Huntington Ingalls Industries, Inc.

2024 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 press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, press star zero to reach an operator. I would now like to hand the call over to Christy Thomas, Vice President of Investor Relations. Mrs. Thomas,

you may begin. Thank you, operator, and good morning. I'd like to welcome everyone to the HII Second Quarter 2024 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO, and Tom Seeley, Executive Vice President and CFO. As a reminder, statements made today that are not historical facts are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. 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 our website's investor relations page at .HII.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Thanks, Christy, and good morning, everyone. The HII team remains focused on executing on our programs and meeting our commitments to our customers. In the second quarter, our Shipbuilding Division delivered two ships, and our Mission Technologies business achieved another quarter of strong performance. The alignment of our products and services to the United States National Security Strategy continues to provide strong visibility to our long-term revenue forecast. To start, I'd like to discuss our results. Records, second quarter revenue was $3 billion, up .8% from a year ago, and diluted earnings per share was $4.38 for the quarter, up from $3.27 in the second quarter of 2023. New contract awards during the quarter were $3.1 billion, which resulted in backlog of $48.5 billion at the end of the quarter, of which $27 billion is currently funded. At Mission Technologies, we had the seventh consecutive quarter of record revenue, with sales of $765 million, 19% over the second quarter of 2023. In addition to very strong revenue, Mission Technologies trailing 12-month booked to bill as $1.15, and its new business opportunity pipeline is over $83 billion. Mission Technologies continues to offer leading-edge technologies aligned with the capabilities our customers need, and this growth in a competitive sector confirms for us that our technology portfolio is ideal for today's market requirements. In shipbuilding, we remain focused on directing our resources toward meeting our delivery commitments to the Navy. Significant efforts continue in each of our shipyards to create labor stability, improve proficiency, and increase capacity, all aimed at meeting our throughput goals. The long-term investments we are making in capital and employee development, coupled with Navy industrial-based investments, will stabilize and improve performance as our portfolio shifts towards new contracts. And our ability to meet scheduled projections and performance goals will support achievement of our financial commitments to our shareholders. In the second quarter at Ingalls, we delivered LPD 29, Richard M. McCool Jr., and are looking forward to launching LPD 30 Harrisburg later this year. Other milestones, including the launch of DDG 129 Jeremiah Denton and the delivery of LHA 8 Bougainville, have been adjusted based on workforce availability, the most efficient utilization of shipyard facilities, and levels of system completion to support predictable downstream execution of future milestones. At Newport News in the second quarter, we delivered SSN 796 New Jersey and continued to make progress toward our remaining milestones that are planned for later this year. During the quarter, SSN 798 construction team experienced a minor disruption to Massachusetts test program due to some equipment replacement identified during testing. The disruption has been resolved and the team is back into the test program making steady progress. It does, however, shift delivery from late 2024 to early 2025. We are reaffirming our shipbuilding margin outlook for the year, and as we've discussed, we are already in negotiations and expect several significant contract awards by the end of this year, including Block 6 Virginia-class submarines, Build 2 Columbia-class submarines, and additional amphibious ships. Turning to activities in Washington, we continue to see bipartisan support for our programs reflected in the fiscal year 2025 defense appropriations and authorization bills as they progress through both chambers of Congress. We are pleased that the two authorization committees have shown strong support for shipbuilding, including support for additional advanced procurement funding authority for CVN 82, additional funding authority to support Virginia-class construction, and the multi-ship procurement of amphibious ships. The Senate authorizers also included additional funding authority for LPD Flight 2 and DDG 51 Flight 3 ships. The House Appropriations Bill continues to support our major shipbuilding programs and notably includes investment of $4 billion into the submarine industrial base. We await Senate appropriations positions, and the final outcomes will depend on eventual respective conference negotiations by the appropriations and authorization committees. Now turning to labor, positive trends continue in talent acquisition as we have hired over 3,800 craft personnel a year to date, which keeps us on track to achieve our full year plan of approximately 6,000. In summary, I'm confident that the team's focus on the execution of the fundamentals on our programs positions us positively for the future. And look forward to the second half of the year as we meet more milestones and deliver on our commitments to our customers and shareholders. 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 six of the presentation, our second quarter revenues are approximately 3 billion increased .8% compared to the same period last year and represent a record second quarter result for HI. This increased revenue was attributable to very strong -over-year revenue growth of nearly 19% at Mission Technologies, as well as growth at Ingalls and Newport News Shipbuilding. Operating income for the quarter of $189 million increased by $33 million, or .2% from the second quarter of 2023. And operating margin of .3% compares to operating margin of .6% in the same period last year. Net earnings in the quarter were $173 million compared to $130 million in the second quarter of 2023. Deluded earnings per share in the quarter were $4.38 compared to $3.27 in the second quarter of the prior year, representing a -over-year growth of approximately 34%. Backlog increased slightly to end the quarter at $48.5 billion, up approximately $100 million from Q1's close. Moving to slide seven, Ingalls revenues of $712 million in the quarter increased $48 million, or .2% from the same period last year, driven primarily by higher volumes in amphibious assault ships and surface combatants, partially offset by lower volumes in the National Security Cutter Program. Ingalls operating income for the quarter was $56 million, an operating margin of 7.9%, compared to $65 million and 9.8%, respectively, from the same period last year. The decreases were primarily due to lower risk retirement on surface combatants, partially offset by delivery contract incentive on LP-29 Richard M. McCool Jr. At Newport News, revenues of $1.5 billion were up $26 million, or .7% from the same period last year. Newport News operating income for the quarter was $111 million, an operating margin of 7.2%, compared to $95 million and 6.3%, respectively, in the prior year period. The increases were primarily driven by favorable contract adjustments, incentives, and volume on the RCOH program, partially offset by lower performance on aircraft carrier construction and the VCS program. Shipbuilding operating margin in the second quarter was 7.4%, up from .8% in Q1 of this year. We are pleased to exceed the shipbuilding margin guidance we previously provided for the quarter, and we continue to see significant opportunity in the second half of the year for margin enhancement. At Mission Technologies, revenues of $765 million increased $120 million, or 18.6%, compared to the second quarter of 2023, primarily due to higher volumes in C5ISR and cyber electronic warfare in space. A portion of Mission Technologies overperformance in the quarter was driven by material and work that may not reoccur on a consistent basis, and we have factored that into our guide going forward. We are obviously very pleased with the growth in the quarter, and we are raising the Mission Technologies revenue guidance range for the year by $50 million. Mission Technologies operating income for the quarter was $36 million, and operating margin was 4.7%, compared to $9 million and 1.4%, respectively, in the second quarter of last year. The increases were driven primarily by higher volumes I just mentioned, as well as stronger performance in fleet sustainment. In addition, in the second quarter of 2023, we recorded a $6 million loss related to the sale of a joint venture interest, which also helps the -over-year comparison. Second quarter results for Mission Technologies included approximately $25 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the second quarter was 8.5%, compared to .7% in the second quarter of 2023 and .7% last quarter. Turning to slide 8, cash used in operations was $9 million in the quarter. Net capital expenditures were $90 million, or 3% of revenues. Free cash flow in the quarter was negative $99 million, consistent with the guidance we provided in the first quarter call. Cash contributions to our pension and other post-retirement benefit plans were $14 million in the quarter. Also, during the quarter, we paid dividends of $1.30 per share, or $51 million in aggregate. We also repurchased approximately 250,000 shares during the quarter, at a cost of approximately $65 million. Moving to slide 9, we have summarized our expectations for the third quarter and the year. For the third quarter, we expect shipbuilding revenue of approximately $2.2 billion, and shipbuilding margin of approximately 7.8%, with margin continuing to ramp in the fourth quarter. For mission technologies, we expect revenues of approximately $650 million, and operating margin of approximately 2.5%. For the year, we are reaffirming our shipbuilding revenue and margin expectations, and as I previously noted, we are raising Mission Technologies revenue guidance range. We are also updating our interest expense expectation to $95 million, based on the phasing of our latest cash flow forecast. We are reiterating our free cash flow outlook for 2024 of $600-700 million, as well as our five-year free cash flow outlook of $3.6 billion. As we have noted, we expect free cash flow to be weighted towards the latter part of the year, which is not unusual. We currently expect third quarter free cash flow to be near zero, preceding expected strong cash collections in the fourth quarter. To summarize, we delivered another quarter of strong -over-year revenue growth, and met our shipbuilding expectations, while Mission Technologies' portfolio continues to perform very well. Additionally, we are pleased to raise our Mission Technologies revenue guidance, and reaffirm our shipbuilding financial outlook for the year. With that, I'll turn the call back over to Christy to manage Q&A.

Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up, so that 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, Christy. We will now begin the Q&A session. Once again, to queue for a question, please press star 1. The first question is from the line of Miles Walton with Wolf Research. Please go ahead.

Thanks. Good morning. Chris, could we... Morning, Miles. I'll start with labor. It sounds like you continue to have good traction on the hiring front, but it's not clear to me if you're net-net increasing your headcount to where you want. Maybe you just touch on attrition. Hiring goals, I guess, are good, but attrition goals for the year at both shipyards, and if that's a meaningful driver to some of the milestone slip-outs.

Yeah, sure. Thanks, Miles. Thanks for your question. We are achieving our hiring goals in both shipyards, so we think we've made significant progress on ensuring that we can get the people to execute the work. Attrition is not materially improving, but we're thinking about it more broadly from a labor standpoint, an execution standpoint. Attrition, excuse me, attendance and overtime both have recovered. We're performing well there. Our outsourcing programs are executing well, and industrial-based funding is being applied where it's necessary to increase the industrial base. It's not just labor. We need to execute on our programs independent of how well attrition is working. We'll continue to work on our attrition issues. We'll work on salary, flexibility, recruiting in the right places, but we're having to go where labor is. We've got some interesting stuff going on in Hampton Roads where we're actually creating manufacturing footprint in areas we hadn't before to attract labor. So we're thinking about it more holistically now. It's not just simply labor and attrition in order to meet our throughput goals.

In terms of its effect on the milestones, I understand that Massachusetts sounds more like a technical discovery. Are the Ingalls milestones more workforce limitations driven?

Well, it's both actually. On LHAA, it's just a significant amount of volume and labor and application of labor to achieve those milestones, so we moved that. DDG 129 is a little different. There's sequencing involved in getting to that launch, but also some impact related to labor. Now, all of that is included in our financials and in our guidance, and we're comfortable with where we are.

Okay. Thank you.

Sure.

Thank you. The next question is from the line of Robert Spingarn with Melias Research. Please go ahead.

Good morning. This is Scott Micasone for Rob Spingarn.

Morning.

Tom or Chris, I wanted to ask, based on the guidance, you need to generate about one billion of free cash flow in the fourth quarter. So I'm just wondering if you could talk about your level of visibility into that cash generation, and then if possible, can you quantify how much of the fourth quarter free cash is tied to working capital that could move into early 25?

Yeah. Thank you for the question. I'll start, then Tom can finish it off with some details here, but I hate to give the answer of timing because it's just not specific enough for you all, but there is a lot of timing in the back half of the year for margin and cash. In order to achieve that progress over the back half of the year, we need to make our milestones and our shifts. We need to achieve contract incentives, and it's not just one. We risk adjust all of our programs over the back half of the year to ensure that we can make guidance, and we have a line of sight to it. So yeah, it is over the back half of the year. There is some timing. There is some unwind in working capital, but we do have line of sight to it. Tom?

Yeah, I'll provide some more color on that too. Hey, Scott, I appreciate the question. Some comments from where we are right now. We usually use cash at the beginning of the year. We have guided both minus 200 and minus 100 for Q1 and Q2 respectively. We find ourselves right now through the first half of the year at minus 274. Honest Brokered, it was about $100 million that moved from Q1 and Q2 in a payment, and then we closed Q2 kind of missing a $75 million payment. So from performance and where we thought we'd be, we're kind of right where we guided. From a perspective, the year had a shape to it. It was back end and loaded anyway. It was more back end loaded in 24 than it was in 2023. When you get the Q and you can take a look at this, a comparison in there from 23 over to 24. It was down operationally in cash, about $284 million, and then we have another $54 million of capex that we're spending in 24 over 23. So that constitutes about $338 million down in 24 over 23. But again, in line with where we thought we'd be in the plan, the portfolio, I would tell you a couple of the milestones we had at the end of 23 that dragged into 24, although it's only a couple of ships, LPD 29, the SSN 796, and then the launch of 798, all just brought that work into 2024 and created just a little bit of a draw on making kind of cost and progress and headway on the existing portfolio we have here. But the guides that we have provided, zero on free cash flow for Q3, which has some variability to it. There's a lot of activity that milestones that you have on major milestones, smaller milestones underneath capital incentives. The capital is a little bit slower than we got. We got it .3% for the year. It was 2.6 in Q1 and 3% for Q2. But as that comes online on the back half of the year, the progress that we want to make to close out the work packages that are in play right now will allow us to fully bill all the costs that you see on the balance sheet. You can see the contract liabilities and the ARAP in there. So there's some net working capital that's going to burn itself down. We finished last year at 5% of working capital at the end of 2023. We sit just under 9% right now. And I kind of foreshadowed at the beginning of the year that we were going to have this shape. And by the end of the year, because of the capital incentives we've had, we'd actually have a little bit of an advancement. We'll work ourselves down to the 2% to 3% range in working capital. And that's aligned with our plan. It's aligned not only with the free cash flow perspective we gave you for 6% to 700% this year, but in the five-year goal, I told you that had some shape into it too. And that working capital level exiting into 2025 is planned in the guidance that I gave you for .6% and kind of going forward. So I think we understand where we are. We aligned with the plan that we had this year. The increases on the back half year between the progressing, milestones, incentives, capital incentives, and then we have some new contract awards that introduce some alignment with the business environments that we have here. That that itself, it was at the beginning of those contracts, we anticipate them to be awarded, if not at the end of Q3 and Q4. A little variability of the effect. Is that going to be like show up in Q3 or Q4? But it will, by the end of the year, we'll have new awards that will assist both in margin and cash as well.

Okay, that gets into my next question. So I wanted to ask, just high level, a big part of the margin story, at least for shipbuilding, is putting new ships and boats on contract that have better pricing compared to some of your older contracts. So can you give us an update on how many ships and boats you've put on contract so far this year and how many you expect to put on contract in the next 12 to 18 months?

Yeah, so we expect to put under contract over the next 6 to 12 months, and probably before the year expires, actually another 21 boats, with pricing that reflects the current macroeconomic environment. So it's a significant amount of work that we intend to put on a contract over the back half of the year.

All right, thanks. I'll stop there. Sure.

Thanks, Scott.

Thank you. The next question is from the line of Pete Skibitzki with Olympic Global. Please go ahead, Pete.

Hey, good morning, guys. Nice quarter. Good morning, Pete. I did have a question on Ingalls margin. I know you've touched on it a little bit, just because it's dipped here for the first time in almost a couple of years. The release talked about lower risk retirement on surface combatants, and I wasn't sure if that's kind of, you know, you've got some early DDG-51s in the yard and you're booking conservatively, or I wasn't sure if that was, you know, if the DDG-129 push out next year impacted this quarter. Can you maybe talk through that a little bit with us, you know, a little more deeply? Yeah, sure.

Sure, sure, I can start. I think you probably have a little bit of a compare issue from last year in that language, but obviously you move to two milestones. Cost goes with schedule, so that impacted the quarter. And then 129 had a bit, or excuse me, LPD-29 at delivery had a little bit less risk retirement than we usually have. So Ingalls are going to continue to execute. This is just a bit of a quiet quarter for them, and I expect them to recover very quickly here.

Okay, and I appreciate it. Just one follow-up. I know some of the, there's been some supply chain issues on the Virginia, I think, and the carriers, but I think one of the issues has been development of the new electric generators. Do you guys have a timeline of when, you know, that new system is expected to arrive in the yard?

Yeah, so I'm probably not the right person to talk about that. Depending on what program you're referencing, we have, our estimates have not changed for 80, if that's what you're referencing, and our schedules have not changed materially either. They're making good progress on 80. They're doing some very interesting things relative to ensuring that we hold on to the schedule for 81 and how we're going to build those. But I'm not really comfortable because there's been no material change between Q1 and Q2 relative to those delivery requirements or expectations.

Okay, got it. Thank you.

Sure.

Thank you. The next question is from the line of David Strauss with Barclays. Please go ahead.

Thanks. Good morning. Good morning, David. Chris, can you talk about where you are in terms of Block 4, Block 5 work, and then negotiating Block 6 on ECS?

Sure. Sure. Block 4, we're marching towards delivery on 798. We did have that minor move on the milestone, but they're making progress on the test program now. It's a good team on it, it's a good crew, it's a good leadership, so I fully expect 798 will resolve at the beginning of next year. 800 is making progress. That milestone is holding the float off the back half of this year, and then we have one more module that we have to deliver to General Dynamics. And then we're making progress on Block 5, and they'll start to fill in behind Block 4 in those getting into the integrated delivery and test of the Block 5 Virginia class boats. Block 6, we're in discussions with the government relative to negotiation of that block. I expect that to resolve this year. Working closely, I think it'll be a fair deal dealing with this macroeconomic environment we talk about with inflation and supply chain insurance. We have all that risk protected. The good news is we're making investments, the Navy's making investments in the industrial base in order to get at this throughput issue and be fully expected. And when we do Block 6, all of that will be wrapped into that deal, and it'll be a fair deal. So that's where we stand on Virginia class.

Thanks. What is your revenue mix right now between Block 4 and Block 5?

The vast majority of it, Tom, if you have the details, but the vast majority of it is headed into Block 5 now.

Yeah, so we're at 95% plus complete on Block 4. And then Block 5, I know it's not the exact answer to your question, but we're at 95 plus percent of the contract completed on Block 4. And Block 5, we're in the -20% range. And we're spending, we crossed over about six quarters ago that Block 5 has higher revenue than Block 4.

Okay, thank you. And then, Tom, a follow-up on working capital. Did I hear correctly? Now it's going to drop to, you're saying 2% by the end of this year. Where does that go in 2025?

So a couple things here. We got, I think the last couple of calls, we've been talking about that, right? And it'd be for the 6 to 700 guide, and where the working capital is right now, the capital incentives pop in here. We will burn down the 9% that we see through Q2 to that level going forward, right? Lower than what we traditionally guided to between 4 and 5% because what's going on on the capital front. We haven't guided both for free cash flow specifically for 2025. And I would be, I don't want to get into specific targets going forward, but I will tell you that we're kind of on plan on that front relative to its implications to the five-year free cash flow guidance. And as we close out the year for Q3, Q4, a lot of activity has to happen on how that's going to fall with everything I've rattled out before on how we're going to make the 6 to 700. I'd prefer to hang on to the exact working capital guidance at the back half of the year as we set the trajectory and the targets for next year on the February's call.

All right. Thank you.

Thank you. The next question is from the line of Katam Khanna with TD Cowan. Please go ahead.

Yeah, thanks. I had two questions. First, just on the Q4 cash flow, was there, are there any major like lumpy events that you could, that, you know, that might actually move that number materially if they were to slip out and relatedly, do the delivery milestone slips have any impact on that whatsoever? And then I have a follow-up.

Yeah, so I would tell you the ramp that we're going to see here between, you know, Q3, Q4, again, we can certainly guide it to zero for Q3, but that could be one to 200 higher, it could be 50 to 100 less there just depending on everything that I said early kind of falls out. But the ramp from now where we are to Q3 and Q4, it's a composite there of, you know, improved trade working capital between AP and AR. The progressing and closing at bills, you can see I have a cost in the balance sheet, so it's just getting the right progressing as we make headway on schedule to be able to build all the costs. The major milestones add into that, you know, we talked about it and we have a slide on the PowerPoint briefing that you can see, the ones that we have to hit there on the deliveries. And then we kind of work ourselves through both incentives and program contract incentives and then capital incentives. And then the new awards kind of contribute that rise and lift on the back half of the year too. So it's all of it. I don't think, you know, missing one milestone here or there is not going to drive the preponderance of the lift that we see kind of going forward, but we'll keep you informed and we'll give you an update on the November call. And the part two of your question.

Great, thank you. And Chris, I was just wondering what's your appetite for acquisitions at this point? Yeah, we could just talk about that.

Yeah, so capital allocation has been fairly consistent here for the last year after we started to pay down the debt. We like to be investment grade. We think that that's where we need to be and where we want to be. We're going to continue to invest in our shipyards. We're going to pay a dividend and then with excess cash, we're going to provide it back to shareholders, but we'll continue to evaluate M&A opportunities as they present themselves. And if it makes strategic and financial sense, we'll evaluate it and entertain it. So there's not really a change in our capital allocation philosophy.

Thank you.

Sure.

Thank you. The next question is from the line of Jason Gursky with Citi. One moment, please, as I open your line. Please go ahead, Jason.

Okay, good morning, everybody. Can you hear me? Morning, Jason. Yes. Okay, great. I think you all are struggling there a bit. And Chris, just a quick question first on mission technology. As you mentioned, the trailing 12 months, booked a bill of 1.15 and the quantum of the pipeline that you have there in that business. I'm wondering if you step back for a minute and just talk a little bit about that 1.15, when you can execute on that backlog and the pipeline that you have available to you, and what that means for growth rates beyond 2024. We're obviously off to a really solid start here in the first half of this year. I'm just kind of curious how this growth rate settles out over the next couple of years.

Yes, so thanks, Jason. We're still comfortable with our 5% growth rate in mission technology. It was a bit of a conservative guide. We've increased it for the year. And beyond that, if we can execute on the $83 billion pipeline and the booked a bill continues to be very good, it could be north of that. And it's really broad based across the business. Each one of those areas is executing very well. I would like to point out that there's a lot of interesting things going on in mission technologies. This is the first time that the Navy is going to deploy a Virginia class submarine with launch and recovery all autonomously of a Remus vehicle. And it's not just an exercise. That's full deployment. It's the yellow moray. It's a great product. And it teaming that we really think about provides a lot of value for our customer. So if they continue to execute like this, they continue to execute on that backlog, and they take advantage of that pipeline, it could be north of that. But we don't want to get too far over our skis. We're going to be relatively conservative as you would expect for us to be. But I'm very encouraged by how mission technologies is developing.

Great. That's helpful. Appreciate that. And then, secondarily, just on labor productivity in the shipyards. I know you talked a little bit earlier during the Q&A session about attrition rates and hiring and all that kind of stuff. It's good stuff, which is great. But I think probably just as important maybe to those numbers is the learning curve of the employees. I'm wondering if you have maybe just from a big picture perspective to talk about labor productivity where you are today relative to maybe where you were pre-pandemic. Just wondering if we're still down relative to pre-pandemic levels from a labor productivity perspective and what you would expect over the next couple of years and maybe when we can return back to pre-pandemic productivity. Thanks.

Great. It's a great question, Jason. So productivity is not as it was before the pandemic. There's no getting around that. And it's related to the experience level of the team. Now, do I expect it to improve? Absolutely. And both teams in Ingalls and Newport News are making investments to ensure it does. And the SIB investments that you see coming out of the Navy are focused on that as well. It's not just infrastructure. It's targeted at the proficiency of the workforce as well. So I do expect it to improve. We're investing against it. We've done it before. We've seen it before. And I expect it to continue to improve as we stabilize moving forward. Great. Thanks. Sure.

The next question is from the line of Seth Seifman with JP Morgan. Please go ahead, Seth.

Okay. Thanks very much. And good morning. Morning. In the slides, I think you talk about reduction year on year in Virginia sub-profitability. Should we attribute that to what's happening on Massachusetts or was there a reduction in expected profitability on Block 5?

Yeah. So I think that's probably a compare issue related to last year. There's no material issue that we can note related to that. It's kind of broadly across the blocks. We assess our ESCs every quarter. We have to make an adjustment. We do that plus or minus. So not anything individually material there.

Okay. So I think you mentioned earlier about the carrier. So with both the carrier and Virginia Block 5, there weren't meaningful changes to the estimated profitability.

No. Not material enough to note. No. But as I said, we assess our ESCs every quarter. We make those adjustments dictated by our evaluation in that quarter.

Okay. Great. And then just for Ingalls, I guess should we expect profitability there to we've seen typically kind of solidly double-digit margins for Ingalls. Is that something going forward that Ingalls can still be kind of at the high end of good shipyard margins? Yeah.

So we don't guide by shipyard, but I fully expect Ingalls to continue to execute on their programs very well. But yeah, we don't provide guidance by our shipyards.

Great. Okay. Great. Thanks very much. Sure.

Sure. Thank you. The next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes. Good morning. Good morning. Tom, I wanted to pursue a little bit the free cash flow needs for the fourth quarter. I mean, obviously we can all do the arithmetic, 973 to 1,073. Now, if I look back, that's nearly twice what you've ever done before. The last highest year in the last five was 539 million in the fourth quarter of 18. In addition, you've never had three quarters in a row where no quarter generated positive cash flow. So my question is, what has changed in the last five years in terms of, you know, contracts that you have or what to suggest such a dramatic swing this year from what we've seen before?

Yeah. So I think we have had a couple of quarters that were negative so we can catch up offline on that, George. But this isn't an idea. I would tell you it's backloaded. One. Two, is I would tell you that pre-COVID as we're executing these contracts right now, we have seen a draw in the schedules over the last three or four years. And that just changes the construct of, you know, as we get progress and collect costs and what we're allowed to bill, it creates a little bit of a draw on that. We still manage it annually. And as you know, we've been pretty good at providing a five-year target back in 19, providing a guidance annually for each of the years and we've met or exceeded that. So I mean, we're in the lane right now. We've actually increased that two nines to three billion. So we threw another hundred billion at it. We've given a next five years a 20% more. So we have pretty good visibility into the portfolio. You know, it's a relatively, I'm sorry. Yeah, there was some feedback here. It's a relatively mature portfolio that's going on that we have here. So we have line of sight as far as what we have to build, program plan, the expected costs, and then all that rolls in once we come through our quarterly ACs into the guidance of free cash flow going forward here. It is back loaded. And as I commented earlier, I did a comparison. You can take a peek at the queue there on what's driving that. A little bit more capex that we've seen. Last two years has been 2.6 and .4% of sales respectively and already we saw a 3% quarter last year. And that's going to ramp in the back half of the year. But there's capital incentives that come along with that. As we continue to make progress, the cost that you can see that's on the books and the balance sheet there, we plan to liquidate that and really drive that working capital. That's going to be the catalyst, the working capital coming down, milestones and deliveries, and additional awards as well as on contract performance and capital incentives are going to drive the back half of the year. The guide at 3% was probably on the conservative side. It could be $100 million or $200 million higher or $50 million to $100 million less. We didn't want to provide a number that we leaned into for Q3. The events and criteria and milestones that we see have to happen are right in that end of September, October end of every timeframe. So we guided conservatively, which does make the Q4 look like it's a larger lift and it may be as it plays out.

Okay, just one comment. What I meant to say, if I didn't say it properly, on the cash flow was there hasn't been, if you look at quarter by quarter, there's been no time in the last five years where one quarter hasn't had at least positive cash flow of the three. There's been several quarters where it's two. Two have been negative, but not zero and a third. A follow-up was in mission technologies, the guide for the second quarter was like $650, you did $750, which is $765, which was similar to the first quarter. You had mentioned the material and that may drop down in the third quarter. Can you just be a little clearer as to what actually drove in the materials comment that you made?

On the material comment that I said in the Q4, there was some sales that we had, which we don't envision to be on a recurring basis. We're not included in the Q2 or the guide kind of going forward. The Q2 revenue that we had at mission technologies was driven by strong performance in C5ISR and CEWS. We believe that will continue going forward. We have normalized out for the book of business on contract right now. So we know what contracts we have and we're executing. And we see how we load that out and we have a clear sight on expectations of the revenues for the last two quarters. As well as there is still awards happen every month and even though we're in the back half of the year, there's several tens of millions of dollars of potential sales that happen on awards. So we have to execute our plan that we have in existing contracts. Those awards have to play out and we've got it rightfully probably on the conservative side of where we stand. The run rate at mission technologies between the first two quarters at 750 and 765 is 1515 or on an annual basis over $3 billion. We've conservatively taken the beginning of the year guys from 27 to 2750 up to 2750 to 280. So let's see how it plays out. We don't want to get ahead of ourselves. Chris made a comment earlier about the growth. We saw some good growth from 21 to 22 at 4% and 22 to 23 at 12.7%. And now both Q1 and Q2 respectively has seen 20 and 18% growth. But we don't want to overly guide here. Obviously we've got to get the people in, win those contracts and continue some good performance. But I'm feeling really strong about the line acquisition, the business proposition that we set, that MT would be a $200 million cash generator, which it is. And I feel really good about the portfolio contracts we have at pipeline growing.

So just one last one. So why guide to only 650 in the third quarter?

Well, I say we have a lot of work to do going forward here. We don't want to over guide and miss. And it's still a function of a couple of awards that will have a minor impact on the revenue for the rest of the year here.

Okay. Thanks very much for all the

color. Yes, sir.

Thank you. The next question is from the line of Jordan Leonet with Bank of America. Her line is now open. Please go ahead.

Hey, good morning.

Good morning, Jordan.

Thanks. On CapEx, the sequential uptick that you guys had, is there a percentage or a portion of that that you could give color on that you'd expect to get back from the Navy CapEx incentives?

Yeah, we always invest with our partner with the Navy on this. And depending on what the CapEx is and the timing and the value equation, what that adds and the desirement of getting in the yard, whether it's for operational here or our Navy sales and things of that nature, there's a mix there of investment. We don't get into that. I mean, that's just part of the business case. I will tell you that any capital projects that we do add value, we get a return on that capital, and it goes into the business construct and how we choose which projects we bid, we approve, and we execute here. So I leave it at that. It was 2.6 in Q1, 3% in Q2. The guide's still 5.3 for this year with a 5% CapEx over the next three years.

Got it. Okay. And then also too, on the contract, that Deloitte one that's for Navy shipbuilding, do you have any sense of the scope for it or why Mission TAC wasn't picked or you guys in general?

I can't necessarily hear the question. There's some feedback. Can you repeat that?

Yeah, so Deloitte, the one that was a $2.4 billion Navy contract for, it seems like an HR contract on the Navy shipbuilding base.

Yeah, I think they're supporting their identification allocation of investments to support where they should make investments. So yeah, we were not involved in that contracting process.

Okay. Got it. Thank you so much. Sure.

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

Thanks everybody for joining today. Before we go, I'd like to extend my thanks to the entire HII team for their continued focus. We look forward speaking with you on our next earnings call. Thank you.

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