Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record second quarter revenue of $3 billion, up 6.8% from a year ago.
- Diluted earnings per share increased to $4.38 from $3.27 in the second quarter of 2023.
- New contract awards during the quarter totaled $3.1 billion, resulting in a backlog of $48.5 billion.
- Mission Technologies achieved its seventh consecutive quarter of record revenue with sales of $765 million, up 19% from the previous year.
- Significant progress in shipbuilding with the delivery of multiple ships and continued investments in labor stability and proficiency.
Negative Points
- Attrition rates have not materially improved, impacting workforce stability.
- Some shipbuilding milestones have been adjusted due to workforce availability and sequencing issues.
- Free cash flow for the quarter was negative $99 million, consistent with previous guidance but still a concern.
- Shipbuilding operating margin, while improved, still faces challenges with lower risk retirement on surface combatants.
- Mission Technologies' overperformance in the quarter included material and work that may not reoccur consistently, affecting future revenue predictability.
Q & A Highlights
Q: Can you provide an update on your labor situation and its impact on milestones?
A: We are achieving our hiring goals in both shipyards, but attrition is not materially improving. We are focusing on labor stability, attendance, and overtime recovery. The delays in milestones are due to both labor and technical issues, but all are included in our financial guidance.
Q: How confident are you in generating $1 billion of free cash flow in Q4?
A: We have a line of sight to achieving this through milestones, contract incentives, and new contract awards. The timing of these factors is crucial, and we have risk-adjusted our programs to ensure we meet our guidance.
Q: Can you update us on the number of ships and boats you expect to put on contract this year?
A: We expect to put another 21 boats under contract over the next 6 to 12 months, with pricing reflecting the current macroeconomic environment.
Q: What is driving the lower risk retirement on surface combatants at Ingalls?
A: It's a comparison issue from last year. The lower risk retirement is due to milestone movements and less risk retirement on LPD 29 at delivery. We expect Ingalls to recover quickly.
Q: Can you discuss the profitability of Virginia-class submarines and the impact of recent disruptions?
A: The minor disruption on SSN 798 has been resolved, shifting delivery to early 2025. We are making progress on Block IV and Block V, and negotiations for Block VI are ongoing. There are no material changes to profitability.
Q: How is Mission Technologies performing, and what are your growth expectations?
A: Mission Technologies had a strong quarter with a trailing 12-month book-to-bill of 1.15 and a pipeline of $83 billion. We are comfortable with a 5% growth rate but see potential for higher growth if we continue to execute well.
Q: What is your approach to capital allocation and acquisitions?
A: We aim to be investment grade, continue investing in our shipyards, pay dividends, and return excess cash to shareholders. We will evaluate M&A opportunities that make strategic and financial sense.
Q: How is labor productivity compared to pre-pandemic levels, and what are your expectations?
A: Productivity is not at pre-pandemic levels due to the experience level of the workforce. We are making investments to improve proficiency and expect productivity to improve as we stabilize.
Q: What is driving the sequential uptick in CapEx, and how much do you expect to get back from Navy incentives?
A: CapEx is driven by investments in shipyards and operational improvements. We partner with the Navy on these investments, and any capital projects add value and provide a return on investment.
Q: Can you explain the reduction in Virginia-class submarine profitability?
A: It's a comparison issue from last year. There are no material issues, and the reduction is broadly across the blocks. We assess our EACs every quarter and make adjustments as needed.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
