What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-05 · 221 added, 153 removed, 371 unchanged (50% of the section changed)

1 unchanged sentence

Huntington Ingalls Industries, Inc.

("HII", "we", "us", or "our") is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry.

("HII", "we", "us", or "our") is an all-domain defense and technologies partner, recognized worldwide as America’s largest shipbuilder.

For more than a century, our Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S.

naval shipbuilder.

Our Mission Technologies (formerly named Technical Solutions) segment provides a range of services to government and commercial customers.

Our Mission Technologies (formerly named Technical Solutions) segment provides a range of services and products to government and commercial customers.

Headquartered in Newport News, Virginia, HII employs approximately 44,000 people domestically and internationally.

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Business Environment

COVID-19 Pandemic - The COVID-19 global pandemic has had wide-ranging effects on the global health environment and disrupted the global and U.S.

economies and financial markets, including impacts to our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”).

COVID-19 Events have also impacted our operations, and the extent of future impacts are uncertain.

The most significant areas of impact have been the disruption of our employees’ ability to work effectively, disruption in our supply chain, disruption of the U.S.

Government's and our other customers' abilities to perform their obligations, and impact on pension assets and other investment performance.

We have aggressively managed our response to the uncertainties regarding COVID-19 Events, and we have incurred costs to respond to COVID-19 Events, including costs for paid leave, quarantining employees, vaccinations, and recurring facility cleaning.

Our shipyards and other facilities have remained open and productive,

but we continue to experience challenges meeting our hiring requirements, which has impacted our operations due to delay and disruption from a shortage of critical skills and out-of-sequence work.

While costs related to COVID-19 Events are allowable under U.S.

Government contracts, our contract estimates reflect profit margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and fixed-price incentive contracts, or may not be adequately covered by insurance.

Reinsurers under our property insurance have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program.

We also initiated arbitration proceedings against other reinsurers seeking similar relief.

The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision.

Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter.

Investigations, Claims, and Litigation.

We have also focused on actively supporting our customers, suppliers, and communities.

We have been proactive engaging with our U.S.

Government customers regarding future contract adjustments.

While there has been no change in contract terms or substantial degradation in timely payments from customers, we have experienced delays in decisions on certain contract awards.

Our suppliers have experienced reductions in employee attendance and hiring challenges, similar to us, which has affected their performance and delayed material deliveries.

We are therefore continuing to monitor material availability and affordability.

We are unable to predict how our customers and suppliers will allocate resources in the future as they react to the evolving demands of the COVID-19 response.

We continue to see uncertainty in the economy, our industry, and our company, with challenges for customers and suppliers, labor shortages, supply chain challenges, and increasing inflation, among other impacts.

Government Contracts - Long-term uncertainty exists with respect to overall levels of defense spending across the future years' defense plan, and it is likely that U.S.

Government discretionary spending levels will continue to be subject to significant pressure.

The fiscal year 2022 budget cycle ultimately concluded with the passage of the Consolidated Appropriations Act of 2022, signed into law March 15, 2022.

Final defense appropriations broadly supported shipbuilding programs, including funding for two Arleigh Burke class (DDG 51) destroyers and two Virginia class attack submarines.

Additionally, the appropriations measure provided $250 million for Advance Procurement ("AP") funding for LPD 32 (unnamed), additional AP for a third Arleigh Burke class (DDG 51) destroyer in fiscal year 2023, funding for the Columbia class ballistic-missile (SSBN 826) submarine program, USS Gerald R.

Ford class (CVN 78) nuclear aircraft carrier programs, and the refueling and complex overhaul ("RCOH") of USS John C.

Stennis (CVN 74).

The President submitted the fiscal year 2023 budget request on March 28, 2022, and it is now under consideration by Congress.

The budget request reflects continued investment in shipbuilding, funding two amphibious ships, LPD 32 (unnamed) and LHA 9 (unnamed), two Arleigh Burke class (DDG 51) surface combatants, and two Block V Virginia class submarines equipped with the Virginia Payload Module, and continues funding USS Gerald R.

Ford class (CVN 78) nuclear aircraft carrier programs, carrier RCOH programs, and construction of Columbia class (SSBN 826) submarines.

Additionally, the budget request includes investment in the submarine industrial base.

Congressional consideration of the fiscal year 2023 President’s Budget Request began following its release in March 2022 and is ongoing.

The House Appropriations Committee voted out a defense appropriations measure that broadly supports our shipbuilding and unmanned programs and awaits floor consideration.

The Senate Appropriations Committee has yet to conduct markups, and the timing of committee action remains uncertain.

The House and Senate Armed Services Committees have each acted on their respective National Defense Authorization bills for fiscal year 2023, both of which broadly support our shipbuilding programs, including increased funding authority for Arleigh Burke class destroyers (DDG-51) and LHA and LPD Flight II amphibious ships.

The full House has approved its authorization bill and awaits Senate floor consideration of its version before the two bills can be reconciled to produce a final measure.

We cannot predict the outcome of the fiscal year 2023 budget process or whether short-term funding will be required in the event annual appropriations measures are not finalized by the start of the October 1 fiscal year.

Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled.

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Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by the U.S.

Government or the prime contractor as a result of lack of government funding or reductions or delays in government funding.

Government or the prime contractor due to lack of government funding or reductions or delays in government funding.

Significant reductions in the number of ships procured by the U.S.

Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, or cash flows.

Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, and cash flows.

The federal budget environment remains a significant long-term risk.

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It is likely budget and program decisions made in this environment will have long-term impacts on HII and the entire defense industry.

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

Geopolitical relationships have changed, and are continuing 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, and the COVID-19 pandemic.

In February 2022, Russian forces invaded Ukraine.

In response, the United States and other countries imposed economic and trade sanctions, export controls, and other restrictions.

The conflict and these sanctions have caused disruptions to global economies and global business, including heightened cybersecurity risks, supply chain challenges, increased energy costs, and an exacerbation of existing inflationary pressures.

Additionally, and more broadly, economic tensions with China and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could impact the global market for defense products, services, and solutions.

In addition to price surges in energy, food, and aluminum as a result of the Russian invasion of Ukraine, rising inflation has led to higher costs of various commodities and supplier products.

Inflation has also increased interest rates, raising the cost of borrowing for the federal government, which could impact other spending priorities.

In an era of unanticipated cost increases, the inclusion of mitigation mechanisms, such as Economic Price Adjustment clauses, in our contracts help reduce risks from negative price adjustments.

Our bids for longer-term firm fixed-price contracts typically include assumptions for labor and other contract costs that historically have been sufficient to cover cost increases over the period of performance.

If, however, recent inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover potential contract cost growth or may impact the availability of resources to execute the respective contracts.

Management is closely monitoring possible cost impacts with our customers .

COVID-19 Pandemic - The COVID-19 pandemic has dramatically impacted the global economic environment, including labor shortages and supply chain challenges.

The COVID-19 crisis initially had a significant impact on the U.S.

labor market, and the resulting challenges and uncertainty have exacerbated already existing workforce trends.

Talent attraction and retention and the ability to maintain a qualified workforce affects not only industry prime contractors but suppliers as well.

Challenges incurred by our suppliers relative to their workforces, access to necessary components, materials, and other supplies at reasonable prices, and access to support services, such as shipping and transportation, may impact the ability of suppliers to provide agreed-upon goods and services in a timely, compliant, and cost-effective manner.

We may in the future incur additional costs and performance challenges, including as a result of higher prices, schedule delays, or the need to identify and develop alternative suppliers.

The COVID-19 pandemic has impacted our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”).

While costs related to COVID-19 Events are allowable under U.S.

We also initiated arbitration proceedings against other reinsurers seeking similar relief.

The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision.

Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter.

Investigations, Claims, and Litigation.

Critical Accounting Policies, Estimates, and Judgments

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• Workers' compensation.

As of March 31, 2022, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2021.

As of June 30, 2022, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2021.

We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units.

We generate most of our revenues from long-term U.S.

Government contracts for design, production, and support activities.

We generate most of our revenues from multi-year contracts with the U.S.

Government for design, production, and support activities.

Due to the size, duration, and nature of many of our multi-year contracts, the estimation of sales and services revenues and costs through completion is complicated and subject to many variables.

Sales and service revenue estimates are based on negotiated contract prices, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with schedule, technical performance, and price adjustment clauses (such as inflation or index-based clauses).

These multi-year contracts generally have a transaction price that is based on estimated cost to produce the product or service plus margin.

Product and service cost estimates are based on negotiated or estimated contract terms, historical performance trends, and other economic projections.

Government contracts typically include the following cost elements:

direct material, labor and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses.

Factors that influence our cost estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, COVID-19 disruptions, and capital costs.

Unless otherwise specified in a contract, costs billed to contracts with the U.S.

Government are treated as allowable and allocable costs under the Federal Acquisition Regulation ("FAR") and the U.S.

Cost Accounting Standards ("CAS") regulations.

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.

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Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Sales and service revenues $ 2,662 $ 2,231 $ 431 19 % $ 5,238 $ 4,509 $ 729 16 %

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Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Product sales $ 1,829 $ 1,763 $ 66 4 % $ 3,553 $ 3,484 $ 69 2 %

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Sales and service revenues $ 2,662 $ 2,231 $ 431 19 % $ 5,238 $ 4,509 $ 729 16 %

Product sales for the three months ended March 31, 2022, increased $3 million from the same period in 2021.

Ingalls product sales decreased $26 million for the three months ended March 31, 2022, primarily as a result of

lower volumes in surface combatants and amphibious assault ships.

Newport News product sales increased $20 million for the three months ended March 31, 2022, primarily as a result of higher volumes in submarines and aircraft carriers.

Mission Technologies product sales increased $9 million for the three months ended March 31, 2022, primarily as a result of higher volumes in unmanned systems and defense and federal solutions ("DFS").

Service revenues for the three months ended March 31, 2022, increased $295 million, or 53%, compared with the same period in 2021.

Ingalls service revenues for the three months ended March 31, 2022, increased $8 million, primarily as a result of higher volumes in amphibious assault ship services, partially offset by lower volumes in surface combatant services.

Newport News service revenues decreased $37 million for the three months ended March 31, 2022, primarily as a result of lower volumes in aircraft carriers and naval nuclear support services.

Mission Technologies service revenues increased $324 million for the three months ended March 31, 2022, primarily as a result of higher volumes in DFS services, partially offset by the divestiture of our oil and gas business in the first quarter of 2021 and lower volumes in Fleet Sustainment.

Product sales for the three months ended June 30, 2022, increased $66 million, or 4%, from the same period in 2021.

Product sales for the six months ended June 30, 2022, increased $69 million, or 2%, from the same period in 2021.

Ingalls product sales decreased $13 million and $39 million for the three and six months ended June 30, 2022, respectively, primarily as a result of lower volumes in surface combatants, partially offset by higher volumes in amphibious assault ships.

Newport News product sales increased $79 million for the three months ended June 30, 2022, primarily as a result of higher volumes in aircraft carriers, partially offset by lower volumes in submarines.

Newport News product sales increased $99 million for the six months ended June 30, 2022, primarily as a result of higher volumes in aircraft carriers.

Mission Technologies product sales were flat for the three months ended June 30, 2022.

Mission Technologies product sales increased $9 million for the six months ended June 30, 2022, primarily as a result of higher volumes in defense and federal solutions ("DFS").

Service revenues for the three months ended June 30, 2022, increased $365 million, or 78%, compared with the same period in 2021.

Service revenues for the six months ended June 30, 2022, increased $660 million, or 64%, compared with the same period in 2021.

Ingalls service revenues increased $4 million and $12 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes in amphibious assault ship services, partially offset by lower volumes in surface combatant services.

Newport News service revenues decreased $6 million for the three months ended June 30, 2022, primarily as a result of lower volumes in naval nuclear support services and aircraft carrier services, partially offset by higher volumes in submarine services.

Newport News service revenues decreased $43 million for the six months ended June 30, 2022, primarily as a result of lower volumes in aircraft carrier services and naval nuclear support services.

Mission Technologies service revenues increased $367 million and $691 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes in DFS services.

Cost of Sales and Service Revenues

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Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Cost of product sales $ 1,526 $ 1,495 $ 31 2 % $ 2,994 $ 2,949 $ 45 2 %

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Cost of Product Sales

Cost of product sales for the three months ended March 31, 2022, increased $14 million, or 1%, compared with the same period in 2021.

Ingalls cost of product sales decreased $10 million for the three months ended March 31, 2022, primarily as a result of volume decreases described above.

Newport News cost of product sales increased $20 million for the three months ended March 31, 2022, primarily as a result of volume increases described above.

Mission Technologies cost of product sales increased $6 million for the three months ended March 31, 2022, driven by volume increases described above.

Cost of product sales related to the Operating FAS/CAS Adjustment decreased $2 million for the three months ended March 31, 2022, as described below.

Cost of product sales as a percentage of product sales increased from 84.5% for the three months ended March 31, 2021, to 85.2% for the three months ended March 31, 2022.

The increase was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program and Bougainville (LHA 8), as well as a contract incentive on USS Jack H.

Lucas (DDG 125) in the first quarter of 2021, partially offset by higher risk retirement on USS Gerald R.

Ford (CVN 78) and Fort Lauderdale (LPD 28) following its delivery, as well as a favorable change in the Operating FAS/CAS Adjustment.

Cost of product sales for the three months ended June 30, 2022, increased $31 million, or 2%, compared with the same period in 2021.

Cost of product sales for the six months ended June 30, 2022, increased $45 million, or 2%, compared with the same period in 2021.

Ingalls cost of product sales decreased $28 million and $38 million for the three and six months ended June 30, 2022, respectively, primarily as a result of volume decreases described above, partially offset by higher risk retirement on Harrisburg (LPD 30).

Newport News cost of product sales increased $56 million and $76 million for the three and six months ended June 30, 2022, respectively, primarily as a result of volume increases described above.

Mission Technologies cost of product sales increased $5 million for the three months ended June 30, 2022, driven by year-to-year variances in contract mix.

Mission Technologies cost of product sales increased $11 million for the six months ended June 30, 2022, driven by volume increases described above.

Cost of product sales related to the Operating FAS/CAS Adjustment decreased $2 million and $4 million for the three and six months ended June 30, 2022, respectively, as described below.

Cost of product sales as a percentage of product sales decreased from 84.8% for the three months ended June 30, 2021, to 83.4% for the three months ended June 30, 2022.

The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), as well as a favorable change in the Operating FAS/CAS Adjustment, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program and receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in 2021.

Cost of product sales as a percentage of product sales decreased from 84.6% for the six months ended June 30, 2021, to 84.3% for the six months ended June 30, 2022.

The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), USS Gerald R.

Ford (CVN 78), Fort Lauderdale (LPD 28) following its delivery, and Frank E.

(DDG 121), as well as a favorable change in the Operating FAS/CAS Adjustment, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program, receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in 2021, and lower risk retirement on Bougainville (LHA 8).

Cost of Service Revenues

Cost of service revenues for the three months ended March 31, 2022, increased $277 million, or 57%, compared with the same period in 2021.

Ingalls cost of service revenues increased $7 million for the three months ended March 31, 2022, primarily as a result of higher volumes described above.

Newport News cost of service revenues decreased $35 million for the three months ended March 31, 2022, primarily as a result of lower volumes described above.

Mission Technologies cost of service revenues increased $306 million for the three months ended March 31, 2022, primarily as a result of higher volumes described above.

Cost of service revenues related to the Operating FAS/CAS Adjustment decreased $1 million for the three months ended March 31, 2022, as described below.

Cost of service revenues as a percentage of service revenues increased from 86.5% for the three months ended March 31, 2021, to 89.1% for the three months ended March 31, 2022, primarily driven by lower performance in DFS services and higher amortization of purchased intangible assets, partially offset by year-to-year variances in contract mix and a favorable change in the Operating FAS/CAS Adjustment.

Cost of service revenues for the three months ended June 30, 2022, increased $332 million, or 80%, compared with the same period in 2021.

Cost of service revenues for the six months ended June 30, 2022, increased $609 million, or 68%, compared with the same period in 2021.

Ingalls cost of service revenues increased $5 million and $12 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes described above.

Newport News cost of service revenues decreased $15 million and $50 million for the three and six months ended June 30, 2022, respectively, primarily as a result of lower volumes described above.

Mission Technologies cost of service revenues increased $342 million and $648 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes described above.

Cost of service revenues

related to the Operating FAS/CAS Adjustment was flat for the three months ended June 30, 2022 and decreased $1 million for the six months ended June 30, 2022, as described below.

Cost of service revenues as a percentage of service revenues increased from 88.5% for the three months ended June 30, 2021, to 89.6% for the three months ended June 30, 2022, primarily driven by higher amortization of purchased intangible assets and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021.

and a favorable change in the Operating FAS/CAS Adjustment.

Cost of service revenues as a percentage of service revenues increased from 87.4% for the six months ended June 30, 2021, to 89.3% for the six months ended June 30, 2022, primarily driven by higher amortization of purchased intangible assets and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, as well as a favorable change in the Operating FAS/CAS Adjustment.

Income (Loss) from Operating Investments, Net

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We therefore record income related to earnings from equity method investments in our operating income.

Income from operating investments, net for the three months ended March 31, 2022, was flat compared to 2021.

Income from operating investments, net for the three and six months ended June 30, 2022, increased $15 million and $14 million, respectively, from the same periods in 2021, primarily due to higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, partially offset by lower equity income from our nuclear and environmental joint ventures.

Other Income and Gains (Losses), Net

Other income and gains (losses), net was a net loss of $1 million and a net gain of $3 million for the three months ended March 31, 2022 and 2021, respectively.

The unfavorable change of $4 million was primarily due to the gain on sale of our oil and gas business in the first quarter of 2021.

Other income and gains (losses), net was a net gain of $1 million and a net loss of $2 million for the three months ended June 30, 2022 and 2021, respectively.

The favorable change of $3 million was primarily due to a loss recognized in the second quarter of 2021 as a result of the final purchase price adjustment to a gain on the sale of our oil and gas business.

Other income and gains (losses), net were flat for the six months ended June 30, 2022, compared to the same period in 2021.

General and Administrative Expenses

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These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.

General and administrative expenses for the three months ended March 31, 2022, increased $11 million from the same period in 2021, primarily due to higher overhead costs as a result of the acquisition of Alion in the third quarter of 2021 and current state income tax expense, partially offset by favorable changes in non-current state income taxes.

General and administrative expenses for the three and six months ended June 30, 2022, increased $23 million and $34 million, respectively, from the same periods in 2021, primarily due to higher overhead costs as a result of the acquisition of Alion in the third quarter of 2021 and current state income tax expense, partially offset by favorable changes in non-current state income taxes.

Operating Income

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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.

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.

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Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Operating income $ 191 $ 128 $ 63 49 % $ 329 $ 275 $ 54 20 %

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Segment Operating Income

Segment operating income for the three months ended March 31, 2022, was $176 million, compared with segment operating income of $191 million for the same period in 2021.

The decrease was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program and Bougainville (LHA 8), receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in the first quarter of 2021, and higher amortization of purchased intangible assets, partially offset by higher risk retirement on Fort Lauderdale (LPD 28) following its delivery and USS Gerald R.

Ford (CVN 78), as well as higher performance in DFS services and unmanned systems.

Segment operating income for the three months ended June 30, 2022, was $225 million, compared with segment operating income of $169 million for the same period in 2021.

The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), as well as improved performance in DFS services and higher equity income, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program and receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in 2021, as well as higher amortization of purchased intangible assets.

Segment operating income for the six months ended June 30, 2022, was $401 million, compared with segment operating income of $360 million for the same period in 2021.

The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), USS Gerald R.

Ford (CVN 78), Fort Lauderdale (LPD 28) following its delivery, and Frank E.

(DDG 121), as well as improved performance in DFS services and higher equity income, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program, receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in 2021, and lower risk retirement on Bougainville (LHA 8), as well as higher amortization of purchased intangible assets.

Activity within each segment is discussed in Segment Operating Results below.

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Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

FAS benefit (expense) $ 19 $ (7) $ 26 371 % $ 43 $ (14) $ 57 407 %

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Operating FAS/CAS Adjustment $ (35) $ (37) $ 2 5 % $ (72) $ (77) $ 5 6 %

The Operating FAS/CAS Adjustment was a net expense of $37 million and $40 million for the three months ended March 31, 2022 and 2021, respectively.

The favorable change in the Operating FAS/CAS Adjustment of $3 million was driven by higher interest rates.

The Operating FAS/CAS Adjustment was a net expense of $35 million and $37 million for the three months ended June 30, 2022 and 2021, respectively.

The Operating FAS/CAS Adjustment was a net expense of $72 million and $77 million for the six months ended June 30, 2022 and 2021, respectively.

The favorable changes in the Operating FAS/CAS Adjustment of $2 million and $5 million for the three and six months ended June 30, 2022, respectively, were primarily driven by the more immediate recognition of higher interest rates under FAS.

Non-current State Income Taxes

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Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

Non-current state income tax expense for the three months ended March 31, 2022, was $1 million, compared to non-current state income tax expense of $4 million for the same period in 2021.

Non-current state income tax benefit for the three months ended June 30, 2022, was $1 million, compared to non-current state income tax expense of $4 million for the same period in 2021.

The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes.

Non-current state income tax benefit for the six months ended June 30, 2022, was less than $1 million, compared to non-current state income tax expense of $8 million for the same period in 2021.

Interest Expense

Interest expense for the three months ended March 31, 2022, increased $5 million, compared with the same period in 2021, primarily due to borrowing under the Term Loan and the issuance of senior notes in August 2021.

Interest expense for the three and six months ended June 30, 2022, increased $8 million and $13 million, respectively, compared with the same periods in 2021, primarily due to the issuance of senior notes and borrowing under the Term Loan in the third quarter of 2021.

Non-Operating Retirement Benefit

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

For the three months ended March 31, 2022, the favorable change in the non-operating retirement benefit of $25 million was primarily driven by higher 2021 returns on plan assets.

Other, net expense increased $8 million for the three months ended March 31, 2022, compared with the same period in 2021, primarily driven by losses on investments in marketable securities.

For the three and six months ended June 30, 2022, the favorable change in the non-operating retirement benefit of $23 million and $48 million was primarily driven by higher 2021 returns on plan assets.

Other, net expense increased $17 million and $25 million for the three and six months ended June 30, 2022, respectively, compared with the same periods in 2021, primarily driven by losses on investments in marketable securities.

Federal and Foreign Income Taxes

Our effective income tax rates on earnings from operations for the three months ended March 31, 2022 and 2021, were 20.5% and 14.5%, respectively.

The higher effective tax rate for the three months ended March 31, 2022, was primarily attributable to a tax loss associated with the sale of the Company’s oil and gas business recorded in 2021.

For the three months ended March 31, 2022, our effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%.

For the three months ended March 31, 2021, our effective tax rate differed from the federal statutory rate primarily as a result of the loss associated with the sale of our oil and gas business.

Our effective income tax rates on earnings from operations for the three months ended June 30, 2022 and 2021, were 19.8% and 19.9%, respectively.

Our effective income tax rates on earnings from operations for the six months ended June 30, 2022 and 2021, were 20.1% and 17.1%, respectively.

The effective tax rate for the three months ended June 30, 2022, was generally flat compared to the prior year.

The higher effective tax rate for the six months ended June 30, 2022, was primarily attributable to a tax loss associated with the sale of our oil and gas business recorded in 2021.

For the three months ended June 30, 2022, our effective tax rate differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits.

For the six months ended June 30, 2022, our effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%.

For the three months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of research and development tax credits.

For the six months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of a tax loss associated with the sale of our oil and gas business.

Income Taxes.

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Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Sales and Service Revenues

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Mission Technologies

25 13 12 92 % 34 20 14 70 %

Segment operating income 225 169 56 33 % 401 360 41 11 %

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Cumulative Adjustments

For the three months ended March 31, 2022 and 2021, favorable and unfavorable cumulative catch-up margin adjustments were as follows:

For the three and six months ended June 30, 2022 and 2021, favorable and unfavorable cumulative catch-up margin adjustments were as follows:

Three Months Ended

June 30 Six Months Ended

($ in millions) 2022 2021 2022 2021

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Net adjustments $ 68 $ 35 $ 113 $ 85

For the three months ended March 31, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Fort Lauderdale (LPD 28) following its delivery and other individually insignificant adjustments.

For the three months ended June 30, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Harrisburg (LPD 30).

During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

For the three months ended March 31, 2021, favorable cumulative catch-up margin adjustments were related to risk retirement on Bougainville (LHA 8) and Block IV of the Virginia class (SSN 774) submarine program.

For the six months ended June 30, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Harrisburg (LPD 30) and Fort Lauderdale (LPD 28) following its delivery.

During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

For the three months ended June 30, 2021, favorable cumulative margin catch-up adjustments included a contract incentive on Jack H.

Lucas (DDG 125) and risk retirement on Richard M.

(LPD 29) and Fort Lauderdale (LPD 28).

During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

For the six months ended June 30, 2021, favorable cumulative margin catch-up adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on Jack H.

Lucas (DDG 125), and risk retirement on Block IV of the Virginia class (SSN 774) submarine program and Fort Lauderdale (LPD 28).

During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Sales and service revenues $ 658 $ 670 $ (12) (2) % $ 1,289 $ 1,319 $ (30) (2) %

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Sales and Service Revenues

Ingalls revenues for the three months ended March 31, 2022, decreased $18 million, or 3%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships.

Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129), George M.

Neal (DDG 131), and Frank E.

(DDG 121), partially offset by higher volumes on Sam Nunn (DDG 133).

Revenues on amphibious assault ships increased due to higher volumes on LHA 9 (unnamed) and L-Class planning yard services contract, partially offset by lower volumes on Bougainville (LHA 8).

Ingalls revenues for the three months ended June 30, 2022, decreased $12 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships.

Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129) and USS Jack H Lucas (DDG 125), partially offset by higher volumes on Thad Cochran (DDG 135).

Revenues on amphibious assault ships increased due to higher volumes on Pittsburgh (LPD 31), Harrisburg (LPD 30), LHA 9 (unnamed), and L-Class planning yard services contract, partially offset by lower volumes on Fort Lauderdale (LPD 28).

Ingalls revenues for the six months ended June 30, 2022, decreased $30 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships.

Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129), USS Jack H.

Lucas (DDG 125), and Frank E.

(DDG 121), partially offset by higher volumes on Thad Cochran (DDG 135).

Revenues on amphibious assault ships increased due to higher volumes on LHA 9 (unnamed), Pittsburgh (LPD 31), and L-Class planning yard services contract and higher volumes on Harrisburg (LPD 30), partially offset by lower volumes on Fort Lauderdale (LPD 28) and Bougainville (LHA 8).

Segment Operating Income

Ingalls segment operating income for the three months ended March 31, 2022, was $86 million, compared with segment operating income of $91 million for the same period in 2021.

The decrease was primarily driven by lower

risk retirement on Bougainville (LHA 8) and receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in the first quarter of 2021, partially offset by higher risk retirement on Fort Lauderdale (LPD 28) following its delivery.

Ingalls segment operating income for the three months ended June 30, 2022, was $106 million, compared with segment operating income of $80 million for the same period in 2021.

The increase was primarily driven by favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), partially offset by receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in 2021.

Ingalls segment operating income for the six months ended June 30, 2022, was $192 million, compared with segment operating income of $171 million for the same period in 2021.

The increase was primarily driven by favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), Fort Lauderdale (LPD 28) following its delivery, and Frank E.

(DDG 121), partially offset by receipt of a contract incentive on USS Jack H.

Lucas (DDG 125) in 2021 and lower risk retirement on Bougainville (LHA 8).

Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Sales and service revenues $ 1,433 $ 1,363 $ 70 5 % $ 2,823 $ 2,770 $ 53 2 %

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Sales and Service Revenues

Newport News revenues for the three months ended March 31, 2022, decreased $17 million, or 1%, from the same period in 2021, primarily driven by lower revenues in aircraft carriers and naval nuclear support services, partially offset by higher revenues in submarines.

Aircraft carrier revenues decreased primarily as a result of lower volumes on the RCOH of USS George Washington (CVN 73), the construction of John F.

Kennedy (CVN 79), and USS Gerald R.

Ford (CVN 78), partially offset by higher volumes on the RCOH of USS John C.

Stennis (CVN 74).

Newport News revenues for the three months ended June 30, 2022, increased $70 million, or 5%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers, partially offset by lower volumes in naval nuclear support services.

Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C.

Stennis (CVN 74), the construction of Doris Miller (CVN 81), the construction of John F.

Kennedy (CVN 79), and Enterprise (CVN 80), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73).

Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.

Submarine revenues increased due to higher volumes on the Columbia class (SSBN 826) program and Block V boats of the Virginia class (SSN 774) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program.

Newport News revenues for the six months ended June 30, 2022, increased $53 million, or 2%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers and submarines, partially offset by lower revenues in naval nuclear support services.

Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C.

Stennis (CVN 74), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73).

Submarine revenues increased due to higher volumes on Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class (SSBN 826) program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program.

Segment Operating Income

Newport News segment operating income for the three months ended March 31, 2022, was $81 million, compared with segment operating income of $93 million for the same period in 2021.

The decrease was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program, partially offset by higher risk retirement on USS Gerald R.

Ford (CVN 78).

Newport News segment operating income for the three months ended June 30, 2022, was $94 million, compared with segment operating income of $76 million for the same period in 2021.

The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program.

Newport News segment operating income for the six months ended June 30, 2022, was $175 million, compared with segment operating income of $169 million for the same period in 2021.

The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on USS Gerald R.

Ford (CVN 78), partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program.

Mission Technologies

Three Months Ended

2022 over 2021

($ in millions) 2022 2021 Dollars Percent

June 30 Six Months Ended

2021 2022 vs.

($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent

Sales and service revenues $ 600 $ 237 $ 363 153 % $ 1,190 $ 496 $ 694 140 %

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Sales and Service Revenues

Mission Technologies revenues for the three months ended March 31, 2022, increased $331 million, or 128%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021, partially offset by the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture in the first quarter of 2021, as well as lower volumes in Fleet Sustainment.

Mission Technologies revenues for the three months ended June 30, 2022, increased $363 million, or 153%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021.

Mission Technologies revenues for the six months ended June 30, 2022, increased $694 million, or 140%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021.

Segment Operating Income

Mission Technologies segment operating income for the three months ended March 31, 2022, was $9 million, compared with segment operating income of $7 million for the same period in 2021.

The increase was primarily driven by higher performance in DFS and unmanned systems, partially offset by higher amortization of purchased intangible assets.

Total backlog as of March 31, 2022, and December 31, 2021, was approximately $47.9 billion and $48.5 billion, respectively.

Mission Technologies segment operating income for the three months ended June 30, 2022, was $25 million, compared with segment operating income of $13 million for the same period in 2021.

The increase was primarily driven by the acquisition of Alion in the third quarter of 2021 and higher equity income, partially offset by higher amortization of purchased intangible assets.

Mission Technologies segment operating income for the six months ended June 30, 2022, was $34 million, compared with segment operating income of $20 million for the same period in 2021.

The increase was primarily driven by the acquisition of Alion in the third quarter of 2021 and higher equity income, partially offset by higher amortization of purchased intangible assets.

Total backlog as of June 30, 2022, and December 31, 2021, was approximately $47.2 billion and $48.5 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).

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For contracts having no stated contract values, backlog includes only the amounts committed by the customer.

The following table presents funded and unfunded backlog by segment as of March 31, 2022, and December 31, 2021:

March 31, 2022 December 31, 2021

The following table presents funded and unfunded backlog by segment as of June 30, 2022, and December 31, 2021:

June 30, 2022 December 31, 2021

($ in millions) Funded Unfunded Backlog Funded Unfunded Backlog

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Approximately 18% of the $48.5 billion total backlog as of December 31, 2021, is expected to be converted into sales in 2022.

Government orders comprised substantially all of the backlog as of March 31, 2022, and December 31, 2021.

The value of new contract awards during the three months ended March 31, 2022, was approximately $2 billion, comprised primarily of an award for the construction of DDG 139 (unnamed).

Government orders comprised substantially all of the backlog as of June 30, 2022, and December 31, 2021.

The value of new contract awards during the six months ended June 30, 2022, was approximately $4 billion, including an award for the construction of DDG 139 (unnamed).

LIQUIDITY AND CAPITAL RESOURCES

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

Three Months Ended

March 31 2022 over 2021

Six Months Ended

June 30 2022 vs.

($ in millions) 2022 2021 Dollars

4 unchanged sentences

Deferred income taxes (1) 31 (32)

Gain on disposition of business — (3) 3

Loss (gain) on investments in marketable securities 26 (12) 38

Retiree benefit funding in excess of expense (34) (65) 31

Retiree benefits (65) (70) 5

Trade working capital increase (281) (230) (51)

Net cash (used in) provided by operating activities $ (83) $ 43 $ (126)

Net cash provided by operating activities $ 184 $ 139 $ 45

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

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obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.

We discuss below our significant operating, investing, and financing activities affecting cash flows for the three months ended March 31, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.

We discuss below our significant operating, investing, and financing activities affecting cash flows for the six months ended June 30, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.

Operating Activities

Cash used in operating activities for the three months ended March 31, 2022, was $83 million, compared with $43 million provided by operating activities for the same period in 2021.

The unfavorable change in operating cash flow was primarily due to changes in trade working capital and income tax refunds in the first quarter of 2021, partially offset by lower contributions to retiree benefit plans.

Cash provided by operating activities for the six months ended June 30, 2022, was $184 million, compared with $139 million provided by operating activities for the same period in 2021.

The favorable change in operating cash flow was primarily due to higher earnings, lower contributions to retiree benefit plans, and lower income tax payments, partially offset by changes in trade working capital and higher interest payments.

The change in trade working capital was primarily driven by the timing of receipts of accounts receivable and payments of accounts payable.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the 12 months beginning April 1, 2022 and beyond such 12-month period based on our current business plan.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the 12 months beginning July 1, 2022, and beyond such 12-month period based on our current business plan.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2022, was $43 million, compared with $46 million used in investing activities for the same period in 2021.

The change in investing cash was driven by the disposition of our oil and gas business in the first quarter of 2021 and lower capital expenditures in 2022, partially offset by contribution of our San Diego Shipyard to a joint venture in the first quarter of 2021.

Cash used in investing activities for the six months ended June 30, 2022, was $101 million, compared with $134 million used in investing activities for the same period in 2021.

The change in investing cash was driven by lower capital expenditures in 2022 and contribution of our San Diego Shipyard to a joint venture in 2021, partially offset by

the disposition of our oil and gas business in 2021.

For 2022, we expect our capital expenditures for maintenance and sustainment to be approximately 1.0% of annual revenues and our discretionary capital expenditures to be approximately 1.5% to 2.0% of annual revenues.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2022, was $171 million, compared with $102 million used in financing activities for the same period in 2021.

Cash used in financing activities for the six months ended June 30, 2022, was $335 million, compared with $169 million used in financing activities for the same period in 2021.

The change in financing cash was primarily due to an increase in the repayment of long-term debt of $200 million, an increase of $7 million in employee taxes on certain share-based payment arrangements, and a $2 million increase in cash dividend payments, partially offset by a decrease of $43 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 represents cash provided by 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 believe free cash flow is an important liquidity measure for our investors because it provides 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 (used in) provided by operating activities to free cash flow:

Three Months Ended

March 31 2022 over 2021

The following table reconciles net cash provided by operating activities to free cash flow:

Six Months Ended

June 30 2022 vs.

($ in millions) 2022 2021 Dollars

Net cash (used in) provided by operating activities $ (83) $ 43 $ (126)

Net cash provided by operating activities $ 184 $ 139 $ 45

Less capital expenditures:

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Free cash flow $ 82 $ 7 $ 75

Free cash flow for the three months ended March 31, 2022, decreased $110 million from the same period in 2021, primarily due to changes in trade working capital and income tax refunds in the first quarter of 2021, partially offset by lower contributions to retiree benefit plans and lower capital expenditures.

Free cash flow for the six months ended June 30, 2022, increased $75 million from the same period in 2021, primarily due to higher earnings, lower capital expenditures, lower contributions to retiree benefit plans, and lower income tax payments, partially offset by changes in trade working capital and higher interest payments.

Governmental Regulation and Supervision

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

As of March 31, 2022 and 2021, the cumulative amounts of payments withheld by the U.S.

As of June 30, 2022 and 2021, the cumulative amounts of payments withheld by the U.S.

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

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

As of March 31, 2022, $15 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding.

As of March 31, 2022, we had no other significant off-balance sheet arrangements.

As of June 30, 2022, $15 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding.

As of June 30, 2022, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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• Changes in government and 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 and perform our contracts effectively;

• Our ability to estimate our future contract costs, including cost increases due to inflation, and perform our contracts effectively;

• Changes in procurement processes and government regulations and our ability to comply with such requirements;

101 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis