Q4 Free Cash Flow Outlook
Q: Can you discuss the visibility into generating $1 billion free cash flow in Q4?
A: Management acknowledges that cash flow is back-end loaded this year, expecting significant cash generation in Q4 driven by milestones, contract incentives, and improved working capital. They are confident in meeting the $600-$700 million free cash flow guidance for the year, with line of sight to key milestones and program performance. The ramp includes unwinding working capital from 9% to 2-3% by year-end.

Labor Challenges Impacting Production
Q: How are labor and attrition issues affecting milestones and productivity?
A: While hiring goals are being met at both shipyards, attrition is not materially improving. Attendance and overtime have recovered, and outsourcing programs are executing well. Labor challenges have impacted milestones on programs like LHA 8 and DDG-129, but management is taking a holistic approach, including salary adjustments, flexible recruiting, and establishing manufacturing footprints in new areas to attract labor. Productivity is expected to improve as the workforce stabilizes.

Ingalls Margin and Recovery
Q: What caused the dip in Ingalls margin this quarter, and can we expect recovery?
A: The dip in Ingalls margin was due to milestone shifts, with costs moving alongside schedule changes, and less risk retirement on LPD 29 at delivery than usual. Management expects Ingalls to recover quickly, as this was just a quiet quarter, and they continue to execute well on their programs.

Virginia-Class Submarine Progress
Q: Can you update us on Virginia-class Blocks IV, V, and negotiations for Block VI?
A: Block IV is 95% complete, with delivery of SSN 798 expected early next year and progress on SSN 800 maintaining schedule. Block V is over 20% complete and now generates higher revenue than Block IV. Negotiations for Block VI are ongoing and expected to conclude this year, aiming for a fair deal that accounts for macroeconomic factors like inflation and supply chain risks.

Mission Technologies Growth Prospects
Q: How is Mission Technologies performing, and what are the growth expectations?
A: Mission Technologies has a trailing twelve-month book-to-bill ratio of 1.15 and an $83 billion pipeline. While maintaining a conservative 5% growth guidance, strong performance in areas like C5ISR and CEWS could drive growth beyond current expectations. The division is also involved in innovative projects like deploying REMUS vehicles autonomously from Virginia-class submarines, demonstrating value to customers.

Capital Allocation and M&A Strategy
Q: What is your current appetite for acquisitions and capital allocation priorities?
A: The company remains focused on maintaining investment-grade status, investing in shipyards, and returning excess cash to shareholders through dividends. They will evaluate M&A opportunities that make strategic and financial sense but there is no change in capital allocation philosophy at this time.

Shipyard Labor Productivity
Q: Is labor productivity in shipyards improving compared to pre-pandemic levels?
A: Productivity is currently below pre-pandemic levels due to the less experienced workforce. However, investments are being made in workforce proficiency and infrastructure, supported by Navy investments, to improve productivity over time as the workforce stabilizes. Management expects productivity to improve as these efforts continue.

Working Capital Guidance
Q: Can you provide guidance on working capital levels for this year and next?
A: Working capital is expected to decrease from 9% to 2-3% by year-end due to capital incentives and milestone achievements. Specific targets for 2025 were not provided, but management indicated they are on plan relative to the five-year free cash flow guidance and will update targets in February.

Capital Expenditures and Navy Incentives
Q: Can you discuss the uptick in CapEx and any offset from Navy incentives?
A: CapEx increased sequentially, with spending at 2.6% of sales in Q1 and 3% in Q2, guided to 5.3% for the year and 5% over the next three years. Investments are made in partnership with the Navy, aiming to add value and generate returns on capital projects, though specifics on incentives are not disclosed.

Impact of Deloitte Winning Navy Contract
Q: Do you have any insight into the Navy contract awarded to Deloitte instead of Mission Technologies?
A: Management was not involved in that contracting process and believes Deloitte is supporting the Navy in identifying and allocating investments.