Huntington Ingalls Industries (HII) Q2 2026 earnings call transcript

I would now like to hand the call over to Kristi Thomas, Vice President of Investor Relations. Mrs. Thomas, you may begin. Thank you, operator, and good morning, everyone. Welcome to the HII second quarter twenty twenty six 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 in the company's SEC filings. We will also refer to certain non-GAP financial measures. For additional disclosures about these non-GAP measures, including reconciliations to comparable GAP 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 Blanchett, Executive Vice President and President of Ingleship Building, and Tom Silly, Executive Vice President and Chief Financial Officer.

Now I'll turn the call over to Chris.

Thanks, Kristi. 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 Blanchett, President of Ingleship Building, has joined me to discuss Ingles' 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 percent 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 percent.

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 percent 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 percent EBITDA margin, reflecting steady demand and disciplined execution. The division secured several major awards this quarter, including a recompute award of $418 million to continue supporting shipward-based elevators across U. S. Navy aircraft carriers and amphibious ships.

A Romulus unmanned surface vessel advanced to the U. S. Navy's M. U. S. V. at-sea testing phase scheduled for September, a major milestone in this development. We also broadened our M. U. S. V. industrial base through new partnerships with Bayou Metals and Halomar Shipbuilding, strengthening production capacity and scalability. Additionally, we secured the next production option for the Navy's line fish, small unmanned undersea vehicle program, further demonstrating how our commercial RIMAS 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-on-man 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 3500 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 and 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 a eventual respective conference committee negotiations.

Now to summarize my remarks with 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-1000 and two. 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 36 DDG-51 Arleigh Burke Class Destroyer and second flight three 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. Neil, achieved stern release and 100% but weld complete on DDG-133, Sam Nunn, and loaded main machinery on DDG-135, Thag Cochran.

We also reached 25% but weld complete on DDG-135 and have received all four units from our distributed shipbuilding partners. DDG-137, John F. Lehman, received two additional capitalizing on the growing value of this production approach. On the AMFib 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 deck houses 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, Ingles 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.

Ingles 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 Pascagua, 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 Ingles 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 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 five 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 a stronger year-over-year growth at both shipyards.

Ingles revenues were 845 million and increased by 16.7% compared to the second quarter of 2025, driven primarily by high volumes and amphibious assault ships. New put news revenues of 1.8 billion increased by 15.3% compared to the second quarter of 2025, driven by high volumes across aircraft carriers and submarines. Together, shipbuilding revenue was 2.7 billion, up 15.7% year-over-year.

Mission technology's 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, a 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 6, 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 Ingles, segment operating income was 58 million, an 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 high volumes in amphibious assault ships, partially offset by favorable contract adjustments in surface combatants in the second quarter of 2025. The second quarter, Nat cumulative adjustment at Ingles, 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 high volumes I described earlier, partially offset by lower performance in aircraft carriers. For the second quarter of 2026, Newport News shipbuilding's Nat 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 defendantization is contemplated in our third quarter guidance. Moving on, mission technology's 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 high equity income from nuclear and environmental joint ventures. For the second quarter of 2026, mission technology's Nat 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 high and non-current state income tax expense and the operating earnings per share were $5.27, up from $152 million and $3.86 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 7, 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 percent and 6.5 percent. 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 percent. I'll note that we continue to see the new battleship and frigate programs as meaningful upside opportunities to our medium-term outlook that 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 percent. For mission technologies, we expect revenues will be similar to the second quarter results of 760 million and operating margin of approximately 4 percent, 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 percent for the third quarter, but we still believe 17 percent is appropriate for 2026 when the 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 continued 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.

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.

Sir, 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 of weeks or a week or two.

We expect that to proceed. And that's on schedule. 800's towards the end of the year, some real critical milestones coming up in the summer here are the latter part of the summer related to 800. So those are the remaining milestones laying the keel of 81's on schedule towards back out for the year. But I don't anticipate a lot of margin related to that. So those are 26 milestones. 27 is all still in place. And we're proceeding on those as well.

OK, got it. And clearly, 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?

That was a real good progress. 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 summering 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, Blanchett 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 and 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 full capacity. The next class that we take in the next month or so should put us there. Our high school programs are going great at 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 that we're positive about the second half of the year.

Yeah, I can add that we are delivering five ships all the next 12 months. I said that in my script as well, three of those in angle. So it's critical. We get through those on schedule to get those ships to the Navy, but also critical you 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.

Great. I appreciate that. 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 at low and in the top end. It is true when you do the math of that actuals now in Q1, Q2, plus the guys, the Q3, where they could land in Q4. That ranges from the 10 to 10, 4 billion for us the whole year. You know, the Q4 then would be anywhere from 25 to 27.

And you're right. If you look at it compared to where we just finished up almost at 27 with the guy to 26. 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 to both sides, but specifically that at angles. So that's a positive guide.

And then also, you know, there's probably a little conservative in there. We want to see both the material. The labor continued to inflect upward at angles. The material has planned to to come in here. I wouldn't overly focus the year over year guy being flat or maybe slightly negative to Q4. But the fact of the matter that, you know, we've had four now quarters in a row, both the HII and in shipbuilding, four quarters in a row of double digit growth. So we're out in front of our 6% you know, medium term guide. And you know, 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 and shipbuilding.

On the margin side there, you know, again, it's the same story. We're given the same 6.3 for Q3, a kind of guidance that we just came through for 6.3 for this quarter. You know, you heard last night that we did get the sub awards, which bring meaningful revenue, more commitment and statement work and and cap act 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 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 know, you could imagine just putting that on contract, adjusting the booking rates, more contract value, more stately work, more capital commitment. And then the time to actually, even though there's capital incentives on there, this time and contract incentives, we need time to actually, you know, meet the milestones, meet the criteria and be able to kind of book 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 on the margin side, as you look at the the March up that we've had, whether we talk about where we've been in quarterly shipbuilding from 5 5 and Q4 last year to 5 7 and 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. And then just from a fiscal perspective, you know, we've seen 5 to 5.2% Ross and shipbuilding in 24 5.9 and 2025. And now raising the guidance from 5 5 to 6 5 to now 6, so to 6 5, you know, midpoint is 6 to 5. Again, a progression both quarterly and annually on how the company's moving forward here as we, you know, the investments are paying off input output, top lines growing, incremental improvement on the bottomless. I'm quite comfortable with both, you know, the quarter itself and where we're projecting the end of the year is going to be.

Okay, great. Tom, I appreciate all that detail. Yeah, I guess just should we think of last night's contracts as in 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 and that was booked in Q2 and then with the awards last night is additional incentives that come about that and that's rolled into the guidance of Q3. We had an expectation 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. Now that's occurred last night, but both the actuals that we had it with the agreement and 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.

Yeah, so on the part one there, yes, 76.6 billion, which comes to Newport News approximately 25 billion of that and about five and a half 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 and totality, those incentives are spread over various contracts relative to the night shift. There's a material for the 10th ship bought as well, I believe. So that's not going to impact production of the class. It's more more of a funding mechanism. So the 10 ships of material, right? And then there's nine ships that's cost-wise for the integration and testing and delivery of the boats, right?

And the 10th ship could be used for spares or could eventually be pushed up with a gold 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 chip building with your outsourcing partners so far. How has the quality of work been? Has it been in line with expectations better than hope? Or maybe are there areas for improvement? Just curious how that's going? Yeah, well, we we have a long history of outsourcing in both shipyards. So we unfortunately made mistakes in the past.

We've learned from that in each shipyard. We've rolled those 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 where we have our QA and our engineering team out there right away. We have in-process inspections to ensure that we execute with our outsourced partners. So it's not been perfect. And we need to continue our outsourcing and we've been pretty pretty successful over the last two years doing that. And we will continue to do additional outsourcing related to distributed ship building. So it's been positive. There have been issues we've had to deal with.

We jump right on them and we remediate the issue. But all in all, it's it's been very positive. And piggyback on the back of that too here is, you know, our ships are following 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 bills. The vendors are at times doing for the first time. But we have program project management oversight, quality and engineering support. And then when they they're finishing their products, it's more of a pilot range that would be 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 ship building 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 grand box. And as we talked about in a release, we just put out from our distributed ship building 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, Scott.

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 were very hard to get it over the goal line. But it's very consistent with what we expect from 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 the 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 or 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 in the light that are in the guidance for the year. So any quantification would be helpful. Yeah, there's a lot of moving parts in there. Obviously, I understand it early very topically, you know, more contract value, more statement, or capital commitments incentives on the contract.

So it's early and we know we 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 within our guidance. Maybe just to put a finer point on it, should we expect a bigger, not 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, you know, the contract itself is in very early stages. So we 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 you, we saw an incremental improvement here. We find our footing once we establish the contracts been awarded, we'll establish our baseline, so we'll get that out. And then we'll off to the rates, it's just managing performance every 13 weeks and making our 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 and 5'7", 6'3", but telling you, 6'3", for Q4, you can do the high and low against that at, you know, six, not six to six and a half percent. 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, we're trying to get those completed and pushed back, you know, there's always the possibility of some step backs on 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, you had to go, because now we're standing at six to six and a half percent for shipbuilding at years end.

Thanks, guys.

Well, the top line was related, and all that Tom talked about the award, but the top line was related to just confidence that we're going to execute in our programs over the balance of the year. Through puts up 12 percent materials preceding the milestones are staying in place. So, from my perspective, that's just confidence and execution under our programs. Now, obviously, we got a large, large contract award. And Tom, well, 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're going to get that under contract anyway, but Tom can comment on the top line.

Yeah, it's much more dug on the former here right now. It's the run race that we're seeing both at Newport News and Ingles. You see good inflection on hiring and insourcing, outsourcing at both yards, and then, you know, expectation down at Ingles that, as Krista earlier, a little flat at the beginning of the year. But what we're seeing in through putting capacity, insourcing, outsourcing, job shop labor, and then just the actual numbers, as I mentioned earlier, we've seen H. I. have double digit growth across the company, H. I. across three divisions, but specifically in shipbuilding and follow suit as well, 18 percent, 19 six, nine seven, and now 15 eight percent, respectively, quarter of a year of a year on a quality basis.

So, you know, there's a good on that, Tom. So, one of the, I mean, one of the things that you've gotten has been, some of it came out of that previous block five awards, the last two ships, was additional support for labor, sort of higher, higher labor wage rates. And so, I guess two things on that. One is, that is, you know, that's truly 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 supported angles too for this.

So, first, how important it is on the revenue side that should be a pass through, but that's the second part of 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 of the goal line of G2 of last year. So, in the comparisons, that's already kind of baked in there.

Hingles just went up with the goal line in the February timeframe. And meaningfully, it's just working itself through the revenue side now. So, I still said, organically, the growth's happening because of higher material and higher labor. You know, we have more ships in flow and more people in the yards and more and more work being as that takes hold in the comparisons year over year will be baked in the 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. To provide a little bit more detail relative to how it's helping us improve throughput with some really good data on experienced crap men and women, first class crap men and women and their retention rates.

And it's improving in both shipyards. And there's nothing better than having a first class weld or ship that are electrician being retained and staying employed and rolling ship over ships. 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.

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? They're 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, ED 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 as we 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 investments is important. Hiring infrastructure throughput, long lead on capital projects, all those go into the construct of when we recognize the commitment, the 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 on a capital project. It's a commitment that from an accounting perspective, we can take that. And that piece that I made both, it's been both in Q2.

Okay. Thank you. And then Tom, just to clarify, are the underlying margins that Newport News excluding incentives and proving 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 the QM adjustments were at Newport News. There was single digit, positive 8 million. If you subtract that, the running EAC without the adjustments is about consistent 5.5%. I think the value equation here of the awards is the additional investments that go into the art, right? throughput, capacity, capital, hiring, infrastructure, training. So I'm excited by it. I mean, we've been talking about these awards for a while here. It's good to get the full complement of both the shipboat package, as well as the incentives, completely on contract not going forward.

I could add that. And I've said this previously, the most important thing is that we transition out of the ships we're working on now in the 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.

Yeah, we're on cost. You know, we've set the trajectory several years ago that when you got to 2027 by the end of the year, we'd have more posts than pre and nothing has changed on that. So we're kind of in the markdown. The end of this year and getting into next will 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 a water 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 subawards, 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, 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 free gate program with battleship opportunities? 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, we'll 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.

So what have you changed in terms of the work environment and how is retaining going? Yeah, 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 you can talk about what he's doing from a labor standpoint. Thanks Chris. So Ron, 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 art of Pascal, we put over a million square feet under cover.

So if you've been to Pascal in the summer time, that shade makes a tremendous amount of difference protection from the elements when it rains, etc. 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 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.

You guys should catch it. And then maybe Chris, just one far one, and you prepared remarks you talked about the opportunities with called unmanned surface vehicles, maybe unmanned underwater vehicles. How much of the naval fleet do you see that actually be coming? If you look at the overall budgets in the Navy and you're given the first time, there's a lot above you. So when you're cutting out. Look at, yeah, here. 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, 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 revenue standpoint, right now it's pretty modest.

But we know it's going to become more of the Navy fleet, because they just can do missions, access missions, and expand the fleet size such that they can do things that not only that large capital ships can't do and take the place of large capital ships in some of the missions. So 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 some very positive results on our lionfish program where we just re-up 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. So, 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 just going to continue to invest in it and watch it grow. Now, is it going to be a billion dollar battle ship? 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.

Yeah. 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 were put on various contracts, and there was an assistance there on that front. On the performance side, as we work out through with AD81, 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 ship back into the cadence of the build cycle of what's left to go, we're continually evaluating performance and what the revised plan, the unique plan as we put AD back, trying to get it back into the rhythm of the construction, 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, I'll take the second one, Emily. Yeah, there's always discussions or comments about potential new technology implementation, and aircraft carriers are redesigned. 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 carriers are successful. So nothing is 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 at the period now and the follow-on kinetic operations, the naval fleet is working over time to say the least, are you all seeing this lead to more scope for maintenance and overhaul demand, and that's for both the nuclear side and the surface side, or is it still kind of too early to tell in the process?

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 to support work out there, but I think we're focused on new construction right now. Great. Thank you. Sure.

We saw Q2 of last year, I think, contract signing, driving some really significant cash flow, and those have been the two really big periods of cash flow generation over these two years, 25 and 26. As we go forward, and if there aren't major contract signings, how do we think about the potential to convert earnings into cash? Yeah, so you are right. 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. Right now, what we found in this Q2 of last Q2 is, unlike last year, we're working capital improved, and we did get the awards last year for FY24. The meaningful awards here are in Q3 with the both themselves, and working capital actually kind of backed up, which it usually does in the last half year.

We've seen that go from about 4%, 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 and 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've had the milestone chart in here. It 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 anticipates to kind of get back.

We have agreement with the IRS, so that's working itself through the system, and that's at the very end of this year, so that's a meaningfully contributes as well. But amid all that conspires, the performance, the awards, top line growth, bottom line growth, tax credit, and then a couple of dollars on the incentives that we've talked about, has a feeling good and reiterating 500 to 600, 100 million in Q3, and then a very robust billion dollar Q4 cash collection quarter. Okay, okay, great. And then moving forward, if there wasn't, 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. I would not hang our head on it, because of these awards, an award every year has to come through here. I mean, you're running a plus 10 billion dollar operations here, and cash follows margin. I know if you look back historically, maybe one year's high or lower, but we expect the cash conversion of 1.0. We've had the same payment terms with the Navy. It's known 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 cost and a piece of fee on that.

So I don't see that changing. And then say, it's just us kind of working through, I think, as COVID, as we make progress on these COVID chips and on the milestone chart, we show five awards this year and next year. So a lot of ships going through integration and test, two steps forward, one step back on passing tests, fair parts, things of that nature. So it just creates 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 six hundred 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. That's very helpful. Thank you. Thanks Seth.

I would now like to hand the call back over to Mr. Casner 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.