Q3 2021 Huntington Ingalls Industries Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to <unk> third quarter 2021, Huntington Ingalls Industries earnings Conference call.
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I would now like to hand, the call over to Dwayne Blake.
Vice President of Investor Relations, Mr. Blake you may begin.
Thanks, Good morning, and welcome to the Huntington Ingalls Industries third quarter 2021 earnings conference call with US today are Mike Petters, President and Chief Executive Officer, Chris Kastner, Executive Vice President and Chief operating Officer, and Tom Steely Executive Vice President and Chief Financial Officer.
As a reminder, statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
Actual results may differ please.
Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.
Also in their remarks today, Mike, Chris and Tom will refer to certain non-GAAP measures.
Conciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website.
We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at Huntington Ingalls Dot com and click all the Investor Relations link to view the presentation as well as our earnings release with that I'll turn the call over to our President and CEO, Mike Petters Mike.
Thanks, Dwayne good morning, everyone and thanks for joining us on today's call. This morning, we released third quarter 2021 financial results that included another quarter of consistent Shipbuilding program execution.
Let me share some highlights from the quarter starting on slide three of the presentation.
Sales of $2 $3 billion were up 1% from the third quarter of 2020.
And diluted EPS was $3.65 down from $5.45 in the third quarter of 2020.
New contract awards during the quarter were approximately $600 million, resulting in backlog of approximately $50 billion at the end of the quarter.
Of which approximately $24 billion is funded.
Shifting to activities in Washington, the Federal government. The federal government began the new fiscal year under a continuing resolution, which funds government operations through December 3rd now.
Now we continue to urge Congress to proceed expeditiously and remain optimistic that the defense appropriations and authorization processes will be completed in the months ahead.
As Bill has progressed through both chambers of Congress, we continue to see bipartisan support for our programs reflected in the defense appropriations and authorization bills in the house and the Senate.
We are pleased that before defense oversight committees have shown strong support for shipbuilding to include adding a second Arleigh Burke class destroyer, which is the navy atop navy priority for fiscal year 2022.
The appropriations bills also include language in supportive of DDG 51 follow on multi year procurement contract in FY 'twenty three.
So as I prepare to close let me give a quick update on COVID-19, we continue to work with our customers to satisfy the requirement for federal contractors to have their work force vaccinated against COVID-19 by December the H 2021.
At Hai, we remain committed to promoting and protecting the health and safety of our employees their families and their communities and continuing to serve our customers and the vital national security interests of our country without disruption as an essential contributor to our nation's critical infrastructure.
We view our workforce of approximately 44000 employees as critical partners in this effort and continue to help our unvaccinated employees meet this requirement as safely and efficiently as possible.
We will continue to evaluate how the vaccine mandate and delta variant impact our workforce as well as material availability from our supply chain and we expect to have more to share during the fourth quarter earnings call in February.
And finally, let me recap what HII has done from a portfolio shaping perspective over the past 20 months.
In short we have done exactly what we said we would do during our February 'twenty 'twenty Investor day.
First we have positioned the technical solutions business in growth markets that support the constantly evolving requirements of our customers.
And second we have demonstrated the financial flexibility to pursue these critical growth opportunities, while maintaining our investment grade credit ratings and continuing to return capital to shareholders.
Following the closing of the Alliant transaction during the quarter. Our team is laser focused on a successful integration in order to produce the financial returns we expect.
We are also ensuring that our core shipbuilding programs are achieving key production milestones in order to generate strong free cash flow, which will enable deleveraging of the balance sheet, while continuing to return capital to shareholders via dividends and share repurchases.
We firmly believe that these are the appropriate steps to generate significant long term sustainable value for our shareholders, our customers and our employees.
And now I will turn the call over to Chris for some remarks on the operations Chris.
Thanks, Mike and good morning, everyone I'm very pleased to report another solid operational quarter.
With that let me share a few highlights.
At Ingalls, let me first provide a brief update on the pending contract Awards Valley J nine LPT 32 and 33.
We still believe that a bundle the acquisition of these critically important ships is the most cost effective method of procurement.
And are pleased that the Navy and Congress have protected the ship schedules with a contract for long lead material in L. H a nine.
Coupled with continued support for L. P D 32 and 33.
Shifting to program status L. H eight Bougainville continues to achieve cost and schedule performance in line with our expectations, while making steady progress through the structural erection and initial outfitting phases of construction.
On the DDG program. The team successfully completed acceptance trials for guided missile destroyer DDG 121, Frank E Peterson Junior.
And expect to deliver the ship to the Navy by the end of this year.
In addition, D. D. G is 123 and 125 remain on track to complete Sea trials next year as planned.
On the LPT program LPT 28, Fort Lauderdale was christened in August.
This ship remains on track to complete sea trials during the fourth quarter with delivery to the Navy planned in the first quarter of next year.
At Newport News <unk> 79, Kennedy is approximately 84% complete and our focus remains on compartment completion and key initial propulsion plant milestones.
Regarding definitive nation of the single phase delivery contract modification, we have reached agreement on the costs and schedule impacts with the Navy and expect to execute the contract modification late this year or early next year.
On the R. C O H program TVN Seventy-three USS George Washington continues to achieve key propulsion plant milestones and is approximately 92% complete.
And Cvs 70, a U S. S. Gerald R. Ford returned to Newport News in August to begin a planned incremental availability following successful completion of full ship shock trials.
On the Vcs program.
S. S. N 794, Montana remains on track for delivery to the Navy later this year and the S. S. N 796, New Jersey flowed up milestone has moved to early next year to ensure that we achieve the optimum build sequence from float off to delivery plan in 2022.
And finally on the submarine fleet support program SSN seven twenty-five Helena remains on track for Redelivered to the Navy later this year.
At technical solutions.
The Alliant transaction closed in mid August and the team announced new business groups and executive appointments that directly align with the strategic focus that we have previously articulated.
We expect this very talented team to execute a successful integration of a lion and deliver unparalleled national security solutions to our customers, while growing the business and producing returns in line with our expectations.
Delays in contract awards in our unmanned business for critical new programs remains a watch item.
We're expecting this to be resolved by the end of the year, but it appears that these awards are not likely until early to mid 2022.
Now I'll turn the call over to Tom for some remarks on the financials Tom.
Thanks, Chris and good morning today, I will briefly review our third quarter results and provide an update on our outlook for 2021.
For more detail on our segment results. Please refer to the earnings release issued this morning and posted to our website beginning with our consolidated results on slide four of the presentation. Our third quarter revenues of $2 3 billion increased approximately 1% compared to the same period last year. This was due to growth at technical solutions driven by the Alliant acquisition.
<unk>, which was largely offset by a decline in revenue at Ingalls, primarily due to lower volumes on the NSC DDG and LH HAE programs.
Segment operating income for the quarter of $163 million increased $1 million compared to the third quarter of 2020 and segment operating margin of 7% was in line with the results from the prior year period operating income for the quarter of $118 million decreased by 104 million from the third quarter of 2020 and operating margin of 5%.
Creased 455 basis points. These decreases were almost entirely due to a less favorable operating fast Cas adjustment compared to the prior year period, the tax rate in the quarter was a negative four 3% compared to one 8% in the third quarter of 2020. The decrease in the tax rate was primarily due to additional research and development.
Next credits for tax years 2016 through 2020 recorded in the third quarter of 2021.
Net earnings and the court at $147 million compared to 222 million in the third quarter of 2020 diluted earnings per share in the quarter or $3, 65% compared to $5.45 in the prior year period.
Third quarter 2021 results include approximately $15 million of nonrecurring pre tax transaction expenses related to the acquisition of alliance, excluding the impact of pension diluted earnings per share in the quarter were $3 58, compared to $3 73 per share in the third quarter of 2020 turning to.
Slide five cash from operations was $350 million in the quarter and net capital expenditures were 73 million or three 1% of revenues, resulting in free cash flow of $277 million.
This compares to cash from operations of $222 million and 62 million of net capital expenditures or free cash flow of $160 million in the prior year period.
Cash contributions to our pension and other post retirement benefit plans were $10 million in the quarter principally related to postretirement benefits.
During the third quarter, we paid dividends of $1 14 per share or $46 million. Our board of directors recently approved a three 5% increase in our quarterly dividend to $1.18 per share and this will take effect in the fourth quarter of this year.
We also repurchased approximately 83000 shares during the quarter at an aggregate cost of approximately $17 million.
Moving onto slide six Ingalls revenues in the quarter of $628 million decreased $47 million or 7% from the same period last year, driven primarily by lower revenues on the NSE DDG and <unk> programs.
Ingalls operating income of $62 million and margin of nine 9% in the quarter compared to operating income of $62 million and margin of nine 2% in the third quarter of 2020, the operating margin improvement was driven by an incentive on the DDG program and higher risk retirement for the L. P. D program, partially offset by lower <unk>.
Risk retirement on the NSC program.
Turning to slide seven Newport news revenues of approximately $1 4 billion in the quarter decreased $4 million or less than 1% from the same period last year driven by lower revenues in naval nuclear support services, partially offset by higher revenues in submarines and aircraft carriers <unk>.
Civil nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.
Submarine revenues increased due to higher volumes and block five boats of the Virginia class submarine program and submarine support services and Columbia class sub.
Submarine program, partially offset by lower volumes on block four boats of the Virginia class submarine program <unk>.
Aircraft carrier revenues increased primarily as a result of higher volumes on the RC O H of U S. S. John C. Stennis, CV and 74 and the construction of Dara smell of TVN 81, an enterprise CDN 80, partially offset by lower volumes on our C. O age of U S. S. George Washington, TVN 73, and the construction.
John F. Kennedy CDN 79.
Newport News operating income of $88 million and margin of six 5% in the quarter compares to operating income of $79 million and margin of five 8% in the third quarter of 2020. The improvement was primarily due to higher risk retirement on the R. C O H of USS George Washington TVN.
73, and block four boats of the Vcs program, partially offset by lower risk retirement on the naval nuclear support services.
Now to technical solutions on slide eight of the presentation.
Technical solutions revenues of $394 million in the quarter increased 23% from the same period last year, mainly due to revenue attributable to the acquisition of a line in mid August partially offset by the divestiture of our oil and gas business and contribution of the San Diego shipyard to a joint venture in the first quarter of this year the.
Mission of ally and closed on August 19th and third quarter results included approximately $163 million of revenue attributable to alliance.
Technical solutions operating income of 13 million, an operating margin of three 3% in the quarter capacity to an operating income of 21 million and operating margin of six 6% in the third quarter of 2020. These decreases were primarily driven by the inclusion of approximately $8 million of ally and related purchase intangible amortization.
<unk> as well as lower performance in defense and federal solutions, the divestiture of our oil and gas business and the contribution of the San Diego shipyard to a joint venture I previously mentioned.
Third quarter 2021 results include approximately 4 million of operating income attributable to alliance.
Third quarter technical solutions, EBITDA was approximately $30 3 million or an EBITDA margin of seven 7%.
Moving on to slide nine of the presentation, we've updated our outlook for 2021, and 2022 pension and postretirement benefits.
For 2022 fast is now projected to be a benefit rather than expense, primarily due to higher asset returns and consequently, the fast Cas adjustment has increased from the prior outlook and is now projected to total $52 million in 2020 two.
Please remember that pension related numbers are subject to year end performance and measurement criteria, we will provide a multiyear update of pension estimates on our fourth quarter earnings call in February.
Finally on slide 10, our perspective on the outlook for the remainder of the year for both shipbuilding in technical solutions inclusive of alliance regarding shipbuilding. We now expect 2021 revenue to be approximately $8 2 billion at the low end, but within our initial guidance range third quarter Shipbuilding revenue was modestly.
Impacted by material timing, which may persist in the near term. Additionally, we continue to navigate through a challenging labor market as well as the potential impacts of COVID-19 vaccine mandate given all of that we think it's best to be prudent and tempered near term expectations.
We continue to expect that shipbuilding operating margin will finish the year in the seven 5% to 8% range. We expect that the fourth quarter shipbuilding operating margin will be roughly consistent with the third quarter results as we were able to recognize some key retirement events in the third quarter, including the completion of sea trials for DDG 121.
Regarding technical solutions I've noted the Alliant acquisition closed in mid August and our updated expectations for 2021 now include alliance from the date of acquisition inclusive of incremental purchase intangible amortization that impacts our segment operating margin expectation.
Turning to free cash flow, we now expect 2021 free cash flow to be between 300, and 350 million as the repayment of the accelerated progress payments, which was initially expected in 2021 has now moved out to 2022.
Additionally, on slide 10, we have provided an updated outlook for a number of other discrete items to assist with your modeling rig.
Regarding our longer term targets, we continue to believe that the 3% CAGR for shipbuilding revenues appropriate. Additionally, we remain comfortable with our free cash flow target of $3 2 billion from 2020 through 2024, we plan to provide a more detailed view of 2022 on our fourth quarter call in February now I'll turn.
On the call back over to Dwayne for 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'll turn it over to you to manage the Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Myles Walton with UBS you May go ahead.
Thanks, Good morning.
Morning.
Was hoping I could just start with the shipbuilding revenue outlook and maybe less specific to the revenue outlook more specific to what you're seeing in the in our labor workforce.
And moving to the low end of this range is that anticipating things that you haven't seen yet as it relates to the COVID-19 mandate and what it could do to attendees attendance and workforce or.
Is it more what you saw in the third quarter.
If you kind of get where I'm going.
Sure.
Good morning, Myles Tommy I'll start with that one.
I'm an outlook perspective, we did go to the bottom end of the range.
Recall, we gave you 808 for at the beginning of the year as we see how the quarter played out right now and what's left in front of us right now.
Well now move to shipbuilding revenue expectation to $8 $8 2 billion a couple of points on that right now.
A little light on material.
Particularly at Ingalls.
From a Newport news perspective.
Net revenues were flat, obviously, a little lift bathroom at TNT perspective, but when we're talking about shipbuilding the material lag behind roughly about $40 million in the quarter and we look forward into Q4 that could.
We don't see.
Significant labor pressures at this time, that's going to impact our revenue we have a keen eye right now with the E O and the mandate and how thats changing dynamic.
Situation, there as well as keeping an eye on our supply chain.
To see how the material flows here, but it's just timing right now as we see the outlook.
And as I say.
And the range that we gave you at the beginning of the year.
Okay, Okay, and what is the percent of the workforce. That's currently vaccinated and.
If the word perturbations is it covered in your contracts because it's a new requirement being placed upon you.
Right Myles this is Mike.
Right now, we're I'd say roughly around 75%, we've seen a tremendous uptick in the last 30 days and folks getting the vaccine.
You know I think are the breaking news right now it looks like the executive orders being moved out into January and.
Hey, and they're talking about having your shocked by January not completely through the quarantine, so where we're going to have to interpret all how all that plays out.
You know, we're working very closely with our customers on how do you implement the executive order.
I mean, the executive order is a we've been we have been from a policy standpoint, we have been are directly aligned with what what with what the white house put out but as you as you kind of hinted out there the executive order is not contractual and so working with our customers on all of our contracts too.
Figure out how best to implement that executive orders, what we're doing and we're doing that across the board. So.
Where you know we're continuing to move ahead and our ambition is to get as many of our employees fraction as we possibly can because we were committed to a safe workplace and we think that's the best way to do it so alright.
Alright, thank you.
Our next question comes from Doug Harned with Bernstein, you May go ahead.
Hi, good morning, Thank you.
Good morning.
Right now you're in the transition on Virginia class from blocks for the block five could you comment on on how block five looks in terms of the amount of content you have on that and how would you describe any risk.
In the transition relative to the one you did when you move to block four.
Well I'll start and then let Chris pick it up.
You know the transition when we kicked off block for the contract took a quite a while to negotiate that contract and we've and as a result, there was some late material procurement.
Hmm true, but that kind of helped.
<unk> helped.
Helped us get off to a rocky start relative to that program as well as the ramp up in production. So we had a lot of things moving a lot of parts moving on the beginning of block four we don't have any of those parts moving it's beating our block five and so where the transition for US is moving you know basically seamlessly from block forward into block five.
Pretty excited about that and I'm pretty optimistic about where that's going to go.
Yeah, No I think that's right and when you think through Vcs in block four getting back to a cadence where we're.
Floating off one about a year and delivering one about a year and then transitioning that work force Friday into block five makes great sense. So.
We have we have high hopes for performance on on block five because of the lessons we're learning through.
<unk> block for when you get to a two or three year sort of cadence.
And then also in submarines you commented this time that your services revenues were down a little bit can you.
Comment on where the three Los Angeles class ship stand in their process and how you see services revenues at Newport News trending over the next.
Couple of years here sure. So so how long will this is Chris Doug Helena will deliver this year.
Columbus is in process and moving to the cycle and they're contracted and Boise is really in their prompt start period. So we're going to get into a place here and I think in communication with our customer where.
It makes great sense to have sort of a consistent stream of work in rabbit and revenue it probably will not be as high as it's been.
Going forward and we need to create that plan with our customer.
But that's the status of the three there are in Newport News now and as I said, we're working with our customers to ensure we have a steady cadence of repair activity going forward.
Okay very good thank you sure.
Okay.
Our next question comes from Seth Theismann with J P. Morgan you May go ahead.
Okay, Thanks, very much and good morning, everyone.
I wanted to start off I think you mentioned a bit earlier.
You were looking to buy.
Analyzing the single phase delivery agreement for the carrier with.
With the Navy either late this year or early in one here.
I guess can you tell us.
Is there.
Any kind of margin or cash impact, we should think about.
Once that is once that is finalized.
Yeah Yeah.
So this is this is Chris that we will defend it ties that if not this year beginning of next don't anticipate significant margin cash impact. It's all they see an increase in.
In the topline for that ship, but it also extends the risk retirement events out a couple of years because it extends the test program. So.
Nothing significant from a or material from a sales margin or cash impact at this point.
Okay, Okay, and then I mean.
It seems like it's mostly at <unk>.
A timing issue, but just wanted to ask about the cash flow guidance increase this year.
Should we think about that.
Increasing your kind of five year.
Spectation or is it.
Mainly having to do with the timing of when those progress payments go back to the government.
Good morning, Yes, it's Tom here, yes. It is the progress payments the predominance of the change that we have right now obviously another corner with risk retirement, and we have actuals.
Actuals for Q3, we have a line of sight for the end of the year, but predominantly the change there was because of the progress payments not getting kicked into the 2022 time frame, but keep in mind you at year end, but we have to.
Hey back half.
Payroll FICA taxes.
We did not pay in 2020, so that's baked into the numbers, so it's timing and within the three to it its still holds.
Thanks very much.
Yeah.
Our next question comes from Ron Epstein with Bank of America, You May go ahead.
Yeah, Yeah, good morning, guys.
Good morning.
I was wondering if you could give us just some more color and maybe just following up on Michael's question about what's going on in your supply chain, where youre seeing some material shortages and is it just being driven by delays in transportation or or or what is it.
Sure Yeah, it's Tom here I'll take that one so we've had this conversation on the last couple of calls and we're watching that carefully I regularly touch base with the supply chain offices that we have in each of the yards come up to speed exactly on where they stand right now actually is given in the past because of the nature of our long term contracts.
Long term material orders that start ahead of the construction of these contracts and then obviously with the backlog that we haven't spent on contract and have line of sight of.
The work that's going to be performed in the yards.
A significant amount of those requirements have already been put on order and when managing them aggressively to make sure that the material flows and it hits the in yard need dates.
Preponderance of the material is coming in on time and meeting the contractual.
Needs that we have within the art I would tell you that recently last three to six months as we have spot orders. What we're seeing is a little bit of volatility in pricing and the validity dates are shrinking a little bit on things that we have.
Spotify, but from our perspective or a execution of existing contracts. We have we don't see a significant impact at this time, obviously, we're watching how the E M.
And the impact of supply chain and.
The pressures that we do we do here.
Our second and third tier or dependent on the raw materials copper cabling things that.
Of that nature, but again as we stand here today.
The supply chain that we need because of how we've contracted that work in advance.
This maintaining schedule at this time.
Okay got it got it alright, thanks for that and then.
On the technical services business, if we just opened.
But the aperture a little bit and think about when.
When we walk out 234 years from now where do you see the margin in that business right I mean, presumably it's much better than where it is today and I'm. Just curious I mean, if you can just give us I know you're not.
Given its forward guidance.
Most companies don't do it so I'm not asking for that but just if you could put a little framework around how we should think about the margin in that business as we think longer term.
Yeah, so because of how we put that that division together with the acquisition purchase intangibles and things of that nature. If you noticed we've been guiding and driving towards an EBITDA relationship against the performance and what we see.
You've noticed from the announced we had any.
The July timeframe, and then with the line close in August.
We've got you on how that was going to cause a lift there from a Roc perspective, we were at 45% we dialed in from an EBIT perspective to be in the 8% to 10% range.
By 2024.
The initial guidance, we gave you in the July timeframe alliance supported that.
As we sit today after the close in August and that we've closed the quarter with a line correct into our financials.
Covering on the low end of the range right now so that's good news because that's more than 50% of that portfolio and I think kind of going forward as we see those purchased intangibles get burnt off in the next 345 years going forward, obviously, that's going to be an improvement I would tell you that ti is baked into the roster. So although the rock even for this quarter at <unk>, two 6% with <unk>.
$8 million of purchased intangibles, when you roll that out it's a five 3% Ross quarter in EBITDA.
Seven seven right now so that's a near term perspective, and how I see it kind of evolving in the out years.
Okay, great. Thank you.
Yeah.
Our next question comes from George Shapiro with Shapiro Research you May go ahead.
Yes, She had you had mentioned.
That the margin in shipbuilding and Q4 will be similar to Q3 cause some items moved to Q3 can use list what moved to Q3 and I thought you've mentioned some might have moved to Q1 or so of next year. So what do we expect in Q2 and Q4 for incentives.
Versus what we had thought before.
Hey, George This is Tom here. Good morning, Yes, I'll take that so just a couple of moving parts that we kind of guided Q2 going into Q3 would be light.
A little bit heavy internet.
Paul a couple of incentives at Newport News on our Coa chunk from 73 to the left as well as at Ingalls taken DDG 121 to two trials.
Our risk retirement evaluation of event so.
Just a couple of moving parts there from Q3 to Q4.
But.
We're still in the.
The lane there 75, 8% Ross that we gave you for shipbuilding for year end.
I didn't mentioned anything moving into into next year.
In my remarks, we do have LPT 28.
Moving on.
Staying on contract in the beginning of 2022.
Okay and then.
A separate one probably more for Mike I noticed at Newport News you got like a.
The union contract with affecting 50% of workers from November here now. So if you could kind of give us what you think about the status here I mean, it's I guess, it's more in the news given the contract we've all seen with you yes.
George I'll.
George I'll start this is Chris where we're.
In process with the Newport News.
Union working through.
Through that contract.
Good relationship with them on.
I fully expect we can comfortable reasonable.
Agreement on a contract I know, Mike ran Newport news for a while so you probably has.
For a long time actually probably has better comments in that but we're working.
With them every day to try to get to a resolution.
Okay. Thanks.
We pride ourselves on having very constructive relationships with our labor partners and and I don't think this will be any different than that.
Okay. Thanks, very much you bet.
Yeah.
Our next question comes from Richard Safran with Seaport Research you May go ahead.
Thanks, Good morning, everybody.
Good morning, good morning.
So.
On the Navy's new destroyer cruiser class.
Right.
The ship doesn't appear to be slated to arrive until very late in the decade, correct me, if I'm wrong, but I think that represents a bit of a slide to the right in terms of schedule could you discuss a timeline for our competition and following up on your opening remarks, I'm wondering how you think that that's the.
The Navy strategy with the new ship now impacts the <unk>.
The new flight of DDG 50 ones since the new ship isn't arriving now for close to 10 years down the line I'm thinking that that.
Really reinforces the idea of a new flight of D. D. G. But that's my view was I was wondering what you think of that.
Yeah.
Hi, This is Mike.
I don't think you're too far off there just in general I think general principles are it's really hard to pin down the development path and timeline for a new program like this this early in the process.
You know, they're trying to work through how do they how do they fund the design how did they how do they fund the project when are they going to have it what are the requirement is gonna be.
That's a pretty dynamic thing and so trying to pin that down precisely.
Is a bit of a challenge.
Our general view is that you don't really want to stop production of a line until you're ready to move to a mature design product going forward. So.
As that product matures it will interact.
The construction work that's going on on the DDG as today the flight III.
Ships will.
But we certainly will advocate and ER and believe that the best prudent course ahead will be to continue to build flight threes until that design is mature and you're ready to go into production on that and you know if that happens to be a 20 something else. Then it's 20 something else and then we'll be ready.
You know as far as the competition for that goes it'll that'll just lay in as that program matures, we will get more visibility.
Visibility into what the competition when it might be what it would look like and that sort of thing I think it would be a mistake. So for there to be any sort of curtailment and the destroyer program.
Anticipating some kind of a maturation path or are we kind of went down that path in a couple of programs. During my career, we've done that with submarines, we did that actually with Ddg's and you know.
When you try to transition over to the one thousands and then transitioned back so we had a gap in the destroyer program.
Our industry is full of people who have seen gaps in production become tremendous.
Problems for restarts of production so, let's keep the production line moving and when the production line. When the design is mature enough to transition we will we will transition it.
Okay. Thanks for that and you know more.
More.
More more general I thought you could talk a little bit about efficiency initiatives you know a while back we had you know things like digital transformation, but I thought you might discuss efforts to reduce cost.
In your answer maybe you could talk about how much that might contribute to margin improvement and the objective of eventually getting to 9% margins.
Yeah.
Richard This is Chris.
I won't discuss.
The contribution to the margin rate and when we expect to get to 9% will talk a lot more about that on the year end call, but but the capital investments. We've made in the technology investments. We've made both of Ingalls and Newport News are going very well the and the most simple form at Ingalls getting getting all the work on undercover really drives efficiency, if you've ever been.
In Mississippi in August and then the digital Shipbuilding Prada.
Products are becoming more mature and helping the manufacturing of C D and E D.
And the Columbia class. So we're very encouraged by the technology investments and the capital investments, we've made and we hope to continue to drive cost out of our out of our products.
Okay. Thank you.
Sure.
Yeah.
Our next question comes from Pete <unk> Kubicki.
Alan Thicke Global you May go ahead.
Hey, good morning, guys.
Just a follow on to SaaS question on the Kennedy.
Chris I think you said youre going to get the contract definitive nation, that's going to maybe move the risk registers to the right a little bit I just want to make sure I'm in line with I think I've been assuming that the Kennedy.
Tyramine opportunities risk retirement opportunities will be 2022, 2023 is that still the case or have they shifted to the right at $24 25, I just wanted to level set that.
23, and 24 may make a lot of sense, whereas were really in volume when it comes to 79 right now getting two compartments and work packages starting localized testing.
But it is 'twenty three 'twenty four time frame.
Okay, Great I appreciate that.
Maybe one for you Mike.
I always like to ask and any hope left on with NFC 12.
It seems like all the committees.
Commodities have reported and I wasn't sure if anyone stuck in any language or funding at all with regard to that.
Yeah, well I think you're reading that right.
We are we.
We are we have a great product line, there and we're very excited about what we've done but right now they're just as.
The in the in the contest for resources, it's not faring very well, so we'll probably just leave it at that.
Yeah. The coast Guard always seems to come up short and I know, it's too bad alright, thanks, guys.
You bet.
Yeah.
Our next question comes from David Strauss with Barclays. You May now go ahead.
Thanks, Good morning.
One wanted to ask him about a lion I think when you announced the deal you talked about 1.6 billion and kind of annualized revenue.
Based on what you did in the core and when you're applying for the year and it would it would seem like either it's it's running well below that are you expecting big growth in in in 'twenty. Two can you just comment on that.
Yeah. It's found here good morning, so for the quarter I think in my remarks, Youll see a $163 million.
Q3s from a line perspective, you kind of run that out for another quarter.
From a Q4, that's the run rate.
It's a little over $300 million. There. So are collectively it's about $450 million on an annualized basis, that's like $1 four and change right and then you get to the 106 at a growth rate of a little bit higher than 11, and a half 12%. So that's the math of it.
Right now.
We still stand by the guidance that we provided.
In the July timeframe.
Coming through our annual plan. This time of the year right now and although its draft, but working ourselves through executive management Board, we still standby those projections of $1 $6 billion in revenue in the 135 of adjusted EBITDA.
David This is Chris I'd also add that the integration of the front end of that business has gone very well.
This development and capture we have a $60 billion total pipeline.
We're working through and prioritizing a number of significant competitions over the next couple days.
Got it.
And our book to Bill at.
One eight in the quarter. So all indications are positive for that business.
Okay. Thanks for that and as a follow up wanted to ask about the Tom that the long term free cash flow.
Profile honestly, you're sticking with.
The three point too.
I think previously you had said that 'twenty two 'twenty three 'twenty four that timeframe would be fairly.
Free cash flow over that period would be fairly ratable across those years is that is that still the view or is there you know is it going to ramp during that during that period.
So as he said the <unk> was still good right. We have 757 behind us I'm, giving you the outlook for this year. So that's about one one and that leads to one last over the last three years, so strict that math to be about $700 million. We do have next year internationally you have to pay back.
The FICA payments. So that's 66 million, we have progress payments that have to be paid back. That's 100 around 160. So you can do some math on that but there is a ramp to it so between those two payments and just a slight ramp I mean, you can just a model those three years out, but we still feel comfortable.
Comfortable and it's appropriate to.
The guidance of $3 2 billion over these five years.
Alright, perfect. Thank you.
Yeah.
Again, if you have a question. Please press Star then one.
Our next question comes from Noah <unk> with Goldman Sachs. You May go ahead.
Hi, good morning, everyone.
Morning.
Tom just with these outside of the normal course of business items supply chain.
Logistics material labor.
And then also combining that with the with how the growth compares shake out should we be thinking of next year.
The shipbuilding growth rate being fairly back end loaded versus the first half.
And then just following up on that.
Why in discussion there are you seeing you know we've seen those headwinds across hardware.
And and outside of hardware or are you seeing some of those.
Same challenges outside of the business and of iron ore or not as much.
Sure so for the first quarter from a shipbuilding perspective.
Highlighted a little bit earlier I didn't hit the backlog piece of the outlook right. So unlike.
Requiring.
New awards.
Lending we have a line of thought of the work that we have in house. So.
I would look at from an outlook perspective from shipbuilding.
Still the 3% CAGR is good I would tell you that although it looks like.
At the same point, we were through the first three quarters of this year compared to last year.
Last year was an exceptional year 1918 to 19 with a 6% growth in the 19 to 20 was another 6% growth and EBIT, specifically Q4 last year with a 19% growth over the quarter previously there so.
Some materialize I highlighted actually Chris Hammond and moved into the end of Q4 2020, I mean, you look kind of thing, which now makes 2021 look flat. So I'm not concerned right now because we have the backlog we have the work we have the labor force right now we are watching material as I said, we're watching it.
And it impacts all work for us, but I don't I'm not concerned with how 2021 is shaping up from a revenue perspective, and I would I would think kind of going forward that it's pretty linear in 2022 for shipbuilding.
Relative to your <unk> question.
I don't see obviously their contracts are different more service oriented we're excited with them on board and he's put his leadership team and play.
As Chris had mentioned earlier the initial assessments that we had going into the purchased another close we've had a good six week run rate in the financials.
So comfortable with what's in front of them the items that the bidding and how they're executing on the existing contracts or evaluating the revenue synergies between aligned making us better the DFS and Mdas and vice versa. So I feel comfortable with that going forward. There I don't see today again, the ELD mandate.
Significantly impacting our revenue expectations have been aligned perspective, we have highlighted from a TCE perspective.
You got to watch.
<unk> come about and the unmanned portfolio evolving growth kind of going.
Going forward, so that's a watch item for us.
Okay. Thank you.
Okay.
I am not showing any further questions at this time.
I'd now like to hand, the call back over to Mr. Petters with any closing remarks.
Well, thank you and I want to thank everyone for joining us on today's call before I close I wanted to pass on to you that Dwayne Blake has informed me that he he wishes to retire.
I had that request like I've already turned it down a couple of times.
But I.
I Dwayne and his Dwayne and his family they've been parts of our family here for 37 years.
His personal support for all of US here at Huntington throughout his career, but especially in this in this loss position here have had just been extraordinary so you call today to harass Duane about the filing or the call just remember he's a short time are now and so.
He might have some leverage in that call so with that.
We are wishing we wished Wayne and his family well and we wish them all the best as they move forward with the next chapter of their lives and with that we appreciate your interest in HII and we welcome your continued engagement and your feedback. Thank you very much.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.