Huntington Ingalls Industries (NYSE:HII) has started the first quarter of 2024 with a solid performance in shipbuilding and a significant growth in its Mission Technologies division, achieving record revenues and a healthy backlog. The company's leadership addressed various operational and financial aspects during the earnings call, highlighting progress in major projects, workforce development, and supply chain management.
Key Takeaways
- HII reported a record first-quarter revenue of $2.8 billion.
- Diluted earnings per share stood at $3.87.
- New contracts amounted to $3.1 billion, leading to a backlog of $48.4 billion, with $27 billion funded.
- Mission Technologies revenue hit $750 million, marking a 20% increase year-over-year.
- The company is actively managing labor constraints and supply chain challenges.
- HII plans to buy back $300 million of shares by year-end.
Company Outlook
- HII maintains a positive financial outlook, expecting to meet shipbuilding margin guides later in the year.
- The CVN-79 project is 90% complete and progressing as planned.
- Two deliveries per year are anticipated for the Virginia-class program.
- HII is strengthening the Australian submarine supply chain and is open to South Korea joining the AUKUS agreement.
Bearish Highlights
- The Columbia-class program faces challenges with valve work at Newport News.
- Estimate at Completion (EAC) for Newport News is negative, indicating potential overruns or reduced profitability.
- Second-quarter margins in shipyards were slightly lower, although within expectations.
Bullish Highlights
- HII reached several shipbuilding milestones, including trials and deliveries.
- EACs for Ingalls and Mission Technologies segments were positive.
- The company is seeing progress in hiring and a reduction in attrition rates.
- Supply chain stability has improved, though major suppliers continue to impact ship construction.
Misses
- Some events from the previous year slipped into the first quarter, affecting timelines.
- Attrition, although improved by 20% over the last year, still requires further improvement.
Q&A Highlights
- HII is focused on buying a full boat of materials for two boats in 2025 to mitigate risk.
- The company is actively working on resolving major equipment supplier issues.
- HII is committed to disciplined capital deployment, with no specified minimum cash balance.
In conclusion, Huntington Ingalls Industries (HII) has presented a robust first quarter, with strategic initiatives in place to address the challenges ahead. The company's focus on meeting customer commitments, investing in its workforce, and managing its financials underscore its commitment to maintaining a strong position in the shipbuilding and defense technology sectors.
With a significant backlog and new opportunities on the horizon, HII is poised to continue its growth trajectory while navigating the complexities of the industry.
InvestingPro Insights
Huntington Ingalls Industries (HII) has demonstrated a strong financial performance in the first quarter of 2024, with a focus on growth and stability. Here are some key insights from InvestingPro that provide a deeper understanding of the company's financial health and future prospects:
InvestingPro Data metrics indicate that HII has a market capitalization of $9.79 billion, showcasing its significant presence in the industry. The company's Price to Earnings (P/E) ratio stands at 14.5, which is attractive when paired with its near-term earnings growth, as reflected in the adjusted P/E ratio of 19.52 for the last twelve months as of Q4 2023.
This suggests that HII is trading at a low P/E ratio relative to its earnings growth, potentially offering value to investors. Additionally, HII's revenue growth of 7.29% over the last twelve months further confirms the company's solid top-line performance.
InvestingPro Tips for HII highlight the company's financial discipline and commitment to shareholders. HII has raised its dividend for 12 consecutive years and has maintained dividend payments for 13 consecutive years, emphasizing its consistent return to shareholders. Moreover, HII boasts a perfect Piotroski Score of 9, indicating high financial health and suggesting that the company is well-positioned to handle market fluctuations with low price volatility.
For investors looking for more in-depth analysis and additional tips on HII, InvestingPro offers a comprehensive resource with further insights. There are 9 additional InvestingPro Tips available, providing a more granular look at the company's financials, operational performance, and market positioning. Interested readers can explore these tips at https://www.investing.com/pro/HII and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Huntington Ingalls Industries Inc (HII) Q1 2024:
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2024 HII Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to the Vice President of Investor Relations, Christie Thomas. Ms. Thomas, please go ahead.
Christie Thomas: Thank you, operator and good morning. I’d like to welcome everyone to the HII first quarter 2024 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, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on our website’s Investor Relations page at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?
Chris Kastner: Thanks, Christie and good morning everyone. Today, we released quarterly results that were characterized by steady performance in shipbuilding and strong growth of Mission Technologies. We saw record first quarter revenues, reflecting the continued strong demand from our customers for our products. As we discussed at our Investor Day in March, we remain focused on delivering the advantage to all our stakeholders, our customers, employees, shareholders, suppliers and communities. Now, let’s turn to our results. Record first quarter revenue was $2.8 billion and diluted earnings per share was $3.87 for the quarter, up from $3.23 in the first quarter of 2023. New contract awards during the quarter were $3.1 billion, which resulted in backlog of $48.4 billion at the end of the quarter, of which $27 billion is currently funded. Turning to an update on our shipbuilding milestones. In the first quarter, at Ingalls, we completed builders and acceptance trials on LPD 29 Richard M. McCool Jr. which led to delivery of the ship last month. At Newport News, we delivered the first Columbia class Stern, floated off SSN 798 Massachusetts and completed acceptance trials for SSN 796 New Jersey, which also delivered in April. We were also awarded the advanced planning contract for CVN 75 USS Harry S. Truman’s RCOH and undocked CVN 74 USS John C. Stennis as part of its RCOH in April. In addition, last month, we announced the first integration of an Australian company into the Newport News shipbuilding supply chain with the purchase of steel from Australian manufacturer, Bisalloy Steel. The steel will be used for training and testing to enable us to begin the qualification process for the incremental steel volume required for AUKUS. This is a critical first step toward an integrated U.S., UK, Australian supply chain under AUKUS. At Mission Technologies, we saw record first quarter revenue with sales of $750 million, 20% over the first quarter of 2023. In addition to very strong sales growth, Mission Technologies won strategic competitions in the quarter, including a $305 million contract to protect U.S. regional interest in the Republic of Korea, a $74 million contract to research, analyze and develop enhanced capabilities for vertical launching systems onboard U.S. Navy surface ships and in order to build a REMUS 620 unmanned underwater vehicle for an international customer. Now, shifting to activities in Washington for a moment, we were pleased that the fiscal year 2024 budget cycle ultimately concluded in March. We saw continued bipartisan support for our programs reflected in the final Defense Appropriations Act, including funding for 2 Arleigh Burke-class destroyers, 2 Virginia-class attack submarines, and 1 Columbia-class ballistic submarine. Additionally, the appropriations measure provided $500 million for advanced procurement funding for LPD 33. The final appropriations bill also provided funding for the submarine industrial base and large surface combatant shipyard infrastructure and authorized the Navy to enter into a multiyear procurement contract for Virginia class submarines. Also in March, the President submitted the fiscal year 2025 budget request now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs, requesting funding for 2 Arleigh Burke-class surface combatants, 1 San Antonio-class amphibious warship and a lead Block VI Virginia-class submarine. Additionally, the budget request funds the first year of the 3-year refueling and complex overhaul of CVN 75 USS Harry S. Truman. The budget request also continues funding for investment in the submarine industrial base and research and development efforts for the next-generation large surface combatants, DDG(X) and nuclear submarines, SSN(X). From an operational standpoint, to access the skilled manufacturing labor coupled with our supply chain experiencing the same labor challenges continue to impact our programs. In that regard, we hired over 1,700 craft personnel in the first quarter, which puts us on track to achieve our full year plan of approximately 6,000. Also in the first quarter, both of our shipyards held apprentice graduations celebrating over 230 graduates across HII who are and will become the leaders in their crafts. We continue to maintain our focus on workforce retention and development and are working closely with our customers and state and local governments to solve this challenging issue. We continue to use over time, contract labor and outsourcing to mitigate risk and strengthen the opportunity for progress and schedule stabilization. In summary, we remain focused on meeting our commitments to our customers and we will continue to invest in our people and our facilities to ensure we meet the demand we forecast for our products and services. And now, I will turn the call over to Tom for some remarks on our financial results. Tom?
Tom Stiehle: Thanks, Chris and good morning. Today, I will briefly review our first 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 3 of the presentation, our first quarter revenues of $2.8 billion increased 4.9% compared to the same period of last year and represent a record first quarter result for HII. This increased revenue was attributable to growth at Mission Technologies in Ingalls. Operating income for the quarter of $154 million increased by $13 million or 9.2% from the first quarter of 2023 and an operating margin of 5.5% compared to operating margin of 5.3% in the same period last year. Net earnings in the quarter were $153 million compared to $129 million in the first quarter of 2023. Diluted earnings per share in the quarter, was $3.87 compared to $3.23 in the first quarter of the previous year and backlog increased to end the quarter at $48.4 billion. Moving to Slide 5, Ingalls revenues of $655 million in the quarter increased $78 million or 14% from the same period last year, driven primarily by higher volumes and surface combatants and amphibious assault ships. Ingalls operating income of $60 million increased 9% from last year and operating margin was 9.2% in the quarter, primarily due to the higher volumes I just mentioned. At Newport News, revenues of $1.4 billion, decreased $72 million or 5% from the same period last year, primarily driven by lower volumes in aircraft carriers and the Virginia-class submarine program. Newport News operating income for Q1 was $82 million and operating margin of 5.7% were relatively flat with the prior year. Shipbuilding operating margin in the first quarter was 6.8%, slightly behind the outlook we provided for the quarter. Our shipbuilding revenue and operating margin outlook for the full year remains unchanged. And as we have previously noted, our expected shipbuilding milestones for 2024 are concentrated largely in the second half of the year. At Mission Technologies, revenues of $750 million increased $126 million or 20% compared to the first quarter of 2023, primarily due to higher volumes in C5ISR in cyber electronic warfare and space. Mission Technologies operating income of $28 million compares to operating income of $17 million in the first quarter of last year. The increase in operating income was driven primarily by higher volumes I just mentioned. First quarter results for Mission Technologies included approximately $25 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the first quarter was 7.7%. Turning to Slide 6. Cash used in operations was $202 million in the quarter. Net capital expenditures were $72 million or 2.6% of revenues. Free cash flow in the quarter was negative $274 million. This compares to cash used in operations of $9 million, net capital expenditures of $40 million, or 1.5% of revenues and free cash flow of negative $49 million in the first quarter of 2023. The use of cash in the first quarter was expected and was due to timing of collections. We reaffirm our free cash flow outlook for 2024 of $600 million to $700 million and our 5-year free cash flow outlook of $3.6 billion. Cash contributions to our pension and other post-retirement benefit plans were $10 million in the quarter. I would also like to note that we made the remaining $145 million debt payment on our term loan associated with the Align (NASDAQ:ALGN) acquisition in Q1. Also during the quarter, we paid dividends of $1.30 per share or $51 million in aggregate. We also repurchased approximately 223,000 shares during the quarter at a cost of approximately $62 million. To summarize, we delivered strong year-over-year revenue growth in the first quarter driven by Mission Technologies in Ingalls and expect Newport News volumes to ramp up throughout the remainder of the year. In addition to its very strong sales, Mission Technologies continued to win new contracts and has a robust opportunity pipeline that has grown now to $80 billion. We are off to a solid start for the year in revenues and operating income. And as typical, we expect free cash flow to ramp up throughout the year. Looking forward, we are confident in reaffirming our 2024 outlook and our 5-year free cash flow outlook of $3.6 billion. Before I end my remarks, I’d like to thank you again for attending and for watching the webcast of our Investor Day on March 20. Chris and I and the HII leadership team appreciated the opportunity to showcase the details of our strategy, investment thesis and financial plans. With that, I’ll turn the call back over to Christie to manage Q&A.
A - Christie Thomas: Thanks Tom. [Operator Instructions] Operator, I will turn it over to you to manage the Q&A.
Operator: Thank you, Christie. [Operator Instructions] Our first question comes from Scott Deuschle from Deutsche Bank (ETR:DBKGn).
Scott Deuschle: Hey, good morning. Hey, Chris, sorry if I missed one. Where is CVN-79, yes, Where CVN 79 at in terms of percent complete?
Chris Kastner: It’s right around 90%. It’s progressing well. They are into the test program. We’re actually seeing dead loads fired off T malls off the ship. So that’s a positive sign. So yes, they are progressing very well.
Scott Deuschle: Okay. And then, Tom, to hit the midpoint of the shipbuilding margin guide, it looks like you’ll need to do second half margins about, I guess, 150 basis points above the first half. It sounds like it’s driven by better milestones. Maybe you can just walk through in a bit more detail as to where that uplift comes from? Thank you.
Tom Stiehle: Yes. So we do have – thanks Scott, appreciate the question. And we do have a shape of our margin, and it’s backloaded in the year because of the milestones. And we guided to 7%. We came in at 6.88% here, just a little light on the margin there. And then on the operating income, the sales being on the Q2, timing on that cost and labor is here, working ourselves to progressing on that front. But on the back half of the year, as we make our milestones, I do anticipate a ramp. We’re guiding for Q2 to be a 7% quarter as well at shipbuilding. And then obviously, the back half of the year, we’ll kind of lift that up.
Scott Deuschle: Alright. Thank you.
Operator: Our next question comes from Robert Spingarn from Melius Research.
Robert Spingarn: Hey, good morning.
Chris Kastner: Good morning, Rob.
Robert Spingarn: Chris, just going to touch on the labor situation, but the Navy controller was saying recently that the Navy just can’t simply buy its way out of programmatic challenges and delays. And I assume that has to do the delays, of course, we’ve talked about this a lot are just driven by labor constraints. I was wondering if you could expand a little bit on that? And is there any possibility that maybe some subsidies to shipbuilders might relieve the situation?
Chris Kastner: Yes. That’s interesting. Obviously, subsidies would help. More important than that is a suborn industrial-based funding that’s been appropriated in ‘24 where there’s real line of sight on projects that are going to improve performance within the industrial base in the supply chain, in the labor force and in capacity. So I think that, that targeted effort by the Navy and the shipbuilders to identify spaces where we can make investments and get improvements is appropriate, and the teams are working very hard to do that.
Robert Spingarn: So it sounds like it’s really then not just labor, there are these other things you can do.
Chris Kastner: Well, there are other things you can do. But labor is the primary issue is manufacturing labor in the United States and then shipbuilding labor in the United States. Simply the amount of labor that’s necessary to build the ships, the access to labor and then the labor rates that we need to develop to be able to access more labor. We’re working very hard on the apprentice schools, in workforce development with the State of Virginia and Mississippi and the community colleges. And it’s really kind of a change in approach relative to ensuring that manufacturing labor is a good job and a good paying job that people want to do coming out of high school. So I don’t think it’s a one-size-fits-all sort of solution to this. But labor is, I believe, the most contributing factor. And when you think about the supply chain, it’s labor in the supply chain as well. So manufacturing labor is definitely a priority that needs to be fixed for the nation, I believe.
Robert Spingarn: Okay. And then just quickly on Mission Technologies. MT had real good sales in the first quarter here ahead of the guidance run rate. So I was just wondering if we could talk about what’s expected for the rest of the year there. What drove the quarter? And then do we fade a little bit in the rest of the year? Or is that just being conservative?
Tom Stiehle: So Rob, I’ll give you some color on that. Yes, it was a strong quarter. Again, it came in at $750 million, following Q4 last year at $745 million, that we are being conservative in the guide, still holding it at 2.7 to 2.75. I mean if you do the quick math, the run rate for the remaining of the year is 6.50 and holding to the guide there at the midpoint. There is opportunity, I think, for him to do better than that, but we don’t want to get ahead of ourselves. It’s about awards that he has in the plan this year, changing contracts that we have that we have backlog on those contracts into sales, and then him continuing his team to continue to stay on his labor plan and is hiring in that. So I do think there’s some potential tailwinds on that front, but we’ll just have to let the year play out right now. I’m really comfortable. We saw – we finished last year at 13% growth from ‘23 over ‘22. And then the news a quarter here where it’s over 20% quarter-over-quarter. So a fantastic start to the year. And he’s got – his pipeline has grown from $60 billion to $80 billion. So the opportunity set and scope of what’s in play there has grown as well. So I’m looking for a strong back half of the year here from MT, but we’ll have to see how it plays out.
Robert Spingarn: Okay, thanks so much.
Operator: Our next question comes from David Strauss from Barclays (LON:BARC).
David Strauss: Thanks. Good morning, everyone.
Chris Kastner: Good morning.
David Strauss: Chris, I wanted to ask you, you’ve now in Q1 and Q2, you’re going to knock off a lot of these milestones that were supposed to happen late last year. But at the same time, we really haven’t seen any of that perceived upside come through in terms of the margins based off of what you did in ship – for ship build in Q1 and what you’re forecasting for Q2. So if you could just square that why we’re not seeing some of that upside that we would think would be there would come – it’s not coming through with these milestones being completed.
Chris Kastner: Yes. Well, no doubt that when you miss milestones and you extend schedules, there’s going to be additional cost. So unfortunately, as we came through those amidst the end of the year and then got them done, 798 we floated off in the first quarter. We got to two deliveries in the second quarter, and there’s just less opportunity. So yes, unfortunately, scheduled equals cost, we’ve got to make our milestones. You think of the balance of the milestones in the year, they’re all holding. I would say the VCS milestones for the back half of the year are going to be a challenge, but the team is committed to getting those done and they’re holding now. But that’s why we give you the milestones, you can get a barometer of how we’re executing.
David Strauss: Okay. Thanks. That’s helpful. And then, Tom, could you maybe – I mean, you guided for free cash flow burn in Q2. Is it – I mean, it seems like obviously, going to be a very back-end loaded year. How should we think about the pacing of the CapEx step up? We didn’t really see it in Q1. So when do we really start to see a pickup in CapEx and then what I would assume would be a big working capital recovery on the other side?
Tom Stiehle: Yes. So from a cash perspective, we came in at $274 million here. We’re guiding another minus $100 million. So we’ll work ourselves through that. Not uncommon, we burn cash at the beginning of the year and not unanticipated here. Yes. So we wanted to make sure everyone align with us on that front. From a CapEx perspective, we spent 2.6% of sales in the first quarter here. And as we get into those projects this year, we’ll ramp on the back half of the year. So we held the guidance at 5.3% of CapEx of sales for the entire year and you’ll see that ramp as we get into the back half of the year here.
David Strauss: Okay, thank you.
Operator: Our next question comes from Doug Harned from Bernstein.
Doug Harned: Good morning. Thank you.
Chris Kastner: Good morning, Doug.
Doug Harned: There has been – and the Navy has commented on the Columbia-class issues with the work on the valve at Newport News. Can you comment on that in terms of what the status is and how that can affect your work flow on Columbia class?
Chris Kastner:
bowel:
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Doug Harned: Okay. Good. And then on Virginia class, the – you talked about the milestones this year. What I’m trying to understand is kind of where everything is in the flow in terms of eventually getting to that two deliveries per year level. And you had this letter come out of the house with a lot of members of Congress, arguing that there should be two Virginia class in the 2025 budget – the President’s budget. But does that matter? In other words, what I’m trying to understand is getting to two looks difficult right now. Does it matter to have the second one in the 2025 budget? And where do you stand on that pathway to get to two when you look at the milestones ahead here.
Chris Kastner: Yes. So I’ll tell you, there has been incremental improvement as we move through the first part of the year on improving the rate on the VCS program. It’s not good enough. There needs to be additional improvement. In regard to the budget, I think the most important thing relative to the discussion on one or two boats procured in 25 is to signal a sense of the supply chain is we need to make sure that we buy a full boat of materials, we keep the supply chain healthy so that we eliminate that risk for them. The last thing we want to do is create risk on the – within the program. So I think we’ve communicated that with the customer and the Congress, they understand it. And as you know, we’re just at the beginning of the budget discussions. So ultimately, we expect it to get resolved. But it’s very important that we get the supply chain under order for both of the boats.
Doug Harned: Very good. Thank you.
Chris Kastner: Thanks, Doug.
Operator: Our next question comes from Ronald Epstein from Bank of America (NYSE:BAC).
Mariana Perez Mora: Good morning, everyone. This is Mariana Perez Mora on for Ron today.
Chris Kastner: Good morning.
Mariana Perez Mora: So the first question is going to be related to Australia. As you see this first order for steel delivery from an Australian company, how should we think about like in the near-term you benefiting from like this early investment to actually make the Australian submarine supply chain stronger?
Chris Kastner: Yes. So that’s an excellent question. This is from an AUKUS standpoint, as I previously indicated, we view this as opening of two markets for us. So it’s a really good opportunity for us. And we think we’re taking all the right steps to prepare for ultimately a pretty material impact to the corporation. This is a really critical first step because we’re flexing muscles in our supply chain to qualify a vendor in Australia that will ultimately potentially be part of the supply chain. We could start – we’re starting small, but it will ultimately grow from here to make them a sovereign-ready submarine provider. So this is just the first step. I don’t believe material revenue will flow from this immediately, but it’s an important step to be prepared for us to support Australia.
Mariana Perez Mora: Perfect. And also in the line of AUKUS, there has been talks that South Korea would like to join this trilateral agreement. If that goes through, how do you see this impacting the potential of the program demand and even supply chain environment?
Chris Kastner: Well, obviously, there would be further upside related to that. I think there are discussions about that, but I don’t want to get ahead of ourselves. Let’s focus on AUKUS at this point, and I’ll leave those sort of discussions to the Pentagon and the Navy.
Mariana Perez Mora: Thank you so much.
Operator: Our next question comes from Gautam Khanna from TD Cowen.
Gautam Khanna: Hey, guys. I was wondering if you could give us the EACs by segment in the quarter? Then I have a follow-up.
Tom Stiehle: Okay. Yes. So it was 53 up, 51 down for net two, and the makeup of that was Ingalls was positive 13, Newport News was the negative 12, and MT was one.
Gautam Khanna: Okay. At NNS, the margins were a little light of our expectation. I’m just curious, any stepbacks in productivity or labor to speak of broadly at NNS or elsewhere?
Chris Kastner: Yes. So I’ll start and then Tom can jump in. Yes, as you know, Gautam, we evaluate our EACs every quarter, and if we have to take step ups or step backs, we do that on more material in nature. But you saw the slip of the milestones, which impacted some programs, so there were minor step ups and step backs throughout.
Tom Stiehle: But nothing material on that…
Chris Kastner: Yes, nothing material.
Tom Stiehle: I will comment to here. So, yes, 6.8 versus guidance of 7.0, a year ago this quarter, it was 6.7 push certainly for, so not that far off. From a Newport News perspective, again at 5.7 for the quarter, a year ago, there were 5 to 6, we finished off last year at 6.2. So, slightly off of that, just working through getting that production line working, material on labor on deck plate at the same time, trying to get that rework down and keeping the production line going here. So, we are fighting through it. And really not that far off the guide, so okay.
Gautam Khanna: Yes. And then just lastly on LPD 29, was that EAC taken in the first quarter, or was the delivery actually in the second quarter, and therefore, it’s more of a second quarter event.
Chris Kastner: Yes. So, we obviously assess EACs in the first quarter, but it’s a second quarter event. And it’s included in our guide for the second quarter and our expectations for the second quarter.
Gautam Khanna: Perfect. Thanks a lot guys.
Chris Kastner: Sure Gautam.
Operator: Our next question comes from Seth Seifman from JPMorgan (NYSE:JPM).
Seth Seifman: Thanks so much and good morning. Tom, just first a quick clarification, I know you mentioned the CapEx really stepping up in the second half, along with the cash generation. So, I assume you are also expecting a step-up in the Navy support for that CapEx in the second half.
Tom Stiehle: It’s aligned. It’s all baked into the plan we have and the guidance that we give, yes.
Seth Seifman: Right. Okay. And then just on the margin rates in the shipyards, Q1, similar to last year, slightly higher. Q2 though, around 7%, like if we look at the Q1 margin rates, kind of seems probably at the lower end of what you might expect for each of the yard. And so would normally expect some sequential improvement in each of the yard, maybe to something like above 6% at Newport and I mean Ingalls is often in the double digits. Is there something to be aware of that weighing on margins in the second quarter, or is it – I know you mentioned one milestone, but maybe a lack of overall milestone that’s driving the 7% for the second quarter?
Tom Stiehle: So, it’s tough to look at the margin rates from quarter-to-quarter, and we do try and forecast so that you can land about where we think that we will be. Behind the scenes is the maturation of where we are on EACs, where the milestones are going to fall, where we see the potential risk burned out. So, we have been taking the step-ups in the booking rates, and it’s just the first half of the year. We have had this for a couple of years. Now, the first half of the year is lighter than the back half. Obviously, the major milestones, the deliveries and the launches are back half loaded. So, we expect to see that there. I am not surprised on where we are. A couple of tens here or there is not a huge deal overall. And we are working through our risks and opportunities going forward here.
Seth Seifman: Great. Thank you very much.
Operator: Our next question comes from George Shapiro from Shapiro Research.
George Shapiro: Yes. Good morning. Just following up a little bit on Seth’s comment, but trying to get into some more detail. To get to the low end of your 7.6% margin guide for shipbuilding for the year would imply something like 8.3% or 8.4% in second half margins, which would imply an incremental $70 million to $75 million in profit. Are the milestones that you are projecting for the second half are going to give us all that $70 million to $75 million, or is there something else?
Tom Stiehle: It’s a mix of the milestones that we have, incentives, all the aspects that we have in burning down risk, so all that plays out. I will tell you from a margin perspective, if you look over the last 3 years, right, whether it’s shipbuilding at 7.7%, last year was 8.3%, even when you take the claim out that we had that recovery it was 7.5%. From a Newport News perspective, which is the preponderance of where the risk is right now. We were 6.2%, 6.1%, 6.2%. So, that margin rate has been stable. What we are talking about is a lift here kind of going forward. And as long as we stay on pace, the tempo of hiring, material and the cost efficiency as we have said in the past, we expect that incrementally to improve annually here. So, we will keep you informed right now. 6.8% versus 7.0% was pretty much on top of what we thought we would expect and we are guiding to 7% right now, yes. So, the back half of the year, right, will be a lift.
George Shapiro: Okay. And a follow-up, a different question on the working capital, I mean receivables were up like $253 million contracts, assets up $124 million in the quarter. That was well above last year’s first quarter. So, can you just kind of talk as to what caused it?
Tom Stiehle: Yes. So, it’s the working capital, it’s timing, it’s trade working capital between the billings and the receipts, the AR and the AP that we have right now. We have the cost in hand, at times, it’s either making the progress or being able to bill, working ourselves through incentives for collections as well as progress restrictions that we have. So, a little bit higher than we guided to at minus $200 million here and minus $400 million for Q2. Not uncommon like in 2022, where we ran the first three quarters in a deficit in cash, and then we came back strong in Q4. So, we are watching that closely. And I think we are on plan right now going forward.
George Shapiro: Okay. Thanks very much Tom.
Operator: Our next question comes from Myles Walton from Wolfe Research.
Myles Walton: Thanks. Good morning. I was wondering if I could ask a question first on the milestones as it relates to – I know you don’t size them individually, but there is not a milestone chart in the slide deck. So, I just was going to refresh the Massachusetts, is that the most important milestone for this year for Newport News and also any of the 25 milestones you had in the deck last time, have those shifted at all?
Chris Kastner: No, 25 has not shifted, and all the milestones are important. It is critical on the VCS program that they meet their commitments because it is an assembly line, and you need to roll crews to the next boat. So, yes, those VCS milestones are important.
Myles Walton: Okay. And then on the supply chain, I guess some of the testimony emerging, was talking about merchant suppliers of propulsion systems for ships. And I am curious, Chris, if you just give us a little baseline of where you are in terms of the whack-a-mole game here of containing issues? And is it supplier component? Is it workforce? And I know you are going to say all of them, but maybe you can just give a little bit more color as the Navy Secretary was willing to offer up Northrop (NYSE:NOC) as a source of issues is a little bit of an incremental step in the direction of emerging of where the supply chain constraints might be.
Chris Kastner: Yes. So, thanks Myles. Workforce is a significant issue. We think we have solved the hiring part of that issue. We have hired over 1,700 in the quarter to our commitment of – or to our goal of 6,000, and we are working very hard on attrition. There are some pilot projects that we have within each of the organizations, each of the shipyards relative to attrition surrounding pay, where you recruit from and flexibility. Those are starting to yield some fruit, but not enough where I can really take it to the bank. So, some positive indicators, but not good enough yet and we are going to continue to work on it. From a supply chain standpoint, we are being impacted by some major equipment within a number of our programs. The overall supply chain is definitely more stable than it was a couple of years ago and even 12 months ago, but some of our major suppliers are impacting the erection of our ships, and we are working hard to resolve that with those subcontractors.
Myles Walton: Okay. Is it concentrated to just a couple, or is this really widespread?
Chris Kastner: Let’s say, two to five.
Myles Walton: Okay. Alright. Thanks so much.
Chris Kastner: Sure Myles.
Operator: Our last question comes from Noah Poponak from Goldman Sachs (NYSE:GS).
Noah Poponak: Hey. Good morning everyone.
Chris Kastner: Hey Noah.
Noah Poponak: Tom, you have referenced with the shipbuilding margin kind of being essentially flat year-over-year and close to the guide in the quarter. But – and I understand and appreciate all of that and how it can move around quarter-to-quarter. But I guess last year, the full year did come in below the original full year outlook and you have cited the movement of milestones out of the end of the year into the beginning of this year. I guess maybe could you frame it as your level of visibility into the back half milestones this year compared to what you saw when you sat there at this time last year?
Tom Stiehle: I think both years kind of near or pretty closely expectations, both from where we were on the margin side and the cash that’s going to follow that. So, it is a year where there is more milestones in the back half. It will be highly dependent that we get those done. Last year, the three events kind of slipped right from Q4 into Q1 and essentially at the very beginning of Q2. So, we had talked about saying attendance to us making our schedules. Two months, three months, four months slip, although we don’t like that, it’s not huge. And I think the milestones we have right now, we have plans in place to make it by the end of the year, but there is risk on a couple of them. So, we will just have to see how that plays out here. I think it’s going to – near is a very similar profile year as 2023. As far as your comments about kind of missing last year, we guided in the upper-7s, we finished 8.3, 7.5. I tell you the year before that, it was a couple of ticks off to a couple of tens. So, I think the guide is realistic. We have a plan in place to hit it. And it’s just about execution here now with eight months to go in this year.
Noah Poponak: Okay. Makes sense. And how should we think about the pacing of the buyback through the year? And I guess also, what’s the minimum cash balance, just given the shape of the free cash flow through the year?
Tom Stiehle: Yes. So, we did buy back 62 million in the first quarter. We talked about a target of 300 million by the end of the year. So, you can do the math on that. That will – that should ramp up as we go through the back half of the year. We follow a very disciplined buying grid. We have algorithms against that where we see value. So, we will continue to employ that process. It has served us well. We reiterated our targets. So, I don’t see a change in that going forward right now. And then from a minimum on the cash balance, it’s not per se a minimum from time-to-time, we will dig into our revolver or our commercial paper, so that’s not uncommon. We have seen that in the past here. And as we are into the seasonality of Q1 in the first half of the year, being cash users, that’s not a concern or problem right now. So, there isn’t like a threshold or a minimum balance of cash that we have that were tied to being opportunistic in seeing value in the repo. So, they are kind of independent.
Noah Poponak: Got it. And Chris, you have touched on labor and attrition here. I think at the Investor Day, you quantified that attrition improved around 20% last year. It sounds like that continues to get better. I don’t know if there are any numbers you can put around how much better that needs to get to be kind of fully normal or stable or what you have seen year-to-date?
Chris Kastner: Yes. We don’t publish our target there. It’s definitely not back at pre-COVID levels. So, we still need to improve our performance from a retention standpoint.
Noah Poponak: Okay. Alright. Thanks very much. Appreciate it.
Chris Kastner: Thanks.
Operator: I am not showing any further questions at this time. I would now like to hand over to Mr. Kastner for any closing remarks.
Chris Kastner: Okay. Thank you everyone for your interest in HII and we will continue to focus on the fundamentals of our business and support of our customers. Have a good afternoon.
Operator: And this concludes today’s conference call. You may now disconnect your lines.
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