10-Q 1 w49173e10-q.txt GENERAL DYNAMICS 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 APRIL 1, 2001 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 PER SHARE - APRIL 29, 2001 200,948,888 =============================================================================== 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 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. CONSOLIDATED FINANCIAL STATEMENTS GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions)
April 1 December 31 2001 2000 (Unaudited) (Audited) ----------- ----------- ASSETS ------ CURRENT ASSETS: Cash and equivalents $ 280 $ 177 Accounts receivable 871 798 Contracts in process 1,485 1,238 Inventories 1,006 953 Other current assets 404 385 ----------- ----------- Total Current Assets 4,046 3,551 ----------- ----------- NONCURRENT ASSETS: Property, plant and equipment, net 1,464 1,294 Intangible assets, net 507 528 Goodwill, net 2,264 2,003 Other assets 637 611 ----------- ----------- Total Noncurrent Assets 4,872 4,436 ----------- ----------- $ 8,918 $ 7,987 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Short-term debt $ 915 $ 340 Accounts payable 754 717 Other current liabilities 1,943 1,844 ----------- ----------- Total Current Liabilities 3,612 2,901 ----------- ----------- NONCURRENT LIABILITIES: Long-term debt 225 162 Other liabilities 1,071 1,104 Commitments and contingencies (See Note L) ----------- ----------- Total Noncurrent Liabilities 1,296 1,266 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, including surplus 629 619 Retained earnings 4,244 4,059 Treasury stock (855) (833) Accumulated other comprehensive loss (8) (25) ------------ ------------ Total Shareholders' Equity 4,010 3,820 ----------- ----------- $ 8,918 $ 7,987 =========== ===========
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 1 April 2 2001 2000 ----------- ----------- NET SALES $ 2,673 $ 2,546 OPERATING COSTS AND EXPENSES 2,339 2,240 ----------- ----------- OPERATING EARNINGS 334 306 Interest expense, net (12) (19) Other income (expense), net 8 (1) ----------- ----------- EARNINGS BEFORE INCOME TAXES 330 286 Provision for income taxes 90 102 ----------- ----------- NET EARNINGS $ 240 $ 184 =========== =========== NET EARNINGS PER SHARE: Basic $ 1.20 $ .92 =========== =========== Diluted $ 1.19 $ .91 =========== =========== DIVIDENDS PER SHARE $ .28 $ .26 =========== =========== SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 182 $ 157 =========== ===========
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 1 April 2 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 240 $ 184 Adjustments to reconcile net earnings to net cash provided by operating activities - Depreciation, depletion and amortization of plant and equipment 36 37 Amortization of intangible assets and goodwill 24 19 (Increase) Decrease in assets, net of effects of business acquisitions- Accounts receivable (8) (124) Contracts in process (118) (209) Inventories (56) (30) Other current assets 2 (7) Increase (Decrease) in liabilities, net of effects of business acquisitions- Accounts payable and other current liabilities (70) 35 Customer deposits 7 40 Current income taxes 96 54 Deferred income taxes (15) 14 Other, net (59) (11) ---------- ----------- Net Cash Provided by Operating Activities 79 2 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired (355) (8) Capital expenditures (53) (79) Proceeds from sale of assets 70 1 Other, net (2) (2) ---------- ----------- Net Cash Used by Investing Activities (340) (88) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from commercial paper issuances 565 144 Net repayments of other debt (146) - Repayments of finance operations debt (4) (3) Dividends paid (52) (48) Purchases of common stock (20) (43) Proceeds from option exercises 14 2 Other, net 7 - ---------- ----------- Net Cash Provided by Financing Activities 364 52 ---------- ----------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 103 (34) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 177 270 ---------- ----------- CASH AND EQUIVALENTS AT END OF PERIOD $ 280 $ 236 ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Federal income taxes $ 12 $ 31 Interest (including finance operations) $ 11 $ 23
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement. 4 6 GENERAL DYNAMICS CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (A) Basis of Preparation The term "company" refers to General Dynamics Corporation and all of its wholly-owned and majority-owned subsidiaries. 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 1, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. 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, 2000. 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 1, 2001 and April 2, 2000. (B) New Accounting Standard The company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and 138, on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income based on the guidelines stipulated in SFAS 133. The adoption of the standard did not have a material impact on the company's results of operations or financial condition. The company's operations attempt to minimize the effects of currency risk by borrowing externally in the local currency or by hedging their limited purchases made in foreign currencies, when practical. The company is exposed to the effects of foreign currency fluctuations on the U.S. dollar value of earnings from its international operations. As a matter of policy, the company does not engage in currency speculation. The company periodically enters into foreign currency derivatives, including forward exchange and currency swap contracts, to hedge its exposure to fluctuations in foreign currency exchange rates. The adjustments to fair value related to these cash flow hedges during the three-month period ended April 1, 2001 resulted in a decrease to accumulated other comprehensive loss of $6. There were no material derivative instruments designated as fair value or net investment hedges during the three-month period ended April 1, 2001. 5 7 (C) Comprehensive Income Comprehensive income was $257 and $185 for the three-month periods ended April 1, 2001 and April 2, 2000, respectively. Comprehensive income consists primarily of net earnings ($240 and $184 for the three-month periods ended April 1, 2001 and April 2, 2000, respectively), foreign currency translation adjustments, and in 2001, the fair value adjustment of a currency swap required by the adoption of SFAS 133 (see Notes B and I). (D) Acquisitions - Purchase Method On May 1, 2001, the company announced that it has reached an agreement to acquire Galaxy Aerospace Company, LP (Galaxy Aerospace), for $330 in cash. In addition, the selling parties may receive additional payments, up to a maximum of $315 through 2006, contingent upon the achievement of specific revenue targets. Galaxy Aerospace designs and manufactures the Astra mid-size twin turbofan business jet and the Galaxy super mid-size class aircraft. The acquisition is expected to close in June 2001. The company expects to finance the purchase through the issuance of commercial paper. On April 25, 2001, the company announced that it has entered into a definitive agreement to acquire for cash the publicly held outstanding shares of Newport News Shipbuilding Inc. (NYSE:NNS) for $67.50 per share. The transaction is valued at approximately $2,600, which includes the obligation to assume approximately $500 in debt. Newport News Shipbuilding designs and constructs nuclear-powered aircraft carriers and submarines for the U.S. Navy and provides life-cycle services for ships in the Navy fleet. The company commenced the tender offer for all the outstanding shares of Newport News Shipbuilding on May 4, 2001. The acquisition, subject to the tendering of a majority of the Newport News Shipbuilding shares as well as regulatory approval, is expected to close in the third quarter of 2001. Following the completion of the tender offer and necessary approvals, the company intends to consummate a second-step merger, in which all of the remaining Newport News Shipbuilding shareholders receive the same price paid in the tender offer. The company expects to finance the purchase through the issuance of commercial paper and subsequent issuance of debt securities. On January 26, 2001, the company acquired Primex Technologies, Inc. (renamed, General Dynamics Ordnance and Tactical Systems) for $334 in cash. The company also assumed $204 of Primex's debt, $149 of which was discharged at the time of acquisition. The company financed the purchase through the issuance of commercial paper. Ordnance and Tactical Systems 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. The purchase price has been allocated to the estimated fair value of net tangible assets acquired, with the excess recorded as goodwill (see Note H). Certain of the estimates are preliminary at April 1, 2001, but will be finalized within one year from the date of acquisition. Ordnance and Tactical Systems is part of the Combat Systems business group and is included in the company's results of operations from the closing date. 6 8 (E) Earnings Per Share Basic and diluted weighted average shares outstanding are as follows (in thousands) for the three-month periods ended:
April 1 April 2 2001 2000 ---- ---- Basic 200,401 200,896 Diluted 202,175 202,281
(F) Contracts in Process Contracts in process primarily represent costs and accrued profit related to defense contracts and programs, and consist of the following:
April 1 December 31 2001 2000 ----------- ----------- Net contract costs and estimated profits $ 767 $ 520 Other contract costs 718 718 ----------- ----------- $ 1,485 $ 1,238 =========== ===========
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. 7 9 (G) Inventories Inventories consist primarily of commercial aircraft components, as follows:
April 1 December 31 2001 2000 ----------- ----------- Work in process $ 421 $ 405 Raw materials 286 289 Pre-owned aircraft 280 236 Other 19 23 ----------- ----------- $ 1,006 $ 953 =========== ===========
Other inventories consist primarily of coal and aggregates, which are stated at the lower of average cost or estimated net realizable value. (H) Intangible Assets and Goodwill, Net Intangible assets consist of the following:
April 1 December 31 2001 2000 ----------- ----------- Contracts and programs $ 442 $ 446 Other 65 82 ----------- ----------- $ 507 $ 528 =========== ===========
Intangible assets are shown net of accumulated amortization of $146 and $139 at April 1, 2001, and December 31, 2000, respectively. Contracts and programs acquired are amortized on a straight-line basis over periods ranging from 25 to 40 years. Other consists primarily of customer lists, workforce and purchase options on buildings currently leased. Other intangible assets are amortized over periods ranging from 3 to 21 years. 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 $148 and $131 at April 1, 2001, and December 31, 2000, respectively. 8 10 (I) Debt Debt (excluding finance operations) consists of the following:
April 1 December 31 2001 2000 ----------- ----------- Commercial paper, net of unamortized discount $ 907 $ 340 Senior notes 145 139 Term debt 55 - Industrial development bonds 15 15 Other 18 8 ----------- ----------- 1,140 502 Less current portion 915 340 ----------- ----------- $ 225 $ 162 =========== ===========
As of April 1, 2001, the company had $913 par value discounted commercial paper outstanding at an average yield of approximately 5.34 percent with an average term of approximately 49 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. The company expects to renegotiate these facilities in the second quarter of 2001. In connection with the company's 1997 acquisition of Information Systems, Computing Devices Canada and U.K., the company borrowed in Canadian dollars the equivalent of $220. In April 1998, the company repaid $70 of this note. In September 1998, Computing Devices Canada refinanced $150 with privately-placed senior notes maturing in 2008. Concurrently, Computing Devices Canada entered into a currency swap, which fixed in U.S. dollars the principal of $150 and annual interest at 6.32 percent, payable semi-annually. At April 1, 2001, the fair value of the debt is $148, and the fair value of the currency swap would result in a $9 gain. As part of the acquisition of Primex Technologies, Inc., the company assumed $204 of outstanding debt, $149 of which was discharged at the time of the acquisition. The remaining $55 is indicated as term debt. Interest is payable in June and December at the rate of 7.5 percent. Principal is payable in $5 increments in December of the years 2001 through 2007, with the remaining $20 payable in December 2008. Other at April 1, 2001, represents two capital leases. One lease expires in 2010. The other expires in 2009, and has a five-year renewal option. 9 11 (J) Liabilities A summary of significant liabilities, by balance sheet caption, follows:
April 1 December 31 2001 2000 ----------- ------------ Customer deposits $ 482 $ 484 Workers' compensation 458 454 Retirement benefits 268 253 Advance payments-government contracts 79 77 Other 656 576 ----------- ----------- Other Current Liabilities $ 1,943 $ 1,844 =========== =========== Retirement benefits $ 334 $ 324 Accrued costs on disposed businesses 100 116 Coal mining related liabilities 71 73 Other 566 591 ----------- ----------- Other Liabilities $ 1,071 $ 1,104 =========== ===========
(K) Income Taxes The company had a net deferred tax asset of $177 and $163 at April 1, 2001, and December 31, 2000, respectively, the current portion of which was $322 and $318, 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 deferred tax assets at April 1, 2001, and December 31, 2000. During the first quarter of 2001, the company reduced its liabilities for tax contingencies. The company recognized a non-cash benefit of $28, or $.14 per diluted share, as a result of this adjustment. The company has recorded liabilities for tax contingencies for open years. Resolution of tax matters for these years is not expected to have a materially unfavorable impact on the company's results of operations or financial condition. 10 12 (L) Commitments and Contingencies Litigation From time to time, the company is subject to various legal proceedings arising out of the ordinary course of its business. Except as described below, the company does not consider any of such proceedings, individually or in the aggregate, to be material to its business or likely to result in a material adverse effect on its results of operations or financial condition. Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note M. 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 individual 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 the individual defendant 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 May 1, 2001, the Appellate Court for the Fifth District of California reversed the jury's verdict in Argo, remanded the case with directions to enter judgment in favor of General Dynamics and awarded the company its trial and appellate court costs. On May 3, 2001, the parties reached a settlement of Argo in which the plaintiffs agreed to waive any further right to appeal and the company agreed to waive its right to seek reimbursement of its costs. 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. The Williamson allegations are virtually identical to the allegations made in the Argo lawsuit; however, Williamson is styled as a class action lawsuit. Plantiffs seek compensatory damages in an unspecified amount as well as punitive damages. On August 7, 1997, General Dynamics removed the case to the United States District Court for the Southern District of California. 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 12, 2000, the Ninth Circuit issued an opinion reversing the district court's order of dismissal and remanded the case to the district court for further proceedings. On remand, the district court entered a stay of the case pending the final outcome of Argo. The Appellate Court's decision in Argo may resolve some or all of the issues in Williamson. The company believes that the ultimate outcome will not have a material impact on the company's results of operations or financial condition. 11 13 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 that 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 rescission of two of the 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 policies. 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. On December 21, 2000, the Circuit Court adopted the findings and conclusions of the special master in their entirety and entered judgment thereon. On April 4, 2001, General Dynamics filed a notice of appeal with the Missouri Court of Appeals, Eastern District. On April 13, 2001, plaintiffs also filed a notice of appeal with the Appellate Court. On May 9, 2001, the plaintiffs and General Dynamics agreed to settle their claims and to dismiss the appeal. General Dynamics' cross-claims against the London broker remain pending. General Dynamics does not expect that this case will have a material impact on 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 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. 12 14 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. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its potential liabilities in these proceedings, in the aggregate, will not be material to the company's results of operations or financial condition. Other A major coal customer is seeking arbitration before a tripartite panel of the American Arbitration Association. The customer alleged in its claim that the company has breached the coal supply agreement by charging excessive seller costs and failing to use best efforts in operating the business in a commercially reasonable fashion for the period of January 1998 to the present. The company anticipates that the panel will hear the claim by year-end 2001 at the earliest, and does not expect the outcome of this proceeding to have a material adverse effect on its results of operations or financial condition. (M) 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. 13 15 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 litigate that issue fully on remand. A trial of the case commenced on May 7, 2001. 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 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. While the company believes the possibility of this result is remote, if in the unlikely event the company is ultimately found to have been in default on the contract, management believes the company would be able to repay the unliquidated progress payments plus interest. Management's Discussion and Analysis of the Results of Operations and Financial Condition contains information on liquidity. 14 16 (N) 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 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 --------- ------------------ April 1 April 2 April 1 April 2 2001 2000 2001 2000 ---- ---- ---- ---- Marine Systems $862 $846 $80 $88 Aerospace 712 730 144 131 Information Systems & Technology 612 606 60 58 Combat Systems 438 315 48 37 Other* 49 49 2 (8) ------ ------ ---- ---- $2,673 $2,546 $334 $306 ====== ====== ==== ====
Identifiable Assets ------------------- April 1 December 31 2001 2000 ---- ---- Marine Systems $1,652 $1,613 Aerospace 1,728 1,710 Information Systems & Technology 2,391 2,340 Combat Systems 1,739 1,054 Other* 316 317 Corporate** 1,092 953 ----- --- $8,918 $7,987 ====== ======
* Other includes the results of the company's coal, aggregates and finance operations, as well as the operating results of the company's commercial pension plans. ** 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 pension plans. 15 17 GENERAL DYNAMICS CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS April 1, 2001 (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, which 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, cash flows, contract awards, aircraft production, deliveries and backlog stability. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. 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; changing priorities or reductions in the U.S. government defense budget; termination of government contracts due to unilateral government action; changing customer demand or preferences for business aircraft; changes from the company's expectations with respect to its customers' exercise of business aircraft options; performance issues with key suppliers and subcontractors; the status or outcome of legal and/or regulatory proceedings; the status or outcome of labor negotiations; 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: Marine Systems, Aerospace, Information Systems and Technology, and Combat Systems. The company also owns certain commercial operations, which are identified for reporting purposes as Other. The following table sets forth the net sales and operating earnings by business group for the three-month periods ended April 1, 2001 and April 2, 2000: 16 18
Three-Months Ended ---------------------------- April 1 April 2 Increase/ 2001 2000 (Decrease) --------- ------------- ------------- NET SALES: Marine Systems $ 862 $ 846 $ 16 Aerospace 712 730 (18) Information Systems and Technology 612 606 6 Combat Systems 438 315 123 Other 49 49 - --------- ------------- ------------- $2,673 $2,546 $ 127 ========= ============= ============= OPERATING EARNINGS: Marine Systems $ 80 $ 88 $ (8) Aerospace 144 131 13 Information Systems and Technology 60 58 2 Combat Systems 48 37 11 Other 2 (8) 10 --------- ------------- ------------- $ 334 $ 306 $ 28 ========= ============= =============
Results of Operations Marine Systems Operating earnings decreased slightly during the three-month period ended April 1, 2001, on higher sales, due primarily to increased work on early stage production programs (including the Virginia-class submarine, commercial ship and LPD construction) as compared to the corresponding period in the prior year. Aerospace Operating earnings increased during the three-month period ended April 1, 2001, on lower sales, due primarily to improved-cost performance in green deliveries and the completion process. Gulfstream delivered 18 green aircraft and completed 15 deliveries during both three-month periods. New aircraft orders for the quarter more than doubled the year-ago orders, and included 10 Gulfstream V-SP aircraft. 17 19 Combat Systems Net sales and operating earnings increased during the three-month period ended April 1, 2001, due primarily to the acquisition of Ordnance and Tactical Systems on January 26, 2001. Ordnance and Tactical Systems is anticipated to add approximately $500 in revenues for the year. Other Operating earnings increased during the three-month period ended April 1, 2001, due to non-recurring charges associated with the coal operations in the prior year. Backlog The following table details the backlog of each business group as calculated at April 1, 2001, and December 31, 2000:
April 1 December 31 2001 2000 ---------------- --------------- $ 10,509 $ 11,211 Marine Systems Aerospace 4,709 4,370 Information Systems & Technology 2,095 1,942 Combat Systems 3,299 1,773 Other 428 446 ---------------- --------------- Total Backlog $ 21,040 $ 19,742 ================ =============== Funded Backlog $ 15,315 $ 14,442 ================ ===============
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. Aerospace Funded aircraft backlog represents orders for which the company has entered into a definitive purchase contract with no material contingencies and has received a significant non-refundable deposit from the customer. Unfunded aircraft backlog includes options, which consist of agreements with two unaffiliated customers who purchase aircraft for use in their respective fractional ownership programs, an agreement with Gulfstream GATX Leasing Company and agreements to provide future aircraft maintenance and support services. 18 20 New Awards Combat Systems In April 2001, the Army's six-year requirements contract award to GM GDLS Defense Group, a joint venture between the company and General Motors Canada Ltd., to equip its Brigade Combat Teams with an eight-wheeled armored vehicle was upheld. The total estimated value of this contract is $4 billion for 2,131 vehicles. On March 30, 2001, the company was awarded a $741 multiyear contract by the U.S. Army to deliver an additional 307 M1A2 Abrams upgrade tanks with the System Enhancement Package. This is a follow-on award to the $1.3 billion, 580 vehicle contract awarded in 1996, and extends the company's deliveries to 2004. Financial Condition, Liquidity and Capital Resources Operating Activities Cash flows from operating activities increased this year over last year due to the growth in operations, an improvement in working capital management and the timing of cash paid for interest and federal income taxes. The company expects to continue to generate funds from operations in excess of its short- and long-term liquidity needs. As discussed further in Note M to the Consolidated Financial Statements, litigation on the A-12 program termination has been in progress since 1991. Management does not anticipate that this litigation will be settled in the near term. However, in the unlikely event the company is ultimately found to have been in default on the contract, management believes the company would be able to repay the unliquidated progress payments of approximately $675, plus interest. The company expects to continue to generate funds from operations in the interim, has the capacity for additional long-term borrowings above its current unused lines of credit and could raise capital in the equity markets, if necessary. Investing Activities On May 1, 2001, the company announced that it has reached an agreement to acquire Galaxy Aerospace, for $330 in cash. In addition, the selling parties may receive additional payments, up to a maximum of $315 through 2006, contingent upon the achievement of specific revenue targets. Galaxy Aerospace designs and manufactures the Astra mid-size twin turbofan business jet and the Galaxy super mid-size class aircraft. The acquisition is expected to close in June 2001. The company expects to finance the purchase through the issuance of commercial paper. 19 21 On April 25, 2001, the company announced that it has entered into a definitive agreement to acquire for cash the publicly held outstanding shares of Newport News Shipbuilding Inc. (NYSE:NNS) for $67.50 per share. The transaction is valued at approximately $2,600, which includes the obligation to assume approximately $500 in debt. Newport News Shipbuilding designs and constructs nuclear-powered aircraft carriers and submarines for the U.S. Navy and provides life-cycle services for ships in the Navy fleet. The company commenced the tender offer for all the outstanding shares of Newport News Shipbuilding on May 4, 2001. The acquisition, subject to the tendering of a majority of the Newport News Shipbuilding shares as well as regulatory approval, is expected to close in the third quarter of 2001. Following the completion of the tender offer and necessary approvals, the company intends to consummate a second-step merger, in which all of the remaining Newport News Shipbuilding shareholders receive the same price paid in the tender offer. The company expects to finance the purchase through the issuance of commercial paper and subsequent issuance of debt securities. On February 15, 2001, Gulfstream sold its engine overhaul business for $60 and purchased airframe service and maintenance operations located in Florida, Minnesota, Nevada and Texas for $17. On January 26, 2001, the company completed the acquisition of Primex Technologies, Inc. (renamed, General Dynamics Ordnance and Tactical Systems) for $334 in cash. The company financed the acquisition through the issuance of commercial paper. As of April 27, 2001, the company had $1,012 in commercial paper outstanding at an average yield of approximately 5.05% with an average term of approximately 37 days. The company expects to reissue commercial paper as it matures, and has the option to extend the term up to 270 days. Financing Activities On March 7, 2001, the company's board of directors declared an increased regular quarterly dividend of $.28 per share. The company had previously increased the quarterly dividend to $.26 per share in March 2000. On January 26, 2001, in connection with the acquisition of Primex Technologies, the company assumed $204 of outstanding debt, $149 of which was repaid at the time of acquisition. On March 7, 2000, the company's board of directors authorized management to repurchase in the open market up to 10 million shares of the company's issued and outstanding common stock. During the first quarter of 2001, the company repurchased approximately 288,000 shares for approximately $20. During the first quarter of 2000, the company repurchased approximately 1 million shares for $43. From the date of authorization through the first quarter of 2001, the company has repurchased approximately 4.3 million shares for $228. 20 22 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. The company expects to renegotiate these facilities in the second quarter of 2001. Additional Financial Information Provision for Income Taxes During the first quarter of 2001, the company reduced its liabilities for tax contingencies. The company recognized a non-cash benefit of $28, or $.14 per diluted share, as a result of this adjustment. For further discussion of this and other tax matters, as well as a discussion of the net deferred tax asset, see Note K 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 Standard The company adopted Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and 138, on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income based on the guidelines stipulated in SFAS 133. The adoption of the standard did not have a material impact on the company's results of operations or financial condition. 21 23 GENERAL DYNAMICS CORPORATION 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, 2000. 22 24 PART II GENERAL DYNAMICS CORPORATION OTHER INFORMATION April 1, 2001 Item 1. Legal Proceedings Reference is made to Note L, 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, which is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.17 General Dynamics Corporation 1997 Incentive Compensation Plan, as amended (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 16, 2001 23