亨廷頓·英格爾斯工業 (HII) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Huntington Ingalls Industries earnings conference call. My name is Shantele, and I will be your facilitator for today's call. At this time, all participants are in a listen-only mode. We will be facilitating 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 turn the presentation over to your host for today's call, Mr. Andy Green, Vice President of Investor Relations. Please proceed.

Thanks, Shantele.

Good morning and welcome to the Huntington Ingalls Industries second 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 non-GAAP measures, including segment operating income and segment operating margin. Reconciliation of these metrics to the comparable GAAP measure 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 would 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 second quarter of 2012. Today, we reported sales of $1.72 billion, up 10.1% from the same period last year, and diluted earnings per share of $1, up from $0.80 in the second quarter of 2011. Second quarter segment operating margin was 7.4%, a significant improvement from 6.3% last year, and we ended the quarter with $669 million of cash on the balance sheet. Total backlog was $16.2 billion, of which $12.6 billion is funded.

During the second quarter, we continued to execute well on all major programs at both Ingalls and Newport News, including achieving several milestones. At Ingalls, we launched two ships, the amphibious assault ship LHA-6 America, and LPD-25 Somerset. We successfully completed acceptance trials for LPD-23 Anchorage, a ship that will be delivered to the Navy next month and we announced a construction contract for the newest amphibious assault ship, LHA-7 Tripoli. Subsequent to quarter end, we announced the $1.5 billion construction contract for LPD-27, the 11th ship in the San Antonio-class of LPDs.

At Newport News, the submarine and carrier programs continue to perform well and our outlook for these programs remains positive. In fact, we are in the preparation phase for a significant amount of new business, including the next block buy of submarines, the inactivation of CVN-65 Enterprise, the refueling of CVN72 Lincoln, and the construction of CVN-79 Kennedy.

Overall, our programs continue to perform in line with our expectations and we remain confident that we can deliver 9-plus percent total operating margin by 2015. In the near term, for the second half of 2012, we expect segment revenue and margins to be similar to the first half.

Regarding the threat of sequestration, I don't have much more to say on the subject, as the potential negative impacts it will have on the industry, our workforce, and our supply chain have been well publicized. And while we hope that an alternative is found to avoid the automatic and indiscriminate spending cuts triggered by sequestration, it is the law of the land. What we are doing is communicating to members of Congress and other leaders, along with our industry partners, about how this could impact us. And we're telling them that our supply chain, nearly 5,000 companies that span all 50 states, is at risk. They are likely to feel the impacts of sequestration much more rapidly than HII, because their contracts and orders tend to cover much shorter periods than our longer term contracts. Our formula for success is continuing to perform well in our contracts and meeting all of our commitments on safety, quality, cost, and schedule. And that's what we focus on each and every day.

Now to hit a few highlights of our major programs at Ingalls. As I mentioned earlier, LPD-23 Anchorage, constructed at our Avondale shipyard, has successfully completed acceptance trials and delivery should occur in September, about one month later than previously planned. The delay is due to the installation of non-compliant bolts associated with certain propulsion system components. Although I'm disappointed with the delay, I am proud that one of our own people identified the issue and that we are correcting it ourselves. We estimate the total cost of inspection and replacement to be less than $1 million.

LPD-24 Arlington, being built in Pascagoula, is nearing completion and is scheduled to go to builder's trials the week after next. Following builder's trials, the ship will complete acceptance trials and then deliver to the Navy by the end of the year. LPD-25 Somerset, the last Navy ship scheduled to be built at the Avondale shipyard, was christened a little over a week ago and is scheduled to deliver next year. At Pascagoula, we continue to ramp up construction on LPD-26 John P. Murtha, and we just announced a construction contract award for LPD-27, the latest ship in the San Antonio class of LPDs.

In June, we successfully launched LHA-6 America and we expect to deliver the ship in 2013. Performance on this program has been trending well, reflecting the outstanding efforts by the program team to improve efficiency and maintain high quality while controlling costs. And although significant risk remains as we move through the outfitting and testing phase, overall we are pleased with the progress on the ship.

During the quarter, we also were awarded the $2.4 billion construction contract for LHA-7 Tripoli, the next America-class amphibious assault ship. Tripoli will be identical in all major respects to LHA-6, meaning it will have the same hybrid electric propulsion system, and instead of a well deck, will have additional hangar space and fuel storage in order to optimize its marine aviation capabilities.

The National Security Cutter program continues to perform well and is a powerful example of the cost benefits of serial production. Construction is underway for the next two ships, NSC-4 and NSC-5. And we are under a long-lead material contract for NSC-6. A construction contract for that ship is expected in 2013. Our Coast Guard customer is very pleased with performance of the National Security Cutters, and we look forward to supporting their future requirements as part of the recapitalization of the aging fleet.

In the DDG-51 program, we are in the early stages of construction of DDG's 113 and 114, and we expect these ships to perform well. Like the NSC program, the DDG-51s are another good example of serial production, and we expect these and subsequent ships to reflect the cost benefits of the Ingalls operating system. The next contract award of DDG-51 should be 9 or 10 ships, split between us and our competitor, with the final award likely in 2013. On the DDG-1000 Zumwalt-class destroyer program, we have delivered the fore-aft PVLS modules and the composite hangar for DDG-1000 and expect to deliver the composite deck house later this year. Construction of the aft PVLS modules, hangar and deck house for DDG-1001 is underway, and we are working with the Navy toward a contract for similar work on the next ship in the class, DDG-1002.

At Avondale we are proceeding with the plan to wind down the facility by the end of next year. The dedicated and highly skilled ship builders at Avondale have performed well on LPD's 23 and 25, and we are continuing to look for alternative ways to preserve those highly skilled jobs.

Now turning to Newport News. CVN-78 Ford was 80% structurally erected and 43% complete at the end of the second quarter, and is on pace to launch next year, with delivery in 2015. Like every lead ship program, we've had to deal with labor and supply chain inefficiencies and issues around the development and insertion of new technologies. However, as I have said before, Ford is the best lead ship program that I've seen during my career in ship building. When Ford joins the fleet, it will be the most advanced and powerful warship ever constructed and will be a symbol of our nation's commitment to a strong Navy. On CVN-79 Kennedy, the next carrier in the Ford class, we are ramping up construction preparation activities and anticipate having a construction contract in place sometime in 2013.

In submarines, performance on the Virginia-class submarine program remains strong, making VCS one of the most successful DoD procurement programs. The close cooperation between us and our teaming partner, coupled with the ramp-up to two submarines per year build rate, has driven steady improvement in productivity and affordability. More efficient production also means these highly capable platforms join the fleet earlier than planned, which enables the Navy's fleet commanders to better fulfill their missions. SSN-783 Minnesota, the last block 2 submarine, and the next submarine to complete construction, should launch late this year and deliver in mid-2013. The eight submarines of block 3 are fully funded, and we expect a block 4 contract award next year for at least 9 additional submarines.

The CVN-71 Roosevelt refueling and complex overhaul is on pace to meet its revised re-delivery schedule of mid-2013. CVN-72 Lincoln, the next carrier scheduled for refueling, just completed its transit to Naval Station Norfolk and should come into the shipyard early next year. Similar to carrier and submarine construction, our COHs provide substantial long-term visibility and predictability, as each carrier is refueled about 23 years after delivery. This facilitates better long-term planning and helps us to optimize our manning levels and material procurement.

CVN-65 Enterprise, the world's first nuclear aircraft carrier, was built at Newport News, and for more than half a century has demonstrated a significant power projection of an aircraft carrier, having participated in virtually every major military action since the Cuban Missile Crisis of 1962. She is currently on her final deployment and is expected to enter the yard in 2013 for inactivation and a de-fueling of its eight nuclear reactors. Overall, we are very pleased with where we stand on all of our major programs and our second quarter results reflect the steady progress our team is making toward achieving our long-term financial objectives.

Before I turn the call over to Barb for more commentary on the financials, I would like to make a few comments on how we manage our business in a way that maximizes value for our shareholders. As I've said before, in the near term, we are focused on three primary mechanisms for creating value. First, to lock in key contracts. At the time of the spend, I mentioned that it was imperative that we finalize five key contracts critical to sustaining the business through 2015, LPD's 26 and 27, DDG's 113 and 114, and LHA-7. We have now been awarded all of these contracts, plus an additional National Security Cutter, NSC-5, which was awarded early.

Second, to retire risk on existing programs; specifically, risk related to our five underperforming contracts at Ingalls. In 2011, we delivered LPD-22 and we expect to deliver LPD-23 and LPD-24 in 2012. The remaining underperforming contracts, LPD-25 and LHA-6, are on track for delivery next year. And third, to complete the closure of Avondale, or if possible, find an alternative use for the shipyard and its workforce. While we continue down the path of closure, we are still investigating other opportunities. As we successfully execute on these three levers, we improve our financial flexibility and strengthen our ability to deploy assets in a way that makes sense for our shareholders, our customers, and our employees.

And 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 briefly review our consolidated and segment results, as disclosed in the press release.

Turning to the financials, on slide 4 of the presentation, consolidated second quarter revenues were up $158 million, or 10.1% compared to the same period last year. This increase was driven by higher volume across multiple business lines, including carrier construction, submarines, and amphibious assault ships, which was partially offset by lower volume on carrier RCOH and fleet support service revenue at Newport News. I will provide more revenue detail in each segment report.

Second quarter segment operating income was $127 million and total operating income was $106 million. Segment operating margin was 7.4%, up from 6.3% in 2011. Total operating margin was 6.2%, up 34 basis points from the same period last year. Total operating margin was impacted by $15 million higher pension expense, offset by a slight decline in deferred state income taxes in 2012. Diluted earnings per share for the quarter was $1, compared to $0.80 for the second quarter 2011. The increase in EPS was driven by sales volume at both segments and margin improvement at Ingalls.

We ended the quarter with a $669 million cash balance. Cash provided by operating activities was $151 million, a decline of $35 million over the same period last year. Capital expenditures were $30 million, up from $20 million in the second quarter last year, and are expected to fall in the high end of the 2% to 3% range for the year. Similar to last year, 2012 cash flows was significantly negative in the first quarter and is now trending positive. We expect this trend to continue for the remainder of the year, with the largest variables being timing of collections, timing of deliveries, and pension contributions compared to last year.

Moving on to pension, the expected qualified pension contributions for the year have increased by $24 million, to $236 million, due to updated demographic data and our practice of maintaining our plan's funded status to avoid benefit restrictions. During the first half of the year, we contributed $183 million to our pension plans and the remainder is expected to be weighted towards the third quarter. In addition, we have updated our FAS/CAS adjustment for 2012 to negative $74 million, down from negative $77 million we estimated at the end of last year. I will have more to say about 2013 pension expense on the Q3 call, but I did want to mention the pension funding relief legislation which was recently signed into law. We expect this will provide significant flexibility to us regarding contributions starting in 2013, but it will not affect our expected 2012 contributions. We are currently analyzing all of the variables related to the legislation and should have more detail next quarter regarding our future pension contributions.

Turning to slide 5, Ingalls revenue for the second quarter increased $48 million, or 6.8% from the same period last year, driven primarily by higher sales on LHA-7, offset by lower sales on LHA-6. The LPD program remained constant for the quarter,as higher sales on LPD-27 and LPD-25 were offset by lower sales on LPD-24 and LPD-22, following the delivery of LPD-22 in Q4 of 2011. The NSC program remained flat, due to lower sales following the delivery of NCS Stratton in 2011, offset by higher sales on the construction of NSC-4 and NSC-5, as well as the advanced procurement contract on NSC-6. Ingalls operating income for the quarter was $38 million, compared with $19 million in the same period of 2011. Operating margin was 5% for the quarter, up from 2.7% last year. The increase was the result of lower net unfavorable performance adjustments in the LPD program for the quarter, as compared to 2011; and during the quarter, Ingalls received $7 million for the resolution of a contract dispute with a private party, which was a direct contribution to operating income.

Turning to slide 6, Newport News revenue for the quarter increased $107 million, or 12.3% from the second quarter 2011, primarily driven by higher volume on CVN-78, CVN-79, the Lincoln RCOH, the advanced planning efforts on the Enterprise inactivation, and the VCS program as it transitions to building two boats per year. These increases were partially offset by lower sales on the Roosevelt RCOH and lower fleet support services, primarily due to the re-delivery of the submarine USS Albany in 2011. Newport News operating income for the quarter was $89 million, compared with $79 million in the second quarter last year. Operating margin was 9.1% for the quarter, flat to prior year. The increase in operating income was driven by higher sales volume and the impact of performance improvements on the VCS program.

Last, interest expense for the second quarter was $29 million and the effective tax rate was 35.1%. For the full year 2012, we now estimate deferred state tax expense should run about $8 million, interest expense should be roughly $118 million, and our tax rate should be close to 35%.

That wraps up my remarks. And with that. I will turn the call over to Andy for Q&A.

Thanks, Barb.

Just a reminder to everyone, if you could limit yourself to one initial question and one follow-up, and then get back in the queue, so we can accommodate as many people as possible.

And with that, Shantele, I would like to turn it over to you to manage the Q&A.

(Operator Instructions)

Sam Pearlstein, Wells Fargo.

Good morning.

Good morning, Sam.

Mike, you said that you thought the second half of this year would be relatively similar in terms of revenue and earnings as the first half. If I look last year, you saw a much steeper step-up in the second half of the year, where the second half was much stronger. What's different there as to why we're not going to see a pick-up in the second half? I know the pension steps up a little bit, but just trying to think about the moving pieces there.

I think, first of all, last year and this year are a little bit different, in that the risk profile that we were working our way through last year was very different than it is now. We've retired, as we've been going quarter by quarter, we've been retiring some of that risk that was in front of us last year; and frankly, the second half of last year was when we retired some of that risk. So that opportunity may not necessarily be quite the same this year.

Secondly, I think if you look at what happened in the first half of this year, I think -- Barb always talks about the lumpiness of our business. I think if you look at the first two quarters of this year, you see the lumpiness of our business. The second quarter, we achieved several significant milestones in second quarter, and it made it a very, very high end kind of quarter for us. But if you look back over the last six months and we look forward for the next six months, we think that they're pretty similar, at this point.

Okay. And then, Barb, you mentioned the $7 million receipt in the quarter. Can you just sum up the other cum adjustments, just in terms of what the benefits were in this quarter?

Sure. You'll see, when the Q comes out, that the positive adjustments were $60 million, which includes that $7 million. And the other positive things were we had a couple of the boats on VCS, performance adjustments there, and also on LPD-23 and 25, we were seeing favorable performance there to the prior adjustments we had made. And then on the negative adjustment side, that's $26 million, and that's primarily driven by LPD-24 and a little bit of LPD-22.

Okay. Thank you.

You're welcome.

Robert Spingarn of Credit Suisse.

Good morning.

Good morning.

So, Mike, I have to say that you sound good. There's a lot of confidence I detect there, having known you for a long time, and I can see the pride in the progress that's been made down in the Gulf Coast. So that being the case, should we think about this -- and based on what you just said to Sam about the second half, when we strip out the $7 million, you did 4.1% down there, is that at this point a sustainable margin?

Yes, I think that I'll stay with what I've already said, that the first half is reflective of how the second half is going to go. I think that what you have to really look at, Rob, is that we are ticking off the events that we laid out and said that these are the risk/retirement events that we have to accomplish. We really accomplished several of those events in second quarter. We had a couple of launchings in there, a couple of trials. Second quarter was a very high paced activity.

And so to go so far as to say that we've got it completely contained and sustainable, I'm not ready to go do that yet. But I am very, very pleased with the way that the team has rallied over the last -- we'd say year and a half, but Barb and I sometimes think that this has been a four and a half year journey for us. We're in a good place right now. And we fully expect to continue to retire the risk and move ahead over the next 18 months.

Okay. Well, that's helpful.

Barb, from the way you book these favorables and unfavorables, is your methodology to take a cum catch and then recognize all of that in the current quarter, or do you do something more akin to what we've seen from your competitor, which is to take a modest amount of that favorable and the remainder of it through the end of the contract? In other words, spreading it more evenly, meaning that, is this quarter a little -- I think to what Mike just said, perhaps this is the peak for the year, because these events happen now.

No. When we do a cum catch-up, that same booking rate continues for the remainder of the program, unless we have another milestone that affects our booking rate up or down. We have a very rigorous process, with a schedule of events and costs associated -- cost performance associated along the way with those events, and so very deliberately make changes in our booking rates.

Yes, Rob, I would add that one of the key tenets of the systems that we've put in place at Ingalls over the last four-and-a-half years is, we've taken the entire risk register and we've attached all of the items in the risk register to specific key events. And when we come through that key event, we do a hot wash on, did we retire the risk, did we mitigate it, if we didn't retire it, is there another opportunity to do that. And so that's why the events are important to us, because that's our chance to do a real-time update on where do we stand on the risk in that program.

Frankly, in my view, that's why we feel so good about where we've been, and we are optimistic about where we're going. But it also is, we still have real clear line of sight on the risk that's still out there, between now and the delivery of the last four ships and the closure of Avondale. We're keeping our eye on all of that.

Just to finish up, on Avondale, if you stick with your plan to wind down and nothing happens differently, and understanding that you're hoping for a different outcome, but if the goes this way, Barb, are there any events we should be looking out for the remainder of this year and '13 that hit the books?

No. You will see, when the Q is filed, that we reduced our restructuring costs from $271 million down to $265 million, and that difference is actually a reduction in our estimated cash outlays. And we talked about that, that it would be a negotiated based on actuals; so as we're incurring the actuals, we update our proposal. So that's about the only thing will you see. But right now, everything is on schedule as planned.

Thank you both.

You're welcome. Have a good day.

Doug Hartnett, Sanford Bernstein.

Good morning.

Good morning, Doug.

On LHA-6 and LPD-25, could you update us on the timing next year when you expect those deliveries? And then related to that, since you've launched these ships, would I be correct to assume that the risks that you've been talking about, either upside or downside, that band should be narrowing somewhat now that these ships are in the water?

Okay. First of all, regarding schedule, I would, at this point, just say second half of next year for both of those ships. We just christened the Somerset, and we'll be christening the America in October. And so the second half of next year is when we're looking at the delivery of those ships. And they will go through the whole trial sequence and everything else.

That's later than you had thought, isn't it, before?

You know, I think that what we've been doing is we've -- I think it is later than we had originally laid out a couple years ago. But again, I think it's -- as we've been working our way through this, we've been adjusting the schedule to reflect our better understanding of what the risk profile is. And so that's part of what our challenge over the past couple of years has been. But both of those ships are in pretty good shape. I'm pleased with the quality of the launch on Somerset, and I'm particularly pleased with what the team on America is doing. They're basically working through a new design program there with the significant engineering change, and they got the ship in the water early. It was a quality launch. And so I'm excited about where that's going.

And then, if I can, on Virginia class, as you move through block 3, I would assume that would you expect margins to improve as you move down the learning curve. I'm curious, where you are today on block 3 Virginia class relative to your plan of margins?

We're basically on our plan. I would point out that the learning curve on these programs is starting to get pretty flat, ship over ship, because of doubling the volume now takes a whole lot more ships than it used to, in the learning curve. But in terms of our financial plan, we are performing very well against our financial plan on all of those programs, on all of the Virginia-class programs.

Okay. Great. Thank you.

George Shapiro, Shapiro Research.

Good morning, George.

Good morning. Question for you is, about 40% of the revenues at Ingalls now still at 0 margin?

We think it's a little less than that.

Okay. So then, it would appear that the margin of the core business was improved a little bit this quarter from what you've had in the past, and if you could explain -- I guess you kind of explained where you took the improvement, but is that a sustainable thing?

Well, George, as we talked before, on all our new programs, we're starting at a lower margin rate until we see progress on each of those ships, and performance, like Mike talked about, against each one of those milestones. But like we said, the first half of the year is going to look like the second half.

I guess what I would say, George, in the same way that we allocated all of the risk registered to key events on our five underperforming programs, we do that on all of our programs. And so as we've been saying for a while, we expect the blended rate of this business across the portfolio of all of our programs to be operating in the 9-plus percent range.

Our challenge at Ingalls is the ships that should be operating above that are not performing. So that has created a hole in the blend. As we retire the risk and deliver those ships, you will see the margins improve at Ingalls in the rest of the business. But they're only going to improve at the rate at which we retire risk on the new programs and get them up to the level of maturity that they need to be. So that's going to be a bit lumpy, because it's about when does the program start, when do you start fab, when did the contract get signed, when is the material coming in. So it's going to be a little bit more bumpy than would you think, and you are going to have a lot more visibility on that than you usually do, because you won't see the full blended rate. So that's kind of what you are seeing right now.

But specifically, Mike, did it go up a little bit this quarter, if you look at the aggregate of the profitable programs?

Well, and that's because of the delivery of LPD-22. So you took one of the ships in a forward loss out of there.

Okay. Thanks very much.

Okay. Thank you, George.

Pete Skibitski, Drexel Hamilton.

Good morning. Mike, just wondered if you could add some more color in terms of your thoughts on the potential impact of sequestration to HII. Do you think they would sort of spread the cuts out over all of your programs, or would you expect to have one large program outright canceled? Just wondering what your thoughts are there.

Well, you know, we happen to -- first of all, I think that a core part of our view on sequestration is that obligated prior year funds, the ships that are on contract today, are going to stay on contract. I just don't think, and maybe I'm the naive one in the room, but I just don't think there's any practical way for there to be any savings generated by trying to go in and reduce scope or cancel or terminate any of the programs for contracts that have already been signed. And so that's been our -- that's why we, frankly, have focused so hard on getting those five big contracts signed, so that we could get those under contract going into next year.

We do think that sequestration could have some effect on the timing of future work for us. The debate about whether it's a budget authority cut or is it an outlays cut and how is the government going to work their way through that. I've seen really smart folks argue both sides of that. There hasn't been any real clear guidance provided as to how that's going to go. It makes it really hard to plan. I would expect that programs could be moved around a little bit to adjust to whatever the law is.

But I would remind you that if you step back and said what are the Navy's top four priority programs in terms of ship building, it's the four programs we're involved in. And so I don't really see today anybody stepping out and saying, we're going to go and terminate one of these whole classes of ships, or stop or curtail production of anything, because these production lines are pretty warm right now, and they're working very well. And we know, we know from history, that if you ever curtail one of these programs, it will be too expensive to restart again.

So the timing of our future work may be something that gets caught up in the discussion. I don't believe the actuality of any of the programs that are out there is at any greater risk than it normally would be anyway. And so that's why we've been able to say that the work we have under contract carries us through the next three to five years of work. And that the work of -- and the timing of future work over the next couple of years, the contracts that we have to sign, that's really why -- that's the time period in the five- to ten-year time frame of work for us. And that's really been the basis of our commentary on that altogether.

Beyond that, though, I would say our supply chain and our suppliers, they have a little bit different view. They supply not just to us, but they supply to the whole industry. And the supply chain has been dwindling and weakening, I would say, over the last several years to the point where the vast majority of our supply chain now is either sole source or single source suppliers. Their ability to plan, their ability to forecast is even less -- they have less visibility than we do, and so we expect the supply chain to be challenged over this next time frame.

That's great color. I appreciate that.

If I could add just one follow-up to Barb on pension. Barb, if you had to take your year-to-date, your return on assets in your plan and peg your discount rate, I was just wondering, number one, how much would your discount rate change by, and sort of directionally how would you expect your FAS and CAS expense to move for 2013?

I'm not going to give anything on 2013. But let me tell you what -- our return on assets year-to-date through the end of the quarter were 5.5%. And then as far as -- I'll give you some sensitivities, though. From a discount rate standpoint, a 25-basis-point increase would be about a $17 million increase, and if it goes the other way, it's about $18 million, on a 25-basis point. And then on a return on assets, you're about on a 25 basis points, about $8 million of change in FAS.

Okay. Thank you very much.

You're welcome.

Jason Gursky, Citi.

Hello. Good morning. This is John Revis in for Jason. Thanks for taking the question.

Just a question on cash flows, operation cash flows came in a little bit light this quarter than what we were expecting. I know Barb mentioned that you expect it to trend upward over the year. I was wondering if you could give an idea of the outlook for the year in terms of magnitude, what kind of swing we can get over the course of the year, and then perhaps just some vision out to '13. And then '14, assuming that Avondale plans -- Avondale closure goes to plan.

Okay. Not going to provide anything on '13 or '14 yet. Sorry about that. But I talk about this all the time, cash -- I expect the same trend as last year. But again, it will all be based on timing of collections, because we have big invoices, one day makes a difference when you close the year, timing of deliveries, getting the 23 and 24 out and getting the DD-250 signed off and billing, our customer getting paid. They're really the two biggest drivers. So I don't expect any issues on the deliveries with 23 and 24. And then, I'm not smart enough to call who is going to pay us on the last day of the year and the first day of 2013. So you've got to bear with us on that. That's just the way it is. And hard to predict.

Fair enough. And then just a quick follow-up on CVN-79 negotiations. I wonder if you could provide an update on the progress there and just address some of the risks, if there's any, on how a longer negotiation process might impact expected margins, since it's a growing business, and one would assume that risk is being -- is coming off the table, even though you still don't that have full contract.

I think we're in the -- everybody's kind of preparing for the negotiations right now. The Navy is working through their -- the scope of the job. We're coming through the estimates. We're taking a look at the cost returns we see on 78. The Navy is working through the budget issues. So all of that stuff is ongoing. It's about where it typically is for this kind of -- we're probably a year away from really having that in the final stages of negotiations. So it's kind of where it ought to be.

I think that the challenge that 79 presents is going to be, we're moving from 78 to 79. We expect that we'll move from a cost-type environment to a price type environment on 79. And we will not have finished 78. And so there will be that kind of calculation that we'll be going through as we go to contract. And that will be a tough one for us with the Navy, as well. They'll have their constraints, we'll have our constraints, and we'll go into the room, and we'll try to figure out how to get a contract wrapped around it. We've always been able to do that, and we fully expect to be able to do that again.

Great. Thanks for the color.

Myles Walton, Deutsche Bank.

Thanks. Good morning.

Hello, Myles. How are you doing?

Good. Good. Just to follow up on the CVN-79 question, is it still looking, I think from your slide, it's still looking at a 2020 delivery, and I think from the most recent SAAR, it would suggest a 2022. And obviously, we're talking way out there in time and space. How does that look to you? Is it stretch out, or is there something else that's going on?

Well, I think I would say there's probably two things that are going on there, Myles. One of them is, how does it fit with the fleet requirements. And so the -- when does the Navy need the ship in the fleet to maintain their forward structure at 11. They've got a little bit of flexibility around that. They're operating at 10 right now, and so all the carrier deployments are being stretched out. We just saw a carrier on the West Coast get accelerated to deploy a few months early to meet its requirements. So the op tempo is really high right now. I think that there's some -- there's just some trying to figure out how are we going to maintain when we get back to 11 after Ford delivers, how are we going to operate and keep the Ford structure at of 11, and how does 79 fit into that discussion. So I think that's part of what you see in some of those documents.

I think the second thing you see in those documents is a bit of a reflection on the lead ship nature of 78. While it's come together as well as -- better than any lead ship I've seen, we've got significantly more pre-outfitting when the units go into the dock. The team is -- the whole thing has gelled a whole lot better than we usually see on a lead ship at this point. We've had some challenges with the usual kind of churn that you see is in lead ships around material, particularly valve suppliers and things like that. And there's some pressure and some thought in some quarters that maybe what we do is we stretch it out, we allow ourselves to get some of those technical issues completely sorted out, in order to support a better schedule.

My own view of it is, the ship builder always has to make the trade-off between are we ready to go to the dock with the unit that's missing valves, or do we wait for the valves. Typically, we get to a point where we need to put the unit in the dock even if we don't have the valves. So that's sort of the discussion that's going on, and I think that's why you see some of that band of when the ship might be needed by the fleet and when it might be delivered, and how do we retire some of the risk associated with the new technology we're seeing come through on 78.

The one thing I'm curious about is, at this point, though, would it seem like there's no risk to learning curve loss as a result of potential delays from here. Where does that become a risk? If it's 2024, then we have kind of a learning risk erosion potential?

Well, I guess in my experience, the optimum gap between carriers is between three and a half and four years. Once you move past that, you start to lose a little bit. Think about, even at four years, if you carry the bow unit of the ship into the dock, and then four years later you're going to do that again -- the bow unit is a very irregular shaped unit, very precise craftsmanship goes into that. Teams form to go do that. They go do it, and then they're going to do it four years later, we're going to do it again. Even in that it might be a bit of a stretch to say that there's a substantial amount of learning carry-over from one ship to the next. And so, yes, there's a lot of pieces that you can kind of go from one ship right into the next piece of it.

I think once you go -- I think five years that the Pentagon has cited as how they want to build these things is something we can manage. I would point out that the gap between 77 and 78, I believe it was six years. And we had some challenges there. The best carriers, in terms of learning, that we ever built were when we built them on two-ship contracts. We had two two-ship contracts. It was, let's see, 72 and 73 were on one contract, and 74 and 75 were on another contract. And they were two ships over 10 years. And we could go right from one to the next. The supply chain was lined up. It was serial production of aircraft carriers, and it was at its best.

I think that every time you put another year in to delay the contract award or you do something, you are absolutely affecting the efficiency of the operation, and you're raising the price to the taxpayers.

And then just two clean-up questions. One, Barb, you gave us some of the sensitivities for FAS/CAS for '13, but where is the starting point, if all else were being held constant for '13, to those sensitivities?

We're going to talk about that in Q3.

All right. I figured camel's nose is already into the tent. Might as well put the whole body in there.

(Laughter) Nice try.

The other cleanup one was, Mike, you mentioned still pursuing alternate uses for Avondale, but curious what kind of timeline could you continue to evaluate those alternatives, given the time to the end date of closing it down is a year, 18 months away.

Yes, I mean, Myles, the most important asset we have in that facility is the workforce that's there. And every week that goes by, every month that goes by, the volume of workforce, the number of people that are working is going down. And so, the value of that asset in terms of how much we can go, that sort of creates a clock that's ticking, as you point out. I don't know that we've come and said that there's an absolute, we have to close if we get to this point, and we don't have any other option. I don't think we've made that call yet. I think that we are hopeful that we will be able to drive this thing to some other outcome.

The reality is that if we end up executing -- continuing to execute the plan that we have for closure, once it's closed, we won't stop looking for ways to redeploy that asset. And so it's just going to be -- it will just shift to a different -- we'll just move to a different phase.

Okay. Great. Thanks.

Brian Ruttenbur, CRT Capital.

Thank you very much. Great quarter.

I have a question on G&A on the year as a dollar amount, and then book to bill for the year. If you could answer those, where you estimate both of those by year end.

Okay, so let's talk about the G&A first. I expect it to look pretty close to where it is year-to-date. So double it. And the biggest thing in the G&A that's driving it is really the FAS/CAS is in there for us. So that's the G&A.

Your other question is the book-to-bill ratio, probably going to go -- I'm thinking, we got 27 after the quarter, and then if you look and you take our sales volume that we've talked about, doubling it, it will really depend on what happens with the continuing resolution and how all our engineering and services contracts get funded at the end of the year. It may go down slightly, but I think it all depends.

Okay. And then the Avondale, is there anything that the state can do at this point to stop you from shutting that operation down?

I don't have a contract with the state. We have contracts today to build ships. If the state wanted to give us a contract to go do some other kind of work, I guess that they could stop us that way, but it would be because we had work to do. There's no regulatory thing that they can do. There's no legal thing that they can do that would stop it.

Frankly, the state of Louisiana has been a very effective partner with us in trying to find ways to redeploy the asset. Last year, the governor and I came together and agreed that the state would come forward with a couple of hundred million dollars of incentive for any potential partner to put into that asset.

So this isn't really about the political process trying to stop the loss of jobs. The political process has been a partner with us to try to find ways to redeploy the asset.

Thank you very much.

Thanks, Brian.

Mayer Manmohan Singh, Barclays.

Good morning, guys. Good quarter.

I just had one question. You maintained earlier the plus 9% margin target by 2015, but in talking about the contract that you've won, that should carry your revenue to 2015, you were pointing out that you got an additional NSC, National Security Cutter, in addition to your earlier plan. It sounds like this suggests there is some upside to your primary revenue forecast for, I think it was for flat over the 2010 level. Does that sound about right?

We're going to stay with that, simply because if you take the National Security Cutter, the most important part about the National Security Cutter award was the Coast Guard recognized the value of serial production, and they wanted to keep the line moving so they could keep their price down. If you take the price of a National Security Cutter and you spread it out over the five-year period, it's not going to substantially affect the -- our outlook over this time frame.

And in the main, we have lots of pluses and minuses like this that are all going to average out, which is why Barb and I have said from the beginning that the way to look at our business is that the revenue is flat, but the earnings will expand. And that's been our objective. That's what we've been trying to get done. And so far, we've been on track for that.

Okay. Great. And just wanted to follow up on Avondale, just coming back to Myles' question earlier.

Just wondering, in terms of the closure is Avondale, are there any contentious items outstanding, I want to say, with the Navy, in terms of what they will cover if you were to end up just closing the facility? Are there any -- I'm just wondering if there's anything contentious left.

No. The FARF spells out the allowability of the costs that we are putting into our effort, and all of that is pretty well defined. As Barb said, we started with estimates for what those costs would be. When this is all said and done, we'll probably end up negotiating it around the actuals.

But I would point out that the Navy has also been a partner with us in trying to find a way to redeploy the asset. We've said, in order to redeploy this asset,we need four things. We would need the Navy to work with us. We would need the states and the political process to work with us. We would need a partner and a sustainable, credible market. Well, we've got the state and the Navy. They're right there with us, helping us in every which way they can. We continue to look for a partner and a market.

Great. Thank you very much.

At this time, I would like to turn the conference back over to Mr. Mike Petters for closing remarks. Please proceed, sir.

Thank you. And thank you all for joining us this morning.

As I said, 18 months ago, I guess, we said we needed to get five contracts signed. We've gotten those five contracts signed. We told you that we needed to get five ships delivered. We've delivered one. We're on the edge of delivering the second. We will have the third delivered by the end of this year, and we're on track to deliver the fourth and fifth ones next year. And so that's on pace. And we said that we would be working our way through the closure and/or redeployment of Avondale, and the closure plan remains in effect, and we continue to think about redeployment.

We're very excited about the steps that we've taken. We recognize that we still have a long ways to go. We're very proud of the work that we've done, and we look forward to continuing to move ahead on our plan.

Thanks for being with us this morning, and we look forward to seeing you on the Street.

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