Good day, ladies and gentlemen, and welcome to the Huntington Ingalls Industries Second Quarter 2016 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Dwayne Blake, Vice President of Investor Relations. Sir, you may begin.

Thanks, Kyla. Good morning and welcome to the Huntington Ingalls Industries second quarter 2016 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer; and Chris Kastner, 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 laws. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also, in their remarks today Mike and Chris will refer to certain non-GAAP measures, including certain segment and adjusted financial measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website. We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at HuntingtonIngalls.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I’ll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. We released second quarter 2016 financial results this morning that reflects strong overall operating performance driven by program execution at Ingalls. So let me share some highlights starting on page 3 of the presentation. Sales of $1.7 billion were down 3% from last year, while diluted EPS was $2.80 for the quarter compared to $3.20 last year. But note that last year’s EPS included a benefit of $1.80 per share for an insurance litigation settlement and a goodwill impairment charge of $0.96 per share. Free cash flow was $121 million, and we ended the quarter with approximately $850 million of cash on the balance sheet. We received $900 million in new contract awards, resulting in backlog of approximately $21 billion at the end of the quarter, of which $13 billion is funded. Regarding activities in Washington, House and Senate conferees have begun the process of reconciling FY2017 Defense Policy Bill and measured progress is also being made in the markup before consideration of respective appropriations bills. We are encouraged by the strong bipartisan support for Navy and Coast Guard shipbuilding programs in the various committee markups and bills, so remain concerned about the prospect of a long term continuing resolution as well as the implications of returning to a sequester top line for defense spending after the two-year Bipartisan Budget Act of 2015 ends. Given the Navy's firm commitment to funding the higher replacement program, a sequester top line would create significant funding challenges across the Navy's budget that could severely impact a broad array of shipbuilding and ship repair programs. We will continue to be vocal about this situation so that all stakeholders are aware of the implications to HII and the shipbuilding industrial base. Now,…

Thanks, Mike, and good morning. Today, I’ll review our second quarter consolidated and segment results. But before I do, to make the comparisons clear, let me remind you of a couple of non-recurring items we adjusted for in the second quarter 2015. In the second quarter 2015, we received $150 million in cash for an insurance litigation settlement. As a result of the settlement, Ingalls’ revenues declined $13 million and operating income increased $136 million. Additionally, in the second quarter 2015, we took a $59 million goodwill impairment charge in the other segment. Where applicable, the numbers I discuss today will be compared to the adjusted second quarter 2015 numbers. Please refer to the slides posted on our Investor Relations website for more information. Starting with our consolidated results on slide 4 of the presentation, total revenues in the quarter of $1.7 billion decreased $58 million or 3.3% than the second quarter of 2015, driven primarily by lower volumes at Newport News. Segment operating income in the quarter increased $18 million to $184 million and segment operating margin increased 138 basis points to 10.8% from the second quarter last year. Total operating income in the quarter increased $25 million to $217 million and total operating margin improved 184 basis points to 12.8%. These increases were due primarily to strong operating performance at Ingalls and the favorable FAS/CAS adjustment. Turning to slide 5, cash from operations were $169 million in the quarter after we funded the remaining $114 million of the planned $167 million discretionary contributions to our qualified pension plans for 2016. Free cash flow was $121 million. Capital expenditures were $48 million or 2.8% of revenues in the quarter compared to $29 million in the second quarter last year. Our CapEx spend is typically back end loaded for the…

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

[Operator Instructions] And our first question comes from the line of Gautam Khanna of Cowen and Company.

I was wondering if you could quantify what the cash contribution in the pension recognizing that’s discretionary if you were to [indiscernible] for next year, what the cash contribution would be?

It's really too early for cash contributions for next year. We'll assess that as we move through the year. As you know, we've been concerned about the updated mortality tables in 2017. It looks like based on the IRS not submitting those yet or making those available that could move to 2018. So we're watching that very closely and we'll be able to discuss that with you at our year end call.

And then I was wondering if you could also talk a little bit about CVN-78, what if any exposure you guys may have to the delays, just wondering I mean I imagine they are accrued for, but there's a lot in the press, so I was just wondering if you could set the record straight?

I don't really want to comment about the delivery. I will say the ship is essentially done and in the quarter we had no material adjustments related to that shift. So Mike, do you want to comment about the delivery date or the schedule?

Sure. I mean, our job is to get the ship ready to go as soon as it's ready and the team there is doing a tremendous job of doing that. We've talked about the test program and the challenge of the lead ship in general and this one in particular and we're working through every day down there. It's an adventure. Our objective right now is to get the ship gone as fast as we can. The Navy has posted a schedule. We're working very hard to support that schedule and believe it to be achievable, but recognize that it is a lead ship and it’s a test program and we're working our way through it.

But just to be clear, your financial exposure to any of these kind of last second delays that are happening is well covered because of cost swap, these are not things that you are actually causing, is that a fair assessment or not?

That's fair, but you have to assess it every quarter. We know now and we assessed it in Q2 and our profit assumptions assume that. So the shift, like I said, is essentially build, we're coming through test issues not only on government furnished property, but for the balance of the shift. So we think we have it captured now, but you have to go through completing delivery and you can finally understand what your final margin projections will be.

And every system is unique in that some systems are government furnished, some systems are systems that we have done, some systems are that our suppliers have done. And so in every circumstance, you have to evaluate who's accountable and how will that accountability be assessed. And so the fact that it's a cost plus contract means that the cost of the work is covered, but then the overall impact of it still have to be assessed on a system by system basis.

Our next question comes from the line of George Shapiro from Shapiro Research.

I was wondering if you could provide how much EAC adjustments were particularly at Ingalls since the margin there was one of the highest I've ever seen for shipbuilding?

The non-recurring or cume adjustments in the quarter were 91 positive and 17 negative and of that net it's about 70/30 Ingalls.

And then maybe for Mike, I mean if you could comment a little bit more in the challenging Newport News that you talked about for the second half, I guess [indiscernible] I know you’ve talked about for a while.

We’ve been talking the fact that we have these three carriers to deliver and we've got a gap between the delivery of the Lincoln and the arrival of the George Washington caused by the budget process back in 2012 that kind of created that challenge. We've got three carrier deliveries that are essentially on top of each other, which means that you don't have one delivery team. You have three delivery teams and that's quite a challenge for the business. We've been talking about that for several quarters now. This is the kind of business where you can see it coming. You can anticipate it; you can plan for it; but you still got to grind your way through it. And right now through probably the second half of next year, Newport News is going to be grinding their way through this. You get to the other side of that though with the Virginia-class program, the agreement on the Ohio replacement program, a contract that we have for the Kennedy which is executing well, the contract that we just signed for the enterprise which is the ship after Kennedy which delivers in 2027 and you have George Washington here in refueling and you have the planning for Stennis beginning. Yeah, it's a grinding time for Newport News right now, but the horizon is really bright for that shipyard. And so we're excited about where this is going to go. We're just kind of grinding right now for the next year or so.

Any way you could quantify what you think the margin risk might be for Newport in this period?

I think the best way to think about it is for the year and over the next five years, it’s really 9% to 10% return on sales. But I hate to try to quantify it at Newport News.

You've seen now in five and a half years of this that to quote, this is pretty lumpy and things move around quite a bit and to try to handicap where things might be next quarter or even the second half of the year can be a bit challenging, especially given the dynamic that's at Newport News right now. But our long term prospect and view and perspective just does not change. The healthy business in shipbuilding is going to operate in a blended way across time at a 9% to 10% range and we think that's very predictable. We're committed to that and we've got everybody pulling on the road to make that happen.

Our next question comes from the line of Joseph DeNardi from Stifel.

Mike, you mentioned kind of the risk around continuing resolution, I'm wondering if you could just provide a little bit more color as to where you see your exposure there? What programs specifically you think could be impacted?

For us we’re probably not terribly impacted by the continuing resolution and that there's not a lot of new starts, that's the real issue with continuing resolutions. If there is a new start, it can hold up the start of the program. For us, it's more about the carryover from one year to the next and the consistency and giving that giving the Pentagon a perspective that they can go ahead and do the strategic planning that they need to do. Fundamentally, I just think it's that process for us to have a continuing resolution instead of a budget and in the main, we're starting to rely on continuing resolutions way too much and our concern here is that the continuing resolution may actually be longer than December, it may go into the next administration which just creates a whole lot more uncertainty. And so we would rather see this get closed out as quick as it can.

Chris, just on the discussions you're having with the Navy over Avondale, is this just kind of the standard practice of business or is there disagreement in one facet of the negotiations that’s causing that to maybe take a little bit longer to get done?

There's obviously a disagreement between the parties or we would have to settle. So we're up against statute limitations and we thought it made sense to protect our rights to get it into a more formal process. Really the last thing you want to do and it's unfortunate and it could delay recovery a bit, but we thought it was the right thing to do to protect our rights there.

Could you quantify maybe how much is being disputed of the total recovery?

I’d really rather not quantify it at this point. We’ll get more visibility when we get their final decision and we'll have to assess that. And then we'll communicate to you any impact that we may have.

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

Chris, I was hoping to circle around pension just real quick, you gave us a sensitivity in spot rate and where you are in ROA year to date, but obviously as a starting point would have to know what your plan was for 2017 on a FAS/CAS basis? Was that planned to be down in this, the headwind to that being down or FAS/CAS might be up, the headwinds being up?

Obviously we haven't provided 2017 numbers for FAS/CAS adjustment yet. You're probably aware; I think you're aware that that’s the last year harmonization. So it was relatively consistent all things being equal, but like I said we haven't provided guidance and we'll be able to come to that over the balance of the year and give that to you beginning of next year. A lot of things moving in connection, we don't like to get ahead of ourselves on it.

So just for clarity though, you said last year harmonization meaning that CAS would rise again proportional to what we saw in 2016 or it would – or 2016 was the last year?

I don't want to speculate, right, proportionately, but it is the last year harmonization. So your CAS cost should be higher than your FAS expense for sure.

And Mike, so you sort of announced this, but I want to ask it in a different way. The CVN-79 versus the CVN-78, obviously you’re under fixed price for CVN-79 versus the CVN-78, you’ve got the realization of challenges on CVN-78. Just from a work share perspective and kind of hiving off risk, is the GSE portion on the CVN-79 the same as it was on the CVN-78 such that whatever problems that are arising from the GSE, the risks that are materializing on CVN-78 are similarly as rolled off as they could be on CVN-79?

That's right. There are some of the GSE that would ordinarily have migrated over to CSE contractor furnished by the second ship. But Myles, if you remember, as we negotiated that contract we were working our way through the lead ship and so there were several items that we decided to leave with the government decided to leave them as GSE for the second ship that ultimately down the road what I would expect would become contract furnished. But for CVN-79, it's about the same.

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

Mike, just maybe a big picture question for you. When you think about your balance and was this something we’ve talked about little bit in the past, how are you thinking about potential M&A going forward?

I think our strategy that we laid out at our investors conference last year is the same, it hasn’t changed. Our focus is on executing in our core business. We're looking to grow our services business in support of the Navy and the Department of Energy. If we have opportunities to do selected M&A in those areas that would make sense to help us do those two things then we would take a look at it. Quite frankly what we're dealing with today is that, I mean we're always scanning and we're always looking, valuations are pretty high and so it's kind of hard to come through the part where – the first question we ask ourselves is why are we the better owner and it's kind of challenging given some of the valuations that are out there today that we could really make the case that we're such a better owner that we would create the value that we need to create. So we're thinking about it. We're scanning for it. We're looking, but we also put in – I think we communicated pretty clearly that we're not going to do M&A unless it meets our financial requirements and we're going be very disciplined about that.

Just as a follow on, are there any international opportunities or is that simply you’re not interested in it?

I don't want to be terribly specific, but I think internationally where it would make sense in support of our primary customer is – if it helps the US Navy do a better job somewhere then we can think about that, but beyond that I'm not so sure that we're terribly interested in that.

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

I was wondering if you could talk about the LHA/TAO competition and just I guess first is what is the impact of LHA and then second the fact that Ingalls was awarded so many more hours on LXR, does that – and that would imply you bid a lower cost, I’m just trying to think about what that means for your cost structure versus your competitor or is it something about the margins that you're willing to accept versus them?

No, I think that there's a lot of variables in this competition beyond just the raw price shoot out. The risk registers on the two programs were very different. The budgets that were allocated to those programs from the government side were very different. The capabilities of the competitors to execute the work was very different. And so I think the confluence of all of those things together and there's probably a half a dozen other variables that go into it, the confluence of all of those things kind of drove the situation to come out the way that it did. We’re very happy with the way that it came out. I would certainly not draw the conclusion that we're willing to do something on the margins that is less than our competitors. I think that the blending of risk and cost and capability drove the decision to go the way that it did. And we're very happy with the way that turned out obviously.

And if I can follow up on the CapEx, just it continues to seem to ramp up at a slower rate than we always think and I guess are projects just getting pushed out, is it that you're finding more efficiencies and you're not needing to spend as much as you thought, what's happening there?

Sam, so we spent $48 million in the quarter, we’re at about 2.5% for the year. I still expect 3.5% to 4.5% the projects are started and it's going to ramp towards the back end of the year. There are some large invoices and some large expenditures that are going to take place on some of these significant capital projects. So projects are authorized or on schedule, it's just going to ramp throughout the year.

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

Kind of explaining what's going to happen in the second half of the year at Newport News, I'm wondering you could shift gears and maybe talk a little bit about Ingalls and puts and takes – transpire at Ingalls over that same time period.

Ingalls is kind of in the crunch of ship delivery right now. I mean, there's a couple of ships that are going to trials and delivery between now and the end of the year which is going to be very exciting for them. And it's going to be more the same. I mean, the bigger issue at Ingalls frankly with the execution that's going on today in serial production, the big issue there is capturing the next work, getting LPD-28 started, working our way through the acceleration of LXR and/or LPD-29 and getting LHA-8 off to a good start. I mean that's really the work that the team there will be trying to – they have to get that right in the next six to nine months to set themselves up to be years after that. But without getting too far out in front of our headlights, I mean we're doing really well there and we've got a couple of ship deliveries coming up. So we expect it will continue to do well.

And then shifting gears back to the Virginia-class program, I know the wish list is to continue on at a rate of two a year. Can you just let us know, or help us understand when we will know for sure, from a funding perspective and a contract perspective, that that's what's actually going to happen? When do we need to see the funding from Congress? And when would we expect to see a contract into you guys that gives us some really good comfort that two a year is the plan?

You kind of faded out there at the end, but I think you're trying to get at the two per year in the Virginia-class program and when do we know for sure and I've been around the business long enough to believe that you don't ever really know for sure until you have a contract in hand. But I mean the reality is that if we were at two per year and the next time that there was a plan to not be at two per year was in 2021 when we funded the – when the government's going to fund the first Ohio Replacement Program ship itself beyond the design. And in this year's budget deliberation, that's the way the budget got presented to the Hill, the Hill said that they would really like to see a second submarine in 2021. The Navy said they'd like to see that too. The industry said that would be great for us too. So everybody agrees that having a second ship in 2021 would be a good thing. I think the next time you get to see whether that's actually made any progress or not is when the next budget gets submitted to the Hill in February or March of next year. Now I have mentioned all of you, I admit to being a bit parochial and biased here, but I do believe that when nations are challenged with the cost of their navy, they build more submarines and I believe that the pressure on submarines is always going to be up not down and so I would expect – I believe that we're going to be at two per year for as far as we can see. But each time we come up where that the next opportunity to drop to…

Our next question comes from the line of Pete Skibitski from Drexel Hamilton.

Mike, I'm just trying to think through – I think the award for LPD-28 and NSC-9 are still set for the second half. You've got LHA-8 now, and LX(R) is in place. So I'm just wondering how you are thinking about your revenue visibility through 2020 at this point, just because it seems like there's an awful lot in place for you now. So I'm just wondering how you are thinking about that and maybe if there's anything else that you need to fall into place.

I think first of all you start talking about revenue in shipbuilding, you've got to figure out what's going to happen with sequestration and what's going to happen with how they pay for Ohio Replacement Program. We had a good situation this year in the budget request in terms of things that needed to get done on the Ohio Replacement are funded and it did not affect any of the HII programs. The question is, is that going to be the case going forward and the visibility around LXR is that we're doing more design work than we had a few months ago before the award. But what we don't have right now is we need to either have that ship accelerated or we need to have another LPD in the line and we don't have either of those right now. So visibility on that is still a little bit murky. So given all of that, I think we're going to stick with our forecast that through 2020 our shipbuilding revenue is going to be relatively flat.

And then just one follow-up, how are you feeling about the likelihood that we'll get an add from Congress on NSC-10 at this point?

There's a lot of support in the Congress for what the Coast Guard is doing and there's a lot of success on what the NSCs are being able to provide to the Coast Guard. I think there's a lot of moving parts, but we remain optimistic and supportive of the program. So we'll see how this end game works itself out, but that’s certainly our objective.

Our next question comes from the line of Robert Spingarn from Credit Suisse.

So Mike, when I look at Ingalls and I look over the last three years, the margins have ticked up from, call it, 10% in 2014 to 11% in 2015. This year is at 14.5%. You have characterized this business even earlier on this call as a 9% to 10% business, but you've also said you've got a lot of delivering ships here, and you are retiring risk at a rapid rate. So with that as the backdrop and with new ships coming, how do margins trend from here rest of this year at Ingalls and into next year? Have you used up a lot of that EAC reserve? Is there any way for us to track this and measure it and project going forward?

I’d just remind you what we've said about the 9% to 10% range. If you are operating outside of that range for any period of time you have to ask yourself why. If you are above the range, it probably means that you have a lot of mature programs and you’re harvesting pretty well, but the fundamental thing you need to be focused on is what's the new work? If you're below the range, you're probably doing a whole lot of new work and you've got to let those programs mature. At Ingalls today, we are have mature work going on in the LPD programs. The LHA-7 now has come along. The DDGs are coming along and the NSCs are coming along, all really well. The question in front of them is, okay, we’re harvesting really well, but what's the new work look like. So LHA-8 was a really big deal from that standpoint because we really needed to have get through that and get that ship to under contract. We really need to get LPD-28 under contract. We need to sort out the LPD-29 and the LXR opportunity in the way that that plays out. And we need to keep the destroyers on track. I mean, the destroyers pro comp at two per year is really important for us to keep that on track. So a lot of the activity at Ingalls, we're doing really well executing, a lot of the activity is on the front end, is on the new business piece of it. In terms of handicapping the next quarter or the next two quarters, I just don't do that because that's not the nature of our business. We have great quarters. We have lumpiness there, we’ll have lots of risk retirement in one quarter and not so much in the next. And so I’m a little reluctant to go there. But in general, the focus is what's the new work coming at Ingalls so that we can maintain the healthiness of that shipyard. Chris, you got anything you want to add to that?

Rob, I will say the positive adjustment in the quarter at Ingalls was dominated by LPD-26, it had a really great delivery and we were able to retire some risk there. I would not expect that over the balance of the year.

Chris, is there a way to quantify or to measure what's left in the reserve as we go forward for the various programs, just to give us a better sense of maturity levels and remaining opportunity?

We don't disclose that type of information. It would be really tough to do and really doesn't serve much of a purpose. We continue to believe that the 9% to 10% return on sales makes sense across the portfolio.

I think it does; it's just timing. And when you back out these EACs, you're closer to 6% this quarter, so it's obviously a hugely important element. So anyway, I just wanted to throw that out there as something to think about. I just had one other question, if I could. Given the ORP and the work split, with the majority going to the other yard, Mike, how do you think about any future opportunity to increase your work share on VCS and does that maybe come into play with the multi-year being discussed?

I think the agreement that we have is that we're going to shift some deliveries to Newport News during those times when we're trying to deliver the Ohio Replacement platforms from Electric Boat. I mean I think that's all part of the deal. How that gets quantified? I mean, the first time you're going to be dealing with that situation is going to be after 2025. I think 2027 or 2028 will be the first time that that comes into play. And so I'm not spending a whole lot of time right now trying to figure out exactly where that line gets, what we are trying to figure out right now is how do we invest in that program and make sure that we can do it as efficiently as possible and then we’ll see where the chips fall.

So where you are a 50% player on submarines now, that will drop at least in the early years here during the development work on ORP and it won't necessarily get offset until about 2025?

I don't know that, I mean if you look at the entire submarine industrial base with the Ohio Replacement Program and the Virginia-class program, I'm not sure that I would go so far as to say that that's a 50% program for us overall. I think it all depends also on what happens to the build rate on VCS. So I'm okay with that given that aligns with our work and aligns with our capital investment.

I wasn't implying that you were 50% on ORP; I'm saying you are 50% on VCS and less on ORP, and that you would average at a lower level when you put the two together. And is there an interest on Huntington's part to become a 50% player down the road by raising your VCS share to offset the lower share on ORP? I know that was confusing, but I think you follow it.

Our only interest is working with our teammate in the Navy to make sure we produce these platforms as efficiently as possible. If we do that, then it'll be good for us and it'll be good for the industry and it’ll be good for the Navy.

The next question comes from the line of Doug Harned from Bernstein.

Mike, as you are talking about investing in ORP, I'm trying to get a sense of what the scale of that investment is, the investment that you're going to have to make over the next few years and then how you think about tying that in with some of the other investments, some of which you just named, and how this CapEx trajectory looks like. Are we looking at something in the 4% range for an extended period of time as you work through these new programs?

Let me take that one, Doug. It's $1.5 billion over the next five years and then retching down to the 2% to 2.5% subsequent to that and included in that is the ORP investment.

And then separately, when you look at CVN-78 and the delivery, do you see much of risk of any post-delivery costs after that ship is delivered?

I think that depends, but I think it'll be the normal situation that we have after ship delivery. There may be some work that we will deliver the ship to go finish after the ship delivers and maybe some of that, but I think it’d be on the margins.

So it's not something that you are particularly worried about at this stage?

I'm not worried about that. I mean, to me right now the issue is can you get through the systems testing so that you have a full up ship ready to go to sea when it's time to go to sea. That's what our focus is on. And the team is working really hard to make sure we have that done. The ship will go to sea, it’ll do some qualifications after delivery. Eventually, it comes back in for a post-shakedown availability and there's already being stuff identified today that is stuff that we're going to want to do during that timeframe. So that work packages is already being worked on. But that's just a normal way that these ships join the fleet. They go through this pretty turbulent period to become part of the greatest suite in the world and so this is all part of getting them ready to do that.

But presumably, once – if you have nailed this on delivery – well, that's the key here, there's probably not a huge risk of residual costs down the road post-delivery.

I mean delivery is a big event, there's no doubt about it from a cost standpoint.

The next question comes from the line of David Strauss from UBS.

It's actually [Matt] on for David. I was wondering if you could comment about your UPI business, it looks like the lost rate there's been relatively stable. When do you think that business actually breakeven and what has to happen to get there?

I mean obviously the business itself is being dramatically affected by the environment that it's in and we're waiting to see capital projects get turned back on by their key customers. They've continued to win work and our strategy of preserving capability to stay close to those customers is working, but the work that they've won doesn't really kick in until the end of this year or the beginning of next year. And so just like that whole industry everybody's trying to figure out how is the best way to survive and we're working with them to make sure we do that. As far as the timing goes, I didn't know the timing of this business before we got into it. So I’d be the last person you should be asking about the timing now.

And then just one more on tax rate, where do you tax rate beyond this year? Is it much different from kind of 2015, ex the Q1 benefit?

So 30% to 32% for the year, dominator the reduction related to stock comp deduction that rolls through the income statement instead of how it used to go through the balance sheet. As you get less stock options or equity vesting that could raise a bit, so I think this is probably as low as it gets and it could go up from here. But we'll give you more visibility when we do the year end call.

Our next question comes from the line of Noah Poponak from Goldman Sachs.

Is the risk to Newport News that you've highlighted in the back half such that the framework needs more net positive cumulative catch-up adjustments at Ingalls whereby that total nets out to a 9% or slightly better shipbuilding segment margin or is it more Newport News is a little below 9%, Ingalls a little above 9%, and you'll see what happens with positive cumulative catch-up adjustments?

We do these adjustments when we evaluate EACs and when we retire risk. And so they come about the way that they come about. We certainly believe that over time, this is why we don't try to do this on a quarter by quarter basis because in any given quarter they may not match. But over a period of time, they will match. And so our sense of it today is that our shipbuilding business will be in the 9% to 10% range over a reasonable amount of time. And we've kind of described in some detail today that over the next 12 to 18 months Newport New is kind of grinding on that a little bit and right now Ingalls is doing really well. We don't see that being dramatically different, but it's important for Ingalls to get the new work in and it's important for Newport News to be successful in grinding through these deliveries. So that's what we're focused on.

I mean, I ask – it’s not an effort to ask for timing of cume catches; it's more the Newport News risk in the back half you've highlighted such that you would need those in the back half to be at 9% or not, if that makes sense?

We're going to have to come through the risk retirements on all the programs every quarter and so we hate to handicap that.

Is the hesitation in quantifying pension contribution beyond 2016 simply the uncertainty around the timing of a mortality table change or is it really many moving pieces that have wide ranges of possible outcomes?

You said that very well actually. Really, the first one is the most significant, the new mortality tables would increase contribution significantly, but there are a lot of moving parts as we all know. So best not to speculate and just do the analysis throughout the year and let you guys know at the year-end call.

I think a lot of people in the investment community are coming up with large ranges of guesses on that use of word significant for the mortality piece. So I didn't know if you guys had been able to at this point hone in on some kind of order of magnitude range of that compared to the baseline or not?

Not at this point.

And then just from there, you have a stated plan to return substantially all the free cash to shareholders. Can you just speak to – I guess that's theoretically inclusive of a pension contribution. But is there a scenario where you can still do that on a pre-pension contribution basis just because the cash generation is so consistent and the leverage is pretty low or is that not in the scenario analysis or is it somewhere in between, if you could just speak to how those ultimately tie together?

That's not in the scenario analysis, pension rolls through free cash. So subsequent to that, we’ll return substantially all the free cash flow to shareholders in the form of at least a 10% annual increase in our dividend and the rest being share buyback. So the way the policy reads and the way we've communicated it is pension actually rolls through free cash.

And we do have a follow-up question from the line of George Shapiro from Shapiro Research.

In the first quarter in the Q, you disclosed there was a $22 million EAC gain on a contract, which I assume was LPD-26. Was that comparable this quarter? And since you delivered the LPD-26 this quarter, is there that kind of upside on LPD-27 going forward?

George, the majority or the most significant non-recurring adjustment in the quarter was LPD-26 delivery; you’re 100% correct there. We’ll have to see on LPD-27. That was a separately negotiated contract and we have to come to the risk retirements as we approach delivery on that ship, which will be in the year. So a little bit early on 27, we’ll have to assess that as we come through the process.

And will the Q disclose the value of that like it did in the first quarter?

I believe it will, yes.

At this time, I'm showing no further questions. I’d now like to turn the call back over to Mr. Mike Petters for closing remarks.

Thanks to all of you for joining us on the call today. We really appreciate your interest in our company. We're excited about what we've done so far and we're really excited about the future that we're building for this organization. So we look forward to continuing our conversation throughout the quarter and we'll see you on the waterfront. Thank you very much.