Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

						Three Months Ended September 30												Nine Months Ended September 30
(in millions, except per share amounts)						2022						2021						2022						2021
Sales and service revenues
Product sales						$	1,774					$	1,701					$	5,327					$	5,185
Service revenues						852						637						2,537						1,662
Sales and service revenues						2,626						2,338						7,864						6,847
Cost of sales and service revenues
Cost of product sales						1,517						1,453						4,511						4,402
Cost of service revenues						747						554						2,252						1,450
Income from operating investments, net						13						11						47						31
Other income and gains, net						—						2						—						3
General and administrative expenses						244						226						688						636
Operating income						131						118						460						393
Other income (expense)
Interest expense						(27)						(24)						(79)						(63)
Non-operating retirement benefit						71						45						209						135
Other, net						(13)						2						(30)						10
Earnings before income taxes						162						141						560						475
Federal and foreign income tax expense (benefit)						24						(6)						104						51
Net earnings						$	138					$	147					$	456					$	424
Basic earnings per share						$	3.44					$	3.65					$	11.37					$	10.52
Weighted-average common shares outstanding						40.1						40.3						40.1						40.3
Diluted earnings per share						$	3.44					$	3.65					$	11.37					$	10.52
Weighted-average diluted shares outstanding						40.1						40.3						40.1						40.3
Dividends declared per share						$	1.18					$	1.14					$	3.54					$	3.42
Net earnings from above						$	138					$	147					$	456					$	424
Other comprehensive income (loss)
Change in unamortized benefit plan costs						12						43						(61)						102
Other						(1)						(1)						(2)						1
Tax benefit (expense) for items of other comprehensive income						(3)						(11)						16						(26)
Other comprehensive income (loss), net of tax						8						31						(47)						77
Comprehensive income						$	146					$	178					$	409					$	501

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HUNTINGTON INGALLS INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)

($ in millions)						September 30, 2022						December 31, 2021
Assets
Current Assets
Cash and cash equivalents						$	117					$	627
Accounts receivable, net of allowance for doubtful accounts of $2 million as of 2022 and $9 million as of 2021						721						433
Contract assets						1,564						1,310
Inventoried costs						174						161
Income taxes receivable						180						209
Prepaid expenses and other current assets						61						50
Total current assets						2,817						2,790
Property, plant, and equipment, net of accumulated depreciation of $2,283 million as of 2022 and $2,149 million as of 2021						3,136						3,107
Operating lease assets						236						241
Goodwill						2,618						2,628
Other intangible assets, net of accumulated amortization of $846 million as of 2022 and $741 million as of 2021						1,054						1,159
Pension plan assets						355						281
Miscellaneous other assets						399						421
Total assets						$	10,615					$	10,627
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable						$	539					$	603
Accrued employees’ compensation						355						361
Current portion of long-term debt						399						—
Current portion of postretirement plan liabilities						137						137
Current portion of workers’ compensation liabilities						241						252
Contract liabilities						768						651
Other current liabilities						453						423
Total current liabilities						2,892						2,427
Long-term debt						2,605						3,298
Pension plan liabilities						394						351
Other postretirement plan liabilities						360						368
Workers’ compensation liabilities						486						506
Long-term operating lease liabilities						202						194
Deferred tax liabilities						274						313
Other long-term liabilities						354						362
Total liabilities						7,567						7,819
Commitments and Contingencies (Note 12)
Stockholders’ Equity
Common stock, $0.01 par value; 150 million shares authorized; 53.5 million shares issued and 39.9 million shares outstanding as of September 30, 2022, and 53.4 million shares issued and 40.0 million shares outstanding as of December 31, 2021						1						1
Additional paid-in capital						2,014						1,998
Retained earnings						4,203						3,891
Treasury stock						(2,200)						(2,159)
Accumulated other comprehensive loss						(970)						(923)
Total stockholders’ equity						3,048						2,808
Total liabilities and stockholders’ equity						$	10,615					$	10,627

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HUNTINGTON INGALLS INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

						Nine Months Ended September 30
($ in millions)						2022						2021
Operating Activities
Net earnings						$	456					$	424
Adjustments to reconcile to net cash provided by (used in) operating activities
Depreciation						158						154
Amortization of purchased intangibles						105						48
Amortization of debt issuance costs						6						6
Provision for doubtful accounts						(7)						—
Stock-based compensation						28						19
Deferred income taxes						(14)						74
Loss (gain) on investments in marketable securities						34						(12)
Change in
Accounts receivable						(281)						52
Contract assets						(254)						(179)
Inventoried costs						(13)						(7)
Prepaid expenses and other assets						(4)						(116)
Accounts payable and accruals						48						93
Retiree benefits						(99)						(73)
Other non-cash transactions, net						2						6
Net cash provided by operating activities						165						489
Investing Activities
Capital expenditures
Capital expenditure additions						(179)						(216)
Grant proceeds for capital expenditures						—						11
Acquisitions of businesses, net of cash received						—						(1,636)
Investment in affiliates						(5)						(22)
Proceeds from disposition of business						—						20
Other investing activities, net						6						1
Net cash used in investing activities						(178)						(1,842)
Financing Activities
Proceeds from issuance of long-term debt						—						1,650
Repayment of long-term debt						(300)						—
Debt issuance costs						—						(22)
Dividends paid						(142)						(138)
Repurchases of common stock						(41)						(87)
Employee taxes on certain share-based payment arrangements						(14)						(7)
Net cash (used in) provided by financing activities						(497)						1,396
Change in cash and cash equivalents						(510)						43
Cash and cash equivalents, beginning of period						627						512
Cash and cash equivalents, end of period						$	117					$	555
Supplemental Cash Flow Disclosure
Cash paid for income taxes (net of refunds)						$	107					$	31
Cash paid for interest						$	61					$	39
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable						$	5					$	4

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HUNTINGTON INGALLS INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

Three Months Ended September 30, 2022 and 2021 ($ in millions)						Common Stock						Additional Paid-in Capital						Retained Earnings (Deficit)						Treasury Stock						Accumulated Other Comprehensive Income (Loss)						Total Stockholders' Equity
Balance as of June 30, 2021						$	1					$	1,977					$	3,718					$	(2,128)					$	(1,501)					$	2,067
Net earnings						—						—						147						—						—						147
Dividends declared ($1.14 per share)						—						—						(46)						—						—						(46)
Stock-based compensation						—						7						—						—						—						7
Other comprehensive income, net of tax						—						—						—						—						31						31
Treasury stock activity						—						—						—						(17)						—						(17)
Balance as of September 30, 2021						$	1					$	1,984					$	3,819					$	(2,145)					$	(1,470)					$	2,189
Balance as of June 30, 2022						$	1					$	2,002					$	4,113					$	(2,186)					$	(978)					$	2,952
Net earnings						—						—						138						—						—						138
Dividends declared ($1.18 per share)						—						—						(48)						—						—						(48)
Stock-based compensation						—						12						—						—						—						12
Other comprehensive income, net of tax						—						—						—						—						8						8
Treasury stock activity						—						—						—						(14)						—						(14)
Balance as of September 30, 2022						$	1					$	2,014					$	4,203					$	(2,200)					$	(970)					$	3,048

Nine Months Ended September 30, 2022 and 2021 ($ in millions)						Common Stock						Additional Paid-in Capital						Retained Earnings (Deficit)						Treasury Stock						Accumulated Other Comprehensive Income (Loss)						Total Stockholders' Equity
Balance as of December 31, 2020						$	1					$	1,972					$	3,533					$	(2,058)					$	(1,547)					$	1,901
Net earnings						—						—						424						—						—						424
Dividends declared ($3.42 per share)						—						—						(138)						—						—						(138)
Stock-based compensation						—						12						—						—						—						12
Other comprehensive income, net of tax						—						—						—						—						77						77
Treasury stock activity						—						—						—						(87)						—						(87)
Balance as of September 30, 2021						$	1					$	1,984					$	3,819					$	(2,145)					$	(1,470)					$	2,189
Balance as of December 31, 2021						$	1					$	1,998					$	3,891					$	(2,159)					$	(923)					$	2,808
Net earnings						—						—						456						—						—						456
Dividends declared ($3.54 per share)						—						—						(142)						—						—						(142)
Stock-based compensation						—						16						(2)						—						—						14
Other comprehensive loss, net of tax						—						—						—						—						(47)						(47)
Treasury stock activity						—						—						—						(41)						—						(41)
Balance as of September 30, 2022						$	1					$	2,014					$	4,203					$	(2,200)					$	(970)					$	3,048

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

HUNTINGTON INGALLS INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

Huntington Ingalls Industries, Inc. ("HII" or the "Company") is a global, all-domain defense partner, building and delivering the world’s most powerful, survivable naval ships and technologies that safeguard America’s seas, sky, land, space, and cyber. HII is organized into three reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Mission Technologies (formerly named Technical Solutions). For more than a century, the Company's 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. The Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial services markets.

HII conducts most of its business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, the Company participates in many high-priority U.S. defense programs. Through its Ingalls segment, HII is a builder of amphibious assault and expeditionary warfare ships for the U.S. Navy, the sole builder of National Security Cutters for the U.S. Coast Guard, and one of only two companies that builds the Navy's current fleet of Arleigh Burke class (DDG 51) destroyers. Through its Newport News segment, HII is the nation's sole designer, builder, and refueler of nuclear-powered aircraft carriers, and one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy. The Mission Technologies segment provides a wide range of services and products, including command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defensive and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive training solutions; platform modernization; and critical nuclear operations.

2. BASIS OF PRESENTATION

Principles of Consolidation - The unaudited condensed consolidated financial statements of HII and its subsidiaries have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). All intercompany transactions and balances are eliminated in consolidation. For classification of current assets and liabilities related to its long-term production contracts, the Company uses the duration of these contracts as its operating cycle, which is generally longer than one year.

These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

The quarterly information is labeled using a calendar convention; that is, first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is management's long-standing practice to establish interim closing dates using a "fiscal" calendar, which requires the businesses to close their books on a Friday near these quarter-end dates in order to normalize the potentially disruptive effects of quarterly closings on business processes. The effects of this practice only exist for interim periods within a reporting year.

Accounting Estimates - The preparation of the Company's unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information, and actual results could differ materially from those estimates.

Fair Value of Financial Instruments - Except for the Company's long-term debt, the carrying amounts of the Company's financial instruments recorded at historical cost approximate fair value due to the short-term nature of the instruments and low credit risk associated with the respective counterparties.

The Company maintains multiple grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $196 million and $220 million as of September 30, 2022, and December 31, 2021, respectively, and are presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position. These trusts consist primarily of investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.

The estimated fair values of the Company's total long-term debt (including current portion) as of September 30, 2022, and December 31, 2021, were $2,768 million and $3,449 million, respectively. The estimated fair value of the current portion of the Company's long-term debt was $386 million as of September 30, 2022. The fair values of the Company's long-term debt were calculated based on recent trades of the Company's debt instruments in inactive markets, which fall within Level 2 under the fair value hierarchy.

Debt Prepayment - As of September 30, 2022, $325 million of the Company's Term Loan due August 19, 2024 has been prepaid, with a remaining balance of $325 million.

3. ACCOUNTING STANDARDS UPDATES

Accounting pronouncements issued but not effective until after December 31, 2022, are not expected to have a material impact on the Company's consolidated financial position, results of operations, and cash flows.

4. ACQUISITIONS

On August 19, 2021, the Company acquired all of the outstanding common stock of Alion Holding Corp., the parent company of Alion Science and Technology Corporation (“Alion”), a technology-driven solutions provider. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805 Business Combinations. The purchase price was $1.79 billion, including $148 million of cash received in the acquisition. In connection with the acquisition, the Company originally recorded $1,024 million of goodwill, which included the value of Alion's workforce, and $720 million of intangible assets related to customer relationships and existing contract backlog. The goodwill is attributable to operational synergies and growth opportunities and was allocated to the Company's Mission Technologies segment. For the nine months ended September 30, 2022, the Company recorded a decrease to goodwill of $10 million, resulting from updates to Alion’s tax carryforwards and the true-up of estimated taxes to filed income tax returns for the pre-acquisition period. The acquisition accounting was completed at September 30, 2022. None of the goodwill resulting from this acquisition is expected to be amortizable for tax purposes.

Alion provides advanced engineering and research and development services in the areas of intelligence, surveillance, and reconnaissance, military training and simulation, cyber, data analytics, and other next-generation technology based solutions to the DoD and intelligence community customers, with the U.S. Navy representing about one-third of current annual revenues.

Pro Forma Financial Information

The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the acquisition of Alion as if it had occurred on January 1, 2021.

						Three Months Ended September 30												Nine Months Ended September 30
($ in millions, except per share amounts)						2022						Pro Forma 2021						2022						Pro Forma 2021
Sales and service revenues						$	2,626					$	2,532					$	7,864					$	7,687
Net earnings						$	138					$	142					$	456					$	416
Basic earnings per share						$	3.44					$	3.52					$	11.37					$	10.32
Diluted earnings per share						$	3.44					$	3.52					$	11.37					$	10.32

These unaudited pro forma results include adjustments associated with the acquisition, such as the amortization of acquired intangible assets and interest expense on debt financing.

The unaudited consolidated pro forma financial information was prepared in accordance with GAAP and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These results also do not give effect to certain charges that the Company incurred in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.

5. STOCKHOLDERS' EQUITY

Treasury Stock - In November 2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $2.2 billion to $3.2 billion and an extension of the term of the program to October 31, 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the nine months ended September 30, 2022, the Company repurchased 196,850 shares at an aggregate cost of $41 million. For the nine months ended September 30, 2021, the Company repurchased 469,436 shares at an aggregate cost of $87 million. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.

Dividends - The Company paid cash dividends totaling $142 million and $138 million for the nine months ended September 30, 2022 and 2021, respectively.

Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss as of September 30, 2022, was comprised of unamortized benefit plan costs of $969 million and other comprehensive loss of $1 million. The accumulated other comprehensive loss as of December 31, 2021, was comprised of unamortized benefit plan costs of $923 million.

The changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2022 and 2021, were as follows:

($ in millions)						Benefit Plans						Other						Total
Balance as of June 30, 2021						$	(1,502)					$	1					$	(1,501)
Other comprehensive income (loss) before reclassifications						14						(1)						13
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1						2						—						2
Amortization of net actuarial loss1						27						—						27
Tax expense for items of other comprehensive income						(11)						—						(11)
Net current period other comprehensive income (loss)						32						(1)						31
Balance as of September 30, 2021						$	(1,470)					$	—					$	(1,470)
Balance as of June 30, 2022						$	(977)					$	(1)					$	(978)
Other comprehensive income (loss) before reclassifications						3						(1)						2
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1						5						—						5
Amortization of net actuarial loss1						8						—						8
Settlement gain1						(4)						—						(4)
Tax (expense) benefit for items of other comprehensive income (loss)						(4)						1						(3)
Net current period other comprehensive income						8						—						8
Balance as of September 30, 2022						$	(969)					$	(1)					$	(970)

($ in millions)						Benefit Plans						Other						Total
Balance as of December 31, 2020						$	(1,546)					$	(1)					$	(1,547)
Other comprehensive income before reclassifications						14						1						15
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1						8						—						8
Amortization of net actuarial loss1						80						—						80
Tax expense for items of other comprehensive income						(26)						—						(26)
Net current period other comprehensive income						76						1						77
Balance as of September 30, 2021						$	(1,470)					$	—					$	(1,470)
Balance as of December 31, 2021						$	(923)					$	—					$	(923)
Other comprehensive loss before reclassifications						(94)						(2)						(96)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1						13						—						13
Amortization of net actuarial loss1						24						—						24
Settlement gain1						(4)						—						(4)
Tax benefit for items of other comprehensive loss						15						1						16
Net current period other comprehensive loss						(46)						(1)						(47)
Balance as of September 30, 2022						$	(969)					$	(1)					$	(970)

1 These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 13: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the three months ended September 30, 2022 and 2021, was $2 million and $8 million, respectively. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the nine months ended September 30, 2022 and 2021, was $8 million and $23 million, respectively.

6. EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows:

						Three Months Ended September 30												Nine Months Ended September 30
(in millions, except per share amounts)						2022						2021						2022						2021
Net earnings						$	138					$	147					$	456					$	424
Weighted-average common shares outstanding						40.1						40.3						40.1						40.3
Net dilutive effect of stock awards						—						—						—						—
Dilutive weighted-average common shares outstanding						40.1						40.3						40.1						40.3
Earnings per share - basic						$	3.44					$	3.65					$	11.37					$	10.52
Earnings per share - diluted						$	3.44					$	3.65					$	11.37					$	10.52

Under the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of 0.4 million Restricted Performance Stock Rights ("RPSRs") for each of the three and nine months ended September 30, 2022 and 2021.

7. REVENUE

Disaggregation of Revenue

The Company's contracts with customers typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials.

*•*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.

The following tables present revenues on a disaggregated basis:

						Three Months Ended September 30, 2022
($ in millions)						Ingalls						Newport News						Mission Technologies						Intersegment Eliminations						Total
Revenue Type
Product sales						$	577					$	1,185					$	12					$	—					$	1,774
Service revenues						41						259						552						—						852
Intersegment						5						1						31						(37)						—
Sales and service revenues						$	623					$	1,445					$	595					$	(37)					$	2,626
Customer Type
Federal						$	618					$	1,444					$	554					$	—					$	2,616
Commercial						—						—						9						—						9
State and local government agencies						—						—						1						—						1
Intersegment						5						1						31						(37)						—
Sales and service revenues						$	623					$	1,445					$	595					$	(37)					$	2,626
Contract Type
Firm fixed-price						$	1					$	1					$	59					$	—					$	61
Fixed-price incentive						577						723						—						—						1,300
Cost-type						40						720						437						—						1,197
Time and materials						—						—						68						—						68
Intersegment						5						1						31						(37)						—
Sales and service revenues						$	623					$	1,445					$	595					$	(37)					$	2,626

						Three Months Ended September 30, 2021
($ in millions)						Ingalls						Newport News						Mission Technologies						Intersegment Eliminations						Total
Revenue Type
Product sales						$	586					$	1,088					$	27					$	—					$	1,701
Service revenues						38						263						336						—						637
Intersegment						4						3						31						(38)						—
Sales and service revenues						$	628					$	1,354					$	394					$	(38)					$	2,338
Customer Type
Federal						$	624					$	1,351					$	354					$	—					$	2,329
Commercial						—						—						9						—						9
Intersegment						4						3						31						(38)						—
Sales and service revenues						$	628					$	1,354					$	394					$	(38)					$	2,338
Contract Type
Firm fixed-price						$	5					$	15					$	52					$	—					$	72
Fixed-price incentive						585						686						—						—						1,271
Cost-type						34						650						261						—						945
Time and materials						—						—						50						—						50
Intersegment						4						3						31						(38)						—
Sales and service revenues						$	628					$	1,354					$	394					$	(38)					$	2,338

						Nine Months Ended September 30, 2022
($ in millions)						Ingalls						Newport News						Mission Technologies						Intersegment Eliminations						Total
Revenue Type
Product sales						$	1,766					$	3,496					$	65					$	—					$	5,327
Service revenues						136						768						1,633						—						2,537
Intersegment						10						4						87						(101)						—
Sales and service revenues						$	1,912					$	4,268					$	1,785					$	(101)					$	7,864
Customer Type
Federal						$	1,902					$	4,264					$	1,665					$	—					$	7,831
Commercial						—						—						32						—						32
State and local government agencies						—						—						1						—						1
Intersegment						10						4						87						(101)						—
Sales and service revenues						$	1,912					$	4,268					$	1,785					$	(101)					$	7,864
Contract Type
Firm fixed-price						$	7					$	12					$	192					$	—					$	211
Fixed-price incentive						1,762						2,180						—						—						3,942
Cost-type						133						2,072						1,299						—						3,504
Time and materials						—						—						207						—						207
Intersegment						10						4						87						(101)						—
Sales and service revenues						$	1,912					$	4,268					$	1,785					$	(101)					$	7,864

						Nine Months Ended September 30, 2021
($ in millions)						Ingalls						Newport News						Mission Technologies						Intersegment Eliminations						Total
Revenue Type
Product sales						$	1,814					$	3,300					$	71					$	—					$	5,185
Service revenues						121						815						726						—						1,662
Intersegment						12						9						93						(114)						—
Sales and service revenues						$	1,947					$	4,124					$	890					$	(114)					$	6,847
Customer Type
Federal						$	1,935					$	4,115					$	760					$	—					$	6,810
Commercial						—						—						37						—						37
Intersegment						12						9						93						(114)						—
Sales and service revenues						$	1,947					$	4,124					$	890					$	(114)					$	6,847
Contract Type
Firm fixed-price						$	29					$	30					$	132					$	—					$	191
Fixed-price incentive						1,790						2,121						3						—						3,914
Cost-type						116						1,964						492						—						2,572
Time and materials						—						—						170						—						170
Intersegment						12						9						93						(114)						—
Sales and service revenues						$	1,947					$	4,124					$	890					$	(114)					$	6,847

						Three Months Ended September 30												Nine Months Ended September 30
($ in millions)						2022						2021						2022						2021
Major Programs
Amphibious assault ships						$	325					$	326					$	1,060					$	1,032
Surface combatants and coast guard cutters						291						286						840						898
Other						7						16						12						17
Total Ingalls						623						628						1,912						1,947
Aircraft carriers						762						742						2,318						2,228
Submarines						519						490						1,459						1,419
Other						164						122						491						477
Total Newport News						1,445						1,354						4,268						4,124
Government and energy services						595						394						1,785						876
Oil and gas services						—						—						—						14
Total Mission Technologies						595						394						1,785						890
Intersegment eliminations						(37)						(38)						(101)						(114)
Sales and service revenues						$	2,626					$	2,338					$	7,864					$	6,847

As of September 30, 2022, the Company had $46.7 billion of remaining performance obligations. The Company expects to recognize approximately 30% of its remaining performance obligations as revenue through 2023, an additional 35% through 2025, and the balance thereafter.

Cumulative Catch-up Adjustments

For the three months ended September 30, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $27 million and $0.53, respectively. For the three months ended September 30, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $21 million and $0.41, respectively. For the nine months ended September 30, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $140 million and $2.75, respectively. For the nine months ended September 30, 2021, net cumulative catch-up

adjustments increased operating income and increased diluted earnings per share by $106 million and $2.07, respectively.

Cumulative catch-up adjustments for the three months ended September 30, 2022, included a favorable adjustment of $41 million on a contract at the Company's Newport News segment, which increased diluted earnings per share by $0.80. For the nine months ended September 30, 2022, no individual favorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.

For the three and nine months ended September 30, 2022, no individual unfavorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.

For the three and nine months ended September 30, 2021, no individual adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.

Contract Balances

The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. The Company’s net contract assets increased $137 million from December 31, 2021, to September 30, 2022, primarily resulting from an increase in contract assets related to revenue on certain U.S. Navy contracts. For the three and nine months ended September 30, 2022, the Company recognized revenue of $17 million and $548 million, respectively, related to its contract liabilities as of December 31, 2021. For the three months ended September 30, 2021, the Company did not recognize revenue related to its contract liabilities as of December 31, 2020. For the nine months ended September 30, 2021, the Company recognized revenue of $447 million related to its contract liabilities as of December 31, 2020.

8. SEGMENT INFORMATION

The following table presents segment results for the three and nine months ended September 30, 2022 and 2021:

						Three Months Ended September 30												Nine Months Ended September 30
($ in millions)						2022						2021						2022						2021
Sales and Service Revenues
Ingalls						$	623					$	628					$	1,912					$	1,947
Newport News						1,445						1,354						4,268						4,124
Mission Technologies						595						394						1,785						890
Intersegment eliminations						(37)						(38)						(101)						(114)
Sales and service revenues						$	2,626					$	2,338					$	7,864					$	6,847
Operating Income
Ingalls						$	50					$	62					$	242					$	233
Newport News						102						88						277						257
Mission Technologies						14						13						48						33
Segment operating income						166						163						567						523
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment						(36)						(41)						(108)						(118)
Non-current state income taxes						1						(4)						1						(12)
Operating income						$	131					$	118					$	460					$	393

Operating FAS/CAS Adjustment - The Operating FAS/CAS Adjustment represents the difference between the service cost component of our pension and other postretirement benefit plan expense determined in accordance with GAAP ("FAS") and our pension and other postretirement expense under CAS.

The following table presents the Company's assets by segment:

($ in millions)						September 30, 2022						December 31, 2021
Assets
Ingalls						$	1,716					$	1,659
Newport News						4,558						4,179
Mission Technologies						3,403						3,553
Corporate						938						1,236
Total assets						$	10,615					$	10,627

9. GOODWILL

The Company’s annual goodwill impairment test will be performed as of November 30, 2022, whereby management will test goodwill for each of its three reporting units with goodwill balances to determine whether an event occurred or circumstances changed that would more likely than not reduce the fair values of the Company's reporting units below their respective carrying values. The Company expects that the fair value of the Government Services reporting unit within the Mission Technologies segment will exceed carrying value by less than 10%. The Company expects that the estimated fair values of its remaining reporting units will exceed by more than 10% their corresponding carrying values as of November 30, 2022.

10. INCOME TAXES

The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended September 30, 2022 and 2021, were 14.8% and (4.3)%, respectively. For the nine months ended September 30, 2022 and 2021, the Company's effective income tax rates on earnings from operations were 18.6% and 10.7%, respectively. The higher effective tax rates for the three and nine months ended September 30, 2022, were primarily attributable to research and development tax credits for prior periods recorded in 2021.

For each of the three and nine months ended September 30, 2022 and 2021, the Company’s effective tax rates differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits for prior periods.

The Company's unrecognized tax benefits increased by $5 million and $10 million during the three and nine months ended September 30, 2022, respectively. As of September 30, 2022, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $91 million. Assuming a sustainment of these tax positions, a reversal of $69 million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. For the three and nine months ended September 30, 2022, interest resulting from the unrecognized tax benefits noted above increased income tax expense by less than $1 million and $1 million, respectively.

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 unrecognized state 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.

11. INVESTIGATIONS, CLAIMS, AND LITIGATION

The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB ASC 450 Contingencies, the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. The Company has, in certain cases, provided disclosure regarding certain matters for which the Company believes at this time that the likelihood of material loss is remote.

False Claims Act Complaint - In 2016, the Company was made aware that it is a defendant in a qui tam False Claims Act lawsuit pending in the U.S. District Court for the Middle District of Florida related to the Company’s purchases of allegedly non-conforming parts from a supplier for use in connection with U.S. Government contracts. In August 2019, the Department of Justice (“DoJ”) declined to intervene in the lawsuit, and the lawsuit was unsealed. The court dismissed the complaint in September 2021, and the plaintiff has appealed the dismissal to the United States Court of Appeals for the 11th Circuit.

Insurance Claims - In September 2020, the Company filed a complaint against 32 reinsurers in the Superior Court, State of Vermont, Franklin Unit, seeking a judgment declaring that the Company's business interruption and other losses associated with COVID-19 are covered by the Company's property insurance program. The Company also initiated arbitration proceedings against six other reinsurers seeking similar relief. In July 2021, the Vermont court granted the reinsurers’ motion for judgment on the pleadings, which would have ended the Company’s claim. The Company appealed the decision to the Vermont Supreme Court, which reversed and remanded the lower court’s decision in September 2022, allowing the Company’s claim to proceed. No assurances can be provided regarding the ultimate resolution of this matter.

In September 2021, the Company filed a complaint in the Superior Court of Delaware, seeking a judgment against certain insurers for breach of contract and breach of the implied covenant of good faith and fair dealing under three representations and warranties insurance policies purchased in connection with the Company’s acquisition of Hydroid. The policies insure the Company against losses relating to the seller’s breach of certain representations and warranties in the Hydroid acquisition agreement. The coverage limit under the insurance policies is $70 million, and the Company believes it has incurred losses equal to at least that amount as a result of breaches of the acquisition agreement. No assurances can be provided regarding the ultimate resolution of this matter.

U.S. Government Investigations and Claims - Departments and agencies of the U.S. Government have the authority to investigate various transactions and operations of the Company, and the results of such investigations may lead to administrative, civil, or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory, treble, or other damages. U.S. Government regulations provide that certain findings against a contractor may also lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges. Any suspension or debarment would have a material effect on the Company because of its reliance on government contracts.

Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. In some instances, partial or full insurance coverage is available for the Company's liabilities. The costs to resolve cases during the nine months ended September 30, 2022 and 2021, were not material individually or in the aggregate. The Company’s estimate of asbestos-related liabilities is subject to uncertainty because liabilities are influenced by many variables that are inherently difficult to predict. Although the Company believes the ultimate resolution of current cases will not have a material effect on its consolidated financial position, results of operations, and cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.

Other Litigation - The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the "Republic") since 2002 over a contract for the repair, refurbishment, and modernization at Ingalls of two foreign-built frigates. Following an arbitration proceeding between the parties, in February 2018, the arbitral tribunal awarded the Company approximately $151 million on its claims and awarded the Republic approximately $22 million on its counterclaims. The Company is seeking to enforce and execute upon the award in multiple jurisdictions. No assurances can be provided regarding the ultimate resolution of this matter.

The Company is party to various other claims, legal proceedings, and investigations that arise in the ordinary course of business, including U.S. Government investigations that could result in administrative, civil, or criminal proceedings involving the Company. The Company is a contractor with the U.S. Government, and such proceedings can therefore include False Claims Act allegations against the Company. Although the Company believes that the resolution of these other claims, legal proceedings, and investigations will not have a material effect on its consolidated financial position, results of operations, and cash flows, the Company cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.

12. COMMITMENTS AND CONTINGENCIES

Contract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances and recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. As of September 30, 2022, amounts recognized in connection with claims and requests for equitable adjustment were not material individually or in the aggregate.

Environmental Matters - The estimated cost to complete environmental remediation has been accrued when it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. Management estimates that as of September 30, 2022, the probable estimable future cost for environmental remediation was not material. Although management cannot predict whether new information gained as remediation progresses or the Company incurs additional remediation obligations will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, and cash flows.

Financial Arrangements - In the ordinary course of business, HII uses 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 the Company's self-insured workers' compensation plans. As of September 30, 2022, the Company had $14 million in issued but undrawn letters of credit and $360 million of surety bonds outstanding.

U.S. Government Claims - From time to time, the U.S. Government communicates to the Company potential claims, disallowed costs, and penalties concerning prior costs incurred by the Company with which the U.S. Government disagrees. When such preliminary findings are presented, the Company and U.S. Government representatives engage in discussions, from which the Company evaluates the merits of the claims and assesses the amounts being questioned. Although the Company believes that the resolution of any of these matters will not have a material effect on its consolidated financial position, results of operations, and cash flows, it cannot predict the ultimate outcome of these matters.

Other Matters - In 1985, the Company and the U.S. Navy entered into a settlement agreement to resolve disputes associated with billing and allocating to contracts the cost of workers’ compensation self-insurance, among other matters. Consistent with the 1985 settlement agreement, the Company has not recovered cumulative billable costs resulting from the different treatment of workers' compensation costs between CAS and U.S. GAAP Financial Accounting Standards ("FAS"). Under the 1985 settlement agreement, these costs would be recovered in future periods. In December 2020, a U.S. Navy Contracting Officer issued a determination that the 1985 settlement agreement did not comply with CAS and directed the Company to develop and implement a different process to bill and allocate the cost of workers’ compensation self-insurance. The Company has submitted to the Navy a proposed draft alternative approach to billing and allocating the cost of workers’ compensation self-insurance, while continuing to reiterate its belief that the 1985 settlement agreement remains binding on the parties. Although the Company believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, the Company is seeking to negotiate a resolution of the matter with the Contracting Officer.

In August 2022, the Navy Contracting Officer issued a written determination that the Ingalls Shipbuilding Property Management System had a significant deficiency, resulting in a 2% withhold of payments on certain invoices issued under one contract. The withhold will terminate and withheld funds paid to the Company when the Contracting Officer determines that the significant deficiency has been corrected. Although the Company believes the ultimate resolution of this matter will not have a material effect on its consolidated financial position, results of operations, or cash flows, it cannot predict or give assurances regarding the ultimate outcome of this matter.

Collective Bargaining Agreements - Of the Company's approximately 43,000 employees, approximately 45% are covered by a total of nine collective bargaining agreements and one site stabilization agreement. The Company believes its relationship with its employees is satisfactory.

13. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company provides eligible employees defined benefit pension plans, other postretirement benefit plans, and defined contribution pension plans.

The costs of the Company's defined benefit pension plans and other postretirement benefit plans for the three and nine months ended September 30, 2022 and 2021, were as follows:

						Three Months Ended September 30																								Nine Months Ended September 30
						Pension Benefits												Other Benefits												Pension Benefits												Other Benefits
($ in millions)						2022						2021						2022						2021						2022						2021						2022						2021
Components of Net Periodic Benefit Cost
Service cost						$	45					$	50					$	2					$	2					$	135					$	149					$	7					$	7
Interest cost						65						60						3						4						194						180						10						11
Expected return on plan assets						(148)						(138)						—						—						(446)						(414)						—						—
Amortization of prior service cost (credit)						6						3						(1)						(1)						16						11						(3)						(3)
Amortization of net actuarial loss (gain)						8						28						—						(1)						26						82						(2)						(2)
Settlement gain						(4)						—						—						—						(4)						—						—						—
Net periodic benefit (income) cost						$	(28)					$	3					$	4					$	4					$	(79)					$	8					$	12					$	13

The Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the nine months ended September 30, 2022 and 2021:

						Nine Months Ended September 30
($ in millions)						2022						2021
Pension plans
Discretionary
Qualified						$	—					$	60
Non-qualified						7						6
Other benefit plans						25						28
Total contributions						$	32					$	94

As of September 30, 2022, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2022.

On September 6, 2022, the Company purchased annuity contracts to transfer $32 million of gross defined benefit pension obligations and related plan assets to an insurance company for approximately 500 retirees and beneficiaries. The annuity contracts were purchased using assets from the pension master trust, and no additional funding contribution was required. This transaction had no impact on the amount, timing, or form of the monthly retirement benefit payments to the affected retirees and beneficiaries. In connection with this transaction, the Company recognized a noncash, non-operating pension settlement gain of $4 million for the affected plan, which represents the accelerated recognition of actuarial losses that were included in accumulated other comprehensive loss within stockholders' equity.

In March 2022, the Company concluded negotiations on one of its collective bargaining agreements, which required an amendment to one of the Company's pension plans. As a result of the amendment, the remeasurement of the plan increased the pension liability and pre-tax accumulated other comprehensive loss by approximately $97 million.

14. STOCK COMPENSATION PLANS

During the nine months ended September 30, 2022 and 2021, the Company issued new stock awards as follows:

Restricted Performance Stock Rights - For the nine months ended September 30, 2022, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $201.48. These rights are subject to cliff vesting on December 31, 2024. For the nine months ended September 30, 2021, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $180.05. These rights are subject to cliff vesting on December 31, 2023. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between 0% and 200% of grant date value.

For the nine months ended September 30, 2022 and 2021, awards of approximately 0.2 million and 0.1 million shares of stock vested, respectively, of which less than 0.1 million each period were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.

The following table summarizes the status of the Company's outstanding stock awards as of September 30, 2022:

						Stock Awards (in thousands)						Weighted-Average Grant Date Fair Value						Weighted-Average Remaining Contractual Term (in years)
Total stock awards						509						$	188.84					1.2

Compensation Expense

The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $12 million and $7 million for the three months ended September 30, 2022 and 2021, respectively. The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $28 million and $19 million for the nine months ended September 30, 2022 and 2021, respectively.

The Company recorded tax benefits related to stock awards of $3 million and $1 million for the three months ended September 30, 2022 and 2021, respectively. The Company recorded tax benefits related to stock awards of $5 million and $3 million for the nine months ended September 30, 2022 and 2021, respectively. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of less than $1 million for each of the three months ended September 30, 2022 and 2021. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $4 million and $2 million for the nine months ended September 30, 2022 and 2021, respectively.

Unrecognized Compensation Expense

As of September 30, 2022, the Company had $3 million of unrecognized compensation expense associated with Restricted Stock Rights granted in 2022 and 2021, which will be recognized over a weighted average period of 1 year, and $37 million of unrecognized compensation expense associated with RPSRs granted in 2022, 2021, and 2020, which will be recognized over a weighted average period of 1.3 years.