亨廷頓·英格爾斯工業 (HII) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Huntington Ingalls Industries Inc. Earnings Conference Call. (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, sir.

Thanks, Andrew. Good morning, and welcome to the Huntington Ingalls Industries First Quarter 2018 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. 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 the call.

Today, we released first quarter 2018 financial results that included revenue growth in all 3 of our business segments. So let me share some highlights, starting on Slide 3 of the presentation. Sales of $1.87 billion for the quarter were 8.7% higher than 2017. Diluted EPS was $3.48, and operating cash was $120 million for the quarter. We received approximately $2.6 billion in new contract awards during the quarter, resulting in backlog of approximately $22 billion at the end of the quarter, of which $15 billion is funded.

So before getting into the discussion of our business segments, I want to talk about the current and near-term shipbuilding environment. At the end of Q1 2018, we had approximately 25 ships under contract to be constructed in our facilities. By the end of 2020, if all goes as planned, we will see a significant amount of contracting activity that is expected to result in the award of base contracts or options to be exercised for 20 to 30 ships. This includes the DDG 51 multiyear procurement, VCS Block V, CVN 80 and 81, NSC 10 and 11 and LPD Flight II. At the same time, as you already know, we are investing approximately $1.8 billion of capital in our facilities to improve efficiency, capacity and affordability.

I have to tell you that this is the most exciting time I have seen in my 30-plus years in shipbuilding. This new work supports our sales outlook for the next 5 years and forms a foundation that will support the business for the next 10 to 15 years.

As the shipbuilding portfolio transitions, we are resetting the expected return on sales range. During the Q4 call, I commented that while our long-term shipbuilding return on sales target remains in the 9% to 10% range, 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. What we are experiencing now and expect to experience over the next 2 years is that the mix of contracts in production is a bit out of balance with more new work than normal. And this puts pressure on the blended return on sales rate. Recognizing this phenomenon, we expect the return on sales for shipbuilding to be in the 7% to 9% range for 2018 and 2019.

So now I will provide a few points of interest on our business segments. At Ingalls, the team is focused on completion of DDG 117, NSC 7 and LHA 7 in the second half of this year. At the same time, they are preparing for the future as the proposal for the next DDG 51 multiyear procurement was recently submitted to the Navy, and Ingalls began reactivating shipbuilding facilities on the east bank of the Pascagoula River. These facilities will provide additional capacity to support Ingalls' current ship construction and modernization programs as well as help us better prepare for future work, including next-generation amphibious assault ships and service combatants.

At Newport News, CVN 79 Kennedy is approximately 75% structurally complete and 43% complete overall. The team continues to produce results that are in line with our expectations and is pushing to accelerate launch by 3 months to the fourth quarter of 2019.

On the submarine program, SSN 789 Indiana is preparing for sea trials and delivery to the Navy in the second quarter. In addition, the team completed and shipped the final module of SSN 792 Vermont, the first Block IV boat during the quarter.

The Newport News team is also preparing for the future as they recently submitted their proposal in response to the Navy's request to provide pricing to purchase CVN 80 and CVN 81 under a 2-ship contract. The 2-ship purchase reduces the cost of aircraft carriers by stabilizing the Newport News workforce in the national supplier base, allowing the team to buy materials in quantity and sequencing construction activities more efficiently.

Turning to Technical Solutions. Australia's Department of Defence awarded a contract to Naval Shipbuilding Institute, a joint venture between Technical Solutions and KBR. The JV will establish and manage the new Naval Shipbuilding College in support of Australia's mission to recapitalize its shipbuilding and maritime sustainment industry over the next 30-plus years.

In closing, we are seeing the early stages of top line growth that supports our outlook for sales in shipbuilding over the next 5 years, and we are investing in the facilities to support this growth. Our partnership with the Navy and solid program execution allow Congress and the administration to provide stable and, in some cases, accelerated funding for our programs.

And finally, our work under contract plus new work on the horizon in our shipbuilding segments, coupled with key wins in our Technical Solutions segment, keep us on a path to create long-term sustainable value for our shareholders, our customers and our employees.

And that concludes my remarks. Now I will now turn the call over to Chris Kastner for some remarks on the financials. Chris?

Thanks, Mike, and good morning.

Before I discuss our first quarter results, I would like to comment on some new accounting standards that we've implemented. During the quarter, we adopted the new revenue recognition and pension cost presentation standards. We also implemented the recent FASB guidance resulting from tax reform on the reclassification of certain tax effects in equity. These changes are clearly identified and explained in our quarterly report.

Moving on to consolidated results on Slide 4 of the presentation. Revenues in the quarter of $1.78 billion increased 8.7%, primarily due to higher volumes in aircraft carriers and navy nuclear support services at Newport News and higher volumes in amphibious assault ships at Ingalls, partially offset by lower NSC program volume.

Operating income in the quarter of $191 million increased $23 million or 13.7% from first quarter 2017, and operating margin of 10.2% increased 45 basis points. These increases were primarily driven by favorable operating FAS/CAS Adjustment.

Turning to Slide 5 of the presentation. Cash from operations was $120 million in the quarter, and free cash flow was $47 million. Net capital expenditures in the quarter were $73 million or 3.9% of revenues compared to $58 million in the first quarter of 2017.

Additionally, we contributed $43 million to our pension and postretirement benefit plans in the quarter, of which $34 million were discretionary contributions to our qualified plans. We also repurchased approximately 674,000 shares at a cost of $166 million and paid dividends of $0.72 per share or $32 million, bringing our quarter-end cash balance to $528 million.

Before I address segment results, please note that segment operating income in the quarter included a onetime $20 million expense for bonuses paid to our employees related to tax reform.

Moving on to Slide 6 of the presentation. Ingalls revenues in the quarter of $585 million increased 6.4% from the same period last year, driven by increased volume on the LPD and LHA programs, partially offset by decreased volume on the NSC program. Ingalls operating income of $64 million and margin of 10.9% in the quarter were down from first quarter 2017, mainly due to lower risk retirement on the NSC program, partially offset by higher risk retirement on the LPD program.

Turning to Slide 7 of the presentation. Newport News revenues of $1.1 billion in the quarter increased 11.4% from the same period last year, mostly due to higher volume in aircraft carrier RCOH programs and submarine support services. Newport News operating income of $51 million and margin of 4.7% in the quarter were down year-over-year primarily because of the onetime payment of bonuses related to tax reform and changes in contract mix.

Now to Technical Solutions on Slide 8 of the presentation. Technical Solutions revenues of $233 million in the quarter increased 3.6% from the same period last year, mainly due to higher revenue in oil and gas and fleet support services, partially offset by lower nuclear and environmental revenue. Technical Solutions operating income of $2 million in the quarter increased $20 million from first quarter 2017 as a result of the $29 million reserve taken in the first quarter of 2017 against accounts receivables due from Westinghouse, partially offset by the onetime payment of bonuses related to tax reform.

That concludes my remarks. I'll turn the call back over to Dwayne for Q&A.

Thanks, Chris. (Operator Instructions) Andrew, I'll turn it over to you to manage the Q&A.

(Operator Instructions) And our first question comes from the line of Doug Harned with Bernstein.

I wanted to understand a little bit more about how you're looking at the CapEx profile going forward. Since you announced that you're going to reactivate the east side of the Pascagoula River, that looks like that would be a big project. And so I'm interested in how you're thinking about, how are you going to use that? Is that tied to higher volumes or more toward how you do new models like LXR? Can you talk a little bit about that CapEx profile and how that fits in?

Good question, Doug. Thanks. We started this overall capital expansion well ahead of this contracting expansion that we just talked about. And so we're actually pretty well positioned to drive the -- to reset and to drive the efficiencies that we need to get these ships under contract. The specifics around the east bank are really driven by, as we look at the extra workload that the Navy's put in, in some of their competitive programs, especially on the nonnuclear ships, it becomes a capacity issue for us. And I'll let Chris talk about it.

Yes. The numbers, the activation of the east bank is all included in the $1.8 billion that we previously talked about. So think about the 5% to 6% of sales that we identified this year, next year's relatively flat, and it tapers down from there.

So this assumes -- this is basically tied to the existing outlook for new ships more than it's tied to the expectation that the volume of ships might go up in the future. I mean, that -- this would give you flexibility for that, but you would do this under any circumstances?

Well, that's interesting. I mean, I think the -- we probably would not have done the east bank if we were in a steady-state position that we were in back when we kicked off the capital program back in 2014. But what we're seeing right now is the expansion of shipbuilding contract that we talked about between the LPD programs, the destroyer programs, the frigate programs. Those -- that expansion drives us to a place where to do all of that efficiently, we need extra capacity. And so that's where we've made the decision to add on that expansion.

Yes. Doug, the Ingalls team is pretty relentless about improving efficiency, and activation of that east bank will help in that regard as well.

And our next question comes from the line of Jon Raviv with Citi.

This is Colin Canfield on for the line for Jon Raviv. Can you just confirm a little bit on margins, if you can just talk a little bit about the bonus payments impacting Newport News and TS? And then with respect to shipbuilding margins, in terms of falling out of that 9% to 10% range, kind of what are the drivers there? And how long are we out of that range for?

Sure. Thanks for the question. First, on the numbers, $20 million, Newport News was $12 million of that, Ingalls was $5 million, and TS was $3 million.

And regarding the shipbuilding margins, we've been on a program here for a few years where we've talked about the healthy balance of the shipbuilding enterprise where the amount of stuff that you're completing is about the same as the amount of work that you're contracting for, that if you're in that healthy blend and you're executing well, you should be in the 9% to 10% range. What we're seeing right now is, and we've been talking about this over the last couple of years, ever since really, ever since the carrier got sequestered and delayed at Newport News, we've been a little bit out of balance. And when you get out of balance and you have a lot of work on the front end of the pipeline, we don't recognize the income from that until we retire the risk. So we've -- we're a little bit out of balance as we go into this phase. And now we look out over the next couple of years, and we see the major amount of shipbuilding coming down the pipeline. So that's going to put us even more out of balance. And we think it's just important for everyone to understand that we're executing really well, we're executing really well in every part of our business. The opportunities right now to retire risk to drive margins up and capture that income are not as many as we have seen before, and certainly, at Newport News, there's not as many opportunities. And in the meantime, we're going to be putting more and more work on the front end of the pipeline. And so we just want to make sure everybody understands that we're in a really good place right now. I wouldn't trade this position for anything. We're not having the execution problems. We need to go get these ships under contract. They need to be good contracts, and they're going to serve us well for the next 5 to 10 years. And so I ask why I find this to be the most exciting. Frankly, this is the most exciting shipbuilding environment in over 30 years. And so where the margins go, the -- I guess my thinking on that is that there's 2 major mistakes you can make in shipbuilding. The first one is you can recognize income before you retire the risk. And when you have to back that out because you didn't retire the risk, that's not a small matter, that's a huge matter. And I've lived through a couple of those. We will not do that here at HII. The second mistake you can make is you can go and you can start trying to sign contracts to fill up the volume and the revenue, and you end up signing bad contracts. We're in a phase right now where the biggest driver we have is -- for the future success of this company is to make sure we get good contracts going forward. So to me, this is exactly where we want to be.

And our next question comes from the line of George Shapiro with Shapiro Research.

Mike, some color on the sales growth. I mean, you were saying 3% this quarter was extraordinarily strong. Is there something unique in this quarter that subsequently -- subsequent quarters, we're going to see at lot slower growth? And then on the -- for Chris, if you just give us what the EAC adjustments were in the quarter.

Well, I'll start with the EAC adjustments, okay? The -- of our positive $52 million, negative $24 million for net $28 million, 80% was Ingalls. I'll start off on sales, Mike, if you'd like.

Sure.

Yes, it was a strong sales quarter. We're still pretty comfortable with our 5-year CAGR of 3% growth. Obviously, if things were perfectly in the budget process and sequestration and getting all the ships awarded that we have planned on our contract, it could be better than that, but we're pretty comfortable at the 3% CAGR.

There was just something unique this quarter that caused the particular strength that won't repeat in subsequent quarters?

Not really. You're just seeing increased volume. Really, the majority of that's coming out of Newport News with the RCOH program and 79 hitting really full throttle.

And our next question comes from the line of Gautam Khanna with Cowen.

Chris, I was hoping you could give us some directional color on where CAS pension reimbursement may trend in 2020. I know you gave us the 2019 last quarter, but can you give us a ballpark on what the range of outcomes are for calendar '20?

Yes. Gautam, I apologize for my answer before I give it. But I was -- the reason I gave '19 was because we had that pension acceleration. I thought it was appropriate to give you guys some additional information you could think through '18 and '19. There's just too many factors that go into that calculation for '20. So I think I'd be remiss in providing that information directionally.

Okay. I mean, could you at least give us some sense? Is it -- it's going to be down presumably, right? You'd at least have a sense.

Like I said, there's -- year-to-date asset returns are [negative 1.7%] (corrected by company after the call), right, versus our assumption of 7.25%, and the discount rates have gone up to 4.13% is what our calculation was at the end of the quarter. So those are opposing -- directionally going in the opposite directions. And all that will go under the calculation on what happens to '19 and '20. So really, I'd rather not get into the sort of directional numbers at this point.

Okay. And stepping back at Newport in the quarter, if we add -- not that we can but if we were to add back the $12 million of onetime bonus payments, the underlying margin's 5.8%. Were there any -- on a net basis, were there negative EACs at NNS in the quarter?

None individually significant enough to mention. It's really about what Mike said, is conservatism relative to some big programs that are taking up a significant amount of the run rate at Newport News.

And to your guidance comment earlier, about the 7% to 9% shipbuilding margin, so we should just assume there's no major risk retirement events this year or next at NNS that allow you to kind of take a big positive cum catch-up? Is that -- we're just not going to see much in the way of major milestones that would afford the opportunity, positive or negative, is that fair?

Well, Gautam, we evaluate our EACs on a quarterly basis. And we do have the submarine program that's being executed but just starting out for Block IV. But I think you're correct, is the major milestones relative to aircraft carriers don't show up here until 2020.

And our next question comes from the line of Sam Pearlstein with Wells Fargo.

(Operator Instructions) Our next question comes from the line of Ron Epstein with Bank of America.

So if we just -- let's jump back to the CVN 80, 81. On that block deal, if that all kind of goes through, does that imply that the construction centers go from, what, roughly 5 years to 3.5 years?

For us, certainly a way to drive some more cost out of the program. We just submitted our proposal this week to the Navy. The discussion that we'll have over the next few months is exactly how we plan to execute that and how they plan to -- how does the contract take shape. Our view is that if you can get away from the 5 or 6 years centers that we've seen and you can get to something more like 3 or 4, you certainly will get to a place where it will be more efficient. Having said that, I would say I'm going to go back to my kind of overall theme of we're talking about multiyear procurement of aircraft carriers. That's the first time in over 30 years that we've submitted a 2-carrier proposal. That's pretty cool. Multi-ship procurement in carriers, we have submitted a multi-ship procurement in submarines proposal. We've submitted a multi-ship multiyear proposal for destroyers. We've been selected to be the sole source provider of what was LXR, which is now LPD Flight II. That's a pretty strong place for us to be, and it's really important that we get these contracts right because 5 years from now, folks will remember whether we -- you'll be able to see firsthand whether we got the contracting of it right or not. And that's the ambition for the next couple of years.

But do you have the labor to handle that, right? I mean, my understanding is to train a master pipefitter for military shipbuilding, it takes a number of years. I mean, do you have the labor to handle it?

Yes, we're ramping the labor up now. But our -- a core of our company is that we're a workforce development company. We know how to create workforce. We have been ramping the workforce at Newport News for a period of time now. And we have apprentice schools. We have craft training programs. We are using digital technology to get our workforce up to speed faster. It's really exciting to watch our young new craftsmen come in and actually take some of our digital tools and show them to some of our more senior folks and have our senior folks engage in that. So there's a lot of excitement on the waterfront right now in terms of how we're going to get work done and how we're creating this new workforce. And that's true at Newport News, and it's true at Ingalls as well. And so we're confident that we're on track to do what we need to do to support the business from the workforce standpoint. I have more concern about the supply chain. We have 5,000 suppliers. They are across virtually every state in the union. And we're spending a lot of time in the supply chain right now, especially with those critical suppliers, to make sure that they get the signals that they need to invest, the support that they need to create the workforce that they need, the -- and I'll go back now to the 2-carrier solicitation. The fact that the government, that the Pentagon sent us a proposal, a request for proposal on 2 carriers is the biggest signal that the Navy could have sent to the entire supply chain that we are serious about this ramp-up in the size of the Navy. And so let's take that signal, and let's run with it. Let's go invest in our facilities and invest in our workforce and get this done. So we're excited about that, and we are seeing that excitement now in our supply chain.

Okay, great. And then one finance question, a quick little detail for Chris. When you look at the investment in the east bank, isn't all of that going to be recoverable on the volume that will go through the east bank over time?

Absolutely.

And our next question comes from the line of Joseph DeNardi with Stifel.

Mike, just on the 7% to 9% margin, does the bottom end of that range assume that maybe you guys experience some challenges on carrier construction? Or maybe just talk about what's driving the assumptions around kind of that range of margins.

Well, really, it's what Mike -- this is Chris, Joe. Really, it's what Mike already mentioned relative to the contract mix and the transition that's taking place in Newport News. It's no individual issue on a program. It's just where we are on the programs that are under contract within Newport News.

Yes. And I would just add that we go into every contract -- as we've talked about many times, we put the entire risk register in front of us, and we don't take credit for any of it until it's retired. And so if we have major stepbacks in a program, it will be because of a risk that we not only did not retire, but it's that we didn't foresee because we -- if we just take a step back on a program, it's because we didn't see that one coming. If we saw it coming, we're not taking credit for it yet. So that's kind of the way -- that's what informs us when we think about where the business ought to be. And so like I said, the biggest sin you can make in this business is recognizing income before it's time, and we just -- we're just not going to fall into that trap.

Yes, I appreciate that, Mike. I guess what I was trying to ask is, maybe what gets you to the bottom end of the 7% range, and what gets you to the high end? Is there any way to kind of clarify that a little bit?

It's just the volume of work, the timing of contracts, the volume of work that's coming in, the opportunities that we might have to recognize income along the way. I mean, it's sort of the composite of all of that, that puts us in -- we just create a band around it and say, "This is what you can expect for the next couple of years." And actually, this is really good. This is a great problem for us to have right now.

I would also add, there was -- there were no major risk retirement milestones in the quarter, and we have 3 ship deliveries over the balance in the second half of the year.

Okay, yes. And then, Mike, maybe just at a higher level, you're one of only 2 shipbuilders on certain programs. You're like the sole source on others. Why can't that degree of consolidation, if you want to call it that, translate into more sustainable margins and maybe less risk for the business?

Well, I mean, I think in most of our situations, as we've talked about, when we go to contract, we're not really talking much about and we might negotiate a little bit about the price of the contract, the target of the contract. But what we're really negotiating in our negotiations is the risk on the contract. And we're usually in a place where the government needs the contract and we need the contract. So when we go in the room, we have differing views of how much risk there is on the program, and both of us have to walk out of the room with a contract that we are both happy with. And so you get -- and that happens -- it doesn't happen on every ship in the multiyear procurements, but it happens on every block. In the case of the larger procurements, it happens on every ship. And so whatever sort of risk retirement that you've accomplished on a previous ship affects the way that, that risk discussion goes in the next contract. And so that kind of keeps it in the band of relative performance in my view. And I think that's pretty healthy for us, and it's healthy for the government, and that's worked well over the years. And I think that's kind of the way it's going to go going forward. If you remember the discussion we've had here, a lot of what put the pressure on Newport News we've talked about for the last year or 2 was it really goes back to 4 or 5 years ago when there was -- we were talking about sequestration, and our refueling overhaul got delayed by a year. And when that happened, the start of that overhaul was delayed by a year, it put Newport News in a place where they actually had to go through a process of laying people off, getting themselves a little bit out of whack in terms of skill set in the business and then bringing those people back as we started the ramp-up. That was absolutely the most inefficient way from a program management standpoint to execute. And it's -- to me, it's Exhibit A in why sequestration's been such a bad idea. Where we are today is we have a 2-year budget deal. We are a company that actually benefits from this 2-year budget deal in a different way than most others. A lot of companies are kind of having a discussion about what happens after the 2-year budget deal was done. For us, our objective is to get as much of this under contract during this 2-year window as we possibly can, and it sort of insulates us from what happens on the back end of that. Not completely, not entirely, but it certainly is a place that I'd like to be. And this shipbuilding ramp-up is larger than any ramp-up we've seen since the Reagan buildup. So that's where we're going.

And our next question comes from the line of Sam Pearlstein with Wells Fargo.

Can you -- you talked about execution. And I guess there was some stuff in the press, and I apologize if this was asked already, about the Indiana being a little bit late. Can you just talk about that construction? Any issues in terms of timing on delivery?

We're just working through -- this is sort of the normal -- the romance of the business, just working through the process of delivery. The delivery of a submarine requires a whole lot of second checks and certifications and retests and those kinds of things. And I don't see it as to be anything exceptionally abnormal. We would certainly like it to be delivered sooner, but that's nothing that's causing us anything other than programmatic concern.

But when it comes to risk retirement upon delivery or however it might -- would you see that as impacting it?

Well, we're going to -- we'll evaluate the EAC as we move through the quarter. And if we have an opportunity, we'll take it.

And our next question comes from the line of George Shapiro with Shapiro Research.

Mike, I wanted to follow up with the Kennedy. I mean, are we still in the same situation as we were last quarter, things are tracking to the accelerated learning curve you have been projecting, and we really won't know anything until 2020? Or are there some data points along the way that we might have a better clue?

Well, we're still tracking, George. The challenge on the Kennedy that we took at the beginning, we invested to take man-hours out. We took a pretty significant man-hour challenge on the ship, and we're tracking to that. And so the things that we invested in are paying off for us. The leadership team is working to try to launch the ship a little bit early. We're supportive of that. But we -- as Chris says, we will be evaluating EACs on that program each quarter as we go forward.

Well, I mean, is there any specific time lines or data points that you could point to that we ought to be out -- look for?

Yes. George, this is Chris. I think launch is a really good milestone that we should be tracking.

Okay. And then the other quick one that I've got is, even if you adjusted out for the charge last year and took out the bonus at TS this year, the profits are still down. I mean, what does it take to actually get improvements in that business?

Well, I think Mike talked a bit about it already. We're in a transition a bit right now, and we're going to be in that transition for a while. And we're adding new programs. It's a place that -- or are we -- I'm sorry, George, is your question about TS?

Yes.

Oh, great, yes. So we're doing all the right things in there. I apologize for that. I think we're doing all the right things in TS. We've won 2 programs within the DOE space for LANL and the Nevada test site, transitioning into both of those now. Our pipelines are fairly rich within oil and gas and in government services. So I think as you see a recovery in oil and gas and we start to get another contract within TS, you'll see the recovery.

Yes, I'll go a step further. I think we're getting real traction in TS right now. As Chris mentioned, the 2 awards, the Nevada test site and the Los Alamos laboratory, both of those awards in the second half of last year basically ratified our view that we can create a channel of capability to a new customer. And DOE is a very important customer with a pretty significant amount of work to do over the next -- basically the next same time line, next 50 years that shipbuilding is looking out to. And so getting our foot in there and proving our worth and working on the hardest stuff that they do and getting that right is a way for us to expand our position in the Department of Energy space. You know we have a teaming agreement with Boeing on the UUV business. We think we're getting traction there, and this is a business that we were not anywhere near being in 7 years ago. And so my estimation is that the UUV business is going to be one of those places where a lot of people are going to be want to be, but we think we're in a good position in that business right now. The Navy's decision and discussion about increasing its readiness and trying to get some fleet support activity out there, that plays right to what AMSEC does as part of Technical Solutions. So we've been planting -- over the last couple of years, we've been planting a lot of seeds in the Technical Solutions business. Some of them are starting to ripen now, and we're -- and I feel comfortable that we're getting good traction there. And that's a part of our business that's really on the move. And I'm glad that they're part of us, and I'm excited about what they're going to do for us.

Okay. And Chris, just one little one. 20% tax rate in the quarter is likely the go-forward rate for the year?

Yes. So I wouldn't change the projection for the tax rate at this point. 21%, I think, is -- I'm comfortable with that.

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

Chris, I was wondering if you could help bridge us on cash flow next year. This year, we have some nonrecurring items, like you mentioned the Avondale recovery. I think if you could clarify, like, how much of the $251 million you ultimately recover and in what years and then what type of headwind that poses for next year and so with the other moving items.

Yes. Thanks for the question, Gautam. I'll see if I can answer the right question this time. 2000 -- I've talked about 2018 cash already, that we have about $100 million of pressure from where we finished '17, which was $452 million. Really, the only -- and included in that number is the restructuring cash recoveries. So the only significant difference between '18 and '19 is going to be the difference in net pension. So you have about $400 million difference there. And if you just focus on that, assuming capital is about the same, then I think you got a reasonable set of assumptions for '19. That is assuming all things remain the same relative to pension.

So just to follow up on that, last quarter, you guys provided that table where you showed the $549 million of cash pension this year, dropping to $90-something million next year. Obviously, there's a cash tax benefit associated with contributing to the plan. So should we be thinking about the $549 million this year can -- it's not the year-to-year change, the $549 million minus $92 million. It's $549 million times 1 minus last year's marginal tax rate. So whatever that is, $370 million. And then next year, $92 million at next year's marginal tax rate, so $70 million. The delta is actually $300 million year-to-year in terms of cash headwind -- tailwind...

A better way to think about it, Gautam, so we don't do calculations on the phone here is just cash taxes are about the same in '18 and '19.

Cash taxes are the same, okay. But so your point is on a net basis, the difference in pension after tax net is $400 million year-to-year?

It's $400 million for net pension, and cash taxes are about the same in '18 and '19.

Got it. But the follow-up on the Avondale question. Of the $251 million that was on the books, how much do you ultimately recover? And I just want to know how much is in this year versus next year.

Yes. So remember, the $251 million is overhead expense. It has to go through your contracts, to the profitability on the contracts and to -- then to your billing rates. So I don't have the specific number that will be recovered relative to restructuring because you have to do it on a contract-by-contract basis. I would say that the vast majority will be recovered in '18. We also recovered some in '17 in Q4.

Right, okay. But just be clear, of the $251 million, do you actually recover all $251 million? Or is there a cost share on it where the government gets, call it, half and you guys get half?

That's right.

So -- and so half of the $251 million is ultimately recovered, some of it in Q4 last year, most of it this year?

Yes. So Gautam, I know you're trying to get to a precise number here, but it's really difficult to because you're dealing with share lines. Some actually have contract protection where you're doing contract adjustments for them. Some you don't where you're just writing the share line and have a 50-50 share. So it's all in the $100 million of pressure that I mentioned, and it will -- the vast majority would be recovered in '18.

So on a net basis, and I'm sorry to be annoying about the questions, but people are trying to anchor to something here with the guidance revision on earnings or the margin guidance on earnings. The free cash flow next year, net, should rise, assuming everything's equal, by about $400 million before considering execution and what have you.

Yes, assuming everything is equal from a pension assumption standpoint. And remember, as my predecessor used to say, cash can be lumpy because we do have large, large contracts where large invoices can move across the period. So yes, your fundamental assumption is correct.

And our next question comes from the line of Carter Copeland with Melius Research.

Mike, I wondered if -- just one kind of final one here on the commentary out of the Navy this quarter and the 355 ships by the end of next decade instead of the following decade and the incremental sort of language around service life extension of Los Angeles-class submarines. How much of that, if any, is incremental to the type of growth outlook that you talked about last quarter and you're talking about this quarter, sort of beyond the setup? And any color you can give us on that evolution that may be different than what you talked about last quarter?

The short answer is not much different than what we've been saying. There's kind of a fixation on the -- a number because that's how the Navy communicates to the Congress and to the country what its requirements are. But if you must know, when they came up with a number, they put it into a plan, and it was going to be many, many years, a couple of decades before they'd get close to that. And so there's a lot of question back saying, if you really go on -- if we really need 355 ships, then we need to get there as fast as we can. So getting there as fast as you can means that not only do you ramp up construction, which is what we've been talking about for most of the last hour, you also need to go and make sure that you bring along the other ships that you've got. And kind of hard to go and ask the citizens to pay for a bigger Navy if you're not doing everything you can to take care of the assets that you have. So whether it's refueling a few 688s that are assessed to be worthwhile or maybe you bring cruisers back or maybe there's extensions on destroyers, all of that is part of, I think, the reality of -- our Navy is strapped. We talked about this 1.5 years ago that our own internal assessment was that the Navy was probably 20% short of ships. The Navy assessment came out with some precision in that number, but that's all consistent in saying that we're asking our Navy to do stuff, and they are -- their operating tempos are too high. They don't have enough ships to be in all the places that they need to be, and they need to get as many of them out there as they possibly can. So I'm not terribly fixated on the 355 as a number because you get into all kinds of arcane discussion about, what are you counting, and what are you not counting, and does this count as a ship? And I don't really spend a lot of time on that. What I can tell you right now is that the Navy is moving forward with multi-ship procurement across its most complex platforms, and they're moving out in a way that we haven't seen since the Reagan era. That is a major change in this space. And that's why I come back to, this is the most exciting time for us to be in this space. You may remember, Carter, that the Reagan buildup was for a 600-ship Navy. We never got to 600. I think that we got up into the 580s before we backed away from that. So that's why I don't fixate so much on the number as I focus on, what are they doing? Releasing the 2-ship RFP for the carrier is a huge signal to the industry that we are going to expand the Navy. And so I'm not -- like I said last quarter, I had to practice saying the word growth. I now am -- I'm a believer. We are moving down the path to expand the Navy, and this company is going to be the principal partner in making that happen. And we're excited about that.

It's great. It's not about the -- it's about the journey, not the destination, got it.

That's exactly right.

And I'm showing no further questions at this time. So with that, I'll turn the conference back over to CEO, Mr. Mike Petters for any further remarks.

Well, I want to thank everybody for joining us on the call. As you can tell, I am very excited about where we are and where our shipbuilding business is headed, but I'm equally excited about the traction we're getting in our Technical Solutions division today.

This big piece of contracting that we're going to be doing is going to actually move us out of the balance that we've been talking about for 7 years in the 9% to 10% range. It's going to put pressure on the low end of the scale. If I have to choose between having pressure on the low end of the scale because I have too many new contracts to work or having -- being out of the margin high because I'm executing a lot of mature work and not getting new contracts, I'd absolutely choose to be where we are today.

I'm excited to be partnered with the Pentagon to go get all of this work done. And we have a team that's executing well and is well positioned to get this done over the next couple of years. So as we do that, we will continue to focus on execution because that's been the hallmark of what we do, and I'm excited about that.

So thanks for joining us this morning, and I look forward to seeing 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 wonderful day.