Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2021 Huntington Ingalls Industries Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the call, you may do so by pressing star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please be advised that today's conference is being recorded. If you need further assistance, please signal the operator by pressing star, then zero. I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Ms. Thomas, you may begin.
Thanks. Good morning and welcome to the Huntington Ingalls Industries fourth quarter 2021 earnings conference call. With us today are Mike Petters, President and Chief Executive Officer, Chris Kastner, Executive Vice President and Chief Operating Officer, and Tom Stiehle, Executive Vice President and Chief Financial Officer. As a reminder, statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ. Please refer to our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Also, in their remarks today, Mike, Chris, and Tom will refer to certain non-GAAP measures. Reconciliations of these metrics to the comparable GAAP measures are included in the appendix of our earnings presentation that is posted on our website.
We plan to address the posted presentation slides during the call to supplement our comments. Please access our website at huntingtoningalls.com and click on the Investor Relations link to view the presentation as well as our earnings release. With that, I will turn the call over to our President and CEO, Mike Petters. Mike?
Well, thanks, Christie. Good morning, everyone, and thanks for joining us on today's call. Before getting into the results for the quarter and the full year, I wanna personally thank each of our 44,000 employees for continuing to execute their daily activities with an unwavering commitment to our operational pillars of safety, quality, cost, and schedule. 2021 was a year of solid performance and resiliency during the COVID pandemic. At HII, we are committed to promoting and protecting the health and safety of our employees, their families, and their communities, and continuing to serve our customers in the vital national security interests of our country without disruption as an essential contributor to the nation's critical infrastructure. Most recently faced with uncertainty around the Omicron variant, our employees remain focused on execution while driving continuous improvement, innovation, and creativity.
While HII has not become subject to a vaccine mandate through any of our shipbuilding contracts at this time, we continue to be committed to promoting the benefits of a vaccinated workforce. Our Technical Solutions division does have the vaccine requirement in a number of contracts, and currently, we estimate that approximately 81% of our HII full-time employees are fully vaccinated. Earlier this morning, we released our 2021 results, which we believe reflect consistent shipbuilding program execution with year-over-year margin expansion and a transformational year for our Technical Solutions division. During the year, we captured major contract awards resulting in maintaining record backlog levels, and we expanded our portfolio by acquiring Alion in our Technical Solutions division. With these actions, HII persevered to diligently pursue the business outcomes of driving growth, managing risk, and generating strong returns.
Some highlights from the quarter start on slide three of the presentation. Sales of $2.7 billion for the fourth quarter are down 3% from the fourth quarter of 2020, and sales of $9.5 billion for the full year are up 2% from the full year of 2020. Given the numerous challenges in 2021, we were pleased to finish the year with shipbuilding revenues at the low end of our guidance, and we remain confident in the 3% shipbuilding average growth rate over time. We also saw strong growth, as anticipated, in our Technical Solutions division.
Diluted EPS was $2.99 for the quarter and $13.50 for the full year, down from $6.15 in the fourth quarter of 2020 and $17.14 for the full year in 2020. Full year segment operating income of $683 million is an increase of $128 million or 23% over 2020. These returns, in line with our expectations, are the result of continued performance improvement in shipbuilding margins and strong performance in our Technical Solutions division. New contract awards during the quarter were approximately $1 billion, resulting in our backlog of approximately $48 billion at the end of the quarter, of which approximately $23 billion is currently funded.
Now, entering 2022, our shipbuilding programs backlog provides, we believe, unmatched stability and visibility, and we are laser-focused on methodically executing our contracts, while the Technical Solutions business is positioned to capture growth opportunities. We remain extremely pleased with the technology, capability, talent, and solutions that Alion has brought to the HII family. Now, shifting to activities in Washington for a moment, we are pleased with the passage and enactment of the fiscal year 2022 defense authorization bill and its strong support for shipbuilding. However, more than one quarter into the fiscal year, congressional appropriations have yet to be finalized, and the federal government continues to operate under a continuing resolution through February 18. It remains uncertain at this point when annual funding measures will be finalized, and we continue to urge Congress to proceed expeditiously.
We do remain optimistic that the appropriations process will be completed in the weeks ahead. Now, before I close, let me take a moment to address the recent announcement that at my recommendation, our board of directors elected Chris Kastner to the role of President and CEO, effective March first. This is consistent with the company's succession plan, and I fully endorse this transition. I truly believe this is a fantastic development for HII. As the executive vice chairman of the board, I will remain an HII employee through the rest of the year and will be able to support Chris and the board.
As the first CEO of this great company, I can tell you confidently that there is no better choice than Chris to lead HII into this bright new chapter, where I believe we are positioned better than ever before to successfully leverage our substantial backlog to generate strong free cash flow, demonstrate growth in our Technical Solutions division, and create long-term sustainable value for our shareholders, our customers, and our employees. Now I will turn the call over to Chris for his remarks on the operations. Chris?
Thanks, Mike, and good morning, everyone. Let me first congratulate Mike on his transition to Executive Vice Chairman of the Board and thank him on behalf of myself and our 44,000 employees for his extraordinary leadership. I also want to thank the Board of Directors for electing me to succeed Mike as HII's next CEO. Thanks to Mike's vision, HII is positioned well today, and the value creation opportunity in front of us is as strong as ever. I'm honored to lead HII in this next chapter. Now shifting to our results, I'm very pleased to report another solid operational quarter. Let me share a few highlights. At Ingalls, the Navy continues to fund advanced procurement for amphibious assault ship LHA-9, and LHA-8 Bougainville is achieving cost and schedule performance in line with our expectations. On the DDG program, the team delivered guided missile destroyer DDG-121, Frank E.
Petersen Jr. to the Navy and began fabrication of DDG-131, George M. Neal. This serial production line continues the positive momentum in 2022 with planned delivery of DDG-123, Lenah Sutcliffe Higbee. On the LPD program, LPD-28 Fort Lauderdale has completed sea trials and is on track for delivery to the Navy in the first quarter of this year. In addition, LPD-29, Richard M. McCool Jr. was launched in early January. We continue to watch the upcoming budget release for advanced procurement funding for LPD-32 to maintain the benefits of this serial production on LPDs. At Newport News, the Ford-class aircraft carriers are progressing well. CVN-79 Kennedy is approximately 83% complete, and the team is focused on compartment completion and key propulsion plant milestones. Later this year, Kennedy will begin testing of EMALS, the electromagnetic launch system.
CVN-80 Enterprise and CVN-81 Dorie Miller continue material procurement and early unit construction, and CVN-80 plans to lay keel this year. On the RCOH program, CVN-73 USS George Washington reached 94% complete and is focused on propulsion plant testing and is planned for redelivery later this year. Regarding CVN-78 USS Gerald R. Ford, the planned incremental availability is on track to complete this year to support the Navy's first deployment of this critical asset. On the VCS program, SSN-794 Montana completed work as planned in Q4 2021 and will complete sea trials and deliver in Q1 2022. SSN-796 New Jersey was christened last year and is expected to achieve its float off milestone early this year. While we did not achieve our projected end of year milestones, the VCS program continues to improve its progress towards a consistent two per year cadence.
Finally, on the Submarine Fleet Support program, SSN-725 Helena recently completed sea trials and was redelivered to the Navy last month. This Los Angeles-class submarine maintenance completion marks the first redelivery from Newport News of a submarine following a major availability since 2009 and demonstrates the successful reconstitution of our submarine maintenance capability in support of the Navy. At Technical Solutions, the Alion integration is progressing on plan, and our organizations are already operating as a consolidated business. Back office systems integration is in full swing and should be largely complete by the end of the year. Book-to-bill for 2021 was healthy at 1.1, and the new business qualified pipeline is very robust at over $20 billion, a level strong enough to support our growth expectations for this business.
Moreover, the velocity of the pipeline has already increased significantly entering 2022, with nearly $5 billion currently in evaluation or in proposal development. This includes multiple opportunities over $1 billion in total contract value that are expected to award this year. Before I close, I want to provide some remarks regarding our labor and material availability. We continue to keep COVID-19 impacts as watch items and are focused on ensuring our supply chain and labor supply will be able to continue to support our performance. Given the nation's overall labor pressures, we have increased attention with regard to hiring and attrition rates, and we have detailed plans in place to accelerate hiring for 2022. We are leveraging targeted hiring events and actively utilizing our world-class apprentice schools, as well as relationships with community colleges and high schools to increase the pace of talent acquisition and development.
Now I'll turn the call over to Tom for some remarks on the financials. Tom?
Thanks, Chris, and good morning. Today, I'll briefly review our fourth quarter and full year results and also provide our outlook for 2022. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated fourth quarter results on slide five of the presentation, our fourth quarter revenues of $2.7 billion decreased approximately 3% compared to the same period last year. This was due to a decline at Newport News and Ingalls Shipbuilding, which was largely driven by a very high level of material volume in the fourth quarter of 2020, partially offset by the growth at Technical Solutions from the acquisition of Alion in the third quarter of this year.
Operating income for the quarter was $120 million, decreased by $185 million from the fourth quarter of 2020, an operating margin of 4.5% decreased 658 basis points. These decreases were largely due to a less favorable operating FAS/CAS adjustment compared to the prior year, as well as lower segment operating income driven by lower risk retirement on the DDG and NSC programs at Ingalls, as well as lower risk retirement on submarine fleet support at Newport News. Moving to our consolidated results for the full year on slide six, revenues were $9.5 billion for the year, an increase of 1.7% from 2020.
The increase was primarily driven by the acquisition of Alion in the third quarter, as well as growth at Newport News Shipbuilding in the Virginia-class and Columbia-class submarine programs and carrier construction and overhaul. This was partially offset by decline in revenue at Ingalls due to lower volumes on the NSC and amphibious assault ships programs, as well as the divestiture of oil and gas business and the contribution of the San Diego shipyard to a joint venture early in 2021. On an organic basis, revenue for Technical Solutions was essentially flat year over year. Operating income for the year was $513 million, and operating margin was 5.4%. This compares to operating income of $799 million and operating margin of 8.5% in 2020.
The decreases were due to a less favorable operating FAS/CAS adjustment compared to 2020, partially offset by stronger segment operating results. Segment operating income for the year was $683 million, and segment operating margin was 7.2%. This compares to segment operating income of $555 million and segment operating margin of 5.9% in 2020. Our effective income tax rate was 18.4% for the quarter and 12.5% for the full year. This compares to 17.8% and 14.1% for the fourth quarter and full year 2020 respectively.
The decrease in the annual tax rate was primarily due to additional research and development tax credits for tax years 2016 through 2020, recorded in the third quarter of 2021. Net earnings in 2021 were $544 million, compared to $696 million in 2020. Diluted earnings per share in 2021 were $13.50, compared to $17.14 in the prior year. Pension adjusted diluted earnings per share in 2021 were $13.03, an increase of 30% from 2020 results due to stronger segment operating performance. 2021 results included approximately $20 million of pre-tax transaction and financing expenses related to the acquisition of Alion.
Additionally, 2021 results include amortization of purchased intangible assets totaling approximately $86 million, of which approximately $33 million was related to Alion. Turning to cash flow on slide seven of the presentation, we ended 2021 with a cash balance of $627 million, up from $512 million at the end of 2020. Cash from operations was $271 million in the fourth quarter, and free cash flow was $165 million. For the full year, cash from operations was $760 million, and free cash flow was $449 million. Net capital expenditures in 2021 were $311 million or 3.3% of revenues. Cash contributions to our pension and other post-retirement benefit plans totaled $106 million in 2021.
During the fourth quarter, we paid dividends of $1.18 per share or $48 million, bringing total dividends paid for the year to $186 million. We also repurchased approximately 75,000 shares during the quarter at an aggregate cost of approximately $14 million. In 2021, we repurchased approximately 544,000 shares at an aggregate cost of approximately $101 million. On slide eight, we have provided our updated five-year pension outlook. The notable change from our prior outlook is the increase in the FAS benefit. This was largely driven by asset returns in 2021 of 12.7% and to a lesser extent, a modest change in the discount rate. Moving on to slide nine, we have provided details on our outlook for 2022.
While we continue to expect shipbuilding growth of approximately 3% over time, our 2022 outlook range of $8.2 billion-$8.5 billion acknowledges uncertainties around the current environment. We finished 2021 with shipbuilding operating margins at 7.7%, the high end of our initial guidance range, and at the midpoint of our revised guidance range. This was a marked improvement from the shipbuilding margin of 6.2% in 2020. We expect shipbuilding operating margin to be between 8% and 8.1% for 2022, and we expect 2023 shipbuilding operating margin will continue to improve beyond 2022 results.
For Technical Solutions, we expect revenue of approximately $2.6 billion in 2022, operating margins of approximately 2.5% and EBITDA margin between 8%-8.5%. These are all consistent with our guidance and messaging at the time of the Alion announcement, and current run rates in 2021 results firmly support our expectations. In 2022, amortization of purchased intangible assets is expected to total approximately $142 million, of which $121 million is attributable to Technical Solutions. Given the timing of the Shipbuilding program milestones and the normal seasonality for Technical Solutions, we expect the first quarter segment operating results to be the weakest of the year, with Shipbuilding operating margin near 7% and Technical Solutions operating margin near 1%.
Additionally, we expect that the first quarter 2022 shipbuilding revenue will be the lightest of the year, given Omicron and the challenging labor market driving to a slow start of the year. Our expectation is for shipbuilding revenue to be approximately $100 million lower than results in the first quarter of 2021, with that equally split between the shipyards. Moving on, we expect 2022 capital expenditures to be between 2.5% and 3% of sales. This guidance does include modest incremental capital expenditures above our prior guidance related to investments in infrastructure and tooling to support the submarine industrial base. We are working with our Navy partner regarding the shared investment and capital incentive structure and believe these critical investments will have minimal impact on our overall free cash flow generation.
We expect 2022 free cash flow to be between $300 million and $350 million, which includes a number of non-recurring items. First, as we noted on the third quarter call, we now expect the repayment of the advanced progress payments we received in 2020 to occur in 2022, which totals approximately $160 million. Additionally, we have a repayment of approximately $70 million in 2022 due to the 2020 payroll tax holiday. Our 2021 free cash flow results were also about $125 million better than the midpoint of our latest guidance, simply due to timing of collections and distributions. The outlook we are providing today is based on the best information we have now and assumes no further degradation in our supply chain.
It also assumes that we're able to continue to hire employees at a pace that supports our staffing, and that we continue to see limited impacts from inflation given the nature of our contracts and the long-term arrangements that we have in place with our labor unions and suppliers. Additionally, on slide nine, we've provided our updated outlook for a number of other discrete items to assist you with your modeling. Regarding our longer term targets, we remain confident in our free cash flow target of $3.2 billion from 2020 through 2024. This outlook does assume the continued expensing of research and development costs for tax purposes. For context, we now believe the impact to 2022 free cash flow would be approximately $100 million if the current R&D amortization treatment remains in place.
On slide 10, we have provided a walk up from our 2022 to 2024 free cash flow outlook. First, 2023 free cash flow is enhanced by the lack of discrete headwinds I just mentioned for 2022, the advance of progress and payroll tax holiday repayments. Second, we do expect a working capital tailwind in 2023. That, along with continued top line growth in Shipbuilding, is expected to drive approximately $200 million of incremental cash flow. Finally, the growth and margin expansion of Technical Solutions is expected to contribute meaningful incremental free cash flow in 2023 and beyond. As a reminder, working capital can be quite lumpy, as we saw at the end of 2021, so we have provided ranges to help account for that variability.
For 2023, we are expecting free cash flow to be between $750 million and $800 million, and between $800 million and $900 million for 2024, which is all consistent with the target of $3.2 billion between 2020 and 2024. In closing, given the persistent challenges presented in 2021, we are pleased that we were able to complete the year with the results generally consistent with our guidance, including shipbuilding margin at the high end of our initial range and free cash flow well above our guidance. Notwithstanding the current environment, we remain enthusiastic regarding our long-term outlook as we begin 2022. With nearly $50 billion in backlog and Technical Solutions business that we believe is poised for very strong growth, we are laser focused on consistent execution and generating sustainable long-term value.
Now I'll turn the call back over to Christie for Q&A.
Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.
Thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Myles Walton with UBS. Please go ahead.
Hey, good morning.
Good morning.
I was wondering if we can focus on cash flow for just a second and beyond 2023, 2024, just the algorithm and the conversion ratios that you think about as being sustainable. Obviously, in 2023, 2024 you know, you're converting well above, I think, what's implied, you know, after you adjust for pension, non-cash pension income, you're converting well above, 100%. Maybe just tell us about what the conversion structure or equation should be after 2024.
Sure. Thanks, Myles. I'll take that. It's Tom here. Sure. You know, as we've been kinda guiding and as we get into the out years here, the portfolio is maturing. The ships are getting deeper into their build cycles. We're getting deeper into progress payments. And we're getting more ships, as we've highlighted in the past, in deliveries in the 2022, 2023, 2024 timeframe from where we've come from. We're seeing additional progress payments, an improvement in working capital in the out years and then a higher conversion rate as we release retentions and run through the deliveries of those ships. I'm with you that there's a couple years that we're playing catch-up, actually.
You know, the bridge I've given here in the PowerPoint on page ten actually kind of shows that there's some headwinds that we have in working capital exiting 2021. Going into 2022, the working capital actually gets a little bit worse. On the top end of our range, almost 8% in the high 7s%. Then as we get into 2023 and out, we actually see that turn back and become favorable for cash, a cash contribution as we work off the progress of the ships and we deliver the ships there.
We shouldn't assume any substantive drop-off post 2024 from a working capital materially
No.
From the opposite direction.
No, I think what we highlighted, you know, long term, I mean, as we work the ships off, have the collections and then deliver, you know, the margin in free cash flow will gravitate to a 10%. You'll see years where there's some pressure on that as the maturity of the enterprise as a whole is on the front end of the cycle. Then as we kind of move a little bit more on the back end of the cycle. You know, we've accumulated this backlog of $48 billion. Now that we're kind of heavy in the ramp up of pushing that work through the snake here, hiring up and then achieving the progress, you'll see that swing backwards to favorability both in 2023 and in 2024.
Okay.
Myles, it's Chris. I think you're getting into a new normal from a free cash flow generation standpoint, up at those elevated levels. It just naturally gets there.
Okay. Congratulations, Chris and Mike. Thanks again.
Thanks, Myles.
Thanks, Myles.
The next question will be from Doug Harned with Bernstein. Please go ahead.
Good morning. Thank you.
Good morning, Doug.
First, Mike, I just want to wish you all the best in this transition. It's been great working with you even from before there was an HII. It's been a pretty exciting road, I think.
Thanks, Doug.
The question I've got is, you know, you all have talked a lot about a, you know, 3% top line growth rate, which is pretty consistent when we model out where the, you know, ship by ship things should go. But if I look at the 2022 guidance, there's really negligible growth versus your shipbuilding revenues in 2020. Is this consistent with your expectations? And can you break it down between Ingalls, Newport News and also the impact of services?
Sure. I'll take that. I appreciate that. Thanks, Doug. Yeah, you know, we gave you some color on how, you know, 2020 finished out against 2019. When you look at each year, specifically depending on how that material and labor hits at the quarter close of each year, it can sway how the trend line looks. You know, if you think about the shipbuilding, we finished off 2019 just under $7.8 billion. We had thought 2020 would be about $8 billion, but we had a strong fourth quarter in 2020, and we actually closed out in shipbuilding at $8.25 billion in that. You know, that was almost a 6% year increase on that.
That material kind of slid in a little bit earlier than we thought it was gonna be in 2021 to 2020. The trend line that we have here is a 7-8, an 8-2. Then last year, although we would you know, we highlight 3%-8% medium to long term with the momentum just kind of accelerating into the 2020 timeframe. That extracted $200 million out of 2021. We did see pressures because of both Delta and Omicron at the end of 2021, which kind of pushed down. We saw, although Newport News was a slight growth, up of about $50 million in their sales.
Ingalls was up about $150 million. That was primarily driven even from a planning perspective that things were accelerated on the material side and some pressures on the labor on the back end. It is true that if you look at you know 2020 and 2021, you're looking at $825 and then $819-$821. We had actually backed up $50 million in shipbuilding itself for 2021. Now, relative to the range in your question of $82-$85, if we're seeing right now problems with the virus and Omicron lessening right now. The case rates are going down at a quick pace at the beginning of this year.
If that sustains itself, then we have a normal run rate year in 2020 and then 2021 were both impacted with the virus and case rates. If we see a normal year right here, we still think that $8.5 billion for shipbuilding, which is a clean over 3.5%. A clean 3% on the actuals would be about 84.36. That's why we've given you a range of $8.2 billion-$8.5 billion. I think $8.5 billion is a clean year. If for some reason COVID runs through the entire year or there's another variant, we could still see another flat year. The pressure would manifest itself on the labor side, right?
We did see some. The end of 2021 and the beginning of 2022. On the labor side, we have hiring plans. We know how to go do that. Our human capital is the most important resource that we have. We've been successful over the years in being able to establish our labor plans, hire, train, retain, and we just got to put our head down and make it happen this year. I do believe that the pressures that we see, and in my opening notes in Q1, that we see at the beginning of the first quarter, Q1 was gonna be a low quarter anyway, and then a little bit light because of the labor, are recoverable this year, as long as we don't see continued impacts for the remaining part of the year.
I would tell you from a growth perspective, if you're concerned about that, you know, if you strike the line, and we always say it's lumpy, whether it's cash or even on the revenue side. You can't kind of look at it from quarter to quarter and even from one year to another year's stuff. If you look at from 2017, using that as the base of shipbuilding, it's $6.6 billion. The CAGR on that over four years is 5.5%. If you use 2018 as the base, the CAGR on that is 3.7%. Even using these two years where we had an acceleration in 2020 and then a little flatness in 2021 because of COVID is a 2.4% CAGR.
I mean, we're being transparent in the notes that although we believe that shipbuilding is still 3%, and like I say, over the last four years, it's 5.5%. The last three years, it's 3.7%. Although we believe it's sustainable that we can get 3% long term, we moderate it just slightly and did guide to a range of 8.2%-8.5%.
Just related to this on timing. You know, you talked about 2021, and one of the things that you reported helping you in margins at Newport News was performance on Virginia-class. Now, you're going through this block 4 to block 5 transition. General Dynamics reported that they were seeing delays in modules and, you know, some supply chain issues right now. I mean, when you're looking at 2022, are you seeing any issues there in terms of this overall program and how you do the transition from block 4 to block 5?
Yeah, no. Doug, this is Chris. Actually, it's pretty encouraging from a module standpoint at Newport News last year. They met their commitment on modules. So they're getting some stability in the manufacturing organization at Newport News. So it's pretty stable. Missed milestones at the end of the year related to Montana and New Jersey, but those will happen here momentarily. They're pressing towards getting back to a two per cadence. The team is very focused on it.
Okay. Okay, great. Thank you.
Sure.
The next question will be from Ron Epstein with Bank of America. Please go ahead.
Yeah. Good morning, guys.
Good morning, Ron.
Thanks for the time. If you could walk through the growth in technical services? Cause it looks like if you look at the guide that you guys are implying, it implies organic growth in the core, you know, if you take out Alion, is actually pretty darn good. I mean, it seems like you had organic growth that might have been mid-teens or higher in the business without Alion. How do we think about that, and what are the growth drivers for that business as we go into 2022?
Ron, it's Tom here. Consistent with the notes I gave you, actually, if you pull a line out, the organic growth year-over-year was flat. We can walk you through that on the side if for some reason you see-
Sure.
Something that's driving you a different way on that. You know, we did have some pressures on manpower, although we feel positive about that business, and we've highlighted that although the budget is small right now, we think that's gonna be a high growth area on the Navy side of the budget, probably fast-growing as any account that they have there. We did see that the appropriations and the awards were delayed, and we've been foreshadowing that that's gonna be pushed out to the summer into the fall timeframe of 2022. So that actually stymied the organic side of TSD. From Alion perspective, though, and you can work yourself through it on the performance in the 10-K and through the performance information that we gave you.
They actually had a stellar year last year from a growth perspective. They were up 23% from 2020 to 2021. Consistent with what we've highlighted at, you know, 18, 19, 20, they were in the teens from a growth perspective. We've incorporated that into our TSD billion-dollar business. Within the 26, we feel comfortable about the growth rates that we've been highlighting there from 7%-9% through at least 2024. Also, as I noted in my opening comments, whether it was in Q3 for the first nine weeks or through Q4 and Q3, Q4, the run rates have been consistent. They've been slightly kind of moving up. They're where we thought they would be to date.
as I've highlighted, with actuals at $507, with that run rate itself, it needs about 11% growth to kind of make the $1.6 billion of the 2026 that we're highlighting for the TSD division for 2022. very comfortable with Alion to date, although you're always good at your next bid and win, so they have to go do that. from the other side, you know, Andy Green has restructured his business over there. He's got his leaders aligned. he's getting some synergy of combining the leadership and resources with the organic TSD. we're watching closely how unmanned unfolds to see the growth in that area.
Hey, Ron, from a market standpoint, I mentioned some significant opportunities that we have bid on and will bid on in the first part of the year. I don't wanna comment on the specific items because they're competitive, but it's broadly across ISR, advanced training, cyber intel, and then we have unmanned opportunities that were delayed from last year that'll come out this year. It's pretty broad within growth markets that Alion and the legacy TSD are engaged in.
Got it. Kinda got it. Maybe just as a follow-on, can you speak a little bit to the CapEx investment you're making? You know, is that prepped for maybe more Virginia-class? Or, I mean, how do we think about that?
Yeah. From the previous quarters, we were kind of highlighting that was a possibility there. Much as we've seen the CapEx come down from 3.6% in 2020 and last year it finished up at 3.3%. We're guiding to about 2%-2.5%. More recently, because of our taking a look at, we're evaluating both the current submarine requirements as well as future anticipated awards that are coming down Block V, Block VI, the Columbia-class follow-on. We're in discussions with our Navy customer on these requirements, and there is a need for additional investments for the submarine industrial base, specifically infrastructure and some tooling.
We would partner with the Navy on that investment and with capital incentives, we would be moderately increasing our CapEx to the forecasted range of 2.5%-3%. That would run out over the next several years. Again, we would only go forward with the customer assistance. To be clear, you know, we'd only move forward if the investment made sense and it had an appropriate return against it. This is a minor change that we've incorporated into the business plan, but it is considered in the forecast of the $3.2 billion free cash flow generation through 2024 that we've reconfirmed.
Yeah. Ron, it's also consistent with the two per year plus the next phase of the Columbia-class. If it were to accelerate to three, then there'd be initial investment that would be required.
Got it. All right. Thank you. Mike, congratulations on the transition, you know, per Doug's remarks, it's been very nice working with you over the years. Thanks.
Yeah, thanks, Ron. I've enjoyed it.
Thank you. The next question will come from Robert Spingarn with Melius Research. Please go ahead.
Hi. Good morning.
Morning.
Yeah, Mike and Chris, congrats. It has been an excellent run working with you, Mike. I wanted to ask, Chris, if you could talk a little bit about labor, how, what you expect net headcount to be or growth to be in 2022, and the pieces of that. Departures, additions, and how we think about cost within that, and how the new collective bargaining agreement might affect things.
Yeah, it's a good question. There's some really positive indicators related to Omicron. We're cautiously optimistic. We only had 20 outs in Newport News or 20 folks that had the virus earlier this week. Attendance is improving, and that's half the battle. Getting the attendance back to stability, we have a predictable labor force to execute on the programs is really you know, nirvana for a shipbuilder. That's half the battle. The other half is we need to hire north of 5,000 people. I don't wanna get into attrition and splitting it by the shipyards, but we're pretty good at building a workforce.
Our relationships with our apprentice schools, community college, high schools, we think we can meet that commitment. It's gonna be a challenge, but we think we can build that workforce in order to achieve our sales guidance.
Okay. Just a quick one for Tom. If you could run through the details on the EACs in the quarter.
Sure. For Q4, we saw a net $10 million favorability, $45 million favorable and $35 million unfavorable. The net there of $10 million was basically attributable to a split between Ingalls and TSD.
Okay. Thank you.
The next question will come from Mike McGarry with Wolfe Research. Please go ahead.
Hey, good morning. Thank you, guys. Mike and Chris, congratulations to both of you.
Thanks, Mike.
Yeah. Chris, following on Doug's question, can you add a little bit more color around the transition between Virginia-class Block IV and Block V, as you close out the year, risk items you're keeping an eye on that happened in Block IV, what you're sort of expecting for Block V, and whether there could be upside there?
Yeah. Remember, we did take a charge on Block IV, so there could potentially be some upside in Block V. The team is very focused on early module fabrication. We met our commitments this year in that regard. The best thing about you know, kind of the rhythm we're getting there on the VCS program is you're training a team, right? You're training a team to deliver one float-off every year. That team is gonna roll right onto Block V. If we can get predictable performance, that's really the place you wanna be in shipbuilding in serial production. We just need to keep the positive momentum going.
Got it. Then, a related follow-up. How does the mix between Block IV and Block V trend over the next three, four years? three years probably?
We don't have that specific information for you. We don't really provide guidance at that level. The deliveries on Block IV happen one a year for the next three years after we get through Montana, and then we'll transition. It'll slowly evolve into more Block V revenue.
Got it. Thank you.
Sure.
The next question will come from Seth Seifman with JP Morgan. Please go ahead.
Hey. Thanks very much. Good morning and congratulations to Mike and Chris. Just wanted to start off asking a little bit about the cash flow bridge and just kind of understanding the piece that's in 2023, I think, the $200 million of shipbuilding growth and working capital. Just when we think about shipbuilding growth and we think about, you know, 3% top line with a shipbuilding margin type drop through after tax, you know, that would imply that, you know, the vast majority of that $200 million is working capital. A, I just wanna confirm that that's kind of the right way to think about it.
Then when we think about what drives the growth from 2023 to 2024, is it a similar dynamic where there's that level of, you know, underlying EBITDA growth from the shipyards on that kind of 3%, and then anything else is kind of working capital as you go to 2024?
Sure. Yeah. Thanks. I appreciate the question. It's Tom here. Yeah, from the working capital perspective, you are right. You know, the bar there shows $200 million. There is a lift there both in the volume and then the expected returns from the 7.7 ROS that we gave you for shipbuilding to now the range that we have here. You can do the quick math of that. You know, that's about a quarter of that. A little fifth of that. The rest is either in working capital, which is the preponderance of it.
There is a piece, even though the CapEx is not at the 2.5%, but at 2.5%-3% on the low end of the range, there is a little bit of a push there. We did put it on the chart kind of going forward. The CapEx could be $10 million-$20 million on a run rate cheaper going forward on that. The working capital itself, the way I kind of look at that, as I mentioned, is we see a drag from the working capital leaving 2021, going into 2022 by about $100 million additional working capital. Then that reverses itself to over $300 million.
I mean, it's both the bar there as well as what's kind of sitting in the advanced progress and the FICA repayments. That's a giveback there too. That comes about through both contract working capital that we have, as well as the trade working capital. You can work yourself through that. It does improve, as I say, significantly from 2022 to 2023, and we find ourselves going from the top end of the range in 2022 of that over 6%-8% to actually with capex incentives, actually kind of gets us even below the bottom end of that 6% range in 2023 with a slight improvement going forward in 2024.
Thanks. Just wanted to follow quickly on the hiring. The 5,000 people, how does that compare to other years recently in terms of, you know, I guess that's the number of gross adds? Because just looking at it as a percentage of the shipbuilding workforce, it seems like it's, you know, it's pretty high. It's probably about 14% of the shipbuilding workforce.
Yeah. Seth, we're pretty good at hiring people. We hired that almost that much last year. We'll actually hire north of that this year. Yeah, we're pretty good at this. My boss considers it a core competency and so do I.
Great. Okay. Thanks very much, guys.
Sure.
Mm-hmm.
The next question will come from David Strauss with Barclays. Please go ahead.
Great. Thanks. Let me echo my congratulations to you both as well.
Thanks.
Thanks, David.
Just wanted to ask about the shipbuilding margin profile. You know, you're calling for a couple of, I guess 40-50 basis points of improvement. Can you talk or give some color how that might break out among the shipyards? I mean, we've been on a trend here where, you know, Newport News has been coming up, Ingalls has been trending down. How does that look, you know, I guess in 2022 and then, you know, for the additional progress you're expecting beyond 2022?
Yeah. You know, to date, we give our outlook against the enterprise there, so we don't kind of break that up between both Ingalls or Newport News. As I kind of mentioned earlier a little bit, it is the ships that we have in the contract, working them through the, you know, EAC processes, the risk registers, burning down risk as we get deeper into the build cycle, the additional progress payment clause allows us to have more collections. With the burn down of risk, we'll have high booking rates as we get into more deliveries in the out years. I mean, that's the essence of it.
Yeah. I will say, David, just I agree with Tom, but it's really the maturity of the ships at Newport News are gonna drive a lot of that earnings growth.
Okay. Got it. Chris, maybe if you could touch on the unmanned portfolio. I think you know highlighted as a bit of a risk item last quarter. I guess you also highlighted in the release today that it dragged on TS margin. Just an update on what you're seeing there. Thanks.
Yeah. Some progress there. Small and medium, we think, will both be awarded late Q1, early Q2, really after the budget is agreed upon. We'll know a lot more after small and medium sizers are awarded. We're making good progress on XLUUV. We shipped our first modules to Boeing, so it's critically important we get that ship or that boat, or Boeing gets that boat in the water to start demonstrating its capability. Reasonable progress in unmanned, and we'll know a lot more this year.
All right. Thanks very much.
Sure.
The next question is from Pete Skibitski with Alembic Global. Please go ahead.
Yeah, good morning, guys. I'll reiterate, Mike, best of luck, and Chris, congrats.
Thanks, Pete.
I wanted to talk about aircraft carriers. It looks like work on the Ford elevators is finally finished up and, you know, the ship's getting closer to deployment. I did see on your slides that the statement of work, I think, on the Kennedy is now done. Can you talk about maybe what you've learned about the technical risk on the Ford-class and how that's gonna apply to the Kennedy? And do you have that contract mod yet on the Kennedy? That's it. Thanks.
Yeah, we do have the mod on the Kennedy. You know, I got a old aircraft carrier program manager here that hasn't answered a question, so I'm curious if he wants to jump in here on the aircraft carriers, then I'll-
Right
I'll jump in after.
Thanks, Chris. I think the first part of your question is what did we learn from Ford that's gonna go through the rest of the class? I think you know, over the time we've talked about, you know, we've pointed out that the first ship in our production run is also a prototype where we have to test out the manning plans, the design, the supply chains, the construction plans, all those things get tested. We then came off of that, just to kind of set you on how we did this, we came off of that with a plan to invest capital. We invested about $250 million in capital, and we reduced the price of the Kennedy by about $1 billion based on that.
That was really driven by learning curves. We went to the government and said, "Okay, we have now figured out how to efficiently build this ship, understanding the supply chains and understanding the, you know, the manning and the technology and all that sort of stuff and the learning curves. The next thing we need to do is we need to buy these things smarter." The government worked with us, and we came up with a two-ship buy for 80 and 81. I think that, you know, where we are right now is weapons elevators on Ford are behind us. The ship is accelerating towards delivery from its last availability with us, post-shock trials, and it's accelerating towards its first deployment.
I think you're gonna see this ship out there, you know, carrying the flag and doing great things. In the meantime, we've got the modification for Kennedy to go forward. We've taken all of the lessons that we've learned from Ford. We've invested against those lessons to drive success on Kennedy. And as I think Chris pointed out, you know, the fabrication and work that we're already doing on Enterprise after that, and then Dorie Miller after that. I mean, you're talking about a four-ship program here that's going to be very mature and hot and running really well. I think it's gonna put our customer in a place where they can think seriously about how do we extend this program and move forward.
You know, my focus would be at this point is how do we take all of this in a package and start talking about 2022 and 2023? I think that's where we need to be going with the program. I think it's positioned very well to do that. We're through the growing pains now, and we're ready to accelerate into efficient production. I'm excited about the future of the program, and it is a tremendous ship.
That's great. Thanks very much.
You bet.
The next question will be from Gautam Khanna with TD Cowen. Please go ahead.
Hey, good morning, guys, and congratulations, Mike and Chris.
Thanks, Gautam.
By the way, it's sad. Now we have Dwayne leaving and, you know, and now you, Mike. Anyway, I just wanted to
You'll be okay, I'm sure. I won't leave.
No, we will.
I'm not leaving you.
No, no insult meant there. I just, you know, it's been a long time.
That's okay.
You know, I was gonna ask about the guidance on shipbuilding margin, first of all. I mean, it seems extraordinarily precise, 8%-8.1%. It's a tighter range than you've given in the past. And I was curious, you know, what informs that conviction around, you know, a 10 basis point swing? And given the soft Q1 start, I mean, is there any weighting you could tell us? Like Q4's got a ton of Q in catch-ups or risk retirement opportunities or what have you. Like, just if you could kind of give us a sense for why the precision and, you know, when do we get those lumpy Q catch-up opportunities later in the year?
Sure. Yeah. It is a more precise range than we gave last year. Last year, we started out at 7%-8%, then we narrowed that in Q3 to 7.5%-8%. It came in at 7.7%.
Mm-hmm.
Although that range was probably a safe and conservative range, we wound up on the top end of that range. We did foresee that that could happen, but we wanted to see the year play out with COVID. That was why we did that. I think going into 2022, we didn't want to give a really wide range. We thought we'd be a little bit more transparent where we think the year's gonna land. We feel comfortable that from where we exited at 7.7% for shipbuilding, we know the work we're doing, the backlog, you know, that's coming on board, which isn't really gonna influence 2022 that much.
The work we're doing, the serial production, the lessons learned that Mike and Chris have talked about, we feel, you know, strong about that kind of going forward.
COVID could have an impact on the revenue, but the cost efficiency and how we're operating right now, we feel good about, and we think this is gonna be a lift. We've been guiding that we're gonna march our way back up, and we think that's still in play here right now. The portfolio mix, as we've said on what we've taken behind us on VCS is in the mix. That's gonna slow the march back, but it's still a march back up from where we thought we'd be. We feel good about it right now. As we get into the year and work down the risk, we'll see that we'll realize that, right?
Now specifically, what we see happening here is with more deliveries in 2022, 2023, and 2024 than where we came from in 2018, 2019, 2020, with the ships as we're building them with the lessons learned in serial production. There are a couple of ships in the next year or so uniquely contracted higher incentives. I think of like DDG-125, for example, that was a modified Flight IIA that we incorporated an ECP, uniquely how we contracted that with incentives on the schedule side of it. There's a couple of nuances in the ships that we believe are gonna provide additional margin, say, than a normal ship. We have lined aside of that right now, and we feel comfortable under that look of 8%-8.1%.
Your point is it sequentially builds through the year? Q4 is greater than Q3, greater than Q2, et cetera, in terms of margin?
We didn't provide that guidance. I would tell you it's pretty flat. I mean, I think, like, obviously a Q1 is gonna be light.
Okay.
From there, we'll see how it plays out. After we get out of Q1, it's not a significant driver from quarter to quarter there.
Okay.
It should go-
Just a follow-up on that.
Building margins is like you know, it's not a quarter-to-quarter game, right?
Got it. Okay. No, that's helpful. With Alion, I'm just curious. We've seen a lot of the government services contractors, you know, not have great results of late for whatever reason, whether it be COVID, whether it be, you know, bookings are soft because the government's not getting stuff awarded on time due to COVID or continuing resolution and the like. I'm just curious, like what can you say about sort of the Alion book-to-bill in Q4? You mentioned there were some contracts you're bidding on in the first half. You know, what do you expect for book-to-bill in Alion in 2022? Thank you.
Yeah. This is Chris, Gautam. I think the book-to-bill will be north of one based on the significant opportunities that we have there. If the CR extends too far into the year, there could be some pressure on the top line, but we're pretty comfortable with our pipeline and the significant opportunities we're bidding on and the markets that we're in. We're pretty comfortable with Alion and Technical Solutions.
Q4 book-to-bill?
Yeah. It was south of that. I don't have that specific information in front of me. Excuse me, Tom, if you have it, go ahead.
That's okay.
No, I know for the year it was 11.
One one, right.
Thank you, guys.
The next question will be from George Shapiro with Shapiro Research. Please go ahead.
Yes. Could you comment on where the learning curve has been on Kennedy? You're 89% done. I remember in the beginning there was this big issue that you were gonna have twice the learning curve that the Navy was suggesting.
Yeah. We don't have a specific learning curve on Kennedy at this point. We just extended the schedule for the single phase delivery. They're heavily into the volume work on the ship. They're miles ahead in some systems and making really good progress. I'm comfortable with where they're at financially, but I don't have a specific learning curve for you right now, George.
Okay. Maybe one quick one for Tom. Given that New Jersey and Montana didn't meet the milestones in Q4, are they expected to meet them in Q1? If so, why wouldn't the margin be a little better than the 7%?
They were planned to happen last year. I will tell you though that just as we go with the goal line, some of the milestones don't specifically bring margin immediately, depending on where they finish in the quarter. There's an EAC and hot wash that we do, and it could be booked a subsequent quarter. Even though they will bring a couple of dollars that goes into the mix against the portfolio. When you really add up all the math, you're not gonna see a big driver in one specific quarter like that.
It is a slight lift, and that probably adds more credence to the 7.7% last year without them coming into this year, bolsters our outlook and our perspective on why 8%-8.1% looks good.
Remember, George, those are Block IV boats, and we did take a charge on those. The opportunity for risk retirement is reduced.
Okay, thanks. Congratulations, Chris, and lots of luck to you, Mike.
Thanks, George.
Thanks, George.
Thank you. I am not showing any further questions at this time. I would like to hand the conference back over to Mr. Petters for any closing remarks.
My last earnings calls, I just wanna take the opportunity to say thank you again to all of the folks that I've had the opportunity to work alongside with the last 35 years. It's been a privilege for me to serve as CEO of this company for so many years, and I frankly have enjoyed working with each and every one of you in the financial community, in the business, in our customer set, and I do appreciate your research and thoughtful questions, even if I didn't say so at the time. I've learned a lot. I would hope that maybe you've learned a little along the way.
As we look forward, and as you can tell by today's call, our company is in very good hands with Chris and the senior leadership team, and I am confident that HII has a very bright future. Thanks for joining us on today's call. I hope that you and your families continue to stay safe and healthy. We appreciate your time and your continuing interest in our company. Thank you very much.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.