Log in
Log in
Or log in with
GoogleGoogle
Twitter Twitter
Facebook Facebook
Apple Apple     
Sign up
Or log in with
GoogleGoogle
Twitter Twitter
Facebook Facebook
Apple Apple     

HUNTINGTON INGALLS INDUSTRIES, INC.

(HII)
  Report
Delayed Nyse  -  04:00 2022-10-06 pm EDT
231.82 USD   -0.51%
10:01aHII to Host Third Quarter Earnings Conference Call and Webcast on November 3
AQ
09/26Huntington Ingalls Industries Names Todd Borkey Chief Technology Officer
MT
09/26HII Names Todd Borkey as Chief Technology Officer
GL
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisionsFunds 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

Huntington Ingalls Industries : Quarterly Report for Quarter Ending 6/30/22 (Form 10-Q)

08/04/2022 | 10:48am EDT
hii-20220630
Table of Contents
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 June 30, 2022
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)
______________________________________________________________
Delaware 90-0607005
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4101 Washington AvenueNewport News, Virginia23607
(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 class Trading Symbol(s) Name of each exchange on which registered
Common Stock HII New 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 Filer Smaller 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 July 29, 2022, 39,947,745 shares of the registrant's common stock were outstanding.


Table of Contents
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations and Comprehensive Income
1
Condensed Consolidated Statements of Financial Position
2
Condensed Consolidated Statements of Cash Flows
3
Condensed Consolidated Statements of Changes in Equity
4
Notes to Condensed Consolidated Financial Statements
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
Item 4.
Controls and Procedures
36
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
37
Item 1A.
Risk Factors
37
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 3.
Defaults Upon Senior Securities
37
Item 4.
Mine Safety Disclosures
37
Item 5.
Other Information
37
Item 6.
Exhibits
38
Signatures
39


Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
June 30
Six Months Ended
June 30
(in millions, except per share amounts) 2022 2021 2022 2021
Sales and service revenues
Product sales $ 1,829 $ 1,763 $ 3,553 $ 3,484
Service revenues 833 468 1,685 1,025
Sales and service revenues 2,662 2,231 5,238 4,509
Cost of sales and service revenues
Cost of product sales 1,526 1,495 2,994 2,949
Cost of service revenues 746 414 1,505 896
Income from operating investments, net 27 12 34 20
Other income and gains (losses), net 1 (2) - 1
General and administrative expenses 227 204 444 410
Operating income 191 128 329 275
Other income (expense)
Interest expense (26) (18) (52) (39)
Non-operating retirement benefit 67 44 138 90
Other, net (10) 7 (17) 8
Earnings before income taxes 222 161 398 334
Federal and foreign income tax expense 44 32 80 57
Net earnings $ 178 $ 129 $ 318 $ 277
Basic earnings per share $ 4.44 $ 3.20 $ 7.93 $ 6.87
Weighted-average common shares outstanding 40.1 40.3 40.1 40.3
Diluted earnings per share $ 4.44 $ 3.20 $ 7.93 $ 6.87
Weighted-average diluted shares outstanding 40.1 40.3 40.1 40.3
Dividends declared per share $ 1.18 $ 1.14 $ 2.36 $ 2.28
Net earnings from above $ 178 $ 129 $ 318 $ 277
Other comprehensive income (loss)
Change in unamortized benefit plan costs 13 30 (73) 59
Other (1) - (1) 2
Tax benefit (expense) for items of other comprehensive income (3) (8) 19 (15)
Other comprehensive income (loss), net of tax 9 22 (55) 46
Comprehensive income $ 187 $ 151 $ 263 $ 323
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1
Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
($ in millions) June 30, 2022 December 31, 2021
Assets
Current Assets
Cash and cash equivalents $ 375 $ 627
Accounts receivable, net of allowance for doubtful accounts of $2 million as of 2022 and $9 million as of 2021
681 433
Contract assets 1,366 1,310
Inventoried costs 196 161
Income taxes receivable 128 209
Prepaid expenses and other current assets 74 50
Total current assets 2,820 2,790
Property, plant, and equipment, net of accumulated depreciation of $2,234 million as of 2022 and $2,149 million as of 2021
3,102 3,107
Operating lease assets 226 241
Goodwill 2,634 2,628
Other intangible assets, net of accumulated amortization of $811 million as of 2022 and $741 million as of 2021
1,089 1,159
Pension plan assets 314 281
Miscellaneous other assets 401 421
Total assets $ 10,586 $ 10,627
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable $ 528 $ 603
Accrued employees' compensation 339 361
Current portion of postretirement plan liabilities 137 137
Current portion of workers' compensation liabilities 255 252
Contract liabilities 757 651
Other current liabilities 431 423
Total current liabilities 2,447 2,427
Long-term debt 3,102 3,298
Pension plan liabilities 396 351
Other postretirement plan liabilities 363 368
Workers' compensation liabilities 496 506
Long-term operating lease liabilities 181 194
Deferred tax liabilities 293 313
Other long-term liabilities 356 362
Total liabilities 7,634 7,819
Commitments and Contingencies (Note 11)
Stockholders' Equity
Common stock, $0.01 par value; 150 million shares authorized; 53.5 million shares issued and 40.0 million shares outstanding as of June 30, 2022, and 53.4 million shares issued and 40.0 million shares outstanding as of December 31, 2021
1 1
Additional paid-in capital 2,002 1,998
Retained earnings 4,113 3,891
Treasury stock (2,186) (2,159)
Accumulated other comprehensive loss (978) (923)
Total stockholders' equity 2,952 2,808
Total liabilities and stockholders' equity $ 10,586 $ 10,627
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
($ in millions) 2022 2021
Operating Activities
Net earnings $ 318 $ 277
Adjustments to reconcile to net cash provided by (used in) operating activities
Depreciation 104 102
Amortization of purchased intangibles 70 26
Amortization of debt issuance costs 4 3
Provision for doubtful accounts (7) -
Stock-based compensation 16 12
Deferred income taxes (1) 31
Loss (gain) on investments in marketable securities 26 (12)
Change in
Accounts receivable (241) (45)
Contract assets (56) (127)
Inventoried costs (35) (3)
Prepaid expenses and other assets 47 (29)
Accounts payable and accruals 8 (32)
Retiree benefits (65) (70)
Other non-cash transactions, net (4) 6
Net cash provided by operating activities 184 139
Investing Activities
Capital expenditures
Capital expenditure additions (102) (134)
Grant proceeds for capital expenditures - 2
Investment in affiliates (5) (22)
Proceeds from disposition of business - 20
Other investing activities, net 6 -
Net cash used in investing activities (101) (134)
Financing Activities
Repayment of long-term debt (200) -
Dividends paid (94) (92)
Repurchases of common stock (27) (70)
Employee taxes on certain share-based payment arrangements (14) (7)
Net cash used in financing activities (335) (169)
Change in cash and cash equivalents (252) (164)
Cash and cash equivalents, beginning of period 627 512
Cash and cash equivalents, end of period $ 375 $ 348
Supplemental Cash Flow Disclosure
Cash paid for income taxes (net of refunds) $ 15 $ 21
Cash paid for interest $ 49 $ 37
Non-Cash Investing and Financing Activities
Capital expenditures accrued in accounts payable $ 6 $ 5
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
Three Months Ended June 30, 2022 and 2021
($ in millions)
Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity
Balance as of March 31, 2021 $ 1 $ 1,974 $ 3,635 $ (2,108) $ (1,523) $ 1,979
Net earnings - - 129 - - 129
Dividends declared ($1.14 per share) - - (46) - - (46)
Stock-based compensation - 3 - - - 3
Other comprehensive income, net of tax - - - - 22 22
Treasury stock activity - - - (20) - (20)
Balance as of June 30, 2021 $ 1 $ 1,977 $ 3,718 $ (2,128) $ (1,501) $ 2,067
Balance as of March 31, 2022 $ 1 $ 1,995 $ 3,982 $ (2,169) $ (987) $ 2,822
Net earnings - - 178 - - 178
Dividends declared ($1.18 per share) - - (47) - - (47)
Stock-based compensation - 7 - - - 7
Other comprehensive loss, net of tax - - - - 9 9
Treasury stock activity - - - (17) - (17)
Balance as of June 30, 2022 $ 1 $ 2,002 $ 4,113 $ (2,186) $ (978) $ 2,952

Six Months Ended June 30, 2022 and 2021
($ in millions)
Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity
Balance as of December 31, 2020 $ 1 $ 1,972 $ 3,533 $ (2,058) $ (1,547) $ 1,901
Net earnings - - 277 - - 277
Dividends declared ($2.28 per share) - - (92) - - (92)
Stock-based compensation - 5 - - - 5
Other comprehensive income, net of tax - - - - 46 46
Treasury stock activity - - - (70) - (70)
Balance as of June 30, 2021 $ 1 $ 1,977 $ 3,718 $ (2,128) $ (1,501) $ 2,067
Balance as of December 31, 2021 $ 1 $ 1,998 $ 3,891 $ (2,159) $ (923) $ 2,808
Net earnings - - 318 - - 318
Dividends declared ($2.36 per share) - - (94) - - (94)
Stock-based compensation - 4 (2) - - 2
Other comprehensive loss, net of tax - - - - (55) (55)
Treasury stock activity - - - (27) - (27)
Balance as of June 30, 2022 $ 1 $ 2,002 $ 4,113 $ (2,186) $ (978) $ 2,952
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4
Table of Contents
HUNTINGTON INGALLS INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

Huntington Ingalls Industries, Inc. ("HII" or the "Company") is an all-domain defense and technologies partner, recognized worldwide as America's largest shipbuilder. HII is organized into three reportable segments: Ingalls Shipbuilding ("Ingalls"), Newport News Shipbuilding ("Newport News"), and Mission Technologies (formerly named Technical Solutions). For more than a century, the Company's Ingalls segment in Mississippi and Newport News segment in Virginia have built more ships in more ship classes than any other U.S. naval shipbuilder. The Mission Technologies segment delivers high-value engineering and technology solutions to enable multi-domain distributed operations in the government and commercial services markets.

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

2. BASIS OF PRESENTATION

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

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

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

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

Fair Value of Financial Instruments - Except for the Company's long-term debt, the carrying amounts of the Company's financial instruments are 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 $201 million and $220 million as of June 30, 2022, and December 31, 2021, respectively, and are
5
Table of Contents
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 as of June 30, 2022, and December 31, 2021, were $2,954 million and $3,449 million, 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.

Debt Prepayment- As of June 30, 2022, $225 million of the Company's Term Loan due August 19, 2024 has been prepaid, with a remaining balance of $425 million.

3. ACCOUNTING STANDARDS UPDATES

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

4. ACQUISITIONS

On August 19, 2021, the Company acquired all of the outstanding common stock of Alion Holding Corp., the parent company of Alion Science and Technology Corporation ("Alion"), a technology-driven solutions provider. The Company accounted for the transaction as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805 Business Combinations. The preliminary purchase price was $1.79 billion, including $148 million of cash received in the acquisition. In connection with the acquisition, the Company originally recorded $1,024 million of goodwill, which included the value of Alion's workforce, and $720 million of intangible assets related to customer relationships and existing contract backlog. The goodwill is attributable to operational synergies and growth opportunities and was allocated to the Company's Mission Technologies segment. For the six months ended June 30, 2022, the Company recorded an increase to goodwill of $6 million, resulting from an adjustment to contingent liabilities for potential information reporting penalties. None of the goodwill resulting from this acquisition is expected to be amortizable for tax purposes.

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

Pro Forma Financial Information

The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the acquisition of Alion as if it had occurred on January 1, 2021.
Three Months Ended
June 30
Six Months Ended
June 30
($ in millions, except per share amounts) 2022 Pro Forma 2021 2022 Pro Forma 2021
Sales and service revenues $ 2,662 $ 2,562 $ 5,238 $ 5,155
Net earnings $ 178 $ 121 $ 318 $ 265
Basic earnings per share $ 4.44 $ 3.00 $ 7.93 $ 6.58
Diluted earnings per share $ 4.44 $ 3.00 $ 7.93 $ 6.58

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

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

6
Table of Contents
The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition date, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. These results also do not give effect to certain charges that the Company incurred in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.

5. STOCKHOLDERS' EQUITY

Treasury Stock- In November 2019, the Company's board of directors authorized an increase in the Company's stock repurchase program from $2.2 billion to $3.2 billion and an extension of the term of the program to October 31, 2024. Repurchases are made from time to time at management's discretion in accordance with applicable federal securities laws. For the six months ended June 30, 2022, the Company repurchased 131,006 shares at an aggregate cost of $27 million. For the six months ended June 30, 2021, the Company repurchased 386,463 shares at an aggregate cost of $70 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 $94 million and $92 million for thesix months ended June 30, 2022 and 2021, respectively.

Accumulated Other Comprehensive Loss - Other comprehensive income (loss) refers to gains and losses recorded as an element of stockholders' equity but excluded from net earnings. The accumulated other comprehensive loss as of June 30, 2022, was comprised of unamortized benefit plan costs of $977 million and other comprehensive loss of $1 million. The accumulated other comprehensive loss as of December 31, 2021, was comprised of unamortized benefit plan costs of $923 million.

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

($ in millions) Benefit Plans Other Total
Balance as of March 31, 2021 $ (1,524) $ 1 $ (1,523)
Other comprehensive income before reclassifications - - -
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
3 - 3
Amortization of net actuarial loss1
27 - 27
Tax expense for items of other comprehensive income (8) - (8)
Net current period other comprehensive income 22 - 22
Balance as of June 30, 2021 $ (1,502) $ 1 $ (1,501)
Balance as of March 31, 2022 $ (987) $ - $ (987)
Other comprehensive loss before reclassifications - (1) (1)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
5 - 5
Amortization of net actuarial loss1
8 - 8
Tax benefit for items of other comprehensive (loss) income (3) - (3)
Net current period other comprehensive loss 10 (1) 9
Balance as of June 30, 2022 $ (977) $ (1) $ (978)

7
Table of Contents
($ in millions) Benefit Plans Other Total
Balance as of December 31, 2020 $ (1,546) $ (1) $ (1,547)
Other comprehensive income before reclassifications - 2 2
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
6 - 6
Amortization of net actuarial loss1
53 - 53
Tax expense for items of other comprehensive income (15) - (15)
Net current period other comprehensive income 44 2 46
Balance as of June 30, 2021 $ (1,502) $ 1 $ (1,501)
Balance as of December 31, 2021 $ (923) $ - $ (923)
Other comprehensive income before reclassifications (97) (1) (98)
Amounts reclassified from accumulated other comprehensive loss
Amortization of prior service cost1
8 - 8
Amortization of net actuarial loss1
16 - 16
Tax expense for items of other comprehensive income 19 - 19
Net current period other comprehensive income (54) (1) (55)
Balance as of June 30, 2022 $ (977) $ (1) $ (978)
1These accumulated comprehensive loss components are included in the computation of net periodic benefit cost. See Note 12: Employee Pension and Other Postretirement Benefits. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the three months ended June 30, 2022 and 2021, was $3 million and $8 million, respectively. The tax benefit associated with amounts reclassified from accumulated other comprehensive loss for the six months ended June 30, 2022 and 2021, was $6 million and $15 million, respectively.

6. EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows:
Three Months Ended
June 30
Six Months Ended
June 30
(in millions, except per share amounts) 2022 2021 2022 2021
Net earnings $ 178 $ 129 $ 318 $ 277
Weighted-average common shares outstanding 40.1 40.3 40.1 40.3
Net dilutive effect of stock awards - - - -
Dilutive weighted-average common shares outstanding 40.1 40.3 40.1 40.3
Earnings per share - basic $ 4.44 $ 3.20 $ 7.93 $ 6.87
Earnings per share - diluted $ 4.44 $ 3.20 $ 7.93 $ 6.87

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

8
Table of Contents
7. REVENUE

Disaggregation of Revenue

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

Firm Fixed-Price Contracts - A firm fixed-price contract is a contract in which the specified scope of work is agreed to for a price that is predetermined by bid or negotiation and not generally subject to adjustment regardless of costs incurred by the contractor.

Fixed-Price Incentive Contracts - Fixed-price incentive contracts provide for reimbursement of the contractor's allowable costs, but are subject to a cost-share limit that affects profitability. Fixed-price incentive contracts effectively become firm fixed-price contracts once the cost-share limit is reached.

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

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

The following tables present revenues on a disaggregated basis:
Three Months Ended June 30, 2022
($ in millions) Ingalls Newport News Mission Technologies Intersegment Eliminations Total
Revenue Type
Product sales $ 611 $ 1,190 $ 28 $ - $ 1,829
Service revenues 45 242 546 - 833
Intersegment 2 1 26 (29) -
Sales and service revenues $ 658 $ 1,433 $ 600 $ (29) $ 2,662
Customer Type
Federal $ 656 $ 1,432 $ 564 $ - $ 2,652
Commercial - - 10 - 10
Intersegment 2 1 26 (29) -
Sales and service revenues $ 658 $ 1,433 $ 600 $ (29) $ 2,662
Contract Type
Firm fixed-price $ 4 $ 3 $ 69 $ - $ 76
Fixed-price incentive 609 754 - - 1,363
Cost-type 43 675 437 - 1,155
Time and materials - - 68 - 68
Intersegment 2 1 26 (29) -
Sales and service revenues $ 658 $ 1,433 $ 600 $ (29) $ 2,662

9
Table of Contents
Three Months Ended June 30, 2021
($ in millions) Ingalls Newport News Mission Technologies Intersegment Eliminations Total
Revenue Type
Product sales $ 624 $ 1,111 $ 28 $ - $ 1,763
Service revenues 41 248 179 - 468
Intersegment 5 4 30 (39) -
Sales and service revenues $ 670 $ 1,363 $ 237 $ (39) $ 2,231
Customer Type
Federal $ 665 $ 1,359 $ 200 $ - $ 2,224
Commercial - - 7 - 7
Intersegment 5 4 30 (39) -
Sales and service revenues $ 670 $ 1,363 $ 237 $ (39) $ 2,231
Contract Type
Firm fixed-price $ 13 $ 7 $ 41 $ - $ 61
Fixed-price incentive 610 713 - - 1,323
Cost-type 42 639 111 - 792
Time and materials - - 55 - 55
Intersegment 5 4 30 (39) -
Sales and service revenues $ 670 $ 1,363 $ 237 $ (39) $ 2,231

Six Months Ended June 30, 2022
($ in millions) Ingalls Newport News Mission Technologies Intersegment Eliminations Total
Revenue Type
Product sales $ 1,189 $ 2,311 $ 53 $ - $ 3,553
Service revenues 95 509 1,081 - 1,685
Intersegment 5 3 56 (64) -
Sales and service revenues $ 1,289 $ 2,823 $ 1,190 $ (64) $ 5,238
Customer Type
Federal $ 1,284 $ 2,820 $ 1,111 $ - $ 5,215
Commercial - 23 - 23
Intersegment 5 3 56 (64) -
Sales and service revenues $ 1,289 $ 2,823 $ 1,190 $ (64) $ 5,238
Contract Type
Firm fixed-price $ 6 $ 11 $ 133 $ - $ 150
Fixed-price incentive 1,185 1,457 - - 2,642
Cost-type 93 1,352 862 - 2,307
Time and materials - - 139 - 139
Intersegment 5 3 56 (64) -
Sales and service revenues $ 1,289 $ 2,823 $ 1,190 $ (64) $ 5,238

10
Table of Contents
Six Months Ended June 30, 2021
($ in millions) Ingalls Newport News Mission Technologies Intersegment Eliminations Total
Revenue Type
Product sales $ 1,228 $ 2,212 $ 44 $ - $ 3,484
Service revenues 83 552 390 - 1,025
Intersegment 8 6 62 (76) -
Sales and service revenues $ 1,319 $ 2,770 $ 496 $ (76) $ 4,509
Customer Type
Federal $ 1,311 $ 2,764 $ 406 $ - $ 4,481
Commercial - - 28 - 28
Intersegment 8 6 62 (76) -
Sales and service revenues $ 1,319 $ 2,770 $ 496 $ (76) $ 4,509
Contract Type
Firm fixed-price $ 24 $ 15 $ 80 $ - $ 119
Fixed-price incentive 1,205 1,435 3 - 2,643
Cost-type 82 1,314 231 - 1,627
Time and materials - - 120 - 120
Intersegment 8 6 62 (76) -
Sales and service revenues $ 1,319 $ 2,770 $ 496 $ (76) $ 4,509

Three Months Ended
June 30
Six Months Ended
June 30
($ in millions) 2022 2021 2022 2021
Major Programs
Amphibious assault ships $ 372 $ 349 $ 735 $ 706
Surface combatants and coast guard cutters 284 325 549 612
Other 2 (4) 5 1
Total Ingalls 658 670 1,289 1,319
Aircraft carriers 814 728 1,556 1,486
Submarines 470 472 940 929
Other 149 163 327 355
Total Newport News 1,433 1,363 2,823 2,770
Government and energy services 600 237 1,190 482
Oil and gas services - - - 14
Total Mission Technologies 600 237 1,190 496
Intersegment eliminations (29) (39) (64) (76)
Sales and service revenues $ 2,662 $ 2,231 $ 5,238 $ 4,509

As of June 30, 2022, the Company had $47.2 billion of remaining performance obligations. The Company expects to recognize approximately 30% of its remaining performance obligations as revenue through 2023, an additional 30% through 2025, and the balance thereafter.
Cumulative Catch-up Adjustments

For the three months ended June 30, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $68 million and $1.34, respectively. For the three months ended June 30, 2021, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $35 million and $0.68, respectively. For the six months ended June 30, 2022, net cumulative catch-up adjustments increased operating income and increased diluted earnings per share by $113 million and $2.22, respectively. For the six months ended June 30, 2021, net cumulative catch-up adjustments increased operating income and
11
Table of Contents
increased diluted earnings per share by $85 million and $1.66, respectively.

Cumulative catch-up adjustments for the three months ended June 30, 2022, included a favorable adjustment of $20 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.40. Cumulative catch-up adjustments for the three months ended June 30, 2021, included a favorable adjustment of $14 million on a contract at the Company's Ingalls segment, which increased diluted earnings per share by $0.28.
For the six months ended June 30, 2022 and 2021, no individual favorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income.

For the three and six months ended June 30, 2022, no individual unfavorable adjustment was material to the Company's unaudited condensed consolidated statements of operations and comprehensive income. For the three and six months ended June 30, 2021, no individual unfavorable 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 decreased $50 million from December 31, 2021, to June 30, 2022, primarily resulting from advance billings on certain U.S. Navy contracts. For the three and six months ended June 30, 2022, the Company recognized revenue of $152 million and $531 million, respectively, related to its contract liabilities as of December 31, 2021. For the three and six months ended June 30, 2021, the Company recognized revenue of $56 million and $453 million, respectively, related to its contract liabilities as of December 31, 2020.

8. SEGMENT INFORMATION

The following table presents segment results for the three and six months ended June 30, 2022 and 2021:
Three Months Ended
June 30
Six Months Ended
June 30
($ in millions) 2022 2021 2022 2021
Sales and Service Revenues
Ingalls $ 658 $ 670 $ 1,289 $ 1,319
Newport News 1,433 1,363 2,823 2,770
Mission Technologies 600 237 1,190 496
Intersegment eliminations (29) (39) (64) (76)
Sales and service revenues $ 2,662 $ 2,231 $ 5,238 $ 4,509
Operating Income
Ingalls $ 106 $ 80 $ 192 $ 171
Newport News 94 76 175 169
Mission Technologies 25 13 34 20
Segment operating income 225 169 401 360
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment (35) (37) (72) (77)
Non-current state income taxes 1 (4) - (8)
Operating income $ 191 $ 128 $ 329 $ 275

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

12
Table of Contents
The following table presents the Company's assets by segment:
($ in millions) June 30, 2022 December 31, 2021
Assets
Ingalls $ 1,701 $ 1,659
Newport News 4,418 4,179
Mission Technologies 3,430 3,553
Corporate 1,037 1,236
Total assets $ 10,586 $ 10,627

9. INCOME TAXES

The Company's earnings are primarily domestic, and its effective income tax rates on earnings from operations for the three months ended June 30, 2022 and 2021, were 19.8% and 19.9%, respectively. For the six months ended June 30, 2022 and 2021, the Company's effective income tax rates on earnings from operations were 20.1% and 17.1%, respectively. The effective tax rate for the three months ended June 30, 2022, was generally flat compared to the prior year. The higher effective tax rate for the six months ended June 30, 2022, was primarily attributable to a tax loss associated with the sale of the Company's oil and gas business recorded in 2021.

For the three months ended June 30, 2022, the Company's effective tax rate differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2022, the Company's effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%. For the three months ended June 30, 2021, the Company's effective tax rate differed from the federal statutory tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2021, the Company's effective tax rate differed from the federal statutory tax rate primarily as a result of a tax loss associated with the sale of its oil and gas business.

The Company's unrecognized tax benefits increased by $3 million and $5 million during the three and six months ended June 30, 2022, respectively. As of June 30, 2022, the estimated amounts of the Company's unrecognized tax benefits, excluding interest and penalties, were liabilities of $86 million. Assuming a sustainment of these tax positions, a reversal of $65 million of the accrued amounts would favorably affect the Company's effective federal income tax rate in future periods.

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

10. INVESTIGATIONS, CLAIMS, AND LITIGATION

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

False Claims Act Complaint- In 2016, the Company was made aware that it is a defendant in a qui tamFalse 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.
13
Table of Contents

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

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

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

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

11. 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
14
Table of Contents
recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. As of June 30, 2022, amounts recognized in connection with claims and requests for equitable adjustment were not material individually or in the aggregate.

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

Financial Arrangements - In the ordinary course of business, HII uses letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support the Company's self-insured workers' compensation plans. As of June 30, 2022, the Company had $15 million in issued but undrawn letters of credit and $276 million of surety bonds outstanding.

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

Other Matters - In 1985, the Company and the U.S. Navy entered into a settlement agreement to resolve disputes associated with billing and allocating to contracts the cost of workers' compensation self-insurance, among other matters. Consistent with the 1985 settlement agreement, the Company has not recovered cumulative billable costs resulting from the different treatment of workers' compensation costs between CAS and U.S. GAAP Financial Accounting Standards ("FAS"). Under the 1985 settlement agreement, these costs would be recovered in future periods. In December 2020, a U.S. Navy Contracting Officer issued a determination that the 1985 settlement agreement did not comply with CAS and directed the Company to develop and implement a different process to bill and allocate the cost of workers' compensation self-insurance. In July 2022, the Contracting Officer reiterated its direction that the Company submit a cost accounting practice change from the 1985 settlement agreement for Government review and concurrence. Although the Company believes the 1985 settlement agreement is CAS-compliant and cannot be unilaterally terminated, the Company is seeking to negotiate a resolution of the matter with the Contracting Officer.

In January 2022, a U.S. Navy Contracting Officer issued a written determination that the Ingalls Shipbuilding Material Management and Accounting System ("MMAS") had three significant deficiencies (as defined in the Defense Federal Acquisition Regulation Supplement provision relating to MMASs), resulting in a 5% withhold of payments on certain invoices issued under one contract. Ingalls subsequently submitted a corrective action plan, which was approved in February 2022, and the withhold was reduced to 2%. On May 27, 2022, the Contracting Officer determined that Ingalls had corrected the significant deficiencies, and the Contracting Officer terminated the remaining 2% withhold and approved the MMAS system.

Collective Bargaining Agreements- Of the Company's approximately 44,000 employees, approximately 45% are covered by a total of nine collective bargaining agreements and one site stabilization agreement. Newport News has three collective bargaining agreements covering represented employees, including one with United Steelworkers Local 8888 (Newport News) (the "USWs"), which covers approximately 50% of Newport News employees. The collective bargaining agreement with the USWs expired in November 2021, and the Company reached a tentative agreement with representatives of the USWs in February 2022. The members of the USWs bargaining unit ratified the contract in March 2022. The Company believes its relationship with its employees is satisfactory.

15
Table of Contents
12. EMPLOYEE PENSION AND OTHER POSTRETIREMENT BENEFITS

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

The costs of the Company's defined benefit pension plans and other postretirement benefit plans for the three and six months ended June 30, 2022 and 2021, were as follows:
Three Months Ended
June 30
Six Months Ended
June 30
Pension Benefits Other Benefits Pension Benefits Other Benefits
($ in millions) 2022 2021 2022 2021 2022 2021 2022 2021
Components of Net Periodic Benefit Cost
Service cost $ 45 $ 49 $ 3 $ 2 $ 90 $ 99 $ 5 $ 5
Interest cost 65 60 3 4 129 120 7 7
Expected return on plan assets (148) (138) - - (298) (276) - -
Amortization of prior service cost (credit) 6 4 (1) (1) 10 8 (2) (2)
Amortization of net actuarial loss (gain) 9 27 (1) - 18 54 (2) (1)
Net periodic benefit (income) cost $ (23) $ 2 $ 4 $ 5 $ (51) $ 5 $ 8 $ 9

The Company made the following contributions to its defined benefit pension plans and other postretirement benefit plans for the six months ended June 30, 2022 and 2021:
Six Months Ended
June 30
($ in millions) 2022 2021
Pension plans
Discretionary
Qualified $ - $ 60
Non-qualified 5 4
Other benefit plans 16 20
Total contributions $ 21 $ 84

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

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

13. STOCK COMPENSATION PLANS

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

Restricted Performance Stock Rights - For the six months ended June 30, 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. For the six months ended June 30, 2021, the Company granted approximately 0.2 million RPSRs at a weighted average share price of $179.21. These rights are subject to cliff vesting on December 31, 2023. All of the RPSRs are subject to the achievement of performance-based targets at the end of the respective vesting periods and will ultimately vest between 0% and 200% of grant date value.

16
Table of Contents
For the six months ended June 30, 2022 and 2021, awards of approximately 0.2 million and 0.1 million shares of stock vested, respectively, of which less than 0.1 million each period were transferred to the Company from employees in satisfaction of minimum tax withholding obligations.

The following table summarizes the status of the Company's outstanding stock awards as of June 30, 2022:
Stock Awards
(in thousands)
Weighted-Average
Grant Date Fair
Value
Weighted-Average Remaining Contractual Term
(in years)
Total stock awards 511 $ 189.61 1.4

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 $7 million and $3 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded stock-based compensation for the value of awards granted to Company employees and non-employee members of the board of directors of $16 million and $12 million for the six months ended June 30, 2022 and 2021, respectively.
The Company recorded tax benefits related to stock awards of $1 million and less than $1 million for the three months ended June 30, 2022 and 2021, respectively. The Company recorded tax benefits related to stock awards of $2 million for each of the six months ended June 30, 2022 and 2021. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of less than $1 million for each of the three months ended June 30, 2022 and 2021. The Company recognized tax benefits associated with the issuance of stock in settlement of stock awards of $4 million and $2 million for the six months ended June 30, 2022 and 2021, respectively.

Unrecognized Compensation Expense

As of June 30, 2022, the Company had $3 million of unrecognized compensation expense associated with Restricted Stock Rights granted in 2022 and 2021, which will be recognized over a weighted average period of 1.2 years, and $44 million of unrecognized compensation expense associated with RPSRs granted in 2022, 2021, and 2020, which will be recognized over a weighted average period of 1.6 years.


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 an all-domain defense and technologies partner, recognized worldwide as America's largest shipbuilder. For more than a century, our 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. Our Mission Technologies (formerly named Technical Solutions) segment provides a range of services and products to government and commercial customers. Headquartered in Newport News, Virginia, HII employs approximately 44,000 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 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 solutions; platform modernization; and critical nuclear operations.

17
Table of Contents
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 Annual Report on Form 10-K for the year ended December 31, 2021.

Business Environment

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

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

Congressional consideration of the fiscal year 2023 President's Budget Request began following its release in March 2022 and is ongoing. The House Appropriations Committee voted out a defense appropriations measure that broadly supports our shipbuilding and unmanned programs and awaits floor consideration. The Senate Appropriations Committee has yet to conduct markups, and the timing of committee action remains uncertain. The House and Senate Armed Services Committees have each acted on their respective National Defense Authorization bills for fiscal year 2023, both of which broadly support our shipbuilding programs, including increased funding authority for Arleigh Burkeclass destroyers (DDG-51) and LHA and LPD Flight II amphibious ships. The full House has approved its authorization bill and awaits Senate floor consideration of its version before the two bills can be reconciled to produce a final measure. We cannot predict the outcome of the fiscal year 2023 budget process or whether short-term funding will be required in the event annual appropriations measures are not finalized by the start of the October 1 fiscal year.

Long-term funding for certain programs in which we participate may be reduced, delayed, or canceled. In addition, spending cuts and/or reprioritization of defense investment could adversely affect the viability of our suppliers, subcontractors, and employee base. Our contracts or subcontracts under programs in which we participate may be terminated or adjusted by the U.S. Government or the prime contractor due to lack of government funding or reductions or delays in government funding. Significant reductions in the number of ships procured by the U.S. Navy or significant delays in funding our ship programs would have a material effect on our financial position, results of operations, and cash flows.

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

Political and Economic Environment- The global geopolitical and economic environment continues to be impacted by uncertainty, heightened tensions, and instability. Geopolitical relationships have changed, and are continuing to change, and the U.S. and its allies face a global security environment that includes threats from state and non-state actors, including major global powers, as well as terrorist organizations, emerging nuclear tensions, diverse regional security concerns, and political instability. These global threats persist across all domains, from undersea to space to cyber, and the global market for defense products, services, and solutions is driven by these complex and evolving security challenges. Our current operating environment exists in the broader context of political and socioeconomic priorities and reflects, among other things, the continued impact of and uncertainty surrounding geopolitical tensions, financial market volatility, inflation, and the COVID-19 pandemic.

In February 2022, Russian forces invaded Ukraine. In response, the United States and other countries imposed economic and trade sanctions, export controls, and other restrictions. The conflict and these sanctions have caused disruptions to global economies and global business, including heightened cybersecurity risks, supply chain challenges, increased energy costs, and an exacerbation of existing inflationary pressures. Additionally, and more broadly, economic tensions with China and changes in international trade policies, including higher tariffs on imported goods and materials and renegotiation of free trade agreements, could impact the global market for defense products, services, and solutions.
18
Table of Contents

In addition to price surges in energy, food, and aluminum as a result of the Russian invasion of Ukraine, rising inflation has led to higher costs of various commodities and supplier products. Inflation has also increased interest rates, raising the cost of borrowing for the federal government, which could impact other spending priorities. In an era of unanticipated cost increases, the inclusion of mitigation mechanisms, such as Economic Price Adjustment clauses, in our contracts help reduce risks from negative price adjustments. Our bids for longer-term firm fixed-price contracts typically include assumptions for labor and other contract costs that historically have been sufficient to cover cost increases over the period of performance. If, however, recent inflationary conditions continue over the long-term, our cost assumptions may not be sufficient to cover potential contract cost growth or may impact the availability of resources to execute the respective contracts. Management is closely monitoring possible cost impacts with our customers.

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

The COVID-19 pandemic has impacted our employees, customers, suppliers, and communities (collectively, "COVID-19 Events"). While costs related to COVID-19 Events are allowable under U.S. Government contracts, our contract estimates reflect profit margin impact uncertainty, because such costs may not result in equitable adjustments, particularly on firm fixed-price and fixed-price incentive contracts, or may not be adequately covered by insurance. Reinsurers under our property insurance have failed to acknowledge coverage for various losses related to COVID-19, and we filed a complaint in state court in Vermont seeking a judgment declaring that our business interruption and other losses associated with COVID-19 are covered by our property insurance program. We also initiated arbitration proceedings against other reinsurers seeking similar relief. The Vermont court dismissed our complaint in response to a motion of the reinsurers for judgment on the pleadings, and we have appealed the decision. Although we continue to believe that our position is well-founded, no assurance can be provided regarding the ultimate resolution of this matter. See Note 10: Investigations, Claims, and Litigation.

Critical Accounting Policies, Estimates, and Judgments

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2021, 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 June 30, 2022, there had been no material changes to the foregoing critical accounting policies, estimates, and judgments since December 31, 2021.

We have incorporated realized and estimated future effects of COVID-19 Events, based upon current conditions and our judgment of the future impacts of COVID-19 Events, with respect to contract costs and revenue recognition, effective income tax rates, and the fair values of our long-lived assets, financial instruments, intangible assets, and goodwill recorded at our reporting units.

19
Table of Contents
Contracts

We generate most of our revenues from multi-year contracts with the U.S. Government for design, production, and support activities. Due to the size, duration, and nature of many of our multi-year contracts, the estimation of sales and services revenues and costs through completion is complicated and subject to many variables. Sales and service revenue estimates are based on negotiated contract prices, modified by our assumptions regarding contract options, change orders, incentive and award provisions associated with schedule, technical performance, and price adjustment clauses (such as inflation or index-based clauses). These multi-year contracts generally have a transaction price that is based on estimated cost to produce the product or service plus margin. Product and service cost estimates are based on negotiated or estimated contract terms, historical performance trends, and other economic projections. Government contracts typically include the following cost elements: direct material, labor and subcontracting costs, and certain indirect costs, including allowable general and administrative expenses. Factors that influence our cost estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, COVID-19 disruptions, and capital costs.

Unless otherwise specified in a contract, costs billed to contracts with the U.S. Government are treated as allowable and allocable costs under the FAR and CAS regulations. Examples of costs incurred by us that are not allowable under the FAR and CAS regulations include certain legal costs, lobbying costs, charitable donations, interest expense, organizational costs, including certain merger and acquisition costs, and advertising costs.

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

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

Program Descriptions

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

CONSOLIDATED OPERATING RESULTS

The following table presents selected financial highlights:
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and service revenues $ 2,662 $ 2,231 $ 431 19 % $ 5,238 $ 4,509 $ 729 16 %
Cost of product sales and service revenues 2,272 1,909 363 19 % 4,499 3,845 654 17 %
Income from operating investments, net 27 12 15 125 % 34 20 14 70 %
Other income and gains (losses), net 1 (2) 3 150 % - 1 (1) (100) %
General and administrative expenses 227 204 23 11 % 444 410 34 8 %
Operating income 191 128 63 49 % 329 275 54 20 %
Other income (expense)
Interest expense (26) (18) (8) (44) % (52) (39) (13) (33) %
Non-operating retirement benefit 67 44 23 52 % 138 90 48 53 %
Other, net (10) 7 (17) (243) % (17) 8 (25) (313) %
Federal and foreign income taxes 44 32 12 38 % 80 57 23 40 %
Net earnings $ 178 $ 129 $ 49 38 % $ 318 $ 277 $ 41 15 %
20
Table of Contents

Operating Performance Assessment and Reporting

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

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

Sales and Service Revenues

Sales and service revenues were comprised as follows:
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Product sales $ 1,829 $ 1,763 $ 66 4 % $ 3,553 $ 3,484 $ 69 2 %
Service revenues 833 468 365 78 % 1,685 1,025 660 64 %
Sales and service revenues $ 2,662 $ 2,231 $ 431 19 % $ 5,238 $ 4,509 $ 729 16 %

Product sales for the three months ended June 30, 2022, increased $66 million, or 4%, from the same period in 2021. Product sales for the six months ended June 30, 2022, increased $69 million, or 2%, from the same period in 2021. Ingalls product sales decreased $13 million and $39 million for the three and six months ended June 30, 2022, respectively, primarily as a result of lower volumes in surface combatants, partially offset by higher volumes in amphibious assault ships. Newport News product sales increased $79 million for the three months ended June 30, 2022, primarily as a result of higher volumes in aircraft carriers, partially offset by lower volumes in submarines. Newport News product sales increased $99 million for the six months ended June 30, 2022, primarily as a result of higher volumes in aircraft carriers. Mission Technologies product sales were flat for the three months ended June 30, 2022. Mission Technologies product sales increased $9 million for the six months ended June 30, 2022, primarily as a result of higher volumes in defense and federal solutions ("DFS").

Service revenues for the three months ended June 30, 2022, increased $365 million, or 78%, compared with the same period in 2021. Service revenues for the six months ended June 30, 2022, increased $660 million, or 64%, compared with the same period in 2021. Ingalls service revenues increased $4 million and $12 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes in amphibious assault ship services, partially offset by lower volumes in surface combatant services. Newport News service revenues decreased $6 million for the three months ended June 30, 2022, primarily as a result of lower volumes in naval nuclear support services and aircraft carrier services, partially offset by higher volumes in submarine services. Newport News service revenues decreased $43 million for the six months ended June 30, 2022, primarily as a result of lower volumes in aircraft carrier services and naval nuclear support services. Mission Technologies service revenues increased $367 million and $691 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes in DFS services.

21
Table of Contents
Cost of Sales and Service Revenues

Cost of product sales, cost of service revenues, income from operating investments, net, and general and administrative expenses were as follows:
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Cost of product sales $ 1,526 $ 1,495 $ 31 2 % $ 2,994 $ 2,949 $ 45 2 %
% of product sales 83.4 % 84.8 % 84.3 % 84.6 %
Cost of service revenues 746 414 332 80 % 1,505 896 609 68 %
% of service revenues 89.6 % 88.5 % 89.3 % 87.4 %
Income from operating investments, net 27 12 15 125 % 34 20 14 70 %
Other income and gains (losses), net 1 (2) 3 150 % - 1 (1) (100) %
General and administrative expenses 227 204 23 11 % 444 410 34 8 %
% of sales and service revenues 8.5 % 9.1 % 8.5 % 9.1 %
Cost of sales and service revenues $ 2,471 $ 2,103 $ 368 17 % $ 4,909 $ 4,234 $ 675 16 %

Cost of Product Sales

Cost of product sales for the three months ended June 30, 2022, increased $31 million, or 2%, compared with the same period in 2021. Cost of product sales for the six months ended June 30, 2022, increased $45 million, or 2%, compared with the same period in 2021. Ingalls cost of product sales decreased $28 million and $38 million for the three and six months ended June 30, 2022, respectively, primarily as a result of volume decreases described above, partially offset by higher risk retirement on Harrisburg(LPD 30). Newport News cost of product sales increased $56 million and $76 million for the three and six months ended June 30, 2022, respectively, primarily as a result of volume increases described above. Mission Technologies cost of product sales increased $5 million for the three months ended June 30, 2022, driven by year-to-year variances in contract mix. Mission Technologies cost of product sales increased $11 million for the six months ended June 30, 2022, driven by volume increases described above. Cost of product sales related to the Operating FAS/CAS Adjustment decreased $2 million and $4 million for the three and six months ended June 30, 2022, respectively, as described below.

Cost of product sales as a percentage of product sales decreased from 84.8% for the three months ended June 30, 2021, to 83.4% for the three months ended June 30, 2022. The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement onHarrisburg (LPD 30), as well as a favorable change in the Operating FAS/CAS Adjustment, partially offset by lower risk retirement on the Virginiaclass (SSN 774) submarine program and receipt of a contract incentive on USS Jack H. Lucas(DDG 125) in 2021. Cost of product sales as a percentage of product sales decreased from 84.6% for the six months ended June 30, 2021, to 84.3% for the six months ended June 30, 2022. The decrease was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg(LPD 30), USS Gerald R. Ford(CVN 78), Fort Lauderdale(LPD 28) following its delivery, and Frank E. Petersen Jr.(DDG 121), as well as a favorable change in the Operating FAS/CAS Adjustment, partially offset by lower risk retirement on the Virginiaclass (SSN 774) submarine program, receipt of a contract incentive on USS Jack H. Lucas(DDG 125) in 2021, and lower risk retirement on Bougainville(LHA 8).

Cost of Service Revenues

Cost of service revenues for the three months ended June 30, 2022, increased $332 million, or 80%, compared with the same period in 2021. Cost of service revenues for the six months ended June 30, 2022, increased $609 million, or 68%, compared with the same period in 2021. Ingalls cost of service revenues increased $5 million and $12 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes described above. Newport News cost of service revenues decreased $15 million and $50 million for the three and six months ended June 30, 2022, respectively, primarily as a result of lower volumes described above. Mission Technologies cost of service revenues increased $342 million and $648 million for the three and six months ended June 30, 2022, respectively, primarily as a result of higher volumes described above. Cost of service revenues
22
Table of Contents
related to the Operating FAS/CAS Adjustment was flat for the three months ended June 30, 2022 and decreased $1 million for the six months ended June 30, 2022, as described below.

Cost of service revenues as a percentage of service revenues increased from 88.5% for the three months ended June 30, 2021, to 89.6% for the three months ended June 30, 2022, primarily driven by higher amortization of purchased intangible assets and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021. and a favorable change in the Operating FAS/CAS Adjustment. Cost of service revenues as a percentage of service revenues increased from 87.4% for the six months ended June 30, 2021, to 89.3% for the six months ended June 30, 2022, primarily driven by higher amortization of purchased intangible assets and year-to-year variances in contract mix, partially offset by improved performance in DFS services due to the acquisition of Alion in the third quarter of 2021, as well as a favorable change in the Operating FAS/CAS Adjustment.

Income (Loss) 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.

Income from operating investments, net for the three and six months ended June 30, 2022, increased $15 million and $14 million, respectively, from the same periods in 2021, primarily due to higher equity income from our investment in an unconsolidated ship repair and specialty fabrication joint venture, partially offset by lower equity income from our nuclear and environmental joint ventures.

Other Income and Gains (Losses), Net

Other income and gains (losses), net was a net gain of $1 million and a net loss of $2 million for the three months ended June 30, 2022 and 2021, respectively. The favorable change of $3 million was primarily due to a loss recognized in the second quarter of 2021 as a result of the final purchase price adjustment to a gain on the sale of our oil and gas business. Other income and gains (losses), net were flat for the six months ended June 30, 2022, compared to the same period in 2021.

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 and six months ended June 30, 2022, increased $23 million and $34 million, respectively, from the same periods in 2021, primarily due to higher overhead costs as a result of the acquisition of Alion in the third quarter of 2021 and current state income tax expense, partially offset by favorable changes in non-current state income taxes.

Operating Income

We consider operating income to be 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
23
Table of Contents
useful indicator to measure our performance. Because not all companies use identical calculations, our presentation of segment operating income may not be comparable to similarly titled measures of other companies.

The following table reconciles operating income to segment operating income:
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Operating income $ 191 $ 128 $ 63 49 % $ 329 $ 275 $ 54 20 %
Operating FAS/CAS Adjustment 35 37 (2) (5) % 72 77 (5) (6) %
Non-current state income taxes (1) 4 (5) (125) % - 8 (8) (100) %
Segment operating income $ 225 $ 169 $ 56 33 % $ 401 $ 360 $ 41 11 %

Segment Operating Income

Segment operating income for the three months ended June 30, 2022, was $225 million, compared with segment operating income of $169 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), as well as improved performance in DFS services and higher equity income, partially offset by lower risk retirement on the Virginiaclass (SSN 774) submarine program and receipt of a contract incentive on USS Jack H. Lucas(DDG 125) in 2021, as well as higher amortization of purchased intangible assets.

Segment operating income for the six months ended June 30, 2022, was $401 million, compared with segment operating income of $360 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg(LPD 30), USS Gerald R. Ford(CVN 78), Fort Lauderdale(LPD 28) following its delivery, andFrank E. Petersen Jr.(DDG 121), as well as improved performance in DFS services and higher equity income, partially offset by lower risk retirement on the Virginiaclass (SSN 774) submarine program, receipt of a contract incentive on USS Jack H. Lucas(DDG 125) in 2021, and lower risk retirement on Bougainville(LHA 8), as well as higher amortization of purchased intangible assets.

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

FAS/CAS Adjustment and Operating FAS/CAS Adjustment

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

The components of the Operating FAS/CAS Adjustment were as follows:
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
FAS benefit (expense) $ 19 $ (7) $ 26 371 % $ 43 $ (14) $ 57 407 %
CAS cost 13 14 (1) (7) % 23 27 (4) (15) %
FAS/CAS Adjustment 32 7 25 357 % 66 13 53 408 %
Non-operating retirement benefit (67) (44) (23) (52) % (138) (90) (48) (53) %
Operating FAS/CAS Adjustment $ (35) $ (37) $ 2 5 % $ (72) $ (77) $ 5 6 %

The Operating FAS/CAS Adjustment was a net expense of $35 million and $37 million for the three months ended June 30, 2022 and 2021, respectively. The Operating FAS/CAS Adjustment was a net expense of $72 million and $77 million for the six months ended June 30, 2022 and 2021, respectively. The favorable changes in the Operating FAS/CAS Adjustment of $2 million and $5 million for the three and six months ended June 30, 2022, respectively, were primarily driven by the more immediate recognition of higher interest rates under FAS.

24
Table of Contents
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 June 30, 2022, was $1 million, compared to non-current state income tax expense of $4 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes. Non-current state income tax benefit for the six months ended June 30, 2022, was less than $1 million, compared to non-current state income tax expense of $8 million for the same period in 2021. The favorable change in non-current state income taxes was driven by a decrease in deferred state income tax expense, primarily attributable to an increase in expenses that are not currently deductible for income tax purposes.

Interest Expense

Interest expense for the three and six months ended June 30, 2022, increased $8 million and $13 million, respectively, compared with the same periods in 2021, primarily due to the issuance of senior notes and borrowing under the Term Loan in the third quarter of 2021.

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 and six months ended June 30, 2022, the favorable change in the non-operating retirement benefit of $23 million and $48 million was primarily driven by higher 2021 returns on plan assets.

Other, Net

Other, net expense increased $17 million and $25 million for the three and six months ended June 30, 2022, respectively, compared with the same periods in 2021, primarily driven by losses on investments in marketable securities.

Federal and Foreign Income Taxes

Our effective income tax rates on earnings from operations for the three months ended June 30, 2022 and 2021, were 19.8% and 19.9%, respectively. Our effective income tax rates on earnings from operations for the six months ended June 30, 2022 and 2021, were 20.1% and 17.1%, respectively. The effective tax rate for the three months ended June 30, 2022, was generally flat compared to the prior year. The higher effective tax rate for the six months ended June 30, 2022, was primarily attributable to a tax loss associated with the sale of our oil and gas business recorded in 2021.

For the three months ended June 30, 2022, our effective tax rate differed from the federal statutory corporate income tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2022, our effective tax rate did not differ materially from the federal statutory corporate income tax rate of 21%. For the three months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of research and development tax credits. For the six months ended June 30, 2021, our effective tax rate differed from the federal statutory tax rate primarily as a result of a tax loss associated with the sale of our oil and gas business. See Note 9: Income Taxes.

25
Table of Contents
SEGMENT OPERATING RESULTS

Basis of Presentation

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

The following table presents segment operating results:
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and Service Revenues
Ingalls $ 658 $ 670 $ (12) (2) % $ 1,289 $ 1,319 $ (30) (2) %
Newport News 1,433 1,363 70 5 % 2,823 2,770 53 2 %
Mission Technologies
600 237 363 153 % 1,190 496 694 140 %
Intersegment eliminations (29) (39) 10 26 % (64) (76) 12 16 %
Sales and service revenues $ 2,662 $ 2,231 $ 431 19 % $ 5,238 $ 4,509 $ 729 16 %
Operating Income
Ingalls $ 106 $ 80 $ 26 33 % $ 192 $ 171 $ 21 12 %
Newport News 94 76 18 24 % 175 169 6 4 %
Mission Technologies
25 13 12 92 % 34 20 14 70 %
Segment operating income 225 169 56 33 % 401 360 41 11 %
Non-segment factors affecting operating income
Operating FAS/CAS Adjustment (35) (37) 2 5 % (72) (77) 5 6 %
Non-current state income taxes 1 (4) 5 125 % - (8) 8 100 %
Operating income $ 191 $ 128 $ 63 49 % $ 329 $ 275 $ 54 20 %

KEY SEGMENT FINANCIAL MEASURES

Sales and Service Revenues

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

Segment Operating Income

Segment operating income reflects the aggregate performance results of contracts within a segment. Excluded from this measure are certain costs not directly associated with contract performance, such as the Operating FAS/CAS Adjustment and non-current state income taxes. Changes in segment operating income are typically expressed in terms of volume, as discussed above, or performance. Performance refers to changes in contract 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.

26
Table of Contents
Cumulative Adjustments

For the three and six months ended June 30, 2022 and 2021, favorable and unfavorable cumulative catch-up margin adjustments were as follows:
Three Months Ended
June 30
Six Months Ended
June 30
($ in millions) 2022 2021 2022 2021
Gross favorable adjustments $ 106 $ 62 $ 213 $ 148
Gross unfavorable adjustments (38) (27) (100) (63)
Net adjustments $ 68 $ 35 $ 113 $ 85

For the three months ended June 30, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Harrisburg(LPD 30). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

For the six months ended June 30, 2022, favorable cumulative catch-up margin adjustments were related to risk retirement on Harrisburg(LPD 30) and Fort Lauderdale(LPD 28) following its delivery. During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

For the three months ended June 30, 2021, favorable cumulative margin catch-up adjustments included a contract incentive on Jack H. Lucas(DDG 125) and risk retirement on Richard M. McCool Jr.(LPD 29) and Fort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

For the six months ended June 30, 2021, favorable cumulative margin catch-up adjustments included risk retirement on Bougainville (LHA 8), a contract incentive on Jack H. Lucas(DDG 125), and risk retirement on Block IV of the Virginia class (SSN 774) submarine program and Fort Lauderdale (LPD 28). During the same period, none of the unfavorable cumulative catch-up margin adjustments were individually significant.

Ingalls
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and service revenues $ 658 $ 670 $ (12) (2) % $ 1,289 $ 1,319 $ (30) (2) %
Segment operating income 106 80 26 33 % 192 171 21 12 %
As a percentage of segment sales 16.1 % 11.9 % 14.9 % 13.0 %

Sales and Service Revenues

Ingalls revenues for the three months ended June 30, 2022, decreased $12 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships. Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129) and USS Jack H Lucas (DDG 125), partially offset by higher volumes on Thad Cochran(DDG 135). Revenues on amphibious assault ships increased due to higher volumes on Pittsburgh (LPD 31), Harrisburg (LPD 30), LHA 9 (unnamed), and L-Class planning yard services contract, partially offset by lower volumes on Fort Lauderdale (LPD 28).

Ingalls revenues for the six months ended June 30, 2022, decreased $30 million, or 2%, from the same period in 2021, primarily driven by lower revenues in surface combatants, partially offset by higher revenues in amphibious assault ships. Revenues on surface combatants decreased due to lower volumes on Jeremiah Denton (DDG 129), USS Jack H. Lucas(DDG 125), and Frank E. Petersen Jr.(DDG 121), partially offset by higher volumes on Thad Cochran(DDG 135). Revenues on amphibious assault ships increased due to higher volumes on LHA 9 (unnamed), Pittsburgh(LPD 31), and L-Class planning yard services contract and higher volumes on Harrisburg(LPD 30), partially offset by lower volumes on Fort Lauderdale(LPD 28) and Bougainville(LHA 8).

27
Table of Contents
Segment Operating Income

Ingalls segment operating income for the three months ended June 30, 2022, was $106 million, compared with segment operating income of $80 million for the same period in 2021. The increase was primarily driven by favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg (LPD 30), partially offset by receipt of a contract incentive on USS Jack H. Lucas(DDG 125) in 2021.

Ingalls segment operating income for the six months ended June 30, 2022, was $192 million, compared with segment operating income of $171 million for the same period in 2021. The increase was primarily driven by favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on Harrisburg(LPD 30), Fort Lauderdale(LPD 28) following its delivery, and Frank E. Petersen Jr.(DDG 121), partially offset by receipt of a contract incentive on USS Jack H. Lucas(DDG 125) in 2021 and lower risk retirement on Bougainville(LHA 8).

Newport News
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and service revenues $ 1,433 $ 1,363 $ 70 5 % $ 2,823 $ 2,770 $ 53 2 %
Segment operating income 94 76 18 24 % 175 169 6 4 %
As a percentage of segment sales 6.6 % 5.6 % 6.2 % 6.1 %

Sales and Service Revenues

Newport News revenues for the three months ended June 30, 2022, increased $70 million, or 5%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers, partially offset by lower volumes in naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), the construction of Doris Miller (CVN 81), the construction of John F. Kennedy(CVN 79), and Enterprise (CVN 80), partially offset by lower volumes on the RCOH of USS George Washington (CVN 73). Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.

Newport News revenues for the six months ended June 30, 2022, increased $53 million, or 2%, from the same period in 2021, primarily driven by higher revenues in aircraft carriers and submarines, partially offset by lower revenues in naval nuclear support services. Aircraft carrier revenues increased primarily as a result of higher volumes on the RCOH of USS John C. Stennis (CVN 74), 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 Columbiaclass (SSBN 826) program, partially offset by lower volumes on Block IV boats of the Virginiaclass (SSN 774) submarine program. Naval nuclear support services revenues decreased primarily as a result of lower volumes in submarine fleet support services and facility maintenance services, partially offset by higher volumes in carrier fleet support services.

Segment Operating Income

Newport News segment operating income for the three months ended June 30, 2022, was $94 million, compared with segment operating income of $76 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses, partially offset by lower risk retirement on the Virginiaclass (SSN 774) submarine program.

Newport News segment operating income for the six months ended June 30, 2022, was $175 million, compared with segment operating income of $169 million for the same period in 2021. The increase was primarily due to favorable changes in contract estimates from facilities capital and price adjustment clauses and higher risk retirement on USS Gerald R. Ford (CVN 78), partially offset by lower risk retirement on the Virginiaclass (SSN 774) submarine program.

28
Table of Contents
Mission Technologies
Three Months Ended
June 30
Six Months Ended
June 30
2022 vs. 2021 2022 vs. 2021
($ in millions) 2022 2021 Dollars Percent 2022 2021 Dollars Percent
Sales and service revenues $ 600 $ 237 $ 363 153 % $ 1,190 $ 496 $ 694 140 %
Segment operating income 25 13 12 92 % 34 20 14 70 %
As a percentage of segment sales 4.2 % 5.5 % 2.9 % 4.0 %

Sales and Service Revenues

Mission Technologies revenues for the three months ended June 30, 2022, increased $363 million, or 153%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021.

Mission Technologies revenues for the six months ended June 30, 2022, increased $694 million, or 140%, from the same period in 2021, primarily due to higher volumes in DFS attributable to the acquisition of Alion in the third quarter of 2021.

Segment Operating Income

Mission Technologies segment operating income for the three months ended June 30, 2022, was $25 million, compared with segment operating income of $13 million for the same period in 2021. The increase was primarily driven by the acquisition of Alion in the third quarter of 2021 and higher equity income, partially offset by higher amortization of purchased intangible assets.

Mission Technologies segment operating income for the six months ended June 30, 2022, was $34 million, compared with segment operating income of $20 million for the same period in 2021. The increase was primarily driven by the acquisition of Alion in the third quarter of 2021 and higher equity income, partially offset by higher amortization of purchased intangible assets.

BACKLOG

Total backlog as of June 30, 2022, and December 31, 2021, was approximately $47.2 billion and $48.5 billion, respectively. Total backlog includes both funded backlog (firm orders for which funding is contractually obligated by the customer) and unfunded backlog (firm orders for which funding is not currently contractually obligated by the customer). Backlog excludes unexercised contract options and unfunded Indefinite Delivery/Indefinite Quantity orders. For contracts having no stated contract values, backlog includes only the amounts committed by the customer.

The following table presents funded and unfunded backlog by segment as of June 30, 2022, and December 31, 2021:
June 30, 2022 December 31, 2021
Total Total
($ in millions) Funded Unfunded Backlog Funded Unfunded Backlog
Ingalls $ 10,208 $ 940 $ 11,148 $ 10,216 $ 792 $ 11,008
Newport News 13,025 18,386 31,411 11,121 21,198 32,319
Mission Technologies
1,361 3,289 4,650 1,334 3,789 5,123
Total backlog $ 24,594 $ 22,615 $ 47,209 $ 22,671 $ 25,779 $ 48,450

Approximately 18% of the $48.5 billion total backlog as of December 31, 2021, is expected to be converted into sales in 2022. U.S. Government orders comprised substantially all of the backlog as of June 30, 2022, and December 31, 2021.

29
Table of Contents
Awards

The value of new contract awards during the six months ended June 30, 2022, was approximately $4 billion, including an award for the construction of DDG 139 (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:
Six Months Ended
June 30
2022 vs. 2021
($ in millions) 2022 2021 Dollars
Net earnings $ 318 $ 277 $ 41
Depreciation and amortization 178 131 47
Provision for doubtful accounts (7) - (7)
Stock-based compensation 16 12 4
Deferred income taxes (1) 31 (32)
Loss (gain) on investments in marketable securities 26 (12) 38
Retiree benefits (65) (70) 5
Trade working capital increase (281) (230) (51)
Net cash provided by operating activities $ 184 $ 139 $ 45
We have historically maintained a capital structure comprising 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 six months ended June 30, 2022 and 2021, as classified on our unaudited condensed consolidated statements of cash flows.

Operating Activities

Cash provided by operating activities for the six months ended June 30, 2022, was $184 million, compared with $139 million provided by operating activities for the same period in 2021. The favorable change in operating cash flow was primarily due to higher earnings, lower contributions to retiree benefit plans, and lower income tax payments, partially offset by changes in trade working capital and higher interest payments. The change in trade working capital was primarily driven by the timing of receipts of accounts receivable and payments of accounts payable.

We expect cash generated from operations in combination with our current cash and cash equivalents, as well as existing credit facilities, to be sufficient to service debt and retiree benefit plans, meet contractual obligations, and finance capital expenditures for at least the 12 months beginning July 1, 2022, and beyond such 12-month period based on our current business plan.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2022, was $101 million, compared with $134 million used in investing activities for the same period in 2021. The change in investing cash was driven by lower capital expenditures in 2022 and contribution of our San Diego Shipyard to a joint venture in 2021, partially offset by
30
Table of Contents
the disposition of our oil and gas business in 2021. For 2022, 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 1.5% to 2.0% of annual revenues.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2022, was $335 million, compared with $169 million used in financing activities for the same period in 2021. The change in financing cash was primarily due to an increase in the repayment of long-term debt of $200 million, an increase of $7 million in employee taxes on certain share-based payment arrangements, and a $2 million increase in cash dividend payments, partially offset by a decrease of $43 million in common stock repurchases.

Free Cash Flow

Free cash flow represents cash provided by 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 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 provided by operating activities to free cash flow:
Six Months Ended
June 30
2022 vs. 2021
($ in millions) 2022 2021 Dollars
Net cash provided by operating activities $ 184 $ 139 $ 45
Less capital expenditures:
Capital expenditure additions (102) (134) 32
Grant proceeds for capital expenditures - 2 (2)
Free cash flow $ 82 $ 7 $ 75

Free cash flow for the six months ended June 30, 2022, increased $75 million from the same period in 2021, primarily due to higher earnings, lower capital expenditures, lower contributions to retiree benefit plans, and lower income tax payments, partially offset by changes in trade working capital and higher interest payments.


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 June 30, 2022 and 2021, the cumulative amounts of payments withheld by the U.S. Government under our contracts subject to these regulations were not material to our liquidity or cash flows.

Off-Balance Sheet Arrangements

In the ordinary course of business, we use letters of credit issued by commercial banks to support certain leases, insurance policies, and contractual performance obligations, as well as surety bonds issued by insurance companies principally to support our self-insured workers' compensation plans. As of June 30, 2022, $15 million in letters of credit were issued but undrawn and $276 million of surety bonds were outstanding. As of June 30, 2022, we had no other significant off-balance sheet arrangements.


31
Table of Contents
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, including the COVID-19 pandemic, and the impacts of vaccination mandates on our workforce;
Our ability to effectively integrate the operations of Alion into our business;
Disruptions impacting global supply, including those attributable to the ongoing COVID-19 pandemic 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.

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.
32
Table of Contents

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
Americaclass (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 Americaclass (LHA 6) ships, together with the Waspclass (LHD 1) ships, are the successors to the decommissioned Tarawaclass (LHA 1) ships. The Americaclass (LHA 6) ships optimize aviation operations and support capabilities. In 2020, we delivered USS Tripoli(LHA 7), and we were awarded a long-lead-time material and construction contract for LHA 9 (unnamed). We are currently constructing Bougainville(LHA 8).
Arleigh Burkeclass (DDG 51) destroyers
Build guided missile destroyers designed for conducting anti-air, anti-submarine, anti-surface, and strike operations. The Aegis-equipped Arleigh Burkeclass (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), and Frank E. Petersen Jr.(DDG121) in 2019, 2020, and 2021, respectively. We have contracts to construct the following Arleigh Burkeclass (DDG 51) destroyers: Lenah H. Sutcliffe Higbee(DDG 123), 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 DDG 139 (unnamed).
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
Newport News is participating in designing the Columbiaclass submarine as a replacement for the current aging Ohioclass nuclear ballistic missile submarines, which were first introduced into service in 1981. The Ohioclass SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. The Columbiaclass program plan of record is to construct 12 new ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and, in early 2017, the DoD signed the acquisition decision memorandum approving the Columbiaclass program's Milestone B, which formally authorizes the program's entry into the engineering and manufacturing development phase. We perform design work as a subcontractor to Electric Boat, and we have entered into a teaming agreement with Electric Boat to build modules for the entire Columbia class (SSBN 826) submarine program that leverages our Virginia class (SSN 774) experience. We have been awarded contracts from Electric Boat for integrated product and process development, providing long-lead-time material and advance construction, and construction of the first two boats of the Columbia class (SSBN 826) program. Construction of the first Columbia class (SSBN 826) submarine began in 2020.
Defense and federal solutions ("DFS") Develops integrated solutions that enable today's connected, all-domain force. Capabilities include: C5ISR systems and operations; the application of artificial intelligence ("AI") and machine learning to battlefield decisions; defensive and offensive cyberspace strategies and electronic warfare ("EW"); and live, virtual, and constructive ("LVC") solutions.
33
Table of Contents
Fleet sustainment Maintains and modernizes a significant majority of the U.S. Navy fleet, from small watercraft to submarines, combatants, and aircraft carriers, our systems and maintenance experts help the Navy maintain a high state of readiness. Ensures effective system operation and sustainment by actively supporting design and decision-making processes through studies, analyses, and reviews of program documents, and provides a wide range of logistics products.
USS Gerald R. Fordclass (CVN 78) aircraft carriers
Design and construction for the Fordclass program, which is the aircraft carrier replacement program for the decommissioned Enterprise(CVN 65) and Nimitzclass (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.
Legendclass 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.
Naval nuclear support services Provide services to and in support of the U.S. Navy, ranging from services supporting the Navy's carrier and submarine fleets to maintenance services at U.S. Navy training facilities. Naval nuclear support services include design, construction, maintenance, and disposal activities for in-service U.S. Navy nuclear ships worldwide through mobile and in-house capabilities. Services include maintenance services on nuclear reactor prototypes.
Nuclear and environmental services
Supports the national security mission of the Department of Energy ("DoE") through the management and operation of its 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.
34
Table of Contents
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 Antonioclass (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 Fort Lauderdale(LPD 28). We are currently constructing Richard M. McCool Jr.(LPD 29) and Harrisburg(LPD 30). In 2020, we were awarded a contract to construct 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 Virginiaclass (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.

35
Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk, primarily related to interest rates and foreign currency exchange rates.

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 June 30, 2022, we had $425 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 June 30, 2022, an increase of 1% in interest rates would increase the interest expense on our debt by approximately $4 million on an annual basis.

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 June 30, 2022. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2022, 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

On August 19, 2021, the Company completed the acquisition of Alion. The Company is in the process of implementing its internal control structure over Alion operations, and the process must be completed within one year of the acquisition.


36
Table of Contents
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, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in the 2021 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 June 30, 2022.
Period
Total Number of Shares Purchased1
Average Price Paid per Share Total 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
April 1, 2022 to April 30, 2022 9,754 $ 208.87 9,050 $ 1,029.2
May 1, 2022 to May 31, 2022 14,084 205.83 14,084 1,026.3
June 1, 2022 to June 30, 2022 57,558 211.96 57,323 1,014.2
Total 81,396 $ 210.53 80,457 $ 1,014.2
1We purchased an aggregate of 80,457 shares of our common stock in the open market pursuant to our repurchase program and 939 shares were transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted performance stock rights during the period.
2 From the stock repurchase program's inception through June 30, 2022, we have purchased 13,526,306 shares at an average price of $161.60 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 billionand 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.

37
Table of Contents
Item 6. Exhibits
3.1
3.2
3.3
3.4
3.5
10.1
10.2
Terms and Conditions Applicable to Restricted Performance Stock Rights Granted Under the 2022 Long-Term Incentive Stock Plan.
10.3
Terms and Conditions Applicable to Restricted Stock Rights (1-year vesting) Granted Under the 2022 Long-Term Incentive Stock Plan.
10.4
Terms and Conditions Applicable to Restricted Stock Rights (2-year vesting) Granted Under the 2022 Long-Term Incentive Stock Plan.
10.5
Terms and Conditions Applicable to Restricted Stock Rights (3-year vesting) Granted Under the 2022 Long-Term Incentive Stock Plan.
10.6
Terms and Conditions Applicable to Non-Employee Director Stock Grants Under the 2022 Long-Term Incentive Stock Plan.
31.1
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certificate of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certificate of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
104 The cover page from the Company's Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101.

38
Table of Contents

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: August 4, 2022 Huntington 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)

39

Disclaimer

Huntington Ingalls Industries Inc. published this content on 04 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 August 2022 14:47:01 UTC.


© Publicnow 2022
All news about HUNTINGTON INGALLS INDUSTRIES, INC.
10:01aHII to Host Third Quarter Earnings Conference Call and Webcast on November 3
AQ
09/26Huntington Ingalls Industries Names Todd Borkey Chief Technology Officer
MT
09/26HII Names Todd Borkey as Chief Technology Officer
GL
09/26HII Names Todd Borkey as Chief Technology Officer
AQ
09/26HII Appoints Todd Borkey as Chief Technology Officer
CI
09/21ETF Preview: ETFs, Futures Advancing Premarket Ahead of Fed Rate Decision
MT
09/21Huntington Ingalls Delivers Three REMUS 100s Unmanned Underwater Vehicles to UK Royal N..
MT
09/21UK Royal Navy Acquires Latest Generation REMUS 100s
GL
09/21UK Royal Navy Acquires Latest Generation REMUS 100s
AQ
09/21HII Announces Delivery of Three REMUS 100s Unmanned Underwater Vehicles to the United K..
CI
More news
Analyst Recommendations on HUNTINGTON INGALLS INDUSTRIES, INC.
More recommendations
Financials (USD)
Sales 2022 10 741 M - -
Net income 2022 603 M - -
Net Debt 2022 2 658 M - -
P/E ratio 2022 15,3x
Yield 2022 2,04%
Capitalization 9 308 M 9 308 M -
EV / Sales 2022 1,11x
EV / Sales 2023 1,05x
Nbr of Employees 44 000
Free-Float 73,0%
Chart HUNTINGTON INGALLS INDUSTRIES, INC.
Duration : Period :
Huntington Ingalls Industries, Inc. Technical Analysis Chart | MarketScreener
Full-screen chart
Technical analysis trends HUNTINGTON INGALLS INDUSTRIES, INC.
Short TermMid-TermLong Term
TrendsNeutralBullishBullish
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus HOLD
Number of Analysts 7
Last Close Price 233,01 $
Average target price 238,57 $
Spread / Average Target 2,39%
EPS Revisions
Managers and Directors
Christopher D. Kastner President, Chief Executive Officer & Director
Thomas E. Stiehle Chief Financial Officer & Executive Vice President
Kirkland H. Donald Chairman
Ron A. Davis Chief Information Systems Officer
Bharat Amin Chief Information Officer & Executive VP