Q2 2022 Huntington Ingalls Industries Inc Earnings Call
Yeah.
Now I want to take a moment to discuss the improvements to our execution operating system in the shipyards are operating systems utilize the best practices at each shipyard and allows our leaders in craftsman across all programs to speak the same language be predictable and relentlessly focused on execution.
For example, the operating system breaks along shipbuilding construction schedule interfaces, the varying duration, but are generally 10 to 12 weeks and allow us to focus on our commitments in the critical path items to be accomplished in that phase.
It also includes a common set of metrics and processes that provide feedback on progress and performance.
I expect continued improvement of our operating system to drive our shipbuilding margin expansion opportunities and to take advantage of our significant backlog.
The operating system also provides transparency to our customer our progress towards delivery of these important assets.
Yes.
Moving to our emission technology segment, we successfully demonstrated a prototype platform, our pharos system, which has capabilities for launching operating with and retrieving unmanned underwater vehicles from an amphibious ship.
This achievement, which leveraged expertise across the HII segments reflects our commitment to delivering advanced technologies and multi domain capability to support our national security customers.
We also were awarded the mobility Air Force's distributed mission operations Prime contract. This award is a key win in our strategy to expand our live virtual constructive customer base beyond the Navy to the Air Force and other services.
Turning to slide five we have provided a snapshot of emission technologies pipeline.
Among recent contract awards, we were just awarded a task order.
Taxes mission actions and technology services, or <unk> to integrate new technology and capabilities and identify and characterize threats in support of the department of defense for the purpose of countering and Detouring current and emerging global threats.
This contract has a total ceiling value of over $800 million and this win is particularly important for further validating our investment thesis, which is bringing together the innovation and technical expertise of legacy ally on with the depth and infrastructure breath of HII.
This will create opportunity and value for our customers shareholders and employees more than either company could have achieved on its own.
While these strategic synergy wins are very positive we continue to see contract award delays pressuring timing of current year revenues.
However, we continue to have a very large pipeline that creates significant opportunity for bookings and sales growth in that regard heading into the third quarter. Our mission technology pipeline stands at 61 billion with $26 billion of qualified pipeline the.
The <unk> award and other expected awards will drive up our book to Bill ratio ratio, which was <unk> eight for the second quarter.
All in all I'm very pleased with the direction of emission technology segment, and I'm excited about the growth opportunities in areas to support our customers' critical needs.
Turning to activities in Washington, the President submitted his fiscal year 2023 budget request in March which is now under consideration by Congress.
Is built for growth through both chambers, we continued to see bipartisan support for our programs reflected into defense appropriations and authorization bills in the house and the Senate.
We are very pleased to see the strong support of our shipbuilding programs in the draft Senate Appropriations Bill released last week.
This bill includes an additional Arleigh Burke class destroyer $250 million for OLED, 33, advanced procurement and $289 million for La <unk>.
And continues to serial production of submarines destroyers amphibious warships that leverages production lines and supply chains to efficiently produce the shifts our nation requires.
The two authorization committees have also shown strong support for shipbuilding to include adding <unk> 33, advanced procurement funding authority and requiring 31 amphibious warfare shifts and the naval combat Force.
Both the appropriations Bill and both authorization bills include language in support of a DDG 51, multiyear procurement contract in FY 'twenty, three and provide additional support and funding for the submarine industrial base.
We are pleased with the legislative support our programs have received thus far and final outcomes will depend on eventual respective conference negotiations between the appropriations and authorization committees.
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 will briefly review our second quarter results 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 six of the presentation, our second quarter revenues of $3 7 billion increased approximately 19% compared to the same period last year.
This increased revenue was attributable to the acquisition of a line in the third quarter of 2021 as well as the growth in aircraft carrier revenue and Newport News Shipbuilding.
Operating income for the quarter of $191 million increased by $63 million or 49% from the second quarter of 2021 and operating margin of seven 2% increased 144 basis points. These increases were largely due to a higher segment operating income driven by higher risk retirement and favorable changes in contract estimates both at <unk>.
<unk> and Newport News shipbuilding as well as a higher nonrecurring equity income admission technologies related to our investment in a ship repair and specialty fabrication joint venture.
Results for Additionally, supported by more favorable non current state income taxes, and operating SaaS Cas adjustment compared to the prior period.
Other net expense was $10 million in the quarter, which was primarily driven by losses on investments and marketable securities given negative asset returns in the quarter.
Our effective tax rate in the quarter was approximately 19, 8% compared to 19, 9% in the second quarter of last year.
Net earnings in the quarter or $178 million compared to $129 million in the second quarter of 2021 diluted earnings per share in the quarter was $4 44 compared to $3 20 in the second quarter of the previous year.
Moving onto slide seven Ingalls revenues of $658 million in the quarter decreased $12 million or one 8% from the same period last year, driven primarily by lower revenues on the DDG program, partially offset by higher amphibious ship revenues.
Ingalls operating income of $106 million and margin of 16, 1% in the quarter were up significantly from last year due to favorable changes in contract estimates as well as higher risk retirement on the <unk> program, partially offset by lower DDG risk retirement.
At Newport News revenues of $1 4 billion increased by $70 million of five 1% from the same period last year due to higher aircraft carrier revenues, partially offset by lowest naval nuclear support services.
Newport News operating income of $94 million and margin of six 6% and were up from last year, primarily due to favorable changes in contract estimates, partially offset by lower risk retirement on Vcs program.
Admission technologies revenues of $600 million increased $363 million compared to the second quarter of 2021, primarily driven by the acquisition of a line in the third quarter of last year.
Mission technologies operating income of $25 million compared to operating income of $13 million in the second quarter of last year.
<unk> quarter 22 results included a nonrecurring gain of approximately $15 million related to higher equity income from our ship repair and specialty fabrication joint venture of which we are a minority owner additions.
Additionally results included approximately $24 million of amortization of align related purchase intangible assets mission technology to EBITDA margin in the second quarter was a robust 10, 7%.
Turning to slide eight cash provided by operations was $267 million in the quarter and net capital expenditures were $59 million or two 2% of revenues, resulting in free cash flow of $208 million.
This compares to cash from operations of $96 million net capital expenditures of $73 million or three 3% of revenues and free cash flow of $23 million in the second quarter of 2021.
Cash contributions to our pension and other postretirement benefit plans were $11 million in the quarter of which less than $1 million of discretionary contributions to our qualified pension plan.
During the second quarter, we paid dividends of $1 18 per share or <unk> $47 million we.
We also repurchased approximately 80000 shares during the quarter at an aggregate cost of approximately $17 million.
Turning to slide nine we are reaffirming our 2022 shipbuilding sales and margin guidance as well as our emission technologies margin guidance and overall free cash flow expectation, while modestly revising emission technologies revenue outlook, given a slower start to the year.
Permission technologies, we are revising our revenue expectation to a range of between two four and $2 6 billion.
This revision is a function of a slower award and contracting environment than we had initially expected and precipitated by the continuing resolution to start the year that said, we remain very confident in and excited by the growth opportunity. We see ahead for emission technologies.
Regarding our near term outlook, our second quarter results were positively impacted by higher risk retirement and favorable changes in contract estimates, particularly for LCD <unk> as reflected in the angles operating margin. The remaining shipbuilding milestones, we expect to achieve in 2022 are weighted towards the fourth quarter given that backdrop, we expect.
The third quarter shipbuilding revenue to be relatively flat sequentially and shipbuilding operating margin to be approximately 7%.
Regarding mission technologies, we expect results will begin to ramp more meaningfully as the pace of awards increases and expect third quarter sequential sales growth in the 7% to 9% range and operating margin in line with our full year guidance of approximately two 5%.
Regarding our longer term target, we remain confident in our free cash flow target of $3 2 billion from 2020 through 2024. This outlook does assume that continued expensing of research and development costs for tax purposes. As a reminder, we believe the impact to 2022 free cash flow would be approximately $100 million if the current R&D.
Amortization treatment remains in place.
On slide 10, we have provided a walk from our 2022 to 2020 for free cash flow outlook, which is consistent with the chart. We began providing earlier this year.
Our strong free cash flow performance in the quarter was partially due to the pull forward from the third quarter given this dynamic and the lack of milestones in the third quarter, we expect free cash flow to be minimal.
As a result, we do expect robust free cash flow generation in the fourth quarter and do see positive tailwind on our overall 2022 free cash flow guidance.
As we are in the midst of our annual long term plan update our reserve and updates of our free cash flow guidance until that is completed and we'll have more details on our third quarter call. Lastly, we are reaffirming our capital allocation priorities and we are committing today to return substantially all free cash flow at the planned debt repayments to shareholders through 2000.
24. This is a significant commitment which should result in increased share repurchases, particularly in 2024. After we reached our desired debt level to summarize this was a strong quarter and we are pleased with our progress as we continue to navigate a challenging operating environment.
With that I'll turn the call back to Chris for some final remarks before we take your questions.
Thanks, Tom in conclusion, I'll wrap up on slide 11, with the key tenets of our investment thesis first we are focused on execution of our significant backlog, which provides meaningful earnings and cash flow.
This coupled with our consistent long term shipbuilding growth profile and high growth opportunities emission technologies positions us to deliver significant free cash flow and generate value for our employees customers and shareholders now I will turn the call over to Christy for Q&A.
Thanks, Craig.
As a reminder to everyone on the call. Please limit yourself to one initial question and one follow up and 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.
Thank you I would like to ask a question. Please press star.
Thank you Pat.
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Sure.
Last question comes from Robert Springer.
Please go ahead.
Good morning.
Good morning, Rob, Hey, Rob, Chris, Chris or Tom can you both talked about it.
The strong Ingalls margins it sounds like that was all PD 30, primarily but you didn't change the shipbuilding margin guidance I assume that was expected.
From the outset or does this reflect maybe some increased costs from labor and such in the back half of the year.
Yes. Good question I'll, just I'll start and then Tom.
Can finish share, but that was a bit of an acceleration.
And that milestone so we got some benefit in Q2, but labor as I indicated previously is our greatest risk what we're watching.
King.
At the portfolio and shipbuilding we've hired.
2000 to 5000 commitment now Luckily, we have least flavor and.
And we have over time and the good news there is people who are actually working over time now.
Back in 2021 and after the pandemic started it was really hard to get people to work overtime. So they started to come back and work work over time, which helps to offset it but labor remains our largest risk I'll kick it over to Tom Shaw.
Donald.
Comment on that front.
We had a milestone that healthy 30 milestone that we referenced that was planned for Q3 that accelerated to Q2, the timing of that Q2 was a good quarter for Ingalls overall, they had some DDG 121 post.
Delivery.
Clean up <unk>, 28, and 29% some additional risk retirements and then on the large deck, which are like a couple of dollars a pop into Q2 that I still think on the back and the reason why we haven't.
Guidance is we don't have as many milestones we do have AG 123 in Q4.
Just the back half of the year to play out.
As Chris says, we're watching a hard labor hire.
The portfolio right now and as the year unfolds and we continued to retire risk we'll provide additional guidance on that front.
So just on the back of that I mean, it sounds like you'd have upside otherwise, but how do we quantify what this least labor and.
Just labor inflation in general over time, you talked about how does that structurally change the cost of labor in the business if it lingers.
For a while.
Yes, that's a great question Amit.
We're fortunate in that we have labor agreements for our own employees, but at least labor can be a bit more.
Now they don't have the benefit so you have to have to trade that off a bit.
So what you do is you put estimates for what you think youre going to do at least flavor on overtime.
<unk> and that's been reflected in our.
And our margin profile. So I think it's a great question you have to be mindful of that.
Okay. Thanks very much.
Okay.
Yes.
Thank you.
Next question comes from Pete <unk> Kubicki from Alembic Typo Peach. Please go ahead.
Hey, good morning, guys.
Thanks, Tom.
Tom I guess on the expectation that share repurchases will ramp in 'twenty four I think you mentioned.
We.
We're trying to figure that out the level of that we should assume that youre going to pay off all of the.
Debt maturing essentially youre not going to refinance.
That's correct, but as you can see we're on a cadence here about 100 million a quarter and year to year will continue to guide you that 'twenty two 'twenty three we paid down to <unk> 23 of the term loan gets paid off in completion in Q3 to Nicky.
You can see that.
We will follow our capital allocation policy that we have will continue to keep the yard up and running.
Don't see any holes in the portfolio from an M&A perspective.
Barring that theres nothing ultra attractive in that timeframe, we will continue to provide all excess free cash flow back to the shareholders and basically that debt slug that I've talked about we'll just kind of transition into repos. If we don't have anything better to do with cash.
Okay. Okay. Thank you for that and last one for me.
Chris are we how are you feeling in terms of.
Standing the Amgen kind of lifecycle at Ingalls I know there were some <unk>.
<unk> on the <unk> line on the <unk> line and it seems like Youre, making some progress do you feel like Youre kind of out of the woods there as long as the.
Momentum Youre seeing in Congress continues.
Yes, so definitely some positive momentum we're about halfway through right, we'd like to say that it's a long process.
<unk> momentum and acceleration of <unk> 33, and some really positive developments by by the Navy and the Marine Corps on establishing 31 assets, which provide some clarity from a planning standpoint, so yes positive momentum but.
But we need to get through the process to completion.
Solidifies the revenue profile that coupled with DDG 51, the 23 multi year that we're working on all of that.
All of that activity within the 23 budget really solidifies.
The Ingalls revenue profile moving forward.
Great. Thanks, guys.
Thanks.
Thank you.
Our next question comes from Robert Palo Alto, That's cool research partners.
Please go ahead.
Thanks, so much good morning.
Good morning.
Chris I'll start with you following up on the labor issues I mean, if you could also comment not just on the numbers.
Thank you.
Next question comes from Tom <unk> from Cowen. Please go ahead.
Hey, good morning, guys.
Good morning, guys.
I was wondering if you could talk a little bit about the Vcs program there has been.
A lot of press.
<unk>.
Industry scuttle about the program being well behind schedule and obviously you guys took a big charge in.
Q2 of 'twenty it looks like there was another negative EAC in this quarter.
Where are we on the program relative to your expectations.
If you could just maybe give us some color on what your accrual rate might be so.
We should either be yes.
Got it.
Yes, I'm, sorry, I'll, let you finish did you have anything else hopefully.
No that's great. Thank you.
Okay, Okay, great yeah, so the Vcs program.
And I would characterize that.
As stable from a scheduling standpoint.
And over the last few quarters pretty stable from AAC.
AAC standpoint actually.
There's always minor adjustments from quarter to quarter.
But I think some of the.
Data you may be referencing.
Is a bit dated as you know we do quarterly Acs.
We incorporate the risks and all of the ships.
And boats.
On a quarterly basis so.
I'm pretty comfortable with where we are.
From AAC standpoint on the Vcs.
I don't think anything is all any of us are comfortable relative to the how we've performed historically on the program we need to improve right I think the Newport News team is very motivated.
And.
Dedicated to getting it right theyre, making progress.
Some.
Potential momentum.
Within block four which will also translate into block five so I think there's some upside in block five so I think the team is very focused I think theyre working working the operating system very well, we need to get back to two per year, we need to get these assets back to our customer because they need them.
So.
Sure.
I would consider its stable from a schedule standpoint, and we need to continue to improve from a cost standpoint, and any details I'll send it over to Tom here sure. Yes, I think when we took that charge back in Q2 of 2020.
The preface of that was we had a list already with our Columbia coming online we saw that.
Ramping up and then getting to a full two to cadence of launching and sell off a ship a year. There was already a lift in a risk and a hiring ramp obviously in 2020 after two quarters of that kind of mid year, we saw with Covid impacting us and then obviously.
With Abercrombie.
Into 2021, so there has been pressure on the program from what was the baseline of already being able to do two plus one between those two programs are hiring ramp with more.
Junior people onboard and then that line that we've talked about in past calls is very serious in nature more than any of our other lines. Each each both goes exactly through crude accrued. So if one is out in front of us gets impacted.
The line behind it both the crews being able to cycle and then.
The schedule aspect of each vote.
I think when we took that looks at where we were in Q2 of 'twenty. We had a perspective of what was in the art of the possible and how we could.
Recover or.
I will finish off the back end of a lot for us.
Translates into block five so I think as Chris said, we're relying on operating system.
We're trying to stay to our many plan that we have.
Doing lessons learned from both to vote, we are seeing incremental improvement from.
Operational where we were a quarter ago to now so that's a positive sign right now and as Chris says, we run a very rigorous.
Rigorous EAC process, and we look at our labor.
Labor and material and overhead.
But ah run apps reevaluating our booking rates.
The changes on that large.
You don't see them on the on the downside, but we do have incremental changes from quarter to quarter here. So I'm comfortable with where were booking. These visa these ships right now.
Thank you very much guys.
Thanks Scott.
Thank you.
Question comes from George Shapiro with Shapiro Research. Please go ahead.
Yes, good morning.
Good morning, My question is this.
Mike.
My question is if you take your Eac's it would imply the underlying margin.
Ingalls is like seven 9%, which is generally higher than what you've seen in the past around 7%. So I was just wondering is that just unique to this quarter or is this more of an ongoing underlying margin rate.
It is a little bit.
<unk> unique.
For this quarter Thats, a high number on the run rate from Ingalls is usually lower than the upper sixes and Sevens I think just how all the Maui.
Played out with the performance lift we talked about the economic adjustment.
The adjustments that were allowed because of the clauses that we have in the contract. So you may ask may just be a little high there but <unk>.
Generally speaking we've talked about the maturity of the portfolio down at Ingalls more serial production and follow on shifts down there. So.
That run rate is at the front of Newport News.
We generally say, it's between 6% to 7% so I would leave you with that George.
Yes.
That's really the question is if I did the numbers this quarter it looks like it would come out to seven 9% like you suggest it's normally like.
Closer to seven so I was just wondering if there is something unique that made this quarter.
Out of line or is it a new run rate.
So it's not a new.
Our run rate, it's just how the math plays out for the quarter.
Okay.
Thanks very much.
Thanks George.
Thank you. Our next question comes from David Strauss from Barclays. David. Please go ahead.
Okay.
Thanks, Good morning.
Good morning, good morning.
Okay.
Tom wanted to ask about.
The free cash flow cadence I know you mentioned.
Q3, close to I guess zero breakeven, but.
I think you are still calling for a pretty meaningful working capital tailwind.
In the second half of the year, it looks like capex might be trending towards the lower end of your range.
What keeps you from coming in.
The amount above kind of the 300 to 350, assuming assuming R&D doesn't doesn't happen.
So Steve question and you are putting the pieces together as we highlighted in the opening call.
Comments, we did say three to $3 50, we are holding that right now I do feel comfortable that with the risk we've seen behind us than in front of us we still have like five months of the year.
Play out, but right now we do see.
Although Q3 will be light.
The way that it's playing out Q2, and Q4 are going to be the cash flow quarters.
But I do see we have been.
Repay has pushed to the back half of the year.
As I come through our planning process and I have complete visibility on how the year is going to play out as the COVID-19 repay happening this year or next year, that's more of a timing play the R&D and <unk>.
<unk> you referenced we'll see how that plays but that could be.
100, 100 million that we talked about as a downtick. This year could go away. If the law changes there seems like there's some traction and momentum to get attached to bill at the back half of the year.
That changes, although we can see the 100 $100 go away.
As we foreshadowed on a downside and then it would validate that $3 2 billion over the five years of cash from operations was very strong in Q2, we saw some some nice pickups as far as the older contracts and service contracts, we're able to get Covid costs that we had on our books included billing rates. So that was a pickup and that's how.
Q2 kind of played out when you think about Q4 on the back half of the year I have a 123 delivery.
The DDG side I have a couple of.
Supply.
Capital incentives.
I would like to eight billings, let's say nine with the construction award helps clean up the long lead contracts that I have on <unk> for cash and then <unk> hundred 81 is going to be able to have progress payments.
Billings as they work through.
Kind of getting into Q4.
We have some incentives.
BCS and then ally and I'll kind of kick in that I'll use at the end of the year two so a good.
Upside potential there, but I'm not ready to call that ball until I can get through our planning process.
Yes.
Okay. Thanks.
I mean is any of this borrowing from kind of the upside you.
The repair sort of activity, but ingalls is a pretty scrappy group I wouldn't.
I wouldn't count them out and with the pace of <unk> and <unk>.
At <unk>, we've got a lot of time to.
To figure that out.
Okay, great. Thank you.
Sure.
Thank you.
Im not showing any further questions at this time I would now like to hand, the call back over to Mr. Casey.
<unk>.
Okay. Thank you for your interest in HII, we welcome your continued engagement and feedback.
Please have a safe and great rest of summer. Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.