How much of General Dynamics' 1999 earnings came from one-time items?

Several one-time items affected 1999 results. Net earnings included a $165 million after-tax benefit from settling IRS R&E tax credit claims for 1981-1989 and a $126 million pre-tax gain from merging the Gulfstream and GD commercial pension plans. These were partly offset by a roughly $60 million pre-tax write-down of undeveloped coal reserves and $36 million of Gulfstream acquisition costs plus a $7 million debt-cost write-off. Excluding the tax settlement, net earnings would have been materially lower, so the headline EPS of $4.36 overstates recurring profitability.

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

Very dependent. U.S. government sales were $5.2 billion in 1999, or 58% of net sales, up from $4.3 billion in 1998. These contracts can be terminated for the government's convenience, and funding depends on congressional appropriations. Management notes that the 1999 defense procurement budget request ($60 billion for FY2001) is the highest in eight years, which supports the outlook, but budget changes or program restructuring (such as the Crusader program cut to 480 systems) could affect future revenue.

What is the Gulfstream acquisition's impact on the company's profile?

The July 1999 Gulfstream acquisition, accounted for as a pooling of interests through a stock exchange of about 72.2 million shares, added a large commercial business. Aerospace now contributes about 32% of sales ($2.9 billion) and 41% of operating earnings ($482 million), with a 16.6% operating margin. Commercial sales, mainly Gulfstream business jets, rose to 31% of total sales. This diversifies the company away from defense, but it also introduces exposure to the cyclical business jet market and reliance on aircraft delivery timing.

What are the main risks or contingent liabilities investors should watch?

The most notable is the A-12 aircraft litigation, in which the Navy's default termination was remanded for further proceedings after a July 1999 appellate ruling. The company has fully reserved related contracts in process, and if the contractors are found in default and must repay $1.35 billion in progress payments, additional losses of about $675 million plus interest could be recognized, though management considers this remote. Other items include the Convair wrongful-termination verdict ($101 million, under appeal), the Hunt insurance case, and the Tucson environmental litigation, which management does not expect to be material. Margin pressure is also expected in Marine Systems as start-up programs like Virginia-class and DD 21 ramp up.

What is management's outlook and capital return strategy?

Management expects Aerospace operating margins in 2000 to exceed 1999 levels, Information Systems and Technology margins to be consistent with 1999, Marine Systems margins to decline slightly due to start-up programs, and Combat Systems margins to be consistent with 1999 excluding international business. The board raised the quarterly dividend to $0.26 per share from $0.24, which annualizes to about $1.04 per share, and in March 2000 authorized repurchases of up to 10 million shares, after rescinding earlier open-market repurchase authority in 1999. The company has a $1 billion and a $400 million committed credit line backing its commercial paper program, which management says provides sufficient liquidity.

GD 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2000. Cited figures are marked; the original filing is the authoritative source.

General Dynamics (GD) reported a transformative 1999 year, anchored by the July 30, 1999 pooling-of-interests acquisition of Gulfstream Aerospace (about 72.2 million shares exchanged) and the September 1, 1999 purchase of GTE Government Systems for $1.01 billion^a in cash.

Reported net sales rose 21% to $8,959 million^b from $7,398 million, operating earnings grew 31% to $1,203 million, and net earnings reached $880 million, or $4.36 diluted EPS. Note that 1999 net earnings include a one-time $165 million tax benefit from the IRS settlement of 1981-1989 R&E credit claims and a $126 million pre-tax pension gain, offset by about $60 million of coal reserve write-downs and $36 million of Gulfstream deal costs, so underlying earnings growth is lower than the headline figure. Operating cash flow was $978 million (net cash from continuing operations $1,023 million), and year-end cash was $270 million against total debt of $1,022 million, with a debt-to-capital ratio of about 24%.

The defense franchise remains the core of the company. U.S. government sales were $5,203 million^c, or 58% of revenue, and the Marine Systems group (Electric Boat, Bath Iron Works, NASSCO) is the largest contributor, with a Virginia-class submarine award and DD 21 and LPD 17 programs providing multi-year visibility. Total backlog rose to $19.5 billion from $18.9 billion, with defense and other backlog at $15.7 billion, although management expects some near-term margin pressure in Marine Systems as start-up programs ramp.

Aerospace (Gulfstream) is now a major growth driver, with sales of $2.9 billion^d and operating margins of 16.6%, and management expects further margin improvement in 2000. Investor considerations include the defense concentration and dependence on congressional appropriations and the ability to terminate contracts for convenience, the contingent exposure from the A-12 litigation (potential additional losses of about $675 million plus interest, which management views as remote), and the cyclical nature of business jet demand. On the positive side, the board raised the quarterly dividend to $0.26 per share and authorized repurchases of up to 10 million shares, and management cites rising U.S. defense procurement (projected to reach $60 billion in the FY2001 request) as a tailwind.

02—Key points

Key Highlights

Net sales rose 21% to $8.96 billion in 1999, and operating earnings rose 31% to $1.20 billion (13.4% operating margin), driven by the Gulfstream and GTE Government Systems acquisitions.
Net earnings of $880 million ($4.36 diluted EPS) were inflated by a one-time $165 million IRS tax settlement benefit and a $126 million pre-tax pension gain, partly offset by a $60 million coal reserve write-down.
U.S. government sales were $5.2 billion (58% of sales), with Marine Systems ($3.1 billion sales, $11.6 billion backlog) as the largest group and Electric Boat holding the Virginia-class and Seawolf programs.
Aerospace (Gulfstream) generated $2.9 billion in sales at a 16.6% operating margin, with the Gulfstream V winning about 30% of its ultra-long-range segment in 1999 deliveries.
Total backlog reached $19.5 billion (funded backlog $11.7 billion), with about $10.4 billion expected to be filled after 2000.
Operating cash flow of $978 million and a 24% debt-to-capital ratio, with $1.09 billion of commercial paper outstanding, support financial flexibility.
The board raised the quarterly dividend to $0.26 per share (from $0.24) and authorized repurchases of up to 10 million shares; the A-12 litigation carries a contingent exposure of about $675 million plus interest that management considers remote.

03—Questions

Frequently Asked Questions

How much of General Dynamics' 1999 earnings came from one-time items?
Several one-time items affected 1999 results. Net earnings included a $165 million after-tax benefit from settling IRS R&E tax credit claims for 1981-1989 and a $126 million pre-tax gain from merging the Gulfstream and GD commercial pension plans. These were partly offset by a roughly $60 million pre-tax write-down of undeveloped coal reserves and $36 million of Gulfstream acquisition costs plus a $7 million debt-cost write-off. Excluding the tax settlement, net earnings would have been materially lower, so the headline EPS of $4.36 overstates recurring profitability.
How dependent is General Dynamics on the U.S. government?
Very dependent. U.S. government sales were $5.2 billion in 1999, or 58% of net sales, up from $4.3 billion in 1998. These contracts can be terminated for the government's convenience, and funding depends on congressional appropriations. Management notes that the 1999 defense procurement budget request ($60 billion for FY2001) is the highest in eight years, which supports the outlook, but budget changes or program restructuring (such as the Crusader program cut to 480 systems) could affect future revenue.
What is the Gulfstream acquisition's impact on the company's profile?
The July 1999 Gulfstream acquisition, accounted for as a pooling of interests through a stock exchange of about 72.2 million shares, added a large commercial business. Aerospace now contributes about 32% of sales ($2.9 billion) and 41% of operating earnings ($482 million), with a 16.6% operating margin. Commercial sales, mainly Gulfstream business jets, rose to 31% of total sales. This diversifies the company away from defense, but it also introduces exposure to the cyclical business jet market and reliance on aircraft delivery timing.
What are the main risks or contingent liabilities investors should watch?
The most notable is the A-12 aircraft litigation, in which the Navy's default termination was remanded for further proceedings after a July 1999 appellate ruling. The company has fully reserved related contracts in process, and if the contractors are found in default and must repay $1.35 billion in progress payments, additional losses of about $675 million plus interest could be recognized, though management considers this remote. Other items include the Convair wrongful-termination verdict ($101 million, under appeal), the Hunt insurance case, and the Tucson environmental litigation, which management does not expect to be material. Margin pressure is also expected in Marine Systems as start-up programs like Virginia-class and DD 21 ramp up.
What is management's outlook and capital return strategy?
Management expects Aerospace operating margins in 2000 to exceed 1999 levels, Information Systems and Technology margins to be consistent with 1999, Marine Systems margins to decline slightly due to start-up programs, and Combat Systems margins to be consistent with 1999 excluding international business. The board raised the quarterly dividend to $0.26 per share from $0.24, which annualizes to about $1.04 per share, and in March 2000 authorized repurchases of up to 10 million shares, after rescinding earlier open-market repurchase authority in 1999. The company has a $1 billion and a $400 million committed credit line backing its commercial paper program, which management says provides sufficient liquidity.

04—Continue

← View all 10-K filings