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Huntington Ingalls Industries Q2 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Christie Thomas
    Vice President of Investor Relations
  • Christopher D. Kastner
    President, Chief Executive Officer And Director
  • Thomas E. Stiehle
    Executive Vice President And Chief Financial Officer

Analysts

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2022 HII Earnings Conference Call. [Operator Instructions]

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

Christie Thomas
Vice President of Investor Relations at Huntington Ingalls Industries

Thank you. Good morning, and welcome to the Huntington Ingalls Industries Second 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 fact 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 Investors 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?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Thanks, Christie. Good morning, everyone, and thank you for joining us on today's call. Before discussing the results, I would like to thank each of our 44,000 employees for the work they do every day as they remain focused on our operational pillars of safety, quality, cost and schedule and driving the delivery of our customer commitments. Today, we reported another quarter of solid performance across each of our operating segments. These results reflect our continued focus on operational execution. Starting with our results on page three of the presentation. Sales of $2.7 billion for the quarter were 19.3% higher than 2021.

And diluted EPS was $4.44 for the quarter, up from $3.20 in 2021. New contract awards during the quarter were approximately $2 billion, which results in backlog of approximately $47 billion at the end of the quarter, of which $24.6 billion is currently funded. At Ingalls this quarter, LPD 29, Richard M. McCool Jr., was Christened until production continued on LPD 30, Harrisburg and LPD 31 Pittsburgh. We were also awarded the advanced procurement contract for LPD 32. Additionally, progress continues on LHA 8, Bougainville and long lead material procurement continued to LHA nine with a detailed design and construction contract award expected later this year.

On the DDG program, DDG 121, Frank E. Peterson, Jr. [Indecipherable] away this quarter until production continues on DDG 123 and subsequent DDGs. On the NSC program, we launched in Christian Denise 10 Calhoun this quarter. At Newport News, submarine and carrier construction and maintenance programs continue to progress. On the VCS program, as discussed in the first quarter call, SSN 796 New Jersey floated off in April. In addition, SSN 798 Massachusetts achieved pressure hole complete in the quarter, and the remaining Block IV and Block V boats continue to make progress. On CVN 79 Kennedy, we turned over the 1,000th compartment to the Navy last month, and we will ramp the testing program later this year.

CVN 80 Enterprise is beginning to take shape in the dry dock and early unit construction has begun on CVN 81 Doris Miller. On the RCOH program, CVN 73 USS George Washington continues to make progress on the testing phase and redelivery is now expected in the first quarter of 2023. CVN 74 USS John C. Stennis continues to make progress. and pre-advanced planning is underway on CVN 75 USS Harry S. Truman. Regarding our shipbuilding labor, ensuring our shipyards have a necessary workforce to execute our backlog remains a key risk and focus area. We have hired over 2,000 craftsmen and women through the first half of the year against our full year plan of 5,000.

While hiring is behind plan, we are making up this deficit using outside lease labor and overtime. Even in this current tight labor environment, we have continued to successfully bring shipbuilders on board and utilize our training programs in apprentice schools, which has positioned us to execute on our commitments. Now I want to take a moment to discuss the improvements to our execution operating system in the shipyards. Our operating system utilizes the best practice at each shipyard and allows our leaders and craftsman across all programs to speak the same language, be predictable and relentlessly focused on execution.

For example, the operating system breaks a long ship building construction schedule into phases the vary in duration but are generally 10 to 12 weeks and allows focus on the commitments and the critical path items to be accomplished in that phase. It also includes a common set of metrics and processes that provide feedback on progress and performance. I expect continued improvement of our operating system to drive our shipbuilding margin expansion opportunities and to take advantage of our significant backlog. The operating system also provides transparency to our customer of progress towards delivery of these important assets.

Moving to our Mission Technologies segment. We successfully demonstrated the prototype platform, the Ferro system, which has capabilities for launching, operating with and retrieving unmanned underwater vehicles from an amphibious ship. This achievement, which leveraged expertise across the HII segments reflects our commitment to delivering advanced technologies and multi-domain capability to support our national security customers. We also were awarded the Mobility Air Forces Distributed Mission Operations prime contract. This award is a key win in our strategy to expand our live virtual constructive customer base beyond the Navy to the Air Force and other services. Turning to slide five.

We have provided a snapshot of the Mission Technologies pipeline. Among recent contract awards, we were just awarded a task order decisive mission actions and technology services or DMAs, to integrate new technology and capabilities and identify and characterize threats in support of the Department of Defense for the purpose of countering and deterring current and emerging global threats. This contract has a total ceiling value of over $800 million, and this win is particularly important for further validating our investment thesis which is bringing together the innovation and technical expertise of legacy Alion with the depth and infrastructure breadth of HII.

This will create opportunity and value for our customers, shareholders and employees more than either company could have achieved on its own. While these strategic synergy wins are very positive, we continue to see contract award delays pressuring timing of current year revenues. However, we continue to have a very large pipeline that creates significant opportunity for bookings and sales growth. In that regard, heading into the third quarter, our Mission Technologies pipeline stands at $61 billion with $26 billion of qualified pipeline. The DMAs award and other expected awards will drive up our book-to-bill ratio, which was 0.8% for the second quarter.

All in all, I'm very pleased with the direction of Mission Technologies segment, and I'm excited about the growth opportunities in areas that support our customers' critical needs. Turning to activities in Washington. The President submitted his fiscal year 2023 budget request in March which is now under consideration by Congress. As bill progressed through both chambers, we continue to see bipartisan support for our programs reflected in the defense appropriations and authorization bills in the House and the Senate.

We are very pleased to see the strong support of our shipbuilding programs in the Draft Senate appropriations bill released last week. This bill includes an additional Arleigh Burke-class destroyer $250 million for LPD 33 advanced procurement and $289 million for LHA 10, and continues the seal production of submarine, destroyers and amphibious warships that leverages production lines and supply chains to efficiently produce the ships our nation requires. The two authorization committees have also shown strong support for shipbuilding to include adding LPD-33 advanced procurement funding authority and requiring 31 amphibious warfare shift in the naval combat force.

Both appropriation bills and both authorization bills include language in support of a DDG-51 multiyear procurement contract in FY 2023, and provide additional support and funding for the submarine industrial base. We are pleased with the legislative support our programs have received thus far, and final outcomes will depend on eventual respective conference negotiations between the appropriations and authorization committees.

And now I will turn the call over to Tom for some remarks on our financial results. Tom?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Thanks, Chris, and good morning. Today, I will briefly review our second 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 six of the presentation, our second quarter revenues of $2.7 billion increased approximately 19% compared to the same period last year. This increased revenue was attributable to the acquisition of Alion in the third quarter of 2021 as well as the growth in aircraft carrier revenue in Newport News Shipbuilding.

Operating income for the quarter of $191 million increased by $63 million or 49% from the second quarter of 2021, an operating margin of 7.2% increased 144 basis points. These increases were largely due to a higher segment operating income, driven by higher risk retirement and favorable changes in contract estimates both at Ingalls and Newport News Shipbuilding as well as a higher nonrecurring equity income at Mission Technologies related to our investment in a ship repair and specialty fabrication joint venture. Results were additionally supported by more favorable noncurrent state income taxes and operating FAS/CAS adjustment compared to the prior period.

Other net expense was $10 million in the quarter, which was primarily driven by losses on investments in marketable securities, given negative asset returns in the quarter. Our effective tax rate in the quarter was approximately 19.8% compared to 19.9% in the second quarter of last year. Net earnings in the quarter were $178 million compared to $129 million in the second quarter of 2021. Diluted earnings per share in the quarter was $4.44 compared to $3.20 in the second quarter of the previous year. Moving on to slide seven, Ingall's revenues of $658 million in the quarter decreased $12 million or 1.8% from the same period last year, driven primarily by lower revenues in the DDG program, partially offset by high amphibious ship revenues.

Ingalls operating income of $106 million and margin of 16.1% in the quarter were up significantly from last year due to favorable changes in contract estimates as well as higher risk retirement on the LPD program partially offset by lower DDG risk retirement. At Newport News, revenues of $1.4 billion increased by $70 million or 5.1% from the same period last year due to higher aircraft carrier revenues partially offset by lower naval nuclear support services. Newport News operating income of $94 million and margin of 6.6%, were up from last year, primarily due to favorable changes in contract estimates partially offset by lower risk retirement on the VCS program.

At Mission Technologies, revenues of $600 million increased $363 million compared to the second quarter of 2021, primarily driven by the acquisition of Alion in the third quarter of last year. Mission Technologies operating income of $25 million compares to operating income of $13 million in the second quarter of last year. Second quarter 2022 results included a nonrecurring gain of approximately $15 million related to higher equity income from our ship repair and specialty fabrication joint venture, of which we are a minority owner. Additionally, results included approximately $24 million of amortization of a line-related purchased intangible assets.

Mission Technologies EBITDA margin in the second quarter was a robust 10.7%. Turning to slide eight. Cash provided by operations was $267 million in the quarter, and net capital expenditures were $59 million or 2.2% of revenues, resulting in free cash flow of $208 million. This compares to cash from operations of $96 million, net capital expenditures of $73 million or 3.3% of revenues and free cash flow of $23 million in the second quarter of 2021. Cash contributions to our pension and other postretirement benefit plans were $11 million in the quarter, of which less than $1 million were discretionary contributions to our qualified pension plans.

During the second quarter, we paid dividends of $1.18 per share or $47 million. We also repurchased approximately 80,000 shares during the quarter at an aggregate cost of approximately $17 million. Turning to slide nine. We are reaffirming our 2022 shipbuilding sales and margin guidance as well as our Mission Technologies margin guidance and overall free cash flow expectations while modestly revising our Mission Technologies revenue outlook given a slower start to the year. For Mission Technologies, we are revising our revenue expectation to a range of between $2.4 billion and $2.6 billion.

This revision is a function of a slower award in contracting environment than we had initially expected, and precipitated by the continuing resolution to start the year. That said, we remain very confident in and excited by the growth opportunity we see ahead for Mission Technologies. Regarding our near-term outlook, our second quarter results were positively impacted by higher risk retirement and favorable changes in contract estimates, particularly for LPD-30, as reflected in Ingalls operating margin. The remaining shipbuilding milestones we expect to achieve in 2022 are weighted towards the fourth quarter.

Given that backdrop, we expect the third quarter shipbuilding revenue to be relatively flat sequentially and shipbuilding operating margin to be approximately 7%. Regarding Mission Technologies, we expect results will begin to ramp more meaningfully as the pace of awards increases and expect third quarter sequential sales growth in the 7% to 9% range and operating margin in line with our full year guidance of approximately 2.5%. Regarding our longer-term target, we remain confident in our free cash flow target 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 to 2022 free cash flow would be approximately $100 million if the current R&D amortization treatment remains in place. On slide 10, we have provided a walk from our 2022 to 2024 free cash flow outlook, which is consistent with the chart we began providing earlier this year. Our strong free cash flow performance in the quarter was partially due to the pull forward from the third quarter. Given this dynamic and the lack of milestones in the third quarter, we expect free cash flow to be minimal. As a result, we do expect robust free cash flow generation in the fourth quarter and do see positive tailwinds on our overall 2022 free cash flow guidance.

As we are in the midst of our annual long-term plan update, our reserve and update of our free cash flow guidance until that is completed, and we'll have more details on our third quarter call. Lastly, we are reaffirming our capital allocation priorities and we are committing today to return substantially all free cash flow after planned debt repayment to shareholders through 2024. This is a significant commitment which should result in increased share repurchases, particularly in 2024 after we reached our desired debt level. To summarize, this was a strong quarter, and we are pleased with our progress as we continue to navigate a challenging operating environment.

With that, I'll turn the call back to Chris for some final remarks before we take your questions.

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Thanks, Tom. In conclusion, I will wrap up on Slide 11 with the key tenets of our investment thesis. First, we're focused on execution of our significant backlog, which provides meaningful earnings and cash flow. This, coupled with our consistent long-term shipbuilding growth profile and high-growth opportunities in Mission Technologies positions us to deliver significant free cash flow and generate value for our employees, customers and shareholders.

Now I'll turn the call over to Christie for Q&A.

Christie Thomas
Vice President of Investor Relations at Huntington Ingalls Industries

Operator, I will turn it over to you to manage the Q&A.

Questions and Answers

Operator

[Operator Instructions] Our first question comes from Robert Spingarn from Melius Research.

Robert Michael Spingarn
Analyst at Melius Research

Good morning. Chris-- or Tom because you both talked about it. The strong Ingalls margin, sounds like that was LPD-30 primarily, but you didn't change the shipbuilding margin guide. So I assume that was expected from the outset? Or does this reflect maybe some increased costs from labor and such in the back half of the year?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes, it's a good question,. This is Chris. I'll start, and then Tom can finish here. But that was a bit of an acceleration in that milestone. So we got some benefit in Q2. But labor, as I indicated previously, is our greatest risk, what we're watching across the portfolio. In shipbuilding, we've hired 2,000 to a 5,000 commitment. Now luckily, we have leased labor, and we have over time. And the good news there is people are actually working over time now. Back in 2021 and after the pandemic started, it was really hard to get people to work over time. So they started to come back and work over time, which helps to offset it but labor remains our largest risk. I'll kick it over to Tom.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Sure. And just additional comment on that front is we had a milestone like LPD 30 milestone that we referenced, that was planned for Q3. That accelerated to Q2. So that's the timing event. Now Q2 was a good quarter for Ingalls overall. They had some DDG-121 post delivery cleanup, LPD-28 and 29, some additional risk retirements. And then on the large deck, we saw like a couple of dollars up into Q2 there. I still think on the back end, the reason why we haven't raised guidance is we don't have as many milestones. We do have DDG-123 in Q4, and there is the back half of the year to play out as Chris says, we're watching our labor higher and how that impacts the portfolio here right now. And as the year unfolds and we continue to retire risk, we'll provide additional guidance on that front.

Robert Michael Spingarn
Analyst at Melius Research

So just on the back of that, I mean, it sounds like you'd have upside otherwise, but how do we quantify what this lease labor and just labor inflation in general over time, you talked about. How does that structurally change the cost of labor in the business if it lingers for a while?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. That's a great question. Obviously, we're fortunate in that we have labor agreements for our own employees. But lease labor can be a bit more expensive. Now they don't have the benefits, so you have to trade that off a bit. So what you do is you put estimates for what you think you're going to do in lease labor and over time in your EACs, and that's been reflected in our margin profile. So I think it's a great question. You have to be mindful of that.

Robert Michael Spingarn
Analyst at Melius Research

Okay. Thanks very much.

Operator

Our next question comes from Pete Skibitski from Alembic Global.

Peter John Skibitski
Analyst at Alembic Global Advisors

Hi, good morning guys. Tom, I guess on the expectation that share repurchase will ramp in 2024, I think you mentioned. We should -- when we're trying to figure that out, the level of that, we should assume that you're going to pay off all the debt that's maturing essentially, you're not going to refinance?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

That's correct. As you can see, we're on a cadence here, about $100 million a quarter, $400 million a year. We'll continue to go do that 2022, 2023, we pay down to two-year bond, 2023, the term loan gets paid off in completion in Q3 to [Indecipherable] there that you can see that we'll follow our capital allocation policy that we have. We'll continue to keep the yard up and running. We don't see any holes in the portfolio from an M&A perspective. And barring that there's nothing ultra attractive in that time frame. We'll continue to provide all excess free cash flow back to the shareholders. And basically, that debt slug that I've talked about will just kind of transition into repos if we don't have anything better so we could do with the cash.

Peter John Skibitski
Analyst at Alembic Global Advisors

Okay. Okay. And last one for me. Chris, are we -- how are you feeling in terms of extending the amphib kind of life cycle at Ingalls? I know there were some concerns there on the LPD line on the LHA line, and it seems like you're making some progress. Do you feel like you're kind of out of the woods there as long as the kind of momentum you're seeing in Congress continues?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. So definitely some positive momentum. We're about halfway through, right? We like to say that it's a long process. Positive momentum on LHA-10 acceleration LPD-33, and some really positive developments by the Navy and the Marine Corps and establishing 31 amphibs, which provides some clarity from a planning standpoint. So yes, positive momentum, but we need to get through the process to completion. It solidifies the revenue profile that, coupled with DDG 51, the 2023 multiyear that we're working on. All that activity within the 2023 budget really solidifies the Ingalls revenue profile moving forward.

Peter John Skibitski
Analyst at Alembic Global Advisors

Great. Thanks guys.

Operator

Our next question comes from Robert Stallard from Vertical Research Partners.

Robert Alan Stallard
Analyst at Vertical Research Partners

Thanks so much. Good morning. Chris, I'll start with you following up on the labor issues. I wonder if you could also comment not just on the numbers, but the experience and skill set of the folks you've been able to get through the door, how that compares to your target?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. So it's -- over the last couple of years, we do have a newer and greener workforce, and we work very hard to train and get that workforce ready to be productive. So it's not new or unexpected for us. We've done it before, but it definitely is a greener workforce. That's why I mentioned the operating system in my script. It's very important that you kind of get into the fundamentals and make sure that all our shipbuilders are very productive. So -- but you are correct. We do have a greener workforce today, but it's not unexpected. We've seen that for the last couple of years.

Robert Alan Stallard
Analyst at Vertical Research Partners

Okay. And then a quick follow-up for Tom. I was wondering if you could give us the latest prognosis on the pension, given that all the market moves, we see and also, of course, base rates going higher?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yes, sure. So I appreciate the question. It is volatile out there, both on the capital front and interest rates on the market front. Right now, there's a favorability for the higher discount rates, which is partially offset by the unfavorable returns on the assets. It's hard to predict right now how they'll play out by year-end, but we do the remeasurement at the end of the year. But consistent with the prior years, we still will provide an update on our Q3 call for 2022 and then the outlook for 2023.

Robert Alan Stallard
Analyst at Vertical Research Partners

Okay. That's great. Thank you.

Operator

Our next question comes from Seth Seifman from JPMorgan.

Seth Michael Seifman
Analyst at JPMorgan Chase & Co.

Hi. Thanks very much. Good morning. Just real quick. I apologize if I missed it, but if you could quantify the EACs and roughly how they were allocated between the [Indecipherable]?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Sure. Great, Seth. Yes, it's -- net, it was 68 net,-- net, it was $106 million favorable, $38 million unfavorable. And on the net to $68 million it was split between Angeles, Newport News and Mission Technologies are a ratio of 80:15:5. So $68 million net, 80:15:5.

Seth Michael Seifman
Analyst at JPMorgan Chase & Co.

Cool. Very good. And just as a quick follow-up, I appreciate some of the pace of contracting activity in Mission Technologies, and we've seen it in other companies in the IT services space. But I guess if you could speak to the level of quarterly visibility that you have in that business, just given that not only did the guidance come down a little bit for the year, but the quarter itself fell a little bit short. And so how you -- what gives you confidence in sort of the remainder of the year there?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. So I'll start, and I'll let Tom. In the pipeline within our presentation because we wanted to make sure everybody understood that there's a lot of opportunity in the space. It has started slow for the beginning of the year, but the win of DMAs which will help backlog and book-to-bill in Q3 and the win of the LVC contract with the Air Force, which really transitions to legacy established program from the Navy established over that into the Air Force, which will allow us to sell to other services as well. It's a really good indicator that things are hopefully starting to break loose and really validates our strategy for the Alion acquisition. So we are seeing some things break loose, we're going to have to see how that translates into revenue. But I'll let Tom talk about how it's distributed by quarter.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yes, sure. So just from a baseline perspective on this question, it's $590 million in the first quarter, we had guided about 5% of $620 million. We did top in line here at $600 million, so we finished the year up just under $1.2 billion with a run rate of like 23.80% against initial guidance of $2.6 billion. So the -- so that background. Going forward, we do think that we'll see for Q3 a run rate here of what we said the growth would be, which would be 7% to 9%. I don't know if you noticed enough, but in the PowerPoint, where you think from -- we added emission technology slide and how we look at that business. Alion has a legacy process there, very robust on the pipeline and how they handle their work.

Exploratory, $61 billion, down to $27 billion on the exploratory side, they break this down to which opportunities that they can qualify and capture and then that goes into the evaluation in bid. So we see that pipeline actually growing from the time that we picked them up last year, so that's a positive sign right now. As Chris said, we were impacted at the beginning of the year with the CRA. And then just the general outflow of contracting acquisitions has been a little bit slower than we thought. We have seen some awards that popped on here in the end of Q2 time frame, and there's still additional opportunity that will happen on the back half of the year. So I'm still optimistic on the awards front.

The other piece that holds us up there is we do have more seats than we have heads right now. So life at shipyards, there's a hiring crunch there, but job market is tight, finding people with that type of background and tickets. So there's seats there we have on sale, and that brings in some variability on the sales outcome of the year. But we still have the $2.4 billion to $2.6 billion. We haven't let go at the top end depending on a couple of awards, which the award to really affect next year's sales in this and filling the seats that aren't occupied. We believe that we're still in the range there between $2.4 billion to $2.6 billion.

Seth Michael Seifman
Analyst at JPMorgan Chase & Co.

Great. Thanks for the detailed responses. Thank you.

Operator

Our next question comes from Gautam Khanna from Cowen.

Gautam J. Khanna
Analyst at Cowen and Company

Hi, good morning guys. I was wondering if you could talk a little bit about the VCS program. There's been a lot of press and GAO and industry scuttle about the program being well behind schedule. And obviously, you guys took a big charge in Q2 of 2020. It looks like there was another negative EAC in this quarter. Just where are we on the program relative to your expectations? If you could just maybe give us some color on what your accrual rate might be. So that we should either be [Indecipherable].

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

It's -- yes. I'm sorry. I'll let you finish. Did you have anything else?

Gautam J. Khanna
Analyst at Cowen and Company

No, that's great.

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Okay. Okay. Great. Yes. So the VCS program, and I would characterize that as stable from a scheduling standpoint. And over the last few quarters pretty stable from EAC standpoint actually. There's always minor adjustments from quarter-to-quarter. But I think some of the data you may be referencing is a bit dated. As you know, we do quarterly EACs. We incorporate the risk in all of the ships and boats on a quarterly basis. So I'm pretty comfortable with where we are from an EAC standpoint on the VCS. I don't think anything is -- all -- any of us are comfortable relative to the how we performed historically on the program. We need to improve, right?

I think the Newport News team is very motivated and I'm dedicated to getting it right. They're making progress. There's some potential momentum within Block IV, which will have to translate into Block V. So I think there's some upside in Block V. So I think the team is very focused. I think they're working the operating system very well. We need to get back to two per year. We need to get these assets back to our customer because they need them. So I would consider it stable from a schedule standpoint, and we need to continue to improve from a cost standpoint. And -- any details, I'll send over to Tom here.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Sure. Yes. I think when we took that charge back in Q2 of 2020, the practice of that was we had a list already with Columbia coming online we saw that ramping up and then getting to a full two cadence of launch and sell off the ship a year, there was already a lift and a risk and a hiring ramp right there. Obviously, in 2020, after two quarters of that kind of midyear, we saw with COVID impacting us. And then obviously, as that continued with Omicron into 2021.

So there's been pressure on the program from what was the baseline of already being able to do two plus one between those two programs, hiring ramp with more junior people on board. And then that line that we've talked about in past calls is very serial in nature more than any of our other lines. Each boat goes exactly through crew to crew. So if one boat in front of us gets impacted, it affects the line behind it, both the crews being able to cycle and then the schedule aspect of each boat. So I think when we took that look to see where we were in Q2 of 2020, we had a perspective of what was in the art of the possible and how we could recover or we'll finish off the back end of Block IV as it translates into Block V.

So I think, as Chris said, we're relying on operating system. We're trying to stay to our manning plan that we have. We're doing -- lessons learned from boat to boat. We are seeing incremental improvement from operational where we were a quarter ago to now. So that's a positive sign right now. And as Chris says, we run a very rigorous EAC process and we look at our labor and material and overhead runoffs, reevaluating our booking rates the changes on that are large. So you don't see them on the downside there. But we do have incremental changes from quarter-to-quarter here. So I'm comfortable with where we're booking these ships right now.

Gautam J. Khanna
Analyst at Cowen and Company

Thank you very much guys.

Operator

Our next question comes from George Shapiro from Shapiro Research.

George D. Shapiro
Analyst at Shapiro Research

Good morning. My question is that if you take your EACs, it would imply the underlying margin at -- Ingalls is like 7.9%, which is generally higher than what you've seen in the past around 7%. So I was just wondering, is that just unique to this quarter? Or is this more of an ongoing underlying margin rate?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yes, it is a little bit of a unique for this quarter. That's a high number. The run rate from Ingalls is usually a low and then the upper 6s and low 7s. I think just how well the math kind of played out with the performance lift. We talked about the economic adjustments that were allowed because of the closes that we have in the contract. So your math may just be a little high there. But generally speaking, we've talked about the maturity of the portfolio date at Ingalls, more are serial production and follow-on ships down there. So their run rate is up in front of Newport News. And we generally say it's between 6% and 7%. So I'd leave you with that, George.

George D. Shapiro
Analyst at Shapiro Research

Yes. No, that's really the question that if I did the numbers this quarter, it looks like it would come out to 7.9%. And like you suggest, it's normally like closer to 7%. So I was just wondering if there's something unique that made this quarter out of line? Or is it a new run rate?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

It's not a run rate. It's just how the NAS plays out for the quarter.

George D. Shapiro
Analyst at Shapiro Research

Okay. Thanks very much.

Operator

Our next question comes from David Strauss from Barclays.

David Egon Strauss
Analyst at Barclays Bank

Thanks. Good morning. Tom, I wanted to ask about the free cash flow cadence. I know you mentioned Q3 close to, I guess, zero breakeven. But I think you're still calling for a pretty meaningful working capital tailwind in the second half of the year. It looks like capex might be trending towards the lower end of your range. What keeps you from coming in a decent amount above kind of the $300 million to $350 million, assuming R&D doesn't happen?

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

Yes. So two questions, and you're putting the pieces together out there, as we highlighted in the opening comments, we did say $300 million to $350 million. We're holding that right now. I do feel comfortable that with the risk we've seen behind us and in front of us, we still have like five months of the year to play out. But right now, we do see although Q3 will be light, just the way that the year is playing out, Q2 and Q4 are going to be the cash flow quarters. But I do see we've been -- the COVID repay has pushed to the back half of the year.

And as I come through our planning process and I have the complete visibility on how the year is going to play out, if the COVID repay either happening this year or next year, that's more of a timing play. The R&D amortization, you referenced, we'll see how that plays. But that could be the $100 million that we talked about as a downtake this year could go away. And if the law changes, there seems like there's some traction and momentum to get attached to bill at the back half of the year, that changes over.

We could see the $100 million go away as we [Indecipherable] on the downside and then it would validate the $3.2 billion over the five years. Cash from operations was very strong in Q2. We saw some nice pickups as far as older contracts, some service contracts. We're able to get COVID costs that we had on our books included in our billing rates. So that was a pickup. And that's how Q2 kind of played out. When you think about Q4, on the back half of the year, I have a 123 delivery on the DDG side, I have a couple of supply capital incentives that play out LHA-8 billings, LHA-9 with the construction award helped clean up the long-lead contract that I have on that for cash.

And then CVN-81 is going to be able to have a progress payment billings as they work through kind of getting into Q4. We have some incentives on VCS and then Alion know kind of kick in that I'll use at the end of the year, too. So a good upside potential there, but I'm not ready to call that ball until I can get through our planning process.

David Egon Strauss
Analyst at Barclays Bank

Okay. Thanks. And I mean, is any of this borrowing from kind of the upside you've talked about for 2023 going up to $750 million to $800 million or you think maybe there's a little bit of upside, but the plan is still intact to get to those kind of numbers in 2023.

Thomas E. Stiehle
Executive Vice President And Chief Financial Officer at Huntington Ingalls Industries

So just to be clear, the majority of what I talked about is in the plan and the forecast right now. Those things could kick out $25 million, $50 million, $75 million upside. The tiny aspect would be the COVID repay. So if I do not have to pay it at the end of this year, that would be a pull forward from 2023 to now. But I believe by the time we have our Q3 call in November, I'll have complete clarity into that, and I'll give you more visibility.

David Egon Strauss
Analyst at Barclays Bank

Okay. Thanks very much.

Operator

Our next question comes from Ron Epstein from Bank of America.

Ronald Jay Epstein
Analyst at BofA Securities

Hi, good morning guys. Maybe can you just walk through a couple of different programs and how things are going. In the unmanned under water vehicle business, I mean how is XLUUV coming for you guys? How is it going?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. So XL is progressing, right? We've delivered our first unit to Boeing really kind of a test unit. We're progressing through the other units. So it's going okay. I think normal first issues that you have on a new program on the development sort of program. So it's going okay.

Ronald Jay Epstein
Analyst at BofA Securities

Okay. Great. And then maybe just another program, if we can. On the next-generation destroyer, where does that stand? And when do you think there will be competition for that and what's going on there? If you can give us an update on the DDG(X).

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. So I think you may have seen in the press that we got the next contract for development there, kind of concept development working. I think the Navy has done some really smart things in this regard and with [Indecipherable] and Angeles working on the development of that program. I think the important thing on the DDG programs is to ensure we don't stop building DDG 51s prior to transitioning and getting the design correct on the next-generation destroyer. And I think that's a smart move. I think they're continuing with the design effort in both shipyards, and we're continuing to build DDG-51. So I think it makes great sense right now.

Ronald Jay Epstein
Analyst at BofA Securities

Okay. Okay. Okay. And then I might have missed this, but I'll just -- but maybe not. Where do we stand on the Coast Guard Offshore Patrol Cutter. Were those -- was that formally awarded yet? Or where do we stand on that program?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes, it was awarded. It was not awarded to us. It was disappointing. We know how to build those ships. Coast Guard is a great customer, but we were not awarded there.

Ronald Jay Epstein
Analyst at BofA Securities

Is there another opportunity for that pole in another competition?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Not sure. I mean they're just coming through this competition for the next block of those boats. So I'm not sure at this point.

Ronald Jay Epstein
Analyst at BofA Securities

Got it. Got it. And maybe just one last one. What -- when we look down the road and maybe in future things you potentially could be bidding for, what can we be looking out for?

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Yes. So interesting, Newport News is full, right? They've got a lot of work to do. They're executing on it, and their legacy programs will continue over the medium to long term actually. Ingalls is based on the pace of LHAs and LPDs, they're going to be in a very good place, but they have other opportunities, DDG 1000 is down there now, and they're doing some combat system upgrades for that and there's potential other DDG 1000 work that might be available and on other repair sort of activity. But Ingalls is a pretty scrappy group. I wouldn't count them out. And with the pace of LHAs and LPDs, we've got a lot of time to figure that out.

Operator

I'm not showing any further questions at this time. So I would now like to hand the call back over to Mr. Kastner for any closing remarks.

Christopher D. Kastner
President, Chief Executive Officer And Director at Huntington Ingalls Industries

Okay. Thank you for your interest in HII. We welcome your continued engagement and feedback. Please have a safe and great rest of summer. Thank you.

Operator

[Operator Closing Remarks]

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