Shipbuilding Margins

Q: Why aren't margins improving with milestones being met?

A: Delayed milestones led to extra costs, impacting margins. As we complete milestones, we expect margins to improve in the back half of the year. The team is committed to meeting them despite challenges.

Labor Constraints

Q: Can you expand on labor issues affecting delays?

A: Labor is the primary issue causing delays. We're focused on workforce development, apprenticeships, and improving labor rates to attract more workers. Manufacturing labor is a national priority that needs fixing.

Supply Chain Challenges

Q: What's the status of supply issues in key programs?

A: For Columbia-class, initial issues are behind us; we're ahead of the recovery plan. In Virginia-class, improvements are being made but more is needed. Supply chain health is critical, so securing full material orders is essential. Some major suppliers are impacting schedules, and we're working to resolve this.

CapEx and Free Cash Flow

Q: How will CapEx and cash flow ramp up this year?

A: CapEx will ramp up in the back half, targeting 5.3% of sales for the year. We typically burn cash early in the year and recover working capital later, expecting strong cash generation in the second half. Navy support aligns with this plan.

AUKUS Opportunities

Q: How will early involvement in Australia benefit you?

A: The first steel order from Australia is an important step in strengthening their submarine supply chain. While not immediately material, it prepares us for significant future opportunities as we support Australia.

Mission Technologies Growth

Q: Can MT sustain strong sales growth?

A: MT had a strong quarter with $750 million in sales, over 20% year-over-year growth. While being conservative in guidance (2.7% to 2.75%), there's potential for continued strength. The pipeline has grown from $60 billion to $80 billion.

Share Buybacks

Q: What's the plan for share repurchases this year?

A: We repurchased $62 million in Q1, aiming for $300 million by year-end. Buybacks will ramp up in the second half following our disciplined approach. No minimum cash balance constraints affect this plan.

Working Capital Movements

Q: What caused the increase in working capital this quarter?

A: Timing differences in billings and receipts led to higher receivables and contract assets. Similar to last year, we expect working capital to normalize, with strong cash flows in Q4.

Employee Attrition Rates

Q: How is employee attrition trending?

A: Attrition has improved but hasn't returned to pre-COVID levels. We continue to work on retention efforts to enhance performance.

EACs by Segment

Q: Can you provide EACs by segment for the quarter?

A: EACs totaled 53 up, net 2. Ingalls was positive 13, Newport News was negative 12, and Mission Technologies was 1.

LPD 29 EAC

Q: Was the LPD 29 EAC taken in Q1 or Q2?

A: We assessed the EACs in Q1, but LPD 29 delivery is a Q2 event and is included in our guidance and expectations for Q2.

Milestones Shifting

Q: Have any milestones shifted this year?

A: No, the 25 milestones remain as planned. All milestones are important, especially for the Virginia-class program, where meeting commitments is critical.

Supply Chain Concentration

Q: Are supply issues concentrated or widespread?

A: Impacts are from a few major suppliers (2 to 5) affecting several programs. We're working hard to resolve these issues with subcontractors.

CapEx and Navy Support

Q: Is Navy support for CapEx expected to step up?

A: Yes, Navy support aligns with our CapEx plan, ramping up in the second half as part of our guidance.

Margins at Shipyards

Q: What's weighing on margins in Q2?

A: Margins can vary quarter to quarter due to EACs and milestones. First half margins are lighter, with major deliveries back-loaded. We're working through risks and opportunities, expecting improvement in the second half.

South Korea Joining AUKUS

Q: How would South Korea joining AUKUS impact you?

A: It would offer further upside, but discussions are ongoing. We'll focus on AUKUS for now and leave such matters to the Pentagon and the Navy.

Impact of Missed Milestones

Q: Can you reconcile margins not improving despite completed milestones?

A: Delays add costs. As we caught up on delayed milestones, there's less opportunity for margin improvement. Going forward, meeting milestones is crucial for better execution.

Capital Allocation

Q: What's the minimum cash balance given free cash flow shape?

A: There's no set minimum cash balance. We may use revolvers or commercial paper as needed. Our share repurchase plan is independent of cash balances.

Visibility into Second Half

Q: How is visibility into second-half milestones compared to last year?

A: Similar to last year, with more milestones in the back half. Execution will be key, and we have plans to meet them despite some risks.

Pacing of CapEx Step Up

Q: When will CapEx step up, and what about working capital recovery?

A: CapEx will increase in the back half as projects ramp up. Working capital recovery is expected later in the year, with strong cash flows anticipated in Q4.

Milestone Importance

Q: Is Massachusetts the most important milestone for Newport News?

A: All milestones are important, especially in the Virginia-class program where timely completion is critical to maintain production flow. Milestones have not shifted.

EAC Step Backs

Q: Any step backs in productivity or labor at Newport News?

A: We evaluate EACs quarterly, taking step ups or step backs as needed. While some minor adjustments were made due to milestone slips, there's nothing material to note.