01—Abstract
Summary
Summary of the 10-K filed March 18, 1999. Cited figures are marked; the original filing is the authoritative source.
General Dynamics' 1998 10-K portrays a defense prime that roughly doubled its Marine Systems backlog and expanded its footprint through acquisitions.
Net sales rose 22% to $4.97 billiona in 1998 from $4.06 billion, and operating earnings climbed 21% to $542 million, with net earnings up 15% to $364 million and diluted EPS of $2.86 versus $2.50. Total backlog jumped 52% to $14.6 billion, driven by a $4.2 billion Virginia-class submarine award, a $2.1 billion DDG 51 multiyear award, the DD 21 alliance, and the NASSCO acquisition. Funded backlog rose to $7.3 billion, though 84% of 1998 sales came from the U.S. government and the company remains heavily exposed to congressional funding decisions.
The balance sheet shows total assets of $4.57 billionb and shareholders' equity of $2.22 billion, but cash and marketable securities fell to $220 million from $441 million after roughly $1.5 billion of cumulative acquisition spending since 1997 and $256 million of 1998 business acquisitions. Operating cash flow dropped to $352 million from $528 million, largely because of working-capital investment on new programs, which management says is temporary. Intangible assets grew to $1.5 billion, a meaningful share of equity that warrants monitoring.
Looking ahead, the filing highlights a pending $38.50c-per-share offer for Newport News Shipbuilding (about $1.5 billion, to be funded with new credit facilities), an expected roughly $250 million after-tax cash tax refund with substantial income recognition in Q1 1999, and a $240 million quarterly dividend increase to $0.24. Key risks include the A-12 litigation (a $1.2 billion judgment under appeal, with a remote but potentially $675 million additional exposure) and the company's dependence on a limited number of large defense programs.
02—Key points
Key Highlights
- Net sales rose 22% to $4.97 billion in 1998; operating earnings rose 21% to $542 million, with operating margin improving to about 10.9%
- Net earnings grew 15% to $364 million; diluted EPS was $2.86, up from $2.50 in 1997
- Total backlog reached $14.6 billion (up 52%), with Marine Systems backlog doubling to $11.7 billion on the Virginia-class, DDG 51, and NASSCO awards
- Cash and marketable securities declined to $220 million from $441 million, and operating cash flow fell to $352 million from $528 million, reflecting acquisition spending and working-capital build
- Pending $38.50/share bid for Newport News Shipbuilding (~$1.5 billion) and an expected ~$250 million after-tax tax refund signal major near-term balance sheet and earnings events
- U.S. government is 84% of net sales, and all government contracts are terminable for convenience, creating concentration and budget-dependence risk
- A-12 litigation carries a $1.2 billion judgment on appeal; an unfavorable reversal could add roughly $675 million in losses plus interest, which management views as remote
03—Questions
Frequently Asked Questions
How did General Dynamics perform financially in 1998?
Net sales grew 22% to $4.97 billion, operating earnings rose 21% to $542 million, and net earnings increased 15% to $364 million, or $2.86 diluted EPS. Growth was driven largely by the NASSCO acquisition, the full-year contribution of 1997 acquisitions, and earnings-rate improvements on the DDG 51 and Seawolf programs.
What drove the large increase in backlog?
Total backlog rose to $14.6 billion from $9.6 billion. The main contributors were a $4.2 billion contract for the first four Virginia-class submarines, a $2.1 billion multiyear award for six DDG 51 destroyers, the DD 21 alliance design award, and about $1.2 billion of backlog added with NASSCO. Only $7.3 billion of the total is funded, so future appropriations matter.
Why did operating cash flow decline, and is the company's liquidity still sound?
Operating cash flow fell to $352 million from $528 million, mainly because of working-capital investment in new production programs such as the Virginia-class submarine and light armored vehicles; management says this trend is not expected to continue indefinitely. Cash and marketable securities fell to $220 million, but the company has a $400 million committed credit line and capacity for additional long-term borrowing, which it plans to use to fund the Newport News bid.
What is the Newport News bid and how would it affect the company?
On February 10, 1999, General Dynamics offered $38.50 per share for Newport News Shipbuilding, an acquisition expected to cost about $1.5 billion funded by existing and new credit facilities. The deal requires regulatory approval and acceptance by Newport News' board and shareholders, so it is not assured. It would significantly expand the company's shipbuilding capacity.
What are the main risks investors should consider?
Key risks include heavy dependence on the U.S. government (84% of 1998 sales), which can terminate contracts for convenience and depends on congressional appropriations; concentration in a few large submarine and shipbuilding programs; the A-12 litigation, where a $1.2 billion judgment is under appeal and an adverse ruling could add about $675 million plus interest in losses; and the growth in intangible assets, which reached $1.5 billion.
04—Continue