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Item 7. Management’s Discussion and Analysis

2025-02-06 compared with 2024-02-01 · 126 added, 142 removed, 511 unchanged (34% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read along with the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, as well as Part II, “Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2022.

The following discussion should be read along with the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K along with the other sections of this Form 10-K, including Item 1A.

"Risk Factors."

Business Environment

We continue to see uncertainty, both domestically and globally, with challenges for customers and suppliers, labor shortages, supply chain challenges, and inflation, among other impacts.

Defense Spending Environment – Congressional consideration of the $886 billion fiscal year 2024 President’s Budget Request for defense spending began following its submission to Congress on March 9, 2023.

Additionally, after the statutory debt limit of $31.4 trillion was reached in January, the President signed into law the Fiscal Responsibility Act of 2023 (the “FRA”) on June 3, 2023, which suspended the federal debt limit through January 1, 2025 and established new discretionary funding limits for defense and non-defense accounts.

The FRA capped national defense spending at $886 billion for fiscal year 2024 (consistent with the President’s budget request level) and $895 billion for fiscal year 2025.

In accordance with the FRA, since Congress did not pass full-year appropriations for all discretionary spending by the end of calendar year 2023, fiscal year 2024 discretionary spending is subject to sequestration after April 30, 2024.

Any additional emergency supplemental funding legislation during fiscal years 2024 and 2025 is not subject to the budget caps.

We continue to see uncertainty in the economy, our industry, and our company.

Our customers, suppliers and subcontractors continue to face challenges, and our results for the year were adversely affected by significant challenges relating to labor availability, our supply chain, and inflation, among other challenges.

We cannot predict how long these challenges will continue, whether these challenges will change over time, or whether our actions to address these challenges will be successful.

Political and Economic Environment – The November 2024 elections, which resulted in Republican control of the executive and legislative branches, has resulted in a range of policy changes both domestically and internationally as Republicans seek to reorient U.S.

The new Administration has employed, and is expected to continue to employ, executive actions and other methods, including regulations and policy proposals that impact trade, tax, immigration, energy policies, and other areas.

The debt ceiling is expected to continue to be an area of considerable debate.

High debt levels may impose fiscal constraints on many policy objectives, complicating efforts to deliver on promises made during the elections.

Domestically, we expect that national debt levels, inflationary pressures, gross domestic product growth, among other considerations, could impact U.S.

budgets and priorities, including with respect to discretionary spending.

While monthly inflation rates have declined since peaking at 9.1% in June of 2022, rising military personnel and operations and maintenance costs continue to pressure the Pentagon’s investment portfolio buying power.

average inflationary conditions continue over the long-term, additional resources may be required to address contract and labor cost growth.

Global supply chain and labor markets continue to experience high levels of disruption, causing significant materials and parts shortages, including raw material, microelectronics and commodity shortages, as well as delivery delays, labor shortages, and price increases.

The labor market continues to present significant challenges for our Company, our industry, and the supply chain.

Our ability to increase throughput and meet production schedules is directly impacted by labor availability and performance.

We monitor labor market conditions and trends and work to mitigate the effects of labor challenges through a variety of measures.

Challenges in the labor market are addressed through targeted talent acquisition, partnerships with community colleges, apprentice school sourcing and recruiting, workforce succession planning, and initiatives to retain current employees.

Labor shortages and retention also are impacting our supply chain, resulting in longer lead times for materials, parts, and other supplies.

Our supply chain has been impacted further by delivery delays, raw material shortages and price increases caused by continued inflationary pressures.

The shipbuilding defense industry is unique in many ways.

It is heavily capital and skilled labor intensive.

Navy, a large single customer with many needs and requirements, dominates the industry's customer base and is served by a fragile supplier base that has trended toward exclusive providers.

The DoD continues to adjust its procurement practices and streamline acquisition organizations and processes in an ongoing effort to reduce costs, gain efficiencies, and enhance program management and control.

Additionally, the U.S.

Navy must compete with other national priorities, including other defense activities, non-defense discretionary spending, and entitlement programs, for a share of federal budget funding.

While the impact to our business resulting from these developments remains uncertain, they could have a material impact on current programs, as well as new business opportunities with the DoD.

Defense Spending Environment – On March 11, 2024, the Biden Administration proposed a Fiscal Year (FY) 2025 budget request of $849.8 billion for the DoD, consistent with the discretionary funding cap for defense approved by Congress under the Financial Responsibility Act (“FRA”) of 2023.

Additionally, the FRA included a sequestration mechanism to incentivize Congress to enact regular, full-year appropriations legislation instead of relying on continuing resolutions ("CR").

Although the Federal government is operating under a CR through March 14, 2025, sequestration would not be enforced until April 30, 2025 and would be reversed upon the enactment of full-year appropriations.

The emergency national security supplemental funding legislation enacted during fiscal year 2025 is not subject to the FRA budget caps.

The House and Senate reached a compromise agreement on the National Defense Authorization Act ("NDAA") for fiscal year 2025 in December 2024.

Overall, the fiscal year 2024 NDAA authorizes $886 billion for national defense programs, consistent with the spending caps directed in the FRA.

The compromise legislation supports our shipbuilding priorities with a total authorization of $32.9 billion for shipbuilding programs, including the authorization of an LPD 33 Flight II amphibious ship along with incremental funding authority, two Virginia class (SSN 774) submarines, one Columbia class (SSBN 826) ballistic missile submarine, and two Arleigh Burke class (DDG 51)

Additionally, the fiscal year 2024 NDAA authorizes multiyear procurement authority for the Block VI Virginia class (SSN 774) submarine contract and includes authorities to help implement the Australia-United Kingdom-United States security partnership, including the authority to transfer Virginia class submarines to Australia effective in fiscal year 2025.

Both House and Senate appropriations bills have been passed out of committee, and the House defense appropriations bill has been approved by the full House.

The House defense appropriations measure broadly supports the President’s budget request for shipbuilding, including funding for two Virginia class (SSN 774) submarines, one Columbia class (SSBN 826) ballistic missile submarine and two Arleigh Burke class (DDG 51) destroyers.

The Senate Appropriations Committee included $500 million in advance procurement for LPD 33 (unnamed) and advance procurement for a third Arleigh Burke class (DDG 51) destroyer in fiscal year 2025, as well as full funding for two Arleigh Burke class (DDG 51) destroyers, two Virginia class (SSN 774) submarines, and one Columbia class (SSBN 826) submarine in fiscal year 2024.

Overall, the fiscal year 2025 NDAA authorizes $883.7 billion in national security spending, including $849.9 billion for the Pentagon, consistent with the spending caps directed in the FRA.

The compromise legislation supports our shipbuilding priorities with a total authorization of $32.7 billion for shipbuilding programs, including procurement authorization of the Travis Manion (LPD 33) Flight II amphibious ship, one Virginia class (SSN 774) submarine, three Arleigh Burke class (DDG 51) destroyers and the RCOH of USS Harry S.

Truman (CVN 75).

Additionally, the fiscal year 2025 NDAA supports the amphibious warship bundle contract signed in 2024 by authorizing advanced procurement funding for LPD 34 (unnamed), LPD 35 (unnamed), and Helmand Province (LHA 10).

Both House and Senate appropriations bills have passed out of committee, and the House defense appropriations bill has been approved by the full House.

The House defense appropriations bill funds the Defense Department within the spending caps in the 2023 debt limit deal and supports the President’s budget request by funding one Virginia class (SSN 774) submarine, two Arleigh Burke class (DDG 51) destroyers, one LPD Flight II amphibious ship, and one CVN RCOH.

The Senate Appropriations Committee added approximately $21 billion in emergency funding not subject to the FRA caps and included fiscal year 2025 funding for three Arleigh Burke class (DDG 51) destroyers, one Virginia class (SSN 774) submarine, one LPD Flight II amphibious ship, one CVN RCOH, one FFG-62 frigate, and advanced procurement funding for an additional Arleigh Burke class destroyer in fiscal year 2026.

Although a new fiscal year began on October 1, 2024, annual appropriations to fund the federal government for fiscal year 2025 have not been enacted.

To provide Congress additional time to reach agreements on funding levels for federal agencies, a Continuing Resolution ("CR") extending funding through November 17, 2023, at fiscal year 2023 levels was enacted on September 30, 2023.

Congress passed a second CR in November 2023 that extended agencies covered by four of the appropriations bills until January 19, 2024, and the balance of agencies, including the DoD, until February 2, 2024.

An additional CR passed by Congress in January 2024 further extended government funding deadlines under the previous CR’s division of appropriations bills until March 1, 2024, and March 8, 2024.

While the DoD is normally prohibited from starting new programs or increasing funding on existing programs under a CR, the current CR includes an exception that will allow the DoD to deviate from typical restrictions and obligate funding to begin construction of the second Columbia class nuclear submarine (SSBN 827).

To provide Congress additional time to reach agreements on funding levels for federal agencies, a continuing resolution was enacted extending funding through December 20, 2024, at fiscal year 2024 levels.

Congress passed a second CR in December 2024 that extended federal funding through March 14, 2025.

While the DoD is normally prohibited from starting new programs or increasing funding on existing programs under a CR, the current CR includes anomalies that will allow the DoD to deviate from typical restrictions and obligate funding to support procurement of the Virginia class and Columbia class submarine programs.

A $5.7 billion emergency appropriations anomaly supports fiscal year 2024 and fiscal year 2025 Virginia class submarines as well as workforce wages and shipyard investments.

This funding does not count against the FRA fiscal year 2025 funding cap.

We cannot predict the outcome of the fiscal year 2025 budget process or whether additional short-term funding will be required in the event annual appropriations measures are not finalized by the expiration date of the current CR.

Global Geopolitical Environment – Our current operating environment exists in the broader context of political and socioeconomic priorities and continues to be impacted by uncertainty, heightened geopolitical tensions, and instability.

Geopolitical relationships continue to change, and the U.S.

and its allies face a global security environment that includes threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns, and political instability.

In February 2022, Russian forces invaded Ukraine, and the conflict is continuing.

In response, the U.S.

and other countries imposed economic and trade sanctions, export controls, and other restrictions on Russia.

This conflict and the associated sanctions have impacted the global economy, causing heightened cybersecurity risks and an exacerbation of supply chain challenges, higher energy costs, and inflationary pressures.

Additionally, and more broadly, tensions with China and changes in international trade policies, including higher tariffs on imported goods and materials, could impact the global market for defense products, services, and solutions.

Meanwhile, the duration and impact of the evolving conflict surrounding Israel and Gaza is unknown but is likely to have global economic and political ramifications.

The escalating strategic competition with China and the implications of Russia’s invasion of Ukraine and the Israeli-Gaza conflict have led Asian, Oceania, and European countries, in particular, to pay renewed attention to their military budget.

Global military expenditures surpassed $2 trillion for the first time in 2021, and the recent conflicts in both Ukraine and Israel could lead to more demand.

Economic Environment – Conflict or the threat thereof has led to an increase in economic and trade sanctions and export controls.

Economic tensions with other nations and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, have impacted the global market for defense products, services, and solutions.

Domestically, the political ramifications of national debt levels coupled with the uncertainty of economic indices including inflation, gross domestic product growth, and the pace of recovery from the coronavirus pandemic could increase pressure on discretionary spending.

While monthly inflation rates have steadily declined since peaking at

9.1% in June of 2022, rising military personnel and operations and maintenance costs continue to pressure the Pentagon’s investment portfolio buying power.

If above-average inflationary conditions continue over the long-term, additional resources may be required to address contract and labor cost growth.

The labor market continues to present significant challenges.

We monitor labor market conditions and trends and work continuously to mitigate the effects of labor constraints through targeted programs.

Labor shortages are also impacting our supply chain, resulting in longer lead times for materials, parts, and other supplies.

We work with our suppliers and subcontractors to mitigate risk, arrange supply source alternatives, increase our inventory of available materials and parts, and regularly pursue cost reductions through quantity orders of materials.

Talent attraction and retention and the ability to maintain a qualified workforce affects not only industry prime contractors but suppliers as well.

Challenges incurred by our suppliers relative to their workforces, access to necessary components, materials, and other supplies at reasonable prices, and access to support services, such as shipping and transportation, may impact the ability of suppliers to provide agreed-upon goods and services in a timely, compliant, and cost-effective manner.

We may in the future incur additional costs and performance challenges, including as a result of higher prices, schedule delays, or the need to identify and develop alternative suppliers.

While costs related to COVID-19 events are allowable under U.S.

Government contracts, our contract financial estimates reflect cost recovery uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and fixed-price incentive contracts, or may not be adequately covered by insurance.

Reinsurers under our property insurance failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program.

We also initiated arbitration proceedings against other reinsurers seeking similar relief.

The Vermont court dismissed our complaint, and we appealed the decision to the Vermont Supreme Court, which reversed and remanded the lower court’s decision in September 2022, allowing our claim to proceed.

No assurance can be provided regarding the ultimate resolution of this matter.

Investigations, Claims, and Litigation.

Political Environment – While geopolitical pressures may point to a world where spending on defense and security in the U.S.

should increase, it remains for Congress and the Executive Branch to determine how best to balance defense and other discretionary spending with rising entitlement costs and a focus in Washington on the federal deficit.

The 118th Congress is nearly equally divided with a thin majority held in both the House and Senate.

Given the partisan political environment that will likely continue through the 2024 elections, when the presidency, all 435 House seats, and 34 Senate seats will be up for consideration, the prospect for significant legislative activity in 2024 is low.

Global Geopolitical Environment – The global geopolitical environment continues to be impacted by uncertainty, heightened tensions, and instability, all of which drive the increasing need for defense offerings, including those provided by our company.

Global geopolitical relationships continue to evolve.

and its allies face a global security environment that is impacted by threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns, and political instability.

The ongoing conflict in Ukraine and the associated sanctions have impacted the global economy, caused heightened cyber and other security risks, exacerbated supply chain challenges, resulted in higher energy costs, and further impacted inflationary pressures.

In addition, tensions with China, along with hostilities in the Middle East, continued conflicts globally, and changes in international trade policies have impacted, and could continue to impact, the global market for defense products, services, and solutions.

Program Descriptions

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In estimating contract costs, we utilize a profit-booking rate based upon performance expectations that incorporate a number of assumptions and estimates regarding risks related to technical requirements, feasibility, schedule, and contract costs.

Management performs periodic reviews of the contracts to evaluate the underlying risks, which may increase the profit-booking rate as we are able to mitigate and retire such

Management performs periodic reviews of the contracts to evaluate the underlying risks, which may increase the profit-booking rate as we are able to mitigate and retire such risks.

For the impacts of changes in estimates on our consolidated statements of operations and comprehensive income, see Note 6:

Revenue and Note 8:

Segment Information in Item 8.

Revenue in Item 8.

Retirement Related Benefit Plans

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The CAS requirements for these costs and their calculation methodologies differ from FAS.

As a result, while both CAS and FAS use assumptions in their calculation methodologies, each method results in different calculated amounts of retirement related benefit plan costs.

As a result, while both CAS and FAS use

assumptions in their calculation methodologies, each method results in different calculated amounts of retirement related benefit plan costs.

We recover our CAS costs through the pricing of products and services on U.S.

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We use only bonds that are denominated in U.S.

Dollars, are rated Aa or better by nationally recognized statistical rating agencies, have a minimum outstanding issue of $50 million as of the measurement date, and are not callable, convertible, or index-linked.

Dollars, are rated Aa or better by nationally recognized statistical rating agencies, have a minimum outstanding issue of $50 million as of the measurement date, and are not convertible or index-linked.

Expected Long-Term Rate of Return - The expected long-term rate of return on assets is used to calculate net periodic expense, based on such factors as historical returns, targeted asset allocations, investment policy, duration, expected future long-term performance of individual asset classes, interest rates, inflation, portfolio volatility, investment management and administrative fees, and risk management strategies.

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While studies are helpful in understanding past and current trends and performance, the rate of return assumption is based more on long-term prospective views to avoid short-term market influences.

Unless plan assets and benefit obligations are subject to re-measurement during the year, the expected return on pension assets is based on the fair value of plan assets at the beginning of the year.

Unless plan assets and benefit obligations are subject to re-

measurement during the year, the expected return on pension assets is based on the fair value of plan assets at the beginning of the year.

Mortality - Mortality assumptions are used to determine the retirement related benefit obligations and expense, and represent the likelihood and duration of benefit payments to plan participants based on historical experience and projected longevity.

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The amortization period for actuarial gains and losses is the estimated average remaining service life of the plan participants.

In 2023, the actual return on assets was approximately 12.3%, which was greater than the expected return assumption of 8.00%.

For the year ended December 31, 2023, the weighted average discount rates for our pension and other postretirement benefit plans decreased by 19 and 15 basis points, respectively.

The differences in asset returns resulted in an actuarial gain of $263 million, and the differences in discount rates resulted in an actuarial loss of $144 million for the year ended December 31, 2023.

In 2024, the actual return on assets was approximately 7.7%, which was less than the expected return assumption of 8.00%.

For the year ended December 31, 2024, the weighted average discount rates for our pension and other postretirement benefit plans increased by 70 and 44 basis points, respectively.

The differences in asset returns resulted in an actuarial loss of $24 million, and the differences in discount rates resulted in an actuarial gain of $500 million for the year ended December 31, 2024.

An increase or decrease of 25 basis points in the discount rate and the expected long-term rate of return assumptions would have had the following approximate impacts on pension expense and obligations:

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Investments in equity securities (common and preferred) are valued at the last reported sales price when an active market exists.

Investments in fixed-income securities are generally valued based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders.

Investments in fixed-income

securities are generally valued based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders.

Investments in hedge funds, real estate investment funds, private partnerships, collective trust funds, and commingled funds are generally valued at their Net Asset Values ("NAV") or equivalent, which are based on the current fair values of the fund's underlying assets.

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As disclosed in Note 16:

Employee Pension and Other Postretirement Benefits in Item 8, net pre-tax unrecognized actuarial losses as of December 31, 2023 and 2022 were $455 million and $678 million, respectively.

The decrease in actuarial losses in 2023 was primarily driven by asset returns greater than expected returns of $263 million, updated mortality assumptions of $118 million, and amortization of previously unrecognized actuarial losses of $2 million, offset by lower discount rates used to determine benefit obligations of $144 million.

Employee Pension and Other Postretirement Benefits in Item 8, net pre-tax unrecognized actuarial gains as of December 31, 2024 were $59 million and unrecognized actuarial losses as of December 31, 2023 were $455 million.

The increase in actuarial gains in 2024 was primarily driven by higher discount rates used to determine benefit obligations of $500 million and amortization of previously unrecognized actuarial losses of $5 million, which were offset by lower than expected asset returns of $24 million.

Net pre-tax unrecognized prior service costs (credits) as of December 31, 2024 and 2023 were $111 million and $125 million, respectively.

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Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.

Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead.

We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts.

Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.

Sales and Service Revenues

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profit margin rate for a particular contract.

Sales and service revenues for the year ended December 31, 2023, increased $778 million, or 7%, compared to the same period in 2022, due to higher volumes at Mission Technologies, Newport News, and Ingalls.

Sales and service revenues for the year ended December 31, 2024, increased $81 million, or 1%, compared to the same period in 2023, due to higher volumes at Mission Technologies and Ingalls, partially offset by lower volumes at Newport News.

Cost of Sales and Service Revenues

Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead.

We manage the type and amount of costs at the contract level,

which is the basis for estimating our total costs at completion of our contracts.

We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts.

Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.

Refer to "Segment Operating Results" and "Product and Service Analysis" in this section for details related to cost of sales for both product sales and service revenues.

Refer to "Segment Operating Results" and "Product and Service Revenues and Cost Analysis" in this section for details related to cost of sales for both product sales and service revenues.

Income from Operating Investments, Net

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Other income and gains, net in 2024 was $9 million, compared to $120 million in 2023.

The increase was due to the sale of our court judgment against the Bolivarian Republic of Venezuela, to recover unpaid receivables for the prior repair, refurbishment, and modernization of foreign-built frigates, and the settlement of a representations and warranties insurance claim related to the acquisition of Hydroid.

The decrease was due to the sale of a court judgment in 2023 and the settlement of a representations and warranties insurance claim related to the acquisition of Hydroid in 2023, partially offset by the settlement of an insurance claim in 2024.

General and Administrative Expenses

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These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.

General and administrative expenses in 2023 increased $98 million, or 11%, compared to 2022.

The increase was primarily due to higher overhead costs and state income taxes.

General and administrative expenses in 2024 decreased $49 million, or 5%, compared to 2023.

The decrease was primarily due to lower state taxes.

Operating Income

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The favorable change was primarily driven by higher interest rates under FAS.

We expect the FAS/CAS Adjustment in 2024 to be a net benefit of approximately $115 million (($65) million FAS and $50 million CAS), primarily driven by the more immediate recognition of the 2023 asset returns, offset by lower interest rates under FAS.

We expect the Operating FAS/CAS Adjustment in 2024 to be a net expense of approximately $63 million ($113 million FAS and $50 million CAS), primarily driven by lower interest rates under FAS.

We expect the FAS/CAS Adjustment in 2025 to be a net benefit of approximately $148 million (($100) million FAS and $48 million CAS), primarily driven by higher discount rates under FAS.

We expect the Operating FAS/CAS Adjustment in 2025 to be a net expense of approximately $43 million ($91 million FAS and $48 million CAS), primarily driven by higher interest rates under FAS.

The expected FAS/CAS Adjustment is subject to change during 2025, when we remeasure our actuarial estimate of the unfunded benefit obligation with updated census data and other items later in the year.

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These amounts are recorded within operating income.

Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

Non-current state income tax benefit in 2023 was $11 million, compared to non-current state income tax expense of $2 million in 2022.

The favorable change in non-current state income taxes was primarily driven by a decrease in deferred state income tax expense, primarily attributable to the timing of long-term contract income for tax purposes.

Current period state income taxes are charged to contract costs and included in cost of sales and service revenues in segment operating income.

Non-current state income tax benefit in 2024 was $24 million, compared to non-current state income tax benefit of $11 million in 2023.

The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to the reduction in the blended state income tax rate applied to our deferred tax balances.

SEGMENT OPERATING RESULTS

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Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded.

Segment operating income may also be affected by, among other things, contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events.

Segment operating income may also be affected by, among other things, contract performance, inflationary pressures on our supply chain, the effects of workforce stoppages and other labor-related shortfalls, the availability of raw materials, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events.

At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as warranty reserves, could also impact contract earnings.

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Net Cumulative Catch-up Revenue Adjustments

For the years ended December 31, 2023, 2022, and 2021, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

For the years ended December 31, 2024, 2023, and 2022, gross favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Year Ended December 31

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Sales and Service Revenues

Ingalls sales and service revenues, including intersegment sales, increased $182 million, or 7%, in 2023 compared to 2022, primarily driven by higher volumes in surface combatants and amphibious assault ships, partially offset by lower volumes in the NSC program.

Ingalls sales and service revenues, including intersegment sales, increased $15 million, or 1%, in 2024 compared to 2023, primarily driven by higher volumes in surface combatants, partially offset by lower volumes in amphibious assault ships and the NSC program.

Segment Operating Income

Ingalls segment operating income in 2024 was $211 million, compared to segment operating income of $362 million in 2023.

The increase was primarily driven by the sale of our court judgment against the Bolivarian Republic of Venezuela, to recover unpaid receivables for the prior repair, refurbishment, and modernization of foreign-built frigates, higher volumes described above, and a contract incentive on Jeremiah Denton (DDG 129), partially offset by lower risk retirement on USS Fort Lauderdale (LPD 28), delivered in 2022, and Harrisburg (LPD 30).

The decrease was primarily driven by the sale of a court judgment in 2023 and lower performance on amphibious assault ships and surface combatants.

Year Ended December 31 2024 over 2023 2023 over 2022

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Sales and Service Revenues

Newport News sales and service revenues, including intersegment sales, increased $281 million, or 5%, in 2023 compared to 2022, primarily driven by higher volumes in aircraft carrier construction and engineering, the Columbia

class (SSBN 826) submarine program, submarine services, and the Virginia class (SSN 774) submarine program, partially offset by lower volumes in aircraft carrier RCOH and naval nuclear support services.

Newport News sales and service revenues, including intersegment sales, decreased $164 million, or 3%, in 2024 compared to 2023, primarily driven by cumulative catch-up adjustments on the Virginia class (SSN 774) submarine program, and lower volumes on aircraft carriers and naval nuclear support services, partially offset by higher volumes in the Columbia class (SSBN 826) program.

Segment Operating Income

Newport News segment operating income in 2024 was $246 million, compared to segment operating income of $379 million in 2023.

The increase was due to higher volumes described above and revenue adjustment on the RCOH of USS George Washington (CVN 73), partially offset by contract incentives on the Columbia class (SSBN 826) submarine program in 2022.

The decrease was primarily driven by lower performance on the Virginia class (SSN 774) submarine program and aircraft carriers, partially offset by contract incentives on the Columbia class (SSBN 826) program.

Mission Technologies

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Sales and Service Revenues

Mission Technologies sales and service revenues, including intersegment sales, for the year ended December 31, 2023, increased $312 million, or 13%, compared to 2022, primarily due to higher volumes in C5ISR and CEW&S contracts.

Mission Technologies sales and service revenues, including intersegment sales, for the year ended December 31, 2024, increased $238 million, or 9%, compared to 2023, primarily due to higher volumes in CEW&S and C5ISR contracts.

Segment Operating Income

Mission Technologies segment operating income for the year ended December 31, 2024, was $116 million, compared to segment operating income of $101 million in 2023.

The increase was primarily driven by the settlement of a representations and warranties insurance claim related to the acquisition of Hydroid and higher volumes described above, partially offset by a contract loss and lower equity income from the disposition of our investment in an unconsolidated ship repair and specialty fabrication joint venture.

The increase was primarily driven by higher volume and performance in CEW&S, higher performance in fleet sustainment, and higher equity income from operating investments, partially offset by the settlement of a representations and warranties insurance claim related to the acquisition of Hydroid in 2023.

PRODUCT AND SERVICE REVENUES AND COST ANALYSIS

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Product Sales and Segment Cost of Product Sales

Product sales in 2023 increased $381 million, or 5%, from 2022, primarily as a result of higher volumes at Newport News in aircraft carrier construction, the Columbia class (SSBN 826) submarine program, and the Virginia class (SSN 774) submarine program, and higher volumes at Ingalls in surface combatants and amphibious assault ships, partially offset by lower volumes at Newport News in aircraft carrier RCOH and lower volumes at Ingalls in the NSC program.

Cost of product sales in 2023 increased $305 million, or 5%, compared to 2022, consistent with higher product sales described above.

Product sales in 2024 decreased $200 million, or 3%, from 2023, primarily due to lower volumes on aircraft carriers and cumulative catch-up adjustments on the Virginia class (SSN 774) submarine program at Newport News and lower volumes at Ingalls in amphibious assault ships, partially offset by higher volumes in the Columbia class (SSBN 826) program at Newport News and higher volumes at Ingalls in surface combatants.

Segment cost of product sales in 2024 increased $42 million, or 1%, compared to 2023, primarily due to higher volumes at Ingalls in surface combatants and higher volumes in the Columbia class (SSBN 826) program at Newport News, partially offset by lower volumes on aircraft carriers at Newport News.

Service Revenues and Segment Cost of Service Revenues

Service revenues in 2023 increased $397 million, or 12%, from 2022, primarily as a result of higher volumes at Mission Technologies in C5ISR and CEW&S contracts, higher volumes at Newport News in aircraft carrier engineering and submarine services, and higher volumes at Ingalls in surface combatant services, partially offset by lower volumes at Newport News in naval nuclear support services.

Cost of service revenues in 2023 increased $340 million, or 11%, compared to 2022, consistent with higher service volumes described above.

Service revenues in 2024 increased $281 million, or 7%, from 2023, primarily as a result of higher volumes at Mission Technologies in CEW&S and C5ISR.

Cost of service revenues in 2024 increased $245 million, or 7%, compared to 2023, consistent with the higher service volumes described above.

OTHER FINANCIAL INFORMATION

Interest Expense

Interest expense in 2023 was $95 million, compared to $102 million in 2022.

The change was driven by an increase in capitalized interest costs on construction in progress.

Interest expense for each of the years ended December 31, 2024 and 2023 was $95 million.

Non-Operating Retirement Benefit

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The non-operating retirement benefit in 2024 was $179 million, compared to $148 million in 2023.

The unfavorable change was primarily driven by lower 2022 returns on plan assets.

Other, net income in 2023 was $19 million, compared to other, net expense of $20 million in 2022.

The increase was primarily driven by unrealized net gains in investments.

The favorable change was primarily driven by higher 2023 returns on plan assets.

Other, net income in 2024 was $24 million, compared to other, net income of $19 million in 2023.

There were no individually significant drivers for the increase in Other, net for the year ended December 31, 2024.

Federal and Foreign Income Taxes

Our effective tax rate on earnings from continuing operations was 14.5% in 2024, compared to 20.2% in 2023.

The increase in our effective tax rate for 2023 was primarily attributable to prior period research and development tax credits recorded in 2022.

The decrease in our effective tax rate for 2024 was primarily attributable to current and prior period research and development tax credits recorded in 2024.

For the year ended December 31, 2024, our effective tax rate differed from the federal statutory corporate income tax rate of 21% primarily due to research and development tax credits for the current and prior periods.

In October 2021, the Organization for Economic Co-operation and Development (the "OECD") announced the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Framework"), which agreed to a two-pillar solution to address tax challenges arising from digitalization of the economy.

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Backlog excludes unexercised contract options and unfunded indefinite delivery/indefinite quantity orders.

For contracts having no stated contract values, backlog includes only the amounts committed by the customer.

For contracts having no stated contract values, backlog includes only the amounts committed by the customer as of December 31, 2024 and 2023, respectively.

The following table presents funded and unfunded backlog by segment as of December 31, 2024 and 2023:

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Total backlog $ 27,422 $ 21,291 $ 48,713 $ 25,981 $ 22,140 $ 48,121

We expect approximately 22% of the $48.1 billion total backlog as of December 31, 2023, to be converted into sales in 2024.

We expect approximately 21% of the $48.7 billion total backlog as of December 31, 2024, to be converted into sales during the year ending December 31, 2025.

Government orders comprised substantially all of the backlog as of December 31, 2024 and 2023.

Contract Awards

The value of new contract awards during the year ended December 31, 2023, was approximately $12.5 billion, including a funded award for the construction of Arleigh Burke class (DDG 51) destroyers, an award for the Joint Network Engineering and Emerging Operations task order, an award modification for the detail design and construction of Philadelphia (LPD 32), an award modification for long-lead-time material and advance construction activities on the Columbia class (SSBN 826) submarine program, an award modification to the construction contract for John F.

Kennedy (CVN 79), and an award modification for long-lead-time material for additional Block V boats of the Virginia class (SSN 774) submarine program.

The value of new contract awards during the year ended December 31, 2024, was approximately $12.1 billion, including an award for the maintenance and overhaul of USS Boise (SSN 764), an award for an advanced planning contract for the RCOH of USS Harry S.

Truman (CVN 75) and an award for construction of USS Richard J.

Danzig (DDG 143).

LIQUIDITY AND CAPITAL RESOURCES

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Net earnings $ 550 $ 681 $ 579 $ (131) (19) % $ 102 18 %

Depreciation and amortization 355 366 301 (11) (3) % 65 22 %

Provision for expected credit losses 6 (7) 7 13 186 % (14) (200) %

Depreciation and amortization of purchased intangible assets 326 347 358 (21) (6) % (11) (3) %

Other non-cash transactions, net 10 29 15 (19) (66) % 14 93 %

Stock-based compensation 23 34 36 (11) (32) % (2) (6) %

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We vary our leverage both to optimize our equity return and to pursue acquisitions.

We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.

We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations, existing borrowing facilities, and/or through refinancing in the debt markets prior to the maturity dates of our debt.

We discuss below our significant operating, investing, and financing activities affecting cash flows for each of the three years in the period ended December 31, 2024, as classified in our consolidated statements of cash flows.

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Cash provided by operating activities in 2024 was $393 million, compared to $970 million provided by operating activities in 2023.

The favorable change in cash was primarily due to accelerated receipts of accounts receivable and higher earnings, partially offset by higher payments for income taxes.

The unfavorable change in operating cash flow was primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs and lower earnings, partially offset by lower payments for income taxes.

We expect cash generated from operations in 2025, in combination with our current cash and cash equivalents, as well as existing borrowing facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and fund capital expenditures for at least the next 12 calendar months beginning January 1, 2025 and beyond such 12-month period based on our current business plans.

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Cash used in investing activities in 2024 was $348 million, compared to $236 million used in investing activities in 2023.

The change in cash used in investing activities was primarily driven by the sale of an unconsolidated ship

repair and specialty fabrication joint venture in 2023, partially offset by increased investment in one of our unconsolidated nuclear and environmental joint ventures in 2023.

The change in investing cash was primarily driven by an increase in capital expenditures and the sale of our

interest in an unconsolidated ship repair and specialty fabrication joint venture in 2023, partially offset by additional investment in one of our unconsolidated nuclear and environmental joint ventures in 2023.

For 2025, we expect our capital expenditures for maintenance and sustainment to be approximately 1.5% of annual revenues and our discretionary capital expenditures to be approximately 2.0% to 2.5% of annual revenues.

We expect our capital expenditures to increase due to an expansion of shipbuilding capacity.

Financing Activities

Cash used in financing activities in 2023 was $771 million, compared to $658 million used in financing activities in 2022.

The change in cash used in financing activities was primarily due to higher repayments of long term debt.

Cash provided by financing activities in 2024 was $356 million, compared to $771 million used in financing activities in 2023.

The change in cash provided by financing activities was primarily due to $1 billion in proceeds from the issuance of long term debt and lower repayment of long term debt in the current year, which was partially offset by increased repurchases of common stock.

Free Cash Flow

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Free cash flow $ 40 $ 692 $ 494

Free cash flow in 2023 increased $198 million from 2022, primarily due to the increase in cash from operating activities as described above.

Free cash flow in 2024 decreased $652 million from 2023, primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs, lower earnings, and higher capital expenditures, which was partially offset by lower payments for income taxes.

Retirement Related Benefit Plan Contributions

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Total contributions $ 47 $ 44 $ 41

As of December 31, 2023 and 2022, our qualified pension plans were funded 114% and 109%, respectively.

As of December 31, 2024 and 2023, our qualified pension plans were funded 125% and 114%, respectively on a FAS basis.

As of December 31, 2024 and 2023, these plans were sufficiently funded on an ERISA basis so as not to be subject to benefit payment restrictions.

The funded percentages under ERISA and FAS vary due to inherent differences in the assumptions and methodologies used to calculate the respective obligations.

We expect our 2024 cash contributions to our qualified defined benefit pension plans to be less than $1 million, all of which we anticipate will be discretionary and which are exclusive of CAS cost recoveries under our contracts.

We expect our 2025 cash contributions to our qualified defined benefit pension plans to be less than $1 million, all of which we anticipate will be discretionary and which are exclusive of CAS cost recoveries in our contracts.

Due to the differences in calculation methodologies, our FAS expense is not necessarily representative of our funding requirements or CAS cost recoveries.

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Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws.

For the year ended December 31, 2023, we repurchased 337,007 shares at an aggregate cost of $ 75 million.

For the year ended December 31, 2024, we repurchased 607,841 shares at an aggregate cost of $ 163 million, including $ 1 million of accrued excise tax.

For the years ended December 31, 2023 and 2022, we repurchased 337,007 and 244,561 shares, respectively, at aggregate costs of $ 75 million and $ 52 million, respectively.

The cost of repurchased shares is recorded as treasury stock in the consolidated statements of financial position.

Additional Capital - I n 2021, we issued $1 billion aggregate principal amount of senior notes, and we entered into a $650 million 3-year delayed draw term loan.

The net proceeds were used to fund a portion of the purchase price for the acquisition of Alion.

In 2021, we amended and restated our existing $1.25 billion credit facility, increasing the capacity thereunder to $ 1.5 billion and extending the maturity date to five years from signing (the "Revolving Credit Facility").

The Revolving Credit Facility includes a letter of credit subfacility of $ 300 million.

We maintain an unsecured commercial paper note program, under which we may issue up to $ 1 billion of unsecured commercial paper notes.

Additional Capital - In November 2024, we issued $ 500 million aggregate principal amount of 5.353% senior notes due 2030 and $ 500 million aggregate principal amount of 5.749% senior notes due 2035.

The net proceeds from these senior notes were expected to be used for general corporate purposes, including debt repayment (which may include repayment of our 3.844 % senior notes due 2025 and commercial paper borrowings) and working capital.

In September 2024, we amended and restated our existing $ 1.5 billion credit facility, increasing the capacity thereunder to $ 1.7 billion and extending the maturity date to September 2029 (the "Second Amended and Restated Revolving Credit Facility").

The Second Amended and Restated Revolving Credit Facility includes a letter of credit sub-facility of $ 300 million.

In September 2024, our borrowing capacity under our unsecured commercial paper note program increased from $ 1 billion to $ 1.7 billion.

As of December 31, 2024, the Company had no outstanding debt under the commercial paper program.

Contractual Obligations - Our future contractual obligations are related to debt, leases, pension liabilities, unrecognized tax benefits, workers compensation, and purchase obligations.

Debt, Note 14:

Leases, Note 17:

Employee Pension and Other Postretirement Benefits, Note 11:

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Summary of Significant Accounting Policies in Item 8 for information about those obligations.

Our purchase obligations as of December 31, 2023, were approximately $5,122 million, with approximately $2,702 million expected to be paid in

2024 and $2,420 million thereafter.

Our purchase obligations as of December 31, 2024, were approximately $5,794 million, with approximately $2,708 million expected to be paid in 2025 and $3,086 million thereafter.

A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including:

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and the approximate timing of the transaction.

As of December 31, 2023, future scheduled periodic interest payments on our outstanding long-term debt, including commitment fees that we are obligated to pay on our existing $ 1.5 billion Revolving Credit Facility, were approximately $333 million, with approximately $87 million expected to be paid in 2024 and $246 million thereafter.

As of December 31, 2024, future scheduled periodic interest payments on our outstanding long-term debt, including commitment fees that we are obligated to pay on our existing $ 1.7 billion Second Amended and Restated Revolving Credit Facility, were approximately $687 million, with approximately $105 million expected to be paid in 2025 and $582 million thereafter.

Off-Balance Sheet Arrangements

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The America class (LHA 6) ships optimize aviation operations and support capabilities.

In 2023, we were awarded a long-lead-time material contract for Helmand Province (LHA 10), and in 2024, we were awarded a contract modification for the detail design and construction of Helmand Province (LHA 10).

We are currently constructing Bougainville (LHA 8) and Fallujah (LHA 9).

In 2023, we were awarded a long-lead-time material contract for LHA 10 (unnamed).

Arleigh Burke class (DDG 51) destroyers

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We delivered USS Frank E.

(DDG 121), Lenah H.

Sutcliffe Higbee (DDG 123), and Jack H.

(DDG 121), USS Lenah H.

Sutcliffe Higbee (DDG 123), and USS Jack H.

Lucas (DDG 125) in 2021, 2022, and 2023, respectively.

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Lehman (DDG 137), Telesforo Trinidad (DDG 139), Ernest E.

Evans (DDG 141), and Charles J.

French (DDG 142).

Evans (DDG 141), Charles J.

French (DDG 142), and Richard J.

Danzig (DDG 143).

Columbia class (SSBN 826) submarines

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The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions.

There were 11 ships planned for this program, of which the first ten ships have been delivered, and Friedman (NSC 11) is currently under construction.

There were 11 ships planned for this program, of which the first ten ships have been delivered.

Naval nuclear support services Provide services to and in support of the U.S.

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Services include maintenance services on nuclear reactor prototypes.

Nuclear and environmental services Supports the national security mission of the Department of Energy ("DoE") through the management and operation of DoE sites, as well as the safe cleanup of legacy waste across the country.

We meet our clients' toughest nuclear and environmental challenges and are positioned to serve the growing commercial nuclear power plant decommissioning market.

We participate in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security.

N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory.

MSTS was awarded a contract for site management and operations at the Nevada National Security Site.

SRNS provides site management and operations at the DoE’s Savannah River Site near Aiken, South Carolina.

Triad provides site management and operations at the DoE’s Los Alamos National Laboratory.

San Antonio class (LPD 17) amphibious transport dock ships

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In 2023, we received an award modification for the detail design and construction of Philadelphia (LPD 32).

We are currently constructing Richard M.

(LPD 29), Harrisburg (LPD 30), and Pittsburgh (LPD 31).

In 2024, we delivered USS Richard M.

(LPD 29), and we were awarded a multi-ship procurement contract for the construction of Travis Manion (LPD 33), LPD 34 (unnamed), and LPD 35 (unnamed).

We are currently constructing Harrisburg (LPD 30), Pittsburgh (LPD 31), and Philadelphia (LPD 32).

Virginia class (SSN 774) fast attack submarines

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis