10-Q 1 d10q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 18, 2001 OR [_] 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 1-12385 ___________________________ NEWPORT NEWS SHIPBUILDING INC. (Exact name of registrant as specified in its charter) Delaware 74-1541566 -------- ---------- State or Other Jurisdiction of IRS Employer Incorporation or Organization Identification No. 4101 Washington Avenue, Newport News, Virginia 23607-2770 ---------------------------------------------- ---------- Address of Principal Executive Offices Zip Code (757) 380-2000 Registrant's Telephone Number, Including Area Code ___________________________ 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. 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. Common Stock, par value $.01 per share: 35,396,356 shares outstanding and associated preferred stock purchase rights as of April 18, 2001. TABLE OF CONTENTS

*No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative. THIS QUARTERLY REPORT ON FORM 10-Q SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000. 1 PART I FINANCIAL INFORMATION NEWPORT NEWS SHIPBUILDING INC. CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

The accompanying notes are an integral part of these consolidated statements of earnings. 2 NEWPORT NEWS SHIPBUILDING INC. CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated balance sheets. 3 NEWPORT NEWS SHIPBUILDING INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these consolidated statements of cash flows. 4 NEWPORT NEWS SHIPBUILDING INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PREPARATION Unless the context otherwise requires, the term "Company" refers to Newport News Shipbuilding Inc. ("NNS") and its consolidated subsidiaries. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, the Company believes that the disclosures included herein are adequate to make the information presented not misleading. Operating results for the three-month period ended March 18, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. EARNINGS PER SHARE Basic earnings per common share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed assuming the terms and conditions for the contingent shares and common stock options were met and converted on March 18, 2001 and March 19, 2000, respectively. The Company established a Stock Employee Compensation Trust ("SECT") in 1997 to fund a portion of its obligations arising from various employee compensation plans. The Company issued shares to the SECT from treasury stock and the SECT engages in open market purchases. As of March 18, 2001, the SECT held 5.8 million shares of the Company's common stock, which are not considered outstanding in computing earnings per share. 3. COMMITMENTS AND CONTINGENCIES Government Contracting As a general practice in the defense industry, the Defense Contract Audit Agency ("DCAA") and other government agencies continually review the cost accounting and other practices of government contractors, including the Company, conduct other investigations, and make specific inquiries. In the course of those reviews and investigations, cost accounting and other issues are identified, discussed and settled, or resolved through legal proceedings. In some cases, recognition of the inherent uncertainties and costs of litigation may cause management to decide to settle a matter. As with other government contractors, the U.S. Government has from time to time recommended that certain of the Company's contract prices be reduced, or costs allocated to its government contracts be disallowed. Some of these recommendations involve substantial amounts. In the past, as a result of such audits and other investigations and inquiries, the Company has on occasion agreed to adjustments to its contract prices and the costs allocated to its government contracts. The Company is currently involved in several such audits and other investigative proceedings with the U.S. Government. The Company is also engaged in settlement discussions on certain matters and has filed a lawsuit concerning specific cost accounting issues. As previously reported, the DCAA conducted a post-award audit of the contract to build the aircraft carrier Ronald Reagan. In April 1998, the DCAA issued its official audit report ("Audit Report") in which it concluded that the cost or pricing data supplied by the Company to the U.S. Navy was not current, accurate, and complete and, therefore, projected labor and overhead costs were overstated for the Reagan contract. Accordingly, the DCAA recommended to the U.S. Navy's contracting officer that the contract price for Reagan be reduced by approximately $135 million. After giving consideration to the cost sharing provisions in the contract, the proposed price reduction could generate an operating income adjustment of approximately $47 million over the life of the contract. 5 The Company disagrees with the conclusions of the Audit Report and the DCAA's recommendation to the contracting officer. Management believes that the Company has substantial and meritorious grounds on which to contest any action by the U.S. Navy seeking to reduce the Reagan contract price and intends to pursue its defenses in response to any attempt by the U.S. Navy to make such a reduction. Management believes that the final resolution of this matter will not have a material impact on the financial position, results of operations, or cash flows of the Company. In addition to the DCAA audit, a civil investigation, also focused on the cost or pricing data that the Company supplied to the U.S. Navy in connection with the Reagan contract, is being conducted jointly by the Department of Defense, the Department of Justice, the U.S. Attorney's Office for the Eastern District of Virginia, and the Naval Criminal Investigative Service. Management believes the Company complied with all applicable laws. During the first quarter of 1999, the Company received a letter from the U.S. Navy Supervisor of Shipbuilding forwarding a DCAA final audit report questioning approximately $83 million of costs allocated to U.S. Government contracts as Independent Research and Development ("IR&D"). The letter requested additional comments regarding why NNS considers its existing cost accounting practice to be compliant with the Cost Accounting Standards. The Company provided such comments in the second quarter of 1999. In June 2000, the Department of Defense Inspector General's Office issued a subpoena to the Company for certain records pertaining to this matter. The Company is in the process of responding to that subpoena. Management believes that the final resolution of this matter will not have a material impact on the financial position, results of operations, or cash flows of the Company. Litigation The Company is both a plaintiff and defendant in matters of varying nature related to the normal conduct of its business. In the opinion of management, the outcome of these proceedings should not have a material adverse effect on the financial position, results of operations, or cash flows of the Company. 4. REPORTABLE SEGMENTS The Company's reportable operating segments represent strategic initiatives supporting the entire lifecycle of U.S. Navy ships - Construction, Fleet Services, and Engineering, as well as a logical linking of similar contracts based on funding provisions. Engineering contracts generally receive funding on an annual basis, Fleet Services contracts typically span one month to three years, and Construction contracts generally span a period of two or more years. The reportable segments are managed separately because each business has different customer requirements based on the nature of the services provided. The Company evaluates performance based on profit or loss from operations before interest and income taxes, not including nonrecurring gains and losses. Information about Revenues and Operating Earnings For the Quarters Ended March 18, 2001 and March 19, 2000, respectively (in millions)

1. Other business activities include valve and pump repair and technical services, equity investments, and corporate activities. 6 A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements is as follows: Reconciliation of Segment Revenues and Operating Earnings to Consolidated Amounts For the Quarters Ended March 18, 2001 and March 19, 2000, respectively (in millions) 2001 2000 ------ ------ Revenues -------- Total revenues for reportable segments............ $ 483 $ 466 Other revenues.................................... 2 3 ------ ------ Total consolidated revenues.................. $ 485 $ 469 ====== ====== Operating Earnings ------------------ Total operating earnings for reportable segments.. $ 51 $ 46 Other operating earnings.......................... - 1 ------ ------ Total consolidated operating earnings........ $ 51 $ 47 ====== ====== Information about Assets (in millions) Fleet All Construction Services Engineering Others (1) Total ------------ -------- ----------- ---------- ----- March 18, 2001....... $ 230 $ 158 $ 20 $ 10 $ 418 December 31, 2000.... 236 122 30 12 400 1. As the Company has a fully integrated production facility, its fixed assets are commingled and not identified with specific profit centers. Therefore, segment assets consist only of accounts receivable ("A/R") and contracts in process ("CIP") balances applicable to identified segments. Reconciliation of Segment Assets to Consolidated Amounts (in millions) March 18, December 31, 2001 2000 ----------- -------------- Assets ------ Total A/R and CIP for reportable segments...... $ 408 $ 388 Other unallocated A/R and CIP.................. 10 12 Other unallocated amounts...................... 1,071 1,076 -------- -------- Total consolidated assets................. $ 1,489 $ 1,476 ======== ======== 7 NEWPORT NEWS SHIPBUILDING INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW The Company's primary business is the design, construction, repair, overhaul and refueling of nuclear-powered aircraft carriers and submarines for the U.S. Navy. The Company also provides ongoing fleet services for other U.S. Navy vessels through work in overhauling, lifecycle engineering, and repair. The U.S. Government accounted for approximately 99% of the Company's revenues for the quarterly periods ended March 18, 2001 and March 19, 2000. RESULTS OF OPERATIONS

Revenues for the first quarter of 2001 increased $16 million to $485 million compared with the same period in 2000. The revenue improvement was primarily attributable to gains in the Construction segment, partially offset by lower Fleet Services volume. Construction revenues reflect increased activity on the Virginia-class submarine program and the Nimitz-class aircraft carrier, CVN 77. Fleet Services revenues decreased due to lower Nimitz refueling and overhaul, ship repair, and fleet maintenance activities. Engineering segment contributions were consistent between the periods. First quarter 2001 operating earnings increased $4 million to $51 million. The improvement was primarily driven by volume gains in the Construction segment and an improved margin on the Nimitz refueling and overhaul work. In addition, the Company reached a final agreement with the Navy during the quarter regarding the simplification of its overhead allocation system. The final agreement amends a preliminary understanding reached between the parties during the third quarter of last year. The reallocation of costs between programs resulted in increased revenues and operating earnings in the Fleet Services segment of approximately $3 million, with corresponding decreases in the Construction segment. Overall, there was no material impact on first quarter revenues, operating earnings, or cash flows of the Company. The Company's funded backlog was $6.1 billion at March 18, 2001, substantially all of which was U.S. Navy-related. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS The following table reflects the summarized components of the Company's cash flows for the periods indicated:

8 NET CASH PROVIDED BY OPERATING ACTIVITIES The $24 million decrease in 2001's comparative cash flows from operating activities was primarily due to an increase in working capital, partially offset by improved quarterly earnings as discussed above in "Results of Operations." The increase in working capital was due to normal timing fluctuations with respect to billings, accounts receivable collections, the recognition of contract costs, and the payment of trade accounts payable. OTHER INVESTING CASH FLOWS Other investing cash flow activities in 2000 relate to a $5 million equity investment in AMSEC LLC. The Company owns 45% of this technical services organization. FINANCING ACTIVITIES The financing activities for the period ended March 18, 2001 reflect the purchase of Company stock on the open market, pay-down of revolver debt, outlays for exercised stock options, and the payment of a quarterly dividend of four cents per share. The 2000 financing activities relate primarily to the purchase of Company stock, pay-down of revolver debt, and the payment of a quarterly dividend of four cents per share. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes with respect to this item from the disclosure included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. RECENTLY ISSUED STANDARDS In June 1998, the Financial Accounting Standards ("FAS") Board issued FAS No. 133, (as amended by FAS No. 137) "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. FAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. FAS No. 133 is effective for fiscal years beginning after June 20, 2000. The Company engages in minimal derivative activity and therefore the adoption of this new standard did not have a material impact on the Company's financial position, results of operations, or cash flows. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No.101, Revenue Recognition in Financial Statements (SAB 101), which, among other guidance, clarifies certain conditions to be met in order to recognize revenue. In June 2000, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101B, which delayed the implementation of SAB 101 until the fourth quarter of fiscal years beginning after December 15, 1999. The implementation of SAB 101 did not have a material impact on the Company's financial position, results of operations, or cash flows. CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-Q contains forward-looking statements concerning, among other things, the Company's prospects, developments and business strategies. These forward-looking statements are identified by terms such as "projections," "intends," "estimates," "expects," "projects," "anticipates," "goal," "plan," "should," "could," "believes," "assumed," and "scheduled." The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include (i) the factors discussed in Note 3 to the Company's Consolidated Financial Statements, (ii) the factors addressed in Management's Discussion and Analysis of Financial Condition and Results of Operations, and (iii) the following factors: (a) general U. S. and international political, economic and competitive conditions; (b) initiatives to reduce the federal budget, including reductions in defense spending, or the failure of anticipated increases in defense spending to materialize in whole or in part; (c) reductions in the number or size of U.S. Navy contracts awarded to the Company; and (d) unanticipated events affecting delivery and production schedules or design and manufacturing 9 processes, which could impair the Company's efforts to deliver its products on time or to reduce production costs and cycle time or realize in a timely manner some or all of the benefits, if any, of such reductions. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Reference is made to Note 3, "Commitments and Contingencies" to the Company's Consolidated Financial Statements contained herein, which is incorporated in this Item 1 of Part II by reference. ITEM 5. OTHER MATTERS. General Dynamics Corporation Offer to Newport News Shipbuilding Inc. In April 2001, the Boards of Directors of Newport News Shipbuilding Inc. and General Dynamics Corporation ("General Dynamics") approved and each company executed a definitive agreement that provides for the acquisition of Newport News Shipbuilding by General Dynamics. The acquisition is to be accomplished through a cash tender offer for all of Newport News Shipbuilding's publicly held outstanding shares at a price of $67.50 per share. The tender offer will be subject to the tendering of a majority of the Newport News Shipbuilding shares, U.S. regulatory reviews, and other customary closing conditions. Potential Sale of Equity Investment The Company is engaged in negotiations concerning the potential sale of some or all of the Company's equity investment in Abu Dhabi Ship Building to a third party. No definitive sales agreement has been reached and no assurances can be given whether these negotiations will ultimately lead to an agreement for the sale of all or any portion of such investment or whether the necessary approval by the Government of the United Arab Emirates of such a sale will be obtained. Share Repurchase Programs On February 1, 2001, the Company announced a $100 million share repurchase program. The new plan is a follow-on to previous programs under which the Company purchased 5.7 million shares at a cost of $187 million since the middle of 1999. The Company has suspended any share purchases under the new plan in light of the agreement with General Dynamics. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. Reports on Form 8-K None. 10 SIGNATURE 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. Newport News Shipbuilding Inc. By: /s/ Charles S. Ream -------------------------------- Senior Vice President and Chief Financial Officer Date: April 27, 2001 11

NEWPORT NEWS SHIPBUILDING INC 10-Q