Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2022 HII 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 session, please press star followed by one on your telephone keypad. Please be advised that today's conference is being recorded. If you need further assistance, please press star followed by zero to speak to an operator. I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin.
Thank you, operator. Good morning, everyone. Welcome to the HII fourth quarter 2022 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO, and Tom Stiehle, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical fact are considered our company's estimates or expectations and are forward-looking statements made pursuant to the safe harbor provisions of federal securities law. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. In their remarks today, Chris and Tom will refer to certain non-GAAP measures.
For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the investor relations website at ir.hii.com. With that, I would like to turn the call over to our President and CEO, Chris Kastner. Chris?
Thanks, Christie. Good morning, everyone, and thank you for joining us on our fourth quarter 2022 earnings call. First, I would like to thank the entire HII team for a solid year and express my gratitude for their outstanding contribution throughout 2022. It was through their dedication and commitment that we were able to deliver results that demonstrated consistent performance in a pretty tough economic environment. Now let's turn to the highlights for the quarter and the year on page 3 of the presentation. In 2022, we reported record sales of $10.7 billion, net earnings of $579 million, and free cash flow of $494 million.
The demand for our products continues to drive a tremendous backlog of $47 billion, and we grew sales and earnings across all three of our segments in 2022, setting the foundation for continued growth in 2023 and beyond. At Ingalls in the fourth quarter, we delivered DDG-123 Lenah Sutcliffe Higbee and completed builder's trials on DDG-125 Jack H. Lucas, the first Flight III ship, just one quarter after DDG-123 completed her trials. Our DDG-51 team also started fabrication on DDG-133 Sam Nunn. In our amphibious ship product line, we were awarded a $2.4 billion detailed design and construction contract and started fabrication for LHA-9 Fallujah, the fourth big deck amphibious warship in the America class. Also at Ingalls, in January, we were awarded the advanced planning contract for the modernization period for Zumwalt-class guided-missile destroyers.
At Newport News in the fourth quarter, we authenticated the keel for SSN-800 Arkansas, honoring the ship's sponsors, the Little Rock Nine. We continue to remain focused on reducing risk and meeting cost and schedule objectives on the Virginia-class boats. As for nuclear aircraft carrier, CVN-79 Kennedy is well into the test program. Distributed systems such as fire main, potable water, air conditioning, and ventilation are coming to life. The EMALS catapult system, which we began testing in 2022, remains on track and is progressing as planned through her test program. We expect to enter into the combat systems test program later this quarter. Finally, for the refueling and complex overhaul of CVN-73 USS George Washington, we are 98% complete as we near planned redelivery later this year.
At Mission Technologies, we achieved solid revenue growth for 2022, with all of the business groups growing year-over-year. We ended the year with a robust potential business pipeline of $66 billion, of which over 1/3 is qualified. Significant wins in 2022 included the Decisive Mission Actions and Technology Services contract, Mobility Air Force Distributed Mission Operations contract, and REMUS 300 selection as the U.S. Navy's small UUV program of record. From an operational perspective, we have integrated Alion into our Mission Technologies and HII team. With the integration complete, we can turn our full attention towards executing our growth strategy. Moving on to slide 4, we are providing the major milestones for 2023 and 2024.
I'm proud to say that we met all of the shipbuilding milestones that we highlighted back in the second quarter of last year for 2022, and we are maintaining all of the 2023 milestones. This demonstrates growing confidence in our ship schedules and provides a solid platform to continue to improve our cost performance. Notable anticipated 2023 milestones at Newport News include the planned delivery of SSN 796 New Jersey and planned float off of SSN 798 Massachusetts, as well as the planned redelivery of CVN-73 and planned crew move aboard on CVN-79. At Ingalls, DDG-125 Jack H. Lucas, NSC-10 Calhoun, and LPD-29 Richard M. McCool Jr. are all forecast to deliver this year, while LHA-8 Bougainville is expected to launch.
In addition to these shipbuilding milestones, Mission Technologies expects to see continued growth resulting from our large opportunity pipeline, including the several award decisions that we expect to be made in the first half of the year. Now, I would like to discuss our operational focus areas. Our top operational priority remains hiring and workforce development. I'm confident in our plans for hiring and, as importantly, our retention and training strategies. These strategies that center around employee skills and leadership development are gaining traction, and we've had a good start to the year. After hiring over 4,900 craft personnel in 2022, we expect a similar hiring rate in 2023, while at the same time improving our productivity, attendance, and overtime together to drive performance. Regarding inflation, we have some insulation through our contracting terms and conditions.
However, non-programmatic elements of inflation have impacted us across all of our programs. Finally, the supply chain is stabilizing, and we have worked closely with our customers and suppliers to achieve the best possible schedules. To summarize, notwithstanding being our most significant risk, as labor and supply chain impacts continue to stabilize and inflation abates, we believe we have the opportunity for improved performance over the next few years. Turning to the budget environment, we are pleased with the passage and enactment of the fiscal year 2023 defense appropriations and defense authorization bills. Both pieces of legislation strongly support shipbuilding, including funding and authority for an additional DDG-51 Flight III ship for a total of three DDGs, two Virginia-class attack submarines, the Columbia-class ballistic missile submarine program, Ford-class nuclear aircraft carrier programs, and the refueling and complex overhaul of CVN 74 John C. Stennis.
Both appropriations and authorization bills continue funding for LPD 32 and LHA-9 and provide new advanced procurement funding for LPD 33, LHA 10, and a third DDG-51 in FY24. The Defense Authorization Act also includes language requiring a naval fleet of no less than 31 operational amphibious warships, including a minimum of 10 amphibious assault ships. We continue to see bipartisan congressional support for our programs. We look forward to working with the administration and Congress on the president's fiscal year 2024 budget request. With that, I will turn the call over to Tom for some remarks on our financial results and guidance. I have a few additional comments before we move on to Q&A.
Thanks, Chris, and good morning. Today, I'll briefly review our fourth quarter and full year results and also provide an outlook for 2023. 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 $2.8 billion increased approximately 5% compared to the same period last year. This growth was driven by higher year-over-year revenue at all three segments, leading to record quarterly revenue for HII. Operating income for the quarter of $105 million decreased by $15 million or 12.5% from the fourth quarter of 2021, an operating margin of 3.7% compared to margin of 4.5% in the prior year period.
The decrease in operating income was primarily due to lower segment operating income. Net earnings in the quarter were $123 million compared to $120 million in the fourth quarter of 2021. Diluted earnings per share in the quarter were $3.07 compared to $2.99 in the fourth quarter of the previous year. Moving to our consolidated results for the full year on Slide six, revenues were $10.7 billion for the year, an increase of 12.1% from 2021. The increase was driven by year-over-year growth at all three segments, along with a full year of Alion revenue. Operating income for the year was $565 million, and operating margin was 5.3%.
This compares to operating income of $513 million and operating margin of 5.4% in 2021. The operating income growth was driven by year-over-year improvement at all three segments, as well as a more favorable non-current state income taxes and operating fast cash adjustments. Net earnings for the year were $579 million compared to $544 million in 2021. Diluted earnings per share were $14.44 compared to $13.50 in the previous year. Moving on to slide seven , Ingalls' 2022 revenues of $2.6 billion increased $42 million or 1.7% from 2021, driven primarily by higher revenues in the LHA and DDG programs, partially offset by lower NSC program revenues.
Ingalls' 2022 operating income of $292 million and margin of 11.4% both improved from $281 million and 11.1% last year. These results were driven primarily by favorable changes in contract estimates and price adjustment clauses, as well as higher risk retirement on the LPD program, partially offset by lower risk retirement on the DDG program compared to 2021. At Newport News, 2022 revenues of $5.9 billion increased by $189 million or 3.3% from 2021, primarily due to higher revenues in both aircraft carriers and submarines, partially offset by a lower revenue in naval nuclear support services. Increased aircraft carrier revenues were driven by higher volumes on the refueling and complex overhaul of the USS John C.
Stennis, CVN-74, and the construction of Doris Miller, CVN-81, and Enterprise, CVN-80, partially offset by lower volumes on the refueling and overhaul of the USS George Washington, CVN-73, and USS Gerald R. Ford, CVN-78. Submarine revenue growth was due to higher volumes on the Columbia-class and Block V boats on the Virginia-class, partially offset by lower volumes on the Virginia-class Block IV boats. Newport News's 2022 operating income of $357 million and margin of 6.1% were relatively consistent with the performance in 2021 of $352 million and margin of 6.2%.
2022 results included favorable changes in contract estimates from facilities capital and price adjustment clauses, as well as contract incentives on the Columbia-class submarine program, partially offset by lower risk retirement on the VCS program and the refueling overhaul of the USS George Washington, CVN-73, compared to 2021. 2022 shipbuilding margin of 7.7% was consistent with the performance of 2021, but below our expectations for year-over-year improvement, as the back half of the year provided limited risk retirement opportunities. Continued labor challenges, including higher attrition rates, the impact of non-programmatic inflation, and supply chain disruption all contributed to slower margin progress.
At Mission Technologies, revenues of $2.4 billion increased $911 million or 61.7% from 2021, primarily driven by the acquisition of Alion in the third quarter of 2021. Mission Technologies' operating income of $63 million compares to operating income of $50 million in 2021. Primary drivers of growth are the acquisition of Alion in 2021, as well as higher equity income from a joint venture, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition. 2022 results include approximately $96 million of amortization of Alion-related purchased intangibles compared to approximately $33 million in 2021.
I'll also note that the fourth quarter in 2022 results included a non-cash downward valuation adjustment of approximately $10 million or approximately $0.20 per share related to an equity method investment. Mission Technologies' EBITDA margin in 2022 was 8.2%, and adjusting out the one-time downward valuation adjustment, EBITDA margin was 8.6%, consistent with 2021 performance. Turning to capital deployment on slide 8, we ended 2022 with a cash balance of $467 million and liquidity of approximately $2 billion. 2022 cash from operations was $766 million, and free cash flow was $494 million.
Free cash flow generated in the fourth quarter of 2022 was significantly above our prior expectations as we were able to accelerate several large cash collection events. This has a direct impact on our expectations for 2023 free cash flow, which I will discuss in more detail in a moment. I'm pleased to report that the net capital expenditures were $272 million or 2.5% of revenues in 2022, at the very bottom end of the guidance range. Cash contributions to our pension and other post-retirement benefit plans totaled $41 million in 2022. During the fourth quarter, we paid dividends of $1.24 per share, or $50 million, bringing total dividends paid for the year to $192 million.
Over the course of 2022, we repurchased approximately 245,000 shares at an aggregate cost of approximately $52 million. Moving on to slide nine and our updated outlook for pension and post-retirement benefits. Our outlook for 2023 has improved modestly from the update we provided in November, given the increase in discount rates since that time. Asset returns for 2022 of -16.1% were about as expected compared to our update in the third quarter. Expectations for 2024 through 2026 have been updated and consistent with the Q3 update, the fast benefit has come down considerably from our last update given the more immediate recognition of the negative asset returns experienced in 2022. This is partially offset by the impact of higher discount rate.
We also have provided an initial review of our 2027 expectations. Turning to slide 10 and our outlook for 2023. While we continue to expect shipbuilding growth of approximately 3% over time, our 2023 outlook range of $8.4 billion-$8.6 billion acknowledges uncertainties around the current environment, particularly the labor challenges we have discussed. For 2023, we expect shipbuilding operating margin between 7.7% and 8% as we continue to target incremental margin improvement, but acknowledge the current challenges have tempered the pace of that progress. For Mission Technologies, we expect 2023 revenue of approximately $2.5 billion organic growth of approximately 5% year-over-year.
We expect operating margins of between 2.5% and 3% and EBITDA margins of between 8% and 8.5%. In 2023, amortization of purchased intangible assets is expected to total approximately $128 million, of which $109 million is attributable to Mission Technologies. We expect 2023 capital expenditures to be approximately 3% of sales. Moving on to expectations for the first quarter of 2023, we expect overall revenue growth for the first quarter to be quite modest given normal seasonality in Mission Technologies and the strong fourth quarter performance for shipbuilding, which benefited from favorable material timing.
Given the timing of the shipbuilding program milestones and the mentioned Mission Technologies seasonality, we expect first quarter segment operating results to be the weakest of the year with the shipbuilding operating margin near 7% and Mission Technologies operating margin near 1%. The outlook we are providing today is based on the best information we currently have and assumes no further degradation in our supply chain, that non-programmatic impacts from inflation continue to abate, and most importantly, that we're able to continue to hire and retain employees at a pace that supports our staffing plans. On slide 10, we have provided our updated outlook for a number of other discrete items to assist with your modeling. On slide 11, we have provided an updated view on our free cash flow expectations through 2024.
Consistent with how we presented this data in the third quarter, this outlook assumes that the current R&D amortization treatment for tax purposes remains in place, and we are reaffirming the $2.9 billion target. If Section 174 is deferred or repealed, all else equal, there would be an opportunity of approximately $250 million in total over the course of 2023 and 2024. As I noted earlier, I mean, we significantly outperformed our 2022 free cash flow expectation of approximately $350 million by accelerating collections. This timing difference, along with the delay of the planned COVID-19 repayment now into this year, have impacted 2023 free cash flow expectations.
Consistent with our normal seasonality, we expect the first quarter of 2023 free cash flow will be the weakest of the year, and given the pull forward of collections into the fourth quarter of 2022, is likely to be an outflow of $200 million-$300 million. Our free cash flow expectation for 2024 remains unchanged as it will not be burdened by COVID-19 repayment. We'll benefit from continued top-line growth and margin expansion potential as compared to 2022. We expect to see sub 6% working capital levels as a percentage of sales in 2024.
We are reaffirming our capital allocation priorities focused on debt paydown, which is on pace to retire both the $400 million bond this year and the remainder of our line acquisition term loan in 2024, and our commitment to return substantially all free cash flow after planned debt repayment to shareholders through 2024. To close my remarks, it was no doubt a challenging year. I'm proud of the entire HII team and the important work we accomplished across the business, from successfully meeting all of our planned shipbuilding milestones to the critical integration work that was completed timely and under budget at Mission Technologies. Across the enterprise, we made meaningful progress in 2022, which resulted in growth across all segments and free cash flow results that were well ahead of our projections.
We enter 2023 intent on driving execution and are well positioned to deliver profitable growth. With that, I will turn the call back over to Chris for some final remarks before we take your questions.
Thanks, Tom. In summary, we delivered consistent results in 2022. We believe we are well-positioned to grow in markets of critical importance to our customers while executing our almost $50 billion of backlog in 2023 and beyond. We will continue to make long-term strategic decisions that benefit our employees, customers, and shareholders, creating long-term value for all of our stakeholders. Now, I will turn the call over to Christy for Q&A.
Thanks, Chris. 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. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please Press Star followed by two. When preparing to ask your question, please ensure your line is unmuted. Our first question today comes from Myles Walton from Wolfe Research. Please go ahead, Myles. Your line is now open.
Thanks. Good morning.
Good morning, Myles.
I was wondering, maybe at a high level, is this still a 9% plus shipbuilding margin business?
Yeah, definitely. I believe that, you know, we've come through some challenging times with COVID and we've got some ships that are still working through that. Ingalls is obviously north of that, Newport News is making great strides. I think the biggest issue we can work on in Newport News is simply working the operating system, getting the Block IV boats delivered over the next next and three years and transitioning to Block V. Yeah, absolutely, it's a 9% business. I'm not gonna give a forecast for when that's gonna happen, but I do expect performance to continue to improve from here.
Okay. Chris or Tom, I don't know, in terms of the plug for capital deployment for share repurchase, I guess it's $250 million-$300 million in 2023, 2024 is what you plan to do. Do you have any sights on doing that a little bit earlier, or do you have to wait until 2024's big cash flow comes through to have confidence to execute against it?
Yes, Myles, it's Tom here. You know, we haven't given the exact number. Obviously, if you work yourself through the math of where we are, expectations on the revenue and the margin expansion, the free cash flow, bridges that we've given you, and then the capital expense as well as with the working capital, you know, the numbers fall out to that way. As we work ourselves through the year, the cash is generated. We anticipate to continue to buy back shares as we see value in the share price. But we haven't really guided on how that is gonna be apportioned over 2023 and 2024. We stand behind our commitment, though, that all excess free cash flow will be given back to the shareholders after debt repayment schedule.
Just 1 clarification. What is non-programmatic inflation? I don't know.
I'll give you an example of that, Myles. It's related to expenses towards the end of the year that we didn't, that, the actuals were higher than what we forecast, stuff like, medical benefits, insurance premiums. We just didn't get that right.
We've seen those margins drop in the market next time.
Yeah, sure.
It's overhead type expenses for us.
Thank you.
Thank you. Our next question comes from Robert Spingarn from Melius Research. Please go ahead, Robert. Your line is now open.
Hi, good morning.
Morning, Rob.
Good morning. Chris, you talked a lot about the labor constraint, I wanted to see if you could give us some granularity as to how that number splits between the two shipyards and Mission Technologies. One thing I've noted is if we look at your job postings, it seems like Newport News has 10x the openings of Ingalls. Does that factor into the margins there?
Not really. I'll Mission Technologies is pretty stable, adding throughout the year with really industry standard attrition rates in a very competitive market. We plan to add about 5,000 shipbuilders throughout the year. There are some positive indications in not only hiring, but also over time, attendance, and attrition. There are some positive indicators. I wouldn't necessarily relate it back to margin. Newport News will hire more this year than Ingalls. We don't break that out separately, but I wouldn't necessarily relate that back to margin. No.
Okay. Then just as a follow-up to that, you know, could there be upside to the 3% top line growth if Congress appropriated more funds to expand shipyard capacity and to fund training and apprenticeship programs?
Yeah. The constraint is labor. Our shipyards are facilitized to grow in excess, really, of that 3%. We need to be conservative in how we project how we're going to add labor over the next few years. Is there upside? Yeah, of course.
Yeah. I guess I'm asking you is, can they help you attract labor faster and train labor faster? It benefits them-
Yeah, sure.
to get the ships sooner.
You know, interesting enough, there's a lot of initiatives, both at the state and federal level, to help in workforce development. We are actively communicating with both states that are involved in that and the federal government, for infrastructure and workforce development support.
Okay. Thanks, Chris.
Sure.
Thank you. Our next question comes from Scott Deuschle from Credit Suisse. Please go ahead. Your line is now open.
Hey, good morning.
Morning, Scott.
Tom, did CVN 79 book a net negative VAC in Q4? Just trying to interpret what's in the press release on the year-over-year comparison there. Thanks.
We don't provide the actual margin booking rates of step ups or step backs on any individual program. I would tell you, to give you some color on that, on the adjustments, there was nothing significant at either yard up or down on any individual program. The answer to your question is no on that. I would tell you that the effect that you're seeing at Newport News there is, although, it's net down as far as the adjustments they had, it was really a function of not having the upside that we would normally see.
you know, it's kind of range bound of what we saw on the downside of EAC adjustments, because the timing on the milestones and just where they saw a little bit of a draw short on labor, a little bit of pressure on overhead costs. Overhead absorption was a little bit higher on all the programs there. And CVN-79 was not immune to that effect as well, but it was not significant enough as you see. It's not called out in the K.
Scott, I'd also add that CVN 79 had a pretty solid year. They met their compartment commitments for the year. EMALS is essentially built out. It's pretty amazing. I was up there last week, and the equipment is in, and they've started that test program. The top side test program has begun. So they've got a bit, a bit of momentum. I hate to use a football reference, but the big game is this weekend. But, 79 is what I, what I call a 4 yards and a cloud of dust, right? Every week, they're executing on a lot of volume work. They met their commitments for last year. They've got a lot of work in front of them, but I have high hopes for success on that program.
Great. Chris, what were the, if you, sorry if I missed this, but what were the gross and net headcount additions in the shipbuilding business in 2022? Just curious on how attrition trended in Q4 sequentially relative to Q3. Thank you.
Attrition got better throughout the year. I don't have the specific number here. We added about 5,000 heads, but it did trend better as we moved through the year, and it's gotten better in January as well. It's what I call this a bit of stability showing up in the shipbuilding organizations from not only a labor standpoint, but also supply chain and inflation. It's not back to pre-pandemic levels, but it's definitely stabilized, and that's what we need to execute.
Thanks, guys. Appreciate it.
Sure.
Mm-hmm. Thanks, Scott.
Thank you. Our next question comes from Pete Skibitski from Alembic Global. Please go ahead. Your line is now open.
Hey, good morning, guys.
Morning.
Just going back to Kennedy, it's a big contract for you guys. It's fixed price. I was just wondering, my recollection was 2023, 2024, you guys are gonna have some big risk milestones on that project. It sounds like that's still gonna happen. Has just the labor situation just kind of eaten up the upside on that potential risk retirement? Is that the right way to think about it?
I wouldn't necessarily say it's eaten up all the upside. I would say that we're very conservative in how we deal with the EAC, and there's a lot of really complex work in front of us. I would not necessarily say it's eaten up all the upside.
Okay. Okay. Just to follow up to that, at Newport News, is VCS Block IV the bigger muscle mover margin-wise? Is that kinda... As the Block IVs kinda roll off over the next two years, does that just give you a lot more relief than anything else?
It will definitely give us a lot more confidence moving forward after we get those Block IV boats delivered and transitioned into Block V.
Okay. Chris, just on that, obviously labor impacts all your programs, but Block IV had kind of the unusually aggressive schedule. Is that combination why that's been such kind of a thorn in your side? Is that fair?
Well, remember Block IV was impacted the most by COVID, right? We had a pretty material impact back in 2020, which really reduced our profit expectations on those boats. We just need to get through them. We need to get them delivered. The program schedules are pretty stable right now, and a lot of cooperation between Electric Boat, Newport News, and really senior Navy to get through those program schedules. We just need to get through them, and then we'll transition into Block V.
Chris, if I could hop on that too. Hey, Pete. On that, you know, to your question of four and five, yeah, you know, Block IV's been with COVID here 2020, 2021, 2022, it's long run rate those contracts have had in the EACs with some additional costs. I think it's twofold. One, getting those Block IV boats done, alleviates the mix in the portfolio at Newport News, there's a lift that you talked about that. Also, it's just the those boats give us time to come down the learning curve, the lessons learned, the metrics in the operating system and the personnel that we have on board there. It truly is a production line of all the programs we have.
It's the most serial production line with the modules go, and then the boats are there. Some will go from unit to unit on with the same personnel. Getting through Block Four and then that kind of benefit lifts the Block Five, which has higher profit potential, and then it will take the preponderance of the portfolio's mix at Newport News. We crossed over the end of last year, already now, you know, the sales apportionment between Block Four and Five is now more in Five than Four. There's gonna be a natural progression of improvement with learning, four boats being accomplished, and then that learning and higher profit potential on Block Five is gonna be affecting the Newport News portfolio.
Got it. Thanks, guys.
Mm-hmm. Thanks.
Thank you. The next question comes from David Strauss from Barclays. Please go ahead, David. Your line is now open.
Yeah. Thanks. Good morning.
Morning.
Tom, similar question that I've asked in the past, around working capital. I mean, you obviously had a big improvement in working capital in the fourth quarter. It looks like in your guide for cash, I guess my back into, it looks like you're assuming relatively neutral working capital for 2024. Is that correct? Or sorry, for 2023. Could you help bridge us how you go from $400 million and, you know, $450 million in cash to, you know, in 2023 to the number you're looking at in 2024? I guess maybe a little bit of CapEx help, but what else gets us there?
Sure, yes. I'll break that down. I have several points I want to hit. I'll hit the percentages on working capital last as I walk you through that. We have updated on slide 11 of the PowerPoint presentation there. You saw we finished at $494, pretty healthy against an expectation of started the year off at $300-$350. We pulled that down to $200-$250 kinda midyear with the re-guide. Then Q3, we told you $350. We finished at $494. Healthy free cash flow in 2022. Obviously, that pulls ahead a little bit. You see we've taken down the 2023 expectation. We had you at $545-$595 or midpoint of $570 last time we discussed.
Because of the pull ahead that we have here right now, we reset expectations to $400-$450. To your point of working capital, you're right. You know, just a couple of quarters ago, we were at 11.1%. Last quarter, we were in the 10% range, and we finished 2022 up at 6.1% of working capital. As we have been guiding over the last 3-4 years, we saw that the workload and just the cadence of the shifts, we were gonna have more deliveries and launches on the back half of the five year free cash flow commitment than the front half, and that's exactly what we see here.
If you look at the milestone chart, you'll see that we're going from three deliveries in 2022 to five deliveries in 2023. We also have three launches in 2023, so that's a pretty big year. Then kind of even going forward to the following year on that, we take that perspective up and we have two deliveries and three launches in 2024. A lot of activity there which will continue us alleviating the working capital, getting rid of the retention that we have, and helping in the free cash flow lift as we go forward. Also, I would tell you that as much as we finished up at 61 on working capital, it will just grow a little bit.
We got a couple of advancements on incentives that we've had, so we'll go from $6.1 to about $6.5-ish working capital in 2023. More deliveries helps. Slight rise in working capital in 2023 slightly hurts. We re-guided on CapEx from $2.5- $3, so there's a couple of dollars of headwinds there. Two things against us, but with all those deliveries and launches, we'll see working capital finish up around $425. Mind you, 2023 has to repay COVID, which right now is about $125 million, right? The way I look at it and give you confidence on where we're going with that, we have three years in the holdout against the five year commitment, $757, $449, and $494. That averages out to $567, $567.
Straight stick math would be about $600 million a year that you need, so we're running behind for the first 3 years, but we knew there was a natural ramp with retention, with revenue and margin expansion. Also, we have Alion on board now. 2022, we had them on board for the first year. I was happy with the contribution they made. If you recall, we took the $3 billion- $3.2 billion with Alion, and I'm happy with the contribution they made in 2022. Alion will be on board for 2023, 2024. As we look going forward, right, even though margin stayed flat from 2021- 2022, we're foreshadowing some margin expansion into 2023. We have the top line growing in shipbuilding right now that we gave you in the guidance, I mean, $4.86 billion.
We expect we'll continue incrementally guiding higher revenue and margin into 2024. Also, I'd ask you to take a look at the three years that we've had, the $757, $449, and $494 free cash flow. That $757 really had two things that actually helped it. If you normalize it out, it kind of makes sense of how we're marching to be north of $700 in free cash flow as we get out to the 2024 and on timeframe. The $757 had the FICA relief, which was $139, and it also had the COVID repayment benefit for $160. $160 and $130 is $290.
$290 up to $757 is about $467 is really how I look at the first of the three years. $467. The $449 for 2021 had the FICA repay in it, so you throw another $65 in that. That's about $510 for a normalized 2021. Now for 2022 at $494, there's $65 of FICA in that too, so that's $550. I really look at it, we've normalized for what we've seen because of COVID with FICA and repay. It's more like a march of $460-ish to $510 last year to $550, $560 this year. The guide we give you is $400-$450 for 2023 only because I have the COVID repay, so it's another with $125 on top of the midpoint.
That's a 550 year. I have the year in front of me to burn down risk and pull in cash. I'm comfortable with how I'm marching past my average of 567 the first three years. The last piece on how we get that up to, hey, how do you get to 780 is the working capital we see is gonna swing about two points down. As I mentioned earlier, we finished 6.1% for 2022. We'll be in the mid-sixes for 2023, it's gonna swing down to below 5% for 2024. 2 points of margin against the top line of $10.8 billion is about $200 million. 550 plus two is 750.
I got you at a midpoint of 780 because we still have revenue growth and margin expansion. I'm quite comfortable with where we are right now. The numbers play out. If you have any questions, you can, as we have our calls afterwards, we can break that down for you further.
Okay. That's a lot of detail. Thank you for that. Chris, as a follow-up on Mission Technologies, you know, the EBITDA margins there, which I guess is the right way to look at it, 80 and a half %, you know, how do we think about those longer term? I mean, those are well below kind of what we see out of typical kind of services companies and, you know, you pitched this as not just your typical kind of services business. How do we think about those EBITDA margin, I guess the potential there? Thanks.
Yeah. Yeah. Thanks, David. You have to remember there that the vast majority of that work is cost plus. That would indicate that you would have a lower EBITDA percent. I do think there's opportunity for upside as we present more solutions and move into a fixed price sort of arrangement. We're not prepared to say that it's going to get better than that right now. There is opportunity for improvement, and that's something we're evaluating.
Thank you.
Thanks.
Thank you. Our next question comes from Doug Harned from Bernstein. Please go ahead. Your line is now open.
Great. Thank you. Good morning.
Morning.
Morning.
I want to go back to Newport News. You had a 5.1% margin this quarter. That follows Q3, that if I take out the Columbia-class benefit, that was a 4.1%. What I want to understand is you've still got certainly the Massachusetts and the New Jersey flowing through there. The work that you've done on Block IV where you've taken charges in the past, I mean, how much of this, what I would call kind of a, you know, low margin in Newport News is due to the overhang of those past charges? When you get out from under those, should we expect a step up?
Yeah. Doug, this is Chris. I'll start and then Tom can jump in there. Yeah, there's absolutely an overhang related to Block IV boats that we're dealing with. We should expect a margin step up. Now, we haven't guided beyond 23, and we need to be conservative because we need to make sure the labor shows up and we get them trained up, and they go execute. I think you're right relative to that overhang on Block IV. We need to get those delivered. As I said previously, those schedules are being very consistent right now. Cost performance, we're working on every day.
And
Sure. Go ahead, Tom.
If I can hop on the back of that, right? We talked about Block IV here, and what we took back in Q2 of 2020. I would tell you the portfolio, with Columbia, that's coming on board in sales. That's a new start program that's booking low right now, cost type contract. I have some change and unadjudicated change that still has to get, you know, proposed and pushed through the system, so that's gonna increase. We're very conservative on that until those unadjudicated changes are definitized. That's both RC 73 and 74 is in its infancy too, both cost type contracts. The portfolio just has a little bit higher level of that as we sit here.
Then lastly, I think as we go forward, burn down risk as 79 marches to its completion. Chris said earlier, there's a potential with good performance there for additional upside here. I think we just find ourselves in a situation where the ships are right now, not too many milestones, a little bit of drag on overhead, down on labor, and I think we're booking prudently to conservatively right now as we wanna see us push these ships over the goal line. Those deliveries I mentioned is the two each for 2023 and 2024, and I think that will assist in the margin lift as well as Block IV gets smaller in the portfolio mix with the potentials of Block V as we move forward here.
I think the Columbia program will mature. With CVN-73 out of here at this year, a CVN 74's focus and maturity will assist the portfolio profitability as well.
If I have it right, then, Block IV, the overhang of these past charges is a contributor, but there's still some other, you know, there are a number of other things you just raised. It's sort of a blend of things that you're working through. I just wondered, you know, General Dynamics, when they did their Q4 call, highlighted a number of issues that is somewhat similar related to labor across shipyards, and they did mention Virginia-class. Can you talk about how you're working with Electric Boat sort of together to deal with these problems, and if there have been changes over time and, you know, and how you work together and work through attrition issues?
Yes
...inflation, all these sorts of things.
Thank you for that question, Doug. It's an important one. You know, the Newport News and EB team, they work very closely together in understanding when the work, what work, and how that work gets executed. There could be movement of work between the yards where it's most efficiently done if there's labor issues. And they're working very closely together. Their objectives are completely aligned to deliver all the Block IV boats. And I would add also the Navy's engaged as well. It's all the way from the deck plate to the senior executive force. Everybody's all in, and all of our objectives are aligned to get those Block IV boats delivered.
I will say that we're fully staffed on Block IV and Columbia, and we're working very hard on execution there. Not only is EB and Newport News working between each other, but working to ensure that any sort of outsourcing is effectively managed to ensure that we meet our production schedules.
Okay. Very good. Thank you.
Sure.
Thank you. Our next question comes from Gautam Khanna from Cowen. Please go ahead. Your line is now open.
Gautam, you out there? Are you on mute, Gautam?
Unfortunately, we're not getting any audio from the line, so we'll move on to the next question. The next question comes from George Shapiro from Shapiro Research. Please go ahead. Your line is now open.
Oh, yes. Good morning.
Morning, George.
Morning, George.
I was curious that you wound up with 7.7% shipbuilding margins. You know, when you did the third quarter call in early November, you were looking for 8%-8.1%. Just wondering, you know, what you missed here in two months because I thought that shipbuilding would be somewhat predictable sort of business.
Yeah, it was just the drag that we talked about at the end of the year. We know we had a strong first half of the year, we're over 9%, and then we got it to 7% for the back half of the year. Even Q3 was in that lane, and we thought the remaining 13 weeks of the year we had that. The shortfall in labor that we saw, a couple of the overhead or the non-programmatic issues drove, hit both yards actually on the cost that we talked about on medical. Just that shortfall as we go through and take a look at EAC performance and then the cost, and how overheads flow through there. There's a little bit of a drag on where we thought we'd land.
If you recall on the call, I was focused on saying I want to see how the year plays out. We did stay on the guide at the $8.0-$8.1, and we thought we could get that home. As the EACs kind of rolled up, there was just a little bit of a draw. I would say both to this question, George, and the previous one, you know, from a Newport News perspective, $6.2 last year, $6.1 this year, about the same type of performance overall, if you think about it. You know, another year with some drag up front, with the effects of COVID and then supply chain, inflation, big year on inflation and then the hiring demands that we had here.
I'm quite comfortable and proud as far as what the Newport News team accomplished there. To your point, we thought we'd get that home and Q4 came in a little flattish on Newport News than we expected.
Tom, did you give the EACs for the quarter?
Not yet, but I can give George.
Okay.
No, I didn't yet. I referenced them just that we didn't have a tremendous downside. We just didn't have upsides at Newport News. From the quarter perspective, what we saw was the gross favorables were $29 million, the gross unfavorables were $56 million. That was a net of $27 million. Effectively about 100% of that was at Newport News, basically neutral at Ingalls and Mission Technologies. It was quiet at the other two divisions and Newport News saw a net down of that unfavorable for the corporation of $27 million.
Okay. Thanks very much.
Thanks, George.
Thank you. Our next question comes from Seth Seifman from JP Morgan. Please go ahead, Seth. Your line is now open.
Hey, thanks very much and, good morning.
Morning, Seth.
Just to follow up on that. Morning. Maybe to follow up on that question, Tom, you talked about Newport News being in the low six for 2022 and 2021. I know you guys don't typically guide segment margins, but if we're just to think kind of maybe qualitatively overall, shipbuilding margins should be up 10-20 basis points at the midpoint of the guidance. Does that mean, you know, there's a little bit of improvement in each yard, or given the way that some of the one-timers or some of the potential upside associated with the milestones that you're expecting at the shipyards, is there opportunity for, you know, more expansion at Newport News and maybe some headwinds at Ingalls? You know, how do we think about that for this year?
Well, I'll start and then Tom can get into details. Thank you for saying we don't guide by by shipyards. We don't do that. I firmly expect Newport News will be better this year. I think they're executing their operating system very well. I think labor is more stable. I think the supply chain is more stable. I think the team has some momentum, and I think Newport News is gonna do better this year. With that, Tom, unless you want to add anything about Ingalls, I think they're pretty stable as well.
I'm with you that we don't guide by division, but from a historical perspective, you know, again, it was $10.5 billion, $11.1 billion, $11.4 billion the last three years. They have the same portfolio basically down there, fighting labor and overheads, the pressures that we talked about, but very strong operating team, a leadership. They know what they're building. There's no ships in zero production. I would think historically, they're gonna continue to perform well down there. I think from a Newport News perspective, as they just fight their way through here, new technology started with Ford and now Columbia, we had that booking we talked about back in 2020. A little bit of COVID pressure, inflation, supply chain and hiring.
You know, you can see some stabilization both in the performance over the last two years. We see stabilization and some stability in the hiring and the schedules here. You know, expectation is that that yard can perform better. I would expect that to increase as we go forward into years here too.
Okay. Great. Great. Then maybe to follow up real quick on similar type of question on Mission Technologies. I think you said the EBITDA margin there ex the valuation allowance was like 8.6% in 2022. So what's driving it down in 2023?
We're probably just being conservative on the guide. We had a 6.6 quarter. With the impairment out of it was 8.3. We've had quarters at Mission Technology anywhere from the low eight to the low nine. Last year was 8.6, and as I say, adjusted, it was, you know, unadjusted was 8.2, 8.6 right now. I think it's just a function of that sales base. You know, we have fixed and semi-variable costs there. It's a good-sized operation. We think we have the right people on board. We have the right strategy. The pipeline's grown from year-over-year. We think the pipeline is more mature.
I think with the Mission Technologies integration into the HII family, with that behind us, as I mentioned in my notes, it was done under budget and it's on time, that the team can completely focus on that pipeline, bids, execution, and performance. I think the 8.8%-8.5% is just being conservative. Obviously we wanted a couple more dollars out of that division last year. We're guiding growth year-over-year right now. We did see Mission Technologies grow 4% from 2021 to 2022, and each of the business units had growth in them. Those were all positive signs.
I think the 8- 8.5 is just awaiting and seeing the awards happen, when the sales hit, I would expect we're gonna be on the up end of that range, if not over it.
Great. Thank you very much.
Thanks, Seth.
Thank you. The next question is from Gavin Parsons from Cohen. Please go ahead. Your line is now open.
Hey, sorry about that. I hope you can hear me.
Oh, yeah. Thanks. Now we have you, Gavin.
Great. Great. Hey, thanks. I was curious if you could just give us some color on the timing of the milestones through the year. If you can tell us, like, if there's anything that's in the month of December or, you know, that has the potential to move out or things we should be watching?
Yeah. The.
in terms of Q4 waiting.
Sure. Sure, Gavin Parsons. When you look at the 2023 milestones, I think Tom Stiehle already mentioned that Q1 was pretty light. They're pretty evenly distributed across Q2 and Q3. LPD 29, the, yeah, is in Q4, so that's at the end of the year. That's the one we'll have to watch. Got a lot of confidence in the team down in Mississippi, but that's the one towards the end of the year.
Okay. Thank you. Just curious on VCS, anything incremental from last quarter on schedule with respect to-
Not really. Pretty stable. Pretty stable from a schedule standpoint on the VCS program. We have, we have movement here and there, but it's pretty stable. I gotta hand it to that team, the program team and the construction team. They're getting after it, and they're learning every day. It's been pretty stable. We just need to stay on it. Chris has talked about that rhythm of the program, you know, launch one and sell one off, and we saw that in 2022, and in the milestones you'll see that in 2023 and 2024. We're working it.
Okay. Just on that last point, anything with respect to negative Q catch-ups that you can talk about Q4 2022 on VCS and aggregate anything? Well, you can never call it out as material, but can we assume that there were kind of consistent negative marks on the program or anything you can tell us about that?
Nothing really significant to highlight here. I mean, I mentioned in Q, you know, the Q net was at Newport News on that, which was down, and it was just kind of sprinkled over the programs, but there was nothing really to highlight here.
Okay. Thank you, guys.
All right, Gavin Parsons.
Thank you. Our final question today comes from Noah Poponak from Goldman Sachs. Please go ahead, Noah. Your line is now open.
Hi. Good morning, everyone.
Hi, Noah. Thanks for joining.
For sure. Tom, just back to the cash flow breakdown, and appreciate all the detail you gave there and appreciate that there are a lot of moving pieces. If I just kind of zoom out on the cash flow statement and look at a long history, you know, it sort of ranged $400 million-$600 million for a while, and the business is pretty stable top line and margin. You know, recognize you have some opportunity to grow the business and expand margins going forward. I think the pension looks pretty net neutral. The CapEx looks pretty stable. It sounded like you said earlier that you expect in that 2024, you know, $780 midpoint about $200 million of working capital.
I guess, you know, should I think of change in working capital as not a sustainable recurring part of the free cash flow, and therefore that kind of $580, $600 as sort of a, you know, predictable, sustainable engine of the cash flow statement going forward? Or is there some other reason to think of the base business as eventually making up that $200 million?
Yes, that's a great question, and we study that all the time, and it's the former. It's the former with a caveat, right? We are hitting the point right now. We've been impacted. If you look at the cash flow statement, we were in the $400- $600. I tell you from 2020, 2021 and 2022, those COVID FICA repays and the COVID payments have tripped up, and you have to normalize it after that. A couple things are happening. Obviously.
For sure.
...prior to this window, the margin has dropped in shipbuilding as we've kind of run through COVID. We're fighting and working ourselves back with incremental improvement. The revenue growth with the backlog that we've shown you there, we expect to at least have, you know, 3% here kind of going forward when we get through this labor crunch, that's in place. I think you can model that out. As we go forward, the working capital I believe will be in that 5%-6% range. Both yards are in a good rhythm right now.
The DDG program annually, what we're doing with launch and sell off a boat on VCS, the rhythm of Block V is behind that, the two carry by following 79, the Columbia-class build one, build two. I think we're settling down on the mix of the portfolios in each yard and the timing on when they're gonna pop out. We have told you in the past, traditionally, a shipbuilding is like 6%-8% of what we would expect. It, that gets watered down a little bit 'cause now with Mission Technologies and Alion with more sales in the base, the numbers kind of pop down. If you normalize them just to the traditional shipbuilding, what we've talked about, right, we were at 12% I think in Q1 of 2022.
Q3 of 2023, we're at 14%. We finished the year up at 7.8% just for shipbuilding. Now, as we go from 7.8% to 8.3% for shipbuilding sales, I will see ourselves go down to 6% in 2024. That's in the range that we were highlighting, say, for the first 10 years of the corporation of 6%-8% in working capital. We were at that range in 2018, we were in the sixes. I think that's sustainable as long as we're in a normal rhythm of adding work, which we have the backlog. We're performing to schedule, we're selling ships off timely.
Although being either at 6% on shipbuilding sales or in the sub-5%, including all my sales with Mission Technologies is on the low end of the range. I think what offsets that is the revenue and the incremental revenue and margin that we think we're going to have in the coming years. I'm still bullish on the north of $700 is gonna be a run rate in a couple of years from now. I think 2024 is that inflection point to kind of start that run.
Okay.
All right.
The north of 700 in a few years, I guess, you know, if 2024 is 780 midpoint, but with $200 million of working capital, you know, once you get to the working capital goal, you then cease to have positive change in working capital flow to the cash flow state. 2025, I mean, who knows exactly what it's gonna be, but sort of directionally would not have that. Is there.
Yes
a step down from $24 and then as the business grows, you over time, get back to that $700.
Yeah, no, we're not...
is that not?
Chris, we're not gonna forecast 2025 free cash right now. I think your logic is okay. The business is going to grow. If we stay down with those working capital numbers, you're not gonna get a benefit from it. You're gonna have to get it from growth and margin improvement. I think your logic is sound. We do definitely believe that free cash is gonna get north of $700 in 2024 and then continue to grow from there.
I tell you, stick with the law of the numbers, right? I walked through how I normalized out the 2021 and 2022 because of COVID. You can see we're incrementally going from that $460-ish to $510 to $550 with a guide of $425 this year, COVID adjusted, that's another $550. I'm telling you the working capital is gonna get us there in 2024. It's just, hey, what's the run rate? I think you're looking at it the right way on how you model it, and we'll provide, you know, guidance for 25 a year from now. Yeah.
Great. Then, Chris, you know, just on labor, you spent some time on it, but it's unpredictable, but I guess maybe just, you know, when do you think you could get to something close to normal on your labor churn and development of the people you're hiring in? I guess with the amount of time you've spent on it, the amount of time you've been in the business, obviously, it's an unprecedented situation, but how much more time do you need to get to something that's pretty stable?
Well, it's absolutely more stable now than it was a year ago, okay? That's a testament to the hard work the shipyards have put in to really kind of pivot who they were hiring, increase the training, increase the leadership training. So it's absolutely better. I don't know if you're ever done, right? It was a pretty generational change in our workforce, where we lost a large swath of people through COVID. So we are retraining a workforce and retraining foremen and general foremen and construction superintendents. And that's happening. The best thing we can do and the greatest learning potential is delivering ships. We're gonna deliver five this year. Once you've been through that, you've learned a lot.
They're gonna continue to learn a lot. I think it's only improvement from here. I don't think you're ever done, but I think we've made great progress.
Okay. Thanks for the time.
Yeah. Thanks, Noah.
Thank you.
Thank you. This concludes our Q&A session for today. I would now like to hand the call back over to Mr. Kastner for any closing remarks.
No, thank you for joining today. I'm proud of all the hard work put in by the team, and I'm confident the hard work we're doing will pay off in value creation for all our stakeholders moving forward. Thanks again for joining the call.
Thank you. That does conclude today's conference call. You may now disconnect.