COVER STORY    

In the post start wars era, Newport News Shipbuilding is easing into unchartered waters as an independent public company.

Sherman was fielding calls from clients, as well as complete strangers, who wanted to know if he had any inside information. “What’d ya hear, Skip?” The callers didn’t have to say much more than that; Sherman knew exactly what they were talking about.

Nearly everyone in town had heard the rumor. Tenneco was planning to sell “the yard,’’ as Newport News Shipbuilding is succinctly known throughout Hampton Roads. But there were so many questions. Who would buy it? Falls Church-based General Dynamics Corp.? California-based Litton Industries Inc.? How would the sale affect the little guy, the shipyard welder, pipe fitter, crane operator or engineer? Would there be more layoffs? What would happen to their pensions and other benefits?

“I don’t think there was a lot of panic in town, but there was genuine concern,” Sherman says.

On Jan. 29, 1996, Tenneco executives denied the rumor. The next day, Dana G. Mead, Tenneco’s chairman, president and chief executive officer, confirmed it: Tenneco was considering selling or spinning off the yard. Ten months later, Tenneco’s stockholders overwhelmingly voted for the spinoff, which allowed the conglomerate to avoid paying about $400 million in taxes.

Newport News Shipbuilding – the nation’s largest shipyard, the largest private employer in Virginia, the only shipyard in the nation that builds and overhauls aircraft carriers – wasn’t making enough money to satisfy Tenneco, so Tenneco cut it loose.

“That was an interesting time,” Sherman says, recalling January 1996, when the yard’s ownership seemed as murky as the coffee-colored waters of the James River where the yard launches its ships. “Who knows, we may have some interesting times down the road.”

John Robinson, a tall man who smiles easily, didn’t want to stick around to find out how the yard would perform in the post-Tenneco era. He retired last year after 42 years with the company.

“I was only 60 and in good health. I could have worked five more years,” says Robinson, who rose to the level of general foreman. “I retired when I did because now my retirement pay is coming from Tenneco, not the yard. I wasn’t really sure – and I’m not sure now – that the yard would have that money for me 10 years down the road. There are people I left, people still working there, who are scared to death.”

Tenneco’s deep pockets – always a safety net during hard times – are gone. Longtime yard workers note that in 1968 the company merged with Tenneco because it was hurting for money. By then, the Navy was the yard’s biggest customer, but it routinely demanded changes while ships were being built, causing major cost overruns. The yard lacked the clout to collect the hundreds of millions of dollars the Navy owed in change orders, but Tenneco was up to the task. It took more than a decade, but Tenneco eventually secured a settlement.

“I don’t see anything keeping that from happening again,” Robinson says, “because now we’ve come full circle: The yard is back on its own again and still very dependent on the Navy.”

More than 90 percent of the yard’s income comes from Navy work. The defense budget continues to shrink, and no one expects that to change any time soon. The yard has a work backlog of $3.5 billion. That sounds massive, but it’s less than half what it was during much of the 1980s, when President Ronald Reagan and Congress approved soaring defense budgets. The yard built 10 to 12 ships a year back then – twice as many as it does today.

And Navy work is becoming harder to get. On Dec. 17, less than a week after it was spun off, the yard learned it was not chosen to help build the Navy’s newest amphibious assault ship. Yard executives made it clear they never banked on landing that contract, but they were disappointed.

The company must attract more commercial work to offset the drop in military demand, but the transition will be difficult. The yard is known for building first-rate ships, but it also has a reputation for building ships with high price tags. Everyone from recently hired welders to President and CEO William P. Fricks says the yard must learn to build ships cheaper. It has acquired some bad habits working for the Navy: Unlike private ship owners, the military doesn’t demand low prices and quick turnarounds.

Newport News Shipbuilding has yet to prove it can make money on commercial ships. It is currently constructing nine double-hull tankers called Double Eagles, but the job has been a double-edged plowshare. It helped boost the yard’s revenues from $1.75 billion in 1995 to $1.87 billion in 1996, but the yard expects to lose $90 million on the first four tankers. The Double Eagles forced the shipyard to climb a nasty learning curve on new steel-cutting equipment, but shipyard executives say they now have a better feel for how much ships like these should cost. They plan to add a profit margin and bid on more double-hull jobs, but some buyers say the shipyard will not win many contracts if it expects an 8 percent to 10 percent profit on tankers.

“If we can be profitable, we’ll build them,’’ Fricks responds. “If we can’t, we won’t.”

The profit picture has been disappointing in recent years. In 1995 the yard netted $73 million. That may sound like Newport News Shipbuilding is loaded, but it actually represented the yard’s poorest performance since 1983. The downward trend continued last year with net income dropping to $55 million, and the bottom line might get even worse this year.

As a result of the spinoff, Tenneco left the shipyard with about $600 million in debt – “a ransom note,” one shipbuilding analyst says. The full effect of that debt will be felt this year, and next year the yard will owe a deferred tax payment of about $150 million when it is scheduled to deliver the Harry S. Truman aircraft carrier.

“If you look at all the factors,” Robinson says, “I think the yard is going to be brought to its knees.”

Bill Fricks admits that the yard has seen better days. Its work force has fallen from more than 30,000 workers in 1984 to less than 18,000 today, and this is a rough time for a shipyard that relies on Navy work.

“We’re in a very low ebb for defense dollars,” says Fricks, who also serves as chairman of the yard’s seven-member board. Other directors include Tenneco’s Mead, former Virginia Gov. Gerald L. Baliles and Hampton University President William R. Harvey. “I would rather have been spun off in 1980, with the Reagan 600-ship buildup getting under way. But we’ve always been up to the challenge, and this is a challenge.”

A Georgian who has worked at the yard since 1966, Fricks speaks optimistically. It has become his duty to do so. In the past, when the yard was sheltered under Tenneco’s sprawling umbrella, it took a major announcement from Newport News Shipbuilding to influence Tenneco’s stock price. Now Fricks realizes that anything he says – good news or bad – can have an immediate impact on Wall Street.

Shipyard executives now meet regularly with stock analysts to make sure the market has enough information to properly evaluate the stock. On Dec. 12, it opened on the New York Stock Exchange at $16 per share (NNS), and it hasn’t fluctuated much since then.

Those who know Fricks describe him as honest and plain-spoken – not one to sugarcoat anything. For example, economists say it is critical to the local economy that the yard continues to employ the workers it has now, but Fricks expects shipyard employment to fluctuate between 16,500 and 18,000 during the next few years. “I certainly don’t see us hiring people,” he says.

If and when employment dips much lower, the yard will likely lose its longtime distinction of being Virginia’s largest private employer. As of December, the shipyard had 17,920 employees. Food Lion had 17,293.

“That’s not one of the things that keep me up at night,” Fricks says of the prospect of falling to second.

What does keep him up at night is trying to figure out how the yard can boost profits at a time when the defense budget is shrinking and the yard is losing money on commercial jobs. continued