Christie Thomas:

Thank you, operator and good morning. I’d like to welcome everyone to the HII second quarter 2024 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on our website’s Investor Relations page at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Tom Stiehle:

Thanks, Chris, and good morning. Today, I'll briefly review our second quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 6 of the presentation, our second quarter revenues of approximately $3 billion increased 6.8% compared to the same period last year and represent a record second quarter result for HII. This increased revenue was attributable to very strong year-over-year revenue growth of nearly 19% at Mission Technologies as well as growth at Ingalls and Newport News shipbuilding. Operating income for the quarter of $189 million increased by $33 million or 21.2% from the second quarter of 2023 and operating margin of 6.3% compares to operating margin of 5.6% in the same period last year. Net earnings in the quarter were $173 million compared to $130 million in the second quarter of 2023. Diluted earnings per share in the quarter were $4.38 compared to $3.27 in the second quarter of the prior year, representing a year-over-year growth of approximately 34%. Backlog increased slightly to end the quarter at $48.5 billion, up approximately $100 million from Q1's close. Moving to Slide 7. Ingalls revenues of $712 million in the quarter increased $48 million or 7.2% from the same period last year, driven primarily by higher volumes in amphibious assault ships and surface combatants, partially offset by lower volumes in the national security cutter program. Ingalls operating income for the quarter was $56 million and operating margin of 7.9% compared to $65 million and 9.8%, respectively, from the same period last year. The decreases were primarily due to lower risk retirement on surface combatants, partially offset by a delivery contract incentive on LPD 29 Richard M. McCool, Jr. At Newport News, revenues of $1.5 billion were up $26 million or 1.7% from the same period last year. Newport News operating income for the quarter was $111 million, and operating margin was 7.2% compared to $95 million and 6.3%, respectively, in the prior year period. The increases were primarily driven by a favorable contract adjustments, incentives and volume on the RCOH program, partially offset by lower performance on aircraft carrier construction and the VCS program. Shipbuilding operating margin in the second quarter was 7.4%, up from 6.8% in Q1 of this year. We are pleased to exceed the shipbuilding margin guidance we previously provided for the quarter, and we continue to see significant opportunity in the second half of the year for margin enhancement. At Mission Technologies, revenues of $765 million increased $129 million or 18.6% compared to the second quarter of 2023, primarily due to higher volumes in C5ISR and cyber electronic warfare and space. A portion of Mission Technologies overperformance in the quarter was driven by material and work that may not reoccur on a consistent basis, and we have factored that into our guide going forward. We are obviously very pleased with the growth in the quarter, and we are raising the Mission Technologies revenue guidance range for the year by $50 million. Mission Technologies operating income for the quarter was $36 million, and operating margin was 4.7% compared to $9 million and 1.4%, respectively, in the second quarter of last year. The increases were driven primarily by higher volumes I just mentioned, as well as stronger performance in fleet sustainment. In addition, in the second quarter of 2023, we recorded a $6 million loss related to the sale of a joint venture interest, which also helps the year-over-year comparison. Second quarter results for Mission Technologies included approximately $25 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the second quarter was 8.5% compared to 6.7% in the second quarter of 2023 and 7.7% last quarter. Turning to Slide 8. Cash used in operations was $9 million in the quarter. Net capital expenditures were $90 million or 3% of revenues. Free cash flow in the quarter was negative $99 million, consistent with the guidance we provided on the first quarter call. Cash contributions to our pension and other postretirement benefit plans were $14 million in the quarter. Also during the quarter, we paid dividends of $1.30 per share or $51 million in aggregate. We also repurchased approximately 250,000 shares during the quarter at a cost of approximately $65 million. Moving to Slide 9. We have summarized our expectations for the third quarter and the year. For the third quarter, we expect shipbuilding revenue of approximately $2.2 billion and shipbuilding margin of approximately 7.8%, with margin continuing to ramp in the fourth quarter. For Mission Technologies, we expect revenues of approximately $650 million and operating margin of approximately 2.5%. For the year, we are reaffirming our share building revenue and margin expectations. And as I previously noted, we are raising Mission Technologies revenue guidance range. We are also updating our interest expense expectation to $95 million based on the phasing of our latest cash flow forecast. We are reiterating our free cash flow outlook for 2024 of $600 million to $700 million as well as our five-year free cash flow outlook of $3.6 billion. As we have noted, we expect free cash flow to be weighted towards the latter part of the year, which is not unusual. We currently expect third quarter free cash flow to be near zero, preceding expected strong cash collections in the fourth quarter. To summarize, we delivered another quarter of strong year-over-year revenue growth and met our shipbuilding expectations, while Mission Technologies portfolio continues to perform very well. Additionally, we are pleased to raise our Mission Technologies revenue guidance and reaffirm our shipbuilding financial outlook for the year. With that, I'll turn the call back over to Christie to manage Q&A.

Operator:

Thank you, Christie. We will now begin the Q&A session. [Operator Instructions] The first question is from the line of Myles Walton with Wolfe Research. Please go ahead.

Chris Kastner :

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

Chris Kastner :

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

Chris Kastner:

Sure.

Scott Mikus:

Good morning. This Scott Mikus on for Rob Spingarn.

Tom Stiehle:

Good morning, Scott.

Chris Kastner:

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

Scott Mikus:

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

Scott Mikus:

All right. I'll stop there.

Operator:

The next question is from the line of Pete Skibitski with Alembic Global. Please go ahead, Pete.

Chris Kastner:

Good morning, Pete.

Chris Kastner:

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

Chris Kastner:

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

Chris Kastner:

Sure.

David Strauss:

Thanks. Good morning.

Tom Stiehle:

Good morning, David.

Chris Kastner:

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

Chris Kastner:

Yes, the vast majority of it tell if you have the details, but the vast majority of it is headed in the Block 5 now.

David Strauss:

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

David Strauss:

All right. Understood. Thank you.

Gautam Khanna:

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

Gautam Khanna:

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

Gautam Khanna:

Thank you.

Operator:

Thank you. The next question is from the line of Jason Gursky with Citi. Please go ahead, Jason.

Chris Kastner:

Good morning, Jason. Yes.

Chris Kastner:

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

Chris Kastner:

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

Chris Kastner:

Sure.

Seth Seifman:

Hey, thanks very much and good morning.

Seth Seifman:

I wonder – good morning. In the slides, I think you talked about a reduction year-on-year in Virginia sub profitability. Should we attribute that to what's happening on Massachusetts? Or was the reduction in expected profitability on Block V?

Seth Seifman:

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

Seth Seifman:

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

Seth Seifman:

Okay, great. Thanks very much.

Operator:

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

Chris Kastner:

Good morning.

Tom Stiehle:

Yes. So, I think we have a couple of quarters that were negative. So we can catch up offline on that, George. But this isn't an odd year, I would tell you, it's backloaded, one. Two, I would tell you that pre-COVID, as we're executing these contracts right now, we have seen a draw in the schedules over the last three or four years. And that just changes the construct of as we get progress and collect costs and what we're allowed to bill and creates a little bit of a draw on that. We still manage it annually. And as you know, we've been pretty good at providing a five-year target back in 2019, providing a guidance annually for each of the years and we've met or exceeded that. So, I mean we're in the lane right now. We've actually increased that $2.9 billion to $3 billion, so we another $10 million at it. We've given the next five years at 20% more. So, we have pretty good visibility into the portfolio. It's a relatively -- I'm sorry? There's some feedback here. It's a relatively mature portfolio that's going on that we have here. So, we have line of sight as far as what we have to build, program plans, the expected costs and then all that rolls in once we come through our quarterly ACs into the guidance of free cash flow going forward here. It is backloaded. And as I commented earlier, I did a comparison, you could take a peek at Q there on what's driving that. A little bit more CapEx that we've seen. The last two years has been 26% and 24% of sales, respectively, and already where we saw the previous headquarter of last year, and that's going to ramp in the back half of the year. Last years capital incentives that come along with that. As we continue to make progress, the cost that you can see that's on the books and the balance sheet there, we plan to liquidate that and really drive that working capital, that's going to be the catalyst, the working capital coming down, milestones and deliveries and additional awards as well as on contract performance and capital incentives are going to drive the back half of the year. The guide of 3% was probably on the conservative side. We didn't want to say it could be $100 million to $200 million higher or $50 million to $100 million less. And we didn't want to provide a number that we leaned into for Q3. The events and criteria and milestones that we see have to happen are right in that end of September, October and November time frame. So we guided conservatively, which does make the Q4 look like it's a larger lift than it may be as it plays out.

Tom Stiehle:

Yes. So, on the material comment that I said in my opening statements, that was more applicable to Q1. So there was some sales that we had, which are not in -- we don't envision to be on a recurring basis. We're not included in the Q2 or the guide kind of going forward. The Q2 revenue that we had at Mission Technologies was driven by strong performance in C5ISR and CEWS. And we believe that will continue going forward. We have normalized out for the book of business on contract right now. So we know what contracts we have and we're executing, and we see the -- how we load that out, and we have a clear sight on expectations of the revenues for the last 2 quarters, as well as there is some -- there's still awards happen every month. And the -- even though we're in the back half of the year, there's several tens of millions of dollars of potential sales that happen on awards. So, we have to execute our plan that we have in existing contracts. Those awards have to play out. And we've guided pricely probably on the conservative side of where we stand. The run rate at Mission Technologies between the first 2 quarters at 750 and 765 is 15.15 on an annual basis, over $3 billion. We've conservatively taken the beginning of the year guide to 2750 up to 2750 to 2280. So let's see how it plays out. We don't want to get ahead of ourselves. Chris made a comment earlier about the growth. We saw some good growth in '21 to '22 at 4% from '22 to '23 at 12.7%. And then both Q1 and Q2, respectively has seen 20% and 18% growth. But we don't want to only guide here. Obviously, we've got to get the people in, win those contracts and continue some good performance. But I'm feeling really strong about the Alion acquisition, the business proposition that we set that MT would be a $200 million cash generated, which it is. And I feel really good about the portfolio of contracts we have and that pipeline growing.

Tom Stiehle:

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

Operator:

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

Chris Kastner :

Good morning, Jordan.

Tom Stiehle :

Yes. We always invest with our partner with the Navy on this. And depending on what the CapEx is and the timing and the value equation, what that adds and the design of getting in the yard, whether it's for operational here or maybe sales and things like a there's a mix there of investment. We don't get into that. I mean, that's just part of the business case. And I will tell you that any capital projects that we do add value, we get a return on our capital, and it goes into the business construct and how we choose which projects we bid, we approved and we execute, so I'd leave it at that. It was 2.6% in Q1, 3% in Q2. The guide is still 53% [ph] for this year with a 5% CapEx over the next three years.

Chris Kastner :

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

Chris Kastner :

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

Chris Kastner :

Sure.

Chris Kastner :

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

Thomas Stiehle:

Thanks, Chris, and good morning. Today, I'll briefly review our first quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website.

Operator:

[Operator Instructions] Our first question comes from Scott Deuschle from Deutsche Bank.

Christopher Kastner:

It's right around 90%. It's progressing well. They're into the test program. We're actually seeing dead loads fired off [ malls ] off the ship. So that's a positive sign. So yes, they're progressing very well.

Thomas Stiehle:

Yes. So we do have -- thanks Scott, appreciate the question. And we do have a shape of our margin, and it's backloaded in the year because of the milestones. And we guided to 7%. We came in at 6.88%, just a little light on the margin there. And then on the operating income, the sales being under Q2. But timing on that cost and labor is here, working ourselves to progressing on that front. But on the back half of the year, as we make our milestones, I do anticipate a ramp. We're guiding for Q2 to be a 7% quarter as well in shipbuilding. And then obviously the back half of the year, we'll kind of lift that up.

Robert Spingarn:

Chris, just going to touch on the labor situation, but the Navy controller was saying recently that the Navy just can't simply buy its way out of programmatic challenges and delays. And I assume that has to do the delays, of course, we've talked about this a lot, are just driven by labor constraints. I was wondering if you could expand a little bit on that. And is there any possibility that maybe some subsidies to shipbuilders might relieve the situation?

Robert Spingarn:

So it sounds like it's really then not just labor. There are these other things you can do.

Thomas Stiehle:

So Rob, I'll give you some color on that. Yes, it was a strong quarter. Again, it came in at $750 million, following Q4 last year at $745 million. That we are being conservative in the guide, it's still holding it at $2.7 billion to $2.75 billion. I mean, if you do the quick math, the run rate for the remaining of the year is $650 million and holding to the guide there at the midpoint.

David Strauss:

Chris, I wanted to ask you, you've now in Q1 and Q2, you're going to knock off a lot of these milestones that were supposed to happen late last year. But at the same time, we really haven't seen any of that perceived upside come through in terms of the margins based off of what you did in ship -- for shipbuilding in Q1 and what you're forecasting for Q2. So if you could just square that, why we're not seeing some of that upside that we would think would be there would come -- that is not coming through with these milestones being completed.

Thomas Stiehle:

Yes. So from a cash perspective, we came in at $274 million here. We're guiding another minus $100 million. So we'll work ourselves through that. Not uncommon, we burn cash at the beginning of the year, and not unanticipated here. Yes. So we wanted to make sure everyone's aligned with us on that front.

Operator:

Our next question comes from Doug Harned from Bernstein.

Christopher Kastner:

Sure. So yes, widely reported on that issue. The team has come through the first-of-class issues on the bow that impacted the schedule. Those are essentially behind us now. And then there's just -- now there's volume work to get the bow complete. We're actually a bit ahead of schedule to the recovery plan. The team is very focused on it. It's really our top priority, it's the top priority of the Navy. So unfortunate that we encountered those first-of-class issues, but we think the specific issue that drove the schedule delay is behind us at this point.

Operator:

Our next question comes from Ronald Epstein from Bank of America.

Christopher Kastner:

Yes. So that's an excellent question. This is, from an AUKUS standpoint, as I previously indicated, we view this as an opening of two markets for us. So it's a really good opportunity for us. And we think we're taking all the right steps to prepare for ultimately a pretty material impact to the corporation.

Christopher Kastner:

Well obviously there would be further upside related to that. I think there are discussions about that, but I don't want to get ahead of ourselves. Let's focus on AUKUS at this point, and I'll leave those sort of discussions to the Pentagon and the Navy.

Gautam Khanna:

I was wondering if you could give us the EACs by segment in the quarter? Then I have a follow-up.

Gautam Khanna:

Okay. At NNS, the margins were a little light of our expectation. I'm just curious, any stepbacks in productivity or labor to speak of broadly at NNS or elsewhere?

Thomas Stiehle:

But nothing material on that...

Thomas Stiehle:

I'll comment, too, here. So yes, 6.8% versus guidance of 7.0%. A year ago this quarter, it was 6.7% push [indiscernible], so not that far off. From a Newport News perspective, again at 5.7% for the quarter. A year ago, there were 5.6%. We finished off last year at 6.2%. So slightly off of that, just working through getting that production line working, material and labor on deck plate at the same time, trying to get that rework down and keeping the production line going here. So we're fighting through it. And really not that far off the guide, so -- okay.

Christopher Kastner:

Yes. So we obviously assess the EACs in the first quarter, but it's a second quarter event. And it's included in our guide for the second quarter and our expectations for the second quarter.

Seth Seifman:

Tom, just first a quick clarification. I know you mentioned the CapEx really stepping up in the second half along with the cash generation. So I assume you're also expecting a step-up in the Navy support for that CapEx in the second half-plus.

Seth Seifman:

Right. Okay. Okay. And then just on the margin rates in the shipyards, Q1, similar to last year, slightly higher. Q2 though, around 7%. Like if we look at the Q1 margin rates, kind of seems probably at the lower end of what you might expect for each of the yards. And so would normally expect some sequential improvement in each of the yards, maybe to something like above 6% at Newport, and I mean, Ingalls is often in the double digits. Is there something to be aware of that weighing on margins in the second quarter? Or is it -- I know you mentioned one milestone, but maybe a lack of overall milestones that's driving the 7% for the second quarter?

George Shapiro:

Yes. Just following up a little bit on Seth's comment, but trying to get into some more detail. To get to the low end of your 7.6% margin guide for shipbuilding for the year would imply something like 8.3% or 8.4% in second half margins, which would imply an incremental $70 million to $75 million in profit. Are the milestones that you're projecting for the second half going to give us all that $70 million to $75 million? Or is there something else?

Thomas Stiehle:

Yes. So it's the working capital, it's timing, it's trade working capital between the billings and the receipts, the AR and the AP that we have right now. We have the cost in hand. At times, it's either making the progress or being able to bill, working ourselves through incentives for collections as well as progress restrictions that we have.

Operator:

Our next question comes from Myles Walton from Wolfe Research.

Christopher Kastner:

No, '25 has not shifted, and all the milestones are important. It is critical on the VCS program, that they meet their commitments because it is an assembly line and you need to roll crews to the next boat. So yes, those VCS milestones are important.

Christopher Kastner:

Yes. So thanks, Myles. Workforce is a significant issue. We think we've solved the hiring part of that issue. We've hired over 1,700 in the quarter to our commitment of -- or to our goal of 6,000, and we're working very hard on attrition. There are some pilot projects that we have within each of the organizations, each of the shipyards, relative to attrition surrounding pay, where you recruit from and flexibility. Those are starting to yield some fruit, but not enough where I can really take it to the bank. So some positive indicators, but not good enough yet and we're going to continue to work on it.

Myles Walton:

Okay. Is it concentrated to just a couple? Or is this really widespread?

Operator:

Our last question comes from Noah Poponak from Goldman Sachs.

Thomas Stiehle:

I think both years kind of near or pretty closely expectations, both from where we were on the margin side and the cash that's going to follow that. So it is a year where there's more milestones in the back half. It will be highly dependent that we get those done. Last year, the 3 events kind of slipped right from Q4 into Q1 and essentially at the very beginning of Q2.

Thomas Stiehle:

Yes. So we did buy back $62 million in the first quarter. We talked about a target of $300 million by the end of the year. So you can do the math on that. That will -- that should ramp up as we go through the back half of the year. We follow a very disciplined buying grid. We have algorithms against that where we see value. So we'll continue to employ that process. It has served us well. We reiterated our targets, so I don't see a change in that going forward right now.

Noah Poponak:

Got it. And Chris, you've touched on labor and attrition here. I think at the Investor Day, you quantified that attrition improved around 20% last year. It sounds like that continues to get better. I don't know if there are any numbers you can put around how much better that needs to get to be kind of fully normal or stable, or what you've seen year-to-date?

Operator:

I am not showing any further questions. At this time, I would now like to hand over to Mr. Kastner for any closing remarks.

Operator:

And this concludes today's conference call. You may now disconnect your lines.

Christie Thomas:

Thank you, operator, and good morning. I'd like to welcome everyone to the HII fourth quarter 2023 earnings conference call. Joining me today on the call are our President and CEO, Chris Kastner; and Executive Vice President and CFO, Tom Stiehle. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks uncertainties, and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliation of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to President and CEO, Chris Kastner. Chris?

Thomas Stiehle:

Thanks, Chris, and good morning. Today, I'll review our fourth quarter and full year results and also provide our outlook for 2024. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated fourth quarter results on Slide 4. Our Q4 revenues of $3.2 billion increased approximately 13% compared to the same period last year. This growth was driven primarily by higher year-over-year revenue at all three segments, leading to record quarterly revenue for HII. Operating income for the quarter of $312 million increased by $207 million or 197% from the fourth quarter of 2022, and operating margin of 9.8% compared to margin of 3.7% in the prior year period, up 609 basis points. The increase in operating margin was primarily due to higher segment operating income. Net earnings in the quarter were $274 million compared to $123 million in the fourth quarter of last year, up 123%. Diluted earnings per share in the quarter was $6.90 compared to $3.07 in the fourth quarter of the previous year. Moving to our consolidated results for the full year. Revenues were a record $11.5 billion for the year, a significant increase of 7.3% from 2022. The improvement was driven by strong year-over-year growth at all three segments. Operating income for the year was $781 million and operating margin was 6.8%. This compares to operating income of $565 million and operating margin of 5.3% in 2022. The operating income growth was primarily driven by year-over-year improvement in segment operating income at all three segments. Net earnings for the year were $681 million, compared to $579 million in 2022, up 17.6% and diluted earnings per share was $17.07 compared to $14.44 in 2022, up 18.2%. For segment results on Slide 5, Ingall's revenues of $2.8 billion in 2023 increased $182 million or 7.1% from 2022, driven primarily by higher volumes in surface combatants and amphibious assault ships partially offset by lower NSE program revenues. Ingalls' operating income of $362 million and margin of 13.2% in 2023, both improved from 2022 results driven primarily by a $70.5 million sale of a court judgment to recover unpaid receivables for the prior repair, refurbishment and modernization of foreign built frigates. The higher volumes that I just mentioned and the contract incentive on DDG 129, partially offset by lower risk retirement on LPD 28 and LPD 30 than the prior year. At Newport News, 2023 revenues of $6.1 billion increased by $281 million or 4.8% from 2022, primarily due to higher volumes in aircraft carrier construction and engineering and submarines and partially offset by lower revenues in the RCOH program and naval nuclear support services. Newport News 2023 operating income of $379 million increased $22 million from 2022 and margin of 6.2% was relatively consistent with 2022 performance. The increase was driven by higher volumes I just discussed, and a revenue adjustment on CVN 73, partially offset by contract incentives on the Columbia Class Submarine Program in 2022. Shipbuilding margin for 2023 was 8.3%. Admission technology, 2023 revenues of $2.7 billion increased $312 million or 13.1% from 2022, primarily driven by higher volumes in C5 ISR and cyber, electronic, warfare and space contracts. Mission Technologies 2023 operating income of $101 million and segment operating margin of 3.7%, both improved operating income of $63 million and segment operating margin of 2.6% in 2022, driven primarily by a $49.5 million settlement of representations and warranties insurance claim relating to the acquisition of hydroids. And the higher volumes I described, partially offset by a contract loss and lower equity income due to the sale of a joint venture. Mission Technologies 2023 results included approximately $109 million of amortization of purchased intangible assets compared to approximately $120 million in 2022. Mission Technologies EBITDA margin for 2023 was 8.6%. Turning to cash. 2023 free cash flow was $692 million, handily beating the guidance due to strong year-end collections as well as benefiting from the sale of the Frigate court judgment and settlement of the reps and warranty insurance claims I've highlighted. During the year, the company reduced debt by $480 million, invested $278 million in capital expenditures, paid $200 million in dividends and used $75 million to repurchase shares, while ending 2023 with $430 million in cash on hand and the liquidity of approximately $1.9 billion. Net capital expenditures finished the year at 2.4% of revenues, just under 2022's value of 2.5%. Cash contributions to our pension and other postretirement benefit plans totaled $44 million in 2023. Our pension outlook for 2024 has improved from the update we provided in November, given the better-than-expected returns to assets, partially offset by a decrease in discount rates since that time. Asset returns for 2023 were 12.3%. Pension expectations for 2025 through 2027 have been updated. And similar to the update we provided for 2024 last quarter, the fast benefit has increased from our last update, given the more immediate recognition of the positive asset returns experienced in 2023. This is partially offset by the impact of the lower discount rate. We've also provided an initial view of our 2028 expectations. Turning to Slide 7 of our financial outlook for 2024. Given backlog growth performance in 2023 and the strong demand for our products and services, we are now forecasting mid- to long-term HII revenue growth of 4-plus percent. For shipbuilding mid- to long-term forecast revenue growth has increased from 3% to approximately 4%, although growth in 2024 will be tempered due to the outperformance in 2023. Accordingly, we are forecasting 2024 shipbuilding revenue between $8.8 billion and $9.1 billion. For 2024, we expect shipbuilding operating margin to be between 7.6% and 7.8% as we continue to target incremental margin improvement. For Mission Technologies, we continue to expect approximately 5% mid- to long-term top line growth. And again, due to the 2023 outperformance driven by approximately $80 million of material timing. We expect tempered growth for FY '24, forecasting revenue between $2.7 billion and $2.75 billion. And we expect Mission Technologies operating margins to be between 3% and 3.5% and EBITDA margins to be between 8% and 8.5%. In 2024, amortization and purchased intangible assets is expected to total approximately $109 million, of which $99 million is attributable to Mission Technologies. We expect first quarter revenues of approximately $2.2 billion for shipbuilding and $650 million for Mission Technologies, with shipbuilding operating margin near 7% and Mission Technologies operating margin near 2.5%. Moving on to capital expenditures. As we've discussed in prior quarters, we continue to see the long-term capital expenditure rate of 1.5% to 2% of general sustainment. In the near term, given the significant demand in submarine construction, we are partnering with our Navy customer to invest in expanding our shipbuilding capacity and throughput. The investment is expected to drive CapEx to approximately 5% on average for the next three years, with 2024 targeted to be approximately 5.3% of sales. I will note that the sustainable free cash flow levels we've previously discussed are not expected to be impacted by this due to customer investment, evidenced by the projected free cash flow growth over the next five years, I'll provide shortly. Additionally, on Slide 7, we have provided our updated outlook for a number of other discrete items to assist with your modeling. Moving on to Slide 8. We have provided an updated view of our free cash flow outlook for 2024 of $600 million to $700 million, ending our prior five year free cash flow projection period with an estimate of $3 billion up from our prior estimate of $2.9 billion. I'm also pleased to provide a free cash flow outlook for the next five years or for FY '24 to '28 of approximately $3.6 billion. I would note that these forecasts do not include Section 174 deferral, which if it occurs, would beat a tailwind to approximately $150 million to $200 million in 2024. On Slide 9, we provided our capital allocation prioritization model unchanged from previous discussions, but updated for current events. We continue to remain committed to an investment-grade rating and have reduced our leverage ratio to under two turns at the end of 2023, a year earlier than planned. In addition, we finished paying off our $650 million term loan in January of 2024, which concludes our debt repayment prioritization while securing our investment-grade ratings and credit metrics. In 2024, we expect to return approximately $500 million of free cash flow to shareholders through dividends and share repurchases. Lastly, on this slide, the Board has approved a revision to our share repurchase program in both term and amount resulting in available share repurchase authorization of $1.5 billion through 2028. To close on my remarks, company's mainstay programs are well supported in demand, and MT's growth success continues to expand and diversify our portfolio. Our future is bright and within our control by executing on our current production contracts and capitalizing on the growth demand for HII products and services. We've exceeded our 2023 financial guidance metrics in terms of revenue, profitability and free cash flow while investing in our programs to facilitate growth and throughput. Additionally, we've strengthened our balance sheet, paying down debt and lowering our leverage ratio. Lastly, fine-tuned the HII investment thesis on the last page of the earnings presentation, focusing on the portfolio strength and visibility execution and growth and free cash flow expansion driving our current and future capital allocation commitments. With that, I'll turn the call back over to Christie for Q&A.

Operator:

[Operator Instructions] Our first question today is from Myles Walton from Wolf Research. Myles, please go ahead. Your line is open.

Thomas Stiehle:

Hi, good morning, Miles. Tom here, I appreciate the question. Yes, so we mentioned here that traditionally we look at maintaining the yards to be about - 1% to 1.5% with about another point-to-point to have specific projects. As we've talked about in the recent past, we have a lot of activity that's going on in the yards, acquisitions specifically at Newport News, and driving down into the submarine program there. So, we're putting more boats on contract in on VCS in the Columbia program. And as we're working ourselves through those negotiations and schedules, we see - it necessitates additional capacity and throughput. So in conversations with our Navy partner, we've partnered on what that means. There'll be - a couple more buildings, more capacity in the yard, and its requiring investments. Just over three years, we have defined projects that, we've worked through and we've gotten approved through the Board and with the Navy. And the investment there from the Navy will pay for the majority of that. So as much as it rolls through, I'm capitalizing the projects themselves. I'll get the investments on the contracts, to help offset that. So it's a three-year run, it peaks out. The first year at 5.3%. And as I said, we've kind of given you, what the free cash flow projection is from '24 to '28 to kind of evidence that, we're still good to our thesis of the cash flow inflection to $700 million plus as we go forward. There's a shake to it, obviously, of that $3.6 billion I gave you. And obviously, it grows over time as the revenue and the incremental margin expansion comes online. And then as the CapEx falls off on years four and five. But we think it's a good business arrangement. It facilitates the growth that we're talking about. You heard in the comments, both from Chris and myself, we're raising shipbuilding from 3% to 4%. And this capital investment by both the Navy and us facilitates that growth long-term.

Miles Walton:

Okay. And Chris, just to follow-up on the longer-term projection and the capital allocation prioritization. You'll probably get into this Investor Day. But the last several years have been a lot of cash going to paydown debt. It doesn't sound like we need to do that. So are we at a point, where we can more commit to a significant majority, or not all of the free cash flow to return to shareholders over the timeframe looking forward?

Thomas Stiehle:

Yes, if I could piggyback on top of that. And Miles, I think you're looking at it the right way. If you look back on where we've been right in '22, we gave back to the shareholders $249 million in dividends and repos. This year, it's up to $275 million, which is 40% of free cash flow. We have to keep in mind for 2023, it was $480 million of debt paydown. So, we actually between the debt paydown and what we gave back to shareholders. It was better than 100% of the free cash flow of $692 million for 2023. And now for this year, as we're saying $500 million of dividends and repos is still another $229 million. I just paid $145 million in January. There's $84 million of on payment in May. So $229 million of debt and that concludes it, kind of going forward plus the $500 million I'm committing to again is over 100% of free cash flow going back to the shareholders this year. If you take the midpoint of the guide of $650 million, right? So it's ramping. We're giving you the commitment through 2024. We haven't told you, we're committing to pass that, but we would envision as we work off each year and the cash is there, that we'll update you accordingly.

Operator:

Thank you. Our next question today is from Gautam Khanna from TD Cowen. Gautam, please go ahead. Your line is open.

Christopher Kastner:

Sure. Thanks, Gautam. The two VCS milestones, we're essentially complete with both of the operational commitments for those milestones. There were some late breaking changes on both of those boats that, needed to be implemented before we could claim victory, and finally achieve them, but we're essentially complete. The staffing has been significantly reduced, on each of the boats and it's been reallocated, to the other boats. And no material financial issue related to those at all. On LPD 29, we ran into an issue going through the test program that we need to stop and do a root cause corrective action on. We've done that. The ship went to sea this week, performed well, we think we'll deliver that here late Q1, early Q2. Now from '24 milestone impact, we're all aligned within the corporation relative to those milestones. It does put some pressure on the VCS milestones at the end of the year on 798 and 800, but we have detailed plans to achieve those and we're committed to getting those done.

Christopher Kastner:

No, there were no material financial issues related to those. Obviously on LPD 29, there is a bit of an opportunity lost there that, will recover when it ultimately gets delivered, but it's all included in our guidance.

Christopher Kastner:

Sure.

Seth Seifman:

Okay. Thanks very much. Good morning.

Seth Seifman:

Good morning. I guess in other your earnings calls this quarter, we've heard about various supply chain challenges on Virginia. I guess, can you speak to kind of how you feel your estimates are looking on Virginia and the amount of risk in those estimates? And then to the extent that, is there much in there that's contemplated for inflation reimbursement, because it seems that contractor expectations for inflation reimbursement have been coming down. Has that been the case for HII, or were they not there in the first place? Or is the sub-industrial base different, because it's such a priority?

Seth Seifman:

Okay. Okay. Thanks. And maybe just a quick follow-up on the capital deployment. If I look at the $3.6 billion over the period, think about the dividends and the 2024 debt paydown. That maybe leaves like $2.25 billion. I know the repo authorization, I think the slide says there's about $1.5 billion left. I mean, would you think that there's before, that it's possible to exceed that $1.5 billion by 2028?

Seth Seifman:

Okay. Thank you very much.

Operator:

Thank you. Our next question is from Scott Deuschle from Deutsche Bank. Scott, please go ahead. Your line is open.

Thomas Stiehle:

Hi.

Scott Deuschle:

Hi Chris, just to clarify, did the LPD 29 delivery delays have much extra cost associated with them? Or is it more just the function of some extra time and a deferral of the AC, rather than a diminishment of the AC opportunity?

Scott Deuschle:

Okay. Got it. And then, Tom, just from a reporting perspective, why are Venezuela insurance recoveries included in operating loans rather than below the line? A lot of people are thinking you started reporting this quarter? Thanks.

Scott Deuschle:

Okay. And then, Tom, last question. Is there any kind of ramp to the - or slope to the free cash flow target, the cumulative target over the next five years? Or is it fairly leveled at '24? Thank you.

Scott Deuschle:

Thank you. That's resolved.

Operator:

Thank you. Our next question is from David Strauss from Barclays. David, please go ahead. Your line is open.

Christopher Kastner:

Good morning, David.

Thomas Stiehle:

Yes. So, we don't want to get ahead of ourselves, right? Yes. We did talk about 7.7% to 8.0%. There's a couple of milestones that we missed at the end of the year, which causes a little bit of a drag, as you saw how we finished off. Still shipbuilding healthy with the recovery of the sale of the claim, 8.3% still kind of beat the guidance with the claim on a recurring run rate. I'm with you that it's a little bit short on that right now. And we'll pick it up kind of going forward, right? So, I'm not just going to have function up, but we'll pick up where we have on our run rate as we finish our milestones as we get credit for that. There'll be some stuff up so long the way. I think 7.6% to 7.8% is appropriate. I'm a comfortable and conservative on that right now. And I've gotten to the last couple of years and we've missed a couple of attempts right at the end of the quarter. So, I don't want us to get ahead of ourselves a little bit. Let's kind of earn each of these quarters. I think 7.6% to 7.8% is the appropriate way to kind of look at it. If we - that get the hiring and the retention and we have clean shifts through the whole year, and we make up our milestones, we could be on the upper end of that range. It's not higher, but I think for now finishing the year off at 8.3% with the claim, the bottom end of the guide right now without the claim. I think that's the right starting point with a year's worth of shipbuilding to go through 2024.

Thomas Stiehle:

Sure. Yes. Yes, we've had a lot of conversation on that working capital. And I know when we were much higher in that at 10% and 8% range that was concerned, like how could we get that down? And we were projecting that that would happen. I'm happy to report that it's kind of landed right where we thought it would be, right? So, I think we started the year off in around 6% to 6.5%. We finished the year off at 5%. The conversations we've had in the recent past, we've talked about it used to be 6% to 8% without Mission Technologies with the additional sales for Mission Technologies. It's more like 4% to 6%. And that's I had highlighted that we were coming down, you know, with COVID in the rearview mirror, production programs that we have, trying to maintain the schedules with the same type work. We would see a normalization of the working capital. And that's exactly what's played out. We've lost about a point of working capital throughout this year. And I still anticipate kind of going forward a little bit improvement in that as we go forward. So 4% to 6% is the right way to kind of look at it. We exit '23 at 5%. And I would expect in 2024 to be on about you know, a little bit lower than that between 4% to 5%. The capital incentives will help as we get the cash up front, before the cost is completely incurred. And I think that's the appropriate way to kind of model it, going forward in the 4% to 5% range in the next couple of years.

Operator:

Thank you. Our next question today is from Pete Skibitski from Alembic Global. Pete, please go ahead. Your line is open.

Christopher Kastner:

Good morning.

Thomas Stiehle:

Yes, our Mission Technologies it was - the warranties and representations for the purchase of Hydroid was a settlement cash $49.5 million. And then Ingalls, we picked up from a frigate repair effort that we had in the late 90s and had cost against that. And we've been working to see how we could get a recovery on that. And we did get a settlement judgment in 2018, and then we were able to broker and sell that entity for $70.5 million. And you'll see in the K2, there's a little bit of a back end on that, too. We'll see how that plays out. But that's about all I want to say about this. It net's about $120 million gross, but obviously I pay tax on that. So net tax is the impact to the profitability and cash was $95 million.

Christopher Kastner:

Yes. So I'll start with that. The '24 budget is very positive for us. All our major programs are supported. LPD 33 is supported, which is really important to Ingalls. The submarine industrial base funding in the baseline budget is important. I think that's around $400 million, but the additional $3 billion in the supplemental, just further effort to improve the supply base. And there's also funds within that to improve the labor force. So getting both of those approved is really important. Now our confidence relative to the guide is just on the demand for our products. We see the demand for nominated products in shipbuilding, both in Newport News and Ingalls, but also Mission Technologies. And when we laid it out, we looked at the investments we're making and the opportunity it just makes sense. We're in a bit of an inflection point from a sales standpoint. And I actually think there's probably some tailwinds if we can get that summary industrial-based funding approved, executed and start improving throughput. Tom, do you have anything to add?

Pete Skibitski:

Great. Thanks guys.

Operator:

Thank you. Our next question is from Ron Epstein from Bank of America. Ron, please go ahead.

Christopher Kastner:

Good morning, Ron.

Christopher Kastner:

Yes. Ron, thanks for that question. It's definitely been a challenge over the last couple of years citing the exact example that you brought up. And the team has a number of initiatives they've implemented over the last year to address the situation, and they center around 3 fundamental issues, really, which is flexibility for the team that we're hiring in work schedules potential time off. The craft person, man and women that we are now hiring is not fully prepared to come right into the workforce and start that kind of daily grind without having some flexibility in the work schedules. So, we have a number of pilots that we're working in that regard. We have some really interesting analytics around targeting geographies that we have better success in hiring and retaining. So, we have initiatives there. And then we have very focused incentives on critical skills. An example is machinists where you have to just pay them more to get them and keep them. So a number of initiatives, we pivot very quickly because we have such good data on what works, or what is going to work and what does work. So, we can expand upon it. But you're hitting on a fundamental issue in the industry right now in the manufacturing industry as a whole. And within defense and in shipbuilding is that the labor issue is obviously one of our major risk issues and one we're working very hard to resolve. I would also say the Navy understands it. And in the SIB funding, as I previously mentioned, there are workforce development issues as well. Getting people into the apprentice schools, because our retention rates in the apprentice schools. And established programs are significantly higher because the people that go in there are choosing that as a profession. So it's something we're well aware of. Our partners are well aware of it and the Navy is well aware of it, and we're addressing it. We've seen some rays of light as we ended the year, but you can't really trust a couple of data points. So we're going to keep working on it this year.

Christopher Kastner:

Yes. So they've done a really good job, both on the VCS program and on the DDG program, it doesn't get enough as much press, but on the DDG program as well as identifying single source or sole source vendors, in the supply chain that need investment to increase capacity because as you know, capacity had dwindled a bit in the previous 10 to 15 years. So they've done a very good job targeting those suppliers and making investments. And then there's some large critical material where there's a single source suppliers that are dealing with the same sort of labor and supply chain issues that we are. So to identify those potentially dual source them, or qualify an additional source is something that the Navy and we are looking at as well. So it's a very comprehensive review. I think it's managed very well by us and our partners. And I think it's going to get it the issue, but it doesn't turn overnight.

Christopher Kastner:

Thanks Ron.

Noah Poponak:

Good morning, everyone.

Noah Poponak:

Tom, can you give us the pieces that bridge your actual full year '23 free cash versus what you had last guided it to?

Noah Poponak:

Okay. So if I take that final and take out the claims, I guess, call that closer to $600 million. Can you bridge me from that to staying there in '24 while CapEx is going up as much as it is? If you're - because you got revenue guidance that's up kind of 2% or 3% in a flat segment operating margin?

Noah Poponak:

So how will we actually...

Noah Poponak:

Well, I'm just wondering like if there's a Navy participation will we see - will not all of that actually be recorded in CapEx? Or will it flow to your CapEx and come back in your rates in your operating margin? Or how will we actually see that in your financials?

Noah Poponak:

So the piece that goes through CapEx that's supported by the Navy that we'll just see that in future margins as it flows through your rates? Is that right?

Noah Poponak:

Okay. And then I guess, I just -- so for '24, with the margin guidance flattish year-over-year, I still struggle to see where that $300 million is coming from?

Christopher Kastner:

Yes. It's part of the total ship P&L, Noah.

Thomas Stiehle:

Sure Noah

Operator:

Thank you. Our next question is from George Shapiro from Shapiro Research. George, please go ahead. Your line is open.

Thomas Stiehle:

Yes, sure, sure. So from the MT side, we saw a nice rush at the end of the year of some receivables. I mentioned in my notes, it's about $80 million. So that was a big pickup. On the shipbuilding side, just the timing of material on how that floating here, the majority of the overage and where we felt we would land was on the material side. We have some outsourcing going on as well. So those costs flow through opportunistic that they landed in 2023 here. But we guided $86 million to $88 million, we came about $100 million over that and you kind of normalize that. It was good growth there. You saw it in shipbuilding better than 5%, 5.5% in shipbuilding. Ingall's up in the 7s and Newport News at 4.8%. But it was a sharing between all three divisions that just exceeded. It was a nice run at the end of the year on the revenue side.

George Shapiro:

Okay. And then the other one probably for Tom, if you had a $49 million benefit in Mission Systems from Hydroid I mean, it implies the rest of the business made $2 million. Now you alluded to some charges at some of the other businesses there. But if you could just provide some more information on that?

George Shapiro:

And Tom, if you could just provide the EAC for each of the sectors in the quarter?

George Shapiro:

Okay. Thanks very much.

Operator:

We will now be taking our last question from Scott Mikus from Melius Research. Scott, please go ahead. Your line is open.

Christopher Kastner:

That's a good question, and I don't have that in front of me. That's a really good question. I don't have that in front of me. I know part of it -- I think a part of it is, but I couldn't quantify it for you. So we'll get that information for you, Scott.

Christopher Kastner:

Well, it has to be both, right? And we -- when we do our projections, we risk adjust them. It's not assuming that everything works out perfectly. So it has to be both. We have to improve our retention rates. We have to improve out of the supply chain, and we have to improve capacity. And if we do that, then throughput will significantly increase. But you're absolutely correct. We have to be successful in both.

Scott Mikus:

Okay. Got it. Thank you.

Operator:

Thank you. This is all the time we have for the Q&A session today. So I would now like to hand back over to Mr. Chris Kastner for any closing remarks.

Operator:

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.

Christie Thomas:

Thank you, operator, and good morning. I’d like to welcome everyone to the HII third quarter 2023 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks uncertainties, and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliation of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to President and CEO, Chris Kastner. Chris?

Thomas E. Stiehle:

Thanks, Chris, and good morning. Today, I'll briefly review our third quarter results. For more detail on the segment results, please be refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on slide six of the presentation, our third quarter revenues of $2.8 billion increased approximately 7.2% compared to the same period last year, and represents a record third quarter result for HII. This increased revenue was largely attributable to growth at Mission Technologies and Ingalls shipbuilding. Operating income for the quarter of a $172 million increased by $41 million or 31% from the third quarter of 2022, and operating margin of 6.1% compares to operating margin of 5% in the same period last year. The increase in operating income was primarily due to higher segment operating income, a more favorable operating FAS/CAS adjustment and more favorable non-current state income taxes compared to the prior year period. Net earnings in the quarter were a $148 million compared to a $138 million in the third quarter of 2022. Diluted earnings per share in the quarter was $3.70 compared to $3.44 in the third quarter of the previous year. Moving on to slide seven, Ingalls revenues of $711 million in the quarter increased to $88 million or about 14% from the same period last year, driven primarily by higher volumes on amphibious assault ships and surface combatants. Ingalls operating income of $73 million and operating margin of 10.3% in the quarter increased from last year, primarily due to higher volumes I mentioned earlier, and favorable changes in contract estimates compared to the prior year. At Newport News, revenues of $1.45 billion increased $8 million or 1% from the same period last year. Newport News operating income for Q3 was $90 million, a decrease of $12 million compared to the third quarter of last year. Operating income was lower due to contract incentives earned in the Columbia-class program in the third quarter of 2022, partially offset by improved performance on the Virginia-class submarine program. Shipbuilding operating margin in the third quarter was 7.5%, slightly ahead of the outlook we had provided for the quarter. Our shipbuilding operating margin outlook for the full year remains unchanged. And as we have previously noted, our expected shipbuilding milestones for 2023 are concentrated largely in the fourth quarter. At Mission Technologies, revenues of $685 million increased $90 million or about 15% compared to the third quarter of 2022, primarily due to higher volumes in mission based solutions, driven by our C5ISR and cyber, electronic warfare, and space programs. Mission Technologies operating income of $24 million compares to operating income $14 million in third quarter of last year. The increase in operating income was driven primarily by the higher volumes I just mentioned, as well as improved performance in unmanned systems. Current results for Mission Technologies included approximately $27 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the third quarter was 8.2%. Turning to slide eight, Cash from operations was $335 million in the quarter. Net capital expenditures were $42 million or 1.5% of revenues. Free cash flow in the quarter was $293 million. This compares to cash used in operations of $19 million. Net capital expenditures of $77 million or 2.9% of revenues and free cash flow of negative $96 million in the third quarter of 2022. Cash contributions to our pension and other postretirement benefit plans were $11 million in the quarter. During the third quarter, we paid dividends of $1.24 per share or $50 million in aggregate. We also repurchased approximately 100,000 shares during the quarter at an aggregate cost of approximately $21 million. Year-to-date through the third quarter, we have repurchased approximately a 176,000 shares as an aggregate cost of approximately $37 million. Moving on to slide nine, I'd like to provide an update on our pension sensitivities for 2024. Our forecast in early 2023 assumed asset returns of 8% and a discount rate of approximately 5.5%. Through the end of the third quarter, discount rates have increased approximately 60 basis points and our year-to-date asset return is roughly 4.6%. Pension related numbers are subject to year-end performance and measurement criteria. We will provide a multiyear update of pension estimates on our fourth quarter earnings call in February. Also I would like to highlight that our pension funded status remains strong and has improved year-to-date. Additionally, I will note that the cash flow impacts related to pension changes remain minimal. Moving on to slide 10. Given the strong third quarter free cash flow, we are increasing our 2023 free cash flow guidance to approximately $500 million, an increase of $75 million from the prior midpoint guidance. This increase is primarily driven by the conclusion of the negotiations regarding the payment of COVID advances as well as positive cash flow contributions for Mission Technologies. We continue to expect approximately $1.2 billion of free cash flow over the two-year period of 2023 and 2024. I'll highlight that we continue to expect to distribute substantially all free cash flow shareholders through 2024 after planned debt repayment, which is currently on track. Turning to slide 11, in addition to increasing our fiscal year ’23 free cash flow guidance we’re increasing our revenue guidance of both shipbuilding and Mission Technologies. Given the strong third quarter revenues across all three divisions, we are increasing the midpoint of shipbuilding revenue guidance by revising a range from $8.4 billion to $8.6 billion to a range of $8.5 billion to $8.6 billion, and increasing our Mission Technologies revenue guidance from approximately $2.5 billion to approximately $2.55 billion. This is an increase to the midpoint of shipbuilding revenue guidance of $50 million an increased to Mission Technologies revenue guidance of $50 million. Additionally, we are reaffirming our shipbuilding Mission Technologies margin guidance. To summarize, we delivered strong revenue growth in the third quarter and finished slightly ahead of our margin expectations for the quarter. We also delivered strong free cash flow. Mission Technologies had an impressive third quarter backlog book-to-bill of 2.4, and year-to-date has the potential total contract value awards of over $5 billion, in addition to a robust opportunity pipeline of $70 billion. Looking to the end of the year, we are pleased to raise 2023 revenue and free cash flow guidance and reaffirm margin guidance as we continue to execute the milestones and commitments that we've laid out. With that, I'll turn the call back over to Christie to manage Q&A.

Operator:

Thank you, Christie. [Operator Instructions]. Our first question today comes from Scott Deuschle from Deutsche Bank. Scott, your line is now open. Please go ahead.

Christopher D. Kastner:

Good morning, Scott.

Christopher D. Kastner:

Yes, approximately 12 months. And we've been holding that risk for a while on our financials. So there's no financial impact related to it. That impact is driven by some issues in the supply chain and some major equipment in the bottom of the ship, but no financial impact related to it. And the team's doing their best to mitigate the impact. The good news on that is we do have some EPA protection, which mitigates it a bit. But the team's focused on it and they're going to do their best to mitigate the impact going forward.

Christopher D. Kastner:

Yes. So, we evaluate our EACs on all our programs on a quarterly basis and take appropriate adjustments up or down as we see fit. I continue to believe that there's opportunity in Block V. As we transition out of the Block IV boats and get into Block V, we should have some upside. But I wouldn't comment on our partner's accounting, but I'm very comfortable with where we're at.

Christopher D. Kastner:

Sure.

Josh Corn:

Hi. Good morning. This is actually Josh Corn, on for David.

Josh Corn:

I wanted to ask about the outlook for shipbuilding margins in 2024 if you see any improvement and what some of the drivers might be. Thanks.

Josh Corn:

Okay. Thank you.

Operator:

Thanks very much. Our next question comes from Doug Harned from Bernstein. Doug, your line is now open. Please go ahead.

Christopher D. Kastner:

Good morning, Doug.

Thomas E. Stiehle:

Hey, Doug. Yes, it's Tom here. So, yes, we have been consistent throughout the year here saying that the shipbuilding milestones were in the back half of the year, specifically for Newport News. We have two large milestones here in the 796, delivery and then the 798 float off. So, that's going to be a driver on the back half of the program. And there's a lot of focus down there. Chris, has talked about the hiring and the attrition that we're doing, the extra training, the operating system that we've added down there. Think as COVID becomes further in the rearview mirror against the portfolio of contracts that we have right there. And opportunity sets are bound as we finish off the ships that were impacted to start new ships. Although we saw them up at a lower level, that incremental margin improvement story exists especially at Newport News. But specifically, just on Q4, I think for the last 13 weeks of the year, it's continued performance on the ships that we have here. And kind of hitting the milestones I just described, ensuring that we're getting progress and watching, the heads we have on the programs, and keeping the rework in check.

Doug Harned:

And then when you look at the submarines, in Columbia-class, becoming more and more important. I mean, how what is the, can you describe what the mix is right now in your work between Columbia-class versus Virginia-class and how you think of Columbia-class as it grows, affecting margins over time.

Doug Harned:

Okay. Very good. Thank you.

Operator:

Thank you, Doug. Our next question comes from Ron Epstein from Bank of America. Ron, your line is open. Please go ahead.

Christopher D. Kastner:

Good morning.

Christopher D. Kastner:

Yes. So, we don't provide our retention rates. We're meeting or actually beating our hiring forecast for the year. So, feel good with, where we are there. The second -- what was your second question again? I'm sorry.

Christopher D. Kastner:

Yes. So, we talk about three to five years, the interesting stuff. Some of the interesting things we have going on in Newport News is digital shipbuilding, which we think will increase the time to talent. But we generally think three to five years and we can accelerate that with some of our digital tools.

Christopher D. Kastner:

Yes, we absolutely expect it eventually to flow through. We – office is very important to us. We actually see that as an opening of markets, right? It's an opening of markets in the U.K. and Australia. We think in the short term here, it's really not material financially, but funds could flow next year in important areas like workforce development, supply chain assessment, infrastructure support. We're following the Navy's lead on this. They absolutely are being very methodical, in how they think through this, but we're, we're standing ready to support them and look forward to. But it's really from top line standpoint, it's more of a medium to long-term opportunity, but we need to make sure that we're taking the steps now to ensure that we're prepared for.

Christopher D. Kastner:

Sure.

George Shapiro:

Hi. Yes. Good morning.

George Shapiro:

Chris, I guess you increased your free cash flow for this year, but reduced it for next year. So, what was the timing that really caused that to occur? Because, obviously, you left a two year number the same.

Thomas E. Stiehle:

Yes. So specifically here on 2023, what we've seen is some good performance on Mission Technologies, both topline and the cash collections. And how they're performing in the MBSS. So, that is positive. Also, just kind of hitting on milestones right now, is adds, to the free cash flow at the end of the year, as well as we've come through the COVID repay with our customer set. We've worked ourselves through strategy and algorithm, how that applies to the contract. And that was a couple of dollars there too. So, that's the confidence in the lift that we went from the midpoint of 425 to 500 for this year. As I've been pretty consistent on our five year target, the guiding light from mid-year this year through the end of next year is $1.2 billion. So, we brought this year up to 75. A piece of that, as I said, is the retentions with the COVID. So, that was just timing anyway between ’23 and ‘24. If you notice between $5 and now $700 next year now from $780, it's still the $1.2 billion. I think there's tailwinds against that as we finish out this year. And opportunity sets kind of going forward, but we didn't want to get ahead of ourselves. So we maintained a $1.2 billion target here. Okay.

Thomas E. Stiehle:

I think, the three remaining milestones are all important for us to kind of get into the range. And, we're watching them as Chris, has a pathway on each of the three here. 796 is ready to go. I think we're just waiting for transfer that ship. 798 should float off before the end of the year. And LPD 29, we've been saying since the beginning of the year that it's just a race to, align up the final tasks, the ship to see in serve approving the ship, and then we see that whether that happens in December, the end of December or at the beginning of next year, those three are pretty significant milestones as they play out as we go forward here. I think opportunity sets on there may be a little EPA adjustment as we've seen rates high, and then just the consistent performance seen, we've seen some settling of performance over the last couple of quarters. So, I think that will play out. ‘23 is opposite on ‘22 where we started off really hot and heavy in the first couple of quarters. But, this isn't a surprise for us that Q4 was going to be a big quarter for us. And, I think we're in the lane right now to kind of we're reaffirming our guidance there on profitability for shipbuilding between [indiscernible].

Christopher D. Kastner:

Thanks, George.

Seth Seifman:

Thanks very much. Good morning. So, I saw that, you guys --

Seth Seifman:

Morning. So, you guys increased the revenue guide for shipbuilding. And I wonder if you could talk maybe a little bit more over time about the opportunity for growth at Ingalls, with the, especially with the latest multi-years on the DDG, how that growth profile kind of looks now maybe versus, several months ago and, to the extent to which that can maybe be helpful for the margin mix.

Thomas E. Stiehle:

Yes. I'll hop on the back of that too.

Thomas E. Stiehle:

Yes, Seth, I’ll hop on the back of that too. I'm pretty happy with what I'm seeing down at Ingalls there. You know, NSC, we delivered NSC 10, so there's one more ship set there. We've talked about how that portfolio can sustain itself and still get 3%, 3% plus potentially if things break their way on just the three major programs down there. We've seen that with the DDGs, the seven DDGs on contract, and now more most recently in August timeframe, they received the seven more there. So, they know what they're building over the next decade. They can line that up from a planning, a labor resource and material perspective, and that's going to kind of really help them drive consistent performance in production down there. Also on top of that, we've seen a maturation of the 1000 program, the DDG 1000 program. So we put, the, first of, there's two on contract, we put the first monetization on contract earlier this year. All three of those ships will be down there over the next two to three years going through an 11 to 12 month modernization process. And that's a good base for them to employ the workforce there too. So I see, good healthiness even with the NSC program sun setting for Ingalls, to hit the 3% guided that we've had through 2023 and going forward. Yes.

Operator:

Thank you. [Operator Instructions] Our next question today comes from Myles Walton from Wolfe Research. Myles, your line is open. Please go ahead.

Christopher D. Kastner:

Hi, Emily.

Thomas E. Stiehle:

Yes. So I think it's just a little premature. Obviously, we have some tentative plans right now. We work ourselves through the final planning process for ‘24 and on at the end of this year. We bring that to our internal management and Board here. Once we get that kind of solidified, I'd really like to take a look to see at the actuals at the end of the year, we've talked about those milestones, which we anticipate to hit in Q4, but they just get trickle into Q1. If that does, it would change the shape. So I wouldn't want to get ahead of myself. But, we still maintain the same thesis here of expectation of incremental margin improvement. We think, I mentioned earlier with COVID getting further behind us, us putting the energy into hiring, extra training, retention. The material seems like it's stabilized. It's not where we want it to be, but we have to get that improve, with the maturation of the workforce, anticipation of less rework, the roll over or the portfolio of the existing ships that have increased EACs and scheduled extensions. There's a lot of positiveness kind of going into the follow on years here. And I would anticipate that to grow for shipbuilding. On the Mission Technology side, we've talked about still scaling that business. We've seen some fantastic growth going on the topline. And we have some work to go do and how we get our margins higher there, a little bit more on the fixed price instead of just, at 85% in cost type, additional technology, which should be able to have us deploy IP technology, more products, a little bit more products and services. That should be able to put a premium on what we bid and what we achieve there. So, I would expect, improvement in the margin and at the Q4 call in February we'll give you the shape of next year.

Christopher D. Kastner:

Yeah. So, Emily, this is Chris. We don't expect real surprise pop ups from a maintenance standpoint. We expect fairly consistent revenue for maintenance at Newport News. At Ingalls, we'll be opportunistic if we see stuff that we could potentially participate in. But right now, it's not in their forecast other than the work we're doing on DDG 1000, which is really not maintenance. It's upgrades.

Christopher D. Kastner:

Sure.

Gautam Khanna:

Hey. Good morning, guys.

Gautam Khanna:

Hey. Quick question. On LPD 29, I just curious your confidence level on that getting, delivered this quarter. Is it a very late in the quarter kind of skew? And just how, if you could give us some framework on what the EAC sensitivity is to that in the fourth quarter?

Gautam Khanna:

Gotcha. Okay. So would you argue that the implied shipbuilding range for Q4 bounds that risk? Because it is a pretty wide margin range, obviously, that’s implied shipbuilding.

Gautam Khanna:

Okay. And just, wanted to get your sense on given all the labor challenges that you guys have faced on over the last couple of years, what is kind of an appropriate margin increase rate shipbuilding next year. Like, what would be a good scenario or a realistic scenario? I mean, are we talking, like, 10, 20 basis points? Are we talking, a more significant step up, next year in shipbuilding?

Gautam Khanna:

All right. Thank you very much guys. Appreciate it.

Operator:

Thank you. There are no further questions at this time. So, I'd now hand the call back to Mr. Kastner for any closing remarks.

Operator:

That concludes today's conference for everybody. Thanks very much for joining. You may now disconnect your lines. Have a great rest of your day.

Christie Thomas:

Thank you, operator, and good morning, everyone. Welcome to the HII second quarter 2023 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical facts are considered our company's estimates or expectations and are forward-looking statements made pursuant to the Safe Harbor provisions of Federal Securities Laws. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Tom Stiehle:

Thanks, Chris, and good morning. Today I'll briefly review our second quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 5 of the presentation, our second quarter revenues of $2.8 billion increased approximately 4.7% compared to the same period last year and represents a record second quarter results for HII. This increased revenue was largely attributable to growth at Newport News Shipbuilding and Mission Technologies. Operating income for the quarter of $156 million decreased by $35 million or 18% from the second quarter of 2020 and operating margin of 5.6% compared to operating margin of 7.2i in the same period last year. The decrease in operating income was primarily due to lower segment operating income, partially offset by more favorable operating FAS/CAS adjustments and more favorable non-current state income taxes compared to the prior year period. Net earnings in the quarter were $130 million compared to $178 million in the second quarter of 2022. Diluted earnings per share in the quarter was $3.27 compared to $4.44 in the second quarter of the previous year. Shipbuilding results in the quarter were in line with our expectations and slightly stronger than the outlook we provided on a first quarter call. Segment operating income in the second quarter of 2022 benefited significantly from favorable adjustments from facilities, capital and economic price adjustment clauses at both Ingalls and Newport News, making for difficult comparison year-over-year as expected. Moving on to Slide 6 Ingalls revenues of $664 million in the quarter increased $6 million or about 1% from the same period last year, driven primarily by higher revenues on the DTG program partially offset by lower NSC program revenues. Ingalls operating income of $65 million and operating margin of 9.8% in the quarter declined from last year, as expected primarily due to lower favorable changes in contract estimates from facilities capital economic price adjustment clauses, as well as lower risk retirement on LPD 30 Harrisburg. At Newport News revenues of $1.5 billion increased by $76 million or 5.3% from the same period last year, due to growth in both aircraft carrier and submarine construction revenues. Newport News operating income in the second quarter of 2023 was $95 million, an increase of $1 million or 1.1% compared to the second quarter of last year. Operating income was largely consistent year-over-year, as favorable VCS program adjustments were offset by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses. Shipbuilding operating margin in the second quarter was 7.4%, above the 7% outlook we had previously provided for the quarter. Our shipbuilding operating margin outlook for the full year is unchanged. We have noted previously that our expected milestones for 2023 are concentrated in the second half of the year, and largely in the fourth quarter. At Mission Technologies revenues of $645 million increased $45 million or 7.5% compared to the second quarter of 2022, primarily driven by higher volumes and mission-based solutions, which includes our C5ISR, cyber/electronic warfare and live virtual and constructive training capabilities. Mission Technologies operating income of $9 million compared to operating income of $25 million in the second quarter of last year. The second quarter of 2022 included additional non-recurring equity income of approximately $15 million for an equity method investment in a ship repair joint venture, which was sold in the second quarter of 2023. Cash proceeds of $61 million from the sale are included in investing cash flows. Additionally, negative equity method adjustment of $6 million was recorded from the sale of the ship repair joint venture. Current results for Mission Technologies included approximately $28 million of amortization of purchased tangible assets. Mission Technologies EBITDA margin in the second quarter was 6.7%. Turning to Slide 7, cash from operations was $82 million in the quarter. Net capital expenditures was $68 million or 2.4% of revenues. Free cash flow in the quarter was $14 million. This compares to cash from operations of $267 million, net capital expenditures of $59 million or 2.2% of revenues and free cash flow of $208 million in the second quarter of 2022. Cash contributions to our pension and other post retirement benefit plans were $11 million in the quarter. During the second quarter we paid dividends of $1.24 per share or $50 million in aggregate. We also repurchase approximately 37,000 shares during the quarter at an aggregate cost of approximately $7 million. Year-to-date through the second quarter, we repurchased approximately 76,000 shares at an aggregate cost of approximately $16 million. Moving on to Slide 8, our free cash flow outlook through 2024 remains unchanged, as do our capital allocation priorities. Regarding 2023 free cash flow guidance, we continue to see $400 million to $450 million as the most likely range. We continue to work with our customer on the timing and mechanics regarding the repayment of COVID-related advances, which is currently forecasted to occur in 2023. At this time, we do not have an agreement in place that will increase our free cash flow above the guidance range we have provided. I'll highlight that we continue to expect to distribute substantially all free cash flow to our shareholders through 2024, after planned debt repayment, which is on track. Turning to Slide 9, we are reaffirming our 2023 segment guidance. I will also provide some color on how we see the third quarter and the remainder of the year. Regarding the third quarter, we expect shipbuilding revenue to be approximately $2.1 billion and shipbuilding operating margin to be consistent with the second quarters result of 7.4%. This expectation does imply meaningful improvement in the fourth quarter results, which is consistent with when we expect our most impactful shipbuilding milestones to occur. For Mission Technologies we expect third quarter revenue to be similar to the second quarter results and expect third quarter operating margin of approximately 2.5%. Given second quarter results and the impact of the equity method accounting adjustment I referenced earlier we currently believe that Mission Technologies' 2023 operating and EBITDA margins are likely to be closer to the low end of the guidance ranges we have provided. We expect third quarter free cash flow to be approximately $100 million. Again, there is no change to our guidance for the year. We expect our cash flow generation will fall predominantly in the fourth quarter. Our cash expectation is consistent with both our expected timing for milestones and our normal cash cadence of the calendar year. To summarize, the second quarter shipbuilding results were largely in line with the expectations we provided on our first quarter call. Newport News and Ingalls continued to hit critical shipbuilding milestones. Mission Technologies delivered impressive year-over-year revenue growth. The Mission Technologies team continues to capture meaningful contract wins and maintains a very robust pipeline. We have great confidence in their future and the long term value creation opportunity. Finally, we are pleased to reaffirm our full year segment guidance as we remain focused on executing the milestones and commitments that we've laid out. With that I'll turn the call back over to Christie to manage the Q&A.

Operator:

Thank you. [Operator Instructions]. And our first question today is from the line of Doug Harned from Bernstein. Doug, your line is live.

Chris Kastner:

Good morning, Doug.

Chris Kastner:

Yeah, the largest obstacle, the largest risk on the VCS program right now is labor and meeting our labor targets. We've worked hard here in Newport News to hire. You saw in my prepared remarks we're ahead plan of over 3,200 heads for the year. So that's some positive indicators. But it's -- this is a labor driven issue. And as I said, we've made good progress. We just need to continue to do that over the next couple of years.

Chris Kastner:

Yeah, so it's not a material difference. Obviously, you have contractual differences. But when you get down to the deck plate, those teams work very closely together. There's a relationship that's been developed over a number of years between the two teams. And when you think about the efficiency of getting the work done and potentially transferring some work back and forth, there's obviously contractual mechanisms that need to be put in place under Columbia that you don't need under the Virginia class, but they work very closely together.

Chris Kastner:

Not really, the objective there is to get these critical assets to the fleet as soon as we can. So the team works very closely to ensure we're working on that.

Chris Kastner:

Sure.

Rob Spingarn :

Hey, good morning, Tom. Just a clarification on…

Rob Spingarn :

Thank you. And Chris then a high level one for you. But Tom, on the margins, at Mission Technologies, you talked about the 1.4%, but a $6 million impact from the sale of the JV. So was that impact built into the guidance?

Rob Spingarn :

All right, so this is why you're tracking to the low end. Is that how I should interpret that?

Rob Spingarn :

Okay, then Chris, a high level question, but between shipbuilding and MT, I thought it might be interesting to hear you talk about how these two businesses can contribute to two priority areas for DoD, and that's CAC C2 and Contested Logistics?

Rob Spingarn :

Thanks so much.

Operator:

Our next question today is from the line of Pete Skibitski of Alembic Global. Pete, your line is now open.

Chris Kastner:

Good morning.

Chris Kastner:

Yeah, so we don't provide the right net. There's a lot of things going into that equation. We have over time, we have attendance, we have attrition, we have Job Shop labor that can contribute to that. I will say there's potentially some upside if we're able to continue to meet our hiring growth goals and deal with attrition over the balance of the year. But we just need to see how the year develops.

Chris Kastner:

Yeah, I know the team did a really good job incorporating the PSA work into the baseline contract and assessing the schedule and. And we're putting the work or integrating that work into the baseline schedule. We're confident the way that Kennedy is developing, they're meeting their compartment completion goals. They're -- their test rates proceeding and the plants proceeding. So we got a lot of confidence in where the Kennedy is at right now.

Chris Kastner:

We're just going to have to see. We're going to have to let things play out over the next 18 months, 18 to 24 months. It's a lot of critical work in front of us. But potentially, if we continue to perform well, there'll be milestone opportunities for sure.

Chris Kastner:

Sure.

Seth Seifman :

Hey, thanks very much. Good morning.

Pete Skibitski :

I wanted to ask in Mission Tech, looking at the margin there, and then looking at the contract mix is -- fixed price is a relatively small portion of the mix. I think it's like 12%. And so when you think over time about the profitability that you want to see in that business, and it seems to be an environment where there are more opportunities in the Fed IT services market right now. Is that something that the business is going to try to move higher? Or is that not really consistent with the risk profile that you want to take on?

Tom Stiehle :

Yeah. So you are right, Seth, CD 7% is cost of [ph] contracts. I would say that there is a move afoot. I mean, we kind of realized the customer sets that we have in the portfolio, there is a move to try it. And as we introduce more technology, that will bring about potential premium on pricing on that front. And then as we get away from services and more into products, that's not an area too where we could see an expansion of the margin on those jobs.

Tom Stiehle :

So right now, a little color on that right. So we got an extension on that. It was supposed to be repaid by the end of June. It was a two month extension. So in negotiations, the Navy's now going out and understanding how we'll transition the contract back from the advanced prog pay that was in place since 2020. I don't have a negotiated settlement on that yet. So I don't know what that's going to entail. The guide assumes that there's not a payback right now on that. And we'll have to work ourselves through that as we go through here. So that's a normal run rate that we expect for the quarter. It doesn't impact the guide of 400 to 450 that I've said for the entire year. And I would tell you that the best way to model it and take a look at it is stick to that guidance right now. I think another 60 days, we're going to look see and what that negotiations entails, the timing of it, and the impact, although then we have some significant milestones in the back half of the year. So I have three deliveries, two launches, and one float off. Every time I have a delivery, we liquidate the contract. I get the contract price, the Navy gets the ship. There's some retentions for work that was incomplete there. So there's opportunities that's there to work those retentions off. And that's an opportunity for both margin and cash. And then as I work myself to the back half of the year with LTE 29 is not going to hit this year or next year. We're still holding that milestone as a 2023 event. But I would take a look at cash just from now through 2024, the milestone chart that we gave you, the five year look. It's 1.2 billion over the next 17 months. And I'm still comfortable that we're on target to kind of make to make those goals.

Operator:

The next question today is from the line of Myles Walton of Wolfe Research. Please go ahead. Your line is now open

Chris Kastner:

Yes, I'll handle that and Tom can chip in if he needs to. So 801 had some late breaking rework that pushed up module to the beginning next year. It was late in the year delivery. So just modest, really not a material impact that, as I said to Doug previously, teams pretty good at moving work back and forth to ensure they do that as efficiently as possible. So not a material impact on 801. On LHA-8 I think, first things first, I don't want to just kind of gloss over a pretty significant thing that we like. We really pay attention to in the shipyards is the fire on LHA-8, first thing you have to do is make sure everybody's safe. The team did a really good job. The first responders made sure no one was hurt. Just minor smoke inhalation. But the shipbuilders, and the Navy personnel were safe. Second thing is to limit the damage. They did that, really minor damage to one compartment, some waterways [ph]. We put a corrective action plan, did a root cause analysis. We're working through that corrective action plan now. So the important thing is that we learned from this issue. So no real cost, or cost to schedule impact that's material on LHA-8, and the milestones for that that ship remain intact.

Chris Kastner:

Yes, so it's already in, right.

Myles Walton :

Thank you.

Operator:

Our next question is from the line of David Strauss of Barclays. Please go ahead. Your line is open.

Chris Kastner:

Good morning.

Tom Stiehle :

Yeah, so I am on plan. And consistent with the forecast and discussions we've had past earnings releases 8% about right of where I find myself right now, popping out of this quarter. I work myself through the back half of the year with the shipyards to get around the 6% target that we've talked about. And then there is some tailwinds as we go from '23 to '24, consistent with what we've had, in past discussions. We used to think of for Mission Technologies the 6% to 8%, was the norm of where we think working capital would be in the yard as Mission Technologies has grown. And we've gotten to more of a cadence between the two yards and our shipyard production programs. I look at it more as 4% to 6%. And we'll finish this year out on the higher end of that range. And then as we work ourselves into 2024, we'll be on the low end of that range here. Just the cadence making milestones or schedule deliveries, we settled down both in material and the labor that we give me some status about. And that's going to bring about some consistency and keep us in the norm range, as I see in the coming years going forward.

Tom Stiehle :

Sure. So we don't give specific forecasts by each yard. But obviously, we can do the math here. It's 6%, 7%, [ph] at the first quarter and 7% for this quarter for Q2 for shipbuilding. And we're guiding 7% for Q3. It's in the low to upper ranges for Q4 and the 9% for shipbuilding across both yards. I'm very comfortable with that. I think I gave an answer earlier, but I'll hit it again. Yeah, we still have three deliveries, two launches, one float off all in Q3 and Q4, heavily loaded in Q4 timeframe. Both of the deliveries themselves that are upcoming, and the two that we've had this year, have retentions and releases associated with that, that bring both margin and cash. And then on the back half we have some smaller incentives and some change adjudication to that will play out. So I think '23 is opposite of '22. We saw a very strong first half, specifically, as you mentioned Ingalls is in the 13% to 16%, Q1 and Q2. I won't get into the breakdown in the yards as a forecast for the back half of 2023. But I'm comfortable that back half is going to be meaningfully higher than the front half, with the pacing here for the first half of this year.

Tom Stiehle :

So it's at the very back half of the year here. As we come through we've talked in the past, whether the deliveries are clean, or the timely or do they go around what we want with a lot of retentions or not. Right now LP 29 is progressing well. We don't see any avenue that is our way right now. We'll have five months of things to do, taking the ship to see and burning down risk there. But we'll have to see how that plays out. I don't want to overly play my hand on that. It's one ship and one milestone in the context of the shipbuilding here. So I don't think it will either overly hurt or overly help us. And I think I think the guide's appropriate right now. We still maintain the 7% to 8% shipbuilding margin by yearend.

Tom Stiehle :

Thanks.

Gautam Khanna :

Hey, good morning, guys.

Gautam Khanna :

Hey, I was wondering, remember when the fit up came out, and there were different schedules for various ships, in terms of delivery dates and the like. And I'm just curious, relative to the prior update, I was curious if you had any better color on how to reconcile that with your own expectations for delivery dates over the next couple of years.

Tom Stiehle :

I don't really have much more to add on that. On an annual basis as the NDAA and the budgets pop out, and then obviously we take a -- look at the [indiscernible], which gives you a five year look at the forecast on funding perspective, we reconcile where we stand. It's a cross reference of what we do anyway, every 13 weeks doing EACs and we make sure that we align actuals to date and estimates to complete where we are with our labor and material performance and burn and expectations of future performance. And all that gets baked into revised EAC that marries home, to an updated long range strategic plan that we have, a labor resource plan and then the master construction schedules that we have at each site. So we're locked tight with ourselves. And then we have monthly reviews with our program offices into our customer. So I don't think there was any disconnect there.

Chris Kastner:

So the net -- I'll start with the VCS performance then Tom will talk about the net EACs in the quarter. So yeah, VCS is definitely showing some stability and some positive momentum. So as Tom said, we assess our EACs every quarter and there's nothing material to note, but there is some -- the team's working very hard, the program team, on VCS, to meet their milestones and meet their cost targets, in really kind of a difficult macroeconomic environment. So there is some progress there. There's definitely some progress on stability on VCS. I continue to think the best thing we can do on the VCs program is meet our commitments on the block for contract, get those ships and modules out and then transition into Block V where we have more where we have more opportunity. So with that Tom the EACs.

Gautam Khanna :

Great.

George Shapiro :

Yes, Tom. If you just look at the free cash flow implied in the fourth quarter, the midpoint's around $360 million. Of the milestones that you have listed for Ingalls in Newport for the fourth quarter, what are the key ones that would contribute to that?

George Shapiro :

Okay, thanks very much.

Operator:

Our next question is from the line of Ron Epstein from Bank of America. Ron, your line is now open. Please go ahead.

Chris Kastner:

Good morning.

Chris Kastner:

Yeah, so DDG-51, excellent job by the Ingalls team competing for that. It was competitive. There's a standard competitive environment between the two shipyards, both of which are very, very capable shipyards. Getting awarded six is very positive, just shows the demonstrated proficiency of that Ingalls team on executing. Obvious we've delivered DDG-125 already. And we're proceeding on the next three destroyers. So really, really a positive indicator. What it does is provide a lot of stability for Ingalls moving forward. That should fix ship by combined with LPDs and support for LPD 33 and potential bundle arrangements for LPDs and LHA moving forward provides a lot of stability for Ingalls. And it's very positive.

Tom Stiehle :

No, we didn't take a gain in the quarter right now. So we become a higher owner of the joint venture, still a minority owner, but a higher owner of it. So as proceeds are released, it's consolidated. How that's recorded as gains happen in the future, they'll be higher than what we've had in the past. So I expect that to play out over the next couple of years.

Tom Stiehle :

No.

Chris Kastner:

Yeah, workforce is definitely evolving. Ron, thanks for that question. As I said previously, hiring is better, right. The applicant rate is better, but retention is still a challenge. And what we're finding is the days of hiring someone, training them and sending them down to the deck plate are really over. We need to ensure that the new hires that don't come through our established programs, because the apprentice school, community colleges, the high school programs are still very successful, when it comes to retention. But the walk-ins, we need to make sure that we shepherd them through the process of the next, 12 to 18 months of their employment, to make them understand that this is a good career, and there's opportunity for growth and stability. So that's really the fundamental change is the walk in applicants are just not the same as they used to be. So that's what both Ingalls and Newport, Newport News are working on.

Chris Kastner:

Sure.

Noah Poponak:

Hey, good morning, everyone.

Tom Stiehle :

So, at 645, that's a record quarter that they've had followed, 624, which was the previous record quarter. Feel comfortable with right now. I think 645 is a balance between -- there's new awards that happened -- occur and then get delivery orders funded and awarded for that, get heads in here. I do think there could be some upside here. So we'll see how that plays out. We look at a Mission Technologies, they grew 4%. Last year each of the six business units grew. We see quarter-over-quarter, it's 7.5% sequentially, grew over 5% right now. So I think north of 5% is the right way to kind of take a look at that. We'll see how that plays out. They on a good string right now of awards. And they're working hard to kind of fill the seats, funded seats that they have. So it's going to be a function of awards and labor as we go forward. But I'm feeling good about the pipeline I have there. Although the book to bill is low right now. I think that's going to come on in the back half of the year. We'll see that pop up on. There's still a plethora of awards for Q3 and Q4 that we're keeping a close eye on here right now. I think that business is starting to really play out and justify the acquisition of alliances, as we see a sales ramp that's happening.

Noah Poponak:

Okay, appreciate that. And Tom, the 7.7% to 8% for the full year shipbuilding margin, it's a relatively tight range. But if I keep it flat sequentially in the third quarter, to get to the low end of the full year, the fourth quarter would need to be close to 9% and to get to the high end, it would need to be close to 10.5%. Can you speak to where in that range, do you see I know the milestones need to occur and every milestone is different. But where in that range, do you more likely see the 4Q shipbuilding margin falling?

Noah Poponak:

Got it? And then just one other item, back to that attrition question, Chris, has the rate of attrition slowed through the year? I know that's another kind of specific question, but it seems like a pretty important element into your total labor equation.

Noah Poponak:

Okay, thanks, guys. Appreciate it.

Operator:

Our next question is from the line of Pete Skibitski of Alembic Global. Pete, your line is now open.

Chris Kastner:

Yeah, so we will absolutely have a role in it. There's a lot of planning going on within the Navy and Newport News on integration of RCA, OHS, and retirements. We obviously did the enterprise, uniquely qualified to do it. And so it's really kind of an advance planning, actually, because it's kind of a dance between the RCA OHS and then finishing the ships and doing the DND. So absolutely. It doesn't change my perspective about the long term growth rate of the business. It's integrated into the forecasting. And Newport News will probably do that work.

Chris Kastner:

I hate to give you a specific time, but it's integrated over the next, 10 to 15 years, to 20 years, actually.

Chris Kastner:

It's all in the mix. It's all in the mix, Pete, when you think about their plan, and how we forecast the long term growth rate of the business.

Operator:

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

Operator:

That concludes today's conference call. You may now disconnect your line.

Christie Thomas :

Thank you, operator, and good morning, everyone. Welcome to the HII First Quarter 2023 Earnings Conference Call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical facts are considered our company's estimates or expectations and are forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Tom Stiehle:

Thanks, Chris, and good morning. Today, I'll briefly review our first quarter results. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on Slide 5 of the presentation. Our first quarter revenues of $2.7 billion increased approximately 4% compared to the same period last year and represents a record first quarter result for HII. This increased revenue was attributable to growth at Newport News Shipbuilding and Mission Technologies. Operating income for the quarter of $141 million increased by $3 million or 2% from the first quarter of 2022, and operating margin of 5.3% was essentially flat from the prior year period. The increase in operating income was primarily due to a more favorable operating FAS/CAS adjustment and more favorable noncurrent state income taxes compared to the prior year period, largely offset by lower segment operating income. Net earnings in the quarter were $129 million compared to $140 million in the first quarter of 2022. Diluted earnings per share in the quarter was $3.23 compared to $3.50 in the first quarter of the previous year. Moving on to Slide 6. Ingalls revenues of $577 million in the quarter decreased $54 million or 8.6% from the same period last year driven primarily by lower revenues on the LPD, LHA and NSC programs, partially offset by higher DDG program revenues. Ingalls operating income of $55 million and operating margin of 9.5% in the quarter declined from last year primarily due to lower-risk retirement on the LPD and LHA programs. It is important to remember that the first quarter of 2022 included a very clean delivery of Fort Lauderdale, LPD 28, which provided significant risk retirement at that time. At Newport News, revenues of $1.5 billion increased by $116 million or 8.3% from the same period last year due to growth in both aircraft carrier and submarine revenues, partially offset by lower support services revenues. Newport News operating income in the first quarter of 2023 was $84 million, an increase of $3 million or 3.7% compared to the first quarter of 2022. Segment operating margin of 5.6% was down slightly from last year primarily due to unfavorable risk retirement on enterprise CVN 80. Shipbuilding operating margin in the first quarter was 6.7%, slightly below the 7% outlook we previously provided for the quarter. Our outlook for the full year is unchanged. As we have noted previously, our expected milestones for 2023 are concentrated in the second half of the year, which will drive our performance for 2023. At Mission Technologies, revenues of $624 million increased $34 million or 5.8% compared to the first quarter of 2022 primarily driven by higher volumes in mission-based solutions, which includes our C5ISR, cyber and electronic warfare and live, virtual and constructive training businesses as well as growth in fleet sustainment. Mission Technologies operating income of $17 million compares to an operating income of $9 million in the first quarter of last year. Current results include approximately $27 million of amortization of purchased intangibles compared to $30 million in the first quarter of last year. Mission Technologies EBITDA margin in the first quarter was 8% compared to 7.3% for the same period last year. During the first quarter, Mission Technologies did record a provision for a contract loss relating to a manufacturing issue that was not material to our financial results as a whole. Turning to Slide 7. Cash used by operations was $9 million in the quarter, and net expenditures were $40 million or 1.5% of revenues, resulting in free cash flow of negative $49 million. This compares positively to cash used by operations of $83 million, net capital expenditures of $43 million or 1.7% of revenues and free cash flow of negative $126 million in the first quarter of 2022. Cash contributions to our pension and other postretirement benefit plans were $10 million in the quarter. During the first quarter, we paid dividends of $1.24 per share or $49 million. We also repurchased approximately 39,000 shares during the quarter at an aggregate cost of approximately $9 million. Moving on to Slide 8. Our free cash flow outlook through 2024 remains unchanged as do our capital allocation priorities. I'll highlight that we will continue to expect to distribute substantially all free cash flow to shareholders through 2024 after planned debt repayment, which is on track. Turning to Slide 9. We are reaffirming our 2023 guidance and providing some color on how we see the second quarter shaping up. Before discussing our second quarter outlook, I want to make clear that we are reaffirming our guidance for the full year with the knowledge that once the PSA modification is completed, the remaining CVN 79 milestones will be updated, including moving the delivery to 2025. We believe we'll be able to reach an agreement that is neutral from a margin and cash perspective to both 2023 and 2024, and our outlook reflects this. Regarding the second quarter, we expect shipbuilding revenue to be largely consistent with first quarter results and shipbuilding operating margin to be approximately 7%. That does imply meaningful improvement in the second half of the year, which is consistent with when we expect our shipbuilding milestones to occur. For Mission Technologies, we expect second quarter revenue of approximately $600 million and operating margin of 2.5%. We expect the second quarter free cash flow to be approximately negative $150 million. Again, there is no change to our expectation for the year. Our cash generation will fall predominantly in the third and fourth quarters, consistent with both our forecasted milestones and our normal cash cadence over the calendar year. To summarize, the first quarter results were largely in line with the expectations we provided on our fourth quarter call. We are pleased to reaffirm our full year guidance, and we remain focused on execution and hitting the milestones and commitments that we've laid out. With that, I will turn the call back over to Chris for some final remarks before we take your questions.

Christie Thomas :

Thanks, Chris. [Operator Instructions] Operator, I will turn it over to you to manage the Q&A.

Doug Harned :

I'm interested, when you look at Newport News right now, and you appear to be getting some good growth there. Can you give us a sense of the breakdown of where growth is coming from? And I would say across Columbia-class, Virginia-class, the CVN programs. What really getting at here is, as Columbia-class starts to ramp, can we expect growth there to move above that kind of 3% to 3.5% trajectory that you've been on?

Tom Stiehle:

Sure, Doug. And I'll hop in. It's Tom here. So yes, we did have some good growth in Q1 there. It was up [$160] million. It was driven by carrier construction, [80 79 81], Columbia-class and the VCS program, partially offset by some fleet support that is just slightly underneath. But as Chris says, I think we feel comfortable about that. We have the capacity and the capability to kind of run that. I think long term, though, it's still kind of governed by labor and program plans that we have in the yard here. So I think 3% is the right way to take a look at it on a long-term basis.

Tom Stiehle:

Yes. So I'll take the CVN 80 first. Just backing up a little bit on color on margin and profitability that we thought we'd be at 7% for the quarter on shipbuilding. We came at 6.7%, and the majority of just that truck full there was about the enterprise step-back that we took. Now we find ourselves, as I noted in my remarks, the front on CVN 80 that we find ourselves from a time capacity and throughput needing to offload and/or outsource unit work and panel work right now. So as we're working ourselves to that, it's early in that project as we ramp that up. And we wanted to make sure that we increase the outsourcing risk protection, and we booked that conservatively. There's still many years to go on that ship, and it's just embarking on some additional out work on that. I would tell you that since the keeling last summer, that ship is coming tremendously along. It's in the dry dock right now. It's growing a lot of steel at it. The shape of the ship is directing, and I'm really proud of what the team is doing with that. But again, we just thought it would be prudent to take a balanced approach as we embark on getting some additional workout cost.

Operator:

Excuse me, ladies and gentlemen. We have lost connection with the speaker line. Please remain on hold as we reconnect them. Excuse me, ladies and gentlemen, thank you for your patience. We have the speakers back on the line. Please proceed.

Doug Harned :

Yes, I’m still on. Yes.

Doug Harned :

You were walking through transitions who full unblocked by in milestones schedule. So that’s where you were at that. I think you broke off in the middle of that.

Doug Harned :

No. No problem.

Rob Spingarn :

Sticking with Newport News, if resources need to be diverted from Virginia to Columbia to keep that on track and given the priority there, are there any conversations with the customer to mitigate any potential economic losses to you or the industrial base -- the submarine industrial base given that Virginia is fixed cost?

Operator:

The next question comes from the line of Seth Seifman with JP Morgan.

Tom Stiehle:

Sure. I appreciate the question there. Yes. So we did say in Q4 that the milestones were on the back half of the year, which we foreshadowed 7% for Q1. And now you can see the outlook for Q2 is going to be that way, too. So it does -- you do the math against the 7%, 7% to 8% and the back half of the year is going to be in the upper 8s on that, and we feel comfortable with that. You are right that the milestones are on the back half of the year there. I would tell you also that what's in the mix there, there's other things on top of the milestones, although they are the major reason that we have the changes in EACs and affect profitability. There's other areas, too, in there, whether it's our performance or capital incentives, either on contract or that we anticipate. We either have those factors or they're in potential. There's risks and opportunities, so we can materialize more opportunities and risk that we realize. So that plays out every quarter that we do at EACs. We also do -- we have our contracts, especially RCOHs, that pop in here and both for the condition and the statement of work that could be fluid over the 2.5 to 3 years that those ships are here. This change, there's condition, it's cost to contracts. So there's change proposals that are in flux right there. We've talked a little bit about on several calls of unadjudicated change. And what you'll see -- what we see here is that the cost is already into the EACs. We conservatively book the recovery on those things. And as that plays out, there's a natural recovery of those true-ups to the contract performance. So there's elements of that that's happening behind the scenes as well as just the milestones. So that gives you some context for 2023. For 2024, there are still more milestones than usual. We have 3 deliveries and 3 launches. We're holding everything on the page that we gave you a quarter ago with the caveat on CVN 79. But there'll be a natural lift as we work ourselves through. We've talked about in the past Block IV and Block V volumes. So that will sit closer to the deliveries of the large ships that we have here. And then as we proceed forward with new contracts that will roll in both the performance and inflationary impacts that we've seen, and that will give us new targets. And then lastly, I'd add that as quarters and years go by here, obviously, the inflection point will hit from the production and learning. As we get this workforce up to speed, the more experienced, successive bills on follow-on shifts, there's a natural lift in profitability on that front as well.

Tom Stiehle:

I just want to caveat that a little bit. We anticipated to be neutral. It's a benefit both of us and the customer to have that ship be more capable, have more functionality in it, and it will be to the latest configuration. And as we work ourselves through the negotiations on that contract, takes one more statement to work. We'll get scheduled, we'll adjust the targets, we'll situate that. Although we won't get the liquidation and the retention release next year, we'll have more statement of work and cost and cash that's running through the books. And it's our -- we anticipate that, that will be margin- and cash-neutral for the next few years through the delivery of that ship.

Operator:

The next question comes from the line of Myles Walton with Wolfe Research.

Chris Kastner:

It's definitely in the mix. It's a Q4 trials and delivery. A lot of volume work to go on that ship. They're making really good progress, let off the engines really last week when we were down there. So I'm optimistic that team will start to continue to hit cadence the LPD program that we're very proud of and confident that LPD 29 will get done this year, contingent upon, of course, that labor stays stable and we continue to make progress. But a lot of confidence in that Ingalls team.

Chris Kastner:

It is. Yes, Myles, it is. So attrition has been positive as well. And it is showing up in the right disciplines. You always having shipbuilding moments in time where you may need welders or rigors or electricians. You might be out of balance a bit. But that's kind of the art of managing labor and shipbuilding. So it's a positive start to the year. It's taken a lot of effort, a lot of effort, and we need to stay on it. Team is very focused on it, but it is positive thus far.

Tom Stiehle:

Yes. Appreciate the question there, Myles. Yes, it is the same issue that we had last time. You'll note when you get the Q that the disclosure has improved from a top range to now we've taken a charge. And no, I wouldn't disclose the customer or the charge itself. It's not material to our financials. So you won't see them in the come correct, all right? So yes.

David Strauss :

Chris, you mentioned in your prepared remarks that there was no amphib funding in fiscal '24. If you could just kind of update us on the status there. I mean we seem like there are always these ongoing reviews, and then Congress adds money back. Just kind of where things stand there?

David Strauss :

Okay. And Block IV versus Block V, can you give us an idea of how much of Virginia-class revenue at this point is Block fo versus Block V and how that transitions over the next year in terms of -- I mean, Tom, your point is some potential margin lift as we progress there, Some sort of baseline where we are today and what that looks like?

Operator:

The next question comes from the line of Gautam Khanna with Cowen.

Operator:

Yes, I still hear you. I don't have Gautam.

Operator:

The next question comes from the line of Pete Skibitski with Alembic Global.

Chris Kastner:

Yes. I don't want to give commentary on '25 margins at this point. We're comfortable with our guidance for this year. I'm comfortable that the way we have the ships delivering and the stability of the milestones that we look for improvement next year. The teams are working on the fundamentals every day within both shipbuilding organizations coming through COVID and the labor challenges, but there are still significant labor challenges we're working through. So I don't want to predict when we'll recover to 9%. I still believe it is a 9%, 9%-plus business. We just need to continue to focus on the fundamentals and execute.

Pete Skibitski :

Okay. Appreciate it. And last one for me, guys, I remember a while back, one of the next big contractual things you were looking to accomplish was getting the fifth [4-class] carrier under contract. And I think you wanted to do that in the midterm, nothing near term. But is that now in the budget? And there was talk maybe even doing another 2-carrier bundle. Are those things still in play in terms of where the budget shook out?

Tom Stiehle:

A comment on the strategy front there, we're looking -- we think it's mix financial and program sense to buy 2 carriers at a time with 3 years of AP on 4-year centers, right? And that's what we're focused on. From a time frame, that would be -- we would be looking for a construction turn on in 2028 and then optimistically, AP in 2025, if not 2026. But that's the playbook we used last time. It's buying power for our customer, it's efficiency for the yard here. We get to buy 2 sets of -- when we materially in the buying efficiency from that. So that's what we're working closely with our customer on.

George Shapiro :

I wanted to ask, General Dynamics on their call commented that they were having supply chain issues in Virginia. I think it was more Block V than IV, and they took a charge for that. And I guess you're not experiencing that. There's different suppliers. Or if you could just explain maybe.

George Shapiro :

So you're not seeing the same supply -- you're not seeing supply chain issues? Is that it?

Tom Stiehle:

Right. And I'd add the cost and projected future costs have been incorporated into our EACs. We've updated the milestone schedule here, George. You've seen that we have walked those over the last couple of years when COVID started, and there has been some charges at Newport News that you know about. So as Chris said, I'll reiterate that every 13 weeks, we take a look at the axles today. The ETC expected the forecasts, the material indices, how costs going to come in. And we are comfortable with how we're booked and -- both in the milestone chart that we give you from a scheduling perspective and obviously, what's put into the financial reports or from an EAC perspective.

Tom Stiehle:

Yes, sir. So the gross favorable was 64 up. The gross unfavorable was 55 down. The net favorable obviously, was $9 million, you know what the math of that is. And that's made up of actually -- you'll see now in the Q, there's a revised disclosure that has that information. Ingalls is 14 up of the 9. MT is 4 up that now it's 18 up, and then the Newport News is cumulatively down $9 million. And really, that $9 million is the preponderance of a 7% shipbuilding versus 6, 7, and we had that discussion early on the outsourcing of CVN 80.

Tom Stiehle:

Yes. So for the free cash flow, there's a rhythm in a cycle that we have. We usually cash users at the beginning of the year. We saw that in Q1. We had guided a minus $200 million to $300 million. We actually came in at minus 49. So we just had some better timing and collections in Q1. That's just probably pull ahead from Q1 to Q2. We're guiding a minus 150 for the back for Q2 now, the combined Q1 actual and the Q2 forecast. So we're still right on plan on where we thought we would be. And I think when I look where The Street perspective, if we add up both in the Q1 and Q2 expectation, we're slightly ahead of that, which is good. For the free cash flow kind of going forward here, you can look at it like 1 of 2 ways. We've talked about the top line revenue expansion. We haven't had a question on it here, but you heard in the remarks, almost 4%, 3.8% growth. Mission Technologies grew 5.8% this quarter and 3 -- in Q1. Year-over-year, it grew 3.5% from last quarter. And like Q4, every one of anti-Green Mission Technologies business unit expanded their top line. So that's a good sign right there. I really like what we're seeing. But I think that bolsters well. We had talked about long-term shipbuilding growth at 3%. It was 3.1% this quarter. We talked about long-term growth in Mission Technologies to be 5%, and it was 5.8%. The weighted mix should be 3.5%. But as we said, we came in at 3.8% this quarter. So the cases there and the numbers are playing out. From a Mission Technologies perspective, I would just leave you with they're in the year, they finished -- they're coming up on year 2 now this August. The restructures behind them, the leadership's chosen, the business units understanding. They've integrated operations, systems, processes. And I really think the team now has full-time focus and support on their objective of go win a lot of work and execute the contract. So I feel really good about that top line growth. Margin expansion, I know we've talked about it. There's an expectation that 8% to 10% that Mission Technologies would move that up. We had guided that, and that thesis is still in place to get from the low 8s to the higher end of the range of 8% to 10%. And we saw the EBITDA margins in pretty good shape, 8.2% last year. When we normalize out the booking for a joint venture sale that we have there, it was 8.6%. And this quarter, it's 8%. It's early in the year. So I think both the expansion of the top line and the bottom line is real, is in front of us. Managing our CapEx, we've guided to 3% here. So we've come off a high of almost 5% and upper 4s over the last 4 or 5 years, and that adds to the bottom line. We get through the adjustments for COVID, both the FICA and the COVID payments back. I think there's a natural lift that you'll see. Macro perspective, you can just take a look at that from a shipyard perspective, we were generating in the 4.75 to 5.50 just between the 2 yards. And then when you throw another $2.5 billion business with Mission Technologies that's growing annually, 8% to 9% EBITDA to take the midpoint at 9%, the math easily generates through taxes in the vicinity of about $200 million for Mission Technologies. So 500 to 700. So I'm comfortable that we'll get there. We've talked about the step up from '23 to '24 specifically will happen as we get into the cadence of production across both yards. And what we'll find is that working capital will come down a little bit. That will be the initial lift to get '23 up to '24. But then with the growth and the expansion of margin, we see us being $700 million plus -- $700 million to $700 million plus going forward in the out-years.

Gautam Khanna :

Can you hear me guys?

Gautam Khanna :

Terrific. I wanted to ask what your best guess as to why in the fit-up. A number of the delivery dates on Ingalls ships have moved to the right. And just relative to the last time they published those delivery dates, and they gave reasons for it. But do you broadly agree with those revised delivery dates expressed in the fit-up?

Tom Stiehle:

Yes. I'll just -- I'll come behind that, too. That comes out every year, and we take a look at it and we might analyze it. I will tell you at times, you'll see ships and boats move. And at other times, they don't move. And sometimes they stick on a contract date for years, and then they move aggressively. I can tell you, from our perspective, we have -- we're aligned programmatically and -- with our customers on the status of the programs. We're aligned from both the milestones and schedules that we run our yards to, our master construction schedules that go into the milestones that we see to The Street. And then from an EAC perspective, to make sure we have the duration of the programs understood and priced in EACs. So I would not be overly concerned. At times, it's just risks and opportunities, when is the ship available, when is the crew available, when is the test sequencing to get the ships and boats out of here. So a lot goes into that. I wouldn't dismiss them. They're important, but our information is updated and evaluated every 13 weeks here. And I can tell you that the schedules and EACs are aligned to the current performance of both yards.

Chris Kastner:

Yes. So obviously, that was a significant adjustment we made with Block IV. But we, from time to time, have adjustments and we've had adjustments on the Block IV program between then and now. They just haven't been material enough to mention. We're very -- as you know, we have a disciplined process around our EACs. And if we have to make adjustments, we do. So you've kind of got it right on there. We had a significant adjustment. We've made smaller, less material adjustments between now and then, and we're very comfortable with where we are right now.

Noah Poponak :

I guess, at this point, should we expect the shipbuilding margin to be up or down in 2024?

Tom Stiehle:

I'll reiterate that, too. We've told you where we want to take it to. We haven't told you when because of the environment that we operate under 3 variants of the COVID virus, inflation, unforeseen inflation from a couple of years ago and then the tightness of the labor market going back 2 years and as we work ourselves through the back end of that right now. It just creates headwinds into the market. We tried to be as transparent with you as possible. We set our objectives and share our forecasts, and we have plans behind them to kind of make them, and then we got to fight through. And if new risks pop up, we got to find other opportunities. But clearly, we anticipate to incrementally expand our margin performance kind of going forward.

Chris Kastner:

Yes. So -- as Tom mentioned in his remarks, we need to keep that financially neutral. And so as we come through that Class 1 change, that's the objective. So the team is working on ensuring that on an annual basis or an annualized basis, we keep cash and margin kind of in a neutral place and risk in a neutral place from where we were today.

Tom Stiehle:

Yes. I think that's just being conservative on where we are in timing. We'll see how that plays out. The quick turn quarters, especially in that business where the contract duration is shorter, a potential for recompetes and wins and when programs top online and things of that nature. So I think it's just us being more conservative. At our position for Q1, the run rate that's 24.96, we guided 2.5 for the year. So I'm feeling good about that. It's the largest quarter by far that MT has had with a line on it, and the 5.8% growth is fantastic. And then each of the business units growing is a great sign, too. And that's 2 quarters in a row of that happening. So I think there's some really good positive signs there. We don't want to overcommit, and that business is highly competitive. There's a lot of proposal working there, plus $60 billion of proposals. So half of that's qualified, a lot of moving pieces on when things either get awarded or delayed or extended or option year exercised. So we're just being conservative on how that plays out. I do think as we -- as I mentioned about restructuring in the rear-view mirror and the team even more focused and experience working together over there, the additions of the Chief Technology Officer that we have here, Eric Tuning, has been from executive S&D, all those will help mature that portfolio over there. So I do anticipate that although it's highly -- the portfolio has a lot of cost-type contracts in it, I think we'll see as we move push for more products and services, more technology than just the service side, and that will have a natural lift to and the profitability in there. So the guide we gave you was 8% to 10% EBITDA when we purchased the line, and that construct still holds here and expectation that we'll grow that up over the next couple of years.

Operator:

The next question comes from the line of Scott Deuschle with Credit Suisse.

Tom Stiehle:

So that's a very specific question. I would tell you that each quarter, once we come through our DAC analysis, we evaluate performance, existing costs, we update our projections going forward, value material labor cost, schedule and overheads, all that goes into the construct of coming up with the booking rate. And then from there, we update our sets of opportunities and risks against that forecast. And from there, we'll make a determination of what the forecast is for ourselves and out to The Street here. So I would tell you that there's always the potential to either exceed the forecast or underrun it. Specifically, we think we book the risk on the CVN 80 outsourcing project accordingly. So I would not anticipate that to to continue to bleed. If anything, I'd like to see us do better than what we have in the plan right now from a risk mitigation standpoint. But I think the guidance still holds that I gave you between 7%, 7% and 8%. The back half will be better, and we'll just watch that play out.

Chris Kastner:

Yes. That's a really good question. And -- so when you're putting in your plan, you're projecting what your workload is going to be and what your labor is going to be. And it just made good sense to, over the last year or so, put together outsourcing plans. And the risk showed up when we finally rationalized and realized the cost estimate for that outsourcing. We needed to incorporate it into our EACs. So it's all in the mix together, and it's all related. Still positive on the labor front, but we still needed to do that outsourcing on 80.

Chris Kastner:

Sure. I can start and then potentially, Tom here. But remember, we do have EPA protection pretty at Ingalls and some EPA protection at Newport News. And we do have long-term labor agreements in place both at Newport News and Ingalls. So that mitigates it to some extent.

Operator:

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

Tom Stiehle:

Thank you.

Christie Thomas:

Thank you, Operator, and good morning, everyone. Welcome to the HII fourth quarter 2022 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical facts are considered our company’s estimates or expectations and are forward-looking statements made pursuant to the Safe Harbor provision of federal securities law. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Tom Stiehle:

Thanks, Chris, and good morning. Today, I will 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 consolidated fourth quarter results on slide five 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 year-over-year revenue at all three segments, leading to record quarterly revenue for HII. Operating income for the quarter of $105 million decreased by $15 million or 12.5% from the fourth quarter of 2021 and operating margin of 3.7%, compared to margin of 4.5% in the prior year period. The decrease 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 six, 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 Alion 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 FAS/CAS 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 NSC program revenues. Ingalls’ 2022 operating income of $292 million and margin of 11.4%, both improved from $281 million 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 DDG 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 a lower revenue in naval nuclear support services. Increased aircraft carrier revenues were driven by higher volumes on the refueling and complex overhaul of the USS John C. Stennis CVN 74 and the construction of Doris Miller CVN 81 and Enterprise CVN 80, 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 was due to higher volumes on the Columbia-class and Block V boats on the Virginia-class, partially offset by lower volumes on the Virginia-class Block IV 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 CVN 73 compared to 2021. 2022 Shipbuilding margin of 7.7% was consistent with the performance of 2021, but below our expectations for year-over-year improvement, as the back half of the year provided limited risk retirement opportunities. Continued labor challenges, including high 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 Alion 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 Alion in 2021, as well as higher equity income from a joint venture, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition. 2022 results included approximately $96 million of amortization of Alion-related purchased intangibles compared to approximately $33 million in 2021. I will also note that the fourth quarter and 2022 results included a non-cash downward valuation adjustment of approximately $10 million or approximately $0.20 per share related to an equity method investment. Mission Technologies’ EBITDA margin in 2022 was 8.2% and adjusting out the onetime downward valuation adjustment, EBITDA margin was 8.6%, consistent with 2021 performance. Turning to capital deployment on slide eight. We ended 2022 with a cash balance of $467 million and liquidity of approximately $2 billion. 2022 cash from operations was $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 expectation for 2023 free cash flow, which I will discuss in more detail in a moment. I am 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 postretirement benefit plans totaled $41 million in 2022. During the fourth quarter, we paid dividends of $1.24 per share or $50 million bringing total dividends paid for the year to $192 million. Over the course of 2022, we repurchased approximately 245,000 shares at an aggregate cost of approximately $52 million. Moving on to slide nine 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% or about as expected compared to our update in the third quarter. Expectations for 2024 through 2026 have been updated and consistent with the Q3 update, the FAS benefit has come down considerably from our last update given the more immediate recognition of the negative asset returns experienced 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 current environment, particularly the labor challenges we have discussed. For 2023, we expect Shipbuilding operating margin between 7.7% and 8%, as we continue to target incremental margin improvement, but acknowledge the current challenges have tempered the pace of that progress. For Mission Technologies, we expect 2023 revenue of approximately $2.5 billion, organic growth of approximately 5% year-over-year. We expect operating margins of between 2.5% and 3% and EBITDA margins of between 8% and 8.5%. In 2023, amortization of purchased intangible 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 seasonality in Mission 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 impact from inflation continue to abate, and most importantly, that we are able to continue to hire and retain employees at a pace that supports our staffing plan. 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 update -- updated view on our free cash flow expectations through 2024, consistent with how we presented this data in the third quarter, this outlook assumes 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, there would be an opportunity of approximately $215 million in total over the cost of 2023 and 2024. As I noted earlier, we significantly outperformed our 2022 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 million to $300 million. Our free cash flow expectation for 2024 remains unchanged, as it will not be burdened by COVID-19 repayment, will benefit from continued topline growth, and margin expansion potential as compared to 2022. Additionally, we expect to see 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 about the $400 million bond this year and the remainder of our Alion acquisition term loan in 2024, and our commitment to return substantially all free cash flow after planned debt repayment to shareholders through 2024. To close my remarks, it was no doubt a challenging year, but I am proud of the entire HII team 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 at Mission Technologies. Across the enterprise, we made meaningful progress in 2022, which resulted in growth across all segments and free cash flow results that were well ahead of our projections. We entered 2023 intent on driving execution and are 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.

Christie Thomas:

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 queue as possible. Operator, I will turn it over to you to manage the Q&A.

Myles Walton:

Thanks. Good morning.

Myles Walton:

The first one, maybe at a high level, is this still a 9% plus Shipbuilding margin business?

Myles Walton:

Okay. And then, Chris or Tom, I don’t know, in terms of the plug for capital deployment for share repurchase, I guess, it’s $250 million to $300 million in 2023, 2024 is what you plan to do. Do you have any sights on doing that a little bit earlier or do you have to wait until 2024 as big cash flow come through to have confidence to execute against it?

Myles Walton:

And then just one clarification, what is non-programmatic inflation?

Tom Stiehle:

And we have seen tight marketing expense [ph].

Tom Stiehle:

Yeah. Sure. So it’s overhead tight expenses for us.

Operator:

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

Chris Kastner:

Good morning, Rob.

Robert Spingarn:

Chris, you talked a lot about the labor constraint and I wanted to see if you could give us some granularity as to how that number splits between the two shipyards and Mission Technologies. One thing I have noted is if we look at your job postings, it seems like Newport News has 10x the openings of Ingalls and does that factor into the margins there?

Robert Spingarn:

Okay. And then just as a follow-up to that, could there be upside to the 3% topline growth if Congress appropriated more funds to expand shipyard capacity and the fund training and apprenticeship programs?

Robert Spingarn:

Yeah. I guess I am asking you is can they help you attract labor faster and train labor faster. The benefit to get the ship...

Robert Spingarn:

Okay. Thanks, Chris.

Operator:

Thank you. Our next question comes from Scott Deuschle from Credit Suisse. Please go ahead. Your line is now open.

Chris Kastner:

Good morning, Scott.

Tom Stiehle:

Yeah. So we don’t provide the actual margin booking rates to step up, so step backs on any individual program. I would tell you -- to give you some color on that, on the adjustments, there was nothing significant either are up or down on any individual program. So the answer to your question is no on that. I would tell you that the effect that you are seeing at Newport News there is, although it’s net down as far as the adjustments it has, it was really a function of not having the upside that we would normally see. So if you kind of range bound to what we saw on the downside of EAC adjustments, because the timing on the milestones and just where they saw a little bit of a draw short on labor, a little bit of pressure on overhead costs, overhead absorption is a little bit higher on all the programs there and CVN 79 is not immune to that effect as well. But it was not significant enough as you see it’s not called out in the K.

Scott Deuschle:

Okay.

Scott Deuschle:

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 and then just curious on how attrition trended in Q4 sequentially relative to Q3? Thank you.

Scott Deuschle:

Thanks, guys. Appreciate it.

Tom Stiehle:

Thanks, Scott.