Huntington Ingalls Industries (NYSE:HII) has reported a significant increase in its second-quarter revenue for 2024, achieving a record $3 billion, marking a 6.8% increase over the previous year. The company's diluted earnings per share also rose to $4.38, up from $3.27 in the same quarter of 2023. New contract awards for the quarter stood at $3.1 billion, contributing to a robust backlog of contracts worth $48.5 billion, with $27 billion funded. The earnings call highlighted the company's solid performance, particularly in its Mission Technologies division, and provided insights into its financial guidance and operational updates.
Key Takeaways
- HII's Q2 revenue reached a record $3 billion, a 6.8% increase from the previous year.
- Diluted earnings per share were $4.38, up from $3.27 in Q2 2023.
- New contracts amounted to $3.1 billion, with a backlog of $48.5 billion.
- Mission Technologies recorded a 19% increase in sales, with $765 million in revenue.
- Two ships were delivered during the quarter, and significant contract negotiations are ongoing.
- HII reaffirmed its shipbuilding margin outlook and raised Mission Technologies revenue guidance.
Company Outlook
- Shipbuilding revenue is expected to be around $2.2 billion for Q3, with a margin of 7.8%.
- Mission Technologies revenue forecast for Q3 is approximately $650 million with a 2.5% operating margin.
- Interest expense updated to $95 million based on cash flow forecast.
- Free cash flow outlook maintained at $600 million to $700 million for 2024.
- Strong cash collections anticipated in Q4, with near-zero free cash flow in Q3.
Bearish Highlights
- Ingalls margin dip due to lower risk retirement on service companies and impact of milestone costs.
- Labor productivity in shipyards has not yet returned to pre-pandemic levels.
Bullish Highlights
- Mission Technologies division expected to surpass a 5% growth rate.
- No material changes in profitability for the Virginia class or carriers.
- Positive outlook on the Alion acquisition and the $200 million cash generated by Mission Technologies.
Misses
- The company did not participate in the $2.4 billion Deloitte Navy contract.
Q&A highlights
- No significant changes in delivery requirements for the Virginia class; progress made on new electric generators.
- Company optimistic about the growth rate, expecting 12.7% from 2022 to 2023.
- CapEx guide for the year is 53%, with a 5% CapEx expected over the next three years.
During the earnings call, HII executives discussed various aspects of the company's performance and future prospects. Notably, the company has seen good growth in the years 2021 and 2022 at 4% and expects a growth rate of 12.7% from 2022 to 2023. The first and second quarters have recorded growth rates of 20% and 18%, respectively. HII is optimistic about the Alion acquisition's contribution and the $200 million cash generated by its Mission Technologies division. The company has a growing pipeline of contracts and is confident in its portfolio. For the third quarter, HII expects Mission Technologies revenue to be around $650 million, acknowledging that there is still work to be done and minor awards that could impact revenue. The company's capital expenditure (CapEx) guide for the year is 53%, with a 5% CapEx expected over the next three years. HII concluded the call by thanking its team and inviting participants to the next earnings call.
InvestingPro Insights
Huntington Ingalls Industries (HII) has displayed a robust financial performance in Q2 2024, as indicated by the reported increase in revenue and earnings per share. To further contextualize these results, let's consider some key metrics and insights from InvestingPro.
InvestingPro Data reveals that HII's market capitalization stands at $10.48 billion, reflecting the company's substantial size and market presence. The Price-to-Earnings (P/E) ratio is currently at 15.01, which suggests that the stock might be trading at a reasonable valuation in relation to its earnings. Moreover, the PEG ratio, which measures the P/E ratio adjusted for earnings growth, is at a low 0.63, indicating potential for future earnings growth that may not be fully reflected in the current stock price.
The company's revenue for the last twelve months as of Q1 2024 is $11.59 billion, with a growth rate of 7.53%, aligning with the positive trends mentioned in the article. The gross profit margin for the same period is 14.42%, which, while solid, points to the InvestingPro Tip that HII suffers from weak gross profit margins relative to some industry peers.
InvestingPro Tips further enhance our understanding of HII's financial health and investment potential. The company has a perfect Piotroski Score of 9, indicating high financial strength, and it has raised its dividend for 12 consecutive years, showcasing a commitment to returning value to shareholders. This consistent dividend growth is complemented by the fact that HII has maintained dividend payments for 13 consecutive years.
For readers interested in deeper analysis or additional metrics, there are more InvestingPro Tips available for HII, which can be explored further at https://www.investing.com/pro/HII. These tips include insights into stock price volatility, debt levels, and profitability predictions, which could be crucial for investors making informed decisions.
In summary, the InvestingPro Insights suggest that Huntington Ingalls Industries is not only performing well in terms of revenue and earnings growth but also presents several characteristics that could be attractive to long-term investors, such as a strong dividend history and a potential undervaluation based on near-term earnings growth.
Full transcript - Huntington Ingalls Industries Inc (HII) Q2 2024:
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2024 HII Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to the Vice President of Investor Relations, Christie Thomas. Ms. Thomas, you may begin.
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?
Chris Kastner: Thanks, Christie and good morning everyone. The HII team remains focused on executing on our programs and meeting our commitments to our customers. In the second quarter, our shipbuilding division delivered two ships, and our Mission Technologies business achieved another quarter of strong performance. The alignment of our products and services to the United States national security strategy continues to provide strong visibility to our long-term revenue forecast. To start, I'd like to discuss our results. Record second quarter revenue was $3 billion, up 6.8% from a year ago and diluted earnings per share was $4.38 for the quarter, up from $3.27 in the second quarter of 2023. New contract awards during the quarter were $3.1 billion, which resulted in backlog of $48.5 billion at the end of the quarter, of which $27 billion is currently funded. At Mission Technologies, we had the seventh consecutive quarter of record revenue with sales of $765 million, 19% over the second quarter of 2023. In addition to very strong revenue, Mission Technologies trailing 12-month book-to-bill is 1.15 and its new business opportunity pipeline is over $83 billion. Mission Technologies continues to offer leading-edge technologies aligned with the capabilities our customers need -- and this growth in a competitive sector confirms for us that our technology portfolio is ideal for today's market requirements. In shipbuilding, we remain focused on directing our resources toward meeting our delivery commitments to the Navy. Significant efforts continue in each of our shipyards to create labor stability, improve proficiency and increase capacity, all aimed at meeting our throughput goals. The long-term investments we are making in capital and employee development, coupled with Navy industrial-based investments will stabilize and improve performance as our portfolio shifts towards new contracts and our ability to meet scheduled projections and performance goals will support achievement of our financial commitments to our shareholders. In the second quarter at Ingalls, we delivered LPD 29, Richard M. McCool Jr. and are looking forward to launching LPD 30 Harrisburg later this year. Other milestones including the launch of DDG 129, Jeremiah Denton and the delivery of LHA 8 Bougainville have been adjusted based on workforce availability, the most efficient utilization of shipyard facilities and levels of system completion to support predictable downstream execution of future milestones. At Newport News, in the second quarter, we delivered SSN 796 New Jersey and continue to make progress toward our remaining milestones that are planned for later this year. During the quarter, SSN 798 construction team experienced a minor disruption to Massachusetts test program due to some equipment replacement identified during testing. The disruption has been resolved, and the team is back into the test program making steady progress. It does, however, shift delivery from late 2024 to early 2025. We are reaffirming our shipbuilding margin outlook for the year. And as we've discussed, we are already in negotiations and expect several significant contract awards by the end of this year, including Block V Virginia class submarines, Build II Columbia class submarines and additional amphibious ships. Turning to activities in Washington. We continue to see bipartisan support for our programs reflected in the fiscal year 2025 defense appropriations and authorization bills as they progress through both chambers of Congress. We are pleased that the 2 authorization committees have shown strong support for shipbuilding including support for additional advanced procurement funding authority for CVN 82, additional funding authority to support for Virginia class construction and a multi-ship procurement of Amphibious shifts. The Senate authorizers also included additional funding authority for LPD Flight II and DDG-51 Flight III ships. The House appropriations bill continues to support our major shipbuilding programs and notably includes investment of $4 billion into the submarine industrial base. We await Senate appropriations positions and the final outcomes will depend on eventual respective conference negotiations by the appropriations and authorization committees. Now turning to labor. Positive trends continue in talent acquisition as we have hired over 3,800 craft personnel year-to-date, which keeps us on track to achieve our full year plan of approximately 6,000. In summary, I'm confident that the teams' focus on the execution of the fundamentals in our programs positions us positively for the future and look forward to the second half of the year as we meet more milestones and deliver on our commitments to our customers and shareholders. And now, I will turn the call over to Tom for some remarks on our financial results. Tom?
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.
Christie Thomas: Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so that we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the 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.
Myles Walton: Thanks. Good morning. Chris, could we start with labor. It sounds like you continue to have good traction on the hiring front, but it's not clear to me if you're net-net increase in your headcount to where you want. So maybe just touch on attrition, hiring goals, I guess, are good, but attrition goals for the year at both shipyards and if that's a meaningful driver to some of the milestone slip-outs?
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.
Myles Walton: And in terms of this effect on the milestones, I understand the Massachusetts sounds more like a technical discovery are the Ingalls milestone slippages more workforce limitations driven?
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.
Myles Walton: Okay, Thank you.
Chris Kastner: Sure.
Operator: Thank you. The next question is from the line of Robert Spingarn with Melius Research. Please go ahead.
Scott Mikus: Good morning. This Scott Mikus on for Rob Spingarn.
Chris Kastner: Good morning.
Tom Stiehle: Good morning, Scott.
Scott Mikus: Tom or Chris, I wanted to ask, based on the guidance, you need to generate about $1 billion of free cash flow in the fourth quarter. So I'm just wondering if you could talk about your level of visibility into that cash generation? And then if possible, can you quantify how much of the fourth quarter free cash is tied to working capital that could move into early 2025?
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?
Tom Stiehle: Yes. I'll provide some more color on that, too. Hey, Scott efficient question. It's not a comment from where we are right now. I mean we usually use cash at the beginning of the year. And we have guided both minus 200 and minus 100 for Q1 and Q2, respectively we find ourselves right now through the quarter -- through the first half of the year at minus $274 million. And this is broken, there was about $100 million that moved from Q1 to Q2 in a payment, and then we closed Q2 kind of missing a $75 million thing. So I mean, from performance and where we thought we'd be, we're kind of right where we guided. From a perspective, the year had to shape to it. It was back end loaded anyway. It was more back end loaded in 2024 than it was in 2023. When you get the Q and you can take a look at this comparison in there from 2023 over to 2024. And we're down operationally in cash about $28.4 million, and then we have another $54 million of CapEx that we're spending in 2024 over 2023. So that constitutes about $330 million down in 2024 over 2023. But again, in line with where we thought we'd be in the plan, the portfolio. I would tell you a couple of the milestones that you had at the end of 2023 that dragged into 2024, although it's only a couple of ships up to 2029, the excess -- 786 and then the launch of 788 all just brought that work into 2024 and created just a little bit of a draw on making kind of cost and progress and headway on the existing portfolio we have here. But the guides that have we provided zero on free cash flow for Q3, which has some variability to it. There's a lot of activity that milestones that you have on major milestones, smaller milestones underneath, capital incentives, the capital is a little bit slower than we guided. You guided 5.3% for the year. It was 2.6% in Q1 and 3% for Q2. But as that comes online in the back half of the year, the progress that we want to make to close out the work packages that are in play right now will allow us to fully fulfill all the costs that you see on the balance sheet. You can see the contract liabilities and ARP in there. So there's some net working capital that's going to burn it off sat down. We finished last year at 5% of working capital at the end of 2023. We sit just under 9% right now. And I kind of foreshowed at the beginning of the year that we were going to have this shape. And by the end of the year because of the capital incentives we've had, we'd actually have a little bit of an advancement. We'll work ourselves down to the 2% to 3% range in working capital. And that's aligned with our plan. It's aligned not only with the free cash flow perspective we gave you to $600 million to $700 million this year. But in the five-year goal, I told you that had some shape in two. And net working capital level exiting 2020 into 2025 is planned in the guidance that I gave you for $3.6 billion kind of going forward. So I think we have -- we understand where we are. We aligned with the plan that we had this year. The increases on the back half of the year between the progressing, milestones, incentives, capital incentives and then we have some new contract awards that introduced some alignment with the business environments that we have here that, that itself, it just at the beginning of those contracts, we anticipate them to be awarded if not at the end of Q3 and Q4, a little variability of the effect. Is that going to be lifespan Q3 or Q4. But it will -- by the end of the year, we'll have new awards that will assist both in margin and cash as well.
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?
Chris Kastner: Yeah. So we expect to put under contract over the next 6 months to 12 months and probably before the year expires actually another 21 boats with pricing that reflects the current macroeconomic environment. So it's a significant amount of work that we intend to put under contract over the back half of the year.
Scott Mikus: All right. I'll stop there.
Chris Kastner: Sure.
Operator: The next question is from the line of Pete Skibitski with Alembic Global. Please go ahead, Pete.
Pete Skibitski: Hey, good morning. Nice quarter.
Chris Kastner: Good morning, Pete.
Pete Skibitski: I did have a question on Ingalls margin. I know you've touched on it a little bit just because it's dipped here for the first time in almost a couple of years. The release talked about lower risk retirement on service companies. And I wasn't sure if that's kind of -- you've got some early DDG-51s in the yard and you're booking conservatively or I wasn't sure if that was -- if the DG-129 push out next year impacted this quarter. Can you maybe talk through that a little bit with us a little more deeply?
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.
Pete Skibitski: Okay. I appreciate it. And just one follow-up. I know some of the -- there's been some supply chain issues on the Virginia, I think -- and the carriers I think one of the issues has been development of the new electric generators. Do you guys have a time line of when that new system is expected to arrive in the yard?
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.
Pete Skibitski: Okay. Got it. Thank you.
Chris Kastner: Sure.
Operator: Thank you. The next question is from the line of David Strauss with Barclays (LON:BARC). Please go ahead.
David Strauss: Thanks. Good morning.
Chris Kastner: Good morning.
Tom Stiehle: Good morning, David.
David Strauss: Chris, can you talk about where you are in terms of Block IV, Block V work and then negotiating Block VI on ECS?
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.
David Strauss: Thanks. What is your revenue mix right now between Block IV and Block V?
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.
Tom Stiehle: Yeah. So we're at 95% complete on Block IV. And then of, I know it's not the exact answer to your question, but we're a 95-plus percent of the contract completed on Block IV and Black V in the mid-20% range. So -- and we're spending -- we crossed over about six quarters ago, that Block V has high revenue on Block IV.
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?
Tom Stiehle: So a couple of things, yes. We got -- I think the last couple of calls, we've been talking about that, right? And the -- for the 600 to 700 guys and we have the working capital is right now, the capital incentives pop in here, we will burn down the 9% that we see through Q2 to that level going forward, right, lower than what we traditionally guided to between 4% and 5% because of what's going on, on the capital front. We haven't guided both for free cash flow specifically for 2025. And I would be -- I don't want to get into specific targets going forward. But I will tell you that we're kind of on plan on that front relative to its implications to the five-year free cash flow guidance. And as we close out the year for Q3, Q4, a lot of activity has to happen and how that's going to fall with everything I rattle on how we're going to make the 600 to 700. I prefer to hang on to the exact working capital guidance at the back half of the year as we set the trajectory and the targets for next year on the February's call.
David Strauss: All right. Understood. Thank you.
Operator: Thank you. The next question is from the line of Gautam Khanna with TD (TSX:TD) Cowen. Please go ahead.
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.
Chris Kastner: Yes. So I would tell you the ramp that we're going to see here between Q3, Q4, again, we can certainly guided to zero for Q3, but that could be 100 to 200 higher. It could be 50 to 100 less there, just depending on how everything that I said earlier kind of falls out. But the ramp from now where we are to Q3 and Q4, it's a composite there of improved trade working capital between AP and AR, the progressing and closing our sales, you can see how the cost in the balance sheet, so just getting the right progressing as we make headway on schedule to be able to build all the costs. The major milestones add into that. We've talked a bit that, I think, we have a slide on the PowerPoint briefing that you can see the ones that we have to hit there on the deliveries. And then we work ourselves through both incentives and program contract incentives and then capital incentives. And then the new awards contribute that rise and lift on the back half of the year, too. So it's all of it. I don't think -- missing one milestone here or there is not going to drive the preponderance of the lift that we see kind of going forward. But we'll keep you informed, and we'll give you an update on the November call. And parts of your other question?
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?
Chris Kastner: Yeah. So capital allocation has been fairly consistent here for the last year after we started to pay down the debt. We like to be investment grade. We think that's where we need to be and where we want to be. We're going to continue to invest in our shipyards. We're going to pay a dividend. And then with excess cash, we're going to provide it back to shareholders, but we'll continue to evaluate M&A opportunities as they present themselves. And if it makes strategic and financial sense, we'll evaluate it and entertain it. So there's not really a change in our capital allocation philosophy.
Gautam Khanna: Thank you.
Chris Kastner: Thank you.
Operator: Thank you. The next question is from the line of Jason Gursky with Citi. Please go ahead, Jason.
Jason Gursky: Okay. Good morning, everybody. Can you hear me?
Chris Kastner: Good morning, Jason. Yes.
Jason Gursky: Okay, great. I think the operator’s struggling there a bit. And Chris, just a quick question first on Mission Technologies. You mentioned the trailing 12 month book-to-bill of 1.15 and the quantum of the pipeline that you have there in that business. I'm wondering if you can step back for a minute and just talk a little bit about the 1.15, when you can execute on that backlog and the pipeline that you have available to you? And what that means for growth rates beyond 2024. We are obviously off to a really solid start here in the first half of this year. I'm just kind of curious how this growth rate settles out over the next couple of years?
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.
Jason Gursky: Okay. Great. That's helpful. Appreciate that. And then secondarily, just on labor productivity in the shipyards. I know you talked a little bit earlier during the Q&A session about attrition rates and hiring and all that kind of stuff, good stuff, which is great. But I think probably just as important, hate to those numbers is kind of the learning curve of the employees -- and I'm wondering if you have the ability, maybe just from a big picture perspective to talk about labor productivity, where you are today relative to maybe where you were pre-pandemic? Just wondering if we're still down relative to pre-pandemic levels from a labor productivity perspective? And kind of what analytics back over the next couple of years and maybe when we can return back to kind of pre-pandemic productivity. Thanks.
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.
Jason Gursky: Great. Thanks.
Chris Kastner: Sure.
Operator: The next question is from the line of Seth Seifman with JPMorgan (NYSE:JPM). Pleas go ahead, sir.
Seth Seifman: Hey, thanks very much and good morning.
Chris Kastner: 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?
Chris Kastner: Yes. So, I think that's probably a compare issue related to last year. There's no material issue that we can note related to that. It's kind of broadly across the blocks. We assess our ACs every quarter. We have to make an adjustment, we do that, plus or minus. So this is not anything individually material there.
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?
Chris Kastner: No, not material enough to note. No. But we -- as I said, we assess our issues every quarter when we make those adjustments dictated by our evaluation in that quarter.
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?
Chris Kastner: Yes. So, we don't guide by shipyard, but I fully expect Ingalls to continue to execute on their programs very well. But yes, we don't provide guidance by our shipyards.
Seth Seifman: Okay, great. Thanks very much.
Chris Kastner: Sure.
Operator: Thank you. The next question is from the line of George Shapiro with Shapiro Research. Please go ahead.
George Shapiro: Yes, good morning.
Chris Kastner: Good morning.
George Shapiro: Tom, I wanted to pursue a little bit the free cash flow needs for the fourth quarter. I mean, obviously, we can all do the arithmetic $973 billion to $1.73 billion. Now, if I look back, that's nearly twice what you've ever done before, the last highest year in the last five with $539 million in the fourth quarter of 2018. In addition, you've never had three quarters in a row where no quarter generated positive cash flow. So, my question is what has changed in the last five years in terms of contracts that you have or what to suggest such a dramatic swing this year from what we've seen before?
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.
George Shapiro: Okay. Just one comment. What I said -- what I meant to say, if I didn't say it properly on the cash flow is, there hasn't been -- if you look at quarter-by-quarter, there's been no time in the last 5 years where one quarter hasn't had at least positive cash flow of the 3. There's been several quarters with two, 2 have been negative, but not 0 in the third. A follow-up I had was, in Mission Technologies, the guide for the second quarter was like $650 million, you did $750 million, which is a $765 million, which was similar to the first quarter. And you had mentioned the material and that may drop down in the third quarter. Can you just be a little clear as kind of what actually drove in the materials comment that you made.
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.
George Shapiro: So just one last one. So why guide only $650 million in the third quarter?
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.
George Shapiro: Okay. Thanks very much for all the color.
Operator: Thank you. The next question is from the line of Jordan Lyonnais with Bank of America (NYSE:BAC). Your line is now open. Please go ahead.
Jordan Lyonnais: Hi. Good morning.
Chris Kastner: Good morning, Jordan.
Jordan Lyonnais: Thanks. On CapEx, the sequential uptick that you guys had, is there a percentage or a portion of that, that you could give color on that you'd expect to get back from the Navy CapEx incentives?
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.
Jordan Lyonnais: Got it. Okay. And then also to the contract at Deloitte one that's for Navy shipbuilding, do you have any sense of the scope for it? Or why like mission tax wasn't picked or you guys in general?
Chris Kastner: I can't necessarily hear the question. There's some feedback. Can you repeat that?
Jordan Lyonnais: Yes. So Deloitte, the one that was a $2.4 billion Navy contract for -- it seems like an HR contract on the Navy shipbuilding data?
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.
Jordan Lyonnais: Okay. Got it. Thank you so much.
Chris Kastner: Sure.
Operator: Thank you. 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.
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.
Operator: That does conclude today's conference call. You may now disconnect.
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