Good day, ladies and gentlemen, and welcome to the Q1 2019 Huntington Ingalls Industries Inc. Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Dwayne Blake, Vice President of Investor Relations. Dwayne, you may begin.

Thanks, Nova. Good morning, and welcome to the Huntington Ingalls Industries First Quarter 2019 Earnings Conference Call. With us today are Mike Petters, President and Chief Executive Officer; and Chris Kastner, Executive Vice President, Business Management and Chief Financial Officer. As a reminder, statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to safe harbor provisions of federal securities laws. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also in their remarks today, Mike and Chris will refer to certain non-GAAP measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website. We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at huntingtoningalls.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I'll turn the call over to our President and CEO, Mike Petters. Mike?

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on the call. So let me share some highlights from the quarter starting on Slide 3 of the presentation. Sales of $2.1 billion for the quarter were 11% higher than 2018, and diluted EPS was $2.85. New contract awards during the quarter were approximately $20 billion, including the historic $15.2 billion contract for the construction of CVN 80 and CVN 81. And as a result, the backlog was approximately $41 billion at the end of the quarter, the highest level since becoming a public company in 2011 of which $20 billion of that is funded. Now turning to Washington for a moment. We were pleased that the President's budget request strongly supported shipbuilding again this year by continuing investment in submarines, destroyers, aircraft carriers and amphibious warships. We were particularly pleased by the proposed increases in production rates for selected programs as well as continued investment for the Refueling and Complex Overhaul of CVN 74 USS John C. Stennis, which we expect to arrive at our Newport News shipyard in 2021. Now similar to previous budget cycles, we will continue to advocate for acceleration of amphibious warship production to enhance affordability by better leveraging our hot production lines and supply chain. We look forward to working with the Congress and our customers during this budget cycle and stand ready to build the Navy our nation needs. Now I'll provide a few points of interest on our business segments. At Ingalls, the team delivered DDG-117 Paul Ignatius and completed acceptance trials on NSC-8 Midgett. Now note that the work on Midgett has also been completed, and the ship was delivered to the Coast Guard just yesterday. For LHA-7 Tripoli, the focus continues on integration and testing to support planned trials and…

Thanks, Mike, and good morning. As I review our first quarter financial results, you may follow along with the slide presentation we posted this morning on our website. Beginning with the consolidated results on Slide 4 of the presentation. Our first quarter revenues of $2.1 billion increased 11% compared to the same period last year, primarily due to higher volumes in aircraft carriers and Navy nuclear support services at Newport News. Operating income in the quarter of $161 million decreased $30 million or 15.7% from first quarter 2018, and operating margin of 7.7% decreased 245 basis points. These decreases were primarily driven by an unfavorable operating FAS/CAS Adjustment and lower risk retirement at Ingalls. Turning to Slide 5 of the presentation. Cash from operations was $11 million in the quarter, and net capital expenditures were $74 million or 3.6% of revenues compared to cash from operations of $120 million and $73 million of net capital expenditures in the first quarter of 2018. Additionally, we contributed $10 million to our pension and postretirement benefit plans in the quarter, of which $1 million were discretionary contributions to our qualified plans. We also repurchased approximately 184,000 shares at a cost of $36 million and paid dividends of $0.86 per share or $36 million, bringing our quarter end cash balance to $51 million. At quarter end, we had drawn $212 million on our revolving credit facility. We utilized the credit facility to fund our shipbuilding capital programs, share buybacks and dividends and the acquisition of Fulcrum. We expect to reduce the amount drawn on the credit facility as we move through the year. Moving on to Slide 6 of the presentation. Ingalls revenues in the quarter of $584 million decreased $1 million from the same period last year. Ingalls operating income of $46 million…

Thanks, Chris. [Operator Instructions]. Nova, I'll turn it over to you to manage the Q&A.

[Operator Instructions]. Our first question comes from the line of Carter Copeland from Melius Research.

Mike, I know you don't -- you guys don't provide quarterly guidance and that's not what this question is meant to get to. But the backlog spike that you have with some of these awards is really sort of unprecedented. And so when you think about the coming quarters, as you get some of this work, you get these contracts kind of flowing. Is that going to have a short- to medium-term impact on revenues as you get that cost into the system that we should be aware of? Just want to make sure we get our expectations right on that because it's a lot of work.

Yes. I mean it's not -- I mean it's a historic moment for the business, frankly, to put that much backlog in, in one quarter, and it's incredibly exciting and creates stability for us for -- really for the next 10 years. And so we're very, very excited about that and pleased that we've been able to work our way through it. You bring up a good -- we don't just go like full board production on these programs on day one, we sign the contract, and there is a very graceful period of time where we slowly ramp up the program, starting from material procurement and then the application of labor and the fabrication. And so there's kind of a bell curve on any given program. It's kind of a bell curve, if you will, in terms of revenue that comes with it. The labor piece of it is on the second 2/3 of the program. Material procurement is kind of on the first 2/3 of the program, and there's a nice, graceful shape to that. Yes, because we have a two carrier contract. We're going to actually be able to coordinate labor from the first ship to the second. In fact, we're looking now to coordinate labor from that the Kennedy to the enterprise, so from the ship we have under contract to the first of the two ship contracts. So it just creates a very graceful move in terms of the revenue for the program for a long period of time. There will be a ramp. There will be a build up as we start to move ahead. And you'll see that it won't be in the next couple of quarters, it's going to happen over the next few years. You'll see that happen. When you take…

Our next question comes from the line of Myles Walton of UBS.

I was wondering on the polar icebreaker contract, that was, I guess, earlier -- awarded earlier the last week. Can you comment on kind of your pursuits there and if you had higher aspirations? I know you had done one in the past at Avondale but, obviously, with that plan going by the wayside, I'm curious if you had that as a aspiration. And then secondly, Mike, maybe you can comment on the M&A activity within technical services -- Technical Solutions? And give us a perspective on how much more capital you kind of want to draw into that through acquisition and kind of what's the -- what's an endgame a few years out for that business?

Okay. Regarding the icebreaker, we were involved with the icebreaker from a technical standpoint, and we're interested in the program. But as the program evolved, we became -- it appeared to us that the alignment of our capacity, the budget and the requirements just didn't really match up well for us. And so while we stayed involved, technically, we made that much less of a priority for our business. Regarding Technical Solutions, we've been saying for a while that we're interested in discrete capabilities and the two most recent acquisitions are directly related to discrete capabilities that our particular customers in those areas are very interested in. We're going to continue to pursue that. Our review is that in the area -- in some of the areas that we're in, in Technical Solutions, particularly the UUV space, the DOE space and Intel communities and the cyber communities, those are areas that -- those are really for us. They're -- if you have the right capabilities, you're going to get the work. And so we're going to continue to use our balance sheet to build capability in those spaces. What we're not doing is we're not trying to go out and just build a lot of scale so that I could tell you, Myles, that three years from now, it's going to be an X billion dollar business. We're going to -- where we want to be 3 to 5 years from now is we want to be the company that our customers will call when they have a really hard problem to solve, and they don't have anybody else that can do it. So that's why we're really focused on building discrete capabilities in those areas.

Okay. And just to round that out, though, you're focused on staying in the professional services end of the spectrum as opposed to your product solutions as an endgame, is that right?

Yes, I'm not exactly sure how to answer that. I mean I think we're looking for the things that our customers are looking for. We're not particularly interested in like commodity-type services or interested in providing solutions. If that means that the customers is looking for some kind of platform or product, then that's what we'll provide. If that means they are looking for some kind of IP of some kind, then that's what we'll provide. So it's kind of a case-by-case basis.

Our next question comes from the line of George Shapiro from Shapiro Research.

Can you hear me now?

George, great to hear from you.

I wanted to know what were the EACs? And in the case of Ingalls, was the base margin lower? Because it's hard to explain all of it just by lower EACs. So if you just go through that a little bit.

Sure. The negative adjustments were $37 million, the positive were $31 million. Newport News is 2/3 of each of those. And Ingalls was negatively impacted in the quarter, approximately $10 million, related to some contract adjustments related to EPA clauses, primarily on the DDG program where we had some negative growth and the labor and the seas. So it's unfortunate, but as Mike indicated, we've a very detailed process to manage our EACs in the quarter. This fell out, and we had to book the impact so you can see the negative adjustment related to EPA and the seas.

Okay. So the base margin then at Ingalls, which has been running around 8% or a shade less hasn't changed that much, it just reflects the negative numbers this quarter.

Not materially, no. And as Mike indicated, you just have less risk retirement events.

Okay. And then just maybe one for Mike. The lower volume in DDGs and the fact you delivered the 117 with no pickup is probably due to being late. Is that the expectations going forward that these DDGs are going to be less profitable than the prior group?

I think that -- I'm not sure I would say that that's with the expectation is. I mean we had to roll 117 from fourth quarter to first quarter. But I think that the fundamental issue is, can you get into a rhythm on any program? Can you get into a rhythm and then just go and be as efficient as possible? With award of the block contract that we had for destroyers last fall, that creates a pipeline of destroyers now for a pretty good run. And while there's a little bit of technical insertion there, we are looking to do pretty well on those contracts. So it's just a matter of getting into the rhythm of it. There's no question that the recovery on 119 from the incident last month is going to be -- that's just a matter of got to get that done so we can get the rhythm started. So no worries about the cost recovery, as Chris pointed out. But I think the issue now is going to get -- is to get that whole program into the production rhythm. And once we do that, I think we'll be fine.

Let me just follow-up a little bit, one quick one for Chris. Chris, so you said there was, I may have misheard you, but minus 10 net EACs at Ingalls?

No, it was a negative 37 cume adjustments, positive 31. 2/3 of each of those adjustments were Newport News. What I added was there was a $10 million negative impact related to contract clauses related to EPA and the seas at Ingalls.

Our next question comes from the line of Jon Raviv of Citi.

This is Colin on for John. Can you just talk a little bit about your capacity to pursue the frigate opportunity? I saw that getting -- sliding into FY '20. And if you have a sense of the end reward being a sole win or a split buy?

Yes, so we've actually made some investment in footprint at Ingalls to be able to support fabrication of the frigate program. And it comes at a time as we wind down the end of the NSC program. We start to build up the startup of frigate program. So from a capacity standpoint, it kind of -- that is right into our program -- into our business in a very productive way. It's a Coast Guard program, kind of, move in towards the Navy program side. I'd hate to say that, that's a hot production line, but it's pretty warm. And so we would be in a pretty good shape from that. And so capacity and shipyards is part of the -- it's partly about capital, it's also partly about workforce and the large part about workforce. And so we have a ready workforce there to go do it. And I'm pretty ready for that program to go forward. As far as how the program is going to come out, there've been some changes from a big contract for 20 ships to now maybe something different than that. So we're just staying engaged with trying to help the Navy get through this as efficiently as they possibly can. We're intensely interested in the program, and we expect to be competitive.

Okay. I appreciate the color on that. And then if you're -- if we're thinking about capability versus cost on that program, have you had any indication from the customer on what they're leaning towards, whether to be higher under the capability spectrum or something a bit smaller?

Well, kind of like every one of us, we want to get as much capability for the dollars as we can. And the beauty of the competition is that, that's a way for companies to actually show how to create the best bank for the buck. We think we've got a good package. We know that they certainly have some cost constraints. But at this point, we're optimistic we can meet their requirements in our cost constraints.

Our next question comes from the line of Seth Seifman of JPMorgan.

So I was wondering if you could talk a little bit about how's your revenue growth? And kind of in light of what you said earlier about, how long it would take for work on the two carrier buy to ramp up? You have a long-term target out there. The front-end of it, you're clearly outperforming, would suggest the risk is on the back end, but then you've kind of talked about that this is a ramp on the carriers that you have on the back end of it. So what are you looking to see before gaining some more confidence of that at your revenues?

Well, we've had a -- I mean we've had a pretty incredible couple of years in shipbuilding budgeting. The historic level of shipbuilding, frankly, for most of my career, the shipbuilding account has been somewhere around $15 billion a year. And for the last couple of years, it's been just short of $24 billion or $25 million. And the quest this year is in that range again, too. And the question that -- we've talked about this before, but the question for us is, is this the new standard? Are we going to be in this $23 billion, $24 billion, $25 billion range for a while? Or are we going to, at some point, fall to that $15 billion level? And the reason that's so important for us is because it all comes down to how does Columbia get paid for. If Columbia get paid for and the budget is at $24 billion to $25 million, and that means all the other programs that we're working on continue to get funded, you continue to see follow-on procurements after the first block of frigate, there'll be another block, after the first block of destroyers, there'll be another block, after -- we've just now begun Flight II of LPDs. You can see the future on that, you can see where the LHA can fit in. You can see all of that. The question is are you going to stay at this level or are you going to come back? And we're still in -- the law of the land right now is that sequester counts. And I mean we want to see that there is going to -- there's going to have to be a sustained commitment to this current level of SCN account for us to believe that the follow-on programs are going to get funded on time and efficiently, supporting half production lines, supporting labor buildups and supporting the rhythm of the industry. At this point, we're hopeful. I guess it's the best way to put it. But we've been here for a while, we know these things can be cyclic. And the advantage we have of having these things under contract is, I think we've said about half of the backlog is already funded. So that gives us a pretty good base for quite a while over this time in front of us. A question is going to be, are the follow-on programs going to pop up in time? And that's what we'd like to see. So we need to see how we get through the next couple of years.

Yes, as Mike indicated, the pace of the amphs is -- down at Ingalls are very important to the long-term growth rate of the company. When LHA 9 happens on an efficient basis and the LPD Flight II, the pace and when those are -- when those come to are very important.

Our next question comes from the line of Gautam Khanna from Cowen and Company.

I wanted to ask if you can just maybe outline, in 2019, some of the major risk retirement events by quarter. Just anything you can give us so that we get a sense for when we might see risk register improvements and alike so that we sort of calibrate margins correctly.

Well, Gautam, I'll start. In Newport News, we obviously have the delivery of the Flight III submarine midyear. We had delivery of the LHA 7 midyear. I can't -- I don't want to give it to you by quarter. We just delivered NSC-8. So now we're just moving to the production cycle on the balance of the shifts. We also have the launch of CVN 73, and then towards the back end of the year, the launch of CVN 79.

I mean it's across all the programs. There's milestones spread over the remainder of the year. We -- I don't know that we would -- we've ever broken up a quarter like that.

I appreciate it. That's helpful. And then a follow-up, just in terms of acquisition or cash redeployment, I should say, are you guys still on the hunt for M&A in the Technical Services business? Or are we -- should we expect that most of the cash is just going to go to buybacks? And like you said the 10% dividend increase annually. Just curious on how we should think about use of cash going forward.

Well, our strategy hasn't changed, Gautam. Thanks for the question. It's we're going to invest in our shipyards $1.8 billion to $1.9 billion over the five year period, and we're going to return substantial free cash flow back to shareholders, including a 10% -- at least a 10% increase in the dividend over the next couple of years. And then if we see opportunities for M&A, primarily in the TS space in the markets Mike indicated, we'll evaluate them. But we have a very disciplined process to evaluate M&A opportunities prior to executing them. But we're -- I don't know if hunt is the right word, but we continue to evaluate opportunities.

Yes, I would add, hunt is the wrong word. It's -- we are just aware of the capabilities that our customers want, and we have the financial flexibility to move in those areas should it make sense. It's -- quite frankly, if you look at the valuations there, it doesn't make a lot of sense to us to just go and acquire things for financial reasons. There needs to be some strategic capability thing that we're intensely interested in to make it worth the acquisition. And that's why I keep coming back to we are not trying to build scale in that space. We're trying to build capability in very discrete areas.

Our next question comes from the line of Kristine Liwag of Bank of America.

For the $20 billion award for the CVN 80 and CVN 81, when do you expect to see a jump in revenue for this? And also since the two carrier buy when you start booking the initial margins -- when you started booking the initial margins of this program, should they be higher than it would have been if you only had one carrier buy? Or should it be lower because there's some sort of volume discount?

Well, we talked earlier about, there's a very graceful ramp up in the production of the programs of those two contracts. The revenues will gradually increase, and frankly, we'll feather on to the revenue profile of the Kennedy -- the enterprise and the Kennedy will feather together. So I think if you are looking for any sort of prompt jump in the revenue profile, you won't see that. Secondly, if you are looking for some sort of prompt jump in the return on sales profile, you wouldn't see that either because now you have a contract that, really, it goes all the way out to 2032. You're going to be at the very early part of that. Clearly, there's a lot of risk that goes along with the 2032 contract. And so we put all of those things, and we just don't take credit for risk retirement until we actually retire the risk. And as we've been talking this morning, on the beginning of contracts, milestones are spaced out and pretty far apart. So we will book conservatively on the program to start with, and we will take credit when we have earned it. And that's kind of the approach we'll take.

That's really helpful color. And may be a follow-up question on the Virginia-class. Can you quantify how much of the margin headwind you've booked as you transition from Block III to Block IV and Block V? And when does that headwind stop?

We don't comment on specific margin rates on specific programs. I think we'll just stay with the 7% to 9% this year in shipbuilding, then 9% to 10% when we get into 2020.

And we don't have the contract today for Block V yet. So where we are is we're delivering the last ship of Block III, and we're executing across the business in Block IV.

Our next question comes from the line of Joseph DeNardi from Stifel.

Mike, can you just remind us what some of the assumptions are that drives the margin improvement from this year into next?

Well, it's just a matter of -- we're working through the volume of the early programs, and we'll start to see more and more milestone opportunities to take credit for the risk that we're retiring today. That's really it. The backlog increase over the last 18 months will start to mature, and we'll have more and more -- this month -- this quarter, we did not have very many milestones to hang our hat on. As time goes forward, we'll have more and more of those. And the way we see this business coming together and executing and the way we're executing today, we believe we're firmly on track for that number for next year.

Okay. And then you referred to the block buys as an historic moment for the company. I think is it historic event for shareholders too? Like in the context of you've never had this much visibility into carrier construction, so margins on carrier constructions longer term should be able to get to a level that they haven't been in the past. Is that a fair way to think about it or not?

Well, that's certainly our objective. We believe this is good for everybody. It was -- it's good for the industry, it retires a lot of risk on the program by being able to move from one platform to the next, whether that's you're talking about labor or you're talking about the supply chain. The fact of the matter is that the two carrier contract actually retires risk, retires some of the supply chain risk in the Columbia program and in the Virginia-class program. So from that standpoint, it was all good. The job now is for us to go and capture all of the opportunity that's out there. We have great visibility, we have great leadership, we have great opportunity with our workforce and with our suppliers and with our customers. And as I say, it's put up or shut up time. And so for us, this is what we've been angling for quite a while. We're excited about the opportunity. It's going to play out over a period of time. So for folks who are interested in what might happen in a quarter, this is going to be a little bit more of a warming trend that you're going to feel. And then when you look back over several quarters, you're going to say, oh, my gosh, this is a whole lot different than it used to be. So that's kind of the way this will -- that's the way shipbuilding plays itself out, and that's the way this one will play itself out. But yes, we're really excited about it.

And our next question comes from the line of Pete Skibitski from Alembic Global.

Sorry if this was asked, I got on a bit late. But Mike, I'm wondering what you thought when you first looked at the fiscal '20 budget and the out years and you saw some of this unmanned money in there. And I think the big program is the LUSV, I believe. How do you guys think about that in terms of strategy? Do you view it as an opportunity for you because it's really a ship? Or do you view this, hey, this is something that may be kind of compete with what we're doing right now? Or do you say, hey, we've got tons of work already, we're going to kind of ignore this type of thing? How you guys are approaching this all unmanned move that maybe is kind of starting out on?

Well, first of all -- and Pete, it's a great question, but I would just point out, our job is to build the Navy the nation needs, not for the nation to buy the Navy we can build. So -- and I do personally believe that no matter what, anybody wants to do. If we're not moving towards a more unmanned future, we're going to miss an opportunity here. And so that's why we've been very focused on in building our unmanned capabilities. We went from -- eight years ago, we didn't have an unmanned capability to speak of. We have now -- we're part of the Boeing team that's going to be producing the XLUUVs. We're going to be actually manufacturing that product to support Boeing. That has given us a pretty good insight into where the UUV space is going. Capabilities that have been created and will be created for the UUV space are going to feed right into the U.S. fee space, so we're intensely interested in that space. I don't see them as being competitive to stuff that we're doing today. Frankly, if that's where the nation needs to go, then we need to be there and make sure that we get there with them and lead the way. So as we talked a little bit before about the strategy in Technical Solutions. We've -- as I said, we've kind of gone from cold iron on the unmanned space to a pretty good position on UUVs now, and we're intensely interested in the future for unmanned platforms across the whole range of Navy ships.

Our next question comes from the line of Robert Spingarn of Crédit Suisse.

Just continue on the talk about carriers, Mike, with the two carrier buy since, I guess, in theory the two ships are being spec-ed in tandem, I would imagine where a lot of this cost savings comes from. Is there some increased risk of design changes on ship number two? Just because -- I don't know, is it a 3.5 year or 4 year centerline that there could be some technology evolution even in the time period that short?

Well, there is always -- I mean, frankly, on every one of the platforms we built because of the -- whether it's 4 or 6 or 8 years to build it, technology continues to evolve, and the war fighters are -- they're always very interested in the latest technology. The question is, how do you mature that technology and then insert it into the platform? In some of the programs where you have multi-ship procurements, there'll be a block insertion of technology so that technology will develop in parallel to the program, and then when it's mature, it gets inserted to DDGs, have a great track record of inserting technology over the life of the ship -- over the life of the program. The submarine program also has a really great track record of inserting technology in terms of block upgrades. I mean the carriers have kind of been because they're eight year platforms, and quite frankly, since the last two ship contract we had was back in 1988. In the 30 years since then, every carrier we built for a while felt like it was the last carrier. And so as you kind of got to the end of construction, there would be real decisions about do we insert the technology now or do we deliver the ship and then try to insert the technology after delivery? The beauty of the two ship contract is that we're going to be able to work our way through that kind of in a hybrid mode where we're going to be allowed to mature technology in parallel with the construction. If is the technology is mature enough to insert it into a construction phase, we will. If it's not mature enough, then we won't. And so I don't think that by the second ship or that contract, we're going to -- I was the program manager on the second ship of the last two ship contracts, and at the very end of that, that was the -- Truman was the second ship to be delivered. At the end of that, we were making really important decisions about, hey, this is technology that we're going to insert after the ship is delivered because we know how to build this and it'll be more efficient. So there's just a stability that, that creates will allow us to get the technology right. So I'm not worried about that as a major risk.

If they do make some design changes, though, for ship two, is that on them or on you?

Well, it's on them, I mean, if that's the contract that we have. And quite frankly, what I think will happen is that if there's a desire to change the -- you may decide that you want to do something different with the volume of the carrier than what we're doing today kind of like what we did between LPD Flight I and Flight II, I don't know that it's going to show up in the second ship. I think it shows up in the next contract.

Okay. And then the other thing I wanted to ask, maybe this is for Chris. But the multiple you paid for G2 at Fulcrum and whether those businesses, it looks like they contributed in the quarter. But we don't notice it on the operating income line. So I wanted to ask you about that contribution. And how we should think about the margin profile for Technical Solutions going forward?

Yes, so both of those were about 9x when you take in the consideration of tax attributes of each. So we think we've got a very fair price for each. We still are confident in the 5% to 7% return on sales in 2020 for TS. I would add that for modeling purposes, there's about $15 million of intangibles this year related to the trend -- to each of those transactions combined. So that should help a bit in your models.

Our next question comes from the line of Noah Poponak of Goldman Sachs.

Mike, when you're speaking to the shipbuilding margin, you've expressed the confidence in returning to 9% to 10% next year. I guess when I look at those schedules, and you've alluded to the margin stepping down this year because the basic mix shift to newer work, less mature work. And when I look at the shipbuilding schedules, it looks like you'll keep mixing down to more -- higher mix of less mature work for a few years. And it's hard to go ship-by-ship on an earnings call, but I guess just bigger picture, philosophically, given how much work you've alluded to having and given how long cycle the business is, I guess why would it only be one year that you would mix shift down and then not have that continue to happen for a longer period of time?

Let me start, Noah, this is Chris. We absolutely have a maturing of work in, especially, Newport News. We you 79 CVN 73 and then the Block IV, both maturing. So fundamentally, the majority of that uplift will be related to Newport News programs maturing in 2020. Added to that, you have two ships at Ingalls LPD 28 and 29, they're at the front-end and performing very well. So we're very confident in those as well. So you're right, I don't want do a program review ship-by-ship on earnings call, but fundamentally, the maturing of those programs at Newport News, coupled with the introduction of the new programs, and we still are very confident in the 9% to 10% return on sales.

And I would just add, Noah, that I know this is "what have you done for me lately" business. But if you just go back a couple of years, you'll see that Newport News has been mixed down for a couple of years now, working their way through all of these new work. And so what they've been doing as they've been retiring risk early on and programs to get ready for some of these milestones that we see picking up next year.

Is Ingalls more on the front-end of that curve of mixing down when you look at each ship there?

I think that's a little bit of what you're seeing, yes. And then you go to the budget and you see that LHA 9 has pushed out, and you see the LPDs have been stretched a little bit, and that's been the thrust of our engagement. We are very supportive of the President's budget in shipbuilding, but they could have done better in amphibs. That's -- that for us is how you kind of mitigate some of that. But yes, I think Ingalls is -- we don't expect it to be as dramatic as it was in Newport News because they have more programs, they have more multiyear stuff, their ships are smaller, and they all take this long to kind of get moving. But Ingalls has had quite a run, and they are kind of going through the shipping of gears right now to get ready for the next run.

Should we expect the Ingalls margin to be up or down in 2020 versus 2019?

Yes, I don't want to get into specific margin rates. We just think 9% to 10% in 2020 makes sense.

Okay. And then in the 2019, 7% to 9%, is that including an expected CVN 79 launch EAC?

No.

Okay. So it's 7% to 9%, I guess, whether or not that happens?

Correct.

Okay. And then just one more on cash flow. You had a large positive change in working capital in the fourth quarter, and it looks like basically just a reversal of that in the first quarter. So Chris, what are you thinking for working capital for the year and the cash flow model? And I guess, kind of update us maybe on a multi-year basis, how sustainable you see having positive change in working capital?

Well, you got it right in Q1, right? We had an exceptional Q4 last year. I think it's a bit early to update the metrics that I provided on the year-end call relative to cash flow. So we'll just move through the year and update those as we get later in the year. The team's going to work very hard at working capital, they did an exceptional job in Q4 '18, they know the objectives. And unfortunately, in shipbuilding from time-to-time, things work perfectly like they did in Q4 and then sometimes not so perfectly. So with a small amount of contracts and large invoices, they can move across the period. All I can say is we'll be on it to maximize working capital as we move through the year.

Our next question comes from the line of Krishna Sinha from Vertical Research.

I see this morning that you guys won a $932 million contract to provide yard services for the Littoral combat ships at Ingalls. Can you just talk about your expected revenue flow-through on that program for the next few years?

Yes. So it's a good question, and we're really excited about the award. Ingalls team did an exceptional job competing for that, and I know that we've executed very well through a partnership with our TS organization, by the way, which is a synergy that we really think is appropriate and we're excited about. But think about the revenue, it's -- so you can't just divide it by six. It's -- we think potentially around $100 million a year of sales with the slow ramp here. That's really a budgetary number that's executed annually, and there are -- at times, you don't receive the full amount. So I think $100 million -- right around $100 million annually for the next five years.

Okay. And then you mentioned earlier being a partner with Boeing on their unmanned ship capability. Can you just talk about the cadence on those programs? And what we can expect in terms of revenue for you guys as you help build out autonomous shipbuilding?

Well, that's a great question. I think every chart that you look at with unmanned in it starts to look like the chart from 20 years ago with unmanned aviation where there is kind of a slow, steady build momentum starts to build and then suddenly, there's knee in the curve, and everybody has got drones and everybody is flying unmanned everywhere all the time. In the unmanned ship area, especially in the unmanned undersea space, we're still in that slow, steady build of capability and experience. The physics of being underwater are just -- we haven't figured out how to repeal those logs yet. And so communication is challenging, autonomy is challenging, navigation is challenging. All of those things are big challenges that we're working our way through. At some point, I think everybody believes that there is a knee in the curve, nobody really knows when or where it is. And so for us, it was really important for us to get into the space in a pretty noticeable and important way before we get the knee in the curve. And Boeing did -- Boeing made a major investment with Eco Voyager to demonstrate capabilities in this pretty harsh environment. And we made an investment in Proteus, which is either a manned or unmanned vessel that we run out of Panama City to learn about the space. And one thing led to another and Boeing turned to us and said, can you help us manufacture a product? And so at this point, the Navy has asked Boeing to manufacture five of these. And so -- and we're working very closely in support that Boeing is going to make five, and we're working with them to do that. But we're still at the point now where we're doing the slow, steady build. We're not at the point yet where we've hit the knee, and everything is going to go to take off. And so for us, it's still about building that experience.

We have a follow-up question from the line of Joh Raviv of Citi.

So when you think about backlog growth, how does that tie into your risk-adjusted 3% sales growth target through 2021?

Well, it's the same. I mean a lot of the backlog we assumed as we stepped out and said, okay, what are the -- how do we see this business moving ahead? We assume some of these contracts, and so far so good, I'd say.

Our next question is a follow-up from the line of George Shapiro of Shapiro Research.

Yes, I just wanted to put together the comments about getting more mature. So I went back and looked, there were total adjustments in '17 of about $200 million that were up to about $110 million in '18. So can you give us -- will the expectation for this year be lower than '18? And then for '20, we see resumption as we've got more mature. I mean is that kind of the thought process?

Yes, I don't want to -- George, I don't want to necessarily track to the cumulative adjustments. And I think post call, maybe Dwayne and I can walk you through what you're referring to that -- I think we're just still comfortable for 7% to 9% this year and 9% to 10% in shipbuilding next year. With this year, more adjustments or more opportunities for adjustment in the back half of the year.

And our next question is the follow-up from the line of Seth Seifman from JPMorgan.

I wanted to follow quickly on one of the points about margin that Noah had made earlier. And I asked about Newport News, it definitely appreciated the fact that they've had mix headwinds for the past few years. But if we look at -- some of the disclosures you guys have had from the proxies, it seems like Newport News has kind of struggled to reach the internal targets that you guys have, which presumably take account of those mix headwinds. And so as you think about the -- in that context, what sort of gives you the confidence in the margin expansion that's coming there, especially in 2020? It seems like it should be a big year for margin expansion at Newport News.

Well, I'll start with that. We've had several transitions at Newport News over the past couple of years. We've had a product transitions, maturity of program transitions, we have leadership transitions. We are now digitizing the shipyards. So there've been a lot of moving parts. But as we move forward with against this backlog, a lot of that is starting to settle down. And a case in point is that we originally expected that we would be launching Kennedy in the first quarter of next year. Program team has recognized and has pursued pretty aggressively the opportunity to have a quality launch before the end of this year. I think that speaks to some of where we're going with that. Now where we are on that is there is a lot of pain happening down there. And if you want to go to see the ship and you stand still for more than a couple of minutes, you're liable to get painted yourself. But they're moving ahead, and that's the sign of where the maturity of the entire -- the technology, the capital, the leadership team, the workforce and the contract mix, we think, is coming together very nicely. So we're pretty confident on that, very confident on that.

I'm showing no further questions in the queue at this time. I'd like to turn the call back over to your President and CEO, Mike Petters, for closing remarks.

Well, thank you all for joining us on the call today. As I said, we had a -- we are very excited about the future of the business. We had a really clean quarter. We've got a lot of things done this quarter that set us up for the future, and we look forward to seeing you and appreciate your interest in our business. Thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.