What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-07-22 compared with 2025-04-22 · 260 added, 157 removed, 291 unchanged (59% of the section changed)

8 unchanged sentences

and international customers with products and services that have defense, civil and commercial applications, with our principal customers being agencies of the U.S.

During the quarter ended March 30, 2025, 72% of our $18.0 billion in sales were from the U.S.

During the six months ended June 29, 2025, 73% of our $36.1 billion in sales were from the U.S.

Government, either as a prime contractor or as a subcontractor (including 63% from the Department of Defense (DoD)), 27% were from international customers (including foreign military sales (FMS) contracted through the U.S.

Government) and 1% were from U.S.

commercial and other customers.

Global Security

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Global Economic and Geopolitical Environment

Our business and financial performance is impacted by general economic conditions including inflationary pressures, delays and disruptions in supply chains, business slowdowns or shutdowns, workforce challenges and labor shortfalls, and market volatility.

These macroeconomic factors have contributed, and may continue to contribute, to increased costs, delays, disruptions and other performance challenges, as well as increased competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers.

Our business and financial performance are impacted by general economic conditions including inflationary pressures, delays and disruptions in supply chains, business slowdowns or shutdowns, workforce challenges and labor shortfalls, and market volatility.

These macroeconomic factors have contributed, and may continue to contribute, to increased costs, delays, disruptions and other performance challenges, as well as competing demands for limited resources to address such increased costs and other challenges, for our company, our suppliers and partners, and our customers.

We continue to experience supply chain challenges, including supplier shortages and performance issues.

These issues have delayed certain customer deliveries, have been a limiting factor on our ability to ramp up production in response to customer demand for certain products and have caused out-of-sequence manufacturing, which increases costs and decreases operational efficiency.

These issues have delayed certain customer deliveries, limited our ability to ramp up production in response to customer demand for certain products and have caused out-of-sequence manufacturing, which increases costs and decreases operational efficiency.

In addition, elevated levels of inflation and macroeconomic conditions present risks for us, our suppliers and the stability of the broader defense industrial base.

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In addition, some suppliers are reducing the duration of pricing validity of their proposals to us or seeking to reopen pricing on existing agreements, which is operationally challenging and increases the risk of cost volatility.

We continue to work to mitigate challenges caused by the supply chain or current macroeconomic environment on our business, including by supporting small business and at-risk suppliers, deploying resources to work with our supply chain, securing materials and support by executing long-term contracts, enforcing existing contract terms, identifying alternative sources, collaborating with our customers to address industry-wide challenges, and optimizing our supply chain organization through digital transformation and workforce development.

Supply chain challenges, including both the availability and cost of goods, may be further impacted due to the imposition of tariffs and the availability of rare earth minerals, as discussed below under “Recent Developments in Trade and Regulatory Policies.” We continue to work to mitigate challenges caused by the supply chain or current macroeconomic environment on our business, including by supporting small business and at-risk suppliers, deploying resources to work with our supply chain, securing materials and support by executing long-term contracts, enforcing existing contract terms, identifying alternative sources, collaborating with our customers to address industry-wide challenges, and optimizing our supply chain organization through digital transformation and workforce development.

If we experience significant supply chain issues or high rates of inflation, and are unable to successfully mitigate the impact, our future profits, margins and cash flows, particularly for existing fixed-price contracts, may be adversely affected.

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improve the cost competitiveness and affordability of our products and services, which may, in part, offset cost increases from inflation.

For additional risks to the company related to the supply chain and availability of materials, see Part I, Item IA, “Risk Factors” of our 2024 Form 10-K.

For additional risks to the company related to the supply chain and availability of materials, see Part I, Item 1A, “Risk Factors” of our 2024 Form 10-K.

Recent Developments in Trade and Regulatory Policies

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and are subject to tariffs, sanctions, embargoes, export and import controls, and other trade restrictions.

Government is in the process of, or has announced its intent to, increase current tariffs, impose additional tariffs, and expand tariffs on goods imported from various countries.

For example, in April 2025, the U.S.

Government imposed broad new tariffs, including a baseline 10% tariff on all imports and a 25% tariff on imports of steel and aluminum products from all countries, and significantly higher tariffs on goods from specific countries such as Canada and Mexico.

We also export certain products to other countries that may take actions in response to these tariffs.

For example, Canada has imposed a 25% surtax on certain U.S.

In addition, recent government actions relating to rare earth minerals used in certain of our products, including U.S.

Government orders on the import on such minerals and the imposition of export controls on such minerals by China, may constrain the availability of those materials over time.

Significant changes in tax, trade, or other policies either in the U.S.

or other countries, as well as any fluctuation in foreign exchange rates as a result of such activity, could materially increase our tax burden, the price we pay for materials and component parts, the price our customers pay, and result in delays in products received or non-delivery from our vendors as well as impact the availability of materials (including rare earth minerals), which could materially impact our business and financial results.

We are pursuing available options to fully or substantially mitigate the impact of the increased tariffs or any future tariffs, including seeking exclusions, through drawbacks, refunds, recovering the costs in the pricing of our products, or securing alternative sources of materials or products.

However, there could be a near term impact on cash flows due to the timing of when tariffs are paid compared to when such costs may be refunded or recovered.

Government under the Trump Administration has increased tariffs, imposed additional tariffs, and expanded tariffs on goods imported from various countries.

We also export certain products to other countries, and several countries have increased tariffs or imposed additional tariffs in response to U.S.

The tariff environment has been dynamic over the last several months, with changes occurring on an ongoing basis, and it is likely that additional developments will occur over the next several months, particularly as the U.S.

negotiates with trade partners.

The tariffs that have been enacted or expanded by the U.S.

or other countries did not materially impact our business or financial results for the quarter ended March 30, 2025.

or other countries did not materially impact our business or financial results for the six months ended June 29, 2025.

We are currently evaluating the potential future impacts of the imposition of the announced tariffs to our business and financial condition.

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However, the actual impact of the new tariffs is subject to a number of factors including the effective date and duration of such tariffs, changes in the amount, scope and nature of the tariffs in the future, any countermeasures that the target countries may take, how our Tier 1 and Tier 2 suppliers react, possible substitution effects, possible duty drawbacks, and any mitigating actions that may become available.

In addition, the President has issued multiple Executive Orders, including two that are intended to (i) simplify and accelerate the procurement process through a review and restructuring of the Federal Acquisition Regulation (FAR), and its supplements and (ii) modernize defense acquisitions by promoting commercial solutions, innovative acquisition authorities, and other existing streamlined processes.

Among the actions directed by the President is a review of major defense acquisition programs that are more than 15% behind schedule or over budget, including identifying any programs for potential cancellation.

Significant changes in tax, trade, or other policies either in the U.S.

We are pursuing available options to fully or substantially mitigate the impact of the increased tariffs or any future tariffs, including seeking exclusions, through drawbacks, refunds, recovering the costs in the pricing of our products, securing alternative sources of materials or products, or, in certain cases, qualifying for duty-free treatment.

However, these actions may not be successful in fully or substantially mitigating the impact of tariffs, and, even if successful, there could be a near term impact on cash flows due to the timing of when tariffs are paid compared to when such costs may be refunded or recovered.

In addition, recent government actions relating to rare earth minerals that are used in certain of our products, including U.S.

Government sourcing prohibitions on the import of such minerals and the imposition of export controls on such minerals by China, had raised concerns about supply availability earlier this year.

Although rare earth shipments have resumed under a new U.S.-China framework agreement, exports remain subject to selective licensing and review by Chinese authorities, and the rare earth supply chain continues to be vulnerable to further disruption due to increasing scarcity and constrained capacity.

Lastly, the President has issued multiple Executive Orders, including two that are intended to (i) simplify and accelerate the procurement process through an overhaul of the Federal Acquisition Regulation (FAR), and its supplements and (ii) modernize the defense acquisition process by promoting commercial solutions, use of innovative acquisition authorities, and other existing streamlined processes.

Among the actions directed by the President is a review of major defense acquisition programs that are more than 15% behind schedule or over budget, or not aligned with the Administration’s priorities, including identifying any programs for potential cancellation.

While the impact of these reforms on our business is uncertain, they could potentially lead to changes in the way we interact with the U.S.

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Our primary customer is the U.S.

Government, from which we derive 72% of our sales, including 63% from the U.S.

Government, from which we derived 73% of our sales during the six months ended June 29, 2025, including 63% from the U.S.

Funding for U.S.

Government programs is subject to a variety of factors that can affect our business, including the administration’s budget requests and procurement priorities and policies, annual congressional budget authorization and appropriation processes, and other U.S.

Government programs is subject to a variety of factors

that can affect our business, including the administration’s budget requests and procurement priorities and policies, annual congressional budget authorization and appropriation processes, and other U.S.

Government domestic and international priorities.

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The Act increases the DoD FY 2025 base budget by $6 billion to a total of $831.5 billion, while reducing nondefense spending.

Unlike other continuing resulting funding measures, the Act provides the DoD conditional authority to permit new program starts as long as they were included in the FY 2025 House or FY 2025 Senate appropriation bills and $8 billion in flexible funding, furthering the flexibility of DoD operating under a CR.

It is anticipated the Administration’s budget request for FY 2026 will be submitted to Congress in the coming months, which will initiate the FY 2026 defense authorization and appropriations legislative process.

Congress will need to approve or revise the Administration’s FY 2026 budget proposal through enactment of appropriations bills and other policy legislation, which would then require final approval from the President in order for the FY 2026 budget to become law and complete the budget process.

We anticipate the federal budget, debt ceiling, regulatory environment, and potential tax reform will continue to be subject to debate and compromise shaped by, among other things, the new Administration and Congress, heightened political tensions, the global security environment, inflationary pressures, and macroeconomic conditions.

Unlike other continuing resolution funding measures, the Act provides the DoD conditional authority to permit new program starts as long as they were included in the FY 2025 House or FY 2025 Senate appropriation bills and $8 billion in flexible funding, furthering the flexibility of DoD operating under a continuing resolution.

The Administration published its FY 2026 budget request in June 2025.

The budget request includes $848.3 billion in the base budget (discretionary) funding, and $113.3 billion in reconciliation (mandatory) funding.

The One Big Beautiful Bill Act passed the Senate and House, and was signed by the President on July 4, 2025.

The bill provides more than $150 billion in mandatory funding (inclusive of the $113.3 billion) for DoD available until September 30, 2029.

The legislative process has been delayed due to the late release of the FY 2026 budget request.

The House Appropriations Subcommittee on Defense (HAC-D) released its FY 2026 congressional marks using the FY 2025 enacted amounts as its baseline on June 12, 2025.

The bill recommends $831.5 billion in discretionary funding for the DoD.

The Senate Armed Services Committee marked up its version of the FY 2026 National Defense Authorization Act (FY 2026 NDAA) on July 10, 2025 and included a topline increase of $32.1 billion.

The House Armed Services Committee (HASC) also completed their markup of the FY 2026 NDAA on July 15, 2025 and held at the topline of the FY 2026 President’s budget request.

We anticipate the federal budget, debt ceiling, additional potential tax law changes and regulatory environment will continue to be subject to debate and compromise shaped by, among other things, the new Administration and Congress, heightened political tensions, the global security environment, inflationary pressures, and macroeconomic conditions.

The result may be shifting funding priorities, which could have material impacts on defense spending broadly and our programs.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis