UNITED STATES 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 MARCH 22, 1998
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 1-12385
-----------------
NEWPORT NEWS SHIPBUILDING INC.
(Exact name of registrant as specified in its charter)
Delaware 74-1541566
- -------- ----------
State or Other Jurisdiction of IRS Employer
Incorporation or Organization Identification No.
4101 Washington Avenue, Newport News, Virginia 23607
- ---------------------------------------------- -----
Address of Principal Executive Offices Zip Code
(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 X No
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 $.01 per share: 35,273,169 shares and associated
preferred stock purchase rights as of April 15, 1998.
<PAGE>
TABLE OF CONTENTS
PAGE
Part I--Financial Information
Newport News Shipbuilding Inc.
Consolidated Statements of Earnings............................. 2
Consolidated Balance Sheets..................................... 3
Consolidated Statements of Cash Flows........................... 4
Notes to Consolidated Financial Statements...................... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Part II--Other Information
Item 1. Legal Proceedings........................................... 11
Item 2. Changes in Securities and Use of Proceeds................... *
Item 3. Defaults Upon Senior Securities............................. *
Item 4. Submission of Matters to a Vote of Security Holders......... *
Item 5. Other Information........................................... *
Item 6. Exhibits and Reports on Form 8-K............................ 11
*No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
THIS QUARTERLY REPORT ON FORM 10-Q SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
<PAGE>
PART I
FINANCIAL INFORMATION
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 22, March 23,
1998 1997
------------ ------------
Millions (Except Shares and Per Share Amounts)
<S> <C>
Revenues............................................................... $ 397 $ 403
Operating Costs and Expenses........................................... 358 368
Other Income (Expense), net............................................ 1 -
------------ ------------
Operating Earnings..................................................... 40 35
Interest Expense, net of interest capitalized.......................... 13 13
------------ ------------
Earnings Before Income Taxes........................................... 27 22
Provision for Income Taxes............................................. 11 9
------------ ------------
Net Earnings........................................................... $ 16 $ 13
============ ============
Weighted Average Number of Common Shares Outstanding................... 34,990,962 34,464,442
============ ============
Basic Net Earnings Per Common Share.................................... $ .46 $ .38
============ ============
Diluted Net Earnings Per Common Share.................................. $ .44 $ .38
============ ===========
Dividends Declared Per Common Share.................................... $ .04 $ .04
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
statements of earnings.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 22, December 31,
1998 1997
--------- -----------
<S> <C>
Millions (Except Share Amounts)
ASSETS
Current Assets
Cash and Cash Equivalents.............................................. $ 11 $ 3
Accounts Receivable.................................................... 114 136
Contracts in Process................................................... 273 210
Inventory.............................................................. 46 44
Deferred Income Taxes.................................................. 44 50
Other Current Assets................................................... 14 12
--------- ---------
Total Current Assets................................................... 502 455
--------- ---------
Noncurrent Assets
Property, Plant and Equipment, net..................................... 791 816
Other Assets........................................................... 217 205
--------- ---------
Total Noncurrent Assets................................................ 1,008 1,021
--------- ---------
$ 1,510 $ 1,476
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade Accounts Payable................................................. $ 143 $ 151
Short-Term Debt........................................................ 30 30
Accrued Liabilities & Other............................................ 200 175
--------- ---------
Total Current Liabilities.............................................. 373 356
--------- ---------
Noncurrent Liabilities
Long-Term Debt......................................................... 548 548
Deferred Income Taxes.................................................. 198 199
Postretirement Benefits................................................ 107 107
Other Long-Term Liabilities............................................ 85 83
Commitments and Contingencies (See Note 3).............................
--------- ---------
Total Noncurrent Liabilities........................................... 938 937
--------- ---------
Stockholders' Equity
Common Stock, $.01 par value -
authorized 70,000,000 shares; issued 35,281,548 shares at
March 22, 1998, and 34,948,663 shares at December 31, 1997........ 1 1
Paid-In Capital........................................................ 259 256
Accumulated Deficit.................................................... (53) (68)
Unearned Compensation.................................................. (3) (4)
Treasury Stock (250,804 shares at March 22, 1998 and
84,069 shares at December 31, 1997)............................... (5) (2)
--------- ---------
Total Stockholders' Equity............................................. 199 183
--------- ---------
$ 1,510 $ 1,476
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 22, March 23,
1998 1997
----------- -----------
<S> <C>
Millions
Cash Flows from Operating Activities:
Net Earnings ........................................................... $ 16 $ 13
Adjustments to Reconcile Net Earnings Before Accounting Changes to
Net Cash Provided by Operating Activities -
Depreciation and Amortization................................... 16 17
Deferred Income Taxes........................................... 5 4
Changes in Components of Working Capital -
Decrease (Increase) in -
Accounts Receivable........................................ 22 83
Contracts in Process....................................... (63) (70)
Inventory.................................................. (2) 2
Other Current Assets....................................... (2) (8)
Increase (Decrease) in -
Trade Accounts Payable..................................... (8) (3)
Accrued Liabilities & Other................................ 25 25
Other, net...................................................... 16 8
------ -------
Net Cash Provided by Operating Activities................................ 25 71
------ -------
Cash Flows from Investing Activities:
Capital Expenditures..................................................... (1) (7)
Other.................................................................... (12) (2)
------ -------
Net Cash Used by Investing Activities.................................... (13) (9)
------ -------
Cash Flows from Financing Activities:
Net Decrease in Revolving Credit Facility................................ - (24)
Payments on Short-Term Debt.............................................. (1) -
Proceeds from Issuance of Common Stock................................... 4 6
Treasury Stock Purchases................................................. (9) -
Proceeds from Issuance of Treasury Stock................................. 3 -
Dividends Paid........................................................... (1) (1)
------ -------
Net Cash Used by Financing Activities.................................... (4) (19)
------ -------
Net Increase in Cash and Cash Equivalents................................ 8 43
Cash and Cash Equivalents at Beginning of Period......................... 3 1
------ -------
Cash and Cash Equivalents at End of Period............................... $ 11 $ 44
====== =======
Cash Paid During the Period for Income Taxes............................. $ - $ -
====== =======
Cash Paid During the Period for Interest................................. $ 4 $ 5
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated
statements of cash flows.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
Unless the context otherwise requires, the term "Company" refers to Newport News
Shipbuilding Inc. ("NNS") and its consolidated subsidiaries. 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 SEC 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 month period ended
March 22, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. These unaudited financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
The Company is reporting quarterly results on an accounting-month basis
consistent with the prior year.
In the opinion of the Company's management, the unaudited financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation.
2. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards ("FAS")
No. 128, "Earnings per Share". Basic earnings per common share was computed by
dividing net earnings by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share was computed
assuming the terms and conditions for the contingent shares and common stock
options were met and converted on March 22, 1998 and March 23, 1997,
respectively.
<TABLE>
<CAPTION>
Quarter Ended March 22, 1998
----------------------------
Per Share
Earnings Shares Amount
-------- ------ ------
<S> <C>
Millions, except for shares and per share data
Basic Net Earnings per Common Share
Income available to common stockholders $ 16 34,990,962 $ .46
===========
Stock Options and Other Common
Stock Equivalents - 1,320,093
------------- -------------
Diluted Net Earnings per Common Share
Income available to common stockholders $ 16 36,311,055 $ .44
============= ============= ===========
</TABLE>
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 23, 1997
----------------------------
Per Share
Earnings Shares Amount
-------- ------ ------
<S> <C>
Millions, except for shares and per share data
Basic Net Earnings per Common Share
Income available to common stockholders $ 13 34,464,442 $ .38
===========
Stock Options and Other Common
Stock Equivalents - 94,682
------------- -------------
Diluted Net Earnings per Common Share
Income available to common stockholders $ 13 34,559,124 $ .38
============= ============= ===========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
Government Contracting
As a general practice within the defense industry, the Defense Contract Audit
Agency (the "DCAA") and other government agencies continually review the cost
accounting and other practices of government contractors, including the Company,
conduct other investigations, and make specific inquiries. In the course of
those reviews and investigations, cost accounting and other issues are
identified, discussed and settled, or resolved through legal proceedings.
As with many government contractors, the government has from time to time
recommended that certain of the Company's contract prices be reduced, or costs
allocated to its government contracts be disallowed. Some of these
recommendations involve substantial amounts. In the past, as a result of such
audits, investigations, and inquiries, the Company has on occasion made
adjustments to its contract prices and the costs allocated to its government
contracts.
The Company is currently involved in several such audits and other investigative
proceedings with the U.S. Government. The Company is also engaged in such
settlement discussions and has filed a lawsuit concerning certain cost
accounting issues. Although the eventual outcome of these discussions, audits
and investigations, and such lawsuit cannot be determined at this time,
management believes, based on current information, that the ultimate resolution
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.
The Company and its former parent have received letters from the DCAA inquiring
about certain aspects of the spinoff, including the disposition of the former
parent's retirement plan (the "FPRP"), which covers salaried employees of the
Company. In the event there is a determination that an amount is due to the U.S.
Government related to the FPRP, the Company and its former parent will share the
obligation for such amount, plus the amount of related defense expenses, in the
ratio of 20% and 80%, respectively.
As previously reported, the DCAA conducted a post-award audit of the contract to
build the aircraft carrier Reagan. In April 1998 the DCAA issued their official
audit report ("Audit Report") in which they concluded that the cost or pricing
data supplied by the Company to the Navy was not current, accurate, and complete
and, therefore, that projected labor and overhead costs were overstated for the
Reagan contract. Accordingly, the DCAA recommended to the Navy's contracting
officer that the contract price for the Reagan be reduced.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Company disagrees with the conclusions of the Audit Report and the DCAA's
recommendation to the contracting officer. Management believes that the Company
has substantial and meritorious grounds on which to contest any action by the
Navy seeking to reduce the Reagan contract price and intends to pursue its
defenses to any attempt by the Navy to make such a reduction.
In addition to the DCAA audit, a civil investigation, also focused on the cost
or pricing data that the Company supplied to the Navy in connection with the
Reagan contract, is being conducted jointly 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. The Company has
previously responded to demands for documents in connection with the inquiry and
is now in the process of responding to Department of Justice Civil Investigative
Demands for documents and testimony from present and former Company officers and
employees.
Although the ultimate outcome of the FPRP and Reagan contract issues cannot be
predicted, should a successful claim be made in either matter, it could entail
an amount material to the Company's financial position and results of
operations; however, based on the Company's present understanding of the claims
the Government might assert, together with the sharing arrangement with its
former parent in connection with the FPRP, and defenses believed to be available
in connection with the Reagan contract matter, management believes that the
final resolution of these matters will not have a material impact on the
financial position or results of operations of the Company.
Significant Estimates
From 1994 to 1996, the Company entered into fixed price contracts to construct a
total of nine Double Eagle product tankers. In January 1997, the Company, one of
the original purchasers, and Mobil Oil Corporation ("Mobil") entered into an
agreement whereby Mobil agreed to acquire the first ship. In March of 1998, the
Company announced a revised strategy for this program that will result in only
five of the remaining eight ships being built, after which the Company will
withdraw from the market. Work is substantially complete on the first three of
the remaining five ships which are scheduled to be delivered in 1998. The final
two ships will be delivered by the middle of 1999. The cumulative provision for
losses recorded on undelivered ships as of March 22, 1998 and December 31, 1997
is approximately $325 million. The Company has recorded charges against earnings
of approximately $207 million (net of previously established reserves of $57
million), $70 million, and $30 million in 1997, 1996, and 1995, respectively.
The Company intends to continue to review this program at the end of each
quarter. 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.
Litigation
The Company is a defendant in matters of varying nature related to the normal
conduct of its business. 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.
<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.
Government accounted for approximately 94% and 89% of the Company's revenues for
the quarterly periods ended March 22, 1998 and March 23, 1997, respectively.
RESULTS OF OPERATIONS
For the First Quarter Ended
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Millions
Revenues........................................... $ 397 $ 403
Operating Earnings................................. 40 35
Revenues for the first quarter of 1998 declined $6 million to $397 million
compared with the same period in 1997 primarily due to lower construction
activity associated with the aircraft carrier Truman as well as Double Eagle
product tankers. In addition, revenues were lower due to the delivery of the
second of two Sealift ships (a roll-on, roll-off heavy armored vehicle
transportation vessel) to the U.S. Navy in May 1997. Increased overhaul activity
on the aircraft carrier Roosevelt and incremental planning work for the Nimitz
refueling partially offset the decline in construction revenues. Engineering
revenues also improved in comparison to last year as a result of increased
submarine engineering activity related to the new attack submarine.
First quarter 1998 operating earnings increased $5 million over the prior year
first quarter primarily due to improved overhaul and repair volume associated
with the carriers Roosevelt and Nimitz as mentioned above and increased activity
in nuclear and submarine engineering. These increases were partially offset by
lower construction work on the carrier Truman which is scheduled to be delivered
to the U.S. Navy in July of this year. In addition, the Company consummated
transactions during the quarter with respect to restructuring its equity
interest in certain limited liability partnerships as part of its exit from
the commercial shipbuilding business. The associated expenses of approximately
$10 million were in line with prior management estimates and, as such, were
mitigated by previously established reserves resulting in no net impact to
the Company.
The Company's backlog was $2.5 billion at March 22, 1998, substantially all of
which was U.S. Navy-related.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table reflects the summarized components of the Company's cash
flows for the periods indicated:
For the Three Months Ended
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Millions
Net cash provided by operating activities........... $ 25 $ 71
Capital expenditures................................ (1) (7)
Other investing cash flows.......................... (12) (2)
------- -------
Subtotal............................................ 12 62
Financing activities................................ (4) (19)
------- -------
Net increase in cash and cash equivalents........... $ 8 $ 43
======= =======
NET CASH PROVIDED BY OPERATING ACTIVITIES
The $47 million decrease in 1998's comparative cash flows from operating
activities is primarily due to an increased investment in working capital,
partially offset by higher operating earnings and lower interest payments as
compared to the prior year. The higher operating earnings are attributable to
the factors discussed above in "Results of Operations." The increase in working
capital was due to normal timing fluctuations in billings and accounts
receivable collections.
CAPITAL EXPENDITURES
The $6 million decrease in capital expenditures for the period ended March 22,
1998 compared to the period ended March 23, 1997 is attributable to higher
expenditures related to capital improvement programs completed in 1997, such as
the development of a state-of-the-art automated steel cutting and fabrication
facility.
OTHER INVESTING CASH FLOWS
The 1998 and 1997 investing activities relate to an investment in a
vessel-owning limited partnership with a U.S. shipping firm which will own and
operate four of the commercial product tankers under construction by the
Company.
FINANCING ACTIVITIES
The financing activities for the period ended March 22, 1998 reflect the
purchase of Company stock, the pay off of short-term debt, and the payment of a
quarterly dividend of four cents per share. These expenditures were partially
offset by proceeds from the issuance of common stock related to the Company's
benefit plans. The 1997 financing activities largely reflected the pay off of
the previous revolver balance under the Company's senior credit facility.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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
concerning, among other things, the Company's prospects, developments and
business strategies. These forward-looking statements are identified by their
use of such terms as "intends," "estimates," "expects," "projects,"
"anticipates," "should," "believes" and "scheduled." The Company's actual
results may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include (i) the factors
discussed in Note 3 to the Company's Financial Statements, (ii) the factors
addressed in Management's Discussion and Analysis of Financial Condition and
Results of Operations, and (iii) the following factors: (a) general political,
economic and competitive conditions; (b) initiatives to reduce the federal
budget deficit and further reductions in defense spending; (c) reductions in the
volume of U.S. Navy contracts awarded to the Company; and (d) unanticipated
events affecting delivery and production schedules or design and manufacturing
processes, which could impair 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, if any, of such reductions.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to Note 3, "Commitments and Contingencies" to the Company's
Financial Statements contained herein, which is incorporated in this Item 1 of
Part II by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 27.1 Financial Data Schedule
Newport News Shipbuilding Inc. filed current reports on Form 8-K on February 12,
1998 and March 16, 1998. These reports were issued, respectively, to report the
amendment and restatement of the Company's By-Laws, dated as of January 30,
1998, and to announce a $150 million charge to 1997 operating earnings related
to Double Eagle product tankers and the Company's planned exit from the
commercial shipbuilding business.
<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.
By David J. Anderson
------------------------------
Senior Vice President and
Chief Financial Officer
Date: May 6, 1998
a:\
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Newport
News Shipbuilding Inc. Balance Sheet as of March 22, 1998 and the related
Statement of Earnings for the three months ended March 22, 1998 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-22-1998
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 114
<ALLOWANCES> 0
<INVENTORY> 46
<CURRENT-ASSETS> 502
<PP&E> 1,621
<DEPRECIATION> 830
<TOTAL-ASSETS> 1,510
<CURRENT-LIABILITIES> 373
<BONDS> 400
0
0
<COMMON> 1
<OTHER-SE> 198
<TOTAL-LIABILITY-AND-EQUITY> 1,510
<SALES> 397
<TOTAL-REVENUES> 397
<CGS> 358
<TOTAL-COSTS> 358
<OTHER-EXPENSES> (1)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> 27
<INCOME-TAX> 11
<INCOME-CONTINUING> 16
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> .46
<EPS-DILUTED> .44
</TABLE>
