Huntington Ingalls Industries Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 1, 2024

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the 4th Quarter 2023 HII Please be advised that today's conference is being recorded. And I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations.

Speaker 1

Welcome everyone to the HII 4th Quarter 2023 Earnings Conference Call. Joining me today on the call are our President and CEO, Chris Kastner and Executive Vice President and CFO, Tom Seeley. As a reminder, statements made today that are not facts are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other that may cause our actual results to be materially different from future results expressed or implied by these forward looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results.

Speaker 1

Also in their remarks today, Chris and Tom will refer to certain non GAAP measures. For reconciliations of these metrics Relations page at ir. Hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Speaker 2

Thanks, Christy. Good morning, everyone, and thank you for joining us on our Q4 2023 earnings call. 2023 was a strong year for HII. We continue to invest both in our shipyards and in IRAD to both expand capacity and develop new products and solutions for Our growth rate for the year of more than 7% and our free cash flow generation of almost 700,000,000 demonstrate that we're entering a period of accelerated growth and increased free cash flow generation. In addition to record sales growth With 2023 revenues of $11,500,000,000 4th quarter revenue was especially strong across all three divisions with 13% year over year growth and a record $3,200,000,000 of revenue.

Speaker 2

In 2023, net earnings were $681,000,000 18% higher than the prior year and strong free cash flow of $692,000,000 was 40% higher than 2022. We also had $12,500,000,000 of contract awards in 2023, resulting in backlog of $48,000,000,000 at year end. At Ingalls, we delivered DDG-one hundred and twenty five Jack H. Lucas, the 1st Flight 3 ship at NSC In our amphibious ship programs, we were awarded a $1,300,000,000 detailed design and construction contract for LPD 32 and launched LHA-eight Bougainville, the 3rd big deck amphibious warship in the America class. Ingalls expects to complete sea trials and deliver LPD-twenty nine, Richard M.

Speaker 2

McCool Jr. In the first half of twenty twenty four. At Newport News, we redelivered CDN 73 USS George Washington After completing her refueling and complex overhaul and continued to progress on the test program for CVN 79 John F. Kennedy. In the Virginia class program last year, we were awarded the long lead time material for 2 additional Block V boats and the first two boats of Block VI.

Speaker 2

We completed work on SSN 796 New Jersey and expect to deliver in the first half of twenty twenty four. And SSN 798 Massachusetts is nearing float off, which we anticipate in the Q1 of 4. In addition to the 2024 milestones, we've included our 2025 milestone outlook, which reflects our continued focus on execution. Regarding our workforce, I'm pleased with the positive progress in hiring. We hired over 6,900 craft personnel in 2023 and continue to see progress early this year.

Speaker 2

For 2024, we have a hiring target of approximately 6,000 craft personnel. The competition for skilled labor in shipbuilding and the larger manufacturing sector continues to impact shipyards and our supply base. With our Navy partner, we will continue to invest in our team to improve worker retention and proficiency, both within our shipyard and in the supply chain to ensure we fulfill our contractual commitments and meet our financial objectives. At Mission Technologies, we delivered another outstanding quarter performing ahead of plan across all business units leading to strong revenue growth in 2023. In addition to the record revenue growth, Mission Technologies booked new and recompete contract awards with nearly $6,000,000,000 in total contract value.

Speaker 2

Also, Mission Technologies ended the year with a robust business pipeline of $75,000,000,000 which makes us optimistic about potential growth opportunities in 2024. Key growth drivers include support for mission readiness in artificial intelligence, Cyber and Electronic Warfare, Advanced Modeling and Simulation, LVC and C5ISR. Turning to activities in Washington DC for a moment, we are pleased with the passage and enactment of the Defense Authorization Bill for fiscal year 2024. The FY 'twenty four NDAA strongly supports our shipbuilding programs, including multiyear procurement authority for Virginia Class Block 6 Submarines an incremental funding authority for LPD 33. The Defense Authorization Act also includes necessary authorities to support the implementation of the AUKUS agreement.

Speaker 2

Looking ahead over the next 5 years, we expect revenue growth of more than 4% and cash generation of $3,600,000,000 Our expectations are grounded on the assumption that we must deliver on our commitments to our customers. Also, while the trajectory may not be linear due to the timing of ship milestones and material timing, we expect that HII will be generating approximately $15,000,000,000 annually in revenue by the end of the decade. As always, fundamental to our expectations for the business is executing on our contracts and developing and providing solutions to our all domain customers. We take this responsibility very seriously and remain focused on Tom?

Speaker 3

Thanks, Chris, and good morning. Today, I'll review our Q4 and full year results and also provide our outlook for 2024. 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 4th quarter results on Slide 4. Our Q4 revenues of $3,200,000,000 increased approximately 13% compared to the same period last year.

Speaker 3

This growth was driven primarily by higher year over year revenue at all three segments, leading to record quarterly revenue for HI. Operating income for the quarter of $312,000,000 increased by $207,000,000 or 197 percent From the Q4 of 2022, an operating margin of 9.8% compared to margin of 3.7% the prior year period, up 6 0 9 basis points. The increase in operating margin was primarily due to higher segment operating income. Net earnings in the quarter were $274,000,000 compared to $123,000,000 in the Q4 of last year, up 123%. Diluted earnings per share in the quarter was $6.90 compared to $3.07 in the Q4 of the previous year.

Speaker 3

Moving to our consolidated results for the full year. Revenues were a record 11 $500,000,000 for the year, a significant increase of 7.3% from 2022. The improvement was driven by strong year over year growth at all three segments. Operating income for the year was $781,000,000 and operating margin was 6.8%. This compares to operating income of $565,000,000 and operating margin of 5.3% in 2022.

Speaker 3

The operating income growth was primarily driven by year over year improvement in segment operating income at all three segments. Net earnings for the year were 681,000,000 compared to $579,000,000 in 2022, up 17.6 percent. And diluted earnings per share were $17.07 compared to $14.44 in 2022, up 18.2%. For segment results on Slide 5, Ingalls revenues of $2,800,000,000 in 2023 increased $182,000,000 or 7.1 percent from 2022, driven primarily by higher volumes in surface combatants and amphibious assault ships, partially offset by lower NSE program revenues. Ingalls' operating income of $362,000,000 and margin of 13.2% in 2023 Both improved from 2022 results, driven primarily by a $70,500,000 sale of court judgment to recover unpaid receivables for the prior repair, refurbishment and modernization of foreign built frigates, the higher volumes that I just mentioned and the contract incentive on DDG-one hundred and twenty nine, partially offset by lower risk retirement on LPD 28 and LPD 30 than the prior year.

Speaker 3

At Newport News, 2023 revenues of $6,100,000,000 increased by $281,000,000 or 4.8 percent from 2022, primarily due to higher volumes in aircraft carrier construction and engineering and submarines and partially offset by lower revenues in the RCOH program and naval nuclear support services. Newport News 2023 Operating income of $379,000,000 increased $22,000,000 from 2022, and margin of a revenue adjustment on CVN 73, partially offset by contract incentives on the Columbia Class submarine program in 2022. Shipbuilding margin for 2023 was 8.3%. At Mission Technologies 2023 revenues $2,700,000,000 increased $312,000,000 or 13.1 percent from 20 driven by higher volumes in C5ISR and cyber, electronic warfare and space contracts. Mission Technologies 2023 operating income of $101,000,000 and segment operating margin of 3.7 percent both improved to operating income of $63,000,000 and segment Operating margin of 2.6% in 2022, driven primarily by a $49,500,000 settlement of Representations and Warranties insurance claim relating to the acquisition of Hydroid and the higher volumes I described, partially offset by a contract loss and lower equity income due to the sale of a joint venture.

Speaker 3

Mission Technologies 2023 results included Approximately $109,000,000 of amortization of purchased intangible assets compared to approximately $120,000,000 in 2022. Mission Technologies EBITDA margin for 2023 was 8.6%. Turning to cash. 2023 free cash flow was $692,000,000 handily beating the guidance due to strong year end collections as well as benefiting from the sale of the Frigate Court judgment and settlement of the REPS and warranty insurance claims I've highlighted. During the year, the company reduced debt by $480,000,000 invested $278,000,000 in capital paid $200,000,000 in dividends and used $75,000,000 to repurchase shares while ending 2023 with 430,000,000 in cash on hand and liquidity of approximately $1,900,000,000 Net capital expenditures finished the year at 2.4% of revenues, just under 20 22's value of 2.5%.

Speaker 3

Cash to our pension and other postretirement benefit plans totaled $44,000,000 in 2023. Our pension outlook 2024 has improved from the update we provided in November given the better than expected returns to assets, partially offset by a decrease In discount rates since that time, asset returns for 2023 were 12.3%. Pension expectations 2025 through 2027 have been updated. And similar to the update we provided for 2024 last quarter, The FAST benefit has increased from our last update given the more immediate recognition of the positive asset returns experienced in 2023. This is partially offset by the impact of the lower discount rate.

Speaker 3

We've also provided an initial view of our 20 expectations. Turning to Slide 7 of our financial outlook for 2024. Given backlog, Growth performance in 2023 and the strong demand for our products and services, we are now forecasting mid- to long term HII revenue growth of 4 plus percent. For shipbuilding, mid- to long term forecast revenue growth has increased from 3% to approximately 4%, Although growth in 2024 will be tepid due to the outperformance in 2023. Accordingly, we are forecasting 2024 shipbuilding revenue between $8,800,000,000 $9,100,000,000 For 2024, we expect shipbuilding operating margin to be between 7.6 percent as we continue to target incremental margin improvement.

Speaker 3

For Mission Technologies, we continue to expect approximately 5% mid- to long term top line And again, due to the 2023 outperformance driven by approximately $80,000,000 of material timing, we expect tempered growth for FY 'twenty four, forecasting revenue between $2,700,000,000 $2,750,000,000 And we expect Mission Technologies operating margins to be between 3% and 3.5 percent and EBITDA margins to be between 8% and 8.5%. In 2024, Amortization and purchase intangible assets is expected to total approximately $109,000,000 of which $99,000,000 is attributable to Mission Technologies. We expect 1st quarter revenues of approximately $2,200,000,000 for Shipbuilding and $650,000,000 for Mission Technologies, with Shipbuilding operating margin near 7% and Mission Technologies operating margin near 2.5%. Moving on to capital expenditures. As we've discussed in prior quarters, we continue to see the long term capital expenditure rate of 1.5% to 2% of general sustainment.

Speaker 3

In the near term, the significant demand in submarine construction, we are partnering with our Navy customer to invest in expanding our shipbuilding capacity and throughput. The investment is expected to drive CapEx to approximately 5% on average for the next 3 years, with 2024 targeted be approximately 5.3 percent of sales. I will note that the sustainable free cash flow levels we've previously discussed are not expected be impacted by this due to customer investment, evidenced by the projected free cash flow growth over the next 5 years I'll provide shortly. Additionally, on Slide 7, we have provided our updated outlook for a number of other discrete items to assist with your modeling. Moving on Slide 8.

Speaker 3

We have provided an updated view of our free cash flow outlook for 2024 of $600,000,000 to 700,000,000 ending our prior 5 year free cash flow projection period with an estimate of $3,000,000,000 up from our prior estimate of 2.9 I'm also pleased to provide a free cash flow outlook for the next 5 years or for FY 'twenty four to 'twenty eight of approximately 3,600,000,000 I would note that these forecasts do not include Section 174 deferral, which, if it occurs, would be a tailwind to approximately $50,000,000 to $200,000,000 in 2024. On Slide 9, we've provided our capital allocation prioritization model, unchanged from previous discussions but updated for current events. We continue to remain committed to an investment grade credit rating have reduced our leverage ratio to under 2 turns at the end of 2023, a year earlier than planned. In addition, We finished paying off our $650,000,000 term loan in January of 2024, which concludes our debt repayment prioritization while securing our investment grade ratings and credit metrics. In 2024, we expect to return approximately $500,000,000 of free cash flow to shareholders through dividends and share repurchases.

Speaker 3

Lastly, on this slide, the Board has approved a revision to our share repurchase program in both term and amount, resulting in available share repurchase authorization of $1,500,000,000 through 2028. To close on my remarks, The company's mainstay programs are well supported in demand, and MT's growth success continues to expand and diversify our portfolio. Our future is bright and within our control by executing on our current production contracts and capitalizing on the growth demand for HI products and services. We've exceeded our 23 financial guidance metrics in terms of revenue, profitability and free cash flow while investing in our programs to facilitate growth and throughput. Additionally, we've strengthened our balance sheet, paying down debt and lowering our leverage ratio.

Speaker 3

Lastly, we fine tuned the HII investment thesis on the last driving our current and future capital allocation commitments. With that, I'll turn the call back over to Christi for Q and A.

Operator

Thanks, Tom. As a

Speaker 1

reminder to everyone on the call, please limit yourself to one initial question and one follow-up, so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q and A.

Operator

Thank you. Our first question today is from Myles Walton from Wolfe Research. Myles, please go ahead. Your line is open.

Speaker 4

Great, thanks. Good morning. Maybe to start with the CapEx change, obviously pretty material, dollars 300,000,000 annualized step up in run rate. A couple of questions on it. 1, why isn't it dropping through a higher revenue run rate in the near term like 24?

Speaker 4

And second, why is it only a couple of 3 year investment? What specifically is it going towards? Thanks.

Speaker 3

Hey, good morning, Myles. This is Tom here. I appreciate the question. Yes, so we mentioned here that traditionally we look at the Maintaining the yards to be about 1% to 1.5% with about another point point a half of specific projects. As we've talked about in the recent past, we have a lot of activity that's going on in the yards, acquisitions specifically at Newport News and driving down into the submarine program So we're putting more boats on contract then on VCS and the Columbia program.

Speaker 3

And as we're working ourselves through Those negotiations and schedules, we see it necessitates additional capacity and throughput. So In conversations with our Navy partner, we partnered on what that means. There'll be more a couple more buildings, more capacity in the yard, and it's requiring investments. Just over 3 years, we have defined projects that we've worked through and we briefed and we've gotten approved through the Board and with the Navy. And The investment there from the Navy will pay for the majority of that.

Speaker 3

So as much as it rolls through that I'm capitalizing the projects themselves. I'll get investments on the contracts that would help offset that. So It's a 3 year run. It peaks out as the 1st shift 5.3%. And as I said, we've kind of given you what the free cash flow projection is from 24% to 28 To kind of evidence that, we're still good to our thesis of the cash flow inflection to $700,000,000 plus as we go forward.

Speaker 3

There's a shape to it obviously of that $3,600,000,000 I gave you. And obviously it grows over time as the revenue and the incremental margin comes online and then as the CapEx falls off on years 45. But we think it's a good business arrangement. It facilitates the growth that we're talking about. You heard in the comments both from Chris and myself, we're raising shipbuilding from 3% to 4%.

Speaker 3

And this capital investment by both the Navy and us facilitates that growth long term.

Speaker 2

Myles, I'd also add that It obviously won't impact 24. These projects take a while to get implemented, but it does support the mid to long term growth.

Speaker 4

Okay. And Chris, just a follow-up on the longer term projection and the capital allocation prioritization and you'll probably get into this at Investor Day. But the last several years have been a lot of cash going to pay down debt. It doesn't sound like we need to do that. So are we at a point where we can more commit to a significant majority or not all of the free cash flow to return to shareholders over the timeframe looking forward?

Speaker 2

Yes. I'll start. So we fundamentally believe the greatest source of value that we can achieve as a corporation is to focus on our operational priorities right now and delivering our ships. So you see that in the capital investments. And then we're fairly clear on our capital allocation priorities relative to investing in our shipyards, being investment grade, progressively improving our dividends and then providing any remainder back to shareholders.

Speaker 2

Now that being said, we're going to have optionality around M and A. We have the responsibility to evaluate M and A projects from time to time. I don't see any significant hold in the portfolio right now. And operationally, I think our greatest focus needs to be on delivering our ships to our customer because they need them. So while we're not going to commit to providing everything back to shareholders on this call, we need to we're fortunate we have a strong balance sheet and we can do everything.

Speaker 2

So that's how we're thinking about capital allocation moving forward.

Speaker 3

Yes. If I could piggyback on top of that. I think you're looking at it the right way. If you look back on where we've been, right, in 'twenty two, we gave back to the shareholders $249,000,000 dividends and repos, this year, it's up to $275,000,000 which is 40% of free cash flow. But we have to keep in mind for 2023, was $480,000,000 of debt pay down.

Speaker 3

So we actually between the debt pay down and what we gave back to shareholders, it was better than 100% of the free cash flow of $692,000,000 for 2023. And now for this year, as we're saying, dollars 500,000,000 of dividends and repos. There's still another $229,000,000 I just paid $145,000,000 in January There's $84,000,000 bond payment in May. So $2.29 of debt and that concludes it kind of going forward Plus the $500,000,000 I'm committing to again is over 100% of free cash flow going back to the shareholders this year. You take the midpoint of the guide of $650,000,000 right?

Speaker 3

So it's ramping. We're giving you the commitment through 2024. We haven't told you a commitment to pass that, But we would envision as we work off each year and the cash is there, that we'll update you accordingly. All right. Thank you.

Operator

Thank you. Our next question today is from Gautam Khanna from TD Cowen. Waltham, please go ahead. Your line is open.

Speaker 5

Yes. Hey, I joined a little late, so I apologize if you covered this. But Could you update us on the timing of when the 3 milestones that slipped out Q4 will get caught up and if there's any downstream impacts from those delays, maybe crowding out labor Or anything else? And then if you could just talk about the milestones in 2024, are there any that are kind of late in the year, Q4 weighted that could pose a similar risk? Thank you.

Speaker 2

Sure. Sure. Thanks, Scott. The 2 VCS milestones, We're essentially complete with both of the operational commitments for those milestones. There were some Late breaking changes on both of those boats that needed to be implemented before we could claim victory and finally achieve them.

Speaker 2

But We're essentially complete. The staffing has been significantly reduced on each of the boats and it's been reallocated to the other boats. And no material financial issue related to those at all. On LPD 29, we ran into an issue Going through the test program that we need to stop and do a root cause corrective action on, we've done that. The ship went to sea this week, performed well.

Speaker 2

And we think we'll deliver that here late Q1, early Q2. Now from a 24 Milestone impact, we're all aligned within the corporation relative to those milestones. It does put some pressure on the DCS milestones at the end of the year on 798800, but we have detailed plans to achieve those and we're committed to getting those done.

Speaker 5

Thank you. And if I could follow-up, I just want to make sure I The accounting on those 3 that moved out of Q4, were there positive cume catch ups related to them Q4 and if not, do you anticipate that in Q1 and Q2 as you recover?

Speaker 2

No. There are no material financial issues related to those. Obviously, on LPD 29, there is a bit of an opportunity loss there that will recover when it ultimately gets delivered. But it's all included in our guidance.

Speaker 3

Got you.

Speaker 5

Thank you so much. Appreciate it.

Speaker 2

Sure.

Operator

Thank you. Our next question is from Seth Seifman from JPMorgan. Seth, please go your line is open.

Speaker 6

Hey, thanks very much. Good morning.

Speaker 7

Good morning.

Speaker 6

Good morning. I guess, in other your earnings calls this quarter, we've heard about various supply chain challenges on Virginia. I guess, can you speak to kind of how you feel your estimates are looking on Virginia and the amount of risk in those estimates? And then to the extent that Is there much in there that's contemplated for inflation reimbursement because it seems that contractor expectations for Inflation reimbursement have been coming down. Has that been the case for HII?

Speaker 6

Or, were they not there in the 1st place? Or is the sub industrial base different because it's such a priority?

Speaker 2

Yes. So we don't have inflation protection on the DCS program at this time. The supply chain is a challenge across all of our programs actually. We do have EPA protection for the most part at Ingalls and we're managing supply chain risk across the portfolio. The Navy is fully aware of this.

Speaker 2

We're very transparent about it. That's why the SIB funding is so important. That's why Getting 3 year AP is so important, so we could just eliminate that risk. But we evaluate our EACs every quarter. And if there's risk, we deal with it in that quarter.

Speaker 2

But it's not going away anytime soon. I think everyone understands that. That's why we have SIB funding being appropriated and authorized. And as soon as we can get that down into the supply chain, the better.

Speaker 6

Okay. Okay. Thanks. And maybe just a quick follow-up on the capital deployment. If I look at the 3.6 $1,000,000,000 over the period.

Speaker 6

Think about the dividends and the 2024 debt pay down, that maybe leaves like $2,250,000,000 I know the repo authorization, I think the slide say there's about $1,500,000,000 left. Mean, would you think that there's before that is possible to exceed that $1,500,000,000 by 2028?

Speaker 3

Yes. I would let that be regarding like we extended it for term and time, but we can always go back and change that again, so I won't read too much into the math of it. But as we said, there's $1,500,000,000 available right now through 20.28. And as we move forward, we'll adjust that accordingly. So that was more that was just more of a housekeeping issue that we cleaned up.

Speaker 6

Great. Thank you very much.

Speaker 2

Sure.

Operator

Thank you. Our next question is from Scott Deucho from Deutsche Bank. Scott, please go ahead. Your line

Speaker 8

is open. Hey, good morning.

Speaker 3

Hi, Chris.

Speaker 8

Hey, Chris. Just to clarify, did the LPD 29 delivery delays have much extra cost associated with them? Or is it more a function of some extra time and the deferral of the AC rather than a diminishment of the AC opportunity?

Speaker 2

Well, time and shipbuilding is cost, right? So we probably lost a little opportunity there. It's not material in nature. And We'll do that. We'll take a step up if appropriate when we make final delivery.

Speaker 2

But It obviously would have been worth more if we did it at the end of the year.

Speaker 8

Okay, got it. And then Tom, just from a reporting perspective, Why are Venezuela insurance recoveries included in operating earnings rather than below the line?

Speaker 2

A lot of people are a

Speaker 8

little confused by the reporting this quarter. Thanks.

Speaker 3

Yes. The way that I think accounting works on that down in Ingalls, it's operating income and other income because It's we've had that contract. We incurred cost on it. So it's a recovery for costs that we've had booked in the past and we had written off. So It comes back still as an operating income.

Speaker 3

It doesn't go into the revenue. So there's not a rev rec to it. But we do accounts for the margin and income statement and obviously we picked up the cash on both of those, on both the frigate and the reps in warranty in Q4.

Speaker 8

Okay. And then Tom, last question. Is there any kind of ramp to the or slope to the free cash flow target, the cumulative target over the next 5 years? Or is it fairly level loaded

Speaker 9

to 24?

Speaker 8

Thank you.

Speaker 3

No. There is a ramp to it and the shape to it. I knew when we gave that that people would want see that because we've been giving you the shape of the current loan from 2020 to 2024, but really only the back end of it. When we first announced that, we didn't provide it either. And the only reason why we're not trying to be kind of too nebulous, but it's 5 years, a lot of moving parts, how it can move around.

Speaker 3

I can tell you, it's not a reach number. Wouldn't put it out there. We don't feel that we can hit it. But I'm most comfortable right now. I try and manage by year.

Speaker 3

And we gave that number to show With the evidence ramp and the revenue that we talked about for 4 plus percent to HI across the enterprise, we see that Mission Technology is Definitely accretive and pulling cash for us right now. Your modeling should easily be able to get to that number. But I really want to get through 2024 And then, we can give you a guide on what like 2025 kind of looks like and each year thereafter. Okay?

Speaker 8

Thank you. Nice results.

Speaker 3

Thank you.

Operator

Thank you. Our next question is from David Strauss from Barclays. David, please go ahead. Your line is open.

Speaker 9

Great. Thanks. Good morning.

Speaker 2

Good morning, David.

Speaker 9

Chris or Tom, I wanted to ask about The shipbuilding margin target. So I think you have been targeting 7.7% to 8% for 2023, and you talked about 2024 being above that. And then you had milestones slip out that I would assume with those potential EAC adjustments that would help. So I guess what changed in terms of The progression on the shipbuilding margin side as it relates to 24 versus what you talked about or were thinking about before?

Speaker 3

Yes. So we don't want to get ahead of ourselves, right? We did talk about 7.7 to 8.0, there's a couple of milestones that we missed at the end of the year, which caused a little bit of a drag as you saw how we finished off. Still shipbuilding healthy with the recovery of the sale of the claim, 8.3% still kind of beat the guidance with the claim. On a recurring run rate, I'm with you that it's a little bit short on that right now.

Speaker 3

And we'll pick it up kind of going forward, right? So I'm not just going to have a step function up, but We'll pick up where we have on our run rate. As we finish our milestones and we get credit for that, there'll be some step ups along the way. I think 7.6 70 is appropriate. It's I'm comfortable to conservative on that right now.

Speaker 3

And I've guided the last couple of years and we've missed a couple of 10ths right at the end of the quarter. So I don't want us to get ahead of ourselves a little bit. Let's kind of earn each of these quarters. I think 7.6% to 7.8% is the appropriate way to kind of look at it. If we get the hiring and the retention and we have clean shifts through the whole year and we make our milestones, we could be on the upper end of that range, it's not higher.

Speaker 3

But I think for now finishing the year off at 8.3 with the claim, the bottom end of the guide right now without the claim, I think the right starting point with a year's worth of shipbuilding to go for 2024.

Speaker 9

Okay. And then wanted to ask about working capital. I think for the year at the end of the year, you came in kind of below Your target looks like you're around 5% of sales. So how does working capital look going forward? I assume some of The CapEx recovery will flow through working capital at least over the near term.

Speaker 9

Thanks.

Speaker 3

Sure. Yes. We've had a lot of conversation on that working capital. And I know when we were much higher in that 10% 8% range, it was concerned like could we get that down? And we were projecting that, that would happen.

Speaker 3

I'm happy to report that it's kind of landed right where we thought it would be, right? So I think we started the year off in around 6% to 6.5%. We finished the year at 5%. Conversations we've had in the recent past, we've talked about it used to be 6% to 8% without Mission Technologies. With the additional sales Mission Technologies, it's more like 4% to 6%.

Speaker 3

And I had highlighted that we were coming down with COVID in the rearview mirror, production programs that we have, trying to maintain the schedules with the same type work, we would see a normalization of the working capital. And that's exactly what's played out. We Lost about a point of working capital throughout this year and I still anticipate kind of going forward a little bit improvement as we go forward. So, 4% to 6% is the right way to kind of look at it. We exit 'twenty three percent at 5%.

Speaker 3

And I would expect in 2024 to be on the A little bit lower than that between 4% to 5%. The capital incentives will help as we get the cash upfront before the cost is completely incurred. And I think that's the appropriate way to kind of model it going forward in the 4% to 5% range in the next couple of

Speaker 9

Thank you.

Operator

Thank you. Our next question today is from Pete Skibitski from Alembic Global. Pete, please go ahead. Your line is open.

Speaker 10

Hey, good morning guys. Nice quarter. Good morning. Tom, I think you just helped us out a little bit, but can you quantify if I missed it. Can you quantify the 2 one off gains in the 4th quarter at Ingalls and Mission Technologies?

Speaker 3

Yes. So, Emission Technologies was the warranties and representations for the purchase of Hydroid. That was a settlement we had for $49,500,000 And then Ingalls, we picked up from A frigate repair effort that we had in the late '90s and had cost against that and we've been working to see how we could get a recovery on that. And we did get a judgment settlement judgment in 2018 and then we were able to broker and sell that entity for $70,500,000 And you'll see in the K2, there's a little bit of a back end on that too. I'll have to see how that plays out, but that's about all I want to say about It nets about $120,000,000 growth, but obviously I pay tax on that.

Speaker 3

So net tax is the impact to the profitability and cash It was $95,000,000 ops.

Speaker 10

Yes. Appreciate it. And then maybe a more top level question. What gave you guys the confidence to raise kind of the midterm outlook despite the fact that we don't have a 'twenty four budget appropriated yet? And then on the 24 supplemental that's out there, I think there's a lot of shipbuilding industrial based money in there.

Speaker 10

Maybe you could talk about that. And Is there anything else in the supplemental that could benefit you guys?

Speaker 2

Yes. So I'll start with that. The 2024 budget is very positive for us. All our major programs are supported. LPD 33 is supported, which is really important to Ingalls.

Speaker 2

The submarine industrial base funding in the baseline budget is important. I think that's around $400,000,000 but the additional $3,000,000,000 in the supplemental Just furthers effort to improve the supply base and there's also funds within that to improve the labor force. So getting both of those approved is really important. Now our confidence relative to the guide is just on the demand for our products. We see The demand for not only the products in shipbuilding, both in Newport News and Ingalls, but also in Mission Technologies.

Speaker 2

And when we laid it out, we looked at the investments we're making And the opportunity, it just makes sense. We're in a bit of an inflection point from a sales standpoint. And I actually think there's probably some tailwinds, if we can get that summary industrial based funding approved, executed and start improving throughput. Tom, you have anything to add?

Speaker 3

Sure. Yes. We've talked about the demand for the products and services we have. When you go around the horn down there, Ingalls just won 7 destroyers with a pretty good clip on the schedule side of that with options in the future for that. We see the year shipbuilding plan, the 5 year FIDAP, we've talked about the 17 boats that are going to happen.

Speaker 3

Already 2 long lead for the last 2 in Block V and then VCS 6, those advanced procurements happen. They have to get definitized. We're talking about the Columbia Bill 2, the RCOH for 75, And then just the preponderance of work that we have, change work and then the growth at Mission Technologies. We update our annual plan Every year, obviously, it's a 10 year look. And when we really kind of look, we say mid to long, that's like 5 to 7, 5 to 10 years.

Speaker 3

I know the street that's too far related, but at least 5 years, We see growth rates at least that is not higher. Now things have to break our way with timely awards, you have to get the labor any of the materials have to hit. But we can just see how, the programs are playing out, costs, inflation, orders, backlog and things of that nature. And we think it's appropriate to raise to these levels. And there's still opportunities above and below this for

Speaker 1

additional growth.

Speaker 10

Great. Thanks guys.

Speaker 3

Sure.

Operator

Thank you. Our next question is from Ron Epstein from Bank of America. Ron, please go ahead. Your line is open.

Speaker 7

Hey, good morning. Good morning, Ron. Yes, a lot to ask, but maybe just A follow on the two questions, 1 on the supply chain and 1 on labor. On the labor front, how's retaining labor, Ben, because something we've heard across the industry, not specific to you guys, but generally across the industry, it's been tough to Retained labor that companies are bringing in young mechanics or whatever, they stick around for a year or 2 and then they take off. How are you guys bearing on that front?

Speaker 7

And what are you doing to keep them?

Speaker 2

Yes. Hey, Ron, thanks for that question. It's definitely been a challenge Over the last couple of years, citing the exact example that you brought up, and the team has a number of initiatives they've implemented over the last year to address the situation. And they center around 3 fundamental issues really, which is Flexibility for the team that we're hiring in work schedules, potential time off. The craft person, man and woman that we are now hiring It's not fully prepared to come right into the workforce and start that kind of daily grind without having some flexibility in their work schedules.

Speaker 2

So we have a number of pilots that we're working in that regard. We have some really interesting analytics around targeting geographies that we have better success in hiring and retaining. So we have initiatives there. And then we have very focused incentives on critical skills. An example is machinists, where you have to just pay them more to get them and keep them.

Speaker 2

So a number of initiatives, we pivot very quickly because we have such good data on what works or what is going to work and what does work, so we can expand upon it. But you're hitting on a fundamental issue in the industry right now. In the manufacturing industry as a whole and within defense and in shipbuilding is that the labor issue is obviously one of our major risk issues and one we're working very hard to resolve. I would also say the Navy understands it. And in the SIB funding, as I previously mentioned, there are workforce development issues as well.

Speaker 2

Getting people into the apprentice schools because our retention rates And the apprentice schools and established programs are significantly higher because the people that go in there are choosing that as a profession. So it's something we're well aware of. Our partners are well aware of it and the Navy is well aware of it and we're addressing it. We've seen Some rays of light as we ended the year, but you can't really trust a couple of data points. So we're going to keep working on it this year.

Speaker 7

Got it. Got it. And then on the supply chain with the investment that the Navy is making, where does that have to be made? I mean, where are weaknesses in the supply chain today as you see it?

Speaker 2

Yes. So they've done a really good job, both on the VCS program and on the DDG program, it doesn't get enough as much press, but on the DDG program as well As identifying single source or sole source vendors in the supply chain that need investment to increase capacity, Because as you know, capacity had dwindled a bit in the previous 10 to 15 years. So they've done a very good job targeting those suppliers and making investments. And then there's some large critical material, whether it's single source suppliers that are dealing with the same sort of labor and supply chain issues that we are. So to identify those potentially dual source them or qualify an additional source is something that the Navy and we are looking at as well.

Speaker 2

So it's a very comprehensive review. I think it's managed very well by us and our partners. And I think it's going to get at the issue, but it doesn't turn overnight.

Speaker 7

Got it. Got it. Thank you very much.

Speaker 2

Thanks, Ron.

Operator

Thank you. Our next question is from Noah Poponak From Goldman Sachs. Noah, please go ahead. Your line is open.

Speaker 11

Hey, good morning, everyone.

Speaker 2

Good morning, Tom.

Speaker 11

Tom, can you give us the pieces that bridge your actual full year 'twenty three free cash versus what you had last guided it to?

Speaker 3

So we started the year 4 to 450. We guided up to 500. You can, at 692 completion, if you take out the 2 claims net tax obviously that's $95,000,000 comes off to $692,000,000 gets you to 5.97 And then the difference between the increased guide in Q3 of $500,000,000 to $597,000,000 was some strong collections in Q4. The team really stayed on it. We made sure that we got our bills in on time and we had a clean Q4 receivable.

Speaker 3

So it's just across the enterprise. There wasn't anything of significance to really note in there.

Speaker 11

Okay. So if I take that final and take out the claims, I guess call that closer to 600, Can you bridge me from that to staying there in 2024 while CapEx is going up as much as it is? If you're because you got revenue guidance that's up kind of 2% or 3% in a flat segment operating margin.

Speaker 3

Yes. So I had mentioned in my comments upfront that this active and insignificant maybe participation in that. I don't want to get too much into the details, but we're both contributing to it, but that's helping offset that increase there. The guide from 600 to 700, we took that down a little bit from where I left you last quarter. As we exceeded this year, a little bit of timing too was in there on the collections.

Speaker 3

So, a little overachievement in 2023, a little back off from where I left you last time at 700, now it's a 6 to 700, But I would not be alarmed because of the higher CapEx in 2024, 2025 or 2024, that it's going to be a major draw on the free cash flow from the discussions we've had in the past. That's been a little bit of guiding light. We definitely want to support our customer, perform an existing contracts. Much of the work we're talking about for the new CapEx is on the new requirements that are coming. And as we broker that relationship and how we make that happen, We're going to ensure that we kind of keep everything in lockstep.

Speaker 3

We got to get these ships out here cleaner and sooner, high quality value. And on our side, we still have to be able to kind of run the business here and have good working capital. So all that's in the mix and I would not be concerned on the 5.3% against the cash flow projection that we've given you. Again, that's why we gave you you probably won't see that too often a 5 year projection going forward, We wanted to settle everyone out there that all that's been factored in as we run the business and we manage our cash.

Speaker 11

So how will we actually I would tell you,

Speaker 3

if I could I forgot. One more. I'm sorry. Go ahead. Go ahead.

Speaker 11

Well, I'm just wondering like if there's a Navy participation, will we see Will not all of that actually be recorded in CapEx or will it flow to your CapEx and come back in your rates in your operating margin or how will we actually see that in your financials?

Speaker 3

So when we do our CapEx, obviously, our cost, we get incentivized to go do that. So it comes on the contract in the form of capital incentives, additional margin in cash that flows through there. That helps offset my additional cost of that. I would comment just earlier to your question as you try to kind of normalize the 6.90 2 assets like 5.97 as I said when you pull up these two claims. It's the ramp that we've been talking about.

Speaker 3

If you go back to 21 $44922 at $494,000,000 And now we've revised the claims, now it's ramped to 5.97 And now we're at $600,000,000 to $700,000,000 We've talked about a $700,000,000 number in 2024, just a little bit. It's range bound now because we exceeded in and now the $3,600,000,000 the average of that is $720,000,000 that's got a shape to it obviously. It's going to be smaller upfront as the revenue incremental margin grows in the out use large in the back. I think that's appropriate right now. It's not a stretch number.

Speaker 3

It's a reason it's conservative to reasonable number. We have risks to kind of go work off. And I think that has both risks and opportunities associated with it. So I'd leave it with that.

Speaker 11

The, so the piece that goes through CapEx that's supported by the Navy that will we'll just see that in future margins as it flows through your rates. Is that right?

Speaker 3

Yes. Margins and cash, yes.

Speaker 11

Okay. And then I guess I just So for 2024 with the margin guidance flattish year over year, I still struggle to see where that $300,000,000 is coming from.

Speaker 3

So on the margin side first, there's a timing over when that happens, right? So you get that on contract and you got to go do the work and there's percentage of completion you take. So there's a lag on the margin side. Then on the cash side, we try and make sure that we try and stay neutral so that we're not impacted as I'm incurring costs that high of 5.3 CapEx, but that gets offset on the payment schedule of the CapEx, right? So the margin is not running exactly with the cash.

Speaker 3

But on our side, we're trying to keep it neutral here. So it's not going to impact our projections that we've given.

Speaker 2

Yes, it's part of the total ship P and L, Noah.

Speaker 3

Okay.

Speaker 11

Okay. All right. I appreciate that. Thanks so much.

Speaker 3

Sure. Sure, Noah. Thanks for the question.

Operator

Thank you. Our next question is from George Shapiro from Shapiro Research. George, please go ahead. Your line is open.

Speaker 12

Yes, I wanted to ask, your actual ship revenues were like almost $300,000,000 higher than what you the high end of the guide that you provided on the November call. So just wondering why given that to me this is a fairly predictable business. And I have a different question too. Thanks.

Speaker 3

Yes, sure. So from the MT side, we saw a nice rush at the end The year of some receivables, I mentioned in my notes it's about $80,000,000 so that was a big pickup. On the shipbuilding side, just the timing of material on how that flowed here. The majority of the overage and where we thought we would land was on the material side. We have some outsourcing going on as well.

Speaker 3

So sales costs flow through, opportunistic that they landed in 2023 here. But we guided 8.6% to 8.8%. We came about $100,000,000 over that. And you kind of normalize that. It was good growth there.

Speaker 3

You saw it in shipbuilding, better than 5%, 5.5% in shipbuilding. Ingalls up in the 7s and Newport News at 4.8%. But it was a sharing between all three divisions just exceeded. It was a nice run at the end of the year on the revenue side.

Speaker 2

George, you're familiar with material timing. You can miss by a month to 2 months time to time that just came in at the end of the year. Now unfortunately it impacts the guide for the next year, right? So you had to we had to include that, but, it was just timing.

Speaker 12

Okay. And then the other one, probably for Tom, if you had a $49,000,000 benefit in Mission Systems from Hydroid, I mean, implies the rest of the business made $2,000,000 Now you alluded to some charges at some of the other businesses There. But if you could just provide some more information on that.

Speaker 3

Yes, that's right. A piece of that's timing on how the programs just play out and the mix in execution on that. We did have one job over there that we just took a slight step back. It wasn't material. You won't find it in the K there because it's not at the threshold.

Speaker 3

There's a couple of $1,000,000 on that, but not a lot of dollars when you break down that kind of business to begin with. And then when you take a small charge and then the timing of performance on how we book things, it came out to be a light quarter there. But overall, with They claim 8.6 percent EBITDA, the RASA 37, you can normalize that out. It'd be a little bit on the bottom end of the guide that we gave you, 8% to 85% at the beginning of the year for EBITDA. But as we had mentioned throughout the year, there was The joint venture that we sold off, we picked up cash, but we lost some equity.

Speaker 3

And we've been kind of mentioning about a charge on a manufacturing effort that we have over there. So I think that's behind us right now kind of going forward. And I'm still very satisfied with the numbers that MT kind of put up across the board for revenue, margin and cash.

Speaker 12

Tom, if you could just provide the EACs for each of the sectors in the quarter?

Speaker 3

Sure. So for the quarter, it was $111,000,000 of favorability, dollars 43,000,000 of unfavorability, a net of $68,000,000 was made up of about 50 percent that net was 50% in Ingalls, about 35% in Newport News, about 15% in MT. Just for everyone on the call, you'll see it in the K, which does the whole year, was $309,000,000 gross favorability for the whole year, $191,000,000 gross unfavorable with a net of $118,000,000 And that breaks out to be about 75% Ingalls and 15% MT and 10% NewPoint News. Appreciate the question.

Speaker 12

Okay. Thanks very much.

Speaker 2

Yes, George.

Operator

Thank you. We will now be taking our last question from Scott Micas from Melius Research. Scott, please go ahead. Your line is open.

Speaker 13

Good morning.

Speaker 2

Good morning, Scott. Craig, I

Speaker 13

wanted to ask, Is any of the customer funded investments over the next 3 years, is any of that contingent on the supplemental package making its way through Congress?

Speaker 2

That's a good question. And I don't have that in front of me. That's a really good question. I don't have that in front of me. I know, a part of it I think a part of it is, But I couldn't quantify it for you.

Speaker 2

So we'll get that information for you, Scott.

Speaker 13

Okay. Got it. And then thinking about the shipbuilding revenue growth rate, you've for a long time talked about labor being the governor on output there. So how much can these investments improve throughput in the shipyard if retention rates don't improve materially?

Speaker 2

Well, it has to be both, right? And when we do our projections, We risk adjust them. It's not assuming that everything works out perfectly. So it has to be both. We have to improve our retention rates.

Speaker 2

We have to improve the supply chain and we have to improve capacity. And if we do that, then throughput will significantly increase. But you're absolutely correct. We have to be successful on both.

Speaker 3

To kind of supplement that too, that as we're building that out on How we hire, how we train, how we retain. We're not standing flat footed, but I know that the yards themselves have active plans either outsourcing or contract labor using additional overtime with the crew that we do have working the 3 full shifts where there's a critical path. But there's dials that we have to try and offset that in the near term. You can't run that 5 or years, if you see that we see the demand, we're building out organically that we'll be able to do things in the yards. But right now, there are dials and opportunity sets for additional labor outside the yard that we're employing right now.

Speaker 13

Okay, got it. Thank you.

Speaker 2

Thanks.

Operator

Thank you. This is all the time we have for the Q and A session today. So would now like to hand back over to Mr. Cliff Casner for any closing remarks.

Speaker 2

Yes. Thank you and thank you for joining the call today. I'm very proud of our team's strong performance last year and I'm confident that we'll continue to create value for our shareholders this year. I would also like to remind you that we're hosting an Investor Day on March 20 and look forward to seeing many of you then. Have a good afternoon.

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Key Takeaways

  • HII reported 13% year-over-year revenue growth in Q4 2023, achieving a record quarterly total of $3.2 billion and full-year revenues of $11.5 billion driven by strength across all three divisions.
  • Free cash flow for 2023 was $692 million—40% above 2022—while net earnings rose 18% to $681 million, supported by $12.5 billion in new contract awards and a year-end backlog of $48 billion.
  • The shipbuilding businesses advanced major programs, including delivery of DDG-125 Jack H. Lucas, launch of LHA-8 Bougainville, completion of USS George Washington’s RCOH, and long-lead procurements for additional Virginia-class submarines and Flight III destroyers.
  • Mission Technologies grew revenues 13.1% to $2.7 billion, booked nearly $6 billion in new and recompete awards, and ended 2023 with a $75 billion pipeline in AI, C5ISR, cyber/electronic warfare and advanced simulation.
  • For the next five years HII forecasts more than 4% annual growth and $3.6 billion in free cash flow, and plans roughly $5 billion of capital investments by 2026 to expand shipyard capacity—largely funded via Navy cost incentives.
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Earnings Conference Call
Huntington Ingalls Industries Q4 2023
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