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

Okay. Great. Okay. I'm Doug Harned, Bernstein's Aerospace and Defense analyst. With us, I'm really happy to have today Chris Kastner, the CEO and Chairman of Huntington Ingalls. And Chris, I'd love to start out by, you're new CEO here, maybe you can tell us a little bit about how you're thinking about Huntington Ingalls today? What your vision is for the company? How you see the strategy?

Yes. So I have -- thanks, Doug. I really appreciate the invitation of being here. I need to say a couple of things, first of all, which is normal safe harbor rules apply here. I'm not going to break any news. I don't want to offend our Chairman because we do have a split role of Chairman and CEO. So I don't want to…

Actually that was my mistake.

That's okay. That's okay. These things happen, but I don't want to offend our Chairman, so I'm the President and CEO; Kirk Donald is our Chairman. But back to the business. HII, we're in a really interesting place. We've got -- I've been right in the middle of the strategy with Mike over the last few years, very deliberately put it in place. We've got a lot of shipbuilding contracts, a lot of backlog, over $45 billion of backlog. And I'm kind of relentlessly focused on executing and getting the return on that backlog that really shareholders deserve and the Navy deserves those ships to be delivered. And then getting the return out of the acquisitions that we've executed; 2 very significant ones, Hydroid, which is unmanned and then Alion, which is in the technology space. So that'll be almost 25% of our portfolio this year, they'll be bigger than Ingalls. So it's a combination of execution and shipbuilding, taking care of our backlog and earnings related to shipbuilding and then getting all we can out of the Mission Technologies Group.

Well, I really want to -- at least for the first part of this, focus, one, on the shipbuilding side. We've seen the President's 2023 budget. Obviously Congress is going to make some changes to that. But perhaps you could talk about what you take away from that for HII.

Yes. So with HII, we always think of the President's budget is really the first step of the process in the budget. So there's a lot of work to get from here to there until we get a signed bill. That being said, we're really comfortable with how it came out. We need to do some work on the Amphib line. We need to get LPD32 and OHA 900 contract and LPD33 is #1 on the Marine's and the Navy's unfunded list, so we need to get that funded in '23. But all in all, all our ship programs are supported, but we need to do some work on the NFIB line, which we're working on very significantly right now.

Yes. And you've always -- I mean, we've seen several budgets come in with perhaps short at DVG, short at LPD in the past.

Right.

And we've seen those additions come through in Congress.

Well, there's no doubt that the requirement exists, right? There's an NFIB study done by the Navy called, just released, 31 NFIBs. That supports the LPD37, right? So you get LPDs on 2-year centers, you get LHAs on 2-year centers, and we need to do some work there as well because we need to accelerate LHA-10 a few years. So it's right behind LHA-9. But if that takes place, I mean, we're very solid in Ingalls for years to come.

And one of the -- I wanted to get into that a little bit later, but maybe right now, on the LPDs, if we went back not too long ago, we were looking at this transition to LXR and this change away from the current LPD design. Instead they move to sort of advanced versions of LPD. I mean, what happened there? Is there still -- is there a development trajectory when you would go to, say, 33, 34 and so on, it would look different, like a different flight?

Yes. So I think the Navy has done some really intelligent things, both on LPD and the DDG program, where they've gone from Flight II to Flight III, where they're incrementally introducing technology. There's not a lot of development. It's really introduction of new technology and new systems around that technology. So they've done that smartly. I don't see different variations of LPDs in the future where you change the whole form significantly. They will introduce new technologies, and we'll do that smartly, but I don't see a significant change to the OPD.

And one of the complexities here is we've seen a lot of debate, a lot of studies coming out of the Pentagon, Navy, I mean, OST, Navy, talking about what the future of the fleet should look like. And I even think back to when Gates was Secretary, he laid out a concept for a much more distributed fleet, fewer carrier groups. When you look at those different scenarios out there, first, how do you think about them in terms of their reality and the transition to these new concepts?

Yes. So I think it's going to happen. There's going to be a transition to more distributed connected fleet. Technology is going to drive you there. It's going to include unmanned boats, which we're right in the middle of from the small UUVs that we won this year to building the structure for the XLUUV for Boeing to the autonomy for surface unmanned. So I think it's going to happen. There's going to be more distributed connected fleet. I think it's complementary to large capital ships that we build. But the customer is going there, technology is going there. We need to be able to support that.

Now does that -- how does that impact things like this long-term LPD plan, for example? If we're really moving in that direction, is there a point in time when you would expect to see, say, a move away from the same scale of the current designs to something new and smaller?

Yes. So LPDs could get smaller, right, there needs to be an orderly transition, right? The Amphib study called for 31, which is through LPD37. So there will be a transition at some point. It could get smaller and more connected and less expensive. We need to participate in that evolution with the Navy, and that's something we would do.

Yes. And I would expect, though, as you move to smaller ships, you could also see new competitors. I mean, there's really only 2 of you right now that can do a lot of these, the major shipbuilding programs you have today. But I would expect there'll be others that may come in.

Absolutely. Yes, there's going to be competitors that can build smaller ships, but don't count Ingalls out. We've spent the capital there. They're very competitive. It's a scrappy shipyard and they'll be able to compete.

If you look at the top line growth, I mean, you and Mike, for some time have said, you're kind of looking at shipbuilding as kind of a 3% CAGR going forward for the next number of years. One thing I find -- one thing I love about this business is its predictable, right? I mean you've got a lot of work under contract.

Right.

But is there anything you see that when you're looking forward, say, 5 years, that could change that trajectory, either up or down? What are the -- any knobs that can be turned?

Not really. I hate to say it, but it's pretty predictable. We have a lot of backlog. Some of our constraints are really labor and the ability to hire labor to meet that demand and then the constraints within the shipyards. So we really see a 3% long-term kind of CAGR. And it will move from time to time. If you get material that's delivered at the end of the year, at the beginning of the year, it swings it a little bit. But we really think -- we think about the business as a 3% long-term, very stable, high cash generation business.

And one of the elements on this that I always do feel can dial things up or down is the services side of the business. So when you had the 3 Los Angeles class subs come in.

Yes.

That did -- it pushed you up a little bit in the short term, you obviously can't draw a straight line off that. But how do you look at that part of your revenue stream? In other words, I've -- a number of discussions I've had have indicated that they want to do a lot more in terms of readiness within the Navy.

Right.

And if that's the case, I would think that you would be well positioned to do increasing amounts of services work. But how does that look to you?

Yes. So we want to get to the position where we're building one and planning one, similar to an RCOH program where you got a continuous flow of work related to LA class and Virginia class submarines in the yard. We've reconstituted that workforce. We're performing actually well right now in the Columbus, Boise hasn't started yet. The Navy's got to make that decision whether they're going to do that work in Newport News. But we like -- we think a consistent $200 million to $300 million of services work related to LA class and Virginia class submarine work makes a lot of sense, and we think we can do that work.

And is that -- that will be predominantly, I mean, you're talking more on the submarine side. But what about like in Ingalls?

No doubt. Yes, thanks for bringing that up. Ingalls can absolutely do major overhaul work, right? It's in -- it's obviously on the Gulf, not on the East and West Coast, so there's no major Navy base there. But if you had a large project, Ingalls is really equipped to do that. They did the Fitzgerald last year or the year before, actually, and did an excellent job on the Fitzgerald. So they have the capabilities to do major repair work.

So when you look long-term, in fact, you and I were talking about this earlier, Mike always talked about this is a 9% to 10% margin business and you said the same thing.

Right.

Can you sort of describe to all of us, why you think of it as a 9% to 10% margin business? And what drives excursions over periods of time up or down relative to that number?

Yes. So we -- just over time, we've seen it's a 9% to 10% business. If you take -- if you have a balanced portfolio, new ships, mature programs, where you're delivering ships and that are in serial production. So we just think that's the right place to be if you're performing well with new work and being conservative and how you book those margins at the beginning. Now excursions around that, heck, you were -- you know about the Ingalls story about Hurricane Katrina and 5 ship classes and challenges down there where it went down. And then you've been on the other side of Ingalls where they're performing very well in serial production. COVID hit us, we've had some labor challenges in Newport News and the ability to attract quality labor, but which has created a bit of an impact in Newport News. But we need to mature those programs there. Now that team is all in. That operating system that they put in place there looks a lot like Ingalls, but has a lot of Newport News elements. When I'm in the room with the Newport News, a shipbuilder or an Ingalls shipbuilder, they're pretty much all HII shipbuilders. They all speak the same and they all absolutely believe in the mission and are committed to doing a good job. So it's all about a predictable operating system where you're kind of relentlessly focused on execution every single day. And that's where we are at Ingalls and Newport News right now. We've got to dig out of a hole at Newport News a little bit, and they're doing that.

Well, then on capital investments, I mean, you made some major investments in Ingalls, you built out at the other side of the river there.

Right.

And then -- and I think you've pretty well capitalized for a lot of what you have to do at Newport News as well.

We have. Yes.

So how do you think of CapEx going forward after this big capital investment cycle?

Yes. So it's definitely going to come down. There are some Columbia Capital that we're evaluating that we'll do with the participation of the Navy that offset some of the capital cost there. So that could be the only thing that would increase it a little bit from a capital. But from a free cash standpoint, it shouldn't impact our free cash flow situation. That's really the only thing, we're facilitized.

Yes.

And so I see it coming down, except for some minor capital related to Columbia that the Navy would be involved in.

I mean what kind of levels are we talking about when you think of percent of revenues?

Not material, not where we were before. I don't want to give a specific number.

Yes.

But definitely coming down.

Okay. Now you mentioned it before, but I just wanted to hit on this because I think it's been important in the budget and that gets to undersea, unmanned, undersea. Can you talk a little bit about that because right now it seems like a really hot area? I mean, it comes up a lot in your earnings calls.

It does.

Even though it's pretty small, but -- today. But when you look forward, say, next 5 years, is there a point where we should start seeing that as a material contributor to revenues?

Yes. So it's not yet, but it will be. We planted the seeds and they're starting to bear fruit, right? We won the small UUV program for the Navy. We're competing for the medium UUV program. We should find that out in Q2 or Q3. We build the structure for the Boeing XLUUV that we deliver to them, they integrate, test and deliver that. We have an Odyssey software suite of autonomy that does undersea, surface and land autonomy, open architecture, built to Navy standards. So we're the autonomy provider for a number of surface vehicles. We think we're in exactly the right, broadly, in exactly the right place we need to be to take advantage of this market, and it's evolving like you think it would. It's -- they're testing out CONOPS. They're in the water. They're seeing what works, what doesn't work. Navy's doing exercises with unmanned undersea ships and surface ships. So it's developing, it's getting the traction. The programs of records are in place, and it's going to start to become more meaningful.

This is also an area where you get new competitors too.

Absolutely.

And how do you think of sort of these new competitors in terms of possible advantages they might have or disadvantages. It's just a different landscape than where you've traditionally competed.

Yes. We're not afraid of competition, right? And part of that is why under sea and our unmanned business is over our mission technologies, right? You have to be competitive. You have to be good at business development. Interesting, 30% of that revenue is international. So you have to have an international presence. There will be more competitors. We're just going to have to deal with that. You need to win program of record, do a good job, and you'll be fine.

Okay. Well, it looks, I mean, it looks like -- I think it's a really exciting area, but it always triggers the thoughts that you're going to get new innovators that come in and disrupt.

There will. It will evolve a bit like the aerospace, right, where there's different missions being created and executed based on different platforms. So I think that will absolutely happen. But we're going to play a significant part of it.

Well, if we go over to Newport News. I just want to start with this because this has been an issue that at least as we've thought about it, the one issue that's sort of been the most challenging at Newport News, and that's been getting through these Virginia-Class Block IV boats. And if we go back 2 years ago now, we're…

Q2 2020, not that I remember.

Yes.

But we did have COVID at the time, right?

We did have COVID, however.

Right.

So back then, that was when the Montana was the biggest of the issues. And certainly then the New Jersey and the Massachusetts, you took charges on at that point in time.

Right.

And since then, it appears that you've really worked through a lot of those issues. However, when we looked at the margins that you just reported, they were light compared to what we thought, which I think is a Virginia class issue.

Yes.

So can you help us understand kind of what's happened? How we got to where we are? And where you see this going?

Yes. So it's more stable now than it was, right? Coming through COVID, Block IV was significantly impacted in those ships. We've reset. The labor has returned. It's not where we want it to be, and we're using lease labor and overtime to deal with that to kind of fill in the cracks. But Block IV has stabilized. We delivered Montana, we launched New Jersey. Now they were late. When you're late on a submarine program, it's actually a production line. It's not only serial production, it's a production line. So if you're not out of that space, the next boat can't come in and take its place and stay on schedule. So we're not quite there yet. We need to get to 2 per year. We need to deliver one and launch one every year. The team is very focused on it. We need to be focused on it because I see opportunity in Block V. I see opportunity in Block V. Now that's a -- you have some legacy design and then going into the Virginia payload module there. So it's a little different. But we need to get on that rhythm and stay on that rhythm and take advantage of really a great contract, a great product, a lot of capital investments we've made in the program, and we're working very hard on it every week.

The Block V, the payload module is really electric boat…

It is.

Module. So when you think of going to Block V, I mean, at least as I've thought of it is that there's not a huge change in terms of what you all are doing.

That's right. Absolutely right.

And so if you take the risk down on Block IV, you probably get pretty confident on Block V. Is that fair?

I think that's fair. And it's all about we're teaching a young workforce and not only a young workforce, but a young cadre of leaders. These are foreman that are young foremen and experienced foremen that we're teaching how to lead and run a crew and execute on a program. So unfortunately it's creating some cost on Block IV and Block IV is not -- did not result like we -- did not perform as we expected it to. But we have high hopes for Block V because we're training that workforce right now.

And are the issues on Block IV, I mean, I mentioned those 3 -- the 3 ships I mentioned are ones that you deliver. But of course you're also doing modules for the ones, the electric boat delivers. Is this something that sort of just spans issues that kind of as a general issue across the program, which affects both of those modules as well as your own?

It does. It does. But you see most of the issues in the integration and test part of the boat. So the performance was impacted in the modules as well, both cost and schedule, but not as much as you saw in integration and delivery.

So is there -- I know you don't give margins by program or anything like that. But if we're to think about just going forward, can we -- are you expecting, as we go through the course of this year and into next, that you will get margins there back closer to what you would hope they would be rather than what we saw in sort of Q1?

Yes. So we don't do it by program, but I do think there's upside on Block V. I absolutely do. I see some utilization of the operating system that's been put in place there. The attention to detail and the fundamentals that the workforce is putting in place, it won't yield a lot on Block IV because it's so far down the road. But I think there's upside on Block V for sure.

Because back in that Q2 2020 quarter, COVID was certainly an issue there, but I know you all talked about -- and one of the challenges in Newport News is you've got a lot of complexity there. And more than you have, say, the mix of electric boat or something, you've got so many different things going on.

Different programs.

CVN program. and so forth. So you talked then about the large number of new people you were bringing in. But I know now, I mean, you've also talked recently about bringing 5,000 new workers this year.

Yes.

So how do you get the confidence that you're not going to run into some of the same issues with more new people coming into the workforce?

Yes. So we -- that's a core competency for us with our apprentice schools, our community college and high school relationships. We're really good at developing a workforce. But I would just say that the work the program team at Newport News has done with the operating system and paying attention to the fundamentals such that you know what you're going to do over the next 12 weeks. And you've got line of sight on what you're going to accomplish and you hold each other accountable to get that done. If we do that well, they're going to be fine because we're pretty good at training shipbuilders and training leaders.

Yes. And in that complexity, the other, obviously, a very large program you have is the Ford-class.

Yes.

So I think you said that Q1 CVN 79 was 83%.

It is. You always get worried about how they calculate that percent complete. We're 2 years away from delivery. It's going well. We're heavily into the volume work, lot to paint, a lot of insulation, a lot of vent, but they're working very hard in the operating system to ensure they're making progress every week, including the elevators. Elevators are something I pay attention to. I know it's received a lot of public attention through CVN 78. I'm comfortable with where they're at. It's a hard job. But we've got the people back from 78 working it. So it's not the first time they've done this.

Yes, because I always find it hard to know when you go, CVN 78 was a cost-plus ship. When you go to CVN 79, then you sort of own the price at some level.

Yes, no doubt.

And so how do you feel about that? I mean, you've got 2 years to deliver this. And the feeling that you're where you want to be in terms of cost on a fixed price shift?

Yes, fixed price incentive shift. I'm comfortable with where we are from a cost standpoint, right? Two years ago into the test program, just starting the topside test program. The plant is going well. Compartments are going well. Volume work is going well. Elevators are going well. They're all on cadence, but it's a lot of work. So it's going to be a nice fight for the next 2 years, but that's okay. We've done it before.

Yes. Well, I can't think of any more complicated products. So CVN 80…

Actually the RCOH is more complicated than it because you're taking fuel out and putting it back in. That's the most complicated thing we do. If there's an RCOH, it's actually more complicated, but yes.

But that seems to go -- those seem to go -- you know how to do those really well.

We do. We do. We know how to do CVNs really well, 2 new construction, right? It's just a lot of technologies implemented on CVN 78 at the same time, which increases the complexity. We're behind that now. So I'm comfortable with where we're at.

So CVN 80, where is that right now?

We've got some stuff already in the dock. We've started to -- we would -- I can't really announce a kill -- because that's a Navy announcement that they will make. But we're actually starting construction on CVN 80. So it's making good progress. CVN 81 right behind it. We bought that material together to get some economies of scale. We have digital shipbuilding. So I've got people, 30-year shipbuilders looking at tablets instead of piles and piles of paper to build that. So it's a digital product, implementing some really interesting technologies. We're doing the elevators is a great story. The 78, how we do the elevators, 79, how we're doing the elevators, which is more efficient, right, because it's not a first of class. We're doing the elevators at the initial stages of construction on CVN 80. So it's just an iteration, that's what shipbuilders do, each ship they get better.

Because when you go to, I mean, not only do they get better, but sometimes, they want to change requirements too, right? When you go…

They do, they do.

Is that much of an issue for you? I mean, you learn -- I mean, clearly, the customer learns a lot as each one of -- each ship is delivered.

Right.

And since these take a long time, it creates the opportunity for maybe more changes than you might want. So I would think sometimes, so…

You generally don't receive changes of the fundamental structure of the ship or both. You're going to have new equipment that you put in there, which could require new power generation capability. But that's done very thoughtfully by the Navy, I think. I've done Navy and Air Force stuff. So I think they both do it thoughtfully, but Navy - we've learned, right? So on DDG-51, LPD, they incrementally put in new technology, so they don't disrupt the program.

And if we go over to Columbia class. So where are you on -- sort of on the trajectory? I mean we're just kind of heading into the time for the first production ship. But just in terms of thinking about how that dovetails with what you're doing. In other words, between you and electric boat, I mean you've got -- correct me if I'm wrong, something on the order of 23% to 24% of content.

Right, yes, in the low 20% of that boat. Same structures we do for VCS, the curb structures and the bow and the stern of the sail and some modules. We've already delivered some modules of the electric boat and we will continue to do that on the first 2 boats over the next few years. It's a challenging program. I think we're making good progress. The team is very focused. We've made a lot of capital investments for that program and you're welcome to come down and look at them. It's pretty amazing, the tooling we put in place to build those curb structures. We've got a good partner in electric boat, it's our top priority. We'll support them a 100% because it's going to be very complex after we get our stuff delivered to them.

And so is that -- and is your work on that also, is it cost plus going…

It is.

Into the first one and then…

First two.

First two.

Yes.

And so you're sort of in the process now of like you're saying delivering structure, but I would imagine we would see a very -- a pretty steep revenue ramp related to that program over the next couple of years. Is that fair?

It's pretty consistent for us.

Yes.

It's pretty consistent. There's no material upswing in it. We're only 23%.

Yes.

Only the first 2 are under contract. So it's been a pretty consistent trajectory for us. There's no significant ramp. It's all in the 3% based on the program of record.

And when do you -- are there any points in time where you see that program as going through a challenging period in the sense? I mean, these are some very new design and…

Well, it could always go. If there are significant design changes, there could be a challenging period as you go through integration of the boat, there could be changes to show up where there could be challenging period, just a first of class. So we need to be thoughtful about how we execute any changes that show up. That's why it's a cost-plus ship. But it's just going to be a -- it's really a focus for GD and us to make sure we get that ship right for the Navy because they really need it.

And then, I mean, I mentioned it before, but I believe it's about 25% of your work in Newport News services.

Yes. So interesting, I saw that. It's a lot of that is engineering support of platforms that we already have. So it's only $200 million to $300 million is the Los Angeles class service work. The rest of it is very stable support.

That's what I was wondering. What all?

Yes, it's very stable. Very stable support of platforms that are in the fleet that go through configuration changes. So it's on the very consistent, stable, flat sort of revenue.

Yes. And I think of that -- I always think of that kind of work as, in general terms, as sort of like high single-digit margin type work on a services basis. Is that kind of a reasonable way to go?

It's all in the margin guidance that we provide and a target to get to 9% to 10%. It's a little less than what you would expect probably.

Yes. Okay. If we go over to Ingalls.

Yes.

Yes. Ingalls, as you and I were discussing, has gone through tremendous transitions over the last decade, certainly.

Holy cow.

So -- and you've gotten great margins there. But when we look forward and still you've had these transitions. Certainly the DDGs, you're going to Flight III.

Flight III, yes.

LPD Flight II. Do you see much risk associated with those transitions now?

So with LPDs, I don't. We've already kind of come through that. We've delivered 28, we'll deliver 29 coming out next year, I believe. So I don't see any risk really in that. I think, like I said before, going to Flight III on DDG 51, they've implemented those changes incrementally. Right now the final integration of the radar and the power that supports that radar is in DDG 125. And that's happening now and they've started that test program. So we're coming through that. There's always risk when you're implementing a technology that significant on a ship. But I think we've managed it. I think we managed it. That ship will deliver next year, and I'm comfortable with how they're progressing on that.

And when you think of all of the capital investments that you've made down there, how does that come through in margins? In other words, you've got a lot of fixed price work.

Fixed price in center work mostly, yes, but the share line.

But it's share line.

Yes.

But you still -- it gives you the opportunity with better performance to get higher margin.

Yes.

I mean is this something that we should think about as, I mean, I know you talked a lot about, Mike always talk that 9% to 10% range. But I guess my question is, can you do better than that longer term after you've made these kinds of capital investments and you're working on fixed price, even though a fixed-price incentive, you're working on those types of contracts.

I mean that's kind of the art of negotiation with the Navy when you do capital investments and you're negotiating the next shift. And ultimately they pay through their rates for the capital and depreciation. So it's paid for by the customer to the amortization schedule. So it's kind of the art of negotiation is how much you're going to save versus what the cost returns are on the previous ship. Of course, it can be there for a medium term, better than 9% to 10%. I would like to get new contracts in there that on developing a new product line that potentially I have to book at a lower rate while I'm figuring it out, so I have a more balanced portfolio, right? So that's then the risk of performing that well for that period of time means you're not -- you don't have a new ship coming in down the pipeline where you have risk.

And I totally understand that.

So I think the LPD and DDG thought process relative to incrementally implementing new technologies helps in that and allows you to perform for a longer period of time because you're not -- you don't have a new ship class in there.

Yes.

So that's possible. But I think you always kind of drift back towards the medium.

How much difference does it make when you're on a program like LPD where that's your program versus DDG where you and Bath will go against each other periodically in these contracts. Does it change the way you think about the program?

Well, it changes the way, obviously you have to propose because you're competing on the DDG 51 program, and you're competing for ships. How many are allocated to you? So you have to think through how you compete and how you establish your cost targets and what your profitability objectives are there. LPD is all about just a fair and reasonable price based on your cost returns and ensuring that you have all the risks covered in the contract arrangement. So it's a little -- it's a little bit different because you have that competitive dynamic where you actually want to win the most ships you can.

Because I remember back when they attempted to compete and LPD and TAO, it's sort of like, okay, that's great, but…

The worst thing that could have happened is we build TAO and they build the LHAs.

Yes, the worst thing for the Navy.

The worst thing for the Navy. So it worked out the way it was supposed to work out. So we're happy we're building LHAs and LPDs for sure.

Yes, yes. So on the Coast Guard Cutters. I mean, on the NSCs, where is that headed?

Yes, stable program. The Coast Guard is a very good customer. They don't change requirements. They have a very consistent rhythm on how they order ships. We figured out how to build that ship, consistently reduce the price of that ship even though more than offset inflation, to reduce the cost incrementally on the ship over time. And now it's kind of truncated at 11, unfortunately.

Is that the end?

Well, I never like to say it's the end, right? There's been authorizers who have authorized NSC 12, that haven't been appropriated. It's a significant chunk of the Homeland Security budget and the Coast Guard has other appropriate priorities on OPC and FRC. So I'm not going to say it's the end because I think that it's a great ship, and it's doing a great mission. They're out with the Navy in the Pacific from time to time, performing and executing on missions with them. So I don't like to say it's the end. I'm not going to admit that.

Okay. Yes. It seems like it's been a great program.

It's been a very -- it started. It's interesting. It didn't start so great as part of deepwater, but that's kind of global program. But we got to the place where we understood the cost, we understood the schedule, and then we kept reducing the price and executing on it. And we had a very happy customer. So that's where you got to get to. You got to survive the pain to get to the…

Yes. That was -- deepwater was one of several situations like that where each of these efforts, whether it's FCS or each…

It was actually -- yes, that's a good example. Very good concepts, maybe not executed as well as they should have been. But we got NSC out of it, which is a great share.

Yes. So if we jump over to Mission Technologies, and we talked a little bit already about unmanned undersea. But when you think of the acquisitions you have made there, which after doing the kind of original stuff, which was different, like oilfield services related and things like that.

Yes. So like Mike will say that I was the only one that couldn't predict oil going from $100 to $30, right? So yes, we're not going to invest in oil and gas for sure.

So you've done a lot in different aspects of the government IT space.

Yes.

But how do you define a business that should fit in Mission Technologies? What does it look like?

That's a great question. I'm glad you phrased it that way because there's a specific kind of business that we look for there, which is a technology business that is their growth rate is going to outpace the market, the normal DoD budget cycle. So you think where we are unmanned, very confident, very complementary shipbuilding, that's going to grow. AIML we're the #4 artificial intelligence, machine learning company for the DoD. That's going to grow. ISR -- C4ISR, the amount of data that's available that can be accessed and understood or distributed to customers very quickly through big data management. It's pretty amazing, and we're right in the middle of that. Cyber, Intel, LVC, which is Live Virtual Constructive training, synthetic training. It's not -- we're the #1 provider of that for the Navy. It's not doing the training. It's actually building the backbone for the training, so it's software, design software. So that's the criteria. It's technology focused, complementary to our Navy customer in some cases and a growth rate that's in excess of what you normally expect from the DoD.

So you really -- you are trying to ensure that these acquisitions do have some linkage to the Navy, which obviously is your core.

Yes. So we think solving problems for our core customer makes a lot of sense, right? When you think about distributed maritime operations, you think about training, these are things that the Navy is very focused on and Alion solves those problems. And I can't imagine not solving your primary customer's major challenges.

So with Alion, maybe you could describe to us a little bit about what you're getting out of that deal? Why it was so attractive to you? And how you're integrating it into the broader company?

Yes. So it's actually an interesting story. Alion, from a legacy standpoint, if you know anything about shipbuilding, Alion is -- was very closely linked to the Navy and did SETA work for the Navy. They were program management, technical support. And we had always kind of looked at Alion from afar because they had other elements of that business that were very attractive, AIML, Cyber, Intel, Big Data, all of that sort of stuff. That was very interesting to us. But we can never do anything with it because it was an OCI issue, right? They were evaluating our designs. We couldn't necessarily, but once they divested that part of the business, it became very attractive to us because they fit all the criteria for what we were looking at in a government in the technology space. What we've got -- there are going to be $2.6 billion this year. We have over $6 billion of bids out in technology-focused areas that we're waiting on, on awards that vast majority of those, Alion could not have bid those and HAI could not have bid those. One, Alion wasn't big enough. They didn't have the breadth and the infrastructure to deal with it, and we didn't have the capability to deal with it. So once you combine this, we think there's a lot of opportunity there, really high-quality bid and proposal and business development personnel within that space. They became leaders within Mission Technologies, really good technology organization. They know how to convert IRAD paid for by the customer into program, which is very interesting.

Well, and then how do you -- so how have you taken that or are taking that and combining it with the other pieces you have in the same space?

Yes. So I'll give you a great example of some of the -- a couple of the IRAD projects we have in place. One is we're actually creating ISR as a service, right, for unmanned vehicles. Think about that for a second. You got an unmet vehicle collecting data that can provide that ISR, right, to using big data and analytics to the place it needs to go and not actually sell the products to the Navy, but sell the service. So it's ISR as a service. That's very interesting. Launch and recovery of unmanned boats is very interesting. We're working on that to make sure that our large capital ships complement our unmanned ships. There's a lot of really interesting -- data is -- we're digital now, right? So 78 is a digital ship. The amount of data that's produced from a lifecycle management standpoint, if we use our big data tools out of Mission Technologies to deal with that and provide that to our customer, that's very interesting to them because it reduces their lifecycle cost. So there's a lot of interaction between the teams, a lot of opportunities, but we'll -- it will be a win -- it's a win if we achieve that $2.6 billion this year and achieve the growth rate we're talking about within Alion and that doesn't count any synergies between shipbuilding and Mission Technologies.

Well, one of the things, perhaps the earliest business in this space was the S.M. Stoller business.

Yes.

Now that one, because as you know, I was pretty skeptical going way back with a lot of this. But that one seemed to be a very interesting fit given your nuclear business and the environmental activities of this.

It is.

Is that an area that you would look to do more? I mean that sort of happened, but I haven't seen any building around that.

Well, the interesting thing, it was Stoller that gave us the presence on the sites, right? And from Savannah River, which we were historically at Newport News, we are on one site, right? Buy Stoller, get presence, pull it out of the shipyards and get -- put focus on it. Now we're at 4 sites. Right? So it's been successful in growing our revenue and our margin within the DOE space, and that's part of Mission Technologies. But you need to make sure that you can generate the return on any additional investments in that space. So there are other interesting nuclear opportunities out there. We evaluate them from time to time, but there's just nothing that's past the bar.

Okay. So when you look at that overall, presumably, I mean, you've got a 3% CAGR in shipbuilding. I mean what should we be thinking about here in terms of the top line?

So 7% to 9% in Mission Technology through 2024. Right? So we think the growth rate is going to be in excess of what you'd see just the normal DoD kind of growth rate at 7% to 9% through 2024 and 3% in shipbuilding. And so we're in a pretty interesting place right now.

Well, when you put all of this together, I want to take this back to cash because you all are generating a very healthy amount of cash. Can you talk about, you're at this kind of inflection point in cash. You talked a little bit about CapEx earlier. How should we think about cash flow going forward?

So we still are confident and our guidance is consistent with the $3.2 billion that we talk about, which is I think $300 million to $350 million of free cash flow this year because there are some nonrecurring things that we're paying back that were advanced because of COVID, FICA and the progress payments and stuff like that. It's going to naturally lift. It's if you do the -- it's a pretty simple model, if you run the top line on our margin guidance and talk about capital being reduced, which it will, put pension into the mix. We guide pension cash versus cash costs and net cash related to pension and then working capital down to our historic rate between 6% to 8%, it's going to grow -- we're going to meet the $3.2 billion margin cash -- free cash flow commitment. Now with that free cash, we're going to pay down debt over the next couple of years. We like to be investment grade. We are now. We want to stay that way. Our customer likes us to be investment grade. We like to be investment grade. So we're going to reduce our debt over the next 2 years. We're going to continue to increase our dividend annually if the Board thinks that's the right thing to do. We're committed to that to increase our dividend. And then we'll evaluate M&A opportunities if we can generate a return, but I don't see anything as significant as Alion over the next couple of years, it would be kind of a niche capability. And then if we can't find anything, we'll just give the cash back to shareholders.

I think some people would like that.

Well, the good news is I think it's a natural lift. I think the model is -- I think the model is pretty simple in '23 and '24. We have to execute it.

So here is, I think, one of the fundamental questions about HII stock is that you look at that, the current price, it's a great free cash flow yield. Now do you look at -- when you look out there, do you see this kind of cash flow as really a sustained opportunity for the long-term, these kind of levels?

They have to be. We have very good cash terms with our customers. Navy pays very well, very good financing. Capital, I think, is going to be at a reduced rate for a while. Now if there's a significant opportunity somewhere where we have to invest some capital, we'll have to evaluate it. I don't see it out there. I don't see a significant recapitalization of our shipyard. They just don't. I just don't see that right now. We've built -- they're full, right? I don't have any my space for it, right? So I think it's going to migrate to that $800 million to $900 million of free cash, and it's going to be like that and growing from there.

Well, we've just got a couple of minutes left. Maybe to finish up, maybe you can just take us through when you look at the next 12 to 18 months, what are the things that are your priorities?

My priorities are executing in shipbuilding right now and working those programs to make sure and we get the returns within all our ship programs, Newport News and Ingalls and working that operating system and being disciplined on the fundamentals in shipbuilding. That is a CEO should be maybe a big thinker, I'm -- I do that too. But right now the best thing I can do is ensure that we execute in shipbuilding and then ensure that we grow within Mission Technologies and take advantage of all the opportunity we have, and there's a lot of opportunity in Mission Technologies.

Great. Well, Chris, thank you very much for being here. I really enjoyed it.

Thanks so much. I appreciate it.