Q1 2026 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2026 HII Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. 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 First Quarter 2026 Conference Call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties and reflect the company's judgment based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially.

Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer; Kari Wilkinson, Executive Vice President and President of Newport News Shipbuilding; and Tom Stiehle, Executive Vice President and Chief Financial Officer.

Now I'll turn the call over to Chris.

Thanks, Christie. Good morning, everyone. Before I begin today, I'd like to thank the men and women in the U.S. military and our shipbuilders for supporting our nation and our allies every day. Our ships, submarines and defense technology solutions are foundational to United States military operations around the globe, providing superior capabilities in a high-threat geopolitical environment.

At HII, we are focused on delivering for mission success, and we are committed to providing quality platforms for the war fighter. Today, I'll start by discussing our results, the Ingalls and Mission Technologies division highlights and provide an update on our operational initiatives. I've asked Kari Wilkinson to join me to discuss Newport news updates, and then Tom will provide more details on our financial performance and outlook. Now turning to our results.

We reported first quarter sales of $3.1 billion and diluted earnings per share of $3.79. Another strong quarter of shipbuilding sales growth at 18% year-over-year was driven by our shipbuilding division's focus on increasing throughput in our shipyards and supported by broader efforts underway to revitalize and rebuild the U.S. maritime industrial base. Customer demand for our products and services remain strong. First quarter contract awards were $4 billion. At Ingalls, in the first quarter, we achieved stern release on LPD 31 Pittsburgh, laid the [indiscernible] for LPD 32 Philadelphia, loaded JP 5 Fuel on LHA 8 Bugganville and continued to make test progress on LPD 30 Harrisburg, which we expect to deliver later this year.

We also completed builders trials for DDG 1000 USA ZoomWault and achieved crew [indiscernible]. On the Detroit program, after delivering DDG 128 Ted Stevens at the end of last year, we loaded fuel on DDG 129 Jeremi Denton, launched DDG 131 George M. Neil and achieved stern release on DDG 133 Sam [indiscernible]. We also loaded main machinery on DDG 135 [indiscernible] Cochrane and received the first 2 of 32 units in yard from our distributed shipbuilding partners on DDG 137 John F.

Lehman. Moving to Mission Technologies. We had another quarter of strong sales of $748 million. We have a robust opportunity pipeline, and we were awarded a position on the $25 billion ceiling Advanced Technology Support Program, Microelectronics multi-award contract and the $151 billion ceiling Missile Defense Agency Shield multi-award contract.

We also secured a new $500 million contract to expand our Cyber Defense and Data mesh solutions for the Department of Ward. In support of the Navy's HEG strategy and the government's approaches to procuring new technology programs, emphasizing corporate investment in product development and demonstration prior to formal contract award, we are increasing our investments in our autonomous solutions portfolio of products. We have multiple autonomous vessels in production, and we are actively extending the capabilities of Odyssey, our autonomy software in strategic partnership with leading AI companies.

We see significant award opportunities in this group as evidenced by material increases in the FY '26 funding and FY '27 budget documents and international growth pipeline. Our expertise in unmanned technology and autonomy, coupled with strong technology partnerships and comprehensive understanding of manned, unmanned interfaces provides a strategic advantage that we can capitalize on to substantially grow this business. Moving on to an update on our operational initiatives. As for the first operational initiative, enhancing shipbuilding throughput, we are on plan through Q1 and continue to expect to achieve our goal of approximately 15% throughput improvement for the full year in 2026. We hired over 1,600 shipbuilders in the first quarter.

We also graduated nearly 200 apprentices from our apprentice schools this year, and our apprentice schools are now at full enrollment. I'm confident that as our workforce continues to stabilize, our workforce will become more proficient. Also, we continue to make progress on our second operational initiative to rapidly grow our trusted industrial base network. Leveraging our distributed shipbuilding strategy, we are on track to grow our outsourcing hours year-over-year by 30%, and we will continue to identify capacity expansion opportunities to meet customer program demand requirements.

The third operational initiative of securing new contract awards is on track, and we are making good progress on the VCS Block VI and the next Columbia contract with awards expected in the second quarter. Shifting to activities in Washington. Congress finalized defense appropriations for fiscal year 2026 in February. In addition to the support for our programs in last year's reconciliation bill, we saw continued bipartisan support for our programs reflected in the 2026 Consolidated Appropriations Act, including funding for CVN 80 and 81, along with advanced procurement for CVN-82, continued funding for CVN 74 RCOH, funding for the Virginia-class and Columbia-class submarine programs, advanced procurement for the DDG 51 program and funding for long-lead materials for the new frigate program.

In early April, the President submitted a top-level fiscal year 2027 budget request to Congress. The proposed budget reflects continued investment in our shipbuilding programs, funding 2 amphibious ships, LPD 34 and LHA 10, 1 DDG 51 surface combatant, 2 Block VI Virginia-class submarines, one Columbia-class submarine and the first FFX frigate. The budget request continues funding Ford-class nuclear aircraft carriers and aircraft carrier refueling programs provides initial advanced procurement funding for the leadership of the Trump Glass battleship program, the USS defiant. Beyond shipbuilding, the fiscal year 2027 request reflects increased investments in capability enablers, including autonomous systems that align well with our advanced technology capabilities of our Mission Technologies division.

Now to wrap up my remarks. In summary, we had a solid first quarter and remain focused on meeting our commitments to our customers and creating value for all our stakeholders. And now I'll turn the call over to Kari for her remarks on Newport News.

Thank you, Chris, and good morning, everyone. We've been busy at Newport News since the start of the year, beginning with our visit from the Secretary of War for the launch of his arsenal of Freedom Tour. Over the course of the day, the Secretary spoke directly to sellers and shipbuilders about the importance of what they do and how what we build directly supports the mission. Appropriately within just a few weeks of that engagement, we marked 140 years of service to our nation.

In program milestones, we exited a very active and successful fourth quarter in 2025 and hit the ground running by successfully completing builders sea trials of CVN-79 John F. Kennedy. We remain focused on preparing for CVN-79 acceptance trials later this year. CVN-80 Enterprise is now coming together at pace and is over 50% erected in dry dock 12 and and CVN-81 units continue to move through steel fabrication and outfitting in support of the [indiscernible] later this year.

In our submarine programs, we completed sea trials and redelivery of SSN 796 USS New Jersey after her post-shakedown availability. We remain laser-focused on getting the last of our Block IV boats SSN 800 Arkansas to sea and delivering later this year. As Chris mentioned, we've made good progress on the framework for both Virginia Class Block VI and Columbia build 2 and anticipate contract awards in the second quarter, demonstrating our continued commitment to increased submarine delivery cadence. We also continue to invest in our future.

Following our January 2025 acquisition of a fully operational facility with an established and talented team of shipbuilders in Charleston, South Carolina, we added nearly 0.5 million earned hours of progress to our programs in our first year operating as Newport News shipbuilding Charleston operations. In 2026, our plan is to double Charleston throughput, including structural fabrication and more fully outfitted units that are ready for integration when they arrive at Newport News. We will also continue our capital investments to grow the site substantially over the next several years. And we will continue to transform our shipyard.

In 2026, we are again making hundreds of millions of dollars of capital investment at Newport News, including significant investment in our manufacturing centers of excellence to support the submarine throughput our nation needs, finishing a multipurpose carrier refueling and overhaul work center and making peer updates to support carrier and activation. Our investments in people will continue as well. Our shipbuilders continue to gain in proficiency, confidence and tenacity. In March, we congratulated 128 apprentice graduates as they walked across the stage and stepped into their leadership roles and our trades.

We continue to partner with local high schools and community colleges as well as Hampton Roads manufacturing pipeline programs to expand our workforce, and we have already reached our strategic goal of onboarding more than 50% of our new shipbuilders through these more sustainable methods. We also continue to graduate our Forman from the leadership programs that our operations leaders have reimagined. This program reboot focuses on the critical skills identified through our process excellence organization and gives our frontline leaders the hard and soft skills they need to do the important work we are asking them to do.

With our 2025 and 2026 successes in hiring, reducing attrition and our continued efforts to enable and strengthen our supply chain partners, I am confident we will continue to see improvement in Newport News outcomes. Now I'll hand the call over to Tom for some remarks on our financial results. Tom?

Thanks, Kari, and good morning. Let me start by briefly discussing our first quarter results, and then I'll provide some color on our expectations 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 first quarter revenues of approximately $3.1 billion increased 13.4% compared to the same period last year.

The higher revenue was attributable to year-over-year growth at all 3 divisions with particularly strong growth at both shipyards. Shipbuilding revenue was up 17.6% compared to the first quarter of 2025. Ingall's revenues were $725 million, an increased 13.8% compared to the first quarter of 2025, driven primarily by higher volume and surface combatants. Newport News revenues of $1.7 billion increased by 19.3% compared to the first quarter of 2025 driven by higher volumes across aircraft carriers, submarines and naval nuclear support services. Together, shipbuilding revenue was $2.4 billion, modestly ahead of the $2.3 billion guidance we have provided for the quarter.

Mission Technologies revenues of $748 million increased by 1.8% compared to the first quarter of 2025, driven by higher volume in all domain operations due to the C5ISR growth unmanned systems due to the growth in [indiscernible] fish autonomous UUV program and Global Security, partially offset by lower volumes in warfare systems. Moving on to Slide 6. Segment operating income of $172 million and segment operating margin of 5.6% in the first quarter of 2026 compared to $171 million and 6.3% in the first quarter of 2025. At Ingalls, segment operating income was $49 million and operating margin was 6.8% compared to $46 million and 7.2% in the first quarter of last year.

The increase in segment operating income was driven by the higher volumes and surface combatants that I noted earlier, partially offset by the lower performance in amphibious assault chips. The first quarter net cumulative adjustment at Ingalls was a negative $3 million, and none of the adjustments were individually significant. At Newport News, segment operating income was $88 million, and operating margin was 5.3% compared to $85 million and 6.1% in the first quarter of 2025. The increase in segment operating income was primarily driven by the higher volumes described earlier, partially offset by contract adjustments and incentives in the first quarter of 2025 from the Virginia-class submarine program as well as lower performance in aircraft carrier construction.

Recall that Newport News results in the first quarter of 2025 had the benefit of meaningful contract incentives related to the award of a contract modification for the construction of 2 additional Block V Virginia class submarines. For the first quarter of 2026, Newport News Shipbuilding's net cumulative adjustment was negative $9 million. None of the adjustments in the quarter were individually significant. Mission Technologies segment operating income was $35 million, and operating margin was 4.7% compared to $40 million and 5.4% in the first quarter of 2025. The decrease in segment operating income was primarily due to the timing of equity income from nuclear and environmental joint ventures, partially offset by higher performance in warfare systems.

For the first quarter of 2026, Mission Technologies' net cumulative adjustment was a positive $13 million. None of the adjustments in the quarter were individually significant. Consolidated operating income for the quarter was $155 million, and operating margin was 5% compared to $161 million and 5.9% in the same period last year. The decrease in operating income was driven by higher noncurrent state income taxes, partially offset by the slightly more favorable segment operating income that I've just reviewed.

Net earnings in the quarter were $149 million, and diluted earnings per share were $3.79 with both consistent with the results from the same period last year. The effective tax rate in the first quarter was 20.7%. We provided the tax guidance for 2026 out of approximately 17% and still believe that is correct. The credit responsible for that lower tax rate is expected to be processed later this year.

I will provide our view on the appropriate tax rate for the second quarter in a moment. Turning to Slide 7. Cash used in operations was $390 million in the quarter. Net capital expenditures were $71 million or 2.3% of revenues. Free cash flow in the quarter was negative $461 million.

Free cash flow results in the quarter were better than the guidance we had provided largely due to stronger collections in the quarter as well as some disbursements moving out of the period. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.38 per share of $54 million in aggregate. Turning to liquidity and the balance sheet.

We ended the quarter with a cash balance of $216 million and liquidity of approximately $1.9 billion. Moving on to our outlook on Slide 8. We are reaffirming all of the guidance elements that we provided on our last quarter's call for both 2026 and our medium-term outlook. I'll note that we continue to see the new battleship in frigate programs as meaningful upside opportunities to our medium-term outlook, that we will need additional details before we can include those in our guidance outlook. As I noted on our last call, our guidance for 2026 is predicated on achieving the shipbuilding throughput improvements that we've outlined as well as reaching agreement on the next Virginia and Columbia class submarine contracts in the near term.

Moving on to the second quarter look ahead outlined on Slide 8, we expect shipbuilding revenue of approximately $2.4 billion and shipbuilding operating margins between 5.7% and 6%. For Mission Technologies, we expect revenue of approximately $750 million and operating margin of approximately 4%, inclusive of the strategic investments that we expect to make in our unmanned capability and production capacity. We expect free cash flow in the second quarter to be between negative $100 million and positive $100 million. There are a number of factors, including the timing of the upcoming submarine contract award regular working capital movement and CapEx timing that create variability in Q2. Regarding the effective tax rate, we believe it's prudent to use a tax rate of 21% for the second quarter though we still believe 17% is appropriate for 2026 with an expected research and development tax credit coming later this year.

To close, it was a good quarter as we continue to make steady progress and execute against our 2026 operational initiatives. With that, I'll turn the call back over to Christie to manage the Q&A.

Thanks, Tom. [Operator Instructions] Operator, I will turn it over to you to manage the Q&A.

[Operator Instructions] Your first question comes from the line of Scott Mikus with Melius Research.

You called out the battleship and Frigate as being potential drivers of upside to the medium-term shipbuilding revenue growth outlook? What we saw in the 2027 budget request, there's a lot of funding in there for auxiliary and support ships. Just wondering how you're thinking about that opportunity set when it comes to Ingalls and could that put upward pressure on the medium-term growth outlook?

Yes. The auxiliary ships when you take into consideration their current workload at Ingalls as well as we'd have to evaluate those kind of on a case-by-case basis. But there's plenty of work at Ingalls when you look at their baseline business, battleship, frigate, which we know we're going to build battleship. We're just at the beginning of with the design effort with the Navy.

But I don't necessarily anticipate competing for those at this point, but we're going to evaluate it based on how they unfold and how the acquisition strategies unfold.

Got it. And then a quick one for Tom. If I look at the 2Q outlook in the 1Q results, it implies that you need to generate about $1 billion of free cash flow in the second half of this year. Just curious if you could talk about the level of visibility to achieving that?

And what are some of the moving parts that could cause that to come in a little bit below or maybe even a little bit higher than that?

Yes, I appreciate the question, Scott. Yes. So we're in the normal cycle here where we use cash at the beginning of the year. We beat guidance for Q1 as we were out in front by about $100 million.

As I mentioned in my remarks, it was some disbursements kind of moved out to the right as well as we did better in collections than we anticipated. The Q2 guidance is about neutral, plus or minus 100, and that will kind of leave us at the midpoint about $460 million negative, which means we've got to pick up about $1 billion in the back half of the year. That's in line with our play book and consistent with what we guided at the beginning of the year. That will come about through making progress through the back half of the year.

We have some major milestones and deliveries as well. We have some tax credits and collections in R&D that will come about, which will provide a tailwind to our performance as well on free cash flow. As far as opportunity set, I mean, obviously, there's opportunities and risks around that, but we're reaffirming the guide for the end of the year at $500 million to $600 million, and we'll keep you informed as we move forward here. We usually don't want to get ahead of ourselves and we guide relatively stable to conservative.

There are opportunities that -- both for improvement or if there's a drag on performance here. But we still feel good about the range that we have as we start to tackle the back half of the year.

Your next question comes from the line of Scott Deuschle with Deutsche Bank.

Tom, does the 2Q guide include any margin benefit at Newport News from the expected contract awards that Kari mentioned.

Yes. So in Chris' remarks, we're expecting and working closely to finalize and execute that contract mod for those subs. There's opportunity sets around those for performance and incentives both in margin and cash collections. And that's just going to depend on the timing as far as when that -- if and when it hits in Q2 and then how we push that through the system, both in modification, margin and cash.

I would tell you that we have that kind of weighted, we factor these things. And it's anticipated, as I said at the beginning of the year to happen in the first half of the year. It is a factor in the Q2 guide that we gave here but it's at a factor weight right now. So I'm comfortable with where we are making meaningful good progress with our customer on this front, and I anticipate that will work itself through the system in Q2 and the back half of the year.

And this is Chris. I might add that operationally, it's important to get that under contract, so we can continue to make progress on the submarines. So that is just as large a factor as the margin and cash guide for the quarter as we need to stay on schedule, need to stay in sequence on the submarine program.

Okay. And then Chris, can you explain what is driving the additional delays for LHA 8, 9 and 10 that the Navy justification book show? And then do you still feel confident that it will be a nice margin step-up on the post-COVID ships LHA 9 and 10, despite these additional delays?

Yes, I'm very confident in the post-COVID ship ability to improve margin. What you found on LHA 8 was just some issues in the test program as we're working through it. We have some new systems on that ship, having some challenges. We have seen over the last couple of weeks a bit of a ramp in the test rate.

So that's positive. I wouldn't get overly concerned about the J. books scheduled date issues. That's kind of contextual and how the Navy communicates to Congress. We evaluate our EACs every quarter and we take into consideration a schedule risk that we may have.

So I'm real confident in the [indiscernible] subsequent to LHA-8, and I have great expectations for their performance.

Your next question comes from the line of David Strauss with Wells Fargo.

Just a follow on to that -- to Scott's question. The Ingalls margin performance, I think this is the lowest we've seen in quite some time there. So Chris, if you could just dig in there in terms of exactly what's driven the margin that's much lower and kind of the outlook from here for Ingall's margin?

Sure. It was really what I would consider a pacing quarter for Ingalls, making good progress on the DDGs. As I said, we did have some risk we had to put into the LHA 8 EAC for the progress in approaching their delivery and risk related to their delivery. So we had to take an adjustment there.

But I think Ingalls is making pretty good progress. It's what I consider, as I said, a pacing quarter. DDGs are showing some improvement. Milestones are in place and holding.

LPD 30 making really good progress. DDG-129, making progress should you get to see this year. So yes, I've got a lot of confidence in Ingalls team. It's pretty stable there.

We just had to take a minor adjustment through on LHA8.

Okay. And in terms of the shipbuilding revenue came through the year based on the guide you gave for Q2, it doesn't look like you're forecasting much in the way of kind of sequential second half versus first half shipbuilding revenue growth typically, we see a fair amount of growth in the second half in terms of just absolute revenue. If you could just talk about kind of the profile for the year.

Yes. It's Tom here. I'll take that one. And I'm comfortable with what we're seeing in shipbuild.

It's a third quarter in a row where it's double-digit returns for 2025, over '24 was a 9.7% growth in shipbuilding. And as I said, from Q3, Q4 and Q1, again, we see both yards overachieving our guide of 6% kind of going forward here. So I think it's fairly linear. We at Newport News, their growth was about 2/3 in labor and 1/3 in material and Ingalls, it was the other way around, about 1/3 in labor and 2/3 in material.

So we see what we strategically trying to do here is get more throughput and capacity, increase the revenue volume here, in-sourcing, outsourcing hiring, additional overtime, additional progress here. So I think it will be linear as we work through the year. And as we increase the guidance from 4% to 6% last year, we said we'd take a look at it. I want to see a little bit more run rate for a couple of more quarters here.

But the backlog has increased to $54 billion. So the work is the demand, what we see already in the FY '27, the draft dock looks like there's even more appetite for additional ships. So I would anticipate a consistent, steady incremental ramp as we go forward here from quarter-to-quarter in ship building.

Your next question comes from the line of John Godyn with Citi.

This is Jeremy Jason on for John Godyn. I kind of wanted to ask about last quarter you.

I'm sorry, I didn't get that. You may have cut off, Jeremy.

I was just going to -- sorry, I thought I heard that was cut out. Last quarter, you guys provided a nice layout for some major milestones for 2026 and 2027. So I was kind of wondering if you could provide an update on that chart. And if you have sort of any indication of when those could hit beyond 2Q?

Sure. Sure. So of the '26 milestones, obviously, we delivered 128 with the sea trials on 1000. We did launch DDG131 and we're on track for delivery of LPD 30. That will be the back half of the year. Newport News, acceptance of 79 will still happen is on schedule.

Lake [indiscernible] of 81 should happen this year. We already did redeliver SSN 796 and delivery of SSN 800 is towards the back half of the year as well. So timing of these, especially the significant ones are towards the back half of the year and '27 is all on schedule.

Your next question comes from the line of Seth Seifman with JPMorgan.

Just wanted to -- just wanted to ask on the carrier. When you talked about some of the performance on the carrier in the quarter and it comes on top of the year ago quarter, where I think there were some challenges on performance there as well. So what do you think it will take to kind of gain confidence in the estimates on the carrier and have the profitability outlook there kind of stabilized?

Yes. Thanks, Seth. I'll start here, and then I'll kick it over to Kari. But I -- we did have a minor adjustment in the quarter just to deal with some schedule challenges that we have getting it back into sequence. But I want to kick it over to Kari to talk about some of the things we're working on, on the aircraft here.

Yes. So it's good to hear your voice. So as Chris mentioned, we have been on previous calls talking about some of that missing equipment [indiscernible] in the ship and having that equipment delivered now and being on pace to erect out the ship is really going to help us from a performance perspective. Those delays are costly, as you're familiar.

And so I'll give you an example. So the team has been really focused on structural completion with those components in place. And so over the quarter, we did 3 super lifts over the course of just 10 days. That's the kind of pace that I was referring to in my initial remarks.

We said another last night. So what that does for us is it really enables the completion of distributed systems. And so the team is getting after that in a more meaningful way and getting the ship integrated. So coming through those delays, as Chris mentioned, being out of sequence and working ourselves back into a more reasonable sequence is a really important part of that strategy, and the team is really working hard to execute on that strategy.

Excellent. That's helpful. And then maybe to turn to the crude side of the business. You talked about some incremental investments there. What's the timeline when you think about when you might see the types of awards to get production going in that area of the business in a way that would kind of stand out to us on the outside.

Yes. So I don't think it's really immediate. If you look at the budget in '26 and '27, you see significant increases in the unmanned and autonomous system budgets. We think we're well positioned to deal with that.

Obviously, we have large capital ships. We've made significant investments in unmanned already. We have our unmanned undersea business. It's very mature.

We have our new Romulus family of systems. And then we have Odyssey with really premier technology providers teamed with their Odyssey software. All that mingled together with our man ships means we're kind of uniquely qualified to take advantage of that business. And then you lay over the top of that on [indiscernible] where we're the prime developer of [indiscernible] for the U.S.

Navy, which is really the common operating environment and visibility for Navy platforms. We think we're uniquely qualified to take advantage of it. Now do I think it's immediate? No, I think there are immediate opportunities that we're competing for, both domestically and internationally.

I think it will start to ramp. I'm not sure it will be material this year, but it will over the next couple of years, you'll see material growth in the unmanned business for HII.

Your next question comes from the line of Gautam Khanna with TD Cowen.

I was wondering if you could just describe whether the fit up delivery schedules aligned with what you're expecting as of a quarter ago. So were there any surprises? You got the question on LHA just in general, were there any delivery time lines that were inconsistent with your internal thinking expressed in the '27 pivot?

Not necessarily. I have high confidence in 30 being delivered this year. I think that's into next year. So I think it will happen this year.

But as I said previously, I think it's contextual. I think it's just a different communication tool. And we're evaluating these things every quarter. So just off the top of my head, 30 is the only one -- LPD-30 is the only 1 that I think we should do a little bit better than, but beyond that, I'd have to do some research on that issue.

Okay. And I know you guys pushed through some wage increases at the Ingalls shipyard. I was wondering if you've seen any notable improvements in attrition since then, any changes really?

Gautam, that's an interesting question. We did adjust Newport News wages last year, and it took a while. It took a while for the additional applications to go through the system where we were able to accelerate hiring, and we're seeing meaningful improvements in attrition and really the right level of attrition, the right people from an attrition standpoint at Newport News. I think you're going to see the same issue at Ingalls.

We did adjust wages at a very positive labor agreement put in place there. We do see some increase in applications, but it's going to take a while to run through the system. We do have better attrition or improved retention actually within both shipyards. But I don't think you're going to see meaningful improvement in Ingalls for a bit.

It takes a couple of quarters for that to work through the system.

Your next question comes from the line of Ron Epstein with Bank of America.

You guys talked about increasing outsourcing. I think I remember you talked about maybe increasing 25%, 30% in 2026. How is that going? How is the South Carolina facility ramp progressing? And can you discuss at all the MOA with Hyundai, how is that evolving? And is that going to impact capacity?

Sure. I'll start, and then I'll kick it over to Kari to talk about Charleston. But yes, we do anticipate 30% increase in outsourcing in 2026 over increases that we had in 2025. We continue to expand our distributed shipbuilding network. Charleston is doing well.

As I said, I kick that over to Kari. But from a Hyundai standpoint, we still have -- we're still engaging in discussions with them and evaluating potential. We don't see them in the network right now. for this year that could provide upside if we're able to jointly invest in some operating manufacturing footprint. So that would be upside.

But we still think there's some very positive, we could get some very positive results from the Hyundai relationship, not only in manufacturing but also in efficiencies, in how we build ships. So I want to kick it over to Kari to talk about Charleston for a second.

So yes, Charleston is tracking to plan. So last year, we spent a lot of time coming up on plan with respect to structural fabrication and the team there did a fantastic job meeting the commitments that they made at the beginning of the year to go from closing in January on our facility to producing almost 0.5 million man hours over the course of 1 year was pretty phenomenal. So I'm really proud of what the team did there. This year tracking to the commitment to increase throughput there and moving into outfitting more meaningfully.

So starting with structure, moving into outfitting, really allows us to start ramping that up in an even more meaningful way. I mentioned in my remarks, we'll do some additional capital investments to continue that growth trajectory, but really pleased with what that team is doing. And that's obviously, a core, we are also working with other distributed shipbuilding partners that have been in our network and those muscles are strengthening as well, getting back to the ebb and flow of what naturally happens in our industry, and we're certainly in a place where we're able to stretch and grow there, and that is tracking pretty well from my estimation.

Great. And then maybe just one quick one. Any update on the [ Romulus USDs ] and the Odyssey autonomy stack. Any production contracts visible that you could discuss or hint at for 2025?

Well, I hate to talk about ongoing competitions, but the obvious one right in front of us is the MUSV program and then some armor concepts over in the U.K. that could be interesting. We're talking about manned unmanned teaming. We're uniquely qualified to do that, but we'll compete for -- really, we have a breadth of product set that we can compete for a number of opportunities in the space. But the one right in front of us is the MUSV program.

Your next question comes from the line of Noah Poponak with Goldman Sachs.

Last quarter, when you provided the initial 2026 outlook. I think we were all a little surprised at a low growth rate in shipbuilding revenue given what happened in the second half of last year and the funding environment and everything going on with shipbuilding. You just logged another high growth rate and outperformed 1Q. So I guess in reiterating the full year, it actually now you would need shipbuilding revenue down year-over-year for the rest of the year to do the midpoint of the guide.

Is that possible? I mean that would imply end of last year, beginning of this year was just a kind of a onetime bump in ship loading growth. It seems like what's happening in the industry is much more long term and structural than that.

No, it's Tom here. I'll take that one. And no, I think the math is a little bit off on that. As I mentioned earlier, we've seen some good growth 3 quarters in a row.

Obviously, there's a comparison that we did from the previous year there, both for what we've seen in in-sourcing, outsourcing high revenues. I talked earlier about the material and the labor that's growing. I think the guide is on the conservative side, we don't want to get ahead of ourselves and where we think we can land here. But we won't see a contraction in revenue in the back half of the year.

I think there's a strong opportunity set for us to exceed that. And we're holding the guide right now as we want to see us kind of burn through the existing work that we have on contract, monetize the backlog that we have and see the new awards that come on board. But I think operationally, going forward in my remarks earlier that I expect incremental quarterly growth in shipbuilding still holds.

Okay. Tom, if we were able to see your internal estimate for the mix of pre-COVID versus post-COVID ships, each of the remaining years through the end of the decade, if we were looking at that right now and then right next to it, we had the version you had of that from a year ago, do those look significantly different? Has there been a lot of movement. It's the pre-pandemic contractual roll off sliding out taking longer?

Or would they look pretty similar?

They look on top of each other right now. We're on plan and on the guide that we've given. We kind of laid out a couple of years ago that would be in 2027, where we would swing over from pre-COVID to post COVID, and we're right on track on that. We'll finish off 2027 with more post-COVID work than pre-COVID work.

And with a perspective on our backlog, it's about 50-50 right now, what we put on contacts before these subs that are coming on contract. So again, that will continue to grow as the subs are awarded CVN, RCOH 75, advanced procurement for CVN 82. The new awards will continue -- from a backlog perspective, we'll see more of that, too. But we're on pace as we watch -- as we retire out the pre-COVID work. 2027 is a significant year we'll see more revenue on post than pre. And there's been really no material change since we've provided that pathway following.

Okay. And is it possible to provide any more color on the sticking points in the -- in getting to the finish line on the next batch of nuclear subcontracts, it's been several months now versus the original timing forecast. And obviously, we know where the demand is, you're performing the long lead. That just remains a little surprising to see if you can help us better understand what points in the contract are holding it up?

Yes. No, I just think it's a large contract that needs significant review and approval and it's complicated, and we're just going through the approval process. I don't want to comment on any specific negotiation points. It's just a -- it's a significant, very important contract that we all need to get right.

Your next question comes from the line of Myles Walton with Wolfe Research.

I was wondering if you could comment on the reports about the Navy revisiting the carrier design and what, if any, impact that might have on ongoing work and/or disruption?

Yes. So this is Chris. I'll start, and then I'll kick it over to Kari, but I'm not worried about the reviews of the aircraft carrier. Those happen from time to time.

It's usually at the end of those, it's found that it's an amazingly capable platform, and it's required, and we can see all the great work it's doing over and its engagement in Iran right now. So I'm not worried about it. I think long lead for 82 will happen this year, and we'll continue on on the aircraft carrier program. But let me kick it over to Kari.

Yes, Myles. The only thing I would add to that is that it's pretty routine for us to evaluate new capabilities as systems progress in order to incorporate those capabilities on all of the classes of ships in both yards that we build. So pretty confident where we are, and we're going to support whatever the Navy needs. So as we do evaluations on any given system, we're able to incorporate those over time pretty routinely.

So I'm pretty comfortable with where we find ourselves.

Okay. And then maybe one for Tom -- sorry, maybe one for Chris, actually back to you. The workforce size, and I asked this kind of frequently, but I'm going to ask it a different way. Should we expect the workforce size to start to grow in line with the sales growth or at least a trend in line with the sales growth of the whole company on a go-forward basis.

You've had roughly the same size for the last 20% increase in sales, but I imagine that probably is going to have to start increasing? Or is the outsourcing initiative enough to carry the load.

Not entirely. I think you will see increase in labor. Obviously, you need to adjust for taking into consideration you have contractors that come in to do work as well that won't be on your role. So outsourcing is going to play a significant part of it, but you should see labor start to trend as well.

I'm 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.

Thank you for joining the call today. I look forward to updating you throughout the year as we continue to make progress on our operational initiatives and deliver on our commitments. Thank you.

That does conclude today's conference call. You may now disconnect.