David Strauss: Okay. And then one last about working capital. I think for the year, at the end of the year, you came in kind of below your target. It looks like you’re around 5% of sales. So how does working capital look going forward? I see some of the CapEx recovery will flow through working capital at least over the near term? Thanks.
Thomas Stiehle: Sure. Yes. Yes, we’ve had a lot of conversation on that working capital. And I know when we were much higher in that at 10% and 8% range that was concerned, like how could we get that down? And we were projecting that that would happen. I’m happy to report that it’s kind of landed right where we thought it would be, right? So, I think we started the year off in around 6% to 6.5%. We finished the year off at 5%. The conversations we’ve had in the recent past, we’ve talked about it used to be 6% to 8% without Mission Technologies with the additional sales for Mission Technologies. It’s more like 4% to 6%. And that’s I had highlighted that we were coming down, you know, with COVID in the rearview mirror, production programs that we have, trying to maintain the schedules with the same type work.
We would see a normalization of the working capital. And that’s exactly what’s played out. We’ve lost about a point of working capital throughout this year. And I still anticipate kind of going forward a little bit improvement in that as we go forward. So 4% to 6% is the right way to kind of look at it. We exit ’23 at 5%. And I would expect in 2024 to be on about you know, a little bit lower than that between 4% to 5%. The capital incentives will help as we get the cash up front, before the cost is completely incurred. And I think that’s the appropriate way to kind of model it, going forward in the 4% to 5% range in the next couple of years.
David Strauss: Thank you.
Operator: Thank you. Our next question today is from Pete Skibitski from Alembic Global. Pete, please go ahead. Your line is open.
Pete Skibitski: Good morning, guys. Nice quarter.
Christopher Kastner: Good morning.
Pete Skibitski: Thank you. Tom, I think you just helped us out a little bit. But can you quantify, and sorry if I missed it, can you quantify the two one-off gains in the fourth quarter at Ingalls and Mission Technologies?
Thomas Stiehle: Yes, our Mission Technologies it was – the warranties and representations for the purchase of Hydroid was a settlement cash $49.5 million. And then Ingalls, we picked up from a frigate repair effort that we had in the late 90s and had cost against that. And we’ve been working to see how we could get a recovery on that. And we did get a settlement judgment in 2018, and then we were able to broker and sell that entity for $70.5 million. And you’ll see in the K2, there’s a little bit of a back end on that, too. We’ll see how that plays out. But that’s about all I want to say about this. It net’s about $120 million gross, but obviously I pay tax on that. So net tax is the impact to the profitability and cash was $95 million.
Pete Skibitski: Yes. I appreciate it. And then maybe a more top-level question, what gave you guys the confidence to raise kind of the midterm outlook despite the fact that we don’t have a ’24 budget appropriated yet. And then on the ’24 supplemental that’s out there, I think there’s a lot of shipbuilding industrial base money in there. Maybe you could talk about that. And is there anything else in the supplemental that could benefit you guys?
Christopher Kastner: Yes. So I’ll start with that. The ’24 budget is very positive for us. All our major programs are supported. LPD 33 is supported, which is really important to Ingalls. The submarine industrial base funding in the baseline budget is important. I think that’s around $400 million, but the additional $3 billion in the supplemental, just further effort to improve the supply base. And there’s also funds within that to improve the labor force. So getting both of those approved is really important. Now our confidence relative to the guide is just on the demand for our products. We see the demand for nominated products in shipbuilding, both in Newport News and Ingalls, but also Mission Technologies. And when we laid it out, we looked at the investments we’re making and the opportunity it just makes sense.
We’re in a bit of an inflection point from a sales standpoint. And I actually think there’s probably some tailwinds if we can get that summary industrial-based funding approved, executed and start improving throughput. Tom, do you have anything to add?
Thomas Stiehle: Sure. Yes. We’ve talked about the demand for the products and services we have. When you go around the horn down there, Ingalls just won seven destroyers with a pretty good clip on the schedule side of that with options in the future for that. We see the 30-ish ship building plan, the five-year side app. We’ve talked about the 17 boats that are going to happen, already to long lead for the last two on Block V and then VCS Block VI. Those advanced procurements happen. They have to get definitized. We’re talking about Columbia Build II, the RCOH for 75 and then just the preponderance of work that we have, change work and then the growth at Mission Technologies. We updated our annual plan every year, obviously, it’s a 10-year look.
And when we really kind of look, we say mid to long that’s like 5% and five to 10 years. I know the street that’s too far, but at least five years, we see growth rates at least that, if not higher. And things have to break our way with timely awards. We have to get labor any of the materials have to hit. But we can just see how the programs are playing out cost, inflation, orders, backlog and things of that nature. And we think it’s appropriate to raise to these levels, and there’s still opportunities above and below this for additional growth.
Pete Skibitski: Great. Thanks guys.
Thomas Stiehle: Sure.
Operator: Thank you. Our next question is from Ron Epstein from Bank of America. Ron, please go ahead.
Ronald Epstein: Hi, good morning.
Christopher Kastner: Good morning, Ron.
Ronald Epstein: Maybe just a follow-on – two questions, one on the supply chain and one on labor. On the labor front, how is retaining labor been? Because something we’ve heard across the industry, not specific to you guys, but generally across the industry, it’s been tough to retain labor that companies are bringing in young mechanics, or whatever, they stick around for a year or two and then they take off. I mean how are you guys fairing on that front? And what are you doing to keep them?
Christopher Kastner: Yes. Ron, thanks for that question. It’s definitely been a challenge over the last couple of years citing the exact example that you brought up. And the team has a number of initiatives they’ve implemented over the last year to address the situation, and they center around 3 fundamental issues, really, which is flexibility for the team that we’re hiring in work schedules potential time off. The craft person, man and women that we are now hiring is not fully prepared to come right into the workforce and start that kind of daily grind without having some flexibility in the work schedules. So, we have a number of pilots that we’re working in that regard. We have some really interesting analytics around targeting geographies that we have better success in hiring and retaining.
So, we have initiatives there. And then we have very focused incentives on critical skills. An example is machinists where you have to just pay them more to get them and keep them. So a number of initiatives, we pivot very quickly because we have such good data on what works, or what is going to work and what does work. So, we can expand upon it. But you’re hitting on a fundamental issue in the industry right now in the manufacturing industry as a whole. And within defense and in shipbuilding is that the labor issue is obviously one of our major risk issues and one we’re working very hard to resolve. I would also say the Navy understands it. And in the SIB funding, as I previously mentioned, there are workforce development issues as well. Getting people into the apprentice schools, because our retention rates in the apprentice schools.
And established programs are significantly higher because the people that go in there are choosing that as a profession. So it’s something we’re well aware of. Our partners are well aware of it and the Navy is well aware of it, and we’re addressing it. We’ve seen some rays of light as we ended the year, but you can’t really trust a couple of data points. So we’re going to keep working on it this year.
Ronald Epstein: Got it. Got it. And then on the supply chain with the investment that the Navy is making, where does that have to be made? And where are the weaknesses in the supply chain today as you see it?
Christopher Kastner: Yes. So they’ve done a really good job, both on the VCS program and on the DDG program, it doesn’t get enough as much press, but on the DDG program as well as identifying single source or sole source vendors, in the supply chain that need investment to increase capacity because as you know, capacity had dwindled a bit in the previous 10 to 15 years. So they’ve done a very good job targeting those suppliers and making investments. And then there’s some large critical material where there’s a single source suppliers that are dealing with the same sort of labor and supply chain issues that we are. So to identify those potentially dual source them, or qualify an additional source is something that the Navy and we are looking at as well. So it’s a very comprehensive review. I think it’s managed very well by us and our partners. And I think it’s going to get it the issue, but it doesn’t turn overnight.
