Huntington Ingalls Industries, Inc. Q1 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2023 HII Earnings Conference Call. 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, operator, and good morning, everyone. Welcome to the HII First Quarter 2023 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 provisions of federal securities laws. 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 today's call. First-quarter results reflect a good start to the year as we stay on course executing our nearly $50 billion of backlog and growing our Mission Technologies business in markets that support our customers. And I want to thank our 43,000 employees for continuing to deliver excellent products and services in support of national security. Our priority continues to be a focus on the fundamentals in shipbuilding, driving our shipbuilding schedules and delivering critically needed assets to the fleet. With that, we believe our milestones for 2023 and 2024 remain on track and consistent with our prior expectations. As we discussed last quarter, 2023 milestones include three ship launches and five ship deliveries, and the cadence of these is expected to pick up through the year, specifically in the third and fourth quarters. I will note that we are working closely with the Navy on a change to optimize the CVN 79 schedule, which pulls baseline work from the post-shakedown availability into the construction period in order to provide more capability at ship delivery. Ultimately, this change would allow for a more capable Kennedy to join the Navy's operational fleet. And once this contract change is finalized, we will adjust the crew move aboard and ship delivery dates accordingly. Now let's turn to our results on Page 3 of the presentation. Top line growth was 3.8% from the first quarter of 2022, resulting in record first quarter revenue of $2.7 billion. Diluted earnings per share was $3.23 for the quarter, down from $3.50 in the first quarter of 2022. New contract awards during the quarter were approximately $2.6 billion, which results in backlog of approximately $47 billion at the end of the quarter, of which $26 billion is currently funded. In the first quarter at Ingalls, we were awarded a $1.3 billion detail design and construction contract for amphibious transport dock LPD 32, continuing the serial production of this critical product line for the U.S. Navy and Marines. At Newport News, we were recently awarded the Columbia bill 2 advanced procurement contract for $567 million, allowing Newport News to purchase major components and commodity material and to begin advanced construction on the next five submarines in the Columbia-class. Finally, at Mission Technologies, we saw strong revenue and margin this quarter with revenue growing 5.8% over the first quarter of 2022. Notably, this quarter, we were awarded the press program, a base plus six one-year options, $1.3 billion task order to provide personnel recovery, enterprise services and solutions for the U.S.-Africa Command. Shifting to activities in Washington. The President submitted his fiscal year 2024 budget request in March, which is now under consideration by Congress. The proposed budget reflects continued investment in our shipbuilding programs, funding the second Columbia-class submarine, two Virginia-class attack submarines, and two Flight III Arlebird-class destroyers. The budget request continues funding for nuclear aircraft carriers, an aircraft carrier refueling and overhaul programs, as well as investment in the submarine industrial base. On the ship maintenance side, the budget request includes $600 million for the engineering overhaul of USS Boise. Funding is included for the final increment of LHA 9, but funding was not included for the LPD program or a third DDG 51 destroyer, although Congress provided advanced procurement for these programs last fiscal year. We will continue to work with Congress and our customers to support their requirements as we move through the budget process. Beyond shipbuilding, the fiscal year 2024 request reflects continued investments in capability enablers, such as AI, cyber and electronic warfare, C5ISR and autonomous systems, which align well with the advanced technology capabilities of our Mission Technologies division. Turning to labor. We successfully hired over 1,500 craftsmen and women in the first quarter, which is at 30% of our full year plan of approximately 5,000. This solid pace for hiring reflects continued recovery and stability in rebuilding our labor workforce post-COVID. While hiring is on a positive trajectory, we continue to remain focused on hiring, the training of our workforce and our workforce development and retention programs. For example, in March, we celebrated the graduation of 200 apprentices from our Newport News shipbuilding apprentice school, strengthening our skilled workforce and leadership pipeline. Moving to an update on the health of our supply chain, where we are seeing stabilized lead times. We have not seen a return to pre-COVID levels. It is important that we not only manage the risk this creates for our current programs but also reflect these increased lead times in our future contracting activity. In summary, we've had a solid start to 2023 with record first quarter sales and continued long-term visibility given our significant backlog as well as future award opportunities based on the strong defense budget. Seeing progress in labor and supply chain lead time stabilization is certainly positive, but we need to continue to manage these risks moving forward. We are maintaining our emphasis on fundamentals, driving productivity to ensure we meet our customer commitments. And now I will 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 5 of the presentation. Our first quarter revenues of $2.7 billion increased approximately 4% compared to the same period last year and represents a record first quarter result for HII. This increased revenue was attributable to growth at Newport News Shipbuilding and Mission Technologies. Operating income for the quarter of $141 million increased by $3 million or 2% from the first quarter of 2022, and operating margin of 5.3% was essentially flat from the prior year period. The increase in operating income was primarily due to a more favorable operating FAS/CAS adjustment and more favorable noncurrent state income taxes compared to the prior year period, largely offset by lower segment operating income. Net earnings in the quarter were $129 million compared to $140 million in the first quarter of 2022. Diluted earnings per share in the quarter was $3.23 compared to $3.50 in the first quarter of the previous year. Moving on to Slide 6. Ingalls revenues of $577 million in the quarter decreased $54 million or 8.6% from the same period last year driven primarily by lower revenues on the LPD, LHA and NSC programs, partially offset by higher DDG program revenues. Ingalls operating income of $55 million and operating margin of 9.5% in the quarter declined from last year primarily due to lower-risk retirement on the LPD and LHA programs. It is important to remember that the first quarter of 2022 included a very clean delivery of Fort Lauderdale, LPD 28, which provided significant risk retirement at that time. At Newport News, revenues of $1.5 billion increased by $116 million or 8.3% from the same period last year due to growth in both aircraft carrier and submarine revenues, partially offset by lower support services revenues. Newport News operating income in the first quarter of 2023 was $84 million, an increase of $3 million or 3.7% compared to the first quarter of 2022. Segment operating margin of 5.6% was down slightly from last year primarily due to unfavorable risk retirement on enterprise CVN 80. Shipbuilding operating margin in the first quarter was 6.7%, slightly below the 7% outlook we previously provided for the quarter. Our outlook for the full year is unchanged. As we have noted previously, our expected milestones for 2023 are concentrated in the second half of the year, which will drive our performance for 2023. At Mission Technologies, revenues of $624 million increased $34 million or 5.8% compared to the first quarter of 2022 primarily driven by higher volumes in mission-based solutions, which includes our C5ISR, cyber and electronic warfare and live, virtual and constructive training businesses, as well as growth in fleet sustainment. Mission Technologies operating income of $17 million compares to an operating income of $9 million in the first quarter of last year. Current results include approximately $27 million of amortization of purchased intangibles compared to $30 million in the first quarter of last year. Mission Technologies EBITDA margin in the first quarter was 8% compared to 7.3% for the same period last year. During the first quarter, Mission Technologies did record a provision for a contract loss relating to a manufacturing issue that was not material to our financial results as a whole. Turning to Slide 7. Cash used by operations was $9 million in the quarter, and net expenditures were $40 million or 1.5% of revenues, resulting in free cash flow of negative $49 million. This compares positively to cash used by operations of $83 million, net capital expenditures of $43 million or 1.7% of revenues and free cash flow of negative $126 million in the first quarter of 2022. Cash contributions to our pension and other postretirement benefit plans were $10 million in the quarter. During the first quarter, we paid dividends of $1.24 per share or $49 million. We also repurchased approximately 39,000 shares during the quarter at an aggregate cost of approximately $9 million. Moving on to Slide 8. Our free cash flow outlook through 2024 remains unchanged as do our capital allocation priorities. I'll highlight that we will continue to expect to distribute substantially all free cash flow to shareholders through 2024 after planned debt repayment, which is on track. Turning to Slide 9. We are reaffirming our 2023 guidance and providing some color on how we see the second quarter shaping up. Before discussing our second quarter outlook, I want to make clear that we are reaffirming our guidance for the full year with the knowledge that once the PSA modification is completed, the remaining CVN 79 milestones will be updated, including moving the delivery to 2025. We believe we'll be able to reach an agreement that is neutral from a margin and cash perspective to both 2023 and 2024, and our outlook reflects this. Regarding the second quarter, we expect shipbuilding revenue to be largely consistent with first quarter results and shipbuilding operating margin to be approximately 7%. That does imply meaningful improvement in the second half of the year, which is consistent with when we expect our shipbuilding milestones to occur. For Mission Technologies, we expect second quarter revenue of approximately $600 million and operating margin of 2.5%. We expect the second quarter free cash flow to be approximately negative $150 million. Again, there is no change to our expectation for the year. Our cash generation will fall predominantly in the third and fourth quarters, consistent with both our forecasted milestones and our normal cash cadence over the calendar year. To summarize, the first quarter results were largely in line with the expectations we provided on our fourth quarter call. We are pleased to reaffirm our full year guidance, and we remain focused on execution and hitting the milestones and commitments that we've laid out. With that, I will turn the call back over to Chris for some final remarks before we take your questions.

Thanks, Tom. Before wrapping up, I would like to point out that we have recently published our 2023 sustainability update report, which among other things describes the governance and management framework that we have established around sustainability. And finally, I would like to emphasize that we remain focused on successfully executing on our strong backlog and positioning for long-term growth, which will 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.

The first question comes from the line of Doug Harned with Bernstein.

I'm interested, when you look at Newport News right now, and you appear to be getting some good growth there. Can you give us a sense of the breakdown of where growth is coming from? And I would say across Columbia-class, Virginia-class, the CVN programs. What really getting at here is, as Columbia-class starts to ramp, can we expect growth there to move above that kind of 3% to 3.5% trajectory that you've been on?

Let me begin, and then Doug and Tom can contribute. I believe that Newport News will drive much of the growth in shipbuilding. As the Columbia-class submarines come into production and aircraft carriers start to play a larger role in our revenue, along with Block V reaching full rate and moving into Block VI, there is a possibility that growth could exceed 3%. However, we believe that, in the long run, the best way to view shipbuilding growth is at around 3%.

Sure, Doug. And I'll hop in. It's Tom here. So yes, we did have some good growth in Q1 there. It was up - approximately $160 million. It was driven by carrier construction, specifically CVN 79 and Columbia-class and the VCS program, partially offset by some fleet support that is just slightly beneath. But as Chris says, I think we feel comfortable about that. We have the capacity and capability to kind of run that. I think long term, though, it's still kind of governed by labor and program plans that we have in the yard here. So I think 3% is the right way to take a look at it on a long-term basis.

There was an unfavorable adjustment in CVN 80 that surprised me because I expected there to be less risk with CVN 80 compared to CVN 79. Can you explain what happened there and also provide an update on the progress of the Virginia-class?

Yes. So I'll take the CVN 80 first. Just backing up a little bit on color on margin and profitability that we thought we'd be at 7% for the quarter on shipbuilding. We came at 6.7%, and the majority of just that truck full there was about the enterprise step-back that we took. Now we find ourselves, as I noted in my remarks, the front on CVN 80 that we find ourselves from a time capacity and throughput needing to offload and/or outsource unit work and panel work right now. So as we're working ourselves to that, it's early in that project as we ramp that up. And we wanted to make sure that we increase the outsourcing risk protection, and we booked that conservatively. There's still many years to go on that ship, and it's just embarking on some additional out work on that. I would tell you that since the keeling last summer, that ship is coming tremendously along. It's in the dry dock right now. It's growing a lot of steel at it. The shape of the ship is directing, and I'm really proud of what the team is doing with that. But again, we just thought it would be prudent to take a balanced approach as we embark on getting some additional workout cost.

Yes, Doug, I'll comment on VCS. The VCS program schedules have been quite stable over the past few quarters. We will deliver 796 units this year, with 798 scheduled for the following year. Additionally, we have a christening with Sheryl Sandberg as the sponsor on Saturday for Massachusetts, and everyone is invited to watch the live stream. Massachusetts is performing well. Following that, we will deliver 800 the year after, and Block V will come next.

Excuse me, ladies and gentlemen. We have lost connection with the speaker line. Please remain on hold as we reconnect them. Excuse me, ladies and gentlemen, thank you for your patience. We have the speakers back on the line. Please proceed.

Hello, Doug, were you still on?

Yes, I’m still on. Yes.

I don’t know when we fell off. I don’t know if you were at the absolute relative to VCS Program.

You were walking through transitions who full unblocked by in milestones schedule. So that’s where you were at that. I think you broke off in the middle of that.

Yes. I apologize again. On Block V, I do think there is opportunity on Block V, and we're just not at the phase of the program where you'd be retiring that risk. So I still think there's opportunity in Block V. And I apologize for the line cutting out.

No. No problem.

The next question comes from the line of Rob Spingarn with Melius Research.

If resources need to be shifted from Virginia to Columbia to keep that project on track, especially considering its priority, are there discussions with the customer to address any possible economic impacts on you or the submarine industrial base, given that Virginia has fixed costs?

Yes. So there could potentially be discussions in that regard. I would say, from our point of view, our staffing is pretty solid on the Columbia-class and the Virginia-class right now. So I don't anticipate that. I think you saw that we had a good start to the year from a labor standpoint. Attrition is trending well. attendance is trending well, a lot of training expense as well. But we don't anticipate that right now. We're pretty comfortable from a staffing point of view.

The next question comes from the line of Seth Seifman with JP Morgan.

I wanted to inquire about the milestones, as it seems there is a lot to anticipate in 2023 that supports the margin expansion you're aiming for in the second half. It appears the margins are coming in slightly lower than expected in the first half but should be higher in the second half, which seems quite variable based on the milestones. Looking ahead to 2024, it appears each of the yards has fewer milestones than in 2023, although the value of those milestones could vary. How should we view the margin trajectory given the significant differences between the first and second halves of this year? How does this influence our outlook for 2024?

I appreciate the question. We mentioned in Q4 that the milestones would be in the latter half of the year, which we projected to be around 7% for Q1. The outlook for Q2 is expected to follow a similar pattern. If you do the math, the range is between 7% and 8%, with the second half of the year likely reaching the upper 8s, and we feel confident about that. You are correct that the milestones are concentrated in the latter half of the year. Additionally, there are other factors at play beyond just the milestones, which significantly contribute to the changes in estimated at completion (EACs) and impact profitability. These factors include our performance and capital incentives, whether they are contractual or anticipated. We have potential risks and opportunities that could materialize, influencing our EACs each quarter. We also have contracts, particularly for RCOHs, that may vary over the 2.5 to 3 years those ships remain in play. Changes and costs associated with contracts mean there are proposals constantly under review. We have previously mentioned unadjudicated changes, and the associated costs are already reflected in the EACs. We conservatively account for recoveries on those aspects. As this develops, there will be a natural recovery in contract performance true-ups. Other elements, alongside milestones, are also impacting the situation for 2023. Looking towards 2024, we have more milestones than usual with three deliveries and three launches. We're maintaining the previous guidance, with a note on CVN 79. Progress will lead to a natural increase as we advance through this. We have discussed Block IV and Block V volumes, which will align closely with the delivery of the larger ships. Moving forward, new contracts will introduce performance and inflationary effects that will set new targets. Lastly, as time goes on, we expect a turning point in production and learning. With our workforce becoming more experienced on successive bills and follow-on shifts, we anticipate an increase in profitability from this front as well.

Great. That's really helpful. And maybe as a follow-up, just a quick confirmation. I want to make sure I understand. The optimization you're talking about on CVN 79, when reaching an agreement there with Navy and that's finalized, that is a neutral event as far as margin and estimates for the program and cash is concerned for you guys?

I want to clarify that we expected to remain neutral. It's beneficial for both us and the customer to have a ship that is more capable and functional, and it will be in the latest configuration. As we continue negotiating that contract, it will take some additional time to finalize. We will get scheduled and adjust the targets accordingly. Although we won't see the liquidation and retention release next year, we will have more work statements along with costs and cash flowing through our accounts. We expect that this will be neutral in terms of margin and cash for the next few years as we deliver that ship.

I could also add, I think it's a really smart thing being done by the Navy here relative to integrating the PSA into the base contract because it reduces deployment risk for the ship. So we're participating in that. We'll get it definitized over the summer. We think it's a very positive development.

The next question comes from the line of Myles Walton with Wolfe Research.

Chris, could you comment on LPD 29? I think there's both the sea trials and the delivery aspect that you're thinking about for '23. And obviously, you have trials where you have delivery. And I'm curious, what's the hold time on the trials that you would need to see to actually be able to accomplish the delivery for this year? And how material is that to this back-end-loaded margin for the year?

It's definitely in the mix. It's a Q4 trials and delivery. A lot of volume work to go on that ship. They're making really good progress, let off the engines really last week when we were down there. So I'm optimistic that team will start to continue to hit cadence in the LPD program that we're very proud of, and confident that LPD 29 will get done this year, contingent upon, of course, that labor stays stable and we continue to make progress. But a lot of confidence in that Ingalls team.

Okay. And just one on labor. Chris, you sound actually really good on labor from a hiring perspective. Could you comment on attrition as well? And is it showing up in the right disciplines and where the pinch...

It is. Yes, Myles, it is. So attrition has been positive as well. And it is showing up in the right disciplines. You always having shipbuilding moments in time where you may need welders or rigors or electricians. You might be out of balance a bit. But that's kind of the art of managing labor and shipbuilding. So it's a positive start to the year. It's taken a lot of effort, a lot of effort, and we need to stay on it. Team is very focused on it, but it is positive thus far.

Great. And sorry, one last one, I can squeeze in. Tom, you mentioned that Mission Technology has absorbed a customer charge, I think. Can you size that? And is that the same that was disclosed in the Q last quarter for the K?

Yes. Appreciate the question there, Myles. Yes, it is the same issue that we had last time. You'll note when you get the Q that the disclosure has improved from a top range to now we've taken a charge. And no, I wouldn't disclose the customer or the charge itself. It's not material to our financials. So you won't see them in the corrections, all right? So yes.

The next question comes from the line of David Strauss with Barclays.

Chris, you mentioned in your prepared remarks that there was no amphib funding in fiscal '24. If you could just kind of update us on the status there. I mean we seem like there are always these ongoing reviews, and then Congress adds money back. Just kind of where things stand there?

Yes. '24 is pretty positive from a budgetary standpoint for us. The one issue, as you mentioned, is LPD 33. We'll work with the customer and the Congress to ensure that they understand the importance of that ship to Ingalls, and we'll just follow it through the process. Got high confidence based on the law of 31 amphibs that we have a chance to get that back in the budget, but we'll just have to follow it through the process.

Can you provide an overview of the current revenue from Virginia-class submarines, specifically how much comes from Block IV compared to Block V, and how you expect this to change in the next year? Additionally, could you discuss the potential for margin improvement as we move forward and what our current position looks like?

Yes. So as we crossed over at the end of last year, Block V actually has more revenue than Block IV in it, although you find the programs for one better than 80% accomplished with 794 delivered, 796 to go, 798 floating off and then the successive years of the sell-off of 798, 800. So Block IV is significantly more complete with cost in the books here. Block V is still less than 30% complete right now. So there's a mix there. I have more volume on V, and I still have a large amount of that program in front of me. As we talked about, I think, keeping the pedal to the metal on the labor, training that workforce, getting serial production cadence happening, which we see that with the operating system incorporated down there. I think all that's going to add to a real potential of additional profitability in Block V or IV. You don't see it yet, obviously, because it's early in the program. So good that we're getting the sales volume from the VCS program, a lot of interest in that. And we'll just keep working to get the production efficiency going on the VCS program.

The next question comes from the line of Gautam Khanna with Cowen.

Gautam, are you out there? We may have lost Gautam. Operator, do you still hear us?

Yes, I still hear you. I don't have Gautam.

Maybe he'll come back in. If you could maybe just go to Pete.

The next question comes from the line of Pete Skibitski with Alembic Global.

Chris, I know many of us were aiming for shipbuilding margins to return to the 9% range by around 2025. With the changes to the Kennedy contract and the current labor situation, do you still think that's a reasonable goal, or is that overly ambitious at this time? What are your thoughts on this?

Yes. I don't want to give commentary on '25 margins at this point. We're comfortable with our guidance for this year. I'm comfortable that the way we have the ships delivering and the stability of the milestones that we look for improvement next year. The teams are working on the fundamentals every day within both shipbuilding organizations coming through COVID and the labor challenges, but there are still significant labor challenges we're working through. So I don't want to predict when we'll recover to 9%. I still believe it is a 9%, 9% plus business. We just need to continue to focus on the fundamentals and execute.

And if I could comment there too, Chris. We're obviously not happy with where we are right now. We're driving hard. We're being realistic with it. The strategy that we have that we've shared with the shareholders is we anticipate and expect expansion of margin. We'll continue to fight through that, and we do that every day and every week here. We get realistic with the ranges that we give that definitely is attainable. We have strategies and plans, and the profiles and the forecast show that we can meet our forecast that we tell the Street. So we'll just keep you updated like we have every quarter, but the trajectory needs to go up, and we're working really hard every day to make that happen.

Okay. Appreciate it. And last one for me, guys, I remember a while back, one of the next big contractual things you were looking to accomplish was getting the fifth aircraft carrier under contract. And I think you wanted to do that in the midterm, nothing near term. But is that now in the budget? And there was talk maybe even doing another two-carrier bundle. Are those things still in play in terms of where the budget shook out?

It is included in the budget. We believe that purchasing them together will save the Navy money and is the correct approach. This hasn't yet appeared in the budget, but we are confident that it is the right method for acquiring aircraft carriers. We are optimistic about the budget and will keep working with the Navy on possibly pursuing a two-ship buy, although that has not yet occurred.

We believe it's a strategic and financial advantage to purchase two carriers simultaneously, supported by three years of Advanced Procurement on four-year centers. Our goal is to initiate construction in 2028, with a hopeful Advanced Procurement in 2025 or potentially 2026. This approach proved effective previously, providing buying power for our customer and increasing efficiency at the yard. We're focused on maximizing buying efficiency by working closely with our customer on this.

The next question comes from the line of George Shapiro with Shapiro Research.

I wanted to ask, General Dynamics on their call commented that they were having supply chain issues in Virginia. I think it was more Block V than IV, and they took a charge for that. And I guess you're not experiencing that. There's different suppliers. Or if you could just explain maybe.

Yes. Well, I can't comment on GD's phone call. That would not be appropriate. I'm comfortable with where we are in the VCS program this quarter, both Block IV and Block V. As I've said, we're progressing down the delivery path on our Block IV boats. And then we need to transition to the Block V. But it would just be inappropriate for me to comment on GD's call, but we're comfortable with where we're at.

So you're not experiencing the same supply chain issues? Is that correct?

Well, I think we're seeing supply chain issues across the board really. It has definitely stabilized from a lead time standpoint, but it's stabilized at a higher level than pre-COVID. And we need to make sure we take that into consideration not only on our current estimates at completion but on our future bids. So yes, there are supply chain issues, but they've stabilized a bit over the last couple of quarters from a lead time standpoint.

Right. I want to emphasize that the costs and anticipated future expenses have been included in our completion estimates. We have revised the milestone schedule here, George. You may recall that we adjusted it over the past couple of years since the onset of COVID, and there have been some expenses at Newport News that you're already aware of. As Chris mentioned, I want to confirm that every 13 weeks, we assess the current situation regarding the axles. We evaluate the expected forecasts, material indices, and the anticipated costs. We feel confident about our bookings, both in the milestone chart from a scheduling perspective and in what is reflected in our financial reports regarding estimates at completion.

Okay. And then, Tom, the net estimates at completion can get for the quarter and the break between the sectors?

Yes, the gross favorable amount was 64 million, while the gross unfavorable came in at 55 million. This results in a net favorable of 9 million. The details are now included in the revised disclosure, where you can see that Ingalls is up 14 million from the 9 million, Mission Technologies is up 4 million bringing it to 18 million total, and Newport News has a cumulative decrease of 9 million. This decrease primarily reflects a 7% shipbuilding rate compared to 6.7%, and we previously discussed the outsourcing aspect of CVN 80.

The next question comes from the line of Scott Deuschle with Credit Suisse.

Tom, does the back half margin guide accommodate for the risk of additional negative estimates at completion like we saw this quarter on CVN 80?

So that's a very specific question. I would tell you that each quarter, once we come through our DAC analysis, we evaluate performance, existing costs, we update our projections going forward, value material labor cost, schedule, and overheads, all that goes into the construct of coming up with the booking rate. And then from there, we update our sets of opportunities and risks against that forecast. And from there, we'll make a determination of what the forecast is for ourselves and out to the Street here. So I would tell you that there's always the potential to either exceed the forecast or underrun it. Specifically, we think we book the risk on the CVN 80 outsourcing project accordingly. So I would not anticipate that to continue to bleed. If anything, I'd like to see us do better than what we have in the plan right now from a risk mitigation standpoint. But I think the guidance still holds that I gave you between 7% and 8%. The back half will be better, and we'll just watch that play out.

Okay. And then, Chris, can you help reconcile the improved hiring and attrition trends you've noted with the increased outsourcing on CVN 80 that drove the negative estimates at completion? I'm just trying to understand why you needed to do the unplanned outsourcing if hiring and attrition did track better.

Yes, that's a really good question. When you're developing your plan, you're estimating both your workload and labor needs. Over the past year, it made sense to create outsourcing plans. The risk became clear when we finally assessed the cost estimates for that outsourcing. We had to include these in our completion estimates. Everything is interconnected, and we remain optimistic about labor. However, we still had to proceed with outsourcing for CVN 80.

Okay. And then last question, kind of bigger picture. But if you priced your fixed price contracts, assuming wage inflation would be at a low single-digit rate and it’s the mid- to high single-digit rate instead, I just – I’m trying to understand mechanically how this can still be a 9% margin business until you burn through a lot of the $47 billion backlog, which I assume would take another 4 to 5 years. Just trying to understand the mechanics of how that works in a chunk cost...

Sure. I can start and then potentially, Tom here. But remember, we do have EPA protection pretty at Ingalls and some EPA protection at Newport News. And we do have long-term labor agreements in place both at Newport News and Ingalls. So that mitigates it to some extent.

Yes. I’d comment on that front, too. So yes, we do have the $47 billion of backlog. Only 55% of it’s funded, that’s one, right? So there’s other areas there, whether they’re going to get finalized, negotiated or exercised. Two is, as Chris said, about 45% of our workforce, we do have union agreements, so I know what I’m paying on that front. Much of the work we do, we’ve talked in the past about long lead contracts, advanced procurement contracts. So we really make sure we get current bids that we can both use in the proposal, get the advanced procurement turned on and then immediately exercise those bids and get the contractors locked into fixed price on the large material components. Most of Ingalls contracts have EPS provisions, which is 90-10 fixed price and then the Newport News where it’s more 50-50 cost type. The cost will be recognized on, I guess, those cost contracts. So a lot of things are in play. I’m with you that there was an expectation on inflation and for any long long-term contract that was put on before. Without EPA, the material could have some exposure. These are the headwinds that we talk about that we try and fight through. But then there’s other avenues and ways to get the contract adjustments, incentives, work-through, workaround or realize more opportunity than risk to still maintain and improve our profitability.

I am not showing any further questions at this time. I would now like to hand the call back over to Mr. Kastner for any closing remarks.

All right. Thank you for your interest in HII today. We look forward to continuing to engage with all of you. Thank you.

Thank you.

That does conclude today's conference call. You may now disconnect your lines.