Capital Allocation Priorities
Q: Can you commit to returning more free cash flow to shareholders?
A: Management emphasized that while they aim to progressively improve dividends and return any remaining free cash flow to shareholders, their primary focus is on operational priorities and delivering ships. They acknowledged having a strong balance sheet and the flexibility to consider M&A opportunities, but currently see no significant portfolio gaps. They are not committing to returning all free cash flow to shareholders at this time.

CapEx Increase and Impact on Free Cash Flow
Q: Why is CapEx increasing, and how will it affect free cash flow?
A: The company is ramping up CapEx by $300 million annually over the next three years to expand shipyard capacity, particularly for submarine programs like Virginia-class and Columbia. Although this won't impact 2024 revenue due to project lead times, it supports mid- to long-term growth. Management indicated that the Navy will pay for the majority of these investments, helping to offset the CapEx increase and maintain free cash flow guidance.

Shipbuilding Margin Outlook
Q: What is the outlook for shipbuilding margins in 2024?
A: Despite missing some milestones at the end of the year, management expects shipbuilding margins to be in the range of 7.6% to 7.8% for 2024. They acknowledged being slightly short of prior targets but anticipate improvements as they achieve milestones and realize step-ups in performance. They are comfortable with this conservative outlook and aim to exceed it if conditions allow.

Supply Chain Challenges on Virginia Program
Q: How are supply chain issues affecting the Virginia-class submarines?
A: Management noted that supply chain challenges persist across all programs, including the Virginia-class submarines. They have no inflation protection on the VCS program and are actively managing risks through quarterly EAC evaluations. The Navy is aware of these issues, and efforts like Submarine Industrial Base (SIB) funding are crucial to mitigate risks and improve the supply chain.

Labor Retention Challenges
Q: How is the company addressing labor retention issues?
A: Labor retention has been a significant challenge, with difficulties in retaining new hires beyond one or two years. The company is implementing initiatives focused on flexible work schedules, targeted hiring in geographies with better retention rates, and offering incentives for critical skills like machinists. They are also partnering with the Navy on workforce development programs, such as apprentice schools, which have higher retention rates. Addressing labor issues is a major priority to ensure operational success.

Free Cash Flow Guidance Amid Higher CapEx
Q: How will free cash flow remain stable despite higher CapEx in 2024?
A: Management plans to maintain free cash flow guidance of $600 million to $700 million for 2024, despite increased CapEx, through significant Navy participation in funding the investments. They expect the Navy's contributions to offset the CapEx increase, and they do not anticipate a major draw on free cash flow. Over the next five years, they project a cumulative free cash flow of $3.6 billion, averaging $720 million per year.

Delayed Milestones and Impact
Q: What is the status of the milestones that slipped in Q4?
A: Three milestones slipped out of Q4 due to late-breaking changes and testing issues. For the two Virginia-class submarines, operational commitments are essentially complete, with minimal financial impact. The LPD 29 faced testing issues but is expected to be delivered in late Q1 or early Q2. Management does not foresee significant downstream impacts or material financial issues from these delays.

Supply Chain Investments
Q: Where are supply chain investments being made?
A: The company is working with the Navy to target investments in single-source or sole-source suppliers, particularly in the Virginia-class and DDG programs. These investments aim to increase capacity in areas where supplier capacity has dwindled over the past 10 to 15 years. They are also exploring dual-sourcing and qualifying additional suppliers for critical materials.

Working Capital Outlook
Q: How does working capital look going forward?
A: Working capital has improved, ending the year at 5% of sales, down from 6% to 6.5% earlier in the year. Management expects it to further improve to 4% to 5% in 2024, attributing this to reductions in program activities and improved collections. They believe this level is appropriate and sustainable moving forward.

Accounting on Delayed Milestones
Q: Were there positive EAC adjustments from delayed milestones?
A: Management stated that there were no material financial issues related to the milestones that slipped. There was a slight opportunity loss on LPD 29, which will be recovered upon delivery. Any financial impact is accounted for in their guidance, and no significant EAC adjustments are expected.

Earnings Impact of One-off Gains
Q: How did one-off gains affect earnings in Q4?
A: The company recorded two one-off gains totaling $120 million gross, or $95 million net of tax, in Q4. This included a $70.5 million gain from the sale related to a frigate repair effort and a $49.5 million gain from insurance recoveries on the Hydroid acquisition representations and warranties. These gains were included in operating income due to their nature.

Revenue Performance and Predictability
Q: Why was shipbuilding revenue higher than guided?
A: Shipbuilding revenue exceeded guidance by nearly $300 million due to timing factors, including material receipts and outsourcing costs arriving earlier than expected. Management indicated that such timing variations can occur due to the nature of material procurement, affecting quarterly revenues but not the overall predictability of the business in the long term.