Q3 2022 Huntington Ingalls Industries Inc Earnings Call
It for DDG 129, Jeremiah Denton.
And on <unk> shipped product lines fabrication began on <unk> 31, Pittsburgh and last week, we were awarded a $2 4 billion detailed design and construction contract for La nine.
Also we have commenced the work to complete the combat system installation and activation on the zoom all class destroyer Lyndon B Johnson DDG 1002.
At Newport News <unk> 79, Kennedy is moving further into the test program and began testing of the electromagnetic launch system and on the other side of the shipyard. The keel was laid in the dry dock for Cvs 80 enterprise.
The <unk> program continues to make progress with Cvs <unk> 73, USS George Washington on track to Redeliver next year.
Also we continue to see progress on the Virginia class submarine program and expect to deliver SSN 796, New Jersey and float off SSN 798, Massachusetts next year.
In the quarter, we experienced continued challenges from the broader macroeconomic environment, most notably a persistent tight labor market with really no material improvement in general economic conditions.
Through the third quarter, we have hired over 3600 craftsmen and women against our full year plan of approximately 5000, and we continued to utilize the levers of outside lease labor and overtime to offset the short term deficit of employees.
In addition supply chain challenges continue across our supplier ecosystem, resulting in longer material lead times and inflation pressure as we've discussed previously on inflation. We do have some contractual mitigation and we continue to actively manage the supply chain and our production schedules to minimize impacts.
To address our shipbuilding labor challenges, we are aggressively enhanced our skilled workforce development pipeline to.
To this end, while we broadened our recruiting efforts to bring in more shipbuilders. We're also expanding our very successful apprenticeship programs, including revised curricula reduction in completion timelines a focus on pre apprenticeships and youth apprenticeships and expansion to underserved populations and women in the.
<unk>.
Moving to our emission technologies business, our pipeline remains very strong with $4 billion in proposal or evaluation and $17 billion in capture our third quarter book to Bill was two two and was a healthy one one year to date <unk>.
Integration of operations and business systems. Following the Alliant acquisition is largely complete and we are already seeing strong synergies such as the recently announced <unk> and map GMO awards totaling over $900 million in total contract value.
We also received a couple of major contract actions and our nuclear and environmental business that were driven by sustained strong performance at.
At Savannah River, our joint venture received an extension for four years, plus an additional option year and at the Nevada National Security site. Our joint venture received a simultaneous early exercise of all five of its option years.
These are significant wins and we are very proud to support dose across.
Across the complex.
Despite headwinds earlier in the year due to the delayed omnibus spending bill and the ongoing intense competition for talent, we continue to gain momentum and see strong growth potential going forward. This includes both domestic and international markets, where we are expanding our presence in regions consistent with the national security strategy.
In summary, I am confident that our presence across all the combatant commands coupled with an increasing demand signal for our advanced technology solutions from our Dod customers positions mission technology, as well going into FY 'twenty three.
Shifting to activities in Washington, the Federal government began the new fiscal year under a continuing resolution, which funds the government operations through December 16th.
We continue to urge Congress to proceed expeditiously and remain optimistic that the annual defense appropriations and authorization processes will be completed in the months ahead.
While final outcomes will depend on eventual respective appropriations and authorization Conference Committee negotiations. We are pleased to see defense oversight committees provide strong support to shipbuilding to include recommendations for new DDG 51, multiyear procurement authority additional funding for amphibious ships and <unk>.
Requirements for not less than 31 amphibious warfare shifts.
The strong shipbuilding demand driven by our national defense requirements as shown on slide five.
These critical customer needs spanning destroyers amphibious submarines and aircraft carriers, and including new construction overhaul and maintenance and modernization will result in significant contract award opportunities driving continued backlog stability.
And now I will turn the call over to Tom for some remarks on our financials Tom.
Thanks, Chris and good morning today, I'll briefly review, our third quarter results for more detail on the segment results. Please refer to the earnings release issued this morning and posted to our web site beginning with our consolidated results on slide six our third quarter revenues of $2 6 billion increased approximately 12% 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 growth at Newport News Shipbuilding.
Operating income for the quarter of $131 million increased by $13 million or 11% from the third quarter of 2021 and operating margin of 5% was essentially flat from the prior year period. The increase in operating income was primarily due to more favorable non current state income taxes, and operating fast Cas adjustment compared to the prior year.
<unk> period, as well as improved results at Newport News Shipbuilding.
Other net expense was $13 million in the quarter, which was primarily driven by losses on equity investments given market volatility in the quarter.
Our effective tax rate in the quarter was approximately 14, 8% compared to negative four 3% in the third quarter of last year, which included research and development tax credit for tax years 2016 through 2020.
Net earnings in the quarter were $138 million compared to $147 million in the third quarter of 2021 diluted earnings per share in the quarter with $3 44, compared to $3 65 and.
In the third quarter of the previous year.
Moving on to slide seven Ingalls revenues of $623 million in the quarter decreased to $5 million or less than 1% from the same period last year, driven primarily by lower revenues on the NSC and <unk> programs and partially offset by higher DDG program revenues.
Ingalls operating income of $50 million and margin of 8% in the quarter declined from last year, primarily due to lower risk retirement on the DDG program, partially offset by higher LPG risk retirement.
At Newport News revenues of $1 4 billion increased by $91 million.
Or a robust six 7% from the same period last year due to higher naval nuclear support services as well as the submarine and aircraft carrier revenues compared to the previous year.
<unk> operating income of $102 million and margin of seven 1% or up from last year due to contract incentives on the Columbia class submarine program, partially offset by lower risk retirement on the Vcs program. The Columbia class contract incentives are related to Newport News support of continued growth in our submarine construction enterprise.
Admission technologies revenues of $595 million increased $201 million compared to the third quarter of 2021, primarily driven by the acquisition of a line in the third quarter of last year.
Mission technologies operating income of $14 million compared to operating income of $13 million in the third quarter of last year. Current results included approximately 24 million of amortization of align related purchased intangible assets compared to $8 million in the third quarter of last year.
Mission technologies EBITA margin in the third quarter was eight 4% and eight 7% year to date.
Turning to slide eight cash used by operations was $19 million in the quarter and net capital expenditures were $77 million or two 9% of revenues, resulting in free cash flow of negative 96 million. This compares to cash from operations of $350 million net capital expenditures of $73 million or $3.
1% of revenues and free cash flow of $277 million in the third quarter of 2021.
While third quarter free cash flow was below the projection we provided on our last earnings call. This is simply a function of timing as well as the tax payment of approximately $80 million that we elected to make in the third quarter given the lower probability of delay in deferral of changes to the R&D tax treatment. In fact, we are increasing our overall free cash flow outlook for fiscal year <unk>.
2022, which I'll discuss in more detail in a moment.
Cash contributions to our pension and other postretirement benefit plans were $11 million in the quarter of which less than $1 million were discretionary contributions to our qualified pension plan.
During the third quarter, we paid dividends of $1 18 per share or $48 million.
We also repurchased approximately 66000 shares during the quarter at an aggregate cost of approximately $14 million.
Moving on to slide nine and our updated outlook for the 2022, and 2023 pension and postretirement benefits first I would like to highlight that our funded status remains strong and has improved year to date. Additionally, I will note that the cash flow impacts related to the pension changes remained muted.
For 2023, the fast benefit has come down considerably from our last update given the more immediate recognition of the negative asset returns experienced thus far in 2022, while the increase in the discount rate does partially offset the impact of asset returns the magnitude of the impact related to lower asset returns is clearly more significant.
Please remember that pension related numbers are subject to year end performance and measurement criteria, we will provide a multiyear update our pension estimates on our fourth quarter call earnings call in February .
Turning to slide 10, we are narrowing our 2022 shipbuilding and emission technologies revenue guidance to the low end of our prior guidance ranges given the results through the third quarter and the current operating environment.
We are now expecting shipbuilding revenue to be between $8 to $8 3 billion and expect mission technologies revenues to be approximately $2 4 billion.
The narrowing of the shipbuilding revenue guidance is a function of the challenging labor environment that we have frequently discussed as well as our expectations for the timing of the material as we near year end.
Emission technologies revenue is a reflection of the slowest start of the year as well as the current hiring environment as Chris noted third quarter book to Bill ratio exceeded two point out a very positive indicator as we move forward and we remain very enthusiastic about the growth opportunities emission technologies.
We are reaffirming our shipbuilding operating margin guidance range of 8% to eight 1% for emission technologies, we are slightly revising our margin guidance to approximately two 3%, which is largely a function of the lower volume of work in the year.
Moving to free cash flow, we are increasing our guidance 2022 under current section 174, R&D tax law, the midpoint of our prior guidance with $225 million, which has now been raised to approximately $350 million. The most significant driver of that increase is in the COVID-19 progress repayment, which we initially expected in <unk>.
22, moving to 2023, given our free cash flow through the third quarter, we are expecting very strong free cash flow generation in the fourth quarter.
On slide 11, we have provided an updated view of our free cash flow expectations. This outlook assumes the current R&D amortization treatment for tax purposes remain in place and given that adjustment. Our 2020 through 2020 for free cash flow expectation is now approximately $2 9 billion as we've noted before the impact of the R&D.
Treatment is approximately $250 million over the 2022 through 2024 timeframe.
We are reaffirming our capital allocation priorities, including our commitment to return substantially all free cash flow asset planned debt repayment to shareholders through 2024 as we have noted this is a significant commitment which should result in increased share repurchases, particularly in 2024. After we have reached the desired debt level.
I will also note that we recently announced an increase to our quarterly cash dividend to $1 24.
A 5% increase over the prior amount.
To summarize the operating environment remains challenging and we were not able to overcome the slow start to the services contracting pace, which has resulted in revenue guidance moving to the low end of our prior ranges. We are pleased to reaffirm our shipbuilding margin guidance and increase our free cash flow expectations as we aggressively manage through current business conditions.
Regarding fiscal year 2023, we plan to provide detailed guidance on our fourth quarter call consistent with our normal cadence with that said, we continue to view a long term shipbuilding revenue CAGR of 3% as appropriate and we are pleased to reaffirm our long term free cash flow target through 2024 as I have discussed we would normally expect.
<unk> Incrementals shipbuilding operating margin improvement in 2023, however, given the current economic environment will lead to close out the year to assess risk retirement and operational efficiencies before we can provide more insight.
We will finish the year just as we started focus on execution and we will provide a more comprehensive update on our view for 2023 in February .
With that I'll turn the call back over to Chris for some final remarks before we take your questions.
Thanks, Tom before wrapping up I would like to highlight on slide 12 that we will release, an updated sustainability report in the coming days, which will be available on our website. We are focused on the alignment of the program with our mission values and purpose and structuring our strategy around securing our business building our community and protecting our.
Horses, we've enhancements in process for future sustainability reporting and expect another update released in the spring of 2023.
Finally, turning to slide 13, we remain focused on successfully executing on our strong backlog and positioning for long term growth.
Which will generate value for our employees customers and shareholders.
Now I will turn the call over to Christy for Q&A.
Thanks, Chris 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 cubic platform.
Operator, I will turn it over to you to manage the Q&A.
Absolutely.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you are trimming that question. Please.
19.
As a reminder, isolate using a speaker phone please remember to pick up the handset before excellent question.
The first question comes from the line of Doug Harned with Bernstein you May proceed.
Good morning, Thank you.
Doug.
Yes.
Yes.
At Newport News.
You give us a sense of how things are progressing on Virginia class and Thats. Good I know you had.
Less risk retirement, this time around but we've talked a lot about this and the importance of getting labor back in trains.
Where does that stand now in terms of your outlook.
Yes, thanks for that Doug.
Absolutely some stability in the Virginia class program right now.
<unk> <unk> and 786, which is the next supposed to be delivered.
Some positive developments from a schedule standpoint, they are very very stable and looking towards beginning of next year to get that.
That both delivered.
I would say stability in the schedule and still working very hard on the fundamentals.
Cost and efficiency.
I think we're in a pretty good place from a schedule standpoint there.
Yes.
In terms of cost.
Cost and efficiency I guess, what I'm trying to get at it is this there is a.
If you are seeing kind of a clear path to a point, where you're really happy that you've got everything under control in terms of cost and so forth I mean, I'm just trying to get a picture for what that trajectory looks like to you know over the next few quarters say, yes, sure so fundamentally.
Yes.
When you have stability in your schedules and stability in your planning documentation and work is in front of you.
And to have a better chance to have an efficient.
Performance from a cost standpoint, so first things first let's get the schedule right. We've got the labor.
We are fully staffed.
On block four on block five.
We're making progress on their milestones and now is just knocking down that we're getting through the test program on 796 and progressing.
On 798, so I'm not going to give you a trajectory on margins on the Vcs program I will say the best indicator.
Within the submarine program is are you, making your milestones are your scheduled stable and if they are youre going to meet your cost youre going to meet your cost objectives.
But theres a lot of heighten that teams are working very hard to get that done.
The team is working very hard on the fundamentals on the operating system, if they get that right and they work on that every single week, which they are they're going to be successful.
If I can squeeze just one more in here.
Related to cost.
You mentioned inflation in the last quarter and <unk>.
Historically.
I felt that your view has been that you can handle inflation you've got enough.
And therefore opportunities in terms of escalators and so forth to deal with that but.
Can you talk about what may be different this time, because we're seeing it a lot of defense companies now that <unk>.
Inflation in the short term is more difficult than we've seen in.
Prior periods.
So as I've said previously we do have some protection. There is the biggest issue for inflation for us is going to be really on our.
On a new contracts.
And ensuring that we get the bids right from the supply chain.
And ensure that the cost and schedule is correct.
When we put those new contracts. So that's probably the greatest risk for us we do have some inflation aerie issues.
Within some of our piece parts in the supply chain, where we didn't have those are under contract, but as I've said previously we have some protection.
For that although not not fully protected so the real issue for us related to inflation is getting the bids right on our new contracts and we're working very hard to ensure we do that.
Okay, great. Thank you.
Sure.
Okay.
Thank you for your question.
Next question comes from the line Rob explained mindset.
Okay.
You May proceed.
Hey, good morning.
Good morning, Rob Hey, Rob.
Tom what was the organic growth for emission technologies in the third quarter. Since you have a partial inclusion last year in the third quarter.
And then.
No.
<unk> has a lot of cost plus work, but how much wage inflation have contributed to the top line growth there.
Yes, so when I look at that but you are right. We closed August 19th of last year.
Third quarter last year was incomplete.
So the organic growth for the quarter, specifically it was about one 5%, but I look at it for the year. It can be choppy dependent because of the CR at the beginning of the year you talked about the slow contracting environment. The wins and then the supply chain issue a little bit on the operational side.
Out of that the overall emission technologies growth for the year is four 3% align itself grew 8% Q2, we told you about 6% emission technologies as a whole.
<unk>.
Mission technologies revenue topline was a little light I, usually that third quarter for us for the fourth fiscal quarter is a sweep.
For both the line and legacy Ntis, we had anticipated when we told you about an 8% growth against the Q2 topline we would see about 650 and that didn't materialize there as I said factors worth.
Sweep up as much as we thought we would and funds have open seats, we've talked about in hiring professionals. There and then just some.
Some material somebody to material didn't hit in the quarter. So.
That's where we stand with growth.
I would I would offer.
Sorry, sorry, Rob.
I don't recall, what you just said that Tom, but I think we had pro forma growth of 8% year to date within mission technology. So.
Feeling very positive about the business, we had two real good wins and D Mats and Air Force training contract, which which is very positive book to Bill is positive. So so I think that team has a lot of opportunity moving into 'twenty three.
Okay, and then just high level, one Chris but on this potential five unit block buy for the Columbia class.
Could you talk about what that might mean for Huntington Ingalls is a cost savings and labor continuity opportunity.
Well, we assume.
That.
The Columbia class will.
Kind of orderly.
Based on the planning Documentations, we've received from from the Navy and electric boat.
That's been included in all of our capacity planning and.
And how we think about the business going forward, our 3% growth rate now.
I think the Navy has been very thoughtful in how they order material and how they're thinking about.
Bundling procurements to ensure they get the best.
Economics relative to ordering material from the supply chain. So.
I think it is a smart way to do it we're just in the initial stages of kind of talking about it.
But it will definitely be involved.
Part of <unk>.
Our growth rate going forward it will be a source of growth in Newport news.
And I think the team is smartly working on it.
Is it fair to think thats better visibility than normal.
Both okay.
Absolutely, but do you think.
You should think about.
The defense strategy and you think about.
<unk> plan and the amount of visibility we have right now into what our backlog will be in our demand signal, we're going to get in shipbuilding.
We have very good visibility and high confidence that we're going to be in a pretty good place over the next 10 to 15 years from a visibility standpoint, the important thing we need to do is focus on execution.
Sure we get these bids correct and then get the ships delivered because the navy needs them.
Okay fair enough. Thank you.
Yes.
I would comment too on the back end of that we added a new slide to kind of hit.
The strong demand for shipbuilding you can see our backlog chart on slide five there.
Backlog of $46 million $46 billion range.
That's sustained itself through at least 2026, we have excellent visibility from both the 30 year Shipbuilding plan.
Plan and then.
The more immediate FY 'twenty three budget of expectations, what we see in the near term.
We have tremendous visibility of the awards, we expect to come in the next three to five years.
Hey, Bob.
You still there.
Keith.
Sure.
Yeah.
Okay.
The next question comes from the line of Scott <unk> with credit Suisse.
You May proceed.
Hey, good morning. Thank you so much for taking my questions.
Good morning.
Tom can you quantify the benefit of the Columbia class incentives.
I'm just wondering if that's something that could help also help the business in the coming quarters here or maybe if that's a one off.
Yes, sure so youll see that in the queue.
Later this morning, when it comes out.
Quantification is $41 million of Columbia incentives.
Over the last two or three calls we highlighted that as we're working closely with our customer <unk> customer on how the Virginia class and Columbia class play out both the additional about some block five the block six boats and then bill two we're working closely the program offices as far as what those requirements look like what are the schedule requirements. The bulks have to.
Slide here and that drives like a capacity and capability requirements within Newport news so.
We've worked closely with the program office there and.
See a need for additional.
Capacity that we have in the yard.
We've negotiated.
<unk> right now and we've achieved those incentives in the quarter. So it was $41 million.
Got it thank you and then Chris apparently the.
Ukrainians recently used unmanned surface vessels and combat I think last Saturday I think there were these kamikaze style USPS.
If I recall correctly, you've said in the past that the con ops with something Thats still needed. Some work on the unmanned surface vessels, So I guess.
Now that you've actually we've actually seen these in combat do you think that's a big moment for us.
Class one weapon systems broadly and what does that mean for Huntington.
Yes, Scott I don't want to comment on the specific mission.
But.
I think getting these assets in the water executing missions for the customer is very important because it's going to demonstrate.
How positive and productive these can be as a force multiplier.
And we think it is.
The most positive thing we can do is get these and.
In service.
So they can demonstrate there.
Pretty impressive capability now I don't know if we.
Hit an inflection point.
From.
Our revenue standpoint.
As of yet, but there is definitely momentum.
That's being gained both both subsea and <unk> and on the surface.
And a number of different con ops and missions that are being contemplated for these type of vessels. So we only take it as a positive development and as we think it will continue to gain momentum and we really like where we're positioned.
Got it thank you so much.
Sure.
Thank you for your question. The next question comes from the line of David Strauss with Barclays. You May proceed.
Thanks, Good morning.
Good morning.
Tom could you just go through the rundown of the EAC when in the quarter.
Cumulative adjustments that we had that was 84 favorable 57 unfavorable a net of $27 million and proportionate to that was about half of that was on Newport News and then 25% each for angles and empty.
Great.
And then.
As we think about the opportunity for improved shipbuilding margins next year. I mean, you, obviously talked about that there potentially could be some leverage on the volume side.
What about Chris I guess from a milestone perspective, how do you see the milestones in 'twenty three relative to 'twenty to giving you an opportunity for to enhance margins.
Yes, So we will give you a comprehensive update on the milestones.
On the next call, but the five deliveries in 'twenty three we're still very positive on those.
Those are our holding and we're pacing towards delivering on those ships in the balance of those those milestones are in process and on schedule as well.
We previously indicated.
So yes, there is some opportunity, but we're going to we're going to assess the risk and opportunity to every quarter.
It's definitely still a tight labor market, there's been some positive indicators here as of late but I don't think two data points is necessarily a trend.
So we're going to be measured in how we deal with that assessor.
Assess our risks and opportunities.
And then provide you a comprehensive update at the end of the year, but.
The milestones in 'twenty three we're holding we're very comfortable with that we need to get these assets delivered and the teams are working very hard to do that.
Thank you very much.
Sure.
Thank you for your question. The next question comes from the line of George Shapiro with Shapiro Research you May proceed.
Yes, I just wanted to pursue you raised the long term assets for the pension to 8%.
I guess, that's maybe just based on how bad it is this year, but if you give some color on it and then also what how that affected your contribute not the contribution how it affected you.
<unk> for next year.
Yes, sure George I appreciate the question, yes. So we did raise that when we look at the companies and this is now 11 full year such as the 12 noninvasive 11, we've exceeded the target of 7% a quarter that we've had obviously this was down yet as we were less than second quarter and that's you've highlighted to the street.
As our peers are too.
Double digit negative returns again against the pension plan that we have here so.
We do think it's prudent when we looked at it going forward at least for next year, we have an expectation that the return on assets could be 8%. So we've raised that three quarters of a point relative to the pension you can see from our table that can give you that updated their parameters for 2023. The discount rate has changed described from 3% to 490, So thats up a 190 bps.
We gave you the returns on what we saw through the.
So year to date at minus 15%.
And you can see that flows through the fast cost adjustment goes down about $102 million. So that's that's some headwinds on EPS next year, but we'll keep you updated in the next call. We can give you the entire tech for a five year projection going forward.
Okay. Thank you.
Thank you. The next question comes from the line of Seth <unk> with Jpmorgan you May proceed.
Okay. Thanks, very much good morning.
I actually just say that I was going to ask good morning, I was going to ask the question about the asset returns and I figure no. One else would ask that question, but if someone did I knew I knew it would be George.
Maybe maybe thinking about a different kind of bigger picture question and I apologize. If this is a little bit squishy, but.
I was looking for something on your website recently and you go on the site and I think initially there is.
There is a picture of like.
Poulter like an army soldier holding job and you've got kind of see cyber land air joint all domain.
When you think long term, Chris about how you want to position the company during during your tenure.
Is there is there a point by I noticed far out there by 2030 or whatever where.
You want to see shipbuilding be.
A certain percentage of sales and much lower than it is right now.
Well, it's going to be a lower percentage of simply because we think we've made really good investments in growth markets. When you think about the technology markets that.
That we're in and emission technologies.
They really directly relate to the national priorities. When you think about AI ml cyber unmanned.
ISR.
Sure.
Live virtual constructive training in advance synthetic training.
Those directly relate.
And apply to.
The defense.
Our priorities moving forward so they will naturally grow.
Shipbuilding will be less.
Percentage of the portfolio, but make no mistake shipbuilding always kind of be at the heart of this company.
And we're focused on it but I think it will naturally reposition a little bit based on the.
The technology and its interesting.
The Navy is asking for this right. These are the navy priorities and I can think of no better way to serve your customer than to answer their call relative to additional more complicated missions that they need to execute so.
It's a good question. It's one when we think about a lot and we think we're making the appropriate investments in these technology areas.
Okay. Thank you very much.
Sure.
Thank you for your question. The next question comes from the line of quantum Kona with Cowen You May proceed.
Wanted to ask just to be clear the labor shortfall this year.
How does that impact the timing of any milestones.
Next couple of years.
Is everything early eight milestones you cited last quarter for 2003 still on for 2003 is there any Q4 way to those.
Et cetera.
There is still on for 'twenty, three and we assess the labor situation.
Got it and thanks for the question. This is Chris and we assess our labor plans on our program schedules on a quarterly basis. So.
All of the labor situation that we've seen this year, while we expect for next year is all included in those program schedules and we are still comfortable with those milestones.
Okay could you quantify so what do you anticipate your labor hires to be this year relative to the 5000.
What is the impact.
On an annual basis from.
The Delta between 5000, and whatever it is likely to be.
Well, we're on pace to get to 5000, and I'm still still comfortable with that number we're going to have to see.
Now it goes we've had a couple of good indicators here.
So we're still comfortable with that.
As we said previously on this call we will give you.
Better highlight on what we think about 'twenty three in February .
Okay.
Do you have a preliminary view on what you need to add next year.
In terms of we're not at this time, we're working on that now we are coming through our plans and we will we will provide you that information in February .
Thank you guys.
Sure.
Yes.
Thank you for your question.
Okay.
The next question comes from the line of Myles Walton with Wolfe Research.
Sir you May proceed.
Hey, good morning, all.
On the topic.
Morning, Myles welcome back sorry.
Hey, Thanks, Chris Thanks, Chris.
My.
Brief absence, albeit.
Yes, very great milestones.
On the topic of milestones I was hoping you could touch on the two that were still on the slate for 'twenty two.
<unk> hundred 23, and then E mails.
Sure so.
123 is on schedule to have some really good trials. They are on pace to get delivered before the end of the year.
Then he malls has been initiated I was actually down the spaces.
Last month, maybe two months ago, all the equipment's installed doing localized testing starting that starting that test program.
So some positive developments there so each of those each of those are on schedule.
Okay got it I was just going off the I think the release talked about few if any milestones in the fourth quarter. So those must be minor.
Minor milestone releases of risk for reserve releases.
We will assess it we'll assess them when they are complete and reviewed the entire.
AAC risk and opportunities.
Then deal with the outcomes reach.
Okay, Alright, and then maybe comment on the progress payment rule or for Chris is there any legislative indication that that rule is going to be reversed at some point because.
I mean, I know it's favorable but.
I'm imagining youre flowing it to your suppliers as well.
Just curious are you anticipating a rule change or are you actually seeing legislative action or policy action that would suggest it's going to change next year.
We think there is interest as Tom Hey, yes. Thanks for the question. We think there is interest on the Hill I don't think its a top priority right now and we'll have to see how it plays out and we get through the elections and does it get inserted into a build by year end or not.
As the year progresses. Since this is one one last tax payment. It may kind of mid December timeframe. The benefit this year doesn't play out, but obviously as soon as that law.
What swings over as we've been highlighting it to $250 million impact a positive impact to the free cash flow. So we're.
We are eagerly awaiting that.
I am hopeful that it does get changed but we'll just have to see how that plays out.
So any time that I was referring to the progress payment rule shifts that you thought it would be reversed in 'twenty, two and now it's going to be reverse in 'twenty three if the timing progress payments.
Do you actually see legislative inertia there.
So I would tell you that I told you at the Q3 call.
<unk>.
Believe it was going to be pushed to the end of the year right now and Thats a piece of the uptick that we have in our free cash flow guidance that we gave you. So we told you. It was 225 was the midpoint. We now project to have to pay those payments back in 2023 timeframe. So to uptick for this year, it's an adjustment in the free cash flow bridge that we gave you.
And the briefing and.
We anticipate paying those back in the first quarter 'twenty three.
Okay alright, thank you.
Thanks, Paul.
Thank you.
The next question comes from the line of Ron Epstein with Bank of America.
Christine.
Okay.
Yes, good morning.
Good morning looking at.
Mission Mr. Ted.
Do you still feel confident on that 6% to 8% margin target by 2004.
Yes.
We're on cost right now.
When we look at the EBITDA right now.
Giving you the numbers and where we finished.
The previous year and 8% range.
You'll notice we just adjusted the EBITDA NDA target down from eight five to eight three because of the volume pressures that we had but we feel comfortable with that right now.
In the briefing, we have we still have a robust pipeline we feel comfortable.
And that we're getting our momentum.
The portfolio itself and the technology that we're going after many opportunities out there. So I do I think theres a little stress on it right now for 2022, just for the volume of sales as we adjust our base and overheads around that but thats still a target.
Target that we've been highlighting and.
And it's good for modeling going forward, yes, Ron remember a lot of that work is cost plus there's a lot of we think there'll be a lot of stability in the margin rate moving forward. So we're still comfortable with that.
Got it got it and then.
If you look at Newport News and you back out the Columbia right the $41 million.
That suggests the balance of the business was that maybe 4% margin in the quarter can you kind of walk through what was going on there.
Yes, So we had we had minor adjustments or what I'll call tweaks in Acs.
Within the quarter on a few programs at Newport news not material enough.
To be mentioned here and that was offset by the Colombia.
Class incentives.
Incentives and schedule incentives performance it sounds are normal.
Our contracts, it's a normal way to incentivize performance, we think it's a good.
Our method to incentivize performance, so it's not out of the ordinary.
But we have to assess our ECS every quarter, we make minor adjustments, where we see fit to the risk and opportunities and there was just some.
Minor adjustments on a few of the programs here.
Can you give any more color on what programs.
Yeah, not material enough to mention it was across a number of them.
Okay.
Alright. Thanks.
Sure.
Thank you for your question.
Okay.
The next question comes from the line of Noah.
With Goldman Sachs You May proceed.
Hi, good morning, everyone.
Hi, Noah.
Why did you choose to exclude the milestone slide from the deck this quarter.
So we only really do that twice a year.
Kind of inserted data as a convention.
Got it.
We've done it twice a year I can comment on any one of them that you'd like.
As I've said previously to some of the questions. The last two for this year on schedule deliveries for next year on schedule.
So it's just been our convention twice twice a year at a time yeah sure.
Okay.
Matt sorry.
Wasn't sure if it was hey, some things happening with the milestones or.
Nothing has changed so it doesn't matter.
Forgotten it was twice a year or so.
It's something that's happening with the milestones I would tell you so.
Yes.
But.
They're on schedule. So thanks for that that's our convention.
Got it okay perfect.
With your discussion of inflation.
I mean I guess at.
At the highest level.
Dressing.
Do you expect inflation too.
Actually negatively impact the margin in any noticeable way.
In the medium term or do you feel you have the contracting conventions to offset it.
Yes, it could.
I'll start and then Tom can chip in here. So we do have some protections right from an inflation standpoint, we're very fortunate.
That with our relationship with the labor unions, we're able to get long term arrangements there.
Which helps us.
Mitigated to some extent having suppliers under contract.
Before we entered into this mitigated to some extent and then our EPA clauses mitigate some.
But absolutely when you think about our exempt workforce and some of the increases.
Had provide from a salary standpoint.
For new hires that that impacts.
Our labor rates a bit and then some of the general inventory that unit count.
Put under contract could impact it a bit as well so so I would say it modestly impacts hit we've assessed all of it.
Process.
And we think we have it but we're going to have to be mindful of it moving forward.
Okay.
And then I guess.
Your commentary about next year's Shipbuilding margin.
Do we need to consider the potential that it is down year over year or were you more just saying the plan was some expansion.
That's still possible, but flattish is also possible.
I think it's more of the latter there obviously you want to come through we're watching our risk profiles the risk the risk registers, when what gets Brexit breakdown this quarter the performance and the cadence we've maintaining schedule all the hiring an experienced in the yard.
The progress that we make with the experience in the materials.
Robert EAC process, a pea study if the process is the contract adjustments, we get the EPA and other type of provisions that will handle for inflation.
Piggyback on what Chris said earlier.
Depending on the portfolio and the mix and Ingalls has more than 90% fixed price point, it's a 50 50 cost type and fixed.
Contracts have EPA clauses, which contracts are being impacted a lot of things are moving around there between inflation supply chain interest rates performance.
Terminal receipt and progress thanks.
Really wanted to get a look see on where we stand right now.
Told you eight to eight one and we still feel comfortable with that right. Now we had a strong first half, which we kind of foreshadowed. We told you in the back half it would be about 7% for shipbuilding and came in at 74 with those incentives. So you can do the math, we can still holding at 7% for the back half of the year. So you can do the math on that what Q4 Q4 looks like but I think 88 one is.
A valid endpoint for us I'd like to see where we land on that see our run rates and then we'll factor that into.
The baseline going forward.
On the February call.
Okay. Thanks, so much.
Sure.
Thank you for your question.
We now have a follow up question from the line of David Strauss with Barclays. You May proceed.
Thanks for taking the question.
Sure just wanted to.
Tom maybe if you could run through the expectations on net working capital now.
I think you had said I think right now we're at about 11% I would say getting down eight.
End of this year, and then relatively flat on a percentage of sales basis from there, but coming down in absolute terms. If you could just give an update thanks.
Sure, Yes, so far that's exactly what I left Youre at 93 about nine 3% was the working capital sales in Q2.
About 11% 11, one for Q3 I anticipated that.
I will turn the corner a little bit as we exit the year here as we kind of work ourselves through.
The train to invoicing payments and progress that will come down and then we've talked about the milestones with the five deliveries of next year, which are still in play here. So.
<unk> 23 that shop, dropping back to more traditional 6% to 8% range and I would expect that we would run in that rate over the next the next couple of years.
And that's the plan.
We're on that trajectory.
Thank you.
Thank you for your question.
That concludes the question answer session I will now pass the line back to be made.
Management team, Chris Kastner for final remarks.
Thanks, a lot thanks very much for your interest in our continued interest in HII. We welcome your continued engagement and feedback. Thank you.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
Okay.