亨廷頓·英格爾斯工業 (HII) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Huntington Ingalls Industries Q1 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Dwayne Blake, Vice President of Investor Relations. Sir, you may begin.

Thanks, Ashley. Good morning, and welcome to the Huntington Ingalls Industries first quarter 2017 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer; and Chris Kastner, Executive 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 law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Also, in their remarks today, Mike and 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. Our first quarter financial results reflect solid performance in shipbuilding, while Technical Solutions absorbed the impact of a reserve booked for work performed by their nuclear and environmental group for Westinghouse. Chris will provide some additional color on this topic during his remarks.

Before I get into highlights for the quarter, let me talk about the leadership change we announced yesterday. Matt Mulherin, President of Newport News Shipbuilding, will retire on August 1 after more than 36 years of service. Matt's career at Newport News has been remarkable, and HII would not be the successful company it is today were it not for Matt's leadership. With Matt retiring, we also announced that Jennifer Boykin will succeed Matt, beginning July 1, as the new President of Newport News Shipbuilding and will join my team. Jennifer has been at Newport News since 1987, and has proven herself to be a strategic and visionary leader focused on operational success. I am extremely confident that the shipyard will be in very capable hands.

So now let me share some highlights from the quarter, starting on Page 3 of the presentation. Sales of $1.7 billion were down 2.2% from last year. Diluted EPS was $2.56, and operating cash was $98 million for the quarter. Additionally, we received $600 million in new contract awards, resulting in backlog of approximately $20 billion at the end of the quarter, of which $12.7 billion is funded. As you know, we hosted President Trump, the Secretary of Defense and the Chief of Naval Operations on board CVN-78 Ford back in March. It is always an honor to host the commander in chief, the secretary and the CNO in our facilities. And we were encouraged by the President's stated commitment to a 12-carrier fleet. And while this is great news, we recognize that aircraft carriers and most other capital ships are funded across several budget cycles. We are encouraged that an omnibus appropriations package for fiscal year 2017 has been finalized that leverages the hot production lines at Ingalls by providing full funding for LPD-29 and long lead material for NSC-10. And we continue to urge both the executive branch and the Congress to support investment in 2018 and beyond that officially leverages our hot production lines to build the future fleet that our nation requires. While the administration's 2018 skinny budget request has been released, it did not contain programmatic details. So we look forward to reviewing the complete 2018 President's budget request when it is released.

So now I'll provide a few points of interest on our business segments. Ingalls achieved several milestones during the quarter, including authenticating the keel for DDG 121 Petersen and NSC-8 Midgett and christening the NSC-7 Kimball. In addition, LHA-7 Tripoli launched earlier this week. The team's focus is to continue executing well across all programs while repairing DDG-114 Johnson and LPD-27 Portland for sea trials and delivery expected in the second half of this year. At Newport News, CVN-78 Ford conducted successful builder sea trials in April, and returned to Norfolk naval base to prepare for acceptance trials and delivery to the Navy. We are very pleased with the way that Ford performed during builder’s trials, and look forward to this first-of-a-class ship being commissioned into the Navy's fleet.

SSN 787 Washington completed successful builder's trials in April as well, and is also preparing for acceptance trials and delivery to the Navy. In addition, Newport News hosted Vice President Pence last weekend for the christening ceremony of SSN 789 Indiana.

CVN-72 Lincoln is preparing for sea trials next week, and is expected to be redelivered to the Navy fleet later this month. This ship has been refueled and recapitalized, and is prepared to serve the Navy for the next 25 years.

So turning to Technical Solutions. This was the first full quarter of operations for the combined segment. They won several small recompetes and new contract awards during the quarter and are executing work under contract while beginning the process of shaping and building the 2018 new business pipeline.

In addition, the leadership team is focused on operating as a combined integrated business in order to leverage their broad array of capabilities to pursue organic growth opportunities.

In closing, I am pleased with the execution and financial performance of our shipbuilding business and the progress that the Technical Solutions team is making with the integration process. We look forward to the administration's release of the FY '18 President's budget request so that our team and the shipbuilding industrial base can begin determining the potential hiring, capital expenditures and supply chain implications.

Now 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. Starting with our consolidated results on Slide 4 of the presentation. Revenues in the quarter $1.72 billion decreased 2.2% due to lower volumes at Ingalls and Newport News, partially offset by the acquisition of Camber. Operating income for the quarter of $164 million decreased $34 million or 17.2% from first quarter 2016, and operating margin of 9.5% declined 172 basis points. These decreases were due to lower volumes and risk retirements in our shipbuilding segments and a $29 million reserve we booked in our Technical Solutions segment as a result of Westinghouse Electric Company filing for bankruptcy protection on March 29. Technical Solutions, Nuclear and Environmental Services business fabricates lower shield on air inlet and tension ring structural steel modules for Westinghouse AP1000 reactor dry shield buildings. Due to the bankruptcy filing, we've decided to reserve for all accounts receivable due from Westinghouse.

Turning to Slide 5 of the presentation, cash from operations was $98 million in the quarter, and free cash flow was $40 million. Capital expenditures in the quarter were $58 million or 3.4% of revenues compared to $37 million in first quarter 2016. Additionally, we contributed $55 million to our pension and postretirement benefit plans in the quarter, of which $45 million were discretionary contributions to our qualified benefit plans. We also repurchased approximately 358,000 shares at a cost of $72 million and paid dividends of $0.60 per share or $28 million, bringing our quarter end cash balance to $608 million.

Moving onto segment results on Slide 6 of the presentation. Ingalls' revenues in the quarter of $550 million decreased 6.1% from the same period last year, driven by lower volumes on the DDG and LPD programs, partially offset by higher volume on the NSC program. Ingalls' operating income of $66 million and margin of 12% in the quarter were down from first quarter 2016 due to lower risk retirement on the LPD program, partially offset by higher risk retirement on the NSC program.

Turning to Slide 7 of the presentation, Newport News revenues of $971 million in the quarter decreased 2.2% from the same period last year, primarily due to lower volume on the VCS program. Newport News operating income of $72 million and margin of 7.4% in the quarter were down year-over-year, primarily due to lower volume and risk retirement on the VCS program.

Now to Technical Solutions on Slide 8 of the presentation. Technical Solutions revenues of $225 million in the quarter increased 8.2% from the same period last year, primarily due to the acquisition of Camber, which contributed approximately $80 million in revenues, partially offset by a favorable resolution of outstanding contract changes on a nuclear and environmental commercial contract in the first quarter of 2016. Technical Solutions' operating loss of $18 million in the quarter decreased $21 million from first quarter 2016 due to the $29 million reserve taken against accounts receivable due from Westinghouse and the favorable resolution of outstanding contract changes in the first quarter of 2016, partially offset by improved performance in the oil and gas services business and the acquisition of Camber.

That concludes my remarks on the quarter. 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. Ashley, I'll turn it over to you to manage the Q&A.

(Operator Instructions) And our first question comes from David Strauss of UBS.

First question. Can you just update us on scheduled kind of risk retirement milestones as we go through the year? I think you've talked about before that they’re weighted towards the second half of this year. And what that means for that margin progression as we go throughout the year.

We still think of the Navy business as flat for the year at a 9% to 10% return on sales. Ingalls did have a good Q1 across a broad array of ships and continued to perform well. And there are risk retirement milestones through the balance of the year. And we're just going to have to see how we perform there, but we still believe it's 9% to 10% Navy business.

A follow-up question. Chris, the free cash flow for the year, the conversion there, I think you've talked about still targeting 100% despite the CapEx and pension headwind. Is that still reasonable to think about it that way?

Well, it's reasonable to think about the $150 million of headwind that we face compared to 2016. Team's working very hard to offset that with working capital performance, but we still see that $150 million of headwind in the year.

Our next question comes from Gautam Khanna from Cowen.

I just wanted to, first, follow up on David's question on the risk retirement schedule at Newport specifically. Previously, you mentioned on CVN-79, there's no real big risk items this year. I was wondering, when do you expect to start to approach some of those bigger milestones and what those are? And then I have a follow-up on just -- go ahead.

Okay. So when you think about Newport News, we've previously spoken about the transition between Block III and Block IV, 78 and 79, and then the RCOH efforts. CVN-79, we don't launch that ship until 2020. So we're going to be conservative as we move through the production cycle on that ship. There's really nothing material that I can mention until the launch of that ship.

Okay. So there's no big opportunities favorable or negative next year either on the 79?

We evaluate it every quarter, but I don't see anything significant.

Okay, that's good to hear. I want to just also ask about new programs. So Icebreaker's been talked about in the past, kind of what the status is there, what your latest thinking is on LXR timing. And the Columbia class funds starting to flow to you guys.

Yes. All of that is -- essentially, with this 2017 deal that's been reached in the last few days, we’re -- we've kind of come through a CR here which was pretty lengthy, which we're glad we're through that. We're happy with the way the '17 piece turned out. Now as we finish that part of it, we're going to be -- it's all eyes on '18, what the budget -- what the request looks like, and then how that gets worked through Congress. What I would tell you is that our discussions with the Pentagon and the Hill have been really focused on how's the most efficient way to buy the stuff you want to buy. Across the board, I'd say, for the most part, the country knows what it wants to get. We're investing in those things to do that as efficiently as possible. The question is, can you actually acquire them in the most efficient way? So for example, you didn't mention it, but the most efficient way to buy an aircraft carrier is to buy 2 of them at a time. We've done that before. That creates the rhythm in the business and the spacing in the business that is most efficient for the business. And the same thing can be said for all of the other programs. The Virginia class program, we are in a rhythm now where we're doing 2 per year. It appears that there's going to be demand for more than that. And so how do we pace ourselves to increase that production flow. The Columbia class, as we head to the first ship, I mean, what's critical now is that we have to keep the design money flowing through the budget process so that we get that ship started on time. And this is really kind of tricky because lots of times, we kind of cut the design money in favor of other things. And then we try to make it up in production, which leads to cost excursions in production. So our view has not changed on any of this stuff. You need to keep moving. You need to be pretty sustainable on it, buying carriers 2 at a time; increasing the production of Virginia class; increasing the production of the DDG program, especially Flight III; accelerating the LXR program so that you can get -- now that we have LPD-29 in the plan, let's now build right off of that and go into LXR. Let's make sure we do that as efficiently as we possibly can. But it's going to be all eyes looking at the 2018 budget. And then not just the president's request, but then how that debate plays out on the Hill.

Our next question comes from Sam Pearlstein of Wells Fargo.

I was wondering if you could address something on Virginia class. Your partner on their first quarter call talked about a negative adjustment they had for a late delivery of a Block III sub. Can you talk a little bit about either what happened in terms of the recovery, and then whether there was any financial impact to Newport News this quarter?

Yes. There was no material financial impact. We dealt with that within EAC on the ship, and there was just minor technical issues that had to be dealt with.

Okay. And then if I could follow up on the Westinghouse bankruptcy. If you've now reserved in terms of the receivables, is there still work to be done? Is there any way that number can grow from here? Or is that everything that you would be potentially exposed to?

Well, that $29 million is for AR pre-bankruptcy of March 29. We're continuing to work and produce product for Westinghouse. We have a contract to do so, and we fully expect to be paid for that. There is some assurance relative to the additional debt financing they received, and then there are interim assessment agreements that they have in place with the owners. So we have a contract. We're continuing to work and produce really good product. We expect to get paid.

Just to clarify that, I think the owners have stepped in with the intention of trying to figure out how do we proceed forward and continue to build these plants. And so they've given us their assurance, with these agreements, that we need to keep working to support that while they go figure out how they're going to finish it. And so we're operating under those agreements right now under the bankruptcy court.

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

I wanted to ask, in technical services, Mike, if I back out the $80 million Camber revenues, and even if I add back $29 million, which I assume you lost in sales because of the reserve that was taken, you're still down like 16%. Admittedly, it's still a small part of the company, but what continues to be relatively weak there? What kind of hope is there?

There's some seasonality there, George. We fully expect that TS organization to be at $1 billion or roughly $1 billion for 2017. But you're absolutely right. There's some seasonality going on there.

Well, but I mean, it's year-over-year, so I wouldn't think there's that much seasonality. I was just wondering what would have transpired to be down that much on an organic basis year-over-year.

Yes. Nothing significant that I can point to at this time, George.

Okay. And then could you just provide us the EACs in the quarter? Since I know it's going to be in your Q, which you're probably going to put out later anyway.

You mean the cumulative adjustments?

Yes for each of the -- for Ingalls and Newport News.

So they were $57 million positive, $31 million negative. About 65% of that positive was Ingalls, the rest Newport News, and then they split the negative fairly equally.

Our next question comes from Rob Spingarn of Credit Suisse.

So going back to some of the questions that were asked earlier, I mean, I think, Mike, you talked about all the various programs and how important the timing is, et cetera. But when we think about the transition to LXR from LPD-29, and we think about the potential for Virginia class to increase to 3 per year, I think starting in 2022, and then a surge possible on the DDG 51, when you put all that together, how do we think about the range of annual CapEx under the various scenarios relative to what you're spending this year in '17 as we go forward the next few years?

Yes. So that's a good question. We've put in place a capital plan back a couple of years ago that really didn't -- that was really based on the 30-year plan at that point in time. And since that time, the Navy has done their Force Structure Assessment and all these other things have happened that have basically said that the fleet needs to be 20% bigger. And so our capital plan that we had put in place before, this $1.5 billion that we're working our way through, we're going to get to the end of that around 2020 or so. If we find ourselves in a place where we really do need to expand the business to be able to do 3 destroyers or 3 submarines, we want to take another look at it and see how that plays out in terms of when do we make -- do we need to make incremental adjustments or incremental investments? And when should we do that to support the program? That's why I go back to kind of all eyes are on the 2018 budget. You've got to actually begin the path and begin the drumbeat of moving down those program lines, so that not only we can make those investments, but our suppliers will make the investments that they need to make as well. I continue to insist that we can ramp up faster than the government can appropriate the funding. This is going to be a big signal to the whole industry about whether we should really go down the path or not. And that's what we'll be watching.

From a magnitude perspective, are we talking about a $300 million-type CapEx number today? Or it's just under that, moving to $400 million with these newer ships 4 years from now, I mean?

Yes. But I think it depends on the program and the timing. And it's just -- there's a lot of variables that we'll have -- we'll have to read the tea leaves of how the budget's shaking out to sort that out. So...

No. I think you hit it on the head. I think that's right.

I mean, is there -- I was going to say, is there a mitigating factor here that are on several of the things we just talked about? We're increasing volumes on existing programs, so at least from a profit perspective, we could mitigate some of that increase? I realize the timing would lag. You'd spend the money on the CapEx, and then take in the higher cash flow later. But it would seem to me that your margins would go up on 3 destroyers, 3 Virginia class, et cetera.

Yes. I mean, I think the margin piece of it, what the volume does for us is it does give us a chance to be more efficient because we can be more predictable in taking advantage of learning curves and capturing the value of whatever investments we make. But I think that just because that they announced that they're going to buy 3 submarines, that doesn't change the margin profile in our business. We actually have to get into the work and walk through our risk retirement protocols that we always do to drive that -- to drive those returns. And frankly, at the end of the day, whatever volume we have, I think it's just fair to say that shipbuilding is going to be in the 9% to 10% range. That's where our shipbuilding business is going to be when you have low volume you put pressure on it, when you have high volume and have the opportunity to do -- to make it work better. But I think that's where we're going to be.

So on that note, Mike, when do we see the margins tail off a little bit on the LPD program as we move away from 26 and into 27?

I think the way to watch the LPD program is whether they can fill the pipeline. We've had 28 get added to the process. We've had 29 now get added to the process. We need to see LXR following on 29. I think that if we're able to do that, I think that we're able to -- we will be able to continue to retire risk and execute on that program and take advantage of the production line.

I don't mean to lengthen the discussion, but given the fact that 26 was so ultra-profitable at the back end, because it was booked so conservatively on the front end, are we already starting to see some margin contraction because 27 was booked more evenly?

There are going to be ships that do better than others. And that's why we don't give specific guidance on margin by ship or report on margin specifically by ship. We still think it's a 9% to 10% return on sales business, and LPDs make up a part of that.

A strong part of that these days?

Before we take the next question, I would like to clarify a comment I made to George. In Q1 of 2016, we did have an NNI restructuring of a fairly significant contract. So you think year-over-year, from a sales standpoint, Q1 of 2016 was a bit higher. So we'll provide you with the details of that or we can give you the details of that subsequent to the call, but that does provide on the rationale. Okay, let's proceed.

(Operator Instructions) Our next question comes from Jason Gursky of Citi.

I wonder if could just continue on a little bit with Rob's questioning on the CapEx and the investments going into the business. And Mike, I was wondering if you can maybe update us on how effective the investments have been to date. Are they doing what you had hoped what they were going to do? Maybe just provide us some color on lessons learned, and whether you're shifting a little bit on the plan and making some tweaks as you go along. Just trying to get a sense of how this is all rolling out.

Sure. That's a good question. First, let me start by saying that these investments are generational and long-term kinds of investments, and their impact is going to be felt over a long period of time and not necessarily in the next year or the next quarter. That being said, some of the investments that we've made are already showing up as value for particular programs. We made some very discrete investments for a carrier construction on CVN-79 to drive learning curves in that program as we took the lessons that we learn from 78 and adjusted our build plan and our material plan for sequencing that ship. And there are many, many examples -- as I walk around that ship, I see many, many examples where we're building it differently to capture the lessons that we learned from 78. And that's being driven, in some cases, by the way that we invested the money. And so those investments that we chose to make are playing out the way that we predicted they would. There are other long-term investments that are going to take a couple of years just to build the facility, and we're not even going to being able to use or start to use the facility for 2019 or 2020. So that's a little bit harder to put our heads around. But I would back up one -- kind of back up one level on all of this. We began -- we made the decision to make this investment ahead of the Navy's reevaluation of the size of their fleet. We were making these investments to optimize our production in support of the 30-year plan that was on the street at that point in time. We also have -- over the last 6 years, we've done a pretty decent job of getting our execution side of our business in order, getting that house in order. And so I think that where we are today is that we're executing well, and we're investing against the future which gives the Navy some confidence that they can go out and actually talk about increasing production of existing programs. There may be a chicken and egg thing there about which came first, but I certainly believe that our partnership with the Navy and our ability to perform to the levels that we've been performing and our willingness to invest in their future gives them some confidence that the future that they're drawing out there is achievable. And I think that that's an important part for us to play in the future of our Navy.

Yes, that's helpful. And then just shifting gears really quickly. You made some comments about the oil and gas industry in your prepared remarks, maybe seen some year-over-year improvement there. Can you provide us a little bit of insight on the pipeline there, whether the pipeline of potential deals is indeed continuing to grow year-over-year and kind of your expectations for the next 12, 18 months?

Sure. I'll take that, Mike. Cost structure, we've done a lot of work on the cost structure in oil and gas last year. I think we have that squared away, and they're competing very well down in Houston. Actually, up in Canada as well. We're adding staff in Canada, which is very positive. I think the stabilization of oil at the price it's currently at has helped provide some of the operators to make some investments. The pipeline, while we haven't seen a complete recovery, we are competing well for the stuff we're competing for. And we're very hopeful that, that organization will continue to improve as we move throughout the year.

Our next question comes from Finbar Sheehy of Bernstein Research.

If we go back to Technical Solutions and set aside the reserve that you took, it looks like the margins would've been nearly 5%. Previously, you said the segment would have fairly low margins. Is this the level you had in mind?

No. We expect TS to be at the low single digit for this year. They have some small nonrecurring items that's really not significant enough to match in, in the quarter, which led to the 5%. So we still believe it's low single digits, lower than 5%.

And how are you thinking about the portfolio you have there now from here? Are there additional capabilities you'd like to add for greater breadth or ones where you'd like to add for more volume?

Well, I think we're going to continue to evaluate that. I mean, our major thrust right now is to complete the integration of the business. And we're seeing opportunities where the combination is starting to be able to pursue things that they couldn't pursue on their own before. Where that leads us to identification of capabilities that could be added, we'll have our eyes open for that. And that's kind of the way we're thinking about it, focusing on the integration right now.

Our next question comes from Pete Skibitski of Drexel Hamilton.

Mike, I want to talk to you about LPD-29. It looks like it's pretty much a done deal now, a $1.8 billion ship. I'm not sure how much is GFE. But I feel like you've had some concerns in the past about Ingalls' kind of work volume and revenue outlook, maybe that 2018 to 2020 kind of time frame. And it just seems like this ship, even if it's built over 4 years or so, it seems like that would really meaningfully improve that outlook in that time frame. Am I wrong about that, number one? And number two, does it also -- are you really still kind of looking at flattish revenue overall for the firm through 2020? Or does this ship, by itself, kind of change that outlook?

Thanks for the question. There's no question that we're better off with the ship than without it. I think that's clear. I think if we back up, the LPD program was going to end after LPD-27, and the LXR program was somewhere over the horizon. And we made the point that as we were beginning to feel the production line heat up and become more efficient across the board, we made the point that about the time we get this line really running, we're going to stop work and then sit on it for 4 or 5 years until the LXR program came. LPD-28 became the first step in a bridge to get from LPD-27 to LXR, but LPD-28 was not a sufficient bridge at the time. LPD-29 is the next piece of the bridge. The last piece of the bridge is to get LXR brought in a little bit. And the more we can make LXR look like LPD, the more you're going to be able to take advantage of the production line that we have. So all of that is part of the process. And I would not say that -- I would say that LPD-29 is a very big step, but I wouldn't say that we're completely out of the woods on that yet. We still got to see the LXR program move ahead, and we need -- in all of the new moving parts of the project, we've got to see that LXR program stay the course and move ahead and take advantage of the production line. So that means it's got to look like LPD. Secondly, I would point out that the LPD program is only 1 of 4 programs that we have at Ingalls right now. And so while it's a very important part of our business there, the National Security Cutter program is important. The destroyer program is important, and the LHA program is important. And so one ship in one of those programs is not going to solve the problem. It becomes a part of the solution. And we have to have -- we have to be looking at all of those. If we ramp up the DDG program, if the next LHA is on track, LHA-9 gets in the plan, and we can move down the path where we continue to work the NSCs, then I think you've got -- Ingalls will continue to be able to do this for a while. On the other hand, if you have hiccups in all of that, all of those are important to the future of Ingalls. And it's not reliant on any particular one of them.

Okay, that's helpful. And just one quick follow-up. Just a slow start to the year at Ingalls revenue-wise, just being down year-over-year. Would you say that that's indicative of how the full year might play out? Or is this a timing issue?

No, that's just timing. That's LPD-26 being replaced by LPD-28 and LPD-28 ramping. So it's just timing.

(Operator Instructions) Our next question comes from Joseph DeNardi from Stifel.

Mike, I wonder if you could just update us on Flight III for DDG. I think there was some uncertainty as to how that program is going to be contracted, whether at fixed price or cost plus, how you're thinking about that now. And whether that change is kind of the risk profile on that program.

Yes. I think that's still moving around a little bit. We just saw some more funding for an additional destroyer in the write-up in the bill for this week. How that gets phased in -- feathered into the production line is something that the Navy is discussing with both companies at this point in time. And I would say that, quite frankly, all the options are still on the table. We believe that it's imperative that we move ahead with Flight III, and we're trying to find the best way to do that in support of our customer. And so how we do that, I think, remains to be seen. But that's kind of the -- and as far as I'm concerned, contract type goes along with the risk register. If you have a lot of risk, you've got to think more about a cost-type contract. If you think you've got your arms really around the risk, you can move more towards a priced kind of contract. And because all of those options right now are on the table, our aperture's wide open, and I wouldn't put a stake in any one of those at this point.

Okay. So you don't think that the risk, as you see it now, mandates cost-type contracts?

Certainly, when you change the ship to the extent that this is being changed that there will be newness, and there's risk in the newness, the question really comes down to the maturity of the design and how confident we are that the design is mature enough to move ahead. And that's part of the evaluation process we go through. Feel pretty good about that right now, but we still got some more work to do.

That's great. And then just an update on Avondale and the proceeds there, kind of where your discussion stands with the Navy at this point.

Yes. We are continuing to discuss possible resolution with the Navy. We did actually do a formal filing at the end of April with the SPCA. So we're following both paths. We think it's prudent to do that, but no real progress or information that we can provide at this time on that.

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

Mike, I just wanted to ask, you were commenting how you're kind looking at the '18 budget to see what's really going to happen. But I mean, shipbuilding in the just approved '17 budget is up like 15% from Obama's initial request. So won't that give you sufficient confidence? Or how much further of an increase do you need to see?

Well, I think you're exactly like, George. I mean, I was scratching my head last night trying to think when it was the last time we saw a $20 billion SCN line, right? And I'm not sure I've ever seen that. So that's -- there's no question that everyone's heads are in the right place saying this was something that we needed to go do. So I have confidence. Having said that, the proof is going to be in the pudding, so to speak. And when the budget request comes over on '18, there's things that we're going to need to see. What would I like to see? I would like to see a desire to buy 2 carriers, get the contract, get the carriers under contract 2 at a time. I'd like to see a stated intent to increase the volume in procurement for VCS and the DDG program. I'd like to see the LXR program stay the course or move ahead a little bit. I don't know if they can do all of those things, given the constraints that they have. And so, one, your point about shipbuilding being a long-term business is exactly right. One good year doesn't mean that we have a sustainable program. We've got to stay the course here for a few years to really get this moving. And I'm optimistic about that. I'm encouraged that everybody is talking about it the right way. I'm watching the mechanics to make sure that, mechanically, it gets done.

How much more you think the budget would have to go up to incorporate the items you just mentioned?

I think it depends on how you decide you're going to fund it and pay for it. I mean, in the carrier case, for instance, if you decided that you wanted to buy 2 carriers at a time and you were going to fund all of that in one year, that'd be a pretty significant piece. But the carriers are actually allowed to fund the ship over 4 years. And if you decided to authorize and fund the ship -- 2 ships, you might decide that you're going to fund that over 6 years or something. So there's -- like I said, the mechanics matter. And the pressure of where do we set the budget for any particular year and how are we going to manage the cash flow, I think, is a very -- I mean, that's a very detailed discussion between the Navy and the authorizers and the appropriators in the industry. And my view is -- that's why I say one budget doesn't necessarily solve the problem. On the other hand, let me just say the '17 solution is a really good solution. And I am really optimistic about where the '18 could go, but I need to see it mechanically get there.

I'm showing no further questions. I would now like to turn the call back to Mike Petters for any further remarks.

Well, I just want to thank you all for joining us today. As we finish the first quarter, we've got 2 carriers that are in the throes of delivery right now between the refueling and the Ford. We have a submarine that we're trying to deliver. And so it's a busy time for us right now in getting ships available to the sailors in the fleet. And we're excited about where our business is. We're exceptionally excited about the future of our business. And we really appreciate the interest you have in our company, and we look forward to talking to you again. Thank you.

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