Huntington Ingalls Industries, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Huntington Ingalls Industries Q1 2015 Earnings Call. At this me, all participants are in a listen-only mode. Later, we will conduct to question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over Mr. Dwayne Blake, Corporate Vice President Investor Relations. Please go ahead, sir.

[Dwayne Blake:]

Thanks, Candice. Good morning and welcome to the Huntington Ingalls Industries' first quarter 2015 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer and Barb Niland, Corporate Vice President, Business Management and Chief Financial Officer. As a reminder, statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also in their remarks today, Mike and Barb will refer to 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 www.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?

[Mike Petters:]

Thanks, Dwayne. Good morning everyone and thanks for joining us on today's call. This morning, we released first quarter 2015 financial results to reflect steady operating margin performance and improved cash generation. Ingalls and Newport News had another solid quarter, while UniversalPegasus continues to be affected by the prolonged weakness in the oil and gas market. For the quarter, sales of $1.6 billion were slightly lower than last year and segment operating margin was 8.2%, down from 8.6% last year. Diluted EPS was $1.79 for the quarter, down from a $1.81, last year. Q1 results include $0.13 impact from the Other segment. We were a net user in the quarter, however operating cash flow improved by over $200 million from last year. Additionally, we received $1.6 billion in new contract awards during the quarter, resulting in backlog of approximately $21 billion of which $14 billion is funded. Since our Q4 earnings call in February, FY'16 defense budget discussions in Washington have been ongoing with what appears to be a healthy debate about ways to mitigate the adverse implications of sequestration. While no decisions have been made, we are encouraged by the ongoing budget deliberations and remain hopeful that the defense authorization and appropriations process will proceed in regular order. At the same time, we will continue to closely monitor the process for all our programs with a particular focus on LPD 28, CVN 73, RCOH, CVN 79 and CVN 80. Now, I will provide a few points of interest on our programs. At Ingalls NSC-5 James completed successful acceptance trials last week and is preparing for delivery to the customer in June. In addition, the contract award of the eighth National Security Cutter at the end of March reinforces the Coast Guard's commitment to leveraging the benefits of serial production of program that continues to perform extremely well. Ingalls also christened LPD 26. John P. Murtha and launched DDG-113 John Finn during the quarter, representing achievement of significant milestones in the construction of these vessels. At Newport News, the test program on CVN 78 Ford is progressing and delivery remains on track for the first half of 2016. For CVN 79 Kennedy, we still expect the detailed design and construction contract to be awarded in the second quarter of this year. In addition, SSN 785 John Warner is preparing for sea trials with delivery slated for next month. Our display of Proteus, a submersible undersea vehicle built by our recently acquired Undersea Solutions Group, Battelle and Bluefin Robotics created long lines and lot of excitement at the annual Navy League Sea-Air-Space Exposition last month. Proteus is designed to be manually crude or to function as an autonomous unmanned underwater vehicle. We see Proteus as a key component in our pursuit of opportunities in the unmanned submersibles market. Regarding UniversalPegasus, I talked about specific actions we were taking to position this business for long-term success during our call last quarter. These difficult, but necessary actions include a 30% workforce reduction and a restructuring of UPI's benefit and compensation programs, which are expected to reduce overhead costs by 25% over the next 12 months. Even with these cost reductions, market conditions will continue to impact performance. While none of us can predict when the market will turn, UPI will be position to provide our customer base with high-quality products and services to help them complete their projects safely, on schedule and on budget. Although the delay in award of the contract for CVN 79 may impact volume at Newport News on a full-year basis, I remain confident in our ability to maintain 9-plus percent operating margin in our shipbuilding business for 2015. We will maintain our relentless focus on program execution and continue investing capital in our shipbuilding businesses to improve operational efficiency and position ourselves for future Navy programs. We will also continue distributing cash to shareholders in the form of dividends and share buybacks subject to board approval and continue evaluating M&A opportunities to provide long-term value creation. With all that being said, when people talk about Huntington Ingalls, the discussion is typically all about navy shipbuilding. However, since January of 2014, we have made three acquisitions that leverage our core competencies in nuclear operations and engineering and program management. I am excited about the future as our company is well-positioned to provide innovative solutions for our Navy customer in the traditional shipbuilding, repair and fleet services markets as well as in the unmanned submersible's market. We have also expanded our ability to compete for engineering and environmental services opportunities for the Department of Energy and commercial nuclear markets and engineering services for the oil and gas market. These strategic actions have form a strong foundation for the future as we continue exploring opportunities to create long-term sustainable value for our customers, employees and shareholders. That concludes my remarks, and I will now turn the call to Barb Niland for some remarks on the financials. Barb?

[Barb Niland:]

Thanks, Mike, and good morning everyone. Starting with the consolidated results for the quarter on Slide 4 of the presentation, revenues of $1.57 billion in the quarter decreased 1.5%, due primarily to lower volumes at Ingalls. Segment operating income decreased 7% in the quarter to $128 million and segment operating margin was 8.2%. Total operating income decreased 2% in the quarter to $156 million and total operating margin was 9.9%. These decreases were primarily due to underperformance at UPI as a result of continued weakness in the oil and gas market. Excluding UPI, segment operating income and in the quarter $137 million, which was consistent with Q1 2014 and segment operating margin was 9%, a 36 basis points improvement over the same period last year. Excluding UPI, total operating income was $165 million, a $6 million increase over Q1 2014 and total operating margin was 10.8 %, which is 81 basis points over the same period last year. As expected, we were net user of cash in the quarter; cash used in operating activities was $3 million, $211 million improvement over the first quarter of 2014. Capital expenditures in the quarter were $20 million compared to $24 million last year. We successfully closed on the sale of Gulfport facility and collected approximately $32 million in proceeds. Now that we have sold the facility, we will focus our attention on reaching a final agreement with the customer on treatment of the remaining closure costs, so that we can begin the recovery process. Additionally, we contributed $2 million of the planned $99 million discretionary contributions to our qualified pension plans. We intend to fund the balance in the second quarter. We also purchased approximately 210,000 shares at a cost of $29 million during the quarter and paid dividends of $0.40 per share or $19 million brining our quarter end cash balance to $904 million. Before I move on to the segment results, let me give you a quick update on Avondale facility. As you may have already seen from the press release a couple weeks ago, we ended the study with Kinder Morgan and have mutually agreed not to pursue a joint venture using the facility. We will continue to explore other alternatives for future use of the facility, including a sale. We have also submitted an updated proposal to the Navy, which reflects a revised estimated restructuring cost of $287 million or $3 million increase over the previous proposal. As a reminder, once a final agreement is reached with the Navy, the restructuring cost will be recovered by our billing rates over a five-year period. Now moving onto segment results on Slide 5 Ingalls' revenues of $469 million, declined 14% for the same period last year, driven the deliveries of LHA-6 and NSC-4 and lower volumes on LPD programs. Operating margin of 9.6% in the quarter increased 173 basis points over the first quarter 2014, primarily due to risk retirement on LHA-6. Turning to Slide 6, Newport News first quarter revenues of $1.1 billion increased 1% over the same period last year, due to higher volumes on the VCS program and on aircraft carrier maintenance. This was partially offset by lower volumes on CVN-72 RCOH and the construction contract for CVN-78. Operating margin for the quarter was 8.8%, down 21 basis points from the same period last year, due to lower risk retirement CVN-78, which was partially offset by higher risk retirement on the VCS program. Now, onto the other segment, which consists primarily of UPI, in the first quarter the segment generated an operating loss of $10 million on revenues of $40 million, lower volumes due to project delays and works scope reductions as well as the cost to restructure the business in light of the downturn in the oil and gas market negatively impacted UPI performance in the quarter. As Mike mentioned, we continue to take aggressive actions at UPI, but the reality is, market conditions will dictate how these action affect the bottom-line for the remainder of the year, and without a favorable turn in the market, we will continue to see pressure in the business. However, we believe the actions we have taken will strengthen the company for the long-term. Let me provide you with an update on deferred state taxes. We are now expecting a benefit of approximately $5 million for the year instead of the $20 million I provided on the Q4 2014 earnings call. As you know, our estimate of deferred state taxes can fluctuate significantly due to timing of contract income for tax purposes, so each quarter we will provide you with an update of our best estimate for the year. That concludes my remarks for the quarter, and I will turn the call back over to Dwayne for Q&A.

[Dwayne Blake:]

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. Candice, I will turn it over to you to manage the Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Doug Harned of Sanford Bernstein. Your line is now open.

[Doug Harned:]

Good morning. Thank you.

[Mike Petters:]

Good morning, Doug.

[Barb Niland:]

Good morning.

[Doug Harned:]

I am interested in Newport News, because the margins were a little less than they have been in recent periods. You this attributed this to lower risk retirement on the CVN-78, but do you see this is a one-quarter event or are we entering a period where there may be some more difficulty in bringing risk down on that program?

[Mike Petters:]

Well, thanks, Doug. A couple of quarters ago, we talked about Newport News was going to be window here, where they are a little bit out of balance. Starting with the delivery of the Ford for next year, following that will be the delivery of the Lincoln and the delivery of the Enterprise from the Lincoln from RCOH and Enterprise from inactivation. We have three carrier deliveries in the next 21 months out of Newport News and all of that work is cost-type work and all of that work is the last year of a carrier project. We do not yet have the contract for CVN-79. We talked about this before. There needs to be a balance in the business of new work coming in along with old, with work that you are retiring. Relative to the risk retirement on these various programs, the Ford has come together really well. Frankly, I still insist that this was in terms of the construction side of it, it was the very best the lead ship that I have ever seen in terms of things coming together and being complete and ready for test. There is a lot of new technology on that ship and we are just being very mindful as we walk our way through to delivery in the first half of next year about risk retirement. Have we really retired the risk? Do we really understand what we have got there? I think that certainly the awarding of a contract for CVN-79 will help this, and we are not backing away from our view that for this full year period, Newport News will be at 9% or better, but I think it is going to be a little bit of a lumpy ride or bumpy ride between here and there and really a bumpy ride between here and over the next 21 months.

[Barb Niland:]

I got to say, in Q1 2014, when you had risk retirement on 78, you had akin-correct [ph] effect of that which made it have a bigger impact. When you do not have akin [ph] correct for the risk retirement this quarter, you have lower margins.

[Doug Harned:]

Then just separately on CapEx. I mean, CapEx was low for the quarter, I think, about 1.6 % of revenues and you have said that you are headed toward the 3% to 4 % type of CapEx level going forward, so should we expect significant increases later this year? What does that CapEx profile look like now?

[Barb Niland:]

Okay. I believe I said on the call, the total CapEx would be like between 4.5% and 5%, so somewhere between 4% and 5% is my expectations for the year, the reason why you are not seeing a bump up is, one, the CVN-79 contract has been delayed and some of that capital was contingent on receipt of that contract based on that contract structure and being able to get the returns generated, so until we have that final contract signed, we won't release the capital associated with that. Then the other thing I believe I told you was, we allocated a little bit of money for some engineering studies at Ingalls and until those studies show the returns that we need there and the efficiencies and improvement to capture the future opportunities for Ingalls, we are not going to release that capital. I would say there is pressures, a down spend [ph] 5%, but it will be in the 4% range and I will keep you posted as we get to the second quartet.

[Mike Petters:]

I would just add, Doug that our intent here is to invest in our core business, and we plan to invest in a substantial way. We are also going to do that in a very thoughtful way. As the business moves around, the investment profile will move around to reflect that, so I think we are committed to doing that and committed to driving efficiencies and improvements in the business and driving more affordability into the business, but we need to do that in a really smart way.

[Doug Harned:]

Okay. Thank you very much.

[Mike Petters:]

You bet.

[Operator:]

Thank you. Our next question comes from Robert Spingarn of Crédit Suisse. Your line is now open.

[Robert Spingarn:]

Good morning, Mike and Barb.

[Mike Petters:]

Good morning.

[Barb Niland:]

Morning.

[Robert Spingarn:]

I wanted to ask you on, first going back to Newport News and following on to last question, with the CVN-79 coming in, I understand that that certainty of getting a contract to positive gets work flowing, but given the fixed-price nature of the contract and the fact that you generally start off booking conservatively, what might we not expect that to crush or bring margins down at Newport News for period of time?

[Mike Petters:]

Well, I think it will be part of the plan [ph], and that is why I say we got a little bit out of balance. I think it is the more immediate impact to the yard is that as work completes on these various other projects, the management of the workforce in the yard and how it flows from one project to another is a little bit out of sequence and I think that is what the programs are actually seeing down on the deckplay. In terms of the returns in the business, my expectation is that the business will stay at 9%, but we got work our way through these three deliveries and we got work through the startup and 79. The reality is that we have been building units for CVN-79 for a couple years, so we got a good start on that program.

[Robert Spingarn:]

Mike, are those the modulars, the things you can sort of build with advanced procurement, but then as you put the ship in drydock and start assembling everything together, does that change the dynamic?

[Mike Petters:]

Certainly, I mean, we are coming through the manufacturing phase of CVN-79, there is a lot of work on CVN-79 going on in the yard, but it is the turning the yard lose to go execute all those other parts of the program that have to be executed to make it successful at delivery. That is what this contract, the detailed design and construction contract will do for us. The advanced construction, advance procurement that we are doing is very specific to material procurement and specific modules that we agree with the Navy that need to be done to keep the ship on schedule.

[Robert Spingarn:]

Okay. Then just a higher-level question, I have asked this before, but here we are now getting well into '15. At what point do you think, if ever, are you going to be comfortable guiding?

[Barb Niland:]

I have hit him too hard, Rob.

[Robert Spingarn:]

Yes. Well, ouch.

[Robert Spingarn:]

Not meant to be too harsh, but we are kind of at that point. The performance has been excellent. You have hit the targets that you have set, even a little bit early. You have been sufficiently cautious where needed. I understand that this UPI and the oil and gas is a curveball, but even guiding axe that, is that something you can do?

[Mike Petters:]

At this point, we do not really have a plan to begin providing guidance. Our view of the business is that, our task is to achieve the full potential of this business, so that is what we will continue to go do. I like the way that this worked out since 2011, when we said this is what we think this business is going to be in 2015. If we do something to provide a of view of what do we think this business is going to be in a in a few years from now, we may have that discussion later this year, but I am not sure of that. We are not a quarter-to-quarter business. As you can see that in some of our programs, the way these things play out, in some cases we are not even a year-to-year business, so I am at this point thinking more about what does this business look like in three to five-year timeframe as opposed to where we are we going to specifically be at the end of this year.

[Robert Spingarn:]

Right, but you are saying or maybe Barb said earlier, at least with UPI this June quarter could look somewhat similar. The pressure is still there.

[Barb Niland:]

UPI? Correct.

[Mike Petters:]

Yes. There's still market pressure at UPI, but on the other hand, we have taken some pretty dramatic steps there that we think will help that business certainly over the course of this year, but also positions it well for the inevitable rebound in that market space. We have a business there that has a great set of customers, they had some big wins in the second half of last year that projects that they won that have now been slowed down or delay and our challenge is to make sure that we maintain the customer contact with those projects, so that when those projects start back up we are ready to provide the quality work that we needed to go do. When they will start back up is, I am not exactly sure. We been looking at this from a standpoint of making sure that we maintain the customer contact and the quality capability that we have to have to support that and some of that will play out over the next couple of quarters.

[Robert Spingarn:]

Now, that is certainly understandable. Thank you.

[Mike Petters:]

You bet.

[Operator:]

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

[Sam Pearlstein:]

Good morning.

[Mike Petters:]

Good morning.

[Barb Niland:]

Good morning.

[Sam Pearlstein:]

You talked about the restructuring in the Other segment, can you size how much that restructuring cost might have been?

[Barb Niland:]

Sure. Out of that $10 million loss, $9 million was specifically related to UPI. If you recall, when we acquired UPI, we set up our Waggaman facility, it was called AEC, and Waggaman was rally to do like the machining and fabrication for the oil and gas market in the Gulf region and support UPI. We closed that facility, so of $10 million, about $1.5 million was for the closure of Waggaman, about little less than $2 million was related to restructuring, so that was separation costs, things like that. Then if you think about it, a $1.5 was related to purchase intangibles, so that is about half of it. Then the other half of was volume impacting performance.

[Sam Pearlstein:]

Okay. Given the downturn, at what point do you reassess the goodwill position in the intangibles and is there any sense that where you have that much change?

[Barb Niland:]

Actually, we reassess it every quarter. We reassess it based on the customer, whether there are cancellations or project delays. We reassess it based on performance, we reassess it based on market conditions, so we look at all of that and we assess our ability when the market comes back to come out in a positive way, which is why we are trying it maintain the skill sets we need to, so when the projects that have been delayed get turned on, we will be successful and those partners will continue with us.

[Sam Pearlstein:]

Okay. Thank you.

[Barb Niland:]

You are welcome.

[Operator:]

Thank you. Our next question comes from Pete Skibitski of Drexel Hamilton. Your line is now open.

[Pete Skibitski:]

Good morning, guys.

[Mike Petters:]

Good morning.

[Barb Niland:]

Good morning, Keith.

[Pete Skibitski:]

I guess, I was looking for maybe some more color about Ingalls just on the top-line and so far as you have had a couple quarters in a row now of double-digit declines there the top-line, is that just kind of timing related or directionally is that kind of the magnitude of headwinds that you are facing there?

[Barb Niland:]

In terms of the volume, we did have a lighter month and part of that a lighter quarter and part of that was we had a very strong quarter in the fourth quarter related to material receipts and payments last year. When you compare Q1 of this year to Q1 of last year, we also had accelerated last year's accounts payable, because we were implementing a new system called MARS, Ingalls, so we were very heavy in the first quarter of 2014 in terms of accounts payable. Volumes, we are expecting to be the same pretty close to last year at Ingalls, so we just had a light quarter primarily attributable to very strong fourth quarter in 2014 and we expect it to be a little higher for the rest of the year.

[Pete Skibitski:]

Got it. Okay. Very helpful. Then just, Barbra, on the working capital performance probably I think the best first quarter you have had in like five years. I am just wondering how you think about the rest of year, because I know you do not have the LHA-6 for retention release this year like last year, so I just wondered does this give you the confidence that you can get to one times free cash conversion this year or because it is such a strong start, are you thinking maybe you can exceed that this year like you did last year?

[Barb Niland:]

I always tell you that it really depends on really the last three days of the year end collections, so I would love to have another performance like last year. I expect us from a segment cash to do pretty well this year. We do have the delivery of one of the NFCs this year, so we will collect that retention. That is all in our plan I would say, I saw lower disbursements [ph] was the biggest driver in the first quarter being less seasonably unfavorable than in the past, but I think cash, you know, it all depends on the last three days year is what I will tell you.

[Pete Skibitski:]

Fair enough. Thanks so much guys.

[Mike Petters:]

You bet.

[Operator:]

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

[John:]

Hi. Good morning. It is actually John [ph] on for Jason.

[Mike Petters:]

Hi, John.

[Barb Niland:]

Good morning. Hi. Barb, could you talk about just EPS cadence this year. You mentioned how Ingalls should be ramping upon the top-line over the course of the year. Can you touch upon any other elements we should be thinking about how we get from this quarter's results through what I assume should be a hopefully better results over the course of the year?

[Barb Niland:]

Well, I think, Mike has talked about at Newport News, we will expect the total year operating margin to be 9%, at Newport News. Ingalls is 9% and Ingalls volume we expect to pick up a bit, so I think that will get you to the EPS. We do have pressure with UPI that I talked about. We think we have right-sized it, but if there is continued delays on project and everything, we could see a little more bleed out there, but I think we are on the right path.

[John:]

Okay. Then on cash deployment, you touched upon sort of all the options in your prepared remarks. Could you just comment a little more into the kind of obstacles you are seeing other gates with the go through [ph] see more repo as a goal on repo to keep share down or drop share count a little bit here? On the related note, is M&A, has the focus changed at all over the last year, any particular accretion targets and market targets that you are looking at just given the fact that Proteus acquisition has been exciting where as UPI has been a little less so.

[Mike Petters:]

Fair enough. First of all, nothing happens in this business unless we are successfully executing in our core business, so as we have talked about, we are going to be investing in our core business to make sure that our programs remain affordable and that we remain effective and efficient at providing those platforms for our primary customer, the Navy. We have been bringing our shareholders along with us over this the last four years and we will continue to do so. We expect to do this in a very balanced way, because we do think that there are opportunities for us to provide some of this tremendous capability that is in this business to new customers and finding the best way to create access to those new customers is very important to us, because I think that that is a part of our task of achieving the full potential of the business. I think we can do all of that. I think we can invest in our core business, I think we can bring our shareholders along and I think that we can continue to create new value for new customers in those things that we are particularly really good at, so that is kind of our approach to it at this point.

[John:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from Myles Walton of Deutsche Bank. Your line is now open.

[Myles Walton:]

Thanks. Good morning.

[Mike Petters:]

Good morning.

[Barb Niland:]

Good morning, Myles.

[Myles Walton:]

You talked about balanced capital deployment and the last questions was on deals that you have done. I am curious in terms of the size of deals, do you have a scope limitation? Would you entertain multibillion-dollar, $200 billion deals over the next 12 months to 24 months? Is that something that is within the scope of possibility?

[Mike Petters:]

That is a great question, Myles. I mean, I guess, at this point I would say, my aperture is, I try to keep it is wide open as possible, because I keep coming back to, we got to find the full potential of the business. If there was something out there like that, that would allow us to achieve full potential, we would have to have to give that some consideration. On the other hand, our approach has been pretty much what you have seen. The acquisition of the Undersea Group was really about technology and a capability that we thought married up well with capability that we already have, similar to what we did was Stoller, we aligned into, we created access to the Department of Energy that while we had great capability in our business for that marketplace, we did have great access. Stoller brings great capability and great access, so we are able to leverage that and we saw the same thing with UPI. I probably was the only person on the planet that did not know that the price of oil was going to drop after we did that acquisition, but having said that, the reason we did was all of the same reasons that we did the other acquisitions and I am excited about what we are doing it at UPI and I am excited about the access that we have created to that market space for capabilities that we have. I won't tell you that we out there trying to find that that home run. We are out there trying to create sustainable value and access to customers for great capability that we have.

[Myles Walton:]

Okay. One clean up question, Barb, what was the net akin [ph] catches in the quarter?

[Barb Niland:]

$55 million.

[Myles Walton:]

Okay. All right. Thanks so much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from George Shapiro of Shapiro Research. Your line is now open.

[George Shapiro:]

Yes. Good morning, Barb.

[Barb Niland:]

Good morning, George.

[Mike Petters:]

Good morning.

[George Shapiro:]

Barb, I kind of had a different take on cash flow that effectively the differences due to trade accounts and payables, which to me is timing and on the other hand receivables actually went up by more than last year at $189 million and that probably included the $30 million that you got from selling Gulfport, so can you just walk me through why the receivables would have gone up so much in the quarter?

[Barb Niland:]

Receivables are up and they are primarily up at Newport News, and it is really just timing of collection, okay? The first semis [ph] were down at Ingalls and now it is because of the material in the fourth quarter of 2014.

[George Shapiro:]

Okay. Then one for you, Mike. if you look at this top-down, everybody was fairly critical of making it diversification attempt and when you are in the defense business and so far this UPI acquisition and timing and what is happened looks like it would validate that concern. I mean, how do you kind of look at it at this point in time?

[Mike Petters:]

Well, as I said, the way I look at this is that we have great capability in the organization and there are customers out there that need access to this capability and our job to achieve our potential is to try to find, create channels for those customers and that capability. I think the jury is still out on UPI and I am not one yet to say that has not worked out. My view of it is, this is a company that has a great set of customers that had some big wins in the fall, the market dynamic that is way beyond anybody's control and it has put a lot of those projects on hold. We have gone through a pretty healthy process of resizing that business which is going to make it an even stronger business when the market comes back and history shows that the market does go back and forth in the space. It is a capability that we actually have a lot of our own capability. I mean, it is in the engineering services and engineering design capability that we have resident in our Shipbuilding business, so there is a lot of affinity there between what we do in our core business and what happens in that space, so we are creating a channel there that I think to a marketplace that I think long-term is going to be a pretty robust marketplace, so I am pretty excited about where - that is a capability that this company did not have four years ago and I am pretty happy to have it at this point.

[George Shapiro:]

I mean, if you had waited four or five months, you probably could have bought it for a lot less?

[Barb Niland:]

You are right.

[Mike Petters:]

Sure. Like I said, I was the only guy that did not know that George, so that one is on me.

[George Shapiro:]

Okay. Thanks very much, Mike.

[Mike Petters:]

You bet.

[Operator:]

Thank you. Our next question comes from Pete Skibitski of Drexel Hamilton. Your line is now open.

[Pete Skibitski:]

Yes. A couple of follow-ups, guys. First, a couple of housekeeping questions, Barb, can you tell us what your full-year expectations for D&A as well as for cash taxes?

[Barb Niland:]

Okay. For cash taxes federal and state around 250, but I am going caveat that, so it is all dependent on timing of ship deliveries, changes in pension and things like that. What was your other question?

[Pete Skibitski:]

D&A full year expectation.

[Barb Niland:]

Okay. I do not think I have provided that in the past.

[Pete Skibitski:]

Okay.

[Barb Niland:]

I mean, I would say do not expect any significant big movement one way or another. How about that?

[Pete Skibitski:]

Okay. Fair enough. Then, Mike, I wondered if you could share with us your thoughts on how the congressional committee so far has touched your programs in terms of the fiscal '16 budget positive or negative? Then how far along are we in terms of kind of your ability to get some assuredness on the timing for the GW RCOH and the 12th LPD-17, so just wondering kind of what the next big milestones are before you can kind of to get some visibility on those programs?

[Mike Petters:]

Sure. As I said, I am a big fan of the regular order process that our government uses to establish priorities and put resources against that. Last year as you know, the government put $1 billion up for LPD-28, which has really turned into something that has been helpful to the Navy and certainly to us in terms of defining our future. Along those lines, that been prompted the Navy to make a decision that the follow-on amphibious class LXR would essentially be a version of the LPD and we think that is the key decision, because that drives the program schedule in a positive way. That program needs to come in to keep the hot production line that we have at Ingalls working. All of that has come together in a way that so far the only committee that has come out in 2016 has been the House Armed Services Committee and we are long ways from law at this point, but the Defense Authorization Act from the House Armed Services Committee has been very, very strongly supportive of Shipbuilding across the board and across the country, particularly to our programs trying to make sure that we take full advantage of last year's decisions around amphibs is part of the language they put in place, but also in regard to the RCOHs, let us not go through is it end or is it out for the rest of the RCOHs. Let us get all of those RCOHs authorized and moved ahead and keep them on schedule, because that we are going to have - because of the discussion around CVN-73, part of the imbalance at Newport News over the next couple of years is that when the CVN-72 leaves the CVN-73 won't be coming in at that point. There is going to be a bit of a gap, so that is a part of the imbalances at Newport News that has been created in this political environment and this discussion about how can you - we are not have yet a discussion about how many carriers we need. We are actually having a discussion about how can we most efficiently buy them. Are they economic order quantities that we could make sense when we buy more than one ship set material at a time? I am old enough to remember that we bought two carriers at a time twice back in the 80s for construction that finished in the 90s. Those were very efficient programs and very efficient ways to build those platforms that the nation needs, so what I see in this regular order process and why I am a big fan of it is, you actually have a chance to vet all of those issues and get them out and allow decision-makers to establish what their priorities are and put resources against it. There has been very strong support for Shipbuilding and there has been really good support for our programs. For that, I am very, very happy about that.

[Pete Skibitski:]

Okay. It sounds like you are a lot more comfortable on the LPD outlook. Is sequestration still a risk for you guys? Do you feel or there is kind of OCO-driven work around. Does that kind of obviate that risk at least maybe for a couple of years or something. How do you think about?

[Mike Petters:]

Well, I mean, obviously, I think sequestration is a wet blanket for everybody. I still, as I have said before, it is absolutely no way to run the best country on the planet and we have got to get rid of the mechanism and we have got to think about what our priorities are and what the resources are that go against that, so I do not exactly know how we are going to find our way through that, but I do believe that we will find our way through it. There will be a path of some sort that is going to go forward and in that environment whenever that path is whether it is an OCO path or Ryan-Murray II kind of thing or whatever it is, whatever that path is, what I see is Shipbuilding programs are being very well supported in that environment.

[Pete Skibitski:]

Okay. Thank you very much.

[Operator:]

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

[George Shapiro:]

Yes. Barb or Mike, I wanted to ask a General Dynamics had like 19% growth in their Marine business and some of the stuff they do was not comparable, but they did highlight that the primary reason for the growth was the Virginia class, so if could just go through that what maybe the accounting differences in terms of your booking of revenues on the Virginia class, just so I can get a better understanding of why they would be such a disparity?

[Barb Niland:]

I mean, we said we had like 1% growth at Newport News and it was a primarily driven by VCS because we had lower sales on CVN-78 and on the RCOH, so it is really our mixed is difference and there they have ORP and Block IV the two subs per year Block IV driving it. We have a small amount of ORP and the two sub per year is, we are seeing growth in VCS, but we are seeing lower volume on CVN-78 as we get to delivery and lower volume on CVS-72.

[George Shapiro:]

Okay. Thanks very much.

[Barb Niland:]

You are welcome.

[Operator:]

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

[John:]

Hi, it is John again. Thanks again for the follow-up. I just on Avondale, I was wondering how the end of the JV study has perhaps reaccelerated the Navy negotiation and to what extent has the menu of options for Avondale contracted? Is it only full sale or full closure at this point? Then finally is there any sort of timing that you are thinking about there?

[Barb Niland:]

Okay. Look, we have an obligation to look at every opportunity we can, so once the Kinder Morgan, we could not find our way to repurpose that facility with them. It opened the doors for others, but the plan right now is closure. We will look at sale as part of that. As far as timing goes, we resubmitted our proposal based on the Kinder Morgan decision to the government and we will work with them to negotiate that going forward.

[John:]

Is there any events around negotiating that and getting Avondale close that could precipitate some sort of cash deployment decisions. Is that something the Board is focused on and wants to see again your before?

[Mike Petters:]

I would say that we are proceeding at pace that we need to - as we shift from the space we have had with Kinder Morgan - we have had a lot of attention on and a lot of energy in that. We are now moving into another phase and we will work our way through that at an appropriate pace. I am not sure if there is any sort of triggering event there of any kind.

[John:]

Okay. Thank you.

[Mike Petters:]

You bet.

[Operator:]

Thank you. Our next question comes from Robert Spingarn of Crédit Suisse. Your line is now open.

[Robert Spingarn:]

Hi. Just wanted to come back to the carriers again and to the mix, Mike, as you shift from CVN-78 to CVN-79 assuming you get the contract on CVN-79, when you are hoping for it. If we just look at the next few years, what is the point at CVN-79 is driving more revenue than CVN-78?

[Mike Petters:]

Well, certainly by next spring when CVN-78 is gone.

[Robert Spingarn:]

Well, yes, but we know these things have trailing revenues and so on, so looked hard for us to see from the outside just exactly how that mix when that shift change occurs?

[Mike Petters:]

I mean, we do not typically breakout all out by programs much less by ship type, but this is the program that we have already been working on for a couple of years, so it has already been part of our base. As Barb pointed out, and you go into this last year on the Ford, the volume on the Ford as we go through the test program and for all the excitement that is in the test program, what actually happens is the volume comes down, because as you complete certain piece of the ship, you do not need as many people on it. They have to move somewhere and they will be moving to CVN-79, so you can think of a ship construction. You can think of it as a bell curve that kind of goes over - I am talking just the construction piece of this, is a bell curve that goes over an eight-year period and we are in the last year of it, so the Ford is kind of going down that tail. The Kennedy, we are a couple of years into in to that. In the perfectly balanced world, this contract for the Kennedy would have been done a couple of years ago, right?

[Robert Spingarn:]

Mike, does the EBIT follow the same curve given the fact that you retire risk towards the end of the Ford and then on the new one, you are going to book conservatively in the beginning?

[Mike Petters:]

Yes. It does not follow that same curve, because the risk retirement is usually in the second half of the program.

[Robert Spingarn:]

Right. That is what I am getting at here. There is a point, there is a different EBIT curve and so what I am trying to understand is over the next couple of years the profitability of new build carrier, how does that trend?

[Barb Niland:]

Well, I think you have to look at total Newport News and we will stick to the 9%, but I will tell you in terms of the volume that you are talking about, so in 2015 you have the volume of CVN-78, plus you have the volume of CVN-79 construction planning, so and if you remember that was like $3.3 billion of awards of that contract, so we have been doing a lot of work on that. When CVN-78 leaves, you will only have CVN-79, unless, and I do not think this it is going to happen in 2016, but unless they start CP on 80, you are going to have a little bit of volume mix and VCS going full-fledged into two subs years pick up a little bit of that.

[Robert Spingarn:]

Okay.

[Mike Petters:]

Let us now go back to what we have been saying for four years and Newport News is a healthy shipyard. A healthy shipyard should be able to operate in 9% to 10% range, notwithstanding all of the different mixes and blends and moving parts that happened in there, we fully expect that our core Shipbuilding business for over any horizon will be operating in that range.

[Robert Spingarn:]

Okay. All right. Thank you.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to Mr. Mike Petters for any closing remarks.

[Mike Petters:]

Well, thanks for joining us today and thanks for your interest in our company. Just to kind of summarize where we are today, I am very pleased with where we are as a company. We are continuing as we have talked about. We are continuing to invest in our core business as that is the engine that drives the success of this company in total. We will continue to bring our shareholders along. We have been doing that and we will continue to do that and we expect to do that in the future and we will continue to look for ways to create long-term sustainable value, new value for the customers that we have and the customers that could not take advantage of our capabilities, so I am very excited about the company that we are building here today. Our capabilities and our channels that we have today put us in a much stronger position than we were four years ago when we first spun out and became a public company, we really appreciate your interest in what we are doing and we look forward to seeing you. Thank you all very much.

[Operator:]

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