Huntington Ingalls Industries, Inc. (HII) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Third Quarter 2017 Huntington Ingalls Industries’ Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time [Operator instructions]. As a reminder, this conference is being recorded. I would now like to introduce Vice President of Investor Relations, Mr. Dwayne Blake. Please go ahead.

Thanks, Andrew. Good morning, and welcome to the Huntington Ingalls Industries’ third quarter 2017 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer and Chris Kastner, Executive Vice President of Business Management and Chief Financial Officer. As a reminder, statements made in today’s call that are not historical facts, are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also, in the remarks today, Mike and 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 Web site. We plan to address the posted presentation slides during the call to supplement our comments. Please access our Web site 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. Today, we reported solid third quarter results that once again met our expectations. These results are a function of the unwavering commitments to safety, quality, cost and schedule by our team of nearly 37,000 employees. So let me share some highlights from the quarter, starting on slide three of the presentation. Sales of $1.86 billion were up 10.7% from last year and diluted EPS was $3.27 for the quarter. Operating cash was $96 million for the quarter and we received approximately $3 billion in new contract awards, including $2.8 billion contract for the refueling and complex overhaul of CVM 73 USS George Washington. As a result, backlog was approximately $23 billion at the end of the quarter of which $14 billion is funded. Yesterday, we announced that our Board of Directors approved 20% increase in our quarterly dividend from $0.60 per share to $0.72 per share. We also increased our share repurchase program from the most recent authority of $1.2 billion to $2.2 billion and extended the term from October 2019 to October 2022. These decisions allow us to continue executing our path to 2020 commitment to return substantially all of our free cash flow to shareholders. Regarding activities in Washington. We are pleased with the progress being made by the Defense committees and Congress on the fiscal 2018 budget, and remain encouraged by the support for our ship building programs in various builds. While we currently find ourselves operating under a continuing resolution, we remain optimistic that Congress will return to regular order and complete the defense authorization and appropriations process in the months ahead. However, as I have said numerous times before the Budget Control Act continues to cause a great degree of uncertainty for the entire shipbuilding industrial base, because Congress is yet to determine how the Columbia class submarines will be funded without impacting other critically important shipbuilding priorities. As the administration builds the fiscal year 2019 budget, we continue to advocate for multi ship procurement strategies, program accelerations and economic order quantity purchase of material for Ford class Aircraft Carries, LXR class amphibi ships, Arleigh Burke-class destroyers and Virginia class submarines. These actions would allow us to capture the inherent efficiencies and significant cost savings achieved by leveraging high production lives in multi-ship material purchases. Now, I’ll provide a few points of interest on our business segments. Ingalls had a very busy quarter as they completed acceptance trials and delivered LPD 27 Portland to the Navy in mid-September. The team also completed acceptance trials on DDG 114 Ralph Johnson and is on track to deliver the ship to the navy by the end of year. In addition, Ingalls launched DDG 119 Delbert D. Black, Christen LHA 7AAA and were selected to repair damage to DDG 62 USS Fitzgerald. At Newport News, the team continues to work through their transition period on the aircraft carrier and submarine programs. CDM 79 Kennedy is approximately 60% structurally complete and 35% complete overall. Construction is progressing very well as the team focuses on unit outfitting and assembly in a dry-dock. In addition, the teams achieved a significant milestone with the first cut of feel for CVN 80 Enterprise. This is the third Ford-class Aircraft carrier, and it has the distinction of being the 9th U.S. Navy vessel to bear that grade name. On the submarine program SSN 789 Indiana, the 8th Virginia-class boat to be delivered by Newport News is expected to be complete early next year, while activity ramps on the Block IV boats. And turning to Technical Solutions. The team continues to execute very well. They are capturing key contracts and effectively working through the integration of seven separate businesses into four business units. So in closing our programs continue to perform well. Our financial results are solid. And our cash deployment strategy remains on track. We are maintaining our focus on safety, quality, cost and schedule, and we remain committed to a culture that produces affordable high quality products and services for our customers, which in turn, creates long term sustainable value for our shareholders and stability for our employees. So that concludes my remarks. And I will now turn the call over to Chris Kastner for some remarks on the financials. Chris?

Thanks, Mike and good morning. Today, I will review our third quarter consolidated and segment results, as well as provide you with a few updates for the end of the year. Starting with our consolidated results on slide four of the presentation, revenues in the quarter of $1.86 billion increased 10.7% over third quarter 2016, primarily due to increased volume in Newport News and the acquisition of Camber, which contributed approximately $74 million. Operating income for the quarter of $237 million increased $62 million or 35% from third quarter 2016, and operating margin of 12.7% increased 232 basis points. These increases were primarily driven by the resolution of outstanding contract changes on CVN 65 and 72 at Newport News, the reversal of a portion of an accounts receivable allowance at Technical Solutions, strong performance at Ingalls and a higher FAS/CAS Adjustment. Turning to slide five of the presentation. Cash from operations was $96 million in the quarter and free cash flow was $5 million. Capital expenditures in the quarter were $91 million compared to $60 million in the third quarter of 2016. Year-to-date, capital expenditures were 4.2% of revenues and we expect capital expenditures for the year to be approximately 5% of revenues. Additionally, during the quarter, we made $203 million of discretionary contributions to our qualified pension plans, completing our contributions for fiscal year 2017 of $294 million. We also repurchased approximately 178,000 shares in the quarter at a cost of $37 million and paid dividends of $0.60 per share or $27 million, bringing our quarter end cash balance to $499 million. As Mike mentioned, our Board increased our quarterly dividend 20% to $0.72 per share and expanded our share repurchase authority by $1 billion, demonstrating our continued commitment to returning substantially all free cash flow to shareholders through fiscal year 2020. Turning to segment results on slide six of the presentation. Ingalls revenues in the quarter of $593 million increased 2.8% from the same period last year, driven by higher volumes on the LPD and LHA programs, partially offset by lower volume on the NSC program. Ingalls segment operating income was $74 million and margin of 12.5% in the quarter were up $8 million and 104 basis points year-over-year respectively, primarily due to higher risk retirement on the LPD program, partially offset by lower risk retirement on the NSC program. Moving to slide seven of the presentation, Newport News revenues of $1 billion in the quarter increased 7.7% from the same period last year, driven by higher volumes on aircraft carriers and submarines. Newport News operating income was $96 million in the quarter with the operating margin of 9.1%. Operating income was up $28 million and operating margin up 216 basis points year-over-year, primarily due to the resolution of outstanding contract changes on CVN 65 and 72, partially offset by lower risk retirement on VCS Block III. Now the technical solutions on slide eight of the presentation. Revenues of $241 million in the quarter increased 56% from the same period last year, primarily due to the acquisition of Camber and higher volumes and fleet support. Technical Solutions operating income of $22 million increased $16 million year-over-year and operating margin was 9.1% compared to 3.9% in Q3 2016. These increases were primarily due to the reversal of $13 million, and accounts receivable allowance related to the Westinghouse bankruptcy filing. Now, for an update on some other items for 2017. We expect the FAS/CAS adjustment of approximately $190 million, interest expense of $70 million, non-current state income tax expense in the $5 million to $10 million range and our effective income tax rate to be 30% to 32%. Also, I would like to give you an update on a couple of items we’ve been tracking. First, in late September, the IRS released final regulations and other guidance on the new mortality tables that will impact our defined-benefit plans that will become effective in 2018. We are currently evaluating the impact of these updates on our expected future contributions, and we’ll provide the results during our fourth quarter call. Second, Moody's and Fitch, recently joined S&P in rating HII investment grade. With the upgrade, we continue to analyze potential refinance opportunities. That concludes my remarks. I'll turn the call back over to Dwayne for Q&A.

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. Andrew, I'll turn it over to you to manage the Q&A.

Thank you [Operator Instructions]. And our first question comes from the line of Doug Harned with Bernstein. Your line is now open.

You are now at a place for investment where your CapEx is going to at 4% to 5% of revenue level, that’s what you’ve previously forecast. But when you look forward, can you talk about what you see the future capital investments being for and how long should we expect these levels to continue?

Look, 4% to 4.5% and now the 5% we forecast for the end of the year, that’s all part of our $1.5 billion capital commitment that we made from 2016 to 2020. And I’ve continued indicate that we should be back at around 2.5% of sales in 2021. That being said, it's our additional capital or opportunities for potential future programs where we need to make capital investments that’s definitely something we would evaluate.

And Doug, I would just add that the capital plan that we have supports the 300 ship navy. If we actually see sustainable opportunity to expand the navy and we need to go and invest in that, we obviously would do that, in addition that we have already programmed.

And on that, can you give us the sense obviously you're talking with a lot of people in the Navy and on the hill. When you look at the discussions today, there seems to be pretty broad support for growing the size of the Navy. But obviously, we've got some real challenges getting a budget through in Congress. Can you give us a sense of how your discussions have gone and the timing, which you see the prospects for taking basically your work up in scale. I'm not saying that very well. But when you talk about these investments, how do you see this difficult scenarios potentially unfolding for Huntington Ingalls?

Well, I think that's kind of the big question everywhere, right. I think the environment for general support and recognition that the Navy needs to be larger, that's pretty well understood in just about every corner. And that's frankly, in my career, that's a bit unusual and it's a good place to be. It's a good place to start from. The question of how you get the budget process through continues to be challenging. And I think the Budget Control Act setting on top of that as the law of the land means that -- I mean the biggest problem with the Budget Control Act in my view has been -- because what we've done is we've had these two year modeling through every couple of years to figure out how we're going to get the next budget out. But with the Budget Control Act still out there, you're not depending on -- not able to make any strategic discussions and decisions about programs that would be longer and more sustainable. So it becomes a bit -- since they can't make those decisions, it becomes hard for us to program our investment to support those things. We took a step forward and got out in front of the Pentagon with our big capital investment that we began back in 2015 and that has served us really well, because as long as we're executing really well, the Pentagon has able to have and the Navy in particular is able to have a discussion about okay this is going great, what else can we do? But we're still in the not sure what's going to come up next month. What I would remind is that there's always three or four tracks here to follow. And we look at this in a very binary way and say it's all nothing in the current budget cycle debate. But the reality is the current budget cycle is going-on on the hill and between the hill executive branch. In the meantime, the executive branch is actually creating the budget for next year and they're beginning the process for the budget the year after. And that is where the Budget Control Act causes problems, because it's hard to predict what the budget for 2020 is going to be if you aren't sure whether the BCA is in place or not. Our view is that there's going to be some modeling through on all of this and that we'll find a way to get through it, but it won't be a strategic way it's going to be program-by-program, ship-by-ship, activity-by-activity. And as a result, we engage basically at the program level, as I said earlier, to talk about how is the smartest way to buy the programs that we have. Doing a multi-ship procurement on aircraft carriers is the smartest way to buy aircraft carriers. Doing a -- accelerating the LXR program and connecting it to the LPD program production line is the smartest way to buy amphibs. So we're having those discussions. And because we are executing well, there's a lot of reception to those discussions. But the proof will be in how the budgets turn out. And at the end, I would say, as I said before, we can always invest a lot faster than the government can appropriate the funding. So we’ll be well positioned to invest ahead of the need from an appropriation standpoint.

And our next question comes from the line of Carter Copeland with Melius Research. Your line is now open.

Just wanted to -- couple of questions. One on technical solutions if you strip-out the Westinghouse reversal and the contribution from Camber, it looks like you were on an operating profit basis about flat there. And I wondered if that was weighed down in anyway by any expenses associated with the integration and restructuring there? Just trying to get a sense of the underlying performance?

Not significantly. We still think of that businesses as starting out low single digit, driven by UPI been at about a breakeven at the current market, and any investments we’re making at SN3, so no significant or material integration or restructuring efforts.

And then another one on Engels, just wondered if you can give us some insight in terms of the underlying profitability transition there. It seems like your risk registers maybe had the most amount of upside and opportunity on NSC for a significant period of time. And it seems increasingly like that's more LPD or DDG given where those programs are today. Is that right? Do you think of it that way in terms of absolute opportunity if you perform well that’s how that's shifting, or is that just metering the net up?

I guess that's a way to look at it. I'm not sure we look at it quite that way. What we’re seeing at this point is we're moving towards the backend of the NSC program, which is usually there, that’s an indication of a very mature program and we're doing very well there. LPD program, frankly, we’re doing very well there, but we're on the backend of that depending upon what happens with LXR. We're heading into a new round of competition on the Destroyer program. We are heading into a new round of -- or a new competition on Frigate program. The LHA 7 is building off lessons learned from LHA 6 going okay, and we've got eight coming behind that. So we look at each of those programs in terms of the relative maturity of that program to its overall class, right. So for instance, we’re in the submarine program and Newport News. When you’re on the backend of one of the block buys, your risk register should look -- your opportunity register should look pretty good. When you’re on the front end of the one of the block buys, there is a lot of risk in that. And that's the way we look at every one of our programs. And so if you’re coming through the end of the program, like we are with NSC, you start to move back the other way for the new program. LPD, we're not really sure what happens there because of the connection to LXR.

And our next question comes from the line of Sam Pearlstein with Wells Fargo. Your line is now open.

Mike, if I can just follow-up on the comment you just made about the Frigate program. Can you just talk a little bit about what that opportunity looks like, and how do you approach that differently just given some of the challenges with prior [indiscernible] program with Ingalls? And just can the Navy actually even afford to go ahead with this program? Just how do you think about it.

Yes, lot questions in there. First of all, it is one of those programs that is probably in the area -- in the bubble of what happens to BCA, Budget Control Act, probably this is one of those programs, the pace of this program is probably affected by how that get's resolved from a budget standpoint. What I think that the thing that we’ve seen the Navy do over the last several years is they’ve recognized that going off to a clean sheet whiteboard and starting with the beginning of what do we want to have in this ship and creating a wish list and then trying to jam in a 10 pounds of requirements in a 5 pound stack of budget. I think they figured out that that’s not exactly the way to do business. And one of the early requirements on this Frigate is that you have to have a parent design. The parent design is a really interesting thing, because that means you're not going to a white board with a wish list of requirements, you're starting out with stuff that’s already been proven. That’s really the great connection between LPD and LXR is the decision the Navy made several years ago that the LXR is going to have the LPD hall. That’s what makes the Destroyer program work, that’s what makes Virginia class program work. And I think where the Navy is on the Frigate is a great place for them to start, but we're not going to start with a blank sheet of paper. You guys come to us with a parent design that we can then see if we can make it meet the requirements that we have for that kind of ship. That’s pretty exciting for us. We know how to do that. It's right in our lane of how do we create more capability and more investment, and accelerate the production of those ships. Our view is that time to the fleet is the biggest issue out there and in any program, at this point. And so that’s the way we’re prosecuting it.

And can you size that resolution with the Newport News, Chris, just in terms of the contract changes on Enterprise and Lincoln?

Sure. There is approximately $25 million, and those were simply recognition of growth work on those ships, which happens from time to time and deal with our COH activity. So it was not a significant claim activity or litigation, it was just recognition of growth work within the price.

And our next question comes from the line of Joseph DeNardi with Stifel. Your line is now open.

To maybe parse out your commentary a little bit too much, you cited strong margin, strong performance in Ingalls. You didn’t mentioned that about Newport, and I guess about back up of $25 million there, looks like margins were under 7%. So can you just talk about performance of that yard and what you're seeing there?

So at Newport News, we're executing very well across all of programs. We are in that, if you go back into the history of this, the delay of the carrier because of sequestration put Newport News in a place where they’re sitting there today with a whole bunch of new programs. We're on the first half of the CVN 79, we’re the beginning of block four, we’re at the beginning of an RCOH, and we're even ahead of the beginning of Columbia class. And so in our simply operating model is that at the beginning of all these programs, the risk registers are really, really high. And so we’re very, very conservative. So that, as I’ve said many, many times, when you’re operating outside the business auto operate between 9% and 10%, if it’s healthy. If you’re executing and you’re below 9%, it means you probably have a majority of new programs. If you are executing and you are above 10%, it probably means you have a majority of very mature programs. What you’re seeing in our shipbuilding business right now is exactly that. We have a lot of new programs at Newport News, we have a lot of mature programs at Ingalls, both yards are executing exceptionally well. The Navy is working closely with us. We’re solving problems for them every day. So the partnership is a strong as I’ve ever seen in my carrier. And I’m excited about that. But we got to work through and it’s going to be a grind for a couple of years. We’ve got to work through the beginning of these programs, because they’re all long-term programs. I am excited about the team at Newport News and the things that they are doing. And is transformative for that business, it’s 130 years old, 50 years from now, people are going to look back at the team Newport News right now and say those guys change the business and drove the business forward in a way that set them up for the next 100 years. And that’s an exciting thing to be part of.

Chris, just on the CapEx guidance for the year, I guess it would imply it depends on what your revenue estimate for fourth quarter is. But it would imply maybe CapEx in fourth quarter of above 5% of sales. So I’m just wondering the run rate into next year? Should we think about next year’s CapEx being above that 4.5% to 5.5% and then coming down in ’19 to get to the average through 2020?

So I’ll talk about 2018 capital on the year-end call. But you’re reasonably correct that next year will be the strong year relative to capital, and then it’ll start to taper off.

And our next question comes from the line of Jason Gursky with Citi. Your line is now open.

This is actually John Raviv on for Jason. Just a quick clarification, could you quantify that the TS benefit, how much of the 1Q reserve did you reversed out?

That’s $13 million. So when you think about the $29 million we took in the first quarter, the remainder is about $9 million.

And any visibility for getting that out…

No, that will be part of the bankruptcy claim, that could take a year, 18 months, or potentially not at all depending on where it results or when it resolves.

And then just a quick follow up on the TS business. You mentioned integration is going pretty well. When do you expect to have that -- those four units firing on all cylinders? And then at that point, what’s in the pipeline? What are some of the big opportunities we should be looking out for that you guys are going after? How much of it is recompete, how much of it is new work. And overall, how do you see organic growth shaping up with that integrated TS business?

Well, that’s a lot of questions. We expect the TS business to be firing on all cylinders right now. Actually, this week, we have a big integration milestone where we -- albeit on the same, or the majority of those businesses got on the same IT backbone. Some of the large opportunities you can look forward to or some large deal opportunities. It’s the lateral clean up contracts that is pending that we’re looking to hear about. It’s a Savannah River recompete that’s out there and then potentially the Seattle recompete as well, and the Hanford recompete as well. So we expect them to be hitting on all cylinders right now. Again, I expect that low single-digit revenue growth. I have previously said that we expect it to be a $1 billion this year. We expect that to be closer to $900 million now, driven by the [SCANA] termination, some delays in SN3 awards and then the Camber sales. So it's closer to $900 million but we think we're in a pretty good place to leap off for 2018. I don't know if I hit all your questions there.

And our next question comes from the line of Gautam Khanna with Cowen and Company. Your line is now open.

Couple of questions. First, I was wondering if you could talk about the CVN 79 and how it's coming down the cost curve. Obviously, we discussed since last quarter after the June GAO report. But I wanted to get a sense for your conviction level on hitting those labor rates that you're hoping to hit? And any metrics you could share with us?

What I would say is that when we came off of 78, we captured a lot of lessons learned like you do from a lead ship. And we made substantial investments in new approaches based on the lessons that we learned to drive man hours out of the program. At this point, where we are as I think I pointed out that the ship is over halfway erected and then about 35% complete. The investments that we made are paying off. As we go and we track through -- we expected to get this much savings out of this investment, whether it's a new facility or a new practice or new process, we're seeing that -- we're seeing that. We're a long ways to go and we're on the front end of the assembly and test piece of the business. And so there's still lots of attention has to be paid every single day to make sure that we capture it. But I'm very pleased with the progress that we've made so far. When we made the investments that where do you expect to be when you're one third of the way through the ship, we were expecting to be where we are. And that's a pretty good thing for us and we're pleased with that. We got a lot of work to do ahead of us.

And to that point, were there any net favorable adjustments on CVN 79 in the period?

Nothing material on that mention now.

I mean, really the way we do our risk register the next big event on 79 has been for a couple of years.

And then what were the net favorable adjustments at Ingalls in the quarter?

So total adjustments, we had 78 positive 22 negative. So net of 56% and 60% of that was Ingalls.

And could you remind me of what the big risk retirement opportunities are in Q4 and maybe at a high level in 2018?

So for the end of the year, it is obviously late in the year. But the last remaining delivery this year is DDG 114. So there is opportunity there. And I will say LPD 27 well delivered in Q3 -- the entire analysis of the work to go on that ship will not -- is not complete yet and it will complete that in Q4, so there is some opportunity on LPD 27. And then you think about deliveries, I am looking at the sub-milestones, next year we have on the first half of the year Indiana and NSC 7 and then second half DDG 117 and LHA 7.

And our next question comes from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.

Mike, I want to ask you about top line expectations with regard to your prior expectations of flattish top line through 2020. Just in light of and maybe this is simplistic guideline is some of the incremental shipper payer orders that have come in. And I think you mentioned the Fitzgerlad, but I probably also start on Boise, and it both seemed liked very, very large repair orders. And I get a sense of maybe there is even more out there. So I'm just wondering if these incremental orders change your view of your top line, particularly in '18 and '19, and maybe you have better visibility. Could you actually maybe see some growth there because of these incremental orders? Or is that just too much within the marginal error.

Yes, it's a good question. The way that I think about our shipbuilding business, you guys who’ve been for a while -- I tend to think of is being flat, because it's been historically flat. These repair jobs are -- they are not in the FCN account. They are typically funded in the O&M accounts. And they tend to be not sustainable. I mean, they’re hit or miss. There is one here and there is one there. And we do believe that there may be some opportunity for more sustainable repair, but that hasn’t sorted itself out yet. And all of that, I think one sort itself out until you get the budget piece sorted out. And if you look across our business Pete, it's not hard to figure out that if you actually move to a budget profile and plan that says we're going to 350 ship Navy then there is opportunity for growth in ship building over the next five to 10 years. But I'm just going to say until I see the budget piece get worked out on that, I'm probably not going to move off of my projection.

And just a quick follow-up, just Chris your comments on Camber I wanted to ask about that because I was looking at your year-to-date revenues I think 239 at Camber. And I think when you bought it you said it was about call $365 million firm. So I don’t know if 4Q is expected to be really strong or maybe approving some lower margin revenue or loss something or could just maybe give some more color on Camber?

We’re really pleased with the team there and the organization, and the re-compete rate. Our win rate has been very, very good. What we need to continue to focus on is the new business and the new business pipeline and new business win rate. Team is very focused on it. And we think we've got a lot of good opportunities that are filling the pipeline, which should set us up well and for 2018.

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

Mike just wanted to follow a bit on Newport News. So if I assume $25 million also is part of sales, even if I take it out, you still had 7% growth at Newport. So what's slows down or what was abnormally strong this quarter because I would look at 7% is somewhat above flattish?

George, I will take that one. This is Chris. It's really across the block four, starting to kick-in in CVN 79 being in full production and then CVN 73 being introduced. So it’s across the portfolio at Newport News, we have some sales growth there in the quarter.

And George, I would add that when we say flat, what we’re talking about is a flat shipbuilding budget account for our shipbuilding businesses. So, you may see some growth in one part of our business with some challenges in other parts of our business. And then I would add that what you see in one particular quarter is probably not indicative of a five year trend.

And then one follow-up for Chris. Will we see operating cash flow in Q4 better than the Q4 of ‘16?

Well, I’ve spoken previously about the $150 million of headwinds I have in cash or we have in cash this year compared to last year. That being said, we're working very hard to offset it. But I still see that that headwind and Q4 historically is a strong quarter for us. We expect it to be the same. So I think the best way to think about cash now is $150 million headwind, we're working very hard to offset it.

And our next question comes from the line of Rob Spingarn with Credit Suisse. Your line is now open.

I jumped over from another call, so hopefully I don’t ask anything that’s been asked. But I wanted to go over couple of small things that I hope were not discussed. But before that, on the back of Gautam’s question on Newport News and profitability on 79. Can that yard be 9% yard between now and when you float off that ship, 79 and 2020? Or is this 7% to 8% margin business during that period, because of 79.

I think, the way that Mike has represented is the way to think about it is total shipbuilding is 9% to 10%. I know you may be frustrated with that answer. But we're going to have quarters within in each business that is greater than 9% or less than 9%, greater than 10% or less than 10% on a quarter-to-quarter basis. So it will move around a little bit. But the best way to think about it is 9% to 10% on a long-term basis.

Well Chris, the way I think about that is simply that yes, if you're at 9% to 10% and Ingalls can hang around and may be this is another one of my questions, maybe we get another LPD. Do we get a plus up in '18? So Mike that’s a question for you, and get an LPD 30 perhaps, does Ingalls continue at an 11% to 12% type of rate offset by Newport News at 7% plus, because CVN 79 is a fixed price ship as we know, and you're booking conservatively in the beginning and therefore your blend out the 9%.

So how many if's do you want to put in there…

Actually I don’t -- the only if is the LPD 30.

You centrally have CVN 79, so big milestone will be when it launches. But between now and then you’ll be finishing block three. You will be finishing or mostly finishing an RCOH and getting ready to start the next one. And so I believe Newport News can proceed better, but the macro trend at Newport News is that they’re on the front end of a bunch of new programs across all their product lines. Ingalls is, on the other hand, they’re in the mature phase and they’re in the mature phase of several programs. But just about every of their programs got a little bit of a question mark about what's the connection to the next one? Where is the NHC program going to go? How's the LPD program going to connect, you talk to that and with the -- is LPD 30, how's that fit into it. How's the timing of that fit? How does the timing of LXR start? If LXR or LPD 52 or how are we designated is at the same rhythm of the LPD program then maybe you have a material program for a while. If on the other hand, there is a delay and there is a transition and it becomes something at a little bit different rhythm because of the budget process then it may start more conservatively and that put pressure on that. So I think our point is that we’re executing really well across our business, the results that you see are the results that you would see from a business is executing really well. And as we go forward, we will take advantage of those opportunities to grab those opportunities for step ups along the way. That’s how we run the business and trying to predict more than that in the climate is probably a little bit beyond my ability.

And if I can just ask you a couple more small things. Going back to the LPD 30, so I was going to ask you -- do you think there's a decent chance of that or we bridge to LXR from 29. It sounds from what you said before like it's still a big unknown. But is there a little bit more bias one way or the other?

My personal view is I think LPD 30 ought to be the first of the next class. And an audit come-in in the time sequences that LPD 30 would come. That's what we advocate for, that's how we're talking about the smart way to move that program forward. There is a lot of chefs in that kitchen so we’ll see how that turns out. But that’s the way we see it and that’d be the best way for it to move forward for the country, for the Navy and for ourselves.

And then just earlier, I think I was looking at the transcript you were talking about the benefit of multiyears. And I'm wondering if you have any feel for when we might see a multiyear competition for 2018, 2022 DDG 51s? And as the second part of the DDG question, are you concerned at all about the challenges or performance challenges of moving to Flight III? Or do you think those ships can be as profitable?

The thing about the competition is that every time you have a competition, it resets your risk register and ultimately resets your view of the return on the program. We felt that it was really important. First of all, for the Navy to get Flight III in our hands as quick as possible, so they could start operating it and seeing what they could do with it. Secondly, we would have a chance to get build it and get it under our belt, so that we can understand where the risk in that program were. And so we went and we did -- we made an arrangement with the Navy to begin a Flight III ship in the last multiyear. We think that sets us up pretty well for the next block of ships that are coming, and that will help the Navy get the ships they need when they need to get them. It's pretty early in that and so we'll see how that plays out. But that’s our view of it. We don’t see anything that jumps out at us as being unobtainium from the standpoint of how the heck are we going to build that. So this is what the Destroyer program has been doing for decades. They’ve been doing -- they do serial production of their ships and they do block upgrades. This is just the next block upgrade.

Thank you. And our next question comes from the line of Joseph DeNardi with Stifel. Your line is now open.

Mike, just to clarify what you said on CVN 79 in terms of the risk retirement schedule, the next opportunity is in a couple of years. Just so I understand like that would be the next opportunity to recognize a favorable adjustment, but if there's cost growth on the program, you would recognize that earlier than that or would you be…

If we see cost growth from the program, we don't wait. The problem with waiting is you start hoping that it'll get better. In my experience, it typically doesn't and if you wait, it starts to build up and then next thing you're breaking your legs because you have a big number instead of a small number. So we actually prosecute those things as quick as we can or we recognize those as quick as we can to head them off. And that 79 team right now is doing a very good job at that.

We evaluate those EACs every quarter.

And then Mike, just maybe a higher level question. You guys have obviously done a really impressive job with margins since the spin and the stock growth and the amount of value return to shareholders reflects that. But when you look at the situation at Newport now with 79 Virginia class, is that maybe the most challenging set up from a margin standpoint or risk standpoint that you faced since the spin? Or is this just normal course of business for you?

Well, I mean, I think the challenge at Newport News is a good challenge to have, because there's clearly demand for that work to be done and there's opportunity for the team there to go and prosecute the demand and improve the performance of the business. But I am going to take it back to the beginning of the spin. I mean, when we spun this business out of north of Bremen, we had five ships underperforming at Ingalls. And we had five contracts that we needed to get that we did not have. That environment, in the first couple of years where -- that environment was significantly more of a challenge to us than where we are with Newport News, I mean at Newport News, we know what we got to go do there. At Ingalls back in those days, we were working through the last two ships at Avondale. We were trying to figure out how do we get the LPD program on a single production schedule and try to get it in the serial production from a production line that actually existed in two different shipyards. We were trying to get the Coastguard to move to a rhythm on national security cutters. We were actually doing a lead ship, LHA 6 with a new ship design. I don't think where we are today compares to that at all. And so I'm excited about what we can do at Newport News. I think we have a great opportunity there over the next couple of years to really set that business up for the next several decades, that's a pretty cool place to be. My team at Ingalls fought through that fight in the first couple of years after we spun out. And frankly, they have become exceptional at harvesting the mature programs that they in fact created by going to serial production on these programs. So I wouldn't say it's the most challenging now. I would go back to the beginning.

And our next question comes from the line of Rob Spingarn with Credit Suisse. Your line is now open.

I thought I’d jump out for the last one. But on the ITPD contract for Colombia, there is $5 billion contract that went to GD for early design work. And I don’t know if you've covered this earlier. But is there any -- can we infer from that any participation for Newport News for you and is there a way to quantify that?

And we expecting award, a formal award facilitization of that in Q4. We don’t -- I haven't published the qualification of that as of yet, but we will participate.

And when would that work start to ramp?

I mean, it's basically the ramp-up has already begun on Columbia and this just continues at over the next couple of years. This is all the work that has to be done ahead of the -- for ship [multiple speakers] 2021, if you want to try to lay it in there.

Just trying to figure out, I mean it's a significant piece of business. Obviously, the program is very significant. But from revenue perspective and you've talked about the top line quite a bit on today's call. But is this something we're going to notice?

It becomes more significant as you move to the next couple of years towards 2021 for sure.

Okay, thank you.

And I just would add, this work is actually at least as important as the first piece of building that we do in the fabrication. This is where we are actually getting the design sorted out. We’re figuring on how we’re going to build it, all of those things. And a lot of decisions that are being made right now will drive the effectiveness and efficiency of the construction. So it's been a very important contract. It's a very important step forward by the program. It's very important that that program continue to be funded in this space. And Rob, I think you and I’ve talked a little bit about, sometimes there is a view that while it's just design work, maybe we it's fungible, we can move it around. You really shouldn’t be moving this money around politically from a budget standpoint. This is critical that this stay on track.

And our next question comes from the line of Gautam Khanna with Cowen and Company. Your line is now open.

First of all, I just want to make sure I have this right. Tax rate for the year, implies a pretty steep step up in Q4. Is that correct?

Not really. It's 30% to 32%. So I think we’re cum to-date around 29%, so not a significant step up now.

I just also want to be clear. In terms of the fiscal '19 budget request, what are the main things that or big opportunities for you guys. What is that that you’re looking for? Is this the LXR getting pulled forward or is it, the stuff you talked about in the script. I'm just curious, what is the full case that we should be hoping for in terms of programmatic moves.

Yes, I think at the very first in line is a decision to move out on a multi-ship procurement for aircraft carriers. There is a lot of discussion about that. There is a lot of work being done on it. It's an influence in the discussion around the FY18 budget at this point. But to actually do that, you actually have to start moving towards creating the contract to do it. You got to start creating the arrangements with the supply chain to get it done. And so that’s really the first thing inline that I think needs to be done. Frankly, if we don’t get something in the '18 authorization and appropriation, it starts to cut into amount of savings you could get from the two ship procurement. Behind that, I think it’s the LXR. I think getting the amphibs in sequence and getting a move forward, those are -- that’s a great opportunity for the Navy to get ships to the fleet faster and more affordably. And I really think that that is the next thing in line. And from there, I think we head down the normal course of business, block 5 is coming, the next multiyear on Destroyers are coming, and the rest of the business starts to fall in the place. But those are the two big things is the amphibs that we carry.

And on the DDG multi-year buy, is that still expected sometime in June of next year, something like that?

Yes, I think that’s on schedule.

And DCS block 5, when should we expect that?

A lot of work in '18, but it's probably '19 [multiple speakers]…

And of course the debate there is three year. And then lastly, icebreakers. What do you expecting if anything by movement there?

Well, we're engaged in that program and watching it as it moves forward. And we expect to respond and engage in -- I think, we built the last one. So we’re staying very to the Coast Guard on that.

And that’s probably 2019…

And in terms of the budget, are we -- should we be looking out for anything specific on icebreaker in the ’19 request?

Well, scheduled to be awarded in '19. So we need to be funds.

And I’m showing no further questions at this time. So with that, I would like to turn the call back over to CEO, Mr. Mike Petters for closing remarks.

Well, thanks to everybody for joining with us today. As you can tell from our results and our discussion, we're executing. We continue to execute well. Our financial results are very solid. We remain committed to our cash deployment strategy. Our teams are focusing on safety, quality, cost and schedule. And we appreciate your interest in our business and we look forward to seeing you wherever we might bump into each other. Thank you all very much.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.