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HUNTINGTON INGALLS INDUSTRIES: Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-Q)

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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
41,000 people both domestically and internationally.
We conduct most of our business with the U.S. Government, primarily the 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.

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, and recurring facility cleaning.
Our shipyards and other facilities remained open and productive, but we
experienced temporary decreases in workforce attendance, which impacted our
operations due to delay and disruption from a shortage of critical skills and
out-of-sequence work. As of June 30, 2021, our workforce was operating at normal
attendance rates.

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. We
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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.
Although we 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.

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 markup process for fiscal year 2022 began following release of
the President's Budget Request in May 2021. The budget request continued
recapitalization of the nation's strategic ballistic missile submarine fleet and
supported funding for Enterprise (CVN 80) and Doris Miller (CVN 81), two
Virginia class (SSN 774) submarines, one Arleigh Burke (DDG 51) class destroyer,
and LHA 9 (unnamed). While a bundled procurement of LHA 9 (unnamed), LPD 32
(unnamed) and LPD 33 (unnamed) was authorized and appropriated by fiscal year
2021 legislation, the President's fiscal year 2022 budget request did not
include funding to enable a bundled award. The DoD included a second Arleigh
Burke (DDG 51) class destroyer in its fiscal year 2022 unfunded priority list,
which was submitted to the Congress shortly after the release of the budget
request.

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 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.

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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 benefit plans; and

• Workers’ compensation.

From June 30, 2021, no material changes have been made to the aforementioned 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. See Note 2:
Basis of Presentation.

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 contracts with the U.S. Government.

Our contracts generally fall into one of four categories: Firm Fixed Price, Fixed Price Incentive Price, Cost Type, Time and Materials. See Note 7: Income.

•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 hour of direct labor spent and reimbursement of eligible 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
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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.

Description of the program

For convenience, a brief description of some of the programs discussed in this Quarterly Report on Form 10-Q is included in the “Program Glossary” in this section.

CONSOLIDATED OPERATING RESULTS

The following table presents some financial highlights:

                                                Three Months Ended                                                                Six Months Ended
                                                      June 30                               2021 over 2020                             June 30                             2021 over 2020
($ in millions)                                2021                2020              Dollars               Percent              2021              2020              Dollars               Percent
Sales and service revenues               $    2,231             $ 2,027          $         204                  10  %       $   4,509          $ 4,290          $         219                   5  %
Cost of product sales and service
revenues                                      1,909               1,763                    146                   8  %           3,845            3,603                    242                   7  %
Income from operating investments,
net                                              12                   7                      5                  71  %              20               13                      7                  54  %
Other income and gains                           (2)                  -                     (2)                  -  %               1                -                      1                   -  %
General and administrative
expenses                                        204                 214                    (10)                 (5) %             410              428                    (18)                 (4) %

Operating income                                128                  57                     71                 125  %             275              272                      3                   1  %
Other income (expense)
Interest expense                                (18)                (25)                     7                  28  %             (39)             (41)                     2                   5  %
Non-operating retirement benefit                 44                  30                     14                  47  %              90               60                     30                  50  %
Other, net                                        7                   3                      4                 133  %               8              (10)                    18                 180  %
Federal and foreign income taxes                 32                  12                     20                 167  %              57               56                      1                   2  %
Net earnings                             $      129             $    53          $          76                 143  %       $     277          $   225          $          52                  23  %


Operational 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,
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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 break down as follows:

                                       Three Months Ended                                                                Six Months Ended
                                             June 30                               2021 over 2020                             June 30                             2021 over 2020
($ in millions)                       2021                2020              Dollars               Percent              2021              2020          
   Dollars               Percent
Product sales                   $    1,763             $ 1,420          $         343                  24  %       $   3,484          $ 3,044          $         440                  14  %
Service revenues                       468                 607                   (139)                (23) %           1,025            1,246                   (221)                (18) %
Sales and service
revenues                        $    2,231             $ 2,027          $         204                  10  %       $   4,509          $ 4,290          $         219                   5  %



Product sales for the three months ended June 30, 2021, increased $343 million,
or 24%, compared with the same period in 2020. Product sales for the six months
ended June 30, 2021, increased $440 million, or 14%, compared with the same
period in 2020. Ingalls product sales increased $60 million and $86 million for
the three and six months ended June 30, 2021, respectively, primarily as a
result of higher volumes in surface combatants and amphibious assault ships,
partially offset by lower volume in the Legend class NSC program. Newport News
product sales increased $285 million for the three months ended June 30, 2021,
primarily as a result of higher volumes in submarines and aircraft carriers.
Newport News product sales increased $340 million for the six months ended June
30, 2021, primarily as a result of higher volumes in aircraft carriers and
submarines. Technical Solutions product sales decreased $2 million for the three
months ended June 30, 2021, primarily as a result of lower volume in unmanned
systems, partially offset by higher volumes in DFS. Technical Solutions product
sales increased $14 million for the six months ended June 30, 2021, primarily as
a result of higher volumes in DFS and unmanned systems.

Service revenues for the three months ended June 30, 2021, decreased $139
million, or 23%, compared with the same period in 2020. Service revenues for the
six months ended June 30, 2021, decreased $221 million, or 18%, compared with
the same period in 2020. Ingalls service revenues decreased $16 million and $24
million for the three and six months ended June 30, 2021, respectively,
primarily as a result of lower volumes in surface combatant and amphibious
assault ship services. Newport News service revenues decreased $46 million for
the three months ended June 30, 2021, primarily as a result of lower volumes in
submarine and naval nuclear support services. Newport News service revenues
decreased $35 million for the six months ended June 30, 2021, primarily as a
result of lower volumes in submarine and naval nuclear support services,
partially offset by higher volumes in aircraft carrier services. Technical
Solutions service revenues decreased $77 million for the three months ended June
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. Technical Solutions service revenues
decreased $162 million for the six months ended June 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, as well as lower volumes in DFS services.

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Cost of Sales and Service Revenues

The cost of sales of products, the cost of income from services, income from operating investments, net expenses and general and administrative expenses are as follows:

                                          Three Months Ended                                                             Six Months Ended
                                                June 30                             2021 over 2020                            June 30                            2021 over 2020
($ in millions)                          2021              2020              Dollars               Percent             2021             2020              Dollars               Percent
Cost of product sales                $   1,495          $ 1,253          $         242                  19  %       $ 2,949          $ 2,543          $         406                  16  %
% of product sales                        84.8  %          88.2  %                                                     84.6  %          83.5  %
Cost of service revenues                   414              510                    (96)                (19) %           896            1,060                   (164)                (15) %
% of service revenues                     88.5  %          84.0  %                                                     87.4  %          85.1  %
Income from operating
investments, net                            12                7                      5                  71  %            20               13                      7                  54  %
Other income and gains                      (2)               -                     (2)                  -  %             1                -                      1                   -  %
General and administrative
expenses                                   204              214                    (10)                 (5) %           410              428                    (18)                 (4) %
% of sales and service
revenues                                   9.1  %          10.6  %                                                      9.1  %          10.0  %

Cost of sales and service
revenues                             $   2,103          $ 1,970          $         133                   7  %       $ 4,234          $ 4,018          $         216                   5  %



Cost of Product Sales

Cost of product sales for the three months ended June 30, 2021, increased $242
million, or 19%, compared with the same period in 2020. Cost of product sales
for the six months ended June 30, 2021, increased $406 million, or 16%, compared
with the same period in 2020. Ingalls cost of product sales increased $29
million for the three months ended June 30, 2021, primarily as a result of the
higher volumes described above, partially offset by higher risk retirement on
the San Antonio class (LPD 17) program. Ingalls cost of product sales increased
$30 million for the six months ended June 30, 2021, primarily as a result of the
higher volumes described above, partially offset by higher risk retirement on
Bougainville (LHA 8) and the San Antonio class (LPD 17) program. Newport News
cost of product sales increased $129 million and $193 million for the three and
six months ended June 30, 2021, respectively, primarily as a result of volume
increases described above. Technical Solutions cost of product sales increased
$2 million for the three months ended June 30, 2021, primarily as a result of
the volume increases in DFS, partially offset by lower volume in unmanned
systems and year-to-year variances in contract mix. Technical Solutions cost of
product sales increased $17 million for the six months ended June 30, 2021,
primarily as a result of the volume increases described above. Cost of product
sales related to the Operating FAS/CAS Adjustment increased $82 million and $166
million for the three and six months ended June 30, 2021, respectively, as
described below.

Cost of product sales as a percentage of product sales decreased from 88.2% for
the three months ended June 30, 2020, to 84.8% for the three months ended June
30, 2021. The decrease was primarily due to impacts related to performance on
the Block IV boats of the Virginia class (SSN 774) submarine program and delay
and disruption from discrete COVID-19 Events in 2020, higher risk retirement on
the San Antonio class (LPD 17) program, and a contract incentive on Jack H.
Lucas (DDG 125), partially offset by an unfavorable change in the Operating
FAS/CAS Adjustment and lower risk retirement on USS Delbert D. Black (DDG 119)
following its delivery. Cost of product sales as a percentage of product sales
increased from 83.5% for the six months ended June 30, 2020, to 84.6% for the
six months ended June 30, 2021. The increase was due to impacts related to
performance on the Block IV boats of the Virginia class (SSN 774) submarine
program and delay and disruption from discrete COVID-19 Events in 2020, an
unfavorable change in the Operating FAS/CAS Adjustment, and higher risk
retirement on Bougainville (LHA 8) and the San Antonio class (LPD 17) program.

Cost of service revenues

Cost of service revenues for the three months ended June 30, 2021, decreased $96
million, or 19%, compared with the same period in 2020. Cost of service revenues
for the six months ended June 30, 2021, decreased $164 million, or 15%, compared
with the same period in 2020. Ingalls cost of service revenues decreased $12
million and $19 million for the three and six months ended June 30, 2021,
respectively, primarily as a result of lower volumes described above. Newport
News cost of service revenues decreased $24 million and $10 million for the
three and
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six months ended June 30, 2021, respectively, due to lower volumes described
above. Technical Solutions cost of service revenues decreased $78 million and
$172 million for the three and six months ended June 30, 2021, respectively,
primarily as a result of the divestiture of our oil and gas business and
contribution of our San Diego Shipyard to a joint venture, lower volumes in
nuclear and environmental services, and year-to-year variances in contract mix.
Cost of service revenues related to the Operating FAS/CAS Adjustment increased
$18 million and $37 million for the three and six months ended June 30, 2021,
respectively, as described below.

Cost of service revenues as a percentage of service revenues increased from
84.0% for the three months ended June 30, 2020, to 88.5% for the three months
ended June 30, 2021, primarily driven by an unfavorable change in the Operating
FAS/CAS Adjustment, partially offset by improved performance on DFS services and
year-to-year variances in contract mix. Cost of service revenues as a percentage
of service revenues increased from 85.1% for the six months ended June 30, 2020,
to 87.4% for the six months ended June 30, 2021, primarily driven by an
unfavorable change in the Operating FAS/CAS Adjustment, partially offset by
improved performance on DFS and nuclear and environmental 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 recognize in our operating income the income related to the results of investments accounted for by the equity method.

Income from operating investments, net for the three and six months ended June
30, 2021, increased $5 million and $7 million, respectively, from the same
periods in 2020, primarily due to higher equity income from our ship repair and
specialty fabrication joint venture and nuclear and environmental joint
ventures.

Other income and earnings

For the three months ended June 30, 2021, we recognized a loss of $2 million,
primarily due to final purchase price adjustment to a gain on the sale of our
oil and gas business. For the six months ended June 30, 2021, we recognized a
gain of $1 million, primarily due to the sale of our oil and gas business.

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,
2021, decreased $10 million and $18 million, respectively, from the same periods
in 2020, primarily driven by favorable changes in current state income tax
expense and lower overhead costs.

Operating result

We consider operating profit to be an important metric in evaluating our operating performance and, in accordance with industry practice, we define operating profit as revenues less cost of production revenues and overheads and administrative.

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.

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The following table reconciles operating income to segment operating income:
                                           Three Months Ended                                                               Six Months Ended
                                                June 30                             2021 over 2020                              June 30                               2021 over 2020
($ in millions)                           2021              2020             Dollars               Percent                2021                2020             Dollars               Percent
Operating income                      $      128          $  57          $          71                 125  %       $     275               $ 272          $           3                   1  %
Operating FAS/CAS Adjustment                  37            (63)                   100                 159  %              77                (126)                   203                 161  %
Non-current state income taxes                 4              1                      3                 300  %               8                   5                      3                  60  %
Segment operating income              $      169          $  (5)         $         174               3,480  %       $     360               $ 151          $         209                 138  %



Segment Operating Income

Segment operating income for the three months ended June 30, 2021, was $169
million, compared with a segment operating loss of $5 million for the same
period in 2020. The increase was primarily due to impacts related to performance
on the 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), higher risk retirement on Richard M. McCool Jr. (LPD
29) and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on
USS Delbert D. Black (DDG 119) following its delivery. Segment operating income
for the six months ended June 30, 2021, was $360 million, compared with segment
operating income of $151 million for the same period in 2020. The increase was
primarily due to impacts related to performance on the Block IV boats of the
Virginia class (SSN 774) submarine program and delay and disruption from
discrete COVID-19 Events in 2020, higher risk retirement on Bougainville (LHA
8), a contract incentive on Jack H. Lucas (DDG 125), and higher risk retirement
on Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS
Delbert D. Black (DDG 119) following its delivery.

The activity within each segment is described in the segment operating results below.

FAS / CAS adjustment and operation 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 used to determine CAS retirement costs. Under the new methodology, the interest rates used to calculate the retirement liabilities under the CAS are consistent with those used to determine the minimum funding requirements under the Retirement Income Security Act 1974 of employees (“ERISA”).

The components of the operational SAF / CAS adjustment were as follows:

                                            Three Months Ended                                                              Six Months Ended
                                                 June 30                            2021 over 2020                              June 30                              2021 over 2020
($ in millions)                            2021              2020             Dollars              Percent                2021                2020             Dollars              Percent
FAS expense                            $       (7)         $ (18)         $         11                  61  %       $     (14)              $ (35)         $         21                  60  %
CAS cost                                       14            111                   (97)                (87) %              27                 221                  (194)                (88) %
FAS/CAS Adjustment                              7             93                   (86)                (92) %              13                 186                  (173)                (93) %
Non-operating retirement benefit              (44)           (30)                  (14)                (47) %             (90)                (60)                  (30)                (50) %
Operating FAS/CAS Adjustment           $      (37)         $  63          $       (100)               (159) %       $     (77)              $ 126          $       (203)               (161) %



The Operating FAS/CAS Adjustment was a net expense of $37 million and a net
benefit of $63 million for the three months ended June 30, 2021 and 2020,
respectively. The Operating FAS/CAS Adjustment was a net expense of $77 million
and a net benefit of $126 million for the six months ended June 30, 2021 and
2020, respectively. The unfavorable changes in the Operating FAS/CAS Adjustment
of $100 million and $203 million for the three and six
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Table of contents months ended June 30, 2021, respectively, were primarily motivated by the more immediate recognition of higher interest rates under the 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 June 30, 2021,
was $4 million, compared to non-current state income tax expense of $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
attributable to a decrease in expenses not currently deductible for income tax
purposes. Non-current state income tax expense for the six months ended June 30,
2021, was $8 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 six months ended June 30, 2021, decreased $7
million and $2 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.

Non-operating pension 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,
2021, the favorable changes in the non-operating retirement benefit of $14
million and $30 million, respectively, were primarily driven by higher 2020
returns on plan assets.

Other, net

Other, net income increased $4 million for the three months ended June 30, 2021,
compared with the same period in 2020, primarily driven by an impairment of a
loan receivable in 2020, partially offset by a decrease in gains on investments
in marketable securities. Other, net income increased $18 million for the six
months ended June 30, 2021, compared with the same period in 2020, primarily
driven by gains on investments in marketable securities and an impairment of a
loan receivable in the second quarter of 2020.

Federal and foreign income taxes

Our effective income tax rates on earnings from operations for the three months
ended June 30, 2021 and 2020, were 19.9% and 18.5%, respectively. Our effective
income tax rates on earnings from operations for the six months ended June 30,
2021 and 2020, were 17.1% and 19.9%, respectively. The higher effective tax rate
for the three months ended June 30, 2021, was primarily attributable to research
and development tax credits for prior periods recorded in 2020. The lower
effective tax rate for the six months ended June 30, 2021, was primarily
attributable to a tax loss associated with the sale of our oil and gas business.

For the three months ended June 30, 2021, our effective tax rate differed from
the federal statutory tax rate primarily as a result of the research and
development tax credit. For the six months ended June 30, 2021, our effective
tax rate differed from the federal statutory tax rate primarily as a result of
the tax loss associated with the sale of our oil and gas business. For the three
and six months ended June 30, 2020, our effective tax rates differed from the
federal statutory tax rate primarily as a result of 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 with three reportable segments: Ingalls, Newport News, and technical solutions.

The following table presents the segment operating results:

                                           Three Months Ended                                                                Six Months Ended
                                                 June 30                               2021 over 2020                             June 30                             2021 over 2020
($ in millions)                           2021                2020         
    Dollars               Percent              2021              2020      
       Dollars               Percent
Sales and Service Revenues
Ingalls                             $      670             $   622          $          48                   8  %       $   1,319          $ 1,251          $          68                   5  %
Newport News                             1,363               1,122                    241                  21  %           2,770            2,463                    307                  12  %
Technical Solutions                        237                 320                    (83)                (26) %             496              637                   (141)                (22) %
Intersegment eliminations                  (39)                (37)                    (2)                 (5) %             (76)             (61)                   (15)                (25) %
Sales and service revenues          $    2,231             $ 2,027          $         204                  10  %       $   4,509          $ 4,290          $         219                   5  %
Operating Income
Ingalls                             $       80             $    55          $          25                  45  %       $     171          $   123          $          48                  39  %
Newport News                                76                 (69)                   145                 210  %             169               26                    143                 550  %
Technical Solutions                         13                   9                      4                  44  %              20                2                     18                 900  %
Segment operating income
(loss)                                     169                  (5)                   174               3,480  %             360              151                    209                 138  %
Non-segment factors affecting
operating income (loss)
Operating FAS/CAS Adjustment               (37)                 63                   (100)               (159) %             (77)             126                   (203)               (161) %
Non-current state income
taxes                                       (4)                 (1)                    (3)               (300) %              (8)              (5)                    (3)                (60) %
Operating income                    $      128             $    57          $          71                 125  %       $     275          $   272          $           3                   1  %


FINANCIAL MEASURES BY KEY SECTOR

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 profit (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 six months ended June 30, 2021 and 2020, the cumulative positive and negative catch-up margin adjustments are as follows:

                                         Three Months Ended                Six Months Ended
                                              June 30                          June 30
($ in millions)                           2021             2020            2021            2020
Gross favorable adjustments        $     62              $   56      $     148            $ 117
Gross unfavorable adjustments           (27)               (167)           (63)            (196)
Net adjustments                    $     35              $ (111)     $      85            $ (79)


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

For the six months ended June 30, 2021, favorable cumulative 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.

For the three months ended June 30, 2020, favorable cumulative catch-up
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 adjustments were primarily driven by $111
million 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, shortage of
critical skills, and out-of-sequence work. Unfavorable cumulative catch-up
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.

For the six months ended June 30, 2020, favorable cumulative catch-up
adjustments included risk retirement on USS Delbert D. Black (DDG 119) in
connection with its delivery and a capital expenditure contract incentive, and
risk retirement on the San Antonio class (LPD 17) program. During the same
period, unfavorable cumulative catch-up adjustments were primarily driven by the
Block IV boats of the Virginia class (SSN 774) submarine program and delay and
disruption from discrete COVID-19 Events, discussed above for the three months
ended June 30, 2020.

Ingalls
                                           Three Months Ended                                                             Six Months Ended
                                                June 30                              2021 over 2020                            June 30                           2021 over 2020
($ in millions)                         2021                  2020             Dollars              Percent             2021             2020              Dollars              Percent
Sales and service revenues          $    670                $ 622          $         48                   8  %       $ 1,319          $ 1,251          $         68                   5  %
Segment operating income                  80                   55                    25                  45  %           171              123                    48                  39  %
As a percentage of segment
sales                                   11.9   %              8.8  %                                                    13.0  %           9.8  %



Sales and Service Revenues

Ingalls revenue for the quarter ended June 30, 2021, increases $ 48 million, or 8%, compared to the same period in 2020, mainly due to higher revenues from surface combatants and amphibious assault ships, partially offset by lower revenues from the Legend-class NSC program. Surface fighters’ income increased due to higher volumes

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on Jack H. Lucas (DDG 125), Jeremiah Denton (DDG 129) and Ted Stevens (DDG 128),
partially offset by lower volumes on USS Delbert D. Black (DDG 119) following
its delivery and USS Fitzgerald (DDG 62) restoration and modernization 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 volume on Fort Lauderdale (LPD 28). Revenues on the Legend class
NSC program decreased due to lower volumes on Stone (NSC 9) following its
delivery and Calhoun (NSC 10).

Ingalls revenues for the six months ended June 30, 2021, increased $68 million,
or 5%, 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 Jack H. Lucas (DDG 125), Jeremiah Denton (DDG 129), and
George M. Neal (DDG 131), partially offset by lower volumes on USS Fitzgerald
(DDG 62) restoration and modernization following its redelivery and USS Delbert
D. Black (DDG 119) following its delivery. Amphibious assault ship revenues
increased due to higher volumes on Pittsburgh (LPD 31), Bougainville (LHA 8),
and LHA 9 (unnamed), partially offset by lower volumes on Fort Lauderdale (LPD
28) and Richard M. McCool Jr. (LPD 29). Revenues on the Legend class NSC program
decreased due to lower volumes on Stone (NSC 9) following its delivery and
Calhoun (NSC 10).

Segment operating profit

Ingalls segment operating income for the three months ended June 30, 2021, was
$80 million, compared with $55 million for the same period in 2020. The increase
was primarily driven by a contract incentive on Jack H. Lucas (DDG 125), and
higher risk retirement on Bougainville (LHA 8), Richard M. McCool Jr. (LPD 29),
and Fort Lauderdale (LPD 28), partially offset by lower risk retirement on USS
Delbert D. Black (DDG 119) following its delivery.

Ingalls segment operating income for the six months ended June 30, 2021, was
$171 million, compared with $123 million for the same period in 2020. The
increase was primarily driven by higher risk retirement on Bougainville (LHA 8),
a contract incentive on Jack H. Lucas (DDG 125), and higher risk retirement on
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                                                             Six Months Ended
                                               June 30                             2021 over 2020                            June 30                            2021 over 2020
($ in millions)                         2021              2020              Dollars               Percent             2021             2020              Dollars               Percent

Sales and service turnover $ 1,363 $ 1,122 $

      241                  21  %       $ 2,770          $ 2,463          $         307                  12  %
Segment operating income
(loss)                                     76              (69)                   145                 210  %           169               26                    143                 550  %
As a percentage of segment
sales                                     5.6  %          (6.1) %                                                      6.1  %           1.1  %



Sales and Service Revenues

Newport News revenues for the three months ended June 30, 2021, increased $241
million, or 21%, from the same period in 2020, primarily driven by higher
revenues in submarines and aircraft carriers. Submarine revenues increased
primarily as a result of higher volumes on Block IV and Block V boats of the
Virginia class (SSN 774) submarine program and the Columbia class submarine
program. Aircraft carrier revenues increased primarily as a result of higher
volumes on Enterprise (CVN 80), the RCOH of USS John C. Stennis (CVN 74), and
Doris Miller (CVN 81), partially offset by lower volumes on John F. Kennedy (CVN
79) and the RCOH of USS George Washington (CVN 73).

Newport News revenues for the six months ended June 30, 2021, increased $307
million, or 12%, from the same period in 2020, primarily driven by higher
revenues in submarines and aircraft carriers. Submarine revenues increased
primarily as a result of higher volumes on the Columbia class submarine program
and the Virginia class (SSN 774) submarine program. The higher volume on the
Virginia class (SSN 774) and the Columbia class submarine program was due to
higher volumes on Block IV and Block V boats. Aircraft carrier revenues
increased primarily as a result of higher volumes on Enterprise (CVN 80), the
RCOH of USS John C. Stennis (CVN 74), and Doris Miller (CVN 81), partially
offset by lower volumes on John F. Kennedy (CVN 79) and the RCOH of USS George
Washington (CVN 73).
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Segment operating profit

Newport News segment operating income for the three months ended June 30, 2021,
was $76 million, compared with a segment operating loss of $69 million for the
same period in 2020. The increase was primarily due to impacts related to
performance on the Block IV boats of the Virginia class (SSN 774) submarine
program and delay and disruption from discrete COVID-19 Events in 2020.

Newport News segment operating income for the six months ended June 30, 2021,
was $169 million, compared with segment operating income of $26 million for the
same period in 2020. The increase was primarily due to impacts related to
performance on the 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                                                              Six Months Ended
                                                June 30                               2021 over 2020                            June 30                           2021 over 2020
($ in millions)                         2021                  2020             Dollars               Percent              2021             2020             Dollars              Percent
Sales and service revenues          $    237                $ 320          $         (83)                (26) %       $    496           $ 637          $       (141)                (22) %
Segment operating income                  13                    9                      4                  44  %             20               2                    18                 900  %
As a percentage of segment
sales                                    5.5   %              2.8  %                                                       4.0   %         0.3  %



Sales and Service Revenues

Technical Solutions revenue for the quarter ended June 30, 2021, decreases
$ 83 million, or 26%, compared to the same period in 2020, mainly due to the divestiture of our oil and gas activities and the contribution of our San Diego Shipyard to a joint venture, as well as lower volumes in unmanned systems, partially offset by increased volumes in DFS.

Technical Solutions revenues for the six months ended June 30, 2021, decreased
$141 million, or 22%, 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 the acquisition of Hydroid in
March 2020 and higher volumes in DFS.

Segment operating income

Technical Solutions segment operating income for the three months ended June 30,
2021, was $13 million, compared with segment operating income of $9 million for
the same period in 2020. The increase was primarily driven by higher equity
income in our ship repair and specialty fabrication joint venture and improved
performance on DFS services and nuclear and environmental services, partially
offset by lower volume in unmanned systems.

Technical Solutions segment operating income for the six months ended June 30,
2021, was $20 million, compared with segment operating income of $2 million for
the same period in 2020. The increase was primarily driven by higher equity
income in our ship repair and specialty fabrication joint venture and improved
performance in DFS services and nuclear and environmental services, partially
offset by lower volume in unmanned systems.
BACKLOG

Total backlog as of June 30, 2021, and December 31, 2020, was approximately
$47.7 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 June
30, 2021, and December 31, 2020:
                                     June 30, 2021                          

December 31, 2020

                                                       Total                                     Total
($ in millions)            Funded       Unfunded      Backlog        Funded       Unfunded      Backlog
Ingalls                  $ 11,077      $    660      $ 11,737      $ 10,443      $  1,758      $ 12,201
Newport News               12,330        22,649        34,979         9,536        23,132        32,668
Technical Solutions           592           432         1,024           502           646         1,148
Total backlog            $ 23,999      $ 23,741      $ 47,740      $ 20,481      $ 25,536      $ 46,017



Approximately 16% 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 June 30, 2021, and December 31, 2020.

Awards

The value of new contract awards during the six months ended June 30, 2021, was
approximately $6.5 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) and
Thad Cochran (DDG 135).

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                2021 over
                                                                               June 30                       2020
($ in millions)                                                          2021                2020           Dollars
Net earnings                                                       $     277               $ 225          $     52
Depreciation and amortization                                            131                 121                10
Provision for doubtful accounts                                            -                   6                (6)
Stock-based compensation                                                  12                  13                (1)

Deferred income taxes                                                     31                  21                10

Loss (gain) on investments in marketable securities                      (12)                  5               (17)

Retiree benefit funding less than (in excess of) expense                 (70)                (50)              (20)

Trade working capital decrease (increase)                               (230)                (72)             (158)
Net cash provided by operating activities                          $     139               $ 269          $   (130)


Cash Flows

We discuss below our main operating, investing and financing activities affecting cash flow for the six months ended. June 30, 2021 and 2020, as classified in our condensed consolidated statements of unaudited cash flows.

Operating activities

Cash provided by operating activities for the six months ended June 30, 2021,
was $139 million, compared with $269 million provided by operating activities
for the same period in 2020. The unfavorable change in operating cash flow was
primarily due to changes in trade working capital. The change in trade working
capital was primarily driven by the timing of receipts of accounts receivable
and payments of accounts payable.
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For the six months ended June 30, 2021, we made discretionary contributions to
our qualified defined benefit pension plans totaling $60 million, compared with
$65 million of discretionary contributions for the same period in 2020. As of
June 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.

Investment activities

Cash used in investing activities for the six months ended June 30, 2021, was
$134 million, compared with $519 million used in investing activities for the
same period in 2020. The change in investing cash was driven by the acquisition
of Hydroid in 2020, disposition of our oil and gas business in 2021, and lower
capital expenditures in 2021, partially offset by the acquisition of a
non-controlling interest in Titan in 2021. For 2021, we expect our capital
expenditures for maintenance and sustainment to be approximately 1.0% of annual
revenues and our discretionary capital expenditures to be approximately 2.0 % to
3.0% of annual revenues.

Financing Activities

Cash used in financing activities for the six months ended June 30, 2021, was
$169 million, compared with $806 million provided by financing activities for
the same period in 2020. The change in financing cash was primarily due to
receipt of net proceeds from the issuance of $1 billion of long-term debt in
2020 and an $8 million increase in cash dividend payments, partially offset by a
decrease of $14 million from common stock repurchases and a decrease of $6
million in employee taxes on certain share-based payment arrangements.

Free movement of capital

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:
                                                      Six Months Ended
                                                          June 30                2021 over 2020
($ in millions)                                       2021            2020           Dollars
Net cash provided by operating activities       $     139            $ 269      $          (130)
Less capital expenditures:
Capital expenditure additions                        (134)            (150)                  16
Grant proceeds for capital expenditures                 2                9                   (7)
Free cash flow                                  $       7            $ 128      $          (121)



Free cash flow for the six months ended June 30, 2021, decreased $121 million
from the same period in 2020, primarily due to higher contributions to retiree
benefit plans and changes in trade working capital, partially offset by lower
capital expenditures.

Government regulation and oversight

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
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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 $400 million 364-day delayed draw term loan
and a $650 million 3-year delayed draw term loan to finance a portion of the
purchase price for Alion. Commitments under the 364-day facility, but not the
3-year facility, are subject to mandatory reduction upon the occurrence of
certain events specified in the term loan credit agreement, including certain
debt and equity issuances. Neither term loan requires principal amortization
payments and each must be repaid prior to or at maturity, which is 364 days and
36 months, respectively, from the date of the initial draw. Each 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%. The
current interest rate on drawn amounts would be 1.375% based on our current
credit rating. The term loans also have a commitment fee rate on unutilized
amounts, currently 0.20%, which will begin accruing on September 2, 2021.

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%. The current interest on drawn amounts would be 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 0.20%.

Off-balance sheet provisions

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, 2021, $15 million in letters of credit were issued but undrawn and $276
million of surety bonds were outstanding. As of June 30, 2021, we had no other
significant off-balance sheet arrangements.


ACCOUNTING STANDARDS UPDATES

See Note 3: Updates to accounting standards in Part I, Article 1 for information relating to updates to accounting standards.

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;
•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;
•Our ability to complete the acquisition of Alion Science and Technology and
integrate its operations into our business;
•Changes in key estimates and assumptions regarding our pension and retiree
health care costs;
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•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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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

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 

Equipped with Aegis 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 to

                                              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.

Colombia class submarines (SNLE 826) Newport News participates in the design of Colombia

                                              class submarine as a 

replacement for 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 Colombia

                                              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 for

                                              build modules for the entire 

Colombia class (SNLE 826)

                                              submarine program that 

takes advantage of our Virginia to classify

                                              (SSN 774) experience. We have 

got 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 

strict national security

                                              challenges for the DoD, the 

intelligence community, and

                                              federal civilian agencies 

around the globe. The group

                                              expertise includes 

intelligence, surveillance and

                                              reconnaissance; cyber operations; secure enterprise
                                              information technology engineering and operations;
                                              advanced modeling,

simulation and training; logistics

                                              management and maritime fleet sustainment.


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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 class (CVN 65) and Nimitz

                                               (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 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, advanced construction and

                                               purchase of long-lead time 

components and hardware. In

                                               addition, we have received 

price for detailed 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

capacity, 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 

the support of the US Navy,

                                               ranging from services 

support the Marine carrier and

                                               submarine fleets to 

maintenance services at US 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 

Triad National subcontractor

                                               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 preparation 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 of the us navy marine base

                                               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 provide

                                               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 designed 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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