-----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, D1NEjpcoJeu84/OrPENkrgpsHPclZtPNKE/msPNPIW/Wq8SOsTAV+Lb1Pf6moKIv UFc+QbjW+aDZmwuMvqk3TQ== 0000040533-97-000009.txt : 19970813 0000040533-97-000009.hdr.sgml : 19970813 ACCESSION NUMBER: 0000040533-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970629 FILED AS OF DATE: 19970812 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: 97656319 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 29, 1997 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 Identification No.) or organization) 3190 Fairview Park Drive, Falls Church, Virginia 22042-4523 (Address of principal (Zip Code) 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 - August 6, 1997 62,840,627 GENERAL DYNAMICS CORPORATION INDEX PART I - FINANCIAL INFORMATION PAGE Item 1 - Consolidated Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Earnings (Three Months) 3 Consolidated Statement of Earnings (Six Months) 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 17 Item 4 - Submission of Matters to a Vote of Security Holders 17 Item 6 - Exhibits and Reports on Form 8-K 18 SIGNATURE 18 PART I GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in millions)
June 29 December 31 1997 1996 ASSETS CURRENT ASSETS: Cash and equivalents $ 205 $ 516 Marketable securities 450 378 655 894 Accounts receivable 172 97 Contracts in process 561 558 Other current assets 286 309 Total Current Assets 1,674 1,858 NONCURRENT ASSETS: Marketable securities 133 261 Leases receivable - finance operations 199 204 Real estate held for development 153 147 Property, plant and equipment, net 520 441 Intangible assets 480 165 Other assets 232 223 Total Noncurrent Assets 1,717 1,441 $3,391 $ 3,299 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 154 $ 182 Other current liabilities 725 651 Total Current Liabilities 879 833 NONCURRENT LIABILITIES: Long-term debt 40 38 Long-term debt - finance operations 110 118 Other liabilities 570 596 Commitments and contingencies (See Note G) Total Noncurrent Liabilities 720 752 SHAREHOLDERS' EQUITY: Common stock, including surplus (shares issued 84,387,336) 132 109 Retained earnings 2,354 2,254 Treasury stock (shares held 1997, 21,575,505; 1996, 21,285,157) (694) (650) Unrealized gain on investments - 1 Total Shareholders' Equity 1,792 1,714 $3,391 $3,299 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 29 June 30 1997 1996 NET SALES $ 1,032 $ 930 OPERATING COSTS AND EXPENSES 918 841 OPERATING EARNINGS 114 89 Interest, net 8 13 Other income (expense), net - - EARNINGS BEFORE INCOME TAXES 122 102 Provision for income taxes 42 35 NET EARNINGS $ 80 $ 67 NET EARNINGS PER SHARE $ 1.28 $ 1.06 WEIGHTED AVERAGE SHARES OUTSTANDING (in millions) 62.6 63.3 DIVIDENDS PER SHARE $ .41 $ .41 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 78 $ 62 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 29 June 30 1997 1996 NET SALES $ 1,973 $ 1,823 OPERATING COSTS AND EXPENSES 1,757 1,651 OPERATING EARNINGS 216 172 Interest, net 17 26 Other income (expense), net (3) 2 EARNINGS BEFORE INCOME TAXES 230 200 Provision for income taxes 79 68 NET EARNINGS $ 151 $ 132 NET EARNINGS PER SHARE $ 2.40 $ 2.09 WEIGHTED AVERAGE SHARES OUTSTANDING (in millions) 62.8 63.2 DIVIDENDS PER SHARE $ .82 $ .82 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 156 $ 118 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 29 June 30 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 151 $ 132 Adjustments to reconcile net earnings to net cash provided by continuing operations - Depreciation, depletion and amortization 43 29 Decrease (Increase) in - Marketable securities (161) 557 Accounts receivable (23) (21) Contracts in process 137 98 Leases receivable - finance operations 5 4 Other current assets 3 (14) Increase (Decrease) in - Accounts payable and other current liabilities (98) (21) Current income taxes (6) 60 Deferred income taxes 34 (41) Other, net (4) (32) Net cash provided by continuing operations 81 751 Net cash used by discontinued operations (25) (51) Net Cash Provided by Operating Activities 56 700 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (450) (55) Purchases of available-for -sale securities (329) (671) Sales/maturities of available-for-sale securities 546 14 Capital expenditures (37) (39) Proceeds from the sale of assets - 22 Other (3) - Net Cash Used by Investing Activities (273) (729) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt - finance operations - 150 Repayment of debt - finance operations (8) (150) Dividends paid (51) (49) Purchase of common stock (60) (3) Proceeds from option exercises 25 3 Other - (6) Net Cash Used by Financing Activities (94) (55) NET DECREASE IN CASH AND EQUIVALENTS (311) (84) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 516 215 CASH AND EQUIVALENTS AT END OF PERIOD $ 205 $ 131 SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Federal income taxes $ 38 $ 83 Interest (including finance operations) 6 8 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 29, 1997, are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. 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 29, 1997 and June 30, 1996. (B) Acquisitions Effective March 29, 1996, the company purchased the assets of Teledyne Vehicle Systems (Muskegon Operations), formerly an operating unit of Teledyne Inc., for approximately $55 in cash. The transaction has been accounted for under the purchase method of accounting. Operating results of the Muskegon Operations are included with those of the company from the closing date. Effective January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, formerly operating units of Lockheed Martin Corporation, for approximately $450 in cash. Defense Systems builds light vehicles, turrets and transmissions for combat vehicles, as well as missile guidance and naval fire control systems. Armament Systems designs, develops and produces advanced gun, ammunition handling and air defense systems, and is a leader in the production of ammunition and ordnance products. The transaction has been accounted for under the purchase method of accounting. Operating results of Defense Systems and Armament Systems are included with those of the company from the closing date. Approximately $320, the excess of the purchase price over the estimated fair value of the net tangible assets acquired, has been recorded as intangible assets comprised of contracts and programs acquired and goodwill. The intangible assets are being amortized on a straight- line basis over periods ranging from 30 to 40 years. This allocation is based on preliminary estimates and may be revised at a later date. (C) Intangible Assets Intangible assets consist of the following: June 29 December 31 1997 1996 Contracts and programs acquired $ 367 $ 149 Goodwill 113 16 $ 480 $ 165
Intangible assets are shown net of accumulated amortization of $18 and $10 at June 29, 1997 and December 31, 1996, respectively. Intangible assets are amortized on a straight-line basis over periods ranging from 25 to 40 years. (D) Liabilities A summary of significant liabilities, by balance sheet caption, follows: June 29 December 31 1997 1996 Workers' compensation $ 230 $ 239 Retirement benefits 201 179 Salaries and wages 77 68 Other 217 165 Other Current Liabilities $ 725 $ 651 Accrued costs on disposed businesses $ 219 $ 256 Retirement benefits 116 111 Coal mining related liabilities 78 77 Other 157 152 Other Liabilities $ 570 $ 596
(E) Income Taxes The company had a net deferred tax asset of $236 and $270 at June 29, 1997 and December 31, 1996, the current portion of which was $207 and $231, respectively, and was included in other current assets on the Consolidated Balance Sheet. No valuation allowance was required for the company's deferred tax assets at June 29, 1997 and December 31, 1996. Certain issues related to the 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. Further, in June 1997, the company filed refund claims of approximately $80 (plus interest) related to additional research and experimentation tax credits for the years 1981 through 1990. This brings to approximately $355 (plus interest) the total refund claims filed to date. A portion of the claims relates to the years 1981 through 1986 and is part of the litigation discussed above, while the remaining claims are being contested at the IRS administrative level. 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 decision in Fairchild Industries v. United States, which held for the taxpayer on this issue. The timing of the resolution of the Tax Court litigation is uncertain. A trial date has been set for April 1998. (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. (G) Commitments and Contingencies Litigation Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note H. On May 1, 1997, a jury in San Diego County rendered a verdict of $101 against the company in favor of 97 former Convair employees. In this lawsuit, Argo, et al. v. General Dynamics, the plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit and concealed its plans to close its Convair division. The jury awarded the plaintiffs a total of $1.8 in actual damages, and $99 in punitive damages. The company is appealing the judgment. The company believes it has substantial legal defenses, but in any case, it believes the punitive damage award is excessive as a matter of law. 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 results of operations or financial condition. 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 in excess of a $40 attachment 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. The company does not expect that the matter will have a material impact on the company's results of operations or financial condition. Hughes Missile Systems Company (HMSC) has filed an amended complaint against the company alleging breaches of certain representations and warranties contained in the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business. The amended complaint which was filed in the Superior Court of the State of California, seeks $42 in damages. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. In March 1996, the company received a judgment for $26 against the government in General Dynamics v. U.S., a case tried in U.S. District Court for the Central District of California. The company sued the government under the Federal Tort Claims Act, alleging that the Defense Contract Audit Agency negligently audited the Division Air Defense contract, which led to the company's indictment in 1985. The indictment was later dropped. The government has appealed the 1996 judgment. HMSC will receive 30 percent of the net recovery as a result of its purchase of the company's missile business in 1992. The company has not recognized any claim revenue from this matter. The company has been sued as the "alter ego" of Asbestos Corporation Ltd., a Canadian company, in which General Dynamics owned shares between 1969 and 1982. The company, along with more than 50 other defendants, has been sued in several thousand cases filed in Texas by plaintiffs alleging exposure to asbestos. Although the gross claims attributable to the plaintiffs cannot be estimated, including the share of the company or any other defendant, any losses arising from these matters are largely covered by insurance. Therefore, the company does not believe that these matters will have a material impact on the company's results of operations or financial condition. The company is a defendant in tort cases pending in state and federal court in Arizona, as well as a Comprehensive Environmental Response, Compensation and Liability Act case. The litigation arises out of groundwater and soil contamination at the Tucson airport. The company's predecessor in interest, Consolidated Aircraft Company, operated a modification center at the site during World War II. The company has defenses to the claims, as well as a claim against the government for indemnification. The company is unable to estimate its share of any liability arising from these claims. However, the company believes it is entitled to indemnity from the U.S. for any liability. Therefore, the company does not believe the litigation will have a material impact on the company's results of operations or 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 results of operations or financial condition. Environmental The company adopted the provisions of the Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" as of January 1, 1997. SOP 96-1 provides authoritative guidance regarding the recognition, measurement, display and disclosure of environmental remediation liabilities resulting from Superfund or analogous laws and regulations. The adoption of the statement did not have a material impact on the company's results of operations or financial condition. 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 enacted laws and existing regulations, and on the technology expected to be approved to complete the remediation effort. The estimated cost to perform each of the elements of the remediation effort is based on when those elements are expected to be performed. Where a reasonable basis for apportionment exists with other PRPs, the company estimates only its allowable share of the joint and several remediation liability for a site, taking into consideration the solvency of other participating PRPs. Based on a site by site analysis, the company believes it has adequate accruals for any liability it may incur arising from the sites. Other The company was contingently liable for debt and lease guarantees and other arrangements of approximately $90 at June 29, 1997. (H) Termination of A-12 Program The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy's new carrier-based Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas (the contractors) were parties to the contract with the Navy, each had full responsibility to the 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 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 for convenience. The parties have concluded their litigation over incurred costs, the final phase in the U.S. Court of Federal Claims. The contractors are seeking a judgment of $1,202 plus interest. The U.S. government is challenging $378 of the total costs incurred by the contractors as unallowable. A final judgment in the U.S. Court of Federal Claims is expected later this year. Final resolution of the A-12 litigation will depend on the entry of final judgment, the outcome of expected appeals, and further litigation or negotiation with the government. The company has not recognized any claim revenue from the 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 29, 1997 (Dollars in millions, except per share amounts) Forward-Looking Statements Management's Discussion and Analysis of the Results of Operations and Financial Condition contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows and contract awards. Such forward looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors including the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; labor negotiations; changing priorities or reductions in the U.S. government defense budget; and termination of government contracts due to unilateral government action. Business Segments The company comprises two major business segments: Marine and Combat Systems Groups, as well as miscellaneous businesses classified as Other. The following table sets forth the net sales and operating earnings by business segment for the three and six month periods ending June 29, 1997 and June 30, 1996: Three Month Period Six Month Period Inc/ Inc/ 1997 1996 (Dec) 1997 1996 (Dec) NET SALES: Marine Group $ 587 $ 612 $ (25) $1,146 $1,226 $ (80) Combat Systems Group 378 261 117 715 507 208 Other 67 57 10 112 90 22 $1,032 $ 930 $ 102 $1,973 $1,823 $ 150 OPERATING EARNINGS: Marine Group $ 61 $ 55 $ 6 $ 120 $ 109 $ 11 Combat Systems Group 41 35 6 86 68 18 Other 12 (1) 13 10 (5) 15 $ 114 $ 89 $ 25 $ 216 $ 172 $ 44
Marine Group Results of Operations and Outlook Net sales decreased during the three and six month periods due to lower submarine construction activity, partially offset by increased engineering and design work on the New Attack Submarine (NSSN) and increased volume on the Arleigh Burke class destroyer (DDG-51) program. Operating earnings increased during the three and six month periods as a result of higher margins obtained from cost reduction efforts and diminishing operating risks as the submarine construction programs mature. For the remainder of 1997, net sales and operating earnings are expected to approach levels reported during the first half of the year. Business and Market Considerations Significant programs in which the Marine Group participates continue to be well supported by Congress in the fiscal year 1998 (FY98) budget process. The House and Senate committees responsible for the authorization and appropriation of the Department of Defense budget each have recommended FY98 funding for the NSSN and DDG-51 programs that either meet or exceed the President's budget request. The company has entered into a Team Agreement, dated February 25, 1997, with Newport News Shipbuilding and Drydock Company (Newport News) for the NSSN program. The Team Agreement provides that Electric Boat will be the prime contractor on construction contracts for the NSSNs, though construction and assembly work will be equally shared with Newport News through a subcontracting arrangement. Electric Boat will retain the lead design role. The Team Agreement requires the approval of the Navy, Department of Defense, and a change in the existing law which currently requires competition between Electric Boat and Newport News for construction of NSSNs after each has produced two ships. The Senate recommends the adoption of a provision that would authorize the Secretary of the Navy to enter into a contract for the construction of NSSNs under the terms of the Team Agreement. While the House has withheld such recommendation, the company believes the cost savings to be provided to the Navy will enhance support for the Team Agreement during the House-Senate Authorization Conference. During the third quarter, the collective bargaining agreements with two unions at Bath Iron Works (BIW) are scheduled to expire. Negotiations on new agreements are currently ongoing, and the company does not anticipate any business disruption. Combat Systems Group Results of Operations and Outlook Net sales and operating earnings increased during the three and six month periods due primarily to the acquisition of Defense Systems and Armament Systems from Lockheed Martin Corporation on January 1, 1997. The acquisition has been accretive to the company's net earnings. For a discussion of the accounting for this transaction and related information, see Note B to the Consolidated Financial Statements. Net sales and operating earnings in the second half of the year are expected to exceed the first half due to the timing of deliveries at Defense Systems and Armament Systems. Operating margins, while subject to quarter-to-quarter volatility, are expected to be similar to those reported during the first half of the year. Business and Market Considerations Significant programs in which the Combat Systems Group participates continue to be well supported by Congress in the FY98 budget process. The House and Senate committees responsible for the authorization and appropriation of the Department of Defense budget have recommended in virtually every case FY98 funding that meets or exceeds the President's budget request for the upgrade of M1 tanks to the M1A2 configuration, the Advanced Amphibious Assault Vehicle, the Crusader Self-Propelled Howitzer development program, the Heavy Assault Bridge, the Hydra Rocket and derivatives of the Bradley combat vehicle. Other Operating earnings increased during the three and six month periods due to the improved performance of both the aggregates business and coal operations. The aggregates business improved due to increased sales volumes and cost reduction efforts. The coal operations improved due to the suspension of mining activity at an unprofitable location. Backlog The following table details the backlog of each business segment as calculated at June 29, 1997 and December 31, 1996: June 29 December 31 1997 1996 Marine Group $ 6,986 $ 7,566 Combat Systems Group 2,581 2,057 Other 699 727 Total Backlog $10,266 $10,350 Funded Backlog $ 6,180 $ 6,161
Total backlog represents the estimated remaining sales value of work primarily performed under authorized U.S. government contracts. Funded backlog represents the portion of total backlog that has been appropriated by Congress and funded by the procuring agency. The increase in backlog at the Combat Systems Group is due primarily to the acquisition of Defense Systems and Armament Systems. To the extent backlog has not been funded, there is no assurance that congressional appropriations or agency allotments will be forthcoming. Total backlog also includes amounts for long-term coal contracts. Additional Financial Information Interest, Net Interest income decreased during the three and six month periods due to a decline in the average cash balance resulting from the acquisition of Defense Systems and Armament Systems on January 1, 1997. Environmental Matters For a discussion of environmental matters and other contingencies, see Note G 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 results of operations or financial condition. New Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997 and No. 130, "Reporting Comprehensive Income" in June 1997. SFAS 128 requires a company to present basic and diluted earnings per share amounts on the face of the Consolidated Statement of Earnings. The company is required to adopt the provisions of the standard during the fourth quarter of 1997, and when adopted, will require restatement of prior years' earnings per share. The standard will not have a material impact on historical earnings per share reported by the company. SFAS 130 requires a company to report comprehensive income and its components in a full set of general- purpose financial statements. The company is required to adopt the provisions of the standard during the first quarter of 1998, and when adopted, will require reclassification of prior years' financial statements. There will be no material difference between comprehensive income and historical net earnings reported by the company. Financial Condition Operating Activities Cash flows from continuing operations decreased 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." Cash flows from discontinued operations improved this year over last year due primarily to lower allocated federal income tax payments. Investing Activities As discussed in Note B, the company acquired the assets of Defense Systems and Armament Systems on January 1, 1997, for approximately $450 in cash. The company is considering an investment of approximately $200 to modernize the facilities at its BIW shipyard, for the purpose of improving productivity. Financing Activities 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 29, 1997, the company had repurchased approximately 1.8 million shares, including approximately 0.9 million shares during 1997. The company expects to generate sufficient funds from operations to meet both its short-term 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 29, 1997 Item 1. Legal Proceedings Reference is made to Note G, Commitments and Contingencies, to the Consolidated Financial Statements in Part I, 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 7, 1997. (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. 56,392,972 677,763 Chabraja, N.D. 56,466,670 604,065 Crown, J.S. 56,447,916 622,819 Crown, L. 56,433,640 637,095 Goodman, C.H. 56,448,271 622,464 Mellor, J.R. 56,457,994 612,741 Sullivan, G.R. 56,484,697 586,038 Trost, C.A.H. 56,487,522 583,213 Selection of Independent Auditors 56,695,879 214,705 160,151 Incentive Compensation Plan Amendment and Restatement 49,816,316 6,888,345 366,074 Shareholders Proposal Regarding: Foreign Military Sales 1,714,778 48,822,960 3,296,392 3,236,605
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 12, 1997 EX-11 2 EX11.ASC Exhibit 11, 2nd Quarter 1997 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 1997 1996 1997 1996 NET EARNINGS $ 80 $ 67 $ 151 $ 132 Weighted average common shares outstanding 62,557,094 63,270,592 62,817,318 63,244,234 NET EARNINGS PER SHARE - PRIMARY $ 1.27 $ 1.05 $ 2.39 $ 2.08 Common Shares from above 62,557,094 63,270,592 62,817,318 63,244,234 Assumed exercise of options (treasury stock method ) 297,217 238,367 272,160 220,145 62,854,311 63,508,959 63,089,478 63,464,379 NET EARNINGS PER SHARE - FULLY DILUTED $ 1.27 $ 1.05 $ 2.39 $ 2.08 Common shares from above 62,557,094 63,270,592 62,817,318 63,244,234 Assumed exercise of options (treasury stock method) 371,905 239,741 371,905 239,741 62,928,999 63,510,333 63,189,223 63,483,975
EX-27 3
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of June 29, 1997, and the related consolidated Statement of Earnings for the six months ended June 29, 1997 and is qualified in its entirety to such financial statements. 1,000,000 6-MOS DEC-31-1997 JUN-29-1997 205 450 172 0 561 1674 1633 1113 3391 879 40 0 0 132 1660 3391 1973 1973 1757 1757 0 0 2 230 79 151 0 0 0 151 2.39 2.39
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