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 3 July 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3671
GENERAL DYNAMICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-1673581
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3190 Fairview Park Drive, 22042-4523
Falls Church, Virginia (Zip Code)
(Address of principal executive offices)
(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 - 31 July 1994 63,080,147
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GENERAL DYNAMICS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements
Unaudited Consolidated Balance Sheet 3
Unaudited Consolidated Statement of Earnings 4 & 5
Unaudited Consolidated Statement of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURE 18
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PART I
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
3 July 31 December
ASSETS 1994 1993
CURRENT ASSETS:
Cash and equivalents $ 129 $ 94
Marketable securities 859 491
988 585
Accounts receivable 77 62
Contracts in process 352 442
Net assets of discontinued operations 101 303
Other current assets 270 262
Total Current Assets 1,788 1,654
NONCURRENT ASSETS:
Leases receivable - finance operations 229 236
Real estate held for development 129 142
Property, plant and equipment, net 286 302
Other assets 281 301
Total Noncurrent Assets 925 981
$ 2,713 $ 2,635
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 525 $ 566
Other current liabilities 208 209
Total Current Liabilities 733 775
NONCURRENT LIABILITIES:
Long-term debt 40 38
Long-term debt - finance operations 151 163
Other liabilities 539 482
Total Noncurrent Liabilities 730 683
SHAREHOLDERS' EQUITY:
Common stock, including surplus
(shares issued 84,387,336) 86 92
Retained earnings 1,791 1,709
Treasury stock (shares held 1994, 21,312,313;
1993, 21,823,824) (627) (624)
Total Shareholders' Equity 1,250 1,177
$ 2,713 $ 2,635
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
3 July 4 July
1994 1993
NET SALES $ 820 $ 774
OPERATING COSTS AND EXPENSES 738 709
OPERATING EARNINGS 82 65
Interest, net 3 12
Other income, net 1 19
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 86 96
Provision for income taxes 30 33
EARNINGS FROM CONTINUING OPERATIONS 56 63
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Loss from operations - (2)
Gain on disposal 15 -
15 (2)
NET EARNINGS $ 71 $ 61
NET EARNINGS PER SHARE:
Continuing operations $ .88 $ 1.00
Discontinued operations:
Loss from operations - (.03)
Gain on disposal .24 -
$ 1.12 $ .97
WEIGHTED AVERAGE SHARES AND EQUIVALENTS
OUTSTANDING (in millions) 63.5 63.1
DIVIDENDS PER SHARE (excluding
special distribution) $ .35 $ .20
SUPPLEMENTAL INFORMATION:
General and administrative expenses included
in operating costs and expenses $ 45 $ 63
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)
Six Months Ended
3 July 4 July
1994 1993
NET SALES $ 1,620 $ 1,632
OPERATING COSTS AND EXPENSES 1,458 1,477
OPERATING EARNINGS 162 155
Interest, net 6 22
Other income, net 3 20
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 171 197
Provision for income taxes 60 67
EARNINGS FROM CONTINUING OPERATIONS 111 130
DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Loss from operations - (27)
Gain on disposal 15 645
15 618
NET EARNINGS $ 126 $ 748
NET EARNINGS PER SHARE:
Continuing operations $ 1.74 $ 2.06
Discontinued operations:
Loss from operations - (.43)
Gain on disposal .24 10.22
$ 1.98 $ 11.85
WEIGHTED AVERAGE SHARES AND EQUIVALENTS
OUTSTANDING (in millions) 63.6 63.1
DIVIDENDS PER SHARE (excluding
special distribution) $ .70 $ .40
SUPPLEMENTAL INFORMATION:
General and administrative expenses included
in operating costs and expenses $ 103 $ 127
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 CASH FLOWS
(UNAUDITED)
(Dollars in millions)
Six Months Ended
3 July 4 July
1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 126 $ 748
Adjustments to reconcile net earnings to net
cash provided (used) by continuing operations -
Discontinued operations (15) (618)
Depreciation, depletion and amortization 20 29
Decrease (Increase) in --
Marketable securities (318) -
Accounts receivable (15) (12)
Contracts in process 90 55
Leases receivable - finance operations 7 6
Other current assets (10) 1
Increase (Decrease) in -
Accounts payable and other
current liabilities (53) (71)
Current income taxes 18 149
Deferred income taxes (8) (82)
Other, net (23) 5
Net cash provided (used) by
continuing operations (181) 210
Net cash provided (used) by
discontinued operations 17 (324)
Net Cash Used by Operating Activities (164) (114)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations 259 1,534
Proceeds from sale of investments
and other assets 4 23
Marketable securities, net - (124)
Purchases of investments - (30)
Capital expenditures (10) (7)
Net Cash Provided by Investing Activities 253 1,396
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (40) (24)
Repurchase of stock (19) -
Repayment of long-term debt -
finance operations (12) (5)
Repayment of long-term debt (1) (100)
Special distributions - (612)
Proceeds from option exercises 14 5
Other 4 -
Net Cash Used by Financing Activities (54) (736)
NET INCREASE IN CASH AND EQUIVALENTS 35 546
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 94 511
CASH AND EQUIVALENTS AT END OF PERIOD $ 129 $ 1,057
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAYMENTS FOR:
Federal income taxes $ 71 $ 170
Interest 10 17
The accompanying Notes to Unaudited Consolidated Financial Statements are
an integral part of this statement.
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GENERAL DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The unaudited consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, the Company believes that the
disclosures included herein are adequate to make the information presented
not misleading. Operating results for the three and six month periods ended
3 July 1994 are not necessarily indicative of the results that may be
expected for the year ended 31 December 1994. These unaudited consolidated
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended 31 December 1993.
Effective 1 January 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as described in Note F.
In the opinion of the Company's management, the unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals, except for the adjustments discussed in Notes B and C
and the Results of Operations section of the Management's Discussion and
Analysis of the Results of Operations and Financial Condition) necessary for
a fair statement of the results for the three and six month periods ended
3 July 1994 and 4 July 1993.
(B) Discontinued Operations
The operating results of discontinued operations are summarized below:
Second Quarter First Half
1994 1993 1994 1993
Net sales $ 222 $ 218 $ 378 $ 851
Loss before income taxes $ - $ (2) $ - $ (39)
Credit for income taxes - - - (12)
Net loss $ - $ (2) $ - $ (27)
Per Share $ - $ (.03) $ - $ (.43)
On 1 July 1994, the Company and McDonnell Douglas Corporation
(McDonnell Douglas) announced an agreement to terminate their contract for
the production of fuselage sections for the MD-11 jetliner. Under the
agreement, the responsibility for production of fuselages will be
transferred from the Company's Commercial Aircraft Subcontracting business
to McDonnell Douglas with the delivery of the 166th shipset in early 1996.
Also as part of the agreement, all previous unnegotiated contract changes
were settled. The agreement is not expected to have a significant impact
on the Company's financial condition or results of operations. The
Company's Commercial Aircraft Subcontracting business will seek no new
business and will cease operations after the completion of its obligations
under this agreement.
On 1 May 1994, the Company closed the sale of its Space Launch Systems
business to Martin Marietta Corporation for $209 in cash. The Company
recognized a gain on disposal of $15, or $ .24 per share, net of income
taxes of $8.
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During the first quarter of 1994, the Company closed the sales of the
lime, brick and a portion of the concrete pipe operations of its Material
Service business for a total of $50 in cash. No gains or losses were
recognized on the sales.
During the first quarter of 1993, the Company closed the sale of its
Tactical Military Aircraft business to Lockheed Corporation for $1,525 in
cash. The Company recognized a gain on disposal of $645, or $10.22 per
share, net of income taxes of $331. Any liabilities associated with the
terminated A-12 aircraft program (see discussion at Note I ) have been
retained by the Company.
The Company has recorded liabilities for contingencies retained by the
Company as part of the aforementioned transactions. These liabilities
include retiree medical obligations prior to the adoption of SFAS 106,
environmental, legal and the estimated cost of facility dispositions and
other restructuring actions contemplated as a result of the Company's
decision to sell these businesses. These liabilities are included in other
noncurrent liabilities on the Consolidated Balance Sheet.
The net assets of discontinued operations are summarized below:
3 July 31 December
1994 1993
Current assets $ 104 $ 1,429
Noncurrent assets 131 185
Total Assets $ 235 $ 1,614
Current liabilities $ 93 $ 1,280
Noncurrent liabilities 41 31
Total Liabilities $ 134 $ 1,311
Net Assets $ 101 $ 303
(C) Corporate Office Reorganization
In March 1993, the Company announced a reorganization of its Corporate
Office as a result of the contraction of the Company. The reorganization
included changes in senior management and reductions in corporate staff.
During the first quarter of 1993, the Company recognized the estimated total
cost of these actions of approximately $75 (before tax). As a substantial
amount of these costs are directly related to the Company's decision to sell
certain businesses, they were charged to previously established liabilities
for discontinued operations. Consequently, these actions did not have a
material impact on the Company's results of operations.
(D) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
3 July 31 December
1994 1993
Accounts payable $ 135 $ 157
Accrued workers' compensation 166 174
Accrued salaries and wages 59 71
Other 165 164
Accounts Payable and Accrued Expenses $ 525 $ 566
A-12 termination liability and legal fees $ 45 $ 57
SINCGARS loss provision 28 48
Other 135 104
Other Current Liabilities $ 208 $ 209
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3 July 31 December
1994 1993
Accrued costs on disposed businesses $ 330 $ 239
Coal mining related liabilities 70 74
Other 139 169
Other Liabilities $ 539 $ 482
(E) Income Taxes
The Company had a net deferred tax asset of $328 and $320 at 3 July
1994 and 31 December 1993, the current portion of which was $205 and $214,
respectively, and was included in other current assets on the Consolidated
Balance Sheet. No valuation allowance was required for the Company's
deferred tax assets as of 3 July 1994 and 31 December 1993.
As previously reported, certain issues related to the Internal Revenue
Service (IRS) audit of the Company's consolidated Federal income tax returns
for the years 1977 through 1986 were not resolved at the administrative
level. Accordingly, in July 1994, the Company received from the IRS a
Statutory Notice of Deficiency which the Company will contest in the U.S.
Tax Court. The resolution of the Tax Court litigation is not expected to
have a material impact on the Company's financial condition or results of
operations.
(F) Investment Accounting
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," as of 1 January 1994. The Company
determined all of its investments currently held in debt and equity
securities are trading securities as defined by SFAS 115 and as such are
reported at fair value. Unrealized holding gains and losses (the adjustment
to fair value) recognized in earnings in accordance with SFAS 115 in 1994
were not significant. As SFAS 115 requires trading securities to be
classified as current assets, investments in preferred stock classified as
noncurrent assets at 31 December 1993 are now classified as marketable
securities. In addition, SFAS 115 requires sales and purchases of trading
securities to be included in Cash Flows From Operating Activities. The net
change in marketable securities had previously been reported as a component
of Cash Flows From Investing Activities.
(G) Earnings Per Share
Earnings per share are computed from the weighted average number of
common shares and equivalents outstanding during each period. Common share
equivalents are attributable primarily to outstanding stock options.
Because there is not a material difference between primary and fully diluted
earnings per share, only fully diluted earnings per share are presented.
On 4 March 1994, the Company's Board of Directors authorized a two-
for-one stock split effected in the form of a 100% stock dividend which was
distributed on 11 April 1994 to shareholders of record on 21 March 1994.
Accordingly, all references in the financial statements to number of shares
and per share amounts have been restated to give retroactive recognition to
the stock split for all periods presented.
(H) Contingencies
Litigation
On 7 January 1991, the U.S. Navy terminated for default a contract
with the Company and McDonnell Douglas for the full-scale development of the
U.S. Navy's A-12 aircraft. The U.S. Navy has demanded repayment of
unliquidated progress payments. The Company and McDonnell Douglas have a
claim pending against the U.S. Government in the Court of Federal Claims
(see Note I).
On 8 March 1993, a class action lawsuit, Berchin et al vs. General
Dynamics Corporation and William A. Anders, was filed in the Federal
District Court for the Southern District of New York. The suit alleges
violations of various provisions of the Federal Securities Laws, fraud,
negligent misrepresentation,
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and breach of fiduciary duty by the defendants with regard to disclosures
made, or omitted, in the Company's tender offer completed in July 1992
relating to the subsequent divestiture of core businesses. The Company
believes there is no liability in connection with this matter and intends
to defend itself vigorously.
The Company is also a defendant in other lawsuits and claims and in
other investigations of varying nature. The Company believes these
proceedings, in the aggregate, are not material to the Company's financial
condition or results of operations.
Environmental
The Company is directly or indirectly involved in sixteen Superfund
sites in which the Company, along with other major U.S. corporations, has
been designated a potentially responsible party (PRP) by the U.S.
Environmental Protection Agency (EPA) or a state environmental agency with
respect to past shipments of hazardous waste to sites now requiring
environmental cleanup.
Chatham Brothers Barrel Yard is a hazardous waste disposal site
located near Escondido, California. The California Department of Toxic
Substances Control is overseeing a cleanup of the site pursuant to
California state laws and is seeking to recover its costs from a variety of
PRPs, including the Company and several other major corporations in the
aerospace and petroleum industries. Under the California equivalent of the
federal Superfund law, all of the PRPs are jointly and severally liable to
the State of California for these costs.
The Casmalia Resources site is a former industrial waste disposal
facility located near Santa Maria, California. Since March 1993, the
Company and a large number of other PRPs have been negotiating with the EPA
to fund and perform an environmental cleanup of this site.
The Company and the Corps of Engineers are negotiating over a Sec. 404
permit for the quarrying of possible wetlands property at Romeoville,
Illinois. Limited operations are continuing at the site while the parties
agree on the scope of future activities. The Corps of Engineers has
indicated that restoration work may be required for past unpermitted
activities.
The Company formerly had a lime plant at Thornton, Illinois, on which
site stands a large pile of lime flue dust, for which closure must be
effected in accordance with applicable state regulations. The Company is
performing ground water testing and exploring alternatives for closing the
pile.
The Company is also involved in the cleanup and remediation of various
conditions at sites it currently or formerly owned or operated, many of
which were sites used in the conduct of the Company's government contracting
business. The Company believes that a portion of these costs are
recoverable under government contracts.
The Company has defenses to liability in some cases, and in other
cases the Company is acting to mitigate and minimize its potential
liability. The Company is participating in steering committees and taking
other actions to establish its percentage liability on an allocated and
sharing basis with other PRPs. Although the Company's involvement and the
extent of the remediation varies from site to site, the Company believes,
based upon an analysis of each site, that its liability will not exceed
the recorded liability for the sites by an amount deemed material to the
financial condition or results of operations of the Company.
Other
The Company was contingently liable for debt and lease guarantees and
other arrangements aggregating up to a maximum of approximately $105 and
$160 at 3 July 1994 and 31 December 1993, respectively.
In connection with the sale of defense businesses, the Company remains
contingently liable for performance by the purchaser of these businesses
under contracts entered into with the U.S. Government. The Company believes
the probability of any liability arising from this matter is remote. In
addition,
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the sales agreements contain certain representations and warranties under
which the purchasers have certain specified periods of time to assert claims
against the Company. Some claims have been asserted which are material in
amount, but the Company does not believe that its liability as a result of
these claims will exceed the liabilities recorded at the time of the sales.
(I) Termination of A-12 Aircraft Contract
As stated above, on 7 January 1991, the U.S. Navy terminated the
Company's A-12 aircraft contract for default. The Company's A-12 contract
was a fixed-price incentive contract for the full-scale development and
initial production of the Navy's new carrier-based Advanced Tactical
Aircraft. Both the Company and McDonnell Douglas were parties to the
contract with the U.S. Navy and each had responsibility to the U.S. Navy for
performance under the contract. Also, the Company and McDonnell Douglas are
parties to a teaming agreement in which profits and losses under the
contract are shared equally. The Company and McDonnell Douglas remain
jointly and severally liable to the U.S. Navy under the A-12 contract for
any potential liabilities arising out of the termination.
In February 1991, the U.S. Navy demanded repayment of unliquidated
progress payments in the approximate amount of $1,400 from the Company and
McDonnell Douglas, but agreed to defer collection pending resolution of the
termination dispute. Terms of the deferment agreement include a requirement
for the contractors to maintain sufficient assets or available credit to pay
the unliquidated progress payments plus any accrued interest. The Company
and McDonnell Douglas are also required to notify the U.S. Navy prior to any
special distributions to shareholders or repurchase of a material amount of
its stock. Pursuant to a Court order, the U.S. Navy was precluded from
terminating the deferment agreement prior to 21 July 1994. Even though the
date has passed, the Company does not believe the U.S. Navy will seek to
terminate the deferment agreement.
The Company and McDonnell Douglas filed a complaint on 7 June 1991 in
the U.S. Court of Federal Claims to contest the default termination. The
suit, in effect, seeks to convert the termination for default to a
termination for convenience of the U.S. Government, and seeks other legal
and equitable relief. In the aggregate, the Company and McDonnell Douglas
seek to recover payment for all costs incurred in the A-12 program and its
termination, including interest. The total amount sought, as updated
through the second quarter of 1994, is approximately $2 billion, over and
above amounts previously received from the U.S. Navy.
The trial on Count XVII of the complaint, which relates to the
propriety of the termination for default, was concluded in October 1993.
In December 1993, the Court issued preliminary findings of fact which appear
to favor the Company and McDonnell Douglas. A Trial on Count I, which
alleges that the Department of Defense failed to make a risk reduction
determination before entering into a fixed price development contract as
required by Sec. 8118 of the 1988 Defense Appropriations Act, concluded in
June 1994. The Company believes that ultimately it will be found not to
have been in default of the contract.
As a result of the termination, the Company has fully reserved the
contracts in process balance associated with the A-12 program and has
recognized the Company's estimated termination liabilities. The Company has
neither recognized any claim revenue from the U.S. Navy, nor any potential
return of unliquidated progress payments to the U.S. Navy.
In the unlikely event that the Company and McDonnell Douglas are
ultimately found to be in default of the A-12 contract, additional losses
of approximately $650 (before tax) may be recognized by the Company. This
estimated additional loss is based upon certain assumptions which are
periodically reviewed by the Company and McDonnell Douglas. This estimate
does not include interest that may ultimately be payable to the U.S.
Government as provided by the deferment agreement.
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GENERAL DYNAMICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
3 July 1994
(Dollars in millions, except per share amounts)
BUSINESS ENVIRONMENT
The Company's primary business has historically been supplying weapons
systems to the U.S. Government. In 1990, U.S. defense budgets, which had
been declining since 1985, began falling sharply in response to the end of
the Cold War. Management realized early on that the budget declines were
structural in that, for the foreseeable future, there would be fewer new
weapons systems required which would result in excess capacity in the
industry. Accordingly, Management believed there would be a necessary
contraction and consolidation of the U.S. defense industry. To date,
Management's analysis of these developments has proven to be true as
evidenced by declines, in real terms, in the defense budget and by the
number of industry combinations in recent years.
As an early response to this changing business environment and the
Company's then weakened financial position, Management initiated in 1991 a
program to improve business performance, restore financial strength,
substantially refocus corporate strategy and, through incentives, reorient
the corporate culture towards shareholder value. This program required the
Company's major businesses to be number one or number two in their markets
and have "critical mass" - the appropriate size to retain key capabilities
and ensure economies of scale. Management sought to have its businesses
meet these criteria either within the Company or as part of other companies
through mergers, joint ventures, acquisitions, or sales of businesses if
necessary. Management also decided to sell peripheral businesses whenever
appropriately valued transactions could be negotiated.
To accomplish this program, the Company strengthened certain of its
defense-related businesses through their sale to other companies, the most
recent being the sale of its Space Launch Systems business to Martin
Marietta Corporation. In addition, the Company's continuing operations are
demonstrating improved profitability, productivity and cash flows. These
steps restored the Company's financial strength permitting the repayment of
approximately $600 in debt, a recapitalization effected by the purchase of
$960 of the Company's common stock through a tender offer, and the tax-
advantaged distribution to shareholders of $1,531 pursuant to the Company's
formal plan of contraction. Even after these actions, the Company had a
cash and marketable securities balance of $988 at 3 July 1994.
The Company's principal continuing operations - Nuclear Submarines and
Armored Vehicles - have been identified as critical to the U.S. Defense
Industrial Base by the Department of Defense (DoD). Programs are being
implemented by the DoD to help preserve their key capabilities, although at
significantly reduced procurement rates. Accordingly, in the absence of
significant changes in world political and economic conditions, the Company
is seeking to supplement volumes in both businesses. Additional volume
could come from expanded involvement in overhaul, upgrade and modification
work. Management is also seeking to broaden its domestic base of armored
vehicle and related electronic systems integration programs, as well as to
further expand the export of these goods and services.
Going forward, Management is continuing to focus on shareholder value
and is aggressively re-engineering the cost structures of all operations to
enhance their competitive positions by creating highly efficient businesses
capable of operating profitably at significantly lower volumes.
Accordingly, the Company continues to explore ways to utilize its financial
capacity to strengthen continuing operations through both internal and
external investments. In addition, Management is considering the benefits
of corporate business combinations and financial restructuring options to
further enhance the value of the Company.
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RESULTS OF OPERATIONS
The following table sets forth the Net Sales and Operating Earnings
by business segment for the three and six month periods ending 3 July 1994
and 4 July 1993:
Three Month Period Six Month Period
Inc/ Inc/
1994 1993 (Dec) 1994 1993 (Dec)
NET SALES:
Nuclear
Submarines $ 441 $ 431 $ 10 $ 884 $ 881 $ 3
Armored
Vehicles 328 296 32 635 657 (22)
Other 51 47 4 101 94 7
$ 820 $ 774 $ 46 $1,620 $1,632 $ (12)
OPERATING EARNINGS:
Nuclear
Submarines $ 46 $ 30 $ 16 $ 92 $ 60 $ 32
Armored
Vehicles 34 31 3 66 89 (23)
Other 2 4 (2) 4 6 (2)
$ 82 $ 65 $ 17 $ 162 $ 155 $ 7
NUCLEAR SUBMARINES
Operating earnings increased during the three and six month periods
due to increased earnings on all three construction programs. Cost re-
engineering efforts allowed the Company to increase the earnings rates on
the SSN 688 and Trident programs and begin earnings recognition on the
Seawolf program in the fourth quarter of 1993. The Company further
increased the earnings rates on the SSN 688 and Trident programs in the
first quarter of 1994 due to continuing cost reduction efforts. The
aforementioned earnings rate increases, along with increased activity on
engineering contracts, offset a decrease in overall construction activity
resulting in no significant change in net sales for the three and six month
periods.
During the second quarter, the Company delivered one Trident reducing
backlog to three ships, while backlog for the SSN 688 and Seawolf programs
remains at two ships each. All of these ships are currently under
construction with the next scheduled delivery to be an SSN 688 in the fourth
quarter of 1994. Construction revenues from the SSN 688 and Trident
programs continue to decrease as the submarines near completion or are
delivered. Previously, increases in Seawolf construction activity had
largely offset the declines in SSN 688 and Trident construction activity,
but this is not expected to continue going forward.
The Company was encouraged by the DoD "Bottom-Up Review" which
recommended construction of a third Seawolf and the new attack submarine
(NSSN), as well as designated the Company's Electric Boat Division as the
shipyard to preserve the submarine industrial base. In July 1994, the
Company was awarded approximately $130 to begin long-lead activity on a third
Seawolf. These funds were part of the $540 authorized by the U.S. Congress
and approved by the President for the preservation of the submarine industrial
base. The Company expects the DoD to seek the remaining funding for a third
Seawolf next year. Without a third Seawolf construction contract and other
related government business, the Company's current backlog is insufficient to
sustain operation of its facilities until construction begins on the NSSN.
In August 1994, the Defense Acquisition Board, which approves acquisition
strategy for the DoD, approved development of the NSSN. Numerous steps,
including Congressional budgetary approval, remain before the award of a
construction contract, which is not expected until near the end of this
decade.
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ARMORED VEHICLES
Net sales and operating earnings increased for the three month period
due to nonrecurring activity on various contracts in 1994. This activity
was offset for the six month period by the completion of the "Fox" Nuclear,
Biological and Chemical Reconnaissance vehicle program in the fourth quarter
of 1993 and reduced production levels on the Egyptian Coproduction program.
Net sales and operating earnings decreased for the six month period due to
the absence of nonrecurring revenue recognized in the first quarter of 1993.
The nonrecurring revenue, which totaled approximately $24, related primarily
to the recognition of earnings on the Egyptian Tank Plant contract and
various completed engineering contracts.
The Company is currently producing M1A2 tanks for Saudi Arabia and
Kuwait. Final delivery is expected in the fourth quarter of this year to
Saudi Arabia and in the fourth quarter of 1995 to Kuwait. Long-lead
activity began in 1994 on the U.S. Government's M1A2 upgrade program, with
production expected to begin later this year. Although this program is
projected to run through the turn of the century, the procurement rate is
expected to be significantly less than that of previous domestic tank
production programs. Based on the Company's existing orders and absent an
increase in the DoD's current procurement rate, the Company will not be able
to sustain its current level of M1 revenues if additional foreign orders are
not received.
On 22 July 1994, the Company and its employees represented by the
Land Systems Division United Auto Workers Union (UAW) reached a settlement
on a new collective bargaining contract. The Company anticipates that this
new contract will result in an improved competitive position. The
settlement followed a five week strike during which the Company continued
operations with its non-union work force and vendors in accordance with its
business continuation plan. Accordingly, the strike did not have a
significant impact on the Company's financial condition or results of
operations in the second quarter, nor is it expected to in the third
quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased for the three and six
month periods due primarily to a reduction in the provision for state and
local income taxes. State and local income taxes, which are allocable to
U.S. Government contracts, were significantly higher in 1993 as a result of
the gain on the disposal of the Tactical Military Aircraft business.
INTEREST, NET
Interest income decreased for the three and six month periods due
primarily to the significant decrease in cash and marketable securities
since the first quarter of 1993 resulting from the payment of approximately
$1.5 billion for the three special distributions to shareholders during
1993.
OTHER INCOME, NET
Other income decreased for the three and six month periods due
primarily to the absence a $14 gain recognized in the second quarter of 1993
related to the sale of the information technology operations of the
Company's Data Systems Division. The gain was originally deferred due to
the significant continuing involvement in the use of the assets sold by the
Company's businesses. However, as certain of these businesses were sold
and, correspondingly, the continuing involvement diminished, the Company
determined that a portion of the gain should be recognized.
ACCOUNTING CHANGE
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," as of 1 January 1994. Accordingly, the
Company determined all of its investments currently held in debt and equity
securities are trading securities as defined by SFAS 115 and as such are
reported at
<PAGE>
fair value (see Note F to the Consolidated Financial Statements for further
discussion). The adoption of SFAS 115 did not have a significant impact on
the Company's financial condition or results of operations.
DISCONTINUED OPERATIONS
Discontinued operations reported no earnings for the three and six
month periods ended 3 July 1994 compared to losses of $2, or $.03 per share,
and $27, or $.43, respectively, for the comparable periods of 1993. The
increase in earnings for the six month period is due primarily to the
absence of the loss recognized by the Company's Space Launch Systems
business in the first quarter of 1993. No additional losses from
operations are anticipated prior to the disposal of the remaining
discontinued operations.
On 1 July 1994, the Company and McDonnell Douglas Corporation
(McDonnell Douglas) announced an agreement to terminate their contract for
the production of fuselage sections for the MD-11 jetliner. Under the
agreement, the responsibility for production of fuselages will be
transferred from the Company's Commercial Aircraft Subcontracting business
to McDonnell Douglas with the delivery of the 166th shipset in early 1996.
Also as part of the agreement, all previous unnegotiated contract changes
were settled. The agreement is not expected to have a significant impact
on the Company's financial condition or results of operations. The
Company's Commercial Aircraft Subcontracting business will seek no new
business and will cease operations after the completion of its obligations
under the agreement.
On 1 May 1994, the Company closed the sale of its Space Launch Systems
business to Martin Marietta Corporation and recognized a gain on disposal
in the second quarter of $15, or $.24 per share, net of income taxes of $8.
In the first quarter of 1994, the Company completed the sales of the lime,
brick and a portion of the concrete pipe operations of its Material Service
business. No gains or losses were recognized on the sales.
In March 1993, the Company completed the sale of its Tactical Military
Aircraft business to Lockheed Corporation and recognized a gain on disposal
of $645, or $10.22 per share, net of income taxes of $331.
EARNINGS PER SHARE
On 4 March 1994, the Company's Board of Directors authorized a two-
for-one stock split effected in the form of a 100% stock dividend.
Accordingly, all references to number of shares and per share amounts have
been restated to give retroactive recognition to the stock split for all
periods presented.
FINANCIAL CONDITION
OPERATING ACTIVITIES
Net cash provided by continuing operations decreased year over year
due primarily to the change in classification of the net sales and purchases
of marketable securities. As previously stated, the Company adopted SFAS
115 as of 1 January 1994. As defined in SFAS 115, the Company has
determined its current investments in marketable securities are trading
securities and, as such, the net change in marketable securities (excluding
the reclassification of investments in preferred stock) is included in Cash
Flows From Operating Activities on the 1994 Consolidated Statement of Cash
Flows. Prior to the adoption of SFAS 115, the net sales and purchases of
marketable securities were reported as a component of Cash Flows From
Investing Activities. Also contributing to the decrease year over year, is
the net impact of option exercises in 1994, including payment of previously
deferred compensation and related withholding taxes.
<PAGE>
For purposes of preparing the Consolidated Statement of Cash Flows,
Federal income tax payments are allocated between continuing and
discontinued operations based on the portion of taxable income attributed
to each. Net cash provided by continuing operations includes $50 of
allocated tax payments in 1994, while no tax payments were allocated to
continuing operations during the first six months of 1993.
As previously reported, the Company's A-12 aircraft contract was
terminated for default by the U.S. Navy in January 1991. In February 1991,
the U.S. Navy demanded repayment of the unliquidated progress payments made
under the contract, but agreed to defer collection pending resolution of the
termination dispute, which is in litigation. For further discussion of the
A-12 termination and terms of the deferment agreement, see Note I to the
Consolidated Financial Statements.
For a discussion of environmental matters and other contingencies, see
Note H to the Consolidated Financial Statements. The Company does not deem
its liability, in the aggregate, with respect to these matters to be
material to the Company's financial condition or results of operations.
Included in the net cash provided by discontinued operations on the
Consolidated Statement of Cash Flows are the investing and financing
activities of the discontinued businesses, as well as an allocable portion
of the Company's Federal income tax payments, which in 1993 included
approximately $180 related to the gain on disposal of the Company's Tactical
Military Aircraft business. Net cash provided by discontinued operations
also increased year over year due to a decrease in payments for disposition
related liabilities.
In accordance with the terms of the sales agreement, the Company paid
Martin Marietta Corporation $48 in August 1994 representing the change in
working capital of the Company's Space Launch Systems business during the
period prior to the close. This payment reflects the positive cash flow of
the Space Launch Systems business during the period due primarily to the
customer deposits received in the first quarter of 1994, which also
contributed to the year over year increase in net cash provided by
discontinued operations.
INVESTING ACTIVITIES
As previously discussed, the Company sold its Tactical Military
Aircraft business to Lockheed Corporation for $1,525 in cash in March 1993.
In addition, the Company received $50 in March 1994 from the sales of the
lime, brick and a portion of the concrete pipe operations of its Material
Service business and $209 in May 1994 from the sale of its Space Launch
Systems business to Martin Marietta Corporation. The proceeds from these
transactions are reported as proceeds from sale of discontinued operations
in the Consolidated Statement of Cash Flows.
FINANCING ACTIVITIES
The Company's Board of Directors increased the regular quarterly
dividend on the Company's common stock from $0.20 to $0.30 per share and
from $0.30 to $0.35 per share in September 1993 and March 1994,
respectively. These increases reflect the Board's confidence in the
sustainability of strong cash flows generated by the Company's continuing
businesses.
During the second quarter of 1994, the Company repurchased
approximately 450,000 shares of its stock on the open market for a total of
$19. As previously reported, the Company made a special distribution to
shareholders of $10 per share in April 1993 and redeemed the entire series
of 9 3/8% Notes which had a face value of $100 in May 1993.
The Company expects to generate sufficient funds from operations to
meet both its short and long-term liquidity needs. In addition, the Company
has the capacity for long-term borrowings and currently has a committed,
short-term $850 line of credit. The line of credit expires in May 1995 at
which time the Company anticipates renewing the line or replacing it.
<PAGE>
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
3 July 1994
Item 1. Legal Proceedings
Reference is made to Note H, Contingencies, which is incorporated
herein by reference, for a statement relevant to activities in the quarter
covering certain litigation to which the Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company, for which
proxies were solicited pursuant to Regulation 14, was held
on 4 May 1994.
(b) & (c) A brief description of each matter voted upon and the number
of votes cast, adjusted to reflect the two-for-one stock
split effected in the form of a 100% stock dividend
distributed on 11 April 1994 to shareholders of record on 21
March 1994, are as follows:
MATTER VOTES CAST
For Against Abstain Non-Votes
Election of Directors:
Carlucci, F.C. 54,396,216 377,680
Chabraja, N.D. 54,596,114 177,782
Crowe, W.J. 54,574,312 199,584
Crown, J.S. 54,585,728 188,168
Crown, L. 54,584,324 189,572
Goodman, C.H. 54,603,394 170,502
Mellor, J.R. 54,592,926 180,970
Puckett, A.E. 54,600,792 173,104
Rogers, B.W. 54,597,364 176,532
Selection of
Independent
Auditors 54,415,946 241,984 115,966
Shareholder Proposal Regarding:
Composition
of Board 7,513,484 38,888,274 1,405,792 6,966,346
Economic
Conversion 2,268,672 43,027,720 2,511,158 6,966,346
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K
None
<PAGE>
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/Michael J. Mancuso
Michael J. Mancuso
Corporate Vice President
and Controller
(Principal Accounting Officer)
Dated 10 August 1994
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<CAPTION>
Exhibit 11, 2nd Quarter 1994
Form 10-Q, Commission File
Number 1-3671
GENERAL DYNAMICS CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
(Dollars in millions, except per share data)
Second Quarter First Half
1994 1993 1994 1993
<S> <C> <C> <C> <C>
NET EARNINGS:
Continuing Operations $ 56 $ 63 $ 111 $ 130
Discontinued Operations:
Loss from operations - (2) - (27)
Gain on disposal 15 - 15 645
$ 71 $ 61 $ 126 $ 748
Weighted average common
shares outstanding 63,165,924 62,135,574 63,072,689 62,053,608
NET EARNINGS PER SHARE - PRIMARY:
Continuing Operations $ .88 $ 1.00 $ 1.74 $ 2.06
Discontinued Operations:
Loss from operations - (.03) - (.43)
Gain on disposal .24 - .24 10.24
$ 1.12 $ .97 $ 1.98 $ 11.87
Common shares from above 63,165,924 62,135,574 63,072,689 62,053,608
Assumed exercise of options
(treasury stock method) 312,432 943,532 499,788 986,152
63,478,356 63,079,106 63,572,477 63,039,760
NET EARNINGS PER SHARE - FULLY DILUTED:
Continuing Operations $ .88 $ 1.00 $ 1.74 $ 2.06
Discontinued Operations:
Loss from operations - (.03) - (.43)
Gain on disposal .24 - .24 10.22
$ 1.12 $ .97 $ 1.98 $ 11.85
Common shares from above 63,165,924 62,135,574 63,072,689 62,053,608
Assumed exercise of options
(treasury stock method) 312,412 1,012,730 500,163 1,071,598
63,478,336 63,148,304 63,572,852 63,125,206
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