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

OVERVIEW

Our Business

Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is 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. For more than a century, our Ingalls Shipbuilding segment ("Ingalls") in Mississippi and Newport News Shipbuilding segment ("Newport News") in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder, making us America's largest shipbuilder. Our Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial markets. Headquartered in Newport News, Virginia, HII employs approximately 43,000 people domestically and internationally.

We conduct most of our business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our 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; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive training solutions; platform modernization; and critical nuclear operations.

The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our 2022 Annual Report on Form 10-K.

Business Environment

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

U.S. Government Contracts - The President submitted the fiscal year 2024 budget request on March 9, 2023, and the request is now under consideration by Congress. The budget request reflects continued investment in shipbuilding, funding the second Columbia class (SSBN 826) submarine, two Virginia class (SSN 774) attack submarines, two Flight III Arleigh Burke class (DDG 51) destroyers, and the final increment of Fallujah (LHA 9). Additionally, the budget request continues funding for USS Gerald R. Ford class (CVN 78) nuclear aircraft carriers and aircraft carrier refueling programs, and includes investment in the submarine industrial base. The U.S. Marine Corps included a LPD Flight II amphibious ship (LPD 33) in its fiscal year 2024 unfunded priority list, which was submitted to the Congress shortly after the release of the budget request.

Political and Economic Environment - The global geopolitical and economic environment continues to be impacted

by uncertainty, heightened tensions, and instability. Geopolitical relationships have changed, and are continuing to

change, and the U.S. and its allies face a global security environment that includes threats from state and non-state

actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional

security concerns, and political instability. These global threats persist across all domains, from undersea to space

to cyber, and the global market for defense products, services, and solutions is driven by these complex and

evolving security challenges. Our current operating environment exists in the broader context of political and

socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding

geopolitical tensions, financial market volatility, inflation, a challenging labor market, and continued public health issues.

For further information on our business environment, see the discussion under Business Environment under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our 2022 Annual Report on Form 10-K.

Critical Accounting Policies, Estimates, and Judgments

As discussed in our 2022 Annual Report on Form 10-K, we consider our policies relating to the following matters to be critical accounting policies and estimates:

• Revenue recognition;

• Purchase accounting, goodwill, and intangible assets;

• Litigation, commitments, and contingencies;

• Retirement related benefit plans; and

• Workers' compensation.

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

Program Descriptions

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

CONSOLIDATED OPERATING RESULTS

We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance. Under FAR rules that govern our business with the U.S. Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract financial estimates and the use of the cumulative catch-up method of accounting in accordance with GAAP. This approach is consistent with the long-term life cycle of our contracts, as management assesses the bidding of each contract by focusing on net sales and operating profit and monitors performance in a similar manner through contract completion. Consequently, our discussion of business segment performance focuses on net sales and operating profit, consistent with our approach for managing our business.

Key Financial Measures

The following table presents selected financial highlights:

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
Sales and service revenues						$	2,674					$	2,576					$	98					4		%
Cost of product sales and service revenues						2,324						2,227						97						4		%
Income from operating investments, net						12						7						5						71		%
Other income and gains (losses), net						(1)						(1)						—						—		%
General and administrative expenses						220						217						3						1		%
Operating income						141						138						3						2		%
Other income (expense)
Interest expense						(24)						(26)						2						8		%
Non-operating retirement benefit						37						71						(34)						(48)		%
Other, net						9						(7)						16						229		%
Federal and foreign income taxes						34						36						(2)						(6)		%
Net earnings						$	129					$	140					$	(11)					(8)		%

Sales and Service Revenues

Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service

revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to

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

levels on individual contracts. Volume changes will typically carry a corresponding income change based on the

profit margin rate for a particular contract.

Sales and service revenues for the three months ended March 31, 2023, increased $98 million, or 4%, compared to the same period in 2022, primarily due to higher volumes at Newport News and Mission Technologies, partially offset by lower volumes at Ingalls.

Cost of Sales and Service Revenues

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

Refer to "Segment Operating Results" and "Product and Service Analysis" in this section for details related to cost of sales for both product sales and service revenues.

Income from Operating Investments, Net

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

Refer to "Segment Operating Results" in this section for details related to income from operating investments.

General and Administrative Expenses

In accordance with industry practice and the regulations that govern the cost accounting requirements for government contracts, most general and administrative expenses are considered allowable and allocable costs on government contracts. These costs are allocated to contracts in progress on a systematic basis, and contract performance factors include this cost component as an element of cost.

General and administrative expenses for the three months ended March 31, 2023, increased $3 million from the same period in 2022, primarily due to higher state income taxes and overhead costs.

Operating Income

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

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

"Segment Operating Results" in this section for details related to segment operating income, as well as activity within each segment.

The following table reconciles operating income to segment operating income:

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
Operating income						$	141					$	138					$	3					2		%
Operating FAS/CAS Adjustment						19						37						(18)						(49)		%
Non-current state income taxes						(4)						1						(5)						(500)		%
Segment operating income						$	156					$	176					$	(20)					(11)		%

Operating income for the three months ended March 31, 2023, increased $3 million compared with the same period in 2022, primarily due to favorable changes in the Operating FAS/CAS Adjustment and non-current state income taxes, partially offset by lower segment operating income.

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

The FAS/CAS Adjustment reflects the difference between expenses for pension and other postretirement benefits determined in accordance with U.S. GAAP Financial Accounting Standards ("FAS") and the expenses for these items included in segment operating income in accordance with U.S. Government Cost Accounting Standards

("CAS"). The Operating FAS/CAS Adjustment excludes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.

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

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
FAS benefit						$	8					$	24					$	(16)					(67)		%
CAS cost						10						10						—						—		%
FAS/CAS Adjustment						18						34						(16)						(47)		%
Non-operating retirement benefit						(37)						(71)						34						48		%
Operating FAS/CAS Adjustment						$	(19)					$	(37)					$	18					49		%

The Operating FAS/CAS Adjustment was a net expense of $19 million and $37 million for the three months ended March 31, 2023 and 2022, respectively. The favorable change was primarily driven by the more immediate recognition of higher interest rates under FAS.

Non-current State Income Taxes

Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in state unrecognized tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

Non-current state income tax benefit for the three months ended March 31, 2023, was $4 million, compared to non-current state income tax expense of $1 million for the same period in 2022. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to the timing of long-term contract income for tax purposes.

SEGMENT OPERATING RESULTS

Our discussion of business segment performance focuses on sales and service revenues and operating income,

consistent with our approach for managing our business. We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.

The following table presents segment sales and segment operating results:

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
Sales and Service Revenues
Ingalls						$	577					$	631					$	(54)					(9)		%
Newport News						1,506						1,390						116						8		%
Mission Technologies						624						590						34						6		%
Intersegment eliminations						(33)						(35)						2						6		%
Sales and service revenues						$	2,674					$	2,576					$	98					4		%
Operating Income
Ingalls						$	55					$	86					$	(31)					(36)		%
Newport News						84						81						3						4		%
Mission Technologies						17						9						8						89		%
Segment operating income						156						176						(20)						(11)		%
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment						(19)						(37)						18						49		%
Non-current state income taxes						4						(1)						5						500		%
Operating income						$	141					$	138					$	3					2		%

Segment Operating Income

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

Cumulative Catch-up Revenue Adjustments

For the three months ended March 31, 2023 and 2022, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

						Three Months Ended March 31
($ in millions)						2023						2022
Gross favorable adjustments						$	64					$	107
Gross unfavorable adjustments						(55)						(62)
Net adjustments						$	9					$	45

For the three months ended March 31, 2023 and 2022, net cumulative catch-up revenue adjustments by segment were as follows:

						Three Months Ended March 31
($ in millions)						2023						2022
Ingalls						$	14					$	41
Newport News						(9)						—
Mission Technologies						4						4
Net adjustments						$	9					$	45

Ingalls

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
Sales and service revenues						$	577					$	631					$	(54)					(9)		%
Segment operating income						55						86						(31)						(36)		%
As a percentage of segment sales						9.5		%				13.6		%

Sales and Service Revenues

Ingalls revenues, including intersegment sales, for the three months ended March 31, 2023, decreased $54 million, or 9%, from the same period in 2022, primarily driven by lower revenues in amphibious assault ships and the Legend class National Security Cutter ("NSC") program, partially offset by higher revenues in surface combatants. Revenues on amphibious assault ships decreased due to lower volumes on USS Fort Lauderdale (LPD 28) following its delivery, Bougainville (LHA 8), L-Class planning yard services contract, and Richard M. McCool Jr. (LPD 29), partially offset by higher volumes on Fallujah (LHA 9) and LPD 32 (unnamed). Revenues on the Legend class NSC program decreased due to lower volumes on Friedman (NSC 11). Revenues on surface combatants increased due to higher volumes on George M. Neal (DDG 131), Jeremiah Denton (DDG 129), John F. Lehman (DDG 137), and Ted Stevens (DDG 128), partially offset by lower volumes on Lenah Sutcliffe Higbee (DDG 123) and USS Jack H. Lucas (DDG 125).

Segment Operating Income

Ingalls segment operating income for the three months ended March 31, 2023, was $55 million, compared to segment operating income of $86 million for the same period in 2022. The decrease was primarily driven by lower risk retirement on USS Fort Lauderdale (LPD 28) and Bougainville (LHA 8).

Newport News

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
Sales and service revenues						$	1,506					$	1,390					$	116					8		%
Segment operating income						84						81						3						4		%
As a percentage of segment sales						5.6		%				5.8		%

Sales and Service Revenues

Newport News revenues, including intersegment sales, for the three months ended March 31, 2023, increased $116 million, or 8%, from the same period in 2022, primarily driven by higher revenues in aircraft carriers and submarines, partially offset by lower revenues in naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the refueling and complex overhaul ("RCOH") of USS John C. Stennis (CVN 74) and the construction of Doris Miller (CVN 81), Enterprise (CVN 80), and John F. Kennedy (CVN 79), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73). Submarine revenues increased due to higher volumes on Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class (SSBN 826) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine

program. Naval nuclear support services revenues decreased primarily as a result of lower volumes in carrier fleet support services.

Segment Operating Income

Newport News segment operating income for the three months ended March 31, 2023, was $84 million, compared to segment operating income of $81 million for the same period in 2022. The increase was primarily due to higher sales volumes, partially offset by unfavorable risk retirement on the Enterprise (CVN 80).

Mission Technologies

						Three Months Ended March 31
									2023 vs. 2022
($ in millions)						2023						2022						Dollars						Percent
Sales and service revenues						$	624					$	590					$	34					6		%
Segment operating income						17						9						8						89		%
As a percentage of segment sales						2.7		%				1.5		%

Sales and Service Revenues

Mission Technologies revenues, including intersegment sales, for the three months ended March 31, 2023, increased $34 million, or 6%, from the same period in 2022, primarily due to higher volumes in mission based solutions and fleet sustainment.

Segment Operating Income

Mission Technologies segment operating income for the three months ended March 31, 2023, was $17 million, compared to segment operating income of $9 million for the same period in 2022. The increase was primarily driven by improved performance in mission based solutions and unmanned systems, and higher equity income from nuclear and environmental joint ventures, partially offset by lower performance in fleet sustainment.

PRODUCT AND SERVICE ANALYSIS

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

						Three Months Ended March 31
($ in millions)						2023												2022
Segment Information						Sales and service revenues						Segment cost of product sales and service revenues						Sales and service revenues						Segment cost of product sales and service revenues
Ingalls
Product						$	534					$	440					$	578					$	457
Service						41						34						50						43
Intersegment						2						2						3						3
Total Ingalls						577						476						631						503
Newport News
Product						1,271						1,092						1,121						959
Service						234						198						267						225
Intersegment						1						1						2						2
Total Newport News						1,506						1,291						1,390						1,186
Mission Technologies
Product						24						20						25						21
Service						570						521						535						485
Intersegment						30						30						30						30
Total Mission Technologies						624						571						590						536
Segment Totals
Product						1,829						1,552						1,724						1,437
Service						845						753						852						753
Total Segment (1)						$	2,674					$	2,305					$	2,576					$	2,190

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

Product Sales and Segment Cost of Product Sales

Product sales for the three months ended March 31, 2023, increased $105 million, or 6%, from the same period in 2022. Product sales at our Ingalls segment decreased $44 million in 2023, primarily as a result of lower volumes in amphibious assault ships and the Legend class NSC program, partially offset by higher volumes in surface combatants. Newport News product sales increased $150 million in 2023, primarily as a result of higher volumes in aircraft carriers and submarines. Mission Technologies product sales decreased $1 million in 2023, primarily as a result of lower volumes in mission based solutions and unmanned systems, partially offset by higher volumes in fleet sustainment.

Segment cost of product sales for the three months ended March 31, 2023, increased $115 million, or 8%, compared with the same period in 2022. Cost of product sales at our Ingalls segment decreased $17 million in 2023, primarily as a result of lower volumes described above, partially offset by lower risk retirement on USS Fort Lauderdale (LPD 28) following its delivery. Cost of product sales at our Newport News segment increased $133 million in 2023, primarily as a result of higher volumes described above. Cost of product sales at our Mission Technologies segment decreased $1 million in 2023, primarily as a result of lower volumes described above.

Service Revenues and Segment Cost of Service Revenues

Service revenues for the three months ended March 31, 2023, decreased $7 million, or 1%, compared with the same period in 2022. Service revenues at our Ingalls segment decreased $9 million in 2023, primarily as a result of

lower volumes in amphibious assault ship services. Service revenues at our Newport News segment decreased $33 million in 2023, primarily as a result of lower volumes in naval nuclear support services, partially offset by higher volumes in aircraft carrier and submarine services. Service revenues at our Mission Technologies segment increased $35 million in 2023, primarily as a result of higher volumes in mission based solutions services and fleet sustainment.

Segment cost of service revenues for the three months ended March 31, 2023, were flat compared with the same period in 2022. Cost of service revenues at our Ingalls segment decreased $9 million in 2023, primarily as a result of lower volumes described above. Cost of service revenues at our Newport News segment decreased $27 million in 2023, primarily as a result of lower volumes described above. Cost of service revenues at our Mission Technologies segment increased $36 million in 2023, primarily as a result of higher volumes described above and year-to-year variances in contract mix.

OTHER FINANCIAL INFORMATION

Interest Expense

Interest expense for the three months ended March 31, 2023, was $24 million, compared with $26 million for the same period in 2022. The decrease was primarily driven by a decrease in outstanding long-term debt from the prior year period.

Non-Operating Retirement Benefit

The non-operating retirement benefit includes the following components of net periodic benefit costs: interest cost, expected return on plan assets, amortization of prior service cost (credit) and actuarial loss (gain), and settlement and curtailment effects.

For the three months ended March 31, 2023, the non-operating retirement benefit was $37 million, compared with $71 million for the same period in 2022. The decrease was primarily driven by lower 2022 returns on plan assets.

Other, Net

Other, net income for the three months ended March 31, 2023 was $9 million, compared with other, net expense of $7 million for the same period in 2022. The favorable change was primarily driven by realized and unrealized net gains in investments.

Federal and Foreign Income Taxes

Our 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%.

BACKLOG

Total backlog as of March 31, 2023, and December 31, 2022, was approximately $47.0 billion and $47.1 billion, respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.

The following table presents funded and unfunded backlog by segment as of March 31, 2023, and December 31, 2022:

						March 31, 2023																		December 31, 2022
																		Total																		Total
($ in millions)						Funded						Unfunded						Backlog						Funded						Unfunded						Backlog
Ingalls						$	10,852					$	2,786					$	13,638					$	9,231					$	3,546					$	12,777
Newport News						13,579						15,069						28,648						11,665						17,742						29,407
Mission Technologies						1,332						3,390						4,722						1,317						3,622						4,939
Total backlog						$	25,763					$	21,245					$	47,008					$	22,213					$	24,910					$	47,123

We expect approximately 21% of the $47.1 billion total backlog as of December 31, 2022, to be converted into sales in 2023. U.S. Government orders comprised substantially all of the backlog as of March 31, 2023, and December 31, 2022.

Contract Awards

The value of new contract awards during the three months ended March 31, 2023, was approximately $2.6 billion, including an award modification for the detail design and construction of LPD 32 (unnamed).

LIQUIDITY AND CAPITAL RESOURCES

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

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

						Three Months Ended March 31												2023 vs. 2022
($ in millions)						2023						2022						Dollars
Net earnings						$	129					$	140					$	(11)
Depreciation and amortization						89						89						—
Provision for doubtful accounts						—						(7)						7
Stock-based compensation						12						9						3
Deferred income taxes						(30)						2						(32)
Loss (gain) on investments in marketable securities						(8)						9						(17)
Retiree benefits						(18)						(34)						16
Trade working capital increase						(183)						(291)						108
Net cash used in operating activities						$	(9)					$	(83)					$	74

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

leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt

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

Cash Flows

We discuss below our significant operating, investing, and financing activities affecting cash flows for the three months ended March 31, 2023 and 2022, as classified on our unaudited condensed consolidated statements of cash flows.

Operating Activities

Cash used in operating activities for the three months ended March 31, 2023, was $9 million, compared with $83 million used in operating activities for the same period in 2022. The favorable change in operating cash flow was primarily due to a favorable change in trade working capital. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing borrowing facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and fund capital expenditures for at least the next 12 calendar months beginning April 1, 2023, and beyond such 12-month period based on our current business plans.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2023, was $60 million, compared with $43 million used in investing activities for the same period in 2022. The change in investing cash was primarily driven by increased investment in one of our unconsolidated nuclear and environmental joint ventures. For 2023, we expect our capital expenditures for maintenance and sustainment to be approximately 1.0% of annual revenues and our discretionary capital expenditures to be approximately 2.0% of annual revenues.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2023, was $80 million, compared with $171 million used in financing activities for the same period in 2022. The change in financing cash was primarily due to a $90 million decrease in the prepayments of our Term Loan.

Free Cash Flow

Free cash flow represents cash provided by (used in) operating activities less capital expenditures net of related grant proceeds. Free cash flow is not a measure recognized under GAAP. Free cash flow has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, net earnings as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. We believe free cash flow is an important liquidity measure for our investors because it provides them insight into our current and period-to-period performance and our ability to generate cash from continuing operations. We also use free cash flow as a key operating metric in assessing the performance of our business and as a key performance measure in evaluating management performance and determining incentive compensation. Free cash flow may not be comparable to similarly titled measures of other companies.

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

						Three Months Ended March 31												2023 vs. 2022
($ in millions)						2023						2022						Dollars
Net cash used in operating activities						$	(9)					$	(83)					$	74
Less capital expenditures:
Capital expenditure additions						(43)						(43)						—
Grant proceeds for capital expenditures						3						—						3
Free cash flow						$	(49)					$	(126)					$	77

Free cash flow for the three months ended March 31, 2023, increased $77 million from the same period in 2022, primarily due to a favorable change in trade working capital.

Governmental Regulation and Supervision

The U.S. Government has the ability, pursuant to regulations relating to contractor business systems, to decrease or withhold contract payments if it determines significant deficiencies exist in one or more such systems. As of March 31, 2023 and 2022, the cumulative amounts of payments withheld by the U.S. Government under our contracts subject to these regulations were not material to our liquidity or cash flows.

Off-Balance Sheet Arrangements

In the ordinary course of business, we use letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans. As of March 31, 2023, $14 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding. As of March 31, 2023, we had no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

Statements in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), as well as other statements we may make from time to time, other than statements of historical fact, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. You can generally identify forward-looking statements by words such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," and similar words or phrases or the negative of these words or phrases. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Although we believe the expectations reflected in the forward-looking statements are reasonable when made, we cannot guarantee future results, levels of activity, performance, or achievements. There are a number of important factors that could cause our actual results to differ materially from the results anticipated by our forward-looking statements, which include, but are not limited to:

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

• Our ability to estimate our future contract costs, including cost increases due to inflation, and perform our contracts effectively;

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

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

• Natural and environmental disasters and political instability;

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

• Adverse economic conditions in the United States and globally;

• Health epidemics, pandemics, and similar outbreaks;

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

• Disruptions impacting global supply, including those attributable to ongoing public health issues and those resulting from the ongoing conflict between Russia and Ukraine;

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

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

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

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

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

GLOSSARY OF PROGRAMS

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

Program Name						Program Description
America class (LHA 6) amphibious assault ships						Design and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. In 2020, we delivered USS Tripoli (LHA 7), and, in 2022, we were awarded a long-lead-time material and construction contract for Fallujah (LHA 9). We are currently constructing Bougainville (LHA 8) and Fallujah (LHA 9).
Arleigh Burke class (DDG 51) destroyers						Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. We delivered USS Paul Ignatius (DDG 117), USS Delbert D. Black (DDG 119), USS Frank E. Petersen Jr. (DDG 121), and Lenah H. Sutcliffe Higbee (DDG 123) in 2019, 2020, 2021, and 2022, respectively. We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: USS Jack H. Lucas (DDG 125), Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), John F. Lehman (DDG 137), and Telesforo Trinidad (DDG 139).
Carrier RCOH						Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS George Washington (CVN 73) arrived at Newport News for the start of its RCOH in August 2017, and USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021.
Columbia class (SSBN 826) submarines						Design and construct modules for Columbia class (SSBN 826) nuclear ballistic missile submarines ("SSBNs") as a subcontractor to Electric Boat. SSBNs are the most secure and survivable of our nation’s nuclear deterrent triad. Columbia class SSBNs will carry approximately 70 percent of the nation’s nuclear arsenal. The Columbia class (SSBN 826) program plan of record is to construct 12 new SSBNs to replace the current aging Ohio class. We have a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) submarine program. Construction of the first Columbia class (SSBN 826) submarine began in 2020. In 2023, we received initial authorization to begin advance procurement and advance construction for the third and fourth boats.
Fleet sustainment						Maintains and modernizes a significant majority of the U.S. Navy fleet, from small watercraft to submarines, combatants, and aircraft carriers, our systems and maintenance experts help the Navy maintain a high state of readiness. Ensures effective system operation and sustainment by actively supporting design and decision–making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products.

USS Gerald R. Ford class (CVN 78) aircraft carriers						Design and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead-time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs.
Legend class National Security Cutter						Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of 11 ships, of which the first nine ships have been delivered. Calhoun (NSC 10) and Friedman (NSC 11) are currently under construction.
Mission based solutions						Develops integrated solutions that enable today's connected, all– domain force. Capabilities include: command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations; the application of artificial intelligence and machine learning to battlefield decisions; defensive and offensive cyberspace strategies and electronic warfare ("CEWS"); and live, virtual, and constructive ("LVC") solutions.
Naval nuclear support services						Provide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes.
Nuclear and environmental services						Supports the national security mission of the Department of Energy ("DoE") through the management and operation of DOE sites, as well as the safe cleanup of legacy waste across the country. We meet our clients' toughest nuclear and environmental challenges and are positioned to serve the growing commercial nuclear power plant decommissioning market. We participate in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE’s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE’s Los Alamos National Laboratory.

San Antonio class (LPD 17) amphibious transport dock ships						Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. In 2022, we delivered USS Fort Lauderdale (LPD 28), and we were awarded a long-lead-time material contract for LPD 32 (unnamed). In 2023, we received an award modification for the detail design and construction of LPD 32 (unnamed). We are currently constructing Richard M. McCool Jr. (LPD 29), Harrisburg (LPD 30), and Pittsburgh (LPD 31).
Unmanned systems						Creates advanced unmanned maritime solutions for defense, marine research, and commercial applications. Serving customers in more than 30 countries, unmanned systems provides design, autonomy, manufacturing, testing, operations, and sustainment of unmanned systems, including unmanned underwater vehicles and unmanned surface vessels.
Virginia class (SSN 774) fast attack submarines						Construct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare.