$ AAPL

$ ABBV

$ ABNB

$ ACGL

$ ADI

$ ADM

$ ADP

$ ADSK

$ AEE

$ AEP

$ AES

$ AFL

$ AIG

$ AIZ

$ AJG

$ AKAM

$ ALB

$ ALGN

$ ALL

$ AMAT

$ AMCR

$ AMD

$ AME

$ AMGN

$ AMP

$ AMT

$ AMZN

$ ANET

$ AOS

$ APA

$ APD

$ APO

$ APTV

$ ARE

$ ATO

$ AVB

$ AWK

$ AXON

$ BA

$ BALL

$ BAX

$ BBY

$ BDX

$ BEN

$ BG

$ BIIB

$ BKNG

$ BLDR

$ BMY

$ BR

$ BRO

$ BXP

$ CAG

$ CAH

$ CARR

$ CAT

$ CBOE

$ CBRE

$ CCL

$ CDNS

$ CDW

$ CEG

$ CF

$ CHD

$ CHRW

$ CI

$ CINF

$ CL

$ CLX

$ CMCSA

$ CMG

$ CMI

$ CMS

$ COIN

$ COO

$ COP

$ COR

$ CPAY

$ CPT

$ CRL

$ CRWD

$ CSCO

$ CTRA

$ CTSH

$ CTVA

$ CVS

$ CVX

$ CZR

$ DAL

$ DASH

$ DAY

$ DD

$ DDOG

$ DE

$ DELL

$ DG

$ DGX

$ DIS

$ DOC

Huntington Ingalls posted strong Q2 EPS and record backlog, but margin pressures—especially in Newport News—temper the outlook despite cost-cutting and digital initiatives.

# Huntington Ingalls Q2 2025: Strong EPS Beat and Record Backlog Offset by Margin Pressures

---

## Executive Summary

- **Huntington Ingalls Industries (HII) delivered a robust Q2 2025 earnings beat, reporting EPS of $3.86 versus the consensus of $3.33, and revenue of $3.08B.** The outperformance was driven by a record backlog and strong defense contract wins, highlighting the company’s ability to capitalize on sector tailwinds and contract timing.
- **Despite the top-line and EPS strength, margin compression remains a key concern.** Operating margins declined to 5.3% from 6.3% year-over-year, with the Newport News segment seeing a drop of over 200 basis points. Cost inflation, particularly in labor and logistics, weighed on profitability.
- **Management’s tone was measured but cautiously optimistic.** They reaffirmed 2025 revenue and margin guidance, raised free cash flow expectations, and emphasized ongoing digital modernization and a $250M annualized cost takeout initiative.
- **Risks remain around persistent margin pressure, labor and supply chain challenges, and execution of cost reduction plans,** especially in the Newport News segment. However, the company’s record backlog, strong defense funding environment, and digital/AI partnerships present significant upside potential.
- **Catalyst watch:** Investors should monitor the pace of cost takeout realization, contract execution in Newport News, and progress on digital transformation initiatives as key drivers for the next two quarters.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $3.08B   | $3.05B    | +$0.03B  | +4%        |
| EPS            | $3.86    | $3.33     | +$0.53   | +8%        |
| Operating Margin | 5.3%   | 5.8%      | -0.5pp   | -1.0pp     |
| Backlog        | $52.1B   | $50.0B    | +$2.1B   | +10%       |
| Free Cash Flow | $410M    | $350M     | +$60M    | +15%       |

---

## Earnings Quality

- **Revenue growth was broad-based and underpinned by a record backlog,** with new contract wins in both shipbuilding and mission technologies. However, the quality of earnings was tempered by **margin compression, particularly in the Newport News segment,** where margins fell by over 200 basis points.
- **Cost structure remains under pressure** from labor inflation, higher COGS, and logistics expenses. Management’s $250M annualized cost takeout plan is in early stages, with benefits expected to ramp in the second half.
- **Profitability lagged sales growth,** as operating leverage was offset by cost headwinds, resulting in a 100 basis point decline in overall operating margin.

---

## Management Commentary & Guidance

- **Management struck a cautiously positive tone,** acknowledging margin challenges but expressing confidence in operational improvements and workforce stabilization.
- **2025 guidance was reaffirmed for revenue and margins,** with an upward revision to free cash flow expectations. Management cited ongoing digital modernization and AI partnerships as key levers for future efficiency gains.
- **Assumptions appear realistic,** grounded in a robust defense funding environment and a record backlog, but with clear recognition of ongoing cost pressures.

---

## Key Risks

- **Margin pressure, especially in Newport News,** remains a central risk, driven by labor and supply chain challenges.
- **Execution risk** around the $250M cost takeout initiative and digital transformation could impact future profitability.
- **Potential for contract delays or regulatory changes** in the defense sector could affect backlog conversion and revenue timing.

---

## Expected Market Reaction

- **Analysts and investors are likely to respond positively to the EPS and free cash flow beat,** but enthusiasm may be tempered by ongoing margin concerns.
- **Market may be underestimating the impact of margin compression** and segment-specific challenges, while underappreciating the upside from backlog strength and cost initiatives.

---

## Final Takeaway

- **Huntington Ingalls delivered a strong quarter on EPS and backlog, but margin pressures signal a need for continued vigilance.** The market may be underpricing the risks in Newport News and overestimating the near-term impact of cost takeout plans.
- **Upcoming catalysts:** Progress on cost reduction execution and digital transformation, as well as contract milestones in Newport News, will be critical for the next two quarters.
- **Overall, Q2 2025 was a solid but not flawless quarter,** with clear opportunities for upside if management can deliver on operational improvements and margin stabilization.

HII Q2: EPS Beat, Margin Risks Persist

HII’s Q2 FY2025 margin recovery depends on cost controls and digital shipbuilding execution, with robust backlog offset by working capital and cash flow risks.

# HII’s Q2 FY2025 Earnings Outlook: Margin Recovery Hinges on Cost Execution and Digital Leverage

## Executive Summary

We maintain a **Neutral** outlook on HII (Huntington Ingalls Industries, Inc.) for Q2 FY2025, expecting **stable revenue near $2.2B** and **operating margins in the 5.5%–6.0% range**. While robust backlog (~$48B) and ongoing U.S. government contract momentum underpin revenue visibility, **elevated working capital (+$598M in Q1)** and persistent cost pressures in Shipbuilding temper near-term EPS upside. The market may be underestimating the potential for HII’s digital transformation initiatives—particularly in shipbuilding—to drive incremental margin improvement and operational efficiency, which could become a more material earnings lever in the second half of the year.

## Recent Trends Signal What’s Next

Recent quarters highlight a company in operational transition, with **Mission Technologies margin expanding from 3.7% to 5.4% in Q1 FY2025** despite flat revenue, and Shipbuilding margins remaining pressured. Revenue has been stable, but margin volatility—especially in Shipbuilding—has been the key swing factor for earnings.

### Quarterly Financial Trends Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q3 FY2024    | 2.63         | 13.2             | 7.1                  | 5.0           | 3.70    |
| Q4 FY2024    | 2.81         | 13.5             | 7.3                  | 5.2           | 4.12    |
| Q1 FY2025    | 2.60         | 12.8             | 5.8                  | 4.1           | 3.18    |
| Q2 FY2025E   | 2.20         | 12.5–13.0        | 5.5–6.0              | 4.0–4.5       | 3.10–3.30|

**Trend:** Revenue is expected to be flat-to-down sequentially, with margin stabilization dependent on cost controls and operational execution.

## Management’s Forward Tone and Positioning

Management’s Q1 FY2025 call and recent filings reflect a **measured, cautious optimism**. The tone has shifted from “navigating headwinds” in prior quarters to a more balanced “progress, but work remains” stance.

- “We’re seeing early signs of normalization in demand, but a lot of work to do on cost structure.” (Q1 2025 Earnings Call)
- “Our backlog remains robust, and we are confident in our ability to deliver on our commitments.” (Q1 2025 Earnings Call)

Compared to Q4 FY2024, when management emphasized “unprecedented supply chain challenges,” the current messaging is more focused on **operational discipline and incremental margin recovery**, with less emphasis on external risks and more on internal execution.

## KPI Trends & Upcoming Quarter Drivers

The following KPIs will be most relevant for Q2 FY2025 results:

### Key KPI Table

| KPI                    | Q2 2024 | Q1 2025 | Q2 2025E | YoY Change | QoQ Change | Impact on Q2 |
|------------------------|---------|---------|----------|------------|------------|--------------|
| Backlog ($B)           | 46.7    | 48.0    | 48.2     | +3%        | +0.4%      | Revenue stability |
| Trade Working Capital ($M) | 1,200   | 1,798   | 1,850    | +54%       | +3%        | Cash flow risk   |
| Mission Tech Margin (%)| 3.7     | 5.4     | 3.0–3.5  | -0.2–0.7ppt| -2.0ppt    | Margin swing     |

- **Backlog**: Remains at record levels, supporting revenue visibility.
- **Trade Working Capital**: Elevated, which could pressure free cash flow and limit upside to EPS.
- **Mission Technologies Margin**: Q1 improvement may not fully sustain, but cost actions could keep margins above 3%.

## Missed by the Street

- **Digital Shipbuilding Initiatives**: Management’s references to “digital shipyard” partnerships (e.g., with Palantir) and process automation are not yet reflected in consensus models. These investments could drive **mid-term margin expansion** and operational leverage, especially if early pilots scale successfully.
- **Working Capital Drag**: The sharp Q1 increase in working capital (+$598M) is a potential headwind for Q2 cash flow, but the Street appears focused on revenue and margin, underappreciating the near-term FCF risk.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS ($)   | Operating Margin (%) | Key Assumptions                                              |
|----------|--------------|-----------|----------------------|--------------------------------------------------------------|
| Bull     | 2.30         | 3.40–3.60 | 6.5                  | Accelerated contract awards, cost savings >$75M, digital gains |
| Base     | 2.20         | 3.10–3.30 | 5.5–6.0              | Stable revenue, moderate cost savings, working capital flat   |
| Bear     | 2.10         | 2.80–3.00 | 5.0                  | Supply chain/working capital drag, margin pressure persists   |

**Most Likely:** The **Base case** is most probable, given management’s conservative guidance, stable backlog, and ongoing cost initiatives, but with persistent working capital and cost headwinds.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Operating Margin (%) |
|--------------|--------------|---------|----------------------|
| Q3 FY2024    | 2.63         | 3.70    | 7.1                  |
| Q4 FY2024    | 2.81         | 4.12    | 7.3                  |
| Q1 FY2025    | 2.60         | 3.18    | 5.8                  |
| Q2 FY2025E   | 2.20         | 3.10–3.30| 5.5–6.0              |

### KPI Movement Table

| KPI                    | Q2 2024 | Q1 2025 | Q2 2025E | YoY Change | QoQ Change |
|------------------------|---------|---------|----------|------------|------------|
| Backlog ($B)           | 46.7    | 48.0    | 48.2     | +3%        | +0.4%      |
| Trade Working Capital ($M) | 1,200   | 1,798   | 1,850    | +54%       | +3%        |
| Mission Tech Margin (%)| 3.7     | 5.4     | 3.0–3.5  | -0.2–0.7ppt| -2.0ppt    |

### Management Quotes

1. **“We’re seeing early signs of normalization in demand, but a lot of work to do on cost structure.”**  
   - Source: Q1 2025 Earnings Call  
   - Interpretation: Margin recovery is a work in progress; cost discipline is a near-term focus.

2. **“Our backlog remains robust, and we are confident in our ability to deliver on our commitments.”**  
   - Source: Q1 2025 Earnings Call  
   - Interpretation: Revenue visibility is strong, reducing top-line risk.

3. **“We expect free cash flow for the year to be in the $300M–$500M range.”**  
   - Source: Q1 2025 Earnings Call  
   - Interpretation: Despite working capital headwinds, management is confident in FCF delivery.

4. **“Digital shipbuilding initiatives are beginning to show early operational benefits.”**  
   - Source: Q1 2025 Earnings Call  
   - Interpretation: Digital investments could be a future margin lever.

5. **“We continue to face a challenging environment in Shipbuilding, particularly on cost and workforce.”**  
   - Source: Q1 2025 Earnings Call  
   - Interpretation: Shipbuilding margin risk remains elevated.

6. **“We are targeting $250M in annualized cost savings through operational efficiency.”**  
   - Source: Q1 2025 Earnings Call  
   - Interpretation: Cost reduction is central to the margin recovery thesis.

7. **“Trade working capital increased by $598M, primarily due to timing of contract receipts.”**  
   - Source: Q1 2025 10-Q  
   - Interpretation: Near-term cash flow could be pressured if working capital remains elevated.

---

**Bottom Line:** HII’s Q2 FY2025 will be defined by its ability to execute on cost savings and manage working capital, with digital transformation as a potential underappreciated catalyst for future margin expansion. The base case scenario of stable revenue and modest margin improvement is most likely, but investors should monitor digital progress and working capital trends for early signs of upside or downside.

HII Margin Recovery Hinges on Cost, Digital Execution