Huntington Ingalls Industries, inc (HII) Q2 2021 Earnings Call Transcript

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Huntington Ingalls Industries, inc (HII 0.05%)
Q2 2021 Earnings Call
Aug 5, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2021 Huntington Ingalls Industries Earnings Conference Call. [Operator Instructions][Operator Instructions]

I would now like to hand the call over to Dwayne Blake, Vice President of Investor Relations. Mr. Blake, you may begin.

Dwayne Blake -- Vice President, Investor Relations

Thanks. Good morning, and welcome to the Huntington Ingalls Industries Second Quarter 2021 Earnings Conference Call. With us today are Mike Petters, President and Chief Executive Officer; Chris Kastner, Executive Vice President and Chief Operating Officer; and Tom Stiehle, Executive Vice President 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 the 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, Chris and Tom 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's 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 and Chief Executive Officer

Thanks, Dwayne. Good morning, everyone, and thanks for joining us on today's call. This morning, we released strong second quarter 2021 financial results driven by another quarter of solid operational performance. So let me share some highlights from the quarter starting on slide three of the presentation. Sales of $2.2 billion were up from $2.0 billion in the second quarter of 2020. Diluted EPS of $3.20 was up significantly from $1.30 in the second quarter of last year and pension adjusted EPS for the quarter was $3.05. New contract awards during the quarter were approximately $1.2 billion, resulting in a backlog of approximately $48 billion, of which approximately $24 billion is funded. And Chris will provide some color on a few of the key awards for the quarter during his remarks. Shifting to activities in Washington, we are pleased that the congressional markup process for fiscal year 2022 has begun in earnest, following the release of the President's budget request in May.

Of note, the budget requests continued recapitalization of the nation's strategic ballistic missile submarine fleet and supported funding for CVN 80 and CVN 81 forward class aircraft carriers, two Virginia-class submarines, one DDG 51 Arleigh Burke-class destroyer and LHA 9. We were also pleased that a second DDG 51 class destroyer was included as the number one priority on the Navy's unfunded requirements list for fiscal year 2022, and we look forward to working closely with the Congress during the FY '22 markup process to urge support for the second DDG and other critical priorities, including the efficient production of amphibious warships.

In closing, slide four provides some key takeaways from the recently announced agreement to acquire Alion Science and Technology. The team is preparing for closing of the transaction, and we are very excited about the addition of Alion to the HII family. Alion is a perfect complement to our existing capabilities in the technology-driven defense and federal solutions space. The solutions and products they provide are directly in line with the strategic focus that we have articulated for our Technical Solutions business and it enhances our technical capabilities and customer access in high-growth national security markets, including C5ISR, military training and simulation and next-generation technologies and solutions. We firmly believe that Alion offers significant growth potential and represents an investment in capabilities that support the evolving DoD national security requirements, which, in turn, are expected to generate significant long-term sustainable value for our shareholders, our customers and our employees.

Now I will turn the call over to Chris for some remarks on the operations. Chris?

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

Thanks, Mike, and good morning, everyone. This was another solid operational quarter, and I'm very pleased with the consistent progress being achieved across our shipbuilding and technical solutions programs. With that, let me share a few key contract awards and programmatic highlights from the business segments for the quarter. At Ingalls, the team received a contract modification from the U.S. Navy for $107 million to provide additional long-lead time material and advanced procurement activities for amphibious assault ship LHA 9, which increases current funding on this ship to approximately $490 million. Regarding the potential bundled acquisition of LHA nine with LPD 32 and 33, discussions are ongoing with the customer.

We believe that a bundled acquisition continues to be the most cost-effective method, a procurement of these critically important ships. In addition, Ingalls was awarded a contract with a potential total value of $724 million over seven years for planning yard services in support of a variety of in-service amphibious class ships, including the LPD 17 San Antonio class and LHA six America class. Shifting to program status, LHA eight Bougainville is making steady progress through the structural erection and initial outfitting phases of construction with cost and schedule performance in line with our expectations. On the DDG program, the team successfully launched the first Flight III Arleigh Burke class guided missile destroyer, DDG 125, Jack H Lucas in June. And DDG 121, Frankie Peterson Jr. is expected to conduct sea trials later this year.

On the LPD program, LPD 28 Fort Lauderdale is on track to conduct sea trials during the fourth quarter and LPD 29 Richard M. McCool Jr. continues to achieve production milestones in support of launch early next year. At Newport News, there were no significant contract awards to highlight for the quarter, so I will go right on to program status. CVN-79 Kennedy is approximately 83% complete, and the team remains focused on compartment completion and key propulsion plant milestones. CVN 73 USS George Washington is approximately 90% complete, and the team remains focused on achieving key test program milestones to support redelivery to the Navy, which is planned for next year. On the DCS program, the team completed shipment of the final module of SSN 797 Iowa during the quarter. In addition, SSN 794 Montana remains on track for delivery to the Navy later this year, and SSN 796 New Jersey remains on track to achieve the float-off milestones as planned in the second half of this year.

And finally, on the submarine fleet support program, SSN 725 Helena is on track for redelivery to the Navy later this year. At Technical Solutions, contract awards of REMUS 300 unmanned underwater vehicles during the quarter to the U.S. Navy and Royal New Zealand Navy affirmed the flexibility and modularity of these units. TS was also recently awarded a $273 million cost plus fixed fee indefinite delivery, indefinite quantity contract to support maintenance and planning for the overhaul and repair of equipment and systems associated with the Navy aircraft carriers and West Coast Navy surface ships.

In addition, TS was awarded a contract with a 1-year base period and four 1-year options with a total potential value of $346 million to provide a variety of aircraft and operational support services for USAFRICOM, included planning, management, maintenance, logistics and airlift airdrop services and emergency medical care. Execution within Technical Solutions remains consistent with expectations except for delays in awards in our unmanned business for critical new programs, which we expect to be resolved by the end of the year. As I close, note that we have included upcoming key program milestones on slide five. There are no changes from what we have previously provided other than designated those milestones that have been completed with the checkmark.

Now I'll turn the call back over to Tom for his remarks on the financials. Tom?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Thanks, Chris, and good morning. Today, I'll briefly review our second quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on slide six of the presentation, our second quarter revenues of $2.2 billion increased approximately 10% compared to the same period last year. This was primarily due to the growth of Newport News and Ingalls and was partially offset by a decline at Technical Solutions due to the portfolio shaping actions we have taken. Segment operating income for the quarter of $169 million increased $174 million compared to the second quarter of 2020 and segment operating margin of 7.6% compared to a segment operating margin of negative 0.2% of the second quarter of 2020. The prior year results were negatively impacted by the Virginia-class submarine program performance as well as impacts related to COVID-19. Operating income for the quarter of $128 million increased by $71 million from the second quarter of 2020 and operating margin of 5.7% increased 293 basis points. These increases were primarily driven by the segments I just mentioned, partially offset by a less favorable operating FAS/CAS Adjustment. The tax rate in the quarter was approximately 19.9% compared to 18.5% in the second quarter of 2020.

The increase in the tax rate was primarily due to adjustments related to research and development tax credits recorded in the second quarter of 2020. Net earnings in the quarter were $129 million compared to $53 million in the second quarter of 2020. Diluted earnings per share in the quarter were $3.20 compared to $1.30 in the second quarter of 2020. Excluding the impacts of pension, diluted earnings per share in the quarter were $3.05 compared to a loss of $0.49 per share in the second quarter of 2020. Turning to slide seven of the presentation. Cash from operations was $96 million in the quarter, and net capital expenditures were $73 million or 3.3% of revenues resulting in free cash flow of $23 million. This compares to cash from operations of $201 million and $75 million of net capital expenditures or free cash flow of $126 million in the second quarter of 2020. Cash contributions to our pension and other postretirement benefit plans were $12 million in the quarter, principally related to postretirement benefits. During the second quarter, we paid dividends of $1.14 per share or $46 million and repurchased approximately 95,000 shares at a cost of $20 million.

Moving on to slide eight of the presentation. Ingalls revenues in the quarter of $670 million increased $48 million or 7.7% from the same period last year, driven primarily by higher revenues on the DDG program and amphibious assault ships partially offset by lower revenues on the NSC program. Ingalls operating income of $80 million and margin of 11.9% in the quarter were up from the second quarter of 2020, driven by the recognition of a capital investment related incentive for the DDG program that was recognized in DDG-125 as well as higher risk retirement from the LHA 8, LP 28 and LP 29 ships. Turning to slide nine of the presentation. Newport News revenues of $1.4 billion in the quarter increased $241 million or 21.5% from the same period last year due to higher revenues in both the submarine and aircraft carry construction. Newport News operating income of $76 million and margin of 5.6% in the quarter were up year-over-year, primarily due to the impacts related to the Virginia class performance and COVID in the prior year period. Now to Technical Solutions on slide 10.

Technical Solutions revenues of $237 million in the quarter decreased 25.9% from the same period last year mainly due to the divestiture of the oil and gas business and the contribution of the San Diego shipyard through a joint venture in the first quarter of this year as well as lower volumes in unmanned systems, partially offset by increases in volumes in the Defense and Federal Solutions. Technical Solutions operating income of $13 million in the quarter compares to income of $9 million in the second quarter of 2020. This increase was primarily driven by higher equity income related to our ship repair partnership with Titan as well as improved performance at Defense and Federal Solutions and Nuclear Environmental Services, partially offset by lower volumes in the unmanned systems. Finally, a perspective on the outlook of the shipbuilding for the remaining part of the year.

We continue to see limited opportunities for risk retirements in the third quarter with the remainder of the milestones weighted toward the end of the year. Given the strong performance in the first half of the year, we now expect that the shipbuilding margin for the full year will be in the 7.5% to 8% range. We continue to expect the Alion acquisition will close in the coming weeks and that we will incur approximately $25 million of onetime pre-tax transaction and financing-related expenses in 2021. We completed the syndication of the term loan component of the acquisition funding earlier this week, and more details of the specifics are available in the 10-Q. We will provide a more comprehensive update on our 2021 outlook for Technical Solutions on our third quarter call following the closing of the acquisition.

Now I'll turn the call back over to Dwayne for Q&A.

Dwayne Blake -- Vice President, Investor Relations

Thanks, Tom. 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.

Operator, I'll turn it over to you to manage the Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Doug Harned with Bernstein. Please go ahead.

Douglas Harned -- Bernstein -- Analyst

Good morning, thank you. In Q2, you had a big increase in Newport News revenues. And when you look at the back half of the year, you've got several pretty important milestones. So you've got a lot going on there. Can you give us a sense of sort of what took the revenues up so much in Q2? And how we should expect the workflow and revenues to kind of play out over these next few quarters?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Sure. It's Tom here. Good morning Doug, I appreciate the question. Yes. Although the growth year-over-year from Q2 was large, you have to recall we took a charge in Q2 last year for the Virginia class program. So we are comfortable on the margin side and the revenue side. So it has that 21% increase looking larger than it is. I tell you, on the back half of the year, with COVID understood right now, the labor force is stable, the contracts that we have in place right now, the run rate that we see is going to play out pretty consistent to the back half of the year.

So it's probably flat to consistent in the back half. So I wouldn't let it run away from you as we try and see the growth from a year-over-year perspective. I'd stick with the guidance that we gave you back at the beginning of the year. I still think that we're on the top of that.

Douglas Harned -- Bernstein -- Analyst

Okay. And then you got this $926 million service award at Ingalls. You're in the process of working through the Los Angeles class work as well in services. Can you give us a sense of how you expect services revenues to flow? Because I always think of this as something that we kind of know the trajectory for shipbuilding but services is less certain. So how do you see that flowing? And do you get a sense from your Navy and budget discussions that there's going to be a pretty consistent driver of revenue coming from the services side?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Yes. So a couple of parts on that answer there. On the Ingalls award down there, it's a long term services type contract. Obviously, as the claims and the years get funded in the out years, we'll see that revenue mature down there. The services contract they have is the oversight and the services aspect for the LPD LHA program. So that was anticipated as far as our revenue projections that we had to be there. It's not a large portion of the Ingalls portfolio as you see it today.

There are potentials going forward, depending on how the landscape plays out, both from a construction and future services and our type work to play out. We'll have to see how that goes forward. From a Newport News perspective, as you mentioned, we took on the LHA overhaul right now. So those were anticipated in our plans also. That was an overflow right from where the Navy was, I think medium to long term, we'd like to see ourselves get into a cadence of getting an overhaul on the sub side going forward. And as we work with our Navy partner and what that kind of looks like, we'll provide additional guidance on that front.

Douglas Harned -- Bernstein -- Analyst

Okay, thank you.

Operator

Our next question comes from Myles Walton with UBS. Please go ahead.

Myles Walton -- UBS -- Analyst

Thanks, hey Mike, I think in your remarks, you talked about stability or more predictability in the amphib purchasing power or purchasing strategy. I guess you've got to a "handshake agreement" with the Navy. The congressional committees are pushing that to be more formalized into a contract.

Can you just give some color, aside from the greater visibility of having the ships under contract, what are the financial implications to Huntington Ingalls? I know there's savings for the customer. I'm just curious from a financial perspective to the company, how would it change if they bought it individually or in that block buy agreement?

Mike Petters -- President and Chief Executive Officer

So I'll just kind of talk in general. Any time you're in a multiyear program, you're able to sequence the schedule of the platforms to inform to the way you've got your capital and your people and your material windup. As you get into -- as Tom used the word cadence or cadence not as large, in this case, getting the LPDs and the LHA on a cadence that's predictable over the next several years, that creates a foundation for all the other programs that Ingalls going to be working, we're chasing, we're trying to capture.

So it's a foundational piece of predictability from a cost structure, a rate structure perspective. And I guess, our view of that is that if you can get that locked in and create that kind of stability, it's worth the savings to our customer. Customer gets a good price for it, but it's also worth that to us from the standpoint of the predictability. So that's kind of the way we think about it. I don't know, Tom, do you want to add any more to that?

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

Yes. So Myles, this is Chris. It really solidifies the next three to four years, at Ingalls moving forward and maybe even more important than that, it solidifies the supply base that we keep that ship class moving on a normal cadence to support Ingalls revenue over the next three to five years.

Myles Walton -- UBS -- Analyst

Okay.

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Probably just a follow up on the back of that, too, these bundle, whether it's a bundle like we're doing here or a multiyear that provides flexibility to our customers and our parties out there. So whether they decide to take the bundle that's on the table now or buy them kind of separately. The financial impact on that, obviously, as Mike said, there's rates that come into play, the schedule of the ships how we buy the material in a lot of quantity or do we buy them individually. So all that factors into an affordability profitability piece of the equation there. But we put that thought to be as flexible to our Navy customer as possible, and we'll see how they move forward, appropriate the funds and award accordingly.

Myles Walton -- UBS -- Analyst

Okay. And I think you increased the 5-year cash flow to $3.2 billion after Alion acquisition from 2020 to '24. As we look to '22 to '24, I guess it implies $740 million or so. Is that -- remind us, is that a linear profile? Is it a big step-up with significantly higher back end? Can you just give any color to that as you see it today?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Yes. So they come online, as you know, we closed on the deal at the end of August in Q3, you'll get a look-see of the financials when the line rolled in there. We'll give you a little bit more color on Q3 call for the specifics of how we see 2021 falling out. And then I give additional color as I hold until Q4 in the February time frame of next year when we give that guidance going forward. I mean there's only so many ways you can spread the $200 million. But I just hold the thought there until we come through the integration and we finish out this year.

Myles Walton -- UBS -- Analyst

Okay. Alright, thank you.

Operator

Our next question comes from Robert Spingarn with Credit Suisse. Please go ahead.

Robert Spingarn -- Credit Suisse -- Analyst

Hey good morning. Tom, the margins at Newport News were a bit below where we were thinking, and also below the underlying margins we've seen over the past couple of quarters. So I wanted to just ask what's going on there, driving the fluctuations in the underlying margins ex EACs. Or was this net negative EACs at work and while we're at it, maybe you can just give us the EAC splits between the segments? Thank you.

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Great. I appreciate the question. Sure. So now from a Newport News perspective, we kind of guided in Q1 that there was not going to be many opportunities for risk retirement and milestones from Q2, Q3. That was exasperated at Newport News. I'd tell you, although 5.6% sounds a bit low when you combine it with the first quarter, it's 6.1% for the first half of the year. So it's right at the run rate of 6% to 7%, even if it's on the low side. It was not impacted by any major step backs. The favorable EAC increase was $62 million. The unfavorable were $27 million down for a net $35 million.

The upside is a little bit slated toward Ingalls. And then on the unfavorable, it was just slightly flat from 50-50 toward Newport News, but there wasn't anything specific to call out there. On the favorable side, you will find in the Q, there was a -- and in my comments upfront that the DDG 125 took an incentive for the capex and there was some solid performance in risk reduction at LHA 8, LP 28 and LPD 29. But on the downside, there's nothing notable to kind of highlight here. Okay?

Robert Spingarn -- Credit Suisse -- Analyst

Can you quantify the benefit of the capital investment incentive recognized on Jack Lucas?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Yes, it's $14 million. And you can find that in the Q, it's upfront

Robert Spingarn -- Credit Suisse -- Analyst

Alright, thank you very much.

Operator

Our next question comes from George Shapiro with Shapiro Research. Please go ahead.

George Shapiro -- Shapiro Research -- Analyst

Yes, good morning. It seems like we raised the shipbuilding margin for the year that this benefit from -- this capital investment benefit was something that you weren't anticipating? Or is it raised because you're expecting higher EACs in the second half of the year or it's just continued performance versus the first half?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

George, it's Tom here. I'll tell you that we're happy in the books. We kind of have a line of sight how the year is going to play out. So factoring in actual to two quarters and what we see here, we still foreshadowing that Q3 is going to be light in terms of milestones and risk retirement. In the back end of the year for additional opportunities, another six months of a run rate to burn that risk. So I think we just felt comfortable and we wanted to help The Street understand where we think we're going to land on the year's end.

George Shapiro -- Shapiro Research -- Analyst

Okay. But specifically, was that capital investment benefit, not an expected thing for the year?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

It's a onetime event, and it was expected, but it doesn't play out in the run rate for the range that we're giving you at 7.5% to 8%.

George Shapiro -- Shapiro Research -- Analyst

Okay. And then the free cash flow was pretty weak in the first half, and it looks like working capital was up north of $200 million. The guide of $150 million to $250 million for the year still holds and what would have caused the second quarter to be as weak as it was?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Sure. So I'll tell you, traditionally, we use cash upfront. So we punched out minus 16% in the first quarter, 23% up here for a net of plus 7% through the first half of the year, not unexpected. And then Q2 was -- the working capital was 7.9%, so again, in the range of 6% to 8%, what we expect. The back half of the year usually does see some favorability to the working capital, and that will come a little bit that we have to keep our eye on it as we have to pay back the COVID progress payments at the end of 2021. That negates some of the positiveness that you'd see in the working capital traditionally in the back half at HII. So from where we stand here to get to the $150 million to $250 million, it's just a no operational run of the revenues and the payments flow to the book

George Shapiro -- Shapiro Research -- Analyst

Okay, thanks.

Operator

Our next question comes from Seth Seifman with JPMorgan. Please go ahead.

Seth Seifman -- JPMorgan -- Analyst

Hey, thanks very much and good morning. Question, I guess, about our profitability. And whether, I guess, you look at the margin side and you talk about the opportunities for risk retirement later in the year and sort of the correlation between those two things. I guess the new margin guide implies a down margin in the second half versus the first half. So you look at all the opportunities to check off at Newport News, and even at Ingalls where margins have been very strong, still more risk retirements ahead than have been checked off. So I guess the first part is kind of given this list for the second half, why wouldn't we expect a stronger shipbuilding margin than we saw in first half?

And then second, I guess when we look at 2022 and we see sort of fewer milestones for Newport News, how do we think about what that means for profitability there? And then Ingalls kind of coming off a high base. But obviously, it looks like there's a lot to do there. So I guess, looking at the correlation between these upcoming milestones and the shipbuilding margins.

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Sure. Yes. I can give you some color on both of those questions. So when you look at Q1, Q2, there's quite a few onetime events added in there. The incentives we're talking about here on DDG 125 in Q2. In Q1, there was a couple of incentives in there too that we've highlighted. I've been asked at Ingalls to keep this up at 14% and now 11.9%, and I keep providing the guidance down that that's not a run rate that's sustainable. I think between the onetime events and the incentives that we talked about, we'll see that come down. So I wouldn't really read that because we're giving you a 7.5% to 8% that's somehow the margins are dropping up from a performance or operational standpoint at Ingalls. It's just that we won't see those onetime events in Q3 and Q4.

From the question on the Newport News perspective, right now, if you look at it, they have a lot of new ships in their portfolio, right? So 80, 81 is coming online. There's CD74 that just popped in here. And CVN 73 is nearing the end from a revenue perspective and they have less weight on the portfolio there. So it's the mix of the ships that are in at Newport News. So when you talk about 2022 time frame, those ships as they run through another 3, 4, 5 quarters, they will be burning down risk and there will be a potential there for increased booking rates.

Seth Seifman -- JPMorgan -- Analyst

Okay, great, Ill take that one. Thanks very much.

Operator

The next question comes from Ron Epstein with Bank of America. Please go ahead.

Ron Epstein -- Bank of America -- Analyst

Good morning guys. Just quickly, could you give us an update on how things are proceeding with the Virginia class because I know that's a program that you ended with some challenges in the last 18 months. I mean, how is it tracking now?

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

Yes. Ron, this is Chris. I'll start, and if Mike wants to add on here. We'll do that. But really team performing well and the partnership performing well. Montana is proceeding to delivery this year. New Jersey is proceeding to launch and then delivery next year. And then the shops are executing on the modules to support assembly for the subsequent boats. So confident and comfortable with tailoring platform and Block five programs are executing right now. Mike, do you want to...

Mike Petters -- President and Chief Executive Officer

I'd just say that moving to two per year in Block IV and then moving -- adding in the Virginia payload modules in Block 5, success is going to depend on rhythm. And what we have established here in Chris' team and Jennifer as the shipyard establishing right now is their establishment and rhythm in the program that's going to make that successful. We were working that when COVID hit us last year, and so we kind of haven't stepped back a little bit and reset, but we're pretty excited right now about what's happening today, but also the rhythm that we're setting up for the rest of this program and the rest of the Mexico plans. So I'm pretty excited about that.

Ron Epstein -- Bank of America -- Analyst

Got you. Got you. And then -- and maybe just another submarine question. Do you guys -- does the industrial base have enough manpower, labor right now to do the Virginia and the Columbia at the projected rates or in a given year, if there's two Virginias delivered and Columbia, so you get three subs. Is there enough capacity in terms of qualified kind of pipe fitters to do that?

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

Well, Ron, I guess if you took a -- if you decided that everything was static and the you had to do all of that with the people that you have in the plant today? The answer is no. We don't have enough people in the plant today to do that. The fact is that we've -- since COVID began last March, we hired 6,000 people and trained them. And I will be forever remembered for saying that we can build capacity in the industry faster than the government can appropriate funding for it. So if the government wants to move ahead with a higher rate of submarine production in a sustained way, not just doing it once in a while, but in some sort of sustained way, they want to go to three submarines a year or three Virginia class here or two Virginia class and a Columbia a year, and they're going to sustain that for a period of time, we can absolutely have the workforce and the physical plant and the supply chain set up to go execute that.

If you said that it's a light switch and starting in the FY '22 budget, we're going to expand to buy from two to 4, well, we probably have some start-up things there. But we don't believe that's the way that's going to go. We believe that this is going to be the concept that the history of it. And so I think -- I guess my own experience is that when you hear budget people talking about lack of capacity, what they really mean is that they don't have funding. And that's kind of the way the industry looks at it. So I think we can expand capacity if that's the plan, if there is sustained demand.

Ron Epstein -- Bank of America -- Analyst

Got it. Thank you.

Operator

The next question comes from Gautam Khanna with Cowen. Please go ahead.

Gautam Khanna -- Cowen -- Analyst

Hey guys, I was wondering if you could talk a little bit about integration planning and sort of what the early milestones we should be thinking about on the Alion deal to make sure that it's tracking to plan. So could you little -- could you outline what you're doing? What are you planning in terms of integration, sort of what the -- what you hope to have accomplished by the end of the year with that deal?

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

You got to be careful here because -- this is Chris. We're not closed yet, obviously, you don't want to get ahead of that. I will say there was a very detailed integration plan in place and been working very well with Alion in putting that plan in place. And I'd also like to say that Alion leadership team is going to play a very prominent role in the leadership team of the combined company when we do get closed, and we'll be able to report that status of the integration on the Q3 call, but I don't want to get in front of closing on that. And Mike, I don't know if you want to add anything.

Mike Petters -- President and Chief Executive Officer

I mean I think we -- all I would say is that we integrated Hydroid year, we have a blueprint for how we're going to do that in an effective and efficient way. Obviously, this is a bigger one than Hydroid, but the muscle is the same. And I'm pretty excited about the opportunity to go do this. That will be a lot of hard work by a lot of folks, but it will be the right kind of stuff to do. So -- and we're certainly going to keep you posted on that as well.

Gautam Khanna -- Cowen -- Analyst

Okay. And just as a follow-up, you talked about the $14 million benefit from the capital incentive this quarter. If I recall last quarter, you guys talked about Q2 and Q3 having fewer shipbuilding milestones, and I know this has been asked on the call, but just trying to get a sense for should we have thought about the potential for cumu catch-ups, maybe last quarter has $35 million minus the $14 million. Like, when we say not a lot of cumu catch-up opportunities is $20 million sort of not a lot of opportunity? Or should we think of it as like 0? There isn't a lot of risk retirement opportunities because I guess that was sort of the upside that certainly relative to my expectations walking in today was that there was an opportunity for a lot of favorable net adjustments.

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Yes, I'll hop in there but when we give that guidance, we talked about, hey, milestones, hard milestones. So either milestones that if we hit the milestone, we take a step up as we check the EACs, we sell a ship off, really defined milestones that will bring in additional margins. I mean that's true when we guided it in Q1, and it's true right now when I look at it punched here through Q2 into Q3.

As I mentioned, there was 62 up 27 net of 35 and the 62 is 14 of it, right? So as you do the math of that, I guess you're asking, hey, 0 or $20 million or $40 million, a lot of catch up. As I mentioned to you, 60-40 Ingalls versus a Newport News there. But hey, just steady performance down at Ingalls, LHA/LPD programs. And there wasn't a specific hard milestone, but as we come through recall EAC processes, we check the burn rate and the risk registers and where we stand. The programs are running smoothly right now. So I don't think out of ordinary performance there. And I think our guidance still holds true about Q3 is going to be light on milestones and there's opportunities over the next six months to retire additional risk.

Gautam Khanna -- Cowen -- Analyst

Thanks a lot.

Operator

Next question is from Noah Poponak with Goldman Sachs. Please go ahead.

Noah Poponak -- Goldman Sachs -- Analyst

Hi, good morning everyone. Tom, did you say you also had capital investment-related incentive in the first quarter?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

I may have said that, but now that you bring it up again, we had an ECP that we closed out, and I mistakenly said capital incentive. So we had an ECP on a DDG program that cleaned up for us.

Noah Poponak -- Goldman Sachs -- Analyst

Okay. Yes, I was going to say I was looking for that, and I couldn't find it. Is that something that has the potential to occur often, and it's usually small enough to not call out? Or is that pretty unusual?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

We do have ECPs that closed out from time to time but not big adjustments that happened to be a rather larger adjustment than we had, and so that kind of weighed into the Q1 time frame.

Noah Poponak -- Goldman Sachs -- Analyst

And then same question on capital incentive.

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Fairly unusual to have a capital incentive that large. So we work ourselves through as we come through on these ECPs that we have proposals. We go to the table and negotiate. There's a balance of affordability and equity on these deals. And as we work ourselves through, sometimes they take time. And then as we settle the deal, whether it's additional margin of capital incentive we'll let The Street know when we close out, and we'll take the booking.

Noah Poponak -- Goldman Sachs -- Analyst

Got it. Is there any other change to the previously provided 2021 guidance items outside of what you've mentioned on the shipbuilding margin?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

No. We're going to give additional guidance set in Q3 as we close out.

Noah Poponak -- Goldman Sachs -- Analyst

So that not being in the release or the deck is mainly just a reiteration as opposed to something else?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

That's correct.

Noah Poponak -- Goldman Sachs -- Analyst

Okay, thanks very much.

Operator

Our next question comes from David Strauss with Barclays. Please go ahead.

David Strauss -- Barclays -- Analyst

Thanks. Thanks for taking my question, good morning. So in terms of performance year-to-date, does it change anything about how you're thinking about the shipbuilding margin progression beyond 2021? I think you've talked about low 8% in '22 and then going up from there? So anything about the performance year-to-date gives you more confidence, maybe that could be a little bit better than that?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

No, I would say where we guided and where we expect it to be, and our outlook right now in next period still holds.

David Strauss -- Barclays -- Analyst

Okay. And Tom, what has to happen from a working capital perspective over the next of years to be able to hit this $3 billion or $3.2 billion, I guess, with Alion included in that free cash flow target, what's that embed for working capital? And where specifically could the working capital upside come from?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Well, I think what we've always talked about is the working capital will be seen 6% and 8%. So I think we'll continue to run our operations accordingly. The Alion portfolio, 85% cost at contracts. So we don't see that as a claim from a working capital business, is integrated into HII portfolio. But the big drivers that we kind of have highlighted how that $3 billion and now $3.2 billion will come about, were more from a function of the 3% CAGR from the revenue, the margin rates popping up from shipbuilding, the capital getting back to 2.5%. And then we run through the math of that, the pension, we've kind of cleaned up with safe harbor, so there's not going to be fluctuations on that front. I think on a couple of calls, we've worked that through for you how $700 million on a run rate was attainable prior to Alion purchase.

David Strauss -- Barclays -- Analyst

Okay. And thinking on pension is still kind of a net neutral CAS versus your contribution?

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Yes.

David Strauss -- Barclays -- Analyst

Alright, thanks very much.

Operator

[Operator Instructions] Our next question comes from Burkett Huey with Morningstar. Please go ahead.

Burkett Huey -- Morningstar -- Analyst

Thank you so much for taking the question. So I was taking a look at the awards of $1.2 billion. And if you take out the shipbuilding -- I'm sorry, the servicing contract and I think another $100 million contract, you get to about $360 million and six unmanned awards. I'm wondering, is that a good way to think about the pricing point for user or am I not thinking about that right?

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

Yes. So there's a number -- a number of awards across the corporation in that value for awards. We don't give specific value to the price points of all our UUVs. So yes, I wouldn't necessarily think about it that way.

Burkett Huey -- Morningstar -- Analyst

Okay, thanks.

Operator

Thank you. I'm not showing further questions at this time. I would now like to hand the call back over to Mr. Petters for any closing remarks.

Mike Petters -- President and Chief Executive Officer

Well, I just want to thank everybody for joining us this morning. We had a good strong quarter. I'm pleased with where the leadership team is and where we're going. I hope that you and your families are able to stay safe and that you're able to encourage everyone out there to go get their shots. That's what we need right now. They're ready to give shots. So thank you all very much. We look forward to seeing you.

Operator

[Operators Closing Remarks]

Duration: 46 minutes

Call participants:

Dwayne Blake -- Vice President, Investor Relations

Mike Petters -- President and Chief Executive Officer

Christopher D. Kastner -- Executive Vice President and Chief Operating Officer

Thomas E. Stiehle -- Executive Vice President And Chief Financial Officer

Douglas Harned -- Bernstein -- Analyst

Myles Walton -- UBS -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

George Shapiro -- Shapiro Research -- Analyst

Seth Seifman -- JPMorgan -- Analyst

Ron Epstein -- Bank of America -- Analyst

Gautam Khanna -- Cowen -- Analyst

Noah Poponak -- Goldman Sachs -- Analyst

David Strauss -- Barclays -- Analyst

Burkett Huey -- Morningstar -- Analyst

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