Huntington Ingalls Industries, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Huntington Ingalls Industries Q3 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Vice President of Investor Relations, Mr. Dwayne Blake. Sir, you may begin.

[Dwayne B. Blake:]

Thanks, Vince. Good morning, and welcome to the Huntington Ingalls Industries third quarter 2014 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 other 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 the 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 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. This morning, we released third quarter 2014 financial results that continue to reflect strong operating margin performance and cash generation, which are right in line with our expectations. Before I discuss the current results, as a reminder, in the third quarter last year, sales and operating income at Ingalls included a onetime charge for closing our Gulfport composite facility and a favorable resolution of hurricane-related insurance claims. So all comparative data that I discussed will adjust for these items. For the quarter, sales of $1.7 billion were up 3% from last year and segment operating margin was 8.8%, up from 6.8% last year. Operating margin at our Ingalls segment improved from 2.9% last year to 9.8%, while our Newport News segment continued to deliver solid performance at 9.2% for the quarter. Diluted EPS was $1.96 in the quarter, up significantly over last year. Additionally, we received $400 million in new contract awards during the quarter, resulting in backlog of $23 billion, of which $13 billion is funded. Now reflecting continued confidence in the performance of our programs and the ability to achieve our 2015 goal, our Board of Directors recently approved an increase in our dividend from $0.20 per share to $0.40 per share as well as an expansion of our share repurchase program from the most recent authority of $300 million to $600 million. Now these decisions reaffirm our commitment to continuing to return cash to our shareholders as a part of a balanced cash employment strategy. Since our quarter -- our second quarter earnings call in August, the Navy has decided to continue planning efforts for the Refueling and Complex Overhaul of the George Washington CVN-73 and is working to reallocate investment across the future year defense plan to fund the RCOH air wing, manpower and support. As we noted last quarter, Newport News was awarded a contract to begin planning of defueling work on George Washington as another positive step toward an anticipated contract for the full RCOH in fiscal year 2015. However, the scope of work for planning the defueling work is only a small portion of the full planning effort we need to be performing to prepare for the RCOH. With this in mind, we are concerned that continued delays in award of the RCOH planning and execution contracts as well as delay of the detailed design and construction contract for CVN-79, John F. Kennedy, it is creating pressure on our programs at Newport News. Regarding the LXR program, we have always advocated that the LPD is a platform with proven capability, flexibility and affordability and would be the best foundation for future amphibious ships. We also believe that construction of the 12th LPD-28, which has been supported by 3 of the 4 congressional defense committees in their fiscal year '15 markups, is a bridge to LXR. However, Congress still needs to decide if they will proceed and will also need to finalize how much funding allotted will be allotted in fiscal year 2015 for the construction of LPD-28. While all of these developments are positive, funding for the CVN-73 RCOH, LPD-28 construction and other ship building parties are still subject to final agreement in passage of the FY '15 defense appropriations bill. Now, I will hit a few highlights of our major programs, beginning with Ingalls. In the LPD program, LPD-26 John P. Murtha is over 80% complete and the team launched the ship last week, marking the transition from the unidirection phase to system integration and testing phase of construction, in support of sea trials and delivery in 2016. LPD-27 Portland is approximately 36% complete and is continuing to make steady progress through the shop and unit manufacturing phases of construction in preparation for launch next year. In the LHA program, LHA-7 Tripoli is in the early phases of construction and is using lessons learned from the LHA-6 America to ensure Tripoli is built with a focus on safety, quality, cost and schedule. In addition, efforts continue on the affordability design contract to reduce the construction in lifecycle cost of LHA-8. In the National Security Cutter program, NSC-4 Hamilton completed acceptance trials and was delivered to the Coast Guard in September. The shipbuilders working on this program are leveraging the benefit of serial productions to reduced cost and schedule from ship to ship. NSC-5 James is over 80% complete and is preparing for propulsion plant light-off in December. NSC-6 Munro had its keel-laying ceremony yesterday. Fabrication of NSC-7 Kimball is scheduled to begin in early 2015 and the purchase of long-lead-time materials for NSC-8 Midgett remains on track. On the DDG-51 program, DDG-113 John Finn is approximately 50% complete and remains on track to be delivered to the Navy in 2016. In addition, we authenticated the keel for DDG-114 Ralph Johnson and have started fabrication of DDG-117 Paul Ignatius. At Avondale, all units under construction for LPD-27 were complete at the end of October. Our joint study group with Kinder Morgan Energy Partners is ongoing. And as we have stated before, if an economically viable best use of a facility is determined, the companies may pursue the formation of a joint venture to redevelop the Avondale site. However, if we are unsuccessful in these efforts, we will proceed with our plan of record and close the facility. And now turning to Newport News. CVN-78 Ford is approximately 83% complete and continues through the final outfitting and test phases of construction, with delivery still on track for 2016. Thus far, we are pleased with the results of the test program on this first-class -- first of a class ship. We maintain a watchful eye on key metrics, such as compartment completion rates and man hour performance as leading indicators for issues that may impact our risk retirement plans. For CVN-79 Kennedy, engineering and design material procurement and advanced unit construction activities continue under the construction preparation contract, given the pressure that continued delays creates on our business space, we are hopeful that a detailed design and construction contract will be awarded late this year or earlier next year. In submarines, SSN-785 John Warner was christened in early September, kicking off a final outfitting, testing and crew certification phase of construction, prior sea trials and delivery next year. Work on the remaining Block III boats remains on track and long-lead-time material purchases and early manufacturing activities are underway on several Block IV boats. CVN-72 Lincoln undocked earlier this year and is transitioned to the reinstallation, outfitting and test phases of the RCOH. CVN-65 Enterprise continues to progress through its 38-month contract for the inactivation and the defueling of its 8 nuclear reactors. Regarding our recently established other segment, this marks the first full quarter of activity for UPI under HII, and integration activities are ongoing. We're also capturing operations from the reopening of our Waggaman engineering and construction facility in this segment. This is a small operation near the Avondale Shipyard that could ultimately support partnering or subcontracting to perform fabrication work for prime contractors in the oil and gas infrastructure market. We believe that as relationships in this space are expanded through our engineering efforts at UPI. Having a facility that can perform fabrication work positions us well for future opportunities that may arise. In closing, I am very pleased with the progress our team is making. We are maintaining a relentless focus on program execution, risk retirement and cash generation in order to continue creating value for all of our stakeholders. There is still a lot of work to do. But I am confident that this team is up to the challenge, and we will achieve our goal of 9-plus percent operating margin in 2015. That concludes my remarks. And I will turn the call over to Barb Niland for some remarks on the financial. Barb?

[Barbara A. Niland:]

Thanks, Mike. And good morning to everyone on the call. Today, I will review our consolidated and segment results. But before I do, I want to remind you of a few changes that we implemented in this year. First, we acquired S.M. Stoller in January, and the financial results are reported under our Newport News segment. Second, during the first quarter, we transferred AMSEC and CMSD businesses from our Ingalls segment to our Newport News segment. All 2013 financial results include this realignment between the segments. And third, we created our other segment during the second quarter to reflect the results of our newly acquired engineering and project management business, UPI. Finally, as Mike mentioned earlier, we had a couple adjustments in the third quarter last year. Sales at Ingalls were increased by $28 million and operating income was decreased by $29 million, reflecting the net impact of the settlement of the hurricane-related insurance claims and closure of the Gulfport composite facility. All of the numbers that I discussed today will be adjusted for these events and you can refer to the presentation on the website, or the earnings release for the reconciliation. Now let's turn to our consolidated financial results on Slide 4 of our presentation. We had a solid quarter with modest revenue growth and strong operating margin performance. Total revenue increased 3% in the quarter, primarily due to the 2 acquisitions we completed during the year, while our existing businesses remained relatively flat. Total operating income during the quarter was $171 million, an increase of 74% over the prior year, driven mostly by the [indiscernible] FAS/CAS adjustment and increased operating income at Ingalls. We had another strong quarter of cash generation. Cash from operations was $256 million in the quarter and free cash flow was $216 million. Capital expenditures in the quarter were $40 million compared to $30 million in the same period last year. To date, capital expenditures are lower than previously projected, and therefore, we expect 2014 to be between 2% and 2.5% of sales. Under our share repurchase program, we purchased approximately 71,000 shares at a cost of $7 million. We also paid our quarterly dividend of $0.20 in September of cost of $10 million, bringing our quarter end cash balance to $769 million. The effective tax rate for the quarter was 33.3%, up from 30.3% in the same period last year due to the favorable impact from the true-up of actual tax return to provisional taxes in the third quarter of last year. Moving to our segment results on Slide 5. Ingalls had slightly lower sales but significant operating income growth for the quarter. Revenue was down 6% in the quarter due to lower volumes on LHA-6 and LPD-25. Operating margin of 9.8% was up significantly over prior year, primarily due to performance improvements and risk retirement on the LPD program. Turning to Slide 6. Newport News revenues increased 2% in the quarter, driven by the Stoller acquisition, which contributed $29 million to revenue and higher volumes in submarines and engineering. Operating margin increased 26 basis points in the quarter to 9.2%, primarily due to higher risk retirement on the VCS program. Now moving to our other segment. Revenues in the quarter were $61 million with an operating loss of $5 million. The loss was driven by non-cash amortization of purchased intangibles and adjustments for the integration of our accounting processes and program risk methodology at UPI as well as absorption of additional startup costs for Waggaman engineering and construction facility. We expect that these items will continue to be a drag on the other segment financial results in the near term. Turning to pension. For the full year, we are estimating a FAS/CAS Adjustment of $76 million, which is lower than our previous guidance. This is due to updated demographic data and other items, which increased by both FAS expense and CAS cost for the year, and is unrelated to the extension of MAP-21, also known as the Highway and Transportation Funding Act of 2014. We were not impacted by HATFA because of the method we select in determining the interest rate under the regulations. The regulations permit to use of current market interest rates in determining cash cost. And therefore, we believe this methodology more closely aligns with the timing of our cash recoveries with our pension contribution. For sensitivity purposes, for 2014, at the end of the third quarter, our discount rates were approximately 60 basis points below last year. And year-to-date, actual returns were approximately 7%. In addition, we expect full year deferred tax income tax expense to be in the $3 million to $4 million, net interest expense to be approximately $110 million and the effective tax rate to be between 33% and 34%. As I said before, after we complete our pension remeasurement at the end of the year, we will provide 2015 pension assumptions and sensitivities during the fourth quarter call. That concludes my remarks on the quarter. And with that, I'll turn the call back over to Dwayne for Q&A.

[Dwayne B. Blake:]

Thanks, Barb. As a reminder to everyone on the call, please limit yourself to 1 initial question and 1 follow-up so we can get as many people through the queue as possible. Vince, I'll turn it over to you to manage the Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Robert Spingarn of Crédit Suisse.

[Robert Spingarn:]

Barb, one for you, Mike one for you. I'll start with Barb on the margins. I just want to clarify the 9-plus for next year contemplates pension or not? In other words, is it a segment number or is it an EBIT number?

[Barbara A. Niland:]

It was a segment number. And it contemplated pension before all the churn with the new mortality tables, and certainly, the discount rate and things like that. So what you have to remember is some of our cost is recovered in the contracts and then SEC CAC. So as we're going through and looking at all the changes, we'll provide guidance at the end of the fourth quarter on that.

[Robert Spingarn:]

Okay, okay, that's helpful. And then, Mike, higher levels, just following the election here, we're going to get center in McKean [ph], as Chairman of Sask [ph]. And he has had a lot of focus on the carrier program, LCS as well, which really isn't your issue. How do we think about potential delays on CVN-79? And is there at some point a revenue bridge -- possible revenue bridge issue?

[C. Michael Petters:]

Yes. That's a good question. I mean, I think, the challenge for us is that -- what made us successful over the last few years has been our ability to really focus on the execution side of our business. And what you're poking at here is really what's the market risk as opposed to what's the program risk. We're going to be executing the final stages of the lead ship of the Ford-class. At the same time, that we're going to be coming through the contracting for the next ship, and we've been kind of working our way through that over the last couple of years. And the way that we've been bridging this has been with these construction preparation contracts. We really need to get to a detailed design and construction contract here. Because what will happen without that is, it will start to affect, as you point out, it'll start to affect the business base at Newport News, which then, in its own way, comes back and reflects on the program performance. So our view is, the sooner we can get to a regular order on the hill, the better things will be in terms of managing the market risk. And it's not just the carriers, I mean, it's going to be LPD-28 is in that mix, the George Washington RCOH is in that mix, LHA-8 is in that mix. All of those things are really crucial for us that we think will come through in the course of regular order process on the Hill that will mitigate that market risk that sits out there from beyond 2015. And so, we're encouraged that there are folks today talking about getting back to regular order. We've been a staunch advocate for that for quite some time. And we look forward to engaging in that process as it develops.

[Robert Spingarn:]

Okay. So just to clarify, Mike. This is beyond '15. At this point, '15 is pretty well set?

[C. Michael Petters:]

Well, I think that a detailed design and construction contract on 79 would help '15. I mean, I'd say, no, there's no doubt about that, in terms of the base. I mean, at Newport News, if you look at '16, what's going to happen in '16 is, you're going to deliver the Ford, you're going to deliver the Washington, you're going to deliver the Enterprise. So there's 3 carrier deliveries in 2016. The follow-on work to those 3 jobs is the 79 and the 73. We really need to have those things sorted out now. We know the 73 contract is -- the start is being delayed by 6 or 7 months. And so that's part of the challenge that we have. But we need to get to 79 on the contract in a big way.

[Operator:]

And our next question comes from Finbar Sheehy of Sanford Bernstein.

[Finbar T. Sheehy:]

Looking at -- I know that you've got UniversalPegasus into the other segment, is that going to be managed separately? And what synergies are you looking at between that business, Newport News and Ingalls?

[C. Michael Petters:]

Well, it's going to be -- it will be managed separately. And we have a great leadership team there in place that stayed with the company as we acquired it. The synergies that we're looking for are the back and forth between the engineers. We've already had some engineers from Ingalls support projects at UniversalPegasus where customers needed some specific skills that were resident in our shipbuilding business. I think the way to think about this is, the acquisition of UniversalPegasus opens a new channel for us to deploy capability that is pretty -- we have pretty strong capability here for shipbuilding, but that's only one channel. So the opportunity here is to use the bandwidth of UniversalPegasus with the depth of the shipbuilding talent, specifically, in engineering, to support projects and customers down the road.

[Finbar T. Sheehy:]

I mean, the way -- when you say it that way, it suggests that you have, at least, for periods of time, engineers in the shipbuilding business that are not being fully utilized. Is that so or how did that happen?

[C. Michael Petters:]

Yes, I know. I think the thing that gets lost in here is, the one thing that we are really good at in shipbuilding is we know how to develop a workforce. We are engaged in workforce development from the governors office in the states that we're in, all the way down to the deckplay through the community colleges, through all the high schools, through the colleges and universities. We know how to go do that. We know how to plan for workforce, where we have a great recruiting program, we have a great hiring program. Staffing is a challenge in the oil and gas space today. And we're bringing that competency for staffing. We're making that part of UniversalPegasus competencies now, which we think will help them, and it makes us a better owner of that business, because we bring that strength to them, and it gives them a chance to better support their customers. I don't have a single person who's sitting here on the bench and waiting to be called to go into the game. But if I know I need to send 2 people to Houston to take care of a project next week, I can manage that.

[Operator:]

And our next question comes from Carter Copeland of Barclays.

[Carter Copeland:]

Mike, a question for you on Avondale. Just a kind of update there, obviously, the exploratory work has gone on for quite a while with Kinder Morgan. And I wondered if there's a point at which a decision really needs to be made if there's a kind of critical decision point out there? And if that exploratory work has yielded anything, incrementally new or interesting from your perspective, since the last time we talked about this?

[C. Michael Petters:]

Yes. I mean, we're still engaged and nothing really changed since the last time we talked about it. Lots of alternatives are being put on the table. Kinder Morgan is a great company with a wide aperture to that space with lots of creativity in terms of ways the facility might be utilized. And so the question is, what's the best way for it to be utilized and how do we bring that to fruition? So we'll continue to engage in that and we'll keep you posted.

[Carter Copeland:]

All right. And one for Barb. Just with respect to your comment around the CapEx. Is that a shift of capital spending into '15 from '14, relative to what you -- the 3% you would call out prior?

[Barbara A. Niland:]

It is. It's just timing.

[Operator:]

Our next question comes from Joe Nadel of JPMorgan.

[Christopher Sands:]

It's actually Chris on for Joe. Just a follow-up on the Avondale question, the financial implications, can you to start to recover the human capital piece now that than naval work is done? Or do you have to wait for the completion of the Kinder Morgan study?

[Barbara A. Niland:]

We're working on that. That's really a negotiation with our customer, but that really is what we'd like to do, if we believe the Kinder Morgan, there's an opportunity there with them.

[Christopher Sands:]

And it sounds like at this point, there's no finite end date for the Kinder Morgan study, is that right?

[Barbara A. Niland:]

We were hoping to have a decision by the end of the year, that may extend a little bit.

[Christopher Sands:]

Okay. And then, Mike, one for you on the broader strategy, and you're pretty close to achieving initial goals you set out for the company, and you're now entering a period with cash flow to get much better. You've clearly showed your interest in entering adjacencies through the acquisition, but how do you think about the right capital appointment next going forward between more acquisitions or more and more return of cash to shareholders?

[C. Michael Petters:]

Well, we've continued to say from the beginning that we expect to have a balanced cash deployment strategy. And I think so far, we've demonstrated that, that's what we're thinking. And is the way you see it playing out as the way we expect it to continue to play out. I do believe that in the next couple of years, you're going to see, we're going to need to make some investments in our Navy business. And that's to support future programs that are coming on and also to retire some of the risks that we see in programs that are about to kick off. So we're investing in our own business, investing in adjacent business, returning cash to shareholders, we're going to keep that all in pretty good balance. We think that's the best way to create value for this business.

[Operator:]

Our next question comes from Jason Gursky of Citi.

[Jonathan Raviv:]

It's actually Jon for Jason. I was wondering, can you guys breakout if there was anything to quantify in terms of margin adjustment at Ingalls, what the benefit was on the LPD adjustment? And then on a related note, where do we go from here? Is empty Avondale dragging you down at all? And then the 9% margin of commentary in 2015, is that just for the ships business or are you -- can you quantify that event with everything including other?

[Barbara A. Niland:]

Okay. So on that, adjustment at Ingalls, we don't really break it down by ship or anything. So it's a combination of risk retirement on LPD-26 as well as continuing to perform better on the deferred work on the delivered ships. So that's really what that was. And in terms of the margin, the 9% is really based on the shipbuilding business, as I talked in the last call, the other segment is a services business and will have lower margins than our Navy shipbuilding business.

[C. Michael Petters:]

Yes. We actually -- the way we're thinking about this is that, if you recall 3.5 years ago, establishing the 9% target was a way for us to drive the efficiencies that we needed to create in our shipbuilding business, for that kind of business. But we expect to move this business forward as -- with an eye towards creating value, a lot more along the lines of return on investment, and return on invested capital. And so the engineering services business doesn't typically require a lot of capital investment and so the actual return on sales can be a little bit different and still have an appropriate return on investment.

[Jonathan Raviv:]

Okay, great. And then just one last one. When you guys pointed out, you talked about there being this nice working capital swing that we're seeing right now. Just clarifying your previous comments about some continued investment requirements, is that something new that AC is cropping up? Or is that just sort of steady-state requirements of the business?

[Barbara A. Niland:]

It's a combination...

[C. Michael Petters:]

Yes. It's a combination of both. I mean, if you look at the -- with the projects that the Navy is kind of putting on the table in front of us over the next 3 to 5 years, LHA-8, TAO-X, LXR future surface combatants or the small surface combatant, ORP and the continuing investment to reduce risk in the carrier construction and overhaul programs, you kind of see that we're entering a phase here where there's a lot of big programs that are going to be on the table that are in their upfront investment phase. And so, we're looking -- we're taking a look that to say what makes sense for us and how do we construct the way to engage in that across-the-board. So that's sort of the Navy investment that goes along with what we kind of typically do across the life of a program.

[Operator:]

And our next question comes from George Shapiro of Shapiro Research.

[George D. Shapiro:]

I wanted to pursue -- Mike, I mean, your goal is 9% margins next year, but effectively, I mean, you made over 9 just in the segment this quarter as well as last quarter. And while maybe pension income is somewhat less next year, you really extend[ph] with pension income and that which sounds like, Barb, you included that in the 9% number. So what do you think then gets worse the next years, is it the investments that you're just talking about, Mike? Because it sounds to me like 9% down from where you currently are?

[C. Michael Petters:]

Well, obviously, George, we are very pleased with where we are. And if you go back to March of '11 and we have written down on an envelope that this is where we would be and we've sealed it up. We would have been very, very happy to take that envelope back in March of '11. But we continue to focus on 2015 because our work here is really, while we feel good, we haven't won this game yet. We're still retiring risk on the new contracts that we have at Ingalls. LPD-26 is going very well, as I mentioned, LPD-27 is going well. LHA-7 is off to a reasonable start, the restart of the destroyer programs are going well. But all of those programs, I'd say, all those programs, particularly, the destroyer programs and the LHA-7 are kind of at the beginning of their risk retirement profile. And so we have to keep our eye focused on that. We're not going to declare victory on that. And we need to follow on work to balance that out, to sustain it. So LPD-28 becomes crucial in terms of being able to sustain our business base and sustain that performance beyond 2015. At Newport News, as I mentioned, we're a little bit -- we're kind of entering a phase here where the balance shipyard that we've been talking about for 3.5 years, we maybe starting to get a little bit out of balance with the 3 carrier deliveries in '16, and the follow-on work is not yet contracted for. In addition, the large effort that it will take to deliver the Ford, there will be scheduled risk and there will be costs risk as we go through the lead ship delivery over the next year. And not being quite imbalanced there, may give us some lumpiness in the way that Newport News looks over the next year. So we're looking at all of that, and we're trying to make sure that, while we feel really good about where we are, we anticipated in 2011 that this is kind of a stuff that we would be facing in 2015. We want to make sure we keep our eyes on that ball.

[Barbara A. Niland:]

And, George, I'd like to add, Mike mentioned, Mike is saying this is for the lumpiness there. But we've seen some great performance on NSC at Ingalls this year and with the delivery of NSC-4 and the benefits of zero production, risk retirement is all about timing and events that occur. And this year, we had quite a few good events, with the launch of 26, with the delivery of NSC-4, we did well on LHA-6 in terms of delivery. So across-the-board, you can't really look at this quarter-over-quarter, we're getting into some of those phases at Newport News, we have the launch of Warner this year. So depending on the timing of our risk retirement event and as you'll see some lumpiness in quarters, but for the year, you'll see a more solid 9%.

[George D. Shapiro:]

And let me follow a little bit, Mike, you mentioned at Newport News, you mentioned in your initial comments. So how much -- you talked about pressure there, so how do you manage that, from a perspective like how much margin risk that you're willing to take by keeping people on board, that are effectively waiting for this contract to occur? So how do you manage that?

[C. Michael Petters:]

Yes. I mean, we don't really -- we don't -- like I've said before, we don't have anybody that's sitting on the bench, waiting for the job to show up. What we have to deal with is how do you hire up to support the new job. And so the timing of the beginning of the contract, the timing of the ramp and the workforce, the managing the labor resource plan in our shipyards, that's the heartbeat of our business. And our folks have to be -- they have to be very good at that, if you want to be really good at shipbuilding. And so it's not a matter of keeping people around, waiting for the contract. It's a matter of anticipating the signing of the contract so you can begin the process of staffing to support that. The real challenge is that if you -- these things are usually timed pretty well, so that as we come off of one program, we're starting up on the next program. And so the people can move from one program to the next. This challenge that we're getting into now is that as people start to move off of the Ford and as people start to move off of the 72, as they head towards the delivery, they need to have the work to go to. And that's why we need to get that work under contract. And that's the balance that we're trying to deal with there, George. And that's how, you can get out of balance. If they have nowhere to go, then we're forced to make some really tough decisions with the workforce. But then that affects our business base, which effects our rates, which then has a program affect.

[Operator:]

And Our next question comes from Sam Pearlstein of Wells Fargo.

[Samuel J. Pearlstein:]

Can you -- my guess, Mike, just because I don't know as I know the business as well on a UPI, but just looking on what's going on in the energy markets and with the fall on commodity prices. Can you just talk about how does that ultimately play out for UPI? And then does that affect at all the Kinder Morgan discussions and the thought about what that means in terms of an alternate use for Avondale?

[C. Michael Petters:]

Yes. That's an interesting question, it's one we've been kicking around here for the last 30 days as well. I don't think you can turn on the news now without somebody talking about what their projection for the oil price is going to be. And so our obvious questions what does that mean for our business? There's a lot of macro discussion about what impact it might have on capital investment and investment in projects by the major oil companies and the major energy companies. But what we're seeing right now, with the customers that we have is, we haven't seen any real change in their commitment to the projects that we're engaged in. And in fact, the discussion over the last 48 hours about the possibility of Keystone is positive for our business. And so at the macro level, I think everybody is watching that and trying to figure out how do you count for that and how do you value that. But business is local here, and our local businesses are still fully engaged. I'll remind you that our business at UniversalPegasus is not just in Houston, it's also in Calgary and it's in Aberdeen. And so the work that we're doing there is high-quality work, and we believe that there will continue to be customers for high-quality engineering work in this space.

[Samuel J. Pearlstein:]

And then I know you talked about a balanced capital deployment before. So I just look at the relatively little share repurchase activity this quarter, you did still have remaining authorization before it got extended. And so I guess, how should we think about how you look at share buybacks? Should you be in the market on a regular basis, on a quarterly basis? Is it more opportunistic when you think the share count or the shares look attractive? How do you think about that?

[Barbara A. Niland:]

Well, I think it's a matter of both. So when we first got our first authorization, it was really anti-dilutive. As we're going forward, we're doing a combination for anti-dilution. We're looking for some opportunistic buying also.

[Samuel J. Pearlstein:]

Okay. If I can sneak one more in. Did you have any retentions, benefit or release on the NSC-4? Or is that too small to ship for us to kind of see that?

[Barbara A. Niland:]

We did -- all ships have retention. But we just delivered that, and so we'll have a little benefit there.

[Operator:]

And Our next question comes from John Godyn of Morgan Stanley.

[John D. Godyn:]

I wanted to, Mike, follow-up on the idea of balanced capital deployment. And what I'm getting at here is that a lot of the other defense companies have maintained very imbalanced capital returns plans. Ones that favor shareholder returns pretty aggressively, and it's worked out very well for the stocks. So could you just kind of help us understand why is that balanced approach better?

[C. Michael Petters:]

Look, I think that everybody is in a particularly unique situation. And I'm not going to suggest that a balanced approach that we are taking is better than, maybe, return to shareholder approach that any other company is taking. Because it does depend on what you -- where you are in your life, and it depends on where you are in terms of your capabilities and what you see as your opportunities. We believe that we have tremendous capability in our business to go and do things in not just shipbuilding, but in other places. We just believe that. And the challenges that whenever companies try to do this, they've walked into other markets, and they say, here we are, give us all the work. And that never works out very well. And our view is that if you can go and be supportive of somebody who is already successful in that business and they can tap into your strength, which are, as I mentioned before, our ability to build to create workforce, then you have an opportunity to create value that otherwise was not there. We are still working our way through the process of increasing our dividends and increasing our share buybacks. We're balancing that with our opportunity, try to open channels in other markets. And I think that if you really go behind the curtain in some of what these other folks that you're talking about are doing, you'll hear them talk about other markets as well. They talk about it in terms of international or applying their technology, just a -- specific technology to a specific market. We're not nearly as big as those guys are, but we do have some pretty strong engineering talent, we're trying to find a way to deploy that. In the end, it's a capital-intensive -- shipbuilding is a capital-intensive business. So it consumes, probably more capital than some other businesses. And but it requires a pretty strong engineering contingent to go forward. And so our view is and our task is to create -- is to achieve the full potential of this business, and we think balancing that is a way to do it.

[John D. Godyn:]

Got it. Very helpful. And when we think about the story over the last few years, it's just been a tremendous margin expansion story. And it really speaks to your execution and the execution of the employees. I think investors are a little bit at sort of a transitioned point here, kind of thinking well, what's the next leg? If there isn't more to go on margins, is there a revenue opportunity that we're not seeing? If it doesn't sound like an aggressive capital returns plan is really the direction the team is going. How do you think about the kind of key value drivers over the next few years from here?

[C. Michael Petters:]

Well, I would also tell you, it's not just the investors that are talking about that. I mean, that's the discussion that we're having as well. And I'll go back to my channel discussion, if you are in any business and you had a channel where -- and your business was focused on one particular market, one particular channel, and the outlook in that channel was, maybe, flat or not growing at the rate that you think you need to have to create the value or achieve the potential of your business, you would try to find other ways to achieve that potential. And so that's kind of the way that we're working on this. What I would suggest to you, though is that one of the reasons we said 2015 and not 2014 was that we recognized that we still have risks to retire in our core business. And so as we're having these discussions, we're balancing that with the risks of the new contracts that we are executing on at Ingalls and the risk of a lead ship delivery at Newport News. We're balancing all of that and where do we go from 2015? That's the discussion that we're having as well. And as we get more insight into that, we'll bring you along. At this point, we think opening up another channel for our capability makes some sense. But we also want to bring, in a balanced way, we want to bring our employees and our shareholders along with us.

[Operator:]

And our next question comes from Myles Walton of Deutsche Bank.

[Myles A. Walton:]

The cash quarter earning, let's start there for a second. Barb, I think the fourth quarter has been your strongest cash quarter for ever. Any reason why the fourth quarter won't be yet again the strongest cash quarter of the year?

[Barbara A. Niland:]

Well, we had couple of interesting things happened during the year. So one, we were able to recover some of our rates from Katrina-related matters, so we really had a good second and third quarter. And I look at the fourth quarter, we are usually have a little seasonality with the cash in the fourth quarter. I would expect it to be similar. But I will caution you that it's all about timing in terms of invoices. So December 31, be anxiously checking the bank account to see where we are, because if we missed by a day, it goes into 2015. So as long as the payment cycle continues at the past, as it has the last few years, we should see similar pattern.

[Myles A. Walton:]

Okay, great. And it looks like it'll be healthy positive working capital, which -- for the quarter, which puts you in shouting range of neutral for the full year, which is pretty darn good. And I wanted to touch on the pension, Barb, because I think there's certainly, the MAP-21, highway bill extension and your prior way of calculating it, I guess, it's not going to have an impact on you. Can you just give us confirmation that it's not going to have an impact on you on a go-forward basis, #1? And then also any sensitivity on mortality tables?

[Barbara A. Niland:]

Okay. So I said I wasn't going to give anything -- any sensitivities on mortality tables or anything. We're coming through all that. And one of the reasons is, we want to compare those mortality tables to our actual experience. So we're doing a much bigger deep dive on the mortality tables. Now as far as not having -- the MAP-21 not having an impact, there is 2 ways you can do all your calculation for your cash recovery, we selected a little different method that was called the method A, where we used the current market interest rates, because that more closely matches with our cash recoveries with our contributions. So, I really want to give you more color at the end of the year, once we complete all the analysis on that.

[Myles A. Walton:]

Okay. And then last one, Mike. So if you come to -- you got a couple of earns in the fire with respect to the expansion and to adjacencies. If you come to an agreement with Kinder Morgan on the JV, is there a scenario where what you've created in the other segment can almost be an equity contributions to JV and alleviate some of the -- I don't know, but the lack of clarity on the business of expanding into that market, and maybe put in into it a separate shell, where you tap in to your desire to develop the workforce but you don't necessarily take away some of the attention from the core business?

[C. Michael Petters:]

Good question. I guess, without talking about any specific possibility, I would say that we're considering all kinds of alternatives for that asset. I mean, the Avondale asset, in terms of its location and its capability and the ability to track workforce there is a tremendous asset. And it's incumbent upon us to try to find the best way to get full value out of that. And so I'd say, nothing is off the table at this point.

[Operator:]

And our next question comes from Pete Skibitski of Drexel Hamilton.

[Peter J. Skibitski:]

I apologize, I got on late. So if this is already asked, I apologize. But, Mike, any update on SSP and X content. I know GD is progressing along there, I'm just wondering if you guys are generating any revenue on that program? And if not, when we might expect any kind of meaningful content for you guys?

[C. Michael Petters:]

Well, the construction program starts in 2021, and so design work is starting to ramp up at this point. And I'm not exactly sure of what not being an account. I'm not exactly sure what meaningful means. But we're engaged in a project and we're engaged with the folks at General Dynamics. And we're engaged with the Navy on what's the best way ahead to make that project as affordable as we can make it. Because it has a major impact to the overall volume of other programs. And I think that, that's -- our interest is in continuing to invest in a way and support in a way that will continue to drive the cost of that program down.

[Operator:]

At this time, I see no further questions in queue. I'd turn it back to you, Mr. Petters.

[C. Michael Petters:]

Well, again, thank you. We're very pleased with where we are, in terms of our path to efficiency and performance in 2015. We've highlighted today some of the market risks that sits out there, but we're encouraged by the path that we see towards regular order. And frankly, what we've been doing for the last couple of years sets us up very well for positive outcomes, should regular order breakout. And so we're really encouraged by that. And we've also been pleased with the acquisition that we've made, both Stoller and with UPI. The integration of those continues, and we continue to move ahead. Our balance cash flow deployment strategy, we think makes a lot of sense and is the best way to create more value in this business. So we appreciate your interest this morning. And we look forward to seeing you. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.