1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-3671
GENERAL DYNAMICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-1673581
- --------------------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
3190 FAIRVIEW PARK DRIVE, FALLS CHURCH, VIRGINIA 22042-4523
- ------------------------------------------------ ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(703) 876-3000
--------------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $1 PAR VALUE - MAY 2, 1999 127,544,577
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GENERAL DYNAMICS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Earnings 3
Consolidated Statement of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis 13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings 19
Item 6 - Exhibits and Reports on Form 8-K 19
SIGNATURE 20
- ---------
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PART I
ITEM 1. FINANCIAL STATEMENTS
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
April 4 December 31
1999 1998
------------------ ------------------
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 133 $ 127
Marketable securities 52 93
------------------ ------------------
185 220
Accounts receivable 314 316
Contracts in process 1,186 952
Other current assets 729 385
------------------ ------------------
Total Current Assets 2,414 1,873
------------------ ------------------
NONCURRENT ASSETS:
Leases receivable - finance operations 181 181
Real estate held for development 63 65
Property, plant and equipment, net 718 698
Intangible assets 1,528 1,525
Other assets 202 230
------------------ ------------------
Total Noncurrent Assets 2,692 2,699
------------------ ------------------
$ 5,106 $ 4,572
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 2
Short-term debt - finance operations 58 58
Accounts payable 215 295
Other current liabilities 1,301 1,106
------------------ ------------------
Total Current Liabilities 1,574 1,461
------------------ ------------------
NONCURRENT LIABILITIES:
Long-term debt 162 167
Long-term debt - finance operations 79 82
Other liabilities 802 643
Commitments and contingencies (See Note J)
------------------ ------------------
Total Noncurrent Liabilities 1,043 892
------------------ ------------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus (shares issued 168,774,672) 312 285
Retained earnings 2,875 2,640
Treasury stock (shares held 1999, 41,312,760; 1998, 42,081,130) (695) (706)
Accumulated other comprehensive income (3) -
------------------ ------------------
Total Shareholders' Equity 2,489 2,219
------------------ ------------------
$ 5,106 $ 4,572
================== ==================
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
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GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
Three Months Ended
------------------------------------------------------
April 4 March 29
1999 1998
------------------ -------------------
NET SALES $ 1,377 $ 1,154
OPERATING COSTS AND EXPENSES 1,234 1,030
------------------ ------------------
OPERATING EARNINGS 143 124
Interest (expense) income, net (1) 1
Other income (expense), net 9 (1)
------------------ -------------------
EARNINGS BEFORE INCOME TAXES 151 124
(BENEFIT) / PROVISION FOR INCOME TAXES
R&E Tax Credit (165) -
Provision 51 42
------------------ ------------------
(114) 42
------------------- ------------------
NET EARNINGS $ 265 $ 82
================== ==================
NET EARNINGS PER SHARE:
Basic $ 2.09 $ 0.65
================== ==================
Diluted $ 2.07 $ 0.65
================== ==================
DIVIDENDS PER SHARE $ 0.24 $ 0.22
================== ==================
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 96 $ 92
================== ==================
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
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5
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
Three Months Ended
--------------------------------------------------------
April 4 March 29
1999 1998
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 265 $ 82
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 33 31
Decrease (Increase) in -
Marketable securities 41 (6)
Accounts receivable 2 46
Contracts in process (31) (99)
Increase (Decrease) in -
Accounts payable and other current liabilities (96) (52)
Current income taxes (121) 15
Deferred income taxes (1) 12
Other, net (21) (10)
-------------------- -------------------
Net cash provided by continuing operations 71 19
Net cash used by discontinued operations (2) (3)
-------------------- -------------------
Net Cash Provided by Operating Activities 69 16
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (20) 12
Purchases of available-for-sale securities (6) (88)
Sales/maturities of available-for-sale securities 7 41
Capital expenditures (28) (45)
Proceeds from sale of assets 13 -
Other - (1)
-------------------- -------------------
Net Cash Used by Investing Activities (34) (81)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Title XI Bonds (5) -
Repayment of debt - finance operations (3) (3)
Dividends paid (28) (26)
Purchase of common stock (1) -
Other 8 2
-------------------- -------------------
Net Cash Used by Financing Activities (29) (27)
-------------------- -------------------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 6 (92)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 127 336
-------------------- -------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 133 $ 244
==================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Income taxes $ 10 $ 7
Interest (including finance operations) $ 6 $ 1
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement
4
6
GENERAL DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The unaudited consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, the company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the three month period ended April 4, 1999, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999. These
unaudited consolidated financial statements should be read in conjunction with
the financial statements and the notes thereto included in the company's Annual
Report on Form 10-K for the year ended December 31, 1998.
In the opinion of the company, the unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair statement of the results for the three-month
periods ended April 4, 1999 and March 29, 1998.
(B) Subsequent Event
On May 17, 1999, the company entered into a definitive agreement to
acquire Gulfstream Aerospace Corporation (Gulfstream), a designer, developer,
manufacturer and marketer of advanced business jet aircraft. The transaction is
structured as a merger under which the company will issue one share of common
stock in exchange for each outstanding share of Gulfstream common stock. As a
result of the acquisition, Gulfstream will become a wholly-owned subsidiary of
the company. The acquisition will be accounted for as a pooling of interests.
Consummation of the merger is subject to shareholder and regulatory approval and
customary closing conditions.
(C) Comprehensive Income
Comprehensive income was $262 and $81 for the three-month periods
ended April 4, 1999 and March 29, 1998, respectively.
(D) Translation of Foreign Currencies
Local currencies have been determined to be functional currencies
for the company's international operations. Foreign currency balance sheets are
translated at the end-of-period exchange rates and earnings statements at the
average exchange rates for each period. The resulting foreign currency
translation adjustments are included in the calculation of other comprehensive
income and included in the equity section on the Consolidated Balance Sheet.
(E) Acquisition
On November 10, 1998, the company acquired control of NASSCO
Holdings Incorporated (NASSCO) for $369 in cash plus the obligation to discharge
$46 in debt. NASSCO's wholly owned subsidiaries include National Steel and
Shipbuilding Company, which is in the business of ship design, engineering,
construction and repair for the United States military and various commercial
customers, and NASSCO Funding Corporation, a finance subsidiary. The transaction
has been accounted for under the purchase method of accounting. Operating
results of NASSCO are included with those of the company from the closing date.
The excess of the purchase price over the estimated fair value of the net
tangible assets acquired, approximately $250, has been recorded as goodwill.
This allocation is based on preliminary estimates and will be finalized within
one year from the date of acquisition.
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(F) Earnings Per Share
Basic and diluted weighted average shares outstanding are as follows
(in thousands):
April 4 March 29
1999 1998
------------ --------------
Basic 127,008 125,933
Diluted 128,326 126,934
(G) Intangible Assets
Intangible assets resulting from the company's acquisitions consist
of the following:
April 4 December 31
1999 1998
-------- -----------
Contracts and programs acquired $ 411 $ 416
Goodwill 1,117 1,109
------ ------
$1,528 $1,525
====== ======
Intangible assets are shown net of accumulated amortization of $85
and $74 at April 4, 1999 and December 31, 1998, respectively. Intangible assets
are amortized on a straight-line basis over periods ranging from 8 to 40 years.
(H) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
April 4 December 31
1999 1998
------------------ ------------------
Workers' compensation $ 486 $ 340
Retirement benefits 230 196
Salaries and wages 105 84
Customer deposits 127 139
Other 353 347
------------------ ------------------
Other Current Liabilities $ 1,301 $ 1,106
================== ==================
Accrued costs on disposed businesses $ 177 $ 177
Retirement benefits 160 183
Coal mining related liabilities 72 73
Other 393 210
------------------ ------------------
Other Liabilities $ 802 $ 643
================== ==================
6
8
(I) Income Taxes
The company had a net deferred tax asset of $288 and $287 at April
4, 1999 and December 31, 1998, respectively, the current portion of which was
$321 and $311, respectively, and was included in other current assets on the
Consolidated Balance Sheet. No material valuation allowance was required for the
company's net deferred tax assets at April 4, 1999 and December 31, 1998.
On March 2, 1999, the company and the U.S. Internal Revenue Service
settled refund claims for research and experimentation tax credits for the years
1981 through 1989 for approximately $270 (including after-tax interest). The
company recognized a benefit of $165 (less amounts previously recorded in 1991
and 1992), or $1.29 per diluted share, as a result of this settlement. During
the first quarter of 1999, the company recorded a receivable in the amount of
$334, representing the cash refund related to this settlement (including
before-tax interest). The receivable was included in other current assets on the
Consolidated Balance Sheet at April 4, 1999, and was collected early in the
second quarter of 1999.
The IRS has completed its examination of the company's 1990 through
1993 consolidated federal income tax returns. Unresolved matters for these years
have been protested to the IRS Appeals Division. A refund claim by the company
for $78 (plus interest) for research and experimentation credits for the year
1990 will also be considered by the IRS Appeals Division. The IRS is currently
examining the company's 1994 and 1995 consolidated federal income tax returns.
Since the company has recorded liabilities for tax contingencies, resolution of
these years is not expected to have a materially unfavorable impact on the
company's results of operations or financial condition.
(J) Commitments and Contingencies
Litigation
Claims made by and against the company regarding the development of
the Navy's A-12 aircraft are discussed in Note K.
On April 19, 1995, 101 then-current and former employees of General
Dynamics' Convair Division in San Diego, California filed a six-count complaint
in the Superior Court of California, County of San Diego, titled Argo, et al. v.
General Dynamics, et al. In addition to General Dynamics, four of Convair's
then-current or former managers were also named as defendants. The plaintiffs
alleged that the company interfered with their right to join an earlier class
action lawsuit by, among other things, concealing its plans to close the Convair
Division. On May 1, 1997, a jury rendered a verdict of $101 against the company
and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the
plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The
company and one of the defendants have appealed the judgment to the Court of
Appeals of the State of California, Fourth Appellate District, Division One. On
appeal, the company is seeking to have the judgment overturned in its entirety
or, alternatively, a substantial reduction in the jury's punitive damage award.
The company believes it has substantial legal defenses, but in any case, it
believes the punitive damage award is excessive as a matter of law. Management
currently believes the ultimate outcome will not have a material impact on the
company's results of operations or financial condition.
7
9
On July 13, 1995, General Dynamics Corporation was named as a
defendant in a complaint filed in the Circuit Court of St. Louis County,
Missouri, titled Hunt, et al. v. General Dynamics Corporation, et al. The
complaint also names two insurance brokers, Lloyd Thompson, Ltd. and Willis
Caroon Corporation of Missouri, as defendants. The plaintiffs are members of
certain Lloyds' of London syndicates and British insurance companies who sold
the company excess loss insurance policies covering the company's self-insured
workers' compensation program at Electric Boat for four policy years, from July
1, 1988 to June 30, 1992. The plaintiffs allege that when procuring the policies
the company and its brokers made misrepresentations to the plaintiffs and failed
to disclose facts which were material to the risk. The plaintiffs also allege
that the company has been negligent in its administration of workers'
compensation claims. The plaintiffs seek rescission of the policies, a
declaratory judgment that the policies are void, and compensatory damages in an
unspecified amount. General Dynamics has counterclaimed, alleging that the
plaintiffs have breached their insurance contracts by failing to pay claims.
General Dynamics seeks a declaratory judgment that the policies are valid,
actual damages, and payment of a penalty under a Missouri statute for the
plaintiffs' vexatious and unreasonable failure to pay claims. The company does
not expect that this case will have a material impact on the company's results
of operations or financial condition.
On August 16, 1996, plaintiffs HE Holdings, Inc., and Hughes Missile
Systems Company filed an action against General Dynamics Corporation in the
Superior Court for the State of California for the County of Los Angeles. In
June 1998, plaintiffs filed a sixth amended complaint in which plaintiffs were
redesignated as HE Holdings, Inc., now known as Raytheon Company, and Hughes
Missile Systems Company, now known as Raytheon Missile Systems Company
("plaintiffs"). On September 8, 1998, plaintiffs filed a seventh amended
complaint which is now pending. The seventh amended complaint alleges breach of
contract, tortious interference with contract, conversion, fraud, and breach of
the implied covenant of good faith and fair dealing, all with respect to the
Asset Purchase Agreement dated May 8, 1992, for the sale of the company's
missile business, various related leases and other alleged agreements. The
seventh amended complaint seeks approximately $25 in compensatory damages, as
well as punitive damages and declaratory relief. The company does not expect
that the lawsuit will have a material impact on the company's results of
operations or financial condition.
The company is either a named defendant or a third-party defendant
in certain multi-plaintiff tort cases pending in Tucson, Arizona, captioned:
Cordova, et al. v. Hughes Aircraft Co., et al.; Lanier, et al. v. Hughes
Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and Arellano, et
al. v. Hughes Aircraft Co. The first case was filed in Superior Court for Pima
County, Arizona. The remaining cases are pending in federal court in Arizona. In
all four cases the plaintiffs allege that they suffered personal injuries and/or
property damage from chronic exposure to drinking water alleged to be
contaminated with trace amounts of the industrial solvent trichloroethylene. The
alleged source of the contamination was industrial facilities in and around the
site now occupied by the Tucson International Airport (TIA) and U.S. Air Force
Plant #44. In addition to the company, defendants are Hughes Aircraft Co. (now
Raytheon), the Tucson Airport authority (TAA), the City of Tucson, (the City)
and McDonnell Douglas Corp. (MDC). The company does not believe that these
lawsuits will have a material impact on the company's results of operations or
financial condition.
In other litigation concerning the Tucson site, the company is a
defendant in two cases brought in federal district court in Arizona by TAA and
the City under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA). Plaintiffs seek reimbursement of CERCLA response costs
and a declaration of the company's alleged liability with respect to soil and
groundwater contamination at portions of the Tucson site. On September 30, 1998,
the U.S. Environmental Protection Agency (U.S.
8
10
EPA) issued a Special Notice Letter notifying the company that it was a
potentially responsible party (PRP) with respect to contamination of soil and
shallow groundwater on and near property currently occupied by the TIA. Other
PRPs receiving a similar notice were the U.S. Air Force, TAA, MDC and the City.
The company has reached an agreement to settle the litigation brought by TAA and
the City and is awaiting U.S. Department of Justice approval to a consent decree
negotiated with the U.S. EPA in response to the Special Notice Letter. The
company does not believe that these lawsuits or the U.S. EPA's notice of
potential liability will have a material impact on the company's results of
operations or financial condition.
The company is also a defendant in other lawsuits and claims and in
other investigations of varying nature. The company believes its liabilities in
these proceedings, in the aggregate, are not material to the company's results
of operations or financial condition.
Environmental
The company is directly or indirectly involved in certain Superfund
sites in which the company, along with other major U.S. corporations, has been
designated a PRP by the U.S. EPA or a state environmental agency with respect to
past shipments of hazardous waste to sites now requiring environmental cleanup.
Based on a site by site analysis of the estimated quantity of waste contributed
by the company relative to the estimated total quantity of waste, the company
believes its liability at any individual site is not material. The company is
also involved in the investigation, cleanup and remediation of various
conditions at sites it currently or formerly owned or operated.
The company measures its environmental exposure based on enacted
laws and existing regulations and on the technology expected to be approved to
complete the remediation effort. The estimated cost to perform each of the
elements of the remediation effort is based on when those elements are expected
to be performed. Where a reasonable basis for apportionment exists with other
PRPs, the company estimates only its allowable share of the joint and several
remediation liability for a site, taking into consideration the solvency of
other participating PRPs. Based on a site by site analysis, the company believes
it has adequate accruals for any liability it may incur arising from sites
currently or formerly owned or operated at which there is a known environmental
condition, or Superfund sites at which the company is a PRP.
(K) Termination of A-12 Program
The A-12 contract was a fixed-price incentive contract for the
full-scale development and initial production of the Navy's new carrier-based
Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft
contract for default. Both the company and McDonnell Douglas, now owned by the
Boeing Company, (the contractors) were parties to the contract with the Navy,
each had full responsibility to the Navy for performance under the contract, and
both are jointly and severally liable for potential liabilities arising from the
termination. As a consequence of the termination for default, the Navy demanded
that the contractors repay $1,352 in unliquidated progress payments, but agreed
to defer collection of the amount pending a decision by the U.S. Court of
Federal Claims on the contractors' 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 relief. A trial on Count XVII of the
complaint, which relates to the propriety of the process used in terminating the
contract for default, was concluded in
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October 1993. In December 1994, the court issued an order vacating the
termination for default. On December 19, 1995, following further proceedings,
the court issued an order converting the termination for default to a
termination for convenience.
On February 23, 1998, a final judgment was entered in favor of the
contractors for $1,200 plus interest. The U.S. government filed an appeal in the
U.S. Court of Appeals for the Federal Circuit. The U.S. government seeks
reversal of the judgment and a remand to the trial court for a full trial on the
merits. The appeal has been briefed and argued. Final resolution of the A-12
litigation will depend on the outcome of the appeal and further proceedings in
the trial court, if any. The company has not recognized any claim revenue from
the Navy.
The company has fully reserved the contracts in process balance
associated with the A-12 program and has accrued the company's estimated
termination liabilities, and the liability associated with pursuing the
litigation through the appeals process. In the unlikely event that the court's
decision converting the termination to a termination for convenience is reversed
on appeal and the contractors are ultimately found to be in default of the A-12
contract and are required to repay all unliquidated progress payments,
additional losses of approximately $675, plus interest, may be recognized by the
company. The company believes the possibility of this result is remote.
10
12
(L) Business Segment Information
The company's primary business is supplying sophisticated defense
systems to the United States and its allies. Management has chosen to organize
its business segments in accordance with several factors, including a
combination of the nature of products and services offered, the nature of the
production processes and the class of customer for the company's products.
Operating segments are aggregated for reporting purposes consistent with these
criteria. Management measures its segments' profit based primarily on operating
earnings. As such, net interest and other income items have not been allocated
to the company's segments. For a further description of the company's business
segments, see Management's Discussion and Analysis of the Results of Operations
and Financial Condition.
Summary financial information for each of the company's segments
follows:
Earnings Statement Data (for the three months ended):
Sales to
Net Sales Operating Earnings U.S. Government
--------- ------------------ ---------------
April 4 March 29 April 4 March 29 April 4 March 29
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Marine Systems* $ 808 $ 555 $ 88 $ 64 $ 805 $ 554
Combat Systems 290 335 35 43 280 314
Information Systems
& Technology* 233 218 20 14 115 109
Other 46 46 - 3 - -
------ ------ ---- ---- ------ ----
$1,377 $1,154 $143 $124 $1,200 $977
====== ====== ==== ==== ====== ====
Depreciation, Depletion,
Capital Expenditures And Amortization
-------------------- ----------------
April 4 March 29 April 4 March 29
1999 1998 1999 1998
---- ---- ---- ----
Marine Systems* $ 17 $ 9 $ 11 $ 11
Combat Systems - 3 7 5
Information Systems
& Technology* 2 4 10 11
Other 9 29 5 4
---- ---- ---- ----
$ 28 $ 45 $ 33 $ 31
==== ==== ==== ====
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Balance Sheet Data:
Identifiable Assets
-------------------
April 4 December 31
1999 1998
---- ----
Marine Systems* $ 1,501 $ 1,255
Combat Systems 927 923
Information Systems & Technology* 1,221 1,261
Other 420 406
Corporate** 1,037 727
----- ---
$ 5,106 $ 4,572
======= =======
*As of January 1, 1999, management moved its Defense Systems operating unit from
the Marine Systems segment to the Information Systems and Technology segment.
Data for prior periods has been restated to give recognition to the current
composition of reportable segments.
**Corporate identifiable assets include cash and equivalents and marketable
securities, R&E tax credit receivable (see Note I), deferred taxes, real estate
held for development and prepaid pension cost.
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GENERAL DYNAMICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 4, 1999
(Dollars in millions, except per share amounts)
Forward-Looking Statements
Management's Discussion and Analysis of the Results of Operations
and Financial Condition contains forward-looking statements that are based on
management's expectations, estimates, projections and assumptions. Words such as
"expects," "anticipates," "plans," "believes," "estimates," variations of these
words and similar expressions are intended to identify forward-looking
statements which include but are not limited to projections of revenues,
earnings, segment performance, cash flows, contract awards and the company's
expectations regarding the upcoming year 2000. Forward-looking statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements are not guarantees of future performance
and involve certain risks and uncertainties which are difficult to predict.
Therefore, actual future results and trends may differ materially from what is
forecast in forward-looking statements due to a variety of factors, including,
without limitation: the company's successful execution of internal performance
plans; performance issues with key suppliers and subcontractors; the status or
outcome of legal proceedings; the status or outcome of labor negotiations;
changing priorities or reductions in the U.S. government defense budget;
termination of government contracts due to unilateral government action; and the
timing and occurrence (or non-occurrence) of circumstances beyond the company's
control.
Business Segments
The company operates in three primary business segments: Marine
Systems, Combat Systems and Information Systems and Technology. The company also
owns coal mining and aggregates operations in the Midwest, and a leasing
operation for liquefied natural gas tankers, which are classified as Other. The
following table sets forth the net sales and operating earnings by business
segment for the three-month periods ended April 4, 1999, and March 29, 1998:
13
15
Three-Month Period Ended
-----------------------------------------------
April 4 March 29 Increase/
1999 1998 (Decrease)
---------------- ---------------------- ----------------------
NET SALES:
Marine Systems $ 808 $ 555 $ 253
Combat Systems 290 335 (45)
Information Systems and
Technology 233 218 15
Other 46 46 -
---------------- --------------- ----------------------
$ 1,377 $ 1,154 $ 223
================ =============== ======================
OPERATING EARNINGS:
Marine Systems $ 88 $ 64 $ 24
Combat Systems 35 43 (8)
Information Systems and
Technology 20 14 6
Other - 3 (3)
---------------- --------------- ----------------------
$ 143 $ 124 $ 19
================ =============== ======================
Marine Systems
Results of Operations
Net sales increased during the three-month period due primarily to
the acquisition of NASSCO Holdings Incorporated (NASSCO), whose wholly owned
subsidiaries include National Steel and Shipbuilding Company, on November 10,
1998. Operating earnings increased during the three-month period due primarily
to the aforementioned acquisition and to an earnings rate increase on the
Arleigh Burke class destroyer (DDG 51) program in the fourth quarter of 1998.
As of January 1, 1999, in order to align the company's information
technology resources, management moved its Defense Systems operating unit from
the Marine Systems segment to the Information Systems and Technology segment.
Data for the three-month period ended March 29, 1998, has been restated to give
recognition to the current composition of reportable segments.
Combat Systems
Results of Operations
Net sales and operating earnings decreased during the three-month
period due primarily to the completion of production on the Single Channel
Ground and Airborne Radio System for the U.S. Army and to the results of the
company's ammunition production facility. Previously a consolidated subsidiary,
the company's Milan Army Ammunition Plant is now part of an unconsolidated joint
venture, American Ordnance LLC.
14
16
Information Systems and Technology
Results of Operations
Net sales increased during the three-month period due primarily to
increased volume for commercial undersea fiber-optic communications equipment.
Operating earnings increased during the three month period as a result of higher
margins obtained from cost reduction efforts employed during the first year of
acquisition of the segment's businesses.
In the first quarter of 1999, as previously mentioned, management
transitioned the Defense Systems' business to the Information Systems and
Technology segment from the Marine Systems segment. Data for the three-month
period ended March 29, 1998, has been restated to give recognition to the
current composition of reportable segments.
Backlog
The following table details the backlog of each business segment as
calculated at April 4, 1999, and December 31, 1998:
April 4 December 31
1999 1998
------- -------
Marine Systems $11,351 $11,565
Combat Systems 1,424 1,579
Information Systems and Technology 925 892
Other 545 562
------- -------
Total Backlog $14,245 $14,598
======= =======
Funded Backlog $ 8,039 $ 7,292
======= =======
Total backlog represents the estimated remaining sales value of work
to be performed under firm contracts. Funded backlog represents the portion of
total backlog that has been appropriated by Congress and funded by the procuring
agency. To the extent backlog has not been funded, there is no assurance that
congressional appropriations or agency allotments will be forthcoming. Total
backlog also includes amounts for long-term coal contracts. As previously
mentioned, data at December 31, 1998, has been restated to give recognition to
the current composition of reportable segments.
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Additional Financial Information
Provision for Income Taxes
During the first quarter of 1999, the company and the U.S. Internal
Revenue Service settled refund claims for research and experimentation tax
credits for the years 1981 through 1989 for approximately $270 (including
after-tax interest). The company recognized a benefit of $165 (less amounts
previously recorded in 1991 and 1992), or $1.29 per diluted share, as a result
of this settlement. In April 1999, the company received the cash refund from the
IRS related to the first quarter settlement totaling $334 (including before-tax
interest). Tax on the interest totaling approximately $65 will be paid during
1999 with the company's regular quarterly tax payments. For further discussion
of this and other tax matters, as well as a discussion of the net deferred tax
asset, see Note I to the Consolidated Financial Statements.
Environmental Matters and Other Contingencies
For a discussion of environmental matters and other contingencies,
see Notes J and K to the Consolidated Financial Statements. The company's
liability, in the aggregate, with respect to these matters, is not expected to
be material to the company's results of operations or financial condition.
Year 2000
The company has developed an internal Year 2000 compliance program
(Y2K Project), which is focusing on three major areas of assessment, project
planning and remediation with respect to Year 2000 issues (the inability of
date-sensitive software and equipment to properly recognize dates beyond 1999):
(1) information technology systems; (2) deliverable software (alone or as a
component of another product); and (3) facilities and embedded processors. The
company is working with its full-time information technology systems partner on
the project. The assessment and project planning phase of the Y2K Project is
complete. The company expects the remediation phase to be substantially complete
by the end of the second quarter of 1999. Validation testing occurs as systems
are remediated and is expected to be finished in the third quarter of 1999. The
company generally develops its deliverable software to conform with customer
specifications. The company is completing its review of customer contracts and
specifications to determine whether any Year 2000 issues exist. Remediation
efforts have been undertaken where requested, required and/or funded by the
customer. Management believes the company will complete the Y2K Project on
schedule and that the costs to implement will not materially impact results of
operations or financial condition, as most of these costs are expected to be
allowable under the company's U.S. government contracts. The company believes
its total Y2K Project costs will not exceed $40.
The company has made inquiries of substantially all third parties
with whom it has material business relationships to determine if they have Year
2000 issues. To date, the company has not been made aware of any Year 2000
issues with respect to these third parties that would be expected to materially
and adversely affect the company. There can be no assurance, however, that these
third parties have been or will be successful in identifying or addressing their
Year 2000 issues.
The implementation schedule, projected costs and beliefs regarding
the company's Year 2000 issues detailed above are based on management's best
estimates utilizing assumptions as to future events. There can be no assurance
that these expectations will be realized. Based on the status of the Y2K Project
and third-party surveys, however, the company does not believe there are any
material risks to the company related to Year 2000 issues. The company believes
its worst case Year 2000 scenario, if realized, would involve a brief slowdown
or cessation of production at one or more business units which would not
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be expected to have a material adverse effect on financial condition or results
of operations. The company engages in project reviews and internal audit
activities designed to ensure Year 2000 readiness. The company has begun, and
expects to complete during the third quarter of 1999, contingency planning with
respect to Year 2000 issues.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The company
is required to adopt the provisions of the standard during the first quarter of
2000. Because of the company's minimal use of derivatives, the company does not
expect that the adoption of the new standard will have a material impact on the
results of operations or financial condition.
Effective January 1, 1999, the company adopted the provisions of
Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments." SOP 97-3 provides guidance to aid in the
determination of when liabilities should be recognized for guaranty-fund and
other insurance-related assessments, as well as requirements for the measurement
of the liability and related recoverable asset. As these costs are recoverable
under the company's contracts and existing backlog, the adoption of the SOP did
not have a material impact on the company's results of operations or financial
condition.
Financial Condition
Operating Activities
Cash flows from continuing operations increased this year over last
year due primarily to the liquidation of marketable securities classified as
trading in accordance with SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities."
The company expects to continue to generate funds from operations in
excess of its short- and long-term liquidity needs.
Investing Activities
On May 17, 1999, the company entered into a definitive agreement to
acquire Gulfstream Aerospace Corporation (Gulfstream), a designer, developer,
manufacturer and marketer of advanced business jet aircraft. The transaction is
structured as a merger under which the company will issue one share of common
stock in exchange for each outstanding share of Gulfstream common stock. As a
result of the acquisition, Gulfstream will become a wholly-owned subsidiary of
the company. The acquisition will be accounted for as a pooling of interests.
Consummation of the merger is subject to shareholder and regulatory approval and
customary closing conditions.
On April 14, 1999, the Department of Defense issued a statement that
it would not support the proposal of General Dynamics to acquire Newport News
Shipbuilding Inc. (Newport News). Thereafter, the company withdrew its February
10, 1999, offer to acquire the outstanding shares of Newport News.
On May 3, 1999, the company paid from available funds the remaining
fixed purchase consideration of $51 in cash for three individual stockholders'
share of NASSCO common stock.
The company began construction on its facility modernization project
at its Bath Iron Works' shipyard in late 1998. The company anticipates investing
a total of approximately $200 through the year 2000, with approximately $120
expected to be expended during 1999.
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Financing Activities
On March 3, 1999, the company's board of directors declared an
increased regular quarterly dividend of $.24 per share.
The company has the capacity for long-term borrowings and currently
has available a committed, $1 billion line of credit expiring in May 2002 and an
available committed, $400 line of credit expiring in December 2002. These credit
facilities contain minimum net worth requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes with respect to this item from the
disclosure included in the company's Annual Report on Form 10-K for the year
ended December 31, 1998.
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PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
April 4, 1999
Item 1. Legal Proceedings
Reference is made to Note J, Commitments and Contingencies, to the
Consolidated Financial Statements in Part I, for statements relevant to
activities in the quarter covering certain litigation to which the company is a
party.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10-40 Agreement and Plan of Merger dated May 16, 1999
between General Dynamics Corporation, Tara
Acquisition Corporation and Gulfstream Aerospace
Corporation
Exhibit 10-41 Voting Agreement dated May 16, 1999 between General
Dynamics Corporation and certain stockholders of
Gulfstream Aerospace Corporation
Exhibit 27 Financial Data Schedule
Exhibit 99 Press Release dated May 17, 1999, "General Dynamics to
Acquire Gulfstream in $5.3 billion Stock Deal"
(b) Reports on Form 8-K
On March 5, 1999, the company reported to the Securities and
Exchange Commission under Item 5, Other Events, that on March 2,
1999, the company was notified that the Joint Committee on Taxation
approved the settlement of the company's tax refund claims for
research and experimentation tax credits for 1987 through 1989.
Included in the filing was a copy of the company's press release of
same subject dated March 2, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL DYNAMICS CORPORATION
by /s/John W. Schwartz
-----------------------------------------
John W. Schwartz
Vice President and Controller
(Authorized Officer and Chief Accounting Officer)
Dated: May 18, 1999
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