Huntington Ingalls Industries, Inc. Q2 FY2025 earnings call

• Financial performance: Second quarter sales $3.1B, EPS $3.86, backlog $56.9B, contract awards $11.9B, free cash flow $730M, CapEx $93M.
• Operational initiatives: Increasing throughput, with Ingalls on plan and Newport News behind due to CVN 80 supply chain issues; $250M annualized cost reduction effort expected to be achieved by year-end; contract awards including 2 Block V submarines and work on Virginia-class Block VI and Columbia Build II.
• Washington activities: FY '26 budget includes support for shipbuilding programs, including funding for Virginia-class submarines, DDG destroyers, amphibious warships, USV/UUV production, and shipbuilding industrial base.
• Ship progress: Newport News floated off SSN 800 Arkansas, on track to deliver SSN 798 Massachusetts; CVN 79 Kennedy on track for trials; CVN 80 Enterprise receiving engine room components. Ingalls completed main engine light off on DDG 128, christened DDG 129, made progress on amphib programs.
• Technology: Partnership with C3 AI to leverage digital technologies in AI for shipbuilding throughput optimization.

In the second quarter, HII reported sales of $3.1 billion. Shipbuilding revenues: Newport News had $1.6 billion, up 4.4% YOY, driven by Columbia and Virginia-class submarine programs. Ingalls had $724 million, up 1.7% YOY, driven by guided missile destroyer program. Mission Technologies had $791 million, up 3.4% YOY, driven by a nonrecurring C5ISR contract resolution and higher live, virtual and constructive training volume. Segment operating income for shipbuilding was $172 million, margin 5.6%. Newport News segment operating income $82 million, margin 5.1%. Ingalls segment operating income $54 million, margin 7.5%. Mission Technologies operating income and margin were largely consistent year-over-year.

• Reiterates shipbuilding revenue $8.9B-$9.1B, margins 5.5%-6.5%; Mission Technologies revenue $2.9B-$3.1B, operating margins 4%-4.5%, EBITDA 8%-8.5%.
• Updates 2025 free cash flow guidance to $500M-$600M. Third quarter shipbuilding sales expected ~$2.2B, Mission Technologies ~$730M, free cash flow ~negative $150M. Annual guidance predicated on achieving operational initiatives, including Virginia-class Block VI and Columbia Build II awards (expected this year, but timing could impact results).

• Supply chain risks: Continued stability expected but risk remains for some major equipment.
• Delay in contract awards: Potential delay in Virginia-class Block VI and Columbia Build II awards could impact 2025 results.
• Labor and industrial base challenges: Transitioning out of pre-COVID contracts and building skilled labor pipeline and industrial base presents challenges.

Q: How to reconcile throughput increase with shipbuilding revenue guide of only 3%?

A: Throughput increase considers wages, outsourcing, and Charleston operations coming online, with most happening in back half of year. Sales forecast takes into account material timing, but confident in 4% growth with execution.

Q: On repeal of Section 174, is 5-year free cash flow target back?

A: No, focus is on annual guidance and hitting current guides before addressing multi-year targets.

Q: Impact of CVN 79 schedule slip?

A: Already factored into guidance, no material financial impact, CVN 79 progressing well with 90 compartments left.

Q: Impact of tax code changes on free cash flow?

A: Tax law changes provide tailwind, with R&D expensing now period expense, increasing free cash flow guidance to $500M-$600M.

Q: Role of AUKUS and international partnerships?

A: AUKUS supported, and strategic relationship with HHI of Korea evaluated for defense and commercial opportunities to increase industrial base throughput.