HUNTINGTON INGALLS INDUSTRIES, INC.(HII)Q2 2026 法說會逐字稿

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.

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.

Thanks, Christie. Good morning, everyone. This morning, we released our second quarter results which reflect our continued focus and progress on increasing throughput and delivering ships and mission solutions to the nation's sailors, Marines, and warfighters. I 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 five 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 toward 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 the U.S. 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 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 and 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 will turn the call over to Brian for his remarks on Ingalls.

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 six destroyers, three LPDs, two LHAs, and supporting work on DDG-1000 and DDG-1000. 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 the 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 Thomas Cochrane. We also reached 25% butt-weld complete on DDG-135 and have received all four units from our distributed shipbuilding partners. DDG-137 John F. Lehman received two additional outsourced units and celebrated her first milestone, start fab, capitalizing on the growing value of this production approach. On the amphibious programs, LPD-30 Harrisburg powered up main engines in the second quarter and is progressing toward 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, 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 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 will hand the call over to Tim for some remarks on our financial results.

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 was $224 million and segment operating margin was 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 and operating margin was 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 in our third-quarter guidance. Moving on, Mission Technologies segment operating income was $55 million and operating margin was 7.2%, compared to $36 million and 4.6% in the second quarter of 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 and 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, 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 to $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, we expect shipbuilding revenue of approximately $2.6 billion and shipbuilding operating margin that is similar to the second quarter result of 6.3%. For Mission Technologies, we expect revenues will be similar to the second quarter results of $760 million 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 a tax rate of 21% for the third quarter.

We still believe 17% is appropriate for 2026 with an expected research and development tax credit 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.

Thanks, Tim. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.

Thank you, Christie. As a reminder, if you would like to ask a question, please press *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.

Hey, guys. Thank you for taking my question. Obviously, a great 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 milestones just to calibrate everybody's expectations on timing.

Sure, Judd. 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 milestone standpoint, delivery of LPD-30 will be toward the end of the year. It will go to trials here in Q3. CVN 79 is actually going to go to trials here in a couple weeks or a week or two and we expect that to proceed, and that is on schedule. SSN-800 has some critical milestones coming up in the summer or the latter part of the summer related to delivery. So those are the remaining milestones, and laying the keel of CVN 81 is on schedule toward the back half of the year but I do not anticipate a lot of margin related to that. Those are the 2026 milestones. 2027 is all still in place and we are proceeding on those as well.

Okay. Got it. And, clearly, you are 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.

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

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 — good for the workforce, good for us, good for the Navy. 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. We are starting to see some good positive indicators on hiring. We have all of our pipeline programs 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; we had an 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.

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

Thanks, guys. Appreciate the color.

Yeah. Thank you.

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

Hey. Good morning, everyone. Thanks. The updated guidance — a few questions on the updated guidance. So the new shipbuilding 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? Specifically, 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 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.

Hey, I appreciate that, Noah. On the revenue side, as you mentioned in the remarks, we did upscale the expectations for shipbuilding by $500 million at both the low end and the top end. It is true when you do the math on the actuals in Q1 and Q2 plus the guide for Q3 where we could land in Q4, that ranges across the $10.4 billion for the whole year. Q4 of last year was a big material quarter, specifically down at Ingalls, so that is a tough comp. Also, there is probably a little conservatism in our guidance. We want to see both the material and the labor continue to inflect up at Ingalls and material as planned to come in. I would not overly focus on the year-over-year guide being flat or slightly negative for Q4; the fact of the matter is we have had four quarters in a row now — both for HII and in shipbuilding — of double-digit growth. So we are out in front of our medium-term guide. I'm comfortable with that and we want to see it continue to occur.

On the margin side, we have given the same 6.3% for Q3 guidance. You heard last night that we did get the sub awards, which bring meaningful revenue commitments, statements of work, capital commitments, and incentive opportunities. A piece of Q2 includes incentives; we had an agreement with the Navy to get started on those incentives and that was booked in Q2. Going forward, there are additional incentives that come with the award and that is rolled into the guidance for Q3. It is still early. You could imagine putting that on contract and adjusting booking rates and more contract value and capital commitment, but there is time to actually meet milestones, meet criteria, and be able to book and eventually get the cash. So I'm quite comfortable with both the quarter itself and where we are projecting for the end of the year. If you look at the progression in quarterly shipbuilding margins from about 5.8% to 6% to 6.3%, that's the incremental march we forecasted as the portfolio changes with these contract awards.

From a fiscal perspective, we saw 5.2% ROS in shipbuilding in 2024, 5.9% in 2025, and now we've raised the guidance for 2026 to a midpoint of about 6.25%. It's a progression quarterly and annually as investments pay off, top line grows, and incremental improvement on the bottom line occurs.

Great, Tim. I appreciate all that detail. Should we think of last night's contracts as included in the outlook you are providing today or incremental to the outlook you are providing today? Because I assume 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.

I'll square that up for you. In the Q2 results, there was already a cadre of incentives that we had an agreement on and those were booked in Q2. With the awards last night, there are additional incentives that come about and that is rolled into the guidance for Q3. We had an expectation and understanding for some time that getting the modifications over the goal line and having mods in hand was likely, and that occurred last night. The actuals we had with the agreement in Q2 are in place and rolled in, and with the anticipation of what was going to be awarded, which aligned with our expectations, that was already baked into the forecast as we go forward.

Okay. Thank you. I am sorry.

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

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 nine Virginias instead of ten?

Yeah. On the part one 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 benefit both the Virginia class, the Columbia class, and Newport News operations in totality. Those incentives are spread over various contracts.

Relative to the nine-ship question, there is material for the tenth ship bought as well. So that is not going to impact production of the class; it is more of a funding mechanism. There are 10 shipsets of material and nine shipsets cost-wise for the integration, test, and delivery of the boats. The tenth ship could be used for spares or could eventually be pushed up with a boat line as another integrated ship.

Okay. That is helpful context. And then, Christopher, you have done a lot of work increasing outsourcing and distributed shipbuilding with your partners so far. How has the quality of work been? Has it been in line with expectations, better than hoped, or are there areas for improvement? I'm just curious how that is going.

We have a long history of outsourcing in both shipyards. We've made mistakes in the past and we've learned from that in each shipyard. We have rolled those lessons learned into our process for outsourcing again in both shipyards. It is not perfect; we still have some issues, but overall in each yard we've had pretty positive results. When we find issues, we have our QA and engineering teams 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 improving, but we've been pretty successful over the last two years doing that and we will continue to do additional outsourcing related to distributed shipbuilding.

It has been positive. There have been issues we've had to deal with; we jump right on them and remediate. All in all it has been very positive. To piggyback on that, our ships are follow-on ships that are in production. Both Newport News and Ingalls provide the engineering package and the package of parts as well. So it is not first-of-class builds. The vendors are at times doing things for the first time, but we have program project management oversight, quality and engineering support. When they finish their products, it is more of a pilot range where we pilot initial construction or fabrication, and as they prove out quality and are on cost and schedule, we provide more work packages.

Maybe Brian could talk about their process and how they evaluate distributed shipbuilding partners.

Yeah. As Christopher said, we worked really hard to incorporate lessons learned from past efforts, and we have worked hand-in-hand with our Navy partners down on the Gulf Coast. It is not a throw-it-over-the-fence mentality. We are there, as Tim said, hand in hand with our suppliers. We have incremental checkpoints just like we would for our internal work, both with our inspectors and Navy inspectors. The proof is in the pudding: we just erected our first two ground blocks from our distributed shipbuilding partners and they were incorporated into the ship as expected. It takes staying on top of it and working hand in hand with suppliers, but we are really positive about the results so far.

Alright. Appreciate the color. Thank you.

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

Hey, guys. Congrats on the submarine contracts, by the way. Great. I was curious — was there anything about the terms once it was finalized that surprised you or made you think the eventual 9% to 10% shipbuilding goal is inconsistent with the terms of the submarine contracts that were agreed to last night?

No. Nothing different or special about the terms. It was a lot of work and the Navy, EB, and the Newport News team worked very hard to get it over the goal line, but it is consistent with what we expect from a profitability standpoint. We did incorporate lessons learned coming through COVID and the economic environment, so I do expect it to perform in line with our long-term margin profile.

Okay. That is great to hear. Since we are all asking the same question about the size of the EAC in Q2 related to it, or what it 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 also the cash impact, presumably advances and the like that are in the guidance for the year. Any quantification would be helpful.

There are a lot of moving parts. More contract value, more statements of work, capital commitments, and incentives on the contract — it's early and we normally do not provide that level of visibility into the contract. As we go forward over the year, there are always timing issues related to incentives. We have included all of that within our guidance.

Maybe just to put a finer point on it, should we expect a bigger adjustment favorably in Q3 versus Q2 related to the contracts being signed?

Yeah. The contract itself is in very early stages. We need to make progress on the revenue side and see how performance plays out against milestones and responsibilities on cost and schedule and relative to the incentives and the evidence of completion on that. So I would expect that we would, just like we