Earnings call transcript: Huntington Ingalls Q2 2025 EPS beats forecast by 18.4%

Published 31/07/2025, 17:28
Earnings call transcript: Huntington Ingalls Q2 2025 EPS beats forecast by 18.4%

Huntington Ingalls Industries (HII), the $11.2 billion market cap shipbuilding giant, reported its second-quarter 2025 earnings on July 31, showcasing a notable performance that surpassed market expectations. The company posted earnings per share (EPS) of $3.86, significantly exceeding the forecasted $3.26, marking an 18.4% surprise. Revenue also outperformed, reaching $3.08 billion against a projection of $2.93 billion. Following these results, the stock price rose 10.34% in pre-market trading, reflecting investor optimism. According to InvestingPro data, the company maintains a "FAIR" overall financial health score, with particularly strong marks in profitability metrics.

Key Takeaways

  • EPS of $3.86 exceeded expectations by 18.4%.
  • Revenue reached $3.08 billion, surpassing forecasts by 5.12%.
  • Stock surged 10.34% pre-market, trading at $275.49.
  • Strong government support for shipbuilding bolstered performance.
  • Strategic partnerships and new contracts highlight future growth.

Company Performance

Huntington Ingalls Industries demonstrated robust performance in Q2 2025, with revenues increasing by 3.5% year-over-year to $3.1 billion. Despite a decrease in EPS from $4.38 in the previous year, the company’s strategic initiatives and strong governmental backing in shipbuilding programs have positioned it favorably in the market.

Financial Highlights

  • Revenue: $3.1 billion, up 3.5% YoY.
  • Earnings per share: $3.86, down from $4.38 last year.
  • Free cash flow: $730 million.
  • Backlog: $56.9 billion.
  • Contract awards: $11.9 billion.

Earnings vs. Forecast

HII’s Q2 2025 earnings per share of $3.86 significantly beat the forecast of $3.26, resulting in an 18.4% earnings surprise. Revenue also surpassed expectations, with a 5.12% surprise, indicating strong operational performance and effective cost management.

Market Reaction

The market reacted positively to Huntington Ingalls’ earnings, with the stock price increasing by 10.34% in pre-market trading. This surge reflects investor confidence in the company’s ability to exceed financial projections and capitalize on strategic initiatives. Trading near its 52-week high, InvestingPro’s Fair Value analysis suggests the stock is currently fairly valued. Analyst price targets range from $180 to $316, reflecting diverse market opinions about the company’s growth trajectory.

Outlook & Guidance

Looking forward, Huntington Ingalls anticipates a 4% revenue growth in its shipbuilding segment, with 2025 shipbuilding revenue guidance set between $8.9 billion and $9.1 billion. The company also expects free cash flow to range from $500 million to $600 million, supported by anticipated contract awards for Block VI and Columbia Build II in 2025. For deeper insights into HII’s financial outlook and comprehensive analysis, access the detailed Pro Research Report available exclusively on InvestingPro, covering what matters most for informed investment decisions.

Executive Commentary

CEO Chris Kastner emphasized the company’s expanding industrial base and stable supply chain, stating, "The industrial base is growing. The supply chain is becoming more stable." CFO Tom Sealy highlighted the company’s commitment to meeting guidance, noting, "We’re razor focused and fixated on showing that we provide guidance going forward that we can hit."

Risks and Challenges

  • Supply chain stability remains a concern despite improvements.
  • Pre-COVID contracts present ongoing challenges.
  • Labor retention and wage increases could impact margins.
  • Changes in tax laws may affect cash flow.
  • Competition in the unmanned underwater vehicle market.

Q&A

During the earnings call, analysts inquired about the potential for separate Virginia class submarine production and the impact of tax law changes on cash flow. Executives addressed these concerns, highlighting improvements in labor retention and the company’s strategic focus on overcoming pre-COVID contractual challenges.

Full transcript - Huntington Ingalls Industries Inc (HII) Q2 2025:

Conference Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter twenty twenty five HII Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. Please be advised that today’s conference is being recorded. I would now like to hand the call over to Christy Thomas, Vice President of Investor Relations.

Mrs. Thomas, you may begin.

Christy Thomas, Vice President of Investor Relations, HII: Thank you, operator, and good morning, everyone. Welcome to the HII second quarter twenty twenty five 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 @ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer and Tom Sealy, Executive Vice President and Chief Financial Officer. I will now turn the call over to Chris.

Chris Kastner, President and Chief Executive Officer, HII: Thanks, Christy. Good morning, everyone, and thank you for joining us on today’s call. I’ll start by providing a high level summary of our financial performance, highlighting key achievements, and then I’ll provide an update on our operational initiatives. Tom will discuss our quarterly results and full year 2025 outlook in more depth. This morning, we reported second quarter sales of 3,100,000,000 and earnings per share of $3.86 with backlog reaching $56,900,000,000 Contract awards of $11,900,000,000 included DDG one hundred forty five and one hundred forty six, LPD thirty three and two Block V submarines with associated investments in shipbuilder wages, workforce development, infrastructure and technology insertion.

Free cash flow was $730,000,000 and we invested $93,000,000 in CapEx. At Newport News in the second quarter, we floated off SSN 800 Arkansas and are on track to deliver SSN seven ninety eight Massachusetts later this year. New carrier construction is also progressing and on CDN 79, we are working with our customer to deliver the most complete and combat ready ship to the Navy as early as possible and are scheduled to go to sea for our first trials toward the end of the year. CVN-eighty Enterprise has received several of the late engine room components that I discussed previously with the remaining equipment scheduled to come in over the next few months. Receipt of the remaining sequence critical components enables progress acceleration as our shipbuilders integrate the equipment into the ship and unlock associated delayed progress.

Moving to Ingalls, in the second quarter we completed main engine light off on DDG128 Ted Stevens and christened DDG129 Jeremiah Denton. And we continue to make progress on our ANFIB programs as we completed fuel load on LPD 30 Harrisburg and generator light off on LHA 8 Bougainville. At Mission Technologies, we had another quarter of strong sales of $791,000,000 Key wins included a contract to provide live training solutions to the U. S. Army’s program executive office for simulation training and instrumentation.

And in our uncrewed business, we delivered the first two Lionfish small uncrewed undersea vehicles to the U. S. Navy under a program that could scale to 200 vehicles. We also announced a commercial sale of Remus 300 UUVs to Hitachi. Notably, our recent announcement of a technology partnership with C3AI is a key strategic highlight for the quarter.

This partnership enables us to leverage digital technologies and AI to accelerate shipbuilding throughput with a primary focus on schedule optimization to drive faster delivery. Now on to the operational update, both Ingalls and Newport News performance was relatively stable in the quarter as we continue to work through ships that were contracted for prior to COVID. As I’ve indicated previously, the next year and a half will be challenging as we transition out of ships contracted for pre COVID to our new contracts. As for the first operational initiative increasing throughput, Ingalls is on plan and Newport News continues to be behind plan primarily due to CVN-eighty supply chain issues I previously discussed. Both shipyards increased throughput in the second quarter and I expect further acceleration on the back half of the year.

It’s important to note that progress is being made on improving performance through this sustained and significant investment by the Navy and Congress along with our internal investments. Leading indicators in the labor pipeline and retention are showing positive trends. And on the supply chain front, we expect continued stability, though risk remains for some major equipment. While these early indicators are encouraging, there’s still tremendous work to be done. We know that it will require sustained improvement to achieve our long term targets.

Also, the industrial base is expanding with significant outsourcing taking place, increasing the capacity of the shipbuilding industry as a whole and our technology efforts to increase efficiency are off to a strong start. The second operational initiative is our $250,000,000 annualized cost reduction effort and we expect to achieve this by year’s end. Finally, regarding the third operational initiative contract awards, we announced the award for two Block V submarines and associated investments on April 30. This award reflects a significant step solidifying the investment our customers making in the shipbuilding industrial base and highlighting the critical and urgent need for these submarines. The shipbuilding and navy teams have now pivoted to negotiate agreements for Virginia Class Block six and Columbia Bill two and I expect these agreements to be completed later this year.

Turning to activities in Washington, the reconciliation bill and the FY 2026 budget includes significant support for our shipbuilding programs. Specifically, the reconciliation bill includes a second FY 2026 Virginia class submarine, two DDG-fifty one Arleigh Burke destroyers, funding for the amphibious warship bundle, funding for expansion of USVUV production and $4,900,000,000 for the shipbuilding industrial base. Additionally, the President’s budget for fiscal year twenty twenty six is now under consideration by Congress and the proposed budget reflects continued investment in our shipbuilding programs with funding provided for the Columbia Class and Virginia Class submarine programs for CVN’s eighty and eighty one construction and CVN 82 advanced procurement and for the second of three years of funding for the refueling and overhaul of CVN 75. In summary, we had a solid Q2 that was largely consistent with our expectations as we remain focused on executing our operational initiatives, increasing throughput, achieving cost reductions and capturing new contract awards. And now I’ll turn the call over to Tom for some remarks on our financial performance.

Tom?

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Thanks, Chris, and good morning. Let me start by briefly discussing our second quarter results, and then I’ll address our outlook for 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 six of the presentation, our second quarter revenues of approximately $3,100,000,000 increased 3.5% compared to the same period last year. The higher revenue was attributable to year over year growth at all three divisions.

Ingalls revenues of $724,000,000 increased by 1.7% compared to the 2024, driven primarily by higher volume on the guided missile destroyer program, partially offset by lower volume on the LHA and LPD programs. Newport News revenues of $1,600,000,000 increased by 4.4% compared to the 2024, driven primarily by higher volumes on both Columbia and Virginia class submarine programs, partially offset by unfavorable cumulative adjustments on aircraft carriers. Mission Technologies revenues of $791,000,000 increased by 3.4 compared to the 2024, driven primarily by a nonrecurring favorable resolution related to a C5ISR contract as well as higher live virtual and constructive training volume. Excluding the impact of the noted resolution, Mission Technologies results were generally in line with our prior expectations and the guidance we provided on the first quarter call. Moving on to Slide seven, segment operating income of $172,000,000 and segment operating margin of 5.6% in the 2025 were both down from prior year results, but were consistent with our expectations for the quarter.

At Newport News, segment operating income was $82,000,000 and operating margin was 5.1% compared to $111,000,000 and 7.2% in the 2024. The decreases were driven by performance of the Virginia class submarine program and aircraft carrier construction, partially offset by a favorable contract incentives of those programs as well as a higher risk retirement on the Columbia class submarine program. Additionally, prior year results benefited from favorable contract adjustments and incentives on the aircraft carrier refueling and complex overhaul program. For the 2025, Newport News shipbuilding’s net cumulative adjustment was negative $17,000,000 This includes a negative adjustment on CVN 80 as well as other performance adjustments. At Ingalls, segment operating income was $54,000,000 and operating margin was 7.5% compared to $56,000,000 and 7.9% in the second quarter of last year.

The decreases were driven by lower performance and lower contract incentives on the amphibious assault ship programs, which was largely offset by favorable contract adjustments related to the guided missile destroyer program. Prior year results included a favorable impact related to the delivery of LPD 29. The second quarter net cumulative adjustment at Ingalls was a positive 4,000,000 and included positive adjustments related to the DESTROY program that were largely offset by an unfavorable adjustment related to LHA-eight. Mission Technologies operating income and margin were largely consistent year over year with changes in contract mix offsetting the impacts of higher volume. Consolidated operating income for the quarter was $163,000,000 and operating margin was 5.3 compared to $189,000,000 and 6.3% in the same period last year.

The variance was driven by the segment’s results I just noted along with a more favorable operating FAST CAS adjustment compared to prior year period. Net earnings in the quarter were 152,000,000 compared to $173,000,000 in the 2024. Diluted earnings per share in the quarter were $3.86 compared to $4.38 in the same period last year. Turning to Slide eight. Cash provided by operations was $823,000,000 in the quarter.

Net capital expenditures were $93,000,000 or 3% of revenues. Free cash flow in the quarter was $730,000,000 Free cash flow results in the quarter were $480,000,000 better than the midpoint of the guidance we provided on the first quarter call. The overperformance is due to a number of factors including the timing of incentives, some of which were received earlier than previously anticipated, normal quarterly timing of cash receipts and disbursements and improvement in quarterly taxes and capital expenditure timing. I’ll discuss our updated 2025 free cash flow guidance in a moment. During the quarter, we did not repurchase any shares.

We did pay a cash dividend of $1.35 per share or $53,000,000 in aggregate. Turning to liquidity and the balance sheet. We ended the quarter with a cash balance of $343,000,000 and liquidity of approximately $2,000,000,000 Our capital allocation priorities are unchanged. We value our investment grade credit rating and we’ll continue to prioritize prudent debt levels while strategically investing in our shipyards and thoughtfully growing our dividend while continuing to use excess free cash for share repurchases. Moving on to our outlook on Slide nine, we are reiterating our segment revenue and operating margin guidance for the year.

We expect shipbuilding revenue between 8,900,000,000 and $9,100,000,000 and margins between 5.56.5%. For Mission Technologies, we expect revenue between 2,900,000,000.0 and 3,100,000,000.0 operating margins between 44.5% and EBITDA margins between 88.5%. Our 2025 guidance is predicated on achieving the operational initiatives we have laid out. As Chris noted, we are progressing on each of these items and we expect to achieve a meaningful improvement in throughput over the course of the year. Regarding our assumption related to the award of Virginia Class Block six and Columbia Bill two submarines, we continue to expect that award to occur this year.

If the award were to push into 2026, it would be a headwind. However, we believe we have accounted for a range of timing considerations within our guidance. For 2025 free cash flow, we are updating our guidance to between 500,000,000 and $600,000,000 At the midpoint, this is an increase of $150,000,000 compared to our prior guidance range. The majority of this growth is related to updated cash tax expectations given the recent change in tax law, including R and D expensing and bonus depreciation changes. We are also updating a number of discrete income statement guidance elements.

We are revising our operating FAST cash adjustment from forty three million dollars to $40,000,000 Our non current state income tax expense for the year is now estimated to be approximately $15,000,000 with approximately $10,000,000 of that expense falling in the third quarter. This update reflects the state impact of recently enacted federal tax law changes that benefited our cash flow expectations and may be further impacted depending on how individual states conform to the recent federal tax law changes. Our interest expense guidance has declined by $20,000,000 from our prior outlook given the strong second quarter cash flow and resulting lower commercial paper usage. Moving on to a preview for the third quarter. For shipbuilding, we expect third quarter sales of approximately $2,200,000,000 and margins near the low end of our annual guidance range.

This does imply a stronger fourth quarter, which is consistent with our expectations and timing of milestones. For Mission Technologies, we expect third quarter sales of approximately $730,000,000 and operating margin of approximately 3.5%. This does imply a sequential decline in revenue. However, a second quarter results did include the non recurring favorable contract resolution I previously discussed. Finally, we expect third quarter free cash flow to be approximately negative $150,000,000 as a result of normal business operations and the strong Q2 cash generation.

To close, I will echo Chris’ sentiment. It was a good quarter as we continue to make steady progress working our way through challenging shifts and executing our twenty twenty five operational initiatives, securing new contracts aligned to the current environment, driving higher throughput and thoughtfully managing cost. With that, I’ll turn the call back over to Christy to manage Q and A.

Christy Thomas, Vice President of Investor Relations, HII: Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so that we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q and A.

Conference Operator: Thank you very much. Our first question comes from Doug Harned with Bernstein. Line is now open. Please go ahead.

Doug Harned, Analyst, Bernstein: Morning. Thank you.

Respondent: Morning, Doug.

Doug Harned, Analyst, Bernstein: Chris, you had a had a big quarter for shipbuilding in q two revenues. And you’re looking at 20% better throughput this year. You’re getting should be getting some money from the Block V award. But your guide for shipbuilding revenue is only up 3%. I mean how should we reconcile those things?

Chris Kastner, President and Chief Executive Officer, HII: Yes. It’s good question, Doug. Thank you. Our throughput increase and our revenue forecast all takes into consideration wages getting incorporated in both shipyards. That’s already happened in Newport News.

We expect that to happen over the back half of the year at Ingalls. Outsourcing improving, which actually outsourcing this year should get up to two million hours, which is over one million hour increase from last year. And then our Charleston operations also comes online and provides additional throughput. So you take all that into consideration, most of that happens in the back half of the year. And if we’re able to achieve that, we should achieve and I’m confident we’ll achieve our 20% improvement on throughput, which lead us should lead us to our guidance estimate.

You always have to take into consideration material timing when you take it when you’re doing your sales forecast. But I’m pretty comfortable that our guidance is appropriate. There’s potentially some upside there if we make all our throughput commitments. If we are able to continue to hire experienced people and our attrition trends continue. But all that works together and conspires together to project towards our sales guidance.

Doug Harned, Analyst, Bernstein: I guess what I’m trying to understand is we’re looking at this situation where a lot of money is coming in to shipbuilding right now in proposed budgets, current budgets, and you’re looking at the higher throughput. Just trying to to figure out and I know that it’s not easy to change shipbuilding revenues in a short period of time, but I’m just trying to understand how we get that we kind of triangulate between the funding trajectories, the throughput and what this revenue outlook would likely be over the at least the coming years.

Chris Kastner, President and Chief Executive Officer, HII: Right. Well, so I’m still comfortable with the 4% growth revenue outlook and I’m very comfortable that this shipbuilding industrial base is getting rebuilt. I think labor is being addressed through increase in salary and positioning towards more experienced people and attracting more people into the industry. I’m very confident the industrial base is expanding led by the prime contractors that are doing that effort including the acquisition of Charleston. So it’s going to happen.

The industrial base is growing. The supply chain is becoming more stable. I can’t predict when that volume will show up, but it’s occurring as we’re moving through this year. I don’t want to get ahead of ourselves from a guidance standpoint and a sales standpoint, but I’m still comfortable with the 4% growth rate and it’s incumbent upon us to execute.

Doug Harned, Analyst, Bernstein: Okay. Very good. Thank you.

Respondent: Thanks, Doug.

Conference Operator: Our next question comes from Scott Micus with Melius Research. Your line is now open. Please go ahead.

Scott Micus, Analyst, Melius Research: Good morning, Chris and Tom. Nice results. Good morning. We have better clarity on the funding environment with the one big beautiful bill signed. The 2026 budget also looks very supportive.

When we think about kind of the appeal of Section 174, is that five year cumulative free cash flow target of $3,600,000,000 now back on the table, but just from 2025 through 2029?

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Yes. We pulled that guidance last year, and I would not say it’s back on the table right now. We’re razor focused and fixated on showing that we provide guidance going forward that we can hit. Right now we have the annual guidance you saw from my remarks upfront and the release information that we provided that we raised that from 300 to $5 to 600,000,000 in free cash flow. But we’re going to stick to an annual guidance right now.

And as we get consistent and we have quarter over quarter meeting or exceeding the guides, we’ll address that in future discussions. But don’t have a five year guide on the table right now.

Scott Micus, Analyst, Melius Research: Okay. And then, Chris, the secretary in navy commented that it might be preferable to have Newport News and Electric Boat each built Virginia separately rather than teaming. So if the navy were to pursue that route, just curious how much capital would you and the Navy need to invest to make that happen? And would you have enough skilled labor or optionality to outsource to support One Virginia by itself at Newport News?

Chris Kastner, President and Chief Executive Officer, HII: I think it’s always important to evaluate alternatives. Right now, we’re happy with the teaming arrangement, that we have with General Dynamics on the Virginia class program. It would take additional capital. I don’t and it would be significant capital and we’ve communicated that to the Navy. We would have enough skilled labor to execute on any job like that.

And we’re talking about a time horizon that’s pretty far out in front of us. So that’s probably all I want to say on that. It’s always good to look at options, look at alternatives. We would need additional significantly more capital to execute on that. But we’ll support the Navy in these initiatives as they work through how they want to proceed.

All right. Thanks for taking the questions. Sure. Our

Conference Operator: next question comes from Gautam Khanna with TD Cowen. Your line is now open. Please go ahead.

Gautam Khanna, Analyst, TD Cowen: Yes. I’m sorry if you covered this a little late. But on CVN 79 and the timing slip to 2027, could you characterize any economic impact from that? And was there a negative EAC? Or could there be because of that schedule change?

Chris Kastner, President and Chief Executive Officer, HII: Yes. So we’ve already taken that schedule consideration into our guidance. And that was understood when we did the financials. There was no material impact related to that. It should be noted that CVN 79 is progressing very well.

There’s only 90 compartments left We’re going go to sea this year. There’s just a couple of systems that are taking a little bit longer and we need to add some capability as well. So 79 is progressing very well. There’s no financial or no material financial impact and we’re going to deliver a great ship when it gets finally delivered.

Gautam Khanna, Analyst, TD Cowen: Thank you, guys.

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Sure. Our

Conference Operator: next question comes from Your line is now open. Please go ahead.

Josh Korn, Analyst: Hi, good morning. This is Josh Korn on for David. Hi, To follow-up on the reconciliation funding for shipbuilding, I guess, both on the shipbuilding and unmanned side. Exactly how you see that flowing through to you time line and any kind of quantification?

Thanks.

Chris Kastner, President and Chief Executive Officer, HII: Yes. So we tend to look at that together with the FY 2026 budget. If you look at them together, all of our programs are supported and all of that is included in our 4% mid to long term guidance relative to shipbuilding sales. So we think it’s all very positive. I think the unmanned stuff is very interesting.

Obviously, we have the premier uncrewed underwater vehicle program up in our Boston organization within Mission Technologies. And that’s some very interesting programs we’re evaluating, participating in from a surface standpoint. So we think that’s positive as well and that could be some tailwinds if we’re successful in that regard. So we look at them together. It’s significant tailwinds in shipbuilding and we’re going to take advantage of them.

Josh Korn, Analyst: Okay. Thanks. And then on Mission Technologies, have you had any impact discussions around Doge at this time?

Chris Kastner, President and Chief Executive Officer, HII: So we’re comfortable with our 25% guidance still. There has been some minor restructuring of contracts, which would potentially impact ’26 We’re looking for ways to offset that. As of this point, we’re still comfortable with our revenue growth within Mission Technologies. But there has been a slowing of awards and activity, although the pipeline still looks very strong at over $90,000,000,000 So we’re going to watch it. We’re following it every day and we’re offsetting impacts where we can.

But as of right now, we’re comfortable with our guidance.

Conference Operator: Our next question comes from Seth Seifman of JPMorgan. Your line is now open. Please go ahead.

Gautam Khanna, Analyst, TD Cowen: Thanks very much and good morning.

Conference Operator: Think you mentioned

Gautam Khanna, Analyst, TD Cowen: earlier, Chris, the timing of the contracts or maybe Tom, you mentioned the timing of the contracts for Block six and Bill two could affect this year’s results. Maybe if you could tell us a little bit more about that based on the margin forecast for Q3, it seems like you’re expecting those results in those contracts in Q4. Are they do you expect them to come together? Do you think they could come separately? If you could give us an update on sort of where things stand and kind of the magnitude of that within the outlook.

Chris Kastner, President and Chief Executive Officer, HII: Sure. I’ll start and then I’ll kick it over to Tom for the details on how he’s thinking about it from an outlook standpoint. We quickly repositioned from the Block V contract into Block VI and the Columbia Build II contracts. And we’re actively engaged with the Navy and our partners to get that done. The good news is that we had a construct that was put together under Block five that we can follow as we move into Block six.

Now it’s going to take some time. We’re working at a very detailed level with them to get these done because they’re very important. But it could slip into Q4 and we’ll do them incrementally. And as Tom indicated in his prepared remarks, while we do expect them to be done this year and we but we also factored it when we think through the balance of the year. So it could potentially provide some upside if it gets done or potentially a minor downside if it doesn’t based on those factors.

But I’ll let Tom talk about details.

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Yes. In February, we had mentioned about the three awards. We’re happy to get the FY 2020 anomaly done in the springtime. Those other two awards were planned for the back half of the year. As we mentioned, there is a factoring of opportunities and risks and how things play out.

So that’s why we give ranges on revenue and margin and cash. Those awards really would we wouldn’t have any cost of sales or they wouldn’t overly impact the margin if they got awarded the back half of the year. It really just is a function of incentives, any advancements, any infrastructure for capital investments that could either provide tailwinds or headwinds. That’s been factored in the guidance right now. So it doesn’t impact the current EACs and profitability that I have today.

And the range of outcomes I see right now we feel really comfortable with the 500 to $600,000,000 in free cash flow in India. So we’ll keep you informed. We do anticipate we’re working actively with the Navy right now on those requirements and those offerings, and we’ll see how the back half of the year plays out.

Gautam Khanna, Analyst, TD Cowen: Okay. Okay, great. And then just a follow-up, just to understand kind of how some of the stuff works. Wage increases that you talked about for Newport News, did those go into productivity assumptions on existing contracts and thus led to some higher booking rates on contracts for or at least in the mix, some upward pressure on booking rates for existing programs and that when that comes to Ingalls, we’ll see something similar? Or is that not the right way to think about it?

Chris Kastner, President and Chief Executive Officer, HII: That’s not necessarily the right way to think about it. We think there’s going to be a direct correlation between higher wages and improved retention, which should lead to a more skilled employee and improved performance. We don’t necessarily bake those into the estimates to complete right away. We need to prove it. So we’re just going to continue to execute.

And if that performance does improve, then could potentially book up there. But it’s not necessarily a direct link as you indicated in your statement.

Conference Operator: Our next question comes from Ron Epstein with Bank of America. Your line is now open. Please go ahead.

Respondent: Hey, good morning guys.

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Hey, Ron.

Respondent: What impact, if any, are you guys expecting on the business from the changes in R and D and the tax code? Is that for you up to do some stuff that you might not have done before?

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Well, I’ll start with the the changes of the tax law. Right? So, obviously, that got approved on, on July 5, and that kind of works itself through. And rather than amortizing the RD expense, it gets period expense.

Doug Harned, Analyst, Bernstein: So

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: there’s tailwind for that. You see about $150,000,000 of increase and that’s why we took the free cash flow up from a midpoint of $450,000,000 now to from 300 to $500 which was 400 of a midpoint up to now $550,000,000 midpoint between $506,100,000,000 So we’ll get some favoritism on that. As you know, it’s now a period expense plus you can do that retroactively since the beginning of this year. And then there’s a catch up between 2224 on the amortization. So a lot of moving parts just on the tax front alone.

And that’s on the federal side. On the state or the noncurrent state taxes, it actually provides a slight kind of headwind, and that’s why we adjusted that for the guidance to be $15,000,000 expense this year as opposed to being neutral. And 10 of that $15,000,000 will show up in q three in the guide that I gave you. So, realistically, it provides a couple of more dollars to kind of run the business and invest in the business here. And as you see, we finished out the quarter with positive cash flow of $343,000,000.

Going forward, as we say, we don’t think, the $147,000,000 of $150,000,000 of tax benefit here we’ll have a credit or we’ll forego paying taxes for the rest of the year.

Respondent: Got it. Got it. Got it. And then maybe just a follow-up with on the unmanned undersea business that you guys have. I mean, large is that product line today?

And if you could frame maybe the kind of growth you could see there?

Chris Kastner, President and Chief Executive Officer, HII: Yes. So we haven’t specifically identified how large they are Externally, Ron, they’re just not significantly material to the Mission Technologies portfolio, but we do expect outsized growth beyond the 5% growth rate. And when you look at the opportunities that are presenting themselves in the space, we have an opportunity, as I indicated in my remarks, for over 200 vehicles on that small uncrewed vehicle contract with the Navy. And there are some upcoming competitions, both in undersea and surface that are very interesting to us that we’re going to evaluate. So while it’s small now, we do expect it to grow an outsized rate within Mission Technologies.

And there’s some really good opportunities there that are absolutely funded within the reconciliation bill.

Respondent: Got it. All right. Thank you very much.

Chris Kastner, President and Chief Executive Officer, HII: Sure.

Conference Operator: Our next question comes from Myles Walton with Wolfe Research. Myles, your line is now open. Please go ahead.

Seth Seifman, Analyst, JPMorgan: Thanks. Good morning.

Scott Micus, Analyst, Melius Research: Morning. Chris, I was wondering

Seth Seifman, Analyst, JPMorgan: if you could touch on your views of AUKUS and its trajectory. It seems like it may be getting a relook, but it’s never quite clear as to what is and what isn’t actually occurring. And then as well, if you can just touch on where you think the role of partnerships with international shipbuilders would be most impactful in a positive way to the business and to getting the output of the overall industry up?

Chris Kastner, President and Chief Executive Officer, HII: Sure. Great. Thank you, Mel. Yes, the AUKUS is still broadly supported simply because it makes great strategic and economic sense. So there’s no backup that I see within Australia, The UK or The United States.

There is a Pentagon review going on, and I think that’s healthy. They need to look at it to make sure that we’re proceeding down the right path. But I fully expect it to continue to be supported across all three countries. From our perspective, we do have a footprint down there now. We’ve got a great partner in Babcock.

We’ve got some good wins under our belt. And we’re competing for some also very interesting wins that should show up over the back half of the year. So it’s positive for us. We’re going to continue to grow. We’re going to continue to have a presence down there with our partner.

And I’m still very bullish on August. From other international shipbuilders, we have taken the steps because we saw this coming. We have developed a strategic relationship with HHI out of Korea to evaluate both defense opportunities and commercial opportunities. Could they help with investments in our current shipyards or other shipyards to increase throughput for the industrial base? Absolutely.

We’re just going have to see how that develops over the next couple of quarters. But I think there’s I’m pretty bullish on that as well. They’re committing dollars to increase the industrial base, which will increase throughput. So I think that’s only positive and just adds to the tailwinds that we see in shipbuilding.

Gautam Khanna, Analyst, TD Cowen: Okay. That’s great. And then

Doug Harned, Analyst, Bernstein: just can you touch on how

Seth Seifman, Analyst, JPMorgan: many employees were hired in the quarter?

Chris Kastner, President and Chief Executive Officer, HII: About 2,400 more experienced. And I didn’t specifically talk about retention, but we’ve seen month over month improvement in our retention and attrition metrics. And since we implemented the wage adjustment in Newport News, there’s been a very good trend for the first few weeks from an attrition standpoint. Now we’re not going to claim victory yet because it’s just a few data points. But our initial assumptions seem to be proving out positively, and we think that’s a really good sign for the future.

Doug Harned, Analyst, Bernstein: All right. That is good news. Thanks.

Chris Kastner, President and Chief Executive Officer, HII: Sure.

Conference Operator: Our next question comes from Noah Uponak with Goldman Sachs. Your line is now open. Please go ahead.

Seth Seifman, Analyst, JPMorgan: Hey, good morning, everyone.

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Good morning, Hal. Good morning, Hal.

Seth Seifman, Analyst, JPMorgan: I I guess it feels like there’s a little bit of a chasm between the very significant change in funding and treatment of your business and the Navy overall by the government in the budgets and what you’re doing here with guidance and sort of your tone on the pace of improvement. Recognizing it’s a very long cycle business and a lot of these things will take time, I’m trying to sort out how much of that is it just will take time. 2025 and 2026 still have the pre COVID contracts. And it’s not till beyond that that we see significant improvement in revenue growth and margin versus I’m wondering if does the block six, block two waiting for that award this year make this year just is that a very binary thing where you can’t really call for much improvement this year until you know that’s in this year and not sliding into early twenty twenty six.

Chris Kastner, President and Chief Executive Officer, HII: Yes. I think your first assumption is correct, Noah. I think you’ve got it. It does take time. We have pre COVID contracts we’re working through.

We’ve assessed the Block six and Build two contracts and factored them into the indicated final. So if it happens, things could potentially get a bit better. If it doesn’t, it could be maybe slightly worse, but we’re comfortable with how we factor that. So I think you’ve got it right. It just takes time.

We need to get through these pre COVID contracts, but the tailwinds are real. The demand is real. The actions we’re taking to expand the industrial base are happening. The maritime industrial base funding that have been flowed to the supply chain have absolutely, improved the supply chain. The technology investments that are taking place with AI, with C3AI in the Newport News Shipyard is going to yield positive results.

So it’s going to happen. We just need to come through these pre COVID shifts to transition to the other side.

Seth Seifman, Analyst, JPMorgan: Chris, can you give us a sense for the split on the labor front, the split between the need to improve new hiring versus the need to improve attrition? Because I would think the former, would take a while and have a long learning curve, whereas I would think the latter would maybe flow to the business much more quickly.

Chris Kastner, President and Chief Executive Officer, HII: That’s interesting. They work together as you would expect. If we can hire more experienced people that are going to stay, then your efficiency is going to get better very quickly. And you can afford to not hire as many people because you’re not losing as many. So it’s directly related and they move together.

And if we’re successful in hiring, then our attrition should get better as well.

Seth Seifman, Analyst, JPMorgan: Okay. And then just, Tom, in the cash flow buildup, the $150,000,000 approximately of cash tax tailwind, does that recur for a while or does it get smaller beyond 25,000,000 And then on CapEx, how long are you in the 3.5% to 4% of sales range before that starts to come down and become a tailwind?

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Yes. So on the taxes right now, we gave the guidance for this year. So it has some tailwinds in the out years, too. We’re working ourselves through that. It’s a bit complicated because one is the timing.

On the Fed side, since it was enacted, we kind of understand that. The states obviously hit different states, how they enacted, when they enacted. We’re working ourselves through the math of that. So we haven’t guided anything for ’26 and on. There are some dollar savings in those years as well, and we’ll provide more guidance on the back half of this year on that front.

Alright? Your part two was? CapEx. CapEx. So after CapEx, we finished 2.5% in Q1, 3% in Q2, with 2.8 through the first half of the year.

We guided 4%. I haven’t provided guidance after this year. I know last year when we thought we were going to put all the subs on contract immediately, it was about 5% for three years. I do envision it to be elevated over the normal what we term medium to long term of 2.5%. I do envision us being higher than that in the next couple of years, but we haven’t provided a specific number.

That will be a function as we come through the Columbia Ville II and the VCS Block 6. Timing and pace, the number of boats and the level of infrastructure and investment that goes into the Newport News yard will dictate. But I’m comfortable like we have in the recent past, we’ll continue to get participation, meaningful participation from our Navy customer as we invest for more throughput and high revenues and new revenues.

Doug Harned, Analyst, Bernstein: Okay. Thank you.

Tom Sealy, Executive Vice President and Chief Financial Officer, HII: Thank

Conference Operator: you. 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, President and Chief Executive Officer, HII: Sure. Thanks for joining the call today and your interest in HII. We are focused on building on these results and driving value for all of our stakeholders. We look forward to providing further updates as we progress throughout the year. Thank you.

Conference Operator: Thank you very much. That concludes today’s conference call. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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