# HUNTINGTON INGALLS INDUSTRIES, INC. (HII) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HUNTINGTON INGALLS INDUSTRIES, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1501585/000150158523000010/hii-20221231.htm
Accession: 0001501585-23-000010
Filing date: 2023-02-09
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HII/
All MD&A years: /company/HII/mda/
Previous year: /company/HII/mda/fy2021/ (FY 2021)
Next year: /company/HII/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion should be read along with the audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, as well as Part II, “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

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

The fiscal year 2023 budget cycle concluded with the enactment of the National Defense Authorization Act ("NDAA") for fiscal year 2023 on December 23, 2022 and the Consolidated Appropriations Act, 2023 on December 29, 2022. The NDAA broadly supported our shipbuilding programs, including multiyear procurement authority for up to 15 DDG Flight III destroyers, a fleet requirement of no less than 31 operational amphibious warships (LPD/LHD/LHA), including a minimum of 10 amphibious assault ships (LHD/LHA), and bundle acquisition authority for LPD/LHA amphibious warship procurement. Final defense appropriations were included in the Consolidated Appropriations Act and provided funding for three Arleigh Burke class (DDG 51) destroyers, two Virginia class (SSN 774) attack submarines and continued funding for LPD 32 (unnamed) and Fallujah (LHA 9). Additionally, the appropriations measure provided advance procurement funding for LPD 33, LHA 10, and a third Arleigh Burke class (DDG 51) destroyer in fiscal year 2024. The bill also provided funding for the Columbia class (SSBN 826) ballistic-missile submarine program, Gerald R. Ford class (CVN 78) nuclear aircraft carrier programs, and the refueling and complex overhaul ("RCOH") of USS John C. Stennis (CVN 74), as well as funding to support large surface combatant shipyard infrastructure and the submarine industrial base.

The federal budget environment remains a significant long-term risk. Considerable uncertainty exists regarding how future budget and program decisions will develop and what challenges budget changes will present for the defense

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

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 the continued threat posed by COVID-19.

In February 2022, Russian forces invaded Ukraine, and the conflict is continuing. In response, the United States and other countries imposed economic and trade sanctions, export controls, and other restrictions. This conflict and the associated sanctions have disrupted the global economy, causing heightened cybersecurity risks, supply chain challenges, higher energy costs, and an exacerbation of existing inflationary pressures. Additionally, and more broadly, tensions with China and changes in international trade policies, including higher tariffs on imported goods and materials, could impact the global market for defense products, services, and solutions.

In addition to price surges in energy, food, and aluminum, an increase in inflation has led to higher costs of various commodities and supplier products. In an era of unanticipated cost increases, the inclusion of mitigation mechanisms, such as economic price adjustment clauses, in our contracts help mitigate certain risks attributable to price inflation. Our bids for longer-term firm fixed-price contracts typically include assumptions for labor and other contract costs that historically have been sufficient to cover cost increases over the period of performance. If, however, recent inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover potential contract cost growth or may impact the availability of resources to execute the respective contracts. Management is closely monitoring possible cost impacts with our customers.

The macro labor market continues to present significant challenges, and those challenges continue to impact our operations and our financial performance. We are aggressively responding to the labor market challenges, including utilizing outside leased labor and overtime to mitigate the short-term deficit of employees and implementing aggressive hiring and retention programs. Labor shortages are also impacting our supply chain, resulting in longer lead times for materials, parts, and other supplies, as well as inflationary pressure. Our longer term ability to meet contract requirements, as well as our financial performance, are dependent on our ability to attract and retain a stable skilled workforce.

The Inflation Reduction Act of 2022 ("IRA") was signed into law during the third quarter of 2022 and included provisions for an alternative minimum tax and a one percent excise tax on share repurchases. We anticipate being subject to the excise tax beginning in 2023 and continue to evaluate other provisions of the IRA for their impact on our business.

COVID-19 Pandemic - The COVID-19 pandemic has dramatically impacted the global economic environment, including labor shortages and supply chain challenges. The COVID-19 crisis initially had a significant impact on the U.S. labor market, and the resulting challenges and uncertainty have exacerbated already existing workforce trends. Talent attraction and retention and the ability to maintain a qualified workforce affects not only industry prime contractors but suppliers as well. Challenges incurred by our suppliers relative to their workforces, access to necessary components, materials, and other supplies at reasonable prices, and access to support services, such as shipping and transportation, may impact the ability of suppliers to provide agreed-upon goods and services in a timely, compliant, and cost-effective manner. We may in the future incur additional costs and performance challenges, including as a result of higher prices, schedule delays, or the need to identify and develop alternative suppliers.

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The COVID-19 pandemic has impacted our employees, customers, suppliers, and communities (collectively, “COVID-19 Events”). While costs related to COVID-19 Events are allowable under U.S. Government contracts, our contract financial estimates reflect profit margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and fixed-price incentive contracts, or may not be adequately covered by insurance. Reinsurers under our property insurance have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. The Vermont court dismissed our complaint, and we appealed the decision to the Vermont Supreme Court, which reversed and remanded the lower court’s decision in September 2022, allowing our claim to proceed. No assurance can be provided regarding the ultimate resolution of this matter. See Note 14: Investigations, Claims, and Litigation.

Defense Industry Overview

The United States faces a complex, uncertain, and rapidly changing national security environment. President Biden released his first National Security Strategy (the "NSS") in October 2022. The NSS, which continues the U.S. focus on China as the “pacing challenge” and Russia as an “acute” threat, calls for investments in emerging technologies and modernizing the U.S. military, with a special focus on allies in the Indo-Pacific region and Europe. The Biden Administration also released in October 2022 the public version of its 2022 National Defense Strategy (the "NDS"). Under the NDS, the Indo-Pacific region remains at the heart of U.S. defense planning, and primary focus is placed on the need to sustain and strengthen U.S. deterrence against China. The NDS also takes into account the challenges posed by Russia, including those connected with its invasion of Ukraine, along with threats posed by North Korea, Iran, and violent extremist organizations. Additionally, ‘non-traditional’ threats, such as pandemic disease and climate change, are included in the NDS as part of the national security dialogue. Integrated deterrence, the defining principle of the NDS, seeks to align DoD activities and investments across all theaters, across the full spectrum of conflict, and across all domains, including space and cyberspace, as well as a closer working relationship with the U.S.’s network of allies and partners to deter aggression, exemplified in the Indo-Pacific region by the Australia, U.K., and U.S. AUKUS agreement and the trilateral cooperation agreement with Japan and Korea.

The U.S. also faces a more lethal and disruptive battlefield, combined across domains and conducted at increasing speed and reach. The security environment is affected by rapid technological advancements and the changing character of war. The drive to develop new capabilities and enhance lethality is relentless, expanding to address emerging threats from peer-competitors as well as actors with lower barriers of entry, and moving at accelerating speed. To address these rapidly-evolving threats, the U.S. is investing in new capabilities and lethality enhancements, including unmanned and autonomous systems and platforms; artificial intelligence; hypersonics; directed energy; resilient networks; command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance; and targeting requirements and microelectronics. Technologies are being prioritized that can penetrate and operate inside highly-contested and highly-defended territory, both physical and cyber.

We anticipate the U.S. Navy’s force projection strategy will continue to emphasize sea control and sea denial, enabling power projection against adversaries with long-range weapons and full-spectrum joint domain capabilities. The Navy will likely continue to employ the evolving concept of Distributed Maritime Operations ("DMO"), which features multiple sensors and shooters that are widely dispersed across a broad range of manned and unmanned platforms and linked through resilient networks. Naval forces are participating in a larger DoD-wide objective to modernize command and control architecture, the concept to connect sensors from all of the military services into a single network known as Joint All-Domain Command and Control ("JADC2"). Future conflicts may require leaders to analyze the operating environment and make decisions rapidly. With JADC2, DoD envisions creating an “internet of things” network that would connect numerous sensors with weapons systems, using artificial intelligence algorithms to help improve decision-making. Project Overmatch is the Navy’s effort to develop the networks, infrastructure, data architecture, and analytics to participate in this larger, networked military operating environment. The end-state for the “Future Navy” envisions a fleet designed to ensure the wholeness of combat capability and lethal forces maximizing the benefits of DMO, expeditionary advanced base operations, and littoral operations in a contested environment. Manned and unmanned technology will be used to expand reach, lethality, and warfighter awareness.

The Navy’s force structure goal of 355 ships, identified in the December 2016 Force Structure Assessment and codified in the fiscal year 2018 National Defense Authorization Act, has remained the fleet objective for six years. The Navy and the DoD have been working to develop a successor for the 355-ship force-level goal. The Navy submitted a long-range shipbuilding plan with the fiscal year 2023 budget request, but, instead of providing a single

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30-year outlook for shipbuilding, the service issued three separate plans for fiscal year 2023. The Navy crafted low-end and high-end plans based on two separate funding profiles, and a third profile emphasized the building of attack submarines and Columbia class (SSBN 826) nuclear ballistic missile submarines. In 2022, the Navy also delivered its initial, long-range ship maintenance plan, The Framework for Maintenance and Modernization of Naval Vessels, to Congress. The maintenance plan provides a long-range look at upcoming maintenance requirements to better prepare Navy and industry partners for projected workloads. The Navy has struggled with maintenance delays in recent years, and a significant tension exists between maintaining and modernizing the fleet.

The DoD and Navy not only face difficult tradeoffs between modernization priorities, but also tradeoffs about where to take risk across time. The shipbuilding defense industry is capital heavy and skilled labor intensive. The Navy, a large single customer with many needs and requirements, dominates the industry's customer base and is served by an increasingly fragile supplier base that has trended toward exclusive providers. Inconsistent shipbuilding plans and annual funding uncertainty severely degrade the ability of shipyards to conduct long-term planning and respond to near-term changes in requirements. This ultimately results in longer construction times and increased costs. For example, the high operational tempo of the Navy in recent years has resulted in a backlog of repair work across the fleet. Coupled with the impacts of COVID-19 and increases in new ship construction, many suppliers are experiencing a shortfall in their capacity to perform work and manufacture products. This increased demand is applying stress to already-aging production equipment. The combination of limited suppliers and an increase in workload could increase cost and potentially create schedule slips, impacting American warfighting capability.

Ultimately, a balance will need to be achieved between the competing priorities of upgrading legacy systems for the near-term, developing and procuring the next generation of systems for the mid-term, and investing in emerging technologies that could drive game-changing capabilities in the long-term. Additionally, the U.S. Navy must compete with other budget priorities, including other defense activities, non-defense discretionary spending, supplemental spending for COVID-19 relief and natural disasters, entitlement programs, and other mandatory spending, for a share of federal budget funding. While the impact to our business resulting from these developments remains uncertain, they could have a material impact on current programs, as well as new business opportunities with the DoD. See Risk Factors in Item 1A.

Program Descriptions

For convenience, a brief description of certain programs discussed in this Annual Report on Form 10-K is included in the Glossary of Programs.

CONTRACTS

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

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

Our contracts typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials. See Note 7: Revenue in Item 8.

•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.

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

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

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

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

CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS

Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments, and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management considers an accounting policy to be critical if it is important to our financial condition and results of operations and requires significant judgment and estimates by management in its application. The development and selection of these critical accounting policies have been determined by our management. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Due to the significant judgment involved in selecting certain of the assumptions used in these policies, it is possible that different parties could choose different assumptions and reach different conclusions. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. We consider our policies relating to the following matters to involve our most critical accounting policies and estimates:

•Revenue recognition;

•Purchase accounting, goodwill, and intangible assets;

•Litigation, commitments, and contingencies;

•Retirement related benefit plans; and

•Workers' compensation.

Revenue Recognition

Most of our revenues are derived from long-term contracts for the production of goods and services provided to the U.S. Government, which are generally accounted for by recognizing revenues over time using a cost-to-cost measure of progress. In estimating contract costs, we utilize a profit-booking rate based upon performance expectations that incorporate a number of assumptions and estimates regarding risks related to technical requirements, feasibility, schedule, and contract costs. Management performs periodic reviews of the contracts to evaluate the underlying risks, which may increase the profit-booking rate as we are able to mitigate and retire such risks. For the impacts of changes in estimates on our consolidated statements of operations and comprehensive income, see Note 8: Segment Information in Item 8.

Purchase Accounting, Goodwill, and Intangible Assets

We allocate the purchase price of acquired businesses to the underlying tangible and intangible assets acquired and liabilities assumed based upon their respective fair values, with the excess recorded as goodwill. We recognize purchased intangible assets from our business acquisitions at fair value on the acquisition date. Our most significant

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purchased intangible assets are generally related to customer contracts, including backlog and recompeted contracts. We determine the fair values of those customer related intangible assets based on estimates and judgments, including the amount and timing of expected future cash flows, long-term growth rates, and discount rates.

Goodwill is tested for impairment on an annual basis at each of our reporting units by assessing qualitative factors to determine whether it is more likely than not that the fair value of other intangible asset or the goodwill allocated to the reporting unit is less than its carrying amount. If the qualitative assessment indicates a possible impairment, the carrying value of the asset or reporting unit is compared with its fair value. If the fair value is determined to be less than the carrying value, we record an impairment charge to the reporting unit. We perform tests for impairment of amortizable intangible assets whenever events or circumstances suggest that amortizable intangible assets may be impaired.

We estimate the fair value of each reporting unit using a combination of discounted cash flow analysis and market-based valuation methodologies. Determining fair value requires the exercise of significant judgment, including judgments about projected revenues, operating expenses, working capital investment, capital expenditures, and cash flows over a multi-year period. The discount rate applied to our forecasts of future cash flows is based on our estimated weighted average cost of capital. In assessing the reasonableness of our determined fair values, we evaluate our results against our market capitalization. Impairment assessment inherently involves management judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Changes in our estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

For further information on purchase accounting, goodwill, and intangible assets, see Risk Factors in Item 1A and Note 2: Summary of Significant Accounting Policies, Note 4: Acquisitions and Divestitures, and Note 11: Goodwill and Other Intangible Assets in Item 8.

Litigation, Commitments, and Contingencies

Overview - We are subject to a range of legal proceedings before various courts and administrative agencies and are periodically subject to government audits, inquiries, and investigations that arise in the ordinary course of business. Estimating liabilities and costs associated with these matters requires judgment and assessment based upon professional knowledge and the experience of management and our internal and external legal counsel. In accordance with our practices relating to accounting for contingencies, we record charges to earnings when we determine, after taking into consideration the facts and circumstances of each matter, including any settlement offers, that it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. The ultimate resolution of any such exposure may vary from earlier estimates as further facts and circumstances become known.

Environmental Accruals - We are subject to the environmental laws and regulations of the jurisdictions in which we conduct operations. We record a liability for the costs of expected environmental remediation obligations when we determine that it is probable we will incur such costs and the amount of the liability can be reasonably estimated. When a range of costs is possible and no amount within that range is a better estimate than another, we record the minimum amount of the range.

Factors that could result in changes to the assessment of probability, range of estimated costs, and environmental liability accruals include: modification of planned remedial actions, increase or decrease in the estimated time required to remediate, discovery of more extensive contamination than anticipated, results of efforts to involve other legally responsible parties, financial insolvency of other responsible parties, changes in laws and regulations or contractual obligations affecting remediation requirements, and improvements in remediation technology. Although we cannot predict whether new information gained as remediation projects progress will materially affect the accrued liability, we do not believe that future remediation expenditures will have a material effect on our financial position, results of operations, or cash flows.

Income Tax Matters - The evaluation of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, requires judgment. We establish reserves for uncertain tax positions that do not meet the more-likely-than-not recognition threshold, based on the merits of the position. We recognize the amount of a tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. If a tax position

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does not meet the minimum statutory threshold to avoid payment of penalties, we recognize an expense for the amount of the penalty in the period the tax position is claimed or expected to be claimed in our tax return. Penalties and accrued interest related to unrecognized tax benefits are recognized as a component of income tax expense. See Note 12: Income Taxes in Item 8. Changes in accruals associated with unrecognized tax benefits are recorded in earnings in the period they are determined.

For further information on litigation, commitments, and contingencies, see Risk Factors in Item 1A and Note 2: Summary of Significant Accounting Policies, Note 4: Acquisitions and Divestitures, Note 12: Income Taxes, Note 14: Investigations, Claims, and Litigation, and Note 16: Commitments and Contingencies in Item 8.

Retirement Related Benefit Plans

We recognize, on a plan-by-plan basis, the funded status of our retirement related benefit plans as an asset or liability on our balance sheet, with corresponding adjustments to after-tax accumulated other comprehensive loss and deferred tax assets or liabilities. The funded status represents the difference between the benefit obligation and the fair value of plan assets. See Note 17: Employee Pension and Other Postretirement Benefits in Item 8.

We calculate our retirement related benefit plan costs under both CAS and U.S. GAAP Financial Accounting Standards ("FAS"). The calculations under CAS and FAS require significant judgment. CAS prescribes the determination, allocation, and recovery of retirement related benefit plan costs on U.S. Government contracts through the pricing of products and services. FAS prescribes the methodology used to determine retirement related benefit plan expense or income, as well as the liability, for financial reporting purposes. The CAS requirements for these costs and their calculation methodologies differ from FAS. As a result, while both CAS and FAS use assumptions in their calculation methodologies, each method results in different calculated amounts of retirement related benefit plan costs.

We recover our CAS costs through the pricing of products and services on U.S. Government contracts, so that the CAS cost is recognized in segment product sales and service revenues and in the costs of those product sales and service revenues. In order to present our consolidated financial statements in accordance with FAS, we record the difference between our FAS expense and CAS cost (“FAS/CAS Adjustment”) as operating income within segment operating income and non-operating retirement benefit (expense).

The minimum funding requirements for our qualified pension plans are determined under the Employee Retirement Income Security Act of 1974 ("ERISA"), which is primarily based on the year's expected service cost and amortization of other previously unfunded liabilities. Effective January 1, 2011, we were subject to the funding requirements under the Pension Protection Act of 2006 ("PPA"), which amended ERISA. Under the PPA, we are required to fully fund our pension plans over a rolling seven-year period as determined annually based upon the funded status at the beginning of each year. PPA also introduced a variety of benefit restrictions that apply if a plan falls below certain funded percentages, as defined by the Internal Revenue Code. In funding our plans, we consider various factors, including the minimum funding requirements, the funded status needed to avoid potential benefit restrictions and other adverse consequences, minimum CAS funding requirements, and the current and anticipated funding levels of each plan.

Effective January 1, 2021, we adopted the Safe Harbor methodology used in determining CAS pension costs. The interest rates used to calculate pension liabilities under CAS are consistent with those used in the determination of minimum funding requirements under ERISA.

Pension funding requirements under ERISA are subject to pension relief for plan sponsors in the form of higher interest rate assumptions introduced by the Moving Ahead for Progress in the 21st Century Act and subsequently extended by the American Rescue Plan Act of 2021. Using these minimum funding interest rates for the purposes of determining pension costs under CAS reduces volatility in CAS costs year-over-year and provides more predictable costs for our customers, while better aligning reimbursements of pension costs under our contracts with our required pension plan contributions under ERISA.

Due to the differences in requirements and calculation methodologies between FAS and CAS, our FAS pension expense is not necessarily indicative of the funding requirements under PPA or the amounts we recover from the U.S. Government under CAS.

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Assumptions - We account for our retirement related benefit plans on the accrual basis under FAS. The measurements of obligations, costs, assets, and liabilities require significant judgment. We annually review our assumptions, which are set at each year end and generally not changed during the following year unless a major plan event occurs, such as an amendment, curtailment, or settlement that would trigger a remeasurement. The key assumptions in these measurements are the interest rate used to discount future benefit payments and the expected long-term rate of return on plan assets.

Discount Rate - The assumed discount rate under FAS is used to determine the retirement related benefit plan obligations and expense, and represents the hypothetical rate at which plan benefit obligations could be effectively settled at the measurement date. Consequently, the discount rate can be volatile from year to year. The discount rate assumption is determined for each plan by constructing a hypothetical portfolio of high-quality bonds with cash flows that match the estimated outflows for future benefit payments to determine a single equivalent discount rate. Benefit payments are not only contingent on the terms of a plan but also on the underlying participant demographics, including current age and assumed mortality. We use only bonds that are denominated in U.S. Dollars, are rated Aa or better by nationally recognized statistical rating agencies, have a minimum outstanding issue of $50 million as of the measurement date, and are not callable, convertible, or index-linked.

Expected Long-Term Rate of Return - The expected long-term rate of return on assets is used to calculate net periodic expense, based on such factors as historical returns, targeted asset allocations, investment policy, duration, expected future long-term performance of individual asset classes, interest rates, inflation, portfolio volatility, investment management and administrative fees, and risk management strategies. Historical plan asset performance alone has inherent limitations in predicting future returns. While studies are helpful in understanding past and current trends and performance, the rate of return assumption is based more on long-term prospective views to avoid short-term market influences. Unless plan assets and benefit obligations are subject to re-measurement during the year, the expected return on pension assets is based on the fair value of plan assets at the beginning of the year.

Mortality - Mortality assumptions are used to determine the retirement related benefit obligations and expense, and represent the likelihood and duration of benefit payments to plan participants based on historical experience and projected longevity. We periodically update our mortality assumptions as circumstances warrant.

Differences arising from actual experience or changes in assumptions might materially affect retirement related benefit plan obligations and the funded status. Actuarial gains and losses arising from differences between assumptions and actual experience or changes in assumptions are deferred in accumulated other comprehensive loss. This unrecognized amount is amortized as a component of net expense to the extent it exceeds 10% of the greater of the plan's benefit obligation or plan assets. The amortization period for actuarial gains and losses is the estimated average remaining service life of the plan participants. In 2022, the actual return on assets was approximately (16.1)%, which was less than the expected return assumption of 7.25%. For the year ended December 31, 2022, the weighted average discount rates for our pension and other postretirement benefit plans increased by 247 and 256 basis points, respectively. The differences in asset returns resulted in an actuarial loss of $1,943 million, and the differences in discount rates resulted in an actuarial gain of $2,605 million for the year ended December 31, 2022.

An increase or decrease of 25 basis points in the discount rate and the expected long-term rate of return assumptions would have had the following approximate impacts on pension expense and obligations:

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Assuming an 8.00% expected return on assets assumption, a $50 million pension plan contribution is generally expected to favorably impact the current year expected return on assets by approximately $2 million, depending on the timing of the contribution.

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Sensitivities to assumptions are not necessarily linear and are specific to the time periods noted.

CAS Cost - In addition to providing the methodology for calculating retirement related benefit plan costs, CAS also prescribes the method for assigning those costs to specific periods. While the ultimate liability for such costs under FAS and CAS is similar, the pattern of cost recognition is different. The key drivers of CAS pension cost include the funded status and the method used to calculate CAS reimbursement for each of our plans. A plan’s CAS pension cost can only be allocated until the plan is fully funded as defined under the CAS requirements.

Other FAS and CAS Pension Considerations - A key driver of the difference between FAS expense and CAS cost (and consequently the FAS/CAS Adjustment) is the pattern of earnings and expense recognition for actuarial gains and losses that arise when our asset and liability experiences differ from our assumptions under each set of requirements. Under FAS, our net actuarial gains and losses exceeding the 10% corridor are amortized over the estimated average remaining service life of the plan participants. Under CAS Harmonization, the amortization period is 10 years for actuarial gains and losses. Both FAS and CAS use a "market-related value" of plan assets approach to calculate the amount of deferred asset gains or losses to be amortized. Under CAS, actual asset gains and losses are systematically smoothed over five years, subject to certain limitations. For FAS, we do not use this smoothing method, and instead use fair value in determining our FAS expense. Accordingly, FAS expense generally reflects recent asset gains and losses sooner than CAS.

Additionally, CAS cost is only recognized for plans that are not fully funded as defined under CAS. If a plan becomes or ceases to be fully funded due to our asset or liability experience, our CAS cost will change accordingly.

Retirement Plan Assets - Retirement plan assets are stated at fair value. Investments in equity securities (common and preferred) are valued at the last reported sales price when an active market exists. Investments in fixed-income securities are generally valued based on market transactions for comparable securities and various relationships between securities that are generally recognized by institutional traders. Investments in hedge funds, real estate investment funds, private partnerships, collective trust funds, and commingled funds are generally valued at their Net Asset Values ("NAV") or equivalent, which are based on the current fair values of the fund's underlying assets.

Management reviews independently appraised values, audited financial statements, and additional pricing information to evaluate the NAV or its equivalent.

For the limited group of investments for which market quotations are not readily available or for which the above valuation procedures are deemed not to reflect fair value, additional information is obtained from the investment manager and evaluated internally to determine whether any adjustments are required to reflect fair value. See Note 17: Employee Pension and Other Postretirement Benefits in Item 8.

Accumulated Other Comprehensive Loss - Changes in assumptions and changes to plan assets and benefit obligations due to differences between actuarial assumptions and actual results are reported as actuarial gains and losses and recorded in accumulated other comprehensive loss, along with unrecognized prior service costs arising from plan amendments. As disclosed in Note 17: Employee Pension and Other Postretirement Benefits in Item 8, net pre-tax unrecognized actuarial losses as of December 31, 2022 and 2021 were $678 million and $1,194 million, respectively. The decrease in actuarial losses in 2022 was primarily driven by lower benefit obligations of $2,605 million resulting from higher discount rates used to determine benefit obligations and amortization of previously unrecognized actuarial losses of $32 million, partially offset by asset returns less than expected returns of $1,943 million.

Net pre-tax unrecognized prior service costs (credits) as of December 31, 2022 and 2021 were $140 million and $60 million, respectively. These net deferred costs (credits) primarily originated from plan amendments, including those resulting from collective bargaining agreements. The change in unrecognized prior service costs (credits) in 2022 resulted from plan amendments and the amortization of previously accumulated prior service costs (credits).

Workers' Compensation

Our operations are subject to federal and state workers' compensation laws. We maintain self-insured workers' compensation plans and participate in federally administered second injury workers' compensation funds. We estimate the liability for such claims and funding requirements on a discounted basis utilizing actuarial methods based on various assumptions, which include our historical loss experience and projected loss development factors. We periodically, and at least annually, update our assumptions based on an actuarial analysis. For further

37

information on workers’ compensation, see Environmental, Health & Safety in Item 1 and Note 16: Commitments and Contingencies in Item 8.

Accounting Standards Updates

See Note 3: Accounting Standards Updates in Item 8 for further information.

CONSOLIDATED OPERATING RESULTS

The following table presents selected financial highlights:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Sales and service revenues","","$","10,676","","","$","9,524","","","$","9,361","","","$","1,152","","","12","%","","$","163","","","2","%"],["Cost of product sales and service revenues","","9,236","","","8,156","","","7,691","","","1,080","","","13","%","","465","","","6","%"],["Income from operating investments, net","","48","","","41","","","32","","","7","","","17","%","","9","","","28","%"],["Other income and gains, net","","1","","","2","","","1","","","(1)","","","(50)","%","","1","","","100","%"],["General and administrative expenses","","924","","","898","","","904","","","26","","","3","%","","(6)","","","(1)","%"],["Operating income","","565","","","513","","","799","","","52","","","10","%","","(286)","","","(36)","%"],["Interest expense","","(102)","","","(89)","","","(114)","","","(13)","","","(15)","%","","25","","","22","%"],["Non-operating retirement benefit","","276","","","181","","","119","","","95","","","52","%","","62","","","52","%"],["Other, net","","(20)","","","17","","","6","","","(37)","","","(218)","%","","11","","","183","%"],["Federal and foreign income taxes","","140","","","78","","","114","","","62","","","79","%","","(36)","","","(32)","%"],["Net earnings","","$","579","","","$","544","","","$","696","","","$","35","","","6","%","","$","(152)","","","(22)","%"]]
[[/GREPCENT_TABLE]]

Operating Performance Assessment and Reporting

We manage and assess the performance of our business based on our performance on individual contracts and programs using the financial measures referred to below, with consideration given to the Critical Accounting Policies, Estimates, and Judgments referred to in this section. Our portfolio of long-term contracts is largely flexibly-priced. Therefore, sales tend to fluctuate in concert with costs across our large portfolio of active contracts, with operating income being a critical measure of operating performance. Under FAR rules that govern our business with the U.S. Government, most types of costs are allowable, and we do not focus on individual cost groupings, such as cost of sales or general and administrative expenses, as much as we do on total contract costs, which are a key factor in determining contract operating income. As a result, in evaluating our operating performance, we look primarily at changes in sales and service revenues, as well as operating income, including the effects of significant changes in operating income as a result of changes in contract 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.

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.

38

Sales and Service Revenues

Sales and service revenues were comprised as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Product sales","","$","7,283","","","$","7,000","","","$","6,850","","","$","283","","","4","%","","$","150","","","2","%"],["Service revenues","","3,393","","","2,524","","","2,511","","","869","","","34","%","","13","","","1","%"],["Sales and service revenues","","$","10,676","","","$","9,524","","","$","9,361","","","$","1,152","","","12","%","","$","163","","","2","%"]]
[[/GREPCENT_TABLE]]

2022 - Product sales in 2022 increased $283 million, or 4%, from 2021. Product sales at our Ingalls segment increased $15 million in 2022, primarily as a result of higher volumes in amphibious assault ships and surface combatants, partially offset by lower volumes in the Legend class NSC program. Newport News product sales increased $278 million in 2022, primarily as a result of higher volumes in aircraft carriers and submarines. Mission Technologies product sales decreased $10 million in 2022, primarily as a result of lower volumes in mission based solutions, unmanned systems, and fleet sustainment.

Service revenues in 2022 increased $869 million, or 34%, from 2021. Service revenues at our Ingalls segment increased $30 million in 2022, primarily as a result of higher volumes in amphibious assault ship services. Service revenues at our Newport News segment decreased $83 million in 2022, primarily as a result of lower volumes in aircraft carrier, submarine and naval nuclear support services. Service revenues at our Mission Technologies segment increased $922 million in 2022, primarily as a result of higher volumes in mission based solutions services due to the acquisition of Alion in 2021.

2021 - Product sales in 2021 increased $150 million, or 2%, from 2020. Product sales at our Ingalls segment decreased $105 million in 2021, primarily as a result of lower volumes in the Legend class NSC program and amphibious assault ships, partially offset by higher volumes in surface combatants. Newport News product sales increased $231 million in 2021, primarily as a result of higher volumes in submarines and aircraft carriers. Mission Technologies product sales increased $24 million in 2021, primarily as a result of higher volumes in mission based solutions, partially offset by lower volumes in unmanned systems.

Service revenues in 2021 increased $13 million, or 1%, from 2020. Service revenues at our Ingalls segment decreased $56 million in 2021, primarily as a result of lower volumes in surface combatants and amphibious assault ship services. Service revenues at our Newport News segment decreased $138 million in 2021, primarily as a result of lower volumes in naval nuclear support services. Service revenues at our Mission Technologies segment increased $207 million in 2021, primarily as a result of higher volumes in mission based solutions services due to the acquisition of Alion, partially offset by the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture.

Cost of Sales and Service Revenues

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Cost of product sales","","$","6,225","","","$","5,958","","","$","5,621","","","$","267","","","4","%","","$","337","","","6","%"],["% of product sales","","85.5","%","","85.1","%","","82.1","%"],["Cost of service revenues","","3,011","","","2,198","","","2,070","","","813","","","37","%","","128","","","6","%"],["% of service revenues","","88.7","%","","87.1","%","","82.4","%"],["Income from operating investments, net","","48","","","41","","","32","","","7","","","17","%","","9","","","28","%"],["Other income and gains, net","","1","","","2","","","1","","","(1)","","","(50)","%","","1","","","100","%"],["General and administrative expenses","","924","","","898","","","904","","","26","","","3","%","","(6)","","","(1)","%"],["% of total sales and service revenues","","8.7","%","","9.4","%","","9.7","%"],["Cost of sales and service revenues","","$","10,111","","","$","9,011","","","$","8,562","","","$","1,100","","","12","%","","$","449","","","5","%"]]
[[/GREPCENT_TABLE]]

39

Cost of Product Sales

2022 - Cost of product sales in 2022 increased $267 million, or 4%, compared to 2021. Cost of product sales at our Ingalls segment increased $46 million in 2022, primarily as a result of volume increases described above and receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021. Cost of product sales at our Newport News segment increased $241 million in 2022, primarily as a result of volume increases described above. Cost of product sales at our Mission Technologies segment decreased $12 million in 2022, primarily as a result of volume decreases described above and year-to-year variances in contract mix. Cost of product sales related to the Operating FAS/CAS Adjustment decreased $8 million from 2021 to 2022.

Cost of product sales as a percentage of product sales increased from 85.1% in 2021 to 85.5% in 2022, primarily due to lower risk retirement on the Virginia class (SSN 774) submarine program and the RCOH of USS George Washington (CVN 73), and receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021, partially offset by favorable changes in contract estimates from facilities capital and price adjustment clauses, contract incentives on the Columbia class (SSBN 826) submarine program, higher risk retirement on Harrisburg (LPD 30) and USS Fort Lauderdale (LPD 28), as well as a favorable change in the Operating FAS/CAS Adjustment.

2021 - Cost of product sales in 2021 increased $337 million, or 6%, compared to 2020. Cost of product sales at our Ingalls segment decreased $82 million in 2021, primarily as a result of the volume changes described above. Cost of product sales at our Newport News segment increased $65 million in 2021, primarily as a result of submarine volume increases described above, partially offset by impacts related to the performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020. Cost of product sales at our Mission Technologies segment increased $20 million in 2021, primarily due to the higher volumes described above. Cost of product sales related to the Operating FAS/CAS Adjustment increased $334 million from 2020 to 2021.

Cost of product sales as a percentage of product sales increased from 82.1% in 2020 to 85.1% in 2021, primarily due to an unfavorable change in the Operating FAS/CAS Adjustment, lower risk retirement on USS Delbert D. Black (DDG 119), and year-to-year variances in contract mix, partially offset by impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020, higher risk retirement on Bougainville (LHA 8), and a contract incentive on Jack H. Lucas (DDG 125).

Cost of Service Revenues

2022 - Cost of service revenues in 2022 increased $813 million, or 37%, compared to 2021. Cost of service revenues at our Ingalls segment increased $30 million in 2022, primarily as a result of higher volumes described above. Cost of service revenues at our Newport News segment decreased $83 million in 2022, primarily as a result of lower volumes described above. Cost of service revenues at our Mission Technologies segment increased $870 million in 2022, primarily as a result of higher volumes described above. Cost of service revenues related to the Operating FAS/CAS Adjustment decreased $4 million from 2021 to 2022.

Cost of service revenues as a percentage of service revenues increased from 87.1% in 2021 to 88.7% in 2022, primarily driven by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, partially offset by higher operating income driven by the acquisition of Alion in 2021 and a favorable change in the Operating FAS/CAS Adjustment.

2021 - Cost of service revenues in 2021 increased $128 million, or 6%, compared to 2020. Cost of service revenues at our Ingalls segment decreased $46 million in 2021, primarily as a result of the lower volumes described above. Cost of service revenues at our Newport News segment decreased $74 million in 2021, primarily as a result of lower volumes described above. Cost of service revenues at our Mission Technologies segment increased $177 million in 2021, primarily as a result of higher volumes changes described above. Cost of service revenues related to the Operating FAS/CAS Adjustment increased $71 million from 2020 to 2021.

Cost of service revenues as a percentage of service revenues increased from 82.4% in 2020 to 87.1% in 2021, primarily driven by an unfavorable change in the Operating FAS/CAS Adjustment, lower risk retirement on submarine support services, and year-to-year variances in contract mix.

40

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.

2022 - Income from operating investments, net increased $7 million, or 17%, to $48 million in 2022 from $41 million in 2021. The increase resulted from higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture.

2021 - Income from operating investments, net increased $9 million, or 28%, to $41 million in 2021 from $32 million in 2020. The increase resulted from higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture and from our unconsolidated nuclear and environmental joint ventures.

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.

2022 - General and administrative expenses in 2022 increased $26 million, or 3%, compared to 2021. This increase was primarily due to higher overhead costs as a result of the acquisition of Alion in 2021 and current state income tax expense, partially offset by favorable changes in non-current state income tax expense.

2021 - General and administrative expenses in 2021 decreased $6 million, or 1%, compared to 2020. This decrease was primarily driven by favorable changes in current state income tax expense, partially offset by unfavorable changes in non-current state income tax expense and higher overhead costs driven by the acquisition of Alion.

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.

The following table reconciles operating income to segment operating income:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

41

Segment Operating Income

2022 - Segment operating income in 2022 was $712 million, compared to $683 million in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses, contract incentives on the Columbia class (SSBN 826) submarine program, higher risk retirement on Harrisburg (LPD 30) and USS Fort Lauderdale (LPD 28), higher operating income driven by the acquisition of Alion in 2021, and higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition, lower risk retirement on the Virginia class (SSN 774) submarine program and the RCOH of USS George Washington (CVN 73), and receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021.

2021 - Segment operating income in 2021 was $683 million, compared to $555 million in 2020. The increase was driven by impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020.

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

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

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

Effective January 1, 2021, we adopted the Safe Harbor methodology for determining CAS pension costs. Under this methodology, the interest rates used to calculate pension liabilities under CAS are consistent with those used in the determination of minimum funding requirements under the Employee Retirement Income Security Act of 1974 ("ERISA").

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["FAS benefit (expense)","","$","86","","","$","(28)","","","$","(70)","","","$","114","","","407","%","","$","42","","","60","%"],["CAS cost","","45","","","52","","","437","","","(7)","","","(13)","%","","(385)","","","(88)","%"],["FAS/CAS Adjustment","","131","","","24","","","367","","","107","","","446","%","","(343)","","","(93)","%"],["Non-operating retirement benefit","","(276)","","","(181)","","","(119)","","","(95)","","","(52)","%","","(62)","","","(52)","%"],["Operating FAS/CAS Adjustment (expense) benefit","","$","(145)","","","$","(157)","","","$","248","","","$","12","","","8","%","","$","(405)","","","(163)","%"]]
[[/GREPCENT_TABLE]]

2022 - The Operating FAS/CAS Adjustment in 2022 was a net expense of $145 million, compared to a net expense of $157 million in 2021. The favorable change was primarily driven by higher interest rates under FAS.

2021 - The Operating FAS/CAS Adjustment in 2021 was a net expense of $157 million, compared to a net benefit of $248 million in 2020. The unfavorable change was primarily driven by the more immediate recognition of higher interest rates under CAS.

We expect the FAS/CAS Adjustment in 2023 to be a net benefit of approximately $81 million (($31) million FAS and $50 million CAS), primarily driven by higher interest rates offset by 2022 asset returns.

We expect the Operating FAS/CAS Adjustment in 2023 to be a net expense of approximately $68 million ($118 million FAS and $50 million CAS), primarily driven by the more immediate recognition of higher interest rates under FAS. The expected FAS/CAS Adjustment is subject to change during 2023, when we remeasure our actuarial estimate of the unfunded benefit obligation for CAS with updated census data and other items later in the year.

42

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.

2022 - Non-current state income tax expense in 2022 was $2 million, compared to $13 million in 2021. The favorable change in non-current state income taxes was primarily driven by a decrease in deferred state income tax expense, largely attributable to research and development expenses that are capitalized and amortized for tax purposes.

2021 - Non-current state income tax expense in 2021 was $13 million, compared to $4 million in 2020. The unfavorable change in non-current state income taxes was driven by an increase in deferred state income tax expense, primarily attributable to a decrease in expenses not currently deductible for income tax purposes.

Interest Expense

2022 - Interest expense in 2022 was $102 million, compared to $89 million in 2021. The increase was primarily due to the issuance of senior notes and borrowing under the Term Loan in 2021 to partially fund the Alion acquisition.

2021 - Interest expense in 2021 was $89 million, compared to $114 million in 2020. The decrease was primarily a result of costs associated with the early redemption in 2020 of $600 million aggregate principal amount of our 5.000% senior notes due 2025, partially offset by increased borrowing to fund the acquisition of Alion with the issuance of $400 million aggregate principal amount of 0.670% senior notes due 2023, $600 million aggregate principal amount of 2.043% senior notes due 2028, and a $650 million three-year Term Loan.

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.

2022 - A favorable change in the non-operating retirement benefit of $95 million from 2021 to 2022 was primarily driven by higher 2021 returns on plan assets.

2021 - A favorable change in the non-operating retirement benefit of $62 million from 2020 to 2021 was primarily driven by higher 2020 returns on plan assets.

Other, Net

2022 - Other, net expense in 2022 was $20 million, compared to other, net income of $17 million in 2021. The decrease was primarily driven by realized and unrealized net investment losses.

2021 - Other, net income in 2021 was $17 million, compared to $6 million with 2020. The increase was primarily driven by an impairment of a loan receivable in 2020.

Federal and Foreign Income Taxes

2022 - Our effective tax rate on earnings from continuing operations was 19.5% in 2022, compared to 12.5% in 2021. The increase in our effective tax rate for 2022 was primarily attributable to income tax benefits recorded in 2021 relating to research and development tax credits for prior periods and a tax loss associated with the sale of our oil and gas business.

2021 - Our effective tax rate on earnings from continuing operations was 12.5% in 2021, compared to 14.1% in 2020. The decrease in our effective tax rate for 2021 was primarily attributable to an increase in research and development tax credits for prior periods and a tax loss associated with the sale of our oil and gas business, partially offset by an increase in unrecognized tax benefits.

43

SEGMENT OPERATING RESULTS

Basis of Presentation

We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.

The following table presents segment operating results:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Sales and Service Revenues"],["Ingalls","","$","2,570","","","$","2,528","","","$","2,678","","","$","42","","","2","%","","$","(150)","","","(6)","%"],["Newport News","","5,852","","","5,663","","","5,571","","","189","","","3","%","","92","","","2","%"],["Mission Technologies","","2,387","","","1,476","","","1,268","","","911","","","62","%","","208","","","16","%"],["Intersegment eliminations","","(133)","","","(143)","","","(156)","","","10","","","7","%","","13","","","8","%"],["Sales and service revenues","","$","10,676","","","$","9,524","","","$","9,361","","","$","1,152","","","12","%","","$","163","","","2","%"],["Operating Income"],["Ingalls","","$","292","","","$","281","","","$","281","","","$","11","","","4","%","","$","\u2014","","","\u2014","%"],["Newport News","","357","","","352","","","233","","","5","","","1","%","","119","","","51","%"],["Mission Technologies","","63","","","50","","","41","","","13","","","26","%","","9","","","22","%"],["Segment operating income","","712","","","683","","","555","","","29","","","4","%","","128","","","23","%"],["Non-segment factors affecting operating income"],["Operating FAS/CAS Adjustment","","(145)","","","(157)","","","248","","","12","","","8","%","","(405)","","","(163)","%"],["Non-current state income taxes","","(2)","","","(13)","","","(4)","","","11","","","85","%","","(9)","","","(225)","%"],["Operating income","","$","565","","","$","513","","","$","799","","","$","52","","","10","%","","$","(286)","","","(36)","%"]]
[[/GREPCENT_TABLE]]

KEY SEGMENT FINANCIAL MEASURES

Sales and Service Revenues

Period-to-period revenues reflect performance under new and ongoing contracts. Changes in sales and service revenues are typically expressed in terms of volume. Unless otherwise described, volume generally refers to increases (or decreases) in reported revenues due to varying production activity levels, delivery rates, or service levels on individual contracts. Volume changes will typically carry a corresponding income change based on the profit margin rate for a particular contract.

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.

44

Cumulative Adjustments

For the years ended December 31, 2022, 2021, and 2020, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31"],["($ in millions)","","2022","","2021","","2020"],["Gross favorable adjustments","","$","325","","","$","244","","","$","244"],["Gross unfavorable adjustments","","(212)","","","(129)","","","(273)"],["Net adjustments","","$","113","","","$","115","","","$","(29)"]]
[[/GREPCENT_TABLE]]

2022 - Favorable cumulative catch-up revenue adjustments included contract incentives on the Columbia class (SSBN 826) submarine program and higher risk retirement on USS Fort Lauderdale (LPD 28), Bougainville (LHA 8), and Harrisburg (LPD 30). Unfavorable cumulative catch-up revenue adjustments included lower risk retirement on the Virginia class (SSN 774) submarine program, the RCOH of USS George Washington (CVN 73), and the construction of John F. Kennedy (CVN 79).

2021 - Favorable cumulative catch-up revenue adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on Jack H. Lucas (DDG 125), and risk retirement on Fort Lauderdale (LPD 28). No unfavorable cumulative catch-up revenue adjustments were individually significant.

2020 - Favorable cumulative catch-up revenue adjustments included risk retirement on USS Delbert D. Black (DDG 119) in connection with its delivery and a capital expenditure contract incentive, naval nuclear support services, the San Antonio class (LPD 17) program, and other individually insignificant adjustments.

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

When estimates of total costs to be incurred exceed estimates of total revenue to be earned on a performance obligation related to a complex, construction-type contract, we recognize the entire loss on the performance obligation in the period the loss is determined.

Ingalls

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Sales and service revenues","","$","2,570","","","$","2,528","","","$","2,678","","","$","42","","","2","%","","$","(150)","","","(6)","%"],["Segment operating income","","292","","","281","","","281","","","11","","","4","%","","\u2014","","","\u2014","%"],["As a percentage of segment sales","","11.4","%","","11.1","%","","10.5","%"]]
[[/GREPCENT_TABLE]]

Sales and Service Revenues

2022 - Ingalls revenues, including intersegment sales, increased $42 million, or 2%, in 2022 compared to 2021, primarily driven by higher revenues in amphibious assault ships and surface combatants, partially offset by lower revenues in the Legend class NSC program. Revenues on amphibious assault ships increased due to higher volumes on Fallujah (LHA 9) and Pittsburgh (LPD 31), partially offset by lower volume on USS Fort Lauderdale (LPD 28) following its delivery. Revenues on surface combatants increased due to higher volumes on Thad Cochran (DDG 135), Sam Nunn (DDG 133), and Telesforo Trinidad (DDG 139), partially offset by lower volumes on

45

Jeremiah Denton (DDG 129) and USS Frank E. Petersen Jr. (DDG 121). Revenues on the Legend class NSC program decreased due to lower volumes on Friedman (NSC 11) and Calhoun (NSC 10).

2021 - Ingalls revenues, including intersegment sales, decreased $150 million, or 6%, in 2021 compared to 2020, primarily driven by lower revenues in the Legend class NSC program and amphibious assault ships, partially offset by higher revenues in surface combatants. Revenues on the Legend class NSC program decreased due to lower volumes on USCGC Stone (NSC 9) following its delivery. Amphibious assault ship revenues decreased due to lower volumes on Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29), Harrisburg (LPD 30), and USS Tripoli (LHA 7), partially offset by higher volumes on Pittsburgh (LPD 31) and Fallujah (LHA 9). Surface combatant revenues increased due to higher volumes on Jack H. Lucas (DDG 125), George M. Neal (DDG 131), Jeremiah Denton (DDG 129), and Sam Nunn (DDG 133), partially offset by lower volumes on USS Delbert D. Black (DDG 119) following its delivery and USS Fitzgerald (DDG 62) following its redelivery.

Segment Operating Income

2022 - Ingalls segment operating income in 2022 was $292 million, compared to segment operating income of $281 million in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30) and USS Fort Lauderdale (LPD 28), partially offset by receipt of a contract incentive on USS Jack H. Lucas (DDG 125) in 2021.

2021 - Ingalls segment operating income in 2021 was flat compared to 2020.

Newport News

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Sales and service revenues","","$","5,852","","","$","5,663","","","$","5,571","","","$","189","","","3","%","","$","92","","","2","%"],["Segment operating income","","357","","","352","","","233","","","5","","","1","%","","119","","","51","%"],["As a percentage of segment sales","","6.1","%","","6.2","%","","4.2","%"]]
[[/GREPCENT_TABLE]]

Sales and Service Revenues

2022 - Newport News revenues, including intersegment sales, increased $189 million, or 3%, in 2022 compared to 2021, 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 RCOH of USS John C. Stennis (CVN 74) and the construction of Doris Miller (CVN 81) and Enterprise (CVN 80), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73) and USS Gerald R. Ford (CVN 78). Submarine revenues increased due to higher volumes on the Columbia class (SSBN 826) submarine program and Block V boats of the Virginia class (SSN 774) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program. Naval nuclear support service revenues decreased primarily as a result of lower volumes in facility maintenance services, partially offset by higher volumes in submarine fleet support services.

2021 - Newport News revenues, including intersegment sales, increased $92 million, or 2%, in 2021 compared to 2020, primarily driven by higher revenues in submarines and aircraft carriers, partially offset by lower revenues in naval nuclear support services. Submarine revenues increased primarily as a result of higher volumes on Block V boats of the Virginia class (SSN 774) submarine program and the Columbia class (SSBN 826) submarine program, partially offset by lower volumes on Block IV boats of the Virginia class (SSN 774) submarine program. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), the construction of Enterprise (CVN 80), and the construction of Doris Miller (CVN 81), partially offset by lower volumes on the construction of John F. Kennedy (CVN 79) and the RCOH of USS George Washington (CVN 73). Naval nuclear support service revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.

Segment Operating Income

2022 - Newport News segment operating income in 2022 was $357 million, compared to segment operating income of $352 million in 2021. The increase was primarily due to favorable changes in contract estimates from facilities

46

capital and price adjustment clauses and contract incentives on the Columbia class (SSBN 826) submarine program, partially offset by lower risk retirement on the Virginia class (SSN 774) submarine program and the RCOH of USS George Washington (CVN 73).

2021 - Newport News segment operating income in 2021 was $352 million, compared to segment operating income of $233 million in 2020. The increase was primarily due to impacts related to performance on Block IV boats of the Virginia class (SSN 774) submarine program and delay and disruption from discrete COVID-19 Events in 2020.

Mission Technologies

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Sales and service revenues","","$","2,387","","","$","1,476","","","$","1,268","","","$","911","","","62","%","","$","208","","","16","%"],["Segment operating income (loss)","","63","","","50","","","41","","","13","","","26","%","","9","","","22","%"],["As a percentage of segment sales","","2.6","%","","3.4","%","","3.2","%"]]
[[/GREPCENT_TABLE]]

Sales and Service Revenues

2022 - Mission Technologies revenues, including intersegment sales, for the year ended December 31, 2022, increased $911 million, or 62%, compared to 2021, primarily due to higher volumes in mission based solutions attributable to the acquisition of Alion in 2021.

2021 - Mission Technologies revenues, including intersegment sales, for the year ended December 31, 2021, increased $208 million, or 16%, compared to 2020, primarily due to higher volumes in mission based solutions from the acquisition of Alion, partially offset by the divestiture of our oil and gas business and contribution of our San Diego Shipyard to a joint venture.

Segment Operating Income

2022 - Mission Technologies segment operating income for the year ended December 31, 2022, was $63 million, compared to segment operating income of $50 million in 2021. The increase was primarily driven by the acquisition of Alion in 2021 and higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition.

2021 - Mission Technologies segment operating income for the year ended December 31, 2021, was $50 million, compared to a segment operating income of $41 million in 2020. The increase was primarily driven by the acquisition of Alion and equity income from nuclear and environmental joint ventures, partially offset by lower performance in unmanned systems and the amortization of Alion purchased intangible assets.

BACKLOG

Total backlog as of December 31, 2022, was approximately $47.1 billion. 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.

47

The following table presents funded and unfunded backlog by segment as of December 31, 2022 and 2021: 

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","December 31, 2021"],["","","","","","","Total","","","","","","Total"],["($ in millions)","","Funded","","Unfunded","","Backlog","","Funded","","Unfunded","","Backlog"],["Ingalls","","$","9,231","","","$","3,546","","","$","12,777","","","$","10,216","","","$","792","","","$","11,008"],["Newport News","","11,665","","","17,742","","","29,407","","","11,121","","","21,198","","","32,319"],["Mission Technologies","","1,317","","","3,622","","","4,939","","","1,334","","","3,789","","","5,123"],["Total backlog","","$","22,213","","","$","24,910","","","$","47,123","","","$","22,671","","","$","25,779","","","$","48,450"]]
[[/GREPCENT_TABLE]]

We expect approximately 22% 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 December 31, 2022 and 2021.

Contract Awards

2022 - The value of new contract awards during the year ended December 31, 2022, was approximately $9.3 billion, including awards for the construction of Fallujah (LHA 9) and Telesforo Trinidad (DDG 139).

2021 - The value of new contract awards during the year ended December 31, 2021, was approximately $8.1 billion, comprised primarily of awards for the RCOH of USS John C. Stennis (CVN 74), construction of a 10th boat of the Virginia class (SSN 774) submarine program, and construction of John F. Lehman (DDG 137).

LIQUIDITY AND CAPITAL RESOURCES

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

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31","","2022 over 2021","","2021 over 2020"],["($ in millions)","","2022","","2021","","2020","","Dollars","","Percent","","Dollars","","Percent"],["Net earnings","","$","579","","","$","544","","","$","696","","","$","35","","","6","%","","$","(152)","","","(22)","%"],["Depreciation and amortization","","366","","","301","","","254","","","65","","","22","%","","47","","","19","%"],["Provision for doubtful accounts","","(7)","","","7","","","(1)","","","(14)","","","(200)","%","","8","","","800","%"],["Stock-based compensation","","36","","","33","","","23","","","3","","","9","%","","10","","","43","%"],["Deferred income taxes","","2","","","98","","","23","","","(96)","","","(98)","%","","75","","","326","%"],["Loss (gain) on investments in marketable securities","","25","","","(19)","","","(17)","","","44","","","232","%","","(2)","","","(12)","%"],["Asset impairments","","\u2014","","","\u2014","","","13","","","\u2014","","","\u2014","%","","(13)","","","(100)","%"],["Retiree benefits","","(127)","","","(78)","","","(176)","","","(49)","","","(63)","%","","98","","","56","%"],["Loss on early extinguishment of debt","","\u2014","","","\u2014","","","21","","","\u2014","","","\u2014","%","","(21)","","","(100)","%"],["Trade working capital decrease (increase)","","(108)","","","(126)","","","257","","","18","","","14","%","","(383)","","","(149)","%"],["Net cash provided by operating activities","","$","766","","","$","760","","","$","1,093","","","$","6","","","1","%","","$","(333)","","","(30)","%"]]
[[/GREPCENT_TABLE]]

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 each of the three years in the period ended December 31, 2022, as classified in our consolidated statements of cash flows.

48

Operating Activities

2022 - Cash provided by operating activities was $766 million in 2022, compared to $760 million in 2021. The $6 million favorable change in operating cash flow was primarily due to lower contributions to retiree benefit plans and favorable changes in trade working capital, partially offset by higher income tax and interest payments. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable.

We expect cash generated from operations in 2023, 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 January 1, 2023 and beyond such 12-month period based on our current business plans.

2021 - Cash provided by operating activities was $760 million in 2021, compared to $1,093 million in 2020. The unfavorable change of $333 million in operating cash flow was primarily due to unfavorable changes in trade working capital, partially offset by lower income tax payments and lower contributions to retiree benefit plans. The change in trade working capital was primarily driven by the timing of payments of accounts payable and receipts of accounts receivable.

Investing Activities

2022 - Cash used in investing activities was $268 million in 2022, a decrease of $1,686 million from 2021. The change in investing cash flow was primarily driven by the acquisition of Alion in 2021.

For 2023, we expect our capital expenditures for maintenance and sustainment to be approximately 1.5% of annual revenues and our discretionary capital expenditures to be approximately 1.5% to 2.5% of annual revenues.

2021 - Cash used in investing activities was $1,954 million in 2021, an increase of $1,195 million from 2020. The change in investing cash flow was driven by the acquisitions of Alion and a non-controlling interest in a specialty fabrication and ship repair joint venture in 2021, partially offset by the acquisition of Hydroid in 2020 and lower capital expenditures and the disposition of our oil and gas business in 2021.

Financing Activities

2022 - Cash used in financing activities in 2022 was $658 million, compared to $1,309 million provided by financing activities in 2021. The change in financing cash was primarily due to a $1,650 million decrease in proceeds from long-term debt, a $375 million increase in the repayment of long-term debt, a $7 million increase in employee taxes on share-based payment arrangements, and a $6 million increase in cash dividend payments, partially offset by a $49 million decrease in common stock repurchases and a $22 million decrease in debt issuance costs.

2021 - Cash provided by financing activities in 2021 was $1,309 million, compared to $103 million provided by financing activities in 2020. The change in financing cash was primarily due to a $1,225 million increase in net proceeds from long-term debt, a $15 million decrease in premiums related to the 2020 early extinguishment of debt, and a $6 million decrease in employee taxes on share-based payment arrangements, partially offset by a $17 million increase in common stock repurchases, a $14 million increase in cash dividend payments, and a $9 million increase in debt issuance costs.

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.

49

The following table reconciles net cash provided by operating activities to free cash flow:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31"],["($ in millions)","","2022","","2021","","2020"],["Net cash provided by operating activities","","$","766","","","$","760","","","$","1,093"],["Less capital expenditures:"],["Capital expenditure additions","","(284)","","","(331)","","","(353)"],["Grant proceeds for capital expenditures","","12","","","20","","","17"],["Free cash flow","","$","494","","","$","449","","","$","757"]]
[[/GREPCENT_TABLE]]

2022 - Free cash flow increased $45 million from 2021, primarily due to lower contributions to retiree benefit plans, lower capital expenditures, and favorable changes in trade working capital, partially offset by higher income tax and interest payments.

2021 - Free cash flow decreased $308 million from 2020, primarily due to an unfavorable change in trade working capital, partially offset by lower income tax payments, lower contributions to retiree benefit plans, and lower capital expenditures.

Retirement Related Benefit Plan Contributions

ERISA, including amendments under pension relief legislation, defines the minimum amount we must contribute to our qualified defined benefit pension plans. In determining whether to make discretionary contributions to these plans above the minimum required amounts, we consider various factors, including maintaining the funded status needed to avoid potential benefit restrictions and other adverse consequences, maintaining minimum CAS funding requirements, and the current and anticipated future funding levels of each plan. The contributions to our qualified defined benefit pension plans are affected by a number of factors, including published IRS interest rates, the actual return on plan assets, actuarial assumptions, and demographic experience. These factors and our resulting contributions also impact the funded status of the plans. We made the following minimum and discretionary contributions to our pension and other postretirement benefit plans in the years ended December 31, 2022, 2021, and 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31"],["($ in millions)","","2022","","2021","","2020"],["Pension plans"],["Discretionary"],["Qualified","","$","\u2014","","","$","60","","","$","205"],["Non-qualified","","10","","","9","","","8"],["Other benefit plans","","31","","","37","","","33"],["Total contributions","","$","41","","","$","106","","","$","246"]]
[[/GREPCENT_TABLE]]

We made discretionary contributions to our qualified defined benefit pension plans totaling less than $1 million, $60 million, and $205 million in the years ended December 31, 2022, 2021, and 2020, respectively.

As of December 31, 2022 and 2021, our qualified pension plans were funded 109% and 102%, respectively, on a FAS basis. As of December 31, 2022 and 2021, these plans were sufficiently funded on an ERISA basis so as not to be subject to benefit payment restrictions. The funded percentages under ERISA and FAS vary due to inherent differences in the assumptions and methodologies used to calculate the respective obligations. We expect our 2023 cash contributions to our qualified defined benefit pension plans to be less than $1 million, all of which we anticipate will be discretionary and which are exclusive of CAS cost recoveries under our contracts. Due to the differences in calculation methodologies, our FAS expense is not necessarily representative of our funding requirements or CAS cost recoveries.

Other postretirement benefit plan contributions were $31 million, $37 million, and $33 million in 2022, 2021, and 2020, respectively. We expect 2023 contributions to our other postretirement benefit plans to be approximately $35 million, which are exclusive of CAS cost recoveries under our contracts. Contributions for other postretirement benefit plans are not required to be funded in advance and are paid on an as-incurred basis.

50

Other Sources and Uses of Capital

Stockholder Distributions - In November 2022, our board of directors authorized an increase in our quarterly cash dividend to $1.24 per share. The board previously increased the quarterly cash dividend to $1.18 per share in November 2021 and $1.14 per share in November 2020. We paid cash dividends totaling $192 million ($4.78 per share), $186 million ($4.60 per share), and $172 million ($4.23 per share) in the years ended December 31, 2022, 2021, and 2020, respectively.

In November 2019, our board of directors authorized an increase to our 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 year ended December 31, 2022, we repurchased 244,561 shares at an aggregate cost of $52 million. For the years ended December 31, 2021 and 2020, we repurchased 544,440 and 390,904 shares, respectively, at aggregate costs of $101 million and $84 million, respectively. The cost of repurchased shares is recorded as treasury stock in the consolidated statements of financial position.

Additional Capital - In 2021, we issued $1 billion aggregate principal amount of senior notes, and we entered into a $650 million 3-year delayed draw term loan. The net proceeds were used to fund a portion of the purchase price for the acquisition of Alion.

In 2021, we amended and restated our existing $1.25 billion credit facility, increasing the capacity thereunder to $1.5 billion and extending the maturity date to five years from signing (the "Revolving Credit Facility"). The Revolving Credit Facility includes a letter of credit subfacility of $300 million.

In 2020, we issued $1 billion aggregate principal amount of senior notes. The net proceeds were intended to be used for general corporate purposes, including debt repayments and working capital.

In 2020, we redeemed $600 million aggregate principal amount of our outstanding senior notes in accordance with the terms of the indenture governing the notes.

We maintain an unsecured commercial paper note program, under which we may issue up to $1 billion of unsecured commercial paper notes.

For a description of our outstanding debt amounts and related restrictive covenants, see Note 13: Debt in Item 8.

Contractual obligations - Our future contractual obligations are related to debt, leases, pension liabilities, unrecognized tax benefits, workers compensation, and purchase obligations. See Note 13: Debt, Note 15: Leases, Note 17: Employee Pension and Other Postretirement Benefits, Note 12: Income Taxes, and Note 2: Summary of Significant Accounting Policies in Item 8 for information about those obligations. Our purchase obligations as of December 31, 2022, were approximately $4,525 million, with approximately $2,451 million expected to be paid in 2023 and $2,074 million thereafter. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. As of December 31, 2022, future scheduled periodic interest payments on our outstanding long-term debt, including commitment fees that we are obligated to pay on our Revolving Credit Facility, were approximately $437 million, with approximately $101 million expected to be paid in 2023 and $336 million thereafter.

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 December 31, 2022, $14 million in letters of credit were issued but undrawn and $360 million of surety bonds were outstanding. As of December 31, 2022, we had no other significant off-balance sheet arrangements.

51

GLOSSARY OF PROGRAMS

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

[[GREPCENT_TABLE]]
[["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","","Participating in designing the Columbia class submarine as a replacement for the current aging Ohio class nuclear ballistic missile submarines, which were first introduced into service in 1981. The Ohio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. The Columbia class program plan of record is to construct 12 new ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, the DoD signed the acquisition decision memorandum approving the Columbia class program\u2019s Milestone B, which formally authorizes the program\u2019s entry into the engineering and manufacturing development phase. We perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long\u2013lead\u2013time 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."],["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\u2013making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products."]]
[[/GREPCENT_TABLE]]

52

[[GREPCENT_TABLE]]
[["USS Gerald R. Ford class (CVN 78) aircraft carriers","","Design and construct 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\u2013domain 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\u2019s 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\u2019s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE\u2019s Los Alamos National Laboratory."]]
[[/GREPCENT_TABLE]]

53

[[GREPCENT_TABLE]]
[["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). 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."]]
[[/GREPCENT_TABLE]]