Huntington Ingalls Industries, Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Huntington Ingalls Industries Earnings Conference Call. I would now like to hand the call over to Dwayne Blake, Vice President of Investor Relations. Mr. Blake, you may begin.

Thanks. Good morning, and welcome to the Huntington Ingalls Industries Third Quarter 2020 Earnings Conference Call. With us today are Mike Petters, President and Chief Executive Officer; and Chris Kastner, Executive Vice President and Chief Financial Officer. As a reminder, statements made in today's call that are not historical fact 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 the remarks today, Mike and Chris will refer to certain non-GAAP measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that's posted on our website. We plan to address the posted presentation along the call to supplement our comments. Please access our website at huntingtoningalls.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I'll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. I hope everyone is staying healthy and safe during these trying times. Let me start by providing a COVID-19 update on Slide 3 of the presentation. The rate of new cases has stabilized in our shipyards, and we are maintaining a sustainable and manageable level of attendance. This has been driven by our ability to start rapid testing of employees and move them out of quarantine and back to work in a prudent way. While this has proven to be successful, the dynamic nature of this virus will require us to continue refining our policies to adapt to changing circumstances. And regarding COVID relief, we have highlighted two decision-makers that the defense industrial base is at the nexus of economic sustainment and national security, and it is uniquely positioned to drive economic recovery in every state through thousands of suppliers. We remain hopeful that directly related COVID-19 labor costs, like quarantining and other paid time off, will be reimbursed, and we will work with the administration to provide the necessary documentation to support this effort. We also continue to encourage the customer to provide funding for cross-program delay and disruption impacts. Now let me share some highlights from the quarter, starting on Slide 4 of the presentation. Sales were $2.3 billion, and diluted EPS was $5.45 for the quarter. New contract awards during the quarter were approximately $1.6 billion, resulting in a backlog of approximately $45 billion at the end of the quarter, of which approximately $22 billion is funded. Turning to capital deployment for a moment, earlier this week, we announced that our Board of Directors approved an 11% increase in our quarterly dividend from $1.03 per share to $1.14 per share. And this action demonstrates our continued commitment to grow the dividend and return excess cash to our shareholders. Now regarding activities in Washington, the federal government began the new fiscal year on October 1 under a continuing resolution, which funds government operations through December 11. During the intervening period, we continue to encourage Congress to complete their work on the fiscal year 2021 National Defense Authorization Bill, adopting the strong support for shipbuilding and other national security priorities reflected in the respective bills of the House and the Senate. We also continue to support completion of the appropriations process as soon as possible to minimize the impact that a long-term continuing resolution could have on current and future programs. Finally, regarding the defense department's future naval forces study and the range of ship quantities it reflected, we are pleased to see our portfolio of ships in the plan and recognize that there is still much work to be done to bring any plan to fruition. We look forward to continuing our work with the Navy, the Coast Guard and Congress to help them effectively and affordably support America's national security requirements, and we remain confident that we can create additional capacity that may be necessary to support even the most robust shipbuilding plan. Now let me share a few business segment highlights from the quarter. At Ingalls, NSC-9 Stone successfully completed acceptance trials and remains on track to deliver late this year. On the DDG program, DDG 119 Delbert Black sailed away from the shipyard and was commissioned in late September, while the next ship, DDG 121 Frank E. Petersen, Jr., is focused on system completion and support of trials next year. DDG 125 Jack H. Lucas, the first Flight III destroyer, continues to move through important production milestones and is scheduled to launch in the first half of next year. Structural work on LHA 8 Bougainville is on track, and the ship is nearly 40% erected. On the LPD program, LPD 28 Fort Lauderdale completed electronic systems light-off at the end of July and is focused on preparation for additional major system light-off event as the ship comes to life. LPD 29 Richard M. McCool, Jr. is well into production, and the key laying ceremony for LPD 30 Harrisburg is planned for later this year. At Newport News, CVN 79 Kennedy is approximately 76% complete, and the team is focusing on compartment completion and key propulsion plant milestones. We recently reached an agreement with the customer on an undefinitized contract action to begin execution of the single-phase delivery work, and we expect to definitize the contract change next year. CVN 73 USS George Washington is continuing to progress through its final outfitting and test phase and is approximately 81% complete. The ship achieved two significant milestones during the quarter with the commencement of shore steam testing and completion of the potable water system to support the start of moving the crew back aboard the ship later this year. On the VCS program, SSN 794 Montana achieved a key milestone as the boat was christened in front of a virtual audience in September and is preparing for launch expected by the end of the year. The submarine is approximately 89% complete and scheduled for delivery to the Navy in late 2021. SSN 796 New Jersey remains on track to achieve the pressure hull complete and float-off milestones in 2021 as planned. In our Technical Solutions business, financial and operational performance was strong across the board. The integration of Hydroid is now largely complete, and we continue to expand our presence in key markets. During the quarter, we were awarded more than $200 million in new business. We also have a number of large captures in progress that are expected to drive further growth while we continue to focus on delivering critical national security mission requirements across our broad customer base. We broke ground on a new Unmanned System Center of Excellence in Hampton, Virginia during the quarter. This new campus will complement our current facilities in Massachusetts, Florida and Washington that have been delivering marine robotics to the Navy for nearly 20 years and gives us the space and infrastructure we need to scale our operations and meet the needs of our customers now and into the future. This includes the manufacturing and support of large and extra-large UUV requirements. I am excited about the alignment of our offerings in this market with the Navy's unmanned strategy, and we look forward to helping the Navy expand their unmanned fleet in an affordable and timely manner. As I prepare to close, let me first thank each and every one of our over 42,000 employees for their hard work, commitment and dedication. Their efforts allowed us to continue meeting key programmatic milestones during these challenging times. I encourage each of our employees to take care of themselves, take care of their families and for them to be safe. I am very pleased with the progress we have made this year and the focused skill and creativity demonstrated by our entire team since the pandemic started. We are achieving key milestones. Our programs continue to be well supported in Washington, and our Technical Solutions business is well positioned to support the Navy's evolving unmanned strategy. Finally, I want to highlight the key attributes that create a very solid foundation and a bright future for our business. We have a $45 billion backlog, a strong management team, a well-trained workforce, significantly recapitalized, more efficient shipyards and a very strong balance sheet. The combination of these attributes positions Huntington Ingalls Industries to generate strong free cash flow and continue creating long-term, sustainable value for our shareholders, our customers and our employees. And now I will turn the call over to Chris Kastner for some remarks on the financials. Chris?

Thanks, Mike, and good morning. Today, I will briefly review our third quarter results and also provide some comments on our 2020 and long-term outlook. Beginning with our consolidated results on Slide 5 of the presentation, our third quarter revenues of $2.3 billion increased 4.3% compared to the same period last year, driven by growth at Newport News and Ingalls. Operating income increased by $8 million to $222 million when compared to the third quarter of 2019, and operating margin was flat at 9.6%. The increase in operating income was driven by a more favorable FAS/CAS adjustment, partially offset by lower segment operating income compared to the prior year. Net earnings in the quarter were $222 million compared to $154 million in the third quarter of 2019. The increase in net earnings was driven by lower income taxes due to higher research and development tax credits for prior years, a more favorable, non-operating retirement benefit compared to the prior year as well as higher operating income, partially offset by higher interest expense. From a segment standpoint, Ingalls' revenues in the quarter were $675 million, an increase of 4.3% from the same period last year. Revenue growth was due to higher volume for both the DDG and NSC programs. Ingalls' operating income was $62 million, and operating margin was 9.2%, relatively consistent with results in the prior year. Newport News revenues of $1.4 billion in the quarter increased 6.6% from the same period last year. Revenue growth was due to higher volumes in submarine and aircraft carrier construction as well as growth in fleet support services. Newport News operating income was $79 million and operating margin was 5.8% in the quarter, which compares to $121 million and 9.5%, respectively, in the prior year. These decreases were driven by lower risk retirement on the Virginia-class submarine program. Additionally, results were impacted by lower risk retirement for fleet support services, as the prior year period benefited from contract actions related to work on LA-class submarines. Technical Solutions revenue in the quarter was $320 million, a decline of $6 million compared to the prior year, primarily driven by lower revenue at the San Diego shipyard due to the conclusion of several repair contracts, partially offset by the acquisition of Hydroid in early 2020. Technical Solutions operating income was $21 million, and operating margin was 6.6%, which compares to $9 million, 2.8%, respectively, in the prior year. The increases were primarily driven by improved performance in Defense and Federal Solutions following the successful integration of recent acquisitions and expected post-acquisition cost synergies. Turning to Slide 6 of the presentation, we ended the quarter with a cash balance of $744 million and total liquidity of $2.5 billion. As we've noted before, we plan to delever later this month by calling $600 million of our senior note due in 2025. In the third quarter, cash from operations was $222 million, and net capital expenditures were $62 million or 2.7% of revenues compared to cash from operations of $363 million and $113 million of net capital expenditures in the third quarter of 2019. In the quarter, we contributed $150 million to our pension and post-retirement benefit plans, of which $140 million consisted of discretionary contributions to our qualified plans. During the third quarter, we paid dividends of $1.03 per share or $42 million. As Mike mentioned earlier, our Board of Directors recently approved an 11% increase to our quarterly dividend to $1.14 per share. While we did not repurchase any shares during the quarter, over the long term, we view share repurchases as an integral part of our capital allocation strategy. We plan to resume share repurchases once we see sustained normalization of activity related to the virus. Turning to Slide 7, we've updated our 2020 and 2021 pension and post-retirement benefits outlook. For 2021, projected FAS expense has increased by $50 million from our initial outlook to $111 million, primarily due to lower discount rates. Consequently, the 2021 FAS/CAS adjustment has decreased from the prior outlook and is now projected to be negative $64 million for the year. Please remember that pension-related numbers are subject to year-end performance and measurement criteria. We will provide a multiyear update of our pension estimates on our fourth quarter earnings call in February. Moving on to Slide 8, we have narrowed some of our expectations for 2020 results and want to provide additional context on our long-term free cash flow target. For 2020, we expect shipbuilding revenue to be approximately $7.9 billion, and we expect Technical Solutions revenue to be approximately $1.25 billion. Inclusive of intersegment eliminations, we expect total revenue of approximately $9 billion. We expect 2020 shipbuilding operating margin to be between 5.5% and 6.5%, and we expect Technical Solutions operating margin and EBITDA margin to be approximately 2.6% and 6.2%, respectively. Technical Solutions outlook includes San Diego Shipyard and UniversalPegasus results through December 2020. Regarding free cash flow, we continue to expect free cash flow in 2020 to exceed $500 million. Together, we expect that 2020 and 2021 will generate cumulative free cash flow of approximately $900 million. There are several significant factors that are impacting the timing of cash flows between the two years, including customer payment cost changes and acceleration of payments to subcontractors, the payroll tax holiday and the timing of capital projects. Given these moving pieces, we think it is appropriate to view these years collectively. Regarding capital expenditures, specifically, a number of the capital projects initially planned for 2020 have experienced delayed starts or extended schedules due to COVID-19 and other factors. While the overall size of our roughly $2 billion generational capital investment program has not changed, some of those expenditures are being pushed into 2021. Given this, we now expect 2020 capital expenditures to be approximately 4.5% of sales and 2021 capital expenditures to be approximately 3.5% of sales, with capital expenditures declining to 2.5% of sales in 2022. Finally, we'll provide detailed 2021 guidance and other information during our year-end call, but as we are coming through the review of our long-term outlook, we are confident in reiterating our expectation to generate approximately $3 billion in free cash flow cumulatively from 2020 to 2024. And now I'll turn the call back over to Dwayne for Q&A.

Thanks, Chris. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I'll turn it over to you to manage the Q&A.

Our first question comes from Jon Raviv of Citi.

So we're back to the multiyear cash flow. It's negative $3 billion cumulative in 2020, 2024. What are you seeing now that you did not see last quarter that lets you reinstate those targets?

Yes. So last quarter, we were in the middle of a pandemic and working on resetting all of our program schedules and reviewing our financial plan related to that. So it's just a function of being more comfortable with the plan as we move through the year and being more confident in our ability to manage through this pandemic.

Yes. I would just add that our weekly active case rate has really stabilized at this point. Back in the summer, it was pretty high. In fact, our highest level of active cases was right around the time of the call. We felt it was prudent to take a pause on that. We feel pretty good now that the protocols we have are in place and give us a good way to deal with what's going on. We're like everybody else, watching to see what the next few months will be like, but we think we're well-positioned for that.

In terms of margin performance, looking at the fourth quarter, it met your full year target, indicating some improvement. Regarding the 2021 target of 6% to 8%, can you provide an update now that you have reset the schedules and completed another quarter? How much of the progress towards 6% to 8%, and eventually beyond that, is within your control compared to relying on government reimbursements for costs and updates on key programs, such as finalizing the carrier contract?

Yes. Jonathan, it's all in our control. We're not relying on any reimbursement from the customer for the COVID reimbursements. We just simply have to execute. Mike, I don't know if you want to add anything there.

Yes. I mean, we're being pretty conservative relative to cost recovery for COVID, but we're focused right now. Our primary focus is on how do we effectively and efficiently execute that backlog given all the external things that are going on; we control the things that are happening inside our gates. And so we're focused on that.

Your next question is from Carter Copeland of Melius Research.

So just to clarify that point on the COVID cost reimbursement. So you have no assumption of recoveries or reimbursements from the customers? So if that were to come through, that would be all upside, I presume?

Yes.

Okay. And just a follow-up on the Center of Excellence you guys mentioned in the quarter. Is that principally going to be set up as an IRAD-focused facility or something different?

Well, I mean, it's a capital investment for an advanced manufacturing facility to support programs that we already know we have. I mean, we're doing manufacturing to support the Navy's extra-large UUV program, and we do considerable manufacturing to support not just Navy but international UUV programs that are smaller than that. The Navy has announced other programs, and we would see that as a way for us to prosecute those programs as well. This kind of came out as what's the next step after the Hydroid acquisition to really help the Navy. It's really positioning us to be able to help the Navy's plan come to fruition. So we're excited about it. We think it's a significant advance in where the undersea unmanned business is going to go for the nation.

The next question is from Doug Harned of Bernstein.

Last quarter, when you took the charge related to Virginia class, and you talked about schedule changes, is this related to the Montana, the New Jersey and the Massachusetts? Can you talk about now, a quarter later, how do things stand in terms of getting to sort of new schedules on those three boats? And then how should we think about that trajectory in terms of when we could expect margin performance on this?

Well, I'll talk about the schedule and the operations. We took a pretty big hit in attendance in April and May. Since then, we've been relatively steady in terms of predicting the number of people that are going to be there and how to allocate those resources. That's working well for us and is consistent with the schedules we reset at the end of Q2. We still have less than 200 active cases, but that's a couple of hundred in the business. It does move around in our workforce, but by and large, we're able to predict the schedule recovery. Now once you sort out the schedule piece, let me make clear, we're tracking the schedules, the new schedules. The opportunity to really recover the losses we took out, we haven't yet figured out how to speed back to where we were in terms of schedule. We're working on that, and we are definitely supporting the new schedules that we have laid out. Now it's about, as you know, how efficiently we're doing that. The things we put in place for training and development for our young workforce, the action teams and the engagement on critical operations, we're seeing first-time quality improvements. We've seen some efficiencies. There's not enough there yet to predict, but we're seeing the right trends.

And then just staying at Newport News because one of the things you've talked about is that you have a lot going on there. You just got the award for the single-phase delivery on CVN 79. How do you think of that program now in terms of what that can potentially add as content benefits versus what some of the risks might be in going to that single-phase delivery?

Actually, let me start. I actually think it reduces the risks, Doug, because we're resetting the test program on that ship over the next couple of years. It's a chance to reset our risk registers, reset the sequencing. Ultimately, at the end of the day, I think it reduces the risk on that ship.

Yes. And let me add that it can be very easy to look down the silo of a single program, but derisking the test program on 79 allows for a more efficient and effective test program on the RCOHs and the submarine repair business. Those are deployable assets. The Navy's operating tempo now is higher than it has been in many years, and getting those ships moved and out is really good for the Navy and for us. There is a cross-program collateral effect that I think will be very beneficial to what we're doing with 79.

Next question is from Myles Walton of UBS.

Chris, on the implied fourth-quarter margins, obviously, 5.5% to 6.5% implies a pretty big range for Q4. Can you give us some of the big swing factors to get from the implied 4Q margins, which could be 7% or implied 4Q, that could be 11% shipbuilding margins? Are there deliveries we should think about as big risk retirements in that fourth quarter?

Yes, sure. Dilutive NSC 9, we're planning in Q4. We need to make progress on the 73 test program. We need to float off Montana. Those are the major milestones in the quarter. I think centering in on the middle of that range probably makes sense, but it can be lumpy in shipbuilding. We want to keep it broad.

Okay. And I'll keep it to one and one follow-up. On the follow-up, Mike, the attendance levels, maybe is that how you look at returning to normal post-virus? It seems like that's one of the limiting factors or gating factors to capital deployment. So maybe give us what normal is, given none of us actually know what normal is sitting in these calls.

Yes. I mean, normal is in the eye of the beholder. In a pre-pandemic world, on any given day, we would have 5% to 10% of our workforce on vacation or out for some reason. It's a little higher than that now, but it's not anywhere near where it was in April and May. The protocols we've put in place have allowed us to be more predictable in terms of who is going to be in and who is going to be out. The only unpredictable factor is if someone becomes an active case or gets quarantined. One protocol we established in August was that we were able to finally do enough testing in the pool of folks that were quarantining. Because we could test folks that were quarantining, we cut the number of people being quarantined by two-thirds. That's significant for us. Once we established that, we feel confident that we have the testing to support us. Now we know where our workforce is and can predict what we will be able to accomplish.

So does that mean you could be in a position to start repo by the end of the year? Or is it really into '21?

Yes. We're watching it right now, Miles. We don't have a specific date when we're going to restart it yet.

The next question is from George Shapiro of Shapiro Research.

Yes. Just to follow up to complete on fourth quarter. In TS, the implication is that margin goes back to around 3.5% from where it is this quarter. So is there something unique in this quarter that doesn't sustain itself?

Yes, there were some one-time items in this quarter, George, that improved performance in TS, alongside some cost synergies related to the integration of the acquisitions, which is very positive. But there were some one-time items that are not significant in nature that we took in the quarter.

Okay. And then my question is on cash flow, Chris. You mentioned 2021, you're looking at projections for cash flow, and I'm curious if you could go through some of the puts and takes with respect to what you see with the changes in the quarters to come.

Sure, George. Yes, we like to look at 2020 and 2021 collectively. The payroll tax deferral is certainly a major factor. Additionally, we have capital that moved from 2020 to 2021 due to the virus. Customer payment clause changes could also impact the timing with potential reversion in 2021. So these are some significant factors, causing a fair amount of unpredictability between the two years. Therefore, we like to think about it collectively. We'll start to ramp in 2022.

The next question is from Ron Epstein of Bank of America.

Just a question about a possible opportunity. There have been reports that the SSN deployments have been delayed due to maintenance backlogs in the government shipyards. Is that an opportunity for you guys to pick up some work from the Navy on helping them with their deployment delays?

Sure. I mean, we're already engaged in that. We currently have three repair jobs going on at Newport News. Plus, we have a team supporting the Navy in their home ports. We've been out of that business for a while. The classic way that kind of work has been done for many years was primarily in the Navy shipyards. So getting back into this business and establishing protocols to operate a deployable asset and do maintenance and support are different from construction. We’re getting our team up to speed on that and working very closely with the Navy, not just on the work we have but trying to lay out a sustainable, predictable plan for how the private sector, in general, can support the Navy’s need for more submarines at sea. This is a big part of what we're discussing with the submarine repair business and the future of Virginia-class construction. The bottom line is that no matter how many submarines the nation puts to sea, we're still going to want more. This is a good opportunity for us, and we're working hard in that area.

And maybe as a follow-on to those comments. Regarding the industrial base, do you think it can support a potential third Virginia-class on top of everything that's going on right now? Because it seems like the reality of a third Virginia-class is potentially getting closer. I know it's not a sure thing, but it does seem like the demand for that is increasing.

Yes. I do believe the industrial base can support that. I think the shipyards will need to build, maybe invest in additional capacity and workforce. We might have to create some parallel capacity, considering potentially buying pieces that we were doing organically before, such as structural units or fittings, so we can expand capacity in a parallel way instead of just vertically inside the shipyards. We'll also need to focus on the supply chain—it’s essential to support all of the shipbuilding, particularly in our nuclear enterprise. Supply chains are capable, but they are also quite thin. The key is to have consistent messaging to the industry that will sustain investment in technology and people that the supply chain will require. I think the shipyards are ahead of that. I know Newport News is ahead of that. Our colleagues at Electric Boat have been coordinating with us and the Navy. I believe there is the capacity to do it, but it won't happen overnight. The rule of thumb is that if there are persistent signals from the government, the industry can ramp up capacity more quickly than the government can secure funding for it. We are actively working through this now, and I’m pretty optimistic about it. No matter how we shape all of this, undersea missions and unmanned technology will be critical components of any future national security requirements.

The next question is from Robert Spingarn of Crédit Suisse.

I wanted to switch to unmanned. A high-level question for you, Mike, and then a related one for Chris. But what's your view of the long-term profitability or profit structure of the UUV and USV business? Will the manufacture of the body and these vehicles become a commodity, with high-margin work coming through the payload? How do you position for that going forward?

Sure. Yes, it's a bit early to be specific about it. There is understanding that intentions are to try to make the different components as open architecture as possible. Having an open architecture set of platforms positions us very well. Looking forward, many programs started with intentions of being open architecture but ended up in proprietary situations, which can be frustrating. What we believe is that having that platform will be a beneficial foundation for leading into a variety of missions. Without that platform, partnering is necessary; with it, we can be organic or partner to fulfill needs for our clients. The overall structure will continue to evolve.

I would add that it is a more traditional defense-type market that can be utilized internationally as well. So we anticipate elevated R&D investment with Hydroid and opening up some international opportunities that we haven’t explored before. We see some opportunities there as well.

If the Navy proceeds with a relatively large unmanned surface vehicle, perhaps 200 to 250 feet, could you leverage some of the existing depreciated PP&E that you have for the NSC program? Or would this be a start-from-scratch kind of initiative?

Yes, I think it's too early for that. Ingalls is right in the middle of it with Hydroid’s involvement as well. But yes, we’ll need to evaluate that further.

The next question is from Joseph DeNardi of Stifel.

Chris, could you talk about the margin assumptions involved in the out-year free cash flow outlook and whether the progress toward getting back to 9% to 10% has improved since last quarter?

Yes, I still think the outlook for Q2 remains for 2021. We will discuss return on sales during our year-end call further. But we will improve from there; however, I’d prefer to postpone any comments regarding improvement on return on sales until our year-end call.

Okay. At the Investor Day, you focused on M&A in the TS segment. Is that still a priority for capital deployment, or have challenges with shipbuilding and COVID changed that approach?

No, we're still on that. We've discussed unmanned, and I'm excited about that area, and we've made investments there. We're also enthusiastic about our energy business with the Department of Energy. There are significant opportunities in environmental and nuclear operations. We've become a leading prime to the Department of Energy at Savannah River, Los Alamos, and the Nevada test site. We're optimistic about growth potential there as well. The restructuring in the Federal systems piece has enabled us to become more competitive, and we are now able to concentrate on crucial lines of business like ISR. We're gaining traction, which informs our strategy for future investments. We haven't backed away from our prior focus on these areas.

The next question is from Seth Seifman of JPMorgan.

You spoke about the long-term cash flow forecast. Should we anticipate that the implied step-up from 2021 to the remaining years will be a step function in '22, or will it build gradually? Additionally, what role does the plan for single-phase acceptance of the carrier play in that cash flow trajectory?

Yes. I don't want to get into too many specifics about that cash flow guidance. It's $3 billion over five years. It will start to ramp in 2022. The CVN 79 certainly plays a part in it; it pushes the delivery out a couple of years. Still, we are confident that through sales growth, earnings growth, and capital reduction, we will achieve that $3 billion.

As a follow-on, we've seen the new shipbuilding plan from the Navy, but it appears that we could see a change of administration in January. To what extent do you view the specifics of that plan as provisional and subject to revision with changes in January?

Start with a few boilerplate points. National security tends to be a bipartisan issue. The Pentagon looks externally to determine how to address security needs. This Pentagon has stated we need a bigger Navy to enhance security, and they are working through that now. If there is a change in leadership and administration, the new officials will evaluate the same external environment. There may be adjustments, but the broader concept of a larger, faster, cheaper Navy with a higher volume of ships will persist. We are diligently positioning ourselves for that. Regardless of the configuration, undersea and unmanned operations will be critical components of future national security requirements.

The next question is from Gautam Khanna of Cowen.

Could you just provide the size of the equitable adjustment you are pursuing with the Navy? If it does materialize, this could be a significant point for sizing.

We're still in the midst of that process, Gautam. We don't have a specific size for that at this point.

Is it possible to ballpark it based on what you have reported over the last couple of quarters?

I would prefer not to at this time.

Stepping back, regarding the FSA, new entrants are emerging in the unmanned vessel market, raising concerns about lower cost structures. Are you looking to make more acquisitions to align the technology and cost base with what's anticipated in this market? Could you comment on the M&A pipeline going forward?

Yes. Let's speak about cost first. We're being very deliberate about keeping our business focused outside our shipyards as we compete. Our competitors won’t have a dry dock to factor into their cost structures. We're aware of the need for a lean and efficient operation to compete effectively. Over the last five years, our focus has been on building capability. Five to six years ago, Huntington Ingalls wasn't in this space; now we have both the ability and capacity to build various sized platforms that any government customer may need. This started with our acquisition of the Columbia Group years ago, introducing us to new customers, distinct from our traditional Navy clients. That acquisition led to the partnership with Boeing on the XL UUV program and subsequently to acquiring Hydroid, which equips us with capabilities in every size range that the Navy is examining today. From this standpoint, we believe we're very well positioned. This will be a marketplace defined by innovation and technology. Whether in autonomy, AI, or solutions for our clients' immediate problems, we are excited to be in this space; more investments will likely follow.

The next question is from David Strauss of Barclays.

Back on the $3 billion cash flow forecast from 2020 through 2024, what has improved in that time frame to counterbalance what appears to be a softer outlook on shipbuilding performance relative to what you flagged last quarter? Is it due to tension being less or just reduced CapEx in the upcoming years?

Yes. There hasn’t been anything significant beyond the plan that rolled up and how the teams have indicated they will perform on their programs. We're still comfortable. Clearly, there's going to be less cash in the VCS program, but overall, across our programs—taking capital into account and working capital changes—we're still confident we will achieve this.

What was the level of EACs in the quarter? Could you break it down between Newport News and Ingalls?

Yes. Are you asking for cumulative adjustments? It was a net favorable $4 million. Ingalls was positive $16 million. Technical Solutions was positive $5 million, and Newport News was negative $17 million. The negative adjustments in Newport News were generally across all their programs, primarily related to overhead issues, both COVID costs and resetting their base. None were individually significant.

And nothing on the Virginia-class?

Just the overhead impacts.

The next question is from Noah Poponak of Goldman Sachs.

Chris, you have a $300 million cumulative target for 2020 to 2024, and you also foresee $900 million in cash flow for 2020 and 2021. The math seems straightforward, as it implies you're looking at a $2.1 billion remainder, which averages $700 million annually across 2022, '23, and '24. Should we think of these years as about even, or do you believe the trajectory will place those years slightly higher than the prior run rate?

No, we still stand by the $3 billion. I'm not hedging on that at all. Cash can be variable due to working capital and delivery movements across periods. So it’s generally pretty level-loaded. I'm confident about the $3 billion.

Then how does 2021 go from a forecast of say, $400 million to more closely approaching the $700 million step-up in just a year?

Yes. Various working capital changes and capital reductions will contribute to a notable increase from the cash perspective in 2022.

Regarding your expectations for '20 and '21, you mentioned the greater than $500 million and $900 million, respectively. I know you are consortiuming them now, but given factors have moved out of 2020, can you quantify what has transitioned?

Absolutely. It includes $120 million from the payroll tax deferral, as you mentioned, which moves into the next two years. We have also deferred between $60 million to $80 million in capital from '20 to '21. Those factors have all contributed to the unpredictability, necessitating a collective review of the two years for context.

If you began the year expecting greater than $500 million, and with capital movements and some favorable tax impacts, why isn’t the year shaping up to be substantially better?

We’re always susceptible to year-end variations depending on receipts. Q4 is usually large from a cash receipt perspective, so there's a little built-in conservatism there.

Finally, what are your projections for 2021 shipbuilding segment margin?

The top level was projected at 7% to 8% return on sales. We’ll elaborate more during the year-end call.

I'm not showing any further questions at this time. I would now like to hand the call back over to Mr. Petters for closing remarks.

Well, thank you all for joining us today. We appreciate your interest and engagement with us and in our company, and we hope that all of you stay healthy, happy and safe out there. Thank you for joining us.

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