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 JUNE 21, 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 23607-2770
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: 35,281,205 shares and associated
preferred stock purchase rights as of July 15, 1998.
<PAGE>
TABLE OF CONTENTS
PAGE
Part I--Financial Information
Newport News Shipbuilding Inc.
Consolidated Statements of Earnings - Second Quarter........... 2
Consolidated Statements of Earnings - Six Months............... 3
Consolidated Balance Sheets.................................... 4
Consolidated Statements of Cash Flows.......................... 5
Notes to Consolidated Financial Statements..................... 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 8
Part II--Other Information
Item 1. Legal Proceedings......................................... 13
Item 2. Changes in Securities and Use of Proceeds................. 13
Item 3. Defaults Upon Senior Securities........................... *
Item 4. Submission of Matters to a Vote of Security Holders....... 13
Item 5. Other Information......................................... *
Item 6. Exhibits and Reports on Form 8-K.......................... 14
*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
--------------------------
June 21, June 22,
1998 1997
------------ -----------
Millions (Except Shares and Per Share Amounts)
<S> <C>
Revenues........................................ $ 466 $ 450
Operating Costs and Expenses.................... 423 413
Other Income (Expense), net..................... (1) -
-------- --------
Operating Earnings.............................. 42 37
Interest Expense, net of interest capitalized... 14 13
-------- --------
Earnings Before Income Taxes.................... 28 24
Provision for Income Taxes...................... 12 10
-------- --------
Net Earnings.................................... $ 16 $ 14
======== ========
Weighted Average Number of Common Shares Outstanding
Basic........................................ 34,909,198 34,809,914
Diluted...................................... 36,042,161 35,226,900
Net Earnings Per Common Share
Basic........................................ $ .46 $ .39
========= =========
Diluted...................................... $ .45 $ .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 STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 21, June 22,
1998 1997
------------ -----------
Millions (Except Shares and Per Share Amounts)
<S> <C>
Revenues........................................ $ 863 $ 853
Operating Costs and Expenses.................... 781 781
Other Income (Expense), net..................... - -
-------- --------
Operating Earnings.............................. 82 72
Interest Expense, net of interest capitalized... 27 26
-------- --------
Earnings Before Income Taxes.................... 55 46
Provision for Income Taxes...................... 23 19
-------- --------
Net Earnings.................................... $ 32 $ 27
======== ========
Weighted Average Number of Common Shares Outstanding
Basic........................................ 34,944,826 34,626,133
Diluted...................................... 36,074,999 35,076,340
Net Earnings Per Common Share
Basic........................................ $ .92 $ .77
========= =========
Diluted...................................... $ .89 $ .76
========= =========
Dividends Declared Per Common Share............. $ .08 $ .08
========= =========
</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>
June 21, December 31,
1998 1997
------------ --------
Millions (Except Share Amounts)
<S> <C>
ASSETS
Current Assets
Cash and Cash Equivalents....................... $ 4 $ 3
Accounts Receivable............................. 124 136
Contracts in Process............................ 247 210
Inventory....................................... 65 44
Deferred Income Taxes........................... 49 50
Other Current Assets............................ 12 12
------ ------
Total Current Assets............................ 501 455
------ ------
Noncurrent Assets
Property, Plant and Equipment, net.............. 773 816
Other Assets.................................... 225 205
------ ------
Total Noncurrent Assets......................... 998 1,021
------ ------
$1,499 $1,476
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade Accounts Payable.......................... $ 136 $ 151
Short-Term Debt................................. 28 30
Accrued Liabilities and Other................... 191 175
------ ------
Total Current Liabilities....................... 355 356
------ ------
Noncurrent Liabilities
Long-Term Debt.................................. 569 548
Deferred Income Taxes........................... 197 199
Postretirement Benefits......................... 108 107
Other Long-Term Liabilities..................... 65 83
Commitments and Contingencies (See Note 3)......
------ ------
Total Noncurrent Liabilities.................... 939 937
------ ------
Stockholders' Equity
Common Stock, $.01 par value -
authorized 70,000,000 shares; issued 35,283,548 shares at
June 21,1998, and 34,948,663 shares at December 31, 1997
1 1
Paid-In Capital................................. 258 256
Accumulated Deficit............................. (38) (68)
Unearned Compensation........................... (16) (4)
Treasury Stock (2,343 shares at June 21,1998 and
84,069 shares at December 31, 1997).......... - (2)
------ ------
Total Stockholders' Equity...................... 205 183
------ ------
$1,499 $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>
Six Months Ended
------------------------
June 21, June 22,
1998 1997
------------ ----------
Millions
<S> <C>
Cash Flows from Operating Activities:
Net Earnings...................................... $32 $ 27
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities -
Depreciation and Amortization............... 33 34
Deferred Income Taxes....................... (1) 14
Loss on Equity Investments.................. 1 -
Changes in Components of Working Capital -
Decrease (Increase) in -
Accounts Receivable...................... 12 45
Contracts in Process..................... (37) (49)
Inventory................................ (21) 3
Other Current Assets..................... - (3)
Increase (Decrease) in -
Trade Accounts Payable................... (15) (2)
Accrued Liabilities and Other............ 15 6
Other, net.................................. 3 5
----- -----
Net Cash Provided by Operating Activities......... 22 80
----- -----
Cash Flows from Investing Activities:
Capital Expenditures.............................. (4) (12)
Other............................................. (23) (3)
----- -----
Net Cash Used by Investing Activities............. (27) (15)
----- -----
Cash Flows from Financing Activities:
Net Increase (Decrease) in Revolving Credit Facility 29 (24)
Payments on Short-Term Debt....................... (2) -
Payments on Long-Term Debt........................ (8) (6)
Proceeds from Issuance of Common Stock............ 7 8
Treasury Stock Purchases.......................... (19) -
Proceeds from Issuance of Treasury Stock.......... 2 -
Dividends Paid.................................... (3) (3)
----- -----
Net Cash Provided (Used) by Financing Activities.. 6 (25)
----- -----
Net Increase in Cash and Cash Equivalents......... 1 40
Cash and Cash Equivalents at Beginning of Period.. 3 1
----- -----
Cash and Cash Equivalents at End of Period........ $ 4 $ 41
===== =====
Cash Paid During the Period for Income Taxes...... $ 14 $ -
===== =====
Cash Paid During the Period for Interest.......... $ 27 $ 28
===== =====
</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 and six month periods
ended June 21, 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 June 21, 1998 and June 22, 1997, respectively.
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.
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.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 its 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.
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.
During the quarter, the Company received a draft audit report from the DCAA
questioning costs allocated and billed to government contracts as Independent
Research and Development ("IR&D"). The Company has responded to the DCAA
by communicating its disagreement with the draft audit report's conclusions
and recommendations.
Although the ultimate outcome of these issues cannot be predicted,
should a successful claim be made in any such 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 currently 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. Management continues to assess
the IR&D matter and believes, based on current information, that it would be
premature to express any opinion as to whether or not the eventual outcome may
have a material impact on the financial position or results of operations of the
Company.
During 1997, the Company submitted a request for a Shipbuilding Capability
Preservation Agreement pursuant to Section 1027 of the National Defense
Authorization Act for the Fiscal Year 1998. This section enables the Company to
recover from the Government a portion of certain indirect costs which would have
been allocated to government contracts had commercial projects not been
undertaken. During the second quarter, an agreement was reached with the Navy
whereby the Company may recover $10 to $15 million of such costs by year-end
2000.
Significant Estimates
From 1994 to 1996, the Company entered into fixed price contracts to construct a
total of nine Double Eagle product tankers. In March of 1998, the Company
announced a revised strategy for this program that will result in only five of
the remaining eight undelivered 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. These three ships are scheduled to be delivered in
1998, while the final two ships should be delivered by the middle of 1999. As of
June 21, 1998 and December 31, 1997, the cumulative provision for losses
recorded on undelivered ships is in the range
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
of $320 to $325 million. 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 a 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.
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 93% and 89% of the Company's revenues for
the quarterly periods ended June 21, 1998 and June 22, 1997, respectively.
RESULTS OF OPERATIONS
For the Second Quarter Ended
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Millions
Revenues.................................. $ 466 $450
Operating Earnings........................ 42 37
Revenues for the second quarter of 1998 increased $16 million to $466 million
compared with the same period in 1997 primarily due to increased overhaul
activity on the aircraft carrier Roosevelt and increased planning work for the
refueling and overhaul of the aircraft carrier Nimitz. In addition, revenues
also improved in comparison to last year as a result of increased submarine
engineering activity related to the new attack submarine program and
contributions from the Company's new wholly-owned subsidiary, Continental
Maritime Industries, Inc. ("CMI"). Lower construction activity on Double Eagle
product tankers and the aircraft carrier Truman due to its June 30, 1998
delivery to the Navy partially offset the increases mentioned above.
Second quarter 1998 operating earnings increased $5 million over the prior year
second quarter primarily due to improved Overhaul and Repair volume associated
with the carriers Roosevelt and Nimitz as mentioned above. These increases were
partially offset by lower construction work on the carrier Truman. During the
quarter, the Company continued to restructure its equity interest in five
vessel-owning limited liability companies as part of its exit from the
commercial shipbuilding business. The attendant 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.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the Six Months Ended
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Millions
Revenues.................................. $ 863 $853
Operating Earnings........................ 82 72
Revenues for the first half of 1998 increased $10 million to $863 million
compared with the 1997 period primarily due to increased Overhaul and Repair and
submarine engineering activity, as well as contributions from CMI. These
increases were partially offset by lower carrier construction and product tanker
revenues.
First half 1998 operating earnings increased $10 million over the prior year
first half primarily due to variations in the revenue mix described above.
Year-to-date results also reflect approximately $20 million of expenses
associated with restructuring the Company's interest in five vessel-owning
limited liability companies as mentioned above. These expenses were offset by
previously established reserves resulting in no net impact to the Company.
The Company's backlog was $3.3 billion at June 21, 1998, substantially all of
which was U.S. Navy-related.
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 Six Months Ended
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
Millions
Net cash provided by operating activities. $ 22 $ 80
Capital expenditures...................... (4) (12)
Other investing cash flows................ (23) (3)
------ ----
Subtotal.................................. (5) 65
Financing activities...................... 6 (25)
------ ----
Net increase in cash and cash equivalents. $ 1 $ 40
====== ====
NET CASH PROVIDED BY OPERATING ACTIVITIES
The $58 million decrease in 1998's comparative cash flows from operating
activities is primarily due to an increased investment in working capital and
higher income tax payments, partially offset by higher operating earnings as
compared to the prior year. The increase in working capital as compared to the
prior year is primarily due to normal timing fluctuations in billings and
accounts receivable collections. Additionally, 1998 reflects higher tax payments
due to the recognition of income previously deferred for tax purposes on the
aircraft carriers Stennis and Truman. The higher operating earnings are
attributable to the factors discussed above in "Results of Operations."
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAPITAL EXPENDITURES
The $8 million decrease in capital expenditures for the period ended June 21,
1998 compared to the period ended June 22, 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 primarily relate to investments in five
vessel-owning limited liability companies in partnership with a U.S. shipping
firm, which will own and operate the five commercial product tankers under
construction by the Company.
FINANCING ACTIVITIES
For the six months ended June 21, 1998, the Company borrowed funds under its
revolving credit facilities. These proceeds were partially offset by the
purchase of Company stock, payments on short-term debt, and the payment of
quarterly dividends of four cents per share. The 1997 financing activities
largely reflect the pay off of the previous revolver balance.
During the second quarter, the Company entered into a $75 million, 364 day
secured revolving credit facility. The interest rate for the facility varies at
the Company's election based on the one, two, three, six, nine, and twelve month
LIBOR, plus 1.125%, or a base rate. The base rate is defined as the higher of
prime (as defined in the Company's credit facility) or the federal funds rate
plus 0.5%.
RECENTLY ISSUED STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. FAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gain and losses to offset
related results on the hedged item in the income statement, and requires that a
company formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. FAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The Company engages in minimal derivative
activity and therefore the adoption of this new standard is not expected to have
any impact on the Company's financial position or results of operations.
YEAR 2000
The Company continues to evaluate the potential impact of the "Year 2000"
problem on its systems and operations. A Year 2000 plan has been developed
addressing Year 2000 awareness, specific problem identification, risk and
potential impact assessment (including the risk and potential impact of
noncompliance by the Company's suppliers, subcontractors and customers,
including the United States Navy), resource allocation, remediation work
required, and a completion timetable.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's Year 2000 analysis and remediation plan is dual faceted, focusing
on both information technology ("IT") systems as well as imbedded, non-IT
systems that are integral to specific operating and support functions. The
Company is also installing new hardware and software as part of the
implementation of its new shared data environment which is expected to help
mitigate potential Year 2000 problems.
An oversight committee consisting of members of senior management has been
established. An outside consultant was retained and recently completed a study
of the non-IT component of the Company's Year 2000 exposure. The results of that
study have been reported to senior management. The consultant is now assisting
with both planning and remediation work in both the IT and non-IT environments.
The Company's Year 2000 effort began at the end of 1994 with the identification
and remediation of systems using long lead-time dates. Such work was completed
in the middle of 1996. Remediation of the Company's critical IT systems is
expected to be completed in the fourth quarter, with comprehensive, off-site
integration tests of the corrected systems scheduled for the first quarter of
1999. It is currently anticipated that remediation and testing of non-IT
systems, and certain IT systems that will be replaced, will be finished by
mid-year 1999.
Remediation work and systems testing will be accomplished using a combination of
existing internal Company resources and outsourcing and will be funded with cash
on hand. Expenditures, including consulting fees and expenses have so far
totaled approximately $8 million since the inception of the Company's Year 2000
effort in 1994. Approximately one million dollars has been expended in 1998. It
is currently projected that aggregate expenditures for both IT and non-IT
systems remediation and testing will total approximately $10 to $15 million,
although, based on the results of the consultant's study and the Company's
continuing risk assessment and remediation planning, the budget in the non-IT
area is just now being developed and may undergo future adjustment as more
systems functions requiring remediation are identified, ranked as to
criticality, and appropriate resources are allocated.
In addition to addressing its own computer systems, the Company has surveyed and
continues to work with its principal subcontractors, suppliers and customers
(including the U.S. Navy) to promote their Year 2000 compliance, as it may
impact on the financial position or results of operations of the Company.
Nevertheless, the Company does not control, and can give no assurances as to the
substance or success of the Year 2000 compliance efforts of such independent
third parties.
Management believes that the Company will successfully implement its Year 2000
remediation plan on schedule and will be Year 2000 compliant before the end of
1999. Nevertheless, management believes that there is a risk that certain of its
principal customers, subcontractors, suppliers and others on whom the Company's
finances and operations depend to a large extent will experience Year 2000
problems that could affect the financial position or results of operations of
the Company.
Without intending to be exhaustive, these risks include the potential inability
of key subcontractors and suppliers to correctly or timely provide necessary
services, materials and components for the Company's operations; the inability
of its customers to timely or correctly process and pay the Company's invoices;
the inability of lenders, lessors or other sources of the Company's necessary
capital and liquidity to make funds available to the Company when required; and
the inability of computer systems service providers to maintain the Company's
essential systems due to excessive demand for their services from other clients
experiencing unanticipated or more severe than anticipated Year 2000 problems.
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In case the Company does experience severe Year 2000 financial and operating
problems, notwithstanding its efforts to avoid or mitigate problems inherent in
its own computer systems or the adverse effects of Year 2000 problems
experienced by third parties on whom it is substantially reliant, the Company
has begun development of appropriate contingency plans. Development of such
contingency plans is a principal focus of the senior management oversight
committee.
Although no assurances can be given, based on the information presently
available to it, management does not expect the overall costs of the Company's
efforts to correct the Year 2000 problems inherent in its IT and non-IT systems,
or a failure by some of its suppliers, subcontractors and customers to timely
anticipate and correct their Year 2000 computer systems problems, to have a
material effect on the financial position or the results of operations of the
Company.
As implementation of the Company's Year 2000 remediation plan progresses, and
more information becomes available to it, the Company expects to periodically
reassess the content of, as well as its strategy for implementing, that plan.
There can be no assurance that the currently estimated costs of implementing its
Year 2000 remediation plan or the currently estimated impact of the Year 2000
problem on the Company's financial position and results of operations will not
be revised at that time based on the facts then known to the Company.
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; (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; and (e) unanticipated
events affecting the Company's efforts and the efforts of its suppliers,
subcontractors, and customers (including the U.S. Navy) to timely correct Year
2000 problems inherent in essential computer systems, which could impair the
Company's operations or the ability of its customers to timely pay for products
and services provided.
<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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 4, 1998, the Board of Directors of the Company declared a dividend of
one Right for each outstanding share of Common Stock, par value $0.01 per share,
of the Company (the "Common Shares"). The description and terms of the Rights
are set forth in a Rights Agreement dated as of the Close of Business on June
10, 1998, as it may be amended from time to time (the "Rights Agreement"),
between the Company and First Chicago Trust Company of New York, as Rights
Agent.
The Rights were issued to the holders of record of Common Shares outstanding at
the Close of Business on June 10, 1998 (the "Record Date") and, with respect to
Common Shares issued after the Record Date, will be issued until the
Distribution Date (as defined in the Rights Agreement). Each Right, when it
becomes exercisable as described in the Rights Agreement, will entitle the
registered holder to purchase from the Company one one-thousandth (1/1,000th) of
a share of Series A Participating Cumulative Preferred Stock, par value $0.01
per share, of the Company at a price of $105.00.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 1998 the Company held its 1998 Annual Meeting of stockholders. In
addition to the re-election of three Class II directors, two proposals were
presented to the stockholders for their approval. The outcome of the voting on
the two proposals was as follows:
1. Proposal to increase by 200,000 the number of shares authorized for issuance
under the Newport News Shipbuilding Employee Stock Purchase and Accumulation
Plan.
For Against Abstain Broker Non-votes
30,178,250 310,215 93,687 None
2. Proposal to ratify the appointment by the Board of Directors of Arthur
Andersen LLP as the Company's independent accountants for 1998.
For Against Abstain Broker Non-votes
30,401,336 109,533 71,283 None
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 4.1* Form of Rights Agreement dated as of June 10, 1998, between
Newport News Shipbuilding Inc. and First Chicago Trust Company of
New York, as Rights Agent (Filed as Exhibit No. 1 to the
Company's Registration Statement on Form 8A, dated June 10, 1998,
Commission File No. 001-12385).
Exhibit 4.2* Form Certificate of the Voting Powers, Designations,
Preferences and Relative Participating, Optional and Other Special
Rights and Qualifications, Limitations or Restrictions of Series A
Participating Cumulative Preferred Stock of Newport News
Shipbuilding Inc. (which is attached as Exhibit A to the Rights
Agreement filed as Exhibit 4.1 hereto).
Exhibit 4.3* Form of Right Certificate (which is attached as Exhibit B to
the Rights Agreement filed as Exhibit 4.1 hereto).
Exhibit 4.4* Certificate of Elimination of Newport News Shipbuilding Inc.'s
Series A Participating Junior Preferred Stock (filed in connection
with the expiration of the Company's previous Rights Agreement),
dated June 4, 1998 (Filed as Exhibit 4 to the Company's
Registration Statement on Form 8A, dated June 10, 1998,
Commission File No. 001-12385).
Exhibit 10.1 Employment Agreement between the Company and Mr. David J.
Anderson, Senior Vice President and Chief Financial Officer of
the Company, dated June 1, 1998.
Exhibit 10.2 Employment Agreement between the Company and Mr. Thomas C.
Schievelbein, Executive Vice President of the Company, dated June
1, 1998.
Exhibit 10.3 Contract (N00024-94-C-2105) between the Company and the United
States Navy for work necessary to prepare and make ready for the
refueling, overhaul, alteration, repair, and maintenance of the
USS Nimitz (CVN 68) and its reactor plants (without schedules,
appendices or exhibits thereto).
Exhibit 10.4 Modification No. P00016 of Contract (N00024-94-C-2105), effective
April 16, 1998, between the Company and the United States Navy
(without schedules, appendices or exhibits thereto).
Exhibit 27.1 Financial Data Schedule
During the second quarter, the Company did not file any current reports on Form
8-K.
- -------------------
*Incorporated by reference.
<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: August 4, 1998
Exhibit 10.1
June 1, 1998
Mr. David J. Anderson
322 East Landing
Williamsburg, Virginia 23185-8254
Dear Dave:
On behalf of Newport News Shipbuilding Inc. (the
"Company"), I am pleased to set forth the terms and conditions
of your employment under this Employment Agreement
("Agreement").
1. Under this Agreement, you will be employed as the Senior Vice President
and Chief Financial Officer of the Company. The initial term will be for
a period of three years commencing June 1, 1998. Thereafter, the
Agreement will be extended automatically in one-year increments unless
notice of termination is given by the Company at least 90 calendar days
prior to the expiration of either the initial three-year term or any
subsequent one-year renewal period.
2. You will be paid a base salary of not less than $300,000 per year, which
shall be subject to such adjustments as may, from time to time, be
approved by the Compensation and Benefits Committee of the Company's Board
of Directors ("Compensation Committee") and payable according to the
regular pay schedule for executives at the Company.
3. You will be a participant in the Company's annual incentive plan and
long-term incentive plan. You will be eligible for annual incentive award
consideration and stock-based incentives in accordance with the terms of
those plans and at the discretion of the Compensation Committee.
<PAGE>
4. You will receive non-cash compensation and be eligible to participate in
employee benefit programs comparable to those provided to Company senior
executives under Company policy, including, but not limited to, the
Company medical, pension, 401(k), long-term disability, and life insurance
plans.
5. You will receive reimbursement for personal financial, tax, and/or estate
planning expenditures of up to $10,500 per year (not grossed up).
6. In the event that your employment is terminated by the Company, other than
for cause, you will be entitled to career transition assistance through a
recognized firm in the field. The Company will provide financial support
for this assistance up to $50,000.
7. You will receive a minimum of four weeks vacation per calendar year.
8. Your pension benefits will be equal to whatever benefits you accrue as a
participant in the Company's qualified defined benefit pension plan for
salaried employees and in the Company's non-qualified retirement benefit
restoration plan, but with the following enhancement: a supplemental
executive retirement plan (SERP) is established on your behalf that will
credit you with an additional eight years of service and eight years of
participation for purposes of retirement benefit calculation. In
addition, your retirement benefit under the SERP will be based on the
average of your base salary and average annual incentive awards received
during the final three years of your employment . Applicable reductions
for early retirement, as described in the Newport News Shipbuilding Inc.
Retirement Plan, shall apply to the basic pension benefit and all
supplemental benefits.
In order to qualify for the above-described SERP benefit, you must have a
minimum of 10 years of participation in the pension plan and be employed
by the Company until the earliest age necessary to qualify for an
immediately payable retirement benefit under the Newport News Shipbuilding
Inc. Retirement Plan (currently age 55).
<PAGE>
9. If your employment is terminated by the Company other than for death,
disability, or cause, or you are constructively terminated, or if the
Company does not continue your employment after the end of the initial
three-year term of this Agreement or any subsequent automatic one-year
renewal period, you will be paid a severance benefit in an amount equal to
two times the total cash compensation (base salary plus targeted bonus) in
effect on the date your employment terminates. This severance benefit
will be payable by the Company in two equal lump sums, the first payment
to be made within 30 days from the date employment terminates and the
second payment to be made within one year from the date employment
terminates.
In addition, and subject to the approval of the Compensation Committee,
all outstanding restricted stock, stock options, and performance shares
will vest and/or become exercisable in the event your employment
terminates under the provisions of this Section. Any vested stock options
will remain exercisable for a period of not less than 90 days from your
employment termination date.
Further, if your employment is terminated by the Company under the
conditions described earlier in this Section, you will be entitled to
continue participation in the Company's medical plan and term life
insurance plan, for a period of two years following the termination of
your employment, under the same terms as are available to active
employees.
For purposes of this Section, "constructively terminated" shall be defined
identically to the term Constructive Termination, as set forth in the
Newport News Shipbuilding Inc. Change in Control Severance Benefit Plan
for key Executives ("Change in Control Plan" or "Plan"), except that, for
purposes of this Agreement, such termination need not occur after a Change
in Control under the Plan.
If your employment is terminated after a Change of Control within the
meaning of the Change in Control Plan, your total cash severance benefit
shall not exceed the greater of (a) the total cash compensation provided
to you under this Section or (b) the total cash compensation provided to
you under the Change in Control Plan.
<PAGE>
10. If you resign or retire voluntarily from the Company, you will not be
entitled to any of the payments, benefits and rights set forth in Section
9 of this Agreement. However, should you retire, you will be entitled to
the benefits delineated in Section 8. (Should you retire, you will also be
eligible for benefits available by company policy to all retirees.)
11. As a condition of receiving the payments, benefits and rights set forth in
Section 9 of this Agreement, you will be required to (a) execute a general
waiver and release of any claims you might have against the Company
arising from, or during the course of your employment with the Company;
and (b) refrain from accepting employment or taking a consulting
assignment with any company that is a direct competitor of Newport News
Shipbuilding for one year following termination of your employment under
this Agreement.
12. The rights and obligations of the Company hereunder shall inure to the
benefit of and be binding upon the successors and assigns of the Company.
13. The validity, interpretation, and performance of this Agreement shall be
controlled by, and construed under, the laws of the Commonwealth of
Virginia. Venue shall be in the applicable federal or state court in
Newport News, Virginia.
Sincerely,
William P. Fricks
Chairman & CEO
ACKNOWLEDGED AND ACCEPTED:
- ------------------------------
David J. Anderson
On this _____ day of June 1998
Exhibit 10.2
June 1, 1998
Mr. Thomas C. Schievelbein
2521 Sanctuary Drive
Williamsburg, Virginia 23185-7676
Dear Tom:
On behalf of Newport News Shipbuilding Inc. (the
"Company"), I am pleased to set forth the terms and conditions
of your employment under this Employment Agreement
("Agreement").
1. Under this Agreement, you will be employed as the Executive Vice President
of the Company. The initial term will be for a period of three years
commencing June 1, 1998. Thereafter, the Agreement will be extended
automatically in one-year increments unless notice of termination is given
by the Company at least 90 calendar days prior to the expiration of either
the initial three-year term or any subsequent one-year renewal period.
2. You will be paid a base salary of not less than $365,000 per year, which
shall be subject to such adjustments as may, from time to time, be
approved by the Compensation and Benefits Committee of the Company's Board
of Directors (Compensation Committee), and payable according to the
regular pay schedule for executives at the Company.
3. You will be a participant in the Company's annual incentive plan and
long-term incentive plan. You will be eligible for annual incentive award
consideration and stock-based incentives in accordance with the terms of
those plans and at the discretion of the Compensation Committee.
4. You will receive non-cash compensation and be eligible to participate in
employee benefit programs comparable to those provided to Company senior
executives under Company policy, including, but not limited to, the
Company medical, pension, 401(k), long-term disability, and life insurance
plans.
<PAGE>
5. You will receive reimbursement for personal financial, tax, and/or estate
planning expenditures of up to $10,500 per year (not grossed up).
6. In the event that your employment is terminated by the Company, other than
for cause, you will be entitled to career transition assistance through a
recognized firm in the field. The Company will provide financial support
for this assistance up to $50,000.
7. You will receive a minimum of four weeks vacation per calendar year.
8. Your pension benefits from all defined benefit pension plans maintained by
the Company or its former parent Tenneco Inc. (qualified and
non-qualified) in which you are or were a participant, will at a minimum,
be equal to the benefit that would be available to you under the company's
qualified defined benefit pension plan and non-qualified retirement
benefit restoration plan, but with the following enhancement: a
supplemental executive retirement plan (SERP) is established on your
behalf that will provide a benefit based on the average of your base
salary and average annual incentive awards received during the final three
years of your employment. Applicable reductions for early retirement, as
described in the Newport News Shipbuilding Inc. Retirement Plan, shall
apply to the basic pension benefit and all supplemental benefits.
In order to qualify for the above described SERP benefit, you must have a
minimum of 10 years of participation in the pension plan and be employed
by the Company until the earliest age necessary to qualify for an
immediately payable retirement benefit under the Newport News Shipbuilding
Inc. Retirement Plan (currently age 55).
9. If your employment is terminated by the Company other than for death,
disability, or cause, or you are constructively terminated, or if the
Company does not continue your employment after the end of the initial
three-year term of this Agreement or any subsequent automatic one-year
renewal period, you will be paid a severance benefit in an amount equal to
two times the total cash compensation (base salary plus targeted bonus) in
effect on the date your employment terminates. This severance benefit
will be payable by the Company in two equal lump sums, the first payment
to be made within 30 days from the date employment terminates and the
second payment to be made within one year from the date employment
terminates.
In addition, and subject to the approval of the Compensation Committee,
all outstanding restricted stock, stock options, and performance shares
will vest and/or become exercisable in the event your employment
terminates under the provisions of this Section. Any vested stock options
will remain exercisable for a period of not less than 90 days from your
employment termination date.
Further, if your employment is terminated by the Company under the
conditions described earlier in this Section, you will be entitled to
continue participation in the Company's medical plan and term life
insurance plan for a period of two years following the termination of your
employment, under the same terms as are available to active employees.
For purposes of this Section, "constructively terminated" shall be defined
identically to the term Constructive Termination, as set forth in the
Newport News Shipbuilding Inc. Change in Control Severance Benefit Plan
for Key Executives ("Change in Control Plan" or "Plan"), except that, for
purposes of this Agreement, such termination need not occur after a Change
in Control under the Plan.
If your employment is terminated after a Change of Control within the
meaning of the Change in Control Plan, your total cash severance benefit
shall not exceed the greater of (a) the total cash compensation provided
to you under this Section , or (b) the total cash compensation provided to
you under the Change in Control Plan.
10. If you resign or retire voluntarily from the Company, you will not be
entitled to any of the payments, benefits and rights set forth in Section
9 of this Agreement. However, should you retire, you will be entitled to
the benefits delineated in Section 8. (Should you retire, you will also be
eligible for benefits available by company policy to all retirees.)
11. As a condition of receiving the payments, benefits and rights set forth in
Section 9 of this Agreement, you will be required to (a) execute a general
waiver and release of any claims you might have against the Company
arising from, or during the course of your employment with the Company;
and (b) refrain from accepting employment or taking a consulting
assignment with any company that is a direct competitor of Newport News
Shipbuilding for one year following termination of your employment under
this Agreement.
12. The rights and obligations of the Company hereunder shall inure to the
benefit of and be binding upon the successors and assigns of the Company.
13. The validity, interpretation, and performance of this Agreement shall be
controlled by, and construed under, the laws of the Commonwealth of
Virginia. Venue shall be in the applicable federal or state court in
Newport News, Virginia.
Sincerely,
William P. Fricks
Chairman & CEO
ACKNOWLEDGED AND ACCEPTED:
- ------------------------------
Thomas C. Schievelbein
On this ____ day of June 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Newport News Shipbuilding Inc. Balance Sheet as of June 21, 1998, and the
related Statement of Earnings for the six months ended June 21, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-21-1998
<CASH> 4
<SECURITIES> 0
<RECEIVABLES> 124
<ALLOWANCES> 0
<INVENTORY> 65
<CURRENT-ASSETS> 501
<PP&E> 1,617
<DEPRECIATION> 844
<TOTAL-ASSETS> 1,499
<CURRENT-LIABILITIES> 355
<BONDS> 400
0
0
<COMMON> 1
<OTHER-SE> 204
<TOTAL-LIABILITY-AND-EQUITY> 1,499
<SALES> 863
<TOTAL-REVENUES> 863
<CGS> 781
<TOTAL-COSTS> 781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 55
<INCOME-TAX> 23
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> .92
<EPS-DILUTED> .89
</TABLE>
