No company builds more ships for the US Navy than Huntington Ingalls Industries (HII). The shipbuilder, which spun off from former parent Northrop Grumman in 2011, builds all the Navy's nuclear aircraft carriers and half its submarines in Newport News, Virginia, and this year will deliver the Gerald R. Ford (CVN 78), first of a new class of carriers. In Pascagoula, Mississippi, Ingalls Shipbuilding builds all the Navy's amphibious ships, roughly half its destroyers, and large cutters for the US Coast Guard. Newport News also handles the midlife refueling overhauls of nuclear-powered aircraft carriers.
Mike Petters, a 1982 graduate of the US Naval Academy and former submariner, oversees the activities of more than 37,000 employees, but the shipbuilding business has its up and down periods, and more than 1,000 employees were laid off recently as carrier overhaul work slowed at Newport News.
Q. Your latest earnings statement shows your first quarter revenues up 12.3 percent over the same period last year. When you spun off from Northrop Grumman in 2011, it was an open question whether HII would survive, yet you seem to be succeeding.
A. In 2011 there wasn't a long track record of great performance yet. So we basically laid it out and said "Here's what we're going to do." We did something unique in that we didn't tell anybody what we were going to do in the next quarter. We said we're going to tell you where we're going to be at the end of 2015. There's going to be some hits and misses along the way, but by and large we did that.
Q. What surprised you about these five years?
A. I think the surprise has been that the investment community has been willing to give us the room to succeed. It's not usual for a CEO to stand up and say we're going to tell you where we're going to be in five years and we're not going to tell you much about what the path looks like. Go with us on that. Some folks have come along with us and I think it's worked out for them. I think I'm most proud of the folks that come through our gate every day who've really grabbed hold of this challenge and made it the success that it is.
Q. Ingalls alone is up $117 million in revenues and operating income is up, too — 80 percent. You seemed to have turned the corner down there.
A. The Ingalls team has turned that corner. We had three years to put that team together before we spun the company, and so that team now has been working at this for eight years. And, they've gotten really good at serial production and staying focused on risk retirement.
Q. A decade ago you were also dealing with a host of new ship designs. That's not so much the case today.
A. If you go back 15 years, just about every class of ship the Navy had was a new design. Today we're on the back end of that. Those new designs are actually in production. I think the Navy learned a lot. You have all these lead ships out there and one lead ship can really, just really bog you down in terms of production. The Navy took all of those lessons and that influenced their decision to make the LXR program look like the LPD. They basically said let's not go through all of the challenges a lead ship would present. I think that's a great decision and then the next step is to make sure you take advantage of the production capacity you have.
Q. The one first-of-class you've got to deliver is the Ford. The cost performance of that program remains a major focus of Sen. John McCain, R-Ariz., and the Government Accountability Office. John F. Kennedy (CVN 79) and Enterprise (CVN 80), the next ships, are both in various stages of construction. Can you demonstrate to date any better performance on CVN 79?
A. Sure. When we signed the contract for that ship, in order for us to take on our share of the challenge of the cost cap, we took a pretty significant reduction in labor cost. At this point, one-fifth of the way through building the ship, we're right on track with our target there, and we're pretty happy about that. We've been able to very deliberately capture lessons from the Ford and carry them forward into the Kennedy to drive the cost down. We're making significant capital investments in Newport News designed specifically to drive cost down on the Kennedy. The supply chain is supporting — you don't have the lead ship challenges where new vendors and new equipment has to be qualified, which holds up delivery of the equipment. Those kinds of problems were on the Ford, but they're not there on the Kennedy. The shipbuilders at Newport News are prosecuting the daylights out of it.
Q. Delivery of the Ford has been delayed several times, and problems have been reported with the advanced arresting gear. Does that remain an impediment on the delivery of that ship?
A. I don't know that — I mean, we're going to be testing the flight deck for months after delivery. I think the question is what's the condition going to be at delivery and then what's the test program going to look like. The Navy's got a path laid out, so I don't see that as being any more of an impediment than anything else. I think one of the challenges is that when we try to put new capabilities and technologies into platforms or systems we struggle sometimes just with the challenges of new technology. If you go out 25 years from now, I think we're going to be pretty happy we've got these systems on these ships. And if you didn't have the ship as the forcing function to drive development of those capabilities, then we might be doing science projects to figure out if this is something we could ever do, but it would never show up on a ship and it would never show up as a capability in the fleet. So, yeah, it's kind of painful and hard to predict at this point, but we do pretty well eventually getting through it. And we provide sailors a capability we think will be something they really need.
Q. You laid off more than 1,200 employees from Newport News over the past few months. Why?
A. As the folks who were doing the modernization and repair work on the [carrier] Abraham Lincoln finished up their work, where do they go [with the delay of the George Washington refueling overhaul]? That's been the transition Newport News has been dealing with. When the GW shows up, in addition to the ramp-up of work on the Kennedy, Newport News will be trying to hire back a whole lot of folks that they've laid off.
This happened because we couldn't get the political business sorted out in Washington. These things are sequenced pretty tightly and they're heavily coordinated to make sure you don't disrupt the industrial base. We had a donnybrook over sequestration and the government shutdown and it caused the delay of the ship and people's lives were affected.
Q. When do you expect you can start hiring people back?
A. Probably start at the end of next year, the end of 2017.
Q. Let's talk submarines. The Navy has finally accepted the proposal for work apportionment on the Ohio-class replacement program (ORP). You have a pretty good chunk of that, under prime contractor General Dynamics.
A. We're happy with the arrangement. This is about how do you start aligning your capital investment, how do you align your design plans, and it was important for us to get this sorted out. Now everybody can focus on the most efficient way to execute.
Q. HII has about 20 percent of the program?
A. Of the entire program, not each hull. We're going to be building the same units for Ohio-class that we build today for Virginia-class, which takes advantage of the craftsmanship and workmanship at Newport News that's been built up over the last 20 years. As our partner moves forward to deliver Ohio-class ships, the Navy will look to have us do more deliveries of Virginia-class to make sure the workload stays balanced. How all of that plays out has a lot to do with how many ships the Navy buys at any particular time. We're really excited about it and we look forward to rolling our sleeves up and getting this done.
Q. So you expect to be compensated with more Virginias when the ORP gets in gear?
A. I wouldn't use those words. What I would say is that the industrial base has to make sure it stays efficient. At times when you're delivering on Ohio-class, you need to think about how much your workforce can take on. And the folks at Newport News will be balancing that workload with more Virginia-class deliveries.
Q. Last month's House Seapower markup broached the prospect of a rate of four submarines built per year through the 2020s, during the ORP period. Setting aside questions of will there be funding to do that, the industrial base hasn't handled four submarines a year in quite a while. Is that something you could handle, and when would you start needing to ramp up for that?
A. In the late '80s and early '90s Newport News, as I recall, won eight of the last 10 [Los Angeles-class submarines] competitively, and they were buying them at the rate of three and four per year. From the industrial base standpoint, we can get there. I would tell you that if you walked in today and said I want four submarines and I need them in five years, I would probably have a hard time doing that. But I can ramp up my workforce faster than the appropriations process can work. So if there really is intent to go and ramp up procurement, the industrial base is nimble enough to stay ahead of that. I don't expect it to be a light switch. I expect it to be a gradual ramp-up if we do it at all.
I'll betray my own history. My observation as an amateur is that when nations can no longer afford the full navy they want, they build submarines. And, I think that the submarine is the most asymmetric platform we can build today. There will just continue to be more and more demand for them.
By Christopher P. Cavas in Washington