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 September 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 September 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 September 30, 1998
- --------------------------------------------------------------------------------
Common stock, par value $1.00 per share 13,250,222 shares
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1.Financial Statements
Independent Accountants' Report 1
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations -
Quarters and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 17
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 consolidated financial statements of Avondale Industries,
Inc. and subsidiaries, as listed in the accompanying index, as of September 30,
1998 and for the three-month and nine-month periods ended September 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 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
October 28, 1998
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents.............................................. $ 58,211 $ 81,752
Receivables (Note 2):
Accounts receivable.................................................. 7,844 13,162
Contracts in progress................................................ 100,392 88,584
Inventories:
Goods held for sale.................................................. 20,101 14,915
Materials and supplies............................................... 8,870 8,311
Deferred tax assets ................................................... 14,203 23,253
Prepaid expenses and other current assets.............................. 2,985 2,891
------------ ------------
Total current assets................................................. 212,606 232,868
------------ ------------
Property, Plant and Equipment:
Land................................................................... 8,232 7,843
Buildings and improvements............................................. 65,883 55,917
Machinery and equipment................................................ 208,718 200,777
------------ ------------
Total................................................................ 282,833 264,537
Less accumulated depreciation.......................................... (139,155) (134,481)
------------ ------------
Property, plant and equipment - net.................................. 143,678 130,056
------------ ------------
Goodwill - net........................................................... 5,060 5,357
Other assets............................................................. 8,383 7,334
------------ ------------
Total assets......................................................... $ 369,727 $ 375,615
============ ============
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities:
Current portion of long-term debt...................................... $ 3,137 $ 3,047
Accounts payable....................................................... 65,091 59,548
Accrued employee compensation.......................................... 17,213 13,198
Other.................................................................. 12,813 11,851
------------ ------------
Total current liabilities.............................................. 98,254 87,644
Long-term debt........................................................... 48,682 51,819
Deferred income taxes.................................................... 12,400 13,400
Other liabilities and deferred credits................................... 14,679 13,775
------------ ------------
Total liabilities...................................................... 174,015 166,638
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' Equity:
Common stock, $1.00 par value, authorized -
30,000,000 shares; issued - 15,963,238
shares in 1998 and 15,956,227 shares in 1997......................... 15,963 15,956
Additional paid-in capital............................................. 374,320 374,173
Accumulated deficit.................................................... (146,409) (169,296)
------------ ------------
Total.................................................................. 243,874 220,833
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............................................. 195,712 208,977
------------ ------------
Total liabilities and shareholders= equity............................. $ 369,727 $ 375,615
============ ============
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
Sales.............................................. $ 197,961 $ 159,217 $ 561,049 $ 444,522
Cost of sales...................................... 174,552 139,547 496,167 386,718
-------------- ------------- ------------- -------------
Gross profit....................................... 23,409 19,670 64,882 57,804
Selling, general and
administrative expenses.......................... 10,990 8,720 28,712 25,689
-------------- ------------- ------------- -------------
Income from operations............................. 12,419 10,950 36,170 32,115
Interest expense................................... (807) (1,235) (2,927) (3,647)
Other-net, principally interest
income .......................................... 844 905 3,444 2,223
-------------- ------------- ------------- -------------
Income before income taxes......................... 12,456 10,620 36,687 30,691
Income taxes ...................................... 4,600 3,700 13,800 11,100
-------------- ------------- ------------- -------------
Net income......................................... $ 7,856 $ 6,920 $ 22,887 $ 19,591
============== ============= ============= =============
Income per share of common stock (Notes 4 and 5):
Net income per share of
common stock - basic............................. $ 0.59 $ 0.48 $ 1.64 $ 1.35
============== ============= ============= =============
Weighted average number
of shares outstanding -
basic............................................ 13,250 14,493 13,952 14,491
============== ============= ============= =============
Net income per share of
common stock - diluted........................... $ 0.59 $ 0.48 $ 1.63 $ 1.35
============== ============= ============= =============
Weighted average number
of shares outstanding -
diluted.......................................... 13,309 14,534 14,023 14,511
============== ============= ============= =============
See Notes to Consolidated Financial Statements.
AVONDALE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 22,887 $ 19,591
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................................ 6,652 8,558
Deferred income taxes................................................ 8,050 11,100
Loss on sale of assets ............................................. 136 -
Changes in operating assets and liabilities:
Receivables........................................................ (6,490) 9,475
Inventories........................................................ (5,745) (522)
Prepaid expenses and other assets.................................. (1,143) (785)
Accounts payable................................................... 5,543 (28,998)
Accrued employee compensation and other liabilities................ 5,881 9,015
Other - net........................................................ 154 403
------------ ------------
Net Cash Provided by Operating Activities.............................. 35,925 27,837
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (20,131) (5,686)
Proceeds from sale of assets .......................................... 18 4
------------ -------------
Net Cash Used for Investing Activities................................. (20,113) (5,682)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term borrowings........................................ (3,047) (4,957)
Purchase of treasury stock (Note 4)................................... (36,306) -
------------ ------------
Net Cash Used for Financing Activities................................. (39,353) (4,957)
------------ ------------
Net (decrease) increase in cash and cash equivalents.................... (23,541) 17,198
Cash and cash equivalents at beginning of period......................... 81,752 48,944
------------ ------------
Cash and cash equivalents at end of period............................... $ 58,211 $ 66,142
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest................................................................. $ 3,052 $ 3,509
============ ============
Income taxes ............................................................ $ 7,150 $ 1,200
============ ============
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 September 30,
1998 and December 31, 1997 (in thousands):
1998 1997
-------------- -------------
Long-term contracts:
U.S. Government:
Amounts billed.......................................... $ 375 $ 967
Unbilled costs, including retentions, and
estimated profits on contracts in
progress............................................ 91,313 80,041
-------------- -------------
Total ................................................... 91,688 81,008
Commercial:
Amounts billed.......................................... 2,126 4,180
Unbilled costs, including retentions, and
estimated profits on contracts in
progress............................................ 9,079 8,543
-------------- -------------
Total from long-term contracts............................. 102,893 93,731
Trade and other current receivables............................... 5,343 8,015
-------------- -------------
Total ........................................................... $ 108,236 $ 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 September 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 September 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 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 13,250,146
and 14,493,211 for the three months ended September 30, 1998 and 1997,
respectively and 13,951,528 and 14,490,644 for the nine months ended September
30, 1998 and 1997, respectively. The number of weighted average shares
outstanding for "diluted" EPS was 13,309,319 and 14,534,417 for the three months
ended September 30, 1998 and 1997, respectively, and 14,022,860 and 14,511,164
for the nine months ended September 30, 1998 and 1997, respectively. The
difference in weighted average shares outstanding of 59,173 and 41,206 for the
three months ended September 30, 1998 and 1997, respectively, and 71,332 and
20,520 for the nine months ended September 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 nine months ended
September 30, 1997, would have been $0.49 and $1.40, respectively. For the nine
months ended September 30, 1998, the Company's diluted earnings per share would
have been $1.68.
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 September 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 September 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 consolidated 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
computer-aided design 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 any remaining debt.
The Company's guarantee is unsecured. As of September 30, 1998, the Foundation
had incurred $35.6 million of costs to construct and equip the Center. In
connection with its non-binding commitment, the State appropriated and paid $3.8
million during 1997 and $6.5 million in 1998, representing the first two
installments to the Foundation.
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 September 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 September 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 13% for
both the third quarter of 1998 and the first nine months of 1998 compared to the
same periods in the prior year. Further, net income increased 14% for the third
quarter and 17% for the first nine months of 1998 over the same periods in 1997.
The Company's firm backlog at September 30, 1998 was approximately $1.6 billion
(including estimated contract escalation) exclusive of unexercised options
aggregating approximately $971 million held by the U.S. Navy (the "Navy")
(including estimated contract escalation) and approximately $328 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 $64 million for long lead time materials. The balance
of approximately $176 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. In addition, during September 1998 the
Company's firm backlog was complemented with further commercial work as ARCO
Marine, Inc. ("ARCO") of Long Beach, California, exercised an option for a third
double-hulled crude oil carrier, valued at approximately $164 million. ARCO
holds options for two additional ships under terms of its contract with the
Company.
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 and
deliver the first of a contract to construct six Strategic Sealift ships during
the fourth quarter of 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 $7.9 million, or $0.59 per share, for the
third quarter of 1998 compared to $6.9 million, or $0.48 per share, for the
third quarter of 1997. For the first nine months of 1998, the Company recorded
net income of $22.9 million, or $1.63 per share, compared to $19.6 million, or
$1.35 per share, for the same period in 1997. Per share amounts are on a diluted
basis.
Income from operations for the quarter and nine months ended September 30, 1998,
increased $1.5 million, or 13%, and $4.1 million, or 13%, respectively, compared
to the prior year periods. The improvement in the Company's operating results
for the third quarter and first nine 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 third quarter of 1998 increased $38.8 million, or 24%, to $198.0
million compared to $159.2 million for the third quarter of 1997 while sales for
the first nine months of 1998 reflected an increase of $116.5 million, or 26%,
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 third quarter and nine
months ended September 30, 1998, the Company recorded increased sales on the
contracts to construct the two 125,000 DWT double-hulled crude oil carriers
(both of which are scheduled for delivery in 2000), the six Strategic Sealift
ships (the last of which is expected to be delivered in 2001), and the LPD-17
(expected to be delivered in 2002). The double-hulled crude oil carrier and LPD
17 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 second 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 third quarter and first nine months of 1998 increased $3.7
million, or 19%, and $7.1 million, or 12%, respectively, compared to the same
periods in 1997. However, the gross profit margin percentage decreased
approximately 0.6% and 1.4%, respectively, for the three and nine months ended
September 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 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, as stated above, the Company includes in its
consolidated financial statements 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 $2.3 million, or
26%, in the third quarter of 1998 and $3.0 million, or 12%, for the first nine
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 U.S. Government and commercial shipbuilding
opportunities and the rental and maintenance of advanced technology in
connection with the Company's focus on enhancing overall efficiency.
Other income increased $1.2 million, or 55%, for the first nine months of 1998
compared to the same period in the prior year while other income for the third
quarter of 1998 remained relatively consistent with the same period in 1997. The
increase for the first nine months of 1998 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.
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.
Year 2000
In accordance with the U.S. Securities and Exchange Commission's ("SEC") Staff
Legal Bulletin No. 5 and the SEC's subsequent interpretive release, the Company
has assessed both the cost of addressing and the cost or the consequence of
incomplete or untimely resolution of the Year 2000 issue. This process includes:
(a) the development of Year 2000 ("Y2K") awareness, (b) a comprehensive review
to identify systems that could be affected by the Y2K issue, (c) an assessment
of potential risk factors (including noncompliance by the Company's suppliers,
subcontractors and customers, including the U.S. Navy), (d) the allocation of
required resources, (e) a determination of the extent of remediation work
required, (f) the development of an implementation plan and timetable, and (g)
the development of contingency plans.
In response to the Y2K issue, Avondale established its own team as a
collaborative effort involving key Company personnel. In addition, the Company
commissioned an outside consultant to make inquiries and provide observations
relating to the Company's plan for identifying and resolving Y2K issues within
its information technology ("IT") systems. The consultant discussed its
observations with members of senior management. A major observation of the
consultant identified some segments of the Company's overall accounting system
as non-compliant. As a result, management considered several alternatives for
remediating non-compliant systems including: repairing/modifying only those
systems, replacing only those systems or developing a more comprehensive
solution. After a thorough review of all options, the Company decided to replace
its entire accounting systems software. The acquisition and implementation of
this replacement software is projected to cost approximately $6.0 to $7.0
million.
The Company has established a two-phased approach for its solution of the Y2K
issue which includes: assessment of each system's compliance with the Y2K issue,
and the testing and modification/replacement of non-compliant systems. The
Company's remediation plan focuses on both IT systems as well as non-IT systems
which are integral to the Company's operating and support functions. This plan
includes both replacement and upgrades of these systems or equipment.
The Company is incurring both internal staff costs as well as consulting and
other expenses relating to these issues. All costs related to remediating the
Y2K issue will be funded with cash on hand. Expenditures, including consulting
fees and other expenses, have totaled approximately $310,000 since the inception
of the Company's Y2K effort. Approximately $280,000 has been expended in 1998
and total aggregate expenditures for both IT and non-IT systems remediation and
testing are projected to be approximately $7.0 to $9.0 million, including the
business systems software discussed above much of which is not required for
remediation of the Company's Y2K issue. The Company expects to complete its
remediation of non-compliance systems during the first six months of 1999.
In addition, the Company is in the process of initiating communications with its
significant suppliers, large customers (including the U.S. Navy), subcontractors
and others to determine the extent to which the Company is vulnerable to these
third parties' failure to remediate their own Y2K issues. The Company can give
no assurance that the systems of these third parties on which the Company relies
will be remediated on time or that failure to remediate by them would not have a
material adverse effect on the Company.
If the Company is unable to timely resolve Y2K issues inherent in its IT and
non-IT systems or any of the Company's significant suppliers, customers,
subcontractors and others are unsuccessful in resolving Y2K issues inherent in
their own systems and existent in machinery, equipment, and other systems
supplied to the Company, the Company may experience some operating disruption.
However, although the Company cannot give assurance on the Y2K issue, based on
current information, the Company does not expect such disruptions to be severe
and therefore does not expect unsatisfactory resolution of Y2K issues by the
Company or its significant suppliers, customers, subcontractors and others to
have a material adverse impact on the Company's consolidated financial
statements.
The Company believes that it will successfully implement its Y2K remediation
plan on schedule and will be Y2K compliant before the end of 1999. However,
management believes that there is a risk that significant suppliers, customers,
subcontractors, and others on whom the Company's finances and operations largely
depend may experience their own Y2K problems that could affect the Company's
operations or financial position. Such risks include but are not limited to: the
inability of the Company to retain qualified personnel and outside consultants
to successfully remediate Y2K issues and implement the new business system as
demand for their services rises due to other companies' unanticipated or more
severe Y2K problems; the inability of the Company's customers, including the U.
S. Navy, to accurately and timely pay invoices; the inability of the Company to
access necessary capital from lenders or other sources when required; and the
inability of the Company's significant suppliers, customers, subcontractors and
others to provide the necessary materials, services, or systems required to run
the Company's business.
If the Company does experience severe Y2K financial and operating difficulties,
notwithstanding its efforts to avoid or mitigate Y2K issues in its own systems
or adverse effects of Y2K issues experienced by third parties on whom the
Company relies, the Company is in the process of developing a contingency plan.
The development of this plan is the current focus of senior management.
The Company will continue to review its plan for solution of Y2K issues for
effectiveness. As such, the Company can give no assurance that the estimated
costs herein for solving its own Y2K issues or the estimated impact of Y2K
issues on the Company's financial condition and operations will not be revised
as a result of the facts that become known to the Company.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $58.2 million at September 30,
1998 as compared to $81.8 million at December 31, 1997. The Company's operations
generated approximately $35.9 million of cash for the nine months ended
September 30, 1998. The Company's primary use of cash during the first nine
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 nine month period
consisted of capital expenditures of $20.1 million and payments on long-term
borrowings of $3.0 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 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.
Capital expenditures for the first nine months of 1998 increased $14.4 million
to $20.1 million compared to $5.7 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
$7.0 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 September 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 September 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 any remaining debt.
The Company's guarantee is unsecured. As of September 30, 1998, the Foundation
had incurred $35.6 million of costs to construct and equip the Center. In
connection with its non-binding commitment, the State appropriated and paid $3.8
million during 1997 and $6.5 million in 1998, representing the first two
installments to the Foundation.
Cautionary Statement for Purposes of ASafe 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 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(2).
10.10 Amended and Restated Revolving Credit Agreement
dated January 29, 1997, effective April 30, 1997,
among Avondale Industries, Inc., various financial
institutions signatory thereto ("the Banks") and
Bank of America National Trust and Savings
Association as the Agent for the Banks, (without
exhibits and schedules)(3).
(d) Fourth Amendment to Amended and Restated
Revolving Credit Agreement, dated September
12, 1998.
15 Letter re: unaudited interim financial information.
27 Financial Data Schedule
(b) Reports on Form 8-K:
Not applicable.
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(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 Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
(3) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997.
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: November 13, 1998 By: /s/ ALBERT L. BOSSIER, JR.
----------------- --------------------------
Albert L. Bossier, Jr.
Chairman, President &
Chief Executive Officer
Date: November 13, 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(2).
10.10 Amended and Restated Revolving Credit Agreement dated January
29, 1997, effective April 30, 1997, among Avondale Industries,
Inc., various financial institutions signatory thereto ("the
Banks") and Bank of America National Trust and Savings
Association as the Agent for the Banks, (without exhibits and
schedules)(3).
(d) Fourth Amendment to Amended and Restated Revolving Credit
Agreement, dated September 12, 1998.
15 Letter re: unaudited interim financial information.
27 Financial Data Schedule
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(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 Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1998.
(3) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997.