10-Q 1 w42338e10-q.txt FORM 10-Q 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 OCTOBER 1, 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 - OCTOBER 29, 2000 199,243,840 ================================================================================ 2 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 (Nine Months) 4 Consolidated Statement of Cash Flows 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis 16 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22 PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings 23 Item 6 - Exhibits and Reports on Form 8-K 23 SIGNATURE 23 ---------
1 3 PART I ITEM 1. FINANCIAL STATEMENTS GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions)
October 1 December 31 2000 1999 (Unaudited) (Audited) --------------- --------------- ASSETS CURRENT ASSETS: Cash and equivalents $ 367 $ 270 Marketable securities 16 - --------------- --------------- 383 270 Accounts receivable 849 746 Contracts in process 1,236 1,204 Inventories 920 961 Other current assets 403 310 --------------- --------------- Total Current Assets 3,791 3,491 --------------- --------------- NONCURRENT ASSETS: Property, plant and equipment, net 1,275 1,169 Goodwill, net 2,019 1,991 Intangible assets, net 521 522 Other assets 625 601 --------------- --------------- Total Noncurrent Assets 4,440 4,283 --------------- --------------- $ 8,231 $ 7,774 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt and current portion of long-term debt $ 840 $ 853 Accounts payable 595 631 Other current liabilities 1,948 1,969 --------------- --------------- Total Current Liabilities 3,383 3,453 --------------- --------------- NONCURRENT LIABILITIES: Long-term debt 171 169 Other liabilities 1,100 981 Commitments and contingencies (See Note K) --------------- --------------- Total Noncurrent Liabilities 1,271 1,150 --------------- --------------- SHAREHOLDERS' EQUITY: Common stock, including surplus 551 487 Retained earnings 3,892 3,363 Treasury stock (857) (673) Accumulated other comprehensive loss (9) (6) ---------------- ---------------- Total Shareholders' Equity 3,577 3,171 --------------- --------------- $ 8,231 $ 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 -------------------------------------------------------- October 1 October 3 2000 1999 --------------- --------------- NET SALES $ 2,502 $ 2,215 OPERATING COSTS AND EXPENSES 2,165 1,860 --------------- --------------- OPERATING EARNINGS 337 355 Interest expense, net (17) (6) Other expense, net (3) (44) ----------------- ---------------- EARNINGS BEFORE INCOME TAXES 317 305 PROVISION FOR INCOME TAXES Provision 113 121 R&E tax credit (90) - ---------------- --------------- 23 121 --------------- --------------- NET EARNINGS $ 294 $ 184 =============== =============== NET EARNINGS PER SHARE: Basic $ 1.48 $ .92 =============== =============== Diluted $ 1.47 $ .91 =============== =============== DIVIDENDS PER SHARE $ .26 $ .24 =============== =============== SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 155 $ 139 =============== ===============
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 3 5 GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts)
Nine Months Ended -------------------------------------------------------- October 1 October 3 2000 1999 --------------- --------------- NET SALES $ 7,665 $ 6,304 OPERATING COSTS AND EXPENSES 6,687 5,429 --------------- --------------- OPERATING EARNINGS 978 875 Interest expense, net (52) (17) Other expense, net (5) (39) ----------------- ---------------- EARNINGS BEFORE INCOME TAXES 921 819 PROVISION FOR INCOME TAXES Provision 329 302 R&E tax credit (90) (165) ---------------- ---------------- 239 137 --------------- --------------- NET EARNINGS $ 682 $ 682 =============== =============== NET EARNINGS PER SHARE: Basic $ 3.41 $ 3.42 =============== =============== Diluted $ 3.39 $ 3.38 =============== =============== DIVIDENDS PER SHARE $ .78 $ .72 =============== =============== SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 475 $ 401 =============== ===============
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 4 6 GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in millions)
Nine Months Ended ---------------------------------------------- October 1 October 3 2000 1999 --------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 682 $ 682 Adjustments to reconcile net earnings to net cash provided by continuing operations - Depreciation, depletion and amortization 171 140 Recognition of pension gains previously deferred - (126) Revaluation of undeveloped coal reserves and equipment - 61 Amortization of debt issuance costs on debt repaid - 7 (Increase) Decrease in assets, net of effects of business acquisitions- Marketable securities (16) 45 Accounts receivable (78) (63) Contracts in process (99) (98) Inventories 46 (317) Other current assets 10 23 Increase (Decrease) in liabilities, net of effects of business acquisitions- Accounts payable and other current liabilities 31 (79) Customer deposits 9 27 Current income taxes (53) 171 Deferred income taxes 113 48 Other, net (115) (20) --------------- --------------- Net cash provided by continuing operations 701 501 Net cash used by discontinued operations (6) (5) --------------- --------------- Net Cash Provided by Operating Activities 695 496 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (41) (1,130) Purchases of available-for-sale securities (16) (26) Sales/maturities of available-for-sale securities 22 75 Capital expenditures (219) (117) Other 2 12 --------------- --------------- Net Cash Used by Investing Activities (252) (1,186) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) proceeds from commercial paper (19) 1,141 Repayments of other debt, net (3) (370) Repayments of debt - finance operations (12) (53) Dividends paid (151) (88) Purchases of common stock (208) (59) Proceeds from option exercises 47 49 --------------- --------------- Net Cash (Used) Provided by Financing Activities (346) 620 --------------- --------------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 97 (70) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 270 210 --------------- --------------- CASH AND EQUIVALENTS AT END OF PERIOD $ 367 $ 140 =============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Federal income taxes $ 182 $ 237 Interest (including finance operations) $ 52 $ 36
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 5 7 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 nine-month periods ended October 1, 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. Certain prior year amounts have been reclassified to conform to the current year presentation. 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- and nine-month periods ended October 1, 2000 and October 3, 1999. (B) Comprehensive Income Comprehensive income was $293 and $184 for the three-month periods and $679 for both nine-month periods ended October 1, 2000 and October 3, 1999. Comprehensive income consists primarily of net earnings ($294 and $184 for the three-month periods and $682 for both nine-month periods ended October 1, 2000 and October 3, 1999), and foreign currency translation adjustments. (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. 6 8 Purchase Method On November 9, 2000, the company announced that it has entered into a definitive agreement to acquire for cash the outstanding shares of Primex Technologies, Inc. (NASDAQ:PRMX) for $32.10 per share plus the obligation to assume approximately $170 in debt. The company anticipates financing the purchase through the issuance of commercial paper. The acquisition is expected to close during January 2001, subject to regulatory review as well as Primex shareholder approval. Primex provides a variety of munitions, propellants, satellite propulsion systems and electronics products to the U.S. and its allies, as well as domestic and international industrial customers. 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 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). Operating results of the three business units are included with those of the company from the closing date. (D) Earnings Per Share Basic and diluted weighted average shares outstanding are as follows (in thousands):
Three-months ended Nine-months ended ------------------ ----------------- October 1 October 3 October 1 October 3 2000 1999 2000 1999 ---- ---- ---- ---- Basic 198,675 200,293 199,892 199,660 Diluted 200,587 202,612 201,352 201,963
(E) Contracts in Process Contracts in process primarily represent costs and accrued profit related to defense contracts and programs, and consist of the following:
October 1 December 31 2000 1999 --------------- --------------- Net contract costs and estimated profits $ 483 $ 483 Other contract costs 753 721 --------------- --------------- $ 1,236 $ 1,204 ================ ===============
7 9 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, retirement 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. (F) Inventories Inventories consist primarily of commercial aircraft components, as follows:
October 1 December 31 2000 1999 --------------- --------------- Work in process $ 446 $ 436 Raw materials 265 262 Pre-owned aircraft 188 243 Other 21 20 --------------- --------------- $ 920 $ 961 =============== ===============
(G) Goodwill and Intangible Assets, Net 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 $122 and $80 at October 1, 2000, and December 31, 1999, respectively. Intangible assets resulted primarily from the company's business acquisitions and consist mainly of contracts and programs acquired, customer lists and purchase options on buildings currently leased. Intangible assets are shown net of accumulated amortization of $128 and $110 at October 1, 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 are amortized over periods ranging from 3 to 21 years. 8 10 (H) Debt Debt (excluding finance operations) consists of the following:
October 1 December 31 2000 1999 --------------- --------------- Commercial paper $ 837 $ 852 Senior notes 149 149 Industrial development bonds 15 15 Other 10 6 --------------- --------------- 1,011 1,022 Less current portion 840 853 --------------- --------------- $ 171 $ 169 =============== ===============
As of October 1, 2000, the company had $848 par value discounted commercial paper outstanding at an average yield of approximately 6.70 percent with an average term of approximately 80 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 the company's commercial paper program. (I) Liabilities A summary of significant liabilities, by balance sheet caption, follows:
October 1 December 31 2000 1999 --------------- --------------- Workers' compensation $ 489 $ 479 Customer deposits 489 471 Retirement benefits 269 270 Salaries and wages 169 154 Other 532 595 --------------- --------------- Other Current Liabilities $ 1,948 $ 1,969 =============== =============== Retirement benefits $ 325 $ 304 Accrued costs on disposed businesses 122 156 Coal mining related liabilities 75 77 Other 578 444 --------------- --------------- Other Liabilities $ 1,100 $ 981 =============== ===============
9 11 (J) Income Taxes The company had a net deferred tax asset of $178 and $291 at October 1, 2000, and December 31, 1999, respectively, the current portion of which was $328 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 October 1, 2000, and December 31, 1999. During the first quarter of 1999, General Dynamics and the U.S. Internal Revenue Service settled outstanding tax issues, including 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. During the third quarter of 2000, General Dynamics settled outstanding tax issues, including its remaining refund claim for research and experimentation tax credits, for the years 1990 through 1993. The company recognized a benefit of $90, or $.45 per diluted share, as a result of this settlement. During the first quarter of 2000, all matters related to Gulfstream's consolidated federal income tax returns for years up to and including 1994 were resolved with no material impact on the company's results of operations or financial condition. 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 and subsequent years is not expected to have a materially unfavorable impact on the company's results of operations, financial condition or cash flows. (K) 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 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, Fourth Appellate District. On April 12, 2000, the California Supreme Court transferred the appeal to the Fifth Appellate District. On appeal, the 10 12 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. The company believes that 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 al. The complaint also names as defendants General Dynamics' two insurance brokers: the London broker, Lloyd Thompson, Ltd.; and the United States broker, Willis Corroon Corporation of Missouri. The plaintiffs are members of certain Lloyd's of London syndicates and British insurance companies who sold the company four aggregate 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 also served cross-claims against Lloyd Thompson for negligence and breach of fiduciary duty, which have been severed pending the trial of claims between General Dynamics and the plaintiffs. In February 2000, General Dynamics completed the trial before a special master of the claims between General Dynamics and the plaintiffs. In August 2000, the special master issued his decision, which recommended recission of the two policies, on the grounds of fraud by the London broker, and recommended an award of damages against the plaintiffs with respect to the other two polices. The special master found that although the company made no misrepresentations of fact in connection with the procurement of the policies, the London broker, who is the company's agent, did. Objections to the special master's decision are due on October 31, 2000. General Dynamics does not expect that this case will have a material impact on the company's results of operations or financial condition. The company is a defendant in three cases brought in federal district court in Arizona under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), concerning the Tucson International Airport Area Superfund Site. Plaintiffs in two cases are the Tucson Airport Authority (TAA) and the City of Tucson. They seek reimbursement of CERCLA response costs and a 11 13 declaration of the company's alleged liability with respect to soil and groundwater contamination at portions of the Superfund Site. On October 16, 2000, the court entered an order dismissing one of the TAA/City cases and the parties are waiting for the court to enter a stipulated dismissal order in the second case. 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 within the Superfund Site. Other PRPs receiving a similar notice were the U.S. Air Force, McDonnell Douglas Crop., TAA, and the City. In March 1999, the U.S. EPA filed in Arizona federal court a complaint and proposed consent decree in response to the Special Notice Letter. In February 2000, the court entered the consent decree. Although the consent decree imposes joint and several liability on the company and other PRPs, by agreement among the parties, the company will be paying 10% of the costs of remediating the site under the terms of the consent decree. 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. 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, or in the aggregate, 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. 12 14 (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. 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. The parties 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. This mediation process was not successful in resolving the litigation. The litigation is now back in the trial court, with the trial likely to be held in 2001. 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. 13 15 (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:
Three Months Ended ------------------ Net Sales Operating Earnings --------- ------------------ October 1 October 3 October 1 October 3 2000 1999 2000 1999 ---- ---- ---- ---- Aerospace $733 $704 $149 $128 Information Systems & Technology 596 354 55 30 Marine Systems 798 788 77 80 Combat Systems 298 296 37 37 Other* 77 73 19 80 ------ ------ ---- ---- $2,502 $2,215 $337 $355 ====== ====== ==== ====
Nine Months Ended ----------------- Net Sales Operating Earnings --------- ------------------ October 1 October 3 October 1 October 3 2000 1999 2000 1999 ---- ---- ---- ---- Aerospace $2,284 $2,037 $431 $341 Information Systems & Technology 1,792 830 166 75 Marine Systems 2,499 2,360 247 256 Combat Systems 901 892 110 106 Other* 189 185 24 97 ------ ------ ---- ---- $7,665 $6,304 $978 $875 ====== ====== ==== ====
14 16
Identifiable Assets ------------------- October 1 December 31 2000 1999 ---- ---- Aerospace $1,668 $1,757 Information Systems & Technology 2,372 2,418 Marine Systems 1,561 1,431 Combat Systems 1,056 938 Other* 341 373 Corporate** 1,233 857 ----- --- $8,231 $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. 15 17 GENERAL DYNAMICS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS October 1, 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 and nine-month periods ended October 1, 2000 and October 3, 1999: 16 18
Three-Month Period Ended Nine-month Period Ended ---------------------------------------------------------------------------------------------------------------------------- October 1 October 3 Increase/ October 1 October 3 Increase/ 2000 1999 (Decrease) 2000 1999 (Decrease) ---------------------------------------------------------------------------------------------------------------------------- NET SALES: ---------------------------------------------------------------------------------------------------------------------------- Aerospace $ 733 $ 704 $ 29 $2,284 $2,037 $ 247 Information Systems & Technology 596 354 242 1,792 830 962 Marine Systems 798 788 10 2,499 2,360 139 Combat Systems 298 296 2 901 892 9 Other 77 73 4 189 185 4 ---------------------------------------------------------------------------------------------------------------------------- $2,502 $2,215 $ 287 $7,665 $6,304 $1,361 ---------------------------------------------------------------------------------------------------------------------------- OPERATING EARNINGS: ---------------------------------------------------------------------------------------------------------------------------- Aerospace $ 149 $ 128 $ 21 $ 431 $ 341 $ 90 Information Systems & Technology 55 30 25 166 75 91 Marine Systems 77 80 (3) 247 256 (9) Combat Systems 37 37 - 110 106 4 Other 19 80 (61) 24 97 (73) ---------------------------------------------------------------------------------------------------------------------------- $ 337 $ 355 $ (18) $ 978 $875 $ 103 ----------------------------------------------------------------------------------------------------------------------------
Results of Operations Aerospace Net sales increased during the three-month period due primarily to an increase in aircraft services and pre-owned aircraft deliveries, partially offset by the timing of new aircraft and completion deliveries. For the nine-month period, net sales increased due primarily to an increase in both new aircraft and completion deliveries in 2000 from 1999 and to an increase in previously owned aircraft deliveries. Operating earnings increased during the respective periods due primarily to improved performance in both the new aircraft and completion processes. Information Systems and Technology Net sales and operating earnings increased during the three- and nine-month periods due primarily to the acquisition of Government Systems Corporation (GSC) on September 1, 1999. Excluding the results of GSC, net sales remained essentially the same and operating earnings increased by 37 and 16 percent during the three- and nine-month periods, respectively. The growth in operating earnings is primarily driven by margin improvements in the company's commercial undersea fiber-optic communications business. 17 19 Marine Systems Net sales increased during the three- and nine-month periods due primarily to increased volume in submarine construction, partially offset by lower destroyer (DDG 51) and sealift construction volume. DDG 51 revenue was delayed due to the work stoppage at Bath Iron Works beginning in late August. On October 22, 2000, the International Association of Machinists and Aerospace Workers union ratified a new 42-month bargaining agreement and the production employees resumed work. Operating earnings decreased slightly year-over-year due to the work stoppage discussed above as well as the mix in development and early stage production programs (including the Virginia-class submarine and the DD21 surface combatant) as compared to mature production programs in 1999. Other Operating earnings decreased during the three- and nine-month periods due primarily to several non-recurring events that occurred during the quarter ended October 3, 1999. As a result of the merger of the General Dynamics and Gulfstream commercial pension plans, the company recognized previously deferred gains on General Dynamics' commercial pension plan, totaling $126 (before-tax). Additionally, management concluded not to make additional investments in its undeveloped high-sulfur coal reserves. As such, the company revalued these coal reserves and related equipment, resulting in a non-cash charge to earnings of approximately $60 (before-tax). Backlog The following table details the backlog of each business group as calculated at October 1, 2000, and December 31, 1999:
October 1 December 31 2000 1999 ---------------------- ------------------ Aerospace $ 3,307 $ 3,753 Information Systems & Technology 1,920 2,000 Marine Systems 11,628 11,608 Combat Systems 1,584 1,596 Other 465 523 ---------------------- ------------------ Total Backlog $ 18,904 $ 19,480 ====================== ================== Funded Backlog $ 12,444 $ 11,665 ====================== ==================
18 20 Aerospace Total backlog includes funded backlog, representing 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. Backlog also includes aircraft options, which primarily include agreements with Executive Jet International, an unaffiliated company, to purchase aircraft for use in their fractional ownership program. Backlog also includes agreements with Gulfstream GATX Leasing Company, LLC (a subsidiary of GATX Capital), which purchases aircraft from the company and then offers the aircraft for lease to customers, generally under short-term operating leases. Gulfstream Aerospace Corporation (Gulfstream) has a 15 percent ownership interest in GATX Leasing Company. 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 Awards Aerospace During early October, Gulfstream announced the launch of the next generation Gulfstream aircraft, the GV-SP. Certification is expected in 2002 with customer delivery planned for 2003. On October 9, 2000, the company announced that Executive Jet converted 17 of its G-V options to firm contracts for GV-SPs. These options were included in the company's unfunded backlog at October 1, 2000. Marine Systems On September 15, 2000, the company received a contract from British Petroleum for the construction of three double-hull crude oil tankers. The contract, valued at $630, includes options for three additional vessels. Construction on the first ship will begin in 2002 with the first delivery in the fourth quarter of 2003, and subsequent deliveries in 2004 and 2005. 19 21 Additional Financial Information Other, Net In the third quarter of 1999, in connection with the acquisition of Gulfstream, the company recorded a charge to earnings of $36 (before-tax) for related costs, consisting of investment banking, legal, bank fees, accounting, printing and regulatory filing fees. Additionally, in connection with the repayment of certain of Gulfstream's debt instruments, the company recorded in the third quarter of 1999 a one-time non-cash charge of $7 (before-tax) for the unamortized debt costs associated with these instruments. Provision for Income Taxes During the first quarter of 1999, General Dynamics and the U.S. Internal Revenue Service settled outstanding tax issues, including 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. During the third quarter of 2000, General Dynamics settled outstanding tax issues, including its remaining refund claim for research and experimentation tax credits, for the years 1990 through 1993. The company recognized a benefit of $90, or $.45 per diluted share, as a result of this settlement. 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 the company's use of derivatives is minimal, it does not expect that the adoption of the new standard will have a material impact on the results of operations or financial condition. 20 22 Financial Condition Operating Activities Cash flows from continuing operations increased this year over last year due to the growth in business through acquisitions, primarily Government Systems, acquired on September 1, 1999, as well as the growth in Gulfstream's results of operations. The company expects to continue to generate funds from operations in excess of its short- and long-term liquidity needs. Investing Activities On November 9, 2000, the company announced that it has entered into a definitive agreement to acquire for cash the outstanding shares of Primex Technologies, Inc. (NASDAQ:PRMX) for $32.10 per share plus the obligation to assume approximately $170 in debt. The company anticipates financing the purchase through the issuance of commercial paper. The acquisition is expected to close during January 2001, subject to regulatory review as well as Primex shareholder approval. Primex provides a variety of munitions, propellants, satellite propulsion systems and electronics products to the U.S. and its allies, as well as domestic and international industrial customers. Primex's 2000 revenues are estimated at $530, with net income estimated at $24. The acquisition is expected to be accretive to earnings. 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 October 1, 2000, the company had approximately $850 million commercial paper outstanding at an average yield of approximately 6.7% with an average term of approximately 80 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 During the first nine months of 1999, the company repaid from its available funds approximately $360 of Gulfstream's debt instruments. 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. From the date of authorization through the third quarter of 2000, the company repurchased approximately 4.1 million shares for $208. 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 21 23 on the open market. During the first nine months of 1999, the company repurchased approximately 1.3 million shares under these programs for $59. 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. 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. 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. 22 24 PART II GENERAL DYNAMICS CORPORATION OTHER INFORMATION October 1, 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 10-45 Agreement and Plan of Merger, dated as of November 9, 2000, among General Dynamics Corporation, Mars Acquisition Corporation and Primex Technologies, Inc. Exhibit 27 Financial Data Schedule Exhibit 99 Press Release dated November 9, 2000, "General Dynamics to Acquire Primex Technologies, Inc." (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: November 13, 2000 23