CHANGES IN ESTIMATES

NOTE L: CHANGES IN ESTIMATES

Many of our contracts utilize the POC cost-to-cost method of revenue recognition. A single estimated profit margin is used to recognize profit for each performance obligation over its period of performance. At the outset of each contract, we gauge its complexity and perceived risks and establish an estimated total cost at completion in line with those expectations. Due to the long-term nature of many of these contracts, developing the estimated total cost at completion and total transaction price often requires judgment. After establishing the estimated total cost at completion, we follow a standard estimate at completion (“EAC”) process in which we review the progress and performance on our ongoing contracts. If we successfully retire risks associated with the technical, schedule and cost aspects of a contract, we may lower our estimated total cost at completion commensurate with the retirement of these risks. Conversely, there are many reasons estimated contract costs can increase, including: (i) supply chain disruptions, inflation and labor issues; (ii) design or other development challenges; and (iii) program execution challenges (including technical or quality issues and other performance concerns). Additionally, as the contract progresses, our estimates of total transaction price may increase or decrease if, for example, we receive incentive or award fees that are higher or lower than expected.

For additional discussion of our revenue recognition policies and our EAC process, see “Critical Accounting Estimates” in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2024 Form 10-K.

The following table presents the effect of aggregate net EAC adjustments:


	Second Quarter				Year to Date
(In millions, except per share amounts)	2025		2024		2025		2024

Operating income	$	(20)	$	—	$	(41)	$	19
Net income(1)	(15)		—		(31)		15
Diluted EPS	(0.08)		—		(0.16)		0.08

(1)Based on a 25 percent federal and state statutory tax rate.

Revenue recognized from performance obligations satisfied (or partially satisfied) in prior periods was $37 million and $74 million for second quarter and year to date 2025, respectively, and $34 million and $87 million for second quarter and year to date 2024, respectively.