UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended April 2, 2000
[ ] 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 1-5109
TODD SHIPYARDS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1506719
(State or other jurisdiction of (IRS Employer I.D.No.)
incorporation or organization)
1801-16th Avenue SW, Seattle, WA 98134-1089
(Address of principal executive offices) (zip code)
Registrant's telephone number (206) 623-1635
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Name of each exchange on which registered: New York Stock Exchange
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non affiliates of the
registrant was approximately $48 million as of June 9, 2000.
There were 9,701,480 shares of the corporation's $.01 par value common stock
outstanding at June 9, 2000.
Documents Incorporated by Reference
Portions of the Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held September 11, 2000 are
incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Page No.
Item 1. Business............................................. *
Item 2. Properties........................................... *
Item 3. Legal Proceedings.................................... *
Item 4. Submission of Matters to a Vote of Security Holders.. *
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.......................... *
Item 6. Selected Financial Data.............................. *
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. *
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...........................................*
Item 8. Consolidated Financial Statements and
Supplementary Data................................... *
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. *
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................... *
Item 11. Executive Compensation............................... *
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... *
Item 13. Certain Relationships and Related Transactions....... *
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................. *
No page numbers are contained in EDGAR version.
PART I
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements contained in this Report which are not historical facts or
information are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate
future events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties which could cause
the outcome to be materially different than stated. Such risks and
uncertainties include both general economic risks and uncertainties and
matters which relate directly to the Company's operations and properties and
are discussed in Items 1, 3 and 7 below. The Company cautions that any
forward-looking statement reflects only the belief of the Company or its
management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove to be inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.
ITEM 1. BUSINESS
INTRODUCTION
Todd Shipyards Corporation (the "Company") was organized in 1916 and has
operated a shipyard in Seattle, Washington (the "Shipyard") since
incorporation. The Company operates the Shipyard through its wholly owned
subsidiary Todd Pacific Shipyards Corporation ("Todd Pacific"). Todd Pacific,
historically, has been engaged in the repair/overhaul, conversion and
construction of commercial and military ships and vessels.
Throughout much of the Company's history, a substantial portion of its
revenues and profits were attributable to long-term United States Government
("Government") contracts. However, in the late 1980's a significant decline
in the annual shipbuilding budgets of the Department of the Navy (the "Navy")
greatly reduced the Company's bidding opportunities for long-term Government
contracts.
In fiscal year 1995 to offset the downturn in long-term Government contract
opportunities, the Company entered into a contract for the construction of
three Jumbo Mark II Class ferries ("Mark II Ferry") for the Washington State
Ferry System ("Ferry System"). The Mark II Ferry project represented the
Company's first new construction effort in 10 years. The $205.5 million
contract was concluded during fiscal year 2000, when the Company reached a
mediated settlement with the Ferry System relating to unpriced engineering and
production changes issued by the Ferry System during construction of the Mark
II Ferries. The settlement was reflected in the Company's 1999 fiscal year
end results and materially affected revenues and earnings for that period.
As the Company neared completion of the Mark II Ferry project, it began
construction of a 70 mega-watt floating electrical power plant (the "Margarita
II"). The Margarita II was delivered during the first quarter of fiscal year
2000 with numerous unsettled engineering and production change orders
remaining to be negotiated with the customer. The Company, which is seeking
full compensation for the costs of these engineering and production change
orders from the customer, is currently engaged in arbitration hearings with
the customer and a third party arbitrator in an attempt to resolve the
unsettled change orders.
With the completion of these two construction projects, the Company has
consciously focused its main business strategy on repair, maintenance and
conversion business opportunities. This strategy has already resulted in the
award and fiscal year 2000 contract start of a new five year cost-type
contract for continuous maintenance work on three Navy aircraft carriers. The
Planned Incremental Availability ("PIA") contract has a notional value of
approximately $100 million.
Subsequent to the end of the Company's fiscal year 2000, the Navy announced
its intention to award the Company, on a sole source basis a multi-ship
contract, not to exceed ten years in duration, for the repair and maintenance
of six surface combatant class vessels stationed in the Puget Sound area. A
non-exclusive teaming arrangement between the Company (as prime contractor)
and other West Coast contractors is anticipated for contract performance. If
awarded, work on this contract will commence during the first quarter of the
Company's fiscal year 2001.
In addition to these recently completed construction projects, the newly
awarded PIA contract, and the potential surface combatant contract, the
Company engages in commercial repair, overhaul and conversion work on other
Navy vessels, U.S. Coast Guard vessels, ferries, container vessels, tankers,
fishing vessels, cruise ships, barges, and tug supply vessels.
Notwithstanding the Company's recent long-term Government contract award, the
current annual shipbuilding and maintenance budgets of the Navy are still
significantly lower than historical levels experienced 10 or 15 years ago.
This overall reduction in long-term Government contracting opportunities has
created excess ship construction and repair capacity, both nationally and
locally, resulting in intense price competition. The Company has responded to
this competition by carefully reviewing its overhead, streamlining its
operations and implementing advanced shipyard production techniques that were
developed over the past five years during the new construction projects.
Management believes that the Company is well positioned to continue performing
a substantial amount of the maintenance and repair work on commercial and
Federal Government vessels engaged in various seagoing trade activities in the
Pacific Northwest. This position should enable the Company to successfully
pursue repair, maintenance, and conversion work for the vessel fleets
operating on Puget Sound (near Seattle) and the Pacific Coast. These fleets
include the U.S. Navy, the U.S. Coast Guard, the Washington State Ferry
System, the Alaska Marine Highway System, other government owned vessels,
passenger cruise ships, American-flagged cargo carriers, fishing fleets,
tankers, and tug and barge operators. While the Company may selectively
pursue new construction opportunities in the future, its primary focus, as
stated previously, will be on repair, maintenance and conversion activities.
OPERATIONS OVERVIEW
Repair and Overhaul Operations
The Company's repair and overhaul work ranges from relatively minor repair to
major overhauls and often involves the dry-docking of the vessel under repair.
The repair and overhaul business opportunities available to domestic, private-
sector shipyards, has been impacted by the downsizing and relocation of the
active Navy fleet. Also affecting private shipyards is the impact of
stationing vessels at Navy home ports, the location of marine accidents, the
availability and scheduling of maintenance and overhauls, and conditions
within the maritime industry as a whole.
Commercial repair and overhaul contracts are obtained by competitive bidding,
awarded by negotiation or assigned by customers who have a preference for a
specific shipyard. On jobs that are advertised for competitive bids, owners
usually furnish specifications and plans which become the basis for an agreed
upon contract. Repair and overhaul jobs are usually contracted on a fixed-
price basis with additional work contracted on a negotiated-price basis.
Government ship repair and overhaul work is usually awarded through a formal
bidding process. The Company also performs repair and overhaul work for the
Navy under cost-type contracts. These contracts provide for reimbursement of
costs, to the extent allocable and allowable under applicable regulations, and
payment of an incentive or award fee based on the customer's judgment of the
Company's performance with respect to certain pre-established criteria. The
Government regulates the methods by which overhead costs are allocated to
Government contracts. The Company's commercial and Government repair and
overhaul contracts contain customer payment terms that are determined by
mutual agreement. Typically, the Company is periodically reimbursed through
progress payments based on the achievement of certain agreed to benchmarks
less a specified level of retention. Some vessel owners contracting for
repair, maintenance, or conversion work also require some form and amount of
performance and payment bonding, particularly state agencies.
Construction Operations
During the third quarter of fiscal year 2000, the Company officially completed
the Mark II Ferry program, with the completion of the warranty period on the
third vessel. The Mark II Ferry program, awarded in fiscal year 1995, called
for the construction of three ferries which are designed to transport 218
automobiles and 2,500 passengers each on the waterways of Puget Sound and are
the largest ferries in the Washington State Ferry System fleet.
During the first quarter of fiscal year 2000, the Company completed work on
the Margarita II. The contract, awarded in August 1998, called for the
construction of a 70 mega-watt floating electrical power-plant. The contract
will officially end with the completion of the warranty period during the
second quarter of fiscal year 2001.
Distribution of Work
The approximate distribution of the Company's Shipyard revenues for each of
the last three fiscal years are summarized as follows:
2000 1999 1998
Federal Government 72% 30% 18%
Commercial 28% 70% 82%
Total 100% 100% 100%
The distribution of the Company's revenues for fiscal year 2000 were
significantly influenced by the increased volume of cost-type Government
repair and maintenance work, the completion of the Power Barge during the
first quarter of fiscal year 2000, and the absence of Mark II Ferry revenue,
which is attributable to the completion of all production related work on the
contract in fiscal year 1999.
During fiscal years 1999 and 1998, the Mark II Ferry program represented 39%
and 55% of revenues, respectively. Mark II Ferry revenue for fiscal year 1999
was significantly influenced by the $24.7 million in additional revenues
recorded as a result of the Mark II Ferry project settlement. The Mark II
Ferry project had a significant impact both on the volume and nature of the
business being conducted in fiscal year 1999, and to the relative contribution
from federal government and commercial customers.
Future Operations
The Company plans to actively pursue Government and commercial repair,
maintenance and conversion opportunities. International construction and
repair opportunities are limited because shipbuilders in foreign countries are
often subsidized by their governments. These subsidies allow foreign
shipyards to enter into production contracts at prices below their actual
production costs. Competition for domestic construction and repair
opportunities will continue to be intense as certain of the Company's larger
competitors have more modern shipbuilding facilities, lower labor cost
structures, or access to greater financial resources. The Company intends to
capitalize on the advantages of its geographic location, the skills of its
experienced workforce and production efficiencies developed over the past
several years as it competes for repair, maintenance and conversion
opportunities.
Employees
The number of persons employed by the Company varies considerably from time to
time depending primarily on the level of Shipyard activity, averaging
approximately 900 employees during fiscal year 2000 and totaling approximately
1,200 employees on April 2, 2000.
During fiscal year 2000 an average of approximately 800 of the Company's
Shipyard employees were covered by a union contract that became effective
during the third quarter of this fiscal year. At April 2, 2000 approximately
1,100 Company employees were covered under this contract.
In February 1998, the Puget Sound Metal Trades Council (bargaining umbrella
for all unions at Todd Pacific) and Todd Pacific were sued in Federal District
Court for the Western District of Washington by in excess of 200 employees
contending that the collective bargaining agreement entered into by Todd
Pacific and the various unions representing these employees had not been
properly ratified by the union membership. The lawsuit sought a declaratory
judgment that the collective bargaining agreement executed in November 1997 be
found null and void. The Puget Sound Metal Trades Council and the plaintiff
employees reached a final settlement of this matter during the Company's first
quarter of fiscal year 2000. The Company has agreed to the terms of the
settlement, which do not require any action or monetary contribution by the
Company.
Availability of Materials
The principal materials used by the Company in its Shipyard are steel and
aluminum plate and shapes, pipe and fittings, and electrical cable and
fittings. Management believes that each of these items can presently be
obtained in the domestic market from a number of different suppliers. In
addition, the Company maintains a small on-site inventory of these items that
is deemed sufficient for emergency ship repairs.
Competition
Competition in the domestic shipyard industry is intense. The Company
competes for commercial and Government work with a number of other shipyards,
some of which have more advantageous cost structures. The Company's
competitors for overhaul/conversion and repair work include non-union
shipyards, shipyards with excess capacity and government subsidized
facilities. Although not a market with which the Company has continued
interest, the Company's competitors for new construction work include
shipyards on the Gulf Coast and East Coast with lower wage structures,
substantial financial resources or significant recent investments in
productivity enhancing facilities. The reduced size of the Government's
active duty fleet has resulted in a significant decline in the total amount of
Government business available to the private sector shipyards, creating excess
shipyard capacity and acute price competition.
Commercial ship construction and, and to a lesser extent, repair work
performed in certain foreign markets is less costly than domestic ship
construction and repair. Many contracts are awarded pursuant to competitive
bidding and profitability is dependent upon effective cost controls,
production efficiencies and the ability to meet strict schedules, among other
factors. With respect to repair work, the location, availability and
technical capability of repair facilities are important factors.
Environmental Matters
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. Fines and penalties may be imposed for non-
compliance with these laws. Such laws and regulations may expose the Company
to liability for acts of the Company which are or were in compliance with all
applicable laws at the time such acts were performed.
Recurring costs associated with the Company's environmental compliance program
are not material and are expensed as incurred. Capital expenditures in
connection with environmental compliance are not material to the Company's
financial statements. See Item 7, Management's Discussion and Analysis and
Note 1 to the Consolidated Financial Statements for further discussion of
these costs.
The Company has an accrued liability of $19.3 million as of April 2, 2000 for
environmental matters. As assessments of environmental matters and
remediation activities progress, these liabilities are reviewed periodically
and adjusted to reflect additional technical, engineering and legal
information that becomes available. The Company's estimate of its
environmental liabilities is affected by several uncertainties such as, but
not limited to, the method and extent of remediation of contaminated sites,
the percentage of material attributable to the Company at the sites relative
to that attributable to other parties, and the financial capabilities of the
other Potentially Responsible Parties ("PRP") at most sites. The Company's
estimate of its environmental liabilities is also affected as additional
information becomes known regarding alleged damages from past exposure to
asbestos at Company facilities. The Company is covered under its various
insurance policies for some, but not all, potential environmental liabilities.
See Item 3. Legal Matters, Item 7. Management's Discussion and Analysis and
Note 11 of the Notes to Consolidated Financial Statements for further
information regarding the Company's environmental matters.
Safety Matters
The Company is also subject to the federal Occupational Safety and Health Act
("OSHA") and similar state statutes. The Company has an extensive health and
safety program and employs a staff of safety inspectors and industrial hygiene
technicians whose primary functions are to develop Company policies that meet
or exceed the safety standards set by OSHA, train production supervisors and
make periodic inspections of safety procedures to insure compliance with
Company policies on safety and industrial hygiene. All employees are required
to attend regularly scheduled safety training meetings.
Backlog
At April 2, 2000 the Company's backlog consists of approximately $37 million
of repair, maintenance, and conversion work. This compares with backlogs of
$46 million and $47 million at March 28, 1999 and March 29, 1998 respectively.
The Company's current backlog is primarily attributable to firm repair,
maintenance and conversion work scheduled for completion during fiscal year
2001.
Since work under several of the Company's Navy contracts is at the option of
the Navy, the Company cannot provide assurance as to the timing or level of
work that may be performed under these contracts. Therefore, projected
revenues from these contracts are not included in the Company's backlog.
INVESTMENTS AND ACQUISITIONS
The Company has from time to time pursued opportunities to diversify its
business, in areas such as metal fabrication, marine transportation, other
marine industries and businesses unrelated to the Shipyard.
The Company continues to evaluate suitable investment opportunities, which it
believes will appropriately utilize the Company's resources. During fiscal
year 2000 the Company did not make any direct investments in other businesses,
either related or unrelated to the Shipyard activities.
ITEM 2. PROPERTIES
The design capacities of the Company's three drydocks, all of which are
located at the Shipyard, are as follows:
Year Type Max.Design Date of Lease
Name Built Owned Leased Capacity(in tons) Expiration
Emerald Sea 1970 Steel 40,000 -
YFD-70 1945 Steel 17,500 4/15/01
YFD-54 1943 Wood 5,700 9/30/00
During fiscal year 2000, the Company extended the lease on its wood drydock
(YFD-54) for a one year period, through September 2000, and has an option to
extend the lease for an additional five years at the conclusion of the
extension period. The Company is currently evaluating several factors,
including, but not limited to, management's plans for future operations,
recent operating results and projected cash flows to determine if the lease
will be extended beyond the current term.
The Company is required to maintain Navy certification on its drydocks and
cranes in order to qualify its facilities to bid on and perform work under
certain Navy and United States Coast Guard ("Coast Guard") contracts. The
Company's current certification for the drydocks listed above are 30,000 tons
(Emerald Sea) and 14,000 tons (YFD-70). While such certification is less than
the maximum design capacity, it is sufficient to allow the Company to perform
work on all non-nuclear U.S. Navy vessels homeported in Puget Sound, as well
as all Coast Guard vessels. Drydock YFD-54 is not currently certified and the
Company is evaluating whether to have it re-certified prior to the lease
expiration later this fiscal year. The Company also maintains certification
of its cranes.
The Company believes that its owned and leased properties at the Shipyard are
in reasonable operating condition given their age and usage, although, from
time to time, the Company has been required to incur substantial expenditures
to ensure the continuing serviceability of its owned and leased machinery and
equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. Fines and penalties may be imposed for non-
compliance with these laws. Such laws and regulations may expose the Company
to liability for acts of the Company which are or were in compliance with all
applicable laws at the time such acts were performed. The Company faces
potential liabilities in connection with the alleged presence of hazardous
waste materials at its Seattle shipyard and at several sites used by the
Company for disposal of alleged hazardous waste.
The Company is identified as a PRP by the Environmental Protection Agency
("EPA") under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA," commonly known as the "Superfund") in connection with
matters pending at four Superfund sites. Additionally, the Company has been
named as a PRP for four Superfund cases where the Company has asserted that
its liability was discharged when it emerged from bankruptcy in 1990.
Generally these environmental claims relate to sites used by the Company for
disposal of alleged hazardous waste. The matters relating to the Harbor
Island site, where the Company's Shipyard is located, are discussed below.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements in Item 8 below for information with respect to all pending suits,
claims and proceedings, including four as to which the Company believes it has
no or only nominal liability.
Harbor Island Site
The Company and several other parties have been named as PRPs by the EPA
pursuant to CERCLA in connection with the documented release or threatened
release of hazardous substances, pollutants and contaminants at the Harbor
Island Superfund Site, (the "Harbor Island Site"). Included in the Company's
$19.3 million total reserve for environmental matters is a reserve of $15.9
million to address the Harbor Island Site.
To date, the EPA has separated the Harbor Island Site into three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and will continue
throughout fiscal year 2001. The Company and the EPA are currently
negotiating the extent and methodology of the soil remediation. The Company
estimates remediation of the entire Soil Unit will take approximately 36 to 60
months from the clean-up start date.
During the third quarter of the fiscal year 1997, the EPA issued its Record of
Decision ("ROD") for the SSOU. The ROD identifies four alternative solutions
for the SSOU remediation and identifies the EPA's selected remedy. During the
third quarter of fiscal year 2000, the EPA expanded the boundaries of the SSOU
issuing their Phase 1B Data Report and resulting Explanation of Significant
Differences outlining the changes to the ROD. The Company has evaluated what
it believes is the financial impact of the EPA's actions and has increased its
reserves to $13.6 million for the remedial effort. This reserve increase
resulted in a $5.6 million charge against current year earnings. During the
fourth quarter of fiscal year 2000, the Company and the EPA entered into an
Administrative Order on Consent for the development of the remedial design for
the SSOU. The Management believes that the timing and cost of the SSOU clean
up will remain significantly uncertain until a remedial design has been
finalized with the EPA that identifies the scope of remediation and the method
of sediment disposal.
During the Company's fiscal year 2000, several species of salmon in Washington
State were designated under the Endangered Species Act. The potential impact
the listing could have on the remedial efforts on the Harbor Island Superfund
site is unknown at this time.
During January 1998, the Company was notified by the EPA that testing would be
required in the West Waterway of the Duwamish River outside the borders of the
SSOU as part of the SOU. The Company during May 1998 entered into an
Administrative Order on Consent to perform certain limited testing as part of
the SOU investigation. After an evaluation of the results, the EPA issued a
draft "no action" ROD on the SOU for public comment which if issued in final
form would end the investigation of the SOU, requiring no remedial action.
The public comment period closed during the Company's fourth quarter of fiscal
year 2000 and the EPA has not yet announced the results.
The Company has been named as a defendant in civil actions by parties alleging
damages from past exposure to toxic substances, generally asbestos, at closed
former Company facilities. The Company has approximately 330 cases involving
550 plaintiffs pending against it, together with other ship builders and
repairers, ship owners, asbestos manufacturers, distributors and installers
and equipment manufacturers, involving injuries or illnesses allegedly caused
by exposure to asbestos or other toxic substances. The Company and its
insurers are vigorously defending these actions. Most of these cases have been
filed since 1991 by heirs of retired employees or employees of subcontractors
who allegedly worked at Company sites, and allege contact with asbestos for
varying periods of time and allege that such exposure caused illness and/or
death. The cases are generally filed with multiple claimants and multiple
defendants and are generally insured matters. Suits of this nature generally
seek amounts in excess of $100,000 on behalf of each claimant as against all
defendants. Claims resolved to date have been settled for net amounts that
are immaterial to the Company's financial condition and operating results. By
their very nature, civil actions relating to toxic substances vary according
to the cases' fact patterns, jurisdiction and other factors. Accordingly, the
Company cannot predict the eventual number of such cases or their eventual
resolution. The Company has included an estimate of its potential liability
for these issues in its environmental reserves.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through solicitation
of proxies or otherwise, during the fourth quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's stock is listed on the New York Stock Exchange (the "NYSE").
The following table sets forth for the fiscal quarters indicated the high and
low composite sales prices of the stock as reported by the NYSE.
Quarter Ended High Low
June 28, 1998 7.50 5.00
September 27, 1998 6.38 4.13
December 27, 1998 5.69 4.50
March 28, 1999 6.00 4.31
June 27, 1999 7.13 3.88
October 3, 1999 7.38 6.25
January 2, 2000 9.56 6.88
April 2, 2000 8.56 7.00
On June 9, 2000 the high and low prices of the Company's common stock on the
NYSE were $7.63 and $7.38, respectively.
At June 9, 2000 there were 1,903 holders of record of the outstanding shares
of common stock. The Company does not presently anticipate the declaration of
dividends.
ITEM 6. SELECTED FINANCIAL DATA (In thousands of dollars,
except per share data)
The following table summarizes certain selected consolidated financial data of
the Company which should be read in conjunction with the accompanying
consolidated financial statements of the Company included in Item 8.
April 2, March 28, March 29, March 30, March 31,
2000 1999 1998 1997 1996
Revenue (1) $123,851 $106,189 $109,537 $114,398 $101,687
Income (loss)
from operations (2)(3) 5,610 10,222 3,197 (25,793) 1,017
Net income(loss) (2)(3)(4) 8,132 17,394 8,103 (21,253) 4,132
Per share of common stock
Income (loss)
Basic EPS 0.83 1.76 0.82 (2.14) 0.42
Diluted EPS 0.82 1.75 0.82 (2.14) 0.41
Financial position:
Working capital 63,554 55,009 44,400 33,245 48,880
Fixed assets 17,356 19,026 21,565 24,477 26,499
Total assets 132,147 129,456 116,873 115,789 120,571
Stockholders'
equity 76,185 71,088 56,813 47,940 67,380
(1) As discussed in greater detail in Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview -
Mark II Ferry Contract" the Company's 1999 revenues included $23.5
million arising from an increase in the contract price relating to the
construction of three Jumbo Mark II Ferries, and an additional $1.2
million in revenue associated with tasks completed under the original
contract that it had not been able to recognize previously, substantially
offsetting approximately $24.6 million of contract losses, before
administrative overhead expenses recognized by the Company under the
prior contract terms. A substantial portion of these contract losses
were recognized during the fiscal year 1997.
(2) During fiscal year 1998, the Company reached agreement with an
insurance company regarding that carrier's obligations for property
damage occurring in previous fiscal years. This settlement contributed
$6.1 million to operating and net income. This settlement was offset
partially by an additional $0.5 million operating charge to environmental
reserves.
(3) During fiscal year 2000, the Company recorded an additional $5.6 million
operating charge for environmental reserves. This charge was
partially offset by a $0.9 million environmental insurance settlement the
Company reached with one of its insurance carriers.
(4) During fiscal year 1998, the Company received a federal income tax refund
of $1.5 million, which contributed a similar amount to net income. In
addition, the Company realized a $1.0 million gain on the sale of its
broadcasting stations, operated by Elettra Broadcasting, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Notes to Consolidated Financial Statements are an integral part of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and should be read in conjunction herewith. The following
discussion and analysis of financial condition and results of operations
contains forward-looking statements, which involve risks and uncertainties.
The Company's actual results in future periods may differ significantly from
the results discussed in or anticipated by such forward looking statements.
Certain factors which may impact results for future periods are discussed
below under the captions "Overview - Profitability," and "Environmental
Matters." Readers should also consider the statements and factors discussed
under the caption "Operations Overview" in Item 1 of the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
fiscal year ended April 2, 2000, and in the Notes to the Company's
Consolidated Financial Statements for the fiscal year then ended.
Overview
During fiscal year 2000, the Company recorded revenue of $123.9 million, which
represented an increase of $17.7 million, or 17%, over fiscal year 1999
revenue. However, considering that revenue for fiscal year 1999 was
materially impacted by the $24.7 million Jumbo Mark II project settlement with
the Washington State Ferry System, the increase in fiscal year 2000 revenue,
excluding the 1999 Jumbo Mark II settlement was $42.4 million, or 52%. Repair
and overhaul activities represented approximately 97% of fiscal year 2000
revenues, while fiscal year 1999 repair and overhaul activities accounted for
approximately 65% of revenues, excluding the $24.7 million Jumbo Mark II
settlement.
Revenue for fiscal year 2000 reflects the Company's business strategy of
emphasizing repair and overhaul activities, while discontinuing the pursuit of
new construction opportunities. This strategy will be central to the
Company's fiscal year 2001 business plan.
During fiscal year 2000 the Company recorded operating income of $5.6 million
on revenue of $123.9 million, or 5% of revenue. Operating income for fiscal
year 2000 was significantly impacted by the Company's decision to increase
environmental reserves by $5.6 million during the fourth quarter. This
reserve increase was partially offset by a $0.9 million environmental
insurance settlement, also realized by the Company during the fourth quarter
of fiscal year 2000. The resulting net environmental reserve charge of $4.7
million, which is unrelated to the current shipyard operations, reduced the
Company's operating income in fiscal year 2000 by 45%.
The environmental reserve increase became necessary when the Company
determined, during the fourth quarter, the cost impact of the Environmental
Protection Agency's Final Remedial Design Data Report on the Shipyard
Sediments Operable Unit. This report relocates and expands the current
sediments boundary. The expansion of the existing boundaries, which was
reported by the Company in the period ending January 2, 2000, significantly
increases the potential cost of sediment remediation.
The Company also recognized a net gain of $0.1 million from the sale of
available-for-sale securities, and $3.1 million in non-operating investment
income during fiscal year 2000. These amounts in addition to the operating
income reported, resulted in fiscal year 2000 income before income tax expense
of $8.8 million.
Auxiliary Oiler Explosive ("AOE") Contract
In May 1996, the Company was awarded a cost-type contract for phased
maintenance repairs to four Navy AOE class supply ships during a five year
availability schedule. The notional value of the original AOE contract was
$79 million. During fiscal year 2000 the notional value of the contract has
increased to approximately $100 million of which $87 million had been recorded
as revenue, cumulatively, as of April 2, 2000.
Based on current availability schedules the contract is anticipated to
conclude during the second quarter of the Company's fiscal year 2002. To meet
this availability schedule, the Company anticipates the Navy to exercise
contract options, which will increase the final contract value to
approximately $129 million. Once the contract concludes, the Company expects
the Navy to undergo a competitive bidding process to award another multi-year,
multi-ship follow-on contract.
Planned Incremental Availability ("PIA")
During January 1999, the Company was awarded a five year cost-type contract
for phased maintenance on three Carrier Vessel Nuclear, or CVN class aircraft
carriers by the Department of the Navy. The PIA contract has a notional value
of approximately $100 million, of which $26 million had been recorded as
revenue, cumulatively, as of April 2, 2000. The contract gives the Navy
options to have the Company perform non-propulsion repair and maintenance work
on three separate nuclear aircraft carriers at Puget Sound Naval Shipyard in
Bremerton, Washington. Work on the first ship availability started during the
Company's first quarter of fiscal year 2000.
Preservation Contract
During the second quarter of fiscal year 2000, the Company was awarded an
overhaul contract with an estimated price of approximately $29 million. The
contract calls for the overhaul of the Washington State Ferry, MV Yakima.
Since the contract was awarded, its scope of work has been reduced slightly
and its value is currently estimated to be approximately $28 million.
Work on the MV Yakima commenced during the third quarter and is approximately
34% complete at April 2, 2000. The project, which will eventually replace or
renovate the majority of the vessel's interior structures, including the
replacement of steel plating, passenger area furniture, galley, fixtures,
windows, and the removal of hazardous materials, is expected to be completed
during the fourth quarter of the Company's fiscal year 2001.
The Company's current estimates to complete the project are within the
established production budgets and the current completion schedule is
projected to be earlier than contractually required. The Company may be
awarded financial incentives if certain contractual delivery dates are met.
However, the Company has not considered these incentives in its contract
revenue projections.
Power Barge Contract
In the second quarter of fiscal year 1999, the Company commenced work on a new
construction contract with an estimated price of approximately $20.0 million.
The contract called for the construction of a floating electrical power plant
(the "Margarita II"), 206 feet long and capable of developing 70 mega-watts of
electricity.
During the first quarter of fiscal year 2000, the Margarita II was delivered
to the customer. To maintain production schedule deadlines and perform
customer directed change orders, the Company experienced significant contract
cost growth in both labor hours and material. However, an agreement was not
reached between the Company and the customer regarding the potential increase
in contract price, if any, to compensate for these changes.
At the time of delivery, the Company claimed it was owed approximately $3.5
million for customer directed change orders. In accordance with the terms of
the contract, sufficient funds were placed in an escrow trust account by the
customer to secure the $3.5 million in un-negotiated customer directed change
orders, as well as additional receivables owed the Company.
During the second quarter of fiscal year 2000, the Company and the vessel
owner negotiated approximately $0.4 million of customer directed change
orders, leaving approximately $3.1 million in un-negotiated change orders at
April 2, 2000. The Company recognized the associated revenue from these
changes during the second quarter. However, it became apparent that
arbitration was required to resolve the remaining un-negotiated customer
directed change orders with the customer, which was provided under the terms
of the contract. Arbitration hearings, which began during the fourth quarter
of fiscal year 2000, resumed during the first quarter of fiscal year 2001, and
are scheduled to be concluded during the second quarter of fiscal year 2001.
Since the Company cannot reasonably predict the outcome of the arbitration
with its customer, it has not included any estimates of possible recoveries in
its contract revenue. In addition, the company cannot reasonably estimate the
costs associated with pursing full recovery from the vessel owner at this
time. Therefore, these costs will be recognized as they are incurred in
future accounting periods.
At April 2, 2000, the Company believes that its remaining contract warranty
reserves are adequate and any potential warranty expense greater than
established reserves will be immaterial to the Company's financial condition
or operating results. However, the Company will review its reserve estimates
during the balance of the warranty period and may revise its reserves as
needed. The warranty period is scheduled to end early in the Company's second
quarter of fiscal year 2001.
Mark II Ferry Contract
During the third quarter of fiscal year 2000, the Company concluded the one
year warranty period on the third Jumbo Mark II ferry, the MV Puyallup. With
the conclusion of this warranty period, the Company has fulfilled its last
remaining contractual obligations under the $205.5 million construction
contract with the Washington State Ferry System ("Ferry System").
The contract, which began in 1995, called for the construction of three Jumbo
Mark II ferries at an original contract price of $182 million. The Mark II
ferries can transport 218 automobiles and 2,500 passengers each and are the
largest ferries in the Ferry System fleet.
During the first quarter of fiscal year 2000, the Company reached a mediated
settlement (the "settlement") with the Ferry System relating to costs incurred
in constructing the three ferries. Under terms of the settlement, the Company
and the Ferry System agreed to increase the total three ship contract value by
$23.5 million. This increase was primarily attributable to unpriced
engineering and production changes issued by the Ferry System during the four
year construction period. The Company recognized the financial impact of the
settlement in fiscal year 1999.
The Company collected all remaining Mark II ferry receivables of approximately
$23.5 million from the Ferry System, plus the release of restricted cash of
approximately $2.9 million during the second quarter of this fiscal year.
Business Volume and Backlog
At April 2, 2000 the Company's backlog consists of approximately $37 million
of repair, maintenance and conversion work. This compares with backlogs of
$46 million and $47 million at March 28, 1999 and March 29, 1998 respectively.
The Company's current backlog position is primarily attributable to firm
repair, maintenance and conversion work scheduled for completion in fiscal
year 2001.
Since work under several of the Company's Navy contracts is at the option of
the Navy, the Company cannot provide assurance as to the timing or level of
work that may be performed as part of these contracts. Therefore, projected
revenues from these contracts are not included in the Company's backlog.
Profitability
The Company's future profitability depends largely on the ability of the
Shipyard to maintain an adequate volume of ship repair, overhaul and
conversion business to augment its longer term contracts. The variables
affecting the Company's business volume include public support provided to
competing Northwest shipyards, excess west coast and industry-wide shipyard
capacity, foreign competition, governmental legislation and regulatory issues,
activity levels of the U.S. Navy, competitors' pricing behavior, and Company
labor efficiencies and work practices.
The Company continues to respond to the increasingly competitive shipbuilding
and repair industry. In addition to management's focus on the profitability
of existing Shipyard operations through reduced operating costs and improved
production efficiencies and the pursuit of business volume, management
continues to evaluate options for deployment of assets with a view to
improving the Company's return on investment.
Year to year comparisons
2000 Compared with 1999
Net income for fiscal year 2000 decreased by $9.3 million from fiscal year
1999 levels primarily due to the impact of the $24.7 million mediated
settlement reached between the Company and the Ferry System relating to the
Mark II Ferries in fiscal year 1999 and to the additional environmental
reserves of $5.6 million in fiscal year 2000. Net income for fiscal year 2000
was also influenced as a result of the following components.
Revenues
The Company recorded revenue of $123.9 million during fiscal year 2000, which
represented an increase of $17.7 million, or 17%, over fiscal year 1999
revenue. The Company recorded revenue of $120.6 million from repair and
overhaul activities during fiscal year 2000 compared to $53.2 million in
fiscal year 1999. Offsetting this increase in repair and overhaul revenues
were decreases in new construction revenue of $49.7 million, resulting in the
net increase in fiscal year 2000 revenue of $17.7 million. Fiscal year 1999
new construction revenue was significantly influenced by the $24.7 million
mediated settlement reached between the Company and the Ferry System relating
to the Mark II Ferries.
Cost of Revenues
Cost of revenues for fiscal year 2000 increased $14.7 million, or 20% from
fiscal year 1999. The increase in fiscal year 2000 cost of revenues is
primarily attributable to the increase in revenues reported for fiscal year
2000. Cost of revenues as a percentage of revenues was 71% and 69% for fiscal
years 2000 and 1999, respectively.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead increased $1.7 million, or 7% in
fiscal year 2000 when compared to fiscal year 1999. The increase, which was
less significant than the increase in revenues, reflects the Company's
continuing efforts over the past three fiscal years to reduce or maintain
current levels of administrative and manufacturing costs.
Contract Reserves Activity
During fiscal year 2000, the Company utilized $2.0 million in previously
recorded contract forward loss and warranty reserves. This compares with
fiscal year 1999 contract reserve utilization of $5.4 million, offset by an
additional $2.1 million charge, resulting in net utilization of $3.3 million.
Fiscal year 2000 reserve utilization offset costs incurred to complete the
Margarita II and to cover mediation costs resulting from the Company's
settlement with the Ferry System on the Mark II Jumbo project, as well as
warranty and other post-delivery costs associated with the completion of both
contracts.
Provision for Environmental Reserves and Other
During fiscal year 2000, the Company provided $5.6 million in additional
environmental reserves associated with the remediation of Harbor Island. The
Company did not provide additional reserves for environmental liabilities
during fiscal year 1999.
The environmental reserve increase became necessary when the Company
determined, during the fourth quarter of fiscal year 2000, the cost impact of
the Environmental Protection Agency's Final Remedial Design Data Report on the
Shipyard Sediments Operable Unit, which relocates and expands the current
sediments boundary. The expansion of the existing boundaries, which was
reported by the Company in the period ending January 2, 2000, significantly
increases the potential cost of sediment remediation. This reserve increase
was partially offset by a $0.9 million environmental insurance settlement,
also realized by the Company during the fourth quarter of fiscal year 2000.
The resulting net environmental reserve charge of $4.7 million, which is
unrelated to the current shipyard operations, reduced the Company's operating
income in fiscal year 2000 by approximately 45%.
Investment and Other Income
Investment and other income in fiscal year 2000 decreased by $3.7 million, or
55% from the previous fiscal year. This decrease was primarily attributable
to the Company recognizing in fiscal year 1999, the remaining $4.5 million
gain on the 1993 sale of its Galveston shipyard facility.
Gain on Sale of available-for-sale securities
Gain on sale of available-for-sale securities decreased $2.1 million in fiscal
year 2000 when compared to fiscal year 1999.
Income Taxes
For fiscal year 2000, the Company recognized $0.7 million in income tax
expense after applying available business tax credits. This represents a
decrease of $1.1 million in income tax expense when compared to fiscal year
1999. In fiscal year 1999, the Company recognized income tax expense of $1.8
million after applying available net operating loss carryforwards and business
tax credits.
1999 Compared with 1998
Net income for fiscal year 1999 increased by $9.3 million from fiscal year
1998 levels as a result of the following components.
Revenues
Revenues for fiscal year 1999 were significantly influenced by the $24.7
million in additional revenues recorded as a result of the mediated settlement
between the Ferry System and the Company relating to the Mark II Ferries.
1999 revenues reflect only a $3.3 million, or 3% decrease compared to the
prior fiscal year as a result of these additional Mark II revenues. For
fiscal year 1999, Mark II revenues including the additional $24.7 million in
settlement revenues, decreased $23.0 million from fiscal year 1998 levels,
resulting from the completion of the production phase of the contract.
Offsetting this decrease in Mark II revenue were increases in other new
construction revenue of $15.7 million and increases in commercial and
government repair and maintenance revenue of $4.1 million, resulting in the
net decrease in fiscal year 1999 revenues of $3.3 million.
Cost of Revenues
Cost of revenues for fiscal year 1999 decreased $17.4 million, or 19% from
fiscal year 1998. The decrease in fiscal year 1999 cost of revenues is
primarily attributable to a reduction in Mark II cost of revenue of $39.5
million resulting from the completion of the production phase of the contract.
Offsetting this decrease in Mark II cost of revenue were increases in other
new construction cost of revenue of $15.8 million and increases in commercial
and government repair and maintenance cost of revenue of $6.4 million.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead decreased $1.3 million, or 5% in
fiscal year 1999 when compared to fiscal year 1998. The decrease, which was
less significant than the decrease in cost of revenues, reflects the Company's
ability over the past several fiscal years to reduce administrative and
manufacturing costs, thus making it more difficult to obtain similar
reductions in variable costs each successive fiscal year.
Contract Reserves Activity
During fiscal year 1999 the Company utilized $5.4 million in previously
recorded contract forward loss reserves that were used to offset additional
contract cost growth in completing the Mark II contract this year. Partially
offsetting this utilization, the Company provided an additional $2.1 million
in contract and warranty reserves at the end of fiscal year 1999. These
reserves will offset additional fiscal year 2000 costs estimated to complete
the Margarita II and to cover mediation costs resulting from the Company's
settlement with the Ferry System on the Mark II project, as well as warranty
and other miscellaneous post-delivery costs associated with the completion of
the Mark II project.
The $5.4 utilized during fiscal year 1999, offset by the additional $2.1
million provided, results in the $3.3 million net utilization reported for the
year. This compares with fiscal year 1998 net contract reserve utilization of
$6.1 million.
Provision for Environmental Reserves
The Company did not provide additional reserves for environmental liabilities
during fiscal year 1999. During fiscal year 1998, the Company added $0.5
million to its environmental reserves for estimated clean-up costs.
Investment and Other Income
Investment and other income in fiscal year 1999 increased by $3.5 million, or
109% from the previous fiscal year. This increase was primarily attributable
to the Company recognizing the remaining $4.5 million gain on the 1993 sale of
its Galveston shipyard facility.
Gain on sale of available-for-sale security
Gains on the sale of available-for-sale securities increased $2.0 million in
fiscal year 1999 when compared to fiscal year 1998.
Income Taxes
For fiscal year 1999, the Company recognized $1.8 million in income tax
expense after applying available net operating loss carryforwards and business
tax credits. This represents an increase of $3.3 million in income tax
expense when compared to fiscal year 1998. In fiscal year 1998, the Company
recognized an income tax benefit of $1.5 million resulting from a net
operating loss carryback.
Environmental Matters
Ongoing Operations
Recurring costs associated with the Company's environmental compliance program
are not material and are expensed as incurred. Capital expenditures in
connection with environmental compliance are not material to the Company's
financial statements.
Past Activities
The Company faces significant potential liabilities in connection with the
alleged presence of hazardous waste materials at its Seattle shipyard and at
several sites used by the Company for disposal of alleged hazardous waste.
The Company has been named as a defendant in civil actions by parties alleging
damages from past exposure to toxic substances at Company facilities.
To date, the EPA has separated the Harbor Island Site into three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and will continue
throughout fiscal year 2001. The Company and the EPA are currently
negotiating the extent and methodology of the soil remediation. The Company
estimates remediation of the entire Soil Unit will take approximately 36 to 60
months from the clean-up start date.
During the quarter ended December 29, 1996, the EPA issued its Record of
Decision ("ROD") for the SSOU. The ROD identifies four alternative clean-up
remedies and specifies the EPA's selected remedy (the "Selected Remedy"). The
Selected Remedy requires sediment dredging, and installation of a clean
sediment cap and various monitoring efforts extending over ten years. The
Selected Remedy included dredging and disposal of approximately 116,000 cubic
yards of material currently in the Duwamish River and Elliott Bay surrounding
the Shipyard. The Selected Remedy allows for two sediment disposal options:
confined nearshore disposal ("CND") and confined aquatic disposal. The Company
identified CND as its preferred disposal method if the Selected Remedy is
implemented. During the third quarter of fiscal year 2000, the EPA expanded
the boundaries of the SSOU issuing their Phase 1B Data Report and resulting
Explanation of Significant Differences outlining the changes to the ROD.
Within the newly established SSOU boundary the Company could be required to
increase the amount of material to be dredged to 150,000 - 200,000 cubic yards
of sediment material. The Company has evaluated what it believes is the
financial impact of the EPA's actions and has increased its reserves to $13.6
million for the remedial effort. During the fourth quarter of fiscal year
2000, the Company and the EPA entered into an Administrative Order on Consent
for the development of the remedial design for the SSOU. The Company believes
that the timing and cost of the SSOU clean up will remain significantly
uncertain until a remedial design has been finalized with the EPA that
identifies the scope of remediation and the method of sediment disposal.
During the Company's fiscal year 2000, several species of salmon in Washington
State were designated under the Endangered Species Act. The potential impact
the listing could have on the remedial efforts on the Harbor Island Superfund
site is unknown at this time.
The Company has been named as a defendant in civil actions by parties alleging
damages from past exposure to toxic substances, generally asbestos, at closed
former Company facilities. The Company has approximately 330 cases involving
550 plaintiffs pending against it, together with other ship builders and
repairers, ship owners, asbestos manufacturers, distributors and installers
and equipment manufacturers, involving injuries or illnesses allegedly caused
by exposure to asbestos or other toxic substances. The Company and its
insurers are vigorously defending these actions. By their very nature, civil
actions relating to toxic substances vary according to the cases' fact
patterns, jurisdiction and other factors. Accordingly, the Company cannot
predict the eventual number of such cases or their eventual resolution. The
Company has included an estimate of its potential liability for these issues
in its environmental reserves. Potential additional future expenses related
to alleged damages from past exposure to toxic substances is not quantifiable
due to uncertainties of the number of cases, the extent of alleged damages,
the population of claimants and size of any awards and/or settlements.
The Company spent $0.7 million, net of insurance recoveries, in fiscal year
1999 for site remediation and other matters. Most of these expenditures were
related to the Shipyard and for judgments and settlements of civil matters
relating to toxic substances. While the Company expects to spend larger
amounts in future years, the timing of such expenditures is impossible to
predict due largely to uncertainties relating to remediation of the Harbor
Island facility.
The Company's policy is to accrue costs for environmental matters in the
accounting period in which the responsibility is established and the cost is
estimable. The Company's estimates of its liabilities for environmental
matters are based on evaluations of currently available facts with respect to
each individual situation and take into consideration factors such as existing
technology, presently enacted laws and regulations, and the results of
negotiations with regulatory authorities. The Company does not discount these
liabilities.
The Company's balance sheet as of April 2, 2000 reflect reserves of $19.3
million. The Company has recorded a non-current asset of $2.4 million to
reflect a contractual arrangement with an insurance company to share costs for
certain environmental matters. The Company is negotiating with its insurance
carriers and certain prior landowners and operators for past and future
remediation costs. In addition, the Company believes that the Government may
be obligated to contribute a share of clean-up costs for certain sites.
However, the Company has not recorded any receivables for any amounts that may
be recoverable from such negotiations or other claims.
Actual costs to address the Soil Unit, SSOU and SOU and other environmental
sites and matters will depend upon numerous factors, including the number of
parties found liable at each environmental site, the method of remediation,
outcome of negotiations with regulatory authorities, outcome of litigation,
technological developments and changes in environmental laws and regulations.
The Company has provided total aggregate reserves of $19.3 million as of April
2, 2000 for the above, described contingent environmental and bodily injury
liabilities. Due to the complexities and extensive history of the Company's
environmental and bodily injury matters, the amounts and timing of future
expenditures is uncertain. As a result, there can be no assurance that the
ultimate resolution of these environmental and bodily injury matters will not
have a material adverse effect on the Company's financial position, cash flows
or results of operations.
Liquidity, Capital Resources and Working Capital
At April 2, 2000, the Company's cash, cash equivalents and securities
available for sale balances were $5.5 million and $47.1 million, respectively,
for a total of $52.6 million. At March 28, 1999 the Company's cash, cash
equivalents and securities available for sale balances were $15.3 million and
$23.8 million, respectively, for a total of $39.1 million. Based upon its
cash position described below and anticipated fiscal year 2001 cash flow, the
Company believes it has sufficient liquidity to fund operations for fiscal
year 2001.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $18.1 million for the year ended
April 2, 2000. This was primarily attributable to decreases in accounts
receivable, resulting from the collection of the $24.7 million Jumbo Mark II
Ferry settlement receivable booked at the end of fiscal year 1999. Excluding
this settlement receipt, fiscal year 2000 operations resulted in a net use of
cash. This net use of cash was primarily attributable to increases in costs
and estimated profits in excess of billings, decreases in reserves for
contract losses, decreases in accounts payable and taxes, and increases in
other accounts receivables, offset by increases in environmental reserves,
depreciation, and fiscal year net income.
Net cash provided by operating activities was $3.8 million for the year ended
March 28, 1999. This consisted primarily of decreases in costs and estimated
profits in excess of billings, depreciation, and growth in net income offset
by increases in accounts receivable and decreases in reserves for contract
losses and environmental matters.
Investing Cash Flows
Net cash used in investing activities was $26.0 million for the year ended
April 2, 2000 and consisted primarily of purchases of marketable securities
and capital equipment offset by sales and maturities of marketable securities.
Net cash provided by investing activities was $1.7 million for the year ended
March 28, 1999 and consisted primarily of sales and maturities of marketable
securities offset by purchases of marketable securities and capital equipment.
Capital Expenditures
During fiscal year 2000, the Company spent approximately $1.6 million on new
capital assets. The increase in capital expenditures over fiscal year 1999
was primarily attributable to the Board of Directors approving the
installation of a new Enterprise Resource Planning (ERP) system. The ERP
system, which will become operational during the third quarter of fiscal year
2001, accounted for approximately $0.7 million in fiscal year 2000 capital
expenditures. Excluding the purchase of the ERP system, the remaining fiscal
year 2000 capital expenditures were approximately $0.9 million, which is
consistent with prior years' capital spending levels.
In the four years prior to fiscal year 2000, the Company had maintained
capital expenditures levels at approximately $1 million per year. This
approximate level of capital investment started in fiscal year 1996 when the
Company completed substantial investments in Shipyard modifications to
accommodate the Mark II Ferry construction project. These capital
expenditures are in addition to ongoing repair and maintenance expenditures in
the Shipyard of $3.3 million, $3.2 million, and $2.4 million in fiscal years
2000, 1999 and 1998, respectively.
Financing Activities
Net cash used by financing activities was $1.9 million for the year ended
April 2, 2000 versus net cash provided by financing activities of $24 thousand
for the year ended March 28, 1999. Cash related to financing activities for
the year ended April 2, 2000 consisted primarily of purchases of treasury
stock. For the year ended March 28, 1999, cash related to financing
activities consisted primarily of activities related to release of escrow
amounts on the Harbor Island Superfund site.
Credit Facility
During the fourth quarter of fiscal year 1999, shortly after the delivery of
the third Mark II Jumbo Ferry, Todd Pacific cancelled its annually renewable
$3.0 million revolving credit facility. At the completion of the Mark II Ferry
project the Company determined that the credit facility was no longer needed
to fund current operational cash flow needs. With the cancellation of its
credit facility, the Company had no outstanding borrowings as of April 2, 2000
and March 28, 1999, respectively.
Stock Repurchase
During fiscal year 2000, the Company purchased 293,700 shares of its stock at
market prices for consideration of $1.9 million. The number of shares held as
treasury stock as of April 2, 2000, is 2,169,553. Subsequent to the end of
fiscal year 2000, the Company's Board of Directors has authorized the
repurchase of up to an additional 500,000 shares.
Year 2000
As of April 2, 2000, the Company has not experienced any Year 2000 related
computer program system failures and believes that all of its financial,
manufacturing and material procurement systems and embedded chip technology in
its various operating equipment are Year 2000 compliant. The Company is
unaware of any Year 2000 related computer program system failures experienced
by any of its inventory suppliers or other vendors with which its systems
interface and exchange data or upon which its business depends, such as banks,
power and communications providers, maintenance providers and other services
suppliers. The cost associated the Company's Year 2000 remediation effort has
not been material to its operating results or financial condition.
Labor Relations
In February 1998, the Puget Sound Metal Trades Council (bargaining umbrella
for all unions at Todd Pacific) and Todd Pacific were sued in Federal District
Court for the Western District of Washington by in excess of 200 employees
contending that the collective bargaining agreement entered into by Todd
Pacific and the various unions representing these employees had not been
properly ratified by the union membership. The lawsuit sought a declaratory
judgment that the collective bargaining agreement executed in November 1997 be
found null and void. The Puget Sound Metal Trades Council and the plaintiff
employees reached a final settlement of this matter during the Company's first
quarter of fiscal year 2000. The Company has agreed to the terms of the
settlement, which do not require any action or monetary contribution by the
Company.
Workers Compensation Insurance
Federal law requires that a maritime employer have Longshore and Harbor
Workers' Act workers' compensation insurance if it is to operate a business.
During fiscal year 1999, the Company changed insurance carriers for its
workers' compensation insurance and entered a new program that provides for a
fixed annual rate per $100 of covered payroll. The new coverage contains
terms and rates which are more favorable to the Company than the previous
insurer's program.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company does not have any derivative financial instruments as of April 2,
2000, nor does it presently plan to in the future. However, the Company is
exposed to interest rate risk. The Company employs established policies and
procedures to manage its exposure to changes in the market risk of its
marketable securities. The Company's interest income is most sensitive to
changes in the general level of U.S. interest rates. In this regard, changes
in U.S. interest rates affect the interest earned on the Company's cash
equivalents and marketable securities. The Company's marketable securities
are also subject to the inherent financial market risks and exposures of the
related debt and equity securities in both U.S. and foreign markets.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See following page
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Todd Shipyards Corporation
We have audited the accompanying consolidated balance sheets of Todd Shipyards
Corporation and subsidiaries (the "Company") as of April 2, 2000 and March 28,
1999 and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended April 2,
2000. Our audits also included the financial statement schedule listed in the
index at item 14(a). The financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Todd Shipyards
Corporation and subsidiaries at April 2, 2000 and March 28, 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 2, 2000 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Seattle, Washington /s/Ernst & Young LLP
May 19, 2000
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
APRIL 2, 2000 and March 28, 1999
(In thousands of dollars)
2000 1999
ASSETS
Cash and cash equivalents $ 5,513 $ 15,292
Securities available-for-sale 47,105 23,823
Accounts receivable, less allowance for
doubtful accounts of $100 and $184, respectively
U.S. Government 8,149 2,977
Other 4,850 30,371
Costs and estimated profits in excess of
billings on incomplete contracts 12,536 2,819
Inventory 1,853 2,270
Other current assets 625 717
Total current assets 80,631 78,269
Property, plant and equipment, net 17,356 19,026
Restricted cash 2,543 2,547
Deferred pension asset 27,482 24,782
Other long term assets 4,135 4,832
Total assets $132,147 $129,456
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 7,227 $ 7,849
Accrued payroll and related liabilities 4,852 3,807
Accrual for loss on contract 109 2,138
Billings in excess of costs and estimated
profits on incomplete contracts 1,840 4,423
Taxes payable other than income taxes 1,319 1,180
Income taxes payable 1,730 3,863
Total current liabilities 17,077 23,260
Environmental and other reserves 19,303 14,416
Accrued post retirement health benefits 19,582 20,692
Total liabilities 55,962 58,368
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at April 2, 2000 and March 28, 1999,
and outstanding 9,701,480 at April 2, 2000
and 9,910,180 at March 28, 1999 120 120
Paid-in capital 38,145 38,181
Retained earnings 50,718 42,586
Accumulated other comprehensive loss (1,291) (182)
Treasury stock (11,114) (9,617)
Notes receivable from officers
for common stock (393) -
Total stockholders' equity 76,185 71,088
Total liabilities and stockholders' equity $132,147 $129,456
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended April 2, 2000, March 28, 1999, and March 29, 1998
(in thousands of dollars, except per share amounts)
2000 1999 1998
Revenues $123,851 $106,189 $109,537
Operating Expenses:
Cost of revenues 88,087 73,393 90,818
Administrative and
manufacturing overhead 27,532 25,880 27,168
Contract reserve (2,029) (3,306) (6,056)
Provision for environmental reserves 5,569 - 536
Other - insurance (918) - (6,126)
Subtotal 118,241 95,967 106,340
Operating income 5,610 10,222 3,197
Investment and other income 3,077 6,777 3,239
Gain on sale of securities 136 2,225 190
Income before income tax expense 8,823 19,224 6,626
Income tax (benefit) expense 691 1,830 (1,477)
Net income $ 8,132 $17,394 $ 8,103
Net income per Common Share:
Basic $ 0.83 $ 1.76 $ 0.82
Diluted $ 0.82 $ 1.75 $ 0.82
Weighted Average Shares Outstanding
(thousands)
Basic 9,765 9,910 9,910
Diluted 9,861 9,962 9,919
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 2, 2000, March 28, 1999, and March 29, 1998
(in thousands of dollars)
2000 1999 1998
OPERATING ACTIVITIES:
Net income $ 8,132 $ 17,394 $ 8,103
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 3,237 3,387 3,479
Environmental reserves 4,887 (1,649) 166
Deferred pension asset (2,700) (2,996) (2,222)
Post retirement health benefits (1,110) (925) (420)
Decrease (increase) in operating assets:
Costs and estimated profits in excess of
billings on incomplete contracts (9,717) 13,374 (8,328)
Inventory 417 (962) 15
Accounts receivable 20,349 (26,215) (736)
Other (net) 779 1,487 1,940
(Decrease) increase in operating liabilities:
Accounts payable and accruals (622) 545 (2,149)
Contract reserves (2,029) (3,306) (6,056)
Accrued payroll and related liabilities 1,045 (283) (445)
Billings in excess of costs and estimated
profits on incomplete contracts (2,583) 2,072 1,369
Income taxes payable (2,133) 2,019 (162)
Other (net) 139 (165) (91)
Net cash provided by (used in) operating
activities 18,091 3,777 (5,537)
INVESTING ACTIVITIES:
Purchases of marketable securities (35,127) (13,295) (10,742)
Maturities of marketable securities 6,298 4,500 3,117
Sales of marketable securities 4,375 11,993 17,799
Capital expenditures (1,567) (848) (1,198)
Other 63 (616) (554)
Net cash provided by (used in) investing
activities (25,958) 1,734 8,422
FINANCING ACTIVITIES:
Change in restricted cash to secure bid and
performance bonds 4 24 2,639
Purchase of treasury stock (1,916) - -
Net cash provided by (used in) financing
activities (1,912) 24 2,639
Net increase (decrease) in cash and cash
equivalents (9,779) 5,535 5,524
Cash and cash equivalents at beginning of period 15,292 9,757 4,233
Cash and cash equivalents at end of period $ 5,513 $ 15,292 $ 9,757
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 33 $ 119 $ 73
Income taxes 2,822 - 56
Noncash investing and financing activities:
Exercise of stock options in exchange for
notes receivable from officers 383 - -
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended April 2, 2000, March 28, 1999, and March 29, 1998
(in thousands of dollars)
Accumulated
Other Notes
Common Paid-in Retained Comprehensive Treasury From Total
Stock Capital Earnings Income (Loss) Stock Officers Equity
Balance at
March 30, 1997 $120 $38,181 $17,089 $2,167 $(9,617) $ - $47,940
Comprehensive
income:
Net income
for the year
ended
March 29, 1998 - - 8,103 - - - 8,103
Net change in
unrealized
gains(losses)
on available-
for-sale
securities - - - 770 - - 770
Total comprehensive
income 8,873
Balance at
March 29, 1998 120 38,181 25,192 2,937 (9,617) - 56,813
Comprehensive
income:
Net income
for the year
ended
March 28, 1999 - - 17,394 - - - 17,394
Net change in
Unrealized
gains (losses)
on available-
for-sale
securities - - - (3,119) - - (3,119)
Total comprehensive
income 14,275
Balance at
March 28, 1999 120 38,181 42,586 (182) (9,617) - 71,088
Purchase of
treasury stock - - - - (1,916) - (1,916)
Exercise of
stock options
in exchange for
notes receivable - (36) - - 419 (383) -
Accrued interest
notes - - - - - (10) (10)
Comprehensive
income:
Net income
for the year
ended
April 2, 2000 - - 8,132 - - - 8,132
Net change in
unrealized
gains (losses)
on available-
for-sale
securities - - - (1,109) - - (1,109)
Total comprehensive
income 7,023
Balance at
April 2, 2000 $120 $38,145 $50,718 $(1,291) $(11,114) $(393) $76,185
The accompanying notes are an integral part of this statement.
<PAGE>
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 2, 2000, March 28, 1999, and March 29, 1998
1. PRINCIPAL ACCOUNTING POLICIES
(A) Basis of Presentation - The Consolidated Financial Statements include
the accounts of Todd Shipyards Corporation (the "Company") and its wholly
owned subsidiaries Todd Pacific Shipyards Corporation ("Todd Pacific"), TSI
Management, Inc. ("TSI") and Elettra Broadcasting, Inc. ("Elettra") prior to
being sold on October 9, 1997 (see Note 15). All intercompany transactions
have been eliminated. The Company's policy is to end its fiscal year on the
Sunday nearest March 31. In accordance with this policy, the Company's fiscal
year 2000 ended on April 2, 2000, and included 53 weeks. Accordingly, the
Company's quarter ending October 3, 1999 contained 14 weeks. Certain
reclassifications of prior year amounts in the Consolidated Financial
Statements have been made to conform to the current year presentation.
(B) Business - The Company's primary business is shipbuilding, conversion and
repair for the United States Government , state ferry systems, and domestic
and international commercial customers. The majority of the Company's work is
performed at either its Seattle, Washington facility or at the Puget Sound
Naval Shipyard in Bremerton, Washington, by a unionized production workforce.
(C) Depreciation and Amortization - Depreciation and amortization are
determined on the straight-line method based upon estimated useful lives (5-31
years) or lease periods; however, for income tax purposes, depreciation is
determined on both the straight-line and accelerated methods, and on shorter
periods where permitted.
(D) Internal Use Software - In March 1998, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use".
The SOP, which was adopted as of March 29, 1999, requires the capitalization
of certain costs incurred in connection with developing or obtaining internal
use software. Prior to the adoption of SOP 98-1, the Company expensed certain
internal use software related costs as incurred. The effect of adopting the
SOP was not material to current year earnings.
(E) Revenues - The Company recognizes revenue, contract costs, and profit on
construction contracts in accordance with Statement of Position No. 81-1 (SOP
No. 81-1), "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts". Revenue, contract costs, and profit on contracts
greater than 6 months or $3.0 million are recognized on the percentage-of-
completion method (determined based on direct labor hours). Revenue, contract
costs, and profit on short-term contracts are recognized on the completed
contract method. The completed contract method is used because the
consolidated financial position and consolidated results of operations of the
Company would not vary materially from those resulting from use of the
percentage-of-completion method on these short-term contracts. Revenue,
contract costs, and profits on time-and-material contracts are recorded based
upon direct labor hours at fixed hourly rates and cost of materials as
incurred. When the current estimates of total contract revenue and contract
cost indicate a loss, a provision for the entire loss on the contract is
recorded. Revisions to contract estimates are recorded as the estimating
factors are refined. The effect of these revisions is included in income in
the period the revisions are made.
(F) Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(G) Income Taxes - Income taxes are determined in accordance with an asset and
liability approach for financial accounting and reporting of income taxes. A
valuation allowance is recorded to reduce deferred tax assets when realization
of the tax benefit is uncertain.
(H) Inventory - Inventories, consisting of materials and supplies, are valued
at lower of cost (principally average) or replacement market. The Company has
many available sources of supply for its commonly used materials.
(I) Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments with a maturity of three months or less at the time acquired to be
cash equivalents. Cash equivalents consist primarily of money market
instruments, investment grade commercial paper and U.S. Government securities.
The carrying amounts reported in the balance sheet are stated at cost, which
approximates fair value.
(J) Securities Available-for-Sale - The Company considers all debt instruments
purchased with a maturity of more than three months to be securities
available-for-sale. Securities available-for-sale consist primarily of U.S.
Government securities, investment grade commercial paper and equities and are
valued based upon market quotes.
Company management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such designation as
of each balance sheet date. All of the Company's investments are classified as
available-for-sale as of the balance sheet date and are reported at fair
value, with unrealized gains and losses, net of tax, recorded as a component
of stockholders' equity. Realized gains and losses are recorded based on
historical cost.
(K) Stock Based Compensation - The Company has elected to apply the disclosure
only provisions of Financial Accounting Standards Board Statement No. 123 (FAS
No. 123), "Accounting for Stock-Based Compensation". Accordingly, the Company
accounts for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees" and related interpretations under
APB No. 25, whereby compensation cost for stock options is measured as the
excess, if any, of the fair value of the Company's common stock at the date of
grant over the stock option price.
(L) Environmental and Other Reserves - The Company accounts for environmental
remediation liabilities in accordance with Statement of Position 96-1,
"Environmental Remediation Liabilities," which provides the accounting and
reporting standards for the recognition and disclosure of environmental
remediation liabilities.
For current operating activities, costs of complying with environmental
regulations are immaterial and expensed as incurred. Environmental costs are
capitalized if the costs extend the life of the property and/or increase its
capacity.
For matters associated with past practices and closed operations, accruals for
environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated,
based upon the projected scope of the remediation, current law and existing
technologies. These accruals are adjusted periodically as assessment and
remediation efforts progress or as additional technical or legal information
becomes available. Such accruals are classified in the balance sheet as long
term obligations at undiscounted amounts. As applicable, accruals include the
Company's share of the following costs: engineering costs to determine the
scope of the work and the remediation plan, testing costs, project management
costs, removal of contaminated material, disposal of contaminated material,
treatment of contaminated material, capping of affected areas and long term
monitoring costs.
Accruals for environmental liabilities exclude legal costs and claims, if
material, for recoveries from insurance or other third parties. Accruals for
environmental liabilities also exclude legal costs to defend against claims of
other parties. Accruals for insurance or other third party recoveries for
environmental liabilities are recorded separately from the associated
liability in the financial statements when it is probable that a claim will be
realized.
The Company accounts for bodily injury liabilities in accordance with
Financial Accounting Standards Board No.5, "Accounting for Contingencies".
Accruals for bodily injury liabilities are recorded when it is probable that
a liability has been incurred and the amount of the liability can be
reasonable estimated based on the known facts. These accruals are adjusted
periodically as new information becomes available. Such accruals are included
in the long term environmental reserves at undiscounted amounts. Accruals for
bodily injury liabilities exclude legal costs to defend against claims of
other parties. Accruals for insurance or other third party recoveries for
bodily injury liabilities are recorded net of the associated liability in the
financial statements when it is probable that a claim will be realized.
(M) Earnings per Share - Basic earnings per share is computed based on
weighted average shares outstanding. Diluted earnings per share includes the
effect of dilutive securities (options and warrants) except where their
inclusion is antidilutive.
(N) Comprehensive Income (Loss) - Unrealized gains or losses on the Company's
available-for-sale securities, are reported as other comprehensive income
(loss) in the Consolidated Balance Sheets and Statement of Stockholders'
Equity.
(O) Pensions and Other Postretirement Benefits - As of March 28, 1999, the
Company adopted FASB Statement No.132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (FAS 132). FAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans, but standardizes the
disclosure requirements for pensions and other postretirement benefits. FAS
132 amends certain disclosures that were contained in FASB Statement No. 87,
"Employers' Accounting for Pensions"; FASB Statement No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits"; and FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions.
(P) Long-lived Assets - The Company's policy is to recognize impairment losses
relating to long-lived assets based on several factors, including, but not
limited to, management's plans for future operations, recent operating results
and projected cash flows.
2. RESTRICTED CASH AND SURETY LINE
A surety company has issued contract bonds totaling $17.7 million for current
repair, maintenance and conversion jobs as of April 2, 2000. Todd Pacific's
machinery, equipment, inventory, and trade accounts receivable on certain
bonded jobs secure these various contract bonds.
Included in Cash and Cash Equivalents is $0.5 million and $3.0 million as of
April 2, 2000 and March 28, 1999, respectively of short-term restricted cash.
This short term restricted cash is generally released upon completion or
acceptance of the contracted work and completion of related warranty periods
and consists primarily of amounts related to work for the Washington State
Ferry System.
The long term restricted cash relates primarily to the Harbor Island Superfund
site clean up and will be released upon the Company satisfying certain clean
up provisions.
3. SECURITIES AVAILABLE FOR SALE
The following is a summary of available-for-sale securities:
Amor- Gross Gross Estimated
tized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
April 2, 2000
Debt securities
U.S. Treasury securities
and agency obligations $ 7,987 $ - $ (68) $ 7,919
U.S. corporate
securities 25,277 8 (326) 24,959
Mortgage-backed
securities 5,963 - (121) 5,842
Municipal obligations 1,000 - (8) 992
Total debt securities 40,227 8 (523) 39,712
Equity securities
U.S. securities 6,750 799 (1,145) 6,404
Foreign stock 1,419 165 (595) 989
Total equity securities 8,169 964 (1,740) 7,393
Total securities $48,396 $ 972 $ (2,263) $47,105
March 28, 1999
Debt securities
U.S. Treasury securities
and agency obligations $ 2,014 $ 9 $ (11) $ 2,012
U.S. corporate
securities 12,864 117 - 12,981
Mortgage-backed
securities 1,991 6 (9) 1,988
Municipal obligations 1,000 7 - 1,007
Total debt securities 17,869 139 (20) 17,988
Equity securities
U.S. securities 4,956 739 (718) 4,977
Foreign stock 1,180 - (322) 858
Total equity securities 6,136 739 (1,040) 5,835
Total securities $24,005 $ 878 $(1,060) $23,823
The Company had gross realized gains of $163 thousand, $2.2 million, and $190
thousand on sales of available-for-sale securities for fiscal years 2000, 1999
and 1998, respectively.
The Company had gross realized losses of $27 thousand, $8 thousand, and $0 on
sales of available-for-sale securities for fiscal year 2000, 1999 and 1998,
respectively.
The amortized cost and estimated fair value of the Company's available-for-
sale debt, mortgage-backed and equity securities are shown below:
Estimated
Amortized Fair
(In thousands) Cost Value
April 2, 2000
Available-for-sale debt:
Due in one year or less $ 15,936 $ 15,842
Due after one year through three years 18,328 18,028
Subtotal 34,264 33,870
Mortgage-backed securities 5,963 5,842
Equity securities 8,169 7,393
Total $ 48,396 $ 47,105
March 28, 1999
Available-for-sale debt:
Due in one year or less $ 3,299 $ 3,309
Due after one year through three years 12,579 12,691
Subtotal 15,878 16,000
Mortgage-backed securities 1,991 1,988
Equity securities 6,136 5,835
Total $24,005 $23,823
4. CONTRACTS
Auxiliary Oiler Explosive ("AOE") Contract
In May 1996, the Company was awarded a cost-type contract for phased
maintenance repairs to four Navy AOE class supply ships during a five year
availability schedule. The notional value of the original AOE contract was
$79 million. During fiscal year 2000 the notional value of the contract has
increased to approximately $100 million of which $87 million had been recorded
as revenue, cumulatively, as of April 2, 2000.
Based on current availability schedules the contract is anticipated to
conclude during the second quarter of the Company's fiscal year 2002. To meet
this availability schedule, the Company anticipates the Navy to exercise
contract options, which will increase the final contract value to
approximately $129 million. Once the contract concludes, the Company expects
the Navy to undergo a competitive bidding process to award another multi-year,
multi-ship follow-on contract.
Planned Incremental Availability ("PIA")
During January 1999, the Company was awarded a five year cost-type contract
for phased maintenance on three Carrier Vessel Nuclear, or CVN class aircraft
carriers by the Department of the Navy. The PIA contract has a notional value
of approximately $100 million of which $26 million had been recorded as
revenue, cumulatively, as of April 2, 2000. The contract gives the Navy
options to have the Company perform non-propulsion repair and maintenance work
on three separate nuclear aircraft carriers at Puget Sound Naval Shipyard in
Bremerton, Washington. Work on the first ship availability started during the
Company's first quarter of fiscal year 2000.
Preservation Contract
During the second quarter of fiscal year 2000, the Company was awarded an
overhaul contract with an estimated price of approximately $29 million. The
contract calls for the overhaul of the Washington State Ferry, MV Yakima.
Since the contract was awarded, its scope of work has been reduced slightly
and its value is currently estimated to be approximately $28 million.
Work on the MV Yakima commenced during the third quarter and is approximately
34% complete at April 2, 2000. The project, which will eventually replace or
renovate the majority of the vessel's interior structures, including the
replacement of steel plating, passenger area furniture, galley, fixtures,
windows, and the removal of hazardous materials, is expected to be completed
during the fourth quarter of the Company's fiscal year 2001.
The Company's current estimates to complete the project are within the
established production budgets and the current completion schedule is
projected to be earlier than contractually required. The Company may be
awarded financial incentives if certain contractual delivery dates are met.
However, the Company has not considered these incentives in its contract
revenue projections.
Power Barge Contract
In the second quarter of fiscal year 1999, the Company commenced work on a new
construction contract with an estimated price of approximately $20.0 million.
The contract called for the construction of a floating electrical power plant
(the "Margarita II"), 206 feet long and capable of developing 70 mega-watts of
electricity.
During the first quarter of fiscal year 2000, the Margarita II was delivered
to the customer. To maintain production schedule deadlines and perform
customer directed change orders, the Company experienced significant contract
cost growth in both labor hours and material. However, an agreement was not
reached between the Company and the customer regarding the potential increase
in contract price, if any, to compensate for these changes.
At the time of delivery, the Company claimed it was owed approximately $3.5
million for customer directed change orders. In accordance with the terms of
the contract, sufficient funds were placed in an escrow trust account by the
customer to secure the $3.5 million in un-negotiated customer directed change
orders, as well as additional receivables owed the Company.
During the second quarter of fiscal year 2000, the Company and the vessel
owner negotiated approximately $0.4 million of customer directed change
orders, leaving approximately $3.1 million in un-negotiated change orders at
April 2, 2000. The Company recognized the associated revenue from these
changes during the second quarter. However, it became apparent that
arbitration was required to resolve the remaining un-negotiated customer
directed change orders with the customer, which was provided under the terms
of the contract. Arbitration hearings, which began during the fourth quarter
of fiscal year 2000, resumed during the first quarter of fiscal year 2001, and
are scheduled to be concluded during the second quarter of fiscal year 2001.
Since the Company cannot reasonably predict the outcome of the arbitration
with its customer, it has not included any estimates of possible recoveries in
its contract revenue. In addition, the company cannot reasonably estimate the
costs associated with pursing full recovery from the vessel owner at this
time. Therefore, these costs will be recognized as they are incurred in
future accounting periods.
At April 2, 2000, the Company believes that its remaining contract warranty
reserves are adequate and any potential warranty expense greater than
established reserves will be immaterial to the Company's financial condition
or operating results. However, the Company will review its reserve estimates
during the balance of the warranty period and may revise its reserves as
needed. The warranty period is scheduled to end early in the Company's second
quarter of fiscal year 2001.
Mark II Ferry Contract
During the third quarter of fiscal year 2000, the Company concluded the one
year warranty period on the third Jumbo Mark II ferry, the MV Puyallup. With
the conclusion of this warranty period, the Company has fulfilled its last
remaining contractual obligations under the $205.5 million construction
contract with the Washington State Ferry System ("Ferry System").
The contract, which began in 1995, called for the construction of three Jumbo
Mark II ferries at an original contract price of $182 million. The Mark II
ferries can transport 218 automobiles and 2,500 passengers each and are the
largest ferries in the Ferry System fleet.
During the first quarter of fiscal year 2000, the Company reached a mediated
settlement (the "settlement") with the Ferry System relating to costs incurred
in constructing the three ferries. Under terms of the settlement, the Company
and the Ferry System agreed to increase the total three ship contract value by
$23.5 million. This increase was primarily attributable to unpriced
engineering and production changes issued by the Ferry System during the four
year construction period. The Company recognized the financial impact of the
settlement in fiscal year 1999.
The Company collected all remaining Mark II ferry receivables of approximately
$23.5 million from the Ferry System, plus the release of restricted cash of
approximately $2.9 million during the second quarter of this fiscal year.
Unbilled Receivables - Certain unbilled items on completed contracts included
in accounts receivable were approximately $1.2 million at April 2, 2000 and
$1.1 million at March 28, 1999.
Customers - Revenues from the Government were $89.3 million (72%), $31.6
million (30%), and $20.3 million (18%) in fiscal years 2000, 1999 and 1998,
respectively. Revenues from the Ferry System were $18.4 million (15%), $40.9
million (39%), and $60.4 million (55%) in fiscal year 2000, 1999 and 1998,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment and accumulated depreciation at April 2, 2000
and March 28, 1999 consisted of the following (in thousands):
2000 1999
Land $ 1,151 $ 1,151
Buildings 11,487 11,487
Piers, shipways and drydocks 22,521 22,625
Machinery and equipment 33,857 32,479
Total plant and equipment, at cost 69,016 67,742
Less accumulated depreciation (51,660) (48,716)
Plant, property and equipment, net $ 17,356 $ 19,026
The Company recognized $3.2 million, $3.4 million and $3.5 million of
depreciation expense in fiscal years 2000, 1999 and 1998, respectively.
6. PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company provides defined pension benefits and postretirement benefits to
employees as described below.
Nonunion Pension Plans - The Company sponsors the Todd Shipyards Corporation
Retirement System (the "Retirement System"), a noncontributory defined benefit
plan under which substantially all nonunion employees are covered. The
benefits are based on years of service and the employee's compensation before
retirement. The Company's funding policy is to fund such retirement costs as
required to meet allowable deductibility limits under current Internal Revenue
Service regulations. New membership in the Retirement System was frozen on
July 1, 1993. However, the Board of Directors has recently authorized the re-
opening of the Retirement System to new employees effective July 1, 2000.
On July 1,1998, the Todd Galveston-Galveston Metal Trades Council Pension Fund
was merged into the Retirement System. This merger was approved by the
respective Board of Trustees. A total of 375 inactive participants came into
the Retirement System due to the merger at July 1, 1998; 116 were entitled to
deferred benefits and 259 were receiving benefits. The present value of
accumulated plan benefits of $6.5 million and $6.4 million in assets were
received due to the merger.
The Retirement System plan assets consist principally of common stocks and
Government and corporate obligations. Plan assets at April 2, 2000, include
172,000 shares of the Company's stock valued at $7.75 per share.
Under a provision of the Omnibus Budget Reform Act of 1990 ("OBRA `90") the
Company transferred approximately $1.4 million and $1.3 million in excess
pension assets from its Retirement System into a fund to pay fiscal year 2000
and 1999 retiree medical benefit expenses, respectively. OBRA `90 was
modified by the Retirement Protection Act of 1994 to extend annual excess
asset transfers through the fiscal year ending March 2001. Subsequent to the
end of the Company's fiscal year 2000, this date has been extended to the
fiscal year ending March 2006.
Post Retirement Group Health Insurance Program - The Company sponsors a
defined benefit retirement health care plan that provides post retirement
medical benefits to former full-time exempt employees, and their spouses, who
meet specified criteria. The Company terminated post retirement health
benefits for any employees retiring subsequent to May 15, 1988. The
retirement health care plan contains cost-sharing features such as deductibles
and coinsurance. These benefits are funded monthly through the payment of
group health insurance premiums.
Because such benefit obligations do not accrue to current employees of the
Company, there is no current year service cost component of the accumulated
post retirement health benefit obligation.
The following is a reconciliation of the benefit obligation, plan assets, and
funded status of the Company's sponsored plans.
Other
Postretirement
Pension Benefits Benefits
2000 1999 2000 1999
Change in Benefit Obligation
(in thousands of dollars)
Benefit obligation at beginning of year $37,428 $30,746 $14,284 $14,580
Service cost 238 245 - -
Interest cost 2,527 2,405 948 976
Actuarial (gain)/loss (828) 722 - -
Merger of Galveston Plan - 6,540 - -
Benefits paid (2,980) (3,230) (1,481) (1,272)
Benefit obligation at end of year $36,385 $37,428 $13,751 $14,284
Other
Postretirement
Pension Benefits Benefits
2000 1999 2000 1999
Change in Plan Assets
(in thousands of dollars)
Fair value of plan assets at beginning
of year $65,824 $59,824 $ - $ -
Actual return on plan assets 7,841 4,148 - -
Merger of Galveston Plan - 6,354 - -
Employer contribution - - 39 -
Asset transfer (1,442) (1,272) 1,442 1,272
Benefits paid (2,980) (3,230) (1,481) (1,272)
Fair value of plan assets at end of year $69,243 $65,824 $ - $ -
Other
Postretirement
Pension Benefits Benefits
2000 1999 2000 1999
Funded Status Reconciliation
(in thousands of dollars)
Funded status of plans $32,858 $28,396 $(13,751)$(14,284)
Unrecognized transition obligation (2,415) (4,829) - -
Unrecognized prior service cost 1,087 1,331 - -
Unrecognized (gain)/loss (4,048) (116) (7,112) (7,680)
Deferred pension asset
(accrued liability) $27,482 $24,782 (20,863) (21,964)
Less: current portion included in
"Accounts payable and accruals" - - 1,281 1,272
Long-term accrued postretirement
health benefits - - $(19,582)$(20,692)
Other
Postretirement
Pension Benefits Benefits
2000 1999 2000 1999
Weighted Average Assumptions
Discount rate 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets 7.50% 7.50% - -
Rate of compensation increase 4.50% 4.50% - -
Medical trend rate (retirees) - - 6.00% 6.00%
Other
Postretirement
Pension Benefits Benefits
2000 1999 1998 2000 1999 1998
Components of Net Periodic
Benefit Cost
(in thousands of dollars)
Service Cost $ 237 $ 245 $ 279 $ - $ - $ -
Interest cost on projected
benefit obligation 2,528 2,405 2,201 948 976 1,219
Expected return on plan
assets (4,737) (4,745) (3,666) - - -
Amortization of transition
obligation (2,415) (2,415) (2,415) - - -
Amortization of prior service
cost 245 242 234 - - -
Recognized actuarial
(gain)/loss - - - (607) (622) (305)
Net periodic (benefit) cost
before OBRA '90 (4,142) (4,268) (3,367) 341 354 914
Transfer of assets for payment
of retiree medical benefits
(401(h) Plan) 1,442 1,272 1,145 (1,442) (1,272) (1,145)
Net periodic (benefit) cost (2,700) (2,996) (2,222) (1,101) (918) (231)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
Other
Postretirement
Benefits
2000 1999
Effect of a 1% Increase in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ 82 $ 84
Accumulated postretirement benefit obligation $ 1,128 $ 1,174
Effect of a 1% Decrease in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ (75) $ (77)
Accumulated postretirement benefit obligation $(1,042) $(1,083)
Union Pension Plans - Operating Shipyard - The Company participates in several
multi-employer plans, which provide defined benefits to the Company's
collective bargaining employees. The expense for these plans totaled $2.8
million, $2.7 million and $3.3 million, for fiscal years 2000, 1999 and 1998,
respectively.
Union Pension Plans - Previously Operated Shipyards - The Company is a sponsor
of several union pension plans due to the prior operation of other shipyards.
The ongoing operation and management of these plans is the responsibility of
boards of trustees made up of equal numbers of Company and union
representatives.
Savings Investment Plan - The Company sponsors a Savings Investment Plan (the
"Savings Plan"), under Internal Revenue Code Section 401, covering
substantially all non-union employees. Under the Savings Plan, the Company at
its sole discretion can contribute an amount up to 6% of each participant's
annual salary depending on the participant's Savings Plan contributions, and
the Company's profits and performance. The Company has not incurred expenses
related to this plan in the last three fiscal years.
7. INCOME TAXES
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate is as follows (in thousands):
2000 1999 1998
Tax provision at
federal statutory tax rate $ 3,088 $ 6,728 $ 2,319
Decrease in valuation
allowance (1,984) (4,910) (4,224)
Expired Business Credits - - 1,870
Net Operating Loss Carryback - - (1,477)
Tax effect of adjustment of
contingent liabilities - - (56)
Other - net (413) 12 91
$ 691 $ 1,830 $(1,477)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred income tax assets and liabilities at April 2, 2000,
March 28, 1999 and March 29, 1998 were as follows (in thousands):
2000 1999 1998
Deferred income tax assets:
Business credit carryforwards $ 217 $1,892 $6,046
Net operating loss carryforwards 81 232 1,299
Alternative minimum tax credit
carryforwards 3,319 3,319 3,319
Accrued employee benefits 8,255 8,577 9,031
Environmental reserve 6,756 4,115 4,344
Contract deferrals - 756 -
Deferred gain on sale of facility - - 548
Reserve for doubtful accounts 35 64 231
Securities available-for-sale 452 - -
Other 149 969 873
Total deferred income tax assets 19,264 19,924 25,691
Valuation reserve for deferred
tax assets (6,902) (8,434) (13,344)
Net deferred tax assets 12,362 11,490 12,347
Deferred income tax liabilities:
Deferred pension income 9,619 8,673 7,625
Accelerated depreciation 2,417 2,617 3,326
Contract deferrals 149 - 1,218
Other 177 200 178
Total deferred income tax liabilities 12,362 11,490 12,347
Net deferred taxes $ - $ - $ -
The Company records its deferred tax assets on the balance sheet net of a
valuation reserve due to the uncertainty of its ability to generate
consistent, sustainable taxable income from its core shipyard operations.
The Company had, for federal income tax purposes, net operating loss
carryforwards of $233 thousand and tax credit carryforwards of $217 thousand
at April 2, 2000. If not utilized, the tax credit carryforwards will expire
in fiscal year 2001, and the net operating loss carryforwards will expire in
fiscal year 2012.
In addition, the Company has paid approximately $3.3 million of alternative
minimum taxes on alternative minimum taxable income from fiscal years 1988
through 1992, which will be allowed as a credit carryforward against regular
federal income taxes in future years in the event regular federal income taxes
exceed the alternative minimum tax.
8. LEASES
Operating lease payments charged to expense were $1.2 million, $0.8 million,
and $1.1 million for fiscal years 2000, 1999 and 1998, respectively. Certain
leases contain renewal options and escalation clauses. Minimum lease
commitments at April 2, 2000 are summarized below (in thousands):
Operating
Leases
2001 182
2002 73
2003 73
2004 51
2005 36
Thereafter 276
Total minimum lease commitments $ 691
9. FINANCING ARRANGEMENTS
Todd Pacific cancelled its annually renewable $3.0 million revolving credit
facility during the fourth quarter of fiscal year 1999. This occurred shortly
after the delivery of the third Mark II Ferry. With the completion of the
Mark II Ferry project the Company has determined that the credit facility is
no longer needed to fund current operational cash flow needs. With the
cancellation of its credit facility, the Company had no outstanding borrowings
as of April 2, 2000 and March 28, 1999.
10. ENVIRONMENTAL AND OTHER RESERVES
The Company faces potential liabilities in connection with the alleged
presence of hazardous waste materials at its Seattle shipyard and at several
sites used by the Company for disposal of alleged hazardous waste. The Company
continues to analyze environmental matters and associated liabilities for
which it may be responsible. No assurance can be given as to the existence or
extent of any environmental liabilities until such analysis has been
completed. The eventual outcome of all environmental matters cannot be
determined at this time, however, the analysis of some matters have progressed
sufficiently to warrant establishment of reserve provisions in the
accompanying consolidated financial statements.
Harbor Island Site
The Company and several other parties have been named as potentially
responsible parties ("PRPs") by the Environmental Protection Agency (the
"EPA") pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA" also known as "Superfund") in connection with the
documented release or threatened release of hazardous substances, pollutants
and contaminants at the Harbor Island Superfund Site (the "Harbor Island
Site"), upon which the Shipyard is located.
To date, the EPA has separated the Harbor Island Site into three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and will continue
throughout fiscal year 2001. The Company and the EPA are currently
negotiating the extent and methodology of the soil remediation. The Company
estimates remediation of the entire Soil Unit will take approximately 36 to 60
months from the clean-up start date. The Company has accrued its best
estimate of the cost of the Soil Unit clean-up in its environmental matters
reserve, as summarized below.
During the quarter ended December 29, 1996, the EPA issued its Record of
Decision ("ROD") for the SSOU. The ROD identifies four alternative clean-up
remedies and specifies the EPA's selected remedy (the "Selected Remedy"). The
Selected Remedy requires sediment dredging, and installation of a clean
sediment cap and various monitoring efforts extending over ten years. The
Selected Remedy included dredging and disposal of approximately 116,000 cubic
yards of material currently in the Duwamish River and Elliott Bay surrounding
the Shipyard. The Selected Remedy allows for two sediment disposal options:
confined nearshore disposal ("CND") and confined aquatic disposal. The Company
identified CND as its preferred disposal method if the Selected Remedy is
implemented. During the third quarter of fiscal year 2000, the EPA expanded
the boundaries of the SSOU issuing their Phase 1B Data Report and resulting
Explanation of Significant Differences outlining the changes to the ROD.
Within the newly established SSOU boundary the Company could be required to
increase the amount of material to be dredged to 150,000 - 200,000 cubic yards
of sediment material. The Company has evaluated what it believes is the
financial impact of the EPA's actions and has increased its reserves to $13.6
million for the remedial effort. This reserve increase resulted in a $5.6
million charge against current year earnings. During the fourth quarter of
fiscal year 2000, the Company and the EPA entered into an Administrative Order
on Consent for the development of the remedial design for the SSOU. The
Company believes that the timing and cost of the SSOU clean up will remain
significantly uncertain until a remedial design has been finalized with the
EPA that identifies the scope of remediation and the method of sediment
disposal.
During the Company's fiscal year 2000, several species of salmon in Washington
State were designated under the Endangered Species Act. The potential impact
the listing could have on the remedial efforts on the Harbor Island Superfund
site are unknown at this time.
In January 1998, the Company was notified by the EPA that testing would be
required in the West Waterway of the Duwamish River outside the borders of the
SSOU as part of the SOU. The Company in May 1998 entered into an Order on
Consent to perform certain limited testing as part of the SOU investigation.
After an evaluation of the results, the EPA issued a draft "no action" ROD on
the SOU for public comment which if issued in final form would end the
investigation of the SOU requiring no remedial action. The public comment
period closed during the Company's fourth quarter of fiscal year 2000 and the
EPA has not yet announced the results.
In January 1990, the Company was notified that it was a PRP in an action
brought by the National Oceanic and Atmospheric Administration ("NOAA") for
alleged damages caused to the coastal and marine natural resources in the
Duwamish River and Elliott Bay off the Harbor Island Site. Subsequent to this
notification, NOAA brought suit against the City of Seattle and the
Governmental agency responsible for sewage treatment in the Seattle area
("Metro") for their contributions of hazardous materials to the Duwamish River
and Elliott Bay. This litigation was settled between the parties. While
NOAA, the City of Seattle and Metro retain the right to bring suit against all
the other named PRPs, including the Company, the Company has not been
contacted since the January 1990 notification. The Company does not know the
scope of the alleged damages caused to the coastal and marine natural
resources or the methods of measuring these alleged damages. For these
reasons, the Company does not believe that any estimate of any potential
liability relating to these actions can be made at this time. The Company's
environmental reserves for the entire Harbor Island Site aggregated $15.9
million at April 2, 2000.
Other Environmental Matters
The Company entered into a Consent Decree with the EPA for the clean up of the
Casmalia Resources Hazardous Waste Management Facility in Santa Barbara
County, California under the Resource Conservation and Recovery Act. The
Company has included an estimate of the potential liability for this site in
its below stated reserves. Payments, expected to be immaterial, began in
fiscal year 1997 and will extend for up to ten years.
Todd Pacific was notified by the California Environmental Protection Agency
that it may be considered a PRP for the cleanup of the Omega Chemical
Corporation site ("Omega Site") in Whittier, California in September of 1994.
It is alleged that the Los Angeles Division of Todd Pacific caused certain
production wastes and by-products to be transported to this hazardous waste
treatment and storage facility between 1976 and 1991. The California
Department of Toxic Substances Control is pursuing the clean up of the Omega
Site pursuant to state and federal regulations. The Company entered into a
settlement agreement with the government during its fiscal year 2000 ending
its involvement with this site. The Company paid an amount that was within
its stated reserve established for the site.
In November 1987, the Company was identified as a PRP by the EPA in
conjunction with the cleanup of the Operating Industries, Inc. ("OII")
hazardous materials disposal site at Monterey Park, California. In September
1995, the Company entered into a Partial Consent Decree with the EPA to
contribute $.6 million as its partial share of remediation costs at the OII
site which encompasses all costs assessed to date. Payment was made to the
EPA in July 1996. A proposed final consent decree for site remediation is
expected from the EPA during the Company's fiscal year 2001. The cost of the
partial settlement and future final consent decree settlement is included in
the below stated reserve.
The Company has been named as a defendant in civil actions by parties alleging
bodily injury damages from past exposure to toxic substances, generally
asbestos, at closed former Company facilities. These cases are generally
filed with multiple claimants and multiple defendants and are generally
insured matters. In certain jurisdictions, the laws are structured to allow
the heirs of former employees to sue for gross negligence and to seek punitive
damages in addition to compensatory awards. The Company is not fully insured
for these matters. Costs to date to administer and settle these cases have
not been material. The Company has included in its reserves amounts to cover
estimated uninsured costs to settle the bodily injury cases currently filed
against the Company. The Company and its insurers are vigorously defending
these actions. The Company is not able to quantify the number of potential
bodily injury cases, the timing of such cases, the jurisdiction or what
judgements or settlements, if any could result.
The Company has recorded $5.6 million, $0, and $0.5 million in charges against
earnings in fiscal year 2000, 1999, and 1998, respectively relating to
additional reserves for environmental and bodily injury matters. The
Company's remediation costs and bodily injury claims paid are charged against
the reserves recorded.
The Company is negotiating with its insurance carriers and prior landowners
and operators for past and future remediation costs. The Company had reached
various agreements with its insurance carriers regarding the carriers'
obligations for property damage occurring in previous fiscal years. These
settlements were recorded as income and totaled $0.9 million, $0, and $6.1
million in fiscal year 2000, 1999, and 1998, respectively. The Company has
recorded an asset of $2.4 million at April 2, 2000 to reflect a contractual
arrangement with an insurance company to share costs for certain environmental
matters.
The Company has provided total aggregate reserves of $19.3 million as of April
2, 2000 for the above, described contingent environmental and bodily injury
liabilities. Due to the complexities and extensive history of the Company's
environmental and bodily injury matters, the amounts and timing of future
expenditures is uncertain. As a result, there can be no assurance that the
ultimate resolution of these environmental and bodily injury matters will not
have a material adverse effect on the Company's financial position, cash flows
or results of operations.
11. OTHER CONTINGENCIES
The Company is subject to various risks and is involved in various claims and
legal proceedings arising out of the ordinary course of its business. These
include complex matters of contract performance specifications, employee
relations, union proceedings, and Government procurement regulations. Only a
portion of these risks and legal proceedings involving the Company are covered
by insurance, because the availability and coverage of such insurance
generally has declined or the cost has become prohibitive. The Company does
not believe these matters will have a material adverse impact on its financial
position, results of operations, or cash flows.
As a general practice within the defense industry, the DCAA continually
reviews the cost accounting practices of Government contractors. In the
course of these reviews, cost accounting issues are identified, discussed and
settled or resolved through agreements with the government's authorized
contracting officer or through legal proceedings. Other than the normal cost
accounting issues raised by the DCAA as a result of their ongoing reviews, the
Company is not aware of any outstanding issues with the DCAA.
12. COLLECTIVE BARGAINING AGREEMENT
During the third quarter of this fiscal year, the Puget Sound Metal Trades
Council (the bargaining umbrella for all unions at Todd Pacific Shipyards) and
Todd Pacific Shipyards reached an agreement on a new three year collective
bargaining agreement. The Todd Pacific Shipyards eligible workforce
subsequently ratified the agreement. The parties had been operating under an
extension of the old agreement, which expired on July 31, 1999. The new
agreement, effective retroactively to August 1, 1999, calls for an annual 3.2%
wage and fringe benefit increase.
13. TREASURY STOCK
During fiscal year 2000, the Company purchased 293,700 shares of its stock at
market prices for consideration of $1.9 million. As of April 2, 2000, the
number of common shares held as treasury stock was 2,169,553. On September
28, 1999, an aggregate of 85,000 shares of treasury stock were reissued
pursuant to the exercise of incentive stock options held by two officers of
the Company. As permitted under the Company's Incentive Stock Plan in the
discretion of the Compensation Committee of the Board of Directors, the
consideration paid by the officers upon exercise of the options is in the form
of secured full-recourse promissory notes in the aggregate amount of $382,500
bearing interest at 5.42% and due on September 28, 2001. The notes and
accrued interest are reflected as deductions from stockholders' equity until
paid.
14. INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
April 2, March 28, March 29,
2000 1999 1998
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted net
income per share:
Net income $ 8,132 $ 17,394 $ 8,103
Denominator:
Denominator for basic net income per
share - weighted average
common shares outstanding 9,765 9,910 9,910
Effect of dilutive securities
Stock options based
on the treasury stock method using
average market price 96 52 9
Denominator for diluted net income per share 9,861 9,962 9,919
Basic income per share $ 0.83 $ 1.76 $ 0.82
Diluted income per share $ 0.82 $ 1.75 $ 0.82
15. SALE OF ELETTRA ASSETS
The radio stations operated by Elettra Broadcasting, Inc., were sold on
October 9, 1997 for $5.3 million, resulting in a $1.0 million gain in fiscal
year 1998.
16. RECOGNITION OF GAIN ON SALE
In December 1993, the Company received $5.4 million of special project revenue
bonds ("Revenue Bonds") from the Board of Trustees of the Galveston Wharves
upon the sale of its Galveston shipyard facilities. The Revenue Bonds
contained provisions for annual principal payments of $216 thousand beginning
on January 1, 1995 with a balloon payment of $3.5 million due on January 1,
2004. The Company recognized the gain on the sale of the facility as each
payment was received. As of March 29, 1998, the Company had received four
annual principal payments. During fiscal year 1999, the Company received
notice that all of the outstanding Revenue Bonds would be called for
redemption at a redemption price of 100% of the principal amount. During
fiscal year 1999, the Company recognized the remaining $4.5 million gain on
the sale of its Galveston facility. The bond proceeds were received in the
fourth quarter of fiscal year 1999.
17. STOCK BASED COMPENSATION
The Company's Incentive Stock Compensation Plan (the "Plan") provides for the
granting of incentive stock options, non-qualified stock options, and
restricted stock or any combination of such grants to directors, officers and
key employees of the Company to purchase shares of the Class A Common Stock of
the Company. An aggregate of 500,000 shares of common stock has been
authorized for issuance under the Plan. Options issued under the Plan vest
ratably over three years and expire not more than ten years from the date of
grant and are granted at prices equal to the fair value on the date of grant.
There were 150,000 options available for future grant under the Plan at April
2, 2000.
A summary of stock option transactions for the years ended April 2, 2000,
March 28, 1999, and March 29, 1998 is as follows:
Number Option Price Weighted Average
of Shares Per Share Exercise Price
Outstanding, March 30, 1997 285,000 4.25 to 6.00 4.79
Granted 55,000 4.38 to 4.56 4.48
Outstanding, March 29, 1998 340,000 4.25 to 6.00 4.74
Granted - - to - -
Outstanding, March 28, 1999 340,000 4.25 to 6.00 4.74
Granted 10,000 4.38 4.38
Exercised (85,000) 4.50 4.50
Outstanding, April 2, 2000 265,000 4.25 to 6.00 4.80
Exercisable, April 2, 2000 240,000 $4.25 to $6.00 4.83
As described in Note 1, the Company has elected to account for stock-based
compensation expense in accordance with APB No. 25. Accordingly, no
compensation expense has been recognized for stock-based compensation since
the grant price equaled the estimated fair value of the stock on the date of
grant. Applying the fair value methodology of FAS No. 123 to the Company's
stock option plans results in net income, which is not materially different
from amounts reported. The outstanding stock options have a contractually
weighted-average life of 3.2 years as of April 2, 2000.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended April 2, 2000 and
March 28, 1999 are as follows. Each quarter is 13 weeks in length, except the
second quarter of fiscal year 2000, which contains 14 weeks.
(in thousands):
Net
Income
Operating Net (loss)
income income Per Share
Revenues (loss) (loss) Diluted
1st Qtr 2000 $ 29,747 $ 1,259 $ 1,797 $ 0.18
2nd Qtr 2000 33,136 2,060 2,678 0.27
3rd Qtr 2000 24,853 1,821 2,506 0.26
4th Qtr 2000 36,115 470 1,151 0.12
1st Qtr 1999 $ 26,996 $ (962) $ (311) $ (0.03)
2nd Qtr 1999 19,485 (56) 429 0.04
3rd Qtr 1999 14,023 (7,752) (1,846) (0.19)
4th Qtr 1999 45,685 18,992 19,122 1.92
The fourth quarter of fiscal year 1999 reflects $24.7 million in additional
revenue resulting from the Company's mediated settlement with the Ferry System
relating to unpriced engineering and production changes issued by the Ferry
System during construction of the Mark II Ferries. Pursuant to the terms of
this settlement, the contract price for the three ferries was increased $23.5
million to $205.5 million. In addition to the $23.5 million price increase,
the Company was able to record $1.2 million in Mark II revenue for tasks
completed under the original contract value that it had not been able to
recognize previously.
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending April 2, 2000, March 28, 1999 and March 29, 1998
(in thousands)
Reserves deducted from assets to which they apply - Allowance for doubtful
accounts:
Year Year Year
ended ended ended
April 2, March 28, March 29,
2000 1999 1998
Balance at beginning of period $ 184 $ 662 $ 861
Charged to costs and expenses 52 - -
Deductions from reserves (1) (136) (478) (199)
Balance at close of period 100 $ 184 $ 662
Notes:
(1) Deductions from reserves represent uncollectible accounts written off
less recoveries
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCED DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
**
ITEM 11. EXECUTIVE COMPENSATION
**
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
**
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
**
** The information for the above items will be provided in, and is
incorporated by reference to, the 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1 & 2. Financial Statements
The financial statements and financial statement schedule
listed in the accompanying index to financial statements and financial
statement schedules are filed as part of this annual report.
All other schedules have been omitted because the required information is
included in the Consolidated Financial Statements, or the notes thereto, or is
not applicable or required.
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part
of this annual report.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter ended April
2, 2000.
<PAGE>
TODD SHIPYARDS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE COVERED BY
REPORT OF INDEPENDENT AUDITORS
Report of Ernst & Young LLP, Independent Auditors.............. *
Consolidated Balance Sheets at April 2, 2000,
and March 28, 1999........................................... *
Consolidated Statements of Income
For the years ended April 2, 2000,
March 28, 1999 and March 29, 1998............................. *
Consolidated Statements of Cash Flows
For the years ended April 2, 2000,
March 28, 1999 and March 29, 1998............................. *
Consolidated Statements of Stockholders' Equity
For the years ended April 2, 2000,
March 28, 1999 and March 29, 1998............................. *
Notes to Consolidated Financial Statements
For the years ended April 2, 2000,
March 28, 1999 and March 29, 1998............................. *
Consolidated Financial Statement Schedule
II-Valuation and Qualifying Reserves......................... *
* No page numbers are included in EDGAR version.
TODD SHIPYARDS CORPORATION INDEX TO EXHIBITS
Item 14(a)3
Exhibit
Number
3-1 Certificate of Incorporation of the Company *
dated November 29, 1990 filed in the Company's
Form 10-K Report for 1997 as Exhibit 3-1.
3-2 By-Laws of the Company dated November 29, 1990, *
as amended October 1, 1992 filed in the Company's
Form 10-K Report for 1993 as Exhibit 3-2.
10-1 Savings Investment Plan of the Company effective *
April 1, 1989 filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-9.
10-2 Todd Shipyards Corporation Retirement System Plan *
and Amendments thereto filed in the Company's Form
10-K Report for 1995 as Exhibit 10-10.
10-3 Employment contract between Todd Pacific and Roland *
H. Webb dated December 27, 1994 filed in the Company's
Form 10-K Report for 1995 as Exhibit 10-14.
10-4 Amendment to employment contract between Todd Pacific *
and Roland H. Webb dated December 17, 1997 filed in the
Company's Form 10-K for 1999 as Exhibit 10-14(a).
10-5 Amendment to employment contract between Todd Pacific *
and Roland H. Webb dated January 18, 1999 filed in the
Company's Form 10-K for 1999 as Exhibit 10-14(b).
10-6 Todd Shipyards Corporation Incentive Stock *
Compensation Plan effective October 1, 1993, approved
by the shareholders of the Company at the 1994 Annual
Meeting of Shareholders filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-19.
10-7 Employment contract between the Company and Stephen G. *
Welch dated September 30, 1997 filed in the Company's
Form 10-K for 1998 as Exhibit 10-27.
10-8 Secured Promissory Note and Collateral Pledge and #
Security Agreement between the Company and Stephen G.
Welch dated September 28, 1999.
10-9 Secured Promissory Note and Collateral Pledge and #
Security Agreement between the Company and Michael G.
Marsh dated September 28, 1999.
22-1 Subsidiaries of the Company. *
23 Consent of Ernst & Young LLP, Independent Auditors *
27 Financial Data Schedule. #
Note: All Exhibits are in SEC File Number 1-5109.
* Incorporated herein by reference.
# Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TODD SHIPYARDS CORPORATION
Registrant
By: /s/ Scott H. Wiscomb
Scott H. Wiscomb
Chief Financial Officer,
Principal Financial Officer,
Principal Accounting Officer,
and Treasurer
June 12, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ Brent D. Baird /s/ Steven A. Clifford
Brent D. Baird, Director Steven A. Clifford, Director
June 12, 2000 June 12, 2000
/s/ Patrick W.E. Hodgson /s/ Joseph D. Lehrer
Patrick W.E. Hodgson, Joseph D. Lehrer, Director
Chairman, June 12, 2000
and Director
June 12, 2000
/s/ Philip N. Robinson /s/ John D. Weil
Philip N. Robinson, Director John D. Weil, Director
June 12, 2000 June 12, 2000
/s/ Stephen G. Welch
Stephen G. Welch
President,
Chief Executive Officer,
and Director
June 12, 2000
