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Huntington Ingalls Industries Inc (HII) Q1 2019 Earnings Call Transcript

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Huntington Ingalls Industries Inc  (NYSE: HII)
Q1 2019 Earnings Call
May. 02, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen, and welcome to the Q1 2019 Huntington Ingalls Industries Inc. Conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (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.

Dwayne Blake -- Vice President-Investor Relations

Thanks Nova. Good morning and welcome to the Huntington Ingalls Industries First Quarter 2018 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 facts are considered forward-looking statements and are made pursuant to Safe Harbor provisions of Federal Securities Law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also in the remarks today, Mike and Chris will refer to certain non-GAAP measures, reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that 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?

Mike Petters -- President, Chief Executive Officer

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 complexed 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 warships production to enhance affordability by better leveraging our high 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 delivery this fall.

And finally, the team is assessing the impact of the incident that occurred during delivery of the new floating drydock at the end of March. DDG 119 Delbert D. Black was damaged, as well as our generator testing barge and the new drydock. Now we are working with all the related stakeholders to create a path for recovery of the direct and indirect costs associated with this incident. But I want to take a moment to personally thank the Ingalls Incident Response team for their swift action that mitigated a damage to the ship in our property, and more importantly, resulted in no major injuries to our employees.

At Newport News, the team is on track with ship erection and painting activities on CVN 79 Kennedy to support launch planned for the fourth quarter of this year. The ship is approximately 91% structurally complete with 406 of 448 lifts joined together in the drydock and approximately 58% complete overall. On the submarine program activities on SSN 791 Delaware are focused on compartment completion, system turnover and test progress to support planned delivery in the third quarter. At the same time Block IV boats continue to perform in line with our expectations, while Block V contract negotiations are ongoing with that award expected later this year.

For the Technical Solutions segment, in addition to closing the Fulcrum transaction during the quarter, the team received several key awards including the USS Rushmore selected restricted availability at San Diego shipyard that expanded the backlog to $1 billion.

In summery, capture of key contracts continues to increase our long-term sales visibility and as a result, backlog has now expanded to a record high of over $40 billion. All the elements of our path to 2020 strategy are on track and our focus remains on execution in the shipbuilding business and integration of the recent acquisitions in Technical Solutions. I am confident that all of these activities will continue to produce long-term sustainable value for our shareholders, our customers and our employees.

And now I will turn the call over to Chris Kastner for some remarks on the financials. Chris?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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 four 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 five 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 post-retirement 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 six 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 in margin of 7.9% in the quarter were down from first quarter 2018, mainly due to lower risk retirement on the LPD program.

Turning to Slide seven of the presentation. Newport News revenues of $1.3 billion in the quarter increased 16.9% from the same period last year, mostly due to higher volume in aircraft carrier, our RCOH programs, aircraft carrier construction, and Navy nuclear support services. Newport News operating income of $78 million and margin of 6.2% in the quarter were up year-over-year primarily due to volume increases in RCOH and carrier construction. Additionally, prior year results were negatively impacted by the one-time bonus payments related to tax reform.

Now the Technical Solutions on Slide eight of the presentation. Technical Solutions revenues of $257 million in the quarter increased 10.3% from the same period last year, mainly due to the acquisition of G2 and Fulcrum. The results include a full quarter of G2 performance which contributed revenue of approximately $7 million in the quarter and only one month of Fulcrum on performance, which closed in late February and contributed revenue of approximately $13 million in the quarter.

Technical Solutions operating income of $5 million in the quarter increased $3 million from first quarter 2018, primarily as a result of positive nuclear and environmental joint venture performance. Finally, we continue to expect that we'll finish the year with shipbuilding margin in the 7% to 9% range with risk retirement events weighted toward the second half of the year. We also remain confident that we will return to shipbuilding margin in the 9% to 10% range in 2020.

From a cash deployment standpoint, we're on schedule to invest between $1.8 billion and $1.9 billion in our shipyards, increase our dividend at least 10% annually through 2020 and utilize share buybacks to return substantially all free cash flow to shareholders from 2016 to 2020. In this regard, through the first quarter of 2019, we've returned 117% of free cash flow to shareholders.

That concludes my remarks, I'll turn the call back over to Dwayne for Q&A.

Dwayne Blake -- Vice President-Investor Relations

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Carter Copeland from Melius Research.

Carter Copeland -- Melius Research -- Analyst

Hey, 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.

Mike Petters -- President, Chief Executive Officer

Yes, I mean, it's not -- I mean it's a historic moment for the business frankly to put that much backlog in one quarter and it's incredibly exciting and creates a 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 bore production on these programs on day one, we sign the contract and then 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 in the fabrication, and so there's kind of a bell curve on any given program which is kind of a bell curve, if you will, in terms of revenue that comes with it.

You know, the labor piece of it is on this the second two-thirds of the program, material procurement is kind of on the two-thirds of the program. And there is a nice, graceful shape to that. Because we have the 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 the Kennedy to the enterprise. So from the ship we have under contract to the first of the two ship contract. 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 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 Newport News and you'd look at the buildup in carriers and then the extra submarine work, you can see that between material procurement and labor hiring and role, we're going to have a pretty nice graceful build up there at Newport News and it's up to us to make sure we do that as efficiently as possible.

As far as the rest of the year goes, yes, I think Chris said it in his comments. This was a quarter where we had a really clean quarter, we didn't have a lot of opportunities to retire risk and that comes with being on the front end of new programs. Our risk retirement milestones are a lot closer together at the back end of a program than they are at the front end of a program and so we've been talking for a couple of years about how we've been making this transition and we're going to increase the backlog a lot and we're going to have a lot more new programs, well, we're in a place now where we had a really clean quarter, we executed well across the business in all of our programs, we didn't have a lot of risk retirement milestones and so the numbers kind of fell out where they did because of the discipline of our process, but we are very optimistic about this year and going forward.

Our plan has been that we'll be in the 7% to 9% range in shipbuilding for this year. We're absolutely committed to that and we'll be in the 9% to 10% range next year again and we are absolutely committed to that. So it's -- we did a lot of good things this quarter to get this business setup and I'm pretty --- I'm very pleased with where we are.

Carter Copeland -- Melius Research -- Analyst

That's great. Thanks, Mike. I'll let somebody else ask.

Mike Petters -- President, Chief Executive Officer

You bet. Thank you.

Operator

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

Myles Walton -- UBS -- Analyst

Just wondering on the polar icebreaker contract that was, I guess, earlier -- awarded earlier last week. Can you comment on kind of your pursuits there and if you had high 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 has a aspiration?

And then secondly, Mike, maybe you can comment on the M&A activity within Technical Services and just in Technical Services 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 an end game a few years out for that business?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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 appear 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 our Technical Solutions, we've been saying for a while that we're interested in discreet 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 view is that in the area -- in some of the areas that we are 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 to 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 three to five 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.

Myles Walton -- UBS -- Analyst

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

Mike Petters -- President, Chief Executive Officer

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. We're interested in providing solutions. If that means that the customer is looking for some kind of platform or product and that's what we'll provide. If that means they're looking for some kind of IP of some kind, and that's what we'll provide. So it's kind of a case-by-case basis.

Myles Walton -- UBS -- Analyst

Okay, thanks guys.

Operator

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

One moment. And our next question comes from the line of George Shapiro. George, your line is open.

George Shapiro -- Shapiro Research -- Analyst

Hello, can you hear me now?

Mike Petters -- President, Chief Executive Officer

Hey , George. Great to hear from you.

George Shapiro -- Shapiro Research -- Analyst

Thanks. I wanted to know what were the EACs and in the case of Ingalls, was the base margin lowered because it's hard to explain all of it just by lower EACs. If you just go through that a little bit.

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

Sure. The negative adjustments were $37 million, the positive were $31 million, Newport News was two-thirds 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 in the labor indices. So it's unfortunate, but our as Mike indicated, we have a very detailed process to manage our EACs in the quarter, this fell out and we had to book the impact. So you see the negative adjustment related EPA indices.

George Shapiro -- Shapiro Research -- Analyst

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?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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

George Shapiro -- Shapiro Research -- Analyst

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

Mike Petters -- President, Chief Executive Officer

I think that I'm not sure I would say that that's what 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 a program is, can you get into a rhythm and then just go and be as efficient as possible. With the 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 -- we 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 it -- is to get that whole program into the production rhythm and once we do that I think we'll be fine.

George Shapiro -- Shapiro Research -- Analyst

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

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

No, it was negative $37 million cume adjustments, positive $31 million, two-thirds 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 indices at Ingalls.

George Shapiro -- Shapiro Research -- Analyst

Okay. Okay , thanks very much.

Mike Petters -- President, Chief Executive Officer

You bet.

Operator

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

Cowen -- Citi -- Analyst

Good morning, guys. It's Cowen (ph) on for Jon. Thanks for taking the question. Can you just talk a little bit about your capacity to pursue the frigate opportunity? So how that could be plotting into FY 2020 and if you have a sense of, the end award being a sole win or a split by?

Mike Petters -- President, Chief Executive Officer

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 to the end of the NSC program, we start to build up the start-up of the frigate program. So, from a capacity standpoint, it kind of -- it feathers right into our program -- into our business in a very productive way. It's a Coast Guard program kind of moving toward a Navy program side. So, I hate to say that that's a hot production line, but it's pretty warm. And so we would be in pretty good shape from that. And so, capacity in shipyards is part of the -- it's a partly about capital, it's also partly about workforce and large part about workforce and so we have already 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 have been some changes from a big contract for 20 ships to now maybe something different than that. So we're just staying engaged with it, 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.

Cowen -- Citi -- Analyst

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 toward, whether it's the higher end of the capability spectrum or something a bit smaller?

Mike Petters -- President, Chief Executive Officer

Well, kind of like everyone of us, we want to get as much capability for the dollar 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 bang 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 -- we're optimistic, we can meet their requirements in our cost constraints.

Cowen -- Citi -- Analyst

All right. Thanks for the color.

Mike Petters -- President, Chief Executive Officer

You bet.

Operator

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

Seth Seifman -- JPMorgan -- Analyst

So, I was wondering if you could talk a little bit about out year 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 this ramp on the carriers that you have on the back end of it. So what are you -- what are you looking to see before gaining some more confidence about out year revenues?

Mike Petters -- President, Chief Executive Officer

Well, we've had a -- I mean we've had a pretty incredible couple of years in shipbuilding budgeting. The historic level of shipbuilding for -- 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 $20 billion, $24 billion or $25 billion. And their 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 the $15 billion level and the reason that's so important for us is, because it all comes down to how does Colombia get paid for it. If Columbia gets paid for and the budget is at $24 billion to $25 billion and that means all the other programs that we're working on, continue to get funded, you continue to see follow-on procurement after the first Block of frigates there will be another Block after the first Block of destroyers there'd be another Block, after -- we've just now begun Flight II of LPDs you could see the future on that, you could see where the LHA could fit in, you can see all of that.

The question is, are you going to stay at this level or you are going to come back? And we're still in the -- the law of the land right now is that the sequester counts and I mean we want to see that there is going to have -- 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 is 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 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. The 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.

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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

Seth Seifman -- JPMorgan -- Analyst

Great, thanks. Thanks very much.

Mike Petters -- President, Chief Executive Officer

You bet.

Operator

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

Gautam Khanna -- Cowen and Company -- Analyst

Thanks. Good morning guys. I wanted to ask if you could 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 retire register improvements and the like, so that we sort of calibrate margins correctly?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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

Mike Petters -- President, Chief Executive Officer

Right. Yes, I mean it's across all the programs. There's milestone spread over the remainder of the year. I don't know that we would -- we've ever broken them out by quarter like that.

Gautam Khanna -- Cowen and Company -- Analyst

No, I appreciate it, it'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?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

Well, our strategy hasn't changed Gautam.Thanks for the question. It's, we're going to invest in our shipyards, a $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 GS 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 are -- I don't know if hunt is the right word, but we continue to evaluate opportunities.

Mike Petters -- President, Chief Executive Officer

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 makes 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 are intensely interested and to make it worth the acquisition. So, 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.

Gautam Khanna -- Cowen and Company -- Analyst

Thank you, gentleman.

Operator

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

Kristine Liwag -- Bank of America/Merrill Lynch -- Analyst

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 it's a two carrier buy, when you start booking the initial margins -- when you start booking 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 some sort of volume discount?

Mike Petters -- President, Chief Executive Officer

Well, we talked earlier about, there is a very graceful ramp up in production of the programs of those two contracts, the revenues will gradually increase and frankly will feature onto the revenue profile of the Kennedy, the Enterprise and the Kennedy will feather together. So I think if you're 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 goes all the way out to 2032, you're going to be at the very early part of that. But clearly, there's a lot of risk that goes along with the 2032 contract. And so we put all of those ends 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 and that's kind of the approach we'll take.

Kristine Liwag -- Bank of America/Merrill Lynch -- Analyst

That's really helpful color. And maybe 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 through Block IV and Block V. And when does that headwind stop?

Mike Petters -- President, Chief Executive Officer

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 and the 9% to 10% when we get into 2020.

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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

Kristine Liwag -- Bank of America/Merrill Lynch -- Analyst

Thank you.

Operator

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

Joseph DeNardi -- Stifel, Nicolaus & Company -- Analyst

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

Mike Petters -- President, Chief Executive Officer

Well, it's just a matter of 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 at the backlog increase of 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 are firmly on track for that number for next year.

Joseph DeNardi -- Stifel, Nicolaus & Company -- Analyst

Okay. And then you referred to the Block buys as an historic moment for the company. I think, is it a historic event for shareholders too, like in the context of, we've never had this much visibility into carrier construction, so margins on carrier construction 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 no?

Mike Petters -- President, Chief Executive Officer

Well, that's certainly our objective. We believe this is good for everybody. It was a -- 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, 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. As they say it's put up or shut up time and so for us this is what we've been angling for, 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 -- tha's the way shipbuilding plays itself out and that's the way this one will play itself out.

Joseph DeNardi -- Stifel, Nicolaus & Company -- Analyst

Okay, thanks.

Mike Petters -- President, Chief Executive Officer

Yes, we're really excited about it.

Joseph DeNardi -- Stifel, Nicolaus & Company -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Pete Skibitski from Alembic Global. Pete, your line is open.

Pete Skibitski -- Alembic Global Advisors -- Analyst

Sorry if this was asked, like I'm a bit late, but Mike, I'm wondering what you saw when you first look at the fiscal 2020 budget at 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 it as, hey, this is something that maybe kind of competes with what we're doing right now? Or do you say, hey, we've got tons of work already, we are going to kind of ignore this type of thing? Are you guys approaching this whole unmanned moves that maybe is kind of starting out on?

Mike Petters -- President, Chief Executive Officer

Well, first of all, 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 too by the Navy we can build. So, it's -- and I do personally believe that no matter what anybody wants to do, if we're not moving toward 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 -- 8 years ago, we didn't have an unmanned capabilities 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 going.

Capabilities that have been created and will be created for the UUV space are going to feed right into the USV space and so we are 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 unmanned space to a pretty good position on UUVs right now and we're intensely interested in the future for unmanned platforms across the whole range of Navy ships.

Pete Skibitski -- Alembic Global Advisors -- Analyst

I appreciate the color.

Mike Petters -- President, Chief Executive Officer

You bet.

Operator

Thank you. Our next question comes from the line of Robert Spingarn of Credit Suisse.

Robert Spingarn -- Credit Suisse -- Analyst

Just continuing on the talk about carriers. Mike, with the two carrier buy since, I guess, in theory, the two ships are being specked in tandem with that's -- 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, four year center line that there could be some technology evolution even in a time period that short?

Mike Petters -- President, Chief Executive Officer

Well, there's always I mean frankly on every one of the platforms we build, because of the whether it's four, six or eight years to build it, technology continues to evolve and the war fighters are, there are 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 will be up Block insertion of technology. So the technology will develop in parallel to the program.

And then when it's mature, it gets in sort of the DDGs, have a great track record of inserting technology over the life of the ship, over the life of the program, submarine program also has a really great track record of inserting technology in terms of Block upgrades, I mean that -- excuse me, they -- the carriers have kind of been, because they are 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, where do we deliver the ship and then try to insert a 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 the technology is mature enough to insert it into the 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 for that contract, we're going to -- I was the program manager on the second ship of the last two ship contract 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 we'll be more efficient. So there is just the stability that that creates will allow us to get the technology right, so I'm not worried about that as a major risk.

Robert Spingarn -- Credit Suisse -- Analyst

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

Mike Petters -- President, Chief Executive Officer

Well, it's on them. I mean, if -- that's the contract that we have and quite frankly what I think will happen is if there's a desire to change, 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.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. And then the other thing I wanted to ask, maybe this is for Chris. But the multiple you paid for the G2 and Fulcrum and whether those businesses -- it looks like they contributed in the quarter, but we don't know to sit 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?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

Yes, so both of those were about nine times when you take into consideration the tax attributes of each. So we think we got a very fair price for each. We still are confident of 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 -- to each of those transactions combined. So that should help a bit in your models.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you guys.

Operator

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

Noah Poponak -- Goldman Sachs -- Analyst

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 the 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 will 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 had mix shift down, and then not have that continue to happen for a longer period of time?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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

Mike Petters -- President, Chief Executive Officer

And I would just add Noah that, I know this is what have you done from a 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 this new work. And so what they've been doing is, they've been retiring risk early on and programs to get ready for some of these milestones that we see picking up next year.

Noah Poponak -- Goldman Sachs -- Analyst

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

Mike Petters -- President, Chief Executive Officer

I think that's a little bit of what you're seeing, yes. I'm -- and then you go to the budget and you see that LHA 9 is 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 a -- that for us is how you kind of mitigate some of that, but yeah, I think Ingalls is -- we don't expect it to be as dramatic as it was at Newport News, because they have more programs, they have more multi-year stuff, their ships are smaller and they won't take as long as it kind of get moving, but Ingalls has had quite a run and they're kind of going through the shifting of gears right now to get ready for the next run.

Noah Poponak -- Goldman Sachs -- Analyst

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

Mike Petters -- President, Chief Executive Officer

No, I don't want to get into the specific margin rates. We just think 9% to 10% in 2020 makes sense.

Noah Poponak -- Goldman Sachs -- Analyst

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

Mike Petters -- President, Chief Executive Officer

No.

Noah Poponak -- Goldman Sachs -- Analyst

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

Mike Petters -- President, Chief Executive Officer

Correct.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. And then just one more on cash flow. You had the 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?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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 is going to work very hard at working capital, they did an exceptional job in Q4 2018, they know the objective and unfortunately shipbuilding from time-to-time, things worked perfectly like they did in Q4 and then sometimes not so perfectly. So with the 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?

Noah Poponak -- Goldman Sachs -- Analyst

Thanks very much.

Operator

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

Krishna Sinha -- Vertical Research Partners -- Analyst

Thanks. 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?

Mike Petters -- President, Chief Executive Officer

Yes. So it's a good question. And we're really excited about the award, the Ingalls team did an exceptional job competing for that and I know that we'll 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 -- you can't just divide by six, it's a -- we think potentially around a $100 million a year of sales with a 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?

Krishna Sinha -- Vertical Research Partners -- Analyst

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?

Mike Petters -- President, Chief Executive Officer

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 a kind of a slow, steady build, momentum starts to build and then suddenly there's a 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 laws 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 it or where it is. And so for us, it was really important for us to get into this space in a pretty, pretty noticeable and important way before we hit the knee in the curve.

And Boeing did -- Boeing made a major investment with Eco Voyager to demonstrate the capabilities in this pretty harsh environment and we made an investment in Proteus, which is a either manned or unmanned vessel that we run out of Panama City to learn about the space in one thing led to another and Boeing turned to us and said, can you help us manufacture the product and so at this point the Navy has asked Boeing to manufacture five of these. And so, and we're working very closely and supportive, they've asked Boeing 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 take off. And so, for us it's still about building that experience.

Krishna Sinha -- Vertical Research Partners -- Analyst

Got you. Thank you guys.

Operator

Thank you. We have a follow-up question from the line of Jon Raviv of Citi.

Jonathan Raviv -- Citigroup -- Analyst

Hey guys, thanks for taking the follow-up. So, if we think about backlog growth, how does that tie into your risk adjusted 3% sales growth target through 2021?

Mike Petters -- President, Chief Executive Officer

Well, it's the same, I mean a lot of the backlog we assumed as we stepped out and said, OK, 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.

Jonathan Raviv -- Citigroup -- Analyst

Thanks.

Operator

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

George Shapiro -- Shapiro Research -- Analyst

Yes, I just wanted to put together the comments about getting more mature. So, I went back and looked, there were total adjustments in 2017 of about $200 million, that dropped to about $110 million in 2018. So can you give us what the expectation for this year be of lower than 2018 and then for 2020 we'd see a resumption as we got more mature, I mean, is that kind of the thought process?

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

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

George Shapiro -- Shapiro Research -- Analyst

Okay, thanks.

Operator

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

Seth Seifman -- JPMorgan -- Analyst

Thanks very much. I wanted to follow-up quickly on one of the points about the margin that Noah had made earlier, and ask about Newport News. I definitely appreciate the fact that they've had mix headwinds for the past few years, but if you 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 -- which presumably take account of those mix headwinds. And so as you think about the operating -- 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.

Mike Petters -- President, Chief Executive Officer

Well, I'll start with that. We've had several transitions at Newport News over the past couple of years . We've had product transitions, maturity of program transitions, we have leadership transitions, we are now digitizing the shipyard. So there have 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 the Kennedy in the first quarter of next year. Our 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 the -- some of where we are going with that.

Now where we are on that is, there's a lot of pain happening down there and if you want to go to go 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.

Seth Seifman -- JPMorgan -- Analyst

Okay, thank you.

Operator

Thank you. 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.

Mike Petters -- President, Chief Executive Officer

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 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.

Operator

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.

Duration: 60 minutes

Call participants:

Dwayne Blake -- Vice President-Investor Relations

Mike Petters -- President, Chief Executive Officer

Christopher Kastner -- Executive Vice President-Business Management and Chief Financial Officer

Carter Copeland -- Melius Research -- Analyst

Myles Walton -- UBS -- Analyst

George Shapiro -- Shapiro Research -- Analyst

Cowen -- Citi -- Analyst

Seth Seifman -- JPMorgan -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Kristine Liwag -- Bank of America/Merrill Lynch -- Analyst

Joseph DeNardi -- Stifel, Nicolaus & Company -- Analyst

Pete Skibitski -- Alembic Global Advisors -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

Krishna Sinha -- Vertical Research Partners -- Analyst

Jonathan Raviv -- Citigroup -- Analyst

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