Operator: Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. Please be advised that today's conference is being recorded. If you need further assistance, please press star zero 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 Q3 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 reconciliation 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.
Christie Thomas: On the call today are Chris Kastner, President and Chief Executive Officer, Andy Green, Executive Vice President and President of Mission Technologies, and Tom Stiehle, Executive Vice President and Chief Financial Officer. Now I'll turn the call over to Chris.
Chris Kastner: Thanks, Christie. Good morning, everyone, and thanks for joining us on today's call. This morning we reported strong Q3 results, underscoring our focus on providing ships and Mission Technologies solutions to our warfighters. Today, I'll begin by providing the Q3 results and highlights from Newport News and Ingalls Shipbuilding. Andy Green, President of Mission Technologies, has joined us to provide an update on recent key wins and accomplishments. Tom will give the financial details and outlook. Starting with our results, we reported record Q3 sales of $3.5 billion and diluted earnings per share of $5.48. At approximately $2.8 billion, Q3 shipbuilding sales were 14% ahead year-over-year. This continued outperformance supports raising our 2026 shipbuilding revenue guidance to between $10.5 billion and $10.7 billion. Our portfolio turnover and throughput increases continue to drive incremental margin expansion.
Chris Kastner: We are reiterating our 2026 shipbuilding margin outlook of 6% to 6.5%, and the midpoint represents a 35 basis point improvement over 2025. Turning to awards, we had an unprecedented quarter, securing over $32 billion in new contract awards driven by Block VI Virginia-class and build two Columbia-class submarine contract awards, as well as a CVN-82 long lead time materials contract. We also finalized the contract for the refueling and complex overhaul of CVN-75 USS Harry S. Truman at the end of September, which will be recognized in our Q4 results. Mission Technologies had strong performance this quarter, with revenues over $790 million, EBITDA margins of 12%, and book-to-bill of 2.4 times. The team is making strides across all business units, and we are raising our full year margins guidance for Mission Technologies.
Chris Kastner: Andy will provide more details on the significant competitions we have recently won and accomplishments we have achieved in Q3. Now, I will provide highlights from the shipyards. At Newport News, CVN-79 Kennedy successfully completed preliminary acceptance trials and is on track for final ship delivery in 2027, consistent with the milestones we provided earlier this year. CVN-80 and CVN-81 continue to make progress, and as I mentioned, we received the long lead time materials contract for CVN-82. One day after the award of the CVN-75 RCOH contract, the ship arrived at Newport News to officially begin the availability. On submarines, SSN-800 Arkansas, which is our last Block IV boat, is progressing towards delivery later this year.
Chris Kastner: At Ingalls, our team is focused on preparing three ships for delivery. LPD-30 Harrisburg will deliver this year, and LHA-8 Bougainville and DDG 129 Jeremiah Denton prepare for deliveries in 2027.
Chris Kastner: Overall, as we head into year-end, all of our shipbuilding milestones remain on track for 2026 and 2027. Shipbuilding throughput has increased approximately 9% year to date over 2025. While Newport News is executing consistent with expectations, Ingalls has been impacted by a slower labor recovery given their wage increases were put in place near the end of Q1. However, we continue to see positive momentum. Year to date, we have hired over 6,000 shipbuilders across both yards, and in Q3, Ingalls has gained a net of 576 shipbuilders, which is their highest net increase over the past 10 quarters. Also, we have achieved enrollment of over 800 at both our apprentice schools, which is a 14% increase over last year. We expect this continued labor ramp to positively impact throughput as we look ahead.
Chris Kastner: Finally, distributed shipbuilding is meeting targeted levels, and we expect to exceed 30% growth year over year. Turning to activities in Washington, the President submitted his fiscal year 2027 budget request in April, which remains under consideration by Congress. As bills progress through both chambers, we continue to see bipartisan support for our programs reflected in the defense bills in the House and the Senate.
Chris Kastner: In closing, overall, the quarter reflects strong operational execution. Our priority is a disciplined finish to the year and sustained momentum into 2027. I will turn the call over to Andy for his remarks on Mission Technologies. Andy?
Andy Green: Thank you, Chris, and good morning, everyone. It is great to join you on today's call. At Mission Technologies, we are proud to be part of shaping the future of America's sea power by supporting and advancing the future fleet, a new paradigm for robotic and autonomous systems and integrated combat power that delivers speed, scale, and resilience. Almost half of our 7,000 employees are veterans, and they know what it takes to win and how to be a partner with our Department of War customers. This quarter, we delivered strong performance with several major strategic contract wins. We continued to grow the top line in the quarter while also expanding operating and EBITDA margins. Year to date, operating margin was 7% and EBITDA margin was 10%, with total contract awards of almost $5 billion.
Andy Green: These results reflect a better revenue mix and continued focus on execution by the entire Mission Technologies team. Notably, we secured several strategically significant contract awards in Q3. In late July, we were awarded the $2.2 billion STINGRAI program to advance our nation's ISR capabilities across the Western Hemisphere in support of SOUTHCOM. Under this program, HII will deliver advanced tracking, intelligence, network services, reconnaissance, and analysis. The program leverages the division's broad portfolio to strengthen operational awareness against evolving threats in the region. Also during the quarter, we were awarded a large follow-on production order for the Navy's Lionfish UUVs, vehicles deployed for critical missions in hotspots around the world. We have supplied more than 750 REMUS UUVs to the Navy and our allies for almost two decades, and more than 90% of these vehicles remain in service today.
Andy Green: This is a testament to the effectiveness and utility of these highly advanced platforms and is why they continue to be central to the Navy's robotics and autonomous systems strategy. Building on our advanced maritime autonomy, we also received an award for 10 ROMULUS 150-foot USVs under the Navy's MUSV program with multiple hulls already in production at our partner shipyards, Breaux Brothers and Halimar. This award followed a successful two-week intensive evaluation of our robust Odyssey autonomy suite. To meet the accelerating demand from the Navy and allied partners, Mission Technologies recently expanded our autonomous system production facility in Massachusetts by 25%, increasing capacity for manufacturing, testing, and integration.
Andy Green: This investment enhances our ability to deliver next-generation unmanned systems to US and international customers. It strengthens the defense industrial base, and it accelerates throughput of several high-priority vehicles.
Andy Green: Additionally, during the quarter, the Air Force awarded HII a new $332 million five-year contract to provide enterprise AI capabilities, including analytics and data engineering. This was a follow-on award reflecting the strong partnership we have developed with our Air Force customer. As we expand support across the joint force, we also continue to invest in the development of containerized and palletized solutions that can be fielded on ground and sea platforms. These flexible modular systems will be able to rapidly field a wide variety of weapons and sensors, including systems such as advanced EW capabilities, directed energy, kinetic launch systems, and counter-UAS systems.
Andy Green: Another powerful example of how HII is committed to delivering adaptable, integrated, and combat-ready capabilities essential to the nation's defense. Looking ahead toward year-end, our team remains focused on operational excellence, disciplined execution, and delivering the most advanced capabilities to our war fighters.
Andy Green: In summary, we play a critical role in strengthening national security, and we are committed to meeting our customers' needs with urgency, innovation, and unwavering performance. With that, I will turn the call over to Tom for some remarks on our financial results and outlook. Tom?
Tom Stiehle: Thanks, Andy, and good morning. Let me start by discussing our Q3 results, and then I will 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 4 of the presentation, new contract awards in the quarter totaled $32.4 billion and brought total backlog to $86.2 billion. Of note, these values do not include the award of the refueling and complex overhaul of CVN-75, USS Harry S. Truman. That contract award, valued at $5.1 billion, will be recognized in the Q4 results. Our Q3 revenues of approximately $3.5 billion increased 10.8% compared to the same period last year. The higher revenue was largely attributable to strong year-over-year growth at both shipyards.
Tom Stiehle: Ingalls revenues were $876 million and increased by 5.8% compared to the Q3 2025, driven primarily by higher volumes in amphibious assault ships. Newport News revenues of $1.9 billion increased by 18.1% compared to the Q3 2025, driven by higher volumes across submarine and aircraft carriers. Together, shipbuilding revenue was $2.8 billion, up 13.9% year over year, and well ahead of our guidance for the quarter, as results benefited from higher than expected material receipts, as well as the impacts of wage investments and our broader efforts to drive higher shipbuilding throughput, including increased outsourcing. Mission Technologies awards in the Q3 totaled $1.9 billion, representing a very strong book-to-bill of 2.4 times. Mission Technologies revenues of $792 million increased slightly compared to the Q3 2025. This was driven by growth in unmanned systems, partially offset by lower volumes in global security.
Tom Stiehle: Moving on to Slide 5, segment operating income of $262 million and segment operating margin of 7.4% in Q3 2026 compared to $179 million and 5.6% in Q3 2025. At Ingalls, segment operating income was $59 million and operating margin was 6.7%, compared to $65 million and 7.9% in Q3 2025. The decrease in segment operating income was driven by surface combatant performance. The Q3 net cumulative adjustment at Ingalls was -$5 million, and none of the adjustments were individually significant. At Newport News, segment operating income was $132 million, and operating margin was 6.9%, compared to $80 million and 4.9% in Q3 2025. The increase in segment operating income was primarily driven by contract adjustments and incentives in the Virginia-class submarine program and higher submarine and aircraft carrier volumes.
Tom Stiehle: For Q3 2026, Newport News Shipbuilding's net cumulative adjustment was +$72 million. The gross favorable adjustments at Newport News totaled $210 million and did include a favorable $65 million adjustment related to the Columbia-class submarine program. Gross unfavorable adjustments totaled $138 million, and no individual adjustment was significant. Q2 and Q3 gross EAC adjustments at Newport News have been larger than historical norm as we have updated assumptions for contract incentives, scope and settlement changes, and risk and expectations across the programs. Mission Technologies segment operating income was $71 million, and operating margin was 9%, compared to $34 million and 4.3% in Q3 2025.
Tom Stiehle: The increase in segment operating income was primarily due to a successful milestone achievement related to the testing of our ROMULUS offering for the Medium Unmanned Surface Vessel program, as well as higher volumes in unmanned systems and higher equity income from nuclear and environmental joint ventures. For Q3 2026, Mission Technologies' net cumulative adjustment was a +$9 million. None of the adjustments in the quarter were individually significant. Consolidated operating income for the quarter was $246 million, and operating margin was 7%, compared to $161 million and 5% in the same period last year. The increase in operating income was driven by the favorable segment operating income that I have just reviewed, as well as a more favorable non-current state income taxes, partially offset by a slightly larger unfavorable operating FAS/CAS adjustment.
Tom Stiehle: Net earnings in the quarter were $217 million, and diluted earnings per share were $5.48, up from $145 million and $3.68 in the same period last year. Turning to Slide 6, cash provided by operations was $520 million in the quarter. Net capital expenditures were $91 million, or 2.6% of Q3 revenues. Free cash flow in the quarter was $429 million. Free cash flow results in the quarter came in above the guidance we provided on the last earnings call, largely due to timing of receipts and disbursements between the quarters. There is no change to our free cash flow expectation for full year, but we are pleased that the Q3 performance has helped de-risk Q4 expectations. During Q3, we did not repurchase any shares. We did pay a cash dividend of $1.38 per share, or $54 million in aggregate.
Tom Stiehle: Turning to liquidity in the balance sheet, we ended the quarter with a cash balance of $387 million and liquidity of approximately $2.1 billion. Regarding pension, we have included an updated view for 2026 and 2027, along with a 2027 sensitivity in the appendix of today's slides. Our forecast in early 2026 assumed asset returns were approximately 7.9% and a discount rate of approximately 5.72%. Through the end of the Q3, discount rates have increased approximately 118 basis points, and asset returns through 30 September were roughly 1.7%. Pension-related numbers are subject to year-end performance and measurement criteria.
Tom Stiehle: We will provide a multi-year update of pension estimates on our Q4 earnings call in early 2027. I would like to highlight that our pension funded status remains strong and that cash flow impacts related to pension changes remain minimal. Moving on to our outlook on Slide 7.
Tom Stiehle: We are increasing our expectation for shipbuilding revenue for the year and reiterating our shipbuilding operating margin guidance for 2026. We now expect shipbuilding revenue between $10.5 billion and $10.7 billion, and continue to expect shipbuilding operating margin of between 6% and 6.5%. We are reiterating Mission Technologies revenue guidance range of between $3 billion and $3.2 billion, noting that the midpoint is the most likely outcome based on our view today. Given the strong performance year to date, we are increasing Mission Technologies margin expectations. We now expect segment operating margins to be approximately 6%, and EBITDA margin to be approximately 9%. We are making a number of other modest adjustments to income statement items, which are provided on the outlook table on Slide 7.
Tom Stiehle: Regarding the effective tax rate, we are reiterating our guidance of approximately 17%, which includes the impact of a favorable research and development tax credit that was approved by the IRS earlier this month. We plan to provide our full view of 2027 guidance on the Q4 call, but want to highlight that we continue to expect incremental shipbuilding margin improvement in 2027, and expect cumulative free cash flow for 2026 and 2027 to total between $1.2 billion and $1.3 billion. 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 top line and Mission Technologies margin expectations for the year, and remain focused on executing our plan. With that, I'll turn the call back over to Christie to manage the Q&A.
Christie Thomas: Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 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, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Scott Mikus with Melius Research. Scott, your line is now open.
Scott Mikus: Morning, Chris and Tom and Andy. Very nice results.
Chris Kastner: Morning, Scott. Thanks.
Scott Mikus: I wanted to ask, we saw the announcement from Anduril about Arsenal-2. They plan to hire 3,100 people in Maryland. The Trump administration has also talked about opening another public shipyard. It looks like HD Hyundai wants to open a shipyard in the United States as well. I understand that investment in the workforce and the industrial base is great, but is there the risk that industry might end up with a bunch of shipyards that are all understaffed? Is everyone tapping the same labor pools?
Chris Kastner: I think that is a pretty good question, Scott. What you need to understand about shipbuilding is it is pretty local. You draw from right around your shipyard for the most part, or within a reasonable commute distance. The shipyards that have been announced are not really near our shipyards, and they are in, I think, good geographic locations where they can draw on a different labor pool. You saw what we did with Charleston. We opened that yard, that manufacturing yard, to draw on a different labor pool. If they were all opening these shipyards near each other, I think there would be an issue, but since they are very local and have their own labor pool, I do not think it is going to be a problem.
Scott Mikus: Okay, got it. It seems like the outsourcing effort and throughput is really improving, particularly at Newport News. Navy officials have talked about getting to the 2+1 submarine cadence around the 2032 timeframe. With the progress you are making and what you are seeing from the supply chain, are you starting to see a credible path to pulling that 2+1 cadence to the left?
Chris Kastner: We are going to do all we can to accelerate submarine production. As I said in my prepared remarks, 800 is on schedule. It should happen this year. Second Columbia-class boat is ahead of cost and schedule projections, or excuse me, improving on cost and schedule projections from the first boat. So that is very positive. I do not want to comment on pace of recovery because there is so much work to do in front of us, but there are some positive indicators at Newport News.
Scott Mikus: All right. Got it. Thank you very much.
Chris Kastner: Sure.
Operator: The next question comes from the line of John Godyn with Citigroup. John, your line is now open.
John Godyn: Hey, guys. Thanks for taking my question. Obviously, great revenue performance, revenue growth year to date, and in addition to that, the unprecedented awards quarter. It is becoming hard to justify, at least from my perspective, the medium-term revenue growth that you guys have out there of 6%. I know that is a multi-year CAGR, but maybe you could just kind of reflect on that for a second.
Chris Kastner: Sure. Let me start and kick it over to Tom. We will provide an update to that or discuss that on the year-end call as well. We will refresh that revenue guide. Remember, as you said, it is a multi-year guide. We have to execute. We have to execute on both our throughput increases as well as our distributed shipbuilding increases. So we think it is a fair CAGR to provide. We are comfortable with it. Obviously, we have done better over the last couple quarters.
Chris Kastner: We think we should keep it right where it is for now. Tom, if you would like to add anything.
Tom Stiehle: Yeah. We have had strong growth. I think we have had 5 quarters in a row now that it has been double-digit growth, both the shipbuilding and MT. A piece of that has been the more capacity throughput and outsourcing. There is an element of that that has to do with the wages that we have increased at Ingalls at the beginning of this year, in Q2 of last year. We have lapped that now at Newport News through Q2. We will lap the Ingalls increase in Q1 as we get into next year. There is meaningful growth in that, on the labor and the materials that we have, as well as the Charleston operations is accretive to that growth equation. I am with you that when you think about the backlog has grown, tremendous push here from $53 billion, $86 billion.
Tom Stiehle: We know what we are building, when we are building it, and where we are building it. I think we are probably on the conservative side. We want to make sure that we continue to execute the increased throughput and capacity and outsourcing plans, and we will evaluate that as we go forward.
John Godyn: Okay, great. Appreciate it. I will ask the sort of margin question generally, because I am not trying to get ahead of next year's guidance specifically, but we have obviously been on a journey here to get shipbuilding margins back to kind of historical levels. Maybe we could just kind of revisit that topic and what is the way to think about margins over the next few years, if we thought about an appropriate kind of annual rate of improvement?
Chris Kastner: Yeah. I am not going to give a specific rate of improvement, and thanks for not getting ahead of the 2027 guidance discussion, and I will let Tom chime in as well. But I do expect both margin and cash to incrementally improve annually. I still expect this business should be 9% to 10% return on sales in shipbuilding. That has not changed. Tom, if you would like to provide any other color, that would be great.
Tom Stiehle: Well, obviously, we just talked about the revenue increase, so there will be more margin and cash that is generated from this portfolio as we continue to expand. The margin rate or the cost efficiency here, we have seen a nice incremental step up that we have kind of talked about as the portfolio transitions from pre-COVID to post-COVID, as the sales continues to ramp. We have seen the shipbuilding go from 5.2% return on sales in 2024 to 5.9% last year, and now we have taken the guide of 5.5% to 6.5% at the beginning of the year. We narrowed the band to 6%, 6.5%. Probably the midpoint is the right way to kind of look at it if we think about the year as it closes out. So 5.2%, 5.9% to 6.2%, 5%.
Tom Stiehle: We are marching along, both growing the top line and incrementally improving the bottom line as we have stabilized the supply chain, and we are really honing the production programs we have to get back to the cadence of expectation to eventually get to 9.5%.
John Godyn: Appreciate it, guys. Thank you.
Operator: Your next question comes from the line of Noah Poponak at Goldman Sachs. Noah, your line is now open.
Noah Poponak: Hey, good morning, everyone.
Chris Kastner: Morning.
Tom Stiehle: Noah.
Noah Poponak: Tom, I think you mentioned a favor. In the quarter at Newport News when you were giving the EACs, I think you mentioned a favorable Columbia, but didn't specify Virginia. I guess, just did the quarter reflect all of the EAC related to the submarine contracts you've booked in the quarter, or is there more of that still to do? You also mentioned the larger than historical norm movement in Newport News the last 2 quarters. I guess, is there a way to frame what the current real underlying Newport News margin is, or where you think it lands in Q4, or how it progresses sequentially from here?
Tom Stiehle: Yes, I appreciate the question, and there was a lot of moving parts. We tried to provide some color in the script remarks, and then when you take a look at the Q, you'll see that we called out what's changed on that front too. Between Q2 and Q3, relative to Newport News, we had the incentives of the 14 boat award that we're recognizing, booked in Q2, and then the additional incentives and the awards themselves on the revenue side was booked in Q3. In those kind of settlements, in those contracts, there was additional statement of work obviously put on contracts that we had already in advanced procurement state.
Tom Stiehle: Between the statement of work, some movement around on where that statement of work sits in the claims, additional funding, capital incentives, performance incentives, and just changes in the current booking rates that we have, had a lot of moving parts in there right now. So it's true that it's difficult to see. I would stay away from just taking the cum catch-up and subtracting that from the gross outcomes and try and calculate a booking rate, a run rate. We calculate too low right now as we move around contract value and incentives and book margin in that. That will settle down in Q4 with the mod and the homework behind us. Mods assigned, the budgets are out, and then the EAC changes have settled down now. So I think that's the way you want to take a look at it.
Tom Stiehle: We've had Ingalls in the low 7s and Newport News around 6%, and I think that's the fair way to take a look at it as we embark on these new contract awards. Q3 had the initial booking of VCS Block VI and Columbia build 2, adjustments in there as well. I've talked about the capital incentives, which were accretive to the portfolio. Hopefully, that gives you some color.
Noah Poponak: Yeah.
Tom Stiehle: When we get to Q4, we'll give you a projection of where we think shipbuilding's going to be for next year.
Noah Poponak: Do the mark-to-markets settle down considerably in 2027 versus 2026 as well, beyond just happening in Q4?
Tom Stiehle: Well, absent anything unforeseen, which, a COVID event or something like that. But the contract changes and the movement in scope and contract value will be behind us, and it'll get back to more normal types of adjustments in EAC run rates.
Noah Poponak: Okay. I think Chris alluded to Ingalls being behind Newport News on pace just relative to the timing of the labor input changes. Is it just that, or is there anything else? About how far behind is it?
Chris Kastner: It is a combination of that, and they have really started to make a pretty good recovery in Q3 and into Q4 from a labor standpoint. They are also delivering three ships, LPD-30 by the end of this year and then LHA-8 and DDG 129 at the beginning of next year. The good news is 30 is at sea. It went out Wednesday. It will come back this weekend. Hopefully, it will be a successful trial. They are making progress on the other test programs on those other two ships.
Chris Kastner: It is really a combination of a slow start in labor at the beginning of the year and ramping that, which there are some positive indicators, and then coming through the test programs on three ships, which is kind of unprecedented. We tried to look back at the last time we have been in that sort of environment, and we could not find it since we have spun.
Chris Kastner: It is really a good job at Ingalls to fight through that. The first really important step was to get 30 to sea, which they have done.
Noah Poponak: Okay. Thank you.
Chris Kastner: Sure.
Noah Poponak: Thanks, Tom.
Operator: Your next question comes from the line of Doug Harned with Bernstein. Doug, your line is now open. A reminder to unmute yourself on your device.
Chris Kastner: If we can have Doug recall back in.
Operator: Great. Your next question then will come from Seth Seifman from JPMorgan. Seth, your line is now open.
Seth Seifman: Hey, thanks very much, and good morning.
Chris Kastner: Good morning.
Seth Seifman: Wanted to start off asking about the cash flow. I think the CapEx expectation for this year came down a bit, and whether we think about that as just maybe a reduced requirement or something that was deferred and then kind of bridging from $550 million this year to $700 million next year. Any particular pieces you would call out or even just the breakdown between CapEx and cash from ops?
Tom Stiehle: Yeah. Thanks, Seth. I appreciate the question. Yeah. The CapEx here, we see where we stand right now year to date on that front. We have guided, in the PowerPoint release there, $500 million for CapEx. We gave you $500 million to $600 million at the beginning of the year. With the higher revenue, that is going to fall around 3.6% CapEx to sales. That helps out a little bit in the march, but the preponderance of just the good cash that we had in Q3 with the collections at $429 million as we march towards the guide of between $500 million and $600 million is more net income, better on the collection side, good cash collections in Q3 into Q4. A little bit of unwind on the working capital.
Tom Stiehle: It's down about a point and a half from mid-10s to 9% right now, and that will continue to unwind as we get into Q4 into the mid 5% to 6% range, just as we play out the assets and contract assets and liabilities and advances and inventory that we have right now. So, relative to the guide that we gave you, a lot like we did last year, we gave you a 2-year guide, just depending on how things transition out with receipts and bills. It's 1.2 to 1.3. I'd still look at this year as the midpoint here and then next year ramping up as we get into 2027.
Seth Seifman: Okay. Cool. Thanks. Chris, when we think about the frigate, I think it was about a year ago, when the Navy first talked about this plan to use the National Security Cutter as a baseline. We've had some leadership changes in the Navy since then. At that time, it seemed like there was a very aggressive plan to put a boat in the water in 2028. Doing that would suggest a need for maybe some more accelerated activity soon. How are you thinking about that, and what's the state of play on that now?
Chris Kastner: Actually really positive. Thanks for that question. We're on schedule. Manufacturer's on schedule. Number of units are already in production. I was down there last month and toured them. They look great. We passed the CDR and PRR. So we're continuing to meet our commitments relative to getting that boat in the water by the end of 2028. Now, we do need to get under contract in Q1. That's a 2027 boat, so we need to make sure that happens. But really proud of the work that the Ingalls team is doing on the frigate.
Seth Seifman: Excellent. Thanks very much.
Chris Kastner: Sure.
Operator: Your next question comes from the line of David Strauss with Wells Fargo. David, your line is now open.
Ben Tomick: This is Ben Tomick, one for David. I am just curious, where does the pre-COVID versus post-COVID revenue mix end up in 2026? Then how does that compare to where you guys expect it to end up by the end of 2027?
Tom Stiehle: Yeah, so it is Tom here, and we are right on the mark here. We talked about 2027 being a transition year, so by the end of 2027, we should have more post-COVID work, like marginally more, 50% to 55% post-COVID work than pre-COVID work. That will continue to march down as we get to the end of the decade, eight to 10 percentage points as we march out and retire the older ships here. So we are on plan, and there is no new news over the guide that we have given you this front.
Ben Tomick: Got it. Thanks. Then on the CVN-79 Kennedy, with that getting the preliminary acceptance, what is left to finish there before the final delivery? Then are there any other key milestones we should be watching out for over the next couple quarters?
Chris Kastner: No, we are progressing well with the final systems that need to be completed. I do not think there is anything significant you need to watch for. We just need to get that ship to deliver. It is performing great. We have got people on the ship right now finishing up, so I would not say it is smooth sailing. Going forward, there is a lot of hard work to do, but we are definitely on track.
Ben Tomick: Thank you.
Operator: Your next question comes from the line of Gautam Khanna with TD Cowen. Your line is now open.
Gautam Khanna: Yeah. Thanks. Good morning, guys. I was wondering because the throughput is up 9% year to date, and I think the target previously was 15%. Is there an update to the target? And then B, if not, what is sort of the economic consequence because of the running under that number?
Chris Kastner: No real update to the target. We are trending a bit south of that towards the end of the year. But I don't want to get ahead of that, and we'll see how we close in both shipyards. Newport News is doing very well, as I said in my comments. Ingalls just had a tough start related to labor and getting through those three ships. We'll just see how that evolves and closes for the year. Tom, if you'd like to comment on the economics of it or what it means from a sales standpoint.
Tom Stiehle: Yeah. So obviously, it does roll into that, Gautam, on that front. Meaningfully, as we work ourselves through a ship construction itself, more earned hours or more efficiency there is assisting the EACs and eventually the profitability and cash against that. But being 9% year to date across the first three quarters, all that's cranked into the EACs right now, both the actuals to date and the forecasting of going forward, as well as the forecast that we gave you here for the back half of this year, free cash flow of next year. So it's up to date. We're kind of aligned. The financials are in line with the expectations and what we're doing right now.
Gautam Khanna: Okay. Just to be clear, and so if it were to stay at 9% for the year, a quarter from now, that in and of itself does not drive a negative variance to the cum catch-ups?
Tom Stiehle: No.
Gautam Khanna: Okay.
Tom Stiehle: That's correct.
Gautam Khanna: Okay, cool. Then just one last one. Tom, if you could just talk about free cash flow, the bridge into Q4, then just preliminary view on 2027 with respect to, if there is any lumpiness or what have you, that you can call out that is visible to you at this point. If you could just talk about what is driving that Q4 cash, then how we should think about the lumpiness in 2027.
Tom Stiehle: Yeah. So we have a very tight view of that. We look at that weekly. I attend a biweekly meeting. I have 55 line items to bring home the ETC and what we want to get on free cash flow on the back end. We understand what is in front of us. I feel good about it. Each one of those actions and tasks that we have are on cost. That is why we reiterated the guide here. It is us selling off the ships that we talked about, SSN-800 and LPD-30.
Tom Stiehle: There are a lot of contract actions and issues in milestones, performance incentives, capital incentives, holding the EACs in schedule with incremental increases in booking rates, allowing us to book and bill a little bit higher. So all in play, and as we said, we have reiterated the guide here. We have been consistent all year long.
Tom Stiehle: As we go into next year, I think it is more of the same. We do have a beneficial, we talked about an IRS kind of settlement we have on tax R&D. Was both in play when we talked to you in Q2. Last month, it was approved both by the IRS and had to run up to Congress for authorization too. So that is in play to help the lift next year as well. But I think just the stabilization of the production programs we have, staying on schedule, CPIs and SPIs, getting about the throughput that we have talked about on that last question for the year, is the playbook and how we are going to see $1.2 billion to $1.3 billion.
Tom Stiehle: Also, that is the position with 2027 in front of us. So I think it is risk bound and adjusted. It is factored in for both opportunities and risks against it. So again, it is another position I feel good about, that it is in play and we are happy to give you that guide for next year.
Gautam Khanna: Thanks, guys.
Chris Kastner: Thanks, Gautam.
Operator: Your next question comes from the line of Ron Epstein with Bank of America. Ron, your line is now open.
Ron Epstein: Hey, guys, thanks.
Ron Epstein: I think changing gears here just a little bit, can we talk about unmanned systems? You won a bunch of awards there. How do you think about, broadly, the teaming of unmanned systems with the bigger ships that you guys make? Where do you see your business being 5 or 10 years from now, a balance between the traditional blue water stuff that you make and now the non-traditional unmanned autonomous stuff that you're building?
Chris Kastner: Yeah. Really interesting question, Ron. Let me start, and then I'll kick it over to Andy, and I'll finish up with how I see the business going forward between the mix. First things first, unmanned systems, north of $200 million top line this year. Margin better than the average in Mission Technologies, and really got some really nice awards. I'm going to kick it over to Andy to kind of give you a summary of autonomous systems.
Andy Green: Yeah. Hi, Ron, and thanks for the question. Yeah, we're very excited about the MUSV program and unmanned in general. As you know, Ron, we've been in this business for just about two decades, making UUVs, selling and installing and developing the Odyssey autonomy suite, evolving that over the past several decades. We've got a number of vehicles, like I said in my opening comments, we've got a number of vehicles out there, both UUVs and USVs, and most of them are still in service today. We view it as a very natural extension of what we do here at HII. Unmanned systems is something that, as you know, you've been following the company for a long time.
Andy Green: We looked at this and invested in unmanned systems very early on as a company because we saw this coming, and we knew that the customer was going to be needing this, and the demand signal was going to be there, and we got out in front of it. When you think about how that market develops, right now you're looking at strictly the, let's say, the MUSV program. This is all recently announced. We've got 10 vessels that we're going to deliver over the next couple of years. That's in partnership with our friends at Breaux Brothers and Halimar down on the Gulf Coast, helping out with hull and mechanical and the construction as well as, on the autonomy stack side, Applied Intuition and Greenroom Robotics who are helping to augment the Odyssey autonomy suite.
Andy Green: You saw the results of that, the success of that in the successful demo test that we did for the Navy a few weeks ago, demonstrating the robustness and effectiveness of that autonomy stack. So we have the solutions out there. We are continuing to look at additional opportunities that I will not comment specifically on right now because their competition is in progress. But there are other opportunities out there for different sizes of USVs, different capabilities. We continue to look at those and to invest in those along with MUSV. Over time, you are going to see that demand signal from the Navy, which is very strong for both autonomous ships as well as UUVs, is very, very strong.
Andy Green: It is only going to get stronger, and you are going to see that mix of the overall fleet start to evolve, and you are going to see a much greater number of unmanned surface vehicles and UUVs over time. At the end of the day, the unmanned vessels are going to augment the legacy capital ships and submarines that you see out there. They are going to extend the reach of those platforms. They are going to work in close coordination with those platforms on an autonomous basis, and they are going to keep our sailors out of harm's way by doing things that we do not want to send them into. So that is kind of the way we see it, Ron. Happy to take any more questions.
Chris Kastner: Yeah. Ron, before we go on, and thanks, Andy. The other part of that equation, and if you step back on where will HII go and how big will we be and how it is distributed between manned, unmanned, we are always going to be a large capital ship provider. That is going to continue. We see significant demand for that, and you see that in our 6% growth rate. But as Andy said, we are going to deliver a lot more unmanned vessels. Interesting part of that is that we actually are the primary developer for Minotaur, which is really the network that connects all the nodes so that you get a good operating environment, and you can see the operating environment.
Chris Kastner: So when you go think about HII, manned, unmanned, and Minotaur connected really provides the tools the Navy needs to execute on their mission. So we think that is how that is evolving.
Chris Kastner: Unmanned is going to be a greater part of our portfolio. I do not think it is ever going to eclipse large capital ships. But the hedge force is happening. It is gradually becoming part of the Navy, and this MUSV award is very important to get those ships delivered and start getting them in the water and testing them out.
Ron Epstein: Got it. Maybe just one follow-on. Thanks for that, guys. Maybe I'll be like, this is what I've learned. I'll be that guy, all right, for a minute.
Andy Green: Sure.
Ron Epstein: Isn't it really hard to set up a shipyard? If you're new to it, Chris, you've been doing this for years, so if someone said, "Hey, Chris, set up a shipyard somewhere." How do you even think about that? Just curious, if you're comfortable saying, it's just like, really? A shipyard from scratch? Really?
Chris Kastner: Yeah. So it's- It is hard to set up a shipyard. What the design tools are, what your ERP systems are, what your IT systems are. It is challenging to set up a shipyard. Probably more challenging than that is having the labor team to execute on the ships, and that legacy knowledge to execute on shipbuilding programs. You can eventually get a shipyard set up. It's the talent to execute on the programs and all that experience. We're testing three ships at Ingalls at the same time. That's amazing. I get it. It's hard to set up a shipyard, but it can be done. There's enough folks out there that understand how to set up a shipyard. But I think more importantly, is really the talent to execute on the programs after it's set up.
Chris Kastner: Because you set up that shipyard not only with technology in mind, but with how you are going to execute on the programs in mind. Yes, it is challenging, but it needs to be done for the nation, right? We need to accelerate shipbuilding capacity. So anything that we do to accelerate shipbuilding capacity, I think is positive.
Ron Epstein: Yeah, that makes sense. Thank you very much.
Chris Kastner: Okay.
Operator: Your next question comes from the line of Myles Walton with Wolfe Research. Myles, your line is now open.
[Analyst] (Wolfe Research): Good morning, everyone. This is actually Emily on for Myles.
Chris Kastner: Hi, Emily.
[Analyst] (Wolfe Research): Hello. A quick question on Ingalls. On the surface combatant commentary, is the weaker performance isolated to specific hulls, or is it across the board on the program? Asking, as we look ahead to deliveries for next year.
Tom Stiehle: Hi, Emily, it's Tom here. Yeah, I'll comment on that. We referenced in the remarks there that it was against the destroyers. We have a lot in flow into production programs. Just getting the engineering people and parts in a rhythm down there's just a little drag on it. We incorporate that into the EACs. Then, on the macro sense down there with the three ships at integration and test, it's just keeping them busy down there, keeping those on schedule as well. Nothing too alarming down there. I think we went 6.7%, 6.9%, 6.7% from a return on sales perspective. We're pushing more volume through Ingalls last year and this year. I'm proud of what the team's accomplishing down there.
Tom Stiehle: They're working more sales, and they have the portfolio right now working itself through pre-COVID contracts and integration and test. So, fairly steady quarter from an efficiency standpoint down at Ingalls.
[Analyst] (Wolfe Research): Sounds good. Then, a quick follow-up on the larger budget landscape. The Trump-class battleship is still hanging in the ether, but we are at the same time looking at a possible change in party control in Congress. So how are you all thinking about the survivability of that program?
Chris Kastner: We are in the initial stages of planning for that and design efforts with the Navy on that program. It is in the budget. Ultimately, we are going to build what they ask us to build. So we will continue to support the customer in that regard.
[Analyst] (Wolfe Research): Okay, got it. I will keep with it, too. Thank you.
Chris Kastner: Thank you.
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.
Chris Kastner: Thank you, everyone, for joining the call. With approximately 90% of expected shipbuilding revenue through 2030 already under contract, our focus is squarely on execution, growing our workforce, improving throughput, and delivering the ships and technologies our nation needs. We look forward to keeping you updated on our progress. Thank you.
Operator: That does conclude today's conference call. You may now disconnect.
