How did General Dynamics perform financially in 2002?

Net sales grew 15% to $13.8 billion and operating earnings rose 6% to $1.58 billion. Reported net earnings were $917 million, down from $943 million, because of a $134 million after-tax loss from discontinued operations. Continuing operations earnings rose about 12% to $1.05 billion, and diluted EPS from continuing operations was $5.18.

What is the A-12 litigation and how could it affect investors?

The Navy terminated the A-12 aircraft contract for default in 1991 and seeks repayment of $1.4 billion in progress payments plus interest, about $2.3 billion in total. The Court of Appeals vacated the trial court's judgment on March 17, 2003, and remanded the case. If the default termination is ultimately sustained, the company's pretax charge would be about $1.2 billion ($685 million after tax). Management says it has sufficient resources to pay if required and believes the evidence does not support the termination. The company shares this liability jointly with The Boeing Company.

Which business groups drove growth, and which lagged?

Information Systems and Technology sales rose 37% to $3.7 billion and operating earnings rose 67% to $436 million. Combat Systems sales rose 32% to $2.9 billion, supported by Stryker and Leopard production. Marine Systems was flat at $3.65 billion with operating margin falling to 7.9%. Aerospace sales were flat at $3.3 billion, but operating earnings fell 28% to $447 million on pre-owned aircraft losses and pricing pressure.

What is the outlook for 2003?

Management expects Combat Systems to be the fastest-growing group, with GM Defense (acquired March 1, 2003) and new contracts driving revenue, though margins may moderate. Information Systems and Technology margins are expected to decline slightly on solid revenue growth. Marine Systems expects slight revenue and earnings growth, with TOTE contract cost risk in the first half. Aerospace margins are expected to be somewhat lower than in 2002, and the company plans to refinance the $1.1 billion GM Defense acquisition debt in medium-term notes.

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

In 2002, 64% of net sales were to the U.S. government, either directly or as a subcontractor, up from 61% in 2001. Government funding depends on annual congressional appropriations, and many programs are fixed-price, which carries cost-overrun risk. In the Aerospace group, NetJets accounts for 53% of funded backlog and substantially all option backlog, so a change in that relationship would materially affect the business aircraft segment.

GD 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed March 25, 2003. Cited figures are marked; the original filing is the authoritative source.

General Dynamics closed 2002 with record revenue and backlog, though earnings were mixed.

Net sales rose 15% to $13.8 billion^a, with organic growth above 6%, and total backlog reached $29.0 billion (up 8%). Operating earnings grew 6% to $1.58 billion, but net earnings fell to $917 million from $943 million because of a $134 million after-tax loss from exiting the undersea fiber optic cable-laying business. Continuing operations earnings rose about 12% to $1.05 billion, and cash from operating activities was $1.125 billion.

Net debt fell to $1.1 billion^b from $1.5 billion, and the debt-to-capital ratio improved to 22% from 30%. Growth was concentrated in Information Systems and Technology (sales up 37%) and Combat Systems (up 32%), helped by acquisitions and the Stryker and Leopard programs. Marine Systems was flat with lower margins, and Aerospace (Gulfstream) saw operating earnings drop about 28% on pre-owned aircraft losses and pricing pressure.

Management guided to lower Aerospace margins in 2003 and expects Combat Systems to be the fastest-growing group. The acquisition of GM Defense closed March 1, 2003, for $1.1 billion^c. The main risk is the A-12 litigation.

The Court of Appeals vacated the lower court's judgment on March 17, 2003, and the Navy is seeking repayment of about $2.3 billion^d, including interest. If the default termination is ultimately upheld, the company's pretax charge would be about $1.2 billion ($685 million after tax).

Management says it has sufficient resources to pay such an obligation. Other risks include dependence on U.S. government funding (64% of sales) and on NetJets for a large share of aircraft backlog.

02—Key points

Key Highlights

Net sales rose 15% to $13.8 billion; organic growth exceeded 6%, with the rest from acquisitions.
Total backlog hit a record $29.0 billion (up 8%), with funded backlog at $21.3 billion (up 10%).
Net earnings fell to $917 million from $943 million due to a $134 million after-tax loss on exiting the fiber optic cable business; continuing operations earnings rose about 12% to $1.05 billion (diluted EPS $5.18).
Operating cash flow of $1.1 billion for the fourth straight year above $1 billion; net debt reduced to $1.1 billion and debt-to-capital improved to 22% from 30%.
Aerospace operating earnings fell about 28% to $447 million on pre-owned aircraft losses and pricing pressure, and management expects lower Aerospace margins in 2003.
Pending A-12 litigation: an adverse outcome could require about $1.4 billion in repayments plus interest, a roughly $1.2 billion pretax ($685 million after-tax) charge; the Court of Appeals vacated the lower court judgment on March 17, 2003.
64% of 2002 net sales were to the U.S. government, and the acquisition of GM Defense (closed March 1, 2003, for $1.1 billion) strengthens the Combat Systems outlook.

03—Questions

Frequently Asked Questions

How did General Dynamics perform financially in 2002?
Net sales grew 15% to $13.8 billion and operating earnings rose 6% to $1.58 billion. Reported net earnings were $917 million, down from $943 million, because of a $134 million after-tax loss from discontinued operations. Continuing operations earnings rose about 12% to $1.05 billion, and diluted EPS from continuing operations was $5.18.
What is the A-12 litigation and how could it affect investors?
The Navy terminated the A-12 aircraft contract for default in 1991 and seeks repayment of $1.4 billion in progress payments plus interest, about $2.3 billion in total. The Court of Appeals vacated the trial court's judgment on March 17, 2003, and remanded the case. If the default termination is ultimately sustained, the company's pretax charge would be about $1.2 billion ($685 million after tax). Management says it has sufficient resources to pay if required and believes the evidence does not support the termination. The company shares this liability jointly with The Boeing Company.
Which business groups drove growth, and which lagged?
Information Systems and Technology sales rose 37% to $3.7 billion and operating earnings rose 67% to $436 million. Combat Systems sales rose 32% to $2.9 billion, supported by Stryker and Leopard production. Marine Systems was flat at $3.65 billion with operating margin falling to 7.9%. Aerospace sales were flat at $3.3 billion, but operating earnings fell 28% to $447 million on pre-owned aircraft losses and pricing pressure.
What is the outlook for 2003?
Management expects Combat Systems to be the fastest-growing group, with GM Defense (acquired March 1, 2003) and new contracts driving revenue, though margins may moderate. Information Systems and Technology margins are expected to decline slightly on solid revenue growth. Marine Systems expects slight revenue and earnings growth, with TOTE contract cost risk in the first half. Aerospace margins are expected to be somewhat lower than in 2002, and the company plans to refinance the $1.1 billion GM Defense acquisition debt in medium-term notes.
How dependent is General Dynamics on the U.S. government and specific customers?
In 2002, 64% of net sales were to the U.S. government, either directly or as a subcontractor, up from 61% in 2001. Government funding depends on annual congressional appropriations, and many programs are fixed-price, which carries cost-overrun risk. In the Aerospace group, NetJets accounts for 53% of funded backlog and substantially all option backlog, so a change in that relationship would materially affect the business aircraft segment.

04—Continue

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