Statement of Dr. Lawrence J. Cavaiola
Vice President
Strategic & Business Development
Litton Ship Systems

Overview

Thank you, Mr. Chairman, and distinguished members of the subcommittee for giving me this opportunity to testify on behalf of the 17,000 men and women of the newly-formed Litton Ship Systems (LSS) organization regarding key programs and issues important to Litton's two shipyards.

Litton Ship Systems is a new Corporate Group within Litton Industries formed coincident with the August 1999 merger of Ingalls Shipbuilding and Avondale Industries. The primary mission of LSS is to focus on customer service and increase shareholder value by successfully coordinating the consolidation of Ingalls Shipbuilding with Avondale Industries, mining all possible synergy savings resulting from this merger, managing the programmatic, financial, marketing and strategic planning operations of these two shipyards, and representing Litton's two shipyards with one voice.

The consolidation of Ingalls and Avondale makes good business sense at a time when rapid industry consolidation was, and still is, underway and in an environment where the way in which the Navy procures ships is changing significantly.  This acquisition will result in a much stronger competitor for all non-nuclear, surface ship programs and services and will generate significant savings for the American taxpayer.

A little more than 30 weeks into this merger, Litton Ship Systems has firmly identified tens of millions of dollars in merger synergy savings and expects to identify much more.  These savings will be passed along to the government in the form of savings on existing programs and lower bids on new programs, and will create additional value for Litton shareholders.  These savings will come from myriad areas, including combined material procurements, combined marketing, common financial and engineering tools, shared work and a stable work force, optimal use of geographically-close facilities, sharing of best practices, a combined approach to capital improvements and sharing of lessons learned.  As an example, less than two months after the merger, Ingalls began filling production requirements for Avondale by fabricating certain steel modules for Avondale's Sealift Ship Program.

The merger was also a response to a shipbuilding environment where bigger is better; bigger engineering organizations, larger capacities, a larger depth and breadth of skills, more combined access to capital for efficiency improvements and strong corporate parents. And we believe that we will be a better and stronger competitor, more efficient and with more opportunities for growth. A significant capital improvement program is currently underway at Ingalls that improves heavy-lift and drydock capabilities and provides increased flexibility in production areas, all of which will result in numerous efficiency improvements. These capital improvements were carefully planned, taking into account complementary capabilities at Avondale and a future, stable ship production rate.  Return on this investment will be maximized with a stable rate of future ship production.

Programs

The DDG 51 Destroyer program is a mature program, running very smoothly, resulting in a highly capable and affordable warship being delivered by LSS at a rate of about 1.5 ships per year.  To date, 25 DDG 51's have been awarded to Ingalls, many of these through multi-year procurement authority granted by the Congress. The program has been made even more affordable with the use of multi-year procurements, shared processes and material purchasing between Ingalls and General Dynamics, close government-industry teaming and a stable production rate of three ships per year split evenly between Ingalls and GD. The proposed reduction in the DDG 51 procurement rate to two ships per year beyond fiscal year 2001 gives us cause for concern in the areas of affordability, skill retention and optimal facility utilization.

Since 1998, LSS has been funded and actively participating in the follow-on destroyer program to the DDG 51, the DD 21 program.  The unique acquisition approach has Ingalls as leader of the DD 21 Gold Team -- with Raytheon Corporation as systems integrator -- and as co-leader of the DD 21 Alliance, with GD.  The competition has been intense, and the investment of time and people has been significant.  The result will be a revolutionary ship design produced in an affordable and stable manner by this country's two premier surface combatant shipyards. However, in recent years the start of lead ship production for this class has slipped from fiscal year 2003, to fiscal year 2004 and now, in the latest Navy budget, to fiscal year 2005 with sustained production proposed to start in fiscal year 2007.

The decisions to stretch out DDG 51 procurement and delay the start of the DD 21 program must be made with a careful eye toward impact on the industrial base, as well Navy requirements.  Extension of multi-year procurement authority and higher, stable procurement rates through the remainder of the DDG 51 class should be a high priority, along with careful attention to marrying the end of the DDG 51 class with the beginning of the DD 21 Destroyer Class.  It is critical to the affordability of these programs, to maintaining a "hot" production line, and to maintaining a 300-ship Navy that the remainder of the DDG 51 program and the DD 21 Destroyer program be carefully planned together with an emphasis on maintaining a stable rate of production of at least three surface combatants per year.

On February 4th, LSS launched the LHD 7 Amphibious Assault ship. The LHD 7 will be christened the IWO JIMA on March 25th.  In fiscal year 2000, the Congress provided $375 million to begin incrementally procuring LHD 8, rather than conduct a major mid-life upgrade to an older LHA 1 Amphibious Assault Ship, in order to maintain the twelve Amphibious Readiness Groups needed to meet operational commitments. This is in addition to the $45 million approved for LHD 8 in fiscal year 1999.  Included in the LHD 8 design will be new gas turbine propulsion, electric auxiliaries, lower manning and life-cycle costs and facilities to accommodate the MV-22 aircraft.  Procuring LHD 8 as soon as possible and taking advantage of the "hot" production line at Ingalls will save the taxpayers hundreds of millions of dollars.

The LHD 1 ship class and the older LHA 1 ship class built at Ingalls form the nucleus of the twelve Marine Amphibious Readiness Groups currently in operation. Like all vessels, these ships must either be replaced on a regular basis as they reach retirement age or face major overhauls to accommodate new technologies and new missions.  As the U.S. Navy and U.S. Marine Corps make future procurement decisions to maintain at least twelve operational ARGs, the choice should be made to procure additional new large Amphibious Assault ships with new technologies and capable of handling the new mission requirements.  It is not too soon to begin this process to help maintain the stability in our industry, an industry that is fragile at relatively low overall production rates.

The Avondale Alliance of Avondale Industries and Bath Iron Works is also involved in a major Amphibious Ship effort with the 12-ship LPD 17 program.  These highly capable ships replace 41 older ships and will introduce significant reductions in life cycle costs. Indeed, over $4 billion in reductions to total ownership costs have been identified so far.  This program is now well underway, with keel laying for the first LPD 17 scheduled for December 2000. These ships are also major components of the ARG, and priority should be placed on procuring the remaining ships in this class in an efficient and stable manner.

The aforementioned military shipbuilding programs, and other critical future programs such as JCC(X) and ADC(X), form the core of ship programs at LSS, but are not sufficient to operate our facilities at optimal levels.  We have pursued successfully additional core commercial programs that capitalize on the expertise at Ingalls and Avondale and that contribute to stabilizing the business base, retaining skills and generating significant commercial expertise at both facilities. 

In March 1999, Ingalls was awarded a contract to design and produce two 2000-passenger, 72,000 ton cruise ships for the Hawaiian trade.  The first ship begins production on July 3rd of this year and has been planned closely with the construction schedules of LHD 8 and DDG 51 destroyers.  In June 1997, Avondale was awarded a contract to design and produce three Suezmax one million barrel tankers for the Alaskan trade. These programs could not have happened without the contribution of the Jones Act, the Title XI Ship Loan Guarantee program and the extraordinary efforts of the U.S. Maritime Administration.  These and future commercial programs being pursued aggressively by LSS are critical elements of our overall strategy to maintain stability in production, retain skills and apply commercial lessons to improve our overall efficiency.

Finally, LSS continues to pursue aggressively foreign military programs throughout the world. The Defense Export Loan Guarantee remains a powerful potential tool to aid in successfully winning international programs to produce surface combatants.

Additional Issues

The era of Acquisition Reform began officially with the signing of the Federal Acquisition Streamlining Act of 1994 and the Federal Acquisition Reform Act of 1996.  The key tenets of Acquisition Reform -- early industry involvement, teaming, commercial practices, innovation, full service contracting and best value -- began immediately and have increased with each successive program.  The impacts have been intensified by the parallel consolidations ongoing within the Navy shipbuilding industry.  Increased requirements for competitive firewalls, significant and early investment, teaming, innovation and new skills are the direct results of this new acquisition environment. To help respond to this environment, the merger of Ingalls and Avondale has provided us with a larger repertoire of talent and skills and a larger business base for investment. 

The increased emphasis on innovation as a major award criteria for new contracts results in an increased emphasis by LSS on Research & Development and the pursuit of both funded and independent research programs.  Funding for surface ship R&D is important to the overall health and competitiveness of the industry.

Finally, LSS is confident that "Full Service Contracting" initiatives being taken by the Navy to partner more closely with industry throughout all stages of an acquisition program will be a win-win for government and industry. It will enable long-term relationships to form, long-term cost-effective solutions to be developed, a long-term balance to be struck between public and private industry and total life cycle costs to be reduced significantly over an entire acquisition.

Conclusion

LSS is doing its part in aggressively responding to a changing environment, a consolidating industry, a very tight labor market and a demand for new skills and sophisticated and affordable ships. We are aggressively exploiting synergies between Ingalls and Avondale. Our Strategic Plan contains specific initiatives to respond to the changing acquisition environment, to grow our businesses and to continue to be a strong competitor in all non-nuclear surface ship programs and services.

We appreciate efforts by the Congress to bring new approaches to ship acquisition into the mainstream, including incremental funding and multi-year procurements.  We urge the Congress to help maintain stability in ship production rates. And we look forward to playing our part in helping to sustain an affordable 300-ship navy. Thank you.