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HUNTINGTON INGALLS INDUSTRIES, INC. - Quarter Report: 2023 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________________________________
FORM 10-Q
 ______________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-34910
  ______________________________________________________________
HUNTINGTON INGALLS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________
Delaware90-0607005
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4101 Washington Avenue Newport News, Virginia 23607
(Address of principal executive offices and zip code)
(757) 380-2000
(Registrant’s telephone number, including area code)
 ______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockHIINew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes No  
As of April 28, 2023, 39,890,672 shares of the registrant's common stock were outstanding.



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TABLE OF CONTENTS
 
  
PART I – FINANCIAL INFORMATIONPage
Item 1.
Item 2.
Item 3.
Item 4.
PART II – OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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HUNTINGTON INGALLS INDUSTRIES, INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
 
 Three Months Ended
March 31
(in millions, except per share amounts)20232022
Sales and service revenues
Product sales$1,829 $1,724 
Service revenues845 852 
Sales and service revenues2,674 2,576 
Cost of sales and service revenues
Cost of product sales1,568 1,468 
Cost of service revenues756 759 
Income from operating investments, net12 
Other income and gains (losses), net(1)(1)
General and administrative expenses220 217 
Operating income141 138 
Other income (expense)
Interest expense(24)(26)
Non-operating retirement benefit37 71 
Other, net9 (7)
Earnings before income taxes163 176 
Federal and foreign income tax expense34 36 
Net earnings$129 $140 
Basic earnings per share$3.23 $3.50 
Weighted-average common shares outstanding39.9 40.0 
Diluted earnings per share$3.23 $3.50 
Weighted-average diluted shares outstanding39.9 40.0 
Dividends declared per share$1.24 $1.18 
Net earnings from above$129 $140 
Other comprehensive income (loss)
Change in unamortized benefit plan costs4 (86)
Tax benefit (expense) for items of other comprehensive income(1)22 
Other comprehensive income (loss), net of tax3 (64)
Comprehensive income$132 $76 

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

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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
($ in millions)March 31, 2023December 31, 2022
Assets
Current Assets
Cash and cash equivalents$318 $467 
Accounts receivable, net of allowance for doubtful accounts of $2 million as of 2023 and 2022
755 636 
Contract assets1,298 1,240 
Inventoried costs190 183 
Income taxes receivable113 170 
Prepaid expenses and other current assets78 50 
Total current assets2,752 2,746 
Property, plant, and equipment, net of accumulated depreciation of $2,351 million as of 2023 and $2,319 million as of 2022
3,182 3,198 
Operating lease assets264 282 
Goodwill2,618 2,618 
Other intangible assets, net of accumulated amortization of $913 million as of 2023 and $881 million as of 2022
987 1,019 
Pension plan assets623 600 
Miscellaneous other assets423 394 
Total assets$10,849 $10,857 
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable$505 $642 
Accrued employees’ compensation330 345 
Current portion of long-term debt399 399 
Current portion of postretirement plan liabilities134 134 
Current portion of workers’ compensation liabilities229 229 
Contract liabilities810 766 
Other current liabilities460 380 
Total current liabilities2,867 2,895 
Long-term debt2,498 2,506 
Pension plan liabilities216 214 
Other postretirement plan liabilities259 260 
Workers’ compensation liabilities464 463 
Long-term operating lease liabilities225 246 
Deferred tax liabilities389 418 
Other long-term liabilities368 366 
Total liabilities7,286 7,368 
Commitments and Contingencies (Note 10)
Stockholders’ Equity
Common stock, $0.01 par value; 150 million shares authorized; 53.6 million shares issued and 39.9 million shares outstanding as of March 31, 2023, and 53.5 million shares issued and 39.9 million shares outstanding as of December 31, 2022
1 
Additional paid-in capital2,024 2,022 
Retained earnings4,354 4,276 
Treasury stock(2,220)(2,211)
Accumulated other comprehensive loss(596)(599)
Total stockholders’ equity3,563 3,489 
Total liabilities and stockholders’ equity$10,849 $10,857 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended
March 31
($ in millions)20232022
Operating Activities
Net earnings$129 $140 
Adjustments to reconcile to net cash used in operating activities
Depreciation55 52 
Amortization of purchased intangibles32 35 
Amortization of debt issuance costs2 
Provision for doubtful accounts (7)
Stock-based compensation12 
Deferred income taxes(30)
Loss (gain) on investments in marketable securities(8)
Change in
Accounts receivable(119)(231)
Contract assets(58)(39)
Inventoried costs(7)(27)
Prepaid expenses and other assets30 
Accounts payable and accruals(31)— 
Retiree benefits(18)(34)
Other non-cash transactions, net2 (1)
Net cash used in operating activities(9)(83)
Investing Activities
Capital expenditures
Capital expenditure additions(43)(43)
Grant proceeds for capital expenditures3 — 
Investment in affiliates(20)— 
Net cash used in investing activities(60)(43)
Financing Activities
Repayment of long-term debt(10)(100)
Dividends paid(49)(47)
Repurchases of common stock(9)(10)
Employee taxes on certain share-based payment arrangements(12)(14)
Net cash used in financing activities(80)(171)
Change in cash and cash equivalents(149)(297)
Cash and cash equivalents, beginning of period467 627 
Cash and cash equivalents, end of period$318 $330 
Supplemental Cash Flow Disclosure
Cash paid for interest$12 $11 
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable$8 $

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED) 
Three Months Ended March 31, 2023 and 2022
($ in millions)
Common StockAdditional Paid-in CapitalRetained Earnings (Deficit)Treasury StockAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
Balance as of December 31, 2021$$1,998 $3,891 $(2,159)$(923)$2,808 
Net earnings— — 140 — — 140 
Dividends declared ($1.18 per share)
— — (47)— — (47)
Stock-based compensation— (3)(2)— — (5)
Other comprehensive loss, net of tax— — — — (64)(64)
Treasury stock activity— — — (10)— (10)
Balance as of March 31, 2022$$1,995 $3,982 $(2,169)$(987)$2,822 
Balance as of December 31, 2022$$2,022 $4,276 $(2,211)$(599)$3,489 
Net earnings  129   129 
Dividends declared ($1.24 per share)
  (49)  (49)
Stock-based compensation 2 (2)   
Other comprehensive income, net of tax    3 3 
Treasury stock activity   (9) (9)
Balance as of March 31, 2023$1 $2,024 $4,354 $(2,220)$(596)$3,563 

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

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HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

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

2. BASIS OF PRESENTATION

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

These unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature considered necessary by management for a fair presentation of the unaudited condensed consolidated financial position, results of operations, and cash flows and should be read in conjunction with the Company's audited consolidated financial statements included in the Company's 2022 Annual Report on Form 10-K.

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

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

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

The Company maintains multiple grantor trusts to fund certain non-qualified pension plans. These trusts were valued at $215 million and $209 million as of March 31, 2023, and December 31, 2022, respectively, and are presented within miscellaneous other assets within the unaudited condensed consolidated statements of financial position. These trusts consist primarily of investments in marketable securities, which are held at fair value within Level 1 of the fair value hierarchy.

The estimated fair values of the Company's total long-term debt (including current portion) as of March 31, 2023, and December 31, 2022, were $2,747 million and $2,703 million, respectively. The estimated fair values of the current portion of the Company's long-term debt were $393 million and $390 million as of March 31, 2023 and December 31, 2022, respectively. The fair values of the Company's long-term debt were calculated based on recent trades of the Company's debt instruments in inactive markets, which fall within Level 2 under the fair value hierarchy.

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3. ACCOUNTING STANDARDS UPDATES

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

4. STOCKHOLDERS' EQUITY

Treasury Stock - In November 2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $2.2 billion to $3.2 billion and an extension of the term of the program to October 31, 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the three months ended March 31, 2023, the Company repurchased 39,325 shares at an aggregate cost of $9 million. For the three months ended March 31, 2022, the Company repurchased 50,549 shares at an aggregate cost of $10 million. The cost of purchased shares is recorded as treasury stock in the unaudited condensed consolidated statements of financial position.

Dividends - The Company paid cash dividends totaling $49 million and $47 million for the three months ended March 31, 2023 and 2022, respectively.

Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss was comprised of unamortized benefit plan costs of $596 million and $599 million as of March 31, 2023 and December 31, 2022, respectively.

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

($ in millions)Benefit PlansOtherTotal
Balance as of December 31, 2021$(923)$— $(923)
Other comprehensive loss before reclassifications(97)— (97)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
— 
Amortization of net actuarial loss1
— 
Tax benefit for items of other comprehensive loss22 — 22 
Net current period other comprehensive loss(64)— (64)
Balance as of March 31, 2022$(987)$— $(987)
Balance as of December 31, 2022$(599)$— $(599)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
3  3 
Amortization of net actuarial loss1
1  1 
Tax expense for items of other comprehensive income(1) (1)
Net current period other comprehensive income3  3 
Balance as of March 31, 2023$(596)$ $(596)
1 These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 11: Employee Pension and Other Postretirement Benefits. The tax expense recorded in stockholders' equity for the amounts reclassified from accumulated other comprehensive loss for the three months ended March 31, 2023 and 2022, was $1 million and $3 million, respectively.

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5. EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows:
 Three Months Ended
March 31
(in millions, except per share amounts)20232022
Net earnings$129 $140 
Weighted-average common shares outstanding39.9 40.0 
Net dilutive effect of stock awards — 
Dilutive weighted-average common shares outstanding39.9 40.0 
Earnings per share - basic$3.23 $3.50 
Earnings per share - diluted$3.23 $3.50 

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

6. REVENUE

Disaggregation of Revenue

The Company's contracts with customers typically fall into one of four categories: firm fixed-price, fixed-price incentive, cost-type, and time and materials. For more information on the Company's contracts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's 2022 Annual Report on Form 10-K.

The following tables present revenues on a disaggregated basis:
Three Months Ended March 31, 2023
($ in millions)IngallsNewport NewsMission TechnologiesIntersegment EliminationsTotal
Revenue Type
Product sales$534 $1,271 $24 $— $1,829 
Service revenues41 234 570 — 845 
Intersegment30 (33)— 
Sales and service revenues$577 $1,506 $624 $(33)$2,674 
Customer Type
Federal$575 $1,505 $581 $— $2,661 
Commercial— — 13 — 13 
Intersegment30 (33)— 
Sales and service revenues$577 $1,506 $624 $(33)$2,674 
Contract Type
Firm fixed-price$$— $75 $— $77 
Fixed-price incentive533 829 — — 1,362 
Cost-type40 676 467 — 1,183 
Time and materials— — 52 — 52 
Intersegment30 (33)— 
Sales and service revenues$577 $1,506 $624 $(33)$2,674 

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Three Months Ended March 31, 2022
($ in millions)IngallsNewport NewsMission TechnologiesIntersegment EliminationsTotal
Revenue Type
Product sales$578 $1,121 $25 $— $1,724 
Service revenues50 267 535 — 852 
Intersegment30 (35)— 
Sales and service revenues$631 $1,390 $590 $(35)$2,576 
Customer Type
Federal$628 $1,388 $547 $— $2,563 
Commercial— — 13 — 13 
Intersegment30 (35)— 
Sales and service revenues$631 $1,390 $590 $(35)$2,576 
Contract Type
Firm fixed-price$$$64 $— $74 
Fixed-price incentive576 703 — — 1,279 
Cost-type50 677 425 — 1,152 
Time and materials— — 71 — 71 
Intersegment30 (35)— 
Sales and service revenues$631 $1,390 $590 $(35)$2,576 


Three Months Ended
March 31
($ in millions)20232022
Major Programs
Amphibious assault ships$323 $363 
Surface combatants and coast guard cutters253 265 
Other
Total Ingalls577 631 
Aircraft carriers837 742 
Submarines540 470 
Other129 178 
Total Newport News1,506 1,390 
Mission based solutions518 491 
Other106 99 
Total Mission Technologies624 590 
Intersegment eliminations(33)(35)
Sales and service revenues$2,674 $2,576 

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

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

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

Cumulative catch-up revenue adjustments for the three months ended March 31, 2022, included a favorable adjustment of $17 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.34. For the three months ended March 31, 2022, no individual unfavorable cumulative catch-up revenue adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.

Contract Balances

The Company reports contract balances in a net contract asset or contract liability position on a contract-by-contract basis at the end of each reporting period. The Company’s net contract assets increased $14 million from December 31, 2022, to March 31, 2023, primarily resulting from an increase in contract assets related to revenue on certain U.S. Navy contracts. For the three months ended March 31, 2023, the Company recognized revenue of $551 million related to its contract liabilities as of December 31, 2022. For the three months ended March 31, 2022, the Company recognized revenue of $379 million related to its contract liabilities as of December 31, 2021.

7. SEGMENT INFORMATION

The following table presents segment results for the three months ended March 31, 2023 and 2022:
 Three Months Ended
March 31
($ in millions)20232022
Sales and Service Revenues
Ingalls$577 $631 
Newport News1,506 1,390 
Mission Technologies624 590 
Intersegment eliminations(33)(35)
Sales and service revenues$2,674 $2,576 
Operating Income
Ingalls$55 $86 
Newport News84 81 
Mission Technologies17 
Segment operating income156 176 
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment(19)(37)
Non-current state income taxes4 (1)
Operating income $141 $138 

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

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The following table presents the Company's assets by segment:
($ in millions)March 31, 2023December 31, 2022
Assets
Ingalls$1,615 $1,633 
Newport News4,566 4,344 
Mission Technologies3,291 3,347 
Corporate1,377 1,533 
Total assets$10,849 $10,857 

8. INCOME TAXES

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

The Company's unrecognized tax benefits increased by $2 million during the three months ended March 31, 2023. As of March 31, 2023, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $92 million. Assuming a sustainment of these tax positions, a reversal of $70 million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense. For the three months ended March 31, 2023, interest resulting from the unrecognized tax benefits noted above increased income tax expense by $1 million.
Non-current state income taxes include deferred state income taxes, which reflect the change in deferred state tax assets and liabilities, and the tax expense or benefit associated with changes in unrecognized state tax benefits in the relevant period. These amounts are recorded within operating income. Current period state income tax expense is charged to contract costs and included in cost of sales and service revenues in segment operating income.

9. INVESTIGATIONS, CLAIMS, AND LITIGATION

The Company is involved in legal proceedings before various courts and administrative agencies, and is periodically subject to government examinations, inquiries and investigations. Pursuant to FASB Accounting Standards Codification 450 Contingencies, the Company has accrued for losses associated with investigations, claims, and litigation when, and to the extent that, loss amounts related to the investigations, claims, and litigation are probable and can be reasonably estimated. The actual losses that might be incurred to resolve such investigations, claims, and litigation may be higher or lower than the amounts accrued. The Company has also provided footnote
disclosure for matters for which a material loss is reasonably possible but a reserve has not been accrued because
the likelihood of a material loss is not probable.

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

Insurance Claims - In September 2020, the Company filed a complaint against 32 reinsurers in the Superior Court, State of Vermont, Franklin Unit, seeking a judgment declaring that the Company's business interruption and other losses associated with COVID-19 are covered by the Company's property insurance program. The Company also has initiated arbitration proceedings against six other reinsurers seeking similar relief. In July 2021, the Vermont court granted the reinsurers’ motion for judgment on the pleadings, which would have ended the Company’s claim. The Company appealed the decision to the Vermont Supreme Court, which reversed and remanded the lower court’s decision in September 2022, allowing the Company’s claim to proceed. No assurances can be provided regarding the ultimate resolution of this matter.
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In September 2021, the Company filed a complaint in the Superior Court of Delaware, seeking a judgment against certain insurers for breach of contract and breach of the implied covenant of good faith and fair dealing under three representations and warranties insurance policies purchased in connection with the Company’s acquisition of Hydroid. The policies insure the Company against losses relating to the seller’s breach of certain representations and warranties in the Hydroid acquisition agreement. The coverage limit under the insurance policies is $70 million, and the Company believes it has incurred losses equal to at least that amount as a result of breaches of the acquisition agreement. No assurances can be provided regarding the ultimate resolution of this matter.

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

Asbestos Related Claims - HII and its predecessors-in-interest are defendants in a longstanding series of cases that have been and continue to be filed in various jurisdictions around the country, wherein former and current employees and various third parties allege exposure to asbestos containing materials while on or associated with HII premises or while working on vessels constructed or repaired by HII. In some instances, partial or full insurance coverage is available for the Company's liabilities. The costs to resolve cases during the three months ended March 31, 2023 and 2022, were not material individually or in the aggregate. The Company’s estimate of asbestos-related liabilities is subject to uncertainty because liabilities are influenced by many variables that are inherently difficult to predict. Although the Company believes the ultimate resolution of current cases will not have a material effect on its condensed consolidated financial position, results of operations, or cash flows, it cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of asbestos related litigation.

Other Litigation - The Company and its predecessor-in-interest have been in litigation with the Bolivarian Republic of Venezuela (the "Republic") since 2002 over a contract for the repair, refurbishment, and modernization at Ingalls of two foreign-built frigates. Following an arbitration proceeding between the parties, in February 2018, the arbitral tribunal awarded the Company approximately $151 million on its claims and awarded the Republic approximately $22 million on its counterclaims. The Company is seeking to enforce and execute upon the award in multiple jurisdictions. No assurances can be provided regarding the ultimate resolution of this matter.
The Company is party to various other claims, legal proceedings, and investigations that arise in the ordinary course of business, including U.S. Government investigations that could result in administrative, civil, or criminal proceedings involving the Company. The Company is a contractor with the U.S. Government, and such proceedings can therefore include False Claims Act allegations against the Company. Although the Company believes that the resolution of these other claims, legal proceedings, and investigations will not have a material effect on its condensed consolidated financial position, results of operations, or cash flows, the Company cannot predict what new or revised claims or litigation might be asserted or what information might come to light and can, therefore, give no assurances regarding the ultimate outcome of these matters.

10. COMMITMENTS AND CONTINGENCIES

Contract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances and recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. As of March 31, 2023, amounts recognized in connection with claims and requests for equitable adjustment were not material individually or in the aggregate.

Environmental Matters - The estimated cost to complete environmental remediation has been accrued when it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be estimated by management. These accruals do not include any litigation costs related to environmental
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matters, nor do they include amounts recorded as asset retirement obligations. Management estimates that as of March 31, 2023, the probable estimable future cost for environmental remediation was not material. Although management cannot predict whether new information gained as remediation progresses or the Company incurs additional remediation obligations will materially affect the estimated liability accrued, management does not believe that future remediation expenditures will have a material effect on the Company's consolidated financial position, results of operations, or cash flows.

Financial Arrangements - In the ordinary course of business, HII uses letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of March 31, 2023, the Company had $14 million in issued but undrawn letters of credit and $360 million of surety bonds outstanding.

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

Other Matters - In 1985, the Company and the U.S. Navy entered into a settlement agreement to resolve disputes associated with billing and allocating to contracts the cost of workers’ compensation self-insurance, among other matters. Consistent with the 1985 settlement agreement, the Company has not recovered cumulative billable costs resulting from the different treatment of workers' compensation costs between CAS and FAS. Under the 1985 settlement agreement, these costs would be recovered in future periods. In December 2020, a U.S. Navy Contracting Officer issued a determination that the 1985 settlement agreement did not comply with CAS and directed the Company to develop and implement a different process to bill and allocate the cost of workers’ compensation self-insurance. The Company believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, but the Company is continuing to negotiate a resolution of the matter with the Contracting Officer.

In August 2022, the Navy Contracting Officer issued a written determination that the Ingalls Shipbuilding Property Management System had a significant deficiency, resulting in a 2% withhold of payments on certain invoices issued under one contract. In response, the Company proposed a corrective action plan, which the Navy approved. Subsequently, the Navy terminated the withhold and released withheld funds to the Company.

In January 2023, the Company entered into discussions with a Mission Technologies' customer to amend an
existing contract to address manufacturing issues. Although final agreement has not been reached, the Company recorded during the period ended March 31, 2023, a provision for contract loss that was not material to the financial statements as a whole.

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

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

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11. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS

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

The costs of the Company's defined benefit pension plans and other postretirement benefit plans for the three months ended March 31, 2023 and 2022, were as follows:
 Three Months Ended
March 31
Pension BenefitsOther Benefits
($ in millions)2023202220232022
Components of net periodic benefit cost
Service cost$28 $45 $1 $
Interest cost86 64 5 
Expected return on plan assets(132)(150) — 
Amortization of prior service cost (credit)4 (1)(1)
Amortization of net actuarial loss (gain)4 (3)(1)
Net periodic benefit (income) cost$(10)$(28)$2 $

The Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the three months ended March 31, 2023 and 2022:
 Three Months Ended
March 31
($ in millions)20232022
Pension plans
Discretionary
Qualified$ $— 
Non-qualified2 
Other benefit plans8 
Total contributions$10 $10 

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

12. STOCK COMPENSATION PLANS

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

Restricted Performance Stock Rights - For the three months ended March 31, 2023, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $215.20. These rights are subject to cliff vesting on December 31, 2025. For the three months ended March 31, 2022, the Company granted approximately 0.1 million RPSRs at a weighted average share price of $204.10. These rights are subject to cliff vesting on December 31, 2024. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between 0% and 200% of grant date value.

For the three months ended March 31, 2023 and 2022, awards of approximately 0.1 million and 0.2 million shares of stock vested, respectively, of which less than 0.1 million for each period were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.

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The following table summarizes the status of the Company's outstanding stock awards as of March 31, 2023:
Stock Awards
(in thousands)
Weighted-Average
Grant Date Fair
Value
Weighted-Average Remaining Contractual Term
(in years)
Total stock awards551 $189.15 1.5

Compensation Expense

The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $12 million and $9 million for the three months ended March 31, 2023 and 2022, respectively.
The Company recorded tax benefits related to stock awards of $2 million and $1 million for the three months ended March 31, 2023 and 2022, respectively. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $3 million and $4 million for the three months ended March 31, 2023 and 2022, respectively.

Unrecognized Compensation Expense

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

13. SUBSEQUENT EVENTS

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


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

OVERVIEW

Our Business

Huntington Ingalls Industries, Inc. ("HII", "we", "us", or "our") is a global, all-domain defense partner, building and delivering the world’s most powerful, survivable naval ships and technologies that safeguard America’s seas, sky, land, space, and cyber. For more than a century, our Ingalls Shipbuilding segment ("Ingalls") in Mississippi and Newport News Shipbuilding segment ("Newport News") in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder, making us America's largest shipbuilder. Our Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial markets. Headquartered in Newport News, Virginia, HII employs approximately 43,000 people domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member, or partner, we participate in many high-priority U.S. defense programs. Ingalls includes our non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. Our Mission Technologies segment provides a wide range of services and products, including command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance ("C5ISR") systems and operations; the application of Artificial Intelligence and machine learning to battlefield decisions; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive training solutions; platform modernization; and critical nuclear operations.
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The following discussion should be read along with the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, as well as our 2022 Annual Report on Form 10-K.

Business Environment

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

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

Political and Economic Environment - The global geopolitical and economic environment continues to be impacted
by uncertainty, heightened tensions, and instability. Geopolitical relationships have changed, and are continuing to
change, and the U.S. and its allies face a global security environment that includes threats from state and non-state
actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional
security concerns, and political instability. These global threats persist across all domains, from undersea to space
to cyber, and the global market for defense products, services, and solutions is driven by these complex and
evolving security challenges. Our current operating environment exists in the broader context of political and
socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding
geopolitical tensions, financial market volatility, inflation, a challenging labor market, and continued public health issues.

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

Critical Accounting Policies, Estimates, and Judgments

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

Revenue recognition;

Purchase accounting, goodwill, and intangible assets;

Litigation, commitments, and contingencies;

Retirement related benefit plans; and

Workers' compensation.

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

Program Descriptions

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

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CONSOLIDATED OPERATING RESULTS

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

Key Financial Measures

The following table presents selected financial highlights:
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
Sales and service revenues$2,674 $2,576 $98 %
Cost of product sales and service revenues2,324 2,227 97 %
Income from operating investments, net12 71 %
Other income and gains (losses), net(1)(1)— — %
General and administrative expenses220 217 %
Operating income141 138 %
Other income (expense)
Interest expense(24)(26)%
Non-operating retirement benefit37 71 (34)(48)%
Other, net9 (7)16 229 %
Federal and foreign income taxes34 36 (2)(6)%
Net earnings$129 $140 $(11)(8)%

Sales and Service Revenues

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

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

Cost of Sales and Service Revenues

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

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

Income from Operating Investments, Net

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

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

General and Administrative Expenses

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

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

Operating Income

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

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

The following table reconciles operating income to segment operating income:
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
Operating income$141 $138 $%
Operating FAS/CAS Adjustment19 37 (18)(49)%
Non-current state income taxes(4)(5)(500)%
Segment operating income$156 $176 $(20)(11)%

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

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

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

The components of the Operating FAS/CAS Adjustment were as follows:
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
FAS benefit$8 $24 $(16)(67)%
CAS cost10 10 — — %
FAS/CAS Adjustment18 34 (16)(47)%
Non-operating retirement benefit(37)(71)34 48 %
Operating FAS/CAS Adjustment$(19)$(37)$18 49 %

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

Non-current State Income Taxes

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

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

SEGMENT OPERATING RESULTS

Our discussion of business segment performance focuses on sales and service revenues and operating income,
consistent with our approach for managing our business. We are aligned into three reportable segments: Ingalls, Newport News, and Mission Technologies.

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The following table presents segment sales and segment operating results:
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
Sales and Service Revenues
Ingalls$577 $631 $(54)(9)%
Newport News1,506 1,390 116 %
Mission Technologies
624 590 34 %
Intersegment eliminations(33)(35)%
Sales and service revenues$2,674 $2,576 $98 %
Operating Income
Ingalls$55 $86 $(31)(36)%
Newport News84 81 %
Mission Technologies
17 89 %
Segment operating income156 176 (20)(11)%
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment(19)(37)18 49 %
Non-current state income taxes4 (1)500 %
Operating income$141 $138 $%

Segment Operating Income

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

Cumulative Catch-up Revenue Adjustments

For the three months ended March 31, 2023 and 2022, favorable and unfavorable cumulative catch-up revenue adjustments were as follows:
Three Months Ended
March 31
 
($ in millions)20232022
Gross favorable adjustments$64 $107 
Gross unfavorable adjustments(55)(62)
Net adjustments$9 $45 

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For the three months ended March 31, 2023 and 2022, net cumulative catch-up revenue adjustments by segment were as follows:
Three Months Ended
March 31
 
($ in millions)20232022
Ingalls$14 $41 
Newport News(9)— 
Mission Technologies4 
Net adjustments$9 $45 

Ingalls
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
Sales and service revenues$577 $631 $(54)(9)%
Segment operating income55 86 (31)(36)%
As a percentage of segment sales9.5 %13.6 %

Sales and Service Revenues

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

Segment Operating Income

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

Newport News
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
Sales and service revenues$1,506 $1,390 $116 %
Segment operating income84 81 %
As a percentage of segment sales5.6 %5.8 %

Sales and Service Revenues

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

Segment Operating Income

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

Mission Technologies
Three Months Ended
March 31
 2023 vs. 2022
($ in millions)20232022DollarsPercent
Sales and service revenues$624 $590 $34 %
Segment operating income17 89 %
As a percentage of segment sales2.7 %1.5 %

Sales and Service Revenues

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

Segment Operating Income

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

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PRODUCT AND SERVICE ANALYSIS

The following table presents segment sales and service revenues and segment cost of sales and service revenues by both product and service:
Three Months Ended March 31
($ in millions)20232022
Segment InformationSales and service revenuesSegment cost of product sales and service revenuesSales and service revenuesSegment cost of product sales and service revenues
Ingalls
Product$534 $440 $578 $457 
Service41 34 50 43 
Intersegment2 2 
Total Ingalls577 476 631 503 
Newport News
Product1,271 1,092 1,121 959 
Service234 198 267 225 
Intersegment1 1 
Total Newport News1,506 1,291 1,390 1,186 
Mission Technologies
Product24 20 25 21 
Service570 521 535 485 
Intersegment30 30 30 30 
Total Mission Technologies624 571 590 536 
Segment Totals
Product1,829 1,552 1,724 1,437 
Service845 753 852 753 
Total Segment (1)
$2,674 $2,305 $2,576 $2,190 
(1) Operating FAS/CAS Adjustment is excluded from segment cost of product sales and service revenues.

Product Sales and Segment Cost of Product Sales

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

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

Service Revenues and Segment Cost of Service Revenues

Service revenues for the three months ended March 31, 2023, decreased $7 million, or 1%, compared with the same period in 2022. Service revenues at our Ingalls segment decreased $9 million in 2023, primarily as a result of
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lower volumes in amphibious assault ship services. Service revenues at our Newport News segment decreased $33 million in 2023, primarily as a result of lower volumes in naval nuclear support services, partially offset by higher volumes in aircraft carrier and submarine services. Service revenues at our Mission Technologies segment increased $35 million in 2023, primarily as a result of higher volumes in mission based solutions services and fleet sustainment.

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

OTHER FINANCIAL INFORMATION

Interest Expense

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

Non-Operating Retirement Benefit

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

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

Other, Net

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

Federal and Foreign Income Taxes

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

BACKLOG

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

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The following table presents funded and unfunded backlog by segment as of March 31, 2023, and December 31, 2022: 
 March 31, 2023December 31, 2022
   Total  Total
($ in millions)FundedUnfundedBacklogFundedUnfundedBacklog
Ingalls$10,852 $2,786 $13,638 $9,231 $3,546 $12,777 
Newport News13,579 15,069 28,648 11,665 17,742 29,407 
Mission Technologies
1,332 3,390 4,722 1,317 3,622 4,939 
Total backlog$25,763 $21,245 $47,008 $22,213 $24,910 $47,123 

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

Contract Awards

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

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes key components of cash flow provided by operating activities:
Three Months Ended
March 31
2023 vs. 2022
($ in millions)20232022Dollars
Net earnings$129 $140 $(11)
Depreciation and amortization89 89 — 
Provision for doubtful accounts (7)
Stock-based compensation12 
Deferred income taxes(30)(32)
Loss (gain) on investments in marketable securities(8)(17)
Retiree benefits(18)(34)16 
Trade working capital increase(183)(291)108 
Net cash used in operating activities$(9)$(83)$74 
We have historically maintained a capital structure comprised of a mix of equity and debt financing. We vary our
leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt
obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.

Cash Flows

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

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Operating Activities

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

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

Investing Activities

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

Financing Activities

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

Free Cash Flow

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

The following table reconciles net cash used in operating activities to free cash flow:
Three Months Ended
March 31
2023 vs. 2022
($ in millions)20232022Dollars
Net cash used in operating activities$(9)$(83)$74 
Less capital expenditures:
Capital expenditure additions(43)(43)— 
Grant proceeds for capital expenditures3 — 
Free cash flow$(49)$(126)$77 

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

Governmental Regulation and Supervision

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

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

ACCOUNTING STANDARDS UPDATES

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

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

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

Changes in government and customer priorities and requirements (including government budgetary constraints, shifts in defense spending, and changes in customer short-range and long-range plans);
Our ability to estimate our future contract costs, including cost increases due to inflation, and perform our contracts effectively;
Changes in procurement processes and government regulations and our ability to comply with such requirements;
Our ability to deliver our products and services at an affordable life cycle cost and compete within our markets;
Natural and environmental disasters and political instability;
Our ability to execute our strategic plan, including with respect to share repurchases, dividends, capital expenditures, and strategic acquisitions;
Adverse economic conditions in the United States and globally;
Health epidemics, pandemics, and similar outbreaks;
Our ability to attract, train, and retain a qualified workforce;
Disruptions impacting global supply, including those attributable to ongoing public health issues and those resulting from the ongoing conflict between Russia and Ukraine;
Changes in key estimates and assumptions regarding our pension and retiree health care costs;
Security threats, including cyber security threats, and related disruptions; and
Other risk factors discussed herein and in our other filings with the SEC.

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

There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business, and we undertake no obligation to update or revise any forward-looking statements. You should not place undue reliance on any forward looking statements that we may make.
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GLOSSARY OF PROGRAMS
Included below are brief descriptions of some of the programs discussed in this Quarterly Report on Form 10-Q.
Program Name  Program Description
America class (LHA 6) amphibious assault ships
  
Design and build large deck amphibious assault ships that provide forward presence and power projection as an integral part of joint, interagency and multinational maritime expeditionary forces. The America class (LHA 6) ships, together with the Wasp class (LHD 1) ships, are the successors to the decommissioned Tarawa class (LHA 1) ships. The America class (LHA 6) ships optimize aviation operations and support capabilities. In 2020, we delivered USS Tripoli (LHA 7), and, in 2022, we were awarded a long-lead-time material and construction contract for Fallujah (LHA 9). We are currently constructing Bougainville (LHA 8) and Fallujah (LHA 9).
Arleigh Burke class (DDG 51) destroyers
  
Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burke class (DDG 51) destroyers are the U.S. Navy's primary surface combatant, and have been constructed in variants, allowing technological advances during construction. We delivered USS Paul Ignatius (DDG 117), USS Delbert D. Black (DDG 119), USS Frank E. Petersen Jr. (DDG 121), and Lenah H. Sutcliffe Higbee (DDG 123) in 2019, 2020, 2021, and 2022, respectively. We have contracts to construct the following Arleigh Burke class (DDG 51) destroyers: USS Jack H. Lucas (DDG 125), Ted Stevens (DDG 128), Jeremiah Denton (DDG 129), George M. Neal (DDG 131), Sam Nunn (DDG 133), Thad Cochran (DDG 135), John F. Lehman (DDG 137), and Telesforo Trinidad (DDG 139).
Carrier RCOH
  
Perform refueling and complex overhaul ("RCOH") of nuclear-powered aircraft carriers, which is required at the mid-point of their 50-year life cycle. USS George Washington (CVN 73) arrived at Newport News for the start of its RCOH in August 2017, and USS John C. Stennis (CVN 74) arrived at Newport News for the start of its RCOH in May 2021.
Columbia class (SSBN 826) submarines
Design and construct modules for Columbia class (SSBN 826) nuclear ballistic missile submarines ("SSBNs") as a subcontractor to Electric Boat. SSBNs are the most secure and survivable of our nation’s nuclear deterrent triad. Columbia class SSBNs will carry approximately 70 percent of the nation’s nuclear arsenal. The Columbia class (SSBN 826) program plan of record is to construct 12 new SSBNs to replace the current aging Ohio class. We have a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long–lead–time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) submarine program. Construction of the first Columbia class (SSBN 826) submarine began in 2020. In 2023, we received initial authorization to begin advance procurement and advance construction for the third and fourth boats.
Fleet sustainmentMaintains and modernizes a significant majority of the U.S. Navy fleet, from small watercraft to submarines, combatants, and aircraft carriers, our systems and maintenance experts help the Navy maintain a high state of readiness. Ensures effective system operation and sustainment by actively supporting design and decision–making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products.
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USS Gerald R. Ford class (CVN 78) aircraft carriers
  
Design and construction for the Ford class program, which is the aircraft carrier replacement program for the decommissioned Enterprise (CVN 65) and Nimitz class (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78), the first ship of the Ford class, was delivered to the U.S. Navy in the second quarter of 2017. In June 2015, we were awarded a contract for the detail design and construction of John F. Kennedy (CVN 79), following several years of engineering, advance construction, and purchase of long-lead-time components and material. In addition, we have received awards for detail design and construction of Enterprise (CVN 80) and Doris Miller (CVN 81). This category also includes the class' non-recurring engineering. The class is expected to bring improved warfighting capability, quality of life improvements for sailors, and reduced life cycle costs.
Legend class National Security Cutter
  
Design and build the U.S. Coast Guard's National Security Cutters ("NSCs"), the largest and most technically advanced class of cutter in the U.S. Coast Guard. The NSC is equipped to carry out maritime homeland security, maritime safety, protection of natural resources, maritime mobility, and national defense missions. The plan is for a total of 11 ships, of which the first nine ships have been delivered. Calhoun (NSC 10) and Friedman (NSC 11) are currently under construction.
Mission based solutionsDevelops integrated solutions that enable today's connected, all–
domain force. Capabilities include: command, control, computers,
communications, cyber, intelligence, surveillance, and
reconnaissance ("C5ISR") systems and operations; the
application of artificial intelligence and machine learning to
battlefield decisions; defensive and offensive cyberspace
strategies and electronic warfare ("CEWS"); and live, virtual, and
constructive ("LVC") solutions.
Naval nuclear support servicesProvide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes.
Nuclear and environmental services
Supports the national security mission of the Department of Energy ("DoE") through the management and operation of DOE sites, as well as the safe cleanup of legacy waste across the country. We meet our clients' toughest nuclear and environmental challenges and are positioned to serve the growing commercial nuclear power plant decommissioning market. We participate in several joint ventures, including Newport News Nuclear BWXT Los Alamos, LLC (" N3B"), Mission Support and Test Services, LLC ("MSTS"), and Savannah River Nuclear Solutions, LLC ("SRNS"), and we are an integrated subcontractor to Triad National Security. N3B was awarded the Los Alamos Legacy Cleanup Contract at the DoE/National Nuclear Security Administration’s Los Alamos National Laboratory. MSTS was awarded a contract for site management and operations at the Nevada National Security Site. SRNS provides site management and operations at the DoE’s Savannah River Site near Aiken, South Carolina. Triad provides site management and operations at the DoE’s Los Alamos National Laboratory.
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San Antonio class (LPD 17) amphibious transport dock ships
  
Design and build amphibious transport dock ships, which are warships that embark, transport, and land elements of a landing force for a variety of expeditionary warfare missions, and also serve as the secondary aviation platform for Amphibious Readiness Groups. The San Antonio class (LPD 17) is the newest addition to the U.S. Navy's 21st century amphibious assault force, and these ships are a key element of the U.S. Navy's seabase transformation. In 2022, we delivered USS Fort Lauderdale (LPD 28), and we were awarded a long-lead-time material contract for LPD 32 (unnamed). In 2023, we received an award modification for the detail design and construction of LPD 32 (unnamed). We are currently constructing Richard M. McCool Jr. (LPD 29), Harrisburg (LPD 30), and Pittsburgh (LPD 31).
Unmanned systems
Creates advanced unmanned maritime solutions for defense, marine research, and commercial applications. Serving customers in more than 30 countries, unmanned systems provides design, autonomy, manufacturing, testing, operations, and sustainment of unmanned systems, including unmanned underwater vehicles and unmanned surface vessels.
Virginia class (SSN 774) fast attack submarines
  
Construct attack submarines as the principal subcontractor to Electric Boat. The Virginia class (SSN 774) is a post-Cold War design tailored to excel in a wide range of warfighting missions, including anti-submarine and surface ship warfare; special operation forces; strike; intelligence, surveillance, and reconnaissance; carrier and expeditionary strike group support; and mine warfare.

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Item 3.    Quantitative and Qualitative Disclosures about Market Risk

We are exposed to certain market risks, including those relating to interest rates and inflation.

Interest Rates - Our floating rate financial instruments subject to interest rate risk include a $650 million Term Loan, a $1.5 billion Revolving Credit Facility, and a $1 billion commercial paper program. As of March 31, 2023, we had $215 million outstanding on the Term Loan and no indebtedness outstanding under our Revolving Credit Facility or our commercial paper program. Based on the amounts outstanding under our Term Loan as of March 31, 2023, an increase of 1% in interest rates would increase the interest expense on our debt by approximately $2 million on an annual basis.

Inflation - Macroeconomic factors have contributed, and we expect will continue to contribute, to increasing cost inflation for raw materials, components, and supplies. We mitigate some cost inflation risk by negotiating long-term agreements with certain raw material suppliers and incorporating price escalation provisions in customer contracts to the extent possible. We include assumptions of anticipated cost growth in the development of our cost of completion estimates, but if inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover all cost escalation or may impact the availability of resources to execute the respective contracts. Persistent cost inflation over the long-term may have an adverse impact on our financial position, results of operations, or cash flows.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of March 31, 2023. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2023, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) accumulated and communicated to management to allow their timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting that occurred in the quarterly period covered by this report that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.


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PART II – OTHER INFORMATION

Item 1.    Legal Proceedings

We have provided information about legal proceedings in which we are involved in the unaudited condensed consolidated financial statements in Part I, Item 1, which is incorporated herein by reference. In addition to the matters disclosed in Part I, Item 1, we are a party to various investigations, lawsuits, claims, and other legal proceedings that arise in the ordinary course of our business. Based on information available to us, we do not believe at this time that any of such other matters will individually, or in the aggregate, have a material adverse effect on our financial condition, results of operations, or cash flows. For further information on the risks we face from existing and future investigations, lawsuits, claims, and other legal proceedings, please see "Risk Factors" in Item 1A below.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10–Q, carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2022 Annual Report on Form 10–K, which could materially affect our business, financial condition, or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchases under our stock repurchase program are made from time to time at management's discretion in accordance with applicable federal securities laws. All repurchases of HII common stock have been recorded as treasury stock. The following table summarizes information relating to purchases made by or on behalf of the Company of shares of the Company's common stock during the quarter ended March 31, 2023.
Period
Total Number of Shares Purchased1
Average Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions)2, 3
January 1, 2023 to January 31, 20237,837 $221.11 7,570 $987.0 
February 1, 2023 to February 28, 20236,005 217.59 6,005 985.7 
March 1, 2023 to March 31, 202381,548 212.53 25,750 980.3 
Total95,390 $213.55 39,325 $980.3 
1We purchased an aggregate of 39,325 shares of our common stock in the open market pursuant to our repurchase program, and 56,065 shares were transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock rights during the period.
2 From the stock repurchase program's inception through March 31, 2023, we have purchased 13,679,186 shares at an average price of $162.27 per share for a total of $2.2 billion.
3 In October 2012, we commenced our stock repurchase program. In November 2019, we announced an increase in the stock repurchase program to $3.2 billion and an extension of the term to October 31, 2024.

Item 3.    Defaults Upon Senior Securities

None.

Item 4.    Mine Safety Disclosures

None.

Item 5.    Other Information

None.

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Item 6. Exhibits
3.1
3.2
3.3
3.4
3.5
31.1 
31.2 
32.1 
32.2 
101 The following financial information for the Company, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations and Comprehensive Income, (ii) the Condensed Consolidated Statements of Financial Position, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Condensed Consolidated Statements of Changes in Equity, and (v) the Notes to Condensed Consolidated Financial Statements.
104The cover page from the Company’s Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:May 4, 2023Huntington Ingalls Industries, Inc.
(Registrant)
By:/s/ Nicolas Schuck
Nicolas Schuck
Corporate Vice President, Controller and Chief Accounting Officer
(Duly Authorized Officer and Principal Accounting Officer)

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