Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2024 HII Earnings Conference Call. Please be advised that today's conference 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 third quarter 2024 conference call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We also will refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer; and Tom Stiehle, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Thanks, Christie, and thank you for joining the call, everyone. Earlier today, we released our third quarter results and announced updated guidance for the year. Before I get to the results, I want to thank the 44,000 HII employees who build ships in our shipyards and who solve some of the most pressing technical challenges related to our national security within our Mission Technologies division. At HII, our mission is clear. It is to deliver the most powerful ships and all domain solutions in service of our nation, creating advantage for our customers to protect peace and freedom around the world. Now for the results. Third quarter revenue was $2.7 billion and earnings per share was $2.56, down from $3.70 a year ago. We updated our shipbuilding revenue guidance for the full year to approximately $8.8 billion and our Mission Technologies revenue guidance to a range of $2.8 billion to $2.85 billion. We also updated our 2024 shipbuilding margin guidance to 5% to 6% and revised our 2024 free cash flow guidance to zero to $100 million. I'll provide some operational milestone updates and division highlights prior to providing a more detailed discussion surrounding the quarter's performance and guidance changes. During the quarter, Newport News shipped the final module of Virginia-class submarine Utah, SSN 801 and on CVN 79 Kennedy, the ship is progressing into the test and turnover phase. 92% of compartments have been turned over to the Navy and all 19 of the ship's combat systems are turned over to the government test team. Looking ahead, float off of SSN 800, Arkansas is moved to 2025 due to a customer-driven design change that requires incorporation prior to launch. At Ingalls Shipbuilding, we received the $9.6 billion award of the multi-ship procurement of amphibious warships, which provides strong revenue visibility for years to come. Combining this with a series of milestone achievements in the quarter and early October, including the launch of LPD 30 Harrisburg, the load-out of three or four hypersonic missile tubes into the DDG 1000 Zumwalt structure and Aegis Light Off on DDG 128 Ted Stevens, the second Ingalls Flight III destroyer, some solid progress is being made at Ingalls. Our results also reflect strong performance at Mission Technologies with 14% revenue growth year-to-date over 2023 and a third quarter funded book-to-bill of 2.2. Mission Technologies had several significant contract wins in the third quarter, totaling $11 billion of potential contract value, including a $6.7 billion contract to provide electronic warfare engineering and technical services support for the U.S. Air Force. The single award Indefinite Delivery and Indefinite Quantity contract is the largest-ever awarded to HII's Mission Technologies division. We were also awarded a $3 billion federal government single award task order for National Security Services and new and emergent technology, a $458 million contract to modernize U.S. government communications and IT networks, and a $209 million contract to support U.S. Air Force Weapons Systems development and sustainment. We ended the third quarter with backlog of $49.4 billion, of which approximately $28 billion is currently funded. Further to results and guidance changes, two issues have impacted our expectations for the year. First, based on constructive discussions with our Navy partner, we expected to reach an agreement for Virginia-class Block V and Block VI and Columbia-class submarines in the second half of 2024. Starting this fall, some uncertainty emerged about the timing of that agreement; where we are confident an agreement will be reached and discussions continue, we have updated our profitability and cash flow assumptions based on the uncertain timing and structure of that award. We continue to pursue innovative contracting approaches that incentivize greater investments in our workforce, facilities, and technology. These investments are critical to the goal of yielding accelerated program schedules that meet the urgent needs of the Navy. Second, our assumptions of performance improvement and risk reduction have not been achieved. This is due to late critical material deliveries and reduced experience levels within our teams, both in production touch labor, and supervision. The combination of material delivery delays and inexperience leads to labor inefficiency and in some cases to rework, which affects program schedules. Late supply chain material has necessitated a renewed look at our labor plans and delivery schedules. This alignment of labor and material from the supply chain is critical to mitigating program cost. It bears repeating that nearly all the ships currently under construction were negotiated prior to COVID. These ship contracts, which provide long-term revenue visibility, did not anticipate in their cost targets and risk-limiting clauses, the significant disruption of our workforce and supply chain or the subsequent inflation experienced by us and the broader economy. They did not anticipate the significant loss of shipbuilding experience in our yards through early retirements and the training requirements of new shipbuilders. As I said, the terms of these contracts are still governing the majority of the work underway now at Newport News. Let me be clear, delays and cost increases on these ships are unacceptable to me, my team, and all of us at HII. Looking ahead, we continue to take decisive actions to focus on the fundamentals of shipbuilding to ensure that we finish these ships, get them delivered to the Navy, and transition to ships negotiated in the context of our current economic reality. Further, regarding actions to improve performance, I'll focus on three points, starting with workforce. I want to emphasize we have thousands of highly skilled and committed shipbuilders, and their example and mentorship are invaluable as we develop a new generation of manufacturing talent to execute on our backlog and the demand ahead of us. We are making significant investments in craft proficiency training and in leadership development, so that our deck plate executes safely, efficiently, and with first-time quality. Our innovative craft learning centers, virtual and augmented reality training cells, and foreman support strategies are helping to accelerate learning within the teams. In partnership with the submarine industrial base, the Hampton Roads regional training pipeline has grown its capacity, allowing Newport News Shipbuilding to hire 30% of craft new hires from a pre-hire training pipeline, up from only 5% two years ago. Also at Newport News, we remain focused on deploying and maturing a common operating system across all programs to improve execution. In trades where we first piloted this, we have seen meaningful throughput improvement by enabling our frontline leaders to spend more time on the deck plate with their people and by standardizing and simplifying how they put their teams to work every day. We are also investing in data analytics and pilot projects utilizing AI to find faster solutions to material delivery delays and mitigate their impacts on ship assembly schedules. Scaling the operating system across all production areas is our best near-term opportunity to improve throughput while we pursue long-term structural improvements to our infrastructure, supply base, and workforce. Second, supply chain and supplier development, we are working with the Navy fueled by submarine industrial-based funding to improve supply-chain performance. With the goal of helping to accelerate throughput in the shipyards, we are also investing in new centralized manufacturing centers of excellence for high-risk items to improve cost and schedule predictability for these build sequence-critical parts. Third, capacity, we are outsourcing additional work to new suppliers, which helps to rebuild the industrial base and takes the work to where there is additional workforce and investing in new industry 4.0 technologies, including additive manufacturing and digital engineering. As an example, we are outsourcing over 1 million hours in 2024 and plan to increase that by over 30% in 2025. We are committed to growing the manufacturing ecosystem necessary to build these ships. Additionally, we are reviewing costs across all three divisions to remain competitive and meet our cost objectives. This enterprise-wide review includes a thorough evaluation of our overhead costs and support costs to ensure that each element supports our customer requirements. We are evaluating capital in a similar fashion and ensuring we focus our capital on improving throughput. While our previous cash-flow forecast included a capital expenditure target at 5% of sales from 2024 through 2026, we have reduced our planned spend for 2024 and we are thoroughly evaluating our 2025 and 2026 capital plans to reflect the uncertainty of the timing and structure of the future contracting activity. Turning to Washington, while the government operates under a continuing resolution into December, we continue to engage with the Navy on the most appropriate path forward on the submarine contracts. As demonstrated with the recent multi-ship procurement award for amphibious ships, HII has a record of reaching equitable agreement on this type of contract that delivers sustainable returns for the company and savings to the customer. In closing, before I turn the call over to Tom, I want to emphasize these primary points. First, we are confident we are focused on the right things on the fundamentals to execute on our current backlog. And once we transition to these post-COVID contracts, cost and schedule performance and predictability will improve. Second, on the outstanding contract awards in shipbuilding, we expect agreement at a fair cost and schedule that reflects our current operating environment, and we will continue to work with the Navy until we get this complete. Finally, the long-term value equation for HII has not changed. There is unprecedented demand for our products and services. We remain confident in our mid to long-term guidance of 9% to 10% shipbuilding margins and we firmly believe the actions we are taking will enable us to stabilize performance as we continue to work through these ships. And now, Tom?

Thanks, Chris, and good morning. Let me first start by briefly discussing our third-quarter results and then I'll address our updated outlook. For more details, 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 third-quarter revenues of approximately $2.7 billion decreased 2.4% compared to the same period last year. This decreased revenue was attributable to declines at both Ingalls Shipbuilding and Newport News Shipbuilding, partially offset by growth at Mission Technologies. Operating income for the quarter of $82 million decreased by $90 million or 52.3% from the third quarter of 2023, and operating margin of 3% in the quarter compares to 6.1% in the same period last year. Decreased operating income was largely driven by declines at both Newport News and Ingalls, which I will discuss in more detail in a moment. Net earnings in the quarter were $101 million compared to $148 million in the third quarter of 2023. Diluted earnings per share in the quarter were $2.56 compared to $3.70 in the third quarter of the prior year. Our contractual commitments increased by approximately $900 million in the period, bringing backlog to $49.4 billion at the end of the quarter, while we did secure the $9.6 billion award in the quarter at Ingalls for four amphibious ships, including LHA 10, LPD 33, 34, and 35. We recorded just the authorized value to date, approximately $565 million in the quarter. We will see the awarded values of those ships grow over time as authorizations expand. Moving to Slide 7, Ingalls revenues of $664 million in the quarter decreased $47 million or 6.6% from the same period last year, driven primarily by lower volumes in the amphibious assault ships and the National Security Cutter Program, partially offset by higher surface combatant volume. Ingalls' operating income in the quarter was $49 million and operating margin was 7.4%, compared to $73 million and 10.3%, respectively, from the same period last year. The decreases were primarily due to lower performance on amphibious assault ships and surface combatants. At Newport News, revenues of $1.4 billion in the quarter were down $41 million or 2.8% from the same period last year, driven primarily by lower volumes in naval nuclear support services as well as the cumulative adjustments on the Virginia-class submarine program in aircraft carriers, partially offset by higher volumes in the Columbia-class submarine program. Newport News' operating income in the quarter was $15 million and operating margin of 1.1% compared to $90 million and 6.2%, respectively in the prior year period. Newport News results included net unfavorable cumulative adjustments totaling $78 million, including $34 million on Block IV of the Virginia-class submarine program, $16 million on the Enterprise CVN 80 and Doris Miller CVN 81 two-carrier contract, and $14 million on the refueling and complex overhaul of the USS John C. Stennis CVN 74. As Chris described, these unfavorable adjustments were driven by both the change in our assumption around contract awards as well as program performance challenges as we have not achieved planned performance improvements. During the quarter, some welder issues were reported publicly that we had previously disclosed to our customer. An initial assessment at Newport News Shipbuilding determined that fewer than two dozen welders did not consistently follow procedures in their weld process. We continue to work alongside with the Navy through a comprehensive investigation and analysis to determine the extent of any financial impact. At Mission Technologies, revenues of $709 million increased $24 million or 3.5% compared to the third quarter of 2023, primarily due to higher volumes in cyber electronic warfare and space. Mission Technologies' operating income for the quarter was $33 million and operating margin was 4.7% compared to $24 million and 3.5%, respectively, in the third quarter of last year. The increases were primarily driven by higher cyber electronic warfare and space volumes as well as equity income from nuclear and environmental joint ventures. Third-quarter results for Mission Technologies included approximately $25 million of amortization to purchased intangible assets. Mission Technologies' EBITDA margin in the third quarter was 8.9% compared to 8.2% in the third quarter of 2023 and 8.5% last quarter. As Chris noted, Mission Technologies' performance in 2024 has been very strong with year-to-date sales growth of 14%. This follows 2023 revenue growth of 13.1% over 2022. Mission Technologies' third-quarter contract awards, which entail new work and recompete wins across the service branches and multi-domain operations represent nearly $11 billion in total potential contract value, a record for Mission Technologies. Turning to Slide 8, cash generated by operations was $213 million in the quarter. Net capital expenditures were $77 million or 2.8% of revenues. Free cash flow in the quarter was $136 million. Cash contributions to our pension and other post-retirement benefit plans were $12 million in the quarter. We have provided an update to our 2024 and 2025 pension outlook in the appendix of today's slides. The cash-flow impacts related to the updated forecast are quite minimal. Pension-related numbers are subject to year-end performance and measurement criteria. As usual, we plan to provide a multi-year update of pension estimates on our fourth quarter call in January. During the quarter, we repurchased approximately 134,000 shares at a cost of approximately $35 million, bringing the year-to-date total to 608,000 shares at a cost of $162 million. With cash from operations now below our initial expectations, consistent with our capital allocation priorities, we have throttled back repurchases for the remainder of the year. Also during the quarter, we paid cash dividends of $1.30 per share or $52 million in aggregate. Yesterday, we were pleased to announce an increase to our quarterly dividend to $1.35 per share, or an increase of approximately 3.8%. Moving on to our updated outlook, which we have summarized on Slide 9. We've increased Mission Technologies' revenue by $50 million for the year, now to $2.8 billion to $2.85 billion and increased their margin outlook to 3.75%. For Shipbuilding, we have centered on revenue guidance to the lower end of the range at $8.8 billion. Our prior shipbuilding revenue and margin guidance anticipated receiving an omnibus of submarine contract awards and contract modifications incorporating opportunities to address key shipbuilding structural challenges across the Newport News enterprise, focusing on investments in our workforce, training, and investments in our infrastructure, buildings, facilities, manufacturing, tooling, and aids for additional throughput and capacity across the Newport News portfolio. While we remain confident that we will ultimately receive the new contract awards, we are now uncertain of the timing and whether the overall contracting construct of those awards will enable full pursuit of near-term key investments needed to accelerate performance, rate, and volume of the Newport News portfolio of contracts. Our initial guidance for 2024 also assumed incremental program performance improvement consistent with normal expectations to capture learning curve improvements and production efficiencies over time. Performance has not improved at the forecasted rate due to workforce inexperience and delays with the supply chain, which along with our updated contracting expectation has a near-term impact on our ability to achieve progress milestones, burn down working capital, and collect associated cash. The results and updated outlook announced today reflect a reduced performance trajectory aligned to current conditions. Our updated shipbuilding operating margin expectation for the year is now 5% to 6%. Our updated free cash flow is between zero and $100 million, and our capital expenditure outlay for the year has been reduced from 5.3% to 3.4% of sales. Prior guidance anticipated contract structures that would have allowed us to capture additional progress milestones as well as the inclusion of incentives related to the new contract awards. We expect to return to more normal free cash flow levels once we are able to work through the challenging portions of our current contracts and have a better understanding of the new submarine awards. In light of this dynamic, we are withdrawing our five-year free cash flow target. Beyond our operational guidance, we have also made modest updates to our outlook for pension-related items, interest expense, and our expected tax rate for the year, which has declined to 17%. The lower annual forecasted tax rate is driven by third quarter results that include an increase in the research and development tax credits for current and prior years, resulting in an effective tax rate of approximately 10% for Q3. Turning to the balance sheet, we ended the quarter with liquidity of approximately $1.3 billion and modest leverage of approximately 2.1 times net debt to trailing 12-month EBITDA. Our capital allocation priorities are unchanged, including our commitment to investment-grade credit rating, thoughtful investment in our shipyards, continued dividend growth, and the return of excess cash through share repurchases. Within the third quarter, we expanded our revolver from $1.5 billion to $1.7 billion and raised our commercial paper program from $1 billion to $1.7 billion, consistent with our normal cost of business and given the more favorable interest-rate environment; we are considering a new debt issuance in the coming months. Proceeds would be used in part to support the redemption of the $500 million senior notes due in May 2025 and for other general corporate purposes. This plan is still under evaluation. Further to Chris' comments on our focus on cost-efficiency ongoing across the corporation, we recently announced the consolidation of Mission Technologies into four groups, down from the previous six business units, simplifying the division's structure around key growth initiatives while enhancing competitiveness by reducing operational costs. This more efficient alignment of the portfolio, talent, and resources will support continued long-term business growth. To close, I will reiterate that while our updated guidance removes the assumption of a near-term Omnibus contract agreement for the next increment of VCS and Columbia submarines, we continue to advocate for innovative and sensible solutions to address the urgent shipbuilding industry challenges we have discussed. We are confident in our ability to work through the current challenges and we will continue to focus on aggressively driving performance improvement in our shipyards, expanding capacity and throughput, and securing equitable contract solutions that address the business realities of the current operating environment.

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.

The first question comes from Gautam Khanna with TD Cowen. Your line is now open. Please go ahead.

Yes. Hi guys. A couple of questions.

Good morning, Khanna.

Good morning. Tom, you mentioned that there was an implicit assumption about obtaining a lease on existing contracts in the yard contingent on signing the new submarine contracts. I'm curious how much of the negative cumulative catch-up at Newport News is related to that and how it affects the ongoing booking rate. It seems like you were already booking with this assumption in mind. So, what's the incremental impact compared to what was already established? That's my first question. My second question is about the welds rework. How much of the keen catch-up relates to that? I'll leave it for someone else. Thanks.

Okay, Gautam. This is Chris. I'll respond to the first question and then address the welds, followed by Tom. During the quarter, we faced two key issues affecting our performance. First, we encountered challenges with execution on the deck plate, particularly concerning pre-COVID ships. Secondly, we had to reassess our operational assumptions for the quarter and our guidance, especially related to the 17 ship contract. To provide more insight, the most significant impact was due to the Block IV submarines, specifically the 798 and 800 vessels, which were approaching critical milestones in their testing programs. We faced unexpected rework on systems, which disrupted our schedule and forced us to adapt our plans. This unpredictability has been characteristic of the pre-COVID ships as we approach major milestones. Regarding the 17-ship contract, we had been making solid progress, as mentioned in my earlier statements. This contract represents a significant reset for our portfolio in Newport News. It is not standard operations to introduce that volume of work into a facility and expect seamless execution, particularly under current labor market conditions, supply chain challenges, and overall industrial capacity. We are diligently collaborating with the customer to ensure that the 17 ships are delivered correctly. The contract is extensive and aims to facilitate investment in labor, infrastructure, and technology throughout our portfolio. We felt we were nearing completion on this contract, but it remains under review, with alternatives being considered, which has contributed to our unpredictability for the quarter, the year, and our overall outlook. I can assure you that when this contract is finalized, it will be fair and equitable, reflecting the economic conditions we face. It is crucial that we do not commit to costs or schedules for these submarines without the ability to meet them, as they are urgently required. Ultimately, I believe it is not entirely appropriate to separate our performance from our expectations regarding the 17-ship contract. We originally anticipated realizing certain incentives within that contract, but that did not happen. The situation is complex, making it difficult to differentiate between the two. As for the welds, Tom began this discussion, and I'll let him delve into the financial aspects. Fundamentally, this issue pertains to our processes. It involves a small number of welders and a limited number of welds that were affected. We are working closely with the customer to assess and manage the situation, and we believe we can navigate through it effectively. Tom, would you like to address the financial implications?

As we continue with the investigations and eventually reach a conclusion, we will have a clearer picture regarding the financials. We have made an initial booking, though it is not significant and not noted in the current queue; it’s simply related to costs we believe may be unallowable. We will provide more information as we finalize this matter. Regarding the earlier point, as Chris mentioned, it is difficult to differentiate between performance and the innovative approach for the new contract, which is still under negotiation. There are options to consider, and we will have to see how things develop. Therefore, it's premature to comment further as we navigate these negotiations independently.

Okay. Thank you.

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

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

Good morning, Scott.

Good morning, Chris. In your press release and opening remarks, you mentioned innovative contracting approaches that encourage increased investments in the workforce, facilities, and technology. I believe you are referring to the SAWS funding plan where the Navy intends to reallocate funds from ships that are yet to begin construction to support higher wages and infrastructure development at this time. Could you share your thoughts on the SAWS plan? I have another follow-up on that as well.

If the SAWS plan has been broadly reported, I won't go into too much detail. You covered the basics well. We support the plan; it was a great idea initiated by the Navy, and I still believe it is the best approach to address this issue as it opens up significant investment in the workforce, infrastructure, and technology. We continue to discuss alternatives with the Navy and Congress while supporting and inquiring about other options. However, the SAWS plan was a very good idea that we believe is still under review and may eventually be put under contract, although we do not anticipate that happening within this year.

Okay. And then there was a letter from a bipartisan group of senators. It was regarding the SAWS plan, but it also mentioned that there could be a $17 billion shortfall in funding on the Virginia-class program over the next six years. I understand shipbuilding costs have increased significantly, but does a $17 billion shortfall sound remotely close to you? And do you think Congress will support plugging that shortfall?

I will not comment on Congress's ability to secure additional funding. The advantage of SAWS is that it did not require extra funding. I also believe it's not appropriate for me to discuss the baseline used for that increase. However, I want to emphasize that our teams are diligently working towards a contract solution regarding these 17 ships. It is essential that the solution is fair, considers the current macroeconomic climate, and allows for initial investments so we can deliver these critical assets to the fleet as quickly as possible.

All right. Thanks for taking the question.

Sure.

Thank you. The next question is from the line of Myles Walton with Wolfe Research. Your line is now open. Please go ahead.

Yes, thanks. I was hoping you could talk and maybe give us a little bit of color on the $800 million cut to operating cash flow for the year. How much of that was specifically tied to the contract slipping out beyond this year? And how much was tied to performance? I know you didn't want to do that for the EAC, but given the size of the cash cut, I hope you can do it for this.

Yes. Let me start, and Tom can join in. When we consider guidance, we evaluate everything with risk in mind. It's a mix of the new contract and the progress made within the yards. Tom, do you have anything more to add?

Yes. We discussed this in Q1 and Q2, outlining a path to achieve our guidance. You could observe the increasing working capital on the balance sheet at that time. We mentioned our progress regarding major and minor milestones along with performance and capital incentives that we have in place. Additionally, our typical run-rate includes unadjudicated changes, change orders, REAs, and similar items, all of which affect our margin and cash flow. The plan laid out at the year's start indicated a clear pathway. In Q1 and Q2, we maintained avenues for performance and investments related to the 17 boats under our innovative contracting approach to meet our guidance. However, the current challenges we face are twofold: not all 17 boats appear to be on track for awards by year-end, which is well understood, and while we've made progress on performance, it hasn't been sufficient or timely enough to cover all costs currently on the balance sheet. Hence, we considered it wise to revise our guidance from $600 million to $700 million down to a range of zero to $100 million. This change reflects timing issues surrounding awards and performance, which has lowered our shipbuilding margin from 7.6% to 7.8% down to between 5% and 6% this year, resulting in less cash flow. There are timing aspects that will defer some items from 2024 to 2025 and operational challenges as well. It’s a combination of factors, and we felt it was necessary to adjust our guidance after observing headwinds post-Q2 concerning the execution of our innovative contracting strategy and the performance in Q3.

Yes. No, and I get the moving parts. I'm just hoping because obviously, the timing piece is an important question, if it's timing or if it's performance and the contract, I think we could perceive some of that as timing. And so I would just ask, is it three quarters related to the contracts? Is it that high or is it not that high?

Yes, Myles, I understand your question regarding the split. The interesting aspect of those 17 ships is the nature of the contract, which is still uncertain. We have been actively discussing what it will entail. I am very confident that they will place orders for those submarines, but we don’t yet know the final details. It is challenging to break that down for you.

Okay. Maybe the following question, I'll leave it is, so going into next year in terms of normalcy of cash generation of this business, what would be the framework that you'd suggest for thinking about cash generation of the business?

Well, I think it's going to be choppy for a couple of years, quite honestly, Myles. We're taking a hard look at all our expenses, our capital. We're relooking at that. But it's all going to be the indicators of cash, they are all going to be about performance and how that shifts, how that contract comes together, how we execute at the deck plate and proceed, and just how we transition into those new contracts. It's that's going to be the story from a cash flow standpoint for the next couple of years for us.

Okay. All right. Thank you.

Yes.

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

Yes, good morning, everyone. Regarding the Block IV charges, was there a design change? Did the Navy request modifications on the 800? Did they compensate you for that, or does that fall under some of the negative EAC?

Yes. So it's both backed-up in the quarter. A part of that is the design change related to 800, there's probably some upside on that when that gets negotiated potentially. It's clearly a Class 1 change for work that needed to get done before we floated off. But that was not the only issue in the quarter for 800, and there could potentially be some upside related to that.

Okay. And then just at Ingalls, it seemed like on the last call, you guys had a feel that things were going to improve imminently at Ingalls, and it seems like they're largely in zero production down there. So I'm just wondering if you can categorize or characterize, is there pretty meaningful net attrition issues at Ingalls as well? Or why are things kind of going in the wrong direction there?

Yes, I wouldn't necessarily say they're going in the wrong direction at Ingalls. They do have the same issues that everyone in manufacturing is facing relative to green labor and they're working very hard to address that. The issue with Ingalls right now is there's just less opportunity for positive adjustments. You don't see significant negative adjustments, but you don't see significant positive either. So they're fighting through the same issues as everyone in manufacturing in the United States fighting through relative to green labor, fragile supply chain, but I got a lot of confidence in Ingalls' team. They're making their milestones and they're proceeding on their programs. And that bundle contract was very positive. It's really representative of the type of contract we need going forward to reflect our current macroeconomic environment, ensuring we protect ourselves against the risk of inflation and a fragile supply chain. So yes, I got a lot of confidence in the Ingalls team.

Okay. Thank you.

Sure.

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

Good morning. Thank you.

Good morning.

Hi, Chris, good morning. Regarding the money allocated to the submarine industrial base, can you clarify where it is being directed? Are there any signs that it is making an impact at this time?

Yes. So the industrial-based funding really positive developments there from Congress and the Navy to flow that money into the industrial base, it gets distributed primarily in the supply base, but we benefit from it as well. And there will be benefits related to it. The problem is it just doesn't happen very quickly. When you're talking about potentially new tooling, new buildings, it takes a while to get that stuff done and then to reap the benefits from it. So we're actually rebuilding the industrial base related to shipbuilding right now and expanding capacity both through Navy investments as well as our investments. So I think it's a very positive development. I think actually, I know there's going to be benefits that come from it. It's just we're going to have to be a bit patient.

Okay. As a follow-up to Myles' question, Tom, regarding working capital, you're currently at about 9%. Your guidance for the full year suggests that by Q4, it will decrease to around 6% to 7%, correct? Do you still consider a normal level of working capital to be approximately 5%?

Yes. So I think obviously you can calculate we are in the upper 8s right now and we are going to take a couple of hundred basis points to 200 basis points out of that by the end of the year. There's a range of variability between zero and 100. I do think once we get past these ships here, the pre-COVID ships, we'll get back to a normal range of cash flow. As Chris said, that could be 12 to 18 months by the end of '24 into '25. So we’re just going to have to work ourselves through that. We're making progress. The cost is there on the balance sheet. We just have to finish these ships up and get paid. The cash will come as we make our deliveries. So it's just a function of us grinding through the current portfolio of ships.

All right. Thank you.

Thank you. The next question is from the line of Scott Deuschle with Deutsche Bank. Your line is now open. Please go ahead.

Hi, good morning.

Good morning, Scott.

Tom, the low end of the shipbuilding margin guide seems to imply significantly more negative EACs in the fourth quarter. So I guess you see risk there. So my question is what prevents that risk from crystallizing other than getting the submarine contract? And then why not just book those negative EACs now if we're going to guide to them? Thanks.

We provided a range of 5% to 6% for the end of the year. With the actions planned for the first three quarters, you can estimate where we will land. There is some volume associated with that, but generally, there is still a spread of about 300 basis points between the low and high ends, expanding to 400 basis points. It all depends on our progress. We are looking at Q4 performance and ensuring we meet milestones, including the CapEx and performance incentives, with expectations for payments by year-end. On the cash and margin side, we are monitoring the EACs and finding stability with our current ships. We wanted an appropriate range that considered all possible outcomes. There is also upside potential between 5% and 6%, and we will assess as the year concludes. Additionally, we accounted for the investment upside that will come as investment dollars are utilized for the VCS and Columbia bill, which will not influence the year-end results.

Okay. Thank you. And then, Chris, sorry if I missed it, but do you still expect to deliver CVN 79 in 2025? And is that pre-COVID ship seeing any issues or rework requirements in the testing phase like those you referenced on Block IV Virginia-class?

Yes. So no change in the milestones other than what I referenced on my script. We're absolutely impacted on all those pre-COVID shifts by additional rework and really the fragility of the supply chain. We've talked previously about the kind of the variability in the supply chain going down from an inflation and predictability standpoint. But when something breaks, when you're going through the test program, something breaks and you have to go reorder or you have to rebuild it, there's just arthritis in the system-related to getting that back, which causes schedule risk. So yes, no change to 79 right now, but it's just going to be a challenge completing any ship that was done negotiated pre-COVID.

Thank you.

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

Yes. Thanks and good morning, everybody.

Good morning, Jason.

Hi, Chris. Hi, I'm just kind of curious how you go about managing the business with this much uncertainty going on the start new contracts and just kind of how you're going to go about managing through this? And then I can't help but wonder if slowing down here for some period of time might be helpful as you try to convert some of your green labor into more experienced labor. So I'm just kind of curious, could we wake up someday and see that we just hit the pause button, let you guys figure out how to get this work done more methodically and we kind of restart it. Is that a bad idea? I'm just trying to understand how this gets fixed.

Well, so that's it, Jason, thank you for that question. And first, first of all, I don't think there's any backup related to the urgency that's required to get these ships delivered and we're doing all we can to get these ships delivered to the Navy. But you bring up a very good point related to green labor. And while we're on our hiring plan for the year, we're actually repositioning our strategy relative to hiring where we're reducing our reliance on green labor, we're just going to hire less. And we're going to focus on more experienced labor because we're just out of alignment or out of balance from an experience level right now, which leads to rework, which leads to inefficiency. And it's not good for anyone. So we're repositioning that a bit, which I don't consider that as slowing down. I consider that investing in the workforce so that you're more efficient and really aligning and that's what we're doing with our capital plans and our cost structure as well, Jason, is we're aligning those investments and that cost structure with what we think the pace of activity will be going forward. As I said previously, and it doesn't do anyone any good to have to meet your hiring plan and then not have supply-chain material there, right? So I think you bring up a good point. I think we have to be very disciplined in how we do that. I think we have to be really disciplined in how we put these ships under contract as well. We can't sign a contract and hope. We have to do that. We have to do it understanding the current macroeconomic environment, understanding of proficiency of our labor force, the fragility of the supply chain, potential for increased inflation, and all of the work that's happening within the shipyard. So you bring up a good point, we're thoughtful about it. We're thinking about it and we're making sure that we do it responsibly.

I appreciate that. Someone has to ask about Mission Technologies, right? The business continues to perform well, showing nice growth and strong margins. Could you discuss the outlook for Mission Tech over the next few years, including your current pipeline, book-to-bill expectations, the composition of your existing backlog, and what opportunities you're pursuing? Additionally, please share your thoughts on potential growth rates and margins, so we have a better understanding of the future of that business. Thank you.

Sure, sure. Mission Technology is doing very well. I know they've grown at 14% year-to-date over last year, some really big wins, $11 billion of wins. The outlook for that business couldn't be better and it's broadly across their portfolio. The team just restructured their business to focus on where they think the higher-growth areas are you think about C5ISR electronic warfare unmanned or uncrewed vehicles. So they're doing very well. The pipeline is strong. The team seems to be very focused and I look forward to them performing over the next few years, consistent with the growth rates or even beyond the growth rates that we communicated at our Investor Day. So yes, very pleased with Mission Technologies. The team is executing very well. Tom, do you have anything to add on Mission Technologies?

No, I mean, just to hop on the back-end on top of the growth rate that we've seen this year at 14% year-to-date has been 13% from '22 to '23. So I'm excited by that. The efficiency that Chris talked about from six business units to four, we're leveraging the strongest leaders here of the portfolio, the talent, we're aligning to be even more efficient on new bids there from a rate structure. So I'm excited with what they're doing there as they're honing the business. And the align acquisition was in 2021 and each year we're finding opportunity sense to either take more cost out or get some additional synergies within the division and the interfacing within shipbuilding and the opportunity set there continue to grow and how we can leverage Mission Technologies' applications and tech into how we construct and support our shipbuilding. So I'm excited about the future. We kind of set that up with a thesis of 7% to 9% growth, 8% to 10% EBITDA. I know that first year was up 4% from 2021 to 2022, but as I said, the last two years have been 13% and 14% higher than the initial hope and the projection that we gave for a 7% to 9% growth. And it's nice to see a couple of quarters here where the EBITDA margins have themselves up. A lot of cost-type contracts over that. But as we continue to mature the portfolio and the relationships with the customers and additional contracts, there'll be opportunity sets to kind of build out from just 80% to 85% cost-type into other type of contracts and delivery orders against those bottle contracts that will offer opportunity sets for higher returns as well, more products and services than just engineering solutions and studies. So I think it's going well right now and I'm excited that it brings about a new line of customer sets, different avenues of funding. We talked at Investor Day, the opportunity sets we have there to go international, commercial contracting, Australia over to England, and with the office opportunity sets in front of us too that's hitting on all cylinders for us.

Right. Okay. I appreciate that color and best of luck to the rest of the questions here.

Thanks, Jason.

Thank you. The next question is from the line of Seth Seifman with JPMorgan. Your line is now open. Please go ahead.

Hi, thanks very much, and good morning.

Good morning.

So I wanted to ask, good morning. You mentioned doing more outsourcing and hiring less. How do we consider the impact on your returns and cost estimates when more of the work is outsourced? Additionally, with the investments in the submarine industrial base and the restart of small and medium-sized shipyards, should we expect a greater percentage of work to be outsourced moving forward, and what does that imply for margins?

Yes, I think there's going to be a greater percentage of our work outsourced going forward. There is a premium related to that. And you're seeing that, that impact in the profitability of our current portfolio. Now, I don't think it's going to be a significant impact going forward on these ships because we pretty much made most of those decisions. But we will increase the industrial base and increase outsourced partners on our future contracting activity and we make sure we protect those potential increases in those targets. That's what I mean about when I talk about ensuring that our new ships reflect the current macroeconomic environment, which means you're going to outsource more, which means it costs more. So we will outsource more. We need to expand the capacity in shipbuilding. We'll do that, but we need on these new contracts to ensure we protect ourselves.

I hop on the back end of that to you a bit. I wouldn't want you to like take away that we're going to significantly reduce hiring. The hiring, the training, working on retention. The backdrop that we've given you is that there's going to be additional growth in shipbuilding, right, from 3% to 4%. So there needs to be more volume and capacity, right? It's not out of the inability just for us to hire enough, but because of the top-line growing. So we'll be outsourcing what makes sense. And compared to maybe the inefficiency of some things we do inside, we don't have the capacity to do it, all that goes into the business construct as we outsource. We'll in-source. There's teams that we can have pop into the yard, painters and welders at times on ships that they can pop in here for a month or a couple of quarters and help out as well. And again, if there's maybe a slight premium, a lot of times you don't pay like the benefit end of that. And then coming in here to offset the inefficiency we have of maybe schedule growth of the inefficiencies of the inexperience, some of the inexperience that we have in here. And all that's rolled into the EAC right here. So I see that as nothing but positive. Also, there's opportunity sets for us to do other things like operating centers, manufacturing operating centers. And that's in the mix. We're always kind of studying that. So we're not flat-footed here. We've kind of talked over the last two or three years since COVID about hiring and we were successful at that. We see the attrition as a draw here and now we're kind of pivoting to like, hey, the answer to that is more training, more relationships, and engagement with our new hires. And then where we need to supplement that, that's where we either outsource, insource, or look at other operating centers that we can team with, team acquire, things of that nature. So I mean, all that's in play on how we're trying to manage the business as we see going forward.

All right. Okay. And then maybe then to follow-up, you mentioned kind of that 3% to 4% annual shipbuilding growth. That target, I think was also based on the investments that you guys thought you were making with the elevated CapEx over three years. Now this year for sure, and it seems like maybe going forward, the capital plan is much lighter without the kind of capacity and productivity that would come from that capital spending. Is it still appropriate to be thinking about that sort of 3% to 4% top-line over the next few years?

Certainly. I want to clarify that we don’t want anyone to misinterpret the reduction in Capital Expenditures for this year. We had projected a 5% growth for the next three years, specifically 5.3% for 2024. We are adjusting our approach and managing expectations as we consider whether we should adopt a more incremental strategy or take a broader approach for the 17 vessels we manage. Importantly, none of our planned projects have been postponed. Each year, we reassess our 10-year operational strategy, and all of our work remains on schedule. The business value we offer, along with our specialized skills and the growing demands from the Navy, including the 30-year shipbuilding plan and the five-year outlook, remains intact. As Chris mentioned, we are making efforts to align the business environment with the challenges we’re facing in labor and supply chain management, aiming to establish fair and balanced contracts that ensure both affordability and profitability. This situation has not altered HII’s value proposition. For the rest of the year, we are taking a cautious approach to our Capital Expenditures and cash flow to navigate uncertainty while seeking clarity on performance in the fourth quarter and beyond. Nonetheless, our long-term vision remains unchanged, as we previously communicated during Investor Day, affirming our growth expectations over the next several years.

Great. Thanks very much.

Thanks.

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

Hi, good morning, guys.

Good morning.

I think we've been kind of through this, but I'm still trying to get my head around back at the Investor Day when you guys gave your outlook, how could you not see this coming?

Yes, it's a valid question, Ron. During Investor Day, we provided a broad overview of the business and shared our medium to long-term growth expectations and performance insights. We acknowledged that we needed to address the pre-COVID contracts, and our initial expectations for how to manage them were somewhat overly optimistic. As a result, we are currently facing challenges. We have a solid accounting process that allows us to review our Estimates at Completion each quarter, and we must address any issues as they arise. This situation aligns with the challenges we anticipated regarding these pre-COVID negotiated contracts. We will need to navigate through them and shift towards new contracts that better match our current circumstances.

Got it. Got it. And then how should we think about margins into next year? I mean, can you talk about that?

Yes, we will not provide guidance until the end of January. This guidance will reflect how we execute over the next few months, along with our expectations for execution for the rest of the year, including associated risks and opportunities. We will also consider the potential 17-ship submarine contract, whether it is awarded together or separately in the FY '24 votes, what that structure looks like, and what the incentives are. We will share that information for guidance in January 2025, and these factors will play a role in it. Tom, do you have anything to add?

You touched on an important point. The outcome will depend on performance and the new contracts we secure moving forward. It seems too early for us to provide guidance at this moment. We have shared a range for the end of this year, and we will offer insights for the future later. We recognize the factors affecting us and are investing significantly in labor and supply chain improvements. As I mentioned during the Investor Day, we need to address the existing ships that have experienced challenges during and after COVID over the past three to four years. Many people believe COVID is behind us, but the contracts we secured were before the pandemic, and we are still feeling the effects of lost hedges and supply chain fragility. These impacts are tangible today, whether they relate to components and labor at the deck plate level or the cumulative effects of soaring costs over the ships' performance during the years of COVID, including inflation exceeding 9% for several years, plus a tightening labor market. These are real challenges we face daily. As discussed, we decommission a few boats and ships each year while introducing new ones. The key lies in the equity of the new contracts we secure, ensuring better contract terms and alignment on schedules. We need to balance affordability and profitability in our new bids, understanding that there will be a transitional phase as the new portfolio replaces the current one. That is the insight we have.

Yes. And then maybe just one more question. Tell me if I'm oversimplifying this, but when looking at commercial airlines as an example, they faced a pilot shortage until they increased pilot salaries, and then the shortage was resolved. Is it as straightforward in the yard, where simply raising pay for shipbuilders would attract more skilled and experienced workers? Is there a way to collaborate with the Navy to facilitate that?

Yes, we are currently collaborating with the Navy on this issue. We've partnered with them on some noteworthy projects aimed at boosting the labor force, and we are observing encouraging outcomes. You raised an important point, Ron. This is something we are closely addressing in relation to a 17-ship submarine contract. We have already implemented some measures at Ingalls, and the results have been positive. While it may be an oversimplification, we believe enhancing compensation is a strategy that can help us improve retention, performance, and predictability.

Yes, it makes sense. All right. Thank you.

Sure.

Thank you. The next question is from the line of Robert Stallard with Vertical Research. Your line is now open. Please go ahead.

Thanks so much. Good morning.

Good morning.

Chris, I don't want to belabor this 17-ship issue, but I was wondering if you could elaborate on what the potential sticking points are here. Is it very basically that the cost per unit has gone up significantly versus what the Navy is prepared to pay, or had budgeted, or that you were trying to get sort of recompense on the older pre-COVID contracts? And what exactly is the issue here?

Yes. The budgets set for those boats were established a few years ago and did not account for our current environment. This creates a risk in securing contracts. Simply proceeding with business as usual to finalize these contracts does not address the significant investment needed to meet the demands of submarine schedules. Innovations and asset creation require a longer approval process. We believe this is still the right approach. It's a mix of insufficient budgeting and the need for further investment in the industrial base to fulfill our contract schedules. Thus, we face a budgeting challenge while also needing a comprehensive strategy to speed up submarine production.

Right. And then just a quick one for Tom. Mission Technologies in Q4, it looks like things stepped down. Is there a reason for that? Yes. We're being cautious about the outcome at this stage. Part of the performance we're observing is related to timing. Nevertheless, if you pay attention, we're increasing our guidance for both revenue and earnings at Mission Technologies. There's no concern there; we just need to let things unfold. They have consistently met or exceeded our expectations each quarter, and I'm optimistic about that. However, there are still over two months left for things to play out, and I'm looking forward to sharing some positive updates in February.

Thank you. We are now approaching the end of the call. If you have any further questions, please press star followed by the number one on your phone. 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.

Sure, thank you. To wrap it up today, I'd like to summarize that we remain focused on optimizing our operations, improving our cost structure in shipbuilding performance, and driving higher throughput. We believe the actions we're taking will enable us to stabilize performance as we continue to work through these ships. Thanks again for your interest and participation today.

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