Defense contractor plays offense

Post sequestration, the country’s defense industry is in the midst of a major reshaping.

No longer can it count on Uncle Sam to provide a steady income. With budget cuts and military wind downs in Iraq and Afghanistan, federal defense spending is far below levels seen during the height of the foreign war years.

That’s a huge consideration for defense contractors like Northrop Grumman Corp. As the sixth-largest defense contractor in the world, Northrop derived 86 percent of its $24.6 billion in annual revenue last year from federal spending. 

Ask company CEO Wes Bush what will drive the company’s growth, and he assumes the bearing of a military commander — engaging but totally on message about his next move.

“Fundamentally, the nation’s security strategy depends on technological superiority,” he says. “That means the things we provide our military have to be far more capable than the things that any other military around the globe can even think about having. In order to do that, we have to stay ahead of the technology.”

Staying ahead in areas such as unmanned aerial vehicles (UAVs, commonly known as drones) and cybersecurity presents challenges and opportunities for growth. The country is just beginning to explore commercial uses for UAVs, and there’s great potential for surveillance aircraft like the Global Hawk in climate control and disaster relief, Bush says.

On the cybersecurity front, Northrop Grumman has launched several initiatives at the middle school, high school and college levels to help recruit a skilled work force. While cybersecurity may represent the biggest domestic channel for growth, Bush says the company expects more revenue from international sales, with growing demand overseas for its unmanned systems, manned military aircraft, airborne surveillance and electronics.

Bush, 52, took over as Northrop’s CEO in 2010. On his first day as the company’s leader, he made a decisive move, announcing that Northrop would move its headquarters from Los Angeles to the Washington, D.C., area.  Rivals Lockheed Martin Corp. and General Dynamics Corp. already had moved their corporate offices to Washington for the same reason Bush wanted to pull up roots: to be closer to their primary customer.

Bush’s decision sparked a fierce fight between the District of Columbia, Maryland and Virginia to land the Northrop Grumman headquarters. The frenzy ended with the company’s decision to settle at its current site on Fairview Park Drive in Fairfax County near Falls Church, a 14-story tower that used to be home to a regional Verizon headquarters.

Slender in stature with dark, wavy hair, Bush doesn’t give many press interviews. 
He’d rather be visiting with the company’s 65,300 workers. Nearly 14,000 work in the metropolitan Washington area. The rest are scattered at more than 502 locations in 23 countries around the globe. “The opportunity to interact with so many smart and dedicated people, for me that’s the charge when I wake up in the morning.”

Bush says the employees “believe in the mission… We know the things we do sometimes mean the difference between life or death for many in our customer community. They rely on us to get it right, and we take that seriously.”

That responsibility along with new concerns about insider threats à la Edward Snowden (the U.S. contractor who leaked sensitive government information and is now living under political asylum in Russia) are among the perils of today’s industry. Bush says Northrop Grumman’s networks are “constantly under attack” from hackers as are the systems of other defense contractors and the U.S. government. “It requires constant vigilance. And we recognize that this is an area where the threat grows more and more capable every day.” 

Bush grew up in West Virginia. He earned his bachelor’s and master’s degrees in electrical engineering from the Massachusetts Institute of Technology.  At Northrop Grumman, he got his start as a systems engineer on the company’s aerospace side. 

With all the talk of budget cuts, Bush says young people may be under the mistaken impression that the defense industry isn’t hiring. Last year, Northrop Grumman hired 5,000 people. As key employees retire and the country strives to stay on the cutting edge of technological superiority, “We’re going to be hiring” he says, “and we’re looking for the best and the brightest.” 

Virginia Business interviewed Bush in February in the company’s boardroom.  An edited transcript of the interview follows.

Virginia Business: Now that there’s a 2014 bipartisan budget in place, where will the opportunities be for Northrop Grumman this year?
Bush: We are certainly glad that there is a budget in place with all of the turmoil that we went through in 2013 … It’s also good that it is a two-year budget deal. That does give us a better opportunity to have plans we can put in place and hopefully execute. The downside, of course, is that the numbers were lower than the president’s budget for ’14 that was originally put forward.  So there’s going to have to be some adjustment to the plans put in place earlier last year before the sequester hit in order to conform to the new budget plan. 

VB: What do you think will drive growth? You said recently that international sales (which produced 10 percent of the company’s revenue in 2013) are expected to increase in 2014.
Bush: We’re seeing a number of trends that I think will make international even more important.  Probably the most important is a growing recognition by the Department of Defense, and I would say more broadly the administration, that we need to do a better job of equipping our allies …

VB: We’re hearing more discussion about the future of drones and how they can be used for commercial purposes. Would that open up some new avenues of growth?
Bush: I think we’re at the very beginning of the realization of the capability of what we call unmanned aerial vehicle technology … Climate monitoring as an example. Many of our unmanned vehicles support NASA and the work that they do in monitoring hurricanes.  Disaster relief has also been a very important role.  When the earthquake struck in Haiti, the first sensor overhead was Global Hawk. It provided an understanding for all of the first responders where they could get in on the ports, where they could get in on the roads. … So, yes, there is a lot of opportunity there as we look at the future.

VB: Any there other things that will drive growth?
Bush: Clearly cyber is an increasingly important area. … With what’s being reported now and what’s happening to commercial companies, we have to as a nation step up to the challenge.

VB: Northrop Grumman was recently awarded a $350 million contract to protect the country’s Internet infrastructure. Can you tell us more about your company’s initiatives to improve cybersecurity?
Bush: Over time, as there has been a growing awareness that we need to protect more than our military networks and more than our intelligence infrastructure, the Department of Homeland Security has taken on an increasing role in actually protecting the national networks.  So the contract you were referencing is the U.S.-CERT program or the Computer Emergency Readiness Team. It is designed to help monitor the networks and to provide emergency response in the case of cyber issues…

But beyond that there’s still a lot that we as a country have to do  … Companies are going to have to invest to protect their networks, and, legislatively, we still need changes to the laws in the United States.  Most of our legislation that pertains to telecommunications today really grew out of telephony and how telephones use networks. It really hasn’t been modernized to reflect the use of networks for communications between computers and the other uses of networks … We have to be in a place where companies and the government can share information freely, so if there is an attack, we’re able to fully communicate with each other … Laws need to be updated for that to happen. The administration has put forward proposals on the Hill.  Both the House and Senate have considered various versions of that type of legislation, but nothing has yet passed.

VB:  How do defense companies protect against inside threats like Edward Snowden? And how do you balance the need for that protection against private security rights?
Bush: This is where some of the legislation needs to help. When we’re talking about the protection of personal information, there are laws today that govern how that personal information is utilized.  Oftentimes when there’s a cyber attack, it comes in through channels that leverage personal information.  So we have to be in a position where we can go to sharing some of that data and protecting it at the same time … We’re in an interesting position where it’s not the technology that’s holding us back; it’s the ability to use the technology to implement cybersecurity.
Clearly insider threat is a real issue, both in companies and in government.  There have been a number of capabilities developed over the years to help address that.  It is easier, quite frankly, for companies in the defense industry to utilize some of those tools because that’s the business that we’re in.  Many other companies are yet to reach that state of technology readiness to use those tools. 

VB: Has Northrop Grumman’s network ever been breached?
Bush: We don’t go into the details of those things, but it’s clearly an area that we put an enormous amount of attention on.

VB: Can you tell us about the company’s initiatives in developing a skilled workforce in cybersecurity?
Bush: Clearly this is an area where the demand for skilled talent far exceeds supply. So we’re attacking it at just about every angle that you could imagine. Internally, we have our own cyber education program that we utilize for our employees and sometimes for our customer community as well … 

But we recognize that’s not going to be enough.  We need graduates from colleges, from good universities, who are coming into the company with those skills.  In order for universities to graduate people in those fields, they need to have people coming into the universities who are interested in cybersecurity.  So we’re addressing it educationally both at the middle school and high school levels as well as working with universities to create cybersecurity programs.

We’re also working with states more broadly, and we have some activity here in Virginia around the Semper Secure Initiative [a public-private state initiative launched last year to boost Virginia’s leadership in the field] … Cyber Patriot is probably our best-known program.  This is a partnership we have with the Air Force Association. It is directed primarily at high schools, but some middle schools have gotten into this as well. Teams of young people get together and compete against each other on defending networks … It’s a national-level competition. The whole intent of Cyber Patriot is to generate more interest among young people so that when they get to college they are able to seize on this as a career opportunity.

VB:  Following the defense cuts that came with sequestration, the industry is going through a major reshaping. Are there major changes ahead for Northrop Grumman? 
Bush: We’ve already been downsizing across our industry … but when we think about going through a period of a downturn, if you will, in spending, the strategy that we put in place … has three basic components to it. 

The first is performance. Making sure that we’re doing all the right things so that our programs — the contracts we take on from our customers — that those are executed extraordinarily well.
Performance also goes to things like affordability. … We’ve had very large affordability initiatives now for several years that have resulted in shrinking our footprint.  It has reduced our overall headcount. We’ve also taken an innovative approach to applying technology toward affordability. How do we design these systems so they are fundamentally more affordable?
So performance is a cornerstone of our strategy as a company … because when we’re talking about performance, we’re talking about performance for our customers. 

VB: Which is primarily the Department of Defense?
Bush: The Department of Defense, the intelligence communities, and other federal agencies as well as the Ministries of Defense around the world …
But perhaps more directly to your question, the second element of our strategy is portfolio. … We took an action a few years ago and sold the advisory services business called TASC that we had here in Virginia. We sold it to private equity, and we did that because we saw that the nature of defense procurement was changing. …

A second step we took was the spin out of our shipbuilding business, also a Virginia-headquartered business, Huntington Ingalls Industries. That was again a step taken recognizing the changing nature of defense acquisition. We believed our shipbuilding business could perform better as a stand-alone business. … I’m incredibly proud of Huntington Ingalls. They’re doing a great job.  They are a strong and vibrant and dynamic company in our industry, and the response of the shareholder community has been very positive to HII…

The third element of our strategy is making good decisions in creating value in terms of how we deploy our cash … We’ve taken an approach over the last number of years now in terms of our dividend approach as well as our share repurchase program that is intended to provide a good return for our shareholders. That’s been especially important as our industry has been through the turmoil associated with a sequester and some of the uncertainties associated with the budgetary environment.

VB: During a recent conference call, an analyst raised the question of taking the company private.  He pointed out that when Northrop Grumman completes its share repurchase program, it will have bought back about half of the company. Is going private a route the company might pursue in the future?
Bush: We don’t talk about what we might do in the future. … We do maintain a very thoughtful process of thinking about all alternatives.  We have to.  We have an obligation to our shareholders to be thinking and considering the full range of alternatives.  But I would just emphasize, as I did on the call, while we think about a lot of things, each time we’ve done it over the last few years, we come back to what we’re doing because it’s working.

VB: How are things going since you moved the company from L.A. to Virginia?
Bush: The move to Virginia has been a wonderful move … Having your corporate office on the other side of the country from your primary customer community was a little bit of a barrier for us. Our senior leadership team has a much tighter connectivity into our customer community as a result.  And we are able to be personally there when things happen that aren’t expected, and our customers need to talk to us …

That said, the other part of the move that has been tremendous for us has been the great availability of professional talent in this region.  It is an area where we are able to both find people already here when senior positions open up, and we’re able to recruit people from anywhere in the country to come live …

Virginia has outstanding school districts. Companies like Northrop Grumman pay a great deal of attention to that.  When we make decisions about where to put our operations, we look at the quality of the school systems because it matters to our employees. If you look at our employee base across our enterprise, we have about 65,000 employees.  More than 30,000 of those employees are degreed scientists, engineers, mathematicians, technologists.  These are folks who care a great deal about where their kids go to school.  All of our employees care about that … but it just emphasizes to me how important this is, and it’s part of what we’ve been so happy about here in Virginia.

VB: What do you like most about your job? And what are things you lose sleep over?
Bush: The thing I enjoy most about our company is the people side of it. … Some industries that do very important work have more of a transactional bond between their company and their customers.  We have a very human bond … Oftentimes our customers are working inside of our facilities … They may be working side-by-side with us if we’re doing threat monitoring.  So we know our customers very well.  Many of our employees spend time in the field with our customer community.  Sometimes we deploy with our customer community.  It is almost a unique relationship. It creates a great enthusiasm about what we do, and you can see that enthusiasm in our employees.  I love that part of what we do and actually can’t imagine working in any other industry.

Things that worry me? … The trust that is placed on us by the nation and by our allies, when, for example, we’re given a contract to build an aircraft. If that aircraft doesn’t work right, that’s a really bad outcome because people are relying on us.  People are relying on us not just because they want to get the value out of the money that was spent.  They’re relying on us because our nation needs that aircraft.  Those are the things that keep me up — something not going right, where we don’t fulfill our commitments. 

VB: How do you unwind when you aren’t at work?
Bush: I’m fortunate to have a wonderful family.  My wife and I have three great children.  Our youngest is about to head off to college  … Our entire family loves the outdoors.  We spend as much time as we can hiking and camping, taking advantage of the outdoors.

VB: Is there anything you would like people to know about Northrop Grumman that we didn’t cover?
Bush: There is a bit of a negative view in the minds of people who are thinking about joining our industry.  I would tell those who are giving that some consideration, this is the place to be. Even though we have been taking our headcount down, our industry is going through a transition of its population. We have a lot of folks who have been here for many years.  In fact, in some of our key disciplines — not just in Northrop Grumman but across the industry — we have more than half of our employees who are retirement eligible … When we look out on the horizon of what we need — to secure our nation and to provide that technological superiority — we’re going to be hiring.  We’re going to be hiring aggressively.