The paragraph discusses the commencement of the HII Third Quarter 2024 Earnings Conference Call. The operator introduces Christie Thomas, Vice President of Investor Relations, who welcomes participants and notes that the call will cover forward-looking statements involving risks and uncertainties, which may result in actual results differing from expectations. Thomas mentions that additional information is available in the press release and SEC filings. She also notes the use of non-GAAP financial measures, with reconciliations on their website. Chris Kastner, President and CEO, then takes over, acknowledging the release of HII's third quarter results and updated annual guidance. He expresses gratitude to the 44,000 employees at HII for their contributions to shipbuilding and national security solutions in the Mission Technologies division, reaffirming the company's mission.

The paragraph discusses the company's operational and financial performance. The third-quarter revenue was $2.7 billion, with earnings per share down from the previous year. The company updated its 2023 shipbuilding and Mission Technologies revenue guidance and revised 2024 shipbuilding margin and free cash flow guidance. Milestones achieved include the completion of the Virginia-class submarine Utah and progress on CVN 79 Kennedy. A customer-driven design change has delayed the float off of SSN 800 Arkansas to 2025. The company received a significant $9.6 billion award for amphibious warships, ensuring strong future revenue. Meanwhile, milestone achievements were made at Ingalls, with the launch of LPD 30 Harrisburg and progress on destroyers. Mission Technologies reported a 14% revenue growth year-to-date and a strong third-quarter funded book-to-bill ratio of 2.2.

In the third quarter, Mission Technologies secured significant contracts totaling $11 billion, including a $6.7 billion deal with the U.S. Air Force and a $3 billion task order for National Security Services. Despite ending the quarter with a $49.4 billion backlog, uncertainties have impacted annual expectations. These include delayed agreements on submarine contracts with the Navy and unmet performance improvement goals due to late material deliveries and inexperienced staff. The company aims to innovate contracting to enhance investment in its workforce and technology, crucial for meeting Navy's urgent needs.

The paragraph discusses the challenges faced by shipbuilding due to material delivery delays, supply chain disruptions, and workforce inexperience, which have led to inefficiencies and increased costs. The ship contracts in place were negotiated before the COVID-19 pandemic and did not account for these challenges or ensuing inflation. Despite this, the company is committed to improving shipbuilding fundamentals to meet delivery schedules and address cost issues, focusing on workforce development through training and leadership enhancement to ensure efficient and high-quality ship construction.

The paragraph discusses Newport News Shipbuilding's efforts to accelerate learning and improve operations through various initiatives. These include enhancing craft training via virtual, augmented reality, and innovative centers, expanding the pre-hire training pipeline, and deploying a common operating system to streamline execution. Investments in data analytics, AI, and supplier development are aimed at mitigating material delivery delays and improving supply-chain performance. Additionally, the company is outsourcing work to new suppliers and employing industry 4.0 technologies like additive manufacturing to increase capacity and efficiency, with plans to significantly expand outsourcing in the coming years.

The paragraph outlines the company's commitment to enhancing its manufacturing ecosystem for shipbuilding while critically reviewing costs across its divisions to remain competitive. It indicates a strategic reduction in capital expenditure for the years 2024 through 2026 due to uncertainties in future contracting. The company is also actively engaging with the Navy on submarine contracts despite the ongoing government budget constraints. It underscores confidence in fulfilling its current backlog and improving cost and schedule performance with new contracts. The company anticipates reaching fair agreements on future shipbuilding contracts and maintains that the demand for its products and services remains strong.

The company expresses confidence in achieving long-term shipbuilding margins of 9% to 10% and highlights efforts to stabilize performance. In the third quarter, revenues decreased by 2.4% to approximately $2.7 billion, primarily due to declines in Ingalls and Newport News Shipbuilding, despite growth in Mission Technologies. Operating income also fell significantly by 52.3%, with an operating margin of 3% compared to 6.1% the previous year. Net earnings and diluted earnings per share also saw declines, partially attributed to downtrends at Newport News and Ingalls. However, the company's contractual commitments increased by $900 million, raising the backlog to $49.4 billion, notably including a $9.6 billion contract for four amphibious ships, with recorded value expected to grow over time as authorizations expand.

In the quarter, Ingalls' revenues decreased by 6.6% to $664 million, primarily due to lower volumes in amphibious assault ships and the National Security Cutter Program, with a slight offset by increased surface combatant volume. This led to a drop in operating income and margin from the previous year. Newport News saw a 2.8% decline in revenues to $1.4 billion, affected by lower volumes in naval nuclear support services and adjustments on the Virginia class submarine program, with some offset by higher volumes in the Columbia class submarine program. Newport News' operating income and margin significantly decreased, impacted by $78 million in unfavorable adjustments across several contracts, attributed to changes in contract award assumptions and performance challenges. Issues with welders not following procedures were also reported, affecting performance improvements.

In the third quarter of 2024, Mission Technologies reported a revenue increase of $709 million, up by $24 million or 3.5% from the previous year, mainly due to higher volumes in cyber electronic warfare and space. Operating income was $33 million with a margin of 4.7%, an improvement from the previous year's figures. The growth was driven by increased volumes and equity income from joint ventures. The EBITDA margin improved to 8.9% from 8.2% in the same quarter of 2023. Year-to-date sales growth for 2024 was 14%, following a 13.1% revenue growth in 2023. Mission Technologies secured record contract awards worth nearly $11 billion. Cash generated by operations was $213 million, with net capital expenditures at $77 million, resulting in a free cash flow of $136 million. Contributions to pension and post-retirement plans were $12 million, with minimal cash-flow impacts expected from updated pension forecasts.

In the fourth quarter update, the company plans to provide a multiyear pension estimate. During the past quarter, they repurchased 134,000 shares at $35 million, totaling 608,000 shares for $162 million year-to-date. Due to lower-than-expected cash from operations, share repurchases will be limited for the remainder of the year. They paid cash dividends of $1.30 per share and announced an increase to $1.35 per share. The company's updated outlook includes a $50 million revenue increase for Mission Technologies, now projected at $2.8 to $2.85 billion, and an improved margin outlook of 3.75%. For Shipbuilding, revenue guidance is set at the lower end of $8.8 billion. The anticipated submarine contract awards to address structural challenges in shipbuilding have been delayed, affecting planned investments in workforce and infrastructure at Newport News. The company remains confident about receiving the new contracts, but the timing and contracting terms are uncertain.

The paragraph discusses the company's updated financial outlook for 2024, indicating reduced performance expectations due to workforce inexperience and supply chain delays affecting progress milestones and cash flow. Shipbuilding operating margins are expected to be 5% to 6%, with free cash flow between zero and $100 million, and reduced capital expenditures from 5.3% to 3.4% of sales. The company is withdrawing its five-year free cash flow target due to current contract challenges and uncertain new submarine awards. Other updates include changes in pension-related items, interest expense, and a lower tax rate for the year at 17%, driven by increased R&D tax credits, resulting in a Q3 effective tax rate of 10%. The company ended the quarter with $1.3 billion in liquidity and a net debt leverage of 2.1 times EBITDA.

The company is maintaining its capital allocation priorities, focusing on maintaining an investment-grade credit rating, investing thoughtfully in shipyards, growing dividends, and repurchasing shares. In the third quarter, they expanded their revolving credit line and commercial paper program due to favorable interest rates and are considering a new debt issuance to support debt redemption and corporate purposes. They also announced consolidation within their Mission Technologies division to improve efficiency and reduce costs. Although their guidance no longer assumes a near-term Omnibus contract for submarine projects, they continue to pursue solutions to industry challenges and improve shipyard performance and contract conditions.

The paragraph is part of a conference call where Chris Kastner, responding to Gautam Khanna's questions, explains two main issues affecting their recent performance. The first issue is related to performance and execution challenges on older, pre-COVID ships. The second involves assumptions tied to a new 17-ship submarine contract which impacted their financial guidance and overall results. He mentions challenges particularly with Block IV submarines, which are nearing crucial testing milestones.

The paragraph discusses the challenges and unpredictability faced in managing pre-COVID ship systems and a 17-submarine contract at Newport News. The unexpected rework has affected schedules and highlighted difficulties related to labor, supply chain, and industrial capacity. Efforts are being made with the customer to ensure the contract is executed fairly and aligns with the current economic environment. However, this situation has introduced uncertainty in quarterly, yearly, and future outlooks. The speaker emphasizes that agreeing to unachievable costs or schedules would be unproductive.

The paragraph discusses challenges and financial implications related to a contract and weld issues. It mentions that incentives in the contract were not realized as expected, and there's difficulty in distinguishing between performance and new contract approaches. Tom Stiehle addresses the financial aspect, noting that the issue is being investigated, and although an initial booking for costs has been made, it's not material or detailed in the queue. Chris Kastner emphasizes that negotiations on the new contract approach are ongoing, and they cannot comment further at this time. The discussion shifts to Scott Mikus, who asks about innovative contracting approaches mentioned in a press release that aim to promote investments in workforce, facilities, and technology.

The paragraph discusses the SAWS funding plan, which involves reallocating funds from unconstructed naval boats to support higher wages and infrastructure improvements. Chris Kastner supports the SAWS plan, calling it a smart initiative that enhances workforce, infrastructure, and technology investment. He mentions ongoing discussions with the Navy and Congress about alternatives, but doesn't expect a contract soon. Scott Mikus asks about a $17 billion funding shortfall in the Virginia-class program, which a bipartisan group of senators highlighted. Kastner refrains from commenting on Congress's ability to secure additional funds and emphasizes that the SAWS plan doesn't require more funding. He notes that efforts are ongoing to finalize a contract for the 17 ships involved.

The paragraph discusses a question about an $800 million reduction in operating cash flow for the year. Myles Walton from Wolfe Research asks for clarification on how much of this reduction is due to contract delays and how much is due to performance issues. Chris Kastner explains that the guidance is risk-adjusted based on both new contracts and yard progress. Tom Stiehle adds that they previously discussed the pathway to achieving guidance in earlier quarters, emphasizing the importance of milestones, incentives, and handling change orders. Overall, the cash flow reduction results from a combination of factors, including performance and contract-related issues.

The paragraph discusses the challenges faced by a company in meeting its financial guidance due to delays in contract awards for 17 boats and performance issues. Initially, guidance was set at $600 million to $700 million, but has since been reduced to $0 to $100 million. This adjustment is due to a combination of delayed contract awards, timing issues, performance shortcomings, and reduced profit margins in shipbuilding. The company decided to lower its financial projections after noticing these headwinds post-Q2 and Q3. Myles Walton queries whether these issues are primarily due to timing or performance, to which Chris Kastner acknowledges understanding the question.

The paragraph features a discussion between Myles Walton and Chris Kastner regarding the future cash generation of a business in relation to orders for submarines. Kastner admits that cash flow will be inconsistent over the next few years due to uncertainties in contract structure and performance. Despite reviewing expenses and capital, the transition into new contracts and execution at the operational level will largely determine cash flow. Another participant, Pete Skibitski, inquires about Block IV charges, specifically regarding design changes requested by the Navy on item 800. Kastner acknowledges that the design changes contributed to some negative estimates at completion (EAC) but notes potential upsides once negotiations over this Class 1 change are completed.

In the paragraph, Chris Kastner addresses concerns about production issues at Ingalls, mentioning that they face common manufacturing challenges such as inexperienced labor and a fragile supply chain. Despite fewer opportunities for positive adjustments, Kastner expresses confidence in the Ingalls team, noting they are meeting milestones and have secured a beneficial contract that aligns with the current economic environment and protects against inflation and supply chain risks. Pete Skibitski then thanks Kastner, and the operator introduces the next question from David Strauss with Barclays, asking about the allocation of submarine industrial base funds.

The paragraph discusses the positive developments in the industrial base funding from Congress and the Navy, aimed at rebuilding and expanding the shipbuilding industrial base. Chris Kastner notes that while the benefits of these investments are promising, they will take time to materialize due to the nature of infrastructure improvements. The discussion also shifts to financial matters, where David Strauss and Tom Stiehle talk about working capital levels. Tom mentions that currently, working capital is around 9%, but they aim to reduce it to 6-7% by Q4, with a normal level estimated at 5%. He anticipates normalizing cash flow in 12 to 18 months as they complete pre-COVID ship projects and receive payments.

In the paragraph, Scott Deuschle from Deutsche Bank inquires about the potential for negative Estimated At Completion (EAC) adjustments in shipbuilding margins for the fourth quarter, given the low-end guidance. He questions why these negative EACs are not booked now if they are anticipated. Tom Stiehle responds by explaining the margin guidance range of 5% to 6% for the year-end and mentions variables like performance and incentives affecting outcomes, with both risks and upsides considered. They are monitoring EACs and waiting for Q4 progress before finalizing figures. Stiehle also notes that investment factors for the Virginia-Class Submarine (VCS) and Columbia bills are not affecting the year-end closeout. Additionally, Scott asks Chris Kastner if the delivery of CVN 79 is still expected in 2025.

In the paragraph, Chris Kastner discusses the challenges faced by pre-COVID shipbuilding projects, particularly due to supply chain fragility and the need for rework during testing phases, similar to issues with the Block IV Virginia-class vessels. He highlights that these issues pose schedule risks but states there are no changes to the milestones for ship 79 at this time. Jason Gursky from Citi inquires about how the business manages such uncertainties, especially when starting new contracts, and suggests whether slowing down operations to train inexperienced labor could be beneficial. Chris acknowledges the complexity of these challenges but does not directly address the idea of pausing operations.

The paragraph discusses the company's strategy to deliver ships to the Navy efficiently while addressing labor issues. They are shifting their hiring approach to focus less on inexperienced ("green") labor and more on skilled labor to reduce rework and inefficiencies. This shift is part of their alignment of investments and cost structures with future activity levels. The speaker emphasizes the need to be disciplined in hiring and contracting processes, taking into account the macroeconomic environment, labor proficiency, supply chain challenges, and potential inflation. They stress the importance of responsible decision-making within these contexts. Jason Gursky acknowledges this explanation and hints at the next topic concerning Mission Technologies.

The paragraph discusses the strong performance and future outlook of Mission Technologies, which has experienced 14% growth year-to-date, with significant wins amounting to $11 billion. The company restructured its business to focus on high-growth areas like C5ISR, electronic warfare, and unmanned vehicles. The pipeline is strong, and leadership is confident in maintaining or exceeding current growth rates as communicated during their Investor Day. Additionally, the restructuring from six to four business units aims to improve efficiency and align talent, further enhancing the potential for success in future bids.

The paragraph discusses the progress and future prospects of a business division following its acquisition in 2021. It highlights the ongoing efforts to reduce costs and achieve synergies within shipbuilding through the use of Mission Technologies. The author is optimistic about future growth, initially projecting 7% to 9% growth and 8% to 10% EBITDA. Despite only reaching 4% growth in the first year, the last two years exceeded expectations with 13% and 14% growth. The company is focusing on developing its portfolio, customer relationships, and contract types to increase returns and expand services beyond engineering solutions. There are also opportunities for international and commercial contracting. An exchange with Jason Gursky and Seth Seifman indicates a positive outlook, and the segment concludes as a question from Seth Seifman is about to begin.

The paragraph discusses the company's plans to increase outsourcing in its operations, particularly in the submarine industrial base, while balancing the impact on profitability. Chris Kastner highlights that a greater percentage of work will be outsourced in future contracts, acknowledging the associated higher costs, but stresses the importance of protecting the company's interests. Tom Stiehle adds that while outsourcing will increase due to growth in shipbuilding, it doesn't imply a significant reduction in hiring. The focus will be on balancing outsourcing with hiring, training, and retention to meet the growing demand in shipbuilding.

The paragraph discusses strategies to address inefficiencies and capacity issues in a business, including outsourcing and insourcing labor and utilizing operating centers. The focus is on adapting to changes and improving operations through training and engagement with new hires, supplemented by external resources when needed. It also mentions the business's shipbuilding growth target of 3% to 4% annually, which was based on planned investments and capital expenditures over three years. However, the future capital plan is now lighter than initially anticipated.

In the paragraph, Chris Kastner confirms the company's expectation of a 3% to 4% top-line growth over the next few years, despite a temporary reduction in capital expenditures (CapEx) for the current year. The company is managing its investments prudently while planning for its 10-year operating strategy. They are aligning business operations with market conditions, labor needs, and supply chain availability to ensure fair contracts that balance affordability and profitability. While short-term measures include throttling back on CapEx for prudence, the medium- to long-term business plan and growth thesis remain unchanged, as presented on Investor Day.

In the paragraph, Chris Kastner addresses a question from Ronald Epstein regarding the company's outlook presented at their Investor Day, acknowledging that their assumptions were overly optimistic in dealing with pre-COVID contracts. Kastner explains that they have a robust accounting process to address any issues that arise. Regarding margins for the next year, Kastner mentions that guidance will not be provided until the end of January, as it depends on upcoming execution, risk assessments, and the outcomes related to a 17-ship submarine contract and its potential award structure in the FY '24 budget.

The paragraph discusses the challenges and considerations for future guidance in 2025, highlighting that it is currently premature to provide specific guidance due to the ongoing effects of COVID-19 on contract values, labor, and the supply chain. Tom Stiehle emphasizes the impact of pre-COVID contracts and inflation during the pandemic, as well as current labor market constraints. The strategy involves phasing out older contracts impacted by these issues, starting new projects, and ensuring new contracts have better terms and cost management, balancing affordability and profitability.

In the article, Ronald Epstein questions whether offering higher pay to shipbuilders, similar to the approach taken by commercial airlines to address pilot shortages, could solve the talent shortage issue in shipyards. Chris Kastner agrees that increasing compensation is one strategy and mentions ongoing collaborative efforts with the Navy to improve labor situations, showing promising results in some projects, such as a 17-ship submarine contract. Robert Stallard further inquires about the challenges related to this contract, specifically whether the costs have significantly exceeded the Navy's budget or if there are issues with compensation for older pre-COVID contracts.

The paragraph discusses challenges related to budgeting and investment for submarine production. It highlights that the budgets for the boats were established a few years ago, not accounting for the current environment, which creates risks in contracting. Additionally, there is a need for significant investment to meet critical submarine schedules. The approach taken is innovative but time-consuming to get approved. It requires a holistic solution to accelerate production. Separately, Tom Stiehle addresses concerns about Mission Technologies in Q4, explaining that while they are conservative due to timing issues, performance remains strong, and the guidance has been raised, indicating no underlying issues. Tom is optimistic about future results.

In this paragraph, Mike McCormick asks Chris Kastner about labor attrition and the margin profile for aircraft carriers like CVN 79, 80, and 81. Kastner responds that there hasn't been a significant improvement in attrition, which has led to a shift in hiring focus towards more experienced workers. Regarding margin profiles, Kastner states that they don't disclose margins by program but expresses confidence in achieving a 9% to 10% business margin once they transition out of pre-COVID contracts. Noah Poponak from Goldman Sachs asks about the timeline for phasing out these pre-pandemic contracts, and Tom Stiehle estimates that between 2024 and 2028, around 50% to 60% of their work might still be from pre-COVID contracts, depending on the pace of new awards.

The paragraph discusses the timeline and contracts for various ship construction projects, including the FY '24 Block V on VCS, Block VI, Columbia Bill II, and CVN 75 RCOH, with significant work ramping up by 2027-28. It also addresses the company's approach to financial projections, with Tom Stiehle explaining their five-year financial guidance. He notes their intent to reassess actual outcomes before updating recurring annualized figures, considering post-COVID contract impacts and innovative contracting approaches. The focus is on observing the results from these strategies before finalizing their long-term cash flow framework.

The paragraph discusses the company's decision to withhold financial guidance due to uncertainties in their performance and contracting landscape. The speaker emphasizes the importance of achieving or exceeding past financial targets but acknowledges missing their target this year. They plan to reassess the situation over the next 6 to 12 months. Despite this, they affirm that the company's long-term investment value remains unchanged. The focus is on adapting to changes in performance, throughput, and contract awards, which will impact future financial recovery and improvement.

In the closing remarks of the conference call, Chris Kastner emphasized the company's focus on optimizing operations, improving cost structures in shipbuilding, and increasing throughput to stabilize performance. The operator then concluded the call, inviting participants to disconnect.

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