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 21, 1999
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: 35,068,024 shares and associated
preferred stock purchase rights as of April 15, 1999.
<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........................ 9
Part II--Other Information
Item 1. Legal Proceedings........................................... 13
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............................ 13
*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, AS AMENDED, FOR THE YEAR ENDED DECEMBER
31, 1998.
<PAGE>
PART I
FINANCIAL INFORMATION
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------
MARCH 21, MARCH 22,
1999 1998
-------------- --------------
<S> <C>
MILLIONS (EXCEPT SHARES AND PER SHARE AMOUNTS)
REVENUES.................................................. $ 430 $ 397
OPERATING COSTS AND EXPENSES.............................. (386) (358)
OTHER INCOME (EXPENSE), NET............................... - 1
---------- ----------
OPERATING EARNINGS........................................ 44 40
Interest Expense, net of interest capitalized............. (12) (13)
---------- ----------
EARNINGS BEFORE INCOME TAXES.............................. 32 27
Provision for Income Taxes................................ (14) (11)
---------- ----------
NET EARNINGS.............................................. $ 18 $ 16
========== ==========
Weighted Average Number of Common Shares Outstanding
Basic................................................. 34,635,540 34,990,962
========== ==========
Diluted............................................... 35,948,639 36,311,055
========== ==========
Net Earnings Per Common Share
Basic................................................. $ .52 $ .46
========== ==========
Diluted............................................... $ .50 $ .44
========== ==========
Dividends Declared Per Common Share....................... $ .04 $ .04
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
earnings. See Note 4 for information on reportable segments.
2
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 21, DECEMBER 31,
1999 1998
-------------- --------------
(UNAUDITED) (AUDITED)
<S> <C>
MILLIONS (EXCEPT SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents................................. $ 2 $ 3
Accounts Receivable....................................... 96 143
Contracts in Process...................................... 333 334
Inventory................................................. 53 52
Deferred Income Taxes..................................... 102 116
Other Current Assets...................................... 14 12
-------- -------
Total Current Assets...................................... 600 660
-------- -------
NONCURRENT ASSETS
Property, Plant and Equipment, net........................ 747 763
Other Assets.............................................. 179 177
-------- -------
Total Noncurrent Assets................................... 926 940
-------- -------
$ 1,526 $ 1,600
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable.................................... $ 84 $ 129
Short-Term Debt........................................... 28 38
Postretirement Benefits................................... 122 122
Other Accrued Liabilities ................................ 230 229
-------- -------
Total Current Liabilities................................. 464 518
-------- -------
NONCURRENT LIABILITIES
Long-Term Debt............................................ 525 591
Deferred Income Taxes..................................... 235 235
Other Long-Term Liabilities............................... 29 24
Commitments and Contingencies (See Note 3)................
-------- -------
Total Noncurrent Liabilities.............................. 789 850
-------- -------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value -
authorized 70,000,000 shares; issued 35,286,386 shares at
March 21, 1999 and December 31, 1998.................. 1 1
Paid-In Capital........................................... 271 276
Retained Earnings/(Accumulated Deficit)................... 10 (7)
Unearned/Deferred Compensation............................ (4) (4)
Stock Employee Compensation Trust (SECT).................. (5) (34)
-------- -------
Total Stockholders' Equity................................ 273 232
-------- -------
$ 1,526 $ 1,600
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets. See Note 4 for information on reportable segments.
3
<PAGE>
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------
MARCH 21, MARCH 22,
1999 1998
-------------- --------------
<S> <C>
MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings................................................ $ 18 $ 16
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities -
Depreciation and Amortization....................... 15 16
Deferred Income Taxes............................... 14 5
Changes in Components of Working Capital -
Decrease (Increase) in -
Accounts Receivable.............................. 47 22
Contracts in Process............................. 1 (63)
Inventory ...................................... (1) (2)
Other Current Assets............................. (2) (2)
Increase (Decrease) in -
Trade Accounts Payable........................... (45) (8)
Accrued Liabilities and Other.................... - 25
Other, net.......................................... 6 16
------ ------
Net Cash Provided by Operating Activities................... 53 25
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures........................................ (1) (1)
Other....................................................... - (12)
------ ------
Net Cash Used by Investing Activities....................... (1) (13)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Revolving Credit Facility....................... (66) -
Payments on Short-Term Debt................................. (10) (1)
Issuance of SECT Shares/Common Stock........................ 24 4
Net Treasury Stock Purchases................................ - (6)
Dividends Paid.............................................. (1) (1)
------ ------
Net Cash Provided (Used) by Financing Activities............ (53) (4)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... (1) 8
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 3 3
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2 $ 11
====== ======
CASH PAID (RECEIVED) DURING THE PERIOD FOR INCOME TAXES..... $ (3) $ -
====== ======
CASH PAID DURING THE PERIOD FOR INTEREST.................... $ 7 $ 4
====== ======
</TABLE>
4
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 21, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. 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, as
amended, for the year ended December 31, 1998.
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 21, 1999 and March 22, 1998,
respectively.
3. COMMITMENTS AND CONTINGENCIES
GOVERNMENT CONTRACTING
As a general practice in 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. In
some cases, recognition of the inherent uncertainties and costs of litigation
may cause management to decide to settle a matter.
As with other government contractors, the U.S. 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 and other investigations and inquiries, the Company has on occasion
agreed to 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 settlement discussions on certain matters and has filed a
lawsuit concerning certain cost accounting issues.
During 1996, 1997, and 1998 the Company and its former parent received letters
from the DCAA inquiring about certain aspects of the spin-off, including the
disposition of the former parent's retirement plan (the "FPRP"), which covers
salaried employees of the Company. Negotiations with the U.S. Government
resulted in a settlement of FPRP issues in January 1999. The settlement, which
was accrued in 1998, did not have a material impact on the Company's financial
position or results of operations.
5
<PAGE>
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 it concluded that the cost or pricing
data supplied by the Company to the U.S. Navy was not current, accurate, and
complete and, therefore, projected labor and overhead costs were overstated for
the REAGAN contract. Accordingly, the DCAA recommended to the U.S. Navy's
contracting officer that the contract price for REAGAN be reduced by
approximately $135 million. After giving consideration to the cost sharing
provisions in the contract, the proposed price reduction could generate an
operating income adjustment of approximately $47 million over the life of the
contract.
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
U.S. Navy seeking to reduce the REAGAN contract price and intends to pursue its
defenses in response to any attempt by the U.S. Navy to make such a reduction.
Management believes that the final resolution of this matter will
not have a material impact on the financial position or results of operations of
the Company.
In addition to the DCAA audit, a civil investigation, also focused on the cost
or pricing data that the Company supplied to the U.S. 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. Management believes
the Company complied with all applicable laws.
During the first quarter of 1999, the Company received a letter from the U.S.
Navy Supervisor of Shipbuilding forwarding a DCAA final audit report questioning
approximately $83 million of costs allocated to U.S. Government contracts as
Independent Research and Development ("IR&D"). The letter requested additional
comments regarding why NNS considers its existing cost accounting practice to be
compliant with the Cost Accounting Standards ("CAS"). The Company provided such
comments in the second quarter of 1999. Based on the Company's present
understanding of the claims the U. S. Government might assert, and defenses
believed to be available in connection with this issue, management believes that
the final resolution of this matter 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. The first of the nine ships was
delivered at the end of September 1997. In March 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. As of March 21, 1999 and December 31, 1998, the cumulative provision
for losses recorded on undelivered ships was approximately $37 million and $80
million, respectively.
The first three of the five remaining ships were delivered during the fourth
quarter of 1998, and the fourth ship was delivered in February 1999. The final
ship should be delivered in mid 1999. 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 both a plaintiff and a defendant in various matters related to
the normal conduct of its business. In the opinion of management, the outcome of
these proceedings should not have a material effect on the financial position or
results of operations of the Company.
6
<PAGE>
4. REPORTABLE SEGMENTS
The Company's reportable operating segments represent strategic initiatives
supporting the entire lifecycle of U.S. Navy ships - Construction, Fleet
Services, and Engineering, as well as a logical linking of similar contracts
based on funding provisions. Engineering contracts generally receive funding on
an annual basis, Fleet Services contracts typically span between one month and
two years, and Construction contracts generally span a period of two or more
years. The reportable segments are managed separately because each business has
differing customer requirements based on the nature of the services provided.
The Company evaluates performance based on profit or loss from operations before
interest and income taxes, not including nonrecurring gains and losses.
INFORMATION ABOUT REVENUES AND OPERATING EARNINGS
For the Quarters Ended March 21, 1999 and March 22, 1998, respectively
(in millions)
<TABLE>
<CAPTION>
FLEET ALL
CONSTRUCTION SERVICES ENGINEERING OTHERS (1) TOTAL
------------ --------- -------------- ---------- --------------
<S> <C>
1999
- ----
Revenues............................ $ 180 $ 206 $ 39 $ 5 $ 430
Segment Operating Earnings.......... 19 21 3 1 44
1998
- ----
Revenues............................ $ 190 $ 140 $ 62 $ 5 $ 397
Segment Operating Earnings.......... 19 15 5 1 40
</TABLE>
1. Other business activities include industrial products, commercial
nuclear activities including valve and pump repair and technical services,
equity investments, and corporate activities.
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
RECONCILIATION OF SEGMENT INFORMATION TO CONSOLIDATED AMOUNTS
For the Quarters Ended March 21, 1999 and March 22, 1998, respectively
(in millions)
1999 1998
-------- -------
Revenues
- --------
Total revenues for reportable segments................. $ 425 $ 392
Other revenues......................................... 5 5
-------- -------
Total consolidated revenues.................... $ 430 $ 397
======== =======
Operating Earnings
- ------------------
Total operating earnings for reportable segments....... $ 43 $ 39
Other operating earnings............................... 1 1
-------- -------
Total consolidated operating earnings.......... $ 44 $ 40
======== =======
7
<PAGE>
5. OTHERS MATTERS
NEWPORT NEWS SHIPBUILDING INC. AND AVONDALE INDUSTRIES, INC. PROPOSED MERGER
In January 1999, the Boards of Directors of Newport News Shipbuilding Inc. and
Avondale Industries, Inc. approved and each company executed a definitive
agreement to combine the two companies. The combined company would be named
Newport News Avondale Industries Inc. Upon consummation of the merger, the
Company's principal operating subsidiaries, Newport News Shipbuilding and Dry
Dock Company and Avondale Industries, Inc., will continue to conduct their
respective businesses under their current names. The transaction is subject to
approval by the shareholders of both companies and other customary closing
conditions, and is scheduled for completion in the second quarter of 1999. In
February 1999, the Department of Justice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 cleared the proposed merger, satisfying one important
condition to the closing of the transaction. It is anticipated that the
transaction would be accounted for as a pooling-of-interests.
GENERAL DYNAMICS CORPORATION OFFER TO NEWPORT NEWS SHIPBUILDING INC.
In February 1999, the Company received an unsolicited offer from General
Dynamics Corporation ("General Dynamics") proposing to pay $38.50 per share in
cash for all of its outstanding shares, subject to various conditions including
antitrust clearance from the appropriate regulatory authorities in the
Departments of Justice and Defense. In April 1999, the Department of Defense
(DoD) announced that it would not approve the proposed General Dynamics
acquisition of Newport News, which led to the withdrawal of the offer by General
Dynamics. As a result, the Company is proceeding with the Avondale transaction
discussed above.
FORMATION OF BUSINESS PARTNERSHIP WITH SCIENCE APPLICATIONS INTERNATIONAL
CORP ("SAIC")
In March 1999, the Company announced its intention to form a worldwide business
partnership with Science Applications International Corp. ("SAIC"). When
consummated, the partnership will conduct business as a new limited liability
company ("LLC") formed from the assets of SAIC's subsidiary, AMSEC, the
Company's life cycle engineering department, and cash invested by the Company.
The new organization will be named AMSEC LLC and is intended to create a low
cost fleet services organization capable of providing logistics and life cycle
services for aircraft carriers, submarines, surface combatants, and amphibious
and auxiliary ships from 20 locations, including every major U.S. Navy port. The
new organization will employ approximately 1,500 current employees of AMSEC and
the Company. The Company will own 45% and SAIC 55% of the new organization. The
transaction is scheduled for completion during the second quarter of 1999.
COLLECTIVE BARGAINING
Local 8888 of the United Steelworkers of America, representing hourly production
and maintenance employees of the Company, went on strike when the Company's
previous labor agreement expired on April 4, 1999. Although no assurances can be
given, management does not believe the strike will have a material impact on the
Company's financial position or results of operations since progress on current
construction, fleet services, and engineering contracts will continue to be
achieved through the use of salaried labor, hourly workers who did not strike,
and the procurement and staging of material. In addition, the majority of the
Company's Government contracts include provisions that excuse delays caused by a
labor stoppage.
8
<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 fleet services for other U.S. Navy vessels
through work in overhauling, lifecycle engineering, and repair. The U.S.
Government accounted for approximately 97% and 94% of the Company's revenues for
the quarterly periods ended March 21, 1999 and March 22, 1998, respectively.
RESULTS OF OPERATIONS
FOR THE FIRST QUARTER ENDED
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
MILLIONS
Revenues...................................... $ 430 $ 397
Operating Earnings............................ 44 40
Revenues for the first quarter of 1999 increased $33 million to $430 million
compared with the same period in 1998 primarily due to increased fleet services
activity associated with the refueling and complex overhaul of the aircraft
carrier NIMITZ. The fleet services revenue increase was partially offset by a
decline in construction revenues due to the absence of work on the aircraft
carrier TRUMAN, which was delivered in July 1998.
First quarter 1999 operating earnings increased $4 million primarily due to
improved fleet services activity associated with the refueling and overhaul of
the carrier NIMITZ as mentioned above.
The Company's funded backlog was $3.8 billion at March 21, 1999,
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 THREE MONTHS ENDED
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
MILLIONS
Net cash provided by operating activities.......... $ 53 $ 25
Capital expenditures............................... (1) (1)
Other investing cash flows......................... - (12)
------ -----
Subtotal........................................... 52 12
Financing activities............................... (53) (4)
------ -----
Net increase (decrease) in cash
and cash equivalents.......................... $ (1) $ 8
====== =====
NET CASH PROVIDED BY OPERATING ACTIVITIES
The $28 million increase in 1999's comparative cash flows from operating
activities is primarily due to a reduction in working capital, as well as
improved quarterly earnings as discussed above in "Results of Operations." The
reduction in working capital is caused by normal timing fluctuations with
respect to billings, accounts receivable collections, the recognition of
contract costs, and the payment of trade payables.
9
<PAGE>
OTHER INVESTING CASH FLOWS
The 1998 investing activities primarily relate to investments in five
vessel-owning limited liability companies, which will own and operate five
commercial product tankers, one of which is under construction by the Company.
Three of the ships were delivered by the Company during the fourth quarter of
1998. The Company delivered a fourth ship in February 1999.
FINANCING ACTIVITIES
The financing activities for the period ended March 21, 1999 reflect the receipt
of proceeds from the issuance of SECT shares related to the Company's benefit
plans, the pay off of short-term debt, pay down of the revolving credit
facility, and the payment of a quarterly dividend of four cents per share. The
1998 financing activities largely reflect the pay off of short-term debt, net
treasury stock purchases, and the payment of a quarterly dividend, partially
offset by proceeds from the issuance of common stock.
YEAR 2000 PLANNING AND PREPARATION
The Company continues to evaluate and prepare for 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 teaming partners, suppliers, subcontractors and
customers, including the U.S. Navy), resource allocation, remediation work
required, failure contingencies, and a completion timetable.
The Company's Year 2000 evaluation 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 in connection with 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. A nationally recognized outside consultant completed a study in
July 1998 of the non-IT component of the Company's Year 2000 exposure. The
results of that study have been reported to the committee and incorporated into
the Company's Year 2000 remediation and contingency plans.
The Company's Year 2000 effort began at the end of 1994 with the identification
and remediation of systems using long lead-time dates. That work was completed
in the middle of 1996. Remediation of the Company's critical IT systems was
substantially completed in the first quarter of 1999, with the exception of
those being replaced by the initial release of the new "shared data
environment", which is expected to occur in the second quarter of 1999. In
addition, the first of two comprehensive, off-site integration tests of IT
applications was completed during the first quarter of 1999. The second test
will be conducted during the third quarter of 1999. It is currently anticipated
that remediation and testing of non-IT systems will be finished by mid-year
1999.
Remediation work and systems testing is being accomplished using a combination
of existing internal Company resources and outsourcing, and is being funded with
cash generated from operations and, if necessary, borrowed under existing credit
facilities. Expenditures, including consulting fees and expenses, have so far
totaled approximately $3 million since inception of the Company's Year 2000
effort in 1994. It is currently projected that aggregate expenditures for both
IT and non-IT systems remediation and testing will total approximately $4 to $6
million when finished, based on the results of the consultant's study of the
Company's non-IT systems and on the Company's continuing risk assessment and
remediation planning; however, it should be noted that the budget continues to
develop and may from time to time be adjusted as more systems functions
requiring remediation are identified, assessed and 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 teaming partners, 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.
10
<PAGE>
In April 1998, surveys were sent to nearly 3,000 key suppliers and
subcontractors. Approximately 1,800 responses have been received with 100% of
those responding indicating their planned Year 2000 compliance by January 1,
2000. Follow up letters have been sent to non-responsive subcontractors, as well
as to certain responsive vendors and subcontractors where more substantial
assurances were desired. Alternate strategies are being considered in the case
of vendors and subcontractors that remain unresponsive or that do not provide
adequate assurances of timely readiness.
Management believes that the Company will successfully implement its Year 2000
remediation plan on schedule and that it will be Year 2000 compliant before the
end of 1999. Nevertheless, management believes that there is an uncertain, but
potentially substantial risk that some of its principal customers,
subcontractors, suppliers, and others on whom the Company's finances and
operations depend to a large extent (including the U.S. Navy) will experience
Year 2000 problems that either alone or in the aggregate could materially 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.
Although the Company is not able to quantify the likelihood that some or all of
these events will come to pass, or their potential effects, consequences could
include delayed production milestones and vessel deliveries, increases in
construction, manufacturing and administrative costs until the problems are
resolved, lost revenues and earnings, lower cash receipts, and delayed or
interrupted cash flow.
In case the Company does experience severe Year 2000 financial or operating
problems, notwithstanding its efforts to avoid or mitigate problems inherent in
its own computer systems or the adverse affects of Year 2000 problems
experienced by third parties on whom it is substantially reliant, the Company is
developing and intends to implement contingency plans. The Company is working in
cooperation with the U.S. Navy and others to ensure continued timely and
accurate payments by the U.S. Navy in the event the U.S. Government experiences
Year 2000 related payment system problems, with the goal of maintaining the
Company's principal source of cash flow uninterrupted and reducing the
likelihood that the Company will have to borrow operating capital. Additionally,
an IT team is being established to quickly respond to Year 2000 call-ins
associated with the Company's affected applications, if any. Implementation of
these contingency plans, as well as identification of other applications
requiring remediation and specific contingency plans will be a principal focus
of the Company throughout the remainder of 1999.
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 teaming partners, suppliers, subcontractors and
customers to timely anticipate and correct their Year 2000 computer systems
problems, to have a material adverse affect on the financial position or 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, the schedule for completing its remediation and
contingency preparedness efforts, or the currently estimated impact of the Year
2000 problem on the Company's financial position and results of operations will
not be revised in significant respects at that time based on facts then known to
the Company.
11
<PAGE>
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 teaming partners,
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.
12
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
During the first quarter, the Company filed the following current reports on
Form 8-K.
Date of Filing Subject
- -------------- -------
January 22, 1999 Newport News Shipbuilding Inc. and Avondale
Industries, Inc. proposed merger.
February 19, 1999 General Dynamics Corporation Offer to Newport News
Shipbuilding Inc.
February 23, 1999 Department of Justice clears Newport News' merger
with Avondale.
March 5, 1999 Anticipated Formation of Business Partnership
with Science Applications International Corp.
("SAIC").
March 16, 1999 Civil investigative demand from the United States
Department of Justice requesting documents and
other information in connection with the proposal
by General Dynamics Corporation to acquire the
Company.
13
<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 /s/ David J. Anderson
_____________________________
Senior Vice President and
Chief Financial Officer
Date: 5/4/99
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE NEWPORT
NEWS SHIPBUILDING INC. BALANCE SHEET AS OF MARCH 21, 1999, AND THE RELATED
STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 21, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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