亨廷頓·英格爾斯工業 (HII) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Huntington Ingalls Industries' Q4 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Dwayne Blake, Vice President of Investor Relations. You may begin.

Thank you, Nicole. Good morning and welcome to the Huntington Ingalls Industries' fourth 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 the 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 the 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 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. As most of you know by now, we have a straightforward business philosophy at Huntington Ingalls Industries. We do what we say and we say we do.

When we spun off from Northrop Grumman almost 3 years ago, 2013 was viewed as an inflection point in our margin expansion story and I am pleased to report to you that our financial results for 2013 are right in line with our expectations and keep us on track to achieve our target of 9% plus operating margin by 2015. Sales for quarter of $1.9 billion were up 6% and for the full year were up 2% to $6.8 billion.

Adjusted operating margin for the quarter at our Ingalls segment improved by 73 basis points to 6%, continuing a trend of improving performance. While our Newport News segment continued to deliver solid performance of 9.1% for the quarter. Adjusted diluted EPS was $1.66 for the quarter and $5.36 for 2013, up significantly over last year. Additionally, during 2013 we increased our backlog by 16% to $18 billion of which $12 billion is funded.

Our entire team has remain focused on safety, quality, cost and schedule and achieved several significant milestones during the year. Including delivery of the submarine, Minnesota, 11 months early, delivery of the amphibious transport dock Somerset the last Navy ship to be built at our Avondale shipyard and the redelivery of the aircraft carrier USS Theodore Roosevelt following its midlife refueling and complex overhaul, enabling it to serve our country for another 25 years. In recognition of our solid financial performance, we doubled our quarterly cash dividend to $0.20 per share and doubled our stock repurchase program to $300 million, demonstrating our commitment to return cash to shareholders as a part of a balanced cash deployment strategy.

To position the business for the future, we continue to take steps to capture the full potential of the business by leveraging our unique expertise facilities and highly trained workforce in adjacent markets. We opened an office in Houston to pursue engineering and modular construction work in the energy industry.

We began 2014 with the acquisition of the S.M. Stoller Corporation, a leading provider of technical environmental ecological waste management remediation and consultation services to private sector companies in the US government. And most recently, Newport News shipbuilding opened a business development office in Aiken, South Carolina, where a company joint venture already manages the Savannah River nuclear site to pursue additional work in the Department of Energy and commercial nuclear markets.

To strengthen the skills of our work force we opened brand-new, state-of-the-art apprentice facilities in Virginia and Mississippi. These schools, built through public-private partnerships, are critical elements of our workforce development strategy and our commitment to improving educational opportunities in the communities where we do business.

While the budget process in Washington, D.C., has been a bit challenging at times, we are pleased with the outcomes for our programs in the 2014 budget. As the 2015 budget is being evaluated, our team remains engaged with Navy and Congressional leadership and our suppliers to ensure that potential implications to the industrial base, our workforce and other programs are communicated and understood.

Now, I will hit a few highlights of our major programs beginning with Ingalls. LPD-25 Somerset sailed away on February 3. Marking the end of Navy ship deliveries at our Avondale facility.

I want to emphasize how much I appreciate the efforts of the shipbuilders that built this ship. In spite of the impending closure of the facility, they remained focused on the task at hand and by all accounts delivered the best LPD to date.

Moving to the other amphibious ships under construction, LPD-26 is over 75% erected as it progresses through the unit manufacturing and erection phases of construction. And LPD-27 continues to progress through the shop and unit manufacturing phases of construction.

LHA-6 America, successfully completed acceptance trials in early February to accommodate dry-docking and underwater paint system repairs that were originally planned to be accomplished after delivery, we now anticipate delivery in April with no impact to our cost to complete the ship. LHA-7 Tripoli continues to make steady progress and is preparing for its keeling event in March.

In the national security cutter program, we continue to capture the benefits of serial production as NFC-4 Hamilton completed waterborne shaft alignment and is progressing toward delivery to the Coast Guard later this year. NSC-5 James is a preparing for launch in the second quarter. NSC-6 Munro, early fabrication is progressing well. And we are continuing to purchase long lead-time material for NSC-7 Kimball.

On the DDG-51 program, DDG-113 John Finn is progressing through the unit manufacturing and erection phases of construction and remains on track to be delivered to the Navy in 2016. Early fabrication work in the shops on Ingalls' 30th Arleigh Burke-class destroyer, DDG-114 Ralph Johnson, is progressing and we are preparing for construction to begin in the fall on DDG-117 Paul Ignatius, the first of the five ship competitive contract award we received last year. Procurement of long lead time material to support construction of the other four ships under that contract is also underway.

Regarding the DDG-1001, we will deliver the deck house from our Gulfport facility in the second quarter. As discussed during our Q3 earnings call, following completion of this work, and the composite mass for LPDs 26 and 27, we will proceed with the shutdown of the Gulfport facility.

At Avondale, we will be continuing unit construction for LPD-27 through the third quarter of 2014. With regard to redeployment opportunities for this facility, we still have not found a project that meets our requirements, but we continue to evaluate potential opportunities including those in the energy market. However, let remind everyone that if we are unsuccessful in these efforts, we will proceed with our plan of record and close the facility.

Now turning to Newport News, CVN-78 Ford has moved into her final outfitting phase following a successful christening and launch at the end of last year. All of the ship's 622 tanks have been coded. Over 6 million feet of approximately 10 million feet of cable has been pulled and waterborne alignment of the catapults is being performed. Delivery of this first-in-class ship remains on track for 2016.

CVN-79 Kennedy continues with engineering and design material procurement and advanced unit construction activities under the construction preparation contract. Awarded the detailed design and construction contract is expected later this year.

In submarines, we are preparing for achievement of pressure hull complete in the first quarter on SSN-785 John Warner, our first block three delivery boat. We expect award of up Block IV contract for up to 10 additional submarines by the middle of this year.

CVN-72 Lincoln is progressing through her 44 month RCOH with a continued focus on refueling preparations, removing equipment for refurbishment and hull and tank work to support undocking in the third quarter. CVN-65 Enterprise is progressing through her 38 month contract for the inactivation and the de-fueling of its eight nuclear reactors with a continued focus on completing temporary systems, access cuts and personnel training and qualification.

In closing, let me congratulate all the shipbuilders at Huntington Ingalls Industries on a job well done in 2013. Their efforts this past year and, frankly, over the past three years, have allowed us to do what we said we would do and meet the financial targets we communicated to the investment community at the time of the spin off. I am extremely pleased with where we are and I am confident in our ability to stay the course toward 9% plus margins in 2015.

That concludes my remarks and I will now turn the 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 key highlights from the fourth-quarter and year-end results. I will also provide some information on our outlook for 2014. Please refer to the slides posted on our website for more information.

Before we get into the details, during last quarter's call we discussed hurricane insurance recoveries and the Gulfport closure that had a significant impact on sales and the operating margin at our Ingalls segment. We had additional adjustments in the fourth quarter related to the hurricane insurance proceeds. These fourth quarter adjustments were refinements of our estimate, not changes in our position on the accounting treatment.

All of the numbers that I discuss today will be adjusted for these third and fourth quarter events where applicable. Please refer to the presentation on our website for our earnings release for reconciliations.

Moving to consolidated results shown on page 4 and 5 of our presentation, we ended the year with a strong quarter at both Newport News and Ingalls. Total revenues increased 5% for the quarter, bringing full-year revenues to 6.8 billion, a 2% increase over prior year. The growth in the fourth quarter was mainly driven by the Ingalls segment related to increased volumes on DDG's and NSC's.

Fourth quarter total operating income was $156 million, up 47% over prior year, which drove full year operating income to $465 million up 30% over last year. These results were mainly driven by increased operating income at both segments and favorable variances in deferred state income taxes and the FAS/CAS adjustment.

Deferred state taxes are different from the estimate that we provided to you on the third-quarter call. During the fourth quarter, we finalized our 2014 planned pension contributions and our estimate was reduced. Since, for tax purposes, pension contributions are pulled for the year the change impacted deferred state income taxes in the fourth quarter.

We generated $238 million of free cash flow in the quarter and $97 million for 2013. This year included an increase in cash taxes and higher pension contributions that were somewhat offset by improved program performance and the hurricane insurance proceeds we received in the third quarter. Additionally, working capital is burdened by closure costs related to Avondale and Gulfport facilities, which will not begin reversing until we reach final agreement with the Navy.

Capital expenditures for the quarter were $54 million and were $130 million for the full year, which were in line with our expectations. During the quarter, under our share repurchase program, we purchased over 800,000 shares at a cost of $64 million.

Looking ahead, we expect our operating margin to continue to show improvement towards our 2015 target of 9%. Our expected increase in free cash flow in 2014 has shifted to the right due to the delay in the recovery of Avondale closure cost and the additional working capital related to the Gulfport shutdown.

Capital expenditures are expected to be in the 3% of sales range. The increase in CapEx is related to investments and Newport News that will increase efficiency.

Moving onto segment results on pages 6 and 7, Ingalls had strong sales and operating income growth for the quarter. Sales were up 9% due to the increased volumes from DDGs and NSC. Operating margin was up 73 basis points over the prior-year quarter primarily due to continued risk retirement on the NSC program.

For the full year, Ingalls adjusted operating margin increased by 123 basis points over last year to 4.6% in line with our expectations. This increase is mainly attributable to lower volume on underperforming contracts that we were working out of our portfolio and risk retirement on the NSC program.

Turning to page 8, Newport News fourth-quarter sales increased 2% primarily due to higher volumes in aircraft carriers. Operating margin for the quarter was consistent with last year at 9.1%.

For the year, Newport News performance was strong with $4.1 billion in sales, an increase of 5.1% over last year with all product lines supporting the growth. 2013 operating margin was 9.5% up 33 basis points from last year, largely driven by program performance improvements and risk retirement on the VCS program.

If you'll turn to slide 9, I'd like to make a few comments on pension. We are expecting a favorable 2014 net FAS/CAS adjustment of $92 million based on an increase in the pension discount range from 4.24% to 5.27%. Holding our long-term return on asset assumption of 7.5%.

2014 cash contributions net of CAS recovery for pension and post-retirement benefit plans are expected to be a benefit of $65 million, mainly due to our pension plan's steadily improving funded status and the phase-in of harmonization. For 2013, our actual return on pension assets was 10.5%.

Regarding some of the other income statement items in 2014, deferred state taxes should provide a benefit of about $5 million based on current 2015 pension assumptions. Interest expense should be roughly $115 million and our tax rate should be close to 34%.

Lastly, beginning in 2014, AMSEC and CMSD, approximately 10% of Ingalls revenue, will be part of our Newport News segment. The change will be reflected in the financial statements starting in the first quarter. That wraps up my remarks and with that I'll 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. Nicole, I'll turn it over to you to manage the Q&A.

(Operator Instructions)

Our first question comes from the line of Joe Nadol of JPMorgan your line is now opened.

Hello, good morning, guys. It's actually Chris Sands on for Joe. Mike, I was wondering if you could you give us some color on the impact if George Washington were to be retired instead of the RCOH, both financially and operationally?

Well, I mean, let's step back and recognize that whether the ship is refueled or inactivated, the work would be done at the Newport News site. So the discussion around George Washington would have some -- would have a little bit of impact in Newport News in the, really, in the timeframe of the inactivation, the RCOH, may affect the planning. Although, that's not really clear yet. It looks like we may be planning either way right now.

The bigger issue is that this is really a debate about how big is the Navy going to be. And interestingly enough, if you follow this very closely you'll have a front row seat at how the nation makes that decision. You'll see all the opinions come out and the blogs. You'll see lots of viewpoints on how many carriers we need and where they need to be.

There will be some discussion about industrial-based impact, but I don't expect industrial base to be the driving force in the decision around how many carriers we have. So at Newport News it's going to be; how much is he planning affected over the next couple years, we don't know that yet.

What does it do to the volume if there's an inactivation instead of an RCOH -- I think we've said before that an RCOH is about half the volume of a new construction job and the inactivation is about half the volume of an RCOH, so the actual execution volume would be --would be impacted a little bit, which would then have some effect on rates and things like that in the shipyard. But the real issue around 73 is going to be the much broader strategic issue of how does the nation decide how big a Navy it wants.

But if you were to skip an entire RCOH, I mean, would you expect that to be pretty disruptive to future RCOHs, just in terms of the skills being lost?

No, because, certainly, we have teams today that are bringing new construction ships to life at the same time that we're doing the RCOHs. So you think about an RCOH -- the RCOH is probably the most complex work that we do because you're doing the de-fueling of the ship, you're doing the refueling and start up of the ship, you're repairing the ship after 25 years at sea and you're doing modernization work.

As far as the nuclear test program, the refueling and the start up of the ship and the RCOH is comparable to the work that we do on the new construction carriers and in the submarines. So the folks that do that, you have to make sure their training and qualification is all line, but their basic is it principles are the essentially the same.

Where it comes to the modernization and repair packages, those are basically driven by the amount of planning that you do and how detailed the planning is. So I don't see it as being -- I see it as being a volume impact, I don't see it as being any specific critical skill, you know, that would decay away and be a problem for future RCOHs. I don't really see it that way at all.

I do think that you have to make sure that you keep a sequence going because the facilities that are available to do these RCOHs and inactivation's are very, very limited and very tightly scheduled for as far as we can see. So, what will matter is that if we decide to inactivate the ship, it needs to be inactivated on time. If we decide to refuel it, we need to refuel it on time, so that we can do the next refueling on time.

Great. Thank you. Then, Barb, just on one cash flow. You mentioned that the working capital reversal related to the closures has slipped to the right. Do you anticipate that you'll recover anything related to Avondale this year in Q4? Just, generally, if you could provide more color if you think that free cash flow conversion could be below 100% again this year?

I think that -- that is unlikely we will attempt to start recovery in the fourth quarter, but it is unlikely that'll occur. I believe it'll move into next year. As far as the free cash flow conversion, like I said, you have to look at us over a five-year period -- a much longer period. I can't guarantee we'll have 100% cash conversion in any given year.

Okay. And then, would Gulfport recovery start this year?

We are working that to start recovery this year. Again, that has the potential to slip into next year, but we're doing every effort that we possibly can to make it begin this year.

Great. Thank you.

Thank you. Our next question comes from line of Sam Pearlstein of Wells Fargo. Your line is now open

Good morning. I just wanted to follow-up on that free cash flow question, which is just, I know that you highlighted the pension piece which looks like a $212 million swing year-over-year. Can you just talk about cash taxes, the closing cost, any other big swings from 2013 to 2014, in terms of just cash flow?

From 2013 to 2014 -- I haven't really given specific guidance into 2014. We have given you what we think the pension would be. In terms of cash taxes -- I really don't want to give specific guidance for 14. So --

Okay. Mike, if I could ask you, just a question. I know you mentioned the Virginia-class sub multi-year could come midyear. I don't know if I caught it, but did you talk about when the next Ford-class carrier timing could be and where you are on the cost to get a better estimate in order to price that ship?

Yes. Our -- the 79 contract Kennedy is the one that is, kind of, in play now. Our desire was to, actually, to have that contract before the end of 2013. For a lot of reasons around the fiscal issues as well as the cost caps on the Ford itself, the decision was made that before we could actually go to a contract for 79, we need to actually have further progress on the 78.

Now, we are doing extensive construction preparation work on the 79 today in the shipyard. There are units that we are working very, very high volume, frankly, through getting that ship ready to be constructed.

We have been working with the Navy to move towards a contract. Our expectation is that we can get to a contract this year. That, probably, later in the year and we'll just have to see how this plays out, I think.

This is not -- I mean, it's a little bit hard to talk about, but it's really not unusual. This is what we went through when we actually went to contract on the Ford. The original for construction contract was set for 2006.

We ultimately did not get to that contract until 2008. In that case, we were coming through the design and we needed to make sure the design matured before we went to the contract.

Now, we're coming through the construction of the lead ship and we expect this contract to be, as opposed to the cost type contract that we have on Ford, we expect the contract to be a price-type contract on the Kennedy. So everybody, the Navy and the Company, everybody wants to make sure that we understand what the risks are associated with the construction when we go to that contract. We're working very closely with the Navy to get that done.

The delay in the contract is -- it's not the optimum way to do this. On the other hand, it is not -- it's not slowing down construction on the ship today.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Doug Harned of Sanford Bernstein. Your line is now open.

Yes. Good morning.

I'd like to understand a little bit more about the S.M. Stoller acquisition and the things you're doing outside in of the core Navy shipbuilding business. As we're looking ahead at quite a bit of cash generation over the next few years.

Can you give us a sense of the scale of effort that you're undertaking, or if you're diversifying into new areas, sort of, what scale this is? How much cash might end up going into something outside of the core?

Well, without trying to predict any certain amount, what I would say is that we've taken a hard look at what our capabilities are and what are the markets that we think we can address those capabilities to. You know, we are a company that has a very strong engineering background.

We're very solid in managing a very deep and extensive supply chain. We have a long history of doing modular manufacturing construction.

We have, already, before the Stoller acquisition, we had already formed a partnership with Floor to operate at the Savannah River nuclear site. That's been going on for several years. We have explored partnerships with other firms in pursuit of potential opportunities in the DOE space because, quite frankly, that's one of our key areas of capability.

We do very solid -- we're best-in-class when it comes to nuclear operations. So there are a lot of companies out there that have wanted us to be part of their teams for different opportunities.

In the course of that effort, we found ourselves partnering with S.M. Stoller on a number of different occasions and meeting with them and finding that they have a set of skills that are very complementary to us. One of the things that I like the most about this company is that they have a customer intimacy that we would take, frankly, years to develop.

They're located in dozens of sites around the country for the DOE. And I liken that to our operation in the Navy-side at AMSEC. Where AMSEC has a couple dozen offices around the world, wherever the Navy is that's where AMSEC is. Well, wherever the DOE is, it seems that Stoller is there as well. This is an opportunity for us to work with them to leverage the unique capabilities that we have to better address the DOE space.

Going forward, it is my view that we have some unique capabilities to offer to other customers. We have talked pretty extensively about -- we do think that we can bring our engineering skill set and our modular construction skill set, we can successfully deploy that towards the oil and gas sector. So we've opened an office in Houston to do that.

We are taking a hard look at how do we take advantage of our skill sets? Who do we partner with? How do we do that in a way that is -- moderate risk but has a great chance to be successful? So we'll continue to evolve.

It's -- I don't see this as being something that's going to double the size of the company in a year. I see this as being something that's going to evolve over time.

As we build a record of success, we can -- just like we've done over the last three years since the spend, but in the last six years since Barb and I first got responsibility for all of shipbuilding, we have evolved the business to a place where we're ready to go and achieve more of our potential. So this is a walk -- this is a walk down a path to see how do we redeploy the tremendous capabilities that we have.

I know you're well aware of the risks associated with diversification, from defense oriented businesses. It's just something that, I think, if there's a way to describe, sort of, the scale of this activity and how you would minimize the risk, I think that would be very important for people to understand here.

It just tends to raise a red flag. So, I'm just trying to get an idea from you about what that task will look like and how people who own the stock for Navy shipbuilding and what that -- you know, the potential that has and can get comfortable with this is the use of cash.

Well, I think that, Doug, the challenge that I would suggest that every defense company is dealing with today is how to, in this environment, how do you articulate the way that you're going to grow the value of your business. A lot of the companies -- as I look around I see and hear that they're talking about international opportunities or commercialization of products and those kind of things. We don't really believe that internationalism is a really solid way for us to try to enhance the value of this business.

We do have 5000 engineers and designers in this company. We are an engineering company and engineering is a great way to see a window into a new space.

I don't know exactly what the path will take us. I don't exactly know how it's going to go down, but I have to tell you that I feel like I'm obligated to pick up every rock and look under and it see if we can find some value there.

It's going to be an incremental approach, at this point, because we certainly recognize that a big bang opportunity would be fraught with risk. If you know anything about us, you know we are very, very thoughtful about the risk that we consider.

Okay. Thank you

Thank you. Our next question comes from the line of Carter Copeland of Barclays. Your line is now open.

Hello. Good morning, guys and good quarter.

Good morning. Thank you

Just a quick couple of clarifications, Barb, on the cash. With respect to 2013, can you help us size what the headwind for cash taxes was? Then with respect to the pension, you gave is the net number, but I wondered if you might tell us what the gross contributions and reimbursements were behind that number in whether or not that number's net of tax.

Okay. So let's start with the cash taxes side. On the cash taxes, that was $126 million, okay?

Okay

Then on pension, the cash piece of that is $227 for the recovery side and the that FAS piece of that is $135. That includes PRB's, I don't know if you want that. PRB's are --

-- Post-retirement. Yes.

Yes.

Do you have just the pension?

Sure. From a pension standpoint, the CAS piece is the $192 and the FAS piece is $118.

Okay

Okay. So that net for just pension is $74.

Okay. Then to move away from the pension and get to a bigger picture question, Mike, I wondered if you might tell us what you're thinking about the language around a new service combatant that the Secretary's talking about as part of a smaller LCS buy? What opportunities might you guys have to play in that? And what might that mean? And from your standpoint?

Well, it's very early. You heard the same things that we heard. Ultimately, this will depend on how the requirements get set and how you can match up against those requirements. But we have -- we have been building the national security cutter for the Coast Guard for several years, now, and we have a -- this ship is proving itself at sea for the Coast Guard.

If the requirements align with that kind of a platform, then I think that we have a great opportunity. If the requirements align around some other set of missions and facts, then, I think, we'll have to take a hard look at that.

You know, that's a platform -- that's a size of a ship and a platform's capabilities set that we have been executing on for the last several years and we've been doing that very successfully. We look forward to a chance to understand it better and to engage with our customer to see how we match up with what it is they're looking for.

Okay. Great. And one final one, Barb, you said very quickly at the end that AMSEC was moving from one segment to the other. Was that correct? And what was the rationale behind that?

I'll take that one. You know when we -- AMSEC was -- and Continental were originally part of Newport News back in -- when Newport News was acquired by Northrop Grumman, they followed -- when we put -- when we put all of shipbuilding together in 2008, we decided to keep -- to let AMSEC and Continental go with the non-nuclear side of the business because all of the work that's done at Continental is at their yard, is non-nuclear shipbuilding. Frankly, Irwin had been responsible for AMSEC before that and we just let him take that with him.

The rationale, today, is that we're bringing them back home to where they were, primarily, because the alignment between what AMSEC is actually doing out servicing the fleet and what Newport News does with the carrier support, there's a high degree of alignment there. Continentals plays an important role in resourcing the work that we do in support of the carriers at North Island in San Diego.

At Ingalls, the issue -- the primary issues for Ingalls going forward, are really in capturing new business related to the amphib business which we've talked about extensively, here, before. With the transition of the leadership team, as you know Irwin is stepping down and Brian Cuccias will be taking over. With that transition we felt it was appropriate to realign to get the priorities for each of those leadership teams better aligned with the folks that we have running it.

So that's really why I wanted to do that. I think, it sets both Newport News and Ingalls up for a higher degree probability of success going forward.

Great. Thanks for the color, Mike.

Thank you. Our next question comes from the line of Jason Gursky of Citigroup. Your line is now open.

Good morning, everyone.

Good morning

Barb, you mentioned that Cap Ex this year was going to be 3% of the sales. You mentioned that it was going to result in some efficiencies. I was hoping that, Mike and Barb, either one of you could comment a little bit more about what the spend is going on and what those efficiencies might look like and whether that doesn't allow for potentially higher margins, either in the near term or over the longer term?

Okay. The intent is that they will help us achieve higher margins longer-term, not near-term, but one of the capital projects that's included is we're replacing very old weld equipment. With that replacement, it'll be easier for the welders to get the equipment to where it needs to go, more efficient use of it. We expect that we'll see headcount reductions as well as gain significant efficiencies in the new processes with this new equipment.

I believe this equipment is like 30, 40 years old. It is ancient. So it makes the welders have a very difficult time.

That's one of the projects that we have. We have some other projects to gain efficiencies on the Virginia-class program as well as for CVN-79 that we're looking at.

I would just add that we do look at these projects in terms of what they might mean for reducing the risk of a program. Whether it's the risk register of a program that we have in place or the acquisition cost risk of a future program, we look at it both ways.

I'm not sure that I'm ever going to be in a place where I'm going to let anybody convince me that a capital investment in something this quarter is going to change our margins next quarter. I just don't see that being this kind -- this is not that kind of business.

Okay. Fair enough. Then, Mike, I was wondering if you would make some bigger picture comments about the outlook for the amphibious shipbuilding plan as we move now into the fiscal 2015 budget process? We had the opportunity to listen to the Secretary Hagel and Chairman Dempsey earlier this week, talk about priorities going into this next budget cycle. What's your updated view on the outlook for the amphibious shipbuilding plan?

You know, I'm not sure that it's changed that much. We have said that the Navy's hierarchy of priorities is carriers, submarines, destroyers, and then amphibs and then auxiliaries after that. We describe that the resources seem to be running then at the amphib line and so that's where the scrum is for work to go.

We are still advocating that a follow-on LPD be bought as a way to bridge from the current LPD production line, which is going very well, to a future program that the Navy has identified as LXR, which is a smaller version -- basically the small version of an amphib and it's replacement of -- I think it's the LSD-41 class.

The gap between the end of our production in Ingalls and the beginning of that program is fairly lengthy. So, unlike the carrier discussion we had earlier, which is, I really think, is a major big strategic issue of how big is the Navy need to be -- I think the amphib discussion is really a pure industrial -- it's not a pure industrial base issue because it is about how much lift do the Marines need and those kind of things, but the industrial base issues play a much bigger role in how you think about the amphibs.

The Congress has appropriated $260 million for follow-on amphib. They did that a year before last. Last year they directed the Navy to come forward with what's your plan for continuing to support the industrial base around amphibs.

We still believe that a follow-on ship makes good sense. The Navy plan does call for a follow-on large deck amphib LHA-8 and we're engaging, and excited to engage with the Navy, on how does that program -- how's the best way to successfully execute that program.

So there's a lot of interaction right now in the area of amphibs. A lot of it is being driven by how do we get the capability that we need for the cost that we can afford? We are happy to be part of that discussion.

Okay. Great. Thank you very much, guys.

Thank you. Our next question comes from the line of George Shapiro of Shapiro Research. Your line is now open.

Good morning.

Good morning.

Barb, for 2013 receivables went up over $200 million of which $68 of that occurred in the fourth quarter. Now, I'm assuming that's all due to the recovery you're looking forward to for Avondale and Gulfport.

My question is, how much higher that receivable goes in 2014, since it sounds like you're not expecting any recovery in 2014? Then, for you, Mike, if you can just go through what the issues are in terms of the negotiation you have with the Navy in terms of getting that money back.

Okay. George, let me start with the receivables. Some of it's altered timing on that. Okay. But as far as, like, an increase for Avondale and Gulfport closure, it'll be small. The majority of it is sitting there now, so less than, you know, half so probably in the $20 million range.

Okay. So you would expect those receivables not to increase very much more in 2014?

Right.

Okay. Then, Mike, if you could just go through what the issues are with the negotiations with the Navy?

You're talking about the recovery on the restructuring?

Yes. For the recovery the cost associated -- or the receivables that are there from --

So, George, the way that, that works is that the recovery becomes part of our billing base. It's not a separate payment by the Navy over a period of time. The negotiates kind of move around a little bit. If you're thinking about what we're doing at Avondale, as we continue to think about how do we redeployed it, there's the part of the recovery that's associated with the asset that's there. But there's also the part that's associated with the workforce that's there.

We've incurred a lot of the workforce cost and depending on how we move forward with the asset, probably, affects the way that, that negotiation goes. You know, I don't know that anybody has a lot of experience with these kinds of events and negotiations but what -- I think where headed is we're going to be negotiating around a set of actual costs, over a period of time. I think that -- in the meantime, I think, that we'll be talking about what's our rate base look like.

So, what's your confidence that all of what you have as receivables, ultimately, gets recovered from the Navy?

Very confident.

Very confident.

Very confident The reason why it's delayed is one, we're doing working in Avondale for Ingalls, and so that is creating part of the delay. You can't close it down and start recovery. So that's part of the delay. Then part of the delay is just typical negotiation stuff we're going through.

Okay. Thanks very much.

Thank you. Our next question comes from the line of Bill Loomis with Stifel. Your line is now open

Hello, good morning.

Good morning.

Just looking at the CVN-79, as you're going into negotiations what type of contract, fixed price contract does that look like it's going to be? Is that going to be something like a fixed price incentive, where you, basically, contract -- you share cost up to a target and then have to assume all the risk beyond that?

Or is it going to be a straight fixed-price program? Is there going to be any cost-type elements involved in CVN-79?

You know, I think, that the top-line answer's we expect it to be a fixed price incentive contract. As we go to the table and as we think about where the different areas of risk are, I think the team has the latitude to try to find the right way to build a contract around the risk that's there.

There may be parts of this that are not fixed-price incentive and I think the whole range of different contract options are available. But in the main, at the highest level, we expect it to be a fixed-price incentive contract

Okay. But there will probably be some of the higher risk elements. How about things that you're not necessarily fully in control with, like, technology, radar, catapult, things of that nature? Would that be, potentially, something that's not a fixed-price for you?

Well, I think, that one of the major discussions that we have going on, today, is there's a substantial amount of government-furnished equipment that comes to this ship and how is that scheduled and what does it look like? There's also a question of what does the government want to buy for the next ship?

What is the -- what is the ship actually look like at delivery and are they going to buy those pieces? Are we going to buy those pieces? That's all part of the discussion.

You know, if it's something that's well proven and understood and they want us to go manage it and we've managed it before, then we feel very comfortable with that. We can get an appropriate contract for that. If it's something that's brand-new that nobody's ever managed then the risk register's very high and you have a different kind of contract for that.

So that's all part of the negotiations and I think it's premature to try to say how that's all going to turn out. But, I think, that the headline of it will be that it's a fixed-price incentive contract.

Okay. And then you protest the offshore patrol cutter award, can you tell us what were the key points that you are protesting on that?

I don't think I want to say too much about that except that we view every -- we do everything we can to learn from every experience that we've got and our view is that we want to understand this better. So we filed a protest so we can have a better understanding of how the decision was made so that we can go learn from this. We'll see how the protest plays itself out.

And just one final one. Kind of a little bit longer-term, but you've been trying to show how the LPD platform can be used for other things like ballistic missile defense -- much larger radars and so forth -- any chance -- have you heard the Defense Secretary talk about a replacement for combat? Would that platform fit a role, or is it just not in the same ballpark?

Different kind of ship. I mean really different kind of ship. The frigate their talking about for replacing the -- or the follow-on to LCS, or whatever it turns out to be -- we need a set -- we don't exactly know what the set of requirements are, but that's a small ship, a small service combatant with a lot of capability.

The LPD is a platform that is fairly large. In my view, the reason it's so powerful is because it's incredibly flexible. It is -- I really think that the key to success, going forward, when you're building platforms that last for decades and you're using technology that gets superseded every 18 months, I think the way that you are successful there is by putting survivable volume at sea.

I think that -- Enterprise has lasted -- was online for 50 years. The planes that flew off that ship at the end of its life were not even on the drawing board at the beginning of its life. But the fact that the enterprise was large and had large volume gave that ship and gave the Navy great flexibility to do all kinds of missions, whether it was power projection or humanitarian aid, whatever it was that volume at sea was very important.

What the LPD brings is large volume at sea. So bringing survivable volume at sea is something that we think makes a lot of sense. We know that there are folks who actually understand that, that does make some sense.

We have a production line that's hot and we continue to try to work that. But is not related at all to whatever happens with a future surface combatant of some type.

Okay. Thank you

Thank you our next question comes from the line of Brian Ruttenbur of SRT Capital. Your line is now open.

Yes. Thank you very much. Great quarter. The dividend, as well as your buyback policy, you purchased $64 million in the quarter and what is your plans going forward with your extra cash flow? Is it going to be equally weighted between dividend? Is it going to be more weighted towards buyback? What are the plans there?

Right now, we have our buyback program in place. I don't see a huge change to that this year. We just have to see how things play out. No commitment one way or another, except for with the current program, which is $300 million and the current dividend policy that we have in place right now.

Okay. Then, as a follow-up, GNA, as a percentage of revenue going forward, what are you looking at as your ideal model with kind of flattish revenue, assuming flattish revenue going forward? Are you going to have a percentage of revenue, or a dollar amount you have in mind?

I think it's tough to say that. I don't see any significant change, really, but you have to remember a lot of things go into GNA. Every company is different.

So in terms of thinking about that, you have state taxes in there, you have group insurance, corporate leases, BNP, legal, all kinds of things in there. So I hate to give this answer, but it just depends, Brian.

Okay. So as a dollar amount, though, it should be dropping in 2014 versus 2013? Logically as you --

I think it's -- should be about the same. But it really depends on what's going on.

Great. Thank you very much.

Okay

Thank you. Our next question comes from the line of George Shapiro of Shapiro Research. Your line is open

Yes. Just a different question. It looks like the zero margin business this quarter was probably under 10%, which would imply that the underlying margin at Ingalls is like 6.5% or so. So what programs has that much upside to be able to get that to 9% by 2015?

So, George, we have talked about this many, many times. The way that, that shipyard operates is the 9% is a blended rate. The blended rate has to come from programs that are very mature as well as programs that have just started.

Three years ago, we said we had to deliver five ships and we had to sign five new contracts. We have now delivered four of those five ships. The fifth one, we'll deliver in the next couple of months. The five contracts that we signed, we signed all of those and we signed some extras to that.

What you have to have is you have to have a maturity -- you have to have the time to mature each of those programs to a point where the risk has been retired so that their blended rate can bring the whole shipyard to 9%. We have pointed out that the reason 2013 was the year of inflection, was that our expectation was around the end of the year of 2013 we would be pretty much through the five very mature ships that were not performing, which was driving the blended rate down and we've had these new contract.

We actually don't get to 9% until 2015 because we need the new contracts to mature. Each one of those contracts has the opportunity to contribute positively to our overall assessment.

Okay. I know I asked this question of bunch of times, it just seems like to go from 6.5% to 9%, where you have, effectively, one year to do, it seems like a big jump, but maybe it's not.

Stay tuned.

Okay. Thanks

Thank you. I'm showing no further questions at this time. I'll hand the -- I'd like to hand the call back over to Mike Petters for any closing remarks.

Okay. Well, thanks to everybody for participating in the call this morning. We do believe that we have achieved the things we set out to achieve when we first spun the business three years ago. We identified 2013 as the year of inflection. We are at that point. The delivery of America is the last delivery of the five underperforming contracts.

We're excited about the prospects for the future. We're committed to the 9% target for both of our businesses in 2015. We continue to think very carefully about how do we take full advantage to achieve the full potential of this business. We're excited about everybody's interest in our business. And we're excited to engage with our customers as they plan their path forward.

So we look forward to seeing you all. Thank you for your interest. Everybody have a good day.

Ladies and gentlemen, I thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.