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 28, 2004
[ ] 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). [X] Yes [] No
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $85.8 million as of May 21, 2004.
There were 5,402,656 shares of the corporation's $.01 par value common stock
outstanding at May 21, 2004.
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 17, 2004 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.................................................... *
PART I
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements contained in this Report, which are not historical facts or
information, are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate
future events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties which could cause
the outcome to be materially different than stated. Such risks and
uncertainties include both general economic risks and uncertainties and
matters which relate directly to the Company's operations and properties and
are discussed in Items 1, 3 and 7 below. The Company cautions that any
forward-looking statement reflects only the belief of the Company or its
management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove to be inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.
ITEM 1. BUSINESS
INTRODUCTION
Todd Shipyards Corporation (the "Company") was organized in 1916 and has
operated a shipyard in Seattle, Washington (the "Shipyard") since
incorporation. The Company is incorporated under the laws of the State of
Delaware and operates the Shipyard through a 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. The Company's general offices are located at
1801 16th Avenue S.W., Seattle, Washington 98134-1089, 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. At the time, this
work included 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. Fiscal year 2004 was the last year
remaining on this contract. Subsequent to the end of fiscal year 2004, the
Department of the Navy awarded the Company a five-year, cost-type contract for
similar work on the NIMITZ CLASS aircraft carriers (CVN) home ported in Puget
Sound.
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, in June 2001, the
Company was awarded by the Navy, a six-year, cost-type contract, under which
the Navy has options to have the Company perform maintenance work on the
Auxiliary Oiler Explosive ("AOE") class vessels. 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. The original
contract included options for thirteen repair availabilities to be performed
between 2001 and 2007 and was expected to have a notional value of
approximately $180 million if all of the options were exercised. Since the
award, five repair availabilities have been accomplished.
During the first quarter of fiscal year 2003, the Navy announced its intention
to transfer the USS Rainier (AOE 7) and the USS Bridge (AOE 10) to the
Military Sealift Command ("MSC") which results in five availabilities that
will not be exercised under this contract. AOE 7 was transferred to MSC in
August 2003. AOE 10 is currently scheduled to be transferred in the summer of
2004. The Company anticipates that MSC will contract for future work on these
two vessels on a competitive basis. The potential impact of these transfers
on the Company's future revenues will depend on such factors as the
expenditures for maintenance by MSC, the Company's capacity to bid on future
AOE 7 and AOE 10 work, and the Company's bidding success if such bids are
submitted.
During the fourth quarter of fiscal year 2004, the Company announced that it
was informed by the Navy that the USS Sacramento (AOE 1) is scheduled to be
decommissioned on or about October 1, 2004. Of the two remaining
availabilities on AOE 1, one was exercised on a reduced scale as a five-week,
pier-side availability. The availability, originally scheduled for 12 weeks
in duration, was to include a dry docking of the ship. The other availability
of AOE 1 will not occur due to its decommissioning. The Company does not know
at this point if it will be involved in any of the work related to the
decommissioning of AOE 1.
The AOE contract contains options for two remaining repair availabilities on
the USS Camden (AOE 2) before the contract expires in 2007. There is no
assurance that these two remaining options will be exercised by the Navy in
whole or in part.
During the fourth quarter of fiscal year 2004, the Company was awarded by the
United States Coast Guard, a cost plus incentive fee contract under which the
Coast Guard has options to have the Company provide maintenance of two Polar
class icebreakers. This contract extends through September 2008 and marks the
first time the Coast Guard has used a long term phased-maintenance approach on
these icebreakers. The Company has performed similar work for the Coast Guard
over the past several years under individual, competitively bid, firm fixed
price contracts.
Also during the fourth quarter of fiscal year 2004, the Company entered into a
contract with Electric Boat Corporation of Groton, Connecticut to support work
on the Trident submarines. The work is being performed under a cost plus
incentive fee contract with Electric Boat for fabrication work, and a firm
fixed price contract for the associated project management and quality
assurance work.
During the fourth quarter of fiscal year 2004, the Company confirmed its
expected participation, along with Southwest Marine, Inc., San Diego Division,
on the team lead by Bath Iron Works, a subsidiary of General Dynamics
(NYSE:GD), to perform Post Shakedown Availability work ("PSA") on DDG-51 Aegis
Destroyers ("Destroyers"). The U.S. Navy contract for this work, which was
awarded to Bath Iron Works, includes options for PSA work to be accomplished
in Navy homeports of Everett, Washington and Pearl Harbor, HI. Any work that
the Company performs for Bath Iron Works will be accomplished under a cost
plus award fee subcontract still to be finalized between Bath Iron Works and
the Company. Work will be performed between 2005 and 2007. The PSA work
primarily involves the installation of system and equipment upgrades and/or
ship alterations as required.
In addition to the above mentioned contracts and agreements, the Company
engages in repair, overhaul and conversion work on other Navy vessels, other
U.S. Coast Guard vessels, ferries, container vessels, tankers, fishing
vessels, cruise ships, barges, and tug supply vessels.
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) 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 and the Coast Guard. 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 and the Coast
Guard 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 cumulative amount of $2.1
million at March 28, 2004.
Construction Operations
During the third quarter of fiscal year 2003, the Company began work on a $5.2
million new construction project to build two large steel structures called
"cutting edges." The cutting edges are barge like structures used as floating
work platforms for the construction of the caissons which will eventually
support the new Tacoma Narrows Bridge. The first cutting edge was delivered
in March 2003 and the second was delivered in April 2003.
Prior to the Tacoma Narrows project, the Company's last 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 is summarized as follows:
2004 2003 2002
Federal Government 84% 82% 79%
Commercial 16% 18% 21%
Total 100% 100% 100%
The distribution of the Company's revenues in fiscal year 2004 remains
relatively unchanged from fiscal year 2003 and continues to be strongly
influenced by the amount of repair, maintenance and overhaul work awarded
under each of its three Navy cost-type contracts.
Future Operations
The Company plans to continue to actively pursue Government and commercial
repair, maintenance and overhaul opportunities. International opportunities
are limited because shipyards 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 depending
primarily on the level of Shipyard activity. Employment averaged
approximately 1,100 during fiscal year 2004 and totaled 867 employees on March
28, 2004.
During fiscal year 2004 an average of approximately 913 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 28, 2004 approximately
685 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 three-
year agreement, which was 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, in addition to West Coast competitors, include Gulf Coast
and East Coast shipyards with lower wage structures, substantial financial
resources or significant investments in productivity enhancing facilities.
Environmental and Bodily Injury 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 expensed as incurred. Capital expenditures in connection with
environmental compliance include a stormwater system of approximately $4.0
million. 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 $32.0 million as of March 28, 2004 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 28, 2004, the Company has recorded an insurance receivable of
$29.2 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 28, 2004 the Company's backlog consists of approximately $19 million
of repair, maintenance, and conversion work. This compares with backlogs of
approximately $22 million and $46 million at March 30, 2003 and March 31,
2002, respectively. The Company's current backlog is primarily attributable to
firm repair, maintenance and conversion work scheduled for completion during
fiscal year 2005.
Since work under the Company's Navy and Coast Guard phased maintenance
contracts is at the option of the Navy and the U.S. Coast Guard, the Company
cannot provide assurance as to the timing or level of work that may be
performed under these contracts. Therefore, the decrease in the backlog is
primarily due to the timing of the availabilities for the phased maintenance
contracts. Projected revenues from these contracts are not included in the
Company's backlog until contract options are exercised by these customers.
INVESTMENTS AND ACQUISITIONS
The Company routinely evaluates 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 2004, the Company maintained all required certifications.
The design capacities of the Company's two remaining drydocks, both of which
are located at the Shipyard, are as follows:
Year Type Owned Leased Max.Design Date of Lease
Name Built Capacity(in tons) Expiration
Emerald Sea 1970 Steel X 40,000 -
YFD-70 1945 Steel X 17,500 4/15/06
YFD-54, a 5700 ton capacity wooden drydock built in 1943 that the Company had
leased from the Navy since November 2, 1994, sank in heavy weather on October
11, 2003. After considerable effort, Todd raised YFD-54 on October 28, 2003
but the drydock required continuous pumping to keep afloat and remains out of
service. Based on the estimated costs of repairing the damage sustained in
the sinking, the drydock was declared a total constructive loss as of November
20, 2003, and the lease was thereby terminated as of that date. The Company
maintained insurance coverage on YFD-54 and the costs associated with raising
the drydock, less the applicable deductible, were covered under the insurance
policies. Insurance covering the total constructive loss of the drydock is
payable to the Navy.
The Company evaluates its plans for future operations of its remaining leased
dry dock when the lease expiration date falls within the next operating cycle.
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 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 in Note 9 of the Notes to the
Consolidated Financial Statements (Item 8).
The Company's current Navy drydock certifications are for amounts that 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 on all Coast Guard and Washington State
Ferry vessels.
The Company believes that its owned and leased properties at the Shipyard are
in reasonable operating condition given their age and usage, although the
Company has from time to time 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
would allow the Company to maintain Navy certification into the future. This
multi-year plan included scheduled refurbishment periods so repairs did not
interfere with the on-going shipyard operations. With the de-commissioning of
the USS Sacramento, transfer of the USS Bridge and USS Rainier to the Military
Sealift Command and the uncertainties concerning the Navy's intent to do
future repairs on the USS Camden, the Company is re-evaluating its Emerald Sea
refurbishment plan. The Company will continue to assess the plan in light of
its future drydock requirements and will make appropriate changes as needed to
support Shipyard operations. Also, the Company performed an impairment
analysis of the Emerald Sea and determined that this dry dock is not impaired.
Early in fiscal year 2004, the Company announced a special capital budget of
approximately $13 million for planned 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 are in addition to the
Company's routine annual capital expenditures. During fiscal year 2004, the
Company spent approximately $10.0 million of the special facilities capital
budget , and $4.6 million on other shipyard 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 potentially responsible party ("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.
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 28, 2004, the Company maintained aggregate reserves of $32.0 million
for pending claims and assessments relating to environmental matters,
including $23.1 million associated with the Harbor Island Superfund Site (the
"Harbor Island Site") and $8.1 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 28, 2004, such receivables aggregated $29.2 million.
Included in the reserves are sediment remediation costs for Harbor Island of
$13.5 million that are expected to occur in fiscal year 2005. These costs are
reflected in the Company's balance sheet under current liabilities. Likewise,
the insurance receivable of $13.5 million relating to these reserves is
reflected in the Company's balance sheet under current assets.
For more information, see 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 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 provides 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 $23.1 million.
Additionally, the Company 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 2009. 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 2004 the
Company submitted its Final Design Report to the EPA for the SSOU. The Final
Design Report 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.
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 2005. 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.
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. In September 2003, the EPA issued the final "no action" ROD on the
SOU. Given the EPA's issuance of the draft "no action" ROD in fiscal year
2000, the Company had not established a reserve for any remediation on the
SOU.
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 28, 2004.
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. While the Company
did not participate in the allocation process, the allocator's findings were
taken into account in including an estimate of potential liability in the
Company's reserve discussed below.
The Company has further been notified by the Commencement Bay Natural Resource
Trustees ("Trustees") that the parties occupying the aforementioned property
subsequent to 1946 have been allocated liability for natural resource damages.
While the Trustees have not submitted a claim against the Company for natural
resource damages, they have invited the Company to participate in a mediation
with the PRPs to resolve intra-facility allocation issues. The Company is
investigating the potential of any liability it may currently have for its
presence on the site during World Wars I and II when it built war ships at the
direction of the United States government.
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
environmental reserves as discussed below. Immaterial payments began in
fiscal year 1997 and will extend for up to ten years.
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 25 "malignant" claims and approximately 563 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 409 cases open as of March 28, 2004 are
approximately 588 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 588
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 373 claimants do not assert any specific amount of relief
sought.
Approximately 160 claims contain standard boilerplate language
asserting on behalf of each claimant a claim for compensatory damages
of $2 million and punitive damages of $20 million 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.
As a result of claims resolution during fiscal year 2004, bodily injury
reserves declined from $9.4 million at March 30, 2003 to $8.1 million at March
28, 2004. Likewise, bodily injury insurance receivables declined from $7.1
million to $5.8 million. These bodily injury liabilities and receivables are
classified within the Company's Consolidated Balance Sheets as environmental
and other reserves, and insurance receivables, respectively.
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 1970's 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 judgment
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
28, 2004, the 1949 through 1976 agreement will provide coverage for an
additional 21.6 years and the 1976 through 1987 agreement will provide
coverage for an additional 5.4 years. At March 30, 2003, the Company
projected that these agreements would provide coverage for an additional 20.4
years and 5.2 years, respectively. The Company resolved 15 malignant claims in
2004 compared with 13 in 2003 and 20 in 2002. 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 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
Claims filed 4 70 74
Claims resolved (15) (41) (56)
Outstanding, March 28, 2004 25 563 588
Due to uncertainties of the number of cases, the extent of alleged damages,
the population of claimants and size of any awards and/or settlements, there
can be no assurance that the current reserves will be adequate to cover the
costs of resolving the existing cases. Additionally, the Company cannot
predict the eventual number of cases to be filed against it or their eventual
resolution and does not include in its reserve amounts for cases that may be
filed in the future. However, it is probable that if future cases are filed
against the Company it will result in additional costs arising either from its
share of costs under current insurance in place arrangements or due to the
exhaustion of such coverage. The Company reviews the adequacy of existing
reserves periodically based upon developments affecting these claims,
including new filings and resolutions, and makes adjustments to the reserve
and related insurance receivable as appropriate.
As the Company is not able to estimate its potential ultimate exposure for
filed and unfiled claims against the Company, it cannot predict whether the
ultimate resolution of the bodily injury cases will have a material effect on
the Company's results of operations or stockholders' equity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through solicitation
of proxies or otherwise during the fourth quarter of the fiscal year ended
March 28, 2004.
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
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
June 29, 2003 16.03 12.56
September 28, 2003 17.24 14.90
December 29, 2003 18.26 15.82
March 28, 2004 17.80 17.70
On May 21, 2004 the high and low prices of the Company's common stock on the
NYSE were $17.40 and $17.10, respectively.
At May 21, 2004 there were 1,658 holders of record of 5,402,656 outstanding
shares of common stock. During fiscal year 2004, the Company declared a ten
cents ($0.10) per share cash dividend to be paid each quarter. The first
dividend payment commenced on June 23, 2003 to shareholders of record as of
June 2, 2003. Subsequent dividend payments were made each quarter, on
September 23, 2003, December 23, 2003 and March 23, 2004.
On March 19, 2004, the Company declared a dividend of ten cents ($0.10) per
shared to be paid June 23, 2004 to all shareholders of record as of June 8,
2004. On May 21, 2004, the Company declared a dividend of ten cents ($0.10)
per share to be paid September 23, 2004 to all shareholders of record as of
September 8, 2004.
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.
ITEM 5C. TREASURY STOCK
The following table summarizes the purchases of the Company's common stock to
be held in treasury for the past two fiscal years.
Maximum
Total Shares Number of
Purchased as Shares that
Period Total Number of Average Price part of publicly may yet be
Shares Purchased Paid per Share announced plan purchased
Authorized 500,000
Oct 2002 10,000 $12.04 10,000 490,000
Jan 2003 400 12.84 400 489,600
Feb 2003 7,200 12.84 7,200 482,400
Mar 2003 1,900 12.98 1,900 480,500
Apr 2003 22,400 12.94 22,400 458,100
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands of dollars, except for 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 28, March 30, March 31, April 1, April 2,
2004 2003 2002 2001 2000
Operations:
Revenue $147,794 $151,811 $121,945 $116,545(6) $123,851
Operating
income 2,166(1) 5,098(4) 6,902 11,950(7) 5,610(8)
Net income 4,032(2) 4,110(4) 7,018 16,727 8,132
Net income
per share of
common stock
Basic EPS 0.76 0.78 1.05 1.74 0.83
Diluted EPS 0.72 0.74 1.03 1.73 0.82
Financial position:
Working capital 36,362(3) 42,525 37,129(5) 59,293 64,880
Fixed assets 28,244(3) 16,634 16,595 17,358 17,356
Total assets 147,902 141,580 133,680(5) 164,900 139,209
Stockholders'
equity $ 71,371 $ 69,534 $ 65,997(5) $ 93,081 $ 76,185
(1) Operating income was impacted unfavorably by reduced commercial and
other non-Navy volumes, higher direct costs on a fixed priced project,
a non-cash charge arising from the provision for anticipated workers
compensation claims costs due to the bankruptcy of one of the Company's
previous insurance carriers, and higher overhead expenses.
(2) Net income was favorably impacted by a decrease in federal income tax
expense due to the decrease in income before income taxes and the
decrease in income tax expense of $1.1 million resulting from the
resolution in the fourth quarter of certain income tax contingencies
that were established in previous years.
(3) Early in fiscal year 2004, the Company announced a special capital
budget 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 are in addition to the Company's routine annual
capital expenditures. During fiscal year 2004, the Company spent
approximately $10.0 million of the special facilities capital budget
and $4.6 million on other shipyard capital expenditures.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
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 28, 2004, together with the Notes
to the Company's Consolidated Financial Statements for the fiscal year then
ended.
Overview
Fiscal year 2004 started slowly, primarily because the Company's scheduled
work for the Navy during the first quarter was postponed by ship deployments
in support of military operations in Iraq. However, the Company's revenue
increased significantly during the second quarter of the year. This increase
was primarily attributable to a large concentration of repair, maintenance and
overhaul work that was awarded under each of the Company's three U.S. Navy
phased maintenance contracts as the previously deployed ships returned home.
During this same period, the Company's commercial and non-Navy repair business
was somewhat reduced, in part due to drydock maintenance projects that removed
two of the company's docks from service for approximately 30 days each.
During the first half of fiscal year 2004, the Company recorded $65.6 million,
or 44% of its full year revenue. The Company's operating and net income
during the six month period were unfavorable because of the limited amount of
Navy work in the first quarter, the impact of the reduced work on the
Company's commercial and non-Navy results, and the impact of the $2.5 million
provision for workers compensation claims arising from the bankruptcy of
Fremont Indemnity Company, the Company's former workers compensation insurance
carrier.
The financial results for the third and fourth quarters of this year were
significantly stronger as revenues for the second half of the year increased
to $82.2 million, an increase of 25% from the volumes experienced during the
first half of the year. A significant portion of the increased revenues,
operating income and net income experienced in the second half of the year was
attributable to the high volume of Navy work that had been previously deferred
due to military operations in Iraq. In spite of the improvement in the
financial results for the second half, the Company's results were somewhat
diminished by the Navy's decision to reduce the scope of work the Company
performed on the USS Sacramento because of the ship's pending decommissioning.
In addition, the Company experienced higher direct costs than planned on a
fixed priced project that commenced in the third quarter and was completed
early in the Company's fiscal year 2005. The impact of these cost increases,
which had no corresponding revenue associated with them, reduced operating
income by approximately $0.8 million.
For the full year ended March 28, 2004, the Company recorded revenue of $147.8
million, a decrease of $4.0 million, or approximately 3%, from fiscal year
2003 reported revenue of $151.8 million. This revenue decrease is primarily
attributable to reduced commercial and other non-Navy work volumes.
During fiscal year 2004, the Company recorded operating income of $2.2 million
on revenue of $147.8 million, or approximately 1% of revenue. This represents
a decrease in operating income of $2.9 million, or approximately 58% from
fiscal year 2003 operating income of $5.1 million. The decline in operating
income was due to the previously mentioned reduced commercial and other non-
Navy volumes, higher direct costs on a fixed priced project, a non-cash charge
arising from the provision for anticipated workers compensation claim costs
due to the bankruptcy of the Company's former workers compensation insurance
carrier, and higher overhead expenses.
In addition, the Company recognized a $0.6 million gain on available for sale
securities and $1.7 million in non-operating investment income for the year
ended March 28, 2004. These amounts in addition to the operating income
reported, resulted in fiscal year 2004 income before income tax expense of
$4.5 million.
Auxiliary Oiler Explosive ("AOE") Contract
In June 2001, the Company was awarded by the Navy, a six-year, cost-type
contract, under which the Navy has options to have the Company perform
maintenance work on the Auxiliary Oiler Explosive ("AOE") class vessels. 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. The original contract included options for thirteen repair
availabilities to be performed between 2001 and 2007 and was expected to have
a notional value of approximately $180 million if all of the options were
exercised. Since the award, five repair availabilities have been
accomplished.
During the first quarter of fiscal year 2003, the Navy announced its intention
to transfer the USS Rainier (AOE 7) and the USS Bridge (AOE 10) to the
Military Sealift Command ("MSC") which results in five availabilities that
will not be exercised under this contract. AOE 7 was transferred to MSC in
August 2003. AOE 10 is currently scheduled to be transferred in the summer of
2004. The Company anticipates that MSC will contract for future work on these
two vessels on a competitive basis. The potential impact of these transfers
on the Company's future revenues will depend on such factors as the
expenditures for maintenance by MSC, the Company's capacity to bid on future
AOE 7 and AOE 10 work, and the Company's bidding success if such bids are
submitted.
During the fourth quarter of fiscal year 2004, the Company announced that it
was informed by the Navy that the USS Sacramento (AOE 1) is scheduled to be
decommissioned on or about October 1, 2004. Of the two remaining
availabilities on AOE 1, one was exercised on a reduced scale as a five-week,
pier-side availability. The availability, originally scheduled for 12 weeks
in duration, was to include a dry docking of the ship. The other availability
of AOE 1 will not occur due to its decommissioning. The Company does not know
at this point if it will be involved in any of the work related to the
decommissioning of AOE 1.
The AOE contract contains options for two remaining repair availabilities on
the USS Camden (AOE 2) before the contract expires in 2007. There is no
assurance that these two remaining options will be exercised by the Navy in
whole or in part.
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 which at the time included 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")
Subsequent to the end of fiscal year 2004, the Department of the Navy awarded
the Company a five-year, cost-type contract with the long-term overhaul and
maintenance to the NIMITZ CLASS aircraft carriers (CVN) home ported in Puget
Sound. The contract consists of multiple contract options for planned
incremental availabilities (PIA's), docking planned incremental availabilities
(DPIA's) and continuous maintenance and upkeep for the USS LINCOLN (CVN-72),
USS STENNIS (CVN-74), USS NIMITZ (CVN-68) and USS VINSON (CVN-70) when they
are in Puget Sound. The work includes all types of non-nuclear ship repair,
alteration and maintenance. All on-board work is accomplished by the Company
workforce at Puget Sound Naval Shipyard in Bremerton, Washington, or Naval
Station Everett.
The work is performed under a cost plus award fee with performance incentive
fee contract and represents the second contract for aircraft carrier
maintenance awarded to the Company. The first such contract, recently
expired, was awarded in 1999. The Company is supported in this effort by
various regional suppliers and subcontractors. Significant support is
provided by the Company's two teaming partners for this contract, Pacific Ship
Repair and Fabrication ("PacShip") and AMSEC LLC ("AMSEC"). The notional value
for this five-year contract is approximately $133 million if all options are
exercised. There is no assurance that all options will be exercised, in whole
or in part.
United States Coast Guard - Multi-ship; Multi-options (MSMO contract).
During the fourth quarter of fiscal year 2004, the United States Coast Guard
awarded the Company a contract to provide maintenance of two Polar Class
icebreakers. The contract consists of multiple contract options for planned
maintenance availabilities (PMA's) and docking planned maintenance
availabilities (DPMA's) for the POLAR STAR (WAGB-10) and POLAR SEA (WAGB-11).
The availabilities, and their companion planning options, extend through the
last DPMA ending August 2008, and the last PMA ending on September 2008. The
work to be performed includes availability planning and generalized ship
maintenance and repairs as needed, with emphasis on propulsion and deck
machinery work. The Company expects to team with the Coast Guard to identify
the appropriate best value work scope and technical solutions for support of
the two icebreakers. The Company will be supported in this effort by various
regional suppliers and subcontractors.
The work will be performed under a cost plus incentive fee contract. The
Company has performed similar work for the Coast Guard over the past several
years under individual, competitively bid, firm fixed priced contracts. This
current award marks the first time the Coast Guard has used a long term
phased-maintenance approach on the two Polar Class icebreakers home ported in
Seattle. The notional value of all options, if exercised by the Coast Guard,
is approximately $50 million. There is no assurance that all options will be
exercised, in whole or in part.
Electric Boat
During the fourth quarter of fiscal year 2004, the Company entered into a
contract with Electric Boat Corporation of Groton, Connecticut ("Electric
Boat") to support work on Trident submarines. During the period from May to
September 2003, the Company completed planning and preparation work for
Electric Boat. The Company has begun work on a follow-on contract to
fabricate components and to accomplish associated steel outfitting, project
management and quality assurance functions. This contract is associated with
the retrofit work being accomplished by Electric Boat on the USS OHIO (SSBN
726) at the Puget Sound Naval Shipyard.
The Company's work is being performed under a cost plus incentive fee contract
with Electric Boat for the fabrication work, and a firm fixed price contract
for the associated project management and quality assurance work. The total
value of these contracts is approximately $5.3 million and the work is
scheduled to be completed in May 2004.
Bath Iron Works
During the fourth quarter of fiscal year 2004, the Company confirmed its
expected participation, along with Southwest Marine, Inc., San Diego Division,
on the team lead by Bath Iron Works, a subsidiary of General Dynamics
(NYSE:GD), to perform Post Shakedown Availability work ("PSA") on DDG-51 Aegis
Destroyers ("Destroyers"). The U.S. Navy contract for this work, which was
awarded to Bath Iron Works, includes options for PSA work to be accomplished
in Navy homeports of Everett, Washington and Pearl Harbor, HI.
The Company's expected participation will include the performance of the PSA
work on between one and three Destroyers that are expected to be home ported
in Everett, Washington. The first option, if exercised by the Navy, is
anticipated to require work in the first quarter of calendar 2005 and would
have a value of approximately $9 million. Any work that the Company performs
for Bath Iron Works will be accomplished under a cost plus award fee
subcontract still to be finalized between Bath Iron Works and the Company. If
the Navy stations the second and third Destroyers at Everett, Washington and
exercises options for PSA work on those ships, the anticipated contract value
to the Company for its expected work on all three ships will be approximately
$30 million between 2005 and 2007. The PSA work primarily involves the
installation of system and equipment upgrades and/or ship alterations as
required.
Business Volume and Backlog
At March 28, 2004 the Company's backlog consists of approximately $19 million
of repair, maintenance, and conversion work. This compares with backlogs of
approximately $22 million and $46 million at March 30, 2003 and March 31,
2002, respectively. The Company's current backlog is primarily attributable to
firm repair, maintenance and conversion work scheduled for completion during
fiscal year 2005.
Since work under the Company's Navy and Coast Guard phased maintenance
contracts is at the option of the Navy and the U.S. Coast Guard, the Company
cannot provide assurance as to the timing or level of work that may be
performed under these contracts. Therefore, the decrease in the backlog is
primarily due to the timing of the availabilities for the phased maintenance
contracts. Projected revenues from these contracts are not included in the
Company's backlog until contract options are exercised by these customers.
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.
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 as those 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 28, 2004, the
Company maintained aggregate reserves of $32.0 million for pending claims and
assessments relating to these environmental matters, including $23.1 million
associated with the Company's Seattle shipyard site and $8.1 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 28, 2004, the
Company had recorded an insurance receivable of $29.2 million relating to
these environmental and bodily injury matters, including $23.1 million
associated with the Company's Seattle shipyard site and $5.8 million for
bodily injury related claims.
Included in the reserves are sediment remediation costs for Harbor Island of
$13.5 million that are expected to occur in fiscal year 2005. These costs are
reflected in the Company's balance sheet under current liabilities. Likewise,
the insurance receivable of $13.5 million relating to these reserves is
reflected in the Company's balance sheet under current assets.
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.
YEAR TO YEAR COMPARISONS
2004 COMPARED WITH 2003
Net income for fiscal year 2004 decreased by $0.1 million, or 2% from fiscal
year 2003 levels. This decrease was attributable to the reduced volume of
commercial and non-Navy work, higher overhead expenses, and the non-cash
charge arising from the provision for anticipated workers compensations claims
due to the bankruptcy of one of the Company's previous insurance carriers.
This decrease was mostly offset by a decrease in federal income tax expense of
$1.1 million resulting from the resolution in the fourth quarter of certain
income tax contingencies that were established in previous years.
Revenues
The Company recorded revenue of $147.8 million during fiscal year 2004, which
represents a decrease of $4.0 million, or approximately 3%, from fiscal year
2003 reported revenue of $151.8 million. This is primarily attributable to
reduced commercial and other non-Navy work volumes.
Cost of Revenues
Cost of revenues for fiscal year 2004 decreased by $1.6 million, or
approximately 2% from fiscal year 2003. The majority of this decrease was
attributable to decreases in work volumes experienced in fiscal year 2004 when
compared to fiscal year 2003. Cost of revenues as a percentage of revenues
was 73% and 72% for fiscal years 2004 and 2003, respectively.
The increase in cost of revenues as a percentage of revenue in fiscal year
2004 is primarily attributable to a charge recorded in the first quarter
related to the unanticipated bankruptcy of one of the Company's previous
insurance carriers. This charge, which reflects the Company's best estimate
of the known liabilities associated with unpaid workers compensation claims
arising from the two-year coverage period commencing October 1, 1998 is
subject to change as additional facts are uncovered. Although the Company
expects to recover a least a portion of these costs from the liquidation and
other sources, the amount and the timing of any such recovery cannot be
estimated currently and therefore no estimate of amounts recoverable is
included in the current financial results.
Administrative and Manufacturing Overhead
Overhead costs for administrative and manufacturing activities increased by
$1.3 million, or 3% from fiscal year 2003. Administrative and manufacturing
overhead as a percentage revenue was approximately 26% and 24% for fiscal
years 2004 and 2003, respectively. The increase in administrative and
manufacturing overhead costs and as a percentage of revenue is attributable to
increases in repair and maintenance expenses for the Company's dry docks, and
expenses associated with recovery and maintaining the condition of the smaller
of the Company's two dry docks that are leased from the U.S. Navy.
Provision for Environmental Reserves and Other
During fiscal year 2004 and fiscal year 2003, the Company received partial
reimbursement of $0.2 million and $0.1 million, respectively from another
Harbor Island potentially responsible party for certain past environmental
costs incurred by the Company. This partial reimbursement is reflected in
other insurance settlements in the Consolidated Statement of Income for the
years ended March 28, 2004 and March 30, 2003.
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.
Investment and Other Income
Investment and other income in fiscal year 2004 increased by $0.5 million or
approximately 38% when compared to fiscal year 2003. The increase in
investment and other income reported during fiscal year 2004 is primarily
attributable to accelerated lease payments of $0.8 million received by the
Company from one of its warehouse tenants under the terms of a negotiated
lease buyout initiated by the tenant.
In both fiscal year 2004 and fiscal year 2003, the Company's average funds
available for investment purposes were $36.6 million.
Gain on Sale of available-for-sale securities
During fiscal year 2004, the Company reported a net gain of $0.6 million on
the sale of available-for-sale securities, which is an increase of $0.6
million. The significant increase in gains on the sale of available-for-sale
securities reported in fiscal year 2004 is primarily attributable to market
conditions that were more favorable during fiscal year 2004 as compared to
fiscal year 2003.
Income Taxes
In fiscal year 2004, the Company recognized federal income tax expense of $0.5
million. This represents a decrease of $1.7 million, or approximately 79% in
federal tax expense when compared to fiscal year 2003. This decrease is
attributable to the decrease in income before taxes in fiscal year 2004 and
the decrease in income tax expense of $1.1 million resulting from the
resolution in the fourth quarter of certain income tax contingencies that were
established in previous years.
The effective income tax rates recorded in fiscal years 2004 and 2003 were 10%
and 35%, respectively. The statutory income tax rates for both fiscal years
2004 and 2003 were 34% and 34%, respectively.
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.
Environmental Matters and Other Contingencies
The Company has provided total aggregate reserves of $32.0 million as of March
28, 2004 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 28,
2004, the Company has recorded an insurance receivable of $29.2 million to
reflect the contractual arrangements with several insurance companies to share
costs for certain environmental and other matters.
Included in the reserves are sediment remediation costs for Harbor Island of
$13.5 million that are expected to occur in fiscal year 2005. These costs are
reflected in the Company's balance sheet under current liabilities. Likewise,
the insurance receivable of $13.5 million relating to these reserves is
reflected in the Company's balance sheet under current assets.
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 2004, the Company spent $0.3 million for environmental site
remediation. All of these costs are reimbursable to the Company through its
insurance coverages. An additional $1.1 million in environmental site
remediation was spent by third party vendors under the direction of the
Company's management. These costs were paid directly to the third party
vendors under the Company's insurance policies. Most of these expenditures
were related to the Harbor Island Site.
The Company spent approximately $0.5 million and $0.2 million on environmental
site remediation in fiscal years 2003 and 2002, respectively. Of these
amounts, approximately $0.5 million and $0.2 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
$2 thousand on bodily injury cases after reimbursement under the Company's
insurance policies in fiscal year 2004. In fiscal year 2003 and 2002, the
Company spent $25 thousand and $0.5 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 increased its Harbor Island Site reserves
by an additional $9.1 million at the end of fiscal year 2003.
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 $23.1 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 25 "malignant" claims and approximately 563 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 409 cases open as of March 28, 2004 are
approximately 588 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 595
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 373 claimants do not assert any specific amount of relief
sought.
Approximately 160 claims contain standard boilerplate language asserting
on behalf of each claimant a claim for compensatory damages of $2
million and punitive damages of $20 million 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.
As a result of claims resolution during fiscal year 2004, bodily injury
reserves declined from $9.4 million at March 30, 2003 to $8.1 million at March
28, 2004. Likewise, bodily injury insurance receivables declined from $7.1
million to $5.8 million. These bodily injury liabilities and receivables are
classified within the Company's Consolidated Balance Sheets as environmental
and other reserves, and insurance receivables, respectively.
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 1970's 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 28, 2004, the 1949 through 1976 agreement will provide
coverage for an additional 21.6 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.4 years. At March 30, 2003, the Company
projected that these agreements would provide coverage for an additional 20.4
years and 5.2 years, respectively. The Company resolved 15 malignant claims in
2004 compared with 13 in 2003 and 20 in 2002. 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.
Other Reserves
During the first quarter of fiscal year 2004, the Company recorded a reserve
of $2.5 million related to the unanticipated bankruptcy of one of its previous
insurance carriers. The reserve, which reflects the Company's best estimate
of the known liabilities associated with unpaid workers compensation claims
arising from the two-year coverage period commencing October 1, 1998, is
subject to change as additional facts are uncovered. These claims have
reverted to the Company due to the liquidation of the insurance carrier.
Although the Company expects to recover at least a portion of these costs from
the liquidation and other sources, the amount and the timing of any such
recovery cannot be estimated currently and therefore no estimate of amounts
recoverable is included in the current financial results.
Since establishing the reserve during the first quarter, the Company has paid
approximately $0.2 million in claims, which have been charged against the
reserve.
Liquidity, Capital Resources and Working Capital
At March 28, 2004, the Company's cash and cash equivalents, and securities
available-for-sale balances were $1.3 million and $30.7 million, respectively,
for a total of $32.0 million. 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.
The Company anticipates that its cash, cash equivalents and marketable
securities position, anticipated fiscal year 2005 cash flow, access to credit
facilities and capital markets, taken together, will provide sufficient
liquidity to fund operations for fiscal year 2005. 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 $7.0 million for the year ended
March 28, 2004. This amount was primarily attributable to fiscal year net
income adjusted for depreciation, an increase in accounts payable and
accruals, a decrease in the insurance receivable offset by an increase in
costs and estimated profits in excess of billings on incomplete contracts and
a decrease in environmental and other reserves.
Net cash provided by operating activities was $13.1 million for the year ended
March 30, 2003 and was primarily attributable to fiscal year net income
adjusted for environmental and other reserves and accounts receivable, offset
by increases in insurance receivables.
Investing Cash Flows
Net cash used in investing activities was $13.2 million for the year ended
March 28, 2004 and consisted primarily of purchases of marketable securities
and capital expenditures offset by sales and maturities of marketable
securities.
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.
Capital Expenditures
Early in fiscal year 2004, the Company announced a special capital budget of
approximately $13.0 million for planned 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 are in addition to the
Company's routine annual capital expenditures. During fiscal year 2004, the
Company spent approximately $10.0 million of the special facilities capital
budget and $4.6 million on other shipyard capital expenditures.
The Company plans to finance these capital projects from its projected future
cash flows and existing working capital.
During fiscal year 2003, the Company spent approximately $2.8 million on new
capital assets.
The capital expenditures for fiscal year 2004 are in addition to ongoing
repair and maintenance expenditures in the Shipyard of $4.8 million, $5.4
million, and $3.9 million in fiscal years 2004, 2003, and 2002, respectively.
The decrease in fiscal year 2004 repair and maintenance costs when compared to
fiscal year 2003 is primarily attributable to a decrease in direct labor costs
associated with the Company's multi-year refurbishment plan of its owned dry
dock.
Financing Activities
Net cash used in financing activities for fiscal year 2004 was $1.5 million.
This consisted primarily of dividends paid on common stock, offset by proceeds
from the exercise of stock options.
On March 19, 2004, the Company declared a dividend of ten cents ($0.10) per
share, payable on June 23, 2004, to shareholders of record as of June 8, 2004.
Based on the current number of outstanding shares, the impact of this dividend
will be approximately $0.5 million.
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.
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 with interest payable at the prime rate. The credit facility, which
is renewable on a bi-annual basis, provides Todd Pacific with greater
flexibility in funding its operational cash flow needs. Todd Pacific had no
outstanding borrowings as of March 28, 2004 and March 30, 2003, respectively.
Commitments
The Company is subject to certain minimum operating lease payments on one of
its dry docks that are charged to expense. These operating leases contain
renewal options and minimum 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 $2.1 million for current
repair, maintenance and conversion jobs as of March 28, 2004. 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 during the first quarter of fiscal year 2004 an
aggregate of 22,400 shares in open market transactions. The shares were
purchased at an average price of $12.94 per share for total consideration of
$289,887.
Also during fiscal year 2004, 154,000 shares of treasury stock were reissued
pursuant to the exercise of stock options held by four officers of the
Company. 6,553,377 shares were held as treasury stock as of March 28, 2004.
The Company repurchased an aggregate of 19,500 shares during 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.
Labor Relations
Todd Pacific Shipyards currently operates under the terms and conditions of a
collective bargaining agreement with the Puget Sound Metal Trades Council (the
bargaining umbrella for all unions at Todd Pacific Shipyards). The three-year
agreement is in effect from August 1, 2002 to July 31, 2005. The Company
believes its relationship with its labor unions to be stable.
Accounting Changes
Beginning in fiscal year 2003, the Company elected to apply the expense
recognition provisions of FAS No. 123. 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.
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.
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 adoption of FAS No. 143 did
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 January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements of FIN 46 apply to older entities in the first
fiscal year or interim period ending after December 15, 2003. Disclosure
requirements apply to financial statements issued after January 31, 2003. FIN
46 applies to any business enterprise, public or private, that has a
controlling interest, contractual relationship or other business relationship
with a variable interest entity. Since the Company has no contractual
relationship or other business relationship with a variable interest entity,
the adoption of FIN 46 did not have any effect on its consolidated financial
position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150 (FAS No. 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. FAS No. 150 requires that certain financial instruments, which under
previous guidance could be accounted for as equity, be classified as
liabilities in statements of financial position. FAS No. 150 represents a
significant change in practice in accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share
repurchase programs. FAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and was effective for the Company
at the beginning of our second quarter ended September 28, 2003. The adoption
of SFAS No. 150 had no material impact on the Company's financial position,
results of operations, or cash flows.
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 28,
2004, 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 REGISTERED PUBLIC ACCOUNTING FIRM
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 28, 2004 and March
30, 2003, and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended March
28, 2004. Our audits also included the financial statement schedule listed in
the index at item 15(a). These 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 the standards of the Public Company
Accounting Oversight Board (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 28, 2004 and March 30, 2003 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 28, 2004 in conformity with U.S.
generally accepted accounting principles. 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 14, 2004
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 registered public accounting firm has 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 registered public accounting
firm 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 28, 2004 and MARCH 30, 2003
(In thousands of dollars)
2004 2003
ASSETS
Cash and cash equivalents $ 1,328 $ 9,053
Securities available-for-sale 30,682 32,126
Accounts receivable, less allowance for
doubtful accounts of $48 and $98
U.S. Government 5,591 4,322
Other 2,039 3,928
Costs and estimated profits in excess of
billings on incomplete contracts 14,367 6,251
Inventory, less obsolescence reserve
of $139 and $237 1,223 1,434
Insurance receivable - current 13,500 -
Other current assets 1,233 1,268
Deferred taxes 867 -
Total current assets 70,830 58,382
Property, plant and equipment, net 28,244 16,634
Restricted cash 2,936 3,030
Deferred pension asset 28,725 29,709
Insurance receivable 15,748 32,427
Other long-term assets 1,419 1,398
Total assets $147,902 $141,580
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 14,616 $ 9,244
Accrued payroll and related liabilities 2,032 2,606
Billings in excess of costs and estimated
profits on incomplete contracts 1,924 1,357
Environmental and other reserves - current 13,500 -
Taxes payable other than income taxes 2,298 1,417
Income taxes payable 98 787
Deferred taxes - 446
Total current liabilities 34,468 15,857
Environmental and other reserves 18,511 35,055
Accrued post retirement health benefits 15,791 16,588
Deferred taxes 4,930 3,025
Other non-current liabilities 2,831 1,521
Total liabilities 76,531 72,046
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at March 28, 2004 and March 30, 2003,
and outstanding 5,402,656 at March 28, 2004
and 5,271,056 at March 30, 2003 120 120
Paid-in capital 38,114 38,405
Retained earnings 79,918 78,573
Accumulated other comprehensive income 393 429
Treasury stock (6,553,377 shares at March 28, 2004
and 6,684,977 shares at March 30, 2003) (47,174) (47,993)
Total stockholders' equity 71,371 69,534
Total liabilities and stockholders' equity $147,902 $141,580
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 28, 2004, March 30, 2003, and March 31, 2002
(in thousands, except per share amounts)
2004 2003 2002
Revenues $147,794 $151,811 $121,945
Operating Expenses:
Cost of revenues 107,758 109,406 84,787
Administrative and
manufacturing overhead 38,115 36,832 30,721
Provision for environmental
and other reserves - 600 -
Other insurance settlements (245) (125) (465)
Total operating expenses 145,628 146,713 115,043
Operating income 2,166 5,098 6,902
Investment and other income 1,717 1,240 1,816
Gain (loss) on available-for-sale
securities 619 (9) 2,216
Income before income tax expense 4,502 6,329 10,934
Income tax expense (470) (2,219) (3,916)
Net income $ 4,032 $ 4,110 $ 7,018
Net income per Common Share:
Basic $ 0.76 $ 0.78 $ 1.05
Diluted $ 0.72 $ 0.74 $ 1.03
Dividends declared, per common share $ 0.50 $ 0.00 $ 0.00
Weighted Average Shares Outstanding
Basic 5,306 5,283 6,677
Diluted 5,569 5,553 6,827
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 28, 2004, March 30, 2003, and March 31, 2002
(in thousands of dollars)
2004 2003 2002
OPERATING ACTIVITIES:
Net income $ 4,032 $ 4,110 $ 7,018
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 2,996 2,774 3,020
Deferred pension asset 984 1,114 (65)
Post retirement health benefits (797) (816) (783)
Deferred income taxes 592 951 3,339
Decrease (increase) in operating assets:
Costs and estimated profits in excess of
billings on incomplete contracts (8,116) (603) 3,971
Inventory 211 55 42
Accounts receivable 620 7,574 321
Insurance receivable 3,179 (5,629) (696)
Other (net) 219 (787) 6
Increase (decrease) in operating liabilities:
Accounts payable and accruals 4,590 88 (9,691)
Accrued payroll and related liabilities 736 295 1,377
Billings in excess of costs and estimated
profits on incomplete contracts 567 (1,507) 1,231
Environmental and other reserves (3,044) 6,588 737
Income taxes payable (689) (1,130) 263
Other (net) 881 20 475
Net cash provided by operating
activities 6,961 13,097 10,565
INVESTING ACTIVITIES:
Purchases of marketable securities (11,435) (29,741) (9,491)
Sales of marketable securities 5,504 7,663 35,863
Maturities of marketable securities 7,339 3,300 5,550
Capital expenditures (14,606) (2,825) (2,171)
Net cash provided by (used in) investing
activities (13,198) (21,603) 29,751
FINANCING ACTIVITIES:
Restricted cash 94 210 878
Purchase of treasury stock (290) (243) (34,631)
Proceeds from exercise of stock options 853 47 246
Dividends paid on common stock (2,145) - -
Collection of notes receivable from
officers for common stock - - 415
Net cash provided by (used in)
financing activities (1,488) 14 (33,092)
Net increase (decrease) in cash and cash
equivalents (7,725) (8,492) 7,224
Cash and cash equivalents at beginning of year 9,053 17,545 10,321
Cash and cash equivalents at end of year $ 1,328 $ 9,053 $ 17,545
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 23 $ - $ 5
Income taxes 950 2,133 319
Non-cash investing and financing activities:
Impairment of available-for-sale securities $ - $ 260 $ -
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 28, 2004, March 30, 2003, and March 31, 2002
(in thousands of dollars, except for shares)
2004 2003 2002
Shares Amount Shares Amount Shares Amount
Common Stock
Balance at beginning
of the year 5,271,056 $ 120 5,283,222 $ 120 9,362,680 $ 120
Purchase of
treasury stock (22,400) - (19,500) - (4,136,124) -
Exercise of
stock options 154,000 - 7,334 - 56,666 -
Balance at end
of the year 5,402,656 $ 120 5,271,056 $ 120 5,283,222 $ 120
Paid-in Capital
Balance at beginning
of the year - $38,405 - $38,295 - $38,186
Stock based
compensation - 205 - 116 - 217
Proceeds from
exercise of
stock options - (256) - (6) - (108)
Reclass of put
option liability - (240) - - - -
Balance at end
of the year - $38,114 - $38,405 - $38,295
Retained Earnings
Balance at beginning
of the year - $78,573 - $74,463 - $67,445
Net income for the
year - 4,032 - 4,110 - 7,018
Dividends declared - (2,687) - - - -
Balance at end
of the year - $79,918 - $78,573 - $74,463
Accumulated Other
Comprehensive
Income
Balance at beginning
of the year - $ 429 - $ 922 - $ 1,271
Net change in
unrealized gains (losses)
on available-for-sale
securities, (net of tax) - (36) - (493) - (349)
Balance at end
of the year - $ 393 - $ 429 - $ 922
Treasury Stock
Balance at beginning
of the year - $(47,993) -$(47,803) -$(13,526)
Purchase of
treasury stock - (290) - (243) - (34,631)
Exercise of
stock options - 1,109 - 53 - 354
Balance at end
of the year - $(47,174) -$(47,993) -$(47,803)
Notes from Officers
Balance at beginning
of the year - $ - - $ - - $ (415)
Notes Receivable
from officers
for common stock - $ - - $ - - $ 415
Balance at end
of the year - $ - - $ - - $ -
Comprehensive Income
Net income - $ 4,032 - $ 4,110 - $ 7,018
Other comprehensive
income (loss) per
above - $ (36) - $ (493) - $ (349)
Total comprehensive
income - $ 3,996 - $ 3,617 - $ 6,669
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 28, 2004, March 30, 2003, and March 31, 2002
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 classification 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. Certain contracts provide for rights of audit of costs
by the customer. Estimated inputs of pending audits are included in the
estimates of contract revenue. 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 FAS No. 123. 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.
If the Company had elected to apply the expense recognition provision of FAS
No. 123 to options granted prior to March 31, 2002, then the net income would
have been adjusted 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) 2004 2003 2002
Net income:
As reported $ 4,032 $ 4,110 $ 7,018
add: Stock Compensation
as recorded 205 116 217
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (407) (340) (445)
Pro forma $ 3,830 $ 3,886 $ 6,790
Net income per share:
Basic
As reported $ 0.76 $ 0.78 $ 1.05
Pro forma 0.72 0.73 1.02
Diluted
As reported 0.72 0.74 1.03
Pro forma $ 0.69 $ 0.70 $ 0.99
(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 adoption of FAS No. 143 did
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 January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 establishes accounting guidance for consolidation of
variable interest entities that function to support the activities of the
primary beneficiary. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements of FIN 46 apply to older entities in the first
fiscal year or interim period ending after December 15, 2003. Disclosure
requirements apply to financial statements issued after January 31, 2003. FIN
46 applies to any business enterprise, public or private, that has a
controlling interest, contractual relationship or other business relationship
with a variable interest entity. Since the Company has no contractual
relationship or other business relationship with a variable interest entity,
the adoption of FIN 46 did not have any effect on its consolidated financial
position or results of operations.
On May 15, 2003, the FASB issued SFAS No. 150 (FAS No. 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. FAS No. 150 requires that certain financial instruments, which under
previous guidance could be accounted for as equity, be classified as
liabilities in statements of financial position. FAS No. 150 represents a
significant change in practice in accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share
repurchase programs. FAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and was effective for the Company
at the beginning of our second quarter ended September 28, 2003. The adoption
of SFAS No. 150 had no material impact on the Company's financial position,
results of operations, or cash flows.
3. RESTRICTED CASH AND SURETY LINE
A surety company has issued contract bonds totaling $2.1 million for current
repair, maintenance and conversion jobs as of March 28, 2004. 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 $0.2 million and $0.3 million as of
March 28, 2004 and March 30, 2003, 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 28, 2004
Debt securities:
U.S. Treasury securities
and agency obligations $ 2,865 $ 18 $ - $ 2,883
U.S. corporate
securities 20,197 297 (12) 20,482
Mortgage-backed
securities 6,288 98 - 6,386
Total debt securities 29,350 413 (12) 29,751
Equity securities:
U.S. securities 360 76 - 436
Foreign stock 366 129 - 495
Total equity securities 726 205 - 931
Total securities $30,076 $ 618 $ (12) $30,682
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
The Company had gross realized gains of $683 thousand, $255 thousand, and $2.4
million on sales of available-for-sale securities for fiscal years 2004, 2003
and 2002 respectively.
The Company had gross realized losses of $64 thousand, $264 thousand, and
$156.6 thousand on sales of available-for-sale securities for fiscal year
2004, 2003 and 2002, 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 28, 2004
Debt securities:
Due in one year or less $ 4,957 $ 5,048
Due after one year through three years 18,105 18,317
Subtotal 23,062 23,365
Mortgage-backed securities 6,288 6,386
Equity securities 726 931
Total $ 30,076 $ 30,682
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
5. CONTRACTS
Auxiliary Oiler Explosive ("AOE") Contract
In June 2001, the Company was awarded by the Navy, a six-year, cost-type
contract, under which the Navy has options to have the Company perform
maintenance work on the Auxiliary Oiler Explosive ("AOE") class vessels. 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. The original contract included options for thirteen repair
availabilities to be performed between 2001 and 2007 and was expected to have
a notional value of approximately $180 million if all of the options were
exercised. Since the award, five repair availabilities have been
accomplished.
During the first quarter of fiscal year 2003, the Navy announced its intention
to transfer the USS Rainier (AOE 7) and the USS Bridge (AOE 10) to the
Military Sealift Command ("MSC") which results in five availabilities that
will not be exercised under this contract. AOE 7 was transferred to MSC in
August 2003. AOE 10 is currently scheduled to be transferred in the summer of
2004. The Company anticipates that MSC will contract for future work on these
two vessels on a competitive basis. The potential impact of these transfers
on the Company's future revenues will depend on such factors as the
expenditures for maintenance by MSC, the Company's capacity to bid on future
AOE 7 and AOE 10 work, and the Company's bidding success if such bids are
submitted.
During the fourth quarter of fiscal year 2004, the Company announced that it
was informed by the Navy that the USS Sacramento (AOE 1) is scheduled to be
decommissioned on or about October 1, 2004. Of the two remaining
availabilities on AOE 1, one was exercised on a reduced scale as a five-week,
pier-side availability. The availability, originally scheduled for 12 weeks
in duration, was to include a dry docking of the ship. The other availability
of AOE 1 will not occur due to its decommissioning. The Company does not know
at this point if it will be involved in any of the work related to the
decommissioning of AOE 1.
The AOE contract contains options for two remaining repair availabilities on
the USS Camden (AOE 2) before the contract expires in 2007. There is no
assurance that these two remaining options will be exercised by the Navy in
whole or in part.
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 which at the time included 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, as well as at Naval
Station Everett, depending on the type of work to be performed.
Planned Incremental Availability ("PIA")
Subsequent to the end of fiscal year 2004, the Department of the Navy awarded
the Company a five-year, cost-type contract with the long-term overhaul and
maintenance to the NIMITZ CLASS aircraft carriers (CVN) home ported in Puget
Sound. The contract consists of multiple contract options for planned
incremental availabilities (PIA's), docking planned incremental availabilities
(DPIA's) and continuous maintenance and upkeep for the USS LINCOLN (CVN-72),
USS STENNIS (CVN-74), USS NIMITZ (CVN-68) and USS VINSON (CVN-70) when they
are in Puget Sound. The work includes all types of non-nuclear ship repair,
alteration and maintenance. All on-board work is accomplished by the Company
workforce at Puget Sound Naval Shipyard in Bremerton, Washington, or Naval
Station Everett.
The work is performed under a cost plus award fee with performance incentive
fee contract and represents the second contract for aircraft carrier
maintenance awarded to the Company. The first such contract, recently
expired, was awarded in 1999. The Company is supported in this effort by
various regional suppliers and subcontractors. Significant support is
provided by the Company's two teaming partners for this contract, Pacific Ship
Repair and Fabrication ("PacShip") and AMSEC LLC ("AMSEC"). The notional value
for this five-year contract is approximately $133 million if all options are
exercised.
United States Coast Guard - Multi-ship; Multi-options (MSMO contract)
During the fourth quarter of fiscal year 2004, the United States Coast Guard
awarded the Company a contract to provide maintenance of two Polar Class
icebreakers. The contract consists of multiple contract options for planned
maintenance availabilities (PMA's) and docking planned maintenance
availabilities (DPMA's) for the POLAR STAR (WAGB-10) and POLAR SEA (WAGB-11).
The availabilities, and their companion planning options, extend through the
last DPMA ending August 2008, and the last PMA ending on September 2008. The
work to be performed includes availability planning and generalized ship
maintenance and repairs as needed, with emphasis on propulsion and deck
machinery work. The Company expects to team with the Coast Guard to identify
the appropriate best value work scope and technical solutions for support of
the two icebreakers. The Company will be supported in this effort by various
regional suppliers and subcontractors.
The work will be performed under a cost plus incentive fee contract. The
Company has performed similar work for the Coast Guard over the past several
years under individual, competitively bid, firm fixed priced contracts. This
current award marks the first time the Coast Guard has used a long term
phased-maintenance approach on the two Polar Class icebreakers home ported in
Seattle. The notional value of all options, if exercised by the Coast Guard,
is approximately $50 million. There is no assurance that all options will be
exercised, in whole or in part.
Electric Boat
During the fourth quarter of fiscal year 2004, the Company entered into a
contract with Electric Boat Corporation of Groton, Connecticut ("Electric
Boat") to support work on Trident submarines. During the period from May to
September 2003, the Company completed planning and preparation work for
Electric Boat. The Company has begun work on a follow-on contract to
fabricate components and to accomplish associated steel outfitting, project
management and quality assurance functions. This contract is associated with
the retrofit work being accomplished by Electric Boat on the USS OHIO (SSBN
726) at the Puget Sound Naval Shipyard.
The Company's work is being performed under a cost plus incentive fee contract
with Electric Boat for the fabrication work, and a firm fixed price contract
for the associated project management and quality assurance work. The total
value of these contracts is approximately $5.3 million and the work is
scheduled to be completed in May 2004.
Unbilled Receivables - Certain unbilled items on completed contracts (costs
and estimated profits in excess of billings) included in accounts receivable
were approximately $2.5 million at March 28, 2004 and $1.0 million at March
30, 2003.
Customers - Revenues from the U.S. Government were $123.8 million (84%),
$123.9 million (82%) and $96.1 million (79%) in fiscal years 2004, 2003, and
2002, respectively. Revenues from the Washington State Ferry System were $4.4
million (3%), $4.9 million (3%) and $10.3 million (8%) in fiscal year 2004,
2003 and 2002, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment and accumulated depreciation at March 28, 2004
and March 30, 2003 consisted of the following (in thousands):
2004 2003
Land $ 1,151 $ 1,151
Buildings 13,457 12,151
Piers, shipways and drydocks 29,326 24,516
Machinery and equipment 46,881 38,492
Total plant and equipment, at cost 90,815 76,310
Less accumulated depreciation (62,571) (59,676)
Plant, property and equipment, net $ 28,244 $ 16,634
The Company recognized $3.0 million, $2.8 million, and $3.0 million of
depreciation expense in fiscal years 2004, 2003 and 2002, 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 $1.6 million and $1.7 million in excess
pension assets from its Retirement System into a fund to pay fiscal year 2004
and 2003 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 Trades 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
2004 2003 2004 2003
Change in Benefit Obligation
(in thousands of dollars)
Benefit obligation at beginning of year $27,870 $33,376 $15,396 $15,592
Service cost 562 550 - -
Interest cost 1,701 1,887 961 1,046
Actuarial (gain)/loss 1,093 (109) 4,679 474
Benefits paid (1,923) (2,086) (1,634) (1,716)
Plan Settlement - (5,748) - -
Benefit obligation at end of year $29,303 $27,870 $19,402 $15,396
Other
Postretirement
Pension Benefits Benefits
2004 2003 2004 2003
Change in Plan Assets
(in thousands of dollars)
Fair value of plan assets at beginning
of year $48,824 $60,799 $ - $ -
Actual gain (loss) on plan assets 7,103 (2,268) - -
Employer contribution - - 51 48
Asset transfer (1,634) (1,668) 1,634 1,668
Benefits paid (1,923) (2,086) (1,685) (1,716)
Plan Settlement - (5,953) - -
Fair value of plan assets at end of year $52,370 $48,824 $ - $ -
Other
Postretirement
Pension Benefits Benefits
2004 2003 2004 2003
Funded Status Reconciliation
(in thousands of dollars)
Funded status of plans $23,067 $20,954 $(19,402) $(15,396)
Unrecognized prior service cost 126 363 - -
Unrecognized (gain)/loss 5,532 8,392 2,095 (2,684)
Deferred pension asset
(accrued liability) 28,725 29,709 (17,307) (18,080)
Less: current portion included in
"Accounts payable and accruals" - - 1,516 1,492
Long-term accrued postretirement
health benefits $ - $ - $(15,791) $(16,588)
Other
Postretirement
Pension Benefits Benefits
2004 2003 2004 2003
Weighted Average Assumptions
Discount rate (1) 5.75% 6.50% 5.75% 6.50%
Expected return on plan assets(2) 7.25% 7.50% - -
Rate of compensation increase 4.50% 4.50% - -
Medical trend rate (retirees) (3) - - 10.50% 9.00%
(1) The Company reduced its discount rate assumption in fiscal year 2004 to
reflect the overall decrease in long term interest rates generally available
in the market.
(2) The Company reduced its expected return on plan assets assumption in 2004
to reflect the overall decrease in the expected performance of its plan assets
due to market conditions.
(3) Postretirement benefit medical trend rate in fiscal year 2004 is 10.5%
graded to 6.00% over 9 years. Fiscal year 2003 is 9.00% graded to 6.00% over
3 years. The increase in the medical trend rate is due to the increasing cost
of prescription drugs and the age of the plan participants.
Other
Postretirement
Pension Benefits Benefits
2004 2003 2002 2004 2003 2002
Components of Net Periodic
Benefit Cost
(in thousands of dollars)
Service Cost $ 562 $ 550 $ 480 $ - $ - $ -
Interest cost on
projected benefit
obligation 1,701 1,887 2,283 961 1,046 1,046
Expected return on
plan assets (3,538) (4,004) (4,660) - - -
Amortization of prior
service cost 238 233 245 - - -
Recognized actuarial
(gain)/loss 388 - - (100) (162) (174)
Plan Settlement - 780 - - - -
Net periodic (benefit)
cost before OBRA '90 (649) (554) (1,652) 861 884 872
Transfer of assets for
payment of retiree
medical benefits
(401(h) Plan) 1,634 1,668 1,587 (1,634) (1,668) (1,587)
Net periodic cost (benefit)$ 985 $ 1,114 $ (65) $(773) $(784) $ (715)
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
2004 2003
Effect of a 1% Increase in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ 76 $ 83
Accumulated postretirement benefit obligation 1,466 1,165
Effect of a 1% Decrease in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost (67) (73)
Accumulated postretirement benefit obligation $(1,308) $(1,040)
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 $3.8
million, $3.4 million and $2.6 million, for fiscal years 2004, 2003 and 2002,
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 has 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 $0.2 million,
$0.1 million, and $0.1 million in fiscal years 2004, 2003, and 2002,
respectively.
Asset allocations - The weighted-average asset allocations for the pension
plan by asset categories are as follows.
Fiscal year ending 2004 2003
Asset Category
Equity Securities 29% 23%
Fixed Income 32 40
Convertible Securities 39 37
Total 100% 100%
Investment strategy - The general investment objective is to obtain a rate of
return and sufficient liquidity that will allow the plan to meet required
benefit payments. Emphasis is placed on long-term performance and not short-
term market aberrations. The assets are diversified among the following asset
categories within allocation ranges approved by the Company's Board of
Directors. These asset categories and respective allocation ranges are as
follows.
Equities 15-35%
Fixed Income 30-50%
Convertible Securities 20-40%
Future Cash Flow Information - Due to the well-funded status of the Company's
pension plan, no contributions are required for the subsequent plan year. No
funding of the Company's post-retirement benefit plan is anticipated in the
subsequent plan year except to pay premium costs which are covered by the
transfer of excess pension assets.
The estimated pension benefit payments and post-retirement premiums are as
follows.
Other
Post-retirement
Plan Year Pension Benefits Benefits
7/03-6/04 $2,523 $1,712
7/04-6/05 2,360 1,744
7/05-6/06 2,336 1,782
7/06-6/07 2,411 1,798
7/07-6/08 2,444 1,809
7/08-6/13 11,799 8,562
Medicare Drug Act - On December 8, 2003, the Medicare Prescription,
Improvement and Modernization Act of 2003 (Medicare Drug Act) was signed into
law. The Act introduces a prescription drug benefit under Medicare Part D as
well as a Federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare
Part D. Specific authoritative guidance on the accounting for the Federal
subsidy was not finalized until May 19, 2004.. Therefore, at this time the
Company has elected to not recognize the impact of the Federal subsidy on our
accumulated postretirement benefit obligation and net postretirement benefit
costs. The future impact of this subsidy is estimated to be an actuarial gain
of approximately $2.0 million to be amortized over the average service life of
the plan participants.
8. INCOME TAXES
Components of the income tax expense (benefit) are as follows (in thousands)
2004 2003 2002
Current tax expense $ (141) $ 1,002 $ 390
Deferred tax expense (benefit) 611 1,217 3,526
Total income tax expense (benefit) $ 470 $ 2,219 $ 3,916
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):
2004 2003 2002
Tax provision at
federal statutory tax rate $ 1,531 34.0% $ 2,152 34.0% $ 3,827 35.0%
Reduction in
current tax liability (1,128)(25.1)% - 0.0% - 0.0%
Other - net 67 1.5% 67 1.1% 89 0.8%
Income tax expense (benefit) $ 470 10.4% $ 2,219 35.1% $ 3,916 35.8%
This decrease in valuation allowance of $1.1 million is due to the resolution
in the fourth quarter of certain income tax contingencies that were
established in prior years.
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 28, 2004
and March 30, 2003 were as follows (in thousands):
2004 2003
Deferred income tax assets:
Alternative minimum tax credit
carryforwards $ 835 $ 1,597
Accrued employee benefits 7,750 7,174
Environmental and other reserves 11,204 12,269
Inventory reserves 49 83
Reserve for doubtful accounts 15 34
Other 559 610
Total deferred income tax assets 20,412 21,767
Deferred income tax liabilities:
Insurance receivable (10,233) (11,349)
Deferred pension income (10,054) (10,398)
Accelerated depreciation (3,591) (1,740)
Contract deferrals 145 (1,020)
Securities available-for-sale (192) (231)
Other (550) (500)
Total deferred income tax
liabilities (24,475) (25,238)
Net deferred tax liability $ (4,063) $ (3,471)
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 2004, the Company utilized approximately, $0.8 million in
alternative minimum tax credits. The Company has approximately $0.8 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, $0.8 million
and $0.9 million for fiscal years 2004, 2003 and 2002, respectively. Certain
leases contain renewal options and minimum amounts of annual maintenance
clauses. Minimum lease commitments at March 28, 2004 are summarized below (in
thousands):
Operating
Leases
2005 $ 823
2006 794
2007 71
2008 43
2009 42
Thereafter 157
Total minimum lease commitments $ 1,930
10. FINANCING ARRANGEMENTS
During fiscal year 2002, the Company negotiated a $10.0 million revolving
credit facility with interest payable at the prime rate. The credit facility,
which is renewable on a bi-annual basis, provides the Company with greater
flexibility in funding its operational cash flow needs. The Company had no
outstanding borrowings as of March 28, 2004 and March 30, 2003, 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 $23.1 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 2004 the
Company submitted its Final Design Report to the EPA for the SSOU. The Final
Design Report 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.
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 2005. 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 2001.
During January 1998, the Company was notified by the EPA that testing would be
required in the West Waterway of the Duwamish River outside the borders of the
SSOU as part of the SOU. The Company 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. In
September 2003, the EPA issued the final "no action" ROD on the SOU. Given
the EPA's issuance of the draft "no action" ROD in fiscal year 2000, the
Company had not established a reserve for any remediation on the SOU.
The Company's environmental reserves for the entire Harbor Island Site
aggregated $23.1 million at March 28, 2004.
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. While the Company
did not participate in the allocation process, the allocator's findings were
taken into account in including an estimate of potential liability in the
Company's reserve discussed below.
The Company has further been notified by the Commencement Bay Natural Resource
Trustees ("Trustees") that the parties occupying the aforementioned property
subsequent to 1946 have been allocated liability for natural resource damages.
While the Trustees have not submitted a claim against the Company for natural
resource damages, they have invited the Company to participate in a mediation
with the PRPs to resolve intra-facility allocation issues. The Company is
investigating the potential of any liability it may currently have for its
presence on the site during World Wars I and II when it built war ships at the
direction of the United States government.
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.
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,
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 25 "malignant" claims and approximately 563 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 409 cases open as of March 28, 2004 are
approximately 588 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 599
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 373 claimants do not assert any specific amount of relief
sought.
Approximately 160 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.
As a result of claims resolution during fiscal year 2004, bodily injury
reserves declined from $9.4 million at March 30, 2003 to $8.1 million at March
28, 2004. Likewise, bodily injury insurance receivables declined from $7.1
million to $5.8 million. These bodily injury liabilities and receivables are
classified within the Company's Consolidated Balance Sheets as environmental
and other reserves, and insurance receivables, respectively.
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 1970's 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 28, 2004, the 1949 through 1976 agreement will provide
coverage for an additional 21.6 years and the 1976 through 1987 agreement will
provide coverage for an additional 5.4 years. At March 30, 2003, the Company
projected that these agreements would provide coverage for an additional 20.4
years and 5.2 years, respectively. The Company resolved 15 malignant claims in
2004 compared with 13 in 2003 and 20 in 2002. 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, $0.6 million and $0 in charges against earnings
in fiscal years 2004, 2003, and 2002, 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 $0.2 million,
$0.1 million and $0.5 million in fiscal years 2004, 2003 and 2002,
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 $32.0 million as of March
28, 2004 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 28, 2004, the
Company has recorded an insurance receivable asset of $29.2 million to reflect
contractual arrangements with several insurance companies to share costs for
certain environmental matters.
Included in the reserves are sediment remediation costs for Harbor Island of
$13.5 million that are expected to occur in fiscal year 2005. These costs are
reflected in the Company's balance sheet under current liabilities. Likewise,
the insurance receivable of $13.5 million relating to these reserves is
reflected in the Company's balance sheet under current assets.
Other Reserves
During the first quarter of fiscal year 2004, the Company recorded a reserve
of $2.5 million related to the unanticipated bankruptcy of one of its previous
insurance carriers. The reserve, which reflects the Company's best estimate
of the known liabilities associated with unpaid workers compensation claims
arising from the two-year coverage period commencing October 1, 1998, is
subject to change as additional facts are uncovered. These claims have
reverted to the Company due to the liquidation of the insurance carrier.
Although the Company expects to recover at least a portion of these costs from
the liquidation and other sources, the amount and the timing of any such
recovery cannot be estimated currently and therefore no estimate of amounts
recoverable is included in the current financial results.
Since establishing the reserve during the first quarter, the Company has paid
approximately $0.2 million in claims, which have been charged against the
reserve.
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
Todd Pacific Shipyards currently operates under the terms and conditions of a
collective bargaining agreement with the Puget Sound Metal Trades Council (the
bargaining umbrella for all unions at Todd Pacific Shipyards). The three-year
agreement is in effect from August 1, 2002 to July 31, 2005. The Company
believes its relationship with its labor unions to be stable.
During fiscal year 2004, an average of approximately 913 of the Company's
Shipyard employees were covered by the collective bargaining agreement. At
March 28, 2004 approximately 685 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,
during the first quarter of fiscal year 2004, the Company repurchased an
aggregate of 22,400 shares in open market transactions. The shares were
purchased at an average price of $12.94 per share for a total consideration of
$289,887.
The Company repurchased an aggregate of 19,500 shares during 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 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
Shares repurchased (22,400) 22,400 -
Options Exercised 154,000 (154,000) -
As of March 28, 2004 5,402,656 6,553,377 11,956,033
15. INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
March 28, March 30, March 31,
2004 2003 2002
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted net
income per share:
Net income $ 4,032 $ 4,110 $ 7,018
Denominator:
Denominator for basic net income per
share - weighted average
common shares outstanding 5,306 5,283 6,677
Effect of dilutive securities
Stock options based
on the treasury stock method using
average market price 263 270 150
Denominator for diluted net income per share 5,569 5,553 6,827
Basic income per share $ 0.76 $ 0.78 $ 1.05
Diluted income per share $ 0.72 $ 0.74 $ 1.03
16. STOCK BASED COMPENSATION
The Company's Incentive Stock Compensation Plan (the "Plan"), approved by the
Board of Directors in 1993 and subsequently ratified by the shareholders,
provided 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. An aggregate of 1,000,000 shares
of common stock had been authorized for issuance under the Plan. Options
issued under that Plan generally vest ratably over three years and expire not
more than ten years from the date of grant and were granted at prices equal to
the fair value on the date of grant. The Plan expired in 2003. At the time
of expiration, there were 135,000 options that had not been granted under the
Plan and they expired as well.
In anticipation of the expiration of the Plan, the Board of Directors approved
the Todd Shipyards Corporation 2003 Incentive Stock Option Plan ("2003 Plan")
in 2003 and it was ratified by the shareholders at the 2003 Annual Meeting.
The 2003 Plan provides for the granting of incentive stock options, non-
qualified stock options, performance share awards and restricted stock grants
or any combination of such grants or awards to directors, officers and key
employees of the Company to purchase shares of the Class A Common Stock of the
Company. An aggregate of 250,000 shares of common stock has been authorized
for issuance under the 2003 Plan.
A summary of stock option transactions for the years ended March 28, 2004,
March 30, 2003 and March 31, 2002 is as follows:
Weighted
Average
Shares Number Option Price Exercise
Exercisable of Shares Per Share Price
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
Granted 100,000 14.19 14.19
Exercised (154,000) 4.25 to 7.94 5.53
Outstanding, March 28, 2004 447,000 6.55 to 14.19 8.37
Exercisable, March 28, 2004 347,000 - 6.55 to 7.94 6.69
At March 28, 2004, the Company has reserved 697,000 shares of its common stock
for issuance under the Plan and the 2003 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.
The outstanding stock options have a contractually weighted-average life of
4.8 years as of March 28, 2004. No options were granted during fiscal year
2002 or fiscal year 2003. The weighted average fair value of options granted
in 2004 was $3.94.
The fair value of options granted in 2004 was calculated using a Black-Scholes
option pricing model with the following weighted-average assumptions on the
option grant date:
Pa
Employee Stock Option
Year Ended
2004
Expected life (years) 4
Expected volatility 38%
Risk-free interest rate 4%
Expected dividend yield 3%
17. SUBSEQUENT EVENTS
On April 1, 2004, the Company announced the U.S. Navy had awarded to its
wholly owned subsidiary, Todd Pacific Shipyards, a five-year contract under
which the Navy has options to have the Company provide long-term overhaul and
maintenance to the NIMITZ CLASS aircraft carriers (CVN) homeported in Puget
Sound.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended March 28, 2004 and
March 30, 2003 and are as follows. Each quarter is 13 weeks in length.
(in thousands, except per share data):
Operating Net Net income(loss)
income income per Share
Revenues (loss) (loss) Basic Diluted
1st Qtr 2004 $ 21,138 $ (3,720) $ (2,220) $ (0.42) $(0.42)
2nd Qtr 2004 44,433 2,619 1,980 0.37 0.35
3rd Qtr 2004 40,305 1,518 1,736 0.32 0.31
4th Qtr 2004 41,918 1,749 2,536 0.47 0.45
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)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
** The information for the below items will be provided in, and is
incorporated by reference to the 2004 Proxy Statement.
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
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of
the period covered by this report. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely making known to
them material information relating to the Company and the Company's
consolidated subsidiaries required to be disclosed in the Company's reports
filed or submitted under the Exchange Act.
There has been no change in the Company's internal control over financial
reporting.
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 Registered Public
Accounting Firm.................................................*
Report of Management ............................................*
Consolidated Balance Sheets at March 28, 2004
and March 30, 2003 ............................................*
Consolidated Statements of Income
For the years ended March 28, 2004,
March 30, 2003 and March 31, 2002. .............................*
Consolidated Statements of Cash Flows
For the years ended March 28, 2004,
March 30, 2003 and March 31, 2002. .............................*
Consolidated Statements of Stockholders' Equity
For the years ended March 28, 2004,
March 30, 2003 and March 31, 2002. .............................*
Notes to Consolidated Financial Statements
For the years ended March 28, 2004,
March 30, 2003 and March 31, 2002. .............................*
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 32.1, 32.2, 99.1 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 September 12, 2003, approved
by the shareholders of the Company at the 2003 Annual
Meeting of Shareholders filed as an appendix in the Company's
definitive proxy statement for 2003 Annual Meeting of the
shareholders.
10-4 Employment contract between the Company and Stephen G. *
Welch dated February 7, 2001.
10-5 Grant of Incentive Stock Option dated February 7, 2001 *
to Stephen G. Welch pursuant to the Incentive Stock
Compensation Plan
10-6 Put Agreement between the Company and Stephen G. *
Welch dated February 7, 2001.
10-7 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.
10-8 Employment contract between the Company and Thomas V *
dated June 4, 2003 filed in the Company's 10-K Report
for 2003.
10-9 Todd Shipyards Corporation Executive Incentive #
Compensation Plan effective March 31, 2003. (filed herewith)
22-1 Subsidiaries of the Company. *
23 Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm #
31.1 Certification of Chief Executive Officer pursuant #
to Rule 13a-14 (filed herewith)
31.2 Certification of Chief Financial Officer pursuant #
to Rule 13a-14a(filed herewith)
32.1 Certification of Chief Executive Officer pursuant to Rule 13a- #
14(b) and section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code. (furnished herewith)
32.2 Certification of Chief Financial Officer pursuant to Rule 13a- #
14(b) and section 906 of the Sarbanes-Oxley Act of 2002
(subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code. (furnished herewith)
99.1 Press Release dated May 25, 2004 announcing financial results #
for the Company's quarterly and nine month periods ending
March 28, 2004. (furnished herewith)
Note: All Exhibits are in SEC File Number 1-5109.
* Incorporated herein by reference.
# Filed or furnished herewith.
(b) Reports on Form 8-K
On December 29, 2003, the Registrant filed a form 8-K, item 5, announcing that
the U.S. Navy has reduced the scope of work requested to be performed by its
wholly owned subsidiary, Todd Pacific Shipyards, on the AOE 1 during an
upcoming availability.
On December 30, 2003, the Registrant filed a form 8-K, item 5, announcing that
the U.S. Navy has awarded to its wholly owned subsidiary, Todd Pacific
Shipyards, a $7,084,130 modification to previously awarded contract (N00024-
00-C-8514).
On January 14, 2004, the Registrant filed a form 8-K, item 5, announcing that
it had been informed by the US Navy that the AOE 1 is scheduled to be
decommissioned on or about October 1, 2004.
On January 29, 2004, the Registrant filed a form 8-K, item 5, announcing that
its wholly owned subsidiary, Todd Pacific Shipyards, had entered into a
contract with Electric Boat Corporation to support their work on Trident
submarines.
On February 6, 2004, the Registrant filed a form 8-K, item 5, announcing that
its wholly owned subsidiary, Todd Pacific Shipyards, confirmed its expected
participation, along with Southwest Marine, Inc., San Diego Division, on the
team lead by Bath Iron Works, a subsidiary of General Dynamics (NYSE:GD), to
perform Post Shakedown Availability work on DDG-51 Aegis Destroyers.
On March 1, 2004, the Registrant filed a form 8-K, item 5, announcing that it
had been notified that its wholly owned subsidiary, Todd Pacific Shipyards,
had been awarded a contract with the United States Coast Guard to provide
long-term maintenance of two Polar Class icebreakers.
On April 1, 2004, the Registrant filed a form 8-K, item 5, announcing that its
wholly owned subsidiary, Todd Pacific Shipyards, had been awarded a five-year
contract with the United States Navy to provide long-term maintenance to the
NIMITZ CLASS aircraft carriers (CVN) home ported in the Puget Sound.
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
May 21, 2004
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
May 21, 2004 May 21, 2004
/s/ Patrick W.E. Hodgson David F. Jeremiah
Patrick W.E. Hodgson, /s/David F. Jeremiah, Director
Chairman, May 21, 2004
and Director
May 21, 2004
/s/ Joseph D. Lehrer /s/ Philip N. Robinson
Joseph D. Lehrer, Director Philip N. Robinson, Director
May 21, 2004 May 21, 2004
/s/ Stephen G. Welch
Stephen G. Welch
President,
Chief Executive Officer,
and Director
May 21, 2004
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending March 28, 2004, March 30, 2003 and March 31, 2002
(in thousands)
Reserves deducted from assets to which they apply - Allowance for doubtful
accounts:
Year Ended
March 28, March 30, March 31
2004 2003 2002
Balance at beginning of period $ 98 $ 150 $ 100
Charged to costs and expenses - - 13
(Deductions) recoveries
from reserves (1) (55) (52) 37
Balance at close of period $ 43 $ 98 $ 150
Reserves deducted from assets to which they apply - Allowance for obsolete
inventory:
Balance at beginning of period $ 237 $ 280 $ 280
Charged to costs and expenses - - -
(Deductions) recoveries
from reserves (2) (98) (43) -
Balance at close of period $ 139 $ 237 $ 280
Notes:
(1) Deductions from reserves represent uncollectible accounts written off less
recoveries.
(2) Deductions from reserves represent obsolete inventory written off.