Huntington Ingalls Industries Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Christie Thomas, Vice President of Investor Relations
• Chris Kastner, President & Chief Executive Officer
• Tom Stiehle, Executive Vice President & Chief Financial Officer

Analysts

• Robert Stallard, Vertical Research
• Pete Skibiski, Alembic Global Advisors
• Seth Seifman, JPMorgan Chase & Co.
• Doug Harned, Sanford C. Bernstein
• Myles Walton, UBS Group AG
• Gotham Khanna, Cowen Inc
• Robert Springer, Melius Research
• David Strauss, Barclays PLC
• George Shapiro, Shapiro Research

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2022 HII Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I'd now like to hand over the call to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.

[Christie Thomas, Vice President of Investor Relations at Huntington Ingalls Industries]

[Technical Issues] first quarter 2022 earnings conference call. With us today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer.

As a reminder, statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ. 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. 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 at hii.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 Kastner. Chris?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Thanks, Christie. Good morning, everyone and thank you for joining us on today's call. Earlier this morning, we reported solid performance 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 supply chain disruption.

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 with our suppliers and our customers. In light of both of these challenges, I'm extremely proud of the resilience and the dedication of each of our 44,000 employees to continue to focus on a mission of delivering on their customer commitments.

Now shifting to our results. Sales of $2.6 billion for the quarter were 13% higher than 2021 and diluted EPS of $3.50 for the quarter was down from $3.68 in 2021. New contract awards during the quarter were approximately $2 billion, driven by the award for DDG 139. This results in backlog of $47.9 billion at the end of the quarter, of which $24.8 billion is currently funded.

At Ingalls, LPD 28 Fort Lauderdale completed sea trials and was delivered to the Navy; LPD 29 Richard M. 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 procurement has begun for LHA 9.

On the DDG program, DDG 123, Helena [Phonetic] achieved main engine light-off; and DDG 125 Jack H. Lucas was Christened this quarter. And finally, on the NSC program, steel production continues on NSC 10 Calhoun launched in April.

At Newport News, SSN 794 Montana completed sea trials and was delivered to the Navy; and SSN 796 New Jersey floated off in April. Also, as discussed in our fourth quarter 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 the Centennial of U.S. Navy Aircraft Carriers and CVN 78 USS Gerald R. Ford was redelivered to the Navy in the first quarter after completion of its inaugural maintenance and modernization period. Progress continued on CVN 79 Kennedy which is 83% complete. And CVN 80 enterprise has begun erecting steel in the dry dock. On the RCOH program, CVN 73 USS George Washington is progressing in the testing phase and is 95% complete. And CVN 74, USS John C. 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. 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 billion of proposals in evaluation with $3 billion in proposal development and a total qualified pipeline of more than $25 billion. We had a significant win and unmanned with the selection of our REMUS 300 vehicle at the U.S. Navy's next-generation small UUV program of record. We also recently released Odyssey, a suite of advanced autonomy solutions that offer scalable autonomy across a variety of platforms and is aligned with the industry open architecture standard.

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.

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 attack submarines. Additionally, the appropriations measure provided $250 million 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 his fiscal year 2023 budget request now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs, funding 2 amphibious ships, LPD 32 and LHA 9; 2 DDG 51 surface combatants; and 2 Block 5 Virginia-class submarines. The budget request continues funding for 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, C5 ISR 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 the call over to Tom for some remarks on our financial results.

Tom?

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Thanks, Chris and good morning. Today, I'll briefly review our first quarter 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 $2.6 billion increased approximately 13% compared to the same period last year. This was largely due to revenue attributable to the acquisition of Alion in the third quarter of 2021. Operating income for the quarter of $138 million decreased by $9 million from the first quarter of 2021 and operating margin of 5.4% 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 noncurrent 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 first quarter of 2021. The lower rate in the first quarter of 2021 was primarily due to divestitures during that quarter. Net earnings in the quarter were $140 million compared to $148 million in the first quarter of 2021. Diluted earnings per share in the quarter were $3.50 compared to $3.68 in the first quarter of 2021.

Turning to Slide 5, cash used by operations was $83 million in the quarter and net capital expenditures were $43 million or 1.7% of revenues, resulting in free cash flow of negative $126 million. This compares to cash from operations of $43 million and net capital expenditures of $59 million and free cash flow of negative $16 million in the first quarter of 2021. Cash contributions to our pension and other postretirement benefit plans were $10 million in the quarter, of which less than $1 million were discretionary contributions to our qualified pension plans.

During the first quarter, we paid dividends of $1.18 per share of $47 million. We also repurchased 51,000 shares during the quarter at an aggregate cost of $10 million.

Moving on to Slide 6. Ingalls' revenues of $631 million in the quarter decreased $18 million or 2.8% from the same period last year, driven primarily by lower revenues on the DDG program, partially offset by high amphibious assault ship revenues. Ingalls' operating income of $86 million and margin of 13.6% in the quarter were down slightly from last year due to lower risk retirement on the LHA and DDG programs which was largely offset by increased risk retirement on the LPD programs following the delivery of LPD 28.

At Newport News, revenues of $1.4 billion decreased by $17 million or 1.2% from the same period last year due to lower aircraft carrier and naval nuclear support service revenues, largely offset by higher submarine revenue. Newport News operating income of $81 million and margin of 5.8% were down from last year, primarily due to lower risk retirement on the VCS program, partially offset by higher risk retirement on CVN 78.

At Mission Technologies, revenues of $590 million increased $331 million compared to the first quarter of 2021, primarily driven by the acquisition of Alion in the third quarter 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 first quarter of 2021. Mission Technologies' operating income of $9 million compared to an operating income of $7 million in the first quarter of 2021. First quarter 2022 results included approximately $24 million of amortization of Alion-related purchase intangible assets. Mission Technologies' EBITDA margin in the first quarter was 7.3%.

Turning to Slide 7. We are reaffirming our 2022 sales margin and free cash flow expectations [Phonetic] revise 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.

Regarding our near-term outlook, our first quarter results were positively impacted by a very high-quality delivery for LPD 28 which allowed us to retire a significant amount of risk for that ship in the first quarter 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 second quarter shipbuilding revenue to be relatively flat sequentially and shipbuilding operating margin to be approximately 7%.

Regarding Mission Technologies, we expect results will ramp through the year with second 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 $3.2 billion from 2020 through 2024. This outlook does assume the continued expensing of research and development costs for tax purposes. As a reminder, we believe the impact 2022 free cash flow would be approximately $100 million if the current R&D amortization treatment remains in place.

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 balanced share repurchases.

We will continue to evaluate M&A but see no significant capability gaps today. in closing, we are pleased with the operational milestones achieved in the first quarter, along with the financial results. Notwithstanding the challenges of the current environment, we remain enthusiastic regarding our long-term outlook with nearly $50 billion in backlog, strong budgetary and customer support for our shipbuilding programs and a Mission Technology business that we believe is poised for a 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 Christie for Q&A.

[Christie Thomas, Vice President of Investor Relations at Huntington Ingalls Industries]

Thanks, Tom. [Operator Instructions] Operator, I will turn it over to you to manage the Q&A.

Questions and Answers

[Operator]

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

[Robert Stallard, Analyst at Vertical Research]

Chris, I'll start off with you a bigger picture question on the FY '22 request, it looks like the Navy is changing its plan for amphibious vessels, at least proposing to this, how do you think this could play out? And what's potentially the risk to HII? And then secondly, a more numbers -- a question perhaps for Tom, you mentioned on Slide 8, the potential for margin growth in Mission. I was wondering what sort of better long-term margin could be for this division because 2.5% is pretty low compared to other companies in the industry.

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Yes. Okay. Rob, I'll start with the budget -- the '23 budget request and then Tom can talk about our Mission Technologies margins. One thing we should always remember with the budgetary process is this is the first step of the process. So we'll work through that throughout the year. 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. We do need to work on the amphib line. But I'm positive as we work through this process, that will 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%.

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Sure, Rob and then I'll pick up the question on MT from a margin perspective. Yes, 1.5%. So we guided 1%. So it's higher than the guidance. That's coming off 2.7% ROS last year -- 2.7% last year for Q1 and 2.9% for a quarter ago in Q4. I would tell you that because of the purchase intangibles, both with MT about $30 million and Alion specifically for '24, that return on sales metric is not probably a good lead indicator as far as where we want to land. That's how we kind of give you the EBITDA perspective from 8% to 8.5%.

The quarter here was 7.3%, not unexpected because we guided you from a ROS perspective, only at 1%. I would tell you that [indecipherable] obviously, the margin will follow the sales. So we're comfortable with where we stand. And from a perspective of where we could go, we've 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 the 8% to 10% is a range of where MT could land. All right?

[Operator]

Our next question comes from Pete Skibitski from Alembic Global Advisors. Pete, your line is now open. Please go ahead with your question.

[Pete Skibiski, Analyst at Alembic Global Advisors]

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

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

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 we execute [indecipherable] but we think it's pretty flat.

[Pete Skibiski, Analyst at Alembic Global Advisors]

Okay. Okay. And then one last question kind of on the beaten path, there was an export notification back in December for e-mails and advanced the resting gear to France in both you guys and General Atomics were cited. Is that any kind of a meaningful or a real revenue opportunity for you guys and just curious what's the timing as well on that?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Not for us, no. Remember, we don't -- GA provides us systems. So not for us, now.

[Operator]

Our next question comes from Seth Seifman from JPMorgan. Seth, your line is now open. Please go ahead with your question.

[Seth Seifman, Analyst at JPMorgan Chase & Co.]

I think you mentioned 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 what are the risk would be in the financial plan if -- to the extent that the hiring situation gets tougher.

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

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

So it's definitely a watch out. We need to we need to hire, we need to train and we need to be productive. So still comfortable with our guidance but labors will watch out for us as we move through the year.

[Seth Seifman, Analyst at JPMorgan Chase & Co.]

Right. And just a 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 so is this really more about setting up for '23? And then to the extent you have an idea of how you're set up for '23, that would affect your risk tolerance that you have in your estimates of completion.

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

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 in place for their learning, they're going to fill a critical role within the shipyard. Now they're not going to be first-class shipbuilders right away but they're going to be earning. They're going to be making progress and 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 first-class shipbuilders coming out of the gate but we expect them to contribute.

[Operator]

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

[Doug Harned, Analyst at Sanford C. Bernstein]

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 -- with Newport News. If I go back to when you had the issues back in 2020, it was the Montana, the New Jersey, the Massachusetts, those I mean the Montana has delivered, New Jersey flowed off. 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 them were attributed to that. If you look at the situation on 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 in. So how are you looking at the Virginia class performance right now?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

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 and 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'll talk about zero production a lot but the VCS program is really a production line. And when you miss schedule, there's a knock-on effect. 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, we 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. 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 the 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.

[Doug Harned, Analyst at Sanford C. Bernstein]

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 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?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Yes. So we've assessed the EACs and the risk on not only Block 4, Block 5 boats and reset the DACs based upon how we project them to perform over the life of both of those blocks. So we don't necessarily give margin guidance at a program level. But I do see after resetting that risk on Block 5 going forward, there's potential for upside if we're able to meet our milestones.

[Operator]

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

[Myles Walton, Analyst at UBS Group]

Thanks. Good morning. I wanted to ask about carriers for a second and in particular, the 79 and the 73. So on the 79, I think the progress, the completion metric you guys provided in 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 first quarter. So any reason why there wasn't progress there. And then just a comment on the 73 and if the slip to 2023 made any difference for your financials.

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

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

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Yes, 79, Myles, we're absolutely making progress on that shift. We're heavily into volume part of that ship completing compartments. If you walk through the base in that ship right now, you'll see a lot of insulation obtained which is a good place to be when you think about an aircraft carrier and attacking that volume and then starting the test program. I don't know specifically about the math around the progress for steel 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.

[Myles Walton, Analyst at UBS Group]

So no movement to the expected look on that vessel?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

No, absolutely not.

[Myles Walton, Analyst at UBS Group]

Okay. Thanks.

[Operator]

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

[Gotham Khanna, Analyst at Cowen]

I was wondering if you could refresh us on how your contracts adjust for higher input costs. So whether it be steel, whether what have you, everything is like you mentioned at the outset -- is moving up in price. How do you recover those? What does that do to margins? Is it just a pass-through where it actually dampens margins. Just if you could walk through the mechanics there.

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Sure. Its Stiehle here. So from an inflation perspective and I break that down, I know your question is focused just on the existing contracts and how that is -- I'll hit that. But also we're watching inflation as it applies to our new bids. So it's like a 2-part answer here. But from the mechanics that we have on how that hits, as we spoke about this in other earnings calls, it really starts with our understanding of what we're buying and how we contract for with 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. So while we have a clear understanding of what we're buying and [indecipherable] these contracts, we have a good bids from our suppliers. We do run in from time to time as we move forward, we have the contracts awarded things are purchased after that and/or this 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 have a long lead phase of a contract, it operates almost like a cost-type contract and we're rolling those axles into the construction, the eventuality of the construction to award that bids. So that's helpful. Another piece of that is when you look at -- you'll see in the queue, we kind of break out across the 3 divisions. The percentage of cost type versus fixed price contracts. But from an entity perspective, it's about 52-48 fixed pricing costs. So this recruitment there in the contract type mission technologies as over 90%, cost types and Newport News 50-50, so that helps there.

Several of our contracts do have EPA clauses which kind of recognized things that we don't put on contract immediately and we have that risk covered with our bids. There's an estimated cost from bids that we received at the time of reward. 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. Even our flex fleet price contracts is a shale on in that. So we work ourselves through that as well. So I think the tool set that we have and 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 a relatively safe space. The last one I'd add to you too is a large majority of the cost of our existing contracts is on the labor side and we come through our union agreements of 4-year down at Ingalls 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.

So I think, overall, it's 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 cost kind of year-over-year but we ensure that we follow that same dedicated process of getting live quotes. Our customer sets are 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.

[Gotham Khanna, Analyst at Cowen]

And just the mechanics, if you wouldn't mind on if in fact, you have an EPA and you got to make the adjustments there, is that just an increase of revenue and cost and therefore, a document to profit margin?

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Sure the back end of your question. So with all that as the backdrop, the mechanics of that, obviously, we go through our disciplined quarterly EAC process getting costs weekly, a monthly program to view and then obviously, our quarterly EAC process. So we can see how the material is trending both against the existing orders that we have and requirements and any pop-up requirements. We'll evaluate that, whether the EAC is improving or degrading and/or the associated risks that we thought we were 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're running that for 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, I guess the portfolio.

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Yes. I'd also add that if there is EPA protection, it's an increase in sales without the results and impact on margins. So that does provide us additional protection and that's in our EAC process as well every quarter.

[Operator]

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

[Robert Springer, Analyst at Melius Research]

Thank you. Good morning. Chris, I have a couple of 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?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Yes, that's 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 get some traction internationally. So we work on that. We're very tactical in how we do that. We make sure the opportunity is valid. But all those are opportunities in Europe and actually any NATO country, actually.

[Robert Springer, Analyst at Melius Research]

Okay. And then on the domestic side, the Navy leadership has been talking about priorities as follows: top priority is Columbia class, then readiness modernization and lethality improvements and then third, capacity. So knowing that the commitment to Colombia is rock-solid and capacity is really a function of the 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.

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

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, 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.

[Robert Springer, Analyst at Melius Research]

Chris, do you see any timing or any visibility on when these things start to come through?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

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.

[Operator]

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

[David Strauss, Analyst at Barclays]

Good morning. Chris, 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?

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Yes, we're still working on it. I think you saw in the '23 budget additional funding allocated to capital in support of the 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.

[David Strauss, Analyst at Barclays]

Okay. And Tom, on the working capital side, I think net working capital as a 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 '23 and '24 from a working capital perspective?

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Sure David. Yes, it was 10% -- and that's just upfront, 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 with the accounts payable. We anticipated that it would be high on the front end here right now. A little bit of a draw eyes. We talked about these milestones to 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 out higher than we were in 2021 but then it start to come back and break away into 2023.

[David Strauss, Analyst at Barclays]

Okay. And what are you targeting from a net working capital as a percent of sales in '23 and '24 specifically?

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

So we don't give guidance specifically on that. We tell you that a normal range, our expectation is 6% to 8%. This 10% is 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 I would get back more into that range and into '23 -- '23 is a help on cash. And then for '24, it's about neutral, '23 and '24. 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.

[Operator]

And our next question comes from George Shapiro from Shapiro Research. George, your line is now open. Please go ahead with your question.

[George Shapiro, Analyst at Shapiro Research]

Tom, I was wondering if you could just provide what's the net EACs were in the quarter by division.

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Sure. Yes. The net EACs, George, was were $45 million and the split of that was 90% Ingalls and 10% Mission Technologies.

[George Shapiro, Analyst at Shapiro Research]

Say that again. I missed the last comment.

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Yes, it was 107 favorable, 62 unfavorable for a net of 45.

[George Shapiro, Analyst at Shapiro Research]

And then you had said that the LPD 28 was a major help in the quarter. Is that a singled-out number in the queue or not?

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

You'll see that for -- the $17 million favorable adjustment, yes. And both it was a clean DDG 50 or delivery that we had in Q1. We usually get -- absent those deliveries, the following quarter, we'll do a hot wash of the remaining work and this sometimes some profitability that will happen in the next quarter. So that's been pulled into this quarter, too. That kind of factored in, in some of the opening remarks of a 7% shipbuilding expectation in Q2 as we pull that margin into the Q1 time frame.

[George Shapiro, Analyst at Shapiro Research]

Yes. And then if the second quarter is 7%, it would imply the third and the fourth quarter has got an average at least as good as the first quarter, if not a little better. So if you had this onetime major benefit in the first quarter, what are the benefits you get in the Q3 or Q4 to get that margin better than 8.3% to have the year at 8% to 8.1%?

[Tom Stiehle, Executive Vice President & Chief Financial Officer at Huntington Ingalls Industries]

Right. So we have several milestones on the back half of the year as we continue through the construction process on the LPD program. The milestones that we have on those ships. And as we bring people back onboard, sales will rise with a margin perspective and there's some efficiency that gains that. So we still feel comfortable with the 8% to 8.1%. We kind of highlighted at the beginning of the -- on the February call that it would be right up front and both the sales and the margin will come on the back half of the year.

[George Shapiro, Analyst at Shapiro Research]

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. Kastner for any closing remarks.

[Chris Kastner, President & Chief Executive Officer at Huntington Ingalls Industries]

Thank you, again, for joining us on today's call and your interest in HII is appreciated. We welcome your continued engagement and feedback. We'll see you out there.