Good day, ladies and gentlemen, and welcome to the Q2 2013 Huntington Ingalls Industries Earnings Conference Call. My name is Catherine, and I will 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, Vice President, Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to the Huntington Ingalls Industries Second 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 fact are considered forward-looking statement 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 huntingtoningalls.com and click on the Investor Relations link to view the presentation, as well as our earnings release. With that, I'll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. I am pleased to report Huntington Ingalls Industries results for the second quarter of 2013. Today, we reported sales of $1.7 billion, slightly down from last year, and diluted earnings per share of $1.12, a 12% improvement over the same period last year. Pension-adjusted earnings per share was $1.36 for the quarter, compared to $1.24 last year. As expected, our segment operating performance continues to improve. Second quarter segment operating margin was 8.1%, up 70 basis points from 7.4% last year. The margin expansion was driven by improved operating performance at Ingalls and risk retirement at Newport News. We received $5.3 billion in new business awards during the quarter, including contracts for the construction of 5 DDG-51s and the inactivation of Enterprise, resulting in a backlog of $20.7 billion at the end of the quarter. Now before I address our major programs, let me make a few comments on the defense budget and sequestration, but in reality, not much has changed since our last call in May. While there has been some progress on both the authorization and appropriations bills in Congress, it is not clear whether these bills will be passed in normal course or at what level Congress will support the programs included in the budget request. While our views regarding the implications of sequestration remain unchanged, if appropriations bills are not passed before the end of the current fiscal year, we may see a replay of last year's process that resulted in an extended continuing resolution. And our team continues to be engaged with our elected representatives to ensure that all parties understand the implications of any potential decisions. So now, I will hit a few highlights of our major programs beginning with Ingalls.…

Thanks, Mike, and good morning to everyone on the call. Please refer to the slides posted on our website as I review our consolidated and segment results for the quarter. Turning to the financials on Slide 4 of the presentation, second quarter sales were down 2.2% from the same period last year, primarily resulting from lower sales in the amphibious assault ships, partially offset by higher sales across most of our other programs. Second quarter GAAP operating income was $116 million, up 9.4% over 2012. Pension-adjusted operating income was $134 million, up 7.2% over the same period last year. GAAP diluted earnings per share for the quarter was $1.12. Pension-adjusted diluted earnings per share was $1.36, up 9.7% over 2012. The increase was primarily driven by additional risk retirement on the VCS and NSC programs, offset by lower volume on amphibious assault ships and the receipt of $7 million for a contract dispute resolution with a private party in the same period last year. We were free cash flow neutral for the quarter, mainly driven by $260 million -- $269 million of discretionary qualified pension contribution, which completes our planned pension contributions for the year. Cash for 2013 is heavily weighted towards the second half of the year and, as I've said many times, is all based on timing, with timing of receipts and ship deliveries having the biggest impact. Capital expenditures for the quarter were $25 million, down $5 million from the second quarter last year. For the full year, we continue to expect capital expenditures to be in the mid 2% to 3% of sales range. During the quarter, under our share repurchase program, we purchased approximately 460,000 shares at a cost of $26 million. Additionally, we paid our third quarterly dividend of $0.10 per share in June.…

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

[Operator Instructions] And please standby for your first question, which is from the line of Joe Nadol from JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Mike, just on the DDG award, congratulations on that and that's actually up very nicely for quite some time. I heard you mention that it's a key driver of getting to the 9% segment margin. Just on that point, how do you think you were able to submit a bid that was -- the low bid, the winning bid? When you think about productivity, labor productivity and the various costs and the margin aspirations of both companies, now that the deal is done, it's signed, you've won, how can you help us get comfortable that, that really is going to be a 9% plus margin contract over its life?

Well, there's -- I mean, there's a lot that goes into pricing an opportunity like that. I would kind of draw your attention back to -- since the beginning of 2008 when Barb and I first started working with all of the businesses in shipbuilding. We focused very hard on making sure that we understand risk registers and risk retirement and a very -- and creating very disciplined and deliberate processes for that. Irwin and his team have extended that with pretty significant restructuring of the business in terms of the different parts of the cost, what are the things that we're spending money on and why should we be spending that. They made some pretty substantial changes in the cost structure of the business. It's taken us a few years to get through that, and we brought all of that to bear into this proposal. We are very excited about the win. It's obviously a testament to the work that we've done, but we recognize that it's only the beginning. Now we have to go and execute on it. And we're excited about the chance to go do that. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just on the Block 4 contract, you said you're still expecting it this year. Do you mean this fiscal year or this calendar year? And can you give any further sense on the level of confidence and conviction that this -- just given everything happening in Washington, this really is going to happen on schedule?

Yes. I probably can't do any better than you can, Joe. I mean, we're working very hard with the Navy. The Navy wants to go to contract. Obviously, there's a fiscal process and a federal process that they have to work their way through that neither the Navy nor the company have complete control over. Given all of that, I think the discussions have been very productive so far. And our expectation is if the federal piece of it will clear out of the way, the Navy and the company will find a way to get this done. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: And you mean in the calendar year?

Yes, calendar year, right, calendar year. I think -- you have to think about, as I mentioned in my comments, the fiscal year ending at the end of September, the politics and where the authorization and appropriations bills are, the prospect for another continuing resolution, all of that, that probably overwhelms the constructive dialogue that we're having with the Navy over our future contracts. It's exactly that. It's been very constructive, and we're moving ahead. But this is all going to be driven by externals.

The next question comes from the line of Carter Copeland from Barclays.

Mike, I wondered if you could expand a little bit on the comments you made on commercial shipbuilding and that comment you made, where -- your comment about the right pricing and risk structure to reenter that market. Can you expand on what that actually would be?

Well, I was actually surprised this wasn't the first question, Carter. We've been pretty clear about our reluctance to enter the market here on the commercial shipbuilding side. And we're adamant that we're not going to do this on our own. We're going to do it with a partner that understands that business. But having said that, a lot of our experience in the commercial shipbuilding was driven by our attempt to do international commercial shipbuilding. Especially, the team at Newport News back 15 years ago was trying to do that. Jones Act shipbuilding looks to be a little bit different in terms of both need and pricing. And so after saying we're not going to go in that by ourselves, we're at the point now where the demand for the ships means that we need to go take a look at this. We have committed to the workforce at Avondale that we're going to turn over every rock that we can to find a way to redeploy that asset. We are very disciplined about how do we price contracts and how do we establish risk registers before we go into it. And we're going to go turn this rock over and see if there is anything under it. We're not backing away from our requirement for a partner. We're not backing away from our requirement for a sustainable market. We have gone back and revisited all of the challenges that we had in all of our commercial shipbuilding exploits in the past 20 years. Given all of that, if we can navigate a way through this in something that makes sense, we'll come forward and tell everybody that we did that. Short of that, we won't be doing commercial shipbuilding. So that's the -- we have an obligation, I think, to go look and see if we can create some value here. And we're going to do that in a very deliberate way in the way that we've done that across our whole business for the last 5.5 years.

And one for Barb, I wondered if you could tell us what the gross favorable adjustments were in the quarter and just some color on the risk retirements you called out on Virginia-class and NSC, what that related to, if it was milestone-based or visibility on overheads or labor rates or -- any color would be helpful.

Sure. So for the quarter, the favorable cumulative adjustments were $55 million. So they were primarily driven by both Virginia-class and CVN-71 and also NSC. And for Virginia-class and 71, it was a combination of performance -- favorable performance, rates and completing some change negotiations. And on NSC, it was milestone driven.

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

Barb, can you just clarify what you meant when you said some changes to the pension plan and how that's going to adjust to your FAS/CAS this year, just -- and thinking about the discount rate being up, call it, 100 basis points here today, what does that pension change mean in terms of the variability going into next year?

Okay. So actually, it wasn't pension. It was a postretirement benefit that I was talking about. And what we did is we've changed to a third-party provider, and we've also capped our monthly contribution for our post-65 employees. And so essentially, what you'll see -- or you can actually see it on our earnings release. You'll see that our postretirement liabilities were reduced and then our FAS/CAS -- net FAS/CAS Adjustment will go down for the year.

Okay. And then, Mike, can you talk a little bit about some of the stuff that's been out in the press about the number of carriers in the fleet. I know it would take time. But just trying to think through if we were to reduce the carrier fleet and some of the overhauls that you have in the pipeline become decommissioning, how long would it take for some of that to even start to affect you if they were to go down that path?

First of all, I think this is a debate that's always going on. Sometimes, you get to see it more visibly at times like this. But even when carriers are not at the forefront of the headlines, a discussion is always going on. And so there are -- there has always been and always will be a discussion about how many do we need and what do we use them for, what's our requirement to have them deploy, then what's the up-tempo and all of that stuff. It's a very dynamic process. The tight fiscal environment that we find ourselves navigating through probably exposes more of that discussion than you might be used to. And so I would say that it's definitely kind of a steady drumbeat that we engage in all the time. Then the question is -- okay, if you hypothetically went and try to say we're going to change the number to something else, the real question is, how are you going to do that? Are you going to continue to use the ships that you have until their service life is extended? Are you going to take them off-line and tie them up at piers and have them be dead asset sitting at the pier? There's a whole host of decisions that would have to be made there that really then drive the way that the industry would support it. From our standpoint, we're pretty solid in our conviction that the right way to do this would be, first of all, keep the present numbers up and not do this at all. That's our preferred option. And I think that makes the most sense for the nation, not just the company. But if you wanted to go down a path of what are the options here,…

The next question is from the line of Doug Harned from Sanford Bernstein. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: First on Newport News, I'm interested in understanding CVN-78. That's, I believe, around 2/3 complete right now. And it would be helpful if you could describe, as you look forward, what does the risk profile look like for the remainder of that carrier. And how does that -- how did those risks impact your timing of activities on CVN-79?

Well, thanks for the question, Doug. We are not quite 2/3 of the way through that ship. And we're heading for our launch later this year. And as you may know, once you launch the ship, that's your opportunity to begin to test the whole ship. What's encouraging is that the ship is further along at this point in construction than the last limit's class was. And so we're excited about that and what that means for us in terms of the basic testing profile that we see. The challenge for us is that we will be -- it is a lead ship. And so we'll be testing all of the new stuff on that ship over the last couple of years. The impact of that to the 79 is -- it's interesting. We all have the dilemma. I think, Congress is even wrestling with the dilemma of how do you go to a contract, a risk-adjusted contract, for the next ship when you haven't finished the first one. I think our -- I think we also are in a place where it's a question of how do you go and price the next ship when you haven't finished the first one. All of that is swirling in the debate. But I would tell you that -- emphatically, that we need to get to that contract and get underway because what we're doing now is we're piecemealing the contract. We're doing a little bit of -- we're doing some advanced construction, and we're doing that one phase at a time. That really limits our ability to energize the complete supply chain. And so if you decide that you want to hold off on signing some sort of detail design and construction contract and so you know when all the risk is going to be, what you end up doing is you end up incurring more cost than the risk might have been. And so I think we're at that point that we need to go ahead and get that contract done. Now having said that, it's an environment where the contract is not necessarily the driver. The other pressures in Washington may end up being the driver. And that's part of how we discussed this project with the Navy going forward, what's the right thing to do and what makes the most sense. We're having good discussions with the Navy today, and we're optimistic about where the program is going to go. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: But in those discussions, are you closing in on what the contract structure may look like in terms of, say, fixed-price incentive? Or would it continue to be cost plus? I mean, how does that look right now?

Well, without going into the inner workings of the negotiations or the discussions, our expectation is that this would be -- as a second ship, would be a fixed-price incentive contract. The question about contract type really is a question about how much risk is there and how do you put your arms around the risk. And we think we can put our arms around that in a fixed-price incentive contract. But then it's a question of, can you fund that? And that will be part of the discussion. Contract type may be a way that we end up mitigating risk, but I'm not expecting that right now. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: And if I can, just a quick one, on the LPD-25 issue, if we see that delay builders trials, what impact does it have on the LHA-6 builders trials? In other words, are we likely to see some -- this pushed a little farther into next year potentially and that could change the cash flow profile of this year and next year?

Yes. There's no question that these trials now are mutually supportive. I guess it's the way I would put it. We need to get through the LPD-25 trial. And I'm -- I just walked that ship last week. And I'm very optimistic about where that program is going to be and how it's going to support us. But there is a little bit of a follow-on effect because the trials team at Ingalls is going to be an incredibly busy team from now until the end of the year to get 2 builders trials and 2 acceptance trials off. That's our plan. That's the way we got it laid out. It is our expectation that LHA-6 probably doesn't deliver until the first part of next year. And so -- and I think we talked about that last time. That's still our expectation. It's -- but we are fully expecting LPD-25 to deliver, get through its trials process here in third quarter and deliver in fourth quarter.

The next question comes from the line of Peter Skibitski from Drexel Hamilton.

Barb, on your updated pension -- or, I guess, your updated net retirement measurement, just directionally, are you still expecting the net pension adjustment to decline in 2014?

Well, as I say all the time, it depends. When -- we look at everything. The rising discount rate is good. And it would increase our funding status, which is a good thing. And it would decrease our pension benefit obligations. But you got to hit your returns. And I think that right now, we can look that there will be a favorable impact. But let's see what happens at the end of the year.

Okay, great. And I guess, maybe one for Mike. Mike, on the commercial construction, it sounds like you have done some homework already, but -- and not to bring up a competitor. But NASSCO really seems to have found the right approach in commercial shipbuilding. Is there anything you guys feel like you could learn from those guys given the success that they've had if you do go forward with that initiative?

Well, I mean, Fred Harris and his team at NASSCO are excellent shipbuilders, and I have high regard for Fred as a leader. And he's been working this problem and project for quite a while at NASSCO. And they've done very well, but they've kind of done it the way that we're talking about. They've had -- they started with a partner, and they found a set of reliable customers in a sustainable market. And they've been able to be very successful in that. We understand that it's beyond that. It's about how -- what is it that you need to do? Where did you trip up before? And we -- I lived through the experience of a nuclear shipyard trying to do commercial shipbuilding. I've got a long list of things not to do out of that experience. Avondale has a history of having been successful in that business in the past. And the question here is, can you really put something together that makes sense? We're obligated to go look at it. And I've told you what the requirements will be. If we come back with something, it will mean that we've met all the requirements and that we're optimistic about the success. So that's -- we're in the business here with no surprises, and so we are doing that.

The next question is from George Shapiro from Shapiro Research.

Mike, I just wondered if you could talk through a little bit more detail when you mentioned about the 1000 doing aluminum versus composite. And then you've made some comment, assessing utilization of facility, which suggests that maybe, there's potential risks there. Could you just be a little bit more thorough on that?

For sure. Our plan for Gulfport has been to provide composite capability to the U.S. Navy. It's a unique facility, really one of a kind. We have said in the past that as the Pentagon moves to 80% solution for its programs, that we were unsure whether Gulfport would be part of that 80% or not. I think the Navy, by this award on Friday, has made it pretty clear that at least for this program, they have decided to move in another direction. And so we're now taking a look at what's the future of Avondale...

Gulfport.

I'm sorry, future of Gulfport. And that's part of what we have to do now that this decision has been made. We'll be coming through that here in the third quarter and be having discussion with you about it. In the meantime, we have work there to do on 1001 that will be executed over the next year or so.

Right. We also have some composites that we're doing on LPD there.

Right, yes. We do some composite superstructure work on the LPDs 26 and 27.

And ballpark, how many people work at that facility now?

I believe it's around 400 or 500.

Okay. And then one quick one for you, Barb, you'd mentioned with the LPD-25, they would be charging anywhere from $2 million to $15 million. Is there any way...

But I also mentioned we're doing everything we can to mitigate it.

No. But my question was, if there is any way to define what would be $2 million versus what would be $15 million because it's a pretty wide range.

It -- really, it will depend on getting to the BT and AT and then what the trial cards are and how much work we have to do. And what we've done is kind of the worst-case scenario to get to the $15 million. And I'm sure we won't get there, but we're working our way through it. Mike just gave me the eye on. I'm sure we won't get there. But we're trying to mitigate all the costs. And we've looked at every aspect of it. And that's our best range right now.

George, let me just add that when we encountered this challenge, our first estimate was that we would be in the dock 3 to 4 weeks. We were in and out of the dock in 9 days. And so I think that the team at Avondale that is working this is -- I couldn't be more proud of that team and what they have done. They recognized the importance of getting the ship to sea and getting it out there so we can get it finished and get it delivered. And I'm very proud of what they're doing, and I can assure you that they are highly energized to get this done.

The next question is from the line of Noah Poponak from Goldman Sachs.

Barb, could you quantify what the pension change means for the pension adjustment in the back half of the year and -- or just going forward? And can you tell us what the plan asset return is year-to-date?

Year-to-date plan asset, well, through the end of the quarter, the plan asset returns were only about 2%. But the markets have been fluctuating pretty much. But they've rebounded in the last couple of weeks. So we're looking at 5.5% return. So we're looking for the rest of the year to continue to go in that positive direction there. As far as quantifying the FAS/CAS Adjustment, for the year, our forecast is approximately $70 million. And that reduction -- I think the last time, we said $85 million. And that reduction is because of this change in our postretirement benefit.

Got it. And then Mike or Barb, I wondered if you would just give us your latest thoughts on capital deployment. You've started your programs, obviously, plenty of risk wood left to chop, if you will, but maybe just what you're thinking for the back half or longer term sort of when you see yourself arriving at a place where you can do more.

Well, obviously, as we've said from the beginning, the delivery of 25 and -- LPD-25 and the delivery of LHA-6 are the #1 issues in front of us. And so this recent thing with LPD-25 with the propeller issue is just an example of until they are gone, we will be focused on getting them gone. And so that's kind of first and foremost. Our approach is to be pretty balanced at this point, looking for ways to deploy our cash and ways that might create some value. But also, we've began a dividend program a year ago -- or 3 quarters ago anyway that's a little bit earlier than we might have thought. I think if I had to guess it back in 2011 when we might pay a dividend, I would have suggested it would have been after LPD-25 and LHA-6 are delivered. And so I think we've done a fairly reasonable job of managing and retiring the risk along the way. We're very thoughtful about investments we make in the business. And we are -- we have had some success in things that are in our sweet spot in terms of being near adjacent. We've done some DOE work with -- at Newport News at Savannah River that has been really good for us. And so as we think about cash deployment going forward, we think about, are there ways to create more value for this business in things that we know how to do maybe for other customers? The opportunity at Avondale gives us a doorway to -- some kind of redeployment of Avondale creates a doorway into what I think will be one of the key drivers for our national economy in the energy and energy infrastructure business. And so we're evaluating all of that and thinking our way through what's the right way for us to engage. Our engagement is going to be very deliberate, very disciplined and very thoughtful. If all we wanted to do is go out and chase a lot of revenue, we would have already done that. And the fact that we haven't done a lot yet should indicate to you that we have a very deliberate process for this. And so that's our approach, and we plan to get through the ship set better at Avondale and move on from there.

The next question is from Bill Loomis from Stifel. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Looking at -- on LPD-25, so if you -- let's say, no more issues and it gets delivered before year end and then a same question on LHA-6 next year, when do you close out the books from that? When does it stop becoming a drag on overall margins at Ingalls?

Yes. The majority of it is complete at that point in time after delivery. But you'd still have to go through a warranty period. And so -- but you shouldn't have significant changes after that. When I would say material, you'll have potential changes, but there shouldn't be material changes. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So by -- with LHA-6 being delivered, all things going well by the end of the second quarter next year, the second half should be pretty easy comparisons at Ingalls then?

I'm not sure I know what you mean by the question. But we -- what we -- the way the business works is we've got to let our new contracts mature to the point where they create the sustainable rate of return. And we've got a lot of new contracts in Ingalls right now. And next year will be the year that they will be maturing. And that's why we said 2015 is when we get to our -- what we would say is our run rate of 9% in each of our business unit. The big challenge at Ingalls, besides the risk retirement of these 2 ships in the front end, the maturing and the successful execution of the -- and starting really of the DDG -- the new contracts and the maturing of the 113 and the 114, success on the LPDs 26 and 27 and LHA-7. The real issue for Ingalls is going to be, what's the follow-on in the amphib business? Where do we go from here with the LPD line? Where is the LHA line going to go? What's going to happen with the LXR? All of that is really about what's the base of work and sustainable base of business at Ingalls beyond 2015. And so that is really a major focus of our engagement today with the Pentagon. It's, "Let's get to a place where we have a sustainable strategy -- sustainable national strategy for amphibs." And that's a priority for us. William R. Loomis - Stifel, Nicolaus & Co., Inc., Research Division: And then just last on LPD-26, -27, again, you talked about it in the past. But how would you characterize, assuming no setback, obviously, the margins on those programs as they mature, do you -- is that supportive of the 9% overall goal?

Yes. And I think that we're -- we know we have to get off to a good start that we can't make up bad starts with good finishes on ships. And so there's -- you have to get a contract you can execute. You have to get off to a good start, and then you have the finish. And we've got a contract that we can execute. We're off to a good start. It's -- we've got a lot of work to do over the next 18 months or so to put those ships in a place where we can finish them.

The next question is from Jason Gursky from Citi.

It's actually Jon Raviv on for Jason. Just a quick question on the Avondale -- sorry, on the DDG winning bid, how much of Avondale closure was included in that bid? And if the bid did include the Avondale closure cost, to what extent is there potential upside if you redeploy the asset instead of closing it?

Well, we're not going to go into all of the pieces of the bid. Let's just say that the bid contemplates -- I guess, the best way to put it is that we are to get this right. We are confident that we can execute those bids that we signed the contracts for, whatever the outcome at Avondale is.

Okay, fair enough. And then just my second question is, Mike, you've talked a lot about flattish sales over the next few years. You never really touched upon it today just yet. What does the DDG loss sort of say to you in terms of sales for 2015? Right now, it looks like consensus is still looking at flat. And I'm wondering what the sensitivities are there?

Yes. I think we're still flat. I think that when we put that stake in the ground back in 2011, our point was that the business is not expanding and -- but the margins are. And so I think that's still our point. The business is not going to expand on the top line but the margins will on the bottom line.

The next question is from Brian Ruttenbur from CRT Capital.

The questions I have a lot of them have been hit on. But the operating margins in the quarter, do you see a period x some minor charges where you would dip below these levels in terms of operating profitability?

I know I said this last quarter about Newport News, that their margins weren't sustainable in this quarter. They came in pretty close to last quarter. And I'm going to repeat myself here the 9.8% segment margin in Newport News is probably not sustainable. So you will see that come down more in the lower 9% or 9% range. So I think that's what you'll see there.

Okay. And then what new bids should we be looking for that you think that you're going to be competitive on, that you're looking for over the next 12 months? And do you see that there's going to be delays because of sequestration or anything else happening in Washington because of those upcoming bids?

Well, I'd say that the Washington scene is it is well -- has been well described by lots of other people. What I would say is that our focus here is get Block 4 contract done for submarines, get the CVN-79 contract done for the carriers and continue to work on a path ahead for the amphibs. That's our business. That's the heart and soul of what we've got to get done. And that's what our team in Washington is very focused on.

And I would add, Mike, it's a little smaller with NSC-7.

NSC-7, we've got a long lead for that. We've got to get the contract and then work our process through for NSC-8.

Okay. And then last quick question on Avondale, how much capital do you have in mind that you would be putting into Avondale? Is there a cap, $100 million? Or do you think along those lines?

Well, we certainly don't think along that line. Avondale is a pretty capable manufacturing facility already. If we have to do anything, it would depend on the customer and the opportunity, and it will be very small. We expect it to be very small, very small meaning a lot smaller than the number you use.

And the next question is from George Shapiro from Shapiro Research.

Barb, I just wanted to follow up. The net receivables are up like to $200 million from the end of the year, and I know that sequentially, they're actually down a little bit. But with the flat sales, I mean, is there one particular program that's causing the receivables to be that much higher? Or if you could explain a little bit more.

Sure. LPD-25 is driving that, and LHA-6 are -- is driving it. So what you should see once we deliver those ships, you should see an improvement there.

So what kind of -- given that LHA-6 looks like it won't deliver until next year, I mean, where should we expect this cash flow to wind up the year? I mean, will it be like negative $390 million year-to-date on a free cash flow basis?

Yes. And what are usually a cash [indiscernible] through the first half of the year and turn that around the second half of the year. And these are my expectations. And you have the remember that we made a bigger cash contribution to pension this year than we did last year. And I'll get back to what I always say. It's really just timing for us. So we're watching everything very closely.

Okay. And then just one other -- if I again look at the numbers, it's probably about 20% of Ingalls sales that's 0 margin. At this point, it would sort of imply the underlying margin is better this quarter. It may be 6.5% or so. So Mike, are you still comfortable that by 2015, effectively, that 6.5% gets to 9% just based on the maturation of some of those programs?

I'm very comfortable that we can get to 9% by 2015. I'm not sure that I would completely agree with all the math that you've done. But yes, I think we can get from where we are to 9% in 2015. The team is challenged. They understand the challenge. They're working that very hard. And I'm very proud of the progress they've made, and I'm excited about where they're going.

The next question is from Darryl Genovesi from UBS.

I'm just wondering, your services business is up 20% this quarter. It's up like 16% year-to-date. And so you called out the Montpelier repair work. But I mean, just kind of wondering what the outlook is from here and now that -- I mean, is that -- I mean, I guess should that be a big headwind for America? That was the one item that you guys have kind of called out as potentially being impacted by the sequester. And what we've seen is double digit growth so far this year. So just any color there would be helpful.

All I would say about that is it's really project by project. And we have some unique capabilities. And when in that sort of -- in that side of the business, when that unique capability is called on, we are there to answer the call. And so I think that a couple of times, we've been called on here that's kind of, I would say, out of the ordinary.

I'd now like to turn the call over to Mike Petters for closing remarks.

Well, thank you, all, for engaging with us this morning again. We are very proud of the quarter. And we're very proud of the team and the energy that has gone into the business, not just in the last quarter, but really since we spun the business off 2.5 years ago. We've made great progress. We've got more work to do, but we have the right team in place with the right focus to go get things done. And we look forward to continue to engage with you in a very transparent way to let you know all the things that we're thinking about. Thanks again. And we'll see you around the street.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and have a very good day.