How dependent is General Dynamics on the U.S. government?

Very dependent. U.S. government sales were $3,312 million in 1996, or 92% of net sales. These contracts can be terminated for convenience, and funding depends on congressional appropriations, so budget decisions on programs like the NSSN submarine and DDG 51 destroyer directly affect results.

What is the A-12 litigation and how much could it cost or benefit the company?

The U.S. Navy terminated the A-12 aircraft contract for default in 1991, and the company and McDonnell Douglas were demanded to repay $1,352 million in unliquidated progress payments. The Court of Federal Claims converted the default to a termination for convenience and the parties stipulated to $1,071 million in damages, plus interest of $399 million through 1996. The company has recognized no claim revenue. If the ruling were reversed on appeal, additional losses of about $675 million plus interest could arise, which management considers remote.

Did the Lockheed Martin acquisition change the company's growth outlook?

Management expects it to increase Combat Systems Group sales in 1997 and to strengthen its presence in light armored vehicles, turrets, ordnance and fire control. The businesses earn lower margins than the company's tank programs, so operating earnings are expected to rise less than proportionately to sales. Interest income is also expected to fall because about $450 million of cash was used for the purchase.

What are the key program opportunities in the backlog?

The NSSN submarine design contract ($1.3 billion) and the Seawolf submarine contract ($1.1 billion) at Electric Boat, plus three DDG 51 destroyers ($1.1 billion) at Bath Iron Works and a $1.3 billion multiyear M1A2 tank upgrade contract at Land Systems. Management also cites potential future programs such as the LPD 17 amphibious ship (12-ship program, protested by Litton), the Crusader howitzer (up to $13 billion) and the AAAV (up to $4 billion), but these depend on future funding and competitive awards.

GD 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 21, 1997. Cited figures are marked; the original filing is the authoritative source.

General Dynamics' 1996 10-K shows a company in transition from a broad defense prime to a focused two-segment business.

Revenue rose 17% to $3,581 million^a in 1996 (from $3,067 million), driven mainly by a full year of Bath Iron Works (acquired September 1995), while net earnings fell to $270 million ($4.27 per share) from $321 million ($5.10 per share), which included $74 million of discontinued-operations income in 1995. Continuing-operations earnings grew 9% to $270 million from $247 million. Operating cash flow rose to $415 million from $349 million, and total backlog nearly rose 40% to $10.35 billion.

The U.S. government accounts for about 92% of sales, so the business depends heavily on congressional appropriations and program timing. The balance sheet is conservative: cash and marketable securities were $1,155 million^b, debt was roughly $173 million including finance-operations debt, and shareholders' equity was $1,714 million. The company spent about $387 million in 1996 on share repurchases and dividends combined ($101 million dividends paid plus $23 million buybacks, with more dividend growth to $1.64 per share), but it also bought Defense Systems and Armament Systems from Lockheed Martin for about $450 million effective January 1, 1997.

Management says the acquisition is accretive, though these lower-margin armored vehicle and ordnance businesses will dilute Combat Systems Group margins. Key uncertainties include the A-12 litigation (a $1,071 million^c stipulated damages judgment plus interest, with a remote downside of about $675 million more), a pending $30 million-plus tax credit case, and the reliance on Navy submarine and destroyer programs such as NSSN, DDG 51 and LPD 17.

02—Key points

Key Highlights

Net sales rose 17% to $3,581 million in 1996, largely from the Bath Iron Works acquisition, and Marine Group sales grew 24% to $2,332 million.
Net earnings fell to $270 million ($4.27 per share) from $321 million in 1995, which included discontinued operations; continuing operations earnings rose 9% to $270 million.
Total backlog rose to $10,350 million from $7,386 million, with funded backlog at $6,161 million, providing multi-year revenue visibility.
Operating cash flow increased to $415 million from $349 million, and net cash from continuing operations reached $1,157 million, helped by marketable securities sales.
Balance sheet remains strong with $1,155 million in cash and marketable securities and shareholders' equity of $1,714 million ($27.16 per share).
The company acquired Defense Systems and Armament Systems from Lockheed Martin for about $450 million effective January 1, 1997, expanding its armored vehicle and ordnance presence.
The A-12 litigation carries a stipulated $1,071 million damages judgment plus interest ($399 million through 1996), a major contingent item, though the company has not recognized any claim revenue.

03—Questions

Frequently Asked Questions

How dependent is General Dynamics on the U.S. government?
Very dependent. U.S. government sales were $3,312 million in 1996, or 92% of net sales. These contracts can be terminated for convenience, and funding depends on congressional appropriations, so budget decisions on programs like the NSSN submarine and DDG 51 destroyer directly affect results.
What is the A-12 litigation and how much could it cost or benefit the company?
The U.S. Navy terminated the A-12 aircraft contract for default in 1991, and the company and McDonnell Douglas were demanded to repay $1,352 million in unliquidated progress payments. The Court of Federal Claims converted the default to a termination for convenience and the parties stipulated to $1,071 million in damages, plus interest of $399 million through 1996. The company has recognized no claim revenue. If the ruling were reversed on appeal, additional losses of about $675 million plus interest could arise, which management considers remote.
Did the Lockheed Martin acquisition change the company's growth outlook?
Management expects it to increase Combat Systems Group sales in 1997 and to strengthen its presence in light armored vehicles, turrets, ordnance and fire control. The businesses earn lower margins than the company's tank programs, so operating earnings are expected to rise less than proportionately to sales. Interest income is also expected to fall because about $450 million of cash was used for the purchase.
What are the key program opportunities in the backlog?
The NSSN submarine design contract ($1.3 billion) and the Seawolf submarine contract ($1.1 billion) at Electric Boat, plus three DDG 51 destroyers ($1.1 billion) at Bath Iron Works and a $1.3 billion multiyear M1A2 tank upgrade contract at Land Systems. Management also cites potential future programs such as the LPD 17 amphibious ship (12-ship program, protested by Litton), the Crusader howitzer (up to $13 billion) and the AAAV (up to $4 billion), but these depend on future funding and competitive awards.

04—Continue

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