Former Northrop Grumman division is now an independent companyJuly 29, 2011 6:00 AM
by Robert Powell
Mike Petters joined Newport News Shipbuilding in 1987 as a planner, a job that required the U.S. Naval Academy graduate to race about the 550-acre shipyard.
“I spent my first couple of years just on a bicycle or by foot running around the shipyard trying to find out who did what,” he says. “Very, very good education.”
Petters rose through a series of management positions to become president of the Newport News shipyard and then president of all shipbuilding operations under parent company Northrop Grumman Corp.
Petters now has launched the shipyards in a new venture that soon will be recognized as Hampton Roads’ latest Fortune 500 company. On March 31, Northrop Grumman spun off its shipbuilding division as an independent, publicly traded company named Huntington Ingalls Industries Inc.
The company’s new identity invokes the names of Newport News Shipbuilding founder Collis Huntington and Ingalls Shipbuilding founder Robert Ingalls. Huntington Ingalls, the nation’s largest military shipbuilder, has annual revenues of about $6.7 billion and employs 38,000 workers in Virginia, Mississippi, Louisiana and California.
In Newport News, the company has 19,000 workers, the most of any manufacturer in the state. The shipyard is the nation’s sole builder of Navy aircraft carriers and one of only two U.S. suppliers of nuclear powered submarines.
Petters says running a publicly traded company is vastly different from operating the shipyards under a large parent company. “Things that I never worried about before — like investor relations, like capital structures, board dynamics — now are pretty central to my day-to-day activity,” he says.
Beginning last December, Petters and other senior management began establishing a presence on Wall Street. The company also had to quickly beef up its lobbying in Washington where a defense budget cycle was already under way as the spinoff occurred.
While getting Huntington Ingalls under way as an independent company, Petters also faces the daunting task of finding replacements for his highly skilled work force. In Newport News, for example, 10,000 employees are expected to retire during the next five years.
“They establish the culture. They’re the mentors in your organization,” Petters says. “And in a very short time, they won’t be there.”
Petters also faces the grim task of closing the Avondale shipyard in New Orleans by 2013 unless other alternatives are found. The shipyard, now employing about 4,000 workers, produces a type of ship that is no longer part of the Navy’s 30-year plan. Many of the workers may transfer to the Ingalls shipyard in Pascagoula, Miss.
Helping in the transformation of the company’s work force will be graduates of its 92-year-old Newport News Shipbuilding Apprentice School. Huntington Ingalls is building a new $70 million school campus in downtown Newport News, with the help of $15.5 million from the city and $25 million from the state.
Huntington Ingalls also is involved in a wind-energy joint venture. The company is working with wind-energy manufacturer Gamesa in developing a 5-megawatt offshore wind turbine. The two companies have set up a team of more than 40 people to work on the project.
Petters, the father of two grown daughters, likes to go boating with his family in his spare time and is active in Navy-related organizations.
“I can truthfully say that I never once aspired to this job,” he says. “My ambition every day is just to come to work and be part of something bigger than myself; grow in some way; learning something new every day. And have fun. When I wake up in the morning, I want to go to work.”
Virginia Business: We’ll start off talking about your plans to replace so many retiring employees. Tell me about that situation?
Petters: I think you have to go back 20 years. The end of the Cold War caused most of the aerospace and defense businesses to downsize. A lot of companies did that by just not hiring for a while. And what we ended up with in our business was a demographic that was either very, very senior or very, very junior …. We have a senior work force now that’s getting ready to retire. And we’re going to have to replace them.
So when this is all said and done, we get these folks hired, our overall employment levels are not going to be substantially higher than they are today.
VB: I would imagine that training these folks, or finding a skilled work force, is an issue.
Petters: Well, there’s a host of issues here that you have to think about as a business. First of all, you have this cadre of folks who are the backbone of your business. They’re the experience base. They establish the culture. They’re the mentors in your organization. And in a very short time, they won’t be there. So you have to think about. What is the culture of your business? How are you going to transfer what they know to a new generation of employees?
And so that becomes a major effort on the part of the business. We own our own cultures. We have to create the incentives and behaviors for the things we want. … It’s kind of a knowledge management problem of: How do you take this expertise and bring it to bear in a new generation?
I think it’s compounded, though, in that the work force that we are looking for has, I think, a fundamentally different requirement in terms of skill set than what we were able to go find 40 years ago. I think our work now requires employees to be able to synthesize information from many, many inputs to create a solution for the particular challenge they have.
And in that regard, I encourage our education systems to start thinking about education as less about learning facts and more about learning problem-solving and synthesis. Those are skills we need. ... I think what will separate the future businesses in this century are going to be the businesses that are successful in finding those employees who are able to synthesize information and problem-solving.
VB: Do you consider this a problem? Do you think there’s a shortage of this kind of worker?
Petters: I think the competition for this talent is going to be pretty fierce.
VB: And how do you evaluate that?
Petters: It’s tough. … But you start out with basic job descriptions. I think I used a job description [in a recent speech] about the kind of math and analytical capability that our crane riggers have to have. …
I think I first noticed this about 10 years ago when we were making all of the changes to personal computers and laptops and moving away from big mainframes. At that time, you could ask a question of someone in the shipyard, and the answer usually came in the form of a computer report. And what we really needed were people who could go mine through all that data and come up with an answer.
VB: Tell me about your plans for the Apprentice School and how this feeds into your efforts to create your work force.
Petters: The Apprentice School was created in 1919 as a four-year program for on-the-job training of [craftsmen]. Where we have gone in the last 10 years is that the graduates of the apprentice program are really the leaders in our business.
We have over 2,000 graduates here who are serving in one capacity or another, typically in management. They’ve moved beyond their craft. And so at the Apprentice School today, we talk a lot about not just craftsmanship, we talk about leadership and what it takes to be that frontline leader. When people come to work, how do they know what their actions are, what their activities are?
And so that’s a big part of our business. If we want to make a change in the shipyard, we make it in the Apprentice School, and it changes the shipyard. And so that’s very important for us.
Now after 92 years of Apprentice School, our facilities have just become older, and it’s time for us to do some expansion there.
So as we go to create the leadership for the work force of the 21st century, we’ve stepped out a really big initiative on the Apprentice School. We’re very appreciative that the state is interested in this as is the city. And we think this is not just good for our business, it’s good for the region and good for the state
VB: What was Northrop Grumman’s reason for deciding to spin off the shipyards?
Petters: Well, I think you ought to ask Northrop Grumman that. … The board decided about a year ago in July to consider all of its strategic alternatives relative to our business. We pursued a couple of paths up to a point where the board said to focus on spinning [off] the business. We weren’t really a party to the decisions that the board was making.
We’ve been given a great opportunity. And having a chance to focus this business on our customers, creating shareholder value, being agile to respond to the marketplace, those are things that most people don’t have a chance to do in their business careers.
VB: What types of things are you doing to raise the profile of the company in Virginia as well as on Wall Street?
Petters: The thing about Virginia, as it is in Mississippi, we’re the largest manufacturing employer in the state. And if you go to Richmond or you go to Jackson, all you have to do is talk about the shipyard, and they know who you’re talking about. …So at the state level, they know us. …
Let’s go to Washington. Our specific customers know who we are. We’re the shipyards they’ve always interacted with. For folks who are not as close to us, sometimes we have to remind them of how we are that shipyard, or we have that product. … So we have created a Washington office. That was one of the first things we did, and staffed that a little bit more than what we had before so we could make sure we were well represented. … The budget cycle doesn’t wait for anybody. We spun the business out from Northrop Grumman on March 31. The authorization and appropriation process was already in full swing at that point. So we had to really hit the ground running.
In New York, and I characterize New York as being the financial markets, we actually had to start before the spin. We had to go through the process of talking to the ratings agencies, getting a rating, going through a bond offering, negotiating a term loan for the banks. We were pretty steady in New York and other financial centers from about the beginning of December. And that’s a process I don’t think we’ll ever stop.
We had no visibility at all except that we were part of Northrop Grumman when we started that process. Now we have a ticker, we have a three-month history of trading, we have owners, and we have all of the stuff that any public company has.
We had to create an investor relations organization to help us create that profile and then manage it as we go forward. I do a lot of that myself. Our CFO, Barb Niland, has the principal responsibility for it. And so far, it seems to be going well. But I would say that we are all new to this, and we’re all learning an awful lot very quickly.
VB: Back to talking about Washington, how is the company faring with the latest budget decisions on defense?
Petters: We’re doing OK. Most of the decisions about our programs were made in previous years. Our current challenge is to negotiate some contracts. On the day we spun the company, we had five major contracting actions out there to do. Two of them have been done. We’ve got really three to go. So getting those ships under contract is what matters to us.
The next round of budgeting is going to be the challenge because I don’t know that anybody has a crystal ball that’s clear enough to be able to predict how that’s going to turn out.
What I know is we are a country that lives on two oceans, and a significant part of our economic strength and our energy comes across the sea, which means we have to have a Navy. We have to have a Navy that ensures freedom of the seas around the world for our economic security. And as long as there’s a Navy out there doing things that are in the national interest, they’ll be doing it off of platforms that we’ve built.
We don’t know exactly what that looks like. We don’t know how that’s all going to play out, but we know we’re going to be right in the middle of it as we go forward.
VB: Now I’ve seen one recent interview where you were saying you were not expecting the revenue of the company to change much, but you were expecting to lower the costs. Tell us a little bit about that.
Petters: Particularly here in Newport News, the business has worked very well for many, many years. It’s a solid business. It’s fairly predictable. We’re going through a bit of a phase right now where the contract mix [offers] lower returns than normal, but we work our way out of that over the next five years. And it’s very consistent across the board.
On the Gulf Coast, we went through a decade of some real challenge, a lot of lead ships [the first ships in a class] under construction. Lead ships have a tendency to create a lot of disruption in the business. One lead ship in a shipyard will challenge a shipyard. There were points where we had multiple lead ships in the shipyards on the Gulf Coast. And so that created lots of churn is probably the best way to put it.
And then we had Katrina. Katrina had a lot of impact on the business. It goes back to the work-force development thing we talked about at the beginning. At the point in time Katrina happened, we had on the Gulf Coast 20 percent of our work force with over 25 years of experience. In the two years after Katrina happened, that percentage had dropped to less than 5 percent. So remember, we talked about these are the people who set the culture; they’re the mentors, they’re the ones who set the expectations. They know how to get the things done inside of the systems that are there. They were all gone.
So, first of all, we had to rebuild the shipyard. That was done in the first 2½ years after the storm hit. When my team arrived at the beginning of 2008, we had a pretty new shipyard, but we also had a pretty new team. We had a new set of employees. We had to now go set the standards of expectations.
If rebuilding the shipyard is resetting the hardware of the business, resetting the human capital side of the business is resetting the software of the business. That’s not something you can do overnight, but we set out about aligning authority, accountability and responsibility in the organization. We went through: What does this team need to look like? Who are the players we need to have on this team? How do we go build a team for success?
And in the last 3½ years, we’ve done that. We have created a team now that has delivered, I think since the beginning of 2008, nine ships.
But the reason I bring that up is any time you deliver a ship, and it doesn’t really matter if it’s a large ship or a small ship, when you deliver a ship, you actually touch every step of the delivery process. And so bringing a team through a delivery is an important thing to do.
What we have left to do on the Gulf Coast is we have a hangover effect of some contracts that were signed in the aftermath of Katrina that we’re not performing very well on. And we could go into all of the reasons why, but the basic thing we have to do is we have to get those contracts out of the business, and it’s going to take us a couple of years.
So you could think about the business today as being 75 percent of the business is working very, very well; 25 percent of the business is underperforming. And over the next two years, that 25 percent is going to go to zero and be replaced by work that is going to be performing at the same level the rest of the business is.
And so that’s why what we say is we don’t expect revenue to grow. We see the ships, the contracts that we have, we know what we’re going to be contracting for. We see the revenue of the business being pretty flat. But as this underperforming work is moved out of the business, we see the opportunity to replace that and then expand the margins and the cash flow that come from the new business there, as that goes down.
So from that standpoint, we think that’s a great way to build shareholder value in the near term. And near term for shipbuilders is by 2015. Near term for some folks is next quarter. That’s not us.
VB: What has been the reaction of the employees to the idea of going back to the names of the founders?
Petters: I think generally it has been very positive. I think what they’re really responding to is less the name than the fact we really do have control of our destiny now. And I think there’s an element of ownership there that it’s not quantifiable. I’ve had outsiders tell me that they can see that our people are walking just a little bit taller right now. They’re standing a little taller, walking with a lift, and we’re pretty lucky about that.