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 SEPTEMBER 19, 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
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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: 32,972,263 shares and associated
preferred stock purchase rights as of October 15, 1999.
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TABLE OF CONTENTS
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Part I--Financial Information
Newport News Shipbuilding Inc.
Consolidated Statements of Earnings - Third Quarter......................................... 2
Consolidated Statements of Earnings - Nine 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....... 9
Part II--Other Information
Item 1. Legal Proceedings....................................................................... 14
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..................................... 14
Item 5. Other Information....................................................................... *
Item 6. Exhibits and Reports on Form 8-K........................................................ 14
</TABLE>
*No response to this item is included herein for the reason that it is
inapplicable or the answer to such item is negative.
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.
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PART I
FINANCIAL INFORMATION
NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
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QUARTER ENDED
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SEPTEMBER 19, SEPTEMBER 20,
1999 1998
------------------ ------------------
MILLIONS (EXCEPT SHARES AND PER SHARE AMOUNTS)
REVENUES........................................................ $ 451 $ 462
OPERATING COSTS AND EXPENSES.................................... (405) (419)
OTHER INCOME (EXPENSE), NET..................................... 1 -
------------ ------------
OPERATING EARNINGS.............................................. 47 43
Interest Expense, net of interest capitalized................... (13) (14)
------------ ------------
EARNINGS BEFORE INCOME TAXES.................................... 34 29
Provision for Income Taxes...................................... (14) (12)
------------ ------------
NET EARNINGS.................................................... $ 20 $ 17
============ ============
Weighted Average Number of Common Shares Outstanding
Basic...................................................... 34,132,786 34,564,034
============ ============
Diluted.................................................... 35,474,413 35,571,649
============ ============
Net Earnings Per Common Share
Basic...................................................... $ .60 $ .47
============ ============
Diluted.................................................... $ .58 $ .46
============ ============
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
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NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
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NINE MONTHS ENDED
-----------------
SEPTEMBER 19, SEPTEMBER 20,
1999 1998
------------------ ------------------
MILLIONS (EXCEPT SHARES AND PER SHARE AMOUNTS)
REVENUES....................................................... $ 1,325 $ 1,325
OPERATING COSTS AND EXPENSES................................... (1,178) (1,200)
OTHER INCOME (EXPENSE), NET.................................... 16 -
------------ ------------
OPERATING EARNINGS............................................. 163 125
Interest Expense, net of interest capitalized.................. (37) (41)
------------ ------------
EARNINGS BEFORE INCOME TAXES................................... 126 84
Provision for Income Taxes..................................... (53) (35)
------------ ------------
NET EARNINGS................................................... $ 73 $ 49
============ ============
Weighted Average Number of Common Shares Outstanding
Basic..................................................... 34,614,703 34,810,940
============ ============
Diluted................................................... 35,939,862 35,900,260
============ ============
Net Earnings Per Common Share
Basic..................................................... $ 2.11 $ 1.39
============ ============
Diluted................................................... $ 2.03 $ 1.35
============ ============
Dividends Declared Per Common Share............................ $ .12 $ .12
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements of
earnings. See Note 4 for information on reportable segments.
3
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NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 19, DECEMBER 31,
1999 1998
----------------- ------------------
(UNAUDITED) (AUDITED)
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MILLIONS (EXCEPT SHARE AMOUNTS)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents.............................................. $ 3 $ 3
Accounts Receivable.................................................... 107 143
Contracts in Process................................................... 304 334
Inventory.............................................................. 54 52
Deferred Income Taxes.................................................. 108 116
Other Current Assets................................................... 13 12
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Total Current Assets................................................... 589 660
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NONCURRENT ASSETS
Property, Plant and Equipment, net..................................... 719 763
Other Assets........................................................... 201 177
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Total Noncurrent Assets................................................ 920 940
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$ 1,509 $ 1,600
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Accounts Payable................................................. $ 77 $ 129
Short-Term Debt........................................................ 29 38
Postretirement Benefits................................................ 122 122
Other Accrued Liabilities ............................................. 216 229
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Total Current Liabilities.............................................. 444 518
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NONCURRENT LIABILITIES
Long-Term Debt......................................................... 522 591
Deferred Income Taxes.................................................. 232 235
Other Long-Term Liabilities............................................ 37 24
Commitments and Contingencies (See Note 3).............................
--------- ---------
Total Noncurrent Liabilities........................................... 791 850
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STOCKHOLDERS' EQUITY
Common Stock, $.01 par value -
authorized 70,000,000 shares; issued 35,292,019 shares at September
19, 1999 and 35,286,386 shares at December 31, 1998................. 1 1
Paid-In Capital........................................................ 276 276
Retained Earnings/(Accumulated Deficit)................................ 62 (7)
Unearned/Deferred Compensation......................................... (4) (4)
Stock Employee Compensation Trust (SECT)............................... (61) (34)
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Total Stockholders' Equity............................................. 274 232
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$ 1,509 $ 1,600
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The accompanying notes are an integral part of these consolidated balance
sheets. See Note 4 for information on reportable segments.
4
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NEWPORT NEWS SHIPBUILDING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED
SEPTEMBER 19, SEPTEMBER 20,
1999 1998
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MILLIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings ........................................................... $ 73 $ 49
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities -
Depreciation and Amortization................................... 43 48
Deferred Income Taxes........................................... 5 (81)
Loss on Equity Investments...................................... - 1
Disposition of Property Plant & Equipment....................... 11 -
Changes in Components of Working Capital -
Decrease (Increase) in -
Accounts Receivable........................................ 36 11
Contracts in Process....................................... 30 (48)
Inventory.................................................. (2) (27)
Other Current Assets....................................... (1) (1)
Increase (Decrease) in -
Trade Accounts Payable..................................... (52) (39)
Accrued Liabilities and Other.............................. (13) 90
Other, net...................................................... 11 4
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Net Cash Provided by Operating Activities................................ 141 7
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures..................................................... (10) (9)
Other.................................................................... (15) (5)
------ -------
Net Cash Used by Investing Activities.................................... (25) (14)
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CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Long-Term Debt.................................... (69) 26
(Decrease) Increase in Short-Term Debt................................... (9) 7
Issuance of SECT Shares/Common Stock..................................... 22 8
Treasury Stock /SECT Purchases........................................... (56) (33)
Dividends Paid........................................................... (4) (4)
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Net Cash (Used) Provided by Financing Activities......................... (116) 4
------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... - (3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 3 3
------ -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 3 $ -
====== =======
CASH PAID DURING THE PERIOD FOR INCOME TAXES............................. $ 51 $ 20
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CASH PAID DURING THE PERIOD FOR INTEREST................................. $ 31 $ 32
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</TABLE>
The accompanying notes are an integral part of these consolidated statements of
cash flows.
5
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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 nine month periods
ended September 19, 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 September 19, 1999 and September 20, 1998,
respectively.
3. COMMITMENTS AND CONTINGENCIES
GOVERNMENT CONTRACTING
As a general practice in the defense industry, the Defense Contract Audit Agency
("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 specific cost accounting issues.
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.
6
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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. 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
In June 1999, the Company delivered its sixth and final commercial product
tanker, completing the strategy announced in March 1998 to exit the commercial
ship construction market. The loss provision on undelivered ships at December
31, 1998 was approximately $80 million. The delivery of the final commercial
product tanker did not have a material impact on the financial position or
results of operations of 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.
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.
7
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INFORMATION ABOUT REVENUES AND OPERATING EARNINGS
FOR THE QUARTERS ENDED SEPTEMBER 19, 1999 AND SEPTEMBER 20, 1998, RESPECTIVELY
(IN MILLIONS)
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REPORTABLE
FLEET SEGMENTS ALL
CONSTRUCTION SERVICES ENGINEERING SUBTOTAL OTHERS (1) TOTAL
------------ -------- ----------- -------- ---------- -----
1999
- ----
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Revenues.......................... $ 148 $ 225 $ 71 $ 444 $ 7 $ 451
Segment Operating Earnings........ 21 21 5 47 - 47
1998
- ----
Revenues.......................... $ 188 $ 190 $ 77 $ 455 $ 7 $ 462
Segment Operating Earnings........ 21 18 6 45 (2) 43
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1. Other business activities include industrial products, commercial nuclear
activities including valve and pump repair and technical services, equity
investments, and corporate activities.
INFORMATION ABOUT REVENUES AND OPERATING EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 19, 1999 AND SEPTEMBER 20, 1998,
RESPECTIVELY (IN MILLIONS)
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REPORTABLE
FLEET SEGMENTS ALL
CONSTRUCTION SERVICES ENGINEERING SUBTOTAL OTHERS (1) TOTAL
------------ -------- ----------- -------- ---------- -----
1999
- ----
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Revenues.......................... $ 492 $ 646 $ 169 $ 1,307 $ 18 $ 1,325
Segment Operating Earnings........ 75 62 13 150 13 163
1998
- ----
Revenues.......................... $ 605 $ 487 $ 214 $ 1,306 $ 19 $ 1,325
Segment Operating Earnings........ 65 47 15 127 (2) 125
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1. Other business activities include industrial products, commercial nuclear
activities including valve and pump repair and technical services, equity
investments, and corporate activities.
5. OTHER MATTERS
RATIFICATION OF NEW COLLECTIVE BARGAINING AGREEMENT
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. On July 30, 1999 the
steelworkers ratified an agreement reached between the Company and the United
Steelworkers of America ending the strike and putting into effect a new 58-month
contract. Management believes that the financial terms of this new contract will
not have a material impact on the financial position or results of operations of
the Company.
8
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SHARE REPURCHASE PROGRAM
The Company's Board of Directors approved a $100 million share repurchase
program in June 1999. This new program is expected to be implemented over the
1999-2000 time period and will be accomplished through open market and privately
negotiated transactions. Subsequent to June 20, 1999 and through October 15,
1999, approximately 2.1 million shares had been repurchased under the program at
a cost of approximately $66 million.
SECURED DEBT UPDATE
During the third quarter of 1999, the Company met certain covenants under the
1996 Senior Credit Facility. This event released the Company's assets as
collateral under this agreement. The Senior Credit Facility consists of a $200
million six-year amortizing term loan and a $215 million six-year revolving
credit facility. Of the revolving credit facility, $125 million may be used for
advances and letters of credit and $90 million may be used only for standby
letters of credit. Approximately $159 million was outstanding as of September
19, 1999 under the Senior Credit Facility.
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 September 19, 1999 and September 20, 1998,
respectively.
RESULTS OF OPERATIONS
FOR THE THIRD QUARTER ENDED
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
MILLIONS
Revenues.................................. $ 451 $ 462
Operating Earnings........................ 47 43
Revenues for the third quarter of 1999 decreased $11 million to $451 million
compared with the same period in 1998. Increased revenues in fleet services
continued the momentum established in that segment over the past several
quarters. Virginia class submarine construction revenues also grew as activity
on that program accelerated. These gains were offset by lower aircraft carrier
construction revenues. The reduction in construction revenue was due to the
absence of work on the carrier TRUMAN, which was delivered in July 1998.
Engineering revenue was lower as a result of reduced activity associated with
submarine programs.
Third quarter 1999 operating earnings increased $4 million to $47 million
compared with the same period in 1998. The volume gains in fleet services,
together with improved margins in the construction segment caused the earnings
improvement.
9
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FOR THE NINE MONTHS ENDED
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
MILLIONS
Revenues................................. $ 1,325 $ 1,325
Operating Earnings....................... 163 125
Revenues for the first nine months of 1999 were consistent with the same period
in 1998. Increases in fleet services were offset by lower construction and
engineering revenues. The fleet services improvement was primarily driven by
Nimitz refueling and overhaul activities. Absence of work on the carrier Truman,
which was delivered in the third quarter of 1998, was the main driver of the
lower construction revenue. Lower engineering revenue was the result of reduced
activity associated with submarine programs.
Operating earnings for the first nine months of 1999 increased $38 million
compared with the same period in 1998. The 1999 operating earnings included
non-recurring gains of $25 million consisting of a break-up fee and option
proceeds associated with the termination of the Avondale merger and the
settlement of insurance claims on construction contracts. Excluding these
one-time items, operating earnings were $138 million, reflecting a 10% increase
over the nine-month 1998 operating earnings of $125 million. Fleet services
volume gains generated the majority of the earnings improvement.
The Company's funded backlog was $3.2 billion at September 19, 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 NINE MONTHS ENDED
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
MILLIONS
Net cash provided by operating activities............... $ 141 $ 7
Capital expenditures.................................... (10) (9)
Other investing cash flows.............................. (15) (5)
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Subtotal................................................ 116 (7)
Financing activities.................................... (116) 4
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Net increase (decrease) in cash and cash equivalents.... $ - $ (3)
========= ========
NET CASH PROVIDED BY OPERATING ACTIVITIES
The $134 million increase in 1999's comparative cash flows from operating
activities is primarily due to a reduction in working capital, as well as
improved 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 accounts payable.
OTHER INVESTING CASH FLOWS
The 1999 investing activities primarily relate to the Company's investment in
AMSEC LLC. The Company owns 45% of this new low-cost fleet services
organization. The 1998 investing activities primarily relate to investments
10
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in five vessel-owning limited liability companies which now own and operate five
commercial product tankers delivered by the Company.
FINANCING ACTIVITIES
The financing activities for the nine months ended September 19, 1999 reflect
the receipt of proceeds from the issuance of SECT shares related to the
Company's benefit plans, the purchase of Company stock under the stock
repurchase program, payments on long-term debt, payments on short-term debt, and
the payment of three quarterly dividends of four cents per share. For the nine
months ended September 20, 1998, the Company borrowed funds under its revolving
credit facilities and generated proceeds from the issuance of common stock.
These proceeds were partially offset by the purchase of Company stock, payments
on long-term debt, and the payment of three quarterly dividends of four cents
per share.
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 has installed new hardware and software in connection with its new
"shared data environment," which is expected to help mitigate potential Year
2000 problems.
In 1998, an oversight committee consisting of members of senior management was
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 IT systems is 97% complete,
with no mission critical systems remaining. Work on the remaining 3%, consisting
of lower priority systems is scheduled to be complete early in the fourth
quarter of 1999. In addition, two comprehensive off-site integration tests of IT
applications were successfully completed during the first and third quarters of
1999, respectively. Remediation and testing of non-IT systems are 99.9%
complete, with no mission critical systems remaining. The remaining 0.1% is
scheduled to be complete early in the fourth quarter of 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 $4 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
$5 million when finished; however, it should be noted that the budget may from
time to time be adjusted should more systems functions requiring remediation be
identified, assessed and ranked as to criticality, and appropriate resources
allocated and as the Company's contingency planning continues.
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.
11
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In April 1998, surveys were sent to nearly 3,000 key suppliers and
subcontractors. Due to changes in product lines and reductions to the Company's
supplier base, 1,700 out of the original 3,000 were specifically targeted. All
but approximately 70 have responded with 100% of those responding indicating
they 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. In
addition, the Company's Sourcing Division has contacted all non-responsive
suppliers and is implementing alternative strategies in cases where vendors and
subcontractors remain non-responsive.
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 effects of Year 2000 problems
experienced by third parties on whom it is substantially reliant, the Company
will 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 engage in additional borrowings. Contingency procedures will also be
implemented with respect to the Company's utilities and plant operations. Each
system will be tested, and if necessary, the procedures will be implemented
supporting both contingency and back-to-normal operations. Additionally, the
Company's IT Division will be staffed to quickly respond to Year 2000 call-ins
associated with the Company's affected applications, if any. Furthermore,
contingency plans associated with the functional areas of the IT Division, which
will be executed during the rollover, have been developed and continue to be
refined as conditions change. Implementation of these 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 effect on the financial position or results
of operations of the Company.
As implementation of the Company's Year 2000 remediation and contingency 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 and contingency 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.
12
<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 under the caption "Year 2000 Planning and Preparation", and (iii) the
following factors: (a) general political, economic and competitive conditions;
(b) 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.
13
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 25, 1999, the Company held its 1999 Annual Meeting of Stockholders.
Three proposals were presented to the stockholders for their approval. The
outcome of the voting on the three proposals was as follows:
1. Proposal for the re-election of two Class III directors to hold office until
2002.
Nominee For Withheld
------- --- --------
Gerald L. Baliles 31,185,345 882,836
Dana G. Mead 29,858,914 2,209,267
2. Proposal to increase by 150,000 the number of shares authorized for
issuance under the Newport News Shipbuilding Employee Stock Purchase and
Accumulation Plan.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
30,780,589 1,152,007 135,585 None
3. Proposal to ratify the appointment by the Board of Directors of Arthur
Andersen LLP as the Company's independent public accountants for 1999.
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
31,766,273 177,083 124,825 None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit Number:
Exhibit 27.1 Financial Data Schedule
During the second quarter, the Company filed the following current reports on
Form 8-K.
September 1, 1999 Announcing the appointment of Scott Stabler as Vice
President, Assembly, and the retirement of Vice President
of Assembly, Test and Trades, George Wade.
August 16, 1999 Announcing the retirement of Dana G. Mead from the Board of
Directors of Newport News Shipbuilding Inc.
August 13, 1999 Announcing the election of Charles A. Bowsher to the Board
of Directors of Newport News Shipbuilding Inc.
June 24, 1999 Announcing the intended adjournment and relocation of the
1999 Annual Meeting of the Stockholders of Newport News
Shipbuilding Inc.
14
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Newport News Shipbuilding Inc.
By: /s/ David J. Anderson
---------------------
Senior Vice President and
Chief Financial Officer
Date: 11/1/99
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Newport
News Shipbuilding Inc. Balance Sheet as of September 19, 1999, and the related
Statement of Earnings for the nine months ended September 19, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-19-1999
<CASH> 3
<SECURITIES> 0
<RECEIVABLES> 107
<ALLOWANCES> 0
<INVENTORY> 54
<CURRENT-ASSETS> 589
<PP&E> 1,604
<DEPRECIATION> 885
<TOTAL-ASSETS> 1,509
<CURRENT-LIABILITIES> 444
<BONDS> 400
0
0
<COMMON> 1
<OTHER-SE> 273
<TOTAL-LIABILITY-AND-EQUITY> 1,509
<SALES> 1,325
<TOTAL-REVENUES> 1,325
<CGS> 1,178
<TOTAL-COSTS> 1,178
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 126
<INCOME-TAX> 53
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<NET-INCOME> 73
<EPS-BASIC> 2.11
<EPS-DILUTED> 2.03
</TABLE>
