Peter Skibitski

Peter Skibitski asked about the pricing performance this quarter relative to the 5% full-year expectation, especially considering LRU sales. He also inquired about Woodward's investment in commercial aftermarket capacity, seeking to understand the percentage of the installed base currently served, the company's goals, and if sales are being missed due to quick-turn aftermarket demands.

Answer

CFO Bill Lacey reported that pricing came in at about 8% for the quarter, higher than the 5% full-year expectation, which has now been revised to closer to 7%, with aerospace contributing more. Chairman and CEO Chip Blankenship clarified that for LEAP GTF, they are not missing market share but rather delaying revenue recognition and customer readiness due to turn times. He explained that capacity expansion, including test stand additions in Rockford, is aimed at staying ahead of predicted growth and improving turn times, not driven by market share concerns.

Peter Skibitski asked about the pricing performance in the quarter relative to the 5% full-year expectation, suspecting it might be higher due to LRUs. He also asked Chip Blankenship about the percentage of Woodward's installed base currently served in the commercial aftermarket and the goal for that, questioning if the company felt it was missing out on sales due to quick turn times.

Answer

Bill Lacey (CFO, Woodward Inc) stated that pricing at the Woodward level came in at about 8% in Q1, higher than the 5% full-year expectation, and the full-year expectation was revised to closer to 7%. Chip Blankenship (Chairman and CEO, Woodward Inc) clarified that for LEAP GTF, they are not missing out on market share but are delaying revenue recognition and customer readiness due to turn times. He explained that capacity expansion is driven by staying ahead of predicted growth and addressing test stand constraints, not by market share concerns.

Peter Skibitski asked if the ongoing continuing resolution (CR) in defense has impacted bookings and questioned the multiyear visibility for growth in guided weapons.

Answer

CEO Charles Blankenship stated that the company has not seen any impact on bookings from the defense CR. Regarding guided weapons, he indicated that visibility does not extend much beyond early 2026.

Pete Skibitski asked about the economics of the MACH-TB program when using Kratos flight test assets, the timeline and expected awards for the Helios facility, its connection to MACH-TB, and the segment for the Poseidon contract.

Answer

Deanna Lund, EVP and CFO of Kratos, confirmed that MACH-TB economics improve with higher Kratos content. Eric DeMarco, President and CEO, explained that Helios, a hypersonic materials testing center, is not directly tied to MACH-TB but can be connected, with Kratos owning and operating it as a multi-decade annuity. He declined to specify Poseidon's segment but noted its first big block significantly contributed to the Q3 book-to-bill ratio.

Pete Skibitski asked about the economics of the Mock TB program, specifically if using a Kratos flight test asset changes the margin rates. He also inquired about the Helios facility's operational timeline, expected further awards, and its connection to Mock TB, and attempted to ask about the segment for the Poseidon program.

Answer

Deanna Lund, Kratos' EVP and CFO, confirmed that higher Kratos content in Mock TB programs results in different, more favorable margin rates. Eric DeMarco, Kratos' President and CEO, explained that the Helios facility, a hypersonic materials testing center, is expected to be operational in 2028, with a site decision imminent. He clarified that Helios can be connected to Mock TB but is not tied to it, and is expected to be a multi-decade, multi-billion-dollar annuity for Kratos. Mr. DeMarco declined to disclose the segment for the classified Poseidon program but noted that the first large block of Poseidon contributed significantly to the quarter's book-to-bill ratio.

Peter Skibitski of Alembic Global Advisors asked for clarification on the space business's Q1 performance and full-year growth outlook, and inquired about the revenue ramp profile for the MACH-TB program.

Answer

CFO Deanna Lund clarified that the space business grew about 2% organically in Q1 and is expected to be up for the full year, driven by a strong book-to-bill from national security awards. Regarding MACH-TB, she confirmed a ramp in the second half of 2025 with a further ramp in 2026. CEO Eric DeMarco added that revenue recognition is tied to the delivery of long-lead items.

Pete Skibitski inquired about the performance of the space segment and the impact of the full-year CR on the Mach TB program.

Answer

CFO Deanna Lund stated space was up 2% organically and is expected to grow for the year. She also confirmed Mach TB revenue ramp in the second half.

Peter Skibitski of Alembic Global Advisors sought clarification on 2025 margins, asking if headwinds were confined to Unmanned Systems, and questioned the accounting for the second Valkyrie production lot and future lots.

Answer

CFO Deanna Lund confirmed the 'lion's share' of the 2025 margin headwind is in the Unmanned Systems segment, with some expansion expected in KGS. She and CEO Eric DeMarco explained that the second Valkyrie lot is substantially completed in 2025 as a capital expenditure, but future production is expected to be treated as traditional inventory as they will no longer need to 'lean forward' and build speculatively.

Peter Skibitski of Alembic Global Advisors sought to clarify the financial impact of the commercial space business downturn, asking about the full-year revenue headwind and when it might bottom. He also asked for confirmation of the full-year guidance for the KGS segment.

Answer

CEO Eric DeMarco quantified the commercial satellite headwind at $30-$35 million in revenue for the year, emphasizing that the rest of Kratos's business has completely offset this decline. He also concurred with the analyst that the business likely bottomed in Q3. CFO Deanna Lund confirmed that the previously provided full-year revenue guidance for the KGS segment remains unchanged.

Pete Skibitski inquired about the revenue contribution from new contracts in the quarter, the drivers behind the significant revenue beat, and the implications of the modest full-year sales guidance increase for a sharp sequential decline in the fourth quarter.

Answer

Mike Fitzgerald, Senior Vice President and CFO, clarified that new contracts had very modest contributions. He attributed the Q4 seasonality to earlier-than-forecasted material procurements in Q2 and Q3. Rex Geveden, President and CEO, added that both government and commercial operations are outperforming in the shops. Pete Skibitski also asked about BWX Technologies' approach to the new Janus program, given their typical preference not to operate reactors. Rex Geveden confirmed their intent to compete, emphasizing the need to find suitable teammates for the contractor-owned, contractor-operated model.

Pete Skibitski asked a housekeeping question regarding the $15 million step-up in Depreciation and Amortization (D&A) in 2026, inquiring if it relates to the two new government contracts, Tech 99, or another factor.

Answer

Chase Jacobson, BWX Technologies' Vice President of Investor Relations, clarified that the D&A step-up is not related to the new government contracts or Tech 99. He explained it's primarily due to timing differences between cost accounting standards and financial accounting standards. He added that Tech 99's D&A impact would not occur until full program approval, and initial investments for new contracts are not yet placed in service, so their D&A impact will bleed in over time.

Pete Skibitski of Alembic Global Advisors questioned the motivation behind the recent pace of Navy contract awards and sought clarification on the company's interest in commercial nuclear fuel opportunities.

Answer

President, CEO & Director Rex Geveden clarified that the contract timing was not accelerated; a prior award was late while the recent one was on time, validating the Navy's commitment to the supply chain. He also noted that while past interest was low, there is now an emerging, albeit small, commercial demand for TRISO fuel that BWXT is positioned to serve, along with potential commercial outlets from its defense enrichment work.

Peter Skibitski of Alembic Global Advisors asked for more detail on the federal reconciliation package's impact on NASA and shipbuilding, questioned if DOE support for advanced nuclear was waning, and inquired if raw material costs would alter the typical margin seasonality for the Commercial segment.

Answer

CEO Rex Geveden confirmed the reconciliation bill includes funding for defense enrichment and DoD reactors and stated that DOE support for nuclear is accelerating, not waning. EVP and CFO Robb LeMasters added that due to the raw material issue, Q2 Commercial margins will be lower than usual, with a stronger-than-expected recovery in the second half of the year.

Peter Skibitski of Alembic Global asked for an update on the BANR microreactor program, its relationship to the Pele project, and the expected development timelines for both.

Answer

President & CEO Rex Geveden described BANR as a larger, commercial derivative of the Pele military microreactor, sharing technology and personnel. He noted that while customers have not published firm schedules, both programs have expanded testing scopes and will continue development over the next few years. EVP & CFO Robb LeMasters positioned microreactors as a key future growth area following SMRs.

Peter Skibitski inquired if supply chain issues at shipyards have impacted BWXT and asked for clarification on the drivers behind the strong growth in the Government Operations segment during the quarter.

Answer

CEO Rex Geveden explained that BWXT's production schedule is a couple of years ahead of the shipyards, giving them early visibility into supply chain pressures, which they have managed well. CFO Robb LeMasters added that the Government Operations growth was due to strong, broad-based execution, particularly in Advanced Technologies like Project Pele and DRACO, and improved labor digestion at naval sites, rather than any specific pull-ahead of orders.

Pete Skibitski inquired about the growth trends in Hexcel's space and defense segment, specifically asking if the observed growth signals the start of a secular European defense spending trend and if a significant ramp-up is expected for the CH-53K program following Lockheed's full-rate production contract. He also asked about the F-35 program's stability.

Answer

Tom Gentile, CEO, Chairman, and President, confirmed strong European defense growth (18% in Q3), indicating increased spending, with programs like Rafale seeing higher production. He noted that while Q3 was softer for CH-53K, Lockheed's $10 billion deal for 99 units through 2032 is a strong indicator, with Hexcel having a substantial position ($2.5-3.5 million per ship set). For the F-35, production remains steady at approximately 156 units per year, with an anticipated uptick in sustainment as the fleet expands.

Pete Skibitski inquired about the growth in Hexcel's space and defense segment, asking if it signals the start of a secular European defense spending trend and if a significant ramp-up is expected for the CH-53K program following Lockheed's full-rate production contract. He also asked about the F-35 program's stability after recent contract definitizations.

Answer

CEO Tom Gentile confirmed strong European defense growth, with an 18% increase for the quarter, citing programs like the Rafale as indicators of rising spending. He expressed excitement for the CH-53K program, noting Lockheed's $10 billion deal for 99 units as a sign of confidence. For the F-35, he stated it's a steady-state program at around 156 aircraft per year, with potential for an uptick in sustainment material sales as the fleet grows and flies more.

Peter Skibitski sought clarification on how revenue from the pending divestiture of the Austria facility would be handled in reporting, the impact of the Hartford sale, 2025 pricing expectations, and the quantifiable margin headwind from the new ERP system.

Answer

Executive Patrick Winterlich stated that any sales from the Austria facility prior to its sale will be reported and called out as incremental to guidance, while the Hartford sale's revenue impact is negligible. Chairman, CEO & President Tom Gentile confirmed expectations for continued price increases and quantified the ERP implementation headwind as a $5 million to $7 million expense in 2025.

Peter Skibitski of Alembic Global Advisors asked about the expected margin trajectory entering 2025, considering program mix and labor costs, and inquired about the duration of the sales headwind from the V-22 program wind-down.

Answer

Executive Patrick Winterlich agreed that it's reasonable to expect volume leverage and margins to improve as 2025 progresses and build rates increase. He noted the V-22 program is sunsetting next year but advised against overplaying its impact on the broader Space & Defense segment, which has many moving parts.

Pete Skibitski questioned why programs with unbilled receivables consume so much factory capacity and why the FY26 free cash flow guidance is only 'positive' rather than stronger, given the focus on these cash-generating activities.

Answer

CEO William Ballhaus clarified that these older programs generate cash but little new revenue upon shipment, as revenue was previously recognized. EVP & CFO David Farnsworth added that these programs had less favorable legacy contract terms. Regarding FY26 free cash flow, he noted that a significant cash acceleration into Q4 2025 and the deferred revenue balance are moderating factors for the upcoming year.

Pete Skibitski of Alembic Global Advisors inquired about the revenue mix between development and production, the drivers behind strong growth in the radar segment versus others, and the potential impact of tariffs on the company's supply chain.

Answer

CEO Will Ballhaus explained that the revenue mix is shifting towards production, following the trend in bookings, but did not provide a specific breakout. He noted the radar segment's growth is partly due to lapping prior periods with negative EAC adjustments and that other areas are affected by timing, not weakness. Regarding tariffs, he stated no material impact is expected in FY'25, citing exclusions and mitigation strategies for both cost and sourcing.

Peter Skibitski asked about the progress and remaining technical risk for the Common Processing Architecture (CPA) programs and the outlook for order flow in the second half of the fiscal year.

Answer

CEO Bill Ballhaus stated that progress on the Common Processing Architecture (CPA) is proceeding as planned, with a ramp to full-rate production expected to make full capacity available in the second half of the year. He noted this progress has already led to significant production awards and a competitive takeaway. Regarding order flow, Ballhaus pointed to the solid trailing 12-month book-to-bill of 1.12 as a positive indicator and expressed confidence in enduring demand drivers.

Peter Skibitski asked for more color on the common processing architecture (CPA) programs, including remaining challenges and their status, and also inquired about the expected cadence for revenue and gross margin in the second quarter.

Answer

CEO William Ballhaus explained that the company no longer uses the term 'challenged programs' due to significant progress. He confirmed the CPA production ramp is proceeding methodically, which helped unlock over $50 million in follow-on orders. Executive David Farnsworth added that while Q2 revenue volume might be lower due to a pull-forward into Q1, the gross margin percentage is expected to remain in a similar range, albeit with less benefit from operating leverage.

Pete Skibitski of Alembic Global Advisors asked about the company's direct foreign military sales (FMS), questioning if they are concentrated in a specific segment and which segment is expected to see the fastest growth.

Answer

President, CEO & Chair Lynn Bamford explained that while not broken out by segment, the top area for FMS is Defense Electronics, with products like stabilization systems for vehicles such as the Boxer tank. She also highlighted arresting systems and aircraft landing equipment in the Naval & Power segment. She projected direct FMS would grow to 10% of total company revenue in 2025.

Peter Skibitski inquired about the specific impact of tariffs, including the products affected and China's role, and asked about sourcing concerns. He also questioned whether the raised commercial aerospace guidance was driven by Boeing's production ramp or the new FAA safety mandate.

Answer

CEO Lynn Bamford explained that a cross-functional 'Tiger team' is mitigating over $20 million in potential tariff impacts through operational flexibility and targeted pricing discussions with customers. CFO K. Farkas added that the exposure is primarily within industrial products and related to China. Farkas clarified the commercial aerospace guidance increase was entirely driven by new cockpit voice recorder business related to the FAA mandate, not Boeing production, and represents a sustainable, long-term revenue stream.

Peter Skibitski sought clarification on the Naval & Power segment's Q4 margin performance, asking if low-margin material receipts were the primary cause. He also inquired about the specifics of the restructuring actions in the segment and their expected impact on 2025 margins.

Answer

CFO Chris Farkas clarified that the Q4 margin was primarily impacted by unfavorable mix, including higher naval defense sales, lower process valve sales, and fewer high-margin international arresting systems sales. He noted that the bulk of the 2025 restructuring savings will benefit the Aerospace & Industrial segment, while efforts in Defense Electronics are focused on footprint optimization and capacity expansion, with some disruption continuing into Q1.

Pete Skibitski inquired about the primary drivers behind the increased guidance for aerospace defense, asking whether it was from new builds, aftermarket, or upgrades, and questioned if the company was seeing any negative impacts from the ongoing government continuing resolution (CR).

Answer

CFO Chris Farkas explained that the aerospace defense guidance increase was mainly due to securing customer funding for R&D programs, which shifted spending from internal to customer-funded projects. CEO Lynn Bamford added that the company is not currently feeling the impact of the CR due to its strong backlog, though a prolonged CR could eventually affect new program starts.

Pete Skibitski of Alembic Global Advisors asked for more color on the industrial segment's growth outlook, given that PMIs remain below 50 while RBC's results are accelerating. He also inquired about any positive or negative impacts from tariffs.

Answer

Chairman, President & CEO Dr. Michael Hartnett explained that industrial growth is sector-dependent, with strong performance in consumables like grain, forest products, and food & beverage, while larger OEM markets remain slow. He noted the impact of the new infrastructure bill is yet to be fully seen. Regarding tariffs, he stated RBC has effectively neutralized the P&L impact through price adjustments and pass-through agreements with customers.

Pete Skibitski of Alembic Global Advisors asked for management's confidence level in sustained mid-single-digit industrial growth given recent PMI data, and also inquired about any positive or negative impacts from tariffs.

Answer

Dr. Michael Hartnett, Chairman, President & CEO, responded that industrial strength is sector-dependent, with consumable-driven markets like food & beverage performing well while larger OEM markets remain slow. Regarding tariffs, he stated that RBC has effectively neutralized the P&L impact through price adjustments and contractual pass-through agreements with customers.

Pete Skibitski of Alembic Global Advisors asked for confirmation on the industrial outlook, questioning if mid-single-digit growth is now a reasonable expectation despite weak PMIs. He also inquired about any observed impacts from tariffs in the recent quarter.

Answer

Chairman, President & CEO Michael Hartnett clarified that industrial strength is sector-dependent, with consumable-driven markets like food & beverage and forest products performing well, while larger OEM markets remain slow. On tariffs, he stated that RBC, being heavily USA-oriented, has neutralized the impact through price adjustments and pass-through agreements with customers.

Peter Skibitski from Alembic Global Advisors questioned the conservatism of the free cash flow conversion target, asked if a defense budget surge would trigger a new CapEx cycle, and sought an update on the timeline for SG&A investments and potential operating leverage.

Answer

Executive Robert Sullivan affirmed the 100% free cash flow conversion target but noted sales growth creates pressure. Executive Mike Hartnett confirmed a defense surge would require more CapEx, stating they are already planning 5 years ahead for certain plants. Sullivan added that while SG&A investment continues, a good portion of gross margin expansion is expected to flow through to EBITDA.

Peter Skibitski of Alembic Global Advisors inquired about the weakness in the oil and gas sector, the potential impact of tariffs on Mexico and China, and the schedule and capital expenditure impact of capacity expansions in the Defense segment.

Answer

Chairman, President and CEO Dr. Michael Hartnett explained the oil and gas weakness is an inventory correction expected to normalize over nine months. Regarding tariffs, he stated Mexico is a 'nonissue' due to contractual clauses and minimal value-add, while a significant China tariff would be a net positive for RBC by creating a supply shortfall. He also noted that the Defense capacity expansion in Tucson is for a leased building and the capital impact is within the normal budget. Rob Moffatt, Director of Corporate Development, added that excluding oil and gas, the industrial OEM business was only down about 2.5%.

Peter Skibitski from Alembic Global Advisors asked for quantification of the Boeing strike's Q2 impact, its lingering effects into the second half, and whether commercial aerospace revenue would decline sequentially. He also questioned the source of the backlog increase and the impact of the DoD's continuing resolution on defense bookings.

Answer

CEO Mike Hartnett stated the company's second-half forecast conservatively assumes Boeing is in production for only one of the next three months and confirmed commercial aero revenue is expected to be down sequentially. CFO Robert Sullivan clarified the backlog increase was driven primarily by the defense side. Hartnett added that they are not seeing any impact from the government's continuing resolution as their defense bookings are mainly long-term contracts with OEMs.

Pete Skibitski from Alembic Global Advisors asked about the potential implications for Citation's long-term growth following the announced expansion by its engine supplier, Williams International.

Answer

Scott C. Donnelly, Chairman, CEO & President, praised Williams International as a very important and good supplier that delivers a great product. While not commenting on Williams' specific plans, he affirmed the strong relationship and expressed his expectation that it will continue to grow and support Textron's new product programs in the future.

Peter Skibitski asked for details on the source of Bell's military sustainment growth and questioned if the unmanned surface vehicle (USV) market is poised for rapid growth.

Answer

Chairman and CEO Scott Donnelly confirmed the military sustainment growth comes from legacy platforms like the H-1 and V-22 and is expected to continue. He affirmed that the USV market is growing, drawing an analogy to the proliferation of unmanned aircraft. He positioned Textron as a long-term, well-funded player with programs like CUSV and Tsunami that can compete effectively against new startups in the space.

Peter Skibitski asked if the fiscal '25 continuing resolution was impacting military programs and inquired about potential business impacts from new regulations, policies, or tariffs under the new administration, specifically mentioning Canada.

Answer

Scott Donnelly, Chairman and CEO, said the continuing resolution is disruptive but not having a major impact, as customers are executing against expected budgets. He sees potential positives from a pro-business climate and a focus on accelerating military programs. However, he identified tariffs as a 'wildcard,' acknowledging uncertainty and potential risk for operations and key suppliers in Canada, such as Bell's commercial assembly and Pratt & Whitney Canada.

Peter Skibitski requested a more precise revenue outlook for the FLRAA program and asked about the technical and schedule risks associated with in-sourcing the cabin production from Spirit AeroSystems.

Answer

CEO Scott Donnelly estimated FLRAA revenue at around $900 million for the current year, with a potential increase of $100-$200 million next year, pending budget approvals. He characterized the cabin in-sourcing as a low-risk transition, given it occurred early in the program's development phase with strong collaboration from Spirit.

Pete Skibitski of Alembic Global Advisors asked for clarification on whether the higher CapEx guidance was a one-year event and followed up on the total backlog decline, seeking to reconcile the change with reported revenue.

Answer

CFO Kevin McDonnell stated that while CapEx should trend down over time, he made no firm predictions due to significant growth opportunities. CEO Wahid Nawabi emphasized that the investment is crucial for scaling production in key areas. Regarding the backlog, management reiterated that no programs were canceled. A later clarification from the CFO explained that a large unfunded contract vehicle expired as purchasing authority shifted to a new DoD group, accounting for the change.

Pete Skibitski asked why AeroVironment did not compete for the Army's Short-Range Reconnaissance (SRR) program and inquired about a separate Army award for company-level UAVs, questioning if it posed a threat to the Long-Range Reconnaissance (LRR) program.

Answer

Wahid Nawabi, Chairman, President, and CEO, explained that the company strategically chose not to compete for the SRR program to focus on larger, more valuable market opportunities where it can deliver greater value. He clarified that the other Army award for company-level UAVs is a smaller, experimental effort for a potential future Medium-Range Reconnaissance program and does not threaten the distinct, billion-dollar Long-Range Reconnaissance (LRR) program, where AeroVironment is strongly positioned with its P550 platform.

Peter Skibitski of Alembic Global Advisors asked for clarification on the distinction between the immediate-need LUS contract and the long-term LASSO program, and also inquired about the company's capabilities and strategy regarding the FPV (first-person view) drone trend seen in Ukraine.

Answer

CEO Wahid Nawabi clarified that LUS (Lethal Unmanned Systems) is the Army's term for fulfilling immediate loitering munition needs, for which Switchblade has been selected. LASSO, in contrast, is the Army's long-term, multi-year program of record. Regarding FPV drones, Nawabi described them as a different, less sophisticated category, stating that AeroVironment intentionally does not compete in this market as Switchblade addresses more complex missions with higher precision and mission success rates.

Pete Skibitski questioned the sustainability of the Flight Support Group's (FSG) 24%+ operating margin and asked about the potential impact of a 10%+ increase in U.S. defense spending on the Electronic Technologies Group (ETG).

Answer

EVP & CFO Carlos Macau advised that the optimal FSG margin range remains 23-24% and that the current high-end performance should not be extrapolated higher too quickly. Co-CEO Victor Mendelson stated that a 10% defense spending increase would bode 'extremely well' for ETG, though the exact impact depends on where the funds are deployed.

Peter Skibitski from Alembic Global Advisors asked for the company's expectation for depreciation and amortization in fiscal 2025 and inquired whether the recent high use of working capital for inventory was a short-term issue.

Answer

CFO Carlos Macau stated that he expects D&A in fiscal 2025 to be very similar to fiscal 2024 as a percentage of sales, though it could increase with new acquisitions. He also explained that inventory levels should moderate as the company has now taken delivery of long-lead-time items ordered post-COVID, expecting a return to more historical levels of working capital consumption.

Peter Skibitski inquired about ongoing supply chain challenges impacting the repair business and asked for more color on the trends in ETG's medical and other non-aerospace markets.

Answer

Eric Mendelson, Co-President, confirmed that significant supply chain problems persist, with vendor challenges and past-due backlogs impacting all parts of the business, especially complex repairs requiring a full bill of materials. Victor Mendelson, Co-President, explained the weakness in medical and other markets was a classic case of customer over-ordering and inventory destocking, noting he is now seeing signs of it bottoming out with higher quote activity.

Peter Skibitski questioned why the outlook for $50 billion in new awards isn't creating upward pressure on the 4% shipbuilding revenue growth guide and asked for a timeline for Ingalls' margins to return to double-digit levels.

Answer

President and CEO Christopher Kastner clarified the $50 billion in awards is not a direct addition to backlog but acknowledged medium-term upside potential. EVP and CFO Thomas Stiehle explained Ingalls' lower margins are due to a lack of positive EAC adjustments, not negative performance, citing post-COVID operational challenges. He expressed confidence in a recovery but did not provide a specific timeframe.

Peter Skibitski inquired about the expected trajectory for shipbuilding margins through the end of the decade, asking whether to model a gradual improvement or a step-change in 2027. He also asked if a potential contract change on the CVN 79 carrier would impact margins.

Answer

President and CEO Christopher Kastner stated that any contract change on CVN 79 for additional capabilities would be an equitable adjustment and not inherently impact margin rates. CFO Thomas Stiehle explained that margin improvement is expected to be a gradual ramp that follows the revenue mix, with profitability rising as post-COVID contracts become the majority of work by 2027. Kastner cautioned against expecting a sharp step-change, noting the company's conservative approach to initial program margins.

Peter Skibitski asked if a Navy-requested design change on the SSN 800 submarine drove the negative charge and inquired about performance issues and attrition at Ingalls Shipbuilding.

Answer

CEO Christopher Kastner confirmed the design change on SSN 800 was a factor in its schedule delay and could have potential upside upon negotiation, but it was not the sole issue. Regarding Ingalls, he acknowledged they face the same 'green labor' challenges as the rest of the industry but noted they are meeting milestones and have less opportunity for positive adjustments at present, expressing confidence in the team.

Peter Skibitski asked about the potential impact of China's new export controls on rare earth metals, focusing on availability risk rather than just cost.

Answer

James Taiclet, CEO, stated that the company is insulated because laws and contracts already constrain them from using Chinese-sourced inputs. He mentioned the existence of stockpiles and the company's 'antifragility' strategy of developing U.S. sources. Maria Lee, an executive, added that they have sufficient supply in the value chain to meet current year delivery commitments without disruption.

Peter Skibitski of Alembic Global Advisors asked whether achieving peak production volumes for key munitions in the MFC segment is dependent on receiving additional supplemental funding bills from Congress.

Answer

CFO Jesus Malave clarified that achieving these rates is 'not dependent on additional supplementals,' as much of the capacity expansion is already committed or under contract. He cited strong, allocated funding for programs like PAC-3 (650 units/year), GMLRS (14,000), and HIMARS (96), viewing the funding as 'fairly low risk.'

Peter Skibitski asked about the Communication Systems (CS) segment's sales mix, inquiring if the domestic/international split in 2025 would be similar to 2024. He also followed up on whether waveform sales are now higher margin than international hardware sales.

Answer

CFO Kenneth Bedingfield explained that the 2024 mix (domestic-heavy first half, international-heavy second half) is playing out as expected but anticipates a more stable mix in 2025 due to growing demand on both fronts and new testing efficiencies. CEO Christopher Kubasik added that confidence for 2025 is high because the supply chain is now more resilient than it was pre-pandemic. He also directly confirmed that proprietary waveform sales are indeed higher margin than international hardware sales.