Huntington Ingalls (HII) Earnings Call Transcript

Image source: The Motley Fool.

DATE

Thursday, October 30, 2025 at 9 a.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Chris Kastner

Executive Vice President and Chief Financial Officer — Tom Stiehle

Vice President, Investor Relations and Corporate Treasurer — Christie Thomas

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

Tom Stiehle warned that a delay in the Virginia Class Block VI and Columbia Build II submarine contract awards "would be a headwind to our guidance and would likely result in ending the year slightly below the midpoint of our shipbuilding margin guidance range" for FY2025.

Chris Kastner reported that although shipbuilding operations have been fully supported during the appropriations lapse, Mission Technologies programs "are more likely to be impacted by budget timing," and management is monitoring these closely.

Tom Stiehle noted, "The effective tax rate in the third quarter was 28.9%, higher than our initial expectations, as results were impacted by a reduction in the estimated research and development tax credit for the prior year."

TAKEAWAYS

Total Revenue -- $3.2 billion in sales for Q3 2025, setting a new quarterly record and representing a 16.1% year-over-year increase driven by all three divisions.

Diluted EPS -- $3.68 diluted earnings per share for Q3 2025, up 43.8% from $2.56 year-over-year.

Shipbuilding Sales -- $2.4 billion in shipbuilding revenue for Q3 2025, up 18% year-over-year, boosted by higher throughput, material receipts, and accelerated outsourcing.

Mission Technologies Revenue -- $787 million in Mission Technologies revenue for Q3 2025, reflecting 11% year-over-year growth attributed to C5ISR, cyber, electronic warfare, space, live virtual constructive training, and unmanned systems.

Backlog -- $56 billion in backlog as of Q3 2025, with $33 billion in funded backlog as of Q3 2025 and $2 billion in new contracts awarded in Q3 2025.

Segment Operating Income -- Segment operating income was $179 million in Q3 2025, with a segment operating margin of 5.6% in Q3 2025, both higher year-over-year, mainly from volume growth and prior-year negative adjustments.

Ingalls Shipbuilding Revenue -- $828 million in Q3 2025, up 24.7% year-over-year, due to higher surface combatant material volume.

Newport News Shipbuilding Revenue -- $1.6 billion in Newport News revenue for Q3 2025, up 14.5% year-over-year, supported by higher volume in submarines and aircraft carrier programs.

Net Earnings -- Net earnings were $145 million in Q3 2025, an increase from $101 million in the same period last year.

Cash from Operations -- $118 million in cash provided by operations in Q3 2025, with net capital expenditures of $102 million (3.2% of revenue) in Q3 2025 and free cash flow of $16 million in Q3 2025.

Dividend -- A cash dividend of $1.35 per share ($53 million total) was paid in Q3 2025; A quarterly dividend increase to $1.38 per share was announced in Q3 2025.

Shipbuilding Revenue Guidance -- Raised to $9 billion-$9.1 billion for FY2025, a $50 million midpoint increase.

Mission Technologies Guidance -- Raised to $3 billion-$3.1 billion in revenue for 2025, with operating margins at 4.5% in 2025 and EBITDA margin between 8%-8.5% for 2025.

Free Cash Flow Guidance -- Updated to $550 million-$650 million for 2025, midpoint up by $50 million.

Cumulative Free Cash Flow Target -- New $1.2 billion target for 2025-2026, implying ~$600 million per year.

Cost Reduction Initiative -- Management reaffirmed that the $250 million annualized cost reduction target is fully incorporated in FY2025 guidance.

Throughput Improvement -- Management expects a 15% throughput improvement in FY2025, citing accelerated performance in both major shipyards equally distributed between labor and outsourcing gains.

Labor Actions -- Over 4,600 shipbuilders have been hired year-to-date as of Q3 2025, with improved retention rates and experienced hiring aided by targeted wage investments.

Industrial Base Expansion -- Distributed shipbuilding strategy now includes significant outsourcing at 23 partner sites and expanding.

Submarine and Carrier Program Milestones -- Final Virginia-class Block IV submarines are in the water; SSN 798 Massachusetts completed sea trials and prepares for delivery; CVN 79 Kennedy near first sea trials; Shipbuilders are installing large components for CVN 80 Enterprise, enabling accelerated erection progress.

Unmanned Systems Initiatives -- Strategic partnerships with Babcock International, Shield AI, and Talos announced; Romulus family of unmanned surface vessels unveiled with flagship Romulus 190 under construction.

Book-to-Bill Ratio -- Mission Technologies recorded a 1.25 book-to-bill ratio in Q3 2025.

Backlog Composition -- Management cited more than 50% of shipbuilding work will be under post-COVID contracts by 2027, as the contract mix transitions.

SUMMARY

Management confirmed significant year-over-year growth across all divisions and record revenue in Q3 2025, citing improved throughput, expanded outsourcing, and labor stability as drivers. The company raised the midpoint of its full-year guidance for both the Shipbuilding and Mission Technologies segments, while also boosting free cash flow projections and establishing a new two-year cumulative target. Management stressed that the successful execution of operational and cost-reduction initiatives is critical to these results, with performance gains evenly split between labor improvements and strategic outsourcing.

Chris Kastner said securing the Virginia Class Block VI and Columbia Build II contract awards before year-end remains a priority, as delay could pressure year-end margins.

Tom Stiehle emphasized underlying growth is substantive and supported by higher throughput and new vendor activation.

Chris Kastner confirmed wage investments at Newport News improved experienced hiring and reduced attrition, with no evidence of market wage increases eroding competitive positioning.

Tom Stiehle stated, "During the quarter, we did not repurchase any shares," reiterating capital allocation remains focused on sustaining investment-grade credit and steady dividend growth.

Tom Stiehle reported net EACs of positive $6 million for Ingalls in Q3 2025, negative $13 million for Newport News, and positive $4 million for Mission Technologies in Q3 2025, totaling net negative $3 million in Q3 2025.

Chris Kastner described equal throughput gains at both shipyards, "distributed fairly evenly between increased outsourcing and labor force performance."

Tom Stiehle emphasized that trends in throughput and top-line sales are promising but must continue to be demonstrated "quarter over quarter" before materially lifting margin expectations.

Tom Stiehle clarified that achieving higher cash flow targets in the $700 million-$800 million range depends on transitioning further into post-COVID contract work with better profitability profiles.

Chris Kastner stated union negotiations at Ingalls regarding wage increases are ongoing and may conclude by early next year.

INDUSTRY GLOSSARY

C5ISR: Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance, and Reconnaissance — key integrated defense and security systems areas.

Book-to-Bill: Ratio comparing the value of new orders ("bookings") received to the revenue ("billings") recognized in a period; values above 1.0 signal rising future demand.

EAC: Estimate At Completion — cumulative estimate of total expected contract costs, including performance to date and future projections.

Throughput: The rate at which shipyards or facilities complete ship construction or repairs, reflecting both labor and supply chain performance.

Full Conference Call Transcript

Chris Kastner: Thanks, Christie. Good morning, everyone. The United States Navy recently celebrated its 200th birthday, and the U.S. Marine Corps will do the same in the coming weeks. So I would like to start today by thanking both of them for their enduring service to our country and their commitment to our national defense. Thank you for all that you have done and all that you do to protect us and future generations. Moving on to the third quarter, I'll start by discussing our results and division highlights and provide an update on our operational initiatives. Then Tom will provide some details on our financial performance and outlook.

Before I begin, I'd like to reiterate our commitment to accelerate shipbuilding construction to meet our customers' requirements. We continue to support the identification of strategies to increase throughput across our shipbuilding programs and are working closely with our customer and partners to achieve this important mission. Now turning to our results. This morning, we reported record third quarter sales of $3.2 billion, with diluted earnings per share of $3.68. Shipbuilding sales growth of 18% year-over-year was driven by our shipbuilding division's focus on increasing throughput in our shipyards and supported by broader efforts underway to rebuild the U.S. Maritime Industrial Base.

Likewise, 11% sales growth at Mission Technologies was driven by our team's continued focus on delivering innovative solutions, including growth in the critical areas of C5ISR, cyber, electronic warfare, space, and live virtual constructive training, as well as unmanned systems. Demand for our products and services remains strong. Third quarter contract awards were $2 billion, and our backlog was $56 billion, of which $33 billion is funded. At Newport News, we continue to make progress on submarines and aircraft carriers. The last two Virginia-class Block IV submarines are in the water, with SSN 798 Massachusetts having recently completed sea trials and preparing for delivery this year.

As for our carrier program, CVN 79 Kennedy continues to make progress in its testing program, and we expect to conduct the ship's first sea trials around the end of the year. Shipbuilders are installing the large components that have now been received on CVN 80 Enterprise, which will allow erection progress to accelerate. Moving to Ingalls, in the third quarter, we successfully completed Builders trial for DDG-128, Ted Stevens, bringing her a step closer to acceptance trials and delivery. Our amphibious warship construction continues to make progress with both LHA-8 Bougainville and LPD-30 Harrisburg going through integration and testing in support of trials next year.

At Mission Technologies, we had another strong quarter of sales at $787 million, along with a book-to-bill of 1.25, and announced key strategic partnerships around future opportunities. First, we joined forces with Babcock International to integrate Huntington Ingalls Industries, Inc.'s unmanned underwater vehicles with the Babcock submarine weapon handling and launch systems, while ARIMA 620 was validated for torpedo tube deployment. This will position our TORPEDO II launch and recovery solutions for international markets. We also announced a partnership with Shield AI to accelerate cross-domain and modular mission autonomy solutions, and a partnership with Talos to develop advanced autonomous undersea mine countermeasure capabilities.

Additionally, we unveiled the Romulus family of unmanned surface vessels powered by Odyssey autonomy software and started building the flagship Romulus 190. Romulus is one example of numerous projects and contracts underway in Mission Technologies that combines internally developed technology with world-class partner technology to create best-of-breed technology solutions for the warfighter. Now shifting to an update on our operational initiatives, both Ingalls and Newport News performance was stable to slightly improving in the quarter as we continue to work through shifts that were contracted prior to COVID. As I previously indicated, during the contract mix transition from pre-COVID contracts to our newly awarded contracts, we continue to expect some choppiness in performance.

The first operational initiative, increasing throughput, is showing improvement over 2024. Initial indications align with our expectation that the Huntington Ingalls Industries, Inc. and Navy investments in workforce, infrastructure, and supply chain will have a positive impact on throughput trajectory. Our updated expectation is to achieve approximately 15% throughput improvement for the full year 2025, as throughput improvements have accelerated throughout the year. From a labor perspective, we have hired over 4,600 shipbuilders year-to-date, and our retention rates have improved at both shipyards. At Newport News, we've seen an increase in experienced hires following the wage investment this summer and increased hiring from regional workforce development pipelines, which provides more proficient incoming shipbuilders.

These are important steps to stabilize and level up the experience of our workforce. Also, we are seeing success and expansion of the industrial base, with our distributed shipbuilding strategy resulting in significant outsourcing taking place at 23 partners and growing. With the Navy's support, we are partnering with shipyards and fabricators in multiple states to grow throughput and improve schedule adherence for all of our shipbuilding programs. The second operational initiative is our $250 million annualized cost reduction effort, and we remain on track to achieve this target. And the final operational initiative is achieving our new contract awards.

Having completed the negotiations for the significant award of two submarines earlier this year, our teams have pivoted to negotiations of Block VI and the next Columbia award and are working towards having agreements in place late this year. Shifting to activities in Washington, the new fiscal year began with a lapse in appropriations, and as a result, many activities of the federal government have halted. I will note in the Department of War shutdown guidance, shipbuilding is one of six departmental priorities that should be supported to the extent possible with available funds. Today, our programs in shipbuilding have been fully supported, and we've seen no impact on normal operations.

We have had immaterial impact on Mission Technologies, but we're watching those programs closely as they are more likely to be impacted by budget timing. We continue to support the completion of FY 2026 appropriations process as soon as possible to minimize the impact that a lapse in funding could have on our programs. Both House and Senate Defense Appropriations bills include critical funding to support the submarine and maritime industrial base.

And both bills reflect continued investment in our shipbuilding programs, with funding provided for the Columbia Class and Virginia Class submarine programs, for CVNs 80 and 81 construction, in CVN 82 advanced procurement, for the DDG 51 program, and for the second of three years of funding for the refueling and overhaul of CVN 75. We also look forward to Congress completing work on the fiscal year 2026 National Defense Authorization Bill, codifying the strong support for shipbuilding and other national security priorities reflected in the respective House and Senate bills. The two defense authorization committees continue to show strong support for our company's programs.

In summary, we had a solid third quarter with record sales as we ramp production in support of delivering on our commitments. Now, I'll turn the call over to Tom for some remarks on our financial performance. Tom?

Tom Stiehle: Thanks, Chris, and good morning. Let me start by briefly discussing our third 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 five of the presentation, our third quarter revenues of approximately $3.2 billion were a record for Huntington Ingalls Industries, Inc. and increased 16.1% compared to the same period last year. The higher revenue was attributable to strong year-over-year growth at all three divisions. Ingalls revenues were a record $828 million and increased by 24.7% compared to 2024, driven primarily by higher material volume in surface combatants.

Newport News revenues of $1.6 billion increased by 14.5% compared to 2024, driven primarily by higher volumes across submarine and aircraft carrier programs. Together, shipbuilding revenue was $2.4 billion, well ahead of our guidance for the quarter as results benefited from higher than expected material receipt as well as the impacts of wage investments and our broader efforts to drive higher shipbuilding throughput, including increased outside outsourcing. Mission Technologies revenues of $787 million increased by 11% compared to 2024, driven by higher volume in C5ISR, cyber, electronic warfare, space, and live virtual and constructive training, as well as our growth in unmanned systems.

Moving on to Slide six, segment operating income of $179 million and segment operating margin of 5.6% in 2025 were both up from prior year results, primarily driven by the prior year period's negative adjustments as well as the positive impacts of the volume growth I discussed. At Ingalls, segment operating income was $65 million and operating margin of 7.9% compared to $49 million and 7.4% in the third quarter of last year. The increases were driven by the volume increases in surface combatants. The third quarter net cumulative adjustment at Ingalls was a positive $6 million, and none of the adjustments were individually significant.

At Newport News, segment operating income was $80 million and operating margin was 4.9% compared to $15 million and 1.1% in 2024. Prior year results were impacted by negative adjustments resulting from the performance challenges and the delay of new contract awards. For 2025, Newport News Shipbuilding's net cumulative adjustment was negative $13 million. None of the adjustments in the quarter were individually significant. Mission Technologies operating income and margin were largely consistent year-over-year as changes in the contract mix offset the higher volumes I previously mentioned. Consolidated operating income for the quarter was $161 million and operating margin was 5% compared to $82 million and 3% in the same period last year.

The variance was primarily driven by the segment results I've just noted. Net earnings in the quarter were $145 million compared to $101 million in 2024. Diluted earnings per share in the quarter were $3.68 compared to $2.56 in the same period last year. The effective tax rate in the third quarter was 28.9%, higher than our initial expectations, as results were impacted by a reduction in the estimated research and development tax credit for the prior year. Turning to Slide seven, cash provided by operations was $118 million in the quarter. Net capital expenditures were $102 million or 3.2% of revenues. Free cash flow in the quarter was $16 million.

Free cash flow results in the quarter were better than the guidance we had provided largely due to stronger collections in the quarter, as well as some disbursements moving out of the quarter. 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 million in the aggregate. Last week, we announced a modest increase in our quarterly dividend to $1.38 per share. Turning to liquidity and the balance sheet, we ended the quarter with a cash balance of $312 million and liquidity of approximately $2 billion. Our capital allocation priorities are unchanged.

We value our investment-grade credit rating, and we will continue to prioritize prudent debt levels while strategically investing in our shipyards and thoughtfully growing our dividend while continuing to use excess free cash flow for share repurchases. Moving on to our outlook on Slide eight. We have narrowed the shipbuilding revenue range to be between $9 billion and $9.1 billion, which is an increase of $50 million at the midpoint from the prior guidance range. We are reiterating the shipbuilding margin range of between 5.5% and 6.5%. For Mission Technologies, we are now expecting revenue between $3 billion and $3.1 billion, an increase of $50 million from the prior guidance range at the midpoint.

We expect Mission Technologies operating margins of approximately 4.5% and EBITDA margins between 8% and 8.5%. Our 2025 guidance is predicated on achieving the operational initiatives we have laid out. We are pleased with the throughput improvement we saw in the third quarter. Though we have not been able to overcome the slower start to the year and therefore had to trim our throughput improvement expectation for the full year. As Chris noted, we are continuing to work towards the Virginia Class Block VI and Columbia Bill II submarine awards later this year.

If the award were to push into 2026, it would be a headwind to our guidance that would likely have us end the year slightly below the midpoint of our shipbuilding margin guidance range. Conversely, an award this year would support us ending at or slightly above the midpoint of the range. For 2025 free cash flow, we are updating our guidance to be $550 million and $650 million. At the midpoint, this is an increase of $50 million compared to our prior guidance range. We are establishing a cumulative free cash flow target for 2025 and 2026 of $1.2 billion.

Using the 2025 free cash flow guidance midpoint, this does imply both years will generate about $600 million in free cash flow. As always, our cash flow in a particular quarter or year can be impacted by small changes in timing for large receipts and disbursements. We are also updating a number of discrete income statement guidance elements. We have made some minor revisions to our pension outlook, and you can find updated 2025 and 2026 expectations in the appendix of today's slide presentation. We are also updating the expected effective tax rate for the year to 22% given the elevated rate in the third quarter that I discussed previously.

To close, it was a good quarter as we continue to make steady progress working our way through challenging ships and executing our 2025 operational initiatives. Securing new contracts aligned to the current environment, drive higher throughput, and thoughtfully manage cost. With that, I'll turn the call back over to Christie to manage Q&A.

Christie Thomas: Thanks, Tom. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I'll turn the call over to you to manage the Q&A.

Operator: Thank you very much. We will now open the Q&A session. Our first question comes from Scott Mikus with Melius Research. Your line is now open. Please go ahead.

Scott Mikus: Good morning, Chris and Tom. I wanted to ask about the Virginia Block VI and Columbia Build II negotiations. So you kind of touched on the fact that shipbuilding is not really impacted by the shutdown. Is there anything that's potentially holding up that negotiation, maybe due to government employees being furloughed? And then also, from a high-level perspective, does it make sense for the industry and the customer to commit to that many boats at once? Or should the negotiation maybe be split up into two or more negotiations to just get a better understanding of the cost and schedule to build those?

Chris Kastner: Yeah. Thanks, Scott. I think furlough is not impacting that negotiation. The team is working very hard to get that done. I won't comment directly on negotiations because it's inappropriate. But the team is working very hard to get that done before the end of the year. I also know the Navy is working on how that works with the shutdown and potential CR to make sure that we can get the ships awarded. So more to come there, but I think we're making good progress.

On the incremental award or potentially awarding fewer ships, it really doesn't make sense and is contrary to what we think is the most important thing for the industrial base, which is a consistent demand signal. And as important as that is to us, the supply chain really needs it. So I think incrementally negotiating these, awarding these does not make a lot of sense. We need to get all 10 of these awarded and be on our way. So thanks, Scott. Appreciate it.

Scott Mikus: Okay. And then a quick one. It looks like you mentioned the retention rates have been improving. You had the wage increase go in at Newport News, I think in June. When is the wage increase going in at Ingalls?

Chris Kastner: Yeah. So we're in discussions with the union at Ingalls. That union agreement expires next year. So we're hoping to get that in place beginning of next year, maybe end of this year. We're in discussions. It makes it a bit more complicated because we have to engage with the union to get that done.

Scott Mikus: Okay. Got it. Thank you.

Chris Kastner: Sure.

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

Noah Poponak: Good morning, everyone.

Chris Kastner: Good morning.

Tom Stiehle: Hey, thanks. Tom, you highlighted the shipbuilding revenue in the quarter being $250 million ahead of your plan. But then only raising the full year by $50 million? And to be in the full year range, 4Q shipbuilding revenue would need to be flat, actually, maybe even down a little. I think the compare is pretty easy. Can you help me with that math? And I guess the bigger picture question is just seeing this very high growth rate in the quarter on shipbuilding revenue. The question is, have you achieved much better ability to get the throughput relative to demand?

And can we extrapolate, you know, maybe it's not 16% every quarter for a while, but can we extrapolate much better growth in the medium term? Or was there something just with, you know, the outlay allocation or something kind of random to the quarter?

Tom Stiehle: I appreciate the question there, Noah. So a couple of things there. Newport News, they grew 15%, Ingalls grew 25%. From a Newport News perspective, what we saw there increased throughput, wages, and outsourcing. It was primarily driven by material that we see on those contracts as well. And from an Ingalls perspective, it was the material volume that we saw on the surface combatants, a mixture of FY '23, the destroyers, the DDG-1000, some growth on some long lead contracts we have, and some orders on that front. I do expect we held the guidance right now. We took the bottom range up.

We held the top range still what we gave you at the beginning of the year there. There are some tailwinds, I'll tell you. So we want to see how we continue to improve. As Chris mentioned in his remarks upfront, it was earned throughput. Charleston operations is providing a lift in revenue. Qualified over 23 new vendors on the outsourcing side. So all that's very favorable. We want to continue to see a positive trend as we go forward here. I would say a couple of the dollars are pull ahead from Q4 to Q3. But there's some foundation and some substance there of increased growth as we go forward here.

Chris and I will evaluate how Q4 plays out. And then we'll provide some guidance of revenue projections for shipbuilding on the February call.

Chris Kastner: Yes. Think to add to that and Noah, obviously, I think 4% midterm growth is probably in the rearview mirror. But we want to make sure we roll up our plans and give you good guidance on the year-end call.

Tom Stiehle: Yes. I would comment too if you pull back just even though Q3 was 18% growth that we had here. Kind of year-over-year in shipbuilding. For the year itself, it's 6.1% between Q1, Q2, and Q3 here. So we do see some positive signs of the capacity and throughput. And I envision as we continue to execute on the backlog we have, we have the book of business, the investments mature, the wages take hold, and the workforce becomes more senior, I would envision that's going to ramp as we go forward here. Chris, 4% is in the rearview mirror. What do you mean by that?

Chris Kastner: Just long midterm guidance for shipbuilding. We've provided kind of midterm guidance for shipbuilding at 4%.

Noah Poponak: Yes, yes. What do you mean by it being in the rearview mirror?

Chris Kastner: To me, it's not probably not valid anymore. It's probably in excess of that. We just need to roll up our plans.

Noah Poponak: Okay. Understood. And then Tom or Chris, the $250 million cost initiative, you know, it's a pretty big number just compared to your EBITDA base. Will that be a gross number? Do we need to net that number? And how much of that is already done and in your numbers versus is still ahead of you?

Chris Kastner: Yes. It's all in our guidance. We assume we're going to achieve that in our guidance. So it's all in.

Noah Poponak: It's in your 2025 guidance?

Chris Kastner: Yes. Yes.

Noah Poponak: And has that been benefiting the margin year-to-date?

Chris Kastner: Well, these are long-term contracts, and you make assumptions about what the cost profile is going to be. So it's all been in our guidance.

Noah Poponak: Okay. All right. Thanks a lot. I appreciate it.

Chris Kastner: Sure, Noah.

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

Ron Epstein: Hey, Jack. Good morning, guys.

Tom Stiehle: Hey, Ronnie. Thanks for the question.

Ron Epstein: Yes, just maybe a quick one here. Can you give us more color on your partnering strategy on unmanned vessels? You announced recently a partnership with Shield AI and progress you're having on your own internal autonomy systems for these vehicles?

Chris Kastner: Sure. Thanks. Thanks for that. As you know, it's Odyssey software solution for autonomy. We've got the beauty of Odyssey, it's open source. So the implementation or incorporation of new software tools is pretty seamless. And so when we reviewed the space and opportunity, we had to identify partners that could add capability into that software. Shield AI made a lot of sense. C3AI makes a lot of sense. It just makes it more powerful for the mission. We've been working on that software for a long time. As you know, we have over 750 uncrewed vehicles that have been delivered both to international and domestic partners. So it's been very positive.

And I don't know if you've seen the releases relative to our Romulus line of vehicles that we're building as well. So Odyssey is a critical part of that. It only makes sense. It's part of Mission Technologies' strategy to use world-class commercial solutions to make sure that we provide the best solutions for our customer. And the open architecture of that software makes that pretty seamless. So we're excited about it. We think it's going to be a great tool. And we tend to include it going forward in our unmanned products.

Ron Epstein: Got it. Got it. And I mean, ultimately, how big do you think the unmanned market can be for you?

Chris Kastner: Yes. So I don't want to give a specific size. It is ramping. It is becoming more material within Mission Technologies. And you see the budget environment, the allocation of additional unmanned opportunities in reconciliation is very positive. So it's ramping. I don't want to size it here, but it's definitely a place we're investing in.

Ron Epstein: Got it. Got it. And then maybe just one last one. You probably saw in the news yesterday, and then if you can't answer this, I mean, it didn't happen that long ago. But the Trump administration suggested that Hanwha is going to be making nuclear submarines at the Philadelphia Navy Yard. How does that change things or not? I mean, how do you think about that strategically?

Chris Kastner: Well, it's definitely been an exciting couple of days in shipbuilding. I don't want to comment specifically on that because that's pretty new information. But at the end of the day, we're going to build what the Navy wants us to build. We're going to partner with them. If they need our help, we're going to help them. So we're not getting distracted by anything. We're keeping our heads down, and we're going to build what's in front of us. But that's pretty new information. I don't want to comment directly on it until we understand more details.

Ron Epstein: Got it. Yeah. Thank you for that.

Chris Kastner: Sure.

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

Seth Seifman: Thanks very much and good morning.

Chris Kastner: Good morning.

Seth Seifman: So I wanted to ask, I think Tom, I think you mentioned with regard to the margin rate, if the contract didn't come in Q4, it'd be below the midpoint for the year. Which I think would imply kind of a step down in the margin in Q4. Just kind of curious what drives that given where the underlying margins are in each shipyard after EACs, it would seem that the underlying margin here with kind of neutral EACs is something that is above 6% kind of in the maybe low towards mid-six range. And so is that some conservatism that leads you to have that guidance? Or is there some kind of anticipation or potential further negative adjustments?

Tom Stiehle: Yes. I appreciate the question. And, you know, our shipbuilding margins for the first three quarters have been stable. We saw 6.4%, 5.8%, and 5.9%. We're just tweaking the guidance on what will happen as we play out Q4. The 15-vote award will have incentives in there, some performance incentives, some capital incentives. Just the math about it, timing of when that happens and how we book that has, you know, incremental changes as we adopt the capital projects, take the CapEx incentives, and how we book that. We're probably being a little conservative on that front, and we're trying to guide the street as to where we could land depending on the timing of those awards.

Don't see some step backs right now through Q3. We've booked our performance for cost and schedule. And we're just reiterating the guide that we gave you at the beginning of the year from 5.5% to 6%. But no issues or concerns. Expect to kind of finish up around the midpoint as we go forward here.

Seth Seifman: Okay. Great. Thanks. Thanks very much. I'll stick to one this morning.

Tom Stiehle: Thank you.

Operator: Our next question comes from Scott Deuschle with Deutsche Bank. Your line is now open. Please go ahead.

Scott Deuschle: Hey, good morning. Chris, relative to that 15% throughput target, are you looking for a similar number from both Ingalls and Newport News? Or is that target materially different between the two yards?

Chris Kastner: No. They actually are ending up at about the same place. So that doesn't often happen. But yes, they're ending up in about the same place. And pretty equally distributed between increased outsourcing and performance of the labor force. So yes, been pretty equal.

Scott Deuschle: Okay. And then relative to the reduction from the 20,000,000 was that also equal? Or did one of the yards see like slightly less improvement then? What's expected? It sounds like fairly equal as well, but I'm just curious for that.

Chris Kastner: Yeah. Yes. Yeah. Yeah. Fairly equal.

Scott Deuschle: Okay. And then, Chris, after you raised wages for your workers at Newport News, trying to get a sense as to whether you're maintaining a consistent spread above the market wage rate as a result of those increases or if the market is also already eating into that at all?

Chris Kastner: Yes. The market has not materially adjusted such that impacted our hiring in Newport News. It's been pretty positive at Newport News, and the effect of those wages has been positive. And reduced attrition. But we're probably most excited about repositioning the experience level of the workforce where we have more experience, but we're also hiring about 50% out of what we call the pipeline. Are the regional workforce development centers, the apprentice schools, and high school programs. It's very positive. So Newport News Labor is doing well. Kind of cautiously optimistic, and we hope to keep it going.

Scott Deuschle: Thank you.

Chris Kastner: Sure.

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

Myles Walton: Great. Thanks. Good morning, Tom.

Tom Stiehle: Good morning.

Myles Walton: On the cash flow flatness implied in 2026, maybe just give us a little bit of a color there. Obviously, an assumption that earnings will grow. CapEx, I would have thought maybe steps down a touch. Is there an offset to that to kind of keep in the flat range? And then a couple of years back, there was a bigger target for cash flow in the $700 to $800 million range. Is that something that can only arrive with something like the SAWS being resolved?

Tom Stiehle: I appreciate the question on that. Yeah. So we brought back more than a guide, an annual guide here for a two-year guide. A piece of that is just with five quarters this quarter this year and next year as the awards come through, we watch performance for Q4, and then we set the trajectory for next year. We wanted to kind of guide the street on where we think we're going to be. We've talked about the book of business we have, the performance where we stand. I think it's consistent. We'll have a run rate of about $600 million between the two years.

We'll just see what hits this year versus kind of next year between receipts and the awards. So I'm comfortable with that right now. Relative to your math, revenue does grow here. There is a lot of moving parts in there between the work capital that I have, the CapEx, and again the timing of receipts and the performance for the next five quarters that plays into all of that here. But generally speaking, I'm comfortable with where we're at. It's a conservative guide, I would tell you, for 2026 as we go forward here.

I really want to close out the year, lock home our plan, get the awards from the customer, which has both opportunity, you know, RNOs around that. And then we'll give you more color of that in the February time frame. Relative to your comment on the $700 to $800 million as we get back, obviously, the top line is growing, and that's good. We've kind of hinted here that the 4% has some good tailwinds. And you see for the first quarters of this year, it's over 6%. So we'll give you increased kind of guidance on that in the February. But the top line will grow kind of meaningfully.

And the major piece that will change that cash flow inflection in the medium to long term will be the return of the profitability. We expect incremental profitability from year to year. And as we continue to retire the pre-COVID contract work, the new contracts are aligned with the efficiencies and schedules and materials that we see. And as we get into those contracts, we start kind of booking more conservatively. But as we get into those contracts, three to five years out, we will see us getting back to more traditional expectations of profitability in shipbuilding.

Obviously, higher top line, higher bottom line, and that's where we get back to the cash flows that you've kind of hinted here on the tail end of the decade here.

Myles Walton: Okay. Got it. And then, Chris, maybe one for you. And I don't know if you can answer this one either, but the President has recently quoted saying he's going to have an executive order. Moving aircraft carrier designs back to steam from EMALS. I'm just curious at what carrier could that cut over into if that was actually a change that was going to take place?

Chris Kastner: Yes. So again, probably don't need to comment on that directly. What I will say is we're going to build whatever the Navy asks us to build. So if they ask us to cut over emails or weapons elevators, we'll work with them to do it the most intelligent way. And cut it over in the right way. But again, we're going to build what they ask us to build.

Myles Walton: Got it. Thank you.

Chris Kastner: Sure.

Operator: Our next question comes from Gautam Khanna with Cowen. And just as a reminder, if you would like to ask a question, Gautam, your line is now open. Please go ahead.

Gautam Khanna: Hey, good morning. Can you hear me?

Chris Kastner: Good morning. Yes.

Gautam Khanna: Great. Guys, I was wondering if you could update us on a couple of things. One, did you receive the modules for CVN 80 that were delayed in the quarter?

Chris Kastner: We did. We did. And we will install those in Q4 and begin to get back on the erection schedule for that boat. So yes, we did receive the modules.

Gautam Khanna: Terrific. And could you give us the net EACs by segment?

Tom Stiehle: Yes. So the net EACs that we had here were, you know, gross favorable was 37, unfavorable was 40, a net of minus three. That was made up of Ingalls of positive six, as I said in my remarks, Newport News at minus thirteen, those are in the remarks as well as Mission Technologies had positive four.

Gautam Khanna: Okay. Sorry, missed that. Thank you. And then I was just curious, Tom, on the Q4 implied shipbuilding EBIT, pretty wide range, but you did mention that it's going to be somewhere around the midpoint with or without the submarine contract signed. Is there the high end, is that like what would get you to the high end of the implied range? Is there any reason to think that the extremes are actually in play?

Tom Stiehle: Let me tell you the point of question is, I mean, yep. I appreciate the question. We gave you that guide at the beginning of the year in February. We have reiterated in May and July and now here. We just have not changed that. I mean, the math at the extremes would take a lot of things breaking one way or another way. I would stick to the comments I had earlier here. We've been very consistent from quarter to quarter. I don't really expect this to inflect significantly up or down from here for the end of the year. As I said earlier, I do expect, as we go from year to year, an incremental improvement here.

We understand how we're operating. The performance has been really steady right now. And we're raising focus on what we have to do for the end of the year to close out, which is within our guidance ranges that we gave.

Gautam Khanna: Perfect. And one last one, Tom. Just I know you talk about the pre-COVID and post-COVID contract mix. Can you remind us what it is this year and what do you expect it to be in 2026?

Tom Stiehle: Yes. We haven't given specific percentages on that, but we've said that when we get to 2027, there'll be more work post-COVID than pre-COVID. It'll be over fifty percent. So you can do the math of that, of where we stand. But we're ramping from being in the 80s and 70s down to that by 2027. And it's fairly significant to retire those boats and ships every time we sell one off. Obviously, there's less pre-COVID work, and then the opportunity set is in front of us there with the new contracts aligned to performance and schedule and cost that we see here.

Gautam Khanna: Okay. Thank you.

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

Noah Poponak: Hey guys, just one follow-up on some kind of everything happening here. Right? Can you talk about why, you know, philosophically or mechanically, whether that's mechanically in the actual work or the nature of your contracting. Why would throughput and top line growth improve?

Chris Kastner: Yeah. That's an interesting question. The throughput assumptions we have in our schedule support the EACs, and we have risk and opportunity around them. So if we can execute on those throughput targets, then it mitigates a significant amount of risk. And there's potential upside. But you have to evaluate each every quarter. It's not a perfectly aligned metric tied to margin performance.

Noah Poponak: Okay. Yeah. Just sort of trying to better understand the much better top line and your confidence in that continuing with the shipbuilding margin being kind of just flat through the year. And I guess I would improve the labor, what I guess, would maybe immediately drive higher throughput, but then you need the labor to refine and get better before it impacts the margin was maybe a thought. Or I didn't know if it's just the nature of percentage of completion accounting. It's just sort of an interesting dynamic in the financials.

Chris Kastner: Yes. So yes, I think it's an interesting question. Tom can chime in here as well. But one quarter doesn't win the day. Right, in any EAC. And you're running risk and opportunity throughout the entire program. So yes, you're retiring risk. And if you're achieving your throughput targets and achieving your sales targets, you are retiring risk. But aren't necessarily going to convert that into profitability in your EACs.

Noah Poponak: Right. So perhaps one quarter is evidence of a start of everything you're doing, but you need more than that to put it in the actual booking rates.

Chris Kastner: That's why I consider this a stable quarter. It's stable, but we need to continue to keep our head down and work.

Tom Stiehle: I'd comment on the back of that too. I'm with Chris that Dan, our, you know, it's thirteen weeks. Of these contracts have two to six years to go. It's good. You know, actuals plus estimate to complete. You put a quarter in the books, that's a solid quarter, which is good. Expect that trend to continue if that improves. But that wouldn't necessarily mean that immediately we change EACs. Incrementally, we'll continue with good performance to retire down the risk. And as the cost risk kind of goes away, that's the catalyst to really take the booking rates up. I like the trends that I'm seeing right now.

And quarter over quarter as we continue to see that, that's what's going to drive the incremental improvement of the bottom line. Thanks for the follow-up.

Noah Poponak: Yes. Yes, interesting. Appreciate the detail. Thanks a lot.

Chris Kastner: Thanks, Noah.

Operator: Thank 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: Thank you for taking the time to join us today and for your interest in Huntington Ingalls Industries, Inc. At Huntington Ingalls Industries, Inc., we're committed to delivering on our strategic priorities and aim to drive growth, improve efficiency, and create value for all our stakeholders. Please have a safe and happy Halloween weekend ahead.

Operator: Thank you very much. That concludes today's call. You may now disconnect your lines.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.