Q3 2025 Huntington Ingalls Industries (HII) Earnings Call

Speaker #1: Ladies and gentlemen , thank you for standing by and welcome to the third quarter 2025 High Earnings Conference Call . At this time , all participants are in listen only mode .

Operator: Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2025 Huntington Ingalls Industries earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press Star followed by one on your telephone keypad. If you change your mind, press Star followed by two. Please be advised that today's conference is being recorded. If you need any further assistance, press Star followed by zero. I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may go ahead.

Speaker #1: After the speakers presentation , there will be a question and answer session . To ask a question during the session , please press star followed by one on your telephone keypad .

Speaker #1: If you change your mind , press star followed by two . Please be advised that this that today's conference is being recorded . If you need any further assistance , press Star followed by zero .

Speaker #1: I would now like to hand the call over to Christie Thomas , Vice President of Investor Relations , Mrs. Thomas , you may go ahead .

Speaker #2: Thank u . Operator and good morning , everyone . Welcome to the third quarter 2025 conference call matters discussed on today's call that constitute forward looking statements , including our estimates regarding the company's outlook , involve risks and uncertainties that reflect the company's judgment based on information available at the time of this call .

Christie Thomas: Thank you, Operator, and good morning, everyone. Welcome to the HII third quarter 2025 conference call. Matters discussed on today's call that constitute forward-looking statements, including our estimates regarding the company's outlook, involve risks and uncertainties that reflect the company's judgment and are based on information available at the time of this call. These risks and uncertainties may cause our actual results to differ materially. Additional information regarding these factors is contained in today's press release and the company's SEC filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations page of our website at ir.hii.com. On the call today are Chris Kastner, President and Chief Executive Officer, and Tom Stiehle, Executive Vice President and Chief Financial Officer.

Speaker #2: These risks and uncertainties may cause our actual results to differ materially . Additional information regarding these factors is contained in today's press release , and the company's SEC filings .

Speaker #2: We will also refer to certain non-GAAP financial measures for additional disclosures about these non-GAAP measures , including reconciliations to comparable GAAP measures . Please see the slides that accompany this webcast , which are available on the Investor Relations page of our website at npr.org .

Speaker #2: On the call today are Chris Castner , president and Chief Executive Officer . And Tom Sealy , executive vice president and chief financial officer .

Speaker #2: Now , I'll turn the call over to Chris .

Christie Thomas: Now I'll turn the call over to Chris.

Speaker #3: Thanks , Christie . Good morning , everyone . The United States Navy recently celebrated its 250th birthday , and the US Marine Corps will do the same in the coming weeks .

Chris Kastner: Thanks, Christie. Good morning, everyone. The United States Navy recently celebrated its 250th birthday, and the U.S. Marine Corps will do the same in the coming weeks. 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. 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.

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: Then Tom will provide some details on our financial performance and outlook . Before I begin , I'd like to reiterate our commitment to accelerate ship building construction to customers requirements .

Speaker #3: 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 .

Chris Kastner: 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 and diluted EPS 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 and space, and live, virtual, constructive training as well as unmanned systems. Demand for our products and services remains strong.

Speaker #3: Now , turning to our results this morning , we reported record third quarter sales of $3.2 billion and diluted earnings per share of $3.68 .

Speaker #3: Shipbuilding sales growth meet our of 18% year over year was driven by our shipbuilding division's focus on increasing throughput in our shipyards and supported broader efforts underway to rebuild the US maritime industrial base .

Speaker #3: Likewise , 11% sales growth , admission technologies was driven by our team's continued focus on delivering innovative solutions , including growth in the critical areas of C5 , ISR , cyber , electronic warfare and space , and live virtual constructive training , as well as unmanned systems .

Speaker #3: Demand for our products and services remains strong . Third quarter contract awards were 2 billion and our backlog is 56 billion , of which 33 billion is funded at Newport News , we continue to make progress on submarines and aircraft carriers .

Chris Kastner: Third quarter contract awards were $2 billion, and our backlog is $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 builder's trial for DDG 128 Ted Stevens, bringing her a step closer to acceptance trials and delivery.

Speaker #3: The last two Virginia class block four submarines are in the water , with SSN 798 . Massachusetts having recently completed sea trials and preparing for delivery .

Speaker #3: This year . As for our carrier program , CVN 79 , Kennedy continues to make progress and is testing program , and we expect to conduct the ship's first sea trials around the end of the year .

Speaker #3: And shipbuilders are installing the large components that have now been received on CVN 80 . Enterprise , which will allow erection progress to accelerate .

Speaker #3: Moving to Ingalls in the third quarter , we successfully completed builder's trials for DDG 128 . Ted Stevens bringing her a step closer to acceptance trials and delivery .

Speaker #3: Our amphibious warship construction continues to make progress , with both La Bougainville and LPD 30 Harrisburg going through integration and testing in support of trials next year .

Chris Kastner: 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 HII's unmanned underwater vehicles with the Babcock submarine weapon handling and launch systems while REMUS 620 was validated for torpedo tube deployment. This will position our torpedo tube 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 Thales to develop advanced autonomous undersea mine countermeasure capabilities.

Speaker #3: Admission by 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 .

Speaker #3: First , we joined forces with Babcock International to integrate his unmanned underwater vehicles with Babcock Submarine Weapon Handling and Launch Systems , while Remus six , 20 , was validated for torpedo tube deployment .

Speaker #3: This will position our torpedo to 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 Telus to develop advanced autonomous undersea mine countermeasure capabilities .

Speaker #3: Additionally , we unveiled the Romulus family of unmanned surface vessels powered by our Odyssey autonomy software and have started building the flagship Romulus .

Chris Kastner: Additionally, we unveiled the Romulus family of unmanned surface vessels powered by Odyssey Autonomy software and have 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 Shipbuilding and Newport News Shipbuilding performance was stable to slightly improving in the quarter as we continue to work through ships 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.

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: The first operational initiative , increasing throughput is showing improvement over 2020 for initial indications align with our expectation that the high end Navy investments in workforce , infrastructure and supply chain will have a positive impact on throughput trajectory .

Chris Kastner: The first operational initiative, increasing throughput, is showing improvement and 2024 initial indications align with our expectation that the HII 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.

Speaker #3: Our updated expectation is to achieve approximately 15% throughput improvement for the full year 2025 , as throughput improvements have accelerated throughout the year .

Speaker #3: From a labor perspective , we have hired over 4600 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 .

Speaker #3: 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 .

Speaker #3: Also , we are seeing success in expansion of the industrial base with our distributed shipbuilding strategy resulting in significant outsourcing taking place at 23 partners and growing with the Navy support .

Chris Kastner: Also, we are seeing success in 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. 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 6 and the next Columbia Award and are working towards having agreements in place late this year.

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: Our teams have pivoted to negotiations of lock six and the next Columbia Award and are working towards having agreements in place late this year .

Speaker #3: 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 .

Chris Kastner: 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. To date, our programs in shipbuilding have been fully supported, and we've seen no impact to normal operations. We have had immaterial impact to Mission Technologies, but we are watching those programs closely as they are more likely to be impacted by budget timing. We continue to support completion of the FY26 appropriations process as soon as possible to minimize the impact that a lapse in funding could have on our programs.

Speaker #3: 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 to date .

Speaker #3: Our programs and shipbuilding have been fully supported , and we've seen no impact to normal operations . We have had immaterial impact to mission technologies .

Speaker #3: We were watching those programs closely as they are more likely to be impacted by budget timing . We continue to support completion of FY 26 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 .

Chris Kastner: 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, and 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.

Speaker #3: Construction and 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 .

Speaker #3: National Defense Authorization Bill , codifying the strong support for shipbuilding and other national security priorities reflected in the respective House and Senate bills .

Speaker #3: 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 .

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

Speaker #3: And now I'll turn the call over to Tom for some remarks on our financial performance . Tom . Thanks .

Tom Stiehle: Tom, 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 5 of the presentation, our third quarter revenues of approximately $3.2 billion were a record for HII 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 the third quarter of 2024, driven primarily by higher material volume in surface combatants. Newport News revenues of $1.6 billion increased by 14.5% compared to the third quarter of 2024, driven primarily by higher volumes across submarine and aircraft carrier programs.

Speaker #4: Chris , and good morning . Let me start by briefly discussing our third quarter results . And then I'll address our outlook for the year .

Speaker #4: 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 high and increased 16.1% compared to the same period last year .

Speaker #4: The higher revenue was attributable to strong year over year growth at all three divisions . Ingles revenues were a record $828 million and increased by 24.7% compared to the third quarter of 2020 .

Speaker #4: Four , driven primarily by higher material volume and surface combatants . Newport News revenues of 1.6 billion increased by 14.5% compared to the third quarter of 2024 , driven primarily by higher volumes across submarine and aircraft carrier programs .

Speaker #4: 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 outsourcing mission technologies .

Tom Stiehle: 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 outsourcing. Mission Technologies revenues of $787 million increased by 11% compared to the third quarter of 2024, driven by higher volume in C5ISR, cyber, electronic warfare in space, and live, virtual and constructive training, as well as our growth in unmanned systems. Moving on to Slide 6, segment operating income of $179 million and segment operating margin of 5.6% in the third quarter of 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.

Speaker #4: Revenues of 787 million increased by 11% compared to the third quarter of 2024 , driven by higher volume in C5 , ISR , cyber electronic warfare and space and live , virtual and constructive training , as well as our growth in unmanned systems .

Speaker #4: Moving on to slide six . Segment operating income of $179 million and segment operating margin of 5.6% in the third quarter of 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 .

Speaker #4: I discussed at Ingles segment . Operating income was $65 million in operating of 7.9% , compared to 49,000,000 in 7 point 4% in the third quarter of last year .

Tom Stiehle: 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 the third quarter of 2024. Prior year results were impacted by negative adjustments resulting from the performance challenges and the delay of new contract awards. For the third quarter of 2025, Newport News Shipbuilding's net cumulative adjustment was negative $13 million. None of the adjustments in the quarter were individually significant.

Speaker #4: The increases were the volume increases in surface combatants . The third quarter net cumulative adjustment at Ingles was a positive 6 million , and none of the adjustments were individually driven by .

Speaker #4: At Newport News segment , operating income was 80 million and operating margin was 4.9% , compared to 15,000,001.1% in the third quarter of 2020 .

Speaker #4: For prior year , results were impacted by negative adjustments resulting from the performance challenges and the delay of new contract awards for the third quarter of 2025 .

Speaker #4: Newport News Shipbuilding Net cumulative adjustment was -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 .

Tom Stiehle: 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 the third quarter of 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 7, cash provided by operations was $118 million in the quarter.

Speaker #4: Consolidated operating income for the quarter was 161 million , and operating margin was 5% , compared to 82,000,003% in the same period last year .

Speaker #4: 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 the third quarter of 2020 .

Speaker #4: For 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 .

Speaker #4: 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 .

Tom Stiehle: 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.

Speaker #4: 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 its stronger collections in the quarter , as well as some moving out of the quarter .

Speaker #4: I'll discuss our updated 2025 free cash flow guidance in a moment . Going 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 .

Speaker #4: Last week , we announced a modest increase in our quarterly dividend to $1.38 per share . Turning to liquidity in the balance sheet , we ended the quarter with a cash balance of $312 million and liquidity of approximately 2 billion .

Speaker #4: 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 .

Tom Stiehle: 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 8, 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%.

Speaker #4: Moving on to our outlook on slide eight . We have narrowed the shipbuilding revenue range to be between nine and 9.1 billion , which is an increase of 50 million at the midpoint from the prior guidance range .

Speaker #4: We are reiterating the shipbuilding margin range of between 5.5 and 6.5% for mission technologies . We are now expecting revenue between 3 and 3.1 billion , an increase of 50 million from the prior guidance range at the midpoint .

Speaker #4: 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 .

Tom Stiehle: 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 Kastner noted, we are continuing to work towards the Virginia-class Block 6 and Columbia-class Bill 2 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 between $550 million and $650 million at the midpoint.

Speaker #4: 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.

Speaker #4: As Chris noted , we are continuing to work towards the Virginia class block six in Columbia . Bill two Submarine Awards later this year .

Speaker #4: 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 .

Speaker #4: Guidance range . Conversely , an award this year would support us ending at or slightly above the midpoint of the range for 2025 .

Speaker #4: Free cash flow . We are updating our guidance to be between 550 and 650 million at the midpoint . This is an increase of 50 million compared to our prior guidance range .

Tom Stiehle: 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.

Speaker #4: 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 .

Speaker #4: 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 .

Speaker #4: We will 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 .

Speaker #4: We will 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 .

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

Speaker #4: 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 .

Speaker #4: With that , I'll turn the call back over to Christy to manage Q&A .

Speaker #2: 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 .

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.

Speaker #2: Operator I'll turn the call over to you to manage the Q&A .

Speaker #1: Thank you very much . We will now open the Q&A session if you would like to ask a question , press star followed by one on your telephone keypad .

Operator: Thank you very much. We will now open the Q&A session. If you would like to ask a question, press Star followed by one on your telephone keypad. When prepping to ask your question, please ensure your device is unmuted locally. If you change your mind or your question has already been answered, press Star followed by two. Our first question comes from Scott with Melius Research. Your line is now open. Please go ahead.

Speaker #1: When prepping to ask your question, please ensure your device is unmuted locally. If you change your mind or your question has already been answered, press star followed by two.

Speaker #1: Our first question comes from Scott Lucas with Melius Research . Your line is now open . Please go ahead .

Speaker #5: Morning , Chris and Tom . I wanted to ask Scott Virginia , block six and Columbia build two negotiations . So you kind of touched on the fact that shipbuilding is not really impacted by the shutdown .

[Analyst 1]: Morning, Chris and Tom. I wanted to ask.

Tom Stiehle: Morning, Scott.

[Analyst 1]: Virginia Block 6 and Columbia build two negotiations. 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? Also, from a high-level perspective, does it make sense for 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?

Speaker #5: 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 industry and the customer to commit to that many boats at once ?

Speaker #5: Or should the negotiation may be split up into two or more negotiations to just get a better understanding of the cost and schedule to build those ?

Speaker #3: Yeah . Thanks , Scott . I think furlough is not impacting that negotiation . The team's working very hard to get that done .

Chris Kastner: Yeah, thanks, Scott. I think furlough is not impacting that negotiation. The team's working very hard to get that done. I won't comment directly on negotiations because it's inappropriate, but the team's working very hard to get that done before the end of the year. I also know the U.S. Navy's working on how that works with the shutdown and potential CR to make sure that we can get the ships awarded. More to come there. I think we're making good progress on the incremental award or potentially award less ships really doesn't make sense. It's contrary to really what we think is the most important thing for the industrial base, which is a consistent demand signal. As important as that is to us, the supply chain really needs it. I think incrementally negotiating these, rewarding these, does not make a lot of sense.

Speaker #3: I won't comment directly on on the negotiations because it's inappropriate , but the team is working very hard to get that done before the end of the year .

Speaker #3: I know . I also know the Navy's working on how that works with the shutdown and potential KR to make sure that we can get the ships awarded .

Speaker #3: So more to come there , but I think we're making good progress on the incremental award or potentially award less ships . Really doesn't make sense .

Speaker #3: And contrary to really what we think is the most important thing for the industrial base , which is a consistent demand signal . And it's important that , as that is to us , the supply chain really needs it .

Speaker #3: I think incrementally negotiating these rewards does not make a lot of sense. We need to get all ten of these awarded and be on our way.

Chris Kastner: We need to get all 10 of these awarded and be on our way. Thanks, Scott. Appreciate it.

Speaker #3: So thanks Scott . Appreciate it .

Speaker #5: Okay . And then a quick one . It looks like you mentioned the retention rates have been improving . You had the wage increase going at Newport News I think in June .

[Analyst 1]: 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?

Speaker #5: When is the wage increase going in at Ingalls?

Speaker #3: 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 leading to next year , maybe end of this year .

Chris Kastner: Yeah, we're in discussions with the union at Ingalls. That union agreement expires next year. 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.

Speaker #3: But we're in discussions . It makes it a bit more complicated because we have to engage with the union to get that done .

Speaker #5: Okay . Got it . Thank you .

[Analyst 1]: Got it. Thank you.

Speaker #6: Sure .

Chris Kastner: Sure.

Speaker #1: Our next question comes from Noah Poponak with a sorry with Goldman Sachs . Your line is now open . Please go ahead .

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

Speaker #6: Good morning everyone .

[Analyst 2]: Morning, everyone.

Speaker #3: Good morning .

Chris Kastner: Good morning.

Speaker #6: Hey . Thanks , Tom . You highlighted the shipbuilding revenue in the quarter being almost 250 million ahead of your plan . But then only raising the full year by 50 million .

[Analyst 2]: Hey, thanks, Tom. You highlighted the shipbuilding revenue in the quarter being almost $250 million ahead of your plan, but then only raising the full year by $50 million. To be in the full year range, Q4 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? 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? 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?

Speaker #6: And to be in the full year range for shipbuilding revenue would need to be flat . Actually , maybe even down a little .

Speaker #6: And I think the compares 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 .

Speaker #6: 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 .

Speaker #6: Or was there something just with, you know, the outlay allocation or something kind of to the quarter?

Operator: Well.

[Analyst 2]: Was there something just with the outlay allocation or something kind of random to the quarter?

Speaker #4: I appreciate the question there , so a couple of things . A Newport News , you know , they grew 15% , English grew 25% from a Newport News perspective .

Tom Stiehle: I appreciate the question there, Noah. A couple 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 the material that we see on those contracts as well. From an Ingalls perspective, it was the material volume that we saw on the surface combatants, a mixture of FY23, the destroyers, the DDG1000, and 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 is some tailwinds, I'll tell you. We want to see how we continue to improve. As Chris Kastner mentioned in his remarks up front, it was earned throughput.

Speaker #4: What we saw there, you know, increased throughput wages and outsourcing. It was primarily driven by the material that we see on those contracts as well.

Speaker #4: And from an Ingles perspective , it was the material volume that we saw on the surface , combatants , a mixture of FY 23 , the destroyers , the DDG 1000 and some growth on some long contracts .

Speaker #4: We have and some orders on that front . I do expect , you know , we held the guidance right now . We took the bottom range up .

Speaker #4: We held the top range still what we gave you at the beginning of the year . There there is some tailwinds . I'll tell you .

Speaker #4: So we want to see how we continue to improve . As Chris mentioned in his remarks up front , it was , you know , earned throughput

Speaker #4: . Charleston operations is is providing a list random in revenue . We've qualified over 23 new vendors on the outsourcing side . So all that's very We want to continue to see a positive trend as we go forward here .

Tom Stiehle: Charleston Operations is providing a lift in revenue. We've qualified over 23 new vendors on the outsourcing side. 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 I'll pull ahead from Q4 to Q3. 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.

Speaker #4: I would say a couple of the dollars I'll pull ahead from Q4 to Q3 , but there's some some foundation and some substance there of increased growth as we go forward here .

Speaker #4: Chris and I will evaluate how Q4 plays out , and then we'll provide some guidance of revenue projections for shipbuilding on on the February call .

Speaker #3: Yeah , I think to add to that and Noah . Obviously , I think 4% mid-term growth is probably in the rear view mirror , but we want to make sure we roll up our plans and give you good guidance .

Chris Kastner: Yeah, I think to add to that. 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.

Speaker #3: On the year end call .

Speaker #4: Yeah , I would comment too . If you pull back just even though Q3 , you know , was 18% growth that we had here , kind of year over year in shipbuilding for the year itself , favorable .

Tom Stiehle: Yeah, I would comment too, if you pull back. Even though Q3 was 18% growth that we had here, kind of year over year in shipbuilding for the year itself at 6.1%, you know, between Q1, Q2, and Q3 here. We do see some positive signs of the capacity and throughput. 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 that's going to ramp as we go forward here.

Speaker #4: it's 6.1% . You know , between Q1 and and Q3 here . So we do see some positive signs of the capacity and throughput .

Speaker #4: And I envision as we continue to execute on the backlog , we have we have the book of business , the investments mature , the the wages take hold and the workforce becomes more senior .

Speaker #4: I envision that that's going to ramp up as we go forward here .

Speaker #6: Chris , for percent in the rear view mirror , what do you mean by that ?

[Analyst 2]: Chris, 4% in the rearview mirror. What do you mean by that?

Speaker #3: Just long term guidance for shipbuilding . It's we we provided kind of mid-term guidance for shipbuilding at 4% . I think .

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

[Analyst 2]: Yeah. What do you mean by it being in the rearview mirror?

Speaker #6: What do you mean by it being in the rearview mirror?

Speaker #7: It means it's not . Probably not valid anymore . It's it's probably in excess of that . We just need to roll up our plans .

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

Speaker #6: Okay . Understood . And then . Yeah . Tom or Chris , the $250 million cost initiative , you know , it's a it's a pretty big number just compared to your EBITDA base .

[Analyst 2]: Okay, understood. Tom or Chris, the $250 million cost initiative is a pretty big number just compared to your EBITDA base. Will that be a gross number? Do we need to net that number? How much of that is already done and in your numbers versus is still ahead of you?

Speaker #6: 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 .

Speaker #3: Yeah , it's all in our guidance right ? We assume we're going to achieve that in our guidance . So it's so it's all in .

Chris Kastner: Yeah, it's all in our guidance. We assume we're going to achieve that in our guidance, so it's all in.

Speaker #6: 2020 guidance .

[Analyst 2]: It's in your 2025 guidance.

Speaker #3: Yes .

Speaker #8: Yes . Yeah .

Chris Kastner: Yes.

Speaker #6: And has that been benefiting the margin year to date .

[Analyst 2]: Has that been benefiting the margin year to date?

Speaker #3: Well these are long term contracts . And you make assumptions about what the cost profile is going to be . So it's all been it's all been in our guidance .

Chris Kastner: These are long term contracts and you make assumptions about what the cost profile is going to be. It's all been in our guidance.

Speaker #6: Okay . All right . Thanks a lot I appreciate it .

[Analyst 2]: Okay. All right, thanks a lot. I appreciate it.

Speaker #8: Sure . No .

Chris Kastner: Sure enough.

Speaker #1: Our next question comes from Ron Epstein with Bank of America . Your line is now open . Please go ahead .

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

Speaker #9: Hey , Jay . Good morning guys . Thanks for the question . Yeah , just maybe a quick one here . Can you give us more color on your your partnering strategy on unmanned vessels you announced recently a partnership with shield AI and and the progress you're having on your own internal autonomy systems for these vehicles .

[Analyst 2]: Hey, yeah, good morning, guys. Thanks for the question. Yeah, 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 the progress you're having on your own internal autonomy systems for these vehicles.

Speaker #3: Sure . Thanks . Thanks for that . As you know , it's an odyssey software solution for autonomy . We've got the beauty of of Odyssey .

Chris Kastner: Sure. Thanks for that. As you know, it's an Odyssey Autonomy software solution for autonomy we've got. The beauty of Odyssey Autonomy is it's open source, so the implementation or incorporation of new software tools is pretty seamless. 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. It's been very positive. I don't know if you've seen the releases relative to our Romulus family of unmanned surface vessels that we're building as well. Odyssey Autonomy is a critical part of that. It only makes sense.

Speaker #3: It's 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 .

Speaker #3: Shield AI made a lot of sense . C3 AI makes a lot of sense . It just makes it more powerful for the mission we've been working on that software for a time .

Speaker #3: As you know , we have over 750 uncrewed vehicles that have been delivered both the international and domestic partners . So it's been very positive .

Speaker #3: And I don't know if you've seen the the releases relative to our Romulus line of vehicles that that we're building as well . So Odyssey is a critical part of that .

Speaker #3: It only makes sense . It's part of its strategy to use world class commercial solutions to make sure that we provide the best solutions for our customer and the the open architecture of that of that software makes that pretty seamless .

Chris Kastner: 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. The open architecture of that software makes that pretty seamless. We're excited about it. We think it's going to be a great tool and we intend to include it going forward in our unmanned products.

Speaker #3: 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 .

Speaker #9: Got it , got it . And I mean , ultimately , how big do you think the unmanned market can be for you ?

[Analyst 2]: Got it. Ultimately, how big do you think the unmanned market can be for you?

Speaker #8: Yeah. So I don't want to give a specific size.

Chris Kastner: 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. It's ramping. I don't want to size it here, but it's definitely a place we're investing in.

Speaker #3: It is ramping . It is long becoming more material within mission technologies . And you see the budget environment , the allocation of additional unmanned opportunities .

Speaker #3: Inn reconciliation is very positive . So it's ramping . I don't want to I don't want to size it here , but it's definitely a place where investing in .

Speaker #9: Got it , got it . And then maybe just one last one . You probably saw in the news yesterday . And if you can't answer this , I mean didn't happen that long ago .

[Analyst 2]: Got it. Maybe just one last one. You probably saw in the news yesterday, and if you can't answer this, I mean, it didn't happen that long ago, but you know, 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? How do you think about that strategically?

Speaker #9: But you know , the Trump administration suggested that hand was going to be making nuclear submarines at the Philadelphia Navy Yard . How's that changed ?

Speaker #9: Things or not ? I mean , how do you think about that strategically ?

Speaker #3: Well , it's definitely been an exciting couple of days in shipbuilding . I don't want to comment specifically on that , because that's that's pretty new information .

Chris Kastner: It has definitely been an exciting couple of days in shipbuilding. I don't want to comment specifically on that because that's pretty new information. 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, and if they need our help, we're going to help them. 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. That's pretty new information. I don't want to comment directly on it until we understand more details.

Speaker #3: 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 .

Speaker #3: And 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 .

Speaker #3: But that's pretty new information . I don't want to comment directly on it until we understand more details .

Speaker #9: Got it . Yeah . Thank you for that . Yeah , yeah . Thanks . Sure ,

[Analyst 2]: Got it. Thank you for that. Thanks.

Speaker #10: Sure .

Chris Kastner: Sure.

Speaker #1: Our next question comes from Seth Seifman with J.P. Morgan . Your line is now open . Please go ahead .

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

Speaker #11: Hey , thanks very much . And good morning . Good morning . So I wanted to ask , I think , Tom , I think you mentioned with regard to the margin rate , if the if the contract didn't come in in Q4 , you'd be below the , the midpoint for , for the year , which I think would , would imply kind of a step down in the margin in Q4 .

Tom Stiehle: Thanks very much.

[Analyst 1]: Good morning.

Tom Stiehle: Good morning. I think, Tom, I think you mentioned with regard to the margin rate, if the contract didn't come in Q4, you'd be below the midpoint for the year, which I think would imply kind of a step down in the margin in Q4. I'm 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 6 range. Is that some conservatism that leads you to have that guidance or is there some kind of anticipation or potential further negative adjustments? Yes, I appreciate the question. Our shipbuilding margins for the first three quarters have been stable. We saw 6, 4, 5, 8 and 5.9.

Speaker #11: And just kind of curious what drives that given given where the underlying margins are in the , you know , in each shipyard after after ekes , it would seem that the , you know , the underlying margin here with kind of neutral eases is something that is , you know , above 6% , you know , kind of in the maybe low , low towards mid six range .

Speaker #11: And so is that some conservatism that , that , you know , leads you to have that guidance . Or is there some kind of , you know , anticipation or potential further negative adjustments ?

Speaker #12: Yes . I appreciate the question . You know , our shipbuilding margins for the first three quarters have been been stable . We saw six , six , four , five , eight and five nine .

Speaker #12: We're .

Speaker #4: Just tweaking the guidance on what will happen as we play out Q4, the 15 Boat Award will have incentives in there, some performance incentives, and some capital incentives.

Tom Stiehle: We're just tweaking the guidance on what will happen as we play out Q4. The 15 boat award will have incentives in there, some performance incentives, some capital incentives. Just the math about the timing of when that happens and how we book that has incremental changes as we adopt the capital projects, take the capital 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 well. 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 for 5.5% to 6.5%, but no issues or concerns. Expect to kind of finish up around the midpoint as we go forward here.

Speaker #4: Just the math of that is the timing of when that happens and how we book that has , you know , incremental changes as we adopt , you know , the capital projects , the CapEx incentives and how we how we book that .

Speaker #4: So we're we're probably , you know , being a little conservative on that front , and we're trying to guide the street as where we could land , depending on the timing of those awards .

Speaker #4: Don't see some setbacks right now . You know , through through Q3 . We've we've booked our performance for cost and schedule , and we're just reiterating the guide that we gave you the beginning of the year for five , 5 to 6 , five .

Speaker #4: But no issues or concerns . Expect to kind of finish up around the midpoint as we go forward here .

Speaker #11: Okay , okay . Great . Thanks . Thanks very much . I'll stick to one this morning .

[Analyst 3]: Okay.

Tom Stiehle: Okay, great. Thanks. Thanks very much. I'll stick to one this morning. Thank you.

Speaker #4: Thank you .

Speaker #1: Our next question comes from Scout with Deutsche Bank . Your line is now open . Please go ahead .

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

Speaker #13: Hey good morning Chris . Relative to that 15% throughput target , are you looking for a similar number from both Ingles and Newport News , or is that target materially different between the two yards ?

[Analyst 1]: 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?

Speaker #3: No , they actually are ending up in about the same place . So you know that doesn't often happen . But yeah they're they're ending up in about the same place .

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

Speaker #3: And it's pretty equally distributed between increased outsourcing and performance of the labor force . So yeah , it's been pretty equal .

Speaker #13: Okay . And then relative to the reduction from the 20 , was that also equal or did one of the yards see like slightly less improvement than than what's expected .

[Analyst 1]: Okay, and then relative to the reduction from the 20, was that also equal or did one of the yards see slightly less improvement than was expected? It sounds like fairly equal as well. Just curious for that.

Speaker #13: It sounds like fairly equal as well . But I'm just curious for that .

Speaker #10: Yeah . Yeah it's yeah yeah fairly equal .

Chris Kastner: Yeah, yes. Yeah, fairly equal.

Speaker #13: Okay . And then Chris after you raised wages for your workers at Newport News , did you see any other local area industries respond in kind by also raising wages ?

[Analyst 1]: Okay. Chris, after you raised wages for your workers at Newport News, did you see any other local area industries respond in kind by also raising wages? I'm just 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's also already eating into that at all.

Speaker #13: I'm just 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's also already eating into that at all .

Speaker #3: Yeah , the market has not materially adjusted such that it's impacted our hiring in Newport News . It's been it's been pretty positive in Newport News .

Tom Stiehle: Yeah.

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

Speaker #3: And the effect of those wages has been positive . And in in reduced attrition . But we're probably most excited about repositioning the experience level of the workforce , where we have more experience .

Speaker #3: But we're also hiring about 50% out of what we call the pipeline, which includes the regional workforce development centers, the apprentice schools, and the high school programs, which is very positive.

Speaker #3: So Newport News Labor is doing well , kind of cautiously optimistic , and we hope to keep it going .

Speaker #13: Thank you .

[Analyst 1]: Thank you.

Speaker #10: Sure .

Chris Kastner: Sure.

Speaker #1: Our next question comes from Myles Walton with Wolfe Research . Your line is now open . Please go ahead .

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

Speaker #10: Great . Thanks .

[Analyst 2]: Great, thanks. Good morning, Tom.

Speaker #14: And thanks . Good morning . Tom . Cash flow on the cash flow . Flatness implied in 2026 . Maybe just give us a little bit of a color there .

Tom Stiehle: On the cash flow, on the cash.

[Analyst 2]: Flow flatness implied in 2026, maybe just give us a little bit of 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? A couple of years back, there was a bigger target for cash flow in the $700 million to $800 million range. Is that something that can only arrive with something like the SAWS being resolved?

Speaker #14: Obviously an assumption that earnings will grow CapEx . I would have thought maybe steps down a touch . Is there 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 7 to $800 million range .

Speaker #14: Is that something that can only arrive with something like the sores being resolved ?

Speaker #15: I appreciate the question on that . Yeah . So , you know , we brought back more than a .

Tom Stiehle: I appreciate the question on that. Yeah. 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 settle 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 that we'll have a run rate here of about $600 million between the two years. We'll just see what hits this year versus kind of next year between receipts, awards. I'm comfortable with that right now. Relative to your math, the revenue does grow here.

Speaker #4: Guide , an annual guide here for a two year guide . You know , a piece of that is just with five quarters this quarter , this year and next year as .

Speaker #4: The awards come through , we watch performance for Q4 . And then we set the trajectory for next year . We wanted to kind of settle the street on where we think we're going to be .

Speaker #4: We've we've talked about the book of business . We have the performance that where we stand . I think it's it's consistent that we'll have a run rate of about $600 million between the the two years .

Speaker #4: We'll just see 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 .

Speaker #4: You know , the revenue does grow here . There is a lot of moving parts in there between the working capital that I have , the CapEx and again , the timing of receipts and the performance for the for the next five quarters that plays into all of that here .

Tom Stiehle: There are a lot of moving parts in there between the working 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. 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 and RNOs around that. We'll give you more color on that in the February timeframe. 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. You see for the first three quarters of this year it's over 6%.

Speaker #4: But generally speaking , there's I'm comfortable with what we we're at . It's a conservative guide . I would tell you for for 2026 as we go forward here , I really want to close out the year lock plan , get the awards from the customer , which has which has both opportunity , you know , RNAs around that .

Speaker #4: And then we'll give you more color that in the February time frame relative to your comment on the 7 to $800 million . You know , as we get back , obviously the top line is growing and that's good .

Speaker #4: We've kind of hinted here that the 4% has some good tailwinds . And you see , for the first three quarters of this year , it's over 6% .

Speaker #4: So we'll give you you know , increased kind of guidance on that in the February time frame . But the top line will grow kind of meaningfully .

Tom Stiehle: We'll give you increased kind of guidance on that in the February timeframe. The top line will grow kind of meaningfully. 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. As we continue to retire the pre-COVID contract work, the new contracts are aligned with the efficiencies and the schedules and the materials that we see. As we get into those contracts, we start kind of booking more conservatively. 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. 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.

Speaker #4: And the , the , the major piece that will change that cash flow inflection in the medium to long term will be the return of the profitability .

Speaker #4: 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 the schedules and the materials that we see .

Speaker #4: And as we get into those contracts , start kind of looking more conservatively . But as we get into those contracts , 3 to 5 years out , we will see us getting back to more traditional expectations of profitability and shipbuilding .

Speaker #4: Obviously, higher top line, higher bottom line. And that's where we get back to the cash flows that you've kind of hinted at here on the tail end of the decade.

Speaker #4: So okay .

Speaker #10: Okay , okay .

Speaker #14: 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 emails .

[Analyst 2]: Okay, got it. Chris, maybe one for you. I don't know if you can answer this one either, but the President has recently been quoted saying he's going to have an executive order losing aircraft carrier design facto steam from emails. I'm just curious what carrier could that cut over into if that was actually a change that was going to take place?

Speaker #14: I'm just curious at what what carrier could that cut over into , if that was actually a change that was going to take place ?

Speaker #10: Yeah .

Speaker #3: So again, I 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.

Chris Kastner: Yeah. I 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. If they ask us to code over EMALS or weapons elevators, we'll work with them to do it the most intelligent way and cut it over in the right way. We're going to build what they ask us to build.

Speaker #3: 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 .

Speaker #3: But again , we're going to build what they ask us to build .

Speaker #10: Thank you . Sure .

[Analyst 2]: Thank you.

Chris Kastner: Sure.

Speaker #1: Our next question comes from Gautam Hannah . City Cohen . And just as a reminder , if you would like to ask a question , please press star followed by one on your telephone keypad .

Operator: Our next question comes from Gautam Turner at CD Cohen. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. Your line is now open. Please go ahead.

Speaker #1: Now . Your line is now open . Please go ahead .

Speaker #16: Hey . Good morning . Can you hear me ?

[Analyst 3]: Hey, good morning. Can you hear me?

Speaker #10: Good morning . Yes .

Chris Kastner: Morning. Yes.

Speaker #16: Great . Guys . I was wondering if you could update us on a couple of things . One , did you receive the the modules for CVN 80 that were delayed in the quarter ?

[Analyst 3]: Great. Guys, I was wondering if you could update us on a couple things. One, did you receive the modules for CVN 80 that were delayed in the quarter?

Speaker #10: We did .

Speaker #3: We did . We're in . We will install those in Q4 and begin to get back on the schedule for that boat . So yeah , we did we did receive the modules .

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

Speaker #16: Terrific. And could you give us the net by segment?

[Analyst 3]: Terrific. Could you give us the net EACs by segment?

Speaker #4: Yeah . So the the net assets that we had here were gross favorable was 37 . Unfavorable was 40 , a net of minus three .

Tom Stiehle: Yeah. The net EACs that we had here were gross favorable was 37, unfavorable was 40, a net of minus 3. That was made up of Ingalls at positive 6, as I said in my remarks. And Newport News put these at minus 13. Those are the remarks as well as Mission Technologies had positive 4.

Speaker #4: And that that was that was made up of angles , a positive six . As I said in my remarks . And at -13 , those were the remarks as well as empty had positive four .

Speaker #16: Okay , sorry I missed that . Thank you . And then I was just curious . Tom , on the Q4 implied shipbuilding Ebit pretty wide range .

[Analyst 3]: Okay, sorry I missed that. Thank you. I was just curious, Tom, on the Q4 implied shipbuilding EBIT, pretty wide range. You did mention that, you know, 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, what would get you to the high end of the implied range? Is there any reason to think that, you know, the extremes are actually in play?

Speaker #16: But you did mention that, you know, it's going to be somewhere around the midpoint, with or without the submarine contracts signed.

Speaker #16: Is there the high end ? Is that like what would what would get you to the high end of the implied range ? And is there any reason to think that the extremes are actually in play , that would tell you the .

Speaker #4: High end function is . Yeah , I appreciate the question . We gave you that guide beginning of the year in February . We have reiterated in May and July , and now here we just have not changed that .

Tom Stiehle: 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, maybe 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 us 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 raise the focus and we have to do for the end of the year to close out within our guidance ranges that we gave you.

Speaker #4: I mean , the math at the extremes are I would take a lot of things , break in one way or another way .

Speaker #4: I would stick to the comments I had earlier here . You know , we've been very consistent from quarter to quarter . I don't really expect this to inflect .

Speaker #4: You know , 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 and incremental improvement here , but we understand how we're operating the performance has been really steady right now , and we , you know , we are we're raising focus on what we have to do for the end of the year to close out within our guidance ranges that we gave you .

Speaker #4: .

Speaker #16: 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 .

[Analyst 3]: Perfect. One last one, Tom, I know you talk about the pre-COVID and post-COVID contract mix. Can you remind us what it is this year and what you expect it to be in 2026?

Speaker #4: Yeah , we haven't given specific percentages on that . But we've said that when we get to 2027 , there'll be there'll more work post Covid than pre Covid .

Tom Stiehle: Yeah, 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 50%. 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. 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 costs that we see here.

Speaker #4: be

Speaker #4: It'll be over 50% . So you can do the math of that of where we stand . But but we're ramping from , you know , being in the 80s and 70s down to that by 2027 .

Speaker #4: And you know , it's fairly significant to retire those boats and ships every time we sell one off . Obviously , there's less pre-COVID work .

Speaker #4: And then the opportunity set is in front of us there with the new contracts aligned to performance and schedule and costs that we see here .

Speaker #16: Thanks a lot , guys .

[Analyst 3]: Thanks a lot, guys.

Speaker #4: Okay . Thank you .

Tom Stiehle: Okay, thank you.

Speaker #1: Our next question comes from Noah with Goldman Sachs . Your line is now open . Please go ahead .

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

Speaker #6: Hey guys . Just one follow up on kind of everything happening here . Can you talk about why you know , philosophically or mechanically and whether that's mechanically in the , in the actual work or , or the nature of your contracting .

[Analyst 2]: Hey guys, just one follow up on kind of everything happening here. Can you talk about why, you know, philosophically or mechanically and whether that's mechanically in the actual work or the nature of your contracting, why would throughput and top line growth improve before faster than the margins?

Speaker #6: Why would throughput and top line growth improve before faster than the margins

Speaker #6: ?

Speaker #3: Yeah , that's a , that's an interesting question . The throughput assumptions we have in our , in our schedule support the Aecs .

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

Speaker #3: And we have risk and opportunity around them . So if we can execute on those throughput targets , then it mitigates significant amount of risk .

Speaker #3: And there's potential upside . But you have to evaluate each every quarter . It's not a perfectly aligned metric tied to margin performance .

Speaker #6: Okay . Yeah . Just just sort of trying to better understand , you know , the much better top line and your confidence in , you know , that continuing with the shipbuilding margin being kind of just flat through the year .

[Analyst 2]: Okay, 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. 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. I didn't know if it's just the nature of percentage of completion accounting. It was just sort of an interesting dynamic in the financials.

Speaker #6: And I guess I would , you know , improved 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 .

Speaker #6: 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 .

Speaker #3: Yeah . So yeah , I think it's an interesting question . Tom can chime in here as well . But one quarter doesn't win the day right .

Chris Kastner: Yeah, I think it's an interesting question. Tom can chime in here as well, but Q1 doesn't win the day. Right. In an EHV and you're running risk and opportunity throughout the entire program. While, yes, you're retiring risk and if you're achieving your throughput targets and achieving your sales targets, you are retiring risk, but you aren't necessarily going to convert that into profitability in your EACs.

Speaker #3: In an EP . And you're running you're running risk . And opportunity throughout the entire program . So well yes you're retiring risk .

Speaker #3: And if you're achieving your throughput targets and achieving your sales targets , you are retiring risk . But you aren't necessarily going to convert that into profitability in your aecs .

Speaker #6: Right . So perhaps one quarter , 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 .

[Analyst 2]: Right. 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.

Speaker #3: That's why I consider this a stable quarter. It's stable. But we need to continue to keep our head down and work.

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.

Speaker #4: Comment on the back of that too . I'm with Chris . That , you know , it's 13 weeks . Some of these contracts have 2 to 6 years to go .

Tom Stiehle: I'd comment on the back of that too. I'm with Chris Kastner. You know, it's 13 weeks. Some of these contracts have two to six years to go. It's good, you know, it's actuals plus estimate to complete and you know, you put a quarter in the books, that's a solid quarter, which is good. Expect that trend to continue, if not improve. That wouldn't necessarily mean that immediately we change the EACs and incrementally we'll continue with good performance to retire down the risk. 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.

Speaker #4: It's good . You know actuals plus estimates to complete . And you know you put a quarter in the books . That's a solid quarter which is which is good .

Speaker #4: Expect that trend to continue . If not improve . But that wouldn't necessarily mean that immediately we change the Aecs incrementally . We'll continue with good performance to retire down the risk .

Speaker #4: And as the cost risk kind of goes away , that's that's the catalyst to really take the booking rates up . So I like the trends that I'm seeing right now .

Speaker #4: And you know , quarter over quarter as we continue to see that that that's what's going to drive the incremental improvement of the bottom line .

Speaker #4: Thanks for the thanks for the follow up .

Speaker #6: Yeah , yeah . It's interesting . I appreciate the detail . Thanks a lot .

[Analyst 2]: Yeah, it's interesting. Appreciate the detail. Thanks a lot.

Speaker #3: Thanks .

Chris Kastner: Thanks, Al.

Speaker #17: Here I'm 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 .

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.

Speaker #3: Thank you for taking the time to join us today and for your interest in high . At high , we're committed to delivering on our strategic priorities and and to drive growth and efficiency and create value for all our stakeholders .

Chris Kastner: Thank you for taking the time to join us today and for your interest in HII. At HII, 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.

Speaker #3: 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.