What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 159 added, 132 removed, 350 unchanged (45% of the section changed)

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naval shipbuilder, making us America's largest shipbuilder.

Our Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial markets.

Our Mission Technologies segment develops integrated solutions that enable today's connected, all-domain force.

Headquartered in Newport News, Virginia, HII employs approximately 43,000 people domestically and internationally.

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and critical nuclear operations.

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our 2022 Annual Report on Form 10-K.

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report on Form 10-K").

Business Environment

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 inflation, among other impacts.

Government Contracts - The President submitted the fiscal year 2024 budget request on March 9, 2023, and the request is now under consideration by Congress.

The budget request reflects continued investment in shipbuilding, funding the second Columbia class (SSBN 826) submarine, two Virginia class (SSN 774) attack submarines, two Flight III Arleigh Burke class (DDG 51) destroyers, and the final increment of Fallujah (LHA 9).

Additionally, the budget request continues funding for USS Gerald R.

Ford class (CVN 78) nuclear aircraft carriers and aircraft carrier refueling programs, and includes investment in the submarine industrial base.

Marine Corps included a LPD Flight II amphibious ship (LPD 33) in its fiscal year 2024 unfunded priority list, which was submitted to the Congress shortly after the release of the budget request.

Government Contracts - Congressional consideration of the fiscal year 2024 President’s Budget Request began following its release in March 2023 and is ongoing.

The House and Senate have each acted on their respective National Defense Authorization bills for fiscal year 2024, both of which support our shipbuilding programs, including the additional authorization of the LPD 33 Flight II amphibious ship.

Both House and Senate appropriations committees fund the procurement of two Virginia class (SSN 774) submarines, one Columbia class (SSBN 826) ballistic missile submarine, and two Arleigh Burke class (DDG 51) destroyers.

The Senate appropriations bill provides advance procurement funding for LPD 33 (unnamed) in fiscal year 2024 and a third Arleigh Burke class (DDG 51) destroyer in fiscal year 2025, and the House appropriations bill includes language supporting a stable rate of procurement of amphibious warfare ships.

All four committees have authorized the U.S.

Navy to enter into one or more contracts for the multiyear procurement of the next block of Virginia class (SSN 774) submarines.

We cannot predict the outcome of the fiscal year 2024 budget process or whether short-term funding will be required in the event annual appropriations measures are not finalized by the October 1 start of the fiscal year.

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, a challenging labor market, and continued public health issues.

by uncertainty, heightened geopolitical 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 a challenging labor market.

For further information on our business environment, see the discussion under Business Environment under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2022 Annual Report on Form 10-K.

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• Workers' compensation.

As of March 31, 2023, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2022.

As of June 30, 2023, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2022.

Program Descriptions

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The following table presents selected financial highlights:

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Sales and service revenues $ 2,787 $ 2,662 $ 125 5 % $ 5,461 $ 5,238 $ 223 4 %

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Income from operating investments, net 4 27 (23) (85) % 16 34 (18) (53) %

Other income and gains (losses), net (1) (1) — — %

Other income and gains, net 1 1 — — % — — — — %

General and administrative expenses 238 227 11 5 % 458 444 14 3 %

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profit margin rate for a particular contract.

Sales and service revenues for the three months ended March 31, 2023, increased $98 million, or 4%, compared to the same period in 2022, primarily due to higher volumes at Newport News and Mission Technologies, partially offset by lower volumes at Ingalls.

Sales and service revenues for the three months ended June 30, 2023, increased $125 million, or 5%, compared to the same period in 2022, primarily due to higher volumes at Newport News and Mission Technologies.

Sales and service revenues for the six months ended June 30, 2023, increased $223 million, or 4%, compared to the same period in 2022, primarily due to higher volumes at Newport News and Mission Technologies, partially offset by lower volumes at Ingalls.

Cost of Sales and Service Revenues

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Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.

Refer to "Segment Operating Results" and "Product and Service Analysis" in this section for details related to cost of sales for both product sales and service revenues.

Refer to "Segment Operating Results" and "Product and Service Revenues and Cost Analysis" in this section for details related to cost of sales for both product sales and service revenues.

Income from Operating Investments, Net

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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, 2023, increased $3 million from the same period in 2022, primarily due to higher state income taxes and overhead costs.

General and administrative expenses for the three months ended June 30, 2023, increased $11 million from the same period in 2022, primarily due to higher overhead costs.

General and administrative expenses for the six months ended June 30, 2023, increased $14 million from the same period in 2022, primarily due to higher overhead costs and state income taxes.

Operating Income

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The following table reconciles operating income to segment operating income:

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Operating income $ 156 $ 191 $ (35) (18) % $ 297 $ 329 $ (32) (10) %

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Segment operating income $ 169 $ 225 $ (56) (25) % $ 325 $ 401 $ (76) (19) %

Operating income for the three months ended March 31, 2023, increased $3 million compared with the same period in 2022, primarily due to favorable changes in the Operating FAS/CAS Adjustment and non-current state income taxes, partially offset by lower segment operating income.

Operating income for the three months ended June 30, 2023, decreased $35 million compared with the same period in 2022, primarily due to lower segment operating income, partially offset by favorable changes in the Operating FAS/CAS Adjustment and non-current state income taxes.

Operating income for the six months ended June 30, 2023, decreased $32 million compared with the same period in 2022, primarily due to lower segment operating income, partially offset by favorable changes in the Operating FAS/CAS Adjustment and non-current state income taxes.

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

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GAAP Financial Accounting Standards ("FAS") and the expenses for these items included in segment operating income in accordance with U.S.

Government Cost Accounting Standards

Government Cost Accounting Standards ("CAS").

The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs:

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

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

FAS benefit $ 7 $ 19 $ (12) (63) % $ 15 $ 43 $ (28) (65) %

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Operating FAS/CAS Adjustment $ (17) $ (35) $ 18 51 % $ (36) $ (72) $ 36 50 %

The Operating FAS/CAS Adjustment was a net expense of $19 million and $37 million for the three months ended March 31, 2023 and 2022, respectively.

The favorable change was primarily driven by the more immediate recognition of higher interest rates under FAS.

The Operating FAS/CAS Adjustment was a net expense of $17 million and $35 million for the three months ended June 30, 2023 and 2022, respectively.

The Operating FAS/CAS Adjustment was a net expense of $36 million and $72 million for the six months ended June 30, 2023 and 2022, respectively.

The favorable changes in the Operating FAS/CAS Adjustment of $18 million and $36 million for the three and six months ended June 30, 2023, 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 benefit for the three months ended March 31, 2023, was $4 million, compared to non-current state income tax expense of $1 million for the same period in 2022.

The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to the timing of long-term contract income for tax purposes.

Non-current state income tax benefit was $4 million and $1 million for the three months ended June 30, 2023 and 2022, respectively.

Non-current state income tax benefit was $8 million and less than $1 million for the six months ended June 30, 2023 and 2022, respectively.

The favorable change in non-current state income taxes for each period was driven by a decrease in deferred state income tax expense, primarily attributable to the timing of long-term contract income for tax purposes.

SEGMENT OPERATING RESULTS

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The following table presents segment sales and segment operating results:

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Sales and Service Revenues

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Mission Technologies

9 25 (16) (64) % 26 34 (8) (24) %

Segment operating income 169 225 (56) (25) % 325 401 (76) (19) %

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Cumulative Catch-up Revenue Adjustments

For the three months ended March 31, 2023 and 2022, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended

For the three and six months ended June 30, 2023 and 2022, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended June 30 Six Months Ended June 30

($ in millions) 2023 2022 2023 2022

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Net adjustments $ 20 $ 68 $ 29 $ 113

For the three months ended March 31, 2023 and 2022, net cumulative catch-up revenue adjustments by segment were as follows:

Three Months Ended

For the three and six months ended June 30, 2023 and 2022, net cumulative catch-up revenue adjustments by segment were as follows:

Three Months Ended June 30 Six Months Ended June 30

($ in millions) 2023 2022 2023 2022

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Net adjustments $ 20 $ 68 $ 29 $ 113

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Sales and service revenues $ 664 $ 658 $ 6 1 % $ 1,241 $ 1,289 $ (48) (4) %

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Sales and Service Revenues

Ingalls revenues, including intersegment sales, for the three months ended March 31, 2023, decreased $54 million, or 9%, from the same period in 2022, primarily driven by lower revenues in amphibious assault ships and the Legend class National Security Cutter ("NSC") program, partially offset by higher revenues in surface combatants.

Revenues on amphibious assault ships decreased due to lower volumes on USS Fort Lauderdale (LPD 28) following its delivery, Bougainville (LHA 8), L-Class planning yard services contract, and Richard M.

(LPD 29), partially offset by higher volumes on Fallujah (LHA 9) and LPD 32 (unnamed).

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

Revenues on surface combatants increased due to higher volumes on George M.

Neal (DDG 131), Jeremiah Denton (DDG 129), John F.

Lehman (DDG 137), and Ted Stevens (DDG 128), partially offset by lower volumes on Lenah Sutcliffe Higbee (DDG 123) and USS Jack H.

Lucas (DDG 125).

Ingalls revenues, including intersegment sales, for the three months ended June 30, 2023, increased $6 million, or 1%, from the same period in 2022, primarily driven by higher revenues in surface combatants, partially offset by lower revenues in the Legend class National Security Cutter ("NSC") program.

Ingalls revenues, including intersegment sales, for the six months ended June 30, 2023, decreased $48 million, or 4%, from the same period in 2022, primarily driven by lower revenues in the NSC program and amphibious assault ships, partially offset by higher revenues in surface combatants.

Segment Operating Income

Ingalls segment operating income for the three months ended March 31, 2023, was $55 million, compared to segment operating income of $86 million for the same period in 2022.

The decrease was primarily driven by lower risk retirement on USS Fort Lauderdale (LPD 28) and Bougainville (LHA 8).

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Ingalls segment operating income for the three months ended June 30, 2023, was $65 million, compared to segment operating income of $106 million for the same period in 2022.

The decrease was primarily driven by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses and lower risk retirement on Harrisburg (LPD 30).

Ingalls segment operating income for the six months ended June 30, 2023, was $120 million, compared to segment operating income of $192 million for the same period in 2022.

The decrease was primarily driven by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses and lower risk retirement on USS Fort Lauderdale (LPD 28) and Harrisburg (LPD 30).

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Sales and service revenues $ 1,509 $ 1,433 $ 76 5 % $ 3,015 $ 2,823 $ 192 7 %

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Sales and Service Revenues

Newport News revenues, including intersegment sales, for the three months ended March 31, 2023, increased $116 million, or 8%, from the same period in 2022, 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 refueling and complex overhaul ("RCOH") of USS John C.

Stennis (CVN 74) and the construction of Doris Miller (CVN 81), Enterprise (CVN 80), and John F.

Kennedy (CVN 79), 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) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine

Naval nuclear support services revenues decreased primarily as a result of lower volumes in carrier fleet support services.

Newport News revenues, including intersegment sales, for the three months ended June 30, 2023, increased $76 million, or 5%, from the same period in 2022, primarily driven by higher revenues in aircraft carrier construction, the Columbia class (SSBN 826) submarine program, and the Virginia class (SSN 774) submarine program, partially offset by lower revenues in aircraft carrier refueling and complex overhaul ("RCOH").

Newport News revenues, including intersegment sales, for the six months ended June 30, 2023, increased $192 million, or 7%, from the same period in 2022, primarily driven by higher revenues in aircraft carrier construction, the Columbia class (SSBN 826) submarine program, and the Virginia class (SSN 774) submarine program, partially offset by lower revenues in naval nuclear support services.

Segment Operating Income

Newport News segment operating income for the three months ended March 31, 2023, was $84 million, compared to segment operating income of $81 million for the same period in 2022.

The increase was primarily due to higher sales volumes, partially offset by unfavorable risk retirement on the Enterprise (CVN 80).

Newport News segment operating income for the three months ended June 30, 2023, was $95 million, compared to segment operating income of $94 million for the same period in 2022.

Current year results were consistent with the prior year, as favorable Virginia class (SSN 774) submarine program revenue adjustments were offset by lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses.

Newport News segment operating income for the six months ended June 30, 2023, was $179 million, compared to segment operating income of $175 million for the same period in 2022.

The increase was primarily due to favorable Virginia class (SSN 774) submarine program revenue adjustments, partially offset by lower risk retirement on Enterprise (CVN 80) and lower favorable changes in contract estimates from facilities capital and economic price adjustment clauses.

Mission Technologies

Three Months Ended

($ in millions) 2023 2022 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2022 2023 vs.

($ in millions) 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Sales and service revenues $ 645 $ 600 $ 45 8 % $ 1,269 $ 1,190 $ 79 7 %

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Sales and Service Revenues

Mission Technologies revenues, including intersegment sales, for the three months ended March 31, 2023, increased $34 million, or 6%, from the same period in 2022, primarily due to higher volumes in mission based solutions and fleet sustainment.

Mission Technologies revenues, including intersegment sales, for the three months ended June 30, 2023, increased $45 million, or 8%, from the same period in 2022, primarily due to higher volumes in mission based solutions.

Mission Technologies revenues, including intersegment sales, for the six months ended June 30, 2023, increased $79 million, or 7%, from the same period in 2022, primarily due to higher volumes in mission based solutions.

Segment Operating Income

Mission Technologies segment operating income for the three months ended March 31, 2023, was $17 million, compared to segment operating income of $9 million for the same period in 2022.

The increase was primarily driven by improved performance in mission based solutions and unmanned systems, and higher equity income from nuclear and environmental joint ventures, partially offset by lower performance in fleet sustainment.

PRODUCT AND SERVICE ANALYSIS

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

Three Months Ended March 31

($ in millions) 2023 2022

Segment Information Sales and service revenues Segment cost of product sales and service revenues Sales and service revenues Segment cost of product sales and service revenues

Mission Technologies segment operating income for the three months ended June 30, 2023, was $9 million, compared to segment operating income of $25 million for the same period in 2022.

The decrease was primarily driven by lower equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, which was sold in June 2023.

The results for the three and six months ended June 30, 2023, include a $6 million loss on the sale of the unconsolidated ship repair and specialty fabrication joint venture.

Mission Technologies segment operating income for the six months ended June 30, 2023, was $26 million, compared to segment operating income of $34 million for the same period in 2022.

The decrease was primarily driven by lower equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, which was sold in June 2023, and lower performance in fleet sustainment, partially offset by higher equity income from nuclear and environmental joint ventures, higher performance in unmanned systems, and higher volumes in mission based solutions.

PRODUCT AND SERVICE REVENUES AND COST ANALYSIS

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

Sales and Service Revenues Segment Cost of Product Sales and Service Revenues

($ in millions) Three Months Ended June 30 2023 vs.

2022 Three Months Ended June 30 2023 vs.

Segment Information 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Product $ 604 $ 611 $ (7) (1) % $ 496 $ 462 $ 34 7 %

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

Sales and Service Revenues Segment Cost of Product Sales and Service Revenues

($ in millions) Six Months Ended June 30 2023 vs.

2022 Six Months Ended June 30 2023 vs.

Segment Information 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Product $ 1,138 $ 1,189 $ (51) (4) % $ 936 $ 919 $ 17 2 %

Service 98 95 3 3 % 83 84 (1) (1) %

Intersegment 5 5 — — % 5 5 — — %

Total Ingalls 1,241 1,289 (48) (4) % 1,024 1,008 16 2 %

Product 2,518 2,311 207 9 % 2,148 1,967 181 9 %

Service 496 509 (13) (3) % 420 427 (7) (2) %

Intersegment 1 3 (2) (67) % 1 3 (2) (67) %

Total Newport News 3,015 2,823 192 7 % 2,569 2,397 172 7 %

Mission Technologies

Product 52 53 (1) (2) % 55 47 8 17 %

Service 1,159 1,081 78 7 % 1,044 983 61 6 %

Intersegment 58 56 2 4 % 58 56 2 4 %

Total Mission Technologies 1,269 1,190 79 7 % 1,157 1,086 71 7 %

Segment Totals

Product $ 3,708 $ 3,553 $ 155 4 % $ 3,139 $ 2,933 $ 206 7 %

Service 1,753 1,685 68 4 % 1,547 1,494 53 4 %

Total Segment (1)

$ 5,461 $ 5,238 $ 223 4 % $ 4,686 $ 4,427 $ 259 6 %

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

Product Sales and Segment Cost of Product Sales

Product sales for the three months ended March 31, 2023, increased $105 million, or 6%, from the same period in 2022.

Product sales at our Ingalls segment decreased $44 million in 2023, primarily as a result of lower volumes in amphibious assault ships and the Legend class NSC program, partially offset by higher volumes in surface combatants.

Newport News product sales increased $150 million in 2023, primarily as a result of higher volumes in aircraft carriers and submarines.

Mission Technologies product sales decreased $1 million in 2023, primarily as a result of lower volumes in mission based solutions and unmanned systems, partially offset by higher volumes in fleet sustainment.

Segment cost of product sales for the three months ended March 31, 2023, increased $115 million, or 8%, compared with the same period in 2022.

Cost of product sales at our Ingalls segment decreased $17 million in 2023, primarily as a result of lower volumes described above, partially offset by lower risk retirement on USS Fort Lauderdale (LPD 28) following its delivery.

Cost of product sales at our Newport News segment increased $133 million in 2023, primarily as a result of higher volumes described above.

Cost of product sales at our Mission Technologies segment decreased $1 million in 2023, primarily as a result of lower volumes described above.

Product sales for the three months ended June 30, 2023, increased $50 million, or 3%, from the same period in 2022, primarily as a result of higher volumes at Newport News in aircraft carrier construction, the Columbia class (SSBN 826) submarine program, and the Virginia class (SSN 774) submarine program, partially offset by lower volumes in aircraft carrier refueling and complex overhaul ("RCOH").

Segment cost of product sales for the three months ended June 30, 2023, increased $91 million, or 6%, compared with the same period in 2022, consistent with higher product sales described above and higher costs at Ingalls.

Product sales for the six months ended June 30, 2023, increased $155 million, or 4%, from the same period in 2022, primarily as a result of higher volumes at Newport News in aircraft carrier construction, the Columbia class (SSBN 826) submarine program, and the Virginia class (SSN 774) submarine program, partially offset by lower volumes at Ingalls in the NSC program and amphibious assault ships.

Segment cost of product sales for the six months ended June 30, 2023, increased $206 million, or 7%, compared with the same period in 2022, consistent with higher product sales described above.

Service Revenues and Segment Cost of Service Revenues

Service revenues for the three months ended March 31, 2023, decreased $7 million, or 1%, compared with the same period in 2022.

Service revenues at our Ingalls segment decreased $9 million in 2023, primarily as a result of

lower volumes in amphibious assault ship services.

Service revenues at our Newport News segment decreased $33 million in 2023, primarily as a result of lower volumes in naval nuclear support services, partially offset by higher volumes in aircraft carrier and submarine services.

Service revenues at our Mission Technologies segment increased $35 million in 2023, primarily as a result of higher volumes in mission based solutions services and fleet sustainment.

Segment cost of service revenues for the three months ended March 31, 2023, were flat compared with the same period in 2022.

Cost of service revenues at our Ingalls segment decreased $9 million in 2023, primarily as a result of lower volumes described above.

Cost of service revenues at our Newport News segment decreased $27 million in 2023, primarily as a result of lower volumes described above.

Cost of service revenues at our Mission Technologies segment increased $36 million in 2023, primarily as a result of higher volumes described above and year-to-year variances in contract mix.

Service revenues for the three months ended June 30, 2023, increased $75 million, or 9%, compared with the same period in 2022, primarily as a result of higher volumes at Mission Technologies in mission based solutions and higher volumes at Newport News in aircraft carrier services.

Segment cost of service revenues for the three months ended June 30, 2023, increased $53 million, or 7%, compared with the same period in 2022, consistent with higher service revenues described above.

Service revenues for the six months ended June 30, 2023, increased $68 million, or 4%, compared with the same period in 2022, primarily as a result of higher volumes at Mission Technologies in mission based solutions services.

Segment cost of service revenues for the six months ended June 30, 2023, increased $53 million, or 4%, compared with the same period in 2022, consistent with higher service revenues described above.

OTHER FINANCIAL INFORMATION

Interest Expense

Interest expense for the three months ended March 31, 2023, was $24 million, compared with $26 million for the same period in 2022.

The decrease was primarily driven by a decrease in outstanding long-term debt from the prior year period.

Interest expense for the three months ended June 30, 2023, was $24 million, compared with $26 million for the same period in 2022.

Interest expense for the six months ended June 30, 2023, was $48 million, compared with $52 million for the same period in 2022.

The decreases in interest expense of $2 million and $4 million for the three and six months ended June 30, 2023, respectively, were driven by a decrease in outstanding long-term debt from the prior year periods.

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, 2023, the non-operating retirement benefit was $37 million, compared with $71 million for the same period in 2022.

The decrease was primarily driven by lower 2022 returns on plan assets.

Other, net income for the three months ended March 31, 2023 was $9 million, compared with other, net expense of $7 million for the same period in 2022.

The favorable change was primarily driven by realized and unrealized net gains in investments.

For the three months ended June 30, 2023, the non-operating retirement benefit was $37 million, compared with $67 million for the same period in 2022.

For the six months ended June 30, 2023, the non-operating retirement benefit was $74 million, compared with $138 million for the same period in 2022.

The decreases in the non-operating retirement benefit of $30 million and $64 million for the three and six months ended June 30, 2023, respectively, were primarily driven by lower 2022 returns on plan assets.

Other, net for the three months ended June 30, 2023, was zero, compared with other, net expense of $10 million for the same period in 2022.

Other, net income for the six months ended June 30, 2023, was $9 million, compared with other, net expense of $17 million for the same period in 2022.

The increases in other, net of $10 million and $26 million for the three and six months ended June 30, 2023, respectively, were primarily driven by unrealized net gains in investments.

Federal and Foreign Income Taxes

Our effective income tax rates on earnings from operations for the three months ended March 31, 2023 and 2022, were 20.9 % and 20.5 %, respectively, which did not differ materially from the federal statutory corporate income tax rate of 21 %.

Total backlog as of March 31, 2023, and December 31, 2022, was approximately $47.0 billion and $47.1 billion, respectively.

Our effective income tax rates on earnings from operations for the three months ended June 30, 2023 and 2022, were 23.1 % and 19.8 %, respectively.

For the six months ended June 30, 2023 and 2022, our effective income tax rates on earnings from operations were 22.0 % and 20.1 %, respectively.

The higher effective tax rate for each of the three and six months ended June 30, 2023, was primarily attributable to a tax gain associated with the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture.

For each of the three and six months ended June 30, 2023, our effective tax rate differed from the federal statutory rate primarily as a result of the tax gain associated with the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture.

For the three months ended June 30, 2022, our effective tax rate differed from the federal statutory 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 rate.

Total backlog as of June 30, 2023, and December 31, 2022, was approximately $46.9 billion and $47.1 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, 2023, and December 31, 2022:

March 31, 2023 December 31, 2022

The following table presents funded and unfunded backlog by segment as of June 30, 2023, and December 31, 2022:

June 30, 2023 December 31, 2022

($ in millions) Funded Unfunded Backlog Funded Unfunded Backlog

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We expect approximately 21% of the $47.1 billion total backlog as of December 31, 2022, to be converted into sales in 2023.

Government orders comprised substantially all of the backlog as of March 31, 2023, and December 31, 2022.

Government orders comprised substantially all of the backlog as of June 30, 2023, and December 31, 2022.

Contract Awards

The value of new contract awards during the three months ended March 31, 2023, was approximately $2.6 billion, including an award modification for the detail design and construction of LPD 32 (unnamed).

The value of new contract awards during the six months ended June 30, 2023, was approximately $5.2 billion, including an award modification for the detail design and construction of LPD 32 (unnamed), an award modification for long-lead-time material and advance construction activities on the Columbia class (SSBN 826) submarine program, an award modification to the construction contract for John F.

Kennedy (CVN 79), and an award modification for long-lead-time material for additional Block V boats of the Virginia class (SSN 774) submarine program.

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 2023 vs.

Six Months Ended June 30 2023 vs.

($ in millions) 2023 2022 Dollars

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Trade working capital increase (272) (281) 9

Net cash used in operating activities $ (9) $ (83) $ 74

Net cash provided by operating activities $ 73 $ 184 $ (111)

We have historically maintained a capital structure comprised of 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, 2023 and 2022, 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, 2023 and 2022, 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, 2023, was $9 million, compared with $83 million used in operating activities for the same period in 2022.

The favorable change in operating cash flow was primarily due to a favorable change in trade working capital.

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 borrowing facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and fund capital expenditures for at least the next 12 calendar months beginning April 1, 2023, and beyond such 12-month period based on our current business plans.

Cash provided by operating activities for the six months ended June 30, 2023, was $73 million, compared with $184 million provided by operating activities for the same period in 2022.

The unfavorable change in operating cash flow was primarily due to higher income tax payments.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing borrowing facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and fund capital expenditures for at least the next 12 calendar months beginning July 1, 2023, and beyond such 12-month period based on our current business plans.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2023, was $60 million, compared with $43 million used in investing activities for the same period in 2022.

The change in investing cash was primarily driven by increased investment in one of our unconsolidated nuclear and environmental joint ventures.

Cash used in investing activities for the six months ended June 30, 2023, was $70 million, compared with $101 million used in investing activities for the same period in 2022.

The change in investing cash was primarily driven by the sale of an unconsolidated ship repair and specialty fabrication joint venture, partially offset by increased investment in one of our unconsolidated nuclear and environmental joint ventures.

For 2023, 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 2.0% of annual revenues.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2023, was $80 million, compared with $171 million used in financing activities for the same period in 2022.

The change in financing cash was primarily due to a $90 million decrease in the prepayments of our Term Loan.

Cash used in financing activities for the six months ended June 30, 2023, was $157 million, compared with $335 million used in financing activities for the same period in 2022.

The change in cash used in financing activities was primarily due to a $170 million decrease in prepayments of our Term Loan.

Free Cash Flow

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Free cash flow may not be comparable to similarly titled measures of other companies.

The following table reconciles net cash used in operating activities to free cash flow:

Three Months Ended

March 31 2023 vs.

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

Six Months Ended June 30 2023 vs.

($ in millions) 2023 2022 Dollars

Net cash used in operating activities $ (9) $ (83) $ 74

Net cash provided by operating activities $ 73 $ 184 $ (111)

Less capital expenditures:

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Free cash flow $ (35) $ 82 $ (117)

Free cash flow for the three months ended March 31, 2023, increased $77 million from the same period in 2022, primarily due to a favorable change in trade working capital.

Free cash flow for the six months ended June 30, 2023, decreased $117 million from the same period in 2022, primarily due to higher income tax payments and increased 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 March 31, 2023 and 2022, the cumulative amounts of payments withheld by the U.S.

As of June 30, 2023 and 2022, 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, 2023, $14 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding.

As of March 31, 2023, we had no other significant off-balance sheet arrangements.

As of June 30, 2023, $14 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding.

As of June 30, 2023, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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

• Disruptions impacting global supply, including those attributable to ongoing public health issues and those resulting from the ongoing conflict between Russia and Ukraine;

• Disruptions impacting global supply, including those resulting from the ongoing conflict between Russia and Ukraine;

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

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The America class (LHA 6) ships optimize aviation operations and support capabilities.

In 2020, we delivered USS Tripoli (LHA 7), and, in 2022, we were awarded a long-lead-time material and construction contract for Fallujah (LHA 9).

We are currently constructing Bougainville (LHA 8) and Fallujah (LHA 9).

In 2020, we delivered USS Tripoli (LHA 7), and we are currently constructing Bougainville (LHA 8) and Fallujah (LHA 9).

Arleigh Burke class (DDG 51) destroyers

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Black (DDG 119), USS Frank E.

(DDG 121), and Lenah H.

Sutcliffe Higbee (DDG 123) in 2019, 2020, 2021, and 2022, respectively.

(DDG 121), USS Lenah H.

Sutcliffe Higbee (DDG 123), and Jack H.

Lucas (DDG 125) in 2019, 2020, 2021, 2022, and 2023, respectively.

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

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

Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M.

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

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

USS George Washington (CVN 73) arrived at Newport News for the start of its RCOH in August 2017, and USS John C.

Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021.

Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021, and USS George Washington (CVN 73) was redelivered to the U.S.

Navy in May 2023.

Columbia class (SSBN 826) submarines

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

In 2023, we received initial authorization to begin advance procurement and advance construction for the third and fourth boats.

In 2023, we received an award modification for long-lead-time material and advance construction for the next five boats.

Fleet sustainment Maintains and modernizes a significant majority of the U.S.

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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