Huntington Ingalls Industries Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2021

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2021 Huntington Ingalls 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. Conference Call. Please be advised that today's conference is being recorded.

Operator

Conference Call. I would now like to hand the call over to Duane Blake, Vice President of Investor Relations. Mr. Blake, you may begin.

Speaker 1

Thanks. Good morning, and welcome to the Huntington Ingalls Industries Third Quarter 2021 Earnings Conference Call. With us today are Mike Petis, President and Chief Executive Officer Chris Kastner, Executive Vice President and Chief Operating Officer and Tom Seeley, Executive Vice President and Chief Financial Officer. As a reminder, statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the Safe Harbor provisions Federal Securities Law. Actual results may differ.

Speaker 1

Please refer to our SEC filings for a description of some of the factors that may cause actual results results. Also in their remarks today, Mike, Chris and Tom will refer to certain non GAAP measures. Inc. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website. We plan to address the posted presentation slides during the call to supplement our comments.

Speaker 1

Please access our website at huntingtoningalls.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I'll turn the call over to our President and CEO, Mike Petters. Mike?

Speaker 2

Thanks, Duane. Good morning, everyone, and thanks for joining us on today's call. This morning, we released Q3 2021 financial results that included another quarter of consistent shipbuilding program execution. Let me share some highlights from the quarter, starting on Slide 3 of the presentation. Sales of $2,300,000,000 were up 1% from the Q3 of 2020 and diluted EPS was $3.65 down from $5.45 in the Q3 of 2020.

Speaker 2

New contract awards during the quarter were approximately $600,000,000 resulting in backlog of approximately $50,000,000,000 at the end of the quarter, of which approximately $24,000,000,000 is funded. Shifting to activities in Washington, The federal government began the new fiscal year under a continuing resolution, which funds government operations through December 3. Now we continue to urge Congress to proceed expeditiously and remain optimistic that the defense appropriations and authorization processes will be completed in the months ahead. As bills progress through both chambers of Congress, we continue to see bipartisan support for our programs reflected in the defense appropriations and authorization bills in the House and the Senate. We are pleased that the 4 defense Oversight Committees have shown strong support for shipbuilding to include adding a second Arleigh Burke class destroyer, which is a Navy a top Navy priority for fiscal year 2022.

Speaker 2

The appropriations bills also include language in support of a DDG 51 follow on multiyear procurement contract in FY 'twenty three. So as I prepare to close, let me give a quick update on COVID-nineteen. We continue to work with our customers to satisfy the requirement for federal contractors to have their workforce vaccinated against COVID-nineteen by December 8, 2021. At HII, we remain committed to promoting and protecting the health and safety of our employees, their families and their communities and continuing to serve our customers and the vital national security interests of our country without disruption as an essential contributor to the nation's critical infrastructure. We view our workforce of approximately 44,000 employees as critical partners in this effort and continue to help our unvaccinated employees meet this requirement as safely and efficiently as possible.

Speaker 2

We will continue to evaluate how the vaccine mandate and Delta variant impact our workforce as well as material availability from our supply chain, and we expect to have more to share during the Q4 earnings call in February. And finally, let me recap what HII has done from a portfolio shaping perspective over the past 20 months. In short, we have done exactly what we said we would do during our February 2020 Investor today. First, we have positioned the technical solutions business in growth markets that support the constantly evolving requirements of our customers. And second, we have demonstrated the financial flexibility to pursue these critical growth opportunities, while maintaining our investment grade credit ratings and continuing to return capital to shareholders.

Speaker 2

Following the closing of the Alliant transaction during quarter, our team is laser focused on a successful integration in order to produce the financial returns we expect. We are also ensuring that our core shipbuilding programs are achieving key production milestones in order to generate strong free cash flow, which will enable deleveraging of the balance sheet while continuing to return capital to shareholders via dividends and share repurchases. We firmly believe that these are the appropriate steps to generate significant long term sustainable value for our shareholders, our customers and our Employees. And now, I will turn the call over to Chris for some remarks on the operations. Chris?

Speaker 3

Thanks, Mike, and good morning, everyone. I'm very pleased to report another solid operational quarter. With that, let me share a few highlights. At Ingalls, Let me first provide a brief update on the pending contract awards of LHA9, LPD 32 and 33. We still believe that a bundled acquisition of these critically important ships is the most cost effective method of procurement and are pleased that the Navy and Congress have protected the ship schedules with a contract for long lead material on LHA-nine, coupled with continued support for LPD-thirty two and thirty three.

Speaker 3

Shifting to program status, LHA Bougainville continues to achieve cost and schedule performance in line with our expectations, while making steady progress through the structural erection and initial outfitting phases of construction. On the DDG program, the team successfully completed acceptance trials for guided missile destroyer DDG 121, Frank E. Peterson, Jr, and expects to deliver the ship to the Navy by the end of this year. In addition, DDGs 123125 remain on track to complete seed trials next year as planned. On the LPD program, LPD 28 Fort Lauderdale was christened in August.

Speaker 3

This ship remains on track to complete sea trials during the Q4 with delivery to the Navy planned in the Q1 of next year. At Newport News, CVN 79 Kennedy is approximately 84% complete and the focus remains on compartment completion and key initial propulsion plant milestones. Regarding the sensitization of the single phase delivery contract modification, We have reached agreement on the cost and schedule impacts with the Navy and expect to execute the contract modification late this year or early next year. On the RCOH program, CDN-seventy three USS George Washington continues to achieve key propulsion plant milestones and is approximately 92% complete. In CVN 70 8, USS Gerald R.

Speaker 3

Ford return to Newport News in August to begin a planned incremental availability following successful completion of full ship shock trials. On the VCS program, SSN 794 Montana remains on track for delivery to the Navy later this year and the SSN 796 New Jersey float off milestone has moved to early next year to ensure that we achieved optimum build sequence from float off to delivery planned in 2022. And finally, on the submarine fleet support program, SSN 725 Helena remains on track for redelivery to the Navy later this year. At Technical Solutions, The Alliant transaction closed in mid August and the team announced new business groups and executive appointments that directly align with the strategic focus that we have previously articulated. We expect this very talented team to execute a successful integration of Allian and deliver unparalleled national Solutions to our customers while growing the business and producing returns in line with our expectations.

Speaker 3

Delays in contract awards in our unmanned business for critical new programs remains a watch item. We're expecting this to be resolved by the end of the year, but it appears that these awards are not likely until early to mid-twenty 22. Now I'll turn the call over to Tom for some remarks on the financials.

Speaker 4

Tom? Thanks, Chris, and good morning. Today, I will briefly review our Q3 results and provide an update on our outlook for 2021. 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 4 of the presentation, Our 3rd quarter revenues of $2,300,000,000 increased approximately 1% compared to the same period last year.

Speaker 4

This was due to growth Solutions driven by the Alliant acquisition, which was largely offset by a decline in revenue at Ingalls primarily due to lower volumes on the NSE, DVG and LHA programs. Segment operating income for the quarter of $163,000,000 increased $1,000,000 compared to the Q3 of 2020. And segment operating margin of 7% was in line with the results from the prior year period. Operating income for the quarter of $118,000,000 decreased by $104,000,000 from the Q3 of 2020, and operating margin of 5% decreased to 4.55 basis points. These decreases were almost entirely due to a less favorable operating fast cash adjustment compared to the prior year period.

Speaker 4

The tax rate in the quarter was a negative 4.3% compared to 1.8% in the Q3 of 2020. The decrease in the tax rate was primarily due to additional research and Development Tax Credits for tax years 2016 through 2020 recorded in the Q3 of 2021. Net earnings in the quarter were $147,000,000 compared to $222,000,000 in the Q3 of 2020. Diluted earnings per share in the quarter were $3.65 compared to $5.45 in the prior year period. Q3 2021 results include approximately $15,000,000 of non recurring pretax transaction expenses related to the acquisition of Alliant.

Speaker 4

Excluding the impacts of pension, diluted earnings per share in the quarter were $3.58 compared to $3.73

Speaker 5

per share

Speaker 4

in the Q3 of 2020. Turning to Slide 5. Cash from operations was $350,000,000 in the quarter and net capital expenditures were $73,000,000 or 3.1 percent of revenues, resulting in free cash flow of $277,000,000 This compares to cash from operations of 222,000,000 and $62,000,000 of net capital expenditures or free cash flow of $160,000,000 in the prior year period. Cash contributions to our pension and other post retirement benefit plans were $10,000,000 in the quarter, principally related to post retirement benefits. During the Q3, we paid dividends of $1.14 per share or $46,000,000 Our Board of Directors recently approved a 3.5% increase in our quarterly dividend to $1.18 per share and this will take effect in the Q4 of this year.

Speaker 4

We also repurchased approximately 83,000 shares during the quarter at an aggregate cost of approximately 17,000,000 Moving on to Slide 6, Ingalls revenues in the quarter of $628,000,000 decreased 47,000,000 or 7% from the same period last year, driven primarily by lower revenues on the NSE, DDG and LHA programs. Ingalls operating income of $62,000,000 and margin of 9.9% in the quarter, compared to operating income of 62,000,000 and margin of 9.2% in the Q3 of 2020. The operating margin improvement was driven by an incentive on the DDG program and higher risk retirement for the LPD program, partially offset by lower risk retirement on the NSE program. Turning to Slide 7. Newport News revenues of approximately $1,400,000,000 in the quarter decreased $4,000,000 or less than 1% from the same period last year, driven by lower revenues in naval nuclear support services, partially offset by higher revenues in submarines and aircraft carriers.

Speaker 4

Naval Nuclear Support Services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services. Submarine revenues increased due to higher volumes in Block V boats of the Virginia class submarine program and submarine support services and Columbia class submarine program, partially partially offset by lower volumes on Block IV boats of the Virginia class submarine program. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis CVN-seventy 4 and the construction of Doris Miller CVN-eighty 1 and Enterprise CVN-eighty, partially offset by lower volumes on the RCOH of USS George Washington CVN 73 and the construction of John F. Kennedy CVN 79.

Speaker 4

Newport News operating income of $88,000,000 and margin of 6.5% in the quarter compares to operating income of 79,000,000 and margin of 5.8% in the Q3 of 2020. The improvement was primarily due to higher risk retirement on the RCOH of USS George Washington CVN 73 and Block IV both of the VCS program, partially offset by lower risk retirement on the Naval Nuclear Support Services. Now to Technical Solutions on Slide 8 of the presentation. Technical Solutions revenues of $394,000,000 in the quarter increased 23% from the same period last year, mainly due to revenue attributable to the acquisition of Align in mid August, partially offset by the divestiture of our oil and gas business and contribution of the San Diego Shipyard to a joint venture in the Q1 of this year. The acquisition of Alliant closed on August 19 and 3rd quarter results included approximately $163,000,000 of revenue attributable to Alliant.

Speaker 4

Technical Solutions Operating income of $13,000,000 and operating margin of 3.3% in the quarter compares to an operating income of $21,000,000 and operating margin 6.6% in the Q3 of 2020. These decreases were primarily driven by the inclusion of approximately $8,000,000 of Alliant related purchase intangible amortization as well as lower performance in Defense and Federal Solutions, the divestiture of our oil and gas business and the contribution of the San Diego Shipyard to a joint venture I previously mentioned. 3rd quarter 2021 results include approximately $4,000,000 of operating income attributable to Alliant. 3rd quarter Technical Solutions EBITDA was approximately $30,300,000 or an EBITDA margin of 7.7%. Moving on to Slide 9 of the presentation, we've updated our outlook for 2021 2022 pension and post retirement benefits.

Speaker 4

For 2022, FAST is now projected to be a benefit rather than an expense, primarily due to higher asset returns. Consequently, the FAST CAS adjustment has increased from the prior outlook and is now projected to total $52,000,000 in 2022. Please remember that pension related numbers are subject to year end performance and measurement criteria. We will provide a multi year update of pension estimates on our 4th quarter earnings call in February. Finally, on Slide 10, a perspective on the outlook for the remainder of the year for both shipbuilding and technical solutions, inclusive of Allian.

Speaker 4

Regarding shipbuilding, we now expect 2021 revenue to be approximately $8,200,000,000 at the low end, but within our initial guidance range. 3rd quarter shipbuilding revenue was modestly impacted by material timing, which may persist in the near term. Additionally, we continue to navigate through a challenging labor market as well as the potential impact of COVID-nineteen vaccine mandate. Given all of that, we think it's best to be prudent and temper near term expectations. We continue to expect that shipbuilding operating margin will finish segment.

Speaker 4

We expect that the 4th quarter shipbuilding operating margin will be roughly consistent with the 3rd quarter results as we were able to recognize some key retirement events in the Q3, including the completion of sea trials for DDG-one hundred and twenty one. Regarding Technical Solutions, I've noted that Alliant acquisition closed in mid August and our updated expectations for 2021 now include Alliant from the date of acquisition, inclusive of incremental purchase intangible amortization that impacts our segment operating margin expectation. Turning to free cash flow, we now expect 2021 free cash flow to be between $300,000,000 $350,000,000 as the repayment of the accelerated progress payments, which was initially expected in 2021 has now moved out to 2022. Additionally, On Slide 10, we have provided an updated outlook for a number of other discrete items to assist with your modeling. Regarding our longer term targets, we continue to believe that the 3% CAGR for shipbuilding revenue is appropriate.

Speaker 4

Additionally, we remain comfortable with our free cash flow target of $3,200,000,000 from 2020 through 2024. We plan to provide a more detailed view of 2022 on our Q4 call in February. Now I'll turn the call back over to Duane for Q and A.

Speaker 1

Thanks, Tom.

Operator

Conference Call. We will now begin the question and answer session. Our first question comes from Myles Walton with UBS. You may go ahead.

Speaker 6

Thanks. Good morning.

Speaker 4

Good morning, Michael. Good morning.

Speaker 6

I was hoping I could just start with the shipbuilding revenue outlook and maybe less Specific to the revenue outlook, more specific to what you're seeing in the labor workforce and moving to the low end of this range, Is that anticipating things that you haven't seen yet as it relates to the COVID mandate and what it could do to attendance and workforce? Or is it more what you saw in the Q3, if you kind of get where I'm going?

Speaker 4

Hey, good morning, Myles. Tommy, I'll start with that one. So from an outlook perspective, yes, we did go to the bottom end of the range. As you recall, we gave you a $2,000,000 to $8,000,000 for the beginning of the year. As we see how the quarter played out right now, what's left in front of us right now, we now move the shipbuilding revenue at $8,200,000,000 A couple of points on that right now.

Speaker 4

We're a little light on material, specifically at Ingalls. If you look from a Newport News perspective, net revenues were flat, obviously, a little less than from a TST perspective. But when we're talking about shipbuilding, the material lagged behind roughly about $40,000,000 in the quarter. And as we look forward into Q4, that could persist. We don't see Significant labor pressures this time that's going to impact our revenue.

Speaker 4

We have a keen eye right now with the EO and the mandate and how that's changing very dynamic situation there as well as keeping an eye on our supply chain to see how the material flows here. But it's just timing right now as we see the outlook. And as I say, it's still in the range that we gave you at the beginning of the year.

Speaker 6

Okay. Okay. And what is the percent of the workforce that's currently vaccinated? And If there were provisions, is it covered in your contracts because it's a new requirement being placed upon you?

Speaker 7

Right. Myles, this is Mike. Right now, we're, I'd say, roughly around 75%. We've seen a tremendous uptick in the last 30 days in folks getting the vaccine. I think the breaking news right now, it looks like the executive order is being moved out into January and they're talking about having your shot by January, not completely through the quarantine.

Speaker 7

So we're going to have to interpret how all of that plays out. We're working very closely with our customers on how do you implement the executive order. I mean, the executive order is we've been we have been from a policy standpoint, we have been directly aligned with what the White House put out. But as you kind of hinted at there, the executive order is not contractual. And so working with our customers on all of contracts to figure out how best to implement that executive order is what we're doing, and we're doing that across the board.

Speaker 7

So We're continuing to move ahead. Our ambition is to get as many of our employees vaccinated as we possibly can, because We are committed to a safe workplace and we think that's the best way to do it.

Speaker 3

All right.

Speaker 4

Thank you.

Speaker 6

In the transition relative to the one you did when you moved to Block IV?

Speaker 7

Well, I'll start and then let Chris

Speaker 4

Pick it

Speaker 7

up. The transition when we kicked off Block IV, the contract took quite a while to negotiate that contract. And as a result, there was some late material procurement, material that kind of helped us get off to a rocky start relative to that program as well as the ramp up in production. So we had a lot of things moving, a lot of parts moving on the beginning of Block IV. We don't have any of those parts moving at the beginning of Block V.

Speaker 7

And so we're the Transition for us is moving basically seamlessly from Block IV into Block V. Pretty excited about that and pretty optimistic about where that's going to go.

Speaker 5

Yes. No, I think that's right. And when you think through VCS and Block IV, getting back to a cadence where we're floating off One boat a year and delivering one boat a year and then transitioning that workforce right into Block V makes great sense. So We have high hopes for performance on Block V because of the lessons we're learning through Block IV when you get to a 2 per year sort of cadence.

Speaker 6

And then also in submarines, you commented this time that your services revenues were down a little bit. Can you comment on where the 3 Los Angeles class ships stand in their process and how you see Services revenues at Newport News trending over the next couple of years here?

Speaker 5

Sure. So Helena will this is Chris, Doug. Helena will deliver this year. Columbus is in process and moving through cycle in their contract and then Boise is really in their prompt start period. So we're going to get into a place here.

Speaker 5

And I think in communication with our customer where it makes great sense to have sort of a consistent stream of work and revenue. It probably will not be as high as it's been going forward, and we need to create that plan with our customer. That's the status of the 3 that are in Newport News now. And as I said, we're working with the customer to ensure we have

Operator

Our next question comes from Seth Seifman with JPMorgan. You may go ahead.

Speaker 8

Thanks very much and good morning everyone.

Speaker 4

Good morning. I wanted to start off, I think you mentioned

Speaker 8

a bit earlier that you were looking to finalized the single phase delivery agreement for the carrier with the Navy either late this year or early in 1Q. Again, can you tell us, is there any kind of margin or cash impact we should think about

Speaker 5

Once that's finalized? Yes. Seth, this is Chris. We will definiteize If not this year, beginning of next. Don't anticipate significant margin cash impact.

Speaker 5

It's obviously seen increase in the top line for that shift, but it also extends the risk retirement events out a couple of years because it extends the test program. So nothing significant from a or material from a sales margin or cash impact at this point.

Speaker 4

Okay. And then, I mean, it seems

Speaker 8

like it's mostly a timing issue, but Just wanted to ask about the cash flow guidance increase this year. Should we think about that increasing your kind of 5 year expectation or is it mainly having to do with the timing of when those progress payments. Go back to the government.

Speaker 4

Good morning. Yes, it's Tom here. Yes, it is. The progress of payments is the predominance of the change that we have right now. Obviously, another quarter with Retirement.

Speaker 4

We have actuals through Q3 and we have a line of sight for the end of the year. But predominantly, the change there was because of the progress payments not getting kicked to the 2020 two time frame. Keep in mind, too, at year end, we have to hit back half of the payroll FICA tax that we did not pay in 20 2020. So that's baked into the numbers. So it's timing and within the 3.2 it still holds.

Speaker 8

Thanks very much.

Operator

Our next question comes from Ron Epstein with Bank of America. You may go ahead.

Speaker 1

I was wondering if you could give us just some more color, maybe just following up on Myles' question About what's going on in your supply chain, where you're seeing some material shortages and is it just being driven by delays in transportation or what is it?

Speaker 4

Sure. Yes, it's Tom here. I'll take that one. So we've had this conversation on the last Couple of calls and we're watching that intently. I regularly touch base with the supply chain offices that we have at each of the yards, some of them see exactly on where And right now, as we've given in the past, because of the nature of our long term contracts, our long term materialize that start ahead of the construction of these contracts.

Speaker 4

And then obviously with the backlog that we have that's been on contract and we have line of sight of the work that's going to be performed in the yard, A significant amount of those requirements have already been put on order and we're managing them aggressively to make sure that the material flows in and hits the in yard need date. The preponderance of the material is coming in on time and meeting the contractual needs that we have within the yard. I would tell you that recently last 3 to 6 months that as We have spot orders. What we're seeing is a little bit of volatility in pricing and the validity dates are shrinking a little bit on things that we have to But from a perspective of execution of the existing contracts we have, we don't see a significant impact at this time. Obviously, we're watching how the EO mandate impacts the supply chain.

Speaker 4

And the pressures that we do here are our 2nd and third tier were dependent on the raw materials, so copper cabling, things of that nature. But again, as we stand here today, The supply chain that we need because of how we've contracted that work in advance has us maintaining schedule.

Speaker 1

Okay, got it. Got it. All right. Thanks for that. And then, on the technical services business, if you just Yes, both at the aperture a little bit and think about when we walk out 2, 3, 4 years from now, where do you see the margin in that business, revenue, presumably it's going to be much better than where it is today.

Speaker 1

And I'm just curious, I mean, if you can just give us I know you're not giving forward guidance, That's something most companies don't do. So I'm not asking for that. But just if you could put a little framework around how we should think about the margin in that business as we think longer term?

Speaker 4

Yes. So because of how we put that division together with the acquisitions, the purchase of tangible and things of that nature, if you notice, we've been guiding and driving towards EBITDA relationship against the performance on where we see. You've noticed from the announcement we had in the July timeframe and then with The line closed in August. We've guided you on how that was going to cause a lift there. From a ROTH perspective, we were at 4% to 5%.

Speaker 4

We dialed in from an EBITDA perspective to be in the 8% to 10% range by 2024. Both the initial guidance we gave you in the July timeframe of Alliance supported that. As we sit today after the close in August and now we've closed the quarter with the line cranked into our financials, they're hovering on the low end of the range right now. So that's good news because that's more than 50% of that portfolio. And I think kind of going forward as we see those purchase intangibles get burnt off in the next 3, 4, 5 years going Obviously, that's going to be an improvement.

Speaker 4

I would tell you that the PI is baked into the roster. So although the roster EBITDA this quarter at CSD is 2.6% with $8,000,000 of purchase intangibles. When you roll that out, it's a 5.3% ROPS quarter and the EBITDA is at 7.7% right So that's a near term perspective and how I see it kind of evolving in the out years.

Speaker 1

Okay, great. Thank you.

Operator

Our next question comes from George Shapiro with Shapiro Research. You may go ahead.

Speaker 9

Yes. You had mentioned that the margin in shipbuilding in Q4 will be similar to Q3 because some items move to Q3. Can you just list what moved to Q3? And I thought you mentioned some might have moved to Q1 or so of next year. So what do we effect in Q2 and Q4 for incentives versus what we had thought before?

Speaker 4

Hey, George, it's Tom Group. Good morning. Yes, I'll take that. So just a couple of moving parts there. We kind of guided in Q2 going into 3 would be light and forward be a little bit heavier than that.

Speaker 4

We have pulled a couple of incentives at Newport News on the RCOH on 73 to the left as well as Ingalls taking DDG-one hundred and twenty one to trials was a risk retirement evaluation and event. So Just a couple of moving parts there from Q3 to Q4, but we're still in the lane there of the 7.5%, 8% Ross that we gave you for shipbuilding for year end. I didn't mention anything moving into next year In my remarks, we do have LPD 28 moving or staying on contract in the beginning of 2022.

Speaker 9

Okay. And then just a separate one probably more for Mike. I noticed that Newport News you got like The union contract was affecting 50% of the workers up in November here now. So if you can kind of give us what you think about the status I guess it's more in the news given the contract results in the year.

Speaker 5

Yes. George, I'll start. This is Chris. We're In process with Newport News Union working through that contract. We have a very good relationship with them.

Speaker 5

And I fully expect we can come to a reasonable agreement on a contract. I know Mike ran Newport News for a while, so he probably has For a long time actually, he probably has better comments than that. But we're working with them every day to try to get to a resolution.

Speaker 4

Okay, thanks.

Speaker 7

We pride ourselves on having very constructive relationships with our labor partners, and I don't think this will be any different than that.

Speaker 9

Okay. Thanks very much.

Speaker 4

You bet, George.

Operator

Our next question comes from Richard Safran with Seaport Research. You may go

Speaker 10

ahead. Thanks. Good morning, everybody.

Speaker 4

Good morning.

Speaker 10

So On the Navy's new destroyer cruiser class, the ship doesn't appear to be slated to arrive until very late in the Okay. Correct me if I'm wrong, but I think that represents a bit of a slide to the right in terms of schedule. Could you discuss A timeline for competition. And following up on your opening remarks, I'm wondering how you think The Navy strategy with the new ship now impacts the new flight of DDG-51s. Since the new ship isn't arriving Now for close to 10 years down the line, I'm thinking that really reinforces the idea of a new flight of DDGs, but That's my view.

Speaker 10

I was wondering what you think of that.

Speaker 4

Hi, this is Mike. I don't

Speaker 7

think you're too far off Just in general, I think general principles are it's really hard to pin down the development path and timeline for a new program like This early in the process. They're trying to work through how do they fund the design, How they fund the project, when are they going to have it, what are the requirements going to be. That's a pretty dynamic thing. And so trying to pin that down precisely is a bit of a challenge. And our general view is that you don't really want to stop production of a line until you're ready to move to a mature design product going forward.

Speaker 7

So as that product matures, it will interact. The construction work that's going on, on the DDGs today, the Flight 3 ships will my we certainly will advocate and believe that the best prudent course ahead will be to continue to build Flight 3s until that design is mature and you're ready to go into production on that. And if that happens position, when it might be, what it would look like and that sort of thing. I think it would be a mistake though for there to be any sort of curtailment in the destroyer program, Anticipating some kind of maturation path. We kind of went down that path in a couple of programs during my career.

Speaker 7

We've done with submarines. We did that actually with DDGs and when we tried to transition over to the 1000s and then transitioned back, so we had Gap in the destroyer program. Our industry is full of people who have seen gaps in production become tremendous problems for restart to production. So let's keep the production line moving. And when the production line when the design Fair enough to transition, we will transition it.

Speaker 10

Okay. Thanks for that. And More general, I thought you could talk a little bit about efficiency initiatives. A while back, we had things like digital transformation, but I thought you might discuss efforts to reduce information, but I thought you might discuss efforts to reduce costs. And in your answer, maybe you could talk about how much that might contribute to margin improvement and the objective eventually getting to 9% margins?

Speaker 5

Yes. Richard, this is Chris. Yes, I I won't discuss the contribution to the margin rate and when we expect to get to 9%. We'll talk a lot more about that on the year end call, but the capital investments we've made, the technology investments we've made, both at Ingalls and Newport News are going very well. In In the most simple form, at Ingalls, getting all the work undercover really drives efficiency if you've ever been in Mississippi in August.

Speaker 5

And then the digital shipbuilding Products are becoming more mature and helping the manufacturing of CVN-eighty and the Columbia class. So we're very encouraged by the technology investments and the capital investments we've made, and we hope to continue to drive cost out of our products.

Speaker 10

Okay. Thank you.

Speaker 5

Sure.

Operator

Our next question comes from Pete Skibitski with Alembic Global. You may go ahead.

Speaker 11

Hey, good morning guys. Good morning. Just a follow on to Seth's question

Speaker 7

on the

Speaker 11

Kennedy. Chris, I think you said you're going to get that contract definitization that's going to maybe move the risk registers to the right

Speaker 12

a little bit. I just

Speaker 11

want to make sure I'm in line with it. I think I've been assuming that the Kennedy retirement opportunities, risk retirement opportunities will be 2022, 2023. Is that still the case? Or have they shifted to the right at 24 or 25? I just want to level set that.

Speaker 5

No, no. 23 and 24 make a lot of We're really in volume when it comes to 79 right now, getting 2 compartments and work packages, starting localized testing, but it's 'twenty three, 'twenty four timeframe.

Speaker 11

Okay, great. I appreciate that. And Maybe one for you, Mike. I would like to ask, any hope left on with NSC-twelve? It seems like all the Committees have reported.

Speaker 11

I wasn't sure if anyone stuck in any language or funding at all with regard to that.

Speaker 7

Well, I think you're reading that right. We have a great product line there, and we're very excited about what we've done. But right now, there's just In the contest for resources, it's not faring very well. So we'll probably just leave it at that.

Speaker 11

Yes, the Coast Guard always seems to come up short. I know. It's too bad.

Speaker 4

All right. Thanks, guys.

Speaker 1

You bet.

Operator

Our next question comes from David Strauss Group Barclays. You may now go ahead.

Speaker 12

Thanks. Good morning. I wanted to ask about Allian. I think when you announced the deal, you talked about $1,600,000,000 in kind of annualized revenue. Based on what you did in the quarter and when you're applying for the year end, it would seem like either it's running well below that or you're expecting big growth in 2022.

Speaker 12

Can you just comment on that?

Speaker 7

Sure. Yes, it's Tom here.

Speaker 4

Good morning. So for the quarter, I think in my remarks, you'll see $3,000,000 is Q3 from a line perspective. You kind of run that out for another quarter and from a Q4 that's the run rate, $300,000,000 there. So collectively, it's about $450,000,000 On an annualized basis, that's like $1,400,000 and change, Right. And then to get to the 1.6% it's a growth rate of a little bit higher than 11.5%, 12%.

Speaker 4

So that's the math of it. Right now, we still stand by the guidance that we provided in the July timeframe. We're coming through our annual plans This time of the year right now and the lowest draft, we're working ourselves through Executive Management Board. We still stand by those projections of 1,600,000,000 in revenue and the $135,000,000 of adjusted EBITDA.

Speaker 5

David, this is Chris. I'd also add that the integration of the front end of that business has Very well in business development and capture. We have a $60,000,000,000 total pipeline that we're working through and prioritizing a number of Significant competition over

Speaker 4

the next 12 to 18 months

Speaker 5

and a book to bill at 1.8 in the quarter. So All indications are positive for that business.

Speaker 12

Okay. As a follow-up, I wanted to ask about the Tom, the long term free cash flow profile, obviously, you're sticking with the 3.2. I think previously you had said that 2022, 2023, 2024 that timeframe would be Fairly free cash flow over that period would be fairly ratable across those years. Is that still the view or is there revenue, is it going to ramp during that period? Thanks.

Speaker 4

Yes. So as we said, the 3.2% is still good, right? We have 7.57% behind us. $100,000,000 We do have next year, as I mentioned, we have to pay back the I guess, that have to be paid back. That's 100 around 160, so you can do some brand.

Speaker 4

I mean, you can just I'll model those 3 years out, but we still have $200,000,000 over these 5 years.

Operator

Industry. Our next question comes from Noah Poponak with Goldman Sachs. You may go ahead.

Speaker 6

Hi, good morning everyone.

Speaker 4

Good morning. Good morning.

Speaker 6

Tom, just with these outside of the normal course of business items, supply chain, the growth compares shake Should we be thinking of next year, the shipbuilding growth rate being fairly back end loaded versus the first Conference. And just following up on that Alliant discussion there, are you seeing we've seen those headwinds across hardware and outside of hardware, are you seeing some of those same challenges outside of the business in Allian or not as much?

Speaker 4

Sure. So for the first part from a shipbuilding perspective, I highlighted a little bit earlier, I didn't hit The backlog piece of the outlook, right? So unlike, say, requiring either new awards or Funding, we have a line of sight of the work that we have in house. So I look at it from an outlook perspective from shipbuilding. Still the 3% CAGR is good.

Speaker 4

I would tell you that, although it looks like we're at the same point we were through the 1st 3 quarters of this year Last year was an exceptional year. 'nineteen to 'eighteen to 'nineteen was a 6% growth and then 'nineteen to 20 was another 6% growth. And even specifically, Q4 last year was a 19% growth over the quarter previously there. So some material, as I highlighted, Actually, Chris highlighted it moved into the end of Q4 2020 and made that year look kind of big, which now makes 2021 look flat. So I'm not concerned right now because we have the backlog, we have the work, we have the labor force right now.

Speaker 4

We are watching material, as And we're watching EO mandate impacts our workforce. But I don't I'm not concerned with how 2021 is shaking out from a revenue perspective. And I would think kind of going forward that it's pretty linearly in 2022 for shipbuilding.

Speaker 1

Okay.

Speaker 4

Relative to your Lyme question, I don't see obviously their contracts are different, more service oriented. We're excited with them on board. Andy's leadership team in play. As Chris had mentioned earlier, the initial assessments that we had going into the purchase and now to close, we've had a good 6 weeks run rate in the financials and a little under the hood there. So we're comfortable with what's in front of them, the items that they're bidding and how they're executing on the contracts.

Speaker 4

We're evaluating the revenue synergies between align making us better, the DFS and NBIS and vice versa. So I feel comfortable With that going forward there, I don't see today, again, the EO mandate significantly impacting our revenue expectations from an aligned perspective. We have highlighted from a TSD perspective, we're eager to watch the funding come about and the unmanned portfolio evolve and grow kind of going forward. So that's a watch item for us.

Speaker 1

Okay. Thank you.

Operator

I would now like to hand the call back over to Mr. Petters with any closing remarks.

Speaker 4

Well, thank you, and I want to

Speaker 7

thank everyone for joining us on today's call. Before I close, I wanted to pass on to you that Duane Blake has informed me that he wishes to retire.

Speaker 5

I had that request, Mike.

Speaker 7

Yes, I've already turned it down a couple of times. But Dwayne and his family, they've been Parts of our family here for 37 years. His personal support for all of us here at Huntington throughout his career, but especially in his last position here, have just been extraordinary. So You called today to harass Dwayne about the filing or the call. Just remember, he's a short timer now.

Speaker 7

And so he might have some leverage in that call. So with that, we wish Dwayne and his family well, and we wish them All the best as they move forward with the next chapter of their lives. And with that, we appreciate your interest in HII, and we welcome your continued engagement

Operator

Conference. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Huntington Ingalls Industries Q3 2021
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