Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

						Three Months Ended March 31
(in millions, except per share amounts)						2023						2022
Sales and service revenues
Product sales						$	1,829					$	1,724
Service revenues						845						852
Sales and service revenues						2,674						2,576
Cost of sales and service revenues
Cost of product sales						1,568						1,468
Cost of service revenues						756						759
Income from operating investments, net						12						7
Other income and gains (losses), net						(1)						(1)
General and administrative expenses						220						217
Operating income						141						138
Other income (expense)
Interest expense						(24)						(26)
Non-operating retirement benefit						37						71
Other, net						9						(7)
Earnings before income taxes						163						176
Federal and foreign income tax expense						34						36
Net earnings						$	129					$	140
Basic earnings per share						$	3.23					$	3.50
Weighted-average common shares outstanding						39.9						40.0
Diluted earnings per share						$	3.23					$	3.50
Weighted-average diluted shares outstanding						39.9						40.0
Dividends declared per share						$	1.24					$	1.18
Net earnings from above						$	129					$	140
Other comprehensive income (loss)
Change in unamortized benefit plan costs						4						(86)
Tax benefit (expense) for items of other comprehensive income						(1)						22
Other comprehensive income (loss), net of tax						3						(64)
Comprehensive income						$	132					$	76

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)						March 31, 2023						December 31, 2022
Assets
Current Assets
Cash and cash equivalents						$	318					$	467
Accounts receivable, net of allowance for doubtful accounts of $2 million as of 2023 and 2022						755						636
Contract assets						1,298						1,240
Inventoried costs						190						183
Income taxes receivable						113						170
Prepaid expenses and other current assets						78						50
Total current assets						2,752						2,746
Property, plant, and equipment, net of accumulated depreciation of $2,351 million as of 2023 and $2,319 million as of 2022						3,182						3,198
Operating lease assets						264						282
Goodwill						2,618						2,618
Other intangible assets, net of accumulated amortization of $913 million as of 2023 and $881 million as of 2022						987						1,019
Pension plan assets						623						600
Miscellaneous other assets						423						394
Total assets						$	10,849					$	10,857
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable						$	505					$	642
Accrued employees’ compensation						330						345
Current portion of long-term debt						399						399
Current portion of postretirement plan liabilities						134						134
Current portion of workers’ compensation liabilities						229						229
Contract liabilities						810						766
Other current liabilities						460						380
Total current liabilities						2,867						2,895
Long-term debt						2,498						2,506
Pension plan liabilities						216						214
Other postretirement plan liabilities						259						260
Workers’ compensation liabilities						464						463
Long-term operating lease liabilities						225						246
Deferred tax liabilities						389						418
Other long-term liabilities						368						366
Total liabilities						7,286						7,368
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Common stock, $0.01 par value; 150 million shares authorized; 53.6 million shares issued and 39.9 million shares outstanding as of March 31, 2023, and 53.5 million shares issued and 39.9 million shares outstanding as of December 31, 2022						1						1
Additional paid-in capital						2,024						2,022
Retained earnings						4,354						4,276
Treasury stock						(2,220)						(2,211)
Accumulated other comprehensive loss						(596)						(599)
Total stockholders’ equity						3,563						3,489
Total liabilities and stockholders’ equity						$	10,849					$	10,857

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)

						Three Months Ended March 31
($ in millions)						2023						2022
Operating Activities
Net earnings						$	129					$	140
Adjustments to reconcile to net cash used in operating activities
Depreciation						55						52
Amortization of purchased intangibles						32						35
Amortization of debt issuance costs						2						2
Provision for doubtful accounts						—						(7)
Stock-based compensation						12						9
Deferred income taxes						(30)						2
Loss (gain) on investments in marketable securities						(8)						9
Change in
Accounts receivable						(119)						(231)
Contract assets						(58)						(39)
Inventoried costs						(7)						(27)
Prepaid expenses and other assets						30						7
Accounts payable and accruals						(31)						—
Retiree benefits						(18)						(34)
Other non-cash transactions, net						2						(1)
Net cash used in operating activities						(9)						(83)
Investing Activities
Capital expenditures
Capital expenditure additions						(43)						(43)
Grant proceeds for capital expenditures						3						—
Investment in affiliates						(20)						—
Net cash used in investing activities						(60)						(43)
Financing Activities
Repayment of long-term debt						(10)						(100)
Dividends paid						(49)						(47)
Repurchases of common stock						(9)						(10)
Employee taxes on certain share-based payment arrangements						(12)						(14)
Net cash used in financing activities						(80)						(171)
Change in cash and cash equivalents						(149)						(297)
Cash and cash equivalents, beginning of period						467						627
Cash and cash equivalents, end of period						$	318					$	330
Supplemental Cash Flow Disclosure
Cash paid for interest						$	12					$	11
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable						$	8					$	1

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 March 31, 2023 and 2022 ($ 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, 2021						$	1					$	1,998					$	3,891					$	(2,159)					$	(923)					$	2,808
Net earnings						—						—						140						—						—						140
Dividends declared ($1.18 per share)						—						—						(47)						—						—						(47)
Stock-based compensation						—						(3)						(2)						—						—						(5)
Other comprehensive loss, net of tax						—						—						—						—						(64)						(64)
Treasury stock activity						—						—						—						(10)						—						(10)
Balance as of March 31, 2022						$	1					$	1,995					$	3,982					$	(2,169)					$	(987)					$	2,822
Balance as of December 31, 2022						$	1					$	2,022					$	4,276					$	(2,211)					$	(599)					$	3,489
Net earnings						—						—						129						—						—						129
Dividends declared ($1.24 per share)						—						—						(49)						—						—						(49)
Stock-based compensation						—						2						(2)						—						—						—
Other comprehensive income, net of tax						—						—						—						—						3						3
Treasury stock activity						—						—						—						(9)						—						(9)
Balance as of March 31, 2023						$	1					$	2,024					$	4,354					$	(2,220)					$	(596)					$	3,563

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. 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, making HII America's largest 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.

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"). As used in the Notes to the Condensed Consolidated Financial Statements (Unaudited), the terms "HII" and "the Company" refer to HII and its subsidiaries. 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 2022 Annual Report on Form 10-K.

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 $215 million and $209 million as of March 31, 2023, and December 31, 2022, 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 March 31, 2023, and December 31, 2022, were $2,747 million and $2,703 million, respectively. The estimated fair values of the current portion of the Company's long-term debt were $393 million and $390 million as of March 31, 2023 and December 31, 2022, respectively. 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.

3. ACCOUNTING STANDARDS UPDATES

Accounting pronouncements issued but not effective until after December 31, 2023, are not expected to have a material impact on the Company's consolidated financial position, results of operations, and cash flows.

4. 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 three months ended March 31, 2023, the Company repurchased 39,325 shares at an aggregate cost of $9 million. For the three months ended March 31, 2022, the Company repurchased 50,549 shares at an aggregate cost of $10 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 $49 million and $47 million for the three months ended March 31, 2023 and 2022, 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 was comprised of unamortized benefit plan costs of $596 million and $599 million as of March 31, 2023 and December 31, 2022, respectively.

The changes in accumulated other comprehensive loss by component for the three months ended March 31, 2023 and 2022, were as follows:

($ in millions)						Benefit Plans						Other						Total
Balance as of December 31, 2021						$	(923)					$	—					$	(923)
Other comprehensive loss before reclassifications						(97)						—						(97)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1						3						—						3
Amortization of net actuarial loss1						8						—						8
Tax benefit for items of other comprehensive loss						22						—						22
Net current period other comprehensive loss						(64)						—						(64)
Balance as of March 31, 2022						$	(987)					$	—					$	(987)
Balance as of December 31, 2022						$	(599)					$	—					$	(599)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1						3						—						3
Amortization of net actuarial loss1						1						—						1
Tax expense for items of other comprehensive income						(1)						—						(1)
Net current period other comprehensive income						3						—						3
Balance as of March 31, 2023						$	(596)					$	—					$	(596)

1 These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 11: Employee Pension and Other Postretirement Benefits. The tax expense recorded in stockholders' equity for the amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2023 and 2022, was $1 million and $3 million, respectively.

5. EARNINGS PER SHARE

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

						Three Months Ended March 31
(in millions, except per share amounts)						2023						2022
Net earnings						$	129					$	140
Weighted-average common shares outstanding						39.9						40.0
Net dilutive effect of stock awards						—						—
Dilutive weighted-average common shares outstanding						39.9						40.0
Earnings per share - basic						$	3.23					$	3.50
Earnings per share - diluted						$	3.23					$	3.50

Under the treasury stock method, the Company has excluded from the diluted share amounts presented above the effects of 0.5 million and 0.4 million Restricted Performance Stock Rights ("RPSRs") for the three months ended March 31, 2023 and 2022, respectively.

6. 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. For more information on the Company's contracts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's 2022 Annual Report on Form 10-K.

The following tables present revenues on a disaggregated basis:

						Three Months Ended March 31, 2023
($ in millions)						Ingalls						Newport News						Mission Technologies						Intersegment Eliminations						Total
Revenue Type
Product sales						$	534					$	1,271					$	24					$	—					$	1,829
Service revenues						41						234						570						—						845
Intersegment						2						1						30						(33)						—
Sales and service revenues						$	577					$	1,506					$	624					$	(33)					$	2,674
Customer Type
Federal						$	575					$	1,505					$	581					$	—					$	2,661
Commercial						—						—						13						—						13
Intersegment						2						1						30						(33)						—
Sales and service revenues						$	577					$	1,506					$	624					$	(33)					$	2,674
Contract Type
Firm fixed-price						$	2					$	—					$	75					$	—					$	77
Fixed-price incentive						533						829						—						—						1,362
Cost-type						40						676						467						—						1,183
Time and materials						—						—						52						—						52
Intersegment						2						1						30						(33)						—
Sales and service revenues						$	577					$	1,506					$	624					$	(33)					$	2,674

						Three Months Ended March 31, 2022
($ in millions)						Ingalls						Newport News						Mission Technologies						Intersegment Eliminations						Total
Revenue Type
Product sales						$	578					$	1,121					$	25					$	—					$	1,724
Service revenues						50						267						535						—						852
Intersegment						3						2						30						(35)						—
Sales and service revenues						$	631					$	1,390					$	590					$	(35)					$	2,576
Customer Type
Federal						$	628					$	1,388					$	547					$	—					$	2,563
Commercial						—						—						13						—						13
Intersegment						3						2						30						(35)						—
Sales and service revenues						$	631					$	1,390					$	590					$	(35)					$	2,576
Contract Type
Firm fixed-price						$	2					$	8					$	64					$	—					$	74
Fixed-price incentive						576						703						—						—						1,279
Cost-type						50						677						425						—						1,152
Time and materials						—						—						71						—						71
Intersegment						3						2						30						(35)						—
Sales and service revenues						$	631					$	1,390					$	590					$	(35)					$	2,576

						Three Months Ended March 31
($ in millions)						2023						2022
Major Programs
Amphibious assault ships						$	323					$	363
Surface combatants and coast guard cutters						253						265
Other						1						3
Total Ingalls						577						631
Aircraft carriers						837						742
Submarines						540						470
Other						129						178
Total Newport News						1,506						1,390
Mission based solutions						518						491
Other						106						99
Total Mission Technologies						624						590
Intersegment eliminations						(33)						(35)
Sales and service revenues						$	2,674					$	2,576

As of March 31, 2023, the Company had $47.0 billion of remaining performance obligations. The Company expects to recognize approximately 40% of its remaining performance obligations as revenue through 2024, an additional 25% through 2026, and the balance thereafter.

Cumulative Catch-up Revenue Adjustments

For the three months ended March 31, 2023, net cumulative catch-up revenue adjustments increased operating income and increased diluted earnings per share by $9 million and $0.17, respectively. For the three months ended March 31, 2022, net cumulative catch-up revenue adjustments increased operating income and increased diluted earnings per share by $45 million and $0.89, respectively.

Cumulative catch-up revenue adjustments for the three months ended March 31, 2023, included a favorable adjustment of $15 million on a contract at the Company's Newport News segment, which increased diluted earnings per share by $0.30. Cumulative catch-up revenue adjustments for the three months ended March 31, 2023, included an unfavorable adjustment of $14 million on a contract at the Company's Newport News segment, which decreased diluted earnings per share by $0.28.

Cumulative catch-up revenue adjustments for the three months ended March 31, 2022, included a favorable adjustment of $17 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.34. For the three months ended March 31, 2022, no individual unfavorable cumulative catch-up revenue 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 $14 million from December 31, 2022, to March 31, 2023, primarily resulting from an increase in contract assets related to revenue on certain U.S. Navy contracts. For the three months ended March 31, 2023, the Company recognized revenue of $551 million related to its contract liabilities as of December 31, 2022. For the three months ended March 31, 2022, the Company recognized revenue of $379 million related to its contract liabilities as of December 31, 2021.

7. SEGMENT INFORMATION

The following table presents segment results for the three months ended March 31, 2023 and 2022:

						Three Months Ended March 31
($ in millions)						2023						2022
Sales and Service Revenues
Ingalls						$	577					$	631
Newport News						1,506						1,390
Mission Technologies						624						590
Intersegment eliminations						(33)						(35)
Sales and service revenues						$	2,674					$	2,576
Operating Income
Ingalls						$	55					$	86
Newport News						84						81
Mission Technologies						17						9
Segment operating income						156						176
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment						(19)						(37)
Non-current state income taxes						4						(1)
Operating income						$	141					$	138

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 U.S. GAAP Financial Accounting Standards ("FAS") and our pension and other postretirement expense under U.S. Government Cost Accounting Standards ("CAS").

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

($ in millions)						March 31, 2023						December 31, 2022
Assets
Ingalls						$	1,615					$	1,633
Newport News						4,566						4,344
Mission Technologies						3,291						3,347
Corporate						1,377						1,533
Total assets						$	10,849					$	10,857

8. INCOME TAXES

The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended March 31, 2023 and 2022, were 20.9% and 20.5%, respectively, which did not differ materially from the federal statutory corporate income tax rate of 21%.

The Company's unrecognized tax benefits increased by $2 million during the three months ended March 31, 2023. As of March 31, 2023, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $92 million. Assuming a sustainment of these tax positions, a reversal of $70 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 months ended March 31, 2023, interest resulting from the unrecognized tax benefits noted above increased income tax expense by $1 million.

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.

9. 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 Accounting Standards Codification 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 also provided footnote

disclosure for matters for which a material loss is reasonably possible but a reserve has not been accrued because

the likelihood of a material loss is not probable.

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 has 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 three months ended March 31, 2023 and 2022, 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 condensed consolidated financial position, results of operations, or 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 condensed consolidated financial position, results of operations, or 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.

10. 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 March 31, 2023, 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 March 31, 2023, 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, or 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 March 31, 2023, 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, or 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 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 believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, but the Company is continuing 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. In response, the Company proposed a corrective action plan, which the Navy approved. Subsequently, the Navy terminated the withhold and released withheld funds to the Company.

In January 2023, the Company entered into discussions with a Mission Technologies' customer to amend an

existing contract to address manufacturing issues. Although final agreement has not been reached, the Company recorded during the period ended March 31, 2023, a provision for contract loss that was not material to the financial statements as a whole.

National Security Cutter (“NSC”) 11 Steel Plates Issue - After the Company’s Ingalls Shipbuilding segment began fabrication of Friedman (NSC 11) for the U.S. Coast Guard, the Coast Guard initiated communications with Ingalls about the degree of corrosion of certain steel plates Ingalls was using to fabricate Friedman (NSC 11), as well as the process Ingalls was using to remediate the corrosion. The Coast Guard subsequently informed Ingalls of its objection to the process Ingalls was using to remediate corrosion in Friedman (NSC 11) steel plates and requested that Ingalls follow a different remediation process or, alternatively, reconstruct affected fabricated units with new steel. Ingalls and the Coast Guard are continuing to seek a resolution of the matter. The Company has included estimates of the financial impact of the Friedman (NSC 11) matter into its contract cost estimates and revenue recognition processes. The variability of the scope of work the Company will perform to resolve the matter and the extent to which the Company will recover increased costs to resolve the matter could impact those estimates in the future. The ultimate resolution of the Friedman (NSC 11) steel plates issue, including the scope of remediation work and recovery of associated costs, could result in an adverse effect on the Company's condensed consolidated financial position, results of operations, or cash flows.

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.

11. 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 months ended March 31, 2023 and 2022, were as follows:

						Three Months Ended March 31
						Pension Benefits												Other Benefits
($ in millions)						2023						2022						2023						2022
Components of net periodic benefit cost
Service cost						$	28					$	45					$	1					$	2
Interest cost						86						64						5						4
Expected return on plan assets						(132)						(150)						—						—
Amortization of prior service cost (credit)						4						4						(1)						(1)
Amortization of net actuarial loss (gain)						4						9						(3)						(1)
Net periodic benefit (income) cost						$	(10)					$	(28)					$	2					$	4

The Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the three months ended March 31, 2023 and 2022:

						Three Months Ended March 31
($ in millions)						2023						2022
Pension plans
Discretionary
Qualified						$	—					$	—
Non-qualified						2						3
Other benefit plans						8						7
Total contributions						$	10					$	10

As of March 31, 2023, the Company anticipates no further significant cash contributions to its qualified defined benefit pension plans in 2023.

12. STOCK COMPENSATION PLANS

During the three months ended March 31, 2023 and 2022, the Company issued new stock awards as follows:

Restricted Performance Stock Rights - For the three months ended March 31, 2023, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $215.20. These rights are subject to cliff vesting on December 31, 2025. For the three months ended March 31, 2022, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $204.10. These rights are subject to cliff vesting on December 31, 2024. 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 three months ended March 31, 2023 and 2022, awards of approximately 0.1 million and 0.2 million shares of stock vested, respectively, of which less than 0.1 million for 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 March 31, 2023:

						Stock Awards (in thousands)						Weighted-Average Grant Date Fair Value						Weighted-Average Remaining Contractual Term (in years)
Total stock awards						551						$	189.15					1.5

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 $9 million for the three months ended March 31, 2023 and 2022, respectively.

The Company recorded tax benefits related to stock awards of $2 million and $1 million for the three months ended March 31, 2023 and 2022, respectively. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $3 million and $4 million for the three months ended March 31, 2023 and 2022, respectively.

Unrecognized Compensation Expense

As of March 31, 2023, the Company had $2 million of unrecognized compensation expense associated with Restricted Stock Rights granted in 2023, 2022, and 2021, which will be recognized over a weighted average period of 0.9 years, and $57 million of unrecognized compensation expense associated with RPSRs granted in 2023, 2022, and 2021, which will be recognized over a weighted average period of 1.7 years.

13. SUBSEQUENT EVENTS

In April 2023, the Company amended its existing $1.5 billion credit facility (the "Revolving Credit Facility") and $650 million term loan due August 19, 2024 (the "Term Loan") to change the benchmark interest rate from the London Interbank Offered Rate to the Secured Overnight Financing Rate (“SOFR”). The new interest rate will be based on SOFR plus an interest spread based on the Company's credit rating, plus an additional 0.10%. The Company does not expect the transition to the SOFR benchmark to materially impact its financial results. For further information on the Company's debt, see the Company's 2022 Annual Report on Form 10-K.