Huntington Ingalls Industries, Inc. (HII) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Huntington Ingalls Industries' Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator instructions]. As a reminder, this conference maybe recorded. I would now like to turn the conference over to Mr. Dwayne Blake, Vice President of Investor Relations. Sir, you may begin.

Thanks Sabrina. Good morning, and welcome to the Huntington Ingalls Industries' fourth 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 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. Let me start out by saying that we at Huntington Ingalls are extending our prayers and thoughts and appreciation to the folks in Florida that are associated with that terrible tragedy yesterday. Our hearts and prayers reach out to them. So, good morning everyone and thanks for joining us today on this business meeting. Today we released fourth quarter and full year financial results from our seventh year of operations as a publicly traded company. I want to take a minute to thank our team of nearly 38,000 employees that produce these results by remaining laser-focused on our operational pillars of safety, quality, cost and schedule. But before I discuss the financial results, let me share my thoughts on a couple of topics. Adoption of the Tax Cuts and Jobs Act commonly referred to as Tax Reform has created an opportunity for us to increase investments in three important areas. The first area is our facilities. Recall that in late 2015 we made a commitment to invest $1.5 billion of capital in our Shipbuilding business through 2020. These investments are intended to improve affordability, efficiency and competitiveness and to preserve and protect current and future U.S. Navy programs. Tax Reform will allow us to increase this commitment by an additional $300 million. These funds are designated for facility improvements that expand operational capacity at Ingalls and for investment in digital tools to improve operational efficiencies at Newport News. The second area is our employees. We will provide a one-time cash benefit of $500 to each hourly and salaried employee. In addition, we are accelerating discretionary contributions of approximately $200 million in 2018 for our qualified pension plans. Chris will provide more details on our pension outlook during his remarks. And the third area is our communities. We are increasing our investments through charitable – through additional charitable contributions to organizations across the country where we live and work. Even with these increased investments, we are maintaining our path to 2020 commitment to return substantially all of our free cash flow to shareholders through annual dividend increases of at least 10% and opportunistic share repurchases. The other topic I want to discuss is our outlook for Shipbuilding. When we developed our path to 2020 strategy three year ago, the revenue outlook was stable based on Congress providing funding to support the Navy's 308 ship plan of record. Since that time, the new National Security Strategy and National Defense Strategy have reexamined the perspective composition and legality of the future force. Additionally, the 2018 National Defense Authorization Act included the SHIPS Act, which is an important signal that demonstrates the nation's commitment to a larger fleet. We stand ready to increase production to support a larger fleet and if that perspective work occurs, we could envision a sales growth rate of approximately 3% over the next five years. This comes with the usual caveats regarding the adequacy of future budget request and a need for the Congress to resolve the final two years of sequestration and provide timely appropriations. Our long-term shipbuilding return on sales target remains in the 9% to 10% range. However in the near term, we may fall slightly below the lower end of that range from time-to-time as we continue through the transition period on programs at Newport News and begin the transition to new programs at Ingalls. Our outlook for Technical Solutions revenue and return on sales remains unchanged. Revenue is expected to grow in the low-single digit range and return on sales is expected to expand from low-single digits to the 5% to 7% range by 2020. Now let me share some highlights from the quarter and full year starting on Slide 3 of the presentation. Sales of $2 billion for the quarter and $7.4 billion for the full year were both higher than 2016. Diluted EPS was $1.41 for the quarter and $10.46 for the full year. Adjusting for the one-time cost to refinance our seven-year notes and for one-time tax expense related to Tax Reform and additional discretionary pension contributions, EPS was $3.11 for the quarter and $12.14 for the full year. Operating cash was $434 million for the quarter and $814 million for the year. 2017 was another strong year operationally as we delivered or redelivered six ships to the U.S. Navy. Most notably, the lead ship of the Ford class aircraft carrier USS Gerald R. Ford and we received $8.1 billion in new contract awards during the year, resulting in backlog of $21 billion at the end of the year of which $13 billion is funded. Now, I will provide a few points of interest on our business segments. Ingalls had another busy quarter as they laid the keel for LPD 28 Fort Lauderdale and DDG 123 Lenah H. Sutcliffe Higbee, christened DDG 119 Delbert D. Black, delivered DDG 114 Ralph Johnson and launched and christened NSC 8 Midgett. In addition the team extended the collective bargaining agreement with its labor unions for an additional four years. At Newport News, CVN 79 Kennedy is approximately 68% structurally complete and 40% complete overall. We continue to be pleased with the quality of the work and the incorporation of lessons learned from the lead ship of the class, the USS Gerald R. Ford. On the submarine program, SSN 789 Indiana remains on track to be delivered to the Navy in the first half of 2018, while activity continues to ramp up on Block IV boats. In addition, integrated product and process development work is underway for the Columbia-class program. Turning to Technical Solutions, the team secured a key win as a part of the LLC that was selected to perform the Los Alamos National Laboratory Legacy Cleanup Contract. That contract is valued at $1.4 billion over a period of 10-years and provides another opportunity to partner with the Department of Energy on a very important long-term project. In closing, I'm extremely pleased with our 2017 results and remain confident in our ability to execute our path to 2020 strategy. We are poised to benefit from modest growth in shipbuilding in the near-term and our Technical Solutions business is creating the building blocks for a bright future. Our credit profile has significantly improved over the past seven years and we are well positioned to continue delivering long-term sustainable value for our shareholders, our customers and our employees. So that concludes my remarks and I will now turn the call over to Chris Kastner for some remarks on the financials.

Thanks Mike and good morning. Today, I will review our fourth quarter and full year consolidated results as well as provide you with some information on the outlook for 2018. Before I get into the results, let me review a couple of one-time items that are included in our financials. We adjusted net earnings $14 million for the one-time expenses related to the early extinguishment of debt in the fourth quarter of 2017. Additionally, we adjusted net earnings $63 million for the impact of tax reform, $56 million for the write-down of our net, the deferred tax assets and $7 million associated with an expected $214 million acceleration of discretionary pension contributions into 2018. Please refer to the earnings presentation on our website or the earnings release for more information on these adjustments as well as the segment results. Turning to our consolidated fourth quarter results on Slide 4 of the presentation, revenue in the quarter of $2 billion increased 3.9% over fourth quarter 2016, primarily due to a full quarter of Camber sales of $70 million versus one month of Camber sales of $23 million in 2016 and higher volumes in Navy nuclear support services and aircraft carriers at Newport News, partially offset by lower volumes on the NSC and DDG programs at Ingalls. Operating income for the quarter of $227 million increased $41 million or 15.3% from fourth quarter 2016 and operating margin of 11.4% decreased 257 basis points. These decreases were primarily driven by $50 million of favorable one-time items at Newport News in 2016 and lower risk retirement at Ingalls, partially offset by improved performance at Technical Solutions and a favorable FAS/CAS adjustment. Moving on to the consolidated results for the full year on Slide 5, revenues were $7.4 billion for the year, an increase of 5.3% from 2016. This increase is primarily driven by a full year of Camber sales of $309 million in 2017 compared to one month of sales in 2016, higher volumes in aircraft carriers and Navy nuclear support services at Newport News and higher volumes in amphibious assault ships at Ingalls. Operating income for the year was $865 million and operating margin was 11.6%. Additionally, interest expense was $94 million for the year, an increase of $20 million from the prior year due to the bond refinancing in December. Our effective income tax rate was 65.8% for the quarter and 38% for the full year. This compares to 21.5% and 26.9%, respectively, for fourth quarter and full year 2016. These increases were primarily due to the revaluation of our net deferred tax assets as a result of Tax Reform. Turning to cash flow on Slide 6 of the presentation, cash from operations was $434 million in the quarter and free cash flow was $301 million. For the full year, cash from operations was $814 million and free cash flow was $453 million. Compared to 2016, cash from operations of $822 million and free cash flow of $537 million. The decrease in free cash flow was primarily due to lower net pension benefit and increased capital expenditures in 2017. Fourth quarter capital expenditures were $133 million and for the year $361 million or 4.9% of sales. This compares to $285 million or 4% of sales in 2016. Cash contribution to our pension and post-retirement benefit plans were $335 million in the year, of which $294 million were discretionary contributions to our qualified pension plan. Additionally, we repurchased approximately 174,000 shares in the quarter at a cost of $41 million, bringing the total number of shares repurchased in 2017 to approximately $1.4 million at a cost of $288 million. We also paid dividends of $0.72 per share, or $33 million in the quarter bringing totals dividends paid for the year to $115 million. Now let me provide you with some items for 2018 as shown on Slide 7. We expect non-current state income tax benefit to be in the $8 million to $12 million range, and our effective income tax rate to be approximately 21%. We expect interest expense of approximately $63 million for the year and we expect capital expenditures as a percent of sales to be between 5% and 6%. As Mike mentioned in his comments, Tax Reform allows us to increase our capital expenditure commitment through 2020 by an additional $300 million. Turning to Slide 8, I'd like to provide you with some perspective on FAS/CAS and pension contributions for 2018 and 2019. These assumptions are based on the pension discount rates and asset returns as identified on Slide 8. As you are aware, pension is sensitive to changes in needs and other assumption, but because of Tax reform, I thought it would be helpful to provide you with an understanding of our current baseline. We expect favorable net FAS/CAS adjustment of $369 million in 2018 and $356 million in 2019. As a reminder, starting in 2018, we have adopted the new retirement benefit standard ASU 2017-07, which moves all components to the FAS, pension and post-retirement benefit expense except for service cost from operating to non-operating income with no impact to net income. And as Mike mentioned, we plan to accelerate a portion of the 2019 discretionary pension contribution of $214 million into fiscal year 2018. This makes our planned cash contributions to pension and post-retirement benefit plans $549 million in 2018 and $92 million in 2019, of which $508 million and $49 million, respectively, are discretionary contributions to our qualified plans. 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. Sabrina, I'll turn it over to you to manage the Q&A.

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

I was interested, Mike, in your comments about the budget and you are saying that you could look at potentially a 3% top-line growth rate going forward. When you think about that, is that how you look at it based on the 2018 and 2019 budget proposals, or is that tied more to your Navy goal of 355 ship Navy, because I don't see those as necessarily exactly tracking together, so I guess what do you base the 3% outlook on?

Yeah. I think – Doug, thanks for the question. It's a little bit of both. You know I had to actually go practice how to save the word growth a few times before this call. We hadn't had a chance to talk about growth in Shipbuilding for a long time. And yet, here we are, we have a budget and a 30-year plan and a National Security Strategy that are all aligned. And if you look at the way this came out, they came out kind of in series the way they were supposed to come out and they came out on time. You know what's encouraged, there's a lot of things that are encouraging to me. Doug, I have been saying for a long-time that I have been worried about how the Columbia-class was going to be paid for without affecting the budget. If you look at the budget and you look at the 30-year plan, it looks like resources are going to be allocated to not create that effect, not create impact. We're going to pay for it. That's really encouraging to me. It's also encouraging to me that, the 30-year plan and the budget and all the documents basically talk about working with industry to find the most efficient ways to do these things. I have been calling that out as a great recognition of the opportunity we have to go and do things more efficiently and maybe even get some things done faster. At the end of the day though, we only do one budget at a time and as we look at the timing of the programs that we're involved with, over the next couple of years, most of those programs were going to be trying to go to contract on in some fashion. And so the startup of those programs and the timing of those programs and how that plays out, all of that kind of comes together and says, it looks like about a 3% target over the next five years. And, we'll adjust that accordingly as we get more facts and get deeper into it. But that's kind of the way we're thinking about it right now. And we're cautiously optimistic that you know we're ready to go here.

When you talked about CapEx and the new depreciation rules making that more attractive and you are making more investments now. Is that – are those investments separate from what you might think about if you start to see this become more concrete. In other words, are you going to be doing some investing, a little bit ahead of a potential growth in programs or is it something that you'll have to wait a little while to see contract get formalized?

Actually Doug I think we started investing a few years ago. And we talked about the need for a generational type investment in the capacity and capability of our shipyards to support that – to support our view of what the Navy needed to be. What this is doing is sort of, this is validating our decision to get out and invest early. And so, we think we're pretty well poised in position right now to answer the call and move ahead.

Thank you. And the next question will come from the line of John Raviv with Citi. Your line is now open.

Hey, Mike can you just qualify the 3% growth number. Is that supposed to be a CAGR over five years, and if so, should we think about it being either back-loaded or front-loaded or how do you think that kind of thing rolls out, given what – normally what you're seeing in the budget now, but the budgets that have been passed and got signature already?

This is Chris. It's a five year CAGR, rather not comment on front-loaded or back-loaded. But the way we're looking at the budget and the way we're looking at our plans look as if we could get that sort of growth rate.

Understood. And then, Mike, I was wondering if you could just give us some historical context for the last time you made facility improvements or generational investments, what did you do? Who paid for it? How long did it take and what did you – what do you feel like you got on the other end for it, was it more ability and more efficiency? Just kind of curious and your perspective there…

That's a really interesting question that we could probably spend all day talking about. I mean the history of the business has been that we've made investment – typically made investments when we can look down the sideline of a program with some confidence that the program is going to be there. They will make big investments, then either the program will pan out or it won't. At Newport News for instance, there were some pretty significant investments made by Tenneco back in the 1980s in support of Newport News participating in the Seawolf program. When the cold war ended and that program got truncated, that – that Newport News did not have any participation in the construction of those programs and those facilities had to be redeployed. My observation of that was that the value of those facilities, they became valuable to other programs and so our ability actually to specifically quantify the capital investments to a particular program, my personal observation is we need to be better than that. We build facilities that are – in the end are going to outlast programs and they are going to be flexibly used for other programs along the way, and so that's what led us to the decision that we were going to make these generational investments a few years ago because we knew that first of all our investment would help actually create future where the Navy would have some confidence that they can move ahead with the program. Secondly, that these facilities would outlast any program that was on the record at that point in time. And so, you know I don't want to say that this was the first time we made generational investments, but it was a major departure from a way that at least in my experience and history, the way that we had always invested in the past. And so, we've been confidently going down that path. Like I said, this – the last series of events with the national security strategy and the budget and the 30-year plan at this point seemed to validate that perspective and we're pretty excited about where we are.

Thank you and the next question will come from the line of Pete Skibitski with Drexel Hamilton. Your line is now open.

Hey Mike can you got into any more detail on your thoughts on the five-year shipbuilding plan just because you know when I look through it, I saw good thing, I saw less good things for you guys in terms of, more DDG 51s and thinking about still that gap on the LHA, I think – I didn't see any more NSCs, so how are you thinking about the puts and takes there and the ability for Congress to shape it, just little more thoughts on that?

Well, I mean, you know if I were write the 30-year plan, it would probably look a little bit different than the one that the Navy wrote. But that's okay, that's part of the process. And there are certainly some things that we could go in and say we would prefer to see this in this place or that in that place. But quite frankly, what I – the first thing that I looked at was the resourcing of the 30-year plan and the call-out for the expansion of resources across the plan to go and build – I mean the phrase you know to create the Navy the Nation Needs, strikes me as the right way to go about doing a 30-year plan. As opposed to trying to maybe in the past we might have done the nation – the Navy the nation can afford. And so, we got to get into how all that's going to work out, but where we have some opportunities to engage with the Navy and to engage with the Congress on more efficient ways to perceive, we'll do that. But all-in-all I'm pretty pleased with where it sits right now.

Okay. So, as it stands, the LHA gap, doesn't present a big marketing challenge or workforce challenge for Ingalls kind of by itself as ways to mitigate that. It looks like they did add more LPDs?

No, I wouldn't say that. I mean if it actually executed the way that it is in the plan, that would – that's something that we would be engaging on, say that there is a better way and more efficient way and more productive way to build in those – build that product and build those product lines. So, I'm not ready to say that, you know we completely 100% endorse the way that it's laid out, but we'll be engaging with the Navy on those things that we think could be improved. And you've highlighted one, the LHA is one of those areas that we will be talking about.

Thank you. The next question will come from the line of Carter Copeland with Melius. Your line is now open.

I wondered if you might just give us a little bit of color about the incremental $300 million CapEx how that's splits between you know facilities improvements versus the capacity expansion efforts you mentioned?

So, Carter this is Chris. $200 million of that is related to facilities and equipment primarily at Ingalls and increasing capacity. And we have a $100 million of it related to additional digital tools at Newport News.

Okay great and then another one Chris with respect to the pension pre-fund, where does that put you now on a funded status when you look out at the 2019 and 2020 on risk basis? I would assume you are at a pretty good spot here in terms of contributions looking beyond what you laid out for 2018 and 2019?

You asked a good question. So, yearend we are at 89% funded on a FAS basis. We don't give specific numbers for 2018 and 2019, but when we have a $900 million liability and we are essentially cutting it in half. So I don't want to project what's going to go on and what's going to happen with asset returns and discount rates till the next couple of years.

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

So Mike, as we change Blocks here on Virginia-class and on DDG 51 into Flight III. Could you talk a little bit maybe in more detail about the timing on unit revenue increases and changes in margin profile? I think, Flight III adds some complexity on the DDG 51, and then of course just the higher unit numbers on the Virginia-class, and when that should flow through?

Yeah. So, first of all, I am not sure that I am going to talk about any particular program like that. I think what I would tell you is, what we've talked about before, that the healthy business has to have the right amount of new work coming in and the right amount of mature work in the business, so that in a blended way you end up being in a 9% to 10% range. Certainly, where you just got the RP for the multiyear on the DDGs and we're beginning to work on getting through to the next Block, Block V on Virginia-class. And we've talked a lot about how that, the start up with those programs, we have pretty good risk registers and we don't take credit for retiring the risk until we retire. I think what I would tell you at this point is that if we really are going to expand the Navy the way that these documents suggest and the way that people are talking about, what that's going to do is that's actually going heavier – it's going to put a heavier weight on the new work than what we have today on mature work. And so that's going to swing our overall. That's my comment about how as we transit – we began transitioning programs at Newport News. We are going to go through a transition at Ingalls as we expand, and so that's going to put a little bit of pressure on the bottom side of that band.

Well, that's really my question, Mike is, when is that Ingalls transition just with all the budget numbers moving around and the ramps and so forth? When is the timeframe for that transition? Because I think what you are implying is 11.8% doesn't happen, when that happens in terms of margin?

I mean, when that happens, when you see a number like that, it means that they've been very successful retiring risk on very mature programs. It's not hard to go through and kick off starting at the very top. There is going to be a new carrier, hopefully two in our contract base in the next couple of years. There is going to be a new block of submarines in our contract base in the next 24 months. There is going to be a new flight of destroyers in our contract base. There is going to be a new flight in transition to LXR in our contract base. We are ramping up right now on LHA 8. And so, just about every single one of our programs over the next 24 months, we are going to be going to new contract on. And so, my view of that is that this is going to play out over the next couple of years, maybe two or three years. And depending on the timing of those contracts, it could extend to the fourth year. But that's – I mean that's all – it's all good because its expansion of the business at a time when we are executing really well. And it allows us to set the stage to move those programs to a point where they are mature for us in the out years. That's why I am really excited about this and we don't typically break any of the programs down by program. But in general, the expansion of the Navy is going to create near term pressure as we take on that risk and long term opportunity as we harvest those programs.

No. Mike, you've proven over the last half decade or so that you're going to book conservatively and then hit your numbers. You guys have been executing very, very well. What I am trying to figure out is as we get this 3% revenue CAGR, can EBIT keep up if the margins profile is going to change that?

So Rob, This is Chris. A good bellwether is the launch of CVN 79 in 2020.

Okay.

That's a good point, Chris. That's sort of a point where we will be able to assess where we stand relative to most of the programs we have.

Thank you. The next question will come from the line of George Shapiro with Shapiro Research. Your line is now open.

Good morning. I don't know whether others are having a problem, but the quality to the call is not very good. So hopefully I am not repeating a question. But I had for you Chris, free cash flow in 2018 I assume was probably going to be less in 2017 given the increased CapEx [Technical Difficulty]?

Can you hear me now?

I hear much better now.

Okay. I can't hear you very well. But I think your question was about cash flow in 2018, it's a good point relative to the additional capital on the net pension. We finished around $450 million free cash in 2017. I probably have about $100 million of pressure to that in 2018.

And then Mike, you'd mentioned that the margins could be a little bit lower in the next year or two. Is that just the Newport News and the pressure from the Kennedy, and if you could also update as to when you think you'll be able to ensure that you're going to be right on your learning curve at some point as opposed to the Navy?

Yeah George, I think I made that out major question out. And we just talked about that with Rob, but I would just say Chris makes a good point in that conversation that the launch of Kennedy in 2020 is the place where we will be able to do a true risk assessment on how much risk did we retire, how much do we still have? Did we get what we wanted? You know, all of the classic stuff we do when we watch these major events. What I can tell you right now on the Kennedy is that we are seeing significant progress being made in terms of the construction schedule. And we are seeing that the investments we made to take man hours out are generally working. So, we are pretty excited about that.

So, is that the concern is to your comment that the margins could dip below the 9% to 10% in the next couple of years?

No. The concern I have about margins is just the macro concern that and it's not a concern, it's just an observation. The observation is that as we expand the volume here, we are going to go to contract in just about every one of our programs over the next couple of years. This is all new work. Every piece of new work that we bring in brings with it a risk register. When we see that risk register, we don't take credit for retiring it until we retire it. So we are going to have as we expand the business, we are going to have more risk registers to go manage and what that's going to do is that that's going to mean more volume of new business relative to volume of mature business, which will swing the pendulum more towards the low end of the range. That's the point of the conversation.

And is that more skewed to Newport verses Ingalls?

It's every program, George, across the business. Newport News has frankly been going through this for the last couple of years as they've been transitioning from Ford to Kennedy, transitioning from Lincoln to George Washington, transitioning from Block III to Block IV and we are getting ready to start in on Block V. They've been working on this for a couple of years. Their programs have longer horizons, but we see this across the whole business over the next couple of years.

Thank you. And the next question will come from the line of Gautam Khanna with Cowen and Company. Your line is now open.

Chris, maybe for you on your comments on free cash, down about $100 million, what does that contemplate through the Avondale recovery in 2018?

That's a really good question. Remember the Avondale restructuring settlement is related to overheard expense, which is incorporated into our contracts, our billing rates, run through share lines at some point that we recover from our customer. So, on the specific number related to that and we'll trickle in this year and you'll see a reduction in the working capital at Ingalls. But at the end of the day it's incorporated into the information I gave you relative to the headwind I have in 2018 versus what we finished in 2017 of $100 million.

Okay, so it's embedded in the rates?

Yes, absolutely, it's overhead cost.

Mike, maybe for you, could you give us some sort of context on Columbia-class revenues over the next three years ahead of actual construction starting in 2021. I know you have some design revenue. What are you recognizing and when will you recognize some of the long lead time items. And the last thing, what are you guys expecting in 2018?

Well, this is Chris, Gautam. We're working on that on that program now. You've got it right relative to the first boat and we'll ramp from here to there kind of incrementally, but that's all contained with the information Mike gave you relative to the 3%, rough 3% CAGR over the next five years.

Can you give us a ballpark of what you expect the revenues on that program to be in call in 2020, 2021 something like that, because I know the share line 22%, you transitioned from design to actual production, is there any sort of sizing of it?

We don't usually get into the sizing of each program, so we'll pass on that.

Last question, Technical Solutions. Are you seeing any signs of life in UPI, and is that finally turning into the black and anything you can comment on business momentum there?

Yes, so that's a good question. Glad you asked it. UPI, that team is operating very well has got their cost structure squared away. They are adding people up in Canada and they are stable in Houston and they are competing very well for new projects and they have a very robust pipeline. So, really positive on how UPI is performing right now.

Thank you and I'm showing now further question at this time. I would now like to turn the call back over to CEO, Mr. Mike Petters for further remarks.

Okay. Well, thank you and thanks for joining us on the call today. And as I mentioned earlier, we are executing well across the business in everything that we're doing. We have key wins in our Technical Solutions area. We're poised to build the Navy the Nation Needs and we are excited about our future going forward. We want to thank you all for joining us today and we appreciate your interest in HII. Thank you.

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