NEW YEAR AS AN INDEPENDENT COMPANY IS OFF TO A GOOD START WITH ARSENAL SHIP WIN

A Message From Bill Fricks -- A very Happy New Year to all of you! Our first full year as an independent yard is now underway. And it will be one of enormous challenges and opportunities. But I am pleased to say that it has started with some good news.

Last Friday the government approved our bid to design the revolutionary Arsenal Ship (along with our teaming partners Lockheed Martin and Ingalls Shipbuilding). We were one of three teams selected out of five submitting bids. This win is an important step forward in our strategy to expand into construction of non-nuclear surface ships for the Navy. My congratulations to those who worked so hard to get us this far. A year from now, one of the three teams will get a contract to build the lead Arsenal Ship.

As most of you know, just before the holiday shutdown, the Navy announced its selection of a competing team to build the LPD-17 amphibious assault ships. We lost even though our team's bid was substantially lower and in our view provided the best value to the Navy. Our partner on that bid, Ingalls Shipbuilding, has submitted a formal protest on behalf of the team to contest the selection. Regardless of the outcome of the protest, we are proceeding with our intentions to win further contracts for the Arsenal Ship and for the Navy's next-generation surface warship, SC-21, as well as for CVN 77 and the New Attack Submarine.

With our current contracts to build nine Double Eagles, a new one to design the Arsenal Ship, our ongoing bid to build FF-21 frigates for the UAE, and our establishment of Newport News Nuclear to expand our role in Department of Energy projects, we have moved well beyond our earlier status as a "nuclear shipbuilder." Although carriers and subs remain our core business, let me state clearly that for NNS there is no "going back" to being a nuclear yard only. Our growth objectives require both improving our profits on all current products and selectively pursuing new opportunities with good profit potential.

Our commercial project continues to present a serious challenge. Before we can take on new contracts in this area, we must improve our cost results to prove that we can compete profitably. And in our naval product lines, we must improve our profit margins.

Key to our success is the work we are doing in Process Innovation. Our "2X" teams, working together with our production, engineering, and support functions throughout the company, have done a great job of identifying ways to cut cycle time and cost by changing some of the ways that we work. The early focus has been on how to improve our commercial ship results, but we have seen increasingly that our naval product lines can benefit as well from many of the new processes when they are in place. Pilot projects, such as the steel factory's Web Line, the "2X" work team in Receipt and Inspection, and redesigned work flow in the Steel Pipe Shop, have shown promising early results.

This year, Process Innovation will take on even greater importance yard-wide with the implementation of the following: Process Lanes in the pre- and final assembly platen areas; Demand-Based-Manufacturing in X10 and several of our outfitting shops; Just-In-Time Material Flow to reduce inventories; improved use of Process Measurements in every process from concept design through testing and delivery; earlier and improved coordination of customer, sourcing, and production input in our design and engineering processes; increased standardization of work processes across product lines; better information flow and improved resource planning through development of a Shared Data Environment.

I challenge all of you to "get smart" about these "2X" projects, to support them in your area of work, and to be proactive in order to accelerate their implementation.

As I said at the outset, 1997 is a year of both challenges and opportunities. The more successful we are at working together to meet these challenges, the more opportunities we will create to prosper going forward. I've said often that as an independent company, we control our own destiny. Let's make 1997 a great year!