Huntington Ingalls Industries, Inc. Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2022 HII Earnings Conference Call. I'd now like to hand over the call to Christie Thomas, Vice President of Investor Relations. Mr. Thomas, you may begin.

First quarter 2022 earnings conference call. With us today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer. As a reminder, statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website. We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at hii.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I will turn the call over to our President and CEO, Chris Kastner. Chris?

Thanks, Christie. Good morning everyone and thank you for joining us on today's call. Earlier this morning we reported solid performance across each of our operating divisions, with our focus on execution and growth positioning us to reaffirm our previous revenue, margin, and free cash flow guidance. Our Shipbuilding and emission technologies teams continue to execute well despite facing some headwinds in the areas of human capital and supply chain disruption. Like the economy broadly, we are facing challenges created by the lingering effects of COVID and its impact on the labor market, which makes it challenging to hire and retain employees. Moreover, our suppliers are facing the same shortage of labor as well as inflation issues, creating a risk of delays in the delivery of key materials for our shipbuilding programs. We are aggressively working through these challenges with our suppliers and our customers. In light of both of these challenges, I'm extremely proud of the resilience and dedication of each of our 44,000 employees to continue to focus on our mission of delivering on our customer commitments. Now, shifting to our results, sales of $2.6 billion for the quarter were 30% higher than 2021 and diluted EPS of $3.50 for the quarter was down from $3.68 in 2021. New contract awards during the quarter were approximately $2 billion, driven by the award for DDG 139. This results in a backlog of $47.9 billion at the end of the quarter, of which $24.8 billion is currently funded. At Ingalls, LPD 28 Fort Lauderdale completed sea trials and was delivered to the Navy. LPD 29 Richard M McCool Jr was launched and we laid the keel for LPD 30 Harrisburg. On the LHA program, LHA 8 Bougainville is progressing well and long-lead material procurement has begun for LHA 9. On the DDG program, DDG 123 Lenah Sutcliffe Higbee achieved main engine light off and DDG 125 Jack H Lucas was christened this quarter. And finally, on the NSC program, serial production continues on NSC 10 Calhoun launched in April. At Newport News, SSN 794 Montana completed sea trials and was delivered to the Navy and SSN 796 New Jersey floated off in April. Also, as discussed in our fourth quarter call, SSN 725 USS Helena was redelivered in January, which demonstrated the successful reconstitution of our submarine maintenance capability in support of the Navy. On the carrier front, Newport News and the Navy celebrated a centennial of U.S. Navy aircraft carriers, and CVN 78 USS Gerald R Ford was redelivered to the Navy in the first quarter after completion of its inaugural maintenance and modernization period. Progress continued on CVN 79 Kennedy, which is 83% complete, and CVN 80 Enterprise has begun erecting steel in the dry-dock. On the RCOH program, CVN 73 USS George Washington is progressing in the testing phase and is 95% complete, and CVN 74 USS John T Stennis is approximately 25% complete. A few weeks ago we renamed our Technical Solutions division to Mission Technologies to better reflect our portfolio of capabilities and our commitment to delivering advanced technologies in multi-domain expertise to support our national security customers. Contract awards for emission technologies have had a slow start to the year, but this was largely due to the continuing resolution and the resulting lack of adjudication of awards. Looking ahead, we are very excited about our pipeline of new business in Mission Technologies and are confident it will support our growth objectives. We currently have almost $6 billion of proposals in evaluation, with $3 billion in proposal development and a total qualified pipeline of more than $25 billion. We had a significant win in unmanned with the selection of our REMUS 300 vehicle as the U.S. Navy's next generation small UUV program of record. We also recently released Odyssey, a suite of advanced autonomy solutions that offer scalable autonomy across a variety of platforms and is aligned with the industry's open architecture standards. Regarding our Shipbuilding workforce, I'm glad to report that we finalized the collective bargaining agreements at both shipyards. Our annual apprentice school graduation at Newport News Shipbuilding saw 170 graduates, and over 200 individuals will complete their apprenticeship program in May at Ingalls Shipbuilding. We continue to work with local high schools and community colleges on our core hiring and development needs. Through the end of the quarter, we had hired over 1,000 craft personnel towards our plan of over 5,000 for the year, and we remain focused on hiring and retaining a strong workforce as we continue to face the headwinds of a tight labor market. Turning to activities in Washington, Congress finalized appropriations for fiscal year 2022 in March. We saw continued bipartisan support for our programs reflected in the Final Defense Appropriations Act, including funding for two Arleigh Burke Class Destroyers and two Virginia-class attack submarines. Additionally, the appropriations measures provided $250 million for advance procurement funding for LPD 32, advance procurement for DDGs, as well as funding for our other programs. Also in March, the President submitted his fiscal year 2023 budget request, which is now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs, funding two amphibious ships LPD 32 and LHA 9, two DDG-51 surface combatants, and two Block 5 Virginia-class submarines. The budget request continues funding for class nuclear aircraft carriers and aircraft carrier refueling programs, and construction of Columbia-class submarines, as well as investment in the submarine industrial base. Beyond Shipbuilding, the fiscal year 2023 request reflects an emphasis on research and development with increased investments in capability enablers such as AI, Cyber, Electronic Warfare, C5, ISR and autonomous systems, which aligns with our advanced technology capabilities in our mission technologies division. In conclusion, we remain well positioned to execute on our shipbuilding backlog and leverage it to generate significant free cash flow while continuing to capture anticipated work and growth within our mission technologies division. So with that, I'll turn the call over to Tom for some remarks on our financial results. Tom.

Thanks, Chris, and good morning. Today, I'll 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 4 of the presentation, our first quarter revenues of $2.6 billion increased approximately 13% compared to the same period last year. This was largely due to revenue attributable to the acquisition of Alion in the third quarter of 2021. Operating income for the quarter of $130 million decreased by $9 million from the first quarter of 2021, and operating margin of 5.4% decreased 110 basis points. These decreases were largely due to lower segment operating income driven by lower risk retirement at Newport News Shipbuilding, partially offset by more favorable non-current state income taxes and operating fast cash adjustment compared to the prior year. Our effective tax rate in the quarter was approximately 20.5% compared to approximately 40.5% in the first quarter of 2021. The lower rate in the first quarter of 2021 was primarily due to divestitures during that quarter. Net earnings in the quarter were $140 million compared to $148 million in the first quarter of 2021. Diluted earnings per share in the quarter were $3.50 compared to $3.68 in the first quarter of 2021. Turning to Slide 5, cash used by operations was $83 million in the quarter and net capital expenditures were $43 million or 1.7% of revenues, resulting in free cash flow of negative $126 million. This compares to cash from operations of $43 million and net capital expenditures of $59 million and free cash flow of negative $16 million in the first quarter of 2021. Cash contributions to our pension and other post-retirement benefit plans were $10 million in the quarter, of which less than $1 million were discretionary contributions to our qualified pension plans. During the first quarter, we paid a dividend of $1.18 per share totaling $47 million. We also repurchased 51,000 shares during the quarter at an aggregate cost of $10 million. Moving on to Slide 6, Ingalls revenues of $631 million in the quarter decreased $18 million or 2.8% from the same period last year, driven primarily by lower revenue on the DDG program, partially offset by higher amphibious assault ship revenues. Ingalls operating income of $86 million and margin of 13.6% in the quarter were down slightly from last year due to lower risk retirement on the LHA and DDG programs, which was largely offset by increased risk retirement on the LPD program, following the delivery of LPD 28. At Newport News, revenues of $1.4 billion decreased by $17 million or 1.2% from the same period last year due to lower aircraft carrier and naval nuclear support service revenues, largely offset by higher submarine revenue. Newport News operating income of $81 million and margin of 5.8% were down from last year, primarily due to lower risk retirement on the VCS program, partially offset by higher risk retirement on CVN 78. At Mission Technologies, revenues of $590 million increased $331 million compared to the first quarter of 2021, primarily driven by the acquisition of Alion in the third quarter of 2021, partially offset by the divestiture of our oil and gas business and the contribution of the San Diego Shipyard to a joint venture in the first quarter of 2021. Mission Technologies operating income of $9 million compared to an operating income of $7 million in the first quarter of 2021. First quarter 2022 results included approximately $24 million of amortization of Alion-related purchase intangible assets. Mission Technologies' EBITDA margin in the first quarter was 7.3%. Turning to Slide 7, we are reaffirming our 2022 sales margin and free cash flow expectations and have slightly revised our pension expectations. During the quarter, we reached a labor agreement with the United Steelworkers at Newport News Shipbuilding. The contract includes increases in pension benefits triggering a pension remeasurement, which also takes into account discount rate changes and asset returns through late February. Regarding our near-term outlook, our first quarter results were positively impacted by a very high quality delivery for LPD 28, which allowed us to retire a significant amount of risk for that ship in the first quarter as reflected in the Ingalls operating margin. The remaining shipbuilding milestones we expect to achieve in 2022 are back-end weighted. Given that backdrop, we expect the second quarter shipbuilding revenue to be relatively flat sequentially and shipbuilding operating margin to be approximately 7%. Regarding mission technologies, we expect results will ramp through the year with second quarter sales up approximately 5% sequentially and operating margin in line with our full year guidance of approximately 2.5%. Regarding our longer-term targets, we remain confident in our free cash flow of $3.2 billion from 2020 through 2024. This outlook does assume that we continue to expense R&D costs for tax purposes. As a reminder, we believe the impact on 2022 free cash flow would be approximately $100 million if the current R&D amortization treatment remains in place. On Slide 8, we provided a walk from our 2022 to 2024 free cash flow outlook. This is consistent with the chart we began providing last quarter. Additionally, we are reaffirming our capital allocation priorities, which include significant deleveraging in the near term, along with continued modest dividend growth and balanced share repurchases. We will continue to evaluate M&A, but we have no significant capability gaps today. In closing, we are pleased with the operational milestones achieved in the first quarter along with the financial results. Notwithstanding the challenges of the current environment, we remain enthusiastic regarding our long-term outlook, with nearly $50 billion in backlog, strong budgetary and customer support for our shipbuilding programs and mission technology business, which we believe is poised for very strong growth. We are laser-focused on consistent execution and generating sustainable long-term value. Now I'll turn the call back over to Christie for Q&A.

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.

Our first question goes from Robert Stallard from Vertical Research. Your line is now open. Robert, please go ahead with your question.

Chris. I'll start off with you a bigger picture question on the FY22 request. It looks like the year may be changing as planned for amphibious vessels proposed into this. How do you think this could play out and what's potentially the risk to HII's? And then secondly, numbers question perhaps for Tom you mentioned on Slide 8, the potential for margin growth in mission. I was wondering what the sort of better long-term margin could be for this division because 0.25 is pretty low compared to other companies in the industry. Thank you.

Yes, okay. Robert, I'll start with the budget, the '23 budget request and then Tom can talk about Mission Technologies margins. One thing we should always remember with the budgetary process, this is the first step of the process. So we all work through that throughout the year, all our major shipbuilding programs were supported. The one line we do have to work on is the NCIB line, as you identified. We need to get LPD 32 under contracts. We need to get LHA 9 under contract. We need to work on LPD 33 and ensure that we support the Marines and the Navy and the Congress in analyzing that program going forward. So you’re right, we do need to work on the NCIB line, but I'm positive as we work through this process that we will get to a solution that makes a lot of sense. From a long-term big picture perspective, I think that the budget really does support our long-term growth rate, and I'm comfortable with the 3%.

Sure, Rob, and I'll pick up the question on MT from a margin perspective. 1.5%. So we got guided at 1%. So it's higher than the guidance that's coming up. 2.7% last year, 2.7% last year for Q1 and 2.9% for a quarter ago in Q4. I would tell you that because of the purchase intangibles both with MT, about $30 million in line specifically for 24, net return on sales metric is not probably a good lead indicator as far as where we want to land. That's why we kind of give you the EBITDA perspective from 8% to 8.5%. The quarter here was 7.3%, not unexpected, because we guided you from a gross perspective only at 1%. We take with the CRM or sales light and obviously the margin will follow the sales, so we're comfortable with where we stand and from a perspective of where we could go, we've told you for the year that it’s 8% to 8.5% from an EBITDA perspective as a percent of revenue and from now going through 2024 we've highlighted that it's more appropriate to think about 8% to 10% as a range at where MT can land.

Our next question comes from Pete Skibitski from Alembic Global Advisors. Pete, your line is now open. Please go ahead with your question.

Chris also a question on the fit-up, one thing that's always a little bit hard to tell, timing-wise is just maintenance trend, shipbuilding maintenance trend. Can you give us a sense of if you see, if you look at the fit-up, you know, should maintenance be a tailwind for you guys or starting to flatten out? I just wonder what your thoughts were.

Yes, I think it's pretty flat. They're coming through the submarine kind of maintenance schedule and how they're going to proceed with LA class and Virginia-class submarines from a maintenance standpoint, but we think it's pretty flat from our perspective. Lots going into how they execute the sign-up, but we think it's pretty flat.

Okay. And then one last question, kind of off-the-beaten-path, there was an export notification back in December for F-35 and Advanced Arresting Gear to France in both you guys and General Atomics were excited. Is that any kind of a meaningful or real revenue opportunity for you guys? And I'm just curious about the timing as well on that.

Yes, not for us now, remember we don't, General Atomics provides those systems, so not for us now.

Our next question comes from Seth Seifman from JPMorgan. Seth, your line is now open. Please go ahead with your question.

I think you mentioned on the last call you had a lot of confidence in hiring this year and you started off this call focusing especially on the tight labor market. Could you just give a little bit of color on how things are tracking there and any metrics we can think about, kind of what you need to do and where the risk would be in the financial plan if the hiring situation gets tougher?

Sure, Seth. Thanks. January and February were tough and really impacted our attendance. But in March attendance recovered, and we're back to the levels that we're used to seeing within both of our shipyards. We've hired over 1,000 people through the end of March. We need to hire over 5,000, so a bit behind, but we're really focused on our relationships with our apprentice schools and high schools, community colleges, and we expect that to ramp over the summer months as graduations happen. So it's definitely a watch item. We need to hire, train, and be productive. So still comfortable with our guidance, but labor is a watch item for us as we move through the year.

All right. And just a follow-up. Is it more about, I mean I would think people come in in the summer there. There’s probably only so much contribution they can make in a couple of months. So, is this really more about setting up for 2023 and then to the extent you have an idea of how you are set up for 2023 that would affect your risk tolerance in your estimates completion?

Yes, when they come out of the apprentice schools they're ready to go, and if they come out of the community colleges and the high schools where we have programs in place where they're learning, they will fill a critical role within the shipyard. Now they're not going to be first-class shipbuilders right away, but they're going to be learning, making progress on executing. It’s all incumbent on our shipbuilding teams to ensure they're trained and have the right mentorship, which we do very well. So yes, they're not going to be first-class shipbuilders coming out of the gate, but we expect them to contribute.

Thank you. Our next question comes from Doug Harned from Bernstein. Doug, your line is now open. Please go ahead with your question.

I'd like to just spend a little bit of time on Virginia class. I mean it was identified as a margin headwind in this quarter at Newport News. If I go back to when you had the issues back in 2020, it was the Montana, the New Jersey, the Massachusetts. Those, I mean the Montana was delivered and New Jersey floated off. Then one of the big issues at that time was the question of lots of new people in a complex environment needing to train them. So, how are you looking at the Virginia class performance right now?

Yes, Doug. It's a good question and I appreciate it. Remember the issues we had previously, we were in the heart of COVID right, and we faced significant outs and labor issues at Newport News, which drove a lot of that. What we're seeing now is interesting; we talk about serial production lines, but the VCS program is really a production line. And when you miss, you miss schedule; there's a knock-on effect. So, as you know, we missed a couple of schedules at the end of the year, and that drifted into Q1. We've accomplished those and it's really had an impact on the future shifts, so we had to deal with that in the quarter, we reassessed our risk, and you see the results in Q1. That being said, there is some stability in that workforce now. Attendance has recovered. We're a bit short of our hiring plans, but it's not like what happened during COVID. The team is very focused on meeting their interim milestones and working their operating system very diligently. I have a lot of confidence that there is actually some upside as we move through the next couple of years on the VCS program.

So, if you go forward, you're finishing the Massachusetts, your own boats in the Arkansas, and then you will go into Block Five. How should we think about performance and margin trajectory as you move through those as well as the work that you're doing for Electric Boat and the modules for Electric Boat? How is this risk retirement likely to move in your thinking?

Yes, we’ve assessed RACs and the risk on not only Block Four but Block Five boats and reset the GACS based on how we project them to perform over the life of both of those blocks. We don't necessarily give margin guidance at a program level, but I do see after resetting that risk on Block Five going forward there's potential for upside if we're able to meet our milestones.

Thank you very much. Our next question comes from Myles Walton from UBS. Myles, your line is now open. Please go ahead with your question.

Thanks, good morning. I wanted to ask about carriers for a second, particularly the 79 and the 73. So on the 79, I think the progress the completion metric you guys provide in the press release every quarter really hasn't moved in the last several quarters. I know one of the adjustments was the single phase delivery, but I don't think that would have played out here in the first quarter. So any reason why there wasn't progress there? And then just a comment on the 73 and if the slip to 2023 made any difference for your financials. Thanks.

So I'll take the 73 one on the back of that. Right now, we're still bringing that ship in and trying to target for year-end completion through the EAC process. We are evaluating some risks to the schedule on that, that wasn't incorporated into the Q1 EAC share.

Yes, 79 we're absolutely making progress on that ship. We’re heavily into the volume part of that ship, completing compartments. If you walk through the base and that ship right now, you see a lot of installation of paint, which is a good place to be when you think about an aircraft carrier tackling that volume and then starting the test program. I don't know specifically about the math around the progress, Christie will fill you in on that after the call. But they're very dedicated and making progress really on a weekly basis on the aircraft carrier.

So no movement to the expected delivery on that vessel?

No, absolutely not.

Thank you very much. Our next question comes from Gautam Khanna from Cowen. Gautam, your line is now open. Please ask your question.

I was wondering if you could refresh us on how your contracts adjust for higher input costs, whether it be steel or what have you. Everything, like you mentioned at the outset, is moving up in price. How do you recover those? What does that do to margins? Is it just a pass-through or does it actually dampen margins? Just if you could walk through the mechanics there. Thanks.

Sure. It's Tom here. Good morning. Yes, from an inflation perspective, I know your question is focused on the existing contracts and how that fits. I'll hit that, but also now we're watching inflation as it applies to our new bids, so it's like a two-part answer. From the mechanics that we have on how that fits, as we’ve spoken about in other earnings calls, it really starts with our understanding of what we're buying and how we contract for these contracts, which can be anywhere from 48 years long. Long-lead contracts are upfront with an understanding of the material and the bill of materials. We have a very disciplined and dedicated process to ensure that we have live quotes and bids. We go hand in glove to make sure the quotes have the procurement side and ourselves locked into the contract value from a starting standpoint. While we have a clear understanding of what we buy and at the onset of these contracts, we have a good bid from our suppliers. We do run into, from time to time as we move forward, we have the contracts awarded and things purchased after that and commodity buys, and we did see increases from time to time on raw materials and commodities. I will tell you that when we have a long lead phase of a contract, it operates almost like a cost-type contract, and rolling those actions into the construction will occur. The eventuality of the construction awarded that bid helps as well. Another piece of that is when you look at our three divisions, the percentage of cost type versus fixed-price contracts break down. From a high-level perspective, it's about 50-48 fixed price and cost. So there are in the contract type, Mission Technologies has about 90% cost pricing and Newport needed 50-50, so that helps. Several of our contracts do have EPA policies, which recognizes things that we don't put on contract immediately. We have that risk covered with our bids within the estimated cost from bids that we see at the time of award and the actual costs that we pay can get adjusted based on inflationary industry factors. That helps us on that side as well. Even our flexible price contracts there is a share on that. We work ourselves through that as well. I think the toolset we have on how we manage our existing contracts and the change management process when we take on new orders to maintain the equity of those contracts, keeps us in a relatively safe space. Lastly, the majority of the cost of our existing contracts is on the labor side, especially coming through our union agreements, a four-year deal at Ingalls and a five-year deal here at Newport News. We understand those costs, and there is a schedule of increases that we consider when putting things on contract. Overall, I think it’s a well-founded process on how we handle it and plays well against these inflationary times. For new bids, I can tell you that we're seeing price increases along the lead times on new bids, and we're seeing higher costs year-over-year, but we ensure to follow the same dedicated process of getting live quotes. Our customer sets are understanding of that and bring that cost and pricing data for evaluation, ensuring we strike a reasonable risk balance here for inflation against new awards.

And just the mechanics if you would mind on if the fact you have an EPA and together, is that just an increased revenue and cost and therefore, a dampening of profit margin?

The back-end of your question. So with all that as the backdrop, the mechanics of that obviously, we go through our disciplined quarterly EAC process. We’re getting a cost weekly across multi-programs, and then obviously our quarterly EAC process, so we can see how the material is trending both against the existing orders we have and material requirements or any price adjustments. We’ll evaluate whether the EAC is improving or degrading, and the associated risks we thought were going to be retired for the quarter will get incorporated into the EAC. If there is an increase, obviously there will be an increase in costs, which will affect our profit tables, and will revise the booking rate accordingly. So all that gets factored in by ship by ship across the program and then it rolls up into our adjustments that you see here.

I'd also add that if there is EPA protection, it's an increase in sales without the resultant impact on margin. So that does provide us additional protection, and that’s in our EAC process as well every quarter.

Our next question comes from Robert Springer from Melius Research. Robert, your line is now open. Please go ahead with your question.

Thank you, Good morning. Chris, covering questions sort of at a higher level. A lot of talk about upside to defense spending from Europe, and while the export opportunity is probably great for the shipbuilding side, what kinds of products and services from Mission Technologies do you think will interest European countries?

Yes, that's a really good question, we think about it a lot. Unmanned, we’ve sold internationally, about 30% of our unmanned sales have historically been international to NATO countries in nature. And then you think about ISR surveillance, big data platforms, cyber, Intel, all of that as part of mission technologies gets some traction internationally. So we work on that; we're very tactical in how we do that. We ensure the opportunity is valid but all those are opportunities in Europe and actually any NATO country.

Okay. And then on the domestic side, the Navy leadership has been talking about priorities as follows: top priorities Columbia class, then readiness modernization and lethality improvements, and lastly capacity. Knowing that the commitment to Columbia is solid and capacity is really a function of the future budgets, how do we think about HII's access to the middle part, the readiness in the modernization part, and how does that tie with MT?

Yes. So interestingly, readiness and modernization in MT is very interesting tools related to big data and data analytics that absolutely support that. So it definitely helps provide tools and access for our customers to improve their readiness. So I actually thank you for that question. It's a very interesting area we're working on with our customer. It's all upside, right? But it will just give our customer additional capabilities. So, thanks for that.

Chris, do you see any timing or any visibility on when these things start to come through?

No, I think unmanned can happen very quickly. The award of small UUVs is very important; it provides us additional opportunity to sell that internationally. The other stuff, we'll just have to see, but I don't see a short-term sort of upside related to it.

Our next question comes from David Strauss from Barclays. David, your line is now open. Please go ahead with your question.

Good morning. Hey Chris. I think it was on the last call you talked about the discussions with the Navy in terms of additional investment in the shipyards and how that was potentially going to be split, and what it meant potentially for the expected CapEx drawdown. Can you just update us on where things stand there?

Yes, we're still working on it. I think you saw in the three budget additional funding allocated to capital and support of infrastructure in the supply base, we're in discussions with the Navy on that now. And we'll just continue to discuss that with them in order to make the investments to support their critical programs.

Okay. And Tom, on the working capital side, I think net working capital represents sales that you guys calculated was around 10% this quarter. I think that's the highest we've seen in a while, even kind of adjusting for typical seasonality. Can you just talk about the working capital trend through the course of this year and what you're baking into that free cash flow forecast for '23 and '24 from a working capital perspective? Thanks.

Sure, David. Yes. So it was 10%. And that's just upfront, that's just the timing on the working capital that we have. It's both the timing on the receipts for the accounts receivable and the collections, the payments for the accounts payable. We anticipated it would be high on the front end here right now, a little bit of a draw, as we talked about these milestones of kind of just stretching a little bit on the VCS program. As we work through the back half of the year, I see that coming down. We will finish the 2022 year at a higher level than we were in 2021, but then it's expected to come back and break our way into 2023.

Okay. What are you targeting from a net working capital as a percent of sales in '23 and '24 specifically?

So we don't give guidance specifically on that, but we are talking about a normal range. Our expectations are that 6% to 8%. This 10% is higher than our deliberate higher on that range, but not unexpected. We saw in the quarter playing out and the impact that we've discussed here. I would tell you that we would get back more into that range in 2023. 2023 is a help on cash. And then for 2024, we talked about more ship milestones and deliveries in the out years, and that's helps facilitate that working capital coming down from 10% and being more to that 6% to 8% range.

Thank you very much. And our next question comes from George Shapiro from Shapiro Research. George, your line is now open. Please go ahead with your question.

Yes, Tom I was wondering if you could just provide what the EA’s net EACs were in the quarter by division.

Sure. Yes, on the net EAC, George was $45 million, and the split of that was 90% Ingalls and 10% Mission Technologies.

Say that again. I missed the last sentence.

Yes, it was 107 favorable, 62 unfavorable for net of 45.

Okay. And then, you said that the LPD 28 was a major help in the quarter. Is that a singled out number in the queue or no?

You will see that for a $17 million adjustment. Yes. And also, it was a clean DDG-50 or delivery that we had in Q1. We usually get after both deliveries in the following quarter. We'll do a hot wash. The remaining work and profitability will happen in the next quarter. So that's been pulled into this quarter too, that kind of factored in in somewhat opening remarks of the 7% shipbuilding expectation in Q2 as we pull that margin into the Q1 timeframe.

Yes. And then if the second quarter is 7%, it would imply that the third and the fourth quarter has got to average at least as good as the first quarter, if not a little better. So if you had this one-time major benefit in the first quarter, what is the benefit you get in Q3 or Q4 to get that margin better than 8.3% to have the year at 8% to 8.1%?

All right. So we have several milestones on the back half of the year as we continue through the construction process on the LPD program. Milestones that we have, and as we bring people back on board, sales will rise with some efficiency gains on that. So we still feel comfortable with the 8.1% we highlighted at the beginning on the February call, which would be right upfront and both the sales and the margin will come in on the back half of the year.

Thank you very much. I'm not showing any further questions at this time. I'd now like to hand the call back over to Mr. Kastner for any closing remarks.

Thank you again for joining us on today's call, and your interest in HII is appreciated. We welcome your continued engagement and feedback. We'll see you out there.