Huntington Ingalls Industries Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 5, 2022

Key Takeaways

  • HII reported Q1 sales of $2.6 billion, up 13% year-over-year, and reaffirmed full-year revenue, margin, and free cash flow guidance.
  • The shipbuilding backlog grew to $47.9 billion with $24.8 billion funded, supported by deliveries and milestones on LPD, DDG and carrier programs.
  • Mission Technologies had a slow start due to funding delays but now has a $6 billion proposal pipeline and launched the ODiSI autonomy suite to drive future growth.
  • Free cash flow was negative $126 million in Q1 versus negative $16 million last year, weighed by working capital timing and milestone phasing.
  • Persistent labor shortages and supplier inflation linked to COVID effects pose execution and margin risks despite newly ratified union contracts and ongoing apprentice hiring.
AI Generated. May Contain Errors.
Earnings Conference Call
Huntington Ingalls Industries Q1 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2022 HII Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I'd now like to hand over the call to Christie Thomas, Vice President of Investor Relations. Mrs.

Operator

Thomas, you may begin.

Speaker 1

1st Quarter 2022 Earnings Conference Call. With us today are Chris Kastner, President and Chief Executive 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 of federal securities law. Actual results Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also in their remarks today, Chris and Tom will refer to certain non GAAP measures.

Speaker 1

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. Please access our website athii.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I will turn the call over to our President and CEO, Chris Kaffner. Chris?

Speaker 2

Thanks, Christy. Good morning, everyone, and thank you for joining us on today's call. Earlier this morning, we reported solid across each of our operating divisions with our focus on execution and growth, positioning us to reaffirm our previous revenue margin and free cash flow guidance. Our Shipbuilding and Mission Technologies teams continue to execute well despite facing some headwinds in the areas of human capital and Like the economy broadly, we are facing challenges created by the lingering effects of COVID and its impact on the labor market, making it challenging to hire and retain employees. Moreover, our suppliers are being impacted by the same shortage of labor As well as inflation issues, which creates risk of delays in delivery of key materials for our shipbuilding programs, we are aggressively working these challenges employees to continue to focus on a mission of delivering on their customer commitments.

Speaker 2

Now shifting to our results. Sales of $2,600,000,000 for the quarter were 13% higher than 2021 and diluted EPS of $3.50 for the quarter was down from $368,000,000 in 2021. New contract awards during the quarter were approximately $2,000,000,000 driven by the award This results in backlog of $47,900,000,000 at the end of the quarter, of which $24,800,000,000 is currently funded. At Ingalls, LPD 28, Fort Lauderdale completed sea trials and was delivered to the Navy. LPD 29, Richard M.

Speaker 2

McCool Jr. Was launched And we laid keel for LPD 30 Harrisburg. On the LHA program, LHA 8 Bougainville is progressing well and long lead material On the DDG program, DDG-one hundred and twenty three, Lena Stuttgart Higbee, Achieved main engine light off and DDG-one hundred and twenty five Jack H. Lucas was christened this quarter. And finally, on At Newport News, SSN 794 Montana completed sea trials and delivered to the Navy and SSN 796 New Jersey floated off in April.

Speaker 2

Also as discussed in our Q4 call, SSN 725 USS Helena was redelivered in January, which demonstrated the successful reconstitution of our submarine maintenance capability in support of the Navy. On the carrier front, Newport News and the Navy celebrated of U. S. Navy aircraft carriers and CVN-seventy eight USS Gerald R. Ford was redelivered to the Navy in the Q1 after completion of its inaugural maintenance and modernization period.

Speaker 2

Progress continued on CVN 79 Kennedy, which is 83 And CVN 80 Enterprise has begun erecting steel in the dry dock. On the RCOH program, CVN 73 USS George Washington It's progressing in the testing phase and is 95% complete. In CVN-seventy four, USS John T. Stennis is approximately 25% complete. A few weeks ago, we renamed our Technical Solutions division Mission Technologies to better reflect our portfolio of capabilities and our commitment to delivering advanced technologies and multi domain expertise to our support of our national security customers.

Speaker 2

Contract awards at Mission Technologies have had a slow start to the year, but this was largely due to the continuing resolution and the resulting lack of adjudication of awards. Looking ahead, we are very excited about our pipeline of new business at Mission Technologies and are confident it will support our growth objectives. We currently have almost $6,000,000,000 of proposals in evaluation with $3,000,000,000 in proposal development and a total qualified pipeline of more We had a significant win in unmanned with the selection of our Remus 300 vehicle at the U. S. We also recently released ODiSI, a suite of advanced autonomy solutions that offers scalable autonomy across a variety of platforms and is aligned with the industry open architecture standard.

Speaker 2

Regarding our shipbuilding workforce, I'm glad to report that we finalized the collective bargaining agreement at both shipyards. Our annual apprentice school graduation at Newport News Shipbuilding saw 170 graduates and over 200 individuals will complete their apprenticeship program in May at Ingalls Shipbuilding. And we continue to work with local high schools and community colleges on our core hiring and development needs. Through the end of the quarter, we had hired over 1,000 craft personnel towards our plan of over 5,000 for the year. We remain focused on hiring and retaining a strong workforce as we continue to face the headwinds of a tight labor market.

Speaker 2

Turning to activities in Washington, Congress finalized appropriations for fiscal year 2022 in March. We saw continued bipartisan support for our programs reflected in the Final Defense Appropriations Act, including funding for 2 Arleigh Burke class destroyers and 2 Virginia class attacks at Marines. Additionally, the appropriations measure provided $250,000,000 for advanced procurement funding for LPD 32, advanced procurement for DDGs as well as funding for our other programs. Also in March, the President submitted The fiscal year 2023 budget request now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs, Funding 2 Amphibia ships, LPD 32 and LHA-nine, 2 DDG 51 surface combatants and 2 Block V Virginia class submarines.

Speaker 2

The budget request continues funding Ford Class nuclear aircraft carriers and aircraft carrier refueling programs and construction of Columbia Class submarines as well as investment in the submarine industrial base. Beyond shipbuilding, the fiscal year 2023 request reflects an emphasis on research and development With increased investments in capability enablers such as AI, cyber, electronic warfare, C5ISR and autonomous systems that align well with our advanced technology capabilities of our Mission Technologies division. In conclusion, we remain well positioned to execute on our shipbuilding backlog and leverage it to generate significant free cash flow while continuing to capture anticipated work and growth within our Mission Technologies division. So with that, I'll turn

Speaker 3

the call over to Tom

Speaker 4

Tom? Thanks, Chris, and good morning. Today, I'll briefly review our Q1 results. 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 first quarter revenues of $2,600,000,000 increased approximately 13% compared to the same period last year.

Speaker 4

This was largely due to the acquisition of Align in the Q3 of 2021. Operating income for the quarter of $130,000,000 decreased by $9,000,000 from the first of 2021, and operating margin of 5.4 percent decreased 110 basis points. These decreases were largely due to lower segment operating income, driven by lower risk retirement at Newport News Shipbuilding, partially offset by more favorable non current state income taxes and operating fast cash adjustment compared to the prior year. Our effective tax rate in the quarter was approximately 20.5% compared to approximately 14.5% in the Q1 of 2021. The lower rate in the Q1 of 2021 was primarily due to divestitures during that quarter.

Speaker 4

Net earnings in the quarter were $140,000,000 compared to $148,000,000 in the Q1 of 2021. Diluted earnings per share in the quarter were $3.50 compared to $3.68 in the Q1 of 2021. Turning to Slide 5. Cash used by operations was $83,000,000 in the quarter and net capital expenditures were $43,000,000 or 1.7 percent of revenues, resulting in free cash flow of negative 126 This compares to cash from operations of $43,000,000 and net capital expenditures of $59,000,000 and free cash flow of negative $16,000,000 in the Q1 of 2021. Cash contributions to our pension and other postretirement benefit plans were $10,000,000 in the quarter, of which less than $1,000,000 were discretionary contributions to our qualified pension plans.

Speaker 4

During the Q1, we paid dividends of $1.18 per share of $47,000,000 We also repurchased 51,000 shares during the quarter at an aggregate cost of $10,000,000 Moving on to Slide 6. Ingalls revenues of 6 was largely offset by increased risk retirement on the LPD program following the delivery of LPD 28. At Newport News, Revenues of $1,400,000,000 decreased by $17,000,000 or 1.2 percent from the same period last year due to lower aircraft carrier and Nuclear Support Service revenues largely offset by higher submarine revenue. Newport News operating income of $81,000,000 and margin of 5 At Mission Technologies, revenues of $590,000,000 increased $331,000,000 compared to the Q1 of 2021, primarily driven by the acquisition of Lion in the Q3 of 2021, partially offset by the divestiture of our oil and gas business and the contribution of the San Diego Shipyard to a joint venture in the Q1 of 2021. Mission Technologies operating income of $9,000,000 compared to an operating income of $7,000,000 in the Q1 of 2021.

Speaker 4

Q1 2022 results included $24,000,000 of amortization of Alliant related purchase intangible assets. Mission Technologies EBITDA margin in the Q1 was 7.3%. Turning to Slide 7, we are reaffirming our 2022 sales, margin and free cash flow expectations and have slightly revised our pension expectations. During the quarter, we reached a labor agreement with the United Steelworkers at Newport News Shipbuilding. The contract includes increases in pension benefits triggering a pension remeasurement, which also takes into account discount rate changes and asset returns through late February.

Speaker 4

Regarding our near term outlook, Our first quarter results were positively impacted by a very high quality delivery for LP28, which allowed us to retire a significant amount of risk for that ship in the Q1 as reflected in the Ingalls operating margin. The remaining shipbuilding milestones we expect to achieve in 2022 are back end weighted. Given that backdrop, We expect the Q2 shipbuilding revenue to be relatively flat sequentially and shipbuilding operating margins to be approximately 7%. Regarding Mission Technologies, we expect results will ramp through the year with 2nd quarter sales up approximately 5 sequentially and operating margin in line with our full year guidance of approximately 2.5%. Regarding our longer term targets, We remain confident in our free cash flow of $3,200,000,000 from 2020 through 2024.

Speaker 4

This outlook does assume the continued expensing of research and development costs for tax purposes. As a reminder, we believe the impact to 2022 free cash flow would be approximately $100,000,000 if the current R and D amortization On Slide 8, we provided a walk from our 2022 to 2024 free cash flow outlook. This is consistent with the chart we began providing last quarter. Additionally, we are reaffirming our capital allocation priorities, which include significant deleveraging in the near term, along with continued modest dividend growth and balance share repurchases. We will continue to evaluate M and A, but see no significant capability gap today.

Speaker 4

In closing, we are pleased with the operational milestones achieved in the Q1 along with the financial results. Notwithstanding strong budgetary and customer support for our shipbuilding programs and the Mission Technology business that we believe is poised for very strong growth, We are laser focused on consistent execution and generating sustainable long term value. Now I'll turn the call back over to Kristie for Q and A.

Speaker 1

Thanks, Tom. Operator, I will turn it over to you to manage the Q and A.

Speaker 5

Thank you very much.

Operator

Our first question goes from Robert Stallard from Vertical Research. Your line is now open, Robert. Please go ahead with your question.

Speaker 6

Thanks so much. Good morning.

Speaker 2

Good morning, Rob. Good morning.

Speaker 6

Chris, I'll start off with you. A bigger picture question. On the FY 'twenty two request, it looks like the Navy is changing its plan for amphibious vessels or at least proposing to this. How do you think this could play out? And what's potentially the risk to HII.

Speaker 6

And then secondly, more numbers question perhaps for Tom. You mentioned on Slide 8 the potential for Margin growth in Mission. I was wondering what the sort of better long term margin could be for this division because 0.2 percent is pretty low compared to of the companies in the industry? Thank you.

Speaker 2

Yes. Okay, Rob. I'll start with the budget, the 2023 budget I'll request and then Tom can talk about Mission Technologies margins. One thing we should always remember With the budgetary processes, this is the first step of the process. So we'll work through that throughout the year.

Speaker 2

All our major shipbuilding programs were supported. The one line we do have to work on is the amphib line As you identified, we need to get LPD 32 under contracts. We need to get LHA 9 under contract. Then we need to work on LPD 33 and ensure that we support the Marines and the Navy and the Congress really in analyzing that program going forward. So you're right.

Speaker 2

We do need to work on the Antfield line, but I'm positive as we work through this process that we'll get to a solution That makes a lot of sense. From a long term big picture perspective, I think that the budget really does support our long term growth rate And I'm comfortable with the 3%.

Speaker 4

Sure, Robin. And then I'll pick up the question on MT from a margin 1.5%. So we guided 1%. So it's higher than the guidance. That's coming off 2.7% ROTH last year 2 point 7% last year for Q1 and 2.9% for a quarter ago in Q4.

Speaker 4

I would tell you that because of the purchase intangibles, Both with MT about $30,000,000 and Alliance specifically for $24,000,000 That return on sales metric is not probably a good Lead indicator as far as where we want to land. That's why we kind of give you the EBITDA perspective from 8% to 8 point The quarter here was 7.3%, not unexpected because we got to do from a RAS perspective only At 1%. At which time with the CRA award sales light and obviously the margin will follow the sales. So we're comfortable with where we stand and from our perspective and where We told you for the year, it's 8% to 8.5% from an EBITDA perspective as a percent of revenue. And from now going through 2024, We've highlighted that it's more appropriate to think about 8% to 10% is a range of where MT can land, right?

Speaker 6

That's right. Yes, that's great. Thanks so much.

Speaker 2

Thanks, Rod.

Operator

Our next question comes from Pete Stavisky from Amyrick Global. Pete, your line is now open. Please go ahead with your question.

Speaker 7

Hey, good morning, everyone.

Speaker 2

Good morning.

Speaker 7

Hey, Chris, Chris, also a question on the fit up. One thing that's always a little bit harder to tell timing wise is just maintenance trends, shipbuilding maintenance trends. You give us a sense of if you look at the fit up, should maintenance be a tailwind for you guys or start to flatten out? I was just wondering what your thoughts were.

Speaker 2

Yes, I think it's pretty flat. They're coming through the submarine kind of maintenance schedule and how they're going to proceed with LA class and Virginia class submarines from a maintenance standpoint. But we think it's pretty flat from our perspective. A lot is going to go into how they execute the SIOP, but we think it's pretty flat.

Speaker 7

Okay. Okay. And then one last question kind of off the beaten path. There was an export notification back in December for emails and advanced arresting gear to France And both you guys and General Atomics were cited. Is that any kind of a meaningful or real revenue opportunity for you guys?

Speaker 7

And just curious about the timing as well on that.

Speaker 2

Yes, not for us, no. Remember, we don't GA provides those systems, so not for us, no.

Speaker 4

Okay. Thank you.

Speaker 8

Thank you.

Speaker 5

Our next

Speaker 8

Hey, thanks very much and good morning everyone.

Speaker 2

Good morning. Chris,

Speaker 5

I think you mentioned Good morning.

Speaker 8

On the last call, you mentioned, Chris, that you guys had a lot of confidence in the hiring, your ability to hire this year. And you started off this call focusing especially on the tight labor market. So maybe if you could just give a little bit of color on how things are tracking there, any metrics we can Think about kind of what you need to do and then kind of where the risk would be in the financial plan if to the extent that the hiring situation gets tougher?

Speaker 2

Sure Seth. Thanks. January February were tough. Omicron really impacted our attendance. But In March, attendance recovered and we're back to tenants levels that we're used to seeing within both of our shipyards.

Speaker 2

We've hired over 1,000 people through the end of March. We need to hire over 5,000, so we're a bit behind, But we're really focused on our relationships with our apprentice schools, our high schools, community colleges, and we expect that to ramp Over the summer months, graduations happen. So it's definitely a watch item. We need to hire, we need to train and we need to be productive. So Still comfortable with our guidance, but labor is a watch item for us as we move through the year.

Speaker 8

Right. And just to follow-up, is it more about I mean, I would think people come in, in the summer, there's probably only so much contribution they can make in a couple of months. And Is this really more about kind of setting up for 2023? And then to the extent you have an idea of how you're set up for 2023 that would affect your the risk tolerance that you have in in your estimates of completion?

Speaker 2

Yes. When they come out of the apprentice school, they're ready to go. And if they could come out of the community colleges and the high schools where we have programs They're learning. They're going to fill a critical role within the shipyard. Now they're not going to be 1st class shipbuilders right away, but they're going to be earning.

Speaker 2

They're going to be making Progress on executing. It's all incumbent on our shipbuilding teams to make sure they're trained up and they've got the right mentorship and we do that very well. So yes, they're not going to be 1st class shipbuilders coming out of the gate, but we expect them to contribute.

Speaker 5

Okay. Thanks very much.

Speaker 2

Sure.

Operator

Thank you. Our next question comes from Doug Harned from Bernstein. Doug, your line is now open. Please go ahead with your question.

Speaker 9

Thank you. Good morning. Good morning, Brian. I'd like to just spend a little bit of time on Virginia class. I mean, it was identified As a margin headwind in this quarter and the Newport News, if I go back to when you had the issues back in 2020, The Montana, the New Jersey, the Massachusetts, those I mean, the Montana is delivered, New Jersey slowed off.

Speaker 9

And one of the big issues then was this question of lots of new people in a complex environment needing to train them. And so some of the issues you had then were attributed to that. If you look at the situation of Virginia class today, Where does it stand? Because it seems that you might run into some of these similar issues as you try and bring a lot of new people So how are you looking at the Virginia class performance right now?

Speaker 2

Yes, Doug, it's a good question and I appreciate it. Remember, The issues we had previously, and we were in the heart of COVID, right? And we had a significant outs and significant labor issues within Newport News, Which drove a lot of that. But what we're seeing now is, it's interesting, we talk about serial production a lot, but The VCS program is really a production line. And when you miss schedule, there's a knock on effect.

Speaker 2

So as you know, we missed a couple of schedules at the end of the year that drifted into Q1. We've accomplished those. And it's really had an impact on the future shifts. And so we've had to deal with that in the quarter, reassessed our risk And you see the results in Q1. That being said, there is some stability in that workforce Now the attendance has recovered.

Speaker 2

We're a bit short of our hiring plans, but it's not like what happened during COVID. The team is very focused on meeting their interim milestones, working their operating system very diligently. And I got a lot of confidence that there's actually some upside As we move through the next couple of years on the VCS program.

Speaker 9

So if you look at And going forward, you're finishing the Massachusetts your own boats in the Arkansas and then you'll go into Block 5. How do you how should we think about kind of performance and margin trajectory As you move through those, as well as the work that you're doing for the electric boat, the modules for electric boat, I mean, how How is this risk retirement likely to move in your thinking?

Speaker 2

Yes. So We've assessed our EACs and the risk on not only Block IV, but Block V boats and reset the EACs based upon How we project them to perform over the life of both of those blocks. So we don't necessarily give margin Guidance, as at a program level, but I do see after resetting that risk On Block V going forward, there's potential for upside if we're able to meet our milestones.

Speaker 9

Okay. Okay. Very good. Thank you.

Speaker 2

Thanks, Doug.

Operator

Thank you very much. Our next question comes from Myles Walton from UBS. Myles, your line is now open. Please go ahead with your question.

Speaker 4

Thanks. Good morning. I wanted

Speaker 8

to ask about carriers for

Speaker 10

a second And in particular, the 79 and the 73. So on the 79, I think the progress, the completion metric you guys provide in and the press release every quarter. It really hasn't moved in the last several quarters. And I know, one of the adjustments was for the single phase delivery, but I don't think that Would have played out here in the Q1. So any reason why there wasn't progress there?

Speaker 10

And then just to comment on the 73 and if the slip to 2023 made any difference for your financials? Thanks.

Speaker 4

So I'll take the $73,000,000 on the back end of that. So right now, we're still bringing that ship home and trying to target for a year end completion. Through the EAC process, we are evaluating some risks to schedule on that. That was incorporated into the Q1 EACs here.

Speaker 2

Yes, 79 miles, we're absolutely making progress on that ship. We're heavily into the volume part of that ship If you walk through the base in that ship right now, you see a lot of insulation and paint, which is a good place to be When you think about an aircraft carrier attacking that volume and then starting the test program, I don't know specifically about the math Around the progress, Christy will fill you in on that after the call. But they're very dedicated And making progress really on a weekly basis on the aircraft carrier.

Speaker 10

So no movement to the expected delivery on that vessel?

Speaker 2

No, absolutely not. Okay. Thanks.

Operator

Thank you very much. Our next question comes from Gautam Khanna from Cowen. Gautam, your line is now open. Please ask your question.

Speaker 5

Hey, thanks guys. I was wondering if you could refresh us on how your contracts adjust for higher input costs. So whether it be steel, whether it what have you, everything's like you mentioned at the outset is moving up in price. How do you recover those? What does that do to margins?

Speaker 5

Is it just a pass through where it actually dampens margins? Just if you could walk through the mechanics there. Thanks.

Speaker 4

Sure. It's Tanya. Good morning. Yes, so from an inflation perspective, now break that down. I know your question is focused just on the existing contracts and how that fits.

Speaker 4

So I'll hit that. But also, we're watching inflation as it applies So it's like a 2 part answer here. But from the mechanics that we have on how to hit, as we Spoke about this at other earnings calls. It really starts with our understanding of what we're buying and how we contract for These contracts being anywhere from 4 to 8 years long, long lead contracts upfront with an understanding of the material and the bill of materials. We have a very disciplined and dedicated process to make sure that we have live quotes and bids and we go hand in glove making sure the quotes have The procurement side and ourselves locked into the contract value from a starting standpoint.

Speaker 4

So while we have clear understanding What we're buying and at the onset of these contracts, we have a good bid from our suppliers. We do run-in from time to time as we move Forward where the contracts awarded things are purchased after that and or there's pop up commodity buys, and we do see increases from time to time on raw materials And commodities. I will tell you that when we're in a long lead phase of a contract, it operates almost like a cost type contract and we're rolling those axles into Construction the eventuality of the construction awarded that bid. So that's helpful. Another piece of that is when you look at you'll see in the Q, we kind of Breakout across the 3 divisions, the percentage of cost type versus fixed price contracts, but from an HII from an entirety perspective, It's about $52,000,000 fixed price and costs.

Speaker 4

So there's recruitment there in the contract type. Mission Technologies is above 90% Cost type and new put new is fifty-fifty, so that helps there. Several of our contracts do have EPA clauses, which kind of recognizes Things that we don't put on cash back immediately and we have that risk covered with our bids. There's an estimated cost from bids that we receive at the time of award And then the actual cost that we pay can get adjusted depending on inflationary indices of the industry. So that helps us out On that side as well.

Speaker 4

Even our flexibly our fixed flexibly priced contracts, there's a big shell on in that. So we work ourselves Through that as well. So, I think the tool set that we have on how we manage our existing contracts as well as the change management process when we take on New orders to make sure that we maintain the equity of those contracts keeps us in relatively safe space. The last one I'd add to you too is a large The majority of the cost of our existing contracts is on the labor side, and we have come through our union agreements of 4 year down to angles and a 5 year at Newport News. So we understand those costs and there's a schedule of increases and we use that when we put things on contract.

Speaker 4

So I think overall, it's a well founded process on how we handle it, and it plays well against these inflationary times. On the new bids, I'll tell you that we're very we are seeing on new bids price increases. We're seeing longer lead times, and we're seeing Higher costs kind of year over year, but we ensure that we follow that same dedicated process of getting live quotes. Our customer sets Our understanding of that, I mean, they're seeing inflationary pressures across the industry. And we bring that cost and pricing data for evaluation and make sure that we strike a reasonable risk balance here for inflation against the new awards.

Speaker 5

And just the mechanics, if you wouldn't mind on if in fact You have an EPA and you got to make the adjustment. Is that just an increase in revenue and cost and therefore Yes. I'll take that one.

Speaker 4

Sure. It's the back end of your question. So with all that as a backdrop, The mechanics of that, obviously, we go through our disciplined quarterly EAC process. I mean, we're getting costs weekly, a monthly program review and then, obviously, Quarterly EAC process. So we can see how the material is trending both against the existing orders that we have and material requirements and any pop up requirements.

Speaker 4

We'll evaluate that, whether the EAC is improving or degrading and or the associated risks that we thought We're going to be retired for the quarter and the rest of the remaining scope on those contracts. That will get incorporated into the EAC. If there is an increase, obviously, there'll be an increase in costs. We'll run that through our profit tables and it will revise the booking rate accordingly. So All that gets factored in by ship by ship across the program and then it kind of rolls up into our adjustments that you see here against the portfolio.

Speaker 4

Yes. I'd also add that if

Speaker 2

there is EPA protection, it's an increase in sales without the resulting impact on margins. So That does provide us additional protection and that's in our EAC process as well every quarter.

Speaker 5

Thanks guys.

Speaker 10

Thanks, Alan.

Operator

Our next question comes from Robert Spingarn from Melius Research. Robert, your line is now open. Please go ahead with your question.

Speaker 11

Thank you. Good morning. Chris, a

Speaker 2

couple of

Speaker 11

questions sort of higher level. A lot of talk about upside to defense spending from Europe. And while the export opportunity probably isn't great for the shipbuilding side, What kind of products and services from MT do you think will interest European countries?

Speaker 4

Yes, that's

Speaker 2

a really good question. We think about it a lot. Unmanned, we've sold internationally about 30% of our unmanned sales have historically been international to NATO countries in nature. And then you think about ISR surveillance, big data platforms, Cyber, Intel, all of that as part of Mission Technologies It gets some traction internationally. So we work on that.

Speaker 2

We're very tactical And how we do that, we make sure the opportunity is valid, but all those are opportunities in Europe and actually any NATO country actually.

Speaker 11

Okay. And then on the domestic side, the Navy leadership has been talking about priorities as follows: Top priorities Columbia class, then readiness, modernization and lethality improvements, and then third, capacity. So knowing that the commitment to Columbia is rock solid and capacity is really a function of the budgets, future budgets, how do we think about HII's access To the middle part, the readiness and the modernization part. And then again, how does that tie into MT?

Speaker 2

Yes. So interesting, Readiness and Modernization. MT has very interesting tools related to big data and data analytics That absolutely support that. So it definitely helps provide tools and access for our customer to improve the readiness. So I actually thank you for that question.

Speaker 2

It's a very interesting thing we're working on with our customer. It's all upside, Right. But it will just give our customer additional capabilities. So thanks for that.

Speaker 5

Chris, do you see any

Speaker 11

timing or any visibility on when these things

Speaker 2

No, I think unmanned can happen very quickly. The award is small. It's very important, provides us additional opportunity to sell that internationally. The other stuff, we'll just have to see, but I don't see a short term sort of upside related to it. Got it.

Speaker 2

Thank you.

Speaker 4

Sure.

Operator

Our next question comes from David Stratas from Barclays. David, your line is now open. Please go ahead with your question.

Speaker 12

Thanks. Good morning.

Speaker 2

Good morning, Dave.

Speaker 12

Hey, Chris. So I think it was on the last call you talked about Discussions with the Navy in terms of additional investment in the shipyards and how that was potentially going to be split and what it meant Potentially for the expected CapEx drawdown, can you just update us on where things stand there?

Speaker 2

Yes, we're still working on it.

Speaker 4

I think you saw on the

Speaker 2

2023 budget additional funding allocated to Capital in support of infrastructure and the supply base. We're in discussions with the Navy on that now And we'll just continue to discuss that with them in order to make the investments to support that critical program.

Speaker 12

Okay. And Tom, on the working capital side, I think net working capital as Percent of sales that you guys calculated was around 10% this quarter. I think that's the highest we've seen in a while even kind of adjusting For typical seasonality, can you just talk about the working capital trend through the course of this year? And again, kind of what you're baking into that Free cash flow forecast for 2023 2024 from a working capital perspective. Thanks.

Speaker 4

Sure, David. Yes, so it was 10%. So, and that's just upfront as just the timing on the working capital that we have. It's both the timing on the receipts for the accounts receivable and the collections, the payments for the accounts payable. We anticipated that it would be high on the front end here right now.

Speaker 4

A little bit of a draw as we talked about these milestones that kind of have just stretched a little bit on the VCS program. And as we work through the back half of the year, I see that coming down. We will finish the 2020 year at higher than we were in 2021, But then it starts to come back and break our way into 2023.

Speaker 12

Okay. And What are you targeting from a net working capital as a percent of sales in 2023 and 2024 specifically?

Speaker 4

So we don't give guidance specifically on that. We tell you that our normal range, our expectations is 6% to 8%. This 10% is hot, a little bit higher on that range, but not unexpected for how we saw the quarter playing out and then the impacts that we've discussed here. I would tell you that we'd get back more into that range and we get into 'twenty three. 'twenty three is a help on cash.

Speaker 4

And then for 2024, it's about neutral, 2024. We've talked about more ship milestones and deliveries in the out years and that helps To facilitate that working capital coming down from 10% and be more to that 6% to 8% range.

Speaker 12

All right. Thanks very much.

Operator

Thank you very much. And our next question comes from George Sharpeau from Sharpeau Research. George, your line is now open. Please go ahead with your question.

Speaker 3

Yes, Tom, I was wondering if you could just provide what the net EACs were in the quarter by Decision?

Speaker 4

Sure. Yes. The net EACs, George, was were $45,000,000 and the split of that was 90% Ingalls and 10% Admission Technologies. It was 107. Go ahead.

Speaker 3

Say that again, I missed the last comment.

Speaker 4

It was 107 favorable, 62 unfavorable for net of 45.

Speaker 3

Okay. And then you had said that the LPD-twenty 8 was a major help in the Quarter. Is that a singled out number in the queue or no?

Speaker 4

You'll see that for a $17,000,000 favorable achievement adjustment, yes. And both of it is a clean DD250 or delivery that we had in Q1, We usually after those deliveries the following quarter, we'll do a hot wash of the remaining work and there's Sometimes some profitability will happen in the next quarter, so that's been pulled into this quarter too. That kind of factored in into my opening remarks of a 7% Shipbuilding expectation in Q2 as we pull that margin into the Q1 timeframe.

Speaker 3

Yes. And then if the second quarter is 7%. It would imply that the 3rd and the 4th quarters got an average at least as good as the Q1, if not a little better. If you had this one time major benefit in the Q1, what are the benefits you get in the Q3 or Q4 To get that margin better than 8.3 percent to have the year at 8% to 8.1

Speaker 4

Right. So we have several milestones on the back half of the year as we continue through the construction process on the LPD program. There's milestones that we have on those ships. And as we bring people back on board, sales will rise with a margin Perspective and there's some efficiency that gains on that. So we still feel comfortable with the 8% to 8.1%.

Speaker 4

We kind of highlighted at the beginning of the on the February call that it would be light upfront and both the sales and the margin We'll comment on the back half of the year.

Speaker 3

Okay. Thanks very much.

Operator

Thank you very much. I'm not showing any further questions at this time. I'd now like to hand the call back over to Mr. Kasner for any closing remarks.

Speaker 4

Thank you again for joining us on today's call.

Speaker 2

Your interest in HII is appreciated. We welcome your continued engagement and feedback. We'll see you out there.

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