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)
For the quarterly period ended June 30, 2002
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
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 ______.
201,993,929 shares of the registrant’s common stock, $1 par value per share, were outstanding at July 28, 2002.
GENERAL DYNAMICS CORPORATION
INDEX
| PART I - FINANCIAL INFORMATION | PAGE | ||||
Item 1 - Consolidated Financial Statements |
|||||
Consolidated Balance Sheet |
2 | ||||
Consolidated Statement of Earnings (Three Months) |
3 | ||||
Consolidated Statement of Earnings (Six Months) |
4 | ||||
Consolidated Statement of Cash Flows |
5 | ||||
Notes to Unaudited Consolidated Financial Statements |
6 | ||||
Item 2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations |
23 | ||||
Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
33 | ||||
PART II — OTHER INFORMATION |
|||||
Item 1 - Legal Proceedings |
34 | ||||
Item 4 - Submission of Matters to a Vote of Security Holders |
34 | ||||
Item 6 - Exhibits and Reports on Form 8-K |
35 | ||||
SIGNATURE |
36 | ||||
1
GENERAL DYNAMICS CORPORATION
PART I – FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
| June 30 | ||||||||
| 2002 | December 31 | |||||||
| (Unaudited) | 2001 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and equivalents |
$ | 376 | $ | 442 | ||||
Accounts receivable |
1,320 | 996 | ||||||
Contracts in process |
1,847 | 1,737 | ||||||
Inventories |
1,370 | 1,289 | ||||||
Other current assets |
431 | 429 | ||||||
Total Current Assets |
5,344 | 4,893 | ||||||
NONCURRENT ASSETS: |
||||||||
Property, plant and equipment, net |
1,827 | 1,768 | ||||||
Intangible assets, net |
499 | 648 | ||||||
Goodwill, net |
3,509 | 3,110 | ||||||
Other assets |
650 | 650 | ||||||
Total Noncurrent Assets |
6,485 | 6,176 | ||||||
| $ | 11,829 | $ | 11,069 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Short-term debt and current portion of long-term debt |
$ | 1,223 | $ | 1,211 | ||||
Accounts payable |
935 | 904 | ||||||
Other current liabilities |
2,719 | 2,464 | ||||||
Total Current Liabilities |
4,877 | 4,579 | ||||||
NONCURRENT LIABILITIES: |
||||||||
Long-term debt |
725 | 724 | ||||||
Other liabilities |
1,238 | 1,238 | ||||||
Commitments and contingencies (See Note K) |
||||||||
Total Noncurrent Liabilities |
1,963 | 1,962 | ||||||
SHAREHOLDERS’ EQUITY: |
||||||||
Common stock, including surplus |
777 | 694 | ||||||
Retained earnings |
5,150 | 4,778 | ||||||
Treasury stock |
(927 | ) | (930 | ) | ||||
Accumulated other comprehensive loss |
(11 | ) | (14 | ) | ||||
Total Shareholders’ Equity |
4,989 | 4,528 | ||||||
| $ | 11,829 | $ | 11,069 | |||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
2
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
| Three Months Ended | ||||||||||
| June 30 | July 1 | |||||||||
| 2002 | 2001 | |||||||||
NET SALES |
$ | 3,511 | $ | 2,962 | ||||||
OPERATING COSTS AND EXPENSES |
3,101 | 2,591 | ||||||||
OPERATING EARNINGS |
410 | 371 | ||||||||
Interest expense, net |
(11 | ) | (15 | ) | ||||||
Other income (expense), net |
3 | (3 | ) | |||||||
EARNINGS BEFORE INCOME TAXES |
402 | 353 | ||||||||
Provision for income taxes |
139 | 126 | ||||||||
NET EARNINGS |
$ | 263 | $ | 227 | ||||||
NET EARNINGS PER SHARE: |
||||||||||
Basic |
$ | 1.30 | $ | 1.13 | ||||||
Diluted |
$ | 1.29 | $ | 1.12 | ||||||
DIVIDENDS PER SHARE |
$ | 0.30 | $ | 0.28 | ||||||
SUPPLEMENTAL INFORMATION: |
||||||||||
General and adminstrative expenses included in
operating costs and expenses |
$ | 224 | $ | 209 | ||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
3
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(Dollars in millions, except per share amounts)
| Six Months Ended | ||||||||||
| June 30 | July 1 | |||||||||
| 2002 | 2001 | |||||||||
NET SALES |
$ | 6,632 | $ | 5,635 | ||||||
OPERATING COSTS AND EXPENSES |
5,857 | 4,930 | ||||||||
OPERATING EARNINGS |
775 | 705 | ||||||||
Interest expense, net |
(23 | ) | (27 | ) | ||||||
Other income (expense), net |
— | 5 | ||||||||
EARNINGS BEFORE INCOME TAXES |
752 | 683 | ||||||||
Provision for income taxes |
260 | 216 | ||||||||
NET EARNINGS |
$ | 492 | $ | 467 | ||||||
NET EARNINGS PER SHARE: |
||||||||||
Basic |
$ | 2.44 | $ | 2.33 | ||||||
Diluted |
$ | 2.42 | $ | 2.31 | ||||||
DIVIDENDS PER SHARE |
$ | 0.60 | $ | 0.56 | ||||||
SUPPLEMENTAL INFORMATION: |
||||||||||
General and adminstrative expenses included in
operating costs and expenses |
$ | 446 | $ | 391 | ||||||
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
4
GENERAL DYNAMICS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(Dollars in millions)
| Six Months Ended | |||||||||
| June 30 | July 1 | ||||||||
| 2002 | 2001 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||||
Net earnings |
$ | 492 | $ | 467 | |||||
Adjustments to reconcile net earnings to net
cash provided by operating activities- |
|||||||||
Depreciation, depletion and amortization of property,
plant and equipment |
94 | 80 | |||||||
Amortization of intangible assets and goodwill |
17 | 47 | |||||||
Deferred income tax provision |
92 | 23 | |||||||
(Increase) decrease in current assets, net of effects of business acquisitions- |
|||||||||
Accounts receivable |
(303 | ) | (51 | ) | |||||
Contracts in process |
2 | (103 | ) | ||||||
Inventories |
(96 | ) | (82 | ) | |||||
Increase (decrease) in liabilities, net of effects of business acquisitions- |
|||||||||
Accounts payable |
1 | (35 | ) | ||||||
Customer deposits on commercial contracts |
(59 | ) | 42 | ||||||
Billings in excess of costs and estimated profits |
79 | 6 | |||||||
Other, net |
19 | (25 | ) | ||||||
Net Cash Provided by Operating Activities |
338 | 369 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||||
Business acquisitions, net of cash acquired |
(213 | ) | (711 | ) | |||||
Capital expenditures |
(100 | ) | (110 | ) | |||||
Proceeds from sale of assets |
25 | 70 | |||||||
Other, net |
7 | (3 | ) | ||||||
Net Cash Used by Investing Activities |
(281 | ) | (754 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||||
Net proceeds from commercial paper |
27 | 611 | |||||||
Net repayments of other debt |
(68 | ) | (157 | ) | |||||
Dividends paid |
(116 | ) | (108 | ) | |||||
Purchases of common stock |
(10 | ) | (20 | ) | |||||
Proceeds from option exercises |
53 | 38 | |||||||
Other, net |
(9 | ) | 7 | ||||||
Net Cash (Used) Provided by Financing Activities |
(123 | ) | 371 | ||||||
NET DECREASE IN CASH AND EQUIVALENTS |
(66 | ) | (14 | ) | |||||
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD |
442 | 177 | |||||||
CASH AND EQUIVALENTS AT END OF PERIOD |
$ | 376 | $ | 163 | |||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
|||||||||
Cash payments for: |
|||||||||
Income taxes |
$ | 178 | $ | 172 | |||||
Interest, including finance operations |
$ | 26 | $ | 35 | |||||
The accompanying Notes to Unaudited Financial Statements are an integral part of this statement.
5
GENERAL DYNAMICS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
(A) Basis of Preparation
The term “company” refers to General Dynamics Corporation and all of its wholly-owned and majority-owned subsidiaries. The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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. Operating results for the three- and six-month periods ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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, 2001.
In the opinion of the company, the unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three- and six-month periods ended June 30, 2002 and July 1, 2001.
(B) New Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146 (SFAS 146), “Accounting for Costs Associated with Exit or Disposal Activities” in June 2002. SFAS 146 nullifies previous guidance on this issue and requires a liability for a cost associated with an exit or disposal activity to be recognized and measured at its fair value in the period in which the liability is incurred. The company is required to adopt the provisions of this statement for exit or disposal activities initiated after December 31, 2002. The company does not expect the adoption of this standard to have a material impact on the company’s results of operations, financial condition or cash flows.
The FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” in April 2002. SFAS 145 clarifies guidance related to the reporting of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting treatment of certain lease modifications. The provisions of this statement relating to extinguishment of debt are effective for financial statements issued for fiscal years beginning after May 15, 2002. The provisions of this statement relating to lease modifications are effective for transactions occurring after May 15, 2002. The company does not expect the adoption of this standard to have a material impact on the company’s results of operations, financial condition or cash flows.
The FASB issued SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in October 2001. SFAS 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less cost to sell, including discontinued operations. The statement also broadens the definition of discontinued operations. The company adopted SFAS 144 on January 1, 2002. The adoption of this standard did not have a material impact on the company’s results of operations, financial condition or cash flows.
6
The FASB issued SFAS 143, “Accounting for Asset Retirement Obligations,” in August 2001. SFAS 143 requires companies to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred, and capitalize the cost by increasing the carrying amount of the related long-lived asset. The company is required to adopt SFAS 143 on January 1, 2003. The company does not expect the adoption of this standard to have a material impact on the company’s results of operations, financial condition or cash flows.
(C) Comprehensive Income
Comprehensive income was $272 and $214 for the three-month periods and $495 and $471 for the six-month periods ended June 30, 2002 and July 1, 2001, respectively. Comprehensive income consists primarily of net earnings ($263 and $227 for the three-month periods and $492 and $467 for the six-month periods ended June 30, 2002 and July 1, 2001, respectively), foreign currency translation adjustments and fair value adjustments for both a currency swap (see Note H) and available-for-sale securities.
(D) Earnings Per Share
Basic and diluted weighted-average shares outstanding were as follows (in thousands) for the three- and six-month periods ended June 30, 2002 and July 1, 2001:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | July 1 | June 30 | July 1 | |||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Basic |
201,827 | 201,029 | 201,410 | 200,715 | ||||||||||||
Diluted |
203,836 | 203,010 | 203,180 | 202,519 | ||||||||||||
(E) Contracts in Process
Contracts in process primarily represent costs and accrued profit related to defense contracts and programs and consisted of the following:
| June 30 | December 31 | |||||||
| 2002 | 2001 | |||||||
Net contract costs and estimated profits |
$ | 1,043 | $ | 1,006 | ||||
Other contract costs |
804 | 731 | ||||||
| $ | 1,847 | $ | 1,737 | |||||
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 accounting principles generally accepted in the United States 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 primarily on the costs priced in the company’s backlog, the majority of which relates to contracts for which the company is the sole source or one of two suppliers on
7
long-term defense programs. 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 adversely affected.
(F) Inventories
Inventories consisted primarily of commercial aircraft components, as follows:
| June 30 | December 31 | |||||||
| 2002 | 2001 | |||||||
Work in process |
$ | 610 | $ | 643 | ||||
Raw materials |
368 | 361 | ||||||
Pre-owned aircraft |
358 | 254 | ||||||
Other |
34 | 31 | ||||||
| $ | 1,370 | $ | 1,289 | |||||
Other inventories consisted primarily of coal and aggregates, which are stated at the lower of average cost or estimated net realizable value.
(G) Intangible Assets and Goodwill, Net
The company adopted SFAS 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. The provisions of SFAS 142 eliminate amortization of goodwill and identifiable intangible assets with indefinite lives. Intangible assets with a finite life will continue to be amortized over their useful life. The standard also requires an impairment assessment at least annually by applying a fair-value-based test. The company completed the required transitional goodwill impairment test during the first quarter of 2002, and no impairment of goodwill was identified.
8
The following table presents comparative earnings data as if SFAS 142 had been adopted January 1, 2001:
| Three Months Ended | Six Months Ended | ||||||||||||||||
| July 1 | July 1 | ||||||||||||||||
| June 30 | 2001 | June 30 | 2001 | ||||||||||||||
| 2002 | (Adjusted) | 2002 | (Adjusted) | ||||||||||||||
Reported net earnings |
$ | 263 | $ | 227 | $ | 492 | $ | 467 | |||||||||
Add back: Amortization, net of tax effect |
— | 12 | — | 24 | |||||||||||||
Adjusted net earnings |
$ | 263 | $ | 239 | $ | 492 | $ | 491 | |||||||||
Basic earnings per share: |
|||||||||||||||||
Reported basic net earnings per share |
$ | 1.30 | $ | 1.13 | $ | 2.44 | $ | 2.33 | |||||||||
Adjusted for amortization |
— | 0.06 | — | 0.12 | |||||||||||||