Huntington Ingalls Industries, Inc. (HII) Earnings Call Transcript & Summary

So welcome to this our 44th Annual Aerospace/Defense & Industrials Conference. My name is Gautam Khanna, research analyst at Cowen. Very pleased to have with us the CEO of Huntington Ingalls, Chris Kastner. Welcome. Thanks for coming.

Thank you.

And we probably have to get the safe harbor out of the way, so let's get that done.

We do. We do. Normal safe harbor rules apply, forward-looking statements, all that stuff. So we're ready to roll. You can just jump into Q&A.

Cool. Thank you. Well, you just reported the quarter, so there was a lot of information of the quarter. But I did want to just ask at a high level, what is the biggest challenge you guys are facing right now?

Yes. So coming out of the pandemic and the kind of the macroeconomic factors that resulted from that. Biggest challenge has been labor, right? I had a pretty good year last year, hired around 5,000 people, and that's crafts people, right. We hired more than that across the entire company, but about 5,000 people in the crafts, we'll hire about the same amount this year. So the biggest challenge there now is to retain them, get them trained up, get them on the deck plate and executing. There's been some positive indicators relative to that attendance is a bit better. Overtime is a bit better. They're actually surprising to note that we're having a hard time having people work overtime over the last year, and that's improved. So January was successful. It's only 1 month, so it's not really a trend I can rest my hat on, but it's a positive indicator for sure.

Okay. And speaking of that, I was curious because when we look at the total headcount at the company, it looked like it declined, I think, 1,000 people. So has churn been an issue?

Yes. So attrition has definitely been an issue across not only the craft, but our technical talent. It's interesting because shipbuilding is so regional. We've never really had issues with technical talent leaving the shipyards. But now with the work from home and the demand that we saw last year to the engineering talent, we actually lost few engineers in Newport News that are working from home for tech companies. And that never happened before. So potentially with the tech layoffs that will stop or abate a bit. But that's an interesting situation that we just never faced before.

So it's interesting because when we were as analysts following the metrics on the hiring every quarter, right, 3,600 as of Q3, 4,900 in Q4. I'm curious, was the -- 5,000 targeted, was that a net number?

No, that was just a hiring number. You can get into a lot of metrics around hiring with equivalent people and overtime and attendance, and it gets fairly complicated fairly quickly. So we just hiring is a pretty good metric. But we did experience attrition higher than what we expected last year.

And so what are you guys doing on the front end? Because I imagine it's a hard job right it's very skilled, very tough, unique job, shipbuilding.

Yes. So we've actually repositioned the way we're doing our hiring. We have really world-class apprentice schools, both in Newport News and Ingalls. And we find if people choose it as a career they stay. We train them, we give them opportunities to become leaders in the organization, and they stay in shipbuilding. So the walk-in individual really, there's the high stance of attrition now with walk-in individuals. So we're really focused on the programs in the apprentice school, in our community colleges, where if people choose the career they stay. So we've repositioned it a bit, and we're being a bit more successful.

Okay. And just to be clear on the 2 shipyards, where is the hiring need the greatest? Is it at Newport?

It's actually fairly even. It's fairly even across both shipyards.

And has the attrition rate been materially different between the 2 yards or...

A bit different, but they're both improving.

Okay. Interesting. And so I'm just curious, at one point, I think it was in August, we met, and the thought was for every 1,000 person shortfall in hiring it meant like $100 million of revenue down the road. Is that still about true?

I wouldn't necessarily use that metric because revenue is not only labor and making progress, but also material and material staying on schedule. So the best thing... 3% long-term growth rate makes great sense for us right now based upon our significant backlog and how we have the ships going through the manufacturing processes. So I wouldn't necessarily use that as a good metric to forecast revenue.

So speaking of the 3% shipbuilding growth rate, this year 2023 might be slightly below that, right?

Yes, that's what we've forecast, yes. Correct.

Does that mean that in '24, we get a bit of a catch up? I mean, I know it may be marginal, but is that... Do we average out over the next 2 years at around 3%?

We haven't given guidance for '24 revenue and it's hard to really project the timing of that right now. But we think on a long-term basis, 3% is the right way to think about the business. Are there upsides? Sure. If we can hire more, if they're productive, if we can enter ships into the production cycle sooner, make our schedules, there's potentially upside, but we think that's the right way to think about the business right now.

Okay. And the other question we often get a lot of is on hiring and training. How long does it take for these folks that come in the door to actually be productive?

It's sooner if they come to the established programs. If you go to apprentice school, when you hit the deck play, you're ready to go. You're really in a good place. If you walk in, it takes longer. I will say some interesting stuff we're doing in digital has really made the transition easier where the people coming to work now, the younger generation, they're used to digital tools. And the 80 and 81 are digital ships, the Columbia class is a digital ship. So the digital products that we're putting on the deck plate is really helping that time to talent as we call it.

Okay. So I mean, I'm just curious, what does it take? Like 2 years?

Rule of thumb is 3 to 5 years to have a first-class shipbuilder.

Incredible. It's a very specialized and impressive skill. I was going to ask also on Mission Tech just with respect to their labor needs. What are the kind of open billets?

I think they have maybe 300 to 500 openings that they're working on right now and that stays, they're pretty current. These aren't really lagging sort of outstanding billets that stay in place for a long time. They have normal... We think they're going to grow up 4%, excuse me, 5% this year. They have normal attrition, as you would expect in the industry, not more, not less. It's very competitive out there, but we will hire across that portfolio this year.

And obviously, those people are billable fairly immediately.

Absolutely. And it's 85% cost-plus work, and we put them right to work.

Okay. That's good. So one of the things people have investors ask about with a number of industrial companies is wage inflation. But you guys have contracts in place. Could you just talk a little bit about how does the new hiring environment affect the inflation you're seeing, if at all?

Well, so in the shipyards, obviously, we have labor agreements. So we're able to put those into our projections relative to profitability and what it's going to cost to build ships. So that's labor. We are seeing some inflation in our technical talent and we're having to take that into consideration in our EACs and we do that on a quarterly basis. And then we have inflation in Mission Technologies as well. The good news is it's cost-plus, so we can flow that through.

That actually brings up a curious question. So when do you guys have the wage increases? Is it every calendar year beginning?

So in shipbuilding, it's essentially once a year. And in mission technology that you have to be more fluid. You have to potentially evaluate it on a more frequent basis.

So I'm just curious, have you ever thought about what is the tailwind at Mission Tech just from wage inflation being passed on to the customer? Is there like a way to quantify that?

We haven't, but we think about 5% growth rate this year and how we're thinking about the business.

Which would include some wage inflation passed on?

Of course.

That's interesting. But to your point on hiring, like the ability to hire, you guys have an established wage rate, right, for the entering...

Absolutely. And the progression as you become more proficient at the craft. That's established as part of our union rules.

Okay. So that's why it's not as big an issue or not necessarily paying spot rates?

Correct.

That's good to hear. I was curious about that. So speaking of EACs, I wanted to make sure I understood this...

My favorite topic.

I know, right. In Q3, we all knew the world had quite a bit of inflation. And in Q4, you guys had a negative CIM catch-up on a net basis. And it didn't seem like it was related to inflation per se of like materials and labor.

It's not... I coined the term nonprogrammatic inflation which has surprises... We obviously forecast an inflation relative to general overhead categories like medical expenses or insurance premiums, and we forecast that. Unfortunately, we were surprised by some upticks in Q4 that were beyond what we had forecast. It's unfortunate. That's kind of on us. I can't blame. The deck plate didn't do that, they weren't less or more efficient. It's just that we just missed our estimate relative to some inflationary elements that we saw in Q4. We had to update our projections. It hits all the ships in flow. So there was a negative [indiscernible] correct there. So we think we've got it right now, and we projected that in the future.

And again, it was related to nonprogrammatic stuff. So just to be very granular, if possible, like what are those items?

The 2 examples I gave are the 2 primary ones. So it's just insurance as cyber protection increased pretty significantly beyond what we would expect. Medical insurance premiums, more use, more than what we expected. We're projecting these expenses all the time. When you've got a 4-year life cycle on a ship or a 7-year life stock on ship, as things change, you have to incorporate that on a quarterly basis. So that's what we had to do.

So it also begs the question: I remember in Q2 of '22, there was an economic price benefit of...

We do it every quarter. We update that every quarter.

It was a big number in Q2, if I recall, right?

Yes, well, the indices change, and your estimates change as well so you have to take those all into consideration as you update your EAC.

Is there anything that we should be mindful of seasonally? That in Q2, we get the economic bigger codex or...

Not really. We update them every quarter. At the end of the year, you do get more fidelity around some of the nonprogrammatic stuff with your medical expenses, insurance and stuff like that. So there is some seasonality there, but not really. We evaluate them every quarter.

Okay. I was just curious because we always focus on the milestones at the shipyards I never thought to think about these other things. And I presume every Q3, you'll have more fidelity on the medical and insurance, right?

We will and we really don't want you focused on all those expenses. And we need to get those right. So milestones is the right way to think about the business. We need to stay on schedule with our ships.

So speaking of that, one of the things that has been discussed ad nauseam is Virginia class and I have continue to discuss this. Can you just talk a little bit about the evolution of HIIs as performance on the Virginia-class Block force and sort of how that's gone and where we are and why the Block Vs are going to be different.

Yes. So remember, Block IV, we're right in the middle of construction on the Block IV ships from COVID hit. We took a significant charge in, I think, Q2 of 2020 related to that. So the opportunity on Block IV is less than what you would expect and we just need to get those ships, those boats delivered. We'll deliver 1 this year, 1 next year and the 1 after that, and it's becoming less share of the total shipbuilding portfolio as we move forward. That being said, we have opportunity on Block V if we can get everything right. If we can get the labor right, we can continue to make progress on those schedules. We can be consistent on those schedules and work the operating system. There's just more opportunity on Block V because they weren't directly as impacted as Block IV.

So what are the differences? So you have 3 boats left on Block IV?

Right.

That you're working on right now.

Right.

They deliver each year. How many Block Vs now are in the yards right now, if any?

All of them in some states, some in manufacturing, some in module development and then they'll move through the process.

Okay. But I think you mentioned on the last earnings call that the revenue split between Block V and Block IV is actually tilting towards Block V...

It is.

So it's over 50% of the...

It is. But you know that we're very conservative on all our boats until we can retire the risk. And we're in the early manufacturing process on most of our Block V work. So we're going to be conservative. And we need to retire that risk as we move through manufacturing, and we will when we do, but not until we do.

Okay. No, I understand that. And what are the differences between the Block IV and Block V ships? Just actually, what's different?

Oh, the configuration is essentially the same except for the Virginia payload module, which was incorporated in the Block V. The vast majority of that work is done by Electric Boat, so our statement of work hasn't changed very much. So that's really the only difference. We know how to build these boats. We know to build the bow and the stern, the sail. And so that's very repeatable for us between Block IV and Block V.

Okay. So that's why it's not going to be very similar.

Very, very similar. It's really the same configuration in the bow and the stern.

Got it. Okay. There is a lot of talk in the industry about the Block IV boats being a little bit behind schedule. But your point, I think, is that it's running according to what you've already accrued for.

Absolutely.

If you take a big jump in Q2 of '20…

Absolutely. And they've been fairly stable, I said that on the earnings call. This is the Block IV contracts have been fairly stable for at least the last 6 months at Newport News. And so I'm very comfortable that we'll get one delivered each of the next 3 years and be done with that moving into Block V.

At the outset, you mentioned overtime. And I presume that means it's more costly to manufacture stuff when you're using overtime.

Yes.

So how does that play into kind of the margin walk over the next couple of...

We have assumptions on how much overtime we'll use, and we're fairly mindful of that, and you'll play overtime when you can make progress. And we use it to search on weekends and late into the second and third shift in order to make progress and keep the schedules in place. It's important to keep the schedules in place. Overtime pays for that schedule. That calculus is done, and we apply it appropriately.

Okay. Yes. So it's interesting. Again, somebody asked on the earnings call, and I thought it was a great question. As you move more block buys as a percentage of the Virginia-class revenue split, you should see a natural lift up in margins. At the same time, your point is you're accruing very conservatively on the front end of the Block V boats. So it's not like it's going to be a gradual feathered in type...

Yes. I think you said it perfectly. We're conservative. We have to retire the risk. If we do, then we'll book up.

Okay. Would you be willing to opine whether -- shipbuilding is a 9% business theoretically.

Yes.

But that's across 2 yards, right? Is the Virginia-class program, does that fit into that rubric kind of level of 9%? Is that a possibility?

Well, it's in the mix and we don't give margin guidance by yard or by program. So it's absolutely in the portfolio that we'll generate a 9% margin business absolutely.

Okay. But we should not think that, okay, we're accruing Block IV at some de minimis level of margin. We're accruing Block V at a substantially higher margin and therefore the minute of Block V start to get delivered we get a big jump.

You should absolutely not think that.

Okay. I just want to be very clear.

Good thinking.

That's fair. I just want to make sure we're not like...

Correct.

Okay. No, that's great. On nonprogrammatic inflation, how does that actually get passed on to contracts, if at all?

It's an overhead. It's applied overhead that gets into the contract price and your cost and your invoices and they're paid.

So the cost share was what was reflected in the EAC? You guys have to eat, right? Some of it's passed on per...

Yes, yes, depending on the contract type. So if you're an incentive type, you're going to share it based on the share ratio, if it's for a fixed price, which you don't really have, you're going to eat it all. If it's cost plus, if it's incentive, you're going to share it as well.

Okay. Sure. I wanted to ask also just quickly on the NSC program because that seems to be winding down.

Unfortunately, it seems to be winding down. We'll deliver the last or the 10th boat this year, the 11th boat will be... We haven't talked about when that delivery is in Ingalls in the next couple of years, 12 to 24 months. But unfortunately, it is winding down. It's a very good program. I think the Coast Guard loves the boat. It's doing great missions, but I think they've repositioned to the smaller boat that they're working on the OPC.

Okay. And so NSC 12, which was authorized...

It's authorized, but we really haven't got a lot of traction. We'd love to build it. I'd love to build 4 more, 5 more. But it doesn't look likely.

Okay. Are there any other opportunities for new boat ships that you guys are bidding on? The frigate came and went. I'm just curious.

I think there's interesting stuff going on down at Ingalls. It's a very competitive capable yard. The DDG 1000 work is very interesting and significant. The prompt strike work they're going to do on those 3 ships. We will have potentially 2 of them down at Ingalls this year and maybe 3 at one time. So think about having 3 DDG 1000s down at Ingalls, doing pretty significant work. That's a big deal. I don't think the LPD line is done. I think there's derivatives of LPDs that will be built into the future that Ingalls needs to be right in the middle of. There could potentially be an additional frigate manufacturer. Ingalls would build the heck out of that ship. There's only 2 that have ever built an ageing ship. Surface Combatant, that's BIW, also great shipyard and Ingalls. That has not been decided. It's something that we could do. If the Navy asked us to participate in that. We absolutely have the capacity to do it. And as I said, we build the heck out of that ship.

I actually don't know the answer was the HII frigate bid basically modeled after the NFC?

It was.

Right. So you guys have a great position there. What are you guys doing on the DDG 1000? Could you...

Just the -- upgrade construction, just the holt. So we don't do any of the technology around the prompt strike. We're modifying the ship so it's able to house that equipment.

How big is that?

Significant. It's significant, potentially between 1 million and 2 million hours a ship.

Okay. Wow. And you have 2 that are definitely that you're working on now?

Well, we're doing. We're finishing 1,002 for BIW, right? That's just the finishing the combat system for the initial delivery. We will potentially get all 3 of them back to do the prompt strike upgrade.

Okay. Interesting. I remember a couple of years ago, you guys were doing some Los Angeles-class submarine repair work. Are you seeing any of that kind of ad hoc business coming through?

So we'll still do maintenance overhauls for LA-class and potentially Virginia-class at Newport News. The capacity that we have in Newport News is important for the Navy, and we need to keep that up and running. So we will continue to have a kind of a recurring business relative to maintenance and overhaul for Los Angeles- and potentially Virginia-class submarines.

Okay. So that's not going to be a headwind over the...

I don't think so, no there will be enough to backfill. Yes, I think it's pretty flat.

Okay. No, that's interesting. One of the things I was also trying to get a sense for is the cash flow. And I know this is a-- Tom actually gave a great explanation on the call.

I thought it was a great one as well.

Yes, it was very thorough. It was helpful to actually normalize the last couple [indiscernible] years have been good years. But I'm curious, you were the CFO at one point you were the COO at one point...

Couldn't do that job so they gave me this one.

Right, but I'm just curious, 200 basis points of working capital reduction. Could you walk through...

Okay. So I would love to give that answer, but I'm going to give a little different one for you.

Please go ahead.

The previous CFO to me, Barb Niland, who you know, fabulous CFO. She used to call cash flow lumpy, right? So I'm going to give a lumpy answer, but I'm going to give it a little differently. Just model net income. If you model the top line that we're talking about that we believe in, absolutely, you model the bottom line we're talking about, and we think we're going to get better from here. And we give you net pension. We give you capital depreciation and amortization of intangibles. You do all of that and you model down to net income it's going to be obvious that we're north of $700 million and on a run rate basis, north of $700 million. Now is cash going to be lumpy? Yes. I've got a lot of large projects that have large invoices. I can swing cash, $150 million with 3 invoices that get paid on January 2 or January 3. That means nothing to the value of the business, but we feel good or bad based on free cash. So my advice and I would hope you would take it and people modeling the companies just get to net income. We're a 1.0 cash conversion business when you model all those other things that we give you the information and the cash will be obvious. That's how I answer that question.

And I appreciate that. It's always, to your point, that everyone obsesses over the flows year-to-year as opposed to like, here's the number. Here's the net income, it converts to cash.

Because it does. We have almost the best paying customer in the world with good cash terms. Unfortunately, it's a little lumpy because we have so few invoices that could float over the end of the year or get accelerated.

Right. And for those who are maybe less familiar with this, why is that that's tied to ship deliveries and milestones, right? That's the biggest...

Well, some of it is yes. But some of it is just a progress payment that someone was out sick or they were going on vacation in January and they wanted to get it paid early. So that we get that sort of stuff happening. But a good example is LPD 29 this year. That's a delivery delivered to the end of the year. It's a significant cash pickup potentially. And we're trying to figure out whether it's going to be end of this year, or beginning of next. It doesn't mean anything for our value as a corporation, but it impacts the free cash flow in the year.

That's fair. And just curious on some of the ship deliveries like the LPD 29. Is there a lot of cash at the end that has hung up and that's a final payment or is it trapped inventory? Is it stuff like that that...

It's what's been retained as you work through the construction cycle. Now on a fixed-price incentive, there's more than on a cost plus obviously. So LPD 29, it's a large value ship. We've done... We've performed historically very well in LPDs. It's a very good program. There's potentially a pickup at the end of the year.

Got it. Okay. No, I totally appreciate the lumpiness associated with the delivery which then begs the question: Are there any kind of Q4 weighted milestones? You mentioned LPD 29, is that the only one that...

That's really the to think about it. And I would also add, when you think about free cash for HII, historically, we focused on shipbuilding. And obviously, our historical financials have the free cash flow and are pretty much all shipbuilding. We've got a Mission Technologies organization that's $2.5 billion that throws off $150 million to $200 million of free cash flow every year. You just put that on top of, you're there, you're there. And that's not often talked about, but there's no capital investment essentially, and you're spinning off $10 million to $200 million of free cash emission technologies. Now we don't give guidance by unit or by division relative to free cash or margin. But that's an important thing to think through.

Actually, what do you think the greater growth at Mission Tech will be over the next couple of years?

I'm pretty comfortable at the 5% growth rate that we're talking about. We're in the right -- I think we're in the right markets. When you think about AIML, LVC, unmanned, cyber, electronic warfare, those markets are growing very quickly. We think we have a really good position. We have a good backlog and a significant pipeline that we're attacking here and we hope for a good year from a book-to-bill standpoint. And I think 5% is a reasonable growth rate for that business.

Okay. A couple of years ago, there was a lot of discussion over the FSA that was done by the prior administration and how it was going to lead to unmanned and lighter ships, et cetera, et cetera. Where are we on that? Has anything really manifested in your view?

I think there is traction. And the traction is coming from all the exercises that the Navy and international navies are doing with unmanned vehicles, demonstrating their performance. So some significant exercises last year where unmanned ships were in the fleet and demonstrating performance. There's a couple this year in the Pacific where unmanned is going to be a critical component of the fleet architecture on executing missions. So it's absolutely gaining some traction. I will say that unmanned like air will develop on a kind of a fragmented basis. It's a low barrier to entry. There's a lot of players. It's very competitive. We understood that going into it. That being said, Hydroid, which we acquired a few years ago have built and delivered the most unmanned undersea vehicles really in the world. And 30% of their business is international, which is important to note. So we've got a really good installed base around the world that we can draw upon. So it is getting traction based on those exercises being successful, and it will become more and more part of the fleet architecture going forward.

Okay. And so Hydroid is one of the angles that HII has in this ecosystem. Partnerships, anything...? What other kind of edge does HII bring to that?

To unmanned?

Yes, to unmanned.

So we made a couple of acquisitions in unmanned, not only Hydroid, but [ SIS ], which is an autonomy provider for surface . So we like to -- we have really a broad base of products that we can introduce in the unmanned space. Autonomy, subsurface, subsea and answer services.

And anything on the partnership front with some of these smaller shipyards? Or is that not really...

Yes. So we have a partnership on the long-range surface vehicle for the Marines with a small shipyard down in Louisiana, I think it's Louisiana or Mississippi. It's a good shipyard. It's a good program. We have 5 demonstrators in the field, I believe right now. 3 to 5 demonstrators showing the capability that, that ship will have for the Marines. It's a good program, it's not often talked about, but it's going to do amazing things.

So there was also a talk at that time about these light carriers, CVM, I don't know what they used to call them CBLs or something. Is that like a thing? Or is that...

I haven't -- it's something that will be picked up and dusted off every 2 or 3 years. And every year, they look at it and they say, what we have now is the most capable thing in the world, and you really can't replace it with 3 or 4 light carriers. Now we build LHAs, which I put F-35s on or the Navy puts F-35s on. So it's not a debate right now that I'm hearing since I've been CEO, actually. And they're talking about CVN 82 and 83 right in a budget and a potential bundle for those. So I think the aircraft carrier does a number of very important missions and the Navy is very good at utilizing it. I don't see a replacement for it.

Understood. I was going to ask you on budget. So what should we be looking for in the next budget request? What are you guys hoping to get funded?

Yes. So the '23 budget was very important for us. Very important for us getting LHA 10 and LPD 33 funded, the long wait for that. There's really nothing new in '24 for us. We need to keep all of our existing programs on schedule, the VCS, DDG 51, making sure they continue to make progress. We need to make sure that LHA 10 and LPD 33 get under contract and start long lead. That's important to keep those schedules in place, especially if we're funded in '23, they need to continue to fund those ships, so we can get to the full contract. CVN 75 needs to continue to do their planning efforts for the RCOH program. But it's really not a... We're not looking for something new in '24. We just need to continue our current programs, which we expected.

Okay. No, that's good to hear. You've gotten -- I remember Mike Petters used to talk about this that the shipyard is going to have business forever and it's kind of true. You had all these bundles...

Yes. I'll tell you the backlog, I mean, we've still got this elevated level in the mid-40s, and we'll stay there for a while because of so much work. The submarine industrial base has significant amount of work. Electric Boat and Newport News work really closely together and the Navy's leaned in to ensure that we can execute that work appropriately. So we have so much work at Newport News. It's going to be very stable for the next 15 to 20 years, and we're really investing in the operating system to make sure that we execute that appropriately. And the teams bought in completely, and I've got high hopes for it.

That's exciting. I wanted to also just step back on cash deployment, if you wouldn't mind. So you guys have some debt that you're retiring. Could you just talk through what sort of the plans are this year and perhaps longer term?

Yes. So we're going to -- obviously, from the Alion acquisition, we took some debt out. And we've had a very structured approach to paying off that debt and over the next 12 to 18 to 24 months, we'll get in a place where we're south of 2 turns, which is where we're comfortable. We like having the flexibility in the balance sheet. We also don't like to keep a lot of cash on the balance sheet. So after we come through that, if we accumulate cash, we'll just give it back to shareholders, right? If we don't have any alternative investments internally or externally that can generate a better return. So we'll continue to evaluate investments in internal IRAD and potentially M&A to build out the portfolio. If we see some real something really interesting niche sort of thing that can add value or add capability for the customers. But absent of that, we're just going to give back to shareholders.

So on M&A, I'm curious what -- you've mentioned there are no gaps to fill. I think you've said that a number of times. Is that still true as you kind of look forward?

Yes. I don't see any material gaps in the portfolio. We don't comment specifically on M&A, but we evaluate technologies from time to time that could provide additional capabilities for our customers, but I don't see any significant gaps right now.

Could you describe again how Alion reaches back into the shipbuilding business?

Sure. I thought about this a lot about how to make this something I could actually talk about because Alion does a lot of really interesting stuff I can't talk about. Predictive maintenance, right? We have so much data on new construction, ships and on information relative to how ships are maintained. You know we have AMSEC, which is an organization within Mission Technologies that does ship alts and maintenance on ships, and they've been doing it for 50 years. Specifically on the aircraft carrier program, they've been supporting that aircraft carrier for a long time. And if we can... We have initiatives now that we're working on with a customer, where we can bundle all that data with AIML tools to do predictive maintenance in a dashboard such that the operational availability of those ships are greater. If you could actually predict when that valve is going to break and make sure that you have the valve ready for installation, that's what we're working on. So I don't -- digital and AIML is permeating everything we do, right, in society as well as in shipbuilding. And if we're not on the cutting edge of that for our customer, then we're missing out on an opportunity.

Okay. That's interesting because, yes, we don't hear much about that. I appreciate you elaborating. So back in the day, 2016 to 2020, you guys delivered more than 100% of free cash flow to shareholders, dividends and buybacks. Then the strategy pivoted with the M&A and what have you. So is there a time like, I'm just curious, over the next 2 years, do you think we'll be in a period of time where it's 100% of free cash flow or then some back to shareholders, we'll take the leverage of when we're under 2 like...

So we haven't made that commitment or forecasted that or publicized that as of yet. I will say that we're going to get out of debt over the next 12 to 18 months, and then we're not going to hold a bunch of cash on our balance sheet, right? And if we can distribute it back to -- if we will be opportunistic relative to distributing that back to shareholders, we'll always protect the dividend. We made great strides in that regard. And share buyback is always a tool we can use to accelerate that.

How much cash do you need on the balance sheet just to be comfortable?

We like around $300 million. I mean we have obviously we got a revolver, we've got access, but around $300 million is an okay number.

Okay. No that makes sense. In terms of you also went through a big capital spending program. Are there any major CapEx needs that you could see emerging over the next...

Not really. We're finalizing all the submarine work, submarine industrial base work. They're at Newport News. I think we broke ground on another building that we're going to finish up over the next couple of years in Newport News to do all that work that we're going to have in submarines for the industrial base. But beyond that, I don't see anything significant.

Okay. So your biggest worry right now is labor, just being able to execute on the backlog. That's...

Look, I'm a shipbuilder. I worry about everything.

Right.

But labor. It's getting the team hired, trained and employed on the ship making progress every day and working the operating system. It's a daily focus for the team. It's fundamentals, right? And you can't really work on the fundamentals if you don't have the team right? Now we think we've got the team stabilized a bit and now we're just working on those fundamentals every day.

And one of the big -- you saw this when the House speaker was elected, there was a lot of talk about debt ceiling and potentially full year CR next year. I'm just curious like how would that impact the shipbuilding business, if at all?

Full year, not significantly. A full year CR, once you get past the summer, which would be over a year from now, could potentially impact us. But remember, we haven't even seen the President's budget yet. So we've got to take this kind of one step at a time. I think cooler heads will prevail in Congress, and I'm hopeful that we won't have to deal with that. It's so interesting that we're talking about a full CR before we've seen the President's budget. I'd like to take it one step at a time a bit.

Understood. Last question on Mission Tech. GAAP between EBITDA and EBIT margins. Yes, right. Obviously, there's a lot of intangibles, but is there anything that you guys are under-earning relative to entitlement in that business? Or do you feel like you're... It's 85% cost plus.

85% cost plus. They're appropriate margins for the work we're doing. It's just we have to burn off the intangibles and we give you all that information.

No, I got it. Okay. Okay. Well, thank you, Chris. Really appreciate it.