Huntington Ingalls Industries, Inc.

Hey, thanks very much. Good morning. Just real quick, I apologize if I missed it, but if you could quantify the EACs and, you know, roughly how they were allocated between the arts.

Sure. Great, Seth. Yeah, it's net, it was 68 net. It was 106 favorable, 38 unfavorable. And on the net for 68 mil, it was split between Ingalls, Newport News, And mission technologies are a ratio of 80-15-5. So 68 net, 80-15-5.

Cool. Very good. And just as a quick follow-up, appreciate some of the pace of contracting activity in mission technologies, and we've seen it in other companies in the IT space. services space. But I guess if you could speak to the level of quarterly visibility that you have in that business, just given that not only did the guidance come down a little bit for the year, but the quarter itself fell a little bit short. And so what gives you confidence in sort of the remainder of the year there?

Yeah, so I'll start and I'll let Tom In the pipeline within our presentation, because we wanted to make sure everybody understood that there's a lot of opportunity in this space. It has started slow, but for the beginning of the year, but the window D mats. Which will help backlog and then book to don't you three and the wind of the LVC contract with the Air Force, which really transition to legacy. established program from the Navy, established over that into the Air Force, which will allow us to sell to other services as well, is a really good indicator that things are hopefully starting to break loose and really validates our strategy for the Alliant acquisition. So we are seeing some things break loose. We're going to have to see how that translates into revenue, but I'll let Tom talk about how it's distributed by quarter.

Yeah, sure. So just from a baseline perspective on this question, you know, it's 590 the first quarter. We had guided about 5% on 620. We did pop in light here at 600, so we finished the year off just under 1.2 with a run rate at like 2380 against initial guidance of 2.6. So that's background. Going forward, we do think that we'll see for Q3 a run right here of what we said the growth would be, which would be 7% to 9%. I don't know if you noticed enough, but in the PowerPoint briefing up front, we added emission technology slide and how we look at that business. Lion has a legacy process there, very robust on their pipeline and how they handle their work. Exploratory, $61 billion, down to $27 on the exploratory side. They break this down to which opportunities that they can qualify and capture, and then that goes into the evaluations and bids. So we see that pipeline actually growing. from the time that we picked them up last year, so that's a positive sign right now. As Chris said, we were impacted at the beginning of the year with the CRA, and then just the general outflow with contracting and acquisitions has been a little bit slower than we thought. We have seen some awards that popped on here in the end of Q2 timeframe, and there's still additional opportunity that will happen on the back half of the year. So I'm still optimistic on the awards front. The other piece that holds us up there is we do have more seats than we have heads right now. Like the shipyards, there's a hiring crunch there. The job market is tight, finding people with that type of background and tickets. So there's seats there we have unfilled, and that brings in some variability on the sales outcome of the year. But we still have the 2.4 to 2.6. We haven't let go of the top end, depending on a couple of awards, which the awards will really affect next year's sales in this, and filling the seats that are unoccupied. We believe that we're still in the range there between 2.4 and 2.6. Great.

Thanks for the detailed responses. Thank you.

Sure. Thank you. Our next question comes from Gautam Khanna from Cowan. Gautam, please go ahead.

Hey, good morning, guys. Morning, Gautam. I was wondering if you could talk a little bit about the VCS program. There's been a lot of press and GAO and industry scuttle about the program being well behind schedule. And obviously you guys took a big charge in Q2 of 20. It looks like there was another negative EAC in this quarter. Just where are we on the program relative to your expectations? And, you know, if you could just maybe give us some color on what your accrual rate might be so that we should either be... Yeah, so thanks for that, Kyle.

I'm sorry. I'll let you finish. Did you have anything else?

No, please. No, that's great. Thank you.

Okay, great. Yeah, so the VCS program, I would characterize that as stable from a scheduling standpoint. And over the last few quarters, pretty stable from an EAC standpoint, actually. There's always minor adjustments from quarter to quarter. But I think some of the data you may be referencing is a bit dated. As you know, we do quarterly EACs. uh, we incorporate the risk in, in all of the ships, uh, and boats, um, on a quarterly basis. So, um, I'm pretty comfortable with where we are, um, uh, from an AAC standpoint on the VCS. Um, I don't think anything is all, any of us are comfortable relative to the, um, how we performed historically on the program. We need to improve, right? I think, um, the Newport News team is very motivated and, um, I'm dedicated to getting it right. They're making progress. There's, some, uh, uh, potential, uh, momentum, uh, within block four, uh, which will have to translate into block five. I think there's some upside in block five. So I think the team is very focused. I think they're working, working the operating system very well. We need to get back to two per year. We need to get these assets back, uh, to our customer because they need them. Um, so, uh, uh, I would consider it stable from a schedule standpoint, and we need to continue to improve from a cost standpoint. And any details, I'll send over to Tom here.

Sure, yeah. You know, I think when we took that charge back in Q2 of 2020, the practice of that was we had a list already, you know, with Columbia coming online. We saw that ramping up and then getting to a full two cadence of launch and sell off a ship a year. There was already a list and a risk and a hiring ramp right there. Obviously, in 2020, after two quarters of that, kind of mid-year, we saw with COVID impacting us, And then obviously that continued with Omicron into 2021. So there's been pressure on the program from what was the baseline of already being able to do two plus one between those two programs, hiring ramp with more junior people on board. And then that line that we've talked about in past calls is very serial in nature, more than any of our other lines. Each boat goes exactly through crew to crew. So if one boat in front of us gets It affects the line behind it, both the crews being able to cycle and then the schedule aspect of each boat. So I think when we took that look-see of where we were in Q2 of 20, we had a perspective of what was in the art of the possible and how we could recover or finish off the back end of Block 4 as it translates into Block 5. So I think, as Chris said, we're relying on operating systems. We're trying to stay to our manning plan that we have. We're doing lessons learned from boat to boat. We are seeing incremental improvement from operational where we were a quarter ago to now. So that's a positive sign right now. And as Chris says, we run a very rigorous EAC process and we look at our labor and material and overhead runouts, reevaluating our booking rates. The changes are not large, so you don't see them on the downside there. But we do have incremental changes from quarter to quarter here. So I'm comfortable with where we're booking these ships right now. Thank you very much, guys.

Thanks, Adam.

Thank you. Our next question comes from George Shapiro from Shapara Research. George, please go ahead.

Yes, good morning.

Good morning.

My question is that if you take your EACs, it would imply the underlying margin at Ingalls is like 7.9%, which is generally higher than what you've seen in the past around 7%. So I was just wondering, Is that just unique to this quarter, or is this more of an ongoing underlying margin rate?

It is a little bit of a unique for this quarter. That's a high number. You know, the run rate from Ingalls is usually a low in the upper sixes and low sevens. I think just how all the math kind of played out with the performance lift. We talked about the economic adjustments that were allowed because of the clauses that we have in the contract. So, Your math may just be a little high there, but generally speaking, we've talked about the maturity of the portfolio down at Ingalls, more serial production and follow-on shifts down there. So their run rate is out in front of Newport News, and we generally say it's between 6% and 7%, so I'd leave you with that, George.

Yeah, no, that's really the question. If I did the numbers this quarter, it looks like it would come out to 7-9, and like you suggest, it's normally closer to 7. So I'm just wondering if there's something unique that made this quarter out of line, or is it a new run rate?

It's not a new run rate. It's just how the math plays out for the quarter.

Okay. Thanks very much. Thanks, George.

Thank you. Our next question comes from David Strauss from Barclay. David, please go ahead.

Thanks. Good morning. Good morning. Good morning. Tom, I wanted to ask about the free passable cadence. I know you mentioned Q3 close to, I guess, zero, break even. I think you're still calling for a pretty meaningful working capital tailwind in the second half of the year. It looks like CapEx might be trending towards the lower end of your range. You know, what keeps you from coming in a decent amount above kind of the 300 to 350, assuming R&D doesn't happen?

Yep, so, astute question, and you're putting pieces together out there. You know, as we highlighted in the opening presentation, comments, we did say $3,350. We're holding that right now. I do feel comfortable that with the risk we've seen behind us and in front of us, we still have like five months of the year to play out. But right now, we do see, although Q3 will be light, just the way the year is playing out, Q2 and Q4 are going to be the cash flow quarters. But I do see we've been, the COVID repay is pushed to the back half of the year. And as I come through our planning process and I have, you know, the complete visibility of how the year is going to play out, is the COVID repay either happening this year or next year? That's more of a timing play. The R&D amortization you referenced, we'll see how that plays. But that could be, you know, the $100 million that we talk about as a down take this year could go away. And if the law changes this, it seems like there's some traction and momentum to get attached to a bill at the back half of the year. If that change is over, we could see the $100 million go away as we foreshadow on a downside, and then it would validate the $3.2 billion over the five years. Cash from operations was very strong in Q2. We saw some nice pickups as far as older contracts, some service contracts. We're able to get COVID costs that we had on our books included in our billing rates, so that was a pickup. And that's how Q2 kind of played out. When you think about Q4 on the back half of the year, I have 123 delivery. On the DDG side, I have a couple of supply capital incentives that play out. LHA 8 billings, LHA 9 with the construction award helped clean up the long-lead contract that I have on there for cash. And then CBN 81 is going to be able to have progress payment billings as they work through kind of getting into Q4. We have some incentives on VCS, and then a lot of nulls kind of kick in that I'll use at the end of the year, too. So a good upside potential there, but I'm not ready to call that ball until I can get through our planning process.

Okay. Thanks. And I mean, is any of this borrowing from kind of the upside you, uh, you know, you, you've talked about for, uh, for 23 going up to 750 to 800 or, you know, you think maybe there's a little bit upside, but you know, the plan's still intact to get to those kinds of numbers in 23.

So just to be clear, the majority of what I talked about is in the plan and the forecast right now, um, those things could kick out, you know, uh, $25, $50, $75 a million upside. The tiny aspect would be the COVID repay. So if I do not have to pay it at the end of this year, that would be a pull forward from 23 to now. But I believe by the time we have our Q3 call in November, I'll have complete clarity into that. I'll give you more visibility.

Okay. Thanks very much.

Thank you. Our next question comes from Ron Epstein from Bank of America. Ron, please go ahead.

Hey, good morning guys. Maybe I could just walk through a couple of different programs and how things are going. In the unmanned underwater vehicle business, how is XLUV coming for you guys?

Yeah, so XL is progressing. Right. We've delivered our first unit to Boeing, really kind of a test unit. We're progressing through the other units, so it's going okay. I think normal first-of-class issues that you have on a new program, on a development sort of program, so it's going okay.

Okay, great. And then maybe just another program, if we can. On the next-generation destroyer, where does that stand, and when do you think there will be – competition for that and what's going on there if you can give us an update on the DDTX.

Yeah, so I think you may have seen in the press that we got the next contract for development there, kind of concept development working. I think the Navy's done some really smart things in this regard with Bath and and Ingalls working on the development of that program. I think the important thing on the DDG programs is to ensure we don't stop building DDG 51s prior to transitioning and getting the design correct on the next generation destroyer, and I think that's a smart move. I think they're continuing with the design effort in both shipyards, and we're continuing to build DDG 51, so I think it makes great sense right now.

Okay, okay, okay. And then I might have missed this, but maybe not. Where did we stand on the Coast Guard officer patrol cutter? Was that formally awarded yet, or where did we stand on that program?

Yeah, it was awarded. It was not awarded to us. It was disappointing. We know how to build those ships. Coast Guard is a great customer, but we were not awarded that.

Is there another opportunity for that program? that tall in another competition?

Not sure. They're just coming through this competition for the next block of those boats. So not sure at this point.

Got it. And maybe just one last one. When we look down the road at maybe some future things you potentially could be bidding for, what can we be looking out for?

Yeah, so interesting, Newport News is full, right? They've got a lot of work to do. They're executing on it, and their legacy programs will continue over the medium to long term, actually. Ingalls is, based on the pace of LHAs and LPDs, they're going to be in a very good place, but they have other opportunities. DDG 1000 is down there now, and they're doing some combat system upgrades for that, and there's potential other DDG 1000 work that might be available. Another repair sort of activity, but Ingalls is a pretty scrappy group. I wouldn't count them out, and with the pace of LHAs and LPDs, we've got a lot of time to figure that out.

Okay, great. Thank you. Sure.

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

Okay, thank you for your interest in HAI. We welcome your continued engagement and feedback. Please have a safe and great rest of summer. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.