Hard Stuff Done Right UNDERWAY
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2012 Annual Report Hard Stuff Done Right UNDERWAY. ON COURSE. HUNTINGTON INGALLS INDUSTRIES HAS CREATED A PERFORMANCE CULTURE FOCUSED ON SAFETY, QUALITY, COST AND SCHEDULE. WE ARE COMMITTED TO PROVIDING AFFORDABILITY FOR OUR CUSTOMERS AND MAXIMIZING VALUE FOR OUR SHAREHOLDERS. WE STRONGLY BELIEVE THE U.S. WILL ALWAYS NEED A ROBUST NAVY, MARINE CORPS AND COAST GUARD AND THAT NO OTHER COMPANY IS BETTER-POSITIONED THAN HII TO CONTINUE SUPPORTING THEIR MARITIME MISSIONS. ProjectPortfolio Aircraft Carrier Construction Aircraft Carrier Refueling and Complex Overhaul Aircraft Carrier Inactivation Surface Combatant Construction Amphibious Transport Dock Construction Amphibious Assault Ship Construction Virginia-Class Submarine Construction Carrier and Submarine Fleet Support Military and Commercial Ship Repair Engineering and Design Commercial/Government Nuclear Operations and Program Management Commercial Energy Engineering and Manufacturing Hard Stuff Done Right DESIGN. BUILD. MAINTAIN. LEGACY OF GIVING GIVING BACK HII is dedicated to being a visible and positive corporate citizen in every United Way 38% community where we do business. As a company we take an active role in improving the health of our communities and improving quality Health & Human Services/ of life through participation in organizations such as the United Way, the Arts & Civic/Youth 30% American Red Cross, Special Olympics and others. We also strongly support efforts to improve education, especially through programs that Military & Veterans 5% promote science, technology, engineering and math (STEM). Education 27% OUR DIVISIONS AND SUBSIDIARIES COVER PHOTO: s William White, a shipfitter at Newport News Shipbuilding, works on a module for the aircraft carrier Gerald R. Ford (CVN 78). PHOTOS (top to bottom): s Stacyann Walker uses modeling and simulation in Newport News Shipbuilding’s Aviation Ship Integration Center (ASIC). s Teri Robinson places an alignment mark on a piece of pipe at Ingalls Shipbuilding. s Continental Maritime of San Diego (CMSD) employee Larry Hart works on a watertight door frame for the amphibius transport dock John P. Murtha (LPD 26). Design. Build. Maintain. Justin Wesselhoft and Karen Cassidy use 3D modeling Pipefitter Claude Weaver works in the auxiliary machinery AMSEC employee Larry Hadley repairs a hatch on the to design ships at Ingalls Shipbuilding. room of the submarine John Warner (SSN 785) under aircraft carrier USS Theodore Roosevelt (CVN 71). construction at Newport News Shipbuilding. We built more than 40 percent of FINANCIAL HIGHLIGHTS the commissioned ships on the ($ in millions, except per share amounts) Naval Vessel Register (NVR). 2012 2011 2010 Sales and Service Revenues $6,708 $6,575 $6,723 Adjusted Segment Operating Income(1) 457 412 294 Adjusted Segment Operating Margin(1) 6.8% 6.3% 4.4% 40% Adjusted Total Operating Income(1) 438 413 297 Adjusted Operating Margin(1) 6.5% 6.3% 4.4% Adjusted Diluted EPS(1,2) 3.95 4.15 3.42 Net Cash Provided by Operating Activities 332 528 359 (1) Adjusted Segment Operating Income, Adjusted Segment Operating Margin, Adjusted Total Operating Income, Adjusted Operating Margin and Adjusted Diluted EPS are non-GAAP financial measures excluding goodwill impairment and the We employ more than FAS/CAS adjustment. Please see the page that precedes the back cover of this report for information on excluded items and a reconciliation of these measures to GAAP. 5,500 veterans. (2) Includes FAS/CAS adjustment tax effected at 35% federal statutory tax rate. THE AMERICAN PRIDE: 5,000 SHIPBUILDING 5,500 SUPPLIERS IN ALL 50 STATES Across all 50 states we have 5,000 qualified suppliers providing high-quality products. 5,000 P 01 Huntington Ingalls Industries (HII) designs, builds and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services for military ships around the globe. For more than a century, HII has built more ships in more ship classes than any other U.S. naval shipbuilder at its Newport News Shipbuilding and Ingalls Shipbuilding divisions. Employing about 37,000 in Virginia, Mississippi, Louisiana and California, HII also provides a wide variety of products and services to the commercial energy industry and other government customers, including the Department of Energy. The National Security Cutter Hamilton (WMSL 753) The bow section of the Virginia-class submarine John Warner (SSN 785) The lower bow unit of the aircraft carrier Gerald R. Ford (CVN 78) An assembly unit for the Aegis guided missile The amphibious assault ship America (LHA 6) The San Antonio-class amphibious transport dock destroyer John Finn (DDG 113) Anchorage (LPD 23) P 02 To our customers, employees and shareholders: At Huntington Ingalls Industries (HII), our goal is to Tripoli (LHA 7). We also made excellent progress create value for our customers, employees and on the refueling and complex overhaul (RCOH) on shareholders. Since March 31, 2011, when we were the aircraft carrier USS Theodore Roosevelt (CVN spun off as an independent, publicly traded company, 71), and we expect to redeliver this ship in 2013, we have been focused on execution, retiring risk, enabling it to serve our country for another driving improved performance and margins at Ingalls quarter-century. Shipbuilding, improving performance and maintaining stability at Newport News Shipbuilding (NNS), and THE DEFENSE SPENDING ENVIRONMENT AND ensuring that a strategic decision regarding Avondale OUR BUSINESS LANDSCAPE is executed in the best manner possible. While we continued our efforts to maximize the value We’re pleased to say that we made significant of our two operating segments, it is clear in this time progress in these areas in 2012 and continue on the of defense budget uncertainty that the current Navy path to accomplishing 9-plus percent operating margins shipbuilding plan may impact HII’s ability to create the by 2015. We also announced our first quarterly stock level of value we believe we need to achieve for our dividend and a share repurchase program, part of our shareholders. Make no mistake: The Navy is and will cash allocation strategy designed to maximize long- continue to remain the foundation of our business term value for all of our stakeholders. portfolio. Yet we are slowly and prudently expanding into adjacent markets where we can leverage our PERFORMANCE IMPROVEMENT AND unique expertise, facilities and highly trained workforce. SHIPBUILDING MILESTONES In 2012, we experienced some success in these Operationally, we continued to retire risk in efforts as we began the year with NNS assuming the underperforming contracts at Ingalls. We delivered two maintenance services role at the U.S. Navy’s Kesselring of these, the amphibious transport docks Anchorage Research and Development Site in West Milton, N.Y. (LPD 23) and Arlington (LPD 24), and both ships We also signed a contract with The Shaw Group to performed well on trials and have received positive fabricate nuclear power units at our Newport News reviews from our customer. These deliveries, along Industrial (NNI) subsidiary, and we continued our very with the delivery of San Diego (LPD 22) at the end of successful joint venture with Fluor and Honeywell at 2011, leave us with two more Ingalls ships to deliver in the Savannah River Nuclear Site (SRNS). 2013—Somerset (LPD 25) and the amphibious assault ship America (LHA 6)—making it a year of inflection for AVONDALE us as we retire the balance of the risk we acknowledged In 2012 we also made the important decision to when we began operating as HII in 2011. vigorously market Avondale as an engineering and We continued to make progress on the aircraft manufacturing provider in the energy infrastructure carrier Gerald R. Ford in 2012, reaching 90 percent industry. Anticipated growth in the demand for this structural completion in December. Importantly, on this kind of manufacturing aligns Avondale with this market first carrier in a new class, we are seeing excellent because of its 75-year legacy of excellence, unique progress in a large number of cost-reduction initiatives, facilities, a highly skilled workforce and technical and we continue to drive improved performance. expertise. We can scale our entrance into this market Also in 2012 we continued to meet and celebrate and assess our competitiveness on a smaller scale major shipbuilding milestones at Ingalls and Newport before moving on to larger, more complex products. News. We launched and christened the aforementioned Although Avondale’s recent focus has been primarily Somerset and America and also launched the Virginia- on Navy shipbuilding, it has a history of success class submarine Minnesota (SSN 783), to be delivered in diverse commercial markets. Our initial goal for this year. We delivered the composite deckhouse for Avondale is to be successful enough in this market the first-of-class Zumwalt destroyer (DDG 1000) and to keep this facility open and its workforce employed. signed several major contracts valued at approximately However, if we find we cannot be successful, we will $6 billion, including a $2.4 billion contract for the have to close it. construction of the amphibious assault ship P 03 GIVING BACK carrier and submarine construction at Newport News HII is strongly committed to enhancing the communities and amphibious ship, destroyer and National Security where we live and work. As a company and as Cutter construction at Ingalls, will make up our individuals, we take an active role in supporting efforts business base for the next several years. to improve education to include science, technology, In spite of federal budget challenges, we strongly engineering and math in our schools. Linked to this are believe the U.S. will always need a robust Navy, our efforts to improve the health of our communities Marine Corps and Coast Guard and that no other and reduce the impact of poverty and hardship. In defense contractor is better-positioned than HII to 2012, we collected thousands of pounds of non- continue supporting their maritime missions.