Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 for the fiscal year ended March 28, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from ___ to ___
Commission File Number 1-5109
TODD SHIPYARDS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1506719
(State or other jurisdiction of (IRS Employer I.D.No.)
incorporation or organization)
1801-16th Avenue SW, Seattle, WA 98134-1089
(Address of principal executive offices) (zip code)
Registrant's telephone number (206) 623-1635
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Name of each exchange on which registered: New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non affiliates of the
registrant was approximately $40 million as of June 11, 1999.
There were 9,910,180 shares of the corporation's $.01 par value common stock
outstanding at June 11, 1999.
Documents Incorporated by Reference
Portions of the Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held September 18, 1999 are
incorporated by reference into Part III.
TABLE OF CONTENTS
PART I
Page No.
Item 1. Business............................................. *
Item 2. Properties........................................... *
Item 3. Legal Proceedings.................................... *
Item 4. Submission of Matters to a Vote of Security Holders.. *
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.......................... *
Item 6. Selected Financial Data.............................. *
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. *
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...........................................*
Item 8. Consolidated Financial Statements and
Supplementary Data................................... *
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. *
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................... *
Item 11. Executive Compensation............................... *
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... *
Item 13. Certain Relationships and Related Transactions....... *
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................ *
No page numbers are contained in EDGAR version.
PART I
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements contained in this Report which are not historical facts or
information are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate
future events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties which could cause
the outcome to be materially different than stated. Such risks and
uncertainties include both general economic risks and uncertainties and
matters which relate directly to the Company's operations and properties and
are discussed in Items 1, 3 and 7 below. The Company cautions that any
forward-looking statement reflects only the belief of the Company or its
management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove to be inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.
ITEM 1. BUSINESS
INTRODUCTION
Todd Shipyards Corporation (the "Company") was organized in 1916 and has
operated a shipyard in Seattle, Washington (the "Shipyard") since
incorporation. The Company operates the Shipyard through its wholly owned
subsidiary Todd Pacific Shipyards Corporation ("Todd Pacific"). Todd Pacific
is engaged in the repair/overhaul, conversion and construction of commercial
and military ships and vessels.
Throughout much of the Company's history, a substantial portion of its
revenues and profits were attributable to long-term United States Government
("Government") contracts. However, in the late 1980's a significant decline
in the annual shipbuilding budgets of the Department of the Navy (the "Navy")
greatly reduced the Company's bidding opportunities for long-term Government
contracts. 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 the construction and delivery of three
Jumbo Mark II Class ferries ("Mark II Ferry") for the Washington State Ferry
System ("Ferry System"). The third ferry, the MV Puyallup, was delivered at
the beginning of the fourth quarter of fiscal year 1999, while the
construction of a 70 mega-watt floating electrical power-plant (the "Margarita
II") began in the Company's second quarter. In addition to these new
construction projects, the Company has engaged in 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.
On June 4, 1999, the Company reached a mediated settlement with the Ferry
System relating to unpriced engineering and production changes issued by the
Ferry System during construction of the Mark II Ferries. Pursuant to the
terms of this settlement, the contract price for the three ferries was
increased $23.5 million to $205.5 million. The settlement is being reflected
as of the close of the Company's 1999 fiscal year and materially affects
revenues and earnings for that period. For a more complete discussion of the
impact of the settlement, see the "Overview" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Item 7 below.
The Company believes that it will continue to perform a substantial amount of
maintenance and repair work on commercial and Federal Government vessels
engaged in various seagoing trade activities in the Pacific Northwest. This
strategy will enable the Company to pursue repair, maintenance, and overhaul
work for the vessel fleets operating on Puget Sound (near Seattle) and the
Pacific Coast. These include the Washington State Ferry System, the Alaska
Marine Highway System, the U.S. Navy, the U.S. Coast Guard, passenger cruise
ships, American-flagged cargo carriers, the fishing fleets, tankers, and the
tug and barge operators. While the Company may selectively pursue new
construction opportunities in the future, its primary near term strategy will
be to focus on maintenance and repair activities.
The Company has from time to time considered opportunities to diversify in
marine industries and businesses unrelated to the Shipyard. During fiscal
year 1999 the Company did not make investments in any related or unrelated
businesses.
OPERATIONS OVERVIEW
Repair and Overhaul Operations
The Company's repair and overhaul work ranges from relatively minor repair to
major overhauls and often involves the dry-docking of the vessel under repair.
The repair and overhaul business opportunities available to domestic, private-
sector shipyards, has been impacted by the downsizing and relocation 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 and 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
During fiscal year 1999, the Company completed production work on its contract
with the Ferry System to build three Mark II Ferries by delivering the third
vessel, the MV Puyallup on December 28, 1998, two months ahead of its
contractual delivery date. The Mark II Ferries are designed to transport 218
automobiles and 2,500 passengers each on the waterways of Puget Sound and are
the largest ferries in the Ferry System fleet. The Mark II Ferry program,
awarded in fiscal year 1995, will officially end with the completion of the
warranty period on the third vessel at the end of the Company's third quarter
in fiscal year 2000. The first and second vessels have successfully completed
their warranty periods.
In the second quarter of fiscal year 1999 the Company commenced work on a new
construction contract with an estimated price of approximately $20.0 million.
The contract calls for the construction of a floating electrical power-plant.
The contract, awarded in August 1998, was completed on April 30, 1999,
subsequent to the Company's fiscal year end of March 28, 1999.
Distribution of Work
The approximate distribution of the Company's Shipyard revenues for each of
the last three fiscal years are summarized as follows:
1999 1998 1997
Federal Government 30% 18% 10%
Commercial 70% 82% 90%
Total 100% 100% 100%
The Mark II Ferry program represented 39%, 55%, and 59% of fiscal year 1999,
1998, and 1997 revenues, respectively, was concluded during fiscal year 1999.
Mark II Ferry revenue for fiscal year 1999 was significantly influenced by the
$24.7 million in additional revenues recorded as a result of the Mark II Ferry
project settlement. This settlement had a significant impact both on the
volume and nature of the business being conducted in fiscal year 1999, and to
the relative contribution of federal government and commercial operations.
Future Operations
The Company plans actively to pursue Government and commercial repair and
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.
Competition for domestic construction and repair opportunities will continue
to be intense as certain of the Company's larger competitors have more modern
shipbuilding facilities, lower labor cost structures, or access to greater
financial resources. The Company is working to maximize its advantages of
geographic location, the skills of its experienced workforce and production
efficiencies developed from its recently completed construction activities.
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 866 employees during fiscal year 1999 and totaling approximately
893 employees on March 28, 1999. With respect to the Mark II Ferry project
which completed on December 28, 1998, the Company employed an average of
approximately 208 on persons this project during fiscal year 1999.
During fiscal year 1999 an average of approximately 748 of the Company's
Shipyard employees were covered by a union contract that became effective on
November 24, 1997. At March 28, 1999 approximately 772 Company employees were
covered under this contract.
In February 1998, the Puget Sound Metal Trades Council (bargaining umbrella
for all unions at Todd Pacific) and Todd Pacific were sued in Federal District
Court for the Western District of Washington by in excess of 200 employees
contending that the collective bargaining agreement entered into by Todd
Pacific and the various unions representing these employees had not been
properly ratified by the union membership. The lawsuit sought a declaratory
judgment that the collective bargaining agreement executed in November 1997 be
found null and void. The Puget Sound Metal Trades Council and the plaintiff
employees reached a final settlement of this matter, subsequent to the
Company's fiscal 1999 year end, in May 1999. The Company has agreed to the
terms of the settlement, which do not require any action or monetary
contribution by the Company.
Over the past three fiscal years, the Company has increased its labor
relations efforts including the establishment of labor/management committees
and conflict resolution education for all parties.
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 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 lower wage structures,
substantial financial resources or significant recent investments in
productivity enhancing facilities. The reduced size of the Government's
active duty fleet has resulted in a significant decline in the total amount of
Government business available to 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 $14.4 million as of March 28, 1999 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 28, 1999 the Company's backlog consists of approximately $46 million
of construction, repair and overhaul work. This compares with backlogs of $47
million and $85 million at March 29, 1998 and March 30, 1997 respectively.
With the completion of the Mark II Ferry project in December 1998, the
Company's backlog position is primarily attributable to firm repair and
overhaul work scheduled for completion in fiscal year 2000. Backlog reported
in fiscal years 1998 and 1997, were significantly influenced by the remaining
work to be completed on the Mark II Ferries.
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 of which $44 million had been recorded as revenue, cumulatively, as of
March 28, 1999.
In January 1999, the Company was awarded a five year cost-type contract for
phased maintenance work by the Department of Navy. The notional value of the
contract is approximately $100 million and gives the Navy options to have the
Company perform repair and maintenance work on three separate nuclear aircraft
carriers at Puget Sound Naval Shipyard in Bremerton, Washington. Work on the
first ship availability started in April, 1999.
Since work under both of these Navy contracts is at the option of the Navy,
the Company cannot provide assurance as to the timing or level of work that
may be performed as part of these contracts, therefore, projected revenues
from these contracts are not included in the Company's backlog.
The Company is working to identify and win additional repair, maintenance, and
conversion work that would match the Shipyard's production capacity.
INVESTMENTS AND ACQUISITIONS
The Company has from time to time pursued opportunities to diversify its
business, in areas such as metal fabrication, marine transportation, other
marine industries and businesses unrelated to the Shipyard.
The Company continues to evaluate suitable investment opportunities which it
believes will appropriately utilize the Company's resources. During fiscal
year 1999 the Company did not make any investments in other businesses, either
related or unrelated to the Shipyard activities.
ITEM 2. PROPERTIES
During fiscal year 1999 the Company sold an out of service drydock that had
been stored at the Company's facility on Harbor Island. The drydock,
purchased in fiscal year 1998 was sold to a foreign shipyard on a non-compete
installment sale basis. The Company's lease on the wood drydock expires in
September 1999. The Company is currently evaluating several factors,
including, but not limited to, management's plans for future operations,
recent operating results and projected cash flows to determine if the lease
will be extended. The design capacities of the Company's three drydocks, all
of which are located at the Shipyard, 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 all non-nuclear U.S. Navy vessels homeported in Puget Sound,
as well as 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 four Superfund sites. Additionally, the Company has been
named as a PRP for four Superfund cases where the Company has asserted that
its liability was discharged when it emerged from bankruptcy in 1990.
In addition to the four 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 two
additional sites, one of which was settled subsequent to the end of fiscal
year 1999.
Generally these environmental claims relate to sites used by the Company for
disposal of alleged hazardous waste, although one matter, which has been
settled, related 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 site, 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.
Harbor Island Site
The Company and several other parties have been named as PRPs by the EPA
pursuant to CERCLA in connection with the documented release or threatened
release of hazardous substances, pollutants and contaminants at the Harbor
Island Superfund Site, (the "Harbor Island Site"). Included in the Company's
$14.4 million total reserve for environmental matters is a reserve of $10.8
million to address the Harbor Island Site.
To date, the EPA has separated the Harbor Island Site into three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and will continue
throughout fiscal year 2000. The Company and the EPA are currently
negotiating the extent and methodology of the soil remediation. The Company
estimates remediation of the entire Soil Unit will take approximately 18 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 SSOU. The ROD identifies four alternative solutions
for the SSOU 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 SSOU. The
parties have not agreed to a remedial design for the SSOU. The Company
believes that the timing and cost of the SSOU clean up will remain
significantly uncertain until a remedial design has been finalized with the
EPA that identifies the scope of remediation and the method of sediment
disposal.
In January 1998, the Company was notified by the EPA that testing would be
required in the West Waterway of the Duwamish River outside the borders of the
SSOU as part of the SOU. The Company in May 1998 entered into an Order of
Consent to perform certain limited testing as part of the SOU investigation.
The EPA is in the process of reviewing the results of the testing and plans to
release their findings during the summer of 1999.
Other
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 243 cases involving
493 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 claims resolved to date have been settled for immaterial
amounts. 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.
In February 1998, the Puget Sound Metal Trades Council (bargaining umbrella
for all unions at Todd Pacific) and Todd Pacific were sued in Federal District
Court for the Western District of Washington by in excess of 200 employees
contending that the collective bargaining agreement entered into by Todd
Pacific and the various unions representing these employees had not been
properly ratified by the union membership. The lawsuit sought a declaratory
judgment that the collective bargaining agreement executed in November 1997 be
found null and void. The Puget Sound Metal Trades Council and the plaintiff
employees reached a final settlement of this matter, subsequent to the
Company's fiscal 1999 year end, in May 1999. The Company has agreed to the
terms of the settlement, which do not require any action or monetary
contribution by the Company.
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 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's stock is listed on the New York Stock Exchange (the "NYSE").
The following table sets forth for the fiscal quarters indicated the high and
low composite sales prices of the stock as reported by the NYSE.
Quarter Ended High Low
June 29, 1997 5.88 3.75
September 28, 1997 4.88 3.88
December 28, 1997 5.38 3.63
March 29, 1998 6.00 3.88
June 28, 1998 7.50 5.00
September 27, 1998 6.38 4.13
December 27, 1998 5.69 4.50
March 28, 1999 6.00 4.31
On June 11, 1999 the high and low prices of the Company's common stock on the
NYSE were $6.00 and $5.75, respectively.
At June 11, 1999 there were approximately 2,600 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)
The following table summarizes certain selected consolidated financial data of
the Company which should be read in conjunction with the accompanying
consolidated financial statements of the Company included in Item 8.
March 28, March 29, March 30, March 31, April 2,
1999 1998 1997 1996 1995
Revenue (1) $ 106,189 $109,537 $114,398 $101,687 $69,096
Income (loss)
from operations (2) 10,222 3,197 (25,793) 1,017 (393)
Income (loss)
before cumulative
effect of change
in accounting
principle (2)(3) 17,394 8,103 (21,253) 4,132 3,402
Cumulative effect
of change in
accounting
principle (4) - - - - 438
Net income(loss) (2)(3) 17,394 8,103 (21,253) 4,132 3,840
Per share of common stock
Income (loss)
before cumulative
effect of change
in accounting
principle
Basic EPS 1.76 0.82 (2.14) 0.42 0.32
Diluted EPS 1.75 0.82 (2.14) 0.41 0.32
Cumulative effect of change
in accounting principle (4) - - - - 0.04
Basic EPS 1.76 0.82 (2.14) 0.42 0.36
Diluted EPS 1.75 0.82 (2.14) 0.41 0.36
Financial position:
Working capital 57,556 44,400 33,245 48,880 50,704
Fixed assets 19,026 21,565 24,477 26,499 24,552
Total assets 129,456 116,873 115,789 120,571 110,924
Stockholders
equity 71,088 56,813 47,940 67,380 62,433
(1) As discussed in greater detail in Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview -
Mark II Ferry Contract" the Company's 1999 revenues include $23.5 million
arising from an increase in the contract price relating to the
adjustment of the contract price for construction of three jumbo ferries,
substantially offsetting contract losses, before general and
administrative expenses, aggregating approximately $24.6 million
recognized by the Company under the prior contract terms. A substantial
portion of these contract losses were recognized during the Company's
1997 fiscal year.
(2) During fiscal year 1998, the Company reached agreement with an
insurance company regarding that carrier's obligations for property
damage occurring in previous fiscal years. This settlement contributed
$6.1 million to operating and net income. This settlement was offset
partially by an additional $.5 million operating charge to environmental
reserves.
(3) During fiscal year 1998, the Company received a federal income tax refund
of $1.5 million, which contributed a similar amount to net income. In
addition, the Company realized a $1.0 million gain on the sale of its
broadcasting stations, operated by Elettra Broadcasting, Inc.
(4) 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 - Profitability," and "Environmental
Matters." Readers should also consider the statements and factors discussed
under the caption "Operations Overview" in Item 1 of the Company's Form 10-K
Annual Report filed with the Securities and Exchange Commission for the fiscal
year ended March 28, 1999, and in the Notes to the Company's Consolidated
Financial Statements for the fiscal year then ended.
Overview
During fiscal year 1999 the Company recorded operating income of $10.2 million
on revenue of $106.2 million. Operating income for the year was primarily
attributable to the mediated settlement the Company reached with the
Washington State Ferry System (the "Ferry System") relating to costs incurred
in constructing three Jumbo Mark II Ferries. Under terms of the settlement,
Todd and the Ferry System agreed to increase the total 3 ship contract value
to $205.5 million from its original value of $182.0 million. The $23.5
million contract price increase arises from unpriced engineering and
production changes issued by the Ferry System during the construction of the
Jumbo Mark II Ferries, which began in 1995.
Along with the $23.5 million increase in contract price, the Company was able
to record $1.2 million in additional revenue associated with tasks completed
under the original contract value that it had not been able to recognize
previously. These amounts contributed $24.7 million to reported revenue and
approximately $24.0 million to operating income, after settlement expenses,
for the year ending March 28, 1999. This additional revenue and operating
income allowed the Company to reverse $18.0 million of Jumbo Mark II contract
losses recorded in previous fiscal years and an additional $4.8 million in
current fiscal year contract losses that had been recorded through the
Company's third quarter.
In addition to the Ferry System settlement, the Company recognized in fiscal
year 1999 a $4.5 million non-operating gain on the 1993 sale of its Galveston
shipyard facilities. In December 1993, the Company received $5.4 million of
special revenue bonds upon the sale of its Galveston facility. In the third
quarter of fiscal year 1999, the Company received notice that the remaining
bonds would be called for redemption. The Company had been recognizing the
gain on the sale as each bond matured, and had previously recorded revenue of
$0.9 million on this sale. The Company recognized the remaining gain of $4.5
million during the third quarter of fiscal year 1999.
The Company also recognized a net gain of $2.2 million from the sale of
available-for-sale securities, and $2.3 million in non-operating investment
income during fiscal year 1999. These amounts along with the gain reported
from the sale of the Company's Galveston shipyard facility, resulted in net
income for the year, before tax, of $19.2 million.
Mark II Ferry Contact
On June 4, 1999 the Company reached a meditated settlement with the Washington
State Ferry System (the "Ferry System") relating to costs incurred in
constructing three Jumbo Mark II Ferries. Under terms of the settlement, Todd
and the Ferry System agreed to increase the total 3 ship contract value to
$205.5 million from its original value of $182.0 million. The $23.5 million
contract price increase arises from unpriced engineering and production
changes issued by the Ferry System during the construction of the Jumbo Mark
II Ferries, which began in 1995.
Prior to the settlement, the Company had previously estimated on December 27,
1998, that it would incur contract costs, excluding general and administrative
expenses, in excess of contract prices by $22.8 million. During the fourth
quarter of fiscal year 1999, the Company incurred an additional $1.8 million
in contract costs in excess of contract prices, bringing the total contract
loss to approximately $24.6 million prior to recognition of the settlement
revenue.
The Company claimed that a significant portion of the increased contract costs
related to high levels of engineering and production changes directed by the
Ferry System. These customer directed changes continued throughout the
production process and caused production rework, and delays and disruptions.
These changes resulted in increased production costs for the entire three ship
ferry construction project.
During this period, the Company could not reasonably predict the outcome of
any potential future negotiations with the Ferry System on these unpriced
changes. Because of this, the Company was unable to include any estimates of
possible recoveries in its program cost estimates. This resulted in the
Company disclosing contract losses on the three ship ferry project as early as
fiscal year 1997.
However, during fiscal year 1999 the Company completed an extensive cost
analysis of both the direct costs and related production schedule impact costs
resulting from these customer directed changes. As a result of this analysis,
the Company believed it was owed approximately $43 million plus the cost of
capital. This amount was in addition to the original contract value of $182
million.
The Ferry System conducted a fact finding review of this cost analysis that
began in the third quarter of fiscal year 1999 and continued through the
balance of the fiscal year. This fact finding phase allowed the Ferry System
an opportunity to discuss and review in more detail the basis for the
Company's cost analysis.
During the fourth quarter of fiscal year 1999, the Company and the Ferry
System agreed to a mediation process that lead to the recent settlement. The
settlement, which was unanimously approved by the Company's Board of
Directors, effectively ends the four year construction contract. While the
settlement reverses the majority of the Company's previously recorded contract
losses, it does not recover the estimated general and administrative expenses
that would have been allocated to the contract during its production phase.
As of March 28, 1999, the Company estimated that it had incurred approximately
$17.9 million in general and administrative expenses, during the four year
project, that are allocable to the Mark II Ferry project. These costs will
not be recovered.
With the settlement on June 4, 1999, the only contractual obligation remaining
for the Company on the Mark II Ferry project is to perform repair work that
may arise during the balance of the warranty period on the third ferry, the MV
Puyallup, which expires on December 28, 1999. As of March 28, 1999, the
Company had provided $1.5 million in contract and warranty reserves. These
reserves will cover costs associated with warranty, mediation, and other post-
delivery costs, not associated with warranty, that the Company expects to
incur in fiscal year 2000. The Company will review its reserve estimates
during the balance of the warranty period and may revise its warranty reserves
as needed.
Power Barge Contract
In the second quarter of fiscal year 1999, the Company commenced work on a new
construction contract with an estimated price of approximately $20.0 million.
The contract calls for the construction of a floating electrical power plant
(the "Margarita II"), 206 feet long and capable of developing 70 mega-watts of
electricity.
The Margarita project, was approximately 85% complete at March 28, 1999.
During the fourth quarter of fiscal year 1999, the Company experienced
significant contract cost growth in both labor hours and material to maintain
production schedule deadlines and perform customer directed change orders.
The Company currently estimates that total contract costs, before general and
administrative expense, will now exceed contract prices by $3.3 million.
As of March 28, 1999, the Company claimed it was owed approximately $3.5
million in customer directed change orders. Since the Company cannot
reasonably predict the outcome of any future negotiations with its customer on
these change orders, it has not included any estimates of possible recoveries
in its above mentioned program loss estimates.
On April 30, 1999, subsequent to the Company's fiscal year end, the Margarita
was delivered to its owner. At the time of delivery, approximately $5.2
million was placed in an escrow trust account by the vessel's owner to secure
the $3.5 million in non-negotiated customer directed change orders, plus an
additional $1.7 million, which represents the final payment that was due at
vessel delivery under the original contract terms.
The Company has been working with the vessel's owner, since delivery, to
resolve the issues regarding the directed change orders. If the Company and
the vessel owner cannot reach an agreement that is acceptable to both parties,
the contract specifically provides for a binding arbitration process to take
place. The Company cannot predict the outcome of this negotiation and
arbitration process at this time.
At March 28, 1999, the Company had recorded a forward loss reserve of
approximately $0.7 million to cover the remaining costs to complete the
project. The Company will review its reserve estimates during the balance of
the warranty period and may revise its reserves as needed.
Business Volume and Backlog
At March 28, 1999 the Company's backlog consists of approximately $46 million
of construction, repair and overhaul work. This compares with backlogs of $47
million and $85 million at March 29, 1998 and March 30, 1997 respectively.
With the completion of the Mark II Ferry project in December 1998, the
Company's backlog position is primarily attributable to firm repair and
overhaul work scheduled for completion in fiscal year 2000. Backlog reported
in fiscal years 1998 and 1997, were significantly influenced by the remaining
work to be completed on the Mark II Ferries.
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 of which $44 million had been recorded as revenue, cumulatively, as of
March 28, 1999.
In January 1999, the Company was awarded a five year cost-type contract for
phased maintenance work by the Department of Navy. The notional value of the
contract is approximately $100 million and gives the Navy options to have the
Company perform repair and maintenance work on three separate nuclear aircraft
carriers at Puget Naval Shipyard in Bremerton, Washington. Work on the first
ship availability started in April, 1999.
Since work under both of these Navy contracts is at the option of the Navy,
the Company cannot provide assurance as to the timing or level of work that
may be performed as part of these contracts, therefore, projected revenues
from these contracts are not included in the Company's backlog.
The Company is working to identify and win additional repair, maintenance, and
conversion 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 of the U.S. Navy, competitors pricing behavior, and Company
labor efficiencies and work practices.
The Company continues to respond to the increasingly competitive shipbuilding
and repair industry. In addition to management's focus on the profitability
of existing Shipyard operations through reduced operating costs and improved
production efficiencies and the pursuit of business volume, management
continues to evaluate options for deployment of assets with a view to
improving the Company's return on investment.
Year to year comparisons
1999 Compared with 1998
Net income for fiscal year 1999 increased by $9.3 million from fiscal year
1998 levels as a result of the following components.
Revenues
Revenues for fiscal year 1999 were significantly influenced by the $24.7
million in additional revenues recorded as a result of the mediated settlement
between the Ferry System and the Company relating to the Mark II Ferries.
1999 revenues reflect only a $3.3 million (3%) decrease compared to the prior
fiscal year as a result of these additional Mark II revenues. For fiscal year
1999, Mark II revenues including the additional $24.7 million in settlement
revenues, decreased $23.0 million from fiscal year 1998 levels, resulting from
the completion of the production phase of the contract. Offsetting this
decrease in Mark II revenue were increases in other new construction revenue
of $15.7 million and increases in commercial and government repair and
maintenance revenue of $4.1 million, resulting in the net decrease in fiscal
year 1999 revenues of $3.3 million.
Cost of Revenues
Cost of revenues for fiscal year 1999 decreased $17.4 million (19%) from
fiscal year 1998. The decrease in fiscal year 1999 cost of revenues is
primarily attributable to a reduction in Mark II cost of revenue of $39.5
million resulting from the completion of the production phase of the contract.
Offsetting this decrease in Mark II cost of revenue were increases in other
new construction cost of revenue of $15.8 million and increases in commercial
and government repair and maintenance cost of revenue of $6.4 million.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead decreased $1.3 million (5%) in
fiscal year 1999 when compared to fiscal year 1998. The decrease, which was
less significant than the decrease in cost of revenues, reflects the Company's
ability over the past several fiscal years to reduce administrative and
manufacturing costs, thus making it more difficult to obtain similar
reductions in marginal variable costs each successive fiscal year.
Contract Reserves Activity
During fiscal year 1999 the Company utilized $5.4 million in previously
recorded contract forward loss reserves that were used to offset additional
contract cost growth in completing the Mark II contract this year. Partially
offsetting this utilization, the Company provided an additional $2.1 million
in contract and warranty reserves at the end of fiscal year 1999. These
reserves will offset additional fiscal year 2000 costs estimated to complete
the Margarita II and to cover mediation costs resulting from the Company's
settlement with the Ferry System on the Mark II project, as well as warranty
and other miscellaneous post-delivery costs associated with the completion of
the Mark II project.
The $5.4 utilized during fiscal year 1999, offset by the additional $2.1
million provided, results in the $3.3 million net utilization reported for the
year. This compares with fiscal year 1998 net contract reserve utilization of
$6.1 million.
Provision for Environmental Reserves
The Company did not provide additional reserves for environmental liabilities
during fiscal year 1999. During fiscal year 1998, the Company added $0.5
million to its environmental reserves for estimated clean-up costs.
Investment and Other Income
Investment and other income in fiscal year 1999 increased by $3.5 million
(109%) from the previous fiscal year. This increase was primarily
attributable to the Company recognizing the remaining $4.5 million gain on the
1993 sale of its Galveston shipyard facility.
Gain on sale of available-for-sale security
Gains on the sale of available-for-sale securities increased $2.0 million in
fiscal year 1999 when compared to fiscal year 1998.
Income Taxes
For fiscal year 1999, the Company recognized $1.8 million in income tax
expense after applying available net operating loss carryforwards and business
tax credits. This represents an increase of $3.3 million in income tax
expense when compared to fiscal year 1998. In fiscal year 1998, the Company
recognized an income tax benefit of $1.5 million resulting from a net
operating loss carryback.
1998 Compared with 1997
Net income for 1998 increased by $29.4 million from 1997 levels as a result of
the following components.
Revenues
Revenues for the fiscal year ended March 29, 1998 decreased $4.9 million (4%)
compared to the prior fiscal year. The decrease in fiscal year 1998 sales was
primarily attributable to a $6.4 million decrease in Mark II revenue resulting
from the completion of the first vessel, the MV Tacoma.
Cost of Revenues
Cost of revenues for fiscal year 1998 decreased $3.2 million (3%) from fiscal
year 1997. The decrease is primarily attributable to the reduction in
business volume experienced in fiscal year 1998.
Administrative and Manufacturing Overhead
Administrative and manufacturing overhead expenses for the fiscal year
decreased $3.3 million (11%) from the previous fiscal year as a result of the
Company's continued efforts to reduce costs and improve Shipyard efficiencies,
and the sale of the Company's radio stations, which resulted in a $1.5 million
reduction in administrative expense when compared to fiscal year 1997.
Contract Reserves Activity
In the fourth quarter of fiscal 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 loss reserve for these
costs in fiscal 1997. In fiscal year 1998, the Company increased the Mark II
Ferry loss reserves by $6.5 million, estimating that it would incur costs of
approximately $18.0 million in excess of the current contract price.
Provision for Environmental Reserves and Other
In fiscal year 1998, the Company added $.5 million to its environmental
reserves for estimated clean-up costs. In fiscal year 1997 the Company added
$4.3 million to its environmental reserves. The lower level of environmental
reserve provisions for 1998 contributed to the operating and net income
increases reported in fiscal year 1998 when compared to fiscal year 1997
results. In addition, the Company reached an agreement in fiscal year 1998
with an insurance company regarding that carrier's obligation for property
damage occurring in previous fiscal years. This settlement contributed $6.1
million to operating income for fiscal year 1998.
Investment and Other Income
Investment and other income in fiscal 1998 increased $0.4 million from the
previous fiscal year. This increase was primarily due to the Company's sale
of its broadcasting stations, operated by Elettra Broadcasting, Inc.
Gain on Sale of available for sale security
Gains on sale of available for sale security decreased $1.5 million from the
previous fiscal year's gain on sale of available securities of $1.7 million.
Income Taxes
For fiscal year 1998, the Company recognized no income tax expense as the
expense was offset by a reduction in the deferred tax valuation reserve and
the utilization of net operating loss carryforwards. In addition, the Company
received a federal income tax refund of $1.5 million in the fourth quarter of
fiscal year 1998, resulting from a net operating loss carryback that the
Company elected to take when filing fiscal year's 1997 federal income tax
return. The Company did not have taxable income for fiscal year 1997,
accordingly the Company recognized no income tax expense.
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.
To date, the EPA has separated the Harbor Island Site into three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and will continue
throughout fiscal year 2000. The Company and the EPA are currently
negotiating the extent and methodology of the soil remediation. The Company
estimates remediation of the entire Soil Unit will take approximately 18 to 24
months from the clean-up start date.
During the quarter ended December 29, 1996, the EPA issued its Record of
Decision ("ROD") for the SSOU. The ROD identifies four alternative clean-up
remedies and specifies the EPA's selected 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 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
SSOU clean up will remain significantly uncertain until a remedial design has
been finalized with the EPA that identifies the scope of remediation and the
method of sediment disposal. The Company has accrued an amount equal to the
high end of the EPA's estimated range, as the reasonably expected cost of the
SSOU clean-up in its below stated environmental matters reserves. The Company
entered into 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.
The Company has approximately 243 cases involving 493 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 $0.6 million, net of insurance recoveries, in fiscal year
1999 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 was 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
submitted its revised AKART analysis to the Washington State Department of
Ecology in May 1998. Potential future expense when quantifiable 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 28, 1999 reflect reserves of
$14.4 million. The Company has recorded a non-current asset of $2.7 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. However, the Company has not recorded any receivables for any
amounts that may be recoverable from such negotiations or other claims.
Actual costs to address the Soil Unit, SSOU and SOU and other environmental
sites and matters will depend upon numerous factors, including the number of
parties found liable at each environmental site, the method of remediation,
outcome of negotiations with regulatory authorities, outcome of litigation,
technological developments and changes in environmental laws and regulations.
The 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 $14.4 million reserve as of March 28, 1999 is adequate to cover all
potential environmental costs the Company could incur.
Liquidity, Capital Resources and Working Capital
At March 28, 1999, the Company's cash balance was $12.3 million, compared to
$5.3 million at March 29, 1998. Securities available for sale balances were
$23.8 million and $29.5 million at March 28, 1999 and March 29, 1998,
respectively.
Net cash provided by operating activities was $3.8 million for the year ended
March 28, 1999 and consisted primarily of net income of $17.4 million,
depreciation and amortization, and decreases in costs and estimated profits in
excess of billings offset by increases in accounts receivable and decreases in
reserves for contract losses and environmental. Net cash used in operating
activities was $5.5 million for the year ended March 29, 1998 and consisted
primarily of increases in costs and estimated profits in excess of billings,
contract loss reserves, accounts payable, and deferred pension assets offset
by net income of $8.1 million, depreciation and amortization, and increases in
other assets.
Net cash provided by investing activities was $1.7 million and $8.4 million
for the years ended March 28, 1999 and March 29, 1998, respectively, and
consisted primarily of sales and maturities of marketable securities offset by
purchases of marketable securities and capital equipment. The Company has
maintained capital expenditures at approximately $1 million per year the past
several years which continues a trend in capital expenditure reductions which
started in fiscal year 1996 when the Company completed substantial investments
in Shipyard modifications to accommodate the Mark II Ferry construction
project. These expenditures are in addition to ongoing repair and maintenance
expenditures in the Shipyard of $3.2 million, $2.4 million, and $3.2 million
in fiscal years 1999, 1998 and 1997, respectively.
Net cash provided by financing activities was $1.5 million for the year ended
March 28, 1999 compared to net cash used in financing activities of $1.8
million for the year ended March 28, 1999. Cash related to financing
activities consisted primarily of activities related to funding and subsequent
release of escrow amounts on the Mark II Ferry Project.
During the fourth quarter of fiscal year 1999, Todd Pacific cancelled its
annually renewable $3.0 million revolving credit facility. The Company
cancelled the credit facility shortly after the delivery of the third Mark II
Ferry. With the completion of the Mark II Ferry project the Company has
determined that the credit facility is no longer needed to fund current
operational cash flow needs. With the cancellation of its credit facility,
the Company had no outstanding borrowings as of March 28, 1999. Total
outstanding borrowings against this credit facility as of March 29, 1998 were
$1.1 million.
Based upon its cash position described above and anticipated fiscal year 2000
cash flow, the Company believes it has sufficient liquidity to fund operations
for fiscal year 2000.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits, rather than four, to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. If not addressed, the
direct result of the year 2000 issue could be a system failure or
miscalculations, causing disruption of operations, including a temporary
inability to process customer transactions, order parts and supplies,
accurately track inventory and revenue, or engage in similar normal business
activities.
The Company believes that all of its financial, manufacturing and material
procurement systems and embedded chip technology in its' various operating
equipment are Year 2000 compliant, and expects that its total costs to make
all its systems Year 2000 compliant will be less than $150,000. The Company
has contacted its major inventory suppliers plus other vendors and suppliers
with which its systems interface and exchange data or upon which it business
depends, such as banks, power and communications providers, maintenance
providers and other service suppliers. These efforts are designed to minimize
the extent to which the Company's business will be vulnerable in the event of
the failure of these third parties to remedy their own Year 2000 issues.
Although initial testing (following program modifications) has shown the
Company's hardware and software to be Year 2000 compliant, some additional
programming testing will continue and are not scheduled to be completed until
August 31, 1999.
Management believes that sourcing from alternative vendors that are Year 2000
compliant will minimize any potential interruption in product, if one or more
vendors are not able to deliver product in accordance with terms of any
purchase order. The local power companies servicing the facilities where the
Company operates have acknowledged Year 2000 compliance. The Company has
determined that its back-up generators cannot provide a sufficient secondary
source of power.
The Company's contingency plans are currently under development and expected
to be completed by September 30, 1999. Such plans will include, but not be
limited to: 1) power disruption, 2) vendor replacement, 3) communication
alternatives, 4) manual processes for temporary delays resulting from
programming changes to correct unforeseen Year 2000 problems. No major
Information Technology projects have been deferred due to Y2K compliance
activities.
Costs of the Year 2000 project and the estimated completion date are based on
management's best estimates, which are derived utilizing numerous assumptions.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from the estimates. Specific factors
that might cause material differences include, but not limited to, the
availability and cost of outside programmers and computer consultants.
The Company's failure to implement its Year 2000 corrections in a timely
fashion or in accordance with its current cost estimates, or the failure of
third-party vendors to correct their Year 2000 problems, could have a material
adverse effect on the Company's business, financial condition and operating
results.
Labor Relations
In February 1998, the Puget Sound Metal Trades Council (bargaining umbrella
for all unions at Todd Pacific) and Todd Pacific were sued in Federal District
Court for the Western District of Washington by in excess of 200 employees
contending that the collective bargaining agreement entered into by Todd
Pacific and the various unions representing these employees had not been
properly ratified by the union membership. The lawsuit sought a declaratory
judgment that the collective bargaining agreement executed in November 1997 be
found null and void. The Puget Sound Metal Trades Council and the plaintiff
employees reached a final settlement of this matter, subsequent to the
Company's fiscal 1999 year end, in May 1999. The Company has agreed to the
terms of the settlement which do not require any action or monetary
contribution by the Company.
Workers Compensation Insurance
Federal law requires that a maritime employer have Longshore and Harbor
Workers' Act workers' compensation insurance if it is to operate a business.
Beginning in October 1998, the Company changed insurance carriers for its
workers' compensation insurance and entered a new program that provides for a
fixed annual rate per $100 of covered payroll. The new coverage contains
terms and rates which are more favorable to the Company than the previous
insurer's program.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company does not have any derivative financial instruments as of March 28,
1999, nor does it presently plan to in the future. However, the Company is
exposed to interest rate risk. The Company employs established policies and
procedures to manage its exposure to changes in the market risk of its
marketable securities. The Company's interest income is most sensitive to
changes in the general level of U.S. interest rates. In this regard, changes
in U.S. interest rates affect the interest earned on the Company's cash
equivalents and marketable securities. The Company's marketable securities
are also subject to the inherent financial market risks and exposures of the
related debt and equity securities in both U.S. and foreign markets.
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 28, 1999 and March
29, 1998 and the related consolidated statements of operations, cash flows and
stockholders' equity, for each of the three years in the period ended March
28, 1999. 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 28, 1999 and March 29, 1998
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended March 28, 1999 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.
Seattle, Washington /s/Ernst & Young LLP
June 9, 1999
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1999 and March 29, 1998
(In thousands of dollars)
1999 1998
ASSETS
Cash and cash equivalents $ 12,332 $ 5,317
Restricted cash 5,507 7,011
Securities available-for-sale 23,823 29,524
Accounts receivable, less allowance for
losses of $184 and $662, respectively
U.S. Government 2,977 2,930
Other 30,371 4,203
Costs and estimated profits in excess of
billings on incomplete contracts 2,819 16,193
Inventories 2,270 1,308
Other 717 292
Total current assets 80,816 66,778
Property, plant and equipment, net 19,026 21,565
Deferred pension asset 24,782 21,786
Other 4,832 6,744
Total assets $129,456 $116,873
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accruals $ 7,849 $ 7,304
Payrolls and vacations 3,807 4,090
Accrual for loss on contract 2,138 5,444
Billings in excess of costs and estimated
profits on incomplete contracts 4,423 2,351
Taxes other than income taxes 1,348 1,345
Income taxes 3,695 1,844
Total current liabilities 23,260 22,378
Environmental reserves 14,416 16,065
Accrued post retirement health benefits 20,692 21,617
Total liabilities 58,368 60,060
Stockholders' equity:
Common stock $.01 par value-authorized
19,500,000 shares, issued 11,956,033
shares at March 28, 1999 and March 29, 1998,
and outstanding 9,910,180 at March 28, 1999
and at March 28, 1998 120 120
Paid-in capital 38,181 38,181
Retained earnings 42,586 25,192
Accumulated other comprehensive income (182) 2,937
Less treasury stock 9,617 9,617
Total stockholders' equity 71,088 56,813
Total liabilities and stockholders'
equity $129,456 $116,873
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 28, 1999, March 29, 1998, and March 30, 1997
(In thousands of dollars, except per share amounts)
1999 1998 1997
Revenues $106,189 $109,537 $114,398
Operating Expenses:
Cost of revenues 73,393 90,818 93,982
Administrative and
manufacturing overhead 25,880 27,168 30,459
Contract reserve (3,306) (6,056) 11,500
Provision for environmental
reserves - 536 4,250
Other - Insurance - (6,126) -
Subtotal 95,967 106,340 140,191
Operating Income (Loss) 10,222 3,197 (25,793)
Investment and other income 6,777 3,239 2,802
Gain on sale of securities 2,225 190 1,738
Income (Loss) Before
Income Tax 19,224 6,626 (21,253)
Income Tax (Benefit) Expense 1,830 (1,477) -
Net Income (Loss) $17,394 $ 8,103 $(21,253)
Net Income (Loss) per Common Share:
Basic EPS $ 1.76 $ 0.82 $ (2.14)
Diluted EPS $ 1.75 $ 0.82 $ (2.14)
Weighted Average Number of Shares
(thousands)
Basic EPS 9,910 9,910 9,910
Diluted EPS 9,962 9,919 9,910
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 28, 1999, March 29, 1998, and March 30, 1997
(in thousands of dollars)
1999 1998 1997
OPERATING ACTIVITIES:
Net income (loss) $ 17,394 $ 8,103 $(21,253)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 3,387 3,479 3,589
Increase (decrease) in contract
loss reserves (3,306) (6,056) 11,500
Decrease (increase) in costs
and estimated profits in
excess of billings on
incomplete contracts 13,374 (8,328) 7,198
Increase (decrease) in
environmental reserves (1,649) 166 4,813
Decrease (increase) in accounts
receivable (26,215) (736) 2,633
Increase (decrease) in accounts
payable and accruals 545 (2,149) (2,378)
Increase in deferred pension
asset (2,996) (2,222) (2,363)
Increase in other assets 1,912 1,847 (426)
Other 1,331 359 629
Total adjustments (13,617) (13,640) 25,195
Net cash provided by (used in)
operating activities 3,777 (5,537) 3,942
Cash flows from investing
activities:
Purchases of marketable securities (13,295) (10,742) (14,365)
Maturities of marketable
securities 4,500 3,117 7,580
Sales of marketable securities 13,428 17,799 3,607
Capital expenditures (848) (1,198) (1,835)
Other (2,051) (554) 416
Net cash provided by (used in)
investing activities 1,734 8,422 (4,597)
Cash flows from financing
activities:
Decrease (increase) in cash
restricted to secure bid and
performance bonds 1,504 (1,801) (3,664)
Net cash provided by (used in)
financing activities 1,504 (1,801) (3,664)
Net increase (decrease) in cash
and cash equivalents 7,015 1,084 (4,319)
Cash and cash equivalents at
beginning of period 5,317 4,233 8,552
Cash and cash equivalents at
end of period $ 12,332 $ 5,317 $ 4,233
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 119 $ 73 $ 27
Income taxes - 56 291
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended March 29, 1998, March 30, 1997, and March 31, 1996
(in thousands of dollars)
Accumulated
Other
Comprehensive Common Paid-in Retained Treasury Total
Income Stock Capital Earnings Stock Equity
Balance at
March 31, 1996 $ 354 $120 $38,181 $38,342 $(9,617) $67,380
Net loss for the year
ended March 30, 1997 - - - (21,253) - (21,253)
Net change in
unrealized gains
(losses)on available-
for-sale securities 1,813 - - - - 1,813
Total comprehensive
income (19,440)
Balance at
March 30, 1997 2,167 120 38,181 17,089 (9,617) 47,940
Net income for the year
ended March 29, 1998 - - - 8,103 - 8,103
Net change in
unrealized gains
(losses) on available-
for-sale securities 770 - - - - 770
Total comprehensive
income 8,873
Balance at
March 29, 1998 2,937 120 38,181 25,192 (9,617) 56,813
Net income for the year
ended March 28, 1999 - - - 17,394 - 17,394
Net change in
unrealized gains
(losses)on available-
for-sale securities (3,119) - - - - (3,119)
Total comprehensive
income 14,275
Balance at
March 28, 1999 (182) 120 38,181 42,586 (9,617) 71,088
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended March 28, 1999, March 29, 1998, and March 30, 1997
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") prior to
being sold on October 9, 1997 (see Note 15). 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.
(C) Depreciation and Amortization - Depreciation and amortization are
determined on the straight-line method based upon estimated useful lives (5-31
years) or lease periods; however, for income tax purposes, depreciation is
determined on both the straight-line and accelerated methods, and on shorter
periods where permitted.
(D) Revenues - 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) Income Taxes - Income taxes are determined in accordance with an asset and
liability approach for financial accounting and reporting of income taxes. A
valuation allowance is recorded to reduce deferred tax assets when realization
of the tax benefit is uncertain.
(G) 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.
(H) Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments with a maturity of three months or less at the time acquired to be
cash equivalents. Cash equivalents consist primarily of money market
instruments, investment grade commercial paper and Government securities. The
carrying amounts reported in the balance sheet are stated at cost which
approximates fair value.
(I) Securities Available-for-Sale - The Company considers all debt
instruments purchased with a maturity of more than three months to be
securities available-for-sale. Securities available-for-sale consist
primarily of Government securities, investment grade commercial paper and
equities and are valued based upon market quotes.
Company management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such designation as
of each balance sheet date. All of the Company's investments are classified as
available-for-sale as of the balance sheet date and are reported at fair
value, with unrealized gains and losses, net of tax, recorded as a component
of stockholders' equity. Realized gains and losses are recorded based on
historical cost.
(J) Stock Based Compensation - The Company has elected to apply the disclosure
only provisions of Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation". Accordingly, the Company accounts
for stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations under APB No. 25, whereby compensation
cost for stock options is measured as the excess, if any, of the fair value of
the Company's common stock at the date of grant over the stock option price.
(K) Environmental Accounting - The Company accounts for environmental
liabilities in accordance with Statement of Position 96-1, "Environmental
Remediation Liabilities," which provides the accounting and reporting
standards for the recognition and disclosure of environmental remediation
liabilities.
For current operating activities, costs of complying with environmental
regulations are immaterial and expensed as incurred. Environmental costs are
capitalized if the costs extend the life of the property and/or increase its
capacity.
For matters associated with past practices and closed operations, accruals for
environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated,
based upon the projected scope of the remediation, current law and existing
technologies. These accruals are adjusted periodically as assessment and
remediation efforts progress or as additional technical or legal information
becomes available. Such accruals are classified in the balance sheet as long
term obligations at undiscounted amounts. As applicable, accruals include the
Company's share of the following costs: engineering costs to determine the
scope of the work and the remediation plan, testing costs, project management
costs, removal of contaminated material, disposal of contaminated material,
treatment of contaminated material, capping of affected areas and long term
monitoring costs.
Accruals for environmental liabilities exclude legal costs and claims, if
material, for recoveries from insurance or other third parties. Accruals for
environmental liabilities also exclude legal costs to defend against claims of
other parties. Accruals for insurance or other third party recoveries for
environmental liabilities are recorded separately from the associated
liability in the financial statements when it is probable that a claim will be
realized.
The Company accounts for bodily injury liabilities in accordance with
Financial Accounting Standards Board No.5, "Accounting for Contingencies".
Accruals for bodily injury liabilities are recorded when it is probable that
a liability has been incurred and the amount of the liability can be
reasonable estimated based on the known facts. These accruals are adjusted
periodically as new information becomes available. Such accruals are included
in the long term environmental reserves at undiscounted amounts. Accruals for
bodily injury liabilities exclude legal costs to defend against claims of
other parties. Accruals for insurance or other third party recoveries for
bodily injury liabilities are recorded net of the associated liability in the
financial statements when it is probable that a claim will be realized.
(L) Earnings per Share - Basic earnings per share is computed based on
weighted average shares outstanding. Diluted earnings per share includes the
effect of dilutive securities (options and warrants) except where their
inclusion is antidilutive.
(M) Comprehensive Income - As of March 28, 1999, the Company adopted FASB
Statement No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net income or shareholders' equity. FAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of FAS 130.
(N) Pensions and Other Postretirement Benefits - As of March 28, 1999, the
Company adopted FASB Statement No.132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (FAS 132). FAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans, but standardizes the
disclosure requirements for pensions and other postretirement benefits. FAS
132 amends certain disclosures that were contained in FASB Statement No. 87,
"Employers' Accounting for Pensions"; FASB Statement No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits"; and FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions. Prior year
financial disclosures have been reclassified to conform to the requirements of
FAS 132.
(O) Long-lived Assets - The Company's policy is to recognize impairment losses
relating to long-lived assets based on several factors, including, but not
limited to, management's plans for future operations, recent operating results
and projected cash flows.
2. RESTRICTED CASH AND SURETY LINE
In fiscal year 1995 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.
This bond will remain in place until the warranty period on the third Mark II
vessel expires at the end of the Company's third quarter in fiscal year 2000.
The surety has also issued bonds totaling $22.1 million for current
construction and commercial repair jobs as of March 28, 1999.
Restricted cash on the balance sheet as of March 28,1999 and March 29, 1998
includes amounts the Company is required to put into escrow for uncompleted
contracts and for environmental clean up. Restricted cash related to
uncompleted contracts is generally released upon completion or acceptance of
the contracted work and completion of related warranty periods. Restricted
cash related to uncompleted contracts at March 28, 1999 and March 29, 1998 was
$2.9 million and $4.4 million, respectively, and consists primarily of
amounts related to the Mark II Ferry Project. Mark II Ferry amounts are
expected to be released during the Company's second quarter of fiscal year
2000. The remaining restricted cash balances relate primarily to the Harbor
Island Superfund site clean up and will be released upon the Company
satisfying certain remediation.
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 28, 1999
Debt securities
U.S. Treasury securities
and agency obligations $ 2,014 $ 9 $ (11) $ 2,012
U.S. corporate
securities 12,864 117 - 12,981
Mortgage-backed
securities 1,991 6 (9) 1,988
Municipal obligations 1,000 7 - 1,007
Total debt securities 17,869 139 (20) 17,988
Equity securities
U.S. securities 4,956 739 (718) 4,977
Foreign stock 1,180 - (322) 858
Total equity securities 6,136 739 (1,040) 5,835
Total securities $24,005 $ 878 $(1,060) $23,823
March 29, 1998
Debt securities
U.S. Treasury securities
and agency obligations $ 2,002 $ 10 $ - $ 2,012
U.S. corporate
securities 15,807 94 (39) 15,862
Mortgage-backed
securities 623 - (2) 621
Total debt securities 18,432 104 (41) 18,495
Equity securities
U.S. securities 7,532 2,817 - 10,349
Foreign stock 623 57 - 680
Total equity securities 8,155 2,874 - 11,029
Total securities $26,587 $2,978 $ (41) $29,524
The Company had gross realized gains of $2.2 million, $190 thousand, and $1.8
million on sales of available-for-sale securities for fiscal years 1999, 1998
and 1997, respectively.
The Company had gross realized losses of $8 thousand, $0, and $48 thousand on
sales of available-for-sale securities for fiscal year 1999, 1998 and 1997,
respectively.
The amortized cost and estimated fair value of the Company's available-for-
sale debt, mortgage-backed and equity securities are shown below:
Estimated
Amortized Fair
(In thousands) Cost Value
March 28, 1999
Due in one year or less $ 3,299 $ 3,309
Due after one year through three years 12,579 12,691
15,878 16,000
Mortgage-backed securities 1,991 1,988
Equity securities 6,136 5,835
$24,005 $23,823
March 29, 1998
Due in one year or less $ 7,555 $ 7,526
Due after one year through three years 10,254 10,348
17,809 17,874
Mortgage-backed securities 623 621
Equity securities 8,155 11,029
$26,587 $29,524
4. CONTRACTS
Mark II Ferry Contract
The Company has a 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 program, awarded in fiscal year 1995, is
substantially complete at March 28, 1999. The Company delivered the first
ferry, the MV Tacoma, during the second quarter of fiscal year 1998; delivered
the second ferry, the MV Wenatchee, during the first quarter of fiscal year
1999; and delivered the third ferry, the MV Puyallup, in the fourth quarter of
fiscal year 1999.
On June 4, 1999 the Company reached a meditated settlement with the Washington
State Ferry System (the "Ferry System") relating to costs incurred in
constructing three Jumbo Mark II Ferries. Under terms of the settlement, Todd
and the Ferry System agreed to increase the total 3 ship contract value to
$205.5 million from its original value of $182.0 million. The $23.5 million
contract price increase arises from unpriced engineering and production
changes issued by the Ferry System during the construction of the Jumbo Mark
II Ferries, which began in 1995. Along with the $23.5 million increase in
contract price, the Company was able to record $1.2 million in additional
revenue associated with tasks completed under the original contract value that
it had not been able to recognize previously. These amounts contributed $24.7
million to reported revenue and approximately $24.0 million to operating
income, after settlement expenses, for the year ending March 28, 1999.
Prior to the settlement, the Company had previously estimated on December 27,
1998, that it would incur contract costs, excluding general and administrative
expenses, in excess of contract prices by $22.8 million. During the fourth
quarter of fiscal year 1999, the Company incurred an additional $1.8 million
in contract costs in excess of contract prices, bringing the total contract
loss to approximately $24.6 million prior to recognition of the settlement
revenue.
The Company claimed that a significant portion of the increased contract costs
related to high levels of engineering and production changes directed by the
Ferry System. These customer directed changes continued throughout the
production process and caused production rework, and delays and disruptions.
These changes resulted in increased production costs for the entire three ship
ferry construction project.
During this period, the Company could not reasonably predict the outcome of
any potential future negotiations with the Ferry System on these unpriced
changes. Because of this, the Company was unable to include any estimates of
possible recoveries in its program cost estimates. This resulted in the
Company disclosing contract losses on the three ship ferry project as early as
fiscal year 1997.
However, during fiscal year 1999 the Company completed an extensive cost
analysis of both the direct costs and related production schedule impact costs
resulting from these customer directed changes. As a result of this analysis,
the Company claimed it was owed approximately $43 million plus the cost of
capital. This amount was in addition to the original contract value of $182
million.
The Ferry System conducted a fact finding review of this cost analysis that
began in the third quarter of fiscal year 1999 and continued through the
balance of the fiscal year. This fact finding phase allowed the Ferry System
an opportunity to discuss and review in more detail the basis for the
Company's cost analysis.
During the fourth quarter of fiscal year 1999, the Company and the Ferry
System agreed to a mediation process that lead to the recent settlement
discussed above. The settlement, which was unanimously approved by the
Company's Board of Directors, effectively ends the four year construction
contract. While the settlement reverses the majority of the Company's
previously recorded contract losses, it does not recover the estimated general
and administrative expenses that would have been allocated to the contract
during its production phase. As of March 28, 1999, the Company estimated that
it had incurred approximately $17.9 million in general and administrative
expenses, during the four year project, that are allocable to the Mark II
Ferry project. These costs will not be recovered.
With the settlement on June 4, 1999, the only contractual obligation remaining
for the Company on the Mark II Ferry project is to perform repair work that
may arise during the balance of the warranty period on the third ferry, the MV
Puyallup, which expires on December 28, 1999. As of March 28, 1999, the
Company had provided $1.5 million in contract and warranty reserves. These
reserves will cover costs associated with warranty, mediation, and other post-
delivery costs, not associated with warranty, that the Company expects to
incur in fiscal year 2000. The Company will review its reserve estimates
during the balance of the warranty period and may revise its warranty reserves
as needed.
Power Barge Contract
In the second quarter of fiscal year 1999, the Company commenced work on a new
construction contract with an estimated price of approximately $20.0 million.
The contract calls for the construction of a floating electrical power plant
(the "Margarita II"), 206 feet long and capable of developing 70 mega-watts of
electricity.
The Margarita project, was approximately 85% complete at March 28, 1999.
During the fourth quarter of fiscal year 1999, the Company experienced
significant contract cost growth in both labor hours and material to maintain
production schedule deadlines and perform customer directed change orders.
The Company currently estimates that total contract costs, before general and
administrative expense, will now exceed contract prices by $3.3 million.
As of March 28, 1999, the Company believed it was owed approximately $3.5
million in customer directed change orders. Since the Company cannot
reasonably predict the outcome of any future negotiations with its customer on
these change orders, it has not included any estimates of possible recoveries
in its above mentioned program loss estimates, or contract revenues.
On April 30, 1999, subsequent to the Company's fiscal year end, the Margarita
was delivered to its owner. At the time of delivery, approximately $5.2
million was placed in an escrow trust account by the vessel's owner to secure
the $3.5 million in non-negotiated customer directed change orders, plus an
additional $1.7 million, which represents the final payment that was due at
vessel delivery under the original contract terms.
The Company has been working with the vessel's owner, since delivery, to
resolve the issues regarding the directed change orders. If the Company and
the vessel owner cannot reach an agreement that is acceptable to both parties,
the contract specifically provides for a binding arbitration process to take
place. The Company cannot predict the outcome of this negotiation and
arbitration process at this time.
At March 28, 1999, the Company had recorded approximately $0.7 million in
contract loss and warranty reserves to offset future contract cost growth in
fiscal year 2000 to complete the project. The Company will review its reserve
estimates during the balance of the warranty period and may revise its
reserves as needed.
Unbilled Receivables - Certain unbilled items on completed contracts included
in acccounts receivable were approximately $1.1 million at March 28, 1999 and
$1.3 million at March 29, 1998.
Customers - Revenues from the Government were $31.6 million (30%), $20.3
million (18%) and $11.0 million (10%) in fiscal years 1999, 1998 and 1997,
respectively. Revenues from the Ferry System were $40.9 million (39%), $60.4
million (55%) and $66.8 million (59%) in fiscal year 1999, 1998 and 1997,
respectively.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, accumulated depreciation and accumulated
amortization at March 28, 1999 and March 28, 1998 consisted of the following:
1999 1998
Land $ 1,151 $ 1,151
Buildings 11,487 11,353
Piers, shipways and drydocks 22,625 22,705
Machinery and equipment 32,479 31,909
Total plant and equipment, at cost 67,742 67,118
Less accumulated depreciation (48,716) (45,553)
Plant, property and equipment, net $ 19,026 $21,565
The Company recognized $3.4 million, $3.5 million and $3.5 million of
depreciation expense in fiscal years 1999, 1998 and 1997, respectively. The
Company recognized no amortization expense in fiscal years 1999 and 1998 and
less than $0.1 million in 1997.
6. PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company provides defined pension benefits and postretirement benefits to
employees as described below.
Nonunion Pension Plans - The Company sponsors the Todd Shipyards Corporation
Retirement System (the "Retirement System"), a noncontributory defined benefit
plan under which 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.
On July 1,1998, the Todd Galveston-Galveston Metal Trades Council Pension Fund
was merged into the Retirement System. This merger was approved by the
respective Board of Trustees. A total of 375 inactive participants came into
the Retirement System due to the merger at July 1, 1998; 116 were entitled to
deferred benefits and 259 were receiving benefits. The present value of
accumulated plan benefits of $6.5 million and $6.4 million in assets were
received due to the merger.
The Retirement System plan assets consist principally of common stocks and
Government and corporate obligations. Plan assets at March 28, 1999, include
172,000 shares of the Company's stock valued at $4.75 per share.
Under a provision of the Omnibus Budget Reform Act of 1990 ("OBRA `90") the
Company transferred approximately $1.3 million and $1.1 million in excess
pension assets from its Retirement System into a fund to pay fiscal year 1999
and 1998 retiree medical benefit expenses, respectively. OBRA `90 was
modified by the Retirement Protection Act of 1994 to extend annual excess
asset transfers through the fiscal year ending March 2001.
Post Retirement Group Health Insurance Program - The Company sponsors a
defined benefit retirement health care plan that provides post retirement
medical benefits to former full-time exempt employees, and their spouses, who
meet specified criteria. The Company terminated post retirement health
benefits for any employees retiring subsequent to May 15, 1988. The
retirement health care plan contains cost-sharing features such as deductibles
and coinsurance. These benefits are funded monthly through the payment of
group health insurance premiums.
Because such benefit obligations do not accrue to current employees of the
Company, there is no current year service cost component of the accumulated
post retirement health benefit obligation.
The following is a reconciliation of the benefit obligation, plan assets, and
funded status of the Company's sponsored plans.
Other
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
Change in Benefit Obligation
(in thousands of dollars)
Benefit obligation at beginning of year $30,746 $30,504 $14,580 $18,000
Service cost 245 279 - -
Interest cost 2,405 2,201 976 1,219
Assumption change - 80 - -
Actuarial (gain)/loss 722 877 - (3,454)
Merger of Galveston Plan 6,540 - - -
Benefits paid (3,230) (3,195) (1,272) (1,185)
Benefit obligation at end of year $37,428 $30,746 $14,284 $14,580
Other
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
Change in Plan Assets
(in thousands of dollars)
Fair value of plan assets at beginning
of year $59,824 $52,983 $ - $ -
Actual return on plan assets 4,148 11,181 - -
Merger of Galveston Plan 6,354 - - -
Employer contribution - - - 40
Asset transfer (1,272) (1,145) 1,272 1,145
Benefits paid (3,230) (3,195) (1,272) (1,185)
Fair value of plan assets at end of year $65,824 $59,824 $ - $ -
Other
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
Funded Status Reconciliation
(in thousands of dollars)
Funded status of plans $28,396 $29,078 $(14,284)$(14,580)
Unrecognized transition obligation (4,829) (7,244) - -
Unrecognized prior service cost 1,331 1,388 - -
Unrecognized (gain)/loss (116) (1,436) (7,680) (8,302)
Deferred pension asset
(accrued liability) $24,782 $21,786 (21,964) (22,882)
Less: current portion included in
"Accounts payable and accruals" - - 1,272 1,265
Long-term accrued postretirement
health benefits - - $(20,692)$(21,617)
Other
Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
Weighted Average Assumptions
Discount rate 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets 7.50% 7.50% - -
Rate of compensation increase 4.50% 4.50% - -
Medical trend rate (retirees) - - 6.00% 6.00%
Other
Postretirement
Pension Benefits Benefits
1999 1998 1997 1999 1998 1997
Components of Net Periodic
Benefit Cost
(in thousands of dollars)
Service Cost $ 245 $ 279 $ 258 $ - $ - $ -
Interest cost on projected
benefit obligation 2,405 2,201 2,077 976 1,219 1,214
Expected return on plan
assets (4,745) (3,666) (3,593) - - -
Amortization of transition
obligation (2,415) (2,415) (2,415) - - -
Amortization of prior service
cost 242 234 233 - - -
Recognized actuarial
(gain)/loss - - - (622) (305) (336)
Net periodic (benefit) cost
before OBRA '90 (4,268) (3,367) (3,440) 354 914 878
Transfer of assets for payment
of retiree medical benefits
(401(h) Plan) 1,272 1,145 1,077 (1,272) (1,145) (1,077)
Net periodic (benefit) cost (2,996) (2,222) (2,363) (918) (231) (199)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
Other
Postretirement
Benefits
1999 1998
Effect of a 1% Increase in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ 84 $ 105
Accumulated postretirement benefit obligation $ 1,174 $ 1,198
Effect of a 1% Decrease in the Health Care Cost Trend On:
(in thousands of dollars)
Service cost plus interest cost $ (77) $ (97)
Accumulated postretirement benefit obligation $(1,083) $(1,105)
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 $2.7 million, $3.3 million and $3.1 million, for fiscal years 1999,
1998 and 1997, 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.
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 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.
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):
1999 1998 1997
Tax provision (benefit) at
federal statutory tax rate $ 6,728 $ 2,319 $(7,439)
Increase (decrease) in valuation
allowance (4,910) (4,224) 7,501
Expired Business Credits - 1,870 -
Net Operating Loss Carryback - (1,477) -
Tax effect of adjustment of
contingent liabilities - (56) (291)
Other - net 12 91 229
1,830 $(1,477) $ -
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 29, 1998,
March 30, 1997 and March 31, 1996 were as follows (in thousands):
1999 1998 1997
Deferred income tax assets:
Business credit carryforwards $1,892 $6,046 $7,261
Net operating loss carryforwards 232 1,299 5,878
Alternative minimum tax credit
carryforwards 3,319 3,319 3,091
Accrued employee benefits 8,577 9,031 9,031
Environmental reserve 4,115 4,344 4,226
Contract deferrals 756 - 1,062
Deferred gain on sale of facility - 548 575
Reserve for doubtful accounts 64 231 301
Other 969 873 202
Total deferred income tax assets 19,924 25,691 31,627
Valuation reserve for deferred
tax assets (8,434) (13,344) (19,923)
Net deferred tax assets 11,490 12,347 11,704
Deferred income tax liabilities:
Deferred pension income 8,673 7,625 6,847
Accelerated depreciation 2,617 3,326 4,036
Securities available-for-sale - - 739
Contract deferrals - 1,218 -
Other 200 178 82
Total deferred income tax liabilities 11,490 12,347 11,704
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 $0 at March 28, 1999 and $.7 million at March 29, 1998. In
addition, the Company had tax credit carryforwards of $1.9 million at March
28, 1999 and $5.4 million at March 29, 1998. If not utilized, the tax credit
carryforwards will expire in fiscal years 2000 and 2001.
In addition, the Company has paid approximately $3.3 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 $0.8 million, $1.1 million,
and $1.0 million for fiscal years 1999, 1998 and 1997, respectively. Certain
leases contain renewal options and escalation clauses. Minimum lease
commitments at March 28, 1999 are summarized below (in thousands):
Operating
Leases
2000 $ 185
2001 180
2002 73
2003 73
2004 51
Thereafter 312
Total minimum lease commitments $ 874
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.
As a general practice within the defense industry, the DCAA continually
reviews the cost accounting practices of Government contractors. In the
course of these reviews, cost accounting issues are identified, discussed and
settled or resolved through agreements with the government's authorized
contracting officer or through legal proceedings. Other than the normal cost
accounting issues raised by the DCAA as a result of their ongoing reviews, the
Company is not aware of any outstanding issues with the DCAA.
10. FINANCING ARRANGEMENTS
Todd Pacific cancelled its annually renewable $3.0 million revolving credit
facility during the fourth quarter of fiscal year 1999. This occurred shortly
after the delivery of the third Mark II Ferry. With the completion of the
Mark II Ferry project the Company has determined that the credit facility is
no longer needed to fund current operational cash flow needs. With the
cancellation of its credit facility, the Company had no outstanding borrowings
as of March 28, 1999.
As of March 29, 1998 Todd Pacific had outstanding borrowings against the line
of credit in the amount of $1.1 million, at an interest rate of 9.1%, and is
reported in Accounts Payable and Accruals on the Balance Sheet. The loan
agreement contained certain restrictive covenants including the maintenance of
certain minimum financial ratios. Todd Pacific was out of compliance with
certain ratios at March 29, 1998. However, Todd Pacific had obtained a
waiver.
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 three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and will continue
throughout fiscal year 2000. The Company and the EPA are currently
negotiating the extent and methodology of the soil remediation. The Company
estimates remediation of the entire Soil Unit will take approximately 18 to 24
months from the clean-up start date. The Company has accrued its best
estimate of the cost of the Soil Unit clean-up in its environmental matters
reserve, as summarized below.
During the quarter ended December 29, 1996, the EPA issued its Record of
Decision ("ROD") for the SSOU. The ROD identifies four alternative clean-up
remedies and specifies the EPA's selected 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 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
SSOU clean up will remain significantly uncertain until a remedial design has
been finalized with the EPA that identifies the scope of remediation and the
method of sediment disposal. The Company has accrued an amount equal to the
high end of the EPA's estimated range, as the reasonably expected cost of the
SSOU clean-up in its environmental matters reserves, as summarized below. The
Company entered into 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 1998, the Company was notified by the EPA that testing would be
required in the West Waterway of the Duwamish River outside the borders of the
SSOU as part of the SOU. The Company in May 1998 entered into an Order of
Consent to perform certain limited testing as part of the SOU investigation.
The EPA is in the process of reviewing the results of the testing and plans to
release their findings during the summer of 1999.
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 had 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
alleged 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 Shipyards
Corporation et al. for contribution under the Spill Act seeking reimbursement
for all monies expended for the cleanup of the Hoboken property. Subsequent
to the end of fiscal year 1999, the Company and the City of Hoboken, New
Jersey entered into an agreement to settle the lawsuit. The Company has
included the settlement amount in its environmental matters reserve, as
summarized below.
Todd Pacific was notified by the California Environmental Protection Agency
that it may be considered a PRP 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 has included an
estimate of the potential liability for the site in its below stated reserves.
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 1999. The cost of the partial
settlement and future final consent decree settlement is included in the below
stated reserve.
During its fiscal year 1998, the Company was 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
submitted its revised AKART analysis to the Washington State Department of
Ecology in May 1998. Potential future expense when quantifiable shall 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.
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 not recorded any significant additional charges against
earnings for environmental matters in fiscal 1998 and 1999. The Company's
remediation costs and bodily injury claims paid are charged against the
reserves recorded. The Company continues to analyze environmental matters and
associated liabilities for which it may be responsible.
The Company's environmental reserves for the entire Harbor Island Site
aggregated $10.8 million at March 28, 1999. The Company has provided total
aggregate reserves of $14.4 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 an asset of $2.7 million to reflect a
contractual arrangement with an insurance company to share costs for certain
environmental matters. In addition, the Company reached an agreement in
fiscal year 1998 with an insurance company regarding the carrier's obligation
for property damage occurring in previous fiscal years. This settlement
contributed $6.1 million to operating income for fiscal year 1998.
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 $14.4 million reserve as of March 28, 1999 is adequate to cover all
potential environmental costs the Company could incur.
12. COLLECTIVE BARGAINING AGREEMENT
During fiscal year 1998, the Company and the Puget Sound Metal Trades Council
(representing the Pacific Coast Metal Trades District Council and its member
unions) submitted their final collective bargaining contract positions to
binding arbitration in accordance with the provisions set forth in the Mark II
Ferry project agreement in force between the parties. Subsequent to and in
keeping with the arbitrator's ruling, the parties executed a new labor
agreement effective November 24, 1997. Prior to the arbitration process, the
Company had reached unanimous agreement with the bargaining representatives of
the workforce on three separate occasions. However, on each occasion, the
agreement was rejected by the Todd workforce. The collective bargaining
agreement will terminate on July 31, 1999 and replaces the previous contract
which expired on July 31, 1996. Collective bargaining for a new agreement is
set to begin in June 1999.
As a result of the binding arbitration process, in February 1998, the Puget
Sound Metal Trades Council (bargaining umbrella for all unions at Todd
Pacific) and Todd Pacific were sued in Federal District Court for the Western
District of Washington by in excess of 200 employees contending that the
collective bargaining agreement entered into by Todd Pacific and the various
unions representing these employees had not been properly ratified by the
union membership. The lawsuit sought a declaratory judgment that the
collective bargaining agreement executed in November 1997 be found null and
void. The Puget Sound Metal Trades Council and the plaintiff employees
reached a final settlement of this matter, subsequent to the Company's fiscal
1999 year end, in May 1999. The Company has agreed to the terms of the
settlement, which do not require any action or monetary contribution by the
Company.
13. Income (loss) per share
The following table sets forth the computation of basic and diluted income
(loss) per share:
March 28, March 29, March 30,
1999 1998 1997
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted
income (loss ) per share
net income (loss) $ 17,394 $ 8,103 $(21,253)
Denominator:
Denominator for basic income per
share - weighted average
common shares 9,910 9,910 9,910
Effect of dilutive securities:
Stock options based
on the treasury stock method using
average market price 52 9 -
Denominator for diluted income per share 9,962 9,919 9,910
Basic income (loss) per share $ 1.76 $ 0.82 $ (2.14)
Diluted income (loss) per share $ 1.75 $ 0.82 $ (2.14)
14. Sale of Elettra Assets.
The radio stations operated by Elettra Broadcasting, Inc., were sold on
October 9, 1997 for $5.3 million, resulting in a $1.0 million gain in fiscal
year 1998.
15. Recognition of Gain on Sale
In December 1993, the Company received $5.4 million of special project revenue
bonds ("Revenue Bonds") from the Board of Trustees of the Galveston Wharves
upon the sale of its Galveston shipyard facilities. The Revenue Bonds
contained provisions for annual principal payments of $216 thousand beginning
on January 1, 1995 with a balloon payment of $3.5 million due on January 1,
2004. The Company recognized the gain on the sale of the facility as each
payment was received. As of March 29, 1998, the Company had received four
annual principal payments. During the period ended December 27, 1998 the
Company received notice that all of the outstanding Revenue Bonds would be
called for redemption at a redemption price of 100% of the principal amount.
The bond proceeds were received in the period ending March 28, 1999 and the
Company recognized the remaining $4.5 million gain on the sale of its
Galveston facility.
16. Stock Based Compensation
The Company's Incentive Stock Compensation Plan (the "Plan") provides for the
granting of incentive stock options, non-qualified stock options, and
restricted stock or any combination of such grants to directors, officers and
key employees of the Company to purchase shares of the Class A Common Stock of
the Company. An aggregate of 500,000 shares of common stock has been
authorized for issuance under the Plan. Options issued under the Plan vest
ratably over three years and expire not more than ten years from the date of
grant and are granted at prices equal to the fair value on the date of grant.
There were 160,000 options available for future grant under the Plan at March
28, 1999.
A summary of stock option transactions for the years ended March 28, 1999,
March 29, 1998, and March 30, 1997 is as follows:
Number Option Price
of Shares Per Share
Outstanding, March 31, 1996 310,000 4.25 to 6.00
Forfeited (25,000) 6.00
Outstanding, March 30, 1997 285,000 4.25 to 6.00
Granted 55,000 4.38 to 4.56
Outstanding, March 29, 1998 340,000 4.25 to 6.00
Granted - - to -
Outstanding, March 28, 1999 340,000 4.25 to 6.00
Exercisable, March 28, 1999 305,000 $4.25 to $6.00
As described in Note 1, the Company has elected to account for stock-based
compensation expense in accordance with APB 25. Accordingly, no compensation
expense has been recognized for stock-based compensation since the grant price
equaled the estimated fair value of the stock on the date of grant. Applying
the fair value methodology of Statement No. 123 to the Company's stock option
plans results in net income which is not materially different from amounts
reported.
17. Workers Compensation Insurance
Federal law requires that a maritime employer have Longshore and Harbor
Workers' Act workers' compensation insurance if it is to operate a business.
Beginning in October 1998, the Company changed insurance carriers for its
workers' compensation insurance and entered a new program that provides for a
fixed annual rate per $100 of covered payroll. The new coverage contains
terms and rates which are more favorable to the Company than the previous
insurer's program.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Financial results by quarter for the fiscal years ended March 28, 1999 and
March 29, 1998 are as follows. Each quarter is 13 weeks in length (in
thousands):
Net
Income
Operating Net (loss)
income income Per Share
Revenues (loss) (loss) Diluted
1st Qtr 1999 $ 26,996 $ (962) $ (311) $ (0.03)
2nd Qtr 1999 19,485 (56) 429 0.04
3rd Qtr 1999 14,023 (7,752) (1,846) (0.19)
4th Qtr 1999 45,685 18,992 19,122 1.92
1st Qtr 1998 33,462 (3,066) (2,401) (0.24)
2nd Qtr 1998 28,042 559 918 0.09
3rd Qtr 1998 27,177 1,480 3,016 0.30
4th Qtr 1998 20,856 4,224 6,570 0.67
The fourth quarter of fiscal year 1999 reflects $24.7 million in additional
revenue resulting from the Company's mediated settlement with the Ferry System
relating to unpriced engineering and production changes issued by the Ferry
System during construction of the Mark II Ferries. Pursuant to the terms of
this settlement, the contract price for the three ferries was increased $23.5
million to $205.5 million. In addition to the $23.5 million price increase,
the Company was able to record $1.2 million in Mark II revenue for tasks
completed under the original contract value that it had not been able to
recognize previously.
The first, third, and fourth quarters of fiscal year 1998 reflect $3.0
million, $1.5 million, and $2.0 million additions respectively to the loss
reserve established for the Mark II Ferry project. In addition, the fourth
quarter of fiscal year 1998 reflects an insurance settlement of $6.1 million
and a federal income tax refund of $1.5 million.
Todd Shipyards Corporation
Schedule II - Valuation and Qualifying Reserves
For years ending March 28, 1999, March 29, 1998 and March 30, 1997
(in thousands)
Reserves deducted from assets to which they apply - Allowance for doubtful
accounts:
Year Year Year
ended ended ended
March 28, March 29, March 30,
1999 1998 1997
Balance at beginning of period $ 662 $ 861 $ 511
Charged to costs and expenses - - 350
Deductions from reserves (1) (478) (199) -
Balance at close of period $ 184 $ 662 $ 861
Notes:
(1) Deductions from reserves represent uncollectible accounts written off
less recoveries
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCED DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
**
ITEM 11. EXECUTIVE COMPENSATION
**
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
**
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
**
** The information for the above items will be provided in, and is
incorporated by reference to, the 1999 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
28, 1999.
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 28, 1999
and March 29, 1998........................................... *
Consolidated Statements of Operations
For the years ended March 28, 1999,
March 29, 1998 and March 30, 1997............................. *
Consolidated Statements of Cash Flows
For the years ended March 28, 1999,
March 29, 1998 and March 30, 1997............................. *
Consolidated Statements of Stockholders Equity
For the years ended March 28, 1999,
March 29, 1998 and March 30, 1997............................. *
Notes to Consolidated Financial Statements
For the years ended March 28, 1999,
March 29, 1998 and March 30, 1997............................. *
Supplementary Information:
Quarterly Financial Data (unaudited)......................... *
Consolidated Financial Statement Schedule:
II-Valuation and Qualifying Reserves......................... *
* No page numbers are included in EDGAR version.
TODD SHIPYARDS CORPORATION INDEX TO EXHIBITS
Item 14(a)3
Exhibit
Number
3-1 Certificate of Incorporation of the Company *
dated November 29, 1990 filed in the Company's
Form 10-K Report for 1997 as Exhibit 3-1.
3-2 By-Laws of the Company dated November 29, 1990, *
as amended October 1, 1992 filed in the Company's
Form 10-K Report for 1993 as Exhibit 3-2.
10-1 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 November 24, 1997.
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.
10-14 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.
10-14(a) Amendment to employment contract between Todd Pacific *
and Roland H. Webb dated December 17, 1997.
10-14(b) Amendment to employment contract between Todd Pacific #
and Roland H. Webb dated January 18, 1999.
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).
10-27 Employment contract between the Company and Stephen G. *
Welch dated September 30, 1997.
22-1 Subsidiaries of the Company. *
23 Consent of Ernst & Young LLP, Independent Auditors #
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/ Scott H. Wiscomb
Scott H. Wiscomb
Chief Financial Officer,
Principal Financial Officer,
Principal Accounting Officer,
and Treasurer
June 16, 1999
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 16, 1999 June 16, 1999
/s/ Patrick W.E. Hodgson /s/ Joseph D. Lehrer
Patrick W.E. Hodgson, Joseph D. Lehrer, Director
Chairman, June 16, 1999
and Director
June 16, 1999
/s/ Philip N. Robinson /s/ John D. Weil
Philip N. Robinson, Director John D. Weil, Director
June 16, 1999 June 16, 1999
/s/ Stephen G. Welch
Stephen G. Welch
President and
Chief Executive Officer
June 16, 1999