 4,704
Commitments and Contingencies
Stockholders' Equity
Common stock, $0.01 par value; 150 million shares authorized; 51.4 million issued and 48.6 million outstanding as of June 30, 2014, and 50.5 million issued and 48.7 million outstanding as of December 31, 2013 1 1
Additional paid-in capital 1,896 1,925
Retained earnings (deficit) 406 236
Treasury stock (225) (120)
Accumulated other comprehensive income (loss) (509) (521)
Total stockholders' equity 1,569 1,521
Total liabilities and stockholders' equity $ 6,080 $ 6,225
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30
($ in millions) 2014 2013
Operating Activities
Net earnings (loss) $ 190 $ 101
Adjustments to reconcile to net cash provided by (used in) operating activities
Depreciation 97 82
Amortization of purchased intangibles 12 11
Amortization of debt issuance costs 5 4
Stock-based compensation 11 19
Excess tax benefit related to stock-based compensation (15) (3)
Deferred income taxes (4) 28
Change in
Accounts receivable (38) (196)
Inventoried costs 18 (25)
Prepaid expenses and other assets (14) (28)
Accounts payable and accruals (131) (146)
Retiree benefits (73) (184)
Net cash provided by (used in) operating activities 58 (337)
Investing Activities
Additions to property, plant, and equipment (51) (55)
Acquisitions of businesses, net of cash received (273)
Net cash provided by (used in) investing activities (324) (55)
Financing Activities
Repayment of long-term debt (14) (13)
Dividends paid (20) (10)
Repurchases of common stock (104) (25)
Employee taxes on certain share-based payment arrangements (64)
Proceeds from stock option exercises 2 3
Excess tax benefit related to stock-based compensation 15 3
Net cash provided by (used in) financing activities (185) (42)
Change in cash and cash equivalents (451) (434)
Cash and cash equivalents, beginning of period 1,043 1,057
Cash and cash equivalents, end of period $ 592 $ 623
Supplemental Cash Flow Disclosure
Cash paid for income taxes $ 94 $ 41
Cash paid for interest $ 52 $ 55
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable $ 3 $ 3

Exhibit B: Reconciliations

We make reference to "segment operating income," "segment operating margin," "pension-adjusted operating income," "pension-adjusted operating margin," "pension-adjusted net earnings," and "pension-adjusted diluted earnings per share."

Segment operating income is total operating income before the FAS/CAS Adjustment and deferred state income taxes.

Segment operating margin is segment operating income as a percentage of total sales and service revenues.

Pension-adjusted operating income is total operating income adjusted for the FAS/CAS Adjustment.

Pension-adjusted operating margin is pension-adjusted operating income as a percentage of total sales and service revenues.

Pension-adjusted net earnings is net earnings adjusted for the tax effected FAS/CAS Adjustment.

Pension-adjusted diluted earnings per share is pension-adjusted net earnings divided by the weighted-average diluted common shares outstanding.

Segment operating income and segment operating margin are two of the key metrics we use to evaluate operating performance because they exclude items that do not affect segment performance. We believe pension-adjusted operating income, pension-adjusted operating margin, pension-adjusted net earnings and pension-adjusted diluted earnings per share are also useful metrics because they exclude non-operating items that we do not consider indicative of our core operating performance. Therefore, we believe it is appropriate to disclose these measures to help investors analyze our operating performance. However, these measures are not measures of financial performance under GAAP and may not be defined or calculated by other companies in the same manner.

Reconciliation of Segment Operating Income and Segment Operating Margin
Three Months Ended
June 30
($ in millions) 2014 2013
Sales and Service Revenues
Ingalls $ 572 $ 592
Newport News 1,129 1,092
Other 20
Intersegment eliminations (2) (1)
Total Sales and Service Revenues 1,719 1,683
Segment Operating Income
Ingalls 59 31
As a percentage of revenues 10.3% 5.2%
Newport News 104 105
As a percentage of revenues 9.2% 9.6%
Total Segment Operating Income 163 136
As a percentage of revenues 9.5% 8.1%
Non-segment factors affecting operating income
FAS/CAS Adjustment 21 (18)
Deferred state income taxes (3) (2)
Total Operating Income 181 116
Interest expense (29) (29)
Federal income taxes (52) (30)
Net Earnings $ 100 $ 57

CONTACT: Jerri Fuller Dickseski (Media) jerri.dickseski@hii-co.com 757-380-2341 Dwayne Blake (Investors) dwayne.blake@hii-co.com 757-380-2104

Source:Huntington Ingalls Industries, Inc.