UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 27, 1998
[ ] 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, WASHINGTON 98134-1089
(Street address of principal executive offices - Zip Code)
Registrant's telephone number: (206) 623-1635
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]
There were 9,910,180 shares of the corporation's $.01 par value common stock
outstanding at September 27, 1998.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TODD SHIPYARDS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands of dollars, except per share data)
Quarter Ended Six Months Ended
9/27/98 9/28/97 9/27/98 9/28/97
Revenues $19,485 $28,042 $46,481 $61,504
Operating expenses:
Cost of revenue 16,811 24,406 38,401 51,439
Administrative and
manufacturing overhead
expense 5,525 6,673 13,510 16,511
Contract reserve (2,795) (3,597) (4,412) (3,939)
Total operating expenses 19,541 27,482 47,499 64,011
Operating income (loss) (56) 560 (1,018) (2,507)
Investment and other income 170 358 820 1,023
Gain on sale of available for
sale security 315 - 315 -
Income (loss) before
income taxes 429 918 117 (1,484)
Income tax expense - - - -
Net income (loss) $ 429 $ 918 $ 117 $(1,484)
Basic EPS $ 0.04 $ 0.09 $ 0.01 $ (0.15)
Diluted EPS $ 0.04 $ 0.09 $ 0.01 $ (0.15)
Retained earnings at
beginning of period $28,537 $17,898 $28,129 $19,256
Income (loss) for the period 429 918 117 (1,484)
Unrealized gain (loss) on
available-for-sale securities (1,013) (208) (293) 836
Retained earnings at
end of period $27,953 $18,608 $27,953 $18,608
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
CONSOLIDATED BALANCE SHEETS
Periods Ended September 27, 1998 and March 29, 1998
(in thousands of dollars)
09/27/98 03/29/98
ASSETS: (Unaudited)(Audited)
Cash and cash equivalents $6,704 $ 5,317
Restricted cash 4,961 7,011
Securities available for sale 27,698 29,524
Accounts receivable, less allowance for
losses of $662 at September 27, 1998
and $662 at March 29, 1998:
Government 2,219 2,930
Commercial and other 4,680 4,203
Costs and estimated profits in excess
of billings on incomplete contracts 13,293 16,193
Inventories 1,907 1,308
Other 147 292
Total current assets 61,609 66,778
Property, plant and equipment, net of
accumulated depreciation 20,168 21,565
Deferred pension asset 22,454 21,786
Other 6,783 6,744
Total assets $111,014 $116,873
LIABILITIES:
Accounts payable and accruals $ 4,099 $ 7,304
Accrual for loss on contract 1,032 5,444
Payrolls and vacations 3,377 4,090
Income taxes 1,827 1,844
Billings in excess of costs and estimated
profits on incomplete contracts 5,681 2,351
Taxes other than income taxes 1,040 1,345
Total current liabilities 17,056 22,378
Accrued post retirement health benefits 21,425 21,617
Environmental reserves 15,896 16,065
Total liabilities 54,377 60,060
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - authorized
19,500,000 shares, issued 11,956,033 shares
at September 27, 1998 and March 29, 1998, and
outstanding 9,910,180 at September 27, 1998
and March 29, 1998 120 120
Additional paid-in capital 38,181 38,181
Retained earnings 27,953 28,129
Less treasury stock 9,617 9,617
Total stockholders' equity 56,637 56,813
Total liabilities and stockholders' equity $111,014 $116,873
The accompanying notes are an integral part of this statement.
TODD SHIPYARDS CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Month Periods Ended September 27, 1998 and September 28, 1997
(in thousands of dollars)
Period Ended
9/27/98 9/28/97
Cash flows from operating activities:
Net income (loss) $ 117 $ (1,484)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 1,474 1,713
Decrease (increase) in costs and estimated
profits in excess of billings 2,900 (5,347)
Contract reserve activity (4,412) (3,939)
Decrease (increase) in accounts receivable 234 (2,001)
Increase (decrease) in accounts payable
and accruals (3,205) 895
Increase in deferred pension asset (668) (668)
Decrease in other accrued taxes (305) (571)
Decrease (increase) in other current assets 144 (273)
Decrease in environmental reserves (169) (157)
Decrease in payroll and vacations (762) (11)
Other, net 2,533 (339)
Total adjustments (2,234) (10,698)
Net cash used in operating activities (2,119) (12,182)
Cash flows from investing activities:
Purchases of marketable securities (7,224) (1,674)
Sales of marketable securities 7,357 12,981
Maturities of marketable securities 1,500 1,068
Capital expenditures (77) (703)
Other (100) -
Net cash provided by investing activities 1,456 11,672
Cash flows from financing activities:
Decrease (increase) in restricted cash 2,050 (3,815)
Net cash used in financing activities 2,050 (3,815)
Net change in cash and cash equivalents 1,387 (4,325)
Cash and cash equivalents at beginning of period 5,317 4,232
Cash and cash equivalents at end of period 6,704 (93)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 94 25
Income taxes $ - $ -
The accompanying notes are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Todd Shipyards Corporation (the "Company") filed its Consolidated Financial
Statements for the fiscal year ended March 29, 1998 with the Securities and
Exchange Commission on Form 10-K. That report should be read in connection
with this Form 10-Q.
1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements are unaudited but in the
opinion of management reflect all adjustments necessary for a fair
presentation of financial position and results of operations.
2. CONTRACTS
The Company has a $181 million contract to construct three Jumbo Mark II
("Mark II") ferries for the Washington State Ferry System (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, is approximately 98% complete at September 27,
1998. The first ferry, the MV Tacoma successfully completed its warranty
period during the second quarter of fiscal year 1999. The second ferry, the
MV Wenatchee, was delivered in the first quarter of fiscal year 1999; and the
third ferry, the MV Puyallup, was launched in the first quarter of fiscal year
1999. The Company currently expects to deliver the MV Puyallup ahead of the
current contractual date of February 28, 1999.
As the remaining construction activities of the third ferry progresses towards
final completion, the Company will continue to review and revise its estimates
of the long term contract sales values and costs at completion. During the
second quarter of fiscal 1999, the Company continued to estimate that it would
incur contract costs in excess of the contract prices for the three ship
program, estimating that total contract costs will exceed contract prices by
$18.0 million.
The Company's construction cost estimates as of September 27, 1998 are based
upon continued implementation of improved production techniques and better
utilization of modular shipbuilding practices in the construction of the third
ship compared to the first two ships. The Company has also benefited from
production efficiencies gained in the experience of constructing the first and
second ships (learning curve efficiencies) and has incorporated these factors
in its construction cost estimates for the remaining work. However, favorable
or unfavorable variances to the estimated production efficiencies could
materially affect the Company's financial results.
Changes in these estimates will be made based upon the facts then known to the
Company and may be a result of change order pricing, productivity factors,
overhead costs, material costs, production schedules and levels of shipyard
activity. Changes in these factors could materially affect the Company's
financial results. The Company's ability to complete the Mark II contract
within the Company's current estimates of the costs to complete is not
presently determinable. If the Company is unable to complete this contract
within its current estimate of the costs to complete, the Company could incur
losses on this contract beyond the $18.0 million program loss reserve recorded
to date with a related adverse impact on cash flow.
The Company believes that a significant portion of the increased contract
costs relate to high levels of engineering and production change orders
directed by the Ferry System. These customer-directed change orders, most of
which have not been settled, have continued throughout the production process
and into the Company's fiscal year 1999, and have caused production rework,
delays and disruption. These change orders have resulted in increased
production costs for the entire three ship ferry construction project.
The Company has recently completed an extensive cost analysis of both the
direct costs and related production schedule impact costs which resulted from
these customer-directed change orders. This analysis concludes that the cost
impact to the current Mark II contract for customer-directed changes is
approximately $43 million plus the cost of capital. This amount is in
addition to the original contract amount of $181 million.
The Company, which plans to pursue full recovery, has advised the Ferry System
of these costs. The Company is currently engaged in a fact finding phase
with the Ferry System that began during the third quarter of fiscal year 1999.
This fact finding phase will provide the Ferry System an opportunity to
discuss and review in more detail the basis for the Company's cost analysis.
No assurances can be made that these preliminary discussions will lead to a
formal stage of negotiation and settlement with the Ferry System. Since the
Company cannot predict the outcome of any future negotiations with the Ferry
System, it has not included any estimates of possible recoveries above the
original contract amount in its above mentioned Mark II Ferry program loss
reserve estimates.
In the second quarter of fiscal year 1999 the Company commenced work on a new
contruction contract with an estimated price of approximately $18.0 million.
The contract calls for the construction of a floating electrical powerplant,
206 feet long and capable of developing 70 mega-watts of electricity. The
project duration is expected to be approximately nine months and will conclude
early in the first quarter of fiscal year 2000.
3. INCOME TAXES
The Company did not have net taxable income during the first six months of
fiscal year 1999 or fiscal year 1998 due to a net operating loss carryforward
from fiscal year 1997. Accordingly, the Company did not recognize income tax
expense during these periods.
4. ENVIRONMENTAL MATTERS
As discussed in the Company's Form 10-K for fiscal year ended March 29, 1998,
the Company faces significant potential liabilities in connection with the
alleged presence of hazardous waste materials at certain of its closed
shipyards, at its Seattle 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.
Harbor Island Site
As discussed further in the Company's Form 10-K for the year ending March 29,
1998, the Company and several other parties have been named as potential
responsible parties by the Environmental Protection Agency ("EPA") pursuant to
the Comprehensive Environmental, Response, Compensation, and Liability Act in
connection with the documented release of hazardous substances, pollutants,
and contaminants at the Harbor Island Superfund Site upon which the Seattle
Shipyard is located.
Other Environmental Matters
The Company also is currently involved, together with other companies in some
cases, in 15 other Superfund and Non-Superfund remediation sites and
environmental legal issues. In certain instances, the Company's liability and
proportionate share of costs have not been determined due to uncertainties as
to the nature and extent of site conditions and the Company's involvement.
Based on the Company's previous experience, its allocated share of multi-
participant remediation sites has often been minimal, in certain instances
less than 1 percent.
The actual costs relating to environmental remediation and settlements will
depend upon numerous factors, including the number of parties found liable at
each environmental site, the method of remediation, outcome of negotiations
with regulatory authorities, outcome of litigation, technological developments
and changes in environmental laws and regulations.
The Company's financial statements as of September 27, 1998 reflect aggregate
reserves for environmental matters of $15.9 million. The Company is
negotiating with its insurance carriers and certain prior landowners and
operators for past and future remediation costs. The Company has recorded a
non-current asset of $3.7 million to reflect a contractual arrangement with an
insurance company to share costs for certain environmental matters. No
assurance can be given that the Company's reserves are adequate to cover all
potential environmental costs the Company could incur.
5. SUPPLEMENTAL CASH FLOW DISCLOSURE
During the six months ending September 27, 1998, the Company paid $94 thousand
in interest. During the prior year period ending September 28, 1997, the
Company paid $25 thousand in interest.
ITEM 2. 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.
OPERATING RESULTS
All comparisons within the following discussion are with the corresponding
periods in the previous year, unless otherwise stated.
Revenue - The Company's second quarter revenue of $19.5 million reflects a
decrease of $8.5 million (31%) from last year's level of $28.0 million. This
decrease is primarily attributable to a $15.0 million decrease in Mark II
revenue reflecting the completion and delivery of the first two ferries.
Partially offsetting this decrease are revenue increases of $6.5 million in
commercial and government repair and construction activities.
Fiscal year 1999 first half revenue of $46.5 million reflects a decrease of
$15.0 million (24%) compared to last year's first half results. This decrease
is also attributable to a significant decrease in Mark II revenue. Mark II
revenue decreased $24.7 million during the first six months of fiscal year
1999 when compared to the same period last year. However, increases in
commercial and government repair and construction activities of $9.7 million
during this same period partially offset the decreases in Mark II revenues.
Cost of Revenue - Cost of revenue during the second quarter of fiscal year
1999 was $16.8 million (86%). Cost of revenue during the second quarter of
fiscal year 1998 was $24.4 million (87%). This decrease of $7.6 million (31%)
is the result of lower levels of Mark II activities partially offset by
increases in commercial and government repair and construction activities
which are reflected in the reduced second quarter revenue figures.
Cost of revenue during the first six months of fiscal year 1999 was $38.4
million (83%), which reflects a $13.0 million (25%) decrease from the previous
fiscal year. This reduction also reflects the lower levels of shipyard
activities primarily attributable to lower levels of Mark II activities
reflected in the reduced first half revenue totals.
Administrative and manufacturing overhead expense - Overhead costs for
administrative and manufacturing activities were $5.5 million (28%) for fiscal
year 1999 second quarter and $13.5 million (29%) for the first six months of
fiscal 1999.
Administrative and manufacturing overhead costs for the second quarter and
first six months of fiscal year 1998 were $6.7 million and $16.5 million,
respectively. The reduction in second quarter fiscal year 1999 administrative
and manufacturing overhead of $1.1 million (17%), as well as the reduction in
first six months of fiscal year 1999 of $3.0 million (18%) results from lower
levels of Mark II construction activities during these respective time
periods. The Company continues to emphasize overhead cost control as
production levels fluctuate throughout the fiscal year.
Contract reserve activity - During the second quarter of fiscal year 1999 the
Company utilized $2.8 million of the previously recognized $18.0 million
forward loss reserve recorded on the MK II Ferry project. During the first
six months of fiscal year 1999, the Company utilized $4.4 million in
previously recorded forward loss reserves.
During the second quarter and first six months of fiscal year 1998, the
Company utilized $3.6 million and $6.9 million, respectively, of previously
recognized forward loss reserves. The reserve utilization for the first six
months of fiscal year 1998 was partially offset by an additional $3.0 million
charge, increasing the then reported forward loss reserve from $11.5 million
to $14.5 million, resulting in the net activity reported of $3.9 million.
Provision for environmental reserves - The Company did not report any changes
to the provision for environmental reserves during the second quarter or first
six months of either fiscal year 1999 or 1998.
Investment and other income - Investment and other income for the second
quarter of fiscal year 1999 was $.2 million. During the first six months of
fiscal year 1999 the Company recorded $.8 million in investment and other
income. Investment and other income for fiscal year 1998 second quarter and
for the first six months were $.4 million and $1.0 million, respectively.
Gain on sale of available-for-sale security - During the second quarter and
first six months of fiscal year 1999 the Company reported a gain from the sale
of an available-for-sale security of $.3 million. During the second quarter
and first six months of fiscal year 1998 the Company did not realize any gains
from the sale of an available for sale security.
Income taxes - The Company did not have net taxable income during the second
quarter and first six months of fiscal year 1999 due to a net operating loss
carryforward from fiscal year 1997. Accordingly, the Company has recognized
no income tax expenses during these periods.
LIQUIDITY AND CAPITAL RESOURCES
Working capital - Working capital during the first six months of fiscal year
1999 remained relatively unchanged from the beginning of the fiscal year.
Working capital for the period ending September 27, 1998 was $44.6 million,
which represents an increase of $.2 million from the working capital reported
at the end of fiscal year 1998.
Unbilled receivables - As of September 27, 1998 unbilled items on completed
contracts totaled $1.6 million compared with $1.7 million at the end of the
second quarter of fiscal year 1998 and $1.3 million at the beginning of fiscal
year 1999.
Capital Resources - Capital expenditures for the second quarter of fiscal 1999
were $.1 million compared to $.5 million in the second quarter of fiscal year
1998. Capital expenditures for the first six months of fiscal year 1999 were
$.3 million compared to $.7 million for the same period in fiscal 1998. The
decrease in capital expenditures during the second quarter and first six
months of fiscal year 1999 when compared to fiscal year 1998 results from the
timing of certain projects which are scheduled to start later in the fiscal
year. The Company's capital expenditures for the past several years have
remained relatively constant, having achieved completion of capital
improvements necessary to complete the Mark II Ferry project. Fiscal year
1999 capital expenditures are planned to remain relatively constant to last
year's level.
Based upon its current cash position described above and anticipated fiscal
year 1999 cash flow, the Company believes it has sufficient liquidity to fund
operations for this fiscal year. Accordingly, shipyard capital expenditures
are expected to be financed out of working capital. A change in the
composition or timing of projected work could cause capital expenditures and
repair and maintenance expenditures to increase.
YEAR 2000
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers, and financial institutions are fully supported.
During the first quarter of fiscal 1999 the Company started efforts to upgrade
the payroll system. Completion of the payroll upgrade is now planned for
fourth quarter due to vendor programming delays and Company Information System
staff priorities. Custom program upgrades and server operating system
upgrades are continuing and will be completed in the fourth quarter. The
telephone system and selected machinery have been tested successfully with a
simulated January 1, 2000 date. The Company has also initiated discussions
with its significant suppliers, large customers, financial intitutions and
utilities to assure that those parties have appropriate plans to remediate
Year 2000 issues.
While the Company believes its planned efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company's
operation. The Company does not expect the cost of the Year 2000 initiatives
to have a material impact upon the Company's results of operations, cash flow
or financial position.
ENVIRONMENTAL MATTERS
On Going 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 some of
its closed shipyards, at its Harbor Island shipyard, and at several sites used
by the Company to dispose of alleged hazardous waste. The Company has been
named as defendant in civil actions by parties alleging damages from past
exposure to toxic substances at Company facilities. The nature of
environmental investigation and clean up activities makes it difficult to
determine the timing and amount of any estimated future cash flows that may be
required for remedial efforts. The Company reviews these matters and accrues
for costs associated with remediation of environmental pollution when it
becomes probable that a liability has been incurred and when the amount of the
Company's liability (or the Company's proportionate share of the amount) can
be reasonably estimated.
The Company's financial statements as of September 27, 1998 reflect aggregate
reserves for environmental matters of $15.9 million. The Company is
negotiating with its insurance carriers and certain prior landowners and
operators for past and future remediation costs. The Company has recorded a
non-current asset of $3.7 million to reflect a contractual arrangement with an
insurance company to share costs for certain environmental matters. No
assurance can be given that the Company's reserves are adequate to cover all
potential environmental costs the Company could incur.
Actual costs to address environmental matters in which the Company is involved
will depend on 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.
BACKLOG
At September 27, 1998 the Company's firm shipyard backlog consists of
approximately $37 million of construction, repair and overhaul work. The
Company's repair and overhaul work generally is of short duration with little
advance notice. The Company's backlog at September 28, 1997 was $45 million of
which $38 million related to the Mark II Ferry Program.
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 seeks a declaratory
judgment that the collective bargaining agreement executed in November 1997 be
found null and void. If plaintiffs were to prevail in this case Todd Pacific
and its unions would have to engage in bargaining for a new collective
bargaining agreement. The Company is not presently able to assess the likely
outcome of the present proceeding or the impact on contract terms in the event
that negotiations over the collective bargaining agreement are required.
FUTURE SHIPYARD OPERATIONS
The Company's future profitability depends largely on the ability of the
shipyard to maintain an adequate volume of repair and new construction
business. The Company competes with other northwest and west coast shipyards,
some of which have more advantageous cost structures. The Company's
competitors include non-union shipyards, shipyards with excess capacity and
government subsidized facilities.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders (the "Meeting") was held on
September 18, 1998 in Seattle, Washington.
At the Meeting the stockholders elected seven directors, each of whom will
serve until the next Annual Meeting of Shareholders or until his respective
successor shall have been elected and qualified or until his earlier
resignation or removal. The Board of Directors elected at the Meeting and the
votes cast in favor of their election (with the votes cast in favor of their
election out of a total of 9,910,180 entitled to vote) are as follows: Brent
D Baird (9,458,349); Steven A. Clifford (9,458,396); Patrick W.E. Hodgson
(9,457,376); Joseph D. Lehrer (9,457,316); Philip N. Robinson (9,458,649);
John D. Weil (9,458,349); and Stephen G. Welch (9,457,591).
The shareholders ratified the appointment of Ernst & Young LLP as the
Company's independent public accountants by a vote of 9,466,980 to 13,746 with
6,138 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TODD SHIPYARDS CORPORATION
Registrant
By:_______________________________
Scott H. Wiscomb
Chief Financial Officer and Treasurer
November 12, 1998