Huntington Ingalls eyes future after 10 solo years
Ten years after casting off the lines tying it to a giant defense contractor, the key thing Huntington Ingalls Industries CEO Mike Petters sees when he looks at the company’s shipyards isn’t its billions of dollars of assets or the long years it takes to build ships.
It’s the agility that can come when a company stands on its own.
And that makes for a new feel at the company that’s basically had only one customer, the U.S. Navy, and one product, warships, in the two decades since Newport News Shipbuilding delivered the tanker Brenton Reef.
The product, that is, is more than ships these days.
“In 10 years, we’ve tried to build trust with all our stakeholders; with our employees and with our suppliers, 2,000 of them across the country, during the pandemic, we’ve stood by them. With our customers, with our communities — if there’s something that needs to be done, if we’re not there it’s a little harder to do.”
Huntington Ingalls Industries CEO Mike Petters
“You look across our shipyards and see all the different talent, all the manufacturing know-how .... We want to expand access to customers, and customers access to our capabilities,” Petters said.
“The harder it is, the shorter the list of folks who can take your call, and we want to be on that list.”
10 years
It was 10 years ago this month that Northrop Grumman spun off HII, setting it up as a separate company by giving Northrop stockholders one share of HII stock for every six shares of Northrop stock.
In the 10 years since, HII’s filings with the U.S. Securities and Exchange Commission show it has:
made more than $1 billion in acquisitions that are turning it into a major player in the fast-growing unmanned vessels business and as an engineering business managing nuclear environmental issues;
more than doubled spending on new capital equipment, to an average of more than $400 million over the past several years;
seen total assets rise 57%, to nearly $8.2 billion;
seen revenue rise 39%, to $9.4 billion;
reported a fivefold rise in annual profits, to $696 million.
At the same time, HII’s Newport News and Mississippi shipyards delivered the first of the Navy’s next generation of carriers, USS Gerald R. Ford, refueled and overhauled USS Theodore Roosevelt and USS Abraham Lincoln, delivered six Virginia-class submarines, two amphibious assault ships, six amphibious transport dock ships, four guided missile destroyers and seven Coast Guard cutters.
In the past five years, HII has hired 25,000 employees.
Politics and relationships
Shipbuilding requires a lot of equipment and a lot of people — and political savvy, said Loren Thompson, a defense analyst at the Lexington Institute, an Arlington-based think tank.
“Mike Petters told me once what you see in the shipyard now is the result of what Congress decided seven years ago,” Thompson said.
Petters also sees something else in HII’s shipyards, especially at Newport News. Lots of sailors.
“We can have 8,000 to 10,000 sailors in the yard . ... When you’ve got the Navy in there all the time, you have to make them a priority,” he said.
When COVID-19 hit, and quarantines combined with HII’s leave policy cut the number of shipyard workers reporting in every day this spring, executives didn’t reshuffle schedules based on which ships were likely to be the most profitable, Petters said.
“The Navy was worried about deployability ... and so were we. That made sense to us,” he said.
It meant shuffling schedules and staffing at Newport News Shipbuilding to keep submarine overhauls such as USS Helena and the refueling and overhaul of USS George Washington on pace, as well as work on nearly completed Virginia-class submarine Montana. Work slowed on USS John F. Kennedy and other Ford-class carriers as well as on Virginia-class subs that weren’t as far along.
Those Navy ties set the culture for HII that Petters said the leadership team refined over the three years they prepared for the 2001 separation from Northrop — the “safety, quality, schedule, cost” mantra that HII executives regularly recite.
Unmanned vessels
Over the past decade, that tight relationship with the Navy turned decade-old Pentagon musing about unmanned vessels into a new line of business.
Political savvy and close relationships with Navy leaders and planners meant a deep look into the Navy’s early concerns about unmanned vessels, Petters said. Such challenges as the complex physics of communications and control for underwater drones and autonomous operations in constantly shifting currents and winds were on the Navy’s mind as other services moved quickly into drone operations.
The Navy — and these days HII — is still thinking about how unmanned vessels could be used best for reconnaissance, for attack or for supplying ships and troops.
“You want the right tool for the job,” he said. “Otherwise, you won’t use it.”
HII’s 2015 acquisition of Columbia Group’s 30-person engineering solutions division, which developed the Proteus undersea vessel that can operate in manned and unmanned models allowed the company to test to water and start to figure out ways to address the Navy’s concerns.
“We know submarines ... but we learned there’s a submarine community and a UUV (unmanned undersea vessel) one,” Petters said.
That led to HII’s fast-paced move into the unmanned vessels business with last year’s acquisition of Hydroid and Spatial Integrated Systems’ autonomy business, which makes unmanned surface vessels. HII’s acquisitions last year used $417 million of cash, according to its SEC filings.
HII also broke ground on a new vessel facility in Hampton last September. In January, it began work assembling the hulls for the Navy’s new Orca undersea drone.
“Less than a year later and we’re manufacturing,” Petters said. “That’s agility.”
Nuclear
Acquisitions helped HII expand into environmental work for the Department of Energy and commercial customers.
Newport News Shipbuilding had been trying for more than a decade to break into that business before, as a Northrop unit, it joined the team that in 2008 won the contract to operate and clean up the Savannah River nuclear site in South Carolina.
In 2014, HII made its first major acquisition. That was The S.M. Stoller Corporation, which provides environmental and nuclear consulting and engineering services to the Department of Energy, Department of Defense and private sector. HII filings with the SEC that year reported spending $272 million in acquisitions.
HII followed up in 2016 with the $380 million acquisition of Camber, a firm that specialized in sensors and simulations, chemical, biological, radiological, nuclear and explosives research and development as well as logistical and IT support. Then, HII formed a new division, Technical Solutions. The businesses in that group grew from a combined $630 million-ayear operation that lost money in 2014 to a $1.3 billion business that reported an operating profit of $41 million last year.
“Within 18 months, we’d won three Department of Energy projects,” including last year’s contract for nationwide deactivation, decommissioning and removal services at excess Department of Energy facilities, Petters said.
The strategy
When Northrop got into the shipbuilding business, it was as an unwanted add-on to the Litton Industries defense electronics business it bought after the Defense Department canceled production of Northrop’s B-2 bomber in the late 1990s.
When, in 2001, General Dynamics offered to buy then-independent Newport News Shipbuilding, despite antitrust worries about combining the nation’s two submarine builders, Northrop’s then-chairman and CEO Kent Kresa saw an opportunity that the Litton yards hadn’t presented.
“With Newport News, we are creating a $4 billion world-class, fully capable shipbuilding enterprise with expertise in every class of nuclear and non-nuclear naval vessel,” he said of Northrop’s $2.6 billion Newport News acquisition.
But the shipyards weren’t as profitable as Northrop’s other lines. In 2010, Northrop’s last full year in the shipbuilding business, its pretax income from the yards amounted to less than a nickel from every dollar of revenue, while its aerospace business was earning nearly a dime and its electronics business more than 13 cents, SEC filings show.
Unlike those other businesses, the shipyards needed huge amounts of fixed assets and large labor forces.
And unlike the aerospace and electronics businesses, the shipyards only had one customer — the Navy — while the rest of Northrop’s businesses could chase commercial business and foreign militaries, too, Thompson said.
“You had a bunch of aerospace executives from Southern California trying to run a labor-intensive shipbuilding business,” Thompson said.
Their biggest challenge was that “you have to deal with long cycles in terms of turning funding into final products,” he said.
But that challenge wasn’t the only thing Northrop saw at Newport News, as Petters recalled.
“When I started (at Newport News Shipbuilding in 1987) I thought we were in the metal bending business . ... When I went on the carrier program in the mid-1990s and thought about the 3,000 compartments in a carrier, all 3,000 different, I thought: ‘We’re really in the project management business,’ ” Petters said.
“At Northrop, after they got to know us, the chairman told me once, ‘If you can run a shipbuilding yard, you can manage any program inside Northrop,’ ” he added.
Managing complex projects is the real business of HII, Petters said.
That’s something that the Navy — and plenty of others — do, too. HII’s Technical Solutions arm is a way of reaching out to those others.
“We need to be at the top of their list when any of our customers have a really hard problem, because they know we can handle it.”
After its first decade on its own, HII is ready for that, Petters said.
“In 10 years, we’ve tried to build trust with all our stakeholders; with our employees and with our suppliers, 2,000 of them across the country, during the pandemic, we’ve stood by them. With our customers, with our communities — if there’s something that needs to be done, if we’re not there it’s a little harder to do,” he said.
“With our stockholders, I think if you had a time machine and wrote down on a piece of paper where we are now, and took it back to them then, they’d say: ‘Yes, we like that.’ ”