Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2024 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 is being recorded. I would now like to hand the call over to the Vice President of Investor Relations, Christie Thomas. Ms. Thomas, you may begin.

Thank you, operator and good morning. I’d like to welcome everyone to the HII second quarter 2024 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, statements made today that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from future results expressed or implied by these forward-looking statements. Please see our SEC filings for important factors that could cause our actual results to differ materially from expected results. Also, in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on our website’s Investor Relations page at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?

Thanks, Christie, and good morning everyone. The HII team is dedicated to executing our programs and fulfilling our commitments to customers. In the second quarter, our shipbuilding division delivered two ships, and our Mission Technologies business had another quarter of strong performance. The alignment of our products and services with the United States national security strategy continues to give us strong visibility for our long-term revenue forecast. To start, I'd like to detail our results. Record revenue for the second quarter was $3 billion, a 6.8% increase from a year ago, with diluted earnings per share at $4.38 for the quarter, up from $3.27 in the second quarter of 2023. We secured new contract awards totaling $3.1 billion, leading to a backlog of $48.5 billion at the quarter's end, $27 billion of which is currently funded. In Mission Technologies, we achieved our seventh consecutive quarter of record revenue with sales of $765 million, 19% higher than the second quarter of 2023. Alongside strong revenue, Mission Technologies has a trailing 12-month book-to-bill ratio of 1.15, and our new business pipeline exceeds $83 billion. This continued growth in a competitive sector confirms that our technology portfolio is well-suited for current market requirements. In shipbuilding, we are committed to channeling our resources towards fulfilling our delivery commitments to the Navy. Significant efforts are being made in each of our shipyards to ensure labor stability, enhance proficiency, and boost capacity, all aimed at achieving our throughput goals. The long-term investments we are undertaking in capital and personnel development, combined with Navy industrial-based investments, will stabilize and enhance our performance as we shift towards new contracts. Our ability to meet scheduled projections and performance goals will also support our financial commitments to shareholders. In the second quarter at Ingalls, we delivered LPD 29, Richard M. McCool Jr., and we are eager to launch LPD 30, Harrisburg, later this year. Other milestones, such as the launch of DDG 129, Jeremiah Denton, and the delivery of LHA 8 Bougainville, have been adjusted based on workforce availability, optimal shipyard facility utilization, and levels of system completion to ensure smooth execution of future milestones. At Newport News, we delivered SSN 796 New Jersey in the second quarter and continue to advance towards our remaining milestones planned for later this year. During the quarter, the construction team for SSN 798 faced a minor disruption in the Massachusetts test program due to equipment replacement needed during testing. This issue has been resolved, and the team is now making steady progress in the test program, although the delivery has shifted from late 2024 to early 2025. We are reiterating our shipbuilding margin outlook for the year and, as previously discussed, we are already in negotiations and anticipate several significant contract awards by year-end, including Block V Virginia class submarines, Build II Columbia class submarines, and additional amphibious ships. Now regarding our activities in Washington, we continue to see bipartisan support for our programs, as reflected in the fiscal year 2025 defense appropriations and authorization bills moving through Congress. We appreciate the strong support from both authorization committees for shipbuilding, including additional funding authority for CVN 82, Virginia class construction, and a multi-ship procurement for amphibious ships. Senate authorizers have also provided additional funding authority for LPD Flight II and DDG-51 Flight III ships. The House appropriations bill further supports our major shipbuilding projects, notably including a $4 billion investment in the submarine industrial base. We await the Senate's appropriations decisions, with final outcomes depending on subsequent negotiations by the appropriations and authorization committees. Turning to labor, we are seeing positive trends in talent acquisition, having hired over 3,800 craft personnel year-to-date, on track to meet our full-year target of approximately 6,000. In summary, I am optimistic that our team's commitment to executing the fundamentals of our programs positions us favorably for the future. I look forward to the second half of the year as we meet more milestones and deliver on our commitments to customers and shareholders. Now, I will hand the call over to Tom for some insights on our financial results. Tom?

Thanks, Chris, and good morning. Today, I'll 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 approximately $3 billion increased 6.8% compared to the same period last year and represent a record second quarter result for HII. This increased revenue was attributable to very strong year-over-year revenue growth of nearly 19% at Mission Technologies as well as growth at Ingalls and Newport News shipbuilding. Operating income for the quarter of $189 million increased by $33 million or 21.2% from the second quarter of 2023 and operating margin of 6.3% compares to operating margin of 5.6% in the same period last year. Net earnings in the quarter were $173 million compared to $130 million in the second quarter of 2023. Diluted earnings per share in the quarter were $4.38 compared to $3.27 in the second quarter of the prior year, representing a year-over-year growth of approximately 34%. Backlog increased slightly to end the quarter at $48.5 billion, up approximately $100 million from Q1's close. Moving to Slide 7. Ingalls revenues of $712 million in the quarter increased $48 million or 7.2% from the same period last year, driven primarily by higher volumes in amphibious assault ships and surface combatants, partially offset by lower volumes in the national security cutter program. Ingalls operating income for the quarter was $56 million and operating margin of 7.9% compared to $65 million and 9.8%, respectively, from the same period last year. The decreases were primarily due to lower risk retirement on surface combatants, partially offset by a delivery contract incentive on LPD 29 Richard M. McCool, Jr. At Newport News, revenues of $1.5 billion were up $26 million or 1.7% from the same period last year. Newport News operating income for the quarter was $111 million, and operating margin was 7.2% compared to $95 million and 6.3%, respectively, in the prior year period. The increases were primarily driven by favorable contract adjustments, incentives, and volume on the RCOH program, partially offset by lower performance on aircraft carrier construction and the VCS program. Shipbuilding operating margin in the second quarter was 7.4%, up from 6.8% in Q1 of this year. We are pleased to exceed the shipbuilding margin guidance we previously provided for the quarter, and we continue to see significant opportunity in the second half of the year for margin enhancement. At Mission Technologies, revenues of $765 million increased $129 million or 18.6% compared to the second quarter of 2023, primarily due to higher volumes in C5ISR and cyber electronic warfare and space. A portion of Mission Technologies overperformance in the quarter was driven by material and work that may not reoccur on a consistent basis, and we have factored that into our guide going forward. We are obviously very pleased with the growth in the quarter, and we are raising the Mission Technologies revenue guidance range for the year by $50 million. Mission Technologies operating income for the quarter was $36 million, and operating margin was 4.7% compared to $9 million and 1.4%, respectively, in the second quarter of last year. The increases were driven primarily by higher volumes I just mentioned, as well as stronger performance in fleet sustainment. In addition, in the second quarter of 2023, we recorded a $6 million loss related to the sale of a joint venture interest, which also helps the year-over-year comparison. Second quarter results for Mission Technologies included approximately $25 million of amortization of purchased intangible assets. Mission Technologies EBITDA margin in the second quarter was 8.5% compared to 6.7% in the second quarter of 2023 and 7.7% last quarter. Turning to Slide 8. Cash used in operations was $9 million in the quarter. Net capital expenditures were $90 million or 3% of revenues. Free cash flow in the quarter was negative $99 million, consistent with the guidance we provided on the first quarter call. Cash contributions to our pension and other postretirement benefit plans were $14 million in the quarter. Also during the quarter, we paid dividends of $1.30 per share or $51 million in aggregate. We also repurchased approximately 250,000 shares during the quarter at a cost of approximately $65 million. Moving to Slide 9. We have summarized our expectations for the third quarter and the year. For the third quarter, we expect shipbuilding revenue of approximately $2.2 billion and shipbuilding margin of approximately 7.8%, with margin continuing to ramp in the fourth quarter. For Mission Technologies, we expect revenues of approximately $650 million and operating margin of approximately 2.5%. For the year, we are reaffirming our shipbuilding revenue and margin expectations. And as I previously noted, we are raising Mission Technologies revenue guidance range. We are also updating our interest expense expectation to $95 million based on the phasing of our latest cash flow forecast. We are reiterating our free cash flow outlook for 2024 of $600 million to $700 million as well as our five-year free cash flow outlook of $3.6 billion. As we have noted, we expect free cash flow to be weighted towards the latter part of the year, which is not unusual. We currently expect third quarter free cash flow to be near zero, preceding expected strong cash collections in the fourth quarter. To summarize, we delivered another quarter of strong year-over-year revenue growth and met our shipbuilding expectations, while Mission Technologies' portfolio continues to perform very well. Additionally, we are pleased to raise our Mission Technologies revenue guidance and reaffirm our shipbuilding financial outlook for the year. With that, I'll turn the call back over to Christie to manage Q&A.

Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so that 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, Christie. We will now begin the Q&A session. The first question is from the line of Myles Walton with Wolfe Research. Please go ahead.

Thanks. Good morning. Chris, could we start with labor? It sounds like you continue to have good traction on the hiring front, but it's not clear to me if you're net-net increase in your headcount to where you want. So maybe just touch on attrition, hiring goals, I guess, are good, but attrition goals for the year at both shipyards and if that's a meaningful driver to some of the milestone slip-outs?

Yes, we are meeting our hiring targets at both shipyards and have made significant progress in securing the workforce needed for the job. While attrition has not seen a substantial improvement, we are considering it from a broader perspective related to labor and execution. Both attendance and overtime have recovered well. Our outsourcing initiatives are functioning effectively, and we are applying industrial-based funding where necessary to enhance our industrial capacity. It's important to execute our programs regardless of attrition trends, and we will continue to focus on our attrition challenges by adjusting salaries, offering flexibility, and recruiting strategically. In Hampton Roads, we are developing a manufacturing presence in new areas to attract labor, so our approach is becoming more comprehensive. It's not just about labor and attrition; it's about achieving our throughput objectives.

And in terms of this effect on the milestones, I understand the Massachusetts sounds more like a technical discovery; are the Ingalls milestone slippages more workforce limitations driven?

Well, it's both actually. On LHA, it's a significant amount of volume and labor needed to achieve those milestones. For DDG 129, there's a different sequencing involved in getting to that launch, along with some labor-related impacts. All of this is included in our financials and guidance, and we're comfortable with our position.

Thank you. The next question is from the line of Robert Spingarn with Melius Research. Please go ahead.

Good morning. This is Scott Mikus on for Rob Spingarn.

Good morning.

Good morning, Scott.

Tom or Chris, I wanted to ask, based on the guidance, you need to generate about $1 billion of free cash flow in the fourth quarter. So I'm just wondering if you could talk about your level of visibility into that cash generation? And then if possible, can you quantify how much of the fourth quarter free cash is tied to working capital that could move into early 2025?

Thank you for the question. I'll begin and then Tom can provide additional details. I would prefer not to specify the timing because it may not be precise enough for you. However, there are significant timing factors in the latter part of the year related to margin and cash. To make progress in this timeframe, we need to hit our milestones and deliver our ships, as well as meet various contract incentives. It's not just one, as we evaluate all our programs for the latter half of the year to ensure we meet our guidance, and we have a clear perspective on it. So yes, it pertains to the latter half of the year. There is some timing involved, and we expect some adjustments in working capital, but we do have a clear view on it. Tom?

Sure, I'll provide some additional details on that. Scott, that's a good question. Currently, we typically use cash at the start of the year. We have projected cash flow to be negative $200 million for Q1 and negative $100 million for Q2. As of now, we've reached a negative $274 million for the first half of the year, influenced by approximately $100 million shifting from Q1 to Q2 in payments and missing a $75 million item at the end of Q2. Performance aligns with our guidance. The year had a certain shape, being back-end loaded, even more so for 2024 than 2023. You can see this comparison in the Q report for both years. Operationally, we’re down about $28.4 million in cash, along with an additional $54 million in CapEx for 2024 compared to 2023. This results in a total reduction of around $330 million from 2023 to 2024, which is consistent with our planning for the portfolio. A few milestones from the end of 2023 have carried over into 2024, including some ships scheduled for up to 2029, which has affected our progress on the current portfolio. We’ve guided for zero free cash flow for Q3, which does have some variability due to numerous major and minor milestones, as well as slower capital than we initially projected. We guided for an overall growth of 5.3% for the year, resulting in 2.6% in Q1 and 3% in Q2. As we progress into the second half of the year, our efforts to complete existing work packages will enable us to manage the costs reflected on the balance sheet, including contract liabilities and accounts receivable. There will be some net working capital reduction. We ended last year with 5% of working capital, and we are currently close to 9%. I had indicated earlier this year that we expected this trend, and by the year’s end, due to capital incentives, we should see some improvement, moving down to the 2% to 3% range in working capital. This aligns with our plan and the free cash flow estimate of $600 million to $700 million for this year, as well as our five-year goal. By exiting 2025, we aim for a net working capital level of $3.6 billion. We understand our current situation and align with the plan established for this year. We anticipate progress in the latter half of the year through milestones and incentives, along with new contract awards that match our business environment. These contracts are expected to be finalized, potentially at the end of Q3 or Q4, which may affect timelines slightly, but we should have new awards by year-end to support both margin and cash flow.

Okay. That gets into my next question. So I wanted to ask, just high level, a big part of the margin story, at least for shipbuilding is putting new ships and boats on contracts that have better pricing compared to some of your older contracts. So can you give us an update on how many ships and boats you put on contract so far this year? And how many you expect to put on contract in the next 12 to 18 months?

Yeah. So we expect to put under contract over the next 6 months to 12 months and probably before the year expires actually another 21 boats with pricing that reflects the current macroeconomic environment. So it's a significant amount of work that we intend to put under contract over the back half of the year.

Thank you. The next question is from the line of Pete Skibitski with Alembic Global. Please go ahead, Pete.

Hey, good morning. Nice quarter.

Good morning, Pete.

I have a question about Ingalls margin. It has decreased for the first time in nearly two years. The release mentioned a lower risk retirement on service companies. I am wondering if this is related to some early DDG-51s in the yard being booked conservatively, or if the push out of DG-129 for next year affected this quarter. Could you explain this in more detail?

Certainly, I can begin. I think there may be some comparison challenges from last year in that regard. However, you achieved two milestones, and costs are aligned with the schedule, which influenced the quarter. Additionally, the delivery for LPD 29 had a slightly lower risk retirement than we typically experience. Ingalls will continue to perform, and although this was a quieter quarter for them, I anticipate a swift recovery.

I appreciate it. Just one follow-up. I know there have been some supply chain issues in Virginia, particularly with the development of the new electric generators. Do you have a timeline for when that new system is expected to arrive in the yard?

I'm not the right person to discuss that, depending on the specific program. Our estimates for 80% remain unchanged, and our schedules have not significantly altered either. Good progress is being made on 80, and there are some interesting developments to ensure we stay on schedule for 81. However, I'm not comfortable discussing specifics because there has been no substantial change in delivery requirements or expectations between Q1 and Q2.

Okay. Got it. Thank you.

Sure.

Thank you. The next question is from the line of David Strauss with Barclays. Please go ahead.

Thanks. Good morning.

Good morning.

Good morning, David.

Chris, can you talk about where you are in terms of Block IV, Block V work and then negotiating Block VI on ECS?

Block IV is progressing towards the delivery of 798. There was a minor shift in the milestone, but the test program is advancing well with a capable team and strong leadership. I anticipate that 798 will be settled at the start of next year. The 800 series is also making steady progress, with its milestone impacting the latter part of this year. We have one additional module to deliver to General Dynamics. Meanwhile, we are making progress on Block V, which will follow Block IV in the integrated delivery and testing of the Block V Virginia-class submarines. For Block VI, we are currently in discussions with the government about negotiating that block, and I expect it to be resolved this year. We are working closely to ensure a fair deal considering the current macroeconomic challenges, including inflation and supply chain problems. We have mitigated those risks. The good news is that both we and the Navy are investing in the industrial base to address throughput issues. When we finalize Block VI, all these considerations will be included in that agreement, making it equitable. This summarizes our current status on the Virginia-class program.

Thanks. What is your revenue mix right now between Block IV and Block V?

Yes, the vast majority of it tell if you have the details, but the vast majority of it is headed in the Block V now.

We are currently 95% complete on Block IV. While it's not the exact answer to your question, we are over 95% completed on the contract for Block IV, and Block V is in the mid-20% range. Additionally, we crossed over about six quarters ago, indicating that Block V now has a high revenue contribution compared to Block IV.

Thank you. I would like to follow up on working capital. Did I hear correctly that it will drop to 2% by the end of this year? What is the projection for that in 2025?

We have been discussing this for the last couple of calls. For the 600 to 700 figure, we currently have the working capital in place, and with the capital incentives coming in, we anticipate reducing the 9% we project through Q2 to that level moving forward. This will be lower than our usual guidance of 4% to 5% due to the ongoing capital situation. We have not provided specific guidance for free cash flow in 2025, and I prefer not to share exact targets for the future. However, I can say that we are on track with respect to our five-year free cash flow guidance. As we conclude Q3 and Q4, a lot of activity is required, and it will play a role in achieving the 600 to 700 figure. I would like to maintain the working capital guidance for the latter half of the year as we define our trajectory and targets for next year during February's call.

Thank you. The next question is from the line of Gautam Khanna with TD Cowen. Please go ahead.

Thank you. I have two questions. First, regarding the Q4 cash flow, are there any significant events that could materially affect that number if they were to get delayed? Also, do the delays in delivery milestones have any impact on that? I have a follow-up as well.

Yes. I can tell you that the ramp we're expecting between Q3 and Q4 could vary. We can certainly guide for zero in Q3, but it may be higher by 100 to 200 or lower by 50 to 100, depending on various factors. The ramp from our current position to Q3 and Q4 includes improvements in trade working capital, such as accounts payable and receivable, and the progress and completion of our sales. This impacts the costs reflected on the balance sheet as we make advancements according to schedule. We have specific major milestones related to deliveries that we need to reach, which are outlined in our PowerPoint briefing. Additionally, we factor in both incentives and program contract incentives as well as new awards that contribute to growth in the latter half of the year. Overall, missing one milestone won’t significantly affect our anticipated progress. We'll keep you updated and provide more information in the November call. Do you have any other questions?

Great. Thank you. And Chris, I was just wondering what's your appetite for acquisitions at this point, if you could just talk about that?

Yeah. So capital allocation has been fairly consistent here for the last year after we started to pay down the debt. We like to be investment grade. We think that's where we need to be and where we want to be. We're going to continue to invest in our shipyards. We're going to pay a dividend. And then with excess cash, we're going to provide it back to shareholders, but we'll continue to evaluate M&A opportunities as they present themselves. And if it makes strategic and financial sense, we'll evaluate it and entertain it. So there's not really a change in our capital allocation philosophy.

Thank you.

Thank you.

Thank you. The next question is from the line of Jason Gursky with Citi. Please go ahead, Jason.

Okay. Good morning, everybody. Can you hear me?

Good morning, Jason. Yes.

Okay, great. I think the operator’s struggling there a bit. And Chris, just a quick question first on Mission Technologies. You mentioned the trailing 12 month book-to-bill of 1.15 and the quantum of the pipeline that you have there in that business. I'm wondering if you can step back for a minute and just talk a little bit about the 1.15, when you can execute on that backlog and the pipeline that you have available to you? And what that means for growth rates beyond 2024. We are obviously off to a really solid start here in the first half of this year. I'm just kind of curious how this growth rate settles out over the next couple of years?

Yes. So thanks, Jason. We're still comfortable with our 5% growth rate in Mission Technologies. It was a bit of a conservative guide. We've increased it for the year. And beyond that, if we can execute on the $83 billion pipeline and the book-to-bill continues to be very good, it could be north of that. And it's really broad-based across the business that each one of those business areas is executing very well. I would like to point out that there's a lot of interesting things going on in Mission Technologies. This is the first time that the Navy is going to deploy a Virginia-class submarine with launch and recovery all autonomously of REMUS vehicle. And it's not just an exercise; that's full deployment to see Elmore. It's a great product, and it demonstrates the kind of the man and autonomous and man teaming that we really think about provides a lot of value for our customer. So if they continue to execute like this, they continue to execute on that backlog, and they take advantage of that pipeline, it could be north of that. But we don't want to get too far over our skis. We're going to be relatively conservative, as you would expect for us to be, but I'm very encouraged by how Mission Technologies is developing.

Thank you for that information. I appreciate it. I’d like to discuss labor productivity in the shipyards. You mentioned earlier in the Q&A about attrition rates and hiring, which is positive. However, I believe the learning curve for employees is equally important. Can you provide a general overview of labor productivity today compared to pre-pandemic levels? Are we still experiencing decreased productivity compared to before the pandemic? What are your projections for the next couple of years regarding a return to pre-pandemic productivity levels? Thank you.

Great question, Jason. Productivity is not at the levels it was before the pandemic, and that's a reality we have to face. This situation is related to the experience level of our team. Do I expect it to improve? Absolutely. Both the Ingalls and Newport News teams are making investments to help ensure it does. The SIB investments from the Navy are also focused on this aspect. It's not just about infrastructure; it aims at enhancing the proficiency of the workforce as well. So, I do anticipate improvement. We are actively investing in this area. We've managed similar situations in the past and have witnessed improvements, and I expect this trend to continue as we stabilize moving forward.

Thank you. The next question is from the line of Seth Seifman with JPMorgan. Please go ahead, sir.

Hey, thanks very much and good morning.

Good morning.

Good morning, David.

I wonder – good morning. In the slides, I think you talked about a reduction year-on-year in Virginia sub profitability. Should we attribute that to what's happening on Massachusetts? Or was the reduction in expected profitability on Block V?

Yes. So, I think that's probably a compare issue related to last year. There's no material issue that we can note related to that. It's kind of broadly across the blocks. We assess our ACs every quarter. We have to make an adjustment; we do that, plus or minus. So this is not anything individually material there.

Okay. You mentioned earlier about the carrier. So, with both the carrier and Virginia Block 5, there weren't meaningful changes to the estimated profitability?

No, it's not significant enough to mention. However, we evaluate our issues every quarter and make necessary adjustments based on our assessments during that time.

Right. Great. For Ingalls, should we expect profitability to remain at the high end of good shipyard margins, considering we have typically seen solid double-digit margins there?

Yes. So, we don't guide by shipyard, but I fully expect Ingalls to continue to execute on their programs very well. But yes, we don't provide guidance by our shipyards.

Thank you. The next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes, good morning.

Good morning.

Good morning, David.

Tom, I wanted to pursue a little bit the free cash flow needs for the fourth quarter. I mean, obviously, we can all do the arithmetic $973 billion to $1.73 billion. Now, if I look back, that's nearly twice what you've ever done before, the last highest year in the last five with $539 million in the fourth quarter of 2018. In addition, you've never had three quarters in a row where no quarter generated positive cash flow. So, my question is what has changed in the last five years in terms of contracts that you have or what to suggest such a dramatic swing this year from what we've seen before?

Yes. I believe we have experienced a couple of negative quarters, and we can discuss that further offline, George. However, this year isn't unusual; it's more backloaded. Pre-COVID, while executing these contracts, we've noticed a shift in schedules over the last three or four years, impacting our progress, cost collection, and billing, which creates some challenges. We still manage this on an annual basis, and as you know, we have been effective in providing a five-year target since 2019, offering annual guidance for each year, which we have generally met or exceeded. Currently, we have increased our target from $2.9 billion to $3 billion, adding another $10 million to it, and we're projecting a 20% increase over the next five years. Our visibility into the portfolio is quite solid. We have a relatively mature portfolio, so we understand what we need to build, the program plans, expected costs, and how all this integrates into our quarterly plans for free cash flow moving forward. It is backloaded. Earlier, I noted that you can refer to our Q results to see what's influencing this. There has been a slight increase in capital expenditures in the past two years, accounting for 26% and 24% of sales, respectively, and we expect to see this ramp up in the latter half of the year. Last year's capital incentives will factor into this as well. As we continue to progress, we will manage the costs on our books and balance sheet, planning to optimize working capital. This will be essential, especially with milestones, deliveries, and additional contracts, alongside capital incentives driving the latter part of the year. Our guidance of 3% was likely conservative; we didn't want to suggest a figure that might be $100 million to $200 million higher or $50 million to $100 million lower for Q3. The events and milestones we anticipate need to take place around the end of September through November. We chose to provide conservative guidance, which might make Q4 seem like a larger challenge than it may ultimately be.

Okay. Just one comment. What I meant to say about cash flow is that there hasn't been a quarter in the last five years without at least positive cash flow in one of the three quarters. Several quarters have had two negative, but none have had zero in the third. A follow-up I had was about Mission Technologies. The guidance for the second quarter was around $650 million, but you achieved $750 million, which is similar to the first quarter. You mentioned that materials may drop in the third quarter. Can you clarify what actually drove your comments on materials?

Yes. The comment I made earlier was primarily relevant to Q1. We had some sales that we don't anticipate will occur regularly, and they are not included in our Q2 guidance. The revenue in Q2 at Mission Technologies was fueled by strong performance in C5ISR and CEWS, and we expect this trend to continue. We have a clear understanding of our contract portfolio and current operations, allowing us to set revenue expectations for the last two quarters. Additionally, there are monthly awards that present potential sales opportunities in the range of tens of millions of dollars. We need to focus on executing our existing contracts as these awards materialize. We conservatively projected our guidance for the beginning of the year, estimating a run rate between our first two quarters at roughly $3 billion annually. We've adjusted our guidance from 2750 to a range of 2750 to 2280. It's important to stay cautious and not get ahead of ourselves. Chris mentioned growth earlier; we saw a 4% increase from '21 to '22 and a 12.7% increase from '22 to '23. Both Q1 and Q2 also reported growth of 20% and 18%, respectively. While we aim for success, we need to onboard the right talent and secure contracts to maintain this positive trend. I'm optimistic about the Alion acquisition and our goal for Mission Technologies to generate $200 million in cash, which we are on track to achieve. The portfolio of contracts we have and the growing pipeline give me confidence.

So just one last one. So why guide only $650 million in the third quarter?

Well, I would say we have a lot of work to do going forward here. We don't want to over guide in this, and it's still a function of a couple of awards that will have a minor impact on the revenue for the rest of the year here.

Thank you. The next question is from the line of Jordan Lyonnais with Bank of America. Your line is now open. Please go ahead.

Hi. Good morning.

Good morning, Jordan.

Thanks. On CapEx, the sequential uptick that you guys had, is there a percentage or a portion of that, that you could give color on that you'd expect to get back from the Navy CapEx incentives?

Yes. We always invest with our partner with the Navy on this. And depending on what the CapEx is and the timing and the value equation, what that adds and the design of getting in the yard, whether it's for operational or maybe sales and things like that, there's a mix there of investment. We don't get into that. I mean, that's just part of the business case. And I will tell you that any capital projects that we do add value, we get a return on our capital, and it goes into the business construct and how we choose which projects we bid, we approve and we execute, so I'd leave it at that. It was 2.6% in Q1, 3% in Q2. The guide is still 5% for this year with a 5% CapEx over the next three years.

Got it. Okay. And then also to the contract at Deloitte one that's for Navy shipbuilding, do you have any sense of the scope for it? Or why Mission Technologies wasn't picked or you guys in general?

Yes, I believe they are effectively directing their investment allocations to areas where they should be investing. However, we were not part of that contracting process.

Okay. Got it. Thank you so much.

Sure.

Thank you. 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.

Thanks, everybody, for joining today. Before we go, I'd like to extend my thanks to the entire HII team for their continued focus, and we look forward to speaking with you on our next earnings call. Thank you.

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