亨廷頓·英格爾斯工業 (HII) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q3 2013 Huntington Ingalls Industries earnings conference call. My name is Mina and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Dwayne Blake, VP of Investor Relations. Please proceed, sir.

Thanks, Mina. Good morning and welcome to the Huntington Ingalls Industries third-quarter 2013 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 facts 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 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 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 our President and CEO, Mike Petters. 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 third quarter of 2013. Today we reported sales of $1.6 billion in diluted earnings per share of $1.36.

Adjusting for a one-time charge for closing our Gulfport composite facility and favorable resolution of hurricane-related insurance claims, sales were $1.7 billion, up 4% from last year. Pension-adjusted diluted earnings per share was $1.17 compared to $0.98 last year, which included adjustments for non-cash workers' compensation and tax expenses.

Adjusted third-quarter segment operating margin was 6.8%, down slightly from 7.1% last year on an adjusted basis. Operating margin at Ingalls was negatively affected by additional costs required to remediate first-of-class mechanical issues identified during testing on LHA-6 and cost to complete LPD 25. While we would've liked to have been able to complete these last two underperforming ships without having to recognize any additional costs, LPD 25 has been delivered to the Navy, and we believe that we are well-positioned to complete the work on LHA 6 within these updated cost parameters.

Reflecting our confidence in the performance of our programs and the ability to achieve our 2015 goals, our Board of Directors recently approved an increase in our dividend from $0.10 per share to $0.20 per share, as well as an expansion of our share repurchase program from the original authority of $150 million to $300 million. These decisions support our commitment to continue returning cash to shareholders as a part of a balanced cash deployment strategy.

Now I will get a few highlights of our major programs beginning with Ingalls. LPD 25 Somerset, the last LPD at Avondale, successfully completed builders and acceptance trials and was delivered to the Navy on October 18. We are very pleased with the efforts of the Avondale team as they overcame major obstacles, including the propeller issue, and delivered the most capable LPD to date. LPDs 26 and 27 continue to progress through the unit construction and erection phases of production.

LHA 6 America commenced builders trials on Tuesday after overcoming several first-of-class mechanical issues during the test program. Resolving these issues impacted test program activities and as a result, we anticipate delivery in the first quarter of 2014. LHA 7 Tripoli is in the early stages of construction and continues to make steady progress.

In the National Security Cutter program, NSC 4 had a successful launch and christening, and the team is focused on completing the ship and delivering her to the Coast Guard next year. NSC 5 has over 80% of its units erected and will launch in the spring of 2014. NSC 6 started fabrication in mid-October, and we are purchasing major equipment, such as the main compulsion systems, generators and electrical switchboards for NSC 7 under a long-lead material contract that was awarded in June.

I am very pleased with our progress on the NSC program. We are seeing improved efficiencies across the board as this program matures and we leverage lessons learned and the benefits of serial production from one ship to the next.

On the DDG 51 program, the keel for DDG 113 John Finn, was authenticated this week. The ship is now 20% complete and is expected to be delivered to the Navy in 2016. We also recently started fabrication on DDG 114, which will be Ingalls' 30th Arleigh Burke-class destroyer.

Regarding the DDG 1000 destroyer program, we delivered the composite hangar for DDG 1001, US Navy's second Zumwalt-class guided missile destroyer, Michael Monsoor, at the end of September. All that remains on this ship is a deck house delivery, which is expected in the first quarter of 2014. Following completion of this work and the composite mass for LPDs 26 and 27, we will proceed with the shutdown of the Gulfport facility as previously announced.

At Avondale, even though LPD 25 has been delivered, the ship will remain on site until February, as we complete post-delivery items for the customer. We are also continuing unit construction for LPDs 26 and 27 that will be completed in the third quarter of 2014.

With regard to Jones Act commercial ship building opportunities, we have not found a project that meets our requirements, but we continue to evaluate potential Avondale redeployment opportunities, including those in the energy market. In support of this process, members of the New Orleans Metal Trades Council and the Metal Trades Department approved a new collective bargaining agreement at the end of September, which will run from January 2014 through January 2019.

The agreement contains a wage and benefits package designed to be competitive in the commercial energy market. Even with this positive development, let me remind everyone that if we are unsuccessful in our redeployment efforts, we will proceed with our plan of record and close the facility.

Now turning to Newport News. CVN 78 Ford continues to make progress and is preparing for its christening ceremony this weekend with launch next week. CVN 79 Kennedy continues with engineering and design, material procurement, and advanced unit production activities. The Navy announced that they will delay the award of the detail design and construction contract and continue along the planned path using an FY14 advanced construction contract vehicle, allowing more time to optimize the technology requirements and the build and test plans for this ship.

In submarines, we continue to make progress on SSN 785 John Warner, our first Block III delivery boat. Given that the government is operating under a continuing resolution without special language allowing new program starts, award of a Block IV contract for up to 10 additional submarines will be delayed until at least early 2014.

CVN-71 Roosevelt completed its refueling and complex overhaul and was redelivered to the Navy at the end of August. CVN-72 Lincoln is progressing through the early stages of its 44-month RCOH with a focus on refueling preparations, removing equipment for refurbishment and hull and tank work. CVN 65 Enterprise is progressing through the early stages of its 38-month contract for the inactivation and the defueling of its eight nuclear reactors, with a focus on completing temporary systems access cuts and personal training and qualification.

In summary, our programs continue to perform well. Our financial results are in line with our expectations, and our long-term outlook of a 9%-plus operating margin by 2015 remains unchanged. We have achieved several important milestones, including the delivery of LPD 25, the fourth of our five under-performing ships.

We took another positive step in our cash deployment strategy by increasing our dividend and expanding our share repurchase program. Although defense budgets remain under pressure, we are maintaining our focus on safety, quality, cost, and schedule.

This drives a culture that is committed to producing affordable high-quality ships for our customers, which in turn creates value for our shareholders and provides stability for our employees. That concludes my remarks and I will now turn call over to Barb Niland for some remarks on the financials. Barb?

Thanks, Mike, and good morning to everyone on the call. Today I'm going to focus my discussion on the key items that occurred during the quarter and give a little insight into 2014 pension sensitivities. Please refer to the slides posted on our website for more information.

As Mike mentioned, there were two significant nonrecurring events during the quarter that we adjusted for in our earnings release. First, we settle hurricane-related insurance claims and received $180 million of cash during the quarter. As a result of the settlement, Ingalls' revenues decreased by $37 million due to lower costs. Operating income increased $46 million. This reflects the economic position of the customer's recent direction for the treatment of insurance-related costs and recoveries.

Second, we announced the planned closure of the Gulfport composite facility as a result of the Navy selecting a steel deck house for DDG 1002. Due to the loss of the deck house and the planned closure, revenues increased $9 million and operating income decreased $17 million, which is within the range that we previously disclosed.

Additionally, please remember that in the third quarter last year, we adjusted both Ingalls and Newport News operating margin for $24 million of non-cash workers' compensation charges. And net earnings was adjusted for an $8 million tax expense related to our spin off Tax Matters Agreement.

Moving on to consolidated results on page 4. All of the numbers that I discuss will be adjusted for these events, and you can refer to the presentation on the website or the earnings release for reconciliations.

Total sales increased 4.3%, which was mainly due to increased volume at Newport News and aircraft carriers and fleet support services. Third-quarter operating income was $98 million, up $8 million or 8.9% over the same period in 2012. The increase in operating income was primarily due to a lower FAS/CAS adjustment this quarter.

Pension-adjusted diluted earnings per share for the quarter was $1.17 compared to $0.98 in Q3 2012. We generated $251 million of free cash flow for the quarter. Capital expenditures for the quarter were $30 million, down $5 million from the third quarter last year. For the full year, we continue to expect capital expenditures to be in the mid 2% to 3% of sales range.

During the quarter, under our current share repurchase program, we purchased over 450,000 shares at a cost of $30 million. Additionally, we paid our fourth quarterly dividend of $0.10 in September.

Turning to segment-level performance on pages 5 and 6 of the slide deck, Ingalls' operating margin was 3% for the quarter or 151 basis points higher than the same period last year. The increase over the prior year was primarily attributable to risk retirement on the NSC program.

However, as Mike discussed, margins were negatively affected this quarter due to additional cost to complete LHA 6 and LPD 25 in an amount similar to the LPD charges during the same period last year. Included in the cost for LPD 25 was $4.8 million for the propeller incident we previously disclosed.

Newport News operating margin was 9.1% for the quarter compared to 10.9% for the same period last year. 2012 operating margin included a $15 million favorable resolution of announced standing contract adjustment on the Enterprise EDSRA.

For 2013, we are still estimating deferred state tax expense in the $10 million range, a FAS/CAS adjustment of approximately $65 million and net interest expense of approximately $116 million. Our effective tax rate for the quarter was 30.3%, which was favorably impacted by an increase in the domestic manufacturing deduction and the true-up of our 2012 estimated tax return. We are now expecting our full-year effective tax rate to be around 33%, which differs from the statutory rate, primarily as a result of the manufacturing deduction and the retroactive extension of the research and development tax credit through the end of 2013.

Turning to slide 7. We have included our 2014 pension sensitivities. As always, remember that pension-related numbers are subject to year-end performance and measurement criteria. This chart shows the sensitivities of our 2014 estimated FAS/CAS adjustment to discount rate assumptions and actual asset returns for 2013, and assumes a 7.5% long-term return on assets going forward.

At the end of the third quarter, our discount rates were approximately 85 basis points above last year and year-to-date actual returns were approximately 5.5%. However, actual returns can be volatile. For example, at the end of last week, year-to-date returns had increased to over 8%. We expect required cash contributions in 2014 to be minimal and lower discretionary contributions than in 2013.

Finally, yesterday we closed an amendment of our bank credit facility which improved pricing and created more flexibility under some of our covenants. An 8-K disclosing this amendment will be filed. So that wraps up my remarks. 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. Mina, I will turn the call over to you to manage the Q&A.

Sure. Thank you very much, Dwayne.

(Operator Instructions)

Robert Spingarn, Credit Suisse.

Good morning, everybody. This is actually Russ Cowley in for Rob. I just had a quick question, Mike, on what do you think about the delivery of LPD 25 in the last quarter? The delivery of LHA 6 early in 2014? And the others there I imagine, ships that you've already delivered. When do you think could be the first quarter where we see a clean number on the margin angles without distortions from those ships?

Well, we have said from the beginning that the first thing we have to do is get the ships out of our system. The second thing we have to do is we have to let the ships that are at Ingalls to mature.

So our statement so far has been that we will be at -- we expect both of our businesses to be operating at 9% in 2015. We really haven't tried to predict what's going to happen between now and then except that there will be an accelerating progression towards those numbers between now and then. That's what we said and we will continue to say that.

Okay. Just one thing on the 9%. Is it still the case that you expect it not to be a full year 2015 margin?

Yes, that's right.

Okay. Thank you.

Joe Nadol, JPMorgan.

This is actually Chris Sands on for Joe. Mike, I was hoping you could give us an update on the energy side of Avondale. I know there's no Jones Act opportunities, but have you guys received any opportunities on the energy side?

Yes, we are continuing to evaluate a broad array of opportunities in both the energy and in the Jones Act. We have got some pretty -- we've got our own internal criteria for what we think -- how do we balance risk and reward in those opportunities.

At this point, while we are talking and working through a lot of different possibilities, we haven't come to one yet that we believe meets the requirements that we are looking for. We just continue to look at that and work our way through that.

There is still a lot of interest in the fabrication potential at Avondale to support the energy segment. The challenge that we have, as we have mentioned before, is that that work is really not eminent. It is a little bit out there. So the question is, how do you get from here to there? We continue to evaluate that, too.

So the ship leaves the yard in February. If the situation remained as it is today, would the yard then close in February?

No. We are doing some unit construction to support Pascagoula's production of the LPDs 26 and 27. It's probably later in the year, but it is definitely next year.

Okay. And how many employees do you have there now? Or will you have come February?

We have about 600. Probably next year we will probably have a running rate of between 500 and 600 people.

Okay. And then, Barb, one for you. You quantified the $4.8 million for LPD 25 just for the propeller, but can you quantify the total amount of charges that were on LPD 25 and LHA 6 in the quarter that weighed on margins?

Yes, we said it was similar to the charge we took the same time last year, which was a little over $20 million in total.

Okay, great. Thank you, guys.

Jason Gursky. Citi.

Good morning, everyone. How are you?

Good morning.

I wanted to just focus a little bit more on Ingalls to get a good understanding of why it is we'll go from the 3% margins today to 9% margins in 2015. I'm wondering, Mike, if you could walk us through in a little bit more detail for the benefit of everybody on the line here, the building blocks of all of that? For example, the initial margin rates that you will focusing on, on the ships that are left in the yard.

Okay. When you are in a shipyard where there is an array of programs, you have mature programs, you have new programs, and you have various maturities in terms of where they are in their cycle relative to serial production. You end up with, you blend all of their different returns together, and you end up at a, I believe, in a 9% to 10% range is where you ought to be operating.

The challenge that we've had over the last couple of years is that the programs that should have been -- if you are going to blend to 9%, that means that you're going to have some that you're going to be above that on and then some that you'll be below that on. The ones that should be above that are the ones that are the most mature. The ones that you have the most experience with, that you have done the most of, the newer programs, because of the risk of a new program and our conservative approach to not booking the income until we have retired the risk, means that in these younger programs, we are typically looking at something less than our target.

So where we have been for the last couple years is that the programs that should have been our highest booking rates are actually our lowest. The first thing we had to do is get those ships out of the blend. We've got four of them gone. We've got one to go.

The second thing you have to do, is you have to take those programs that are new, and remember that in 2011 we said we needed to go and sign five contracts. Well, we signed all five of those contracts. In fact, we signed more than that. But you have to give those programs that are new, the time and the effort to retire risk before you can book them to the place where they need to be.

So getting the first step done was something that we wanted to get done. We now expect to finish that by the end of first quarter 2014. That's when America will be gone, those five ships will be gone.

The second part though, requires a couple more years before those five new contracts that we signed will mature to the point where they are actively contributing to the full 9% target that we've set. Now, the third piece that has to happen is that as those ships mature, you have to come back in and you have to fill in more work behind that.

If you have followed what we have been saying for quite a while now, we are very focused on the three- to five-year horizon with the Navy and the Navy budgeting, and the future of amphibs, because it is the future work in amphibs that will fill in behind that, that will allow us to sustain our workforce, sustain our rate base and help make the blended rate all work together. So the first step is almost complete. We are not going to call it done until we're done, which is the delivery of America.

The second step will take us until 2015 to let those programs mature and let us retire the risk on the new contracts that we have signed since March of 2011. The third step is something that we're working on very, very much right now. We are actively engaged in an environment where there's not a whole lot of oxygen for discussion about something that is three to five years from now.

That's where it is. I'm not sure that we are going to be ever providing any sort of quarter-by-quarter or program-by-program breakout of how that blend comes together, but that's what we are up to.

And Jason, you will see when you file the Q, in our cumulative contract adjustment side, there is a favorable adjustment on NSC that you'll see as part of that. So, as Mike was talking, the contracts are starting to mature. We are retiring risk. Just because of all the other moving parts this quarter, it doesn't stand out.

Right. You know what I think might be helpful is to give us a bit of a sense of whether the initial booking rate on the new work that you'll be bringing into the yard will be any different, higher or lower, than that you've historically done on initial booking rates.

Because I think the fear here would be that you come in and you started booking at a higher initial rate than you would have in the past. That opens us up to the risk of negative Q adjustments going forward. So if you could you give us a sense of your approach to the initial booking rates, or the new rate you'll be bringing in as 9%.

Without going into the rates, I would just tell you that our approach to any new program is to take a look at what's in the risk register when we sign the contract, determine what we think the effective starting booking rate will be, and then we adjust as we retire the risk. That is our very disciplined method for doing this across all of our programs at every stage of construction. I don't think of it as, we're booking higher or lower than we have historically done. We are following our process.

That's very helpful. Thank you.

Sam Pearlstein, Wells Fargo.

Good morning. Just following up on that question. Now that LPD 25 is out of the yard, in the fourth quarter do you end up getting a significant sequential jump in the Ingalls margin?

Well, we are not going to predict fourth quarter, but the issue is the ship is still in the yard. The ship will still be in the yard until February, because we are doing post-delivery items that we traditionally do. Sail away, I think, is scheduled now for February.

Okay. And then with regards to LHA 6 now being in the first quarter, how should we think about the cash impact of that move from this year into next year?

Well, we won't collect the retention until after delivery, so it does move those cash collections into 2014.

Have you ever sized what that could be? In terms of the range?

No, we didn't provide any ranges on that.

Okay. All right. Thank you.

My CFO continues to remind everyone that our cash collections are very lumpy, and this is an example of what that's about. I mean, it's just timing.

Finbar Sheehy, Sanford Bernstein.

Good morning. You're closing the Gulfport composite facility because the Navy decided not to go with the composite deck house. Can you give us a sense of what the total closure cost there is? How much of it you have booked already? How much of it the Navy will cover and when they will cover it?

Well, there's a couple pieces. There is the part that is associated with accelerated depreciation on the assets, and then there is actual cost of closure which is severance and facility work. We said it was $57 million for closure cost, and what you are seeing right now is we have to accelerate the depreciation of assets. That's $52 million.

As a result of that, you had an increased cost to our cost-type contract work there. That increase in cost reduced the margin, so we took a $17 million charge for that. So we had that margin impact and we gave you a range of $15 million to $20 million. It ended up being 17. I think that explains the margin impact and the cost of closure.

I guess I'm trying to understand better, is that a net cost to you? Is there an outstanding amount that you'll be able to recover from the Navy at a later point, since it was their decision that actually led to this?

Yes. The depreciation is being accelerated in our rates and getting charged on the last of the work we are completing on the DDG 1000 program there. So it's being recovered in the contract.

And that's the $52 million?

Yes.

Okay. Thank you.

Brian Ruttenbur, CRT capital.

A couple questions on G&A. Typically, you have seasonality in the fourth quarter where, I assume due to bonuses and other things you have a spike in the fourth quarter. First of all, I wanted to figure out if you can give us that guidance that you'd see that seasonality continue. And then I have one follow-on.

Well, on the G&A, with the litigation that we have been with FM, the different litigation, we seen a little bit of a spike in G&A. When you think about it right now, you are paying higher state taxes on our taxable income. Don't mind that. The other side of it is we are seeing a little bit of increase in legal expenses that are causing that, Brian.

Is that a seasonal fourth-quarter issue? It was last year. I just wanted to understand on a sequential basis from third-quarter to fourth quarter this year, if you are going to see that upward jump last year.

I wouldn't say it's seasonal. I think it's really just related to whatever, if there is extra B&P, if we are doing extra proposals, what happens in the legal expense side, and then the last part of it is just the taxable income. I wouldn't say expect that trend. We will just have to see what happens in the quarter.

Okay. I don't know if you're going to be able to answer this or willing to answer this, Barb, but on a segment operating margins, do you see stability from this level? Or do you see that there's going to be -- it's still going to be jumpy from quarter to quarter depending on ship production and what's being launched? I didn't know if this is going to be our base or we are going to see a jump up or down from here.

You know, you will see some spikes over time. It really depends on what events occur in the shipyard, where we are, and how we are progressing on each individual ship. In this quarter we have the NSC 4 launch and our performance is going very well on that ship. We were able to retire risk on that ship. So you won't see it next quarter because there is no big milestone next quarter. You will get a little bit of the peaks and valleys. That's why we say you can't look out as quarter to quarter, you have to look out as, from a perspective of the year there.

Right. Thank you.

Myles Walton, Deutsche Bank.

Thanks. Good morning.

Good morning.

I'm going to go to the esoteric topic of pension. There's a big move on FAS/CAS year on year. Barb, could you just give us -- is it $50 million to $75 million down on FAS and maybe $70 million to $100 million up on CAS? Is that what the moving parts are?

How about if we wait until the fourth quarter and I will actually give you each of the pieces. What I have right now is just the net. You are directionally in the right direction.

Okay. It's really leading the question, which is, Mike, when you think about going to the Navy with costs that are clearly allowable but escalating at the pace that they would be under this circumstance, how, if any, do you approach the conversation? Are you able to offset it in other areas of the cost structure? Because it looks like it's going -- pension, in isolation, CAS recovery would be going in isolation from 2% of cost to 4% of cost in two years. Likely through harmonization, that's only going to get higher.

Yes. And I think, Miles, you're right. Frankly, that's a tough discussion. Where we end up finding ourselves is in the negotiation of each of our contracts there is a pretty healthy dialogue over what are the correct rates for the programs, especially when we are in those discussions today around CVN 79, which is a program that will take eight years to build.

And we are talking about Block IV submarines, which is a 9 or 10-ship program which will play out over at least that long. You know, you are trying to make sure that in that discussion that you have a good enough view of your whole rate base, not just the pension side of it, but the whole workload and everything else, the education, the training, the retirements, retention, all that stuff becomes part of the discussion.

To the extent that we are able to negotiate that into the contracts appropriately, it doesn't become part of our risk register. But when we come out of the room with a signed contract, any of those things that we think are creating some risk on the contract become part of the risk register. And now I'm back to the discussion I had before, which is, okay, so now we've got these items in our risk register, how does that affect our initial booking rates?

That's the process. It's looking at how we make the sausage. We find ourselves routinely discussing what we think the wage growth might be or the pension impact might be, inside of a contract negotiation seven, eight years from now. And that's what makes the business so much fun.

All right. Are you having a challenge capturing as much of that recovery as you used to, three-year contracts? Or are you capturing the same percentage?

I will start and let Barb talk to this. I think this whole harmonization issue is something that the Pentagon has not yet quite put their own head around. Again, we are not the biggest player in this pool right now.

As more and more of the folks that have to deal with that, have to deal with that through their own negotiations with the Pentagon, I think the Pentagon is going to have to continue to come to grips with it. So that's my observation from where I sit, is that this is -- the final chapter on harmonization has not been written yet. And I will turn it over to Barb from there.

Myles, negotiations are tough. They are pushing back on what our CAS assumptions are for pension returns and also discount rates. So it just adds to the tough part of the negotiations. They want us to use higher pension returns and higher discount rates that are unrealistic, and we try to push them back to a more realistic position. Fortunately, we have been doing okay there. But it is tough. It's tough.

And then just one clarification, clean-up. The $180 million cash recovery that you talked about from the insurance, it looks like on the cash flow statement $58 million was in cash from investing. Was the other $120 million in operating cash flow?

Yes, it was.

Okay, great. Thanks again.

You're welcome.

[Olmar Kahli], Goldman Sachs.

Barb, this one is for you. In the unfortunate scenario where you cannot land replacement energy work, what type of cash closure costs would you be looking at? I understand that if it's tough to come up with an exact number, but a range would be helpful. How much of that would be recoverable, if you would know?

So that is all in our restructuring proposal. What we have in the restructuring is the assets, the accelerated depreciation on the assets, and then the cost associated with closing the facility, which includes severance and also things like retention for people we needed to keep to finish LPD 25 and 26 work. So all of that is included in our restructuring proposal. It's $256 million.

All right. Thank you.

That hasn't changed. That's been holding pretty steady for the last year.

Okay. Thank you.

Ron Epstein, Bank of America.

Good morning. It's actually [Christine Lelaugh] calling in for Ron Epstein today.

Good morning.

My question is about capital deployment. How are you thinking about returning cash to shareholders, and will you be announcing some sort of share repurchase plan?

Well, first of all, our approach is that we are going to continue to be very balanced in this. We will continue to look for ways to create overall value for our business, and that includes dividends and share repurchase.

Just last week we announced at the doubling of our dividend, and we doubled the amount of the authorization for the share repurchase. Our Board approved all of that last week. So I think we are on track with what we have said our approach will be, which is to be very balanced and find ways to continue to create value for everybody.

Thank you.

Peter Skibitski, Drexel.

Good morning, guys.

Good morning.

I got on a little late, so I apologize. I think you might have touched on these two questions already. Mike, a couple maybe difficult questions to answer. On LSDX or LX or whatever the denotation is right now, I know the Marine Corp wants it. What is your sense of the degree of how much the Navy want the follow-on amphib? And B, can they fit into their budget in this environment? And lastly, just what year would you like to have or do you need that to be budgeted in, in order to have a smooth transition from the current class?

Yes, thanks for that. I think that the first question you asked was, does the Navy want this? The answer is, yes, the Navy wants it.

The second question is, can they fit into their budget? This has been the dilemma is that if -- This is the piece of the budget that seems to be, we have said before, carriers submarines, destroyers sit at the top of the Navy's list in terms of complexity and priority. Below that is amphibs.

Somewhere in between destroyers and amphibs and surface combatants is where the line is in terms of affordability. We have been on that now for quite a while.

The reality is, and the program you are talking about is the LXR program, which is smaller amphib that the LPD. The reality is that you can make the LXR look a lot like the LPD and take advantage of all of the engineering and work that we have already done, but the timing of that program is already too far out.

Our view is, let's keep the LPD production line hot instead of shutting it down and bringing it back. So that means that we really need to have another ship between LPD 27 and the LXR program.

Congress has put $260 million out there to the Navy to say -- hey, there's something you need to do with the amphib industrial base to keep this thing moving so that we can do this efficiently, because we think that shutting down a production line would be an inefficient way to move ahead. All of that is in play. All of that is part of -- it's imperative for us to go and try to continue to make that happen.

Obviously, the challenge that we all are faced with right now is that it's really hard to have that discussion with anybody when you are moving from -- we went through a period where the government shut down. We are now back up, operating under a CR that all it can do is reflect last year. And we are only good until January when we are going to have this CR expire.

It becomes really, really hard to have a discussion with anybody about, let's have a discussion about how do we keep a production line hot and be efficient and strategic in our thinking about an amphibious program that supports the long-term interests of the country, when we seem to be operating the country on a month-by-month basis right now. That's intentionally frustrating and, frankly, is no way to run a railroad.

We've got to get out of this cycle of moving from one crisis to another so that we can get back to a much more strategic discussion about how do we do the right thing for our war fighters and our sailors and then, ultimately, for the industrial base.

Hey, Mike, can you hear? In your toss of people on the Hill, what's your sense that we can actually get a Fiscal 2014 Bill in January? If we do, do you think they may put in additional money for this transition amphib?

My crystal ball is completely fogged. You know, I don't know what's different in January than where we are today. And I'm not sure I know what's different between -- we have the budget committees are working to try to solve the budget. There's a lot of good statements about we are going to solve this, but I don't see where the overlap is, and I don't know why this is any different than we had BCA before.

I'm not a political handicapper. I am a ship builder. That's why I'm watching this, trying to figure out where the overlap is. I don't know where it is.

It feels to me like this is going to be something where we won't see the overlap until the deal is done. If that's the case, it may be January 14 before we finally understand where everything is going.

If that means we are back to regular order, that would be great. If that means that we have CR with anomalies, that would be okay. If that means we end up with CR with no anomalies and it is a clean, a 12 month CR, that would not be good. That would not be good across a lot of programs. So that's the way we are handicapping it right now.

Okay, okay. Last one, on the CVN 79 construction contract, does it feel like in this environment that just gets pushed out a ways, to 2015 even?

Well, the Navy has already announced a plan to push it out and operate on a construction preparation contract, so we are engaging with the Navy on working our way through that. I would start with, if you go back to the whole budget discussion, it's considered a new start.

If you are not able to do a new start, that creates a whole set of dilemmas for us in January, if we are not able to go forward. But I expect that we will.

I actually think cooler heads will prevail and that we will be able to move forward on both the submarine contract as well as the construction preparation, and then ultimately the detailed design and construction contract. Whether we actually get the detailed design and construction done before the end of 2014 for if it goes into 2015, I am not sure I can handicap that today.

Great. Thanks for the color, Mike.

Jason Gursky, Citi.

A quick follow-up question for you, Mike and Barb. Your answer, I should say, on the FAS/CAS question earlier was pretty nuanced. I want to walk through this in a little bit more detail.

In some discussions that we've all had with other defense companies over the last couple of quarters, it has become apparent that FAS/CAS is getting Incorporated into most companies' contracts today. And what they are doing to offset the increased cost is to look for cost savings in other areas. So that the net billable rate going back in to the customer isn't necessarily rising, per se. It sounded to me like you were saying something similar to that, but I just want to confirm that that's the case.

Secondly, I'd also like to confirm that when you do something like that, the FAS/CAS is essentially coming in as revenues with zero costs associated with it. Whereas if you are reducing your cost structure in other areas, you are reducing your revenue line but that had costs associated with it.

So this exercise we're going through right now is, essentially, trying to keep our cost structure in line with where we were before FAS/CAS. But what we're doing is replacing some revenue streams that had costs associated with it, with revenue streams that don't necessarily have incremental costs associated with it. I'd love to get your quick thoughts on this.

Well, I will start. I will start with that. I don't think that I said much different than that. When you go to negotiate the contract, any of our contracts, you're looking at the whole package.

We do a lot on each line item and there's a whole of discussion on each line item. In the end, its a total rate package. It's a total labor package. It's a total material package. That all comes together to be a contract.

Yes, if you are going to push the balloon in space, you got to make up for it somewhere else. That's the approach that ends up being taken. You want the discussions to be very fact-based. That is where the negotiations comes in, because you kind of start out, both parties start out with what they wish things would be like. You end up with facts getting in the way of all of that. You end up with a contract that's more fact-based instead of hope-based.

That's our approach to it. I don't think that we do much different than anybody else there. I will let Barb take up any more than that.

I think that's right. We are not treating it any different than anybody else is.

Okay. That's helpful. Thank you.

Thank you. There are no further questions. Now I would like to turn the call over to Mike Petters for closing marks. Thank you.

Well, thank you. I appreciate your interest in the call this morning. I would like to point out again, that we are very excited about how the quarter went, even though there were a lot of moving parts here.

It does show the challenge of ship building. As Barb would say, shipbuilding is government accounting on steroids. We have absolutely been experiencing that for the last quarter.

I would say that inside the gates of our operations, things are going very well. We are on track with all of the targets that we have set for ourselves.

I am probably in the crowd of folks who are frustrated with some of the things that are going on outside the gate. We do what we tend to try to influence that, but our focus continues to be on, what do we need to do inside the gates for this business to be successful?

We are very proud of the work that our team is doing, what our employees are doing. We are delivering tremendous products to our customers and our customers are very, very happy with the products we got. Even today we have another great product at sea on builders trials demonstrating the capability of the craftsmanship of our people.

So with that, we are going to continue to keep the focus inside the gates and try to influence things outside the gates. We look forward to talking to you guys over the next quarter. Thank you all very much.

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