Huntington Ingalls Industries, Inc. (HII) Earnings Call Transcript & Summary

Well, thank you, and good afternoon. I'm Doug Harned, Bernstein's aerospace and defense analyst. I'm very pleased to have with us today, Mike Petters, the Chairman and CEO of Huntington Ingalls. We also have Chris Kastner, who's the Chief Financial Officer of HII; and then Dwayne Blake, who's the Head of Investor Relations. I'm first, I'm going to hand it over to Dwayne, then I think he's going to hand it over to Mike to say a few words, and then we'll start the fireside chat. Dwayne, it's yours.

Great. Thanks, Doug. Good afternoon, everyone. Just a quick reminder. Statements made in today's fireside chat that are not historical fact are considered forward-looking statements and may be pursuant to safe harbor provisions of federal securities law. 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. With that, I'll turn the call over to Mike for some opening remarks. Mike?

Thanks, Dwayne, and Doug, thanks for inviting us back. It's always good to be with you at this conference. I'm not going to say a lot to start off with because I know there's a lot of questions out there. But I think just as a kind of to set the stage for our discussion, we're a long-term business with a large backlog today. We've gone through, we're going through, we're responding to this global crisis that we're going through. But we're moving to a place where we can see the other side, and we can say that the long -- while we may have timing issues coming forward out of this as a result of this, the long-term value of this company hasn't changed. And in fact, we see some opportunities there. So we'll explore that some more, Doug. I'm sure as we talk our way through that. But I'm pretty excited about where we can go, given the environment that we've come through. The team has done exceptional work meeting near-term milestones and setting us up for long-term success. And I'm just -- I'm really excited about that. So with that, Doug, why don't we start?

Great. Well, thanks, Mike, and well, it's great we're doing this. I'm sorry, we can't do it in person again but, hopefully, not too long. But in that light, the thing that is out there right now is COVID-19. And I'd just like to first maybe hear from you about how that's affecting Huntington Ingalls, how it's affecting operations at the shipyard and then also, your people who are not in production directly?

Okay. We -- I think to set the stage for this a little bit. I think it helps to kind of frame where we are as we kind of walked into this unforeseen issue. We're on the back end of a major capital investment in our business. And we have been hiring -- over the last 5 years, we've been hiring about -- we've hired about 25,000 people in the last 5 years. And we put several hundred million dollars’ worth of training investment in those folks to set the stage for executing the backlog that we've been able to capture over the last 5 years. So when we recognize that this is not a if problem but a when problem, our first priority was, let's make sure that we protect that investment in our people because we recognized at the very beginning that this was a human capital crisis. This was not a physical capital crisis. It was not a hurricane. It wasn't going to be short term. It's going to be a long-term pressure on our human capital. So how do we do that? How do we make sure that, that investment that we've made over the last 5 years persists? And we've made that investment in an environment where unemployment was historically low. So we were in the fight for talent. We got talent. We've made it even better. That was a lot of work on our part, and we didn't want to see that just evaporate. So at the very beginning, we created a lot of flexibility for our workforce to make the choices they needed to make to manage the disruption in their lives. And if you can possibly think back to what it was like in the middle of March, schools were closing. People were getting laid off. People were being told in some parts of the country to isolate, other parts of the country, maybe not. There was a lot of noise and calamity and disruption, and people had chaos in their personal life. So we went through and we made a lot of decisions there with a recognition that we needed to give our employees flexibility, and we needed to be able to operate in an environment where we were going to have positive test cases in our employee base as well as in our communities. And we needed to create a way to be able to work through that because that was going to be a long-term situation, not something that was going to be over in 2 weeks. I would say that the shipyard teams, both Brian Cuccias and Jennifer Boykin, the Presidents of the shipyards and their teams did an unbelievable job of managing their way through that. We have reinvented the way that we do business. A lot of our business is done outside in the manufacturing side. So that was pretty straightforward. But now you have to do it outside where you're more than 6 feet apart. There are parts of our business that require people to work closely together, and we had to really go back and think hard about how do we do that. If we have people in a confined space inside of a ship, do we need to have everybody that's there? Can we use technology to our advantage? Can we use -- can inspectors use cameras instead of being physically present? Can we do stuff like that? Can we change the way we do PPE? Can we protect people better? And can we empower our workforce to put their hand up and say, I've got a better idea. All of that happened. And so as a result, even though our attendance was down, driven by these external factors of school closings and other issues, the CARES Act being one of them, we've been able to meet pretty much all of our near-term milestones for shipbuilding throughout this process. So we've been able to sustain our near-term effort. But the attendance being down, that came with a commitment to say, "Look, you have freedom to do what you need to do, and we're not going to hold your absences against you if you need to not be at work for some reason." We call that liberal leave. There's a point though, now where we're starting to unwind liberal leave, and we're starting to tell our workforce, it's time to come back. And we're in the middle of that process, we're not at the end of it. But as we're doing that, what we're seeing is the workforce is coming back. And so we -- I think Brian and Jennifer have done a tremendous job of responding to the crisis, and they have done a great job of protecting the investment that we've made in that workforce that's going to position us for the work we've got going on over the next several years. That's in our backlog. The other thing that we did, Doug, and you alluded to it, is we completely changed our posture on remote work. We're a company of teams, and we want to be present, and we want to have teams working together all the time to do this work, and it takes a lot of that. But we decided that in light of this situation, we needed to find ways to still have teams but have them operate remotely. We went from having less than 1,000 people operating remotely back in the first part of March to now today, we have somewhere around 11,000 people working remotely across the whole business. And that has been remarkable because we had the infrastructure to do it. We had the technology to do it. We now needed to have the posture to do it. And our leadership teams have been able to create the environment where that's been a way for us to move ahead. So given all of that, what we've been trying to do is to take this, what I think is going to be a long-term issue. I don't -- I'd love to believe that there's going to be some all-clear signal in the next few weeks, and we can all just go back to the way that it was. But I fundamentally don't think that's going to be the case. I think we're going to be operating in an environment where people are going to continue to test positive from time to time. And from time to time, we're going to have employees test positive. We've got protocols in place to deal with that. We've got relationships in our communities to deal with that. We now are getting to the place where we're coming back to a sustainable level of employment to go forward. We can reset the schedules of the business moving ahead, the milestones in the business moving ahead. And we can contain this -- even though it's going to be a long-term event for the country, we can -- our ambition is to contain the disruption for us to something that we can contain and restrict to basically a Q2 kind of event. And that's our ambition. I'd say we're not quite there yet, but that's kind of how we're going through it.

And just related, when you look through this, once we get to the other side, are there -- are you seeing things that you may do differently once we get to the other side, whether it's in terms of cost reduction, investment priorities, how do you look at that?

Well, there's no question that a lot of our processes that we had in place before this happened have been reengineered in this environment. And many, if not most, probably not all, but most will not go back to the way they were. There were a lot of meetings that we have that we somehow have managed to not have any more, and we still get the work done. There was a lot of travel that we did in the past that we somehow are figuring out how to do the work without that travel. That doesn't mean that meetings aren't important, and it doesn't mean that travel is not important. But I think that our propensity for those things is going to be very different on the back end of this. Doug, I know of one case where one of our business presidents was on the verge of signing a lease, a 5-year lease for an office building. And in light of the change in posture and the process changes that we've seen, they decided to change that to a 1-year lease because they felt like -- that particular President felt like in 12 months, I'm going to figure out how to do my job and do my work without that building at all. And so I think that you -- that's just an example of what we're going to see going forward. And the fact -- and I can't overemphasize this. The fact that we've been able to do this without a dislocation in our workforce. We've had some -- we've had absence in our workforce. But we're coming out of this on the other side with essentially the same workforce that we had going into it. That's an incredibly important thing for us because it validates the investment we made in that workforce leading into this. So I'm pretty excited about that. I'm looking forward to taking and capturing and harvesting those opportunities that have shown up.

Now I want to spend a little time just on the revenue outlook and the budget. So this -- you have a huge backlog. And you've talked about kind of a 3%-type CAGR on growth going over the next few years. When you look at the budget today, and I know the budget in shipbuilding came down a little bit. Virginia-class and DDG were taking out of the President's budget. In the past, we've seen Congress add ships back in. Can you help us understand, first, do changes in the budget like this matter very much to you for the -- I mean they matter over the long term, but do they matter very much for the revenue trajectory over the next 5 years that you've laid out? And then also that 3% growth rate, are there things that can take that higher for the shipbuilding revenues at HII?

Yes. So I'd start with -- you're looking at the budget as submitted compared to the budget that was approved last year and saying that there was a reduction. I would just -- I feel like, Doug, you and I talk about this a lot. The budget that was submitted this year -- even though it's less than the budget that was approved last year, the budget that was submitted this year is still an historically high budget relative to what shipbuilding has been over the last 30 years. And so -- and what that means is that the outlook is still pretty bullish for shipbuilding in general. Now when you take things out of the budget at the eleventh hour like they did, it doesn't mean that they don't like the program. It means they're trying to figure out how they're going to pay for it and when they're going to pay for it. Taking a submarine out in your submission then gives the Congress an opportunity to put it back in or it means that you're going to appropriate the money in next year's budget and not this year's budget. And so a change like that doesn't really -- doesn't really affect -- it doesn't change our production schedule. It doesn't change the trajectory of our revenues in the near term. If you decide to curtail a program, then that certainly would have an effect, but it would have an effect only as you wound down that program over the next several years with the work that you have. There's no curtailments going on. This is just really moving pieces around to try to figure out how to fit them into the appropriations process for 2020, 2021, 2022. It's just trying to figure out the best way to do that. And Congress is a full partner in that. And so we're just at the very beginning of that process.

As far as the growth rate for shipbuilding revenues, you have a lot of visibility into that. And I will have to say, I often hear investors saying, well, I saw it go up this quarter, couldn't they grow at 4% to 5% or something to that effect. And it seems like what you've laid out kind of 3% to 3.5%. So it fits with the shipbuilding outlook that we see. But how do you look at that? I mean, how much flexibility can there be in that growth rate?

Well, I guess the first thing I would say is that we have really clear visibility on a 3%. And if you hear people today, if you want to start a watercooler conversation in the Beltway somewhere, just ask -- just throw the question out and say what's going to happen to the defense budget next year? If you have 10 people there, you'll have 10 opinions, right? And so some folks will be saying that I'm going to grow my business 5% in what could be a declining defense budget. Well, that's an interesting math problem for people to do. So we are more comfortable saying, we've got line of sight on 3%. And the budgets can kind of move around wherever they want to go and do whatever they want to do, but we've got really solid line of sight on 3%. Now could we do better? It kind of depends. The Navy's operating tempo is going to require more maintenance to the extent that we're involved in the maintenance side, we can do more and do more support there. Some of that actually requires facilities. The Navy's business model for maintenance is changing. Our business model for supporting that is changing as we're contributing San Diego shipyard to a JV. So if there's alignment there, there's opportunity for some growth. We are finished up with -- finishing up with the Fitzgerald in Pascagoula as a major repair activity. In Pascagoula, they did pretty well. To the extent there might be more opportunity to do some of that kind of stuff in the same way that Newport News has been doing some fleet maintenance and support in the submarine and the carrier business, I think that's opportunity. But I think that you just have to kind of go fight that every day. And it's very unpredictable. So we're comfortable with the 3% that we have now and see only upside to that.

One of the things that a few people have asked here coming in, and it's a question I know you've talked about a lot is the margin outlook in shipbuilding and the 9% -- 9% target for 2020. Now do you see -- do you -- are you able to still be pretty confident with that given the impact of COVID-19? And how do you see that margin and your ability to -- and you've talked for a long time about kind of a 9% to 10% range as a normal kind of range for shipbuilding. How do you see that progressing over time?

Yes. So I think it's -- maybe, Doug, you and I can go down memory lane here a little bit. When we first spun out 9 years ago, there was a lot of question about how efficient is this business going to be? And so margins became a proxy for execution and a proxy for efficiency. And I think it's still a good one. And we modeled this to say that if you have the company -- if you have a portfolio that's in balance between mature programs and new programs, if you're doing that right, you should -- historically, what we've seen is that companies to do that right are generally in the 9% to 10% range. In the last 3 years, what we've done is we have doubled our backlog, more than doubled our backlog. So we don't have that in balance right now. We are way out of balance towards new contracts, risk registers at the beginning of new programs are really high. We've got to work them down, and it takes time to work them through. So you got to kind of work our way through that. And so our sense of it is with all of that, that puts pressure on making the margin lower. More importantly than margin though, I would say, is cash. The ability of the company to generate cash over the next 5 years hasn't changed, whether it's at 8.5% or at 9.5% this quarter, our 5-year outlook on cash is no different than it was 4 months ago. And so from my standpoint, the margin is going to be kind of -- it's going to be a little bit lumpy. It's going to move around based on milestones and schedules and things that are happening in each quarter. But the long-term ability of this organization to create cash and then deploy it is, frankly, the best that this franchise has ever seen, and we're pretty excited about that. And that's where our focus is. Now you did ask about the 2020 outlook. And let me just say that at the end of Q1, when we did the earnings call, if you recall, we described that quarter as independent of any disruption from COVID-19. We basically kept all of the COVID discussion out of that. We are working through what that disruption is right now. Okay? And so our -- as I said before, our ambition is to try to restrict all of that to put it in a box, if you will, for -- in second quarter and say, this is what we think the disruption for COVID-19 is. This is what the long-term sustainable outlook for the company absent that will be and be able to communicate that in Q2. And so there's no question that there has been some impact to schedules. There has been some -- the attendance issue alone is enough to say there's going to be some schedule impact, if not in the near term, in the medium to longer term, that we're going to have to work our way through. And we just got to get our arms around that, and our expectation is to do that this quarter. We don't have it today, but that's what we're working on.

Yes. But presumably, that's -- that's simply a timing issue on your programs. It's -- the -- and you mentioned the -- you mentioned cash because this is -- I mean, I think of this is one of the most important points here is that you're in the process of completing this CapEx cycle right now which should bring CapEx down substantially, and then I think you've talked about this being at a lower level for like 8 to 9 years, given what you've got in place. Could you describe how you get there? Will we -- could we see any timing delay given the COVID-19 issues right now?

Timing delay in the decline in CapEx? Yes. I mean...

Yes. And you're right, you completing the investment cycle.

Yes. We're completing those investments essentially on schedule, and we expect to have our run rate established next year. So that's all been good. We invested early, and it turned into a large backlog. I can't say that we were smart enough to say that's why we were investing, but it turned out that way. And so now we've capitalized to do the work that we have and the work that we have is essentially work that we know how to do. So I think we're pretty well poised for the next 3 to 5 years. And really, the foundation is in place for the next 10.

Okay. Now on the -- you mentioned before on some of the maintenance work that you've been doing, and certainly, the work on the Los Angeles-class submarines has been very important. You also commented that you sort of have to fight for that every day, but it does seem that there is a huge readiness need on the part of the Navy and the older portions of the fleet. I mean how should we think about this? Is this -- I know it's hard to predict, but should we think of, say, the maintenance work you're doing now as being more episodic? Or do you think of it more as a part of a long-term program that will add to revenues here?

Yes. I think we're on the front end of it, Doug. My observation is that the Navy has more demand for maintenance today than there is capacity to provide it. And there's some inefficiencies in the way that, as a nation, we decide to fund it. We fund it basically on an annual basis as opposed some of these things take longer than a year. So it's a little bit because we do it in that way, it becomes a little bit harder to think about it strategically from a customer standpoint or from an industry standpoint. What the Navy has been trying to do is because maintenance is so complex in terms of predictability, just a particular job in maintenance is a very unpredictable evolution because you know the ship needs to be repaired, you bring it in, you start doing the repair, you find other stuff. Do you fix it now? Or do you put it on the table to be fixed later? Well, if you fix it now, you probably are going to affect the schedule. And if you have -- and you're going to affect the price. So if you affect the price and the schedule, are you eating into the next job that's coming in? And that's been the thing that the Navy has been dealing with is the unpredictability of the maintenance business. So they've been trying to change their business model for how they get more readiness per dollar, if you will, and make this whole maintenance process more predictable for them and for the industry. From our standpoint, as they've been changing their model, we've been rethinking our model. And as you know, we've decided to contribute the San Diego shipyard to a JV that or to a venture that will be a consolidation of several of these kinds of activities that we'll be able then to match up the industry model with the Navy model, which then gives it a chance to mature over the next couple of years. I think the Navy has got their head screwed on right about this. I've been watching maintenance for a long time. And I think right now, they actually are thinking about it the right way. I think it's up to the industry to be able to respond to that and support it. Ultimately, we both share the objective of giving the Navy more readiness per dollar than they're getting today. And so we got to find ways to make that more efficient. I think in that, there is opportunity. And so you see the submarine repair going on at Newport News, that's opportunity for us. That has been a pretty good opportunity over the last couple of years. We're still working our way through that because that's complex work and not easy. As I mentioned, Ingalls just finished the Fitzgerald, and you can look around and see that there may be other -- there may be other maintenance kinds of activities that the Navy needs to do that might require a full industrial shipyard to do as opposed to repair activity to support. So we'll see. We'll see how that works out. But we're on the front end of it as the models are changing, and we see opportunity in that.

Looking at Newport News, a little more. You talked about this on the Q1 earnings call. But CVN 79 going to the single-phase delivery rather than the dual phase that you previously expected. Can you talk a little bit about that? And what that may mean -- what that could mean for margins? How should we think about it?

Well, I think the first way to think about it is that for the long-term future of the business, this is a great thing. It's an increased scope of work. And it is -- and it's going to allow the Navy -- if we all do this right, it's going to allow the Navy to have a ship that's ready to deploy sooner than it would have been if they had done it in 2 phases, which is really important when you think about their operating tempo. Having said that, we're on a path right now that would help us deliver the ship at a certain point in time and then bring the ship back and do this second job at another point in time. And we're going to marry those 2 together. One of the things we have to do is we're going to have to resynchronize the ship schedule to that system schedule, which will probably delay some of the milestones that we have laid out -- the near-term milestones we have laid out for 79 could get delayed in that process. We're negotiating that right now with the Navy. So it's a little premature to say what will happen. But that's kind of the big moving muscles that will be going on there is how much -- in the end, it's good work. It's important work. It's volume increase at a point in time when we can -- we'll certainly be able to take advantage, most efficient for the taxpayer to do it in this way. And long term, we'll have higher sales, and we'll have more margin and more cash out that. In the near term, the milestones might move and it becomes a timing issue.

Well, and then also on Newport News, so Columbia-class, can you give us a picture of how that work is building up? And then perhaps how large could that ultimately become in terms of work at Newport News.

Well, we capitalized for -- that was part of the capital investment we made with some significant investment for Colombia. And that capital, that work is essentially done. We've hired the folks to go work it. We've actually been able to test some of those facilities out in the Virginia-class program, just to demonstrate that we can do it and that they do what we said they would do. So I'm actually pretty bullish on our ability to support the program. How big could it be kind of depends on how does the overall -- how fast does the overall program go. But in terms of the fraction of Newport News, it's going to be a new product line at Newport News. You've got carrier construction, carrier overhaul, submarine construction, and now you're going to have Columbia. So it's going to be -- it will be a new product line there. And -- and we've done it. We facilitized it, and we have manned it in a way that has not actually disrupted any of the other parts of our business. So I'm pretty excited about that.

I mean when you're ramping up Columbia-class work, you've got Virginia-class going from Block IV to Block V, you'll have CVN 80 coming in. I mean, these are good problems to have, but it's a lot of development work. So is this something that -- when we talked about margins earlier, should we see some ongoing pressure on margins at Newport News just because of mix here?

Well, there's no question, the mix is a major pressure on Newport News. But Doug, I would turn it around and say, what you just described is exactly why it was so critical for us to be able to retain our workforce through this crisis. Because you don't just wake up one morning and decide that you want to do Columbia, you have to actually think about that for years. We started making the capital investment for Columbia 5 years ago. We started hiring the people for Colombia 5 years ago. And so making sure -- the capital is done. The people part of it, we've been able to successfully hang on to those people and keep them engaged without losing any -- without losing any steam through this crisis. So for us, that's major success. There will be just from a structural standpoint, the fact that it's going to be -- we're going to have new contracts, and we have these new contracts. We're transparent, and we are conservative. We do not -- I've got scars. We do not take credit for retiring a risk until it's retired. And so when we have a new contract, the entire risk register is sitting on top of that contract, and it does not flow to the bottom line until we retire that risk. So there's no question that Newport News has got a big imbalance between new work and mature work right now, and that's going to keep pressure on Newport News for a while. We see that as a huge opportunity for us. I see it as a great...

And huge opportunity basically as the long-term profile of that business, if I'm exactly right. That's what you're hinting at, right?

Yes. I mean, I would go so far to say that in many ways, Newport News is in -- from a workforce standpoint is in the place where Ingalls was about 10 years ago. Ingalls lost its workforce due to Katrina and did not get it back. And so you had to kind of start over. And Chris was there right from the beginning, I came in a couple of years later, and here's what I saw. I saw that Ingalls had the youngest workforce in the country. And in 2008, it had the most inexperienced workforce in the country. 3 years later, Ingalls had delivered 10 ships. And it had the youngest -- it still had the youngest workforce in the industry, but now it had the most experienced workforce in the industry, just like that. I think Newport News is in the same place. They have been hiring dramatically over the last 3 years, and they've been investing in that workforce. Right now at the front end of these programs, we've got a new workforce. We've got new tools. We've got new capital, and we've got new contracts. And as this all matures together, I think it's going to set Newport News up for a very successful run going forward. But there's no question that there's near-term things they'll have to work out, just like there were at Ingalls back in '08 and '09 and 2010.

Although I remember being down in Ingalls with Irwin in those days and seeing the situation there, you had the combination of a lot of new development work that perhaps have been set under contracts that you would not have bought into, I imagine. And -- but then you also had the problems of Katrina. So you sort of had a perfect storm in a sense at that point. It doesn't sound like at Newport News, you don't have that storm, you basically have the mix change.

At Ingalls, Katrina was both a physical capital and human capital crisis. COVID-19 is only a human capital crisis. And I would tell you with confidence that we have managed our way through the human capital side of that. We're not starting with a blank sheet. We're starting with the team that we've been building over the last 5 years. And so that's why I'm just so optimistic about where Newport News is going to go because they've worked hard to set this up. They've done a great job over the last 2 months of preserving the equity they have in that workforce. And now they're ready to go accelerate into this backlog and really retire some risk. So I'm excited about that. There's going to be some growing pains. We got to work our way through the next year or so. But I think long term, it's going to be very good.

Can you give us a sense of how you're thinking about how margins will evolve there over the next few years, given the mix?

Well, I think it's -- we got to get this box. We've got to get through the COVID-19 issue here in Q2 and see what that's done to our schedules. Because in the end, the margins are going to be determined by how quickly -- what's the pace of risk retirements. And so as you start to retire the risks, that's how you fundamentally set the run rate for margins. And so we'll have to see what the timing of those retirements are going to be and how much they're affected by that. But I do see Newport News as a 9-plus percent business.

And in that, you mean kind of longer term, as you get through these -- the heavy development work in...

Not in the next 3 months, Doug. But yes, longer term...

I know that.

I see if you snapped the line and said, 10 years from now, what was the return at Newport News, I'd be exceptionally disappointed if it wasn't, if it was below 9%, for sure. I'd be very disappointed.

Yes. So if we go over to Ingalls. In Ingalls, you actually have a number of transitions underway there as well. Can you talk about on the DDG program, if you're going to flight 3, I mean, how difficult is this? I mean, I'm trying to get a sense because you've got kind of LPD Flight II. You've got LHA. You've got a number of new things going on there. And just want to understand how difficult those transitions are and how you see them proceeding.

Well, I think every day in shipbuilding is an adventure so -- but I think what's really good about what's happened here for Ingalls programs is that the Navy and the team at Ingalls have worked really closely together to feather in the change. The Flight III on the DDGs was not a light switch that said we're going to start Flight III on that ship. If you go back and look, you'll see that they started phasing it in over a couple of ships. And they would do a little bit here and a little bit more there, a little bit more there. And then you get to the first full-up Flight III. Same thing with the LPDs. I mean the transition from LPD Flight I to LPD Flight II, frankly, you had a couple of ships in there where you -- where you were able to kind of change the way, change the scope, change the way that you think about that. And you could do that without being terribly disruptive to production. So yes, change is not easy, but it's much more manageable when you're working off of a consistent foundation, consistent platform than it is if you went and started out a whiteboard and said, okay, I mean I imagine if -- I guess my view here, Doug, is that if we had decided at the end of flight I on LPDs that we are going to go back to the whiteboard and draw up a new LPD for a flight II, I would submit to you that we still wouldn't be building that ship. We would be arguing about the design. And the Marines wouldn't have the platform. And so to be able to -- there are times when you have to go do a new design. We did that with carriers for 40 years, we did incremental change on carriers. And we finally got to the point, said, you know what, 40 years, there's enough time for us to go and throw the old design, take what's good out of it, but then start over again, and that's where Ford came from. Same thing with submarines. There's going to come a point in time where Virginia-class is going to -- we're going to stop and say, you know what, it's now time to do a new design for the submarine program. But if you compare Block V and Virginia-class to the Virginia herself, there's significant change inside that ship. And we've been able to manage all of that in a construction line. So incremental change is really good for the industry. It actually gives the customer capability faster than they might have otherwise gotten it. You just have to be able to call the ball and say at some point, you got to do a new design. Right now, on the DDG program and the LPD program, we made -- the decision has been made not to do that. So pretty happy.

It does sounds like the difference between -- at one point when the Navy was thinking of going to LXR, there was a big gap, and it would be LXR as opposed to the strategy today, which seems much more gradual. At least, that's my sense on it.

Yes. You could go back, be it an old submarine guy. And most of the audience probably don't even remember this, but the 688 program, Los Angeles-class submarine was actually 3 or 4 classes. But it was all -- it all goes -- if you go look it up in James, it will show up as 1 class just because it was all -- the hall was the same and the propulsion was the same, but the ship's changed. The -- just fundamentally kept changing that ship from one platform to the next. And so you're able to create lots of advanced capability in a timely way without going through the disruption and dislocation, if you will, of the industrial base.

You know, I want to switch gears again and several questions came in on this topic. When you and I have talked about it a lot, and that's Technical Solutions. And the question is about what led you to do acquisitions in the IT space. And how do you think about that fitting with the work you do in shipbuilding?

Yes. So that's kind of asking the question at the end of the game. I think you have to kind of step back and say, how do we get there in the first place. What we want to do is we really wanted to create channels of access for new customers into the capability we had in shipbuilding. And our focus there was really on supporting the fleet around the world and supporting the fleet in their training and to support the Department of Energy because of the significant nuclear work that we do at Newport News. In the course of that, I would kind of -- there were a lot of decisions made. But in the interest of time, I would just say, we found ourselves acquiring Camber, which is a company in the training space that our training organization was either partnering with or competing with and there were opportunities that neither Camber nor our team could pursue because they weren't big enough, but together, they could pursue them. We made the decision to -- we had worked with them on a lot of stuff. We like the company. We acquired that company. Once we acquired that company and understood all of the other things that they had, all of the other customers that they supported, we recognize that there's -- they have customers that they're bringing to us now that actually like the fact that they're now associated with a company like Huntington Ingalls with our financial structure and balance sheet and that sort of thing. But those customers need some capabilities, too. And so as we were looking around, we saw and the business units came to us and said, these are capabilities that our customers are going to need going forward. And so we went down the path to acquire those. And I'd say they worked out for us. Whether it's in the ISR world, we had a big announcement here at the beginning of the year in the ISR space. But even in the space back in shipbuilding, where the Pentagon is going to the cyber -- the CMMC requirements for cyber. We have expertise in this company that helped write some of the new standards for those requirements. And so that helps us be a better supporter and be more responsible as a partner with the department at this point. We've kind of streamlined it. We're trying to deal with the San Diego shipyard. The oil and gas piece, we -- as an asset held for sale as well, and that's an entirely separate discussion, really good company, really good folks there. It's just -- we're probably not the best owner of that business anymore. But the -- focusing in on the unmanned space, the Department of Energy space, and government and federal services and solutions, those kind of major ways to move ahead is where we're going with Technical Solutions. And we're going to continue to look and see are there other capabilities that we need to build that out. That's going to be a thing that we're going to be very focused on.

Yes. A really important area in Technical Solutions has been the undersea -- unmanned undersea. This is clearly a very hot area for the Pentagon. It's not that big yet. But how do you think about this in terms of opportunities and the growth potential?

Well, we just acquired Hydroid. And we see that there's kind of a piece of the business that's around platforms and there's a piece of the business that's around payloads. Platforms are kind of bigger. Payloads are kind of smaller. Hydroid is really dominant in the payload side. Boeing has the principal contract on the platform side now with the XLUUV. They had asked us to work with them. We're still kind of working our way through that. But there's another program out there, a Large Diameter UUV (sic) [ Large Displacement UUV ] program, and we feel very -- we feel like the acquisition of Hydroid and our experience now from where we were 5 years ago, we're now in a really good position. I would tell you that the LDUUV program was a program we were interested in 5 years ago. And the Navy decided they derailed that program really to move ahead with the Orca program, the XLUUV program. I look back on how we were getting set up to go after that program 5 years ago. I was really excited about it then. The team we have together today to go after that program is far superior to anything we had back then. So I'm really excited about where we can go. I see this unmanned space as being an amplification of the platforms that we build in our shipbuilding side. I don't see it as an either/or. A lot of people try to talk about it that way, but it's not. I think it's an extension of the shipbuilding program. And I'm very, very pleased that we're on both sides of that.

Well, so as you go forward, you've got this strengthening free cash flow outlook, and how do you think about acquisitions? You're going to be bringing in a lot more cash in the next few years. Can you give us a sense of the scale and direction you may want to go here?

Well, I mean, we're going to continue to look at opportunities to create capabilities in the Technical Solutions space that the customers that we have need or that will give us access to give us -- give our capabilities more access to new customers. Where that could go? I think we talked about this at the investor conference back in February, which feels like an entirely different universe from where we are today. But our principles haven't changed. We think Technical Solutions can be a bigger part of our business. What we see there is lots of opportunity for people that are able to provide unique capabilities and discrete solutions to really hard problems. And that's the kind of stuff we want to work on. We are coming through, like we're shaping that portfolio, taking a couple of things out of it to make it a little bit more streamlined and more focused. And we're coming through the -- is there something here that says there's a range of capabilities that you need to have the scale to go exercise on. And so as we think our way through that, that becomes a very strategic conversation. At the end of the day, right now, I don't need to tell this audience that valuation is a really hard thing to figure out in the M&A world. If you have an opportunity to look at the share price of a company and say, we could own that company for this much, you're probably never going to convince the Board of Directors of that company that, that's a fair price. So -- so we're kind of, like everybody else, we're thinking our way through it, looking at it, but that's about as far as it can go right now. In the meantime, our discretionary use of capital or of cash is -- hasn't changed a whole lot. We're still going to -- we don't really want to have a lot of this free cash sitting on our balance sheet for -- with no purpose. So we are not buying shares back now, but there will come a point in time where we would start doing that again. In the last 5 years, we've been committed to returning substantially all of our free cash. Given the outlook on the M&A side, we'll be returning that, but it's probably not -- I'm not sure we're going to say substantially all. We're just going to be returning free cash to our shareholders with the expectation that there's going to be opportunities to do some M&A along the way.

Okay. Well, great. I think we are about out of time here, but I want to thank you, Mike, Chris and Dwayne, for all being here today. I'm hoping next year, we can do this all in person, even though it kind of clashes logistics things we were talking about a little earlier, but anyway, Mike, thank you very much for joining us, and all the best down there.

Yes. Thanks, Doug. It's great to see you again. Hope you and your family are doing well. And for everybody else who is listening, please, please take care of yourself and be safe.