Huntington Ingalls Industries, Inc. Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the Second Quarter 2022 HII Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.

Thank you. Good morning, and welcome to the Huntington Ingalls Industries' second 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 Investors 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. Before discussing the results, I would like to thank each of our 44,000 employees for the work they do every day as they remain focused on our operational pillars of safety, quality, cost, and schedule and driving the delivery of our customer commitments. Today, we reported another quarter of solid performance across each of our operating segments. These results reflect our continued focus on operational execution. Starting with our results on Page 3 of the presentation, sales of $2.7 billion for the quarter were 19.3% higher than 2021, and diluted EPS was $4.44 for the quarter, up from $3.20 in 2021. New contract awards during the quarter were approximately $2 billion, which resulted in a backlog of approximately $47 billion at the end of the quarter, of which $24.6 billion is currently funded. At Ingalls this quarter, LPD 29, Richard M. McCool Jr. was christened, and serial production continued on LPD 30, Harrisburg, and LPD 31, Pittsburgh. We were also awarded the advanced procurement contract for LPD 32. Additionally, progress continues on LHA 8, Bougainville, and long-lead material procurement continues for LHA 9, with the detailed design and construction contract award expected later this year. On the DDG program, DDG 121, Frank E. Petersen Jr., sailed away this quarter, and serial production continues on DDG 123 and subsequent DDGs. On the NSC program, we launched and christened NSC 10, Calhoun, this quarter. At Newport News, the submarine care and carrier construction and maintenance programs continued to progress. On the VCS program as discussed in the first quarter call, SSN 796, New Jersey floated off in April. In addition, SSN 798, Massachusetts achieved pressure hull complete in the quarter, and the remaining Block 4 and Block 5 boats continue to make progress. On CVN 79, Kennedy, we turned over the 1000th compartment to the Navy last month, and we will ramp the testing program later this year. CVN 80, Enterprise, is beginning to take shape in the dry dock, and early unit construction has begun on CVN 81, Doris Miller. On the RCOH program, CVN 73, USS George Washington, continues to make progress on the testing phase, and redelivery is now expected in the first quarter of 2023. CVN 74, USS John C. Stennis, continues to make progress, and pre-advanced planning is underway on CVN 75, USS Harry S. Truman. Regarding our shipbuilding labor, ensuring our shipyards have the necessary workforce to execute our backlog remains a key risk and focus area. We have hired over 2,000 craftsmen and women through the first half of the year against our full year plan of 5,000. While hiring is behind plan, we are making up this deficit using outside lease labor and overtime. Even in this current tight labor environment, we have continued to successfully bring shipbuilders on board and utilize our training programs and apprentice schools, which has positioned us to execute on our commitments. Now I want to take a moment to discuss the improvements to our execution operating system in the shipyards. Our operating system utilizes the best practices at each shipyard and allows our leaders and craftsmen across all programs to speak the same language, be predictable, and remain relentlessly focused on execution. For example, the operating system breaks a long shipbuilding construction schedule into phases, with varying durations, but they are generally 10 to 12 weeks and allow focus on the commitments and the critical path items to be accomplished in that phase. It also includes a common set of metrics and processes that provide feedback on progress and performance. I expect continued improvement of our operating system to drive our shipbuilding margin expansion opportunities and to take advantage of our significant backlog. The operating system also provides transparency to our customer, regarding progress toward the delivery of these important assets. Moving to our Mission Technologies segment, we successfully demonstrated the prototype platform, the Pharos system, which has capabilities for launching, operating with, and retrieving unmanned underwater vehicles from an amphibious ship. This achievement, which leveraged expertise across HII segments, reflects our commitment to delivering advanced technologies and multi-domain capability to support our national security customers. We also were awarded the Mobility Air Forces Distributed Mission Operations prime contract. This award is a key win in our strategy to expand our live virtual constructive customer base beyond the Navy to the Air Force and other services. Turning to Slide 5, we have provided a snapshot of the mission technologies pipeline. Among recent contract awards, we were just awarded a task order, Decisive Mission Actions and Technology Services or DMATS, to integrate new technology and capabilities and identify and characterize threats in support of the Department of Defense for the purpose of countering and deterring current and emerging global threats. This contract has a total ceiling value of over $800 million. This win is particularly important for further validating our investment thesis, which is bringing together the innovation and technical expertise of Legacy Alliance with the depth and infrastructure breadth of HII. This will create opportunity and value for our customers, shareholders, and employees, more than either company could have achieved on its own. While these strategic synergy wins are very positive, we continue to see contract award delays, putting pressure on the timing of current year revenues. However, we continue to have a very large pipeline that creates significant opportunity for bookings and sales growth. In that regard, heading into the third quarter, our mission technologies pipeline stands at $61 billion with $26 billion of qualified pipeline. The DMATS award and another expected award will drive up our book-to-bill ratio, which was 0.8 for the second quarter. All in all, I'm very pleased with the direction of the mission technologies segment, and I'm excited about the growth opportunities in areas that support our customers' critical needs. Turning to activities in Washington. The President submitted his fiscal year 2023 budget request in March, which is now under consideration by Congress. As the bill progresses through both chambers, we continue to see bipartisan support for our programs reflected in defense appropriations and authorization bills in the House and the Senate. We are very pleased to see strong support for our shipbuilding programs in the draft Senate appropriations bill released last week. This bill includes an additional Arleigh Burke-class destroyer, $250 million for LPD 33 advanced procurement, and $289 million for LHA-10, and continues the serial production of submarines, destroyers, and amphibious warships that leverage production lines and supply chains to efficiently produce the ships our nation requires. Both appropriations bills and both authorization bills include language in support of a DDG-51 multi-year procurement contract in FY 2023 and provide additional support and funding for the submarine industrial base. We are pleased with the legislative support our programs have received thus far, and final outcomes will depend on eventual respective conference negotiations between the appropriations and authorization committees. And now I will turn the call over to Tom for some remarks on our financial results.

Thanks, Chris, and good morning. Today, I will briefly review our second 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 6 of the presentation, our second quarter revenues of $2.7 billion increased approximately 19% compared to the same period last year. This increased revenue was attributable to the acquisition of Alion in the third quarter of 2021, as well as the growth in aircraft carrier revenue in Newport News Shipbuilding. Operating income for the quarter was $191 million, an increase of $63 million or 49% from the second quarter of 2021, and operating margin of 7.2% increased by 144 basis points. These increases were largely due to higher segment operating income driven by higher risk retirement and favorable changes in contract estimates, both at Ingalls and Newport News Shipbuilding, as well as a higher non-recurring equity income at Mission Technologies related to our investment in a ship repair and specialty fabrication joint venture. Results were additionally supported by more favorable non-current state income taxes and operating FAS/CAS adjustments compared to the prior period. Other net expense was $10 million in the quarter, which was primarily driven by losses on investments in marketable securities, given negative asset returns in the quarter. Our effective tax rate in the quarter was approximately 19.8% compared to 19.9% in the second quarter of last year. Net earnings in the quarter were $178 million compared to $129 million in the second quarter of 2021, and diluted earnings per share in the quarter was $4.44 compared to $3.20 in the second quarter of the previous year. Moving on to Slide 7, Ingalls revenues of $658 million in the quarter decreased $12 million or 1.8% from the same period last year, driven primarily by lower revenues on the DDG program, partially offset by higher amphibious ship revenues. Ingalls operating income of $106 million and margin of 16.1% in the quarter were up significantly from last year due to favorable changes in contract estimates as well as higher risk retirement on the LPD program, partially offset by lower DDG risk retirement. At Newport News, revenues of $1.4 billion increased by $70 million or 5.1% from the same period last year due to higher aircraft carrier revenues, partially offset by lower naval nuclear support services. Newport News operating income of $94 million and margin of 6.6% were up from last year, primarily due to favorable changes in contract estimates, partially offset by lower risk retirement on the VCS program. At Mission Technologies, revenues of $600 million increased $363 million compared to the second quarter of 2021, primarily driven by the acquisition of Alion in the third quarter of last year. Mission Technologies operating income was up $25 million compared to operating income of $13 million in the second quarter of last year. Second quarter 2022 results included a non-recurring gain of approximately $15 million related to higher equity income from our ship repair and specialty fabrication joint venture, of which we are a minority owner. Additionally, results included approximately $24 million of amortization of Alion-related purchase intangible assets. Mission Technologies EBITDA margin in the second quarter was a robust 10.7%. Turning to Slide 8, cash provided by operations was $267 million in the quarter, and net capital expenditures were $59 million or 2.2% of revenues, resulting in free cash flow of $208 million. This compares to cash from operations of $96 million, net capital expenditures of $73 million or 3.3% of revenues and free cash flow of $23 million in the second quarter of 2021. Cash contributions to our pension and other post-retirement benefit plans were $11 million in the quarter, of which less than $1 million were discretionary contributions to our qualified pension plans. During the second quarter, we paid dividends of $1.18 per share, totaling $47 million. We also repurchased approximately 80,000 shares during the quarter at an aggregate cost of approximately $17 million. Turning to Slide 9, we are reaffirming our 2022 shipbuilding sales and margin guidance, as well as our Mission Technologies margin guidance and overall free cash flow expectations, while modestly revising our Mission Technologies revenue outlook, given a slower start to the year. For Mission Technologies, we are revising our revenue expectation to a range of between $2.4 billion and $2.6 billion. This revision is a function of a slower award in the contracting environment than we had initially expected, precipitated by the continuing resolution to start the year. That said, we remain very confident and excited by the growth opportunity we see ahead for Mission Technologies. Regarding our near-term outlook, our second quarter results were positively impacted by higher risk retirement and favorable changes in contract estimates, particularly for LPD-30, as reflected in the Ingalls operating margin. The remaining shipbuilding milestones we expect to achieve in 2022 are weighted towards the fourth quarter. Given that backdrop, we expect the third quarter shipbuilding revenue to be relatively flat sequentially and shipbuilding operating margin to be approximately 7%. Regarding Mission Technologies, we expect results will begin to ramp more meaningfully as the pace of awards increases and expect third quarter sequential sales growth in the 7% to 9% range 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 target of $3.2 billion from 2020 through 2024. This outlook assumes the continued expensing of research and development costs for tax purposes. As a reminder, we believe the impact to 2022 free cash flow would be approximately $100 million if the current R&D amortization treatment remains in place. On Slide 10, we have provided a walk from our 2022 to 2024 free cash flow outlook, which is consistent with the chart we began providing earlier this year. Our strong free cash flow performance in the quarter was partially due to the pull forward from the third quarter, given this dynamic and the lack of milestones in the third quarter, we expect free cash flow to be minimal. As a result, we do expect robust free cash flow generation in the fourth quarter and see positive tailwinds on our overall 2022 free cash flow guidance. As we are in the midst of our annual long-term plan update, our reserve and update of our free cash flow guidance until that is completed will have more details on our third quarter call. Lastly, we are reaffirming our capital allocation priorities and we are committing today to return substantially all free cash flow after planned debt repayment to shareholders through 2024. This is a significant commitment, which should result in increased share repurchases, particularly in 2024, after we reach our desired debt level. To summarize, this was a strong quarter and we are pleased with our progress as we continue to navigate a challenging operating environment. With that, I will turn the call back to Chris for some final remarks before we take your questions.

Thanks, Tom. In conclusion, I will wrap up on Slide 11 with the key tenants of our investment thesis. First, we're focused on execution of our significant backlog, which provides meaningful earnings and cash flow. This coupled with our consistent long-term shipbuilding growth profile and high growth opportunities in Mission Technologies positions us to deliver significant free cash flow and generate value for our employees, customers, and shareholders. Now I'll turn the call over to Christie for Q&A.

Thanks, Chris. Operator, I will turn it over to you to manage the Q&A.

Thank you. Our first question comes from Robert Springer from Melius Research. Robert, please go ahead.

Good morning.

Good morning, Rob.

Chris or Tom, because you both talked about it, the strong Ingalls margin sounds like that was LPD-30 primarily, but you didn't change the shipbuilding margin guide. So I assume that was expected from the outset or does this reflect maybe some increased costs from labor and such in the back half of the year?

Yeah, that's a good question. This is Chris I'll start and then Tom can finish here. That was a bit of an acceleration in that milestone so we got some benefit in Q2, but labor, as I indicated previously is our greatest risk, what we're watching across the portfolio, in shipbuilding, we've hired 2,000 to over to 5,000 commitment. Now, luckily we have leased labor and we have overtime and the good news there is people are actually working overtime now. Back in 2021 and after the pandemic started, it was really hard to get people to work overtime. So they started to come back and work overtime, which helps to offset it, but labor remains our large risk. So I'll kick it over to Tom.

Sure. Just additional comment on that front is we had a milestone that LPD-30 milestone that we referenced that was planned for Q3 that accelerated to Q2. So that's the timing event, Q2 was a good quarter for Ingalls overall. They had some DDG 121 post-delivery, clean up LPD-28 and LPD-29s, some additional risk retirements. And then on the large deck, we saw like a couple of dollars that popped into Q2 there. I still think on the back end, the reason why we haven't raised guidance is we don't have as many milestones. We do have DDG 123 in Q4, and there is the back half of the year to play out as Chris has, we're watching higher and how that impacts the portfolio here right now. And as the year unfolds and we continue to retire risk we'll provide additional guidance in that front.

So just on the back of that, I mean, it sounds like you'd have upside otherwise, but how do we quantify what this leased labor and just labor inflation in general over time you talked about how does that structurally change the cost of labor in the business, if it lingers for a while?

Yeah, that's a great question. Obviously, we're fortunate in that we have labor agreements for our own employees, but leased labor can be a bit more expensive now they don't have the benefits. So you have to trade that off a bit. So what you do is you put estimates for what you think you're going to do in leased labor overtime in your EACs and that's been reflected in our margin profile. So I think it's a great question. You have to be mindful of that.

Okay. Thanks very much.

Thank you. Our next question comes from Pete Skibiski from Alembic Global. Pete, please go ahead.

Hey, good morning guys. Tom, I guess on the expectation that share repurchase will ramp in 2024, I think you mentioned we should when we're trying to figure that out the level of that, we should assume that you're going to pay off all the debt that's maturing essentially, you're not going to refinance?

That's correct. You can see we're on a cadence here about $100 million, a quarter for 100 year. We'll continue to go do that in 2022, 2023 we pay down the two-year bond, 2023, the term loan gets paid off in completion in Q3 and you can see that. So we'll follow our capital allocation policy that we have. We'll continue to keep the yard up and running. We don't see any holes in the portfolio from an M&A perspective and barring that there's nothing ultra attractive in that timeframe. We'll continue to provide all excess free cash flow back to the shareholders. And basically that desk slug that I've talked about will just kind of transition into repos if we don't have anything better to do with cash.

Okay. Thank you for that. And last one for me. Chris, are we how are you feeling in terms of extending the amphibious kind of life cycle at Ingalls? I know there were some concerns there on the LPD line, on the LHA line and it seems like you're making some progress. Do you feel like you're kind of out of the woods there as long as the kind of momentum you're seeing in Congress continues?

Yeah. So definitely some positive momentum, we're about halfway through. We like to say that it's a long process, positive momentum on LHA-10, acceleration LPD-33, and some really positive developments by the Navy and the Marine Corps on establishing 31 amphibious, which provides some clarity from a planning standpoint. So yeah, positive momentum but we need to get through the process to completion. It solidifies the revenue profile that's coupled with DDG 51, the 2023 multi-year that we're working on. All of that, all that activity within the 2023 budget really solidifies the Ingalls revenue profile moving forward.

Great, thanks guys.

Thanks.

Thank you. Our next question comes from Robert Stallard from Vertical Research Partners. Robert, please go ahead.

Thanks so much. Good morning.

Good morning.

Chris, I'll start with you following up on the labor issue. I wonder if you could also comment, not just on the numbers but the experience and skill set of the folks you've been able to get through the door how that compares to your target?

Yeah. So it's over the last couple of years, we do have a newer and greener workforce and we work very hard to train and get that workforce ready to be productive. So it's not new or unexpected for us. We've done it before but it definitely is a greener workforce. That's why I mentioned the operating system in my script. It's very important that you kind of get into the fundamentals and make sure that all our ship builders are very productive. So, but you are correct. We do have a greener workforce today, but it's not unexpected. We've seen that for the last couple of years.

Okay. And then quick follow-up for Tom, I was wondering if you could give us the latest prognosis on the pension, given that all the market moves we see and also because base rates are going higher?

Yeah. Sure. So appreciate the question. It is volatile out there, both on the capital front and interest rates on the market front. Right now, there's a favorability for the higher discount rates, which is partially offset by the unfavorable returns on the assets. It's hard to predict right now how that will play out by year-end, but we will do the re-measurement at the end of the year. Consistent with the prior years, we still will provide an update on our Q3 call for 2022 and then the outlook for 2023.

Okay. That's great. Thank you.

Thank you. Our next question comes from Seth Seifman from JPMorgan. Seth, please go ahead.

Hey thanks very much. Good morning. Just real quick, apologize if I missed it, but if you could quantify the EACs and roughly how they were allocated between the yards?

Sure. Great, Seth. Yeah, it's net of $68 million. It was 106 favorable, 38 unfavorable and on the net for $68 million, it was split between Ingalls, Newport News and Mission Technologies at a ratio of 80:15:5, so $68 million net 80:15:5.

Cool, very good and just as a quick follow-up appreciate the pace of contracting activity in Mission Technologies and we've seen it in other companies in the IT Services space. But I guess, if you could speak to the level of quarterly visibility that you have in that business, just given that the guidance came down a little bit for the year, but the quarter itself fell a little bit short and so how you what gives you confidence in sort of the remainder of the year there?

Yeah, so I'll start and I'll let Tom. In the pipeline within our presentation because we wanted to make sure everybody understood that there was a lot of opportunity in this space. It has started slow for the beginning of the year, but the win of DMATS, which will help backlog, and then book-to-bill in Q3 and the win of the LVC contract with the Air Force, which really transitioned a legacy established program from the Navy to the Air Force, which will allow us to sell to other services as well. It is a really good indicator that things are hopefully starting to break loose and really validates our strategy for the Alion acquisition. So we are seeing some things break loose. We're going to have to see how that translates into revenue, but I'll let Tom talk about how it's distributed by quarter.

Yeah, sure. So just from a baseline perspective on this question, it was $590 million in the first quarter we had gotten about 5% on $620 million, we did stop in light here at $600 million, so we finished the year off just at under $1.2 million with a run rate at about $23.80 million against initial guidance of $2.6 billion, so that's background. Going forward we do think that we will see for Q3 a run rate here of what we said the growth would be, which would be 7% to 9%. I don't know if you noticed enough, but in the PowerPoint briefing up front, we added Mission Technology slide and how we look at that business. Alion has a legacy process there, very robust on their pipeline and how they handle their work. Exploratory, $61 billion down to $27 billion on the exploratory side, they break that down to which opportunities that they can qualify and capture. We see that pipeline actually growing from the time we picked them up last year. So that's a positive sign right now. As Chris said, we were impacted at the beginning of the year with the CRA and then just the general outflow of contracting and acquisitions have been a little bit slower than we thought. We have seen some awards that popped on here in the end of Q2 timeframe, and there's still additional opportunity that will happen on the back half of the year. So I'm still optimistic on the awards front. The other piece that holds us up there is we do have more seats than we have heads right now. So like the shipyard, there's a hiring crunch there. The job market is tight, finding people with that type of background and tickets, so there are seats there we have unfilled, bringing in some variability on the sales outcome of the year. But we still have the $2.4 billion to $2.6 billion. We haven't let go of the top end, depending on a couple of awards, which the awards will really affect next year sales and this, and filling the seats that are unoccupied. We believe that we're still in the range there between $2.4 billion and $2.6 billion.

Great. Thanks for the detailed responses. Thank you.

Thank you. Our next question comes from Gautam Khanna from Cowen. Gautam, please go ahead.

Hey, good morning guys.

Good morning, Gautam.

I was wondering if you could talk a little bit about the VCS program. There's been a lot of press and GAO, and industry scuttle about the program being well behind schedule. Obviously, you guys took a big charge in Q2 of 2020. It looks like there was another negative EAC in this quarter. Just where are we on the program relative to your expectations? And if you could just maybe give us some color on what your accrual rate might be?

Yes. So thanks. I'm sorry. I'll let you finish. Did you have anything else?

No, please. No, that's great. Thank you.

Okay, great. Yes, so the VCS program, I would characterize that as stable from a scheduling standpoint and over the last few quarters it's been stable from an EAC standpoint, actually. There's always minor adjustments from quarter-to-quarter but I think some of the data you may be referencing is a bit dated as you know, we do quarterly EACs. We incorporate the risk in all of the ships and boats on a quarterly basis. So I'm pretty comfortable with where we are from an EAC standpoint on the VCS. I don't think any of us are comfortable relative to how we've performed historically on the program; we need to improve, right? I think the Newport News team is very motivated and dedicated to getting it right. They're making progress. There's some potential momentum within Block 4 which we ought to translate into Block 5. I think there's some upside in Block 5. So I think the team is very focused. I think they're working the operating system very well. We need to get back to two per year. We need to get these assets back to our customer because they need them. So I would consider it stable from a schedule standpoint, and we need to continue to improve from a cost standpoint. Any details, I'll send over to Tom here.

Sure. Yes. I think when we took that charge back in Q2 of 2020, the preface of that was we had a list already with Columbia coming online, we saw that ramping up. Getting to full two cadences, launch and sell off a ship a year. There was already a list and a risk and a hiring ramp right there, obviously in 2020 after two quarters of that kind of midyear we saw with COVID impacting us, that continued without a prime into 2021. So there's been pressure on the program from what was the baseline of already being able to do two plus one between those two programs, hiring ramp with more junior people on board, and then that line that we've talked about in the past calls is very serial in nature. More than any of our other lines, each boat goes exactly through crew to crew. If one boat in front of us gets impacted, it affects the line behind it, both the crews being able to cycle and then the schedule aspect of each boat. So I think when we took that look, see where we were in Q2 of 2020, we had a perspective of what was in the order was possible and how we could recover or we'll finish off the back end of Block 4 as that translates into Block 5. So I think, as Chris says, we're relying on the operating system, we're trying to stay to our manning plan that we have. We're doing lessons learned from boat to boat. We are seeing incremental improvement from operational where we were a quarter ago to now. So that's a positive sign right now. As Chris says, we run a very rigorous EAC process and we look at our labor and material and overhead, a run-out, reevaluating our booking rates, the changes on that large. So you don't see them on the downside there, but we do have incremental changes from quarter-to-quarter here. So possible with where we're booking these ships right now.

Thank you very much, guys.

Thank you. Our next question comes from George Shapiro from Shapiro Research. George, please go ahead.

Yes. Good morning.

Good morning.

Good morning.

My question is, if you take your EACs, it would imply the underlying margin that Ingalls is like 7.9%, which is generally higher than what you've seen in the past around 7%. So I was just wondering, is that just unique to this quarter? Or is this more of an ongoing underlying margin rate?

Yes, it is a little bit unique for this quarter. That's a high number. The run range from Ingalls is usually lower than upper 6s and low 7s. I think just how all the map kind of played out with the performance list. We talked about the economic adjustments that were allowed because of the clauses that we have in the contract. So you may just be a little high there, but generally speaking, we've talked about the maturity, the portfolio data at Ingalls, more our serial production and follow on ships down there. Their run rate is out in front of Newport News. We generally say it's between 6% and 7%. So I'd leave you with that, George.

Yes, no, that's really the question. If I did the numbers this quarter, it looks like it would come out to seven, nine. And like you suggest it's normally like closer to seven. So I'm just wondering if there's something unique that made this quarter out of line or is it at new run rate?

It's not a new run rate. It's just how the match plays out to the quarter.

Okay. Thanks very much.

Thanks, George.

Thank you. Our next question comes from David Strauss with Barclays. David, please go ahead.

Thanks. Good morning.

Good morning.

Tom, wanted to ask about the free cash flow of cadence. I know you mentioned Q3 close to, I guess, zero break-even, but I think you're still calling for a pretty meaningful working capital tailwind in the second half of the year. It looks like CapEx might be trending towards the lower end of your range. What keeps you from coming in a decent amount above kind of the 300 to 350, assuming R&D, it doesn't happen?

Yes. So astute question and you're putting pieces together out there. As we highlighted in the opening comments, we did say 300 to 350, we're holding that right now. I do feel comfortable that with the risk we've seen behind us and in front of us, we still have like five months of the year to play out. But right now, we do see although Q3 will be light just the way that year is playing out, Q2 and Q4 are going to be the cash flow quarters. But I do see we've been the COVID repay is pushed to the back half of the year. As I come through our planning process and I have the complete visibility in how the year is going to play out is the COVID repay either happening this year or next year, that's more of a timing play. The R&D amortization you referenced; we'll see how that plays, but that could be the $100 million that we talk about as a down take this year could go away. If the law changes, it seems like there's some traction and momentum to get attached to a bill at the back half of the year. That changes over. We could see the 100 million go away as we force out on a downside, and then it would validate the 3.2 billion over the five years. Cash from operations was very strong in Q2. We saw some nice pickups as far as older contracts, some service contracts we're able to get COVID costs that we had on our books included in our billing rates. So that was a pickup. That's how Q2 kind of played out. When you think about Q4 on the back half of the year, I have 123 delivery. On the DDG side, I have a couple of supply capital incentives that play out LHA 8 billings, LHA 9 with the construction award helped clean up the long-lead contract that I have on there for cash. CVN 81 is going to be able to have progress payment billings as they work through kind of getting into Q4. We have some incentives on BCF and then Laurie Knowles kind of kick in that I'll use at the end of the year too. So a good upside potential there, but I'm not ready to call that ball until I can get through our planning process.

Okay. Thanks. And I mean, is any of this borrowing from kind of the upside you've talked about for 2023 going up to 750 to 800, or do you think maybe there's a little bit upside, but the plans full unpack to get to those kind of numbers in 2023?

So just to be clear, the majority of what I talked about is in the plan and the forecast right now. Those things could kick out, $25 million, $50 million, $75 million upside; the tiny aspect would be the COVID repay. So if I do not have to pay it at the end of this year, that would be a pull forward from 2023 to now. But I believe by the time we have our Q3 call in November, I will have complete clarity into that and I'll give you more visibility to that.

Okay. Thanks very much.

Thank you. Our next question comes from Ron Epstein from Bank of America. Ron, please go ahead.

Hey, good morning guys. Maybe why don't you just walk through a couple of different programs and how things are going? In the unmanned underwater vehicle business, I mean, how's Excel UUV coming for you guys with Boeing?

Yes. So Excel is progressing. We've delivered our first unit to Boeing really kind of a test unit. We're progressing through the other units, so it's going okay. I think normal, first of class issues that you have on a new program, on a development sort of program. So it's going okay.

Okay, great. And then maybe just another program, if we can, on the next-generation destroyer, where does that stand and when do you think there'd be competition for that and what's going on there, if you could give us an update on the DDG(X)?

Yes. So I think you may have seen in the press, we got the next contract for development there, kind of concept development working. I think the Navy's done some really smart things in this regard and with Bath and Ingalls working on the development of that program. I think the important thing on the DDG programs is to ensure we don't stop building DDG 51s prior to transitioning, getting the design correct on the next-generation destroyer. I think that's a smart move. I think they're continuing with the design effort in both shipyards, and we're continuing to build DDG 51. So I think it makes great sense right now.

Okay. Okay. Okay. And then I might have missed this, but maybe not. Where did we stand on the Coast Guard offshore patrol cutter? Was that formally awarded yet or where did we stand on that program?

Yes, it was awarded, it was not awarded to us. It was disappointing. We know how to build those ships. The Coast Guard is a great customer. But we were not awarded that.

Is there another opportunity for that poll in another competition?

Not sure. I mean, they're just coming through this competition for the next block of those boats. So not sure at this point.

Got it. Got it. And maybe just one last one; when we look down the road at maybe in future things you potentially could be bidding for, what can we be looking out for?

Yes. So interesting. Newport News is full, right? They've got a lot of the work to do. They're executing on it. Their legacy programs will continue over the medium to long-term actually. Ingalls is based on the pace of LHAs and LPDs; they're going to be in a very good place, but they have other opportunities. They have a DDG 1000 down there now, and they're doing some combat system upgrades for that. There’s potential other DDG 1000 work that might be available. Other repair sort of activity; but Ingalls is a pretty scrappy group. I wouldn't count them out and with the pace of LHAs and LPDs, we've got a lot of time to figure that out.

Okay, great. Thank you.

Sure.

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

Okay. Thank you for your interest in HII. We welcome your continued engagement and feedback. Please have a safe and great rest of summer. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.