The HII team has delivered a solid second quarter in 2023, with top line growth and steady operational performance. Christie Thomas, Vice President of Investor Relations, welcomed everyone to the earnings conference call and introduced Chris Kastner, President and CEO, and Tom Stiehle, Executive Vice President and CFO. The call also included forward-looking statements and non-GAAP measures. Chris Kastner then spoke, noting the team's progress on their strategy in shipbuilding and mission technologies.

Ingalls and Newport News have made significant progress on their shipbuilding backlog, with Ingalls laying the keel for LPD 31 and successfully completing builder's trials for NSC 10 Calhoun, while Newport News christened Virginia class attack submarine SSN 798 Massachusetts and redelivered the Nimitz class aircraft carrier CVN 73 USS George Washington. Additionally, CVN 79 Kennedy received a contract modification intended to optimize its construction schedule and deliver a more capable ship to the fleet earlier. Mission Technologies also saw record high revenue of $645 million, with sales growing 7.5% over the second quarter of 2022.

Mission Technologies had multiple successes in the quarter, such as winning a $1.4 billion contract vehicle for the national security innovation network. They are also looking to international opportunities such as the OCAS agreement. The President's budget request for 2024 is under consideration by Congress and there is bipartisan support for the programs. Both the House and Senate Appropriations Committees have authorized funding for two Virginia class submarines, one Columbia class ballistic missile submarine, and two DDG 51 Early Bird destroyers. The Senate Appropriations Bill also includes advanced procurements funding for LPD 33 in FY24, and the House Appropriations Bill supports a stable rate of procurement of amphibious warfare ships.

HII had record second quarter results with revenues of $2.8 billion, an increase of 4.7% from the same period the previous year. Operating income for the quarter was $156 million, a decrease of 18% from the second quarter of 2020, largely due to lower segment operating income. HII is continuing to hire craftsmen and women to meet its full year plan of approximately 5,000, but attrition remains high and labor is still the greatest risk to meeting this plan.

Shipbuilding results in the second quarter of 2023 were in line with expectations, with Ingalls revenues increasing 1% and Newport News revenues increasing 5.3% year-over-year. Ingalls operating income and operating margin declined due to lower favorable changes in contract estimates, while Newport News operating income was largely consistent year-over-year. Shipbuilding operating margin for the quarter was 7.4%, and the outlook for the full year remains unchanged.

In the second quarter of 2023 at Mission Technologies, revenues increased by 7.5% compared to the second quarter of 2022, primarily driven by higher volumes and mission-based solutions. Operating income was $9 million, which included non-recurring equity income and an amortization of purchased tangible assets. Cash from operations was $82 million and net capital expenditures was $68 million, resulting in a free cash flow of $14 million. Additionally, cash contributions to pension and other post retirement benefit plans were $11 million and dividends of $1.24 per share were paid. During the quarter, 37,000 shares were repurchased at an aggregate cost of $7 million. Year-to-date, 76,000 shares were repurchased at an aggregate cost of $16 million.

The company expects to distribute substantially all free cash flow to shareholders through 2024 and is reaffirming its 2023 segment guidance. Shipbuilding revenue for the third quarter is expected to be $2.1 billion with an operating margin of 7.4%, and Mission Technologies is expected to have revenue similar to the second quarter with an operating margin of 2.5%. Free cash flow for the third quarter is expected to be $100 million and cash flow generation will predominantly fall in the fourth quarter.

Chris Kastner states that the largest obstacle for the Virginia Class submarine program is labor and meeting labor targets. Newport News has worked hard to hire more employees, and they are ahead of their plan with over 3,200 heads for the year. This is a labor-driven issue, and they have made good progress.

Tom Stiehle explains that the sale of a joint venture had a $6 million impact on Mission Technologies, which was not built into the guidance. This is why they are tracking to the low end of the guidance. Chris Kastner adds that when it comes to their relationship with Electric Boat on the Columbia and Virginia class programs, they work closely together, regardless of contractual differences, in order to get the assets to the fleet as soon as possible.

Chris Kastner was asked how shipbuilding and MT can contribute to two priority areas for DoD, CAC C2 and Contested Logistics. He discussed how their AI/ML and big data products can be used in CAC C2 missions and war gaming concepts, as well as how they have had high level conversations with the Navy about potential applications. He declined to provide the net hiring numbers, as there are many factors that contribute to it, such as overtime, attendance, attrition, and Job Shop labor.

Pete Skibitski is asking Chris Kastner about the Kennedy contract mod and the potential milestone opportunities for the company. He then inquires about the Mission Tech contract mix, noting that the fixed price portion is only 12%.

Chris Kastner and Tom Stiehle discuss the profitability of the business and the opportunities in the Federal IT services market. They note that the majority of contracts are cost plus, which drives the margin rate lower. They are focused on technology and are pursuing fixed-price opportunities to improve the mix and margin. Tom Stiehle also mentions that there is a move to try to expand margins on products and Pete Skibitski follows up with a question about the Q3 cash flow target, which includes an extension on the advance repayment from the Navy.

Chris Kastner answers questions about the 801 module move and the LHA-8 costs. He states that the 801 module move does not put pressure on the margin guidance range for the year, and the costs for the LHA-8 were minor and non-material. He also mentions that there are opportunities for both margin and cash through the liquidation of contracts and retentions for work that was incomplete. Additionally, he states that there is 1.2 billion in cash expected over the next 17 months, and he is still confident of reaching the goals.

Chris Kastner and Tom Stiehle provided an update on the progress of 801 and LHA-8, with 801 having some rework that pushed up its module to the beginning of the next year but with no material impact. There was a fire on LHA-8, but the team was able to contain the damage and no one was hurt. They are now working through a corrective action plan and the milestones for the ship remain intact. Additionally, they paid $24 million to buy out Honeywell's portion of the Savannah River JV and expect to get additional margin and cash in the out years. Finally, they gave an update on working capital progress, which is tracking year-to-date.

Tom Stiehle reports that he is on track with his forecast and expects to be around 8% of revenues in terms of net working capital by the end of the year. He is expecting to reach a range of 4%-6% in the following year. David Strauss then asked about shipbuilding margins for Q4, to which Tom Stiehle replied that they do not give specific forecasts but are guiding 7% for Q3.

Tom Stiehle is confident that the shipbuilding margins for Q4 will be in the low to upper ranges and 9%. He expects three deliveries, two launches, and one float off in Q3 and Q4, which will bring both margin and cash. He believes that Q2 of 2023 will be higher than the first half, and that the delivery of LPD 29 is progressing well, and should not overly hurt or help them. He maintains the shipbuilding margin by yearend will be 7-8%.

Chris Kastner and Tom Stiehle discuss how they reconcile the different schedules for ships with their own expectations for delivery dates. They assess risk and context, and make sure to align actuals with estimates. This is done by taking a look at the budget, doing EACs, and creating a long range strategic plan, labor resource plan, and master construction schedule. They also have monthly reviews with their program offices and customers.

Tom Stiehle and Chris Kastner discuss the VCS program, which is showing stability and positive momentum. They assess the EACs every quarter and there is nothing material to note. The team is working hard to meet their milestones and cost targets. The gross favourable variance was $72 million and the net was $20 million, with $17 million from Ingalls and $3.9 million from NMT. Tom Stiehle then explains that free cash flow in the fourth quarter will come from a host of milestones from Ingalls and Newport.

Chris Kastner spoke about the competitive DDG-51 award that was won by the Ingalls team. He mentioned that Q4 is usually a strong quarter, and that the guide for Q3 assumes there will be a repayment for COVID. He also said that more color on the milestone performance will be given on the November call for Q3.

Ingalls Shipbuilding has been awarded six ships, providing stability for the company, and they have not taken a gain in the quarter from the Savannah River joint venture. However, workforce retention is still a challenge, and the days of hiring and training someone and sending them down to the deck plate are over.

Tom Stiehle reported that Mission Technologies' revenue growth is currently over 5% and that their record quarter was 645. He suggested that there could be some upside to this number and that they are expecting to exceed 5% growth. He also mentioned that each of the six business units grew last year.

The team at Mission Technologies is doing well and has already achieved a record of almost $4 billion in awards for the year. Noah Poponak then inquired about the shipbuilding margin for the fourth quarter, to which Tom Stiehle replied that there are a lot of milestones and incentives in play that could change the margin, but he did not want to be too precise.

Chris Kastner states that Huntington Ingalls Industries (HII) will have a role in the Navy's strategy for the Nimitz retirement. He mentions that there is a lot of planning going on within the Navy and Newport News on integration of RCA, OHS, and retirements, and HII is uniquely qualified to do it.

Chris Kastner discusses the long-term growth rate of the business, which is integrated into the forecasting and will happen over the next 10 to 20 years. He explains that it is an advance planning process between the RCA OHS and the DND in order to finish ships. He concludes by thanking participants for joining the call and expressing interest in HII.

This summary was generated with AI and may contain some inaccuracies.