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DATE

Thursday, July 30, 2026, at 9 a.m. ET

CALL PARTICIPANTS

• Vice President of Investor Relations - Christie Thomas
• President and Chief Executive Officer - Christopher Douglas Kastner
• Executive Vice President and President of Ingalls Shipbuilding - Brian D. Blanchette
• Executive Vice President and Chief Financial Officer - Thomas E. Stiehle

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TAKEAWAYS

• Revenue -- $3.4 billion, representing a 10.9% increase over the second quarter of 2025 driven by growth at both shipyards.
• Diluted EPS -- $5.27, an increase from $3.86 in the prior year period.
• Shipbuilding Revenue -- $2.7 billion, representing 15.7% growth and marking the fourth consecutive quarter of double-digit expansion for the segment.
• 2026 Shipbuilding Revenue Guidance -- $10.2 billion to $10.4 billion, raised from the previous range of $9.7 billion to $9.9 billion due to throughput momentum.
• 2026 Shipbuilding Operating Margin Guidance -- 6% to 6.5%, an increase from the previous range of 5.5% to 6.5%.
• Mission Technologies Revenue -- $760 million, a 3.9% decrease reflecting a $45 million non-recurring contract resolution in the prior year period.
• Newport News Shipbuilding Revenue -- $1.8 billion, a 15.3% increase driven by higher volumes across aircraft carriers and submarines.
• Ingalls Shipbuilding Revenue -- $845 million, rising 16.7% year over year primarily due to higher volumes in amphibious assault ships.
• Contract Awards -- $6.7 billion for the second quarter, supporting a total backlog of $54 billion.
• Submarine Contract Modifications -- $76.6 billion total for VCS Block VI and Columbia class, including approximately $25 billion for Newport News and $5.5 billion for the Columbia program.
• Free Cash Flow Guidance -- $500 million to $600 million for the full year 2026, which the company reiterated.
• Shipbuilding Throughput -- 12% improvement year to date, with management targeting a 15% improvement for the full year.
• Workforce Hiring -- 3,500 shipbuilders hired year to date to support production schedules and operational initiatives.
• Distributed Shipbuilding -- 30% planned increase for 2026 as the company expands its regional industrial base network.
• Capital Expenditures -- $119 million in the second quarter, representing 3.5% of total revenues.
• Liquidity -- $1.7 billion as of the end of the quarter, including a cash balance of $12 million.
• Segment Operating Income -- $224 million, resulting in a segment operating margin of 6.6%.
• Effective Tax Rate -- 18.1% for the quarter, lower than previous 21% guidance due to stock award settlement activity.
• Mission Technologies EBITDA Margin -- Above 10%, reflecting steady demand for autonomous systems and all-domain operations.
• Ship Deliveries -- Management remains on track to deliver five ships over the next 12 months.
• Cash Used in Operations -- $31 million for the quarter, below previous forecasts due to the timing of receipts and disbursements.

SUMMARY

Huntington Ingalls Industries (HII +14.09%) reported a second quarter characterized by double-digit shipbuilding revenue growth and the finalization of multi-billion-dollar submarine contract modifications. Management raised full-year shipbuilding revenue and margin guidance, citing improved throughput and the impact of recent labor agreements on workforce retention. The company confirmed it is on track to deliver five ships over the next 12 months while expanding its distributed shipbuilding strategy to increase total production capacity. The Mission Technologies division maintained double-digit EBITDA margins despite year-over-year revenue declines stemming from non-recurring prior-year contract resolutions.

Full Conference Call Transcript

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 26 HII Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Please be advised that today's conference is being recorded. If you need further assistance, please press *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.

Christie Thomas: Thank you, operator, and good morning, everyone. Welcome to the HII Second Quarter 26 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 Christopher Douglas Kastner, President and Chief Executive Officer Brian D. Blanchette, Executive Vice President and President of Ingalls Shipbuilding and Thomas E. Stiehle, Executive Vice President and Chief Financial Officer.

Now I will turn the call over to Christopher.

Christopher Douglas Kastner: 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, warfighters. I will start today by providing the Q2 results, highlights from Newport News Shipbuilding and Mission Technologies, and an update on our operational initiatives. Brian D. Blanchette, president of Ingalls Shipbuilding, has joined me to discuss Ingalls updates and then Tim 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 5 ships over the next year, we are raising our 2026 shipbuilding revenue guidance to between $10.2 billion 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 builders 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 an 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 U. S. Navy aircraft carriers and amphibious ships. A ROMULUS unmanned surface vessel advanced to US Navy's MUSV at-sea testing phase scheduled for September, a major milestone in this 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 a 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 have 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 have hired over 3.5 thousand 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 VI 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 that provide parts for these submarines. Turning to activities in Washington, the president submitted his fiscal year 27 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 5 ships over the next 12 months. And now I will turn the call over to Brian for his remarks on Ingalls.

Brian D. Blanchette: Thank you, Christopher 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 6 destroyers 3 LPDs, 2 LHAs, and supporting work on DDG-1 thousand and DDG-1 thousand. We are also purchasing material and doing preproduction work for an additional 12 ships under contract. Today, I will 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 26 marking the 36th DDG 51 Arleigh Burke class destroyer and second Flight III 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 THAAD Cochrane. We also reached 25% butt-weld complete on DDG 135 and have received all 4 units from our distributed shipbuilding partners. DDG-137 John F. Lehman, received 2 additional outsourced units, and celebrated her first milestone, start fab, 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 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-1 thousand 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 offsite 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 3 ships over the next 12 months. Increasing production pace, through distributed shipbuilding, and strengthening the workforce required to deliver on our commitments. Now I will hand the call over to Tom for some remarks on our financial results. Tom?

Thomas E. Stiehle: Thanks, Brian, and good morning. Let me start by discussing our second quarter results. And then I will 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 25 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 25, 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 25, 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 6, segment operating income of $224 million and segment operating margin of 6.6% in the second quarter of 26. Compared to $172 million and 5% in the second quarter of 25. 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 25. 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 25. The increase in segment operating income was primarily driven by contract adjustments and incentives in aircraft carriers the higher volumes I described earlier, partially offset by lower performance in aircraft carriers. For the second quarter of 26, Newport News shipbuilding's net cumulative adjustment was a 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 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 25. The increase in segment operating income was primarily due to higher equity income from Nuclear and Environmental joint ventures. For the second quarter of 26, 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, the operating FAS/CAS adjustment. Net earnings in the quarter were $208 million and diluted 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 is 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, which 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 billion 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 $3 billion and $3.2 billion and a margin of approximately 5%.

I will 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. 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 and 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 million 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. 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 will turn the call back over to Christie to manage Q&A.

Christie Thomas: Thanks, Tom. As a reminder to everyone on the call, please limit yourself to 1 initial question and 1 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.

Operator: Thank you, Christie. As a reminder, if you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *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, remember to unmute your device. Your first question comes from the line of Judd Goddin. with Citi. Your line is open. Please go ahead.

Judd Goddin: Hey, guys. Thank you for taking my question. Obviously, a great kind of margin quarter. You raised shipbuilding and you are 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 just to calibrate everybody's expectations on timing.

Christopher Douglas Kastner: Sure, John. I think Tim indicated where we think we are going to be in Q3. And then if you look at the full year, you can kind of see how we are thinking about margin. For the balance of the year. But from a--from a milestone standpoint, delivery of 30 will be towards the end of the year. It will go to trials here. In Q3. 2079 is actually gonna go to trials here in a couple weeks or a week or 2. And we expect that to proceed, and that is on schedule. 800 is towards the end of the year, some real critical milestones coming up, in the summer here. Or the latter part of the summer related to 800. So those are the remaining milestones, laying the keel of 81 is on schedule towards the back half of the year. But I do not anticipate a lot of margin related to that. So Those are the 2026 milestones. 2027 is all still in place, and we are proceeding on those as well.

Judd Goddin: 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 have come and how much more there is to go.

Christopher Douglas Kastner: Yeah. We have 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 2 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 is 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 are doing from a labor standpoint and how the how the ships are progressing through the factory there.

Brian D. Blanchette: Thanks, Christopher. As Chris said, we signed an updated collective bargaining agreement at the, end of the first quarter, and it was really a win. Agreement, good for the workforce, good for us, good for the Navy. And we saw immediate benefit from a retention standpoint. But there is 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 are 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 the next month or so should put us there. Our high school programs are going great. How do excellent signing day ceremony, in the spring. And our biggest class ever for that. So we are excited about, where we are headed As Chris said, it was a bit of a slow start, but we are positive about the second half of the year.

Christopher Douglas Kastner: Yeah. I can add that we are delivering 5 shifts over the next 12 months. I said that in my script as well. 3 of those in Ingles, so critical we get through those on schedule to get those ships to the Navy, but also critical to rotate those crews to the next ships in the production line. So that is also very important.

Judd Goddin: Thanks, guys. Appreciate the color.

Christopher Douglas Kastner: Yeah. Thank you.

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

Noah Poponak: Hey. Good morning, everyone. Morning. Thanks. The updated guidance. A few questions on the updated guidance. So the new shipbuilding range, revenue range implies the back half Q3 and Q4 combined are kind of flat year over year. Can you help us out with why it would be flat in the back half versus the double digit growth in the first half? And specifically, I think it implies Q3 is up about 6% and Q4 is down about 6%. What drives Q4 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. Thanks.

Thomas E. Stiehle: Hey, I appreciate that, Noah. On the revenue side, you know, as you mentioned and said in the remarks, we did up upscale the expectations for shipbuilding by $500 million, both the low end and the top end. It is true when you do the math, the actuals now in Q1, Q2, plus the guide for Q3 where we could land in Q4, you know, that ranges from the $10.4 billion plus the whole year. You know, the Q4, that would be anywhere from $2.5 billion to $2.7 billion and you are right. If you look at it compared to where we just finished up almost at $2.7 billion with a guide at $2.6 billion, And then compared to Q4 of last year, it seems like it is flat, if anything, kind of pulls back a little bit. But a couple of points to come back on that. 1 in Q4 of last year was a big material quarter. For both sides, specifically down at Ingalls. So that is a positive guide.

And then, also, you know, there is probably a little conservatism in there. We want to see both the material, the labor continue to inflect up at Ingalls. Material as planned to come in here. I would not overly focus the year over year guide being flat or maybe slightly negative to Q4, but the fact of the matter that we have had 4 now quarters in a row, both for HII and in shipbuilding, 4 quarters in a row of double digit growth. So we are out in front of our 6%, you know, medium term guide. And, you know, I feel really comfortable about that. I think we just wanna see it occur and happen.

And, again, it is a tough comp against Q4 to 25 in shipbuilding. On the on the margin side there, you know, again, it is the same story. We have given the same 6.3% for Q3. 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 subawards. Which bring meaningful revenue more commitment, and statement of work, and CapEx. And incentive opportunities in that too. I would tell you that a piece of Q2 has 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 is additional incentives that come about with the award in Q3. I would tell you it is on the early side. You know, you could imagine just putting that on contract, adjusting the booking rates, more contract value, more statement work, more capital commitment. Then the time to actually even though there is capital incentives on there, there is time and contract incentives.

We need time to actually, know, meet the milestones, meet the criteria and be able to kinda book that and eventually get the cash at the end of the year. So I am quite comfortable with that. A perspective again, just like I gave you on the revenue, on the margin side, if you look, at the march up that we have had, whether we talk about where we have been in quarterly shipbuilding from 5.8% to 6% to now 6.3%. that is the nice incremental march that we have kind of forecasted that was coming about as the portfolio would change over and with these subcontract vote awards. And then just from a fiscal perspective, you know, we have seen 5.2% ROS in shipbuilding in 2024, 5.9 in 2025. And now raising the guidance from 6% to 6.5% to now 6.0% to 6.5%. You know, a mid point of 6.25%. Again, a progression both quarterly and annually. On how the company's moving forward here as we you know, the investments are paying off in input output, top line's growing, incremental improvement on the bottom line. So I am quite comfortable with both, you know, the quarter itself and where we are projecting the end of the year is going to be.

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

Thomas E. Stiehle: Yeah. So I will 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 is Additional incentives that come about that, and that is rolled into the guidance of Q3. We had an expectation and understanding. We have been saying for a while that, you know, first and goal of getting the mods over the goal line, actually have mods in hand. That has 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 gonna be awarded, which was aligned with our expectations, that was already baked into the forecast as we go forward.

Noah Poponak: Okay. Thank you. Noah. I am sorry.

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

Scott Mikus: Morning, Christopher, Tim, 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? Do you have a ballpark figure there? And is there a reason why it was only 9 Virginias instead of 10?

Thomas E. Stiehle: Yeah. So on the part 1 there, yes, $76.6 billion. When it comes to Newport News, it is approximately $25 billion of that. And about $5.5 billion on the Columbia program. The rest of that is, related with the Block VI. 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.

Christopher Douglas Kastner: Relative to yeah, the 9-ship. The 9-ship, there is material for the 10th ship bought as well, I believe. So that is not gonna impact production of the class. it is more of a funding mechanism. So there is 10 shipsets of material. Right? And then there is 9 shipsets 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 boat line as another integrated ship.

Scott Mikus: Okay. that is helpful context. And then, Christopher, you have done a lot of work increasing the outsourcing. 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 is going.

Christopher Douglas Kastner: Yeah. Well, we have a long history of outsourcing, in both shipyards. So we unfortunately made mistakes in the past. We have learned from that in each shipyard. We have rolled those lessons learned into our process for outsourcing again, in both shipyards. Now it is not perfect, we still have some issues, but all in all, in each, we have had pretty positive results. When 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 outsourced partners. So it is not been perfect, and we need to continue our outsourcing. And we have been pretty successful over the last 2 years doing that, and we will continue to do additional outsourcing related to distributed shipbuilding.

Thomas E. Stiehle: So it is it is been positive. There have been issues we have had to deal with. We jumped right on them. And we remediate the issue. But all in all, it is been very positive. And to piggyback on that, our ships are 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 is 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. We have quality and engineering support. And then when they are finishing their products, it is more of in a pilot range that we would pilot initial construction or fabrication. And then as they are able to prove out, get good quality and they are on cost and schedule, then we provide more work packages.

Christopher Douglas Kastner: Yeah. Maybe Brian could talk about their process and how they evaluate distributed shipbuilding partners.

Brian D. Blanchette: Yeah. As Christopher said, we worked really hard to incorporate all the lessons learned from past efforts, and we have worked hand in hand with our navy partners down on the Gulf Coast. So it is not a throw it over the fence kind of mentality. We are there, as Tim 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 2 ground blocks. And 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 is it takes staying on top of it, and working hand in hand with the suppliers but we are really positive about the results so far.

Scott Mikus: Alright. Appreciate the color. Thank you.

Operator: Your next question comes from the line of Gautam Khanna. TD Cowen. Your line is open. Please go ahead.

Gautam Khanna: Hey, guys. Congrats on the submarine contracts, by the way. Great. Yeah. I was curious just was there anything about the terms when 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?

Christopher Douglas Kastner: No. No, nothing different or special about the terms. It was a lot of work. it is 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 is very consistent with what we expect from a profitability standpoint. So nothing really special. Obviously, we had to incorporate kind of lessons learned, from 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 is very consistent with the long term margin profile that we expect.

Gautam Khanna: Okay. that is great to hear. And because we are all kind of asking the same question on what the size of the EAC was in Q2 related to it, 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 their advances and the like that are in the guidance for the year. So any quantification would be helpful.

Thomas E. Stiehle: Yeah. there is a lot of moving parts in there. Obviously, as I stated earlier, very topically, you know, more contract value, more statement of work, capital commitments, incentives on the contract. So it is early, and we normally do not provide that type of visibility into the contract. Now as we go forward a year. there is always timing issues related to incentives on the contract. But we have included all that within our guidance.

Gautam Khanna: Maybe just to put a finer point on it, is 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?

Thomas E. Stiehle: I'll take that. Yeah. The contract itself is in very early stages. We got to make progress on the revenue side, see how performance plays out. There are milestones and responsibilities we have, obviously, to execute the contract and cost and schedule, relative to the incentives and things we have to go do and evidence completion on that. I would expect that we would, just like we saw an incremental improvement here, we find our footing once the contract's been awarded, we'll establish our baseline, we'll get that out. Then we're off to the race. It's just managing performance every 13 weeks and making our commitments in those contracts. 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 now 6%-6.5%. Steady performance and staying on schedule. It's a piece of the portfolio at Newport News gets us to the top end, and if we were to run into some headwinds on the existing contracts as we're trying to get those completed and pushed back, there's always the possibility of some step backs in those. We did clip off half the bottom range here, and we feel good here with just a little less than half year to go, now standing at 6%-6.5% for shipbuilding at year's end.

Gautam Khanna: Thanks, guys.

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

Doug Harned: Good morning. Thank you.

Christopher Douglas Kastner: Hi, Doug.

Doug Harned: I'd like to just go back to Noah's question. Just trying to understand the shipbuilding guidance, because this is an industry you don't get a lot of surprises. 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? How much might be due to something else, like a change in a milestone or something like that?

Christopher Douglas Kastner: Top line was related, I'll let Tom talk about the award, but the top line was related just confidence that we're going to execute in our programs over the balance of the year. Throughput's up 12%, materials proceeding. The milestones are staying in place. From my perspective, that's just confidence in execution under our programs. Obviously, we got a large contract award, Tom, I don't think he's going to give you specific numbers in that regard because we had that in our guidance, or we knew that we were going to get that under contract anyway. Tom can comment on the top line.

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

Doug Harned: On that, Tom, one of the things that you've gotten, some of it came out of that previous Block V award for the last two ships, was additional support for labor, higher labor wage rates. I guess two things on that. One is, that's presumably a contributor to the near-term revenue growth when the additional labor cost flows through. Can you comment on that, how important that has been in taking these revenue numbers up? I know you're getting support at Ingalls too for this. First, how important it is on the revenue side, that should be a pass-through, as a second part, how that's helping you improve your performance and your throughput.

Thomas E. Stiehle: Relative to the revenue growth, obviously, there's a timing of that. Newport News pushed that over the goal line of Q2 of last year. In the comparisons, that's already kind of baked into that. Ingalls just went over the goal line into February timeframe, meaningfully it's just working itself through the revenue side now. I still say organically the growth's happening because of higher material and higher labor, we have more ships in flow, more people either in the yards and/or more work being outsourced. 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 in the higher wages, 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.

Christopher Douglas Kastner: 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 craftsmen and women, first-class craftsmen and women, and their retention rates. It's improving in both shipyards. There's nothing better than having a first-class welder, ship fitter, electrician being retained and staying employed and rolling ship over ship. 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, we're starting to see that as well at Ingalls on some initial indicators that first-class labor is starting to stay, that's very positive.

Doug Harned: Thank you.

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

Scott Deuschle: Hi. Good morning. Chris, what are these contract incentives tied to? What do you have to do from a performance perspective to fully earn them out?

Christopher Douglas Kastner: Yeah. 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. 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. 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.

Scott Deuschle: Okay. 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?

Thomas E. Stiehle: The majority of them will be kind of recognized on a go-forward basis here, right? As we booked a couple of the incentives in Q2 there, it's just the 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, the urgency of wanting to get started on the investment's important. Hiring, infrastructure, throughput, long lead on capital projects, all those go into the construct of when we recognize the commitment, it's a bilateral commitment that was put on contract, as we execute going forward, we're allowed to kind of book that.

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

Thomas E. Stiehle: 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, a piece of that may have been booked in Q2.

Scott Deuschle: Okay. Thank you. 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.

Thomas E. Stiehle: I think it's a mix. Obviously, you can subtract that. We told you what the QEM adjustments were at Newport News. They were single digit, a positive $8 million. 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. 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.

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

Scott Deuschle: Thank you very much. Nice results.

Christopher Douglas Kastner: Thanks.

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

Ben Tenzer: Hi. Good morning. This is Ben Tenzer going for David. I was just wondering could 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?

Thomas E. Stiehle: On costs, 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, nothing has changed on that. 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, by the end of the year, we'll actually have more post-COVID than pre-COVID. It's good to retire that. Every time you hear a milestone of us either 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. A much better balanced risk and opportunity set so that we can achieve our intended and expected outcome on these post-COVID contracts.

Ben Tenzer: Got it. How are you thinking about the frigate program with the battleship opportunity? Is there any upside to guidance there?

Christopher Douglas Kastner: Yeah. Not yet. We're evaluating the acquisition approaches to each of those. As we come to our plan this year, we'll incorporate those into the plan based on the latest information. If we update anything, it'll be in 2027. I would say on the frigate, we started that build on a preliminary basis. 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.

Ben Tenzer: Great. Thank you.

Christopher Douglas Kastner: Sure.

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

Ron Epstein: Hey, just 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?

Christopher Douglas Kastner: 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. Rather than I take a shot at that, let me talk to a shipyard president, he can talk about what he's doing from a labor standpoint.

Brian Blanchette: Thanks, Chris. Ron, it's front and center in just about every discussion, what we can do to support the workforce, both the 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 massive capital investment in the yard of Pascagoula. We put over a million square feet under cover. 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, 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. 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. 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.

Ron Epstein: Got you. Maybe Chris, just one follow on. In your prepared remarks, you talked about the opportunities with unmanned surface vehicles, maybe unmanned underwater vehicles. How much of the naval fleet do you see that actually becoming? If you look at the overall budgets in the Navy and given the price tag-

Christopher Douglas Kastner: Ron, you're cutting out

Ron Epstein: a lot of the Yeah. When you-

Christopher Douglas Kastner: Ron, sorry, you're cutting out a bit

Ron Epstein: Here. Hang on. Hey, sorry about that. Can you hear me now?

Christopher Douglas Kastner: That's okay. Yeah. Yes, we can.

Ron Epstein: Yep. Yeah, great. When you look at unmanned systems, surface vehicles and underwater, and you compare that to a lot of the big stuff you make, the blue water stuff, ultimately, how much of the Navy is that really? How big an opportunity is that really relative to a lot of the other stuff you do?

Christopher Douglas Kastner: From a revenue standpoint right now, it's pretty modest. We know it's going to become more of the Navy fleet because they just can do excess missions and expand the fleet size such that they can do things that large capital ships can't do and take the place of large capital ships in some of the missions. 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 MUSV program. I've talked about that, it's a competitive program, so I'd rather not go into too much details. The international and domestic pipeline is strong, we're going to pursue those. We have really world-class autonomy.

It's a good business unit. It's a growing business unit. The profitability should be solid because it's firm fixed price contracts. 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. 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.

Ron Epstein: Got it. All right. Thank you very much.

Christopher Douglas Kastner: Sure.

Operator: Your next question comes from the line of Emilee Deutschman with Wolfe Research. Your line is open. Please go ahead.

Emilee Deutchman: Hey, good morning, everyone. Quick question-

Thomas E. Stiehle: Hi, Emilee.

Emilee Deutchman: On carriers. Hey, good morning. 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? 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 teeth yet, or is that something that's in discussions now?

Thomas E. Stiehle: Yeah, sure. Thanks, Emilee. I appreciate the question. Yeah. 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. They were 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.

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 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. All that was rolled into the performance of it, and it was both puts and takes on the carrier front. Crystal, answer.

Christopher Douglas Kastner: Yeah, I'll take the second one, Emily. Yeah, there's always discussions or comments about potential new technology implementation into aircraft carriers or redesign. We'll work with the Navy in whatever's chosen, and if 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. Nothing as yet. We've received no direction on any change. If it is, we'll make sure that we work closely with the Navy.

Emilee Deutchman: Great. Then one quick follow-up. With the high operating tempo with Operation Prosperity Guardian now and the follow-on kinetic operations, the naval fleet is working overtime, to say the least. Are you all seeing this lead to more scope for maintenance and overhaul demand? That's for both the nuclear side and the surface side? Or is it still kind of too early to tell in the process?

Christopher Douglas Kastner: 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. I think we're focused on new construction right now.

Emilee Deutchman: Great. Thank you.

Christopher Douglas Kastner: Sure.

Operator: Your next question comes from the line of Seth Seifman with JPMorgan. Your line is open. Please go ahead.

Seth Seifman: Hey, thanks very much. Good morning. Just one this morning. With regard to the cash flow, we'll see the strong Q4, I think it was Q, and some relation to the contract signing there. 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, 2025 and 2026. If there aren't major contract signings, how do we think about the potential to convert earnings into cash?

Thomas E. Stiehle: Yeah. You are right. If you look back at Q2 of last year with the awards, that assisted it. I wouldn't say it's the only piece that's driving that. Right now, what we found, in this Q2 over last Q2, is unlike last year, where working capital improved. We did get the awards last year for FY 2024. The meaningful awards here are in Q3 with the boats themselves. 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. 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. As we continue to make our milestones, we've had the milestone chart in here. It hasn't really been 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. There's a couple of significant milestones and deliveries as well as in my remarks, I mentioned, there's a tax credit that we 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. That meaningfully contributes as well.

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 us feeling good and reiterating five to 600, $100 million in Q3, and then a very robust $1 billion-dollar Q4 cash collection quarter.

Seth Seifman: Okay. Great. Moving forward, if there's not a large contract in 2027 on the order of what we've seen, does that have any impact on cash conversion and how we think about cash going forward?

Thomas E. Stiehle: No, it doesn't. No. As I say, I would not hang our hat on it because of these awards. An award every year has to come through here. You're running a +$10 billion operations here, cash follows margin. I know if you look back historically, maybe one year's 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. As you make more progress, those percentages change here. It's tried and true. It works. It's equitable for both sides. As we make progress, we are able to collect cost and a piece of fee on that. I don't see that changing. As I say, it's just us kind of working through.

I think as we make progress on these COVID ships, on the milestone chart, we show five awards in this year and next year. A lot of ships going through integration and test. Two steps forward, one step back on passing tests, spare parts, things of that nature. It just creates some headwinds a little bit there. 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 500 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.

Christopher Douglas Kastner: Yeah. I would focus on the deliveries. Those five deliveries over the next 12 months are really important.

Seth Seifman: Got it. That's very helpful. Thank you.

Christopher Douglas Kastner: Thanks, Seth.

Operator: 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.

Christopher Douglas Kastner: Okay. Thank you for your continued interest. I look forward to seeing many of you over the next quarter. Have a good afternoon.

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