Ladies and gentlemen, thank you for standing by. And welcome to the Fourth 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. Ms. Thomas, you may begin.

Thank you, Operator, and good morning, everyone. Welcome to the HII fourth quarter 2022 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, any forward-looking statements made today that are not historical facts are considered our company’s estimates or expectations and are forward-looking statements made pursuant to the Safe Harbor provision of federal securities law. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. 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 the Investor Relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Thanks, Christie. Good morning, everyone. And thank you for joining us on our fourth quarter 2022 earnings call. First, I would like to thank the entire HII team for a solid year and express my gratitude for their outstanding contributions throughout 2022. It was through their dedication and commitment that we were able to deliver results that demonstrated consistent performance in a challenging economic environment. Now let’s turn to the highlights for the quarter and the year on page three of the presentation. In 2022, we reported record sales of $10.7 billion, net earnings of $579 million and free cash flow of $494 million. The demand for our products continues to drive a tremendous backlog of $47 billion, and we grew sales and earnings across all three of our segments in 2022, setting the foundation for continued growth in 2023 and beyond. At Ingalls, in the fourth quarter, we delivered DDG 123 Lenah Sutcliffe Higbee and completed builders’ trials on DDG 125 Jack H. Lucas, the first Flight III ship just one quarter after DDG 123 completed her trials. Our DDG 51 team also started fabrication on DDG 133 Sam Nunn. In our amphibious ship product line, we were awarded a $2.4 billion detailed design and construction contract and started fabrication for LHA 9 Fallujah, the fourth big deck amphibious warship in the America class. Also at Ingalls, in January, we were awarded the advanced planning contract for the modernization period for Zumwalt-class guided missile destroyers. At Newport News in the fourth quarter, we authenticated a keel for SSN 800 Arkansas, honoring the ship sponsors to Little Rock 9. We continue to remain focused on reducing risk and meeting cost and schedule objectives on the Virginia-class boats. As for our nuclear aircraft carrier, CVN 79 Kennedy is well into the test program. Distributed systems such as fire main, potable water, air conditioning, and ventilation are coming to life. The EMALS Catapult system, which we began testing in 2022 remains on track and is progressing as planned through her test program and we expect to enter into the Combat Systems Test program later this quarter. And finally, for the refueling and complex overhaul of CVN 73 USS George Washington, we are 98% complete as we near planned re-delivery later this year. At Mission Technologies, we achieved solid revenue growth for 2022, with all of the business groups growing year-over-year and we ended the year with a robust potential business pipeline of $66 billion, of which over one-third is qualified. Significant wins in 2022 included the Decisive Mission Actions and Technology Services contract, Mobility Air Forces Distributed Mission Operations contract, and the Remus 300 selection as the U.S. Navy's small UUV program of record. From an operational perspective, we have integrated Alion into our Mission Technologies and HII team and with the integration complete, we can turn our full attention towards executing our growth strategy. Moving on to slide four. We are providing the major milestones for 2023 and 2024. I am proud to say that we met all of the Shipbuilding milestones that we highlighted back in the second quarter of last year for 2022 and we are maintaining all of the 2023 milestones. This demonstrates growing confidence in our ship schedules and provides a solid platform to continue to improve our cost performance. Notable anticipated 2023 milestones at Newport News include the planned delivery of SSN 796 New Jersey and planned float off of SSN 798 Massachusetts, as well as the planned re-delivery of CVN 73 and planned crew move aboard on CVN 79. At Ingalls, DDG 125, NSC 10 Calhoun, and LPD 29 Richard M. McCool Jr. are all forecast to deliver this year, while LHA 8 Bougainville is expected to launch. In addition to these Shipbuilding milestones, Mission Technologies expects to see continued growth resulting from our large opportunity pipeline, including several award decisions that we expect to be made in the first half of the year. Now I would like to discuss our operational focus areas. Our top operational priority remains hiring and workforce development. I am confident in our plans for hiring, as well as our retention and training strategies. These strategies, which center around employee skills and leadership development, are gaining traction, and we have had a good start to the year. After hiring over 4,900 craft personnel in 2022, we expect a similar hiring rate in 2023, while at the same time, improving our productivity, attendance, and overtime together to drive performance. Regarding inflation, we have some insulation through our contracting terms and conditions. However, non-programmatic elements of inflation have impacted us across all of our programs. And finally, the supply chain is stabilizing, and we have worked closely with our customers and suppliers to achieve the best possible schedules. To summarize, and notwithstanding being our most significant risk, as labor and supply chain impacts continue to stabilize and inflation abate, we believe we have the opportunity for improved performance over the next few years. Turning to the budget environment, we are pleased with the passage and enactment of the fiscal year 2023 Defense Appropriations and Defense Authorization Bills. Both pieces of legislation strongly support Shipbuilding, including funding and authority for an additional DDG 51 Flight III ship for a total of three DDGs, two Virginia-class attack submarines, the Columbia-class ballistic missile submarine program, Ford-class nuclear aircraft carrier programs, and the refueling and complex overhaul of CVN 74 John C. Stennis. Both Appropriations and Authorization Bills continue funding for LPD 32 and LHA 9 and provide new advanced procurement funding for LPD 33, LHA 10, and a third DDG 51 in FY 2024. The Defense Authorization Act also includes language requiring a naval fleet of no less than 31 operational amphibious warships, including a minimum of 10 amphibious assault ships. We continue to see bipartisan congressional support for our programs. We look forward to working with the administration and Congress on the President’s fiscal year 2024 budget request. With that, I will turn the call over to Tom for some remarks on our financial results and guidance, and then I have a few additional comments before we move on to Q&A.

Thanks, Chris, and good morning. Today, I will briefly review our fourth quarter and full year results and also provide an outlook for 2023. 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 fourth quarter results on slide five of the presentation. Our fourth quarter revenues of $2.8 billion increased approximately 5% compared to the same period last year. This growth was driven by higher year-over-year revenue at all three segments, leading to record quarterly revenue for HII. Operating income for the quarter of $105 million decreased by $15 million or 12.5% from the fourth quarter of 2021, and operating margin of 3.7%, compared to a margin of 4.5% in the prior year period. The decrease in operating income was primarily due to lower segment operating income. Net earnings in the quarter were $123 million, compared to $120 million in the fourth quarter of 2021. Diluted earnings per share in the quarter were $3.07, compared to $2.99 in the fourth quarter of the previous year. Moving to our consolidated results for the full year on slide six, revenues were $10.7 billion for the year, an increase of 12.1% from 2021. The increase was driven by year-over-year growth at all three segments, along with a full year of Alion revenue. Operating income for the year was $565 million and operating margin was 5.3%. This compares to operating income of $513 million and operating margin of 5.4% in 2021. The operating income growth was driven by year-over-year improvement at all three segments, as well as a more favorable non-current state income taxes and operating FAS/CAS adjustment. Net earnings for the year were $579 million, compared to $544 million in 2021, and diluted earnings per share were $14.44, compared to $13.50 in the previous year. Moving on to slide seven. Ingalls’ 2022 revenues of $2.6 billion increased $42 million or 1.7% from 2021, driven primarily by higher revenues in the LHA and DDG programs, partially offset by lower NSC program revenues. Ingalls’ 2022 operating income of $292 million and margin of 11.4%, both improved from $281 million and 11.1% last year. These results were driven primarily by favorable changes in contract estimates and price adjustment clauses, as well as higher risk retirement on the LPD program, partially offset by lower risk retirement on the DDG program compared to 2021. At Newport News, 2022 revenues of $5.9 billion increased by $189 million or 3.3% from 2021, primarily due to higher revenues in both aircraft carriers and submarines, partially offset by a lower revenue in naval nuclear support services. Increased aircraft carrier revenues were driven by higher volumes on the refueling and complex overhaul of the USS John C. Stennis CVN 74 and the construction of Doris Miller CVN 81 and Enterprise CVN 80, partially offset by lower volumes on the refueling and overhaul of the USS George Washington CVN 73 and USS Gerald R. Ford CVN 78. Submarine revenue growth was due to higher volumes on the Columbia-class and Block V boats on the Virginia-class, partially offset by lower volumes on the Virginia-class Block IV boats. Newport News 2022 operating income of $357 million and margin of 6.1% were relatively consistent with the performance in 2021 of $352 million and margin of 6.2%. 2022 results included favorable changes in contract estimates from facilities, capital, and price adjustment clauses, as well as contract incentives on the Columbia-class submarine program, partially offset by lower risk retirement on the VCS program and the refueling overhaul of the USS George Washington CVN 73 compared to 2021. 2022 Shipbuilding margin of 7.7% was consistent with the performance of 2021, but below our expectations for year-over-year improvement, as the back half of the year provided limited risk retirement opportunities. Continued labor challenges, including high attrition rates, the impact of non-programmatic inflation, and supply chain disruption all contributed to slower margin progress. At Mission Technologies, revenues of $2.4 billion increased $911 million or 61.7% from 2021, primarily driven by the acquisition of Alion in the third quarter of 2021. Mission Technologies’ operating income of $63 million compares to operating income of $50 million in 2021. Primary drivers of growth are the acquisition of Alion in 2021, as well as higher equity income from a joint venture, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition. 2022 results included approximately $96 million of amortization of Alion-related purchased intangibles compared to approximately $33 million in 2021. I will also note that the fourth quarter and 2022 results included a non-cash downward valuation adjustment of approximately $10 million or approximately $0.20 per share related to an equity method investment. Mission Technologies’ EBITDA margin in 2022 was 8.2% and adjusting out the one-time downward valuation adjustment, EBITDA margin was 8.6%, consistent with 2021 performance. Turning to capital deployment on slide eight. We ended 2022 with a cash balance of $467 million and liquidity of approximately $2 billion. 2022 cash from operations was $766 million and free cash flow was $494 million. Free cash flow generated in the fourth quarter of 2022 was significantly above our prior expectations, as we were able to accelerate several large cash collection events. This has a direct impact on our expectation for 2023 free cash flow, which I will discuss in more detail in a moment. I am pleased to report that the net capital expenditures were $272 million or 2.5% of revenues in 2022 at the very bottom end of the guidance range. Cash contributions to our pension and other post-retirement benefit plans totaled $41 million in 2022. During the fourth quarter, we paid dividends of $1.24 per share or $50 million bringing total dividends paid for the year to $192 million. Over the course of 2022, we repurchased approximately 245,000 shares at an aggregate cost of approximately $52 million. Moving on to slide nine and our updated outlook for pension and post-retirement benefits. Our outlook for 2023 has improved modestly from the update we provided in November, given the increase in discount rates since that time. Asset returns for 2022 of negative 16.1% are about as expected compared to our update in the third quarter. Expectations for 2024 through 2026 have been updated and consistent with the Q3 update, the FAS benefit has come down considerably from our last update, given the more immediate recognition of the negative asset returns experienced in 2022. This is partially offset by the impact of higher discount rates. We also have provided an initial review of our 2027 expectations. Turning to slide 10 and our outlook for 2023, while we continue to expect Shipbuilding growth of approximately 3% over time, our 2023 outlook range of $8.4 billion to $8.6 billion acknowledges uncertainties around the current environment, particularly the labor challenges we have discussed. For 2023, we expect Shipbuilding operating margin between 7.7% and 8%, as we continue to target incremental margin improvement, but acknowledge the current challenges have tempered the pace of that progress. For Mission Technologies, we expect 2023 revenue of approximately $2.5 billion, organic growth of approximately 5% year-over-year. We expect operating margins of between 2.5% and 3% and EBITDA margins of between 8% and 8.5%. In 2023, amortization of purchased intangible assets is expected to total approximately $128 million, of which $109 million is attributable to Mission Technologies. We expect 2023 capital expenditures to be approximately 3% of sales. Moving on to expectations for the first quarter of 2023, we expect overall revenue growth for the first quarter to be quite modest given normal seasonality in Mission Technologies and the strong fourth quarter performance for Shipbuilding, which benefited from favorable material timing. Additionally, given the timing of the Shipbuilding program milestones and the mentioned Mission Technology seasonality, we expect first quarter segment operating results to be the weakest of the year, with the Shipbuilding operating margin near 7% and Mission Technologies operating margin near 1%. The outlook we are providing today is based on the best information we currently have and assumes no further degradation in our supply chain, that non-programmatic impacts from inflation continue to abate, and most importantly, that we are able to continue to hire and retain employees at a pace that supports our staffing plan. Additionally, on slide 10, we have provided our updated outlook for a number of other discrete items to assist with your modeling. On slide 11, we have provided an updated view on our free cash flow expectations through 2024, consistent with how we presented this data in the third quarter. This outlook assumes the current R&D amortization treatment for tax purposes remains in place and we are reaffirming the $2.9 billion target. If Section 174 is deferred or repealed, all else being equal, there would be an opportunity of approximately $215 million in total for the cost of 2023 and 2024. As I noted earlier, we significantly outperformed our 2022 free cash flow expectation of approximately $350 million by accelerating collections. This timing difference, along with the delay of the planned COVID-19 repayment now into this year have impacted 2023 free cash flow expectations. Consistent with our normal seasonality, we expect the first quarter of 2023 free cash flow will be the weakest of the year and given the pull-forward of collections into the fourth quarter of 2022, it is likely to be an outflow of $200 million to $300 million. Our free cash flow expectation for 2024 remains unchanged, as it will not be burdened by COVID-19 repayment and will benefit from continued topline growth and margin expansion potential as compared to 2022. Additionally, we expect to see sub-6% working capital levels as a percentage of sales in 2024. We are reaffirming our capital allocation priorities focused on debt paydown, which is on pace to retire about the $400 million bond this year and the remainder of our Alion acquisition term loan in 2024, and our commitment to return substantially all free cash flow after planned debt repayment to shareholders through 2024. To close my remarks, it was no doubt a challenging year, but I am proud of the entire HII team and the important work we accomplished across the business, from successfully meeting all of our planned Shipbuilding milestones to the critical integration work that was completed timely and under budget at Mission Technologies. Across the enterprise, we made meaningful progress in 2022, which resulted in growth across all segments and free cash flow results that were well ahead of our projections. We entered 2023 intent on driving execution and are well positioned to deliver profitable growth. With that, I will turn the call back over to Chris for some final remarks before we take your questions.

Thanks, Tom. In summary, we delivered consistent results in 2022, and we believe we are well positioned to grow in markets of critical importance to our customers, while executing on almost $50 billion of backlog in 2023 and beyond. We will continue to make long-term strategic decisions that benefit our employees, customers, and shareholders, creating long-term value for all of our stakeholders. Now I will turn the call over to Christie for Q&A.

Thanks, Chris. 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.

Thank you. Our first question today comes from Myles Walton from Wolfe Research. Please go ahead, Myles. Your line is now open.

Thanks. Good morning.

Hi, Myles.

The first one, maybe at a high level, is this still a 9% plus Shipbuilding margin business?

Yeah. Definitely. I believe that we have come through some challenging times with COVID and we have got some ships that are still working through that. Ingalls is obviously north of that, and Newport News is making great strides. And I think the biggest issue we can work on at Newport News is simply work in the operating system, getting the Block IV boats delivered over the next two years and three years and transitioning to Block V. So, yeah, absolutely, it’s a 9% business. I am not going to give a forecast for when that’s going to happen, but I do expect performance to continue to improve from here.

Okay. And then, Chris or Tom, I don’t know, in terms of the plug for capital deployment for share repurchase, I guess, it’s $250 million to $300 million in 2023, 2024 is what you plan to do. Do you have any sights on doing that a little bit earlier, or do you have to wait until 2024 as big cash flow comes through to have confidence to execute against it?

Yeah. Myles, this is Tom. We haven't provided a specific number yet, but if you calculate based on our revenue expectations and margin growth, along with the free cash flow projections and capital expenditures, the figures align accordingly. As the year progresses, we expect to generate cash and continue buying back shares when we find the share price attractive. However, we haven't indicated how this will be distributed over 2023 and 2024. We remain committed to returning all excess free cash flow to shareholders following our debt repayment schedule.

And then just one clarification, what is non-programmatic inflation?

Sure, Myles. An example of that would be related to expenses at the end of the year that turned out to be higher than we had forecasted, like medical benefits and insurance premiums; we just didn’t estimate those correctly.

And we have seen tight marketing expenses.

All right. Thank you.

Thank you. Our next question comes from Robert Spingarn from Melius Research. Please go ahead, Robert. Your line is now open.

Hi. Good morning.

Good morning, Rob.

Good morning.

Chris, you talked a lot about the labor constraint, and I wanted to see if you could give us some granularity as to how that number splits between the two shipyards and Mission Technologies. One thing I have noted is if we look at your job postings, it seems like Newport News has 10x the openings of Ingalls. Does that factor into the margins there?

Not really. Mission Technologies is pretty stable, adding throughout the year with really industry standard attrition rates in a very competitive market. We plan to add about 5,000 shipbuilders throughout the year, and then there are some positive indications in not only hiring but also overtime, attendance, and attrition. So there are some positive indicators. I wouldn’t necessarily relate it back to margin. Newport News will hire more this year than Ingalls. We don’t break that out separately. But I wouldn’t necessarily relate that back to margin, no.

Okay. And then just as a follow-up to that, could there be upside to the 3% topline growth if Congress appropriated more funds to expand shipyard capacity and fund training and apprenticeship programs?

Yeah. But the constraint is labor. Our shipyards are facilitized to grow in excess really of that 3%, but we need to be conservative in how we project how we are going to add labor over the next few years. But is there upside? Yes, of course.

Yeah. I guess I am asking you is can they help you attract labor faster and train labor faster? The benefit to get the ship...

Yeah. Interestingly enough, there’s a lot of initiatives both at the state and federal level to help in workforce development. And we are actively communicating with both states that are involved in that and the federal government for infrastructure and workforce development support.

Okay. Thanks, Chris.

Sure.

Thank you. Our next question comes from Scott Deuschle from Credit Suisse. Please go ahead. Your line is now open.

Hey. Good morning.

Good morning, Scott.

Good morning.

Tom, did CVN 79 book a net-net negative EAC in Q4? Just trying to interpret what’s in the press release on the year-over-year comparison there? Thanks.

We don’t disclose the specific margin booking rates to provide a detailed step up or step back on any individual program. To give you some insight on the adjustments, there was nothing notable impacting any specific program. So, to answer your question, no. The situation at Newport News reflects a net decline due mainly to a lack of expected upside. If we look at the downside regarding the Estimate at Completion adjustments, it relates to the timing of milestones and some shortfalls in labor, along with a bit of pressure on overhead costs, which are slightly elevated across all the programs there. CVN 79 has also experienced this effect, but it wasn't substantial enough to be mentioned in the report.

Scott, I want to mention that CVN 79 had a strong year. They fulfilled their compartment commitments, and EMALS is nearly complete. It's impressive. I visited last week, and the equipment is installed, and they've started the test program. The topside test program has kicked off, so they have gained some momentum. I dislike using a football analogy, but with the big game this weekend, 79 is like gaining four yards at a time. They are consistently handling a lot of volume work. They met last year’s commitments and have plenty of work ahead, but I am optimistic about the success of that program.

Great. And then, Chris, what were the, sorry, if I missed this, but what were the gross and net headcount additions in the Shipbuilding business in 2022 and then just curious on how attrition trended in Q4 sequentially relative to Q3? Thank you.

Attrition improved throughout the year. I don’t have the exact number, but we added about 5,000 employees, and the trend showed improvement as the year progressed, continuing into January. There is some stability emerging in the Shipbuilding organizations, not just in terms of labor but also regarding supply chain and inflation. Although we haven't returned to pre-pandemic levels, the situation has definitely stabilized, which is essential for us to execute effectively.

Thanks, guys. Appreciate it.

Sure.

Thanks, Scott.

Thank you. Our next question comes from Pete Skibitski from Alembic Global. Please go ahead. Your line is now open.

Hey. Good morning, guys.

Hi.

Just going back to Kennedy, it’s a big contract for you guys at fixed price, and I was just wondering, my recollection was 2023, 2024, you guys are going to have some big risk milestones on that project. It sounds like that’s still going to happen. But is just the labor situation has kind of eaten up the upside on that potential risk retirement, is that the right way to think about it?

I wouldn’t necessarily say it’s eating up all the upside. I would say that we are very conservative in how we deal with the EAC and there’s a lot of really complex work in front of us. So I would not necessarily say it’s eating up all the upside.

Okay. Just a follow-up on that, in Newport News, is VCS Block IV the main contributor to margins? Is the Block IV roll-off over the next two years expected to provide more relief than anything else?

It will definitely give us a lot more confidence moving forward after we get those Block IV boats delivered and transition into Block V.

Okay. And Chris, regarding that, it's clear that labor affects all your programs, but Block IV has had a particularly aggressive schedule. Is that one of the reasons it has been such a challenge for you? Is that a fair assessment?

Well, remember, Block IV was impacted the most by COVID, right? We had a pretty material impact back in 2020, which really reduced our profit expectations on those boats. So we just need to get through them. We need to get them delivered. The program schedules are pretty stable right now and a lot of cooperation between Electric Boat, Newport News, and really senior Navy to get through those program schedules. So we just need to get through them and then we will transition into Block V.

Chris, I'd like to add to that. Regarding your question about Block IV or V, Block IV has faced challenges due to COVID in 2021 and 2022. This has affected the long-term financial estimates for those contracts with some added costs. There are two key points to consider. First, completing the Block IV submarines will improve the product mix at Newport News, as you mentioned. Second, these submarines allow us to gain experience, learn from our operations, and refine our production system. It's important to recognize that this production line is particularly efficient, with modules being integrated and personnel moving between units. Successfully finishing Block IV will also enhance Block V, which has greater profit potential, shifting the overall portfolio at Newport News. We reached a tipping point at the end of last year, where sales of Block V now surpass those of Block IV. Therefore, as we complete more boats, we can expect to see natural improvements and increased profitability from Block V influencing Newport's overall portfolio.

Got it. Thanks, guys.

Thanks.

Thank you. Our next question comes from David Strauss from Barclays. Please go ahead, David. Your line is now open.

Thanks. Good morning.

Good morning.

Tom, I have a question I've asked before about working capital. You clearly showed a significant improvement in working capital in the fourth quarter. It seems that your guidance for cash suggests you are assuming fairly neutral working capital for 2023, is that right? Also, could you explain how you plan to move from $400 million and $450 million in cash in 2023 to the figure you’re targeting for 2024? I assume some of that will come from CapEx, but what else will contribute to reaching that number?

Sure. I will break that down and cover several points. I will mention the percentage on working capital last as we go through it. We updated slide 11 of the presentation, where we finished at $494 million, which is quite healthy compared to our expectations at the start of the year of $300 million to $350 million. We adjusted that midyear to a range of $200 million to $250 million, and later projected $350 million for Q3, but ended up at $494 million with strong free cash flow in 2022. This has led us to adjust our expectations for 2023 downwards. Our previous guidance was $545 million to $595 million, with a midpoint of $570 million, but due to this pull ahead, we now set expectations at $400 million to $450 million. Regarding working capital, a few quarters ago, we were at 11.1%, then around 10% last quarter, and finished 2022 at 6.1%. We have been guiding over the past few years about increased workload and the timing of deliveries and launches, and that trend continues. According to our milestone chart, we are moving from three deliveries in 2022 to five in 2023, along with three launches this year, marking a significant year ahead. For 2024, we anticipate two deliveries and three launches. This influx of activity will assist in managing working capital, reducing retention, and improving free cash flow. While we finished at 6.1% working capital, we expect a slight increase to about 6.5% in 2023 due to some incentives. So, the additional deliveries will lead to a small rise in working capital, negatively impacting our projections. We also adjusted our CapEx guidance from 2.5% to 3%, presenting additional headwinds. Despite these challenges, we expect working capital to finish around $425 million in 2023, taking into account the repayment of COVID losses, which stands at about $125 million. Looking at our performance over the past three years against our five-year commitment, we averaged around $567 million in free cash flow, and we anticipate needing about $600 million annually. Although we are behind in these first three years, we expected this due to factors like retention, revenue, and margin expansion. With Alion contributing positively since last year, we are optimistic about their impact moving forward. We expect to see stable EBITDA margins from 2021 to 2022, with some margin expansion expected in 2023 as our Shipbuilding top line grows, with guidance set at $486 million. We project continued increases in revenue and margins into 2024. In reviewing our free cash flow numbers, the $757 million had significant boosts from a FICA release of $130 million and a COVID repayment benefit of $160 million. When you adjust for these, the normalized figure is closer to $467 million for that year. The $449 million from 2021 includes a FICA repayment, bringing it to about $510 million when adjusted, and the $494 million in 2022 also contained $65 million from FICA, totaling $550 million. Given our projections for 2023, we expect $450 million, adjusted by the COVID repayment, might result in a $550 million year, and I believe we can effectively manage our risk and cash. With our average achieving $567 million in the first three years, to reach $780 million, we're anticipating working capital to decline by around two points. As previously mentioned, we expect to finish 2023 in the mid-6s for working capital and drop below 5% in 2024, which translates into about $200 million in margin against the topline of $10.8 million. Consequently, $550 million plus $200 million gives us $750 million. I’m estimating a midpoint of $780 million, factoring in revenue growth and margin expansion. I feel confident about our current trajectory, and we can address any questions you may have during our calls afterward.

Okay. That’s a lot of detail. Thank you for that. And Chris, as a follow-up on Mission Technologies, the EBITDA margin there, which I guess is the right way to look at 18.5%. How do we think about those as longer term? I mean, those are well below kind of what we see out of typical kind of services companies and you pitch this is not just your typical kind of services business. So how do we think about those EBITDA margin, I guess, the potential there? Thanks.

Yeah. Thanks, David. You have to remember that the vast majority of that work is cost-plus. So that would indicate that you would have a lower EBITDA percentage. I do think there’s opportunity for upside as we present more solutions and move into a fixed price sort of arrangement. We are not prepared to say that it’s going to get better than that right now, but there is opportunity for improvement and that’s something we are evaluating.

Thank you.

Thanks.

Thank you. Our next question comes from Doug Harned from AllianceBernstein. Please go ahead. Your line is now open.

Great. Thank you. Good morning.

Good morning.

Good morning.

So I want to go back to Newport News and you had a 5.1% margin this quarter. That follows Q3 that if I take out the Columbia-class benefit, that was 4.1%. And what I want to understand is you have still got certainly the Massachusetts and the New Jersey flowing through there. And so the work that you have done on Block IV where you have taken charges in the past, I mean, how much of this, what I would call, kind of a low margin in Newport News is due to the overhang of those past charges. So then when you get out from under those, should we expect a step up?

Well, yeah, Doug, this is Chris. I will start and then Tom can jump in there. There’s absolutely an overhang related to Block IV boats that we are dealing with, and so we should expect a margin step up. Now we haven’t guided beyond 2023 and we need to be conservative, because we need to make sure the labor shows up and we get them trained up and they go execute. But I think you are right, relative to that overhang on Block IV, so we need to get those delivered. And as I said previously, those schedules are being very consistent right now. Cost performance, we are working on every day. Go ahead, Tom.

Sure. If I can hop on the back of that, right? So we talked about Block IV here and what we took back in Q2 of 2020, I would tell you the portfolio with Columbia that’s coming on board and sales. So that’s a new stock program that’s booking along right now across that contract. I have some change, change in unadjudicated change that still has to get proposed and pushed through the system. So that’s going to increase, we are very conservative on that until those unadjudicated changes are definitized. That’s boat RC 73 and 74 as is in infancy too both cost-type contracts. So the portfolio just has a little bit higher level of that as we see it. And then, lastly, I think, as we go forward, burn down risk as 79 marches to its completion, as Chris said earlier, there’s a potential with good performance there for additional upside here. So I think we just find ourselves in a situation where the ships are right now, not too many milestones, a little bit of drag on overhead, down on labor. And I think we are booking prudently to conservatively right now as we want to see us pushing ships over the goal line. Those deliveries I mentioned are two each for 2023 and 2024, and I think that will assist in the margin list, as well as Block IV gets small in the portfolio mix with the potential of Block V as we move forward. I think the Columbia program will mature and with 73 out of here at this year, 74 focus, and maturity will assist the portfolio of profitability as well.

If I understand correctly, Block IV and the impact of previous charges play a role, but there are several other issues you've mentioned. It's a combination of factors you're addressing. I recall that during General Dynamics' Q4 call, they pointed out various labor-related challenges in shipyards, specifically mentioning the Virginia-class. Can you explain how you're collaborating with Electric Boat to tackle these issues, any changes over time, and how you both manage challenges like attrition and inflation?

Yeah. Thank you for that question, Doug. It’s an important one. The Newport News and EV team, they work very closely together in understanding when the work, what work and how that work gets executed. So there could be movement of work between the yards where it’s most efficiently done if there’s labor issues, and they are working very closely together. Their objectives are completely aligned to deliver all the Block IV boats. And I would add also the Navy is engaged as well. It’s all from the deck plate to the senior executive force. Everybody is all in and all of our objectives are aligned to get those Block IV boats delivered. And I will say that we are fully staffed on Block IV and Columbia, and we are working very hard on execution there. And not only is Newport News working between each other, but working to ensure that any sort of outsourcing is effectively managed to ensure that we meet our production schedules.

Okay. Very good. Thank you.

Sure.

Thank you. Our next question comes from Gautam Khanna from Cowen. Please go ahead. Your line is now open.

Hey. Sorry about that. I hope you can hear me.

No. Yeah. Thanks. Now we had you, Gautam.

Great. Great. Hey. Thanks. I was curious if you could just give us some color on the timing of the milestones through the year. If you can tell us like, if there’s anything that’s in the month of December that has the potential to move out or things we should be watching in terms of Q4 the way things happened.

Sure. Sure, Gautam. When you look at the 2023 milestones, I think, Tom already mentioned that Q1 was pretty light. The pretty evenly distributed across Q2 and Q3, but then CVN 79, excuse me, LPD 29, yeah, is in Q4. So that’s at the end of the year. So that’s the one we will have to watch. We got a lot of confidence in and the team down in Mississippi, but that’s the one towards the end of the year.

Okay. Thank you. And then just curious on VCS, anything incremental from last quarter on schedule with respect to...

Not really. Pretty stable from a schedule standpoint on the VCS program. We have movement here and there, but it’s pretty stable. I got to hand it to that team, the program team and the construction team. They are getting after it and they are learning every day. So it’s been pretty stable. We need to stay on.

Chris has talked about that rhythm of the program, launch one and sell one off. When we saw that in 2022 and in the milestones, you will see that in 2023 and 2024. So we are working it.

Okay. And just on that last point, anything with respect to negative catch-ups or you can talk about 422 on VCS in aggregate anything, yeah, you can never call it out as material, but can we assume that there were kind of consistent negative marks in the program or anything you can tell us about that?

Nothing really significant to highlight here. I mean, I mentioned the keel, the keel net was at Newport News on that, which was down, and they just kind of sprinkled over the programs, but there was nothing really to highlight here.

Okay. Thank you, guys.

All right, Gautam.

Thank you. Our final question today comes from Noah Poponak from Goldman Sachs. Please go ahead, Noah. Your line is now open.

Hi. Good morning, everyone.

Hi, Noah. Thanks for joining.

Sure. Tom, regarding the cash flow breakdown, I appreciate the detailed information you provided, and I understand there are many variables involved. If I look at the cash flow statement over the long term, it appears to have fluctuated between $400 million and $600 million for some time, with the business maintaining stable top-line revenue and margins. I acknowledge there are opportunities for growth and margin expansion ahead. The pension situation seems fairly neutral, and capital expenditures appear consistent. Earlier, you mentioned that for 2024, the midpoint of $780 million includes about $200 million in working capital. Should I consider changes in working capital as a non-recurring part of the free cash flow, suggesting that the reliable sustainable cash flow moving forward is around $580 million to $600 million? Or is there another reason to believe that the core business will eventually account for that $200 million?

That's a great question and we analyze it regularly. Currently, we are at a point of impact. If you review the cash flow statement, our figures were between $400 million and $600 million. Since 2020, the COVID-related FICA repayments and payments have caused some fluctuations, and we need to normalize after those events. There are a few developments occurring, obviously...

Okay.

Prior to this period, the margin in Shipbuilding declined as we navigated through COVID. We are now working to improve incrementally. The revenue growth reflected in our backlog suggests we expect at least 3% growth going forward once we overcome the current labor challenges. This is something you can factor into your models. As we progress, I believe our working capital will fall within the 5% to 6% range. Both yards are currently operating smoothly, with our ongoing DDG program and the VCS launch and sell-off contributing positively. The Block V production is advancing as planned, and we are establishing a reliable mix across our portfolios in each yard regarding timing for deliveries. Historically, Shipbuilding margins have been around 6% to 8%. This figure has been impacted somewhat by the addition of Mission Technology and Alion, which lowers our overall numbers. If we focus solely on traditional Shipbuilding, we noted an increase from 12% in Q1 2022 to 14% in Q3 2023. We wrapped up the year with a margin of 7.8% specifically for Shipbuilding and anticipate moving from 7.8% to 8.3% for Shipbuilding sales, projecting a decline to 6% in 2024. This aligns with the range we highlighted for the initial decade of the corporation, maintaining working capital between 6% and 8%. We were at this level in 2018, sustaining at around 6%. I believe this is achievable as long as we maintain a steady pace of adding work, which we are capable of doing with our backlog and scheduled performance enabling timely ship sales. Although our Shipbuilding sales may settle at the lower end of the range at 6%, I believe the incremental revenue and margin we expect to achieve in the upcoming years will offset that. I remain optimistic that we will reach over $700 million in annual run rate in a couple of years, with 2024 marking the turning point for that growth.

The revenue is expected to exceed $700 million in a few years, with a midpoint of $780 million in 2024 and around $200 million in working capital. Once we reach our working capital goal, there won't be any positive change in working capital flow contributing to cash flow. It's uncertain what 2025 will look like, but it's likely there won't be a significant increase at that time. This could suggest a decrease from 2024, and as the business continues to grow, we may eventually return to that $700 million figure.

Yeah. Noah, we are not going to discuss.

You are not.

We are not going to forecast 2025 free cash right now. But I think your logic is okay. The business is going to grow. And if we stay down with those working capital numbers, you are not going to get a benefit from it. You are going to have to get it from growth and margin improvement. So I think your logic is sound. But we do definitely believe that free cash is going to get north of $700 million in 2024 and then continue to grow from there.

I will tell you stick with a lot of the numbers, right? So I walk through how we normalize out the 2021 and 2022 because of COVID that you can see we are incrementally going from that $460-ish million to $510 million to $550 million with the guide of $425 million this year, COVID-adjusted, that’s another $550 million. And then I am telling you the working capital is going to get us there in 2024. So that is just say what’s the run rate. I think you are looking at…

Okay.

... the right way on how you model it, and we will provide guidance for 2025 a year from now.

Yeah.

Great. And then, Chris, just on labor, you spent some time on it, but it’s unpredictable. When do you think you could get to something close to normal regarding your labor churn and the development of the people you are hiring? Given the time you’ve spent on this and your experience in the business, this is obviously an unprecedented situation. How much more time do you need to reach a stable state?

Yeah. Well, it’s absolutely more stable now than it was a year ago, okay? And that’s a testament to the hard work the shipyards have put in to really kind of pivot who they were hiring, increase the training, increase the leadership training. So it’s absolutely better. I don’t know if you have ever done, right? There was a pretty generational change in our workforce where we lost a large swath of people through COVID. So we are retraining a workforce and retraining foreman and general foreman and construction superintendents, and that’s happening. And the best thing we can do and the greatest learning potential is delivering ships. We are going to deliver five this year. Once you have been through that, you have learned a lot, and they are going to continue to learn a lot. So I think it’s only improvement from here. I don’t think you have ever done, but I think we have made great progress.

Okay. Thanks for the time.

Yeah. Thanks, Noah.

Okay.

Thank you. This concludes our Q&A session for today. I would now like to hand the call back over to Mr. Kastner for any closing remarks.

Thank you for joining today. I am proud of all the hard work put in by the team and I am confident the hard work we are doing will pay off and value creation for all our stakeholders moving forward. Thanks again for joining the call.

Thank you. That does conclude today’s conference call. You may now disconnect.