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 March 29, 1998
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 Identification
or organization) 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 - April 26, 1998 126,380,243
<PAGE>
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 Comprehensive
Income 4
Consolidated Statement of Cash Flows 5
Notes to Unaudited Consolidated
Financial Statements 6
Item 2 - Management's Discussion and Analysis 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURE 19
<PAGE>
<TABLE>
PART I
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<CAPTION>
<S> <C> <C>
March 29 December 31
1998 1997
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 244 $ 336
Marketable securities 97 105
341 441
Accounts receivable 188 234
Contracts in process 822 702
Other current assets 293 312
Total Current Assets 1,644 1,689
NONCURRENT ASSETS:
Marketable securities 62 -
Leases receivable - finance
operations 193 193
Real estate held for
development 131 128
Property, plant and equipment,
net 630 592
Intangible assets 1,217 1,204
Other assets 268 285
Total Noncurrent Assets 2,501 2,402
$ 4,145 $ 4,091
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt $ 111 $ 108
Accounts payable 220 255
Other current liabilities 921 928
Total Current Liabilities 1,252 1,291
NONCURRENT LIABILITIES:
Long-term debt 157 157
Long-term debt - finance
operations 97 100
Other liabilities 651 628
Commitments and contingencies
(See Note J)
Total Noncurrent Liabilities 905 885
SHAREHOLDERS' EQUITY:
Common stock, including
surplus (shares issued
168,774,672) 236 220
Retained earnings 2,440 2,386
Treasury stock (shares held
1998, 42,498,630;1997,
42,989,118) (687) (691)
Accumulated other
comprehensive income (1) -
Total Shareholders' Equity 1,988 1,915
$ 4,145 $ 4,091
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts) <CAPTION>
<S> <C> <C>
Three Months Ended
March 29 March 30
1998 1997
NET SALES $ 1,154 $ 941
OPERATING COSTS AND EXPENSES 1,030 839
OPERATING EARNINGS 124 102
Interest income, net 1 9
Other income (expense), net (1) (3)
EARNINGS BEFORE INCOME TAXES 124 108
Provision for income taxes 42 37
NET EARNINGS $ 82 $ 71
BASIC AND DILUTED NET EARNINGS PER
SHARE $ 0.65 $ 0.56
DIVIDENDS PER SHARE $ .22 $ .205
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions):
Basic 125.9 126.2
Diluted 126.9 126.9
SUPPLEMENTAL INFORMATION:
General and administrative
expenses included in operating
costs and expenses $ 92 $ 78
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in millions)
<CAPTION>
<S> <C> <C>
Three Months Ended
March 29 March 30
1998 1997
NET EARNINGS $ 82 $ 71
OTHER COMPREHENSIVE INCOME, NET OF
TAX (1) (2)
COMPREHENSIVE INCOME $ 81 $ 69
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement.
</TABLE>
<PAGE>
<TABLE>
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<CAPTION>
<S> <C> <C>
Three Months Ended
March 29 March 30
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 82 $ 71
Adjustments to reconcile net earnings
to net cash provided by continuing
operations -
Depreciation, depletion and
amortization 31 21
Decrease (Increase) in -
Marketable securities (6) (12)
Accounts receivable 46 10
Contracts in process (99) (28)
Increase (Decrease) in -
Accounts payable and other current
liabilities (52) (54)
Current income taxes 15 44
Deferred income taxes 12 (7)
Other, net (10) 1
Net cash provided by continuing
operations 19 46
Net cash used by discontinued
operations (3) (34)
Net Cash Provided by Operating
Activities 16 12
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions 12 (450)
Purchases of available-for-sale
securities (88) (243)
Sales/maturities of available-for-sale
securities 41 292
Capital expenditures (45) (10)
Other (1) (2)
Net Cash Used by Investing Activities (81) (413)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt - finance operations (3) (3)
Dividends paid (26) (26)
Purchase of common stock - (26)
Other 2 5
Net Cash Used by Financing Activities (27) (50)
NET DECREASE IN CASH AND EQUIVALENTS (92) (451)
CASH AND EQUIVALENTS AT BEGINNING OF
PERIOD 336 516
CASH AND EQUIVALENTS AT END OF
PERIOD $ 244 $ 65
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Income taxes $ 7 $ -
Interest (including finance
operations) $ 1 $ 2
The accompanying Notes to Unaudited Consolidated Financial Statements
are an integral part of this statement.
</TABLE>
<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 month period ended March 29,1998,
are not necessarily indicative of the results that may be expected
for the year ended December 31, 1998. 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, 1997.
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 March 29, 1998 and March
30, 1997.
(B) Comprehensive Income
Effective January 1, 1998, the company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," which requires the presentation of
comprehensive income. The company has reported the components of
comprehensive income on the Consolidated Statement of Comprehensive
Income.
(C) 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.
(D) Acquisitions
Effective December 31, 1997, the company purchased the assets of
Computing Devices International, formerly a division of Ceridian
Corporation, for approximately $500, net of cash acquired of $100. The
company borrowed $220 to effect the acquisition. See Note G for details on
the terms of the debt. Computing Devices International is a defense
electronics and systems integration business with presence in the U.S.,
Canadian and U.K. defense electronics markets.
<PAGE>
Effective October 1, 1997, the company purchased the assets of
Advanced Technology Systems, formerly an operating unit of Lucent
Technologies, for $267, net of purchase price adjustment of $17 received in
January 1998. Advanced Technology Systems is a leading supplier of undersea
surveillance systems, signal processing and vibration control systems and
related technologies for a wide range of applications.
Effective January 1, 1997, the company purchased the assets of
Defense Systems and Armament Systems, formerly operating units of Lockheed
Martin Corporation, for approximately $450 in cash. Defense Systems builds
light vehicles, turrets and transmissions for combat vehicles, as well as
missile guidance and naval fire control systems. Armament Systems designs,
develops and produces advanced gun, ammunition handling and air defense
systems, and is a leader in the production of ammunition and ordnance
products.
Each of these acquisitions has been accounted for under the purchase
method of accounting. The purchase prices have been allocated to the
estimated fair values of net tangible assets acquired, with any excess
recorded as intangible assets (see Note E). Certain of the estimates
related to the acquisitions of Computing Devices International and Advanced
Technology Systems are still preliminary at March 29, 1998, but will be
finalized within one year from their respective date of acquisition. The
operating results of the acquired businesses are included with those of the
company from their respective closing dates.
(E) Intangible Assets
Intangible assets resulting from the company's acquisitions discussed
in Note D consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
March 29 December 31
1998 1997
Contracts and programs
acquired $ 374 $ 376
Goodwill 843 828
$ 1,217 $ 1,204
</TABLE>
Intangible assets are shown net of accumulated amortization of $40 and
$31 at March 29, 1998 and December 31, 1997, respectively. Intangible assets
are amortized on a straight-line basis over periods ranging from 8 to 40
years.
<PAGE>
(F) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
<TABLE>
<S> <C> <C>
March 29 December 31
1998 1997
Workers' compensation $ 245 $ 242
Retirement benefits 227 221
Salaries and wages 77 93
Customer deposits 111 114
Other 261 258
Other Current Liabilities $ 921 $ 928
Accrued costs on disposed
businesses $ 204 $ 211
Retirement benefits 157 154
Coal mining related liabilities 72 78
Other 218 185
Other Liabilities $ 651 $ 628
</TABLE>
(G) Debt
Debt consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
March 29 December 31
1998 1997
Note payable $ 223 $ 220
9.95% Debentures 38 38
Other 7 7
268 265
Less current portion 111 108
$ 157 $ 157
</TABLE>
On December 31, 1997, the company borrowed $220 from a Canadian
bank to effect the acquisition of Computing Devices International at a rate
of 5.17 percent. In April 1998, the company repaid $70 of this debt and
extended the maturity of the remaining balance at a rate of 5.07 percent.
The company expects to refinance this balance under a long-term arrangement
during the second half of 1998.
The company exercised its option to call for the early redemption of all
of its outstanding 9.95 percent Debentures on April 1, 1998.
<PAGE>
(H) Income Taxes
The company had a net deferred tax asset of $233 and $285 at March 29,
1998 and December 31, 1997, the current portion of which was $219 and $223,
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 March 29, 1998 and December 31, 1997.
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 resolved in the U.S. Tax Court in favor of the company.
The IRS has the right to appeal the Court's decision; however, in the event
of an appeal, the company believes the decision will be upheld.
In addition, the company had filed refund claims totaling $355
(plus interest) for additional research and experimentation tax credits for
the years 1981 through 1990. On October 16, 1997, as part of the Tax Court
litigation, the company and the IRS reached an agreement that settled the
tax claims for the years 1981 through 1986 for $132 (plus interest). This
agreement is subject to approval by the Joint Committee on Taxation.
Remaining claims totaling $176 (plus interest) for the years 1987 through
1990 are still being contested at the IRS administrative level and are not
covered by the settlement agreement.
The exact amount and timing of the net refund associated with the Tax
Court litigation and related settlement is not known. However, the company
expects the net refund will exceed the amounts previously recorded and,
therefore, will result in the recognition of additional tax benefits when
realization is assured.
The IRS has completed its examination of the company's consolidated
federal income tax returns for the years 1987-1989. Certain issues related
to these years have been protested to the IRS Appeals Division. The IRS is
also currently examining the company's consolidated returns for the years
1990 through 1995. Since the company has recorded liabilities for tax
contingencies, resolution of these matters is not expected to have a
materially unfavorable impact on the company's financial condition or
results of operations.
(I) Shareholders' Equity
On March 4, 1998, the company's board of directors authorized a
two-for-one stock split effected in the form of a 100 percent stock dividend
which was distributed on April 2, 1998, to shareholders of record on
March 13, 1998. Accordingly, all references in the financial statements to
number of shares and per share amounts have been restated to reflect the
stock split.
<PAGE>
(J) Commitments and Contingencies
Litigation
Claims made by and against the company regarding its consolidated
federal income tax returns are discussed in Note H. Claims made by and
against the company regarding the development of the Navy's A-12 aircraft
are discussed in Note K.
On May 1, 1997, a jury in San Diego County rendered a verdict of
$101 against the company in favor of 97 former Convair employees. In
this lawsuit, Argo, et al. v. General Dynamics, the plaintiffs alleged that
the company interfered with their right to join an earlier class action
lawsuit and concealed its plans to close its Convair division. The jury
awarded the plaintiffs a total of $1.8 in actual damages, and $99 in
punitive damages. The company is appealing the judgment. 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.
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 in excess of a $40 attachment point in each of the four policy
years. The named plaintiffs are members of the Lloyd's of London syndicates
and other British insurers who have underwritten the risk. 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, seeks actual damages, and
payment of a penalty under a Missouri statute, on the ground that the
plaintiffs' failure to pay is vexatious and unreasonable. The company does
not expect that the matter will have a material impact on the company's
results of operations or financial condition.
HE Holdings, Inc. and Hughes Missile Systems Company (HMSC) have filed
a fifth amended complaint against the company alleging breach of contract,
fraud, and conversion with respect to certain representations and warranties
contained in the Asset Purchase Agreement dated May 8, 1992, for the sale of
the company's missile business. The amended complaint, which was filed in
the Superior Court of the State of California, seeks $38 in compensatory
damages as well as punitive damages. The company does not expect that the
lawsuit will have a material impact on the company's results of operations
or financial condition.
In March 1996, the company received a judgment for $26 against the
government in General Dynamics v. U.S., a case tried in U.S. District Court
for the Central District of California. The company sued the government
under the Federal Tort Claims Act, alleging that the Defense Contract Audit
Agency negligently audited the Division Air Defense contract, which led to
the company's indictment in 1985. The indictment was later dropped. The
government appealed the 1996 judgment, and on March 27, 1998, the U.S. Court
of Appeals reversed the District Court's decision. The company intends to
petition the Court of Appeals for a rehearing. HMSC will receive 30 percent
of any net recovery as a result of its purchase of the company's missile
business in 1992. The company has not recognized any claim revenue from this
matter.
<PAGE>
The company is a defendant in tort cases pending in state and federal
court in Arizona, as well as in cases brought under the Comprehensive
Environmental Response, Compensation and Liability Act. This litigation
arises out of groundwater and soil contamination at the Tucson airport. The
company's predecessor in interest, Consolidated Aircraft Company, operated a
modification center at the site during World War II. The company has
defenses to the claims, as well as a claim against the government for
indemnification. Although the company is unable to estimate its liability
arising from these claims, the company does not believe the litigation 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 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 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 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 the sites.
<PAGE>
(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 (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
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.
On February 23, 1998, a final judgment was entered in favor of the
contractors for $1,200 plus interest. The U.S. government has filed a
notice of appeal. Final resolution of the A-12 litigation will depend on the
outcome of expected appeal or negotiation with the government. 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. This result is considered remote.
<PAGE>
GENERAL DYNAMICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
March 29, 1998
(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 and contract awards.
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: the
company's successful execution of internal performance plans; performance
issues with key suppliers and subcontractors; legal proceedings; labor
negotiations; changing priorities or reductions in the U.S. government defense
budget; and termination of government contracts due to unilateral government
action.
Business Segments
The company comprises three primary business segments: Marine, Combat
Systems and Information Systems and Technology, which was formed at the
beginning of 1998. The company also has several miscellaneous businesses
classified as Other. The following table sets forth the net sales and
operating earnings by business segment for the three month period ending
March 29, 1998 and March 30, 1997:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Increase /
Three Month Period (Decrease)
1998 1997
NET SALES:
Marine $ 586 $ 559 $ 27
Combat Systems 335 337 (2)
Information Systems
and Technology 187 - 187
Other 46 45 1
$1,154 $ 941 $ 213
OPERATING EARNINGS:
Marine $ 66 $ 59 $ 7
Combat Systems 43 45 (2)
Information Systems and
Technology 12 - 12
Other 3 (2) 5
$ 124 $ 102 $ 22
</TABLE>
Marine
Results of Operations
Net sales increased during the three month period due primarily to the
transition of the ballistic missile fire control business to the Marine
segment from the Combat Systems segment. Operating earnings increased during
the three month period due to an earnings rate increase on the Arleigh Burke
class destroyer (DDG 51) program in the fourth quarter of 1997 and on the
Seawolf program in the third quarter of 1997. Additionally, as the Seawolf
program continues to benefit from diminishing operating risks as the program
matures, the company increased the earnings rate in the first quarter of this
year. The increase in operating earnings resulting from earnings rate
increases was partially offset by a decline in submarine construction
activity.
Business and Market Considerations
During the first quarter, the Navy awarded a multi-year contract to the
company for the construction of six additional DDG 51s for $2.1 billion.
This award extends the company's deliveries to 2006. The company
anticipates an award later in 1998 for the continued design and construction
of the first four New Attack Submarines (NSSNs) for approximately $5 billion.
The company is part of a three-contractor team formed to compete for the
development, design, construction and life-cycle support of the U.S. Navy's
next-generation surface combatant ships (DD 21). The DD 21 program is
estimated at $25 billion and includes the construction of more than 30 ships
during the first quarter of the next century. The Navy has undertaken a
review of its acquisition strategy because no other team formed to compete
for the DD 21. The outcome of the review may affect the nature of the Navy's
approach for the development and construction of the DD 21.
<PAGE>
Combat Systems
Results of Operations
Net sales and operating earnings were comparable with last year. The
affect of the transition of the ballistic missile fire control business to
the Marine segment was partially offset by an increase in land combat
programs, such as the Heavy Assault Bridge; the Advanced Amphibious Assault
Vehicle; and the Fox Nuclear, Biological and Chemical Reconnaissance System
vehicle programs.
Information Systems and Technology
The acquisitions of Computing Devices International and Advanced
Technology Systems led to the creation of the company's new primary
reporting segment, Information Systems and Technology. General Dynamics
Information Systems provides the company with broader and deeper capabilities
in electronics and systems integration and information management.
Computing Devices Canada, Ltd. is Canada's premier defense electronics
contractor with extensive experience in the management of complex projects
involving large scale systems integration. They are the systems integrator
on the Iris program, whose objective is to modernize and fully digitize
the tactical command, control and communications systems of the Canadian
land forces. Computing Devices Company Ltd. in the United Kingdom opens new
markets in highly sophisticated defense electronics. Advanced Technology
Systems is a leading supplier of undersea surveillance systems, signal
processing systems, vibration control systems, and related technologies for
a wide range of applications.
Backlog
The following table details the backlog of each business segment as
calculated at March 29, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
March 29 December 31
1998 1997
Marine $ 7,669 $ 5,864
Combat Systems 2,067 2,323
Information Systems and
Technology 840 805
Other 591 607
Total Backlog $ 11,167 $ 9,599
Funded Backlog $ 7,226 $ 6,796
</TABLE>
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. The company's anticipated NSSN award of approximately $5 billion,
as previously mentioned, is not included in total backlog indicated above.
<PAGE>
Additional Financial Information
Interest, Net
Interest income decreased during the three month period due primarily
to a decline in the average cash balance resulting from the use of $1.2
billion for business acquisitions during 1997. Interest expense increased
during the three month period as a result of borrowings made in connection
with the Computing Devices International acquisition at the end of 1997.
Provision for Income Taxes
The company reached a favorable agreement with the Internal Revenue
Service, subject to approval by the Joint Committee on Taxation, with
respect to its claim for additional research and experimentation tax credits.
For further discussion of this and other tax matters, as well as a discussion
of the net deferred tax asset, see Note H to the Consolidated Financial
Statements.
Earnings Per Share
On March 4, 1998, the company's board of directors authorized a
two-for-one stock split effected in the form of a 100 percent stock dividend.
Accordingly, earnings per share data has been restated to give retroactive
recognition to the stock split for all periods presented.
Environmental Matters
For a discussion of environmental matters and other contingencies,
see Note J 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 results of operations or financial condition.
New Accounting Standards
Effective January 1, 1998, the company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", which requires the presentation of comprehensive
income. The company has reported the components of comprehensive income on
the Consolidated Statement of Comprehensive Income.
Financial Condition
Operating Activities
Cash flows from continuing operations decreased this year over last
year due primarily to the stage of completion on active submarine production
in the current year as compared to the prior year. Cash flows from
discontinued operations improved this year over last year as a result of
decreased payments for disposition related liabilities.
The company expects to generate funds from operations in excess of its
short- and long-term liquidity needs.
<PAGE>
Investing Activities
The company commenced a project to modernize the facilities and to
improve productivity at its Bath Iron Works' shipyard in late 1997. The
company anticipates investing approximately $200 over a period of three
years, beginning in the second quarter of this year.
Financing Activities
To effect the acquisition of Computing Devices International on
December 31, 1997, the company borrowed $220 from a Canadian bank. The
company repaid $70 of this note in April 1998 and expects to refinance the
balance under a long-term arrangement during the second half of 1998.
The company exercised its option to call for the early redemption of
all of its outstanding 9.95% Debentures on April 1, 1998, for a total of
approximately $40.
On March 4, 1998, the company's board of directors declared an
increased regular quarterly dividend of $.22 per share.
The company has the capacity for long-term borrowings and currently
has a committed, $400 line of credit expiring in December 1998 and a
committed, five-year $400 line of credit.
<PAGE>
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
March 29, 1998
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 27, Financial Data Schedule
(b) Reports on Form 8-K
On March 3, 1998, the company reported to the Securities
and Exchange Commission under Item 5, Other Events, that
the Court of Federal Claims awarded the company and The
Boeing Company $1.2 billion in damages stemming from the
Pentagon's improper default termination in 1991 of the
contract to build the A-12 attack aircraft for the U.S.
Navy. Included in this filing was the company's press
release dated February 20, 1998 announcing the same.
On January 16, 1998, the company reported to the Securities
and Exchange Commission under Item 5, Other Events, that
on December 31, 1997, the company had completed its
acquisition of Ceridian Corporation's Computing Devices
International division.
<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/John W. Schwartz
John W. Schwartz
Vice President and Controller
(Principal Accounting Officer)
Dated May 5, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the General Dynamics
Corporation Consolidated Balance Sheet as of March 29, 1998, and the related
consolidated Statement of Earnings for the three months ended March 29, 1998 and
is qualified in its entirety to such financial statements.
</LEGEND>
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