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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 1, 2001
[ ] 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $52 million as of June 14, 2001.
There were 9,362,680 shares of the corporation's $.01 par value common stock
outstanding at June 14, 2001.
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 10, 2001 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.
To offset the downturn in long-term Government contract opportunities, the
Company entered into a major new construction project beginning in fiscal year
1995. During that year the Company contracted with the Washington State Ferry
System ("Ferry System") to built three Jumbo Mark II Class ferries. This
contract represented the Company's first new construction effort in 10 years.
The $205.5 million contract was considered a technical success, however the
financial results were less than expected as the Company reached a mediated
settlement with the Ferry System relating to unsettled engineering and
production changes during the first quarter of fiscal year 2000. The results
of that settlement were reflected in the Company's 1999 fiscal year end
results.
As the Company neared completion of the Mark II Ferry project, it began a
second new construction project with the construction of a floating electrical
power plant (the "Margarita II"). Similar to the Jumbo Mark II contract, the
Company delivered the vessel to its owner with numerous unsettled engineering
and production change orders. Shortly after completion, the Company and the
vessel owner entered into an arbitration process with a third party arbitrator
in an attempt to resolve the unsettled change orders.
The arbitration proceedings were completed during the fiscal year 2001.
Subsequent to the end of fiscal year 2001, the Company was notified of the
arbitration award in its favor and the results of this settlement are
reflected in the Company's fiscal year 2001 results.
With the completion of the Jumbo Mark II and Margarita II contracts in fiscal
years 1999 and 2000, respectively, the Company has shifted its main business
focus to repair, maintenance and conversion business opportunities. This
strategy has resulted in the award of two major five year cost-type contracts
for continuous maintenance work on three Navy aircraft carriers and six
surface combatant class vessels stationed in the Puget Sound area.
The work performed on the Navy aircraft carriers is referred to as the Planned
Incremental Availability ("PIA") contract and has a notional value of
approximately $100 million. Work on this contract began during the first
quarter of fiscal year 2000. The work performed on the Navy surface combatant
vessels is referred to as the Combatant Maintenance Team ("CMT") contract and
has a notional value between $60 to $75 million. Work on this contract began
in the second quarter of fiscal year 2001.
In addition to these two long-term multi-ship contracts, the Navy announced
during the fourth quarter of the Company's fiscal year 2001 its intention to
renew the existing Auxiliary Oiler Explosive ("AOE") contract with the Company
on a sole source basis for an additional six years. This will represent the
fourth consecutive, multi-year contract that the Company has been awarded by
the Navy on the AOE class vessels. The three previous contracts, which were
each five years in duration, were all awarded on a competitive basis. This
cost type contract provides for phased maintenance repairs to four Navy AOE
class supply ships stationed in the Puget Sound area.
Subsequent to the end of fiscal year 2001, the Company completed negotiations
with the Navy and was awarded a renewal contract on June 15, 2001. The
notional value of this contract is expected to be approximately $180 million
over a six-year period if all options are exercised.
In addition to the above mentioned contracts, 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.
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 other 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 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.
During the past decade, repair and overhaul business opportunities available
to domestic, private-sector shipyards, have been impacted by the downsizing
and relocation of the active Navy fleet. The impact has had both positive and
negative effects on domestic shipyards depending on their proximity to the
affected Navy fleet operations. Also affecting private shipyards is the
impact of stationing vessels at Navy home ports, the availability and
scheduling of maintenance and overhauls, the location of marine accidents 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 on a fixed price
basis 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
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
The Company completed production work on its last new construction project
during the first quarter of fiscal year 2000, with the delivery of the
Margarita II, a 70 mega-watt floating electrical power plant. The Margarita
II contract officially ended during the second quarter of fiscal year 2001
with the completion of the warranty period.
Since the delivery of the Margarita II, the Company has been involved in an
arbitration proceeding with the vessel owner over the value of un-negotiated
change orders that were issued during the construction phase of the contract.
Subsequent to end of fiscal year 2001 the Company received an arbitration
award in the amount of $1.9 million. In addition, the Company was also
awarded interest and reimbursement of certain expenses. The Company
recognized the award in 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:
2001 2000 1999
Federal Government 64% 72% 30%
Commercial 36% 28% 70%
Total 100% 100% 100%
The decrease in the percentage of Federal Government work in fiscal year 2001
when compared to fiscal year 2000 levels is due primarily to planned
scheduling breaks in government cost-type overhaul and maintenance activities.
In addition, the Company worked on the renovation of the MV Yakima throughout
the majority of the fiscal year 2001. The $29 million renovation of the MV
Yakima for the Washington State Ferry System contributed significantly to the
increase in the percentage of commercial work in fiscal year 2001 when
compared to fiscal year 2000. Work on the MV Yakima, which began in fiscal
year 2000, was completed in the fourth quarter of fiscal year 2001.
The distribution of the Company's revenues in fiscal year 2000 were
significantly influenced by the increased volume of cost-type Government
repair and maintenance work over fiscal year 1999 levels. It was also
impacted by the completion of the Margarita II, a commercial new construction
project, during the first quarter of fiscal year 2000 and the absence of Mark
II Ferry revenue, a commercial new construction project, which completed
production related work in fiscal year 1999.
During fiscal year 1999, the Mark II Ferry program represented 39% of Company
revenues. 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 and in some cases enjoy significantly
lower labor costs. 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
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. Employment
averaged approximately 800 during fiscal year 2001 and totaled approximately
500 employees on April 1, 2001.
During fiscal year 2001 an average of approximately 700 of the Company's
Shipyard employees were covered by a union contract that became effective
during the third quarter of fiscal year 2000. At April 1, 2001 approximately
400 Company employees were covered under this contract.
Todd Pacific Shipyards and the Puget Sound Metal Trades Council (the
bargaining umbrella for all unions at Todd Pacific Shipyards) continue to
operate under a collective bargaining agreement ratified in fiscal year 2000.
That contract will expire July 31, 2002. Management considers its relations
with the various unions to be stable.
Availability of Materials
The principal materials used by the Company in its Shipyard are steel and
aluminum plate and shapes, pipe and fittings, paint 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 those items that
is deemed sufficient for emergency ship repairs.
Competition
Competition in the domestic ship repair and overhaul 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 foreign 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 private sector shipyards, creating excess
shipyard capacity and acute price competition.
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 $19.9 million as of April 1, 2001 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.
As of April 1, 2001, the Company has recorded environmental insurance
receivables of $18.3 million, which mitigate a major portion of its accrued
environmental liability. See Item 3. Legal Proceedings, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations 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 1, 2001 the Company's backlog consists of approximately $30 million
of repair, maintenance, and conversion work. This compares with backlogs of
$37 million and $46 million at April 2, 2000 and March 28, 1999 respectively.
The Company's current backlog is primarily attributable to firm repair,
maintenance and conversion work scheduled for completion during fiscal year
2002.
Since work under the Company's three Navy phased maintenance 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 until contract options are awarded.
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 2001 the Company did not make any direct investments in other businesses,
either related or unrelated to ship repair and overhaul activities.
ITEM 2. PROPERTIES
During the Company's fourth quarter, the Puget Sound region experienced the
effects of a moderate earthquake. The Company sustained damage to its
physical plant that required certain emergency repairs to be made. Additional
earthquake repairs, of a non-emergency nature will be required to be made
during fiscal year 2002. The Company is continuing to evaluate its
alternatives and plans for repairing this damage, as well as potential
recoveries under its insurance coverage (see Note 11 of the Notes to the
Consolidated Financial Statement in Item 8). The Company does not anticipate
that these repairs will have a material effect on its financial condition or
results of operation.
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. Damage
caused by the earthquake resulted in the Navy temporarily suspending its
certifications of the Company's three drydocks.
After completing certain repairs, the Company's certification on drydock YFD-
70 was reinstated prior to the end of fiscal year 2001. The Company's
certification on the Emerald Sea drydock was reinstated subsequent to the end
of fiscal year 2001. Drydock YFD-54, is not currently certified, however, the
Company plans to complete repairs and obtain reinstatement during the second
quarter of fiscal year 2002. The current de-certification of drydock YFD-54
is not expected to impact current drydock schedules or shipyard operations.
In addition, damage caused by the earthquake resulted in the Company making
certain repairs to various cranes. Repairs to all cranes that are critical to
shipyard operations were made prior to the end of fiscal year 2001 and the
Company obtained re-certification on these cranes.
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 4/15/06
YFD-54 1943 Wood 5,700 9/30/05
During fiscal year 2001, the Company extended the leases on each of its leased
drydocks for a period of five years. Under terms of the expiring leases, the
Company was required to make annual lease payments, as well as perform a
minimum amount of annual maintenance on each dock.
The new lease terms on drydock YFD-70 contain a nominal annual lease payment
and an increase in the minimum amount of annual maintenance that the Company
must perform. The new lease also includes minimum levels of maintenance that
the Company must perform during the life of the lease. The new lease terms on
drydock YFD-54 call for a continuation of both an annual lease payment and a
certain minimum amount of annual maintenance to be performed by the Company.
The Company has included the nominal lease payment and the amortized
maintenance cost that must be performed over the life of the lease on drydock
YFD-70, as well as the annual lease payments that must be made on drydock YFD-
54 in Note 8 of the Notes to the Consolidated Financial Statements in Item 8.
The Company's current Navy certifications are less than the maximum design
capacity, however they are sufficient to allow the Company to perform work on
all non-nuclear Navy vessels homeported in Puget Sound, as well as all Coast
Guard vessels.
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.
During the fourth quarter of fiscal year 2001, the Company determined that
such serviceability repairs would be required on the Emerald Sea to maintain
Navy certification on a long-term basis. Certain repairs began subsequent to
the end of fiscal year 2001 and will continue into fiscal year 2002. The
Company is currently evaluating several factors, including but not limited to,
alternative repair scenarios and management's plans for future operations to
develop a more comprehensive, multi-year refurbishment plan that will allow
the Company to maintain certification into the future. This multi-year plan
may include increased annual maintenance costs and/or increased capital
expenditures. Although the ultimate course of action cannot be predicted,
based on current information management believes that fiscal year 2002
maintenance costs for existing dry dock facilities will increase over fiscal
year 2001.
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 three Superfund sites. Additionally, the Company has been
named as a PRP in three Superfund cases and has received information requests
in two 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 10 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
$19.9 million total reserve for environmental matters is a reserve of $15.8
million to address the Harbor Island Site.
Harbor Island Site Insurance
On January 12, 2001, the Company entered into a 30-year agreement with an
insurance company that will provide the Company with broad-based insurance
coverage for the remediation of all of the Company's operable units at the
Harbor Island Superfund Site.
The agreement provides coverage for the known liabilities in an amount equal
to and exceeding the Company's current booked reserves of approximately $15.8
million. Additionally, the Company has entered into a 15-year agreement for
coverage of any new environmental conditions discovered at the Seattle
shipyard property that would require environmental remediation.
The Company funded this insurance premium from current cash reserves in two
installments. The first payment was made in the Company's fourth quarter of
fiscal year 2001. The second payment was made subsequent to the end of fiscal
year 2001. The Company has recorded a non-current asset in the form of an
insurance receivable as of April 1, 2001 in accordance with its environmental
accounting policies. This transaction did not have a material effect on the
Company's results of operations, nor did the transaction have a material
effect on stockholders' equity.
Harbor Island Site History
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 is
anticipated to continue through fiscal year 2003. 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 evaluated what it
believed was the financial impact of the EPA's actions and increased its
reserves to $13.6 million for the remedial effort. This reserve increase
resulted in a $5.6 million charge against fiscal year 2000 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 designation could have on the remedial efforts on the Harbor Island
Superfund site is unknown at this time, although any related costs within
aggregate policy limits will be covered by insurance purchased in January
2001.
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 381 cases involving
591 plaintiffs pending against it and 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. 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. Accordingly, the Company cannot predict the
eventual number of such cases or their eventual resolution and does not
include in its reserve amounts for cases that may be filed in the future. The
Company has included an estimate of its potential liability for known cases in
its environmental reserves net of insurance recoveries.
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 2001.
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 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
July 2, 2000 8.50 6.63
October 1, 2000 8.31 7.06
December 31, 2000 7.94 6.44
April 1, 2001 8.00 6.38
On June 14, 2001 the high and low prices of the Company's common stock on the
NYSE were $7.85 and $7.80, respectively.
At June 14, 2001 there were 1,857 holders of record of the outstanding shares
of common stock. The Company has not paid cash dividends during the past two
fiscal years and it does not presently anticipate the declaration of
dividends.
ITEM 6. SELECTED CONSOLIDATED 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 1, April 2, March 28, March 29, March 30,
2001 2000 1999 1998 1997
Revenue 116,545(1) $123,851 $106,189(4) $109,537 $114,398
Income (loss)
from operations 11,950(2) 5,610(3) 10,222 3,197(5) (25,793)(7)
Net
income(loss) 16,727 8,132 17,394 8,103(6) (21,253)
Per share of
common stock
Income (loss)
Basic EPS 1.74 0.83 1.76 0.82 (2.14)
Diluted EPS 1.73 0.82 1.75 0.82 (2.14)
Financial position:
Working capital 60,873 65,339 55,009 44,400 33,245
Fixed assets 17,358 17,356 19,026 21,565 24,477
Total assets 157,106 132,147 129,456 116,873 115,789
Stockholders'
equity 93,081 76,185 71,088 56,813 47,940
(1) As discussed in greater detail in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, the
Company's 2001 revenues were impacted favorably by an agreement reached
with the U.S. Navy to share in certain environmental insurance costs.
Under terms of the agreement, the Company was able to invoice and record
revenue of $3.9 million during the fourth quarter. In addition, the
Company received a favorable arbitration award on the Margarita II, a
floating electrical power plant that was completed in fiscal year 2000.
The award allowed the Company to recognize $1.9 million of revenue in the
fourth quarter of fiscal year 2001.
(2) During fiscal year 2001, the Company recorded a net environmental
insurance settlement of $2.1 million, which was partially offset by a
$1.5 million environmental reserve charge, resulting in an increase to
income from operations of $0.6 million.
(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) 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. A substantial portion of these
contract losses were recognized during the fiscal year 1997.
(5) 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 income. This settlement was offset partially
by an additional $0.5 million operating charge to environmental reserves.
(6) 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.
(7) Fiscal year 1997 reflects the establishment of the Mark II Ferry contract
loss reserve, the reversal of $3.6 million of previously recognized Mark
II Ferry program profits, losses on commercial overhaul activities and
lower Government repair volume. Operating results for fiscal year 1997
also include a $4.3 million environmental reserve charge for the Harbor
Island Superfund Site.
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 1, 2001, and in the Notes to the Company's
Consolidated Financial Statements for the fiscal year then ended.
Overview
During fiscal year 2001, the Company recorded revenue of $116.5 million, which
represented a decrease of $7.3 million, or 6%, over fiscal year 2000 revenue.
This revenue decline would have been greater if not for the favorable impact
of two significant events.
First, the Company reached an agreement with the U.S. Navy in the fourth
quarter to share in certain environmental insurance costs. Under terms of the
agreement, the Company was able to invoice and record revenue of $3.9 million.
Second, the Company received a favorable arbitration award on the Margarita
II, a floating electrical power plant that was completed in fiscal year 2000.
The award allowed the Company to recognize $1.9 million of revenue in the
fourth quarter of the fiscal year.
Excluding these two events, fiscal year revenues reported would have been
$110.7 million, a decrease of $13.2 million, or 11%, from fiscal year 2000
revenue. Decreases in the fiscal year revenues primarily reflect commercial
and government ship owners' cyclical overhaul schedule considerations,
partially offset by the favorable impact of the two significant events
discussed above.
Repair and overhaul activities represented approximately 98% and 97% of fiscal
year 2001 and fiscal year 2000 revenues, respectively. The high concentration
of repair and overhaul activities in relation to overall revenue during the
past two fiscal years reflects the Company's business strategy of emphasizing
repair and overhaul activities, while discontinuing the pursuit of new
construction opportunities. This strategy has been a central component of the
Company's business plan since the completion of the Margarita II in fiscal
year 2000.
During fiscal year 2001 the Company recorded operating income of $12.0 million
on revenue of $116.5 million, or 10% of revenue. Operating income for fiscal
year 2001 was impacted favorably by the agreement reached with the U.S. Navy
to share in certain environmental insurance costs, as well as the arbitration
award on the Margarita II. In addition to the favorable impact of these two
items, the Company recorded a net environmental insurance settlement of $2.1
million, which was partially offset by a $1.5 million environmental reserve
charge, which resulted in a net increase to operating income of $0.6 million
for the fiscal year.
Excluding the favorable impact of these items, fiscal year 2001 operating
income reported would have been $5.6 million, or 5% of adjusted revenue of
$110.7 million.
The Company also recognized a net gain of $0.7 million from the sale of
available-for-sale securities, and $3.9 million in non-operating investment
income during fiscal year 2001. These amounts in addition to the operating
income reported, resulted in fiscal year 2001 income before income tax expense
of $16.6 million.
Combatant Maintenance Team ("CMT") Contract
During the first quarter of fiscal year 2001, the Company was awarded, by the
Department of the Navy on a sole source basis, a five year, cost-type contract
for the repair and maintenance of six surface combatant class vessels
(frigates and destroyers) stationed in the Puget Sound area. Although the
Navy has not released a notional value of the maintenance work, the Company
believes that the value may be approximately $60 million to 75 million if all
options are exercised. Work on this contract, which will be performed
primarily in the Company's Seattle shipyard, began late in the Company's first
quarter.
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 stationed in the Puget
Sound area during a five year availability schedule. The contract, which has
been performed primarily at the Company's Seattle shipyard, had an original,
notional value of $79 million. Based on current availability schedules the
contract is anticipated to conclude during the second quarter of the Company's
fiscal year 2002.
In response to the impending conclusion of the current contract, the Navy
announced during the fourth quarter of the Company's fiscal year 2001 its
intention to renew the existing AOE contract with the Company on a sole source
basis for an additional six years. This contract will represent the fourth
consecutive, multi-year contract that the Company has been awarded by the Navy
on the AOE class vessels. The three previous contracts, which were each five
years in duration, were all awarded on a competitive basis.
Subsequent to the end of fiscal year 2001, the Company completed negotiations
with the Navy and was awarded a renewal contract on June 15, 2001. The
notional value of this contract is expected to be approximately $180 million
over a six-year period if all options are exercised.
Planned Incremental Availability ("PIA")
In January 1999, the Department of the Navy awarded the Company a five-year
cost-type contract for phased maintenance on three CVN class aircraft
carriers. The notional value for this five-year contract is approximately
$100 million. Work on this contract is performed primarily at the Puget Sound
Naval Shipyard, located in Bremerton, Washington.
Preservation Contract
During the second quarter of fiscal year 2000, the Company was awarded a $29
million overhaul contract to renovate the Washington State Ferry, MV Yakima.
Work on this project commenced during the third quarter of fiscal year 2000
and called for the replacement or renovation of 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.
On January 8, 2001, the Company successfully completed and delivered the
vessel to the Washington State Ferry System ahead of the contractually
scheduled delivery date. The Company earned financial incentives for the
early delivery of the vessel and these incentives have been recognized in its
current year contract revenue.
Power Barge Contract ("Margarita II")
In the second quarter of fiscal year 1999, the Company commenced work on a
floating electrical power plant, the Margarita II, under a new construction
contract with an estimated price of approximately $20.0 million. During the
first quarter of fiscal year 2000, the Margarita II was delivered to its
owner. 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, agreement was not reached
between the Company and the owner regarding the potential increase in the
contract price, if any, to compensate for all of these changes.
In accordance with the terms of the contract, the Company and the vessel owner
agreed to settle the remaining change orders through a formal arbitration
process. Formal arbitration hearings, which began during the fourth quarter
of fiscal year 2000, concluded during the third quarter of fiscal year 2001,
when both parties submitted final written arguments to the arbitration board.
On May 17, 2001, the Company was awarded approximately $1.9 million from the
arbitration board. Under the award the Company is also entitled to receive
interest and reimbursement of certain agreed expenses. The Company recognized
the award in fiscal year 2001.
Business Volume and Backlog
At April 1, 2001 the Company's backlog consists of approximately $30 million
of repair, maintenance, and conversion work. This compares with backlogs of
$37 million and $46 million at April 2, 2000 and March 28, 1999 respectively.
The Company's current backlog is primarily attributable to firm repair,
maintenance and conversion work scheduled for completion during fiscal year
2002.
Since work under the Company's three Navy phased maintenance 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 until contract options are awarded.
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. Other factors that can contribute to
future profitability include the amounts of annual expenditures needed to
ensure continuing seviceability of the Company's owned and leased machinery
and equipment.
The Company continues to respond aggressively 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,
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
2001 Compared with 2000
Net income for fiscal year 2001 increased by $8.6 million from fiscal year
2000 levels. This increase was primarily due to the impact of the settlement
reached with the U.S. Navy to share in certain environmental insurance costs
which resulted in the Company recognizing $3.9 million in revenue and the
arbitration award on the Margarita II which contributed approximately $2.3
million in revenue, interest income and reimbursed expenses. Net income for
fiscal year 2000 was impacted unfavorably by a net environmental reserve
charge of $4.7 million, which contributes to the comparative increase shown in
fiscal year 2001. Net income for fiscal year 2001 was also influenced as a
result of the following components.
Revenues
The Company recorded revenue of $116.5 million during fiscal year 2001, which
represents a decrease of $7.3 million, or 6%, over fiscal year 2000 revenue.
The Company recorded revenue of $114.2 million from repair and overhaul
activities during fiscal year 2001 compared to $120.6 million in fiscal year
2000. In addition to the $6.4 million decrease in repair and overhaul
activities, revenues from new construction decreased $0.9 million, resulting
in the net decrease of in fiscal year 2001 revenue of $7.3 million.
Cost of Revenues
Cost of revenues for fiscal year 2001 decreased $10.6 million, or 12% from
fiscal year 2000. Cost of revenues as a percentage of revenues was 66% and
71% for fiscal years 2001 and 2000, respectively. The decrease in cost of
revenues as a percentage of revenue in fiscal year 2001 is primarily
attributable to the $3.9 million in revenue the Company recognized on the
agreement with the U.S. Navy to share in certain environmental insurance costs
and the $1.9 million recognized on the Margarita II arbitration award. Costs
associated with these revenues were either incurred in prior years or are not
categorized as cost of revenues. If these amounts were excluded from revenue
the resulting cost of revenues as a percentage of revised revenues would be
70%.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead increased $0.3 million, or 1%, in
fiscal year 2001 when compared to fiscal year 2000. As a percentage of
revenue, administrative and manufacturing overhead was 24% of revenue in
fiscal year 2001. This percentage increases to 25% if revenues are adjusted
to exclude the favorable impacts to revenue that occurred in fiscal year 2001.
Administrative and manufacturing overhead costs as a percentage of revenue in
fiscal year 2000 was 22%. The increase in these costs as a percentage of
revenue in fiscal year 2001 is primarily attributable to plant utility costs,
contract acquisition costs, financial system implementation costs and costs
associated with earthquake repairs.
Contract Reserves Activity
During fiscal year 2001, the Company utilized $0.1 million in previously
recorded contract warranty reserves associated with the Margarita II. This
compares with fiscal year 2000 contract reserve utilization of $2.0 million.
Fiscal year 2000 reserve utilization offset costs incurred to complete the
Margarita II and to cover mediation costs resulting from 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 2001, the Company provided $1.5 million in additional
environmental and other reserves. In fiscal year 2000, the Company provided
$5.6 million in additional environmental reserves associated with the
remediation of Harbor Island.
The reserve increase of $1.5 million in fiscal year 2001 was fully offset by a
net environmental insurance settlement of $2.1 million realized by the Company
during the fourth quarter of fiscal year 2001.
Investment and Other Income
Investment and other income in fiscal year 2001 increased by $0.8 million, or
26% when compared to fiscal year 2000. Contributing to this increase was
approximately $0.3 million in interest income that the Company recognized as a
result of the Margarita II arbitration award.
Gain on Sale of available-for-sale securities
Gain on sale of available-for-sale securities increased $0.6 million in fiscal
year 2001 when compared to fiscal year 2000.
Income Taxes
In fiscal year 2001, the Company recognized a $0.2 million federal income tax
benefit after applying available net operating loss carryforwards and business
tax credits. This represents a decrease of $0.9 million in income tax expense
when compared to fiscal year 2000.
The fiscal year 2001 tax benefit is the result of the Company recording its
net deferred tax asset on the balance sheet based on its ability to utilize
this net asset in future years. The Company has recorded its net deferred
taxes as a non-current deferred tax asset and a current deferred tax liability
on its balance sheet at April 1, 2001.
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.
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 also 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 is
anticipated to continue through fiscal year 2003. 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 evaluated what it believed was the
financial impact of the EPA's actions and 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 designation could have on the remedial efforts on the Harbor Island
Superfund site is unknown at this time, although any related costs within
aggregate policy limits will be covered by insurance purchased in January
2001.
On January 12, 2001, the Company entered into a 30-year agreement with an
insurance company that will provide the Company with broad-based insurance
coverage for the remediation of the Company's operable units at the Harbor
Island Superfund Site.
The agreement provides coverage for the known liabilities in an amount equal
to and exceeding the Company's current booked reserves of approximately $15.8
million. Additionally, the Company has entered into a 15-year agreement for
coverage of any new environmental conditions discovered at the Seattle
shipyard property that would require environmental remediation.
The Company funded this insurance premium from current cash reserves in two
installments. The first payment was made in the Company's fourth quarter of
fiscal year 2001. The second payment was made subsequent to the end of fiscal
year 2001. The Company has recorded a non-current asset in the form of an
insurance receivable as of April 1, 2001 in accordance with its environmental
accounting policies. This transaction did not have a material effect on the
Company's results of operations, nor did the transaction have a material
effect on stockholders' equity.
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 381 cases involving
591 plaintiffs pending against it and 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. 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.
Accordingly, the Company cannot predict the eventual number of such cases or
their eventual resolution and does not include in its reserve amounts for
cases that may be filed in the future. The Company has included an estimate
of its potential liability for the known cases in its environmental reserves
net of insurance recoveries.
The Company spent $0.5 million, net of insurance recoveries, in fiscal year
2001 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 the cost associated with
civil litigation involving the alleged exposure to asbestos containing
products at the Company's previously owned facilities.
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 1, 2001 reflects reserves of $19.9
million. The Company has recorded a non-current asset of $18.3 million to
reflect contractual arrangements with several insurance companies to share
costs for certain environmental matters. The Company continues to negotiate
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 and any such recoveries may be subrogated, in whole or in part,
in favor of the Company's insurors. 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 $19.9 million as of April
1, 2001 for the forgoing 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 1, 2001, the Company's cash, cash equivalents and securities
available-for-sale balances were $11.9 million and $46.1 million,
respectively, for a total of $58.0 million. 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. Based
upon its cash position and anticipated fiscal year 2002 cash flow, the Company
believes it has sufficient liquidity to fund operations for fiscal year 2002.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $8.3 million for the year ended
April 1, 2001. Net cash provided by operating activities was primarily
attributable to fiscal year net income, an increase in accounts payable,
offset by an increase in environmental insurance receivables.
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.
Investing Cash Flows
Net cash provided by investing activities was $0.4 million for the year ended
April 1, 2001 and consisted primarily of maturities and sales of marketable
securities offset by purchases of marketable securities and capital
expenditures.
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 expenditures offset by sales and maturities of marketable
securities.
Capital Expenditures
During fiscal year 2001, the Company spent approximately $3.1 million on new
capital assets. Approximately $0.4 million of these expenditures relate to
capital projects that were approved in fiscal years other than 2001.
Excluding these expenditures, the $2.7 million spent in fiscal year 2001 was
significantly higher than the $1.6 million in capital expenditures reported in
fiscal year 2000.
The increase in capital expenditures from fiscal year 2000 levels was
primarily attributable to the installation of a new Enterprise Resource
Planning ("ERP") system. The ERP system, which was successfully implemented
in the fourth quarter of fiscal year 2001, accounted for approximately $1.0
million in fiscal year 2001 capital expenditures. Excluding the expenditures
for the ERP system and expenditures related to projects approved in other
fiscal years, fiscal year 2001 capital expenditures would have been $1.7
million.
Fiscal year 2000 capital expenditures of $1.6 million included approximately
$0.7 million of ERP system related expenditures. Excluding the ERP system
costs, fiscal year 2000 capital expenditures would have been approximately
$0.9 million.
These capital expenditures are in addition to ongoing repair and maintenance
expenditures in the Shipyard of $3.6 million, $3.3 million, and $3.2 million
in fiscal years 2001, 2000 and 1999, respectively.
Financing Activities
Net cash used in financing activities for the fiscal years ended April 1, 2001
and April 2, 2000, was $2.4 million and $1.9 million, respectively. Cash used
in financing activities for both years consisted primarily of purchases of
treasury stock.
Credit Facility
Todd Pacific previously cancelled a credit facility during the fourth quarter
of fiscal year 1999, shortly after delivery of the third Mark II Jumbo Ferry.
Subsequent to the end of fiscal year 2001, Todd Pacific negotiated a $10.0
million revolving credit facility. The credit facility, which is renewable on
a bi-annual basis, will provide the Company with greater flexibility in
funding its operational cash flow needs.
Since this new credit facility was negotiated subsequent to the end of the
fiscal year, the Company had no outstanding borrowings as of April 1, 2001.
The Company did not have a credit facility in place during fiscal year 2000
and therefore, had no outstanding borrowings as of April 2, 2000.
Stock Repurchase
During fiscal year 2001, the Company under a stock repurchase plan repurchased
an aggregate of 358,800 shares of its Common Stock, at an average price per
share of $7.00. The shares were repurchased at per share prices ranging from
$6.56 to $7.75, for a total consideration of $2.5 million. The number of
shares held as treasury stock as of April 1, 2001, is 2,593,353.
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, was 2,169,553.
Labor Relations
Todd Pacific Shipyards and the Puget Sound Metal Trades Council (the
bargaining umbrella for all unions at Todd Pacific Shipyards) continue to
operate under a collective bargaining agreement ratified in fiscal year 2000.
That contract will expire July 31, 2002. Management considers its relations
with the various unions to be stable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company does not have any derivative financial instruments as of April 1,
2001, nor does it presently plan to in the future. However, the Company is
exposed to interest rate risk. 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. The Company employs established policies and procedures to manage
its exposure to changes in the market risk of its marketable securities. The
Company believes that the risk associated with interest rate and market
fluctuations related to these marketable securities is not a material risk.
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 1, 2001 and April 2,
2000 and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended April 1,
2001. 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 1, 2001 and April 2, 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 1, 2001 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 16, 2001
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
APRIL 1, 2001 and APRIL 2, 2000
(In thousands of dollars)
2001 2000
ASSETS
Cash and cash equivalents $ 11,901 $ 5,513
Securities available-for-sale 46,112 47,105
Accounts receivable, less allowance for
doubtful accounts of $100
U.S. Government 8,100 8,149
Other 8,045 4,850
Costs and estimated profits in excess of
billings on incomplete contracts 9,619 12,536
Inventory 1,531 1,853
Other current assets 360 625
Total current assets 85,668 80,631
Property, plant and equipment, net 17,358 17,356
Restricted cash 2,538 2,543
Deferred pension asset 30,758 27,482
Environmental insurance receivable 18,308 2,861
Other long term assets 1,266 1,274
Deferred taxes 1,210 -
Total assets $157,106 $132,147
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 18,823 $ 7,227
Accrued payroll and related liabilities 1,348 3,067
Accrual for loss on contract 24 109
Billings in excess of costs and estimated
profits on incomplete contracts 1,633 1,840
Deferred taxes 391 -
Taxes payable other than income taxes 922 1,319
Income taxes payable 1,654 1,730
Total current liabilities 24,795 15,292
Environmental and other reserves 19,936 19,303
Accrued post retirement health benefits 18,187 19,582
Other non-current 1,107 1,785
Total liabilities 64,025 55,962
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at April 1, 2001 and April 2, 2000,
and outstanding 9,362,680 at April 1, 2001
and 9,701,480 at April 2, 2000 120 120
Paid-in capital 38,186 38,145
Retained earnings 67,445 50,718
Accumulated other comprehensive income (loss) 1,271 (1,291)
Treasury stock (13,526) (11,114)
Notes receivable from officers for common stock (415) (393)
Total stockholders' equity 93,081 76,185
Total liabilities and stockholders' equity $157,106 $132,147
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended April 1, 2001, April 2, 2000, and March 28, 1999
(in thousands, except per share amounts)
2001 2000 1999
Revenues $116,545 $123,851 $106,189
Operating Expenses:
Cost of revenues 77,496 88,087 73,393
Administrative and
manufacturing overhead 27,801 27,532 25,880
Contract reserve (85) (2,029) (3,306)
Provision for environmental reserves 1,501 5,569 -
Other - insurance (2,118) (918) -
Subtotal 104,595 118,241 95,967
Operating income 11,950 5,610 10,222
Investment and other income 3,889 3,077 6,777
Gain on sale of securities 713 136 2,225
Income before income tax expense 16,552 8,823 19,224
Income tax (expense) benefit 175 (691) (1,830)
Net income $ 16,727 $ 8,132 $17,394
Net income per Common Share:
Basic $ 1.74 $ 0.83 $ 1.76
Diluted $ 1.73 $ 0.82 $ 1.75
Weighted Average Shares Outstanding
Basic 9,587 9,765 9,910
Diluted 9,676 9,861 9,962
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 1, 2001, April 2, 2000, and March 28, 1999
(in thousands of dollars)
2001 2000 1999
OPERATING ACTIVITIES:
Net income $16,727 $ 8,132 $ 17,394
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 3,017 3,237 3,387
Environmental reserves 633 4,887 (1,649)
Deferred pension asset (3,276) (2,700) (2,996)
Post retirement health benefits (1,395) (1,110) (925)
Deferred income taxes (819) - -
Decrease (increase) in operating assets:
Costs and estimated profits in excess of
billings on incomplete contracts 2,917 (9,717) 13,374
Inventory 322 417 (962)
Accounts receivable (3,146) 20,349 (26,215)
Environmental receivable (15,447) 657 1,074
Other (net) 358 122 413
Increase (decrease) in operating liabilities:
Accounts payable and accruals 11,596 (622) 545
Contract reserves (85) (2,029) (3,306)
Accrued payroll and related liabilities (2,397) 1,045 (283)
Billings in excess of costs and estimated
profits on incomplete contracts (207) (2,583) 2,072
Income taxes payable (76) (2,133) 2,019
Other (net) (397) 139 (165)
Net cash provided by operating
activities 8,325 18,091 3,777
INVESTING ACTIVITIES:
Purchases of marketable securities (16,836) (35,127) (13,295)
Sales of marketable securities 6,164 4,375 11,993
Maturities of marketable securities 14,465 6,298 4,500
Capital expenditures (3,084) (1,567) (848)
Other (260) 63 (616)
Net cash provided by (used in) investing
activities 449 (25,958) 1,734
FINANCING ACTIVITIES:
Restricted cash 5 4 24
Purchase of treasury stock (2,511) (1,916) -
Proceeds from exercise of stock options 120 - -
Net cash provided by (used in) financing
activities (2,386) (1,912) 24
Net increase (decrease) in cash and cash
equivalents 6,388 (9,779) 5,535
Cash and cash equivalents at beginning of period 5,513 15,292 9,757
Cash and cash equivalents at end of period $ 11,901 $ 5,513 $ 15,292
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ - $ 33 $ 119
Income taxes 1,400 2,822 -
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 1, 2001, April 2, 2000, and March 28, 1999
(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 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
Purchase of
treasury stock - - - - (2,511) - (2,511)
Stock based
compensation - 20 - - - - 20
Proceeds from
exercise of
stock options - 21 - - 99 - 120
Accrued interest
notes - - - - - (22) (22)
Comprehensive
income:
Net income
for the year
ended
April 1, 2001 - - 16,727 - - - 16,727
Net change in
unrealized
gains (losses)
on available-
for-sale
securities,
(net, tax of $685) - - - 2,562 - - 2,562
Total comprehensive
income 19,289
Balance at
April 1, 2001 $120 $38,186 $67,445 $ 1,271 $ (13,526) $(415) $93,081
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 1, 2001, April 2, 2000, and March 28, 1999
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") and TSI
Management, Inc. ("TSI"). All inter-company 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
2001, 2000 and 1999 included 52, 53 and 52 weeks, respectively. 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 (the "Shipyard") or at
the Puget Sound Naval Shipyard in Bremerton, Washington, by a unionized
production workforce.
(C) Property, Plant and Equipment, net - Property, plant and equipment is
carried at cost, net of accumulated depreciation. The Company capitalizes
certain major repair activities when such activities are determined to
increase the useful life or operating capacity of the asset. 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) 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
are recognized on the percentage-of-completion method (determined based on
direct labor hours). 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.
(E) Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
(F) 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.
(G) 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.
(H) 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.
(I) 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.
(J) 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.
(K) 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 as environmental insurance receivables
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
reasonably 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.
(L) 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.
(M) 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.
(N) 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. To date no such impairment has been indicated.
(O) Derivative and Hedging Instruments - In July 1999, the Financial
Accounting Standards Board (FASB) announced the delay of the effective date of
Statement of Financial Accounting Standards 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), to the first quarter of the
Company's fiscal year 2002. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
companies to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting under SFAS 133. The Company adopted this standard on April 2, 2001
with no impact to its consolidated financial statements.
2. RESTRICTED CASH AND SURETY LINE
A surety company has issued contract bonds totaling $6.0 million for current
repair, maintenance and conversion jobs as of April 1, 2001. 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 $1.6 million and $0.5 million as of
April 1, 2001 and April 2, 2000, 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
remediation 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 1, 2001
Debt securities
U.S. Treasury securities
and agency obligations $ 6,987 $ 153 $ - $ 7,140
U.S. corporate
securities 26,671 647 - 27,318
Mortgage-backed
securities 4,986 58 - 5,044
Total debt securities 38,644 858 - 39,502
Equity securities
U.S. securities 4,949 1,439 (323) 6,065
Foreign stock 563 38 (56) 545
Total equity securities 5,512 1,477 (379) 6,610
Total securities $44,156 $2,335 $ (379) $46,112
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
The Company had gross realized gains of $1.4 million, $163 thousand, and $2.2
million on sales of available-for-sale securities for fiscal years 2001, 2000
and 1999 respectively.
The Company had gross realized losses of $0.7 million, $27 thousand, and $8
thousand on sales of available-for-sale securities for fiscal year 2001, 2000
and 1999, 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 1, 2001
Available-for-sale debt:
Due in one year or less $ 9,744 $ 9,807
Due after one year through three years 23,914 24,651
Subtotal 33,658 34,458
Mortgage-backed securities 4,986 5,044
Equity securities 5,512 6,610
Total $ 44,156 $ 46,112
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
4. CONTRACTS
Combatant Maintenance Team ("CMT") Contract
During the first quarter of fiscal year 2001, the Company was awarded, by the
Department of the Navy on a sole source basis, a five year, cost-type contract
for the repair and maintenance of six surface combatant class vessels
(frigates and destroyers) stationed in the Puget Sound area. The Navy has not
released a notional value of the maintenance work, though the Company believes
that if all options are exercised, the value may be approximately $60 to $75
million over the five-year period. Work on this contract, which will be
performed primarily in the Company's Seattle shipyard, began late in the
Company's first quarter.
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 stationed in the Puget
Sound area during a five year availability schedule. The contract, which has
been performed primarily at the Company's Seattle shipyard, had an original,
notional value of $79 million. Based on current availability schedules the
contract is anticipated to conclude during the second quarter of the Company's
fiscal year 2002.
In response to the impending conclusion of the current contract, the Navy
announced during the fourth quarter of fiscal year 2001 its intention to renew
the existing AOE contract with the Company on a sole source basis for an
additional six years. This contract will represent the fourth consecutive,
multi-year contract that the Company has been awarded by the Navy on the AOE
class vessels. The three previous contracts, which were each five years in
duration, were all awarded on a competitive basis.
Subsequent to the end of fiscal year 2001, the Company completed negotiations
with the Navy and was awarded a renewal contract during the first quarter of
fiscal year 2002. The notional value of this contract is expected to be
approximately $180 million over a six-year period if all options are
exercised.
Planned Incremental Availability ("PIA")
In January 1999, the Department of the Navy awarded the Company a five-year
cost-type contract for phased maintenance on three CVN class aircraft
carriers. The notional value for this five-year contract is approximately
$100 million. Work on this contract is currently being performed at the Puget
Sound Naval Shipyard, located in Bremerton, Washington.
Preservation Contract
During the second quarter of fiscal year 2000, the Company was awarded a $29
million overhaul contract to renovate the Washington State Ferry, MV Yakima.
Work on this project commenced during the third quarter of fiscal year 2000
and called for the replacement or renovation of 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.
On January 8, 2001, the Company successfully completed and delivered the
vessel to the Washington State Ferry System ahead of the contractually
scheduled delivery date. The Company earned financial incentives for the
early delivery of the vessel and these incentives have been recognized in its
current year contract revenue.
Power Barge Contract (the "Margarita II")
In the second quarter of fiscal year 1999, the Company commenced work on a
floating electrical power plant, the Margarita II, under a new construction
contract with an estimated price of approximately $20.0 million. During the
first quarter of fiscal year 2000, the Margarita II was delivered to its
owner. 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, agreement was not reached
between the Company and the owner regarding the potential increase in the
contract price, if any, to compensate for all of these changes.
In accordance with the terms of the contract, the Company and the vessel owner
agreed to settle the remaining change orders through a formal arbitration
process. Formal arbitration hearings, which began during the fourth quarter
of fiscal year 2000, concluded during the third quarter of fiscal year 2001,
when both parties submitted final written arguments to the arbitration board.
On May 17, 2001, the Company was awarded approximately $1.9 million from the
arbitration board. Under the award the Company is also entitled to receive
interest and reimbursement of certain agreed expenses. The Company recognized
the award in 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 fiscal year 2000.
Unbilled Receivables - Certain unbilled items on completed contracts included
in accounts receivable were approximately $6.8 million at April 1, 2001 and
$1.2 million at April 2, 2000. The significant increase in unbilled items on
completed contracts in fiscal year 2001 is primarily attributable to two
significant events. First, the Company recognized $3.9 million in revenue
under terms of an agreement reached with the Navy on certain environmental
insurance costs. Second, the Company recorded $1.9 million in revenue when it
was notified of a favorable arbitration award on the Margarita II contract.
Customers - Revenues from the Government were $74.5 million (64%), $89.3
million (72%), and $31.6 million (30%) in fiscal years 2001, 2000 and 1999,
respectively. Revenues from the Ferry System were $25.0 million (21%), $18.4
million (15%), and $40.9 million (39%) in fiscal year 2001, 2000 and 1999,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment and accumulated depreciation at April 1, 2001
and April 2, 2000 consisted of the following (in thousands):
2001 2000
Land $ 1,151 $ 1,151
Buildings 11,777 11,487
Piers, shipways and drydocks 23,108 22,521
Machinery and equipment 35,531 33,857
Total plant and equipment, at cost 71,567 69,016
Less accumulated depreciation (54,209) (51,660)
Plant, property and equipment, net $ 17,358 $ 17,356
The Company recognized $3.0 million, $3.2 million and $3.4 million of
depreciation expense in fiscal years 2001, 2000 and 1999, 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 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, in fiscal year 2001, the Board of Directors authorized the re-
opening of the Retirement System to new employees effective July 1, 2000.
The Retirement System plan assets consist principally of common stocks and
Government and corporate obligations. Plan assets at April 1, 2001, include
172,000 shares of the Company's stock valued at $7.00 per share.
Under a provision of the Omnibus Budget Reform Act of 1990 ("OBRA `90") the
Company transferred approximately $1.7 million and $1.4 million in excess
pension assets from its Retirement System into a fund to pay fiscal year 2001
and 2000 retiree medical benefit expenses, respectively. OBRA `90 was
modified by the Work Incentives Improvement Act of 1999 to extend annual
excess asset transfers through 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
2001 2000 2001 2000
Change in Benefit Obligation
(in thousands of dollars)
Benefit obligation at beginning of year $36,385 $37,428 $ 13,751 $14,284
Service cost 400 238 - -
Interest cost 2,395 2,527 904 948
Actuarial (gain)/loss (663) (828) 3,228 -
Benefits paid (3,010) (2,980) (1,710) (1,481)
Benefit obligation at end of year $35,507 $36,385 $16,173 $13,751
Other
Postretirement
Pension Benefits Benefits
2001 2000 2001 2000
Change in Plan Assets
(in thousands of dollars)
Fair value of plan assets at beginning
of year $69,243 $65,824 $ - $ -
Actual gain (loss) on plan assets (1,098) 7,841 - -
Employer contribution - - 44 39
Asset transfer (1,666) (1,442) 1,666 1,442
Benefits paid (3,010) (2,980) (1,710) (1,481)
Fair value of plan assets at end of year $63,469 $69,243 $ - $ -
Other
Postretirement
Pension Benefits Benefits
2001 2000 2001 2000
Funded Status Reconciliation
(in thousands of dollars)
Funded status of plans $27,962 $32,858 $(16,173) $(13,751)
Unrecognized transition obligation - (2,415) - -
Unrecognized prior service cost 842 1,087 - -
Unrecognized (gain)/loss 1,954 (4,048) (3,406) (7,112)
Deferred pension asset
(accrued liability) $30,758 $27,482 (19,579) (20,863)
Less: current portion included in
"Accounts payable and accruals" - - 1,392 1,281
Long-term accrued postretirement
health benefits - - $(18,187) $(19,582)
Other
Postretirement
Pension Benefits Benefits
2001 2000 2001 2000
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) - - 12.00%(1) 6.00%
(1) Postretirement benefit medical trend rate in fiscal year 2001 is 12.00%
graded to 6.00% over 5 years.
Other
Postretirement
Pension Benefits Benefits
2001 2000 1999 2001 2000 1999
Components of Net Periodic
Benefit Cost
(in thousands of dollars)
Service Cost $ 400 $ 237 $ 245 $ - $ - $ -
Interest cost on projected
benefit obligation 2,396 2,528 2,405 904 948 976
Expected return on plan
assets (5,568) (4,737) (4,745) - - -
Amortization of transition
obligation (2,415) (2,415) (2,415) - - -
Amortization of prior service
cost 245 245 242 - - -
Recognized actuarial
(gain)/loss - - - (522) (607) (622)
Net periodic (benefit) cost
before OBRA '90 (4,942) (4,142) (4,268) 382 341 354
Transfer of assets for payment
of retiree medical benefits
(401(h) Plan) 1,666 1,442 1,272 (1,666) (1,442) (1,272)
Net periodic benefit (3,276) (2,700) (2,996) (1,284) (1,101) (918)
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
2001 2000
Effect of a 1% Increase in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ 86 $ 82
Accumulated postretirement benefit obligation $ 1,219 $ 1,128
Effect of a 1% Decrease in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ (76) $ (75)
Accumulated postretirement benefit obligation $(1,087) $(1,042)
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 $2.5
million, $2.8 million and $2.7 million, for fiscal years 2001, 2000 and 1999,
respectively.
Union Pension Plans - Previously Operated Shipyards - The Company no longer
sponsors union pension plans attributable to the prior operation of other
shipyards. The ongoing operation and management of these plans have either
been terminated or transferred to other parties.
Savings Investment Plan - The Company sponsors a Savings Investment Plan (the
"Savings Plan"), under Internal Revenue Code Section 401, covering all non-
union employees. Under the terms of the Savings Plan, which were modified in
fiscal year 2001 and became effective on January 1, 2001, the Company now
contributes an amount up to 2.4% of each participant's annual salary depending
on the participant's Savings Plan contributions. These Company contributions
are subject to a two year cliff-vesting. The Company incurred expenses
related to this plan of $38 thousand in fiscal year 2001. The Company did not
incur expenses related to this plan in fiscal years 2000 and 1999.
7. INCOME TAXES
Components of the income tax expense (benefit) are as follows (in thousands):
2001 2000 1999
Current tax expense $ 1,329 $ 691 $ 1,830
Deferred tax benefit (1,504) - -
Total income tax expense (benefit) $ (175) $ 691 $ 1,830
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate and is as follows (in thousands):
2001 2000 1999
Tax provision at
federal statutory tax rate $ 5,793 $ 3,088 $ 6,728
Decrease in valuation
allowance (5,905) (2,529) (4,910)
Other - net (63) 132 12
Income tax expense (benefit) $ (175) $ 691 $ 1,830
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 1, 2001,
April 2, 2000 and March 28, 1999 were as follows (in thousands):
2001 2000 1999
Deferred income tax assets:
Business credit carryforwards $ - $ 474 $1,892
Net operating loss carryforwards - 84 232
Alternative minimum tax credit
carryforwards 2,863 3,319 3,319
Accrued employee benefits 7,298 8,255 8,577
Environmental reserve 6,978 6,756 5,045
Contract deferrals - - 756
Inventory reserves 98 49 -
Reserve for doubtful accounts 35 35 64
Securities available-for-sale - 452 -
Other 527 149 969
Total deferred income tax assets 17,799 19,573 20,854
Valuation reserve for deferred
tax assets - (6,357) (8,434)
Net deferred tax assets 17,799 13,216 12,420
Deferred income tax liabilities:
Environmental insurance receivable 2,828 854 930
Deferred pension income 10,766 9,619 8,673
Accelerated depreciation 2,174 2,417 2,617
Contract deferrals 351 149 -
Securities available-for-sale 685 - -
Other 176 177 200
Total deferred income tax liabilities 16,980 13,216 12,420
Net deferred tax asset $ 819 $ - $ -
During fiscal year 2001, the Company fully utilized its remaining net
operating loss and tax credit carryforwards. In addition, the Company
utilized approximately $0.5 million in alternative minimum tax credits. The
Company has approximately $2.9 million in remaining alternative minimum tax
credit carryforwards that can be used in the future and have no expiration
date.
Prior to fiscal year 2001, the Company recorded 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. In fiscal year 2001, the Company recorded its net deferred tax
asset on the balance sheet based on its ability to utilize this net asset in
future years. The Company has recorded its net deferred taxes as a non-
current deferred tax asset and a current deferred tax liability on its balance
sheet at April 1, 2001.
8. LEASES
Operating lease payments charged to expense were $1.5 million, $1.2 million,
and $0.8 million for fiscal years 2001, 2000 and 1999, respectively. Certain
leases contain renewal options and minimum amounts of annual maintenance
clauses. Minimum lease commitments at April 1, 2001 are summarized below (in
thousands):
Operating
Leases
2002 835
2003 829
2004 803
2005 780
2006 775
Thereafter 236
Total minimum lease commitments $ 4,258
9. FINANCING ARRANGEMENTS
Todd Pacific previously cancelled a credit facility during the fourth quarter
of fiscal year 1999, shortly after delivery of the third Mark II Jumbo Ferry.
Subsequent to the end of fiscal year 2001, Todd Pacific negotiated a $10.0
million revolving credit facility. The credit facility, which is renewable on
a bi-annual basis, will provide the Company with greater flexibility in
funding its operational cash flow needs.
Since this new credit facility was negotiated subsequent to the end of the
fiscal year, the Company had no outstanding borrowings as of April 1, 2001.
The Company did not have a credit facility in place during fiscal year 2000
and therefore, had no outstanding borrowings as of April 2, 2000.
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.
Harbor Island Site Insurance
On January 12, 2001, the Company entered into a 30-year agreement with an
insurance company that will provide the Company with broad-based insurance
coverage for the remediation of the Company's operable units at the Harbor
Island Superfund Site.
The agreement provides coverage for the known liabilities in an amount equal
to and exceeding the Company's current booked reserves of approximately $15.8
million. Additionally, the Company has entered into a 15-year agreement for
coverage of any new environmental conditions discovered at the Seattle
shipyard property that would require environmental remediation.
The Company funded this insurance premium from current cash reserves in two
installments. The first payment was made in the Company's fourth quarter of
fiscal year 2001. The second payment was made subsequent to the end of fiscal
year 2001. The Company recorded a non-current asset in the form of an
insurance receivable as of April 1, 2001 in accordance with its environmental
accounting policies. This transaction did not have a material effect on the
Company's results of operations, nor did the transaction have a material
effect on stockholders' equity.
Harbor Island Site History
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 is
anticipated to continue through fiscal year 2003. 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 evaluated what it believed was the
financial impact of the EPA's actions and increased its reserves to $13.6
million for the remedial effort. This reserve increase resulted in a $5.6
million charge against fiscal year 2000 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 designation could have on the remedial efforts on the Harbor Island
Superfund site is unknown at this time, although any related costs within
aggregate policy limits will be covered by insurance purchased in January
2001.
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. The Company's environmental reserves
for the entire Harbor Island Site aggregated $15.8 million at April 1, 2001.
Other Environmental Matters
In January 2001, the EPA issued Special Notice letters naming the PRPs on the
Hylebos Waterway Operable Unit of the Commencement Bay Superfund Site in
Tacoma, Washington. The Company was not included on the EPA's list. Todd has
been notified by other PRPs of their intent to bring a contribution action
against the Company. Subsidiaries of the Company had a presence on the site
from 1917-1925 and again from 1939-1946, for the most part, coinciding with
World Wars I and II when the Company built war ships at the direction of the
United States government. Several parties in 2000 hired an allocator to
assign percentages of responsibility to all parties, historical and present,
notwithstanding potential defenses or contractual claims. The allocator's
findings were taken into account in including an estimate of potential
liability in the Company's reserve discussed below.
During the fourth quarter of fiscal year 2001, the Company received a request
for information from the EPA regarding the Agriculture Street Landfill
Superfund Site in New Orleans, Louisiana. The EPA informs that the area was
used as a landfill from 1909 through 1934 and then sporadically until its
final closure in 1966. The Company has indicated to the EPA that it has no
information regarding this site. No estimate of potential liability has been
included in the Company's reserves discussed below.
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. Immaterial payments began in fiscal year 1997 and
will extend for up to ten years.
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 $0.6 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 2002. 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. By their very nature, civil actions relating to toxic
substances vary according to the cases' fact patterns, jurisdiction and other
factors. 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. Accordingly, the Company
cannot predict the eventual number of such cases or their eventual resolution
and does not include in its reserve amounts for cases that may be filed in the
future. The Company has included an estimate of its potential liability for
the known cases in its environmental reserves net of insurance recoveries.
The Company has recorded $1.5 million, $5.6 million and $0 in charges against
earnings in fiscal year 2001, 2000, and 1999, 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 continues to negotiate with its insurance carriers and prior
landowners and operators for certain past and future remediation costs. The
Company has 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 $2.1 million,
$0.9 million and $0 in fiscal year 2001, 2000, and 1999, respectively. The
Company has recorded an asset of $18.3 million at April 1, 2001 to reflect
contractual arrangements with several insurance companies to share costs for
certain environmental matters.
The Company has provided total aggregate reserves of $19.9 million as of April
1, 2001 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, tax matters and Government procurement
regulations. In addition, the Company is subject to various risks from
natural disasters such as the earthquake that struck the Puget Sound area
during the fourth quarter of fiscal year 2001. 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.
As mentioned above, during the Company's fourth quarter the Puget Sound region
experienced the effects of a moderate earthquake. The Company sustained
damage to its physical plant that required certain emergency repairs to be
made in fiscal year 2001. Additional earthquake repairs, of a non-emergency
nature will be required during fiscal year 2002. The Company is currently
evaluating its alternatives and plans for repairing this damage, as well as
potential recoveries by insurance.
The Company does not believe these risks or legal matters will have a material
adverse impact on its financial position, results of operations, or cash
flows. However, the Company continues to evaluate its exposures in each of
these areas and may revise its estimates as necessary.
As a general practice within the defense industry, the Defense Contract Audit
Agency ("DCAA") and other government agencies 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
Todd Pacific Shipyards and the Puget Sound Metal Trades Council (the
bargaining umbrella for all unions at Todd Pacific Shipyards) continue to
operate under a collective bargaining agreement ratified in fiscal year 2000.
That contract will expire July 31, 2002. Management considers its relations
with the various unions to be stable.
13. TREASURY STOCK
During fiscal year 2001, the Company under a stock repurchase plan
repurchased an aggregate of 358,800 shares of its Common Stock, at an average
price per share of $7.00. The shares were repurchased at per share prices
ranging from $6.56 to $7.75, for a total consideration of $2.5 million. The
number of shares held as treasury stock as of April 1, 2001, is 2,593,353.
During fiscal year 2000, the Company repurchased 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, 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 1, April 2, March 28,
2001 2000 1999
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted net
income per share:
Net income $ 16,727 $ 8,132 $ 17,394
Denominator:
Denominator for basic net income per
share - weighted average
common shares outstanding 9,587 9,765 9,910
Effect of dilutive securities
Stock options based
on the treasury stock method using
average market price 89 96 52
Denominator for diluted net income per share 9,676 9,861 9,962
Basic income per share $ 1.74 $ 0.83 $ 1.76
Diluted income per share $ 1.73 $ 0.82 $ 1.75
15. 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 as other income in the accompanying
Consolidated Statements of Income. The bond proceeds were received in the
fourth quarter of fiscal year 1999.
16. 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 1,000,000 shares of common stock has been
authorized for issuance under the Plan. Options issued under the Plan
generally 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 235,000 options available for future grant
under the Plan at April 1, 2001.
A summary of stock option transactions for the years ended April 1, 2001,
April 2, 2000, and March 28, 1999 is as follows:
Number Option Price Weighted Average
of Shares Per Share Exercise Price
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
Granted 415,000 6.55 to 7.94 6.72
Exercised (55,000) 4.56 to 6.00 5.48
Outstanding, April 1, 2001 625,000 4.25 to 7.94 6.01
Exercisable, April 1, 2001 218,333 $4.25 to $7.94 $4.85
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 6.2 years as of April 1, 2001.
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended April 1, 2001 and
April 2, 2000 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
Operating Income
income Net Per Share
Revenues (loss) income Diluted
1st Qtr 2001 $ 33,401 $ 2,405 $ 2,320 $ 0.24
2nd Qtr 2001 28,681 2,276 2,602 0.27
3rd Qtr 2001 24,489 (483) 2,420 0.25
4th Qtr 2001 29,974 7,752 9,385 0.99
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
The fourth quarter of fiscal year 2001 reflects $3.9 million in additional
revenue resulting from an agreement reached with the U.S. Navy to share in
certain environmental insurance costs and $1.9 million in revenue associated
with the Margarita II arbitration award and $0.4 million of related interest
and expenses.
The fourth quarter of fiscal year 2000 reflects an environmental charge of
$5.6 million associated with the Company's Harbor Island site offset by a $0.9
million environmental insurance settlement the Company reached with one of its
insurance carriers.
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending April 1, 2001, April 2, 2000 and March 28, 1999
(in thousands)
Reserves deducted from assets to which they apply - Allowance for doubtful
accounts:
Year Ended
April 1, April 2, March 28,
2001 2000 1999
Balance at beginning of period $ 100 $ 184 $ 662
Charged to costs and expenses 81 52 -
Deductions from reserves (1) (81) (136) (478)
Balance at close of period 100 100 $ 184
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 2001 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 has filed the following reports on Form 8-K during the fourth
quarter of its fiscal year ended April 1, 2001:
Form 8-K dated January 17, 2001 submitting the press release issued by the
Company regarding the Company's 30-year agreement with an insurance company to
provide broad-based insurance coverage for the remediation of the Harbor
Island Superfund Site.
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 1, 2001,
and April 2, 2000 ........................................... *
Consolidated Statements of Income
For the years ended April 1, 2001,
April 2, 2000 and March 28, 1999.............................. *
Consolidated Statements of Cash Flows
For the years ended April 1, 2001,
April 2, 2000 and March 28, 1999.............................. *
Consolidated Statements of Stockholders' Equity
For the years ended April 1, 2001,
April 2, 2000 and March 28, 1999.............................. *
Notes to Consolidated Financial Statements
For the years ended April 1, 2001,
April 2, 2000 and March 28, 1999.............................. *
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 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.
10-4 Secured Promissory Note and Collateral Pledge and *
Security Agreement between the Company and Stephen G.
Welch dated September 28, 1999.
10-5 Secured Promissory Note and Collateral Pledge and *
Security Agreement between the Company and Michael G.
Marsh dated September 28, 1999.
10-6 Employment contract between the Company and Stephen G. #
Welch dated February 7, 2001.
10-7 Grant of Incentive Stock Option dated February 7, 2001 #
to Stephen G. Welch pursuant to the Incentive Stock
Compensation Plan
10-8 Put Agreement between the Company and Stephen G. #
Welch dated February 7, 2001.
22-1 Subsidiaries of the Company. *
23 Consent of Ernst & Young LLP, Independent Auditors #
Note: All Exhibits are in SEC File Number 1-5109.
* Incorporated herein by reference.
# Filed herewith.
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 15, 2001
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 15, 2001 June 15, 2001
/s/ Patrick W.E. Hodgson /s/ Joseph D. Lehrer
Patrick W.E. Hodgson, Joseph D. Lehrer, Director
Chairman, June 15, 2001
and Director
June 15, 2001
/s/ Philip N. Robinson /s/ John D. Weil
Philip N. Robinson, Director John D. Weil, Director
June 15, 2001 June 15, 2001
/s/ Stephen G. Welch
Stephen G. Welch
President,
Chief Executive Officer,
and Director
June 15, 2001