How much of General Dynamics' revenue depends on the U.S. government, and what risks does that create?

In 1997, 90% of net sales ($3.65 billion of $4.06 billion) came from the U.S. government, including Foreign Military Sales. All U.S. government contracts can be terminated for convenience or default, and funding depends on annual congressional appropriations. The company also flagged that defense procurement policy is evolving and that budget reductions or shifts in priorities could affect its programs.

Why did revenue grow in 1997, and was that growth organic?

Most of the growth came from acquisitions. Combat Systems sales rose $483 million, mainly due to the January 1997 purchase of Defense Systems and Armament Systems from Lockheed Martin. Excluding acquisitions, Combat Systems sales fell about 5%, and Marine sales declined $21 million as submarine construction wound down after the final Trident and first Seawolf deliveries. Management expects the NSSN program to partly offset the decline.

What is the status of the A-12 litigation and how much could it cost shareholders?

The Navy terminated the A-12 aircraft contract for default in 1991 and demanded repayment of $1.352 billion in progress payments. In December 1995 the court converted the termination to one for convenience, and on February 23, 1998 a final judgment was entered for the contractors for $1.2 billion plus interest. The government has appealed. The company has not recognized any claim revenue. It has fully reserved related contracts in process and accrued termination and litigation costs. If the default termination were reinstated, additional losses of about $675 million plus interest could be recognized, which management considers remote.

Is the company's backlog healthy heading into 1998?

Total backlog was $9.6 billion at year-end 1997, down from $10.35 billion, and about $5.9 billion of it is expected to be filled in 1998. Funded backlog, the portion appropriated by Congress, rose to $6.8 billion from $6.2 billion. Management expects significant new awards, including about $2 billion for six DDG 51 destroyers (awarded March 1998) and roughly $5 billion for the first four NSSN submarines, which it anticipated later in 1998.

What did the company's balance sheet and capital allocation look like after the 1997 acquisitions?

Cash and marketable securities fell to $441 million from $1.155 billion, and total debt rose to $265 million from $38 million, including a $220 million bank note used to buy Computing Devices International. Shareholders' equity increased to $1.915 billion, and book value per share was $15.22 (restated for the split). The company paid $102 million in dividends and repurchased about 1.8 million shares for $60 million. It also planned to redeem its 9.95% debentures on April 1, 1998 for about $40 million and said it had about $400 million in funds on hand and $800 million in committed credit lines.

GD 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 18, 1998. Cited figures are marked; the original filing is the authoritative source.

General Dynamics closed 1997 with net sales of $4.06 billion^a (up 13% from $3.58 billion in 1996), earnings from continuing operations of $316 million (up 17%), and diluted EPS of $2.50 (up from $2.13).

Growth was driven largely by acquisitions: the company bought Defense Systems and Armament Systems from Lockheed Martin (January 1997), Advanced Technology Systems from Lucent (October 1997), and Computing Devices International from Ceridian (December 31, 1997), spending about $1.23 billion^b in cash for businesses in 1997. The company is overwhelmingly dependent on the U.S. government, which accounted for 90% of 1997 sales, and it is concentrated in submarines (Electric Boat, Bath Iron Works), armored vehicles (M1 Abrams, Crusader), and defense electronics. The filing shows a mixed picture of the core business.

Marine sales fell slightly as submarine construction wound down after the final Trident and first Seawolf deliveries, but management is counting on the NSSN submarine program and expected DDG 51 awards to replace that revenue. Total backlog fell to $9.6 billion^c from $10.35 billion, though the company noted about $2 billion in DDG 51 and roughly $5 billion in NSSN awards that were anticipated, and funded backlog rose to $6.8 billion. Operating cash flow was strong at $528 million, but management said cash flow from operations would not stay above operating earnings plus depreciation as the submarine programs matured.

Cash and marketable securities fell to $441 million and debt rose to $265 million^d, reflecting the acquisitions. The most significant risk flagged is the A-12 aircraft litigation. A February 1998 court judgment awarded the contractors (General Dynamics and McDonnell Douglas) $1.2 billion plus interest, and the government has appealed.

The company has not recognized any claim revenue from the judgment; management has fully reserved the related contracts in process. In the unlikely event the default termination is reinstated, the company could face about $675 million in additional losses, which management considers remote. Investors should also note the board approved a two-for-one stock split and raised the quarterly dividend to $0.22 per share, both effective in 1998.

02—Key points

Key Highlights

Net sales rose 13% to $4.06 billion in 1997, with Combat Systems up 47% to $1.51 billion, largely from acquisitions, and Marine down about 1% to $2.31 billion
Earnings from continuing operations rose 17% to $316 million; diluted EPS rose to $2.50 from $2.13 (restated for the 2-for-1 split)
Total backlog declined to $9.6 billion from $10.35 billion, while funded backlog increased to $6.8 billion from $6.2 billion
Acquisitions totaling about $1.23 billion in cash closed in 1997, including Lockheed Martin's Defense and Armament Systems, Lucent's Advanced Technology Systems, and Ceridian's Computing Devices International
U.S. government customers accounted for 90% of 1997 net sales ($3.65 billion), leaving the company highly exposed to defense budget decisions and contract termination risk
A-12 litigation: a $1.2 billion judgment in favor of the contractors (February 1998) is under government appeal, with management indicating no revenue has been recognized and about $675 million in potential additional losses considered remote
Board approved a 2-for-1 stock split and increased quarterly dividend to $0.22 per share (from $0.205 pre-split) in March 1998

03—Questions

Frequently Asked Questions

How much of General Dynamics' revenue depends on the U.S. government, and what risks does that create?
In 1997, 90% of net sales ($3.65 billion of $4.06 billion) came from the U.S. government, including Foreign Military Sales. All U.S. government contracts can be terminated for convenience or default, and funding depends on annual congressional appropriations. The company also flagged that defense procurement policy is evolving and that budget reductions or shifts in priorities could affect its programs.
Why did revenue grow in 1997, and was that growth organic?
Most of the growth came from acquisitions. Combat Systems sales rose $483 million, mainly due to the January 1997 purchase of Defense Systems and Armament Systems from Lockheed Martin. Excluding acquisitions, Combat Systems sales fell about 5%, and Marine sales declined $21 million as submarine construction wound down after the final Trident and first Seawolf deliveries. Management expects the NSSN program to partly offset the decline.
What is the status of the A-12 litigation and how much could it cost shareholders?
The Navy terminated the A-12 aircraft contract for default in 1991 and demanded repayment of $1.352 billion in progress payments. In December 1995 the court converted the termination to one for convenience, and on February 23, 1998 a final judgment was entered for the contractors for $1.2 billion plus interest. The government has appealed. The company has not recognized any claim revenue. It has fully reserved related contracts in process and accrued termination and litigation costs. If the default termination were reinstated, additional losses of about $675 million plus interest could be recognized, which management considers remote.
Is the company's backlog healthy heading into 1998?
Total backlog was $9.6 billion at year-end 1997, down from $10.35 billion, and about $5.9 billion of it is expected to be filled in 1998. Funded backlog, the portion appropriated by Congress, rose to $6.8 billion from $6.2 billion. Management expects significant new awards, including about $2 billion for six DDG 51 destroyers (awarded March 1998) and roughly $5 billion for the first four NSSN submarines, which it anticipated later in 1998.
What did the company's balance sheet and capital allocation look like after the 1997 acquisitions?
Cash and marketable securities fell to $441 million from $1.155 billion, and total debt rose to $265 million from $38 million, including a $220 million bank note used to buy Computing Devices International. Shareholders' equity increased to $1.915 billion, and book value per share was $15.22 (restated for the split). The company paid $102 million in dividends and repurchased about 1.8 million shares for $60 million. It also planned to redeem its 9.95% debentures on April 1, 1998 for about $40 million and said it had about $400 million in funds on hand and $800 million in committed credit lines.

04—Continue

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