FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
For Quarter Ended June 30, 1998
Commission File Number 0-16572
AVONDALE INDUSTRIES, INC.
Louisiana 39-1097012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 50280, New Orleans, Louisiana 70150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 504/436-2121
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 file such filing
requirements for the past 90 days. YES X NO .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at June 30, 1998
- --------------------------------------------------------------------------------
Common stock, par value $1.00 per share 13,249,228 shares
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1.Financial Statements
Independent Accountants' Report 1
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations -
Quarters and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II. Other Information 15
Item 4.Submission of Matters to a Vote of Security Holders
Item 6.Exhibits and Reports on Form 8-K
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholders of
Avondale Industries, Inc.
We have reviewed the condensed consolidated financial statements of Avondale
Industries, Inc. and subsidiaries, as listed in the accompanying index, as of
June 30, 1998 and for the three-month and six-month periods ended June 30, 1998
and 1997. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Avondale Industries, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 20, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1997 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
New Orleans, Louisiana
August 3, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $ 67,439 $ 81,752
Receivables (Note 2):
Accounts receivable.................................................. 16,068 13,162
Contracts in progress................................................ 87,925 88,584
Inventories:
Goods held for sale.................................................. 13,022 14,915
Materials and supplies............................................... 8,964 8,311
Deferred tax assets ................................................... 17,903 23,253
Prepaid expenses and other current assets.............................. 3,054 2,891
------------ ------------
Total current assets................................................. 214,375 232,868
------------ ------------
Property, Plant and Equipment:
Land................................................................... 7,986 7,843
Buildings and improvements............................................. 60,578 55,917
Machinery and equipment................................................ 205,747 200,777
------------ ------------
Total................................................................ 274,311 264,537
Less accumulated depreciation.......................................... (137,001) (134,481)
------------ ------------
Property, plant and equipment - net.................................. 137,310 130,056
------------ ------------
Goodwill - net........................................................... 5,159 5,357
Other assets............................................................. 7,205 7,334
------------ ------------
Total assets......................................................... $ 364,049 $ 375,615
============ ============
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
June 30, December 31,
1998 1997
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt...................................... $ 3,137 $ 3,047
Accounts payable....................................................... 67,853 59,548
Accrued employee compensation.......................................... 16,330 13,198
Other.................................................................. 11,726 11,851
------------ ------------
Total current liabilities............................................ 99,046 87,644
Long-term debt........................................................... 49,663 51,819
Deferred income taxes.................................................... 12,900 13,400
Other liabilities and deferred credits................................... 14,604 13,775
------------ ------------
Total liabilities...................................................... 176,213 166,638
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' Equity:
Common stock, $1.00 par value, authorized -
30,000,000 shares; issued - 15,962,244 shares in 1998
and 15,956,227 shares in 1997........................................ 15,962 15,956
Additional paid-in capital............................................. 374,301 374,173
Accumulated deficit.................................................... (154,265) (169,296)
------------ ------------
Total................................................................ 235,998 220,833
Treasury stock (common: 2,713,016 shares in 1998
and 1,463,016 shares in 1997) at cost (Note 4)....................... (48,162) (11,856)
------------ ------------
Total shareholders' equity............................................. 187,836 208,977
------------ ------------
Total liabilities and shareholders' equity............................. $ 364,049 $ 375,615
============ ============
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
Quarters Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Sales............................................ $ 178,463 $ 145,792 $ 363,088 $ 285,305
Cost of sales.................................... 157,118 126,291 321,615 247,171
---------- ---------- ---------- ----------
Gross profit..................................... 21,345 19,501 41,473 38,134
Selling, general and
administrative expenses........................ 9,409 8,635 17,722 16,969
---------- ---------- ---------- ----------
Income from operations........................... 11,936 10,866 23,751 21,165
Interest expense................................. (983) (1,195) (2,120) (2,412)
Other-net, principally interest
income ........................................ 1,376 709 2,600 1,318
---------- ---------- ---------- ----------
Income before income taxes....................... 12,329 10,380 24,231 20,071
Income taxes .................................... 4,675 4,000 9,200 7,400
---------- ---------- ---------- ----------
Net income....................................... $ 7,654 $ 6,380 $ 15,031 $ 12,671
========== ========== ========== ==========
Income per share of common stock (Notes 4 and 5):
Net income per share of
common stock - basic........................... $ 0.54 $ 0.44 $ 1.05 $ 0.87
========== ========== ========== ==========
Weighted average number
of shares outstanding -
basic......................................... 14,125 14,493 14,308 14,488
========== ========== ========== ==========
Net income per share of
common stock - diluted......................... $ 0.54 $ 0.44 $ 1.04 $ 0.87
========== ========== ========== ==========
Weighted average number
of shares outstanding -
diluted........................................ 14,198 14,497 14,385 14,498
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(In thousands)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 15,031 $ 12,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................................ 4,392 5,716
Deferred income taxes................................................ 4,850 7,400
Loss on sale of assets ............................................. 41 -
Changes in operating assets and liabilities:
Receivables........................................................ (2,247) 10,643
Inventories........................................................ 1,240 (2,270)
Prepaid expenses and other assets.................................. (34) 302
Accounts payable................................................... 8,305 (26,600)
Accrued employee compensation and other liabilities................ 3,836 5,565
Other - net........................................................ 134 303
------------ ------------
Net Cash Provided by Operating Activities............................... 35,548 13,730
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (11,507) (3,306)
Proceeds from sale of assets .......................................... 18 -
------------ ------------
Net Cash Used for Investing Activities................................. (11,489) (3,306)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term borrowings........................................ (2,066) (3,976)
Purchase of treasury stock (Note 4)................................... (36,306) -
------------ ------------
Net Cash Used for Financing Activities................................. (38,372) (3,976)
------------ ------------
Net (decrease) increase in cash and cash equivalents..................... (14,313) 6,448
Cash and cash equivalents at beginning of period......................... 81,752 48,944
------------ ------------
Cash and cash equivalents at end of period............................... $ 67,439 $ 55,392
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest................................................................. $ 2,353 $ 2,666
============ ============
Income taxes ............................................................ $ 5,650 $ 700
============ ============
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Avondale Industries, Inc. and its wholly-owned subsidiaries
("Avondale" or the "Company"). In the opinion of the management of the Company,
all adjustments (such adjustments consisting only of a normal recurring nature)
necessary for a fair presentation of the operating results for the interim
periods presented have been included in the interim financial statements. These
interim financial statements should be read in conjunction with the December 31,
1997 audited financial statements and related notes filed on Form 10-K for the
year ended December 31, 1997 (the "1997 Form 10-K").
The financial statements required by Rule 10-01 of Regulation S-X have been
reviewed by independent public accountants as stated in their report included
herein.
2. RECEIVABLES
The following information presents the elements of receivables at June 30, 1998
and December 31, 1997 (in thousands):
1998 1997
------------ ------------
Long-term contracts:
U.S. Government:
Amounts billed.......................................... $ 767 $ 967
Unbilled costs, including retentions, and
estimated profits on contracts in
progress............................................ 76,299 80,041
------------ ------------
Total ................................................... 77,066 81,008
Commercial:
Amounts billed.......................................... 5,774 4,180
Unbilled costs, including retentions, and
estimated profits on contracts in
progress............................................ 11,626 8,543
------------ ------------
Total from long-term contracts............................. 94,466 93,731
Trade and other current receivables............................... 9,527 8,015
------------ ------------
Total ........................................................... $ 103,993 $ 101,746
============ ============
Unbilled costs and estimated profits on contracts in progress were not billable
to customers at the balance sheet dates under terms of the respective contracts.
3. FINANCING ARRANGEMENTS
The Company's $65 million revolving credit agreement ("the agreement") provides
liquidity for working capital purposes, capital expenditures and letters of
credit. At June 30, 1998, there were approximately $11.3 million of letters of
credit issued against the agreement leaving approximately $53.7 million of
liquidity available to Avondale for operations and other purposes. There have
been no borrowings under the agreement since its inception in 1994. Continuing
access to the agreement is conditioned upon the Company remaining in compliance
with the covenants contained therein. At June 30, 1998, the Company was in
compliance with such covenants.
4. TENDER OFFER
In June 1998, the Company completed a tender offer purchasing 1.25 million
shares of its common stock at $28 7/8 per share. Under the terms of the offer,
the Company had invited its shareholders to tender their shares at prices
ranging from $26 1/2 to $29 per share as specified by each shareholder. The
total cost to the Company of completing the tender was approximately $36.3
million, including legal, consulting and other professional fees. The total
shares repurchased represented approximately 8.6% of the outstanding shares at
that date, and following the tender, the Company had approximately 13.2 million
shares of its common stock outstanding. The transaction was funded using
existing cash balances.
5. EARNINGS PER SHARE
The number of weighted average shares outstanding for "basic" EPS was 14,124,885
and 14,493,211 for the three months ended June 30, 1998 and 1997, respectively
and 14,308,031 and 14,488,034 for the six months ended June 30, 1998 and 1997,
respectively. The number of weighted average shares outstanding for "diluted"
EPS was 14,197,661 and 14,496,853 for the three months ended June 30, 1998 and
1997, respectively, and 14,385,443 and 14,498,211 for the six months ended June
30, 1998 and 1997, respectively. The difference in weighted average shares
outstanding of 72,776 and 3,642 for the three months ended June 30, 1998 and
1997, respectively, and 77,412 and 10,177 for the six months ended June 30, 1998
and 1997, respectively, relate to stock appreciation rights and options.
As discussed in Note 4 of the Notes to Consolidated Financial Statements herein,
the Company completed a tender offer purchasing 1.25 million shares of its
common stock in June 1998. Had the repurchase taken place as of January 1, 1997,
the Company's diluted earnings per share for the three and six months ended June
30, 1997, would have been $0.45 and $0.90, respectively. For the three and six
months ended June 30, 1998, the Company's diluted earnings per share would have
been $0.55 and $1.08, respectively.
6. COMMITMENTS AND CONTINGENCIES
Litigation
As discussed in Note 9 of the Notes to Consolidated Financial Statements
included in the 1997 Form 10-K, the Company was advised in 1986 that it was a
potentially responsible party ("PRP") with respect to an oil reclamation site
operated by an unaffiliated company in Walker, Louisiana. To date, the Company
and certain of the other PRPs (the "Funding Group") for the site have funded the
site's remediation expenses, PRP identification expenses and related costs for
the participating parties. As of June 30, 1998 such costs totaled approximately
$19.0 million, of which the Company has funded approximately $4.0 million. Since
1988, the Funding Group filed petitions to add a number of companies as
third-party defendants with regard to the remedial action. The Funding Group has
agreed to settle with the majority of these companies. All funds collected are
placed in escrow to fund future expenses. At June 30, 1998, the balance of the
escrow was $8.5 million, which is to be used to fund any ongoing remediation
expenses. The Company will not be required to fund any future assessments until
the balance in escrow is depleted. There are additional settlements being
negotiated which could add to the balance in escrow.
Additional remedial work scheduled for the site includes completion of studies
and if required by the results of these studies, subsequent remediation.
Following completion of any such required additional remediation, it will be
necessary to obtain Environmental Protection Agency approval to close the site,
which consent may require subsequent post-closure activities such as groundwater
monitoring and site maintenance for many years. The Company is not able to
estimate the final costs for any such additional remedial work or post-closure
costs that may be required; however, the Company believes that its proportionate
share of expenditures for any additional work will not have a material impact on
the Company's financial statements. In addition, the Company and other members
of the Funding Group have entered into a final cost sharing agreement under
which all parties have agreed that there would be no re-allocation of previous
remediation costs, but that future remediation costs would be established by a
formula. Under this agreement, the Company's share of future costs will not
exceed 17.5%.
Furthermore, the Company has initiated litigation against its insurer for a
declaration of coverage of the liability, if any, that may arise in connection
with the remediation of the site referred to above. The court has ruled that the
insurer has the duty to defend the Company, but has not yet ruled on whether the
carrier has a duty to indemnify the Company if any liability is ultimately
assessed against it. After consultation with counsel, the Company is unable to
predict the eventual outcome of this litigation or the degree to which such
potential liability would be indemnified by its insurance carrier.
In addition to the above, the Company is also named as a defendant in numerous
other lawsuits and proceedings arising in the ordinary course of business, some
of which involve substantial claims.
The Company has established accruals as appropriate for certain of the matters
discussed above. While the ultimate outcome of lawsuits and proceedings against
the Company cannot be predicted with certainty, management believes, based on
current facts and circumstances and after review with counsel, that the eventual
resolution of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
Guarantee
Pursuant to agreements related to the University of New Orleans ("UNO")/Avondale
Maritime Technology Center of Excellence (the "Center"), the Company has agreed
to guarantee indebtedness with a principal amount not to exceed $40 million for
expenditures incurred by the UNO Research and Technology Foundation, Inc. (the
"Foundation") for the construction of the facility and the acquisition of
technology. Under the terms of a Cooperative Endeavor Agreement, the State of
Louisiana made a non-binding commitment to appropriate $40 million, plus
interest, in installments over a period from 1997 through 2007 for donation to
the Foundation for purposes of servicing the debt incurred in connection with
construction of the Center. Avondale and the Foundation anticipate that
appropriations by the State will be sufficient for the Foundation to service its
debt. However, if the State's appropriations are insufficient, Avondale will
ultimately be required to repay the debt. The Company's guarantee is unsecured.
As of June 30, 1998, the Foundation had incurred $29.2 million of cost to
construct and equip the Center. In connection with its non-binding commitment,
the State appropriated and paid $3.8 million during 1997, representing the first
installment to the Foundation. The second installment in the amount of $6.5
million was included in the Governor's executive budget for the fiscal year
beginning July 1, 1998. The budget has been approved and the Foundation expects
to receive the second installment during the third quarter of 1998.
Letters of Credit and Bonds
In the normal course of its business activities, the Company is required to
provide letters of credit and bonds to secure the payment of workers'
compensation obligations, other insurance obligations and to provide a debt
service reserve fund related to $34.4 million of Series 1994 industrial revenue
bonds. Additionally, under certain contracts the Company may be required to
provide letters of credit to secure certain performance obligations of the
Company thereunder. Outstanding letters of credit and bonds relating to these
business activities amounted to approximately $32.3 million at June 30, 1998 and
December 31, 1997.
7. RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for disclosure of operating segments, products, services, geographic areas and
major customers. The Company is required to adopt this standard for fiscal 1998.
Management believes that the implementation of SFAS 131 will not have a material
impact on the presentation of the Company's financial statements but may require
additional disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the
standards for disclosure of pension and other postretirement benefit plans by
standardizing the disclosure requirements, requiring additional information on
changes in the benefit obligations and fair values of plan assets and
eliminating certain disclosure requirements no longer considered to be useful.
These new disclosure requirements are designed to improve the understandability
of benefit disclosures for financial analysis. The Company is required to adopt
this standard for fiscal 1998. Management believes that the implementation of
SFAS 132 will not have a material impact on the presentation of the Company's
financial statements but will require additional disclosure.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements for the periods ended June 30, 1998
and 1997 and Management's Discussion and Analysis of Financial Condition and
Results of Operations included under Item 7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K").
Overview
The Company continued its trend of improvement in its operating results compared
to the same periods in the prior year. Income from operations increased 10% for
the second quarter of 1998 and 12% for the first six months of 1998 compared to
the same periods in the prior year. Further, net income increased 20% for the
second quarter and 19% for the first six months of 1998 over the same periods in
1997.
The Company's firm backlog at June 30, 1998 was approximately $1.5 billion
(including estimated contract escalation) exclusive of unexercised options
aggregating approximately $1.1 billion held by the U.S. Navy (the "Navy")
(including estimated contract escalation) and approximately $500 million held by
a commercial customer for additional ship orders. During 1998, the Navy
exercised a portion of its option for a seventh Strategic Sealift vessel
relating to approximately $50 million for long lead time materials. The balance
of approximately $200 million for this option is exercisable by the Navy during
the first quarter of 1999. Also, in July 1998, the Navy exercised a contract
modification, relating to approximately $78 million, authorizing the procurement
of long lead time materials for construction of a second vessel in the LPD-17
program. The Navy's option on the remainder of the second LPD vessel is
exercisable before the end of 1998. During the first quarter of 1998, the
Company delivered the LSD-CV 52 to the Navy representing the fourth and final
ship of this class constructed by the Company under two contracts. In addition,
the Company expects to complete the first of a contract to construct six
Strategic Sealift ships during 1998.
As previously disclosed, in December 1996 the Navy awarded, and in April 1997
the General Accounting Office affirmed, a $641 million contract to a Company-led
alliance, which includes Bath Iron Works ("Bath") and Raytheon Company
("Raytheon"), to design and construct the first of an anticipated 12 ships under
the Navy's LPD-17 program. The contract award provides for options exercisable
by the Navy for two additional LPD-17 class ships to be built by the alliance.
Under the terms of an agreement between the alliance members, the Company will
build the ship covered under the December 1996 contract, and, if the Navy
exercises the two options, the Company would construct the second while Bath
would construct the third of the three LPD-17 class ships to be built under the
initial contract. Raytheon is responsible for total ship integration. The
alliance is using an advanced three-dimensional ship design and product modeling
technology for the design and manufacture of the ships. As the prime contractor
under the LPD-17 contract, the Company is required to report in its financial
statements as sales and cost of sales the entire contract amount for each vessel
in the LPD-17 program constructed by the alliance. Under the subcontracting
agreements entered into between the Company and each of Bath and Raytheon, the
award fees that can be earned under the LPD-17 contract are to be allocated
among the alliance members in proportion to each member's performance and
participation in the construction of the vessel for which the award was granted.
To the extent that the Company's revenues include costs incurred and award fees
paid to the other alliance members, such revenues will be recorded with no gross
profit margin.
Results of Operations
The Company recorded net income of $7.7 million, or $0.54 per share, for the
second quarter of 1998 compared to $6.4 million, or $0.44 per share, for the
second quarter of 1997. For the first six months of 1998, the Company recorded
net income of $15.0 million, or $1.04 per share, compared to $12.7 million, or
$0.87 per share, for the same period in 1997. Per share amounts are on a diluted
basis.
Income from operations for the quarter and six months ended June 30, 1998,
increased $1.1 million, or 10%, and $2.6 million, or 12%, respectively, compared
to the prior year periods. The improvement in the Company's operating results
for the second quarter and first six months of 1998 compared to the same periods
of the prior year primarily reflect operating profits recognized on the
contracts to construct the six Strategic Sealift ships, the Icebreaker and the
LSD-CV 52. Also contributing to the 1998 operating results were profits recorded
by the Company's wholesale steel, modular construction and marine repair
operations.
Sales for the second quarter of 1998 increased $32.7 million, or 22%, to $178.5
million compared to $145.8 million for the second quarter of 1997 while sales
for the first six months of 1998 reflected an increase of $77.8 million, or 27%,
compared to the same period in the prior year. The increase in sales in the
current periods is primarily a result of increased costs associated with
contracts in the initial stages of construction. In the second quarter and six
months ended June 30, 1998, the Company recorded increased sales on the
contracts to construct the six Strategic Sealift ships (the last of which is
expected to be delivered in 2001), the two 125,000 DWT double-hulled crude oil
carriers (both of which are scheduled for delivery in 2000) and the LPD-17
(expected to be delivered in 2002). The oil carrier and LPD contracts are in the
initial stages of construction resulting in significant engineering design and
material acquisition costs. The increases noted above were partially offset by
decreased sales recorded on contracts that are at or near completion. The
Company recorded decreased sales on the contract to retrofit four single-hulled
commercial tankers with new double hulls (the last of which was delivered in
September 1997) and the contracts to construct the Icebreaker (expected to be
delivered in the first quarter of 1999), the LSD-CV 52 (delivered in February
1998), the 100 river hopper barges (the last of which was delivered in November
1997) and the four coastal MHCs (the last of which was delivered in January
1997).
Gross profit for the second quarter and first six months of 1998 increased $1.8
million, or 9%, and $3.3 million, or 9%, respectively, compared to the same
periods in 1997. However, the gross profit margin percentage decreased
approximately 1.4% and 2.0%, respectively, for the three and six months ended
June 30, 1998 compared with the same periods in the prior year. The decreases in
gross profit margin percentages are primarily attributable to the fact that the
LPD-17 and the two double-hulled crude oil carriers are in the initial stages of
contract performance which result in significant engineering design and material
acquisition costs recorded as net sales with little or no corresponding gross
profit. The Company does not begin profit recognition until final results can be
estimated with reasonable accuracy. Refer to the 1997 Form 10-K for a discussion
of the Company's policies and procedures for revenue recognition. In addition,
the Company includes costs incurred and award fees paid to other members of the
alliance in the LPD-17 program as sales and cost of sales with no gross profit
margin.
Selling, general and administrative ("SG&A") expenses increased $774,000, or 9%,
in the second quarter of 1998 and $753,000, or 4%, for the first six months of
1998 compared to the same periods in 1997. The increase in SG&A expenses was due
primarily to an increase in proposal preparation and related costs in 1998 in
connection with upcoming U.S. Government and commercial shipbuilding
opportunities.
Other income increased $667,000, or 94%, and $1.3 million, or 97%, for the
second quarter and first six months of 1998, respectively, compared to the same
periods in the prior year. This increase is primarily attributable to an
increase in interest income resulting from significantly higher cash and cash
equivalents available for investment during the period preceding the stock
repurchase.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for disclosure of operating segments, products, services, geographic areas and
major customers. The Company is required to adopt this standard for fiscal 1998.
Management believes that the implementation of SFAS 131 will not have a material
impact on the presentation of the Company's financial statements but may require
additional disclosure.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises the
standards for disclosure of pension and other postretirement benefit plans by
standardizing the disclosure requirements, requiring additional information on
changes in the benefit obligations and fair values of plan assets and
eliminating certain disclosure requirements no longer considered to be useful.
These new disclosure requirements are designed to improve the understandability
of benefit disclosures for financial analysis. The Company is required to adopt
this standard for fiscal 1998. Management believes that the implementation of
SFAS 132 will not have a material impact on the presentation of the Company's
financial statements but will require additional disclosure.
In accordance with the U. S. Securities and Exchange Commission's Staff Legal
Bulletin No. 5, the Company has assessed both the cost of addressing and the
cost or the consequences of incomplete or untimely resolution of the Year 2000
issue. This assessment included a comprehensive review to identify the systems
that could be affected by the Year 2000 issue and the development of an
implementation plan. The implementation plan includes both replacement and
upgrades of certain systems or equipment. The Company is incurring both internal
staff costs as well as consulting and other expenses related to these issues.
Maintenance and modification costs related to the Year 2000 issue will be
expensed as incurred and new software will be capitalized and amortized over its
useful life.
The Company has established a three-phased approach for its solution of the Year
2000 issue which includes: identification of all systems, assessment of each
system's compliance with the Year 2000 issue, and the testing and
modification/replacement of non-compliant systems. The Company is presently in
the final phase of this program and expects to incur a total of $5.0 to $7.0
million in remediating the Year 2000 issue. The Company expects to complete its
solution to the Year 2000 issue during the first six months of 1999.
In addition, the Company is in the process of initiating communications with its
significant suppliers and large customers (including the U. S. Navy) to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The Company can give no
assurance that the systems of suppliers or customers on which the Company relies
will be converted on time or that failure to convert by another company would
not have a material adverse effect on the Company.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $67.4 million at June 30, 1998
as compared to $81.8 million at December 31, 1997. The Company's primary use of
cash during the first six months of 1998 was the repurchase of 1.25 million
shares of the Company's common stock for $36.3 million. Other uses of cash in
the current six month period consisted of capital expenditures of $11.5 million
and payments on long-term borrowings of $2.1 million.
As discussed above, during the second quarter of 1998, the Company completed a
tender offer purchasing 1.25 million shares of its common stock at $28 7/8 per
share. Under the terms of the offer, the Company had invited its shareholders to
tender their shares at prices ranging from $26 1/2 to $29 per share as specified
by each shareholder. The total cost to the Company of completing the tender was
approximately $36.3 million, including legal, consulting and other professional
fees. The total shares repurchased represent approximately 8.6% of the
outstanding shares at that date, and following the tender, the Company had
approximately 13.2 million shares of its common stock outstanding. The
transaction was funded using existing cash balances.
Capital expenditures for the first six months of 1998 increased $8.2 million to
$11.5 million compared to $3.3 million for the same period in 1997. This
increase is primarily attributable to plant improvements and equipment additions
which are designed to improve the Company's operating efficiency. The Company
continues to evaluate investment opportunities, particularly productivity and
technology-focused capital expenditures, in order to enhance the Company's
overall efficiency and provide for future growth. As a result, the Company
expects to increase capital spending during the next several years above the
levels of 1996 and 1997. Included in this increased spending is approximately
$5.0 million in connection with the acquisition and implementation of new
integrated business systems software.
The Company's $65 million revolving credit agreement (the "agreement") provides
liquidity for working capital purposes, capital expenditures and letters of
credit. At June 30, 1998, there were approximately $11.3 million of letters of
credit issued against the agreement leaving approximately $53.7 million of
liquidity available to Avondale for operations and other purposes. There have
been no borrowings under the agreement since its inception in 1994. Continuing
access to the agreement is conditioned upon the Company remaining in compliance
with the covenants contained therein. At June 30, 1998, the Company was in
compliance with such covenants. The Company believes that its capital resources
will be sufficient to finance current and projected operations, existing debt
service requirements and planned capital expenditures.
In order to comply with the terms of the LPD-17 contract, the Company was
required to make significant capital improvements, including enhancing its
computer-aided design and product modeling capabilities. As a result, the
Company teamed with the University of New Orleans (the "University" or "UNO"),
the University of New Orleans Research and Technology Foundation, Inc. (the
"Foundation") and the State of Louisiana in a cooperative effort. Pursuant to
terms of various agreements, the Foundation is purchasing hardware and software
required to implement the extensive three-dimensional ship design and Integrated
Product Data Environment teaming technology and constructed a 200,000 square
foot building on property donated to the University by the Company and located
adjacent to the Company's main shipyard. This facility was completed during the
second quarter of 1998. The initial $40 million investment in this new
technology and facility, which is known as the "UNO/Avondale Maritime Technology
Center of Excellence" (the "Center"), is being financed by the Foundation using
third-party debt and lease financing, both of which are guaranteed by the
Company. The Company has entered into a long-term lease for the Center requiring
a nominal annual lease payment. The Company provides access to the technology
and a portion of the Center to the University for its use in research and the
development of educational curricula related to naval architecture and marine
engineering. During the remainder of 1998, additional amounts are expected to be
incurred in order to complete the customization of the design software to comply
with the LPD-17 requirements.
The Foundation is the borrower on all indebtedness incurred to construct and
equip the Center. Under the terms of a Cooperative Endeavor Agreement, the State
of Louisiana made a non-binding commitment to appropriate $40 million, plus
interest, in installments over a period from 1997 through 2007 for donation to
the Foundation for purposes of funding the Center. Avondale and the Foundation
anticipate that appropriations by the State will be sufficient for the
Foundation to service its debt. However, if the State's appropriations are
insufficient, Avondale will ultimately be required to repay the debt. The
Company's guarantee is unsecured. As of June 30, 1998, the Foundation had
incurred $29.2 million of cost to construct and equip the Center. In connection
with its non-binding commitment, the State appropriated and paid $3.8 million
during 1997, representing the first installment to the Foundation. The second
installment in the amount of $6.5 million was included in the Governor's
executive budget for the fiscal year beginning July 1, 1998. The budget has been
approved and the Foundation expects to receive the second installment during the
third quarter of 1998.
Cautionary Statement for Purposes of "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
Certain statements, other than statements of historical fact, contained in this
Quarterly Report on Form 10-Q are forward-looking statements. These
forward-looking statements are generally accompanied by such terms and phrases
as "anticipates," "estimates," "expects," "believes," "should," "projects,"
"scheduled," or similar statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to have been correct.
Important factors that could cause the Company's results to differ materially
from the results discussed in such forward-looking statements include the
Company's reliance on U.S. Navy contracts, including its ability to replenish
its backlog by securing additional contracts from the U.S. Navy, profit
recognition on government contracts, the outcome of the Company's litigation
involving efforts to unionize the Company's production workers and the
competitive impact of a resolution in favor of the union, the importance of
obtaining commercial contracts, the Company's ability to complete its contracts
within its cost estimates, intense competition for government and commercial
contracts, labor, regulatory and other risks in the shipbuilding and marine
construction industries and other unanticipated events affecting the Company's
efforts and the efforts of its suppliers, subcontractors, and customers
(including the U. S. Navy) to timely correct Year 2000 problems inherent in
essential computer systems, which could impair the Company's operations or the
ability of its customers to timely pay for products and services provided. All
forward-looking statements in this Form 10-Q are expressly qualified in their
entirety by the cautionary statements in this paragraph.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the shareholders of Avondale
Industries, Inc. held on June 12, 1998, 11,821,207 shares of the
14,493,211 shares outstanding were present in person or by proxy
at the meeting. The voting tabulation follows:
(a) The election of the following to the Board of Directors:
Francis R. Donovan, 11,088,704 votes for, 732,503 votes
withheld and Thomas M. Kitchen, 11,036,798 votes for,
784,409 votes withheld. The directors were elected by
plurality vote.
The following is a list of each other director whose
term of office as a director continued after the
meeting:
Albert L. Bossier, Jr., Anthony J. Correro, III, Kenneth
B. Dupont, and Hugh A. Thompson.
(b) A proposal to urge the Board of Directors to redeem the
rights issued under the Shareholder Protection Rights
Plan: 6,964,264 for, 3,707,745 against, 68,272 abstained
and 1,080,926 broker nonvotes. Proposal (b), which
required the approval of a majority of the shares of
Common Stock present or represented at the Annual
Meeting, is a precatory, non-binding resolution.
(c) A proposal to urge the Board of Directors to implement
confidential voting by Shareholders: 6,434,097 for,
4,238,999 against, 67,185 abstained and 1,080,926 broker
nonvotes.
(d) A proposal related to declassification of the Board of
Directors: 7,019,512 for, 3,645,396 against, 75,373
abstained and 1,080,926 broker nonvotes.
Proposals (c) and (d) required the affirmative vote of 80% of
the total outstanding Common Stock. Each of these proposals has
failed to pass at five consecutive annual meetings and, at each
of these meetings, received the affirmative vote of less than a
majority of the outstanding shares.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company(1).
3.2 Bylaws of the Company.
10.3 Employee Benefit Plans
(c) The Company's Amended and Restated
Employee Stock Ownership Plan(2) as
further amended by: Amendment No. 1
adopted April 5, 1995(3) , Amendment
No. 2 adopted June 16, 1995(4) ,
Amendment No. 3 adopted February 5,
1996(5) , Amendment No. 4 adopted
December 31, 1996(6) , Amendment No. 5
adopted December 30, 1997(7) , and
Amendment No. 6 adopted May 5, 1998
and the related Amended and Restated
Trust Agreement(5) as further amended
by Amendment No. 1 adopted May 5,
1998.
(e) The Company's Amended and Restated
Supplemental Pension Plan(8), as
amended by Amendment Nos. 1 and 2
thereto adopted December 29, 1989(9),
and Amendment No.
3 adopted May 5, 1998.
(f) The Company's Executive Excess
Retirement Plan(9) as amended by
Amendment No.1 adopted February 2,
1998 and Amendment No. 2 adopted May
5, 1998.
15 Letter re: unaudited interim financial
information.
27 Financial Data Schedule
(b) Reports on Form 8-K:
Not applicable.
- ---------------
(1) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1993.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(3) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1995.
(4) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1995.
(5) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996.
(6) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
(7) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1997.
(8) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-20145) filed with the
Commission on February 16, 1988.
(9) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, as amended
by Form 10-K/A.
SIGNATURES
Pursuant to the requirements 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.
AVONDALE INDUSTRIES, INC.
Date: August 14, 1998 By:/s/ ALBERT L. BOSSIER, JR.
--------------- ---------------------------
Albert L. Bossier, Jr.
Chairman, President &
Chief Executive Officer
Date: August 14, 1998 By:/s/ THOMAS M. KITCHEN
--------------- ---------------------
Thomas M. Kitchen
Corporate Vice President &
Chief Financial Officer
EXHIBIT INDEX
Number Description
- ------ ----------------------------------------------------------------------
3.1 Articles of Incorporation of the Company(1).
3.2 Bylaws of the Company.
10.3 Employee Benefit Plans
(c) The Company's Amended and Restated Employee Stock Ownership
Plan(2) as further amended by: Amendment No. 1 adopted April 5,
1995(3) , Amendment No. 2 adopted June 16, 1995(4), Amendment
No. 3 adopted February 5, 1996(5), Amendment No. 4 adopted
December 31, 1996(6), Amendment No. 5 adopted December 30,
1997(7), and Amendment No. 6 adopted May 5, 1998 and the related
Amended and Restated Trust Agreement (5) as further amended by
Amendment No. 1 adopted May 5, 1998.
(e) The Company's Amended and Restated Supplemental Pension Plan(8),
as amended by Amendment Nos. 1 and 2 thereto adopted December
29, 1989(9), and Amendment No. 3 adopted May 5, 1998.
(f) The Company's Executive Excess Retirement Plan(9) as amended by
Amendment No.1 adopted February 2, 1998 and Amendment No. 2
adopted May 5, 1998.
15 Letter re: unaudited interim financial information.
27 Financial Data Schedule
- ---------------
(1) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1993.
(2) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(3) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1995.
(4) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1995.
(5) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1996.
(6) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
(7) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1997.
(8) Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-20145) filed with the
Commission on February 16, 1988.
(9) Incorporated by reference from the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, as amended
by Form 10-K/A.