Huntington Ingalls Industries, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2026 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. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. Please be advised that today's conference is being recorded. If you need further assistance, please press star 1 on your telephone keypad. 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, and good morning, everyone. Welcome to the HII Second Quarter 2026 Conference Call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the investor relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer, Brian Blanchette, Executive Vice President and President of Ingalls Shipbuilding, and Tom Stiehle, Executive Vice President and Chief Financial Officer. Now, I'll turn the call over to Chris.

Thanks, Christie. Good morning, everyone. This morning, we released our second quarter results, which reflect our continued focus and progress on increasing throughput and delivering ships and mission solutions to the nation's sailors, marines, and warfighters. I'll start today by providing the Q2 results, highlights from Newport News Shipbuilding and Mission Technologies, and an update on our operational initiatives. Brian Blanchette, President of Ingalls Shipbuilding, has joined me to discuss Ingalls updates, and then Tom will provide more details on our financial performance and outlook. Now, turning to our results, we reported second quarter sales of $3.4 billion and diluted earnings per share of $5.27. Shipbuilding sales were $2.7 billion, 16% ahead year-over-year, and reflect our fourth consecutive quarter of double-digit growth. Given this momentum and our plans to deliver five ships over the next year, we are raising our 2026 shipbuilding revenue guidance to between $10.2 and $10.4 billion, and our 2026 shipbuilding margin guidance to between 6 and 6.5%. At the same time, customer demand for our products and services remains strong, Second quarter contract awards were $6.7 billion. At Newport News, CVN 79 Kennedy successfully completed builder's trials earlier this year, and we expect to achieve preliminary acceptance later this year with final ship delivery in 2027. CVN 80 Enterprise continues to gain momentum and has achieved 64% erected. We expect to lay the keel for CVN 81 later this year. and on submarines, SSN 800 Arkansas is progressing towards delivery later this year. Shifting to mission technologies, we delivered another strong quarter with $760 million in sales and above 10% EBITDA margin, reflecting steady demand and disciplined execution. The division secured several major awards this quarter, including a recompete award of $418 million to continue supporting shipboard-based elevators across US Navy aircraft carriers and amphibious ships. A Romulus unmanned surface vessel advanced to U.S. Navy's MUSV at-sea testing phase scheduled for September, a major milestone in its development. We also broadened our MUSV industrial base through new partnerships with Bayou Metals and Halimar Shipbuilding, strengthening production capacity and scalability. Additionally, we secured the next production option for the Navy's Lionfish small unmanned undersea vehicle program, further demonstrating how our commercial Remus 300 has successfully evolved into the Navy's preferred next-generation UUV. The growth in budgets for autonomous products coupled with a strong domestic and international pipeline point to a potential significant growth in this market space. Our proven products and technologies, along with our partnerships with commercial technology leaders, put us in position to take advantage of this market inflection. For example, we recently announced our partnership with Applied Intuition to develop and integrate AI-defined capabilities for Next Generation Naval Platforms and Maritime Manned-Unmanned Teaming. Moving to an update on our operational initiatives, increasing shipbuilding throughput continues to be a main focus. Year to date, we've achieved a 12% improvement over 2025 with plans in place to meet our full year goal of 15%. Throughput improvements are expected to accelerate in the second half of the year as we hit more milestones and deliveries. Year to date, we've hired over 3,500 shipbuilders, We continue to gain traction with attracting new shipbuilders from pipeline programs, providing a foundation for our future workforce. Also, we are on track to increase distributed shipbuilding by 30% this year. We continue to evaluate meaningful opportunities to bring more capacity into the shipbuilding space, including additional shipyard facilities. Finally, an agreement has been reached on VCS Block 6 and the next Columbia submarine contracts. These contracts represent critical demand, signals, and stability, not just for our workforce, but for the thousands of suppliers across the country who provide parts for these submarines. Turning to activities in Washington, the President submitted his fiscal year 2027 budget request in April, which is now under consideration by Congress. As bills progress through both chambers, we continue to see bipartisan support for our programs reflected in the defense authorization and appropriation bills in the House and the Senate. The House Appropriations Bill adds funding for the submarine industrial base to invest in critical areas including supplier capacity and capability, strategic outsourcing, workforce training, technology, and infrastructure. We await the Senate appropriations position and final outcomes will depend on eventual respective conference committee negotiations. Now to summarize my remarks, we had a solid second quarter and are beginning to see positive momentum from continued investments in shipbuilding in the Maritime Industrial Base. We are focused every day on meeting our operational commitments to the Navy and delivering five ships over the next 12 months. And now I'll turn the call over to Brian for his remarks on Ingalls.

Thank you, Chris. And good morning, everyone. With 13 ships currently in construction, Ingalls Shipbuilding has had a productive first half of the year. The shipyard is building six destroyers, three LPDs, two LHAs, and supporting work on DDG 1000 and DDG 1002. We are also purchasing material and doing pre-production work for an additional dozen ships under contract. Today, I'll provide an update on our ship delivery progress, our distributed shipbuilding strategy, and our continued focus on workforce readiness. On the destroyer program, we ended 2025 with a successful delivery of DDG 128, Ted Stevens. The ship sailed away in the second quarter of 2026. marking the 36th DDG-51 Arleigh Burke-class destroyer and second Flight 3 destroyer Ingalls has delivered to the fleet. This year, we also loaded fuel and lit off generators on DDG-129 Jeremiah Denton as we prepare for her planned delivery in 2027. Across the destroyer line, we continue to make steady progress. We launched and christened DDG 131, George M. Neal, achieved stern release and 100% butt weld complete on DDG 133, Sam Nunn, and loaded main machinery on DDG 135, Thad Cochran. We also reached 25% butt weld complete on DDG 135 and have received all four units from our distributed shipbuilding partners. DDG 137, John F. Lehman, received two additional outsource units and celebrated her first milestone, StartFab, capitalizing on the growing value of this production approach. On the Amphib programs, LPD 30 Harrisburg powered up main engines in the second quarter and is progressing towards delivery this year. On LPD 31 Pittsburgh, the forward and aft deckhouses were landed, and we laid the keel of LPD-32 Philadelphia. On LHA-8 Bougainville, we continue to ramp up the test program as we prepare for her planned delivery in 2027. We also completed sea trials for DDG-1000 USS Zumwalt and achieved crew move aboard earlier this year. And finally, In April, Ingalls was awarded the Frigate Lead Yard Support Contract to procure long lead time material, execute design work, and begin pre-construction activities for the first ship. Ingalls is also continuing to increase production capability through new technology investments and additional distributed shipbuilding partners along the Gulf Coast. This strategy allows selected units to be built off-site and integrated in Pascagoula, creating a dual production path that supports greater throughput. Inside our shipyard, we remain focused on workforce development. By pairing targeted hiring with advanced training and onboarding technologies, we are working to build a stronger workforce pipeline, increase readiness, and improve retention. Supporting these efforts, we successfully reached an updated collective bargaining agreement with our union partners in March, and we are seeing early indications that the higher wages have a positive impact on our ability to hire and retain skilled shipbuilders. In summary, the Ingalls team is focused on delivering three ships over the next 12 months increasing production pace through distributed shipbuilding, and strengthening the workforce required to deliver on our commitments. Now, I'll hand the call over to Tom for some remarks on our financial results. Tom?

Thanks, Brian, and good morning. Let me start by discussing our second quarter results, and then I'll provide some color on our expectation for the remainder of the year. For more detail, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated results on slide 5 of the presentation, our second quarter revenues of approximately $3.4 billion increased 10.9% compared to the same period last year. The higher revenue was attributable to stronger year-over-year growth at both shipyards. Ingalls revenues were $845 million and increased by 16.7% compared to the second quarter of 2025, driven primarily by higher volumes in amphibious assault ships. Newport News revenues of $1.8 billion increased by 15.3% compared to the second quarter of 2025, driven by higher volumes across aircraft carriers and submarines. Together, shipbuilding revenue was $2.7 billion, up 15.7% year-over-year. Mission Technologies revenues of $760 million decreased by 3.9% compared to the second quarter of 2025, primarily due to lower volumes in all-domain operations and global security, partially offset by higher volumes in warfare systems and unmanned systems. This result is modestly better than the guidance we had given for the quarter, as the prior year results included approximately $45 million of revenue related to a non-recurring contract resolution. Excluding that impact, Mission Technologies revenues grew modestly year over year on an organic basis. Moving on to slide six, segment operating income of $224 million and segment operating margin of 6.6% in the second quarter of 2026 compared to $172 million and 5.6% in the second quarter of 2025. At Ingalls, segment operating income was $58 million and operating margin was 6.9%. Compared to $54 million and 7.5% in the second quarter of last year. The increase in segment operating income was driven by higher volumes in amphibious assault ships, partially offset by favorable contract adjustments in surface combatants in the second quarter of 2025. The second quarter net cumulative adjustment at Ingalls was a negative $2 million and none of the adjustments were individually significant. At Newport News, segment operating income was $111 million, an operating margin of 6%, compared to $82 million and 5.1% in the second quarter of 2025. The increase in segment operating income was primarily driven by contract adjustments and incentives in aircraft carriers and the higher volumes I described earlier, partially offset by lower performance in aircraft carriers. For the second quarter of 2026, Newport News Shipbuilding's net cumulative adjustment was positive 8 million. The quarterly result did include meaningful positive and negative adjustments within the carrier refueling and complex overhaul program as we incorporated change settlements and realigned risk and expectations across that program. As Chris mentioned, we reached agreement on the submarine contracts. The contract definitization is contemplated in our third quarter guidance. Moving on, Mission Technologies' segment operating income was $55 million, and operating margin was 7.2%, compared to $36 million and 4.6% in the second quarter of 2025. The increase in segment operating income was primarily due to higher equity income from nuclear and environmental joint ventures. For the second quarter of 2026, Mission Technologies' net cumulative adjustment was a positive $4 million. None of the adjustments in the quarter were individually significant. Consolidated operating income for the quarter was $210 million, and operating margin was 6.1%, compared to $163 million and 5.3% in the same period last year. The increase in operating income was driven by the favorable segment operating income that I just reviewed, partially offset by higher non-current state income tax expense and the operating fast-cast adjustment. Net earnings in the quarter were $208 million. and diluted earnings per share were $5.27, up from $152,003.86 in the same period last year. The effective tax rate in the second quarter was 18.1%. This was below the guidance of 21% that we previously provided, primarily due to favorable tax impacts related to stock award settlement activity. Turning to slide seven, cash used in operations was $31 million in the quarter. Net capital expenditures were $119 million, or 3.5% of revenues. Free cash flow results in the quarter came in below the forecast we provided on the last earnings call, largely due to timing of receipts and disbursements between quarters. There's no change to our free cash flow expectation for the year, which I will provide some more color on in a moment. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.38 per share, or $55 million in aggregate. Turning to liquidity and the balance sheet, we ended the quarter with a cash balance of $12 million and liquidity of approximately $1.7 billion. Moving on to our outlook on slide 8, we are increasing our expectation for shipbuilding revenue for the year, as well as bringing up the bottom end of the shipbuilding operating margin range for 2026. We now expect shipbuilding revenue between $10.2 and $10.4 billion and expect shipbuilding operating margin in the range between 6% and 6.5%. We are reiterating all other aspects of our guidance for 2026, including the expectations for Mission Technologies revenue of between $3 and $3.2 billion and Mission Technologies segment operating margins of approximately 5%. I'll note that we continue to see the new battleship and frigate programs as meaningful upside opportunities to our medium-term outlook, though we will need additional details before we can include those in our guidance outlook. Moving on to the third quarter look ahead outlined on slide 8, we expect shipbuilding revenue of approximately $2.6 billion and shipbuilding operating margin that is similar to the second quarter result of 6.3%. For Mission Technologies, we expect revenues will be similar to the second quarter results of $760 million, an operating margin of approximately 4%, inclusive of strategic investments that we expect to make in our unmanned capability and production capacity. We expect free cash flow in the third quarter to be approximately $100 million. This does mean that we expect significant free cash flow generation in the fourth quarter to meet our guidance for the full year of between $500 and $600 million. We are reiterating that outlook and do expect meaningful positive cash impacts from contract advances and incentives, as well as favorable cash tax impacts in the fourth quarter. Regarding the effective tax rate, we believe it is prudent to use our tax rate of 21% for the third quarter, though we still believe 17% is appropriate for 2026 with an expected research and development tax credit expected in the fourth quarter at the end of the year. To close, it was another good quarter as we continue to make steady progress and execute against our 2026 operational initiatives. We are pleased to improve the shipbuilding expectations for the year and remain focused on executing our plan. With that, I'll turn the call back over to Christie to manage 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, Christie. As a reminder, if you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of John Godin with Citi. Your line is open. Please go ahead.

Hey, guys. Thank you for taking my question. Obviously, a great kind of margin quarter. You raised shipbuilding margins and you're tracking in line with the full year guidance. I was hoping you could shed some light on how to think about shipbuilding margins through the remainder of the year, just by quarter. And at the same time, it would be helpful to step through any of the remaining milestones just to calibrate everybody's expectations on timing.

Sure, John. I think Tom indicated where we think we're going to be in Q3. And then if you look at the full year, you can kind of see how we're thinking about margin for the balance of the year. But from a milestone standpoint, delivery of 30 will be towards the end of the year. It'll go to trials here in Q3. 79 is actually going to go to trials here in a couple weeks, a week or two. We expect that to proceed, and that's on schedule. 800s towards the end of the year. Some real critical milestones coming up in the summer here or the later part of the summer related 800s. So those are the remaining milestones laying the keel of 81s on schedule towards the back half of the year. But I don't anticipate a lot of margin related to that. So those are the 26 milestones. 27 is all still in place and we're proceeding on those as well. Okay, got it.

And clearly, you know, executing well operationally, trends are moving in the right direction. But are there any additional data points you can share on improving throughput, productivity, reducing costs, just to help paint a picture of how far you've come and how much more there is to go?

Yeah, we've made real good progress, right? We had 14% last year in throughput. We expect 15% this year. Newport News has had a great start of the year over the first two quarters relative to throughput, primarily on the submarine programs. Ingalls had a bit of a slow start this year related to labor and labor growth, and that's really tied to getting their labor agreement done in March. I actually, fortunately enough, have Brian here, Blanchette, from Ingalls Shipbuilding. He can talk about what they're doing from a labor standpoint and how the ships are progressing through the factory there.

Thanks, Chris. As Chris said, we signed an updated collective bargaining agreement at the end of the first quarter, and it was really a win-win-win agreement, good for the workforce, good for us, good for the Navy. And we saw immediate benefit from a retention standpoint, but there's a little bit of a lag from a hiring standpoint, just as Newport News saw when they did some wage adjustments last year. But we're starting to see some good positive indicators on hiring. We have all of our pipeline, all of our pipeline programs are going really well. Our apprentice school is near full capacity. The next class that we take in in the next month or so should put us there. Our high school programs are going great. Had an excellent signing day ceremony in the spring and our biggest class ever for that. So we're excited about where we're headed. As Chris said, it was a bit of a slow start, but we're positive about the second half of the year.

Yeah, I can add that we are delivering five ships over the next 12 months. I said that in my script as well. Three of those in Ingalls, so it's critical we get through those on schedule to get those ships to the Navy, but also critical you get to rotate those crews to the next ships in the production line. So that's also very important.

Thanks, guys. Appreciate the color.

Yeah. Thank you.

Your next question comes from the line of Noah Popenac with Goldman Sachs. Your line is open. Please go ahead.

Hey, good morning, everyone. Morning. Thanks. A few questions on the updated guidance. So the new shipbuilding range, revenue range, implies the back half, 3Q and 4Q combined, are kind of flat year over year. Maybe you can help us out with why it'd be flat in the back half versus the double-digit growth in the first half. And specifically, I think it implies 3Qs up about 6% and 4Qs down about 6%. What drives 4Q down? And then on the shipbuilding margin, forecasting it kind of flattish sequentially, could you talk a little bit more about the moving pieces there? Because I thought you had explained previously that Whenever you captured the contracts on the next batch of subs, there were, you know, maybe payments associated with that, plus the retroactive catch-up of having had booked long lead at very low margin. If you could help out with those things. Thanks.

I appreciate that, Noah. On the revenue side, you know, as you mentioned and said in the remarks, we did upscale the expectations for shipbuilding by half a billion, both the low end and the top end. It is true when you do the math of that, axles now in Q1, Q2, plus the guys for Q3 where that could land in Q4. You know, that ranges from the $10 billion to $10 billion, $4 billion across the whole year. You know, the Q4 would be anywhere from $2.5 billion to $2.7 billion. And you're right if you look at it compared to where we just finished up almost at $2.7 billion with a guy at $2.6 billion. and then compared to Q4 of last year it seems like it's flat if anything kind of pulls back a little bit but a couple of points to come back on that one in Q4 of last year was a big material quarter for both sites but specifically down at Ingalls so that's a positive guide and then also you know there's probably a little conservatism in there we want to see both the material the labor continue to inflect upward at Ingalls the material has planned to to come in here I wouldn't overly focus the year-over-year guide being flat or maybe slightly negative to Q4 But the fact of the matter that we've had four now quarters in a row, both for HII and in shipbuilding, four quarters in a row of double-digit growth. So we're out in front of our 6% medium-term guide. And I feel really comfortable about that. I think we just want to see it occur and happen. And again, it's a tough comp against Q4 to 2025 in shipbuilding. On the margin side there, Again, it's the same story. We're given the same 6-3 for Q3 kind of guidance that we just came through for 6-3 for this quarter. You heard last night that we did get the subawards, which bring meaningful revenue, more commitment in statement of work and CapEx, and incentive opportunities in that too. I would tell you that a piece of Q2 had incentives in there. We did not want to wait. We had an agreement with the Navy to get started on those incentives. So the Q2 has a piece of the incentives baked into it. And going forward, there's additional incentives that come about with the awarding Q3. I would tell you it's on the early side. You can imagine just putting that on contract, adjusting the booking rates, more contract value, more statement work, more capital commitment. And then the time to actually, even though there's capital incentives on there, there's time and contract incentives. We need time to actually, you know, meet the milestones, meet the criteria. and be able to kind of bulk that and eventually get the cash at the end of the year. So I'm quite comfortable with that. A perspective again, just like I gave you on the revenue, on the margin side, if you look at the marchup that we've had, whether we talk about where we've been in quarterly shipbuilding from 5.5 in Q4 of last year to 5.7 in Q1 of this year to now 6.3, that's the nice incremental march that we've kind of forecasted that was coming about as the portfolio would change over and with these subcontract boat awards. Just from a fiscal perspective, we've seen 5.2% Roth in shipbuilding in 2024, 5.9% in 2025, and now raising the guidance from 5.5% to 6.5% to now 6.0% to 6.5%, a midpoint of 6.25%. Again, a progression both quarterly and annually on how the company is moving forward here. The investments are paying off, input-output, top line is growing, incremental improvement on the bottom of some, quite comfortable here. with both the quarter itself and where we're projecting the end of the year is going to be.

Okay, great, Tommy. I appreciate all that detail. Yeah, I guess just should we think of last night's contracts as in the outlook you're providing today or incremental to the outlook you're providing today? Because I guess you're technically giving us this post the contracts, but you're also, I assume, not formulating your earnings report and guidance only the night prior.

Yeah, so I'll square that up for you. As I mentioned earlier, in the Q2 results already was a cadre of the incentives, right? We had an agreement, and that was booked in Q2. And then with the awards last night, there's additional incentives that come about that, and that's rolled into the guidance of Q3. We had an expectation and understanding. We've been saying for a while that, you know, first and goal of getting the mods over the goal actually have mods in hand. That's occurred last night, but both the actuals that we had with the agreement in Q2 are in place and rolled in there. And then with the anticipation of what was going to be awarded, which was aligned with our expectations, that was already baked into the forecast as we go forward.

Okay. Thank you.

Your next question comes from the line of Scott Mikus with Melius Research. Your line is open. Please go ahead.

Morning, Chris, Tom, and Brian. Very nice results and congrats on the submarine contract. I have a couple quick clarifications on it. Of the 76.6 billion of contract mods, how much of that goes to Newport News versus Electric Boat, if you have a ballpark figure there? And is there a reason why it was only nine Virginias instead of 10?

Yeah, so on the part one there, yes, $76.6 billion. What comes to Newport News is approximately $25 billion of that and about $5.5 billion on the Columbia program. The rest of that is related with the Block 6 contract award. Obviously, it goes on the VCS contract. And then the capital incentives that benefit both the Virginia class, the Columbia class, and Newport News operations in totality, those incentives are spread over various contracts.

Yeah, the nine ships, the nine ships, there's material for the 10th ship bought as well, I believe. So that's not going to impact production of the class. It's more of a funding mechanism.

So there's 10 ships of material, right? And then there's nine ship sets cost-wise for the integration and test and delivery of the boats, right? And the 10th ship could be used for spares or could eventually be pushed up with a goat line as another integrated ship.

Okay, that's helpful context. And then, Chris, you've done a lot of work increasing the outsourcing through distributed shipbuilding. With your outsourcing partners so far, how has the quality of work been? Has it been in line with expectations, better than hoped, or maybe are there areas for improvement? Just curious how that's going.

Yeah, well, we have a long history of outsourcing in both shipyards, so we've unfortunately made mistakes in the past. We've learned from that in each shipyard. We've rolled those lessons learned into our process for outsourcing, again, in both shipyards. Now, it's not perfect. We still have some issues, but all in all, in each, we've had pretty positive results. We do find issues. We have our QA and our engineering team out there right away. We have in-process inspections to ensure that we execute with our outsource partners. So it's not been perfect. and we need to continue our outsourcing and we've been pretty successful over the last two years doing that and we will continue to do additional outsourcing related to distributed shipbuilding. So it's been positive. There have been issues we've had to deal with. We jumped right on them and we remediate the issue, but all in all, it's been very positive.

And piggyback on the back of that too here is, you know, our ships, our follow-on ships that are in production, both Newport News and Ingalls provides the engineering package and the package of parts as well. So it's not first of class or first new builds. The vendors are at times doing it for the first time, but we have program project management oversight, quality and engineering support. And then when they're finishing their products, it's more of a pilot range that we pilot initial construction or fabrication. And then as they're able to prove out and get good quality and they're on cost and schedule, then we provide more work packages.

Yeah, maybe Brian could talk about their process and how they evaluate distributed shipbuilding partners.

Yeah, as Chris said, we worked really hard to incorporate all the lessons learned from past efforts and we've worked hand in hand with our Navy partners down on the Gulf Coast. So it isn't a throw it over the fence kind of mentality. We're there, as Tom said, hand in hand with our suppliers. We have incremental checkpoints, just like we would for ourselves, both with our inspectors and our Navy inspectors. And, you know, the proof's in the pudding. We just erected our first two ground blocks. As we talked about in a release we just put out from our distributed shipbuilding partners, and they were incorporated into the ship as expected. and so, you know, it takes staying on top of it and working hand in hand with the suppliers, but we're really positive about the results so far. All right. Appreciate the color.

Thank you.

Your next question comes from the line of Gautam Khanna with TD Cowan. Your line is open. Please go ahead.

Hey, guys. Congrats on the submarine contracts, by the way.

Great, great.

Yeah, I was curious, just was there anything about the terms once it was finalized that surprised you or made you think the 9% to 10% eventual goal at shipbuilding is not consistent with the terms of the submarine contracts that were agreed to last night?

No, no, nothing different or special about the terms. It was a lot of work. It's a very big contract. The Navy, the EB, and the Newport News team worked very hard to get it over the goal line, but it's very consistent with what we expect from a profitability standpoint. So nothing really special. Obviously, we had to incorporate kind of lessons learned for coming through COVID and the economic environment we dealt with there. So I do obviously expect it to perform better than those contracts, but I think it's very consistent with a long-term margin profile that we expect.

Okay, that's great to hear. And because we're all kind of asking the same question on what the size of the EAC was in Q2 related to it and will be in Q3, is there any way you can give us some way to assess how big that was related to signing these contracts? And then also the cash impact. Presumably there are advances and the like that are in the guidance for the year. So any quantification would be helpful.

There's a lot of moving parts in there. I understand early, very topically, you know, more contract value, more statement of work, capital commitments, incentives on the contract. So it's early and we normally don't provide that type of visibility into the contract right now as we go forward here.

There's always timing issues related to incentives under the contract, but we've included all that within our guidance.

Maybe just to put a finer point on it, should we expect a bigger, not knowing what the absolute numbers are, should we expect a bigger adjustment favorably in Q3 versus Q2 related to the contracts being signed?

So I'll take that. Yeah, the contract itself is in very early stages. So we've got to make progress on the revenue side, see how performance plays out. There's milestones and responsibilities we have to obviously to execute the contract and cost and schedule and relative to the incentives and things we have to go do and evidence completion on that. So I would expect that we would just like we saw an incremental improvement here. We find our footing once we establish the contract's been awarded, we'll establish our baselines, we'll get that out. And then we're off to the races, just managing performance every 13 weeks and making our commitments in those contracts. So I think it's aligned. The guidance kind of incorporates that. You can see after a meaningful kind of step up in shipbuilding at 5.7 to 6.3, we're telling you 6.3 for Q4. You can do the high and low against that at, you know, now 6 to 6.5%. And, you know, steady performance and staying on schedule, you know, it's a piece of the portfolio at Newport News gets us to the top end. And, you know, if we were to run into Some headwinds on the existing contracts as we're trying to get those completed and push back. You know, there's always the possibility of some step backs in those. But, you know, we did clip off, you know, half the bottom range here. And we feel good here with just a little less than half year to go. Now, stating it's six to six and a half percent for shipbuilding at year's end.

Thanks, guys.

Your next question comes from the line of Doug Harned with Bernstein. Your line is open. Please go ahead.

Good morning. Thank you. I'd like to go back to Noah's question. I was trying to understand the shipbuilding lines because This is an industry you don't get a lot of surprises. So the fact that you took guidance up by a pretty large amount, $500 million quarter over quarter, how much of that was due to this new award? And how much might be due to something else like a change in a milestone or something like that?

Well, the top line was related, and I'll let Tom talk about the award, but the top line was just confidence that we're going to execute in our programs over the balance of the year. Throughputs up 12%, materials proceeding, the milestones are staying in place. So from my perspective, that's just confidence in execution under our programs. Now, obviously, we got a large contract award, and Tom, I don't think he's going to give you specific numbers in that regard because we had that In our guidance, we knew that we were going to get that under contract anyway, but Tom can comment on the top line.

It's much more, Doug, on the former here right now. It's the run race that we're seeing both at Newport News and Ingalls. We see good inflection on hiring and insourcing, outsourcing at both yards, and then expectation down at Ingalls that, as Chris said earlier, a little flat at the beginning of the year. but what we're seeing in throughput and capacity, insourcing, outsourcing, job shop labor, and then just the actual numbers. As I mentioned earlier, we've seen HI have double-digit growth across the company, HI across three divisions, but specifically in shipbuilding, it follows suit as well, 18%, 19.6, 9.7, and now 15.8%, respectively, quarter over quarter, year over year on a quarterly basis. So there's good footing there. We're doing what we're saying. We're executing. Yes? There's a question out there?

Yeah, on that, Tom, so one of the, I mean, one of the things that you've gotten has been, I mean, some of it came out of that previous Block 5 award for the last two shifts was additional support for labor, some higher labor wage rates. And so I guess two things on that. One is that is, you know, that's presumably a contributor to the near-term Revenue Growth, when that flows through, the additional labor cost flows through. Can you comment on that, how important that has been in taking these revenue numbers up? And I know you're getting support at Ingalls, too, for this. So first, how important it is on the revenue side, that should be a pass-through. But the second part, how that's helping you improve your performance and your throughput.

Yeah, so relative to the revenue growth, obviously there's a timing of that. You know, Newport News pushed out over the goal line of Q2 of last year. So in the comparisons, that's already kind of baked in there. Ingalls just went over the goal line in the February timeframe. And meaningfully, it's just working itself through the revenue side now. So I still say organically the growth's happening because of higher material and higher labor. You know, we have more shifts in flow, more people either in the yards and or more work being outsourced. So that's what's really driving that. I'm with you that as that takes hold and the comparisons year over year, it'll be baked into higher wages, but that's less than half of the growth rate differential of what's happening right now. It's just more capacity and throughput through both yards.

Doug, to provide a little bit more detail relative to how it's helping us improve throughput, we have some really good data on experienced craft men and women, first class craft men and women, and their retention rates. and it's improving in both shipyards. And there's nothing better than having a first-class welder, shipfitter, electrician being retained and staying employed and rolling ship over ship. So that's what we've been looking for. The wages and the support by the Navy on the wages on the nuclear programs has really been beneficial in that regard. And we're starting to see that as well at Ingalls, some initial indicators that first-class labor is starting to stay. and that's very, very positive.

Thank you.

Your next question comes from the line of Scott Deutschla with Deutsche Bank. Your line is open. Please go ahead.

Hi, good morning. Chris, what are these contract incentives tied to? Like, what do you have to do from a performance perspective to fully earn them out?

Yeah, so they're very broad, right? related to labor investments, capital investments, performance under the contract. I don't want to get into specifics on what they are, but each of them have specific milestones that need to be accomplished with the goal ultimately of improving performance on the ships and making sure we meet our commitments to the Navy. So they've been very well thought out and negotiated between us, EB, and the Navy. We're comfortable we'll be able to execute against them and achieve the baseline contract.

Okay. And then from an accounting perspective, why do they get recognized in margin at the time of award rather than the period of execution against those milestones?

The majority of them will be kind of recognized on a go-forward basis here, right? And then as we booked a couple of the incentives in Q2 there, there's just a value equation there as far as what the incentive was based on. Again, we're not going to get into the details on the phone call here, but the urgency of wanting to get started on the investment is important. You know, hiring, infrastructure, throughput, long lead on capital projects, all those go into the construct of when we recognize the commitment, bilateral commitment that was put on contract, and then as we execute going forward, we're allowed to kind of book that.

Okay. Are there cases where you've accomplished some of the milestones before the award and that's what allows that treatment?

on a couple of the incentives. As an example, there may be an advancement to get started on a capital project. It's a commitment that from an accounting perspective, we can take that. And a piece of that may have been booked in Q2.

Okay. Thank you. And then, Tom, just to clarify, are the underlying margins at Newport News excluding incentives improving as well, or is this mainly incentive-driven margin improvement? Thank you.

I think it's a mix. I mean, obviously you can subtract that. We told you what the QM adjustments were at Newport News. They were single digit, you know, positive 8 million. You know, if you subtract that out, the running EAC without the adjustments is about consistent at 5.5%. I think the value equation here of the awards is the additional investments that go into the yard, right? Throughput, capacity, capital, hiring, infrastructure, training, So I'm excited by it. We've been talking about these awards for a while here. It's good to get the full complement of both the ship boat package as well as the incentives completely on contract now going forward.

Scott, I could add to that, and I've said this previously, is the most important thing is that we transition out of the ships we're working on now into the new New contracts. This new contract is a step in the right direction. But Newport News throughput over the first part of the year has been very, very solid. And as I mentioned in the submarine programs as well. So as they continue to make progress, make the ship deliveries, reposition into the future ships, I think margin will naturally improve.

Thank you very much.

Nice results. Thanks.

Your next question comes from the line of David Strauss with Wells Fargo. Your line is open. Please go ahead.

Hi, good morning. This is Ben Tomic on for David. I was just wondering, can you guys give us an update on the mix of pre-COVID versus post-COVID shipbuilding revenue today and then where you think you will be over the next couple of years?

Yes. We're on course. You know, we've set the trajectory several years ago that when we got to 2027, by the end of the year, we'd have more post than pre. And nothing has changed on that. So we're kind of in the march down the end of this year and getting into next. We'll be right at the 50-50 mark. And then by the end of the year, we'll actually have more post-COVID than pre-COVID. So it's good to retire that every time you hear a milestone of us either taking a boat to putting a boat in the water or a ship and taking the seat and selling it off. That's one pre-COVID effort that's behind us, and we're continually getting awards, whether it's these sub-awards. We had a DDG that was fully awarded just a couple of weeks ago. That's a new start program, a contract that has a better mix of understanding the statement of work, the schedule, the overall bid cost, the materials in line with what we're seeing in the business environment, the labor and labor efficiency associated with what's in the yards right now is incorporated into that. and a much, much better balanced risk and opportunity set so that we can achieve our intended and expected outcome on these post-COVID contracts.

Got it. And then how are you thinking about the ForGate program with the battleship opportunity? Is there any upside to guidance there? Yeah, not yet.

We're evaluating the acquisition approaches to each of those. And as we come through our plan this year, will incorporate those into the plan based on the latest information. If we update anything, it'll be in 27. I would say on the frigate we started that bill on a preliminary basis, and we expect to be put under contract for that potentially later this year. And we've done the initial start of the design work for the battleship as well on a limited basis with support and cooperation with the Navy.

Great. Thank you.

Your next question comes from the line of Ron Epstein with Bank of America. Your line is open. Please go ahead.

Hey, maybe I have two follow-up questions for you. On your prepared remarks, you talked about all the preparation you're doing with the workforce. Can you talk about how you're retaining labor? You mentioned you hired 3,500 shipbuilders. Did you lose any in the quarter? What was your net add? What's really worked to retaining them besides just pay? Are there things that you've changed in terms of work conditions? I know there were complaints about parking far, far away and having to take buses and that sort of stuff. What have you changed in terms of the work environment and how is retaining going?

Ron, thanks for that. I think you've been in my all hands meeting relative to the parking question, which is kind of always the first one. But rather than I take a shot at that, let me talk to a shipyard president and he can talk about what he's doing from a labor standpoint.

Thanks, Chris. So, Ron, you know, it's front and center in just about every discussion, what we can do to support the workforce, both retention of the workers that we already have. as well as attracting the next set of workers, both skilled and unskilled. We have done just about everything over the years, starting with the massive capital investment in the yard of Pascagoula. We put over a million square feet under cover. So if you've been to Pascagoula in the summertime, that shade makes a tremendous amount of difference, protection from the elements when it rains, et cetera. The collective bargaining agreement was a huge win. As we said earlier, we saw immediate impacts on attrition with the CBA being signed, and we're starting to see a real benefit on hiring as well, particularly with rehires, people who know who we are and people that we know are good shipbuilders. And so that's been a positive as well. We have done busing both inside and outside the shipyard. We do a lot of work on employee engagement, really putting a lot of focus on putting the right leaders in the right place because it all starts with the foreman and frontline supervisor. So pretty much every day that's at the front of what we think about as a leadership team trying to make the conditions optimal for increasing throughput and delivering these ships.

Gotcha, gotcha, gotcha. And then maybe, Chris, just one follow-on. In your prepared remarks, you talked about the opportunities with, you know, called unmanned surface vehicles, maybe unmanned underwater vehicles. How much of the naval fleet do you see that actually becoming? You know, if you look at the overall budget in the Navy and, you know, given the price tag, a lot of them. Yeah, so when you look at... Yeah, here, hang on. Hey, sorry about that. Can you hear me now?

That's okay. Yeah, yes. Yes, we can.

Yeah, great. So when you look at unmanned systems, you know, surface vehicles and underwater, and you kind of compare that to a lot of the big stuff you make, the blue water stuff. I mean, ultimately, how much of the Navy is that really? I mean, how big an opportunity is that really relative to a lot of the other stuff you do?

Yeah, so it's from a and many more. I don't really want to comment on how large it's going to be, but I'll tell you one thing. It's the fastest growing business unit we have. We have had some very positive results on our lionfish program where we just re-upped the next option year. We're competing for the MUSC program. I've talked about that, but it's a competitive program, so I'd rather not go into too much details. The international and domestic pipeline is strong. and so we're going to pursue those. And we have really world-class autonomy. So it's a good business unit. It's a growing business unit. The profitability should be solid because it's firm fixed price contracts. So we think we're very competitive and we're going to continue to invest in it and watch it grow. Now, is it going to be a billion-dollar battleship? No. But We think it's going to grow. We think there's significant opportunity, and we think it's going to be a greater part of the fleet.

Got it. All right. Thank you very much. Sure.

Your next question comes from the line of Emily Deutschman with Wolf Research. Your line is open. Please go ahead.

Hey, good morning, everyone. Quick question on carriers. Hey, good morning. So it looks like at Newport News, there was a mix of positive incentives and adjustments, as well as on the opposite end, lower performance on the programs. Are you able to speak to more about the dynamics within carriers and which ships are reflected in that? And then secondarily, these public comments that keep coming out about redesigning the carrier, is that something that's just sort of hanging in the ether and doesn't have peace yet? Or is that something that's in discussions now?

Yeah, sure. Thanks, Emily. I appreciate the question. So on carriers, we did say that in the remarks there. On the incentive side, I mentioned earlier on the award that we've talked about, there's some capital projects that just benefit the facility as a whole. So they would put on various contracts, and there was an assistance there on that front. On the performance side, as we work our way through with 80 and 81, we talked to you about getting that machinery equipment last year, and we decked over the Q3, Q4 timeframe. And as we just work ourselves through now getting that shipped back into the cadence of The build cycle of what's left to go, you know, we're continually evaluating performance and what the revised plan, the unique plan, as we put 80 back, trying to kind of get it back into the rhythm of the construction there, what that affects and means to the EAC there. So all that was rolled into the performance of it, and it was both puts and takes on the carrier front. Chris will answer.

Yeah, I'll take the second one, Emily. Yeah, there's always discussions or comments about potential new technology implementation in aircraft carriers or redesign. We'll work with the Navy in whatever's chosen. And if there's a change, there's a decision to make a change, we'll work with them to ensure that we mitigate any impact as much as we can and reset the cost and schedule to make sure the aircraft carrier is successful. So nothing as yet. We've received no direction on any change. But if it is, we'll make sure that we work closely with the Navy.

Great. And then one quick follow-up. So with the high operating tempo with Operation Epicurean now and the follow-on kinetic operations, you know, the Naval fleet is working overtime to say the least. Are you all seeing this lead to more

I think it's too early to tell, and we've got a lot of new construction work, so there could potentially be more service and support work out there, but I think we're focused on new construction right now.

Great. Thank you.

Sure.

Your next question comes from the line of Seth Seifman with JP Morgan. Your line is open. Please go ahead.

Hey, thanks very much. And good morning. We just had just one this morning. But, you know, with regard to the cash flow, we'll see the strong Q4. I think it was cute. And, you know, some relation to the contract signing there. We saw Q2 of last year, I think, contract signing. Thank you for joining us.

Yeah, so you are right. You know, if you look back at Q2 of last year with the awards that that assisted it, I wouldn't say it's the only piece that's driving that. You know, right now what we found in this Q2 of the last Q2 is unlike last year where working capital improved and we did get the awards last year for FY24, the meaningful awards here are in Q3 with the boats themselves and working capital actually kind of backed up, which it usually does in the first half of the year. We've seen that go from about 4% at the end of last year to 8% in Q1, and now we're sitting around just under 11%. That's natural as we work ourselves through. We sprint at the end of last year, and then the working capital kind of swings back. I see that improving as we get into Q3, Q4. The ramp in the top line that we've talked about assists cash flow. The improvement, obviously, on the bottom line, it provides assistance there. and then as we continue to make our milestones we had the milestone chart in here hasn't really talked about on this call but we give you religiously the milestone chart in Q2 and Q4. We reiterated that all milestones are in play right now so there's a couple of significant milestones and deliveries as well as in my remarks I mentioned there's a tax credit that anticipate to kind of get back we have agreement with the IRS for that it's working itself through the system and that's at the very end of this year. So that's a meaningfully, meaningfully contributes as well. But I mean, all that conspires the performance, the awards, top line growth, bottom line growth, tax credit, and then, you know, a couple of dollars on the incentives that we we've talked about has a feeling good and reiterating five to 600, 100 million in Q3 and then, you know, a very robust billion dollar Q4 cash collection quarter.

OK, OK, great. And then Moving forward, if there's not a large contract in 27 on the order of what we've seen, does that have any impact on cash conversion and how we think about cash going forward?

No, it doesn't. As I say, I would not hang our hat on. It's because of these awards. An award every year has to come through here. I mean, you're running a plus $10 billion operations here, and cash follows margin. I know if you look back historically, maybe one year is high or low, but we expect a cash conversion of 1.0. We've had the same payment terms with the Navy. As you make progress, you get cost and a piece of fee. And as you make more progress, those percentages change here. But it's tried and true it works it's equitable for both sides as we make progress we were able to collect costs and a piece of fee on that so I don't see that changing and as I say it's just us kind of working through I think as COVID as we make progress on these COVID ships you know on the milestone trial we show five awards in the next this year and next year so a lot of ships going through integration test you know two steps forward one step back on passing tests spare parts things of that nature so it Just create some headwinds a little bit there, but seeing what we did for the first half of the year, the work scope that's in front of us and the plans that we have, I feel good about the guide right now between five and 600 plans are in place. We know the 50 or so milestones and steps that have to happen for us to achieve our perspective and guide.

I would focus on the deliveries. Those five deliveries over the next 12 months are really important.

Got it. That's very helpful. Thank you. Thanks, Seth.

I am not showing any further questions at this time. I would now like to hand the call back over to Mr. Kastner for any closing remarks.

Okay, thank you for your continued interest. I look forward to seeing many of you over the next quarter. Have a good afternoon.

That concludes today's conference call. Thank you for attending. You may now disconnect.