Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Our Business

Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is America’s largest military shipbuilding company and a provider of professional services to partners in government and industry. For more than a century, our Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. Our Technical Solutions segment provides a range of services to government and commercial customers. Headquartered in Newport News, Virginia, HII employs approximately 44,000 people both domestically and internationally.

We conduct most of our business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Technical Solutions segment provides a wide range of professional services and products, including defense and federal solutions ("DFS"), nuclear and environmental services, and unmanned systems.

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2020.

Business Environment

COVID-19 Pandemic - The COVID-19 global pandemic has had wide ranging effects on the global health environment and disrupted the global and U.S. economies and financial markets, including impacts to our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”). COVID-19 Events have also impacted our operations, and the extent of future impacts are uncertain. The most significant areas of impact have been the disruption of our employees’ ability to work effectively, disruption in our supply chain, disruption of the U.S. Government's and our other customers' abilities to perform their obligations, and impact on pension assets and other investment performance. On September 9, 2021, President Biden issued an executive order requiring all employers with U.S. Government contracts to ensure that their U.S.-based employees, contractors, and subcontractors that work on or in support of U.S. Government contracts are fully vaccinated by December 8, 2021.

The executive order includes on-site and remote U.S.-based employees, contractors, and subcontractors, with limited exceptions for medical and religious reasons.

It is currently not possible to predict with any certainty the impact the executive order will have on our workforce. As a U.S. Government contractor, we are currently requiring all U.S.-based employees, contractors, and subcontractors that service or support our U.S. Government contracts to be fully vaccinated in accordance with the guidelines of the Safer Federal Workforce Task Force. Our implementation of these requirements will result in employee attrition to some extent, including attrition of critical skilled labor, and difficulty meeting future labor requirements.

See Item 1A. Risk Factors in this Form 10-Q for a discussion of COVID-19-related risks, including risks associated with the potential adverse effects on our workforce of the U.S. Government vaccine mandate for employees, contractors, and subcontractors that service federal contracts.

We have aggressively managed our response to the uncertainties regarding COVID-19 Events, and we have incurred costs to respond to COVID-19 Events, including paid leave, quarantining employees, vaccinations, and recurring facility cleaning. Our shipyards and other facilities have remained open and productive, but we continue to experience decreases in workforce attendance and challenges meeting our hiring requirements, which has impacted our operations due to delay and disruption from a shortage of critical skills and out-of-sequence work.

Under Section 3610 of the CARES Act, contractors may submit claims for employee paid time off caused by restrictions from COVID-19 Events in circumstances where the employee could not work remotely. Such instances may include paid time off for employees to allow for plant decontamination, idle time due to social distancing restrictions, paid time off to take care of dependents impacted by government ordered school or day care closures, paid time for employee vaccinations or responding to side effects from vaccination, and employee quarantines due to travel restrictions or coming into contact, being diagnosed, or taking care of someone diagnosed with COVID-19. We have taken steps to preserve our rights to pursue such claims for HII and our subcontractors, and we submitted an initial Section 3610 Reimbursement Request to the DoD for Ingalls and Newport News Shipbuilding. Section 3610 under the CARES Act was not extended past September 30, 2021. We anticipate submitting supplemental requests for Section 3610 reimbursement for HII and our subcontractors into 2022. Reimbursements of our requests are contingent upon contracting officers making funding available, and most DoD contracting officers are awaiting supplemental appropriations from Congress before approving such reimbursement requests. We have no assurance that Congress will appropriate sufficient funds to cover the reimbursement of costs contemplated by the CARES Act.

While costs related to COVID-19 Events are allowable under U.S. Government contracts, our contract estimates reflect margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed price and fixed price incentive contracts, or may not be adequately covered by insurance. Our reinsurers have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision. Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 13: Investigations, Claims, and Litigation.

We have also focused on actively supporting our customers, suppliers, and communities. We have been proactive in engaging with our U.S. Government customers regarding future contract adjustments. While there has been no change in contract terms or substantial degradation in timely payments from customers, we have experienced delays in decisions on certain contract awards. We are unable to predict how our customers will allocate resources in the future as they react to the evolving demands of the COVID-19 response. We also accelerated payments to small business suppliers in an effort to minimize supply chain disruption.

We temporarily halted stock repurchases in the first quarter of 2020, but we resumed share repurchases during the first quarter of 2021. We also deferred certain payroll taxes in 2020 pursuant to the CARES Act, which increased our cash from operations in 2020, but will reduce cash from operations in 2021 and 2022.

U.S. Government Contracts - Long-term uncertainty exists with respect to overall levels of defense spending across the future years' defense plan, and it is likely that U.S. Government discretionary spending levels will continue to be subject to significant pressure.

The Congressional budget markup process for fiscal year 2022 is ongoing, following a late release of the President’s Budget Request in May 2021. Consequently, the U.S. Government is currently operating under a Continuing Resolution which funds government operations through December 3, 2021. It remains uncertain at this point whether fiscal year 2022 government operations will require additional short-term funding or if annual appropriations measures will be finalized by December 3. The House of Representatives and the Senate Armed Services Committee have each acted on respective National Defense Authorization bills for fiscal year 2022, but the Congress has yet to reconcile those bills and produce a final measure. Additionally, while the House Appropriations Committee voted out a defense appropriations measure earlier this year, the Senate Appropriations Committee has released the text of its defense appropriations measure, but a traditional markup process remains uncertain. Appropriations measures must be passed by Congress and enacted by the President, and we cannot predict the outcome of the fiscal year 2022 budget process.

Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled. In addition, spending cuts and/or reprioritization of defense investment could adversely affect the viability of our suppliers, subcontractors, and employee base. Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by the U.S. Government or the prime contractor as a result of lack of government funding or reductions or delays in government funding. Significant reductions in the number of ships procured by the U.S. Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, or cash flows.

The federal budget environment remains a significant long-term risk. Considerable uncertainty exists regarding how future budget and program decisions will develop and what challenges budget changes will present for the defense industry. We believe continued budget pressures will have serious implications for defense discretionary spending, the defense industrial base, including HII, and the customers, employees, suppliers, subcontractors, investors, and communities that rely on companies in the defense industrial base. Although it is difficult to determine specific impacts, we expect that over the longer term, the budget environment may result in fewer contract awards and lower revenues, profits, and cash flows from our U.S. Government contracts. It is likely budget and program decisions made in this environment will have long-term impacts on HII and the entire defense industry.

Critical Accounting Policies, Estimates, and Judgments

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2020, we consider our policies relating to the following matters to be critical accounting policies:

• Revenue recognition;

• Purchase accounting, goodwill, and intangible assets;

• Litigation, commitments, and contingencies;

• Retirement related benefit plans; and

• Workers' compensation.

As of September 30, 2021, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2020.

We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units.

Contracts

We generate most of our revenues from long-term U.S. Government contracts for design, production, and support activities. Government contracts typically include the following cost elements: direct material, labor, and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Unless otherwise specified in a contract, costs billed to contracts with the U.S. Government are treated as allowable and allocable costs under the Federal Acquisition Regulation ("FAR") and the U.S. Cost Accounting Standards ("CAS") regulations. Examples of costs incurred by us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including most merger and acquisition costs, and advertising costs.

We monitor our policies and procedures with respect to our contracts on a regular basis to ensure consistent application under similar terms and conditions, as well as compliance with all applicable government regulations. In addition, the Defense Contract Audit Agency routinely audits the costs we incur that are allocated to U.S. Government contracts.

Our contracts typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials. See Note 7: Revenue.

*•*Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.

• Fixed-Price Incentive Contracts - Fixed-price incentive contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.

*•*Cost-Type Contracts - Cost-type contracts provide for reimbursement of the contractor's allowable costs plus a fee that represents profit. Cost-type contracts generally require that the contractor use its reasonable efforts to accomplish the scope of the work within some specified time and some stated dollar limitation.

*•*Time and Materials - Time and materials contracts specify a fixed hourly billing rate for each direct labor hour expended and reimbursement for allowable material costs and expenses.

Contract Fees - Negotiated contract fee structures include: fixed fee amounts, cost sharing arrangements to reward or penalize contractors for under or over cost target performance, respectively, positive award fees, and negative penalty arrangements. Profit margins may vary materially depending on the negotiated contract fee arrangements, percentage-of-completion of the contract, the achievement of performance objectives, and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

Award Fees - Certain contracts contain award fees based on performance criteria such as cost, schedule, quality, and technical performance. Award fees are determined and earned based on an evaluation by the customer of our performance against such negotiated criteria. We consider award fees to be variable consideration and generally include these fees in the transaction price using a most likely amount approach. Award fees are limited to the extent of funding allotted by the customer and available for performance and those amounts for which a significant reversal of revenue is not probable.

Program Descriptions

For convenience, a brief description of certain programs discussed in this Quarterly Report on Form 10-Q is included in the "Glossary of Programs" in this section.

CONSOLIDATED OPERATING RESULTS

The following table presents selected financial highlights:

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Sales and service revenues						$	2,338					$	2,314					$	24					1		%				$	6,847					$	6,604					$	243					4		%
Cost of product sales and service revenues						2,007						1,878						129						7		%				5,852						5,481						371						7		%
Income from operating investments, net						11						6						5						83		%				31						19						12						63		%
Other income and gains						2						—						2						—		%				3						—						3						—		%
General and administrative expenses						226						220						6						3		%				636						648						(12)						(2)		%
Operating income						118						222						(104)						(47)		%				393						494						(101)						(20)		%
Other income (expense)
Interest expense						(24)						(27)						3						11		%				(63)						(68)						5						7		%
Non-operating retirement benefit						45						29						16						55		%				135						89						46						52		%
Other, net						2						2						—						—		%				10						(8)						18						225		%
Federal and foreign income taxes						(6)						4						(10)						(250)		%				51						60						(9)						(15)		%
Net earnings						$	147					$	222					$	(75)					(34)		%				$	424					$	447					$	(23)					(5)		%

Operating Performance Assessment and Reporting

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 as a result of changes in contract 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.

Cost of sales for both product sales and service revenues consists of materials, labor, and subcontracting costs, as well as an allocation of indirect costs for overhead. We manage the type and amount of costs at the contract level, which is the basis for estimating our total costs at completion of our contracts. Unusual fluctuations in operating performance driven by changes in a specific cost element across multiple contracts are described in our analysis.

Sales and Service Revenues

Sales and service revenues were comprised as follows:

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Product sales						$	1,701					$	1,699					$	2					—		%				$	5,185					$	4,743					$	442					9		%
Service revenues						637						615						22						4		%				1,662						1,861						(199)						(11)		%
Sales and service revenues						$	2,338					$	2,314					$	24					1		%				$	6,847					$	6,604					$	243					4		%

Product sales for the three months ended September 30, 2021, increased $2 million from the same period in 2020. Product sales for the nine months ended September 30, 2021, increased $442 million, or 9%, compared with the same period in 2020. Ingalls product sales decreased $37 million for the three months ended September 30, 2021, primarily as a result of lower volumes in the Legend class NSC program and amphibious assault ships, partially offset by higher volumes on surface combatants. Ingalls product sales increased $49 million for the nine months ended September 30, 2021, primarily as a result of higher volumes in surface combatants and amphibious assault ships, partially offset by lower volumes in the Legend class NSC program. Newport News product sales increased $34 million and $374 million for the three and nine months ended September 30, 2021, respectively, primarily as a result of higher volumes in submarines and aircraft carriers. Technical Solutions product sales increased $5 million for the three months ended September 30, 2021, primarily as a result of higher volumes in DFS due to the acquisition of Alion, partially offset by lower volumes in unmanned systems. Technical Solutions product sales increased $19 million for the nine months ended September 30, 2021, primarily as a result of higher volumes in DFS and unmanned systems.

Service revenues for the three months ended September 30, 2021, increased $22 million, or 4%, compared with the same period in 2020. Service revenues for the nine months ended September 30, 2021, decreased $199 million, or 11%, compared with the same period in 2020. Ingalls service revenues for the three months ended September 30, 2021, decreased $14 million, primarily as a result of lower volumes in surface combatant services. Ingalls service revenues for the nine months ended September 30, 2021, decreased $38 million, primarily as a result of lower volumes in surface combatant and amphibious assault ship services. Newport News service revenues decreased $38 million for the three months ended September 30, 2021, primarily as a result of lower volumes in naval nuclear support services, partially offset by higher volumes in submarine services. Newport News service revenues decreased $73 million for the nine months ended September 30, 2021, primarily as a result of lower volumes in naval nuclear support services, partially offset by higher volumes in aircraft carrier and submarine services. Technical Solutions service revenues increased $74 million for the three months ended September 30, 2021, primarily as a result of higher volumes in DFS services due to the acquisition of Alion, partially offset by the divestiture of our oil and gas business. Technical Solutions service revenues decreased $88 million for the nine months ended September 30, 2021, primarily as a result of the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, partially offset by higher volumes in DFS services due to the acquisition of Alion.

Cost of Sales and Service Revenues

Cost of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows:

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Cost of product sales						$	1,453					$	1,388					$	65					5		%				$	4,402					$	3,931					$	471					12		%
% of product sales						85.4		%				81.7		%																84.9		%				82.9		%
Cost of service revenues						554						490						64						13		%				1,450						1,550						(100)						(6)		%
% of service revenues						87.0		%				79.7		%																87.2		%				83.3		%
Income from operating investments, net						11						6						5						83		%				31						19						12						63		%
Other income and gains						2						—						2						—		%				3						—						3						—		%
General and administrative expenses						226						220						6						3		%				636						648						(12)						(2)		%
% of sales and service revenues						9.7		%				9.5		%																9.3		%				9.8		%
Cost of sales and service revenues						$	2,220					$	2,092					$	128					6		%				$	6,454					$	6,110					$	344					6		%

Cost of Product Sales

Cost of product sales for the three months ended September 30, 2021, increased $65 million, or 5%, compared with the same period in 2020. Cost of product sales for the nine months ended September 30, 2021, increased $471 million, or 12%, compared with the same period in 2020. Ingalls cost of product sales decreased $30 million for the three months ended September 30, 2021, primarily as a result of volume decreases described above. Ingalls cost of

product sales for the nine months ended September 30, 2021, were flat primarily as a result of volume increases described above, partially offset by higher risk retirement on Bougainville (LHA 8). Newport News cost of product sales increased $14 million and $207 million for the three and nine months ended September 30, 2021, respectively, primarily as a result of volume increases described above. Technical Solutions cost of product sales decreased $2 million for the three months ended September 30, 2021, driven by improved performance in DFS services, partially offset by volume increases described above. Technical Solutions cost of product sales increased $15 million for the nine months ended September 30, 2021, primarily as a result of the volume increases described above. Cost of product sales related to the Operating FAS/CAS Adjustment increased $83 million and $249 million for the three and nine months ended September 30, 2021, respectively, as described below.

Cost of product sales as a percentage of product sales increased from 81.7% for the three months ended September 30, 2020, to 85.4% for the three months ended September 30, 2021. The increase was primarily due to an unfavorable change in the Operating FAS/CAS Adjustment, lower performance in unmanned systems, and lower risk retirement on Bougainville (LHA 8), partially offset by higher risk retirements on the RCOH of USS George Washington (CVN 73), Block IV boats of the Virginia class (SSN 774) submarine program, and USS Frank E. Peterson Jr. (DDG 121). Cost of product sales as a percentage of product sales increased from 82.9% for the nine months ended September 30, 2020, to 84.9% for the nine months ended September 30, 2021. The increase was due to an unfavorable change in the Operating FAS/CAS Adjustment, partially offset by impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, a contract incentive on Jack H. Lucas (DDG 125), and higher risk retirement on Bougainville (LHA 8) and Fort Lauderdale (LPD 28).

Cost of Service Revenues

Cost of service revenues for the three months ended September 30, 2021, increased $64 million, or 13%, compared with the same period in 2020. Cost of service revenues for the nine months ended September 30, 2021, decreased $100 million, or 6%, compared with the same period in 2020. Ingalls cost of service revenues decreased $15 million and $34 million for the three and nine months ended September 30, 2021, respectively, primarily as a result of lower volumes described above. Newport News cost of service revenues decreased $19 million and $29 million for the three and nine months ended September 30, 2021, respectively, primarily as a result of lower volumes described above. Technical Solutions cost of service revenues increased $80 million for the three months ended September 30, 2021, primarily as a result of higher volumes described above. Technical Solutions cost of service revenues decreased $92 million for the nine months ended September 30, 2021, primarily as a result of lower volumes described above. Cost of service revenues related to the Operating FAS/CAS Adjustment increased $18 million and $55 million for the three and nine months ended September 30, 2021, respectively, as described below.

Cost of service revenues as a percentage of service revenues increased from 79.7% for the three months ended September 30, 2020, to 87.0% for the three months ended September 30, 2021, primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, lower risk retirement on submarine support services, lower performance in DFS services, and year-to-year variances in contract mix. Cost of service revenues as a percentage of service revenues increased from 83.3% for the nine months ended September 30, 2020, to 87.2% for the nine months ended September 30, 2021, primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, lower risk retirement on submarine support services, and year-to-year variances in contract mix.

Income (Loss) from Operating Investments, Net

The activities of our operating investments are closely aligned with the operations of the segments holding the investments. We therefore record income related to earnings from equity method investments in our operating income.

Income from operating investments, net for the three and nine months ended September 30, 2021, increased $5 million and $12 million, respectively, from the same periods in 2020, primarily due to higher equity income from our nuclear and environmental joint ventures and ship repair and specialty fabrication joint venture.

Other Income and Gains

For the three months ended September 30, 2021, we recognized a gain of $2 million, primarily due to a favorable claim resolution. For the nine months ended September 30, 2021, we recognized a gain of $3 million, primarily due a favorable claim resolution and the sale of our oil and gas business.

General and Administrative Expenses

In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. 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 September 30, 2021, increased $6 million from the same period in 2020, primarily due to higher overhead costs, partially offset by favorable changes in current state income tax expense. General and administrative expenses for the nine months ended September 30, 2021, decreased $12 million from the same period in 2020, primarily driven by favorable changes in current state income tax expense, partially offset by higher overhead costs.

Operating Income

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

We internally manage our operations by reference to "segment operating income," which is defined as operating income before the Operating FAS/CAS Adjustment and non-current state income taxes, neither of which affects segment performance. Segment operating income is not a recognized measure under GAAP. When analyzing our operating performance, investors should use segment operating income in addition to, and not as an alternative for, operating income or any other performance measure presented in accordance with GAAP. It is a measure we use to evaluate our core operating performance. We believe segment operating income reflects an additional way of viewing aspects of our operations that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our business. We believe the measure is used by investors and is a useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies.

The following table reconciles operating income to segment operating income:

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Operating income						$	118					$	222					$	(104)					(47)		%				$	393					$	494					$	(101)					(20)		%
Operating FAS/CAS Adjustment						41						(60)						101						168		%				118						(186)						304						163		%
Non-current state income taxes						4						—						4						—		%				12						5						7						140		%
Segment operating income						$	163					$	162					$	1					1		%				$	523					$	313					$	210					67		%

Segment Operating Income

Segment operating income for the three months ended September 30, 2021, was $163 million, compared with segment operating income of $162 million for the same period in 2020. The increase was primarily due to higher risk retirement on the RCOH of USS George Washington (CVN 73), and Block IV boats of the Virginia class (SSN 774) submarine program, and equity income in nuclear and environmental joint ventures and our ship repair and specialty fabrication joint venture, partially offset by lower performance in unmanned systems. Segment operating income for the nine months ended September 30, 2021, was $523 million, compared with segment operating income of $313 million for the same period in 2020. The increase was primarily due to impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, a contract incentive on USS Jack H. Lucas (DDG 125), and higher risk retirement on Bougainville (LHA 8) and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery.

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

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with GAAP ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Cost Accounting Standards ("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.

Effective January 1, 2021, we adopted the Safe Harbor methodology for determining CAS pension costs. Under the new methodology, the interest rates used to calculate pension liabilities under CAS are consistent with

those used in the determination of minimum funding requirements under the Employee Retirement Income Security Act of 1974 ("ERISA").

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

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
FAS expense						$	(7)					$	(18)					$	11					61		%				$	(21)					$	(53)					$	32					60		%
CAS cost						11						107						(96)						(90)		%				38						328						(290)						(88)		%
FAS/CAS Adjustment						4						89						(85)						(96)		%				17						275						(258)						(94)		%
Non-operating retirement benefit						(45)						(29)						(16)						(55)		%				(135)						(89)						(46)						(52)		%
Operating FAS/CAS Adjustment						$	(41)					$	60					$	(101)					(168)		%				$	(118)					$	186					$	(304)					(163)		%

The Operating FAS/CAS Adjustment was a net expense of $41 million and a net benefit of $60 million for the three months ended September 30, 2021 and 2020, respectively. The Operating FAS/CAS Adjustment was a net expense of $118 million and a net benefit of $186 million for the nine months ended September 30, 2021 and 2020, respectively. The unfavorable changes in the Operating FAS/CAS Adjustment of $101 million and $304 million for the three and nine months ended September 30, 2021, respectively, were primarily driven by the more immediate recognition of higher interest rates under CAS.

Non-current State Income Taxes

Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. 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 expense for the three months ended September 30, 2021, was $4 million, compared to non-current state income tax expense of less than $1 million for the same period in 2020. The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily

attributable to a reduction in the tax basis of fixed assets resulting from increased tax depreciation. Non-current state income tax expense for the nine months ended September 30, 2021, was $12 million, compared to non-current state income tax expense of $5 million for the same period in 2020. The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily attributable to a decrease in expenses not currently deductible for income tax purposes.

Interest Expense

Interest expense for the three and nine months ended September 30, 2021, decreased $3 million and $5 million, respectively, compared with the same periods in 2020, primarily due to the early redemption of our senior notes in the fourth quarter of 2020, partially offset by the issuance of senior notes and borrowing under the Term Loan in August 2021.

Non-Operating Retirement Benefit

The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects. For the three and nine months ended September 30, 2021, the favorable changes in the non-operating retirement benefit of $16 million and $46 million, respectively, were primarily driven by higher 2020 returns on plan assets.

Other, Net

Other, net income for the three months ended September 30, 2021, was flat with the same period in 2020. Other, net income increased $18 million for the nine months ended September 30, 2021, compared with the same period in 2020, primarily driven by an impairment of a loan receivable in 2020 and net gains on investments in marketable securities.

Federal and Foreign Income Taxes

Our effective income tax rates on earnings from operations for the three months ended September 30, 2021 and 2020, were (4.3)% and 1.8%, respectively. Our effective income tax rates on earnings from operations for the nine months ended September 30, 2021 and 2020, were 10.7% and 11.8%, respectively. The lower effective tax rate for the three months ended September 30, 2021, was primarily attributable to research and development tax credits for prior periods. The lower effective tax rate for the nine months ended September 30, 2021, was attributable to an increase in research and development tax credits for prior periods and a tax loss associated with the sale of our oil and gas business, partially offset by an increase in unrecognized tax benefits.

For each of the three and nine months ended September 30, 2021 and 2020, our effective tax rates differed from the federal statutory tax rate primarily as a result of the research and development tax credits for prior periods. See Note 11: Income Taxes.

SEGMENT OPERATING RESULTS

Basis of Presentation

We are aligned into three reportable segments: Ingalls, Newport News, and Technical Solutions.

The following table presents segment operating results:

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Sales and Service Revenues
Ingalls						$	628					$	675					$	(47)					(7)		%				$	1,947					$	1,926					$	21					1		%
Newport News						1,354						1,358						(4)						—		%				4,124						3,821						303						8		%
Technical Solutions						394						320						74						23		%				890						957						(67)						(7)		%
Intersegment eliminations						(38)						(39)						1						3		%				(114)						(100)						(14)						(14)		%
Sales and service revenues						$	2,338					$	2,314					$	24					1		%				$	6,847					$	6,604					$	243					4		%
Operating Income
Ingalls						$	62					$	62					$	—					—		%				$	233					$	185					$	48					26		%
Newport News						88						79						9						11		%				257						105						152						145		%
Technical Solutions						13						21						(8)						(38)		%				33						23						10						43		%
Segment operating income (loss)						163						162						1						1		%				523						313						210						67		%
Non-segment factors affecting operating income (loss)
Operating FAS/CAS Adjustment						(41)						60						(101)						(168)		%				(118)						186						(304)						(163)		%
Non-current state income taxes						(4)						—						(4)						—		%				(12)						(5)						(7)						(140)		%
Operating income						$	118					$	222					$	(104)					(47)		%				$	393					$	494					$	(101)					(20)		%

KEY SEGMENT FINANCIAL MEASURES

Sales and Service Revenues

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 margin rate for a particular contract.

Segment Operating Income (Loss)

Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract margin rates. These changes typically relate to profit recognition associated with revisions to estimated costs at completion ("EAC") that reflect improved or deteriorated operating performance on that contract. Operating income changes are accounted for on a cumulative to date basis at the time an EAC change is recorded. Segment operating income may also be affected by, among other things, contract performance, the effects of workforce stoppages, the effects of natural disasters such as hurricanes, resolution of disputed items with the customer, recovery of insurance proceeds, and other discrete events. At the completion of a long-term contract, any originally estimated costs not incurred or reserves not fully utilized, such as warranty reserves, could also impact contract earnings. Where such items have occurred and the effects are material, a separate description is provided.

Cumulative Adjustments

For the three and nine months ended September 30, 2021 and 2020, favorable and unfavorable cumulative catch-up margin adjustments were as follows:

						Three Months Ended September 30												Nine Months Ended September 30
($ in millions)						2021						2020						2021						2020
Gross favorable adjustments						$	51					$	40					$	199					$	157
Gross unfavorable adjustments						(30)						(36)						(93)						(232)
Net adjustments						$	21					$	4					$	106					$	(75)

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

For the nine months ended September 30, 2021, favorable cumulative catch-up margin adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on Jack H. Lucas (DDG 125) and risk retirement on Fort Lauderdale (LPD 28). During the same period, no unfavorable cumulative catch-up margin adjustments were individually significant.

For the three months ended September 30, 2020, no favorable cumulative catch-up margin adjustments were individually significant.

For the nine months ended September 30, 2020, favorable cumulative catch-up margin adjustments included risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, and other individually insignificant adjustments.

During the same period, unfavorable cumulative catch-up margin adjustments were primarily driven by $111 million in the second quarter of 2020 on the Block IV boats of the Virginia class (SSN 774) submarine program, including $95 million for cost and schedule performance and updates to our assumptions for future program efficiencies and performance as a result of cost and schedule trends. Our risk retirement assumptions on Block IV boats anticipated boat-to-boat cost and schedule improvements working down the learning curve, but performance trends, exacerbated by the COVID-19 Events, made those improvements less likely to occur. Unfavorable cumulative catch-up adjustments on the Block IV boats of the Virginia class (SSN 774) submarine program also included $16 million from delay and disruption directly attributable to COVID-19 Events due to lower employee attendance, a shortage of critical skills, and out-of-sequence work. Unfavorable cumulative catch-up margin adjustments across all programs resulting from delay and disruption cost estimates for discrete COVID-19 Events were $61 million, including $16 million in relation to the Block IV boats of the Virginia class (SSN 774) submarine program, discussed above.

Ingalls

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Sales and service revenues						$	628					$	675					$	(47)					(7)		%				$	1,947					$	1,926					$	21					1		%
Segment operating income						62						62						—						—		%				233						185						48						26		%
As a percentage of segment sales						9.9		%				9.2		%																12.0		%				9.6		%

Sales and Service Revenues

Ingalls revenues for the three months ended September 30, 2021, decreased $47 million, or 7%, from the same period in 2020, primarily driven by lower revenues in the Legend class NSC program, surface combatants, and amphibious assault ships. Revenues on the NSC program decreased due to lower volumes on Stone (NSC 9) following its delivery. Revenues on surface combatants decreased due to lower volumes on *Ted Stevens (*DDG 128) and USS Delbert D. Black (DDG 119) following its delivery, partially offset by higher volumes on USS Jack H.

Lucas (DDG 125). Revenues on amphibious assault ships decreased due to lower volumes on Bougainville (LHA 8), partially offset by higher volumes on LHA 9 (unnamed).

Ingalls revenues for the nine months ended September 30, 2021, increased $21 million, or 1%, from the same period in 2020, primarily driven by higher revenues in surface combatants and amphibious assault ships, partially offset by lower revenues in the Legend class NSC program. Surface combatant revenues increased due to higher volumes on USS Jack H. Lucas (DDG 125), USS Jeremiah Denton (DDG 129), USS George M. Neal (DDG 131), and USS Sam Nunn (DDG 133), partially offset by lower volumes on USS Delbert D. Black (DDG 119) following its delivery and USS Fitzgerald (DDG 62) following its redelivery. Amphibious assault ship revenues increased due to higher volumes on Pittsburgh (LPD 31), LHA 9 (unnamed) and Bougainville (LHA 8), partially offset by lower volumes on Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29) and USS Tripoli (LHA 7). Revenues on the Legend class NSC program decreased due to lower volumes on Stone (NSC 9) following its delivery, partially offset by higher volumes on Friedman (NSC 11).

Segment Operating Income

Ingalls segment operating income for the three months ended September 30, 2021, was flat with the same period in 2020.

Ingalls segment operating income for the nine months ended September 30, 2021, was $233 million, compared with $185 million for the same period in 2020. The increase was primarily driven by a contract incentive on USS Jack H. Lucas (DDG 125) and higher risk retirement on Bougainville (LHA 8) and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119) following its delivery.

Newport News

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Sales and service revenues						$	1,354					$	1,358					$	(4)					—		%				$	4,124					$	3,821					$	303					8		%
Segment operating income (loss)						88						79						9						11		%				257						105						152						145		%
As a percentage of segment sales						6.5		%				5.8		%																6.2		%				2.7		%

Sales and Service Revenues

Newport News revenues for the three months ended September 30, 2021, decreased $4 million from the same period in 2020, primarily driven by lower revenues in naval nuclear support services, partially offset by higher revenues in submarines and aircraft carriers. Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), the construction of Doris Miller (CVN 81), and the construction of Enterprise (CVN 80), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73) and the construction of John F. Kennedy (CVN 79). Submarine revenues increased due to higher volumes on Block V boats of the Virginia class (SSN 774) submarine program, submarine support services and the Columbia class (SSBN 826) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program.

Newport News revenues for the nine months ended September 30, 2021, increased $303 million, or 8%, from the same period in 2020, primarily driven by higher revenues in submarines and aircraft carriers, partially offset by lower revenues in naval nuclear support services. Submarine revenues increased primarily as a result of higher volumes on Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class (SSBN 826) submarine program. Aircraft carrier revenues increased primarily as a result of higher volumes on the construction of Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74), and the construction of Doris Miller (CVN 81), partially offset by lower volumes on the construction of John F. Kennedy (CVN 79) and the RCOH of USS George Washington (CVN 73). Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.

Segment Operating Income

Newport News segment operating income for the three months ended September 30, 2021, was $88 million, compared with segment operating income of $79 million for the same period in 2020. The increase was primarily due to higher risk retirement on the RCOH of USS George Washington (CVN 73) and Block IV boats of the Virginia class (SSN 774) submarine program, partially offset by lower risk retirement on naval nuclear support services.

Newport News segment operating income for the nine months ended September 30, 2021, was $257 million, compared with segment operating income of $105 million for the same period in 2020. The increase was primarily due to impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020.

Technical Solutions

						Three Months Ended September 30																								Nine Months Ended September 30
									2021 over 2020															2021 over 2020
($ in millions)						2021						2020						Dollars						Percent						2021						2020						Dollars						Percent
Sales and service revenues						$	394					$	320					$	74					23		%				$	890					$	957					$	(67)					(7)		%
Segment operating income						13						21						(8)						(38)		%				33						23						10						43		%
As a percentage of segment sales						3.3		%				6.6		%																3.7		%				2.4		%

Sales and Service Revenues

Technical Solutions revenues for the three months ended September 30, 2021, increased $74 million, or 23%, from the same period in 2020, primarily due to higher volumes in DFS due to the acquisition of Alion, offset by the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture in the first quarter of 2021.

Technical Solutions revenues for the nine months ended September 30, 2021, decreased $67 million, or 7%, from the same period in 2020, primarily due to the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture, partially offset by higher volumes in DFS due to the acquisition of Alion.

Segment Operating Income

Technical Solutions segment operating income for the three months ended September 30, 2021, was $13 million, compared with segment operating income of $21 million for the same period in 2020. The decrease was primarily driven by the amortization of Alion purchased intangible assets, lower performance in DFS, the divestiture of our oil and gas business, and a contribution of our San Diego Shipyard to a joint venture, partially offset by the acquisition of Alion.

Technical Solutions segment operating income for the nine months ended September 30, 2021, was $33 million, compared with segment operating income of $23 million for the same period in 2020. The increase was primarily driven by equity income in nuclear and environmental joint ventures and our ship repair and specialty fabrication joint venture and the acquisition of Alion, partially offset by lower performance in unmanned systems and the amortization of Alion purchased intangible assets.

BACKLOG

Total backlog as of September 30, 2021, and December 31, 2020, was approximately $50.1 billion and $46.0 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). Backlog excludes unexercised contract options and unfunded IDIQ orders. 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, 2021, and December 31, 2020:

						September 30, 2021																		December 31, 2020
																		Total																		Total
($ in millions)						Funded						Unfunded						Backlog						Funded						Unfunded						Backlog
Ingalls						$	10,561					$	661					$	11,222					$	10,443					$	1,758					$	12,201
Newport News						11,715						21,741						33,456						9,536						23,132						32,668
Technical Solutions						1,499						3,967						5,466						502						646						1,148
Total backlog						$	23,775					$	26,369					$	50,144					$	20,481					$	25,536					$	46,017

Approximately 15% of the $46.0 billion total backlog as of December 31, 2020, is expected to be converted into sales in 2021. U.S. Government orders comprised substantially all of the backlog as of September 30, 2021, and December 31, 2020.

Awards

The value of new contract awards during the nine months ended September 30, 2021, was approximately $7.1 billion, comprised primarily of awards for the RCOH of the USS John C. Stennis (CVN 74), construction of a 10th boat of the Virginia class (SSN 774) submarine program, and construction of John F. Lehman (DDG 137).

LIQUIDITY AND CAPITAL RESOURCES

We seek to efficiently convert operating results into cash for deployment in operating our businesses, implementing our business strategy, and maximizing stockholder value. We use various financial measures to assist in capital deployment decision making, including net cash provided by operating activities and free cash flow. We 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:

						Nine Months Ended September 30												2021 over 2020
($ in millions)						2021						2020						Dollars
Net earnings						$	424					$	447					$	(23)
Depreciation and amortization						208						182						26
Provision for doubtful accounts						—						(2)						2
Stock-based compensation						19						16						3
Deferred income taxes						74						(7)						81
Loss (gain) on investments in marketable securities						(12)						(3)						(9)
Asset impairments						—						13						(13)
Retiree benefit funding less than (in excess of) expense						(73)						(183)						110
Trade working capital decrease (increase)						(151)						28						(179)
Net cash provided by operating activities						$	489					$	491					$	(2)

Cash Flows

We discuss below our significant operating, investing, and financing activities affecting cash flows for the nine months ended September 30, 2021 and 2020, as classified on our unaudited condensed consolidated statements of cash flows.

Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2021, was $489 million, compared with $491 million provided by operating activities for the same period in 2020. The unfavorable change in operating

cash flow was primarily due to changes in trade working capital, partially offset by lower contributions to retiree benefit plans and lower income tax payments. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable and payments of accounts payable.

For the nine months ended September 30, 2021, we made discretionary contributions to our qualified defined benefit pension plans totaling $60 million, compared with $205 million of discretionary contributions for the same period in 2020. As of September 30, 2021, we anticipate no further significant cash contributions to our qualified defined benefit pension plans in 2021.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the next 12 months.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2021, was $1,842 million, compared with $586 million used in investing activities for the same period in 2020. The change in investing cash was driven by the acquisitions of Alion and a non-controlling interest in Titan in 2021, partially offset by the acquisition of Hydroid in 2020 and the disposition of our oil and gas business in 2021. For 2021, we expect our capital expenditures for maintenance and sustainment to be approximately 1.5% of annual revenues and our discretionary capital expenditures to be approximately 1.5% to 2.5% of annual revenues.

Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2021, was $1,396 million, compared with $764 million provided by financing activities for the same period in 2020. The change in financing cash was primarily due to an increase in net proceeds from the incurrence of long-term debt of $650 million and a decrease of $6 million in employee taxes on certain share-based payment arrangements, partially offset by a $12 million increase in cash dividend payments, a $9 million increase in debt issuance costs, and an increase of $3 million from common stock repurchases.

Free Cash Flow

Free cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. 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												2021 over 2020
($ in millions)						2021						2020						Dollars
Net cash provided by operating activities						$	489					$	491					$	(2)
Less capital expenditures:
Capital expenditure additions						(216)						(220)						4
Grant proceeds for capital expenditures						11						17						(6)
Free cash flow						$	284					$	288					$	(4)

Free cash flow for the nine months ended September 30, 2021, decreased $4 million from the same period in 2020, primarily due to changes in trade working capital and higher capital expenditures, partially offset by lower contributions to retiree benefit plans and lower income tax payments.

Governmental Regulation and Supervision

The U.S. 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, 2021 and 2020, 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.

Other Sources and Uses of Capital

In August 2021, we entered into a $650 million 3-year delayed draw Term Loan to finance a portion of the purchase price for Alion. The Term Loan must be repaid prior to or at maturity, which is 36 months from the date of the initial draw. The Term Loan has a variable interest rate on outstanding borrowings based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and 2.000%. As of September 30, 2021, the annual interest rate spread was 1.375% based on our current credit rating.

In August 2021, we also amended and restated our existing $1.25 billion credit facility, increasing the capacity thereunder to $1.5 billion and extending the maturity date to five years from signing. The amended and restated Revolving Credit Facility has a variable interest rate on outstanding borrowings based on LIBOR, plus a spread based upon our credit rating, which may vary between 1.125% and 2.000%. As of September 30, 2021, the interest rate spread on drawn amounts would have been 1.375% based on our current credit rating. The amended and restated Revolving Credit Facility also has a commitment fee rate on unutilized amounts, currently 0.200%.

In August 2021, we issued $400 million aggregate principal amount of callable unregistered 0.670% senior notes due 2023 and $600 million aggregate principal amount of unregistered 2.043% senior notes due 2028, both with registration rights. The net proceeds were used to fund a portion of the purchase price for the acquisition of Alion. Interest on these senior notes is payable semiannually.

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 September 30, 2021, $16 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding. As of September 30, 2021, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

See Note 3: Accounting Standards Updates in Part I, Item 1 for information related to accounting standards updates.

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

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. Forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Factors that may cause such differences include:

• Changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans);

• Our ability to estimate our future contract costs and perform our contracts effectively;

• Changes in procurement processes and government regulations and our ability to comply with such requirements;

• Our ability to deliver our products and services at an affordable life cycle cost and compete within our markets;

• Natural and environmental disasters and political instability;

• Our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions;

• Adverse economic conditions in the United States and globally;

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

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

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

• Security threats, including cyber security threats, and related disruptions; and

• Other risk factors discussed herein and in our other 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. You should not place undue reliance on any forward looking statements that we may make.

GLOSSARY OF PROGRAMS

Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q.

Program Name						Program Description
America class (LHA 6) amphibious assault ships						Design and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. We delivered USS Tripoli (LHA 7) in February 2020, and we are currently constructing Bougainville (LHA 8).
Arleigh Burke class (DDG 51) destroyers						Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. In 2019 we delivered USS Paul Ignatius (DDG 117), and in 2020 we delivered USS Delbert D. Black (DDG 119). We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: Frank E. Petersen Jr. (DDG 121), Lenah H. Sutcliffe Higbee (DDG 123), Jack H. Lucas (DDG 125), Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), and John F. Lehman (DDG 137).
Carrier RCOH						Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS George Washington (CVN 73) arrived at Newport News for the start of its RCOH in August 2017 and USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021.
Columbia class (SSBN 826) submarines						Newport News is participating in designing the Columbia class submarine as a replacement for the current aging Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. The Ohio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. The Columbia class program plan of record is to construct 12 new ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, the DoD signed the acquisition decision memorandum approving the Columbia class program’s Milestone B, which formally authorizes the program’s entry into the engineering and manufacturing development phase. We perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) program. Construction of the first Columbia class (SSBN 826) submarine began in 2020.
Defense and federal solutions						DFS is focused on solving tough national security challenges for the DoD, the intelligence community, and federal civilian agencies around the globe. The group provides a wide range of professional services and products including fleet sustainment, cyber and electronic warfare, intelligence, surveillance, and reconnaissance, and live, virtual, and constructive solutions.

USS Gerald R. Ford class (CVN 78) aircraft carriers						Design and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs.
Legend class National Security Cutter						Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of 11 ships, of which the first nine ships have been delivered. Calhoun (NSC 10) and Friedman (NSC 11) are currently under construction.
Naval nuclear support services						Provide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes.
Nuclear and environmental services						Provide services in nuclear management and operations, including site management, nuclear and industrial facilities operations and maintenance, decontamination and decommissioning, radiological and hazardous waste management services, and technical engineering services. We participate in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE’s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE’s Los Alamos National Laboratory.
San Antonio class (LPD 17) amphibious transport dock ships						Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. We are currently constructing Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29), and Harrisburg (LPD 30). In 2020 we were awarded a contract to construct Pittsburgh (LPD 31).
Unmanned systems						Our unmanned systems products and services create 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						Construct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare.