<PAGE> 1
================================================================================
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 28, 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 OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
3190 FAIRVIEW PARK DRIVE, FALLS CHURCH, VIRGINIA 22042-4523
------------------------------------------------ ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE)
(703) 876-3000
----------------------------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
--- ----
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $1 PAR VALUE - JULY 26, 1998 126,573,474
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<PAGE> 2
GENERAL DYNAMICS CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<S> <C>
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Earnings (Three Months) 3
Consolidated Statement of Earnings (Six Months) 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 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURE 20
- ---------
</TABLE>
1
<PAGE> 3
PART I
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
June 28 December 31
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 138 $ 336
Marketable securities 106 105
------------- -------------
244 441
Accounts receivable 231 234
Contracts in process 839 702
Other current assets 283 312
------------- -------------
Total Current Assets 1,597 1,689
------------- -------------
NONCURRENT ASSETS:
Marketable securities 78 -
Leases receivable - finance operations 187 193
Real estate held for development 131 128
Property, plant and equipment, net 630 592
Intangible assets 1,210 1,204
Other assets 263 285
------------- -------------
Total Noncurrent Assets 2,499 2,402
------------- -------------
$ 4,096 $ 4,091
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 108
Accounts payable 213 255
Other current liabilities 931 928
------------- -------------
Total Current Liabilities 1,144 1,291
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt 160 157
Long-term debt - finance operations 91 100
Other liabilities 637 628
Commitments and contingencies (See Note K)
------------- -------------
Total Noncurrent Liabilities 888 885
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus (shares issued 168,774,672) 244 220
Retained earnings 2,505 2,386
Treasury stock (shares held 1998, 42,239,316; 1997, 42,989,118) (684) (691)
Accumulated other comprehensive income (1) -
------------- -------------
Total Shareholders' Equity 2,064 1,915
------------- -------------
$ 4,096 $ 4,091
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
2
<PAGE> 4
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
June 28 June 29
1998 1997
------------- -------------
<S> <C> <C>
NET SALES $ 1,178 $ 1,032
OPERATING COSTS AND EXPENSES 1,043 918
------------- -------------
OPERATING EARNINGS 135 114
Interest income, net - 8
Other income (expense), net 4 -
------------- -------------
EARNINGS BEFORE INCOME TAXES 139 122
Provision for income taxes 47 42
------------- -------------
NET EARNINGS $ 92 $ 80
============= =============
NET EARNINGS PER SHARE:
Basic $ 0.73 $ 0.64
============= =============
Diluted $ 0.72 $ 0.64
============= =============
DIVIDENDS PER SHARE $ .22 $ .205
============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions):
Basic 126.4 125.1
Diluted 127.5 125.8
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 90 $ 78
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
3
<PAGE> 5
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------
June 28 June 29
1998 1997
------------- -------------
<S> <C> <C>
NET SALES $ 2,332 $ 1,973
OPERATING COSTS AND EXPENSES 2,073 1,757
------------- -------------
OPERATING EARNINGS 259 216
Interest income, net 1 17
Other income (expense), net 3 (3)
------------- -------------
EARNINGS BEFORE INCOME TAXES 263 230
Provision for income taxes 89 79
------------- -------------
NET EARNINGS $ 174 $ 151
============= =============
NET EARNINGS PER SHARE:
Basic $ 1.38 $ 1.20
============= =============
Diluted $ 1.37 $ 1.20
============= =============
DIVIDENDS PER SHARE $ .44 $ .41
============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING (in millions):
Basic 126.2 125.6
Diluted 127.3 126.3
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 182 $ 156
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
4
<PAGE> 6
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------------------
June 28 June 29
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 174 $ 151
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 61 43
Decrease (Increase) in -
Marketable securities (31) (161)
Accounts receivable 3 (23)
Contracts in process (115) 137
Leases receivable - finance operations 5 5
Other current assets 2 3
Increase (Decrease) in -
Accounts payable and other current liabilities (53) (98)
Current income taxes (3) (6)
Deferred income taxes 31 34
Other, net (17) (4)
-------------- --------------
Net cash provided by continuing operations 57 81
Net cash used by discontinued operations (4) (25)
-------------- --------------
Net Cash Provided by Operating Activities 53 56
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions 12 (450)
Purchases of available-for-sale securities (132) (329)
Sales/maturities of available-for-sale securities 85 546
Capital expenditures (65) (37)
Proceeds from the sale of assets 15 -
Other (3) (3)
-------------- --------------
Net Cash Used by Investing Activities (88) (273)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt, net (109) -
Repayment of debt - finance operations (9) (8)
Dividends paid (53) (51)
Proceeds from option exercises 10 25
Other (2) -
-------------- --------------
Net Cash Used by Financing Activities (163) (94)
-------------- --------------
NET DECREASE IN CASH AND EQUIVALENTS (198) (311)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 336 516
-------------- --------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 138 $ 205
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Income taxes $ 49 $ 38
Interest (including finance operations) $ 11 $ 6
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement
5
<PAGE> 7
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 28, 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 and six
month periods ended June 28, 1998, and June 29, 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 and disclosure of comprehensive
income. Comprehensive income was $92 and $81 for the three month period and
$173 and $150 for the six month period ended June 28, 1998, and June 29, 1997,
respectively.
(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.
6
<PAGE> 8
(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 in connection with the acquisition. See Note H for details on the terms
of the debt. Computing Devices International added three new operating units
to the company, General Dynamics Information Systems, Computing Devices Canada,
Ltd. and Computing Devices Company Ltd. in the United Kingdom.
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.
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.
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 F). Purchase price allocations related to the
acquisitions of the three Computing Devices International businesses and
Advanced Technology Systems 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) Sale of Real Estate Held for Development
Following the sale of the company's operations located in southern
California, the company retained certain properties, including a 232-acre site
in the Kearny Mesa section of San Diego. In July 1998, the company completed
the sale of the Kearny Mesa site for approximately $80 million in cash.
(F) Intangible Assets
Intangible assets resulting from the company's acquisitions discussed
in Note D consist of the following:
<TABLE>
<CAPTION>
June 28 December 31
1998 1997
------------- -------------
<S> <C> <C>
Contracts and programs acquired $ 368 $ 376
Goodwill 842 828
------------- -------------
$ 1,210 $ 1,204
============= =============
</TABLE>
Intangible assets are shown net of accumulated amortization of $52 and
$31 at June 28, 1998, and December 31, 1997, respectively. Intangible assets
are amortized on a straight-line basis over periods ranging from 8 to 40 years.
7
<PAGE> 9
(G) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
<TABLE>
<CAPTION>
June 28 December 31
1998 1997
------------- --------------
<S> <C> <C>
Workers' compensation $ 246 $ 242
Retirement benefits 228 221
Salaries and wages 80 93
Customer deposits 119 114
Other 258 258
------------- -------------
Other Current Liabilities $ 931 $ 928
============= =============
Accrued costs on disposed businesses $ 196 $ 211
Retirement benefits 155 154
Coal mining related liabilities 72 78
Other 214 185
------------- -------------
Other Liabilities $ 637 $ 628
============= =============
</TABLE>
(H) Debt
Debt consists of the following:
<TABLE>
<CAPTION>
June 28 December 31
1998 1997
------------- --------------
<S> <C> <C>
Note payable $ 153 $ 220
9.95% Debentures - 38
Other 7 7
------------- --------------
160 265
Less current portion - 108
------------- --------------
$ 160 $ 157
============= ==============
</TABLE>
On December 31, 1997, the company borrowed $220 in connection with its
acquisition of Computing Devices International. In April 1998, the company
repaid $70 of this note 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 percent Debentures on April 1, 1998.
8
<PAGE> 10
(I) Income Taxes
The company had a net deferred tax asset of $217 and $285 at June 28,
1998, and December 31, 1997, the current portion of which was $209 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 June 28, 1998, and December 31, 1997.
The company filed refund claims totaling $355 (plus interest) for
research and experimentation tax credits for the years 1981 through 1990. The
company and the IRS settled the claims for the years 1981 through 1986 for $132
(plus interest). The timing and amount of the net refund associated with these
claims will depend upon the resolution of other litigated matters with respect
to the same tax years. Because substantially all of the tax credits associated
with the settlement will be carried forward to 1987, the timing and amount of
the net refund is therefore also subject to resolution of matters related to
the IRS examination of the company's 1987 through 1989 consolidated federal
income tax returns, currently under review by the IRS Appeals Division. Refund
claims totaling $98 (plus interest) for research and experimentation tax
credits for the years 1987 through 1989 will also be resolved as part of the
IRS examination of these tax years.
Refund claims totaling $78 (plus interest) for research and
experimentation tax credits for the year 1990 are pending before the IRS. The
timing and amount of any net refund is subject to conclusion of the IRS
examination of the company's 1990 consolidated federal income tax return. The
IRS is currently examining the company's consolidated federal income tax
returns for the years 1990 through 1995. Since the company has recorded
liabilities for tax contingencies, conclusion of these audit years is not
expected to have a materially unfavorable impact on the company's results of
operations or financial condition.
The company expects to realize tax benefits in excess of amounts
previously recorded when these matters are resolved.
(J) 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.
(K) Commitments and Contingencies
Litigation
Claims made by and against the company regarding its consolidated
federal income tax returns are discussed in Note I. Claims made by and against
the company regarding the development of the Navy's A-12 aircraft are discussed
in Note L.
9
<PAGE> 11
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 threshold 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 and 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.
Raytheon Company and Raytheon Missile Systems Company (as successors in
interest to HE Holdings, Inc. and Hughes Missile Systems Company, respectively)
have filed a sixth 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 approximately $39 in
compensatory damages as well as punitive damages and declaratory relief. The
company does not expect that the lawsuit will have a material impact on the
company's results of operations or financial condition.
The company is 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.
10
<PAGE> 12
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 investigation, cleanup and remediation of various
conditions at sites it currently or formerly owned or operated.
The company measures its environmental exposure based on enacted laws and
existing regulations, and on the technology expected to be approved to complete
the remediation effort. The estimated cost to perform each of the elements of
the remediation effort is based on when those elements are expected to be
performed. Where a reasonable basis for apportionment exists with other PRPs,
the company estimates only its allowable share of the joint and several
remediation liability for a site, taking into consideration the solvency of
other participating PRPs. Based on a site by site analysis, the company
believes it has adequate accruals for any liability it may incur arising from
sites currently or formerly owned or operated at which there is a known
environmental condition, or Superfund site at which the company is a PRP.
(L) 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. The contractors have filed briefs regarding the appeal of this
action. 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.
11
<PAGE> 13
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.
12
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GENERAL DYNAMICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
June 28, 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 and six month periods
ended June 28, 1998, and June 29, 1997:
13
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Three Month Period Six Month Period
- ---------------------------------------------------------------------------------------------------------------------
Increase/ Increase/
1998 1997 (Decrease) 1998 1997 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES:
- ---------------------------------------------------------------------------------------------------------------------
Marine $ 618 $ 587 $ 31 $1,204 $1,146 $ 58
Combat Systems 298 378 (80) 633 715 (82)
Information Systems and 196 - 196 383 - 383
Technology
Other 66 67 (1) 112 112 -
- ---------------------------------------------------------------------------------------------------------------------
$1,178 $1,032 $ 146 $2,332 $1,973 $ 359
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS:
- ---------------------------------------------------------------------------------------------------------------------
Marine $ 71 $ 61 $ 10 $ 137 $ 120 $ 17
Combat Systems 38 41 (3) 81 86 (5)
Information Systems and 13 - 13 25 - 25
Technology
Other 13 12 1 16 10 6
- ---------------------------------------------------------------------------------------------------------------------
$ 135 $ 114 $ 21 $ 259 $ 216 $ 43
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Marine
Results of Operations
Net sales increased during the three and six month periods 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 and six month periods 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 and 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 second quarter, in response to the Navy's review of its
acquisition strategy for the next-generation surface combatant ships (DD 21),
the company was designated by the Navy to lead one of two industry teams to
develop competing design concepts. The company will participate in
construction throughout the full program. The development, design,
construction and life-cycle support of the DD 21 ships is estimated at $25
billion and includes the construction of 32 ships during the first quarter of
the next century.
Also during the second quarter, the company completed negotiations with
the Metal Trades Council Union at Electric Boat and ratified a new, three-year
labor contract.
14
<PAGE> 16
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.
Combat Systems
Results of Operations
Net sales and operating earnings decreased during the three and six
month periods due primarily to the aforementioned transfer of the ballistic
missile fire control business to the Marine segment and timing of land combat
program deliveries and material receipts.
Information Systems and Technology
Results of Operations
The acquisitions of Computing Devices International and Advanced
Technology Systems led to the creation of one of the company's primary
reporting segments, Information Systems and Technology. Computing Devices
International added three new operating units to the company, General Dynamics
Information Systems, Computing Devices Canada, Ltd. and Computing Devices
Company Ltd. in the United Kingdom. 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.
It is 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.
Effective June 30, 1998, the company acquired the assets of Computer
Systems and Communications Corporation, a systems integration and
communications company serving the U.S. Department of Defense and other NATO
countries. Computer Systems and Communications Corporation augments the
company's battlespace information management business and anticipates full year
1998 sales of approximately $15. Its results of operations will be included
with those of the company beginning in the third quarter.
The company continues to seek improvements in operating margins in
Information Systems and Technology through efforts to reduce costs. The
company initiated internal actions during the second quarter to consolidate the
electronics manufacturing processes of the segment in Advanced Technology
Systems' Greensboro, North Carolina, facility.
15
<PAGE> 17
Backlog
The following table details the backlog of each business segment as
calculated at June 28, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
June 28 December 31
1998 1997
----------------- ------------------
<S> <C> <C>
Marine $ 7,154 $ 5,864
Combat Systems 2,003 2,323
Information Systems and Technology 824 805
Other 612 607
----------------- ------------------
Total Backlog $ 10,593 $ 9,599
================= ==================
Funded Backlog $ 6,647 $ 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.
Additional Financial Information
Interest, Net
Interest income decreased during the three and six month periods 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 and six month periods 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 settled its claims for research and experimentation tax
credits for the years 1981 through 1986 with the Internal Revenue Service
(IRS). The exact amount and timing of the net refund associated with these
claims will depend upon the resolution of other litigated matters with respect
to the same tax years, as well as resolution of matters related to the IRS
examination of the company's consolidated federal income tax returns for the
years 1987 through 1989. For further discussion of this and other tax matters,
as well as a discussion of the net deferred tax asset, see Note I to the
Consolidated Financial Statements.
16
<PAGE> 18
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 K 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.
Market Risk
The company's investment securities carry fixed rates of interest over
their respective maturity terms. The company does not use derivative
instruments to alter the interest characteristics of these instruments.
In connection with the long-term financing arrangement anticipated
during the second half of 1998, the company entered into an agreement to reduce
the exposure to interest rate and foreign currency rate fluctuations. The
company does not expect these transactions to have a material effect on the
company's results of operations or financial condition.
The company attempts to minimize the effects of currency risk by
borrowing externally in local currencies and by hedging purchases made in
foreign currencies when practical. As a matter of policy, the company does not
engage in currency speculation.
With the acquisition of Computing Devices International, the company
is exposed to the effect of foreign currency fluctuations on the U.S. dollar
value of earnings of Computing Devices Canada and Computing Devices Company in
the U.K. The company does not expect the impact of foreign currency
fluctuations to be material to the company's results of operations or financial
condition.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
company is required to adopt the provisions of the standard during the first
quarter of 2000. Because of the company's minimal use of derivatives, the
company does not expect that the adoption of the new standard will have a
material impact on the results of operations or financial condition.
Effective January 1, 1998, the company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
which requires the presentation and disclosure of comprehensive income. There
were no material differences between net earnings and comprehensive income for
the three and six month periods ended June 28, 1998, and June 29, 1997.
17
<PAGE> 19
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 with 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.
Investing Activities
Following the sale of the company's operations located in southern
California, the company retained certain properties, including a 232-acre site
in the Kearny Mesa section of San Diego. In July 1998, the company completed
the sale of the Kearny Mesa site for approximately $80 million in cash.
The company anticipates investing approximately $200 over a period of
three years on a facility modernization project at its Bath Iron Works'
shipyard. Construction is anticipated to begin in the second half of this year.
Financing Activities
In connection with the company's acquisition of Computing Devices
International on December 31, 1997, the company borrowed $220. 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 percent 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 committed lines of credit totaling $800. One $400 line expires in December
1998 and the other $400 line expires in December 2002.
18
<PAGE> 20
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
June 28, 1998
Item 1. Legal Proceedings
Reference is made to Note K, 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 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 6, 1998.
(b) & (c) A brief discussion of each matter voted upon and the number of
votes cast is as follows:
<TABLE>
<CAPTION>
Matter Votes Cast
------ ---------------------------------------------------------------
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
Election of Directors:
Becton, J.W., Jr. 105,495,876 2,099,604
Chabraja, N.D. 105,848,984 1,746,496
Crown, J.S. 105,844,332 1,751,148
Crown, L. 105,813,858 1,781,622
Goodman, C.H. 105,857,056 1,738,424
Joulwan, G.A. 105,967,462 1,628,018
Kaminski, P.G. 105,419,874 2,175,606
Mellor, J.R. 105,847,442 1,748,038
Mundy, C.E., Jr. 105,948,734 1,646,746
Trost, C.A.H. 105,973,842 1,621,638
Selection of Independent
Auditors 107,113,492 275,008 206,980
Shareholders Proposal
Regarding Foreign
Military Sales 2,572,190 91,659,994 4,155,796 9,207,500
</TABLE>
19
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule
(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
Vice President and Controller
(Principal Accounting Officer)
Dated: August 4, 1998
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the General Dynamics
Corporation Consolidated Balance Sheet as of June 28, 1998, and the related
consolidated Statement of Earnings for the six months ended June 28, 1998 and is
qualified in its entirety to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-28-1998
<CASH> 138
<SECURITIES> 106
<RECEIVABLES> 231
<ALLOWANCES> 0
<INVENTORY> 839
<CURRENT-ASSETS> 1,597
<PP&E> 1,636
<DEPRECIATION> 1,006
<TOTAL-ASSETS> 4,096
<CURRENT-LIABILITIES> 1,144
<BONDS> 160
0
0
<COMMON> 244
<OTHER-SE> 1,820
<TOTAL-LIABILITY-AND-EQUITY> 4,096
<SALES> 2,332
<TOTAL-REVENUES> 2,332
<CGS> 2,073
<TOTAL-COSTS> 2,073
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 263
<INCOME-TAX> 89
<INCOME-CONTINUING> 174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.37
</TABLE>
