01—Abstract
Summary
Summary of the 10-K filed March 9, 1995. Cited figures are marked; the original filing is the authoritative source.
General Dynamics' 1994 10-K describes a company in the middle of a deliberate contraction.
Following the end of the Cold War and sharp declines in U.S. defense budgets, GD sold or exited most of its historic businesses (Tactical Military Aircraft to Lockheed for $1,525 milliona, Missile Systems, Space Launch Systems, Cessna, Electronics, and parts of Material Service) and now reports three continuing segments: Nuclear Submarines (Electric Boat), Armored Vehicles (Land Systems, M1 Abrams tanks), and Other (Freeman Energy coal, AMSEA ship management, and LNG tanker leasing). 1994 net sales were $3,058 million, down from $3,187 million, and operating earnings rose to $321 million from $309 million. Net earnings fell to $238 million from $885 million, but that comparison is distorted by the 1993 gain on the Tactical Military Aircraft sale.
Earnings from continuing operations were $223 millionb, or $3.51 per share, down from $4.27. The balance sheet strengthened over the year. Cash and marketable securities rose to $1,059 million from $585 million, and shareholders' equity reached $1,316 million.
Operating cash flow from continuing operations was $108 millionc, reflecting heavy reliance on investment income and tax payments. Backlog fell sharply to $6,006 million from $7,015 million, and only $3,612 million is expected to be filled in 1995. Investors should note that the company's future depends heavily on a few programs: the final Los Angeles class 688 submarine, the Trident and Seawolf programs, and the M1A2 tank upgrade.
Management has signaled interest in overseas sales and possible corporate business combinations to offset lower domestic volumes. The key legal overhang is the A-12 aircraft litigation. In December 1994 the Court of Federal Claims vacated the Navy's default termination, a favorable development.
GD has not recognized any claim revenue, and the matter goes to trial in November 1995 on damages. Management considers the risk of a $675 milliond pre-tax loss to be remote, but the outcome could be material to future results and cash.
02—Key points
Key Highlights
- Net sales fell 4% to $3,058 million; operating earnings rose 4% to $321 million, reflecting better earnings rates on submarine and armored vehicle programs.
- Net earnings dropped to $238 million ($3.75 per share) from $885 million, largely because 1993 included a $645 million gain on the Tactical Military Aircraft sale.
- Total backlog declined to $6,006 million from $7,015 million, with $3,612 million expected to be filled in 1995, signaling significant revenue pressure ahead.
- Cash and marketable securities increased to $1,059 million from $585 million, and the company repurchased shares while paying a $1.40 annual dividend per share.
- The U.S. government accounted for 94% of 1994 net sales, leaving the company highly dependent on Congressional funding for the Seawolf, M1A2 and NSSN programs.
- A-12 litigation: the court vacated the Navy's default termination in December 1994, but damages are still to be tried in November 1995, with a remote risk of roughly $675 million pre-tax exposure.
- Electric Boat faces a 1995 labor negotiation with the Metal Trades Council, and the final 688-class submarine delivery is scheduled for September 1995.
03—Questions
Frequently Asked Questions
Why did net earnings fall so sharply in 1994?
The 1993 results included a $645 million gain ($10.19 per share) from selling the Tactical Military Aircraft business, plus large special distributions. In 1994, net earnings of $238 million included only a $15 million gain from the Space Launch Systems sale. Earnings from continuing operations were $223 million, down from $270 million, mainly because 1993 had higher tax and other income items.
How dependent is General Dynamics on the U.S. government?
Very dependent. U.S. government sales were $2,880 million in 1994, or 94% of net sales. Foreign Military Sales were $690 million of that total. All government contracts can be terminated for convenience or default, and funding depends on annual Congressional appropriations.
What is the outlook for revenue given the falling backlog?
Revenue is likely to keep declining. Total backlog fell 14% to $6,006 million, and only $3,612 million of it is expected to be filled in 1995. Submarine construction revenue will drop as the final 688 and Trident ships are delivered, and the lead Seawolf is not due until 1996. Management is pursuing international M1A2 sales, DoD overhaul and upgrade work, and possible acquisitions to offset the decline.
What is the A-12 matter and how much could it cost?
The Navy terminated the A-12 contract for default in 1991, and GD and McDonnell Douglas sued in the Court of Federal Claims. In December 1994 the court vacated the default termination, finding that funding was withdrawn rather than the contractors being at fault. The companies seek about $2 billion, and the damages trial is set for November 1995. GD has recorded no claim revenue. If the contractors were found in default, losses of roughly $675 million pre-tax plus interest could follow, which management considers remote.
Is the dividend and capital return policy sustainable?
The quarterly dividend was raised to $0.35 per share in early 1994, totaling $1.40 annually, or about $84 million paid in 1994. Cash and marketable securities of $1,059 million and an undrawn $850 million credit line provide support. Operating cash flow from continuing operations was only $108 million, though, and management expects operating cash flow to roughly equal operating earnings in 1995. The company also has authority to repurchase up to 3 million shares.
04—Continue