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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
SCHEDULE TO
Tender Offer Statement under Section 14(d)(1) or 13(e)(1)
of the Securities Exchange Act of 1934
NEWPORT NEWS SHIPBUILDING INC.
(Name of Subject Company (issuer))
GENERAL DYNAMICS CORPORATION
GRAIL ACQUISITION CORPORATION
(Name of Filing Persons (offeror))
Common Stock, Par Value $0.01 Per Share
(including associated rights)
(Title of Class of Securities)
652228107
(CUSIP Number of Class of Securities)
David A. Savner
Senior Vice President and General Counsel
General Dynamics Corporation
3190 Fairview Park Drive
Falls Church, Virginia 22042-4523
(703) 876-3000
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
Copy to:
Charles J. McCarthy, Esq.
Jenner & Block, LLC
One IBM Plaza
Chicago, Illinois 60611
(312) 222-9350
CALCULATION OF FILING FEE
===========================================================================
Transaction Valuation* Amount of Filing Fee
---------------------------------------------------------------------------
Not applicable. Not applicable.
===========================================================================
*Set forth the amount on which the filing fee is calculated and state how
it was determined.
[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
[ ] Check the appropriate boxes to designate any transactions to which this
statement relates:
[X] third party tender offer subject to Rule 14d-1 [ ] going-private transaction subject to Rule 13e-3
[ ] issuer tender offer subject to Rule 13e-4 [ ] amendment to Schedule 13D under Rule 13d-2
Check the following box if the filing is a final amendment reporting the
results of the tender offer: [ ]
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General Dynamics Corporation ("General Dynamics") and Newport News
Shipbuilding Inc. ("Newport News") jointly announced on April 25, 2001 that
they have signed a definitive agreement and plan of merger under which General
Dynamics will acquire Newport News. The acquisition is to be accomplished
through a cash tender offer followed by a merger.
The description contained herein is neither an offer to purchase nor a
solicitation of an offer to sell shares of Newport News. At the time the
tender offer is commenced, General Dynamics will file a Tender Offer Statement
and Newport News will file a Solicitation/Recommendation Statement with
respect to the offer. The Tender Offer Statement (including an offer to
purchase, a related letter of transmittal and other offer documents) and the
Solicitation/Recommendation Statement will contain important information that
should be read carefully before any decision is made with respect to the
offer.
The offer to purchase, the related letter of transmittal and certain
other documents, as well as the Solicitation/Recommendation Statement, will be
made available to all shareholders of Newport News, at no expense to them. The
Tender Offer Statement (including an offer to purchase, a related letter of
transmittal and other offer documents) and the Solicitation/Recommendation
Statement will also be available at no charge at the SEC's website at
www.sec.gov.
The following is a transcript of the conference at which the media,
financial analysts and investors were invited, which was held at 9:00 a.m. EDT
on April 25, 2001.
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CITIGATE SARD VERBINNEN
MODERATOR: RAY LEWIS
APRIL 25, 2001
9:00 A.M. EST
RAY LEWIS, VICE PRESIDENT INVESTOR RELATIONS, GENERAL DYNAMICS: Thank you for
joining us today to discuss the proposed acquisition of Newport News by
General Dynamics Company: General Dynamics Corporation; Ticker: GD ; URL:
http://www.gendyn.com/.
My name is Ray Lewis. I'm staff Vice President, Investor Relations. Before I
turn it over to the CEOs of both companies, let me get a few legal issues out
of the way.
Our presentation today is neither an offer to purchase nor a solicitation of
an offer to sell shares of Newport News. At the time the offer is commenced,
General Dynamics will file a tender offer statement with the SEC and Newport
News will file a solicitation recommendation statement with respect to the
offer. The tender offer statement, including an offer to purchase the related
letter of transmittal, other offer documents and the solicitation
recommendations statement will contain information that should be read
carefully before any decision is made with respect to the offer.
The offer to purchase the related letter of transmittal and certain other
documents as well as the solicitation recommendation statement will be made
available to all shareholders of Newport News at no expense to them. The
tender offer statement, excluding the offer to purchase, the related letter of
transmittal and all other documents filed with the SEC and these solicitation
recommendation statement will also be available at no charge at the SEC's Web
site at www.sec.gov.
In addition to that, as you probably know, we'll probably make some
forward-looking statements today. These are the best estimates available to
us, but they are subject to the standard risks that all businesses are subject
to.
And having said all of that, it's my pleasure to introduce my boss, General
Dynamics CEO, Nick Chabraja, to kick this off.
NICHOLAS CHABRAJA, CHIEF EXECUTIVE OFFICER, GENERAL DYNAMICS: Thank you, Ray,
and good morning. Ray likes to do those charts because he doesn't think I'll
do it adequately.
We just have a few charts for you today, Bill and I do. We'll each speak to a
couple of them, tell you a little bit about the deal, where we think we're
going and then take your questions and do our best to provide answers.
This first chart summarizes the transaction that we have done or the agreement
we have reached together to contemplates an offer for the issued and
outstanding shares of Newport News, $67.50 per share. That represents a cash
outlay of about $2.1 billion for the equity. The way that works is about $2
billion for the 29.6 million publicly held shares and about $100 million net
for the in-the-money option.
In addition, General Dynamics will assume the debt Newport News that, as we
speak, is approximately $500 million, $400 million of it is term debt senior
notes. The transaction, of course, is subject to the tender by a majority of
the Newport News shareholders and, of course, a regulatory approval. We fully
expect this transaction will close in the third quarter 2001. The numbers I
gave you of course, with respect to cost are without regard to transaction and
related costs, which I only have ballpark estimates.
Why? Why this deal? Well, we've been friends and partners and colleagues in
nuclear shipbuilding for a long, long time. We've worked closely together.
It's obviously an excellent fit. And this transaction, if concluded, will
streamline the management of the two nuclear capable shipyards in the United
States. We believe, collectively, that there is a potential for very
significant savings to the United States Navy and synergy to the company who
executes those savings. I'm frankly reluctant to get deeply into the question
of the savings, in part because the transaction
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moved so rapidly from the time that Bill and I first began discussing it today
that we didn't form teams to go study this. But some of them are very obvious
and relatively easy to achieve.
Our businesses are complementary as opposed to competitive. Any competition
between us ended in 1991, competition over the second Seawolf class ships.
Since then, General Dynamics has built the attack submarines in the last of
the tridents and we recently -- 1997, Bill -- '96, '97, I can't remember --
formed a venture together to build the new attack submarine, the Virginia
Class, which has worked spectacularly. Our teams have knitted perfectly and,
in many ways, it led the comfort level between us that brought us to discuss
the ability to capture further efficiencies by formalizing the arrangement
more broadly.
This transaction will be immediately accretive without the contemplated
synergies. Let me just clarify that a little bit. That is under the new FASB
rule, that is, not amortizing goodwill. If we were under the old rule, it'd be
about a push, about even Steven with respect to accretiveness.
Just to touch on transaction metrics, this is my rough approximation. This
morning at 8:30 Newport News issued its earnings statement for the quarter,
and I'm using some of the information that's available in that announcement to
make these estimates, about 1.2 times 2001 sales, slightly less than 11 times
EBIT and slightly less than nine times EBITDA.
With that said, let me give the podium to Bill.
WILLIAM FRICKS, CHAIRMAN, CEO, NEWPORT NEWS: Thanks, Nick. As you can well
imagine, as Nick said, this occurred in a fairly short order. And we're very
pleased with this merger.
I think that over the last two years, a lot of people were asking me if you
walked up what's changed in two years. Well, one thing, we know each other a
lot better. It's very rare, I think, in corporate marriages that you give to
live together for a while, and we've had the opportunity to live together for
the last three years. And we like each other. So, that made it very helpful.
When we met the last -- next -- well, last two or three weeks, it's nice to
walk in and on a first name basis know basically all the senior management of
both teams. So, it really has been a natural evolution. These companies sort
of cry out to be naturally -- the propensity is just to merge together. We
have people operating at EB at Newport News from both companies every day. So,
it's a natural phenomenon. So, it's our logical next step.
Now, as far as who benefits from this, obviously our shareholders leave a good
premium after a rather substantial ride in the last year or so. Our employees
and our communities are going to benefit from being part of a wider and larger
company. And our customer, as Nick said, is going to be the prime beneficiary
of substantial cost savings as we merge together. Rarely, I think, do you find
a situation that you get win, win, win all the way across the board, and I
think we've defined it here. And we're very positive about this coming to a
conclusion, relatively quickly, I think.
And with that, I'd like to turn it to your questions.
UNKNOWN MALE #1: Would the cost savings be different if you were closing one
of the yards?
WILLIAM FRICKS: Well, we haven't even addressed that. We haven't thought
about closing one of the yards. That's not in our plans. So, we don't know.
NICHOLAS CHABRAJA: You begin with a premise that the United States Navy and
the Department of Defense bottoms up review identified the need and
requirements to maintain two nuclear capable yards in the United States. That
has never changed. So, we haven't even thought about closing one of these
yards. In fact, it would appear that employment is on the slight increase at
each facility.
Next.
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HOWARD: Could you talk a little bit about some of the antitrust issues? It
sounds like the Navy is on board with this and, since they're your major
customer, if that solves one of the bigger problems. But you push it out a
little bit more than that?
NICHOLAS CHABRAJA: I'd be happy to, Howard. And I want Bill to speak to this.
I really kind of alluded to it in my earlier remarks, we haven't engaged in
competition -- meaningful competition -- since 1991, really any kind of
competition. And we don't see that billed rates that currently are employed or
plan to be that there is any future competition contemplated. Can't have
competition when you're building one or two submarines a year. You just can't
do it. So, the Navy has agreed with us that we should build the submarines
together. It just really just further into that.
People always ask what changed since the last. And there is an impression at
large that there was some kind of a transaction turned down by the Department
of Defense for competitive reasons. We never got there, never rose to that
level. It was at that time -- Bill wasn't prepared to do the transaction and
the Navy wasn't prepared for it at that point in time. They had other
initiatives at work that they preferred, that is, cost savings initiatives
together with Bill. So, we don't believe that there is a fundamental antitrust
issue here to begin with. And that's part of the reason we expect an early
closing in this case.
But, Bill, why don't you give that one a try?
WILLIAM FRICKS: I would just echo what Nick said. I think two years ago there
was some thought in some people's mind that the bill rate for submarines may
go up dramatically. I think that's -- I don't think anybody thinks that
anymore. So, there is -- we knew there was no competition then. Some people
thought there might be some competition if the bill rate grows dramatically in
the future. We know that not to be true now.
We're also further along the teaming. We see what that has given us and we see
what else can be obtained, I think, from a merger. So, I think that all the
people that are involved in the nuclear program understand that we need to get
the cost down. The only way to do that effectively is to merge these
companies. And you have no loss in competition because there is no
competition.
HOWARD: OK.
OPERATOR: And any listeners on the phone lines, if you do have a question or a
comment at this time, please press the numbers one followed by four on your
touch-tone telephone. And if you are on a speakerphone, please utilize your
handset for optimum sound quality.
Our first question or comment is coming from Amy Cohen of Mentor Partners.
Ma'am, your line is live.
AMY COHEN, MENTOR PARTNERS: Just to go -- I don't mean to beat a dead horse,
but just to go back. Have you had discussions with the DOD and the Navy at
this point? And can you go back through what happened two years ago in terms
of the Navy and their interest in the R&D budget?
NICHOLAS CHABRAJA: I think we're not at liberty to talk about discussions
that we may have had all at this point. Highly confidential. I think it
should be adequate to say our customer isn't surprised by this.
WILLIAM FRICKS: And I think -- obviously, if Nick and I didn't have a sense
that the people, the customer, was going to be receptive to this we wouldn't
be doing this in the first place.
OPERATOR: Thank you. Our next question or comment is coming from Jung Park
of Deal Analytics.
JUNG PARK, DEAL ANALYTICS: I have one further question regarding the
antitrust issues. Wondering if you need antitrust approval from EU or any
foreign approvals.
NICHOLAS CHABRAJA: The last time Bill and I looked at the question we weren't
selling any nuclear submarines or carriers to foreign powers. So, I think that
the EU is not within the ambit of our concern.
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JUNG PARK: OK. So, no foreign approvals. Thank you.
NICHOLAS CHABRAJA: Sam.
SAM: If -- in Newport News' business, my understanding is that a great
majority of that would be cost plus type of work. I'm wondering, what kind of
opportunity is there to actually reap any net savings in terms of synergies?
And I know you can't quantify a number, but is there big opportunity, or does
that savings really go back to the customer?
NICHOLAS CHABRAJA: Well, first of all, the vast majority of our business is
not cost plus. All of our contracts have some kind of sharing divisions except
for the engineering piece. So, the vast majority has some kind of sharing
piece. It varies from 30 percent to, some cases, up to about 35 percent. So,
there is adequate room for us to benefit collectively in savings.
WILLIAM FRICKS: I think there's one other thing to think about, Sam. You
focused on savings at Newport News -- when we're streamlining, there's savings
at Newport -- I mean, at Electric Boat as well. That's across the -- spreads
to the organization. That's what makes it so good. But it is true, however,
that the major beneficiary of our efficiencies will be the United States Navy.
SAM: I understand you may not be comfortable with sharing a hard target for
cost savings at this early stage, but could you take an opportunity to review
with us some of the specific areas that you would regard as maybe an order of
priority, the biggest opportunities for cost savings and perhaps elaborating a
little bit on the degree to which you can make changes either in management,
in R&D, processes and so on? Just flush it out for us a little.
NICHOLAS CHABRAJA: Let's just kind of cover some high level topics that are
relatively -- and we won't go into transition planning because I don't want
there. We haven't done it ourselves. But there's obviously the elimination of
infrastructure. One corporate layer will go away. Think about information
technology and information systems, where we both are users of the same design
tools.
We have the ability, we believe, to enjoy very significant savings in that
area by avoiding duplication and using our combined purchasing power. Think
about the fact that as businesses -- Electric Boat and Newport News --
procure, excluding subcontracts, a couple billion dollars a year. It's not
unrealistic to think that you get five percent out of that in the joint
efforts. And then there's the wide variety of employee benefit costs that can
be harmonized and acquired less expensively.
So, when we do just our rough cut over a 10-year timeframe on relatively easy
things but things that are peculiar to this combination that others couldn't
achieve, it results in a very large number. And I'm not talking yet about
other stuff, the organizing the way we do work, process re-engineering and
other business initiatives. So, I think, without getting too deeply into it,
that sort of gives you some high level subjects to cut at.
WILLIAM FRICKS: Those are right. One thing I would add, and we added this in
some of our discussions, is that we're not talking money layoffs to achieve
this. Our workforces and engineering, as Nick pointed out earlier, are
growing. So, these are basically internal savings that we have because just of
the combination and leveraging two companies together for materials and IT, as
Nick has mentioned.
NICHOLAS CHABRAJA: I think that it -- a latter point is really an important
point. And it helps us with the communities involved. We absolutely do not
contemplate layoffs of the trade or the engineering workforce, and both of
which may well grow right now. And it enables us to shift the burden, to
adjust it to the existing workforces. So, we're very pleased with that. We may
work hard on getting more work done with the existing force as opposed to
expanding it rapidly, but that's all to be worked out.
We have reason to believe that our teams that will look at that, for the
benefit of the Navy and for our own benefits, see things very similarly. And
so, we'll be highly skilled and get the job done.
UNKNOWN FEMALE #1: We're going to take some questions from the phone lines.
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NICHOLAS CHABRAJA: OK.
OPERATOR: We have a question coming from Dina Chandler of Cathay Financial.
DINA CHANDLER, CATHAY FINANCIAL: Yes. Good morning. Congratulations on the
merger. I was wondering if you might be able to give me any termination fees
from the merger itself if either party was to walk away.
NICHOLAS CHABRAJA: There is a breakup fee. I can't remember. Was it $50
million? There's no shop clauses, the whole potpourri of stuff that the
lawyers pick in on us. But I can't say as we stand here that Bill and I are
thinking that any of those clauses to mean much to us. We're going down this
path and are really locked at the hip to get this done.
OPERATOR: Thank you. Our next question or comment is coming from Tom
Vanbuskirk of Silverado Capital.
TOM VANSBUSKIRK, SILVERADO CAPITAL: Hi. I think most of my questions have been
answered. The only thing that I was -- I'm still curious about, getting back
to antitrust, is away from the sub business, which I'm sure everybody's
looking at the most closely, do any other business overlaps stand out, if
there are any at all when you go through your business portfolios?
NICHOLAS CHABRAJA: Well, this merger is simply about really the nuclear
shipbuilding business, which is holding to think different from the rest of
the shipbuilding business. So, this is -- it doesn't affect the rest of the
surface ships and auxiliary ships that the Navy builds. So, this is just about
nuclear shipbuilding, which is basically already consolidated. We're just
formalizing it.
WILLIAM FRICKS: I think -- I'm trying to anticipate a little bit what your
question may really mean. We don't compete actively against each other in the
repair area. That seems to be reasonably geographic, that is, Electric Boat
seems to be called upon to support the submarine base at New London and help
the folks up at Kittery in Maine and New Hampshire as their workload is, from
time to time, heavy. And Newport News works the tidewater area and the big
naval bases there. So, we don't see each other hanging into each other in the
repair area. So, I don't think that's a significant issue.
DINA CHANDLER: OK. Thanks.
UNKNOWN FEMALE #1: OK. We'll take some questions from the floor.
UNKNOWN FEMALE #2: Bill, you announced earnings this morning and you raised
expectations for '01 by 10 percent, which really seems to make the numbers
work for this deal. Could you comment on how much of that is real operating
improvements and how much of that is just a conservative in coming out of the
numbers?
WILLIAM FRICKS: Well, I admit to a little conservatism. But our revenues are
going up. We just signed the CV77 (ph) contract about a month-and-a-half ago.
So, we were waiting to see the results of that. So, we see that now, so we can
make a little bit better projection for the year. But our margins are growing
basically as we get into -- a little later into submarines. So, we see that
we're going to make those margins. So, I would say it's a little bit half and
half, a little conservatism on my part till we got a little further along in
the submarine program and also till we signed the CV77 (ph) contract.
UNKNOWN FEMALE #2: Hi. Just a couple questions. Nick, how much of the Navy's
R&D will now be concentrated between you and Newport News after this deal? And
secondly, doesn't this allow this merger somewhat preclude the rationalization
of the other naval depot that's geographically closer to Newport News?
NICHOLAS CHABRAJA: Hi. I can take the first try at that, but Bill should as
well. In terms of a portion of the naval R&D budget that we would enjoy, I
have no idea. But the biggest probably part of the Navy's research and
development budget goes to Navy facilities. They have several facilities that
do nuclear work as a matter of fact. But in terms of that money given to
contractors, for nuclear projects we currently have all of it.
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We would, after the transaction closes, have all of it. And what you really
have is you want to make it one market by your question is a segmented market.
There is a nuclear Navy that administers a research and development budget and
then there is a surface fleet, which is made up of surface combatants, anfibs
(ph) and auxiliary ships, which is in the midst of several research and
development projects. One, like the DD21 that's in the development stage and
two teams -- everybody knows all about the money that's being deployed there.
Bill, you want to say anything to that subject?
WILLIAM FRICKS: Most of the engineering -- we don't do that much R&D. Our R&D,
per se, is quite small. Most of what people have -- R&D and engineering -- the
engineering is the big piece. For instance, the CBX -- CBNX propulsion design.
It's a big contract for us, but we're the only ones -- we and the EB are the
only ones that can do, the only ones that have any experience in nuclear
propulsion for the last 50 years. So, I think that's sort of an argument that
really doesn't work once you segment that down to what we do.
UNKNOWN FEMALE #2: The naval yard -- I forget, this Newport News and ...
WILLIAM FRICKS: Norfolk Navy Yard.
UNKNOWN FEMALE #2: Yes, exactly. I would -- if they allow you and GD to get
together, then that presumes that they'll never be able to consolidate those
yards. Isn't that a fair assumption?
WILLIAM FRICKS: I wouldn't say so. We do a lot of overhaul work today. We
do the refueling work on the carrier. The Navy yards basically service the
fleet. They do all the submarine refuelings. We don't do any of that, nor
does EB. I think that we could help down the road, but I don't see that it
would preclude that.
NICHOLAS CHABRAJA: And it exceeds maximum environment.
WILLIAM FRICKS: That's right. Need a guy with the long arms at that.
UNKNOWN MALE #3: I'll pass it on. Nick, a couple things. One, financed cost
assumptions on the transaction to get to the accretion. Secondly, can you talk
to the pro forma combined cash flow of the entity and talk about your comfort
level with the balance sheet after the transaction?
NICHOLAS CHABRAJA: I'm very comfortable with the balance sheet after the
transaction. Only about 40 percent -- we're finally going to get some debt on
our books. It's still not enough. The -- I think we made a conservative
assumption. I won't get into the details of it. We expect to be able to borrow
when all is said and done at rates that are lower than the assumption in our
model. That's something we typically don't share the way we analyze the deal.
You're trying to take the penny or two that I might have in my tuck to beat
you.
UNKNOWN MALE #3: (INAUDIBLE).
NICHOLAS CHABRAJA: Newport News is a tremendous cash generator, well over $100
million a year. And it'll be add on, bolt on to what we have. In our view,
this business is going to be a tremendous cash generator over the next four or
five years, and their internal plans show that as well. So, it's going to be
-- it'll look like a General Dynamics business.
One of the glories of this, in my view, is we have two companies that have
each managed the street's expectations very well, performed to them, and each
done a very good job of generating cash historically. And I don't see anything
to change that in the future.
UNKNOWN MALE #4: Hi, Nick. Two questions. First, the last time you looked at
Newport News I think your total consideration for the company was about $2
billion. This time, it's around $2.6 billion. What changed over the last two
years? Has there been a reassessment of the synergies you could achieve? If
you can address that. And then the other issue really for both you and Bill,
why announce the deal now? Why not wait two, three, four months until the
civilian leadership is in place at the Department of Defense and the brought
out line of the strategic review?
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NICHOLAS CHABRAJA: Well, they have a saying in shipbuilding, that the tide
waits for no man. I'd say the same thing about deals. They reach a point of
maturity, and one doesn't sit on them very well. They either do it or it goes
away. And this was something we found compelling. And we think that there is
adequate infrastructure in place within the Navy-DOD community to get done
what we think will not be terribly controversial. We hope we're not surprised
by that.
What's the difference from over two years ago that resulted in a greater
purchase price? What you expect -- more revenue, more earnings, greater cash
flow. The business is worth more. That's reflected not only in my assessment
but in the investor's view as well, because I think when we were going through
our last episode the price of Newport News shares was in the -- trading in the
$30 to $32 range, if I remember correctly. And during the last week or so
they've traded right around $55. I don't think that that's malarkey. It is as
a result of the business improvement. And if we could get into Bill's head,
he'd probably say, "I didn't want to sell the business in 1999 because I saw
my way to value creation," which he did and did splendidly. He told me so at
the time.
Bill, you want to add some?
WILLIAM FRICKS: Honestly, that's right. I felt a couple of years ago that we
would not get the full value of the company at that point in time, that we had
a long ways to go, and I thought we could do. And that's one reason we
wouldn't warm to the idea two years ago. We have now, I think, demonstrated
and have the contracts to prove that. So, we feel like this is a good time for
us. As Nick said, I think, we met, came together and said, "Let's do it."
There's always another reason -- or to delay it, that push it off. We thought
about that. We just felt like this was the time.
UNKNOWN FEMALE #1: We'll take a couple questions from the phone lines.
OPERATOR: We have a question or comment coming from Cai VonRunohr of SG
Cowen.
CAI VONRUNOHR, SG COWEN: Yes. Congratulations. Obviously you're going to have
large opportunities for cost savings, as you've indicated, but you also have
one customer. Have you talked with the customer in terms of how much of these
cost savings they would let you retain or is kind of a plan because the
backlog is so large and pushes out so far that you will be able to capture
these cost savings, certainly under the current contract? But how do you deal
with the issue about, looking forward, how much will they let you keep? Or
will they just kind of put you back to normal type margins?
NICHOLAS CHABRAJA: Cai, we're not at liberty to discuss with you our
conversations with our naval customer. When we talk about savings and
synergies, for the purposes of this meeting, we're assuming that those will
fall to the Navy or to General Dynamics in accordance with the existing
contractual documents and share lines. And from time, as we enter into new
contracts, you will deal with what you're asking right now.
CAI VONRUNOHR: Without getting into specifics, presumably it is an important
issue. I assume you have dealt with it -- you have had discussions with the
Navy and you have had discussions with DOD to kind of at least set out sort of
some rules of the road that seem to be acceptable to you.
NICHOLAS CHABRAJA: I will neither confirm nor deny your assumptions. Our job
today isn't to calibrate your model for five or six years out. We have enough
backlog today in these two businesses to cover the next five or six years, and
we know where the chips will fall. Our job, going forward, is to work on those
savings, identify them for the Navy and get the transaction closed as rapidly
as we can.
Steve, is that you hiding in the back?
STEVE: This is either for Nick or Bill. But I think if you looked historically
Electric Boat is typically generated a return on assets at least threefold
greater than Newport News. It's tougher to tell now obviously with the other
acquisitions GD had done. I'm just wondering, you touched on the cost side as
far as the opportunities. How about on the asset side? Obviously, since you're
not obviously closing down any facilities, but is there much of an asset
shrink story here above and beyond what meets the eye with Newport News' cash
generation?
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NICHOLAS CHABRAJA: I'm not sure I want to go there today. I think Newport News
has done a great job managing their yard efficiently. But let's remember that
back under Teneco's (ph) stewardship, and probably over a young Bill Frick's
objection -- he was probably a financial guy then -- Teneco (ph) continues to
pour money into facilities, including those facilities that were used for
commercial purposes, at a time when others were making a different decision.
So, some of what the public company Newport News had is returned on assets
were cards they were dealt. I think that since they became a public entity
they have been a wonderful steward of those assets and have worked their way
through that as best they can.
So, as far as we're concerned we have two shipyards once this transaction is
closed, two nuclear shipyards. And we have enormous asset possibilities as
well, some of them prospective. That is, why replicate things? Why have the
same facilities built on a going forward basis at each place? Why duplicate
test facilities at each location? We have the ability now together to have
maintenance capital and select when we want the place and where we want to
place additional capital for new facilities.
So, yeah, the big answer is yes, there's asset play. But I certainly wan to be
careful to say that the comparison of Electric Boats and Newport News return
on asset is unfair without looking at it in its historical context.
WILLIAM FRICKS: I don't really have anything to add to that. It's just EB and
Newport is two entirely different companies. Half of our business is in the
refueling and overhaul, which requires a lot of investment. I think Nick's
right, the savings on the asset side is going to prospective. When you've got
to dock you got to dock. You're not going to sell it off. But obviously we
have cut back in capital. We don't need to spend a lot of capital. And I think
between the marine group there are a lot of ideas that could decrease the
capital needs in the future.
UNKNOWN FEMALE #1: We'll take some questions from the phones now.
OPERATOR: We have a question or comment coming from George Shapiro of Salomon
Smith Barney.
GEORGE SHAPIRO, SALOMON SMITH BARNEY: Yeah. Good morning. Two questions,
one probably for Bill. If you could comment not only did the GD merger two
years ago not go through, but Litton also made a bid for Newport News and that
was turned down. And in that case, there wasn't any overlap with submarines
because you make different products. So, if you could comment on why that
transaction was turned down.
WILLIAM FRICKS: Well, if you remember, that transaction was turned down after
about two or three weeks. So, there wasn't a whole lot of study that went into
that. I think at that point in time DOD was saying, "Look, we don't want to
address this right now," that, we don't know what our future bill rates are
going to be. We don't know where we are. We're going to push this off. If you
remember, they said, "We don't want to do this right now." And I think that's
what happened.
GEORGE SHAPIRO: But, I mean, in reality, whatever the billed rates were going
to turn out to be, you were not a competitor to Litton's shipyard in any area.
So, why would that have been an issue?
WILLIAM FRICKS: It wasn't an issue. Basically, if you remember -- you'll have
to ask them, but it was a pretty terse reply that they weren't going to
entertain that right now. And that was about the only answer. So, I don't know
any more than that.
NICHOLAS CHABRAJA: George, I think we're all being historians now about
something that happened over two years and none of us really know all sides of
the story. But remember, none of the proposed transactions were by agreement.
Nobody had a discussion with Bill. They were each unsolicited sort of letter
proposals. In that environment, a transaction is politically difficult. And I
think that the Department of Defense had initiatives underway at Newport News
that were their own, and they said, "Stand down. We're not saying you can
never do a deal. We're just saying leave it alone right now. The conditions
have changed."
UNKNOWN FEMALE #1: Another question from the floor?
NICHOLAS CHABRAJA: All right. There's questions here.
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HOWARD: Nick, it doesn't look like there's much left in shipbuilding because
of what you've done here today and what other people have done. Could you talk
about corporate strategy for a moment? And you alluded to the fact that about
40 percent debt isn't necessarily the highest you might be. So, talk for a
moment about what other things you're trying to do outside of shipbuilding for
a moment.
NICHOLAS CHABRAJA: Howard, nothing has changed. I've always used the same
mantra and look for acquisitions in each of our four lines of business. We'll
continue to do so as long as the deals make sense economically and they are a
good, strategic fit. I don't think anything has changed here. This is
something that has been brought about and contemplated for years, many years.
I go back, try to buy Newport News when Teneco (ph) had it. Teneco (ph) talked
to us about buying Electric Boat way back when. So, these two entities have
had a desire to be together at the working level probably the last 10 years.
And it's had a number of manifestations, one of them just happened to bubble
into the public a couple of years ago. But this has a long and really happy
history. These two yards have been great partners and Bill and I have been
good friends since we've known each other, and that friendship was not
disturbed at all by the offer we made to him a couple years ago. That
proceeded in an orderly way and we were both satisfied at the end of it.
UNKNOWN MALE #5: You mentioned one of the questions about duplicating work. Is
there anything at General Dynamics that may stop in the more near term in
electric drive or some of the other development programs or technologies that
may, after you guys are combined -- may look differently? Is there anything
that would be stopping before this would be closing?
NICHOLAS CHABRAJA: No, absolutely not. And the same is true, I think, at
Newport News. All innovation is encouraged. We work on a lot of the same
things, sometimes have a slightly different solution.
UNKNOWN FEMALE #1: And one question over here.
UNKNOWN MALE #6: Hi. In maintenance and repair, you might serve different
geographies, but I think one can assume that you served as a comparator for
the Navy in terms of worked on and cost. How much in the past has the Navy, in
negotiations, bore down on you with respect to comparing you to each other?
And how do you expect to deal with that in the future?
NICHOLAS CHABRAJA: It's been a long time since we were compared because
obviously in the last four years we've been teaming together. And as was said
earlier, we haven't competed on anything since 1991 really. So, those are days
that almost gone by that they would compare Newport News and Electric Boat.
We're now -- all our costs -- everything we do together is basically under one
contract. We share 50-50 today the profits of the contract. So, we're not
whipsawed or compared anymore.
WILLIAM FRICKS: Yeah, that's true. Most of our maintenance is on the carrier
side. And, of course, the only other person that even carry work are Navy
yards, not Electric Boat.
NICHOLAS CHABRAJA: I think, to the extent that comparisons are made, it's
private versus public competition, not one private yard against the other.
Somebody made a comment here about shipbuilding's fairly well rationalized
now. It was fairly well rationalized before this transaction. You have written
(ph) shipbuilding part of Northrop Grumman. That is the largest non-nuclear
shipbuilding company in the United States. It competes directly against Bath
Iron Works and Masco (ph), owned by General Dynamics. Good competition. They
have a little more market share than we do. Bigger facilities. In the nuclear
business, which was rationalized already through the various teaming
arrangements, now we're letting ownership catch up with what was occurring de
facto.
RAY LEWIS: Bill and Nick, thank you very much. We appreciate it.
OPERATOR: Thank you. This does conclude today's General Dynamics
teleconference. You may disconnect your lines at this time. And have a
wonderful day.
END
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