亨廷頓·英格爾斯工業 (HII) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2012 Huntington Ingalls Industries conference call. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the presentation over to Mr. Dwayne Blake, Vice President of Investor Relations. Please proceed.

Thank you, Stephanie. Good morning, and welcome to the Huntington Ingalls Industries fourth 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 certain non-GAAP measures, including certain segment and adjusted financial measures. 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 will turn the call over to Mike. Mike?

Thanks, Dwayne. 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 of 2012. Today we reported sales of $1.8 million for the quarter, and full year sales of $6.7 billion, both up slightly from last year. Diluted earnings per share was $0.98 for the quarter, and $2.91 for the full year. Pension adjusted EPS was $1.30 for the quarter, compared to $1.25 last year, and for the year, $3.95 compared to $4.15 in 2011. All 2011 comparative earnings and margin results excluding a non-cash goodwill impairment adjustment of $10 million in the fourth quarter, and a $290 million charge for the full year.

Segment operating performance was very strong. Fourth quarter adjusted segment operating margin was 7.7%, up 94 basis points from last year, and for the year, 6.8%, up 55 basis points from last year. The margin expansion was primarily driven by improved operating performance at Ingalls. Including $236 million of increased pension contributions in 2012, free cash flow for the year was $170 million, compared to $331 million in 2011, and we ended the year with over $1 billion of cash on hand. We received $6 billion in new awards during 2012, including the detailed design and construction of LHA-7 Tripoli and LPD-7, contributing to a healthy backlog that was $15.5 billion at the end of the year.

The cash generation that has been realized over the past two years, along with the confidence that we have in the long-term performance of our programs, affirm our decision to proceed with a balanced cash deployment strategy that will return cash to shareholders, optimize our capital structure, and prudently pursue value creating growth opportunities. One of these growth opportunities involves the potential redeployment of our Avondale facilities, and more importantly, our talented Avondale workforce into the commercial energy market. We are pursuing this opportunity, which would open up a new source of revenue with long-term growth potential, diversify our customer base, and enable us to retain the Avondale workforce and facilities. Our announcement earlier this month that we are opening a business development office in Houston, Texas was the next step to help us evaluate and pursue engineering and construction opportunities in this market. The Avondale facility sits on over 260 acres on the Mississippi River, has world-class modular construction capabilities, features the largest floating dry dock in North America, and requires little or no additional investment to pursue this market. As for returning cash to shareholders, our share repurchase program continues, and we were pleased to announce our second quarterly cash dividend earlier this month.

Now to hit a few highlights of our major programs, and please keep in mind that this assumes a reasonable resolution to the fiscal year 2013 budget. Let me begin with Ingalls. LPD-24 Arlington was delivered during the fourth quarter, which leaves only two remaining under-performing ships at Ingalls, LPD-25 and LHA-6. The delivery of LPD-24 and the continued progress on LPD-24 and LHA-6 represent key milestones on our path to achieving our 2015 operating margin goal. LPD-25 Somerset, the last Navy ship under construction at the Avondale shipyard, successfully completed combat systems light off, and remains on schedule to deliver later this year. At Pascagoula, we continued the ramp up of construction and make progress on LPD-26 John P Murtha, and LPD-27, the newest ship in the San Antonio class of LPDs. LHA-6 America remains on schedule for delivery later this year, and we are making progress on LHA-7 Tripoli.

In the National Security Cutter program, NSC-4 and NSC-5 are under construction, and we are under a long lead-time material contract for NSC-6. We expect awards for the construction of NSC-6, and procurement of long lead-time materials for NSC-7 in 2013. Construction of DDGs-113 and -114 in support of the DDG-51 program restart is progressing well. We expect the Navy to announce the next DDG-51 multi-year shift award of either 9 or 10 ships split between ourselves and our competitor in 2013. On the DDG-1000 destroyer program, we delivered the composite deckhouse on DDG-1000 in the fourth quarter. Construction of the aft PVLS modules, hagar, and deckhouse for DDG-1001 is progressing. We are under contract for procurement of long lead-time material for similar work on the third ship in the class, DDG -1002. At Avondale, we continue to wind down Navy shipbuilding at the facility, which we expect to complete by the end of the year. Although closure remains our baseline assumption, we are aggressively evaluating the possibility of keeping the facility open, as I discussed earlier.

I'm now turning to Newport News. CVN-78 Ford was 90% structurally erected and 53% complete at the end of the fourth quarter, and is on pace to launch this year. We continue efforts under our construction perpetration contract to ramp up design, planning, long lead-time material procurement, and advanced instruction on CVN-79 Kennedy, the next carrier in the Ford class, and anticipate having a construction contract in place later this year. In submarines, SSN-783 Minnesota remains on track to deliver this spring, 11 months ahead of schedule, and we have completed our module work on the first boat of the third block, SSN-784 North Dakota, with shipment of the bow section to electric boat in the fourth quarter. We expect a block four contract award this year for 9 or 10 additional submarines, with construction beginning in 2014. CVN-71 Roosevelt remains on track to complete its refueling and complex overhaul, and redeliver midyear. While the Navy has announced a delay of the RCOH for CVN-72 Lincoln, our team continues efforts on the ship at Naval Station Norfolk, and will work to make as much progress as possible as efficiently as possible prior to Lincoln's arrival. CVN-65 Enterprise is expected to enter the yard later this year for inactivation and the defueling of its eight nuclear reactors.

In summary, we are very pleased with where we are on all of our major programs. We remain confident in our ability to reach our anticipated 2015 targets. Newport News continues to generate steady and predictable operating margins, and while we know that risk remains on the last two under-performing ships, I am pleased with the progress we have made, and we expect delivery of LPD-25 and LHA-6 later in the year to drive operating margin expansion at Ingalls. Now regarding the uncertainty surrounding the defense budget and sequestration, the prospect of a continuing resolution without shipbuilding provisions is our primary concern. I have said in the past that shipbuilding was more insulated from sequestration due to the long-term nature of our contracts and our backlog, but we are not insulated from the impact of a continuing resolution. The failure to pass a defense appropriations bill for 2013 has delayed the start of the refueling and complex overhaul of the USS Abraham Lincoln, and could impact our DoD customers' ability to execute on new work. This will result in inefficiencies in the programs, increased costs, reduced learning curves, increase risk to an already fragile industrial base, and as the Navy has communicated, the fleet's operational readiness.

Delaying the start of any shipbuilding or overhauling program invariably makes it more expensive, because the work is precisely coordinated across numerous departments and with suppliers. All of that has to come together in a very synchronized way, and when you start moving things around, you upset that synchronization. We have been very clear and consistent in our efforts to communicate the adverse impact that the current continuing resolution and the threat of an extended continuing resolution without shipbuilding provisions will have. We remain hopeful that the right decisions will be made, and we continue to engage with our elected officials to ensure that they understand the implications of their potential decisions, and ultimately the unnecessary additional cost to taxpayers.

Now since the spin almost two years ago, I have emphasized the issues we face and why it is critical that we retire risk and replace under-performing contracts with new business that can perform at more typical shipbuilding margins. Although we still have two years before we reach our 2015 target, I am extremely proud of what our team has accomplished thus far, and I am confident that we will achieve our goals. I may sound like a broken record, but the story remains unchanged. We are steadily retiring risk. We are working with our customer to get critical new business funded and under contract at both shipyards. We are streamlining our operations. We are executing well on new business.

We have created and are reinforcing a culture based on safety, quality, cost, and schedule which drives affordability, and we have a management team that is highly focused on maximizing shareholder value. Looking ahead, 2013 is the inflection point in our margin expansion story. We expect modest segment operating margin improvement with relatively flat sales. This will be driven by anticipated margin expense at Ingalls, combined with the stability and predictability at Newport News. I look forward to reporting continued progress as we deliver on the commitments we made to our shareholders when we spun off in 2011. And with that, I will turn the call over to Barb Nilan for some remarks on the financials. Barb?

Thanks Mike, and good morning to everyone on the call. I'd like to briefly review our consolidated and segment results, as disclosed in the press release, then wrap up with some comments on pension. Before I get into the details, all non-GAAP comparisons to 2011 excludes the non-cash goodwill adjustment in Q4 and the total goodwill impairment charge for 2011. We are also providing you pension-adjusted operational results, including operating margin, operating income, and diluted earnings per share to show operational performance without the impact of the FAS/CAS adjustments.

Now if you turn to slide 4 of the presentation, fourth quarter sales increased by 5% over the same period last year, primarily due to higher sales in aircraft carriers and amphibious assault ships. Fourth quarter GAAP operating income was $106 million. Pension-adjusted operating income was $131 million, up 11% over 2011. GAAP diluted earnings per share for the quarter was $0.$0.98. Pension-adjusted diluted earnings per share was $1.30, up 4% over 2011, driven by improved operating performance at Ingalls. For the fourth quarter, diluted earnings per share would be approximately $0.$0.23 higher if you exclude the impact of the increased non-cash workers compensation expense related to the lower discount rate, which was $10 million for the quarter, and the increase of $8 million in deferred state taxes in the quarter, which resulted from settlement of prior year deferred state taxes.

Turning to slide 5. Sales for the year increased 2% over the prior year, as a result of higher volume on aircraft carrier and surface combatant programs, partially offset by reduced volume on submarine and amphibious assault ships. GAAP operating income for the year was $358 million. Pension-adjusted operating income was $438 million, up 6.1% over 2011. GAAP diluted earnings per share was $2.91 for the full year. Pension-adjusted diluted earnings per share was $3.95, down from $4.15 in 2011. 2012 pension-adjusted diluted earnings per share would be approximately $0.$0.70 higher if you exclude the increased non-cash workers compensation expense related to the lower discount rate, which was $34 million for the year, the $8 million non-cash tax matters agreement expense, both of which we discussed on the third quarter call, and the $8 million increase in deferred state taxes I referred to earlier for this year.

Cash provided by operating activities for the year was $332 million, a decline of $196 million from 2011. This decrease was primarily driven by $236 million of increased contributions to our qualified pension plans in 2012. Capital expenditures were $162 million, or 2.4% of revenue, $35 million less than last year. We began our share repurchase program in November, and through the end of the year we purchased approximately 31,000 shares at a cost of $1.2 million. And we ended the year with just over $1 billion cash balance.

Turning to slide 6. Ingalls revenue for the quarter were $722 million, up 6.8% from the same period in 2011, primarily driven by higher sales on LHA-7 Tripoli, partially offset by lower sales following the deliveries of LPD-23 Anchorage in the third quarter 2012 and LPD-22 USS San Diego in the fourth quarter of 2011. Ingalls operating income for the quarter was $38 million, compared with $15 million in the same period in 2011, and operating margin was 5.3% for the quarter, up from 2.2% in the same period last year. Turning to slide 7. Ingalls revenue for the year were $2.8 billion, relatively flat from 2011, with lower sales volume in amphibious assault programs, partially offset by higher sales volume in the MSc program. Ingalls operating income was $97 million, compared to $70 million in 2011, primarily due to overall improved performance, partially offset by an increase in workers compensation expense due to the lower discount rate.

Turning to slide 8. Newport News revenues for the quarter increased $44 million, or 4.1% from last year, primarily driven by higher sales volume on Ford, the construction preparation on Kennedy, and higher sales volume from the advanced planning on the Lincoln RCOH. For the year, Newport News revenues increased by $174 million, or 4.6% from 2011, primarily driven by higher aircraft carrier volumes and energy services revenue related to the maintenance of the Kesselring site. Newport News operating income for the quarter was $102 million, flat from the same period last year. For the year, Newport News operating income was $360 million, compared to $342 million last year, primarily driven by volume and favorable cumulative adjustments on CVN-65 Enterprise EDSRA and CVN-71 Roosevelt RCOH, partially offset by the increased workers compensation expense due to the change in the discount rate. Newport News operating margin for the year was 9.1%, unchanged from 2011.

If you will turn to slide 9, I'd like to make a few comments on our pension and post-retirement benefit-related assumptions. As always, remember that pension-related numbers are subject to change based on year-end performance, discount rates, and other measurement criteria. We are providing these estimates in ranges, as we have many moving parts this year, including the collective bargaining agreement to be negotiated at Newport News this year, and we will be remeasuring pension expense, along with cash contributions upon the completion of negotiations. In 2013, we estimate the FAS/CAS adjustment to be a net expense between $70 million and $100 million, and we expect qualified pension contributions to be between $270 million and $330 million, all of which is discretionary. Our pension assumptions are based on a discount rate of 4.2%, an expected long-term asset return of 7.5%. Other post-retirement benefit contributions for 2013 are expected to be $38 million. For 2013, we estimate that deferred state tax expense should be more in the $10 million range, net interest expense should be approximately $116 million, and our effective tax rate should be slightly below 35%. As in the past, we will be a large cash user in the first quarter and see that trend reverse over the remainder of the year, and our capital expenditures for the year as a percent of revenue will be in the mid-2% to 3% range.

That wraps up my remarks, and with that I will turn the call over to Dwayne for Q&A.

Thanks, Barb. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Stephanie, I will turn it over to you to manage the Q&A.

Thank you. Ladies and gentlemen, we are ready to open the lines up for your questions.

(Operator Instructions)

Please stand by for your first question. Your first question comes from the line of Carter Copeland with Barclays. Please proceed.

Good morning, Mike and Barb. Good quarter.

Good morning.

Thank you.

Two questions. The first on Avondale, Mike. When you think about the decision process there, you said your baseline assumption was still closure, but that you are exploring the opportunity that you laid out in the press release about a month ago. How should we think about how this process goes? You said there is little or no investment to pursue the opportunity you've outlined. Obviously, that business still has overhead. I wondered where you stand in terms of building this sort of new book of business, and what sort of timeline you are giving yourself to do that, to determine if this opportunity is really viable. How should we think about that thought process from your end?

Well, I think the first thing to recognize is that the most important asset that we have at Avondale is the workforce that's there. We are facing into a market that appears to have a large demand for a highly skilled and qualified workforce. The projects in Louisiana and Texas that have already been announced, and the ones that we know are on the books to be announced, demand a workforce that is larger than is in place in that region of the country today. So we are being swept -- we are being pulled into that. People are calling for our skilled workforce to be applied to that base. I think there's two elements of that, that we have to think through, and we will be working our way through that, mostly this year.

Number one, how do we sustain the workforce to line up with the work opportunity? Make sure -- how do we bridge from the Navy work that we are doing? If we just go and finish the Navy work, the workforce at Avondale will continue to ramp down to the end of this year when there would be no workforce left. We have to kind of understand, when would that workforce be required? Is that this year or is that early next year, or how do you bridge through that? That is still unfolding in front of us. So we are working our way through that piece of it. I think the second part of it is to recognize that it really is about getting the Navy work out of the business so that we can restructure the cost and be affordable. We may have the most skilled workforce in the area, but if they are not competitive, we won't be able to go very far in that marketplace. So both of those issues. How do we sustain the critical skills that we need? How do we demonstrate our affordability? Those are the things that we are going to be working on. I mean, we are working on them now and we will be working on them through, basically, the next couple of quarters here this year.

Okay, great. And one question on cash for Barb. I noticed that, despite the pension contribution, which was pretty sizable, your conversion in net income was still very high, at about 116%. As you look forward to next year, obviously, you've called out that the pension contributions will be a little bit higher. That will be a bit of an incremental use. I noted that deferred taxes were a bit of a source this year. You said that the cash will be a use early on and then step up over the course of the year, but as I put some of those pieces together, is it still likely that the cash conversion can be better than 100% of net income again next year? Or again in 2013?

Okay. I'm going to sound like the broken record myself, but it all depends on the timing of the ships deliveries and the time of the payments from the customer, because we will having big invoices after those deliveries. I won't commit that it will be 100% cash conversion, but I will commit over a long period of time, you can look at it that way and it works out.

Okay, totally fair. Thank you very much.

Thank you.

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

Good morning.

Good morning, Doug.

I'm interested in understanding a little bit more about how you would see the CR and sequestration impact. I know, Mike, you mentioned the Lincoln refueling delay. When you look at the CR, what are the things that you think could impact the Company most in '13 and '14? I'd ask the same about sequestration. Knowing that some things are under contract, and you probably won't see a lot of impact, but what are the ships that you are most concerned about?

Yes, that's a great question, Doug. We've spent a lot of time on this. I have said from the beginning that sequestration by itself is not nearly the issue for us that it is for a lot of other folks in our space. Sequestration, the way that it is laid out, is typically going to -- it's going to be about today's cash expenditures. So the short of it is, the way you get at today's cash expenditures by the government is you talk about flight hours and steaming hours and training dollars, which is not really in our -- we have some business in that area at Continental and at Amsec, but it is not the principal source of our business. From the beginning of this, we've been focused on the continuing resolution.

If you want to think about where we are, it's the end of February, we are operating under a continued resolution for 2013. The fiscal year 2013 started in October, October 1. And, frankly, Doug, we go through this every year. You need an appropriations bill to allow new programs to start on October 1. Well, this year, October 1 of 2012 is actually March 27 of 2013, and we are about halfway through the process and we still don't have a budget for 2013. So, all of the things that were due to start in 2013 have not been allowed to start by the way the continuing resolution was structured. So, in one sense, we look at March 27 as just October 1, except the dynamics and the interplay between sequestration -- the delay of sequestration to March 1, and now the two of them are interacting in and amongst themselves creates some level of uncertainty that March 27 is actually going to have an appropriations bill.

And our concern -- and we've actually been saying this for sometime now, that our concern has been that, if you just extend the CR the way that it is now, many of our programs will be affected. One program that has already been affected has been the destroyer program. The destroyer program was a bid that we put together last summer. My view is the Navy would have been able to evaluate those bids and make those awards before the end of last year, but because we had a CR, they had to push that off until the end of March or April -- can't do a new start under the current law. If we get an extension to the CR, then that award gets moved all the way out past October 1 of 2014. Now, let's go down the list of all of the starts that we have to have in 2013 that we have been counting on and that we are working very hard for.

We mentioned the Lincoln. The Lincoln was due to arrive here on February 14. A few days before that, we were notified that the Navy, because of their uncertainty around what would happen on March 27, decided to postpone that and have the work continue at the Naval Station but not come into the shipyard. That's not the most efficient way to do business, but it is the way the Navy has chosen to do it under the restrictions that they have to operate under. Now, we have a workforce that's working on the ship there. But it is not -- they are not making nearly the progress that we would be making if we were here in the shipyard.

Other work for 2013 that we would see if there had been a normal appropriations process -- the start of that Kennedy. The detailed design and construction contract for the Kennedy is due to be awarded before the end of this fiscal year. The inactivation of the Enterprise is due to begin during this fiscal year. I've mentioned the destroyer award. I've mentioned the Lincoln. There's cost to complete effort on LHA-6 and LPD-25 and on -- I'm sorry, LHA-6 and on CBN-71. Now, we find ourselves in a place where our list of things that we have to have in FY '13 is an exact copy of what the Navy's list is for what they have to have in 2013, and if you look at the testimony that the Chief of Naval Operations and the Vice Chief have given over the last six weeks, their list and our list are the same. So, we expect that March 27 will ultimately look like October 1 should have, and that's the way we are thinking about our business, but it is a pretty dynamic time right now, and we are getting a lot of visitors to our business to understand what these impacts are.

If you were to look at the sequester, I know that's -- you said that's not as big an impact. Where would you see that as being most important? I'm thinking if we go into a scenario where there was some relief in terms of the ability to reprogram funds on a CR, yet we have sequestration at some level going forward, are there programs that you would think '13 and '14 that, that would have a significant effect on?

You know, Doug, I don't know how to put my arms around all of the potential variations that are here. The fundamental question is that we are halfway through 2013. We don't have a budget for 2013. We actually are trying to figure out the 2014 budget legislatively while we don't have a budget for 2013. The degree of uncertainty is as high right now as I've ever seen it. We have operated under continuing resolutions in the past. Typically, we've had continuing resolutions with anomalies that would allow us to go start programs on time. This hasn't happened this time. This continued resolution has been exceptionally long, and the prospect of an extension is what our concern is.

How the numbers between what happens with the sequester and how that interplays with what the ultimate numbers that have come out of a continuing resolution or appropriations bill, how those interact, there's probably as many variations as there are people with opinions. What I would say is that, overall, we believe that the fundamental issue of the fiscal challenges facing the country are strategic issues for us on the horizon, in terms of the size of the Navy, and the amount of support that we would be providing from a ship-building perspective. There may be things like we've talked about many times, there may be things where a program might move from one year to another because of budget authority issues or outlay issues. We kind of typically deal with those kinds of things as they come up, but the strategic issue of how big is our Navy, what kind of ships are going to be in it, I think that is a 5- to 10-year time frame, and that's really the longer-term strategic impact of this.

Okay. Thank you.

Your next question comes from the line of Peter Skibitski with Drexel Hamilton. Please proceed.

Hey, good morning, guys. Mike, you mentioned 2013 you are expecting similar revenue to 2012. Following on Doug's comments, it looks like the sequester is going to happen. Is there any way to handicap the top-line guidance you've given, assuming that we do get a CR for the full year, or if we get a resolution at the end of March? Is there anyway to add some color around that?

Again, I think there's just so many variables here relative to how this all plays out. If all you had was a sequester and then you had ship building, all of the ship building things happen in the way that they happen, our continued discussion about a business that's got flat revenues pretty much holds in place at this point, as best we can understand it. The dynamics of what might happen in the particular harbors and how Continental might be affected, or how Amsec might be affected, those are very important businesses to us, but in terms of affecting the kind of numbers that you are talking about, we are not as -- we are much more focused on the ship-building starts that we have to get done.

Okay. Okay, understood. I guess one last one for Barb. Barb, you talked to 2013 pension. For a lot of companies, they are projecting by 2014 or so pension to begin to turn positive for them. Is that something you've taken a look at, sort of the out-year pension perspective?

Yes. Don't worry, we look at it all the time. I'm not going to go out on a limb there, because it will depend on what asset returns are and things like that. But, in 2014, what you see is 25%, I believe, as a pension harmonization coming into play. So, that's increasing your CAS recovery over your FAS expense, so it's starting to align more. But, I don't want to go out on the limb and say, yes, it's going to be positive, because I've got to take a look at whatever the returns are, and I don't have that crystal ball.

Understood. Yes, just assuming your returns hit your mark, things get incrementally better, it sounds like?

They will be better than where they are today.

Okay, great. Thanks very much, guys.

Your next question comes from the line of Jason Gursky with Citi. Please proceed.

Hi, good morning. It's actually John [Reed] on for Jason today. Thanks for taking my question. Hi, how are you? Just jumping back to Avondale for a moment. You guys used to be really clear about trying to find the right partner to deal with a new customer outside of the Navy. I was wondering if you could add a little more color, and maybe add some comfort on that front, given the fact that this opportunity would be something new for you guys. How are you making sure that you are not overextending, so to speak?

Sure. We said we needed four things, actually, to be successful here. We needed the Navy to support us. We needed the state to support us. We needed a sustainable marketplace. And we needed a good partnership, or a good partner that understood the marketplace. What we've got is the Navy is definitely supportive of us pursuing this, and the state has been more than forthcoming in trying to create an environment where we could be successful here. Our view of the marketplace is that this looks pretty sustainable, at least for a while. The demand -- the fact that there is a demand for this and it's a pull into the marketplace instead of a push by us into something, that's a much different perspective than we had a couple years ago when we were first starting to think about what happens with Avondale.

As far as the partnerships, what we found is that the folks that are in that business today are looking for good skilled workforce, and they have been working with us to help us understand what the cost requirements would be, what the quality requirements would be, the schedule performance would need to be, the safety requirements that we would have to be able to perform to. And so we're getting good support from other players in the industry who are looking to us as maybe potential suppliers to them, or maybe ultimately partners with them as they support this industry. So, no, we are not charging into this with our blindfold on and just suggesting that we can do this better than anybody else. We are actually getting a lot of good, constructive engagement from the folks who need to really make this be successful, and so we are treading carefully down that path of, does this make sense? As I said, it's going to come down to, are we going to be able to sustain the workforce, and can we meet the competitive requirements that, that industry will require?

Fair enough. And then just a quick follow-up on sequester. I know you said you guys are relatively insulated, but you do, do some repair and some O&M type work, and Navy guidance has basically frozen a lot of that. Are you not seeing impacts from those sorts of activities that the Navy has rolled out?

Certainly. I mean, the Navy has made some major decisions about -- they are not deploying assets on their normal deployments. They have provisionally announced availabilities for the third and fourth quarter that would not be performed. All of those things at this point, and let's go one step further, it's more of a CR impact, but something as simple as the Lincoln. All of those things -- none of that work is being done the way that it ought to be done, so it's all becoming more inefficient.

The challenge for us is that some of that you just have to wait and see how this plays out, because I think what really is going to happen here is that the sequester law will go into effect at the end of this week, but then I think that the resolution of all of this issue is going to become apparent with the resolution of the CR at the end of March. I know there is a lot of pressure on the sequester itself. My view of it, a personal view, my view is that the law will go into effect, and that the energy will be focused on creating an appropriations bill or some kind of continuing resolution that actually creates a stable base for this to go forward in the next month. So trying to speculate on how that's all going to play out, we just chosen not to try to create any particular cases because we know that whatever cases we create will be wrong.

Thank you.

Your next question comes from the line of Robert Spingarn with Credit Suisse.

Good morning. Mike, staying on the same topic, I'd like to try to put a finer point on at least the dollars associated with the programs that we've been discussing. I think you've gone over them, but if I've got this right, you've got -- or we are hoping for fiscal '13 money of around $600 million on Kennedy, about $1.5 billion on Lincoln, and I think about $900 million in O&M money on Enterprise. Then there's $200 million in prior-year ship-building recovery. I think you mentioned CVN-71, et cetera. I add all that up, that's about $3 billion-plus. How much of that is in your '13 expectations, so that we can at least have some context, if we get a full year CR, for example, and there is no special rider for those funds? Or under what other circumstances might come up here, sequester, et cetera? How much of that $3 billion was in your calculus for '13?

Well, Rob, I would tell you, that go back to what we said before, we are assuming that all of this will work out. We are looking at March 27 as being October 1. I haven't added the numbers up the way that you have, but our view is that, after March 27, we would expect that we would proceed on the path that we had laid out, that these programs would start in accordance with the schedule that's out there. If we find ourselves a month from now in a different place than that, then we will have to have a different discussion, but that's the path that we are on. It is encouraging to me that the Navy has identified the same priorities that we have, and I think that our position, and frankly, the industry's position is pretty well understood. I was once told that short-term decisions in this business are political and long-term ones are economic. We are, quite frankly, in the middle of a big political decision right now that's going to play out over the next 30 days.

Mike, I think we all understand that there's no clear outlook here, but I also think the only way to talk about it is to at least know what you were expecting. When I think about that money, and I understand that a good part of that $3 billion is '14, '15, and so forth from your P&L perspective, but is there any way to frame what the 2013 portion of that would be, and then we can all wonder separately about whether or not it happens?

I don't know how to put my arms around that, Rob. I mean, we're looking at a carrier contract that would be -- the Kennedy contract itself was a multi-billion dollar contract that we have been spending money on for a couple years in advance procurement. If the Navy were to decide, or if we were to find ourselves in a place where we were not going to go to contract in 2013, the next question is, okay, how do you bridge the work that you are doing to the contract whenever it gets awarded? We've done that in the past. In fact, that's how we did CVN-78. That contract was supposed to be done in 2006. We actually didn't go to contract until 2008.

We had two years of construction preparation there to bridge from the time when the contract was planned for to the time that we actually went to contract. That allowed the design to mature more. It allowed all of those things to happen, but the sequence of how all that plays out is something that is very difficult for us to predict. What I do know is that none of these programs, none of these programs, are being talked about in terms of cancellation. So that all of this is going to happen, it's really a matter of when and how is it going to happen. That's what we're trying to work our way through. Our plan today is that it will happen on time because that is the most efficient way for this work to proceed in our business, and it is absolutely the best way to be good stewards of the taxpayer dollars.

Yes, and I wasn't trying to ask you how it would play out. I was merely trying to understand how those four programs fit -- what they are worth in '13, but I guess it sounds like that's just a complex answer. I will ask something else instead. On Ingalls, where you've clearly been progressing on your margin plan, at what point do you get enough of those zero margin ships out the door, and most of them are gone at this point, that you can give us some visibility into a consistent linear sequential progression in margins. Do we get to a point -- start to see 50 basis points a quarter, or something like that?

Well, our story two years ago is the same as it is today. We have two ships left to go that we expect to deliver this year. This year is a point of inflection for the business, and that you will see earnings accelerate. I don't know that we will ever tell you that it's going to be a quarter-over-quarter slope on earnings for any part of our business. To quote my Chief Financial Officer, this business depends and is lumpy, and so we are headed to 9% from where we are today. This year will probably look a little bit more like last year than it will look like next year, but that's because we are getting those last two ships out. We need '14 and '15 to make the progress on the new work that we've signed at Ingalls to get them to the point where they are mature enough to book at the normal rate. That's what we're focused on.

Okay. Thanks, Mike.

Your next question comes from the line of Joe Nadol with JPMorgan. Please proceed.

Good morning.

Hi, Joe.

Mike, I maybe want to try to come at this from a slightly different angle, which is people instead of dollars. Really, it seems that, obviously, a lot of uncertainty, a lot of different moving parts. Where you are starting to the impacted now on material programs, it really seems to be the Lincoln, but it's only really just started, or a couple weeks in. Could you help us understand maybe -- you've 37,000 employees in total in the Company. How many employees -- what was supposed to be, or what is supposed to be, the ramp-up rate on labor on that very labor-intensive program as we go through 2013?

Well, the normal course of business and the synchronization that we talked about in this business is that, as you finish the Roosevelt, that workforce would transition to the Lincoln. The Roosevelt is in its last few months and will be heading towards its redelivery, and the people would normally just come off of Roosevelt because you ramp down toward delivery, and they would move onto the Lincoln and ramp back up there. Instead of ramping up inside the shipyard, we are starting the ramp up over at the Naval Base. I would say that what is happening to us right now is less about the people that are in the yard, and it's more about our hiring rates and what our expectations are for the whole business.

The reality is, and I had a chance to tell the President this yesterday, that over the next five years we plan to invest nearly $1 billion in our corporate -- in our Navy business across the whole Corporation. We will hire more than 10,000 people, and we will be investing $0.5 billion in the training of those folks. We are throttling that right now based on, let's get some certainty about what these future programs and the timing of these programs will be. I say that's probably where the first effect is, is what are we doing with our hiring rates right now? Now, let's go hypothesize. We have said that if the Lincoln doesn't come at the end of March or the beginning of April, we will be in a position there where we will have to start talking about layoffs, particularly because of that program. And how many and who and all that sort of stuff remains to be determined, based on how the rest of the business plays out at that point. Yes, we would be affected at that point. We have a couple thousand folks working that program today.

Okay. That's helpful. And then, my second question is, on the Virginia class multi-year, could you just give us your latest -- and I may have missed it in your opening comments, but your latest on, if this plays out the way you are hoping, which is during the month of March before the 27 we get either an appropriations bill or CR with the anomalies that have been discussed --

Right.

-- which I don't think you used that term, but that's, I think, what I was reading into your comments. If you get that, what your expectation would be. Do you still think you can get that multi-year signed by the end of 2013?

We do. The Navy has actually made a pretty good case. Set aside -- I know it's hard to do for everybody, but if you just set aside the extraordinary budget process that's going on around sequester and the CR and everything, and you can actually find a way to look at the regular budget process that's going on, where the budget gets submitted and the Navy defends its budget and the Congress weighs in on priorities, that process has gotten us to a place where the Congress is interested in a 10th submarine. That's a 9-ship block, and they are interested in a 10th submarine, and they're interested in a 10th destroyer in the 9-ship program that we have already bid on. Both of those to me are indications of how important the Navy is going forward strategically. I believe, I don't know whether those two platforms actually survive the extraordinary budget process, but I think that -- I believe we will get to a contract on block four by the end of the year. I do. I'm pretty comfortable with that, assuming that we get through the next month politically.

Okay. Thank you.

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

Good morning.

Good morning, Sam.

Mike, let me try to ask a question that you can answer. How about something about the fourth quarter. If I look at the carrier, you mentioned -- you called out the carrier volume as being higher than expected. Can you, and I think relative to everybody's sales estimates, it did turn out to be higher. Is that more cost-plus work that flowed through in terms of hours? Is it long-lead material, is it just you are working ahead of schedule? What's driving, I guess, that coming in ahead, and related, since you are up 2% in sales for 2012, when you say your long-term target has been relatively flattish. Are we now talking about flattish off this higher level?

Okay. So I will take the one on the carrier increase in sales. It's just really, it's a cost-tech contract and its just labor and material coming in. Can't really say we are ahead of schedule in any way, but we are progressing well in that program. There's nothing special going on there. It's just timing. So as far as your question related to sales being flat, we are sticking with that story, given what our expectations are in terms of the programs to get funded this year. Timing will drive an impact -- potential impact this year, but overall, don't see any issues as long as those programs are funded with our long-term projection.

Okay. Barb, can I ask you another question, just in terms of the balance sheet in terms of some of the moving pieces? The shareholder equity decline from the third quarter, and that accumulated loss. I guess, is that all pension, and than the deferred tax jump, is that all related to the pension contribution, just in terms of those moving --

Okay, for your first question, the answer is, yes. But for the tax, it's a combination of a lot of things on the tax. In the fourth quarter, most state taxes are done, and you are doing it for the prior year. It's just an increased provision adjustment related to free spend returns. So it isn't all pension on the tax side.

Okay. Thank you.

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

Yes. Good morning.

Good morning, George.

Barb, in the fourth quarter, the Ingalls margin, that's a better margin than we've seen for probably for five years. Was there anything one-time in there, like was there a reversal of some of the reserves you took in the third quarter, or is that just kind of just what the margin was?

Just what the margin was.

And so, then what happens in 2013, as to why that 5.3% wouldn't be sustainable margin, because, Mike, the implication is if '13 looks like '12, you kind of take the average margin at Ingalls for '12, which is obviously lower than what you reported in the fourth quarter.

We didn't say it was or it wasn't. Mike did say it would look a little like this year, but it will be leaning towards the 5%.

Okay. And then, on the percentage of sales that were probably those two programs, where you're talking zero margin now. Are we down to somewhere between 20% and 25% of the sales at Ingalls?

Less than 25%.

Less than 25%, okay. Thank you very much.

You're welcome.

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

Good morning.

Good morning, Myles.

Before Congress, the Appropriations Committee, I think the C&O was talking about the overall ship-building plan and kind of where it is today and where it would be if everything that is on the table actually played out like it's on the table. They talked about a baseline of 295, at this point, ships by 2020. They said it would be 30 ships lower if everything played out the way it is, 260, 265. Do you have a sense as to what comes out?

No. What I do know is, what we have seen is that there is strong support for carriers. There's strong support for submarines, and there is strong support for destroyers. There is also strong support for amphibs, but by the normal course of business, we were going to be entering a bit of a lull in the amphib production. LPD-27 could have been the last LPD, and LHA-7 we got under contract and LHA-8 is out there on the horizon. The Navy has a great desire for amphibs. The Marines are looking for lift capability, but -- I've said this before, in my opinion, despite all of that desire and demand, that seems to be where the resources start to thin, in my view.

That's one of our core businesses, and that's a big thrust of our political engagement right now, is around how do you sustain the amphib lines? We've got a really -- we've squared away the LPD program at Ingalls, and we've got a pretty warm production line down there right now. You've probably seen that we've come up with some creative ideas to use that hull for other missions for the Navy that would create some affordability relief, if you will, for the Navy. So we're going to continue to push that. That's kind of the way that I think about it, Myles, is that the Navy's priorities at the top of the list are the carriers and then the submarines and the destroyers and the amphibs, that's where our business sits. We are seeing this resource discussion kind of focus in on the amphib piece, not really on the other parts.

Okay. And then, the other question, we talked it about from a revenue perspective, the CR, and sequestration delays. It's hard for us to see your contract protection relative to margin profit absorption, and kind of the dynamics that can occur. Would you advise us to just think about the revenue risk at this point, as opposed to any type of adverse drop through?

Frankly, kind of back to -- I hate to sound like a little bit more like a broken record, but this is tough to handicap, because the way that the sequester and the CR now are interplaying with each other, and the fact that we are very much more exposed to the CR, as opposed to the sequester, makes that -- as we said before, the work that we have under contract is probably not going to be terribly affected by the sequester. The work that we have under contract doesn't get really affected by the CR. In that sense, we keep doing what we're doing for the near term, and it keeps moving things the way that they've been moving. It's the signing of new contracts going forward that is the really the big issue for us, and that's really about what is this business look like in 2015, '16, and '17?

Yes. Okay, then the last one. Mike, I understand the opportunity on Avondale. I think it makes sense to explore it in the near term. I mean, is it, do you envision, over the medium term, that it still sits under the Huntington Ingalls umbrella, or is this more of a taking it to a -- from a neonatal stage to a adolescent stage?

Well, we certainly don't believe that we can be competitive if the cost structure is a Navy cost structure. So we will have to find other ways to deal with creating a competitive cost structure for that business. I think you have an interesting perspective of, this is the very beginning of this process, and we will be exploring all kinds of alternatives there relative to how do we make that business, in order to be successful, how do we make it competitive?

Okay. Barb, what's the funding for the pension look like beyond '13 funding requirements for the pension? I know you said it was discretionary in '13, but beyond that?

We haven't given anything beyond that.

Where did the funding end up for the year?

$236 million -- I'm sorry. (multiple speakers) For the 2012, minimum required was $64 million, and we did $172 million of discretionary, so $267 million.

Sorry. I meant the funded status of the plan at the end of the year.

We continue to maintain a 90% funded, based on, well now it's called map 21, but on a PPA basis.

Okay, okay. All right. Thanks.

And the final question will come from the line of Brian Ruttenbur with CRT Capital. Please proceed.

Thank you very much. Great quarter, by the way. Welcome. The last question, G&A -- let's ask a real simple one. G&A in 2013, is it going to be less than 2012 or more than 2012?

Wow, that's a tough one to call. Pension expense drove G&A up from 2011 to 2012. It will really depend on what my pension expense looks like, and so I gave you ranges. It could be close, it could be a tiny bit higher.

Okay, great. And then, as I look at it, Mike, is it seems like maintenance services, as you put in there, services are at a bigger risk than products. Is that the correct way to look at it? If we are going to take anything out, assuming a CR and sequestration, would I be taking it out of the products side or the services side?

I mean, Mike talked about that Amsec and CMSD are probably less inflated. So it would be out of the services side for that.

Great. Thank you, guys, very much.

Okay. Thank you.

Thanks for your time today, folks. I think we have demonstrated that our crystal ball is no better than yours relative to the politics that are out there. The next month is going to be a pretty dynamic time. It will probably be a new story, if not every day, every hour between now and the end of March. As you know, we are very, very heavily engaged in that process to the best of our ability, and the thing about our business is it shows well. There are folks -- there's no misunderstanding about how important our programs are. The alignment we have with the Navy relative to the importance of getting the '13 budget -- the things that they are prioritizing, they are the things that we prioritize. I think the President's visit to our shipyard yesterday in Newport News just demonstrates the priority that our business has, and the alignment we have with our customer.

We've got a political process we've got to work through over the next month, and we will be doing that. But our core business is staying -- we are very pleased with where that is. The progress that we've made in the last two years, but really over the last five years since Barb and I first went to Pascagoula. Our focus on safety and quality and cost and schedule continues to drive the performance of this business towards our goals in 2015. And where I sit today, I'm not backing off of that. I think that we will fight our way through the politics, but the execution and the risk retirement and the creation of value in this business, we are very focused on it, and we keep moving ahead on that. So, thanks for your engagement with us, and thanks for your time today. We look forward to seeing you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.