Huntington Ingalls Industries, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2023 HII earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please dial star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, please dial star 0 to speak with an operator. I would now like to turn the call over to Christy Thomas, Vice President of Investor Relations. Mr. Thomas, you may begin.

Thank you, Operator, and good morning, everyone. Welcome to the HII Second Quarter 2023 Earnings Conference Call. Joining me today on the call are Chris Kastner, our President and CEO, and Tom Steele, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical fact are considered our company's estimates or expectations and are forward-looking statements made pursuant to the safe harbor provisions of federal securities law. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also in the remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner.

Chris? Thanks, Christy. Good morning, everyone. Thank you for joining us. The HI team delivered another solid quarter. Our results demonstrate continued top-line growth and steady operational performance. We continue to make progress on our strategy, executing on our significant shipbuilding backlog and growing mission technologies. Not only are we executing on our shipbuilding backlog, we are also delivering all domain solutions through our unique capabilities to connect the different platforms that our customers use to perform their missions. Now let's turn to our results on page three of the presentation. Top line growth was 4.7% from the second quarter of 2022, resulting in second quarter revenue of $2.8 billion. Diluted earnings per share was $3.27 for the quarter, down from $4.44 in the second quarter of 2022. New contract awards during the quarter were approximately $2.6 billion, which resulted in backlogs of approximately $47 billion at the end of the quarter, of which $24 billion is currently funded. In the second quarter at Ingalls, we laid the keel for LPD 31 Pittsburgh and successfully completed builder's trials for NSC 10 Calhoun. We also successfully completed acceptance trials and delivered the first flight three Arleigh Burke destroyer DDG-125 Jack H. Lucas. We expect to launch DDG-128 Ted Stevens and LHA-8 Bougainville and deliver NSC-10 and LPD-29 Richard M. McCool Jr. later this year. At Newport News, we christened Virginia-class attack submarine SSN-798 Massachusetts and re-delivered the Nimitz-class aircraft carrier, CBN 73 USS George Washington. Later this year, Newport News expects to float off SSN 798 and deliver SSN 796 New Jersey. As I previewed last quarter, CBN 79 Kennedy received the contract modification intended to optimize its construction schedule and deliver a more capable ship to the fleet earlier which updates the expected ship delivery to 2025. Slide four summarizes the projected shipbuilding milestones for 2023 and 2024, reflecting the updates for the CVN 79 contract modification and an update for the expected shipment of the final module of Virginia Class Submarine Block 4, SSN 801 Utah, which is moved to 2024. At Mission Technologies, we saw the second straight quarter of record high revenue of $645 million, with sales growing 7.5% over the second quarter of 2022. Mission Technologies had multiple wins in the quarter across its business units, capped off with the early third quarter win of JNEO, a $1.4 billion contract vehicle that serves the National Security Innovation Network and its mission partners by enabling the transition of innovation in both speed and scale from the lab to the battle space. In addition to these accomplishments, we recognize and are committed to the broader international opportunities represented by the AUKUS agreement, which directly align with our capabilities in nuclear submarines, as well as other emerging technologies as set forth in Pillar 2 of the AUKUS agreement. Turning to activities in Washington, the President's budget request for fiscal year 2024 is under consideration by Congress, and as bills progress through both chambers, we continue to see bipartisan support for our programs. We are pleased that the Armed Services Committees have shown strong support for shipbuilding to include authorizing funding for LPD-33 and multi-year procurement authorization for the next block of Virginia-class submarines. Both authorization bills, which have been passed by the respective chambers, authorized funding for the requested procurement of two Virginia-class submarines, one Columbia-class ballistic missile submarine, and two DDG-51 Arleigh Burke destroyers. Both House and Senate appropriations committees include multi-year procurement authority for Block 6 Virginia-class submarines and fund the procurement of two Virginia-class submarines, one Columbia-class ballistic missile submarine, and two DDG-51 Arleigh Burke destroyers. The Senate Appropriations Bill provides advanced procurement funding for LPD-33 in FY24 and a third DDG-51 in FY25. And the House Appropriations Bill includes language supporting a stable rate of procurement of amphibious warfare ships. Final outcomes will depend on respective conference negotiations between the appropriations and the authorization committees. Now moving to labor, through the second quarter we hired over 3,200 craftsmen and women on a solid pace to meet our full-year plan of approximately 5,000. Although we are meeting our hiring targets, attrition remains high, and labor is still the greatest risk to meeting our plan. We are continuing to devote substantial effort at both shipyards in the areas of recruiting, robust training, and retention of our workforce in this very challenging labor environment. In summary, the strong demand for our products and services coupled with continued progress on our strategy of executing against our backlog and growing mission technologies sets the foundation for HII to continue to fulfill our mission to deliver the world's most powerful ships and all the main solutions in service of the nation. And now, I will turn the call over to Tom for some remarks on our financial results. Tom?

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 five of the presentation, our second quarter revenues of $2.8 billion increased approximately 4.7 percent compared to the same period last year and represents a record second quarter result for HII. This increase to revenue was largely attributable to growth at Newport News Shipbuilding and Mission Technologies. Operating income for the quarter of $156 million decreased by $35 million, or 18%, from the second quarter of 2022, with a margin of 7.2% in the same period last year. The decrease in operating income was primarily due to lower segment operating income, partially offset by more favorable operating fast cash a year period. Net earnings in the quarter were $130 million compared to $178 million in the second quarter of 2022. Diluted earnings per share in the quarter was $3.27 compared to $4.44 in the second quarter of the previous year. Shipbuilding results in the quarter were in line with our expectations and slightly stronger than the outlook we provided on our first quarter call. Segment operating income in the second quarter of 2022 benefited significantly from favorable adjustments from facilities capital and economic price adjustment clauses at both Ingalls and Newport News, making for a difficult comparison year over year as expected. Moving on to slide six, Ingalls revenues of $664 million in the quarter and increased $6 million, or about 1% from the same period last year, driven primarily by higher revenues. revenues on the DDG program, partially offset by lower NSC program revenues. Ingalls operating income of $65 million and operating margin of 9.8% in the quarter declined from last year, as expected, primarily due to lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses.

period last year due to growth in both aircraft carrier and submarine construction revenues.

Newport News operating income in the second quarter of 2023 was $95 million, an increase of $1 million, or 1.1%, compared to the second quarter of last year.

Operating income was largely consistent year-over-year, as favorable... ...contract estimates from facilities capital and economic price adjustment clauses.

Shipbuilding operating margin in the second quarter was 7.4 percent, above the 7 percent outlook we had previously provided for the quarter. Our shipbuilding operating margin outlook for the full year is unchanged. We have noted previously that our expected milestones for 2023 are concentrated in the second half of the year and largely in the fourth quarter. Admission technologies revenues of $645 million increased 45 million or 7.5 percent compared to the second quarter Primarily driven by higher volumes in mission-based solutions, which includes our C5ISR, cyber electronic warfare, and live virtual and constructive training capabilities. Mission technology's operating income of $9 million compares to operating income of $25 million in the second quarter of last year. The second quarter of 2022 included additional non-recurring equity income of approximately $15 million for an equity method investment in a ship repair joint venture.

flows.

Additionally, a negative equity method adjustment of $6 million was recorded from the sale of the ship repair joint venture. Current results for Mission Technologies included approximately $28 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the second quarter was 6.7%. Turning to slide 7, cash from operations was $82 million in the quarter. Net capital expenditures was $68 million, or 2.4% of revenues. Free cash flow in the quarter was $14 million. This compares to $67 million, net capital expenditures of $59 million, or 2.2% of revenues, and free cash flow of $208 million in the second quarter of 2022. Cash contributions to our pension and other post-retirement benefit plans were $11 million in the quarter. During the second quarter, we paid dividends of $1.24 per share, or $50 million in aggregate. We also repurchased approximately 37,000 shares during the quarter at an aggregate cost of approximately $7 million. Year-to-date through the second quarter, we repurchased approximately 76,000 shares at an aggregate cost of approximately $16 million. Moving on to slide eight, our free cash flow outlook through 2024 remains unchanged, as do our capital allocation priorities. Regarding 2023 free cash flow guidance, we continue to see $400 to $450 million as the most likely range. We continue to work with our customer on the timing and mechanics regarding the repayment of COVID-related advances, which is currently forecasted to occur in 2023. At this time, we do not have an agreement in place that would increase our free cash flow above the guidance range we have provided. I'll highlight that we continue to expect to distribute substantially all free cash flow to our shareholders through 2024 after planned debt repayment, which is on track. Turning to slide nine, we are reaffirming our 2023 segment guidance. I will also provide some color on how we see the third quarter and the remainder of the year.

Regarding the third quarter, we expect shipbuilding revenue to be approximately 2.1 million dollars. We expect our most impactful shipbuilding milestones to occur.

For Mission Technologies, we expect third quarter revenue to be similar to the second quarter results and expect third quarter operating margin of approximately 2.5%. Given second quarter results and the impact of the equity method accounting adjustment I referenced earlier, we currently believe that Mission Technologies 2023 operating and EBITDA margins are likely to be close to the low end of the guidance ranges we have provided. We expect third quarter free cash flow to be approximately 100 million. Again, there is no change to our guidance for the year. We expect our cash flow generation will fall predominantly in the fourth quarter. Our cash expectation is consistent with both our expected timing for milestones and our normal cash cadence of the calendar year. To summarize, the second quarter shipbuilding results were largely in line with the expectations we provided on our first quarter call. Newport News and Ingalls continued to hit critical shipbuilding milestones. Mission Technologies delivered impressive year-over-year revenue growth. the Mission Technologies team continues to capture meaningful contract wins and maintains a very robust pipeline. We have great confidence in their future and the long-term value creation opportunity. Finally, we are pleased to reaffirm our full-year segment guidance as we remain focused on executing the milestones and commitments that we've laid out. With that, I'll turn the call back over to Christy to manage the Q&A.

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 will turn it over to you to manage the Q&A.

Thank you. If you would like to ask a question, please dial star 1 on your telephone keypad to enter the queue. And our first question today is from the line of Doug Harned from Bernstein. Doug, your line is now open.

Thank you. Good morning.

Good morning, Doug.

On Virginia CLASP, the program right now is It's well behind the two-per-year delivery objective in Block 5. I mean, do you see a path to get there?

What is the rate?

Yeah, the largest obstacle, the largest risk on the VCS program right now is labor and meeting our labor targets. We've worked hard here in Newport News to hire. You saw in my prepared remarks, we're ahead of plan, over 3,200 heads for the year. So that's some positive indicators. But this is a labor-driven issue. And as I said, we've made good progress. We just need to continue to do that over the next couple of years.

When you look at Newport News, you're a partner with Electric Boat on Virginia class, but you're a subcontractor on Columbia class. How do those different relationships affect the way in which you work with Electric Boat on the programs?

It's not a material difference. Obviously, you have contractual differences, but when you get down to the deck plate, those teams work very closely together. There's There's a relationship that's been developed over a number of years between the two teams. And when you think about the efficiency of getting the work done and potentially transferring some work back and forth, there's obviously contractual mechanisms that need to be put in place under Columbia that you don't need under the Virginia class, but they work very closely together.

So there's no, in your mind, there's no real effective difference in the way, there's no sort of preferred relationship here that one works better than the other?

Not really. Not really. The objective there is to get, you know, these critical assets to the fleet as soon as we can. So the team works very closely to ensure we're working on that.

Okay, great. Thank you.

Sure.

Our next question is from the line of Robert Springard of Milius Research. Robert, your line is now open. Please go ahead.

Hey, good morning. Tom, just a clarification on the Thank you. And, Chris, then a high-level one for you. But, Tom, on the margins at Mission Technologies, you talked about the 1.4 percent, but a $6 million impact in the sale of the JV. So, was that impact built into the guidance?

No, it wasn't built into it. It wasn't into our guidance right now. So, go ahead. All right.

And so, this is why you're tracking to the low end? Is that how I should interpret that? Okay. And then, Chris, a very high-level question, but between shipbuilding and MT, I thought it might be interesting to hear you talk about how these two businesses can contribute to two priority areas for DOD, and that's JADC2 and contested logistics.

Oh, that's a really good question, Pete. You almost kind of teed me up there. You know, interesting, the Align acquisition, they have really great AIML products and big data products that fit right into JADC2 and potential JADC2 missions. And when you think about data and big data and the speed in which data can be understood, it fits right into the contested logistics model as well. You know, we have an LVC enterprise that is not just training. It can fit right into a war gaming concept. Think about war gaming. You think about O-plans. You think about O-plans. You have to think about contested logistics. So we have products that can quickly be adapted to deal with those two issues. We've had high-level conversations with the Navy and other customers about potential applications there. So we think we can add to those product sets. We think they're important product sets. and we'll continue to talk to the customer about it.

Thanks so much.

Sure.

Our next question today is from the line of Pete Skiewiczki from Olympic Global. Pete, your line is now open.

Hey, good morning, guys. Good morning. Chris, on the hiring, can you give us the actual net hiring, net retention numbers, kind of after attrition, and maybe – Can you gauge a level of revenue that could be at risk if you don't meet your net goals for the balance of the year?

Yeah, so we don't provide net. There's a lot of things going into that equation. We have overtime. We have attendance. We have attrition. We have job shop labor that could contribute to that. I will say, you know, there's potentially some upside if we're able to continue to meet our hiring goals and deal with attrition. over the balance of the year, but we just need to see how the year develops.

Okay, okay. And then I want to ask about the Kennedy contract mod. It was a little under $400 million on the mod. Does it raise your – now that that's in place, does it raise your confidence level in terms of, you know, how your performance on that project could trend through next year and the potential milestone opportunities for you on the project?

Yeah, no, the team did a really good job incorporating the – the PSA work into the baseline contract and assessing the schedule, and we're putting the work or integrating that work into the baseline schedule. We're confident the way that Kennedy is developing. They're meeting their compartment completion goals, their test rates proceeding, and the plans proceeding. So we've got a lot of confidence in where the Kennedy's at right now.

Okay. Maybe another way of saying it, are the – milestone opportunities on the Kennedy meaningful relative to other programs, or should we not, you know, focus so much on the Kennedy?

We're just going to have to see. We're going to have to let things play out over the next 18 months, 18 to 24 months. It's a lot of critical work in front of us, but potentially if we continue to perform well, there will be milestone opportunities for sure.

Okay. Okay. Thank you.

Sure.

The next question says from the line of Seth Seifman of J.P. Morgan. Seth, please go ahead. Your line is up.

Okay. Thanks very much, and good morning. Good morning. I wanted to ask, in mission tech, you know, looking at the margin there and then looking at the contract mix, is fixed price is a relatively small portion of the mix. I think it's like 12%. And so when you think over time about the profitability that you want to see in that business, and it seems to be an environment where there are more opportunities in the Fed IT services market right now, is that something that the business is going to try to move higher? Or is that not really consistent with the risk profile that you want to take on?

Yeah, so we believe it will move higher. We're going to, you indicated that the majority of those contracts are cost plus. That's true. I think over 80%, which drives the margin rate a bit lower. The team there at Mission Technologies is, you know, we're focused on technology there. So there's going to be a lot of cost plus work, but they're competing very well also. And in their pipeline, there is fixed price opportunities. And we're going to pursue those where those make sense. And if we're successful, the mix should improve a bit and margin will improve. And Tom, do you have anything on that?

Yeah, so you are right there, Seth. It's 87% is cost of contracts. I would say that there is a move of a foot there. I mean, we kind of realize the customer sets that we have in the portfolio. There is a move to try and introduce more technology that will bring about potential premium on pricing on that front. And then as we get away from services and more into products, that's another area, too, where we could see an expansion of the margin on those jobs.

Great. Great. Thanks. And then just a real quick follow-up, Tom. The Q3 cash flow target that you gave, what does that contemplate with regard to the advance repayment?

So right now, a little color on that, right? So we got an extension on that. It was supposed to be repaid by the end of June. It was a two-month extension. So in negotiations, the Navy's now going out and understanding how we'll transition the contract back from the advanced product pay that was in place since 2020. Don't have a negotiated settlement on that yet, so I don't know what that's going to entail. The guide assumes that there's not a payback right now on that, and we'll have to work ourselves through that as we go through here. So, you know, that's a normal run rate that we expect for the quarter. It doesn't impact the guide of 4 to 450 that I've said for the entire year. And I would tell you that the best way to model it and take a look at it is stick to that guidance right now. I think in another 60 days we'll get a look-see on what that negotiations entails. The timing of it and the impact I'll know then. We have some significant milestones in the back half of the year, so we'll have three deliveries, two launches, and one float off. You know, every time I have a delivery, we liquidate the contract, I get the contract price, the Navy gets the ship. Just some retentions for work that was incomplete there, so there's opportunities that's there to work those retentions off, and that's an opportunity for both margin and cash. As I work myself to the back half of the year with LP29, it's not going to hit this year. Next year we're still holding that milestone as a 2023 event. But I would take a look at cash just from now through 2024, the milestone chart that we gave you, the five-year look. It's $1.2 billion over the next 17 months, and I'm still comfortable that we're on target to kind of make those goals.

Great.

Cool. Thank you very much. The next question today is from the line of Miles Walton of Wolf Research. Please go ahead. Your line is now open.

Thanks. I was hoping you could comment on two items. One, the 801 module move, and I guess does that put any pressure on the marketing guidance range for this year? And then also on LHA 8, were there any costs that you had to absorb in the quarter, or was it minor and sort of non-material?

Yeah, so I'll handle that, and then Tom can chip in if he needs to. So 801 had some late breaking rework that pushed that module at the beginning of next year. It was a late in the year delivery, so just modest, really not a material impact. As I said to Doug previously, the team's pretty good at moving work back and forth to ensure they do that as efficiently as possible, so not a material impact on 801. On LHA 8, I think first things first, I don't want to just kind of gloss over a pretty significant thing that we really pay attention to in the shipyards is the fire on LHA 8. First thing you have to do is make sure everybody's safe. The team did a really good job. The first responders made sure no one was hurt, just minor smoke inhalation, but all the shipbuilders and the Navy personnel were safe. Second thing is to limit the damage. They did that. minor damage to one compartment, some wireways. We put a corrective action plan, did a root cause analysis. We're working through that corrective action plan now. So the important thing is that we learn from this issue. So no real cost or schedule impact that's material on LHA 8, and the milestones for that ship remain intact.

Okay. Thanks for that. And then just on the buying out of Honeywell's portion of the Savannah River JV, What's the expected outflow for your incremental portion being acquired?

Yes, it's already in, right?

So we pay that right now. You can see that in the cash flow in investing. It's $21 million on out, and we expect to get additional margin of cash in the out years. We haven't defined that.

Thank you.

Thanks, Miles.

Our next question is from the line of David Strauss of Barclays. Please go ahead. Your line is open.

Great. Thank you. Good morning.

Good morning.

Tom, good morning. Tom, can you just give us an update kind of working capital progress year to date as it's tracking? I think you're about 8% of revenues now in the working capital if you're tracking. kind of where you would expect it year to date. Remind us again of what you're expecting at the end of the year and what your big hand to the 24 free cash flow forecast.

Yeah, so I am on plan and consistent with the forecast and discussions we've had at past earnings releases. 8% is about right. That's where I find myself right now, popping out of this quarter. I'll work myself through the back half of the year with the shipyards. to get around the 6 percent target that we've talked about. And then there is some tailwinds as we go from 23 to 24, consistent with what we've had in past discussions. You know, we used to think of, before Mission Technologies, the 6 to 8 percent was the norm of where we think working capital would be in the yard. As Mission Technologies has grown and we've gotten to more of a cadence between the two yards and our cereal production programs, I look at it more as 4 to 6 percent. We'll finish this year out on the higher end of that range, and then as we work ourselves into 2024, we'll be on the lower end of that range here. Just the cadence, making milestones, the schedule, deliveries, we settle down both in the material and the labor that we give you some status about, and that's going to bring about some consistency and keep us in the norm range as I see in the coming years going forward.

Okay, great. And then as a follow-up, in terms of the shipbuilding margin that's implied for Q4, are you or are we potentially looking at a margin at Ingalls in a similar range to kind of what we saw in the first half of 2022 when it was strongly in the double-digit range? And if LTD 29, that delivery does slip, how much risk is there to the Q4 margin guide? Thanks.

Sure. So we don't give specific forecasts by each yard, but, you know, obviously we can do the math here. It's 6-7 at the first quarter and 7-4 this quarter for Q2 for shipbuilding, and we're guiding 7-4 for Q3. You know, it's in the low to upper ranges for Q4 in the 9% for shipbuilding across both yards. I'm very comfortable with that. I think I gave an answer earlier, but I'll hit it again. You know, we still have three deliveries, two launches, one float off, all in Q3 and Q4, heavily loaded in Q4 timeframe. Both the deliveries themselves that are upcoming and the two we've had this year have retentions and releases associated with that that bring both margin and cash. And then on the back half of the year, I have some smaller incentives and some change adjudication too that will play out. So I think 23 is opposite of 22. We saw a very strong first half. Specifically, as you mentioned, angles is in the 13% and 16% in Q1 and Q2. I won't get into the breakdown in the yards as a forecast for the back half of 2023, but I'm comfortable that back half is going to be meaningfully higher than the front half. It was a pacing year for the first half of this year.

And the risk around if LPD 29 slips, the delivery?

So, you know, it's the very back half of the year here. As we come through, we've talked in the past whether the deliveries are clean or, you know, are they timely or do they go around when we want with a lot of retentions or not. Right now, LPD 29 is progressing well. We're in it to win it. We don't see any avenue that is in our way right now. We still have five months of things to do, taking the ship to sea and burning down risk there. But we'll have to see how that plays out. I don't want to overly play my hand on that. It's one ship and one milestone in the context of the shipbuilding here. So I don't think it will either overly hurt or overly help us. And I think the guide's appropriate right now. We still maintain the 7%, 7% to 8% shipbuilding margin by year's end.

Thank you.

Thanks.

My next question is from the line of Gautam Khanna of TD Cowan. Gautam, please go ahead. Your line is open. Hey, good morning, guys.

Good morning, Guy.

Hey, I was wondering, remember when the fit-up came out and there were different schedules for various ships in terms of delivery dates and the like? And I'm just curious, relative to the prior update, I was curious if you had any better color on, you know, how to reconcile that with your own expectations for delivery dates? over the next couple years?

Yeah, I can start and then Tom can chime in. I think it's context and timing on those delivery dates and really assessment of risk. They might move a couple of months or have a different representation of deliveries a couple months one way or the other. But we assess our EACs and our schedules on a very consistent basis. You're looking at a one-time adjustment potentially or notification to Congress. So I really think it's a context issue more than a disconnect because we work very closely with our customers so that they understand where we are from a schedule standpoint, how we're assessing the schedule. They have their own point of view on the schedules, and it's very reconcilable.

I really don't have much more to add on that. On an annual basis, as the NDAA and the budgets pop out, and then obviously we take a look at the FIDAP, which gives you a five-year look at the forecast on funding perspective, we reconcile where we stand. It's a cross-reference of what we do anyway, every 13 weeks doing EACs, and we make sure that we align actuals to date and estimate to complete, where we are with our labor and material performance and burden expectations of future performance. And all that gets baked into a revised EAC that marries home to an updated long-range strategic plan that we have, a labor resource plan, and then the master construction schedules that we have at each site. So we're locked tight with ourselves. And then we have monthly reviews with our program offices into our customers. So I don't think there is any disconnect there.

OK. And just if you wouldn't mind providing the EACs, the NET EACs by segment and also there was some language in the release about VCS favorable variants. Could you just give us a quick update on how that program is performing and if there was a favorable EAC on that program in particular? Thanks.

I'll start with the VCS performance, and then Tom will talk about the net EACs in the quarter. So, yeah, VCS is definitely showing some stability and some positive momentum. So, as Tom said, we assess our EACs every quarter, and there's nothing material to note, but there is some. The team's working very hard, the program team on VCS, to meet their milestones and meet their costs targets in really kind of a difficult macroeconomic environment. So there is some progress there. There's definitely some progress on stability on VCS. I continue to think the best thing we can do on the VCS program is meet our commitments on the Block 4 contract, get those shifts and modules out, and then transition into Block 5 where we have more opportunity. So with that, Tom, the- Sure, yeah, right.

And the favorable, the gross favorable was $72 million. Unfavorable was $52 million. The net was $20 million, and that was made up of $17 million at Ingalls, or 85%, and $3 million, or 15% at MT. There was no specific program, either favorable, unfavorable. That was material. Thanks.

Great. Our next question stays from the line of George Shapiro from Shapiro Research. George, please go ahead. Your line's open.

Yes, Tom, if you just look at the free cash flow implied in the fourth quarter at the midpoints around $360 million, of the milestones that you have listed for Ingalls and Newport for the fourth quarter, what are the key ones that would contribute to that?

So I think it's a host of it. You can run down there if you go to the slide on the milestones, but the launches and the deliveries that we've talked about, the retention releases on delivered chips. We've talked about adjudication of change. There's some minor incentives that we pick up too. So, you know, usually because of the seasonality, you do see Q4 to be very strong for us. We saw that last year with over half a billion dollars in Q4. So I think the plan and the milestones are situated for us to generate that same type result this year. I would want to clarify, too, because earlier I think I want to make sure everyone understands what I said. The guide specific for Q3 assumes that there is a repayment for COVID right now. My comment was, since I don't know of any change with the Navy and what that could do, we're sticking to how we got it at the beginning of the year, $450,000. with the COVID repay is going to occur this year. If and when that changes, and we know how much, we'll give you some more color. I would expect that come the November call for Q3, we'll have a real good look at the milestone performance, how the rest of the year is wrapping up, and I would anticipate the negotiations with the Navy is behind us, and then give you more color on that.

Okay, thanks very much. Thanks, George.

Our next question is from the line of Ron Epstein from Bank of America. Ron, your line is now open. Please go ahead.

Hey, hey, man. Good morning, guys. Just a couple of quick ones. Morning. Can you speak a little bit about the DDG 51 award? That was pretty gigantic. You know, how that's going to play out and, you know, was it a competitive bid? I'm guessing it was right. And how you're thinking about that, but let's start with that.

Yeah. So DDG 51, um, Excellent job by the Ingalls team competing for that. It was competitive. There's a standard competitive environment between the two shipyards, both of which are very, very capable shipyards. Getting awarded six is very positive. It just shows the demonstrated proficiency of that Ingalls team on executing. It's obvious we've delivered DDG-125 already, and we're proceeding on the next flight three. So really, really a positive indicator. What it does is provide a lot of stability for Ingalls moving forward. That ship six ship by combined with LPDs and support for LPD 33 and potential bundle arrangements for LPDs and LHA moving forward provides a lot of stability for Ingalls and it's very positive.

Got it. Got it. And then on the Savannah River stuff, my understanding of how the accounting would work, that you guys would potentially take a gain, right? I think that's how it works. Are you deferring it, or did you take a gain in the quarter?

No, we didn't take a gain in the quarter right now. So we've become a higher owner of the joint venture. You know, still a minority owner, but a higher owner of it. So as proceeds are released, it's unconsolidated, you know, how that's reported. As the gains happen in the future, it'll be higher than what we've had in the past. So I expect that to play out over the next, the next couple of years.

Got it. So it wasn't like a, an event where you could mark to market and then you're carrying value or whatever. Nope. Nope. Got it. Got it. And then could you, could you speak a little bit to, you know, how it's going in terms of, of, you know, retention of employees and how the workforce has evolved here as we recover from kind of all the COVID disruptions?

Yeah. Workforce is, Definitely evolving, Ron. Thanks for that question. As I said previously, hiring is better, right? The applicant rate is better. But retention is still a challenge. And what we're finding is the days of hiring someone, training them, and sending them down to the deck plate are really over. We need to ensure that the new hires that don't come through our established programs, because the apprentice school, community colleges, and high school programs are still very successful. when it comes to retention. But the walk-ins, we need to make sure that we shepherd them through the process of the next 12 to 18 months of their employment to make them understand that this is a good career and there's opportunity for growth and stability. So that's really the fundamental change is the walk-in applicants are just not the same as they used to be. So that's what both Ingalls and Newport News are working on.

Got it. All right. Thank you very much.

Sure.

And the next question is from the line of Noah Poppenack of Goldman Sachs. Noah, your line is open.

Hey, good morning, everyone. Noah?

Good morning, Noah. If I take the MT revenue guide to be flat sequentially in the third quarter, I think we'd have to be maybe down a little or flat year over year in the fourth quarter to be at the 5% for the year after being kind of six to eight through the first nine months of the year. So how much of that is just kind of leaving some conservatism there? How do you see the MT organic revenue growth profile from here?

At 645, that's a record quarter that they've had, followed 624, which was the previous record quarter. I feel comfortable with it right now. I think 645 is a balance between these new awards that have to occur and then get delivery orders funded and awarded for that and get heads in here. I do think there could be some upside here, so we'll see how that plays out. We look at emission technologies. They grew 4% last year. Each of the six business units grew. We see quarter over quarter, it's 7.5%. Sequentially, it grew over 5% right now. So, you know, I think north of 5% is the right way to kind of take a look at that. We'll see how that plays out. They're on a good string right now of awards, and they're working hard to kind of fill all of the seats of Billis, funded seats that they have. So it's going to be a function of awards and labor as we go forward. But I'm feeling good about the pipeline they have there. Although the book to bill is low right now, I think that's going to come on in the back half of the year. We'll see that pop up. There's still a plethora of awards for Q3 and Q4 that we're keeping a close eye on here right now. I think that business is starting to really play out and justify the acquisition of Alliant as we see a sales ramp that's happening.

I could add that, not to jump into the early wins in Q3, but On a total contract value, not just awarded, we're almost at $4 billion of awards for this year, which is really a record for allying mission technologies together. It's kind of unprecedented. That team is really doing very well and will create a lot of stability into the future and potential growth for mission technologies.

Okay. Appreciate that. Tom, the 7.7 to 8 for the full year shipbuilding margin, it's a relatively tight range, but if I keep it flat sequentially in the third quarter, to get to the low end of the full year, the fourth quarter would need to be close to 9, and to get to the high end, it would need to be close to 10.5. Can you speak to where in that range you You see, I know the milestones need to occur and every milestone is different, but where in that range do you more likely see the 4Q shipbuilding margin falling?

Yeah, I think we're splitting hands right there right now. I mean, you can see that there are a lot of milestones out there. Things, and then there's incentives and adjudication of change, too, that occur. LTD 29 is a piece of it, although we said earlier it's not a big swinger, but it does contribute to the margin and the end results. You know, I wouldn't want to get too precise. I mean, 7780 is pretty precise right there. But I do, in fact, when you run the math, we said 6774 through Q2, another 74 about for Q3. You know, we'll be in the nines for Q4 is the math of it. And I feel comfortable with what's on our plate, the performance I see to date. The avenue, I speak daily and weekly with the CFOs down in the yard, so I know what's in front of them and what has to get done both from a performance end of it and then what has to get done on the contract side. And we're very much in play to finish up in that range.

Got it. And then just one other item, back to that attrition question, Chris. Has the rate of attrition slowed through the year? I know that's another kind of specific question, but it seems like a pretty important question. element into your total labor equation?

So it's definitely lower than it was coming out of COVID. It's been pretty consistent this year. I haven't seen a lot of slowing in attrition this year. It's still the walk-in early career people that just really aren't prepared for the rigors of shipbuilding. It's a challenging job, and we're just working very hard to get them prepared to understand the real benefits of being a shipbuilder.

Okay. Thanks, guys.

Appreciate it.

Sure. See you next time.

Our next question is from the line of Pete Skibitsky of Alembic Global. Pete, your line is now open.

Yeah, Chris, I don't think we've talked about this, but... The Navy, I think, is working up the strategy for the Nimitz retirement. I think there's an RFI out there. Can you talk about if you think HIA will have a role on that, maybe the timing and the potential sizing of that, just your thoughts on that overall?

Yeah, so we will absolutely have a role in it. There's a lot of planning going on within the Navy and Newport News on integration of RCOHs and retirements we obviously did the enterprise uniquely qualified to do it and so it's really kind of an advanced planning actually because it's kind of a dance between the RCOHs and then finishing the shifts and doing the D&D so absolutely it doesn't change my perspective about the long-term growth rate of the business. Um, it's integrated into the forecasting, uh, and, um, you know, Newport news will probably do that work.

Okay. But maybe we should like a mid decade to slightly after mid decade before it starts.

Uh, I hate to give you a specific time, but, uh, it's integrated over the next, you know, 10 to 15 years to 20 years, actually.

I see. Okay. Thank you.

It's all in the mix. It's all in the mix, Pete, when you think about their plan and how we forecast the long-term growth rate of the business.

Got it.

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

Thank you for joining us today. We appreciate your interest in HII and look forward to continuing to engage with you all going forward.

That does conclude today's conference call. You may now disconnect your line.