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 30, 2003
[ ] 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [ ] Yes [X] No
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $60.4 million as of June 6, 2003.
There were 5,288,656 shares of the corporation's $.01 par value common stock
outstanding at June 6, 2003.
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 12, 2003 are
incorporated by reference into Part III of the Annual Report on Form 10-K.
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 and Related Stockholders Matters...... *
Item 13. Certain Relationships and Related Transactions....... *
Item 14. Controls and Procedures *
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................. *
Signatures.....................................................*
Certifications................................................ *
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
General
Todd Shipyards Corporation (the "Company") was organized in 1916 and has
operated a shipyard in Seattle, Washington (the "Shipyard") since
incorporation. The Company is incorporated under the laws of the State of
Delaware and 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. The Company's general offices are
located at 1801 16th Avenue S.W., Seattle, Washington 98134, and its telephone
number is (206) 623-1635. Information about the Company is available to the
public on the internet at www.toddpacific.com.
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 contracting
opportunities, the Company entered into several new construction projects
beginning in the mid 1990's. These new construction opportunities represented
the Company's first new construction projects in 10 years.
As the Company neared completion on these new construction projects in fiscal
year 2000, the Company shifted its main business focus to repair, maintenance
and overhaul opportunities. This strategy resulted in the award of two major
five year cost-type contracts for phased maintenance work on three Navy
aircraft carriers and six Navy surface combatant class vessels stationed in
the Puget Sound area.
The maintenance work performed on the Navy aircraft carriers, which began
during the first quarter of fiscal year 2000 is referred to as the Planned
Incremental Availability ("PIA") contract. The maintenance work performed on
the Navy surface combatant vessels is referred to as the Combatant Maintenance
Team ("CMT") contract. Work on the CMT contract began in the second quarter
of fiscal year 2001.
In addition to these two long-term multi-ship contracts, the Company
negotiated with the Navy during the first quarter of the prior fiscal year for
the renewal of the existing Auxiliary Oiler Explosive ("AOE") contract on a
sole source basis for an additional six years. This contract represents the
fourth consecutive, multi-year contract that the Company has been awarded by
the Navy on the AOE class vessels. The three previous AOE 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 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
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 a variety of 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, tugs and barges. While the Company may selectively pursue new
construction opportunities in the future, its primary focus will remain on
repair, maintenance and conversion activities.
Available Information
The Company will make available its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act free of charge through the Company's internet website at
www.toddpacific.com as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the Securities
and Exchange Commission.
OPERATIONS OVERVIEW
Repair and Overhaul Operations
The Company's repair and overhaul work ranges from relatively minor repairs to
major overhauls and often involves the dry-docking of the vessel under repair.
Since the late 1980's, repair and overhaul 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 or time and material basis.
The majority of the Company's Government ship repair and overhaul contracts
are awarded on an option basis under one of the Company's three cost-type
contracts with the Navy. These contracts provide for reimbursement of costs,
to the extent allocable and allowable under applicable government regulations,
and payment of an incentive or award fee based on the Company's performance
with respect to certain pre-established criteria. 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 ship 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. Because of these requirements
the Company is bonded for certain projects in the amount of $11.5 million at
March 30, 2003.
Construction Operations
During the third quarter of fiscal year 2003, the Company began work on a $5.2
million new construction project destined for the City of Tacoma, Washington.
The contract called for the Company to build two large steel structures, which
will be used to assemble a portion of the support structure for the new Tacoma
Narrows Bridge. The first structure was delivered in March 2003 and the
second was delivered in April 2003.
Prior to the Tacoma Narrows project, the Company's last major new construction
project was completed during the first quarter of fiscal year 2000, with the
delivery of the Margarita II, a floating electrical power plant.
While the Company may selectively pursue new construction opportunities in the
future, its primary focus will remain on repair, maintenance and overhaul
business opportunities.
Distribution of Work
The approximate distribution of the Company's Shipyard revenues for each of
the last three fiscal years are summarized as follows:
2003 2002 2001
Federal Government 82% 79% 64%
Commercial 18% 21% 36%
Total 100% 100% 100%
The distribution of the Company's revenues in fiscal year 2003 continued to be
strongly influenced by the amount of repair, maintenance and overhaul work
awarded under each of its three Navy cost-type contracts. As a result, work
on federal government contracts increased to 82% of total revenues from 79% in
fiscal year 2002.
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.
Future Operations
The Company plans to continue to actively pursue Government and commercial
repair, maintenance and overhaul 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 overhaul 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 1,000 during fiscal year 2003 and totaled 880 employees
on March 30, 2003.
During fiscal year 2003 an average of approximately 840 of the Company's
Shipyard employees were covered by a union contract that became effective
during the third quarter of fiscal year 2003. At March 30, 2003 approximately
700 Company employees were covered under this contract.
During the third quarter of fiscal year 2003, the Puget Sound Metal Trades
Council (the bargaining umbrella for all unions at Todd Pacific Shipyards) and
Todd Pacific Shipyards reached an agreement on a new collective bargaining
agreement. The Todd Pacific Shipyards eligible workforce ratified the
agreement on October 22, 2002. The parties had been operating under an
extension of the old agreement, which expired on July 31, 2002. The new
three-year agreement, which is effective retroactively to August 1, 2002,
includes an annual 3.5% wage and fringe benefit increase. 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 plates and shapes, pipe and fittings, paint and electrical cable and
associated 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
various materials that are available 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 repair, maintenance and overhaul
work include non-union shipyards, shipyards with excess capacity and foreign
government subsidized facilities. The Company's competitors for new
construction work include Gulf Coast and East Coast shipyards 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 $35.1 million as of March 30, 2003 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 30, 2003, the Company has recorded an insurance receivable of
$32.4 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 30, 2003 the Company's backlog consists of approximately $22 million
of repair, maintenance, and conversion work. This compares with backlogs of
approximately $46 million and $30 million at March 31, 2002 and April 1, 2001,
respectively. The Company's current backlog is primarily attributable to firm
repair, maintenance and conversion work scheduled for completion during fiscal
year 2004.
In the fourth quarter of fiscal year 2003, several planned Navy repair
projects were delayed due to the conflicts in Iraq. These delays contributed
to the decline in firm backlog orders at March 30, 2003, when compared to the
prior fiscal years. These delayed repair projects are anticipated to start in
the second quarter of fiscal year 2004.
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 exercised by the Navy.
INVESTMENTS AND ACQUISITIONS
The Company may evaluate suitable investment opportunities that it believes
will appropriately utilize the Company's resources. However, the Company has
no present plans to make any direct investments in other businesses, either
related or unrelated to ship repair and overhaul activities.
ITEM 2. PROPERTIES
The Company is required to maintain Navy certification on its drydocks and
cranes in order to be eligible to bid on and perform work under certain Navy
and United States Coast Guard ("Coast Guard") contracts. Throughout fiscal
year 2003, the Company maintained all required certifications.
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 9/30/04
The Company evaluates its plans for future operations for each of its leased
dry docks when the lease expiration date falls within the next operating
cycle. Accordingly, the Company will begin evaluating its plans for renewal
of the YFD-54 lease during the third and fourth quarter of fiscal year 2004.
The lease terms on drydock YFD-70 contain a nominal annual lease payment and a
minimum amount of annual maintenance that the Company must perform. The lease
also includes minimum levels of maintenance that the Company must perform
during the life of the lease. The lease terms on drydock YFD-54 include both
an annual lease payment and a 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
(Item 8).
The Company's current Navy drydock certifications are less than the drydocks'
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 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 certain owned and leased machinery and
equipment.
Towards the end of fiscal year 2001, the Company determined that such
serviceability repairs would be required on the Emerald Sea to maintain Navy
certification on a long-term basis. Certain time sensitive repairs began
early in fiscal year 2002, while the Company evaluated several alternative
repair scenarios and management's plans for future operations.
Once the Company completed its evaluation in fiscal year 2002, a
comprehensive, multi-year refurbishment plan was approved by management that
will allow the Company to maintain Navy certification into the future. This
multi-year plan includes scheduled refurbishment periods so repairs do not
interfere with the on-going shipyard operations. The Company anticipates that
capitalized costs associated with this plan will be approximately $1.8 million
in fiscal year 2004. The Company will continue to assess this refurbishment
plan as it progresses and make appropriate changes as needed to support
Shipyard operations.
Subsequent to fiscal year 2003, the Company announced a special capital budget
plan of approximately $13 million for improvements to its Seattle shipyard
facility during its fiscal years 2004 and 2005. These improvements include
the replacement of a major pier, a stormwater collection and discharge system
and significant upgrades to its electrical system and will be in addition to
the Company's routine annual capital expenditures.
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 two Superfund sites. In fiscal year 2003, the Company
satisfied its liability at one Superfund site. Additionally, the Company 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 30, 2003, the Company maintained aggregate reserves of $35.1 million
for pending claims and assessments relating to environmental matters,
including $24.8 million associated with the Harbor Island Superfund Site (the
"Harbor Island Site") and $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 30, 2003, such receivables aggregated $32.4 million.
Reference is made to Note 11 of the Notes to the Consolidated Financial
Statements (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 (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 $24.8 million.
Additionally, the Company has entered into a 15-year agreement for coverage of
any new environmental conditions discovered at the Seattle shipyard property
that would require environmental remediation.
The Company funded this insurance premium from 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 2006. 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. 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.
During the fourth quarter of fiscal year 2003, the company and the EPA entered
into a Consent Decree for the cleanup of the SSOU, which, along with the
associated Remedial Design Statement of Work for Remedial Action ("SOW"), was
subsequently approved by the Department of Justice. The Consent Decree
provides for the submittal of the Remedial Action Work Plan to the EPA
subsequent to the approval by the EPA of the final design. The Remedial
Action Work Plan will provide for construction and implementation of the
remedy set forth in the ROD, the two Explanation of Significant Differences
(issued in fiscal years 2000 and 2003), the SOW, and the design plans and
specifications developed in accordance with the Remedial Action Work Plan and
approved by the EPA. During the fourth quarter of fiscal year 2003 the
Company submitted its 95% SOW to the EPA for the SSOU. The SOW provides for
the following actions to take place at the SSOU:
Piers 2 and 4 South (located on the Duwamish Waterway) will be
demolished and removed from the site to achieve more complete cleanup in
those areas. Pier 4 South will be rebuilt after remediation with a
shortened berth length.
Dredging of all contaminated sediments and shipyard waste in the open
areas of the SSOU (surrounding the shipyard) and in the areas beneath
Piers 2 and 4 South. The total estimated volume of sediments to be
removed is 195,200 cubic yards.
Disposal of all recovered sediment and shipyard waste at an appropriate
upland disposal facility.
Backfilling of portions of the areas dredged to create inter-tidal
habitat where feasible.
Capping of areas beneath the piers that are not scheduled for demolition
to an average thickness of one foot.
Pursuant to the current schedule, remediation of the SSOU is expected to begin
in the second 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
current estimated cost of the SSOU cleanup is included in the environmental
reserve resulting in an increase in that reserve of $6.1 million during fiscal
year 2003. $5.7 million of that reserve is covered by the environmental
insurance policy procured by the Company in fiscal year 2000 and has been
recorded as an insurance receivable. The net difference of $0.4 million
represents a portion of the $0.6 million environmental remediation expense
recorded by the Company during the quarter ending March 30, 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.
Under the Federal Superfund law, potentially responsible parties may have
liability for damages to natural resources in addition to liability for
remediation. During the second quarter of fiscal year 2003, the Company began
discussions with the natural resource trustees ("Trustees") for the Harbor
Island Superfund Site ("Site") and continued these discussions during the
remainder of fiscal year 2003. The Company anticipates that the Trustees will
file a claim against the Company at some future date alleging damages to the
natural resources at the Site caused by the release of hazardous substances.
The best estimate of a potential natural resource damage claim has been
included in the environmental reserve. The payment of any eventual claim is
covered by the aforementioned insurance policy, except for the policy
deductible, provided that aggregate policy limits have not been exceeded. The
amount of the policy deductible payment is reflected in the Company's
environmental reserve at March 30, 2003, and $0.2 million is included in
environmental remediation expense in the quarter ending March 30, 2003.
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.
The cases generally include as defendants, in addition to the Company, other
ship builders and repairers, ship owners, asbestos manufacturers, distributors
and installers, and equipment manufacturers and arise from injuries or
illnesses allegedly caused by exposure to asbestos or other toxic substances.
The Company assesses claims as they are filed and as the cases develop,
dividing them into 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 other claims of a less medically serious nature are
categorized as "non-malignant". The Company is currently defending
approximately 36 "malignant" claims and approximately 534 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 375 cases open as of March 30, 2003 are
approximately 570 claimants. The exact number of claimants is not
determinable as approximately 150 of the open cases include multiple claimant
filings against 30-100 defendants. The filings do not indicate which
claimants allege liability against the Company. The previously stated 570
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 365 claimants do not assert any specific amount of relief
sought.
Approximately 150 claims contain standard boilerplate language asserting on
behalf of each claimant a claim for damages of $2 million compensatory and $20
million punitive against approximately 100 defendants. Approximately 20
claims set forth the same boilerplate language asserting $10-$20 million in
compensatory and $10-$20 million in punitive damages on behalf of each
claimant against approximately 30-100 defendants. Approximately 20 cases
assert $1-$15 million in compensatory and $5-$10 million in punitive damages
on behalf of each claimant against approximately 30-100 defendants.
Approximately 10 claimants seek compensatory damages of less than $100,000 per
claim and approximately 5 claimants seek compensatory damages between $1
million and $15 million. The claims involved in the foregoing cases do not
specify against which defendants which claims are made or alleged dates of
exposure.
Based upon settled or concluded claims to date, the Company has not identified
any correlation between the amount of the relief sought in the complaint and
the final value of the claim. The Company and its insurers are vigorously
defending these actions.
During fiscal year 2003, the Company experienced no material changes in its
bodily injury liabilities and insurance receivables. At both March 30, 2003
and March 31, 2002, respectively, the Company had recorded bodily injury
liability reserves of $9.4 million and bodily injury insurance receivables of
$7.1 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.
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 that 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 30, 2003, the 1949 through 1976 agreement will provide
coverage for an additional 20.4 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.2 years. At March 31, 2002, the Company
projected that these agreements would provide coverage for an additional 20.6
years and 5.2 years, respectively. The Company resolved 13 malignant claims in
2003 compared with 20 in 2002 and 16 in 2001. 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 costs related to subsequent claims and for legal expenses
previously covered by these insurance agreements may increase. 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 the number 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, 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
Claims filed 14 72 86
Claims resolved (13) (73) (86)
Outstanding, March 30, 2003 36 534 570
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.
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, by quarter, the high and low composite sales
prices of the stock as reported by the NYSE.
Quarter Ended High Low
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
June 30, 2002 17.12 11.10
September 29, 2002 15.20 11.45
December 29, 2002 15.85 11.65
March 30, 2003 14.43 12.70
On June 6, 2003 the high and low prices of the Company's common stock on the
NYSE were $15.01 and $14.50, respectively.
At June 6, 2003 there were 1,704 holders of record of 5,288,656 outstanding
shares of common stock. The Company has not paid cash dividends during the
past two fiscal years, however subsequent to fiscal year 2003 the Company
announced the declaration of a ten cents ($0.10) per share cash dividend to be
paid each quarter. The first dividend payment will commence on June 23, 2003
to shareholders of record as of June 2, 2003. Subsequent dividend payments
will be made each quarter, beginning September 23, 2003.
It is the intent of the Company to consider and act upon the payment of future
dividends on a regular quarterly basis. Future dividend declarations will
depend, among other factors, on the Company's earnings and prospects, its cash
position and investment needs.
During the first quarter of fiscal year 2002, the Company commenced a tender
offer for up to 4.0 million shares of the Company's Common Stock at a price
not to exceed $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. The tender offer
was completed in the second quarter of fiscal year 2002 (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 30, March 31, April 1, April 2, March 28,
2003 2002 2001 2000 1999
Operations:
Revenue $151,811 $121,945 $116,545(3) $123,851 $106,189(6)
Operating
income 5,098(1) 6,902 11,950(4) 5,610(5) 10,222
Net income 4,110(1) 7,018 16,727 8,132 17,394
Net income
per share of
common stock
Basic EPS 0.78 1.05 1.74 0.83 1.76
Diluted EPS 0.74 1.03 1.73 0.82 1.75
Financial position:
Working capital 42,525 37,129(2) 59,293 64,880 52,050
Fixed assets 16,634 16,595 17,358 17,356 19,026
Total assets 141,580 133,680(2) 164,900 139,209 136,514
Stockholders'
equity $ 69,534 $ 65,997(2) $ 93,081 $ 76,185 $ 71,088
(1) Operating income was impacted unfavorably by a non-recurring, non-cash
charge of $0.8 million arising from the settlement of a portion of the
Company's pension liabilities. This settlement transferred a portion of
the Company's pension liability to an international labor union
organization. Under the provisions of pension accounting, the settlement
of these liabilities triggered recognition of certain cumulative
differences between pension plan assumptions and actual results.
(2) In fiscal year 2002, 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.
(3) 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 allowed the Company to invoice and 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.
(4) 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.
(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.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Notes to the 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
contain 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
this Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended March 30, 2003, together with the Notes
to the Company's Consolidated Financial Statements for the fiscal year then
ended.
Overview
Fiscal year 2003 started very strongly as the Company had significant revenue
increases during the first six months of the year. These increases were
primarily attributable to the large concentration of repair, maintenance and
overhaul work awarded under each of the Company's three U.S. Navy phased
maintenance contracts. During the first half of fiscal year 2003, the Company
recorded $89.8 million, or 59% of its full year revenue. The Company's
financial results during this period were very favorable as the Company
recorded operating income and income before income tax expense of $6.0 million
and $6.6 million, respectively.
However, the financial results for the third and fourth quarters of this year
were very disappointing as revenues for the second half of the year fell to
$62.0 million, a decrease of 31% from the volumes experienced during the first
and second quarters. While the Company had anticipated the reduced business
volume and decline in revenues, it had not anticipated the significant decline
in profitability during the second half of the fiscal year. During this six
month period, the Company sustained an operating loss and a loss before income
tax expense of $0.9 million and $0.3 million, respectively.
Operating losses during the second half of fiscal year 2003, were the result
of four primary factors. First, the Company experienced higher direct costs
on two fixed priced projects that commenced and were completed in the third
quarter. The impact of these cost increases, which had no corresponding
revenue associated with them, reduced operating income by approximately $2.0
million. Second, the Company underestimated the total costs to complete a
fixed price project that commenced in the third quarter but was not completed
until April 2003. The estimating problem was not determined until the fourth
quarter. The impact of this estimating error reduced operating income by
approximately $1.7 million in the quarter ending March 30, 2003. Third, the
Company recognized in the third quarter a non-recurring, non-cash charge of
$0.8 million arising from the settlement of a portion of the Company's pension
liabilities. This settlement transferred a portion of the Company's pension
liability to an international labor union organization. Under the provisions
of pension accounting, the settlement of these liabilities triggered
recognition of certain cumulative differences between pension plan assumptions
and actual results. Fourth, the Company recognized $0.6 million in
environmental remediation expenses during the fourth quarter.
For the full year ended March 30, 2003, the Company recorded revenue of $151.8
million, which represents an increase of $29.9 million, or approximately 24%,
over fiscal year 2002 reported revenue of $121.9 million. This revenue
increase, as mentioned previously, is primarily attributable to the large
concentration of repair, maintenance and overhaul work under the Company's
three U.S. Navy phased maintenance contracts that occurred during the first
and second quarters of this year.
During fiscal year 2003, the Company recorded operating income of $5.1 million
on revenue of $151.8 million, or approximately 3% of revenue. This represents
a decrease in operating income of $1.8 million, or approximately 26% from
fiscal year 2002 operating income of $6.9 million. The decline in operating
income reported, as previously mentioned, was primarily attributable to higher
direct costs on two fixed priced projects, an error in estimating the costs to
complete a third fixed priced project, a non-cash charge arising from the
settlement of a portion of the Company's pension liabilities, and an
environmental remediation charge.
In addition, the Company recognized $1.2 million in non-operating investment
income for the year ended March 30, 2003. The investment income in addition
to the operating income reported, resulted in fiscal year 2003 income before
income tax expense of $6.3 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.
During the first quarter of fiscal year 2003, the Navy announced its intention
to decommission AOE 7 and AOE 10 for transfer to the Military Sealift Command
("MSC") in calendar years 2003 and 2004, respectively. The transfer of these
vessels to MSC will reduce the Company's future work under its current cost-
type contract with the Navy. The Company anticipates that MSC will contract
for future work on these vessels on a competitive, fixed-price basis.
The potential impact of this transfer on the Company's future AOE revenues
cannot be determined at this time, but will depend on factors such as the
realized reduction in AOE revenues upon transfer to MSC, the Company's ability
to bid on future AOE 7 and AOE 10 work once transferred, and the Company's
bidding success if such bids are submitted.
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,
by 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 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, 2) Environmental Remediation, Bodily Injury, Other
Reserves, and Insurance Receivable and 3) Deferred Pension Asset and Accrued
Post Retirement Health Benefits. This discussion and analysis should be read
in conjunction with the 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 at 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 management and
accounting personnel assigned to 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 future revenues either favorably or unfavorably.
U.S. Government procurement standards are followed to determine 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
Shipyards personnel, and are subject to audit by the Defense Contract Audit
Agency ("DCAA"). Other than normal cost accounting issues raised by the DCAA
as a result of their regular, ongoing reviews, the Company is not aware of any
outstanding issues with the DCAA.
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 30, 2003, the
Company maintained aggregate reserves of $35.1 million for pending claims and
assessments relating to these environmental matters, including $24.8 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 30, 2003, the
Company had recorded an insurance receivable of $32.4 million relating to
these environmental and bodily injury matters, including $24.7 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 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 areas, and
the impact of regulatory changes. Bodily injury liabilities are based on
judgments that include the number of outstanding claims, the expected outcome
of 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 damages that may be
alleged.
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.
Pension Asset and Accrued Post Retirement Health Benefits
The Company's employee pension and other post retirement benefit costs and
obligations are governed by Financial Accounting Standards No.87 and No. 106.
Under these rules, management determines appropriate assumptions about the
future, which are used by actuaries to estimate net costs and liabilities.
These assumptions include discount rates, health care cost trends, inflation
rates, long-term rates of return on plan assets, retirement rates, mortality
rates and other factors. Management bases these assumptions on historical
results, the current environment and reasonable expectations of future events.
Actual results that differ from the assumptions are accumulated and amortized
over future periods and, therefore, generally affect the recognized expense
and recorded obligation in such future periods. While management believes the
assumptions used are appropriate, significant differences in actual experience
or significant changes in assumptions would affect pension and other post
retirement benefits costs and obligations. See Note 7. To the Financial
Statements for more information regarding costs and assumptions for employee
pension and other post retirement benefits.
Business Volume and Backlog
At March 30, 2003 the Company's backlog consists of approximately $22 million
of repair, maintenance, and conversion work. This compares with backlogs of
approximately $46 million and $30 million at March 31, 2002 and April 1, 2001,
respectively. The Company's current backlog is primarily attributable to firm
repair, maintenance and conversion work scheduled for completion during fiscal
year 2004.
In the fourth quarter of fiscal year 2003, several planned Navy repair
projects were delayed due to the conflicts in Iraq. These delays contributed
to the decline in firm backlog orders at March 30, 2003, when compared to the
prior fiscal years. These delayed repair projects are anticipated to start in
the second quarter of fiscal year 2004.
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 exercised by the Navy.
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, work practices and estimating abilities. Other factors
that can contribute to future profitability include the amounts of annual
expenditures needed to ensure continuing serviceability 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, customer needs and the pursuit of new
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
2003 Compared with 2002
Net income for fiscal year 2003 decreased by $2.9 million, or 42% from fiscal
year 2002 levels. This decrease was primarily attributable to a decrease in
income before taxes of $4.6 million offset by a decrease in income taxes
payable of $1.7 million. Net income for fiscal year 2003 was influenced as a
result of the following components:
Revenues
The Company recorded revenue of $151.8 million during fiscal year 2003, which
represents an increase of $29.9 million, or approximately 24%, over fiscal
year 2002 reported revenue of $121.9 million. U.S. Navy phased maintenance
contracts accounted for approximately $16.0 million of this increase, while
increases in other commercial and government repair and overhaul activities,
and new construction activities accounted for $8.9 million and $4.9 million,
respectively.
Cost of Revenues
Cost of revenues for fiscal year 2003 increased by $24.6 million, or
approximately 29% from fiscal year 2002. The majority of this increase was
attributable to increases in work volumes experienced in fiscal year 2003 when
compared to fiscal year 2002. Cost of revenues as a percentage of revenues
was 72% and 70% for fiscal years 2003 and 2002, respectively. The increase in
cost of revenues as a percentage of revenue in fiscal year 2003 is primarily
attributable to higher direct costs on two fixed priced projects that
commenced and were completed in the third quarter, as well as underestimating
the direct costs to complete a third project that commenced later in the third
quarter but was not completed until April 2003. The impact of these cost
increases, which had no corresponding revenue, increased cost of revenues by
approximately $3.7 million.
Also contributing, but to a lesser extent, was a non-recurring, non-cash
charge of $0.8 million arising from the settlement of a portion of the
Company's pension liabilities. This settlement transferred a portion of the
Company's pension liability to an international labor union organization.
Under the provisions of pension accounting, the settlement of these
liabilities triggered recognition of certain cumulative differences between
pension plan assumptions and actual results.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead increased $6.1 million, or
approximately 20% from fiscal year 2002. This increase was attributable to an
overall increase in production volumes as well as planned maintenance expenses
and Company initiated process improvement costs. Administrative and
manufacturing overhead as a percentage of revenue was approximately 24% in
fiscal year 2003, which was consistent with the 25% rate experienced in the
prior fiscal year.
Provision for Environmental Reserves and Other
During fiscal year 2003, the Company estimated that the expected remediation
costs associated with the Company's operable units at the Harbor Island
Superfund Site would increase by approximately $9.1 million. This increase in
environmental reserves was offset by a $8.5 million increase in the Company's
insurance receivable. The net amount of $0.6 million is reflected in the
Company's operating results for fiscal year 2003 and is shown in the
Consolidated Statements of Income under Provision for environmental and other
reserves.
Also, in fiscal year 2003 the Company received partial reimbursement from
another Harbor Island potentially responsible party for certain past
environmental costs incurred by the Company. This partial reimbursement in
the amount of $0.1 million is reflected in other insurance settlements in the
Consolidated Statement of Income for the year ended March 30, 2003.
In fiscal year 2002, the Company estimated that the remediation costs
associated with its Harbor Island site would increase approximately $3.2
million. This amount was fully offset by a similar increase in the Company's
insurance receivable. The Company also received $0.5 million in
reimbursements from another potentially responsible party during fiscal year
2002.
Investment and Other Income
Investment and other income in fiscal year 2003 decreased by $0.6 million or
approximately 32% when compared to fiscal year 2002. The decrease in
investment and other income reported during fiscal year 2003 primarily
reflects the reduction in the average funds available for investment purposes
during the fiscal year, as well as lower investment yields generally available
in the market.
In fiscal year 2002, the Company's average funds available for investment
purposes were $44.8 million. In fiscal year 2003, the average funds available
for investment purposes declined $8.2 million, or 18%, to $36.6 million. This
decline reflects the results of the Company's Dutch Auction share repurchase
of 4.1 million shares of its common stock that occurred during the second
quarter of fiscal year 2002. This repurchase only affected a portion of the
average funds available for investment purposes in fiscal year 2002, but
affected the average funds available for the entire fiscal year 2003.
Gain on Sale of available-for-sale securities
During fiscal year 2003, the Company reported a net loss of $9 thousand on the
sale of available-for-sale securities, which is a decrease of $2.2 million, or
approximately 100% from fiscal year 2002. The significant decrease in gains
on the sale of available-for-sale securities reported in fiscal year 2003 is
primarily attributable to market conditions that were more favorable during
fiscal year 2002. .
Income Taxes
In fiscal year 2003, the Company recognized federal income tax expense of $2.2
million. This represents a decrease of $1.7 million, or approximately 43% in
federal tax expense when compared to fiscal year 2002. This decrease is
attributable to the decrease in income before taxes in fiscal year 2003. The
effective income tax rates recorded in fiscal years 2003 and 2002 remained
relatively unchanged at 35% and 36%, respectively. The statutory income tax
rates for fiscal years 2003 and 2002 were 34% and 35%, respectively.
Differences between effective rates and statutory rates reflect certain non-
deductible expenses in both years.
2002 Compared with 2001
Net income for fiscal year 2002 decreased by $9.7 million, or approximately
58% 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 the 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
represented 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 were 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.
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
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 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, non-recurring 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 a partial reimbursement from
another Harbor Island potentially responsible party for certain past
environmental costs incurred by the Company. This partial 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 more than 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 reflected 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 reflected 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, an effective income tax rate of 36%. This represented an increase of
$4.1 million in federal tax expense when compared to fiscal year 2001. The
Company's statutory rate in fiscal year 2002 was 35%. The difference between
the Company's effective rate and statutory rate is due to certain non-
deductible costs.
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.
Environmental Matters and Other Contingencies
The Company has provided total aggregate reserves of $35.1 million as of March
30, 2003 for its 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 of 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 30,
2003, the Company has recorded an insurance receivable of $32.4 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. 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 - Environmental
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 2003, the Company spent $0.5 million for environmental site
remediation. All of these costs are reimbursable to the Company through its
insurance coverages. An additional $1.3 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.
The Company spent approximately $0.2 million on environmental site remediation
in fiscal years 2002 and 2001, respectively. Of these amounts, approximately
$0.2 million and $0.1 million, respectively, were reimbursable to the Company
under the Company's insurance policies.
In addition to environmental site remediation costs, the Company spent a net
$25 thousand on bodily injury cases after reimbursement under the Company's
insurance policies in fiscal year 2003. In fiscal year 2002 and 2001, the
Company spent $0.5 million and $0.4 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. The Company
entered into a Consent Decree with the EPA during the fourth quarter of fiscal
year 2003. As a result the company has increased its Harbor Island Site
reserves by an additional $9.1 million.
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 $24.8 million.
Additionally, the Company has entered into a 15-year agreement for coverage of
any new environmental conditions discovered at the Seattle shipyard property
that would require environmental remediation.
The Company funded this insurance premium from 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.
Past Activities - Asbestos and 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.
The cases generally include as defendants, in addition to the Company, other
ship builders and repairers, ship owners, asbestos manufacturers, distributors
and installers, and equipment manufacturers and arise from injuries or
illnesses allegedly caused by exposure to asbestos or other toxic substances.
The Company assesses claims as they are filed and as the cases develop,
dividing them into 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 other claims of a less medically serious nature are
categorized as "non-malignant". The Company is currently defending
approximately 36 "malignant" claims and approximately 534 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 375 cases open as of March 30, 2003 are
approximately 570 claimants. The exact number of claimants is not
determinable as approximately 150 of the open cases include multiple claimant
filings against 30-100 defendants. The filings do not indicate which
claimants allege liability against the Company. The previously stated 570
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 365 claimants do not assert any specific amount of relief
sought.
Approximately 150 claims contain standard boilerplate language asserting on
behalf of each claimant a claim for damages of $2 million compensatory and $20
million punitive against approximately 100 defendants. Approximately 20
claims set forth the same boilerplate language asserting $10-$20 million in
compensatory and $10-$20 million in punitive damages on behalf of each
claimant against approximately 30-100 defendants. Approximately 20 cases
assert $1-$15 million in compensatory and $5-$10 million in punitive damages
on behalf of each claimant against approximately 30-100 defendants.
Approximately 10 claimants seek compensatory damages of less than $100,000 per
claim and approximately 5 claimants seek compensatory damages between $1
million and $15 million. The claims involved in the foregoing cases do not
specify against which defendants which claims are made or alleged dates of
exposure.
Based upon settled or concluded claims to date, the Company has not identified
any correlation between the amount of the relief sought in the complaint and
the final value of the claim. The Company and its insurers are vigorously
defending these actions.
During fiscal year 2003, the Company experienced no material changes in its
bodily injury liabilities and insurance receivables. At both March 30, 2003
and March 31, 2002, respectively, the Company had recorded bodily injury
liability reserves of $9.4 million and bodily injury insurance receivables of
$7.1 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.
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 that 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 30, 2003, the 1949 through 1976 agreement will provide
coverage for an additional 20.4 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.2 years. At March 31, 2002, the Company
projected that these agreements would provide coverage for an additional 20.6
years and 5.2 years, respectively. The Company resolved 13 malignant claims in
2003 compared with 20 in 2002 and 16 in 2001. 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 for legal expenses 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.
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.
Liquidity, Capital Resources and Working Capital
At March 30, 2003, the Company's cash and cash equivalents, and securities
available-for-sale balances were $9.1 million and $32.1 million, respectively,
for a total of $41.2 million. At March 31, 2002 the Company's cash and cash
equivalents, and securities available for sale balances were $17.6 million and
$13.8 million, respectively, for a total of $31.4 million.
The Company anticipates that its cash, cash equivalents and marketable
securities position, anticipated fiscal year 2004 cash flow, access to credit
facilities and capital markets, taken together, will provide sufficient
liquidity to fund operations for fiscal year 2004. Accordingly, shipyard
capital expenditures are expected to be financed from working capital. A
change in the composition or timing of projected work could cause planned
capital expenditures and repair and maintenance expenditures to change.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $13.1 million for the year ended
March 30, 2003. This amount was primarily attributable to fiscal year net
income adjusted for environmental and other reserves and accounts receivable,
offset by increases in insurance receivables.
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.
Investing Cash Flows
Net cash used in investing activities was $21.6 million for the year ended
March 30, 2003 and consisted primarily of purchases of marketable securities
and capital expenditures offset by sales and maturities of marketable
securities.
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.
Capital Expenditures
During fiscal year 2003, the Company spent approximately $2.8 million on new
capital assets. This represents an increase of approximately $0.6 million
from the $2.2 million spent in fiscal year 2002. The increase in fiscal year
2003 capital expenditures is primarily attributable to the design costs
associated with the replacement of one of the Company's existing piers.
Activities associated with the pier replacement project will continue into
fiscal year 2004 and are an integral part of the Company's special capital
budget that was announced subsequent to the end of fiscal year 2003. On April
15, 2003, the Company's Board of Directors announced a special capital budget
for its fiscal years 2004 and 2005 of approximately $13.0 million for
improvements to its Seattle shipyard facility. These improvements, which
include the replacement of the previously mentioned pier, a stormwater
collection and discharge system and significant upgrades to its electrical
system, will be in addition to the Company's routine annual capital
expenditures. The Company plans to finance these capital projects from its
projected future cash flows and existing working capital.
The capital expenditures for fiscal year 2003 are in addition to ongoing
repair and maintenance expenditures in the Shipyard of $5.4 million, $3.9
million, and $3.6 million in fiscal years 2003, 2002 and 2001, respectively.
The increase in fiscal year 2003 repair and maintenance costs when compared to
fiscal year 2002 are primarily attributable to the Company's multi-year
refurbishment plan of its owned dry dock.
Financing Activities
Net cash provided by financing activities for fiscal year 2003 was $14
thousand. This consisted primarily of a reduction in restricted cash and
proceeds from the exercise of stock options, offset by the purchase of
treasury stock.
Subsequent to the end of fiscal year 2003, the Company declared a dividend of
ten cents ($0.10) per share payable on June 23, 2003, to shareholders of
record as of June 2, 2003, and quarterly thereafter. The impact of this
dividend payment based on the current number of outstanding shares will be
approximately $0.5 million quarterly. The dividend is the first dividend
declared by the Company since emerging from bankruptcy reorganization in 1991.
Net cash used in financing activities for fiscal year 2002 was $33.1 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.
Credit Facility
In 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,
provides Todd Pacific with greater flexibility in funding its operational cash
flow needs. Certain Todd Pacific trade receivables, equipment and inventory
secure this revolving credit facility. Todd Pacific had no outstanding
borrowings as of March 30, 2003 and March 31, 2002, respectively
Commitments
The Company is subject to certain minimum operating lease payments on two of
its dry docks that are charged to expense. These operating leases contain
renewal options and minimum amounts of annual maintenance requirements. The
minimum lease commitments are summarized in Note 9 of the Notes to
Consolidated Financial Statements.
A surety company has issued contract bonds totaling $11.2 million for current
repair, maintenance and conversion jobs as of March 30, 2003. Todd Pacific's
trade accounts receivable on certain bonded jobs secure these various contract
bonds.
Stock Repurchase
During the third quarter of fiscal year 2003, the Board of Directors approved
the repurchase of up to 500,000 shares of the Company's common stock from time
to time in open market or negotiated transactions. Under this authorization,
the Company repurchased an aggregate of 19,500 shares during the balance of
fiscal year 2003 in open market transactions at an average price of $12.44 per
share for total consideration of $242,592.
Also during fiscal year 2003, 7,334 shares of treasury stock were reissued
pursuant to the exercise of stock options held by two officers of the Company.
6,684,977 shares were held as treasury stock as of March 30, 2003.
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 4.0
million shares that the Company offered to repurchase from existing
stockholders represented 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. In accordance with the terms of its
offer, 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. The
share repurchase had a favorable impact on net income per Common Share ("EPS")
in fiscal year 2002 by increasing Basic EPS by 30 cents ($0.30) per share and
Diluted EPS by 29 cents ($0.29) per share. 6,672,811 shares were held as
treasury stock as of March 31, 2002.
Labor Relations
During the third quarter of fiscal year 2003, the Puget Sound Metal Trades
Council (the bargaining umbrella for all unions at Todd Pacific Shipyards) and
Todd Pacific Shipyards reached an agreement on a new collective bargaining
agreement. Todd Pacific Shipyards' eligible workforce ratified the agreement
on October 22, 2002. The parties had been operating under an extension of the
old agreement, which expired on July 31, 2002. The new three-year agreement,
effective retroactively to August 1, 2002, includes an annual 3.5% wage and
fringe benefit increase. Management considers its relations with the various
unions to be stable.
Accounting Changes
Beginning in fiscal year 2003, the Company elected to apply the expense
recognition provisions of Financial Accounting Standards Board (FASB)
Statement No. 123 (FAS No. 123), "Accounting for Stock-Based Compensation."
The recognition provisions are applied prospectively to all employee awards
granted, modified or settled after March 31, 2002. Under the transition
provisions of FAS No. 123 and as amended by FAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure," no cumulative effect is
recorded for this accounting change. The Company has adopted FAS No. 123 as
it is designated as the preferred method of accounting for stock-based
compensation.
Previously, the Company had applied the disclosure only provisions of FAS No.
123 and accounted for stock-based compensation using the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25 (APB No.
25), "Accounting for Stock Issued to Employees" and related interpretations.
Under APB No. 25, 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. No stock-based employee compensation cost
is reflected in fiscal year 2002 and 2001, net income, as all options granted
under those plans had an exercise price equal to the market price of the
underlying common stock at the date of the grant.
During fiscal year 2003, the Company did not grant any new stock options and
therefore there is no expense recorded under FAS No. 123. Note 1, item (J) to
the Consolidated Financial Statements includes pro forma information as if the
expense recognition provisions of FAS No. 123 were applied to stock option
grants for all periods presented, based on the valuation of the option as of
the date of the grants.
Since the expense recognition provisions of FAS No. 123 apply to stock options
granted subsequent to March 31, 2002, the Company cannot presently determine
the financial impact that this change will have on its future results of
operations or financial condition.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("FAS No. 143), which is effective for fiscal years beginning
after June 15, 2002 (fiscal year 2004 for the Company). FAS No. 143 provides
accounting and reporting standards for recognizing obligations related to
asset retirement costs associated with the retirement of tangible long-lived
assets. Under FAS No. 143, legal obligations associated with the retirement
of long-lived assets are to be recognized at fair value in the period in which
they are incurred if a reasonable estimate of fair value can be made. The
fair value of the asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset and expensed using a systematic and
rational method over the assets' useful lives. Any subsequent changes to the
fair value of the liability will be expensed.
The Company has evaluated the impact of FAS No. 143 and based on its
evaluation believes that adoption will not have a material impact on the
Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS No. 146"), which is effective for exit
or disposal activities that are initiated after December 31, 2002. Under FAS
No. 146, a liability for a cost associated with an exit or disposal activity
will be recognized and measured initially at fair value only when the
liability is incurred. FAS No. 146 nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) ("Issue 94-3"). The principal difference between FAS No.
146 and Issue 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. FAS No. 146 will
only impact the Company if it incurs exit or disposal activities. If and when
an exit or disposal activity occurs, management will record such activity
under the rules of FAS No. 146.
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 will
significantly change current practice in the accounting for, and disclosure
of, guarantees. Guarantees meeting the characteristics described in FIN No.
45 are required to be initially recorded at fair value, which is different
from the general current practice of recording a liability only when a loss is
probable and reasonably estimable, as those terms are defined in FAS No. 5,
"Accounting for Contingencies."
FIN No. 45 also requires a guarantor to make significant new disclosures for
virtually all guarantees even when the likelihood of the guarantor's having to
make payments under the guarantee is remote. FIN No. 45 will not currently
have an impact on the Company's disclosures in its Form 10-K.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure" ("FAS No. 148"), which is effective
for fiscal years ending after December 15, 2002. FAS No. 148 amends FAS No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation. In addition, FAS No. 148 amends the disclosure provisions of
FAS No. 123 to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements.
As stated above, the Company elected to adopt the fair value method of
accounting for employee stock-based compensation in accordance with FAS No.
123 on a prospective basis. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed in APB No. 25 for
stock-based awards granted prior to April 1, 2002 and thus applies the
disclosure only provisions of FAS No. 148 to such awards.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46, clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have (i) the
characteristics of a controlling financial interest or (ii) sufficient at risk
equity. FIN No. 46 applies to a broad range of unconsolidated investee
entities (e.g. joint ventures, partnerships and cost basis investments) and,
effective for financial statements issued after January 31, 2003, adds certain
disclosure requirements.
The Company is currently evaluating the adoption of FIN No. 46, but does not
anticipate that it will have an impact on the Company's Form 10-K.
Organizational Change
On May 27, 2003, the Company announced the resignation of Roland H. Webb,
President and Chief Operating Officer of Todd Pacific Shipyards Corporation, a
wholly owned subsidiary of Todd Shipyards Corporation. Mr. Webb's resignation
was effective May 30, 2003. The Company also announced on June 4, 2003, that
Thomas V. Van Dawark would succeed Mr. Webb as President and Chief Operating
Officer of Todd Pacific Shipyards Corporation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company does not own any derivative financial instruments as of March 30,
2003, 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 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
based on a 1% sensitivity analysis.
The Company is 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 changes in market interest
rates. 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.
The Company is also exposed to potential increases in future health care cost
trend rates. Increases in these trend rates could have a significant affect
on the amounts reported by the Company for its health care plans. The Company
reports in Note 7 to the financial statements the effects of a 1% change in
the health care cost trend rates.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 30, 2003 and March
31, 2002, and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended March
30, 2003. Our audits also included the financial statement schedule listed in
the index at item 15(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 30, 2003 and March 31, 2002 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 30, 2003 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.
As discussed in Note 16 to the financial statements, beginning March 31, 2002,
the Company changed its method of accounting for stock-based employee
compensation.
Seattle, Washington /s/Ernst & Young LLP
May 22, 2003, except for Note 17,
as to which the date is June 6, 2003
REPORT OF MANAGEMENT
The management of Todd Shipyards Corporation is responsible for the
preparation, fair presentation, and integrity of the information contained in
the financial statements in this Annual Report on Form 10-K. These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America and include amounts determined using
management's best estimates and judgments.
The company maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and that transactions are recorded
properly to produce reliable financial records. The system of internal
controls includes appropriate divisions of responsibility, established
policies and procedures (including a code of conduct to promote strong ethics)
that are communicated throughout the company, and careful selection, training
and development of our people. The company conducts a corporate audit program
to provide assurance that the system of internal controls is operating
effectively.
Our independent certified public accountants have performed audit procedures
deemed appropriate to obtain reasonable assurance that the financial
statements are free of material misstatement.
The Board of Directors provides oversight to the financial reporting process
through its Audit and Compliance Committee, which meets regularly with
management, corporate audit, and the independent certified public accountants
to review the activities of each and to ensure that each is meeting its
responsibilities with respect to financial reporting and internal controls.
Finally, each of the undersigned has personally certified that the information
contained in this Annual Report on Form 10-K is accurate and complete in all
material respects, and that there are in place sound disclosure controls
designed to gather and communicate material information to appropriate
personnel within the company.
/s/ Stephen G. Welch
Stephen G. Welch
President and Chief Executive Officer
/s/ Scott H. Wiscomb
Scott H. Wiscomb
Chief Financial Officer
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 30, 2003 and MARCH 31, 2002
(In thousands of dollars)
2003 2002
ASSETS
Cash and cash equivalents $ 9,053 $ 17,545
Securities available-for-sale 32,126 13,841
Accounts receivable, less allowance for
doubtful accounts of $98 and $150
U.S. Government 4,322 12,738
Other 3,928 3,086
Costs and estimated profits in excess of
billings on incomplete contracts 6,251 5,648
Inventory, less allowance for obsolescence
of $237 and $280 1,434 1,489
Deferred taxes - 126
Other current assets 1,268 428
Total current assets 58,382 54,901
Property, plant and equipment, net 16,634 16,595
Restricted cash 3,030 3,240
Deferred pension asset 29,709 30,823
Insurance receivable 32,427 26,798
Other long-term assets 1,398 1,323
Total assets $141,580 $133,680
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 9,244 $ 9,156
Accrued payroll and related liabilities 2,606 2,438
Billings in excess of costs and estimated
profits on incomplete contracts 1,357 2,864
Taxes payable other than income taxes 1,417 1,397
Income taxes payable 787 1,917
Deferred taxes 446 -
Total current liabilities 15,857 17,772
Environmental and other reserves 35,055 28,467
Accrued post retirement health benefits 16,588 17,404
Deferred taxes 3,025 2,646
Other non-current liabilities 1,521 1,394
Total liabilities 72,046 67,683
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at March 30, 2003 and March 31, 2002,
and outstanding 5,271,056 at March 30, 2003
and 5,283,222 at March 31, 2002 120 120
Paid-in capital 38,405 38,295
Retained earnings 78,573 74,463
Accumulated other comprehensive income 429 922
Treasury stock (6,684,977 shares at March 30, 2003
and 6,672,811 shares at March 31, 2002) (47,993) (47,803)
Total stockholders' equity 69,534 65,997
Total liabilities and stockholders' equity $141,580 $133,680
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 30, 2003, March 31, 2002, and April 1, 2001
(in thousands, except per share amounts)
2003 2002 2001
Revenues $151,811 $121,945 $116,545
Operating Expenses:
Cost of revenues 109,406 84,787 77,411
Administrative and
manufacturing overhead 36,832 30,721 27,801
Provision for environmental
and other reserves 600 - 1,501
Other insurance settlements (125) (465) (2,118)
Total operating expenses 146,713 115,043 104,595
Operating income 5,098 6,902 11,950
Investment and other income 1,240 1,816 3,889
Gain (loss) on available-for-sale
securities (9) 2,216 713
Income before income tax expense 6,329 10,934 16,552
Income tax (expense) benefit (2,219) (3,916) 175
Net income $ 4,110 $ 7,018 $ 16,727
Net income per Common Share:
Basic $ 0.78 $ 1.05 $ 1.74
Diluted $ 0.74 $ 1.03 $ 1.73
Weighted Average Shares Outstanding
Basic 5,283 6,677 9,587
Diluted 5,553 6,827 9,676
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 30, 2003, March 31, 2002, and April 1, 2001
(in thousands of dollars)
2003 2002 2001
OPERATING ACTIVITIES:
Net income $ 4,110 $ 7,018 $16,727
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 2,774 3,020 3,017
Environmental and other reserves 6,588 737 633
Deferred pension asset 1,114 (65) (3,276)
Post retirement health benefits (816) (783) (1,395)
Deferred income taxes 951 3,339 (819)
Decrease (increase) in operating assets:
Costs and estimated profits in excess of
billings on incomplete contracts (603) 3,971 2,917
Inventory 55 42 322
Accounts receivable 7,574 321 (3,146)
Insurance receivable (5,629) (696) (15,447)
Other (net) (787) 6 358
Increase (decrease) in operating liabilities:
Accounts payable and accruals 88 (9,691) 11,511
Accrued payroll and related liabilities 295 1,377 (2,397)
Billings in excess of costs and estimated
profits on incomplete contracts (1,507) 1,231 (207)
Income taxes payable (1,130) 263 (76)
Other (net) 20 475 (397)
Net cash provided by operating
activities 13,097 10,565 8,325
INVESTING ACTIVITIES:
Purchases of marketable securities (29,741) (9,491) (16,836)
Sales of marketable securities 7,663 35,863 6,164
Maturities of marketable securities 3,300 5,550 14,465
Capital expenditures (2,825) (2,171) (3,084)
Other - - (260)
Net cash provided by (used in) investing
activities (21,603) 29,751 449
FINANCING ACTIVITIES:
Restricted cash 210 878 (1,116)
Purchase of treasury stock (243) (34,631) (2,511)
Proceeds from exercise of stock options 47 246 120
Collection of notes receivable from
officers for common stock - 415 -
Net cash provided by (used in)
financing activities 14 (33,092) (3,507)
Net increase (decrease) in cash and cash
equivalents (8,492) 7,224 5,267
Cash and cash equivalents at beginning of period 17,545 10,321 5,054
Cash and cash equivalents at end of period $ 9,053 $ 17,545 $ 10,321
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ - $ 5 $ -
Income taxes 2,133 319 1,400
Non-cash investing and financing activities:
Impairment of available-for-sale securities $ 260 $ - $ 645
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 30, 2003, March 31, 2002, and April 1, 2001
(in thousands of dollars)
Accumulated
Other Notes
Common Paid-in Retained Comprehensive Treasury From Total
Stock Capital Earnings Income Stock Officers Equity
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 of taxes
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 of tax
benefit of $188) - - - (349) - - (349)
Total comprehensive
income 6,669
Balance at
March 31, 2002 $120 $38,295 $74,463 $ 922 $(47,803) $ - $65,997
Purchase of
treasury stock - - - - (243) - (243)
Stock based
compensation - 116 - - - - 116
Proceeds from
exercise of
stock options - (6) - - 53 - 47
Comprehensive
income:
Net income
for the year
ended
March 30, 2003 - - 4,110 - - - 4,110
Net change in
unrealized
gains (losses)
on available-
for-sale
securities,
(net of tax
benefit of $265) - - - (493) - - (493)
Total comprehensive
income 3,617
Balance at
March 30, 2003 $120 $38,405 $78,573 $ 429 $(47,993) $ - $69,534
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 30, 2003, March 31, 2002, and April 1, 2001
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. 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 overhaul 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, 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, costs, and profit on contracts are
recognized on the percentage-of-completion method (determined based on direct
labor hours). Revenue, 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 identified.
(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 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 stated maturity of three months or less 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 includes all debt instruments
purchased with a maturity of more than three months as 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, excluded from earnings and presented
as accumulated other comprehensive income or loss, net of related deferred
income taxes. Realized gains and losses are recorded based on historical cost
of individual securities
The Company continually monitors its investment portfolio for other than
temporary impairment of securities. When an other than temporary decline in
the value below cost or amortized cost is identified, the investment is
reduced to its fair value, which becomes the new cost basis of the investment.
The amount of reduction is reported as a realized loss in the Consolidated
Statements of Income. Any recovery of value in excess of the investment's new
cost basis is recognized as a realized gain only on sale, maturity or other
disposition of the investment.
Factors that the Company evaluates in determining the existence of an other
than temporary decline in value include (1) the length of time and extent to
which the fair value has been less than cost or carrying value, (2) the
circumstances contributing to the decline in fair value (including a change in
interest rates or spreads to benchmarks), (3) recent performance of the
security, (4) the financial strength of the issuer, and (5) the intent and
ability of the Company to retain the investment for a period of time
sufficient to allow for anticipated recovery. Additionally, for asset-backed
securities, the Company considers the security rating and the amount of credit
support available for the security.
(J) Stock Based Compensation - Beginning in fiscal year 2003, the Company
elected to apply the expense recognition provisions of Financial Accounting
Standards Board (FASB) Statement No. 123 (FAS No. 123), "Accounting for Stock-
Based Compensation." The recognition provisions are applied to stock option
grants awarded subsequent to March 31, 2002. The Company has adopted FAS No.
123 as it is designated as the preferred method of accounting for stock-based
compensation.
Previously, the Company had applied the disclosure only provisions of FAS No.
123 and accounted 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, 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.
During fiscal year 2003, the Company did not grant any new stock options and
therefore there is no expense recorded under FAS No. 123. Since the expense
recognition provisions of FAS No. 123 apply to stock options granted
subsequent to March 31, 2002, the Company cannot presently determine the
financial impact that this change will have on its future results of
operations or financial condition.
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) 2003 2002 2001
Net income:
As reported $ 4,110 $ 7,018 $ 16,727
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (224) (228) (64)
Pro forma $ 3,886 $ 6,790 $ 16,663
Net income per share:
Basic
As reported $ 0.78 $ 1.05 $ 1.74
Pro forma 0.73 1.02 1.74
Diluted
As reported 0.74 1.03 1.73
Pro forma $ 0.70 $ 0.99 $ 1.72
(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 are 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 in accordance with Financial Accounting
Standards Board No.144, "Accounting for the Impairment or Disposal of Long-
Lived Assets" based on several factors, including, but not limited to,
management's plans for future operations, recent operating results and
projected cash flows. To date no such impairment has been indicated.
(O) Concentration of Risk -The Company is subject to concentration of credit
risk from investments and cash balances on hand with banks and other financial
institutions, which may be in excess of the Federal Deposit Insurance
Corporation's insurance limits. Risk for investments is managed by purchase
of investment grade securities and diversification of the investment portfolio
among issuers and maturities.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("FAS No. 143), which is effective for fiscal years beginning
after June 15, 2002 (fiscal year 2004 for the Company). FAS No. 143 provides
accounting and reporting standards for recognizing obligations related to
asset retirement costs associated with the retirement of tangible long-lived
assets. Under FAS No. 143, legal obligations associated with the retirement
of long-lived assets are to be recognized at fair value in the period in which
they are incurred if a reasonable estimate of fair value can be made. The
fair value of the asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset and expensed using a systematic and
rational method over the assets' useful lives. Any subsequent changes to the
fair value of the liability will be expensed.
The Company is still evaluating the impact of FAS No. 143, but believes
adoption will not have a material impact on the Company's financial position,
results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS No. 146"), which is effective for exit
or disposal activities that are initiated after December 31, 2002. Under FAS
No. 146, a liability for a cost associated with an exit or disposal activity
will be recognized and measured initially at fair value only when the
liability is incurred. FAS No. 146 nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) ("Issue 94-3"). The principal difference between FAS No.
146 and Issue 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. FAS No. 146 will
only impact the Company if it incurs disposal activities. If and when a
disposal activity occurs, management will record such activity under the rules
of FAS No. 146.
In December 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45 will
significantly change current practice in the accounting for, and disclosure
of, guarantees. Guarantees meeting the characteristics described in FIN No.
45, which are not included in a long list of exceptions, are required to be
initially recorded at fair value, which is different from the general current
practice of recording a liability only when a loss is probable and reasonably
estimable, as those terms are defined in FAS No. 5, "Accounting for
Contingencies."
FIN No. 45 also requires a guarantor to make significant new disclosures for
virtually all guarantees even when the likelihood of the guarantor's having to
make payments under the guarantee is remote. FIN No. 45 will not currently
have any impact on the Company's disclosures in its Form 10-K.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure" ("FAS No. 148"), which is effective
for fiscal years ending after December 15, 2002. FAS No. 148 amends FAS No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation. In addition, FAS No. 148 amends the disclosure provisions of
FAS No. 123 to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per
share in annual and interim financial statements.
Effective April 1, 2002, the Company elected to adopt the fair value method of
accounting for employee stock-based compensation in accordance with FAS No.
123 on a prospective basis. Accordingly, the Company accounts for stock-based
compensation using the intrinsic value method prescribed in APB No. 25 for
stock-based awards granted prior to April 1, 2002 and thus applies the
disclosure only provisions of FAS No. 148 to such awards.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46, clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have (i) the
characteristics of a controlling financial interest or (ii) sufficient at risk
equity. FIN No. 46 applies to a broad range of unconsolidated investee
entities (e.g. joint ventures, partnerships and cost basis investments) and,
effective for financial statements issued after January 31, 2003, adds certain
disclosure requirements. Adoption of FIN No. 46 has not currently impacted
the Company's disclosures on Form 10-K.
3. RESTRICTED CASH AND SURETY LINE
A surety company has issued contract bonds totaling $11.2 million for current
repair, maintenance and conversion jobs as of March 30, 2003. Todd Pacific's
trade accounts receivable on certain bonded jobs secure these various contract
bonds.
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. Also included is $0.3 million and $0.2 million as of
March 30, 2003 and March 31, 2002, respectively, of restricted cash which will
be 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.
4. SECURITIES AVAILABLE FOR SALE
Securities available-for-sale are carried at fair value. The following is a
summary of available-for-sale securities:
Amor- Gross Gross
tized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
March 30, 2003
Debt securities:
U.S. Treasury securities
and agency obligations $ 4,949 $ 53 $ - $ 5,002
U.S. corporate
securities 14,122 354 - 14,476
Mortgage-backed
securities 9,876 166 - 10,042
Total debt securities 28,947 573 - 29,520
Equity securities:
U.S. securities 2,153 186 (200) 2,139
Foreign stock 365 102 - 467
Total equity securities 2,518 288 (200) 2,606
Total securities $31,465 $ 861 $ (200) $32,126
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
The Company had gross realized gains of $255 thousand, $2.4 million and $1.4
million on sales of available-for-sale securities for fiscal years 2003, 2002
and 2001 respectively.
The Company had gross realized losses of $264 thousand, $0.2 million and $.7
million on sales of available-for-sale securities for fiscal year 2003, 2002
and 2001, respectively.
The amortized cost and estimated fair value of the Company's available-for-
sale debt, mortgage-backed and equity securities are shown below:
Amortized Fair
(In thousands) Cost Value
March 30, 2003
Debt securities:
Due in one year or less $ 4,025 $ 4,090
Due after one year through three years 15,046 15,388
Subtotal 19,071 19,478
Mortgage-backed securities 9,876 10,042
Equity securities 2,518 2,606
Total $ 31,465 $ 32,126
March 31, 2002
Debt securities:
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
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.
During the first quarter of fiscal year 2003, the Navy announced its intention
to decommission AOE 7 and AOE 10 for transfer to the Military Sealift Command
("MSC") in calendar years 2003 and 2004, respectively. The transfer of these
vessels to MSC will reduce the Company's future work under its current cost-
type contract with the Navy. The Company anticipates that MSC will contract
for future work on these vessels on a competitive, fixed-price basis.
The potential impact of this transfer on the Company's future AOE revenues
cannot be determined at this time, but will depend on factors such as the
realized reduction in AOE revenues upon transfer to MSC, the Company's ability
to bid on future AOE 7 and AOE 10 work once transferred, and the Company's
bidding success if such bids are submitted.
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 (costs
and estimated profits in excess of billings) included in accounts receivable
were approximately $1.0 million at March 30, 2003 and $1.2 million at March
31, 2002.
Customers - Revenues from the U.S. Government were $123.9 million (82%), $96.1
million (79%) and $74.5 million (64%) in fiscal years 2003, 2002 and 2001 ,
respectively. Revenues from the Washington State Ferry System were $4.9
million (3%), $10.3 million (8%) and $25.0 million (21%) in fiscal year 2003,
2002 and 2001, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment and accumulated depreciation at March 30, 2003
and March 31, 2002 consisted of the following (in thousands):
2003 2002
Land $ 1,151 $ 1,151
Buildings 12,151 11,818
Piers, shipways and drydocks 24,516 23,401
Machinery and equipment 38,492 37,301
Total plant and equipment, at cost 76,310 73,671
Less accumulated depreciation (59,676) (57,076)
Plant, property and equipment, net $ 16,634 $ 16,595
The Company recognized $2.8 million, $3.0 million, and $3.0 million of
depreciation expense in fiscal years 2003, 2002 and 2001, 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.
Under a provision of the Omnibus Budget Reform Act of 1990 ("OBRA `90") the
Company transferred approximately $1.7 million and $1.6 million in excess
pension assets from its Retirement System into a fund to pay fiscal year 2003
and 2002 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 April 2, 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.
On July 1, 2002, the Todd Galveston Metal Trading Council Pension Fund
liability and assets were transferred from the Todd Shipyards Corporation
Retirement System to an international labor union organization. This transfer
resulted in a non-recurring, non-cash charge of $0.8 million.
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
2003 2002 2003 2002
Change in Benefit Obligation
(in thousands of dollars)
Benefit obligation at beginning of year $33,376 $35,507 $15,592 $16,173
Service cost 550 480 - -
Interest cost 1,887 2,284 1,046 1,046
Actuarial (gain)/loss (109) (1,550) 474 -
Benefits paid (2,086) (3,345) (1,716) (1,627)
Plan Settlement (5,748) - - -
Benefit obligation at end of year $27,870 $33,376 $15,396 $15,592
Other
Postretirement
Pension Benefits Benefits
2003 2002 2003 2002
Change in Plan Assets
(in thousands of dollars)
Fair value of plan assets at beginning
of year $60,799 $63,469 $ - $ -
Actual gain (loss) on plan assets (2,268) 2,262 - -
Employer contribution - - 48 40
Asset transfer (1,668) (1,587) 1,668 1,587
Benefits paid (2,086) (3,345) (1,716) (1,627)
Plan Settlement (5,953) - - -
Fair value of plan assets at end of year $48,824 $60,799 $ - $ -
Other
Postretirement
Pension Benefits Benefits
2003 2002 2003 2002
Funded Status Reconciliation
(in thousands of dollars)
Funded status of plans $20,954 $27,423 $(15,396) $(15,592)
Unrecognized prior service cost 363 597 - -
Unrecognized (gain)/loss 8,392 2,803 (2,684) (3,272)
Deferred pension asset
(accrued liability) 29,709 30,823 (18,080) (18,864)
Less: current portion included in
"Accounts payable and accruals" - - 1,492 1,460
Long-term accrued postretirement
health benefits $ - $ - $(16,588) $(17,404)
Other
Postretirement
Pension Benefits Benefits
2003 2002 2003 2002
Weighted Average Assumptions
Discount rate (1) 6.50% 7.00% 6.50% 7.00%
Expected return on plan assets 7.50% 7.50% - -
Rate of compensation increase 4.50% 4.50% - -
Medical trend rate (retirees) (2) - - 9.00% 10.00%
(1) The Company reduced its discount rate assumption in fiscal year 2003 to
reflect the overall decrease in long term interest rates generally
available in the market.
(2) Postretirement benefit medical trend rate in fiscal year 2003 is 9.00%
graded to 6.00% over 3 years. Fiscal year 2002 is 10.00% graded to 6.00%
over 4 years.
Other
Postretirement
Pension Benefits Benefits
2003 2002 2001 2003 2002 2001
Components of Net Periodic
Benefit Cost
(in thousands of dollars)
Service Cost $ 550 $ 480 $ 400 $ - $ - $ -
Interest cost on
projected benefit
obligation 1,887 2,283 2,396 1,046 1,046 904
Expected return on
plan assets (4,004) (4,660) (5,568) - - -
Amortization of
transition obligation - - (2,415) - - -
Amortization of prior
service cost 233 245 245 - - -
Recognized actuarial
(gain)/loss - - - (162) (174) (522)
Plan Settlement 780 - - - - -
Net periodic (benefit)
cost before OBRA '90 (554) (1,652) (4,942) 884 872 382
Transfer of assets for
payment of retiree
medical benefits
(401(h) Plan) 1,668 1,587 1,666 (1,668) (1,587) (1,666)
Net periodic cost (benefit)$ 1,114 $ (65) $(3,276) $(784) $(715) $(1,284)
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
2003 2002
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 1,165 1,176
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 $(1,040) $(1,050)
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 $3.4
million, $2.6 million and $2.5 million, for fiscal years 2003, 2002 and 2001,
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,
$0.1 million, and $38 thousand in fiscal years 2003, 2002, and 2001,
respectively
8. INCOME TAXES
Components of the income tax expense (benefit) are as follows (in thousands):
2003 2002 2001
Current tax expense $ 1,002 $ 390 $ 1,329
Deferred tax expense (benefit) 1,217 3,526 (1,504)
Total income tax expense (benefit) $ 2,219 $ 3,916 $ (175)
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate and is as follows (in thousands).
(percentages represent income tax expense (benefit) as a percent of income
before income tax expense):
2003 2002 2001
Tax provision at
federal statutory tax rate $ 2,152 34.0% $ 3,827 35.0% $ 5,793 35.0%
Decrease in valuation
allowance - 0.0% - 0.0% (5,905)(35.7)%
Other - net 67 1.1% 89 0.8% (63) (0.4)%
Income tax expense (benefit) $ 2,219 35.1% $ 3,916 35.8% $ (175) (1.1)%
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 30, 2003
and March 31, 2002 were as follows (in thousands):
2003 2002
Deferred income tax assets:
Alternative minimum tax credit
carryforwards $ 1,597 $ 2,590
Accrued employee benefits 7,174 7,465
Environmental and other reserves 12,269 9,964
Inventory reserves 83 98
Reserve for doubtful accounts 34 53
Other 610 487
Total deferred income tax assets 21,767 20,657
Deferred income tax liabilities:
Insurance receivable (11,349) (9,379)
Deferred pension income (10,398) (10,788)
Accelerated depreciation (1,740) (1,943)
Contract deferrals (1,020) (362)
Securities available-for-sale (231) (497)
Other (500) (208)
Total deferred income tax
liabilities (25,238) (23,177)
Net deferred tax liability $ (3,471) $ (2,520)
The realization of deferred income tax assets is dependent upon the ability to
generate taxable income in future periods. The Company has evaluated evidence
supporting the realization of its deferred income tax assets and determined it
is more likely than not that its deferred income tax assets will be realized.
During fiscal year 2003, the Company utilized approximately, $1.0 million in
alternative minimum tax credits. The Company has approximately $1.6 million
in remaining alternative minimum tax credit carryforwards that can be used in
the future and have no expiration date.
9. LEASES
Operating lease payments charged to expense were $0.8 million, $0.9 million
and $1.5 million for fiscal years 2003, 2002 and 2001, respectively. Certain
leases contain renewal options and minimum amounts of annual maintenance
clauses. Minimum lease commitments at March 30, 2003 are summarized below (in
thousands):
Operating
Leases
2004 $ 835
2005 801
2006 783
2007 72
2008 43
Thereafter 204
Total minimum lease commitments $ 2,738
10. FINANCING ARRANGEMENTS
During 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 Todd Pacific with greater
flexibility in funding its operational cash flow needs. Todd Pacific had no
outstanding borrowings as of March 30, 2003 and March 31, 2002, respectively.
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 $24.8 million.
Additionally, the Company has entered into a 15-year agreement for coverage of
any new environmental conditions discovered at the Seattle shipyard property
that would require environmental remediation.
The Company 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 2006. 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. 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.
During the fourth quarter of fiscal year 2003, the company and the EPA entered
into a Consent Decree for the cleanup of the SSOU, which, along with the
associated Remedial Design Statement of Work for Remedial Action ("SOW"), was
subsequently approved by the Department of Justice. The Consent Decree
provides for the submittal of the Remedial Action Work Plan to the EPA
subsequent to the approval by the EPA of the final design. The Remedial
Action Work Plan will provide for construction and implementation of the
remedy set forth in the ROD, the two Explanation of Significant Differences
(issued in fiscal years 2000 and 2003), the SOW, and the design plans and
specifications developed in accordance with the Remedial Action Work Plan and
approved by the EPA. During the fourth quarter of fiscal year 2003 the
Company submitted its 95% SOW to the EPA for the SSOU. The SOW provides for
the following actions to take place at the SSOU:
Piers 2 and 4 South (located on the Duwamish Waterway) will be
demolished and removed from the site to achieve more complete cleanup in
those areas. Pier 4 South will be rebuilt after remediation with a
shortened berth length.
Dredging of all contaminated sediments and shipyard waste in the open
areas of the SSOU (surrounding the shipyard) and in the areas beneath
Piers 2 and 4 South. The total estimated volume of sediments to be
removed is 195,200 cubic yards.
Disposal of all recovered sediment and shipyard waste at an appropriate
upland disposal facility.
Backfilling of portions of the areas dredged to create intertidal
habitat where feasible.
Capping of areas beneath the piers that are not scheduled for demolition
to an average thickness of one foot.
Pursuant to the current schedule, remediation of the SSOU is expected to begin
in the second 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
current estimated cost of the SSOU cleanup is included in the environmental
reserve resulting in an increase in that reserve of $6.1 million during fiscal
year 2003. $5.7 million of that reserve is covered by the environmental
insurance policy procured by the Company in fiscal year 2000.
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 $24.8 million at March 30, 2003.
Under the Federal Superfund law, potentially responsible parties may have
liability for damages to natural resources in addition to liability for
remediation. During the second quarter of fiscal year 2003, the Company began
discussions with the natural resource trustees ("Trustees") for the Harbor
Island Superfund Site ("Site") and continued these discussions during the
third quarter. The Company anticipates that the Trustees will file a claim
against the Company at some future date alleging damages to the natural
resources at the Site caused by the release of hazardous substances. The best
estimate of a potential natural resource damage claim has been included in the
environmental reserve. The payment of any eventual claim is covered by the
aforementioned insurance policy, provided that aggregate policy limits have
not been exceeded.
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 Final Consent Decree
was entered by the United States District Court during the first quarter of
fiscal year 2003 and payment was made by the Company.
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.
The cases generally include as defendants, in addition to the Company, other
ship builders and repairers, ship owners, asbestos manufacturers, distributors
and installers, and equipment manufacturers and arise from injuries or
illnesses allegedly caused by exposure to asbestos or other toxic substances.
The Company assesses claims as they are filed and as the cases develop,
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 36 "malignant" claims and approximately 534 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 375 cases open as of March 30, 2003 are
approximately 570 claimants. The exact number of claimants is not
determinable as approximately 150 of the open cases include multiple claimant
filings against 30-100 defendants. The filings do not indicate which
claimants allege liability against the Company. The previously stated 570
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 365 claimants do not assert any specific amount of relief
sought.
Approximately 150 claims contain standard boilerplate language asserting on
behalf of each claimant a claim for damages of $2 million compensatory and $20
million punitive against approximately 100 defendants. Approximately 20
claims set forth the same boilerplate language asserting $10-$20 million in
compensatory and $10-$20 million in punitive damages on behalf of each
claimant against approximately 30-100 defendants. Approximately 20 cases
assert $1-$15 million in compensatory and $5-$10 million in punitive damages
on behalf of each claimant against approximately 30-100 defendants.
Approximately 10 claimants seek compensatory damages of less than $100,000 per
claim and approximately 5 claimants seek compensatory damages between $1
million and $15 million. The claims involved in the foregoing cases do not
specify against which defendants which claims are made or alleged dates of
exposure.
Based upon settled or concluded claims to date, the Company has not identified
any correlation between the amount of the relief sought in the complaint and
the final value of the claim. The Company and its insurers are vigorously
defending these actions.
During fiscal year 2003, the Company experienced no material changes in its
bodily injury liabilities and insurance receivables. At both March 30, 2003
and March 31, 2002, respectively, the Company had recorded bodily injury
liability reserves of $9.4 million and bodily injury insurance receivables of
$7.1 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.
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 30, 2003, the 1949 through 1976 agreement will provide
coverage for an additional 20.4 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.2 years. At March 31, 2002, the Company
projected that these agreements would provide coverage for an additional 20.6
years and 5.2 years, respectively. The Company resolved 13 malignant claims in
2003 compared with 20 in 2002 and 16 in 2001. 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.
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.
The Company has recorded $0.6 million, $0 and $1.5 million in charges against
earnings in fiscal years 2003, 2002 and 2001, 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 $0.1 million,
$0.5 million and $2.1 million in fiscal years 2003, 2002 and 2001,
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 $35.1 million as of March
30, 2003 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 30, 2003, the
Company has recorded an insurance receivable asset of $32.4 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 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 normal cost accounting
issues raised by the DCAA as a result of their regular, ongoing reviews, the
Company is not aware of any outstanding issues with the DCAA.
13. COLLECTIVE BARGAINING AGREEMENT
During the third quarter of fiscal year 2003, the Puget Sound Metal Trades
Council (the bargaining umbrella for all unions at Todd Pacific Shipyards) and
Todd Pacific Shipyards reached an agreement on a new collective bargaining
agreement. The Todd Pacific Shipyards eligible workforce ratified the
agreement on October 22, 2002. The parties had been operating under an
extension of the old agreement, which expired on July 31, 2002. The new
three-year agreement, effective retroactively to August 1, 2002, includes an
annual 3.5% wage and fringe benefit increase.
During the third quarter, the Company paid the retroactive portion of this
increase, which was approximately $0.3 million in wage and benefit costs.
These amounts had been estimated and accrued in the second quarter of fiscal
year 2003.
During fiscal year 2003, an average of approximately 840 of the Company's
Shipyard employees were covered by the collective bargaining agreement. At
March 30, 2003 approximately 700 Company employees were covered under this
contract.
14. TREASURY STOCK
During the third quarter of fiscal year 2003, the Board of Directors approved
the repurchase of up to 500,000 shares of the Company's common stock from time
to time in open market or negotiated transactions. Under this authorization,
the Company repurchased an aggregate of 19,500 shares during the balance of
fiscal year 2003 in open market transactions at an average price of $12.44 per
share for total consideration of $242,592.
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.
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 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
Shares repurchased (19,500) 19,500 -
Options Exercised 7,334 (7,334) -
As of March 30, 2003 5,271,056 6,684,977 11,956,033
15. INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
March 30, March 31, April 1,
2003 2002 2001
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted net
income per share:
Net income $ 4,110 $ 7,018 $ 16,727
Denominator:
Denominator for basic net income per
share - weighted average
common shares outstanding 5,283 6,677 9,587
Effect of dilutive securities
Stock options based
on the treasury stock method using
average market price 270 150 89
Denominator for diluted net income per share 5,553 6,827 9,676
Basic income per share $ 0.78 $ 1.05 $ 1.74
Diluted income per share $ 0.74 $ 1.03 $ 1.73
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 30, 2003.
A summary of stock option transactions for the years ended March 30, 2003,
March 31, 2002 and April 1, 2001 is as follows:
Number Option Price Weighted Average
of Shares Per Share Exercise Price
Outstanding, April 2, 2000 265,000 4.25 to 6.00 4.80
Exercisable, April 2, 2000 240,000 4.25 to 6.00 4.83
Granted 415,000 6.55 to 7.94 6.72
Exercised (55,000) 4.56 to 6.00 5.48
Outstanding, April 1, 2001 625,000 4.25 to 7.94 6.01
Exercisable, April 1, 2001 218,333 4.25 to 7.94 4.85
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
Exercised (7,334) 4.38 to 7.94 6.32
Outstanding, March 30, 2003 501,000 4.25 to 7.94 6.33
Exercisable, March 30, 2003 374,335 $4.25 to 7.94 $6.22
At March 30, 2003, the Company has reserved 736,000 shares of its common stock
for issuance under its stock option plan.
As described in Note 1, the Company accounts for stock-based compensation to
its employees and directors based on the expense recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123 (FAS No. 123),
"Accounting for Stock-Based Compensation." The recognition provisions are
applied to stock option grants awarded subsequent to March 31, 2002.
During fiscal year 2003, the Company did not grant any new stock options and
therefore there is no expense recorded under FAS No. 123. Since the expense
recognition provisions of FAS No. 123 apply to stock options granted
subsequent to March 31, 2002, the Company cannot presently determine the
financial impact that this change will have on its future results of
operations or financial condition.
The outstanding stock options have a contractually weighted-average life of
5.0 years as of March 30, 2003. The weighted average fair value of options
granted in 2001 was $2.55. No options were granted during fiscal years 2003
and 2002.
The fair value of options granted in 2001 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
Expected life (years) 4
Expected volatility 38%
Risk-free interest rate 6%
Expected dividend yield 0%
17. Subsequent Events
On April 15, 2003, the Company declared a dividend of 10 cents ($0.10) per
share payable on June 23, 2003 to shareholders of record as of June 2, 2003.
The impact of this dividend payment based on the estimated number of shares
outstanding will be approximately $0.5 million.
On June 6, 2003, the Company approved a dividend of 10 cents ($0.10) per share
to be paid quarterly, beginning September 23, 2003 to all shareholders of
record as of September 8, 2003 and quarterly thereafter.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended March 30, 2003 and
March 31, 2002 and are as follows. Each quarter is 13 weeks in length.
(in thousands):
Operating Net Net income(loss)
income income per Share
Revenues (loss) (loss) Basic Diluted
1st Qtr 2003 $ 49,260 $ 3,240 $ 2,306 $ 0.44 $ 0.41
2nd Qtr 2003 40,583 2,743 1,973 0.37 0.36
3rd Qtr 2003 31,840 (613) (117) (0.02) (0.02)
4th Qtr 2003 30,128 (272) (52) (0.01) (0.01)
1st Qtr 2002 31,242 1,868 1,802 0.19 0.19
2nd Qtr 2002 31,017 2,167 2,971 0.44 0.43
3rd Qtr 2002 30,556 1,360 1,124 0.21 0.21
4th Qtr 2002 $ 29,130 $ 1,507 $ 1,121 $ 0.21 $ 0.21
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
** AND RELATED STOCKHOLDERS MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
**
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 day period prior to the filing date of this Annual Report on
Form 10-K, the Company, under the supervision, and with the participation, of
its management, including its chief executive officer and chief financial
officer, performed an evaluation of the Company's disclosure controls and
procedures, as contemplated in rules 13a-14(c) and 15d-14(c) under the
Securities and Exchange Act of 1934, as amended. Based on that evaluation,
the Company's chief executive officer and chief financial officer concluded
that such disclosure controls and procedures are effective in ensuring that
material information relating to the Company, including its consolidated
subsidiaries, is made known to them, particularly during the period for which
the periodic reports are being prepared.
(b) CHANGES IN INTERNAL CONTROLS
No significant changes were made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation performed pursuant rules 13a-14(c) and 15d-14(c) under
the Securities and Exchange Act of 1934, as amended.
** The information for the above items will be provided in, and is
incorporated by reference to the 2003 Proxy Statement.
PART IV
ITEM 15. 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.
TODD SHIPYARDS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Report of Ernst & Young LLP, Independent Auditors............... *
Report of Management ...................... .................... *
Consolidated Balance Sheets at March 30, 2003
and March 31, 2002 ........................................... *
Consolidated Statements of Income
For the years ended March 30, 2003,
March 31, 2002 and April 1, 2001. ............................. *
Consolidated Statements of Cash Flows
For the years ended March 30, 2003,
March 31, 2002 and April 1, 2001. ............................. *
Consolidated Statements of Stockholders' Equity
For the years ended March 30, 2003,
March 31, 2002 and April 1, 2001. ............................. *
Notes to Consolidated Financial Statements
For the years ended March 30, 2003,
March 31, 2002 and April 1, 2001. ............................. *
Consolidated Financial Statement Schedule
II-Valuation and Qualifying Reserves.......................... *
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 below are filed as part of, or furnished with, this
annual report. Exhibits 99.1, 99.2 and 99.3 are furnished rather than filed
for purposes of the Securities Exchange Act of 1934 and shall not be deemed
incorporated into any other filing by the Registrant unless such filing
specifically provides for such incorporation.
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.
10-9 Employment contract between the Company and Roland H.
Webb dated August 28, 2002 #
10-10 Employment contract between the Company and Thomas V.
Van Dawark dated June 4, 2003. #
10-11 Grant of Incentive Stock Option dated June 4, 2003 to
Thomas V. Van Dawark pursuant to the Incentive Stock Compensation
Plan. #
22-1 Subsidiaries of the Company. *
23 Consent of Ernst & Young LLP, Independent Auditors #
99.1 Certification Pursuant to 18 U.S.C Section 1350 as adopted #
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C Section 1350 as adopted #
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
99.3 Press Release dated June 10, 2003 announcing financial #
results for the Company's fiscal year ending March 30, 2003.
Note: All Exhibits are in SEC File Number 1-5109.
* Incorporated herein by reference.
# Filed or furnished herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
Registrant's fiscal year ended March 30, 2003. On April 15, 2003, the
Registrant filed a Form 8-K, Item 5, announcing the declaration of a cash
dividend in the amount of $0.10 per share. On May 27, 2003, the Registrant
filed a Form 8-K, item 5, announcing the resignation of Roland Webb as
President and Chief Operating Officer of Todd Pacific Shipyards Corporation,
an executive officer of the Registrant. On June 4, 2003, the Registrant filed
a Form 8-K, item 5, announcing the hiring of Thomas V. Van Dawark as President
and Chief Operating Officer of Todd Pacific Shipyards Corporation.
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 10, 2003
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 10, 2003 June 10, 2003
/s/ Patrick W.E. Hodgson /s/ Joseph D. Lehrer
Patrick W.E. Hodgson, Joseph D. Lehrer, Director
Chairman, June 10, 2003
and Director
June 10, 2003
/s/ Philip N. Robinson /s/ John D. Weil
Philip N. Robinson, Director John D. Weil, Director
June 10, 2003 June 10, 2003
/s/ Stephen G. Welch
Stephen G. Welch
President,
Chief Executive Officer,
and Director
June 10, 2003
CERTIFICATION
I, Stephen G. Welch, President and Chief Executive Officer of Todd Shipyards
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Todd Shipyards
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and,
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: June 10, 2003
/s/ Stephen G. Welch
Stephen G. Welch,
President and Chief Executive Officer
CERTIFICATION
I, Scott H. Wiscomb, Chief Financial Officer and Treasurer of Todd Shipyards
Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Todd Shipyards
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and,
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: June 10, 2003
/s/ Scott H. Wiscomb
Scott H. Wiscomb,
Chief Financial Officer and Treasurer
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending March 30, 2003, March 31, 2002 and April 1, 2001
(in thousands)
Reserves deducted from assets to which they apply - Allowance for doubtful
accounts:
Year Ended
March 30, March 31, April 1,
2003 2002 2001
Balance at beginning of period $ 150 $ 100 $ 100
Charged to costs and expenses - 13 81
(Deductions) recoveries
from reserves (1) (52) 37 (81)
Balance at close of period $ 98 $ 150 $ 100
Reserves deducted from assets to which they apply - Allowance for obsolete
inventory:
Balance at beginning of period $ 280 $ 280 $ 141
Charged to costs and expenses - - 139
(Deductions) recoveries
from reserves (2) (43) - -
Balance at close of period $ 237 $ 280 $ 280
Notes:
(1) Deductions from reserves represent uncollectible accounts written off less
recoveries.
(2) Deductions from reserves represent obsolete inventory written off.