What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-07-31 compared with 2025-05-01 · 167 added, 100 removed, 338 unchanged (44% of the section changed)

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Our Mission Technologies segment develops integrated technology solutions and products that enable today's connected, all-domain force.

Headquartered in Newport News, Virginia, we employ over 44,000 people domestically and internationally.

Headquartered in Newport News, Virginia, we employ approximately 44,000 people domestically and internationally.

We conduct most of our business with the U.S.

14 unchanged sentences

The federal budget environment remains a significant long-term risk, and we continue to see uncertainty in the economy, our industry, and our company.

Our customers and suppliers continue to face challenges, and we believe

continued budget pressures could have serious implications for defense discretionary spending, the defense industrial base, including HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base.

Our customers and suppliers continue to face challenges, and we believe continued budget pressures could have serious implications for defense discretionary spending, the defense industrial base, including HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base.

We cannot clearly 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.

Defense Spending Environment – The fiscal year 2025 budget cycle ultimately concluded with the passage of the Full-Year Continuing Appropriations and Extensions Act, 2025, signed into law March 15, 2025.

This marks the first time the DoD will operate under a Continuing Resolution ("CR") for the full fiscal year.

While unprecedented, exceptions were made to the Navy Shipbuilding and Conversion account in the full-year CR to provide the authorities and necessary funding levels for program execution.

Final defense appropriations provided by the CR broadly supported shipbuilding programs, including funding for three Arleigh Burke class (DDG 51) guided missile destroyers, one Virginia class (SSN 774) fast attack submarine, one San Antonio class (LPD 17) Amphibious Transport Dock, the RCOH for USS Harry S.

Truman (CVN 75), and funding to support Columbia class (SSBN 826) submarines, CVN, and LHA programs.

The CR also included funding for the Submarine Industrial Base for investment in critical areas including supplier capacity and capability, strategic outsourcing, workforce training and technology and infrastructure, and multi-year procurement authority was provided for the Virginia class (SSN 774) program.

An earlier short-term CR funding the government from December 20, 2024 through March 14, 2025 included additional supplemental funding for expenses necessary for procurement of two fiscal year 2024 Virginia class (SSN 774) submarines, one fiscal year 2025 Virginia class (SSN 774) submarine, and to incrementally fund contract obligations for the improvement of workforce wages and non-executive level salaries on new or existing contracts pertaining to the Virginia class (SSN 774) submarine program or to other nuclear-powered vessel programs.

Defense Spending Environment – The federal government is operating under the Full-Year Continuing Appropriations and Extensions Act, 2025, signed into law March 15, 2025.

This marks the first time the DoD has operated under a Continuing Resolution ("CR") for a full fiscal year.

While unprecedented, exceptions were made to the Navy Shipbuilding and Conversion account in the full-year CR to provide the necessary authorities and funding for program execution.

The fiscal year 2026 budget process is unique.

As proposed, the first budget submission of Donald Trump’s second Administration requested two Congressional bills to be passed — a base annual appropriations bill and a budget reconciliation bill.

For fiscal year 2026, the Administration recommends a National Defense budget of $1.01 trillion, of which $961.6 billion is specific to the Pentagon and consists of $848.3 billion for the Pentagon’s annual discretionary budget and $113.3 billion for the Pentagon in mandatory funding via Congressional reconciliation.

On May 2, 2025, the Administration released the President's topline recommendations on discretionary funding levels for fiscal year 2026, followed by detailed budget justification documents in June.

The Department of the Navy requested $248.9 billion in the base budget and $43.3 billion in reconciliation funds.

Included in the Navy's proposed fiscal year 2026 budget is $47.4 billion for shipbuilding — $20.9 billion in the base budget request and $26.5 billion in reconciliation funding.

The proposed budget relies on reconciliation funding to fund 14 of 17 battle force ships requested.

Combined, the base budget and reconciliation budget reflect continued investment in shipbuilding.

The Navy’s fiscal year 2026 base discretionary budget request seeks one Columbia class (SSBN 826) ballistic missile submarine, one

Virginia class (SSN 774) fast attack submarine and one ocean surveillance ship.

The budget reconciliation bill, known as the One Big Beautiful Bill Act (the "Act"), was signed into law on July 4, 2025 and includes more than $29 billion for Shipbuilding and the Maritime Industrial Base.

The Act funds one Virginia class (SSN 774) fast attack submarine, two Arleigh Burke class (DDG 51) guided-missile destroyers, nine Landing Ship Mediums and two John Lewis class (T-AO 205) fleet oilers.

Funding is also provided for amphibious warfare ships and unmanned surface vessels.

Lawmakers proceeded with consideration of the fiscal year 2026 budget request for the Federal government, while simultaneously considering the reconciliation bill.

On July 18, 2025, the House approved its Fiscal Year 2026 Defense Appropriations Bill which was developed to complement the defense investments in the reconciliation bill.

For the shipbuilding account, the House appropriation bill provides $36.9 billion in base discretionary funding, including six battle force ships:

one Columbia class (SSBN 826) ballistic missile submarine, two Virginia class (SSN 774) fast attack submarines, two Arleigh Burke class (DDG 51) guided missile destroyers, and one T-AGOS SURTASS ship for antisubmarine warfare.

Additionally, the House appropriations bill includes $1.5 billion for the Maritime Industrial Base to invest in critical areas including supplier capacity and capability, strategic outsourcing, workforce training, and technology, and infrastructure;

$1.6 billion for productivity enhancements to improve shipbuilder capability, capacity, and efficiency at the private nuclear shipyards;

and $521 million for wage enhancements at the private nuclear shipyards.

The timing of Senate Appropriations Committee action remains uncertain.

Both the Senate Armed Services Committee ("SASC") and the House Armed Services Committee ("HASC") approved their respective versions of the fiscal year 2026 National Defense Authorization Act ("NDAA") legislation in July.

The SASC authorization bill supports a total of $925 billion in fiscal year 2026 funding for national defense, including $878.7 billion for the Defense Department, $35.2 billion for defense programs within the Department of Energy, and $11.1 billion for defense spending outside the jurisdiction of the NDAA.

Language is included in the bill that authorizes the procurement of up to five Columbia class (SSBN 826) ballistic missile submarines and supports amphibious warship production by reinforcing the statutory requirement for 31 amphibious ships.

Additional funding is authorized for Virginia class (SSN 774) submarines and Arleigh Burke class (DDG 51) destroyers.

In addition to the Virginia class (SSN 774) submarine and two Arleigh Burke class (DDG 51) destroyers provided for by reconciliation, the HASC bill authorizes the procurement of the third Columbia class (SSBN 826) submarine and additional funding for Virginia class (SSN 774) submarines.

Additionally, the HASC bill supports the authorization of advance procurement for future Columbia class (SSBN 826) submarines, additional funding for Virginia class (SSN 774) submarines, as well as completion of prior year ships including aircraft carriers and Virginia class (SSN 774) submarines.

We cannot predict the outcome of the fiscal year 2026 budget process or if short-term funding will be made available if annual appropriations measures are not finalized by the start of the new fiscal year on October 1, 2025.

Global Geopolitical and Economic Environment – The global geopolitical and economic environment continues to be impacted by uncertainty, heightened geopolitical tensions, and instability.

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These global threats persist across all domains, from undersea to space to cyber, and the global market for defense products, services, and solutions is driven by these complex and evolving security challenges.

Our current operating environment exists in the broader context of political and socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding geopolitical tensions, financial market volatility, inflation, and a challenging labor market.

For further information on our business environment, see the discussion under Business Environment under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2024 Annual Report on Form 10-K.

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• Workers' compensation.

As of March 31, 2025, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2024.

As of June 30, 2025, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2024.

Program Descriptions

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The following table presents selected financial highlights:

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Sales and service revenues $ 3,082 $ 2,977 $ 105 4 % $ 5,816 $ 5,782 $ 34 1 %

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Income from operating investments, net 8 11 (3) (27) % 21 23 (2) (9) %

Other income and gains (losses), net — (1) 1 100 %

Other income and gains, net 1 1 — — % 1 — 1 — %

General and administrative expenses 241 255 (14) (5) % 487 487 — — %

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Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance.

Under the Federal Acquisition Regulation (the "FAR") rules that govern our business with the U.S.

Under the Federal Acquisition Regulation rules that govern our business with the U.S.

Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income.

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Volume changes will typically carry a corresponding income change based on the profit margin rate for a particular contract.

Sales and service revenues for the three months ended March 31, 2025, decreased $71 million, or 3%, compared to the same period in 2024, primarily due to lower volumes at Newport News, Ingalls, and Mission Technologies.

Sales and service revenues for the three months ended June 30, 2025, increased $105 million, or 4%, compared to the same period in 2024, primarily due to higher volumes at Newport News, Mission Technologies, and Ingalls.

Sales and service revenues for the six months ended June 30, 2025, increased $34 million, or 1%, compared to the same period in 2024, primarily due to higher volumes at Newport News and Mission Technologies, partially offset by lower volumes at Ingalls.

Net Cumulative Catch-up Revenue Adjustments

For the three months ended March 31, 2025 and 2024, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended March 31

For the three and six months ended June 30, 2025 and 2024, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended June 30 Six Months Ended June 30

($ in millions) 2025 2024 2025 2024

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Net adjustments $ (10) $ 24 $ (10) $ 26

For the three months ended March 31, 2025, cumulative catch-up revenue adjustments netted to zero, and did not have an effect on operating income.

The Company’s Newport News segment continues to experience performance challenges in the construction of aircraft carriers and Virginia class (SSN 774) submarines.

For the three months ended March 31, 2025, cumulative catch-up revenue adjustments included significant unfavorable performance adjustments on the construction of Enterprise (CVN 80) and Virginia class (SSN 774) submarines, which were offset by contract incentives.

Revenue and "Segment Operating Results" in this section for additional information on our net cumulative catch-up revenue adjustments.

Cost of Sales and Service Revenues

Cost of Product 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.

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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 for the three months ended March 31, 2025, increased $14 million from the same period in 2024, primarily due to higher overhead costs, partially offset by lower state income taxes.

General and administrative expenses for the three months ended June 30, 2025, decreased $14 million from the same period in 2024, primarily due to lower overhead costs.

General and administrative expenses for the six months ended June 30, 2025, remained consistent with the same period in 2024.

Operating Income

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The following table reconciles operating income to segment operating income:

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Operating income $ 163 $ 189 $ (26) (14) % $ 324 $ 343 $ (19) (6) %

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The components of the Operating FAS/CAS Adjustment were as follows:

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

FAS benefit $ 25 $ 17 $ 8 47 % $ 50 $ 33 $ 17 52 %

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Operating FAS/CAS Adjustment expense $ (6) $ (15) $ 9 60 % $ (16) $ (32) $ 16 50 %

The Operating FAS/CAS Adjustment was a net expense of $10 million and $17 million for the three months ended March 31, 2025 and 2024, respectively.

The favorable change in the Operating FAS/CAS Adjustment was primarily driven by higher interest rates under FAS.

The Operating FAS/CAS Adjustment was a net expense of $6 million and $15 million for the three months ended June 30, 2025 and 2024, respectively.

The Operating FAS/CAS Adjustment was a net expense of $16 million and $32 million for the six months ended June 30, 2025 and 2024, respectively.

The favorable change in the Operating FAS/CAS Adjustment for each period was primarily driven by higher interest rates under FAS.

Non-current State Income Taxes

2 unchanged sentences

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 expense for the three months ended March 31, 2025 was less than $1 million, compared to non-current state income tax benefit of $1 million for the three months ended March 31, 2024.

The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily attributable to a change in net capitalized research and development expenditures and the timing of long-term contract income for tax purposes.

Non-current state income tax expense was $3 million for the three months ended June 30, 2025, compared to a non-current state income tax benefit of $1 million for the three months ended June 30, 2024.

The unfavorable change in non-current state income taxes for the three months ended June 30, 2025 was driven by an increase in deferred state income tax expense, primarily attributable to the timing of depreciation deductions for income tax purposes.

Non-current state income tax expense was $3 million for the six months ended June 30, 2025, compared to a non-current state income tax benefit of $2 million for the six months ended June 30, 2024.

The unfavorable change in non-current state income taxes for the six months ended June 30, 2025 was driven by an increase in deferred state income tax expense, primarily attributable to the timing of depreciation deductions and the timing of long-term contract income for income tax purposes.

SEGMENT OPERATING RESULTS

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The following table presents segment operating results:

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Sales and Service Revenues

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Net Cumulative Catch-up Revenue Adjustments by Segment

For the three months ended March 31, 2025 and 2024, net cumulative catch-up revenue adjustments by segment were as follows:

Three Months Ended March 31

For the three and six months ended June 30, 2025 and 2024, net cumulative catch-up revenue adjustments by segment were as follows:

Three Months Ended June 30 Six Months Ended June 30

($ in millions) 2025 2024 2025 2024

3 unchanged sentences

Net adjustments $ (10) $ 24 $ (10) $ 26

For the three months ended March 31, 2025, cumulative catch-up revenue adjustments netted to zero, and did not have an effect on operating income.

The Company’s Newport News segment continues to experience performance challenges in the construction of aircraft carriers and Virginia class (SSN 774) submarines.

Revenue and "Consolidated Operating Results" in this section for additional information on our net cumulative catch-up revenue adjustments.

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Sales and service revenues $ 724 $ 712 $ 12 2 % $ 1,361 $ 1,367 $ (6) — %

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Sales and Service Revenues

Ingalls revenues, including intersegment sales, for the three months ended March 31, 2025, decreased $18 million, or 3%, from the same period in 2024, primarily driven by lower volumes in amphibious assault ships.

Ingalls revenues, including intersegment sales, for the three months ended June 30, 2025, increased $12 million, or 2%, from the same period in 2024, primarily driven by higher volumes in surface combatants, partially offset by lower volumes in amphibious assault ships.

Ingalls revenues, including intersegment sales, for the six months ended June 30, 2025, decreased $6 million from the same period in 2024, primarily driven by lower volumes in amphibious assault ships, partially offset by higher volumes in surface combatants.

Segment Operating Income

Ingalls segment operating income for the three months ended March 31, 2025, was $46 million, compared to segment operating income of $60 million for the same period in 2024.

The decrease was primarily driven by lower performance on amphibious assault ships.

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Ingalls segment operating income for the three months ended June 30, 2025, was $54 million, compared to segment operating income of $56 million for the same period in 2024.

The decrease was primarily driven by lower performance and lower contract incentives on amphibious assault ships, partially offset by contract adjustments in surface combatants.

Ingalls segment operating income for the six months ended June 30, 2025, was $100 million, compared to segment operating income of $116 million for the same period in 2024.

The decrease was primarily driven by lower performance and lower contract incentives on amphibious assault ships, partially offset by contract adjustments in surface combatants.

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Sales and service revenues $ 1,603 $ 1,535 $ 68 4 % $ 2,999 $ 2,969 $ 30 1 %

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Sales and Service Revenues

Newport News revenues, including intersegment sales, for the three months ended March 31, 2025, decreased $38 million, or 3%, from the same period in 2024, primarily driven by lower volumes in aircraft carriers and naval nuclear support services, partially offset by higher volumes in the Columbia class (SSBN 826) submarine program.

Newport News revenues, including intersegment sales, for the three months ended June 30, 2025, increased $68 million, or 4%, from the same period in 2024, primarily driven by higher volumes in the Columbia class (SSBN 826) submarine program and the Virginia class (SSN 774) submarine program, partially offset by cumulative catch-up adjustments on aircraft carrier construction, and favorable contract adjustments and incentives in the second quarter of 2024 on the RCOH program.

Newport News revenues, including intersegment sales, for the six months ended June 30, 2025, increased $30 million, or 1%, from the same period in 2024, primarily driven by higher volumes in the Columbia class (SSBN 826) submarine program and the Virginia class (SSN 774) submarine program, partially offset by cumulative catch-up adjustments on aircraft carrier construction, and favorable contract adjustments and incentives in 2024 on the RCOH program.

Segment Operating Income

Newport News segment operating income for the three months ended March 31, 2025, was $85 million, compared to segment operating income of $82 million for the same period in 2024.

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

Newport News segment operating income for the three months ended June 30, 2025, was $82 million, compared to segment operating income of $111 million for the same period in 2024.

The decrease was primarily driven by lower performance in the Virginia class (SSN 774) submarine program and aircraft carrier construction, as well as contract adjustments and incentives in the second quarter of 2024 on the RCOH program, partially offset by contract incentives on the Virginia class (SSN 774) submarine program and aircraft carrier construction, as well as higher risk retirement on the Columbia class (SSBN 826) submarine program.

Newport News segment operating income for the six months ended June 30, 2025, was $167 million, compared to segment operating income of $193 million for the same period in 2024.

The decrease was primarily driven by lower performance in the Virginia class (SSN 774) submarine program and aircraft carrier construction, as well as contract adjustments and incentives in 2024 on the RCOH program, partially offset by contract incentives on the Virginia class (SSN 774) submarine program and aircraft carrier construction, as well as higher risk retirement on the Columbia class (SSBN 826) submarine program.

Mission Technologies

Three Months Ended March 31

($ in millions) 2025 2024 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2024 2025 vs.

($ in millions) 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Sales and service revenues $ 791 $ 765 $ 26 3 % $ 1,526 $ 1,515 $ 11 1 %

2 unchanged sentences

Sales and Service Revenues

Mission Technologies revenues, including intersegment sales, for the three months ended March 31, 2025, decreased $15 million, or 2%, from the same period in 2024, primarily due to lower volumes in C5ISR, partially offset by higher volumes in cyber, electronic warfare & space.

Mission Technologies revenues, including intersegment sales, for the three months ended June 30, 2025, increased $26 million, or 3%, from the same period in 2024, primarily due to higher volumes in C5ISR and live, virtual, and constructive training solutions.

Mission Technologies revenues, including intersegment sales, for the six months ended June 30, 2025, increased $11 million, or 1%, from the same period in 2024, primarily due to higher volumes in live, virtual, and constructive training solutions, cyber, electronic warfare & space, and uncrewed systems, partially offset by lower volumes in C5ISR and fleet sustainment.

Segment Operating Income

Mission Technologies segment operating income for the three months ended March 31, 2025, was $40 million, compared to segment operating income of $28 million for the same period in 2024.

The increase was primarily driven by higher performance in cyber, electronic warfare & space and uncrewed systems.

Mission Technologies segment operating income for the three months ended June 30, 2025, was consistent with the same period in 2024, as changes in contract mix offset the higher volumes described above.

Mission Technologies segment operating income for the six months ended June 30, 2025, was $76 million, compared to segment operating income of $64 million for the same period in 2024.

The increase was primarily driven by the volumes mentioned above and lower purchased intangible amortization.

PRODUCT AND SERVICE REVENUES AND COST ANALYSIS

The following table presents segment sales and service revenues and segment cost of sales and service revenues by both product and service:

The following tables present segment sales and service revenues and segment cost of sales and service revenues by both product and service:

Sales and Service Revenues Segment Cost of Product Sales and Service Revenues

($ in millions) Three Months Ended March 31 2025 vs.

2024 Three Months Ended March 31 2025 vs.

($ in millions) Three Months Ended June 30 2025 vs.

2024 Three Months Ended June 30 2025 vs.

Segment Information 2025 2024 Dollars Percent 2025 2024 Dollars Percent

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1 Operating FAS/CAS Adjustment is excluded from segment cost of product sales and service revenues.

Sales and Service Revenues Segment Cost of Product Sales and Service Revenues

($ in millions) Six Months Ended June 30 2025 vs.

2024 Six Months Ended June 30 2025 vs.

Segment Information 2025 2024 Dollars Percent 2025 2024 Dollars Percent

Product $ 1,136 $ 1,217 $ (81) (7) % $ 978 $ 1,024 $ (46) (4) %

Service 218 147 71 48 % 190 125 65 52 %

Intersegment 7 3 4 133 % 7 3 4 133 %

Total Ingalls 1,361 1,367 (6) — % 1,175 1,152 23 2 %

Product 2,479 2,439 40 2 % 2,116 2,055 61 3 %

Service 519 528 (9) (2) % 427 437 (10) (2) %

Intersegment 1 2 (1) (50) % 1 2 (1) (50) %

Total Newport News 2,999 2,969 30 1 % 2,544 2,494 50 2 %

Mission Technologies

Product 55 57 (2) (4) % 40 58 (18) (31) %

Service 1,409 1,394 15 1 % 1,260 1,244 16 1 %

Intersegment 62 64 (2) (3) % 62 64 (2) (3) %

Total Mission Technologies 1,526 1,515 11 1 % 1,362 1,366 (4) — %

Segment Totals

Product $ 3,670 $ 3,713 $ (43) (1) % $ 3,134 $ 3,137 $ (3) — %

Service 2,146 2,069 77 4 % 1,877 1,806 71 4 %

Total Segment 1

$ 5,816 $ 5,782 $ 34 1 % $ 5,011 $ 4,943 $ 68 1 %

1 Operating FAS/CAS Adjustment is excluded from segment cost of product sales and service revenues.

Product Sales and Segment Cost of Product Sales

Product sales for the three months ended March 31, 2025, decreased $74 million, or 4%, from the same period in 2024, primarily due to lower volumes in surface combatants and amphibious assault ships at Ingalls, and lower volumes in aircraft carriers, partially offset by higher volumes in the Columbia class (SSBN 826) submarine program at Newport News.

Segment cost of product sales for the three months ended March 31, 2025, decreased $80 million, or 5%, compared with the same period in 2024, primarily due to lower volumes described above.

Product sales for the three months ended June 30, 2025, increased $31 million, or 2%, from the same period in 2024, primarily due to higher volumes in the Columbia class (SSBN 826) submarine program and the Virginia class (SSN 774) submarine program at Newport News, and surface combatants at Ingalls, partially offset by cumulative catch-up adjustments on aircraft carrier construction and favorable contract adjustments and incentives in the second quarter of 2024 on the RCOH program at Newport News, as well as lower volumes in amphibious assault ships at Ingalls.

Segment cost of product sales for the three months ended June 30, 2025, increased $77 million, or 5%, compared with the same period in 2024, primarily due to the higher volumes described above.

Product sales for the six months ended June 30, 2025, decreased $43 million, or 1%, from the same period in 2024, primarily due to lower volumes in amphibious assault ships at Ingalls, as well as cumulative catch-up adjustments on aircraft carrier construction and favorable contract adjustments and incentives in 2024 on the RCOH program at Newport News, partially offset by higher volumes in the Columbia class (SSBN 826) submarine program and the Virginia class (SSN 774) submarine program at Newport News, and surface combatants at Ingalls.

Segment cost of product sales for the six months ended June 30, 2025, decreased $3 million compared with the same period in 2024, primarily due to the lower volumes described above.

Service Revenues and Segment Cost of Service Revenues

Service revenues for the three months ended March 31, 2025, increased $3 million from the same period in 2024, primarily as a result of higher volumes in surface combatant services at Ingalls, and higher volumes in cyber, electronic warfare & space at Mission Technologies, partially offset by lower volumes in naval nuclear support services at Newport News, and lower volumes in C5ISR at Mission Technologies.

Segment cost of service revenues for the three months ended March 31, 2025, decreased $3 million compared with the same period in 2024, primarily as a result of lower volumes in naval nuclear support service at Newport News, and lower volumes in C5ISR at Mission Technologies, partially offset by higher volumes in cyber, electronic warfare & space at Mission Technologies and higher volumes in surface combatant services at Ingalls.

Service revenues for the three months ended June 30, 2025, increased $74 million, or 7%, from the same period in 2024, primarily due to higher volumes in surface combatants at Ingalls, and live, virtual, and constructive training solutions and C5ISR at Mission Technologies.

Segment cost of service revenues for the three months ended June 30, 2025, increased $74 million, or 8%, compared with the same period in 2024, primarily due to the higher volumes described above.

Service revenues for the six months ended June 30, 2025, increased $77 million, or 4%, from the same period in 2024, primarily due to higher volumes in surface combatants at Ingalls, and live, virtual, and constructive training solutions and cyber, electronic warfare & space at Mission Technologies, partially offset by lower volumes in C5ISR and fleet sustainment at Mission Technologies.

Segment cost of service revenues for the six months ended June 30, 2025, increased $71 million, or 4%, compared with the same period in 2024, primarily due to the higher volumes described above.

OTHER FINANCIAL INFORMATION

Interest Expense

Interest expense for the three months ended March 31, 2025, was $28 million, compared with $21 million for the same period in 2024.

The increase in interest expense for the three months ended March 31, 2025, was driven by an increase in outstanding long-term debt from the prior year period.

Interest expense for the three and six months ended June 30, 2025, was $28 million and $56 million, respectively, compared with $24 million and $45 million, respectively, for the same periods in 2024.

The increase in interest expense for both periods was driven by an increase in outstanding long-term debt compared to the prior year periods.

Non-Operating Retirement Benefit

1 unchanged sentence

interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.

For the three months ended March 31, 2025, the non-operating retirement benefit was $48 million, compared with $44 million for the same period in 2024.

The increase in the non-operating retirement benefit was primarily driven by the amortization of net actuarial costs.

Other, net income for the three months ended March 31, 2025, was $6 million, compared with other, net income of $7 million for the same period in 2024.

For the three and six months ended June 30, 2025, the non-operating retirement benefit was $47 million and $95 million, respectively, compared with $46 million and $90 million, respectively, for the same periods in 2024.

The favorable change in the non-operating retirement benefit for both periods was primarily driven by the amortization of net actuarial costs.

Other, net income for the three and six months ended June 30, 2025, was $6 million and $12 million, respectively, compared with other, net income of $5 million and $12 million, respectively, for the same periods in 2024.

For both periods, there were no individually significant drivers in other, net income.

Federal and Foreign Income Taxes

Our effective income tax rates on earnings from operations for the three months ended March 31, 2025 and 2024, were 20.3 % and 16.8 %, respectively.

The higher effective tax rate for the three months ended March 31, 2025, was primarily attributable to excess tax benefits recognized on stock-based compensation recorded in the prior period.

For the three months ended March 31, 2025, 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 period.

Total backlog as of March 31, 2025, and December 31, 2024, was $48.0 billion and $48.7 billion, respectively.

Our effective income tax rates on earnings from operations for the three months ended June 30, 2025 and 2024, were comparable at 19.1 % and 19.9 %, respectively.

Our effective income tax rates on earnings from operations for the six months ended June 30, 2025 and 2024, were 19.7 % and 18.5 %, respectively.

The higher effective tax rate for the six months ended June 30, 2025, was primarily attributable to excess tax benefits recognized on stock-based compensation recorded in the prior period.

For each of the three and six months ended June 30, 2025, 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 periods.

Total backlog as of June 30, 2025, and December 31, 2024, was $56.9 billion and $48.7 billion, respectively.

Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer).

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 as of March 31, 2025 and December 31, 2024, respectively.

The following table presents funded and unfunded backlog by segment as of March 31, 2025, and December 31, 2024:

March 31, 2025 December 31, 2024

For contracts having no stated contract values, backlog includes only the amounts committed by the customer as of June 30, 2025 and December 31, 2024, respectively.

The following table presents funded and unfunded backlog by segment as of June 30, 2025, and December 31, 2024:

June 30, 2025 December 31, 2024

($ in millions) Funded Unfunded Total Backlog Funded Unfunded Total Backlog

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We expect approximately 22% of the $48.7 billion total backlog as of December 31, 2024, to be converted into sales in 2025.

Government orders comprised substantially all of the backlog as of March 31, 2025 and December 31, 2024.

Government orders comprised substantially all of the backlog as of June 30, 2025 and December 31, 2024.

Contract Awards

The value of new contract awards during the three months ended March 31, 2025, was approximately $2.1 billion, primarily driven by awards at Newport News.

The value of new contract awards during the six months ended June 30, 2025, was approximately $14.0 billion, primarily driven by awards at Newport News and Ingalls, inclusive of a contract modification for construction of two additional Block V Virginia -class submarines.

LIQUIDITY AND CAPITAL RESOURCES

We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value.

We use various financial measures to inform our capital deployment strategy, including net cash provided by operating activities and free cash flow.

We use various financial measures to inform our capital deployment strategy, including net cash provided by (used in) operating activities and free cash flow.

We believe these measures are useful to investors in assessing our financial performance.

The following table summarizes key components of cash flow provided by operating activities:

Three Months Ended March 31 2025 vs.

The following table summarizes key components of cash flow provided by (used in) operating activities:

Six Months Ended June 30 2025 vs.

($ in millions) 2025 2024 Dollars

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Depreciation and amortization of purchased intangible assets 162 160 2

Other non-cash transactions, net 3 2 1

Stock-based compensation 33 7 26

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Gain on investments in marketable securities (10) (11) 1

Other non-cash transactions, net 9 2 7

Retiree benefits (77) (57) (20)

Trade working capital increase (598) (399) (199)

Net cash used in operating activities $ (395) $ (202) $ (193)

Trade working capital decrease (increase) 29 (610) 639

Net cash provided by (used in) operating activities $ 428 $ (211) $ 639

We have historically maintained a capital structure comprised of a mix of equity and debt financing.

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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 the three months ended March 31, 2025 and 2024, as classified in our unaudited condensed consolidated statements of cash flows.

We discuss below our significant operating, investing, and financing activities affecting cash flows for the six months ended June 30, 2025 and 2024, as classified in our unaudited condensed consolidated statements of cash flows.

Operating Activities

Cash used in operating activities for the three months ended March 31, 2025, was $395 million, compared with cash used in operating activities of $202 million for the same period in 2024.

The change in operating cash flow was primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs.

We expect cash generated from operations 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 April 1, 2025, and beyond such 12-month period based on our current business plans.

Cash provided by operating activities for the six months ended June 30, 2025, was $428 million, compared with cash used in operating activities of $211 million for the same period in 2024.

The change in operating cash flow was primarily due to a favorable change in trade working capital driven by the timing of billings across programs and lower payments for income taxes.

We expect cash generated from operations 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 July 1, 2025, and beyond such 12-month period based on our current business plans.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2025, was $199 million, compared to $71 million used in investing activities for the same period in 2024.

Cash used in investing activities for the six months ended June 30, 2025, was $291 million, compared to $162 million used in investing activities for the same period in 2024.

The change in investing cash was primarily driven by the acquisition of W International.

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Financing Activities

Cash used in financing activities for the three months ended March 31, 2025, was $70 million, compared with $147 million used in financing activities for the same period in 2024.

The change in cash used in financing activities was primarily due to a decrease of $62 million in common stock repurchases.

Cash used in financing activities for the six months ended June 30, 2025, was $625 million, compared with $46 million used in financing activities for the same period in 2024.

The change in cash used in financing activities was primarily due to a $440 million decrease in proceeds from our commercial paper program and a $271 million increase in repayments of long term debt, partially offset by a decrease of $127 million in common stock repurchases.

Free Cash Flow

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Free cash flow is not a measure recognized under GAAP.

Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, net earnings as a measure of our performance or net cash provided by operating activities as a measure of our liquidity.

Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, net earnings as a measure of our performance or net cash provided by (used in) operating activities as a measure of our liquidity.

We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations.

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Free cash flow may not be comparable to similarly titled measures of other companies.

The following table reconciles net cash used in operating activities to free cash flow:

Three Months Ended March 31 2025 vs.

The following table reconciles net cash provided by (used in) operating activities to free cash flow:

Six Months Ended June 30 2025 vs.

($ in millions) 2025 2024 Dollars

Net cash used in operating activities $ (395) $ (202) $ (193)

Net cash provided by (used in) operating activities $ 428 $ (211) $ 639

Less capital expenditures:

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Free cash flow $ 268 $ (373) $ 641

Free cash flow for the three months ended March 31, 2025, decreased $188 million from the same period in 2024, primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs.

Free cash flow for the six months ended June 30, 2025, increased $641 million from the same period in 2024, primarily due to a favorable change in trade working capital driven by the timing of billings across programs and lower payments for income taxes.

Governmental Regulation and Supervision

Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies exist in one or more such systems.

As of March 31, 2025 and 2024, the cumulative amounts of payments withheld by the U.S.

Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines material weaknesses exist in one or more such systems.

As of June 30, 2025 and 2024, the cumulative amounts of payments withheld by the U.S.

Government under our contracts subject to these regulations were not material to our liquidity or cash flows.

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In the ordinary course of business, we use letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans.

As of March 31, 2025, $12 million in letters of credit were issued but undrawn and $389 million of surety bonds were outstanding.

As of March 31, 2025, we had no other significant off-balance sheet arrangements.

As of June 30, 2025, $11 million in letters of credit were issued but undrawn and $380 million of surety bonds were outstanding.

As of June 30, 2025, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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FORWARD-LOOKING STATEMENTS AND PROJECTIONS

Statements in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

Statements in this Quarterly Report on Form 10-Q and in our other filings with the SEC, as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "guidance," "outlook," "predicts," "potential," "continue," and similar words or phrases or the negative of these words or phrases.

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In 2023, we received an award modification for long-lead-time material and advance construction for the next five boats.

USS Gerald R.

Ford class (CVN 78) aircraft carriers

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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.

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

In Q2 2025, we reached agreement with the U.S.

Coast Guard to terminate production and delivery of the 11th ship.

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

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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-Q

Item 2. Management’s Discussion and Analysis