-----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, Ut1982CGIHkJU1lZqjusVXmUaAV6FDXhWOSWGl1SdmiU/gspuY8XTo85yMDsrPuC eOuKPX7ihSheB98+oBscRA== 0000950133-00-001998.txt : 20000515 0000950133-00-001998.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950133-00-001998 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000402 FILED AS OF DATE: 20000512 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: SEC FILE NUMBER: 001-03671 FILM NUMBER: 628729 BUSINESS ADDRESS: STREET 1: 3190 FAIRVIEW PARK DRIVE CITY: FALLS CHURCH STATE: VA ZIP: 22042 BUSINESS PHONE: 7038763000 MAIL ADDRESS: STREET 1: 3190 FAIRVIEW PARK DR CITY: FALLS CHURCH STATE: VA ZIP: 22042 10-Q 1 QUARTERLY REPORT DATED APRIL 2, 2000 1 =============================================================================== UNITED STATES 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 APRIL 2, 2000 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 OF INCORPORATION (I.R.S. EMPLOYER OR ORGANIZATION) IDENTIFICATION NO.) 3190 FAIRVIEW PARK DRIVE, FALLS CHURCH, VIRGINIA 22042-4523 ------------------------------------------------ ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (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 - APRIL 30, 2000 200,658,744
============================================================================== 2 GENERAL DYNAMICS CORPORATION INDEX
PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- Item 1 - Consolidated Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Earnings 3 Consolidated Statement of Cash Flows 4 Notes to Unaudited Consolidated Financial Statements 5 Item 2 - Management's Discussion and Analysis 14 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19 PART II - OTHER INFORMATION - --------------------------- Item 1 - Legal Proceedings 20 Item 6 - Exhibits and Reports on Form 8-K 20 SIGNATURE 20 - ---------
1 3 PART I ITEM 1. FINANCIAL STATEMENTS GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions)
April 2 December 31 2000 1999 (Unaudited) (Audited) ------------- ------------- ASSETS - ------ CURRENT ASSETS: Cash and equivalents $ 236 $ 270 Accounts receivable 875 746 Contracts in process 1,340 1,204 Inventories 991 961 Other current assets 337 310 ------------- ------------- Total Current Assets 3,779 3,491 ------------- ------------- NONCURRENT ASSETS: Property, plant and equipment, net 1,211 1,169 Goodwill, net 1,983 1,991 Intangible assets, net 520 522 Other assets 608 601 ------------- ------------- Total Noncurrent Assets 4,322 4,283 ------------- ------------- $ 8,101 $ 7,774 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Short-term debt and current portion of long-term debt $ 1,001 $ 853 Accounts payable 624 631 Other current liabilities 2,068 1,969 ------------- ------------- Total Current Liabilities 3,693 3,453 ------------- ------------- NONCURRENT LIABILITIES: Long-term debt 170 169 Other liabilities 968 981 Commitments and contingencies (See Note K) ------------- ------------- Total Noncurrent Liabilities 1,138 1,150 ------------- ------------- SHAREHOLDERS' EQUITY: Common stock, including surplus 498 487 Retained earnings 3,495 3,363 Treasury stock (718) (673) Accumulated other comprehensive loss (5) (6) -------------- -------------- Total Shareholders' Equity 3,270 3,171 ------------- ------------- $ 8,101 $ 7,774 ============= =============
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 2 4 GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts)
Three Months Ended ------------------------------------------------ April 2 April 4 2000 1999 ------------- ------------- NET SALES $ 2,546 $ 2,002 OPERATING COSTS AND EXPENSES 2,240 1,761 ------------- ------------- OPERATING EARNINGS 306 241 Interest expense, net (19) (6) Other (expense) income, net (1) 9 ------------- ------------- EARNINGS BEFORE INCOME TAXES 286 244 Provision (benefit) for income taxes 102 (79) ------------- -------------- NET EARNINGS $ 184 $ 323 ============= ============= NET EARNINGS PER SHARE: Basic $ .92 $ 1.62 ============= ============= Diluted $ .91 $ 1.60 ============= ============= DIVIDENDS PER SHARE $ .26 $ .24 ============= ============= SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 157 $ 126 ============= =============
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 3 5 GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in millions)
Three Months Ended ------------------------------------------------ April 2 April 4 2000 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 184 $ 323 Adjustments to reconcile net earnings to net cash provided by continuing operations - Depreciation, depletion and amortization 56 43 Decrease (Increase) in assets, net of effects of business acquisitions- Marketable securities - 41 Accounts receivable (124) (64) Contracts in process (209) (31) Inventories (30) (23) Other current assets (7) (2) Increase (Decrease) in liabilities, net of effects of business acquisitions- Accounts payable and other current liabilities 35 (55) Customer deposits 40 71 Current income taxes 54 (121) Deferred income taxes 14 12 Other, net (10) (18) ------------- ------------- Net cash provided by continuing operations 3 176 Net cash used by discontinued operations (1) (2) ------------- ------------- Net Cash Provided by Operating Activities 2 174 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (8) (20) Capital expenditures (79) (31) Proceeds from sale of assets 1 13 Other (2) 1 ------------- ------------- Net Cash Used by Investing Activities (88) (37) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from commercial paper issuances 144 - Repayments of other debt - (24) Repayments of debt - finance operations (3) (3) Dividends paid (48) (28) Purchases of common stock (43) (46) Proceeds from option exercises 2 14 -------------- ------------- Net Cash Provided (Used) by Financing Activities 52 (87) -------------- -------------- NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (34) 50 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 270 210 -------------- ------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 236 $ 260 ============== ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Federal income taxes $ 31 $ 21 Interest (including finance operations) $ 23 $ 12
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 4 6 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-month period ended April 2, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of the company, the unaudited consolidated financial statements contain all adjustments necessary for a fair statement of the results for the three-month periods ended April 2, 2000 and April 4, 1999. (B) Comprehensive Income Comprehensive income was $185 and $320 for the three-month periods ended April 2, 2000 and April 4, 1999, respectively. (C) Acquisitions Pooling of Interests Method On July 30, 1999, the company acquired Gulfstream Aerospace Corporation (Gulfstream), a leading designer, developer, manufacturer and marketer of advanced business jet aircraft. The acquisition was accounted for as a pooling of interests, and, accordingly, the consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of Gulfstream. Purchase Method On September 1, 1999, the company completed the $1.01 billion cash acquisition of three business units comprising GTE Government Systems Corporation, a subsidiary of GTE Corporation, (renamed, General Dynamics Government Systems Corporation). The company financed the purchase through its commercial paper program. Government Systems Corporation is a leader in the advancement of 5 7 command, control, communications and intelligence systems; electronic defense systems; communication switching; and information systems for defense, government and industry in the United States and abroad. The purchase price has been allocated to the estimated fair value of net tangible assets acquired, with the excess recorded as goodwill and intangible assets (see Note G). Certain of the estimates are still preliminary at April 2, 2000, but will be finalized within one year from the date of acquisition. Operating results have been included with those of the company from the acquisition closing date. (D) Earnings Per Share Basic and diluted weighted average shares outstanding are as follows (in thousands):
Three-month periods ended --------------------------- April 2 April 4 2000 1999 ---- ---- Basic 200,896 199,458 Diluted 202,281 202,240
(E) Contracts in Process Contracts in process primarily represent costs and accrued profit related to defense contracts and programs and consist of the following:
April 2 December 31 2000 1999 ------------- ------------- Net contract costs and estimated profits $ 616 $ 483 Other contract costs 724 721 ------------- ------------- $ 1,340 $ 1,204 ============= =============
Contract costs are net of advances and progress payments and include production costs and related overhead, such as general and administrative expenses. Other contract costs primarily represent amounts required to be recorded under generally accepted accounting principles that are not currently allocable to contracts, such as a portion of the company's estimated workers' compensation, other insurance-related assessments, postretirement benefits and environmental expenses. Recovery of these costs under contracts is considered probable based on the company's backlog. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company's remaining contracts could be affected. Under the contractual arrangements by which progress payments are received, the U.S. government asserts that it has a security interest in the contracts in process identified with the related contracts. 6 8 (F) Inventories Inventories consist primarily of commercial aircraft components, as follows:
April 2 December 31 2000 1999 ------------- ------------- Work in process $ 449 $ 436 Raw materials 251 262 Pre-owned aircraft 270 243 Other 21 20 ------------- ------------- $ 991 $ 961 ============= =============
(G) Goodwill and Intangible Assets Goodwill resulted from the company's business acquisitions. Goodwill is amortized on a straight-line basis over 40 years and is shown net of accumulated amortization of $98 and $84 at April 2, 2000, and December 31, 1999, respectively. Intangible assets resulting primarily from the company's acquisitions consist of the following:
April 2 December 31 2000 1999 ------------- ------------- Contracts and programs acquired $ 451 $ 455 Other 69 67 ------------- ------------- $ 520 $ 522 ============= =============
Intangible assets are shown net of accumulated amortization of $115 and $110 at April 2, 2000, and December 31, 1999, respectively. Contracts and programs acquired are amortized on a straight-line basis over periods ranging from 8 to 40 years. Other intangible assets consist primarily of customer lists and purchase options on buildings currently leased. These other intangible assets are amortized over periods ranging from 3 to 20 years. (H) Debt Debt (excluding finance operations) consists of the following:
April 2 December 31 2000 1999 ------------- ------------- Commercial paper $ 996 $ 852 Senior notes 149 149 Industrial development bonds 15 15 Other 11 6 ------------- ------------- 1,171 1,022 Less current portion 1,001 853 ------------- ------------- $ 170 $ 169 ============= =============
7 9 As of April 2, 2000, the company had $1,009 par value discounted commercial paper outstanding at an average yield of approximately 6.18 percent with an average term of approximately 83 days. The company has available a $1 billion committed line of credit expiring in May 2002 and an available $400 committed line of credit expiring in December 2002, both of which back this commercial paper program. (I) Liabilities A summary of significant liabilities, by balance sheet caption, follows:
April 2 December 31 2000 1999 ------------- ------------- Customer deposits $ 530 $ 471 Workers' compensation 482 479 Retirement benefits 269 279 Billings in excess of cost 138 142 Other 649 598 ------------- ------------- Other Current Liabilities $ 2,068 $ 1,969 ============= ============= Retirement benefits $ 298 $ 296 Accrued costs on disposed businesses 135 156 Coal mining related liabilities 70 71 Other 465 458 ------------- ------------- Other Liabilities $ 968 $ 981 ============= =============
(J) Income Taxes The company had a net deferred tax asset of $277 and $291 at April 2, 2000, and December 31, 1999, respectively, the current portion of which was $283 and $264, respectively, and was included in other current assets on the Consolidated Balance Sheet. Based on the level of projected earnings and current backlog, no valuation allowance was required for the company's net deferred tax assets at April 2, 2000, and December 31, 1999. During the first quarter of 1999, the company and the U.S. Internal Revenue Service settled refund claims for research and experimentation tax credits for the years 1981 through 1989 for approximately $334 (including before-tax interest). The company recognized a benefit of $165 (net of amounts previously recorded in 1991 and 1992), or $.82 per diluted share, as a result of this settlement. In April 1999, the company received the $334 cash refund from the IRS related to this settlement. The IRS has completed its examination of General Dynamics' 1990 through 1993 consolidated federal income tax returns. Unresolved matters for these years have been protested to the IRS Appeals Division. A refund claim by General Dynamics for $78 (plus interest) for research and experimentation tax credits for the year 1990 will also be considered by the IRS Appeals Division. The IRS is currently examining General Dynamics' 1994 and 1995 consolidated federal income tax returns. The company has recorded liabilities for tax contingencies; therefore, resolution of open matters for these years is not 8 10 expected to have a materially unfavorable impact on the company's results of operations or financial condition. All matters related to Gulfstream's consolidated federal income tax returns for years up to and including 1994 have been resolved. Resolution of these years did not have a material impact on the company's results of operations or financial condition. (K) Commitments and Contingencies Litigation Claims made by and against the company regarding its consolidated federal income tax returns are discussed in Note J. Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note L. On April 19, 1995, 101 then-current and former employees of General Dynamics' Convair Division in San Diego, California filed a six-count complaint in the Superior Court of California, County of San Diego, titled Argo, et al. v. General Dynamics, et al. In addition to General Dynamics, four of Convair's then-current or former managers were also named as defendants. The plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit for overtime wages brought pursuant to the Federal Fair Labor Standards Act by, among other things, concealing its plans to close the Convair Division. On May 1, 1997, a jury rendered a verdict of $101 against the company and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The company and one of the defendants have appealed the judgment to the Court of Appeals of the State of California, Fifth Appellate District. On appeal, the company is seeking to have the judgment overturned in its entirety or, alternatively, a substantial reduction in the jury's punitive damage award. 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. Management currently believes the ultimate outcome will not have a material impact on the company's results of operations or financial condition. Less than a month following the jury's verdict in Argo, on June 27, 1997, General Dynamics Corporation was named as a defendant in a complaint filed in the Superior Court of California, County of San Diego, titled Williamson, et al. V. General Dynamics Corporation, et al. On August 7, 1997, General Dynamics removed the case to the United States District Court for the Southern District of California. The Williamson allegations are virtually identical to the allegations made in the Argo lawsuit, however, Williamson is styled as a class action lawsuit. On April 3, 1998, the district court granted General Dynamics' motion to dismiss plaintiffs' complaint in its entirety. Plaintiffs appealed that decision to the Ninth Circuit Court of Appeals. On April 20, 2000, the Ninth Circuit issued an opinion reversing the district court's order of dismissal. Plaintiffs seek compensatory damages in an unspecified amount as well as punitive damages. The company believes that the ultimate outcome will not have a material impact on the company's results of operations or financial condition. On July 13, 1995, General Dynamics Corporation was named as a defendant in a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics Corporation, et 9 11 al. The complaint also names two insurance brokers, Lloyd Thompson, Ltd. and Willis Corroon Corporation of Missouri, as defendants. The plaintiffs are members of certain Lloyd's of London syndicates and British insurance companies who sold the company excess loss insurance policies covering the company's self-insured workers' compensation program at Electric Boat for four policy years, from July 1, 1988 to June 30, 1992. The plaintiffs allege that when procuring the policies the company and its brokers made misrepresentations to the plaintiffs and failed to disclose facts which were material to the risk. The plaintiffs also allege that the company has been negligent in its administration of workers' compensation claims. The plaintiffs seek rescission of the policies, a declaratory judgment that the policies are void, and compensatory damages in an unspecified amount. General Dynamics has counterclaimed, alleging that the plaintiffs have breached their insurance contracts by failing to pay claims. General Dynamics seeks a declaratory judgment that the policies are valid, actual damages, and payment of a penalty under a Missouri statute for the plaintiffs' vexatious and unreasonable failure to pay claims. In February 2000, General Dynamics completed the trial of this matter before a special master. The company expects a decision later in 2000 and does not expect that this case will have a material impact on the company's results of operations or financial condition. The company was either a named defendant or a third-party defendant in certain multi-plaintiff tort cases pending in state or federal court in Arizona, captioned: Cordova, et al. v. Hughes Aircraft Co.; Lanier, et al. v. Hughes Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et al. v. Hughes Aircraft Co. In these cases the plaintiffs alleged that they suffered personal injuries and/or property damage from chronic exposure to drinking water alleged to be contaminated with trace amounts of the industrial solvent trichloroethylene. The alleged source of the contamination was industrial facilities in and around the site now occupied by the Tucson International Airport (TIA) and U.S. Air Force Plant #44. In addition to the company, defendants were Hughes Aircraft Co. (now Raytheon), the Tucson Airport Authority (TAA), the City of Tucson (the City), and McDonnell Douglas Corp. (MDC). In Cordova, the company negotiated a settlement with all but four plaintiffs, who have had summary judgment entered against them. These four plaintiffs failed to appeal the judgment against them and the time for appeal expired in January 2000. The company settled all the remaining cases and final dismissal orders were entered by the court in February 2000. The resolution of these matters did not have a material impact on the company's results of operations or financial condition. In other litigation concerning the Tucson site, the company is a defendant in two cases brought in federal district court in Arizona by TAA and the City under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). Plaintiffs seek reimbursement of CERCLA response costs and a declaration of the company's alleged liability with respect to soil and groundwater contamination at portions of the Tucson site. On September 30, 1998, the U.S. Environmental Protection Agency (U.S. EPA) issued a Special Notice Letter notifying the company that it was a potentially responsible party (PRP) with respect to contamination of soil and shallow groundwater on and near property currently occupied by the TIA. Other PRPs receiving a similar notice were the U.S. Air Force, TAA, MDC and the City. The company has reached an agreement to settle the litigation brought by TAA and the City. The parties are processing final dismissal orders to be entered by the court. The court entered a consent decree negotiated with the U.S. EPA in response to the Special Notice Letter in February 2000. The company does not believe that these lawsuits or the consent decree will have a material impact on the company's results of operations or financial condition. 10 12 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 is directly or indirectly involved in certain Superfund sites in which the company, along with other major U.S. corporations, has been designated a PRP by the U.S. EPA or a state environmental agency with respect to past shipments of 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 its liability at any individual site is not material. The company is also involved in the investigation, cleanup and remediation of various conditions at sites it currently or formerly owned or operated where the release of hazardous materials may have occurred. 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 sites currently or formerly owned or operated at which there is a known environmental condition, or Superfund or other multi-party sites at which the company is a PRP. (L) 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. In January 1991, the Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas, now owned by the Boeing Company, (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' challenge to 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 relief. A trial on Count XVII of the complaint, which relates to the propriety of the process used in terminating the contract 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 further proceedings, the court issued an order converting the termination for default to a termination for convenience. On March 31, 1998, a final judgment was entered in favor of the contractors for $1,200 plus interest. 11 13 On July 1, 1999, the Court of Appeals found that the trial court erred in converting the termination for default to a termination for convenience without first determining whether a default existed. The Court of Appeals remanded the case for determination of whether the government's default termination was justified. The Court of Appeals stated that it was expressing no view on that issue, and it left the parties the opportunity to fully litigate that issue on remand. The company continues to believe that the government's default termination was improper, both as to process (the basis relied upon by the trial court) and because the contractors were not in default. The company continues to believe that at a full trial it will be able to demonstrate that the default termination was not justified and that the termination for default will be converted to a termination for convenience. If the company is successful in such a new trial, it could result in the same, a lesser or a greater award to the contractors. Nonetheless, the parties have explored the possibility of an out-of-court settlement of the litigation, in which Warren Christopher, former U.S. Secretary of State, served as a neutral mediator. The parties have agreed that they will not comment on negotiations during this process. 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 the appeals process and remand proceedings. In the event that the contractors are ultimately found to have been in default under 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. The company believes the possibility of this result is remote. (M) Business Group Information Management has chosen to organize and measure its business groups in accordance with several factors, including a combination of the nature of products and services offered, the nature of the production processes and the class of customer for the company's products. Operating groups are aggregated for reporting purposes consistent with these criteria. Management measures its groups' profit based primarily on operating earnings. As such, net interest, other income items and income taxes have not been allocated to the company's business groups. For a further description of the company's business groups, see Management's Discussion and Analysis of the Results of Operations and Financial Condition. Summary financial information for each of the company's business groups follows: 12 14
Three Months Ended ------------------ Net Sales Operating Earnings --------- ------------------ April 2 April 4 April 2 April 4 2000 1999 2000 1999 ---- ---- ---- ---- Aerospace $730 $625 $ 131 $ 97 Information Systems & Technology 606 233 58 21 Marine Systems 846 808 88 88 Combat Systems 315 290 37 35 Other* 49 46 (8) - ------ ------ ----- ----- $2,546 $2,002 $306 $241 ====== ====== ==== ====
Identifiable Assets ------------------- April 2 December 31 2000 1999 ---- ---- Aerospace $1,907 $1,757 Information Systems & Technology 2,542 2,418 Marine Systems 1,544 1,431 Combat Systems 1,029 938 Other* 380 373 Corporate** 699 857 --- --- $8,101 $7,774 ====== ======
* Other operating earnings include the operating results of the company's commercial pension plans, including Gulfstream's merged plans post-acquisition. Other identifiable assets include assets of both of the company's finance operations. These assets include cash and equivalents and receivables. ** Corporate identifiable assets include cash and equivalents from domestic operations, deferred taxes, real estate held for development and net prepaid pension cost related to the company's commercial plans. 13 15 GENERAL DYNAMICS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS April 2, 2000 (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," "scheduled," "estimates," variations of these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, aircraft production and deliveries, cash flows, contract awards, and aircraft backlog stability. 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, without limitation: the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; the status or outcome of legal and/or regulatory proceedings; the status or outcome of labor negotiations; changing customer demand or preferences for business aircraft; changes from the company's expectations with respect to its customers' exercise of business aircraft options; changing priorities or reductions in the U.S. government defense budget; termination of government contracts due to unilateral government action; and the timing and occurrence (or non-occurrence) of circumstances beyond the company's control. Business Groups The company operates in four primary business groups: Aerospace, Information Systems and Technology, Marine Systems, and Combat Systems. The company also owns coal mining and aggregates operations in the Midwest, and a leasing operation for liquefied natural gas tankers, which are classified as Other. The following table sets forth the net sales and operating earnings by business group for the three- month periods ended April 2, 2000 and April 4, 1999: 14 16
Three-Month Period Ended ---------------------------------- April 2 April 4 Increase/ 2000 1999 (Decrease) ----------- ---------------- ---------------- NET SALES: Aerospace $ 730 $ 625 $ 105 Information Systems and Technology 606 233 373 Marine Systems 846 808 38 Combat Systems 315 290 25 Other 49 46 3 ----------- ---------------- ---------------- $2,546 $2,002 $ 544 =========== ================ ================ OPERATING EARNINGS: Aerospace $ 131 $ 97 $ 34 Information Systems and Technology 58 21 37 Marine Systems 88 88 - Combat Systems 37 35 2 Other (8) - (8) ----------- ---------------- ---------------- $ 306 $ 241 $ 65 =========== ================ ================
Results of Operations Aerospace Net sales increased during the three-month period due primarily to an increase in completion deliveries to 15 in 2000 from 11 in 1999, as well as to the mix of new aircraft sold in 2000 as compared to 1999. Operating earnings increased during the three-month period due to the increase in completion deliveries previously noted, as well as to improved performance primarily in the completion process. Information Systems and Technology Net sales and operating earnings increased during the three-month period due primarily to the acquisition of Government Systems Corporation on September 1, 1999. Excluding the results of Government Systems Corporation, net sales and operating earnings increased 10 percent and 24 percent, respectively, primarily driven by growth in the company's commercial undersea fiber-optic communications business. 15 17 Marine Systems Net sales increased during the three-month period due primarily to increased volume on start-up programs, including the Virginia-class submarine and the DD 21 surface combatant, partially offset by lower destroyer (DDG 51) and sealift construction volume. While these early stage programs contribute lower earnings, operating earnings remained comparable with last year due primarily to earnings rate increases on mature programs, including both the Seawolf-class submarine and the strategic sealift ship programs. Operating risks associated with these programs continue to diminish due to their maturity, as well as to business base stabilization at each of the shipyards. Combat Systems Net sales increased during the three-month period due primarily to increased work on the Hydra-70 program. Operating earnings increased slightly during the three-month period due primarily to an earnings rate increase on the M1A2 tank upgrade program, attributable to cost performance improvements. Other Operating earnings decreased during the three-month period due primarily to performance at the coal operations. Backlog The following table details the backlog of each business group as calculated at April 2, 2000, and December 31, 1999:
April 2 December 31 2000 1999 -------------------- ------------------- Aerospace $ 3,514 $ 3,753 Information Systems and Technology 2,120 2,000 Marine Systems 11,815 11,608 Combat Systems 1,631 1,596 Other 503 523 -------------------- ------------------- Total Backlog $ 19,583 $ 19,480 ==================== =================== Funded Backlog $ 12,909 $ 11,665 ==================== ===================
Aerospace Total backlog includes aircraft options- agreements with customers to grant them the option to subsequently purchase additional aircraft upon defined terms and conditions. Funded backlog includes only orders for which the company has entered into a definitive purchase contract with no significant contingencies and has received a significant non-refundable deposit from the customer. 16 18 Defense Businesses Total backlog represents the estimated remaining sales value of work to be performed under firm contracts. Funded backlog for government programs represents the portion of total backlog that has been appropriated by Congress and funded by the procuring agency. To the extent backlog has not been funded, there is no assurance that congressional appropriations or agency allotments will be forthcoming. Other backlog primarily includes amounts for long-term coal contracts. New Award On May 4, 2000, the company was awarded five contracts to operate and maintain ships for the U.S. government. The first is a $58 contract for the maintenance and operation of eight fast sealift ships. The other four, totaling $41, are for the operation and maintenance of nine ships for the Department of Transportation, Maritime Administration's Ready Reserve Force. These contracts expand the company's ship management services for the U.S. government to a total of 22 ships. Additional Financial Information Provision (Benefit) for Income Taxes During the first quarter of 1999, the company and the U.S. Internal Revenue Service settled refund claims for research and experimentation tax credits for the years 1981 through 1989 for approximately $334 (including before-tax interest). The company recognized a benefit of $165 (net of amounts previously recorded in 1991 and 1992), or $.82 per diluted share, as a result of this settlement. The company received the $334 cash refund from the IRS related to this settlement during the second quarter of 1999. For further discussion of this and other tax matters, as well as a discussion of the net deferred tax asset, see Note J to the Consolidated Financial Statements. Environmental Matters and Other Contingencies For a discussion of environmental matters and other contingencies, see Notes K and L to the Consolidated Financial Statements. The company's liability, in the aggregate, with respect to these matters, is not expected to be material to the company's results of operations or financial condition. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 137 issued in June 1999 deferred the effective date of SFAS 133 by one year. As such, the company is now required to adopt the provisions of the standard during the first quarter of 2001. Because of the company's minimal use of 17 19 derivatives, it does not expect that the adoption of the new standard will have a material impact on the results of operations or financial condition. Financial Condition Operating Activities Cash flows from continuing operations decreased this year over last year due primarily to a working capital buildup to support growth in the company's operations. The company expects to continue to generate funds from operations in excess of its short- and long-term liquidity needs. Investing Activities On September 1, 1999, the company completed the acquisition of three business units formerly part of GTE Government Systems Corporation (renamed, General Dynamics Government Systems Corporation) for $1.01 billion in cash. The company financed the purchase through the issuance of commercial paper. As of April 2, 2000, the company had approximately $1.01 billion commercial paper outstanding at an average yield of approximately 6.18% with an average term of approximately 83 days. The company expects to reissue commercial paper as it matures, and has the option to extend the term up to 270 days. On July 30, 1999, the company acquired Gulfstream in a pooling of interests transaction. Accordingly, all data for periods prior to the combination have been restated to include the accounts and results of operations of Gulfstream. Financing Activities On March 7, 2000, the company's board of directors formally authorized management to repurchase in the open market up to ten million shares of the company's issued and outstanding common stock. During the first quarter of 2000, the company repurchased approximately one million shares for $43. On June 23, 1999, the company's board of directors formally rescinded management's authority to repurchase shares of the company's common stock on the open market. On June 25, 1999, Gulfstream's board of directors formally rescinded management's authority to repurchase shares of its common stock on the open market. During the first quarter of 1999, the company repurchased approximately .98 million shares under these programs for $46. On March 1, 2000, the company's board of directors declared an increased regular quarterly dividend of $.26 per share. The company had previously increased the quarterly dividend to $.24 per share in March 1999 and to $.22 per share in March 1998. The company has available a $1 billion committed line of credit expiring in May 2002 and an available $400 committed line of credit expiring in December 2002, both of which back the company's commercial paper program. These credit facilities contain minimum net worth requirements. 18 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no material changes with respect to this item from the disclosure included in the company's Annual Report on Form 10-K for the year ended December 31, 1999. 19 21 PART II GENERAL DYNAMICS CORPORATION OTHER INFORMATION April 2, 2000 Item 1. Legal Proceedings Reference is made to Note K, Commitments and Contingencies, to the Consolidated Financial Statements in Part I, for statements relevant to activities in the quarter covering certain litigation to which the company is a party. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 Financial Data Schedule (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 Vice President and Controller (Authorized Officer and Chief Accounting Officer) Dated: May 12, 2000 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET AS OF APRIL 2, 2000, AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED APRIL 2, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 APR-02-2000 236 0 875 0 2,331 3,779 2,457 (1,246) 8,101 3,693 170 0 0 498 2,772 8,101 2,546 2,546 2,240 2,240 0 0 19 286 102 184 0 0 0 184 .92 .91
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