Huntington Ingalls Industries - Q2 2023
August 3, 2023
Transcript
Operator (participant)
Ladies and gentlemen, thank you for standing by, and welcome to the second quarter 2023 HII Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please dial star one on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, please dial star zero to speak with an operator. I would now like to turn the call over to Christie Thomas, Vice President of Investor Relations. Ms. Thomas, you may begin.
Christie Thomas (VP of Investor Relations)
Thank you, operator. Good morning, everyone. Welcome to the HII second quarter 2023 Earnings Conference Call. Joining me today on the call are Chris Kastner, our President and CEO, and Tom Stiehle, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical fact are considered our company's estimates or expectations and are forward-looking statements made pursuant to the safe harbor provisions of federal securities laws. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures.
For re-reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?
Chris Kastner (President and CEO)
Thanks, Christie. Good morning, everyone. Thank you for joining us. The HII team delivered another solid quarter. Our results demonstrate continued top-line growth and steady operational performance. We continue to make progress on our strategy, executing on our significant shipbuilding backlog and growing Mission Technologies. Not only are we executing on our shipbuilding backlog, we are also delivering all-domain solutions through our unique capabilities to connect the different platforms that our customers use to perform their missions. Now, let's turn to our results on page three of the presentation. Top line growth was 4.7% from Q2 2022, resulting in second quarter revenue of $2.8 billion. Diluted earnings per share was $3.27 for the quarter, down from $4.44 in Q2 2022.
New contract awards during the quarter were approximately $2.6 billion, which resulted in backlog of approximately $47 billion at the end of the quarter, of which $24 billion is currently funded. In the second quarter at Ingalls, we laid the keel for LPD 31 Pittsburgh and successfully completed builder's trials for NSC 10 Calhoun. We also successfully completed acceptance trials and delivered the first Flight III Arleigh Burke destroyer, DDG-125 Jack H. Lucas. We expect to launch DDG-128 Ted Stevens and LHA-8 Bougainville and deliver NSC-10 and LPD-29 Richard M. McCool Jr. later this year. At Newport News, we christened Virginia-class attack submarine SSN-798 Massachusetts and redelivered the Nimitz-class aircraft carrier CVN-73 USS George Washington. Later this year, Newport News expects to float off SSN-798 and deliver SSN-796 New Jersey.
As I previewed last quarter, CVN-79 Kennedy received the contract modification intended to optimize its construction schedule and deliver a more capable ship to the fleet earlier, which updates the expected ship delivery to 2025. Slide 4 summarizes the projected shipbuilding milestones for 2023 and 2024, reflecting the updates for the CVN-79 contract modification and an update for the expected shipment of the final module of Virginia-class submarine Block IV, SSN 801 Utah, which has moved to 2024. At Mission Technologies, we saw the second straight quarter of record-high revenue of $645 million, with sales growing 7.5% over the second quarter of 2022.
Mission Technologies had multiple wins in the quarter across its business units, capped off with the early third quarter win of J-NEO, a $1.4 billion contract vehicle that serves the National Security Innovation Network and its mission partners by enabling the transition of innovation in both speed and scale from the lab to the battlespace. In addition to these accomplishments, we recognize and are committed to the broader international opportunities represented by the AUKUS Agreement, which directly align with our capabilities in nuclear submarines, as well as other emerging technologies, as set forth in Pillar 2 of the AUKUS Agreement. Turning to activities in Washington, the President's budget request for fiscal year 2024 is under consideration by Congress, as bills progress through both chambers, we continue to see bipartisan support for our programs.
We are pleased that the Armed Services Committees have shown strong support for shipbuilding to include authorizing funding for LPD 33 and multi-year procurement authorization for the next block of Virginia-class submarines. Both authorization bills, which have been passed by their respective chambers, authorize funding for the requested procurement of 2 Virginia-class submarines, 1 Columbia-class ballistic missile submarine, and 2 DDG 51 Arleigh Burke destroyers. Both House and Senate Appropriations Committees include multi-year procurement authority for Block VI Virginia-class submarines and fund the procurement of 2 Virginia-class submarines, 1 Columbia-class ballistic missile submarine, and 2 DDG 51 Arleigh Burke destroyers. The Senate appropriations bill provides advanced procurement funding for LPD 33 in FY 2024 and a third DDG 51 in FY 2025, and the House Appropriations bill includes language supporting a stable rate of procurement of amphibious warfare ships.
Final outcomes will depend on respective conference negotiations between the Appropriations and the Authorization Committees. Now moving to labor. Through the second quarter, we hired over 3,200 craftsmen and women on a solid pace to meet our full year plan of approximately 5,000. Although we are meeting our hiring targets, attrition remains high, and labor is still the greatest risk to meeting our plan. We are continuing to devote substantial effort at both shipyards in the areas of recruiting, robust training, and retention of our workforce in this very challenging labor environment.
In summary, the strong demand for our products and services, coupled with continued progress on our strategy of executing against our backlog and growing Mission Technologies, sets the foundation for HII to continue to fulfill our mission to deliver the world's most powerful ships and all-domain solutions in service of the nation. Now, I will turn the call over to Tom for some remarks on our financial results. Tom?
Tom Stiehle (EVP and CFO)
Thanks, Chris. Good morning. Today, I'll 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 5 of the presentation, our second quarter revenues of $2.8 billion increased approximately 4.7% compared to the same period last year and represents a record second quarter result for HII. This increase to revenue was largely attributable to growth at Newport News Shipbuilding and Mission Technologies. Operating income for the quarter of $156 million decreased by $35 million, or 18%, from the second quarter of 2022, an operating margin of 5.6% compared to operating margin of 7.2% in the same period last year.
The decrease in operating income was primarily due to lower segment operating income, partially offset by more favorable operating FAS/CAS adjustment and more favorable non-current state income taxes compared to the prior year period. Net earnings in the quarter were $130 million, compared to $178 million in the second quarter of 2022. Diluted earnings per share in the quarter was $3.27, compared to $4.44 in the second quarter of the previous year. Shipbuilding results in the quarter were in line with our expectations and slightly stronger than the outlook we provided on our first quarter call.
Segment operating income in the second quarter of 2022 benefited significantly from favorable adjustments from facilities, capital, and economic price adjustment clauses at both Ingalls and Newport News, making for a difficult comparison year-over-year, as expected. Moving on to Slide 6, Ingalls revenues of $664 million in the quarter and increased to $6 million, or about 1% from the same period last year, driven primarily by higher revenues on the DDG program, partially offset by lower NSC program revenues. Ingalls operating income of $65 million, an operating margin of 9.8% in the quarter declined from last year, as expected, primarily due to lower favorable changes in contract estimates from facilities, capital, and economic price adjustment clauses, as well as lower risk retirement on LPD-30 Harrisburg.
At Newport News, revenues of $1.5 billion increased by $76 million, or 5.3% from the same period last year, due to growth in both aircraft carrier and submarine construction revenues. Newport News operating income in the second quarter of 2023 was $95 million, an increase of $1 million or 1.1% compared to the second quarter of last year. Operating income was largely consistent year-over-year, as favorable VCS program adjustments were offset by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses. Shipbuilding operating margin in the second quarter was 7.4%, above the 7% outlook we had previously provided for the quarter. Our shipbuilding operating margin outlook for the full year is unchanged.
We have noted previously that our expected milestones for 2023 are concentrated in the second half of the year and largely in the fourth quarter. At Mission Technologies, revenues of $645 million increased to $45 million, or 7.5% compared to the second quarter of 2022, primarily driven by higher volumes in mission-based solutions, which includes our C5ISR, cyber electronic warfare, and live virtual and constructive training capabilities. Mission Technologies operating income of $9 million compares to operating income of $25 million in the second quarter of last year. The second quarter of 2022 included additional non-recurring equity income of approximately $15 million for an equity method investment in a ship repair joint venture, which was sold in the second quarter of 2023.
Cash proceeds of $61 million from the sale are included in investing cash flows. A negative equity method adjustment of $6 million was recorded from the sale of the ship repair joint venture. Current results from Mission Technologies included approximately $28 million of amortization of purchased intangible assets. Mission Technologies' EBITDA margin in the second quarter was 6.7%. Turning to slide 7, cash from operations was $82 million in the quarter. Net capital expenditures were $68 million, or 2.4% of revenues. Free cash flow in the quarter was $14 million. This compares to cash from operations of $267 million, net capital expenditures of $59 million, or 2.2% of revenues, and free cash flow of $208 million in the second quarter of 2022.
Cash contributions to our pension and other post-retirement benefit plans were $11 million in the quarter. During the second quarter, we paid dividends of $1.24 per share, or $50 million in aggregate. We also repurchased approximately 37,000 shares during the quarter at an aggregate cost of approximately $7 million. Year to date, through the second quarter, we've repurchased approximately 76,000 shares at an aggregate cost of approximately $16 million. Moving on to Slide 8, our free cash flow outlook through 2024 remains unchanged, as do our capital allocation priorities. Regarding 2023 free cash flow guidance, we continue to see $400 million-$450 million as the most likely range. We continue to work with our customer on the timing and mechanics regarding the repayment of COVID-related advances, which is currently forecasted to occur in 2023.
At this time, we do not have an agreement in place that would increase our free cash flow above the guidance range we have provided. I'll highlight that we continue to expect to distribute substantially all free cash flow to our shareholders through 2024 after planned debt repayment, which is on track. Turning to Slide 9, we are reaffirming our 2023 segment guidance. I will also provide some color on how we see the third quarter and the remainder of the year. Regarding the third quarter, we expect shipbuilding revenue to be approximately $2.1 billion, and shipbuilding operating margin to be consistent with the second quarter's result of 7.4%. This expectation does imply meaningful improvement in the fourth quarter results, which is consistent with when we expect our most impactful shipbuilding milestones to occur.
For Mission Technologies, we expect third quarter revenue to be similar to the second quarter results and expect third quarter operating margin of approximately 2.5%. Given second quarter results and the impact of the equity method accounting adjustment I referenced earlier, I mean, we currently believe that Mission Technologies' 2023 operating and EBITDA margins are likely to be closer to the low end of the guidance ranges we have provided. We expect third quarter free cash flow to be approximately $100 million. There is no change to our guidance for the year. We expect our cash flow generation will fall predominantly in the fourth quarter. Our cash expectation is consistent with both our expected timing for milestones and our normal cash cadence of the calendar year.
To summarize, the second quarter shipbuilding results were largely in line with the expectations we provided on our first quarter call. Newport News and Ingalls continued to hit critical shipbuilding milestones. Mission Technologies delivered impressive year-over-year revenue growth. The Mission Technologies team continues to capture meaningful contract wins and maintains a very robust pipeline. We have great confidence in their future and the long-term value creation opportunity. Finally, we are pleased to reaffirm our full year segment guidance as we remain focused on executing the milestones and commitments that we've laid out. With that, I'll turn the call back over to Christie to manage the Q&A.
Christie Thomas (VP of Investor Relations)
Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up, so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.
Operator (participant)
Thank you. If you would like to ask a question, please dial star one on your telephone keypad to enter the queue. Our first question today is from the line of Doug Harned from Bernstein. Doug, your line is now open.
Doug Harned (Managing Director)
Thank you. Good morning.
Tom Stiehle (EVP and CFO)
Morning, Doug.
Doug Harned (Managing Director)
On Virginia-class, the program right now is, you know, it's well behind the two per year delivery objective in Block V. I mean, do you see a path to get there, or what are the obstacles here that need to be overcome to get to that rate?
Tom Stiehle (EVP and CFO)
Yeah, our, the largest obstacle, the largest risk on the VCS program right now is, is labor, and meeting our, meeting our labor targets. We've worked hard, here in Newport News, to hire. You saw in my prepared remarks, we're ahead of plan, up over 3,200 heads for the year. That's some positive indicators, but it's really this is a labor-driven issue. As I said, we've, we've made good progress. We just need to continue to do that, over the next couple of years.
Doug Harned (Managing Director)
When, you know, when you look at Newport News, you know, you're a partner with Electric Boat on Virginia-class, but you're a subcontractor on Columbia-class. I mean, how do those different relationships affect the way in which you work with Electric Boat on the programs?
Tom Stiehle (EVP and CFO)
Yeah. So, it's not a material difference. Obviously, you have, you have contractual differences. When you get down to the deck plate, those teams work very closely together. There's a relationship that's been developed over a number of years between the two teams. When you think about the efficiency of getting the work done and potentially transferring some work back and forth, there's obviously contractual mechanisms that need to be put in place under Columbia, that you don't need under the Virginia-class. They work very closely together.
Doug Harned (Managing Director)
there's no in your mind, there's no real effective difference in the way There's no sort of preferred relationship here that one works better than the other?
Tom Stiehle (EVP and CFO)
Not really. Not really. The objective there is to get, you know, these critical assets to the fleet as soon as we can. The team works very closely to ensure we're working on that.
Doug Harned (Managing Director)
Okay, great. Thank you.
Tom Stiehle (EVP and CFO)
Sure.
Operator (participant)
Our next question is from the line of Robert Spingarn of Melius Research. Robert, your line is now open. Please go ahead.
Robert Spingarn (Managing Director)
Hey, hey, good morning. Tom, just a clarification-
Chris Kastner (President and CEO)
Morning.
Robert Spingarn (Managing Director)
Thank you. Chris, then a high-level one for you. Tom, on the margins at Mission Technologies, you talked about the 1.4%, but a $6 million impact from the sale of the JV. Was that impact built into the guidance?
Chris Kastner (President and CEO)
No, it wasn't built into it. It wasn't into our-
Robert Spingarn (Managing Director)
Okay.
Chris Kastner (President and CEO)
our guidance right now. Go ahead.
Robert Spingarn (Managing Director)
All right, so this is why you're tracking to the low end. Is that, is that how I should-
Chris Kastner (President and CEO)
That's right, yeah.
Robert Spingarn (Managing Director)
Interpret that?
Chris Kastner (President and CEO)
Yeah.
Robert Spingarn (Managing Director)
Okay. Chris, a very high-level question, but between shipbuilding and MT, I thought it might be interesting to hear you talk about how these 2 businesses can contribute to 2 priority areas for DoD, and that's JADC2 and contested logistics.
Chris Kastner (President and CEO)
That's a, that's a really good question, too. You almost kind of teed me up there. You know, interesting, the Alion acquisition, they have really great AI ML products and big data products that fit right into JADC2 and potential JADC2 missions. When you think about data and big data and the speed in which data can be understood, it fits right into the contested logistics model as well. You know, we have an LVC Enterprise that is not just training. It can fit right into a war gaming concept. Think about war gaming, you think about O plans. You think about O plans, you have to think about contested logistics. We have products that can quickly be adapted to deal with those, those two issues.
We've had high-level conversations with the Navy, and other customers about potential applications there. We think we can, we can add to those product sets. We think they're important product sets, and we'll continue to talk to the customer about it.
Robert Spingarn (Managing Director)
Thanks so much.
Chris Kastner (President and CEO)
Sure.
Operator (participant)
Our next question today is from the line of Pete Skibitski from Alembic Global. Pete, your line is now open.
Peter Skibitski (Managing Director)
Hey, good morning, guys.
Chris Kastner (President and CEO)
Good morning.
Peter Skibitski (Managing Director)
Chris, Chris, on the hiring, can, can you give us the actual net hiring, you know, net retention numbers, kind of after attrition? Maybe could you gauge a level of revenue that could be at risk if, if you don't meet your, your net goals for the balance of the year?
Chris Kastner (President and CEO)
We don't provide, provide net. There's a lot of things going into that equation. We have overtime, we have attendance, we have attrition, we have job shop labor that could contribute to that. I will say, you know, there's potentially some upside if we're able to continue to meet our hiring goals and deal with attrition over the balance of the year. We just need to see how the year develops.
Peter Skibitski (Managing Director)
Okay. Okay. Then, I want to ask about the Kennedy contract mod, it was a little under $400 million on the mod. Does it raise your confidence level in terms of, you know, how your performance on that project could trend through next year and the potential milestone opportunities for you on the project?
Chris Kastner (President and CEO)
Yeah, no, the team did a really good job incorporating the PSA work into the baseline contract and assessing the schedule, and we're putting the work or integrating that work into the baseline schedule. We're confident the way that Kennedy is developing. They're meeting their compartment completion goals, their test rate's proceeding and the plan's proceeding. We got a lot of confidence in where the Kennedy's at right now.
Peter Skibitski (Managing Director)
Okay. Maybe another way of saying it, are the milestone opportunities on the Kennedy meaningful relative to other programs, or should we not, you know, focus so much on the Kennedy?
Chris Kastner (President and CEO)
We're just, we're just gonna have to see. We're, we're gonna have to let things play out over the next 18 months, 18-24 months. It's a lot of critical work in front of us, but potentially, if we continue to perform well, there'll be milestone opportunities for sure.
Peter Skibitski (Managing Director)
Okay. Okay, thank you.
Chris Kastner (President and CEO)
Sure.
Operator (participant)
The next question today is from the line of Seth Seifman of JPMorgan. Seth, please go ahead, your line's open.
Seth Seifman (Executive Director)
Hey, thanks, thanks very much, and good morning.
Chris Kastner (President and CEO)
Good morning.
Seth Seifman (Executive Director)
I wanted to ask. Morning. In, in Mission Tech, you know, looking at the margin there and then looking at the, the contract mix is, you know, fixed price is a, is a relatively small portion of the mix. I think it's like 12%. So when you think over time about the profitability that you want to see in, in that business, and it seems to be an environment where there are more opportunities in, in the Fed IT services, market right now, is that something that the business is gonna try to move higher? Is that not really consistent with the risk profile that, that you want to take on?
Chris Kastner (President and CEO)
Yeah. We believe it will move higher. We're gonna. You've indicated that the majority of those contracts are cost plus. That's true, I think over 80%, which drives the margin rate a bit lower. The team there at Mission Technologies is, you know, we're focused on technology there, so there's gonna be a lot of cost plus work. They're competing very well as also, and in their pipeline there is fixed price opportunities, and we're going to pursue those where those make sense. If we're successful, the mix should improve a bit and margin will improve. Tom, do you have anything on that?
Tom Stiehle (EVP and CFO)
Yeah. You are right that If it's 87% is cost sub contracts, I would say that there is a move afoot there. I mean, we kind of realized the customer sets that we have in the portfolio. There is a move to try and as we introduce more technology, that will bring about a potential premium on, on, on pricing on that front. Then as we get, you know, away from, from services and more into products, that's another area too, where we could see an expansion of, of, of the margin on those jobs.
Seth Seifman (Executive Director)
Great.
Tom Stiehle (EVP and CFO)
Okay.
Seth Seifman (Executive Director)
Great. Thanks. Then just a real quick follow-up, Tom. The Q3 cash flow target that you gave, what, what does that contemplate with regard to the advanced repayment?
Tom Stiehle (EVP and CFO)
Right now, a little color on that, right? We got an extension on that. It was supposed to be repaid by the end of June. It was a 2-month extension. We're in negotiations. The Navy's now going out and understanding how we'll transition the contract back from the advanced, the advanced prog pay that was in place since 2020. Don't have a negotiated settlement on that yet. I don't know what that's gonna entail. The guide assumes that there's not a payback right now on that. We'll have to work ourselves through that as we go through here. You know, that's a normal run rate that we expect for the quarter. It doesn't impact the guide of $4-$4.50 that I've said for the entire year.
I would tell you that the best way to model it and take a look at it is stick to that guidance right now. I think, in another 60 days, we'll get a look-see on what that negotiation entails. The timing of it and the impact, I'll know then. We have some significant milestones in the back half of the year. Still have 3 deliveries, 2 launches, and 1 float off. You know, every time I have a delivery, we liquidate the contract, I get the contract price, the Navy gets the ship. There's some retentions for work that was incomplete there, so there's opportunities that's there to work those retentions off, and that's an opportunity for both margin and cash.
As I work myself to the back half of the year, LPD-29 is not gonna hit this year or next year. We're still holding that milestone as a 2023 event. I would take a look at cash just from now through 2024, the milestone chart that we gave you, the five-year look. It's $1.2 billion over the next 17 months, and I'm still comfortable that we're on target to make, to make those goals.
Seth Seifman (Executive Director)
Great. Cool. Thank you very much.
Tom Stiehle (EVP and CFO)
Mm-hmm.
Operator (participant)
The next question today is from the line of Myles Walton of Wolfe Research. Please go ahead. Your line is now open.
Myles Walton (Managing Director)
Thanks. I was hoping you could comment on, on two items. One, the 801 module move, and I guess, does that put any pressure on the margin guidance range for this year? Then also on LHA-8, were there any costs that you had to absorb in the quarter, or was it, was it minor, and sort of not material?
Chris Kastner (President and CEO)
Yes, I'll handle that, and then Tom can chip in if he needs to. 801 had some late breaking rework that pushed that module into the beginning of next year. It was a late in the year delivery, so just modest, really not a material impact. That as I said to Doug previously, the team's pretty good at moving work back and forth to ensure they do that as efficiently as possible. Not a material impact on 801. On LHA-8, I think first things first, I don't want to just kind of gloss over a pretty significant thing that we like, we really pay attention to in the shipyards is the fire on LHA-8.
First thing you have to do is make sure everybody's safe. The team did a really good job. The first responders made sure no one was hurt. I mean, just minor smoke inhalation, but all the shipbuilders and, and the Navy personnel were safe. Second thing is to limit the damage. They did that. Really minor damage to one compartment, some wire ways. We put a corrective action plan, I did a root cause analysis. We're working through that corrective action plan now. The important thing is that, that we learn from, learn from this issue. No real cost or cost or schedule impact that's material on LHA-8, and the milestones for that, that ship remain intact.
Myles Walton (Managing Director)
Okay, thanks for that. Just on the buying out of Honeywell's portion of the Savannah River JV, what's the, the expected outflow for your, incremental portion, being acquired?
Chris Kastner (President and CEO)
Yeah, so it's already in, right?
Tom Stiehle (EVP and CFO)
Yeah.
Chris Kastner (President and CEO)
It's already-
Tom Stiehle (EVP and CFO)
We paid that. Right now, it's in the-- You can see that in the cash flow. In investing, it's $24 million on the way on out, and we expect to get additional margin and cash in the out years. We haven't defined that.
Myles Walton (Managing Director)
Thank you.
Chris Kastner (President and CEO)
Thanks, Myles.
Operator (participant)
Our next question is from the line of David Strauss of Barclays. Please go ahead. Your line is open.
David Strauss (Managing Director)
Great. Thank you. Good morning.
Chris Kastner (President and CEO)
Good morning.
David Strauss (Managing Director)
Tom, good morning. Tom, can you just give us an update, kind of working capital progress year to date as it's tracking? I think you're about 8% of revenues now net working capital. If you're tracking, kind of, where you would expected year to date, remind us again of what you're expecting at the end of the year and what you're baking in to the 2024 free cash flow forecast. I am on plan, and consistent with the forecast and discussions we've had at past earnings releases. 8% is about right as where I find myself right now, popping out of this quarter. I'll work myself through the back half of the year with the shipyards to get around the 6% target that we've talked about.
Tom Stiehle (EVP and CFO)
There is some tailwinds as we go from 2023 to 2024, consistent with what we've had in past. Yeah, we used to think of, before Mission Technologies, the 6%-8% was the norm of where we think working capital would be in the yard. As Mission Technologies has grown, and we've gotten to more of a cadence between the two yards and our serial production programs, I look at it more as 4%-6%, and we'll finish this year out on the higher end of that range. As we work ourselves into 2024, we'll be on the low end of that range here. Just the cadence, making milestones to schedule, to deliveries.
We settle down both in the material and the labor that we're giving you some status about, and that's going to bring about some consistency and keep us in the norm range as I see in the coming years going forward.
David Strauss (Managing Director)
Okay, great. As a follow-up, in terms of the shipbuilding margin that's implied for Q4, are, are, are you or are we potentially looking at a margin at Ingalls in a similar range to kind of what we saw in the first half of 2022, when it was strongly in the double-digit range? If LPD-29, that delivery does slip, how much risk is there to, you know, to the, to the Q4 margin guide? Thanks.
Tom Stiehle (EVP and CFO)
Sure. We don't give specific forecasts by each yard, but, you know, obviously, we can do the math here. It's 6.7% at the first quarter and 7.4% this quarter for Q2 for shipbuilding. We're guiding 7.4% for Q3. You know, it's in the low to upper ranges for Q4 in the 9% for shipbuilding across both yards. I'm very comfortable with that. I think I gave an answer earlier, but I'll hit it again. You know, we still have three deliveries, two launches, one float off, all in, you know, Q3 and Q4, heavily loaded in Q4 time frame. Both the deliveries themselves that are upcoming and the two we've had this year have retentions and releases associated with that, that bring both, both, both margin and cash.
Then on the back half of the year, I have some smaller incentives and some change adjudication too, that will play out. You know, I think 2023 is opposite of 2022. We saw a very strong first half. Specifically, as you mentioned, Ingalls was in the 13%-16% in Q1 and Q2. I won't get into the breakdown in the yards as a forecast for the back half of 2023, I'm comfortable that back half is going to be meaningfully higher than the front half. It was, it was a pacing year for, for the first half of this year.
David Strauss (Managing Director)
The risk around if LPD-29 slips, the delivery?
Tom Stiehle (EVP and CFO)
You know, it's at the very back half of the year here, as we come through, we've talked in the past whether the, the deliveries are clean or, you know, are they timely, or do they, do they go around what we want with a lot of retentions or not? Right now, LPD-29 is progressing well. We're, we're in it to win it. We don't see any avenue that, that, is in our way right now. We still have five months of things to do, taking the ship to sea and burning down risk there. We'll have to see how that plays out. I don't want to overly play my hand on that.
You know, it's one ship and one milestone in the context of the shipbuilding here, so I don't think we'll either overly hurt or overly help us. I think, I think the guide is appropriate right now. We still maintain the 7%-8% shipbuilding margin by year-end.
David Strauss (Managing Director)
Thank you.
Tom Stiehle (EVP and CFO)
Mm-hmm.
Chris Kastner (President and CEO)
Thanks.
Operator (participant)
Our next question is from the line of Gautam Khanna of TD Cowen. Gautam, please go ahead. Your line is open.
Gautam Khanna (Analyst)
Hey, good morning, guys.
Chris Kastner (President and CEO)
Morning, Gautam.
Gautam Khanna (Analyst)
Hey, I was wondering, remember when the FYDP came out and there were different schedules for various ships in terms of delivery dates and the like? I'm just curious, relative to the prior update, I, I was curious if, if you had any better color on, you know, how to reconcile that with your own expectations for delivery dates over the next couple of years?
Chris Kastner (President and CEO)
Yeah, I can start and then Tom can chime in. I think it's context and timing on those, on those delivery dates and, and really assessment of risk. They might move 2 months or have a different representation of deliveries 2 months, one way or the other. We, you know, we assess our, our EACs and our schedules on a very consistent basis. I mean, you're looking at a one-time adjustment, potentially, or notification to Congress. I really think it's a context issue more than a, more than a disconnect. Because we work very closely with our customers so that they understand where we are from a schedule standpoint, how we're assessing the schedule.
They have their own point of view on the schedules, and, it's very reconcilable.
Tom Stiehle (EVP and CFO)
Yeah, I don't really-
Gautam Khanna (Analyst)
Okay.
Tom Stiehle (EVP and CFO)
Have much more to add on that.
Gautam Khanna (Analyst)
And-
Tom Stiehle (EVP and CFO)
On an annual, annual basis, as the, you know, NDAA and the budgets pop, pop out, then obviously, we take a, a look at the FYDP, which gives you a five-year look at the forecast on funding perspective. We reconcile where we stand. It's a cross-reference of what we do anyway, every 13 weeks, doing EACs, and we, we make sure that we align actuals to date and estimate to complete, where we are with our labor and material performance, and burn in expectations of future performance. All that gets baked into a revised EAC that marries home to an updated long-range strategic plan that we have, our labor resource plan, and then the master construction schedules that we have at each site.
We're locked, we're locked tight with ourselves, and then we have monthly reviews with our program offices and to our customers. I don't think there is any disconnect there.
Gautam Khanna (Analyst)
Okay. Just, if you wouldn't mind, providing the EACs, the net EACs by segment. Also, there was some language in the release about VCS favorable variance. Could you just give us a quick update on how that program is performing, and if there was a favorable EC on that program in particular? Thanks.
Chris Kastner (President and CEO)
The net, oh, I'll start with the VCS performance, then Tom will talk about the, the net EACs in the quarter. Yeah, VCS is, is definitely showing some stability and some, some positive momentum. Like, as Tom said, we, we assess our EACs every quarter, and there's nothing material to note. There is some, the team's working very hard, the program team on VCS, to meet their milestones and, and meet their cost targets in really kind of a difficult macroeconomic environment. There is some progress there. There's, there's definitely some progress, progress on stability on VCS.
I continue to think, the best thing we can do on the VCS program is meet our commitments on the Block IV contract, get those ships and modules out, and then transition into Block V, where we have more opportunity. With that, Tom.
Tom Stiehle (EVP and CFO)
Sure
Chris Kastner (President and CEO)
Tom, take.
Tom Stiehle (EVP and CFO)
Yeah, right, the, the favorable, the gross favorable was $72 million, unfavorable was $52 million. The net was $20 million, and that was, that was made up of $17 million Ingalls, or 85%, and $3 million, or 15% at MT. There was no specific program-
Gautam Khanna (Analyst)
Thank you, Tom.
Tom Stiehle (EVP and CFO)
Either favorable or unfavorable, that was material. Thanks.
Gautam Khanna (Analyst)
Great.
Operator (participant)
Our next question today is from the line of George Shapiro from Shapiro Research. George, please go ahead. Your line's open.
George Shapiro (Managing Partner)
Yes, Tom, if you just look at the free cash flow implied in the fourth quarter at the midpoint's around $360 million, of the milestones in the that you have listed for Ingalls in Newport for the fourth quarter, what are the key ones that would contribute to that?
Tom Stiehle (EVP and CFO)
I, I think it's a host of it. You can run down it if you go to the slide on, on the milestones, but the, the launches and the deliveries that, that we've talked about, the retention releases on delivered ships. We've talked about adjudication to change. There's some minor incentives that we pick up, too. You know, usually because of the seasonality, you do see Q4 to be very strong for us. We saw that last year with over $500 million in Q4. I think the plan and the milestones are situated for us to generate that, that, that, that same type of result this year. I would want to clarify, too, because earlier, I think I, I, I want to make sure everyone understands what I said.
The guide specific, the guide specific for Q3 assumes that there is a repayment for COVID right now. My comment was, since I don't know of any change with the Navy and what that could do, we're sticking to how we got it at the beginning of the year, $4-$4.50, with the COVID repay is going to occur this year. If and when that changes, and we know how much, we'll give you some more color. I would expect that come the November call for Q3, we'll have a real good look at the milestone performance, how the rest of the year is wrapping up, I would anticipate the negotiations with the Navy is behind us, then give you more color on that.
George Shapiro (Managing Partner)
Okay, thanks very much.
Tom Stiehle (EVP and CFO)
Mm-hmm.
Chris Kastner (President and CEO)
Thanks, George.
Operator (participant)
Our next question is from the line of Ron Epstein from Bank of America. Ron, your line is now open. Please go ahead.
Ron Epstein (Senior Equity Analyst)
Hey, hey, men. Good morning, guys. Just 2 quick ones.
Chris Kastner (President and CEO)
Morning.
Tom Stiehle (EVP and CFO)
Morning.
Ron Epstein (Senior Equity Analyst)
Can you speak a little bit about the DDG 51 award? That was pretty gigantic. You know, how that's going to play out, and you know, was it a competitive bid? I'm guessing it was, right? How you're thinking about that. Let's start with that.
Chris Kastner (President and CEO)
Yeah, DDG 51, excellent job by the Ingalls team competing for that. It was competitive. There's a standard competitive, competitive environment between the two shipyards, both of which are very, very capable shipyards. Getting awarded six is very positive. Just shows the demonstrated proficiency of that Ingalls team on executing. Obvious, we've delivered DDG-125 already, and we're proceeding on the next Flight III destroyer. Really, really a positive indicator. What it does is provide a lot of stability for Ingalls moving forward. That, that ship, sixth ship by, combined with LPDs and support for LPD 33, and potential bundle arrangements for LPDs and LHA moving forward, provides a lot of stability for Ingalls and is very positive.
Ron Epstein (Senior Equity Analyst)
Got it. Got it. Then, on the Savannah River stuff, my understanding of how the accounting would work, that you guys would potentially take a gain, right? I mean, I think that's how it works. Are you deferring it, or did you take a gain in the quarter?
Tom Stiehle (EVP and CFO)
We didn't take a gain in the quarter right now. We become a, a higher owner of the, the joint venture. You know, we're still a minority owner, but the higher owner of it. As proceeds are released, it's unconsolidated, you know, how that, how that's recorded. As the gains happen in the future, it'll be higher than what we've had in the past. I expect that to play out over the next, the next couple of years.
Ron Epstein (Senior Equity Analyst)
Got it. It wasn't like a, an event where you could mark to market, and then your carrying value would-
Tom Stiehle (EVP and CFO)
No
Ron Epstein (Senior Equity Analyst)
Be greater or whatever?
Tom Stiehle (EVP and CFO)
No.
Chris Kastner (President and CEO)
Nope.
Tom Stiehle (EVP and CFO)
Nope.
Ron Epstein (Senior Equity Analyst)
Got it. Got it. Then, could you, could you speak a little bit to, you know, how it's going in terms of, you know, retention of employees and how the workforce has, you know, evolved here as we recover from kind of all the COVID disruptions?
Chris Kastner (President and CEO)
Yeah, workforce is definitely evolving, Ron. Thanks, thanks for that question. What we're finding is, the days of hiring someone, training them, and sending them down to the deck plate are really over. We need to ensure that the new hires that don't come through our established programs, because the apprentice school, community colleges, and high school programs are still very successful when it comes to retention. The walk-ins, we need to make sure that we shepherd them through the process of the next, you know, 12-18 months of their employment to make them understand that this is a good career, and there's opportunity for growth and stability.
That's really the fundamental change, is, is the walk-in applicants are just not the same as they used to be. That's what both Ingalls and Newport, Newport News are working on.
Ron Epstein (Senior Equity Analyst)
Got it. All right. Thank you very much.
Chris Kastner (President and CEO)
Sure.
Operator (participant)
The next question is from the line of Noah Poponak of Goldman Sachs. Noah, your line is open.
Noah Poponak (Managing Director)
Hey, hey, good morning, everyone.
Chris Kastner (President and CEO)
Noah? Hey, good morning, Noah.
Noah Poponak (Managing Director)
If I take the MT revenue guide to be flat sequentially in the third quarter, I think it would have to be maybe down a little or, or flat year-over-year in the fourth quarter to be at, at the 5% for the year, after being, you know, kind of 6%-8% through the first nine months of the year. How much of that is just kind of leaving some conservatism there? How do you see the MT organic revenue growth profile from here?
Tom Stiehle (EVP and CFO)
You know, at $645 million, that's the record quarter that they've had, followed $624 million, which was the previous record quarter. I feel comfortable with it right now. I think $645 million is a balance between, you know, these new awards that have to occur and then get delivery orders funded and awarded for that, and get heads in here. I do think there could be some upside here, we'll see how that plays out. We look at Mission Technologies, they grew 4%. Last year, each of the six business units grew. We see quarter-over-quarter, it's 7.5%. Sequentially, it grew over 5% right now. You know, I think north of 5% is the right way to kind of take a look at that.
We'll see how that plays out. They're on a good string right now of awards, and they're working hard to kind of fill all the seats available, funded seats that they have. It's gonna be a function of awards and labor as we go forward, but I'm feeling, I'm feeling good about the pipeline they have there. The book to bill is low right now, I think this that's gonna come on in the back half of the year. We'll see that pop up. There's still a plethora of awards for Q3 and Q4 that we're keeping a close eye on here right now. I think that business is starting to really play out and justify the acquisition of Alion, as we see a sales ramp-up happening.
Chris Kastner (President and CEO)
Yeah, so Noah, I could, I could add that, not to jump into, you know, the, the early wins in Q3, but on a total contract value, not just awarded, we're almost at $4 billion of awards for this year, which is really a record for Alion Mission Technologies together. It's kind of unprecedented. That team is really doing very well and will create a lot of stability into the future and potential growth for Mission Technologies.
Noah Poponak (Managing Director)
Okay, appreciate that.
Chris Kastner (President and CEO)
Sure.
Noah Poponak (Managing Director)
Tom, the 7%-8% for the full year shipbuilding margin, it's a relatively tight range, but if I keep it flat sequentially in the third quarter, to get to the low end of the full year, the fourth quarter would need to be close to 9%, and to get to the high end, it would need to be close to 10.5%. Can you speak to where in that range you see, I know the milestones need to occur, and every milestone is different, but where in that range do you more likely see the 4Q shipbuilding margin falling?
Tom Stiehle (EVP and CFO)
Yeah, I think we're split in half right now. I mean, you can see that there are a lot of milestones out there, things, and then there's incentives and adjudication of change, too, that occur. LPD-29 is a piece of it, although we said earlier, it's not a big swinger, but it does contribute to the margin and the, the end results. You know, I wouldn't want to get too precise. I mean, 7780 is pretty precise right there. But I do expect it.
Noah Poponak (Managing Director)
Yeah.
Tom Stiehle (EVP and CFO)
When, when you run the math, we said 6.7, 7.4 through Q2, another 7.4 about for Q3. You know, we'll be in the 9s for Q4 is the math of it. I feel comfortable with what's on our plate, the performance I see to date. The, the avenue, I, I speak daily and weekly with the CFOs down in the yard, so I know what's in front of them and what has to get done, both from a performance end of it, and then what has to get done on the contract side. We're, we're very much in play to, to finish up in that range.
Noah Poponak (Managing Director)
Got it. Then just one other item, back to that attrition question, Chris. Has the rate of attrition slowed through the year? I know that's another kind of specific question, but it seems like a pretty important element into your total, you know, labor equation.
Chris Kastner (President and CEO)
It's, it's definitely lower than it was coming out of COVID. It's been pretty consistent this year. I haven't seen a lot of slowing in attrition this year. It's still, it's still the walk-in, early career people that just really aren't prepared for the rigors of shipbuilding. It's a challenging job, and, and we're just working very hard to, to get them prepared to understand the, the real benefits of, of being a shipbuilder.
Noah Poponak (Managing Director)
Thanks, guys. Appreciate it.
Chris Kastner (President and CEO)
Sure. See you now.
Operator (participant)
Our next question is from the line of Pete Skibitski of Alembic Global. Pete, your line is now open.
Peter Skibitski (Managing Director)
Yeah, Chris, I don't think we've talked about this, but the Navy, I think, is working up the strategy for the Nimitz retirement. I think there's an RFI out there. Can you talk about?
Chris Kastner (President and CEO)
Yeah.
Peter Skibitski (Managing Director)
You know, if you think HII will have a role on that? you know, you know, maybe the timing and the potential sizing of that, just your thoughts on that overall.
Chris Kastner (President and CEO)
Yeah, we will absolutely have a role in it. There's a lot of planning going on within the Navy and Newport News on integration of RCOHs and retirements. We obviously did the Enterprise, uniquely qualified to do it. It's, it's really kind of an advanced planning, actually, because you-- it's, it's kind of a dance between the RCOHs and the and then finishing the ships and doing the D and D. Absolutely, it doesn't change my perspective about the long-term growth rate of the business. It's integrated into the forecasting, and, you know, Newport News will probably do that work.
Peter Skibitski (Managing Director)
Okay. maybe we should look like a mid-decade to slightly after mid-decade before it starts?
Chris Kastner (President and CEO)
I hate to give you a specific time, but it's integrated over the next, you know, 10-15 years, to 20 years, actually.
Peter Skibitski (Managing Director)
I see. Okay. Thank you.
Chris Kastner (President and CEO)
It's all, it's all in the mix. It's all in the mix, Pete, when you think about their plan and how they, how we forecast the long-term growth rate of the business.
Peter Skibitski (Managing Director)
Got it.
Operator (participant)
Thank you. I'm not showing any further questions at this time, so I'd now like to hand the call back over to Mr. Kastner for any closing remarks.
Chris Kastner (President and CEO)
Yeah, thank you for joining us today. We appreciate your interest in HII, and look forward to continuing to engage with you all going forward.
Operator (participant)
That does conclude today's conference call. You may now disconnect.
