The operator introduces the HII fourth quarter 2023 earnings conference call and turns it over to Christie Thomas, Vice President of Investor Relations. Christie introduces the President and CEO, Chris Kastner, and Executive Vice President and CFO, Tom Stiehle. Chris and Tom will be discussing forward-looking statements and non-GAAP measures, and Chris mentions the company's strong performance and investments in shipyards and IRAD.

The company has shown strong growth and free cash flow generation in 2023, with record sales and revenue across all divisions. They also received significant contract awards and completed important milestones in various shipbuilding programs. They expect to continue this trend in 2024 and 2025, and are making positive progress in workforce hiring.

In 2023, the company hired over 6,900 craft personnel and plans to hire 6,000 more in 2024. The competition for skilled labor in the shipbuilding and manufacturing sectors continues to impact the company. Mission Technologies had a successful year with record revenue growth and new contract awards. They also have a strong business pipeline for potential growth opportunities in 2024. The company is pleased with the passage of the defense authorization bill for fiscal year 2024 and expects revenue growth and cash generation over the next five years. They are committed to fulfilling their contractual commitments to their customers.

The article discusses Huntington Ingalls Industries' financial results for the fourth quarter and full year, highlighting their record revenues and strong growth. The company expects to generate $15 billion in revenue annually by the end of the decade and remains focused on executing their contracts and providing solutions to their customers. The consolidated results show a significant increase in revenue and operating income compared to the previous year.

In 2023, the company's operating income was $681 million, a 17.6% increase from 2022, and diluted earnings per share were $17.07, an 18.2% increase from 2022. Ingalls saw a revenue increase of $182 million, driven by higher volumes in surface combatants and amphibious assault ships. Newport News also saw a revenue increase of $281 million, primarily due to higher volumes in aircraft carrier construction and engineering. Admission technology saw a revenue increase of $312 million, driven by higher volumes in C5 ISR and cyber, electronic, warfare and space contracts. Overall, all three segments saw improvements in operating income and margin, with Ingalls and Newport News benefiting from higher volumes and contract incentives, and Admission technology benefiting from increased revenues in key areas.

Mission Technologies had a strong year in 2023, with operating income of $101 million and a segment operating margin of 3.7%, both improved from the previous year. This was driven by a settlement of a representation and warranty insurance claim and higher volumes, partially offset by a contract loss and lower equity income. The company also had a free cash flow of $692 million, reduced debt, and invested in capital expenditures. The pension outlook for 2024 has improved, but the discount rate has decreased.

HII has provided an initial view of their expectations for 2028, forecasting mid- to long-term revenue growth of 4% for shipbuilding and 5% for Mission Technologies. They expect tempered growth in 2024 due to outperformance in 2023, with shipbuilding revenue between $8.8 billion and $9.1 billion and Mission Technologies revenue between $2.7 billion and $2.75 billion. They also anticipate shipbuilding operating margin of 7.6% to 7.8% and Mission Technologies operating margin of 3% to 3.5%. Capital expenditures will remain at 1.5% to 2% of general sustainment, but they are investing in expanding shipbuilding capacity to meet demand in submarine construction.

The company's investment is expected to increase capital expenditures to approximately 5% in the next three years, with a target of 5.3% in 2024. However, this is not expected to impact sustainable free cash flow levels. The company has provided updated outlooks for free cash flow and other discrete items. The new five-year free cash flow projection is $3 billion, and the next five-year outlook is approximately $3.6 billion. The company remains committed to an investment-grade rating and plans to return $500 million to shareholders in 2024 through dividends and share repurchases. The Board has also approved a revision to the share repurchase program, resulting in $1.5 billion in available authorization through 2028.

The company's mainstay programs are in high demand and their growth success is expanding and diversifying their portfolio. The company has exceeded their financial guidance for 2023 and has strengthened their balance sheet by paying down debt and lowering their leverage ratio. They have also fine-tuned their investment thesis, focusing on portfolio strength, visibility, execution, growth, and free cash flow expansion. The company's CapEx has increased by $300 million annually, with a focus on maintaining the yards and specific projects, such as acquisitions at Newport News and driving down into the submarine program.

The company is expanding their capacity and throughput in the Columbia program, which will require investments and partnerships with the Navy. This will result in a three-year run with a peak of 5.3% in the first year and a projected cash flow inflection to $700 million plus in the years following. This investment will support the company's long-term growth and allow for an increase in shipbuilding from 3% to 4%. The company will discuss their capital allocation prioritization at their upcoming Investor Day.

The company's focus is on operational priorities and delivering ships to customers, with capital investments being a top priority. They have clear capital allocation priorities, including investing in shipyards, maintaining an investment grade rating, and progressively increasing dividends. Any remaining cash flow may be returned to shareholders, but there is also the possibility of M&A projects. In the past, the company has given back a significant portion of free cash flow to shareholders through dividends and debt paydown. This trend is expected to continue in the future.

The company has committed to returning over 100% of its free cash flow to shareholders this year, with a plan to continue doing so through 2024. They have completed two of their milestones and are close to completing the third, with no significant financial impact. The delay in the third milestone will not have any downstream impacts and the company is aligned on future milestones in 2024.

The supply chain challenges on Virginia are a concern for HII, but they are managing the risk across all of their programs. They do not have inflation protection on the VCS program, but they do have EPA protection at Ingalls. The Navy is aware of the challenges and the SIB funding is important in managing them.

The delay in the delivery of LPD 29 has resulted in some extra costs and a loss of opportunity, but it is not a significant impact. The company will make up for it when the final delivery is made.

Tom explains that the Venezuela insurance recoveries are included in operating income because they are a recovery from previous costs. He also mentions that there is a ramp to the free cash flow target over the next five years, but the shape of it is not provided due to potential changes. He assures that the target is achievable and that the revenue from mission technology is helping to reach it.

The speaker is discussing the company's shipbuilding margin target and how it has changed. They mention a missed milestone and the potential for EAC adjustments to help reach the target. The speaker is being conservative and suggests a range of 7.6% to 7.8% for the target. They want to focus on earning each quarter and not get ahead of themselves.

The speaker believes that if they are successful in hiring and retaining employees and meeting their milestones, they could potentially be on the upper end of their projected range for the year. They also discuss their working capital, stating that it has decreased as expected and they anticipate further improvement in the future. They project a range of 4% to 6% for their working capital, with a potential decrease to 4% to 5% in 2024.

The company has seen a positive quarter, with two one-off gains at Ingalls and Mission Technologies. These gains amount to $120 million gross, with a net tax impact of $95 million. Despite the lack of a '24 budget appropriation, the company has raised its midterm outlook. The '24 supplemental budget includes funding for shipbuilding and other areas that could benefit the company.

The company is seeing demand for its products and services, and is confident in its ability to meet this demand. They have won contracts for seven destroyers and have a 30-ship building plan. They also have long-term plans for Columbia Build II and RCOH for 75. The company expects to see growth rates of at least 5% in the next five to 10 years.

The company is facing challenges with labor retention due to the difficulty of retaining young mechanics and other workers. To address this issue, they have implemented initiatives focused on flexibility in work schedules, targeting specific geographies, and offering incentives for critical skills. Despite these challenges, the company remains optimistic about their growth potential.

The speaker discusses the challenges of the labor issue in the manufacturing industry, specifically in defense and shipbuilding. The Navy is aware of this issue and is addressing it through workforce development initiatives and investments in the supply chain. They have identified single source suppliers that need investment to increase capacity and are dealing with similar labor and supply chain issues.

The speaker explains that the company is conducting a comprehensive review to identify potential dual sources and qualify additional sources. They are managing the issue well with their partners, but it will not be resolved overnight. In response to a question, the speaker provides a breakdown of the company's free cash flow for the year and explains that the increase in guidance is due to strong collections in Q4. They also mention that the active participation of the Navy is helping to offset the increase in CapEx for the following year.

The company has adjusted their projected guide for $600 million to $700 million as there was a slight overachievement in 2023 and higher CapEx in '24 and '25. They want to support their customers and ensure everything is in lockstep. The company is not concerned about the 5.3% against the cash flow projections and has factored in a five-year projection. When the company does their CapEx, they receive incentives and additional margin and cash flows through the contract.

The company is expecting to see a ramp in costs due to additional claims and a projected increase in revenue. The $300 million increase in revenue for 2024 will be supported by the Navy and will impact both margins and cash flow. The company is aiming to stay neutral in terms of cash flow while incurring costs for the project.

The company's ship revenues were higher than expected due to a rush of receivables and timing of material and outsourcing costs. This resulted in a better-than-expected growth in all three divisions. However, the timing of material also impacted the next year's forecast.

The speaker is asking for clarification on the $49 million benefit in Mission Systems from Hydroid and the rest of the business making only $2 million. The speaker asks for more information on this and the speaker also asks for the EAC for each sector in the quarter. The speaker is informed that the rest of the business making only $2 million is due to timing and one job that had a slight step back. The EAC for the quarter was $111 million of favorability and $43 million of unfavorability, with Ingall's accounting for 50% of the net $68 million.

The speaker discusses the net revenue for the company, which saw a 50% increase in Ingalls, a 35% increase in Newport News, and a 15% increase in MT. The total gross favorability for the year was $309 million, with a net of $118 million after accounting for unfavorable factors. The speaker also mentions that customer-funded investments over the next 3 years may be contingent on a supplemental package from Congress, and that improvements in retention rates and supply chain management are necessary for increased throughput in shipbuilding operations.

Thomas Stiehle and Scott Mikus discuss the company's plans for hiring, training, and retaining employees as they continue to grow. They mention using outsourcing, contract labor, and overtime to offset the current labor shortage, but also have plans to build out organically in the future. They will discuss these plans further at an upcoming Investor Day on March 20.

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