1
EXHIBIT 13
GENERAL DYNAMICS CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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(Dollars in millions, except per share amounts)
BUSINESS SEGMENT INFORMATION
A description of the company's business segments follows:
MARINE GROUP. The company's Electric Boat subsidiary designs and
builds nuclear submarines for the U.S. Navy. The company has contracts for
construction of Ohio class ballistic missile submarines (Trident) and Seawolf
class attack submarines (Seawolf). Electric Boat also performs overhaul and
repair work on submarines as well as a broad range of engineering work,
including the design of the New Attack Submarine (NSSN). The company's Bath
Iron Works subsidiary, which was acquired in 1995, designs and builds surface
combatants for the U.S. Navy. The company has contracts for construction of
Arleigh Burke class destroyers (DDG 51) as well as engineering and life cycle
support for this class of ships. The company's American Overseas Marine
subsidiary provides ship management services for the U.S. government on
prepositioning and ready reserve ships. The ship management operations were
previously reported in the Other business segment. Accordingly, data for 1994
and 1993 has been restated to reflect the new presentation.
ARMORED VEHICLES. The company's Land Systems subsidiary designs and
manufactures the M1 Series Abrams Main Battle Tank for the U.S. Army and the
U.S. Marine Corps. The company is currently under contract with the U.S. Army
to upgrade M1 tanks to the M1A2 configuration, the latest version of the M1. In
addition to domestic sales, the company is under contract with the U.S. Army to
manufacture M1A2 tanks for Kuwait and M1A1 kits - including hulls, turrets and
other major components - to be shipped to Egypt for final assembly as part of a
coproduction program. The company also provides training, maintenance and other
logistical support on international sales. The company is the second-source
producer of the Single Channel Ground and Airborne Radio System (SINCGARS) for
the U.S. Army.
OTHER. The company has coal mining operations located primarily in
central Illinois and leases liquefied natural gas tankers.
Net Sales Operating Earnings Sales to U.S. Government
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1995 1994 1993 1995 1994 1993 1995 1994 1993
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Marine Group $ 1,884 $ 1,733 $ 1,764 $ 194 $ 196 $ 145 $ 1,869 $ 1,721 $ 1,737
Armored Vehicles 1,050 1,184 1,286 140 140 174 1,029 1,159 1,266
Other 133 141 137 (19) (15) (10) -- -- --
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$ 3,067 $ 3,058 $ 3,187 $ 315 $ 321 $ 309 $ 2,898 $ 2,880 $ 3,003
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Depreciation, Depletion
Identifiable Assets Capital Expenditures and Amortization
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1995 1994 1993 1995 1994 1993 1995 1994 1993
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Marine Group $ 935 $ 381 $ 400 $ 8 $ 6 $ 4 $ 23 $ 20 $ 25
Armored Vehicles 237 239 296 8 5 5 9 10 11
Other 317 344 359 3 6 4 5 8 5
Corporate* 1,675 1,709 1,580 13 6 1 1 1 15
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$ 3,164 $ 2,673 $ 2,635 $ 32 $ 23 $ 14 $ 38 $ 39 $ 56
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* Corporate identifiable assets include cash and equivalents and marketable
securities, deferred taxes, real estate held for development, net assets of
discontinued operations and prepaid pension cost.
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BUSINESS ENVIRONMENT
BACKGROUND
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 anticipated 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
proved to be true as evidenced by declines, in real terms, in the defense
budget and by the number of industry combinations.
In response to this changing business environment, management
initiated a program requiring its major businesses to be market leaders and to
have "critical mass" - the appropriate size to retain key capabilities and
ensure economies of scale, and sought to meet these criteria through mergers,
acquisitions, or sales of businesses if necessary. In following this strategy,
the company sold in prior years its Tactical Military Aircraft, Missile Systems
and Space Launch Systems businesses. In 1995, the company acquired Bath Iron
Works, a builder of surface combatant ships for the U.S. Navy. Bath Iron Works
has served as the lead shipyard for 10 of 20 classes of surface combatants
built for the Navy since World War II, and its backlog includes contracts for
the delivery of 10 DDG 51 destroyers. Navy plans call for the construction of
an additional 25 destroyers which are expected to be allocated between Bath
Iron Works and its principal competitor. With the company's marketing
experience, Bath Iron Works is now looking to pursue international defense
customers for its products and services.
More recently, on February 12, 1996, the company announced it had
agreed to buy the assets of Teledyne Vehicle Systems (TVS), an operating unit
of Teledyne Inc., for $55 in cash. The acquisition is subject to certain
conditions, including clearance by the appropriate governmental agencies. TVS
specializes in combat vehicles as well as mobility systems, suspension
technology, and diesel engines for armored vehicle markets world-wide. The
acquisition brings the company's share of the U.S. Army's Crusader Advanced
Field Artillery System (Crusader) program to more than 25 percent. TVS is also
a subcontractor on the company's candidate for the U.S. Marine Corps' Advanced
Amphibious Assault Vehicle (AAAV) development program. TVS will be reported in
the company's Armored Vehicles segment.
LEGISLATIVE DEVELOPMENTS
MARINE GROUP. For fiscal year 1996 (FY96), Congress approved $700 million of
the remaining $1.5 billion funding required for the third Seawolf, and $1.25
billion for the continued design and long-lead materials for construction of
the first two ships of the NSSN program. The third Seawolf provides the level
of construction activity necessary to maintain operation of all of Electric
Boat's facilities until construction begins on the NSSN. Current Department of
Defense (DoD) plans call for the construction of the NSSN lead ship to begin at
Electric Boat in 1998, with a total of 30 ships in the program. Current
Congressional directives call for the first four NSSNs to be equally allocated
between Electric Boat and its competitor, with competition on subsequent ships.
Also in 1995, Congress approved the procurement of an additional DDG 51
destroyer in 1996, which is expected to be directed to the company, and
provided funding for the design and construction of the lead ship in the LPD 17
class amphibious assault ship program. Bath Iron Works is teamed with other
major contractors competing for the LPD 17 which the Navy anticipates to be a
12-ship program.
ARMORED VEHICLES. The U.S. Army has begun a program to upgrade over
1,000 of its M1 Abrams tanks to the M1A2 configuration by the year 2003. For
FY96, Congress approved the authority to enter into a multi-year contract under
this program, and included the first year's funding. This contract should
stabilize domestic tank production and provide the foundation for further
international opportunities. Congress also approved funding for four armored
vehicle programs in which the company is participating. The first is a
four-year program to upgrade approximately 90 Fox Nuclear, Biological and
Chemical Reconnaissance System (Fox) vehicles. The second is the Heavy Assault
Bridge which is currently under development and is expected to enter production
late in the decade. In addition, the company (including TVS) is teamed with two
other contractors on the Crusader development contract which could lead to a
production program worth as much as $13 billion. Finally, the company is
competing for the AAAV development contract which is expected to be awarded in
mid-1996 and followed by a multibillion dollar production program in the next
decade. Additional funding was also approved for the FY96 SINCGARS procurement
which the Army plans to continue to dual source.
STRATEGIC FOCUS
The company is working closely with its customers to meet demands for
capability and affordability at significantly reduced procurement rates.
Accordingly, management is continuing to focus on aggressively reengineering
the cost structures of all operations to create highly efficient businesses
capable of operating profitably at significantly lower volumes. With DoD
initiatives to reduce its own infrastructure, additional opportunities may be
available for greater involvement in overhaul, maintenance, upgrade and
modification work. In addition, the company continues to explore ways to
utilize its financial capacity to strengthen its operations through both
internal and external investments. Accordingly, management will continue to
consider the benefits of corporate business combinations and financial
restructuring options to further enhance the value of the company.
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GENERAL DYNAMICS CORPORATION
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BACKLOG
The following table shows the approximate backlog of the company as calculated
at December 31, 1995 and 1994, and the portion of the December 31, 1995,
backlog not reasonably expected to be filled in 1996:
December 31
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Not Filled
1995 1994 in 1996
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Marine Group $ 3,671 $ 2,486 $ 1,932
Armored Vehicles 959 1,378 303
Other 597 698 540
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Funded Backlog $ 5,227 $ 4,562 $ 2,775
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Total Backlog $ 7,386 $ 6,006 $ 4,759
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Funded backlog represents the total estimated remaining sales value of
authorized work that has been appropriated by Congress, and authorized and
funded by the procuring agency. Funded backlog also includes amounts for
long-term coal contracts. To the extent backlog has not been funded, there is
no assurance that congressional appropriations or agency allotments will be
forthcoming.
In January 1996, the company agreed to the initial terms of a
nine-year, $1.5 billion contract for design of the NSSN, and is currently
negotiating the contracts for the construction of the third Seawolf and the
upgrade of M1 tanks. While this new business was appropriated by Congress, it
was not authorized as of year end and, therefore, not reflected in the December
31, 1995, backlog data reported above.
RESULTS OF OPERATIONS
MARINE GROUP. Net sales increased $151 in 1995 due primarily to the
acquisition of Bath Iron Works. For a discussion of the accounting for this
transaction and related information, see Note B to the Consolidated Financial
Statements. The operating results of Bath Iron Works have been included with
those of the company from the closing date, September 13, 1995.
Excluding the results of Bath Iron Works, net sales and operating
earnings decreased over 5 percent during 1995 due primarily to decreased
construction activity on the Trident and Los Angeles class attack submarine
(688) programs, partially offset by increased engineering and design work on
the NSSN. The company delivered the final 688 and one Trident in 1995. The two
remaining Tridents are scheduled for delivery in 1996 and 1997, while the first
two Seawolf Submarines are scheduled for delivery in 1996 and 1998.
Accordingly, submarine construction revenues will continue to decline as the
company delivers these ships.
As these long-term submarine programs near completion, operating risks
are diminishing and the benefits of cost reduction efforts are being realized.
Accordingly, the company regularly assesses the estimated earnings at
completion on these programs. Based on such an assessment, the earnings rate on
the Trident program was increased in the second quarter of 1995. Previously,
the earnings rates on both the 688 and Trident programs were increased in the
third quarter of 1994. These earnings rate increases partially offset the
effect on operating earnings of decreased construction volume.
Net sales for the Marine Group are expected to increase in 1996 due to
the operating results of Bath Iron Works being included in the company's
results for a full year, which more than offsets the expected decline in
submarine construction revenue. However, operating earnings are not expected to
increase proportionately due to the lower margin currently being earned on the
destroyer program as compared to the margins reported by the mature submarine
programs in 1995.
Net sales decreased $31 during 1994 due primarily to decreased
submarine construction activity. Operating earnings increased $51 during 1994
due primarily to the earnings rate increases on the Trident and 688 programs.
ARMORED VEHICLES. Net sales decreased $134 during 1995 due primarily
to decreased M1 production, as well as related spare parts and engineering
work. Production of 315 tanks for Saudi Arabia was completed in 1994 and was
only partially replaced in 1995 by increased activity on the domestic upgrade
program, resulting in an overall decrease in M1 revenue. However, the M1
program still accounted for nearly one half of Armored Vehicles' revenues in
1995. With volume on the upgrade program expected to remain at similar levels
in 1996 and production of 218 M1A2 tanks for Kuwait completed in the first
quarter of 1996, M1 revenues will continue to decrease in 1996. Because the
procurement rate of the upgrade program is significantly less than previous
domestic tank production programs, the company is seeking to supplement volumes
by further expanding international sales and by participating in other armored
vehicle programs.
Operating earnings were unchanged in 1995 due to the increase in the
earnings rates on the M1 and SINCGARS programs in the third quarter of 1994
which offset the aforementioned volume decrease. The current M1 program
earnings rate, which yields a substantially higher margin than other armored
vehicle business, has benefited from the company's cost reengineering efforts
and conservative revenue recognition practices during the early stages of the
program when greater uncertainty as to operating risks existed. Due to the
method of pricing business under government contracts, the cost reengineering
benefits the company is currently realizing will be passed on to the customer
in future contracts and will result in new business that will yield a lower
margin than the current contracts which complete in 1996. However, the company
will continue its cost-cutting efforts which may enhance the margins on these
new contracts.
Production levels continued to increase on the SINCGARS program during
1995. The company began recognizing earnings on the program during the third
quarter of 1994 due to improving performance and the favorable impact of the
approximate 40 percent share of the FY94 dual-source competitive procurement.
The company was awarded an approximate 45 percent share of the FY95 procurement
and anticipates at least a similar share in FY96.
Through 1995, the company has delivered 383 of the 499 M1A1 kits it is
under contract to manufacture for Egypt. Recently, the government of Egypt
exercised an option to purchase an additional 31 kits. Revenues from the
coproduction program are expected to remain relatively even through the end of
1996 as production completes in mid-1997.
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Net sales decreased $102 in 1994 due primarily to the completion of
the Fox program in the fourth quarter of 1993. Operating earnings decreased $34
during 1994 due primarily to the absence of approximately $40 of nonrecurring
revenue from the close-out of certain non-production contracts in 1993.
OTHER. Operating earnings decreased during the three year period
ended 1995 due primarily to the declining market conditions for the company's
coal operations.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased during 1994 due primarily to a lower 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 tax
on the gain on disposal of the Tactical Military Aircraft business.
INTEREST, NET. The company's interest income varies from period to
period based primarily on the average balance of cash and equivalents and
marketable securities. The average balance has fluctuated significantly during
the last three years as a result of transactions such as the sales of
businesses and special distributions to shareholders.
OTHER INCOME, NET. In 1993, the company recognized a $37 gain from
the sale of Federal Express Corporation stock and recognized an additional $14
in excess of scheduled amortization of the deferred gain on the sale of the
company's information technology operations due to the disposal of other
operations. For further discussion of other income items, see Note N to the
Consolidated Financial Statements.
PROVISION FOR INCOME TAXES. The company is litigating the
disallowance of a research and experimentation tax credit refund
claim relating to certain prior years' tax returns. The outcome of this
litigation could have a material favorable impact on the company's results of
operations and financial condition. For further discussion of this and other
tax litigation, as well as a discussion of the company's net deferred tax
asset, see Note E to the Consolidated Financial Statements.
DISCONTINUED OPERATIONS. The company has sold or intends to sell
certain businesses which are accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. Earnings from
operations increased in 1995 due primarily to the MD-11 program at the
company's Commercial Aircraft Subcontracting business. Previously, the company
had ceased earnings recognition on the MD-11 program due to uncertainties
surrounding its completion. As a result of resolving these and other matters
related to the shut-down of the operations, the company began recognizing
earnings on the program once again in 1995. Due to the completion of the MD-11
program in early 1996, earnings from discontinued operations are expected to
decrease in 1996. Operating results also improved in 1994 without the loss
recognized by the company's Space Launch Systems business in 1993. For a
discussion of the financial impact from the disposal of discontinued
operations, see Note C to the Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS. The Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," in March 1995 and No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS 121 requires a company to adjust the
carrying value of long-lived assets and certain identifiable intangibles if
their value is determined to be impaired as defined by the standard. SFAS 123
encourages companies to adopt a fair value approach to valuing stock options
which would require a charge to earnings in the period the options are granted.
Companies are permitted to continue to follow the current method of accounting
for stock options with supplemental disclosures as to the pro forma impact of
applying the new method. The company is required to adopt the provisions of
these standards in 1996 and expects the standards will not have a material
impact on the results of operations or financial condition.
FINANCIAL CONDITION
The company's liquidity and financial condition continued to improve during
1995 as the balance of cash and equivalents and marketable securities increased
from $1,059 at December 31, 1994, to $1,095 at December 31, 1995. A discussion
of the company's financial condition in terms of its operating, investing and
financing activities as defined in the Consolidated Statement of Cash Flows
follows.
OPERATING ACTIVITIES - CONTINUING. The net cash provided by
continuing operations as reported on the Consolidated Statement of Cash Flows
is summarized by type as follows:
Year Ended December 31
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1995 1994 1993
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Operations $ 405 $ 343 $ 344
Allocated federal income
tax payments (89) (89) (78)
Purchase of marketable
securities, net (203) (136) (109)
Other 33 (6) 24
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$ 146 $ 112 $ 181
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The four types of cash flows are described as follows:
- - - Operations represent the pre-tax cash flows generated by the company's
three business segments. Cash flows from operations generally approximate
operating earnings plus depreciation. In 1995, cash flows from operations
increased due to a reduction in operating working capital, but the company
expects cash flows to return to historical levels in 1996.
- - - 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.
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GENERAL DYNAMICS CORPORATION
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- - - As the company classifies its marketable securities as trading
securities in accordance with SFAS 115, the net purchases are included in
operating activities on the Consolidated Statement of Cash Flows.
- - - Other cash flows include items which are not directly attributable to
a business segment such as interest received from investments in excess of
interest paid on debt. Other cash flows were negative in 1994 due primarily to
the payment of previously deferred compensation.
For a discussion of environmental matters and other contingencies, see
Note O to the Consolidated Financial Statements. The company believes that the
amount it has recorded with respect to these matters is adequate, and any
amount by which the liability exceeds the recorded amount would not be deemed
material to the company's financial condition or results of operations.
OPERATING ACTIVITIES - DISCONTINUED. The net cash provided by
discontinued operations increased during 1995 and 1994 due to lower allocated
federal income tax payments, improved operating cash flows and a decrease in
payments for disposition related liabilities. In 1993, tax payments included
approximately $180 related to the gain on disposal of the company's Tactical
Military Aircraft business. The improvement in operating cash flows was due
primarily to the receipt of scheduled payments by the company's Commercial
Aircraft Subcontracting business in accordance with the terms of the
termination agreement with McDonnell Douglas Corporation (for further
discussion, see Note C to the Consolidated Financial Statements). Net cash
provided by discontinued operations is expected to decrease significantly in
1996 due to the completion of operations at the Commercial Aircraft
Subcontracting business and the payment of its deferred federal income tax
liability.
INVESTING ACTIVITIES. As previously discussed, the company acquired
Bath Iron Works Corporation on September 13, 1995, for $300 in cash. In
December 1995, the company received a purchase price adjustment of $8 in
accordance with the terms of the purchase agreement.
The company has received proceeds of $1.8 billion over the last three
years from the sale of discontinued operations (for a discussion of individual
transactions, see Note C to the Consolidated Financial Statements). The company
has also received proceeds over the last three years from the sale of excess
assets and miscellaneous investments, including $37 in 1993 from the sale of
its investment in Federal Express Corporation stock.
As part of the sale of discontinued operations, certain properties
located primarily in southern California were retained by the company. These
properties have been segregated on the Consolidated Balance Sheet as real
estate held for development. The company has retained outside experts to
support the development of plans which will maximize the market value of these
properties. The company does not expect to hold these properties long term.
Development work began on certain of these properties during 1994 which is the
primary reason for the overall increase in the company's capital expenditures
for the past two years.
FINANCING ACTIVITIES. In the first quarter of 1995, the company's
board of directors declared an increased regular quarterly dividend of $.375
per share, reflecting the board's confidence in the sustainability of the cash
flows generated by the company's continuing operations. The company had
previously increased the dividend to $.35 and $.30 per share in March 1994 and
September 1993, respectively.
In 1994, the company's board of directors reconfirmed management's
authority to repurchase, at its discretion, up to 3 million shares of the
company's common stock. During 1994, the company repurchased approximately
530,000 shares of its stock on the open market for a total of $22.
The company made three special distributions to shareholders during
1993 totaling $1,531. The special distributions represent substantially all of
the funds available for tax-advantaged distribution to shareholders from the
sales of businesses under the company's 1992 plan of contraction (for further
discussion, see Note D to the Consolidated Financial Statements). Also during
1993, the company redeemed the entire series of 9 3/8 percent Notes which had a
face value of $100 and the remaining $45 of 5 3/4 percent Debentures.
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
$600 line of credit. The line of credit expires in May 1996 at which time the
company anticipates renewing or replacing it if deemed appropriate.
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CONSOLIDATED STATEMENT OF EARNINGS
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Year Ended December 31
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(Dollars in millions, except per share amounts) 1995 1994 1993
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NET SALES $ 3,067 $ 3,058 $ 3,187
OPERATING COSTS AND EXPENSES 2,752 2,737 2,878
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OPERATING EARNINGS 315 321 309
Interest, net 55 22 36
Other income, net 5 -- 68
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EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 375 343 413
Provision for income taxes 128 120 143
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EARNINGS FROM CONTINUING OPERATIONS 247 223 270
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Earnings (loss) from operations 55 -- (30)
Gain on disposal 19 15 645
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74 15 615
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NET EARNINGS $ 321 $ 238 $ 885
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NET EARNINGS PER SHARE:
Continuing operations $ 3.92 $ 3.53 $ 4.34
Discontinued operations:
Earnings (loss) from operations .88 -- (.48)
Gain on disposal .30 .24 10.37
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$ 5.10 $ 3.77 $ 14.23
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The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
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GENERAL DYNAMICS CORPORATION
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CONSOLIDATED BALANCE SHEET
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December 31
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(Dollars in millions) 1995 1994
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ASSETS
CURRENT ASSETS:
Cash and equivalents $ 215 $ 382
Marketable securities 880 677
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1,095 1,059
Accounts receivable 105 104
Contracts in process 567 351
Net assets of discontinued operations 68 44
Other current assets 178 239
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Total Current Assets 2,013 1,797
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NONCURRENT ASSETS:
Leases receivable-finance operations 213 220
Real estate held for development 136 128
Property, plant and equipment, net 398 264
Other assets 404 264
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Total Noncurrent Assets 1,151 876
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$ 3,164 $ 2,673
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 130 $ 134
Other current liabilities 729 492
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Total Current Liabilities 859 626
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NONCURRENT LIABILITIES:
Long-term debt 38 39
Long-term debt-finance operations 132 157
Other liabilities 568 535
Commitments and contingencies (See Note O)
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Total Noncurrent Liabilities 738 731
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SHAREHOLDERS' EQUITY:
Common stock, including surplus (shares issued 84,387,336) 98 87
Retained earnings 2,087 1,860
Treasury stock (shares held 1995, 21,141,961; 1994, 21,391,547) (625) (631)
Unrealized gain on investments 7 --
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Total Shareholders' Equity 1,567 1,316
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$ 3,164 $ 2,673
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The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
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CONSOLIDATED STATEMENT OF CASH FLOWS
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Year Ended December 31
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(Dollars in millions) 1995 1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 321 $ 238 $ 885
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Discontinued operations (74) (15) (615)
Depreciation, depletion and amortization 38 39 56
Decrease (Increase) in -
Marketable securities (203) (136) (109)
Accounts receivable 21 (42) 6
Contracts in process 6 91 (10)
Leases receivable - finance operations 14 15 14
Other current assets 21 6 (8)
Increase (Decrease) in -
Accounts payable and other current liabilities (22) (105) (73)
Current income taxes 3 27 60
Deferred income taxes 36 4 5
Other, net (15) (10) (30)
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Net cash provided by continuing operations 146 112 181
Net cash provided (used) by discontinued operations 84 31 (438)
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Net Cash Provided (Used) by Operating Activities 230 143 (257)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Bath Iron Works (292) -- --
Proceeds from sale of discontinued operations 24 259 1,534
Proceeds from sale of investments and other assets 13 17 60
Capital expenditures (32) (23) (14)
Other (5) -- --
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Net Cash Provided (Used) by Investing Activities (292) 253 1,580
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (2) (2) (146)
Repayment of debt - finance operations (15) (14) (15)
Dividends paid (92) (84) (56)
Special distributions to shareholders -- -- (1,531)
Purchase of common stock -- (22) --
Proceeds from option exercises 4 14 8
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Net Cash Used by Financing Activities (105) (108) (1,740)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (167) 288 (417)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 382 94 511
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CASH AND EQUIVALENTS AT END OF YEAR $ 215 $ 382 $ 94
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The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
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GENERAL DYNAMICS CORPORATION
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) Common Stock Treasury Stock Unrealized
----------------------------------- Retained ---------------------- Gain on
Shares Par Surplus Earnings Shares Amount Investments
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 84,387,336 $ 84 $ -- $ 2,432 22,545,130 $ 642 $ --
- - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings 885
Cash dividends declared ($1.00 per share) (62)
Special distributions to shareholders (1,546)
Shares issued under Incentive
Compensation Plan 8 (721,306) (18)
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BALANCE, DECEMBER 31, 1993 84,387,336 84 8 1,709 21,823,824 624 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings 238
Cash dividends declared ($1.40 per share) (87)
Shares purchased 529,600 22
Shares issued under Incentive
Compensation Plan (5) (961,877) (15)
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BALANCE, DECEMBER 31, 1994 84,387,336 84 3 1,860 21,391,547 631 --
- - -----------------------------------------------------------------------------------------------------------------------------------
Net earnings 321
Cash dividends declared ($1.50 per share) (94)
Shares issued under Incentive
Compensation Plan 11 (249,586) (6)
Unrealized gains on available-for-
sale securities 7
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BALANCE, DECEMBER 31, 1995 84,387,336 $ 84 $ 14 $ 2,087 21,141,961 $ 625 $ 7
- - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the
accounts of the company and all majority-owned subsidiaries.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
SALES AND EARNINGS UNDER LONG-TERM CONTRACTS AND PROGRAMS. Major
defense programs are accounted for using the percentage-of-completion method of
accounting. The combination of estimated profit rates on similar, economically
interdependent contracts is used to develop program earnings rates. These rates
are applied to contract costs, including general and administrative expenses,
for the determination of sales and operating earnings. Program earnings rates
are reviewed quarterly to assess revisions in contract values and estimated
costs at completion. Based on these assessments, any changes in earnings rates
are made prospectively.
Any anticipated losses on contracts or programs are charged to
earnings when identified. Such losses encompass all costs, including general
and administrative expenses, allocable to the contracts. Revenue arising from
the claims process is not recognized either as income or as an offset against a
potential loss until it can be reliably estimated and its realization is
probable.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses amounted to $234, $234 and $292 in 1995, 1994 and 1993, respectively,
and are included in operating costs and expenses on the Consolidated Statement
of Earnings.
INTEREST, NET. Interest income was $59, $27 and $40 in 1995, 1994 and
1993, respectively. Interest expense of $6 was allocated to discontinued
businesses in 1993 on the ratio of net assets of discontinued operations to
consolidated net assets. Interest expense incurred by the company's finance
operations totaled $13, $13 and $15, in 1995, 1994 and 1993, respectively, and
is classified as operating costs and expenses. Interest payments for the total
company were $18, $16 and $28 in 1995, 1994 and 1993, respectively.
NET EARNINGS PER SHARE. As there is no material dilution, net
earnings per share is based upon the weighted average number of common shares
outstanding during each period. Prior period amounts have been restated to
present simple earnings per share. The weighted average shares were 63.0, 63.1
and 62.2 million in 1995, 1994 and 1993, respectively.
CASH AND EQUIVALENTS AND MARKETABLE SECURITIES. The company considers
securities with a remaining maturity of three months or less when purchased to
be cash equivalents. Marketable securities consist primarily of investment
grade tax-exempt municipal notes and bonds, commercial paper, and other
short-term investment funds.
ACCOUNTS RECEIVABLE AND CONTRACTS IN PROCESS. Accounts receivable
represent only amounts billed and currently due from customers. Recoverable
costs and accrued profit related to long-term contracts and programs on which
revenue has been recognized, but billings have not been presented to the
customer (unbilled receivable), are included in contracts in process.
REAL ESTATE HELD FOR DEVELOPMENT. As a result of the sale of
businesses, certain properties were retained by the company. These properties
are carried at the lower of cost or net realizable value.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is
carried at cost net of accumulated depreciation. The company primarily uses
accelerated methods of depreciation for depreciable assets. Depletion of coal
properties is computed using the units-of-production method.
IMPAIRMENT OF LONG-LIVED ASSETS. Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing the review for recoverability, the entity
should estimate the future cash flows expected to result from the use of the
asset. The company is required to adopt this standard on January 1, 1996. The
company believes that adoption will not have a material impact on its financial
condition or results of operations.
INTANGIBLE ASSET. The intangible asset related to the destroyer
program is amortized on a straight-line basis over an estimated benefit period
of 25 years. The intangible asset is included in other assets on the
Consolidated Balance Sheet.
ENVIRONMENTAL LIABILITIES. The company accrues environmental costs
when it is probable that a liability has been incurred and the amount can be
reasonably estimated. Cleanup and other environmental exit costs related to
sold businesses were recorded at the time of disposal. Recorded liabilities
have not been discounted. To the extent the U.S. government has specifically
agreed to pay the ongoing maintenance and monitoring costs at sites currently
used in the conduct of the company's government contracting business, these
costs are treated as contract costs and recognized as paid.
CLASSIFICATION. Consistent with industry practice, assets and
liabilities relating to long-term contracts and programs are classified as
current although a portion of these amounts is not expected to be realized
within one year.
27
11
GENERAL DYNAMICS CORPORATION
- - -------------------------------------------------
B. ACQUISITIONS
On September 13, 1995, the company closed an agreement to purchase Bath Iron
Works Corporation for approximately $300 in cash. In December 1995, the company
received a purchase price adjustment of $8 in accordance with the terms of the
purchase agreement. Bath Iron Works is a builder of surface combatant ships for
the U.S. Navy and has a backlog which currently includes contracts for the
delivery of 10 DDG 51 destroyers. The transaction has been accounted for under
the purchase method of accounting. The excess of the purchase price over the
estimated fair value of the net tangible assets acquired has been primarily
recorded as an intangible asset related to the destroyer program and amounted
to approximately $140. Operating results of Bath Iron Works have been included
with those of the company from the closing date.
The following pro forma combined financial information presents the
historical results of operations of the company and Bath Iron Works for the
years ended December 31, 1995 and 1994, with pro forma adjustments as if Bath
Iron Works had been acquired as of the beginning of the periods presented. The
pro forma information is not necessarily indicative of what the results of
operations actually would have been if the transaction had occurred on the date
indicated, or of future results of operations.
Year Ended December 31
(Unaudited)
- - -----------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------
Net Sales $ 3,705 $ 3,951
- - -----------------------------------------------------------------
Earnings From Continuing Operations $ 260 $ 242
- - -----------------------------------------------------------------
Per Share $ 4.13 $ 3.84
- - -----------------------------------------------------------------
On February 12, 1996, the company announced an agreement to purchase
the assets of Teledyne Vehicle Systems (TVS) for approximately $55 in cash. The
acquisition is subject to certain conditions, including clearance by the
appropriate governmental agencies. TVS specializes in combat vehicles as well
as mobility systems, suspension technology, and diesel engines for armored
vehicle markets worldwide.
C. DISCONTINUED OPERATIONS
TACTICAL MILITARY AIRCRAFT. In March 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 $10.37 per share, net of
income taxes of $331. Any contingencies associated with the terminated A-12
aircraft program (see discussion at Note P) have been retained by the company.
SPACE LAUNCH SYSTEMS. On May 1, 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.
COMMERCIAL AIRCRAFT SUBCONTRACTING. On July 1, 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 was 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 company's Commercial Aircraft Subcontracting business ceased
operations after the completion of its obligations under this agreement.
OTHER. During 1995, the company closed the sale of the remaining
concrete pipe and ready-mix operations of its Material Service business for $24
in cash. In addition, the company recognized a portion of its deferred gain
from a prior disposal as a result of the favorable resolution of a contingency.
The company recognized a gain on these transactions of $19, or $.30 per share,
net of income taxes of $6.
During 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.
EARNINGS FROM OPERATIONS. The operating results of discontinued
operations are:
Year Ended December 31
- - ------------------------------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------
Net sales $ 467 $ 644 $ 1,474
- - ------------------------------------------------------------------------
Earnings (loss) before
income taxes $ 84 $ -- $ (44)
Provision (credit) for
income taxes 29 -- (14)
- - ------------------------------------------------------------------------
Net earnings (loss) $ 55 $ -- $ (30)
- - ------------------------------------------------------------------------
Net earnings (loss) per share $ .88 $ -- $ (.48)
- - ------------------------------------------------------------------------
The 1993 results reflect a charge of $25 ($16 after tax, or $.26 per
share), related to Space Launch Systems' Commercial Atlas Expendable Launch
Vehicle program. This charge was the direct result of launch failures in that
period.
NET ASSETS OF DISCONTINUED OPERATIONS. The assets and liabilities of
discontinued operations are:
December 31
- - ---------------------------------------------------------
1995 1994
- - ---------------------------------------------------------
Current assets $ 43 $ 52
Noncurrent assets 99 124
- - ---------------------------------------------------------
Total Assets $ 142 $ 176
- - ---------------------------------------------------------
Current liabilities $ 64 $ 79
Noncurrent liabilities 10 53
- - ---------------------------------------------------------
Total Liabilities $ 74 $ 132
- - ---------------------------------------------------------
Net Assets $ 68 $ 44
- - ---------------------------------------------------------
28
12
D. SPECIAL DISTRIBUTIONS TO SHAREHOLDERS
On May 6, 1992, the board of directors of the company adopted a formal plan of
contraction of the company's business within the meaning of Internal Revenue
Code Section 302(e)(1)(B). Under the plan, the company anticipated the sale of
certain qualifying businesses and the subsequent tax-advantaged distribution of
the proceeds on or before December 31, 1993. The company made the following
special distributions in 1993:
Charged to Retained Earnings
- - ----------------------------------------------------------------
Date Declared Paid Deferred Total
- - ----------------------------------------------------------------
March 18 $ 612 $ 10 $ 622
June 2 551 8 559
September 15 368 5 373
- - ----------------------------------------------------------------
$ 1,531 $ 23 $ 1,554
- - ----------------------------------------------------------------
The deferred portion of the distributions relates to restricted
shares. These amounts are payable as the restrictions lapse. In addition, as
the deferred amounts represent deductible compensation for federal income tax
purposes when the restrictions on the related shares lapse, the company
recorded a tax benefit of $8 directly to retained earnings related to the
distributions. The total of the three special distributions represents
substantially all of the funds available for tax-advantaged distribution to
shareholders.
E. INCOME TAXES
The provision for federal income taxes for continuing operations is summarized
as follows:
Year Ended December 31
- - -------------------------------------------------
1995 1994 1993
- - -------------------------------------------------
Current $ 92 $ 116 $ 138
Deferred 36 4 5
- - -------------------------------------------------
$ 128 $ 120 $ 143
- - -------------------------------------------------
The reconciliation from the statutory federal income tax rate to the
company's effective income tax rate is as follows:
Year Ended December 31
- - ----------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
Other (.9) -- (.4)
- - ----------------------------------------------------------------
Effective income tax rate 34.1% 35.0% 34.6%
- - ----------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities consist of the following:
December 31
- - ----------------------------------------------------------------
1995 1994
- - ----------------------------------------------------------------
Accrued costs on disposed businesses $ 96 $ 107
A-12 termination 96 90
Long-term contract costing methods 63 120
Coal mining liabilities 24 27
Other 130 157
- - ----------------------------------------------------------------
Deferred Assets $ 409 $ 501
- - ----------------------------------------------------------------
Lease income $ 77 $ 79
Commercial pension asset 40 40
Intangible asset 23 --
Other 60 66
- - ----------------------------------------------------------------
Deferred Liabilities $ 200 $ 185
- - ----------------------------------------------------------------
Net Deferred Asset $ 209 $ 316
- - ----------------------------------------------------------------
No material valuation allowance was required for the company's
deferred tax assets at December 31, 1995 and 1994. The current portion of the
net deferred tax asset is $120 and $185 at December 31, 1995 and 1994,
respectively, and is included in other current assets on the Consolidated
Balance Sheet. Deferred taxes for the discontinued operations which have not
yet been sold or ceased operations are included in the net assets of
discontinued operations on the Consolidated Balance Sheet.
The company made federal income tax payments of $83, $107 and $316 in
1995, 1994 and 1993, respectively.
The Internal Revenue Service (IRS) has completed its examination of
the company's consolidated tax returns through the year 1989. Certain issues
related to the years 1977 through 1986 are in litigation (for further
discussion see Note O). Other issues related to the years 1987 through 1989
have been protested to the IRS Appeals Division. In addition, the IRS is
currently examining the company's consolidated tax returns for the years 1990
through 1993. As the company has recorded liabilities for tax contingencies,
resolution of these matters is not expected to have a material unfavorable
impact on the company's financial condition or results of operations.
In addition, the company has filed refund claims for approximately
$275 (plus interest) in additional research and experimentation tax credits for
the years 1981-1990. A portion of the claims relates to the years 1981-1986 and
is part of the litigation discussed above, while the remaining claims are being
contested at the IRS administrative level. As the ultimate allowance of these
claims is expected to be dependent upon the outcome of the litigation, no
benefits will be recognized until the completion of the litigation.
The provision for state and local income taxes, which is allocable to
U.S. government contracts, is included in operating costs and expenses.
29
13
GENERAL DYNAMICS CORPORATION
- - -------------------------------------------------
F. CONTRACTS IN PROCESS
Contracts in process consist of the following:
December 31
- - ------------------------------------------------------------------------------------
1995 1994
- - ------------------------------------------------------------------------------------
Contract costs and estimated profits $ 5,916 $ 4,072
Other costs 398 160
- - ------------------------------------------------------------------------------------
6,314 4,232
- - ------------------------------------------------------------------------------------
Less advances and progress payments 5,747 3,881
- - ------------------------------------------------------------------------------------
$ 567 $ 351
- - ------------------------------------------------------------------------------------
Contracts costs include production costs and related overhead,
including general and administrative expenses. Other costs primarily
represent amounts required to be recorded under GAAP which are not currently
allocable to contracts, such as a portion of the company's estimated workers'
compensation, retiree medical and environmental expenses. These costs have been
deferred because their recovery under contracts is considered probable based on
existing backlog. If the level of backlog in the future does not support the
continued deferral of these costs, their recognition could impact the
profitability of the company's remaining contracts.
Under the contractual arrangements by which progress payments are
received, the U.S. government asserts that it has a security interest in the
contracts in process identified with the related contracts.
G. PROPERTY, PLANT AND EQUIPMENT, NET
The major classes of property, plant and equipment are as follows:
December 31
- - ------------------------------------------------------------------------------------
1995 1994
- - ------------------------------------------------------------------------------------
Land and improvements $ 80 $ 72
Coal reserves 52 52
Buildings and improvements 212 152
Machinery and equipment 864 797
- - ------------------------------------------------------------------------------------
1,208 1,073
Less accumulated depreciation,
depletion and amortization 810 809
- - ------------------------------------------------------------------------------------
$ 398 $ 264
- - ------------------------------------------------------------------------------------
Certain of the company's armored vehicle plant facilities are provided
by the U.S. government.
H. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
December 31
- - ------------------------------------------------------------------------------------
1995 1994
- - ------------------------------------------------------------------------------------
Workers' compensation $ 233 $ 162
Retirement benefits 199 50
Salaries and wages 74 56
A-12 termination liability and legal fees 38 61
Other 185 163
- - ------------------------------------------------------------------------------------
$ 729 $ 492
- - ------------------------------------------------------------------------------------
I. LONG-TERM DEBT
Long-term debt consists of the following:
December 31
- - ------------------------------------------------------------------------------------
1995 1994
- - ------------------------------------------------------------------------------------
9.95% Debentures due 2018 $ 39 $ 39
Other -- 2
- - ------------------------------------------------------------------------------------
39 41
- - ------------------------------------------------------------------------------------
Less:
Unamortized discount 1 1
Current portion -- 1
- - ------------------------------------------------------------------------------------
$ 38 $ 39
- - ------------------------------------------------------------------------------------
Annual sinking fund payments to retire the 9.95 percent Debentures,
will commence in 2011. Among the restrictions under the Indenture
covering the unsecured Debentures are provisions limiting the company's ability
to secure additional debt through mortgages on existing properties and sale and
leaseback transactions of principal properties as defined.
The company may borrow up to $600 under a committed, short-term line
of credit. Under the line of credit, the company pays a fee on the commitment
and would pay interest at varying rates based on market conditions. There were
no borrowings under the line of credit during 1995 and 1994.
J. OTHER LIABILITIES
Other liabilities consist of the following:
December 31
- - ------------------------------------------------------------------------------------
1995 1994
- - ------------------------------------------------------------------------------------
Accrued costs on disposed businesses $ 274 $ 306
Coal mining related liabilities 69 73
Other 225 156
- - ------------------------------------------------------------------------------------
$ 568 $ 535
- - ------------------------------------------------------------------------------------
The company has recorded liabilities for contingencies retained by the
company related to disposed businesses. These liabilities include retiree
medical, environmental, legal and the estimated cost
30
14
of facility dispositions and other costs contemplated as a result of the
company's plan of contraction.
The company has certain liabilities which are specific to the coal
mining industry, including workers' compensation and reclamation. The company
is subject to the Federal Coal Mine Health & Safety Act of 1969, as amended,
and the related workers' compensation laws in the states in which it operates.
These laws require the company to pay benefits for occupational disability
resulting from coal workers' pneumoconiosis (black lung). The liability for
known claims and an actuarially-determined estimate of future claims that will
be awarded to current and former employees is discounted based on a rate of
7.25 percent at December 31, 1995 and 1994, respectively. Liabilities to
reclaim land disturbed by the mining process and to perform other closing
functions are recorded over the production lives of the mines.
K. SHAREHOLDERS' EQUITY
STOCK SPLIT. On March 4, 1994, the company's board of directors authorized a
two-for-one stock split effected in the form of a 100 percent stock dividend
distributed on April 11, 1994, to shareholders of record on March 21, 1994.
Shareholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the split. In
addition, all references in the financial statements to number of shares, per
share amounts, stock option data and market prices of the company's common
stock have been restated.
AUTHORIZED STOCK. The authorized capital stock of the company
consists of 200 million shares of $1 par value common stock and 50 million
shares of $1 par value preferred stock issuable in series, with the rights,
preferences and limitations of each series to be determined by the board of
directors.
L. FINANCE OPERATIONS
The company owns three liquefied natural gas (LNG) tankers which have been
leased to a nonrelated company. The leases are financed through Title XI Bonds
which are secured by the LNG tankers. Under Title XI financing, the debt is
guaranteed by the U.S. government with no recourse to the company. Accordingly,
in the event the lessee defaults on the lease payments, the company is not
obligated to repay the debt.
The following is a summary of the comparative financial statements
for the finance operations:
BALANCE SHEET DATA
December 31
1995 1994
- - ---------------------------------------------------------------------
ASSETS
Leases receivable $ 222 $ 236
Due from parent 72 83
- - ---------------------------------------------------------------------
$ 294 $ 319
- - ---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt $ 146 $ 161
Income taxes 77 79
Shareholder's equity 71 79
- - ---------------------------------------------------------------------
$ 294 $ 319
- - ---------------------------------------------------------------------
EARNINGS DATA
Year Ended December 31
- - -------------------------------------------------------------------------------
1995 1994 1993
- - -------------------------------------------------------------------------------
Interest income $ 17 $ 16 $ 17
Interest expense and
income taxes 14 14 16
- - -------------------------------------------------------------------------------
Net earnings $ 3 $ 2 $ 1
- - -------------------------------------------------------------------------------
On October 1, 1995, the leases were extended from 2004 through the
year 2009. These leases are classified as direct financing leases. The lease
extension increased aggregate future minimum lease payments and unearned
interest income, but did not alter the company's net investment in leases
receivable. The components of the company's net investment in the leases
receivable are as follows:
December 31
- - --------------------------------------------------------------
1995 1994
- - --------------------------------------------------------------
Aggregate future minimum
lease payments $ 380 $ 288
Unguaranteed residual value 38 38
Less unearned interest income 196 90
- - --------------------------------------------------------------
$ 222 $ 236
- - --------------------------------------------------------------
The company is scheduled to receive minimum lease payments of $31
annually in each of the next five years.
Semiannual sinking fund payments, sufficient to retire 100 percent of
the aggregate principal amount of the debt, have commenced and will continue
through maturity in 2004. The interest rate on the debt varies from 8 percent
to 9 percent, with a weighted average rate of 8.1 percent. The schedule of
principal payments for the next five years is $14 in 1996, $15 in 1997, $16 in
1998, $18 in 1999, and $19 in 2000.
M. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the company's financial instruments are as
follows:
December 31
- - -----------------------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- - -----------------------------------------------------------------------------------
Cash and equivalents
and marketable
securities $ 1,095 $ 1,095 $ 1,059 $ 1,059
Other investments 50 50 -- --
Long-term debt 38 43 40 42
Long-term debt-
finance
operations 146 168 161 163
- - -----------------------------------------------------------------------------------
31
15
GENERAL DYNAMICS CORPORATION
- - -------------------------------------------------
Fair value is based on quoted market prices, except for long-term
debt-finance operations where fair value is based on a risk-adjusted discount
rate.
The company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," as of January 1, 1994. The company determined
all of its investments classified as cash equivalents and marketable securities
are trading securities as defined by SFAS 115 and as such are recorded at fair
value. Unrealized gains and losses (the adjustment to fair value) recognized in
earnings during 1995 and 1994 on these securities were not significant.
Included in other investments at December 31, 1995, are equity
securities of $10 whose sale are restricted for a period of less than one year.
Also included in other investments at December 31, 1995, are U.S. government
obligations of $40 that are restricted for payment of workers' compensation
benefits under an agreement with the State of Maine. The amortized cost of the
U.S. government obligations is $39 at December 31, 1995. Approximately $9 of
these obligations matures within one year, and $31 matures between 1997 and
2000.
Both investments are available-for-sale securities as defined by SFAS
115 and as such are recorded at fair value. The unrealized gain of $7, net of
income taxes of $4, is classified as a separate component of shareholders'
equity at December 31, 1995. The proceeds from the sale and the realized gain
on sale of these investments was $7 in 1995.
The company was contingently liable for debt and lease guarantees and
other arrangements aggregating up to a maximum of approximately $85 and $105 at
December 31, 1995 and 1994, respectively. The company knows of no event of
default which would require it to satisfy these guarantees and, therefore, the
fair value of these contingent liabilities is considered immaterial.
N. OTHER INCOME, NET
Other income, net consists of the following:
Year Ended December 31
- - ------------------------------------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------
Gain on sale of Federal
Express Corporation stock $ -- $ -- $ 37
Amortization of gain on
sale of DSD -- 7 26
Gain on sale of equity
securities 7 -- --
Other, net (2) (7) 5
- - ------------------------------------------------------------------------------
$ 5 $ -- $ 68
- - ------------------------------------------------------------------------------
As stated in Note M, the company realized gains from the sale of
investments classified as available-for-sale securities of $7 in 1995.
During 1993, the company redeemed its remaining 53/4 percent
Debentures which were exchangeable for shares of Federal Express Corporation
common stock owned by the company and having no book value. As a result, the
company sold these shares during the third quarter of 1993 for $37, with the
corresponding gain reported as other income.
In November 1991, the company signed an agreement with Computer
Sciences Corporation (CSC) for the sale of the information technology
operations of the company's Data Systems Division (DSD). As the company had a
significant continuing involvement in the use of the assets sold, the $51 gain
(before tax) on the sale was being deferred and amortized on a straight-line
basis over three years into other income. Due to the novation of the company's
agreement with CSC allowing the buyers of the company's sold businesses to
assume the remaining obligation applicable to businesses sold, the company's
continuing involvement had diminished. Accordingly, after completing an
analysis during the second quarter of 1993, the company recorded $14 of the
previously deferred gain which was attributable to businesses sold. The
remaining balance was recognized on a straight-line basis through the end of
1994, which was consistent with the original amortization period.
O. COMMITMENTS AND CONTINGENCIES
LITIGATION. On January 7, 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 demanded repayment of unliquidated
progress payments, plus interest. The company and McDonnell Douglas have a
claim pending against the U.S. government in the Court of Federal Claims (see
Note P).
On March 8, 1993, a class action lawsuit, Berchin et al v. 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 with regard to the subsequent divestiture of
core businesses, which disclosures were contained in the company's tender offer
completed in July 1992. The parties have reached a tentative agreement to
settle the litigation, which agreement must be approved by the Court. The
expected settlement will not have a material impact on the company's financial
condition or results of operations.
Certain issues related to the 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 a
Statutory Notice of Deficiency from the IRS which the company is contesting in
the U.S. Tax Court. The company has accrued an amount which is expected to be
adequate to cover any liability arising from this matter. Also, as part of the
Tax Court litigation, the company is contesting the disallowance by the IRS of
its refund claim for additional research and experimentation tax credits for
the years 1981 through 1986. The company's position is that it is entitled to a
tax credit for certain research performed pursuant to fixed price government
contracts. The company believes that its position has been strengthened by the
recent decision in Fairchild Industries v. United States, which held for the
taxpayer on this issue. The resolution of the Tax Court litigation is expected
to take several years.
On July 14, 1995, 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
32
16
losses of up to $30 million in excess of a $40 million point in each of the
four policy years. The named plaintiff, Paul Hunt, is an individual suing on
behalf of himself and other individuals who are members of the Lloyd's of
London syndicates and other British insurers who have underwritten the risk. A
similar lawsuit, Bath Iron Works v. Institute of London Underwriters, is
pending in Maine. The company does not expect that the matter will 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 its liabilities in
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
fourteen 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 it is a small contributor and its
liability at any individual site is not material. 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
considers the solvency of other PRPs, whether responsibility is being disputed,
and its experience in similar matters in determining its share. Based on a site
by site analysis, the company has recorded an amount which it believes will be
adequate to cover any liability arising from the sites.
OTHER. In the ordinary course of business, the company has entered
into letter of credit agreements and other arrangements with financial
institutions aggregating approximately $100 at December 31, 1995. For
discussion of other financial guarantees, see Note M. The company's rental
commitments under existing leases at December 31, 1995, are not significant.
In connection with the sale of its defense businesses, the company
remains contingently liable for contract performance by the purchasers of these
businesses under agreements 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 in the
aggregate 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.
P. TERMINATION OF A-12 PROGRAM
As stated in Note O, the U.S. Navy terminated the company's A-12 aircraft
contract for default. The A-12 contract was a fixed-price incentive contract
for the full-scale development and initial production of the U.S. Navy's new
carrier-based Advanced Tactical Aircraft. Both the company and McDonnell
Douglas (the contractors) were parties to the contract with the U.S. Navy, each
had full responsibility to the U.S. 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 U.S.
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.
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 and equitable relief. In the
aggregate, the contractors 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 end of 1995, is approximately $2.2 billion, over
and above amounts previously received from the U.S. Navy. The company has not
recognized any claim revenue from the U.S. Navy.
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, finding
that the A-12 contract was not terminated for contractor default, but because
the Office of the Secretary of Defense withdrew support and funding from the
A-12. On December 19, 1995, following a trial on issues the U.S. government
raised with respect to the contractors' performance and the U.S. Navy's
knowledge thereof, the court issued an order converting the termination for
default to a termination for convenience. The court has set November 1996 as
the date for the trial on damages.
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 trial. In the unlikely event that the court's decision
converting the termination to a termination for convenience is reversed, 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 pre-tax
losses of approximately $675, plus interest, may be recognized by the company.
This result is considered remote.
Q. INCENTIVE COMPENSATION PLAN
Under the 1988 Incentive Compensation Plan, as amended, the company may grant
awards in combination of cash, common stock, stock options and restricted
stock. In 1993, the company introduced a long-term incentive program which
granted Performance Restricted Stock and Performance Stock Options. The terms
of these grants generally provide for the quantity of restricted stock and the
exercisability of the stock options to be tied to the performance of the
company's stock price over a two year period. Stock options granted in 1995 did
not include the aforementioned performance feature.
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GENERAL DYNAMICS CORPORATION
- - -------------------------------------------------
There were 199,395 shares of restricted stock awarded in 1995, and
746,008 shares outstanding at year end. Information with respect to stock
options is as follows:
Year Ended December 31
- - -----------------------------------------------------------------------------------
1995 1994 1993
- - -----------------------------------------------------------------------------------
NUMBER OF SHARES
UNDER STOCK
OPTIONS:
Outstanding at
beginning of year 1,820,887 3,610,428 2,937,704
Granted 719,650 135,810 1,394,190
Exercised (171,264) (1,705,172) (493,308)
Canceled (66,550) (220,179) (228,158)
- - -----------------------------------------------------------------------------------
Outstanding at
end of year 2,302,723 1,820,887 3,610,428
- - -----------------------------------------------------------------------------------
STOCK OPTIONS
EXERCISABLE AT
END OF YEAR 979,311 509,866 205,518
- - -----------------------------------------------------------------------------------
PRICE OF STOCK OPTIONS:
Granted $43.44 - 60.44 $39.81-46.84 $46.66-50.07
Exercised $ 7.21 - 47.00 $ 7.21-23.56 $ 7.21-39.16
Canceled $ 7.58 - 47.00 $18.06-47.00 $ 7.58-38.19
Outstanding $ 7.21 - 60.44 $ 7.21-47.00 $ 7.21-47.00
- - -----------------------------------------------------------------------------------
At December 31, 1995, 1,346,617 treasury shares have been reserved for
options which may be granted in the future in addition to the shares reserved
for issuance on the exercise of options outstanding.
Federal income tax benefits of $3, $21 and $7 were credited to
shareholders' equity during 1995, 1994 and 1993, respectively, primarily as a
result of the exercise of non-qualified stock options which generated
deductions for the company equal to the difference between the market price at
the date of exercise and the option price.
R. RETIREMENT PLANS
PENSION. The company has seven trusteed noncontributory defined benefit
pension plans covering substantially all employees. Under certain of the plans,
benefits are primarily a function of both the employee's years of service and
level of compensation, while under other plans, benefits are a function
primarily of years of service.
It is the company's policy to fund the plans to the maximum extent
deductible under existing federal income tax regulations. Such contributions
are intended to provide not only for benefits attributed to service to date,
but also for those expected to be earned in the future.
Net periodic pension cost for the total company included the following:
Year Ended December 31
- - ------------------------------------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------
Service cost-benefits earned
during period $ 47 $ 65 $ 70
Interest cost on projected
benefit obligation 158 146 164
Actual loss (gain) on
plan assets (933) 152 (350)
Net amortization and deferral 737 (334) 129
- - ------------------------------------------------------------------------------
$ 9 $ 29 $ 13
- - ------------------------------------------------------------------------------
The following table sets forth the plans' funded status:
December 31
- - -----------------------------------------------------------------------
1995 1994
- - -----------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested benefit obligation $ (2,453) $ (1,780)
- - -----------------------------------------------------------------------
Accumulated benefit obligation $ (2,487) $ (1,814)
- - -----------------------------------------------------------------------
Projected benefit obligation $ (2,657) $ (1,946)
Plans' assets at fair value 3,441 2,429
- - -----------------------------------------------------------------------
Plans' assets in excess of
projected benefit obligation 784 483
Unrecognized net gain (607) (196)
Unrecognized prior service cost 257 315
Unrecognized net asset at
January 1, 1986 (47) (56)
- - -----------------------------------------------------------------------
Prepaid pension cost $ 387 $ 546
- - -----------------------------------------------------------------------
Assumptions used in accounting for the plans are as follows:
December 31
- - --------------------------------------------------------------------------
1995 1994 1993
- - --------------------------------------------------------------------------
Discount rate 7% 8% 7%
Varying rates of increase in
compensation levels
based on age 4.5-10% 4.5-10% 4.5-10%
Expected long-term rate of
return on assets 8% 8% 8%
- - --------------------------------------------------------------------------
Under SFAS No. 87, "Employers' Accounting for Pensions," the company
is required to assume a discount rate at which the obligation could be
currently settled. Reflecting the movement in interest rates, the company
decreased its discount rate assumption from 8 percent to 7 percent at December
31, 1995, which increased the projected benefit obligation approximately $280.
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18
Changes in prior service cost resulting from plan amendments are
amortized on a straight-line basis over the average remaining service period of
employees expected to receive benefits under the plan.
Since 1992, the company has deferred gains realized by the commercial
plan for the purpose of offsetting any costs associated with its final
disposition, either through reversion or other actions. These deferred gains
have been classified against the prepaid pension cost related to the commercial
plan of approximately $220 resulting in the recognition of a net asset of $115
at December 31, 1995 and 1994, which is included in other noncurrent assets on
the Consolidated Balance Sheet.
The company's contractual arrangements with the U.S. government
provide for the recovery of contributions to the company's government plans.
Historically, the amount contributed to these plans, charged to contracts and
included in net sales has exceeded the net periodic pension cost included in
operating costs and expenses as determined under SFAS 87. Therefore, the
company has deferred recognition of earnings resulting from the difference
between contributions and net periodic pension cost to provide better matching
of revenues and expenses. Similarly, pension settlements and curtailments
under the government plans have also been deferred. As the U.S. government will
receive an equitable interest in the excess assets of a government pension plan
in the event of plan termination, the aforementioned deferrals have been
classified against the prepaid pension cost related to the government plans
resulting in the recognition of no net asset on the Consolidated Balance Sheet.
In 1995, the company realized curtailment losses of approximately
$120, including the cost of special termination benefits which amounted to $50,
in connection with retirement incentive programs at its government contracting
business. These losses, which have been deferred as described above, were the
primary reason for the overall decrease in prepaid pension cost in 1995.
At December 31, 1995, approximately 90 percent of the plans' assets
are invested in securities of the U.S. government or its agencies, and 10
percent in mortgage-backed securities and diversified corporate fixed income
securities.
In addition to the defined benefit plans, the company provides
eligible employees the opportunity to participate in savings plans that permit
contributions on both a pre-tax and after-tax basis. Generally, salaried
employees and certain hourly employees with at least one year of continuous
service are eligible to participate. Under most plans, the employee may
contribute to various investment alternatives, including investment in the
company's common stock. In certain of the plans, the company matches a portion
of the employees' contributions with contributions to a fund which invests in
the company's common stock. The company's contributions amounted to $25, $30
and $43 in 1995, 1994 and 1993, respectively. Approximately 6 million shares of
the company's common stock were held by the plans at both December 31, 1995 and
1994, respectively.
The company also sponsors several unfunded non-qualified supplemental
executive plans that provide participants with additional benefits, including
any excess of such benefits over limits imposed on qualified plans by federal
law. The recorded liability and expense related to these plans are not material
to the company's results of operations and financial condition.
OTHER POSTRETIREMENT BENEFITS. The company maintains plans providing
retiree medical coverage for many of its current and former employees. The
coverage provided and the extent to which the retirees share in the cost of the
program vary throughout the company. Postretirement life insurance benefits
are also provided to certain retirees. These benefits vary by employment status
and age, service and salary level at retirement. Both medical and life
insurance benefits are provided only to those employees who retire directly
from the service of the company and not to those who terminate
service/seniority prior to eligibility for retirement.
The company established and began funding a Voluntary Employee's
Beneficiary Association (VEBA) trust in 1992 for certain plans in the amount of
their related annual net periodic postretirement benefit cost under SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The remaining plans are primarily funded as claims are received.
The net periodic postretirement benefit cost for the total company
included the following:
Year Ended December 31
- - -------------------------------------------------------------------------------------
1995 1994 1993
- - -------------------------------------------------------------------------------------
Service cost - benefits earned
during period $ 8 $ 12 $ 13
Interest cost on projected
benefit obligation 51 51 41
Actual loss (gain) on plan assets (32) 1 (6)
Amortization of unrecognized
transition obligation 35 44 40
Net amortization and deferral 20 (7) 1
- - -------------------------------------------------------------------------------------
$ 82 $ 101 $ 89
- - -------------------------------------------------------------------------------------
The following table sets forth the plans' funded status:
December 31
- - -------------------------------------------------------------------------------
1995 1994
- - -------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ 483 $ 405
Other fully eligible participants 43 73
Other active participants 162 195
- - -------------------------------------------------------------------------------
688 673
Less plans' assets at fair value 179 134
- - -------------------------------------------------------------------------------
Obligation in excess of plans' assets 509 539
Unrecognized transition obligation (272) (428)
Unrecognized net loss (6) (2)
Unrecognized prior service cost (4) --
- - -------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 227 $ 109
- - -------------------------------------------------------------------------------
35
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GENERAL DYNAMICS CORPORATION
- - -------------------------------------------------
Assumptions used in accounting for the plans are as follows:
December 31
- - -------------------------------------------------------------------------------
1995 1994 1993
- - -------------------------------------------------------------------------------
Discount rate 7% 8% 7%
Expected long-term rate of
return on assets 8% 8% 8%
Assumed health care cost trend
rate for next year:
Post-65 claim groups 7% 8% 9%
Pre-65 claim groups 9.5-13% 10.5-14% 11.5-15%
- - -------------------------------------------------------------------------------
As stated above, the company decreased its discount rate assumption
from 8 percent to 7 percent at December 31, 1995, which increased the
accumulated postretirement benefit obligation approximately $60. In addition,
the obligation decreased approximately $80 in 1995 due to certain plan
amendments.
The health care cost trend rates are assumed to gradually decline to
4.5 percent and 5 percent for post-65 and pre-65 claim groups, respectively, in
the year 2004 and thereafter over the projected payout period of the benefits.
The effect of a one percent increase each year in the health care cost
trend rate used would result in an increase of $68 in the accumulated
postretirement benefit obligation at December 31, 1995, and an increase of $7
in the aggregate of the service and interest cost components of the 1995 net
periodic cost.
At December 31, 1995, approximately 55 percent of the trusts' assets
were invested in securities of the U.S. government and its agencies, 35 percent
in diversified U.S. common stocks, and 10 percent in mortgage-backed
securities.
The company's contractual arrangements with the U.S. government
provide for the recovery of contributions to a VEBA and costs based on claims
paid. The net periodic postretirement benefit cost calculated pursuant to SFAS
106 exceeds the company's cost currently allocable to contracts. To the extent
the company has contracts in backlog sufficient to recover the excess SFAS 106
cost, the company is deferring the charge in contracts in process until such
time that the cost is allocable to contracts. Similarly, the company is
deferring curtailments, including a $50 loss realized in 1995 in connection
with the previously discussed retirement incentive programs.
The company has certain employees covered by multiemployer plans,
including the fund established by the Coal Industry Retiree Health Benefit Act
of 1992 (the Act). The company estimates its obligation under the Act to former
employees to be approximately $25 at December 31, 1995. The Act also provides
for the allocation of beneficiaries who cannot be assigned to an employer. The
company's obligation related to such beneficiaries cannot be determined at this
time. The company accounts for its contributions related to these plans on the
cash basis in accordance with GAAP.
S. BUSINESS SEGMENT INFORMATION
The company's primary business is supplying weapons systems to the U.S.
government. For a discussion of the company's business segments, including
their current business environment, operating results and related
uncertainties, see Management's Discussion and Analysis of the Results of
Operations and Financial Condition.
T. QUARTERLY DATA (UNAUDITED)
Common Stock
- - --------------------------------------------------------------------------------------------------------
Market Price
Range
Net Operating Net Net Earnings ---------------------- Dividends
Sales Earnings Earnings Per Share High Low Declared
- - --------------------------------------------------------------------------------------------------------
1995
4th Quarter (b) $ 893 $ 83 $ 88 $ 1.40 $ 63 $ 51 3/8 $.375
3rd Quarter (b) 718 77 91 1.45 56 1/8 44 1/8 .375
2nd Quarter 703 76 82 1.30 48 1/4 42 1/2 .375
1st Quarter 753 79 60 .95 47 1/2 42 3/8 .375
- - --------------------------------------------------------------------------------------------------------
1994
4th Quarter $ 724 $ 82 $ 58 $ .92 $ 45 1/8 $ 38 1/4 $ .35
3rd Quarter 714 77 54 .85 46 5/8 38 .35
2nd Quarter (a) 820 82 71 1.13 45 39 .35
1st Quarter 800 80 55 .87 47 5/8 41 3/16 .35
- - --------------------------------------------------------------------------------------------------------
Note: Quarterly data is based on a 13 week period.
(a) Includes gain from the sale of the Space Launch Systems business which
increased net earnings and net earnings per share by $15 and 24 cents,
respectively. See Note C.
(b) Includes results from Bath Iron Works which was acquired on September
13, 1995. See Note B.
36
20
STATEMENT OF FINANCIAL RESPONSIBILITY
- - --------------------------------------------------------------------------------
To the Shareholders of General Dynamics Corporation:
The management of General Dynamics Corporation is responsible for the
consolidated financial statements and all related financial information
contained in this report. The financial statements, which include amounts based
on estimates and judgments, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis.
The company maintains a system of internal accounting controls
designed and intended to provide reasonable assurance that assets are
safeguarded, that transactions are executed and recorded in accordance with
management's authorization and that accountability for assets is maintained. An
environment that establishes an appropriate level of control consciousness is
maintained and monitored by management. An important element of the monitoring
process is an internal audit program that independently assesses the
effectiveness of the control environment.
The Audit and Corporate Responsibility Committee of the board of
directors, which is composed of five outside directors, meets periodically and,
when appropriate, separately with the independent auditors, management and
internal audit to review the activities of each.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose report follows.
/s/ MICHAEL J. MANCUSO /s/ JOHN W. SCHWARTZ
- - ------------------------ ------------------------
Michael J. Mancuso John W. Schwartz
Vice President and Controller
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- - --------------------------------------------------------------------------------
To General Dynamics Corporation:
We have audited the accompanying Consolidated Balance Sheet of General Dynamics
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1994, and the related Consolidated Statements of Earnings, Shareholders'
Equity and Cash Flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of General Dynamics
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
---------------------------
ARTHUR ANDERSEN LLP
Washington, D.C.,
February 12, 1996
37
21
GENERAL DYNAMICS CORPORATION
- - -------------------------------------------------
SELECTED FINANCIAL DATA (UNAUDITED)
- - --------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share and per employee amounts)
SUMMARY OF OPERATIONS
Net sales $ 3,067 $ 3,058 $ 3,187 $ 3,225 $ 3,161
Operating costs and expenses 2,752 2,737 2,878 2,970 2,950
Interest, net 55 22 36 27 10
Provision (credit) for income taxes 128 120 143 5(a) (82)(b)
Earnings from continuing operations 247 223 270 305(a) 274(b)
Earnings per share from
continuing operations (d) 3.92 3.53 4.34 4.03(a) 3.20(b)
Cash dividends on common stock 1.50 1.40 1.00 .80 .50
Sales per employee 152,100(c) 143,900 138,100 121,500 102,800
- - --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT DECEMBER 31
Cash and equivalents and marketable securities $ 1,095 $ 1,059 $ 585 $ 943 $ 812
Property, plant and equipment, net 398 264 302 339 380
Total assets 3,164 2,673 2,635 3,530 4,177
Long-term debt (including current portion) 38 40 38 183 613
Long-term debt - finance operations
(including current portion) 146 161 175 190 204
Shareholders' equity 1,567 1,316 1,177 1,874 1,980
Per share 24.78 20.89 18.81 30.30 23.62
- - --------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Funded backlog $ 5,227 $ 4,562 $ 5,487 $ 6,780 $ 8,214
Total backlog 7,386 6,006 7,015 8,488 9,846
Shares outstanding at December 31 (in millions) 63.2 63.0 62.6 61.8 83.8
Weighted average shares outstanding (in millions)(d) 63.0 63.1 62.2 75.6 85.6
Common shareholders of record at December 31 22,930 23,935 24,496 26,158 33,078
Active employees at December 31:
Total company 27,700 24,200 30,500 56,800 80,600
Excluding discontinued operations 26,800 21,300 23,100 26,500 30,700
- - --------------------------------------------------------------------------------------------------------------------------------
(a) Includes a $95 gain ($1.26 per share) from the recognition of research and
experimentation and investment tax credits.
(b) Includes a $140 gain ($1.64 per share) from an adjustment to the company's
deferred income tax liability.
(c) Excludes Bath Iron Works for comparative purposes.
(d) Simple earnings per share is presented for 1993-1995, fully diluted
earnings per share is presented for 1991-1992.
38