HUNTINGTON INGALLS INDUSTRIES, INC. – 10-Q – 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 America's
largest military shipbuilding company and a provider of professional services to
partners in government and industry. 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 Technical
Solutions segment provides a range of services to government and commercial
customers. Headquartered in Newport News, Virginia, HII employs approximately
44,000 people both 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 Technical Solutions segment provides a wide range of
professional services and products, including defense and federal solutions
("DFS"), nuclear and environmental services, and unmanned systems.

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,
2020.

Business Environment

COVID-19 Pandemic - The COVID-19 global pandemic has had wide ranging effects on
the global health environment and disrupted the global and U.S. economies and
financial markets, including impacts to our employees, customers, suppliers, and
communities (collectively, "COVID-19 Events"). COVID-19 Events have also
impacted our operations, and the extent of future impacts are uncertain. The
most significant areas of impact have been the disruption of our employees'
ability to work effectively, disruption in our supply chain, disruption of the
U.S. Government's and our other customers' abilities to perform their
obligations, and impact on pension assets and other investment performance. On
September 9, 2021, President Biden issued an executive order requiring all
employers with U.S. Government contracts to ensure that their U.S.-based
employees, contractors, and subcontractors that work on or in support of U.S.
Government contracts are fully vaccinated by December 8, 2021.
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The executive order includes on-site and remote U.S.-based employees,
contractors, and subcontractors, with limited exceptions for medical and
religious reasons.

It is currently not possible to predict with any certainty the impact the
executive order will have on our workforce. As a U.S. Government contractor, we
are currently requiring all U.S.-based employees, contractors, and
subcontractors that service or support our U.S. Government contracts to be fully
vaccinated in accordance with the guidelines of the Safer Federal Workforce Task
Force. Our implementation of these requirements will result in employee
attrition to some extent, including attrition of critical skilled labor, and
difficulty meeting future labor requirements.
See Item 1A. Risk Factors in this Form 10-Q for a discussion of COVID-19-related
risks, including risks associated with the potential adverse effects on our
workforce of the U.S. Government vaccine mandate for employees, contractors, and
subcontractors that service federal contracts.

We have aggressively managed our response to the uncertainties regarding
COVID-19 Events, and we have incurred costs to respond to COVID-19 Events,
including paid leave, quarantining employees, vaccinations, and recurring
facility cleaning. Our shipyards and other facilities have remained open and
productive, but we continue to experience decreases in workforce attendance and
challenges meeting our hiring requirements, which has impacted our operations
due to delay and disruption from a shortage of critical skills and
out-of-sequence work.

Under Section 3610 of the CARES Act, contractors may submit claims for employee
paid time off caused by restrictions from COVID-19 Events in circumstances where
the employee could not work remotely. Such instances may include paid time off
for employees to allow for plant decontamination, idle time due to social
distancing restrictions, paid time off to take care of dependents impacted by
government ordered school or day care closures, paid time for employee
vaccinations or responding to side effects from vaccination, and employee
quarantines due to travel restrictions or coming into contact, being diagnosed,
or taking care of someone diagnosed with COVID-19. We have taken steps to
preserve our rights to pursue such claims for HII and our subcontractors, and we
submitted an initial Section 3610 Reimbursement Request to the DoD for Ingalls
and Newport News Shipbuilding. Section 3610 under the CARES Act was not extended
past September 30, 2021. We anticipate submitting supplemental requests for
Section 3610 reimbursement for HII and our subcontractors into 2022.
Reimbursements of our requests are contingent upon contracting officers making
funding available, and most DoD contracting officers are awaiting supplemental
appropriations from Congress before approving such reimbursement requests. We
have no assurance that Congress will appropriate sufficient funds to cover the
reimbursement of costs contemplated by the CARES Act.

While costs related to COVID-19 Events are allowable under U.S. Government
contracts, our contract estimates reflect 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. Our reinsurers 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 13:
Investigations, Claims, and Litigation.

We have also focused on actively supporting our customers, suppliers, and
communities. We have been proactive in engaging with our U.S. Government
customers regarding future contract adjustments. While there has been no change
in contract terms or substantial degradation in timely payments from customers,
we have experienced delays in decisions on certain contract awards. We are
unable to predict how our customers will allocate resources in the future as
they react to the evolving demands of the COVID-19 response. We also accelerated
payments to small business suppliers in an effort to minimize supply chain
disruption.

We temporarily halted stock repurchases in the first quarter of 2020, but we
resumed share repurchases during the first quarter of 2021. We also deferred
certain payroll taxes in 2020 pursuant to the CARES Act, which increased our
cash from operations in 2020, but will reduce cash from operations in 2021 and
2022.

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

The Congressional budget markup process for fiscal year 2022 is ongoing,
following a late release of the President's Budget Request in May 2021.
Consequently, the U.S. Government is currently operating under a Continuing
Resolution which funds government operations through December 3, 2021. It
remains uncertain at this point whether fiscal year 2022 government operations
will require additional short-term funding or if annual appropriations measures
will be finalized by December 3. The House of Representatives and the Senate
Armed Services Committee have each acted on respective National Defense
Authorization bills for fiscal year 2022, but the Congress has yet to reconcile
those bills and produce a final measure. Additionally, while the House
Appropriations Committee voted out a defense appropriations measure earlier this
year, the Senate Appropriations Committee has released the text of its defense
appropriations measure, but a traditional markup process remains uncertain.
Appropriations measures must be passed by Congress and enacted by the President,
and we cannot predict the outcome of the fiscal year 2022 budget process.

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 as a result of 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,
or 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 will 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.

Critical Accounting Policies, Estimates, and Judgments

As discussed in our Annual Report on Form 10-K for the year ended December 31,
2020, we consider our policies relating to the following matters to be critical
accounting policies:

•Revenue recognition;

•Purchase accounting, goodwill, and intangible assets;

•Litigation, commitments, and contingencies;

•Retirement related benefit plans; and

•Workers' compensation.

As of September 30, 2021, there had been no material changes to the foregoing
critical accounting policies, estimates, and judgments since December 31, 2020.

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.

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Contracts

We generate most of our revenues from long-term U.S. Government contracts for
design, production, and support activities. Government contracts typically
include the following cost elements: direct material, labor, and subcontracting
costs, and certain indirect costs, including allowable general and
administrative expenses. Unless otherwise specified in a contract, costs billed
to contracts with the U.S. Government are treated as allowable and allocable
costs under the Federal Acquisition Regulation ("FAR") and the U.S. Cost
Accounting Standards ("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 most merger and acquisition costs, and advertising costs.

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

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

•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.

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.

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CONSOLIDATED OPERATING RESULTS

The following table presents selected financial highlights:

                                                Three Months Ended                                                                Nine Months Ended
                                                   September 30                             2021 over 2020                           September 30                           2021 over 2020

($ in millions)                                2021                2020              Dollars               Percent              2021               2020              Dollars               Percent
Sales and service revenues               $    2,338             $ 2,314          $          24                   1  %       $    6,847          $ 6,604          $         243                   4  %
Cost of product sales and service
revenues                                      2,007               1,878                    129                   7  %            5,852            5,481                    371                   7  %
Income from operating investments,
net                                              11                   6                      5                  83  %               31               19                     12                  63  %
Other income and gains                            2                   -                      2                   -  %                3                -                      3                   -  %
General and administrative
expenses                                        226                 220                      6                   3  %              636              648                    (12)                 (2) %

Operating income                                118                 222                   (104)                (47) %              393              494                   (101)                (20) %
Other income (expense)
Interest expense                                (24)                (27)                     3                  11  %              (63)             (68)                     5                   7  %
Non-operating retirement benefit                 45                  29                     16                  55  %              135               89                     46                  52  %
Other, net                                        2                   2                      -                   -  %               10               (8)                    18                 225  %
Federal and foreign income taxes                 (6)                  4                    (10)               (250) %               51               60                     (9)                (15) %
Net earnings                             $      147             $   222          $         (75)                (34) %       $      424          $   447          $         (23)                 (5) %

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                                                               Nine Months Ended
                                          September 30                            2021 over 2020                           September 30                           2021 over 2020
($ in millions)                       2021                2020              Dollars              Percent              2021               2020              Dollars               Percent
Product sales                   $    1,701             $ 1,699          $          2                   -  %       $    5,185          $ 4,743          $         442                   9  %
Service revenues                       637                 615                    22                   4  %            1,662            1,861                   (199)                (11) %
Sales and service
revenues                        $    2,338             $ 2,314          $         24                   1  %       $    6,847          $ 6,604          $         243                   4  %



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Product sales for the three months ended September 30, 2021, increased $2
million from the same period in 2020. Product sales for the nine months ended
September 30, 2021, increased $442 million, or 9%, compared with the same period
in 2020. Ingalls product sales decreased $37 million for the three months ended
September 30, 2021, primarily as a result of lower volumes in the Legend class
NSC program and amphibious assault ships, partially offset by higher volumes on
surface combatants. Ingalls product sales increased $49 million for the nine
months ended September 30, 2021, primarily as a result of higher volumes in
surface combatants and amphibious assault ships, partially offset by lower
volumes in the Legend class NSC program. Newport News product sales increased
$34 million and $374 million for the three and nine months ended September 30,
2021, respectively, primarily as a result of higher volumes in submarines and
aircraft carriers. Technical Solutions product sales increased $5 million for
the three months ended September 30, 2021, primarily as a result of higher
volumes in DFS due to the acquisition of Alion, partially offset by lower
volumes in unmanned systems. Technical Solutions product sales increased
$19 million for the nine months ended September 30, 2021, primarily as a result
of higher volumes in DFS and unmanned systems.

Service revenues for the three months ended September 30, 2021, increased $22
million, or 4%, compared with the same period in 2020. Service revenues for the
nine months ended September 30, 2021, decreased $199 million, or 11%, compared
with the same period in 2020. Ingalls service revenues for the three months
ended September 30, 2021, decreased $14 million, primarily as a result of lower
volumes in surface combatant services. Ingalls service revenues for the nine
months ended September 30, 2021, decreased $38 million, primarily as a result of
lower volumes in surface combatant and amphibious assault ship services. Newport
News service revenues decreased $38 million for the three months ended September
30, 2021, primarily as a result of lower volumes in naval nuclear support
services, partially offset by higher volumes in submarine services. Newport News
service revenues decreased $73 million for the nine months ended September 30,
2021, primarily as a result of lower volumes in naval nuclear support services,
partially offset by higher volumes in aircraft carrier and submarine services.
Technical Solutions service revenues increased $74 million for the three months
ended September 30, 2021, primarily as a result of higher volumes in DFS
services due to the acquisition of Alion, partially offset by the divestiture of
our oil and gas business. Technical Solutions service revenues decreased $88
million for the nine months ended September 30, 2021, primarily as a result of
the divestiture of our oil and gas business and contribution of our San Diego
Shipyard to a joint venture, partially offset by higher volumes in DFS services
due to the acquisition of Alion.

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                                                             Nine Months Ended
                                             September 30                           2021 over 2020                          September 30                          2021 over 2020
($ in millions)                          2021              2020              Dollars               Percent             2021              2020              Dollars               Percent
Cost of product sales                $   1,453          $ 1,388          $          65                   5  %       $  4,402          $ 3,931          $         471                  12  %
% of product sales                        85.4  %          81.7  %                                                      84.9  %          82.9  %
Cost of service revenues                   554              490                     64                  13  %          1,450            1,550                   (100)                 (6) %
% of service revenues                     87.0  %          79.7  %                                                      87.2  %          83.3  %
Income from operating
investments, net                            11                6                      5                  83  %             31               19                     12                  63  %
Other income and gains                       2                -                      2                   -  %              3                -                      3                   -  %
General and administrative
expenses                                   226              220                      6                   3  %            636              648                    (12)                 (2) %
% of sales and service
revenues                                   9.7  %           9.5  %                                                       9.3  %           9.8  %

Cost of sales and service
revenues                             $   2,220          $ 2,092          $         128                   6  %       $  6,454          $ 6,110          $         344                   6  %



Cost of Product Sales

Cost of product sales for the three months ended September 30, 2021, increased
$65 million, or 5%, compared with the same period in 2020. Cost of product sales
for the nine months ended September 30, 2021, increased $471 million, or 12%,
compared with the same period in 2020. Ingalls cost of product sales decreased
$30 million for the three months ended September 30, 2021, primarily as a result
of volume decreases described above. Ingalls cost of
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product sales for the nine months ended September 30, 2021, were flat primarily
as a result of volume increases described above, partially offset by higher risk
retirement on Bougainville (LHA 8). Newport News cost of product sales increased
$14 million and $207 million for the three and nine months ended September 30,
2021, respectively, primarily as a result of volume increases described above.
Technical Solutions cost of product sales decreased $2 million for the three
months ended September 30, 2021, driven by improved performance in DFS services,
partially offset by volume increases described above. Technical Solutions cost
of product sales increased $15 million for the nine months ended September 30,
2021, primarily as a result of the volume increases described above. Cost of
product sales related to the Operating FAS/CAS Adjustment increased $83 million
and $249 million for the three and nine months ended September 30, 2021,
respectively, as described below.

Cost of product sales as a percentage of product sales increased from 81.7% for
the three months ended September 30, 2020, to 85.4% for the three months ended
September 30, 2021. The increase was primarily due to an unfavorable change in
the Operating FAS/CAS Adjustment, lower performance in unmanned systems, and
lower risk retirement on Bougainville (LHA 8), partially offset by higher risk
retirements on the RCOH of USS George Washington (CVN 73), Block IV boats of the
Virginia class (SSN 774) submarine program, and USS Frank E. Peterson Jr. (DDG
121). Cost of product sales as a percentage of product sales increased from
82.9% for the nine months ended September 30, 2020, to 84.9% for the nine months
ended September 30, 2021. The increase was due to an unfavorable change in the
Operating FAS/CAS Adjustment, partially offset by impacts related to performance
on Block IV boats of the Virginia class (SSN 774) submarine program and delay
and disruption from discrete COVID-19 Events in 2020, a contract incentive on
Jack H. Lucas (DDG 125), and higher risk retirement on Bougainville (LHA 8) and
Fort Lauderdale (LPD 28).

Cost of Service Revenues

Cost of service revenues for the three months ended September 30, 2021,
increased $64 million, or 13%, compared with the same period in 2020. Cost of
service revenues for the nine months ended September 30, 2021, decreased $100
million, or 6%, compared with the same period in 2020. Ingalls cost of service
revenues decreased $15 million and $34 million for the three and nine months
ended September 30, 2021, respectively, primarily as a result of lower volumes
described above. Newport News cost of service revenues decreased $19 million and
$29 million for the three and nine months ended September 30, 2021,
respectively, primarily as a result of lower volumes described above. Technical
Solutions cost of service revenues increased $80 million for the three months
ended September 30, 2021, primarily as a result of higher volumes described
above. Technical Solutions cost of service revenues decreased $92 million for
the nine months ended September 30, 2021, primarily as a result of lower volumes
described above. Cost of service revenues related to the Operating FAS/CAS
Adjustment increased $18 million and $55 million for the three and nine months
ended September 30, 2021, respectively, as described below.

Cost of service revenues as a percentage of service revenues increased from
79.7% for the three months ended September 30, 2020, to 87.0% for the three
months ended September 30, 2021, primarily driven by an unfavorable change in
the Operating FAS/CAS Adjustment, lower risk retirement on submarine support
services, lower performance in DFS services, and year-to-year variances in
contract mix. Cost of service revenues as a percentage of service revenues
increased from 83.3% for the nine months ended September 30, 2020, to 87.2% for
the nine months ended September 30, 2021, primarily driven by an unfavorable
change in the Operating FAS/CAS Adjustment, lower risk retirement on submarine
support services, and year-to-year variances in contract mix.

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 nine months ended
September 30, 2021, increased $5 million and $12 million, respectively, from the
same periods in 2020, primarily due to higher equity income from our nuclear and
environmental joint ventures and ship repair and specialty fabrication joint
venture.

Other Income and Gains

For the three months ended September 30, 2021, we recognized a gain of $2
million, primarily due to a favorable claim resolution. For the nine months
ended September 30, 2021, we recognized a gain of $3 million, primarily due a
favorable claim resolution and the sale of our oil and gas business.

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General and Administrative Expenses

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

General and administrative expenses for the three months ended September 30,
2021, increased $6 million from the same period in 2020, primarily due to higher
overhead costs, partially offset by favorable changes in current state income
tax expense. General and administrative expenses for the nine months ended
September 30, 2021, decreased $12 million from the same period in 2020,
primarily driven by favorable changes in current state income tax expense,
partially offset by higher overhead costs.

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 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                                                           Nine Months Ended
                                              September 30                         2021 over 2020                         September 30                         2021 over 2020
($ in millions)                           2021              2020             Dollars              Percent              2021             2020             Dollars              Percent
Operating income                      $      118          $ 222          $       (104)                (47) %       $     393          $ 494          $       (101)                (20) %
Operating FAS/CAS Adjustment                  41            (60)                  101                 168  %             118           (186)                  304                 163  %
Non-current state income taxes                 4              -                     4                   -  %              12              5                     7                 140  %
Segment operating income              $      163          $ 162          $          1                   1  %       $     523          $ 313          $        210                  67  %


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Segment Operating Income

Segment operating income for the three months ended September 30, 2021, was $163
million, compared with segment operating income of $162 million for the same
period in 2020. The increase was primarily due to higher risk retirement on the
RCOH of USS George Washington (CVN 73), and Block IV boats of the Virginia class
(SSN 774) submarine program, and equity income in nuclear and environmental
joint ventures and our ship repair and specialty fabrication joint venture,
partially offset by lower performance in unmanned systems. Segment operating
income for the nine months ended September 30, 2021, was $523 million, compared
with segment operating income of $313 million for the same period in 2020. The
increase was primarily due to impacts related to performance on Block IV boats
of the Virginia class (SSN 774) submarine program and delay and disruption from
discrete COVID-19 Events in 2020, a contract incentive on USS Jack H. Lucas (DDG
125), and higher risk retirement on Bougainville (LHA 8) and Fort Lauderdale
(LPD 28), partially offset by lower risk retirement on USS Delbert D. Black (DDG
119) following its delivery.

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.

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

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

                                            Three Months Ended                                                              Nine Months Ended
                                               September 30                         2021 over 2020                            September 30                            2021 over 2020
($ in millions)                            2021              2020             Dollars              Percent                 2021                2020             Dollars              Percent
FAS expense                            $       (7)         $ (18)         $         11                  61  %       $      (21)              $ (53)         $         32                  60  %
CAS cost                                       11            107                   (96)                (90) %               38                 328                  (290)                (88) %
FAS/CAS Adjustment                              4             89                   (85)                (96) %               17                 275                  (258)                (94) %
Non-operating retirement benefit              (45)           (29)                  (16)                (55) %             (135)                (89)                  (46)                (52) %
Operating FAS/CAS Adjustment           $      (41)         $  60          $       (101)               (168) %       $     (118)              $ 186          $       (304)               (163) %



The Operating FAS/CAS Adjustment was a net expense of $41 million and a net
benefit of $60 million for the three months ended September 30, 2021 and 2020,
respectively. The Operating FAS/CAS Adjustment was a net expense of $118 million
and a net benefit of $186 million for the nine months ended September 30, 2021
and 2020, respectively. The unfavorable changes in the Operating FAS/CAS
Adjustment of $101 million and $304 million for the three and nine months ended
September 30, 2021, respectively, were primarily driven by the more immediate
recognition of higher interest rates under CAS.

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 expense for the three months ended September 30,
2021, was $4 million, compared to non-current state income tax expense of less
than $1 million for the same period in 2020. The unfavorable change in
non-current state income taxes was driven by an increase in deferred state
income tax expense, primarily
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attributable to a reduction in the tax basis of fixed assets resulting from
increased tax depreciation. Non-current state income tax expense for the nine
months ended September 30, 2021, was $12 million, compared to non-current state
income tax expense of $5 million for the same period in 2020. The unfavorable
change in non-current state income taxes was driven by an increase in deferred
state income tax expense, primarily attributable to a decrease in expenses not
currently deductible for income tax purposes.

Interest Expense

Interest expense for the three and nine months ended September 30, 2021,
decreased $3 million and $5 million, respectively, compared with the same
periods in 2020, primarily due to the early redemption of our senior notes in
the fourth quarter of 2020, partially offset by the issuance of senior notes and
borrowing under the Term Loan in August 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 nine months ended
September 30, 2021, the favorable changes in the non-operating retirement
benefit of $16 million and $46 million, respectively, were primarily driven by
higher 2020 returns on plan assets.

Other, Net

Other, net income for the three months ended September 30, 2021, was flat with
the same period in 2020. Other, net income increased $18 million for the nine
months ended September 30, 2021, compared with the same period in 2020,
primarily driven by an impairment of a loan receivable in 2020 and net gains on
investments in marketable securities.

Federal and Foreign Income Taxes

Our effective income tax rates on earnings from operations for the three months
ended September 30, 2021 and 2020, were (4.3)% and 1.8%, respectively. Our
effective income tax rates on earnings from operations for the nine months ended
September 30, 2021 and 2020, were 10.7% and 11.8%, respectively. The lower
effective tax rate for the three months ended September 30, 2021, was primarily
attributable to research and development tax credits for prior periods. The
lower effective tax rate for the nine months ended September 30, 2021, was
attributable to an increase in research and development tax credits for prior
periods and a tax loss associated with the sale of our oil and gas business,
partially offset by an increase in unrecognized tax benefits.

For each of the three and nine months ended September 30, 2021 and 2020, our
effective tax rates differed from the federal statutory tax rate primarily as a
result of the research and development tax credits for prior periods. See Note
11: Income Taxes.

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SEGMENT OPERATING RESULTS

Basis of Presentation

We are aligned into three reportable segments: Ingalls, Newport News, and
Technical Solutions.

The following table presents segment operating results:

                                           Three Months Ended                                                               Nine Months Ended
                                              September 30                            2021 over 2020                           September 30                          2021 over 2020
($ in millions)                           2021                2020         

    Dollars              Percent              2021               2020      

       Dollars              Percent
Sales and Service Revenues
Ingalls                             $      628             $   675          $        (47)                 (7) %       $    1,947          $ 1,926          $         21                   1  %
Newport News                             1,354               1,358                    (4)                  -  %            4,124            3,821                   303                   8  %
Technical Solutions                        394                 320                    74                  23  %              890              957                   (67)                 (7) %
Intersegment eliminations                  (38)                (39)                    1                   3  %             (114)            (100)                  (14)                (14) %
Sales and service revenues          $    2,338             $ 2,314          $         24                   1  %       $    6,847          $ 6,604          $        243                   4  %
Operating Income
Ingalls                             $       62             $    62          $          -                   -  %       $      233          $   185          $         48                  26  %
Newport News                                88                  79                     9                  11  %              257              105                   152                 145  %
Technical Solutions                         13                  21                    (8)                (38) %               33               23                    10                  43  %
Segment operating income
(loss)                                     163                 162                     1                   1  %              523              313                   210                  67  %
Non-segment factors affecting
operating income (loss)
Operating FAS/CAS Adjustment               (41)                 60                  (101)               (168) %             (118)             186                  (304)               (163) %
Non-current state income
taxes                                       (4)                  -                    (4)                  -  %              (12)              (5)                   (7)               (140) %
Operating income                    $      118             $   222          $       (104)                (47) %       $      393          $   494          $       (101)                (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 (Loss)

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.

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Cumulative Adjustments

For the three and nine months ended September 30, 2021 and 2020, favorable and
unfavorable cumulative catch-up margin adjustments were as follows:

                                          Three Months Ended                 Nine Months Ended
                                             September 30                      September 30
($ in millions)                             2021              2020            2021            2020
Gross favorable adjustments        $       51                $ 40      $     199             $ 157
Gross unfavorable adjustments             (30)                (36)           (93)             (232)
Net adjustments                    $       21                $  4      $     106             $ (75)

For the three months ended September 30, 2021, no favorable or unfavorable
cumulative catch-up margin adjustments were individually significant.

For the nine months ended September 30, 2021, favorable cumulative catch-up
margin adjustments included risk retirement on Bougainville (LHA 8), a contract
incentive on Jack H. Lucas (DDG 125) and risk retirement on Fort Lauderdale (LPD
28). During the same period, no unfavorable cumulative catch-up margin
adjustments were individually significant.

For the three months ended September 30, 2020, no favorable cumulative catch-up
margin adjustments were individually significant.

For the nine months ended September 30, 2020, favorable cumulative catch-up
margin adjustments included risk retirement on USS Delbert D. Black (DDG 119) in
connection with its delivery and a capital expenditure contract incentive, and
other individually insignificant adjustments.

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

Ingalls
                                           Three Months Ended                                                              Nine Months Ended
                                              September 30                            2021 over 2020                          September 30                         2021 over 2020
($ in millions)                         2021                  2020             Dollars               Percent             2021              2020              Dollars              Percent
Sales and service revenues          $    628                $ 675          $         (47)                 (7) %       $  1,947          $ 1,926          $         21                   1  %
Segment operating income                  62                   62                      -                   -  %            233              185                    48                  26  %
As a percentage of segment
sales                                    9.9   %              9.2  %                                                      12.0  %           9.6  %



Sales and Service Revenues

Ingalls revenues for the three months ended September 30, 2021, decreased $47
million, or 7%, from the same period in 2020, primarily driven by lower revenues
in the Legend class NSC program, surface combatants, and amphibious assault
ships. Revenues on the NSC program decreased due to lower volumes on Stone (NSC
9) following its delivery. Revenues on surface combatants decreased due to lower
volumes on Ted Stevens (DDG 128) and USS Delbert D. Black (DDG 119) following
its delivery, partially offset by higher volumes on USS Jack H.
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Lucas (DDG 125). Revenues on amphibious assault ships decreased due to lower
volumes on Bougainville (LHA 8), partially offset by higher volumes on LHA 9
(unnamed).

Ingalls revenues for the nine months ended September 30, 2021, increased $21
million, or 1%, from the same period in 2020, primarily driven by higher
revenues in surface combatants and amphibious assault ships, partially offset by
lower revenues in the Legend class NSC program. Surface combatant revenues
increased due to higher volumes on USS Jack H. Lucas (DDG 125), USS Jeremiah
Denton (DDG 129), USS George M. Neal (DDG 131), and USS Sam Nunn (DDG 133),
partially offset by lower volumes on USS Delbert D. Black (DDG 119) following
its delivery and USS Fitzgerald (DDG 62) following its redelivery. Amphibious
assault ship revenues increased due to higher volumes on Pittsburgh (LPD 31),
LHA 9 (unnamed) and Bougainville (LHA 8), partially offset by lower volumes on
Fort Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29) and USS Tripoli (LHA
7). Revenues on the Legend class NSC program decreased due to lower volumes on
Stone (NSC 9) following its delivery, partially offset by higher volumes on
Friedman (NSC 11).

Segment Operating Income

Ingalls segment operating income for the three months ended September 30, 2021,
was flat with the same period in 2020.

Ingalls segment operating income for the nine months ended September 30, 2021,
was $233 million, compared with $185 million for the same period in 2020. The
increase was primarily driven by a contract incentive on USS Jack H. Lucas (DDG
125) and higher risk retirement on Bougainville (LHA 8) and Fort Lauderdale (LPD
28), partially offset by lower risk retirement on USS Delbert D. Black (DDG 119)
following its delivery.

Newport News
                                         Three Months Ended                                                            Nine Months Ended
                                            September 30                          2021 over 2020                          September 30                          2021 over 2020
($ in millions)                         2021              2020              Dollars              Percent             2021              2020              Dollars               Percent

Sales and service revenues $ 1,354 $ 1,358 $

      (4)                  -  %       $  4,124          $ 3,821          $         303                   8  %
Segment operating income
(loss)                                     88               79                     9                  11  %            257              105                    152                 145  %

As a percentage of segment
sales                                     6.5  %           5.8  %                                                      6.2  %           2.7  %



Sales and Service Revenues

Newport News revenues for the three months ended September 30, 2021, decreased
$4 million from the same period in 2020, primarily driven by lower revenues in
naval nuclear support services, partially offset by higher revenues in
submarines and aircraft carriers. 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. 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), and the construction of Enterprise (CVN
80), partially offset by lower volumes on the RCOH of USS George Washington (CVN
73) and the construction of John F. Kennedy (CVN 79). Submarine revenues
increased due to higher volumes on Block V boats of the Virginia class (SSN 774)
submarine program, submarine support services and the Columbia class (SSBN 826)
submarine program, partially offset by lower volumes on Block IV boats of the
Virginia class (SSN 774) submarine program.

Newport News revenues for the nine months ended September 30, 2021, increased
$303 million, or 8%, from the same period in 2020, primarily driven by higher
revenues in submarines and aircraft carriers, partially offset by lower revenues
in naval nuclear support services. Submarine revenues increased primarily as a
result of higher volumes on Block V boats of the Virginia class (SSN 774)
submarine program and the Columbia class (SSBN 826) submarine program. Aircraft
carrier revenues increased primarily as a result of higher volumes on the
construction of Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74),
and the construction of Doris Miller (CVN 81), partially offset by lower volumes
on the construction of John F. Kennedy (CVN 79) and the RCOH of USS George
Washington (CVN 73). Naval nuclear support 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.

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Segment Operating Income

Newport News segment operating income for the three months ended September 30,
2021, was $88 million, compared with segment operating income of $79 million for
the same period in 2020. The increase was primarily due to higher risk
retirement on the RCOH of USS George Washington (CVN 73) and Block IV boats of
the Virginia class (SSN 774) submarine program, partially offset by lower risk
retirement on naval nuclear support services.

Newport News segment operating income for the nine months ended September 30,
2021, was $257 million, compared with segment operating income of $105 million
for the same period in 2020. The increase was primarily due to impacts related
to performance on Block IV boats of the Virginia class (SSN 774) submarine
program and delay and disruption from discrete COVID-19 Events in 2020.

Technical Solutions
                                           Three Months Ended                                                               Nine Months Ended
                                              September 30                           2021 over 2020                           September 30                            2021 over 2020
($ in millions)                         2021                  2020             Dollars              Percent              2021                 2020             Dollars               Percent
Sales and service revenues          $    394                $ 320          $         74                  23  %       $    890               $ 957          $         (67)                 (7) %
Segment operating income                  13                   21                    (8)                (38) %             33                  23                     10                  43  %
As a percentage of segment
sales                                    3.3   %              6.6  %                                                      3.7   %             2.4  %



Sales and Service Revenues

Technical Solutions revenues for the three months ended September 30, 2021,
increased $74 million, or 23%, from the same period in 2020, primarily due to
higher volumes in DFS due to the acquisition of Alion, offset by the divestiture
of our oil and gas business and contribution of our San Diego Shipyard to a
joint venture in the first quarter of 2021.

Technical Solutions revenues for the nine months ended September 30, 2021,
decreased $67 million, or 7%, from the same period in 2020, primarily due to the
divestiture of our oil and gas business and contribution of our San Diego
Shipyard to a joint venture, partially offset by higher volumes in DFS due to
the acquisition of Alion.

Segment Operating Income

Technical Solutions segment operating income for the three months ended
September 30, 2021, was $13 million, compared with segment operating income of
$21 million for the same period in 2020. The decrease was primarily driven by
the amortization of Alion purchased intangible assets, lower performance in DFS,
the divestiture of our oil and gas business, and a contribution of our San Diego
Shipyard to a joint venture, partially offset by the acquisition of Alion.

Technical Solutions segment operating income for the nine months ended September
30, 2021, was $33 million, compared with segment operating income of $23 million
for the same period in 2020. The increase was primarily driven by equity income
in nuclear and environmental joint ventures and our ship repair and specialty
fabrication joint venture and the acquisition of Alion, partially offset by
lower performance in unmanned systems and the amortization of Alion purchased
intangible assets.
BACKLOG

Total backlog as of September 30, 2021, and December 31, 2020, was approximately
$50.1 billion and $46.0 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 IDIQ orders. For contracts having no stated contract
values, backlog includes only the amounts committed by the customer.

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The following table presents funded and unfunded backlog by segment as of
September 30, 2021, and December 31, 2020:

                                   September 30, 2021                       

December 31, 2020

                                                       Total                                     Total
($ in millions)            Funded       Unfunded      Backlog        Funded       Unfunded      Backlog
Ingalls                  $ 10,561      $    661      $ 11,222      $ 10,443      $  1,758      $ 12,201
Newport News               11,715        21,741        33,456         9,536        23,132        32,668
Technical Solutions         1,499         3,967         5,466           502           646         1,148
Total backlog            $ 23,775      $ 26,369      $ 50,144      $ 20,481      $ 25,536      $ 46,017



Approximately 15% of the $46.0 billion total backlog as of December 31, 2020, is
expected to be converted into sales in 2021. U.S. Government orders comprised
substantially all of the backlog as of September 30, 2021, and December 31,
2020.

Awards

The value of new contract awards during the nine months ended September 30,
2021, was approximately $7.1 billion, comprised primarily of awards for the RCOH
of the USS John C. Stennis (CVN 74), construction of a 10th boat of the Virginia
class (SSN 774) submarine program, and construction of John F. Lehman (DDG 137).

LIQUIDITY AND CAPITAL RESOURCES

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

The following table summarizes key components of cash flow provided by operating
activities:
                                                                        Nine Months Ended             2021 over
                                                                          September 30                   2020
($ in millions)                                                        2021             2020           Dollars
Net earnings                                                       $     424          $ 447          $     (23)
Depreciation and amortization                                            208            182                 26
Provision for doubtful accounts                                            -             (2)                 2
Stock-based compensation                                                  19             16                  3

Deferred income taxes                                                     74             (7)                81

Loss (gain) on investments in marketable securities                      (12)            (3)                (9)
Asset impairments                                                          -             13                (13)
Retiree benefit funding less than (in excess of) expense                 (73)          (183)               110

Trade working capital decrease (increase)                               (151)            28               (179)
Net cash provided by operating activities                          $     489          $ 491          $      (2)


Cash Flows

We discuss below our significant operating, investing, and financing activities
affecting cash flows for the nine months ended September 30, 2021 and 2020, as
classified on our unaudited condensed consolidated statements of cash flows.

Operating Activities

Cash provided by operating activities for the nine months ended September 30,
2021, was $489 million, compared with $491 million provided by operating
activities for the same period in 2020. The unfavorable change in operating

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cash flow was primarily due to changes in trade working capital, partially
offset by lower contributions to retiree benefit plans and lower income tax
payments. The change in trade working capital was primarily driven by the timing
of receipts of accounts receivable and payments of accounts payable.

For the nine months ended September 30, 2021, we made discretionary
contributions to our qualified defined benefit pension plans totaling $60
million, compared with $205 million of discretionary contributions for the same
period in 2020. As of September 30, 2021, we anticipate no further significant
cash contributions to our qualified defined benefit pension plans in 2021.

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 next 12 months.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2021,
was $1,842 million, compared with $586 million used in investing activities for
the same period in 2020. The change in investing cash was driven by the
acquisitions of Alion and a non-controlling interest in Titan in 2021, partially
offset by the acquisition of Hydroid in 2020 and the disposition of our oil and
gas business in 2021. For 2021, we expect our capital expenditures for
maintenance and sustainment to be approximately 1.5% of annual revenues and our
discretionary capital expenditures to be approximately 1.5% to 2.5% of annual
revenues.

Financing Activities

Cash provided by financing activities for the nine months ended September 30,
2021, was $1,396 million, compared with $764 million provided by financing
activities for the same period in 2020. The change in financing cash was
primarily due to an increase in net proceeds from the incurrence of long-term
debt of $650 million and a decrease of $6 million in employee taxes on certain
share-based payment arrangements, partially offset by a $12 million increase in
cash dividend payments, a $9 million increase in debt issuance costs, and an
increase of $3 million from common stock repurchases.

Free Cash Flow

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

The following table reconciles net cash provided by operating activities to free
cash flow:
                                                      Nine Months Ended
                                                        September 30              2021 over 2020
($ in millions)                                        2021            2020           Dollars
Net cash provided by operating activities       $     489             $ 491      $            (2)
Less capital expenditures:
Capital expenditure additions                        (216)             (220)                   4
Grant proceeds for capital expenditures                11                17                   (6)
Free cash flow                                  $     284             $ 288      $            (4)



Free cash flow for the nine months ended September 30, 2021, decreased $4
million from the same period in 2020, primarily due to changes in trade working
capital and higher capital expenditures, partially offset by lower contributions
to retiree benefit plans and lower income tax payments.
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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
September 30, 2021 and 2020, 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.

Other Sources and Uses of Capital

In August 2021, we entered into a $650 million 3-year delayed draw Term Loan to
finance a portion of the purchase price for Alion. The Term Loan must be repaid
prior to or at maturity, which is 36 months from the date of the initial draw.
The Term Loan has a variable interest rate on outstanding borrowings based on
LIBOR, plus a spread based upon our credit rating, which may vary between 1.125%
and 2.000%. As of September 30, 2021, the annual interest rate spread was 1.375%
based on our current credit rating.

In August 2021, we also amended and restated our existing $1.25 billion credit
facility, increasing the capacity thereunder to $1.5 billion and extending the
maturity date to five years from signing. The amended and restated Revolving
Credit Facility has a variable interest rate on outstanding borrowings based on
LIBOR, plus a spread based upon our credit rating, which may vary between 1.125%
and 2.000%. As of September 30, 2021, the interest rate spread on drawn amounts
would have been 1.375% based on our current credit rating. The amended and
restated Revolving Credit Facility also has a commitment fee rate on unutilized
amounts, currently 0.200%.

In August 2021, we issued $400 million aggregate principal amount of callable
unregistered 0.670% senior notes due 2023 and $600 million aggregate principal
amount of unregistered 2.043% senior notes due 2028, both with registration
rights. The net proceeds were used to fund a portion of the purchase price for
the acquisition of Alion. Interest on these senior notes is payable
semiannually.

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
September 30, 2021, $16 million in letters of credit were issued but undrawn and
$276 million of surety bonds were outstanding. As of September 30, 2021, we had
no other significant off-balance sheet arrangements.

ACCOUNTING STANDARDS UPDATES

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

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

Statements in this Quarterly Report on Form 10-Q and in our other filings with
the Securities and Exchange Commission ("SEC"), as well as other statements we
may make from time to time, other than statements of historical fact, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements involve risks and
uncertainties that could cause our actual results to differ materially from
those expressed in these statements. Factors that may cause such differences
include:

•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 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;
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•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;
•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.
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GLOSSARY OF PROGRAMS
Included below are brief descriptions of some of the programs discussed in this
Quarterly Report on Form 10-Q.
Program Name                                  Program Description

America class (LHA 6) amphibious              Design and build large deck amphibious assault ships
assault ships                                 that provide forward presence and power projection as
                                              an integral part of joint, interagency and
                                              multinational maritime expeditionary forces. The
                                              America class (LHA 6) ships, together with the Wasp
                                              class (LHD 1) ships, are the successors to the
                                              decommissioned Tarawa class (LHA 1) ships. The America
                                              class (LHA 6) ships optimize aviation operations and
                                              support capabilities. We delivered USS Tripoli (LHA 7)
                                              in February 2020, and we are currently constructing
                                              Bougainville (LHA 8).

Arleigh Burke class (DDG 51)                  Build guided missile destroyers designed for conducting
destroyers                                    anti-air, anti-submarine, 

anti-surface, and strike

                                              operations. The 

Aegis-equipped Arleigh Burke class (DDG

                                              51) destroyers are the U.S. Navy's primary surface
                                              combatant, and have been constructed in variants,
                                              allowing technological

advances during construction. In

                                              2019 we delivered USS Paul 

Ignatius (DDG 117), and in

                                              2020 we delivered USS Delbert 

D. Black (DDG 119). We

                                              have contracts to construct 

the following Arleigh Burke

                                              class (DDG 51) destroyers: 

Frank E. Petersen Jr. (DDG

                                              121), 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), and John F. Lehman (DDG
                                              137).

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 Columbia

                                              class submarine as a 

replacement for the current aging

                                              Ohio class nuclear ballistic missile submarines, which
                                              were first introduced into service in 1981. The Ohio
                                              class SSBN includes 14 nuclear ballistic missile
                                              submarines and four nuclear cruise missile submarines.
                                              The Columbia class program plan of record is to
                                              construct 12 new ballistic missile submarines. The U.S.
                                              Navy has initiated the design process for the new class
                                              of submarines, and, in early 2017, the DoD signed the
                                              acquisition decision

memorandum approving the Columbia

                                              class program'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 is focused on solving 

tough national security

                                              challenges for the DoD, the 

intelligence community, and

                                              federal civilian agencies 

around the globe. The group

                                              provides a wide range of professional services and
                                              products including fleet sustainment, cyber and
                                              electronic warfare,

intelligence, surveillance, and

                                              reconnaissance, and live, virtual, and constructive
                                              solutions.


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USS Gerald R. Ford class (CVN 78)              Design and construction for the Ford class program,
aircraft carriers                              which is the aircraft 

carrier replacement program for

                                               the decommissioned 

Enterprise (CVN 65) and Nimitz class

                                               (CVN 68) aircraft carriers. USS Gerald R. Ford (CVN 78),
                                               the first ship of the Ford class, was delivered to the
                                               U.S. Navy in the second

quarter of 2017. In June 2015,

                                               we were awarded a contract for the detail design and
                                               construction of John F. Kennedy (CVN 79), following
                                               several years of

engineering, advance construction, and

                                               purchase of long-lead time 

components and material. In

                                               addition, we have received 

awards for detail design and

                                               construction of Enterprise (CVN 80) and Doris Miller
                                               (CVN 81). This category also includes the class'
                                               non-recurring engineering. The class is expected to
                                               bring improved warfighting

capability, quality of life

                                               improvements for sailors, 

and reduced life cycle costs.

Legend class National Security Cutter          Design and build the U.S. Coast Guard's National
                                               Security Cutters ("NSCs"), the largest and most
                                               technically advanced class of cutter in the U.S. Coast
                                               Guard. The NSC is equipped to carry out maritime
                                               homeland security, maritime safety, protection of
                                               natural resources, maritime mobility, and national
                                               defense missions. The plan is for a total of 11 ships,
                                               of which the first nine ships have been delivered.
                                               Calhoun (NSC 10) and

Friedman (NSC 11) are currently

                                               under construction.

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             Provide services in nuclear management and operations,
                                               including site management, nuclear and industrial
                                               facilities operations and maintenance, decontamination
                                               and decommissioning,

radiological and hazardous waste

                                               management services, and 

technical engineering services.

                                               We participate in several joint ventures, including
                                               Newport News Nuclear BWXT Los Alamos, LLC (" N3B"),
                                               Mission Support and Test Services, LLC ("MSTS"), and
                                               Savannah River Nuclear

Solutions, LLC ("SRNS"), and we

                                               are an integrated 

subcontractor to Triad National

                                               Security. N3B was awarded the Los Alamos Legacy Cleanup
                                               Contract at the DoE/National Nuclear Security
                                               Administration's Los Alamos National Laboratory. MSTS
                                               was awarded a contract for site management and
                                               operations at the Nevada National Security Site. SRNS
                                               provides site management and operations at the DoE's
                                               Savannah River Site near Aiken, South Carolina. Triad
                                               provides site management and operations at the DoE's Los
                                               Alamos National Laboratory.

San Antonio class (LPD 17) amphibious          Design and build amphibious transport dock ships, which
transport dock ships                           are warships that embark, transport, and land elements
                                               of a landing force for a variety of expeditionary
                                               warfare missions, and also serve as the secondary
                                               aviation platform for

Amphibious Readiness Groups. The

                                               San Antonio class (LPD 17) is the newest addition to the
                                               U.S. Navy's 21st century amphibious assault force, and
                                               these ships are a key

element of the U.S. Navy's seabase

                                               transformation. We are currently constructing Fort
                                               Lauderdale (LPD 28), Richard M. McCool Jr. (LPD 29), and
                                               Harrisburg (LPD 30). In 2020 we were awarded a contract
                                               to construct Pittsburgh (LPD 31).

Unmanned systems                               Our unmanned systems products and services create
                                               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.


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Virginia class (SSN 774) fast attack           Construct attack submarines as the principal
submarines                                     subcontractor to Electric 

Boat. The Virginia class (SSN

                                               774) is a post-Cold War 

design tailored to excel in a

                                               wide range of warfighting missions, including
                                               anti-submarine and surface ship warfare; special
                                               operation forces; strike;

intelligence, surveillance,

                                               and reconnaissance; carrier and expeditionary strike
                                               group support; and mine warfare.



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