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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Our Business

Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is a global, all-domain defense partner, building and delivering the world’s most powerful, survivable naval ships and technologies that safeguard America’s seas, sky, land, space, and cyber. For more than a century, our Ingalls Shipbuilding segment ("Ingalls") in Mississippi and Newport News Shipbuilding segment ("Newport News") in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder, making us America's largest shipbuilder. 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 approximately 44,000 people domestically and internationally.

We conduct most of our business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Mission Technologies segment is organized into four groups, All-Domain Operations, Warfare Systems, Global Security, and Uncrewed Systems, and specializes in a wide range of services and products across our capabilities, which include command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations; the application of artificial intelligence and machine learning to battlefield decisions; defensive and offensive cyber, electronic warfare & space; uncrewed systems; live, virtual, and constructive training solutions; fleet sustainment; and critical nuclear operations.

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2024 (our "2024 Annual Report on Form 10-K").

Business Environment

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. 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 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. 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. 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, trade policy, 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.

Critical Accounting Policies, Estimates, and Judgments

As discussed in our 2024 Annual Report on Form 10-K, we consider our policies relating to the following matters to be critical accounting policies and estimates:

  • Revenue recognition;

  • Retirement related benefit plans; and

  • Workers' compensation.

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

For convenience, a brief description of certain programs discussed in this Quarterly Report on Form 10-Q is included in the "Glossary of Programs" in this section.

CONSOLIDATED OPERATING RESULTS

The following table presents selected financial highlights:

Three Months Ended June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
Sales and service revenues$3,082$2,977$1054%$5,816$5,782$341%
Cost of product sales and service revenues2,6872,5451426%5,0274,975521%
Income from operating investments, net811(3)(27)%2123(2)(9)%
Other income and gains, net11——%1—1—%
General and administrative expenses241255(14)(5)%487487——%
Operating income163189(26)(14)%324343(19)(6)%
Other income (expense)
Interest expense(28)(24)(4)(17)%(56)(45)(11)(24)%
Non-operating retirement benefit474612%959056%
Other, net65120%1212——%
Federal and foreign income taxes3643(7)(16)%7474——%
Net earnings$152$173$(21)(12)%$301$326$(25)(8)%

Operating Performance Assessment and Reporting

We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. 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 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. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract financial estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.

Sales and Service Revenues

Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts. 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 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 and six months ended June 30, 2025 and 2024, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended June 30Six Months Ended June 30
($ in millions)2025202420252024
Gross favorable adjustments$138$83$218$138
Gross unfavorable adjustments(148)(59)(228)(112)
Net adjustments$(10)$24$(10)$26

See Note 7: Revenue and "Segment Operating Results" in this section for additional information on our net cumulative catch-up revenue adjustments.

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. 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 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

The activities of our operating investments are closely aligned with the operations of the segments holding the investments. We therefore record income related to earnings from equity method investments in our operating income.

Refer to "Segment Operating Results" in this section for details related to income from operating investments.

General and Administrative Expenses

In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. 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 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

We consider operating income an important measure for evaluating our operating performance, and, consistent with industry practice, we define operating income as revenues less the related costs of producing the revenues and general and administrative expenses.

Segment Operating Income

We internally manage our operations by reference to "segment operating income," which is a non-GAAP measure and is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects contract performance. Segment operating income is a measure we use to evaluate our core operating performance as it reflects the aggregate performance results of contracts within a segment. When analyzing our operating performance, investors should use segment operating income in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. We believe segment operating income reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies.

Changes in segment operating income are typically expressed in terms of volume, as discussed in “Sales and Service Revenues” above, or performance. Performance refers to changes in contract profit margin rates. These changes typically relate to profit recognition associated with revisions to estimated costs at completion ("EAC"), which reflect improved or deteriorated operating performance on that contract. 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, 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. Where such items have occurred and the effects are material, a separate description is provided. Refer to "Segment Operating Results" in this section for activity within each segment.

The following table reconciles operating income to segment operating income:

Three Months Ended June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
Operating income$163$189$(26)(14)%$324$343$(19)(6)%
Operating FAS/CAS Adjustment615(9)(60)%1632(16)(50)%
Non-current state income taxes3(1)4400%3(2)5250%
Segment operating income$172$203$(31)(15)%$343$373$(30)(8)%

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.

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

Three Months Ended June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
FAS benefit$25$17$847%$50$33$1752%
CAS cost1614214%2925416%
FAS/CAS Adjustment41311032%79582136%
Non-operating retirement benefit(47)(46)(1)(2)%(95)(90)(5)(6)%
Operating FAS/CAS Adjustment expense$(6)$(15)$960%$(16)$(32)$1650%

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

Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. 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 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

Our discussion of business segment performance focuses on sales and service revenues and operating income, consistent with our approach for managing our business. We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.

The following table presents segment operating results:

Three Months Ended June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
Sales and Service Revenues
Ingalls$724$712$122%$1,361$1,367$(6)—%
Newport News1,6031,535684%2,9992,969301%
Mission Technologies791765263%1,5261,515111%
Intersegment eliminations(36)(35)(1)(3)%(70)(69)(1)(1)%
Sales and service revenues$3,082$2,977$1054%$5,816$5,782$341%
Operating Income
Ingalls$54$56$(2)(4)%$100$116$(16)(14)%
Newport News82111(29)(26)%167193(26)(13)%
Mission Technologies3636——%76641219%
Segment operating income172203(31)(15)%343373(30)(8)%
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment(6)(15)960%(16)(32)1650%
Non-current state income taxes(3)1(4)(400)%(3)2(5)(250)%
Operating income$163$189$(26)(14)%$324$343$(19)(6)%

Key Segment Financial Measures

Refer to "Consolidated Operating Results" in this section for details related to sales and service revenues and segment operating income.

Net Cumulative Catch-up Revenue Adjustments by Segment

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 30Six Months Ended June 30
($ in millions)2025202420252024
Ingalls$4$6$4$19
Newport News(17)10(23)(2)
Mission Technologies3899
Net adjustments$(10)$24$(10)$26

See Note 7: Revenue and "Consolidated Operating Results" in this section for additional information on our net cumulative catch-up revenue adjustments.

Ingalls

Three Months Ended June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
Sales and service revenues$724$712$122%$1,361$1,367$(6)—%
Segment operating income5456(2)(4)%100116(16)(14)%
As a percentage of segment sales7.5%7.9%7.3%8.5%

Sales and Service Revenues

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 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.

Newport News

Three Months Ended June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
Sales and service revenues$1,603$1,535$684%$2,999$2,969$301%
Segment operating income82111(29)(26)%167193(26)(13)%
As a percentage of segment sales5.1%7.2%5.6%6.5%

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

Sales and Service Revenues

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 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 June 30Six Months Ended June 30
2025 vs. 20242025 vs. 2024
($ in millions)20252024DollarsPercent20252024DollarsPercent
Sales and service revenues$791$765$263%$1,526$1,515$111%
Segment operating income3636——%76641219%
As a percentage of segment sales4.6%4.7%5.0%4.2%

Sales and Service Revenues

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

Sales and Service RevenuesSegment Cost of Product Sales and Service Revenues
($ in millions)Three Months Ended June 302025 vs. 2024Three Months Ended June 302025 vs. 2024
Segment Information20252024DollarsPercent20252024DollarsPercent
Ingalls
Product$610$631$(21)(3)%$526$533$(7)(1)%
Service111803139%100673349%
Intersegment312200%312200%
Total Ingalls724712122%629601285%
Newport News
Product1,3191,263564%1,1451,054919%
Service283271124%23422594%
Intersegment11——%11——%
Total Newport News1,6031,535684%1,3801,2801008%
Mission Technologies
Product2832(4)(13)%2027(7)(26)%
Service731700314%656624325%
Intersegment3233(1)(3)%3233(1)(3)%
Total Mission Technologies791765263%708684244%
Segment Totals
Product$1,957$1,926$312%$1,691$1,614$775%
Service1,1251,051747%990916748%
Total Segment1$3,082$2,977$1054%$2,681$2,530$1516%

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

Sales and Service RevenuesSegment Cost of Product Sales and Service Revenues
($ in millions)Six Months Ended June 302025 vs. 2024Six Months Ended June 302025 vs. 2024
Segment Information20252024DollarsPercent20252024DollarsPercent
Ingalls
Product$1,136$1,217$(81)(7)%$978$1,024$(46)(4)%
Service2181477148%1901256552%
Intersegment734133%734133%
Total Ingalls1,3611,367(6)—%1,1751,152232%
Newport News
Product2,4792,439402%2,1162,055613%
Service519528(9)(2)%427437(10)(2)%
Intersegment12(1)(50)%12(1)(50)%
Total Newport News2,9992,969301%2,5442,494502%
Mission Technologies
Product5557(2)(4)%4058(18)(31)%
Service1,4091,394151%1,2601,244161%
Intersegment6264(2)(3)%6264(2)(3)%
Total Mission Technologies1,5261,515111%1,3621,366(4)—%
Segment Totals
Product$3,670$3,713$(43)(1)%$3,134$3,137$(3)—%
Service2,1462,069774%1,8771,806714%
Total Segment1$5,816$5,782$341%$5,011$4,943$681%

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 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 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 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

The non-operating retirement benefit includes the following components of net periodic benefit costs: 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 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

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 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.

BACKLOG

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 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, 2025December 31, 2024
($ in millions)FundedUnfundedTotal BacklogFundedUnfundedTotal Backlog
Ingalls$15,783$3,308$19,091$13,519$2,333$15,852
Newport News16,55715,27631,83312,07914,66626,745
Mission Technologies1,8384,0935,9311,8244,2926,116
Total backlog$34,178$22,677$56,855$27,422$21,291$48,713

We expect approximately 22% of the $48.7 billion total backlog as of December 31, 2024, to be converted into sales in 2025. U.S. 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 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 (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 (used in) operating activities:

Six Months Ended June 302025 vs. 2024
($ in millions)20252024Dollars
Net earnings$301$326$(25)
Depreciation and amortization of purchased intangible assets1621602
Stock-based compensation33726
Deferred income taxes(19)(28)9
Gain on investments in marketable securities(10)(11)1
Other non-cash transactions, net927
Retiree benefits(77)(57)(20)
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. 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, existing borrowing facilities, and/or through refinancing in the debt markets prior to the maturity dates of our debt.

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 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 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.

For 2025, we expect our capital expenditures for maintenance and sustainment to be approximately 1.0% to 1.5% of annual revenues and our discretionary capital expenditures to be approximately 2.0% to 2.5% of annual revenues. Our capital expenditures are expected to increase due to investments to expand our shipbuilding capacity.

Financing Activities

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

Free cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. 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 (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. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.

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

Six Months Ended June 302025 vs. 2024
($ in millions)20252024Dollars
Net cash provided by (used in) operating activities$428$(211)$639
Less capital expenditures:
Capital expenditure additions(163)(165)2
Grant proceeds for capital expenditures33—
Free cash flow$268$(373)$641

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

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.

Off-Balance Sheet Arrangements

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 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

See Note 3: Accounting Standards Updates in Part I, Item 1 for further information.

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

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. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable when made, we cannot guarantee future results, levels of activity, performance, or achievements. There are a number of important factors that could cause our actual results to differ materially from the results anticipated by our forward-looking statements, which include, but are not limited to:

  • our dependence on the U.S. Government for substantially all of our business;

  • significant delays or reductions in appropriations for our programs and/or changes in customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans);

  • our ability to estimate our future contract costs, including cost increases due to inflation, labor challenges, changes in trade policy, or other factors and our efforts to recover or offset such costs and/or changes in estimated contract costs, and perform our contracts effectively;

  • changes in business practices, procurement processes and government regulations and our ability to comply with such requirements;

  • adverse economic conditions in the United States and globally;

  • our level of indebtedness and ability to service our indebtedness;

  • our ability to deliver our products and services at an affordable life cycle cost and compete within our markets;

  • our ability to attract, retain, and train a qualified workforce;

  • subcontractor and supplier performance and the availability and pricing of raw materials and components;

  • our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions;

  • investigations, claims, disputes, enforcement actions, litigation (including criminal, civil, and administrative), and/or other legal proceedings, and improper conduct of employees, agents, subcontractors, suppliers, business partners, or joint ventures in which we participate, including the impact on our reputation or ability to do business;

  • changes in key estimates and assumptions regarding our pension and retiree health care costs;

  • security threats, including cyber security threats, and related disruptions;

  • natural and environmental disasters and political instability;

  • health epidemics, pandemics and similar outbreaks; and

  • other risk factors discussed herein and in our other filings with the SEC.

Additional factors include those described in our 2024 Annual Report on Form 10-K, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the SEC.

There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements. You should not place undue reliance on any forward-looking statements that we may make.

GLOSSARY OF PROGRAMS

Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q.

Program NameProgram Description
Aircraft carrier RCOHPerform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021, and USS George Washington (CVN 73) was redelivered to the U.S. Navy in May 2023.
America class (LHA 6) amphibious assault shipsDesign and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. 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).
Arleigh Burke class (DDG 51) destroyersBuild guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. We delivered USS Frank E. Petersen Jr. (DDG 121), USS Lenah H. Sutcliffe Higbee (DDG 123), and USS Jack H. Lucas (DDG 125) in 2021, 2022, and 2023, respectively. We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), John F. Lehman (DDG 137), Telesforo Trinidad (DDG 139), Ernest E. Evans (DDG 141), Charles J. French (DDG 142), and Richard J. Danzig (DDG 143).
Columbia class (SSBN 826) submarinesDesign and construct modules for Columbia class (SSBN 826) nuclear ballistic missile submarines ("SSBNs") as a subcontractor to Electric Boat. SSBNs are the most secure and survivable of our nation’s nuclear deterrent triad. Columbia class SSBNs will carry approximately 70 percent of the nation’s nuclear arsenal. The Columbia class (SSBN 826) program plan of record is to construct 12 new SSBNs to replace the current aging Ohio class. We have a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) submarine program. Construction of the first Columbia class (SSBN 826) submarine began in 2020. In 2023, we received an award modification for long-lead-time material and advance construction for the next five boats.
Gerald R. Ford class (CVN 78) aircraft carriersDesign and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead-time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs.
Legend class National Security CutterDesign and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. 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 servicesProvide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes.
San Antonio class (LPD 17) amphibious transport dock shipsDesign and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. In 2022, we delivered USS Fort Lauderdale (LPD 28), and we were awarded a long-lead-time material contract for Philadelphia (LPD 32). In 2023, we received an award modification for the detail design and construction of Philadelphia (LPD 32). In 2024, we delivered USS Richard M. McCool Jr. (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 submarinesConstruct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare.

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