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 June 30, 1996
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 - July 28, 1996 63,028,555
<PAGE>
GENERAL DYNAMICS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Earnings 3 and 4
Consolidated Statement of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 4 - Submission of Matters to a Votes
of Security Holders 18
Item 6 - Exhibits and Reports on Form 8-K 19
SIGNATURE 19
<PAGE>
PART I
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
June 30 December 31
ASSETS 1996 1995
CURRENT ASSETS:
Cash and equivalents $ 131 $ 215
Marketable securities 641 880
772 1,095
Accounts receivable 143 105
Contracts in process 494 567
Other current assets 332 246
Total Current Assets 1,741 2,013
NONCURRENT ASSETS:
Marketable securities 340 -
Leases receivable - finance operations 209 213
Real estate held for development 144 136
Property, plant and equipment, net 470 398
Other assets 354 404
Total Noncurrent Assets 1,517 1,151
$3,258 $3,164
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 109 $ 130
Other current liabilities 754 729
Total Current Liabilities 863 859
NONCURRENT LIABILITIES:
Long-term debt 38 38
Long-term debt - finance operations 127 132
Other liabilities 589 568
Commitments and contingencies (See Note H)
Total Noncurrent Liabilities 754 738
SHAREHOLDERS' EQUITY:
Common stock, including surplus
(shares issued 84,387,336) 105 98
Retained earnings 2,167 2,087
Treasury stock (shares held 1996,
21,021,717; 1995, 21,141,961) (632) (625)
Unrealized gain on investments 1 7
Total Shareholders' Equity 1,641 1,567
$3,258 $3,164
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
Three Months Ended
June 30 July 2
1996 1995
NET SALES $ 930 $ 703
OPERATING COSTS AND EXPENSES 841 627
OPERATING EARNINGS 89 76
Interest, net 13 15
Other income, net - 2
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 102 93
Provision for income taxes 35 32
EARNINGS FROM CONTINUING OPERATIONS 67 61
DISCONTINUED OPERATIONS, NET OF INCOME TAXES
Earnings from operations - 13
Gain on disposal - 8
- 21
NET EARNINGS $ 67 $ 82
NET EARNINGS PER SHARE:
Continuing operations $ 1.06 $ .97
Discontinued operations:
Earnings from operations - .20
Gain on disposal - .13
$ 1.06 $ 1.30
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions) 63.3 63.0
DIVIDENDS PER SHARE $ .41 $ .375
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 62 $ 48
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
Six Months Ended
June 30 July 2
1996 1995
NET SALES $ 1,823 $1,456
OPERATING COSTS AND EXPENSES 1,651 1,301
OPERATING EARNINGS 172 155
Interest, net 26 28
Other income, net 2 2
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 200 185
Provision for income taxes 68 64
EARNINGS FROM CONTINUING OPERATIONS 132 121
DISCONTINUED OPERATIONS, NET OF INCOME TAXES
Earnings from operations - 13
Gain on disposal - 8
- 21
NET EARNINGS $ 132 $ 142
NET EARNINGS PER SHARE:
Continuing operations $ 2.09 $ 1.92
Discontinued operations:
Earnings from operations - .20
Gain on disposal - .13
$ 2.09 $ 2.25
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions) 63.2 63.0
DIVIDENDS PER SHARE $ .82 $ .75
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 118 $ 100
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
Six Months Ended
June 30 July 2
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 132 $ 142
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Discontinued operations - (21)
Depreciation, depletion and amortization 29 17
Decrease (Increase) in -
Marketable securities 557 (190)
Accounts receivable (21) 10
Contracts in process 98 59
Leases receivable - finance operations 4 8
Other current assets (14) 17
Increase (Decrease) in -
Accounts payable and other current liabilities (21) (56)
Current income taxes 60 19
Deferred income taxes (41) 25
Other, net (32) (15)
Net cash provided by continuing operations 751 15
Net cash provided (used)
by discontinued operations (51) 14
Net Cash Provided by Operating Activities 700 29
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (671) -
Sales/maturities of marketable securities 14 -
Purchase of Teledyne Vehicle Systems (55) -
Proceeds from sale of assets 22 23
Capital expenditures (39) (14)
Net Cash Provided (Used) by Investing Activities (729) 9
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt
- finance operations 150 -
Repayment of debt - finance operations (150) (4)
Dividends paid (49) (45)
Other (6) -
Net Cash Used by Financing Activities (55) (49)
NET DECREASE IN CASH AND EQUIVALENTS (84) (11)
CASH AND EQUIVALENTS AT
BEGINNING OF PERIOD 215 382
CASH AND EQUIVALENTS AT END OF PERIOD $ 131 $ 371
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for:
Federal income taxes $ 83 $ 16
Interest (including finance operations) 8 10
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
<PAGE>
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 June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. 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, 1995.
The company adopted 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," as of January 1, 1996. 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. The adoption of the standard did not have a material impact on
the company's results of operations or financial condition.
SFAS No. 123, "Accounting for Stock-Based Compensation," 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. The company
has elected, as permitted by the standard, to continue to follow its current
method of accounting for stock options which has no impact on earnings.
In the opinion of the company, the unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair statement of the results for the three and six
month periods ended June 30, 1996 and July 2, 1995.
(B) Marketable Securities
During 1996, the company purchased securities which pursuant to SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," were
classified as available-for-sale. Accordingly, these securities are recorded at
fair value, with unrealized gains and losses (the adjustment to fair value)
charged to a separate component of shareholders' equity. As these securities
have been classified as available-for-sale, their purchases, sales and
maturities are required to be reflected as cash flows from investing activities.
In addition, the portion of these securities with maturities longer than one
year was classified as noncurrent assets. All other securities owned by the
company are classified as trading pursuant to SFAS 115.
<PAGE>
(C) Acquisitions
Effective September 13, 1995, the company purchased the stock of 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. This transaction has been accounted for under the purchase
method of accounting. Operating results of Bath Iron Works have been included
with those of the company from the closing date. Had the acquisition been
completed as of January 1, 1995, net sales, earnings from continuing operations
and net earnings per share from continuing operations on a pro forma basis would
have been $943, $67 and $1.07 per share, respectively, for the three month
period ending July 2, 1995, and $1,939, $132 and $2.10 per share, respectively,
for the six month period ending July 2, 1995.
Effective March 29, 1996, the company purchased the assets of Teledyne
Vehicle Systems (TVS), an operating unit of Teledyne Inc., for approximately $55
in cash. TVS specializes in combat vehicles as well as mobility systems,
suspension technology, and diesel engines for armored vehicle markets worldwide.
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 recorded as intangible assets related to the
TVS product lines and goodwill which are being amortized on a straight line
basis over periods ranging from 25 to 40 years. This allocation was based on
preliminary estimates and may be revised at a later date. The results of TVS are
included with those of the company beginning in the second quarter. Pro forma
results are not presented because the effects of the acquisition are not
material to the company's results of operations or financial condition.
(D) Liabilities
A summary of significant liabilities, by balance sheet caption, follows:
June 30 December 31
1996 1995
Workers' compensation $ 251 $ 233
Retirement benefits 186 199
Salaries and wages 73 74
A-12 termination liability
and legal fees 34 38
Other 210 185
Other Current Liabilities $ 754 $ 729
Accrued costs on disposed businesses $ 271 $ 274
Coal mining related liabilities 73 69
Other 245 225
Other Liabilities $ 589 $ 568
<PAGE>
(E) Deferred Tax Asset
The company had a net deferred tax asset of $250 and $209 at June 30, 1996
and December 31, 1995, the current portion of which was $238 and $120,
respectively, and was included in other current assets on the Consolidated
Balance Sheet. No material valuation allowance was required for the company's
deferred tax assets at June 30, 1996 and December 31, 1995.
(F) 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.
(G) Discontinued Operations
The operating results of discontinued operations are summarized below:
Second Quarter First Half
1996 1995 1996 1995
Net sales $ - $131 $ 28 $221
Earnings before income taxes $ - $ 20 $ - $ 20
Provision for income taxes - 7 - 7
Net earnings $ - $ 13 $ - $ 13
Per Share $ - $.20 $ - $ .20
During the first quarter of 1996, the company's Commercial Aircraft
Subcontracting business ceased operations after the delivery of its final
shipset.
Effective the beginning of the second quarter of 1996, the aggregates
operations of the company's Material Service business were reclassified to
continuing operations. Previously, the company sold the lime, brick, concrete
pipe and ready-mix operations, including eight ready-mix yards in the second
quarter of 1995. As the results of operations and financial condition of
Material Service are not material to the company, prior periods have not been
restated to reflect this reclassification.
(H) Commitments and Contingencies
Litigation
On January 7, 1991, the U.S. Navy terminated for default a contract with
the company and McDonnell Douglas Corporation (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, plus interest. The company and
McDonnell Douglas have a claim pending against the U.S. government in the Court
of Federal Claims (see Note I). In December 1995, the court issued an order
converting the termination for default to a termination for convenience. A
trial on damages has been set for September 1996.
<PAGE>
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 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 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, was recently
settled with the insurers. The company does not expect that these matters will
have a material impact on the company's financial condition or results of
operations.
On July 26, 1996, a jury in Los Angeles County rendered a verdict in favor
of the plaintiffs in the trial of Dolores Blanton and William B. Forti v.
General Dynamics. The plaintiffs, former employees of the company's E-Metrics
subsidiary, claimed they were promised an equity interest in E-Metrics, and were
not compensated when the assets and liabilities were transferred to Hughes
Aircraft Company as part of the sale of the Missile Systems business in 1992.
The company asserted that the decision on equity interests was left to the E-
Metrics board of directors, which never considered the issue. The jury found for
each of the plaintiffs $3.7 million for breach of contract, as well as punitive
damages of $50 million each. The company believes the jury verdict is not
supported by the facts or the applicable law. The company will therefore,
ask the judge to enter judgment for the company notwithstanding the verdict, or,
in the alternative to order a new trial. The company will also ask the trial
judge to exercise his discretion to substantially reduce or eliminate the
punitive damage award. While the company is unable to assess the ultimate
outcome of this matter, management currently believes it will not
have a material impact on its 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 financial
condition or results of operations.
<PAGE>
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
The company was contingently liable for debt and lease guarantees and other
arrangements aggregating up to a maximum of approximately $70 and $85 at June
30, 1996 and December 31, 1995, respectively. During the first quarter, a
nonaffiliate for whom the company has guaranteed debt of approximately $40
disclosed that it anticipated not being in compliance with loan covenants. On
July 2, 1996 this nonaffiliate announced that it had obtained additional bank
financing that is expected to meet all of its capital requirements until its
operations become fully self-sufficient on a cash flow basis.
In connection with the sale of its defense businesses, 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.
(I) Termination of A-12 Program
As stated in Note H, 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.
<PAGE>
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. A trial on Count
XVII of the complaint, which relates to the propriety of the termination for
default, was concluded in October 1993. In December 1994, the court issued an
order vacating the termination for default. On December 19, 1995, following a
trial on the merits, the court issued an order converting the termination for
default to a termination of convenience. In June 1996, the court ruled that it
will not consider a loss adjustment nor profit in deciding the amount of the
contractors' recovery and, therefore, only the amount of incurred costs
remains to be determined. The court indicated that if the parties are unable
to stipulate the amount of incurred costs, the issue will be tried beginning
September 16, 1996.
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 June 30, 1996, is approximately $1.3 billion
plus applicable interest, over and above amounts previously received from the
U.S. Navy. The company has not recognized any claim revenue from the U.S.
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
trial. In the unlikely event that the court's decision converting the
termination to a termination for convenience is reversed on appeal, and the
contractors are ultimately found to be in default of the A-12 contract and are
required to repay all unliquidated progress payments, additional losses of
approximately $675, plus interest, may be recognized by the company. This result
is considered remote.
<PAGE>
GENERAL DYNAMICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
June 30, 1996
(Dollars in millions, except per share amounts)
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 recent years.
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. Effective March
29, 1996, the company purchased the assets of Teledyne Vehicle Systems (TVS), an
operating unit of Teledyne Inc. 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
approximately 25 percent. The operating results of TVS are being reported in
the company's Armored Vehicles segment beginning in the second quarter.
Legislative Developments
Marine Group. For fiscal year 1997 (FY97), the President's budget submission
included $700 of the remaining $800 funding required for the third Seawolf, and
funding for the continued design and long-lead materials for construction of the
first ship of the New Attack Submarine (NSSN) program. Construction of the
third Seawolf provides the level of activity necessary to maintain operation of
all Electric Boat's facilities until construction of the first NSSN begins in
1998. Current Department of Defense (DoD) plans call for a total of 30 ships in
the NSSN program. Congressional directives require that the first four NSSNs be
equally allocated between Electric Boat and its competitor, with competition on
subsequent ships to begin in 2003.
<PAGE>
Also in FY97, the President is requesting funding to complete a two year
procurement of six DDG 51 destroyers, three of which were allocated to the
company in June. Finally, the President's FY97 budget includes additional
research and development funding for the Navy's new arsenal ship, which
represents the potential for additional ship construction for Bath Iron Works.
Funding was previously obtained for the design and construction of the lead ship
in the LPD 17 class amphibious assault ship program which is to be awarded later
in 1996. 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 FY97, the
President is requesting funding for the multi-year contract, which the company
signed in July. This multi-year contract should stabilize domestic tank
production and provide the foundation for further international opportunities.
In June, the company won a competition for the AAAV development program.
Funding was requested for this program, and the company believes there is strong
support in Congress and that it is the Marine Corps' top priority. This
development program is expected to be followed by a multibillion dollar
production program in the next decade. Funding was also requested in the
President's budget for three additional armored vehicle programs in which the
company is participating. The first is a four-year program to upgrade Fox
Nuclear, Biological and Chemical Reconnaissance System vehicles. The second is
the Heavy Assault Bridge which is currently under development and is expected to
enter production late in this decade. The third is the Crusader development
program in which the company is teamed with one other contractor, and which
could lead to a production program worth as much as $13 billion. Additional
funding has also been proposed for the FY97 Single Channel Ground and Airborne
Radio System (SINCGARS) procurement which the Army plans to dual source. The
company was recently awarded a contract for 40% of the third competitive
SINCGARS production bid.
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.
<PAGE>
Backlog
The following table shows the approximate backlog of the company as
calculated at June 30, 1996 and December 31, 1995:
June 30 December 31
1996 1995
Marine Group $ 4,470 $ 3,671
Armored Vehicles 847 959
Other 589 597
Funded Backlog $ 5,906 $ 5,227
Total Backlog $ 9,351 $ 7,386
Funded backlog represents the total estimated remaining sales value of work
that has been appropriated by Congress, and contracted 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.
During the second quarter, the company obtained definitive contracts for the
construction of the third Seawolf submarine, as well as for the design of the
NSSN. These contracts added $1.1 billion and $1.3 billion to total backlog,
respectively. Also during the second quarter, the company received a $400
million firm contract for the construction of one of the three DDG 51 destroyers
which the company was allocated, as discussed above. Subsequent to the end of
the quarter, the company obtained a letter contract for the multiyear upgrade of
M1 tanks. While not reflected in the backlog data reported above, this contract
will add $1.5 billion to the company's total backlog during the third quarter.
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 June 30, 1996 and
July 2, 1995:
Three Month Period Six Month Period
Inc/ Inc/
1996 1995 (Dec) 1996 1995 (Dec)
NET SALES:
Marine Group $ 612 $ 410 $ 202 $1,226 $ 849 $ 377
Armored Vehicles 261 261 - 507 539 (32)
Other 57 32 25 90 68 22
$ 930 $ 703 $ 227 $1,823 $1,456 $ 367
OPERATING EARNINGS:
Marine Group $ 55 $ 47 $ 8 $ 109 $ 96 $ 13
Armored Vehicles 35 35 - 68 71 (3)
Other (1) (6) 5 (5) (12) 7
$ 89 $ 76 $ 13 $ 172 $ 155 $ 17
<PAGE>
Marine Group
Net sales and operating earnings increased during the three and six month
periods due primarily to the acquisition of Bath Iron Works. For a discussion
of the accounting for this transaction and related information, see Note C 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. Also during the three and six month periods, construction activity on
the Trident and Los Angeles class submarine programs decreased, but were offset
by increased engineering and design work on the NSSN and by the increase in the
earnings rate on the Trident program in the second quarter of 1995.
Armored Vehicles
Net sales and operating earnings decreased during the six month period due
primarily to decreased M1 tank production resulting from the delivery of the
final M1A2 tank to Kuwait in the first quarter of 1996. This decrease was
partially offset in the second quarter by the acquisition of TVS.
Other
Net sales increased during the three and six month periods due to the
reclassification of the company's Material Service business to continuing
operations beginning in the second quarter of 1996 (for further discussion see
Note G). Operating earnings increased during the three and six month periods
due primarily to extension of the leases held by the company's Ship Financing
business.
Discontinued Operations
The company reported earnings from discontinued operations of $13 in the
second quarter of 1995. These earnings were attributable primarily to the MD-11
program at the company's Commercial Aircraft Subcontracting business. As
described in Note G, the Commercial Aircraft Subcontracting business ceased
operations in the first quarter of 1996 after the delivery of its final shipset,
and the remaining operations of the company's Material Service business were
reclassified to continuing operations in the second quarter of 1996.
General and Administrative Expenses
General and administrative expenses increased during the three and six
month periods due primarily to the acquisition of Bath Iron Works. However,
general and administrative expenses as a percentage of net sales have decreased
period over period.
<PAGE>
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. The company adopted the provisions of SFAS 121 as of January 1,
1996, which had no material impact on the company's results of operations or
financial condition. 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. The company has elected, as permitted by
the standard, to continue to follow its current method of accounting for stock
options which has no impact on earnings.
Financial Condition
Operating Activities
Net cash provided by continuing operations increased this year over last
year due primarily to the change in the amount the company invested in
marketable securities classified as trading per SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities". Net cash provided by
discontinued operations decreased this year over last year due primarily to the
company's Commercial Aircraft Subcontracting business ceasing operations in
January 1996 and the resulting higher tax payments associated with the delivery
of its final shipset.
For a discussion of environmental matters and other contingencies, see Note
H to the Consolidated Financial Statements. The company's liability, in the
aggregate, with respect to these matters, is not deemed to be material to the
company's financial condition or results of operations.
Investing Activities
As discussed in Note B, the company has purchased available-for-sale
securities in order to favorably affect the performance of its investment
portfolio. Those securities with maturities longer than one year are classified
as noncurrent assets. Although the maturities extend beyond one year, the
securities are still available currently to fund internal and external
investment opportunities.
As previously discussed, the company acquired TVS on March 29, 1996, for
$55 in cash.
Financing Activities
The Title XI Bonds issued by the company's finance operations were retired
in 1996. This retirement was financed by the private placement of new, non-
callable bonds which are also non-recourse to the company. The refinancing has
no material impact on the company's results of operations or financial
condition.
<PAGE>
The company's Board of Directors increased the regular quarterly dividend
on the company's common stock from $0.375 to $0.41 per share in March 1996.
This increase reflects the Board's confidence in the sustainability of the cash
flows generated by the company's continuing operations.
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. As of June 30, 1996, the company had repurchased
approximately 600,000 shares. During July 1996, the company repurchased
approximately 300,000 additional shares.
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.
<PAGE>
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
June 30, 1996
Item 1. Legal Proceedings
Reference is made to Note H, Commitments and 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 May 1, 1996.
(b) & (c) A brief discussion of each matter voted upon and the number of votes
cast is as follows:
Matter Votes Cast
For Against Abstain Non-Votes
Election of Directors:
Carlucci, F.C. 55,757,811 676,988
Chabraja, N.D. 55,378,698 1,056,101
Crown, J.S. 55,828,568 606,231
Crown, L. 55,719,995 714,804
Goodman, C.H. 55,725,429 709,370
Mellor, J.R. 55,732,400 702,399
Sullivan, G.R. 55,743,864 690,935
Trost, C.A.H. 55,714,626 720,173
Selection of Independent
Auditors 56,086,831 204,221 143,747
Shareholders Proposal
Regarding:
Composition of
Board 8,318,065 42,851,077 923,146 4,342,511
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL DYNAMICS CORPORATION
by /s/John W. Schwartz
John W. Schwartz
Staff Vice President and Controller
(Principal Accounting Officer)
Dated August 13, 1996
<TABLE>
Exhibit 11, 2nd Quarter 1996
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
1996 1995 1996 1995
NET EARNINGS:
<CAPTION>
<S> <C> <C> <C> <C>
Continuing Operations $ 67 $ 61 $ 132 $ 121
Discontinued Operations:
Earnings from
operations - 13 - 13
Gain on disposal - 8 - 8
$ 67 $ 82 $ 132 $ 142
Weighted average common
shares outstanding 63,270,592 62,958,300 63,244,234 62,975,885
NET EARNINGS PER SHARE - PRIMARY:
Continuing Operations $ 1.05 $ .97 $ 2.08 $ 1.92
Discontinued Operations:
Earnings from operations - .20 - .20
Gain on disposal - .13 - .13
$ 1.05 $ 1.30 $ 2.08 $ 2.25
Common shares from above 63,270,592 62,958,300 63,244,234 62,975,885
Assumed exercise of options
(treasury stock method) 238,367 201,587 220,145 200,701
63,508,959 63,159,887 63,464,379 63,176,586
NET EARNINGS PER SHARE - FULLY DILUTED:
Continuing Operations $ 1.05 $ .97 $ 2.08 $ 1.92
Discontinued Operations:
Earnings from operations - .20 - .20
Gain on disposal - .13 - .13
$ 1.05 $ 1.30 $ 2.08 $ 2.25
Common shares from above 63,270,592 62,958,300 63,244,234 62,975,885
Assumed exercise of options
(treasury stock method) 239,741 201,587 239,741 200,701
63,510,333 63,159,887 63,483,975 63,176,586
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the General Dynamics
Corporation Consolidated Balance Sheet as of June 30, 1996, and the related
consolidated Statement of Earnings for the six months ended June 30, 1996 and is
qualified in its entirety to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> QTR-2
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 131
<SECURITIES> 641
<RECEIVABLES> 143
<ALLOWANCES> 0
<INVENTORY> 494
<CURRENT-ASSETS> 1741
<PP&E> 1409
<DEPRECIATION> 939
<TOTAL-ASSETS> 3258
<CURRENT-LIABILITIES> 863
<BONDS> 38
<COMMON> 105
0
0
<OTHER-SE> 1536
<TOTAL-LIABILITY-AND-EQUITY> 3258
<SALES> 1823
<TOTAL-REVENUES> 1823
<CGS> 1651
<TOTAL-COSTS> 1651
<OTHER-EXPENSES> -2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 200
<INCOME-TAX> 68
<INCOME-CONTINUING> 132
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 132
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.08
</TABLE>
