HII Q2 Deep Dive: Shipbuilding Backlog Climbs, Labor and Supply Chain Shape Outlook

Aerospace and defense company Huntington Ingalls (NYSE:HII) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 3.5% year on year to $3.08 billion. Its non-GAAP profit of $3.86 per share was 13.9% above analysts’ consensus estimates.

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StockStory’s Take

Huntington Ingalls delivered Q2 results that surpassed Wall Street expectations, driven by higher volumes across all three divisions and notable contract wins. The market responded positively to these developments, reflecting management's emphasis on expanding shipbuilding throughput and investments in technology partnerships. CEO Christopher Kastner credited improved labor retention and ongoing supply chain stabilization as key contributors, noting, “Both shipyards increased throughput in the second quarter, and I expect further acceleration on the back half of the year.”

Looking ahead, management sees continued momentum from recent contract awards and ongoing growth in the shipbuilding industrial base, supported by federal funding and collaborative industry efforts. However, the company remains cautious about the pace at which these tailwinds will convert into higher revenue and margins, with CFO Thomas Stiehle stating, “We are progressing on each of these items, and we expect to achieve a meaningful improvement in throughput over the course of the year.” Management also highlighted the importance of technology adoption and labor force stability as vital to future performance.

Key Insights from Management’s Remarks

Management attributed second quarter performance to increased throughput, stronger labor retention, and a series of significant contract awards, while flagging supply chain risks and margin pressures.

• Shipbuilding throughput gains: Both Ingalls and Newport News saw improved throughput, aided by new hiring and better employee retention, though Newport News remained behind plan due to CVN 80 supply chain delays. Management expects further productivity improvements in the second half.
• Labor pipeline progress: The company reported hiring approximately 2,400 new, more experienced employees this quarter, with wage adjustments at Newport News contributing to month-over-month improvement in retention and attrition metrics.
• Key contract awards: Major wins included DDG 145 and 146, LPD 33, and two Block V submarines, providing increased visibility and stability for future shipbuilding operations. The award for Block VI and Columbia Build II submarines remains a key upcoming milestone.
• Technology initiatives: A new partnership with C3 AI aims to accelerate shipbuilding schedules using artificial intelligence for digital optimization. Early results are promising, but management cautioned that significant benefits will take time to materialize.
• Margin pressures: Operating margin declined year over year due to unfavorable performance on certain pre-COVID contracts and supply chain issues, particularly affecting Newport News. Management expects margin improvement as older contracts are completed and newer, better-priced contracts ramp up.

Drivers of Future Performance

Management expects future performance to be shaped by increased throughput, recent contract wins, and ongoing investments in labor and technology, but flagged lingering risks from legacy contracts and supply chain constraints.

• Backlog conversion and contract timing: The record backlog and recent funding, including from the reconciliation bill and FY '26 budget, should support mid-single digit revenue growth in future years. However, management noted that the timing of key contract awards, like Block VI and Columbia Build II submarines, will be critical to translating backlog into revenue.
• Labor and supply chain stability: Ongoing hiring and improved retention are expected to drive greater productivity and efficiency, but management remains cautious about persistent supply chain risks for major components. Wage increases are seen as supporting retention but are not assumed in productivity forecasts until proven over time.
• Margin recovery from contract mix: As the company transitions away from pre-pandemic, lower-margin contracts to newer agreements, operating margins are expected to recover. Management highlighted that further cost reductions and successful execution on new awards will be necessary to achieve long-term margin targets.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will be monitoring (1) the pace of throughput improvement at both shipyards as new hiring and technology initiatives take hold, (2) the conversion of backlog to revenue as Block VI and Columbia Build II submarine contracts are finalized, and (3) progress on margin recovery as the company completes legacy contracts. Updates on supply chain stability and further labor force retention will also be important signposts for future performance.

Huntington Ingalls currently trades at $268.99, up from $258.65 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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