Posted March 16, 1998
NNS pulls out of commercial shipbuilding |
Newport News Shipbuilding will withdraw from the commercial shipbuilding business by the middle of next year. It is canceling three of the eight Double Eagle products tankers it has contracted to build. (Editorial comment from the April 1998 print Marine Log) A pre-tax charge of approximately $150 million is being taken against 1997 results to include projected contract cancellation and program close-out costs and the recognition of higher than expected production costs on commercial ship currently under construction. Chairman and CEO William P. Fricks said, "A special review of the commercial operation's performance was prompted by several recent events. This review revealed a number of issues relating to costs of material and labor productivity. Both the existence and the severity of the issues led us to the difficult but necessary decision to take a substantial earnings charge, truncate this program, and exit the market." "The work is substantially complete on the first three of the remaining five ships, and they will be delivered in 1998. The last two ships will be delivered by mid-1999. To help ensure this program is completed on time and within our revised cost projections, I have engaged an outside consulting firm to support our commercial program management. Furthermore, I have engaged independent auditors to assist in ascertaining why we did not have an earlier warning of these higher than anticipated costs." Fricks noted that the company's core Navy business is "unaffected by these difficulties in the commercial shipbuilding business, and should allow us to deliver consistent performance while meeting 1998 earning targets."
Explanation of Charge The company's commercial business has contracts to construct eight product tankers. Under agreements reached with its commercial customers, Newport New will complete construction of five of these tankers and the remaining three contracts will be canceled. A very recent review of commercial cost performance revealed that material cost and labor productivity estimates upon which the earnings announcement of late January was based were not achievable. As a result, the charge of $150 million includes $75 million for additional projected costs to build out the remaining five ships: * Increases in projected material costs of $60 million were driven by higher painting and coating costs, the costs of schedule delays resulting from supplier problems, and higher material requirements associated with changes to the new domestic ship design. * Projected labor cost growth of $15 million reflects higher labor-hour estimates for the remaining ships under construction. Actual labor results for January and February, which became available after the date of the January 1998 press release, indicate that previously anticipated productivity improvements will not be achieved. Consequently, estimate have been modified to be consistent with demonstrated performance. This caused labor-hour estimates for these ships to increase by nearly 500,000 hours. Cancellation costs for the three canceled contracts are estimated to be $75 million, comprised mostly of the net write-off of purchased materials. These estimated costs, which generate $65 million of the charge, reflect moderate recovery values for purchased material compared to the original price. Additionally, other costs associated with the close out of commercial shipbuilding operations, including reserves for severance and asset write-offs, total $10 million.
Results for 1997 The charge announced today will be reflected in the company's results for 1997. Prior to this unanticipated charge, Newport News announced earning before interest and taxes for 1997 of $131 million, net income of $44 million, and diluted earnings per share of $1.23. The $150 million charge will result in an operating loss of approximately $19 million, and a net loss of $1.36 per share. The net cash impact in 1998 of the increased cost projections and one-time exit expenses is estimated to be approximately $40 million in free cash flow.The cash outlook for 1999 actually improves by approximately $10 million compared to previous internal estimates due to the absence of commercial outflows and higher core business contributions.
Newport News Shipbuilding Inc.
1997 Consolidated Statement of Earnings (Unaudited)
Dollars in Millions, Except Per Share Amounts
Fourth Quarter Twelve Months
Reported Revised Reported Revised
Revenues $512 $431 $1,788 $1,707
Operating Costs and
Expenses 470 539 1,660 1,729
Other Income (Expense),
net 1 1 3 3
Earnings Before Interest
and Taxes (EBIT) 43 (107) 131 (19)
Interest Expense, net (15) (15) (55) (55)
Earnings Before Income
Taxes 28 (122) 76 (74)
Provision for Income
Taxes 12 (46) 32 (26)
Net Earnings $16 $(76) $44 $(48)
Earnings Per Share
- Basic $0.44 $(2.21) $1.26 $(1.39)
- Diluted $0.43 $(2.16) $1.23 $(1.36)
Weighted Average Shares
(In Millions) 34.9 34.9 34.7 34.7
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