2011 Annual Report to Our CUSTOMERS, EMPLOYEES
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AA LLEGENDEGEND RREBORNEBORN 20112011 ANNUALANNUAL REPORTREPORT A LEGEND REBORN The amphibious assault ship America (LHA 6), currently under construction at Ingalls Shipbuilding, will be the Navy’s newest and largest expeditionary warfare ship for joint operations. Huntington Ingalls Industries (HII) designs, builds and maintains nuclear- and conventionally powered ships for the U.S. Navy and U.S. Coast Guard and provides after-market services for military ships around the globe. For more than a century, HII has built more ships in more ship classes than any other U.S. military shipbuilder. The amphibious assault ship America (LHA 6) has 984 miles of cable and is nearly as long as three football fields. 1 HUNTINGTON INGALLS INDUSTRIES 2011 Annual Report TO OUR CUSTOMERS, EMPLOYEES AND SHAREHOLDERS left: Thomas B. Fargo, Chairman right: C. Michael Petters, President and Chief Executive Officer he opening highlight of 2011 was bringing Huntington Ingalls Industries (HII) to market as a “new” T 125-year-old company. Equally exciting was our decision to bring back the legacy names of Newport News Shipbuilding and Ingalls Shipbuilding that form the foundation of HII. The pride our employees have in their association with these names is immense. Using the names of the historic shipyard founders in our company name (Collis P. Huntington, founder of Newport News Shipbuilding, and Robert I. Ingalls Sr., founder of Ingalls Shipbuilding) was our way of paying tribute to the tradi- tions of manufacturing excellence and the strong heritage established by both shipyards. LEADership Expectations were high from day one, and we are confident we have the right leadership team in place, a team whose members have worked together since 2008 and who have more than 150 years of combined shipbuilding and manufacturing experience. We have assembled a strong and impressive Board of Directors, an experienced and versatile group of individuals who have demonstrated expertise in areas critical to the success of our business and a publicly traded company. With a high level of interaction between the Board and senior management team, this kind of alignment will be invaluable to our success. All of these efforts, combined with our nearly 38,000 skilled and talented employees, enable us to focus on improving performance, creating value and achieving the full potential of the business for our customers, employees and shareholders. A YEAR OF CHAllenges AND AccOMplishMents We’re pleased to report that our first year as an independent, publicly traded company was very successful. On our second day as HII we signed a contract with the Navy valued at $1.5 billion for the amphibious transport dock LPD 26, the first of four new ship contracts and other significant HUNTINGTON INGALLS INDUSTRIES 2 awards that totaled $4.8 billion for the year. In 2011 we delivered three ships and one submarine (eight months early), began fabrication of the first submarine in the two-subs-per-year plan, and reached the 50 percent steel erection milestone on the first ship of the new class of nuclear-powered aircraft carriers, Gerald R. Ford (CVN 78). Also at Newport News, we are on track with the refueling complex overhaul of USS Theodore Roosevelt (CVN 71) and won a key competitive contract supporting the Naval Nuclear Propulsion Program at the Kesselring facility in New York. At Ingalls, we made excellent progress in improving our quality and in the application of our class build plans. We were also awarded contracts for the destroyers John Finn (DDG 113) and Ralph Johnson (DDG 114), the first ships in the restart of the DDG 51 program—a program very important to our future success. And at the end of the year, we negotiated a contract extension with our union-eligible workforce at Ingalls. We remain on the path to consolidate our Gulf Coast operations in Mississippi to better align our footprint with the Navy’s shipbuilding plans, while we continue to work with the State of Louisiana to seek redeployment opportunities in an effort to keep the thousands of talented Avondale shipbuilders employed. PROgress in Our PerfORMAnce A major focus for HII in 2011 was to retire risk in all of our programs and particularly at Ingalls. This focus will continue. As we have consistently said, our ability to improve margins is aligned with the ship deliveries of legacy underperforming contracts. We anticipate measurable margin improvement beginning in 2013 with the delivery of Somerset (LPD 25) and the amphibious assault ship America (LHA 6). Beyond 2013, we expect our margin expansion to accelerate as we leverage the benefits of serial production and work toward our 2015 goal of 9 percent returns. A Bright Future At HII, it is the people who count the most. We’re confident we have an exceptionally capable workforce and the right leadership team in place to take on the challenges of 2012 and beyond. Although there is uncertainty in the defense budget environment, we do not anticipate any significant impact in the next three to five years as we work contracts that are already in place or that are currently being negotiated. This equates to business stability. And by leveraging the successes and experiences we gained in our first year, we believe HII is well-positioned to continue supporting the missions of the U.S. Navy and U.S. Coast Guard. Our goal is to provide the highest-quality ships and products at the lowest possible cost on or ahead of schedule, objectives we believe will create substantial long-term value for our customers, employees and shareholders. This is a goal driven by an experienced leadership team, an engaged Board of Directors and a highly skilled and dedicated workforce that is 38,000 strong. Thank you for your support in 2011 and for your continued commitment to HII. Sincerely, Adm. Thomas B. Fargo, U.S. Navy (Ret.) C. Michael Petters Chairman of the Board President and CEO 3 HUNTINGTON INGALLS INDUSTRIES HARD stUff done RIGHT There are nearly 1,000 Master Shipbuilders those with 40 or more years of experience—employed at Huntington Ingalls Industries. Gary Shaffer, a rigger, connects crane cables in the Ring Module Shop at Newport News Shipbuilding, where Virginia-class submarines are built. HUNTINGTON INGALLS INDUSTRIES 4 Tosha Revere, an engineer at Newport News Shipbuilding, demonstrates the ROVR (Rapid Operational Virtual Reality) 3D visualization and collaboration tool. A Diverse POrtfOliO OF COMpleX AND Highly CAPABLE PRODucts Founded on March 31, 2011, when Northrop Grumman Corp. spun off its shipbuilding capabilities, Huntington Ingalls Industries takes its name from the founders of its legacy and legendary divisions: Newport News Shipbuilding, founded by Collis P. Huntington in 1886, and Ingalls Shipbuilding, founded by Robert I. Ingalls Sr. in Pascagoula, Miss., in 1938. Today, HII builds the most complex and capable ships for the U.S. Navy and U.S. Coast Guard. It is the only company building nuclear-powered aircraft carriers, large-deck amphibious assault ships and amphibious transport docks and one of two companies building nuclear-powered Virginia-class submarines and Aegis guided-missile destroyers. At the high end of the equity spectrum for the U.S. Navy and U.S. Coast Guard, the construction of each of these sophisticated ships requires a highly skilled, knowledgeable and engaged workforce, prudent yet critical capital investments in state-of-the-art facilities and a leadership team that is aligned with their customers’ priorities. Calvin Daniels touches up paint along the flight deck of an LPD 17-class amphibious transport dock at Ingalls Shipbuilding’s Avondale facility. 5 HUNTINGTON INGALLS INDUSTRIES Newport News Shipbuilding (NNS) is the nation’s sole designer, builder and refueler of nuclear-powered aircraft carriers and one of only two shipyards capable of designing and building nuclear-powered submarines. The 550-acre shipyard in Newport News, Va., is currently building the first in a new class of carriers, Gerald R. Ford (CVN 78), designed with increased capability and reduced maintenance requirements. Several Virginia-class submarines are in varied states of construction at the yard, and delivery times are being reduced as learning efficiencies increase. NNS is also uniquely qualified to perform the refueling complex overhaul (RCOH) on Nimitz- class aircraft carriers, representing a potential backlog that could span many years. Another potential backlog, one that’s just beginning, is carrier inactivations, and NNS is planning for the first nuclear-powered aircraft carrier inactivation, the 50-year-old USS Enterprise (CVN 65), scheduled to begin in 2013. The Ingalls Shipbuilding portfolio includes Arleigh Burke- class (DDG 51) destroyers, with two under contract. Ingalls is also the sole builder of large-deck amphibious assault ships (LHDs and LHAs) and is building America (LHA 6) as well as four San Antonio-class (LPD 17) amphibious transport docks. Ingalls’ Gulfport Composite Center of Excellence is manufacturing the composite deckhouses and hangars for Zumwalt-class (DDG 1000) destroyers for the U.S. Navy, as well as the forward and aft mast sets for the LPD ship class. The Legend-class National Security Cutters for the U.S. Coast Guard are also being built at Ingalls, and the shipyard is currently working on the fourth and fifth of these cutters. With vast shops and facilities located on the Pascagoula River, Ingalls also provides U.S. Navy fleet maintenance and logistics support around the world. Ingalls Shipbuilding’s operations also include its Avondale facility in Louisiana. Improvements in first-time quality at Ingalls are the result of an extraordinary amount of time and effort to incorporate ship-class build plans and retire risk on existing contracts as well as future work. While shipbuilding is at the core of HII’s business, the company is also continuing to explore opportunities in adjacent markets that complement its shipbuilding competencies, management excellence and uniquely talented workforce.