May 4, 2017
Operator
Good day, ladies and gentlemen, and welcome to the Huntington Ingalls Industries Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later we'll conduct a question-and-answer session and instructions will follow at that time. [Operator instructions].
As a reminder, this conference call is being recorded. I would now like to introduce our to Dwayne Blake, Vice President of Investor Relations.
Sir, you may begin.
Dwayne Blake
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 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 laws.
Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.
Also, in their remarks today, Mike and Chris will refer to certain non-GAAP measures, including certain segment and adjusted financial measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website.
We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at HuntingtonIngalls.com and click on the Investor Relations link to view the presentation, as well as our earnings release.
With that, I'll turn the call over to our President and CEO, Mike Petters. Mike?
Mike Petters
Thanks Dwayne. Good morning, everyone and thanks for joining us on today's call.
Our first quarter results reflect solid performance in shipbuilding, while technical solutions absorb the impact of the reserve book 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 as 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 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 forward back in March. Is always an honor to host the Commander-in-Chief, the Secretary and CNO in our facilities and we were encouraged by the President 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're encouraged that an Omnibus appropriations package for fiscal year 2017 has been finalized that leverages the high production lines at Ingalls, by providing full funding for the 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 efficiently 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 Peterson and NSC 8 Midgett and christening the NSC 7 Kimball.
In addition, LHA 7 AAA 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-784 conducted successful Builder C 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 the four performed during Builders trials and look forward to this first-of-a-class ship being commissioned into the Navy's fleet.
SSN-787 Washington completed successful Builders trials in April as well and is also preparing for acceptance trials and delivery to the Navy. In addition, Newport News hosted Vice President Pen's 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 re-competes 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'm 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'll now turn the call over to Chris Kastner for some remarks on the financials, Chris?
Chris Kastner
Thanks Mike and good morning. Starting with our consolidated results on Slide 4 of the presentation.
Revenues in the quarter of $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 point.
These decreases were due to lower volumes and risk retirements in our shipbuilding segments and a $29 million reserve we booked in our technical solution 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 intention ring, structural steel modules for Westinghouse AP 1000 reactor shield buildings.
Due to the bankruptcy filing, we 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 of 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 on to 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 Ingalls 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 reserves taken against accounts receivables due from Westinghouse and the favorable resolution of outstanding contract changes in the first quarter of 2016, partially assets 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.
Dwayne Blake
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.
And Ashley, I'll turn it over to you to manage the Q&A.
Operator
[Operator instructions] And our first question comes from David Strauss of UBS. Your line is open.
David Strauss
Good morning. Thank you.
Mike Petters
Good morning.
David Strauss
First question. Could you just update us on schedule 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 the margin progression as we go throughout the year?
Mike Petters
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 as ships and continue 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.
David Strauss
Follow-up question, Chris, the free cash flow for the year, the conversion there, I think you talked about still targeting 100% despite the CapEx and pension headwind, is that still reasonable to think about it that way?
Mike Petters
Well it's reasonable to think about the $150 million of headwind that we face compared to 2016, teams working very hard top that with working capital performance, but we still see that $150 million of headwind in the year.
David Strauss
All right. Thank you.
Mike Petters
Thank you.
Operator
Our next question comes from Gautam Khanna from Cowen. Your line is open.
Gautam Khanna
Yes, thanks. Good morning, guys.
Mike Petters
Good morning.
Gautam Khanna
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 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.
Mike Petters
So, when you about Newport News, we've previously spoken about the transition between Block 3 and Block 4 of 78 and 79 and then the RCOH efforts. So, in 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 is really nothing material that I can I mention until the launch of that ship.
Gautam Khanna
Okay. So, there is no big opportunities favorable or negative next year either on the 79.
Mike Petters
Well we evaluate it every quarter, but I don't see anything significant.
Gautam Khanna
Okay. That's good to hear.
I wonder just also ask about new programs. So, Icebreakers then talked about in the past kind of what the status is there, what your latest thinking is on LXR timing and Columbia Class funds starting to flow to you guys?
Mike Petters
Yeah all of that is essentially with this 2017 deal that's been reached in the last few days, where we've kind of come through a CR, which is 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 is the most efficient way to buy the stuff you want to buy.
Across the Board, I would 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 two 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're in a rhythm now where we're doing two 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, 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 tricky because lots of times we 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 two at a time, increasing the production of Virginia class, increasing the production of the DDG program especially Flight 3, 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.
Gautam Khanna
Thanks Mike. I appreciate it.
Mike Petters
You bet.
Operator
And our next question comes from Sam Pearlstein of Wells Fargo. Your line is open.
Sam Pearlstein
Good morning.
Mike Petters
Good morning.
Sam Pearlstein
I was wondering if 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 the Block 3.
So, 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?
Mike Petters
There was no material financial impact. We dealt with that within the AC on the ship and there was just minor technical issues that had to be dealt with.
Sam Pearlstein
Okay. And if I could follow-up on the Westinghouse bankruptcy, if you've now reserved it in terms of receivables, is there still work to be done, is there any way that number can grow from here or is that everything that you'd be potentially exposed to?
Mike Petters
Well, that $29 million is for AR bankruptcy as 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 owner.
So, we have a contract. We're continuing to work and produce really good product.
We expect to get paid.
Sam Pearlstein
Okay. Thank you.
Mike Petters
I think 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 and under the bankruptcy court.
Sam Pearlstein
Thank you.
Operator
Our next question comes from the line of George Shapiro from Shapiro Research. Your line is open.
George Shapiro
Yes, I wanted to ask 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% and admittedly it's still a small part of the company, but what continues to be relatively weak there and what kind of hope is there?
Mike Petters
There is some seasonality there George, thanks for the question we fully expect that GS organization to be the $1 billion or roughly $1 billion for 2017 so right, there is some seasonality going on there.
George Shapiro
Well, but its year-over-year, so I won't think there's that much seasonality. I was just wondering what it transpire to be down that much on an organic basis year-over-year?
Mike Petters
Nothing significant that I can point to at this time George.
George Shapiro
Okay. And then could you just provide us the EAC in a quarter since I know it's going to be in your queue, which you're probably going to put out later anyway?
Mike Petters
You mean the cumulative adjustments?
George Shapiro
Yeah for each of the set -- for Ingalls and Newport News?
Mike Petters
So, there were $57 million positive, $31 million negative, about 65% of that positive was Ingalls, the rest Newport News and then they split to negative fairly equally.
George Shapiro
Okay. Thanks very much.
Mike Petters
Sure George. You bet.
Operator
Our next question comes from Rob Spingarn of Credit Suisse. Your line is open.
Rob Spingarn
Good morning.
Mike Petters
Good morning.
Rob Spingarn
So, going back to some of the questions that were asked earlier, I think Mike you talked about all the various programs and how important the timing is etcetera, but when we think about the transition to LXR from LPD 29 and we think about the potential for Virginia class to increase to three 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?
Mike Petters
Yes, so that's a good question. We put in place a capital plan back couple 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 there for 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 have 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 three destroyers or three submarines, they want to look 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, 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 we'll be watching.
Rob Spingarn
From a magnitude perspective, where we talked about a $300 million type CapEx number today or just under that moving to $400 million with these newer ships…
Mike Petters
Yeah, but I think it depends on the program and the timing and there's a lot of variables that we'll have to read the tea leaves of how the budget has shaken out to sort that out.
Chris Kastner
I think you hit it on the head. I think that's right.
Rob Spingarn
I was going to say, is there a mitigating factor here that on several of the things we just talked about we're increasing volumes on existing program, so at least from a profit perspective, we can mitigate some of that increase. The timing would with lag.
You'd spend the money on the CapEx and then taken the higher cash flow later, but it would seem to me that your margins would go up on three destroyers, three Virginia class etcetera.
Mike Petters
Yeah, I think the margin piece of it, what the volume does for us is it does give us a chance to be more efficient more 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 three 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 that 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 to pressure on it, when you have high-volume it has the opportunity to do -- to make it work better, but I think that's where we're going to be.
Rob Spingarn
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?
Mike Petters
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.
Rob Spingarn
I don't mean to lengthen the discussion, but given the fact that 26 was so ultra-profitable at the backend because it was booked so conservatively on the front end, aren’t we already starting to see some margin contraction because 27 was booked more evenly?
Mike Petters
There is 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.
Rob Spingarn
Okay. A strong part of that these days.
Thank you.
Mike Petters
Before we take the next question, I would like to clarify a comment I made to George, in Q1 of 2016 we did have a restructuring of a fairly significant contract. So, when you think year-over-year from a sales standpoint, Q1 2016 what was a bit higher.
So, we'll provide you with the details of that or we'll give you the detail of that subsequent to the call, but that does provide the rationale. Okay.
Let's proceed.
Operator
[Operator instructions] Our next question comes from Jason Gursky of Citi. Your line is now open.
Jason Gursky
Yes, good morning everyone.
Mike Petters
Good morning.
Jason Gursky
I wanted to just continue on a little bit with Rob's question on the CapEx and the investments going into business and Mike I was wondering if you could may be update us on how effective the investments have been to date, or did you think what you had hoped that they were going to do and maybe just provide us some color on lessons learned and whether you are 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, thanks
Mike Petters
Sure, that's a good question. First if I only 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 value for particular programs. We made some very discrete investments for 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 -- there are many, many examples.
As I walk around that ship, I see many examples where we're building it differently to capture the lessons that we learn 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 years just to build the facility and we're even going to be able to use or start to use the facility for 2019 or 2020.
So that's a little bit harder to put our hands around. But I would 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 third-year plan that was on the street at that point in time.
We also have over the last six years -- we've done a got pretty decent job of getting our execution aside 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 were 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 that 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.
Jason Gursky
Yeah, that's helpful and then just to think really quickly you made some comments about the oil and gas industry in your prepared remarks, maybe you're seeing some year-over-year improvement there. Can you provide a little bit of an insight on the pipeline there, whether the potential deals is indeed continuing to grow year-over-year and your expectation for the next 12 to 18 months, thanks?
Mike Petters
Sure, I'll take that, the cost structure, we've done a lot of work on the cost structure in oil and gas last year, to have that squared away and they're competing very well down in Houston and actually up in Canada as well, we're having staff in Canada, which is 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're 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.
Jason Gursky
Yeah, thank you very much. Thank you.
Mike Petters
Thanks Jason.
Operator
Our next question comes from Finbar Sheehy of Bernstein Research. Your line is open.
Finbar Sheehy
Good morning.
Mike Petters
Good morning.
Finbar Sheehy
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?
Mike Petters
No, we expect TS to be at the low single-digit for this year. They had some small nonrecurring items that really not significant enough to mention in the quarter, which led to the 5%.
So, we still believe it's low single digits, lower than 5%.
Finbar Sheehy
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 breath or ones where you would like to add for more volume?
Mike Petters
Well I think we're going to continue to evaluate data. Our major thrust right now is to complete the integration of the business and we're seeing -- 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.
Finbar Sheehy
All right. Thank you.
Mike Petters
Thank you.
Operator
Our next question comes from Pete Skibitski of Drexel Hamilton. Your line is open.
Pete Skibitski
Good morning, guys.
Mike Petters
Good morning, Pete.
Pete Skibitski
Hey Mike, I want to talk about your LPD 29 looks like it's pretty much a done deal now $1.8 million ship and not sure how much is GSE, but I feel like you had some concerns in the past about Ingalls, work volume in revenue outlook maybe that 2018 to 2020 kind of timeframe. And it just seems like this ship even if it's built over four years or so, it seems like that would really meaningfully improved that outlook in that timeframe, am I wrong about that number one.
And number two, does it also, are you really still looking at flattish revenue overall for the firm through 2020 or does this ship by itself kind of change that outlook?
Mike Petters
Thanks for the question. There is 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 four or five 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 and in all 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 lines. That means it's got to look like LPD.
Secondly, I would point out that the LPD program is only one of four 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, Destroyer program is important and the LHA program is important. And so, once 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 hick-ups 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.
Pete Skibitski
Okay. Thank you.
And just one quick follow-up, just this slow start to the year at Ingalls revenue line just being down year-over-year, would you say that that's indicative of how the full year might play out or is just the timing issue.
Mike Petters
No that's just timing, that's LPD 26 being replaced by LPD 28 and LPD 28 ramping, so just timing.
Pete Skibitski
Got it. Thanks very much guys.
Mike Petters
You bet.
Operator
[Operator instructions] Our next question comes from Joseph DeNardi from Stifel. Your line is open.
Joseph DeNardi
Yes, thank you very much, Mike wondered if you could just update us on Slide 3 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.
Mike Petters
I think that's still moving around a little bit. We just saw some more funding for an additional destroyer in the writeup in the build 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 3 and we're trying to find that the best way to do that in support of our customer and so how we do that I think it 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 got to think more about the cost type contract.
If you think you've got your arms really around the risk, you can move more towards a priced, contract and because all of those options right now are on the table, are after wide open, I wouldn't put a stake in any one of those at this point.
Joseph DeNardi
Okay. So, you don't think that the risk as you see it now and mandate cost type contract?
Mike Petters
Certainly, when you change the ship to the extent this is being changed, that there will be -- there will be newness in those risk and 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.
We feel pretty good about that right now, but we still got some more work to do.
Joseph DeNardi
That's great and then just an update on Avondale and the proceeds there, where you discussion stand with the Navy at this point?
Mike Petters
Yes, we are continuing to discuss possible resolution with the Navy and we did actually do a formal filing at the end of April with the PCAs and 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.
Joseph DeNardi
Okay. Thank you.
Mike Petters
You're welcome.
Operator
And we have a follow-up question from George Shapiro of Shapiro Research. Your line is open.
George Shapiro
Mike, I just wanted to ask you, you were commenting how you kind of looking at the '18 budget to see what's really going to happen, but shipbuilding and they 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?
Mike Petters
Well I think you're exactly right George, I was scratching my head last night, trying to think when there was the last time we saw $20 billion SEM line right and I'm not sure I've ever seen that. So, there is no question that everyone is heads are in the right place saying this is something that we need 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 desired by two carriers get the contract -- get the carriers under contract two 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 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 year 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.
George Shapiro
How much more you think the budget would have to go up to incorporate the items you just mentioned?
Mike Petters
I think it depends on how you decide you're going to fund it and pay for it. In the carrier case for instance if you decided that you wanted to buy two carriers at a time and you were going to fund all of that in one year, that would be a pretty significant piece, but the carriers are actually allowed to fund the ship over four years and if you decided to authorize and fund the ship -- two ships, you might decide that you're going to fund that over six 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 that 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.
George Shapiro
Okay. Thanks.
Mike Petters
You bet.
Operator
I am showing no further questions. I would now like to turn the call back to Mike Petters for any further remarks.
Mike Petters
Well, I just want to thank you all for joining us today. As we finish the first quarter we've got two 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 talking to you again. Thank you.
Operator
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.