Document/Exhibit Description Pages Size
1: 10-K Annual Report 77± 394K
2: EX-10 Icp 5± 29K
3: EX-23 Auditors Consent Form 1 6K
4: EX-31 Certification 2± 11K
5: EX-31 Certification 2± 11K
6: EX-32 Certification 1 6K
7: EX-32 Certification 1 6K
8: EX-99 Press Release 4± 25K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 28, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from ___ to ___
Commission File Number 1-5109
TODD SHIPYARDS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 91-1506719
(State or other jurisdiction of (IRS Employer I.D.No.)
incorporation or organization)
1801-16th Avenue SW, Seattle, WA 98134-1089
(Address of principal executive offices) (zip code)
Registrant's telephone number (206) 623-1635
Securities registered pursuant to Section 12(g) of the Act: None
Securities registered pursuant to Section 12(b) of the Act: Common Stock
Name of each exchange on which registered: New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes [] No
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $85.8 million as of May 21, 2004.
There were 5,402,656 shares of the corporation's $.01 par value common stock
outstanding at May 21, 2004.
Documents Incorporated by Reference
Portions of the Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held September 17, 2004 are
incorporated by reference into Part III of the Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Page No.
Item 1. Business............................................. *
Item 2. Properties........................................... *
Item 3. Legal Proceedings.................................... *
Item 4. Submission of Matters to a Vote of Security Holders.. *
PART II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters.......................... *
Item 6. Selected Financial Data.............................. *
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. *
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... *
Item 8. Consolidated Financial Statements and
Supplementary Data................................... *
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. *
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................... *
Item 11. Executive Compensation............................... *
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholders Matters...... *
Item 13. Certain Relationships and Related Transactions....... *
Item 14. Controls and Procedures.............................. *
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................. *
Signatures.................................................... *
PART I
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements contained in this Report, which are not historical facts or
information, are "forward-looking statements." Words such as "believe,"
"expect," "intend," "will," "should," and other expressions that indicate
future events and trends identify such forward-looking statements. These
forward-looking statements involve risks and uncertainties which could cause
the outcome to be materially different than stated. Such risks and
uncertainties include both general economic risks and uncertainties and
matters which relate directly to the Company's operations and properties and
are discussed in Items 1, 3 and 7 below. The Company cautions that any
forward-looking statement reflects only the belief of the Company or its
management at the time the statement was made. Although the Company believes
such forward-looking statements are based upon reasonable assumptions, such
assumptions may ultimately prove to be inaccurate or incomplete. The Company
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement was made.
ITEM 1. BUSINESS
INTRODUCTION
Todd Shipyards Corporation (the "Company") was organized in 1916 and has
operated a shipyard in Seattle, Washington (the "Shipyard") since
incorporation. The Company is incorporated under the laws of the State of
Delaware and operates the Shipyard through a wholly owned subsidiary, Todd
Pacific Shipyards Corporation ("Todd Pacific"). Todd Pacific, historically,
has been engaged in the repair/overhaul, conversion and construction of
commercial and military ships. The Company's general offices are located at
1801 16th Avenue S.W., Seattle, Washington 98134-1089, and its telephone
number is (206) 623-1635. Information about the Company is available to the
public on the internet at www.toddpacific.com.
Throughout much of the Company's history, a substantial portion of its
revenues and profits were attributable to long-term United States Government
("Government") contracts. However, in the late 1980's a significant decline
in the annual shipbuilding budgets of the Department of the Navy (the "Navy")
greatly reduced the Company's bidding opportunities for long-term Government
contracts. To offset the downturn in long-term Government contracting
opportunities, the Company entered into several new construction projects
beginning in the mid 1990's. These new construction opportunities represented
the Company's first new construction projects in 10 years.
As the Company neared completion on these new construction projects in fiscal
year 2000, the Company shifted its main business focus to repair, maintenance
and overhaul opportunities. This strategy resulted in the award of two major
five year cost-type contracts for phased maintenance work. At the time, this
work included three Navy aircraft carriers and six Navy surface combatant
class vessels stationed in the Puget Sound area.
The maintenance work performed on the Navy aircraft carriers, which began
during the first quarter of fiscal year 2000 is referred to as the Planned
Incremental Availability ("PIA") contract. Fiscal year 2004 was the last year
remaining on this contract. Subsequent to the end of fiscal year 2004, the
Department of the Navy awarded the Company a five-year, cost-type contract for
similar work on the NIMITZ CLASS aircraft carriers (CVN) home ported in Puget
Sound.
The maintenance work performed on the Navy surface combatant vessels is
referred to as the Combatant Maintenance Team ("CMT") contract. Work on the
CMT contract began in the second quarter of fiscal year 2001.
In addition to these two long-term multi-ship contracts, in June 2001, the
Company was awarded by the Navy, a six-year, cost-type contract, under which
the Navy has options to have the Company perform maintenance work on the
Auxiliary Oiler Explosive ("AOE") class vessels. This contract represents the
fourth consecutive, multi-year contract that the Company has been awarded by
the Navy on the AOE class vessels. The three previous AOE contracts, which
were each five years in duration, were all awarded on a competitive basis.
This cost type contract provides for phased maintenance repairs to four Navy
AOE class supply ships stationed in the Puget Sound area. The original
contract included options for thirteen repair availabilities to be performed
between 2001 and 2007 and was expected to have a notional value of
approximately $180 million if all of the options were exercised. Since the
award, five repair availabilities have been accomplished.
During the first quarter of fiscal year 2003, the Navy announced its intention
to transfer the USS Rainier (AOE 7) and the USS Bridge (AOE 10) to the
Military Sealift Command ("MSC") which results in five availabilities that
will not be exercised under this contract. AOE 7 was transferred to MSC in
August 2003. AOE 10 is currently scheduled to be transferred in the summer of
2004. The Company anticipates that MSC will contract for future work on these
two vessels on a competitive basis. The potential impact of these transfers
on the Company's future revenues will depend on such factors as the
expenditures for maintenance by MSC, the Company's capacity to bid on future
AOE 7 and AOE 10 work, and the Company's bidding success if such bids are
submitted.
During the fourth quarter of fiscal year 2004, the Company announced that it
was informed by the Navy that the USS Sacramento (AOE 1) is scheduled to be
decommissioned on or about October 1, 2004. Of the two remaining
availabilities on AOE 1, one was exercised on a reduced scale as a five-week,
pier-side availability. The availability, originally scheduled for 12 weeks
in duration, was to include a dry docking of the ship. The other availability
of AOE 1 will not occur due to its decommissioning. The Company does not know
at this point if it will be involved in any of the work related to the
decommissioning of AOE 1.
The AOE contract contains options for two remaining repair availabilities on
the USS Camden (AOE 2) before the contract expires in 2007. There is no
assurance that these two remaining options will be exercised by the Navy in
whole or in part.
During the fourth quarter of fiscal year 2004, the Company was awarded by the
United States Coast Guard, a cost plus incentive fee contract under which the
Coast Guard has options to have the Company provide maintenance of two Polar
class icebreakers. This contract extends through September 2008 and marks the
first time the Coast Guard has used a long term phased-maintenance approach on
these icebreakers. The Company has performed similar work for the Coast Guard
over the past several years under individual, competitively bid, firm fixed
price contracts.
Also during the fourth quarter of fiscal year 2004, the Company entered into a
contract with Electric Boat Corporation of Groton, Connecticut to support work
on the Trident submarines. The work is being performed under a cost plus
incentive fee contract with Electric Boat for fabrication work, and a firm
fixed price contract for the associated project management and quality
assurance work.
During the fourth quarter of fiscal year 2004, the Company confirmed its
expected participation, along with Southwest Marine, Inc., San Diego Division,
on the team lead by Bath Iron Works, a subsidiary of General Dynamics
(NYSE:GD), to perform Post Shakedown Availability work ("PSA") on DDG-51 Aegis
Destroyers ("Destroyers"). The U.S. Navy contract for this work, which was
awarded to Bath Iron Works, includes options for PSA work to be accomplished
in Navy homeports of Everett, Washington and Pearl Harbor, HI. Any work that
the Company performs for Bath Iron Works will be accomplished under a cost
plus award fee subcontract still to be finalized between Bath Iron Works and
the Company. Work will be performed between 2005 and 2007. The PSA work
primarily involves the installation of system and equipment upgrades and/or
ship alterations as required.
In addition to the above mentioned contracts and agreements, the Company
engages in repair, overhaul and conversion work on other Navy vessels, other
U.S. Coast Guard vessels, ferries, container vessels, tankers, fishing
vessels, cruise ships, barges, and tug supply vessels.
Available Information
The Company will make available its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act free
of charge through the Company's internet website at www.toddpacific.com as
soon as reasonably practicable after the Company electronically files such
material with, or furnishes it to, the Securities and Exchange Commission.
OPERATIONS OVERVIEW
Repair and Overhaul Operations
The Company's repair and overhaul work ranges from relatively minor repairs to
major overhauls and often involves the dry-docking of the vessel under repair.
Since the late 1980's, repair and overhaul opportunities available to
domestic, private-sector shipyards have been impacted by the downsizing and
relocation of the active Navy fleet. The impact has had both positive and
negative effects on domestic shipyards depending on their proximity to the
affected Navy fleet operations. Also affecting private shipyards is the
impact of stationing vessels at Navy home ports, the availability and
scheduling of maintenance and overhauls, the location of marine accidents and
conditions within the maritime industry as a whole.
Commercial repair and overhaul contracts are obtained by competitive bidding,
awarded by negotiation or assigned by customers who have a preference for a
specific shipyard. On jobs that are advertised for competitive bids, owners
usually furnish specifications and plans which become the basis for an agreed
upon contract. Repair and overhaul jobs are usually contracted on a fixed-
price or time and material basis.
The majority of the Company's Government ship repair and overhaul contracts
are awarded on an option basis under one of the Company's three cost-type
contracts with the Navy and the Coast Guard. These contracts provide for
reimbursement of costs, to the extent allocable and allowable under applicable
government regulations, and payment of an incentive or award fee based on the
Company's performance with respect to certain pre-established criteria. The
Company also performs repair and overhaul work for the Navy and the Coast
Guard on a fixed price basis through a formal bidding process.
The Company's commercial and Government ship repair and overhaul contracts
contain customer payment terms that are determined by mutual agreement.
Typically, the Company is periodically reimbursed through progress payments
based on the achievement of certain agreed to benchmarks less a specified
level of retention. Some vessel owners contracting for repair, maintenance,
or conversion work also require some form and amount of performance and
payment bonding, particularly state agencies. Because of these requirements
the Company is bonded for certain projects in the cumulative amount of $2.1
million at March 28, 2004.
Construction Operations
During the third quarter of fiscal year 2003, the Company began work on a $5.2
million new construction project to build two large steel structures called
"cutting edges." The cutting edges are barge like structures used as floating
work platforms for the construction of the caissons which will eventually
support the new Tacoma Narrows Bridge. The first cutting edge was delivered
in March 2003 and the second was delivered in April 2003.
Prior to the Tacoma Narrows project, the Company's last new construction
project was completed during the first quarter of fiscal year 2000, with the
delivery of the Margarita II, a floating electrical power plant.
While the Company may selectively pursue new construction opportunities in the
future, its primary focus will remain on repair, maintenance and overhaul
business opportunities.
Distribution of Work
The approximate distribution of the Company's Shipyard revenues for each of
the last three fiscal years is summarized as follows:
2004 2003 2002
Federal Government 84% 82% 79%
Commercial 16% 18% 21%
Total 100% 100% 100%
The distribution of the Company's revenues in fiscal year 2004 remains
relatively unchanged from fiscal year 2003 and continues to be strongly
influenced by the amount of repair, maintenance and overhaul work awarded
under each of its three Navy cost-type contracts.
Future Operations
The Company plans to continue to actively pursue Government and commercial
repair, maintenance and overhaul opportunities. International opportunities
are limited because shipyards in foreign countries are often subsidized by
their governments and in some cases enjoy significantly lower labor costs.
These subsidies allow foreign shipyards to enter into production contracts at
prices below their actual production costs. Competition for domestic
construction and repair opportunities will continue to be intense as certain
of the Company's larger competitors have more modern facilities, lower labor
cost structures, or access to greater financial resources. The Company
intends to capitalize on the advantages of its geographic location, the skills
of its experienced workforce and production efficiencies developed over the
past several years as it competes for repair, maintenance and overhaul
opportunities.
Employees
The number of persons employed by the Company varies considerably depending
primarily on the level of Shipyard activity. Employment averaged
approximately 1,100 during fiscal year 2004 and totaled 867 employees on March
28, 2004.
During fiscal year 2004 an average of approximately 913 of the Company's
Shipyard employees were covered by a union contract that became effective
during the third quarter of fiscal year 2003. At March 28, 2004 approximately
685 Company employees were covered under this contract.
During the third quarter of fiscal year 2003, the Puget Sound Metal Trades
Council (the bargaining umbrella for all unions at Todd Pacific Shipyards) and
Todd Pacific Shipyards reached an agreement on a new collective bargaining
agreement. The Todd Pacific Shipyards eligible workforce ratified the
agreement on October 22, 2002. The parties had been operating under an
extension of the old agreement, which expired on July 31, 2002. The three-
year agreement, which was effective retroactively to August 1, 2002, includes
an annual 3.5% wage and fringe benefit increase. Management considers its
relations with the various unions to be stable.
Availability of Materials
The principal materials used by the Company in its Shipyard are steel and
aluminum plates and shapes, pipe and fittings, paint and electrical cable and
associated fittings. Management believes that each of these items can
presently be obtained in the domestic market from a number of different
suppliers. In addition, the Company maintains a small on-site inventory of
various materials that are available for emergency ship repairs.
Competition
Competition in the domestic ship repair and overhaul industry is intense. The
reduced size of the Government's active duty fleet has resulted in a
significant decline in the total amount of Government business available to
private sector shipyards, creating excess shipyard capacity and acute price
competition. The Company competes for commercial and Government work with a
number of other shipyards, some of which have more advantageous cost
structures. The Company's competitors for repair, maintenance and overhaul
work include non-union shipyards, shipyards with excess capacity and foreign
government subsidized facilities. The Company's competitors for new
construction work, in addition to West Coast competitors, include Gulf Coast
and East Coast shipyards with lower wage structures, substantial financial
resources or significant investments in productivity enhancing facilities.
Environmental and Bodily Injury Matters
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. Fines and penalties may be imposed for non-
compliance with these laws. Such laws and regulations may expose the Company
to liability for its acts, which are or were in compliance with all applicable
laws at the time such acts were performed.
Recurring costs associated with the Company's environmental compliance program
are expensed as incurred. Capital expenditures in connection with
environmental compliance include a stormwater system of approximately $4.0
million. See Item 7. Management's Discussion and Analysis and Note 1 to the
Consolidated Financial Statements for further discussion of these costs.
The Company has an accrued liability of $32.0 million as of March 28, 2004 for
environmental and bodily injury matters. As assessments of environmental
matters and remediation activities progress, these liabilities are reviewed
periodically and adjusted to reflect additional technical, engineering and
legal information that becomes available. The Company's estimate of its
environmental liabilities is affected by several uncertainties such as, but
not limited to, the method and extent of remediation of contaminated sites,
the percentage of material attributable to the Company at the sites relative
to that attributable to other parties, and the financial capabilities of the
other Potentially Responsible Parties ("PRP") at most sites. The Company's
estimate of its bodily injury liabilities is also affected as additional
information becomes known regarding alleged damages from past exposure to
asbestos at Company facilities. The Company is covered under its various
insurance policies for some, but not all, potential environmental and bodily
injury liabilities.
As of March 28, 2004, the Company has recorded an insurance receivable of
$29.2 million, which mitigates a major portion of its accrued environmental
and bodily injury liability. See Item 3. Legal Proceedings, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 11 of the Notes to Consolidated Financial Statements for
further information regarding the Company's environmental and bodily injury
matters.
Safety Matters
The Company is also subject to the federal Occupational Safety and Health Act
("OSHA") and similar state statutes. The Company has an extensive health and
safety program and employs a staff of safety inspectors whose primary
functions are to develop Company policies that meet or exceed the safety
standards set by OSHA, train production supervisors and make periodic
inspections of safety procedures to insure compliance with Company policies on
safety and industrial hygiene. All Shipyard employees are required to attend
regularly scheduled safety training meetings.
Backlog
At March 28, 2004 the Company's backlog consists of approximately $19 million
of repair, maintenance, and conversion work. This compares with backlogs of
approximately $22 million and $46 million at March 30, 2003 and March 31,
2002, respectively. The Company's current backlog is primarily attributable to
firm repair, maintenance and conversion work scheduled for completion during
fiscal year 2005.
Since work under the Company's Navy and Coast Guard phased maintenance
contracts is at the option of the Navy and the U.S. Coast Guard, the Company
cannot provide assurance as to the timing or level of work that may be
performed under these contracts. Therefore, the decrease in the backlog is
primarily due to the timing of the availabilities for the phased maintenance
contracts. Projected revenues from these contracts are not included in the
Company's backlog until contract options are exercised by these customers.
INVESTMENTS AND ACQUISITIONS
The Company routinely evaluates suitable investment opportunities that it
believes will appropriately utilize the Company's resources. However, the
Company has no present plans to make any direct investments in other
businesses, either related or unrelated to ship repair and overhaul
activities.
ITEM 2. PROPERTIES
The Company is required to maintain Navy certification on its drydocks and
cranes in order to be eligible to bid on and perform work under certain Navy
and United States Coast Guard ("Coast Guard") contracts. Throughout fiscal
year 2004, the Company maintained all required certifications.
The design capacities of the Company's two remaining drydocks, both of which
are located at the Shipyard, are as follows:
Year Type Owned Leased Max.Design Date of Lease
Name Built Capacity(in tons) Expiration
Emerald Sea 1970 Steel X 40,000 -
YFD-70 1945 Steel X 17,500 4/15/06
YFD-54, a 5700 ton capacity wooden drydock built in 1943 that the Company had
leased from the Navy since November 2, 1994, sank in heavy weather on October
11, 2003. After considerable effort, Todd raised YFD-54 on October 28, 2003
but the drydock required continuous pumping to keep afloat and remains out of
service. Based on the estimated costs of repairing the damage sustained in
the sinking, the drydock was declared a total constructive loss as of November
20, 2003, and the lease was thereby terminated as of that date. The Company
maintained insurance coverage on YFD-54 and the costs associated with raising
the drydock, less the applicable deductible, were covered under the insurance
policies. Insurance covering the total constructive loss of the drydock is
payable to the Navy.
The Company evaluates its plans for future operations of its remaining leased
dry dock when the lease expiration date falls within the next operating cycle.
The lease terms on drydock YFD-70 contain a nominal annual lease payment and a
minimum amount of annual maintenance that the Company must perform. The lease
also includes minimum levels of maintenance that the Company must perform
during the life of the lease. The Company has included the nominal annual
lease payment and the average annual maintenance cost that must be performed
over the life of the lease on drydock YFD-70 in Note 9 of the Notes to the
Consolidated Financial Statements (Item 8).
The Company's current Navy drydock certifications are for amounts that are
less than the drydocks' maximum design capacity, however they are sufficient
to allow the Company to perform work on all non-nuclear Navy vessels
homeported in Puget Sound, as well as on all Coast Guard and Washington State
Ferry vessels.
The Company believes that its owned and leased properties at the Shipyard are
in reasonable operating condition given their age and usage, although the
Company has from time to time been required to incur substantial expenditures
to ensure the continuing serviceability of certain owned and leased machinery
and equipment.
Towards the end of fiscal year 2001, the Company determined that such
serviceability repairs would be required on the Emerald Sea to maintain Navy
certification on a long-term basis. Certain time sensitive repairs began
early in fiscal year 2002, while the Company evaluated several alternative
repair scenarios and management's plans for future operations.
Once the Company completed its evaluation in fiscal year 2002, a
comprehensive, multi-year refurbishment plan was approved by management that
would allow the Company to maintain Navy certification into the future. This
multi-year plan included scheduled refurbishment periods so repairs did not
interfere with the on-going shipyard operations. With the de-commissioning of
the USS Sacramento, transfer of the USS Bridge and USS Rainier to the Military
Sealift Command and the uncertainties concerning the Navy's intent to do
future repairs on the USS Camden, the Company is re-evaluating its Emerald Sea
refurbishment plan. The Company will continue to assess the plan in light of
its future drydock requirements and will make appropriate changes as needed to
support Shipyard operations. Also, the Company performed an impairment
analysis of the Emerald Sea and determined that this dry dock is not impaired.
Early in fiscal year 2004, the Company announced a special capital budget of
approximately $13 million for planned improvements to its Seattle shipyard
facility during its fiscal years 2004 and 2005. These improvements include
the replacement of a major pier, a stormwater collection and discharge system
and significant upgrades to its electrical system and are in addition to the
Company's routine annual capital expenditures. During fiscal year 2004, the
Company spent approximately $10.0 million of the special facilities capital
budget , and $4.6 million on other shipyard capital expenditures.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the treatment, storage and disposal of
toxic and hazardous wastes. Fines and penalties may be imposed for non-
compliance with these laws. Such laws and regulations may expose the Company
to liability for acts of the Company, which are or were in compliance with all
applicable laws at the time such acts were performed. The Company faces
potential liabilities in connection with the alleged presence of hazardous
waste materials at its Seattle shipyard and at several sites used by the
Company for disposal of alleged hazardous waste.
The Company is identified as a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA," commonly known as the
"Superfund") in connection with matters pending at two Superfund sites.
Additionally, the Company has received information requests in two Superfund
cases where the Company has asserted that its liability was discharged when it
emerged from bankruptcy in 1990.
Generally these environmental claims relate to sites used by the Company for
disposal of alleged hazardous waste. The Company has also been named as a
defendant in a number of civil actions alleging damages from past exposure to
toxic substances, generally asbestos, at closed former Company facilities.
At March 28, 2004, the Company maintained aggregate reserves of $32.0 million
for pending claims and assessments relating to environmental matters,
including $23.1 million associated with the Harbor Island Superfund Site (the
"Harbor Island Site") and $8.1 million for asbestos related claims.
Funding for costs and payments of claims represented by such reserves is
expected to be provided to a significant extent by receivables due from
insurance companies under policies and insurance in place agreements described
below. At March 28, 2004, such receivables aggregated $29.2 million.
Included in the reserves are sediment remediation costs for Harbor Island of
$13.5 million that are expected to occur in fiscal year 2005. These costs are
reflected in the Company's balance sheet under current liabilities. Likewise,
the insurance receivable of $13.5 million relating to these reserves is
reflected in the Company's balance sheet under current assets.
For more information, see Note 11 of the Notes to the Consolidated Financial
Statements (Item 8.) below and to the discussion under the heading
"Environmental Matters and Contingencies" in Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item 7.) below.
Harbor Island Site
The Company and several other parties have been named as potentially
responsible parties ("PRPs") by the Environmental Protection Agency (the
"EPA") pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA" also known as "Superfund") in connection with the
documented release or threatened release of hazardous substances, pollutants
and contaminants at the Harbor Island Superfund Site (the "Harbor Island
Site"), upon which the Shipyard is located.
Harbor Island Site Insurance
In the fourth quarter of fiscal year 2001, the Company entered into a 30-year
agreement with an insurance company that provides the Company with broad-based
insurance coverage for the remediation of all of the Company's operable units
at the Harbor Island Superfund Site.
The agreement provides coverage for the known liabilities in an amount
exceeding the Company's current booked reserves of $23.1 million.
Additionally, the Company entered into a 15-year agreement for coverage of
any new environmental conditions discovered at the Seattle shipyard property
that would require environmental remediation.
The Company funded this insurance premium from cash reserves in two
installments. The first payment was made in the Company's fourth quarter of
fiscal year 2001 and the second payment was made in the first quarter of
fiscal year 2002. The Company recorded a non-current asset in the form of an
insurance receivable in accordance with its environmental accounting policies
at the time it entered into this agreement. This transaction did not have a
material effect on the Company's results of operations, nor did the
transaction have a material effect on stockholders' equity.
Harbor Island Site History
To date, the EPA has separated the Harbor Island Site into three operable
units that affect the Company: the Soil and Groundwater Unit (the "Soil
Unit"), the Shipyard Sediments Operable Unit (the "SSOU") and the Sediments
Operable Unit (the "SOU"). The Company, along with a number of other Harbor
Island PRPs, received a Special Notice Letter from the EPA on May 4, 1994
pursuant to section 122 (e) of CERCLA. The Company entered into a Consent
Decree for the Soil Unit in September 1994 under which the Company has agreed
to remediate the designated contamination on its property. Removal of floating
petroleum product from the water table began in October 1998 and is
anticipated to continue through fiscal year 2009. The Company and the EPA are
currently negotiating the extent and methodology of the soil remediation.
During the third quarter of fiscal year 1997, the EPA issued its Record of
Decision ("ROD") for the SSOU. The ROD identifies four alternative solutions
for the SSOU remediation and identifies the EPA's selected remedy. During the
third quarter of fiscal year 2000, the EPA expanded the boundaries of the SSOU
issuing their Phase 1B Data Report and resulting Explanation of Significant
Differences outlining the changes to the ROD. During the fourth quarter of
fiscal year 2000, the Company and the EPA entered into an Administrative Order
on Consent for the development of the remedial design for the SSOU.
During the fourth quarter of fiscal year 2003, the company and the EPA entered
into a Consent Decree for the cleanup of the SSOU, which, along with the
associated Remedial Design Statement of Work for Remedial Action ("SOW"), was
subsequently approved by the Department of Justice. The Consent Decree
provides for the submittal of the Remedial Action Work Plan to the EPA
subsequent to the approval by the EPA of the final design. The Remedial
Action Work Plan will provide for construction and implementation of the
remedy set forth in the ROD, the two Explanation of Significant Differences
(issued in fiscal years 2000 and 2003), the SOW, and the design plans and
specifications developed in accordance with the Remedial Action Work Plan and
approved by the EPA. During the fourth quarter of fiscal year 2004 the
Company submitted its Final Design Report to the EPA for the SSOU. The Final
Design Report provides for the following actions to take place at the SSOU:
Piers 2 and 4 South (located on the Duwamish Waterway) will be
demolished and removed from the site to achieve more complete cleanup in
those areas.
Dredging of all contaminated sediments and shipyard waste in the open
areas of the SSOU (surrounding the shipyard) and in the areas beneath
Piers 2 and 4 South. The total estimated volume of sediments to be
removed is 195,200 cubic yards.
Disposal of all recovered sediment and shipyard waste at an appropriate
upland disposal facility.
Backfilling of portions of the areas dredged to create inter-tidal
habitat where feasible.
Capping of areas beneath the piers that are not scheduled for demolition
to an average thickness of one foot.
Pursuant to the current schedule, remediation of the SSOU is expected to begin
in the second quarter of fiscal 2005. Current environmental regulations limit
the period of time during the year that dredging may occur. Given these
limits, dredging in the SSOU will require several years to complete. The
current estimated cost of the SSOU cleanup is included in the environmental
reserve.
During January 1998, the Company was notified by the EPA that testing would be
required in the West Waterway of the Duwamish River outside the borders of the
SSOU as part of the SOU. During May 1998, the Company entered into an
Administrative Order on Consent to perform certain limited testing as part of
the SOU investigation. After an evaluation of the results, the EPA issued a
draft "no action" ROD on the SOU for public comment which if issued in final
form would end the investigation of the SOU, requiring no remedial action.
The public comment period closed during the Company's fourth quarter of fiscal
year 2000. In September 2003, the EPA issued the final "no action" ROD on the
SOU. Given the EPA's issuance of the draft "no action" ROD in fiscal year
2000, the Company had not established a reserve for any remediation on the
SOU.
Under the Federal Superfund law, potentially responsible parties may have
liability for damages to natural resources in addition to liability for
remediation. During the second quarter of fiscal year 2003, the Company began
discussions with the natural resource trustees ("Trustees") for the Harbor
Island Superfund Site ("Site") and continued these discussions during the
remainder of fiscal year 2003. The Company anticipates that the Trustees will
file a claim against the Company at some future date alleging damages to the
natural resources at the Site caused by the release of hazardous substances.
The best estimate of a potential natural resource damage claim has been
included in the environmental reserve. The payment of any eventual claim is
covered by the aforementioned insurance policy, except for the policy
deductible, provided that aggregate policy limits have not been exceeded. The
amount of the policy deductible payment is reflected in the Company's
environmental reserve at March 28, 2004.
Other Environmental Remediation Matters
In January 2001, the EPA issued Special Notice letters naming the PRPs on the
Hylebos Waterway Operable Unit of the Commencement Bay Superfund Site in
Tacoma, Washington. The Company was not included on the EPA's list. Todd has
been notified by other PRPs of their intent to bring a contribution action
against the Company. Subsidiaries of the Company had a presence on the site
from 1917-1925 and again from 1939-1946, for the most part, coinciding with
World Wars I and II when the Company built war ships at the direction of the
United States government. Several parties in 2000 hired an allocator to
assign percentages of responsibility to all parties, historical and present,
notwithstanding potential defenses or contractual claims. While the Company
did not participate in the allocation process, the allocator's findings were
taken into account in including an estimate of potential liability in the
Company's reserve discussed below.
The Company has further been notified by the Commencement Bay Natural Resource
Trustees ("Trustees") that the parties occupying the aforementioned property
subsequent to 1946 have been allocated liability for natural resource damages.
While the Trustees have not submitted a claim against the Company for natural
resource damages, they have invited the Company to participate in a mediation
with the PRPs to resolve intra-facility allocation issues. The Company is
investigating the potential of any liability it may currently have for its
presence on the site during World Wars I and II when it built war ships at the
direction of the United States government.
The Company entered into a Consent Decree with the EPA for the clean up of the
Casmalia Resources Hazardous Waste Management Facility in Santa Barbara
County, California under the Resource Conservation and Recovery Act. The
Company has included an estimate of the potential liability for this site in
environmental reserves as discussed below. Immaterial payments began in
fiscal year 1997 and will extend for up to ten years.
Asbestos Related Claims and Insurance
The Company has been named as a defendant in civil actions by parties alleging
damages from past exposure to toxic substances, generally asbestos, at closed
former Company facilities.
The cases generally include as defendants, in addition to the Company, other
ship builders and repairers, ship owners, asbestos manufacturers, distributors
and installers, and equipment manufacturers and arise from injuries or
illnesses allegedly caused by exposure to asbestos or other toxic substances.
The Company assesses claims as they are filed and as the cases develop,
dividing them into two different categories based on severity of illness.
Based on current fact patterns, certain diseases including mesothelioma, lung
cancer and fully developed asbestosis are categorized by the Company as
"malignant" claims. All other claims of a less medically serious nature are
categorized as "non-malignant". The Company is currently defending
approximately 25 "malignant" claims and approximately 563 "non-malignant"
claims.
The relief sought in all cases varies greatly by jurisdiction and claimant.
Included in the approximate 409 cases open as of March 28, 2004 are
approximately 588 claimants. The exact number of claimants is not
determinable as approximately 150 of the open cases include multiple claimant
filings against 30-100 defendants. The filings do not indicate which
claimants allege liability against the Company. The previously stated 588
claimants is the Company's best estimate taking known facts into
consideration.
Approximately 373 claimants do not assert any specific amount of relief
sought.
Approximately 160 claims contain standard boilerplate language
asserting on behalf of each claimant a claim for compensatory damages
of $2 million and punitive damages of $20 million against approximately
100 defendants. Approximately 20 claims set forth the same boilerplate
language asserting $10-$20 million in compensatory and $10-$20 million
in punitive damages on behalf of each claimant against approximately
30-100 defendants. Approximately 20 cases assert $1-$15 million in
compensatory and $5-$10 million in punitive damages on behalf of each
claimant against approximately 30-100 defendants.
Approximately 10 claimants seek compensatory damages of less than
$100,000 per claim and approximately 5 claimants seek compensatory
damages between $1 million and $15 million. The claims involved in the
foregoing cases do not specify against which defendants which claims
are made or alleged dates of exposure.
Based upon settled or concluded claims to date, the Company has not
identified any correlation between the amount of the relief sought in
the complaint and the final value of the claim. The Company and its
insurers are vigorously defending these actions.
As a result of claims resolution during fiscal year 2004, bodily injury
reserves declined from $9.4 million at March 30, 2003 to $8.1 million at March
28, 2004. Likewise, bodily injury insurance receivables declined from $7.1
million to $5.8 million. These bodily injury liabilities and receivables are
classified within the Company's Consolidated Balance Sheets as environmental
and other reserves, and insurance receivables, respectively.
The Company has entered into agreements with several of its insurers to
provide coverage for a significant portion of settlements and awards related
to these bodily injury claims. These agreements have aggregate limits on
amounts to be paid overall and formulas for amounts of payment on individual
claims. The two most significant agreements provide coverage applicable to
claims of exposure to asbestos occurring between 1949 and 1976 and occurring
between 1976 through 1987. Insurance coverage for exposures to asbestos was
no longer available from the insurance industry after 1987. Due to changes in
federal regulations in the 1970's that resulted in the swift decline in
commercial and military application of asbestos and increased regulation over
the handling and removal of asbestos, there exists minimal risk of claims
arising from exposure after 1987. Contractual formulas are utilized to
determine the amount of coverage from each agreement on each claim settled or
litigated. Once the initial date of alleged exposure to asbestos is
determined, all contractual years subsequent to that date participate in the
settlement. Since all known claims involve alleged exposure prior to 1976,
the 1976 through 1987 agreement will participate in the settlement or judgment
of all outstanding claims that are settled or litigated. As a result, and as
the years remaining calculation set forth below indicates, the 1976 through
1987 agreement will exhaust prior to the 1949 through 1976 agreement. Based
on historical claims settlement data only, the Company projects that at March
28, 2004, the 1949 through 1976 agreement will provide coverage for an
additional 21.6 years and the 1976 through 1987 agreement will provide
coverage for an additional 5.4 years. At March 30, 2003, the Company
projected that these agreements would provide coverage for an additional 20.4
years and 5.2 years, respectively. The Company resolved 15 malignant claims in
2004 compared with 13 in 2003 and 20 in 2002. If historical settlement
patterns or the rate of filing for new cases change in future periods, these
estimated coverage periods could be shorter or longer than anticipated.
Moreover, if one or both of these coverages are exhausted at some future date,
the Company's costs related to subsequent claims and for legal expenses
previously covered by these insurance agreements may increase. In addition to
providing coverage for assessments or settlements of claims, the agreements
also provide for costs of defending and processing such claims.
The following chart indicates the number of claims filed and resolved in the
past three fiscal years, including the number of claims yet to be resolved at
the end of each fiscal year. (Resolution includes settlements, adjudications
and dismissals). The claims are further categorized as either malignant or
non-malignant.
Bodily Injury Claims
Non-
Malignant Malignant Total
Outstanding, April 1, 2001 35 551 586
Claims filed 20 52 72
Claims resolved (20) (68) (88)
Outstanding, March 31, 2002 35 535 570
Claims filed 14 72 86
Claims resolved (13) (73) (86)
Outstanding, March 30, 2003 36 534 570
Claims filed 4 70 74
Claims resolved (15) (41) (56)
Outstanding, March 28, 2004 25 563 588
Due to uncertainties of the number of cases, the extent of alleged damages,
the population of claimants and size of any awards and/or settlements, there
can be no assurance that the current reserves will be adequate to cover the
costs of resolving the existing cases. Additionally, the Company cannot
predict the eventual number of cases to be filed against it or their eventual
resolution and does not include in its reserve amounts for cases that may be
filed in the future. However, it is probable that if future cases are filed
against the Company it will result in additional costs arising either from its
share of costs under current insurance in place arrangements or due to the
exhaustion of such coverage. The Company reviews the adequacy of existing
reserves periodically based upon developments affecting these claims,
including new filings and resolutions, and makes adjustments to the reserve
and related insurance receivable as appropriate.
As the Company is not able to estimate its potential ultimate exposure for
filed and unfiled claims against the Company, it cannot predict whether the
ultimate resolution of the bodily injury cases will have a material effect on
the Company's results of operations or stockholders' equity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through solicitation
of proxies or otherwise during the fourth quarter of the fiscal year ended
March 28, 2004.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's stock is listed on the New York Stock Exchange (the "NYSE").
The following table sets forth, by quarter, the high and low composite sales
prices of the stock as reported by the NYSE.
Quarter Ended High Low
June 30, 2002 17.12 11.10
September 29, 2002 15.20 11.45
December 29, 2002 15.85 11.65
March 30, 2003 14.43 12.70
June 29, 2003 16.03 12.56
September 28, 2003 17.24 14.90
December 29, 2003 18.26 15.82
March 28, 2004 17.80 17.70
On May 21, 2004 the high and low prices of the Company's common stock on the
NYSE were $17.40 and $17.10, respectively.
At May 21, 2004 there were 1,658 holders of record of 5,402,656 outstanding
shares of common stock. During fiscal year 2004, the Company declared a ten
cents ($0.10) per share cash dividend to be paid each quarter. The first
dividend payment commenced on June 23, 2003 to shareholders of record as of
June 2, 2003. Subsequent dividend payments were made each quarter, on
September 23, 2003, December 23, 2003 and March 23, 2004.
On March 19, 2004, the Company declared a dividend of ten cents ($0.10) per
shared to be paid June 23, 2004 to all shareholders of record as of June 8,
2004. On May 21, 2004, the Company declared a dividend of ten cents ($0.10)
per share to be paid September 23, 2004 to all shareholders of record as of
September 8, 2004.
It is the intent of the Company to consider and act upon the payment of future
dividends on a regular quarterly basis. Future dividend declarations will
depend, among other factors, on the Company's earnings and prospects, its cash
position and investment needs.
ITEM 5C. TREASURY STOCK
The following table summarizes the purchases of the Company's common stock to
be held in treasury for the past two fiscal years.
Maximum
Total Shares Number of
Purchased as Shares that
Period Total Number of Average Price part of publicly may yet be
Shares Purchased Paid per Share announced plan purchased
Authorized 500,000
Oct 2002 10,000 $12.04 10,000 490,000
Jan 2003 400 12.84 400 489,600
Feb 2003 7,200 12.84 7,200 482,400
Mar 2003 1,900 12.98 1,900 480,500
Apr 2003 22,400 12.94 22,400 458,100
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands of dollars, except for share data)
The following table summarizes certain selected consolidated financial data of
the Company, which should be read in conjunction with the accompanying
consolidated financial statements of the Company included in Item 8.
March 28, March 30, March 31, April 1, April 2,
2004 2003 2002 2001 2000
Operations:
Revenue $147,794 $151,811 $121,945 $116,545(6) $123,851
Operating
income 2,166(1) 5,098(4) 6,902 11,950(7) 5,610(8)
Net income 4,032(2) 4,110(4) 7,018 16,727 8,132
Net income
per share of
common stock
Basic EPS 0.76 0.78 1.05 1.74 0.83
Diluted EPS 0.72 0.74 1.03 1.73 0.82
Financial position:
Working capital 36,362(3) 42,525 37,129(5) 59,293 64,880
Fixed assets 28,244(3) 16,634 16,595 17,358 17,356
Total assets 147,902 141,580 133,680(5) 164,900 139,209
Stockholders'
equity $ 71,371 $ 69,534 $ 65,997(5) $ 93,081 $ 76,185
(1) Operating income was impacted unfavorably by reduced commercial and
other non-Navy volumes, higher direct costs on a fixed priced project,
a non-cash charge arising from the provision for anticipated workers
compensation claims costs due to the bankruptcy of one of the Company's
previous insurance carriers, and higher overhead expenses.
(2) Net income was favorably impacted by a decrease in federal income tax
expense due to the decrease in income before income taxes and the
decrease in income tax expense of $1.1 million resulting from the
resolution in the fourth quarter of certain income tax contingencies
that were established in previous years.
(3) Early in fiscal year 2004, the Company announced a special capital
budget of approximately $13 million for improvements to its Seattle
shipyard facility during its fiscal years 2004 and 2005. These
improvements include the replacement of a major pier, a stormwater
collection and discharge system and significant upgrades to its
electrical system and are in addition to the Company's routine annual
capital expenditures. During fiscal year 2004, the Company spent
approximately $10.0 million of the special facilities capital budget
and $4.6 million on other shipyard capital expenditures.
(4) Operating income was impacted unfavorably by a non-recurring, non-cash
charge of $0.8 million arising from the settlement of a portion of the
Company's pension liabilities. This settlement transferred a portion of
the Company's pension liability to an international labor union
organization. Under the provisions of pension accounting, the settlement
of these liabilities triggered recognition of certain cumulative
differences between pension plan assumptions and actual results.
(5) In fiscal year 2002, the Company repurchased an aggregate of 4,136,124
shares of its common stock at a price of $8.25 per share through its
tender offer ("Dutch Auction") that was completed as of July 31, 2001.
The Company's working capital, total assets, and stockholders' equity
declined approximately $34 million as a result of the share repurchases
and related transactions.
(6) The Company's 2001 revenues were impacted favorably by an agreement
reached with the U.S. Navy to share in certain environmental insurance
costs. Under terms of the agreement, the Company was able to invoice and
record revenue of $3.9 million during the fourth quarter of fiscal year
2001. The agreement also allowed the Company to invoice and recognize
an additional $1.7 million in fiscal years 2002, 2003 and 2004,
respectively. In addition, the Company received a favorable arbitration
award on the Margarita II, a floating electrical power plant that was
completed in fiscal year 2000. The award allowed the Company to
recognize $1.9 million of revenue in the fourth quarter of fiscal year
2001.
(7) During fiscal year 2001, the Company recorded a net insurance settlement
of $2.1 million, which was partially offset by a $1.5 million
environmental and other reserve charge, resulting in an increase to
income from operations of $0.6 million.
(8) During fiscal year 2000, the Company recorded an additional $5.6 million
operating charge for environmental and other reserves. This charge was
partially offset by a $0.9 million insurance settlement the Company
reached with one of its insurance carriers.
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Notes to the Consolidated Financial Statements are an integral part of
Management's Discussion and Analysis of Financial Condition and Results of
Operations and should be read in conjunction herewith. The following
discussion and analysis of financial condition and results of operations
contain forward-looking statements, which involve risks and uncertainties.
The Company's actual results in future periods may differ significantly from
the results discussed in or anticipated by such forward looking statements.
Certain factors, which may impact results for future periods, are discussed
below under the captions "Overview - Profitability," and "Environmental
Matters." Readers should also consider the statements and factors discussed
under the caption "Operations Overview" in Item 1 and the discussion of
environmental matters and related bodily injury claims set forth in Item 3 of
this Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the fiscal year ended March 28, 2004, together with the Notes
to the Company's Consolidated Financial Statements for the fiscal year then
ended.
Overview
Fiscal year 2004 started slowly, primarily because the Company's scheduled
work for the Navy during the first quarter was postponed by ship deployments
in support of military operations in Iraq. However, the Company's revenue
increased significantly during the second quarter of the year. This increase
was primarily attributable to a large concentration of repair, maintenance and
overhaul work that was awarded under each of the Company's three U.S. Navy
phased maintenance contracts as the previously deployed ships returned home.
During this same period, the Company's commercial and non-Navy repair business
was somewhat reduced, in part due to drydock maintenance projects that removed
two of the company's docks from service for approximately 30 days each.
During the first half of fiscal year 2004, the Company recorded $65.6 million,
or 44% of its full year revenue. The Company's operating and net income
during the six month period were unfavorable because of the limited amount of
Navy work in the first quarter, the impact of the reduced work on the
Company's commercial and non-Navy results, and the impact of the $2.5 million
provision for workers compensation claims arising from the bankruptcy of
Fremont Indemnity Company, the Company's former workers compensation insurance
carrier.
The financial results for the third and fourth quarters of this year were
significantly stronger as revenues for the second half of the year increased
to $82.2 million, an increase of 25% from the volumes experienced during the
first half of the year. A significant portion of the increased revenues,
operating income and net income experienced in the second half of the year was
attributable to the high volume of Navy work that had been previously deferred
due to military operations in Iraq. In spite of the improvement in the
financial results for the second half, the Company's results were somewhat
diminished by the Navy's decision to reduce the scope of work the Company
performed on the USS Sacramento because of the ship's pending decommissioning.
In addition, the Company experienced higher direct costs than planned on a
fixed priced project that commenced in the third quarter and was completed
early in the Company's fiscal year 2005. The impact of these cost increases,
which had no corresponding revenue associated with them, reduced operating
income by approximately $0.8 million.
For the full year ended March 28, 2004, the Company recorded revenue of $147.8
million, a decrease of $4.0 million, or approximately 3%, from fiscal year
2003 reported revenue of $151.8 million. This revenue decrease is primarily
attributable to reduced commercial and other non-Navy work volumes.
During fiscal year 2004, the Company recorded operating income of $2.2 million
on revenue of $147.8 million, or approximately 1% of revenue. This represents
a decrease in operating income of $2.9 million, or approximately 58% from
fiscal year 2003 operating income of $5.1 million. The decline in operating
income was due to the previously mentioned reduced commercial and other non-
Navy volumes, higher direct costs on a fixed priced project, a non-cash charge
arising from the provision for anticipated workers compensation claim costs
due to the bankruptcy of the Company's former workers compensation insurance
carrier, and higher overhead expenses.
In addition, the Company recognized a $0.6 million gain on available for sale
securities and $1.7 million in non-operating investment income for the year
ended March 28, 2004. These amounts in addition to the operating income
reported, resulted in fiscal year 2004 income before income tax expense of
$4.5 million.
Auxiliary Oiler Explosive ("AOE") Contract
In June 2001, the Company was awarded by the Navy, a six-year, cost-type
contract, under which the Navy has options to have the Company perform
maintenance work on the Auxiliary Oiler Explosive ("AOE") class vessels. This
contract represents the fourth consecutive, multi-year contract that the
Company has been awarded by the Navy on the AOE class vessels. The three
previous AOE contracts, which were each five years in duration, were all
awarded on a competitive basis. This cost type contract provides for phased
maintenance repairs to four Navy AOE class supply ships stationed in the Puget
Sound area. The original contract included options for thirteen repair
availabilities to be performed between 2001 and 2007 and was expected to have
a notional value of approximately $180 million if all of the options were
exercised. Since the award, five repair availabilities have been
accomplished.
During the first quarter of fiscal year 2003, the Navy announced its intention
to transfer the USS Rainier (AOE 7) and the USS Bridge (AOE 10) to the
Military Sealift Command ("MSC") which results in five availabilities that
will not be exercised under this contract. AOE 7 was transferred to MSC in
August 2003. AOE 10 is currently scheduled to be transferred in the summer of
2004. The Company anticipates that MSC will contract for future work on these
two vessels on a competitive basis. The potential impact of these transfers
on the Company's future revenues will depend on such factors as the
expenditures for maintenance by MSC, the Company's capacity to bid on future
AOE 7 and AOE 10 work, and the Company's bidding success if such bids are
submitted.
During the fourth quarter of fiscal year 2004, the Company announced that it
was informed by the Navy that the USS Sacramento (AOE 1) is scheduled to be
decommissioned on or about October 1, 2004. Of the two remaining
availabilities on AOE 1, one was exercised on a reduced scale as a five-week,
pier-side availability. The availability, originally scheduled for 12 weeks
in duration, was to include a dry docking of the ship. The other availability
of AOE 1 will not occur due to its decommissioning. The Company does not know
at this point if it will be involved in any of the work related to the
decommissioning of AOE 1.
The AOE contract contains options for two remaining repair availabilities on
the USS Camden (AOE 2) before the contract expires in 2007. There is no
assurance that these two remaining options will be exercised by the Navy in
whole or in part.
Combatant Maintenance Team ("CMT") Contract
During the first quarter of fiscal year 2001, the Company was awarded, by the
Department of the Navy on a sole source basis, a five year, cost-type contract
for the repair and maintenance which at the time included six surface
combatant class vessels (frigates and destroyers) stationed in the Puget Sound
area. Although the Navy has not released a notional value of the maintenance
work, the Company believes that the value may be approximately $60 million to
$75 million if all options are exercised. Work on this contract is being
performed primarily in the Company's Seattle shipyard.
Planned Incremental Availability ("PIA")
Subsequent to the end of fiscal year 2004, the Department of the Navy awarded
the Company a five-year, cost-type contract with the long-term overhaul and
maintenance to the NIMITZ CLASS aircraft carriers (CVN) home ported in Puget
Sound. The contract consists of multiple contract options for planned
incremental availabilities (PIA's), docking planned incremental availabilities
(DPIA's) and continuous maintenance and upkeep for the USS LINCOLN (CVN-72),
USS STENNIS (CVN-74), USS NIMITZ (CVN-68) and USS VINSON (CVN-70) when they
are in Puget Sound. The work includes all types of non-nuclear ship repair,
alteration and maintenance. All on-board work is accomplished by the Company
workforce at Puget Sound Naval Shipyard in Bremerton, Washington, or Naval
Station Everett.
The work is performed under a cost plus award fee with performance incentive
fee contract and represents the second contract for aircraft carrier
maintenance awarded to the Company. The first such contract, recently
expired, was awarded in 1999. The Company is supported in this effort by
various regional suppliers and subcontractors. Significant support is
provided by the Company's two teaming partners for this contract, Pacific Ship
Repair and Fabrication ("PacShip") and AMSEC LLC ("AMSEC"). The notional value
for this five-year contract is approximately $133 million if all options are
exercised. There is no assurance that all options will be exercised, in whole
or in part.
United States Coast Guard - Multi-ship; Multi-options (MSMO contract).
During the fourth quarter of fiscal year 2004, the United States Coast Guard
awarded the Company a contract to provide maintenance of two Polar Class
icebreakers. The contract consists of multiple contract options for planned
maintenance availabilities (PMA's) and docking planned maintenance
availabilities (DPMA's) for the POLAR STAR (WAGB-10) and POLAR SEA (WAGB-11).
The availabilities, and their companion planning options, extend through the
last DPMA ending August 2008, and the last PMA ending on September 2008. The
work to be performed includes availability planning and generalized ship
maintenance and repairs as needed, with emphasis on propulsion and deck
machinery work. The Company expects to team with the Coast Guard to identify
the appropriate best value work scope and technical solutions for support of
the two icebreakers. The Company will be supported in this effort by various
regional suppliers and subcontractors.
The work will be performed under a cost plus incentive fee contract. The
Company has performed similar work for the Coast Guard over the past several
years under individual, competitively bid, firm fixed priced contracts. This
current award marks the first time the Coast Guard has used a long term
phased-maintenance approach on the two Polar Class icebreakers home ported in
Seattle. The notional value of all options, if exercised by the Coast Guard,
is approximately $50 million. There is no assurance that all options will be
exercised, in whole or in part.
Electric Boat
During the fourth quarter of fiscal year 2004, the Company entered into a
contract with Electric Boat Corporation of Groton, Connecticut ("Electric
Boat") to support work on Trident submarines. During the period from May to
September 2003, the Company completed planning and preparation work for
Electric Boat. The Company has begun work on a follow-on contract to
fabricate components and to accomplish associated steel outfitting, project
management and quality assurance functions. This contract is associated with
the retrofit work being accomplished by Electric Boat on the USS OHIO (SSBN
726) at the Puget Sound Naval Shipyard.
The Company's work is being performed under a cost plus incentive fee contract
with Electric Boat for the fabrication work, and a firm fixed price contract
for the associated project management and quality assurance work. The total
value of these contracts is approximately $5.3 million and the work is
scheduled to be completed in May 2004.
Bath Iron Works
During the fourth quarter of fiscal year 2004, the Company confirmed its
expected participation, along with Southwest Marine, Inc., San Diego Division,
on the team lead by Bath Iron Works, a subsidiary of General Dynamics
(NYSE:GD), to perform Post Shakedown Availability work ("PSA") on DDG-51 Aegis
Destroyers ("Destroyers"). The U.S. Navy contract for this work, which was
awarded to Bath Iron Works, includes options for PSA work to be accomplished
in Navy homeports of Everett, Washington and Pearl Harbor, HI.
The Company's expected participation will include the performance of the PSA
work on between one and three Destroyers that are expected to be home ported
in Everett, Washington. The first option, if exercised by the Navy, is
anticipated to require work in the first quarter of calendar 2005 and would
have a value of approximately $9 million. Any work that the Company performs
for Bath Iron Works will be accomplished under a cost plus award fee
subcontract still to be finalized between Bath Iron Works and the Company. If
the Navy stations the second and third Destroyers at Everett, Washington and
exercises options for PSA work on those ships, the anticipated contract value
to the Company for its expected work on all three ships will be approximately
$30 million between 2005 and 2007. The PSA work primarily involves the
installation of system and equipment upgrades and/or ship alterations as
required.
Business Volume and Backlog
At March 28, 2004 