What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-02 compared with 2023-11-02 · 120 added, 191 removed, 322 unchanged (49% of the section changed)

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naval shipbuilder, making us America's largest shipbuilder.

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

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

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

Headquartered in Newport News, Virginia, we employ over 44,000 people domestically and internationally.

We conduct most of our business with the U.S.

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

defense and offensive cyberspace strategies and electronic warfare;

defensive and offensive cyberspace strategies and electronic warfare;

unmanned autonomous systems;

live, virtual, and constructive training solutions;

platform modernization;

live, virtual, and constructive training solutions ("LVC");

fleet sustainment;

and critical nuclear operations.

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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.

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.

Defense Spending Environment - The National Defense Authorization Act ("NDAA") for fiscal year 2024 was finalized in December 2023, and the fiscal year 2024 budget cycle concluded with the enactment of the Further Consolidated Appropriations Act, 2024 (the "Act") on March 23, 2024.

Final defense appropriations broadly supported shipbuilding programs, including funding for two Arleigh Burke class (DDG 51) destroyers, two Virginia class (SSN 774) attack submarines, and one Columbia class (SSBN 826) ballistic submarine.

Additionally, the appropriations measure provided $500 million for advance procurement ("AP") funding for LPD-33, additional AP funding for a third DDG-51 in fiscal year 2025, and funding for Ford class (CVN 78) nuclear aircraft carrier programs.

The Act also provides funding for the submarine industrial base and large surface combatant shipyard infrastructure and authorizes the Navy to enter into a multi-year procurement contract for Virginia class (SSN 774) submarines.

The President submitted the fiscal year 2025 budget request on March 11, 2024, which is now under consideration by Congress.

The budget request reflects continued investment in shipbuilding, funding two Arleigh Burke class (DDG 51) surface combatants, one San Antonio class (LPD 17) amphibious warship, and the lead Block VI Virginia class (SSN 774) submarine, which is proposed to be executed as a multiyear procurement.

Additionally, the budget request continues funding for Ford class (CVN 78) nuclear aircraft carriers and the first of three years of full funding for the refueling and complex overhaul of USS Harry S.

Truman (CVN 75).

The budget request continues investment in the submarine industrial base and research and development on next generation large surface combatants (DDG(X)) and nuclear submarines (SSN(X)).

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

Geopolitical relationships continue 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.

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• Revenue recognition;

• Purchase accounting, goodwill, and intangible assets;

• Litigation, commitments, and contingencies;

• Retirement related benefit plans;

• Workers' compensation.

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

As of March 31, 2024, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2023.

Program Descriptions

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CONSOLIDATED OPERATING RESULTS

We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section.

Our portfolio of long-term contracts is largely flexibly-priced.

Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance.

Under FAR rules that govern our business with the U.S.

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 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.

Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.

Key Financial Measures

The following table presents selected financial highlights:

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Sales and service revenues $ 2,805 $ 2,674 $ 131 5 %

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Income from operating investments, net 12 12 — — %

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

General and administrative expenses 232 220 12 5 %

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Net earnings $ 153 $ 129 $ 24 19 %

Operating Performance Assessment and Reporting

Our portfolio of long-term contracts is largely flexibly-priced.

Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance.

Under FAR rules that govern our business with the U.S.

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.

Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.

Sales and Service Revenues

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profit margin rate for a particular contract.

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.

Sales and service revenues for the three months ended March 31, 2024, increased $131 million, or 5%, compared to the same period in 2023, primarily due to higher volumes at 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 each contract.

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.

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 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.

General and administrative expenses for the three months ended March 31, 2024, increased $12 million from the same period in 2023, primarily due to higher overhead costs.

Operating Income

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The following table reconciles operating income to segment operating income:

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Operating income $ 154 $ 141 $ 13 9 %

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Segment operating income $ 170 $ 156 $ 14 9 %

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 September 30 Nine Months Ended September 30

2022 2023 vs.

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

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

FAS benefit $ 16 $ 8 $ 8 100 %

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Non-operating retirement benefit (44) (37) (7) (19) %

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

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.

Operating FAS/CAS Adjustment expense $ (17) $ (19) $ 2 11 %

The Operating FAS/CAS Adjustment was a net expense of $17 million and $19 million for the three months ended March 31, 2024 and 2023, respectively.

The favorable change was primarily driven by demographic assumptions, offset by lower 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 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.

Non-current state income tax benefit was $1 million and $4 million for the three months ended March 31, 2024 and 2023, respectively.

The unfavorable change was driven by an increase in deferred state income tax expense, primarily attributable to a change in net capitalized research and development expenditures and the timing of long-term contract income for tax purposes.

SEGMENT OPERATING RESULTS

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Ingalls, Newport News, and Mission Technologies.

The following table presents segment sales and segment operating results:

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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

The following table presents segment operating results:

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Sales and Service Revenues

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Where such items have occurred and the effects are material, a separate description is provided.

Cumulative Catch-up Revenue Adjustments

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

Net Cumulative Catch-up Revenue Adjustments

For the three months ended March 31, 2024 and 2023, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended

($ in millions) 2024 2023

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Net adjustments $ 2 $ 9

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

For the three months ended March 31, 2024 and 2023, net cumulative catch-up revenue adjustments by segment were as follows:

Three Months Ended

($ in millions) 2024 2023

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Net adjustments $ 2 $ 9

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Sales and service revenues $ 655 $ 577 $ 78 14 %

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Sales and Service Revenues

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.

Ingalls revenues, including intersegment sales, for the three months ended March 31, 2024, increased $78 million, or 14%, from the same period in 2023, 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 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.

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

Ingalls segment operating income for the three months ended March 31, 2024, was $60 million, compared to segment operating income of $55 million for the same period in 2023.

The increase was primarily driven by the changes in volume described above.

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Sales and service revenues $ 1,434 $ 1,506 $ (72) (5) %

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Sales and Service Revenues

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.

Newport News revenues, including intersegment sales, for the three months ended March 31, 2024, decreased $72 million, or 5%, from the same period in 2023, primarily driven by lower volumes in aircraft carriers and the Virginia class (SSN 774) submarine program.

Segment Operating Income

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.

Newport News segment operating income for the three months ended March 31, 2024, was $82 million, compared to segment operating income of $84 million for the same period in 2023.

The decrease was primarily driven by the changes in volume described above.

Mission Technologies

Three Months Ended September 30 Nine Months Ended September 30

2022 2023 vs.

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

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Sales and service revenues $ 750 $ 624 $ 126 20 %

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Sales and Service Revenues

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.

Mission Technologies revenues, including intersegment sales, for the three months ended March 31, 2024, increased $126 million, or 20%, from the same period in 2023, primarily due to higher volumes in C5ISR and cyber, electronic warfare & space ("CEW&S").

Segment Operating Income

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.

Mission Technologies segment operating income for the three months ended March 31, 2024, was $28 million, compared to segment operating income of $17 million for the same period in 2023.

The increase was primarily driven by the higher volumes described above.

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 September 30 2023 vs.

2022 Three Months Ended September 30 2023 vs.

Segment Information 2023 2022 Dollars Percent 2023 2022 Dollars Percent

Product $ 637 $ 577 $ 60 10 % $ 514 $ 482 $ 32 7 %

Service 73 41 32 78 % 62 34 28 82 %

Intersegment 1 5 (4) (80) % 1 5 (4) (80) %

Total Ingalls 711 623 88 14 % 577 521 56 11 %

Product 1,170 1,185 (15) (1) % 987 992 (5) (1) %

Service 281 259 22 8 % 231 216 15 7 %

Intersegment 2 1 1 100 % 2 1 1 100 %

Total Newport News 1,453 1,445 8 1 % 1,220 1,209 11 1 %

Mission Technologies

Product 28 12 16 133 % 24 12 12 100 %

Service 627 552 75 14 % 563 492 71 14 %

Intersegment 30 31 (1) (3) % 30 31 (1) (3) %

Total Mission Technologies 685 595 90 15 % 617 535 82 15 %

Segment Totals

Product $ 1,835 $ 1,774 $ 61 3 % $ 1,525 $ 1,486 $ 39 3 %

Service 981 852 129 15 % 856 742 114 15 %

Total Segment (1)

$ 2,816 $ 2,626 $ 190 7 % $ 2,381 $ 2,228 $ 153 7 %

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

The following table presents 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) Nine Months Ended September 30 2023 vs.

2022 Nine Months Ended September 30 2023 vs.

($ in millions) Three Months Ended

March 31 2024 vs.

2023 Three Months Ended

March 31 2024 vs.

Segment Information 2024 2023 Dollars Percent 2024 2023 Dollars Percent

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Product Sales and Segment Cost of Product Sales

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.

Product sales for the three months ended March 31, 2024, decreased $42 million, or 2%, from the same period in 2023, primarily as a result of lower volumes at Newport News in aircraft carriers and the Virginia class (SSN 774) submarine program, partially offset by higher volumes at Ingalls in amphibious assault ships and surface combatants.

Segment cost of product sales for the three months ended March 31, 2024, decreased $29 million, or 2%, compared with the same period in 2023, consistent with the lower product sales described above.

Service Revenues and Segment Cost of Service Revenues

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.

Service revenues for the three months ended March 31, 2024, increased $173 million, or 20%, from the same period in 2023, primarily as a result of higher volumes at Mission Technologies in C5ISR and CEW&S.

Segment cost of service revenues for the three months ended March 31, 2024, increased $137 million, or 18%, compared with the same period in 2023, consistent with the higher service volumes described above.

OTHER FINANCIAL INFORMATION

Interest Expense

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.

Interest expense for the three months ended March 31, 2024, was $21 million, compared with $24 million for the same period in 2023.

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

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 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.

For the three months ended March 31, 2024, the non-operating retirement benefit was $44 million, compared with $37 million for the same period in 2023.

The favorable change was primarily driven by higher 2023 returns on plan assets.

Other, net income for the three months ended March 31, 2024, was $7 million, compared with other, net income of $9 million for the same period in 2023.

The decrease was primarily driven by lower unrealized net gains in investments.

Federal and Foreign Income Taxes

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.

Our effective income tax rates on earnings from operations for the three months ended March 31, 2024 and 2023, were 16.8 % and 20.9 %, respectively.

The lower effective tax rate differed from the federal statutory corporate income tax rate of 21% for the three months ended March 31, 2024, primarily due to research and development tax credits and income tax benefits associated with stock award settlement activity.

Total backlog as of March 31, 2024, and December 31, 2023, was $48.4 billion and $48.1 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 September 30, 2023, and December 31, 2022:

September 30, 2023 December 31, 2022

The following table presents funded and unfunded backlog by segment as of March 31, 2024, and December 31, 2023:

March 31, 2024 December 31, 2023

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

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We expect approximately 22% of the $48.1 billion total backlog as of December 31, 2023, to be converted into sales in 2024.

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

Government orders comprised substantially all of the backlog as of March 31, 2024, and December 31, 2023.

Contract Awards

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.

The value of new contract awards during the three months ended March 31, 2024, was $3.1 billion, including an award for the maintenance and overhaul of USS Boise (SSN 764) and an advanced planning contract for the refueling and complex overhaul ("RCOH") of USS Harry S.

Truman (CVN 75).

LIQUIDITY AND CAPITAL RESOURCES

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

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 inform our capital deployment strategy, including net cash provided by operating activities and free cash flow.

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

Nine Months Ended September 30 2023 vs.

Three Months Ended

March 31 2024 vs.

($ in millions) 2024 2023 Dollars

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Depreciation and amortization 82 89 (7)

Provision for doubtful accounts — (7) 7

Provision for expected credit losses (3) — (3)

Stock-based compensation 14 12 2

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Trade working capital increase (396) (183) (213)

Net cash provided by operating activities $ 408 $ 165 $ 243

Net cash used in operating activities $ (202) $ (9) $ (193)

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 nine months ended September 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 three months ended March 31, 2024 and 2023, as classified in our unaudited condensed consolidated statements of cash flows.

Operating Activities

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.

Cash used in operating activities for the three months ended March 31, 2024, was $202 million, compared with $9 million used in operating activities for the same period in 2023.

The unfavorable change in operating cash flow was primarily due to an unfavorable change in trade working capital driven by the timing of receipts of accounts receivable and payments of accounts payable.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing 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, 2024, and beyond such 12-month period based on our current business plans.

Investing Activities

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.

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.

Cash used in investing activities for the three months ended March 31, 2024, was $71 million, compared with $60 million used in investing activities for the same period in 2023.

The change in investing cash was primarily driven by an increase in capital expenditures, partially offset by additional investment in one of our unconsolidated nuclear and environmental joint ventures in 2023.

For 2024, we expect our capital expenditures for maintenance and sustainment to be approximately 1.5% to 2.0% of annual revenues and our discretionary capital expenditures to be approximately 2.5% to 3.5% of annual revenues.

We expect our capital expenditures to increase from the past few years due to investments to expand our shipbuilding capacity.

Financing Activities

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.

Cash used in financing activities for the three months ended March 31, 2024, was $147 million, compared with $80 million used in financing activities for the same period in 2023.

The change in cash used in financing activities was primarily due to a $135 million increase in repayments on a term loan, a $53 million increase in common stock repurchases, and a $13 million increase in employee taxes on certain share-based payment arrangements, partially offset by a $117 million increase in proceeds from our commercial paper program and a $22 million increase in net proceeds from revolving credit facility borrowings.

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 provided by operating activities to free cash flow:

Nine Months Ended September 30 2023 vs.

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

Three Months Ended

March 31 2024 vs.

($ in millions) 2024 2023 Dollars

Net cash provided by operating activities $ 408 $ 165 $ 243

Net cash used in operating activities $ (202) $ (9) $ (193)

Less capital expenditures:

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Free cash flow $ (274) $ (49) $ (225)

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.

Free cash flow for the three months ended March 31, 2024, decreased $225 million from the same period in 2023, primarily due to an unfavorable change in trade working capital and higher 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 September 30, 2023 and 2022, the cumulative amounts of payments withheld by the U.S.

As of March 31, 2024 and 2023, 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 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.

As of March 31, 2024, $12 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding.

As of March 31, 2024, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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Statements in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

You can generally identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and similar words or phrases or the negative of these words or phrases.

In some cases, you can identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and similar words or phrases or the negative of these words or phrases.

These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.

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• health epidemics, pandemics, and similar outbreaks;

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

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

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

• disruptions impacting global supply, including those resulting from the ongoing conflict between Russia and Ukraine and in the Middle East;

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

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• other risk factors discussed herein and in our other filings with the SEC.

Additional factors include those described in our 2022 Annual Report on Form 10-K, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.

Additional factors include those described in our 2023 Annual Report on Form 10-K, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and

“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the SEC.

There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements.

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

In 2023, we were awarded a long-lead-time material contract for LHA 10 (unnamed).

Arleigh Burke class (DDG 51) destroyers

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

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

Lehman (DDG 137), Telesforo Trinidad (DDG 139), Ernest E.

Evans (DDG 141), and Charles J.

French (DDG 142).

Columbia class (SSBN 826) submarines

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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.

Navy fleet, from small watercraft to submarines, combatants, and aircraft carriers, our systems and maintenance experts help the Navy maintain a high state of readiness.

Ensures effective system operation and sustainment by actively supporting design and decision–making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products.

USS Gerald R.

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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 ten ships have been delivered.

Friedman (NSC 11) is currently under construction.

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

domain force.

Capabilities include:

command, control, computers,

communications, cyber, intelligence, surveillance, and

reconnaissance ("C5ISR") systems and operations;

application of artificial intelligence and machine learning to

battlefield decisions;

defensive and offensive cyberspace

strategies and electronic warfare ("CEWS");

and live, virtual, and

constructive ("LVC") solutions.

There were 11 ships planned for this program, of which the first ten ships have been delivered, and Friedman (NSC 11) is currently under construction.

Naval nuclear support services Provide services to and in support of the U.S.

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

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

Serving customers in more than 30 countries, unmanned systems provides design, autonomy, manufacturing, testing, operations, and sustainment of unmanned systems, including unmanned underwater vehicles and unmanned surface vessels.

Virginia class (SSN 774) fast attack submarines

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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