The operator introduces the Third Quarter 2023 HII Earnings Conference Call and reminds participants that the call is being recorded. Christie Thomas, Vice President of Investor Relations, welcomes everyone and introduces the speakers, President and CEO Chris Kastner and Executive Vice President and CFO Tom Stiehle. She also mentions that statements made during the call may be forward-looking and that non-GAAP measures will be used. Chris Kastner then discusses the company's quarterly results, highlighting growth, operational performance, and free cash flow generation.

The company has seen strong revenue growth and increased guidance for the future. They attribute this success to their focus on the fundamentals of the business and their dedicated workforce. In the third quarter, they achieved record revenue and earnings per share, as well as new contract awards and backlog. They also reached several shipbuilding milestones, including launching and christening new ships and completing acceptance trials for others.

Ingalls and Newport News shipyards have been awarded several contracts this quarter, including the modernization of USS Zumwalt and the construction of seven Arleigh Burke-class destroyers. Progress is also being made on Virginia-class attack submarines and nuclear-powered aircraft carriers. However, due to delays caused by COVID-related supply chain issues, the delivery of CVN 80 will be approximately 12 months late. Mission Technologies has also seen record revenue and won major contracts in the quarter.

In the third quarter, the company received significant contract awards, resulting in a backlog book-to-bill ratio of 2.4 for the quarter and 1.2 for the year. The federal government began the new fiscal year under a continuing resolution, but the company is hopeful for the completion of appropriations bills and the fiscal year 2024 National Defense Authorization Act. The company has hired more craft personnel than anticipated, but is focused on improving retention and workforce development.

The company had a strong quarter, with a focus on executing backlog and driving growth in Mission Technologies. They remain committed to creating value for all stakeholders. The third quarter saw a 7.2% increase in revenues and a record result for HII. Operating income and margin also increased, thanks to higher segment operating income and more favorable taxes. Ingalls revenues increased by 14% due to higher volumes in certain areas.

In the third quarter, Ingalls operating income and margin increased due to higher volumes and favorable contract estimates. Newport News also saw an increase in revenues, but a decrease in operating income due to contract incentives earned in 2022. Shipbuilding operating margin was slightly ahead of expectations and the outlook for the full year remains unchanged. Mission Technologies saw a significant increase in revenues and operating income, driven by higher volumes and improved performance. Cash from operations was $335 million and free cash flow was $293 million.

In the third quarter of 2022, the company had net capital expenditures of $77 million and a negative free cash flow of $96 million. They also made cash contributions to their pension and other postretirement benefit plans and paid dividends and repurchased shares. Their pension funded status has improved and they have increased their 2023 free cash flow guidance to $500 million. They expect $1.2 billion of free cash flow over the next two years.

The company expects to distribute most of its free cash flow to shareholders through 2024, and has seen strong revenue growth in the third quarter. They have revised their shipbuilding and Mission Technologies revenue guidance, increasing the midpoint by $50 million each. The company reaffirms their margin guidance and has a strong backlog and opportunity pipeline. They have raised their 2023 revenue and free cash flow guidance and will continue to execute their commitments. The call is now open for questions.

Scott asks Christopher about the financial impacts of the delay on CVN 80 and if it was known when the books were closed. Christopher confirms the 12-month delay and explains that there is no financial impact, as they have been holding the risk on their financials. He also mentions that the team is working to mitigate the impact, and that they have EPA protection. Scott also asks about the impact of negative EACs on Block V Virginia-class boats, and Christopher explains that they evaluate their EACs quarterly and that he is comfortable with their current position.

A question is asked about the outlook for shipbuilding margins in 2024 and the drivers for potential improvement. The speaker, Christopher D. Kastner, expects incremental improvement in margins, with a focus on transitioning out of certain projects and continuing to improve in Newport News. The company has met its margin goal for the quarter but will need to see significant improvement in Q4 to meet their guidance. This will be driven by two large milestones and a focus on hiring, training, and operations.

The company is optimistic about its future as COVID becomes less of an issue and they are able to focus on finishing current projects and starting new ones. They expect to see incremental margin improvement, especially at Newport News, as they complete impacted ships and start new ones. In the fourth quarter, they will continue to focus on completing current projects and keeping rework in check. The completion of projects for 796 and 798 and the progress of 29 will be important in the coming weeks. While Columbia-class work is important, it will not have a significant impact on Newport News' margins compared to the performance of the Virginia-class program. Overall, the company is confident in their future growth and performance at Newport News.

Jordan Lyonnais, speaking on behalf of Ron, asks Christopher D. Kastner for more information on the company's retention rates and the timeline for new hires to reach optimal efficiency. Kastner responds that they are meeting or exceeding their hiring forecast and it generally takes three to five years for new hires to reach full potential, with the potential for acceleration through digital tools. Lyonnais also asks about the $3 billion in office funding and supplemental funding from the White House, to which Kastner states that they expect it to eventually flow through and see it as an opening of markets. However, it is not currently material financially and they are following the Navy's lead on how to use the funds.

The speaker discusses the company's free cash flow for the current and upcoming years, attributing the increase for this year to improved performance in certain areas and timely cash receipts. The decrease for next year is due to timing and adjustments related to COVID. The overall target for the next five years remains at $1.2 billion.

The company has maintained a target of $1.2 billion for the year and there are tailwinds against it as the year finishes. The margins in the fourth quarter are expected to be about 9.2% to reach the low-end of the guide. The three remaining milestones are important for the company to reach its target and they are closely monitoring them. They expect some adjustments in rates and consistent performance. The fourth quarter is expected to be a big quarter for the company and they are reaffirming their guidance.

Seth Seifman asks about the opportunity for growth at Ingalls and the impact of the latest multi-year contracts on their revenue and margin mix. Christopher Kastner and Thomas Stiehle mention a positive inflection point in both shipbuilding and Mission Technologies, driven by supply chain stabilization and winning new contracts. They are optimistic about growth for the rest of the year and will provide more information at the end of the year. Stiehle also mentions the delivery of NSC 10 at Ingalls.

The company is confident in their ability to sustain a 3% margin on their shipbuilding portfolio thanks to their three major programs and a maturing DDG 1000 program. They expect consistent performance in production and have plans to employ their workforce effectively. They are unable to provide specific quarterly cadence for 2024 at this time.

The company is in the final planning process for '24 and beyond, and will present it to their management and board at the end of the year. They expect incremental margin improvement due to COVID getting further behind, hiring and training efforts, and stabilization of materials. They anticipate growth in shipbuilding with the maturation of the workforce, and on the Mission Technology side, they are focusing on scaling the business and improving margins through fixed price contracts and deploying IP technology. They will provide more details on next year's plans in the Q4 call in February. The Navy has been emphasizing the need for maintenance for a long time.

The speaker asks about the timeline for maintenance from the Navy customer and whether there have been any surprises on the submarine or surface side. The response is that there are no expected surprises for maintenance at Newport News, but there may be opportunities at Ingalls. The speaker also mentions that there is a race to finish LPD 29 and there is some sensitivity to the EAC in the fourth quarter, but a specific range is not given. The shipbuilding range for Q4 may bound that risk.

Christopher D. Kastner declines to comment on the wide margin range for shipbuilding and states that they will not provide specifics on improvement for 2024 until the year-end call. He also mentions that they will be hosting an Investor Day on March 20th in New York.

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