<PAGE> 1
===============================================================================
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 APRIL 2, 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)
<TABLE>
<S> <C>
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
</TABLE>
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.
<TABLE>
<S> <C>
COMMON STOCK, $1 PAR VALUE - APRIL 30, 2000 200,658,744
</TABLE>
==============================================================================
<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 3
Consolidated Statement of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURE 20
- ---------
</TABLE>
1
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PART I
ITEM 1. FINANCIAL STATEMENTS
GENERAL DYNAMICS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
<TABLE>
<CAPTION>
April 2 December 31
2000 1999
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and equivalents $ 236 $ 270
Accounts receivable 875 746
Contracts in process 1,340 1,204
Inventories 991 961
Other current assets 337 310
------------- -------------
Total Current Assets 3,779 3,491
------------- -------------
NONCURRENT ASSETS:
Property, plant and equipment, net 1,211 1,169
Goodwill, net 1,983 1,991
Intangible assets, net 520 522
Other assets 608 601
------------- -------------
Total Noncurrent Assets 4,322 4,283
------------- -------------
$ 8,101 $ 7,774
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Short-term debt and current portion of long-term debt $ 1,001 $ 853
Accounts payable 624 631
Other current liabilities 2,068 1,969
------------- -------------
Total Current Liabilities 3,693 3,453
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt 170 169
Other liabilities 968 981
Commitments and contingencies (See Note K)
------------- -------------
Total Noncurrent Liabilities 1,138 1,150
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, including surplus 498 487
Retained earnings 3,495 3,363
Treasury stock (718) (673)
Accumulated other comprehensive loss (5) (6)
-------------- --------------
Total Shareholders' Equity 3,270 3,171
------------- -------------
$ 8,101 $ 7,774
============= =============
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
2
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GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
April 2 April 4
2000 1999
------------- -------------
<S> <C> <C>
NET SALES $ 2,546 $ 2,002
OPERATING COSTS AND EXPENSES 2,240 1,761
------------- -------------
OPERATING EARNINGS 306 241
Interest expense, net (19) (6)
Other (expense) income, net (1) 9
------------- -------------
EARNINGS BEFORE INCOME TAXES 286 244
Provision (benefit) for income taxes 102 (79)
------------- --------------
NET EARNINGS $ 184 $ 323
============= =============
NET EARNINGS PER SHARE:
Basic $ .92 $ 1.62
============= =============
Diluted $ .91 $ 1.60
============= =============
DIVIDENDS PER SHARE $ .26 $ .24
============= =============
SUPPLEMENTAL INFORMATION:
General and administrative expenses included in
operating costs and expenses $ 157 $ 126
============= =============
</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 CASH FLOWS
(UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
April 2 April 4
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 184 $ 323
Adjustments to reconcile net earnings to net
cash provided by continuing operations -
Depreciation, depletion and amortization 56 43
Decrease (Increase) in assets, net of effects of business acquisitions-
Marketable securities - 41
Accounts receivable (124) (64)
Contracts in process (209) (31)
Inventories (30) (23)
Other current assets (7) (2)
Increase (Decrease) in liabilities, net of effects of business acquisitions-
Accounts payable and other current liabilities 35 (55)
Customer deposits 40 71
Current income taxes 54 (121)
Deferred income taxes 14 12
Other, net (10) (18)
------------- -------------
Net cash provided by continuing operations 3 176
Net cash used by discontinued operations (1) (2)
------------- -------------
Net Cash Provided by Operating Activities 2 174
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (8) (20)
Capital expenditures (79) (31)
Proceeds from sale of assets 1 13
Other (2) 1
------------- -------------
Net Cash Used by Investing Activities (88) (37)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from commercial paper issuances 144 -
Repayments of other debt - (24)
Repayments of debt - finance operations (3) (3)
Dividends paid (48) (28)
Purchases of common stock (43) (46)
Proceeds from option exercises 2 14
-------------- -------------
Net Cash Provided (Used) by Financing Activities 52 (87)
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (34) 50
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 270 210
-------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 236 $ 260
============== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Federal income taxes $ 31 $ 21
Interest (including finance operations) $ 23 $ 12
</TABLE>
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of this statement.
4
<PAGE> 6
GENERAL DYNAMICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The unaudited consolidated financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, the company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the three-month period ended April 2, 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.
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-month periods ended April 2, 2000 and April 4, 1999.
(B) Comprehensive Income
Comprehensive income was $185 and $320 for the three-month periods
ended April 2, 2000 and April 4, 1999, respectively.
(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.
Purchase Method
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
5
<PAGE> 7
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). Certain of
the estimates are still preliminary at April 2, 2000, but will be finalized
within one year from the date of acquisition. Operating results have been
included with those of the company from the acquisition closing date.
(D) Earnings Per Share
Basic and diluted weighted average shares outstanding are as follows
(in thousands):
<TABLE>
<CAPTION>
Three-month periods ended
---------------------------
April 2 April 4
2000 1999
---- ----
<S> <C> <C>
Basic 200,896 199,458
Diluted 202,281 202,240
</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>
April 2 December 31
2000 1999
------------- -------------
<S> <C> <C>
Net contract costs and estimated profits $ 616 $ 483
Other contract costs 724 721
------------- -------------
$ 1,340 $ 1,204
============= =============
</TABLE>
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, postretirement 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.
6
<PAGE> 8
(F) Inventories
Inventories consist primarily of commercial aircraft components, as
follows:
<TABLE>
<CAPTION>
April 2 December 31
2000 1999
------------- -------------
<S> <C> <C>
Work in process $ 449 $ 436
Raw materials 251 262
Pre-owned aircraft 270 243
Other 21 20
------------- -------------
$ 991 $ 961
============= =============
</TABLE>
(G) Goodwill and Intangible Assets
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 $98 and $84 at April 2, 2000, and December 31, 1999,
respectively.
Intangible assets resulting primarily from the company's acquisitions
consist of the following:
<TABLE>
<CAPTION>
April 2 December 31
2000 1999
------------- -------------
<S> <C> <C>
Contracts and programs acquired $ 451 $ 455
Other 69 67
------------- -------------
$ 520 $ 522
============= =============
</TABLE>
Intangible assets are shown net of accumulated amortization of $115 and
$110 at April 2, 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 consist primarily of customer lists
and purchase options on buildings currently leased. These other intangible
assets are amortized over periods ranging from 3 to 20 years.
(H) Debt
Debt (excluding finance operations) consists of the following:
<TABLE>
<CAPTION>
April 2 December 31
2000 1999
------------- -------------
<S> <C> <C>
Commercial paper $ 996 $ 852
Senior notes 149 149
Industrial development bonds 15 15
Other 11 6
------------- -------------
1,171 1,022
Less current portion 1,001 853
------------- -------------
$ 170 $ 169
============= =============
</TABLE>
7
<PAGE> 9
As of April 2, 2000, the company had $1,009 par value discounted
commercial paper outstanding at an average yield of approximately 6.18 percent
with an average term of approximately 83 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 this
commercial paper program.
(I) Liabilities
A summary of significant liabilities, by balance sheet caption,
follows:
<TABLE>
<CAPTION>
April 2 December 31
2000 1999
------------- -------------
<S> <C> <C>
Customer deposits $ 530 $ 471
Workers' compensation 482 479
Retirement benefits 269 279
Billings in excess of cost 138 142
Other 649 598
------------- -------------
Other Current Liabilities $ 2,068 $ 1,969
============= =============
Retirement benefits $ 298 $ 296
Accrued costs on disposed businesses 135 156
Coal mining related liabilities 70 71
Other 465 458
------------- -------------
Other Liabilities $ 968 $ 981
============= =============
</TABLE>
(J) Income Taxes
The company had a net deferred tax asset of $277 and $291 at April 2,
2000, and December 31, 1999, respectively, the current portion of which was $283
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 April 2, 2000, and December 31, 1999.
During the first quarter of 1999, the company and the U.S. Internal
Revenue Service settled 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. In April 1999, the company received the $334 cash refund from
the IRS related to this settlement.
The IRS has completed its examination of General Dynamics' 1990 through
1993 consolidated federal income tax returns. Unresolved matters for these years
have been protested to the IRS Appeals Division. A refund claim by General
Dynamics for $78 (plus interest) for research and experimentation tax credits
for the year 1990 will also be considered by the IRS Appeals Division. 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 is not
8
<PAGE> 10
expected to have a materially unfavorable impact on the company's results of
operations or financial condition.
All matters related to Gulfstream's consolidated federal income tax
returns for years up to and including 1994 have been resolved. Resolution of
these years did not have a material impact on the company's results of
operations or financial condition.
(K) Commitments and Contingencies
Litigation
Claims made by and against the company regarding its consolidated
federal income tax returns are discussed in Note J. 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, Fifth Appellate District. On appeal, the
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. Management currently
believes 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
9
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al. The complaint also names two insurance brokers, Lloyd Thompson, Ltd. and
Willis Corroon Corporation of Missouri, as defendants. The plaintiffs are
members of certain Lloyd's of London syndicates and British insurance companies
who sold the company 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 seeks a declaratory judgment that the policies are valid,
actual damages, and payment of a penalty under a Missouri statute for the
plaintiffs' vexatious and unreasonable failure to pay claims. In February 2000,
General Dynamics completed the trial of this matter before a special master. The
company expects a decision later in 2000 and does not expect that this case will
have a material impact on the company's results of operations or financial
condition.
The company was either a named defendant or a third-party defendant in
certain multi-plaintiff tort cases pending in state or federal court in
Arizona, captioned: Cordova, et al. v. Hughes Aircraft Co.; Lanier, et al. v.
Hughes Aircraft Co., et al.; Yslava, et al. v. Hughes Aircraft Co.; and
Arellano, et al. v. Hughes Aircraft Co. In these cases the plaintiffs alleged
that they suffered personal injuries and/or property damage from chronic
exposure to drinking water alleged to be contaminated with trace amounts of the
industrial solvent trichloroethylene. The alleged source of the contamination
was industrial facilities in and around the site now occupied by the Tucson
International Airport (TIA) and U.S. Air Force Plant #44. In addition to the
company, defendants were Hughes Aircraft Co. (now Raytheon), the Tucson Airport
Authority (TAA), the City of Tucson (the City), and McDonnell Douglas Corp.
(MDC). In Cordova, the company negotiated a settlement with all but four
plaintiffs, who have had summary judgment entered against them. These four
plaintiffs failed to appeal the judgment against them and the time for appeal
expired in January 2000. The company settled all the remaining cases and final
dismissal orders were entered by the court in February 2000. The resolution of
these matters did not have a material impact on the company's results of
operations or financial condition.
In other litigation concerning the Tucson site, the company is a
defendant in two cases brought in federal district court in Arizona by TAA and
the City under the Comprehensive Environmental Response Compensation and
Liability Act (CERCLA). Plaintiffs seek reimbursement of CERCLA response costs
and a declaration of the company's alleged liability with respect to soil and
groundwater contamination at portions of the Tucson site. 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 currently occupied by the TIA. Other PRPs receiving a similar notice
were the U.S. Air Force, TAA, MDC and the City. The company has reached an
agreement to settle the litigation brought by TAA and the City. The parties are
processing final dismissal orders to be entered by the court. The court entered
a consent decree negotiated with the U.S. EPA in response to the Special Notice
Letter in February 2000. 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.
10
<PAGE> 12
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 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.
(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.
11
<PAGE> 13
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.
Nonetheless, the parties have 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. The parties have agreed
that they will not comment on negotiations during this process.
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.
(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:
12
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<TABLE>
<CAPTION>
Three Months Ended
------------------
Net Sales Operating Earnings
--------- ------------------
April 2 April 4 April 2 April 4
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Aerospace $730 $625 $ 131 $ 97
Information Systems
& Technology 606 233 58 21
Marine Systems 846 808 88 88
Combat Systems 315 290 37 35
Other* 49 46 (8) -
------ ------ ----- -----
$2,546 $2,002 $306 $241
====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Identifiable Assets
-------------------
April 2 December 31
2000 1999
---- ----
<S> <C> <C>
Aerospace $1,907 $1,757
Information Systems
& Technology 2,542 2,418
Marine Systems 1,544 1,431
Combat Systems 1,029 938
Other* 380 373
Corporate** 699 857
--- ---
$8,101 $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.
13
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GENERAL DYNAMICS CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 2, 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 periods ended April 2, 2000 and April 4,
1999:
14
<PAGE> 16
<TABLE>
<CAPTION>
Three-Month Period Ended
----------------------------------
April 2 April 4 Increase/
2000 1999 (Decrease)
----------- ---------------- ----------------
<S> <C> <C> <C>
NET SALES:
Aerospace $ 730 $ 625 $ 105
Information Systems and
Technology 606 233 373
Marine Systems 846 808 38
Combat Systems 315 290 25
Other 49 46 3
----------- ---------------- ----------------
$2,546 $2,002 $ 544
=========== ================ ================
OPERATING EARNINGS:
Aerospace $ 131 $ 97 $ 34
Information Systems and
Technology 58 21 37
Marine Systems 88 88 -
Combat Systems 37 35 2
Other (8) - (8)
----------- ---------------- ----------------
$ 306 $ 241 $ 65
=========== ================ ================
</TABLE>
Results of Operations
Aerospace
Net sales increased during the three-month period due primarily to an
increase in completion deliveries to 15 in 2000 from 11 in 1999, as well as to
the mix of new aircraft sold in 2000 as compared to 1999. Operating earnings
increased during the three-month period due to the increase in completion
deliveries previously noted, as well as to improved performance primarily in the
completion process.
Information Systems and Technology
Net sales and operating earnings increased during the three-month
period due primarily to the acquisition of Government Systems Corporation on
September 1, 1999. Excluding the results of Government Systems Corporation, net
sales and operating earnings increased 10 percent and 24 percent, respectively,
primarily driven by growth in the company's commercial undersea fiber-optic
communications business.
15
<PAGE> 17
Marine Systems
Net sales increased during the three-month period due primarily to
increased volume on start-up programs, including the Virginia-class submarine
and the DD 21 surface combatant, partially offset by lower destroyer (DDG 51)
and sealift construction volume. While these early stage programs contribute
lower earnings, operating earnings remained comparable with last year due
primarily to earnings rate increases on mature programs, including both the
Seawolf-class submarine and the strategic sealift ship programs. Operating risks
associated with these programs continue to diminish due to their maturity, as
well as to business base stabilization at each of the shipyards.
Combat Systems
Net sales increased during the three-month period due primarily to
increased work on the Hydra-70 program. Operating earnings increased slightly
during the three-month period due primarily to an earnings rate increase on the
M1A2 tank upgrade program, attributable to cost performance improvements.
Other
Operating earnings decreased during the three-month period due
primarily to performance at the coal operations.
Backlog
The following table details the backlog of each business group as
calculated at April 2, 2000, and December 31, 1999:
<TABLE>
<CAPTION>
April 2 December 31
2000 1999
-------------------- -------------------
<S> <C> <C>
Aerospace $ 3,514 $ 3,753
Information Systems and Technology 2,120 2,000
Marine Systems 11,815 11,608
Combat Systems 1,631 1,596
Other 503 523
-------------------- -------------------
Total Backlog $ 19,583 $ 19,480
==================== ===================
Funded Backlog $ 12,909 $ 11,665
==================== ===================
</TABLE>
Aerospace
Total backlog includes aircraft options- agreements with customers to
grant them the option to subsequently purchase additional aircraft upon defined
terms and conditions. Funded backlog includes only 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.
16
<PAGE> 18
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 Award
On May 4, 2000, the company was awarded five contracts to operate and
maintain ships for the U.S. government. The first is a $58 contract for the
maintenance and operation of eight fast sealift ships. The other four, totaling
$41, are for the operation and maintenance of nine ships for the Department of
Transportation, Maritime Administration's Ready Reserve Force. These contracts
expand the company's ship management services for the U.S. government to a total
of 22 ships.
Additional Financial Information
Provision (Benefit) for Income Taxes
During the first quarter of 1999, the company and the U.S. Internal
Revenue Service settled 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. The company received the $334 cash refund from the IRS related
to this settlement during the second quarter of 1999. 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 of the company's minimal use of
17
<PAGE> 19
derivatives, it does not expect that the adoption of the new standard will have
a material impact on the results of operations or financial condition.
Financial Condition
Operating Activities
Cash flows from continuing operations decreased this year over last
year due primarily to a working capital buildup to support growth in the
company's operations. The company expects to continue to generate funds from
operations in excess of its short- and long-term liquidity needs.
Investing Activities
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
April 2, 2000, the company had approximately $1.01 billion commercial paper
outstanding at an average yield of approximately 6.18% with an average term of
approximately 83 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
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. During the first quarter of 2000,
the company repurchased approximately one million shares for $43.
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 on the
open market. During the first quarter of 1999, the company repurchased
approximately .98 million shares under these programs for $46.
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 and
to $.22 per share in March 1998.
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.
18
<PAGE> 20
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.
19
<PAGE> 21
PART II
GENERAL DYNAMICS CORPORATION
OTHER INFORMATION
April 2, 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 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
(Authorized Officer and Chief Accounting Officer)
Dated: May 12, 2000
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE GENERAL
DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET AS OF APRIL 2, 2000, AND THE
RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED APRIL 2,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-02-2000
<CASH> 236
<SECURITIES> 0
<RECEIVABLES> 875
<ALLOWANCES> 0
<INVENTORY> 2,331
<CURRENT-ASSETS> 3,779
<PP&E> 2,457
<DEPRECIATION> (1,246)
<TOTAL-ASSETS> 8,101
<CURRENT-LIABILITIES> 3,693
<BONDS> 170
0
0
<COMMON> 498
<OTHER-SE> 2,772
<TOTAL-LIABILITY-AND-EQUITY> 8,101
<SALES> 2,546
<TOTAL-REVENUES> 2,546
<CGS> 2,240
<TOTAL-COSTS> 2,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> 286
<INCOME-TAX> 102
<INCOME-CONTINUING> 184
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 184
<EPS-BASIC> .92
<EPS-DILUTED> .91
</TABLE>
