Huntington Ingalls Industries, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Operational Milestones: Newport News shipped final module of Virginia-class submarine Utah, SSN 801; CVN 79 Kennedy progressing to test and turnover phase. Ingalls received $9.6 billion award for multi-ship procurement of amphibious warships, launched LPD 30 Harrisburg, etc.
• Challenges: Uncertainty in timing of Virginia-class and Columbia-class submarine contract agreements; late material deliveries and reduced experience levels affecting labor efficiency and causing rework.
• Improvement Actions: Focus on workforce training (craft proficiency, leadership development); supply chain improvement; capacity expansion (outsourcing, new technologies); enterprise-wide cost review to remain competitive.

Segment Performance

• Shipbuilding: Third quarter revenue was $2.7 billion. Updated shipbuilding revenue guidance for the full year is approximately $8.8 billion, with 2024 shipbuilding margin guidance at 5% to 6% and free cash flow guidance zero to $100 million. Newport News had revenue of $1.4 billion in the third quarter, down 2.8% year-over-year, impacted by lower volumes in naval nuclear support services and Virginia class submarine program adjustments. Ingalls had revenue of $664 million in the quarter, down 6.6% year-over-year, driven by lower volumes in amphibious assault ships and National Security Cutter Program.
• Mission Technologies: Third quarter revenue was $709 million, up 3.5% year-over-year. Year-to-date revenue growth is 14%. Had nearly $11 billion in total potential contract value in the third quarter, including a $6.7 billion contract for U.S. Air Force electronic warfare engineering support. Backlog at the end of the third quarter was $49.4 billion, with approximately $28 billion funded.

Guidance

• Shipbuilding: Revised revenue guidance to $8.8 billion, margin guidance to 5% to 6%, free cash flow guidance zero to $100 million.
• Mission Technologies: Increased revenue guidance to $2.8 billion to $2.85 billion, margin outlook to 3.75%.
• Pension and Tax: Updated pension outlook; reduced expected tax rate for 2024 to 17% due to third quarter research and development tax credits.

Risks

• Uncertain Submarine Contracts: Timing uncertainty of Virginia-class and Columbia-class submarine contract agreements impacts profitability and cash flow assumptions.
• Supply Chain and Labor Issues: Late material deliveries and reduced experience levels lead to labor inefficiency and rework, affecting program schedules.

Question and Answer

Q: What is the impact of submarine contract uncertainty on earnings?

A: Uncertainty in the timing of contract awards for Virginia-class and Columbia-class submarines affected profitability and cash flow assumptions.

Q: What are your thoughts on the SAWS plan?

A: Supportive of the SAWS plan as it unlocks investment in workforce, infrastructure, and technology, but still in discussions on alternatives.

Q: What is the cash flow outlook for the business?

A: Cash flow is expected to be choppy for a couple of years, dependent on performance, contract execution, and transition to new contracts.

Q: How is Mission Technologies performing?

A: Mission Technologies is performing strongly with 14% year-to-date revenue growth and nearly $11 billion in potential contract value in the third quarter.