American Shipbuilding Association

American Shipbuilder - Volume 7, Issue 5 - July 2001

H.R. 2189 Will Strengthen the
Defense Shipbuilding Industrial Base

On June 14th Representatives Nancy Johnson (R-CT) and William Jefferson (D-LA), joined by their colleagues Representatives Jim McCrery (R-LA), Floyd Spence (R-SC), Duncan Hunter (R-CA), Curt Weldon (R-PA), Gene Taylor (D-MS), Jim Saxton (R-NJ), Rob Simmons (R-CT), James Maloney (D-CT), Jo Ann Davis (R-VA), Edward Schrock (R-VA), Randy “Duke” Cunningham (R-CA), Roger Wicker (R-MS), David Vitter (R-LA), John Cooksey (R-LA), Eric Cantor (R-VA), Bobby Scott (D-VA), Charles “Chip” Pickering, Jr. (R-MS), and Ronnie Shows (D-MS) introduced H.R. 2189, a bill to amend the Internal Revenue Code of 1986 to allow the use of a modified version of Completed Contract Method of Accounting for naval vessel construction.

Naval ship construction is very different from the construction of any other weapon system. Naval ships take three to seven years to build – whereas other defense systems are constructed in a matter of months. However, the Tax Code fails to recognize the unique nature of naval shipbuilding by applying the same tax accounting principles to all defense contractors regardless of the differences in construction periods. Significantly, the Tax Code recognizes the lengthy construction time for commercial ship construction and allows shipbuilders to pay taxes upon completion of the contract.

Currently, the Tax Code requires naval shipbuilders to use the Percent of Completion Method of Accounting (PCM). This method requires a company to estimate the profit it may or may not realize upon completion of a ship and pay taxes annually on progress payments during construction. These progress payments are not revenue, but a source of construction financing. The PCM imposes a severe cash flow penalty on naval shipbuilders during the construction phase by eliminating the resources that should be used to construct the ship and to invest in facilities and processes, which would reduce the cost of naval ships to the taxpayer. Neither the Office of Management and Budget nor the Congressional Research Service have estimated with accuracy the revenue the U.S. Treasury will receive years into the future, but the current Tax Code expects just that of builders of naval ships. Compounding this unfair tax burden is the fact that these companies are not fully paid for the ship until 12 months, or longer, after the ship is delivered to the U.S. Navy.

H.R. 2189 would allow a builder of a naval ship to pay taxes on profits earned upon delivery of each ship, regardless of the number of ships covered under the contract, provided the construction period is two years or more in duration. A company would pay the same amount of income taxes, but would be allowed to pay those taxes when the profit is actually known upon delivery of the ship.

H.R. 2189, like its Senate counterpart S. 666, is not a tax cut. It is an amendment to the Tax Code that reflects the unique nature of naval shipbuilding and conforms tax payment schedules to ship deliveries. H.R. 2189 will strengthen the financial health of our defense shipbuilding industrial base and allow for greater investment in shipbuilding and innovation that will in turn reduce the cost of naval ships for the taxpayer. It will also strengthen our supplier base by facilitating timely payments to suppliers of ship systems.

FY2001 Supplemental Includes Funds For
Prior Year Shipbuilding Bills

On June 20th the House passed H.R. 2216, the 2001 Supplemental Appropriations Act, by a vote of 341 to 87. Included in the bill was $222 million to cover prior year shipbuilding bills for four Navy programs: CVN 76, LPD-17, DDG-51, and the Virginia class submarine. This funding will cover bills owed by the Navy through the end of September of this year. At that time additional money will need to be made available to avoid work stoppage.

The Senate Appropriations Committee provided an additional $75 million in its mark of the Supplemental Appropriations Act for FY2001 (S.1077) for the LPD-17 program. This additional money, which was transferred from FY’01 Advanced Procurement dollars for LPD-17 will fund construction on the program through the end of 2001.

These bills are a result of overly optimistic cost estimating in a very constrained budget environment; reduced numbers of ships of a class being bought causing the unit price to rise; higher than expected inflation in the cost of materials and equipment; and increasing energy prices.

Navy Directed to Update 30-Year Shipbuilding Plan

A memorandum dated May 25, 2001 from E.C. “Pete” Aldridge, Under Secretary of Defense for Acquisition, Technology, and Logistics, directed the Navy to support a comprehensive review of its 30-year shipbuilding plan. Also participating in the review will be the Pentagon’s Program Analysis and Evaluation Office, the Cost Analysis and Improvement Group, the Office of Secretary of Defense - Comptroller, the Joint Staff, and the regional Commanders-in-Chiefs.

Under Secretary Aldridge tasked the Navy to update its work in the specific force structure areas to “new assumptions” being developed for the Quadrennial Defense Review (QDR) about the force-to-threat relationship. Particularly, the Under Secretary’s memorandum states that, “A substantial amount of work has already been accomplished, such as the Joint Staff study on future submarine forces, the surface combatant study update, and the submarine payloads and sensors study.” Also, the memo states that review is expected to take about 30 days to produce preliminary results.

Subsequent to the initial announcement of the review, it has been learned that the 30-year shipbuilding plan will be updated concurrently with the QDR. The QDR will determine the naval force structure required in the 21st Century, and those requirements will become the basis of the Pentagon’s future shipbuilding acquisition policy. It is unclear at this time if the Pentagon will incorporate the new shipbuilding plan into the QDR or publish a separate report upon completion of the QDR.

Last year, in response to a congressional requirement in Public Law 106-65, the Navy submitted a 30-year shipbuilding plan. The study, which looked at shipbuilding needs for the next 30-years, did not address the past decade of neglect. However, it did indicate the regional Commanders-in-Chief’s stated need for a naval fleet of 360-ships.

New Faces in All The Old Familiar Places

With the election of President George W. Bush, new personnel have been nominated or confirmed to key positions in the Pentagon with Secretary of Defense Donald Rumsfeld.

Dr. Paul Wolfowitz has been confirmed as the new Deputy Secretary of Defense. Dr. Wofowitz previously served in the Pentagon as Under Secretary of Defense for Policy from 1989 to 1993.

Serving as the New Under Secretary of Defense and Comptroller is Dr. Dov Zakheim. Before coming to the Pentagon, he served as the CEO of SPC International, and has served in the Pentagon previously as Deputy Under Secretary of Defense for Planning and Resources.

The new Under Secretary of Defense for Acquisition, Technology, and Logistics is Mr. E.C. “Pete” Aldridge, Jr. Previously Under Secretary Aldridge served in the Pentagon as Secretary of the Air Force from 1986 to 1988.

The New Secretary of the Navy is Mr. Gordon R. England. Previously, Mr. England served as Executive Vice President of General Dynamics Corporation, and was responsible for two major company sectors, Information Systems and International.

Serving under Secretary England is the new Under Secretary of the Navy, Ms. Susan Morrisey Livingstone. Ms. Livingstone was recently the CEO and Deputy Chairman of the Association of the United States Army, and from 1989 to 1993 she served as Assistant Secretary of the Army for Installations, Logistics and Environment.

Nominated to serve under Secretary England as Assistant Secretary of the Navy for Research, Development, and Acquisition, Mr. John J. Young. Currently Mr. Young is a Professional Staff Member on the U.S. Senate Appropriations Defense Subcommittee.

Nominated to serve as Assistant Secretary of the Navy and Comptroller is Mr. Dionel M. Aviles. Mr. Aviles is currently a Professional Staff Member on the U.S. House Armed Services Committee, responsible for Navy procurement and research and development.

Industry News

NASSCO Begins Construction on First Ship for TOTE

On June 4th National Steel and Shipbuilding Company (NASSCO) began construction on the first of two roll-on, roll-off (Ro/Ro) ships for Totem Ocean Trailer Express, Inc. (TOTE). Richard Vortmann, President of NASSCO stated that, “the TOTE ships will be the first to benefit from nearly $85 million in capital investment NASSCO is making in its shipyard, including the addition of two 300-ton cranes.” The heavy-lift cranes and other new equipment will allow NASSCO production teams to assemble and lift much larger blocks, increasing efficiencies in the use of manpower and materials and reducing the time required to build the ships. NASSCO is the only West Coast shipyard capable of building large ocean-going vessels for the Navy and commercial customers. The shipyard employs approximately 3,000 people in San Diego, CA.

U.S. Navy Awards $124 Million For DD-21 Alliance

On June 14th the Navy announced a $124 million contract modification for continuation of design and test planning of the DD-21 destroyer program. The contract was awarded to the DD-21 Alliance which included Ingalls Shipbuilding and Bath Iron Works.

Ingalls Shipbuilding/ Lockheed Martin Announce Joint Venture
for Coast Guard Deepwater Project

In a joint announcement on June 14th Ingalls Shipbuilding of Northrop Grumman and Lockheed Martin announced the creation of a joint venture partnership under which the two major corporations will submit a proposed “best value” solution for the U.S. Coast Guard’s Deepwater Program. This newly formed joint venture – Integrated Coast Guard Systems – formalizes a partnership underway for more than three years

W.P. “Pat” Keene – A Shipbuilder for 35 Years Retires

Mr. Pat Keene, Executive Vice President of Litton Ship Systems, retired on June 1st after a 35-year career in the shipbuilding industry. Prior to his promotion to Litton Ship Systems, Mr. Keene served as President of Ingalls Shipbuilding. Mr. Keene joined Ingalls Shipbuilding in 1966 as a nuclear submarine test engineer. In 1980, he was named Director of Operations and then in 1982 he was promoted to Vice President in charge of all manufacturing.