What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 120 added, 116 removed, 393 unchanged (38% of the section changed)

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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 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 - 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 geopolitical tensions, and instability.

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

All four defense oversight committees have acted on their respective bills.

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

Both bills also authorize funding for two Virginia class (SSN 774) submarines, one Columbia class (SSBN 826) ballistic missile submarine and two Arleigh Burke class (DDG 51) destroyers.

Additionally, both bills authorize multiyear procurement authority for the Block VI Virginia class (SSN 774) submarine contract.

The Armed Services Committees will now work to adjudicate differences between the House and Senate authorization bills.

Both House and Senate appropriations bills have been passed out of committee, and the House defense appropriations bill has been approved by the full House.

The House voted out a defense appropriations measure that broadly supports the President’s budget request, including funding for 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 Committee included $500 million in advance procurement for LPD 33 (unnamed) and advance procurement for a third Arleigh Burke class (DDG 51) destroyer in fiscal year 2025, as well as full funding for two Arleigh Burke class (DDG 51) destroyers, two Virginia class (SSN 774) submarines, and one Columbia class (SSBN 826) submarine in fiscal year 2024.

Appropriations to fund the federal government for fiscal year 2024 have not been enacted.

To provide Congress additional time to reach agreements on funding levels for federal agencies, a Continuing Resolution extending funding through November 17, 2023, at fiscal year 2023 levels was enacted on September 30, 2023.

We cannot predict the outcome of the fiscal year 2024 budget process or whether additional short-term funding will be required in the event annual appropriations measures are not finalized by the November 17, 2023, the expiration date of the current Continuing Resolution.

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

Geopolitical relationships have changed, and are continuing to change, and the U.S.

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• Workers' compensation.

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

As of September 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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Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income.

As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract financial estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP.

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 resulting from 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.

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The following table presents selected financial highlights:

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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Income from operating investments, net 9 13 (4) (31) % 25 47 (22) (47) %

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

General and administrative expenses 253 244 9 4 % 711 688 23 3 %

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profit margin rate for a particular contract.

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.

Sales and service revenues for the three months ended September 30, 2023, increased $190 million, or 7%, compared to the same period in 2022, primarily due to higher volumes at Mission Technologies and Ingalls.

Sales and service revenues for the nine months ended September 30, 2023, increased $413 million, or 5%, compared to the same period in 2022, primarily due to higher volumes at Newport News and Mission Technologies.

Cost of Sales and Service Revenues

Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead.

We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts.

We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of each contract.

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

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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 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.

General and administrative expenses for the three and nine months ended September 30, 2023, increased $9 million and $23 million, respectively, from the same periods in 2022, primarily due to higher overhead costs and state income taxes.

Operating Income

We consider operating income an important measure for evaluating our operating performance, and, consistent with industry practice, we define operating income as revenues less the related costs of producing the revenues and general and administrative expenses.

We internally manage our operations by reference to "segment operating income," which is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects segment performance.

Segment operating income is not a recognized measure under GAAP.

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The following table reconciles operating income to segment operating income:

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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Segment operating income $ 187 $ 166 $ 21 13 % $ 512 $ 567 $ (55) (10) %

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.

Operating income for the three months ended September 30, 2023, increased $41 million compared with the same period in 2022, primarily due to higher segment operating income, favorable changes in the Operating FAS/CAS Adjustment, and non-current state income taxes.

Operating income for the nine months ended September 30, 2023, increased $9 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.

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

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

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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Operating FAS/CAS Adjustment $ (19) $ (36) $ 17 47 % $ (55) $ (108) $ 53 49 %

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.

The Operating FAS/CAS Adjustment was a net expense of $19 million and $36 million for the three months ended September 30, 2023 and 2022, respectively.

The Operating FAS/CAS Adjustment was a net expense of $55 million and $108 million for the nine months ended September 30, 2023 and 2022, respectively.

The favorable changes in the Operating FAS/CAS Adjustment of $17 million and $53 million for the three and nine months ended September 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 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.

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

Non-current state income tax benefit was $12 million and $1 million for the nine months ended September 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.

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The following table presents segment sales and segment operating results:

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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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.

These changes typically relate to profit recognition associated with revisions to estimated costs at completion ("EAC") on a contract, which reflect improved or deteriorated operating performance on that contract.

Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded.

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Cumulative Catch-up Revenue Adjustments

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

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

Three Months Ended September 30 Nine Months Ended September 30

($ in millions) 2023 2022 2023 2022

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Net adjustments $ 21 $ 27 $ 50 $ 140

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

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

Three Months Ended September 30 Nine Months Ended September 30

($ in millions) 2023 2022 2023 2022

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Net adjustments $ 21 $ 27 $ 50 $ 140

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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Sales and Service Revenues

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.

Ingalls revenues, including intersegment sales, for the three months ended September 30, 2023, increased $88 million, or 14%, from the same period in 2022, primarily driven by higher volumes in amphibious assault ships and surface combatants.

Ingalls revenues, including intersegment sales, for the nine months ended September 30, 2023, increased $40 million, or 2%, from the same period in 2022, primarily driven by higher volumes in surface combatants and amphibious assault ships, partially offset by lower volumes in the Legend class National Security Cutter (“NSC”) program.

Segment Operating Income

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

Ingalls segment operating income for the three months ended September 30, 2023, was $73 million, compared to segment operating income of $50 million for the same period in 2022.

The increase was primarily driven by higher volumes described above and favorable changes in contract estimates from facilities capital and economic price adjustment clauses.

Ingalls segment operating income for the nine months ended September 30, 2023, was $193 million, compared to segment operating income of $242 million for the same period in 2022.

The decrease was primarily driven by lower risk retirement on USS Fort Lauderdale (LPD 28), delivered in 2022, and Harrisburg (LPD 30).

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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Sales and Service Revenues

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.

Newport News revenues, including intersegment sales, for the three months ended September 30, 2023, increased $8 million, or 1%, from the same period in 2022, primarily driven by higher volumes in aircraft carrier construction, partially offset by lower volumes in aircraft carrier refueling and complex overhaul ("RCOH").

Newport News revenues, including intersegment sales, for the nine months ended September 30, 2023, increased $200 million, or 5%, from the same period in 2022, primarily driven by higher volumes 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 RCOH and naval nuclear support services.

Segment Operating Income

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.

Newport News segment operating income for the three months ended September 30, 2023, was $90 million, compared to segment operating income of $102 million for the same period in 2022.

The decrease was primarily due to contract incentives on the Columbia class (SSBN 826) submarine program in 2022, partially offset by improved performance on the Virginia class (SSN 774) submarine program.

Newport News segment operating income for the nine months ended September 30, 2023, was $269 million, compared to segment operating income of $277 million for the same period in 2022.

The decrease was primarily due to contract incentives on the Columbia class (SSBN 826) submarine program in 2022, partially offset by higher volumes described above.

Mission Technologies

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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Sales and Service Revenues

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.

Mission Technologies revenues, including intersegment sales, for the three months ended September 30, 2023, increased $90 million, or 15%, from the same period in 2022, primarily due to higher volumes in mission based solutions.

Mission Technologies revenues, including intersegment sales, for the nine months ended September 30, 2023, increased $169 million, or 9%, 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 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.

Mission Technologies segment operating income for the three months ended September 30, 2023, was $24 million, compared to segment operating income of $14 million for the same period in 2022.

The increase was primarily driven by higher volumes in mission based solutions and improved performance in unmanned systems.

Mission Technologies segment operating income for the nine months ended September 30, 2023, was $50 million, compared to segment operating income of $48 million for the same period in 2022.

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

PRODUCT AND SERVICE REVENUES AND COST ANALYSIS

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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.

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

2022 Three Months Ended September 30 2023 vs.

Segment Information 2023 2022 Dollars Percent 2023 2022 Dollars Percent

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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.

($ in millions) Nine Months Ended September 30 2023 vs.

2022 Nine Months Ended September 30 2023 vs.

Segment Information 2023 2022 Dollars Percent 2023 2022 Dollars Percent

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Product Sales and Segment Cost of Product Sales

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.

Product sales for the three months ended September 30, 2023, increased $61 million, or 3%, from the same period in 2022, primarily as a result of higher volumes at Ingalls in amphibious assault ships and at Newport News in aircraft carrier construction, partially offset by lower volumes at Newport News in aircraft carrier RCOH.

Segment cost of product sales for the three months ended September 30, 2023, increased $39 million, or 3%, compared with the same period in 2022, consistent with higher product sales described above.

Product sales for the nine months ended September 30, 2023, increased $216 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, and at Ingalls in amphibious assault ships and surface combatants, partially offset by lower volumes at Newport News in aircraft carrier RCOH, and at Ingalls in the NSC program.

Segment cost of product sales for the nine months ended September 30, 2023, increased $245 million, or 6%, 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 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.

Service revenues for the three months ended September 30, 2023, increased $129 million, or 15%, from the same period in 2022, primarily as a result of higher volumes at Mission Technologies in mission based solutions services, at Ingalls in surface combatant services, and at Newport News in aircraft carrier services.

Segment cost of service revenues for the three months ended September 30, 2023, increased $114 million, or 15%, compared with the same period in 2022, consistent with higher service volumes described above.

Service revenues for the nine months ended September 30, 2023, increased $197 million, or 8%, from the same period in 2022, primarily as a result of higher volumes at Mission Technologies in mission based solutions services,

at Newport News in aircraft carrier services, and at Ingalls in surface combatant services, partially offset by lower volumes at Newport News in naval nuclear support services.

Segment cost of service revenues for the nine months ended September 30, 2023, increased $167 million, or 7%, compared with the same period in 2022, consistent with higher service volumes described above.

OTHER FINANCIAL INFORMATION

Interest Expense

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.

Interest expense for the three months ended September 30, 2023, was $22 million, compared with $27 million for the same period in 2022.

Interest expense for the nine months ended September 30, 2023, was $70 million, compared with $79 million for the same period in 2022.

The decreases in interest expense of $5 million and $9 million for the three and nine months ended September 30, 2023, respectively, were driven by a decrease in outstanding long-term debt from 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 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.

For the three months ended September 30, 2023, the non-operating retirement benefit was $37 million, compared with $71 million for the same period in 2022.

For the nine months ended September 30, 2023, the non-operating retirement benefit was $111 million, compared with $209 million for the same period in 2022.

The unfavorable changes in the non-operating retirement benefit of $34 million and $98 million for the three and nine months ended September 30, 2023, respectively, were primarily driven by lower 2022 returns on plan assets.

Other, net income for the three months ended September 30, 2023, was $2 million, compared with other, net expense of $13 million for the same period in 2022.

Other, net income for the nine months ended September 30, 2023, was $11 million, compared with other, net expense of $30 million for the same period in 2022.

The increases in other, net of $15 million and $41 million for the three and nine months ended September 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 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.

Our effective income tax rates on earnings from operations for the three months ended September 30, 2023 and 2022, were 21.7 % and 14.8 %, respectively.

For the nine months ended September 30, 2023 and 2022, our effective income tax rates on earnings from operations were 21.9 % and 18.6 %, respectively.

The higher effective tax rate for the three months ended September 30, 2023, was primarily attributable to prior period research and development tax credits recorded in 2022.

The higher effective tax rate for the nine months ended September 30, 2023, was primarily attributable to prior period research and development tax credits recorded in 2022 and to a tax gain associated with the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture.

For the three months ended September 30, 2023, our effective income tax rate differed from the federal statutory corporate income tax rate primarily as a result of expenses that are not deductible for income tax purposes.

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

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

Total backlog as of September 30, 2023, and December 31, 2022, was $49.4 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 June 30, 2023, and December 31, 2022:

June 30, 2023 December 31, 2022

($ in millions) Funded Unfunded Backlog Funded Unfunded Backlog

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

September 30, 2023 December 31, 2022

($ in millions) Funded Unfunded Total Backlog Funded Unfunded Total Backlog

Ingalls $ 13,100 $ 2,968 $ 16,068 $ 9,231 $ 3,546 $ 12,777

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We expect approximately 20% 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 June 30, 2023, and December 31, 2022.

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

Contract Awards

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.

The value of new contract awards during the nine months ended September 30, 2023, was $10.6 billion, including a funded award for the construction of two Arleigh Burke class (DDG 51) destroyers, an award for the Joint Network Engineering and Emerging Operations task order, an award modification for the detail design and construction of Philadelphia (LPD 32), 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

We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value.

We use various financial measures to assist in capital deployment decision making, including net cash provided by operating activities and free cash flow.

We seek to efficiently convert operating results into cash for deployment in operating our businesses, executing our business strategy, and maximizing stockholder value.

We use various financial measures to inform our capital deployment strategy, including net cash provided by operating activities and free cash flow.

We believe these measures are useful to investors in assessing our financial performance.

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

Six Months Ended June 30 2023 vs.

Nine Months Ended September 30 2023 vs.

($ in millions) 2023 2022 Dollars

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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 six months ended June 30, 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 nine months ended September 30, 2023 and 2022, 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, 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.

Cash provided by operating activities for the nine months ended September 30, 2023, was $408 million, compared with $165 million provided by 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, partially offset by higher payments for income taxes.

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 October 1, 2023, and beyond such 12-month period based on our current business plans.

Investing Activities

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.

Cash used in investing activities for the nine months ended September 30, 2023, was $111 million, compared with $178 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.

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Financing Activities

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.

Cash used in financing activities for the nine months ended September 30, 2023, was $655 million, compared with $497 million used in financing activities for the same period in 2022.

The change in cash used in financing activities was primarily due to the repayment of $400 million of senior notes, offset by a $245 million decrease in prepayments of our Term Loan.

Free Cash Flow

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

Six Months Ended June 30 2023 vs.

Nine Months Ended September 30 2023 vs.

($ in millions) 2023 2022 Dollars

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Free cash flow $ 258 $ (14) $ 272

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.

Free cash flow for the nine months ended September 30, 2023, increased $272 million from the same period in 2022, primarily due to a favorable change in trade working capital and lower capital expenditures, partially offset by higher payments for income taxes.

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, 2023 and 2022, the cumulative amounts of payments withheld by the U.S.

As of September 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 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.

As of September 30, 2023, $12 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding.

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

ACCOUNTING STANDARDS UPDATES

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Program Name Program Description

Aircraft carrier RCOH

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

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.

America class (LHA 6) amphibious assault ships

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

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

Arleigh Burke class (DDG 51) destroyers

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Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction.

We delivered USS Paul Ignatius (DDG 117), USS Delbert D.

Black (DDG 119), USS Frank E.

We delivered USS Frank E.

(DDG 121), USS Lenah H.

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

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.

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.

Lehman (DDG 137), Telesforo Trinidad (DDG 139), DDG 141 (unnamed), and DDG 142 (unnamed).

Columbia class (SSBN 826) submarines

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The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions.

The plan is for a total of 11 ships, of which the first nine ships have been delivered.

Calhoun (NSC 10) and Friedman (NSC 11) are currently under construction.

The plan is for a total of 11 ships, of which the first ten ships have been delivered.

Friedman (NSC 11) is currently under construction.

Mission based solutions Develops integrated solutions that enable today's connected, all–

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Navy's seabase transformation.

In 2022, we delivered USS Fort Lauderdale (LPD 28), and we were awarded a long-lead-time material contract for LPD 32 (unnamed).

In 2023, we received an award modification for the detail design and construction of LPD 32 (unnamed).

In 2022, we delivered USS Fort Lauderdale (LPD 28), and we were awarded a long-lead-time material contract for Philadelphia (LPD 32).

In 2023, we received an award modification for the detail design and construction of Philadelphia (LPD 32).

We are currently constructing Richard M.

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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