Huntington Ingalls Industries, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2020 Huntington Ingalls Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker for today, Dwayne Blake, Vice President, Investor Relations. You may begin.

Dwayne Blake Thanks, Wanda. Good morning, and welcome to the Huntington Ingalls Industries second quarter 2020 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer, and Chris Kastner, Executive Vice President and Chief Financial Officer. As a reminder, statements made in today's call that are not historical facts 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 HuntingtonEngels.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 Perez.

Mike? Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. I do hope that everyone is staying healthy and safe during these trying times. So I want to start by expressing my very deep appreciation and gratitude to the workforce of HII. Since the COVID-19 pandemic started back in March, our team has been on the front lines of this battle. They have balanced fighting this highly contagious virus while at the same time using every bit of their energy, focus, skill, and creativity to achieve key milestones on our programs and help us navigate through one of the most challenging times of my 30-plus year career. And I can say without a doubt that what I have witnessed from this team over the past five months absolutely epitomizes our motto of hard stuff done right. Now, turning to slide three of the presentation, I want to help you understand the thought process behind our approach to dealing with the COVID-19 pandemic in our shipbuilding business. We have hired about 25,000 people in the last five years in an environment where unemployment was historically low. And we have invested over a half billion dollars to train and certify those folks to execute the backlog that we've been able to capture over the last five years, which now totals $46 billion. So as the pandemic broke, our first priority was to protect this investment in the workforce so that they would be trained, ready, and available to execute our record backlog as we emerge from this difficult time. And at the outset, we decided to give our workforce the flexibility they needed to deal with the disruption in their personal lives. Think back to what it was like across the country in the middle of March. Schools were closing. Many companies were forced to lay off portions, or in some cases, all of their workforce. And in some parts of the country, people were being told to isolate. And this backdrop created a lot of uncertainty and disruption for our workforce. So we introduced several benefit changes, including liberal leave, to make it easier for our employees to stay home if they were sick or if they had child or elder care challenges so that those absences would not count against them. At the same time, we also had to stay in step with the CDC guidelines in order to assure those that could come to work that it was safe to do so. And this included adjustments to shift schedules to facilitate social distancing and temperature screenings, enhanced cleaning of high touchpoint areas between shifts, and requiring face coverings by everyone entering our shipyards. So during the second quarter, attendance of our hourly production workforce at both shipyards was approximately 65%, with several days during April and May around 50%. Following the end of our liberal leave policy in May, we did see those metrics improve. and during June and July, attendance of our hourly production workforce at both shipyards was approximately 77%. Now, cases have been increasing in our shipyards as states have opened up, but we are now seeing a sustainable and manageable level of attendance, and we continue to refine our policies to adapt to the changing circumstances. Now, as a point of reference, after Hurricane Katrina hit the Gulf Coast in 2005, we lost a significant portion of the experienced workforce at Ingalls. With COVID-19, we took a lot of bold and aggressive actions to make certain that this pandemic did not result in a similar outcome. And I am confident that we have made the right decisions to preserve our workforce for the path ahead. Now, we have also been making significant investments over the past several years to digitize shipbuilding processes to accelerate efficiency and training of our young workforce. This investment created the infrastructure in our shipbuilding support functions that allowed us to increase the number of people we had working remotely by a factor of 10 in a matter of days. COVID-19 has been an extremely disruptive factor on our business, and we have been pursuing all potential avenues for recovery of our costs with our customers. Now, there are indications that we may be able to recover directly related COVID-19 labor costs, like quarantining and other paid time off, per the provisions in the CARES Act or any subsequent legislation. However, at this point, there remains no clear path for recovery of delay and disruption impact, though the customer's intentions still appear to be favorable. Now, turning to slide four of the presentation... During the quarter, we recognized a charge of $167 million, driven primarily by updated cost and schedule assumptions across all of our programs. The majority of the impact, $111 million, is on the Block 4 boats of the Virginia-class submarine program, driven by recent cost and schedule performance and updates to assumptions for future program performance and efficiencies, which include the impacts of COVID-19. And let me provide some additional color for context and clarity. Our plan called for cost and schedule improvements as we worked down the learning curve on the Block 4 boats in support of a two-boat per year cadence. As we conducted our regular second quarter program status reviews, it became clear that the VCS program was particularly impacted by staffing and efficiency challenges as we prioritized work to align with our customers' priorities at Newport News. This, in turn, disrupted the cadence of work and significantly impacted our ability to reasonably rely on the assumptions we were using in our risk registers for boat-to-boat learning and cost improvement. As a result, we are resetting our risk registers to reflect the performance trends we experienced in the quarter, including the impact of COVID-19. Note that the slide includes key milestones for our next two Block 4 delivery boats. I am very proud of the team for their tireless work and uncompromising commitment to safety and quality during the ongoing pandemic. Going through these challenging times together will give the team invaluable insights and experiences that will help them learn, grow, and drive performance that meets our safety, quality, cost, and schedule targets as we move forward. Now, let me share some highlights from the quarter starting on slide five of the presentation. Sales were $2.0 billion, and Diluted EPS was $1.30 for the quarter. These results included the aforementioned $167 million charge. New contract awards during the quarter were approximately $3 billion, including a $1.5 billion contract for the construction of M-31, resulting in backlog of approximately $46 billion at the end of the quarter, of which approximately $21 billion is funded. Our backlog is a tremendous source of visibility and stability, with over 85% of expected FY20 to FY24 shipbuilding revenue under contract, and it's well supported by the annual congressional authorization and appropriations process to this point. And regarding activities in Washington, we supported COVID relief efforts by the Navy, the Department of Defense, and Congress to help ensure liquidity of the supply base, provide contractual relief, and promote workforce retention. We also continue to work with Congress in supporting consideration of the fiscal year 2021 President's budget request, and we are very pleased with the strong support for shipbuilding and other national security priorities reflected by respective defense authorization bills in the House and the Senate. The House's recent passage of appropriations measures is encouraging, and we have urged the Senate to complete the appropriations process as soon as possible. And finally, we will continue to work with Congress and the administration to support additional authorities and investments that will enable our nation's economic recovery through the Defense Industrial Base. Now let me share a few business segment highlights from the quarter. At Ingalls, DDG 119 Delbert D. Black was delivered to the Navy. Production was started on DDG 128 Ted Stevens, the first ship of the FY18 multi-year contract. and DDG-62 Fitzgerald sailed away from the shipyard. On the LPD program, the contract for LPD-31, the second ship in the Flight 2 class, was awarded. And in addition, NSC-9 Stone is continuing to progress through the test program and is expected to deliver late this year. Notable events since the end of Q2 include the contract award for the DDG-FY-20 option ship, the eighth Flight 3 ship, and the sail away of LHA-7 Tripoli from the shipyard. At Newport News, CVN-79 Kennedy is approximately 74% complete, and the team remains focused on compartment completion and completion of our single-phase delivery proposal for submission to the Navy. CVN-73 USS George Washington is continuing to progress through its final outfitting and test phase and is approximately 78% complete. The next major milestone for the ship is the start of crew move aboard later this year. In our technical solutions business, the team had two key re-compete wins, including a contract award to provide analytical support services to the U.S. Special Operations Command and an award from the U.S. Postal Service Office of Inspector General to continue providing support services to the Office of the Chief Information Officer. TS also recently announced a major IDIQ contract award worth up to $3 billion over a 10-year period from the Department of Energy to provide nationwide deactivation, decommissioning, and removal services at excess DOE facilities across the nation. Overall, these recent wins reaffirms HII's longstanding strategic partnerships with several of our key customers. In addition, TS recently completed a strategic equity investment in Sea Machines Robotics, a Boston-based autonomous technology company that specializes in advanced software for unmanned surface vessels. This investment represents our commitment to advanced innovation across the unmanned systems market and our drive to form complementary partnerships in this important and growing domain. I would like to conclude my prepared remarks by highlighting a few key attributes of our business. And these attributes point to a very stable foundation and a bright future as we work our way through this undoubtedly challenging period. We have a management team that, in my estimation, is the best in the business. The thoughtfulness, rigor, and resolve that the team has exhibited by continuing to meet programmatic milestones while dealing with the disruption from COVID-19 across the business has only reinforced my view. Over the past five years, we have made significant investment in human capital and took the right steps as the COVID-19 pandemic broke to preserve our workforce so they would be trained, ready, and available to execute our record backlog as we emerge out of this difficult time. In addition, our balance sheet is very strong. As Chris will discuss, we have taken a number of prudent actions recently that will lower our cost of capital and provide more than ample liquidity. And we continue to see free cash flow generation accelerating over the next several years as we complete the generational capital investments in our shipyards this year. And finally, our backlog of $46 billion, or over five times last year's revenues, represents an incredible amount of work for us to execute. And as a key reason, we took very aggressive action to preserve the investments we made to train and qualify our workforce over the past five years. This workforce is now operating in a significantly recapitalized, more efficient shipyards with better technological tools at their disposal and is crucial to our success as we work through and accelerate out of this period of uncertainty. I want to thank them for the work they've done, particularly during the ongoing pandemic. As I said earlier, this is by far the most challenging operational environment I have experienced in my career, but I know we have the right team in place to answer the call, and I am very confident that we will emerge stronger and even more capable over the long term. So now I will turn the call over to Chris Kastner for some remarks on the financials. Chris.