亨廷頓·英格爾斯工業 (HII) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Huntington Ingalls Industries' earnings conference call. My name is Keisha, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to hand the conference over to Mr. Andy Green, Vice President, Investor Relations. Please proceed, sir.

Thanks, Keisha. Good morning, and welcome to the Huntington Ingalls Industries' fourth quarter and year-end 2011 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 referred 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 the remarks today, Mike and Barb will refer to certain non-GAAP measures including free cash flow, segment operating income, adjusted segment operating income, adjusted segment operating margin, adjusted operating income, adjusted operating margin, and adjusted diluted EPS in the fourth quarter and full-year 2011. Full-year 2011 adjusted figures exclude the $290 million non-cash goodwill impairment charge. Fourth-quarter 2011 adjusted figures exclude a $10 million reversal of a portion of the impairment charge taken in the third quarter 2011.

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.

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 fourth quarter and full-year 2011. Today, we reported fourth quarter sales of $1.74 billion, flat over the same period last year, and full-year sales of $6.6 billion, down about 2% from last year. As you recall, in the third quarter we booked an estimated $300 million goodwill impairment charge that was driven by adverse equity market conditions. After completing the appropriate goodwill impairment test, the final impairment charge was $290 million. Because of the change in the goodwill impairment, reported fourth-quarter EPS was $1.39, and reported full-year EPS was a loss of $1.93. Barb will have more detail on the goodwill impairment during her remarks.

Now excluding the impact of the impairment, fourth quarter total operating margin was 6.6%, up from 6% last year, and diluted earnings per share was $1.19 for the quarter, down from $1.29 in 2010. For the full-year, again excluding the impact of the impairment, operating margin was 6.1% compared with 3.7% last year, and diluted earnings per share was $3.97 for the year, up from $2.77 in 2010. Total backlog at the end of the quarter was $16.3 billion, compared with $17.3 billion last year. Free cash flow for the fourth quarter and the full-year came in very strong. During the fourth quarter, we generated just under $400 million in free cash flow, and we ended the year with $915 million of cash.

Now I'd like to walk through some of the highlights of our individual ship programs, starting with Ingalls. For the DDG-51s, we began fabrication work on DDG-113, and will soon begin construction of DDG-114, the second ship in the DDG-51 restart. We expect the next Block V DDG-51s later this year, a contract that could be for as many as nine ships split between us and General Dynamics. We are aggressively preparing for the next round of awards, and are confident that we will be competitive.

On the LPD program, we delivered LPD-22 San Diego in December, and our customer the US Navy, said this ship was the best LPD delivered to date. We expect LPD's 23 and 24 to go to sea trials later this summer, and delivery of the two ships by the end of the year. LPD-25 is progressing well and should launch later this year, although significant risk remains since it is the last ship to be completed at Avondale. We've also begun construction of LPD-26, and we are working under a long-lead material contract for LPD-27, and expect to finalize the construction contract for LPD-27 in the near future.

In the LHA program, we expect to launch LHA-6 America this summer, a critical point in the construction program as all subsequent work is performed in the water. We are in the process of negotiating a contract for LHA-7, which is the next America class amphibious assault ship, and expect to have a contract in place soon. For National Security Cutters, we've begun construction of NSC-4 and we'll soon begin construction of NSC-5. We expect a long-lead material contract for NSC-6 later this year, and a construction contract in 2013.

For the DDG-1000 program, we are manufacturing the deckhouses, hangars, and vertical launch system components for DDGs1000 and 1001, and expect a contract award for similar work on DDG-1002 later this year. At Avondale, we are maintaining our plan of record to wind down our operations. However, we remain committed to examining other opportunities to redeploy the shipyard, and its talented workers in other ways, including the possibility of a joint venture with a credible partner.

Now turning to Newport News. In aircraft carrier construction, Ford is over 74% structurally erected. The program remains on track, and the ship is on schedule for launch in 2013, with expected delivery in 2015. On Kennedy, structural manufacturing, material procurement and design and planning continue under the construction preparation contract. We expect to have a construction contract in place sometime in 2013. The refueling and complex overhaul for Roosevelt is progressing very well, and she is on schedule for redelivery in mid- 2013. We're also preparing for the refueling of Lincoln, which comes into the shipyard in early 2013.

For carrier inactivations, we are preparing for Enterprise to enter the yard in mid 2013 for defueling of its eight nuclear reactors. Enterprise just recently left Norfolk for a final overseas deployment, and following this deployment, she will begin the inactivation process. On the Virginia class submarine program, the two submarine per year build plan is going well, and we expect to launch Minnesota, the last Block II submarine later this year, with expected delivery in 2013. On Block IV, we expect a contract award in 2013 for at least nine boats to be built between 2014 and 2018.

Outside of the submarine and carrier businesses, Newport News began execution of the contract to manage maintenance for the Navy's reactor prototype facility in Kesselring, New York. This is an important win for us, as it enables us to leverage our significant strengths in nuclear engineering to pursue other opportunities in reactor maintenance. And finally, our Newport News industrial subsidiary was awarded a contract to manufacture shield-building wall modules for four AP-1000 nuclear reactors being constructed in Georgia and South Carolina. This contract represents a significant achievement for us, as we expand into commercial nuclear energy.

Overall, our programs are progressing well. We're working through our underperforming contracts at Ingalls, and we have a strong pipeline of new business. And we were pleased see that the President's budget request submitted to Congress in mid-February demonstrated support for the Navy and for ship building. Now, although the budget process is only just begun, and many things can change before it becomes law, we believe our programs are well-represented. Under the request, funding for our major programs remains intact, including the construction of CVN-79, and the refueling of CVN-72 beginning in 2013 as planned. Funding continues for DDG-51s and submarines, although one Virginia class submarine slips from fiscal year '14 to FY '18 under the plan.

There were no amphibious ships in the request but this was expected, given both LHA-7 and LPD-27 were funded just last year. One thing we are sure of, is that the best way we can shape our future is by providing the most capable and most affordable ships to our customers. I can assure you that we are, and will remain intensely focused on achieving this goal.

Now, turning to cash deployment. Since the spin, we've been very transparent about the risks in the business, including the completion of the legacy LPD and LHA contracts, and the wind-down of the Avondale shipyard. Although we've quantified our best estimates to complete these projects, it's important to remember that risk remains until these items are behind us. For that reason, we've taken a conservative approach to cash management. And we'll continue to do so for the near future until we get more clarity on these major challenges. That being said, we are continually evaluating alternatives, and we are committed to deploying cash in a manner that creates the most value for our shareholders.

Now looking ahead, I'll make a couple of comments on the outlook for 2012, as it relates to operating margin. As I said before, the real inflection point in our margin expansion story is in 2013, after we've delivered LPD-25 and LHA-6. Then, we expect margin expansion should continue on its way to our goal of 9% plus total Company operating margin in 2015. Between now and then, we expect continued margin expansion at Ingalls, which combined with the stability at Newport News, should drive modest improvement in overall segment operating margin. Barb will have some more detail in her remarks on items below the segment operating income level.

So in summary, we closed out 2011 with a strong fourth quarter. We are carrying that momentum into 2012. In the fourth quarter, we posted year over year improvement in operating earnings and operating margin, both at Ingalls and at the Company level, reflecting our continued focus on improving productivity and profitability. We delivered LPD-22, the first of the five underperforming ships that we expect to deliver between now and 2013. And looking ahead, we remain firmly on track to achieve our long-term revenue and margin targets that we've laid out over the past year. So with that, I'll turn the call over to Barb Niland for some remarks on the financials. Barb?

Thanks, Mike, and good morning to everyone on the call. I would like to believe briefly review our consolidated and segment results as disclosed in the press release, and wrap up with some comments on pension and cash. Before I get into our operational results, I'd like to discuss the goodwill impairment charge we took during 2011. As you are aware, with the decline in our stock price and market capitalization that began in the second quarter, we performed an impairment analysis that resulted in a $300 million preliminary goodwill charge in the third quarter. During the fourth quarter, we finalized the calculation, which decreased the charge by $10 million for a 2011 total non-cash goodwill impairment charge of $290 million.

Now, turning to the financials on slide 4 of the presentation, reported fourth quarter sales were essentially flat, and 2011 sales decreased $148 million from the comparable periods in 2010. These changes were mainly driven by lower volume, following the delivery of DDG-110, lower volume on the LPD 22 through 25 contract, the Roosevelt RCOH, the Enterprise EDSRA, and the PSA for Bush. These were partially offset by higher volume on DDG-113, LHA-6, the National Security Cutter program, long-lead procurement for LPD-27, construction on the Ford, construction preparation on the Kennedy, advanced planning on the Lincoln RCOH, and the VCS program increasing production to two submarines per year.

As a result of the non-cash goodwill impairment charge and subsequent partial reversal, GAAP reported segment operating income for the quarter was $127 million, and $122 million for the full-year. The total operating income for the quarter was $124 million, and $110 million for the full-year. Diluted earnings per share was $1.39 for the quarter, and negative for the full-year. Adjusted for the goodwill impairment, fourth quarter segment operating income was $117 million, and total operating income was $114 million. Total operating margin was 6.6%, compared to 6% for the same period last year.

For 2011, adjusted segment operating income was $412 million, and adjusted total operating income was $400 million. Adjusted total operating margin was 6.1%, compared to 3.7% in 2010. Adjusted for the goodwill charge, diluted earnings per share for the quarter was $1.19 compared to $1.29 for the fourth quarter 2010, and $3.97 for the year, compared to $2.77 for the prior year. Cash from operating activities for the fourth quarter was $474 million, up $266 million or 128% over the same period last year. Cash from operating activities for the year was $523 million, up $169 million or 47% over 2010.

Capital expenditures for the fourth quarter were down -- were $78 million, down from $95 million in the fourth quarter last year. For the full-year, capital expenditures were $197 million or 3% of sales. CapEx generally falls between 2% and 3% of sales annually, and we expect CapEx for 2012 to continue at the high end of this range. Beyond 2012, CapEx should begin declining towards the lower end of that range.

Turning to slide 5, Ingalls' revenues for the fourth quarter of 2011 decreased $51 million or 7% from the same period last year. 2011 sales decreased $142 million or 4.7% from 2010. Lower sales were primarily driven by lower volume following the delivery of DDG-110, and lower volume on the LPD 22 through 25 contract, partially offset by higher volume on DDG-113, LHA-6, NCS, and long lead procurements for LPD-27. Excluding the $10 million reversal of the non-cash goodwill impairment charge, Ingalls' operating income for the quarter was $15 million, compared with $10 million in the same period in 2010. Ingalls adjusted operating income for 2011 was $70 million, up significantly over the operating loss in 2010. Ingalls adjusted operating margin was 2.2% for the quarter, up from 1.4% last year, driven by LPD-22 through 25 program performance and the effects of the new contract.

Turning to slide 6, Newport News revenue for the quarter increased $51 million or 5% from fourth quarter 2010, primarily driven by higher volume on the Ford, the construction preparation contract for Kennedy, advanced planning efforts on the Lincoln RCOH and the VCS program, partially offset by lower volume on the Roosevelt RCOH, and the Enterprise EDSRA and the PSA for Bush. 2011 sales decreased $9 million or 0.2%, primarily driven by the decrease in aircraft carrier sales volume which I discussed, and lower fleet support sales volume. These decreases were partially offset by higher volume on the VCS program from increasing production to two submarines per year.

Newport News operating income for the quarter was $102 million, compared with $106 million in the fourth quarter last year. Segment operating income for 2011 was $342 million, down $13 million from 2010. This decrease was primarily due to contract mix and risk retirement that occurred in 2010, on Vincent and Bush, partially offset by risk retirement on the VCS program in 2011. Newport News operating margin was 9.5% for the quarter, compared to 10.3% in the fourth quarter 2010, and was 9.1% for 2011 versus 9.4% last year.

If you'll turn to slide 7, I'd like to make a few comments on pension. We are expecting 2012 net FAS/CAS adjustment of negative $77 million, based on a reduction in the discount rate from 5.84% to 5.23%, and a reduction in our expected long-term return on assets from 8.5% to 8%. 2012 cash contributions to pension and post retirement benefit plans are expected to be $111 million net of CAS recovery.

Regarding some of the other income statement items in 2012, deferred state taxes should run about negative $16 million, interest expense should be roughly $118 million, and our tax rate should be close to 35%. Dilution in 2012 is expected to be approximately 600,000 shares, similar to 2011. As Mike highlighted earlier, we ended the year with $915 million in cash, due to multiple large invoices paid at the end of the year.

We are typically a cash user in the first quarter of this year, and then this reverses over the remaining three quarters. We saw this in 2011, and are seeing a similar trend in 2012. Also in the first quarter, we have already contributed $123 million to the pension plans, or about 50% of our expected totaled 2012 obligation. As a result, we expect first quarter cash balance to be between $500 million and $600 million. That wraps up my remarks. And with that, I'll turn the call over to Andy for Q&A.

Thanks, Barb. Before we start the Q&A, just as a reminder we'd like everyone to limit yourselves to one initial question and one follow-up, so we can get as many in the queue as possible. Keisha, can you start the Q&A?

(Operator Instructions).

Your first question comes from the line of Jason Gursky with Citigroup. Please proceed.

Good morning, everyone.

Good morning.

Two quick questions. First, on the DDG-51, Mike you mentioned that there would be as many as 9 ships in this next buy, and that it would be split. Can you just talk a little bit about your confidence level on that split, and any risk that all 9 ships could go to one shipyard, would be the first question? And then the second one, is just on the carrier build, and the delivery of the next ship, and the impacts that it might have, in being pushed out maybe a year or two here on your revenue stream and your statement of, kind of flattish revenues as we get out to 2015?

Okay. First of all, on the DDGs, this -- this approach that the Navy has taken over, not just the current time period, but really goes back over 20 years on the DDG program, keeping two competitors viable and in a place to strongly compete, has created really, a model shipbuilding program, in terms of the best destroyers on the planet, with lots of technology insertion at a very competitive and affordable program.

And my view is that the Navy views that compete -- the fact that they have competition on this program as one of their -- one of the key attributes for the program. So I think that the odds that all 9 ships could be awarded to one competitor are almost nonexistent. The number of programs where the Navy has competition, especially in the high end of Navy warships is very small, and this is one of them. And the Navy will work to continue to protect that.

From our standpoint as you recall, there was a competition last fall for DDG-116. And while we did not win that competition, it was our first competition, in this ship -- in this entire business in just about -- certainly, since Katrina and probably going back about 10 years. We've been doing a lot of things. We needed to get out of the field, and compete. We learned a lot from that competition. And while we did not win, we are definitely better for having competed, and we look forward to the next round. And we're taking steps today, to make sure that we're as competitive as we can be on the next round.

Relative to the CVN-79, the challenge to your question about what happens if 79 moves out, on our revenue streams and things like that is, is well, it depends. It depends on how does -- how do you bridge from the work that we're doing today on 79, to the point where you actually go to a full detail design and construction contract. How long is that time period? How do you bridge that work? How would the Navy want to bridge that work? And so, and we kind of take that one chunk at a time.

Our sense of it is, that right now the, our plan and the Navy's plan, and the administration's plan is to go to contract next year. And so, we're working very hard to be ready to go, and sit down with the Navy and get that done. If all of that were to change and move out, then we'd have -- we would have to assess what the bridges would look like, to get from point A to point B. If you decided that you were going to absolutely stop all work, and not bridge from where we are today, to the point of signing the contract to build the ship. The cost of the ship would go up so much, that it would probably not be -- it wouldn't make any sense to do that.

So I can't give you a whole lot more clarity on that, except to say it really depends on what the bridge looks like. And our focus is not so much on the bridging from here to there, but really, in making sure that we're ready to go to contract next year, and avoid that whole problem.

That's helpful. Thank you.

Your next question comes from the line of Rob Spingarn with Credit Suisse. Please proceed.

Good morning.

Good morning, Rob.

Good morning, Rob.

On something you said earlier, Mike, when you were talking about the DDG-51s, and you alluded to the competition on 116, I think if I understand the way the Navy worked that competition, it was really 114 through 116, with the low bidder winning 2 of the ships. GD got the first 2 -- or you got 114. They got 115 and 116. But if I understand what Secretary Mabus has said, is they were the low bidder, and the high bidder would get the low bidder's price? So how do we think about your improvement in profitability, given that dynamic?

Well, that's probably an oversimplification of a pretty complex relationship in this competition. Rob, I'd take you back -- remember, as a result of the swap, we were going to build the first 2 DDGs, and that would be 113 and 114, and Bath was going to build the 115. What the Navy did, was they came back and said, why don't we do a competition for 116, that is a 2 ship competition, so you bid on 114 and 116. Bath would bid on 115 and 116, and the Navy would get to choose between them.

We -- we actually supported that pretty strongly, because I really felt the need to get the team out there and compete. And I was glad that we were able to go and compete in this environment, before we had to go and try to do a competition for a 9 ship multi-year kind of program. So that was all valuable for us. The only drawback is, we didn't win it. Now, the way the pro competition works is much more complex, relative to the way you set the fee. But your general presumption is that, the team that gets -- the losing competition does get a lower return on the program than the winning team does, unless the losing team improves its performance.

And so our view of it is, at this point, we think hard about how we go and get to be competitive. We're thinking very hard today, about what are the steps we need to take, or are taking to be competitive on the next competition, and actually how that's actually driving our performance on the current ships we have under contract. And so there is sort of a -- there is a reach back into the work we have under contract. And ultimately, all of that doesn't have -- at the end of the day, we don't think that that changes our long-term outlook of getting the business up above 9% by 2015.

Okay. I'll take that the way you've said it. I just still have a little bit of trouble reconciling -- I think your contract was in the $690s million. The other two contracts were between $660 million and somewhere in the $670s million. And again, just to quote the Secretary, said this recently, the difference in price would come out of the high bidders fee. But I think what you're saying is that, that's partially true?

Yes. It's -- the Secretary is not wrong. It's a -- I think it's a simplification.

Okay.

And I think that -- but in the end, you're correct. If we performed at the level that we projected, we would get a lower return, than if our competitor performed at the level they projected.

Okay.

But our indication here -- our ambition is, that as we move into our next round of competition, we are taking steps to be more competitive. And that creates positive opportunity on the ships we already have under contract.

Okay. And then just on the Avondale closure, you talked about the possibility of a joint venture. And clearly, the benefit -- the first benefit of doing something like that is jobs get retained, and I'm sure that's a high priority for everybody. How would the financial exposure change for HII, in a joint venture, with a going concern, versus a shut -- a full closure as planned?

The --

I know it's complex.

Yes.

But this goes to the point, of whether all of the reimbursable costs are actually really reimbursable, and there is an open issue there? And then what liabilities might still be there, in a joint venture?

Yes. What we've said, Rob, from the beginning is that, in order for us to do anything other than close the shipyard, we need to have four things happen. We need to have, first of all, we need to have the Navy on board with regard to the allocation, or the way we would handle our restructuring costs in the event that we don't close it. And so we would need -- we've had an agreement with the Navy to go and consider these negotiations. If we ended up in some -- with some specific thing to consider, we would have another round of discussion with the Navy about how the restructuring would be handled.

The second thing we need is, is we need state involvement. And if you may recall, in the fall the state of Louisiana stepped up to the plate with something like $200 million of incentives for a partner. The third thing we would need is a partner that understands the business that is not Navy business, because the purpose here is to get this at -- get this footprint out of the Navy production base to lower the Navy's cost.

And then the fourth piece of it is, is that there has to be a credible and sustainable market out there. Our view of it is, if we get a specific opportunity to go and pursue down these paths, we're going to be talking down all four of these paths again. We will have to have a discussion with the Navy about how this specific opportunity would be handled, in light of the restructuring. We would have to talk to the state about how this specific opportunity would be handled, in light of the incentives that are out there.

We would have to make sure that we are comfortable, that the market that's being -- that would be pursued, would be credible and sustainable. And that the partner has the wherewithal to -- and the credibility to go pursue that market. And so, there's a lot of moving parts in that. So I'm not even sure complex captures the full range of how that would all work out. And a lot of it would be subject to the negotiations around any specific transaction that might be considered.

So the time frame here -- it sounds fairly complex. It would take some time.

Well, the time frame really, is what -- what we are talking about here is, we're delivering one of the two ships in Avondale this year, we're delivering the other one next year. And as soon as the second 1 delivers, our plan would be to proceed close the shipyard. So from that standpoint, the time frame -- the clock is ticking on the sideline here, as we're working our way through this. And we are committed to our Avondale employees to go and turn over every rock to figure this out. We are doing that, but we're still on path right now to close it.

Okay. Thanks very much.

Yes.

Your next question comes from the line of Doug Harned with Sanford Bernstein. Please proceed.

Good morning.

Good morning, Doug.

On CVN-78, I mean, Secretary Mabus had a lively exchange with the Senate Armed Services Committee recently. Can you highlight the technical and budget challenges that you're facing on that program, and how you see the margin outlook now, and how that compares with prior plans?

Well, let me first of all say, that we've had -- we have no change in our outlook on 79 -- or 78. No change at all. We are proceeding with building the first ship of a new class of aircraft carriers. The ship has basically been completely redesigned from the inside. The hull is the same, but everything else is different. The team is performing at a level better than any I have ever seen on any lead ship. Nothing has changed in our outlook.

And so from that standpoint, Doug, we're kind of -- we're kind of separating the fact that we are building a lead ship with the best shipbuilders. We're separating that from the political exchanges going on around the budget, about how does the risk of building a lead ship get financed? And so, we have our contract. We're working our way through the contract, and we are proceeding just on the path that we've been on.

So despite all of those discussions that have been in the press, there is really not a change from your standpoint, is what it sounds like?

Yes, I think you have to separate the things that are going on here. And we've been working this program for a couple of years -- or several years. And we're going to be working this program for the next three or four years. We have a contract with the government that shares the risk of this program. We have taken a look from the Company standpoint, as to what the risks are, and we've created our plan around that risk set.

And we have been on that plan, basically since -- you remember a year ago, we took back and said, we weren't quite sure we had retired the risk in a timely fashion. And so, we -- first quarter last year, we held back just a little bit. But we basically have been on the financial plan that we've laid out from the beginning. Our friends in the government are working their way through their process in a very public manner, on how do they manage the financial risk on their side?

And so, that's really, in my view, that's sort of what's happening here. And let me just tell you, just like we're working with Avondale, we're not leaving any stone unturned. We are not leaving any stone unturned on how to drive the costs down on CVN-78. Our contract actually rewards us for driving the cost down, and we have been fairly successful with that. We've still got four years to go, and we're going to keep working that very, very hard. We think that -- it's clearly to our advantage, but we think that's in the government's interest as well. They have been very supportive of the things that we need to go do. And they review this with us very, very often. And right now, we're keeping it on track.

And then on margins, at Ingalls, you talked about the real potential being in 2013 after -- once LPD-25 is delivered. Now, as we look over the course of this year, and also think about competing on the DDG, the next DDG contract, what are the kinds of things that you're doing at Ingalls today, in terms of cost reduction? And are there some expectations we should have, with respect to margin I would say, separate from simply the delivery of -- of getting the LPDs behind you?

Well, first of all, I'm not going to go, because of the competitive nature of what we're trying to do, I'm not going to go into all the different things that we're trying to do to drive costs in our competitive business. I think the thing for you to focus on right now, Doug, is that this year, we have three major milestones. We have a delivery of 2 of the LPDs. One of them is at Avondale, one of them is in Pascagoula. And we have the launch of LHA-6. Those three milestones are -- they move us -- today we sit here with 1 of the 5 ships delivered. Those three things happen, we're going to be on the backside, with an eye towards the finish line on getting that risk retired.

The delivery of LPD-22 before the end of the year was a major, major accomplishment for the team at Ingalls. It also gave us some perspective on what we need to do to get 23, 24, and 25 delivered. And so, as we factor that into what we're doing, that will clearly factor into 23 and 24s delivery. Getting those done, getting 6 in the water with a quality launch, those are the things that we're focused on right now. I don't want to get too much further out in front of our headlights on that, because those are -- it's easy for me to say that, but that's a lot of hard work by the team -- the team down south.

Okay. Great. Thank you.

Your next question comes from the line of Sam Pearlstein with Wells Fargo. Please proceed.

Good morning.

Good morning.

Good morning, Sam.

I was wondering if you could talk a little bit about the cash, and just thinking about cash flow? This year you talked about the pension increase of kind of $111 million. In the past, you've talked about Avondale, that this is the peak year, in terms of the spending. So I am just trying to think about the roughly $500 million of cash from operations in 2011. We know those two headwinds. Is there anything else we should be thinking about? Or is it -- mean we should be on the target of kind of a $150 million to $200 million less in 2012 than 2011?

Well, I wouldn't say that your last statement is correct. Let me just give you a little story on the cash flow here. Basically, it's all about timing of cash collections. And in the last two weeks of the year, we collected over $500 million in the last two weeks, and 20% of that came on the last day of the year. So I've talked about it in every quarter, it just depends on timing of cash collections. So we will be going through the same thing, as we go to the end of this year. And then, it depends on the deliveries.

So one of the reasons the cash collections were as high as they were in December was the delivery of LPD-22. And so, we got to collect the cash associated with the retention on that ship. So as we go to the delivery of 23 and 24, it will depend on timing of that delivery, timing on the invoices, timing on when the customer chooses to pay those invoices -- they will be large invoices just like LPD-22. So at the risk, of say, that your number is right, I'd give you caution, because the timing of these cash payments will make a significant difference at the end of the year.

Like I said, we're always a cash user. This year is no different. We're a cash user in the quarter. And basically, last year, we were negative free cash flow until the second to the last week of the year. And so, this business, for some reason seems to operate -- in my 8.5 years in it, that's how I've seen it operate, and I don't think it will operate any different this year.

But in terms of big moving pieces, is there any -- I mean, because you've talked about some of the operating margins, based on some of the other items as being relatively flattish until you get behind some of these big milestones. Is there a way to think about cash flow in any sort of a similar way? And that's why I know there's a couple big pieces like pension and Avondale spending. But is there anything else big, that would move it up or down from where it's been?

The -- I mean, like I said, the only thing that will move it up, is the timing of these payments for the deliveries on -- so the timing on the deliveries, and the timing of payments. And the things that will [move] it significantly down would be, if we don't have the cost right on LPD-23 and 24, and we incur more costs than we anticipate. And then really, it's all on the timing on the Avondale closure of -- as we let people go, we are incurring that cash associated with letting them go. Also, the employee incentives -- so it's all in the timing.

Okay. And then if I can follow-up one question is, is Mike, can you just talk about -- you're negotiating LPD-27, I guess, LHA-27 and DDG-1002 -- you kind of talked about those coming in this year. Has what's been going on in terms of Washington, with the budget process, the sequestration, has that slowed the process down? Or how does that impact the timing?

Actually, I think that the sequestration budget discussion is really for future work, work that hasn't been appropriated yet. The contracts that we're working on of -- these have basically been appropriated, and we're just working our way through the process of getting the scope right, and getting the risk register settled so that we can get to a contract. And that's really the challenge, is that -- you just kind of -- you work your way through this, and just make sure that there is a common view of what's the scope of work? What's the risk register look like? How are we going to manage that? And then, what's the price? And I don't think there's anything in particular that is slowing it down so much, as it's just the next thing we have got to go do.

Okay. Thank you.

Your next question comes from the line of Carter Copeland with Barclays. Please proceed.

Hi, good morning. This is Meyer in for Carter. Hi, Mike, I had a question. My starting question is, the revenue target that you talked about -- keeping it flat through 2015. I just wanted to be clear, does that guidance include or exclude the step down of the Virginia class in '14?

Yes. I think that the -- I mean the reality is that moving that ship out of 2014 into 2015, and pushing everything back, will have a minimal effect to our overall view. We would be barely started on that program by 2015.

All right. And on just the kind of -- go with Doug's question just another way, you've talked about the 2015 inflection point on margins. But if you were to take away the underperforming contracts now, would you say that -- I mean I'm just curious to know what your underlying margins are, if you were to just exclude those contracts? I mean, it seems you're already at about 9% at Newport News. But I was just wondering, how do -- how are you right now at Ingalls? If you can provide any color there?

All I would say is that we're on the start of -- if you go and you take those contracts that we're executing, and you just take them out of the business, we're going to replace them with new work. And last year, we said that we needed to go sign 5 contracts. We have actually signed 4 of the 6 that have turned out, because we've got an extra one on the National Security Cutter in there. We still have the 7 contract, and the 27 contract to work our way through.

These new contracts will come online. The challenge for us on those is that we're not going to -- because of the way we normally recognize income on these programs, we don't go to the final position until we retire all the risk. And so, at the very beginning of these programs, the very beginning of 113 and 114, the very beginning of 26, these programs all look good. But we're still on the very -- there is the whole contract to go.

And so, we're not -- we're not ready yet to step up and say, that we're at our full, final fee rate on those programs. So it's a little bit -- it would give you a little bit of a skewed view, if you tried to do the analysis the way you are doing it. Our view is that by 2015, we would have all of that sorted out, the effect of the 5 ships gone, and the -- bringing the new contracts up to the rate that we expect to be normal for the business. We don't see any issue -- we don't see anything holding us back from that at this point, and we're on track to it.

Okay. Great. And if I can just sneak in a quick one for Barb. I don't know if you can provide any color, in terms of the sequencing of revenues through the course of the year. And if there's anything you can provide more specifically on Q1, since we're just a couple days away from finishing that quarter?

(Laughter). Yes. I -- I think revenues will flow similar to how they did last year. We're pretty ratable. The biggest swing happens with material, and I -- timing of payables, that type of thing. And then only other thing that can affect sales up or down would be our progressing. So as we've launched these ships, we'll -- as we launch LHA-6, we'll be looking at progressing pretty hard. And that could have a swing on sales one way or another.

Great. Thank you very much. Oh sorry, and anything on Q1?

Nothing in particular.

Okay. Great. Thanks very much.

Your next question comes from the line of George Shapiro with Shapiro Research. Please proceed.

Yes, good morning.

Good morning.

Good morning, George.

Barb, if I take a look at the loss provision number, it declined from $31 million to $19 million. So $12 million this quarter, which was improvement, because the prior quarter was like $19 million. Were there any -- was there anything in there, like moving around reserves, or is that was just how it showed? And then, since the last LPD doesn't get delivered until the middle of '13 -- so you have got 5 or 6 quarters and only $19 million to go through, without having another charge. I mean, what's the confidence that you're going to go down to averaging a decline of $3 million or $4 million a quarter, from what was $12 million this quarter?

Okay. So loss provisions that remain are just for LPD-23 and 24. Okay? Okay, prior to that, we had loss provisions in there for -- also 22 and LHDA. Okay, both those ships are delivered. We feel very confident where we are there. So what you have -- that $19 million for -- $19 million for is LPD-23 and 24. They are both around 89%, 90% complete. And we plan on delivering them by year-end. And we learned a lot with the delivery of the LPD-22. So we feel pretty comfortable about where we are on the next 2 ships. And I feel very comfortable with the provisions that we have.

Okay. And then, a follow-up, just to get at this margin at Ingalls maybe a little differently. If I would kind of roughly estimate that the LHA-6 and the LPDs are maybe half of the revenues at Ingalls, that would imply that the underlying margin at Ingalls ex these, is more like 4.5%? And then, with the risk associated on the DDG, and the Ford becoming a bigger percentage of the total, I mean could you provide a little clearer path on how that 4.5% say, gets to 8.5% by 2015, to get to your overall 9% number?

Well, basically, what we talked about in the past, is that when we're starting new contracts -- so on DDG-113, LPD-26 and NSC, we're (inaudible) we have booked to a risk number. So we start out very conservatively. As we progress on those ships and we retire risk and certain events occur -- so we file the material, we launch the ship, and we are on our cost projections, you'll see incremental improvement. So as we retire the risk, you'll see incremental improvements on those conservative margins, which our plan is to be at 9% or better at Ingalls in the future.

And all that's sufficient to get, what looks like -- unless my numbers are wrong -- about a doubling of the margin, even without the current -- when the current ships go away?

What happens -- I'm not going to comment on your numbers, George. But what I would say, is when you have a problem like we've come through over the last four years, this -- the business gets out of balance. The balanced portfolio of the business, if you were to just take a snapshot -- and take a snapshot at Newport News for instance, you have programs there that are at the very beginning of the program, and we're very -- and we're booking those very conservatively. We also have programs that are at the very end, and we've recognized that risk is retired. And so, we're able to go recognize the full opportunity there.

Those blended together create a pretty solid level of performance, that's fairly predictable in this business. When we've -- what we've come through on the Gulf Coast, is that a substantial fraction of the business basically got knocked off. And basically, became so underperforming that we couldn't get the blended rates to be where they need to be. And we're were going through now, between basically, for the last four years that Barb and I have been working this, and through the next three years to 2015, is rebalancing that portfolio, and getting it back to where it needs to be.

The first thing we need to do is get those 5 ships out of the portfolio. Then what we have to do, is we have to go retire risk on the new programs. And so, we're starting these new programs. We signed the contracts in the last year. We're starting down the path. We are retiring risk. We're looking -- we're feeling fairly confident about that. But we have a process that we go through, and it just takes some time to work our way through it.

Okay. Thanks very much.

You bet.

Thanks, George.

Your next question comes from the line of Brian Ruttenbur with Morgan Keegan. Please proceed.

Thank you very much. One -- most of my questions have been answered. My macro question is on presidential elections. I know that there has been talk by the Romney camp of potentially increasing shipbuilding. Can you talk about what that would mean potentially for you? And if that would accelerate your margin picture in the near-term? Or decelerate in the near-term, and then accelerate it longer term? Maybe you can just give us some round numbers on that?

What I would say, Brian, is that, just what we've said before. The work that you see, and the performance of this business between now and three to five years from now, is primarily the work we already have under contract. The debate about the budget, the debate about what does the Navy look like, that's more in the five to ten year time frame. If you were to go, and have some major change, and we were going to head to some other size, some other strategy, some other volume of work, it probably still wouldn't show up necessarily in our financials in the near-term. It takes a while for these things to get to a point where we can recognize them.

And so, I think that the debate is -- what is interesting about the debate is, it's really a debate about what is -- what's the role of the Navy, and what's the -- and how does that play into our overall national economic health, which is something that I always thought was the right place for the Navy to be having the debate. So I -- and I think frankly, the fact that the current administration wants to continue on the path with 11 carriers, and has supported the Navy so far, it shows me that at the national level, people recognize -- both parties recognize, both possibilities here recognize, that the Navy is a key part of our economic future going forward. And that puts Huntington Ingalls in a really good place.

Great. Thank you very much.

Okay.

Thanks, Brian.

Your next question comes from the line of Myles Walton with Deutsche Bank. Please proceed.

Thanks. Good morning.

Good morning.

Good morning.

I was wondering, maybe Barb, if you can start on the cash flow for pension funding, moving it up to $250 million plus level for 2012, and it was a relatively de minimis in '11. I think prior to '11, it was running around $200 million. Is the -- kind of the longer term, next few years funding requirements, or funding expectations in this kind of $200 million, $250 million level?

Well, I would need a crystal ball on that one. What we like to do is maintain our funding at 90% on a PPA basis. But like -- like you know, after what happened this year, it depends what the discount rate is going to be. It depends on what your long-term return on asset expectations are going to be. So your guess is as good as my guess. I'd like to say it's predictable. But after what we saw at the end of the year, and the changes it has made in the pension, I would say, saying it looks like this year, is fine.

Okay. It -- the other one -- maybe a clarification -- it's probably that I just missed it, but what was the size of the risk retirement, the Virginia class?

Well, what -- we don't really give any full disclosure on individual programs or anything. But we did -- we did have a net adjustment for the year of about $54 million positive, and that was primarily due to the Virginia class, but this was across all the businesses --

Okay.

-- so the net impact. And you -- a lot of it was attributable to Virginia class.

So was that net 54, is that what the SEC disclosure will be, in terms of the net cum. adjustment, or is that in addition to that disclosure?

No. That will be what the disclosure will be.

Okay. And given it was -- I imagine it was mostly Block I retirement? Is that right?

Well, it was Block I, Block II, and Block III, as we hit certain material milestones, deliveries, out of warranty periods, it's across the board, pressure hull complete.

Okay. And that opportunity level is remaining in 2012 for that kind of risk retirement?

It moves around.

Okay. Okay. Great. I think that's it for me. Thanks.

Okay. Thanks, Myles.

There are no further questions in queue at this time. I would now like to hand the conference back over to Mr. Mike Petters for any closing remarks.

Thank you. And thank you all for your interest in today's call. But also, this week marks the one-year anniversary of this, Huntington Ingalls Industries as a public Company. And we've done a lot of things in the last year for the very first time.

We are now moving into of, the kind of the normal order of business, where we're doing things over now. And every time we do things over, we do things better. So we appreciate your interest over the past 12 months, and we look forward to continuing to work with you going forward. We're on our way. We are very excited about that. We've completed a pretty successful first year, and we're on track to achieve the targets that we laid out for you a year ago. Thank you all very much, and hope you all have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines. Good day.