Huntington Ingalls Industries, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2021 Huntington Ingalls Industries earnings conference call. At this time, all participant lines are in listen only mode. After the speaker's presentation, there will be an opportunity for you to ask questions. There will be a question and answer session. To ask a question during the session, you may press star then one on your telephone keypad. To withdraw your question, please press star then do. Please be advised that today's conference is being recorded. I would now like to turn the call over to Dwayne Blake, Vice President of Investor Relations. Mr. Blake, you may now begin.

Thanks. Good morning and welcome to the Huntington Ingalls Industries first quarter 2021 earnings conference call. With us today are Mike Pettis, President and Chief Executive Officer, Chris Kastner, Executive Vice President and Chief Operating Officer, and Tom Steele, Executive Vice President 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, Chris, and Tom 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 HuntingtonEnglish.com and click on the investor relations link to view the presentation as well as our earnings release. With that, I'll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. I trust that everyone is staying healthy and safe. Now, let me share some highlights from the quarter starting on slide three of the presentation. Sales of $2.3 billion for the quarter were slightly higher than 2020. Diluted EPS was $3.68 for the quarter, and pension adjusted EPS was $3.56, up from $2.43 in 2020. New contract awards during the quarter were approximately $5.3 billion, resulting in a record backlog of approximately $49 billion, of which approximately $25 billion is funded. Chris will provide some color on a few of the key awards for the quarter during his remarks. Shifting to activities in Washington, we were pleased that the recently released summary of the fiscal year 2022 President's budget request affirmed that maintaining U.S. naval power is critical to reassuring allies and signaling U.S. resolve to potential adversaries. Of note, the budget summary cited continued recapitalization of the nation's strategic ballistic missile submarine fleet, investment in remotely operated and autonomous systems, and funding for the Next Generation Attack Submarine Program. And we look forward to understanding budget details for these and other national security priorities when that information becomes available, as well as funding levels requested for the Department of Energy and the Department of Homeland Security. We also look forward to working closely with the Congress as the FY22 President's Budget Request is considered during the current legislative cycle. Regarding portfolio shaping actions during the quarter, we completed the previously announced sale of our oil and gas business and also completed the contribution of the San Diego shipyard to tighten acquisition holdings in exchange for a non controlling interest in this leading provider of ship repair and fleet sustainment services. Completion of these transactions sharpens the focus of our technical solutions business into areas where we believe our unique capabilities and close customer relationships will drive strong organic revenue growth and margin expansion. And as I prepare to close, I'm very pleased with the operating rhythm the team is achieving, which led to the third consecutive quarter of solid program execution and financial results. and I am very confident that our strength, agility, and positive momentum resulting from enduring the impacts of COVID-19 will serve as key catalysts to help us leverage our historic backlog to generate strong free cash flow and create long-term sustainable value for our shareholders, customers, and employees. Now, before I turn the call over to Chris, let me make a few comments about a recent leadership change. After serving as president of Ingalls since 2014, and with more than 40 years of service, Brian Kouchis retired on April 1st. Brian's career at Ingalls has been remarkable, and HII has truly benefited from his leadership. Effective April 1st, Carrie Wilkinson succeeded Brian as the new president of Ingalls and will report to Chris. Carrie has proven herself to be a strategic and visionary leader that is focused on operational excellence, and I am extremely confident that Ingalls is in very capable hands. And now I will turn the call over to Chris for some remarks on the operations.

Chris? Thanks, Mike, and good morning, everyone. Operationally, we had a solid quarter, making consistent progress across our shipbuilding and technical solutions programs. With that, let me share a few key contract awards and programmatic highlights from the business segments for the quarter. At Ingalls, the team was awarded a life cycle engineering and support services contract for the LPD program with a cumulative value of approximately $214 million. The scope of work includes engineering change management, supply chain management, training for new shipboard systems, and the execution of post-delivery availabilities. Regarding program status, LHA 8 Bougainville achieved a 25% complete milestone during the quarter, and the team remains focused on maintaining strong cost and schedule performance in support of their planned production milestones. On the DDG program, the team remains focused on preparations for launch of DDG 125 Jack H. Lucas and sea trials for DDG 121 Frank E. Peterson, Jr., both planned for the second half of this year. And on the LPD program, LPD 28, Fort Lauderdale, remains on track to complete sea trials later this year. And LPD 29, Richard M. McCool, Jr., remains on schedule for launch early next year. The team at Ingalls is also working closely with the Navy to put LPD 32 and 33, along with LHA 9, under contract. This bundled acquisition approach is the most affordable method to buy these ships, and when complete, affords predictable savings for the Navy. At Newport News, the team was awarded a $3 billion contract for the refueling and complex overhaul of CVN-74 USS John C. Stennis, and also received a contract modification for construction of the 10th Virginia-class Block 5 submarine. These key awards are additional building blocks for a record backlog which now stands at nearly $49 billion. Shifting to program status, CVN 79 Kennedy is approximately 81% complete. The team is finalizing plans to support the single-phase delivery requirements while continuing to focus on compartment completion and key initial test milestones. CVN 73 USS George Washington is approximately 87% complete and continues to make progress with the crew recently beginning to move back aboard the ship. This is another key milestone in support of re-delivery to the Navy planned for next year. On the VCS program, SSN 794 Montana continues test program activities in preparation for delivery to the Navy, planned for later this year. In addition, SSN 796 New Jersey remains on track to achieve the float-off milestone as planned in the second half of this year. At Technical Solutions, the team booked several key awards during the quarter, This included a $175 million police sustainment recompete and a position on a Naval Information Warfare Center Pacific ISR and cybersecurity IDIQ contract. Additionally, production of the first ORCA XLUUV modules is now underway at our unmanned systems center of excellence. Approximately 75% of all structural components have been fabricated and assembly has commenced with final unit delivery to Boeing planned later this year. And finally, our nuclear and environmental services business continues to perform very well, with strong performance across our Department of Energy contracts at Los Alamos, Nevada, and Savannah River. Now I'll turn the call over to Tom for some remarks on the financials. Tom?

Thanks, Chris, and good morning. Today I will briefly review our first quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on slide four of the presentation, our first quarter revenues of $2.3 billion increased less than 1% compared to the same period last year. This was primarily due to growth at Newport News and Ingalls that was largely offset by decline of technical solutions due to divestitures associated with the portfolio shaping actions we had taken. Segment operating income for the quarter of $191 million increased $35 million from the first quarter of 2020, and segment operating margin of 8.4% increased 149 basis points. The improvement was driven by higher risk retirement at angles and improved performance for technical solutions. Operating income for the quarter of 147 million decreased by 68 million from the first quarter of 2020, and operating margin of 6.5% decreased 305 basis points. These decreases were primarily driven by a less favorable operating fast cash adjustment, partially offset by the stronger segment operating results compared to the prior year. The tax rate in the quarter was approximately 15% compared to approximately 20% in the first quarter of 2020. The declining tax rate was primarily due to the divestiture of our oil and gas business, as well as the recognition of R&D tax credits for the current year and prior periods. Net earnings in the quarter were $148 million compared to $172 million in the first quarter of 2020. Diluted earnings per share in the quarter were $3.68 compared to $4.23 in the first quarter of 2020. Excluding the impact of pension, diluted earnings per share in the quarter were $3.56 compared to $2.43 in the first quarter of 2020. Turning to slide 5 of the presentation, cash from operations was $43 million in the quarter and net capital expenditures were $59 million or 2.6% of revenues, resulting in free cash flow of negative $16 million. This compares to cash from operations of $68 million and net capital expenditures of $66 million and free cash flow of $2 million in the first quarter of 2020. Cash contributions to our pension and other post-retirement benefit plans were $72 million in the quarter, of which $60 million were discretionary contributions to our qualified pension plans. During the first quarter, we paid dividends of $1.14 per share, or $46 million. As noted on our fourth quarter earnings call, we did reinitiate share repurchases earlier this year and continue to view the return of excess free cash flow via share repurchases as an integral part of our capital allocation strategy over the long term. During the quarter, we repurchased approximately 292,000 shares at a cost of approximately $50 million. Moving on to pensions. With the passage of the American Rescue Plan Act, we have reviewed the five-year pension outlook that we provided on our last earnings goal and continue to believe that remains the most appropriate view. Due to the limited nature of our projected contributions and the impact of lower cash sensitivity with safe harbor implementation, the passage of the legislation does not have an meaningful impact on our outlook. We plan to provide an update to near-term pension expectations on our Q3 call consistent with our prior cadence. Moving on to slide six of the presentation, Engel's revenues of $649 million in the quarter increased $20 million, or 3.2%, from the same period last year, driven primarily by higher revenues on the DDG program. Engel's operating income of $91 million and margin of 14% in the quarter were up from the first quarter of 2020, mainly due to higher risk retirement on LHA 8, which was related to the 25% completion milestone that Chris mentioned earlier. Turning to slide seven of the presentation, Newport News revenues of $1.4 billion in the quarter increased to $66 million, or 4.9%, from the same period last year due to higher revenues in both aircraft carrier and submarine construction, as well as fleet support services. Newport News operating income of $93 million and margin of 6.6% in the quarter were down slightly year over year, primarily due to lower risk retirement on CBN 73 RCOH, partially offset by higher risk retirement on VCS Block 4 votes. Now to technical solutions on slide eight of the presentation. Technical solutions revenues of $259 million in the quarter decreased 18.3% from the same period last year, mainly due to the divestitures of both our oil and gas business in the San Diego shipyard on February 1st of this year, partially offset by a full quarter of results from hydroids, which was required at the end of the first quarter of 2020. Technical solutions operating income of $7 million in the quarter compares to a loss of $7 million in the first quarter of 2020. This was driven primarily by improved performance in defense and federal solutions and nuclear environmental services, as well as a gain related to the sale of our oil and gas business. Turning to slide nine, we continue to expect we will finish the year with shipbuilding operating margin in the 7% to 8% range, with the significant remaining risk retirement events weighted towards the end of the year. In addition, we expect shipbuilding margins for the first half of 2021 to be around the midpoint of our annual guidance range. We continue to view the remainder of our 2021 guidance as appropriate, with the exception of the effective tax rate, which we now expect to be approximately 18%. Now I'll turn the call back over to Duane for Q&A.

Thanks, Tom. 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. Operator, I'll turn it over to you to manage the Q&A.

Thank you, anyone. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your hands quickly. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Carter Coupland from Milius Research. Please go ahead.

Hey, good morning, everybody. Mike, I wondered if you could expand. I mean, it's been... been quite a string of challenges thrown at you over the last several quarters. But the comment you made around the operating rhythm and finding, I guess, more of a better cadence there, I wondered if you could expand on that and specifically what sort of operating metrics you're looking at that give you conviction that that's a trend you're going to stay on.

Okay. You know, I think, first of all, Carter, you're right. We've had a lot of stuff thrown at us in the last 12 months. And, you know, we took a pretty good body blow back a year ago with attendance relative to the pandemic. And the impact that had on our ability to retire risk, you know, we recognized that in Q2. But what came out of that was, you know, we've stabilized our employment levels. We've stabilized our scheduling. We've actually, you know, created the mechanisms in our risk registers so that we know where we are and where we're going and where we need to get. It helps a lot that we have this backlog that we're working off of. And, you know, where we are now is when you come through a crisis like this as a leadership team, the connectivity, the tools that you've put in place, the innovation that has happened, you're taking advantage of all of that. And as you move forward, you start to look at what have we actually accomplished? Well, we started at the beginning of the pandemic thinking that we needed to preserve the 25,000 people we had just hired over the last five years in our workforce. We've done that. We actually have hired between 5,000 and 6,000 people since the pandemic started. That's pretty creative and innovative, if you will, and we still have pretty robust hiring plans going forward. Our case rates today are lower than they have been since last summer. That's inside of our yard. And the quarantine volume today is lower than it's been really since this began. We have actually administered. We've administered vaccines to about a third of our workforce on top of where they're widely available to the rest of the employees who are getting them not through us. And so, you know, we're seeing a pretty steady rhythm now of folks are at work, they're engaged, we understand what needs to be done, and we're actually getting stuff done. I think the change where we moved Chris over to be the chief operating officer and really create more management bandwidth on how do we manage that risk going forward and how do we make sure that we're doing what we said we were going to do has really helped. And so, you know, I don't know. I guess I've been around it for a long time, but I feel really good about where we are right now in terms of doing what we said we're going to do.

Okay. And then just as a quick follow-up, there's obviously a lot of talk macro-wise about inflation and inflationary impacts. When you look at, at least in terms of your fixed price work, is there any cost exposure that you watch there to be aware of, or is it not significant at this point? How should we think about that?

Yeah, Carter, I'm going to let Tom take that one and let him talk to you about what we're seeing there.

Good morning, Carter. Yeah, so relative to inflation, you know, our contracts, you know, they're much longer term. We have the benefit here with long-lead contracts from a planning horizon and the backlog that we have to plan our work at. So we have sight as far as the materials that we need. Additionally, when we put together our proposals and the contracts that we bring home, We generally want to see those POs in place. They're backstopped by proposals and commitments shortly there after the award. So what we're seeing, and I've talked to both yards just this week, as a matter of fact, on that point, we're not seeing a tremendous amount of inflation across the purchases that we have, and we're not having a problem feeding the yards from a material perspective. We do see going forward, as we're getting new quotes, that the span of the validity of the quotes is short. I think the subcontractors are staying light on their feet as far as what they're committing to. But relative to our contracts and our performance, we don't see an impact right now.

Okay. Thank you very much, gentlemen. You bet.

Thank you. We take the next question from the line of Miles Wong from UPS. Please go ahead.

Thanks, Gabriel. I was hoping, Chris, you could clarify that LPD bundled contract you mentioned, the size, timing, and if that is more to just generate efficiencies or could there actually be increased levels of work versus your medium-term plan as well?

Yeah, so that's all kind of contained in the 3% guidance that we talked about from a growth standpoint. The benefits of the bundle are pretty clear. When you can order those three shifts together and sequence them, the work in an efficient manner, you're going to absolutely get savings. So it's something we support. It's something we're working very closely with the Navy. If we are not able to get that done, we'll get those ships under contract incrementally. It just will not be as efficient.

What would be the size of a bundle of those three?

About $5.5 billion, potentially. Okay.

And there's clarification for Tom, the sequential margin into Q given the one H is expected to be at the midpoint of the range.

Can you you know, can you point to maybe why the step down is so so significant to six mid sixes or so?

Sure. As I related in my comments, opening comments there, you know, there's not a tremendous amount of milestones that we have in Q2, Q3. It's just a pacing year right now. So we're watching the volume come through at the present booking rates that we have right now. We think the first half of the year will come in around the midpoint of the guidance. And then we have milestones in the back half of the year that, you know, if retired, add some potential there. But obviously we have to burn that off as the year ticks by.

All right. Thank you.

Thank you. The next question is from the line of Doug Honneth from Bernstein.

Good morning. Thank you. Good morning. Now, you know, we've seen a whole lot of Navy shipbuilding plans. We've got the 500-plus versions. And the C&O appears to have gone back to kind of the 355-ship goal. But even that goal has been not easy to get to, and the mix appears very uncertain. So, Mike, when you think about planning in this environment, how do you do it? How do you think about long-term investments? and where you want to sit given all of the flux around these shipbuilding plans?

Thanks, Doug. You know, that's a great question. It's one we actually kind of kick around a lot is, you know, are we thinking about this the right way? I think at a macro kind of at the higher level, what we see is that – The shipbuilding execution plan is on a much longer rhythm than the shipbuilding theoretical plans. Like a 30-year plan comes out, I don't know, every couple of years. But the contracts, you know, we have ships right now that are under contract to deliver. I mean, Dory Miller delivers in 2032. So what is that, like four 30-year plans between now and then? So we look at those plans not so much as the precision of the plan, but more about what's the intent of the plan. And what we're seeing in the intent of the plan, and you've acknowledged that they move around a little bit, but what we see in those movements is Navy wants to move to a Navy that has many ships, faster ships, maybe smaller ships, cheaper ships. So our investments are aimed in that direction. Now, that doesn't mean they're not going to build aircraft carriers or submarines, because I think they are, but they're going to want to build aircraft carriers more efficiently. They're going to want to build submarines more efficiently. They may want to build more submarines more efficiently. When it comes to the non-nuclear ships, You know, amphibs, destroyers, frigates, you know, those kinds of platforms, they either go through class change or block changes. And our challenge is to be agile enough to respond to the customer's requirements and do that as effectively and efficiently as we can. So the investments we make in our facilities are designed to be able to do that. They're multipurpose, multiproduct kinds of investments. You know, we'll do a capital investment at angles that will apply to four classes of ships. We'll do capital investments at Newport News that you can use for carriers or submarines. And so that's kind of the way we think about that, as opposed to we need to go make a big investment for, you know, pick your program that three years from now may evaporate. We don't do that. So that's kind of the way we sized and thought about this generational investment we made over the past five years or so, a couple of billion dollars in our shipyards. We think that positions us very, very well for the direction that we think the Navy's going to end up going. And, you know, we'll probably have lots of discussion about whether it's one more submarine or one less destroyer, all that sort of thing. But it means our investments were still the right thing to do.

And do you think when you look forward, you know, as you were saying, more, you know, faster ships, slower ships, in a sense, it can open it up to other competitors rather, you know, as opposed to you in general dynamics. And we saw this with the frigate. I mean, do you foresee a time, obviously it's a ways away, when the competitive structure of this industry could change because of these smaller, faster, different ships?

You know, I mean, I don't know, Doug. I guess maybe. But I would say that I would caution anybody from thinking about that question as a binary question, that it's either one or the other. It's going to be a kind of a transformation that's going to be product line specific. Most of the shipyards in this country build a product. You know, our shipyards build several classes. You know, we build four classes of ships at Ingalls. We build carriers and submarines at Newport News and refueling and all that sort of thing. So we do multiple classes of ships in our shipyard. We think that serves us pretty well for whatever direction the future is going to be. And if the environment is going to be more competitive, so be it. We're happy to compete. Great. Thank you.

Thank you. The next question comes from Ron Epstein from Bank of America.

Please go ahead. Good morning, guys. Morning. Can we talk a little bit maybe about the services business? The margins in the quarter were maybe, what, 2.7%, and the target margins are 3% to 5%. What drives the upside there? How are you thinking about that?

Yes, I'll take that. Hey, Russ, it's found here. So a couple things. We have got it from 3% to 5%. You're right, it is a 2.7% quarter. Right now we saw a little bit of volume, you know, shortfall there as we're waiting for awards and the sales to come along with those awards for the year. Just with COVID and then the announcements of where we are in some re-competes, it's just a little bit, say, behind relative to guidance of 3% to 5%. But, you know, the year is still in front of us. We haven't changed our guidance yet. We think TS will be there at year's end.

All right. Ron, I can add to that. There's in our equity accounting relative to the nuclear space, the timing of some of those are slated towards second and fourth quarter. So you don't generally see that happening in the first quarter. So it's a bit lumpy, and we usually start light.

Got it, got it. And then a question for Mike. When you're looking out medium term, let's call it, what are the biggest opportunities that you're trying to plan for now? I mean, this is a follow-on to Doug's question. As you're positioning the business, what's the big fish out there that you want to catch, say, call it, three, four, five years out?

So in shipbuilding, I think that we'll start with that. I think that if there's an expansion of a product line, say, and there has been some discussion about what's the industry's ability to support expansion of, say, the submarine product line, we certainly want to be able to take full advantage of that. In the same way, if the Navy wants to expand in the frigate space, we want to be able to assist that if we need to be able to go and do that. You know, and then I think it's, you know, engagement on the planning and design piece for so what happens to the future of amphibs. Probably that's mid to long term, probably not near to midterm. And what happens with the carrier is, you know, are there going to be, you know, is CBN 82 going to have some design for affordability put to it, and are we going to engage in that? I mean, frankly, CBN 82 is a ship that starts to show up here. I mean, you go to contract in 27 or 28. So, you know, making sure that that stays on track, that's kind of the way we think about it in shipbuilding. In the technical solution space, you know, we've made a big investment in unmanned, and expansion of the unmanned business, I think, is something that now that we've made that investment and we have the portfolio, it's up to us to make sure that we capture that expansion. Of all the budget items that I see out there, the unmanned budget item is probably going to have the largest percentage growth over the next five years, in my view. We've established, as Chris kind of alluded to a minute ago, we've established our position as a Department of Energy prime, and there's a lot of work over there that needs to be done, and we are pursuing all of that very aggressively. We think that's a really great spot for us to be in. It takes advantage of capability that we have in our shipbuilding business, but it gives access to another customer, and we've done very well with that, and we look to continue to expand that. And then, you know, ISR is a space where we've really actually done well and we expect to do well going forward. So, you know, we kind of look at that as it's kind of a capability dependent based on what our customers' needs for capability are, but that's kind of how we think about it. Where do we think our customers are going to want to be in three to five years, and how do we make sure we get there and help them get there?

Great. Thank you. You bet. Thank you.

Next question comes from George Shapiro from Shapiro Research.

Please go ahead. Yes. Tom, if you could provide the EACs, and is it fair that the pickup on the LHA-8 was probably $35 million or so?

Good morning, George. A little bit of color on that is 86 was the favorable, 36 was down, net 50. Across the yards was about 90, 10 at Ingalls. The only significant drivers on the upside there were the LHA-8. We usually don't give guidance or information on a specific ship. So 35 is kind of heavy there. Ingalls had a good quarter on top of the LHA hitting the 25% vessel complete milestone where they reevaluate the risk and they restrict the EAC. They did have a change proposal that's been focused on cost management there. So overall it was a good quarter for Ingalls. There was no significant upsides or downsides that I'd probably highlight here.

Tom, if 35 is a little bit heavy, I mean, just on the rough numbers you gave, it would imply about $45 million of favorables at Ingalls. So was there anything else you can specify, or it's all spread across the board for, say, another $20 million if 30 was the LHA 8?

Yeah, the Q has the information on LHA, so when that pops out, you'll see that you're about $10 million heavy there. But as I say, the other aspects of it, change management, we've definitized the change down there, not overly significant, and then just good performance in LPD-28s coming along and paying attention on cost. You know, 14% high, so I wouldn't expect that going forward, but they cleaned up well and they didn't get bit for the quarter, so that's where they landed.

One quick one for Mike. Can you update us on the Block 5 submarines? That was the one that you had some problems with as to where we stand right now.

Actually, the challenge we had in Q2 was on Block 4, George. We're establishing a rhythm in Block 4 that's going to carry through and help us do really well on Block 5. I don't know, Chris, if you want to add to that.

I can add on Block 4. We've met some important milestones in the first quarter with Montana floating off and New Jersey getting pressure all complete. Two important milestones on the balance of the year there for BCS Block 4, getting Montana delivered and getting New Jersey floated off. So we're watching those milestones very closely. Good progress. on Montana, on getting ready for delivery. So we're optimistic on kind of the rhythm and the momentum on the Block 4 contract right now.

Okay, thanks very much. You bet.

Thank you. The next question comes from Richard Safran from Seaport Global. Please go ahead.

Thank you. Good morning, everybody. Good morning. Good morning. So I've just been doing reading about the work. I wanted to ask you about the Ford. I've been reading about the work being done there. Based on that, Newport's still doing work on things like the weapons elevators and there are other maintenance items, et cetera. I just wanted to know if you could discuss how the work on the Ford's progressing relative to your expectations, when you expect completion, and if there's been any commentary from the Navy about the level of satisfaction with your efforts so far.

Yeah, this is Chris, and I'll let our ex-aircraft care program manager, Mike, talk about it after me. But, yeah, really positive interaction with the Navy on the Ford, weekly interaction on the Ford, especially on the weapons elevators. I've got seven of those turned over. Four of them will be done this summer. So really positive interaction. That work will go on for a while, but nothing – not really material going forward. But, yeah, it's been positive. The Newport News team is performing very well, and I think the Navy is very pleased with the performance of that ship right now.

And I'll just add that, you know, the Ford was at sea as much as – probably more than any other ship in the fleet last year. It's the training carrier for – for the East Coast. And, you know, the Navy will say, and they have said, they can quote you the number of traps, the number of launches, the tons of ordnance that they've moved on the weapons elevators, how easy it is to operate, how much power density changes from the Nimitz class. I mean, it is a centerpiece of – the design is a centerpiece of the Navy strategy going forward. And the ship is coming together really well, and they're getting ready to go towards their shock trial. So all systems are green and full speed ahead.

Okay. And now – I'd like to revisit this comment you talked about, the comments you were making about the future of the Navy fleet. There was one program, I think, that was omitted, and maybe it was deliberate. And there was talk of a replacement for the Ticonderogas. I was kind of wondering if you could just comment on the status of that program, if you think that will ever materialize to a real opportunity. Or, for example, do you think that Flight 3 with Spy 6 is – is what you think is going to replace the Tyco's.

You know, I'm not sure I know how to handicap that. One of the first things I learned at the Academy 40 years ago was that there's countermeasures, and then there's counter-countermeasures, and there's counter-counter-countermeasures. And what happens is the technology races ahead, you know, at a speed that's, you know, a lot different than the build cycle of a ship. And so the question is, what kind of platform are you going to need to work the technology? If you look at the Type 3 destroyer and you look at what they're trying to do with it, that ship is pretty full. And so if the technology is going to require that kind of space and weight, then it probably needs something different to carry it forward. How we get there as an industry to design that, you know, and create the platform that has the – The margin, if you will, for future technological upgrades, I think the Navy and the industry are having a pretty robust discussion about that right now, and I'm not sure I'm ready to handicap how it's going to turn out.

Okay. Thanks a lot.

You bet. Thank you.

The next question comes from Noah Poponate from Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Morning, Noah. Morning, Noah. Just going back to the pace of margin through the year topic and the risk retirements and how they flow through, the shipbuilding margin, if I take out the net positive EAC in a lot of your history, is in the zone of 6.5. And the different guidance comments you've provided for first half and full year sort of imply 6.5, 2Q, 3Q, and then stepping up in 4Q. So, I guess it implies, you know, essentially no risk retirement events, 2Q, 3Q, actually maybe even embedding something slightly negative. Just want to make sure, you know, that's what you're looking for, and I have that correct.

Yeah, I tell you, we are in the zone now. So, you know, between 6% and 7% would be the norm. Six and a half is a good estimate on your part. I tell you that, you know, the mix moves around at both yards as far as where the ships are. So ships get either sold off or mature when they take a step up. and or you have new ships that start at a lower booking rate, that mix changes. So I wouldn't read too much into that, where we need to be from a plan perspective and against our guidance that we gave you there. So, yeah, I think you got that right.

Makes sense. And, Tom, when you look to next year in 2022, do you have more risk retirement events or less or a similar amount? No.

So, you know, we told you 7% to 8% this year, low 8% next year. We had mentioned that as we go forward, when Chris gave the guidance for Q4 in February, he had mentioned that, hey, this is a pacing year, and then as we get it to 22 or 23, we'll see more ship deliveries. So there is the potential there, and the plan has us moving upward. And obviously, as the quarters kind of click off, we'll burn down that risk, and we'll realize those margin expansions that we've discussed.

Got it. And then just a clarification on the ARPA into pension cash flow inputs. Do the contribution and cash recovery numbers you provided previously literally not change at all, or it's just that those had come down enough that the change is going to be small relative to your total cash flow? Yes.

As far as the change, if you do the math, it's something there, but we really don't want to chase it on a quarter-by-quarter basis. Since we swung over to safe harbor, we really kind of mitigated the cast variability, and already we're at a limited contribution over the projection that Chris gave in February again. The max contribution was $80 million, half of that's post-retirement benefits. And then also, obviously, the projections on pension is going to be equally a function of the discount rate as that changes and then the plan performance. So between those three variables, you know, we're not going to update every quarter here. We'll give you a look-see at Q3. That's the normal cadence for the remainder of the year in 2022. And then as 21 closes out, we'll give you a fresh look at a five-year projection next February.

Makes sense. Okay, thank you.

Thank you. The next question comes from David Strauss from Barclays. Please go ahead.

Thanks. Good morning. Good morning. Mike, you touched on the unmanned portfolio and the potential growth there in a couple of your comments. Could you size the revenue, you know, unmanned revenue now that sits within TS? You know, what a reasonable kind of target for that business could be over the next couple of years and when you would think about actually breaking it out so we can see what's going on there?

Yeah, we haven't broken that out yet, and so we'll just – We'll let you know when we're ready to break it out.

Okay. I guess, you know, in the first quarter you did, you know, you had 5% growth at Newport, three at Ingalls. You know, you're forecasting shipbuilding relatively flat up a little bit this year, and then 3% from here. How should we think about the relative growth rate of Newport? Newport versus Ingalls both this year and into the future?

Yeah, this is Chris. We don't break out the growth rate by the two shipyards. We have historically said that Ingalls is more flattish moving forward, and a lot of the growth is coming from Newport News, but we don't give specific growth rates.

Okay. See if I can hit on one here. The R&D amortization, Tom, what potential impact could you guys be looking at there if that holds?

Yeah, so, you know, the opinion that we have on that, it's not constructive from an investment standpoint in R&D because that has to get amortized over five years. So we'll have to see how that legislation flows out. You know, we have run – some models on that. It's not a tremendous impact. It does obviously affect the cash on it. I mean, our models say it could be in the 50-ish range, 50 to $100 million range, and we'll have to see how that legislation unfolds.

Okay, 50 to $100 million on annualized cash flow in 2022?

Right, because obviously you've got to amortize it over five years, those credits, and, you know, that's That's an evaluation we do annually against the portfolio that we have. So, okay.

Thanks very much. Thank you.

The next question comes from Gautam Khanna from Cohen. Please go ahead.

Yes. Thanks, guys. Good morning. Good morning. Good morning. I have a question of the National Security Cutter Program. Any change in the Biden administration on the desire to keep buying these? What should we be looking for? 22 requests and what's under contract? If we could just refresh us on that.

Yeah, we're pushing hard to get NFC 12 appropriated. I think it's kind of like the Navy side. We're kind of living off of the work done on the FY22 budget. before this administration got here, and I think the administration now is doing a kind of a top-to-bottom review of all of that stuff. That's why, frankly, for DoD, you've just seen the top-line number come out with not any details behind it. You know, our view is that there's a lot of strong support for the national security cutter. The Coast Guard is, you know, gainfully using that platform around the world. And we're proud to be able to partner with them to get it done, and we're going to continue to pursue it.

Yeah, Gollum, I could add. We've delivered through nine, as you're probably aware, 11, 10-11 under production there at Ingalls, 11 delivers out in the 24 timeframe. But as Mike indicated, very capable ship, and we're working with the Coast Guard for potentially in the Congress to get 12 under contract.

Okay, and is there any discussion of an additional block buy of these, or is 12 sort of the end of the line on that program?

I think we'll see. You know, I think we're just, you know, a lot of new players are coming to the table to have a discussion around it. We're happy to provide whatever requirement the nation needs in that platform.

Okay, and... I may have missed it in your opening remarks, but where are we in terms of staffing at the shipyards, people showing up, like level of absenteeism and or, you know, from COVID-related impacts?

Yeah, we're at normal levels. Yeah, we're at normal levels now. I mean, we have our lowest case rates since last summer. We have the fewest number of people in quarantine since last summer. A third of our workforce, we've actually vaccinated one third of the workforce. And the workforce is getting vaccinations in other places as well. And so, you know, what that's doing is that's just driving our case rates down pretty dramatically. You know, we hired 6,000 people during the pandemic. Our hiring plans continue. And so we're moving ahead. We expect that by the 1st of June, the people in our shipyards that want to get the vaccine will have had access to get it. And so, you know, we're moving ahead.

And last one for me, I'm just curious, is there any precedent for the bundled purchase that you were talking about, you know, with maybe LHA and LPD being put together, you know, a In other words, a bundle across different ship classes.

Well, we had a competition a few years ago where the competition was around an LHA and a TAO. And, you know, we won the LHA and our friends at NASCO won the TAOs. So, you know, we've been building ships in this country for over 200 years. I would say that there's probably precedent for just about everything that's out there.

That's a good point. Thank you very much.

The next question comes from Robert from Credit Suisse. Please go ahead.

Hey, good morning.

Good morning.

Chris, this one's for you. I wanted to ask in your new role, I think one of the things that you're tackling is just smoothing out the best practices from one yard to the other, or maybe across all three businesses. And I was hoping you could expand on that a little bit, talk about where the opportunities are within that.

Yeah, no, that's a really good question. I have had the opportunity to work at Ingalls as a CFO there and then my corporate CFO job reviewing all the processes at Newport News. And there are significant things that happen within each of the yards and even in technical solutions that can be shared there. One example I could give is supply chain. You know, the supply chain teams work very closely with each other. They bundle procurements. They look at capacity across the spectrum, and they do a very good job at that. Their operating systems are a bit different, but they learn from each other. And we bring best practices in the operating systems as well. So, you know, I could talk for days on the things we're working on across shipbuilding and within technical solutions to learn from each other. But those are just a few of them.

You know, I think on one of our visits, one of the things we saw at Newport News was the implementation of VR, sort of to replace physical blueprints as an example of where, you know, technology can come in. Is there an update on how well that's implemented and if you're actually using that yet or if there are other technologies we're talking about?

Yeah, so another good question. Digital is absolutely being utilized within Newport News in building a CBN 80, and it's preparing for utilization on the Columbia class. So it's absolutely an investment we're making. It's paying off. The craft and the trades like the new product, and we're hoping for really great things to come from that.

Has anyone quantified the benefit? Have you seen, you know, at least in testing, you know, percentage of man hours reduced or anything like that?

We have definitely seen a percent increase in savings. We haven't published anything to that regard. It's just at the beginning stages on 80. So we don't want to get ahead of ourselves, but we are achieving savings, yes.

Okay. Thanks.

Sure.

Thank you. The next question comes from Joseph Donati from Stifel. Please go ahead.

Oh, thanks. Good morning. Morning. Morning. Just to clarify Carter's question, maybe more specifically, when you think about an inflationary environment, what protections do you have, and then where are the risks? I understand you're not seeing anything right now, but, you know, to the extent we do see that, where are you protected and where are the risks?

Excellent. Thanks, Joseph. So as I said earlier on that, you know, our contracts are a little bit more long-term than, say, across other industries. We do have a planning cycle, long lead on our contracts. We usually, our process here is we want to make sure that we have as much material understood and on the quote. So when we go on award, you know, the risk of inflation hitting, you know, Our handshake values is low on that. Additionally, as contracts run out, there are some contracts here, you know, with the calories of six to seven or eight years, you know, and we buy the material much further where it's tough to get that quote. We still have EPA indices and pricing bands with the customer that we share in both the potential underrun or the overrun in that. And then obviously these contracts to FPIF, so there's some sharing there. But like more immediate as we pulse right now for the execution of the contracts that we're working today, we don't see that right now. I mean, there's pockets here and there, a piece of material that may be late. But on the whole, material is being flown into the yard at the expected times and expectation of costs that the contracts are centered around. So I hope that hits the essence of your question.

Okay, yeah, that's helpful. And then, Mike, when you look at 80, 81, and 82, can you talk about the degree of commonality you're expecting from those ships? Does the block buy ensure greater commonality so that maybe you can benefit more from serial production? You know, when you think about the opportunity to improve margins on carrier construction, how important is maybe more commonality, or is it something very different than that? Thank you.

Yeah, so 80 and 81 are the two ships under contract. 82 is the ship that's out there. You know, Chris alluded to my ancient history of being a program manager. I was actually a program manager for the Stennis and Truman, which was the last time we built two ships at the same time. I can tell you that the second ship... absolutely benefits from the first ship in the way that the teams move from one platform to the next. The learning curves are there. It's kind of hard to think about learning curves on ships that deliver four or five years apart, but they actually, it's real. As you get to the second ship, you have well-trained crews who have been through this, who are working through it, who are capturing the lessons and are carrying the lessons learned with them into that platform. Then the trick will be, how do you take what we've learned at 81 and make sure that you do that with 82? And what that means is 82 has got to be on time. If you delay 82, and I've seen this over my whole career, you start spreading these things back out, you start breaking those learning curves. So what 80-81 means is that you're going to get great efficiency there. I think the Navy advertised $4 billion of efficiency across the enterprise, which, you know, that's pretty significant. if you spread that out and you delay 82 and you push it out, you're going to start to, you're going to start to cut into that efficiency, uh, pretty dramatically. Um, that's what happened after, you know, Stennis and Truman were 74 and 75, uh, really came together very nicely. Then we kind of pushed 76 out to the right a little bit. Uh, and then we pushed 77 out to the right a little bit, and then we pushed 78 out to the right a little bit. And so all of that, you know, we're trying to try to capture that back and, and, uh, You know, I would – no surprise, I would argue that the next carrier contract should also be a two-shift buy, 82 and 83. So – but that's just me.

That's helpful. Thank you very much.

You bet. Thanks.

Thank you. I'm not seeing any further questions at this time. I would now like to have the call back over to the presenters for any closing remarks.

Well, thanks for that, and thanks for joining us today. We certainly hope that you and your families are all staying safe and are healthy in this environment as we kind of come through the pandemic. But one final thought for you all is I'd like to direct your attention to our investor relations page on our website and take a look at our corporate sustainability report. We've been doing a lot of work over many years around these kinds of issues related to sustainability, but we've collected all of that and created a virtual report for you to take a look at. It's only been up there, I don't know, a couple of months. And, you know, it's a pretty dynamic presentation. But I'm very proud of what this company does relative to our communities, relative for our employees, for their families, for our customers. I just am very proud of what we do and how we do it, and this is a chance for us to kind of brag about it a little bit. So if you get a chance, take a look at that. And as always, I appreciate your and we appreciate your interest in our company, your engagement with us, and any feedback that you have. And we look forward to seeing you again soon. Thanks. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.