Good day, ladies and gentlemen. And welcome to the Huntington Ingalls Industries Inc. Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference Dwayne Blake, Vice President of Investor Relations. Sir, you may begin.

Thanks, Brendan. Good morning. And welcome to the Huntington Ingalls Industries' second quarter 2018 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 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 description of some of the factors that may cause actual results to vary materially from anticipated results. Also, in the remarks today, Mike and Chris will refer to certain non-GAAP measures. 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. This morning we released second quarter 2018 financial results that reflects solid performance across all three business segments. So let me share some highlights starting on slide three of the presentation. Sales of $2 billion for the quarter were 8.7% higher than the second quarter of 2017, diluted EPS was $5.40 and included the benefit of a claim for prior year research and development tax credits and Chris will provide some additional color on taxes during his remarks. We received approximately $1.1 billion in new contract awards during the quarter resulting in a backlog of approximately $21 billion at the end of the quarter, of which $15 billion is funded. Regarding activities in Washington both the House and Senate recently passed the 29 National Defense Authorization Conference Agreement and the bill is now ready for the President's signature. We are very encouraged by the support for Navy shipbuilding in the final measure, which includes the following: it authorizes the purchase of a four forward class aircraft carriers CVN81. It supports the purchase of CVN 80 and 81 under single contract if anticipated savings can be confirmed and it supports advance procurement for LPD Flight II amphibious warships to leverage high production lines and supply chains. We're also pleased with the progress of the Defense Appropriations Bills in each chamber, but also very supportive of navy shipbuilding and we remain hopeful that the appropriations process will continue to proceed expeditiously. Now I'll provide a few points of interest on our business segments. At Ingalls the team is continuing to drive DDG-117 the Paul Ignatius, NSC-7 Kimball and LHA-7 Tripoli toward completion with trials and deliveries for these ships expected to stay in the fourth quarter and first…

Thanks, Mike, and good morning. As I review our second quarter financial results and provide a few updates to the full year, you may follow along with the slide presentation we included with our earnings release this morning. Beginning with our consolidated results on slide four of the presentation. Our second quarter revenue growth was particularly strong as this marks the first time since we spun that we generated revenues in excess of $2 billion in a given quarter. Revenues in the quarter of $2 billion increased 8.7% over second quarter 2017, driven by higher volumes in aircraft carriers and Navy nuclear support services in Newport News. Operating income in the quarter of $257 million increased $16 million or 6.6% from second quarter 2017. The increase was primarily driven by favorable operating FAS/CAS adjustment in the quarter compared to d same period of 2017, partially offset by lower segment operating income. Operating margin in the quarter was 12.7%. Turning to slide five of the presentation, cash from operations was $239 million in the quarter after contributing $60 million to our pension and post-retirement benefit plans, of which $50 million were discretionary contributions to our qualified plans. Year-to-date, we have contributed $84 million to our qualified plans. And as discussed previously, we expect to make a total of $508 million in discretionary contributions to our qualified plans of 2018, with the balance occurring in the third quarter. Free cash flow in the quarter was $154 million. Net capital expenditures in the quarter were $85 million or 4.2% of revenues compared to $79 million in the same period of 2017. We continue to expect capital expenditures for the year to be between 5% and 6% of revenues. We returned almost $280 million to our shareholders in the quarter by repurchasing approximately 1.1…

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 in the queue as possible. Brendan, I'll turn it over to you to manage the Q&A. Brendan?

Thank you. [Operator Instructions] Our first question comes from Doug Harned of Bernstein. Your line is open.

Thank you. Good morning.

Good morning, Doug.

I wanted to get a little better understanding of the margin profile at Newport News. And particularly when you look at CVN 79, can you give us a sense of the risk profile on that program? In other words, if things go according to - just according to plan, do you foresee next year that we could see some improvement in margins at Newport news?

Doug, we've talked about this before, really the next major event on 79 from a risk while we do quarterly EACs, our risk-retirement milestone is going to be launched. And the nominal schedule for launch is the beginning of 2020, but the team is pushing hard to get the launch done in the fall of next year. And at this time, we seem to be on track for that and we're happy about that. But we're probably not going to do any sort of major risk reassessment between now and launch.

Okay. So if I think of Newport News more broadly. I mean, you're well into Block IV on Virginia Class. I'm just trying to understand if we should start to see some potential for margin improvement there as Block IV matures. And if you - and would think, if you get launch early on CVN 79 that would also be some potential for upside. I'm just trying to understand what levers are there?

No, Doug, it's Chris. That's a really good point, Block IV will be maturing 73 will be maturing as well. So along with 79 you have both of those programs maturing. But we are still pretty comfortable with the 7% to 9% return on sales. It could fluctuate some quarters, but we are comfortable with the 7% to 9% for shipbuilding.

Great, thank you.

Thank you. Our next question comes from Carter Copeland of Melius Research. Your line is now open.

Good morning, gentlemen.

Good morning.

Just a couple of quick ones. One, Chris, can you clarify for us the gross favorable unfavorable cumulative. And then Mike, I just wondered if with the NDA supportive of many of the things that you've been looking for. How does that play into your updated thoughts around timing on contracting of some of these opportunities? How far out will that take us, now that you've got some very clear support for what you've been looking for?

Sure, I'll take the adjustments first and then I'll kick it over to Mike. There were $50 million of positive adjustments, 13 negative for net 37. 70% of that net was Ingalls.

Thanks, Chris.

Sure.

Carter on the - as far as the NDAA goes, as I mentioned, we're very encouraged and pleased with the way that Bill came out. And we look forward to the President finally signing that Bill. There is still an appropriations process that has to work through self through. I think I said before, this is the most exciting time that I've seen in shipbuilding in 30 years. And if you step back and just look at what we're doing right now. We actually have an offer into the Navy to build two aircraft carriers. Our team has an offer into the Navy to build 10 submarines. And we are in a competition for our share of 10 destroyers and that's right now their support for multi-year procurement of LPDs. So we're all very encouraged by all of this. But the way the nation makes its decisions to go and actually execute these requires both authorizations and appropriations where we're engaged in the appropriations process, but we are not through that process yet. And so, we're at a place where all the things that need to be happening or happening, but we are not across the goal line. And have been around long enough to know that you don't get points until you get across the goal line. So, as far as the longer term view, I do think that we're going to - I am encouraged to things that we're going to be able to get contracts for all of these of ships over the next year to 18 months and get that done and that's going to set the shipbuilding piece of our business up for the next 5 to 10 years and I am very encouraged about that. But we're not done yet and before we look at the scoreboard, we're going to keep trying to get first balance.

I like it. Thanks Mike.

You bet.

Thank you. Our next question comes from George Shapiro of Shapiro Research. Your line is now open.

Yes, I wanted to know Mike for the first half for the year now you have had 7% revenue growth and you were suggesting more like 3% over next several years. You want to change that estimate or what's going on here and do you expect this kind of growth in the second half?

Yes, George, I think that we talked about the 3%, we talked about it over several year period. Yes, we've had a couple of good quarters, but we're comfortable with our 3% estimate over a longer timeframe.

George, this is Chris. I may add we've three submarines in Newport News right now in availabilities. That's really not work that is consistent over the long-term, it'll be lumpy overtime. But we are still comfortable with a 3% CAGR at this point.

Okay. And then Chris just a follow-up, you had said before that at Ingalls, we would see probably lower margins later on in the year as we see more new ships coming, starting, so you'll have less EACs, is that still an accurate statement?

Yes, I think overtime what we've said is that, as we get new ships at Ingalls, there should be less opportunity for the higher margins, as they have had over last couple of years. I still think we're comfortable with the 7% to 9% return on sales for shipbuilding.

Okay, thanks.

Sure.

Thank you. Our next question comes from John Raviv of Citi. Your line is now open.

Thank you. On free cash flow for this year, Chris can you just revisit some of the targets you have intimated for the year, I think $100 million down year-on-year, which would imply $350 million in 2018. And then what are the building blocks on the 2019 beyond the mechanical $400 million year-on-year swing from pension?

Yes, we don't provide free cash flow guidance, but I had discussed $100 million of pressure to where we finished last year and we finished last year around $450 million. And then just the significant swing based on our accelerated pension contribution, net pension cash of about $400 million in 2019. There are other puts and takes that will go into 2019 cash and we're coming to our plan now. So as things evolve through the year and when we get into the year-end call I'll be able to provide you more color.

And then sort of related to that question on sustainable almost like taking out sustainable cash flow, obviously the net pension inflow is pretty significant right now. When that starts shrinking is due to pension mechanics is there anything you can do to fill that hole, so to speak?

Well, don't necessarily think of it as a hole, right. The major swings for cash for us right now are our capital program, which we think makes great sense that is $1.8 billion through 2020. And then pension driven by CAS cash and FAS, so overtime as we become more fully funded, all FAS/CAS and cash should come down. We provided the information where we directionally think that is in 2018 and 2019, we'll come through the plan and we'll provide you additional guidance or additional direction for 2019 and 2020 for pension. So there is not a lot of moving parts, when you think about cash and shipbuilding, it's really capital net pension and working capital and working capital is fairly consistent. So, we really don't think of it as a hole we need to fill, it's just a normal operation of the business.

Understood. Thank you, Chris.

Sure.

Thank you. Our next question comes from Sam Pearlstein of Wells Fargo. Sir, your line is now open.

Good morning.

Good morning.

I wanted to go back on the 3% outlook that you have. Because you mentioned this is for the sales growth, you mentioned a couple of different competitions or things that are out there. And I guess trying to just think about how the things like the frigate and icebreaker in terms of how those break or how we buy the DDG 51 Flight IIIs in terms of the split. How do you think about those and their profile in that longer term growth rate?

It's a good question. The 3% CAGR is really a risk adjusted viewpoint on how things could evolve between now and 2022. If things fall perfectly, it could be more than that, but it's really a risk adjusted look at shipbuilding revenue taking into consideration all of those competitions and all of those programs.

And Mike, the Flight III competition, is this similar to prior ones or where you might have the loser get some of the winners' price. Should we expect a 50-50 split? Anything different about this competition versus other ones we've seen in the destroyers?

Yes, I think in the main it's - I'd say it's in the same box, but it's in the different part of the box. Because I think the Navy came to this solicitation this is my perspective, but they came to - this time around they came with a view that they're trying to figure out how to get quantity as well as value out of this Block by considering that it's also is a radar upgrade. And so we actually had to price several different scenarios of schedules and quantities of ships complementary between our yard and our competitor's yard. And I can't speak to the Navy's evaluation process, but I think they were looking at all of those different scenarios and trying to figure out how to optimize their return. For us, it created a circumstance in the proposal that basically if you want the ships faster, there is an opportunity to do that. And so it's just going to be interesting to see how this all turns out on the backend. But I think where we're going to be like I said we're going be in the same box, but I think this is going to be a case where the industrial base is trying to support the Navy from a quantity standpoint. And I think that's going to be pretty good, however it turns out. And it's going to be pretty good for at least for us. It's going to be pretty good no matter how it turns out.

Thank you.

Thank you. Our next question comes from Gautam Khanna, Cowen & Company. Your line is open.

Thank you, good morning.

Good morning.

I was wondering if you could give us any flavor on the gross unfavorable cumulative catch ups year-to-date whatever it is, $37 million. Is that skewed to NNS and how is that mix changed if you look kind of first half versus first half of last year?

Yes, this is year I don't believe there was anything materially that we would address. And I don't have the specific cumulative adjustments for the first six months of the year last year versus this year in front of me. Gautam I could walk you through that later today if you like.

Okay. No that would be helpful. I'm just trying to get at on CVM 79 have you - are you sort of on plan with the cost estimates over the last couple of quarters. Or is that been a source of gross unfavorable?

No, we're comfortable with where we are on 79.

Okay. Chris, I was hoping if you could give us some directional color perhaps even the floor on where the pension trends FAS/CAS recovery beyond 2019. I mean, what sort of - you're giving guidance on a CapEx it appears that it would drop something like $200 million in 2020 based on your five year plan. Do you have any sort of lower bound on pension recovery that you can give us so we have some framework (inaudible) outcomes?

Gautam, I don't right now. We're going through our planning process and I'll be able to update our analysis for pension for both 2019 and 2020 and provide that to you on the year-end call.

Okay. And just last one, based on the deliveries you are forecasting Q3 and Q4, should we expect that Newport's margin this quarter is sort of a high watermark for the year or do you have any sort of color you can give us on sort of the sequential cadence of margin at MMS?

Yes, Gautam, we don't - as you know, we don't provide margin guidance. What we have said, is it will be 7% to 9% return on sales in shipbuilding for the next two years.

All right. Thank you. I thought I'd try.

Thank you. Our next question comes from David Strauss of Barclays. Sir, your line is open.

Thanks. Wanted to ask about cash return, so far year-to-date you've had a heavy amount of share repurchase, you've got the pension fund coming due in - or your plan on doing that in Q3. How should we think about from here are you going to increase debt or raise debt to fund the pension given where you stand today and how should we think about share repurchase through the rest of the year? Thanks.

Yes, share repurchase is an essential part of our strategy that we kicked off in 2015 where first we invest in our shipyards, n we're investing $1.8 billion in our shipyards through 2020. And then returning substantially all free cash flow back to shareholders. What we did in Q2 is consistent with that strategy and we're going to continue to execute it. Relative to raising debt, we don't necessarily need to do that for our pension contribution in Q3, we have our cash balance of I think $398 million and we have a $1.3 billion revolver. So, we have a strong balance sheet that we can deal with that.

Okay. And a follow-up on TS, I think in the past you said you've targeted that business as a 5% margin business in the 2020 timeframe. How does Nevada and Los Alamos kind of change - potentially change that story?

It's all part of that story. It's an essential part of the strategy within TS was to be successful in the DOE space, team has done an excellent job there. I think Mike's done two of the facilities here. So, if he wants to comment on it.

Yes, I would just - as Chris said, this is an essential part of our TS strategy. And I would kind of offer that in my over 30 years in the business. I have watched this over 30 years try to chase down some of this business with really only one success and that was at Savannah River. At the end of 2016, we reorganized the business and we created a separate division and we created and established new leadership lines. And we became much more focused on going after that business. And since that time, we have become - we're on the team at the Nevada test site. We are subcontractor to the team at Los Alamos on the M&O contract. And we're the prime for the Los Alamos legacy clean-up. So, in basically 18 months we've won three awards where after 30 years we had only won one. So, I am excited about where we're going with that business. And as I said, and Chris has said, it's an essential part of where the TS business profile is going to go, not just over the next couple of years, but really over the next several decades. We're a principle partner now with Department of Energy and we're proud to be there and very supportive.

Thanks for taking my questions.

You bet.

Sure.

Thank you. Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is open.

Hey, good morning, guys.

Good morning, Ron.

Maybe two questions, back to the revenue growth assumption of 3%, Mike, for your comments if some of that stuff that is being talked about potentially a two carrier block and the 10 submarines so on and so forth. And it being in your words the best environment you've seen in 30 years it's hard to believe that's a 3% growth environment if any of that actually comes through?

Yes, like as Chris said Ron this is the 3% is kind of risk adjusted. We're not home on the two carriers, we're encouraged but we're not there. On the submarine business the 10 ship Block V contract is one we're working on. Congress is considering adding a couple of ships to that, but not sure how that's going to play out. The destroyer business is 10 ship competition so there's share of 10 ships with an option for five more, not really sure how that's going to play out. There's desire to go to multi-years on the LPD, the LXR program, the LPD Flight II, but we're not at that point yet either. And the frigate competition is in end of next year RFP and maybe a 2020 award so we're really way up in front of that. And so our view of it is as that, Chris said if all of those things break our way it's definitely more than 3%, but as we step back and handicap where we think that things are going to go with some confidence from a risk standpoint we think 3% is a good number to work from right now. If some of these things start to break our way and we see a different number and see it and make an adjustment we'd be happy to let you know.

Okay, yes, fair enough. And then maybe another question when we were down visiting the shipyard a little while back and walk around CVN 79 and seeing all the super lifts and what's going on with that ship. Can you maybe just talk to everyone on about some of the lessons learned you guys have had on that ship that you can apply to CVN 80 in terms of efficiency. So as we think about the transition to the next carrier how we could maybe see maybe more margin stability or even potentially margin uplift?

Sure, you saw it when you were here, we have made pretty significant capital investment to reduce the cost of 79 and we targeted a pretty significant man hour reduction just in the labor side of that contract between 78 and 79 we see opportunity to continue to advance those reductions when you go to 80 and 81. Especially if you happen to have it in a two ship contract where you're able to just have the teams move from doing the work on 80 and going right over and doing the work on 81. Shift gears if you're able to do that inside of the shipyard you ought to be able to do that in the supply chain as well and approaching the market and approaching our suppliers and talking to them about buying two ships that's worth the material as oppose to one should create some efficiencies for us there. And then, as we go through and I think Ron when you were here we talked with you all like we've talked with everybody about the digital transformation that's going on in Newport News and how you bring the technologies that are out there to bear on this pretty complex manufacturing enterprise, we believe there's opportunities there as well. And the real push for the two carrier contract is to create that stable floor so that we can then go and prosecute all of those efficiencies and opportunities. So as I keep saying we're very encouraged about where we are today. If we had - if you were able to do us time lapse and say a year ago today we were preparing a one ship proposal for the Navy for CVN 80. Today we have a proposal into the Navy for CVN 80 and 81 and we are seeing and encouraged by a lot of broad support both inside the Navy and across river and the Congress for proceeding down that path. We think that sets the foundation for affordably producing and delivering aircraft carriers in the future and we're really excited about what that means for us.

Okay, great. Thank you very much.

You bet.

Thank you. Our next question comes from Krishna Sinha of Vertical Research. Your line is now open.

Hi, thanks for taking the question. On the Indiana 789, given that you delivered in the quarter and you completed sea trials. I would have expected a little bit of more of a risk reserve to be taken this quarter. Is that something that's still yet to be booked, is that like a 3Q event, or did you take most of the risk reserve on that at launch at an earlier date?

Well, thanks for question Krishna and welcome. We assess issues on a quarterly basis, we have adjusted those previously on the Indiana. I don't anticipate material adjustments related to that, that both going forward, and I still believe that 7% to 9% is the right way to think about the business over the next couple of years.

Yes. And then on future sort of risk events, - risk reserve events, EAC events. Can you just talk about - I think that the 789 was the major launch this year, are there any other milestones, major milestones on other programs that we should be aware of in 3Q and 4Q?

We do had delivery of NSC 7 this year and then we're moving down the path on delivery of the other two boats, DDG 117 and LHA 7 towards the back half of this year, the first half of next year. And then we have incremental milestones on a number of ships that we'll assess on a quarterly basis.

Are the EAC adjustments typically in looking at a single program, when are the bulk of EAC adjustment sort of taking. Are they more towards the launch date or the delivery date?

Well, you have to assess each program and each program and each ship will have its individual risk register. So there is not a path formula that's determined for each of the milestones, it's all based on the risk register on the specific ship, on that specific program, as it runs through the manufacturing cycle.

Yes, we have a pretty discipline process, where we - when we come off a contract we map all of the risk that we see to the milestones in the program. And we evaluate at each milestone, we evaluate whether we actually retired that risk or not and if not, can we continue the work to retire that risk at the next milestone or another milestone. Or do we have to actually recognize that we didn't retire that risk. Every program has its own profile, we tend to be conservative in that regard. And so I'd say - and that sort of the blend that we have been talking about for almost eight years now. That early in programs, we tend not to go and recognize risk retirement, we don't want to recognize it before we know for sure we have retired it. So, there is probably a bias towards the backend of programs, but each one has got its own profile, as Chris said.

Yes. And then one quick one on revenues, you talked a little bit earlier about obviously the positively shipbuilding environment and the sub-committee NDA write-ups and how that's breaking your way as it stands right now. If things go to plan, even your risk adjusted plan. Is there a particular year where you'll see a surge in new builds, or is it really spread out very easy over say the next 10 years or some long period?

Yes, we actually think that we're in a pretty unique position right here, because if you step back just a little bit and look at what happened in the FY 2018 process and now what's happening in the FY 2019 process, with regard to shipbuilding, there is a pretty good surge, that's why I'd say it's the most exciting time I have seen. In these two years there is a surge for ship authorizations and appropriations, each program has its own path and sequence for playing it, for win you actually go to contract for the particular ships. But the issue that I think that makes us a little bit unique in the industry is it, this two year window is really special for shipbuilding. There is a big question really about what happens out in 2020, sequestration kicks back in, what happens after that. Our view is that a lot of the work that we're going to get under contract before 2020 puts us in a pretty unique place. If you see the same kind of activity in 2020 and 2021 and follow-on, than that's just going to be even better for the business. But we're - we think that - I think I have described it before, are we going to be at a new - is this an indication of a new sustained level for the business or is this just going to be the rat and the snake where we have a lump in the business that we're going to work through over the next five to ten years. The job right now is to get the lump under contract and then we'll go figure out how do we keep it at that sustained level.

Okay, that's great. Thank you guys.

[Operator Instructions] Our next question comes from Joseph DeNardi with Stifel. Your line is now open.

Yes, thank you very much. Mike just on Columbia Class if you look at the work share it looks pretty similar just from our standpoint in terms of what you guys are doing in Virginia Class. So should we assume that maybe the margin profile on that business could actually be pretty good right out of the gate because there's some commonality or there are actually some aspects that would lead to it being kind of more of a normal margin curve, I know it's ways out, but just curious how you think about that?

Well, I mean, the work share is a little bit different than it is on Virginia Class. We will not be delivering any of those ships whereas we deliver half of the Virginia Class programs. We will be building units and we're doing design work for those. Our scope on Virginia is about half, our scope on Columbia is less than that and we're going to be moving into a lead ship environment for ship that's really 100% new. And so for the next period of time next few years we're going to be in the design phase moving into construction. And we're going to be incredibly as supportive as we can be to make this program as much of a success from the gate - from the opening gate as we can. But I don't think you want to just turn around and say it's the same as Virginia and it's just the expansion of volume I think that would be a misread. This is a new program and I think you need to treat it as a new program.

Okay. And then Mike you mentioned a couple of times the risk adjusted growth you see in the business. Wondered if you could share kind of what the upper end of that range would look like if everything falls your way? And then what are some of the key risk items that you're looking at that'll determine kind of how that plays out? Thank you.

Yes, I think that's completely driven by whatever assumptions you want to pick. And it could be something as simple as are there going to be any options picked up on the Destroyers or not. Is the RFP for the Frigate going to come out on time, is it going to be only one builder and they're going to make that award on time. And I think you start getting into a top line guess based on and it's driven entirely by your assumption. So I don't know that there's much value in trying to do that. Our view is that we've looked at all of that we think that right now the best way to position the business and to talk about where the business is going is that from a risk adjusted standpoint 3% seems to make sense. As I mentioned before if a couple things start to break our way and it changes our view we would be happy to describe that with you and discuss it with you.

Also timing is very important you could have six month delay on a ship, which could impact your revenue, be very successful on acquiring a ship and building the ship, but that six month delay could impact your revenue. So the 3% is really a risk adjusted answer based on knowledge of all those factors.

Thank you.

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

Good morning.

Good morning, Rob.

I'm jumping in a little late so I'm going to - hopefully these haven't been asked, the first one is on for Chris on the cash flow statement there are some grant proceeds offsetting some of your CapEx. And I wanted to see if you have any color on what that relates to whether that's for Columbia or something else? And would something like this be recurring going forward and is it net or gross relative to the CapEx guidance of 5% to 6% of sales?

Yes that…

And Mike I have one for you.

Well that's all included in the 5% to 6% of sale from that shipyard of the future proceeds from the State of Mississippi.

So that's - okay so it's obviously for Ingalls programs therefore nothing to do with Columbia is it program specific or just across Ingalls?

No across Ingalls.

Okay. And then Mike on the - just wanted to ask you on the multi-year for DDG 51 what is winning this competition really mean? Do you have an indication on how the 10 ships would be split, how the priced options would be split? And then how we think about the price the loser would have to accept?

Actually, I have no indication. We've submitted our offer. What was unique about the proposal was that we actually put - we actually price several scenarios and the scenarios included building more than half and building less than half of those programs. So, then the Navy will go and they will make their choice. And since we priced all of that, I think that this is one of those - it's a unique situation because I think the Navy bid per quantity on a pedestal with cost in this competition. And I think that's good for the whole industry. And we will see how it turns out.

Does that mean it could be more than let's say 60-40, like 70-30 kind of thing or?

No. I don't think it would be any more than what you've seen in the past. But I - yes, and let's just leave at that.

Okay. Last question actually on the - I just wanted to ask for your outlook on the cutter, on the Coast Guard cutter deliveries, how we should think about those since they often are strong ships from a margin perspective, what the delivery schedule looks like for the cutters?

Yes, NSE 7 back half of this and NSE 8 first part of next year.

Thank you very much.

You bet.

Thank you. Our next question comes from Jon Raviv of Citi. Your line is now open.

Hey, thanks for taking the follow up.

Sure.

I will not ask about growth, but I will ask about cash deployment. And I understood that repo is an important part of this strategy where we have seen other companies in this space, defense broadly contributing more to pension, we've seen sizeable M&A. What's the current mindset on cash deployment beyond repo?

Current posture hasn't really changed since we came in a few years ago and described it. We're going to invest in our core business. So, large capital investment that we've been - and we're in the middle of that right now. And then when you move from capital investment to the free cash, we're going to return substantially all of our free cash to shareholders in the form of either share buyback or dividends and we have a commitment to increase our dividends every year. As far as M&A goes, we believe that our balance sheet is strong enough to - if we have opportunities to take advantage of, we'd be able to do that. That's the path we've been on. That's the path we expect to be on through 2020. I think this quarter we had a little bit more share buyback than we've had in the past, but that's completely consistent with what we said back in 2015 and we're not changing that posture at this point.

And on M&A, if you - as you evaluate the pipeline or look at opportunities or evaluate them, are you focused more on core shipbuilding or could we see some interest in expanding the services market which u seems to be - which it appears to be going well thus far?

We stand close to the core and we'd always evaluate shipbuilding opportunities. But within TS, there are markets such as unmanned underwater vehicles, [indiscernible] advanced training, agile software development, restricted work and then even environmental management in support of the DOE. So, we're going to stay close to the core and utilize a fair - a very disciplined process to evaluate those. Anything else, Jon?

No, no. I said thank you very much.

You're welcome.

Yes, we just didn't hear that.

Thank you. At this time, I am showing no further questions and would like to turn the call back over to Mike Petters.

Well, thanks everybody for joining us on the call this morning. As I mentioned, this is an exciting time for our business. Not only is it the most exciting time that we've seen in shipbuilding in 30 years, but we have feeling that growth now in our TS division that with a couple of key wins in the DOE business and our footprint in the UUV business. We really see that some of the seeds we planted a few years ago are starting to sprout. And we're very encouraged by that. And we look forward to the rest of the year and for the years to come. Thank you all very much for joining us. Bye.

Ladies and gentlemen thank you for participation in today's conference. This concludes the program. You may now disconnect.