亨廷頓·英格爾斯工業 (HII) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Huntington Ingalls Industries Q4 2016 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Dwayne Blake, Vice President of Investor Relations. Sir, you may begin.

Thanks, Sondra. Good morning, everyone, and welcome to the Huntington Ingalls Industries fourth-quarter 2016 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer, and Chris Kastner, Executive Vice President of 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 laws. 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 Chris 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'll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone, and thanks for joining us today.

Let me start by thanking all 37,000 members of the Huntington Ingalls team for another year of excellent financial results. Their focus, hard work, and dedication enabled Huntington Ingalls to continue delivering on our commitments in creating long-term sustainable value for our shareholders and our customers.

So turning to Page 3 of the presentation, sales of $1.9 billion for the quarter and $7.1 billion for the full year were slightly higher than 2015. Diluted EPS was particularly strong, with $4.20 for the quarter and $12.14 for the full year. Operating cash was also strong, as we generated $345 million for the quarter and over $800 million for the year. Additionally, we received $5.2 billion in new contract awards during the year, resulting in backlog of $21 billion at the end of the year, of which $13 billion is funded.

Shifting for a moment to developments in Washington, DC, we are encouraged by the new administration's desire to increase the size and readiness of the fleet. While this is welcome news, we recognize that achievement of this objective is a multistep process that will span several budget cycles. We look forward to working with the administration, Congress, the Navy, and the Coast Guard and our supplier base of 5,000 companies across all 50 states to continue to build the most effective and affordable ships that our nation may require.

Now I will provide a few points of interest on our business segments. Ingalls conducted acceptance trials and delivered DDG-113 John Finn and NSC-6 Monroe during the quarter. Both ships performed extremely well, and I am very pleased with the team's continued focus on safety, quality, cost, and schedule that allows them to provide highly capable ships to our Navy and our Coast Guard customers.

Ingalls also launched DDG 117 Paul Ignatius and NSC 7 Kimball during the quarter, and both ships are scheduled to deliver next year. We also received a detailed design and construction contract for LPD 28 and the construction contract for NSC 9, which leverage the hot production lines and excellent performance on these programs. In addition, the contract for LPD 28 is yet another positive step in building the bridge to the LXR program. And finally, the LHA program continues to perform in accordance with our expectations.

At Newport News, we continued working with our Navy customer to support preparations for sea trials and delivery of CVN 78 Ford, while CVN 79 Kennedy continues to perform in accordance with our expectations by leveraging the lessons learned from Ford.

The Virginia-class submarine program continues its strong performance on Block III as we transition to Block IV. The refueling and complex overhaul team is preparing for completion of CVN 72 Lincoln, scheduled for the first half of this year, and continues to perform planning work for CVN 73 Washington's refueling overhaul, which will begin later this year, and CVN 65 Enterprise remains on track to complete its inactivation by the end of this year.

Reflecting our commitment to optimize and expand our services business, we closed on the Camber Corporation acquisition and established the technical solutions segment during the fourth quarter. We expect TS to produce low single-digit topline growth, as we now offer a broader set of capabilities to a larger customer base, and we expect margins to improve from low single digits this year to the 5% to 7% range by 2020.

So in closing, 2016 was an outstanding year for HII, as Ingalls and Newport News generated segment operating margin above 9% for the third year in a row. Operating and free cash flow were strong and we sustained a healthy backlog with $5 billion in new contracts. Looking ahead, we remain firmly committed to our path to 2020 strategy to invest $1.5 billion in capital to strengthen and protect our core shipbuilding business, to return substantially all of our free cash flow to shareholders via dividend increases of at least 10% annually and share repurchases, and to leverage our deep technical services competencies and nuclear operations expertise to optimize and expand our services portfolio.

That concludes my remarks, and I will now turn the call over to Chris Kastner for some remarks on the financials. Chris?

Thanks, Mike, and good morning. Today, I will focus my review on our consolidated results for the fourth quarter and the full year, and then I'll wrap up with some information on the outlook for 2017. For more details on the segment results, please refer to the earnings release issued this morning and posted to our website.

Before I get into the results, let me review some portfolio changes we executed during the fourth quarter. We completed the acquisition of Camber Corporation and formed our new operating segment, technical solutions, which replaced the other segment as our third reportable operating segment. The formation of technical solutions and the Camber acquisition are consistent with our strategic commitment to optimize and expand our services platform.

Technical solutions is comprised of Camber and several of our existing services subsidiaries, including AMSEC, Continental Maritime of San Diego, Newport News Industrial, SN3, Undersea Solutions Group, and Universal Pegasus International.

Our financial results presented today reflect the realignment of our segments, which had no impact on our previously reported consolidated financial position, results of operation, or cash flows. Also, in 2015 our financial results included a few items that we adjusted for, including an insurance litigation settlement, goodwill and intangible asset impairment charges, and expenses related to the early extinguishment of debt. Where applicable, all comparisons I make to 2015 are adjusted for these items. Please refer to the earnings presentation on our website or the earnings release from earlier this morning for more information on these adjustments.

Turning to our consolidated results on Slide 4 of the presentation and starting with the fourth quarter, revenues of $1.9 billion increased 29% from fourth-quarter 2015. The increase was driven by higher volumes on the DDG and NSC programs at Ingalls and the acquisition of Camber, partially offset by lower volumes on the aircraft carrier and submarine programs at Newport News.

Operating income of $268 million increased $81 million from fourth-quarter 2015 and operating margin of 13.9% increased 413 basis points. These increases were driven by higher risk retirement and improved performance on the DDG, LPD, and NSC program at Ingalls; improved performance on oil and gas services and fleet support at technical solutions; favorable changes in overhead costs; and a local government incentive grant at Newport News; and a favorable FAS/CAS adjustment.

Moving on to the consolidated results for the full year on Slide 5, revenues were $7.1 billion for the year, an increase of 0.5% from 2015. This increase was primarily driven by higher volumes on the DDG and LPD programs at Ingalls, higher volume in nuclear and environmental products at technical solutions, partially offset lower volumes on the aircraft carrier program at Newport News.

Operating income of $858 million increased $123 million from 2015 and operating margin of 12.1% increased 169 basis points. These increases were primarily driven by higher risk retirement and improved performance on the LPD program and higher risk retirement on the DDG program at Ingalls, improved performance in oil and gas and nuclear and environmental at technical solutions, and a favorable FAS/CAS adjustment.

Interest expense of $74 million for the year, a decrease of $19 million from the prior year, due to the bond refinancing and term loan repayment in 2015. Our effective income tax rate for the quarter was 21.5% and 26.9% for 2016. This compares to 37.5% and 36.1%, respectively, for fourth-quarter and full-year 2015. These decreases were driven by the accounting change for stock-based compensation and the release of uncertain tax positions.

Turning to cash flow on slide 6 of the presentation, cash from operations was $345 million in the quarter and free cash flow was $205 million. For the full year, cash from operations was $822 million and free cash flow was $537 million, compared to cash from operations in 2015 of $861 million and free cash flow of $673 million.

Cash contributions to our pension and post-retirement benefit plans were $205 million in the year, of which $167 million were discretionary contributions to our qualified pension plans. The pension asset returns for the year were approximately 6.9% and pension discount rates decreased 26 basis points to 4.47% at the end of the year, compared to 4.73% at the end of 2015.

Capital expenditures in the quarter were $140 million, and for the year, capital expenditures were $285 million or 4% of sales. This compares to $188 million, or 2.7% of sales, in 2015. Many of the capital projects are in full swing now, so you can expect our capital spend to be at this elevated level over the next few years.

For 2017, we expect capital expenditures as a percent of sales to be between 4.5% and 5.5%.

Additionally, we repurchased approximately 253,000 shares in the quarter at a cost of $40 million, bringing the total number of shares repurchased in 2016 to approximately 1.3 million at a cost of $192 million. We also paid dividends of $0.60 per share or $28 million in the quarter, bringing total dividends paid for the year to $2.10 per share, or $98 million. We remain committed to returning substantially all free cash flow generated through 2020 to our shareholders.

Before I get into the 2017 outlook, let me bring you up to date on Avondale. In the second quarter, we requested from the contracting officer a final decision on Avondale's restructuring costs. In December, the contracting officer denied our claim, but we are continuing discussions with the contracting officer. We will also pursue our claim under the Contract Disputes Act. As we proceed, we remain confident that our claimed cost is allowable and allocable and a resolution will be in accordance with our cost recovery expectations.

Now let me provide you with some below-the-line items for 2017, as shown on Slide 7. We are expecting a favorable net FAS/CAS adjustment of $198 million for the year and we expect noncurrent state income tax expense to be in the $5 million to $10 million range. We expect interest expense of approximately $70 million for the year and the effective income tax rate to be in the 30% to 32% range.

And finally, we plan to contribute $333 million to our pension and post-retirement benefit plans in 2017, of which $290 million will be discretionary contributions to our qualified pension plans.

That concludes my remarks. I'll turn the call back over to Dwayne for Q&A.

Thanks, Chris. 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 in the queue as possible. Sondra, I'll turn the call over to you to manage the Q&A.

(Operator Instructions). Doug Harned, Bernstein.

We've heard a lot about the Navy objective force of 355 ships. Clearly, that would add a lot to the budget, but let's say that that all happens and we go there. From an Huntington Ingalls standpoint, can you talk about what that means for you? It looks like the first real additions to the shipbuilding plan would occur in that 2021 to 2026 time frame. How would you prepare for that and what do you think it would mean for your facilities today?

Thanks, Doug. I think you've already scratched at one of the things about the rhetoric and discussion and strategies and positions that everybody has out there is that none of this is a light switch that you just turn on and you start building 350 ships this summer.

Our view is that it's going to take a few budget cycles even to start to line the programs up to do that. In order to get to those rates, they are going to have to build, I believe -- they will need to continue to produce the ships that we are already producing, as opposed to go off on a whole new design program and design a new fleet. I think you'll see mature programs get expanded.

In the cases of particular programs that we're involved with today, the capital investment that we are making is in line with what we see in the current Navy 30-year plan. If there were a significant expansion, say, in the submarine production or the carrier production or the destroyer production or the amphib production, it would probably require more capital on our part to go and be able to meet that demand.

I think, though, that I'll stand by what I've said before. Our ability to meet that demand is -- we're a lot faster than the government would be on this. We'll be ready before they can get the money appropriated, from the shipbuilder standpoint. From both Newport News' and Ingalls' perspective, we'll be ready. Once we start to see the process begin to churn, we'll have the workforce ready, we'll have the facilities ready, and we don't see that as an issue for the buildup.

We do, though, recognize that there are 5,000 suppliers to support our business and making sure that -- they've been under a lot of strain over the last 15 years, and if I thought there was a risk in the process, I think it's probably in the supply chain. How do you get those folks to ramp up their production in order to support us? At the end of the day, if we don't have the equipment from the suppliers to build on time, that ends up impacting the ships.

So this would be a big buildup, and it would require some pretty consistent messaging and some pretty consistent and persistent legislation over the next several years to actually achieve what you're reading about right now. And so, that's kind of our view of it right now is that we are very encouraged by the discussion. We think it's better to have this discussion than not have it.

There's a lot of hard work to do. Number one, we've got to get through the FY17 bill. We're in a CR right now. Number two, we've got to figure out what the heck we're going to do with sequestration and how that's all going to work and get that legislatively resolved. And then, number three, the impact of ORP on shipbuilding in general. If you're ramping up budgets, maybe that problem that we've been talking about goes away, but until you do that, it's still the number one issue out there. So that's kind of our view of it.

The other aspect of it, I think you just alluded to it, is the consistency of budget issue here because if we went notionally to this plan and this budget cycle, these ships, the new additions, and most analysis I've seen of it suggests they will occur into 2021 and beyond, actually delivering ships it will be beyond that point. And so, what would it take to get comfortable that you can make the investments, because clearly you're investing for something that may occur in a subsequent administration?

Right. But frankly, Doug, that's what we always do. The ships we have under construction are for the administration after next anyway.

And so, we always watch that sort of thing, and there are certainly some things that we could see happening right now that would be near term that would make -- actually would have real impact to the success of a buildup. For instance, let's buy two aircraft carriers at a time instead of one. We've done that before. That is the most efficient way -- frankly, you could do even more than that, but buying them in bulk, it works for the smaller ship programs; let's do that for the carriers.

The next multi-year for destroyers, maybe let's go to three per year instead of two per year. The next time we start to go to a multi-year on submarines, let's change the production rate in that.

Well, when we start talking about those changes, that's well in advance of the actual building in the yard. That process is -- the appropriations process, we get some pretty clear signaling on that. We're more than comfortable to go make those investments.

Another immediate thing that could happen is accelerate the LXR program. All of those things -- you're right, all of those things don't result in ships that would be delivered in the next four years or so, but all of those things would be clear signals that we are actually going to go and do this buildup and it would be worth our while to go make the investment and bring the supply chain along with us.

Gautam Khanna, Cowen and Company.

Lucy Guo on for Gautam. I wanted to get a better understanding on maybe what your projections might be for your shipbuilding margins ex services. Are they still 9% to 10%? And I have a couple follow-ups.

Sure. And I think they are still 9% to 10%. We've said from the beginning that the shipbuilding business should operate in the range of 9% to 10%. If you're at the top end of that range, you probably have really mature programs that are performing very well, and if you're at the bottom end of that range, you are probably doing startup programs or doing early design work.

I think 2016 actually proves the point the three ships that we delivered in 2016 were ships in mature programs, and I think going forward particularly Newport News is in transition time. They are going to be starting up programs on the Kennedy, starting up the refueling overhaul of George Washington, moving into the next block of submarines, and starting up the ORP program. So you are going to continue to see the transition at Newport News in particular play out in terms of where they're going to be relative to our normal band.

On the other hand, at Ingalls our effort right now is let's take advantage of those hot mature lines. If we are really going to build up the fleet, let's go accelerate the programs and make sure we keep the lines hot so that we can continue to be efficient for the Navy.

I could also add that in 2017, the way the programmatic milestones line up, they are more towards the back end of the year, so the opportunity to retire risk and the opportunity for margin is towards the back end of the year, not towards the front end.

Right.

That is actually a perfect segue to my next question. You've mentioned one DDG and the NSC 7 delivery for 2017. It sounds like that will be in the second half. Are all their deliveries planned? I mean (multiple speakers)

At Newport News, 787 delivers the submarine second or third quarter or midyear 2017, and then NSC -- excuse me, not NSC, but DDG 114 and LPD 27 deliver out at Ingalls. But, again, the major risk retirement milestones are towards the end of the year.

Great. And then a follow-up on Doug's question and your commentary on the supply chain, do you have any (technical difficulty) plans on how you might diversify and reduce the risk, if there were a buildup?

Our approach -- we're very happy to be -- to have the kind of supply chain that we do.

Like I said, they've been under a lot of pressure. We evaluate that chain every day. We have lots of different ways to look at it, in terms of where are the critical technologies? Who are the critical suppliers? What is their ability to support our demand? Does that affect the way we think about designing the ships? We do all of that sort of thing, and I think beyond that I don't know that I want to say much more than there'll be a case-by-case basis where if we felt like there was a real need for us to step in and prop something up in some particular way, we might consider that, but in general we want the suppliers to be healthy.

Ron Epstein, BofA Merrill Lynch.

Our question is related to the proposals, increasing the Virginia-class submarines to three per year and even to four per year. Can you please provide color on how much upside to sales this could mean and how much CapEx you may have to invest if this happens?

Okay. So this is something Doug was talking about. If anything like that happened, it would be after 2020, and our view of right now we could run all kinds of different permutations on it, but without being terribly specific, we're going to watch the appropriations process and figure out what the real buildup rate is going to be.

I'm confident that whatever buildup rate they decide to go to over whatever time frame they want to go to, we'll be able to make that investment in a timely way. I don't see that as something that we would particularly make an investment in this year or next quarter.

George Shapiro, Shapiro Research.

Chris, when I look at the cash flow, it's actually weaker, much weaker this quarter than last year's quarter, despite the much better earnings. But it looks like a lot of it was due to a $118 million rise in receivables Q3 to Q4. So maybe you could just talk about what those receivables pertain to.

Nothing special going on there. We did deliver NSC 6 and did not get that receipt until subsequent -- in 2017. So we delivered the ship and billed for it and hadn't received that in Q4.

Okay. And then, just where the margins and shipbuilding looked so much above what Mike said is even the high end of mature programs, was there a substantial amount of EACs in the quarter? Maybe you could just tell us how much.

The nonrecurring adjustments in the quarter were positive 89 and negative 32. Of the positive $89 million, it was roughly 70%/30% Ingalls Newport News and they split the negative adjustments.

I would like to point out in Newport News there were two nonrecurring items, the state grant for the apprentice school that we received in Q4 for $15 million and then $35 million related to remeasuring our workers' comp expense that Newport News booked in the quarter. So, it's not really a formal adjustment, but they are nonrecurring items in the quarter that need to be taken into consideration.

And once again, the $35 million, because the $15 million was spelled out in the release, but the $35 million wasn't, so I just missed exactly what that was.

That was remeasuring our workers' comp expense. The discount rate increased towards the end of the year, you remeasure it, and we receive that benefit. It's a large workers' comp liability that we maintain down in Newport News.

And one last one for you, Mike, you talked about this bathtub with Newport starting -- so far, you seem to be doing a splendid job. What are the risks that you see in 2017?

I think, George, it's what we've talked about before. We're in the early stages of Kennedy in terms of we're buying equipment and we're doing early fabrication there.

And so, we just don't want to get out in front of our headlights in terms of taking credit for risk retired on a contract that -- you know, in order to get that ship to contract, we took a pretty significant but we believe achievable challenge in terms of the pricing. And so, we're just going to be very -- as we are in all of our programs, we're very thoughtful and conservative about the way we go into these programs on the front end.

We're also doing exactly the same thing in the startup on the next block of submarines. We're doing well in Block III, but we're moving into Block IV, and so we will be very conservative on the front end of that.

The challenge at Newport News is that their deliveries this year are all cost-type contracts, with the exception of the submarine, but the Ford delivery, the Lincoln delivery, and the Enterprise delivery are all cost-type contracts. And so while those deliveries are critically important to the operation of the business and great people are doing great things to make that happen down there, from the adjustment and financial standpoint they are less consequential than, say, a delivery of a mature program out of -- especially the programs that are coming out of Ingalls right now.

So that's the -- you're just seeing -- what you're seeing here is you are getting real insight into the blend that we've been talking about for the last six years, and right now Newport News is kind of holding the bottom half of the blend and Ingalls is holding the top half of the blend. That's not unusual and that's not unexpected, but it does create -- it's just going to continue to create some pressure, particularly on the Newport News side of it. And as Chris pointed out, even the retirements we have at Ingalls are going to be in the second half of the year. So that's kind of the way the business is and you guys are seeing a whole lot of it.

(Operator Instructions). Sam Pearlstein, Wells Fargo.

I was wondering if you could talk a little bit more about the new segment with technical solutions, and I guess twofold. One is it looked like Newport News, because some of the businesses came out of that, are we still -- should we think in 2017 of Newport News as relatively flat from this $4 billion number, now that you've pulled out some of the business? And then, the technical solutions, just what kind of size -- is this $185 million a reasonable run rate? Is it not a reasonable run rate? And I think you said low single-digit margins. Just what can you share on 2017 about this segment.

This is Chris. I think you can assume Newport News, that's a normal run rate. Again, we're not going to give guidance on 2017, but that's a fair assumption.

And then as we said in our release, we believe the TS segment is essentially a billion-dollar business going forward at low single digit -- starting out at low single-digit return on sales, moving towards 5% to 7% in 2020.

Okay. And Chris, on the pension contributions, we've talked a lot about the new mortality tables and that might step up a contribution. But the 2017 number you put out there is mostly a voluntary contribution. Are you getting ahead of that? Is there still a step-up in 2018 that we should be expecting or does this voluntary contribution really help with that?

We're watching 2018 and the implementation of the new mortality tables. It's still unclear whether they will be implemented or not.

This current contribution is consistent with our policy to be at least 90% funded on a pre-pension relief basis, so it could provide some benefit when the new mortality tables are implemented. But we're going to stay consistent with our policy of funding it to 90% on a pre-pension relief basis. We think it's the right thing for the employees and we've been fairly consistent in that regard.

Jason Gursky, Citi.

I'd like to start with a question for you, Chris. And it's on Avondale. Can you tell us in dollar terms how much of the recovery you've already booked and has flown through your P&L over the last couple of years?

We haven't disclosed that amount, so I'm not really comfortable providing that.

We're entering into a more formal stage with the Navy. While we'd like to get to a resolution on the matter, at the end of the quarter I believe we are probably going to have to appeal the contracting officer decision and proceed, but I'm really not comfortable. You know it's a $273 million issue -- or $275 million of costs that have flown to our balance sheet, but we haven't provided the actual P&L impact.

Okay. And then, can you just provide us a little bit of clarity on what the process is from here? You suggested that there's an appeal coming. For those of us that are not familiar with these types of appeals, can you just walk through the logistics of it and what are the early milestones that we might be thinking about from a timing perspective?

The first step will be for us to appeal at the end of the quarter and then it gets into the court system. I don't have that information with me relative to the specific dates, but it could take a significant amount of time for resolution of the matter.

Okay. Great. And then, Mike, for you, I just was wondering some of the verbiage that you had used on the solutions business going forward and the expansion of it. Are you talking about organic growth at this point? Or are we still in a mode where we're going to be out making some tuck-in acquisitions for that business? And if that's the case, to return all of your cash flow to the shareholders, will you be looking to change the capital structure at all and be issuing increased levels of debt going forward? Thanks.

Thanks for the question. Our overall strategy has been pretty clear that if and when we choose to do something to broaden our business, we'll be looking at the balance sheet as a way to do that, too, because our commitment is to return substantially all the free cash.

We also, when we laid that out, we gave -- we created some pretty disciplined financial criteria that we would have to go through before we would actually do something like that in terms of how fast it needs to be accretive and those kinds of things.

Having said that, we continue to think about where the businesses are and where we need to be for the future and where do we think that our array of customers is going to need for us to be in the future. And so, we're actually going to continue to keep thinking and looking and keep the aperture open to possibilities in that area. But we've got some pretty good filters on that to make sure we do it the right way. But that's our approach.

Pete Skibitski, Drexel Hamilton.

Good morning, guys. Mike, this potential for another fiscal 2017 supplemental, it sounds like it would be kind of a readiness-focused supplemental, but with some procurement as well. I'm wondering, if that happens in the springtime, do you think there would be potentially a meaningful repair opportunity for you guys, because I think the Navy is talking about a pretty huge backlog in repair?

And then, separately, I think at least out of the House there's talk of maybe adding, I think, an LPD 29, maybe some other ships in that supplemental. Could you talk through that whole potential opportunity for us?

Certainly, the legislative process is something that we're pretty keenly focused on in general.

I think that in order to get to a supplemental, you've got to get through the 2017 bill, too, and so all eyes are focused on getting through that, get out of the CR mode that we're in and get into some kind of regular order of sorts.

So as we talked about before, Newport News is kind of in the startup phase across the broad range of their programs. Ingalls is in the mature phase of their programs, and what's really important right now is that we continue to keep those production lines hot. So LPD 29 as a bridge to getting LXR funded and accelerated is a very important decision. The next NSC would also be crucial in that keeping the efficiency of that line. That's a very successful product line for both the Coast Guard and the Company.

And then, getting the amphibs kind of locked down with the next LHD and the -- I'm sorry, the next LHA and the LXR program, I think those are all very important things.

What could happen in the supplemental, though, is really narrowly focused, I think, towards the NSC and the LPD.

In terms of the fleet support side of the business, we're in that business today. We support the fleet all over the world. Our view is that as programs come along and as opportunities present themselves we're positioned to take advantage of that. If we see that areas where we're doing work are going to be expanded, we will be expanding. So that's kind of our perspective on it. Kind of hard to say right now, given a little bit of the fogginess in the crystal ball around the legislative activity in Washington.

Got it. Maybe just one quick follow-up for Chris. Chris, can you give us the 2017 effective tax rate? And then, I'm guessing you guys could substantially benefit from a corporate tax rate cut. Do you see the same thing?

Yes. 2017's projection of 30% to 32%, yes, we'd obviously benefit from a tax rate change, as everyone else would.

(Operator Instructions). Robert Spingarn, Credit Suisse.

Hi, good morning. Now I know you don't want to talk too specifically about 2017, but based on everything that's been discussed so far, the book of business, program of record, excluding any plus-ups we might get, which probably wouldn't affect 2017 anyway, when you think about the increase in the pension contribution, is there any reason not to conclude that free cash flow would decline in 2017? Or are there positive offsets that continue for you to accrete free cash flow?

Good question, Rob. We had a positive year in cash in 2016. There are a couple items, you mentioned pension and also capital, that are headwinds to that, to meeting that number. We're going to do all we can from a working capital standpoint to offset that because I have a personal goal to get to 1.0 cash conversion every year, and so we just have to offset those headwinds.

But those numbers are pretty big, those headwinds. On the pension alone, it's, what, $100 million, $150 million?

Those are good numbers, yes.

And then on the CapEx, so can you move working capital enough there or is there some kind of equivalent upside in terms of just the fundamental revenues and operating profit?

We're going to do our best, right? Cash is lumpy. As we continue to say, we have large invoices and a small amount of programs that can fall over a year. That's why we really don't like to give cash guidance. But you identified the proper headwinds and probably the proper amount that we're going to try to offset.

Carter Copeland, Barclays.

Good morning, gentlemen. Mike, big-picture question for you on just all the commentary coming out of the new administration or even Sen. McCain's white paper around a significantly larger Navy than what we have today. If we end up going down that path and having a much bigger shipbuilding budget and want to procure more vessels, how will the investment in the industrial base, in terms of just CapEx shared capacity expansion, how will that be funded? Will there be portions of that that are on you that are billed later? Does the Navy fund that? How would an expansion like that actually be put into place?

Thanks. We actually look at that as pretty much our investment. The challenge that you have when you have multiple programs in a facility is that most of the types of facilities that we build are multiple program kinds of facilities, so -- and the way the budget process works that if the government decided it wanted to build a facility to support the building of a particular program, the funding of that would come out of that particular program.

When the facility is going to be used for multiple programs, it gets to be really hard for the government to do that kind of thing. And so from our standpoint, we look at all of this from the standpoint of those are investments that we will need to go make. But we also do them from the standpoint that it's -- there are multiple programs and they are going to improve the efficiency and probability that the program will actually happen.

I might add that the state of Mississippi and the state of Virginia are excellent partners with us in assisting us in capital investments. They've helped us previously and that's a potential as well in the future.

That's great. That's what I figured. I just wondered are you looking at where the yards are today, to come anywhere near what's sort of being thrown around, there would be a pretty significant amount of capital investment, I would assume.

I think it just depends on how does it shake out. We are investing today for the 30-year plan, our best guess as to how the 30-year plan is going to shake out.

If there is a significant ramp up in that, we would probably have to go and make some additional investments incremental to what we're doing now to be able to handle the throughput. But as we've talked about today, that throughput doesn't show up until the middle of the next decade. So I think you've just got to -- you kind of take it program by program, and Chris is right. We do have great partnerships with the states and we have a great partnership with the Navy. But in the end, most of the investment that will have to be made will be ours.

I'm sure you would welcome the throughput. Thanks for the color, guys.

David Strauss, UBS.

Good morning. It's actually Matt on for David. Following up on the cash question from earlier, I guess, do you expect to return 100% of cash in 2017? I know you've got kind of a longer-term goal to do that, but 2016 looked quite a bit below.

No, that's really just a rule of thumb that I have that I think you should always try to get to a 1.0 cash conversion. I think the previous conversation was correct. There are two items of headwind that amount to between $130 million to $150 million compared to 2016 that we're going to try to offset.

Okay, but like in terms of how much you will return to shareholders, I guess (multiple speakers)

I'm sorry. I thought you asked something else. Yes, we don't have a specific number in 2017, but we remain firm in our commitment that we're going to return substantially all by 2020.

Okay. And then, maybe I missed it, but did you say if Lincoln delivered? I thought that was going to be before the end of 2016. And then, when do you think Ford will deliver?

We see both of those programs in the first half of the year, given where they are now. And both of those teams are working pretty hard to get those ships ready to go to sea.

George Shapiro, Shapiro Research.

Just a follow-up on that cash question, so you returned about 54% of free cash flow in 2016. Was that due to the Camber acquisition, which limited it, and so you go back to a higher kind of return?

No, not really. That's why we put a commitment through 2020, George, is we know there's going to be times we're behind or ahead, based on how the cash flow is distributed throughout those years. So it had nothing to do with the Camber acquisition. It's just how the plan was executed.

Okay. That was it. Thanks very much.

And I'm showing no further questions at this time. I would like to turn the call back over to Mr. Mike Petters for any further remarks.

Thanks to everyone for joining us today on the call. 2016 was an outstanding year for HII and certainly sets a high standard for the years ahead. With that being said, I'm confident our leadership team is up to the challenges we see coming our way. Thanks for your interest in our Company and we look forward to seeing you soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.