Huntington Ingalls Industries HII · USD

SEGMENT INFORMATIONThe Company is organized into three operating segments, which are also its reportable segments: Ingalls, Newport News, and Mission Technologies, consistent with HII’s principal lines of business. Ingalls includes the Company’s non-nuclear ship design, construction, repair, and maintenance businesses. Newport News includes all of the Company’s nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. The Mission Technologies segment provides a wide range of services and products, including command, control, computers, communications, cyber, intelligence, surveillance, and reconnaissance systems and operations; the application of artificial intelligence and machine learning to battlefield decisions; defense and offensive cyberspace strategies and electronic warfare; unmanned autonomous systems; live, virtual, and constructive training solutions; platform modernization; and critical nuclear operations.The Company’s operations are managed by senior executives reporting to the Company’s President and Chief Executive Officer, the chief operating decision maker, who regularly reviews the reportable segments’ operating results to assess performance and allocate resources. The Company internally manages 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 contract performance. In evaluating operating performance, the chief operating decision maker looks primarily at changes in sales and service revenues, as well as segment operating income. This approach is consistent with the long-term life cycle of the Company’s 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.The Operating FAS/CAS Adjustment represents the difference between the service cost component of the Company's pension and other postretirement benefit plan expense determined in accordance with GAAP ("FAS") and the Company's pension and other postretirement expense under CAS.U.S. Government Sales - Revenues from the U.S. Government include revenues from contracts for which HII is the prime contractor, as well as contracts for which the Company is a subcontractor and the ultimate customer is the U.S. Government. The Company derived substantially all of its revenues from the U.S.

REVENUEThe following is a description of principal activities from which the Company generates its revenues. For more detailed information regarding reportable segments, see Note 8: Segment Information. For more detailed information regarding the Company's accounting policy for revenue, see Note 2: Summary of Significant Accounting Policies.U.S. Government ContractsThe Ingalls and Newport News segments generate revenue primarily from performance under multi-year contracts with the U.S. Government, generally the U.S. Navy and U.S. Coast Guard, or prime contractors to contracts with the U.S. Government, relating to the advance planning, design, construction, repair, maintenance, refueling, overhaul, or inactivation of nuclear-powered ships and non-nuclear ships. The period over which the Company performs may extend past five years. The Mission Technologies segment also generates the majority of its revenue from contracts with the U.S. Government, including U.S. Government agencies. The Company generally invoices and receives related payments based upon performance progress no less frequently than monthly.Shipbuilding - For most of the Company's shipbuilding contracts, the customer contracts with the Company to provide a comprehensive service of designing, procuring long-lead-time materials, manufacturing, and integrating complex equipment and technologies into a single ship or project, often resulting in a single performance obligation. Contract modifications to account for changes in specifications and requirements are recognized when approved by the customer. In the majority of circumstances, modifications do not result in additional performance obligations that are distinct from the existing performance obligations in the contract, and the effects of the modifications are recognized as an adjustment to revenue on a cumulative catch-up basis. Alternatively, in instances in which the performance obligations in the modifications are deemed distinct, contract modifications are accounted for prospectively.The Company’s multi-year shipbuilding contracts with the U.S. Government are routinely modified as the result of unpriced change orders arising in the ordinary course of business. These anticipated changes are accounted for as contract modifications when the scope of the work has been approved and it is probable that the price will be approved.

COMMITMENTS AND CONTINGENCIESContract Performance Contingencies - Contract profit margins may include estimates of revenues for matters on which the customer and the Company have not reached agreement, such as settlements in the process of negotiation, contract changes, claims, and requests for equitable adjustment for unanticipated contract costs. These estimates are based upon management's best assessment of the underlying causal events and circumstances and recognized to the extent of expected recovery based upon contractual entitlements and the probability of successful negotiation with the customer. The Company believes its outstanding customer settlements will be resolved without material impact to its financial position, results of operations, or cash flows.Environmental Matters - The estimated costs to complete environmental remediation are accrued when it is probable that the Company will incur such costs in the future to address environmental conditions at currently or formerly owned or leased operating facilities, or at sites where it has been named a Potentially Responsible Party by the Environmental Protection Agency or similarly designated by another environmental agency, and the related costs can be reasonably estimated by management. When only a range of costs is established and no amount within the range is more probable than another, the minimum amount in the range is accrued. Environmental liabilities are recorded on an undiscounted basis and are expensed or capitalized as appropriate. Capitalized expenditures, if any, relate to long-lived improvements in currently operating facilities. The Company does not record insurance recoveries before collection is probable. As of December 31, 2025 and 2024, the Company did not have any accrued receivables related to insurance reimbursements or recoveries for environmental matters.The Company’s environmental liability accruals do not include any litigation costs related to environmental matters, nor do they include amounts recorded as asset retirement obligations. Management estimates that as of December 31, 2025, the probable estimable future cost for environmental remediation is not material.

DEBTThe Company's long-term debt consisted of the following:December 31($ in millions)20252024Senior notes due May 1, 2025, 3.844%$— $500 Senior notes due December 1, 2027, 3.483%600 600 Senior notes due August 16, 2028, 2.043%600 600 Senior notes due January 15, 2030, 5.353%500 500 Senior notes due May 1, 2030, 4.200%500 500 Senior notes due January 15, 2035, 5.749%500 500 Gulf opportunity zone industrial development revenue bonds due December 1, 2028, 4.55%21 21 Finance lease obligations— 9 Less unamortized debt issuance costs(21)(27)Total long-term debt$2,700 $3,203 Less current portion— 503 Long-term debt, net of current portion$2,700 $2,700 Debt Facilities - In September 2024, the Company amended its existing $1.5 billion credit facility, increasing the capacity thereunder to $1.7 billion and extending the maturity date for five years from signing (the "Second Amended and Restated Revolving Credit Facility"). The Second Amended and Restated Revolving Credit Facility has a variable interest rate on outstanding borrowings based on the Secured Overnight Financing Rate ("SOFR") plus an interest spread, currently 1.475% based upon the Company's credit rating, which may vary between 1.225% and 2.100%. The commitment fee rate on the Second Amended and Restated Revolving Credit Facility as of December 31, 2025, was 0.200% and may vary between 0.125% and 0.300%. The Second Amended and Restated Revolving Credit Facility includes a letter of credit sub-facility of $300 million. As of December 31, 2025, the Company had $11 million in issued but undrawn letters of credit and $1,689 million unutilized under the Second Amended and Restated Revolving Credit Facility. The Company had unamortized debt issuance costs associated with its debt facilities of $8 million and $10 million as of December 31, 2025 and 2024, respectively. The Second Amended and Restated Revolving Credit Facility contains customary affirmative and negative covenants and events of default, as well as a financial covenant based on a maximum total leverage ratio.In September 2024, the Company's borrowing capacity under its unsecured commercial paper note program increased from $1 billion to $1.7 billion. As of December 31, 2025, the Company had no outstanding debt under the commercial paper program. Senior Notes - In May 2025, the Company repaid $500 million aggregate principal amount of its 3.844% senior notes upon their maturity.

INCOME TAXESTax Reform - Public Law 119-21 (the "Act"), signed into law on July 4, 2025, provides for significant changes to the U.S. federal income tax law that impacts corporations, including making certain business deductions permanent, such as bonus depreciation, immediate expensing of domestic research and development ("R&D") expenditures, and providing an election to accelerate the deduction for the remaining unamortized domestic R&D expenditures capitalized during the 2022 through 2024 tax years. These unamortized expenditures can be deducted over one or two years. The Act contains other provisions that are not expected to have a material impact on the Company's consolidated financial position, results of operations, or cash flows.The Company’s financial statements as of December 31, 2025 include the impact of the following significant items:Domestic R&D expenditures: The Company recorded a current tax benefit of $115 million based on its intent to expense all current year domestic R&D expenditures and to accelerate the deduction for the remaining unamortized domestic R&D expenditures capitalized during the 2022 through 2024 tax years over a two-year period. This resulted in an increase of approximately $115 million to the Company’s current income taxes receivable and a corresponding increase in its net deferred tax liability.Bonus Depreciation: While the Company has not completed its analysis of all capital expenditures that may qualify for immediate expensing, the Company recorded an estimated current tax benefit of $16 million based on its intent to fully expense all qualified property acquired and placed into service after January 19, 2025. This resulted in an increase of approximately $16 million to the Company’s current income taxes receivable and a corresponding increase in its net deferred tax liability.The Company's earnings are primarily domestic, and its effective tax rate on earnings from operations for the year ended December 31, 2025, was 22.1%, compared with 14.5% and 20.2% for 2024 and 2023, respectively. For the year ended December 31, 2025, the Company's effective tax rate differed from the statutory federal corporate income tax rate primarily as a result of a decrease in the estimated R&D tax credits for the prior period. For the years ended December 31, 2024 and 2023, the Company's effective tax rate differed from the statutory federal corporate income tax rate primarily as a result of R&D tax credits.

Returns for the 2016, 2018, 2019, 2021, and 2022 tax years were filed under the Compliance Assurance Process ("CAP") program and accepted by the Internal Revenue Service ("IRS") with the exception of the R&D tax credit. The 2017 tax year was also filed under the CAP program and was accepted by the IRS with the exception of the manufacturing deduction and the R&D tax credit. The 2023 tax year was filed under the CAP program and accepted by the IRS with the exception of the R&D tax credit and capitalized R&D expenses. The statute of limitations for the 2020 and 2021 tax years has been extended to June 30, 2027.

LEASESThe Company leases certain land, warehouses, office space, and production, office, and technology equipment, among other items. Most equipment is leased on a short-term basis. Many land, warehouse, and office space leases include renewal terms that can extend the lease term. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements is generally limited by the expected lease term. The Company's lease agreements do not generally contain material residual value guarantees, material restrictive covenants, or purchase options. The Company's lease portfolio consists primarily of operating leases and an immaterial finance lease included in the consolidated financial statements. See Note 2: Summary of Significant Accounting Policies and Note 13: Debt.The following table presents costs and other information related to the Company's leases:Year Ended December 31($ in millions)202520242023Operating lease costs$72 $72 $67 Short-term operating lease costs$61 $57 $54 Variable operating lease costs$5 $5 $7 Operating cash flows from operating leases$(73)$(70)$(66)Right-of-use assets obtained in exchange for new operating lease liabilities$91 $41 $80 Weighted-average remaining lease term (years) - operating leases8 years8 years9 yearsWeighted-average discount rate - operating leases5.4 %5.2 %5.

ACQUISITIONSIn January 2025, the Company acquired substantially all of the assets of W International SC, LLC and Vivid Empire SC, LLC (collectively “W International”), a South Carolina-based complex metal fabricator specializing in the manufacture of shipbuilding structures, modules, and assemblies, for a purchase price of $132 million. The acquired manufacturing facility expands the Company’s shipbuilding capacity and operates within the Newport News segment. The transaction closed using cash on hand and qualifies as a business combination under FASB Accounting Standards Codification ("ASC") Topic 805 – "Business Combinations."The Company recognized $32 million of goodwill, which includes expected synergies and the value of W International’s acquired workforce, all of which was allocated to the Newport News segment and is tax deductible. There have been no other changes to the Company's goodwill since December 31, 2024. See Note 11: Goodwill and Other Intangible Assets.The assets, liabilities, and results of operations of W International are not material to the Company’s consolidated financial position, results of operations, or cash flows.