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 March 31, 2002
[ ] 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 $63 million as of June 7, 2002.
There were 5,283,222 shares of the corporation's $.01 par value common stock
outstanding at June 7, 2002.
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 9, 2002 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 build three Jumbo Mark II Class ferries. This
contract represented the Company's first new construction effort in 10 years.
As the Company neared completion of the Mark II Ferry project in fiscal year
1999, it began a second new construction project with the construction of a
floating electrical power plant (the "Margarita II"). The Margarita II was
completed in fiscal year 2000.
With the completion of the Jumbo Mark II and Margarita II contracts in fiscal
years 1999 and 2000, respectively, the Company shifted its main business focus
to repair, maintenance and conversion business opportunities. This strategy
resulted in the award of two major five year cost-type contracts for
continuous maintenance work on three Navy aircraft carriers and six Navy
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 Company completed
negotiations with the Navy during the first quarter of fiscal year 2002 for
the renewal of the existing Auxiliary Oiler Explosive ("AOE") contract on a
sole source basis for an additional six years. This new contract represents
the fourth consecutive, multi-year contract that the Company has been awarded
by the Navy on the AOE class vessels. The notional value of this contract is
expected to be approximately $180 million over a six-year period if all
options are exercised. 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.
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
remain 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.
The majority of the Company's Government ship repair and overhaul work is
awarded on an option basis under one of the three cost-type contracts the
Company has been awarded. 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 also performs repair and overhaul work for the Navy on a fixed price
basis through a formal bidding process.
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 in fiscal year 2000, the Company has
not actively pursued new construction opportunities. While the Company may
selectively pursue new construction opportunities in the future, its primary
focus will remain on repair, maintenance and conversion activities.
Distribution of Work
The approximate distribution of the Company's Shipyard revenues for each of
the last three fiscal years are summarized as follows:
2002 2001 2000
Federal Government 79% 64% 72%
Commercial 21% 36% 28%
Total 100% 100% 100%
The distribution of the Company's revenues in fiscal year 2002 were
significantly influenced by the increased volume of cost-type Government
repair and maintenance work over fiscal year 2001 levels. It was also
impacted by the completion in fiscal year 2001 of the MV Yakima, a $29 million
commercial renovation project for the Washington State Ferry System.
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 MV Yakima contributed significantly
to the increase in the percentage of commercial work in fiscal year 2001 when
compared to fiscal year 2000.
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.
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 2002 and totaled approximately
1,000 employees on March 31, 2002.
During fiscal year 2002 an average of approximately 660 of the Company's
Shipyard employees were covered by a union contract that became effective
during the third quarter of fiscal year 2000. At March 31, 2002 approximately
830 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. Discussions with the unions for a
new collective bargaining agreement began on June 11, 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
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. 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 investments in
productivity enhancing facilities.
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 its acts 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 $28.5 million as of March 31, 2002 for
environmental and bodily injury 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 bodily injury 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 and bodily
injury liabilities.
As of March 31, 2002, the Company has recorded an insurance receivable of
$26.8 million, which mitigates a major portion of its accrued environmental
and bodily injury 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 and bodily injury
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 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 Shipyard employees are required to attend
regularly scheduled safety training meetings.
Backlog
At March 31, 2002 the Company's backlog consists of approximately $46 million
of repair, maintenance, and conversion work. This compares with backlogs of
$30 million and $37 million at April 1, 2001 and April 2, 2000, respectively.
The Company's current backlog is primarily attributable to firm repair,
maintenance and conversion work scheduled for completion during fiscal year
2003.
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 2002 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 of fiscal year 2001, 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. All remaining earthquake repairs, of a non-
emergency nature were made during fiscal year 2002. These repairs, which
totaled approximately $0.3 million more than established reserves are included
in the Company's results from operations. The Company intends to pursue
recoveries of its incurred earthquake related costs under its insurance
coverage.
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 in fiscal year 2001 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 during the first
quarter of fiscal year 2002 and drydock YFD-54 was reinstated during the
second quarter of fiscal year 2002.
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 those 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
In fiscal year 2001, the Company extended the leases with the Navy on both 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 annual lease payment and the average
annual 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 9 of the Notes to the Consolidated Financial Statements
in Item 8.
The Company's current Navy drydock certifications are less than the drydock's
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 and Washington State Ferry 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. These repairs began during the first
quarter of fiscal year 2002 and continued throughout the fiscal year and are
included in the Company's results of operations.
During fiscal year 2002, the Company evaluated several alternative repair
scenarios and management's plans for future operations and developed a
comprehensive, multi-year refurbishment plan that will allow the Company to
maintain certification into the future. This multi-year plan includes
scheduled refurbishment periods so that repairs do not interfere with on-going
shipyard operations. The Company will continue to assess this refurbishment
plan as it progresses and make appropriate changes as needed to support
Shipyard operations.
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 Company has also been named as a
defendant in a number of civil actions alleging damages from past exposure to
toxic substances, generally asbestos, at closed former Company facilities.
At March 31, 2002, the Company maintained aggregate reserves of $28.5 million
for pending claims and assessments relating to environmental matters,
including $17.7 million associated with the Harbor Island Superfund Site (the
"Harbor Island Site") and a reserve of $9.4 million for asbestos related
claims.
Funding for costs and payments of claims represented by such reserves is
expected to be provided to a significant extent by receivables due from
insurance companies under policies and insurance in place agreements described
below. At March 31, 2002, such receivables aggregated $26.8 million.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements in Item 8. below and to the discussion under the heading
"Environmental Matters and Contingencies" in Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7. below.
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").
Harbor Island Site Insurance
In the fourth quarter of fiscal year 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
exceeding the Company's current booked reserves of $17.7 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 cash reserves in two
installments. The first payment was made in the Company's fourth quarter of
fiscal year 2001 and the second payment was made in the first quarter of
fiscal year 2002. The Company recorded a non-current asset in the form of an
insurance receivable in accordance with its environmental accounting policies
at the time it entered into this agreement. 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 2005. The Company and the EPA are
currently negotiating the extent and methodology of the soil remediation.
During the third quarter of 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 $5.5 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. Management anticipates that during fiscal year 2003 agreement
will be reached with the EPA on a remedial design that identifies the scope of
remediation and the method of sediment disposal. Pursuant to the current
schedule, remediation of the SSOU is expected to begin in the third quarter of
fiscal 2004. Current environmental regulations limit the period of time
during the year that dredging may occur. Given these limits, dredging in the
SSOU will require several years to complete. The ultimate cost of the SSOU
clean up will remain uncertain until agreement has been reached with the EPA
during fiscal year 2003.
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. During May 1998, the Company 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.
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. As of March 31, 2002, the Company believes that aggregate policy limits
are currently adequate to cover this potential impact.
Asbestos Related Claims and Insurance
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. At March 31, 2002, the Company had approximately
377 cases involving approximately 570 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 assesses claims as they are filed and developed, analyzing them in two
different categories based on severity of illness. Based on current fact
patterns, certain diseases including mesothelioma, lung cancer and fully
developed asbestosis are categorized by the Company as "malignant" claims.
All others of a less medically serious nature are categorized as "non-
malignant". The Company is currently defending approximately 35 "malignant"
claims and approximately 535 "non-malignant" claims. The Company and its
insurers are vigorously defending these actions.
The Company has entered into agreements with several of its insurers to
provide coverage for a significant portion of settlements and awards related
to these bodily injury claims. These agreements have aggregate limits on
amounts to be paid overall and formulas for amounts of payment on individual
claims. The two most significant agreements provide coverage applicable to
claims of exposure to asbestos occurring between 1949 and 1976 and occurring
between 1976 through 1987. Insurance coverage for exposures to asbestos was no
longer available from the insurance industry after 1987. Due to changes in
federal regulations in the 1970s which resulted in the swift decline in
commercial and military application of asbestos and increased regulation over
the handling and removal of asbestos, there exists minimal risk of claims
arising from exposure after 1987. Contractual formulas are utilized to
determine the amount of coverage from each agreement on each claim settled or
litigated. Once the initial date of alleged exposure to asbestos is
determined, all contractual years subsequent to that date participate in the
settlement. Since all known claims involve alleged exposure prior to 1976,
the 1976 through 1987 agreement will participate in the settlement or
judgement of all outstanding claims that are settled or litigated. As a
result, and as the years remaining calculation set forth below indicates, the
1976 through 1987 agreement will exhaust prior to the 1949 through 1976
agreement. Based on historical claims settlement data only, the Company
projects that at March 31, 2002, the 1949 through 1976 agreement will provide
coverage for an additional 20.6 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.2 years. At April 1, 2001, the Company
projected that these agreements would provide coverage for an additional 23.7
years and 8.0 years, respectively. The increased declination of estimated
coverage experienced from fiscal year 2001 to fiscal year 2002 was due to
increased settlement activity on malignant cases including six cases that had
been in inventory dating back as far as 1993. The Company resolved 20
malignant claims in 2002 compared with 16 in 2001 and 11 in 2000. If
historical settlement patterns or the rate of filing for new cases change in
future periods, these estimated coverage periods could be shorter or longer
than anticipated. Moreover, if one or both of these coverages are exhausted
at some future date, the Company's share of responsibility will increase for
any subsequent claims' and legal expense previously covered by these insurance
agreements. In addition to providing coverage for assessments or settlements
of claims, the agreements also provide for costs of defending and processing
such claims.
The following chart indicates numbers of claims filed and resolved in the past
three fiscal years, including the number of claims yet to be resolved at the
end of each fiscal year. (Resolution includes settlements, adjudications and
dismissals). The claims are further categorized as either malignant or non-
malignant.
Bodily Injury Claims
Non-
Malignant Malignant Total
Outstanding, March 28, 1999 29 362 391
Claims filed 17 167 184
Claims resolved (11) (14) (25)
Outstanding, April 2, 2000 35 515 550
Claims filed 16 66 82
Claims resolved (16) (30) (46)
Outstanding, April 1, 2001 35 551 586
Claims filed 20 52 72
Claims resolved (20) (68) (88)
Outstanding, March 31, 2002 35 535 570
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, there
can be no assurance that the current reserves will be adequate to cover the
costs of resolving the existing cases. Additionally, the Company cannot
predict the eventual number of cases to be filed against it or their eventual
resolution and does not include in its reserve amounts for cases that may be
filed in the future. However, it is probable that if future cases are filed
against the Company it will result in additional costs arising either from its
share of costs under current insurance in place arrangements or due to the
exhaustion of such coverage. The Company reviews the adequacy of existing
reserves periodically based upon developments affecting these claims,
including new filings and resolutions, and makes adjustments to the reserve
and related insurance receivable as appropriate.
As the Company is not able to estimate its potential ultimate exposure for
filed and unfiled claims against the Company, it cannot predict whether the
ultimate resolution of the bodily injury cases will have a material effect on
the Company's results of operations or stockholders' equity.
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 2002.
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 indicating the high and
low composite sales prices of the stock as reported by the NYSE.
Quarter Ended High Low
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
July 1, 2001 8.11 6.79
September 30, 2001 9.55 7.70
December 30, 2001 9.05 7.70
March 31, 2002 11.00 8.80
On June 7, 2002 the high and low prices of the Company's common stock on the
NYSE were $14.55 and $14.50, respectively.
At June 7, 2002 there were 1,763 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.
During the first quarter of fiscal year 2002, the Company announced a tender
offer for up to 4.0 million shares of the Company's Common Stock at a price of
not in excess of $8.25 or less than $7.00 per share. The exact price was
determined by a procedure commonly referred to as a "Dutch Auction". The
Company elected to increase the number of shares to be purchased in order to
avoid proration procedures otherwise applicable to the offer and purchased an
aggregate of 4,136,124 shares at a price of $8.25 per share (See Item 7.
Management's Discussion & Analysis of Financial Condition and Results of
Operations and Note 14 of the Notes to Consolidated Financial Statements for
additional information).
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.
March 31, April 1, April 2, March 28, March 29,
2002 2001 2000 1999 1998
Revenue $121,945 $116,545(2) $123,851 $106,189(6) $109,537
Income
from operations 6,902 11,950(3) 5,610(5) 10,222 3,197(7)
Net income 7,018 16,727 8,132 17,394 8,103(8)
Net income
per share of
common stock
Basic EPS 1.05 1.74 0.83 1.76 0.82
Diluted EPS 1.03 1.73 0.82 1.75 0.82
Financial position:
Working capital 37,379(1) 60,873 65,339 55,009 44,400
Fixed assets 16,595 17,358 17,356 19,026 21,565
Total assets 133,680(1) 164,900(4) 139,209(4) 136,514(4) 124,295(4)
Stockholders'
equity $ 65,997(1) $ 93,081 $ 76,185 $ 71,088 $ 56,813
(1) As discussed in greater detail in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company
repurchased an aggregate of 4,136,124 shares of its common stock at a
price of $8.25 per share through its tender offer ("Dutch Auction") that
was completed as of July 31, 2001. The Company's working capital, total
assets, and stockholders' equity declined approximately $34 million as a
result of the share repurchases and related transactions.
(2) 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 of fiscal year
2001. The agreement also allows the Company to recognize an additional
$1.7 million in fiscal years 2002, 2003 and 2004, respectively. 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.
(3) During fiscal year 2001, the Company recorded a net insurance settlement
of $2.1 million, which was partially offset by a $1.5 million
environmental and other reserve charge, resulting in an increase to
income from operations of $0.6 million.
(4) Total assets for fiscal years 1998 through 2001 have been reclassified to
conform to the current year presentation change in insurance receivables.
(5) During fiscal year 2000, the Company recorded an additional $5.6 million
operating charge for environmental and other reserves. This charge was
partially offset by a $0.9 million insurance settlement the Company
reached with one of its insurance carriers.
(6) 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. In fiscal 1997 and earlier years,
the Company had recognized significant losses in connection with the
contract involving the Jumbo Mark II Ferries.
(7) 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 and other
reserves.
(8) During fiscal year 1998, the Company received a federal income tax refund
of $1.5 million, which contributed a similar amount to net income. In
addition, the Company realized a $1.0 million gain on the sale of its
broadcasting stations, operated by Elettra Broadcasting, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Notes to Consolidated Financial Statements are an integral part of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and should be read in conjunction herewith. The following
discussion and analysis of financial condition and results of operations
contains forward-looking statements, which involve risks and uncertainties.
The Company's actual results in future periods may differ significantly from
the results discussed in or anticipated by such forward looking statements.
Certain factors, which may impact results for future periods are discussed
below under the captions "Overview - Profitability," and "Environmental
Matters." Readers should also consider the statements and factors discussed
under the caption "Operations Overview" in Item 1 and the discussion of
environmental matters and related bodily injury claims set forth in Item 3 of
the this Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended March 31, 2002, together with the Notes
to the Company's Consolidated Financial Statements for the fiscal year then
ended.
Overview
During fiscal year 2002, the Company recorded revenue of $121.9 million, which
represents an increase of $5.4 million, or approximately 5%, over fiscal year
2001 reported revenue of $116.5 million. This revenue increase is primarily
attributable to an increase in commercial and government repair and overhaul
activities of $7.7 million, offset by a decrease in new construction revenue
of $2.3 million. Increases in repair and overhaul activities are primarily
due to the scheduling by ship owners of commercial and government overhaul
activities. Decreases in new construction revenue are caused by the absence
of new construction activities being performed by the Company in fiscal year
2002 and reflect the Company's decision to focus on repair and overhaul
opportunities.
Fiscal year 2001 revenue benefited from the impact of two significant events.
First, the Company reached an agreement with the U.S. Navy in the fourth
quarter of fiscal year 2001 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 in fiscal year 2001. This amount was reduced to $1.7
million in fiscal year 2002. Second, the Company received a favorable
arbitration award on the Margarita II, a new construction project 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.
Repair and overhaul activities represented approximately 100% and 98% of
fiscal year 2002 and fiscal year 2001 revenues, respectively. The high
concentration of repair and overhaul activities 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 2002 the Company recorded operating income of $6.9 million
on revenue of $121.9 million, or approximately 6% of revenue. This represents
a decrease in operating income of $5.0 million, or approximately 42% from
fiscal year 2001 operating income reported of $12.0 million.
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 insurance
settlement of $2.1 million, which was partially offset by a $1.5 million
environmental and other reserve charge, resulting in a net increase to
operating income of $0.6 million for the fiscal year.
The Company also recognized a net gain of $2.2 million from the sale of
available-for-sale securities, and $1.8 million in non-operating investment
income during fiscal year 2002. These amounts in addition to the operating
income reported, resulted in fiscal year 2002 income before income tax expense
of $10.9 million.
Auxiliary Oiler Explosive ("AOE") Contract
During the first quarter of fiscal year 2002, the Company was awarded a six-
year, sole source cost-type contract for phased maintenance repairs to four
Department of Navy AOE class supply ships. This contract represents the
fourth consecutive, multi-year contract that the Company has been awarded by
the Navy on the AOE class vessels. The notional value of this new contract is
expected to be approximately $180 million if all options are exercised. Work
on this contract is being performed primarily in the Company's Seattle
shipyard.
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 is being performed primarily in
the Company's Seattle shipyard.
Planned Incremental Availability ("PIA")
During the fourth quarter of fiscal year 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 if all options are exercised. Work on
this contract is currently being performed at the Puget Sound Naval Shipyard,
located in Bremerton, Washington.
Preservation Contract (the "MV Yakima")
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.
During the fourth quarter of fiscal year 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 were
recognized in fiscal year 2001 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. 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, at the time of vessel delivery, an agreement had not
reached between the Company and the owner regarding the potential increase in
the contract price 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. Subsequent to the end of fiscal year 2001, the Company was awarded
approximately $1.9 million, as well as interest and certain agreed expenses
from the arbitration board. The Company recognized the award in fiscal year
2001.
Critical Accounting Policies
The Company's established accounting policies are outlined in the footnotes to
the Consolidated Financial Statements (contained in Part II, Item 8. of this
Form 10-K) entitled "Principal Accounting Policies." As part of its reporting
responsibilities, management continually evaluates and reviews the adequacy of
its accounting policies and methods as new events occur. Management believes
that its policies are applied in a consistent manner that provides the user of
the Company's financial statements with a current, accurate and complete
presentation of information in accordance with generally accepted accounting
principles generally accepted in the United States.
The preparation of financial statements requires the use of judgments and
estimates. The Company's critical accounting policies are described below to
provide a better understanding of how these judgments and estimates can impact
the Company's financial statements. A critical accounting policy is one that
management believes may contain difficult, subjective or complex estimates and
assessments and is fundamental to the Company's results of operation. The
Company has identified its most critical accounting policies which relate to:
1) Revenue Recognition and 2) Environmental Remediation, Bodily Injury, Other
Reserves, and Insurance Receivable. This discussion and analysis should be
read in conjunction with our consolidated statements and related notes
included elsewhere in this report.
Revenue Recognition
The Company recognizes revenue, contract costs, and profit on the percentage-
of completion method based upon direct labor hours incurred. Using the
percentage-of-completion method requires the Company to make certain estimates
of the total cost to complete a project, estimates of project schedule and
completion dates, estimates of the percentage of which the project is
complete, estimates of annual overhead rates and estimates of amounts of any
probable unapproved claims and/or change orders. These estimates are
continuously evaluated and updated by experienced project office and
accounting personnel assigned to manage these activities, and senior
management also reviews them on a periodic basis. When adjustments in
contract value or estimated costs are determined, any changes from prior
estimates are generally reflected in revenue in the current period.
The Company has considerable experience in managing multiple projects
simultaneously and in preparing accurate cost estimates, schedules and project
completion dates. However, many factors, including but not limited to
weather, fluctuations in material prices, labor shortages, and timely
availability of materials can affect the accuracy of these estimates and may
impact our future revenues either favorably or unfavorably.
U.S. Government procurement standards are followed relative to assessing the
allowability as well as the allocability of costs charged to Government
contracts. Costs incurred and allocated to contracts with the U.S. Government
are closely scrutinized for compliance with underlying regulatory standards by
Todd Pacific Shipyards' personnel, and are subject to audit by the Defense
Contract Audit Agency.
Environmental Remediation, Bodily Injury, Other Reserves and Insurance
Receivable
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 has also been named as a defendant in a number of civil actions
alleging damages from past exposure to toxic substances, generally asbestos,
at former Company facilities that are now closed. At March 31, 2002, the
Company maintained aggregate reserves of $28.5 million for pending claims and
assessments relating to these environmental matters, including $17.7 million
associated with the Company's Seattle shipyard site and $9.4 million for
asbestos or bodily injury related claims.
The Company has various insurance policies and agreements that provide
coverage on the costs to remediate these environmental sites and for the
defense and settlement of bodily injury claims. At March 31, 2002, the
Company had recorded an insurance receivable of $26.8 million relating to
these environmental and bodily injury matters, including $17.7 million
associated with the Company's Seattle shipyard site and $7.1 million for
bodily injury related claims.
The Company reviews these matters on a continual basis and revises its
estimates of known liabilities and insurance recoveries when appropriate. The
Company follows guidance provided in Statement of Position 96-1,
"Environmental Remediation Liabilities" for recording its environmental
liabilities and recoveries. The Company accounts for bodily injury
liabilities in accordance with Financial Accounting Standards Board No. 5,
"Accounting for Contingencies."
Estimating environmental remediation liabilities requires judgments and
assessments based upon independent professional knowledge, the experience of
Company management and our legal counsel. Environmental liabilities are based
on judgments that include calculating the cost of alternative remediation
methods and disposal sites, changes in the boundaries of the remediation
sites, and the impact of regulatory changes. Bodily injury liabilities are
based on judgments that include the number of outstanding claims, the expected
most likely outcome of any claim litigation and anticipated settlement amounts
for open claims based on historical experience. The Company does not accrue
liabilities for unknown bodily injury claims that may be asserted in the
future due to uncertainties of the number of cases that may be filed and the
extent of alleged damages.
The development of liability estimates that support both environmental
remediation and bodily injury reserves involve complex matters that include
the development of estimates and the use of judgments. The actual outcome of
these matters may differ from Company estimates. To the extent not covered by
insurance, increases to environmental remediation and bodily injury
liabilities would unfavorably impact future earnings.
The Company's insurance recoveries for environmental remediation and bodily
injury claims are estimated independently from the associated liabilities and
are based on insurance coverages or contractual agreements negotiated with its
former insurance companies. These policies and agreements are primarily with
two insurance companies. Based upon the current credit rating of both of
these companies, the Company anticipates that both insurance companies will be
able to satisfy their respective obligations under the policy or agreement.
However, if this assumption is incorrect and either of these companies is
unable to meet its future financial commitments, the Company's financial
condition and results of operation could be adversely affected.
Business Volume and Backlog
At March 31, 2002 the Company's backlog consists of approximately $46 million
of repair, maintenance, and conversion work. This compares with backlogs of
$30 million and $37 million at April 1, 2001 and April 2, 2000, respectively.
The Company's current backlog is primarily attributable to firm repair,
maintenance and conversion work scheduled for completion during fiscal year
2003.
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
2002 Compared with 2001
Net income for fiscal year 2002 decreased by $9.7 million from fiscal year
2001 levels. This decrease was primarily attributable to the impact of the
following four significant events:. 1) In fiscal year 2001, the Company
reached a settlement with the U.S. Navy to share in certain environmental
insurance costs, which resulted in the Company recognizing $3.9 million in
revenue. The amount the Company was able to recognize in fiscal year 2002
under terms of this agreement decreased to $1.7 million. 2) In fiscal year
2001, the Company received an arbitration award on the Margarita II, which
contributed approximately $2.3 million in revenue, interest income and
reimbursed expenses. 3) In fiscal year 2002, the Company recognized $3.9
million in federal income tax expense while in fiscal year 2001 it recorded a
federal income tax benefit of $0.2 million resulting from the elimination of
its deferred tax asset valuation reserve. This change resulted in a $4.1
million increase in federal income tax expense in fiscal year 2002 when
compared to fiscal year 2001. 4) In fiscal year 2002, the Company's pension
income decreased $3.2 million when compared to fiscal year 2001 (see Note 7 of
the Notes to Consolidated Financial Statements for more details). Net income
for fiscal year 2002 was also influenced as a result of the following
components:
Revenues
The Company recorded revenue of $121.9 million during fiscal year 2002, which
represents an increase of $5.4 million, or approximately 5% over fiscal year
2001 revenue. All revenue recorded by the Company in fiscal year 2002 was
attributable to repair and overhaul activities compared to $114.2 million in
repair and overhaul revenue recorded in fiscal year 2001. This increase in
repair and overhaul activities of $7.7 million was offset by a decrease in new
construction revenue in fiscal year 2002 of $2.3 million. Increases in repair
and overhaul activities are primarily due to the scheduling by ship owners of
commercial and government overhaul activities. New construction revenue
recorded in fiscal year 2001 was attributable to the Margarita II arbitration
settlement. The absence of new construction revenue in fiscal year 2002 is
due to the Company's primary business strategy of focusing on repair,
maintenance and conversion activities.
Cost of Revenues
Cost of revenues for fiscal year 2002 increased by $7.4 million, or
approximately 10% from fiscal year 2001. Cost of revenues as a percentage of
revenues was 70% and 66% for fiscal years 2002 and 2001, respectively. The
increase in cost of revenues as a percentage of revenue in fiscal year 2002 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 in fiscal year 2001. Costs associated with these revenues
were either incurred in prior years or are not categorized as cost of
revenues, which effectively lowered the cost of revenues as a percentage of
revenues in fiscal year 2001. If these amounts were excluded from revenue the
resulting cost of revenues as a percentage of revised revenue would have been
70% in fiscal year 2001.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead increased $2.9 million, or
approximately 11% from fiscal year 2001. This increase was attributable to
increased production volumes during the fiscal year. As a percentage of
revenue, administrative and manufacturing overhead was approximately 25% of
revenue in fiscal year 2002. Administrative and manufacturing overhead as a
percentage of revenue was 24% in fiscal year 2001, but would have been 25% if
revenues were adjusted to exclude the favorable impacts to revenue that
occurred that year.
Provision for Environmental Reserves and Other
During fiscal year 2002, the Company estimated that the expected remediation
costs associated with the Company's operable units at the Harbor Island
Superfund Site increased by approximately $3.2 million. This increase in
environmental reserves was offset by a similar increase in the Company's
insurance receivable. The recognition of these increases did not impact the
Company's financial results or stockholders' equity.
Also, in fiscal year 2002, the Company received reimbursement from a certain
Harbor Island potentially responsible party for certain past environmental
costs incurred by the Company. This reimbursement in the amount of $0.5
million is reflected in Other insurance settlements in the financial results
reported at March 31, 2002.
During fiscal year 2001, the Company provided $1.5 million in additional
environmental and other reserves. The reserve increase was fully offset by a
net 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 2002 decreased by $2.1 million when
compared to fiscal year 2001. This decrease reflects the reduction in
available funds for investment purposes as a result of the Company's
repurchase of 4.1 million shares in July 2002 through its Dutch Auction tender
offer. The share repurchase decreased available funds for investment purposes
by approximately $34.1 million.
Gain on Sale of available-for-sale securities
Gain on sale of available-for-sale securities increased $1.5 million when
compared to fiscal year 2001. This increase reflects favorable market
conditions associated with certain securities which were sold by the Company.
Income Taxes
In fiscal year 2002, the Company recognized federal income tax expense of $3.9
million. This represents an increase of $4.1 million in federal tax expense
when compared to fiscal year 2001. In fiscal year 2001, the Company
recognized a federal income tax benefit of $0.2 million after applying all
remaining net operating loss carryforwards and business tax credits and the
elimination of its deferred tax asset valuation allowance.
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 and other
reserve charge of $4.7 million, which contributed 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 $8.6 million, or approximately
10% from fiscal year 2000. Cost of revenues as a percentage of revenues was
66% and 69% for fiscal years 2001 and 2000, respectively. The decrease in
cost of revenues as a percentage of revenue in fiscal year 2001 was 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 were 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 increased to 25% if revenues were 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 was primarily attributable to plant utility costs,
contract acquisition costs, financial system implementation costs and costs
associated with earthquake repairs.
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 and other 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 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 represented 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.
Environmental Matters and Other Contingencies
The Company has provided total aggregate reserves of $28.5 million as of March
31, 2002 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.
The Company has various insurance policies and agreements that provide
coverage on the costs to remediate environmental sites and for the defense and
settlement of bodily injury cases. These policies and agreements are
primarily with two insurance companies. Based upon the current credit rating
of both of these companies, the Company anticipates that both parties will be
able to perform under their respective policy or agreement. As of March 31,
2002, the Company has recorded an insurance receivable of $26.8 million to
reflect the contractual arrangements with several insurance companies to share
costs for certain environmental and other 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 insurers.
The Company has not recorded any receivables for any amounts that may be
recoverable from such negotiations or other claims.
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 (the
"Harbor Island Site") 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. Information with respect to these
contingencies and claims is provided in Item 3 in this report.
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.
In fiscal year 2002, the Company directly spent $0.2 million for environmental
site remediation. All of these costs are reimbursable to the Company through
its insurance coverages. An additional $1.1 million in environmental site
remediation was spent by third party vendors under the direction of the
Company's management. These costs were paid directly to the third party
vendors under the Company's insurance policies. Most of these expenditures
were related to the Harbor Island Site.
In fiscal year 2001 and 2000, the Company spent approximately $0.2 million and
$0.5 million on environmental site remediation, respectively. Of these
amounts, approximately $0.1 million and $0.2 million were reimbursable to the
Company under the Company's insurance policies.
In addition to environmental site remediation costs, the Company spent $0.5
million for bodily injury cases after reimbursement under the Company's
insurance policies in fiscal year 2002. In fiscal year 2001 and 2000, the
Company spent $0.4 million and $0.1 million, respectively for bodily injury
cases after reimbursement under the Company's insurance policies.
Actual costs to address the Harbor Island Site 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. In fiscal
2000, the Company evaluated the financial impact of EPA actions changing the
EPA's selected remedy relating to dredging affecting the "Shipyard Sediments
Operable Unit" at the Harbor Island Site and increased its reserves through a
charge to fiscal year 2000 earnings in the amount of $5.5 million. The
Company anticipates that estimates of the cost of remediation will remain
significantly uncertain until agreement on the selected remedy is reached.
Such agreement is currently anticipated to occur in fiscal 2003.
Remediation costs at the Harbor Island Site may also be impacted by recent
designation of several species of salmon under the Endangered Species Act.
In the fourth quarter of fiscal year 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
exceeding the Company's current booked reserves of $17.7 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 cash reserves in two
installments. The first payment was made in the Company's fourth quarter of
fiscal year 2001 and the second payment was made in the first quarter of
fiscal year 2002. The Company recorded a non-current asset in the form of an
insurance receivable in accordance with its environmental accounting policies
at the time it entered into this agreement. 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. At March 31, 2002, the Company had approximately
377 cases involving approximately 570 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 assesses claims as they are filed and developed, analyzing them in two
different categories based on severity of illness. The Company and its
insurers are vigorously defending these actions. The Company's policy is to
record accruals for bodily injury liabilities when it is probable that a
liability has been incurred and the amount of liability can be reasonably
estimated based on the known facts. Accordingly, potential expenses for
claims that may be filed in the future related to alleged damage from past
exposure to toxic substances are not estimable and are not included in the
Company's reserves. Accruals for bodily injury liabilities are adjusted
periodically as new or updated information becomes available.
The Company has entered into agreements with several of its insurers to
provide coverage for a significant portion of settlements and awards related
to these bodily injury claims. These agreements have aggregate limits on
amounts to be paid overall and formulas for amounts of payment on individual
claims. The two most significant agreements provide coverage applicable to
claims of exposure to asbestos occurring between 1949 and 1976 and occurring
between 1976 through 1987. Insurance coverage for exposures to asbestos was
no longer available from the insurance industry after 1987. Due to changes in
federal regulations in the 1970s which resulted in the swift decline in
commercial and military application of asbestos and increased regulation over
the handling and removal of asbestos, there exists minimal risk of claims
arising from exposure after 1987. Contractual formulas are utilized to
determine the amount of coverage from each agreement on each claim settled or
litigated. Once the initial date of alleged exposure to asbestos is
determined, all contractual years subsequent to that date participate in the
settlement. Since all known claims involve alleged exposure prior to 1976,
the 1976 through 1987 agreement will participate in the settlement or
judgement of all outstanding claims that are settled or litigated. As a
result, and as the years remaining calculation set forth below indicates, the
1976 through 1987 agreement will exhaust prior to the 1949 through 1976
agreement. Based on historical claims settlement data only, the Company
projects that at March 31, 2002, the 1949 through 1976 agreement will provide
coverage for an additional 20.6 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.2 years. At April 1, 2001, the Company
projected that these agreements would provide coverage for an additional 23.7
years and 8.0 years, respectively. The increased declination of estimated
coverage experienced from fiscal year 2001 to fiscal year 2002 was due to
increased settlement activity on malignant cases including six cases that had
been in inventory dating back as far as 1993. The Company resolved 20
malignant claims in 2002 compared with 16 in 2001 and 11 in 2000. If
historical settlement patterns or the rate of filing for new cases change in
future periods, these estimated coverage periods could be shorter or longer
than anticipated. Moreover, if one or both of these coverages are exhausted
at some future date, the Company's share of responsibility will increase for
any subsequent claims' and legal expense previously covered by these insurance
agreements. At March 31, 2002, the Company has recorded a bodily injury
liability reserve of $9.4 million and a bodily injury insurance receivable of
$7.1 million. At April 1, 2001, the Company recorded a bodily injury
liability reserve of $10.6 million and a bodily injury insurance receivable of
$7.8 million. These bodily injury liabilities and receivables are classified
within the Company's Consolidated Balance Sheets as environmental and other
reserves, and insurance receivables, respectively.
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, there
can be no assurance that the current reserves will be adequate to cover the
existing cases. Additionally, the Company cannot predict the eventual number
of cases to be filed against the Company or their eventual resolution and does
not include in its reserve amounts for cases that may be filed in the future.
However, it is probable that if future cases are filed against the Company it
will result in additional costs arising either from its share of costs under
current insurance in place arrangements or due to the exhaustion of such
coverage. The Company reviews the adequacy of existing reserves periodically
based upon developments affecting these claims, including new filings and
resolutions, and makes adjustments to the reserve and related insurance
receivable as appropriate.
As the Company is not able to estimate its potential ultimate exposure for
filed and unfiled claims against the Company, it cannot predict whether the
ultimate resolution of the bodily injury cases will have a material effect on
the Company's results of operations or stockholders' equity.
Liquidity, Capital Resources and Working Capital
At March 31, 2002, the Company's cash, cash equivalents and securities
available-for-sale balances were $17.8 million and $13.8 million,
respectively, for a total of $31.6 million. 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.
Fiscal year 2002 cash, cash equivalents and securities available-for-sale
balances were impacted primarily by the Company's repurchase of approximately
4.1 million shares of its common stock through its "Dutch Auction" tender
offer during the second quarter of fiscal year 2002. Upon completion, this
offer reduced the Company's current cash, cash equivalents and securities
available-for-sale balances by approximately $34 million. Also impacting
cash, cash equivalents and securities available-for-sale balances was the
payment made in the first quarter of fiscal year 2002, for insurance coverage
relating to the remediation of all of the Company's operable units at the
Harbor Island Superfund Site.
The Company anticipates that its remaining cash, cash equivalents and
marketable securities position, anticipated fiscal year 2003 cash flow, access
to credit facilities and capital markets, taken together, will provide
sufficient liquidity to fund operations for fiscal year 2003. Accordingly,
shipyard capital expenditures are expected to be financed out of working
capital. A change in the composition or timing of projected work could cause
capital expenditures and repair and maintenance expenditures to increase.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $10.6 million for the year ended
March 31, 2002 and was primarily attributable to fiscal year net income
adjusted for depreciation and deferred taxes.
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 insurance receivables.
Investing Cash Flows
Net cash provided by investing activities was $29.8 million for the year ended
March 31, 2002 and consisted primarily of maturities and sales of marketable
securities offset partially by purchases of marketable securities and capital
expenditures.
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.
Capital Expenditures
During fiscal year 2002, the Company spent approximately $2.2 million on new
capital assets. This represents a decrease of $0.9 million from the $3.1
million spent in fiscal year 2001. This decrease is primarily attributable to
the installation of a new Enterprise Resource Planning ("ERP") system that was
completed in the fourth quarter of fiscal year 2001. The implementation of
the ERP system accounted for approximately $1.0 million in fiscal year 2001
capital expenditures.
These capital expenditures are in addition to ongoing repair and maintenance
expenditures in the Shipyard of $3.9 million, $3.6 million, and $3.3 million
in fiscal years 2002, 2001 and 2000, respectively.
Financing Activities
Net cash used in financing activities for fiscal year 2002 was $34.4 million.
Cash used in financing activities during fiscal year 2002 consisted primarily
of purchases of treasury stock resulting from the Company's Dutch Auction that
was completed during the second quarter of fiscal year 2002.
Net cash used in financing activities for the fiscal year ended April 1, 2001
was $2.4 million. Cash used in financing activities during fiscal year 2001
consisted primarily of purchases of treasury stock.
Credit Facility
During the first quarter of fiscal year 2002, Todd Pacific Shipyards
Corporation, a wholly owned subsidiary of the Company, negotiated a $10.0
million revolving credit facility. The credit facility, which is renewable on
a bi-annual basis, will provide Todd Pacific with greater flexibility in
funding its operational cash flow needs. Todd Pacific had no outstanding
borrowings as of March 31, 2002. Todd Pacific did not have a credit facility
in place during fiscal year 2001 and therefore, had no outstanding borrowings
as of April 1, 2001.
Commitments
The Company is subject to certain minimum operating lease payments on two of
its dry docks that are charged to expense. These operating lease payments
contain renewal options and minimum amounts of annual maintenance clauses.
These minimum lease commitments are summarized in Note 9. of the Notes to
Consolidated Financial Statements.
A surety company has issued contract bonds totaling $5.4 million for current
repair, maintenance and conversion jobs as of March 31, 2002. Todd Pacific's
trade accounts receivable on certain bonded jobs secure these various contract
bonds.
Stock Repurchase
During the first quarter of fiscal year 2002, the Company announced a tender
offer for up to 4.0 million shares of the Company's Common Stock at a price of
not in excess of $8.25 or less than $7.00 per share. The exact price was
determined by a procedure commonly referred to as a "Dutch Auction." This
offer to repurchase up to 4.0 million shares from existing stockholders was
approximately 42.7% of the total number of shares outstanding at that time.
Following verification of the tenders and receipt of shares tendered subject
to guarantees of delivery, an aggregate of 4,136,124 shares were validly
tendered at a price of $8.25 per share. The Company elected to increase the
number of shares to be purchased in order to avoid proration procedures
otherwise applicable to the offer, resulting in an aggregate purchase price of
$34.1 million. The Company incurred expenses in connection with this offer of
approximately $0.5 million. The Company utilized available cash and proceeds
from available-for-sale securities to fund the share repurchases completed
through the offer.
During the fourth quarter of fiscal year 2002, 30,000 shares of treasury stock
were reissued pursuant to the exercise of stock options held by an officer of
the Company. The number of shares held as treasury stock as of March 31,
2002, is 6,672,811.
During fiscal year 2001, the Company 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.
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. Discussions with the unions for a
new collective bargaining agreement began on June 11, 2002. Management
considers its relations with the various unions to be stable.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company has analyzed the impact of these statements and
does not expect the adoption of either will have an impact on its financial
statements.
In October 2001, the FASB, issued Statements of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
effective for fiscal years beginning after December 15, 2001, with transition
provisions for certain matters. The FASB's new rules on asset impairment
supersedes FASB Statement No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and provides a single
accounting model for long-lived assets to be disposed of. The Company is
currently analyzing the impact of this statement but does not expect the
adoption will have a material impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company does not own any derivative financial instruments as of March 31,
2002, 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 certain 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.
The Company is also exposed to potential interest rate risk on its revolving
credit facility. Interest charged on the Company's credit facility is based
on the prime lending rate, which may fluctuate based on financial market
risks. Increases in the prime lending rate could increase the Company's
borrowing costs under its existing credit facility. The Company believes that
the risk associated with interest rate fluctuations related to its credit
facility 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 March 31, 2002 and April 1,
2001 and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended March
31, 2002. 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 misstatement. 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 March 31, 2002 and April 1, 2001 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 2002 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, 2002
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 and APRIL 1, 2001
(In thousands of dollars)
2002 2001
ASSETS
Cash and cash equivalents $ 17,795 $ 11,901
Securities available-for-sale 13,841 46,112
Accounts receivable, less allowance for
doubtful accounts of $150 and $100
U.S. Government 12,738 8,100
Other 3,086 8,045
Costs and estimated profits in excess of
billings on incomplete contracts 5,648 9,619
Inventory 1,489 1,531
Deferred taxes 126 -
Other current assets 428 360
Total current assets 55,151 85,668
Property, plant and equipment, net 16,595 17,358
Restricted cash 2,990 2,538
Deferred pension asset 30,823 30,758
Insurance receivable 26,798 26,102
Other long-term assets 1,323 1,266
Deferred taxes - 1,210
Total assets $133,680 $164,900
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 9,156 $ 18,847
Accrued payroll and related liabilities 2,438 1,348
Billings in excess of costs and estimated
profits on incomplete contracts 2,864 1,633
Deferred taxes - 391
Taxes payable other than income taxes 1,397 922
Income taxes payable 1,917 1,654
Total current liabilities 17,772 24,795
Environmental and other reserves 28,467 27,730
Accrued post retirement health benefits 17,404 18,187
Deferred taxes 2,646 -
Other non-current liabilities 1,394 1,107
Total liabilities 67,683 71,819
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at March 31, 2002 and April 1, 2001,
and outstanding 5,283,222 at March 31, 2002
and 9,362,680 at April 1, 2001 120 120
Paid-in capital 38,295 38,186
Retained earnings 74,463 67,445
Accumulated other comprehensive income 922 1,271
Treasury stock (47,803) (13,526)
Notes receivable from officers for common stock - (415)
Total stockholders' equity 65,997 93,081
Total liabilities and stockholders' equity $133,680 $164,900
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31, 2002, April 1, 2001, and April 2, 2000
(in thousands, except per share amounts)
2002 2001 2000
Revenues $121,945 $116,545 $123,851
Operating Expenses:
Cost of revenues 84,787 77,411 86,058
Administrative and
manufacturing overhead 30,721 27,801 27,532
Provision for environmental
and other reserves - 1,501 5,569
Other - insurance settlements (465) (2,118) (918)
Subtotal 115,043 104,595 118,241
Operating income 6,902 11,950 5,610
Investment and other income 1,816 3,889 3,077
Gain on sale of securities 2,216 713 136
Income before income tax expense 10,934 16,552 8,823
Income tax (expense) benefit (3,916) 175 (691)
Net income $ 7,018 $ 16,727 $ 8,132
Net income per Common Share:
Basic $ 1.05 $ 1.74 $ 0.83
Diluted $ 1.03 $ 1.73 $ 0.82
Weighted Average Shares Outstanding
Basic 6,677 9,587 9,765
Diluted 6,827 9,676 9,861
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 2002, April 1, 2001, and April 2, 2000
(in thousands of dollars)
2002 2001 2000
OPERATING ACTIVITIES:
Net income $ 7,018 $16,727 $ 8,132
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 3,020 3,017 3,237
Environmental and other reserves 737 633 4,887
Deferred pension asset (65) (3,276) (2,700)
Post retirement health benefits (783) (1,395) (1,110)
Deferred income taxes 3,339 (819) -
Decrease (increase) in operating assets:
Costs and estimated profits in excess of
billings on incomplete contracts 3,971 2,917 (9,717)
Inventory 42 322 417
Accounts receivable 321 (3,146) 20,349
Insurance receivable (696) (15,447) 657
Other (net) 6 358 122
Increase (decrease) in operating liabilities:
Accounts payable and accruals (9,691) 11,511 (2,651)
Accrued payroll and related liabilities 1,377 (2,397) 1,045
Billings in excess of costs and estimated
profits on incomplete contracts 1,231 (207) (2,583)
Income taxes payable 263 (76) (2,133)
Other (net) 475 (397) 139
Net cash provided by operating
activities 10,565 8,325 18,091
INVESTING ACTIVITIES:
Purchases of marketable securities (9,491) (16,836) (35,127)
Sales of marketable securities 35,863 6,164 4,375
Maturities of marketable securities 5,550 14,465 6,298
Capital expenditures (2,171) (3,084) (1,567)
Other - (260) 63
Net cash provided by (used in) investing
activities 29,751 449 (25,958)
FINANCING ACTIVITIES:
Restricted cash (452) 5 4
Purchase of treasury stock (34,631) (2,511) (1,916)
Proceeds from exercise of stock options 246 120 -
Notes receivable from officers for common stock 415 - -
Net cash used in financing (34,422) (2,386) (1,912)
Net increase (decrease) in cash and cash
equivalents 5,894 6,388 (9,779)
Cash and cash equivalents at beginning of period 11,901 5,513 15,292
Cash and cash equivalents at end of period $ 17,795 $ 11,901 $ 5,513
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5 $ - $ 33
Income taxes 319 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 March 31, 2002, April 1, 2001, and April 2, 2000
(in thousands of dollars)
Accumulated
Other Notes
Common Paid-in Retained Comprehensive Treasury From Total
Stock Capital Earnings Income Stock Officers Equity
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
Purchase of
treasury stock - - - - (34,631) - (34,631)
Stock based
compensation - 217 - - - - 217
Proceeds from
exercise of
stock options - (108) - - 354 - 246
Notes receivable
from officers
for common stock - - - - - 415 415
Comprehensive
income:
Net income
for the year
ended
March 31, 2002 - - 7,018 - - - 7,018
Net change in
unrealized
gains (losses)
on available-
for-sale
securities,
(net, tax of $188) - - - (349) - - (349)
Total comprehensive
income 6,669
Balance at
March 31, 2002 $120 $38,295 $74,463 $ 922 $ (47,803) $ - $65,997
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 31, 2002, April 1, 2001, and April 2, 2000
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
2002, 2001 and 2000 included 52, 52, and 53 weeks, respectively. Certain
reclassifications of prior year amounts in the Consolidated Financial
Statements have been made to conform to the current year presentation,
including the recording of certain other reserves and the related insurance
receivable.
(B) Business - The Company's primary business is ship overhaul, 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 - 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) Revenue Recognition - 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 Remediation, Bodily Injury, Other Reserves, and Insurance
Receivable - 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. 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 are not discounted and exclude legal
costs to defend against claims of other parties. Insurance or other third
party recoveries for environmental liabilities are recorded separately at
undiscounted amounts in the financial statements as insurance receivables when
it is probable that a claim will be realized.
The Company accounts for bodily injury liabilities and other reserves 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. Civil actions relating
to toxic substances vary according to the case's fact patterns, jurisdiction
and other factors. Accordingly, any potential expenses for claims that may be
filed in the future related to alleged damages from past exposure to toxic
substances is not estimable and as such are not included in the Company's
reserves.
Accruals for bodily injury liabilities are adjusted periodically as new
information becomes available. Such accruals are included in the
environmental and other reserves at undiscounted amounts and exclude legal
costs to defend against claims of other parties. Insurance or other third
party recoveries for bodily injury liabilities are recorded undiscounted in
the financials statements as insurance receivables 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 - 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company has analyzed the impact of these statements and
does not expect the adoption of either will have an impact on its financial
statements.
In October 2001, the FASB, issued Statements of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
effective for fiscal years beginning after December 15, 2001, with transition
provisions for certain matters. The FASB's new rules on asset impairment
supersedes FASB Statement No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and provides a single
accounting model for long-lived assets to be disposed of. The Company is
currently analyzing the impact of this statement but does not expect the
adoption will have a material impact on its financial statements.
3. RESTRICTED CASH AND SURETY LINE
A surety company has issued contract bonds totaling $5.4 million for current
repair, maintenance and conversion jobs as of March 31, 2002. Todd Pacific's
trade accounts receivable on certain bonded jobs secure these various contract
bonds.
Included in Cash and Cash Equivalents is $0.2 million and $1.6 million as of
March 31, 2002 and April 1, 2001, 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.
4. 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
March 31, 2002
Debt securities
U.S. Treasury securities
and agency obligations $ 1,015 $ 6 $ - $ 1,021
U.S. corporate
securities 2,333 41 - 2,374
Mortgage-backed
securities 5,386 34 (26) 5,394
Total debt securities 8,734 81 (26) 8,789
Equity securities
U.S. securities 2,832 1,185 (1) 4,016
Foreign stock 856 203 (23) 1,036
Total equity securities 3,688 1,388 (24) 5,052
Total securities $12,422 $1,469 $ (50) $13,841
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
The Company had gross realized gains of $2.4 million, $1.4 million and $163
thousand on sales of available-for-sale securities for fiscal years 2002, 2001
and 2000 respectively.
The Company had gross realized losses of $0.2 million, $0.7 million and $27
thousand on sales of available-for-sale securities for fiscal year 2002, 2001
and 2000, 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
March 31, 2002
Available-for-sale debt:
Due in one year or less $ 1,334 $ 1,335
Due after one year through three years 2,014 2,060
Subtotal 3,348 3,395
Mortgage-backed securities 5,386 5,394
Equity securities 3,688 5,052
Total $ 12,422 $ 13,841
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
5. CONTRACTS
Auxiliary Oiler Explosive ("AOE") Contract
During the first quarter of fiscal year 2002, the Company was awarded a six-
year, sole source cost-type contract for phased maintenance repairs to four
Department of Navy AOE class supply ships. This contract represents the
fourth consecutive, multi-year contract that the Company has been awarded by
the Navy on the AOE class vessels. The notional value of this new contract is
expected to be approximately $180 million if all options are exercised. Work
on this contract is being performed primarily in the Company's Seattle
shipyard.
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 is being performed primarily in
the Company's Seattle shipyard.
Planned Incremental Availability ("PIA")
During the fourth quarter of fiscal year 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 if all options are exercised. Work on
this contract is currently being performed at the Puget Sound Naval Shipyard,
located in Bremerton, Washington.
Preservation Contract (the "MV Yakima")
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.
During the fourth quarter of fiscal year 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 were
recognized in fiscal year 2001 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. 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, at the time of vessel delivery, an agreement had not
reached between the Company and the owner regarding the potential increase in
the contract price 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. Subsequent to the end of fiscal year 2001, the Company was awarded
approximately $1.9 million, as well as interest and certain agreed expenses
from the arbitration board. The Company recognized the award in fiscal year
2001.
Unbilled Receivables - Certain unbilled items on completed contracts included
in accounts receivable were approximately $1.2 million at March 31, 2002 and
$6.8 million at April 1, 2001. The $5.6 million decrease in unbilled items on
completed contracts in fiscal year 2002 is primarily attributable to two
significant fiscal year 2001 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. These amounts totaling $5.8 million were recorded
in fiscal year 2001 as unbilled items and subsequently invoiced and collected
in fiscal year 2002.
Customers - Revenues from the U.S. Government were $96.1 million (79%), $74.5
million (64%), and $89.3 million (72%) in fiscal years 2002, 2001 and 2000,
respectively. Revenues from the Washington State Ferry System were $10.3
million (8%), $25.0 million (21%), and $18.4 million (15%) in fiscal year
2002, 2001 and 2000, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment and accumulated depreciation at March 31, 2002
and April 1, 2001 consisted of the following (in thousands):
2002 2001
Land $ 1,151 $ 1,151
Buildings 11,818 11,777
Piers, shipways and drydocks 23,401 23,108
Machinery and equipment 37,301 35,531
Total plant and equipment, at cost 73,671 71,567
Less accumulated depreciation (57,076) (54,209)
Plant, property and equipment, net $ 16,595 $ 17,358
The Company recognized $3.0 million, $3.0 million, and $3.2 million of
depreciation expense in fiscal years 2002, 2001 and 2000, respectively.
7. 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. The Retirement System plan assets consist principally of common
stocks and Government and corporate obligations. Plan assets at April 1,
2001, included 172,000 shares of the Company's stock valued at $7.00 per
share. During fiscal year 2002, all of these shares were tendered to the
Company under the Company's "Dutch Auction," therefore at March 31, 2002 the
Plan assets did not include any Company stock.
Under a provision of the Omnibus Budget Reform Act of 1990 ("OBRA `90") the
Company transferred approximately $1.6 million and $1.7 million in excess
pension assets from its Retirement System into a fund to pay fiscal year 2002
and 2001 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
2002 2001 2002 2001
Change in Benefit Obligation
(in thousands of dollars)
Benefit obligation at beginning of year $35,507 $36,385 $16,173 $13,751
Service cost 480 400 - -
Interest cost 2,284 2,395 1,046 904
Actuarial (gain)/loss (1,550) (663) - 3,228
Benefits paid (3,345) (3,010) (1,627) (1,710)
Benefit obligation at end of year $33,376 $35,507 $15,592 $16,173
Other
Postretirement
Pension Benefits Benefits
2002 2001 2002 2001
Change in Plan Assets
(in thousands of dollars)
Fair value of plan assets at beginning
of year $63,469 $69,243 $ - $ -
Actual gain (loss) on plan assets 2,262 (1,098) - -
Employer contribution - - 40 44
Asset transfer (1,587) (1,666) 1,587 1,666
Benefits paid (3,345) (3,010) (1,627) (1,710)
Fair value of plan assets at end of year $60,799 $63,469 $ - $ -
Other
Postretirement
Pension Benefits Benefits
2002 2001 2002 2001
Funded Status Reconciliation
(in thousands of dollars)
Funded status of plans $27,423 $27,962 $(15,592) $(16,173)
Unrecognized prior service cost 597 842 - -
Unrecognized (gain)/loss 2,803 1,954 (3,272) (3,406)
Deferred pension asset
(accrued liability) $30,823 $30,758 (18,864) (19,579)
Less: current portion included in
"Accounts payable and accruals" - - 1,460 1,392
Long-term accrued postretirement
health benefits - - $(17,404) $(18,187)
Other
Postretirement
Pension Benefits Benefits
2002 2001 2002 2001
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) (1) - - 10.00% 12.00%
(1) Postretirement benefit medical trend rate in fiscal year 2002 is 10.00%
graded to 6.00% over 4 years. Fiscal year 2001 is 12.00% graded to 6.00%
over 5 years.
Other
Postretirement
Pension Benefits Benefits
2002 2001 2000 2002 2001 2000
Components of Net Periodic
Benefit Cost
(in thousands of dollars)
Service Cost $ 480 $ 400 $ 237 $ - $ - $ -
Interest cost on
projected benefit
obligation 2,283 2,396 2,528 1,046 904 948
Expected return on
plan assets (4,660) (5,568) (4,737) - - -
Amortization of
transition obligation - (2,415) (2,415) - - -
Amortization of prior
service cost 245 245 245 - - -
Recognized actuarial
(gain)/loss - - - (174) (522) (607)
Net periodic (benefit)
cost before OBRA '90 (1,652) (4,942) (4,142) 872 382 341
Transfer of assets for
payment of retiree
medical benefits
(401(h) Plan) 1,587 1,666 1,442 (1,587) (1,666) (1,442)
Net periodic benefit $ (65) $(3,276) $(2,700) $(715) $(1,284) $(1,101)
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
2002 2001
Effect of a 1% Increase in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ 83 $ 86
Accumulated postretirement benefit obligation $ 1,176 $ 1,219
Effect of a 1% Decrease in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ (73) $ (76)
Accumulated postretirement benefit obligation $(1,050) $(1,087)
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 $2.6
million, $2.5 million and $2.8 million, for fiscal years 2002, 2001 and 2000,
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, 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 $0.1 million
and $38 thousand in fiscal years 2002 and 2001, respectively. The Company did
not incur expenses related to this plan in fiscal year 2000.
8. INCOME TAXES
Components of the income tax expense (benefit) are as follows (in thousands):
2002 2001 2000
Current tax expense $ 390 $ 1,329 $ 691
Deferred tax expense (benefit) 3,526 (1,504) -
Total income tax expense (benefit) $ 3,916 $ (175) $ 691
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate and is as follows (in thousands):
2002 2001 2000
Tax provision at
federal statutory tax rate $ 3,827 $ 5,793 $ 3,088
Decrease in valuation
allowance - (5,905) (2,529)
Other - net 89 (63) 132
Income tax expense (benefit) $ 3,916 $ (175) $ 691
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 March 31, 2002
and April 1, 2001 were as follows (in thousands):
2002 2001
Deferred income tax assets:
Alternative minimum tax credit
carryforwards $ 2,590 $ 2,863
Accrued employee benefits 7,465 7,298
Environmental and other reserves 9,964 9,706
Inventory reserves 98 98
Reserve for doubtful accounts 53 35
Other 487 527
Total deferred income tax assets 20,657 20,527
Deferred income tax liabilities:
Insurance receivable 9,379 5,556
Deferred pension income 10,788 10,766
Accelerated depreciation 1,943 2,174
Contract deferrals 362 351
Securities available-for-sale 497 685
Other 208 176
Total deferred income tax
liabilities 23,177 19,708
Net deferred tax asset (liability) $ (2,520) $ 819
During fiscal year 2002, the Company utilized approximately, $0.3 million in
alternative minimum tax credits. The Company has approximately $2.6 million
in remaining alternative minimum tax credit carryforwards that can be used in
the future and have no expiration date. During fiscal year 2001, the Company
fully utilized its remaining net operating loss and tax credit carryforwards.
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.
9. LEASES
Operating lease payments charged to expense were $0.9 million, $1.5 million
and $1.2 million for fiscal years 2002, 2001 and 2000, respectively. Certain
leases contain renewal options and minimum amounts of annual maintenance
clauses. Minimum lease commitments at March 31, 2002 are summarized below (in
thousands):
Operating
Leases
2003 $ 857
2004 815
2005 788
2006 783
2007 71
Thereafter 245
Total minimum lease commitments $ 3,559
10. FINANCING ARRANGEMENTS
During the first quarter of fiscal year 2002, Todd Pacific Shipyards
Corporation, a wholly owned subsidiary of the Company, negotiated a $10.0
million revolving credit facility with interest at the prime rate. The credit
facility, which is renewable on a bi-annual basis, will provide the Todd
Pacific with greater flexibility in funding its operational cash flow needs.
Todd Pacific had no outstanding borrowings as of March 31, 2002. Todd Pacific
did not have a credit facility in place during fiscal year 2001 and therefore,
had no outstanding borrowings as of April 1, 2001.
11. 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
In the fourth quarter of fiscal year 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
exceeding the Company's current booked reserves of $17.7 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 recorded a non-current asset in the form of an insurance
receivable in accordance with its environmental accounting policies at the
time it entered into this agreement. 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 2005. The Company and the EPA are
currently negotiating the extent and methodology of the soil remediation.
During the third quarter of fiscal year 1997, 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. 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 current proposed method of disposal is in an
approved upland disposal site. The Company evaluated what it believed was
the financial impact of the EPA's actions and this resulted in a charge
against fiscal year 2000 earnings of $5.5 million. 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 anticipates that during fiscal year 2003 agreement will be reached
with the EPA on a remedial design that identifies the scope of remediation and
the method of sediment disposal. Pursuant to the current schedule,
remediation of the SSOU will begin in the third quarter of fiscal 2004.
Current environmental regulations limit the period of time during the year
that dredging may occur. Given these limits, the completion of dredging in
the SSOU will require several years to complete. The cost of the SSOU clean
up will remain significantly uncertain until agreement has been reached with
the EPA during fiscal year 2003.
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. As of March 31, 2002, the Company believes that aggregate policy limits
are currently adequate to cover this potential impact.
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 $17.7 million at March 31, 2002.
Other Environmental Remediation 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 informed the Company 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. During fiscal year 2002 the Company entered into a Final
Consent Decree with the EPA to contribute an additional $0.4 million in final
settlement of its alleged liability on this site. The Company expects the
Final Consent Decree to be entered by the United States District Court during
fiscal year 2003 with payment due shortly thereafter.
Asbestos-Related Claims
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. At March 31, 2002, the Company had approximately
377 cases involving approximately 570 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 assesses claims as they are filed and developed, analyzing them in two
different categories based on severity of illness. Based on current fact
patterns, certain diseases including mesothelioma, lung cancer and fully
developed asbestosis are categorized by the Company as "malignant" claims.
All others of a less medically serious nature are categorized as "non-
malignant". The Company is currently defending approximately 35 "malignant"
claims and approximately 535 "non-malignant" claims. The Company and its
insurers are vigorously defending these actions. See Item 3. Legal
Proceedings for additional claim information.
The Company has entered into agreements with several of its insurers to
provide coverage for a significant portion of settlements and awards related
to these bodily injury claims. These agreements have aggregate limits on
amounts to be paid overall and formulas for determining amounts of payment on
individual claims. The two most significant agreements provide coverage
applicable to claims of exposure to asbestos occurring between 1949 and 1976
and occurring between 1976 through 1987. Insurance coverage for exposures to
asbestos was no longer available from the insurance industry after 1987. Due
to changes in federal regulations in the 1970s which resulted in the swift
decline in commercial and military application of asbestos and increased
regulation over the handling and removal of asbestos, there exists minimal
risk of claims arising from exposure post 1987. Contractual formulas are
utilized to determine the amount of coverage from each agreement on each claim
settled or litigated. Once the initial date of alleged exposure to asbestos
is determined, all contractual years subsequent to that date participate in
the settlement. Since all known claims involve alleged exposure prior to
1976, the 1976 through 1987 Agreement will participate in the settlement or
judgement of all outstanding claims that are settled or litigated. As a
result, and as the years remaining calculation set forth below indicates, the
1976 through 1987 agreement will exhaust prior to the 1949 through 1976
agreement. Based on historical claims settlement data only, the Company
projects that at March 31, 2002, the 1949 through 1976 agreement will provide
coverage for an additional 20.6 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.2 years. At April 1, 2001, the Company
projected that these agreements would provide coverage for an additional 23.7
years and 8.0 years, respectively. The increased declination of estimated
coverage experienced from fiscal year 2001 to fiscal year 2002 was due to
increased settlement activity on malignant cases including six cases that had
been in inventory dating back as far as 1993. The Company resolved 20
malignant claims in 2002 compared with 16 in 2001 and 11 in 2000. If
historical settlement patterns or the rate of filing for new cases change in
future periods, these estimated coverage periods could be shorter or longer
than anticipated. Moreover, if one or both of these coverages are exhausted
at some future date, the Company's share of responsibility will increase for
any subsequent claims' expense previously covered by these insurance
agreements. At March 31, 2002, the Company has recorded a bodily injury
liability reserve of $9.4 million and a bodily injury insurance receivable
asset of $7.1 million. At April 1,2001, the Company had recorded a bodily
injury liability reserve of $10.6 million and a bodily injury insurance
receivable of $7.8 million. These bodily injury liabilities and receivables
are classified within the Company's Consolidated Balance Sheets as
environmental and other reserves, and insurance receivables, respectively.
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, there
can be no assurance that the current reserves will be adequate to cover the
costs of resolving existing cases. Additionally, the Company cannot predict
the eventual number of cases to be filed against it or their eventual
resolution and does not include in its reserve amounts for cases that may be
filed in the future. However, it is probable that if future cases are filed
against the Company it will result in additional costs arising either from its
share of costs under current insurance in place arrangements or due to the
exhaustion of such coverage. The Company reviews the adequacy of existing
reserves periodically based upon developments affecting these claims,
including new filings and resolutions, and makes adjustments to the reserve
and related insurance receivable as appropriate.
As the Company is not able to estimate its potential ultimate exposure for
filed and unfiled claims against the Company, it cannot predict whether the
ultimate resolution of the bodily injury cases will have a material effect on
the Company's results of operations or stockholders' equity.
The Company has recorded $0, $1.5 million and $5.6 million in charges against
earnings in fiscal years 2002, 2001, and 2000, respectively relating to
additional reserves for environmental and bodily injury matters. These
charges are classified in the Company's Consolidated Statements of Income as a
Provision for environmental and other reserves. The Company's remediation
costs and bodily injury claims paid are charged against the reserves recorded
when paid. In certain cases, amounts paid by the Company are reimbursable
under its existing contractual arrangements with several insurance companies.
These reimbursements are recorded against the environmental insurance asset
when collected. In other cases, the Company manages work conducted by third
party vendors and submits invoices to its insurance companies for
reimbursement on behalf of the third party vendor. In these cases, the
insurance companies reimburse the third party vendor directly. These expenses
and payments associated with third party vendors are taken into consideration
when estimating the Company's environmental and bodily injury liabilities and
amounts available for reimbursement under its contractual arrangements. In
addition to providing coverage for assessments or settlements of claims, the
agreements also provide for costs of defending and processing such claims.
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 $0.5 million,
$2.1 million and $0.9 million in fiscal years 2002, 2001 and 2000,
respectively. These settlements are classified in the Company's Consolidated
Statements of Income as Other - insurance settlements.
The Company has provided total aggregate reserves of $28.5 million as of March
31, 2002 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.
The Company has various insurance policies and agreements that provide
coverage on the costs to remediate environmental sites and for the defense and
settlement of bodily injury cases. These policies and agreements are
primarily with two insurance companies. Based upon the current credit rating
of both of these companies, the Company anticipates that both parties will be
able to perform under the policy or agreement. As of March 31, 2002, the
Company has recorded an insurance receivable asset of $26.8 million to reflect
contractual arrangements with several insurance companies to share costs for
certain environmental matters.
12. 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.
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 review 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.
13. 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. Discussions with the unions for a
new collective bargaining agreement began on June 11, 2002. Management
considers its relations with the various unions to be stable.
14. TREASURY STOCK
During the first quarter of fiscal year 2002, the Company announced a tender
offer for up to 4.0 million shares of the Company's Common Stock at a price of
not in excess of $8.25 or less than $7.00 per share. The exact price was
determined by a procedure commonly referred to as a "Dutch Auction." This
offer to repurchase up to 4.0 million shares from existing stockholders was
approximately 42.7% of the total number of shares outstanding at that time.
Following verification of the tenders and receipt of shares tendered subject
to guarantees of delivery, an aggregate of 4,136,124 shares were validly
tendered at a price of $8.25 per share. The Company elected to increase the
number of shares to be purchased in order to avoid proration procedures
otherwise applicable to the offer, resulting in an aggregate purchase price of
$34.1 million. The Company incurred expenses in connection with this offer of
approximately $0.5 million. The Company utilized available cash and proceeds
from available-for-sale securities to fund the share repurchases completed
through the offer.
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 following table summarizes the total number of common shares outstanding,
held in treasury and issued by the Company during the past three fiscal years.
Total Shares of Common Stock
Held in
Outstanding Treasury Issued
As of March 28, 1999 9,910,180 2,045,853 11,956,033
Shares Repurchased (293,700) 293,700 -
Options Exercised 85,000 (85,000) -
As of April 2, 2000 9,701,480 2,254,553 11,956,033
Shares Repurchased (358,800) 358,800 -
Options Exercised 20,000 (20,000) -
As of April 1, 2001 9,362,680 2,593,353 11,956,033
Shares Repurchased
through Dutch Auction (4,136,124) 4,136,124 -
Options Exercised 56,666 (56,666) -
As of March 31, 2002 5,283,222 6,672,811 11,956,033
15. INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
March 31, April 1, April 2,
2002 2001 2000
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted net
income per share:
Net income $ 7,018 $ 16,727 $ 8,132
Denominator:
Denominator for basic net income per
share - weighted average
common shares outstanding 6,677 9,587 9,765
Effect of dilutive securities
Stock options based
on the treasury stock method using
average market price 150 89 96
Denominator for diluted net income per share 6,827 9,676 9,861
Basic income per share $ 1.05 $ 1.74 $ 0.83
Diluted income per share $ 1.03 $ 1.73 $ 0.82
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 March 31, 2002.
A summary of stock option transactions for the years ended March 31,2002,
April 1, 2001 and April 2, 2000 is as follows:
Number Option Price Weighted Average
of Shares Per Share Exercise Price
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
Exercised (116,666) 4.25 to 6.00 4.61
Outstanding, March 31, 2002 508,334 4.25 to 7.94 6.33
Exercisable, March 31, 2002 245,001 $4.25 to $7.94 $6.00
As described in Note 1, the Company accounts for stock-based compensation to
its employees and directors using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for awards.
Generally, no compensation expense has been recognized for such awards because
the fair value of the underlying common stock equals the exercise price of the
stock options granted. The outstanding stock options have a contractually
weighted-average life of 6.0 years as of March 31, 2002.
If compensation costs had been recognized based on the fair value of the grant
for options awarded under the Plan, the fair value would have been calculated
using a Black-Scholes option pricing model with the following weighted-average
assumptions on the option grant date:
Employee Stock Option
Year Ended
2001 2000
Expected life (years) 4 4
Expected volatility 38% 38%
Risk-free interest rate 6% 6%
Expected dividend yield 0% 0%
The weighted average fair value of options granted during 2001 and 2000 was
$2.55 and $1.81, respectively. No options were granted during fiscal year
2002.
Under SFAS 123, if the Company had elected to recognize the compensation cost
based on the fair value of the options granted at the grant date, net income
would have decreased as follows (the estimated fair value of the options is
amortized to expense over the options' vesting period):
(in thousands, Year Ended
except per share data) 2002 2001 2000
Net income:
As reported $ 7,018 $ 16,727 $ 8,132
Pro forma 6,790 16,663 8,109
Net income per share:
Basic
As reported $ 1.05 $ 1.74 $ 0.83
Pro forma 1.02 1.74 0.83
Diluted
As reported $ 1.03 $ 1.73 $ 0.82
Pro forma 0.99 1.72 0.82
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended March 31, 2002 and
April 1, 2001 are as follows. Each quarter is 13 weeks in length.
(in thousands):
Net
Operating Income per
income Net Diluted
Revenues (loss) income Share
1st Qtr 2002 $ 31,242 $ 1,868 $ 1,802 $ 0.19
2nd Qtr 2002 31,017 2,167 2,971 0.43
3rd Qtr 2002 30,556 1,360 1,124 0.21
4th Qtr 2002 29,130 1,507 1,121 0.21
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(1) 29,974 7,752 9,385 0.99
(1) 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, and reversal of $5.9 million valuation
allowance on deferred tax assets.
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending March 31, 2002, April 1, 2001 and April 2, 2000
(in thousands)
Reserves deducted from assets to which they apply - Allowance for doubtful
accounts:
Year Ended
March 31, April 1, April 2,
2002 2001 2000
Balance at beginning of period $ 100 $ 100 $ 184
Charged to costs and expenses 13 81 52
(Deductions) recoveries
from reserves (1) 37 (81) (136)
Balance at close of period $ 150 $ 100 $ 100
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 2002 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
None
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 March 31, 2002
and April 1, 2001 ........................................... *
Consolidated Statements of Income
For the years ended March 31, 2002,
April 1, 2001 and April 2, 2000. ............................. *
Consolidated Statements of Cash Flows
For the years ended March 31, 2002,
April 1, 2001 and April 2, 2000. ............................. *
Consolidated Statements of Stockholders' Equity
For the years ended March 31, 2002,
April 1, 2001 and April 2, 2000. ............................. *
Notes to Consolidated Financial Statements
For the years ended March 31, 2002,
April 1, 2001 and April 2, 2000. ............................. *
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.
10-6 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 14, 2002
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 14, 2002 June 14, 2002
/s/ Patrick W.E. Hodgson /s/ Joseph D. Lehrer
Patrick W.E. Hodgson, Joseph D. Lehrer, Director
Chairman, and Director June 14, 2002
June 14, 2002
/s/ Philip N. Robinson /s/ John D. Weil
Philip N. Robinson, Director John D. Weil, Director
June 14, 2002 June 14, 2002
/s/ Stephen G. Welch
Stephen G. Welch
President,
Chief Executive Officer,
and Director
June 14, 2002