Huntington Ingalls Industries, Inc. (HII) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed outlook. While there are positive aspects like strategic partnerships and potential growth in unmanned undersea business, concerns remain over wage impacts, slow contract transitions, and unclear guidance on future improvements. The Q&A highlights some uncertainties, especially regarding labor and long-term contracts, balancing out any immediate optimism. Without a clear market cap, the overall sentiment leans towards neutral, considering both positive strategic moves and existing challenges.

Key Financial Performance

Second Quarter Sales $3.1 billion, increased 3.5% year-over-year due to growth across all three divisions.

Earnings Per Share (EPS) $3.86, decreased from $4.38 in the same period last year due to lower operating income and margins.

Backlog $56.9 billion, reflecting strong contract awards.

Contract Awards $11.9 billion, including DDG 145 and 146, LPD 33, and 2 Block V submarines.

Free Cash Flow $730 million, increased significantly due to timing of incentives, cash receipts, and tax improvements.

Capital Expenditures (CapEx) $93 million, representing 3% of revenues.

Ingalls Revenues $724 million, increased 1.7% year-over-year due to higher volume on guided missile destroyer programs, partially offset by lower volume on LHA and LPD programs.

Newport News Revenues $1.6 billion, increased 4.4% year-over-year due to higher volumes in Columbia and Virginia-class submarine programs, partially offset by unfavorable adjustments on aircraft carriers.

Mission Technologies Revenues $791 million, increased 3.4% year-over-year due to a nonrecurring favorable resolution related to a C5ISR contract and higher training volume.

Segment Operating Income $172 million, decreased year-over-year due to lower performance in Newport News and Ingalls divisions.

Segment Operating Margin 5.6%, down from prior year due to lower performance in shipbuilding programs.

Net Earnings $152 million, decreased from $173 million in the second quarter of 2024 due to lower operating income.

Diluted Earnings Per Share $3.86, decreased from $4.38 in the same period last year.

Cash Provided by Operations $823 million, reflecting strong cash flow performance.

Liquidity $2 billion, supported by a cash balance of $343 million.

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Operating Highlights

Lionfish small uncrewed undersea vehicles: Delivered the first 2 units to the U.S. Navy under a program that could scale to 200 vehicles.

REMUS 300 UUVs: Announced a commercial sale to Hitachi.

Contract awards: Secured $11.9 billion in awards, including DDG 145 and 146, LPD 33, and 2 Block V submarines.

Technology partnership: Announced a partnership with C3 AI to leverage AI for shipbuilding schedule optimization.

Operational initiatives: Focused on increasing throughput, achieving $250 million in annualized cost reductions, and securing new contracts.

Shipyard performance: Ingalls is on plan, while Newport News is behind due to CVN 80 supply chain issues. Both shipyards increased throughput in Q2.

Industrial base expansion: Significant outsourcing and technology efforts are increasing shipbuilding capacity and efficiency.

Government support: Reconciliation bill and FY '26 budget include significant funding for shipbuilding programs, including submarines and destroyers.

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Risk or Challenges

Supply Chain Issues: Newport News continues to face delays due to supply chain issues, particularly with CVN 80 critical components. While progress is being made, risks remain for some major equipment, which could impact throughput and delivery timelines.

Operational Transition Challenges: The company is transitioning out of ships contracted pre-COVID, which presents challenges over the next 1.5 years. This transition period is expected to be difficult as the company adjusts to new contracts and operational demands.

Performance and Margin Declines: Segment operating income and margins have declined year-over-year, particularly at Newport News and Ingalls, due to lower performance on key programs like Virginia-class submarines and aircraft carriers. This could impact financial stability and investor confidence.

Labor and Retention Risks: Although there are positive trends in labor pipeline and retention, sustained improvement is required to meet long-term targets. Any setbacks in workforce development could hinder operational efficiency.

Cost Reduction Targets: The company aims to achieve $250 million in annualized cost reductions by year-end. Failure to meet this target could strain financial performance and operational budgets.

Contract Timing Risks: Delays in awarding Virginia-class Block VI and Columbia Build II submarine contracts could pose a headwind to financial performance if pushed into 2026.

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Guidance & Outlook

Revenue Guidance: Shipbuilding revenue is expected to be between $8.9 billion and $9.1 billion for 2025. Mission Technologies revenue is projected to be between $2.9 billion and $3.1 billion.

Operating Margins: Shipbuilding operating margins are expected to range between 5.5% and 6.5%. Mission Technologies operating margins are projected to be between 4% and 4.5%, with EBITDA margins between 8% and 8.5%.

Free Cash Flow: 2025 free cash flow guidance has been updated to a range of $500 million to $600 million, an increase of $150 million from prior guidance.

Submarine Contracts: The company expects the award of Virginia-class Block VI and Columbia Build II submarine contracts to occur in 2025. If delayed to 2026, it would pose a headwind, but the current guidance accounts for timing considerations.

Operational Initiatives: The company is progressing on operational initiatives, including increasing throughput and achieving cost reductions. A meaningful improvement in throughput is expected over the course of the year.

Third Quarter Preview: Shipbuilding sales are expected to be approximately $2.2 billion with margins near the low end of the annual guidance range. Mission Technologies sales are projected to be approximately $730 million with operating margins of about 3.5%. Free cash flow for Q3 is expected to be approximately negative $150 million.

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Shareholder Return Plan

Cash Dividend: Paid a cash dividend of $1.35 per share, totaling $53 million in aggregate.

Share Repurchase: No shares were repurchased during the quarter.

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Key Q&A

Q:You had a big quarter for shipbuilding in Q2 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?

A:Christopher Kastner explained that the revenue forecast considers wage adjustments, outsourcing improvements, and Charleston operations coming online, most of which will occur in the back half of the year. He expressed confidence in achieving the 20% throughput improvement and guidance estimate, with potential upside if hiring and attrition trends continue positively.

Q:A lot of money is coming into shipbuilding right now in proposed budgets, current budgets; and you're looking at the higher throughput. Just trying to figure out how we get -- we kind of triangulate between the funding trajectories, the throughput and what this revenue outlook would likely be over, at least, the coming years?

A:Kastner stated he is comfortable with the 4% growth revenue outlook and confident in the expansion of the shipbuilding industrial base. He noted that labor issues are being addressed, the supply chain is stabilizing, and the industrial base is growing, but he cannot predict when the volume will show up.

Q:When we think about kind of the repeal of Section 174, is that 5-year cumulative free cash flow target of $3.6 billion now back on the table, but just from 2025 through 2029?

A:Thomas Stiehle clarified that the 5-year guidance is not back on the table. The company is focused on providing annual guidance, which has been raised to $500 million to $600 million in free cash flow for the year. Future discussions will address longer-term guidance once consistency is demonstrated.

Q:The Secretary in Navy commented that it might be preferable to have Newport News and Electric Boat each build Virginias separately rather than teaming. If the Navy were to pursue that route, 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 1 Virginia by itself at Newport News?

A:Kastner stated that while the current teaming arrangement is satisfactory, pursuing separate builds would require significant capital investment, which has been communicated to the Navy. He assured that there would be enough skilled labor to execute such a project, but emphasized that this is a long-term consideration.

Q: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?

A:Kastner confirmed that the schedule change for CVN 79 was already factored into the guidance, with no material financial impact. He noted that the ship is progressing well, with only 90 compartments left, and is expected to go to sea this year.

Q:I wanted 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.

A:Kastner explained that all programs are supported in the FY '26 budget and included in the 4% mid- to long-term guidance for shipbuilding sales. He highlighted the potential for tailwinds in the unmanned sector, particularly in uncrewed underwater vehicle programs and surface programs.

Q:On Mission Technologies, have you had any impact or discussions around DOGE at this time?

A:Kastner stated that while there has been some minor restructuring of contracts potentially impacting 2026, the company is still comfortable with its 2025 guidance. He noted a slowing of awards and activity but emphasized a strong pipeline of over $90 billion.

Q:The timing of the contracts for Block VI and Build II 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?

A:Kastner and Stiehle explained that the contracts could slip into Q4 and may be awarded incrementally. While they are factored into the guidance, their timing could provide upside or minor downside. The company is actively engaged with the Navy to finalize these contracts.

Q:The 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 or at least in the mix upward pressure on booking rates for existing programs and when that comes to Ingalls, we'll see something similar?

A:Kastner clarified that while higher wages are expected to improve retention and performance, these improvements are not immediately baked into estimates to complete. The company needs to prove the performance improvements before reflecting them in financials.

Q:What impact, if any, are you guys expecting on the business from the changes in R&D in the tax code?

A:Stiehle explained that the changes in the tax code provide a tailwind of approximately $150 million, which has been factored into the free cash flow guidance of $500 million to $600 million. He noted that the changes allow for retroactive adjustments and provide additional funds for business investment.

Q:On the unmanned undersea business that you guys have. I mean how large is that product line today? And if you could frame maybe the kind of growth you could see there?

A:Kastner stated that while the unmanned undersea business is not significantly material to the portfolio currently, it is expected to grow at an outsized rate. He highlighted opportunities for over 200 vehicles and upcoming competitions in undersea and surface programs.

Q:Chris, I was wondering 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?

A:Kastner expressed confidence in the continued support for AUKUS across Australia, the U.K., and the U.S., despite a Pentagon review. He highlighted the company's partnership with Babcock and strategic relationship with HHI in Korea as positive steps to increase industrial base throughput and support the shipbuilding industry.

Q: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?

A:Kastner explained that hiring and attrition are directly related. Hiring more experienced people who stay longer improves efficiency and reduces the need for additional hiring. He noted positive trends in retention and attrition metrics since implementing wage adjustments.

Q:In the cash flow buildup, the $150 million approximately of cash tax tailwind, does that recur for a while? Or does it get smaller beyond '25? 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?

A:Stiehle stated that while there are some tax savings in future years, specific guidance beyond 2025 has not been provided. He noted that CapEx is expected to remain elevated above the long-term average of 2.5% for the next few years, depending on the timing and scope of infrastructure investments.

Q: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 and 2025 and 2026, still have the pre-COVID contracts, and it's not until beyond that, that we see significant improvement in revenue growth and margin versus I'm wondering if -- does the Block VI, Block II (sic) [ Build II ] 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 '26?

A:Kastner confirmed that the long-cycle nature of the business and pre-COVID contracts are the primary reasons for the slower pace of improvement. He emphasized that the demand and tailwinds are real, but it will take time to transition to post-COVID contracts and realize significant improvements.

Q:Review of Unclear Management Responses

A:Management appeared to avoid giving a direct answer to the question about the potential for Newport News and Electric Boat to build Virginias separately. While Kastner acknowledged the possibility and the need for significant capital investment, he did not provide specific details or a clear stance on the feasibility or timeline of such a change.

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Earnings Word Cloud

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