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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 30, 1997
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 (206) 623-1635
(Address of principal executive offices)(zip code) Registrant's
telephone number
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
Common stock, $.01 par value per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non affiliates
of the registrant was approximately $29 million as of June 18,
1997.
There were 9,910,180 shares of the corporation's $.01 par value
common stock outstanding at June 18, 1997.
TABLE OF CONTENTS
PART I
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 8. Consolidated Financial Statements and
Supplementary Data..................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................
PART III
Item 10. Directors and Executive Officers of the
Registrant..........................................
Item 11. Executive Compensation..............................
Item 12. Security Ownership of Certain Beneficial Owners
and Management.....................................
Item 13. Certain Relationships and Related Transactions......
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................
ITEM 1. BUSINESS
INTRODUCTION
Todd Shipyards Corporation (the "Company") was organized in 1916
and has operated a shipyard in Seattle, Washington (the
"Shipyard") since incorporation. The Company operates the
Shipyard through its wholly owned subsidiary Todd Pacific
Shipyards Corporation ("Todd Pacific"). Todd Pacific is engaged
in the repair/overhaul, conversion and construction of commercial
and military marine vessels.
Until early in this decade, a substantial portion of the
Company's revenues and profits were attributable to long-term
United States Government ("Government") contracts. The
significant decline in the annual shipbuilding budgets of the
Department of the Navy (the "Navy") has greatly reduced the
Company's bidding opportunities for long-term Government
contracts. This reduction in long-term Government contracts has
created excess ship construction and repair capacity in all of
the Company's markets. This excess shipyard capacity, both
nationally and locally, has resulted in intense price
competition. The Company has responded to this competition by
carefully reviewing its overhead, streamlining its operations and
implementing advanced shipyard production techniques.
Recent Shipyard activity has included construction of Jumbo Mark
II Class ferries ("Mark II Ferry") for the Washington State Ferry
System ("Ferry System"), short-term repair, overhaul and phased
maintenance work on Government vessels, as well as commercial
repair, overhaul and conversion work on container vessels,
tankers, fishing industry vessels, cruise ships, barges, tug
supply vessels and ferries.
The Company believes that it will continue to perform a
substantial amount of maintenance and repair work on commercial
vessels engaged in various seagoing trade activities in Puget
Sound (near Seattle). It plans to pursue repair, maintenance,
overhaul and new construction work for the ferry fleets operated
by the states of Washington and Alaska. Additionally, the
military vessels home ported in Puget Sound waters at the
Everett, Washington Navy home port facility are expected to
present business opportunities to Puget Sound shipyards.
The Company has from time to time considered opportunities to
diversify in marine industries and businesses unrelated to the
Shipyard.
OPERATIONS OVERVIEW
Repair and Overhaul Operations
The Company's repair and overhaul work ranges from relatively
minor repair to major overhauls and often involves the drydocking
of the vessel under repair. The level of repair and overhaul
business available to domestic private-sector shipyards has been
impacted by the downsizing of the active Navy fleet. Also
affecting private shipyards is the impact of stationing vessels
at Navy home ports, the location of marine accidents, the
availability and scheduling of maintenance and overhauls, and
conditions within the maritime industry as a whole.
Commercial repair and overhaul contracts are obtained by
competitive bidding, awarded by negotiation or assigned by
customers who have a preference for a specific shipyard. On jobs
that are advertised for competitive bids, owners usually furnish
specifications and plans which become the basis for an agreed
upon contract. Repair and overhaul jobs are usually contracted
on a fixed-price basis with additional work contracted on a
negotiated-price basis.
Government ship repair and overhaul work is usually awarded
through a formal bidding process. The Company also performs
repair/overhaul work for the Navy under flexibly-priced
contracts. These contracts provide for reimbursement of costs, to
the extent allocable and allowable under applicable regulations,
and payment of an incentive or award fee based on the customer's
judgment of the contractor's performance with respect to certain
pre-established criteria. The Government regulates the methods
by which overhead costs are allocated to Government contracts.
The Company's commercial and Government repair and overhaul
contracts contain terms of customer payment determined by mutual
agreement. Typically the Company is periodically reimbursed
through progress payments based on the achievement of certain
agreed to benchmarks subject to a specified level of retention.
Some vessel owners contracting for repair, overhaul and new
construction work require some form and amount of performance and
payment bonding, particularly state agencies.
Construction Operations
The Company has a contract with the Ferry System for the
construction of three Mark II Ferries for $181 million (including
$7 million of optional growth items). The Mark II Ferries are
designed to transport 218 automobiles and 2,500 passengers on the
waterways of Puget Sound and will be the largest ferries in the
Ferry System fleet.
Future Operations
The Company plans to actively pursue Government and commercial
repair/overhaul opportunities. International construction and
repair opportunities are limited because shipbuilders in foreign
countries are often subsidized by their governments. These
subsidies allow foreign shipyards to enter into production
contracts at prices below their actual production costs. Passage
of the proposed Organization for Economic Cooperation and
Development ("OECD") legislation currently being considered in
Congress is expected to require reduction of these shipbuilding
subsidies and enhance the Company's ability to pursue
international prospects. Competition for domestic construction
and repair opportunities will be intense as certain of the
Company's larger east coast competitors have better shipbuilding
facilities and access to more financial resources. The Company
is working to maximize its advantages of geographic location, its
current Mark II Ferry construction activities and the skills of
its experienced workforce.
Distribution of Work
The approximate distribution of the Company's Shipyard activities
for each of the last three fiscal years are summarized as
follows:
1997 1996 1995
Government 10% 35% 60%
Commercial 90% 65% 40%
Total 100% 100% 100%
As the table indicates, a majority of the Company's work in
fiscal years 1997 and 1996 was comprised of commercial activity.
Commercial activity increased in each year, principally due to
the construction activities related to the three Mark II Ferries
discussed above in "Construction Operations".
Employees
The number of persons employed by the Company varies considerably
from time to time depending primarily on the level of Shipyard
activity, averaging approximately 1,100 employees during fiscal
year 1997 and totaling approximately 1,400 employees on March 30,
1997. With respect to the Mark II Ferry project, the Company
employed an average of approximately 515 persons on the project
during fiscal year 1997 and 570 persons on March 30, 1997.
During fiscal year 1997 an average of approximately 925 of the
Company's Shipyard employees were covered by a union contract
which expired on July 31, 1996. At March 30, 1997 approximately
1,225 Company employees were covered under this contract.
During fiscal year 1997, the Company negotiated a new labor
contract with local union leadership aimed at resolving
contractual and business issues. Subsequent to the end of fiscal
year 1997, on April 9, 1997 and again on May 20, 1997, Company
union workers did not ratify two versions of the proposed
contract. For the duration of the Mark II Ferry contract, the
Company's existing contracts with the unions include "no
strike/no lockout" provisions. Additionally, these agreements
provide that a binding arbitration process be utilized between
the bargaining parties in the event an agreement for a new labor
contract cannot be reached. It is the Company's intent to
request such an arbitration in order to achieve a new collective
bargaining agreement. The Company expects work to continue under
the existing contract until contractual issues are resolved.
Over the past two fiscal years, the Company has invested heavily
in its labor relations efforts including the establishment of
labor/management committees and conflict resolution education for
all parties. Notwithstanding the contract rejections, the
Company believes that its relations with its employees are
stable.
Availability of Materials
The principal materials used by the Company in its Shipyard are
steel and aluminum plate and shapes, pipe and fittings, and
electrical cable and fittings. The Company believes that each of
these items can presently be obtained in the domestic market from
a number of different suppliers. In addition, the Company
maintains a small on-site inventory of these items that is deemed
sufficient for emergency ship repairs.
Competition
Competition in the domestic shipyard industry is intense. The
Company competes for commercial and Government work with a number
of other northwest shipyards, some of which have more
advantageous cost structures. The Company's competitors for
overhaul/conversion and repair work include non-union shipyards,
shipyards with excess capacity and government subsidized
facilities. The Company's competitors for new construction work
include shipyards on the gulf coast and east coast with
substantial financial resources and significant recent
investments in productivity enhancing facilities. The reduced
size of the Government's active duty fleet has resulted in a
significant decline in the total amount of Government business
available to the private sector shipyards, has created excess
shipyard capacity, and has led to acute price competition.
Commercial ship construction and, and to a lesser extent, repair
work performed in certain foreign markets is less costly than
domestic ship construction and repair. Many contracts are
awarded pursuant to competitive bidding and profitability is
dependent upon effective cost controls, production efficiencies
and the ability to meet strict schedules, among other factors.
With respect to repair work, the location, availability and
technical capability of repair facilities are important factors.
Environmental Matters
The Company is subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the
treatment, storage and disposal of toxic and hazardous wastes.
Fines and penalties may be imposed for non-compliance with these
laws. Such laws and regulations may expose the Company to
liability for acts of the Company which are or were in compliance
with all applicable laws at the time such acts were performed.
Recurring costs associated with the Company's environmental
compliance program are not material and are expensed as incurred.
Capital expenditures in connection with environmental compliance
are not material to the Company's financial statements. See Item
7, Management's Discussion and Analysis and Note 1 to the
Consolidated Financial Statements for further discussion of these
costs.
The Company has an accrued liability of $15.9 million as of March
30, 1997 for environmental matters. As assessments of
environmental matters and remediation activities progress, these
liabilities are reviewed periodically and adjusted to reflect
additional technical, engineering and legal information that
becomes available. The Company's estimate of its environmental
liabilities is affected by several uncertainties such as, but not
limited to, the method and extent of remediation of contaminated
sites, the percentage of material attributable to the Company at
the sites relative to that attributable to other parties, and the
financial capabilities of the other Potentially Responsible
Parties ("PRP") at most sites. The Company's estimate of its
environmental liabilities is also affected as additional
information becomes known regarding alleged damages from past
exposure to asbestos at Company facilities. The Company is
covered under its various insurance policies for some, but not
all, potential environmental liabilities. See Item 3. Legal
Matters, Item 7. Management's Discussion and Analysis and Note 11
of the Notes to Consolidated Financial Statements for further
information regarding the Company's environmental matters.
Safety Matters
The Company is also subject to the federal Occupational Safety
and Health Act ("OSHA") and similar state statutes. The Company
has an extensive health and safety program and employs a staff of
safety inspectors and industrial hygiene technicians, whose
primary functions are to develop Company policies that meet or
exceed the safety standards set by OSHA, train production
supervisors and make periodic inspections of safety procedures to
insure compliance with Company policies on safety and industrial
hygiene. All employees are required to attend routine periodic
safety training meetings.
Backlog
At March 30, 1997 the Company's backlog consists of approximately
$85 million of construction, repair and overhaul work. This
compares with backlogs of $146 million and $76 million at March
31, 1996 and April 2, 1995 respectively. Substantially all of
the Company's firm backlog is for the construction of three Mark
II Ferries that are scheduled for delivery during fiscal years
1998 and 1999.
In May 1996, the Company was awarded a cost-type contract for
phased maintenance repairs to four Navy supply ships currently
scheduled over eleven availabilities in five years. The notional
value of the contract is $79 million. The Company can provide no
assurance as to the timing or level of work that may be performed
as part of the maintenance contract.
INVESTMENTS AND ACQUISITIONS
The Company has from time to time pursued opportunities to
diversify its business, in areas such as metal fabrication,
marine transportation, other marine industries and businesses
unrelated to the Shipyard. In fiscal year 1996, the Company,
through a subsidiary, purchased three radio stations. As
discussed further in Note 13 to the Consolidated Financial
Statements, in June 1997, the Company announced the sale of the
three radio stations. The Company continues to evaluate suitable
investment opportunities which it believes will appropriately
utilize the Company's resources.
ITEM 2. PROPERTIES
The Company has three drydocks, two steel and one wood, all of
which are located at the Shipyard. The design capacities of the
drydocks are as follows:
Year Type Max.Displacement Date of Lease
Name Built Owned Leased Capacity(in tons) Expiration
Emerald Sea 1970 Steel 40,000 -
YFD-70 1945 Steel 17,500 4/15/01
YFD-54 1943 Wood 5,700 9/30/99
The Company is required to maintain Navy certification on its
drydocks and cranes in order to qualify its facilities to bid on
and perform work under certain Navy and United States Coast Guard
("Coast Guard") contracts. The Company's current certification
for the drydocks listed above are 30,000 tons, 14,000 tons and
4,205 tons, respectively. While such certification is less than
the maximum design capacity, it is sufficient to allow the
Company to perform work on most Navy and all Coast Guard vessels.
The Company also maintains certification of its cranes.
The Company believes that its owned and leased properties at the
Shipyard are in reasonable operating condition given their age
and usage, although, from time to time, the Company has been
required to incur substantial expenditures to ensure the
continuing serviceability of its owned and leased machinery and
equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of
pollutants into the environment and establish standards for the
treatment, storage and disposal of toxic and hazardous wastes.
Fines and penalties may be imposed for non-compliance with these
laws. Such laws and regulations may expose the Company to
liability for acts of the Company which are or were in compliance
with all applicable laws at the time such acts were performed.
The Company faces potential liabilities in connection with the
alleged presence of hazardous waste materials at certain of its
closed shipyards, at its Shipyard and at several sites used by
the Company for disposal of alleged hazardous waste.
The Company is identified as a PRP by the Environmental
Protection Agency ("EPA") under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA," commonly
known as the "Superfund") in connection with matters pending at
five Superfund sites. Additionally, the Company has been named
as a PRP for three Superfund cases where the Company has asserted
that its liability was discharged when it emerged from bankruptcy
in 1990.
In addition to the five pending Superfund matters, the Company is
subject to suits, claims and proceedings brought by state
agencies and others seeking contribution towards remediation of
alleged environmental impairments at five additional sites.
Generally these environmental claims relate to sites used by the
Company for disposal of alleged hazardous waste, although one
matter relates to a site in which the allegations are predicated
upon the Company's prior ownership of a shipyard property. The
matters relating to the Harbor Island sites, at which the
Company's Shipyard is located, are discussed below. Reference is
made to Note 11 of the Notes to the Consolidated Financial
Statements in Item 8 below for information with respect to all
pending suits, claims and proceedings, including four as to which
the Company believes it has no or only nominal liability.
The Company and several other parties have been named as PRPs by
the EPA pursuant to CERCLA in connection with the documented
release or threatened release of hazardous substances, pollutants
and contaminants at the Harbor Island Superfund Site,(the "Harbor
Island Site"). To date, the EPA has separated the Harbor Island
Site into two operable units, the Soil and Groundwater Unit (the
"Soil Unit")and the Shipyard Sediments Operable Unit (the
"Sediments Unit"). 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. Soil Unit
remediation is anticipated to begin in fiscal year 1998. The
Company and the EPA are currently negotiating the extent and
methodology of the Soil Unit remediation. The Company estimates
remediation of the Soil Unit will take approximately 12 to 24
months from the clean-up start date.
In the third quarter of the fiscal year 1997, the EPA issued its
Record of Decision ("ROD") for the Sediments Unit. The ROD
identifies four alternative solutions for the Sediments Unit
remediation and identifies the EPA's selected solution. The
Company and the EPA are negotiating the scope and extent of
testing and evaluation necessary to determine the extent of the
clean-up of the Sediments Unit. The parties have not agreed to a
remedial design for the Sediments Unit. The Company believes
that the timing and cost of the Sediments Unit clean up will
remain significantly uncertain until a remedial design has been
finalized with the EPA that identifies the scope of remediation
and the method of sediment disposal. Included in the Company's
$15.9 million total reserve for environmental matters is a
reserve of $11.4 million to address the Harbor Island Site.
The Company has been named as a defendant in civil actions by
parties alleging damages from past exposure to toxic substances,
generally asbestos, at closed former Company facilities. The
Company has approximately 109 cases involving 262 plaintiffs
pending against it, together with other ship builders and
repairers, ship owners, asbestos manufacturers, distributors and
installers and equipment manufacturers, involving injuries or
illnesses allegedly caused by exposure to asbestos or other toxic
substances. The Company and its insurers are vigorously
defending these actions. Most of these cases have been filed
since 1991 by heirs of retired employees or employees of
subcontractors who allegedly worked at Company sites, and allege
contact with asbestos for varying periods of time and allege that
such exposure caused illness and/or death. The cases are
generally filed with multiple claimants and multiple defendants
and are generally insured matters. Suits of this nature
generally seek amounts in excess of $100,000 on behalf of each
claimant as against all defendants and to date have been settled
for immaterial amounts. The Company and its insurers are
vigorously defending these actions. By their very nature, civil
actions relating to toxic substances vary according to the cases'
fact patterns, jurisdiction and other factors. Accordingly, the
Company cannot predict the eventual number of such cases or their
eventual resolution. The Company has included an estimate of its
potential liability for these issues in its environmental
reserves.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter
of fiscal year 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's stock is listed on the New York Stock Exchange (the
"NYSE"). The following table sets forth for the fiscal quarters
indicated the high and low composite sales prices of the stock as
reported by the NYSE.
Quarter Ended High Low
July 2, 1995 6.50 5.38
October 1, 1995 7.00 5.50
December 31, 1995 6.50 5.88
March 31, 1996 7.50 5.88
June 30, 1996 7.88 7.00
September 29, 1996 7.38 6.00
December 29, 1996 7.38 6.50
March 30, 1997 6.63 5.38
On June 18, 1997 the high and low prices of the Company's common
stock on the NYSE were $4.25 and $4.125, respectively.
At June 18, 1997 there were approximately 2088 holders of record
of the outstanding shares of common stock. The Company does not
presently anticipate the declaration of dividends.
ITEM 6. SELECTED FINANCIAL DATA (In thousands of dollars,
except per share data)
Mar 30, Mar 31, Apr 2, Apr 3, Mar 28,
1997 1996 1995 1994 1993
Revenue $114,398 $101,687 $69,096 $68,552 $54,278
Income (loss)
from operations (25,793) 1,017 (393) (6,958) (14,018)
Income (loss)
before cumulative
effect of change
in accounting
principle (21,253) 4,132 3,402 (2,714) (11,802)
Cumulative effect
of change in
accounting
principle (1) - - 438 - -
Net income(loss) (21,253) 4,132 3,840 (2,714) (11,802)
Per share of common stock
Income (loss)
before cumulative
effect of change
in accounting
principle (2.14) 0.42 0.32 (0.24) (0.99)
Cumulative effect
of change in
accounting
principle (1) - - 0.04 - -
Net income (loss) (2.14) 0.42 0.36 (0.24) (0.99)
Financial position:
Working capital 33,245 48,880 50,704 52,337 57,311
Fixed assets 24,477 26,499 24,552 24,001 24,636
Total assets 115,789 120,571 110,924 111,447 129,287
Stockholders'
equity 47,940 67,380 62,433 63,740 70,700
per common share 4.84 6.80 6.28 5.83 5.99
(1) Effective April 4, 1994 the Company changed its method of
accounting for general and administrative costs from
recognizing these expenses as contract costs to recognizing
them as incurred. The change in method reflects the
change, over time, in the Company's business from
predominately longer term Department of Defense contracts to
predominately shorter term commercial and Government
contracts. This change has been applied to general and
administrative costs of prior years and resulted in a
cumulative effect credit of $438 thousand ($0.04 per share)
at the time of adoption.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Notes to Consolidated Financial Statements are an integral
part of Management's Discussion and Analysis of Financial
Condition and Results of Operations and should be read in
conjunction herewith. The following discussion and analysis of
financial condition and results of operations contains forward-
looking statements which involve risks and uncertainties. The
Company's actual results in future periods may differ
significantly from the results discussed in or anticipated by
such forward looking statements. Certain factors which may
impact results for future periods are discussed below under the
captions "Overview - Mark II Ferry Program," "Overview -
Profitability," and "Environmental Matters." Readers should also
consider the statements and factors discussed under the caption
"Operation Overview" in Item 1 of the Company's Form 10-K Annual
Report filed with the Securities and Exchange Commission for the
fiscal year ended March 30, 1997, and in the Notes to the
Company's Consolidated Financial Statements for the fiscal year
then ended.
Overview:
The Company lost $21.3 million on sales of $114.4 million in
fiscal year 1997. The year's sales performance reflects high
levels of Mark II Ferry activity as the Company approached the
completion of the first vessel, the MV Tacoma, and started
construction of the second and third vessels, the MV Wenatchee,
and the MV Puyallup. The fiscal year's sales performance also
reflects lower levels of Government maintenance efforts due to
Navy budget cuts. The Company's loss for the year reflects loss
reserves recognized on the Mark II Ferry construction program,
the reversal of previously recognized Mark II Ferry profits,
losses experienced on commercial overhaul activities, lower
levels of Government maintenance work and a provision for the
sediment portion of the environmental clean-up for the Company's
Harbor Island Site. The net loss for the year benefited from the
$1.7 million gain on the sale of securities.
Mark II Ferry Program
The Company's Mark II Ferry program, awarded in fiscal year 1995,
is approximately 55% complete at March 30, 1997. Construction of
the first ferry began in the fall of 1995. The Company
anticipates delivering the first ferry and launching the second
ferry during the summer of 1997.
As construction of the Mark II Ferries progresses, the Company
reviews and revises its estimates of long term contract sales
values and costs at completion. Based upon its reviews initiated
in conjunction with the fiscal year-end, the Company estimates
that it will incur contract costs of approximately $11.5 million
in excess of the contract prices for the three ship program
resulting in the fourth quarter 1997 reversal of previously
recognized program profit of $2.4 million and the establishment
of a program loss reserve of $11.5 million. During fiscal year
1997, the Company reversed a total of $3.6 million of previously
recognized Mark II Ferry program profit.
Mark II Ferry contract costs, which include direct and related
labor costs, direct material costs and allocated manufacturing
overhead costs, are expected to exceed contract price due to the
following factors: steel work overruns encountered on the first
vessel, higher than previously forecast program engineering
costs, and increased efforts to complete the outfitting of the
vessel - including installation of the joiner work; piping and
electrical system; and painting costs.
The Company's construction cost estimates as of March 30, 1997
are based upon implementing improved production techniques and
better utilization of modular shipbuilding practices in the
construction of the second and third ships compared to the first
ship. The Company also expects to benefit from production
efficiencies gained in the experience of constructing the first
ship (learning curve efficiencies) and has incorporated these
factors in its construction cost estimates for the second and
third vessels. However, favorable or unfavorable variances to the
estimated production efficiencies could materially affect the
Company's financial results.
As construction of the ferries progresses, revisions in cost and
profit estimates for the contract will be made. Changes in these
estimates will be made based upon the facts then known to the
Company and may be a result of productivity factors, change order
pricing, overhead costs, material costs, production schedules and
levels of shipyard activity. Changes in these factors could
materially affect the Company's financial results. The Company's
ability to complete this contract within the Company's current
estimates of the costs to complete is not presently determinable.
If the Company is unable to complete this contract within its
current estimate of the costs to complete, the Company could
incur losses on this contract beyond the $11.5 million recorded
herein with a related adverse impact on cash flow.
The Company believes that a portion of the increased contract
costs relate to high levels of engineering and production change
orders directed by the Ferry System. These customer-directed
change orders, which have continued throughout the production
process and into the Company's fiscal year 1998, have caused
production rework, delays and disruption. These change orders
have resulted in increased production costs for the first two
ferries, the MV Tacoma and the MV Wenatchee, and the entire three
ship ferry construction project. The Company will pursue full
recovery from the Ferry System for the impact of these changes.
The Company cannot predict the outcome of any negotiations with
the Ferry System. Accordingly, the Company has not included any
estimates of such settlements, if any, in its above mentioned
Mark II Ferry program loss reserve estimates.
Business Volume and Backlog
The Company's backlog at March 30, 1997 was approximately $85
million. This backlog consists primarily of Mark II Ferry work
to be performed. In May 1996, the Company was awarded a cost-
type contract for phased maintenance repairs to four Navy supply
ships currently scheduled over eleven availabilities in five-
years. The notional value of the contract is $79 million. The
Company can provide no assurance as to the timing or level of
work that may be performed as part of the maintenance contract.
The Company is working to identify and win additional
construction and repair work that would match the Shipyard's
production capacity.
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 at the Everett Navy home port, competitors
pricing behavior, and Company labor efficiencies and work
practices.
The Company continues to respond to the increasingly competitive
shipbuilding and repair industry. Company management is focusing
on profitably operating the Shipyard. To accomplish this
objective, Shipyard management is working to increase business
volume, reduce operating costs and improve production
efficiencies.
Year to year comparisons:
1997 Compared with 1996
Net income for 1997 decreased by $25.4 million from 1996 levels
as a result of the following components.
Revenues
Revenues for the fiscal year ended March 30, 1997 increased $12.7
million (13%) compared to the prior fiscal year. The increase in
fiscal year 1997 sales was primarily attributable to the Mark II
Ferry construction program partially offset by lower Government
maintenance work.
Cost of Revenues
Fiscal year 1997 cost of revenues increased $22.3 million (31%)
compared to 1996 results as 1997 includes higher Mark II
activity. Cost of revenues in fiscal year 1997 reflect
production and engineering difficulties encountered on the Mark
II Ferry project.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead expenses for the year
were up $1.5 million (5%) from prior year results due to
increased radio station activity and increased Shipyard volume.
Contract Reserves Activity
As discussed above, during the fourth quarter of fiscal year
1997, the Company estimated that it would incur costs of
approximately $11.5 million in excess of the contract prices of
the three Mark II Ferries and accordingly established a reserve
for these costs in fiscal year 1997. No contract loss reserves
were recognized in fiscal year 1996.
Provision for Environmental Reserves
In fiscal year 1997, the Company added $4.3 million to its
environmental reserves for estimated Sediments Unit clean-up
costs and other environmental matters. In fiscal year 1996, the
Company did not add to its environmental provision.
Operating Results
Fiscal year 1997 operating income decreased $26.8 million
compared to the prior fiscal year income of $ 1.0 million. The
decrease in operating income reflects the establishment of the
Mark II Ferry contract loss reserve, the reversal of $3.6 million
of previously recognized Mark II Ferry program profits, losses on
commercial overhaul activity and lower Government repair volume.
Operating results for fiscal year 1997 also include a $4.3
million environmental reserve established to address sediment
clean up at the Company's Seattle Shipyard.
Investment and Other Income
The Company's fiscal year 1997 investment and other income of
$2.8 million decreased $.3 million compared to fiscal year 1996
as fiscal year 1997's lower investment balances were partly
offset by the effect of higher interest rates.
Gain on sale of available-for-sale security
Fiscal year 1997 results include a $1.7 million gain from the
sale of an available-for-sale security.
Income Taxes
The Company did not have taxable income for fiscal year 1997,
accordingly the Company recognized no income tax expense and
recorded a net operating loss carryforward as described in Note 7
to the Consolidated Financial Statements. For fiscal year 1996,
the Company recognized no income tax expense as the expense was
offset by a reduction in the deferred tax valuation reserve.
1996 Compared with 1995
Net income for 1996 increased by 8% from 1995 levels as a result
of the following components.
Revenues
Revenues for the fiscal year ended March 31, 1996 increased $32.6
million (47%) compared to the prior fiscal year. The increase in
sales was primarily attributable to the Mark II Ferry
construction program partially offset by lower Government
maintenance work.
Cost of Revenues
Fiscal year 1996 cost of revenues increased $26.5 million (59%)
compared to 1995 results as the Company's 1996 Mark II Ferry
margins recognized were lower than the margins earned on
maintenance work in 1995. As a result of this difference, costs
of revenues were 70% of sales in fiscal year 1996 compared to 65%
of sales in fiscal year 1995.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead expenses for fiscal
year 1996 were up $5.3 million (22%) from prior year results as
the Company incurred higher than usual repair and maintenance
costs preparing for the new construction project and added costs
relating to the radio station acquisitions. These repair cost
increases and radio station start-up costs were partially offset
by changes in the estimate of workers' compensation insurance
refunds for favorable claims experience during past fiscal years.
Contract Reserves Activity
In 1995, the Company utilized $1.0 million in contract loss
reserves related to performance of a contract to repair a
Government vessel.
Provision for Environmental Reserves
In fiscal year 1996, the Company did not add to its environmental
provisions. In fiscal year 1995, the Company added $2.0 million
in provisions for environmental liabilities for sites and
circumstances where it was possible to make reasonable estimates
of the Company's potential liability.
Operating Results
In fiscal year 1996 operating profit increased $1.4 million
compared to the prior fiscal year. The increase in operating
profit reflects increased Mark II Ferry construction overhead
contribution and environmental reserve activity in 1995 offset by
lower contract margins on repair activities, increased
administrative costs and modest start-up losses for the Company's
radio station operations. The Company completed the sale of an
inactive facility in fiscal year 1995 and recognized a gain on
the sale of $.5 million.
Investment and Other Income
Investment and other income decreased $.7 million compared to
fiscal year 1995 results. Higher interest rates earned in fiscal
year 1996 were offset by decreased investment balances compared
to fiscal year 1995. Fiscal year 1995 investment and other
income results included a $.4 million bankruptcy distribution.
Income Taxes
For fiscal year 1996 and fiscal year 1995, the Company recognized
no income tax expense as the expense was offset by a reduction in
the deferred tax valuation reserve.
Cumulative Effect of Change in Accounting Principles
Effective April 4, 1994 the Company changed its method of
accounting for general and administrative costs from recognizing
these expenses as contract costs to recognizing them as incurred
which reflects the change, over time, in the Company's business
from predominately longer term Department of Defense contracts to
predominately shorter term commercial and Government contracts.
This change has been applied to general and administrative costs
of prior years and resulted in a cumulative effect credit of $.4
million, which was included in income of the first quarter of
fiscal year 1995. The effect of the change was to decrease
fiscal year 1995 income before the cumulative effect of the
accounting change by $1.3 million. There was no income tax effect
as a result of the change.
Environmental Matters
Ongoing Operations:
Recurring costs associated with the Company's environmental
compliance program are not material and are expensed as incurred.
Capital expenditures in connection with environmental compliance
are not material to the Company's financial statements.
Past Activities:
The Company faces significant potential liabilities in connection
with the alleged presence of hazardous waste materials at certain
of its closed shipyards, at its Shipyard and at several sites
used by the Company for disposal of alleged hazardous waste. The
Company has been named as a defendant in civil actions by parties
alleging damages from past exposure to toxic substances at
Company facilities.
The EPA has separated the Harbor Island Site into two operable
units, the Soil Unit and the Sediments Unit. 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. Soil Unit
remediation is anticipated to begin in fiscal year 1998. The
Company and the EPA are currently negotiating the extent and
methodology of the Soil Unit remediation. The Company estimates
remediation of the Soil Unit will take 12 to 24 months from the
clean-up start date. In the third quarter of fiscal year 1997,
the EPA issued its Record of Decision ("ROD") for the Sediments
Unit. The ROD identifies four alternative solutions for the
Sediments Unit remediation and identifies the EPA's selected
solution (the "Selected Solution").
The Selected Solution proposes the dredging and disposal of
approximately 116,000 cubic yards of material currently in the
Duwamish River and Elliott Bay surrounding the Company's
facility. The EPA estimated the Company's portion of the
remedial cost including long term monitoring and maintenance
between $5.5 million and $7.9 million. The estimated range does
not include the cost of any potential under-pier dredging or
capping, should any be required. The potential scope and costs
of dredging and capping remedies are currently indeterminable as
the necessity and magnitude of such efforts is strongly dependent
on site-specific conditions. The Company believes that the
timing and cost of the Sediments Unit clean up will remain
significantly uncertain until a remedial design has been
finalized with the EPA that identifies the scope of remediation
and the method of sediment disposal. The Company is currently
negotiating an Order of Consent with the EPA covering solely the
additional sampling necessary for any remedial design. The
proposed Order of Consent does not include the remedial design
itself.
During the fiscal year ending March 30, 1997, based on the ROD,
currently available facts and consideration of other factors, the
Company recognized a $4.3 million charge to earnings, including
$7.9 million for anticipated costs associated with the Company's
portion of the remediation costs associated with the Sediments
Unit, a decrease to the Soil Unit remediation reserve and
adjustments to other environmental matters.
The Company has approximately 109 cases involving 262 plaintiffs
pending against it, together with other ship builders and
repairers, ship owners, asbestos manufacturers, distributors and
installers and equipment manufacturers, involving injuries or
illnesses allegedly caused by exposure to asbestos or other toxic
substances. The Company and its insurers are vigorously
defending these actions. By their very nature, civil actions
relating to toxic substances vary according to the cases' fact
patterns, jurisdiction and other factors. Accordingly, the
Company cannot predict the eventual number of such cases or their
eventual resolution. The Company has included an estimate of its
potential liability for these issues in its environmental
reserves. Potential additional future expenses related to
alleged damages from past exposure to toxic substances is not
quantifiable due to uncertainties of the number of cases, the
extent of alleged damages, the population of claimants and size
of any awards and/or settlements.
The Company spent $.5 million in fiscal year 1997 for site
remediation and other matters. Most of these expenditures were
related to the Shipyard and for judgments and settlements of
civil matters relating to toxic substances. While the Company
expects to spend larger amounts in future years, the timing of
such expenditures is impossible to predict due largely to
uncertainties relating to remediation of the Harbor Island
facility.
During its fiscal year 1998, the Company will be required by
Washington state environmental regulations to take action in
order to determine all known, available and reasonable methods of
prevention, control, and treatment ("AKART") for storm water
discharges from its shipyard. In accordance with its National
Pollution Discharge Elimination System permit the Company will be
required to submit its engineering analysis of AKART to the
Washington State Department of Ecology during the second quarter
of fiscal year 1998. Potential future expense for compliance
with these AKART regulations will be not quantifiable until the
engineering analysis has been completed and will be recognized in
the period incurred.
The Company's policy is to accrue costs for environmental matters
in the accounting period in which the responsibility is
established and the cost is estimable. The Company's estimates
of its liabilities for environmental matters are based on
evaluations of currently available facts with respect to each
individual situation and take into consideration factors such as
existing technology, presently enacted laws and regulations, and
the results of negotiations with regulatory authorities. The
Company does not discount these liabilities.
The Company's financial statements as of March 30, 1997 reflect
reserves of $15.9 million. The Company has recorded a non-
current asset of $3.8 million to reflect a contractual
arrangement with an insurance company to share costs for certain
environmental matters. The Company is negotiating with its
insurance carriers and certain prior landowners and operators for
past and future remediation costs. In addition, the Company
believes that the Government may be obligated to contribute to a
share of clean-up costs for certain sites.
Actual costs to address the Soil and Sediments Units 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 effect of resolution of environmental matters on results of
operations, liquidity, capital resources or on the consolidated
financial condition of the Company cannot be predicted due to the
uncertainty concerning both the amount and timing of future
expenditures. No assurance can be given that the Company's $15.9
million reserve as of March 30, 1997 is adequate to cover all
potential environmental costs the Company could incur.
Liquidity, Capital Resources and Working Capital
During fiscal year 1997, working capital decreased by $15.6
million to $33.2 million at March 30, 1997 which includes
restricted and unrestricted cash, cash equivalents and marketable
securities of $47.3 million. The decrease in working capital is
attributable predominantly to the $11.5 million contract loss
reserve accrual and the reversal of $3.6 million of previously
recognized profit on the Mark II Ferry project.
Expenditures for property, plant and equipment in fiscal year
1997 were $1.8 million compared to $5.0 million for the prior
fiscal year and were attributable to Shipyard equipment
purchases. These expenditures are in addition to ongoing repair
and maintenance expenditures in the Shipyard of $4.7 million,
$6.2 million, and $3.3 million in fiscal years 1997, 1996 and
1995, respectively. The decrease in fiscal year 1997 capital
expenditures compared to 1996 reflects last year's investment in
Shipyard modifications necessary to accommodate the Mark II Ferry
construction project.
The Company is required on some of its projects to provide
customers with performance, contract and payment bonds. On
December 28, 1994 Todd Pacific entered into an agreement with a
surety pursuant to which the surety provided a contract bond for
the Mark II Ferry contract. The contract bond is secured by Todd
Pacific's machinery, equipment, inventory and trade accounts
receivable on certain bonded jobs. The surety has also issued
bonds totaling $5.0 million for current commercial repair jobs.
Todd Pacific established an annually renewable $3 million
revolving credit facility secured by a first lien on certain
trade receivables. Outstanding borrowings under the credit
facility may not exceed certain percentages of Todd Pacific's
trade receivables.
The Company received $5.4 million of special project revenue
bonds ("Revenue Bonds")from the Board of Trustees of the
Galveston Wharves ("Galveston Wharves") upon the December 1993
sale of its Galveston shipyard facilities. The Revenue Bonds
bear interest at the rate of eight percent payable semiannually
and are secured by a lien on the shipyard property and a
subordinate lien on the revenues of the Galveston Wharves. The
bonds contain provisions for annual principal payments of $216
thousand beginning on January 1, 1995 with a balloon payment of
$3.456 million due on January 1, 2004. As of March 30, 1997, the
Company has received three annual principal payments. The
Company is recognizing the gain on the sale of the facility as
payments are received.
Based upon its cash position described above and anticipated
fiscal year 1998 cash flow, the Company believes it has
sufficient liquidity to meet cash flows or to fund operations for
fiscal year 1998.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See following page.
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Todd Shipyards Corporation
We have audited the accompanying consolidated balance sheets of
Todd Shipyards Corporation and subsidiaries (the "Company") as of
March 30, 1997 and March 31, 1996 and the related consolidated
statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended March 30, 1997. Our
audits also included the financial statement schedule listed on
the index at item 14(a). The financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 statements presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Todd Shipyards Corporation and subsidiaries
at March 30, 1997 and March 31, 1996 and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended March 30, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion,
the related financial statements 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 more fully described in Note 1 to the financial statements, in
1995 the Company changed its method of applying general and
administrative costs on contracts.
/s/Ernst & Young LLP
Seattle, Washington
June 6, 1997
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 30, 1997 and March 31, 1996
(In thousands of dollars)
1997 1996
ASSETS
Cash and cash equivalents $ 4,233 $ 8,552
Restricted cash 5,210 1,546
Securities available-for-sale 37,878 33,036
Accounts receivable, less allowance for
losses of $861 and $511, respectively
U.S. Government 2,696 2,731
Other 3,701 6,299
Costs and estimated profits in excess of
billings on incomplete contracts 7,865 15,063
Inventories 1,323 1,225
Other 251 254
Total current assets 63,157 68,706
Property, plant and equipment, net 24,477 26,499
Deferred pension asset 19,564 17,201
Other 8,591 8,165
Total assets $115,789 $120,571
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 9,453 $ 11,831
Payrolls and vacations 4,535 3,896
Accrual for loss on contract 11,500 -
Billings in excess of costs and estimated
profits on incomplete contracts 982 656
Taxes other than income taxes 1,436 1,073
Income taxes 2,006 2,370
Total current liabilities 29,912 19,826
Environmental reserves 15,900 11,087
Accrued post retirement health benefits 22,037 22,278
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at March 30, 1997 and March 31, 1996,
and outstanding 9,910,180 at March 30, 1997
and at March 31, 1996 120 120
Additional paid-in capital 38,181 38,181
Retained earnings 19,256 38,696
57,557 76,997
Less treasury stock 9,617 9,617
Total stockholders' equity 47,940 67,380
Total liabilities and stockholders'
equity $115,789 $120,571
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 30, 1997, March 31, 1996, and April 2, 1995
(In thousands of dollars, except per share amounts)
1997 1996 1995
Revenues $114,398 $101,687 $ 69,096
Operating Expenses:
Cost of revenues 93,982 71,674 45,234
Administrative and
manufacturing overhead 30,459 28,996 23,740
Contract reserve 11,500 - (980)
Provision for environmental
reserves 4,250 - 2,000
Other - - (505)
Subtotal 140,191 100,670 69,489
Operating Income (Loss) (25,793) 1,017 (393)
Investment and other income 2,802 3,139 3,795
Gain (loss) on sale of securities 1,738 (24) -
Income (Loss) Before Cumulative
Effect of Change in Accounting
Principle (21,253) 4,132 3,402
Cumulative effect to April 3,
1994 of accounting change, - - 438
Net Income (Loss) $(21,253) $ 4,132 $ 3,840
Net Income (Loss) per Common Share:
Income (Loss), before Cumulative
Effect of Change in Accounting
Principle $ (2.14) $ .42 $ .32
Cumulative effect of change
in accounting principle - - .04
Net Income (Loss) $ (2.14) $ .42 $ .36
Weighted Average Number of Shares
(thousands) 9,910 9,931 10,740
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 30, 1997, March 31, 1996, and April 2, 1995
(in thousands of dollars)
1997 1996 1995
OPERATING ACTIVITIES:
Net income (loss) $(21,253) $ 4,132 $ 3,840
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 3,589 3,208 3,078
Increase (decrease) in contract
loss reserves 11,500 - (980)
Decrease (increase) in costs
and estimated profits in
excess of billings on
incomplete contracts 7,198 (8,671) (4,178)
Increase in environmental
reserves 4,813 2,664 1,923
Decrease (increase) in accounts
receivable 2,633 (2,264) 1,377
Increase (decrease) in accounts
payable and accruals (2,378) 4,755 (190)
Increase in deferred pension
asset (2,363) (1,637) (1,627)
Increase in other assets (426) (2,360) (282)
Other 629 (428) (964)
Total adjustments 25,195 (4,733) (1,843)
Net cash provided by (used in)
operating activities 3,942 (601) 1,997
Cash flows from investing
activities:
Purchases of marketable securities (14,365) (19,774) (10,297)
Maturities of marketable
securities 7,580 22,959 15,358
Sales of marketable securities 3,607 6,721 1,466
Capital expenditures (1,835) (4,954) (3,287)
Acquisition - (3,850) -
Other 416 16 106
Net cash provided by (used in)
investing activities (4,597) 1,118 3,346
Cash flows from financing
activities:
Increase in cash restricted
to secure bid and performance
bonds $ (3,664) $(1,233) $ 5,406
Purchases of treasury stock - (2,698) (2,570)
Net cash provided by (used in)
financing activities (3,664) (3,931) 2,836
Net increase (decrease) in cash
and cash equivalents (4,319) (3,414) 8,179
Cash and cash equivalents at
beginning of period 8,552 11,966 3,787
Cash and cash equivalents at
end of period $ 4,233 $ 8,552 $11,966
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 27 $ 3 $ 3
Income taxes 291 541 900
Noncash financing activities:
Treasury stock purchases payable - - 2,525
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 30, 1997, March 31, 1996, and April 2, 1995
(in thousands of dollars)
Additional
Common Paid-in Retained Treasury Total
Stock Capital Earnings Stock Equity
Balance at
April 3, 1994 $ 120 $38,181 $29,788 $(4,349) $63,740
Purchase of common
shares for treasury (5,095) (5,095)
Unrealized losses on
marketable securities
available-for-sale,
net of tax (52) (52)
1995 Net income 3,840 3,840
Balance at
April 2, 1995 120 38,181 33,576 (9,444) 62,433
Purchase of common
shares for treasury (173) (173)
Unrealized gains on
marketable securities
available-for-sale,
net of tax 988 988
1996 Net income 4,132 4,132
Balance at
March 31, 1996 120 38,181 38,696 (9,617) 67,380
Unrealized gains on
marketable securities
available-for-sale,
net of tax 1,813 1,813
1997 Net loss (21,253) (21,253)
Balance at
March 30, 1997 $ 120 $38,181 $19,256 $(9,617) $47,940
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 30, 1997, March 31, 1996, and April 2, 1995
1. PRINCIPAL ACCOUNTING POLICIES
(A) Basis of Presentation - The Consolidated Financial
Statements include the accounts of Todd Shipyards Corporation
(the "Company") and its wholly-owned subsidiaries Todd Pacific
Shipyards Corporation ("Todd Pacific"), TSI Management, Inc.
("TSI") and Elettra Broadcasting, Inc. ("Elettra"). All
intercompany transactions have been eliminated. The Company's
policy is to end its fiscal year on the Sunday nearest March 31.
Certain reclassifications of amounts in the Consolidated
Financial Statements have been made to conform to the current
year presentation.
(B) Business - The Company's primary business is shipbuilding,
conversion and repair for the United States Government (the
"Government"), state ferry systems, and domestic and
international commercial customers. Substantially all of the
Company's work is performed at its Seattle, Washington facility
(the "Shipyard") by a unionized production workforce. Through
TSI, the Company's investment subsidiary, the Company has
invested in Elettra, a radio station operator.
(C) Depreciation and Amortization - Depreciation and amortization
are determined on the straight-line method based upon estimated
useful lives 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.
Intangible assets, predominantly broadcasting licenses held by
Elettra, are amortized using the straight-line method over the
expected period of benefit ranging from 5 to 40 years.
(D) Revenues - Revenues consist of the estimated realizable value
of work performed under construction, repair and conversion
contracts. Profits on major contracts, those in excess of $3
million or six months duration, are recorded on the percentage-of-
completion method (determined based on direct labor hours).
Losses on contracts are reported in the period when first
estimated. Revisions to contract estimates are recorded as the
estimating factors are refined. The effect of these revisions is
included in income in the period the revisions are made.
(E) Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(F) Changes in Accounting Principles - Effective April 4, 1994
the Company changed its method of accounting for general and
administrative costs from recognizing these expenses as contract
costs to recognizing them as incurred which reflects the change,
over time, in the Company's business from predominately longer
term Department of Defense contracts to predominately shorter
term commercial and Government contracts. This change has been
applied to general and administrative costs of prior years and
results in a cumulative effect credit of $.4 million, which is
included in income of the first quarter of fiscal year 1995. The
effect of the change was to decrease income before the cumulative
effect of the accounting change by $1,314 ($.12 per share) for
the fiscal year ended April 2, 1995. There was no income tax
effect as a result of the change.
(G) Income Taxes - Income taxes are determined in accordance with
an asset and liability approach for financial accounting and
reporting of income taxes. A valuation allowance is recorded to
reduce deferred tax assets when realization of the tax benefit is
uncertain.
(H) Inventories - Inventories, consisting of materials and
supplies, are valued at lower of cost (principally average) or
replacement market. The Company has many available sources of
supply for its commonly used materials.
(I) Cash and Cash Equivalents - The Company considers all highly
liquid debt instruments with a maturity of three months or less
to be cash equivalents. Cash equivalents consist primarily of
money market instruments, investment grade commercial paper and
Government securities. The carrying amounts reported in the
balance sheet are stated at cost which approximates fair value.
(J) Securities Available-for-Sale - The Company considers all
debt instruments purchased with a maturity of more than three
months to be securities available-for-sale. Securities available-
for-sale consist primarily of Government securities, investment
grade commercial paper and equities and are valued based upon
market quotes.
Company management determines the appropriate classification of
debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. All
of the Company's investments are classified as available-for-sale
as of the balance sheet date and are reported at fair value, with
unrealized gains and losses, net of tax, recorded as a component
of stockholders' equity.
(K) Environmental Accounting - For current operating activities,
costs of complying with environmental regulations are immaterial
and expensed as incurred. Environmental costs are capitalized if
the costs extend the life of the property and/or increase its
capacity.
For matters associated with past practices and closed operations,
accruals for environmental matters are recorded when it is
probable that a liability has been incurred and the amount of the
liability can be reasonably estimated, based upon the projected
scope of the remediation, current law and existing technologies.
These accruals are adjusted periodically as assessment and
remediation efforts progress or as additional technical or legal
information becomes available. Such accruals are classified in
the balance sheet as long term obligations at undiscounted
amounts. As applicable, accruals include the Company's share of
the following costs: engineering costs to determine the scope of
the work and the remediation plan, testing costs, project
management costs, removal of contaminated material, disposal of
contaminated material, treatment of contaminated material,
capping of affected areas and long term monitoring costs.
Accruals for environmental liabilities exclude legal costs and
claims, if material, for recoveries from insurance or other third
parties. Accruals for environmental liabilities also exclude
legal costs to defend against claims of other parties. Accruals
for insurance or other third party recoveries for environmental
liabilities are recorded separately from the associated liability
in the financial statements when it is probable that a claim will
be realized.
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position 96-1, "Environmental
Remediation Liabilities," which establishes new accounting and
reporting standards for the recognition and disclosure of
environmental remediation liabilities. The provisions of the
statement are effective for fiscal years beginning after December
15, 1996. The impact of this new standard is not expected to
have a significant effect on the Company's financial position or
results of operations.
2. RESTRICTED CASH AND SURETY LINE
On December 28, 1994 Todd Pacific entered into an agreement with
a surety pursuant to which the surety will provide a contract
bond for a contract to build three Jumbo Mark II class ferries
("Mark II Ferries") for the Washington State Ferry System ("Ferry
System"). The contract bond is secured by Todd Pacific's
machinery, equipment, inventory and trade accounts receivable on
certain bonded jobs. The surety has also issued bonds totaling
$5.0 million for current commercial repair jobs. Restricted cash
includes retention relating to Mark II Ferry construction
progress payments pursuant to contract terms.
3. SECURITIES AVAILABLE FOR SALE
The following is a summary of available-for-sale securities:
Amor- Gross Gross Estimated
tized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
March 30, 1997
U.S. Treasury securities
and agency obligations $ 7,979 $ - $ 119 $ 7,860
U.S. corporate
securities 15,948 4 94 15,858
Mortgage-backed
securities 3,875 - 25 3,850
Total debt securities 27,802 4 238 27,568
Equity securities 7,963 2,347 - 10,310
$35,765 $2,351 $ 238 $37,878
Amor- Gross Gross Estimated
tized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
March 31, 1996
U.S. Treasury
securities and agency
obligations $13,424 $ - $ 128 $13,296
U.S. corporate securities 8,131 8 51 8,088
Mortgage-backed
securities 6,524 1 36 6,489
Total debt securities 28,079 9 215 27,873
Equity securities 4,603 560 - 5,163
$32,682 $ 569 $ 215 $33,036
The Company had gross realized gains of $1,786 thousand on sales
of available-for-sale securities for the fiscal year ending March
30, 1997. The Company had no gross realized gains on sales of
available-for-sale securities for the fiscal years ending March
31, 1996 or April 2, 1995. The Company had gross realized losses
of $48 thousand and $24 thousand on sales of available-for-sale
securities during fiscal year 1997 and 1996, respectively. The
Company had no realized losses on sales of available-for-sale
securities in fiscal year 1995.
The amortized cost and estimated fair value of the Company's
available-for-sale debt, mortgage-backed and equity securities
are shown below:
Estimated
Amortized Fair
(In thousands) Cost Value
March 30, 1997
Due in one year or less $ 3,166 $ 3,165
Due after one year through three years 20,761 20,553
23,927 23,718
Mortgage-backed securities 3,875 3,850
Equity securities 7,963 10,310
$35,765 $37,878
Estimated
Amortized Fair
(In thousands) Cost Value
March 31, 1996
Due in one year or less $ 6,978 $ 6,968
Due after one year through three years 14,577 14,416
21,555 21,384
Mortgage-backed securities 6,524 6,489
Equity securities 4,603 5,163
$32,682 $33,036
4. CONTRACTS
Mark II Ferry Contract
The Company has a $181 million contract to construct three Jumbo
Mark II Ferries for the Ferry System. The Mark II Ferries are
designed to transport 218 automobiles and 2,500 passengers each
and will be the largest ferries in the Ferry System fleet. The
Mark II Ferry contract is approximately 55% complete at March 30,
1997. Delivery of the first ferry, the MV Tacoma, is scheduled
for Summer 1997 and delivery of the second and third ferries (the
MV Wenatchee and the MV Puyallup) is scheduled for fourth quarter
of fiscal years 1998 and 1999, respectively.
As construction of the Mark II Ferries progresses, the Company
reviews and revises its estimates of long term contract sales
values and costs at completion. Based upon its reviews initiated
in conjunction with the fiscal year-end, the Company estimates
that it will incur contract costs of approximately $11.5 million
in excess of the contract prices for the three ship Mark II Ferry
program resulting in the fourth quarter 1997 reversal of
previously recognized program profit of $2.4 million and the
establishment of a program loss reserve of $11.5 million. During
fiscal year 1997, the Company reversed a total of $3.6 million of
previously recognized Mark II Ferry program profit.
Mark II Ferry contract costs, which include direct and related
labor costs, direct material costs and allocated manufacturing
overhead costs, are expected to exceed contract price due to the
following factors: steel work overruns encountered on the first
vessel, higher than previously forecast program engineering
costs, and increased efforts to complete the outfitting of the
first vessel - including installation of the joiner work; piping
and electrical system; and painting costs.
The Company's construction cost estimates as of March 30, 1997
are based upon implementing improved production techniques and
better utilization of modular shipbuilding practices in the
construction of the second and third ships. The Company also
expects to benefit from production efficiencies gained in the
experience of constructing the first vessel (learning curve
efficiencies) and has incorporated these factors in its
construction cost estimates for the second and third vessels.
However, favorable or unfavorable variances to the estimated
production efficiencies could materially affect the Company's
financial results.
As construction of the Mark II Ferries progresses, revisions in
cost and profit estimates for the contract will be made. Changes
in these estimates will be made based upon the facts then known
to the Company and may be a result of productivity factors,
change order pricing, overhead costs, material costs, production
schedules and levels of shipyard activity. Changes in these
factors could materially affect the Company's financial results.
The Company's ability to complete this contract within the
Company's current estimates of the costs to complete is not
presently determinable. If the Company is unable to complete
this contract within its current estimate of the costs to
complete, the Company could incur losses on this contract beyond
the $11.5 million recorded herein with a related adverse impact
on cash flow.
The Company believes that a portion of the increased contract
costs relate to high levels of engineering and production change
orders directed by the Ferry System. These customer-directed
change orders, which have continued throughout the production
process and into the Company's fiscal year 1998, have caused
significant production rework, delays and disruption. These
change orders have resulted in increased production costs for the
first two ferries, the MV Tacoma and the MV Wenatchee, and the
entire three ship Mark II Ferry construction project. The
Company will pursue full recovery from the Ferry System for the
impact of these changes. The Company cannot predict the outcome
of any negotiations with the Ferry System. Accordingly, the
Company has not included estimates of such settlements, if any,
in its above mentioned Mark II Ferry program loss reserve
estimates.
Unbilled Receivables - Certain unbilled items on completed
contracts included in accounts receivable were approximately $2.0
million at March 30, 1997 and $.3 million at March 31, 1996.
Retainages - Costs and estimated profits in excess of billings on
incomplete contracts include $5.2 million in retainages at March
30, 1997 and $.4 million at March 31, 1996 (after deducting
progress billings relating to multi-year Government maintenance
work and the Mark II Ferry contract of $296 million and $196
million at March 30, 1997 and March 31, 1996, respectively).
Retainages are generally due upon completion or acceptance of the
contracted work and completion of related warranty periods.
Retainage at March 30, 1997 is predominantly related to the Mark
II Ferry project. Mark II Ferry retainage will be released as
each ship is accepted by the Ferry System.
Customers - Revenues from the Government were $11.0 million
(10%), $35.5 million (35%) and $41.2 million (60%) in fiscal
years 1997, 1996 and 1995, respectively. Revenues from the Ferry
System were $66.8 million (59%), $40.7 million (40%) and $8.3
million (12%) in fiscal year 1997, 1996 and 1995, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, accumulated depreciation and
accumulated amortization at March 30, 1997 and March 31, 1996
consisted of the following:
1997 1996
Land $ 1,151 $ 1,151
Buildings 11,244 9,755
Piers, shipways and drydocks 22,304 26,105
Machinery and equipment 32,114 28,596
Total plant and equipment, at cost $66,813 $65,607
Less accumulated depreciation 42,336 39,108
Plant, property and equipment, net $24,477 $26,499
The Company recognized $3,499 and $3,188 of depreciation expense
in fiscal years 1997 and 1996, respectively. The Company
recognized $90 and $20 of amortization expense in fiscal years
1997 and 1996, respectively.
6. EMPLOYEE BENEFIT PLANS
Union Pension Plans - Operating Shipyard - The Company
participates in several multi-employer plans, which provide
defined benefits to the Company's collective bargaining employees
at its Shipyard. The expense for these plans totaled $3.1
million, $2.5 million and $1.8 million, for fiscal years 1997
1996 and 1995, respectively.
Union Pension Plans - Previously Operated Shipyards - The Company
is a sponsor of several union pension plans due to the prior
operation of other shipyards. The ongoing operation and
management of these plans is the responsibility of boards of
trustees made up of equal numbers of Company and union
representatives.
Nonunion Pension Plans - The Company sponsors the Todd Shipyards
Corporation Retirement System (the "Retirement System"), a
noncontributory defined benefit plan under which substantially
all nonunion employees are covered. The benefits are based on
years of service and the employee's compensation before
retirement. The Company's funding policy is to fund such
retirement costs as required to meet allowable deductibility
limits under current Internal Revenue Service regulations. New
membership in the Retirement System was frozen on July 1, 1993.
The components of net periodic pension benefit for the Retirement
System defined benefit plan in fiscal years 1997, 1996 and 1995
are as follows (in thousands):
1997 1996 1995
Service cost during the time period $ 258 $ 195 $ 248
Interest cost on projected benefit
obligation 2,077 2,184 2,179
Actual return on plan assets (3,862) (5,583) (2,367)
Net amortization and deferral (1,913) 342 (3,093)
Net periodic pension benefit before
OBRA '90 (3,440) (2,862) (3,033)
Transfer of assets for payment of
retiree medical benefits
(401(h) Plan) 1,077 1,225 1,406
Net periodic pension benefit $(2,363) $(1,637) $(1,627)
Significant assumptions used in determining pension obligations,
and the related pension expense, include a weighted-average
discount rate of 7.5% at March 30, 1997, 7.25% at March 31, 1996
and 8% at April 2, 1995, an assumed rate of increase in future
compensation of 4.5% at March 30, 1997 and March 31, 1996 and 5%
at April 2, 1995, and an estimate of expected long-term rate of
return on plan assets of 7% at March 30, 1997 and March 31, 1996
and 6.5% at the end of fiscal year 1995. The increase in the
discount rate reflects the increase in long-term interest rates
at March 30, 1997.
The following table sets forth the Retirement System plan's
funded status and amounts recognized in the Company's
consolidated balance sheets at March 30, 1997 and March 31, 1996
for the Retirement System defined benefit plan (in thousands):
1997 1996
Actuarial present value of benefit obligation:
Accumulated benefit obligations,
fully vested $28,874 $28,371
Projected benefit obligation $30,504 $29,810
Plan's assets at fair value 52,983 52,525
Plan's assets in excess of projected
benefit obligation 22,479 22,715
Unrecognized net loss 6,743 6,559
Unrecognized net transition asset being
recognized over 15 years (9,658) (12,073)
Deferred pension asset $19,564 $17,201
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 $1.1 million in
excess pension assets from its Retirement System into a fund to
pay fiscal year 1997 retiree medical benefit expenses. OBRA '90,
was modified by the Retirement Protection Act of 1994 to extend
annual excess asset transfers through the fiscal year ending
March 2001.
Savings Investment Plan - The Company sponsors a Savings
Investment Plan (the "Savings Plan"), under Internal Revenue Code
Section 401, covering substantially all non-union employees.
Under the Savings Plan, the Company at its sole discretion can
contribute an amount equal to up to 6% of each participant's
annual salary depending on the participant's Savings Plan
contributions, and the Company's profits and performance. The
Company has made no contributions to the Savings Plan during the
last three years.
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 met 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.
The actuarially calculated components of net periodic post
retirement health care benefit cost for the defined benefit plan
in fiscal years 1997, 1996 and 1995 are as follows (in
thousands):
1997 1996 1995
Interest cost on projected
benefit obligation $ 1,214 $ 1,180 $ 1,343
Net amortization of gain (336) (276) (182)
Net period postretirement benefit
cost $ 878 $ 904 $ 1,161
Current year plan contributions $ 1,118 $ 1,274 $ 1,467
Because such benefit obligations do not accrue to current
employees of the Company, there is no current year service cost
component of the accumulated post retirement health benefit
obligation.
The weighted average discount rates for fiscal years 1997, 1996
and 1995 were 7%, 6.5% and 7%, respectively. The rate of
increase in the per capita cost of covered benefits (i.e., health
care cost trend) used in determining the actuarial present value
of the accumulated health benefit obligation were 8% grading down
to 5% over 20 years for fiscal years 1997 and 1996 and 8% for
fiscal year 1995. The 1997 health care cost trend reflects the
expectation that long term medical cost growth trends will not
stay at current levels. Retirement health care plan gains or
losses exceeding 10% of the benefit obligation are amortized over
the beneficiaries average remaining life expectancy (10 years).
The health care cost trend rate assumption has a significant
effect on the amounts reported. Increasing the assumed health
care cost trend rate by one percentage point in each year would
increase the accumulated post retirement health benefit
obligation as of March 30, 1997 by $1.9 million and the interest
cost component of net periodic post retirement benefit cost for
1997 by $.1 million.
The following table sets forth the amounts recognized in the
Company's consolidated balance sheet at March 30, 1997 and March
31, 1996 for the post retirement health benefit obligation (in
thousands):
1997 1996
Accumulated post retirement health benefit
obligation $18,000 $20,016
Plan assets - -
Accumulated post retirement health benefit
obligation in excess of plan assets 18,000 20,016
Unrecognized net gain 5,153 3,378
Accrued post retirement health benefits 23,153 23,394
Less estimated current portion of obligations
classified as accrued expenses 1,116 1,116
Long-term portion of accrued post retirement
health benefits $22,037 $22,278
7. INCOME TAXES
The provision for income taxes differs from the amount of tax
determined by applying the federal statutory rate for the
following reasons (in thousands):
1997 1996 1995
Tax provision (benefit) at
federal statutory tax rate $(7,439) $ 1,446 $ 1,344
Increase (decrease) in valuation
allowance 7,501 (829) (908)
Tax effect of adjustment of
contingent liabilities (291) (541) (850)
Other - net 229 (76) 414
$ - $ - $ -
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred income tax assets and liabilities at March 30, 1997,
March 31, 1996 and April 2, 1995 were as follows (in thousands):
1997 1996 1995
Deferred income tax assets:
Business credit carryforwards $7,261 $7,269 $8,092
Net operating loss carryforwards 5,878 - -
Alternative minimum tax credit
carryforwards 3,091 2,874 2,874
Accrued employee benefits 9,031 9,214 9,272
Environmental reserve 4,226 2,490 2,815
Contract deferrals 1,062 1,115 958
Deferred gain on sale of facility 575 601 627
Securities available-for-sale - - 241
Reserve for doubtful accounts 301 179 192
Other 202 1,087 802
Total deferred income tax assets 31,627 24,829 25,873
Valuation reserve for deferred
tax assets (19,923) (13,872) (14,701)
Net deferred tax assets 11,704 10,957 11,172
Deferred income tax liabilities:
Deferred pension income 6,847 6,020 5,447
Accelerated depreciation 4,036 4,739 5,488
Securities available-for-sale 739 124 -
Other 82 74 237
Total deferred income tax liabilities 11,704 10,957 11,172
Net deferred taxes $ - $ - $ -
The Company records its deferred tax assets on the balance sheet
net of a valuation reserve due to the lack of reasonable
assurance that they will be realized.
The Company had, for federal income tax purposes, net operating
loss carryforwards of $5.9 million at March 30, 1997 and tax
credit carryforwards of $7.3 million at March 30, 1997 and March
31, 1996. If not utilized, the net operating loss carryforwards
will expire in fiscal year 2012 and the tax credit carryforwards
will expire in fiscal years 1998 through 2001.
In addition, the Company has paid approximately $3.1 million of
alternative minimum taxes on alternative minimum taxable income
from fiscal years 1988 through 1992, which will be allowed as a
credit carryforward against regular federal income taxes in
future years in the event regular federal income taxes exceed the
alternative minimum tax.
8. LEASES
Operating lease payments charged to expense were $1.0 million,
$.9 million, and $.5 million for fiscal years 1997, 1996 and
1995, respectively. Certain leases contain renewal options and
escalation clauses. Minimum lease commitments at March 30, 1997
are summarized below (in thousands):
Operating
Leases
1998 $ 271
1999 237
2000 199
2001 183
2002 73
Thereafter 437
Total minimum lease commitments $ 1,400
9. 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, environmental protection and Government procurement
regulations. Only a portion of these risks and legal proceedings
involving the Company are covered by insurance, because the
availability and coverage of such insurance generally has
declined or the cost has become prohibitive.
10. FINANCING ARRANGEMENTS
Todd Pacific utilizes an annually renewable $3 million revolving
credit facility secured by a first lien on certain trade
receivables. Outstanding borrowings under the credit facility
may not exceed certain percentages of Todd Pacific's trade
receivables. There were no balances outstanding at March 30,
1997.
11. ENVIRONMENTAL MATTERS
The Company faces potential liabilities in connection with the
alleged presence of hazardous waste materials at certain of its
closed shipyards, at the Shipyard and at several sites used by
the Company for disposal of alleged hazardous waste. The Company
continues to analyze environmental matters and associated
liabilities for which it may be responsible. No assurance can be
given as to the existence or extent of any environmental
liabilities until such analysis has been completed. The eventual
outcome of all environmental matters cannot be determined at this
time, however, the analysis of some matters have progressed
sufficiently to warrant establishment of reserve provisions in
the accompanying consolidated financial statements.
Harbor Island Site:
The Company and several other parties have been named as
potentially responsible parties ("PRPs") by the Environmental
Protection Agency (the "EPA") pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"
also known as "Superfund") in connection with the documented
release or threatened release of hazardous substances, pollutants
and contaminants at the Harbor Island Superfund Site (the "Harbor
Island Site"), upon which the Shipyard is located.
To date, the EPA has separated the Harbor Island Site into two
operable units that involve the Company: the Soil and Groundwater
Operable Unit (the "Soil Unit") and the Shipyard Sediments
Operable Unit (the "Sediments Unit").
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. That remediation is anticipated to begin in
1997. The Company and EPA currently are negotiating the extent
and methodology of that remediation. The duration of the Soil
Unit remediation is expected to be approximately 12 to 24 months
from the start date. The Company has accrued the EPA's estimate
of the cost of the Soil Unit clean-up in its below stated
environmental matters reserves.
During the quarter ended December 29, 1996, the EPA issued its
Record of Decision ("ROD") for the Sediments Unit. The ROD
identifies four alternative clean-up remedies and specifies the
EPA's selected solution (the "Selected Solution"). The Selected
Solution requires sediment dredging, and installation of a clean
sediment cap and various monitoring efforts extending over ten
years. The Selected Solution includes dredging and disposal of
approximately 116,000 cubic yards of material currently in the
Duwamish River and Elliott Bay surrounding the Shipyard. The
Selected Solution allows for two sediment disposal options:
confined nearshore disposal ("CND") and confined aquatic
disposal. The Company identified CND as what would be its
preferred disposal method if the Selected Solution is
implemented. In that regard, the Company has initiated
independent studies to estimate costs of a CND effort. The EPA
estimates the Company's portion of the remedial cost for the
Selected Solution including long term monitoring and maintenance
between $5.5 million and $7.9 million. The low end of the EPA's
estimated range reflects the Company's independent cost estimate
for CND of sediments on Company-owned property. The high end of
the EPA range reflects the average CND cost of other Puget Sound
CND dredging projects.
The estimated range does not include the cost of any potential
under-pier dredging or capping, should any be required. The
potential scope and costs of under-pier dredging and capping
remedies are currently indeterminable as the necessity and
magnitude of such efforts is strongly dependent on site-specific
conditions. The Company believes that the timing and the
eventual cost of the Sediments Unit clean up will remain
significantly uncertain until a remedial design has been
finalized with the EPA that identifies the scope of remediation
and the method of sediment disposal. The Company has accrued an
amount equal to the high end of the EPA's estimated range, as the
reasonably expected cost of the Sediments Unit clean-up in its
below stated environmental matters reserves. The Company is
currently negotiating an Order of Consent with the EPA covering
solely the additional sampling necessary for any remedial design.
The proposed Order of Consent does not include the remedial
design itself.
In January 1990, the Company was notified that it was a PRP in an
action brought by the National Oceanic and Atmospheric
Administration ("NOAA") for alleged damages caused to the coastal
and marine natural resources in the Duwamish River and Elliott
Bay off the Harbor Island Site. Subsequent to this notification,
NOAA brought suit against the City of Seattle and the
Governmental agency responsible for sewage treatment in the
Seattle area ("Metro") for their contributions of hazardous
materials to the Duwamish River and Elliott Bay. This litigation
was settled between the parties. While NOAA, the City of Seattle
and Metro retain the right to bring suit against all the other
named PRPs, including the Company, the Company has not been
contacted since the January 1990 notification. The Company does
not know the scope of the alleged damages caused to the coastal
and marine natural resources or the methods of measuring these
alleged damages. For these reasons, the Company does not believe
that any estimate of any potential liability relating to these
actions can be made at this time.
Other Environmental Matters:
The Company entered into a Consent Decree with the EPA for the
clean up of the Casmalia Resources Hazardous Waste Management
Facility in Santa Barbara County, California under the Resource
Conservation and Recovery Act. The Company has included an
estimate of the potential liability for this site in its below
stated reserves. Payments, expected to be immaterial, began in
fiscal year 1997 and will extend for up to ten years.
In June 1989, the Company was notified by the City of Hoboken,
New Jersey (the "City") that a volume of oil had been discovered
on the surface of the property that had been owned and operated
as the Hoboken Division of the Company. In June 1992, the City
and the Company were named as PRPs by the State of New Jersey
(the "State"). The City has undertaken a clean-up of the
property. The State has issued a Notice of Violation against the
Company pursuant to the New Jersey Spill Act ("Spill Act"). The
City and the State allege that the Company abandoned three
underground storage tanks in 1969 when the property was sold to
the City and that the discovered surface oil spilled from those
tanks. In April 1994 the City of Hoboken initiated a civil
action against the Company entitled City of Hoboken v. Todd et
al. for contribution under the Spill Act seeking reimbursement
for all monies expended for the cleanup of the Hoboken property.
Also named in the suit is the developer who allegedly trespassed
onto the property and caused the oil spill and several insurance
companies who allegedly issued comprehensive general liability
insurance policies in favor of the City of Hoboken covering the
property. The Company is vigorously defending this action. The
Company has included an estimate of the potential liability for
the site in its below stated reserves. The trial date for this
case is scheduled for Spring of calendar year 1998.
Todd Pacific was notified by the California Environmental
Protection Agency that it may be considered a potentially
responsible party for the cleanup of the Omega Chemical
Corporation site ("Omega Site") in Whittier, California in
September of 1994. It is alleged that the Los Angeles Division
of Todd Pacific caused certain production wastes and by-products
to be transported to this hazardous waste treatment and storage
facility between 1976 and 1991. The California Department of
Toxic Substances Control is pursuing the clean up of the Omega
Site pursuant to state and federal regulations. The Company is
investigating these allegations. No estimation of potential
liability or potential timing of payments, if any, is currently
available as the scope of the total Omega Site has not yet been
quantified and little information regarding the Company's
involvement in the site has to date been identified.
In November 1987, the Company was identified as a PRP by the EPA
in conjunction with the cleanup of the Operating Industries, Inc.
("OII") hazardous materials disposal site at Monterey Park,
California. In September 1995, the Company entered into a
Partial Consent Decree with the EPA to contribute $.6 million as
its partial share of remediation costs at the OII site which
encompasses all costs assessed to date. Payment was made to the
EPA in July 1996. A proposed final consent decree for site
remediation is not expected from the EPA until late calendar year
1997. The cost of the partial settlement and future final
consent decree settlement is included in the below stated
reserve.
The Company has recently been named as one of approximately 50
defendants in a civil action seeking monetary damages incurred as
the result of the ongoing clean up of the Basin By-Products
CERCLA Site in Los Angeles County, California. Investigation has
just begun in this matter and no estimate yet can be made of any
liability.
During its fiscal year 1998, the Company will be required by
Washington state environmental regulations to take action in
order to determine all known, available and reasonable methods of
prevention, control, and treatment ("AKART") for storm water
discharges from its shipyard. In accordance with its National
Pollution Discharge Elimination System permit the Company will be
required to submit its engineering analysis of AKART to the
Washington State Department of Ecology during the second quarter
of FY'98. Potential future expense for compliance with these
AKART regulations will be not quantifiable until the engineering
analysis has been completed and will be recognized in the period
incurred.
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. These
cases are generally filed with multiple claimants and multiple
defendants and are generally insured matters. In certain
jurisdictions, the laws are structured to allow the heirs of
former employees to sue for gross negligence and to seek punitive
damages in addition to compensatory awards. The Company is not
fully insured for these matters. Costs to date to administer and
settle these cases have not been material. Estimation of
eventual potential liability, if material, is not possible as the
Company has no means to quantify the number of potential cases,
the timing of such cases, the jurisdiction or what judgments or
settlements, if any, would result. The Company and its insurers
are vigorously defending these actions. The Company has included
its current estimate of the potential liability for known issues
in its below stated reserves.
During fiscal year 1997, the Company recognized a $4.3 million
charge against earnings that includes $7.9 million for
anticipated costs associated with the Company's portion of the
Selected Solution, a decrease to the Soil Unit reserve and
adjustments to other environmental matters. The Company has also
reclassified a previously established $1 million siltation
dredging reserve to the Selected Solution reserve as the efforts
will be performed concurrently. These adjustments increase the
Company's environmental reserves for the entire Harbor Island
Site to $11.4 million. The Company has provided total aggregate
reserves of $15.9 million for the above described contingent
environmental liabilities. The Company is negotiating with its
insurance carriers and prior landowners and operators for past
and future remediation costs. The Company has recorded a non-
current asset of $3.8 million to reflect a contractual
arrangement with an insurance company to share costs for certain
environmental matters. No assurance can be given that the
Company's reserves are adequate to cover all potential
environmental costs the Company could incur.
12. COLLECTIVE BARGAINING AGREEMENT
On July 31, 1996, the existing labor contract with a consortium
of unions covering substantially all production workers expired.
During fiscal year 1997, the Company negotiated a new labor
contract with local union leadership aimed at resolving
contractual and business issues. Subsequent to the end of fiscal
year 1997, on April 9, 1997 and again on May 20, 1997, Company
workers did not ratify two versions of the proposed contract.
For the duration of the Mark II Ferry contract, the Company's
existing contracts with the unions include "no strike/no lockout"
provisions. Additionally, these agreements provide that a
binding arbitration process be utilized between the bargaining
parties in the event an agreement for a new labor contract cannot
be reached. It is the Company's intent to request such an
arbitration in order to achieve a new collective bargaining
agreement. The Company expects work to continue under the
existing contract until contractual issues are resolved. The
Company cannot quantify the financial impact, if any, to the
Consolidated Financial Statements of operating without a union
contract. Over the past two fiscal years, the Company has
invested heavily in its labor relations efforts including the
establishment of labor/management committees and conflict
resolution education for all parties. Notwithstanding the
contract rejections, the Company believes that its relations with
its employees are stable.
13. SUBSEQUENT EVENT
Subsequent to the Company's fiscal year ending March 30, 1997,
the Company announced that it had entered into an agreement to
sell its radio broadcasting subsidiary, Elettra Broadcasting,
Inc., for $5.3 million. The Company expects to record a small
gain on completion of the transaction, which is expected to close
in the third quarter of fiscal year 1998.
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended March 30,
1997 and March 31, 1996 are as follows. Each quarter is 13 weeks
in length (in thousands):
Net
Operating Net Income
income income Per
Revenues (loss) (loss) Share
1st Qtr 1997 $ 30,231 $ (2,528) $ 31 $ 0.00
2nd Qtr 1997 26,627 (2,240) (1,643) (0.17)
3rd Qtr 1997 27,215 (5,873) (5,067) (0.51)
4th Qtr 1997 30,325 (15,151) (14,574) (1.47)
1st Qtr 1996 $ 12,952 $ (800) $ 59 $ 0.01
2nd Qtr 1996 26,837 (1) 689 0.07
3rd Qtr 1996 21,783 1,240 2,059 0.21
4th Qtr 1996 40,115 578 1,325 0.13
The third quarter of fiscal year 1997 includes a $4.25 million
environmental provision. The fourth quarter of fiscal year 1997
reflects a $11.5 million loss reserve established for the Mark II
Ferry project and the reversal of $2.4 million of previously
recognized Mark II Ferry profit.
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending March 30, 1997, March 31, 1996 and April 2, 1995
(in thousands)
Reserves deducted from assets to which they apply - Allowance for
doubtful accounts:
Year Year Year
ended ended ended
Mar 30, Mar 31, Apr 2,
1997 1996 1995
Balance at beginning of period $ 511 $ 548 $ 653
Charged to costs and expenses 350 68 -
Deductions from reserves (1) - (105) (105)
Balance at close of period $ 861 $ 511 $ 548
Notes:
(1) Deductions from reserves represent uncollectible accounts
written off less recoveries. Deductions to the allowance account
include $100 thousand credited to other income in fiscal year
1995 for changes in the Company's business volume.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCED DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
**
ITEM 11. EXECUTIVE COMPENSATION
**
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
**
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
**
** The information for the above items will be provided in, and
is incorporated by reference to, the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1 & 2. Financial Statements
The financial statements and financial statement schedule
listed in the accompanying index to financial statements and
financial statement schedules are filed as part of this annual
report.
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this annual report.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth
quarter ended March 30, 1997.
TODD SHIPYARDS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
Report of Ernst & Young LLP Independent Auditors.............
Consolidated Balance Sheets at March 30, 1997
and March 31, 1996..........................................
Consolidated Statements of Operations
For the years ended March 30, 1997,
March 31, 1996 and April 2, 1995.............................
Consolidated Statements of Cash Flows
For the years ended March 30, 1997,
March 31, 1996 and April 2, 1995.............................
Consolidated Statements of Stockholders Equity
For the years ended March 30, 1997,
March 31, 1996 and April 2, 1995.............................
Notes to Consolidated Financial Statements
For the years ended March 30, 1997,
March 31, 1996 and April 2, 1995.............................
Supplementary Information:
Quarterly Financial Data (unaudited).......................
Consolidated Financial Statement Schedule:
II-Valuation and Qualifying Reserves.......................
TODD SHIPYARDS CORPORATION INDEX TO EXHIBITS
Item 14(a)3
Exhibit
Number
3-1 Certificate of Incorporation of the Company #
dated November 29, 1990.
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 Lease Agreement of floating drydock YFD-70 dated *
April 16, 1996 between the Company and NAVSEA,
filed in the Company's Form 10-K Report for 1996
as Exhibit 10-1.
10-2 Lease Agreement of floating drydock YFD-54 dated *
April 1, 1987 between the Company and NAVSEA and
amendments thereto filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-2.
10-3 Collective Bargaining Agreement between Todd *
Pacific, Seattle Division and the Metal Trades
Dept. of the A.F.L.- C.I.O., the Pacific Coast
Metal Trades District Council, the Seattle Metal
Trades Council and the International Unions
signatory thereto dated April 1, 1993 filed in the
Company's Form 10-K Annual Report for 1994 as
Exhibit 10-4.
10-4 Project Agreement between Todd Pacific, Seattle *
Division and the Metal Trades Dept. of the A.F.L.
- C.I.O., the Pacific Coast Metal Trades District
Council, the Seattle Metal Trades Council and the
International Unions signatory thereto dated August
1994 filed in the Company's Form 10-K Report for
1995 as Exhibit 10-4.
10-5 Unsigned executed copy of Harbor Area Lease *
Agreement No. HA-2202 dated March 21, 1985 between
the Company and the State of Washington Dept. of
Natural Resources filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-5.
10-6 Harbor Area Lease Agreement No. 2590 dated *
December 13, 1982 between the Company and the State
of Washington Dept. of Natural Resources filed in the
Company's Form 10-K Report for 1995 as Exhibit 10-6.
10-7 Harbor Area Lease Agreement No. 22-090038 dated *
September 1, 1986 between the Company and the State
of Washington Dept. of Natural Resources filed in the
Company's Form 10-K Report for 1995 as Exhibit 10-7.
10-8 Harbor Area Lease Agreement No. 22-090039 dated *
September 1, 1986 between the Company and the State
of Washington Dept. of Natural Resources filed in the
Company's Form 10-K Report for 1995 as Exhibit 10-8.
10-9 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.
10-10 Todd Shipyards Corporation Retirement System Plan *
and Amendments thereto filed in the Company's Form
10-K Report for 1995 as Exhibit 10-10.
10-13 Purchase and Sale Agreement and Deed of Trust *
relating to the sale of the Company's Galveston
facility to the Galveston Wharves dated December
16, 1993 filed in the Company's Form 10-K
Annual Report for 1994 as Exhibit 10-14.
10-14 Employment contract between Todd Pacific and Roland *
H. Webb dated December 27, 1994 filed in the Company's
Form 10-K Report for 1995 as Exhibit 10-14.
10-15 Contract between Todd Pacific and the Washington *
State Ferries, a division of the Washington State
Department of Transportation for the construction of
one Jumbo Mark II Class Ferry dated January 30, 1995
filed in the Company's Form 10-K Report for 1995 as
Exhibit 10-15.
10-15(a) Change Order Estimate from the Washington State *
Ferries, amending Exhibit 10-15 and exercising its
Option for the construction of the second and third
Jumbo Mark II Class Ferries dated June 14, 1995,
filed in the Company's Form 10-K Report for 1996
as Exhibit 10-15(a).
10-16 Contract No. N000024-91-C-8503 between Todd Pacific *
and the Department of the Navy for the maintenance
and repair of supply ships filed in the Company's Form
10-K Report for 1995 as Exhibit 10-16.
10-16(a) Contract No. N000024-96-R-8500 between Todd Pacific #
and the Department of the Navy for the maintenance
and repair of supply ships dated May 20, 1996.
10-17 Documents pertaining to the bonding arrangements of *
Todd Pacific relating to the Ferry Contract (Exhibit
10-16): Underwriting and Continuing Indemnity Agreement,
Security Agreement, Pledge Agreement, Intercompany
Credit Agreement, Preferred Mortgage of vessel
EMERALD SEA, UCC-1 Financing Statement, and UCC-2
Fixture Statement filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-17.
10-18 Documents pertaining to revolving line of credit *
agreement between Todd Pacific and U.S. Bank of
Washington, National Association: Security Agreement,
Commercial Guaranties, Corporate Resolution to Borrow,
Corporate Resolutions to Guaranty/Grant Collateral,
Business Loan Agreement, Disbursement Request and
Authorization Agreement, Accounts Receivable Collateral
Parameters Agreement, Promissory Note, and UCC-1
Financing Agreement filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-18.
10-19 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.
10-20 Grant of Nonqualified Stock Option dated *
June 24, 1994 to Patrick W.E. Hodgson pursuant
to the Incentive Stock Compensation Plan
(Exhibit 10-19) filed in the Company's Form 10-K
Report for 1995 as Exhibit 10-20.
10-21 Grant of Incentive Stock Option dated June 24, 1994 *
to Roland H. Webb pursuant to the Incentive
Stock Compensation Plan (Exhibit 10-19) filed in the
Company's Form 10-K Report for 1995 as Exhibit 10-21.
10-22 Grant of Incentive Stock Option dated September 29, *
1994 to Stephen G. Welch pursuant to the Incentive
Stock Compensation Plan (Exhibit 10-19) filed in the
Company's Form 10-K Report for 1995 as Exhibit 10-22.
10-23 Grant of Incentive Stock Option dated September 29, *
1994 to Michael G. Marsh pursuant to the Incentive
Stock Compensation Plan (Exhibit 10-19) filed in the
Company's Form 10-K Report for 1995 as Exhibit 10-23.
10-25 Form of Grant of Non-Qualified Stock Options dated *
July 17, 1995 to Patrick W.E. Hodgson pursuant
to the Incentive Stock Compensation Plan
(Exhibit 10-19).
10-26 Form of Grant of Incentive Stock Options dated *
July 17, 1995 to certain key employees pursuant to
the Incentive Stock Compensation Plan (Exhibit 10-19).
18-1 Letter dated 8/17/94 from Ernst & Young, LLP *
regarding changes in accounting principles, filed in
the Company's Form 10-K for 1996 as Exhibit 18-1.
22-1 Subsidiaries of the Company. #
27 Financial Data Schedule. #
Note: All Exhibits are in SEC File Number 1-5109.
* Incorporated herein by reference.
# Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934 the registrant has duly caused
this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TODD SHIPYARDS CORPORATION
Registrant
By: /s/ Stephen G. Welch
Stephen G. Welch
Vice President, Chief Financial Officer
and Treasurer
June 7, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated:
/s/ Brent D. Baird /s/ Steven A. Clifford
Brent D. Baird, Director Steven A. Clifford, Director
June 7, 1997 June 7, 1997
/s/ Patrick W.E. Hodgson /s/ Joseph D. Lehrer
Patrick W.E. Hodgson, Joseph D. Lehrer, Director
Chairman, Chief Executive June 7, 1997
Officer, and Director
June 7, 1997
/s/ Philip N. Robinson /s/ John D. Weil
Philip N. Robinson, Director John D. Weil, Director
June 7, 1997 June 7, 1997
/s/ Stephen G. Welch
Stephen G. Welch
Vice President, Chief Financial Officer
Principal Financial Officer and
Principal Accounting Officer
June 7, 1997