What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-04 · 184 added, 181 removed, 411 unchanged (47% of the section changed)

1 unchanged sentence

Huntington Ingalls Industries, Inc.

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

("HII", "we", "us", or "our") is a global, all-domain defense partner, building and delivering the world’s most powerful, survivable naval ships and technologies that safeguard America’s seas, sky, land, space, and cyber.

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

8 unchanged sentences

Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses.

Our Mission Technologies segment provides a wide range of services and products, including C5ISR systems and operations;

Our Mission Technologies segment provides a wide range of services and products, including command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations;

the application of Artificial Intelligence and machine learning to battlefield decisions;

1 unchanged sentence

unmanned autonomous systems;

live, virtual, and constructive solutions;

live, virtual, and constructive training solutions;

platform modernization;

5 unchanged sentences

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

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.

Congressional consideration of the fiscal year 2023 President’s Budget Request began following its release in March 2022, and appropriations for the Federal government have yet to be finalized.

Consequently, the U.S.

Government is currently operating under a Continuing Resolution ("CR") that funds government operations through December 16, 2022.

The House Appropriations Committee voted out a defense appropriations measure earlier this year, and the Senate Appropriations Committee released the text of its defense appropriations measure, but a traditional markup process remains uncertain.

The House and Senate Armed Services Committees have acted on their respective National Defense Authorization bills for fiscal year 2023, both of which broadly support our shipbuilding programs.

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

It remains uncertain at this point whether fiscal year 2023 government operations will require additional short-term funding or, alternatively, annual appropriations measures will be finalized by the expiration of the CR.

Appropriations measures must be passed by Congress and enacted by the President, and we cannot predict the outcome of the fiscal year 2023 budget process.

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

13 unchanged sentences

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.

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.

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.

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

Additionally, and more broadly, 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, rising inflation has led to higher costs of various commodities and supplier products.

Inflation has also resulted in rising 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.

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Management is closely monitoring possible cost impacts with our customers .

The macro labor market continues to present significant challenges, and those challenges are continuing to impact our operations and our financial performance.

We are aggressively responding to the labor market challenges, including utilizing outside leased labor and overtime to mitigate the short-term deficit of employees and implementing aggressive hiring and retention programs.

Labor shortages are also impacting our supply chain, resulting in longer lead times for materials and inflationary pressure.

Our longer term ability to meet contract requirements, as well as our financial performance, are dependent on our ability to attract and retain a stable skilled workforce.

The Inflation Reduction Act of 2022 was signed into law during the third quarter of 2022 and included, among other things, provisions for an alternative minimum tax and a one percent excise tax on share repurchases.

We anticipate being subject to the excise tax beginning in 2023 and continue to evaluate other provisions of the Act for their impact on our business.

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

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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.

Government contracts, our contract financial 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.

The Vermont court dismissed our complaint, and we appealed the decision to the Vermont Supreme Court.

That court reversed and remanded the lower court’s decision in September 2022, allowing our claim to proceed.

No assurance can be provided regarding the ultimate resolution of this matter.

Investigations, Claims, and Litigation.

6 unchanged sentences

• Workers' compensation.

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

As of September 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.

23 unchanged sentences

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

3 unchanged sentences

Income from operating investments, net 13 11 2 18 % 47 31 16 52 %

Other income and gains (losses), net 1 (2) 3 150 % — 1 (1) (100) %

Other income and gains, net — 2 (2) (100) % — 3 (3) (100) %

General and administrative expenses 244 226 18 8 % 688 636 52 8 %

12 unchanged sentences

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 estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP.

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.

6 unchanged sentences

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

3 unchanged sentences

Sales and service revenues $ 2,626 $ 2,338 $ 288 12 % $ 7,864 $ 6,847 $ 1,017 15 %

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.

Product sales for the three months ended September 30, 2022, increased $73 million, or 4%, from the same period in 2021.

Product sales for the nine months ended September 30, 2022, increased $142 million, or 3%, from the same period in 2021.

Ingalls product sales decreased $9 million for the three months ended September 30, 2022, primarily driven by lower volumes in the Legend class National Security Cutter ("NSC") program and amphibious assault ships, partially offset by higher volumes in surface combatants.

Ingalls product sales decreased $48 million for the nine months ended September 30, 2022, primarily as a result of lower volumes in surface combatants and the Legend class NSC program, partially offset by higher volumes in amphibious assault ships.

Newport News product sales increased $97 million for the three months ended September 30, 2022, primarily as a result of higher volumes in submarines and aircraft carriers.

Newport News product sales increased $196 million for the nine months ended September 30, 2022, primarily as a result of higher volumes in aircraft carriers and submarines.

Mission Technologies product sales decreased $15 million for the three months ended September 30, 2022, primarily as a result of lower volumes in Unmanned Systems, partially offset by higher volumes in Fleet Sustainment.

Mission Technologies product sales decreased $6 million for the nine months ended September 30, 2022, primarily as a result of lower volumes in Unmanned Systems, partially offset by higher volumes in Defense and Federal Solutions (“DFS”) and Fleet Sustainment.

Service revenues for the three months ended September 30, 2022, increased $215 million, or 34%, compared with the same period in 2021.

Service revenues for the nine months ended September 30, 2022, increased $875 million, or 53%, compared with the same period in 2021.

Ingalls service revenues increased $3 million for the three months ended September 30, 2022, primarily as a result of higher volumes in surface combatant services.

Ingalls service revenues increased $15 million for the nine months ended September 30, 2022, 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 $4 million for the three months ended September 30, 2022, primarily as a result of lower volumes in submarine services, partially offset by higher volumes in naval nuclear support services.

Newport News service revenues decreased $47 million for the nine months ended September 30, 2022, primarily as a result of lower volumes in submarine and aircraft carrier services, partially offset by higher volumes in naval nuclear support services.

Mission Technologies service revenues increased $216 million and $907 million for the three and nine months ended September 30, 2022, respectively, primarily as a result of higher volumes in DFS services due to the acquisition of Alion in the third quarter of 2021.

Cost of Sales and Service Revenues

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

5 unchanged sentences

Income from operating investments, net 13 11 2 18 % 47 31 16 52 %

Other income and gains (losses), net 1 (2) 3 150 % — 1 (1) (100) %

Other income and gains, net — 2 (2) (100) % — 3 (3) (100) %

General and administrative expenses 244 226 18 8 % 688 636 52 8 %

2 unchanged sentences

Cost of Product Sales

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.

Cost of product sales for the three months ended September 30, 2022, increased $64 million, or 4%, compared with the same period in 2021.

Cost of product sales for the nine months ended September 30, 2022, increased $109 million, or 2%, compared with the same period in 2021.

Ingalls cost of product sales increased $8 million for the three months ended September 30, 2022, primarily as a result of lower risk retirement on Arleigh Burke class (DDG 51) destroyers, partially offset by volume decreases described above.

Ingalls cost of product sales decreased $30 million for the nine months ended September 30, 2022, 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 $70 million and $146 million for the three and nine months ended September 30, 2022, respectively, primarily as a result of volume increases described above.

Mission Technologies cost of product sales decreased $11 million for the three months ended September 30, 2022, driven by volume changes described above.

Mission Technologies cost of product sales remained flat for the nine months ended September 30, 2022.

Cost of product sales related to the Operating FAS/CAS Adjustment decreased $3 million and $7 million for the three and nine months ended September 30, 2022, respectively, as described below.

Cost of product sales as a percentage of product sales increased from 85.4% for the three months ended September 30, 2021, to 85.5% for the three months ended September 30, 2022.

The increase was primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program, higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, and lower risk retirement on Ted Stevens (DDG 128) and Delbert D.

Black (DDG 119), partially offset by contract incentives on the Columbia class (SSBN 826) submarine program, higher risk retirement on USS Portland (LPD 27), as well as a favorable change in the Operating FAS/CAS Adjustment.

Cost of product sales as a percentage of product sales decreased from 84.9% for the nine months ended September 30, 2021, to 84.7% for the nine months ended September 30, 2022.

The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses, contract incentives on the Columbia class (SSBN 826) submarine program, higher risk retirement on Harrisburg (LPD 30) and USS Fort Lauderdale (LPD 28) following its delivery, 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 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

Cost of service revenues for the three months ended September 30, 2022, increased $193 million, or 35%, compared with the same period in 2021.

Cost of service revenues for the nine months ended September 30, 2022, increased $802 million, or 55%, compared with the same period in 2021.

Ingalls cost of service revenues increased $6 million and $18 million for the three and nine months ended September 30, 2022, respectively, primarily as a result of higher volumes described above.

Newport News cost of service revenues decreased $8 million and $58

million for the three and nine months ended September 30, 2022, respectively, primarily as a result of lower volumes described above.

Mission Technologies cost of service revenues increased $197 million and $845 million for the three and nine months ended September 30, 2022, respectively, primarily as a result of higher volumes described above.

Cost of service revenues related to the Operating FAS/CAS Adjustment decreased $2 million and $3 million for the three and nine months ended September 30, 2022, respectively, as described below.

Cost of service revenues as a percentage of service revenues increased from 87.0% for the three months ended September 30, 2021, to 87.7% for the three months ended September 30, 2022.

The increase was primarily driven by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition 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.

Cost of service revenues as a percentage of service revenues increased from 87.2% for the nine months ended September 30, 2021, to 88.8% for the nine months ended September 30, 2022.

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.

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 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.

Income from operating investments, net for the three and nine months ended September 30, 2022, increased $2 million and $16 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 and from our nuclear and environmental joint ventures.

Other Income and Gains, Net

Other income and gains, net for the three months ended September 30, 2022, was $2 million less than the same period in 2021, primarily due to a gain recognized in the third quarter of 2021 as a result of a favorable claim resolution.

Other income and gains, net for the nine months ended September 30, 2022, was $3 million less than the prior year period, primarily due to gains recognized as a result of a favorable claim resolution and the sale of our oil and gas business in 2021.

General and Administrative Expenses

1 unchanged sentence

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 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.

General and administrative expenses for the three and nine months ended September 30, 2022, increased $18 million and $52 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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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.

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.

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.

1 unchanged sentence

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

5 unchanged sentences

Segment Operating Income

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.

Segment operating income for the three months ended September 30, 2022, was $166 million, compared with segment operating income of $163 million for the same period in 2021.

The increase was primarily due to contract incentives on the Columbia class (SSBN 826) submarine program, improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, higher equity income, and higher risk retirement on the USS Portland (LPD 27), partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program, higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, and lower risk retirement on Ted Stevens (DDG 128) and Delbert D.

Black (DDG 119).

Segment operating income for the nine months ended September 30, 2022, was $567 million, compared with segment operating income of $523 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, contract incentives on the Columbia class (SSBN 826) submarine program, higher risk retirement on Harrisburg (LPD 30) and USS Fort Lauderdale (LPD 28), improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, and higher equity income, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, 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.

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

6 unchanged sentences

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

5 unchanged sentences

Operating FAS/CAS Adjustment $ (36) $ (41) $ 5 12 % $ (108) $ (118) $ 10 8 %

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.

The Operating FAS/CAS Adjustment was a net expense of $36 million and $41 million for the three months ended September 30, 2022 and 2021, respectively.

The Operating FAS/CAS Adjustment was a net expense of $108 million

and $118 million for the nine months ended September 30, 2022 and 2021, respectively.

The favorable changes in the Operating FAS/CAS Adjustment of $5 million and $10 million for the three and nine months ended September 30, 2022, respectively, were primarily driven by the more immediate recognition of higher interest rates under FAS.

Non-current State Income Taxes

2 unchanged sentences

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 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.

Non-current state income tax benefit for the three months ended September 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.

Non-current state income tax benefit for the nine months ended September 30, 2022, was $1 million, compared to non-current state income tax expense of $12 million for the same period in 2021.

Interest Expense

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.

Interest expense for the three and nine months ended September 30, 2022, increased $3 million and $16 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 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.

For the three and nine months ended September 30, 2022, the favorable change in the non-operating retirement benefit of $26 million and $74 million was primarily driven by higher 2021 returns on plan assets.

Other, net expense increased $15 million and $40 million for the three and nine months ended September 30, 2022, respectively, compared with the same periods in 2021, primarily driven by realized and unrealized net losses in investments.

Federal and Foreign Income Taxes

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.

Our effective income tax rates on earnings from operations for the three months ended September 30, 2022 and 2021, were 14.8% and (4.3)%, respectively.

Our effective income tax rates on earnings from operations for the nine months ended September 30, 2022 and 2021, were 18.6% and 10.7%, respectively.

The higher effective tax rates for the three and nine months ended September 30, 2022, were primarily attributable to research and development tax credits for prior periods recorded in 2021.

For each of the three and nine months ended September 30, 2022 and 2021, our effective tax rates differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits for prior periods.

Income Taxes.

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Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

22 unchanged sentences

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 margin rate for a particular contract.

Volume changes will typically carry a corresponding income change based on the profit margin rate for a particular contract.

Segment Operating Income

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Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance.

Performance refers to changes in contract margin rates.

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") that reflect improved or deteriorated operating performance on that contract.

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Cumulative Adjustments

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

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

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

($ in millions) 2022 2021 2022 2021

2 unchanged sentences

Net adjustments $ 27 $ 21 $ 140 $ 106

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 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.

For the three months ended September 30, 2022, favorable cumulative catch-up margin adjustments were related to contract incentives on the Columbia class (SSBN 826) submarine program.

During the same period, the unfavorable cumulative catch-up margin adjustments were related to lower risk retirement on the Virginia class (SSN 774) submarine program.

For the nine months ended September 30, 2022, favorable cumulative catch-up margin adjustments were related to contract incentives on the C olumbia class (SSBN 826) submarine program and higher risk retirement on USS Fort Lauderdale (LPD 28), Bougainville (LHA 8), and Harrisburg (LPD 30).

During the same period, the unfavorable cumulative catch-up margin adjustments were related to lower risk retirement on the RCOH of USS George Washington (CVN 73) .

For the three months ended September 30, 2021, no favorable or unfavorable cumulative catch-up margin adjustments were individually significant.

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

Lucas (DDG 125), and risk retirement on USS Fort Lauderdale (LPD 28).

During the same period, no unfavorable cumulative catch-up margin adjustments were individually significant.

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

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Sales and Service Revenues

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).

Ingalls revenues for the three months ended September 30, 2022, decreased $5 million, or 1%, from the same period in 2021, primarily driven by lower revenues in the Legend class NSC program and amphibious assault ships, partially offset by higher revenues in surface combatants.

Revenues on the Legend class NSC program decreased due to lower volumes on Friedman (NSC 11) and Calhoun ( NSC 10).

Revenues on amphibious assault ships decreased due to lower volumes on USS Fort Lauderdale (LPD 28), partially offset by higher volumes on LHA 9 (unnamed).

Revenues on surface combatants increased due to higher volumes on Thad Cochran (DDG 135) and Telesforo Trinidad (DDG 139), partially offset by lower volumes on Frank E.

(DDG 121), Jeremiah Denton (DDG 129), and Ted Stevens (DDG 128).

Ingalls revenues for the nine months ended September 30, 2022, decreased $35 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants and the Legend class NSC program, partially offset by higher revenues in amphibious assault ships.

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

(DDG 121), and USS Jack H.

Lucas (DDG 125), partially offset by higher volume on Thad Cochran (DDG 135).

Revenues on the Legend class NSC program decreased due to lower volumes on Friedman (NSC 11) and Calhoun ( NSC 10).

Revenues on amphibious assault

ships increased due to higher volumes on LHA 9 (unnamed), partially offset by lower volumes on USS Fort Lauderdale (LPD 28) and Bougainville (LHA 8).

Segment Operating Income

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.

Ingalls segment operating income for the three months ended September 30, 2022, was $50 million, compared with segment operating income of $62 million for the same period in 2021.

The decrease was primarily driven by lower risk retirement on Ted Stevens (DDG 128) and Delbert D.

Black (DDG 119), partially offset by higher risk retirement on USS Portland (LPD 27).

Ingalls segment operating income for the nine months ended September 30, 2022, was $242 million, compared with segment operating income of $233 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) and USS Fort Lauderdale (LPD 28), 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

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

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Sales and Service Revenues

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.

Newport News revenues for the three months ended September 30, 2022, increased $91 million, or 7%, from the same period in 2021, primarily driven by higher revenues in naval nuclear support services, submarines, and aircraft carriers.

Naval nuclear support services revenues increased primarily as a result of higher volumes in submarine and carrier fleet support services.

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

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.

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.

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

Newport News revenues for the nine months ended September 30, 2022, increased $144 million, or 3%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers, submarines, and 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.

Submarine revenues increased due to higher volumes on the Columbia class (SSBN 826) submarine 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.

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

Segment Operating Income

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.

Newport News segment operating income for the three months ended September 30, 2022, was $102 million, compared with segment operating income of $88 million for the same period in 2021.

The increase was primarily due to contract incentives on the Columbia class (SSBN 826) submarine program, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program.

Newport News segment operating income for the nine months ended September 30, 2022, was $277 million, compared with segment operating income of $257 million for the same period in 2021.

The increase was primarily due to contract incentives on the Columbia class (SSBN 826) submarine program and 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.

Mission Technologies

Three Months Ended

June 30 Six Months Ended

September 30 Nine Months Ended

2021 2022 vs.

4 unchanged sentences

Sales and Service Revenues

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.

Mission Technologies revenues for the three months ended September 30, 2022, increased $201 million, or 51%, 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 nine months ended September 30, 2022, increased $895 million, or 101%, 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 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.

Mission Technologies segment operating income for the three months ended September 30, 2022, was $14 million, compared with segment operating income of $13 million for the same period in 2021.

The increase was primarily driven by improved performance in DFS due to the acquisition of Alion in the third quarter of 2021, as well as higher equity income, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition.

Mission Technologies segment operating income for the nine months ended September 30, 2022, was $48 million, compared with segment operating income of $33 million for the same period in 2021.

Total backlog as of September 30, 2022, and December 31, 2021, was approximately $46.7 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 June 30, 2022, and December 31, 2021:

June 30, 2022 December 31, 2021

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

September 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 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).

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

The value of new contract awards during the nine months ended September 30, 2022, was approximately $6.1 billion, including an award for the construction of Telesforo Trinidad (DDG 139).

LIQUIDITY AND CAPITAL RESOURCES

3 unchanged sentences

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

Six Months Ended

June 30 2022 vs.

Nine Months Ended

September 30 2022 vs.

($ in millions) 2022 2021 Dollars

12 unchanged sentences

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 six months ended June 30, 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 nine months ended September 30, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.

Operating Activities

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 July 1, 2022, and beyond such 12-month period based on our current business plan.

Cash provided by operating activities for the nine months ended September 30, 2022, was $165 million, compared with $489 million provided by operating activities for the same period in 2021.

The unfavorable change in operating cash flow was primarily due to an unfavorable change in trade working capital, as well as higher payments for income taxes and interest, partially offset by lower contributions to retiree benefit plans.

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

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 October 1, 2022, and beyond such 12-month period based on our current business plan.

Investing Activities

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.

Cash used in investing activities for the nine months ended September 30, 2022, was $178 million, compared with $1,842 million used in investing activities for the same period in 2021.The change in investing cash was driven by the acquisition of Alion 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 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.

Cash used in financing activities for the nine months ended September 30, 2022, was $497 million, compared with $1,396 million provided by financing activities for the same period in 2021.

The change in financing cash was primarily due to $1,650 million of proceeds from the incurrence of long term debt in 2021, an increase in the repayment of long-term debt of $300 million, an increase of $7 million in employee taxes on certain share-based payment arrangements, and a $4 million increase in cash dividend payments, partially offset by a decrease of $46 million in common stock repurchases and a decrease of $22 million in debt issuance costs.

Free Cash Flow

6 unchanged sentences

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

Six Months Ended

June 30 2022 vs.

Nine Months Ended

September 30 2022 vs.

($ in millions) 2022 2021 Dollars

4 unchanged sentences

Free cash flow $ (14) $ 284 $ (298)

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.

Free cash flow for the nine months ended September 30, 2022, decreased $298 million from the same period in 2021, primarily due to an unfavorable change in trade working capital, as well as higher payments for income taxes and interest, partially offset by lower contributions to retiree benefit plans and lower capital expenditures.

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

As of September 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.

1 unchanged sentence

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

As of June 30, 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.

As of September 30, 2022, $14 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding.

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

ACCOUNTING STANDARDS UPDATES

14 unchanged sentences

• Health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic, and the impacts of vaccination mandates on our workforce;

• Our ability to effectively integrate the operations of Alion into our business;

• Our ability to attract and retain a qualified workforce;

• Disruptions impacting global supply, including those attributable to the ongoing COVID-19 pandemic and those resulting from the ongoing conflict between Russia and Ukraine;

21 unchanged sentences

We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers:

Sutcliffe Higbee (DDG 123), Jack H.

Sutcliffe Higbee (DDG 123), USS Jack H.

Lucas (DDG 125), Ted Stevens (DDG 128), J eremiah Denton (DDG 129), George M.

Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), John F.

Lehman (DDG 137), and DDG 139 (unnamed).

Lehman (DDG 137), and Telesforo Trinidad ( DDG 139).

Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle.

7 unchanged sentences

We perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience.

We have been awarded contracts from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) program.

Construction of the first Columbia class (SSBN 826) submarine began in 2020.

1 unchanged sentence

Capabilities include:

C5ISR systems and operations;

command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations;

the application of artificial intelligence ("AI") and machine learning to battlefield decisions;

39 unchanged sentences

Navy's seabase transformation.

In 2022, we delivered Fort Lauderdale (LPD 28).

In 2022, we delivered USS Fort Lauderdale (LPD 28).

We are currently constructing Richard M.

(LPD 29) and Harrisburg (LPD 30).

In 2020, we were awarded a contract to construct Pittsburgh (LPD 31).

(LPD 29), Harrisburg (LPD 30), and Pittsburgh (LPD 31).

Unmanned systems Creates advanced unmanned maritime solutions for defense, marine research, and commercial applications.

8 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