Earnings Call: Q1 2021

May 6, 2021

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Huntington Ingalls Earnings Conference Call. On your telephone keypad. Please that today's conference is being recorded. I would now like to turn the call over to Duane 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 Petters, President and Chief Executive Officer Chris Kastner, Executive Vice President and Chief Operating Officer and Tom Spieling, 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 Industrial 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 Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website. Industrial Relations. 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, Duane. 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 3 of the presentation. Sales of $2,300,000,000 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 Industry in 2020. New contract awards during the quarter were approximately $5,300,000,000 resulting in a record backlog of approximately $49,000,000,000 of which approximately $25,000,000,000 is funded. Chris will provide some color on a few of the key awards for 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 affirm 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 FY 'twenty 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 Titan Acquisition Holdings in exchange for a non controlling interest in this leading provider of ship repair and fleet sustainment services. Industrial. 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 3rd 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-nineteen will serve as key catalyst 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 Kuchis retired on April 1. Brian's career at Ingalls has been remarkable and HII has truly benefited from his leadership. Effective April 1, 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 Industry 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. Approximately $214,000,000 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, LHAA 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-one hundred and twenty five JAK H. Lupus and sea trials for DDG-one hundred and twenty one Frank E. Peterson 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, report predictable savings for the Navy. At Newport News, the team was awarded a $3,000,000,000 contract for the refueling and complex overhaul of CVN-seventy 4, USS John C. Stennis and also received a contract modification for construction of the 10th Virginia Class Block V Submarine. These key awards are additional building blocks for a record backlog, which now stands at nearly $49,000,000,000 Shifting to program status, CDN 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. CBN 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 redelivery 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 pull it 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 ISR and Cybersecurity IDIQ contract. Additionally, production of the 1st Orca XL UUV modules is now underway 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 Q1 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 4 of the presentation. Our first quarter revenues of $2,300,000,000 increased less than 1% compared to the same period last year. This was primarily due to growth in Newport News and Ingalls that was largely offset by a decline of technical solutions due to divestitures Industrial segment operating margin of 8.4% increased 149 basis points. The improvement was driven by higher risk Retirement at Ingalls and improved performance at Technical Solutions. Operating income for the quarter of $147,000,000 decreased by $68,000,000 from the Q1 of 2020, and operating margin of 6.5% decreased 305 basis points. These decreases were primarily driven by a less favorable operating FAST CAS 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 Q1 of 2020. The decline in tax rate was primarily due to the divestiture of our oil and gas business as well as the recognition of R and D tax credits for the current year and prior periods. Net earnings in the quarter were $148,000,000 compared to $172,000,000 in the Q1 of 2020. 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 $43,000,000 in the quarter And net capital expenditures were $59,000,000 or 2.6 percent of revenues, resulting in free cash flow of negative $16,000,000 This compares to cash from operations of $68,000,000 and net capital expenditures of $66,000,000 and free cash flow of $2,000,000 in the Q1 of 2020. Contribution to our qualified pension plans. During the Q1, we paid dividends of $1.14 per share for $46,000,000 As noted on our Q4 earnings call, we did reinitiate share repurchases earlier this year and continue to view the return of During the quarter, we repurchased approximately 292,000 shares at a cost of approximately $50,000,000 Moving on to pension. With the passage of the American Rescue Plan Act, we have reviewed the 5 year pension outlook that we provided on our last earnings call I continue to believe that remains the most appropriate view. Due to the limited nature of our projected contributions and the impact of lower cash expectations on our Q3 call consistent with our prior cadence. Moving on to Slide 6 of the presentation. Indalls revenues of $649,000,000 in the quarter increased $20,000,000 or 3.2 percent from the same period last year driven primarily by higher revenues on the DDG program. Ingalls operating income of $91,000,000 and margin of 14% in the quarter were up from the Q1 of 2020 mainly due to higher risk retirement on LHA8, which was related to the 25% completion milestone that Chris as mentioned earlier. Turning to Slide 7 of the presentation. Newport News revenues of $1,400,000,000 in the quarter increased to $66,000,000 Corp. 4.9 percent 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 $93,000,000 and margin of 6.6% in the quarter were down slightly year over year, primarily due to lower risk retirement on CVN 73 RTOH, partially offset by higher risk retirement on DCS Block 4 boats. In the San Diego shipyard on February 1 this year, partially offset by a full quarter of results from Hydroid, which was acquired at the end of the Q1 of 2020. Industrial Solutions operating income of $7,000,000 in the quarter compared to a loss of $7,000,000 in the Q1 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 9, 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 margin for the first half of twenty twenty one to be around the midpoint of our annual guidance range. We continue to view the remainder of our 2021 guidance as appropriate with The first question comes from Carter Copeland from Melius Research. Please go ahead. Hey, good morning, everybody. Good morning. Mike, I wondered if you could expand. I mean, it's It's 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 To give you conviction that that's a trend you're going to stay on. Okay. I think first of all, Corey, you're right. We've had a lot of stuff thrown at us in the last 12 months. And 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, we recognized that in Q2. But What came out of that was we've stabilized our employment levels. We've stabilized our Scheduling. We've actually created the mechanisms in our risk register 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 where we are now is that 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. Industrial. 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 25 1,000 people we had just hired over the last 5 years in our workforce, we've done that. We actually have hired between 5,06,000 people since the Pandemic started. That's pretty creative and innovative, if you will. And that's 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 Vaccines to 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 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 It has really helped. And so 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 Is exposure that you watch there to be aware of or is it not significant at this point? How should we think about that? Yes. 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. Yes. So Relative to inflation, our contracts, they're much longer term. We have the benefit here with long lead contracts and from a planning horizon and the backlog that we have to plan our work out. So we have a site 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 back stopped by proposals and commitments shortly thereafter the awards. So what we're seeing, I Talked about 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 And the validity of the quotes are 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 Thank you. We take the next question from the line of Myles Walton from S. Please go ahead. Thanks. Good morning. I was hoping, Chris, you could clarify that LPD bundled contracts 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. Yes. 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 3 ships together and sequence the work in an efficient manner, you're 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 3? It's about $5,500,000,000 potentially. And just a clarification for Tom, the sequential margin in 2Q given the 1H is expected to be at the midpoint of the range, Can you point to maybe why the step down is so significant, the 6 mid-6s or so? Sure. As I relayed in my comments, opening comments there, there's not a tremendous amount of milestones that we have in Q2, Q3. It's just It's 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 if retired add some potential there, but obviously we have to burn that off as the year Investment. Thank you. The next question is from the line of Doug Harned from Bernstein. Good morning. Thank you. Good morning. We've seen a whole lot of Navy shipbuilding plans. We've got the 500 plus versions and the CNO appears to have Going back to kind of the 355 ship goal, but even that goal has been not easy to get to and the mix appears 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. That's a great question. It's one we actually kind of kick around a lot is 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 the 30 year plan comes out, I don't know, every couple of years. But the contracts, we have ships right now that are under contract to deliver, I mean, Dorey Miller delivers in 2,032. So What is that like 4, 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 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, amphibs, destroyers, Frigates, those kinds of platforms go they either go through class change or block changes. Industrial 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. We'll do a capital investment at Ingalls that will apply to 4 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 Pick your program that 3 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 5 years or so, a couple of $1,000,000,000 in our shipyards, we think that positions us very, very well discussion about whether it's 1 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, as you're saying more faster ships, smaller ships, S. In a sense, it can open it up to other competitors rather Post EU and General Dynamics, we saw this with the frigate LCS. I mean, do you We 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. 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. Our shipyards build several classes. We build 4 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. Yes. Hey, good morning, guys. Good 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, Ross, it's Fauci here. So a Couple of things. We have guided from 3% to 5%. You're right, it is a 2.7% quarter. Right now, we saw a little bit of volume 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 recompetes, it's just a little bit Stay behind relative to guidance of 3% to 5%, but the year is still in front of us. We haven't changed our guidance. We think TS will be there at year's end. Ron, I can add to that. There is in our equity accounting relative to the nuclear space, the timing of some of those are slated towards 2nd and 4th quarter. So you see you don't generally see that happening in the Q1. 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 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 3, 4, 5 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 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. And then I think it's 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 mid term. And what happens with the carrier is, are there going to be, is CDN-eighty two going to have some design affordability put to it and are we going to engage in that. I mean, frankly, CVN-eighty two is a ship that starts to show up here. I mean, it's You go to contract in 'twenty seven or 'twenty eight. So making sure that that stays on track, that's kind of the way we think about it in shipbuilding. In the technical solutions space, 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 5 years in my view. We've established our as Chris kind of alluded to a minute ago, we've established our position as a Department of Energy Prime and there is a lot of work over there that needs And we are pursuing all of that very aggressively. We think that's a really great spot for us to be in, customer, and we've done very well with that, and we look to continue to expand that. And then ISR is a space We've really actually done well and we expect to do well going forward. So as we kind of look at that, 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 3 to 5 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 Yes. Tom, if you could provide the EACs and Is it fair that the pickup on the LHA-eight was probably $35,000,000 or so? A little bit color on that is 86 was the favorable, 36 was down net 50. Across the yards, there's about 90, 10 Ingalls. The only significant drivers on the upside there were the LHA-eight. We usually don't give guidance or information on a specific ship. Segment. So 35% kind of heavy there. Ingalls had a good quarter on top of the LHA hitting the 25% vessel complete milestone where they We evaluate the risk and the restructure EAC. They did have a change proposal led to Finitize. They've been focused on cost management there. So overall, it was a good quarter for Ingalls. There was no other significant upsides or downsides that I'd probably highlight here. Yes. Tom, if 35 is a little bit Heavy, I mean, just on the rough numbers you gave, it would imply about $45,000,000 of favorables at Ingalls. So Was there anything else you can specify or it's all spread across the board for say another $20,000,000 if $30,000,000 was The LHA 8. Yes. The queue has the information on LHA 8. So when that pops out, you'll see that you're about $10,000,000 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 a good performance in LPD 20 8 is coming along And paying attention on cost. 14% high, so I wouldn't expect that going forward, but they cleaned up well and they didn't get this for the quarter. So That's where they landed. And one quick one for Mike. Can you update us on the Block 5 submarines, I mean 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 IV, George. And we've got a Rhythym and Block we're establishing a rhythm in Block 4 that's going to carry through and help us do really well on Block 5. So I don't know, Chris, if you want to add that. I can add on Block 4. We met some important milestones in the Q1 with Montana floating off and New Jersey getting Industrial Complete. Two important milestones on the balance of the year there for PCS Block IV 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 IV 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. Industrial. 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 still doing work on things like the weapons elevators and there are other maintenance items, etcetera. I just wanted to know if you could how the work on the Ford is progressing relative to your expectations, when you expect completion and if there's been any commentary from the Navy about the level of satisfaction that you referenced so far. Yes, this is Chris and I'll let our ex Aircraft Care Program Manager Mike talked about it after me. But yes, really positive interaction with the Navy on the Ford, Weekly interaction on the Fort, especially on the weapons elevators. I've got 7 of those turned over. 4 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. Yes, 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 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 the East Coast. And the Navy will say and they have said that they can quote you the number of traps, the number of launches, The number of the tons of ordinance 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 Your 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 Ticonderogas, I was kind of wondering if you could just comment on the status of that program. I mean, if you think that will ever materialize to a real opportunity or for example, do you think that Flight 3 was 56 Is what you think is going to replace the tycos? 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, counter measures and there's counter, counter, counter measures. And what happens is the technology races ahead at a speed that's Industry. 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 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 is there a 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 and create the platform that has The margin, if you will, for future technological upgrades, I think the Navy is and the industry are having a pretty robust discussion Thank you. The next question comes from Noah Poponak from Goldman Sachs. Please go ahead. Hey, good morning, everyone. Good morning, everyone. Good morning, everyone. 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 Industrial. I guess it implies essentially no risk retirement events 2Q, 3Q, actually maybe even embedding something slightly negative. Just want to make sure that's what you're looking for and I have that correct. Yes. I'll tell you, we are in the zone there. So between 6% and 7% would be the norm, 6.5% is a good estimate on your part. I'd tell you that the mix It moves around at both yards as far as where the ships are. So as ships get either sold off or mature when they take a step up and or you have new ship Ship have started a lower booking rate, that mix changes. So I wouldn't read too much into that. Where we need to be from a plan And against our guidance that we gave you there. So, yes, 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? So we told you 7% to 8% this year, low 8% next year. He had mentioned that as we go forward, when Chris gave the guidance For Q4 February, he had mentioned that, hey, this is the pacing year and then as we get into 2022 or 2023, we'll see more ship deliveries. So there is The potential there and the plant 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 discussed. Got it. And then just a clarification on the ARPA into pension cash flow inputs. Do the contribution and CAS recovery numbers you provided previously Literally not changed 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 flows. Yes. It seems significant as far as the change. But if you do the math, there'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 CASK variability and already we're at a limited Contributions over the projection that Chris gave in February again, the max contribution was $80,000,000 half of that post retirement benefits. So 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 planned performance. So between those three variables, 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 'twenty one closes out, we'll give you a fresh look at a 5 year projection next February. Makes sense. Okay. Thank you. Thank you. The next question comes from David Strauss from Barclays. Please go ahead. Mike, you touched on the unmanned portfolio and the potential growth 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? Yes. 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. Growth at Newport, III at Ingalls, you're forecasting shipbuilding relatively flat, but up a little bit this year And then 3% from here. How should we think about the relative growth rate of Newport versus Ingalls both this year and into the future. Yes, this is Chris. We don't break out the growth rate By the 2 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 and D amortization, Tom, what potential impact could you guys be looking at there if that holds? Yes. So the opinion that we have on that, it's not Destructive to from an investment standpoint in R and D, if that has to get amortized over 5 years. So we'll have to See how that legislation flows out. 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 to $50,000,000 to $100,000,000 range And we'll have to see how that legislation unfolds. Okay. Dollars 50,000,000 to $100,000,000 on annualized cash flow in 2020. Securities. You've got to amortize it over 5 years, those credits and that's an evaluation we do annually against the portfolio that we have. Next question comes from Gautam Khanna from Cowen. Please go ahead. Yes. Thanks guys. Good morning. Good morning. Good morning. I have a question on good morning, guys. Question on the National Security Cutter Program. Any change in the Biden administration on the desire to keep buying these? What should we be looking for? Incorporated. I think it's kind of like the Navy side. We're kind of living off of the work done on the FY 'twenty two 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. Our view is that there's a lot Strong support for the National Security Cutter. The Coast Guard is gainfully using that platform around the world. Indore. And we're proud to be able to partner with them to get it done, and we're going to continue to pursue it. Yes, Gautam, I could add, we've delivered through 9 as you're probably aware, 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 and the Congress to get 12 under contract. Okay. And is there any discussion of additional Block 5 of these or is 12 sort of the end of the line on that program. I think we'll see. I think we're just 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, Yes, 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 1 third of the workforce and the workforce is getting vaccinations in other places as well. And so what that's doing is that's just driving our case rates down pretty dramatically. We hired 6,000 people during the pandemic. Our hiring plans continue. And so we're moving ahead. We expect that by the 1st June, the people in our shipyards that have that want to get the vaccine will have had access And so we're moving ahead. And last one for me. Just curious, Is there any precedent for the bundled purchase that you were talking about with maybe LHA and LPD being put together, in other words, a bundle across different ship classes. Well, we had a competition Industrial Solutions. We had a competition a few years ago where the competition was around an LHA and a TAO. And we won the LHA and our friends at NASSCO won the TAOs. Industrial. 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. Question comes from Robert Spingrand from Credit Suisse. Please go ahead. Hey, 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 on that a little bit, talk about where the opportunities are within that. Yes. No, that's a really good question. I do. I have had the opportunity to work at Ingalls as a CFO there and then my corporate CFO job reviewing all the This is at Newport News. And there are significant things that happen within each of the yards and even in technical solutions that can be shared. One example I could give is supply chain. The supply chain teams work very closely with each other. They bundle procurements. They look at capacity across the spectrum 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 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. I think on one of our visits, one of the things we saw at Newport News was the implementation of VR. It's sort of to replace physical blueprints as an example of where 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? Yes. So another Good question. Digital is absolutely being utilized within Newport News and 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, at least in testing, 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 DeNardi from Stifel. Please go ahead. Thanks. Good morning. Good morning. Tom. Good 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 to the extent we do see that, where are you protected and where are the risks? Thanks, Joseph. So as I said earlier on that, our contracts are a little bit more long term than say Across other industries, we do have the 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 on the quote. So when we go on awards, the risk of inflation hitting our handshake values is low on that. Additionally, as contracts run out, there are some contracts here with the carriers of 6 to 7 or 8 years and we buy the material much further where it's tough to 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 are FPIF, so there's some sharing there. But like more immediate as we pulse right now for the execution of that we of the contracts 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 Beyond the expected times and expectation of costs that the contracts are centered around. So hope that It's the S and C question. Okay. Yes, 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 Industrial production. 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. Yes. So 80 and 81 are The 2 ships under contract, A2 is the ship that's out there. Chris alluded to my ancient history of being Being a program manager. I was actually a program manager for the Stennis and Truman, which was the last time we built 2 ships at the same time. I can tell you that the second ship Absolutely benefits from the 1st ship in that 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 4 or 5 years apart, but they actually it's It's real. And as you get to the second ship, you have well trained crews who have been through this, who are working through it, We're capturing the lessons and are carrying 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 we've and I've seen this over my whole career, You start spreading these things back out, you start breaking those learning curves. So what 8,801 means is that you're going to get great efficiency there. I think the Navy We advertised $4,000,000,000 of efficiency across the enterprise, which that's pretty significant. If you spread that out and you delay 82 and you push it out, you're going to start to cut into that efficiency Pretty dramatically. That's what happened after Stennis and Truman, 'seventy four and 'seventy five really came together very nicely. Then we kind of pushed 76 out to the right a little bit 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, we're Trying to capture that back and I would no surprise, I would argue that the Next carrier contract should also be a 2 ship buy, 82 and 83. So but that's just me. I'm not showing any further questions at this Inc. I would now like to hand the call back over to competitors for any closing remarks. Well, thanks for that and thanks for joining us today. And 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. 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 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'm very proud of what we do and how we do it and this is a chance for us to I brag about a little bit. So if you get a chance, take a look at that. And as always, Partners. 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.