10-Q 1 d10q.txt FORM 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 SEPTEMBER 16, 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: 35,397,728 shares outstanding and associated preferred stock purchase rights as of October 15, 2001. TABLE OF CONTENTS

PAGE ---- Part I--Financial Information Newport News Shipbuilding Inc. Consolidated Statements of Earnings ....................................................~~....~~ 2 Consolidated Balance Sheets............................................................~~.....~~ 4 Consolidated Statements of Cash Flows..................................................~~.....~~ 5 Notes to Consolidated Financial Statements.............................................~~.....~~ 6 Management's Discussion and Analysis of Financial Condition and Results of Operations..~~.....~~ 9 Part II--Other Information Item 1. Legal Proceedings.................................................................~~......~~ 12 Item 2. Changes in Securities and Use of Proceeds.........................................~~......~~ * Item 3. Defaults Upon Senior Securities...................................................~~......~~ * Item 4. Submission of Matters to a Vote of Security Holders...............................~~......~~ 12* Item 5. Other Matters.....................................................................~~......~~ 1312 Item 6. Exhibits and Reports on Form 8-K..................................................~~......~~ 13

*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)

Quarter Ended ------------------------------ ~~June~~September 1716, ~~June~~September 1817, 2001 2000 ------------- ------------- Millions (Except Shares and Per Share Amounts) Revenues ........................................~~...~~ $ ~~576~~578 $ ~~532~~493 Operating Costs and Expenses ....................~~...~~ (~~525~~522) (~~478~~445) Other Income (Expense), net .....................~~...~~ (1 2) -- --------~~----~~ ------------ Operating Earnings ..............................~~...~~ 4957 5450 Interest Expense, net of interest capitalized ...~~...~~ (13) (1413) ------------ ------------ Earnings Before Income Taxes ....................~~...~~ 3644 4037 Provision for Income Taxes ......................~~...~~ (1517) (16) ------------ ------------ Net Earnings ....................................~~...~~ $ 2127 $ 2421 ============ ============ Weighted Average Number of Common Shares Outstanding Basic ......................................~~...~~ 29,~~548~~531,~~228~~632 30,~~919~~359,~~234~~834 ============ ============ Diluted ....................................~~...~~ 31,~~370~~330,~~125~~147 32,~~290~~143,~~845~~996 ============ ============ Net Earnings Per Common Share Basic ......................................... $ .7390 $ .7771 ============ ============ Diluted ....................................... $ .6985 $ .7467 ============ ============ Dividends Declared Per Common Share .............~~...~~ $ .04 $ .04 ============ ============

The accompanying notes are an integral part of these consolidated statements of earnings. 2 PART I FINANCIAL INFORMATION NEWPORT NEWS SHIPBUILDING INC. CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

~~Six~~Nine Months Ended ---------------------------- ~~June~~September 1716, ~~June~~September 1817, 2001 2000 ------------- ------------- Millions (Except Shares and Per Share Amounts) Revenues ........................................~~...~~ $ 1,~~061~~639 $ 1,~~001~~494 Operating Costs and Expenses ....................~~...~~ (~~959~~1,481) (~~901~~1,346) Other Income (Expense), net .....................~~...~~ (21) 13 ------------ ------------ Operating Earnings ..............................~~...~~ ~~100~~157 ~~101~~151 Interest Expense, net of interest capitalized ...~~...~~ (2437) (2538) ------------ ------------ Earnings Before Income Taxes ....................~~...~~ 76120 76113 Provision for Income Taxes ......................~~...~~ (3148) (3147) ------------ ------------ Net Earnings ....................................~~...~~ $ 4572 $ 4566 ============ ============ Weighted Average Number of Common Shares Outstanding Basic ......................................... 29,~~587~~569,~~750~~044 31,~~506~~124,~~944~~574 ============ ============ Diluted ....................................~~...~~ 31,~~381~~364,~~271~~229 32,~~737~~539,~~629~~751 ============ ============ Net Earnings Per Common Share Basic ......................................... $ 12.5343 $ 12.4212 ============ ============ Diluted ....................................... $ 12.4429 $ 12.3603 ============ ============ Dividends Declared Per Common Share .............~~...~~ $ .0812 $ .0812 ============ ============

The accompanying notes are an integral part of these consolidated statements of earnings. 3 NEWPORT NEWS SHIPBUILDING INC. CONSOLIDATED BALANCE SHEETS

~~June~~September 1716, December 31, 2001 2000 ------------- ------------ (Unaudited) (Audited) Millions (Except Share Amounts) ASSETS Current Assets Cash and Cash Equivalents ........................................ $ 4666 $ 3 Accounts Receivable .............................................. ~~116~~131 135 Contracts in Process ............................................. ~~329~~359 265 Inventory ........................................................ 4850 50 Deferred Income Taxes ............................................ ~~101~~110 90 Other Current Assets ............................................. 19 13 ------- ------- Total Current Assets ............................................. ~~659~~735 556 ------- ------- Noncurrent Assets Property, Plant and Equipment, net ............................... ~~671~~666 692 Other Assets ..................................................... ~~234~~237 228 ------- ------- Total Noncurrent Assets .......................................... ~~905~~903 920 ------- ------- $ 1,~~564~~638 $ 1,476 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade Accounts Payable ........................................... $ 7687 $ 51 Short-Term Debt .................................................. 3846 29 Postretirement Benefits .......................................... ~~137~~138 134 Other Accrued Liabilities ........................................ ~~303~~346 223 ------- ------- Total Current Liabilities ........................................ ~~554~~617 437 ------- ------- Noncurrent Liabilities Long-Term Debt ................................................... ~~447~~432 498 Deferred Income Taxes ............................................ ~~246~~247 245 Other Long-Term Liabilities ...................................... 38 38 ------- ------- Total Noncurrent Liabilities ..................................... ~~731~~717 781 ------- ------- Commitments and Contingencies (See Note 3) Stockholders' Equity Common Stock, $.01 par value - authorized 70,000,000 shares; issued 35,399,967 shares at ~~June~~September 1716, 2001 and 35,352,730 shares at December 31, 2000... 1 1 Paid-In Capital .................................................. ~~434~~452 384 Retained Earnings ................................................ ~~210~~236 168 Unearned Compensation ............................................ (1) (1) Stock Employee Compensation Trust (SECT) - shares held of 5,866,096 and 5,655,695 at ~~June~~September 1716, 2001 and December 31, 2000, respectively ................................ (~~365~~384) (294) ------- ------- Total Stockholders' Equity ....................................... ~~279~~304 258 ------- ------- $ 1,~~564~~638 $ 1,476 ======= =======

The accompanying notes are an integral part of these consolidated balance sheets. 4 NEWPORT NEWS SHIPBUILDING INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

~~Fleet~~Nine ~~All~~Months ~~Construction~~Ended ~~Services Engineering Others (2) Total~~ ------------ -------- ----------- September 16, September 17, 2001 2000 ------------- ----- ~~2001~~ -------- ~~Revenues~~Millions Cash Flows from Operating Activities: Net Earnings...................................... $ ~~273~~72 $ ~~212~~66 $Adjustments 87to $Reconcile 4Net $Earnings ~~576~~to ~~Segment~~Net Cash Provided by Operating ~~Earnings~~Activities - ~~reported~~Depreciation and Amortization................ 2841 41 Deferred Income Taxes........................ (18) (2) Loss on Asset Disposition.................... 3 6 Equity Income................................ (4) (4) Changes in Components of Working Capital - Decrease (Increase) in - Accounts Receivable........................ 5 (50) Contracts in Process....................... (94) 46 Inventory ................................. - (2) Other Current Assets....................... (6) 3 Increase (Decrease) in - Trade Accounts Payable..................... 36 (22) Accrued Liabilities and Other.............. 130 49 ~~Segment~~Other, net................................... 4 (3) ----- ----- Net Cash Provided by Operating ~~Earnings~~Activities......... 169 128 ----- ~~adjusted~~----- Cash Flows from Investing Activities: Capital Expenditures.............................. (118) (13) Other............................................. 321 20(4) 5----- 1----- 58Net ~~2000~~Cash Used by Investing Activities............. (17) (17) ----- ~~Revenues~~----- Cash Flows from Financing Activities: Decrease in Revolving Credit Facility............. (34) (2) Payments on Short-Term Debt....................... $(15) ~~227~~(15) $Purchase ~~219~~of $Common 80Stock.......................... $(10) 6(73) $Stock ~~532~~Options ~~Segment~~Exercised........................... ~~Operating~~(24) ~~Earnings~~(16) Dividends Paid.................................... 27(4) 22 (4) Other............................................. (2) (1) 54----- ----- Net Cash Used by Financing Activities............. (89) (111) ----- ----- Net Increase in Cash and Cash Equivalents......... 63 - Cash and Cash Equivalents at Beginning of Period.. 3 2 ----- ----- Cash and Cash Equivalents at End of Period........ $ 66 $ 2 ===== ===== Cash Paid During the Period for Income Taxes...... $ 1 $ 41 ===== ===== Cash Paid During the Period for Interest.......... $ 28 $ 32 ===== =====

The accompanying notes are an integral part of these consolidated statements of cash flows. 5 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 and nine month periods ended September 16, 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 September 16, 2001 and September 17, 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 September 16, 2001, the SECT held 5.9 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. 6 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 September 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 a varying nature related to the normal conduct of its business. In the opinion of management, the outcome of these proceedings will 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 three 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 September 16, 2001 and September 17, 2000, respectively (in millions)

Fleet All Construction Services Engineering Others (2) Total ------------ -------- ----------- ---------- ----- 2001 ---- Revenues.................................... $300 ~~504~~ $189 ~~397~~ $84 ~~154~~ $5 6 $578 ~~1,061~~ Segment Operating Earnings - reported....... 5533 3818 95 ~~(2)~~1 ~~100~~57 Segment Operating Earnings - adjusted (1)... 5935 4020 95 1 ~~109~~61 2000 ---- Revenues.................................... $222 ~~433~~ $188 ~~411~~ $80 ~~148~~ $3 9 $493 ~~1,001~~ Segment Operating Earnings.................. 5127 3917 95 21 ~~101~~50

1. Adjusted segment operating earnings exclude the transaction costs associated with the proposed acquisition of the Company by General Dynamics Corporation. 7 2. Other business activities include valve and pump repair and technical services, equity investments, and corporate activities. Information about Revenues and Operating Earnings For the Nine Months Ended September 16, 2001 and September 17, 2000, respectively (in millions)

~~2001~~Fleet ~~2000~~All Construction Services Engineering Others (2) Total --------- --- -------- ~~Revenues~~ ----------- ~~Total revenues for reportable segments................................... $ 572 $ 526 Other revenues........................................................... 4 6~~ ---------- ------ 2001 ---- ~~Total consolidated revenues~~Revenues..................................... $804 ~~576~~$586 $238 ~~532~~$11 ~~=========~~$1,639 ~~=========~~Segment Operating Earnings -~~-----------------~~ ~~Total operating earnings for reportable segments~~reported...... 88 56 14 (1) 157 Segment Operating Earnings - adjusted (1)..~~.................~~ $94 5160 $14 532 ~~Other~~170 ~~operating~~2000 ~~earnings~~---- Revenues...................................~~..............~~ ~~(2)~~$655 1$599 ~~---------~~$228 ~~---------~~$12 ~~Total~~$1,494 ~~consolidated~~Segment ~~operating~~Operating ~~earnings~~Earnings.................~~..........~~ $78 4956 $14 543 ~~========= =========~~151

1. Adjusted segment operating earnings exclude the transaction costs associated with the proposed acquisition of the Company by General Dynamics Corporation. 2. Other business activities include valve and pump repair and technical services, equity investments, and corporate activities. 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 September 16, 2001 and September 17, 2000, respectively (in millions)

2001 2000 -----~~----~~ -----~~----~~ Revenues -------- Total revenues for reportable segments............~~.......................~~ $ ~~1,055~~573 $ ~~992~~490 Other revenues....................................~~.......................~~ 65 93 -----~~----~~ -----~~----~~ Total consolidated revenues..................~~...................~~ $ ~~1,061~~578 $ ~~1,001~~493 =====~~====~~ =====~~====~~ Operating Earnings ------------------ Total operating earnings for reportable segments..~~.......................~~ $ ~~102~~56 $ 9949 Other operating earnings..........................~~.......................~~ ~~(2)~~1 21 -----~~----~~ -----~~----~~ Total consolidated operating earnings........~~...................~~ $ ~~100~~57 $ ~~101~~50 =====~~====~~ =====~~====~~

Reconciliation of Segment Revenues and Operating Earnings to Consolidated Amounts For the Nine Months Ended September 16, 2001 and September 17, 2000, respectively (in millions)

~~Fleet~~2001 ~~All~~2000 ~~Construction Services Engineering Others (1) Total~~ ------------ -------- Revenues -------- Total revenues for reportable segments............ $1,628 $1,482 Other revenues.................................... 11 12 --- -------- -- ------- ~~June~~Total ~~17,~~consolidated ~~2001~~revenues......................~~.........~~ $1,639 ~~229~~ $1,494 ~~152~~=========== $========= 56Operating Earnings ----------------- Total operating earnings for reportable segments.. $ 8158 $ ~~445~~148 ~~December~~Other ~~31,~~operating ~~2000~~earnings.......................... (1) 3 ----------- --------- Total consolidated operating earnings............ ~~236~~$ ~~122~~157 30$ 12151 ~~400~~=========== =========

8 Information about Assets (in millions)

~~June~~Fleet ~~17,~~All ~~December~~Construction ~~31,~~Services ~~2001~~Engineering ~~2000~~Others (1) Total ------------ -------- ----------- ~~Assets~~ --------- ~~Total~~----- ~~A/R~~September ~~and~~16, ~~CIP for reportable segments~~2001................................ $ ~~437~~297 $132 ~~388~~$ ~~Other~~52 ~~unallocated~~$ ~~A/R~~9 ~~and~~$490 ~~CIP............................................~~December ~~8 12 Other unallocated amounts................................................ 1~~31,~~119~~ ~~1,076 --------- ----------- Total consolidated assets~~2000.................................~~......~~ $236 ~~1,564~~122 $30 ~~1,476~~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)

5. SUBSEQUENT EVENT Partial Sale of Equity Investment Subsequent to the close of the accounting quarter, the Company sold 25% of its equity investment in Abu Dhabi Ship Building. The transaction will not have a material impact on the Company's 2001 financial position, results of operations, or cash flows. 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% and 98% of the Company's revenues for the quarterly periods ended September 16, 2001 and September 17, 2000, respectively.

Revenues for the third quarter of 2001 increased $85 million to $578 million compared with the same period in 2000. The revenue improvement was primarily attributable to gains in the Construction segment due to increased activity on the Virginia-class submarine program and the Nimitz-class aircraft carrier CVN 77. 9 Third quarter 2001 operating earnings of $57 million included $4 million of transaction costs associated with the proposed acquisition of the Company by General Dynamics Corporation. Excluding these one-time items, operating earnings were $61 million and reflected an increase of 22% over 2000 third quarter operating earnings of $50 million. The increase was primarily attributable to Construction volume gains and improved Fleet Services margins.

Revenues for the first nine months of 2001 increased $145 million to $1,639 million compared with the same period in 2000. The increased revenue was primarily due to Construction volume gains on the Virginia-class submarine program and the Nimitz-class aircraft carrier CVN 77. Operating earnings of $157 million for the first nine months of 2001 included $13 million of transaction costs associated with the proposed acquisition of the Company by General Dynamics Corporation. Excluding these one-time items, operating earnings were $170 million and reflected an increase of 13% over the same period in 2000. This increase was primarily driven by Construction volume gains and improved Fleet Services margins, partially offset by lower Fleet Services volume. In addition, the Company reached a final agreement with the Navy regarding the simplification of its overhead allocation system. The final agreement amends a preliminary understanding reached between the parties during the third quarter of 2000 which resulted in increased operating earnings in the Fleet Services segment of $9 million with a corresponding $6 million decrease in the Construction segment. The final reallocation of costs between programs in 2001 resulted in increased operating earnings in the Fleet Services segment of approximately $3 million, with a corresponding decrease in the Construction segment. Overall, there was no material impact on year-to-date revenues, operating earnings, or cash flows of the Company. The Company's funded backlog was $5.9 billion at September 16, 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:

NET CASH PROVIDED BY OPERATING ACTIVITIES The $41 million increase in 2001's comparative cash flows from operating activities was primarily due to increased operating earnings, as well as lower income tax and interest payments. 10 OTHER INVESTING CASH FLOWS The 2001 other investing cash flow activities relate to a $1 million dividend received from AMSEC LLC. Other investing cash flow activities in 2000 primarily relate to a $5 million equity investment in AMSEC LLC, partially offset by a $1 million dividend received from Abu Dhabi Ship Building. FINANCING ACTIVITIES The financing activities for the period ended September 16, 2001 reflect the purchase of Company stock on the open market, pay-down of revolver debt, payments on short-term debt, outlays for exercised stock options, and the payment of three quarterly dividends of four cents per share. The 2000 financing activities relate primarily to the purchase of Company stock, decreased revolver borrowings, payments on short-term debt, outlays for exercised stock options, and the payment of three quarterly dividends 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 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. The provisions of SFAS 142 eliminate the amortization of goodwill and identifiable intangible assets with indefinite lives and require an impairment assessment at least annually by applying a fair-value-based test. The Company is required to adopt SFAS 142 on January 1, 2002. Management does not expect the elimination of goodwill amortization or the other provisions of the statement to have a material impact on the Company's financial position, results of operations, or cash flows. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company is required to adopt SFAS 143 on January 1, 2002. Management believes the adoption of SFAS 143 will 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 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. 11 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. Proposed Acquisition of Newport News Shipbuilding Inc. by General Dynamics Corporation and the Subsequent Northrop Grumman 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 is subject to the tendering of a majority of the Newport News Shipbuilding shares, U.S. regulatory clearance, and other customary closing conditions. In May 2001, Northrop Grumman Corporation ("Northrop Grumman") commenced an offer to acquire the entire common equity interest in Newport News Shipbuilding for Northrop Grumman common stock and cash. That offer, which is more fully described in a prospectus that accompanied the offer, is designed to have a value of $67.50 per share subject to the limitations on the amount of Northrop Grumman stock and cash to be issued, and provides that each Newport News Shipbuilding stockholder will be able to elect to receive, for all his or her Newport News Shipbuilding shares, cash or Northrop Grumman shares subject to the election and proration procedures and limitations described in the prospectus. This offer is subject to a number of conditions, including Newport News Shipbuilding terminating the agreement with General Dynamics and entering into an agreement with Northrop Grumman and U.S. regulatory clearance. In June 2001, the Board of Directors of Newport News Shipbuilding considered both the General Dynamics and Northrop Grumman offers. The Board unanimously affirmed its prior recommendation that the shareholders of Newport News Shipbuilding accept the General Dynamics offer and stated that it was unable to take a position with respect to the Northrop Grumman offer until it had obtained additional information regarding the position of the Department of Defense and the Department of Justice with respect to both the General Dynamics offer and the Northrop Grumman offer. In October 2001, the Board of Directors of Newport News Shipbuilding initiated discussions with Northrop Grumman concerning a possible acquisition based upon the price of Northrop Grumman's common stock and other factors. The Board reaffirmed its recommendation of the General Dynamics offer because it is uncertain whether Newport News Shipbuilding and Northrop Grumman will be able to reach a satisfactory agreement. On October 23, 2001, the Department of Defense ("DoD") recommended to the Department of Justice ("DoJ") that it approve a merger between Newport News Shipbuilding and Northrop Grumman and not approve a merger between Newport News Shipbuilding and General Dynamics. DoJ filed an antitrust lawsuit seeking to prevent the potential General Dynamics and Newport News Shipbuilding merger. DoJ continues to review the details of the potential Newport News Shipbuilding and Northrop Grumman merger. Any merger agreement between Newport News Shipbuilding and Northrop Grumman would require the approval of the Board of Directors of 12 Newport News Shipbuilding. Newport News Shipbuilding can give no assurances as to whether such a final agreement will be reached. Partial Sale of Equity Investment Subsequent to the close of the accounting quarter, the Company sold 25% of its equity investment in Abu Dhabi Ship Building. The transaction will not have a material impact on the Company's 2001 financial position, results of operations, or cash flows. 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. Exhibit Number: Exhibit 10.1 Amendment to the Amended and Restated Stock Employee Compensation Trust Agreement. Reports on Form 8-K: None 13 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: October 24, 2001

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