Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2025 HII Earnings Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question and answer session. [Operator Instructions] Please be advised that this -- that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Mrs. Thomas, you may go ahead.

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 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. Now I'll turn the call over to Chris.

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. 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 and 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, and constructive training as well as unmanned systems. Demand for our products and services remain 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. The last 2 Virginia-Class Block IV submarines are in…

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 3 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. 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 & 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, 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…

Thanks, Tom. [Operator Instructions] Operator, I'll turn the call over to you to manage the Q&A.

[Operator Instructions] Our first question comes from Scott Mikus with Melius Research.

Chris and Tom, I wanted to ask on 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 industry and the customer to commit to that many boats at once? Or should the negotiation maybe split up into 2 or more negotiations to just get a better understanding of the cost and schedule to build those?

Yes. 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 the negotiations because it's inappropriate. But the team is working very hard to get that done before the end of the year. I know -- 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 award less ships, really doesn't make sense and contrary to really 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, rewarding 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.

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?

Yes. 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 at the beginning of next year or maybe end of this year, but we're in discussions. It makes it a bit more complicated because we have to engage with the union to get that done.

Our next question comes from Noah Poponak with Goldman Sachs.

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. And to be in the full year range, 4Q shipbuilding revenue would need to be flat, actually maybe even down a little. And 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 -- 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 the outlay allocation or something kind of random to the quarter?

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 the 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 commend, a mixture of FY '23, the destroyers, the DDG-1000 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 and what we gave you at the beginning of the year there. There is 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. We've 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.

Yes. I 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.

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 that's going to ramp as we go forward here.

Chris, 4% is in the rearview mirror. What do you mean by that?

Just long midterm guidance for shipbuilding. We have provided kind of midterm guidance for shipbuilding at 4%...

What do you mean by it being in the rearview mirror?

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

Okay. Understood. And then Tom or Chris, the $250 million cost initiative, 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?

Yes, it's all in our guidance. We assume we're going to achieve that in our guidance. So it's all in.

It's in your 2025 guidance?

Yes.

Yes.

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

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.

Our next question comes from Ron Epstein with Bank of America.

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 the progress you're having on your own internal autonomy systems for these vehicles?

Sure. Thanks for that. As you know, it's an 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. 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 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 MT's 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.

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

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.

Got it. Got it. And then maybe just one last one. You probably saw in the news yesterday. And if you can 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 into the Philadelphia Navy Yard. How does that changed things or not? I mean, how do you think about that strategically?

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

Our next question comes from Seth Seifman with JPMorgan.

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, you'd be below the midpoint for the year, which I think would imply kind of a step down in the margin in Q4. And just kind of curious what drives that given where the underlying margins are in the -- 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. And so is that some conservatism that leads you to have that guidance? Or is there some kind of anticipation of potential further negative adjustments?

Yes, I appreciate the question. Our shipbuilding margins for the first 3 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 in Q4. The [indiscernible] award will have incentives in there, some performance incentives and some capital incentives. Just the math of that is the timing of when that happens and how we book that, has incremental changes as we adopt the capital projects, the CapEx incentives and how we book that. So we're probably 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. We don't see some stepbacks 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 [indiscernible]. But no issues or concerns, expect to kind of finish up around the midpoint as we go forward here.

Our next question comes from Scott Deuschle with Deutsche Bank.

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 2 yards?

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 it's pretty equally distributed between increased outsourcing and performance of the labor force. So yes, it's been pretty equal.

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 was expected? It sounds like fairly equal as well, but just curious for that.

Yes. Yes, fairly equal.

Okay. And then, Chris, after you raised the wages for your workers in Newport News, did you see any other local area industries respond in kind by also raising wages? 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 is also already eating into that at all?

Yes. 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 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, which are the regional workforce development centers, the apprentice schools and the high school programs, which is very positive. So Newport News labor is doing well, kind of cautiously optimistic, and we hope to keep it going.

Our next question comes from Myles Walton with Wolfe Research.

Tom, on cash flow -- 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 tad. 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 million to $800 million range. Is that something that can only arrive with something like the [indiscernible]?

I appreciate the question on that. Yes. So we brought back more than a guide, an annual guide here for 2-year guide. A piece of that is just with 5 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 about $600 million between the 2 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, 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 next 5 quarters, that plays into all of that here. But generally speaking, there's -- 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 on our plan, get the awards from the customer, which has both opportunity R&Os around that. And then we'll give you more color on that in the February time frame. Relative to your comment on the $700 million to $800 million, as we get back, obviously, the top line is growing, that's good. We've kind of hinted here that the 4% has some good tailwinds. And you see for the first 3 quarters of this year, it's over 6%. So we'll give you increased kind of guidance on that in the February time frame. 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 the schedules and the 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 3 to 5 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, so okay.

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 emails. I'm just curious, what carrier could that cut over into if that was actually a change that was going to take place?

Yes. 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. So if they ask us to code over e-malls 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.

Our next question comes from Gautam Khanna, TD Cowen. [Operator Instructions]

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?

We did. We did. We're -- we will install those in Q4 and to get back on the erection schedule for that both. So yes, we did receive the modules.

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

Yes. So the net EACs that we had here were gross favorable was 37%, unfavorable was 40%, net of minus 3%. And that was made up Ingalls at positive 6%, as I said in my remarks, Newport News at minus 13%, those in the remarks as well as NTA at positive 4%.

Okay. Sorry, I missed that. 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 contracts signed. Is there the high end, is that like 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?

Yes. I appreciate the question. We gave you that guide at the beginning of the year in February. We have reiterated in May and July now here. We just have not changed that. I mean the math of the extremes would take a lot of things break in 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. But we understand how we're operating. The performance has been really steady right now, and we're razor-focused on what we have to do for the end of the year to close out within our guidance ranges that we gave.

Perfect. And one last one, Tom, just I know you talked 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?

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 will be over 50%. 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.

Our next question comes from Noah Poponak with Goldman Sachs.

Just one follow-up on kind of everything happening here. Can you talk about why 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?

Yes. 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.

Okay. Yes. 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, 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.

Yes. So, I think it's an interesting question. Tom can chime in here as well. But 1 quarter doesn't win the day, right, in an EAC. And you're running risk and opportunity throughout the entire program. So 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.

So perhaps 1 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.

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

I'd comment on the back of that, too. I'm with Chris, Noah, it's 13 weeks. Some of these contracts have 2 to 6 years to go. It's good -- it's actuals plus estimate to complete and you put a quarter in the books that's a solid quarter, which is good. Expect that trend to continue if not improve, but that wouldn't necessarily mean that immediately we change the 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. So 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.

Yes, yes. It's interesting. The appreciate the detail.

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.

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.

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