What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-01 compared with 2024-05-02 · 158 added, 107 removed, 335 unchanged (44% of the section changed)

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

defensive and offensive cyberspace strategies and electronic warfare;

defensive and offensive cyberspace strategies and electronic warfare ("CEW&S");

unmanned autonomous systems;

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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.

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.

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

Defense Spending Environment - 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.

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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)).

Congressional consideration of the fiscal year 2025 President’s Budget Request began following its release in March 2024 and is continuing.

Each of the House and Senate Armed Services Committees have acted on their respective National Defense Authorization bills for fiscal year 2025.

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

The full House also approved the fiscal year 2025 defense appropriations bill.

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

We cannot predict the outcome of the fiscal year 2025 budget process or whether short-term funding will be required in the event annual appropriations measures are not finalized by the October 1, 2024 start of the next fiscal year.

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

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These global threats persist across all domains, from undersea to space to cyber, and the global market for defense products, services, and solutions is driven by these complex and evolving security challenges.

Our current operating environment exists in the broader context of political and socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding geopolitical tensions, financial market volatility, inflation, and a challenging labor market.

Our current operating environment exists in the broader context of political and

socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding geopolitical tensions, financial market volatility, inflation, and a challenging labor market.

For further information on our business environment, see the discussion under Business Environment under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2023 Annual Report on Form 10-K.

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• Workers' compensation.

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

As of June 30, 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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The following table presents selected financial highlights:

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Sales and service revenues $ 2,977 $ 2,787 $ 190 7 % $ 5,782 $ 5,461 $ 321 6 %

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Income from operating investments, net 11 4 7 175 % 23 16 7 44 %

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

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

General and administrative expenses 255 238 17 7 % 487 458 29 6 %

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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 as a result of changes in contract financial estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP.

This approach is consistent with the long-term life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion.

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Period-to-period revenues reflect performance under new and ongoing contracts.

Changes in sales and service

revenues are typically expressed in terms of volume.

Unless otherwise described, volume generally refers to

increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service

levels on individual contracts.

Volume changes will typically carry a corresponding income change based on the

profit margin rate for a particular contract.

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.

Changes in sales and service revenues are typically expressed in terms of volume.

Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts.

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

Sales and service revenues for the three months ended June 30, 2024, increased $190 million, or 7%, compared to the same period in 2023, primarily due to higher volumes at Mission Technologies, Ingalls, and Newport News.

Sales and service revenues for the six months ended June 30, 2024, increased $321 million, or 6%, compared to the same period in 2023, primarily due to higher volumes at Mission Technologies and Ingalls, partially offset by lower volumes at Newport News.

Cost of Sales and Service Revenues

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

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

General and administrative expenses for the three and six months ended June 30, 2024, increased $17 million and $29 million, respectively, from the same periods in 2023, primarily due to higher overhead costs, including bid and proposal costs.

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 contract performance.

contract 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

($ in millions) 2024 2023 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Operating income $ 189 $ 156 $ 33 21 % $ 343 $ 297 $ 46 15 %

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

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

FAS benefit $ 17 $ 7 $ 10 143 % $ 33 $ 15 $ 18 120 %

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Operating FAS/CAS Adjustment expense $ (15) $ (17) $ 2 12 % $ (32) $ (36) $ 4 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.

The Operating FAS/CAS Adjustment was a net expense of $15 million and $17 million for the three months ended June 30, 2024 and 2023, respectively.

The Operating FAS/CAS Adjustment was a net expense of $32 million and $36 million for the six months ended June 30, 2024 and 2023, respectively.

The favorable change in the Operating FAS/CAS Adjustment for each period was primarily driven by demographic assumptions, partially 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 $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.

Non-current state income tax benefit was $1 million and $4 million for the three months ended June 30, 2024 and 2023, respectively.

Non-current state income tax benefit was $2 million and $8 million for the six months ended June 30, 2024 and 2023, respectively.

The unfavorable change in non-current state income taxes for each period 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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The following table presents segment operating results:

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Sales and Service Revenues

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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

For the three and six months ended June 30, 2024 and 2023, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

Three Months Ended June 30 Six Months Ended June 30

($ in millions) 2024 2023 2024 2023

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Net adjustments $ 24 $ 20 $ 26 $ 29

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

Three Months Ended

For the three and six months ended June 30, 2024 and 2023, net cumulative catch-up revenue adjustments by segment were as follows:

Three Months Ended June 30 Six Months Ended June 30

($ in millions) 2024 2023 2024 2023

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Net adjustments $ 24 $ 20 $ 26 $ 29

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Revenue for additional information on our net cumulative catch-up revenue adjustments.

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Sales and service revenues $ 712 $ 664 $ 48 7 % $ 1,367 $ 1,241 $ 126 10 %

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Sales and Service Revenues

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.

Ingalls revenues, including intersegment sales, for the three months ended June 30, 2024, increased $48 million, or 7%, from the same period in 2023, primarily driven by higher volumes in amphibious assault ships and surface combatants, partially offset by lower volumes in the Legend class National Security Cutter ("NSC") program.

Ingalls revenues, including intersegment sales, for the six months ended June 30, 2024, increased $126 million, or 10%, 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 NSC program.

Segment Operating Income

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

Ingalls segment operating income for the three and six months ended June 30, 2024, was $56 million and $116 million, respectively, compared to segment operating income of $65 million and $120 million, respectively, for the same periods in 2023.

The decreases were primarily driven by lower performance on surface combatants, partially offset by a delivery contract incentive on Richard M.

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Sales and service revenues $ 1,535 $ 1,509 $ 26 2 % $ 2,969 $ 3,015 $ (46) (2) %

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Sales and Service Revenues

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.

Newport News revenues, including intersegment sales, for the three months ended June 30, 2024, increased $26 million, or 2%, from the same period in 2023, primarily driven by higher volumes in the Columbia class (SSBN 826) submarine program.

Newport News revenues, including intersegment sales, for the six months ended June 30, 2024, decreased $46 million, or 2%, from the same period in 2023, primarily driven by lower volumes in the Virginia class (SSN 774) submarine program and aircraft carriers, partially offset by higher volumes in the Columbia class (SSBN 826) submarine program.

Segment Operating Income

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.

Newport News segment operating income for the three months ended June 30, 2024, was $111 million, compared to segment operating income of $95 million for the same period in 2023.

The increase was primarily driven by contract adjustments, incentives, and volumes on the RCOH program, partially offset by lower performance on aircraft carrier construction and the Virginia class (SSN 774) submarine program.

Newport News segment operating income for the six months ended June 30, 2024, was $193 million, compared to segment operating income of $179 million for the same period in 2023.

The increase was primarily driven by contract adjustments, incentives, and volumes on the RCOH program and higher performance in naval nuclear support services, partially offset by lower performance on the Virginia class (SSN 774) submarine program and aircraft carrier construction.

Mission Technologies

Three Months Ended

($ in millions) 2024 2023 Dollars Percent

Three Months Ended June 30 Six Months Ended June 30

2023 2024 vs.

($ in millions) 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Sales and service revenues $ 765 $ 645 $ 120 19 % $ 1,515 $ 1,269 $ 246 19 %

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Sales and Service Revenues

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").

Mission Technologies revenues, including intersegment sales, for the three and six months ended June 30, 2024, increased $120 million, or 19%, and $246 million, or 19%, respectively, from the same periods in 2023, primarily due to higher volumes in C5ISR and CEW&S.

Segment Operating Income

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.

Mission Technologies segment operating income for the three months ended June 30, 2024, was $36 million, compared to segment operating income of $9 million for the same period in 2023.

The increase was primarily driven by the higher volumes described above, a $6 million loss in 2023 on the sale of our investment in an unconsolidated ship repair and specialty fabrication joint venture, and higher performance in fleet sustainment.

Mission Technologies segment operating income for the six months ended June 30, 2024, was $64 million, compared to segment operating income of $26 million for the same period in 2023.

The increase was primarily

driven by the higher volumes described above, higher performance in fleet sustainment, and a $6 million loss in 2023 on the sale of our investment in an unconsolidated ship repair and specialty fabrication joint venture.

PRODUCT AND SERVICE REVENUES AND COST ANALYSIS

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

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

March 31 2024 vs.

2023 Three Months Ended

March 31 2024 vs.

($ in millions) Three Months Ended June 30 2024 vs.

2023 Three Months Ended June 30 2024 vs.

Segment Information 2024 2023 Dollars Percent 2024 2023 Dollars Percent

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

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

($ in millions) Six Months Ended June 30 2024 vs.

2023 Six Months Ended June 30 2024 vs.

Segment Information 2024 2023 Dollars Percent 2024 2023 Dollars Percent

Product $ 1,217 $ 1,138 $ 79 7 % $ 1,024 $ 936 $ 88 9 %

Service 147 98 49 50 % 125 83 42 51 %

Intersegment 3 5 (2) (40) % 3 5 (2) (40) %

Total Ingalls 1,367 1,241 126 10 % 1,152 1,024 128 13 %

Product 2,439 2,518 (79) (3) % 2,055 2,148 (93) (4) %

Service 528 496 32 6 % 437 420 17 4 %

Intersegment 2 1 1 100 % 2 1 1 100 %

Total Newport News 2,969 3,015 (46) (2) % 2,494 2,569 (75) (3) %

Mission Technologies

Product 57 52 5 10 % 58 55 3 5 %

Service 1,394 1,159 235 20 % 1,244 1,044 200 19 %

Intersegment 64 58 6 10 % 64 58 6 10 %

Total Mission Technologies 1,515 1,269 246 19 % 1,366 1,157 209 18 %

Segment Totals

Product $ 3,713 $ 3,708 $ 5 — % $ 3,137 $ 3,139 $ (2) — %

Service 2,069 1,753 316 18 % 1,806 1,547 259 17 %

Total Segment 1

$ 5,782 $ 5,461 $ 321 6 % $ 4,943 $ 4,686 $ 257 5 %

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

Product Sales and Segment Cost of Product Sales

Product sales for the three months ended March 31, 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.

Product sales for the three months ended June 30, 2024, increased $47 million, or 3%, from the same period in 2023, primarily as a result of higher volumes at Ingalls in amphibious assault ships and at Newport News in the Columbia class (SSBN 826) program, partially offset by lower volumes in aircraft carriers.

Segment cost of product sales for the three months ended June 30, 2024, increased $27 million, or 2%, compared with the same period in 2023, consistent with product sales described above.

Product sales and segment cost of product sales for the six months ended June 30, 2024, increased $5 million and decreased $2 million, respectively, from the same period in 2023.

The changes were consistent with the respective Ingalls and Newport News drivers discussed in the "Segment Operating Results" of this section.

Service Revenues and Segment Cost of Service Revenues

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.

Service revenues for the three months ended June 30, 2024, increased $143 million, or 16%, 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 June 30, 2024, increased $122 million, or 15%, compared with the same period in 2023, consistent with the higher service volumes described above.

Service revenues for the six months ended June 30, 2024, increased $316 million, or 18%, 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 six months ended June 30, 2024, increased $259 million, or 17%, 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 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.

Interest expense for each of the three months ended June 30, 2024 and 2023, was $24 million.

Interest expense for the six months ended June 30, 2024, was $45 million, compared with $48 million for the same period in 2023.

The decrease in interest expense for the six months ended June 30, 2024, was driven by a decrease in outstanding long-term debt from the prior year period, partially offset by an increase in outstanding short-term debt.

Non-Operating Retirement Benefit

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

For the three months ended March 31, 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.

For the three months ended June 30, 2024, the non-operating retirement benefit was $46 million, compared with $37 million for the same period in 2023.

For the six months ended June 30, 2024, the non-operating retirement benefit was $90 million, compared with $74 million for the same period in 2023.

The increases in the non-operating retirement benefit for the three and six months ended June 30, 2024, were primarily driven by higher 2023 returns on plan assets.

Other, net income for the three months ended June 30, 2024, was $5 million, compared with other, net of zero for the same period in 2023.

Other, net income for the six months ended June 30, 2024, was $12 million, compared with other, net income of $9 million for the same period in 2023.

There were no individually significant drivers for the increases in other, net for the three and six months ended June 30, 2024.

Federal and Foreign Income Taxes

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.

Our effective income tax rates on earnings from operations for the three months ended June 30, 2024 and 2023, were 19.9 % and 23.1 %, respectively.

Our effective income tax rates on earnings from operations for the six months ended June 30, 2024 and 2023, were 18.5 % and 22.0 %, respectively.

The lower effective tax rate for each of the three and six months ended June 30, 2024, was primarily attributable to a taxable gain associated with the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture recorded in 2023.

For the three months ended June 30, 2024, our effective tax rate differed from the federal statutory corporate income tax rate of 21 % primarily due to research and development tax credits.

For the six months ended June 30, 2024, our effective tax rate differed from the federal statutory corporate income tax rate primarily due to research and development tax credits and income tax benefits associated with stock award settlement activity.

Total backlog as of June 30, 2024, and December 31, 2023, was $48.5 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 March 31, 2024, and December 31, 2023:

March 31, 2024 December 31, 2023

The following table presents funded and unfunded backlog by segment as of June 30, 2024, and December 31, 2023:

June 30, 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 March 31, 2024, and December 31, 2023.

Government orders comprised substantially all of the backlog as of June 30, 2024, and December 31, 2023.

Contract Awards

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).

The value of new contract awards during the six months ended June 30, 2024, was $6.2 billion, including an award for the maintenance and overhaul of USS Boise (SSN 764), an award for an advanced planning contract for the RCOH of USS Harry S.

Truman (CVN 75) and an award for construction of USS Richard J.

Danzig (DDG 143).

LIQUIDITY AND CAPITAL RESOURCES

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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:

Three Months Ended

March 31 2024 vs.

The following table summarizes key components of cash flow provided by (used in) operating activities:

Six Months Ended June 30 2024 vs.

($ in millions) 2024 2023 Dollars

Net earnings $ 326 $ 259 $ 67

Depreciation and amortization 82 89 (7)

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

Depreciation and amortization of purchased intangible assets 160 174 (14)

Other non-cash transactions, net 2 14 (12)

Stock-based compensation 7 18 (11)

Deferred income taxes (28) (62) 34

Loss (gain) on investments in marketable securities (8) (8) —

Gain on investments in marketable securities (11) (12) 1

Retiree benefits (57) (36) (21)

Trade working capital increase (610) (282) (328)

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

Net cash provided by (used in) operating activities $ (211) $ 73 $ (284)

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

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We expect to meet our current debt

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

We discuss below our significant operating, investing, and financing activities affecting cash flows for the three months ended March 31, 2024 and 2023, as classified in our unaudited condensed consolidated statements of cash flows.

obligations as they come due through internally generated funds from current levels of operations, existing borrowing facilities, 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, 2024 and 2023, as classified in our unaudited condensed consolidated statements of cash flows.

Operating Activities

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.

Cash used in operating activities for the six months ended June 30, 2024, was $211 million, compared with cash provided by operating activities of $73 million 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 payments of accounts payable and receipts of accounts receivable, partially offset by lower payments for income taxes.

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, 2024, and beyond such 12-month period based on our current business plans.

Investing Activities

Cash used in investing activities for the three months ended March 31, 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.

Cash used in investing activities for the six months ended June 30, 2024, was $162 million, compared to $70 million used in investing activities for the same period in 2023.

The change in investing cash was primarily driven by the sale of our interest in an unconsolidated ship repair and specialty fabrication joint venture in 2023 and 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.

Our capital expenditures are increasing compared to the past few years due to investments to expand our shipbuilding capacity.

Financing Activities

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.

Cash used in financing activities for the six months ended June 30, 2024, was $46 million, compared with $157 million used in financing activities for the same period in 2023.

The change in cash used in financing activities was primarily due to a $440 million increase in proceeds from our commercial paper program, partially offset by a $199 million increase in repayments of long term debt, and a $111 million increase in common stock repurchases.

Free Cash Flow

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

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

Three Months Ended

March 31 2024 vs.

The following table reconciles net cash provided by (used in) operating activities to free cash flow:

Six Months Ended June 30 2024 vs.

($ in millions) 2024 2023 Dollars

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

Net cash provided by (used in) operating activities $ (211) $ 73 $ (284)

Less capital expenditures:

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Free cash flow $ (373) $ (35) $ (338)

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.

Free cash flow for the six months ended June 30, 2024, decreased $338 million from the same period in 2023, primarily due to an unfavorable change in trade working capital and higher capital expenditures, partially offset by lower 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 March 31, 2024 and 2023, the cumulative amounts of payments withheld by the U.S.

As of June 30, 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.

Off-Balance Sheet Arrangements

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

As of March 31, 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.

companies principally to support our self-insured workers' compensation plans.

As of June 30, 2024, $11 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding.

As of June 30, 2024, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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

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).

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

Arleigh Burke class (DDG 51) destroyers

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(DDG 121), USS Lenah H.

Sutcliffe Higbee (DDG 123), and Jack H.

Sutcliffe Higbee (DDG 123), and USS Jack H.

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

3 unchanged sentences

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

Evans (DDG 141), and Charles J.

French (DDG 142).

Evans (DDG 141), Charles J.

French (DDG 142), and Richard J.

Danzig (DDG 143).

Columbia class (SSBN 826) submarines

53 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis