president and chief executive officer barb niland
TRANSCRIPT
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Huntington Ingalls Industries
Mike Petters President and Chief Executive Officer
Barb Niland Corporate Vice President, Business Management
& Chief Financial Officer
Safe Harbor
Statements in this presentation, 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 costs and perform effectively; risks related to our spin-off from Northrop Grumman (including our increased costs and leverage); risks relating to the amount of an estimated goodwill charge relative to the final amount and any additional impairment charges; our ability to realize the expected benefits from consolidation of our Gulf Coast facilities; natural disasters; adverse economic conditions in the United States and globally; 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. This presentation also contains non-GAAP financial measures and include a GAAP reconciliation of these financial measures. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures.
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2010 Revenues: $6.7 bn
2010 PF Adj. EBITDA(1): $562 mm
Backlog: ~$17.3 bn
Employees: ~38,000
Engineers / Designers: ~7,500
Headquarters: Newport News, VA
History: 125 years
HII Overview
• Nation’s premier naval shipbuilder
• Mission critical partnership with the U.S. Navy
• The principal nuclear shipbuilder
• World-class facilities, processes and people
• Significant revenue stability and visibility
• Substantial margin expansion and cash flow improvement opportunity
• Seasoned management team and strong Board
(1) PF Adj. EBITDA reflects a net reduction in cost of sales of $7 million, resulting from the elimination of historically allocated corporate expenses associated with Federal Contract Matters accruals, offset by higher compensation costs post spin-off. Refer to page 22 for reconciliation to reported financial data.
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Aircraft
Carrier
Overhaul
Aircraft
Carrier
Construction
Submarine
Construction
2010 Revenues: $6.7 bn
Strong competitive position
Nation’s Premier Military Shipbuilder
Surface
Combatants
Fleet
Support &
Other
National
Security
Cutters
Amphibious
• Sole source for U.S. Navy nuclear-powered aircraft carriers and their refueling services
• One of two builders constructing the Virginia-class nuclear-powered submarines
• One of two builders of the Arleigh Burke–class of destroyer
• Builder of record for LPD, LHD and LHA class amphibious assault ships
• Builder of largest multi-mission U.S.C.G. National Security Cutters
• Provider of U.S. Navy fleet maintenance and overhaul services
Newport News
Ingalls
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Mission Critical Partner Aligned with U.S. Navy
U.S. Navy Warship HII %
Force Structure Participation
Aircraft Carriers
Aircraft Carriers
Aircraft Carrier RCOH
Aircraft Carrier Inactivation (1)
Submarines
Virginia –Class Submarines 48 50%
Cruise Missile Submarines 4 Capability
Ballistic Missile Submarines 14 Capability
Surface Combatants
Surface Combatants DDG-51 88 ~50%
Littoral Combat Ships 55 Capability
Amphibious Ships
Amphibious Ships LHA
Amphibious Ships LPD
Amphibious Ships LSD(X) (2) Capability
Auxillaries
Combat Logistics 30 Capability
Prepositioning Force 12 Capability
Mine Warfare / Support 20 0%
Total Fleet 313 (3)
11 100%
31100%
Source: U.S. Navy 30-year Shipbuilding Plan. (1) Contract not yet awarded, expected to be awarded in 2013. (2) Contract not yet awarded. If awarded, program expected to begin in 2017. (3) 30-year plan projects procurement for 276 ships over the next 30 years (198 combat, 78 logistics and support ships).
Ford-Class Aircraft Carrier
Virginia-Class Fast Attack Submarine
America-Class Amphibious Assault Ship (LHA)
Arleigh Burke-Class Destroyer (DDG 51)
Strategy is to be aligned with the U.S. Navy priorities
San Antonio-Class Amphibious Transport Dock Ship (LPD)
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Unique Visibility and Stability Example: Aircraft Carrier Program Plan
'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35 '36 '37 '38 '39 '40
Aircraft Carrier Construction
CVN-78 Gerald R. Ford
CVN-79 John F. Kennedy
CVN-80 (Unnamed)
CVN-81 (Unnamed)
CVN-82 (Unnamed)
CVN-83 (Unnamed)
Aircraft Carrier RCOH
CVN-71 USS Theodore Roosevelt
CVN-72 USS Abraham Lincoln
CVN-73 USS George Washington
CVN-74 USS John C. Stennis
CVN-75 USS Harry S. Truman
CVN-76 USS Ronald Reagan
CVN-77 USS George H.W. Bush
CVN-78 Gerald R. Ford
Aircraft Carrier Inactivation
CVN-65 USS Enterprise
CVN-68 USS Nimitz
CVN-69 USS Dwight D. Eisenhower
CVN-70 USS Carl Vinson
CVN-71 USS Theodore Roosevelt Planning Construction and Execution
Source: U.S. Navy 30-year Shipbuilding Plan.
The sole designer, builder and refueler of nuclear aircraft carriers
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World-Class Facilities and Workforce
Workforce and facilities drive performance and competitive positioning
Newport News
Pascagoula
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$372 $400 $398 $442
2007 2008 2009 2010
Segment EBITDA (before goodwill impairment charge in 2008)
Consistent, Strong Profitability at Newport News
Newport News has performed solidly for many years… ($ in millions)
($ in millions)
…challenges have been isolated at Ingalls
$295
$73$33
($45)
2007 2008 2009 2010
(1)
(1)
Note: EBITDA figures on an as reported basis and before corporate overlay. Refer to reconciliation to reported segment financial data on page 21. (1) 2008 EBITDA adjusted for goodwill impairment charge.
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Newport News – Protect and Strengthen
CVN-78 Gerald R. Ford CVN-79 John F. Kennedy CVN-71 USS Theodore Roosevelt RCOH
CVN-72 USS Abraham Lincoln RCOH
Virginia-class submarine
Aircraft Carrier Construction Aircraft Carrier RCOH Submarine Construction
Maintain primary position in nuclear shipbuilding
• New aircraft carrier for 21st century
• Replacement for Nimitz-class
• 2015 delivery
• 2nd aircraft carrier in the Ford-class
• 2013 construction start
• 2020 delivery
• 4th Nimitz-class carrier to be refueled
• 2013 redelivery
• 5th Nimitz-class carrier to be refueled
• 2013 refueling execution start
• 2016 redelivery
• Alternating delivery with Electric Boat
• Block III transitioning to 2 boats per year
• Block IV construction starting in 2014
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Newport News – Capture New Business
Energy Inactivation
Ohio-class Submarine Replacement Program
Leveraging unique capabilities to capture growth
• Significant, expected revenue opportunity as the Nimitz-class retires
• Well-invested facilities close to completion
• 2013 anticipated execution of Enterprise inactivation
• Twelve ballistic missile submarines over 15 years
• Electric Boat expected to lead the program
• Newport News anticipates sharing in the design effort
• 2015 ship design
• Expected 2019 construction
• Leverages nuclear capabilities in non-Navy initiatives
• Partnerships with DoE contractors and AREVA
• Limited capital investment in JV structures
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Ingalls – Capture Benefits of Serial Production
LHA-6 America & LHA-7 LPD-17 San Antonio-Class
Sole source supplier of amphibious assault ships and National Security Cutters and one of only two suppliers of surface combatants
DDG-51 Arleigh Burke-Class
National Security Cutter
• LHA-6 America is 1st ship in LHA(R) program
– 2013 delivery
• LHA-7 is 2nd ship
– 2012 contract expected
– 2018 delivery
• Newest ship in the U.S. Navy’s amphibious fleet
• Delivered LPD-21 USS New York in 2009
• Five ships under construction
• Construction contract for LPD-26
• Long lead material contract for LPD-27
• US Navy’s primary and most advanced surface combatant ship class
• Currently 62-ship program / 28 awarded to HII
• 2011 delivered DDG-110
• Construction contracts for DDG-113, DDG-114
• Largest and most capable new multi-mission cutter
• Plans to build 8 NSCs to replace aging fleet
• Delivered NSC-3
• Construction contract for NSC-4
• Construction contract for NSC-5
Underperforming ships 11
Ingalls – Construction Schedule
Avondale
Final Avondale Delivery
12 week phasing of operational commitments
Other ships Potential future work
Under LLTM Contract
Under LLTM Contract
Under LLTM Contract
Under LLTM Contract
Under LLTM Contract
Under LLTM Contract
Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
LHA 6
LHA 7
LHA 8
LPD 22
LPD 23
LPD 24
LPD 25
LPD 26
LPD 27
DDG 110
DDG 113
DDG 114
DDG XXX
DDG XXX
DDG XXX
DDG 1000 DH
DDG 1001 DH
DDG 1002 DH
NSC 3
NSC 4
NSC 5
NSC 6
NSC 7
2015 20182011 2012 2013 2014 2016 2017
• LHA 6 rescheduled
• LHA 7 long lead material contract funded
• LHA 8 in Navy plan
• NSC 4 under contract
• NSC 5 under contract
• Plan for 12-month centers
• Optimizing production rates
• Class plans implemented
• LPD 26 construction & LPD 27 long lead material contracts funded
• Swap Agreement executed
• DDG 51 line restarted
− First ship under construction at Pascagoula
• DDG 113 & DDG 114 construction
• Eliminated lead ship complexity
• Serial production on composite deckhouse
Avondale
Pascagoula
Pascagoula
Pascagoula
Pascagoula
Avondale
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Summary of Expected Impacts of Key Management Actions
Strengthen market position and execute well on all contracts
Improved Contract Performance
Lower Risk
Improved Margin Opportunity
Better Competitive Position for Future
Business
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5.5%
2010 Adjusted Long-Term Objective
EBIT Performance Opportunity
EBIT Improvement Objective
9%+
Key Drivers:
• Roll-off of underperforming contracts
• Getting wind-down at Avondale “right”
• New contracts reflecting recent experience
• Serial production at Ingalls
Clear path to improved performance
(1)
(1) Refer to reconciliation to reported financial data on page 20.
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$76
$136
$220
$266
$287
$246
$218
$181$191
1.6%
2.5%
3.5%
4.6%
5.4%
4.3%
3.5%
2.9% 2.8%
$0
$100
$200
$300
2002 2003 2004 2005 2006 2007 2008 2009 2010 Future
Capex Capex % of Revenues
Completing a Long Cycle of Substantial Capital Investment
Capital Expenditure
($ in millions)
2007 – 2011 – Carrier Inactivation/RCOH
2009 – 2014 – VCS 2-per year (Submarines)
2003 – 2009 – Ford-class (Carriers)
2003 – 2007 – New Pier (Carriers)
Long term “Maintenance” capex =
~2.0-3.0% of sales
2003 – 2008 – Electrical System and CAD Upgrade
2005 – 2009 – Hurricane spending
Substantial investments in past to protect market position
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Improving Working Capital Profile
0
Key Working Capital Drivers:
– LPD 22-25 performance
– Avondale restructuring costs
Near-Term
Key Working Capital Drivers:
+ LPD and LHA 6 retention releases
+ Avondale restructuring recovery
Long-Term
Today Future
Free cash flow significantly increasing beyond 2013
~2013 (and LPD 23, 25 deliveries)
Cash Flow from Working Capital
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The Huntington Ingalls Value Proposition
Strong, Consistent Performance at Newport News
Improving Working Capital
Increasing Free Cash Flow Generation
Significant Margin Improvement at
Ingalls
Declining Capital Expenditure
Clear path to creating shareholder value
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Reconciliation of Non-GAAP Measures – Adjusted EBITDA
($ in millions)
Historical
Fiscal year ended December 31, 2007 2008 2009 2010
Revenue $5,692 $6,189 $6,292 $6,723
Operating Margin $447 ($2,354) $211 $248
Plus Other Income / (Expense) $6 – $1 ($2)
EBIT $453 ($2,354) $212 $246
Less one-time adjustments
A. Goodwill impairment – ($2,490) – –
B. AMSEC gain 23 – – –
C. LHD 8 EAC impacts (55) (263) 54 (30)
D. Hurricane Ike – (16) – 17
E. Hurricane Katrina recovery 62 – – –
F. LPD EAC impacts – – (171) –
G. Avondale shut-down LPD-23 & 25 impacts – – – (113)
Subtotal non-recurring $30 ($2,769) ($117) ($126)
Adjusted EBIT $423 $415 $329 $372
% margin 7.4% 6.7% 5.2% 5.5%
Plus non-cash expenses
A. Depreciation $129 $137 $156 $160
B. Amortization of purchased intangibles (1)
41 37 30 23
Subtotal non-cash expenses $170 $174 $186 $183
Adjusted EBITDA $593 $589 $515 $555
% margin 10.4% 9.5% 8.2% 8.3%
(1) 2008 amount adjusted for $19 million of additional amortization related to LHD 8 EAC impacts, already reflected in C.
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Reconciliation of Non-GAAP Measures – Segment EBITDA
($ in millions)
Historical
Fiscal year ended December 31, 2007 2008 2009 2010
Newport News
Operating margin $290 ($895) $313 $355
Plus:
A. Other, net – – – –
EBIT $290 ($895) $313 $355
Plus:
A. Depreciation & Amortization of purchased intangibles 82 83 85 87
B. Goodwill impairment charge – 1,212 – –
EBITDA $372 $400 $398 $442
Gulf Coast
Operating margin $201 ($1,433) ($29) ($61)
Plus:
A. Other, net 6 – 1 (2)
EBIT $207 ($1,433) ($28) ($63)
Plus:
A. Depreciation & Amortization of purchased intangibles 88 110 101 96
B. Goodwill impairment charge – 1,278 – –
EBITDA $295 ($45) $73 $33
Note: Segment EBITDA adjusted only for goodwill impairment charge in 2008. Segment EBITDA is on as reported basis and before corporate overlay.