Huntington Ingalls Industries, Inc. (HII) Earnings

Management highlights

### Shipbuilding Program Milestones - Newport News Shipbuilding: CVN 79 Kennedy completed builder's trials, with preliminary acceptance expected by end-2026 and final delivery in 2027; CVN 80 Enterprise is 64% erected; keel laying for CVN 81 scheduled for late 2026; SSN 800 Arkansas is on track for delivery by end-2026. Agreements have been reached for VCS Block 6 and next Columbia submarine contracts, providing long-term program stability. - Ingalls Shipbuilding: 13 ships are currently in construction, with pre-production ongoing for 12 additional contracted ships. Delivered DDG 128 Ted Stevens (second Flight III Arleigh Burke-class destroyer) in Q2; achieved milestones across multiple destroyer, LPD, and LHA programs; completed sea trials for DDG-1000 USS Zumwalt; awarded the Frigate Lead Yard Support contract for pre-construction activities.

Guidance

- **2026 Full Year Guidance**: Raised shipbuilding revenue guidance to $10.2–$10.4 billion (up from prior guidance) and raised shipbuilding operating margin guidance to 6%–6.5% (up from the prior 5.5%–6.5% range). Reiterates all other 2026 guidance: Mission Technologies revenue of $3–$3.2 billion, Mission Technologies operating margin of approximately 5%, and full year free cash flow of $500–$600 million. Expects the full year effective tax rate to be 17%, driven by an expected R&D tax credit in Q4. - **Third Quarter 2026 Guidance**: Expects shipbuilding revenue of approximately $2.6 billion, with shipbuilding operating margin similar to Q2's 6.3%. Expects Mission Technologies revenue of approximately $760 million (similar to Q2), with an operating margin of approximately 4%, including planned strategic investments in unmanned systems capability and production capacity. Expects Q3 free cash flow of approximately $100 million, with significant free cash flow generation expected in Q4 to hit the full year target. - Medium-term upside opportunity exists from new frigate and battleship programs, which will be added to guidance once additional details are finalized.

Segment performance

Consolidated second quarter 2026 total revenue was $3.4 billion, an increase of 10.9% year-over-year (YoY). Total segment operating income was $224 million with a 6.6% operating margin, up from $172 million and 5.6% YoY. 1. Ingalls Shipbuilding: Revenue was $845 million, up 16.7% YoY, representing 24.9% of total consolidated revenue. Segment operating income was $58 million with a 6.9% operating margin, compared to $54 million and 7.5% YoY. The income increase was driven by higher amphibious assault ship volumes, partially offset by favorable 2025 YoY surface combatant contract adjustments. 2. Newport News Shipbuilding: Revenue was $1.8 billion, up 15.3% YoY, representing 52.9% of total consolidated revenue. Segment operating income was $111 million with a 6.2% operating margin, compared to $82 million and 5.1% YoY. The income increase was driven by contract adjustments, incentives in aircraft carriers, and higher volumes across aircraft carriers and submarines. 3. Combined Shipbuilding: Total revenue was $2.7 billion, up 15.7% YoY, representing 79.4% of total consolidated revenue. 4. Mission Technologies: Revenue was $760 million, down 3.9% YoY, representing 22.4% of total consolidated revenue. Excluding a $45 million 2025 non-recurring contract resolution, organic revenue grew modestly YoY. Segment operating income was $55 million with a 7.2% operating margin, up from $36 million and 4.6% YoY. The income increase was primarily driven by higher equity income from nuclear and environmental joint ventures.

Risks & headwinds

- Labor hiring and retention at Ingalls Shipbuilding experienced a temporary slow start to 2026, tied to waiting for finalization of the collective bargaining agreement in March, though early indicators show improvement post-agreement. - Q2 2026 free cash flow came in below prior forecast due to timing of receipts and disbursements, though full year free cash flow guidance remains unchanged. - Carrier program performance requires ongoing re-alignment of risk and expectations as construction progresses, with mixed positive and negative adjustments in Q2 2026. - The final outcome of the FY2027 defense budget remains pending congressional conference committee negotiations, despite bipartisan support for HII programs to date. - Distributed shipbuilding with external partners carries inherent quality and execution risk, requiring ongoing active oversight and remediation of occasional issues.

Analyst Q&A

• Q: How should investors think about shipbuilding margin trajectory and key remaining 2026 operational milestones? /

  A: Management expects Q3 2026 shipbuilding margin to hold steady at the Q2 level of ~6.3%. Key remaining 2026 milestones include: LPD 30 Harrisburg sea trials in Q2 and delivery by end of 2026; CVN 79 Kennedy builder's trials starting in early Q3; SSN 800 Arkansas delivery by end of 2026; and CVN 81 keel laying in H2 2026. No material margin impact is expected from these milestones in 2026.

• Q: What progress has been made on shipbuilding throughput and labor retention after the new Ingalls collective bargaining agreement? /

  A: Year-to-date 2026 throughput is up 12% over 2025, on track to hit the full year 15% target, with strong submarine throughput at Newport News. Ingalls had a slow start to hiring tied to waiting for the new CBA, signed in March 2026. Early post-agreement indicators show improved retention and accelerating hiring; apprentice school is near full capacity, pipeline programs are exceeding expectations, and higher wages are driving improved retention of skilled first-class shipbuilders, which directly supports future throughput gains.

• Q: What is the split of the $76.6 billion Virginia class submarine Block 6 contract between Newport News and Electric Boat, and why was the contract for 9 ships instead of 10? /

  A: Approximately $25 billion of the total contract value goes to Newport News, plus an additional $5.5 billion for the Columbia program. Material for a 10th ship has already been procured, so the 9-ship cost structure does not impact production of the class; the 10th ship can either be fully built later or used for spare parts, so this is purely a funding arrangement, not a production change.

• Q: How has the quality of work from distributed shipbuilding outsourcing partners performed to date? /

  A: HII incorporated lessons learned from past outsourcing mistakes into its current process, with active engineering, quality assurance, and in-process inspection oversight from HII teams at partner facilities. While occasional issues arise that require remediation, overall results have been positive. For Ingalls' first distributed shipbuilding ground blocks, the units were successfully erected and integrated into the new build as planned, and HII ramps up work with new partners gradually after they prove quality, cost, and schedule performance.