-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fr6Oqlbno65TwNwJJ+h/t7LGQo2vMevKOYluyWqEeTV589jT16ORJ7fL/B89JLzL tOKk4Df03zfNnT6bWqLjMQ== 0000950133-98-003737.txt : 19981111 0000950133-98-003737.hdr.sgml : 19981111 ACCESSION NUMBER: 0000950133-98-003737 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL DYNAMICS CORP CENTRAL INDEX KEY: 0000040533 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 131673581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03671 FILM NUMBER: 98742136 BUSINESS ADDRESS: STREET 1: 3190 FAIRVIEW PARK DRIVE CITY: FALLS CHURCH STATE: VA ZIP: 22042 BUSINESS PHONE: 7038763375 MAIL ADDRESS: STREET 1: 3190 FAIRVIEW PARK DR CITY: FALLS CHURCH STATE: VA ZIP: 22042 10-Q 1 FORM 10-Q 1 ================================================================================ 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 SEPTEMBER 27, 1998 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 25, 1998 126,718,344 ================================================================================ 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 13 PART II - OTHER INFORMATION - -------------------------------- Item 1 - Legal Proceedings 22 Item 5 - Other Matters 22 Item 6 - Exhibits and Reports on Form 8-K 23 SIGNATURE 23 - ---------
1 3 PART I GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in millions)
September 27 December 31 1998 1997 ------------ ----------- ASSETS - ------ CURRENT ASSETS: Cash and equivalents $ 111 $ 336 Marketable securities 113 105 ------------ ----------- 224 441 Accounts receivable 191 234 Contracts in process 906 702 Other current assets 302 312 ------------ ----------- Total Current Assets 1,623 1,689 ------------ ----------- NONCURRENT ASSETS: Marketable securities 176 - Leases receivable - finance operations 187 193 Real estate held for development 65 128 Property, plant and equipment, net 626 592 Intangible assets 1,251 1,204 Other assets 225 285 ------------ ---------- Total Noncurrent Assets 2,530 2,402 ------------ ---------- $ 4,153 $ 4,091 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current portion of long-term debt $ - $ 108 Accounts payable 242 255 Other current liabilities 968 928 ------------ ----------- Total Current Liabilities 1,210 1,291 ------------ ----------- NONCURRENT LIABILITIES: Long-term debt 149 157 Long-term debt - finance operations 88 100 Other liabilities 586 628 Commitments and contingencies (See Note K) - - ------------ ----------- Total Noncurrent Liabilities 823 885 ------------ ----------- SHAREHOLDERS' EQUITY: Common stock, including surplus (shares issued 168,774,672) 256 220 Retained earnings 2,572 2,386 Treasury stock (shares held 1998, 42,460,553; 1997 42,989,118) (705) (691) Accumulated other comprehensive income (3) - ------------ ----------- Total Shareholders' Equity 2,120 1,915 ------------ ----------- $ 4,153 $ 4,091 ============ ===========
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 ----------------------------------- September 27 September 28 1998 1997 ------------ ------------ NET SALES $ 1,172 $ 988 OPERATING COSTS AND EXPENSES 1,036 875 ------------ ------------ OPERATING EARNINGS 136 113 Interest income, net 2 11 Other income (expense), net 3 (1) ------------ ------------ EARNINGS BEFORE INCOME TAXES 141 123 Provision for income taxes 47 41 ------------ ------------ NET EARNINGS $ 94 $ 82 ============ ============ BASIC AND DILUTED NET EARNINGS PER SHARE $ .74 $ .65 ============ ============ DIVIDENDS PER SHARE $ .22 $ .21 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING (in millions): Basic 126.5 125.7 Diluted 127.7 126.8 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 89 $ 83 ============ ============
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 --------------------------------- September 27 September 28 1998 1997 ------------ ------------ NET SALES $ 3,504 $ 2,961 OPERATING COSTS AND EXPENSES 3,109 2,632 ------------ ------------ OPERATING EARNINGS 395 329 Interest income, net 3 28 Other income (expense), net 6 (4) ------------ ------------ EARNINGS BEFORE INCOME TAXES 404 353 Provision for income taxes 136 120 ------------ ------------ NET EARNINGS $ 268 $ 233 ============ ============ NET EARNINGS PER SHARE: Basic $ 2.12 $ 1.85 ============ ============ Diluted $ 2.11 $ 1.84 ============ ============ DIVIDENDS PER SHARE $ .66 $ .62 ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING (in millions): Basic 126.3 125.6 Diluted 127.3 126.5 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 271 $ 239 ============ ============
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 ------------------------------------- September 27 September 28 1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 268 $ 233 Adjustments to reconcile net earnings to net cash provided by continuing operations - Depreciation, depletion and amortization 91 64 Decrease (Increase) in - Marketable securities (39) (396) Accounts receivable 39 (21) Contracts in process (198) 116 Leases receivable - finance operations 6 5 Other current assets (1) 11 Increase (Decrease) in - Accounts payable and other current liabilities (24) (89) Current income taxes (9) 23 Deferred income taxes 45 18 Other, net (22) 2 ------------ ------------ Net cash provided by continuing operations 156 (34) Net cash used by discontinued operations (11) (31) ------------ ------------ Net Cash Provided by Operating Activities 145 (65) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (5) (447) Purchases of available-for-sale securities (439) (360) Sales/maturities of available-for-sale securities 293 725 Capital expenditures (88) (50) Proceeds from the sale of assets 89 7 Other (3) (3) ------------ ------------ Net Cash Used by Investing Activities (153) (128) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of debt, net (111) - Repayment of debt - finance operations (12) (12) Dividends paid (81) (77) Purchase of common stock (25) (60) Proceeds from option exercises 14 28 Other (2) - ------------ ------------ Net Cash Used by Financing Activities (217) (121) ------------ ------------- NET DECREASE IN CASH AND EQUIVALENTS (225) (314) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 336 516 ------------ ------------ CASH AND EQUIVALENTS AT END OF PERIOD $ 111 $ 202 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Income taxes $ 79 $ 63 Interest (including finance operations) $ 15 $ 9
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 September 27, 1998, are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 1997. In the opinion of the company, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the three and nine month periods ended September 27, 1998, and September 28, 1997. (B) Comprehensive Income Effective January 1, 1998, the company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires the presentation and disclosure of comprehensive income. Comprehensive income was $92 and $82 for the three month period and $265 and $232 for the nine month period ended September 27, 1998, and September 28, 1997, respectively. (C) Translation of Foreign Currencies Local currencies have been determined to be functional currencies for the company's international operations. Foreign currency balance sheets are translated at the end-of-period exchange rates and earnings statements at the average exchange rates for each period. The resulting foreign currency translation adjustments are included in the calculation of other comprehensive income and included in the equity section on the Consolidated Balance Sheet. 6 8 (D) Acquisitions On October 8, 1998, the company entered into a definitive agreement to acquire NASSCO Holdings Inc., the parent company of National Steel and Shipbuilding Company (NASSCO), for approximately $370 in cash, payable over the fourth quarter of this year and the second quarter of 1999, plus the obligation to discharge $46 in debt. NASSCO is a designer and builder of U.S. Navy auxiliary ships, a Navy ship repair facility for the West Coast and has expertise in commercial shipbuilding. The acquisition will close during November 1998. Effective December 31, 1997, the company purchased the assets of Computing Devices International, formerly a division of Ceridian Corporation, for approximately $500, net of cash acquired of $100. The company borrowed $220 in connection with the acquisition. See Note H for details on the terms of the debt. Computing Devices International added three new operating units to the company, General Dynamics Information Systems, Computing Devices Canada, Ltd. and Computing Devices Company Ltd. in the United Kingdom. Effective October 1, 1997, the company purchased the assets of Advanced Technology Systems, formerly an operating unit of Lucent Technologies, for $267, net of purchase price adjustment of $17 received in January 1998. Effective January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, formerly operating units of Lockheed Martin Corporation, for approximately $450 in cash. Each of these acquisitions has been accounted for under the purchase method of accounting. The purchase prices have been allocated to the estimated fair values of net tangible assets acquired, with any excess recorded as intangible assets (see Note F). Purchase price allocations related to the acquisitions of the three Computing Devices International businesses and Advanced Technology Systems will be finalized within one year from their respective date of acquisition. The operating results of the acquired businesses are included with those of the company from their respective closing dates. (E) Sale of Real Estate Held for Development Following the sale of the company's operations located in southern California, the company retained certain properties, including a 232-acre site in the Kearny Mesa section of San Diego. In July 1998, the company completed the sale of the Kearny Mesa site for approximately $80 million in cash. 7 9 (F) Intangible Assets Intangible assets resulting from the company's acquisitions discussed in Note D consist of the following:
September 27 December 31 1998 1997 ------------ ----------- Contracts and programs acquired $ 417 $ 376 Goodwill 834 828 ------------ ----------- $ 1,251 $ 1,204 ============ ===========
Intangible assets are shown net of accumulated amortization of $59 and $31 at September 27, 1998, and December 31, 1997, respectively. Intangible assets are amortized on a straight-line basis over periods ranging from 8 to 40 years. (G) Liabilities A summary of significant liabilities, by balance sheet caption, follows:
September 27 December 31 1998 1997 ------------ ----------- Workers' compensation $ 245 242 Retirement benefits 233 221 Salaries and wages 78 93 Customer deposits 127 114 Other 285 258 ------------ ----------- Other Current Liabilities $ 968 $ 928 ============ =========== Accrued costs on disposed businesses $ 182 $ 211 Retirement benefits 157 154 Coal mining related liabilities 72 78 Other 175 185 ------------ ----------- Other Liabilities $ 586 $ 628 ============ ===========
8 10 (H) Debt Debt consists of the following:
September 27 December 31 1998 1997 ------------- ----------- Note payable $ 142 $ 220 9.95% Debentures - 38 Other 7 7 ------------- ----------- 149 265 Less current portion - 108 ------------- ------------ $ 149 $ 157 ============= ===========
On December 31, 1997, the company borrowed $220 in connection with its acquisition of Computing Devices International. In April 1998, the company repaid $70 of this note, and in September 1998, refinanced the balance with a note maturing in 2008. The debt carries a 6.32 percent interest rate, payable semi-annually. On April 1, 1998, the company exercised its option to call for the early redemption of all of its outstanding 9.95 percent Debentures. (I) Income Taxes The company had a net deferred tax asset of $240 and $285 at September 27, 1998, and December 31, 1997, the current portion of which was $228 and $223, respectively, and was included in other current assets on the Consolidated Balance Sheet. No material valuation allowance was required for the company's net deferred tax assets at September 27, 1998, and December 31, 1997. The company filed refund claims totaling $355 (plus interest) for research and experimentation tax credits for the years 1981 through 1990. The company and the IRS settled the claims for the years 1981 through 1986 for $132 (plus interest). Because substantially all of the tax credits associated with the settlement will be carried forward to 1987, the timing and amount of the net refund is therefore subject to resolution of matters related to the IRS examination of the company's 1987 through 1989 consolidated federal income tax returns, currently under review by the IRS Appeals Division. Refund claims totaling $98 (plus interest) for research and experimentation tax credits for the years 1987 through 1989 will also be resolved as part of the IRS examination of these tax years. The amount of the net refund is also subject to approval by the Joint Committee on Taxation. Refund claims totaling $78 (plus interest) for research and experimentation tax credits for the year 1990 are pending before the IRS. The timing and amount of any net refund is subject to conclusion of the IRS examination of the company's 1990 consolidated federal income tax return. The IRS is currently examining the company's consolidated federal income tax returns for the years 1990 through 1995. Since the company has recorded liabilities for tax contingencies, conclusion of these audit years is not expected to have a materially unfavorable impact on the company's results of operations or financial condition. The company expects to realize tax benefits in excess of amounts previously recorded when these matters are resolved. 9 11 (J) Shareholders' Equity On March 4, 1998, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend, which was distributed on April 2, 1998, to shareholders of record on March 13, 1998. Accordingly, all references in the financial statements to number of shares and per share amounts have been restated to reflect the stock split. (K) Commitments and Contingencies Litigation Claims made by and against the company regarding its consolidated federal income tax returns are discussed in Note I. Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note L. On May 1, 1997, a jury in San Diego County rendered a verdict of $101 against the company in favor of 97 former Convair employees. In this lawsuit, Argo, et al. v. General Dynamics, the plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit and concealed its plans to close its Convair division. The jury awarded the plaintiffs a total of $1.8 in actual damages, and $99 in punitive damages. The company is appealing the judgment. The company believes it has substantial legal defenses, but in any case, it believes the punitive damage award is excessive as a matter of law. Management currently believes the ultimate outcome will not have a material impact on the company's results of operations or financial condition. General Dynamics Corporation was served with a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics and Lloyd Thompson, seeking a declaratory judgment and rescission of certain excess loss insurance contracts covering the company's self-insured workers' compensation program at its Electric Boat division for the period July 1, 1988, to June 30, 1992. The insurance contracts cover losses of up to $30 in excess of a $40 threshold in each of the four policy years. The named plaintiffs are members of the Lloyd's of London syndicates and other British insurers who have underwritten the risk. General Dynamics has counterclaimed, alleging that the plaintiffs have breached their insurance contracts by failing to pay claims. General Dynamics seeks a declaratory judgment that the policies are valid and seeks actual damages and payment of a penalty under a Missouri statute, on the ground that the plaintiffs' failure to pay is vexatious and unreasonable. The company does not expect that the matter will have a material impact on the company's results of operations or financial condition. Raytheon Company and Raytheon Missile Systems Company (as successors in interest to HE Holdings, Inc. and Hughes Missile Systems Company, respectively) have filed a seventh amended complaint against the company alleging breach of contract, fraud, and conversion with respect to certain representations and warranties contained in the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business. The amended complaint, which was filed in the Superior Court of the State of California, seeks approximately $25 in compensatory damages as well as punitive damages and declaratory relief. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. 10 12 The company is a defendant in tort cases pending in state and federal court in Arizona, as well as in cases brought under the Comprehensive Environmental Response, Compensation and Liability Act. This litigation arises out of groundwater and soil contamination at the Tucson airport. The company's predecessor in interest, Consolidated Aircraft Company, operated a modification center at the site during World War II. The company has defenses to the claims, as well as a claim against the government for indemnification. The company does not believe the litigation will have a material impact on the company's results of operations or financial condition. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its liabilities in these proceedings, in the aggregate, are not material to the company's results of operations or financial condition. Environmental The company is directly or indirectly involved in certain Superfund sites in which the company, along with other major U.S. corporations, has been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency with respect to past shipments of hazardous waste to sites now requiring environmental cleanup. Based on a site by site analysis of the estimated quantity of waste contributed by the company relative to the estimated total quantity of waste, the company believes its liability at any individual site is not material. The company is also involved in the investigation, cleanup and remediation of various conditions at sites it currently or formerly owned or operated. 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 site at which the company is a PRP. (L) Termination of A-12 Program The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy's new carrier-based Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas (the contractors) were parties to the contract with the Navy, each had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors' appeal of the termination for default, or a negotiated settlement. 11 13 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 termination for default, was concluded in October 1993. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following a trial on the merits, the court issued an order converting the termination for default to a termination for convenience. On February 23, 1998, a final judgment was entered in favor of the contractors for $1,200 plus interest. The U.S. government has filed a notice of appeal. The contractors have filed briefs regarding the appeal of this action. Final resolution of the A-12 litigation will depend on the outcome of expected appeal or negotiation with the government. The company has not recognized any claim revenue from the Navy. The company has fully reserved the contracts in process balance associated with the A-12 program and has accrued the company's estimated termination liabilities, and the liability associated with pursuing the litigation through the appeals process. In the unlikely event that the court's decision converting the termination to a termination for convenience is reversed on appeal, and the contractors are ultimately found to be in default of the A-12 contract and are required to repay all unliquidated progress payments, additional losses of approximately $675, plus interest, may be recognized by the company. This result is considered remote. 12 14 GENERAL DYNAMICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION September 27, 1998 (Dollars in millions, except per share amounts) Forward-Looking Statements Management's Discussion and Analysis of the Results of Operations and Financial Condition contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of 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 and contract awards. 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 that are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including: the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; legal proceedings; labor negotiations; changing priorities or reductions in the U.S. government defense budget; and termination of government contracts due to unilateral government action. Business Segments The company comprises three primary business segments: Marine, Combat Systems and Information Systems and Technology, which was formed at the beginning of 1998. The company also has several miscellaneous businesses classified as Other. The following table sets forth the net sales and operating earnings by business segment for the three and nine month periods ended September 27, 1998, and September 28, 1997: 13 15
- -------------------------------------------------------------------------------------------------------------- Three Month Period Nine Month Period - -------------------------------------------------------------------------------------------------------------- Increase/ Increase/ 1998 1997 (Decrease) 1998 1997 (Decrease) - -------------------------------------------------------------------------------------------------------------- NET SALES: - -------------------------------------------------------------------------------------------------------------- Marine $ 627 $ 547 $ 80 $ 1,831 $ 1,693 $ 138 Combat Systems 284 372 (88) 917 1,087 (170) Information Systems and Technology 193 - 193 576 - 576 Other 68 69 (1) 180 181 (1) - -------------------------------------------------------------------------------------------------------------- $ 1,172 $ 988 $ 184 $ 3,504 $ 2,961 $ 543 - -------------------------------------------------------------------------------------------------------------- OPERATING EARNINGS: - -------------------------------------------------------------------------------------------------------------- Marine $ 68 $ 55 $ 13 $ 205 $ 175 $ 30 Combat Systems 39 47 (8) 120 133 (13) Information Systems and Technology 15 - 15 40 - 40 Other 14 11 3 30 21 9 - -------------------------------------------------------------------------------------------------------------- $ 136 $ 113 $ 23 $ 395 $ 329 $ 66 - --------------------------------------------------------------------------------------------------------------
Marine Results of Operations Net sales increased during the three and nine month periods due primarily to the transition of the ballistic missile fire control business to the Marine segment from the Combat Systems segment. Operating earnings increased during the three and nine month periods due to an earnings rate increase on the Arleigh Burke class destroyer (DDG 51) program in the fourth quarter of 1997 and on the Seawolf program in the third quarter of 1997 and in the first quarter of this year. The increase in operating earnings resulting from earnings rate increases was partially offset by a decline in submarine construction activity. Business and Market Considerations During the third quarter, the Navy awarded a $4.2 billion contract to the company for the first four ships of the Virginia class submarine, formerly known as the New Attack Submarine. Construction work will be shared equally with the company as the prime contractor and Newport News Shipbuilding and Drydock Company in the role of subcontractor. The company is scheduled to deliver the lead ship of the class in 2004. Also during the third quarter, the Navy awarded a $68.5 contract to the newly formed DD 21 Shipbuilder Alliance comprised of the company and Ingalls Shipbuilding Inc. for the first phase of system concept design work for the next generation surface combatant ships (DD 21). The company will serve as the Alliance prime contractor for the first phases of the DD 21 program and leads one of the Alliance's two competing design teams. Each team will share equally in the funding of the first phase award, and both shipbuilders are expected to share equally in the production of the DD 21 ships. The development, design, construction and life-cycle support of the DD 21 ships is estimated at $25 billion 14 16 and includes the construction of 32 ships during the first quarter of the next century. Construction is expected to start in 2004. On October 8, 1998, the company entered into a definitive agreement to acquire NASSCO Holdings Inc., the parent company of National Steel and Shipbuilding Company (NASSCO), for approximately $370 in cash, payable over the fourth quarter of this year and the second quarter of 1999, plus the obligation to discharge $46 in debt. The acquisition will close during November 1998. NASSCO is a designer and builder of U.S. Navy auxiliary ships, a Navy ship repair facility for the West Coast and has expertise in commercial shipbuilding. NASSCO anticipates full year 1998 sales of $485 and has a backlog of approximately $1.4 billion. During the second quarter, the company completed negotiations with the Metal Trades Council Union at Electric Boat and ratified a new, three-year labor contract. During the first quarter, the Navy awarded a multi-year contract to the company for the construction of six additional DDG 51s for $2.1 billion. This award extends the company's deliveries to 2006. Combat Systems Results of Operations Net sales and operating earnings decreased during the three month period due to the aforementioned transfer of the ballistic missile fire control business to the Marine segment, timing of land combat program deliveries and completion of production on the Single Channel Ground and Airborne Radio System (SINCGARS). In addition to the decrease noted for the three month period, net sales also declined during the nine month period due to the completion of the Egypt tank kit co-production program in early 1997, partially offset by increased design and development on the Advanced Amphibious Assault Vehicle. Operating earnings decreased during the nine month period due to the aforementioned declines in sales for the same period, partially offset by higher margins obtained from the SINCGARS program as production is completed. Information Systems and Technology Results of Operations The acquisitions of Computing Devices International and Advanced Technology Systems led to the creation of one of the company's primary reporting segments, Information Systems and Technology. Computing Devices International added three new operating units to the company, General Dynamics Information Systems, Computing Devices Canada, Ltd. and Computing Devices Company Ltd. in the United Kingdom. General Dynamics Information Systems provides the company with broader and deeper capabilities in electronics and systems integration and information management. Computing Devices Canada, Ltd. is Canada's premier defense electronics contractor with extensive experience in the management of complex projects involving large scale systems integration. It is the systems integrator on the Iris program, whose objective is to modernize and fully digitize the tactical command, control and communications systems of the Canadian land forces. Computing Devices Company Ltd. in the United Kingdom opens new markets in highly sophisticated defense electronics. Advanced 15 17 Technology Systems is a leading supplier of undersea surveillance systems, signal processing systems, vibration control systems, and related technologies for a wide range of applications. During the third quarter, the company completed two additional acquisitions. On August 3, the company acquired the assets of Caldwell Cable Ventures, a provider of underwater fiberoptic and power cable installation. Caldwell Cable Ventures operates as a subsidiary of Advanced Technology Systems. On June 30, the company acquired the assets of Computer Systems and Communications Corporation, a systems integration and communications company serving the U.S. Department of Defense and other NATO countries. The operating results of these acquired businesses are included with those of the company from their respective closing dates. The company continues to seek improvements in operating margins in Information Systems and Technology through efforts to reduce costs. During the second quarter, the company initiated internal actions to consolidate the electronics manufacturing processes of the segment in Advanced Technology Systems' Greensboro, North Carolina, facility. Other Results of Operations Operating earnings increased during the three and nine month periods due to improved performance of both the aggregates business and coal operations, resulting from cost reduction efforts. Business and Market Considerations Freeman Energy's contract as part of the Bituminous Coal Operators' Association (BCOA) expired on August 1, 1998. In 1997, Freeman Energy elected to withdraw from the BCOA and negotiate future contracts independently with the United Mine Workers of America union (UMWA). Freeman Energy and the UMWA held talks on a new contract beginning in April 1998. However, on September 11, 1998, the union workforce, representing approximately seventy percent of Freeman's total workforce, went on strike. Negotiations are currently ongoing. Although the business disruption may impact the net sales of the Other segment, the company does not expect the business disruption to materially impact the company's results of operations or financial condition. 16 18 Backlog The following table details the backlog of each business segment as calculated at September 27, 1998, and December 31, 1997:
September 27 December 31 1998 1997 ------------ ----------- Marine $ 10,819 $ 5,864 Combat Systems 1,873 2,323 Information Systems and Technology 805 805 Other 590 607 ------------ ----------- Total Backlog $ 14,087 $ 9,599 ============ =========== Funded Backlog $ 7,050 $ 6,796 ============ ===========
Total backlog represents the estimated remaining sales value of work to be performed under firm contracts. Funded backlog 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. Total backlog also includes amounts for long-term coal contracts. The company's Virginia class submarine award of $4.2 billion, as previously discussed, is included in total backlog indicated above. Additional Financial Information Interest, Net Interest income decreased during the three and nine month periods due primarily to a decline in the average cash balance resulting from the use of $1.2 billion for business acquisitions during 1997. Interest expense increased during the three and nine month periods as a result of borrowings made in connection with the Computing Devices International acquisition at the end of 1997. Provision for Income Taxes The company settled its claims for research and experimentation tax credits for the years 1981 through 1986 with the Internal Revenue Service (IRS). Because substantially all of the tax credits associated with the settlement will be carried forward to 1987, the exact amount and timing of the net refund is therefore subject to resolution of matters related to the IRS examination of the company's 1987 through 1989 consolidated federal income tax returns, currently under review by the IRS Appeals Division, as well as subject to approval by the Joint Committee on Taxation. For further discussion of this and other tax matters, as well as a discussion of the net deferred tax asset, see Note I to the Consolidated Financial Statements. 17 19 Earnings Per Share On March 4, 1998, the company's board of directors authorized a two-for-one stock split effected in the form of a 100 percent stock dividend. Accordingly, earnings per share data has been restated to give retroactive recognition to the stock split for all periods presented. Environmental Matters For a discussion of environmental matters and other contingencies, see Note K to the Consolidated Financial Statements. The company's liability, in the aggregate, with respect to these matters, is not deemed to be material to the company's results of operations or financial condition. Market Risk The company's investment securities carry fixed rates of interest over their respective maturity terms. The company does not use derivative instruments to alter the interest characteristics of these instruments. In connection with the long-term financing arrangement completed in September 1998, the company entered into an agreement to reduce the exposure to interest rate and foreign currency rate fluctuations. The company does not expect these transactions to have a material effect on the company's results of operations or financial condition. The company attempts to minimize the effects of currency risk by borrowing externally in local currencies and by hedging purchases made in foreign currencies when practical. As a matter of policy, the company does not engage in currency speculation. With the acquisition of Computing Devices International, the company is exposed to the effect of foreign currency fluctuations on the U.S. dollar value of earnings of Computing Devices Canada and Computing Devices Company in the U.K. The company does not expect the impact of foreign currency fluctuations to be material to the company's results of operations or financial condition. Year 2000 The company has developed an internal Year 2000 Compliance Program (Y2K Project), consisting of three major areas for assessment, project planning and remediation: 1) information technology systems, 2) deliverable software, and 3) facilities and embedded processors. The company is working with its full-time information technology systems partner to assist in the Y2K Project. Additionally, the company has initiated a plan to discuss and monitor Year 2000 compliance issues with its major subcontractors, vendors and customers. Substantially all of the company's operating units have completed their assessments for information technology systems and have begun the remediation process. For those operating units where assessment is not yet complete, assessments will be completed by the end of 1998 and remediation will begin in January 1999. In the area of deliverable software, the company has completed or is in the process of completing the review of contracts with its customers to determine Year 2000 issues. Remediation efforts have been identified where requested, required and funded by the customer. In the area of facilities and embedded processors, assessments are currently 18 20 being performed and will be completed by the end of 1998. Remediation of facilities and embedded processors will begin in January 1999. Although there can be no assurances, the company expects that remediation of all critical systems will be completed before the year 2000. The company has engaged its internal auditors to perform an assessment of the company's Y2K Project. The Audit Committee of the Board of Directors regularly reviews the progress of the company's Y2K Project, including each operating unit's progress and a report from the company's internal auditors. In addition to the Audit Committee review, regular status reviews are conducted by key members of management and legal staff. Management believes that the company will complete the Y2K Project on schedule and that the costs to implement will not have a material impact on the company's results of operations or financial condition, as most of these costs are expected to be allowable under the company's contracts with the U.S. Government. Based on information available at this time, the company estimates that its Y2K Project costs should not exceed $40. The current implementation schedule and projected cost are based on management's best estimate utilizing various assumptions including, but not limited to, third party manpower cost and availability, vendor's support of proprietary software, and current scope of business. There are no guarantees that the implementation schedule and costs to complete will be achieved; however, the company through its continual monitoring, project reviews, and internal audit activities will endeavor to complete all Year 2000 remediation which is critical to continued operations. Nevertheless, the company will also develop contingency plans in the event some of the remediation is not completed and implemented on schedule. 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. The company is required to adopt the provisions of the standard during the first quarter of 2000. Because of the company's minimal use of derivatives, the company does not expect that the adoption of the new standard will have a material impact on the results of operations or financial condition. Effective January 1, 1998, the company adopted the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which requires the presentation and disclosure of comprehensive income. There were no material differences between net earnings and comprehensive income for the three and nine month periods ended September 27, 1998, and September 28, 1997. Effective January 1, 1998, the company adopted the provisions of Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides authoritative guidance on accounting for the costs of computer software developed or obtained for internal use and provides authoritative guidance for determining whether computer software is for internal use. The adoption of the SOP did not have a material impact on the company's results of operations or financial condition. 19 21 Financial Condition Operating Activities Cash flows from continuing operations increased this year over last year due primarily to the amount the company invested in marketable securities classified as trading in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Excluding the net purchases, sales and maturities of marketable securities classified as trading, cash flows from continuing operations decreased this year over last year due primarily to the stage of completion on active submarine production in the current year as compared with the prior year. Cash flows from discontinued operations improved this year over last year as a result of decreased payments for disposition related liabilities. The company expects to generate funds from operations in excess of its short- and long-term liquidity needs. Investing Activities On October 8, 1998, the company announced an agreement to acquire NASSCO Holdings Inc., the parent company of National Steel and Shipbuilding Company (NASSCO). This transaction is expected to result in a use of cash of approximately $416 over the fourth quarter of this year and the second quarter of 1999. Following the sale of the company's operations located in southern California, the company retained certain properties, including a 232-acre site in the Kearny Mesa section of San Diego. In July 1998, the company completed the sale of the Kearny Mesa site for approximately $80 million in cash. The company anticipates investing approximately $200 over a period of three years on a facility modernization project at its Bath Iron Works' shipyard. Construction will begin in November of this year. Financing Activities In connection with the company's acquisition of Computing Devices International on December 31, 1997, the company borrowed $220. The company repaid $70 of this note during the second quarter and refinanced the balance in September 1998 under a 10-year arrangement. The company exercised its option to call for the early redemption of all of its outstanding 9.95 percent Debentures on April 1, 1998, for a total of approximately $40. The company's board of directors declared an increased regular quarterly dividend of $.22 per share on March 4, 1998. 20 22 In 1994, the board of directors reconfirmed management's authority to repurchase, at its discretion, up to six million shares of the company's common stock. As of September 27, 1998, the company had repurchased approximately 4.2 million shares, including approximately 0.5 million shares repurchased during the third quarter of this year. The company has the capacity for long-term borrowings and currently has committed lines of credit totaling $800. One $400 line expires in December 1998 and the other $400 line expires in December 2002. 21 23 PART II GENERAL DYNAMICS CORPORATION OTHER INFORMATION September 27, 1998 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 5. Other Matters The Securities and Exchange Commission (the "Commission") recently amended Rule 14a-4 and Rule 14a-5 under the Securities and Exchange Act of 1934, as amended. Those rules govern the manner in which shareholder proposals may be presented from the floor of the shareholders meeting and the ability of the company to exercise discretionary voting authority on those proposals. Under the company's Amended and Restated Bylaws, a shareholder who wishes to propose business for consideration at the Annual Meeting of Shareholders must deliver to the company between February 4, 1999 and March 6, 1999 the information specified in the company's Bylaws regarding such proposal or nomination. Under the Commission's Rule 14a-4, as recently amended, the company may exercise discretionary voting authority under proxies it solicits to vote on any proposal made by a shareholder that the shareholder does not seek to include in the company's proxy statement pursuant to Rule 14a-8, unless the shareholder satisfies the requirements of the Bylaws and the other requirements of Rule 14a-4(c). Separately, under Commission Rule 14a-8, a shareholder wishing to submit a proposal to the company that qualifies for inclusion in the company's proxy statement must submit his or her proposal to the company before November 30, 1998. 22 24 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27, Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENERAL DYNAMICS CORPORATION by /s/John W. Schwartz --------------------------------------- John W. Schwartz Vice President and Controller (Principal Accounting Officer) Dated: November 10, 1998 23 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of September 27, 1998, and the related consolidated Statement of Earnings for the nine months ended September 27, 1998 and is qualified in its entirety to such financial statements. 1,000,000 9-MOS DEC-31-1998 SEP-27-1998 111 113 191 0 906 1,623 1,647 1,021 4,153 1,210 149 0 0 256 1,864 4,153 3,504 3,504 3,109 3,109 0 0 9 404 136 268 0 0 0 268 2.12 2.11
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