<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-9864
----------------
NEWPORT NEWS SHIPBUILDING INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1541566
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
4101 WASHINGTON AVENUE 23607
NEWPORT NEWS, VIRGINIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(757) 380-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [_] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common Stock, par value $100.00 per share: 10 shares as of September 30,
1996 (see Item 5)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I--Financial Information
Newport News Shipbuilding Inc.
Combined Statements of Earnings....................................... 2
Combined Balance Sheets............................................... 3
Combined Statements of Cash Flows..................................... 4
Statements of Changes in Combined Equity.............................. 5
Notes to Combined Financial Statements................................ 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 11
Part II--Other Information
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities........................................... *
Item 3. Defaults Upon Senior Securities................................. *
Item 4. Submission of Matters to a Vote of Security Holders............. *
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 14
</TABLE>
- --------
*No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
1
<PAGE>
PART I
FINANCIAL INFORMATION
NEWPORT NEWS SHIPBUILDING INC.
COMBINED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1996 1995 1996 1995
--------- --------- -------- --------
(MILLIONS)
<S> <C> <C> <C> <C>
Net Sales................................ $ 522 $ 445 $ 1,437 $ 1,290
Operating Costs and Expenses............. 486 410 1,320 1,165
--------- --------- -------- --------
Operating Earnings....................... 36 35 117 125
Interest Expense......................... 8 6 25 26
--------- --------- -------- --------
Earnings Before Income Taxes............. 28 29 92 99
Provision For Income Taxes............... 13 12 40 41
--------- --------- -------- --------
Net Earnings............................. $ 15 $ 17 $ 52 $ 58
========= ========= ======== ========
</TABLE>
The accompanying notes to unaudited combined financial statements are an
integral part of these combined statements of earnings.
2
<PAGE>
NEWPORT NEWS SHIPBUILDING, INC.
COMBINED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(MILLIONS)
ASSETS
------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents.......................... $ 1 $ 2
Accounts Receivable, net........................... 105 67
Contracts in Process............................... 298 263
Inventory.......................................... 48 54
Notes Receivable................................... -- 18
Other Current Assets............................... 27 15
------ ------
Total Current Assets............................. 479 419
------ ------
Noncurrent Assets
Property, Plant and Equipment, net................. 834 820
Other Assets....................................... 160 141
------ ------
Total Noncurrent Assets.......................... 994 961
------ ------
$1,473 $1,380
====== ======
<CAPTION>
LIABILITIES AND COMBINED EQUITY
-------------------------------
<S> <C> <C>
Current Liabilities
Trade Accounts Payable............................. $ 102 $ 99
Accounts Payable to Tenneco........................ 31 67
Short-Term Debt.................................... 160 68
Deferred Income Taxes.............................. -- 39
Other Accrued Liabilities.......................... 181 165
------ ------
Total Current Liabilities........................ 474 438
------ ------
Noncurrent Liabilities
Long-Term Debt..................................... 267 292
Postretirement Benefits............................ 103 101
Deferred Income Taxes.............................. 136 138
Other Long-Term Liabilities........................ 159 139
Commitments and Contingencies (See Note 3)
------ ------
Total Noncurrent Liabilities..................... 665 670
------ ------
Combined Equity...................................... 334 272
------ ------
$1,473 $1,380
====== ======
</TABLE>
The accompanying notes to unaudited combined financial statements are an
integral part of these combined balance sheets.
3
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings................................................... $ 52 $ 58
Adjustments to Reconcile Net Earnings to Net Cash
Provided (Used) by Operating Activities--
Depreciation................................................. 48 51
Deferred Income Taxes........................................ (41) 48
Allocated Corporate Interest, net of tax..................... 16 17
Changes in Components of Working Capital--
Decrease (Increase) in--
Accounts Receivable, net................................... (38) (10)
Contracts in Process....................................... (35) (56)
Inventory.................................................. 6 (9)
Other Current Assets....................................... (12) (2)
Increase (Decrease) in--
Trade Accounts Payable..................................... 3 19
Accounts Payable to Tenneco................................ (36) (115)
Other Accrued Liabilities.................................. 16 11
Other, net................................................... 25 (22)
------ ------
Net Cash Provided (Used) by Operating Activities.......... 4 (10)
------ ------
Cash Flows from Investing Activities:
Capital Expenditures........................................... (55) (43)
Other.......................................................... (11) --
------ ------
Net Cash Used by Investing Activities..................... (66) (43)
------ ------
Cash Flows from Financing Activities:
Cash Transfers from Tenneco.................................... 61 52
------ ------
Net Decrease in Cash and Cash Equivalents....................... (1) (1)
Cash and Cash Equivalents at Beginning of Period................ 2 1
------ ------
Cash and Cash Equivalents at End of Period...................... $ 1 $ --
====== ======
Cash Paid During the Period for:
Interest....................................................... $ -- $ --
====== ======
Income taxes................................................... $ 67 $ 46
====== ======
</TABLE>
The accompanying notes to unaudited combined financial statements are an
integral part of these combined statements of cash flows.
4
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
STATEMENTS OF CHANGES IN COMBINED EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Combined Equity, beginning of period............................ $ 272 $ 199
Net Earnings.................................................... 52 58
Net Cash Transfers From Tenneco................................. 61 52
Non-Cash Transactions With Tenneco..............................
Net Change in Allocated Corporate Debt........................ (67) (34)
Allocated Corporate Interest, net of tax...................... 16 17
------ ------
Combined Equity, end of period.................................. $ 334 $ 292
====== ======
</TABLE>
The accompanying notes to unaudited combined financial statements are an
integral part of these
statements of changes in combined equity.
5
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying combined financial statements represent the financial
position, results of operations and cash flows for all shipbuilding operations
owned directly or indirectly by Tenneco Inc. ("Tenneco") and its subsidiaries.
Unless the context otherwise requires, as used herein, the term "Company"
refers: (i) for periods prior to the Shipbuilding Distribution (as defined
below), to Newport News Shipbuilding and Dry Dock Company ("Newport News") and
certain other consolidated subsidiaries through which Tenneco conducted its
shipbuilding business (the "Shipbuilding Business") during such period, and
(ii) for periods after the Shipbuilding Distribution, to Newport News
Shipbuilding Inc. ("NNS," formerly Tenneco InterAmerica Inc.) and its
consolidated subsidiaries, including Newport News.
The unaudited combined financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, the Company believes that the disclosures included
herein are adequate to make the information presented not misleading.
Operating results for the three and nine month periods ended September 30,
1996, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996. These unaudited combined financial
statements should be read in conjunction with the audited combined financial
statements and notes thereto as of December 31, 1995 and for the three years
then ended included in the Company's Registration Statement on Form 10
effective November 6, 1996 (File No. 001-12385).
In the opinion of the Company's management, the unaudited combined financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation.
2. THE SHIPBUILDING DISTRIBUTION
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged into Tenneco (the "Merger"). The Merger is part of a larger Tenneco
reorganization (the "Transaction") which includes the distribution of the
common stock of the Company (the "Shipbuilding Distribution") and New Tenneco
Inc. ("New Tenneco"), a newly formed subsidiary of Tenneco which will hold
substantially all the assets, liabilities and operations of Tenneco's current
automotive and packaging businesses and its administrative services business
(the "Industrial Distribution" and together with the Shipbuilding Distribution
the "Distributions"), to the holders of Tenneco common stock. Upon completion
of the Transaction, currently anticipated to occur in December 1996, holders
of Tenneco common stock will receive equity securities of the Company, New
Tenneco and El Paso.
Prior to the Transaction, Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain New Tenneco
debt will be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for other Tenneco debt, and certain debt issues
may be defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, New Tenneco (which may declare
and pay a dividend to Tenneco) and the Company (which will declare and pay a
dividend of approximately $600 million to Tenneco or one or more of its
subsidiaries). Upon completion of the debt realignment, Tenneco will have
responsibility for $2.65 billion of debt, subject to certain adjustments, the
Company will have responsibility for the borrowings under its credit lines
(refer to Note 4), and New Tenneco will have responsibility for the remaining
debt.
6
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A favorable ruling by the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes was issued October 30, 1996. A special meeting of
stockholders of Tenneco has been called for December 10, 1996, for the purpose
of seeking such approval. On November 1, 1996, the New York Stock Exchange
approved the listing of the Company's Common Stock upon notice of issuance.
The approval of the Transaction by Tenneco stockholders is also a condition of
such Transaction.
3. COMMITMENTS AND CONTINGENCIES
Government Contracting
More than 90% of the Company's business involves contracting with the U.S.
Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed-price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. In certain instances, the Company
has made adjustments to its contract prices and the costs allocated to
government contracts involving such issues.
Retirement Plan
Tenneco and the Company have received letters from the Defense Contract
Audit Agency (the "DCAA"), inquiring about certain aspects of the Transaction,
including the disposition of the Tenneco Inc. Retirement Plan (the "TRP"),
which covers salaried employees of the Company and other Tenneco divisions.
The DCAA has been advised that (i) the TRP will retain the liability for all
benefits accrued by the Company's employees through the date of the
Distributions (the "Distribution Closing Date"), (ii) the Company's employees
will not accrue additional benefits under the TRP after the Distribution
Closing Date and (iii) no liabilities or assets of the TRP will be transferred
from the TRP to any plan maintained by the Company. A determination of the
ratio of assets to liabilities of the TRP attributable to the Company will be
based on facts, assumptions and legal issues which are complicated and
uncertain; however, it is likely that the Government will assert a claim
against the Company with respect to the amount, if any, by which the assets of
the TRP attributable to the Company's employees are alleged to exceed the
liabilities. New Tenneco, with the full cooperation of the Company, will
defend against any claim by the Government, and in the event there is a
determination that an amount is due to the Government. New Tenneco and the
Company will share its obligation for such amount plus the amount of related
defense expenses, in the ratio of 80% and 20%, respectively. Pending a final
determination of any such claim, the Government may, absent an agreement with
the Company to defer the payment of the amounts claimed, withhold all or a
portion of all future progress payments due the Company under its government
contracts until it has recovered its alleged share of the claimed amount plus
interest. In the event of a claim by the Government, the Company will
diligently seek a deferral agreement with the Government; however, there can
be no assurance that the Company will be able to arrange such an agreement and
thus avoid an offset against future progress payments pending a final
determination. At this preliminary stage it is impossible to predict with
certainty any eventual outcome regarding this matter, however, the Company
does not believe that this matter will have a material adverse effect on its
financial condition or results of operations.
CVN-76 Cost and Pricing Data Submission
In March 1995, the DCAA informed the Company that it would conduct a post-
award audit of the contract to build the aircraft carrier Ronald Reagan (CVN-
76). The audit concerns the Company's submission to the U.S. Navy of current,
accurate and complete data relating to labor and overhead costs submitted in
connection with the proposals and negotiations relating to the CVN-76
contract. The audit is ongoing and the DCAA has not issued its audit report.
In discussions with the DCAA auditors, however, the DCAA auditors have
indicated to Company management that the $2.5 billion CVN-76 contract should
be reduced by approximately $122 million based on an alleged submission of
defective cost and pricing data.
7
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In addition, in May 1996, the Company received a subpoena from the Inspector
General of the Department of Defense requesting documents in connection with a
joint inquiry being conducted by the Department of Defense, the Department of
Justice, the U.S. Attorney's Office for the Eastern District of Virginia, and
the Naval Criminal Investigative Service. Like the DCAA audit, the
investigation appears to focus on whether data relating to labor and overhead
costs that the Company supplied in connection with the proposals and
negotiations relating to the CVN-76 contract were current, accurate and
complete.
The Government has not asserted any formal claims against the Company
related to these CVN-76 contract matters. Based on the Company's present
understanding of the focus of the inquiries, it is the Company's opinion that
it has substantial defenses to claims that the government might potentially
assert that the Company submitted cost or pricing data that was not current,
accurate and complete for the CVN-76 contract. It is the Company's intention
to vigorously assert these defenses in the event that the Government should
assert such claims. Although the ultimate outcome cannot be predicted, based
on the Company's present understanding of the claims the Government might
assert, together with defenses the Company believes are available to it,
management is of the opinion that the ultimate resolution of this matter will
not have a material adverse effect on the financial condition or results of
operations of the Company.
However, the early stage of the investigation and audit relating to the CVN-
76 contract, and the uncertainties and vagaries attendant to such
investigations and audits and any litigation which may ultimately arise with
respect to these potential claims make it impossible to predict with certainty
any eventual outcome. Construction of the Reagan (CVN-76) is scheduled for
completion in 2002 and the contract represents a substantial portion of the
Company's current backlog of business. Depending on the outcome of the audit
and investigation, the Company could be subject, under various civil and
criminal statutes, to a reduction to the CVN-76 contract price and to fines
and other penalties, including the suspension or debarment from government
contracting work. Any of these in substantial amounts could have a material
adverse effect on the Company's financial condition and results of operations.
Pending the ultimate resolution of the investigation and audit relating to
the CVN-76 contract and to reduce the consequences of an adverse outcome, the
Company has taken steps to adjust its future progress billings on the CVN-76
contract. Although these steps will reduce the Company's cash flow pending a
final resolution, management believes these steps will not have a material
adverse effect on the Company's financial condition or results of operations.
Other
As a general practice within the defense industry, the DCAA continually
reviews the cost accounting practices of government contractors. In the course
of those reviews, cost accounting issues are identified, discussed and
settled, or resolved through legal proceedings. In addition, various
government agencies may at any time be conducting various other investigations
or making specific inquiries. The Company is currently engaged in discussions
on several cost accounting and other matters in addition to those described
above. The Company is also a party to numerous other legal proceedings
relating to its business and operations. The Company believes that the outcome
of these cost accounting or other matters and proceedings will not have a
material adverse effect on the Company's financial condition or results of
operations.
Significant Estimates
In 1994 and 1995, the Company entered into fixed-price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson Corporation at a price of $36 million per ship. Construction of the
first tanker is substantially complete; construction has begun on the second
tanker; and a substantial portion of the materials needed for the
8
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
construction of the three uncompleted tankers has been ordered. The Company
presently estimates that these ships will be constructed over the period
ending February, 1998. In connection with the construction of these four
tankers, the Company has incurred or estimates it will incur costs of
approximately $90 million in excess of the fixed contract prices. As of
September 30, 1996, the full amount of these excess costs has been reserved
for by a charge against income; $56.6 million in 1996 ($30.4 million in the
three months ended September 30, 1996), $29.7 million in 1995 and $5.0 million
in 1994. Disagreements have arisen during the course of construction as to
whether the first and second ships were and are being constructed in
compliance with the specifications set forth in the contracts, and the
purchasers sent letters to the Company purporting to invoke the procedures set
forth in the contracts for resolution of this situation and requested that the
Company in the interim stop construction on the ships. The Company saw no
reason to stop construction on the ships because of its confidence that the
ships will be in compliance with all contract and classification society
requirements. The purchasers have withdrawn both their invocation of the
dispute resolution procedures under the contracts and their request that the
Company cease further construction of the ships. Discussions between the
Company and the purchasers to date have resulted in the resolution of a
significant number of these disagreements, although some remain unresolved and
are the subject of further discussions. No assurances can be given as to the
effect the resolution of these remaining disagreements will have on the
Company (although the Company does not believe such resolution will materially
and adversely affect it) or the extent to which the remaining work on these
contracts can be completed without further disagreements with the purchasers
or the incurrence of additional losses in excess of current estimates. These
estimates are based on the use of new robotic technology and the utilization
of a different building strategy going forward. The Company believes that
these factors, as well as the experience gained in the construction of the
first ship, will result in a very significant reduction in the man-hours
necessary to construct each of the remaining vessels. There can be no
assurance that these factors will produce this result. The Company intends to
review this situation at the end of each quarter and, accordingly, there can
be no assurance that the estimate of costs to be incurred on these contracts
will not be revised at that time based on the facts then known to the Company.
In 1995, the Company entered into fixed price contracts with limited
liability companies comprised principally of Hvide Partners, L.P. and an
affiliate of Van Ommeren International BV to construct an additional five
Double Eagle product tankers having a somewhat different design for the
domestic Jones Act market at a current average price of $43.4 million per
ship. The Company is in the process of completing its design work on these
ships and expects to begin construction in the first half of 1997. These ships
are scheduled for delivery in 1998. The Company presently estimates that it
will break even on these ships on an aggregate basis, but there can be no
assurance that the costs incurred in constructing these ships will not exceed
the contract prices for them for the reasons described in the immediately
preceding paragraph.
Contracting with the U.S. Government can also result in the Company filing a
Request for Equitable Adjustment ("REA") in connection with a contract. REAs
represent claims against the U.S. Government for changes in the original
contract specifications and resulting delays and disruption in contract
performance. All major REAs filed by the Company in connection with its
contracts, have been settled as of September 1996 for approximately the same
amount recorded previously by the Company. Through 1995, costs of $18 million
had been recognized on the Sealift REA in excess of the adjudicated REA price.
Cost growth of $48 million that was not recoverable through that REA was
recognized in the first nine months of 1996. Due to uncertainties inherent in
the estimation process there can be no assurance that the projection of costs
to be incurred will not be revised in the future. The first of two Sealift
ships was delivered in August 1996. Management expects this contract to be
substantially complete by the end of the first quarter of 1997.
Litigation
The Company is also a defendant in other matters of varying nature. In the
opinion of management, the outcome of these proceedings should not have a
material adverse effect on the financial position or results of operations of
the Company.
9
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
4. FINANCING
In connection with the Transaction and to provide for working capital needs.
NNS entered into a $415 million secured credit facility (the "Senior Credit
Facility") effective November 7, 1996 comprised of a $200 million six-year
amortizing term loan (the "Term Loan") and a $215 million six-year revolving
credit facility (the "Revolving Credit Facility"), of which $125 million may
be used for advances and letters of credit and $90 million may be used for
standby letters of credit. NNS also intends to issue Notes (as defined below)
in the amount of $400 million.
The Company expects to utilize the proceeds of the Notes and Term Loan and
borrowings of $14 million under the Revolving Credit Facility to distribute
(i) $600 million as a dividend to Tenneco or one or more of its subsidiaries
for use in retiring certain Tenneco consolidated debt and (ii) $14 million in
payment of certain fees and expenses incurred in connection with the Senior
Credit Facility and the Notes.
The Term Loan will amortize in 24 quarterly installments, commencing March
31, 1997, with an annual aggregate payment amount of $27.5 million in each of
1997 through 2001, and $62.5 million in 2002. Borrowings under the Senior
Credit Facility are to be secured by perfected liens on substantially all of
the Company's assets. After January 1, 1998, the security interest in the
collateral will be released if the Company meets certain specific financial
and other conditions.
Interest on borrowings under the Senior Credit Facility accrues at a
floating rate based on either LIBOR or a base rate. The Senior Credit Facility
contains customary representations and warranties and financial and other
standard covenants, including minimum net worth, total debt to EBITDA and
EBITDA less capital expenditures to interest expense. The Senior Credit
Facility also provides for limitations on debt and dividend levels and
specifies mandatory prepayments (with certain agreed-upon exceptions),
including 100% of the net proceeds from debt issuance, 50% of the net proceeds
from equity issuance and 100% of the net proceeds from asset sales.
The Notes will consist of $200 million of Senior Notes due 2006 and $200
million of Senior Subordinated Notes due 2006. Interest on the Notes is
payable semiannually. The Notes will be redeemable under certain
circumstances. The Senior Credit Facility places restrictions, subject to
certain exceptions, upon the right of NNS to declare and pay dividends and
make certain similar or related kinds of payments, including a cap of (i)
$10,000,000 plus (ii) 10% of consolidated net income (or minus 100% of
consolidated net loss) calculated for the period from the closing date under
the Senior Credit Facility through the end of the most recent fiscal quarter
for NNS and its subsidiaries (which for purposes of this calculation is
treated as a single accounting period). Additionally, the indentures for the
Notes, subject to certain exceptions, generally restrict the right of NNS and
its subsidiaries to declare and pay dividends and certain similar or related
kinds of payments. These restrictions may materially limit the right of NNS to
declare and pay dividends on the NNS Common Stock.
NNS' obligations under the Notes and Senior Credit Facility are guaranteed
by Newport News. Certain other subsidiaries of NNS are presently excluded as
guarantors, but are subject to becoming guarantors in the future under certain
conditions, pursuant to the indentures for the Notes and the agreements for
the Senior Credit Facility.
10
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
The Company's primary business is the design, construction, repair, overhaul
and refueling of nuclear-powered aircraft carriers and submarines for the U.S.
Navy. The Company also provides ongoing maintenance for other U.S. Navy
vessels through work in overhauling, lifecycle engineering and repair. The
U.S. Navy accounted for approximately 94% and 97% of the Company's net sales
for the nine months ended September 30, 1996 and 1995, respectively.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----- -----
(MILLIONS)
<S> <C> <C>
Net sales..................................................... $ 522 $ 445
Operating earnings............................................ 36 35
</TABLE>
Third quarter 1996 operating earnings increased $1 million over the prior
year third quarter due to higher volume and productivity improvements on the
Eisenhower overhaul, partially offset by lower submarine construction earnings
due to the conclusion of the Los Angeles class program and lower margins on
commercial and conversion work. The third quarter 1996 results included a
charge of $31 million to cover estimated contract losses related to
construction of commercial product tankers compared with a $14 million charge
recorded in the year ago period.
Net sales for the 1996 third quarter increased $77 million to $522 million
compared with the 1995 period primarily due to increased activity on carrier
construction and the Eisenhower overhaul, partially offset by lower submarine
and conversion program revenues. Construction activity on the Los Angeles-
class submarines was completed in August 1996 with the delivery of Cheyenne.
The Company's backlog was $3.7 billion at September 30, 1996, substantially
all of which is U.S. Navy-related. The backlog at September 30, 1995 was $4.9
billion.
The backlog at September 30, 1996 included two Nimitz-class aircraft
carriers (Harry S. Truman and Ronald Reagan), surface ship overhaul contracts
and contracts to construct nine "Double Eagle" product tankers. In addition,
Newport News has ongoing engineering contracts related to submarine and
carrier work. Subject to receipt of new orders, this backlog will decline as
the remaining aircraft carriers are delivered in 1998 and 2002.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Net sales................................................... $1,437 $1,290
Operating earnings.......................................... 117 125
</TABLE>
The Company reported operating earnings of $117 million in the first nine
months of 1996 compared with $125 million in the 1995 period. Net sales were
$1,437 million for the nine months of 1996 compared with
11
<PAGE>
$1,290 million in the year ago period. Net sales increased due to higher
volumes on carrier construction and the Eisenhower overhaul, partially offset
by lower activity on conversion work and submarine construction. Operating
earnings declined due to additional costs of $30 million associated with
conversion work in the first nine months of 1996 compared to the prior year
and $57 million of higher than expected costs associated with the production
of commercial product tankers, an increase of $42 million over the comparable
prior year period. These reductions were partially offset by increased
activity on the Eisenhower overhaul and productivity improvements.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table reflects the summarized components of the Company's cash
flow for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Net cash provided (used) by operating activities......... $ 4 $(10)
Capital expenditures..................................... (55) (43)
Other investing cash flows............................... (11) --
------ ------
Subtotal................................................. (62) (53)
Cash transfers from Tenneco.............................. 61 52
------ ------
Net cash flow after transactions with Tenneco............ $ (1) $ (1)
====== ======
</TABLE>
OPERATING CASH FLOWS
The $14 million increase in comparative cash flows from operating activities
for the respective nine month periods ended September 30, 1996 and 1995 is due
to several factors, some offsetting. These factors include less contracts in
process build-up and a lower level of payments to Tenneco, offset by increased
levels of accounts receivable, higher taxes currently payable and lower
operating earnings. The lower contracts in process build-up coupled with the
increase of accounts receivable is essentially offsetting and is a result of
normal timing differences in the submission of billings, as well as the
settlement and billing of a request for equitable adjustment in 1996. The
lower level of payments to Tenneco in 1996 is due to the higher payments for
taxes in 1995. Increased taxes currently payable relate to the delivery of
submarines and the level of progress on aircraft carrier construction.
CAPITAL EXPENDITURES
The $12 million increase in capital expenditures for the nine month period
ended September 30, 1996 compared to the nine month period ended September 30,
1995 is attributable to ongoing capital improvement programs. The capital
improvement programs consist principally of three separate projects: (i) the
development of a state-of-the-art automated steel cutting and fabrication
facility; (ii) the extension of a dry dock facility; and (iii) the
construction of the Carrier Refueling Complex. The Company expects to fund its
planned capital expenditures with cash flows generated from its operations.
OTHER INVESTING CASH FLOWS
The 1996 investing activity relates to a $11 million investment for a 49%
ownership interest in a limited partnership, $3 million of which was invested
in the third quarter of 1996.
12
<PAGE>
SOURCES OF CAPITAL SUBSEQUENT TO THE SHIPBUILDING DISTRIBUTION
To provide for working capital needs, the Company entered into a $215
million six-year revolving credit facility effective November 7, 1996 as part
of a secured senior credit facility, of which $125 million may be used for
advances and letters of credit and $90 million may be used for standby letters
of credit; see Note 4, "Financing," for additional discussion.
DEBT AND INTEREST ALLOCATION
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and centrally manage
various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense has been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt. The Company has
also been allocated tax benefits approximating 35% of the allocated pre-tax
interest expense. Although interest expense, and the related tax effects, have
been allocated to the Company for financial reporting on a historical basis,
the Company has not been billed for these amounts. The changes in allocated
corporate debt and the after-tax allocated interest have been included as a
component of the Company's combined equity. Although management believes that
the historical allocation of corporate debt and interest is reasonable, it is
not necessarily indicative of the Company's debt upon completion of the debt
realignment nor debt and interest that will be incurred by the Company as a
separate public entity. Further, management believes that the Company's
interest rate and, therefore, interest expense as a separate entity will be
higher initially.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning among other things, the Company's prospects, developments and
business strategies for its operations, all of which are subject to risks and
uncertainties that may cause the Company's actual results to differ materially
from the results discussed in the forward-looking statements. These forward-
looking statements are identified by their use of such terms and phrases as
"intends," "intend," "intended," "goal," "estimate," "estimates," "expects,"
"expect," "expected," "project," "projects," "projected," "projections,"
"plans," "anticipates," "anticipated," "should," "designed to," "foreseeable
future," "believe," "believes" and "scheduled." When a forward-looking
statement includes a statement of the assumptions or basis underlying the
forward-looking statement, the Company cautions that, while it believes such
assumptions or basis to be reasonable and makes them in good faith, assumed
facts or basis almost always vary from actual results, and the differences
between assumed facts or basis and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company
or its management expresses an expectation or belief as to future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result or be achieved or accomplished.
Factors that might cause such a difference include: (a) the general
political, economic and competitive conditions in the United States and other
markets where the Company operates; (b) initiatives to reduce the federal
budget deficit and reductions in defense spending; (c) reductions in the
volume of U.S. Navy contracts awarded to the Company; (d) unanticipated events
affecting delivery or production schedules, and designs and manufacturing
processes, thus impairing the Company's efforts to deliver its products on
time or to reduce production costs and cycle time or realize in a timely
manner some or all of the benefits of such reductions; (e) changes in capital
availability or costs, such as changes in interest rates, market perceptions
of the industry in which the Company operates, or security ratings; (f)
employee workforce factors, including issues relating to collective bargaining
agreements or work stoppages; and (g) authoritative generally accepted
accounting principles or policy changes from such standard-setting bodies as
the Financial Accounting Standards Board and the Securities and Exchange
Commission.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to Note 3, "Commitments and Contingencies" herein, which
is incorporated in this Item 1 by reference.
ITEM 5. OTHER INFORMATION.
The Company's Registration Statement on Form 10 became effective on November
6, 1996. Reference is made to Note 2, "The Shipbuilding Distribution" herein,
which is incorporated in this Item 5 by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
No reports on Form 8-K were filed by the Company during the quarter for
which this Quarterly Report on Form 10-Q is filed.
14
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Newport News Shipbuilding Inc.
David J. Anderson
By___________________________________
Senior Vice President and
Chief Financial Officer
Date: November 14, 1996
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> OPUR1
<LEGEND> This schedule contains summary financial information extracted from
Newport News Shipbuilding Inc. and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 834
<OTHER-PROPERTY-AND-INVEST> 834
<TOTAL-CURRENT-ASSETS> 27
<TOTAL-DEFERRED-CHARGES> 0
<OTHER-ASSETS> 160
<TOTAL-ASSETS> 1,473
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 334
<TOTAL-COMMON-STOCKHOLDERS-EQ> 334
0
0
<LONG-TERM-DEBT-NET> 267
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 160
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 0
<TOT-CAPITALIZATION-AND-LIAB> 1,473
<GROSS-OPERATING-REVENUE> 1,437
<INCOME-TAX-EXPENSE> 40
<OTHER-OPERATING-EXPENSES> 0
<TOTAL-OPERATING-EXPENSES> 1,320
<OPERATING-INCOME-LOSS> 117
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 117
<TOTAL-INTEREST-EXPENSE> 25
<NET-INCOME> 52
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 4
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
