HUNTINGTON INGALLS INDUSTRIES, INC. (HII) FY 2024 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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

Business Environment

We continue to see uncertainty in the economy, our industry, and our company. Our customers, suppliers and subcontractors continue to face challenges, and our results for the year were adversely affected by significant challenges relating to labor availability, our supply chain, and inflation, among other challenges. We cannot predict how long these challenges will continue, whether these challenges will change over time, or whether our actions to address these challenges will be successful.

U.S. Political and Economic Environment – The November 2024 elections, which resulted in Republican control of the executive and legislative branches, has resulted in a range of policy changes both domestically and internationally as Republicans seek to reorient U.S. priorities. The new Administration has employed, and is expected to continue to employ, executive actions and other methods, including regulations and policy proposals that impact trade, tax, immigration, energy policies, and other areas.

The debt ceiling is expected to continue to be an area of considerable debate. High debt levels may impose fiscal constraints on many policy objectives, complicating efforts to deliver on promises made during the elections.

Domestically, we expect that national debt levels, inflationary pressures, gross domestic product growth, among other considerations, could impact U.S. budgets and priorities, including with respect to discretionary spending. While monthly inflation rates have declined since peaking at 9.1% in June of 2022, rising military personnel and operations and maintenance costs continue to pressure the Pentagon’s investment portfolio buying power. If above-

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

Global supply chain and labor markets continue to experience high levels of disruption, causing significant materials and parts shortages, including raw material, microelectronics and commodity shortages, as well as delivery delays, labor shortages, and price increases. The labor market continues to present significant challenges for our Company, our industry, and the supply chain. Our ability to increase throughput and meet production schedules is directly impacted by labor availability and performance. We monitor labor market conditions and trends and work to mitigate the effects of labor challenges through a variety of measures. Challenges in the labor market are addressed through targeted talent acquisition, partnerships with community colleges, apprentice school sourcing and recruiting, workforce succession planning, and initiatives to retain current employees. Labor shortages and retention also are impacting our supply chain, resulting in longer lead times for materials, parts, and other supplies. Our supply chain has been impacted further by delivery delays, raw material shortages and price increases caused by continued inflationary pressures.

The shipbuilding defense industry is unique in many ways. It is heavily capital and skilled labor intensive. The U.S. Navy, a large single customer with many needs and requirements, dominates the industry's customer base and is served by a fragile supplier base that has trended toward exclusive providers. The DoD continues to adjust its procurement practices and streamline acquisition organizations and processes in an ongoing effort to reduce costs, gain efficiencies, and enhance program management and control. Additionally, the U.S. Navy must compete with other national priorities, including other defense activities, non-defense discretionary spending, and entitlement programs, for a share of federal budget funding. While the impact to our business resulting from these developments remains uncertain, they could have a material impact on current programs, as well as new business opportunities with the DoD.

Defense Spending Environment – On March 11, 2024, the Biden Administration proposed a Fiscal Year (FY) 2025 budget request of $849.8 billion for the DoD, consistent with the discretionary funding cap for defense approved by Congress under the Financial Responsibility Act (“FRA”) of 2023. Additionally, the FRA included a sequestration mechanism to incentivize Congress to enact regular, full-year appropriations legislation instead of relying on continuing resolutions ("CR"). Although the Federal government is operating under a CR through March 14, 2025, sequestration would not be enforced until April 30, 2025 and would be reversed upon the enactment of full-year appropriations. The emergency national security supplemental funding legislation enacted during fiscal year 2025 is not subject to the FRA budget caps.

The House and Senate reached a compromise agreement on the National Defense Authorization Act ("NDAA") for fiscal year 2025 in December 2024. Overall, the fiscal year 2025 NDAA authorizes $883.7 billion in national security spending, including $849.9 billion for the Pentagon, consistent with the spending caps directed in the FRA. The compromise legislation supports our shipbuilding priorities with a total authorization of $32.7 billion for shipbuilding programs, including procurement authorization of the Travis Manion (LPD 33) Flight II amphibious ship, one Virginia class (SSN 774) submarine, three Arleigh Burke class (DDG 51) destroyers and the RCOH of USS Harry S. Truman (CVN 75). Additionally, the fiscal year 2025 NDAA supports the amphibious warship bundle contract signed in 2024 by authorizing advanced procurement funding for LPD 34 (unnamed), LPD 35 (unnamed), and Helmand Province (LHA 10).

Both House and Senate appropriations bills have passed out of committee, and the House defense appropriations bill has been approved by the full House. The House defense appropriations bill funds the Defense Department within the spending caps in the 2023 debt limit deal and supports the President’s budget request by funding one Virginia class (SSN 774) submarine, two Arleigh Burke class (DDG 51) destroyers, one LPD Flight II amphibious ship, and one CVN RCOH. The Senate Appropriations Committee added approximately $21 billion in emergency funding not subject to the FRA caps and included fiscal year 2025 funding for three Arleigh Burke class (DDG 51) destroyers, one Virginia class (SSN 774) submarine, one LPD Flight II amphibious ship, one CVN RCOH, one FFG-62 frigate, and advanced procurement funding for an additional Arleigh Burke class destroyer in fiscal year 2026.

Although a new fiscal year began on October 1, 2024, annual appropriations to fund the federal government for fiscal year 2025 have not been enacted. To provide Congress additional time to reach agreements on funding levels for federal agencies, a continuing resolution was enacted extending funding through December 20, 2024, at fiscal year 2024 levels. Congress passed a second CR in December 2024 that extended federal funding through March 14, 2025.

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While the DoD is normally prohibited from starting new programs or increasing funding on existing programs under a CR, the current CR includes anomalies that will allow the DoD to deviate from typical restrictions and obligate funding to support procurement of the Virginia class and Columbia class submarine programs. A $5.7 billion emergency appropriations anomaly supports fiscal year 2024 and fiscal year 2025 Virginia class submarines as well as workforce wages and shipyard investments. This funding does not count against the FRA fiscal year 2025 funding cap.

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

Global Geopolitical Environment – The global geopolitical environment continues to be impacted by uncertainty, heightened tensions, and instability, all of which drive the increasing need for defense offerings, including those provided by our company. Global geopolitical relationships continue to evolve. The U.S. and its allies face a global security environment that is impacted by threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns, and political instability.

The ongoing conflict in Ukraine and the associated sanctions have impacted the global economy, caused heightened cyber and other security risks, exacerbated supply chain challenges, resulted in higher energy costs, and further impacted inflationary pressures. In addition, tensions with China, along with hostilities in the Middle East, continued conflicts globally, and changes in international trade policies have impacted, and could continue to impact, the global market for defense products, services, and solutions.

Program Descriptions

For convenience, a brief description of certain programs discussed in this Annual Report on Form 10-K is included in the Glossary of Programs.

CONTRACTS

We generate most of our revenues from long-term U.S. Government contracts for the production of goods and services. Government contracts typically include the following cost elements: direct material, labor and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Unless otherwise specified in a contract, costs billed to contracts with the U.S. Government are treated as allowable and allocable costs under the FAR and CAS regulations. Examples of costs incurred by us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including certain merger and acquisition costs, and advertising costs.

We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions, as well as compliance with all applicable government regulations. In addition, the DCAA routinely audits the costs we incur that are allocated to U.S. Government contracts.

Our contracts typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials. See Note 6: Revenue in Item 8.

•Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.

•Fixed-Price Incentive Contracts - Fixed-price incentive contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.

•Cost-Type Contracts - Cost-type contracts provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the work within some specified time and some stated dollar limitation.

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•Time and Materials - Time and materials contracts specify a fixed hourly billing rate for each direct labor hour expended and reimbursement for allowable material costs and expenses.

Contract Fees - Negotiated contract fee structures include: fixed fee amounts, cost sharing arrangements to reward or penalize contractors for under- or over-cost target performance, respectively, positive award fees, and negative penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract, the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality, and technical performance. Award fees are determined and earned based on an evaluation by the customer of our performance against such negotiated criteria. We consider award fees to be variable consideration and generally include these fees in the transaction price using a most likely amount approach. Award fees are limited to the extent of funding allotted by the customer and available for performance and those amounts for which a significant reversal of revenue is not probable.

CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgment and estimates by management in its application. The development and selection of these critical accounting policies have been determined by our management. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties could choose different assumptions and reach different conclusions. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. We consider our policies relating to the following matters to involve our most critical accounting policies and estimates:

•Revenue recognition;

•Retirement related benefit plans; and

•Workers' compensation.

Revenue Recognition

Most of our revenues are derived from long-term contracts for the production of goods and services provided to the U.S. Government, which are generally accounted for by recognizing revenues over time using a cost-to-cost measure of progress. In estimating contract costs, we utilize a profit-booking rate based upon performance expectations that incorporate a number of assumptions and estimates regarding risks related to technical requirements, feasibility, schedule, and contract costs. Management performs periodic reviews of the contracts to evaluate the underlying risks, which may increase the profit-booking rate as we are able to mitigate and retire such risks. For the impacts of changes in estimates on our consolidated statements of operations and comprehensive income, see Note 6: Revenue in Item 8.

Retirement Related Benefit Plans

We recognize, on a plan-by-plan basis, the funded status of our retirement related benefit plans as an asset or liability on our balance sheet, with corresponding adjustments to after-tax accumulated other comprehensive loss and deferred tax assets or liabilities. The funded status represents the difference between the benefit obligation and the fair value of plan assets. See Note 16: Employee Pension and Other Postretirement Benefits in Item 8.

We calculate our retirement related benefit plan costs under both CAS and U.S. GAAP Financial Accounting Standards ("FAS"). The calculations under CAS and FAS require significant judgment. CAS prescribes the determination, allocation, and recovery of retirement related benefit plan costs on U.S. Government contracts through the pricing of products and services. FAS prescribes the methodology used to determine retirement related benefit plan expense or income, as well as the liability, for financial reporting purposes. The CAS requirements for these costs and their calculation methodologies differ from FAS. As a result, while both CAS and FAS use

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

We recover our CAS costs through the pricing of products and services on U.S. Government contracts, so that the CAS cost is recognized in segment product sales and service revenues and in the costs of those product sales and service revenues. In order to present our consolidated financial statements in accordance with FAS, we record the difference between our FAS expense and CAS cost (“FAS/CAS Adjustment”) as operating income within segment operating income and non-operating retirement benefit (expense).

The minimum funding requirements for our qualified pension plans are determined under the Employee Retirement Income Security Act of 1974 ("ERISA"), which is primarily based on the year's expected service cost and amortization of other previously unfunded liabilities. Effective January 1, 2011, we were subject to the funding requirements under the Pension Protection Act of 2006 (the "PPA"), which amended ERISA. Under the PPA and the American Rescue Plan Act of 2021, we are required to fully fund our pension plans over a rolling 15-year period as determined annually based upon the funded status at the beginning of each year. The PPA also introduced a variety of benefit restrictions that apply if a plan falls below certain funded percentages, as defined by the Internal Revenue Code. In funding our plans, we consider various factors, including the minimum funding requirements, the funded status needed to avoid potential benefit restrictions and other adverse consequences, minimum CAS funding requirements, and the current and anticipated funding levels of each plan.

Effective January 1, 2021, we adopted the Safe Harbor methodology for determining CAS pension costs. As a result, the interest rates used to calculate pension liabilities under CAS are consistent with those used in the determination of minimum funding requirements under ERISA.

Pension funding requirements for plan sponsors under ERISA are subject to pension relief in the form of higher interest rate assumptions introduced by the Moving Ahead for Progress in the 21st Century Act and subsequently extended by the American Rescue Plan Act of 2021. Using these minimum funding interest rates for the purposes of determining pension costs under CAS reduces volatility in CAS costs year-over-year and provides more predictable costs for our customers, while better aligning reimbursements of pension costs under our contracts with our required pension plan contributions under ERISA.

Due to the differences in requirements and calculation methodologies between FAS and CAS, our FAS pension expense is not necessarily indicative of the funding requirements under the PPA or the amounts we recover from the U.S. Government under CAS.

Assumptions - We account for our retirement related benefit plans on the accrual basis under FAS. The measurements of obligations, costs, assets, and liabilities require significant judgment. We annually review our assumptions, which are set at each year end and generally not changed during the following year unless a major plan event occurs, such as an amendment, curtailment, or settlement that would trigger a remeasurement. The key assumptions in these measurements are the interest rate used to discount future benefit payments and the expected long-term rate of return on plan assets.

Discount Rate - The assumed discount rate under FAS is used to determine the retirement related benefit plan obligations and expense, and represents the hypothetical rate at which plan benefit obligations could be effectively settled at the measurement date. Consequently, the discount rate can be volatile from year to year. The discount rate assumption is determined for each plan by constructing a hypothetical portfolio of high-quality bonds with cash flows that match the estimated outflows for future benefit payments to determine a single equivalent discount rate. Benefit payments are not only contingent on the terms of a plan but also on the underlying participant demographics, including current age and assumed mortality. We use only bonds that are denominated in U.S. Dollars, are rated Aa or better by nationally recognized statistical rating agencies, have a minimum outstanding issue of $50 million as of the measurement date, and are not convertible or index-linked.

Expected Long-Term Rate of Return - The expected long-term rate of return on assets is used to calculate net periodic expense, based on such factors as historical returns, targeted asset allocations, investment policy, duration, expected future long-term performance of individual asset classes, interest rates, inflation, portfolio volatility, investment management and administrative fees, and risk management strategies. Historical plan asset performance alone has inherent limitations in predicting future returns. While studies are helpful in understanding past and current trends and performance, the rate of return assumption is based more on long-term prospective views to avoid short-term market influences. Unless plan assets and benefit obligations are subject to re-

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

Mortality - Mortality assumptions are used to determine the retirement related benefit obligations and expense, and represent the likelihood and duration of benefit payments to plan participants based on historical experience and projected longevity. We periodically update our mortality assumptions as circumstances warrant.

Differences arising from actual experience or changes in assumptions might materially affect retirement related benefit plan obligations and the funded status. Actuarial gains and losses arising from differences between assumptions and actual experience or changes in assumptions are deferred in accumulated other comprehensive loss. This unrecognized amount is amortized as a component of net expense to the extent it exceeds 10% of the greater of the plan's benefit obligation or plan assets. The amortization period for actuarial gains and losses is the estimated average remaining service life of the plan participants. In 2024, the actual return on assets was approximately 7.7%, which was less than the expected return assumption of 8.00%. For the year ended December 31, 2024, the weighted average discount rates for our pension and other postretirement benefit plans increased by 70 and 44 basis points, respectively. The differences in asset returns resulted in an actuarial loss of $24 million, and the differences in discount rates resulted in an actuarial gain of $500 million for the year ended December 31, 2024.

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

Assuming an 8.00% expected return on assets assumption, a $50 million pension plan contribution is generally expected to favorably impact the current year expected return on assets by approximately $2 million, depending on the timing of the contribution.

Sensitivities to assumptions are not necessarily linear and are specific to the time periods noted.

CAS Cost - In addition to providing the methodology for calculating retirement related benefit plan costs, CAS also prescribes the method for assigning those costs to specific periods. While the ultimate liability for such costs under FAS and CAS is similar, the pattern of cost recognition is different. The key drivers of CAS pension cost include the funded status and the method used to calculate CAS reimbursement for each of our plans. A plan’s CAS pension cost can only be allocated until the plan is fully funded as defined under the CAS requirements.

Other FAS and CAS Pension Considerations - A key driver of the difference between FAS expense and CAS cost (and consequently the FAS/CAS Adjustment) is the pattern of earnings and expense recognition for actuarial gains and losses that arise when our asset and liability experiences differ from our assumptions under each set of requirements. Under FAS, our net actuarial gains and losses exceeding the 10% corridor are amortized over the estimated average remaining service life of the plan participants. Under CAS Harmonization, the amortization period is 10 years for actuarial gains and losses. Both FAS and CAS use a "market-related value" of plan assets approach to calculate the amount of deferred asset gains or losses to be amortized. Under CAS, actual asset gains and losses are systematically smoothed over five years, subject to certain limitations. For FAS, we do not use this smoothing method, and instead use fair value in determining our FAS expense. Accordingly, FAS expense generally reflects recent asset gains and losses sooner than CAS.

Additionally, CAS cost is only recognized for plans that are not fully funded as defined under CAS. If a plan becomes or ceases to be fully funded due to our asset or liability experience, our CAS cost will change accordingly.

Retirement Plan Assets - Retirement plan assets are stated at fair value. Investments in equity securities (common and preferred) are valued at the last reported sales price when an active market exists. Investments in fixed-income

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securities are generally valued based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders. Investments in hedge funds, real estate investment funds, private partnerships, collective trust funds, and commingled funds are generally valued at their Net Asset Values ("NAV") or equivalent, which are based on the current fair values of the fund's underlying assets.

Management reviews independently appraised values, audited financial statements, and additional pricing information to evaluate the NAV or its equivalent.

For the limited group of investments for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional information is obtained from the investment manager and evaluated internally to determine whether any adjustments are required to reflect fair value. See Note 16: Employee Pension and Other Postretirement Benefits in Item 8.

Accumulated Other Comprehensive Loss - Changes in assumptions and changes to plan assets and benefit obligations due to differences between actuarial assumptions and actual results are reported as actuarial gains and losses and recorded in accumulated other comprehensive loss, along with unrecognized prior service costs arising from plan amendments. As disclosed in Note 16: Employee Pension and Other Postretirement Benefits in Item 8, net pre-tax unrecognized actuarial gains as of December 31, 2024 were $59 million and unrecognized actuarial losses as of December 31, 2023 were $455 million. The increase in actuarial gains in 2024 was primarily driven by higher discount rates used to determine benefit obligations of $500 million and amortization of previously unrecognized actuarial losses of $5 million, which were offset by lower than expected asset returns of $24 million.

Net pre-tax unrecognized prior service costs (credits) as of December 31, 2024 and 2023 were $111 million and $125 million, respectively. These net deferred costs (credits) primarily originated from plan amendments, including those resulting from collective bargaining agreements. The change in unrecognized prior service costs (credits) in 2024 resulted from plan amendments and the amortization of previously accumulated prior service costs (credits).

Workers' Compensation

Our operations are subject to federal and state workers' compensation laws. We maintain self-insured workers' compensation plans and participate in federally administered second injury workers' compensation funds. We estimate the liability for such claims and funding requirements on a discounted basis utilizing actuarial methods based on various assumptions, which include our historical loss experience and projected loss development factors. We periodically, and at least annually, update our assumptions based on an actuarial analysis. For further information on workers’ compensation, see Environmental, Health & Safety in Item 1 and Note 16: Commitments and Contingencies in Item 8.

Accounting Standards Updates

See Note 3: Accounting Standards Updates in Item 8 for further information.

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CONSOLIDATED OPERATING RESULTS

The following table presents selected financial highlights:

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

Cost of Sales and Service Revenues

Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.

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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.

Other Income and Gains, Net

Other income and gains, net in 2024 was $9 million, compared to $120 million in 2023. The decrease was due to the sale of a court judgment in 2023 and the settlement of a representations and warranties insurance claim related to the acquisition of Hydroid in 2023, partially offset by the settlement of an insurance claim in 2024.

General and Administrative Expenses

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 in 2024 decreased $49 million, or 5%, compared to 2023. The decrease was primarily due to lower state taxes.

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.

We internally manage our operations by reference to "segment operating income," which 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 not a recognized measure under GAAP. 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. It is a measure we use to evaluate our core operating performance. 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. Refer to "Segment Operating Results" in this section for details related to segment operating income, as well as activity within each segment.

The following table reconciles operating income to segment operating income:

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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 and the expenses for these items included in segment operating income in accordance with 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:

The Operating FAS/CAS Adjustment in 2024 was a net expense of $62 million, compared to a net expense of $72 million in 2023. The favorable change was primarily driven by higher interest rates under FAS.

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

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

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

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 benefit in 2024 was $24 million, compared to non-current state income tax benefit of $11 million in 2023. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to the reduction in the blended state income tax rate applied to our deferred tax balances.

SEGMENT OPERATING RESULTS

Basis of Presentation

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.

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The following table presents segment operating results:

KEY SEGMENT FINANCIAL MEASURES

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.

Segment Operating Income

Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed 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.

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Net Cumulative Catch-up Revenue Adjustments

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

For the years ended December 31, 2024, 2023, and 2022, net cumulative catch-up revenue adjustments by segment were as follows:

Ingalls

Sales and Service Revenues

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

Segment Operating Income

Ingalls segment operating income in 2024 was $211 million, compared to segment operating income of $362 million in 2023. The decrease was primarily driven by the sale of a court judgment in 2023 and lower performance on amphibious assault ships and surface combatants.

Newport News

Sales and Service Revenues

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

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Segment Operating Income

Newport News segment operating income in 2024 was $246 million, compared to segment operating income of $379 million in 2023. The decrease was primarily driven by lower performance on the Virginia class (SSN 774) submarine program and aircraft carriers, partially offset by contract incentives on the Columbia class (SSBN 826) program.

Mission Technologies

Sales and Service Revenues

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

Segment Operating Income

Mission Technologies segment operating income for the year ended December 31, 2024, was $116 million, compared to segment operating income of $101 million in 2023. The increase was primarily driven by higher volume and performance in CEW&S, higher performance in fleet sustainment, and higher equity income from operating investments, partially offset by the settlement of a representations and warranties insurance claim related to the acquisition of Hydroid in 2023.

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PRODUCT AND SERVICE REVENUES AND COST ANALYSIS

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

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

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

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

Service Revenues and Segment Cost of Service Revenues

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

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

OTHER FINANCIAL INFORMATION

Interest Expense

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

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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.

The non-operating retirement benefit in 2024 was $179 million, compared to $148 million in 2023. The favorable change was primarily driven by higher 2023 returns on plan assets.

Other, Net

Other, net income in 2024 was $24 million, compared to other, net income of $19 million in 2023. There were no individually significant drivers for the increase in Other, net for the year ended December 31, 2024.

Federal and Foreign Income Taxes

Our effective tax rate on earnings from continuing operations was 14.5% in 2024, compared to 20.2% in 2023. The decrease in our effective tax rate for 2024 was primarily attributable to current and prior period research and development tax credits recorded in 2024.

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

In October 2021, the Organization for Economic Co-operation and Development (the "OECD") announced the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the "Framework"), which agreed to a two-pillar solution to address tax challenges arising from digitalization of the economy. In December 2021, the OECD released Pillar Two Model Rules defining the global minimum tax rules, which contemplate a minimum tax rate of 15%. To date, various jurisdictions have enacted, or are in the process of enacting, legislation on these rules, and the OECD continues to release additional guidance. While it is uncertain whether the U.S. will enact legislation to adopt the minimum tax directive, certain countries in which we operate have adopted legislation, and other countries are in the process of introducing legislation to implement the minimum tax directive. Further, the OECD issued administrative guidance providing transition and safe harbor rules that could delay the impact of the minimum tax directive. We will continue to monitor the implementation of the Framework by the countries in which we operate. We currently do not expect the Framework to have a material impact on our effective tax rate or our consolidated results of operation, financial position, and cash flows.

BACKLOG

Total backlog as of December 31, 2024, was approximately $48.7 billion. 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 December 31, 2024 and 2023, respectively.

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

We expect approximately 21% of the $48.7 billion total backlog as of December 31, 2024, to be converted into sales during the year ending December 31, 2025. U.S. Government orders comprised substantially all of the backlog as of December 31, 2024 and 2023.

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Contract Awards

The value of new contract awards during the year ended December 31, 2024, was approximately $12.1 billion, including an award for the maintenance and overhaul of USS Boise (SSN 764), an award for an advanced planning contract for the RCOH of USS Harry S. Truman (CVN 75) and an award for construction of USS Richard J. Danzig (DDG 143).

LIQUIDITY AND CAPITAL RESOURCES

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 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:

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 each of the three years in the period ended December 31, 2024, as classified in our consolidated statements of cash flows.

Operating Activities

Cash provided by operating activities in 2024 was $393 million, compared to $970 million provided by operating activities in 2023. The unfavorable change in operating cash flow was primarily due to an unfavorable change in trade working capital driven by the timing of billings across programs and lower earnings, partially offset by lower payments for income taxes.

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

Investing Activities

Cash used in investing activities in 2024 was $348 million, compared to $236 million used in investing activities in 2023. The change in investing cash was primarily driven by an increase in capital expenditures and the sale of our

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

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

Financing Activities

Cash provided by financing activities in 2024 was $356 million, compared to $771 million used in financing activities in 2023. The change in cash provided by financing activities was primarily due to $1 billion in proceeds from the issuance of long term debt and lower repayment of long term debt in the current year, which was partially offset by increased repurchases of common stock.

Free Cash Flow

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 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 operating activities to free cash flow:

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

Retirement Related Benefit Plan Contributions

ERISA, including amendments under pension relief legislation, defines the minimum amount we must contribute to our qualified defined benefit pension plans. In determining whether to make discretionary contributions to these plans above the minimum required amounts, we consider various factors, including maintaining the funded status needed to avoid potential benefit restrictions and other adverse consequences, maintaining minimum CAS funding requirements, and the current and anticipated future funding levels of each plan. The contributions to our qualified defined benefit pension plans are affected by a number of factors, including published IRS interest rates, the actual return on plan assets, actuarial assumptions, and demographic experience. These factors and our resulting contributions also impact the funded status of the plans.

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We made the following minimum and discretionary contributions to our pension and other postretirement benefit plans in the years ended December 31, 2024, 2023, and 2022:

As of December 31, 2024 and 2023, our qualified pension plans were funded 125% and 114%, respectively on a FAS basis. As of December 31, 2024 and 2023, these plans were sufficiently funded on an ERISA basis so as not to be subject to benefit payment restrictions. The funded percentages under ERISA and FAS vary due to inherent differences in the assumptions and methodologies used to calculate the respective obligations. We expect our 2025 cash contributions to our qualified defined benefit pension plans to be less than $1 million, all of which we anticipate will be discretionary and which are exclusive of CAS cost recoveries in our contracts. Due to the differences in calculation methodologies, our FAS expense is not necessarily representative of our funding requirements or CAS cost recoveries.

We expect 2025 contributions to our other postretirement benefit plans to be approximately $34 million, which are exclusive of CAS cost recoveries under our contracts. Contributions for other postretirement benefit plans are not required to be funded in advance and are paid on an as-incurred basis.

Other Sources and Uses of Capital

Stockholder Distributions - In November 2024, our board of directors authorized an increase in our quarterly cash dividend to $1.35 per share. The board previously increased the quarterly cash dividend to $1.30 per share in November 2023 and $1.24 per share in November 2022. We paid cash dividends totaling $206 million ($5.25 per share), $200 million ($5.02 per share), and $192 million ($4.78 per share) in the years ended December 31, 2024, 2023, and 2022, respectively.

In January 2024, our board of directors authorized an increase to our stock repurchase program from $3.2 billion to $3.8 billion and an extension of the term of the program to December 31, 2028. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the year ended December 31, 2024, we repurchased 607,841 shares at an aggregate cost of $163 million, including $1 million of accrued excise tax. For the years ended December 31, 2023 and 2022, we repurchased 337,007 and 244,561 shares, respectively, at aggregate costs of $75 million and $52 million, respectively. The cost of repurchased shares is recorded as treasury stock in the consolidated statements of financial position.

Additional Capital - In November 2024, we issued $500 million aggregate principal amount of 5.353% senior notes due 2030 and $500 million aggregate principal amount of 5.749% senior notes due 2035. The net proceeds from these senior notes were expected to be used for general corporate purposes, including debt repayment (which may include repayment of our 3.844% senior notes due 2025 and commercial paper borrowings) and working capital.

In September 2024, we amended and restated our existing $1.5 billion credit facility, increasing the capacity thereunder to $1.7 billion and extending the maturity date to September 2029 (the "Second Amended and Restated Revolving Credit Facility"). The Second Amended and Restated Revolving Credit Facility includes a letter of credit sub-facility of $300 million.

In September 2024, our borrowing capacity under our unsecured commercial paper note program increased from $1 billion to $1.7 billion. As of December 31, 2024, the Company had no outstanding debt under the commercial paper program.

Contractual Obligations - Our future contractual obligations are related to debt, leases, pension liabilities, unrecognized tax benefits, workers compensation, and purchase obligations. See Note 12: Debt, Note 14: Leases,

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Note 16: Employee Pension and Other Postretirement Benefits, Note 11: Income Taxes, and Note 2: Summary of Significant Accounting Policies in Item 8 for information about those obligations. Our purchase obligations as of December 31, 2024, were approximately $5,794 million, with approximately $2,708 million expected to be paid in 2025 and $3,086 million thereafter. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. As of December 31, 2024, future scheduled periodic interest payments on our outstanding long-term debt, including commitment fees that we are obligated to pay on our existing $1.7 billion Second Amended and Restated Revolving Credit Facility, were approximately $687 million, with approximately $105 million expected to be paid in 2025 and $582 million thereafter.

Off-Balance Sheet Arrangements

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 December 31, 2024, $11 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding. As of December 31, 2024, we had no other significant off-balance sheet arrangements.

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GLOSSARY OF PROGRAMS

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

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