Huntington Ingalls Industries, Inc. Q3 FY2025 earnings call

• Thanked the U.S. Navy and Marine Corps for their enduring service. - Reported record third quarter sales of $3.2 billion and diluted earnings per share of $3.68. Shipbuilding sales growth of 18% was driven by the shipbuilding division's focus on increasing throughput in shipyards. Mission Technologies' 11% sales growth was due to its team's focus on delivering innovative solutions in areas like C5ISR, cyber, etc. - Newport News made progress on submarines (SSN 798 Massachusetts completed sea trials) and aircraft carriers (CVN-79 Kennedy in testing, CVN-80 Enterprise with large components being installed). - Ingalls successfully completed builders trials for DDG 128 Ted Stevens and made progress on amphibious warships. - Mission Technologies had a strong quarter with $787 million sales, a book-to-bill of 1.25x, and announced strategic partnerships with Babcock, Shield AI, Thales, and unveiled the ROMULUS family of unmanned surface vessels. - Operational initiatives: Expected ~15% throughput improvement for 2025, hired over 4,600 shipbuilders year-to-date, distributed shipbuilding strategy with 23 partners, $250 million annualized cost reduction effort on track, and negotiating new contracts including submarines. - In Washington, the new fiscal year began with a funding lapse, but shipbuilding programs have been fully supported, and Mission Technologies programs have had immaterial impact but are being watched.

Third quarter sales totaled $3.2 billion. Shipbuilding sales saw an 18% year-over-year growth, reaching $2.4 billion, which accounts for approximately 75% of the total revenue. Mission Technologies reported sales of $787 million, marking an 11% year-over-year increase, representing about 24.6% of the total revenue. Ingalls achieved record revenues of $828 million, a 24.7% year-over-year growth, while Newport News had revenues of $1.6 billion, up 14.5% year-over-year. In terms of segment operating income, shipbuilding had a segment operating income of $179 million with an operating margin of 5.6%. Ingalls had a segment operating income of $65 million and an operating margin of 7.9%, Newport News had a segment operating income of $80 million and an operating margin of 4.9%, and Mission Technologies' operating income and margin were largely consistent year-over-year.

• Narrowed the shipbuilding revenue range to between $9 billion and $9.1 billion, an increase of $50 million at the midpoint from prior guidance. - Reiterated the shipbuilding margin range of between 5.5% and 6.5%. - Updated 2025 free cash flow guidance to be between $550 million and $650 million, with the midpoint increased by $50 million from prior guidance. - Announced a modest increase in the quarterly dividend to $1.38 per share.

• Lapse in federal appropriations in the new fiscal year, though shipbuilding programs have been fully supported so far, and Mission Technologies programs have had immaterial impact but are being closely watched. - Uncertainty around government contract negotiations and potential delays that could impact program timelines and outcomes.

Q: On Virginia Block VI and Columbia Build II negotiations, any impact from the government shutdown?

A: Furlough is not impacting the negotiation. The team is working hard to complete it before the end of the year. Incremental awards are not beneficial for the industrial base as a consistent demand signal is important for the supply chain.

Q: When will the wage increase be implemented at Ingalls?

A: In discussions with the union at Ingalls. The union agreement expires next year, and we are hoping to have it in place at the beginning of next year or maybe end of this year.

Q: Shipbuilding revenue was up in the quarter but the full year only saw a $50 million increase. Explain.

A: Newport News grew 15%, Ingalls grew 25%. There are tailwinds, and we are evaluating Q4. We envision capacity and throughput ramping as we execute on the backlog and investments mature.

Q: Talk about the partnering strategy on unmanned vessels.

A: Using Odyssey software solution for autonomy. Partnerships with Shield AI, C3 AI enhance capabilities. Over 750 uncrewed vehicles have been delivered.

Q: Impact of the President's executive order on aircraft carrier designs?

A: We will build whatever the Navy asks us to build. We will work with them to implement changes in the most intelligent way.

Q: Is the throughput target equal between Ingalls and Newport News?

A: Fairly equal, resulting from increased outsourcing and performance of the labor force.

Q: What about cash flow in 2026?

A: Expecting ~$600 million free cash flow over two years, tied to earnings growth, CapEx, and contract performance.

Q: Net EACs by segment?

A: Gross favorable was 37%, unfavorable was 40%, net of minus 3%. Ingalls was positive 6%, Newport News was minus 13%, and NTA was positive 4%.

Q: Pre-COVID vs post-COVID contract mix?

A: By 2027, post-COVID work will be over 50%, ramping down from high percentages currently.

Q: Why does throughput and top line growth improve before margins?

A: Throughput assumptions support EACs, and there is risk and opportunity. One quarter doesn't determine margin; continued performance is needed to retire risk and impact margins.