Huntington Ingalls Industries, Inc. Q1 FY2025 earnings call

• Operational initiatives include enhancing shipbuilding throughput, reducing costs, and securing new contract awards. Progress made on improving shipbuilding throughput by 20% Y/Y with Ingalls largely on plan and Newport News modestly behind due to weather and CVN 80 equipment delays. - Shipyard highlights: Ingalls launched DDG 129, christened LPD 30, and started fabrication of LPD 32; Newport News CVN 79 continued catapult testing; Virginia-class program completed a major test event on SSN 802 Oklahoma. - Mission Technologies delivered initial Lionfish small UUVs, surpassed 700 Remus Uncrewed underwater vehicles sold, and had key wins in training support, pilot training, and air and space operations. - Retained 99% of transitioning workforce at Newport News Charleston operations and celebrated apprentice school graduations with 115 graduates.

In the first quarter, total revenue was $2.7 billion. Ingalls Shipbuilding had revenues of $637 million, a 2.7% decrease compared to Q1 2024, driven primarily by lower volume on amphibious assaults ships. Newport News Shipbuilding had revenues of $1.4 billion, a 2.6% decrease compared to Q1 2024, due to lower volumes in aircraft carriers and naval nuclear support services, partially offset by higher volumes in the Columbia-class submarine program. Mission Technologies had revenues of $735 million, a 2% decrease compared to Q1 2024, primarily driven by lower volume in C5ISR. Segment operating income was $171 million, an increase of less than 1% compared to Q1 2024, with improved performance at Mission Technologies in cyber, electronic warfare and space and Uncrewed Systems offset by lower amphibious assault ship risk retirements at Ingalls.

• Reiterating 2025 guidance with no changes. For Shipbuilding, expects Q2 sales of approximately $2.2 billion and margins near the low end of annual guidance range. For Mission Technologies, expects Q2 sales relatively flat sequentially and margins of 3% to 3.5%. Anticipates Q2 free cash flow to be between $200 million and $300 million. Long-term outlook remains positive with expectations of top line growth and margin and free cash flow normalization by 2030.

• Weather impacts in January and February affected Newport News' progress, particularly CVN 80 due to late major equipment. - Delays in receiving equipment for CVN 80 impacting construction approach. - Labor negotiations and potential variability in contract types. - Timing variability of incentives and normal fluctuations in program receipts and disbursements affecting free cash flow.

Q: Doug Harned asked about shipbuilding throughput and the trajectory to achieve 2 Virginia class per year.

A: Chris Kastner responded that the FY 2024 tub-boat contract with targeted investments in workforce, equipment, facilities, and training will accelerate throughput, and they expect to negotiate additional investments for further acceleration.

Q: David Strauss inquired about the cost-plus contract for the two-boat Virginia contract and shipbuilding margins.

A: Tom Stiehle explained it's a CTIF contract with constraints on costs, and shipbuilding margins came in better than guided due to various factors including EAC adjustments, with Newport News performing better and Ingalls having a pacing quarter. They forecast margin step down in Q2 due to conservatism and risk management.

Q: Scott Mikus asked about workforce trends, outsourcing quality, and SAS program impact on carriers.

A: Chris Kastner said they hired 1,000 people in Q1, attrition is down, outsourcing quality is good with pilots, and SAS supports the entire nuclear industrial base including aircraft carriers.

Q: Seth Seifman questioned the contract announcement's cash impact and international partnerships with Hyundai.

A: Tom Stiehle said the contract was incorporated into Q2 guidance, and the partnership with Hyundai is early, focusing on commercial and defense shipbuilding collaboration to leverage best practices and expand capacity.

Q: Jason Gursky asked about shipbuilding industrial base investment strings, OTAs impact on Mission Systems, and SAS.

A: Chris Kastner said it's too early to determine cash flow impact from industrial base investment, OTAs are positive for Mission Technologies, and while SAS may not be in the executive order, investments needed for build rate will continue.

Q: Noah Poponak asked about SAS in the executive order, wage impacts on attrition, and Q2 margin decline.

A: Chris Kastner said SAS's investments are reflected in current contracts, attrition improvement is from targeted hiring of experienced labor, and Q2 margin guidance is conservative due to risk management and waiting for initiatives to play out.

Q: Ron Epstein asked about manufacturing process automation in shipyards and demand for unmanned products.

A: Chris Kastner said streamlining and targeted hiring are key to improving throughput, and demand for unmanned products, especially uncrewed underwater vehicles, is strong with significant backlog and potential ramp this year.