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 2 October 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3671
GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1673581
(State or other jurisdiction (I.R.S. Employer
of incorporation 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 - 30 October 1994 66,066,148
GENERAL DYNAMICS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements
Unaudited Consolidated Balance Sheet 3
Unaudited Consolidated Statement of Earnings 4 & 5
Unaudited Consolidated Statement of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURE 19
PART I
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
2 October 31 December
ASSETS 1994 1993
CURRENT ASSETS:
Cash and equivalents $ 45 $ 94
Marketable securities 908 491
953 585
Accounts receivable 95 62
Contracts in process 371 442
Net assets of discontinued operations 117 303
Other current assets 251 262
Total Current Assets 1,787 1,654
NONCURRENT ASSETS:
Leases receivable - finance operations 227 236
Real estate held for development 127 142
Property, plant and equipment, net 279 302
Other assets 234 301
Total Noncurrent Assets 867 981
$2,654 $ 2,635
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 512 $ 566
Other current liabilities 140 209
Total Current Liabilities 652 775
NONCURRENT LIABILITIES:
Long-term debt 40 38
Long-term debt - finance operations 149 163
Other liabilities 530 482
Total Noncurrent Liabilities 719 683
SHAREHOLDERS' EQUITY:
Common stock, including surplus
(shares issued 84,387,336) 87 92
Retained earnings 1,824 1,709
Treasury stock (shares held
1994, 21,313,236; 1993, 21,823,824) (628) (624)
Total Shareholders' Equity 1,283 1,177
$2,654 $ 2,635
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
Three Months Ended
2 October 3 October
1994 1993
NET SALES $ 714 $ 776
OPERATING COSTS AND EXPENSES 637 712
OPERATING EARNINGS 77 64
Interest, net 7 8
Other income (expense), net (1) 45
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 83 117
Provision for income taxes 29 41
EARNINGS FROM CONTINUING OPERATIONS 54 76
DISCONTINUED OPERATIONS, NET OF
INCOME TAXES - (3)
NET EARNINGS $ 54 $ 73
NET EARNINGS PER SHARE:
Continuing operations $ .85 $ 1.20
Discontinued operations - (.05)
$ .85 1.15
WEIGHTED AVERAGE SHARES AND EQUIVALENTS
OUTSTANDING (in millions) 63.3 63.3
DIVIDENDS PER SHARE
(excluding special distribution) $ .35 $ .30
SUPPLEMENTAL INFORMATION:
General and administrative expenses
included in operating costs and expenses $ 76 $ 96
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
Nine Months Ended
2 October 3 October
1994 1993
NET SALES $2,334 $2,408
OPERATING COSTS AND EXPENSES 2,095 2,189
OPERATING EARNINGS 239 219
Interest, net 13 30
Other income, net 2 65
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 254 314
Provision for income taxes 89 108
EARNINGS FROM CONTINUING OPERATIONS 165 206
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Loss from operations - (30)
Gain on disposal 15 645
15 615
NET EARNINGS $ 180 $ 821
NET EARNINGS PER SHARE:
Continuing operations $ 2.60 $ 3.25
Discontinued operations:
Loss from operations - (.47)
Gain on disposal .24 10.20
$ 2.84 $12.98
WEIGHTED AVERAGE SHARES AND EQUIVALENTS
OUTSTANDING (in millions) 63.5 63.2
DIVIDENDS PER SHARE (excluding
special distribution) $ 1.05 $ .70
SUPPLEMENTAL INFORMATION:
General and administrative expenses included
in operating costs and expenses $ 179 $ 223
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
Nine Months Ended
2 October 3 October
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 180 $ 821
Adjustments to reconcile net earnings to net
cash provided (used) by continuing operations -
Discontinued operations (15) (615)
Depreciation, depletion and amortization 30 43
Decrease (Increase) in --
Marketable securities (367) -
Accounts receivable (33) 5
Contracts in process 71 18
Leases receivable - finance operations 8 7
Other current assets (9) (2)
Increase (Decrease) in -
Accounts payable and other
current liabilities (76) (105)
Current income taxes (4) 71
Deferred income taxes 37 48
Other, net (13) (29)
Net cash provided (used) by
continuing operations (191) 262
Net cash used by discontinued operations (28) (417)
Net Cash Used by Operating Activities (219) (155)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of
discontinued operations 259 1,534
Proceeds from sale of investments
and other assets 4 59
Marketable securities, net - (495)
Capital expenditures (15) (10)
Net Cash Provided by Investing Activities 248 1,088
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (62) (36)
Repurchase of stock (19) -
Repayment of long-term debt -
finance operations (14) (8)
Repayment of long-term debt (1) (146)
Special distributions - (1,163)
Proceeds from option exercises 14 7
Other 4 -
Net Cash Used by Financing Activities (78) (1,346)
NET DECREASE IN CASH AND EQUIVALENTS (49) (413)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 94 511
CASH AND EQUIVALENTS AT END OF PERIOD $ 45 $ 98
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Federal income taxes $ 71 $ 214
Interest 12 23
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
GENERAL DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The unaudited consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, the Company believes that the
disclosures included herein are adequate to make the information presented
not misleading. Operating results for the three and nine month periods ended
2 October 1994 are not necessarily indicative of the results that may be
expected for the year ended 31 December 1994. 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 31 December 1993.
Effective 1 January 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as described in Note F.
In the opinion of the Company's management, the unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals, except for the adjustments discussed in Notes B and C and
the Results of Operations section of the Management's Discussion and Analysis
of the Results of Operations and Financial Condition) necessary for a fair
statement of the results for the three and nine month periods ended 2 October
1994 and 3 October 1993.
(B) Discontinued Operations
The operating results of discontinued operations are summarized below:
Third Quarter Nine Months
1994 1993 1994 1993
Net sales $ 130 $ 303 $ 508 $1,154
Loss before income taxes $ - $ (5) $ - $ (44)
Credit for income taxes - (2) - (14)
Net loss $ - $ (3) $ - $ (30)
Per Share $ - $(.05) $ - $ (.47)
On 1 July 1994, the Company and McDonnell Douglas Corporation
(McDonnell Douglas) announced an agreement to terminate their contract for the
Company's production of fuselage sections for the MD-11 jetliner. Under the
agreement, the responsibility for production of fuselages will be transferred
from the Company's Commercial Aircraft Subcontracting business to McDonnell
Douglas with the delivery of the 166th shipset in early 1996. Also as part of
the agreement, all previous unnegotiated contract changes were settled. The
agreement is not expected to have a significant impact on the Company's
financial condition or results of operations. The Company's Commercial
Aircraft Subcontracting business will seek no new business and will cease
operations after the completion of its obligations under this agreement.
On 1 May 1994, the Company closed the sale of its Space Launch Systems
business to Martin Marietta Corporation for $209 in cash. The Company
recognized a gain on disposal of $15, or $ .24 per share, net of income taxes
of $8.
During the first quarter of 1994, the Company closed the sales of the
lime, brick and a portion of the concrete pipe operations of its Material
Service business for a total of $50 in cash. No gains or losses were
recognized on the sales.
During the first quarter of 1993, the Company closed the sale of its
Tactical Military Aircraft business to Lockheed Corporation for $1,525 in
cash. The Company recognized a gain on disposal of $645, or $10.20 per share,
net of income taxes of $331. Any liabilities associated with the terminated
A-12 aircraft program (see discussion at Note I ) have been retained by the
Company.
The Company has recorded liabilities for contingencies retained by the
Company as part of the aforementioned transactions. These liabilities include
retiree medical obligations, environmental, legal and the estimated cost of
facility dispositions and other restructuring actions contemplated as a result
of the Company's decision to sell these businesses. These liabilities are
included in other noncurrent liabilities on the Consolidated Balance Sheet.
The net assets of discontinued operations are summarized below:
2 October 31 December
1994 1993
Current assets $ 118 $ 1,429
Noncurrent assets 128 185
Total Assets $ 246 $ 1,614
Current liabilities $ 88 $ 1,280
Noncurrent liabilities 41 31
Total Liabilities $ 129 $ 1,311
Net Assets $ 117 $ 303
(C) Corporate Office Reorganization
In March 1993, the Company announced a reorganization of its Corporate
Office as a result of the contraction of the Company. The reorganization
included changes in senior management and reductions in corporate staff.
During the first quarter of 1993, the Company recognized the estimated total
cost of these actions of approximately $75 (before tax). As a substantial
amount of these costs are directly related to the Company's decision to sell
certain businesses, they were charged to previously established liabilities
for discontinued operations. Consequently, these actions did not have a
material impact on the Company's results of operations.
(D) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
2 October 31 December
1994 1993
Accounts payable $ 123 $ 157
Accrued workers' compensation 161 174
Accrued salaries and wages 59 71
Accrued postretirement medical benefits 52 27
Other 117 137
Accounts Payable and Accrued Expenses $ 512 $ 566
2 October 31 December
1994 1993
A-12 termination liability and
legal fees $ 40 $ 57
SINCGARS loss provision 18 48
Other 82 104
Other Current Liabilities $ 140 $ 209
Accrued costs on disposed businesses $ 316 $ 239
Coal mining related liabilities 70 74
Other 144 169
Other Liabilities $ 530 $ 482
(E) Income Taxes
The Company had a net deferred tax asset of $283 and $320 at 2 October
1994 and 31 December 1993, the current portion of which was $185 and $214,
respectively, and was included in other current assets on the Consolidated
Balance Sheet. No valuation allowance was required for the Company's deferred
tax assets as of 2 October 1994 and 31 December 1993.
(F) Investment Accounting
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," as of 1 January 1994. The Company determined
all of its investments currently held in debt and equity securities are
trading securities as defined by SFAS 115 and as such are reported at fair
value. Unrealized holding gains and losses (the adjustment to fair value)
recognized in earnings in accordance with SFAS 115 in 1994 were not
significant. As SFAS 115 requires trading securities to be classified as
current assets, investments in preferred stock classified as noncurrent assets
at 31 December 1993 are now classified as marketable securities. In addition,
SFAS 115 requires sales and purchases of trading securities to be included in
Cash Flows From Operating Activities. The net change in marketable securities
had previously been reported as a component of Cash Flows From Investing
Activities.
(G) Earnings Per Share
Earnings per share are computed from the weighted average number of
common shares and equivalents outstanding during each period. Common share
equivalents are attributable primarily to outstanding stock options. Because
there is not a material difference between primary and fully diluted earnings
per share, only fully diluted earnings per share are presented.
On 4 March 1994, the Company's Board of Directors authorized a two-
for-one stock split effected in the form of a 100% stock dividend which was
distributed on 11 April 1994 to shareholders of record on 21 March 1994.
Accordingly, all references in the financial statements to number of shares
and per share amounts have been restated to give retroactive recognition to
the stock split for all periods presented.
(H) Contingencies
Litigation
On 7 January 1991, the U.S. Navy terminated for default a contract
with the Company and McDonnell Douglas for the full-scale development of the
U.S. Navy's A-12 aircraft. The U.S. Navy has demanded repayment of
unliquidated progress payments. The Company and McDonnell Douglas have a
claim pending against the U.S. Government in the Court of Federal Claims in
connection with the termination (see Note I).
On 8 March 1993, a class action lawsuit, Berchin et al vs. General
Dynamics Corporation and William A. Anders, was filed in the Federal District
Court for the Southern District of New York. The suit alleges violations of
various provisions of the Federal Securities Laws, fraud, negligent
misrepresentation, and breach of fiduciary duty by the defendants with regard
to disclosures made, or omitted, in the Company's tender offer completed in
July 1992 relating to the subsequent divestiture of core businesses. The
Company believes there is no liability in connection with this matter and
intends to defend itself vigorously.
As previously reported, certain issues related to the Internal Revenue
Service (IRS) audit of the Company's consolidated Federal income tax returns
for the years 1977 through 1986 were not resolved at the administrative level.
Accordingly, in July 1994, the Company received from the IRS a Statutory
Notice of Deficiency which the Company will contest in the U.S. Tax Court.
The resolution of the Tax Court litigation is not expected to have a material
impact on the Company's financial condition or results of operations.
The Company is also a defendant in other lawsuits and claims and in
other investigations of varying nature. The Company believes these
proceedings, in the aggregate, are not material to the Company's financial
condition or results of operations.
Environmental
The Company is directly or indirectly involved in sixteen 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 (EPA) or a state environmental agency with respect to past
shipments of hazardous waste to sites now requiring environmental cleanup.
The Company is also involved in the cleanup and remediation of various
conditions at sites it currently or formerly owned or operated.
The Company measures its environmental exposure based on currently
available facts, existing technologies, and presently enacted laws and
regulations. Where a reasonable basis for apportionment exists with other
PRPs, the Company has considered only its share of the liability. The
Company has considered recovery from the U.S. Government in estimating the
exposure for cleanup costs at sites used in the conduct of the Company's
government contracting business to the extent the costs have been priced
into contracts. Based on such an analysis, the Company has recorded a
liability for certain sites which are discussed below.
Chatham Brothers Barrel Yard is a hazardous waste disposal site
located near Escondido, California. The California Department of Toxic
Substances Control is overseeing a cleanup of the site pursuant to California
state laws and is seeking to recover its costs from a variety of PRPs,
including the Company and several other major corporations in the aerospace
and petroleum industries. Under the California equivalent of the federal
Superfund law, all of the PRPs are jointly and severally liable to the State
of California for these costs.
The Casmalia Resources site is a former industrial waste disposal
facility located near Santa Maria, California. Since March 1993, the Company
and a large number of other PRPs have been negotiating with the EPA to fund
and perform an environmental cleanup of this site.
The Company is seeking a Sec. 404 permit for the quarrying of aggregate
at Romeoville, Illinois. The application process includes studies of the
effect of the operations on wetlands areas. A cease and desist order prohibits
the stripping of wetlands, but mining operations continue at the site in other
areas while the parties agree on the scope of the future permissible
activities. The Corps of Engineers has indicated that restoration work may
be required for past unpermitted activities.
The Company formerly had a lime plant at Thornton, Illinois, on which
site stands a large pile of lime flue dust, for which closure must be effected
in accordance with applicable state regulations. The Company is performing
ground water testing and exploring alternatives for closing the pile.
The Company formerly owned a facility in Abilene, Texas which was sold
as part of the Tactical Military Aircraft business in 1993. An environmental
assessment revealed groundwater contamination at the site. The Company is
negotiating with the Texas Natural Resource Conservation Commission over the
required remediation.
The Company believes that its liability for these sites will not
exceed the recorded liability by an amount deemed material to the financial
condition or results of operations of the Company.
Other
The Company was contingently liable for debt and lease guarantees and
other arrangements aggregating up to a maximum of approximately $100 and $160
at 2 October 1994 and 31 December 1993, respectively.
In connection with the sale of defense businesses, the Company remains
contingently liable for performance by the purchaser of these businesses under
contracts entered into with the U.S. Government. The Company believes the
probability of any liability arising from this matter is remote. In addition,
the sales agreements contain certain representations and warranties under
which the purchasers have certain specified periods of time to assert claims
against the Company. Some claims have been asserted which are material in
amount, but the Company does not believe that its liability as a result of
these claims will exceed the liabilities recorded at the time of the sales.
(I) Termination of A-12 Aircraft Contract
As stated above, on 7 January 1991, the U.S. Navy terminated the
Company's A-12 aircraft contract for default. The Company's 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. Both
the Company and McDonnell Douglas were parties to the contract with the U.S.
Navy and each had responsibility to the U.S. Navy for performance under the
contract. Also, the Company and McDonnell Douglas are parties to a teaming
agreement in which profits and losses under the contract are shared equally.
The Company and McDonnell Douglas remain jointly and severally liable to the
U.S. Navy under the A-12 contract for any potential liabilities arising out of
the termination.
In February 1991, the U.S. Navy demanded repayment of unliquidated
progress payments in the approximate amount of $1,400 from the Company and
McDonnell Douglas, but agreed to defer collection pending resolution of the
termination dispute. Terms of the deferment agreement include a requirement
for the contractors to maintain sufficient assets to pay the unliquidated
progress payments plus any accrued interest. The Company and McDonnell
Douglas are also required to notify the U.S. Navy prior to any special
distributions to shareholders or repurchase of a material amount of
its stock.
The Company and McDonnell Douglas filed a complaint on 7 June 1991 in
the U.S. Court of Federal Claims to contest the default termination. The
suit, in effect, seeks to convert the termination for default to a termination
for convenience of the U.S. Government, and seeks other legal and equitable
relief. In the aggregate, the Company and McDonnell Douglas seek to recover
payment for all costs incurred in the A-12 program and its termination,
including interest. The total amount sought, as updated through the third
quarter of 1994, is approximately $2 billion, over and above amounts
previously received from the U.S. Navy.
The trial on Count XVII of the complaint, which relates to the
propriety of the termination for default, was concluded in October 1993. In
December 1993, the Court issued preliminary findings of fact which appear to
favor the Company and McDonnell Douglas. A Trial on Count I, which alleges
that the Department of Defense failed to make a risk reduction determination
before entering into a fixed price development contract as required by Sec.
8118 of the 1988 Defense Appropriations Act, concluded in June 1994. In
addition to the two counts which have been tried, five other counts are
the subject of motions for summary judgment. Three of the counts allege that
the U.S. Navy waived the delivery schedule and weight specifications on the
aircraft, and thus could not use weight and schedule as the basis for a
default termination. The other counts allege that the U.S. Navy could not
issue a cure notice and default notice while funds for the aircraft were
exhausted. Besides the seven counts which have been tried or are the subject
of pending motions for summary judgment, all remaining counts are set for
trial in November 1995, unless the issues are resolved sooner by settlement
or otherwise. The Company believes that ultimately it will be found not to
have been in default of the contract.
The parties, at the urging of the Court, have discussed engaging in
settlement negotiations. In order to prepare for negotiations, the U.S. Navy
has undertaken an independent review of the legal and factual merits of the
case. In order to preserve the status quo, the Court issued an order
agreeing to defer the dispositive ruling on the merits while the review took
place, conditioned on a representation by the U.S. Navy that it would not
seek to terminate the deferment agreement during the same period.
As a result of the termination, the Company has fully reserved the
contracts in process balance associated with the A-12 program and has
recognized the Company's estimated termination liabilities. The Company has
neither recognized any claim revenue from the U.S. Navy, nor any potential
return of unliquidated progress payments to the U.S. Navy.
In the unlikely event that the Company and McDonnell Douglas are
ultimately found to be in default of the A-12 contract, additional losses of
approximately $650 (before tax) may be recognized by the Company. This
estimated additional loss is based upon certain assumptions which are
periodically reviewed by the Company and McDonnell Douglas. This estimate
does not include interest that may ultimately be payable to the U.S.
Government as provided by the deferment agreement.
(J) Long-Term Debt
In May 1993, the Company redeemed the entire series of 9 3/8% Notes
which had a face value of $100. In addition, in July 1993, the Company
redeemed the remaining $45 of 5 3/4% Exchangeable Subordinated Debentures and,
as a result, approximately 649,000 shares of Federal Express Corporation stock
held by the Company were available for sale. These shares, which had no book
value, were sold during the third quarter of 1993 for $37 and the
corresponding gain is reported as other income in the Consolidated Statement
of Earnings.
GENERAL DYNAMICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
2 October 1994
(Dollars in millions, except per share amounts)
BUSINESS ENVIRONMENT
The Company's primary business has historically been supplying weapons
systems to the U.S. Government. In 1990, U.S. defense budgets, which had been
declining since 1985, began falling sharply in response to the end of the Cold
War. Management realized early on that the budget declines were structural in
that, for the foreseeable future, there would be fewer new weapons systems
required which would result in excess capacity in the industry. Accordingly,
Management believed there would be a necessary contraction and consolidation
of the U.S. defense industry. To date, Management's analysis of these
developments has proven to be true as evidenced by declines, in real terms, in
the defense budget and by the number of industry combinations in recent years.
As an early response to this changing business environment and the
Company's then weakened financial position, Management initiated in 1991 a
program to improve business performance, restore financial strength,
substantially refocus corporate strategy and, through incentives, reorient the
corporate culture towards shareholder value. This program required the
Company's major businesses to be number one or number two in their markets and
have "critical mass" - the appropriate size to retain key capabilities and
ensure economies of scale. Management sought to have its businesses meet
these criteria either within the Company or as part of other companies through
mergers, joint ventures, acquisitions, or sales of businesses if necessary.
Management also decided to sell peripheral businesses whenever appropriately
valued transactions could be negotiated.
To accomplish this program, the Company strengthened certain of its
defense-related businesses through their sale to other companies, the most
recent being the sale of its Space Launch Systems business to Martin Marietta
Corporation. In addition, the Company's continuing operations are
demonstrating improved profitability, productivity and cash flows. These
steps restored the Company's financial strength permitting the repayment of
approximately $600 in debt, a recapitalization effected by the purchase of
$960 of the Company's common stock through a tender offer, and the tax-
advantaged distribution to shareholders of $1,531 pursuant to the Company's
formal plan of contraction. Even after these actions, the Company had a cash
and marketable securities balance of $953 at 2 October 1994.
The Company's principal continuing operations - Nuclear Submarines and
Armored Vehicles - have been identified as critical to the U.S. Defense
Industrial Base by the Department of Defense (DoD). Programs are being
implemented by the DoD to help preserve their key capabilities, although at
significantly reduced procurement rates. Accordingly, in the absence of
significant changes in world political and economic conditions, the Company is
seeking to supplement volumes in both businesses. Additional volume could
come from expanded involvement in overhaul, upgrade and modification work.
Management is also seeking to broaden its domestic base of armored vehicle and
related electronic systems integration programs, as well as to further expand
the export of these goods and services.
Going forward, Management is continuing to focus on shareholder value and
is aggressively re-engineering the cost structures of all operations to
enhance their competitive positions by creating highly efficient businesses
capable of operating profitably at significantly lower volumes. Accordingly,
the Company continues to explore ways to utilize its financial capacity to
strengthen continuing operations through both internal and external
investments. In addition, Management is considering the benefits of corporate
business combinations and financial restructuring options to further enhance
the value of the Company.
RESULTS OF OPERATIONS
The following table sets forth the Net Sales and Operating Earnings by
business segment for the three and nine month periods ending 2 October 1994
and 3 October 1993:
Three Month Period Nine Month Period
Inc/ Inc/
1994 1993 (Dec) 1994 1993 (Dec)
NET SALES:
Nuclear Submarines $ 389 $ 425 $ (36) $1,273 $1,306 $(33)
Armored Vehicles 277 304 (27) 912 961 (49)
Other 48 47 1 149 141 8
$ 714 $ 776 $ (62) $2,334 $ 2,408 $(74)
OPERATING EARNINGS:
Nuclear Submarines $ 40 $ 29 $ 11 $ 132 $ 89 $ 43
Armored Vehicles 37 32 5 103 121 (18)
Other - 3 (3) 4 9 (5)
$ 77 $ 64 $ 13 $ 239 $ 219 $ 20
NUCLEAR SUBMARINES
Through the second quarter of 1994, increases in Seawolf construction
activity along with increases in the earnings rates on all construction
programs, as discussed below, had largely offset the declines in SSN 688 and
Trident construction activity resulting from the reduced number of submarines
under construction. In the third quarter, Seawolf construction activity
leveled off while SSN 688 and Trident construction activity continued to
decline, resulting in a decrease in net sales for the three and nine month
periods.
Operating earnings increased during the three and nine month periods due
to increased earnings on all three construction programs. Cost re-engineering
efforts allowed the Company to increase the earnings rates on the SSN 688 and
Trident programs and begin earnings recognition on the Seawolf program in the
fourth quarter of 1993. The Company further increased the earnings rates on
the SSN 688 and Trident programs in the first and third quarters of 1994 due
to continuing cost reduction efforts.
During the second quarter, the Company delivered one Trident reducing
backlog to three ships. One of the two remaining SSN 688 submarines was
delivered in November reducing backlog to one ship while backlog for the
Seawolf program remains at two ships.
The Company was encouraged by the DoD "Bottom-Up Review" which recommended
construction of a third Seawolf and the new attack submarine (NSSN), as well
as designated the Company's Electric Boat Division as the shipyard to preserve
the submarine industrial base. In July 1994, the Company was awarded
approximately $130 to continue long-lead activity on a third Seawolf. These
funds were part of the $540 authorized by the U.S. Congress and approved by
the President for the preservation of the submarine industrial base. The
Company expects the DoD to seek the remaining funding for a third Seawolf next
year. Without a third Seawolf construction contract and other related
government business, the Company's current backlog is insufficient to sustain
operation of the Company's facilities until construction begins on the NSSN.
During the third quarter, the Defense Acquisition Board, which approves
acquisition strategy for the DoD, approved development of the NSSN and funding
for the development program was included in the FY95 budget approved by the
U.S. Congress. The Defense Acquisition Board, through its Acquisition
Decision Memorandum, directed the U.S. Navy to submit for approval an
acquisition strategy report reflecting, among other things, the plan to
initiate detailed design/construction of the lead ship at the Company's
Electric Boat Division, with the lead ship in FY98 and lead ship reactor
components in FY96.
ARMORED VEHICLES
Net sales decreased for the three month period due primarily to lower
production levels on the M1 tank program resulting in part from the strike
discussed below. Net sales decreased for the nine month period due to the
completion of the "Fox" Nuclear, Biological and Chemical Reconnaissance
vehicle program in the fourth quarter of 1993, scheduled reductions in work
content on the Egyptian Coproduction program and lower production levels on
the M1 tank program.
Operating earnings increased in both the three and nine month periods,
excluding the impact of the nonrecurring items discussed below, due to the
increase in the M1 program earnings rate during the third quarter of 1994 as
a result of continuing cost re-engineering efforts. In addition, the Company
began recognizing earnings on the Single Channel Ground and Airborne Radio
System (SINCGARS) program during the third quarter of 1994 due to improving
performance and the favorable impact of the previously reported contract with
the U.S. Army awarded in April 1994.
In the first quarter of 1993, the Company recognized nonrecurring profit
from various completed contracts which had an equal impact on sales and
operating earnings. In the second quarter of 1994, the Company recorded
nonrecurring sales volume which had only a marginal impact on operating
earnings. Accordingly, during the nine month comparative periods discussed
above, the net impact of the nonrecurring items on sales was minimal, while
the net impact on operating earnings was approximately a $20 decrease.
Production was completed during the third quarter on M1A2 tanks for Saudi
Arabia while production on M1A2 tanks for Kuwait is now expected to run
through the first quarter of 1996 due to a decision to extend the schedule as
a result of the five week strike discussed below. Long-lead and production
activity began in 1994 on the U.S. Government's M1A2 upgrade program and
deliveries are expected to begin in the fourth quarter. Although this program
is projected to run through the turn of the century, the procurement rate is
expected to be significantly less than that of previous domestic tank
production programs.
On 22 July 1994, the Company and its employees represented by the Land
Systems Division United Auto Workers Union (UAW) reached a settlement on a new
collective bargaining contract. The Company anticipates that this new
contract will result in an improved competitive position. The settlement
followed a five week strike during which the Company continued operations with
its non-union work force and vendors in accordance with its business
continuation plan. Accordingly, the strike did not have a significant impact
on the Company's financial condition or results of operations but it did
contribute to reduced production levels for both the three and nine month
periods.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased for the three and nine month
periods due primarily to a reduction in the provision for state and local
income taxes. State and local income taxes, which are allocable to U.S.
Government contracts, were significantly higher in 1993 as a result of the
gain on the disposal of the Tactical Military Aircraft business.
INTEREST, NET
Interest income decreased for the nine month period due primarily to the
significant decrease in cash and marketable securities since the first quarter
of 1993 resulting from the payment of approximately $1.5 billion for the three
special distributions to shareholders during 1993.
OTHER INCOME, NET
Other income decreased for the three and nine month periods due primarily
to the absence of a $37 gain recognized in the third quarter of 1993 on the
sale of Federal Express Corporation stock (for further discussion see Note J
to the Consolidated Financial Statements). In addition, the 1993 nine month
period includes a $14 gain recognized in the second quarter related to the
sale of the information technology operations of the Company's Data
Systems Division. The gain was originally deferred due to the significant
continuing involvement in the use of the assets sold by the Company's
businesses. However, as certain of these businesses were sold and,
correspondingly, the continuing involvement diminished, the Company
determined that a portion of the gain should be recognized.
ACCOUNTING CHANGE
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of 1 January 1994. Accordingly, the Company
determined all of its investments currently held in debt and equity securities
are trading securities as defined by SFAS 115 and as such are reported at fair
value (see Note F to the Consolidated Financial Statements for further
discussion). The adoption of SFAS 115 did not have a significant impact on
the Company's financial condition or results of operations.
DISCONTINUED OPERATIONS
Discontinued operations reported no earnings for the three and nine month
periods ended 2 October 1994 compared to losses of $3, or $.05 per share, and
$30, or $.47 per share, respectively, for the comparable periods of 1993. The
increase in earnings for the nine month period is due primarily to the absence
of the loss recognized by the Company's Space Launch Systems business in the
first quarter of 1993. No additional losses from operations are anticipated
prior to the disposal of the remaining discontinued operations. For a
discussion of sales transactions involving discontinued operations and the
related financial impact, see Note B to the Consolidated Financial Statements.
EARNINGS PER SHARE
On 4 March 1994, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% stock dividend. Accordingly, all
references to number of shares and per share amounts have been restated to
give retroactive recognition to the stock split for all periods presented.
FINANCIAL CONDITION
OPERATING ACTIVITIES
Net cash provided by continuing operations decreased year over year due
primarily to the change in classification of the net sales and purchases of
marketable securities. As previously stated, the Company adopted SFAS 115 as
of 1 January 1994. As defined in SFAS 115, the Company has determined its
current investments in marketable securities are trading securities and, as
such, the net change in marketable securities (excluding the reclassification
of investments in preferred stock as discussed in Note F to the Consolidated
Financial Statements) is included in Cash Flows From Operating Activities on
the 1994 Consolidated Statement of Cash Flows. Prior to the adoption of SFAS
115, the net sales and purchases of marketable securities were reported as a
component of Cash Flows From Investing Activities. Also contributing to the
decrease year over year, is the payment of previously deferred compensation
and related withholding taxes resulting from option exercises in 1994.
For purposes of preparing the Consolidated Statement of Cash Flows,
Federal income tax payments are allocated between continuing and discontinued
operations based on the portion of taxable income attributed to each. Net
cash provided by continuing operations includes an allocated tax payment of
$56 and an allocated $11 tax credit for 1994 and 1993, respectively.
Included in the net cash used by discontinued operations on the
Consolidated Statement of Cash Flows are the investing and financing
activities of the discontinued businesses, as well as an allocable portion of
the Company's Federal income tax payments, which in 1993 included
approximately $180 related to the gain on disposal of the Company's Tactical
Military Aircraft business. Net cash used by discontinued operations also
decreased year over year due to improved operating cash flows of the
discontinued businesses and a decrease in payments for disposition related
liabilities. The improved operating cash flows for the discontinued
businesses were due primarily to approximately $90 of customer deposits
received by the Company's Space Launch Systems business in the first quarter
of 1994.
In accordance with the terms of the asset purchase agreement, the Company
paid Martin Marietta Corporation $48 in August 1994 representing the net
change in working capital of the Company's Space Launch Systems business
during the period between execution of the asset purchase agreement and
closing. This payment is included in the net cash used by discontinued
operations.
As previously reported, the Company's A-12 aircraft contract was
terminated for default by the U.S. Navy in January 1991. In February 1991,
the U.S. Navy demanded repayment of the unliquidated progress payments made
under the contract, but agreed to defer collection pending resolution of the
termination dispute, which is in litigation. For further discussion of the
A-12 termination and terms of the deferment agreement, see Note I to the
Consolidated Financial Statements.
For a discussion of environmental matters and other contingencies, see
Note H to the Consolidated Financial Statements. The Company does not deem
its liability, in the aggregate, with respect to these matters to be material
to the Company's financial condition or results of operations.
INVESTING ACTIVITIES
As previously discussed, the Company sold its Tactical Military Aircraft
business to Lockheed Corporation for $1,525 in cash in March 1993. In
addition, the Company received $50 in March 1994 from the sales of the lime,
brick and a portion of the concrete pipe operations of its Material Service
business and $209 in May 1994 from the sale of its Space Launch Systems
business to Martin Marietta Corporation. The proceeds from these transactions
are reported as proceeds from sale of discontinued operations in the
Consolidated Statement of Cash Flows.
The Company received proceeds of $37 from the sale of its remaining
investment in Federal Express Corporation stock during the third quarter of
1993 (for further discussion see Note J to the Consolidated Financial
Statements). These proceeds are included in the proceeds from the sale of
investments and other assets in the Consolidated Statement of Cash Flows.
FINANCING ACTIVITIES
The Company's Board of Directors increased the regular quarterly
dividend on the Company's common stock from $0.20 to $0.30 per share and from
$0.30 to $0.35 per share in September 1993 and March 1994, respectively.
These increases reflect the Board's confidence in the sustainability of strong
cash flows generated by the Company's continuing businesses.
During the second quarter of 1994, the Company repurchased
approximately 450,000 shares of its stock on the open market for a total of
$19. As previously reported, the Company made a special distribution to
shareholders of $10 and $9 per share in April and July 1993, respectively. In
addition, the Company redeemed the entire series of 9 3/8% Notes and the
remaining 5 3/4% Debentures in May and July 1993, respectively (for further
discussion see Note J to the Consolidated Financial Statements).
The Company expects to generate sufficient funds from operations to
meet both its short and long-term liquidity needs. In addition, the Company
has the capacity for long-term borrowings and currently has a committed,
short-term $850 line of credit.
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
2 October 1994
Item 1. Legal Proceedings
Reference is made to Note H, Contingencies, which is
incorporated herein by reference, for a statement relevant to
activities in the quarter covering certain litigation to which the
Company is a party.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GENERAL DYNAMICS CORPORATION
by /s/John W. Schwartz
John W. Schwartz
Staff Vice President and Controller
(Principal Accounting Officer)
Dated 16 November 1994