Huntington Ingalls Industries, Inc.
Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to Q3 2013 Huntington Ingalls Industries Earnings Conference Call. My name is Meena, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Dwayne Blake, VP of Investor Relations. Please proceed, sir.

[Dwayne B. Blake:]

Thanks, Meena. Good morning, and welcome to the Huntington Ingalls Industries Third Quarter 2013 Earnings Conference Call. With us today are Mike Petters, President and Chief Executive Officer; and Barb Niland, Corporate Vice President, Business Management and Chief Financial Officer. As a reminder, statements made in today's call that are not historical facts are considered forward-looking statements, and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the 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 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?

[C. Michael Petters:]

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. I'm pleased to report Huntington Ingalls Industries results for the third quarter of 2013. Today, we reported sales of $1.6 billion, and diluted earnings per share of $1.36. Adjusting for a one-time charge for closing our Gulfport Composite facility and favorable resolution of hurricane-related insurance claims, sales were $1.7 billion, up 4% from last year, and pension adjusted diluted earnings per share was $1.17 compared to $0.98 last year, which included adjustments for noncash worker's compensation and tax expenses. Adjusted third quarter segment operating margin was 6.8%, down slightly from 7.1% last year on an adjusted basis. Operating margin at Ingalls was negatively affected by additional costs required to remediate first of class mechanical issues identified during testing on LHA-6 and cost to complete LPD-25. While we would have liked to have been able to complete these last 2 underperforming ships without having to recognize any additional costs, LPD-25 has been delivered to the Navy and we believe that we are well-positioned to complete the work on LHA-6 within these updated cost parameters. Reflecting our confidence in the performance of our programs and the ability to achieve our 2015 goals, our Board of Directors recently approved an increase in our dividend from $0.10 per share to $0.20 per share, as well as an expansion of our share repurchase program from the original authority of $150 million to $300 million. These decisions support our commitment to continue returning cash to shareholders as a part of a balanced cash deployment strategy. Now I will hit a few highlights of our major programs beginning with Ingalls. LPD-25 Somerset, the last LPD at Avondale, successfully completed builders and acceptance trials, and was delivered to the Navy on October 18th. We are very pleased with the efforts of the Avondale team as they overcame major obstacles, including the propeller issue, and delivered the most capable LPD today. LPDs 26 and 27 continue to progress through the unit construction and erection phases of production. LHA-6 America commenced builder's trials on Tuesday after overcoming several first-of-class mechanical issues during the test program. Resolving these issues impacted test program activities, and as a result, we anticipate delivery in the first quarter of 2014. LHA-7 Tripoli is in the early stages of construction, and continues to make steady progress. In the National Security Cutter program, NSC-4 has a successful launch in Kesselring and the team is focused on completing the ship and delivering her to the Coast Guard next year. NSC-5 has over 80% of its units erected, and will launch in the spring of 2014. NSC-6 started fabrication in mid-October, and we are purchasing major equipment, such as the main propulsion systems, generators and electrical switchboards for NSC-7 under a long lead material contract that was awarded in June. I am very pleased with our progress on the NSC program. We are seeing improved efficiencies across the board as this program matures and we leveraged lessons learned in the benefits of serial production from one ship to the next. On the DDG-51 program, the keel for DDG-113, John Finn, was authenticated this week. The ship is now 20% complete, and is expected to be delivered to the Navy in 2016. We also recently started fabrication on DDG-114, which will be Ingalls' 30th Arleigh Burke class destroyer. Regarding the DDG-1000 destroyer program, we delivered the composite hangar for DDG-1001, the U.S. Navy's second Zumwalt class guided missile destroyer, Michael Monsoor, at the end of September, and all that remains on the ship is the deckhouse delivery, which is expected in the first quarter of 2014. Following completion of this work and the composite masts for LPDs 26 and 27, we will proceed with the shutdown of the Gulfport facility as previously announced. At Avondale, even though LPD-25 has been delivered, the ship will remain on site until February as we complete post-delivery items for the customer. We are also continuing unit construction for LPDs 26 and 27 that will be completed in the third quarter of 2014. With regard to Jones Act commercial shipbuilding opportunities, we have not found a project that meets our requirements, but we continue to evaluate potential Avondale redeployment opportunities, including those in the energy market. In support of this process, members of the New Orleans Metal Trade Council and the Metal Trades Department approved a new collective bargaining agreement at the end of September, which will run from January 2014 through January 2019. The agreement contains a wage and benefits package designed to be competitive in the commercial energy market. Even with this positive development, let me remind everyone that if we are unsuccessful in our redeployment efforts, we will proceed with our plan of record and close the facility. Now turning to Newport News. CVN-784 [ph] continues to make progress, and is preparing for its christening ceremonies this weekend with launch next week. CVN-79 Kennedy continues with engineering and design material procurement and advanced unit construction activities. The Navy announced that they will delay the award of the detailed design and construction contract, and continue along the planned path, using an FY '14 advanced construction contract vehicle, allowing more time to optimize the technology requirements and the build and test plans for this ship. In submarines, we continue to make progress on SSN-785 John Warner, our first Block 3 delivery boat. Given that the government is operating under a continuing resolution without special language allowing new program starts, award of a Block 4 contract for up to 10 additional submarines will be delayed until at least early 2014. The CVN-71 Roosevelt completed its refueling and complex overhaul, and was redelivered to the Navy at the end of August. CVN-72 Lincoln is progressing through the early stages of its 44-month RCOH with a focus on refueling preparations, removing equipment for refurbishment and haul and tank work. And CVN-65 Enterprise is progressing through the early stages of its 38-month contract for the inactivation and the defueling of its 8 nuclear reactors, with a focus on completing temporary systems, access cuts and personnel training and qualification. In summary, our programs continue to perform well. Our financial results are in line with our expectations, and our long-term outlook of a 9-plus percent operating margin by 2015 remains unchanged. We have achieved several important milestones, including the delivery of LPD-25, the fourth of our 5 underperforming ships, and we took another positive step in our cash deployment strategy by increasing our dividend and expanding our share repurchase program. And although defense budgets remain under pressure, we are maintaining our focus on safety, quality, cost and schedule. This drives a culture that is committed to producing affordable, high-quality ships for our customers, which in turn creates value for our shareholders and provide stability for our employees. Now that concludes my remarks, and I will now turn the call over to Barb Niland for some remarks on the financials. Barb?

[Barbara A. Niland:]

Okay, thanks, Mike, and good morning to everyone on the call. Today, I'm going to focus my discussion on the key items that occurred during the quarter, and give a little insight into 2014 pension sensitivities. Please refer to the slides posted on our website for more information. As Mike mentioned, there were 2 significant nonrecurring events during the quarter that we adjusted for in our earnings release. First, we settled hurricane-related insurance claims and received $180 million of cash during the quarter. As a result of the settlement, Ingalls' revenues decreased by $37 million due to lower overhead cost, and operating income increased $46 million. This reflects the economic position of the customers' recent direction for the treatment of insurance related costs and recoveries. Second, we announced the planned closure of the Gulfport Composite facility as a result of the Navy selecting a steel deckhouse for DDG-1002. Due to the loss of the deckhouse and the planned closure, revenues increased $9 million and operating income decreased $17 million, which is within the range that we previously disclosed. Additionally, please remember that in the third quarter last year, we adjusted both Ingalls and Newport News operating margins for $24 million of noncash worker's compensation charges and net earnings was adjusted for an $8 million tax expense related to our spinoff Tax Matters Agreement. Moving onto consolidated results on Page 4. All of the numbers that I discuss will be adjusted for these events, and you can refer to the presentation on the website or the earnings release for reconciliations. Total sales increased 4.3%, which was mainly due to increased volume at Newport News and aircraft carriers and fleet support services. Third quarter operating income was $98 million, up $8 million or 8.9% over the same period in 2012. The increase in operating income was primarily due to a lower FAS/CAS Adjustment this quarter. Pension adjusted diluted earnings per share for the quarter was $1.17 compared to $0.98 in Q3 2012. We generated $251 million of free cash flow for the quarter. Capital expenditures for the quarter were $30 million, down $5 million from the third quarter last year. For the full year, we continued to expect capital expenditures to be in the mid-2% to 3% of sales range. During the quarter, under our current share repurchase program, we purchased over 450,000 shares at a cost of $30 million. Additionally, we paid our fourth quarterly dividend of $0.10 in September. Turning to segment level performance on Pages 5 and 6 of the slide deck. Ingalls' operating margin was 3% for the quarter or 151 basis points higher than the same period last year. The increase over the prior year was primarily attributable to risk retirement on the NSC program. However, as Mike discussed, margins were negatively affected this quarter due to additional cost to complete LHA-6 and LPD-25 in an amount similar to the LPD charges during the same period last year. Included in the cost for LPD-25 was $4.8 million for the propeller incident we previously disclosed. Newport News operating margin was 9.1% for the quarter compared to 10.9% for the same period last year. 2012 operating margin included a $15 million favorable resolution of an outstanding contract adjustment on the Enterprise EDSRA. For 2013, we are still estimating deferred state tax expense in the $10 million range, a FAS/CAS Adjustment of approximately $65 million and net interest expense of approximately $116 million. Our effective tax rate for the quarter was 30.3%, which was favorably impacted by an increase in the domestic manufacturing production, and the true-up of our 2012 estimated tax return. We are now expecting our full year effective tax rate to be around 33%, which differs from the statutory rate primarily as a result of the manufacturing deductions and the retroactive extension of the research and development tax credit through the end of 2013. Turning to Slide 7. We have included our 2014 pension sensitivities. As always, remember that pension-related numbers are subject to year end performance and measurement criteria. This chart shows the sensitivities of our 2014 estimated FAS/CAS Adjustment to discount rate assumptions and actual asset returns for 2013, and assumes a 7.5% long-term return on assets going forward. At the end of the third quarter, our discount rates were approximately 85 basis points above last year, and year-to-date actual returns were approximately 5.5%. However, actual returns can be volatile. For example, at the end of last week, year-to-date return had increased to over 8%. We expect required cash contributions in 2014 to be minimal and lower discretionary contributions than in 2013. Finally, yesterday, we closed an amendment of our bank credit facility, which improved pricing and created more flexibility under some of our covenants. An 8-K disclosing this amendment will be filed. So that wraps up my remarks, and with that, I'll turn the call over to Dwayne for Q&A.

[Dwayne B. Blake:]

Thanks, Barb. [Operator Instructions] Nina, I'll turn the call over to you to manage the Q&A.

[Operator:]

[Operator Instructions] Your first question comes from the line of Robert Spingarn, Credit Suisse.

[Ross Cowley:]

This is actually Ross Cowley in for Rob. I just had a quick question, Mike, on -- when you think about the delivery of LPD-25 in the last quarter, the delivery of LHA-6 early in '14 and the other zero margin ships that you've already delivered, when do you think could be the first quarter where we see kind of a clean number on the margin at Ingalls without the distortions from those ships?

[C. Michael Petters:]

Well, we've said from the beginning that the first thing we have to do is get the ships out of our system. The second thing we have to do is we have to let the ships that are at Ingalls to mature. And so our statements so far has been that we will be at -- we expect both of our businesses to be operating at 9% in 2015 and we really haven't tried to predict what's going to happen between now and then, except that there'll be an accelerating progression towards those numbers between now and then, and so that's kind of what we said and we'll continue to say that.

[Ross Cowley:]

Okay. Just one thing on the 9%. Is it still the case that you're expecting that to be a full year 2015 margin?

[C. Michael Petters:]

Yes, that's right.

[Operator:]

Your next question comes from the line of Joe Nadol from JPMorgan.

[Unknown Analyst:]

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

[C. Michael Petters:]

Yes. We're continuing to evaluate a broad array of opportunities in both the energy and in the Jones Act and we've got some pretty -- we've got our own internal criteria for what we think -- how do we balance risk and rewards in those opportunities. And so at this point, while we're talking and working through a lot of different possibilities, we haven't come to one yet that we believe meets the requirements that we're looking for. So we just continue to look at that and work our way through that. There is still a lot of interest in the fabrication potential at Avondale to support the Energy segment. The challenge that we have, as we've mentioned before, is that that work is really not eminent. It's a little bit out there, and so the question is how do you get from here to there and so we continue to evaluate that, too.

[Christopher Sands:]

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

[C. Michael Petters:]

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

[Christopher Sands:]

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

[Barbara A. Niland:]

600.

[C. Michael Petters:]

Yes, we have about 600 -- probably next year, we'll probably have a running rate of between 500 and 600 people.

[Christopher Sands:]

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

[Barbara A. Niland:]

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

[Operator:]

Your next question comes from the line of Jason Gursky from Citi.

[Jason M. Gursky:]

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

[C. Michael Petters:]

Okay. When you're in a shipyard where there's an array of programs, you have mature programs, you have new programs and you have various maturities in terms of where they are in their cycle relative to serial production. You end up with -- you blend all of their different returns together and you end up at a, I believe, in a 9% to 10% range is where you ought to be operating. The challenge that we've had over the past couple of years is that the programs that should have been -- if you're going to blend to 9%, that means that you're going to have some that you're going to be above that on and then some that you'll be below that on. The ones that should be above that are the ones that are the most mature, the ones you have the most experience with that you've done the most of. The newer programs, because of the risk of a new program and our conservative approach to not booking the income until we've retired the risk, means that in these younger programs, we're typically booking at something less than our target. So where we've been for the last couple of years is that the program that should have been our highest booking rates were actually our lowest. And so the first measure -- the first thing we have to do is get those ships out of the blend. We've got 4 of them gone. We've got one to go. The second thing you have to do is you have to take those programs that are new, and remember that in 2011, we said we needed to go and sign 5 contracts, well, we signed all 5 of those contracts. In fact, we signed more than that. But you have to give those programs that are new the time and the effort to retire risk before you can book them to the place where they need to be. So getting the first step done was something that we wanted to get done. We now expect to finish that by the end of first quarter 2014. That's when America will be gone, those 5 ships will be gone. The second part, though, requires a couple more years before those 5 new contracts that we signed will mature to the point where they're actively contributing to the full 9% target that we set. Now the third piece that has to happen is that, as those ships mature, you have come back in and you have the fill in more work behind that. And if you have followed what we've been saying for quite a while now, we are very focused on the 3 to 5-year horizon with the Navy and the Navy budgeting and the future of amphibs because it's the future work in amphibs that will fill in behind that, that will allow us to sustain our workforce, sustain our rate base and help make the blended rate all work together. So the first step is almost complete. We're not going to call it done until we're done, which is the delivery of America. The second step will take us until 2015 to let those programs mature, and let us retire the risk on the new contracts that we've signed since March of 2011. The first step is something that we're working on very, very much right now. We're actively engaged in an environment where there's not a whole lot of oxygen for a discussion about something that's 3 to 5 years from now. So that's kind of -- that's where it is. I'm not sure that we're going to be ever providing any sort of quarter-by-quarter or program-by-program breakout of how that blend comes together, but that's what we're up to.

[Barbara A. Niland:]

And Jason, I'll add, you'll see when we file the Q in our cumulative contract adjustment side, there's a favorable adjustment on NSC that you'll see as part of that. And so, as Michael was talking, the contracts are starting to mature. We're retiring risk, and just because of all the other moving parts this quarter, it doesn't stand out.

[Jason M. Gursky:]

Right. You know what I think might be helpful is to just give us a bit of a sense of whether the initial booking rate on the new work that you'll be bringing into the yard will be any different, higher or lower, than you've historically done on initial booking rates. Because I think the fear here would be that you come in and you started booking at a higher initial rate than you would have in the past, and that opens us up to the risk of negative cum [ph] adjustments going forward. So if you could just give us a sense of your approach to the initial booking rates or the new work that you'll be bringing in is [indiscernible] 9%?

[C. Michael Petters:]

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

[Operator:]

The next question is coming from the line of Sam Pearlstein from Wells Fargo.

[Samuel J. Pearlstein:]

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

[C. Michael Petters:]

Well, we're not going to predict fourth quarter. But the issue is the ship is still in the yard. The ship will still be in the yard until February, because we're doing postdelivery items that we traditionally do and sail-away, I think, is scheduled now for February so...

[Samuel J. Pearlstein:]

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

[Barbara A. Niland:]

We won't collect the retention until after delivery. So it does move those cash collections into 2014.

[Samuel J. Pearlstein:]

Have you ever sized what that could be in terms of what are the ranges?

[Barbara A. Niland:]

No. We didn't provide any ranges on that.

[C. Michael Petters:]

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

[Operator:]

If we can move onto the next question, which comes from the line of Finbar Sheehy from Sanford Bernstein.

[Finbar T. Sheehy:]

You're closing the Gulfport Composite facility because the Navy decided not go with the composite deckhouse. Can you give us a sense of what the total closure cost there is, how much of it you've booked already, how much of it the Navy will cover and when they'll cover it?

[Barbara A. Niland:]

Well, there's a couple pieces, okay? There's the part that's associated with accelerated depreciation on the assets, okay. And then there's actual cost of closure, which is severance and facility work, okay? So in our -- we said it was $57 million for closure cost and what you're seeing right now is we have to accelerate the depreciation of assets. That's $52 million, and as a result of that, you had an increased cost to our cost type contract work there, and that increase in cost reduced the margin. So we took a $17 million charge for that, okay? So we had that margin impact, and we gave you a range of $15 million to $20 million. It ended up being $17 million. So I think that explains the margin impact and the cost of closure.

[Finbar T. Sheehy:]

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

[Barbara A. Niland:]

Yes, it will be -- it is being -- the depreciation is being accelerated in our rates and getting charged on the last of the work we're completing on the DDG-1000 program there, and so it's being recovered in the contract.

[Finbar T. Sheehy:]

And that's the $52 million?

[Barbara A. Niland:]

Yes.

[Operator:]

Your next question comes from the line of Brian Ruttenbur from CRT Capital.

[Brian W. Ruttenbur:]

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

[Barbara A. Niland:]

On the G&A, with the litigations that we've been with FM and the different litigation, we've seen a little bit of a spike in G&A. So when you think about it, right now, you're paying higher state taxes on our taxable income, so don't mind that. And the other side of it is we're seeing a little bit of increase in legal expenses that are causing that, Brian.

[Brian W. Ruttenbur:]

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

[Barbara A. Niland:]

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

[Brian W. Ruttenbur:]

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

[Barbara A. Niland:]

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

[Operator:]

Your next question comes from the line of Myles Walton from Deutsche Bank.

[Myles A. Walton:]

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

[Barbara A. Niland:]

Well, how about if we wait until the fourth quarter, and I'll actually give you each of the pieces. What I have right now is just the net, but you're directionally in the right direction.

[Myles A. Walton:]

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

[C. Michael Petters:]

Yes. And I think, Miles, you're right. In fact, that's a tough discussion, and where we end up finding ourselves is in the negotiation of each of our contracts. There's a pretty healthy dialogue over what are the correct rates for the programs, especially when we're in those discussions today around CVN-79, which is a program that will take 8 years to build, and we're talking about Block 4 submarines, which is a 9 or 10-ship program, which will play out over at least that long. You're trying to make sure that in that discussion that you have a good enough view of your whole rate base, not just the pension side of it, but the whole workload and everything else, the education, the training, the retirements, retention, all that stuff because it's part of the discussion. And to the extent that we're able to negotiate that into the contracts appropriately, it doesn't become part of our risk register. But when we come out of the room with a signed contract, any of those things that we think have created some risk on the contract become part of the risk register, and now I'm back to the discussion I had before, which is, okay, so now we've got these items in our risk register, how does that affect our initial booking rates? So that's kind of a process. It's kind of looking at how we make the sausage, but we are -- find ourselves routinely discussing what we think the wage growth might be or the pension impact might be inside of a contract negotiation 7, 8 years from now, and that's what makes the business so much fun.

[Myles A. Walton:]

Are you having any challenge capturing as much of that recovery as you used to through your contracts or is it -- are you capturing the same percentage?

[C. Michael Petters:]

I'll start and let Barb talk to this. I think this whole harmonization issue is something that the Pentagon has not yet quite put their own head around, and so as more and more -- again, we're not the biggest player in this pool right now. As more and more of the folks that have to deal with that -- have to deal with that through their own negotiations with the Pentagon, I think the Pentagon is going to have to continue to come to grips with it, and so that's my observation from where I sit is that this is -- the final chapter on harmonization has not been written yet so -- and I'll now turn it over to Barb from there.

[Barbara A. Niland:]

Yes, Miles, negotiations are tough. They're pushing back on what our CAS assumptions are for pension returns and also discount rate, and so it just adds to the top part of the negotiations. They want us to use higher pension returns and higher discount rates that are unrealistic, and we try to push them back to a more realistic position, and fortunately, we've been doing okay there, but it's tough. It's tough.

[Myles A. Walton:]

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

[Barbara A. Niland:]

Yes, it was.

[Operator:]

Your next question comes from the line of Omear Khalid from Goldman Sachs.

[Omear Khalid:]

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

[Barbara A. Niland:]

So that's all in our restructuring proposal. So what we have in the restructuring is the assets, the accelerated depreciation on the assets, and then the cost associated with closing the facility, which includes severance and also things like retention for people we needed to keep to finish LPD-25 and 26 work. So all that's included in our restructuring proposal so it's $256 million, and that hasn't changed. That's held -- been holding pretty steady for the last year.

[Operator:]

The next question comes from the line of Ron Epstein from Bank of America.

[Kristine T. Liwag:]

It's actually Kristine Liwag calling in for Ron Epstein today. My question is about, I guess, capital deployment. How are you thinking about returning cash to shareholders and will you be announcing some sort of share repurchase plans?

[C. Michael Petters:]

Well, we just -- first, our approach is that we're going to be -- continue to be very balanced in this. We will continue to look for ways to create overall value for our business, and that includes dividends and share repurchase. And just last week, we announced the doubling of our dividend, and we doubled the amount of the authorization for the share repurchase. Our board approved all of that last week. So I think we're on track with what we've said our approach will be, which is to be very balanced and find ways to continue to create value for everybody.

[Operator:]

Your next question comes from the line of Peter Skibitski from Drexel.

[Peter J. Skibitski:]

I got in a little bit late, so I apologize. I think you might have touched on these 2 questions already. But Mike, a couple maybe difficult questions to answer. On LSD x or LX or whatever the notation is right now, I know the RCOH wants it. What's your sense of the degree of how much the Navy wants to follow-on amphib? And B, can they fit it into their budget in this environment? And maybe lastly, just kind of what year would you like to add or do you need that to be budgeted in in order to have kind of a smooth transition from the current class?

[C. Michael Petters:]

Yes, that's -- thanks for that. I think the first answer -- the question -- the first question you asked was does the Navy want it? The answer is, yes, the Navy wants it. The second question is, can they fit it into their budget. This has been the dilemma is that if -- this is the piece of the budget that seems to be -- we've said before, carrier submarines, destroyers sit at the top of the Navy's list in terms of complexity and priority. Below that is amphibs. Somewhere in between destroyers and amphibs and surface combatants is where the line is in terms of affordability, and we've been on that now for quite a while. The reality is that this -- and the program you're talking about is the LXR program, which is a smaller amphib in the LPD. The reality is that you can make the LXR look a lot like the LPD, and take advantage of all of the engineering and work that we've already done, but the timing of that program is already too far out. And our view is "Let's keep the LPD production line hot instead of shutting it down and bringing it back. So that means that we really need to have another ship between LPD-27 and the LXR program. Now Congress has put $260 million out there to the Navy to say, "Hey, there's something you need to do with the amphib industrial base to keep this thing moving so that we can do this efficiently because we think that shutting down our production line would be an inefficient way to move ahead. All of that is in play, and all of that is part of our -- it's an imperative for us to go and try to continue to make that happen. And obviously, the challenge that we all are faced with right now is that it's really hard to have that discussion with anybody when you're moving from -- we went through a period when the government was shut down. We're now back up, operating under a CR with a -- all it can do is reflect last year, and we're only good until January when we're going to have this CR expire. It becomes really, really hard to have a discussion with anybody about, let's have a discussion about how do we keep a production line hot and be efficient and strategic in our thinking about an amphibious program that supports the long-term interest of the country when we seem to be operating the country on a month-by-month basis right now, and that's intensely frustrating and frankly is no way to run a railroad. And so we've got to get out of this cycle of moving from one crisis to another so that we can get back to a much more strategic discussion about how do we get -- how do we do what's the -- do the right thing for our war fighters and our sailors, and then ultimately, for the industrial base.

[Peter J. Skibitski:]

Mike, when you talk to the people on the Hill, what's your sense that we can actually get a fiscal '14 bill in January? And if we do, do you think they might put in additional money for this, maybe transition amphib?

[C. Michael Petters:]

Yes, I -- my crystal ball is completely fogged. I don't know what's different in January than where we are today, and I'm not sure I know what's different between -- we have this -- the budget committees are working to try to solve the budget, but there's a lot of good statements about we're going to solve this, but I don't see where the overlap is, and I don't know why this is any different than we had the BCA before. And so I'm not a political handicapper. I'm a shipbuilders. So that's why I'm kind of watching this, trying to figure out where the overlap is. I don't know where it is. It feels to me like this is going to be something where we won't see the overlap until the deal was done. And if that's the case, it may be January '14 before we finally understand where everything's going. And if that means we're back to regular order, that would be great. If that means that we have a CR with anomalies, that would be okay. If that means we end up with a CR with no anomalies and it's a clean -- a 12-month CR, that would not be good, and that would be -- not be good across a lot of programs, and so that's kind of the way we're handicapping it right now.

[Peter J. Skibitski:]

Okay. And then last one on CVN-79 construction contract, does it feel like in this environment that that just gets pushed out maybe away, maybe to like 2015, even?

[C. Michael Petters:]

Well, the Navy's already announced the plan to push it out and operate on the construction preparation contract, and so we're engaging with the Navy on working our way through that. I'd kind of start with, if you go back to the whole budget discussion, I mean it's considered a new start. So if you're not able to do a new start, that creates a whole set of dilemmas for us in January if we're not able to go forward, but I expect that we will. I actually think cooler heads will prevail, and that we'll be able to move forward on both the submarine contract as well as the construction preparation, and then ultimately the detail design and construction contract. Whether we actually get the detail design and construction done before the end of '14 or if it goes into '15, I'm not sure I can handicap that today.

[Operator:]

Your next question comes from the line of Jason Gursky, again from Citi.

[Jason M. Gursky:]

A quick follow-up question for Mike here and Barb. Your question -- your answer, I should say, on the FAS/CAS question earlier was pretty nuanced, and I want to walk through this in a little bit more detail. In some discussions that we've all had with other defense companies over the last couple of quarters, it's become apparent that FAS/CAS is getting incorporated into most companies' contracts today, and what they're doing to offset the increased cost is to look for cost savings in other areas so that the net billable rate going back into the customer isn't necessarily rising per se. And it sounded to me like you're saying something similar to that, but I just want to confirm that that's the case. And then secondly, I'd also like to confirm that when you do do something like that, the FAS/CAS is essentially coming in as revenues with 0 costs associated with it, whereas if you were reducing your cost structure in other areas, you're reducing your revenue line, but that has costs associated with it. So this exercise that we're going through right now is essentially trying to keep our cost structure in line with where we were before FAS/CAS, but what we're doing is replacing some revenue streams that have costs associated with it with revenue streams that don't necessarily have incremental cost associated with it, and let me just get your quick thoughts on them.

[C. Michael Petters:]

Yes, I'll start with that. I don't think that I've said much different than that. When you go to negotiate the contract, any of our contracts, though, you're looking at the whole package. We do a lot on each line item and there's a whole lot of discussion on each line item, but in the end, it's a total rate package, it's a total labor package, it's a total material package, and that all comes together to be a contract. And so yes, there's a -- if you're going to push the balloon in one space, you got to make up for it somewhere else, and so that's kind of the approach that ends up being taken. You want the discussions to be very fact-based, and that's where the negotiations comes in because you kind of start out, both parties kind of start out with what they wish things would be like, and you end up with facts getting in the way of all that, and you end up with a contract that's more fact-based instead of hope-based. And so that's a -- that's kind of our approach it, and I don't think that we do much different than anybody else there. And I'll let Barb take up any more than that.

[Barbara A. Niland:]

I think that's right. So we're not treating it any different than anybody else does.

[C. Michael Petters:]

Yes.

[Operator:]

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

[C. Michael Petters:]

Thank you. I appreciate your interest in the call this morning. I would like to point out again that we're very excited about how the quarter went, even though there were a lot of moving parts here. It does sort of show the challenge of shipbuilding. As Barb would say, shipbuilding is government accounting on steroids, and we have absolutely been experiencing that for the last quarter. But I would say that inside the gates of our operations, things are going very well, and we are on track with all of the targets that we have set for ourselves. I'm probably just in the crowd of folks who are frustrated with some of the things that are going on outside the gate. We do what we can do try to influence that, but our focus continues to be on what do we need to do inside the gates for this business to be successful. We're very proud of the work that our team is doing, what our employees are doing, and we are delivering tremendous products to our customers and our customers are very, very happy with the product that we got. And we are -- even today, we have another great product that we see on builders' trials demonstrating the capability of the craftsmanship of our people. So with that, we're going to continue to keep the focus inside the gates, and try to influence things outside the gates, and we look forward to talking you guys over the next quarter. Thank you all very much.

[Operator:]

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