Prepared remarks
Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2025 HII Earnings Conference Call. After the speaker's presentation, there will be a question and answer session. Please be advised that this conference is being recorded. 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 the water with SSN 798 Massachusetts having recently completed sea trials and preparing for delivery this year. As for our carrier program, CVN-79 Kennedy continues to make progress in its testing program, and we expect to conduct the ship's first sea trials around the end of the year. Shipbuilders are installing the large components that have now been received on CVN-80 Enterprise, which will allow erection progress to accelerate. Moving to Ingalls, in the third quarter, we successfully completed builders trials for DDG 128 Ted Stevens, bringing her a step closer to acceptance trials and delivery. Our amphibious warship construction continues to make progress with both LHA-8 Bougainville and LPD-30 Harrisburg 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 1.25x 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. Additionally, we unveiled the ROMULUS family of unmanned surface vessels powered by our 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 combine internally developed technology with world-class partner technology to create best-of-breed technology solutions for the warfighter. Now shifting to an update on our operational initiatives. Both Ingalls and Newport News performance was stable to slightly improving in the quarter as we continue to work through 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. The first operational initiative increasing throughput is showing improvement over 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. Also, we are seeing success and expansion of the industrial base with our distributed shipbuilding strategy resulting in significant outsourcing taking place at 23 partners and growing. With the Navy's support, we are partnering with shipyards and fabricators in multiple states to grow throughput and improve schedule adherence for all of our shipbuilding programs. The second operational initiative is our $250 million annualized cost reduction effort, and we remain on track to achieve this target. And the final operational initiative is achieving our new contract awards. Having completed the negotiations for the significant award of 2 submarines earlier this year, our teams have pivoted to negotiations of Block VI and the next Columbia award and are working towards having agreements in place late this year. Shifting to activities in Washington. The new fiscal year began with a lapse in appropriations. As a result, many activities of the federal government have halted. I will note, in the Department of Water shutdown guidance, shipbuilding is 1 of 6 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 on normal operations. We have seen 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 the completion of the 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 construction and CVN 82 advanced procurement for the DDG-51 program and for the second of 3 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, qualifying the strong support for shipbuilding and other national security priorities reflected in the respective House and Senate bills. The 2 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. And now I'll turn the call over to Tom for some remarks on our financial performance. 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 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 receipts 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 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 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. 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. Net capital expenditures were $102 million or 3.2% of revenues. Free cash flow in the quarter was $16 million. Free cash flow results in the quarter were better than the guidance we had provided, largely due to stronger collections in the quarter as well as some disbursements moving out of the quarter. I'll discuss our updated 2025 free cash flow guidance in a moment. During the quarter, we did not repurchase any shares. We did pay a cash dividend of $1.35 per share or $53 million in the aggregate. Last week, we announced a modest increase in our quarterly dividend to $1.38 per share. Turning to liquidity and the balance sheet, we ended the quarter with a cash balance of $312 million and liquidity of approximately $2 billion. Our capital allocation priorities are unchanged. We value our investment-grade credit rating, and we will continue to prioritize prudent debt levels while strategically investing in our shipyards and thoughtfully growing our dividend while continuing to use excess free cash flow for share repurchases. Moving on to our outlook on Slide 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%. Our 2025 guidance is predicated on achieving the operational initiatives we have laid out. We are pleased with the throughput improvement we saw in the third quarter, though we have not been able to overcome the slower start to the year and therefore had to trim our throughput improvement expectation for the full year. As Chris noted, we are continuing to work towards the Virginia-Class Block VI and Columbia Build II submarine awards later this year. If the award were to push into 2026, it would be a headwind to our guidance that would likely have us end the year slightly below the midpoint of our shipbuilding margin guidance range. Conversely, an award this year would support us ending at or slightly above the midpoint of the range. For 2025 free cash flow, we are updating our guidance to be between $550 million and $650 million. At the midpoint, this is an increase of $50 million compared to our prior guidance range. We are establishing a cumulative free cash flow target for 2025 and 2026 of $1.2 billion. Using the 2025 free cash flow guidance midpoint, this does imply both years will generate about $600 million in free cash flow. As always, our cash flow in a particular quarter or year can be impacted by small changes in timing for large receipts and disbursements. We are also updating a number of discrete income statement guidance elements. We have made some minor revisions to our pension outlook, and you can find updated 2025 and 2026 expectations in the appendix of today's slide presentation. We are also updating the expected effective tax rate for the year to 22% given the elevated rate in the third quarter that I discussed previously. To close, it was a good quarter as we continue to make steady progress working our way through challenging shifts and executing our 2025 operational initiatives, securing new contracts aligned to the current environment, driving higher throughput, and thoughtfully managing costs. With that, I'll turn the call back over to Christie to manage Q&A.
Thanks, Tom. Operator, I'll hand the call over to you to handle the Q&A.
Questions and answers
Our first question comes from Scott Mikus with Melius Research.
Chris and Tom, I wanted to ask about 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 the Navy is also working on how that works with the shutdown and potential continuing resolution to make sure that we can get the ships awarded. So more to come there, but I think we're making good progress. On the incremental award or potentially awarding fewer ships, it really doesn't make sense and is contrary to what we think is the most important thing for the industrial base, which is a consistent demand signal. 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. I appreciate it.
Okay. And then a quick one. It looks like you mentioned that 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 mentioned that shipbuilding revenue for the quarter was nearly $250 million over your target, yet you only increased the full year guidance by $50 million. To meet the full year estimate, shipbuilding revenue in the fourth quarter would need to be steady or possibly slightly decrease, which seems quite achievable. Can you clarify that? Additionally, given the significant growth rate in shipbuilding revenue this quarter, the main question is whether you've improved your ability to match throughput with demand. Can we expect better growth in the medium term, even if not at a constant 16% every quarter, or was this quarter's performance influenced by a unique allocation or other transient factors?
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 therewas 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 combatants, 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 are some tailwinds, I'll tell you. So we want to see how we continue to improve. As Chris mentioned in his remarks upfront, it was earned throughput. Charleston Operations is providing a lift in revenue. 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, Noah, obviously, I think mid-term growth of 4% 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 like to add that even though we experienced an 18% growth in Q3 year-over-year in shipbuilding, the growth for the year across Q1, Q2, and Q3 stands at 6.1%. We are seeing some positive signs regarding our capacity and throughput. As we continue to work through our backlog, capitalize on our business opportunities, and as our investments mature, alongside a more experienced workforce, I anticipate that we will see an increase in growth moving forward.
Chris, 4% is in the rearview mirror. What do you mean by that?
Just long mid-term guidance for shipbuilding. We have provided mid-term guidance for shipbuilding at 4%...
What do you mean by it being in the rearview mirror?
That likely isn't valid anymore. It's probably more than that. We just need to finalize 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 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, Odyssey is a software solution for autonomy. The advantage of Odyssey is that it's open source, allowing for easy integration of new software tools. When we evaluated the market and opportunities, we found that partnering with companies like Shield AI and C3 AI would enhance our software capabilities. This collaboration strengthens our mission, and we've been developing this software for quite some time. We've delivered over 750 uncrewed vehicles to both international and domestic partners, which has been very encouraging. Additionally, we have updates regarding our ROMULUS line of vehicles. Odyssey plays a crucial role in this, aligning with our strategy to utilize top-tier commercial solutions to ensure we deliver the best offerings to our customers. The open architecture of the software facilitates this integration. We are excited about its potential and plan to incorporate it into our unmanned products moving forward.
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 change 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.
I wanted to ask, Tom, you mentioned regarding the margin rate that if the contract doesn't come in Q4, you would be below the midpoint for the year, which suggests a decrease in the margin for Q4. I'm curious about what drives that, considering the underlying margins in the shipyard after EACs seem to be above 6%, possibly in the low to mid-6 range. Is this guidance reflecting some conservatism, or is there an expectation 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 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 to where we could land depending on the timing of those awards. We don't see some significant stepbacks right now. Through Q3, we've booked our performance for cost and schedule. And we're just reiterating the guidance that we gave you at the beginning of the year. 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 the 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 slightly less improvement than was expected? It sounds like fairly equal as well, but just curious for that.
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, cautiously optimistic, and we hope to keep it going.
Our next question comes from Myles Walton with Wolfe Research.
Tom, regarding cash flow and the expected flatness in 2026, could you provide some insights? It seems that earnings are anticipated to grow, and I would expect capital expenditures to decrease slightly. Is there something that balances that out to maintain the flat trend? Additionally, a couple of years ago, there was a higher cash flow target in the range of $700 million to $800 million. Is that target achievable only with something like the award?
I appreciate the question on that. Yes, we've provided more than just an annual guide; we have a two-year outlook. A part of that is based on five quarters, including this quarter and the next year. As the awards come in, we will monitor performance for Q4 and adjust our expectations for next year accordingly. We wanted to clarify our expectations with the market. We’ve discussed our book of business and where we currently stand. I believe we’ll maintain a run rate of about $600 million over the two years, and we will see how this year compares to next year in terms of receipts and awards. I'm comfortable with this projection for now. Based on your calculations, revenue is set to grow. There are many variables at play, including my working capital, capital expenditures, and the timing of receipts, along with performance over the next five quarters. Generally, I'm confident about our current position. The guidance for 2026 is conservative. Our aim is to wrap up this year, finalize our plans, and receive customer awards, which provide opportunities for revenue growth. We will share more details in February. Regarding your mention of the $700 million to $800 million target, the top line is indeed expanding, which is positive. We’ve indicated that the 4% figure has good tailwinds, and in the first three quarters of this year, we've seen over 6%. We will offer updated guidance in February as well. The top line will grow significantly. A crucial factor influencing cash flow in the medium to long term will be our return to profitability. We anticipate gradual profitability increases each year. As we complete pre-COVID contracts, the new contracts are designed with greater efficiencies and better scheduling. As we engage with these new contracts, we will start booking more conservatively. However, as we move into contracts that span three to five years, we expect to return to traditional profitability expectations in shipbuilding, leading to an increase in both top and bottom lines, which will improve cash flows, especially as we approach the end of the decade.
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 electric. 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 electric or weapons elevators, we’ll work with them to do it in 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 at TD Cowen. Christopher Kastner, President and CEO, responded that while he may not be able to comment directly on that matter, the company is committed to building whatever the Navy requests. If they require the conversion of electric systems or weapons elevators, the team will collaborate with them to ensure it is done intelligently and correctly. Ultimately, they will build according to the Navy's specifications.
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 will install those in Q4 and get back on the erection schedule for 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 to 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.
Our next question comes from Noah Poponak with Goldman Sachs.
Just one follow-up on 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. 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. I'm trying to better understand the improved top line and your confidence in its continuation alongside the shipbuilding margin remaining flat throughout the year. Improving labor could potentially drive higher throughput immediately, but it seems like you need the labor to refine and get better before it impacts the margin. This dynamic in the financials is quite interesting.
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. 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.
Well, these are long-term contracts, and you make assumptions about what the cost profile is going to be. So it's all been in our guidance.
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.