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

Okay. Good morning, everybody. It's Noah Poponak here from Goldman aerospace and defense equity research. We're very happy to have with us for our next presenting company out of A&D, Huntington Ingalls. And with us from the company on the screen here with me, we have CEO, Mike Petters; and CFO, Tom Stiehle; and then Dwayne Blake from the IR team. First of all, gentlemen, thanks so much for joining us and for being with us here today.

Yes. Thanks, Noah, for having us.

Awesome. So please give us a quick safe harbor statement and then we'll jump into my questions for the team. [Operator Instructions] Dwayne, over to you.

Great. Thanks, Noah. Good morning, everyone, and thanks for having us as part of the conference today. Just as a quick reminder, any 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 materially from those projections. Please refer to our SEC filings for a description of the facts that may cause actual results to vary materially from anticipated results. And with that, I'll turn it back over to you, Noah.

Okay. Excellent. Well, let's maybe start high level, big picture. Over the last several years, inclusive of but also even exclusive of administration change, the discussion of prioritization of the Navy has ebbed and flowed a bit. There's been many times where we've heard from the Pentagon seemingly that Navy is of the utmost highest priority. It's never sounded low priority, but there's been times where the message has been a little different. And so Mike, what are the signposts that you're hearing now? What do you -- with a new administration, new Pentagon leadership, how are you feeling that they are positioning the Navy moving forward?

Well, thanks, Noah. I appreciate that. That's a pretty good perspective of how things flow. They do kind of ebb and flow a little bit over time. We look -- we don't really look so much at the change from one administration to another. We really look, some of this may be because we want to believe this, but actually it's been our practice that a lot of the discussion in the Pentagon is driven not by the administration but by what's going on in the rest of the world. And I can go back to the summer of 2016. We actually -- you know we started our capital investment program in 2014 to basically to reset our shipyards generationally because we knew they needed it. We knew there would be some kind of persistent demand for the Navy. And we didn't know what it was, but we knew that there would be. About 2016, our sources, this is no analysis, it's just back to the napkin from what we're hearing from our people on the ships and in the fleet, is the Navy is being asked to do an awful lot of things, they don't have enough ships. And so we actually started to see the demand signal going up even higher than it always was and they didn't have enough shifts. And sure enough, by the end of 2016, all the think tanks in the Navy themselves have come out with a force structure said it need to be 20% bigger. Noah, that number has kind of persisted for the last 4 or 5 years. But in -- last year, the Navy went off and -- I mean, there were a lot of interesting dynamics between the Navy and the rest of the Pentagon last year. But at the end of the day, the Pentagon came through and said, "You know what, they're right, the Navy does need to be bigger and it needs to be bigger in this way." They actually were somewhat specific about that. I don't know how much of that carries over in the terms of the details line items, how much of that actually translates into new people and new leadership. But what I do know is that the general sense of the Navy needs to be bigger and has a primary role in what the world has going on right now, I think that's very persistent. And since that's the way we looked at it, that's kind of the way we think about investing against our Navy customer to help them be successful when they go forward. So we've done a few things. I mean, we've invested in unmanned. We think that the -- I think that the capacity for readiness for repair is -- it's not there. I mean, there needs to be some investment in that. We had an operation in San Diego, the business model for the repair side of the business is changing. We decided to contribute that investment to a larger entity. So it's now part of a JV and we are part of the leadership team on that. In exchange for a role in leadership of that, we contributed our San Diego shipyard. It keeps us in the game, but it also helps us influence the way that's going to go forward. So that's kind of the way we think about it strategically what's going on in the rest of the world and how is that going to play. I think the primary -- the primacy of the Navy is going to persist, not exactly sure what that means for any particular program. But I do think the Navy is going to be primary.

Yes. And it's certainly looking like whereas the investment community was -- has been concerned that the administration change would just simply mean lower defense spending that, that reality of the geopolitical situation in the world that you refer to is pretty clearly in the minds and strategy of new leadership in the new Pentagon.

Yes. And I would just remind you, Noah, that this isn't just a wild guess on our part. We've got $50 billion worth of work under contract. And that work stretches into the 20 -- early 2030s. And so I think that we're -- we look at each administration, but we don't vibrate when the administration changes. As I said before, if you want to build big platforms, we're going to be the ones that are going to be building it. And on the day before elections, we're building those ships. And on the day after elections, we're still going to be built in those ships. So administrations matter, they do. They absolutely matter. But they don't -- we don't vibrate on that. Our -- maybe the frequency of our vibration is very different than other folks. And right now, with the historic backlog that we have, we really have the chance to be thinking about how do we position ourselves for the second half of this decade and the early and mid-30s. That's kind of the way we're thinking about the business.

Yes. Okay. You mentioned unmanned. And the latest force structure assessment from the Navy certainly had like a notable pivot into some less traditional ships versus traditional ships. And it's a type of thing that often in the industry will be sensibly thought through but then takes a long time to play out. But we actually have seen this pivot and legitimate programs come through and be awarded in terms of unmanned ships. How do you see that playing out going forward? I mean, can it really become a pretty significant percentage of the fleet? And maybe talk about how you've positioned Huntington in this regard.

Yes. So you can think about this, like everything, you can think about it a lot of ways. If you want to talk about numbers of platforms, I think you're going to see a lot of unmanned platforms out there. If you want to think about it in terms of volume of ships at sea, the volume of those unmanned platforms is not going to be the same as manned side of the Navy. And everybody that I talk to that kind of watches this from the bleachers wants to talk about, "Is it unmanned or manned?" And I think that's too binary. I think what you're going to see is there's a persistent demand for the platforms that are out there, the carriers and the destroyers and the submarines. That is a persistent demand. The unmanned is going to come along -- at least in the first phase, the unmanned is going to come along to augment that, maybe even amplify that. But I don't see a situation where the unmanned is going to replace any of that. I mean, I just don't -- I don't see that yet. I'm not going to say that 25 years from now, you won't be talking about that, but certainly not in the next 5 years. And I don't think you'll see that in the next 10 years. And so what you're seeing now is the undersea part of unmanned, that's pretty structured. That's been worked for a long time. The players there, they all know each other, the customers all know each other. And we've managed to get a primary position in that space with our investment in The Columbia Group to get the Proteus platform. Our acquisition of Hydroid for teaming with Boeing to produce the extra-large UUV. In the UUV space, we have offerings and platforms and products in every range of size for every customer that's out there, both domestic and international. Nobody else has that. In the unmanned surface space, I think we're still kind of in the, "What are we going to use it for? How are we going to amplify this? Are they going to be arsenal ships that carry around missiles? Are they going to be logistics ships? Are they going to be ISR ships?" I think you've got that whole CONOPS discussion going on there. So there's still some sorting out to do on the surface side. But I think that, that will come. That will come by putting platforms at sea and trying them out on certain things. And they're going to find stuff that works. And they're going to find stuff that they thought would work and they say, "That's not probably not the best use of this platform. It's not going to amplify us in a way that we think is valuable." So what I feel comfortable with, Noah, is that the amount of money that's being spent right now on the unmanned space, I think it's going to be 3 to 5x bigger in 5 years. But 3 to 5x bigger, that's great. But 3 to 5x bigger is still not a submarine. And so I think you're going to see pretty rapid growth here year-over-year in that line item. But in terms of displacing anything, I don't see that -- I don't really see it displacing anything, at least in the near to mid-term. You want to talk about 2035, that's a different game. But I don't see that right now, so...

Okay. Got it. Yes, that's really good perspective and helpful. The company has had a sort of forecast or framework for 3% top line growth in the shipbuilding business. And what's interesting is you have that framework. And despite all the ebbing and flowing we're talking about, it seems like no matter where we are in ebb or flow or in between, you stick to that 3%. I mean, is there anything that could happen that would deviate that? Or should we really just lock into that for a long time?

Wow, I think that's based on what we see in our current programs over the next mid-term, mid- to long term. That's just what we see based on what we have under contract, based on the discussions we're having with our customers, based on the state of play that's happening in the business today in our space. Could anything happen to that? I mean, I guess, maybe you could do -- have a Washington Naval Treaty kind of thing that everybody decides not to build ships for 10 years and takes a holiday like they did back in the '20s, 100 years ago. But I don't really see that kind of thing coming right now. I don't think the world's situation is anywhere close to that. And I think that the other part of it is if you decided that you really needed to go -- I mean, let's say that we want to -- and there's been some discussion about how do we increase, for instance, the amount of production we have in submarine force. Well, how do you do that? How do you synchronize the authorization and appropriation process of Congress with the industry's ability to expand its capacity? We've had a lot of discussion with the Navy about that. And if you can get the acquisition phase -- and what is some we know to be true is if you can acquire these programs in phase with the industry's ability to produce them, you can reap great efficiencies by doing that. We've seen that in program-after-program. So how to -- the question is how do you do that? That's not a light switch. I insist that the industry can go faster than the Congress can, so we can ramp up and build capacity faster than the Congress can appropriate. But we have a lot of indicators ahead of that before you actually get to appropriation as to whether we should do that or not. And we're watching all those things. So I just don't see anything that's like a sharp left turn or a sharp right turn right now. I think we have got just a pretty steady path. There may be some places where we expand. And that's kind of the way we see it.

So that makes a lot of sense. But if I look at the last 3 years, the shipbuilding business has grown faster than target. Now it's led by Newport News, where you have ramp-up in next-generation submarine and you saw the growth in legacy submarine. Anything else to that? And then yes, I mean, as we go forward here, can that sustain? Because maybe kind of level set us on where you are in the Columbia ramp. And then as you alluded to with Virginia, there's this ongoing discussion with the potential to add another ship for a year and more capacity there. I mean, why can't Newport News keep up something like the growth rate it's had over the last few years?

Well, I think that's a different question than what we think is going to happen, okay? And I just kind of go back to 4, 5 years ago. My whole career has been basically a shipbuilding budget at around $15 billion a year. It might be a little bit more, it might be a little bit less. But year in and year out, that's kind of been the number. And then where you see the ebbs and flows are in the product mixes, right? And so you take that number and sometimes you have to go buy a carrier and sometimes you're buying amphibs. And so that's kind of been the ebb and flow, it's been below that kind of steady state. The discussion we started to have back in 2015 and 2016 was the demand for -- the demand signal for Navy was going up. And so we could see the Navy needed more ships. But what we could also see was the Navy was going to have to buy Columbia. And the question that we had in our mind at that point in time was when the Navy buys Columbia, is that going to be on top of the demand signal? Or is that going to be squeezing out the demand signal, right? And so if you stay at $15 billion a year, year over year over year and you go buy Columbia, you're going to put a lot of programs in jeopardy. So what happened in the '17, '18, '19 time frame is that as Columbia started to ramp up, it ramped up on top of the demand signal, right? And frankly, the shipbuilding budget in the last 3 to 4 years has been pretty aggressively higher. It's been in the almost mid-20s in terms of budget. The question the whole industry has, not just us, but the question the whole industry has is that ramp-up, is it really -- I think I called it, is it a rat in the snake? Or is it going to be sustained going forward? All the indicators that we have is that it's going to be sustained going forward. But we've been through this before. It could be just the rat and the snake. And if it is, that's going to put a lot of pressure on other programs. When we handicap all of that, it's -- we kind of come back and say based on what we have under contract, based on what we see in our discussions with our customers and the programs that we have and the maturity of those programs and their plans for moving forward in those programs, we think 3% in shipbuilding is a pretty reasonable -- a 3% growth rate in shipbuilding is historically high, given the historic $15 billion. So that's kind of the way we see it. We'd love to be surprised.

Yes. Okay. That all makes a lot of sense and is helpful. Where are you in the Columbia process? I mean, what's the sort of revenue -- not the exact revenue contribution, but where is this today in its ramp-up to whatever steady state it's going to be for the company?

Yes. So we're -- we have capitalized for it. And we're cutting steel on it. If you compare the Columbia program back to the last time the nation did this ballistic missile submarine program, Newport News did not have a role in the last program. Today, Newport News has a role, and it's probably in the 20% to 25% of the program in terms of what we're going to do in that program going forward. Our partners at General Dynamics will deliver all of those ships, but we're going to continue to build the bows and stern units for those ships because that's what we've been doing for Virginia-class. We've facilitized to do that. And that's going to be a very important part of our business. It's still ramping up a little bit from a standpoint of the volume. But we've been running on this now for a few years. We've got the workforce in place. We've got the capital in place. We've got the leadership team in place. I'm excited about where it's going to go. I think you're still -- we're still just kind of leaning into it on the schedule. Our objective because we do prioritize Columbia -- even though our role is kind of a minority role on Columbia, we prioritize Columbia because we've got to get Columbia, right, so we don't put pressure on the other programs that we have. That's sort of a give and go for us is if Columbia starts to have real issues, the pressure is going to be on some of the other programs that are our programs. And so that's why we've put top leadership on that and we've put top capital into it to go make sure that we do everything we can to get it right.

Okay. Yes, oftentimes, the long-lead buys are greater than what maybe we would all be looking for relative to the stated timeline of the program. And so just so I understand, it sounds like that you've seen a decent amount of revenue already from Columbia, notwithstanding that it will continue to ramp from here.

Yes. I can probably let Tom speak to that more. But yes, we're just -- we're kind of ramping into it and material does lead typically, especially on the nuclear programs, material buys lead. But they lead anywhere from a year to 2 years. And it kind of depends on what you're buying there in terms of how that shows up in your revenue. So I don't know, Tom, if you want to add to that?

Tom, maybe you're on mute.

You're still muted, Tom.

So yes, just a couple of things. So you probably saw out in The Street, Electric Boat awarded us the first couple of modules on that. So as Mike said, that's ramping up. We're cutting steel on that. A little over $2 billion was the contract award to us from a purchase order perspective. And we'll be supporting the first 2 ship sets there on both modules on that. And then as the subsequent orders start to come in, we'll get more of a level-loading and a ramp-up of that program. We really don't provide a revenue at each class of ship or boat level, so -- but you could lay that out as a modeling. As you see the funding come down from the prime down to Electric Boat and then our piece of it on that, that will play out and moderately grow in the coming years.

Okay. That's helpful. Thanks, Tom. And then maybe just to round out Newport, if you guys could just level-set us on where we are in the carriers. I mean, what's next? What milestones should we all be looking for there?

Yes. I'll start with -- the biggest moving part in the carrier business right now is the transition on CVN 79 from a two-step delivery to a single delivery. The insertion of technology after delivery was something that was a plan that we -- that we had years ago. Kind of back to the demand signal, the intention now is to get that ship deployable as fast as we can. So what that does is we have to kind of -- we have to merge the ship delivery with the technology insertion. And what that did is you kind of -- as you were watching it, that, that moved some milestones that in the second half of last year, they moved them out and kind of pushes the delivery out. But it's a change, it's a substantial change to the contract in terms of scope. And it gives us the opportunity to make a more complete ship when we deliver it. And so we're pretty excited. That's probably the biggest moving part in the carrier business. We have a 2-ship contract for 80 and 81. Those are getting off the ground. 80, in particular, is moving ahead pretty robustly, but even 81 is now starting to move ahead. But the question then is really, so are you ready -- are we going to be ready to go efficiently and effectively to follow on the 81. And that's kind of where we are with newbuilds. We actually have the RCOHs, the refuelings, going on for GW, George Washington. And the Stennis just arrived just this past week into the shipyard. And so both of those assets are really important to us. We're starting on Stennis, we'll be finishing up on GW. So those are things we know how to do. And we plan those extensively. We understand the scope. We've been through several. And they become pretty predictable for us. So we're excited about that.

Okay. Excellent. Maybe moving over to Ingalls. You are -- you're negotiating bundled acquisition with LPD, LHA. Maybe just update us on how that's going. And does -- why is bundle better or not better for you or the customer?

Well, the -- what the bundle does is it allows us to predict our -- both our workforce and our supply chain. And when you bring predictability in there, that just makes it more efficient. When it's predictable, you can invest against it, you can hire against it. You can work with the suppliers in terms of getting things to be delivered efficiently and effectively. You can -- it's just -- it's so much better to be in a group acquisition, a serial kind of -- a serial production environment than it is to be buying one ship at a time and not know when the next ship is coming. And that's true whether you're talking about small ships or carriers or any of the ships in between. And Noah, evidence of that is that in the submarine program, where we've been now for several years been getting up to 2 submarines per year, 80% of our suppliers in the submarine business are single [ support ] force. And yes, because we know that we're going to buy 8, 9 or 10 of these things in the block, Block IV, Block V, Block VI, when you know that, you can go to the -- you can go to your supply chain, you could actually manage the cost in the supply chain. Because I know you're going to show up with not just 1 ship set of material, but you're going to have an order for 6, 7, 8 ship sets. And that allows them to effectively plan. And so it's really all about serial production and learning curves and predictability. That's what the bundle does for you. Our view of the LPD is that getting the bundle under contract is really important. It's a way to save some dollars, but it's also a way to help make sure that the supply chain and the workforce are efficiently and effectively employed. And we're working really hard on that right now, trying to -- it's kind of top of one frankly to get it across the finish line.

Is there any range of time in which you're anticipating accomplishing that?

Tom, what have we said about that so far?

So we've given a position on that, the Navy is evaluating it and the teams are together. We'd like to see that happen in the next coming months for it to materialize. Really, there's a critical path that's further to the right than that of like securing the 2 LPDs with the LHA 9, which will be awarded later this year in the fall as it gives the Navy that buying power that Mike talked about. An element that I'll throw in, too, is it's not only with our suppliers, and it's a signal, obviously more backlog, more time for us to go plan it, but it secures the business base. So when we know that the book is that much more fuller and we're putting these ships on contract, LHA 9 and then the 32, 33, on block buy, it affords both the Navy and us the confidence on what we're bidding, and we can be as aggressive as possible with that. You see them employ what they buy, when they buy and how they buy it. That how piece is important, and they can see the buying power. The 2-class carrier buy, the multi-years on destroyers. Obviously, Mike talked about subs, how they buy them. And hey, let's get the buying power going and giving the demand signal to the prime and the subs with these LPD, LHA buys. Opportunistic, LHA 9 wants to get on contract, long lead that's been out there for 2 years right now. And I think there's a good opportunity both for the Navy and HI Ingalls to kind of make that happen this summer.

Okay. Excellent. I have a few more top line-oriented questions, so I'm going to pivot into the margins and the cash flow here, just in the interest of time, then we can circle back if we have more at the end. But just thinking about margins, last year, there were some challenges related to the pandemic and obviously very -- getting challenging to navigate that and then some execution issues. Is all of that -- I mean, we've seen the margin progression. Is all of that in the rearview mirror at this point?

Well, we think so. You know, Noah, you follow us for a long time. You know we have a very disciplined process around our EACs and risk retirement and all that. And when the pandemic hit us, obviously it affected every risk register in the organization. But we lost line of sight on the retirement of risk in submarine program, which was why we had to -- driven by our process and by the deliberateness of what we did is why we had to take that charge. What that did though was we reestablished that risk register with an eye towards the pandemic and we could do it that way. What's really happened here is that the execution on the ships has kind of fallen right on top of where we're targeting. We're getting the first ship ready for delivery. We're getting the next ship ready for launch. The most important thing in the submarine program is to establish the cadence for production. And I think the team understands that. And you can see the cadence coming through. And there's a ramp-up in here of new workforce and increased production rate going from the single ship per year to 2 ships per year. And you kind of have all of that going on. You're seeing the cadence actually. In the depths of the organization, you're seeing the cadence being established for 2 submarines per year. That's really, really important because you get that cadence going. Now you have the predictability. Now you have the opportunity to move forward. So we're pretty pleased with the way that it's played out over the last 3 quarters in the submarine program. The rest of our programs are -- we see the risks, we see the opportunities. We capture some opportunities. We miss some. We capture some -- we retire some risks. We miss some. You see that every quarter. But net-net, I think that the -- dealing with the pandemic from a leadership standpoint has actually congealed the team in a way that maybe it wouldn't have happened before. And we feel pretty excited about what we've done. And we preserved the workforce that we basically built up in the last 5 years. We've managed to hang on to those folks. And so I think we're very well positioned going forward.

Yes, kind of a rallying cry. It took a moment. The guidance for this year calls for the shipbuilding margin 2Q, 3Q to step down versus 1Q, back up in 4Q. Tom, maybe you could just walk us through which milestones you're looking for and wind that drives that.

Yes, sure. So as you mentioned, the first quarter, 8, 9 in shipbuilding, we guided 7% to 8% in the words that I had there. And actually, I think we'd probably be at the midpoint through half year. Q2, Q3 is a little light on milestones and just step-up activities. It's the pacing -- those are pacing quarters right there. The back half of the year, we're excited about. And there are some events that, if they come off and there's some risk that gets retired there, we are taking 121 out to sea and there's a delivery at the very end of the year on 121. So that's in play, and that looks good right now. LPD 28 also does its sea trials. And that progresses through the end of the year with a delivery at the very beginning of next year. So we're watching that. We have our -- from the VCS perspective, 794 gets delivery, 796 floats off. And those are milestones that we have a line of sight on. And we're on plan right now. So we still feel good about the 7% to 8% by year-end. And that's where we're at right now.

Do the 4Q milestones have above-average or below-average risk of slipping into the next quarter, the first quarter of '22?

Yes, I'll be honest with you, that split has above-average or below-average risk. I mean, I think -- I look at it in the context of the year, again I wouldn't guide by quarter or try and manage by quarter. I do tell you that we have -- every 12 weeks, we have our head down. We're rowing hard. We understand what has to get done. We understand the statement of works that we have, what needs to be retired and we're progressing well. So 2020 was a tough year with COVID with the people. We had 1/3 of the workforce out and we had to deal with that. But we've had a good run, Q3, Q4, Q1, good stock for 2021. And right now, we see a good year progressing for us here.

Okay. And you have the 7% to 8% guidance for this year. If I kind of comb through my historical notes here, obviously there was a long discussion of 9% to 10% is kind of the natural shipbuilding margin. I also have you saying that you thought 2022 would be in the low 8s and sort of steadily improving from 2021. I don't think the mix of age of ship changes a ton over the next few years. So on a kind of 3-, 4-year basis, should we be thinking steady annual improvement in the low 8s? Or should we be thinking 9% to 10%?

Yes. So we haven't given you that guidance yet, and we've been very purposeful on that, right? With the Q2 step-back that we had in the Virginia-class, obviously we've realigned progress performance and where we were as far as the risks that we'll burn down. As Mike said, with the missing workforce and the choppiness because of COVID, we missed the window actually to see a line of sight that we'd burn down those risks. Just from a VCS perspective, that makes those contracts a little bit more laid on the EAC side. And then if we play the rest of the ETC out, the estimate to complete to go, the possibility of getting back to where you want it to be, maybe a little bit less. That's only a small piece of the portfolio. But we've taken the reset that we've done since Q2 and I think we try and guide for the year and then we give you an expectation for next year. At Q4, in February of 2022, we'll give you another perspective of what '22 looks like and then we'll update you for 2023. So we don't want to get ahead of ourselves. I think it's a prudent process. It's been well. We try and give you as much information to fill out your models in there, whether it's the top line and the CAGR at the shipyards in TSD, whether it's ROS and EBITDA expectations, respectively, to those 2 division sets, the capital, we've given you the tax rate. So we feel most comfortable with the guidance we have right now. I know you're interested in, "Hey, what happens next," but I'd ask you to stay tuned. Let us have another consistent 3 quarters like we have on the last 3, and I would expect additional margin expansion as we move forward.

And Noah, I would just add though. Tom's exactly right about all of that, stay tuned. But you said something about the maturity of the programs won't change much. But actually, it will. We will see more deliveries in the '23 to '25 time frame than we've seen in '19 to '21. So we have more deliveries, we have more risk retirements and so it gives us more opportunities. We've got to go do that. We've got to go capture it. But having -- kind of having a historic $20 billion backlog and then suddenly having it shift from $20 billion to $49 billion, that creates a lot of immaturity in our programs in terms of working through the process. As we work our way through that and we start delivering more of those ships that are in the backlog, we're optimistic.

That makes a lot of sense. And Tom, I appreciate all that detail and it's a very sensible approach. Mike, I have been looking at that more from the perspective of just the aggregate mix of age of ship or where each ship is in its process year-to-year and thinking, when you had that large jump in the backlog, that you would have a long period of constantly replacing new ships into the fold and therefore that the mix didn't have a substantial change. But I hear your point that if there's -- when it's delivered, that's a big milestone, that's an opportunity to be higher risk.

Yes. That's the way to look and you're looking at it the right way. It's just that it's -- you're going to ramp into some steady state of deliveries. We're not at that steady state of deliveries. What's encouraging though, frankly, is we've been able to persist and maintain the backlog. I mean, kind of back to the rat and the snake analogy, I mean, it would be one thing if we went up to $45 billion and then went back down to $20 million, but -- and I'm not going to say that we will maintain it, but I'm just going to say it's been encouraging that kind of ends up being the whole conversation, we're actually kind of booking the bill here about where we want to, to hold it, so...

Yes. Okay. That's good. Okay. And then just translating all that to cash flow, you have the $3 billion cumulative 2020 to 2024. And that was kind of $900 million cumulative '20 and '21. And then there was a discussion of $700 million year '22 to '24, so $700 million times 3, $2.1 billion plus the $9 billion, that gets to $3 billion. Does the changes you've had with the submarine program or anywhere else, does that change that shape a little bit, where '22 or maybe even '23 are still a little light of the $700 million run rate and then you get to that later? Or how should I think about that?

Yes. So I'll tell you that the change that you talked about for Q2 of last year is not a player in that profile of the $3 billion. I mean, it's a piece of the portfolio. But the bigger drivers on that, and Chris laid it out with the expectation going into 2020, and at the Investor Day we had in February of 2020, also kind of laid that out, COVID actually helped us a little bit with relief in progress payments and the state [indiscernible] tax gave us some relief in 2020. So we got a little bit of tailwind at $757 million free cash flow 2020. We tweaked that guidance to, hey, look at 2020 and '21 combined, the initial guidance was $900 million to $950 million. More recently, we've told you $900 million to $1 billion. So I mean, that's a little bit of a lift right there over the 2 years. And then kind of going forward, it kind of plays out from '22, '23, '24. Does that ovally a shape to that because of the more deliveries? One, that's the portfolio mix that you talked about. The other one, just as you go down the income statement and then how that translates into cash over there is a constant CAGR at 3% here, TSD at 4% on the top line. We have said that we're pulling back on the capital expenditures in the yard. We're just finishing up from '16 to 2021 throwing $2 billion of upgrades and maintenance with the shipyard of the future at Ingalls and then both for rate on the submarine side and cost efficiency on the carrier side, capital insertion over that same time frame. The capital is about 3.5% this year that we're thinking about. And then that's going to be 2.5% going forward on a run rate. And then we've swung over both to the pension harmonization in '18 and then safe harbor now, so the pension contribution is relatively small and consistent. You can see that in the table that we provided at the beginning of the year for the next 5 years. And then the working capital in that 6% to 8% range, so just working through your models and that -- you hit those parameters, the cash kind of falls out there. We still feel comfortable about that. The guidance we gave you both when we established that plan and then post Q2 2020, we've reiterated it several times. Chris did it at Q4 and I did at Q1 again. So we feel comfortable with that right now.

Awesome. So just one specific question there, Tom, is it in the official guidance that you get to the $700 million run rate in 2022? Or is that not an official guidance item and it can ebb and flow a little bit on the way to that?

Yes. We haven't provided the specific annual guidance for the free cash flow in '22, '23, '24. I mean, you can do the math as you do, and there's only so many ways that you can get there. But as the prudent way we do our EACs and measure performance as well as tie that to the guidance that we provide to The Street, I'd ask you to stay tuned on that, and we'll give you that as the year progresses here.

Okay. Excellent. Well, we haven't gotten everything. But we got through a lot of it and we've gone a few minutes over, and I'm required to keep everybody on schedule. So we'll have to wrap the session there. But gentlemen, thank you so much for being with us today. This was great, a lot of fun, always great to speak with you. Thanks again.

Yes, thanks, Noah. Great to see you guys again. Looking forward to catching up in person when -- as soon as we can. It won't be much longer now.

Likewise. Okay, thanks. Take care.

Thanks, Noah.

Thanks, Dwayne.