-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ce/eQC4MWkoVZfX2lK1LUA+PBaV7S5wfbyW6+3mnz0M8701lBU7KZeJ+CyUc7qhY K9GEEBpAyLYi/0kn7qeHIA== 0000040533-96-000005.txt : 19960814 0000040533-96-000005.hdr.sgml : 19960814 ACCESSION NUMBER: 0000040533-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL DYNAMICS CORP CENTRAL INDEX KEY: 0000040533 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 131673581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03671 FILM NUMBER: 96611108 BUSINESS ADDRESS: STREET 1: 3190 FAIRVIEW PARK DRIVE CITY: FALLS CHURCH STATE: VA ZIP: 22042 BUSINESS PHONE: 7038763375 MAIL ADDRESS: STREET 1: 3190 FAIRVIEW PARK DR CITY: FALLS CHURCH STATE: VA ZIP: 22042 10-Q 1 SECOND QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-3671 GENERAL DYNAMICS CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-1673581 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3190 Fairview Park Drive, 22042-4523 Falls Church, Virginia (Zip Code) (Address of principal executive offices) (703) 876-3000 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 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, $1 par value - July 28, 1996 63,028,555 GENERAL DYNAMICS CORPORATION INDEX PART I - FINANCIAL INFORMATION PAGE Item 1 - Consolidated Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Earnings 3 and 4 Consolidated Statement of Cash Flows 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis 12 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 18 Item 4 - Submission of Matters to a Votes of Security Holders 18 Item 6 - Exhibits and Reports on Form 8-K 19 SIGNATURE 19 PART I GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in millions) June 30 December 31 ASSETS 1996 1995 CURRENT ASSETS: Cash and equivalents $ 131 $ 215 Marketable securities 641 880 772 1,095 Accounts receivable 143 105 Contracts in process 494 567 Other current assets 332 246 Total Current Assets 1,741 2,013 NONCURRENT ASSETS: Marketable securities 340 - Leases receivable - finance operations 209 213 Real estate held for development 144 136 Property, plant and equipment, net 470 398 Other assets 354 404 Total Noncurrent Assets 1,517 1,151 $3,258 $3,164 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 109 $ 130 Other current liabilities 754 729 Total Current Liabilities 863 859 NONCURRENT LIABILITIES: Long-term debt 38 38 Long-term debt - finance operations 127 132 Other liabilities 589 568 Commitments and contingencies (See Note H) Total Noncurrent Liabilities 754 738 SHAREHOLDERS' EQUITY: Common stock, including surplus (shares issued 84,387,336) 105 98 Retained earnings 2,167 2,087 Treasury stock (shares held 1996, 21,021,717; 1995, 21,141,961) (632) (625) Unrealized gain on investments 1 7 Total Shareholders' Equity 1,641 1,567 $3,258 $3,164 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts) Three Months Ended June 30 July 2 1996 1995 NET SALES $ 930 $ 703 OPERATING COSTS AND EXPENSES 841 627 OPERATING EARNINGS 89 76 Interest, net 13 15 Other income, net - 2 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 102 93 Provision for income taxes 35 32 EARNINGS FROM CONTINUING OPERATIONS 67 61 DISCONTINUED OPERATIONS, NET OF INCOME TAXES Earnings from operations - 13 Gain on disposal - 8 - 21 NET EARNINGS $ 67 $ 82 NET EARNINGS PER SHARE: Continuing operations $ 1.06 $ .97 Discontinued operations: Earnings from operations - .20 Gain on disposal - .13 $ 1.06 $ 1.30 WEIGHTED AVERAGE SHARES OUTSTANDING (in millions) 63.3 63.0 DIVIDENDS PER SHARE $ .41 $ .375 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 62 $ 48 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts) Six Months Ended June 30 July 2 1996 1995 NET SALES $ 1,823 $1,456 OPERATING COSTS AND EXPENSES 1,651 1,301 OPERATING EARNINGS 172 155 Interest, net 26 28 Other income, net 2 2 EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 200 185 Provision for income taxes 68 64 EARNINGS FROM CONTINUING OPERATIONS 132 121 DISCONTINUED OPERATIONS, NET OF INCOME TAXES Earnings from operations - 13 Gain on disposal - 8 - 21 NET EARNINGS $ 132 $ 142 NET EARNINGS PER SHARE: Continuing operations $ 2.09 $ 1.92 Discontinued operations: Earnings from operations - .20 Gain on disposal - .13 $ 2.09 $ 2.25 WEIGHTED AVERAGE SHARES OUTSTANDING (in millions) 63.2 63.0 DIVIDENDS PER SHARE $ .82 $ .75 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 118 $ 100 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in millions) Six Months Ended June 30 July 2 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 132 $ 142 Adjustments to reconcile net earnings to net cash provided by continuing operations - Discontinued operations - (21) Depreciation, depletion and amortization 29 17 Decrease (Increase) in - Marketable securities 557 (190) Accounts receivable (21) 10 Contracts in process 98 59 Leases receivable - finance operations 4 8 Other current assets (14) 17 Increase (Decrease) in - Accounts payable and other current liabilities (21) (56) Current income taxes 60 19 Deferred income taxes (41) 25 Other, net (32) (15) Net cash provided by continuing operations 751 15 Net cash provided (used) by discontinued operations (51) 14 Net Cash Provided by Operating Activities 700 29 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (671) - Sales/maturities of marketable securities 14 - Purchase of Teledyne Vehicle Systems (55) - Proceeds from sale of assets 22 23 Capital expenditures (39) (14) Net Cash Provided (Used) by Investing Activities (729) 9 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt - finance operations 150 - Repayment of debt - finance operations (150) (4) Dividends paid (49) (45) Other (6) - Net Cash Used by Financing Activities (55) (49) NET DECREASE IN CASH AND EQUIVALENTS (84) (11) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 215 382 CASH AND EQUIVALENTS AT END OF PERIOD $ 131 $ 371 SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for: Federal income taxes $ 83 $ 16 Interest (including finance operations) 8 10 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. GENERAL DYNAMICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in millions, except per share amounts) (A) Basis of Preparation The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 such 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 six month periods ended June 30, 1996, are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 1995. The company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," as of January 1, 1996. SFAS 121 requires a company to adjust the carrying value of long-lived assets and certain identifiable intangibles if their value is determined to be impaired as defined by the standard. The adoption of the standard did not have a material impact on the company's results of operations or financial condition. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages companies to adopt a fair value approach to valuing stock options which would require a charge to earnings in the period the options are granted. The company has elected, as permitted by the standard, to continue to follow its current method of accounting for stock options which has no impact on earnings. In the opinion of the company, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the three and six month periods ended June 30, 1996 and July 2, 1995. (B) Marketable Securities During 1996, the company purchased securities which pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," were classified as available-for-sale. Accordingly, these securities are recorded at fair value, with unrealized gains and losses (the adjustment to fair value) charged to a separate component of shareholders' equity. As these securities have been classified as available-for-sale, their purchases, sales and maturities are required to be reflected as cash flows from investing activities. In addition, the portion of these securities with maturities longer than one year was classified as noncurrent assets. All other securities owned by the company are classified as trading pursuant to SFAS 115. (C) Acquisitions Effective September 13, 1995, the company purchased the stock of Bath Iron Works Corporation for approximately $300 in cash. In December 1995, the company received a purchase price adjustment of $8 in accordance with the terms of the purchase agreement. This transaction has been accounted for under the purchase method of accounting. Operating results of Bath Iron Works have been included with those of the company from the closing date. Had the acquisition been completed as of January 1, 1995, net sales, earnings from continuing operations and net earnings per share from continuing operations on a pro forma basis would have been $943, $67 and $1.07 per share, respectively, for the three month period ending July 2, 1995, and $1,939, $132 and $2.10 per share, respectively, for the six month period ending July 2, 1995. Effective March 29, 1996, the company purchased the assets of Teledyne Vehicle Systems (TVS), an operating unit of Teledyne Inc., for approximately $55 in cash. TVS specializes in combat vehicles as well as mobility systems, suspension technology, and diesel engines for armored vehicle markets worldwide. The transaction has been accounted for under the purchase method of accounting. The excess of the purchase price over the estimated fair value of the net tangible assets acquired has been recorded as intangible assets related to the TVS product lines and goodwill which are being amortized on a straight line basis over periods ranging from 25 to 40 years. This allocation was based on preliminary estimates and may be revised at a later date. The results of TVS are included with those of the company beginning in the second quarter. Pro forma results are not presented because the effects of the acquisition are not material to the company's results of operations or financial condition. (D) Liabilities A summary of significant liabilities, by balance sheet caption, follows: June 30 December 31 1996 1995 Workers' compensation $ 251 $ 233 Retirement benefits 186 199 Salaries and wages 73 74 A-12 termination liability and legal fees 34 38 Other 210 185 Other Current Liabilities $ 754 $ 729 Accrued costs on disposed businesses $ 271 $ 274 Coal mining related liabilities 73 69 Other 245 225 Other Liabilities $ 589 $ 568 (E) Deferred Tax Asset The company had a net deferred tax asset of $250 and $209 at June 30, 1996 and December 31, 1995, the current portion of which was $238 and $120, respectively, and was included in other current assets on the Consolidated Balance Sheet. No material valuation allowance was required for the company's deferred tax assets at June 30, 1996 and December 31, 1995. (F) Earnings Per Share As there is no material dilution, net earnings per share is based upon the weighted average number of common shares outstanding during each period. Prior period amounts have been restated to present simple earnings per share. (G) Discontinued Operations The operating results of discontinued operations are summarized below: Second Quarter First Half 1996 1995 1996 1995 Net sales $ - $131 $ 28 $221 Earnings before income taxes $ - $ 20 $ - $ 20 Provision for income taxes - 7 - 7 Net earnings $ - $ 13 $ - $ 13 Per Share $ - $.20 $ - $ .20 During the first quarter of 1996, the company's Commercial Aircraft Subcontracting business ceased operations after the delivery of its final shipset. Effective the beginning of the second quarter of 1996, the aggregates operations of the company's Material Service business were reclassified to continuing operations. Previously, the company sold the lime, brick, concrete pipe and ready-mix operations, including eight ready-mix yards in the second quarter of 1995. As the results of operations and financial condition of Material Service are not material to the company, prior periods have not been restated to reflect this reclassification. (H) Commitments and Contingencies Litigation On January 7, 1991, the U.S. Navy terminated for default a contract with the company and McDonnell Douglas Corporation (McDonnell Douglas) for the full- scale development of the U.S. Navy's A-12 aircraft. The U.S. Navy has demanded repayment of unliquidated progress payments, plus interest. The company and McDonnell Douglas have a claim pending against the U.S. government in the Court of Federal Claims (see Note I). In December 1995, the court issued an order converting the termination for default to a termination for convenience. A trial on damages has been set for September 1996. Certain issues related to the Internal Revenue Service (IRS) audit of the company's consolidated federal income tax returns for the years 1977 through 1986 were not resolved at the administrative level. Accordingly, in July 1994, the company received a Statutory Notice of Deficiency from the IRS which the company is contesting in the U.S. Tax Court. The company has accrued an amount which is expected to be adequate to cover any liability arising from this matter. Also, as part of the Tax Court litigation, the company is contesting the disallowance by the IRS of its refund claim for additional research and experimentation tax credits for the years 1981 through 1986. The company's position is that it is entitled to a tax credit for certain research performed pursuant to fixed price government contracts. The company believes that its position has been strengthened by the recent decision in Fairchild Industries v. United States, which held for the taxpayer on this issue. The resolution of the Tax Court litigation is expected to take several years. On July 14, 1995, General Dynamics Corporation was served with a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics and Lloyd Thompson, seeking a declaratory judgment and rescission of certain excess loss insurance contracts covering the company's self-insured workers' compensation program at its Electric Boat division for the period July 1, 1988 to June 30, 1992. The insurance contracts cover losses of up to $30 million in excess of a $40 million point in each of the four policy years. The named plaintiff, Paul Hunt, is an individual suing on behalf of himself and other individuals who are members of the Lloyd's of London syndicates and other British insurers who have underwritten the risk. A similar lawsuit, Bath Iron Works v. Institute of London Underwriters, was recently settled with the insurers. The company does not expect that these matters will have a material impact on the company's financial condition or results of operations. On July 26, 1996, a jury in Los Angeles County rendered a verdict in favor of the plaintiffs in the trial of Dolores Blanton and William B. Forti v. General Dynamics. The plaintiffs, former employees of the company's E-Metrics subsidiary, claimed they were promised an equity interest in E-Metrics, and were not compensated when the assets and liabilities were transferred to Hughes Aircraft Company as part of the sale of the Missile Systems business in 1992. The company asserted that the decision on equity interests was left to the E- Metrics board of directors, which never considered the issue. The jury found for each of the plaintiffs $3.7 million for breach of contract, as well as punitive damages of $50 million each. The company believes the jury verdict is not supported by the facts or the applicable law. The company will therefore, ask the judge to enter judgment for the company notwithstanding the verdict, or, in the alternative to order a new trial. The company will also ask the trial judge to exercise his discretion to substantially reduce or eliminate the punitive damage award. While the company is unable to assess the ultimate outcome of this matter, management currently believes it will not have a material impact on its financial condition. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its liabilities in these proceedings, in the aggregate, are not material to the company's financial condition or results of operations. Environmental The company is directly or indirectly involved in fourteen Superfund sites in which the company, along with other major U.S. corporations, has been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency with respect to past shipments of hazardous waste to sites now requiring environmental cleanup. Based on a site by site analysis of the estimated quantity of waste contributed by the company relative to the estimated total quantity of waste, the company believes it is a small contributor and its liability at any individual site is not material. The company is also involved in the cleanup and remediation of various conditions at sites it currently or formerly owned or operated. The company measures its environmental exposure based on currently available facts, existing technologies, and presently enacted laws and regulations. Where a reasonable basis for apportionment exists with other PRPs, the company has considered only its share of the liability. The company considers the solvency of other PRPs, whether responsibility is being disputed, and its experience in similar matters in determining its share. Based on a site by site analysis, the company has recorded an amount which it believes will be adequate to cover any liability arising from the sites. Other The company was contingently liable for debt and lease guarantees and other arrangements aggregating up to a maximum of approximately $70 and $85 at June 30, 1996 and December 31, 1995, respectively. During the first quarter, a nonaffiliate for whom the company has guaranteed debt of approximately $40 disclosed that it anticipated not being in compliance with loan covenants. On July 2, 1996 this nonaffiliate announced that it had obtained additional bank financing that is expected to meet all of its capital requirements until its operations become fully self-sufficient on a cash flow basis. In connection with the sale of its defense businesses, the sales agreements contain certain representations and warranties under which the purchasers have certain specified periods of time to assert claims against the company. Some claims have been asserted which in the aggregate are material in amount, but the company does not believe that its liability as a result of these claims will exceed the liabilities recorded at the time of the sales. (I) Termination of A-12 Program As stated in Note H, the U.S. Navy terminated the company's A-12 aircraft contract for default. The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the U.S. Navy's new carrier-based Advanced Tactical Aircraft. Both the company and McDonnell Douglas (the contractors) were parties to the contract with the U.S. Navy, each had full responsibility to the U.S. Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the U.S. Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors' appeal of the termination for default, or a negotiated settlement. The contractors filed a complaint on June 7, 1991, in the U.S. Court of Federal Claims contesting the default termination. The suit, in effect, seeks to convert the termination for default to a termination for convenience of the U.S. government and seeks other legal and equitable relief. A trial on Count XVII of the complaint, which relates to the propriety of the termination for default, was concluded in October 1993. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following a trial on the merits, the court issued an order converting the termination for default to a termination of convenience. In June 1996, the court ruled that it will not consider a loss adjustment nor profit in deciding the amount of the contractors' recovery and, therefore, only the amount of incurred costs remains to be determined. The court indicated that if the parties are unable to stipulate the amount of incurred costs, the issue will be tried beginning September 16, 1996. In the aggregate, the contractors seek to recover payment for all costs incurred in the A-12 program and its termination, including interest. The total amount sought, as updated through June 30, 1996, is approximately $1.3 billion plus applicable interest, over and above amounts previously received from the U.S. Navy. The company has not recognized any claim revenue from the U.S. Navy. The company has fully reserved the contracts in process balance associated with the A-12 program and has accrued the company's estimated termination liabilities, and the liability associated with pursuing the litigation through trial. In the unlikely event that the court's decision converting the termination to a termination for convenience is reversed on appeal, and the contractors are ultimately found to be in default of the A-12 contract and are required to repay all unliquidated progress payments, additional losses of approximately $675, plus interest, may be recognized by the company. This result is considered remote. GENERAL DYNAMICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION June 30, 1996 (Dollars in millions, except per share amounts) Business Environment Background The company's primary business has historically been supplying weapons systems to the U.S. government. In 1990, U.S. defense budgets, which had been declining since 1985, began falling sharply in response to the end of the Cold War. Management anticipated that the budget declines were structural in that, for the foreseeable future, there would be fewer new weapons systems required which would result in excess capacity in the industry. Accordingly, management believed there would be a necessary contraction and consolidation of the U.S. defense industry. To date, management's analysis of these developments has proved to be true as evidenced by declines, in real terms, in the defense budget and by the number of industry combinations in recent years. In response to this changing business environment, management initiated a program requiring its major businesses to be market leaders and to have "critical mass" - the appropriate size to retain key capabilities and ensure economies of scale, and sought to meet these criteria through mergers, acquisitions, or sales of businesses if necessary. In following this strategy, the company sold in prior years its Tactical Military Aircraft, Missile Systems and Space Launch Systems businesses. In 1995, the company acquired Bath Iron Works, a builder of surface combatant ships for the U.S. Navy. Effective March 29, 1996, the company purchased the assets of Teledyne Vehicle Systems (TVS), an operating unit of Teledyne Inc. TVS specializes in combat vehicles as well as mobility systems, suspension technology, and diesel engines for armored vehicle markets world-wide. The acquisition brings the company's share of the U.S. Army's Crusader Advanced Field Artillery System (Crusader) program to approximately 25 percent. The operating results of TVS are being reported in the company's Armored Vehicles segment beginning in the second quarter. Legislative Developments Marine Group. For fiscal year 1997 (FY97), the President's budget submission included $700 of the remaining $800 funding required for the third Seawolf, and funding for the continued design and long-lead materials for construction of the first ship of the New Attack Submarine (NSSN) program. Construction of the third Seawolf provides the level of activity necessary to maintain operation of all Electric Boat's facilities until construction of the first NSSN begins in 1998. Current Department of Defense (DoD) plans call for a total of 30 ships in the NSSN program. Congressional directives require that the first four NSSNs be equally allocated between Electric Boat and its competitor, with competition on subsequent ships to begin in 2003. Also in FY97, the President is requesting funding to complete a two year procurement of six DDG 51 destroyers, three of which were allocated to the company in June. Finally, the President's FY97 budget includes additional research and development funding for the Navy's new arsenal ship, which represents the potential for additional ship construction for Bath Iron Works. Funding was previously obtained for the design and construction of the lead ship in the LPD 17 class amphibious assault ship program which is to be awarded later in 1996. Bath Iron Works is teamed with other major contractors competing for the LPD 17, which the Navy anticipates to be a 12-ship program. Armored Vehicles. The U.S. Army has begun a program to upgrade over 1,000 of its M1 Abrams tanks to the M1A2 configuration by the year 2003. For FY97, the President is requesting funding for the multi-year contract, which the company signed in July. This multi-year contract should stabilize domestic tank production and provide the foundation for further international opportunities. In June, the company won a competition for the AAAV development program. Funding was requested for this program, and the company believes there is strong support in Congress and that it is the Marine Corps' top priority. This development program is expected to be followed by a multibillion dollar production program in the next decade. Funding was also requested in the President's budget for three additional armored vehicle programs in which the company is participating. The first is a four-year program to upgrade Fox Nuclear, Biological and Chemical Reconnaissance System vehicles. The second is the Heavy Assault Bridge which is currently under development and is expected to enter production late in this decade. The third is the Crusader development program in which the company is teamed with one other contractor, and which could lead to a production program worth as much as $13 billion. Additional funding has also been proposed for the FY97 Single Channel Ground and Airborne Radio System (SINCGARS) procurement which the Army plans to dual source. The company was recently awarded a contract for 40% of the third competitive SINCGARS production bid. Strategic Focus The company is working closely with its customers to meet demands for capability and affordability at significantly reduced procurement rates. Accordingly, management is continuing to focus on aggressively reengineering the cost structures of all operations to create highly efficient businesses capable of operating profitably at significantly lower volumes. With DoD initiatives to reduce its own infrastructure, additional opportunities may be available for greater involvement in overhaul, maintenance, upgrade and modification work. In addition, the company continues to explore ways to utilize its financial capacity to strengthen its operations through both internal and external investments. Accordingly, management will continue to consider the benefits of corporate business combinations and financial restructuring options to further enhance the value of the company. Backlog The following table shows the approximate backlog of the company as calculated at June 30, 1996 and December 31, 1995: June 30 December 31 1996 1995 Marine Group $ 4,470 $ 3,671 Armored Vehicles 847 959 Other 589 597 Funded Backlog $ 5,906 $ 5,227 Total Backlog $ 9,351 $ 7,386 Funded backlog represents the total estimated remaining sales value of work that has been appropriated by Congress, and contracted and funded by the procuring agency. Funded backlog also includes amounts for long-term coal contracts. To the extent backlog has not been funded, there is no assurance that congressional appropriations or agency allotments will be forthcoming. During the second quarter, the company obtained definitive contracts for the construction of the third Seawolf submarine, as well as for the design of the NSSN. These contracts added $1.1 billion and $1.3 billion to total backlog, respectively. Also during the second quarter, the company received a $400 million firm contract for the construction of one of the three DDG 51 destroyers which the company was allocated, as discussed above. Subsequent to the end of the quarter, the company obtained a letter contract for the multiyear upgrade of M1 tanks. While not reflected in the backlog data reported above, this contract will add $1.5 billion to the company's total backlog during the third quarter. Results of Operations The following table sets forth the net sales and operating earnings by business segment for the three and six month periods ending June 30, 1996 and July 2, 1995: Three Month Period Six Month Period Inc/ Inc/ 1996 1995 (Dec) 1996 1995 (Dec) NET SALES: Marine Group $ 612 $ 410 $ 202 $1,226 $ 849 $ 377 Armored Vehicles 261 261 - 507 539 (32) Other 57 32 25 90 68 22 $ 930 $ 703 $ 227 $1,823 $1,456 $ 367 OPERATING EARNINGS: Marine Group $ 55 $ 47 $ 8 $ 109 $ 96 $ 13 Armored Vehicles 35 35 - 68 71 (3) Other (1) (6) 5 (5) (12) 7 $ 89 $ 76 $ 13 $ 172 $ 155 $ 17 Marine Group Net sales and operating earnings increased during the three and six month periods due primarily to the acquisition of Bath Iron Works. For a discussion of the accounting for this transaction and related information, see Note C to the Consolidated Financial Statements. The operating results of Bath Iron Works have been included with those of the company from the closing date, September 13, 1995. Also during the three and six month periods, construction activity on the Trident and Los Angeles class submarine programs decreased, but were offset by increased engineering and design work on the NSSN and by the increase in the earnings rate on the Trident program in the second quarter of 1995. Armored Vehicles Net sales and operating earnings decreased during the six month period due primarily to decreased M1 tank production resulting from the delivery of the final M1A2 tank to Kuwait in the first quarter of 1996. This decrease was partially offset in the second quarter by the acquisition of TVS. Other Net sales increased during the three and six month periods due to the reclassification of the company's Material Service business to continuing operations beginning in the second quarter of 1996 (for further discussion see Note G). Operating earnings increased during the three and six month periods due primarily to extension of the leases held by the company's Ship Financing business. Discontinued Operations The company reported earnings from discontinued operations of $13 in the second quarter of 1995. These earnings were attributable primarily to the MD-11 program at the company's Commercial Aircraft Subcontracting business. As described in Note G, the Commercial Aircraft Subcontracting business ceased operations in the first quarter of 1996 after the delivery of its final shipset, and the remaining operations of the company's Material Service business were reclassified to continuing operations in the second quarter of 1996. General and Administrative Expenses General and administrative expenses increased during the three and six month periods due primarily to the acquisition of Bath Iron Works. However, general and administrative expenses as a percentage of net sales have decreased period over period. New Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of," in March 1995 and No. 123, "Accounting for Stock-Based Compensation," in October 1995. SFAS 121 requires a company to adjust the carrying value of long-lived assets and certain identifiable intangibles if their value is determined to be impaired as defined by the standard. The company adopted the provisions of SFAS 121 as of January 1, 1996, which had no material impact on the company's results of operations or financial condition. SFAS 123 encourages companies to adopt a fair value approach to valuing stock options which would require a charge to earnings in the period the options are granted. The company has elected, as permitted by the standard, to continue to follow its current method of accounting for stock options which has no impact on earnings. Financial Condition Operating Activities Net cash provided by continuing operations increased this year over last year due primarily to the change in the amount the company invested in marketable securities classified as trading per SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". Net cash provided by discontinued operations decreased this year over last year due primarily to the company's Commercial Aircraft Subcontracting business ceasing operations in January 1996 and the resulting higher tax payments associated with the delivery of its final shipset. For a discussion of environmental matters and other contingencies, see Note H to the Consolidated Financial Statements. The company's liability, in the aggregate, with respect to these matters, is not deemed to be material to the company's financial condition or results of operations. Investing Activities As discussed in Note B, the company has purchased available-for-sale securities in order to favorably affect the performance of its investment portfolio. Those securities with maturities longer than one year are classified as noncurrent assets. Although the maturities extend beyond one year, the securities are still available currently to fund internal and external investment opportunities. As previously discussed, the company acquired TVS on March 29, 1996, for $55 in cash. Financing Activities The Title XI Bonds issued by the company's finance operations were retired in 1996. This retirement was financed by the private placement of new, non- callable bonds which are also non-recourse to the company. The refinancing has no material impact on the company's results of operations or financial condition. The company's Board of Directors increased the regular quarterly dividend on the company's common stock from $0.375 to $0.41 per share in March 1996. This increase reflects the Board's confidence in the sustainability of the cash flows generated by the company's continuing operations. In 1994, the company's Board of Directors reconfirmed management's authority to repurchase, at its discretion, up to 3 million shares of the company's common stock. As of June 30, 1996, the company had repurchased approximately 600,000 shares. During July 1996, the company repurchased approximately 300,000 additional shares. The company expects to generate sufficient funds from operations to meet both its short and long-term liquidity needs. In addition, the company has the capacity for long-term borrowings and currently has a committed, short-term $600 line of credit. PART II GENERAL DYNAMICS CORPORATION OTHER INFORMATION June 30, 1996 Item 1. Legal Proceedings Reference is made to Note H, Commitments and Contingencies, which is incorporated herein by reference, for a statement relevant to activities in the quarter covering certain litigation to which the company is a party. Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders of the Company, for which proxies were solicited pursuant to Regulation 14, was held on May 1, 1996. (b) & (c) A brief discussion of each matter voted upon and the number of votes cast is as follows: Matter Votes Cast For Against Abstain Non-Votes Election of Directors: Carlucci, F.C. 55,757,811 676,988 Chabraja, N.D. 55,378,698 1,056,101 Crown, J.S. 55,828,568 606,231 Crown, L. 55,719,995 714,804 Goodman, C.H. 55,725,429 709,370 Mellor, J.R. 55,732,400 702,399 Sullivan, G.R. 55,743,864 690,935 Trost, C.A.H. 55,714,626 720,173 Selection of Independent Auditors 56,086,831 204,221 143,747 Shareholders Proposal Regarding: Composition of Board 8,318,065 42,851,077 923,146 4,342,511 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11, Statement Re Computation of Per Share Earnings (b) Reports on Form 8-K None. 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. GENERAL DYNAMICS CORPORATION by /s/John W. Schwartz John W. Schwartz Staff Vice President and Controller (Principal Accounting Officer) Dated August 13, 1996 EX-11 2 EXHIBIT Exhibit 11, 2nd Quarter 1996 Form 10-Q, Commission File Number 1-3671 GENERAL DYNAMICS CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (Dollars in millions, except per share data) Second Quarter First Half 1996 1995 1996 1995 NET EARNINGS:
Continuing Operations $ 67 $ 61 $ 132 $ 121 Discontinued Operations: Earnings from operations - 13 - 13 Gain on disposal - 8 - 8 $ 67 $ 82 $ 132 $ 142 Weighted average common shares outstanding 63,270,592 62,958,300 63,244,234 62,975,885 NET EARNINGS PER SHARE - PRIMARY: Continuing Operations $ 1.05 $ .97 $ 2.08 $ 1.92 Discontinued Operations: Earnings from operations - .20 - .20 Gain on disposal - .13 - .13 $ 1.05 $ 1.30 $ 2.08 $ 2.25 Common shares from above 63,270,592 62,958,300 63,244,234 62,975,885 Assumed exercise of options (treasury stock method) 238,367 201,587 220,145 200,701 63,508,959 63,159,887 63,464,379 63,176,586 NET EARNINGS PER SHARE - FULLY DILUTED: Continuing Operations $ 1.05 $ .97 $ 2.08 $ 1.92 Discontinued Operations: Earnings from operations - .20 - .20 Gain on disposal - .13 - .13 $ 1.05 $ 1.30 $ 2.08 $ 2.25 Common shares from above 63,270,592 62,958,300 63,244,234 62,975,885 Assumed exercise of options (treasury stock method) 239,741 201,587 239,741 200,701 63,510,333 63,159,887 63,483,975 63,176,586
EX-27 3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of June 30, 1996, and the related consolidated Statement of Earnings for the six months ended June 30, 1996 and is qualified in its entirety to such financial statements. QTR-2 DEC-31-1996 JUN-30-1996 131 641 143 0 494 1741 1409 939 3258 863 38 105 0 0 1536 3258 1823 1823 1651 1651 -2 0 2 200 68 132 0 0 0 132 2.08 2.08
-----END PRIVACY-ENHANCED MESSAGE-----