<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
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 - OCTOBER 29, 2000 199,243,840
================================================================================
<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 (Nine Months) 4
Consolidated Statement of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis 16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
PART II - OTHER INFORMATION
---------------------------
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
SIGNATURE 23
---------
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
October 1 December 31
2000 1999
(Unaudited) (Audited)
--------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 367 $ 270
Marketable securities 16 -
--------------- ---------------
383 270
Accounts receivable 849 746
Contracts in process 1,236 1,204
Inventories 920 961
Other current assets 403 310
--------------- ---------------
Total Current Assets 3,791 3,491
--------------- ---------------
NONCURRENT ASSETS:
Property, plant and equipment, net 1,275 1,169
Goodwill, net 2,019 1,991
Intangible assets, net 521 522
Other assets 625 601
--------------- ---------------
Total Noncurrent Assets 4,440 4,283
--------------- ---------------
$ 8,231 $ 7,774
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current portion of long-term debt $ 840 $ 853
Accounts payable 595 631
Other current liabilities 1,948 1,969
--------------- ---------------
Total Current Liabilities 3,383 3,453
--------------- ---------------
NONCURRENT LIABILITIES:
Long-term debt 171 169
Other liabilities 1,100 981
Commitments and contingencies (See Note K)
--------------- ---------------
Total Noncurrent Liabilities 1,271 1,150
--------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus 551 487
Retained earnings 3,892 3,363
Treasury stock (857) (673)
Accumulated other comprehensive loss (9) (6)
---------------- ----------------
Total Shareholders' Equity 3,577 3,171
--------------- ---------------
$ 8,231 $ 7,774
=============== ===============
</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
--------------------------------------------------------
October 1 October 3
2000 1999
--------------- ---------------
<S> <C> <C>
NET SALES $ 2,502 $ 2,215
OPERATING COSTS AND EXPENSES 2,165 1,860
--------------- ---------------
OPERATING EARNINGS 337 355
Interest expense, net (17) (6)
Other expense, net (3) (44)
----------------- ----------------
EARNINGS BEFORE INCOME TAXES 317 305
PROVISION FOR INCOME TAXES
Provision 113 121
R&E tax credit (90) -
---------------- ---------------
23 121
--------------- ---------------
NET EARNINGS $ 294 $ 184
=============== ===============
NET EARNINGS PER SHARE:
Basic $ 1.48 $ .92
=============== ===============
Diluted $ 1.47 $ .91
=============== ===============
DIVIDENDS PER SHARE $ .26 $ .24
=============== ===============
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 155 $ 139
=============== ===============
</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>
Nine Months Ended
--------------------------------------------------------
October 1 October 3
2000 1999
--------------- ---------------
<S> <C> <C>
NET SALES $ 7,665 $ 6,304
OPERATING COSTS AND EXPENSES 6,687 5,429
--------------- ---------------
OPERATING EARNINGS 978 875
Interest expense, net (52) (17)
Other expense, net (5) (39)
----------------- ----------------
EARNINGS BEFORE INCOME TAXES 921 819
PROVISION FOR INCOME TAXES
Provision 329 302
R&E tax credit (90) (165)
---------------- ----------------
239 137
--------------- ---------------
NET EARNINGS $ 682 $ 682
=============== ===============
NET EARNINGS PER SHARE:
Basic $ 3.41 $ 3.42
=============== ===============
Diluted $ 3.39 $ 3.38
=============== ===============
DIVIDENDS PER SHARE $ .78 $ .72
=============== ===============
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 475 $ 401
=============== ===============
</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>
Nine Months Ended
----------------------------------------------
October 1 October 3
2000 1999
--------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 682 $ 682
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 171 140
Recognition of pension gains previously deferred - (126)
Revaluation of undeveloped coal reserves and equipment - 61
Amortization of debt issuance costs on debt repaid - 7
(Increase) Decrease in assets, net of effects of business acquisitions-
Marketable securities (16) 45
Accounts receivable (78) (63)
Contracts in process (99) (98)
Inventories 46 (317)
Other current assets 10 23
Increase (Decrease) in liabilities, net of effects of business acquisitions-
Accounts payable and other current liabilities 31 (79)
Customer deposits 9 27
Current income taxes (53) 171
Deferred income taxes 113 48
Other, net (115) (20)
--------------- ---------------
Net cash provided by continuing operations 701 501
Net cash used by discontinued operations (6) (5)
--------------- ---------------
Net Cash Provided by Operating Activities 695 496
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (41) (1,130)
Purchases of available-for-sale securities (16) (26)
Sales/maturities of available-for-sale securities 22 75
Capital expenditures (219) (117)
Other 2 12
--------------- ---------------
Net Cash Used by Investing Activities (252) (1,186)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) proceeds from commercial paper (19) 1,141
Repayments of other debt, net (3) (370)
Repayments of debt - finance operations (12) (53)
Dividends paid (151) (88)
Purchases of common stock (208) (59)
Proceeds from option exercises 47 49
--------------- ---------------
Net Cash (Used) Provided by Financing Activities (346) 620
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 97 (70)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 270 210
--------------- ---------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 367 $ 140
=============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Federal income taxes $ 182 $ 237
Interest (including finance operations) $ 52 $ 36
</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 nine-month periods ended October 1, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. These unaudited consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
company's Annual Report on Form 10-K for the year ended December 31, 1999.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
In the opinion of the company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
for the three- and nine-month periods ended October 1, 2000 and October 3, 1999.
(B) Comprehensive Income
Comprehensive income was $293 and $184 for the three-month periods
and $679 for both nine-month periods ended October 1, 2000 and October 3, 1999.
Comprehensive income consists primarily of net earnings ($294 and $184 for the
three-month periods and $682 for both nine-month periods ended October 1, 2000
and October 3, 1999), and foreign currency translation adjustments.
(C) Acquisitions
Pooling of Interests Method
On July 30, 1999, the company acquired Gulfstream Aerospace
Corporation (Gulfstream), a leading designer, developer, manufacturer and
marketer of advanced business jet aircraft. The acquisition was accounted for as
a pooling of interests, and, accordingly, the consolidated financial statements
for periods prior to the combination have been restated to include the accounts
and results of operations of Gulfstream.
6
<PAGE> 8
Purchase Method
On November 9, 2000, the company announced that it has entered into a
definitive agreement to acquire for cash the outstanding shares of Primex
Technologies, Inc. (NASDAQ:PRMX) for $32.10 per share plus the obligation to
assume approximately $170 in debt. The company anticipates financing the
purchase through the issuance of commercial paper. The acquisition is expected
to close during January 2001, subject to regulatory review as well as Primex
shareholder approval. Primex provides a variety of munitions, propellants,
satellite propulsion systems and electronics products to the U.S. and its
allies, as well as domestic and international industrial customers.
On September 1, 1999, the company completed the $1.01 billion cash
acquisition of three business units comprising GTE Government Systems
Corporation, a subsidiary of GTE Corporation, (renamed, General Dynamics
Government Systems Corporation). The company financed the purchase through its
commercial paper program. Government Systems Corporation is a leader in the
advancement of command, control, communications and intelligence systems;
electronic defense systems; communication switching; and information systems for
defense, government and industry in the United States and abroad. The purchase
price has been allocated to the estimated fair value of net tangible assets
acquired, with the excess recorded as goodwill and intangible assets (see Note
G). Operating results of the three business units are included with those of the
company from the closing date.
(D) Earnings Per Share
Basic and diluted weighted average shares outstanding are as follows
(in thousands):
<TABLE>
<CAPTION>
Three-months ended Nine-months ended
------------------ -----------------
October 1 October 3 October 1 October 3
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic 198,675 200,293 199,892 199,660
Diluted 200,587 202,612 201,352 201,963
</TABLE>
(E) Contracts in Process
Contracts in process primarily represent costs and accrued profit
related to defense contracts and programs, and consist of the following:
<TABLE>
<CAPTION>
October 1 December 31
2000 1999
--------------- ---------------
<S> <C>
Net contract costs and estimated profits $ 483 $ 483
Other contract costs 753 721
--------------- ---------------
$ 1,236 $ 1,204
================ ===============
</TABLE>
7
<PAGE> 9
Contract costs are net of advances and progress payments and include
production costs and related overhead, such as general and administrative
expenses. Other contract costs primarily represent amounts required to be
recorded under generally accepted accounting principles that are not currently
allocable to contracts, such as a portion of the company's estimated workers'
compensation, other insurance-related assessments, retirement benefits and
environmental expenses. Recovery of these costs under contracts is considered
probable based on the company's backlog. If the level of backlog in the future
does not support the continued deferral of these costs, the profitability of the
company's remaining contracts could be affected.
Under the contractual arrangements by which progress payments are
received, the U.S. government asserts that it has a security interest in the
contracts in process identified with the related contracts.
(F) Inventories
Inventories consist primarily of commercial aircraft components, as
follows:
<TABLE>
<CAPTION>
October 1 December 31
2000 1999
--------------- ---------------
<S> <C> <C>
Work in process $ 446 $ 436
Raw materials 265 262
Pre-owned aircraft 188 243
Other 21 20
--------------- ---------------
$ 920 $ 961
=============== ===============
</TABLE>
(G) Goodwill and Intangible Assets, Net
Goodwill resulted from the company's business acquisitions. Goodwill
is amortized on a straight-line basis over 40 years and is shown net of
accumulated amortization of $122 and $80 at October 1, 2000, and December 31,
1999, respectively.
Intangible assets resulted primarily from the company's business
acquisitions and consist mainly of contracts and programs acquired, customer
lists and purchase options on buildings currently leased. Intangible assets are
shown net of accumulated amortization of $128 and $110 at October 1, 2000, and
December 31, 1999, respectively. Contracts and programs acquired are amortized
on a straight-line basis over periods ranging from 8 to 40 years. Other
intangible assets are amortized over periods ranging from 3 to 21 years.
8
<PAGE> 10
(H) Debt
Debt (excluding finance operations) consists of the following:
<TABLE>
<CAPTION>
October 1 December 31
2000 1999
--------------- ---------------
<S> <C>
Commercial paper $ 837 $ 852
Senior notes 149 149
Industrial development bonds 15 15
Other 10 6
--------------- ---------------
1,011 1,022
Less current portion 840 853
--------------- ---------------
$ 171 $ 169
=============== ===============
</TABLE>
As of October 1, 2000, the company had $848 par value discounted
commercial paper outstanding at an average yield of approximately 6.70 percent
with an average term of approximately 80 days. The company has available a $1
billion committed line of credit expiring in May 2002 and an available $400
committed line of credit expiring in December 2002, both of which back the
company's commercial paper program.
(I) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
<TABLE>
<CAPTION>
October 1 December 31
2000 1999
--------------- ---------------
<S> <C> <C>
Workers' compensation $ 489 $ 479
Customer deposits 489 471
Retirement benefits 269 270
Salaries and wages 169 154
Other 532 595
--------------- ---------------
Other Current Liabilities $ 1,948 $ 1,969
=============== ===============
Retirement benefits $ 325 $ 304
Accrued costs on disposed businesses 122 156
Coal mining related liabilities 75 77
Other 578 444
--------------- ---------------
Other Liabilities $ 1,100 $ 981
=============== ===============
</TABLE>
9
<PAGE> 11
(J) Income Taxes
The company had a net deferred tax asset of $178 and $291 at October
1, 2000, and December 31, 1999, respectively, the current portion of which was
$328 and $264, respectively, and was included in other current assets on the
Consolidated Balance Sheet. Based on the level of projected earnings and current
backlog, no valuation allowance was required for the company's net deferred tax
assets at October 1, 2000, and December 31, 1999.
During the first quarter of 1999, General Dynamics and the U.S.
Internal Revenue Service settled outstanding tax issues, including refund claims
for research and experimentation tax credits, for the years 1981 through 1989
for approximately $334 (including before-tax interest). The company recognized a
benefit of $165 (net of amounts previously recorded in 1991 and 1992), or $.82
per diluted share, as a result of this settlement. During the third quarter of
2000, General Dynamics settled outstanding tax issues, including its remaining
refund claim for research and experimentation tax credits, for the years 1990
through 1993. The company recognized a benefit of $90, or $.45 per diluted
share, as a result of this settlement.
During the first quarter of 2000, all matters related to Gulfstream's
consolidated federal income tax returns for years up to and including 1994 were
resolved with no material impact on the company's results of operations or
financial condition. The IRS is currently examining General Dynamics' 1994 and
1995 consolidated federal income tax returns.
The company has recorded liabilities for tax contingencies;
therefore, resolution of open matters for these years and subsequent years is
not expected to have a materially unfavorable impact on the company's results of
operations, financial condition or cash flows.
(K) Commitments and Contingencies
Litigation
Claims made by and against the company regarding the development of
the Navy's A-12 aircraft are discussed in Note L.
On April 19, 1995, 101 then-current and former employees of General
Dynamics' Convair Division in San Diego, California filed a six-count complaint
in the Superior Court of California, County of San Diego, titled Argo, et al. v.
General Dynamics, et al. In addition to General Dynamics, four of Convair's
then-current or former managers were also named as defendants. The plaintiffs
alleged that the company interfered with their right to join an earlier class
action lawsuit for overtime wages brought pursuant to the Federal Fair Labor
Standards Act by, among other things, concealing its plans to close the Convair
Division. On May 1, 1997, a jury rendered a verdict of $101 against the company
and one of the defendants in favor of 97 of the plaintiffs. The jury awarded the
plaintiffs a total of $1.8 in actual damages and $99 in punitive damages. The
company and one of the defendants have appealed the judgment to the Court of
Appeals of the State of California, Fourth Appellate District. On April 12,
2000, the California Supreme Court transferred the appeal to the Fifth Appellate
District. On appeal, the
10
<PAGE> 12
company is seeking to have the judgment overturned in its entirety or,
alternatively, a substantial reduction in the jury's punitive damage award. The
company believes it has substantial legal defenses, but in any case, it believes
the punitive damage award is excessive as a matter of law. The company believes
that the ultimate outcome will not have a material impact on the company's
results of operations or financial condition.
Less than a month following the jury's verdict in Argo, on June 27,
1997, General Dynamics Corporation was named as a defendant in a complaint filed
in the Superior Court of California, County of San Diego, titled Williamson, et
al. v. General Dynamics Corporation, et al. On August 7, 1997, General Dynamics
removed the case to the United States District Court for the Southern District
of California. The Williamson allegations are virtually identical to the
allegations made in the Argo lawsuit, however, Williamson is styled as a class
action lawsuit. On April 3, 1998, the district court granted General Dynamics'
motion to dismiss plaintiffs' complaint in its entirety. Plaintiffs appealed
that decision to the Ninth Circuit Court of Appeals. On April 20, 2000, the
Ninth Circuit issued an opinion reversing the district court's order of
dismissal. Plaintiffs seek compensatory damages in an unspecified amount as well
as punitive damages. The company believes that the ultimate outcome will not
have a material impact on the company's results of operations or financial
condition.
On July 13, 1995, General Dynamics Corporation was named as a
defendant in a complaint filed in the Circuit Court of St. Louis County,
Missouri, titled Hunt, et al. v. General Dynamics Corporation, et al. The
complaint also names as defendants General Dynamics' two insurance brokers: the
London broker, Lloyd Thompson, Ltd.; and the United States broker, Willis
Corroon Corporation of Missouri. The plaintiffs are members of certain Lloyd's
of London syndicates and British insurance companies who sold the company four
aggregate excess loss insurance policies covering the company's self-insured
workers' compensation program at Electric Boat for four policy years, from July
1, 1988 to June 30, 1992. The plaintiffs allege that when procuring the policies
the company and its brokers made misrepresentations to the plaintiffs and failed
to disclose facts which were material to the risk. The plaintiffs also allege
that the company has been negligent in its administration of workers'
compensation claims. The plaintiffs seek rescission of the policies, a
declaratory judgment that the policies are void, and compensatory damages in an
unspecified amount. General Dynamics has counterclaimed, alleging that the
plaintiffs have breached their insurance contracts by failing to pay claims.
General Dynamics also served cross-claims against Lloyd Thompson for negligence
and breach of fiduciary duty, which have been severed pending the trial of
claims between General Dynamics and the plaintiffs. In February 2000, General
Dynamics completed the trial before a special master of the claims between
General Dynamics and the plaintiffs. In August 2000, the special master issued
his decision, which recommended recission of the two policies, on the grounds of
fraud by the London broker, and recommended an award of damages against the
plaintiffs with respect to the other two polices. The special master found that
although the company made no misrepresentations of fact in connection with the
procurement of the policies, the London broker, who is the company's agent, did.
Objections to the special master's decision are due on October 31, 2000. General
Dynamics does not expect that this case will have a material impact on the
company's results of operations or financial condition.
The company is a defendant in three cases brought in federal district
court in Arizona under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA), concerning the Tucson International Airport Area
Superfund Site. Plaintiffs in two cases are the Tucson Airport Authority (TAA)
and the City of Tucson. They seek reimbursement of CERCLA response costs and a
11
<PAGE> 13
declaration of the company's alleged liability with respect to soil and
groundwater contamination at portions of the Superfund Site. On October 16,
2000, the court entered an order dismissing one of the TAA/City cases and the
parties are waiting for the court to enter a stipulated dismissal order in the
second case. On September 30, 1998, the U.S. Environmental Protection Agency
(U.S. EPA) issued a Special Notice Letter notifying the company that it was a
potentially responsible party (PRP) with respect to contamination of soil and
shallow groundwater on and near property within the Superfund Site. Other PRPs
receiving a similar notice were the U.S. Air Force, McDonnell Douglas Crop.,
TAA, and the City. In March 1999, the U.S. EPA filed in Arizona federal court a
complaint and proposed consent decree in response to the Special Notice Letter.
In February 2000, the court entered the consent decree. Although the consent
decree imposes joint and several liability on the company and other PRPs, by
agreement among the parties, the company will be paying 10% of the costs of
remediating the site under the terms of the consent decree. The company does not
believe that these lawsuits or the consent decree will have a material impact on
the company's results of operations or financial condition.
The company is also a defendant in other lawsuits and claims and in
other investigations of varying nature. The company believes its liabilities in
these proceedings, in the aggregate, are not material to the company's results
of operations or financial condition.
Environmental
The company is directly or indirectly involved in certain Superfund
sites in which the company, along with other major U.S. corporations, has been
designated a PRP by the U.S. EPA or a state environmental agency with respect to
past shipments of 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, or in the aggregate, 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 where the
release of hazardous materials may have occurred.
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 or other multi-party sites at which the company is a
PRP.
12
<PAGE> 14
(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. In January 1991, the Navy terminated the company's
A-12 aircraft contract for default. Both the company and McDonnell Douglas, now
owned by the Boeing Company, (the contractors) were parties to the contract with
the Navy, each had full responsibility to the Navy for performance under the
contract, and both are jointly and severally liable for potential liabilities
arising from the termination. As a consequence of the termination for default,
the Navy demanded that the contractors repay $1,352 in unliquidated progress
payments, but agreed to defer collection of the amount pending a decision by the
U.S. Court of Federal Claims on the contractors' challenge to the termination
for default, or a negotiated settlement.
The contractors filed a complaint on June 7, 1991, in the U.S. Court
of Federal Claims contesting the default termination. The suit, in effect, seeks
to convert the termination for default to a termination for convenience of the
U.S. government and seeks other legal relief. A trial on Count XVII of the
complaint, which relates to the propriety of the process used in terminating the
contract for default, was concluded in October 1993. In December 1994, the court
issued an order vacating the termination for default. On December 19, 1995,
following further proceedings, the court issued an order converting the
termination for default to a termination for convenience. On March 31, 1998, a
final judgment was entered in favor of the contractors for $1,200 plus interest.
On July 1, 1999, the Court of Appeals found that the trial court
erred in converting the termination for default to a termination for convenience
without first determining whether a default existed. The Court of Appeals
remanded the case for determination of whether the government's default
termination was justified. The Court of Appeals stated that it was expressing no
view on that issue, and it left the parties the opportunity to fully litigate
that issue on remand.
The company continues to believe that the government's default
termination was improper, both as to process (the basis relied upon by the trial
court) and because the contractors were not in default. The company continues to
believe that at a full trial it will be able to demonstrate that the default
termination was not justified and that the termination for default will be
converted to a termination for convenience. If the company is successful in such
a new trial, it could result in the same, a lesser or a greater award to the
contractors.
The parties explored the possibility of an out-of-court settlement of
the litigation, in which Warren Christopher, former U.S. Secretary of State,
served as a neutral mediator. This mediation process was not successful in
resolving the litigation. The litigation is now back in the trial court, with
the trial likely to be held in 2001.
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 and remand proceedings. In the event that
the contractors are ultimately found to have been in default under the A-12
contract and are required to repay all unliquidated progress payments,
additional losses of approximately $675, plus interest, may be recognized by the
company. The company believes the possibility of this result is remote.
13
<PAGE> 15
(M) Business Group Information
Management has chosen to organize and measure its business groups in
accordance with several factors, including a combination of the nature of
products and services offered, the nature of the production processes and the
class of customer for the company's products. Operating groups are aggregated
for reporting purposes consistent with these criteria. Management measures its
groups' profit based primarily on operating earnings. As such, net interest,
other income items and income taxes have not been allocated to the company's
business groups. For a further description of the company's business groups, see
Management's Discussion and Analysis of the Results of Operations and Financial
Condition.
Summary financial information for each of the company's business
groups follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
Net Sales Operating Earnings
--------- ------------------
October 1 October 3 October 1 October 3
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aerospace $733 $704 $149 $128
Information Systems
& Technology 596 354 55 30
Marine Systems 798 788 77 80
Combat Systems 298 296 37 37
Other* 77 73 19 80
------ ------ ---- ----
$2,502 $2,215 $337 $355
====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Net Sales Operating Earnings
--------- ------------------
October 1 October 3 October 1 October 3
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aerospace $2,284 $2,037 $431 $341
Information Systems
& Technology 1,792 830 166 75
Marine Systems 2,499 2,360 247 256
Combat Systems 901 892 110 106
Other* 189 185 24 97
------ ------ ---- ----
$7,665 $6,304 $978 $875
====== ====== ==== ====
</TABLE>
14
<PAGE> 16
<TABLE>
<CAPTION>
Identifiable Assets
-------------------
October 1 December 31
2000 1999
---- ----
<S> <C> <C>
Aerospace $1,668 $1,757
Information Systems
& Technology 2,372 2,418
Marine Systems 1,561 1,431
Combat Systems 1,056 938
Other* 341 373
Corporate** 1,233 857
----- ---
$8,231 $7,774
====== ======
</TABLE>
* Other operating earnings include the operating results of the company's
commercial pension plans, including Gulfstream's merged plans post-acquisition.
Other identifiable assets include assets of both of the company's finance
operations. These assets include cash and equivalents and receivables.
** Corporate identifiable assets include cash and equivalents from domestic
operations, deferred taxes, real estate held for development and net prepaid
pension cost related to the company's commercial plans.
15
<PAGE> 17
GENERAL DYNAMICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
October 1, 2000
(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," "scheduled," "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, aircraft production and deliveries,
cash flows, contract awards, and aircraft backlog stability. Forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and involve certain risks and uncertainties, which are
difficult to predict. Therefore, actual future results and trends may differ
materially from what is forecast in forward-looking statements due to a variety
of factors, including, without limitation: the company's successful execution of
internal performance plans; performance issues with key suppliers and
subcontractors; the status or outcome of legal and/or regulatory proceedings;
the status or outcome of labor negotiations; changing customer demand or
preferences for business aircraft; changes from the company's expectations with
respect to its customers' exercise of business aircraft options; changing
priorities or reductions in the U.S. government defense budget; termination of
government contracts due to unilateral government action; and the timing and
occurrence (or non-occurrence) of circumstances beyond the company's control.
Business Groups
The company operates in four primary business groups: Aerospace,
Information Systems and Technology, Marine Systems, and Combat Systems. The
company also owns coal mining and aggregates operations in the Midwest, and a
leasing operation for liquefied natural gas tankers, which are classified as
Other. The following table sets forth the net sales and operating earnings by
business group for the three-month and nine-month periods ended October 1, 2000
and October 3, 1999:
16
<PAGE> 18
<TABLE>
<CAPTION>
Three-Month Period Ended Nine-month Period Ended
----------------------------------------------------------------------------------------------------------------------------
October 1 October 3 Increase/ October 1 October 3 Increase/
2000 1999 (Decrease) 2000 1999 (Decrease)
----------------------------------------------------------------------------------------------------------------------------
NET SALES:
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aerospace $ 733 $ 704 $ 29 $2,284 $2,037 $ 247
Information Systems
& Technology 596 354 242 1,792 830 962
Marine Systems 798 788 10 2,499 2,360 139
Combat Systems 298 296 2 901 892 9
Other 77 73 4 189 185 4
----------------------------------------------------------------------------------------------------------------------------
$2,502 $2,215 $ 287 $7,665 $6,304 $1,361
----------------------------------------------------------------------------------------------------------------------------
OPERATING EARNINGS:
----------------------------------------------------------------------------------------------------------------------------
Aerospace $ 149 $ 128 $ 21 $ 431 $ 341 $ 90
Information Systems
& Technology 55 30 25 166 75 91
Marine Systems 77 80 (3) 247 256 (9)
Combat Systems 37 37 - 110 106 4
Other 19 80 (61) 24 97 (73)
----------------------------------------------------------------------------------------------------------------------------
$ 337 $ 355 $ (18) $ 978 $875 $ 103
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Results of Operations
Aerospace
Net sales increased during the three-month period due primarily to an
increase in aircraft services and pre-owned aircraft deliveries, partially
offset by the timing of new aircraft and completion deliveries. For the
nine-month period, net sales increased due primarily to an increase in both new
aircraft and completion deliveries in 2000 from 1999 and to an increase in
previously owned aircraft deliveries. Operating earnings increased during the
respective periods due primarily to improved performance in both the new
aircraft and completion processes.
Information Systems and Technology
Net sales and operating earnings increased during the three- and
nine-month periods due primarily to the acquisition of Government Systems
Corporation (GSC) on September 1, 1999. Excluding the results of GSC, net sales
remained essentially the same and operating earnings increased by 37 and 16
percent during the three- and nine-month periods, respectively. The growth in
operating earnings is primarily driven by margin improvements in the company's
commercial undersea fiber-optic communications business.
17
<PAGE> 19
Marine Systems
Net sales increased during the three- and nine-month periods due
primarily to increased volume in submarine construction, partially offset by
lower destroyer (DDG 51) and sealift construction volume. DDG 51 revenue was
delayed due to the work stoppage at Bath Iron Works beginning in late August. On
October 22, 2000, the International Association of Machinists and Aerospace
Workers union ratified a new 42-month bargaining agreement and the production
employees resumed work.
Operating earnings decreased slightly year-over-year due to the work
stoppage discussed above as well as the mix in development and early stage
production programs (including the Virginia-class submarine and the DD21 surface
combatant) as compared to mature production programs in 1999.
Other
Operating earnings decreased during the three- and nine-month periods
due primarily to several non-recurring events that occurred during the quarter
ended October 3, 1999. As a result of the merger of the General Dynamics and
Gulfstream commercial pension plans, the company recognized previously deferred
gains on General Dynamics' commercial pension plan, totaling $126 (before-tax).
Additionally, management concluded not to make additional investments in its
undeveloped high-sulfur coal reserves. As such, the company revalued these coal
reserves and related equipment, resulting in a non-cash charge to earnings of
approximately $60 (before-tax).
Backlog
The following table details the backlog of each business group as
calculated at October 1, 2000, and December 31, 1999:
<TABLE>
<CAPTION>
October 1 December 31
2000 1999
---------------------- ------------------
<S> <C> <C>
Aerospace $ 3,307 $ 3,753
Information Systems & Technology 1,920 2,000
Marine Systems 11,628 11,608
Combat Systems 1,584 1,596
Other 465 523
---------------------- ------------------
Total Backlog $ 18,904 $ 19,480
====================== ==================
Funded Backlog $ 12,444 $ 11,665
====================== ==================
</TABLE>
18
<PAGE> 20
Aerospace
Total backlog includes funded backlog, representing orders for which
the company has entered into a definitive purchase contract with no significant
contingencies and has received a significant non-refundable deposit from the
customer. Backlog also includes aircraft options, which primarily include
agreements with Executive Jet International, an unaffiliated company, to
purchase aircraft for use in their fractional ownership program. Backlog also
includes agreements with Gulfstream GATX Leasing Company, LLC (a subsidiary of
GATX Capital), which purchases aircraft from the company and then offers the
aircraft for lease to customers, generally under short-term operating leases.
Gulfstream Aerospace Corporation (Gulfstream) has a 15 percent ownership
interest in GATX Leasing Company.
Defense Businesses
Total backlog represents the estimated remaining sales value of work
to be performed under firm contracts. Funded backlog for government programs
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.
Other backlog primarily includes amounts for long-term coal
contracts.
New Awards
Aerospace
During early October, Gulfstream announced the launch of the next
generation Gulfstream aircraft, the GV-SP. Certification is expected in 2002
with customer delivery planned for 2003. On October 9, 2000, the company
announced that Executive Jet converted 17 of its G-V options to firm contracts
for GV-SPs. These options were included in the company's unfunded backlog at
October 1, 2000.
Marine Systems
On September 15, 2000, the company received a contract from British
Petroleum for the construction of three double-hull crude oil tankers. The
contract, valued at $630, includes options for three additional vessels.
Construction on the first ship will begin in 2002 with the first delivery in the
fourth quarter of 2003, and subsequent deliveries in 2004 and 2005.
19
<PAGE> 21
Additional Financial Information
Other, Net
In the third quarter of 1999, in connection with the acquisition of
Gulfstream, the company recorded a charge to earnings of $36 (before-tax) for
related costs, consisting of investment banking, legal, bank fees, accounting,
printing and regulatory filing fees. Additionally, in connection with the
repayment of certain of Gulfstream's debt instruments, the company recorded in
the third quarter of 1999 a one-time non-cash charge of $7 (before-tax) for the
unamortized debt costs associated with these instruments.
Provision for Income Taxes
During the first quarter of 1999, General Dynamics and the U.S.
Internal Revenue Service settled outstanding tax issues, including refund claims
for research and experimentation tax credits, for the years 1981 through 1989
for approximately $334 (including before-tax interest). The company recognized a
benefit of $165 (net of amounts previously recorded in 1991 and 1992), or $.82
per diluted share, as a result of this settlement. During the third quarter of
2000, General Dynamics settled outstanding tax issues, including its remaining
refund claim for research and experimentation tax credits, for the years 1990
through 1993. The company recognized a benefit of $90, or $.45 per diluted
share, as a result of this settlement. For further discussion of this and other
tax matters, as well as a discussion of the net deferred tax asset, see Note J
to the Consolidated Financial Statements.
Environmental Matters and Other Contingencies
For a discussion of environmental matters and other contingencies,
see Notes K and L to the Consolidated Financial Statements. The company's
liability, in the aggregate, with respect to these matters, is not expected to
be material to the company's results of operations or financial condition.
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. SFAS 137
issued in June 1999 deferred the effective date of SFAS 133 by one year. As
such, the company is now required to adopt the provisions of the standard during
the first quarter of 2001. Because the company's use of derivatives is minimal,
it does not expect that the adoption of the new standard will have a material
impact on the results of operations or financial condition.
20
<PAGE> 22
Financial Condition
Operating Activities
Cash flows from continuing operations increased this year over last
year due to the growth in business through acquisitions, primarily Government
Systems, acquired on September 1, 1999, as well as the growth in Gulfstream's
results of operations. The company expects to continue to generate funds from
operations in excess of its short- and long-term liquidity needs.
Investing Activities
On November 9, 2000, the company announced that it has entered into a
definitive agreement to acquire for cash the outstanding shares of Primex
Technologies, Inc. (NASDAQ:PRMX) for $32.10 per share plus the obligation to
assume approximately $170 in debt. The company anticipates financing the
purchase through the issuance of commercial paper. The acquisition is expected
to close during January 2001, subject to regulatory review as well as Primex
shareholder approval. Primex provides a variety of munitions, propellants,
satellite propulsion systems and electronics products to the U.S. and its
allies, as well as domestic and international industrial customers. Primex's
2000 revenues are estimated at $530, with net income estimated at $24. The
acquisition is expected to be accretive to earnings.
On September 1, 1999, the company completed the acquisition of three
business units formerly part of GTE Government Systems Corporation (renamed,
General Dynamics Government Systems Corporation) for $1.01 billion in cash. The
company financed the purchase through the issuance of commercial paper. As of
October 1, 2000, the company had approximately $850 million commercial paper
outstanding at an average yield of approximately 6.7% with an average term of
approximately 80 days. The company expects to reissue commercial paper as it
matures, and has the option to extend the term up to 270 days.
On July 30, 1999, the company acquired Gulfstream in a pooling of
interests transaction. Accordingly, all data for periods prior to the
combination have been restated to include the accounts and results of operations
of Gulfstream.
Financing Activities
During the first nine months of 1999, the company repaid from its
available funds approximately $360 of Gulfstream's debt instruments.
On March 7, 2000, the company's board of directors formally
authorized management to repurchase in the open market up to ten million shares
of the company's issued and outstanding common stock. From the date of
authorization through the third quarter of 2000, the company repurchased
approximately 4.1 million shares for $208.
On June 23, 1999, the company's board of directors formally rescinded
management's authority to repurchase shares of the company's common stock on the
open market. On June 25, 1999, Gulfstream's board of directors formally
rescinded management's authority to repurchase shares of its common stock
21
<PAGE> 23
on the open market. During the first nine months of 1999, the company
repurchased approximately 1.3 million shares under these programs for $59.
On March 1, 2000, the company's board of directors declared an
increased regular quarterly dividend of $.26 per share. The company had
previously increased the quarterly dividend to $.24 per share in March 1999.
The company has available a $1 billion committed line of credit
expiring in May 2002 and an available $400 committed line of credit expiring in
December 2002, both of which back the company's commercial paper program. These
credit facilities contain minimum net worth requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes with respect to this item from the
disclosure included in the company's Annual Report on Form 10-K for the year
ended December 31, 1999.
22
<PAGE> 24
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
October 1, 2000
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10-45 Agreement and Plan of Merger, dated as of November 9,
2000, among General Dynamics Corporation, Mars
Acquisition Corporation and Primex Technologies, Inc.
Exhibit 27 Financial Data Schedule
Exhibit 99 Press Release dated November 9, 2000, "General
Dynamics to Acquire Primex Technologies, Inc."
(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
(Authorized Officer and Chief Accounting Officer)
Dated: November 13, 2000
23
