Q4 2022 Huntington Ingalls Industries Inc Earnings Call

Speaker 2: 22 earnings conference call. Joining me today on the call are Chris Casner, our president and CEO , and Tom Sealey, Executive Vice President and CFO .

Speaker 3: are considered our company's estimates or expectations, and our forward-looking statement made pursuant to the State Harbor provisions of federal security's law.

Speaker 4: Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 5: For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings.

Speaker 6: Also in their remarks today, Chris and Tom will refer to certain non-get measures.

Speaker 7: For reconciliations of these metrics to the Comparable GAT measures, please see the slides that accompany this webcast which are available on the Investor Relations website at ir.hII.com.

Speaker 8: With that, I would like to turn the call over to our President and CEO , Chris Kastner. Chris? Thanks, Kristi. Good morning, everyone, and thank you for joining us on our fourth quarter 2022 earnings call.

Speaker 9: First, I would like to thank the entire HII team for a solid year.

Speaker 10: and express my gratitude for their outstanding contributions throughout 2022.

Speaker 11: It was through the dedication and commitment that we were able to deliver results that demonstrated consistent performance in a pretty tough economic environment.

Speaker 12: Now let's turn to the highlights for the quarter and the year on page 3 of the presentation.

Speaker 13: In 2022, we reported record sales of 10.7 billion.

Speaker 14: Net earnings of 579 million and free cash flow of 494 million.

Speaker 15: The demand for our products continues to drive a tremendous backlog of $47 billion. And we grew sales and earnings across all three of our segments in 2022, sitting to our foundation for continued growth in 2023 and beyond.

Speaker 16: At Angles on the 4th quarter, we delivered DG123 Lina stud clit Higby and completed builder trials on DG125 Jack H. Lucas.

Speaker 17: The first flight three ship just one quarter after DDG123 completed her trial.

Speaker 18: Our DDG 51 team also started fabrication on DDG 133 SAM-NUN.

Speaker 19: In our amphibious ship product line, we were awarded a 2.4 billion detailed design and construction contract and started fabrication for LHA 9 Fallujah, the fourth big deck amphibious warship in the American class.

Speaker 20: Also at Ingalls in January we were awarded the Advanced Planning Contract for the Modernization Period for Zumwalt-class guided missile destroyers.

Speaker 21: At Newport News in the fourth quarter, we authenticated the Keele for SSN 800 Arkansas honoring the shift sponsors, the Little Rock 9.

Speaker 22: We continue to remain focused on reducing risk and meeting cost and schedule objectives on the Virginia class boats.

Speaker 23: As for nuclear aircraft carrier, CVN-79 Kennedy is well into the test program.

Speaker 24: Distributed systems such as fire mains, potable water, air conditioning, and ventilation are coming to life.

Speaker 25: The EMOLC catapult system, which we began testing in 2022, remains on track and is progressing as planned through her test program.

Speaker 26: And we expect to enter into the Combat Systems Test Program later this quarter.

Speaker 27: And finally, for the refueling and complex overhaul of CDN73 USS George Washington, we are 98% complete as we near planned re-delivery later this year.

Speaker 28: Admission technologies, we achieved solid revenue growth for 2022 with all of the business groups growing year-over-year.

Speaker 29: And we ended the year with a robust potential business pipeline of 66 billion, of which over one third is qualified.

Speaker 30: Significant wins in 2022 included the decisive mission actions and technology services contract, Mobility Air Force's distributed mission operations contract, and the REMUS 300 selection as the U.S. Navy's small UUV program of record.

Speaker 31: From an operational perspective, we have integrated a lion into our mission technologies and H.I. team, and with the integration complete, we can turn our full attention towards executing our growth strategy.

Speaker 32: Moving on to slide four, we are providing the major milestones for 2023 and 2024.

I'm proud to say that we met all the shipbuilding milestones that we highlighted back in the second quarter of last year for 2022 and we are maintaining all of the 2023 milestones.

This demonstrates growing confidence in our ship schedules and provide a solid platform to continue to improve our cost performance.

Notable, anticipated 2023 milestones at Newport News include the planned delivery of SSN 796 New Jersey and planned flowdough of SSN 798 Massachusetts.

as well as the Plan Redelivery of CVN 73 and Plan Crew Move aboard on CVN 79.

At Ingalls, DDG125, Jack H. Lucas, NSD10, Calhoun, and LPD29, Richard M. McCool Jr. are all forecast to deliver this year. Well, LHA-8 Booganville is expected to launch.

In addition to these shipbuilding milestones, mission technology expects to see continued growth resulting from our large opportunity pipeline.

including the several award decisions that we expect to be made in the first half of the year.

Now, I would like to discuss our operational focus areas.

Our top operational priority remains hiring and workforce development.

I'm confident in our plans for hiring and, as importantly, our retention and training strategies.

These strategies that center around employee skills and leadership development are gaining traction.

and we've had a good start to the year.

After hiring over 4,900 craft personnel in 2022, we expect a similar hiring rate in 2023, while at the same time improving our productivity, attendance and overtime together to drive performance.

Regarding inflation, we have some installation to our contracting terms and conditions. However, non-programmatic elements of inflation have impacted us across all of our programs.

And finally, the supply chain is stabilizing and we have worked closely with our customers and suppliers to achieve the best possible schedules.

To summarize and notwithstanding BNR most significant risk, as labor and supply chain impact continue to stabilize and inflation abates, we believe we have the opportunity for improved performance over the next few years.

Turning to the budget environment, we are pleased with the passage and enactment of the fiscal year 2023 defense appropriations and defense authorization bills. Both pieces of legislation strongly support shipbuilding, including funding and authority for an additional DDG 51 Flight 3 ship.

for a total of three DDGs.

3DGs, 2 of our Junior Class Attack Summarines.

the Columbia-class ballistic missile submarine program, Ford-class nuclear aircraft carrier programs, and the refueling and complex overhaul of CVN-74 John C. Stennis.

Both appropriations and authorization bills continue funding for LH-32 and LHA-9 and provide new advance procurement funding for LH-33, LHA-10, and a third DDG-51 in FY-24.

The Defense Authorization Act also includes language requiring a naval fleet of no less than 31 operational antibiot warships, including a minimum of 10 antibiot assault ships.

We continue to see by partisan congressional support for our programs. We look forward to working with the administration and Congress on the President's fiscal year 2024 budget request.

So with that, I will turn the call over to Tom for some remarks on our financial results and guidance. And then I have a few additional comments before we move on to Q&A.

Thanks, Chris, and good morning. Today, I'll briefly review our fourth quarter and full-year results, and also provide an outlook for 2023. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidation, fourth quarter results on slide five of the presentation of the presentation.

Our fourth quarter revenues of 2.8 billion increased approximately 5% compared to the same period last year. This growth was driven by higher yearly revenue at all three segments leading to a record-cordily revenue for HII.

Operating income for the quarter of $105 million decreased by $15 million or 12.5% from the fourth quarter of 2021. An operating margin of 3.7% compared to margin of 4.5% in the prior year period. The decreased in operating income was primarily due to lower segment operating income.

Net earnings in the quarter were $123 million compared to $120 million in the fourth quarter of 2021. Diluted earnings per share in the quarter were $3.07 compared to $2.99 in the fourth quarter of the previous year.

Moving to our consolidated results for the full year on slide 6, revenues were $10.7 billion for the year, an increase of 12.1% from 2021.

The increase was driven by year-over-year growth at all three segments along with a full year of aligned revenue.

Operating income for the year was $565 million, and operating margin was 5.3%. This compares to operating income of $513 million, and operating margin of 5.4% in 2021.

The operating income growth was driven by year-over-year improvement at all three segments, as well as a more favorable non-current state income taxes and operating FASCAS adjustment.

Net earnings for the year were $579 million compared to $544 million in 2021 and diluted earnings per share were $14.44 compared to $13.50 in the previous year.

Moving on to slide seven, Ingalls 2022 revenues of $2.6 billion increased $42 million or 1.7% from 2021, driven primarily by higher revenues in the LHA and DDG programs, partially offset by lower NSE program revenues.

In the age of 222, the angle of 222, and margin of 11.4% have improved from 281, and 11.1% last year.

These results were driven primarily by favorable changes in contract estimates and price adjustment clauses, as well as higher risk retirement on the LPD program partially offset by lower risk retirement on the DVC program compared to 2021.

At Newport News, 2022 revenues of 5.9 billion increased by 189 million or 3.3% from 2021 primarily due to higher revenues in both aircraft carriers and submarines, partially offset by lower revenues enable nuclear support services.

Increased aircraft carrier revenues were driven by higher volumes on the refueling and complex overhaul of the USS John C. Stennis CvN74 and the construction of Doris Mellus CvN81 and Enterprise CvN80 partially offset by lower volumes.

on the refueling and overhaul of the USS George Washington CVN 73 and USS Gerald R. Ford CVN 78.

Submarine revenue growth is due to higher volumes on the Columbia class and Block 5 boats on the Virginia class, partially offset by lower volumes on the Virginia class Block 4 boats.

Newport News 2022 operating income of $357 million and margin of 6.1% were relatively consistent with the performance in 2021 of $352 million and margin of 6.2%.

2022 results included favorable changes in contract estimates from facilities capital and price adjustment clauses, as well as contract incentives on the Columbia-class submarine program, partially offset by lower risk retirement on the VCS program and the refueling overhaul of the USS George Washington CBN-73 compared to 2021.

including higher attrition rates, the impact of non-programmatic inflation, and supply chain disruption all contributed to slower margin progress.

At Mission Technologies, revenues of $2.4 billion increased $911 million or 61.7% from 2021, primarily driven by the acquisition of a line in the third quarter of 2021.

Mission Technologies operating income of $63 million compares to operating income of $50 million in 2021. Primary drivers of growth are the acquisition of Allianz in 2021, as well as higher equity income from a joint venture, partially offset by higher amortization of purchasing tangible assets in 2022 due to the Allianz Act.

cash downwind valuation adjustment of approximately $10 million or approximately 20 cents per share related to an equity method investment.

Mission Technologies EBITDA margin in 2022 was 8.2 percent. And adjusting out the one-time downward valuation adjustment, EBITDA margin was 8.6 percent consistent with 2021 performance.

Turning to capital deployment on slide 8, we ended 2022 with a cash balance of $467 billion and liquidity of approximately $2 billion.

2022 cash from operations for $766 million and free cash flow was $494 million.

Free cash flow generated in the fourth quarter of 2022 was significantly above our prior expectations, as we were able to accelerate several large cash collection events.

This has a direct impact on our expectations for 2023 Cat Creek Ashtlow, which I will discuss in more detail in a moment.

I'm pleased to report that the net capital expenditures were $272 million, or 2.5% of revenues in 2022.

at the very bottom end of the guidance range.

Cash contributions to our pension and other post-retirement benefit plans totaled 41 million in 2022.

During the fourth quarter we pay dividends of $1.24 per share or $50 million, bringing total dividends paid for the year to $192 million.

Over the cost of 2022, we repurchased approximately 245,000 shares at an aggregate cost of approximately $52 million.

Moving on to slide 9 and our updated outlook for pension and post-retirement benefits.

Our outlook for 2023 has improved modestly from the update we provided in November , given the increase in discount rates since that time. Asset returns for 2022 of negative 16.1% were about as expected compared to our update in the third quarter. US$ 20.2M

Expectations for 2024-2026 have been updated and consistent with the Q3 updates. The fast benefit has come down considerably from our last update given the more immediate recognition of the negative asset returns experience in 2022.

This is partially offset by the impact of higher discount rate.

We also have provided an initial review of our 2027 expectations. Turning to slide 10 and our outlook for 2023, while we continue to expect shipbuilding growth of approximately 3% over time, our 2023 outlook range of $8.4 billion to $8.6 billion acknowledges uncertainties around the country.

For mission technologies, we expect a 2023 revenue of approximately 2.5 billion organic growth of approximately 5% year-to-year.

We expect operating margins of between 2.5 and 3%, and even a margin of between 8 and 8.5%.

In 2023, amortization of purchase and tangible assets is expected to total approximately 128 million, of which 109 million is attributable to mission technologies.

We expect 2023 capital expenditures to be approximately 3% of sales.

Moving on to expectations for the first quarter of 2023, we expect overall revenue growth for the first quarter to be quite modest, given normal peasantality emission technologies and the strong fourth quarter performance for shipbuilding which benefited from favorable material timing.

Additionally, given the timing of the shipbuilding program milestones and the mentioned mission technology seasonality, we expect first quarter segment operating results to be the weakest of the year, with the shipbuilding operating margin near 7% and mission technologies operating margin near 1%.

The outlook we are providing today is based on the best information we currently have and assumes, no further degradation in our supply chain, that non-programmatic impacts from inflation continue to evade, and most importantly that we are able to continue to hire and retain employees at a pace that supports our staffing plans.

Additionally, on slide 10, we have provided our updated outlook for a number of other discrete items to assist with your modeling.

On slide 11, we have provided an updated view on our free cash flow expectations through 2024. Consistent with how we presented this data in the third quarter, this outlook assumes that the current R&D amortization treatment for tax purposes remains in place, and we are reaffirming the $2.9 billion target.

If Section 174 is deferred or repealed, all else equal, it would be an opportunity of approximately 250 million in total over the cost of 2023 and 2024.

As I noted earlier, we significantly outperform the 2020 free cash flow expectation of approximately 350 million by accelerating collections.

This timing difference, along with the delay of the planned COVID-19 repayment now into this year, have impacted 2023 free cash flow expectations. Consistent with our normal seasonality, we expect the first quarter of 2023 free cash flow will be the weakest of the year.

and given the pull forward of collections into the fourth quarter of 2022, is likely to be an outflow of $200 to $300 million. Our free cash flow expectation for 2024 remains unchanged, as it will not be burdened by COVID-19 repayment. We'll benefit from continued top line growth.

and margin expansion potential as compared to 2022. Additionally, we expect that these sub-6% working capital levels as a percentage of sales in 2024.

We are reaffirming our capital allocation priorities focused on debt paydown, which is on pace to retire both a $400 million bond this year and the remainder of our line acquisition term loan in 2024 and our commitment to return substantially all free cash flow at the planned debt repayment to shareholders through 2024.

To close my remark, it was no doubt a challenging year, but I'm proud of the entire HITM and the important work we accomplished across the business. From successfully meeting all of our planned shipbuilding milestones to the critical integration work that was completed timely and under budget admission technologies.

Across the enterprise, we made meaningful progress in 2022, which resulted in growth across all segments and free cash flow results that will well ahead of our projections. We entered 2023 intent on driving execution and our well-positioned to deliver profitable growth. With that, I will turn the call back over to Chris for some final remarks before we take your questions.

continue to make long-term strategic decisions that benefit our employees, customers, and shareholders, creating long-term value for all of our stakeholders.

Now I will turn the call over to Chrisley for Q&A.

Thanks, Chris. As a reminder to everyone on the call, please submit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn over to you to manage the Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure your line is unmuted.

I will start testing today, constant miles, routing from Wolfers that. Peace go ahead, Miles, your line is now open.

Thank you.

Thanks, good morning.

I was wondering, maybe at a high level, is this still a 9% plus shipbuilding margin business?

Oh yeah, definitely. I believe that, you know, we've come through some challenging times with COVID, and we've got some shifts that are still working through that. Ingalls is obviously north of that, and Newport News is making.

great strides and I think the biggest issue we can work on in Newport News is simply working the operating system getting the block for both delivered over the next two and three years and transitioning to block five. So yeah, absolutely. It's a 9 percent. I'm not going to give a forecast for when that's going to happen. So, I'm going to give a forecast for when that's going to happen.

but I do expect performance to continue to improve from here.

Okay. And then, Chris or Tom, I don't know, in terms of the plug for capital deployment, you're for Sherry purchase. I guess it's 250 to 300 million in 2324 is what you're planning to do. Do you have any...

on doing that a little bit earlier or do you have to wait until 24's big cash flow comes through to have confidence to execute against it?

Yes, I'm out this time. You know, we haven't given you an exact number. Obviously, if you work yourself through the math of where we are, expectations on the revenue and the margin expansion, the free cash flow bridges that we've given you, and then the capital expense as well as with the working capital. You know, the numbers fall out to that way. So as we work ourselves through the year, we – the cash is –

is generated. We anticipate to continue to buy back shares as we see value in the share price. But we haven't really guided on how that is going to be abortion over 23-24. We stand behind our commitment though that all excess free cash will be given back to the shareholders after that repayment schedule.

And then just one clarification. What is non-programmatic inflation?

Yes, so I'll give you an example of that Miles. It's related to expenses towards the end of the year that the actuals were higher than what we forecast. Stuff like medical benefits, insurance premiums, we just didn't get that right.

Can we have seen his part?

Yeah sure so it's it's overhage type expensive so

Thank you.

Thank you. Our next question comes from Robert Springen from Melius Research. Please go ahead Robert, your line is now open.

Hi, good morning.

Good morning, Rob. Chris, you talked a lot about the labor constraint. And I wanted to see if you could give us some granularities to how that number splits between the two shipyards and mission technologies. One thing I've noted is if we look at your job postings, it seems like Newport News has Pretty action. Right.

10x the openings of Ingles and does that factor into the margins there? Not really. Mission technology is pretty stable adding throughout the year with really industry standard attrition rates in a very competitive market.

We planned to add about 5,000.

shipbuilders throughout the year. And there are some positive indications in not only hiring, but also over time attendance.

and attrition. So there are some positive indicators. I wouldn't necessarily relate it back to margin. Newport News will hire more this year than Ingalls. We don't break that out separately, but I wouldn't necessarily relate that back to margin, though.

Okay, and then just as a follow up to that, you know, could there be upside to the 3% top line growth if Congress appropriated more funds to expand shipyard capacity and the fund training and apprenticeship programs? Now, I know that not one here can equal enough dollars to do this right now.

Yeah, but the constraint...

Our shipyards are facilities to grow in excess really of that 3% but we need to be conservative in how we project and how we're going to add labor over the next few years but is there upside...of course

Yeah, I guess I'm asking you, can they help you attract labor faster and train labor faster?

It benefits us. Yeah, sure. It's a good decision. You know, interesting enough, there's a lot of initiatives, both at the state and federal level to help in workforce development. And we are actively communicating with both states that are involved in that and the federal government.

for infrastructure and workforce development support. Thanks, Chris. Thanks.

and workforce development support. Thanks Chris. Thanks. Thank you.

Thank you. Our next question comes from Scott Duschel from Credit Suisse. Please go ahead, your line is now open.

Hey, good morning.

morning. Morning Scott.

Tom, did CDN79 book a net net negative EAC in Q4? Just trying to interpret what's in the press release on the year-over-year comparison. Thanks. Yes, so we don't provide the actual margin booking rates to step up or step back on any individual program. I would tell you to give you some color on that.

adjustments they had, it was really a function of not having the upsides that we would normally So, you know, that you kind of range bound to what we saw on the downside of EC adjustments, because the timing on the milestones and just where they saw a little bit of a drawer, a short on labor, a little bit of depression, overhead costs, overhead absorption, and a little bit higher on all the programs there.

And CDN79 was not immune to that effect as well, but it was not significant enough as you see it's not cold out in the k. Scott, Scott, I also added CDN79 had a pretty solid year. They met their compartment commitments for the year. E-Malls is essentially built out. It's pretty amazing. I was up there last week.

and the equipment is in and they started that test program. The topside test program has begun. So they've got a bit a bit of momentum. I hate to use a football reference but the big game is this weekend but 79 is what I call four yards and a cloud of dust right there.

every week they're executing on a lot of volume work. They met their commitments for last year. They got a lot of work in front of them, but I have high hopes for success on that program.

Great. And then Chris, what were the – sorry if I missed this – but what were the gross and net headcount additions in the shipbuilding business in 2022? I'm just curious on how attrition trended in Q4 sequentially relative to Q3. Thank you. Yeah, so attrition got better throughout the year. I don't have the specific number here. We added about 5,000 heads.

of supply chain and inflation. It's not back to pre-pandemic levels, but it's definitely stabilized, and that's what we need to execute.

Thanks for having me appreciate it.

Sure.

Sure.

Thank you. Our next question comes from Pete Skibitsky from Alembic Global. Please go ahead your line is now open. Hi, everyone.

Hey, good morning, guys.

Um, just go just go back to Kennedy

It's a big contract for you guys at fixed price and I was just wondering

My recollection was 23-24 you guys are going to have some some big risk milestones on that project It sounds like that's still going to happen, but and just the labor situation is kind of eaten up the upside on that potential risk retirement is that the right way to think about it?

Hi, I wouldn't necessarily say it's eaten up all the upside. I would say that we're very conservative in how we deal with the EAC and there's a lot of really complex work in front of us. So I would not necessarily say it's eaten up all the upside.

Okay, just to follow up, so at Newport News, is VCS Block 4 the bigger muscle mover margin-wise? Is the Block 4 to kind of roll off over the next two years? Does that just give you a lot more relief than anything else?

It will definitely give us a lot more confidence moving forward after we get those block 4 boats delivered and transition into block 5.

Okay, and Christ just on that.

Obviously, labor impacts all your programs, but Block 4 had kind of the unusually aggressive schedule. Is that combination why that's been such kind of a thorn in your side? Is that fair? Well, remember Block 4 was impacted the most by COVID.

We have a pretty material impact back in 2020, which really reduced our profit expectations on those boats. So we just need to get through them. We need to get them delivered. The program schedules are pretty stable right now and a lot of cooperation between ElectroPo new port news and really senior Navy to get through those program schedules. So...

One, getting those Block 4 boats done alleviates the mix in the portfolio at Newport News. So there's a list that you talked about that. But then also it's just those boats give us time to come down the learning curve, the lessons learned, the metrics and the operating system and the personnel that we have on board there. That's the production line of all the programs you have.

the most serial production line with the modules go and then the boats are there. Some will go from unity with the same personnel. So getting through four and then that kind of benefit lifts the block five which has higher profit potential and then it will take the preponderance of the portfolios next as we cross over the end of last year. So already now the you know the

the sales proportionate between block four and five is now more than five and four. So this is going to be a natural progression of improvement with learning, four boats being accomplished and then that learning and higher profit potential on block five is going to be affecting the new foot news portfolio. www.mooji.org

between block 4 and 5 is now more than 5 and 4. So this is going to be a natural progression of improvement with learning, four votes being accomplished, and then that learning and higher profit potential on block 5 is going to be affecting the new putting these points. Got it. Thanks guys.

Mm-hmm, back.

Thank you. Our next question comes from David Strauss from Barclays. Please go ahead David. Your line is now open.

Yeah, thanks, good morning. Thomas, there's a similar question that I left in the past around working capital. I mean, you obviously had a big improvement in working capital in the fourth quarter. It looks like in your guide for cash, I guess, my back ends up looking like you're seeing irreversibly.

neutral working capital for 24 is that correct or sorry for 23 and Then could you could you help bridge us how you go from 400 million and you know for 400 450 million in cash to You know in 23 to number here looking at in in 24 I guess

healthy against the next expectation. We started the year off at 3 to 3.50 and we pulled that down to 2 to 2.50, kind of mid-year with the reguide and then Q3.50, we finished a wonderful 75? Lets go on Arels?

Obviously that pulls ahead a little bit. You see we've taken down the 23 expectation. We had you at 545 to 595 or midpoint to 570 last time we discussed. The pull ahead that we have here right now, we reset expectations to 400 to...

To your point of working capital, you're right. Just a couple of quarters ago, we were at 11.1%. Last quarter, we were in the 10% range, and we finished 2022 up at 6.1% of working capital. As we have been guiding over the last three or four years, we saw that the workload and just the cadence of the ships.

We're going to have more deliveries and launches on the back half of the 5-year free cash flow command in the front half. And that's exactly what we see here. If you look at the milestone chart, you'll see that we're going from three deliveries in 2022 to five deliveries in 2023. We also have three launches in 2023. So that's a pretty big year.

And then kind of keep it going forward to the following year on that. We take that perspective up and we have two deliveries and three launches in 2024. So a lot of activity there which will continue us alleviating the working capital, getting rid of the retention that we have and helping in the free cash flow.

as we go forward. Also I would tell you that as much as we finished up at 6.1 on working capital, it will just grow a little bit. We've got a couple of advancements on incentives that we've had, so we'll go from 6.1 to about 6.5ish working capital in 2023. So more deliveries helps, slight rise in working capital in 2023 slightly hurts.

We've re-gotten on CAPX from two and a half to three, from a couple of dollars of headwind there. So two things against this, but with all those deliveries and launches, we'll see working capital finish up around $4.25. And mind you, 2023 has to repay COVID, which right now is about $125 million, right?

The way I look at it and give you confidence on where we're going with that, we have three years in the hole now against the five-year commitment, $757,449, and $494. That averages out to $567, 567. Straight to the max we would be at about $600 million a year that you need. So we're running behind for the first three years, but we knew there was a natural ramp with revenue and margin expansion.

And also we have a line on board now. In 2022 we have them on board for the first year. I was happy with the contribution they made. If you recall we took the $3 billion to $3.2 billion with a line. I'm happy with the contribution they made in 2022. And the line will be on board for 23, 24. So as we look going forward, even though margin space lasts from 21 to 22, for foreshadows for margin expansion.

We have the top line growing and shipbuilding right now that we gave you in the Guides of the M486 and we expect it will continue incrementally guiding higher revenue margin into 2024. And also, it is to take a look at the three years that we have the 757, 449, 494, free cash flow.

That 757 really had two things that actually helped it. And if you normalize it out, it kind of makes sense of how we're marching to be north of 700 in free cash as we get out to the 24 and on timeframe. The 757 had the FICA relief which was $139. And it also had the COVID repayment.

benefit for 160. So 160 and 130 is 290, 290 of the 757 is about 4.467 is really how I look at the first of the three or 4.67. The 4.49 for 21 had the 5-in-repay in it, so you throw another 65 in that that's about 510.

for a normalized 20.21 and now for 20.22.4.94 is 65 of a fighter in that 2.5.50. So I really look at it. We've normalized for what we've seen against the COVID with fighter and repay. It's more like a march of 4.60-ish to 5.10 last year to 5.50.5.60 this year. They got to be giving us 4.450.

for 23 only because I have the COVID repays with another with 125 on top of the midpoint. That's a 550 year and I have the year in front of me to burn down risk in pulling cash. I'm comfortable with how I'm marching past my average of 567 in the first three years. And then the last piece and how we get that up to, hey how do you get this to 780?

is the working capital we see is going to swing it at two points down. As mentioned earlier, we've finished 6.1% to 22. It'll be in the mid-sixes for 23. And then it's going to swing down below 5% for 2024. And two points to margin against the top line of $10.8 billion. It's about $200 million. So $5.50 plus two is 750. I got you at the mid-point.

Thank you for that.

Chris, as a follow-up on mission technologies, the EBITDA market is in there, which I guess is the right way to look at it, 8.5%. How do we think about those longer term? Those are well below what we see out of typical services companies.

lower EBITDA percentage. I do think there's opportunity for upside as we present more solutions and move into a fixed price sort of arrangement. We're not prepared to say that it's going to get better than that right now, but there is opportunity for improvement and that's something we're evaluating.

Thank you.

Thanks. Thank you. Our next question comes from Doug from Alliance Band Team. Hi, Jourdan. It's now open.

Up great, thank you good morning.

Good morning. Good morning. Good morning.

So I want to go back to Newport News and you've had a 5% 1% margin this quarter. That's Pala Q3 that if I take out the Columbia class then it's fit. That was a 4.1%. And what I want to understand is you've still got certainly the Massachusetts.

the New Jersey flowing through there. And so the work that you've done on Block 4, where you've taken charges in the past, I mean how much of this, what I would call kind of a low margin in Newport news, is due to the overhang of those past charges.

So then when you get out from under those should we expect to step up?

Well, yeah, Doug, this is Chris. I'll start and then Tom can jump in there. There's absolutely an overhang.

related to block four votes that we're dealing with. So we should expect a margin step up. Now we haven't guided beyond 23 and we need to be conservative because we need to make sure the labor shows up and we get them trained up and they go execute.

But I think you're right relative to that overhang on Block 4, so we need to get those delivered. And as I said previously, those schedules are being very consistent right now. Cost performance, we're working on every day.

If I can hop on the back of that, right? So we talked about block four here.

and what we took back in Q2 of 2020. I would tell you the portfolio with Columbia, that's coming on board in sales. So that's a new start program that's fucking low right now across that country. I have some change, change in unadjudicated change that still has to get proposed.

through the system so that's going to increase. We're very conservative on that until those unadjudicated changes are defenitized. That's both RC73 and 74 is in C2, both cost by contract. So the portfolio just has a little bit higher level of that as we sit here. And then lastly I think as we go forward, burn down risk as 79 marches to...

its completion. As Chris said earlier, there's a potential with good performance there, traditional upside here. So I think we just find ourselves in a situation where the ships are right now, not too many milestones, a little bit of drag on overhead, down on labor, and I think we're bucking prudently to conservatively right now as we want to see us push these ships over the goal line.

But those deliveries I mentioned is the two each for 23 and 24 and I think that will assist in a marginal lift as well as block four gets smaller in the portfolio mix with the potential

block five as we move forward. I think the Columbia program will mature and with 73 out of

This year a 74's focus and maturity will assist the portfolio profitability as well.

So if I have it right, then block for the overhang of these past charges is a contributor but there's still some other, you know, there are never other things you just raised. So it's sort of a blend of things that you're working through. I just wondered, in general, the academics, when they did their Q4 call.

highlighted in the number of issues that is somewhat similar related to labor across shipyards. And they did mention Virginia class.

Can you talk about how you're working with?

with electric boat sort of together to deal with these problems and if there have been changed over time and you know how you work together.

work through a Tristan issue and inflation all these sorts of things.

Thank you for that question, Doug. It's an important one. You know, the Newport News and EB team, they work very closely together.

in understanding when the work, what work, and how that work gets executed. So there could be movement of work between the yards where it's most efficiently done, if there's labor issues. And they're working very closely together. Their objectives are completely aligned to deliver all the Block IV boats.

And I would add also the Navy is engaged as well. It's all from the deck plate to the senior executive force. Everybody's all in and all of our objectives are aligned to get those block four, both delivered. I will say that we're fully staffed on block four and Columbia.

Okay, very good. Thank you. Sure. Thank you. Our next question comes from Dutum Connor from Calvin. Please go ahead. Your line is now open. Calvin, are you out there? Are you on mute, Calvin?

Unfortunately we're not getting any audio from the line so we'll move on to the next question. Our next question comes from George Shapiro from Shapiro Research. Please go ahead, your line is now open.

Unfortunately, we're not getting any audio from the line, so we'll move on to the next question. Our next question comes from George Shapiro from Shapiro Research. Please go ahead, your line is now open.

I guess good morning. I was curious that you wound up with 7.7% shipbuilding margins and you know when you did the third quarter call in early November you were looking for 8 to 8.1 so just wondering you know.

what you missed here in two months because i thought that shipbuilding would be somewhat predictable sort of business

Yeah, it was just the drag that we talked about at the end of the year. We had a strong first half of the year, we all over 9% and we got it to 7% of the back half of the year. And even Q3 was in that lane and we thought the remaining 13 weeks of the year we had that. But the shortfall of labor that we saw a couple of the overhead on the non-programmatic issues drove...

We hit both yards actually on the cost that we talk about on a medical. And just that shortfall as you go through and take a look at EEC performance and then the cost and how overheads flow through there is a little bit of a drag on where we felt we'd land. So if you call on the call, I was focused on saying I want to see how the year...

The year plays out, we did stay on the guy at the 8-8-1 and we thought we could get that home but as the AACs kind of rolled up, it was just a little bit of a draw. I would say both to this question George and the previous one, you know, from a new produce perspective, 62 last year, 61 this year, about the same type of performance overall if you think about it, you know, another year.

with some drag at front with the effects of COVID and then supply chain, inflation, big year-honour-flation, and then the hiring demands that we had here. So I'm quite comfortable proud as far as what the new putting in new scene accomplished at. But to your point, we saw we get that home and Q4.

just that we didn't have tremendous downside. We just didn't have upsides at Newport News. But from a quarter perspective what we saw was the gross favorables were $29 million, the gross unfavorables were $56 million. That was a net of $27 million. And effectively about 100% of that was at Newport News. Basically—

neutral angles in emission technology. So it was quiet at the other two divisions and and Newport News saw a net down of that unfavorable.

for the cooperation of 27L.

for the cooperation of 27 now. Okay, thanks very much.

Thank you. Our next question comes from Seth Seifman from JP Morgan. Please go ahead Seth, your line is now open.

Okay, thanks very much and good morning. Morning, Seth. Just maybe to follow up on that morning. Maybe to follow up on that question, Tommy, you talked about Newport News being in the low sixes for 22 and 21. I know you guys don't typically guide.

segment margins, but if we're just to think kind of maybe qualitatively, overall shipbuilding margins should be up 10 to 20 basis points at the midpoint of the guidance. Does that mean you know there's a little bit of improvement in each yard or given the way that some of the one-timers or some of the

potential upside associated with the milestones that you're expecting at the shipyards. Is there opportunity for more expansion and important news and maybe some headwinds and angles? How do we think about that for this year?

Well, I'll start and then Tom can get into the details. Thank you for saying we don't guide by shipyards. We don't do that. I firmly expect Newport News will be better this year.

I think they're executing their operating system very well. I think labor is more stable. I think the supply chain is more stable. I think the team has some momentum and I think Newport News is going to do better this year. So with that, Thomas, you want to add anything about the Ingalls. I think they're pretty stable as well. So I'll wait here that we don't guide by division, but from historical perspective, you know, things 10, 5, 11, 11, 11, 4, the last.

New technology started with Ford and now Columbia. We had that book and we talked about that back in 2020. A little bit of COVID pressure, inflation, supply chain and hiring. But you know you can see some stabilization both in the performance over the last two years. We see stabilization and some stability in hiring and the schedules here and you know the expectation is that you are going to perform better.

and 22 and so what's driving it down in 23?

We're probably just being conservative on the guys. So we had a 6-6 quarter with the impairment out of it. It was 8-3. We've had quarters at Mission Technology anywhere from the low 8s to the low 9s. Last year was 8-6 and as I say adjusted, it was, you know, unadjusted was 8-2, 8-6 right now. So I think it's just a function of that sales base. You know we have fixed.

that the team can completely focus on that pipeline, bid, execution, and performance. So I think the 8 to 8, 5 is just being conservative. Obviously, we wanted to, a couple more dollars out of that division last year. We're guiding Rose year of year right now. We did see mission technologies grow 4% from 21 to 22. Any questions?

Thanks, Seth.

Thank you. The next question is from Galson Connor from Cohen. Please go ahead, your line is now open.

Hey, sorry about that. I hope you can hear me. Oh, yeah. Thanks. Now we had you got him.

Great, great, hey thanks. I was curious if you could just give us...

Some color on the timing of the milestones through the year.

if you can tell us like if there is anything that is in the month of December or you know that has the potential to move out, things we should be watching.

Yeah, this is 2-4 weight. So slowly just tell us. So slowly just tell us.

Sure, got him. When you look at the 23 miles down, I think Tom already mentioned that Q1 was pretty light, that pretty evenly distributed across Q2 and Q3, but then, even 70, excuse me, LPD 29 is in Q4. So that's at the end of the year, so that's the one we'll.

We'll have to watch. Got a lot of confidence in the team down in Mississippi, but that's the one towards the end of the year.

Okay, thank you. Just curious on VCS, anything incremental from last quarter on schedule?

With respect not really pretty pretty stable pretty stable from a scheduled standpoint on the VCS program we have we have movement here and there but

It's pretty stable. I gotta hand it to that team, the program team and the construction team. They're getting after it and they're learning every day. So it's been pretty stable. We need to stay on it. Chris has talked about that rhythm of the program, launch one and sell one off. We saw that in 22 and in the milestones you'll see that in 23 and 24.

Can we assume that there were kind of consistent negative marks on the program or?

there were kind of consistent negative marks on the program or anything you can tell us about that.

Nothing really significant to highlight here. I mean, I mentioned in Q, the QNet was at Newport News on that, which was down, and it just kind of sprinkled over the programs, but there was nothing really to highlight here. Okay, thank you guys. All right, go on. Thank you. I'll find a question today. Thank you.

the detail you gave there and appreciate that there are a lot of moving pieces.

But if I just kind of zoom out on the cash flow statement and look at a long history.

It's sort of ranged 400 million to 600 million for a while, and the business is pretty stable, top line and margin.

range 400 million to 600 million for a while, and the business is pretty stable, top line, and margin.

I recognize you have some opportunity to grow the business and expand margins going forward.

I think the pension looks pretty net neutral, the capex looks...

pretty stable. It sounded like you said earlier that the expect in that 24

You know, 780 midpoint, about 200 million of working capital.

And I guess, you know, should I think of working change in working capital is not a sustainable recurring part of the free cash flow and therefore that kind of 58600 as sort of the, you know, predictable sustainable engine of the cash flow statement going forward.

Or is there some other reason to think of the base business as eventually making up that $200 million? Yes, that's a great question and we study that all the time. It's the former with a caveat. So we are hitting the point right now. We've been impacted. If you look at the cash flow...

statement, we were in the 400 to 600. I tell you from 2020, 2021 and 2022, those COVID cycle repays and the COVID payments have tripped up and you have to normalize it after that. A couple things are happening. Obviously, prior to this window, the margin has dropped in shipbuilding as we've kind of run through COVID. So we're fighting and working ourselves back with incremental improvement.

The revenue growth at the backlog that we've shown you there and we expect at least to have 3% here going forward when we get through this labor crunch, that's in place. I think you can model that out.

As we go forward, the working capital, I believe, will be in that 5 to 6 per...

5 to 6% range and both yards are in a good rhythm right now. The DDG program annually, what we're doing with launch and sell off a boat on VCS, the rhythm of block 5 is behind that, the two carry by following 79, the Columbia Bill 1, Bill 2. We're settling down on the...

the numbers kind of pop down. If you normalize them just to the traditional shipbuilding what we've talked about, right? We were at 12% I think in...

Q1 of 22, Q3 of 23 we're at 14%, we finished the year at 7.8% just for shipbuilding. And now as we go from 7.8 to 8.3 for shipbuilding sales, we'll see our sales go down to 6% in 2024. That's in the range that we were highlighting say for the first 10 years of the corporation of 6% to 8% in working capital. We were at that range in...

My

technologies are on the lower end of the range. I think what offsets that is the revenue and incremental revenue and margin that we think we're going to have in the coming years. So I'm still bullish on the North to 700 is going to be a run rate in a couple years from now. And I think 2024 is that inflection point to kind of start that run. Okay.

The north of 700 in a few years, I guess, you know, if 24 is 780 midpoint, both 200 million of working capital.

You know, once you get to the working capital goal, you then cease to have positive change in working capital flow to the cashless. So 25.

I mean, who knows exactly what it's going to be, but sort of directionally would not have that. So is there a step down from 24 as and then as the business grows, you over, over time, get back to that 700.

Yeah, no, we're not going to, we're not going to forecast 25 free cash right now, but I think your logic is okay, the business is going to grow. And if we stay down, if those working capital numbers, you're not going to get a benefit from it, you're going to have to get it from growth and margin improvement. So I think your logic has sound, but we do definitely.

believe that free cash is going to get north of 700 in 2024 and then continue to grow from there.

I tell you, stick with the law of the numbers, right? I walked through how I normalized out the 2021 and 22 because of COVID, but you can see we're incrementally going from that 460ish to 510 to 550 with a guy to 425 this year. COVID adjusted to another 550. And then I'm telling you the working capital is going to get us there in 2024. So then it should say what's the run rate. I think you're looking at it the right way on how you model it.

I think you could get to something close to normal on your labor churn and development of the people you are hiring in. I guess with the amount of time you spent on it, the amount of time you've been in the business, obviously it's an unprecedented situation, but how much more time do you need to get to something that's pretty stable? Yeah, well it's absolutely more stable now than it was a year ago.

Okay, and that's a testament to the hard work to ship yards have put in to really kind of pivot who they were hiring, increase the training, increase the leadership training. So it's absolutely better. I don't know if you've ever done, right? It's a pretty generational change in our workforce where we lost a large swat.

of people through COVID. So we are retraining a workforce and retraining a form and a general form and a construction superintendent. And that's happening. And the best thing we can do and the greatest learning potential is delivering ships. We're going to deliver five this year.

Once you've been through that, you've learned a lot and they're going to continue to learn a lot. So I think it's only improvement from here. I don't think you're ever done, but I think we've made great, great progress.

Okay, thanks for the time.

Thank you. This concludes our Q&A session for today. I would now like to hand the call back over to Mr. Castner for any closing remarks.

Thank you for joining today. I'm proud of all the hard work put in by the team and I'm confident the hard work we're doing will pay off and value creation for all our stakeholders moving forward. Thanks again for joining the call.

Thank you for joining today. I'm proud of all the hard work put in by the team, and I'm confident the hard work we're doing will pay off and value creation for all our stakeholders moving forward. Thanks again for joining the call.

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