10-QPeriod: Q3 FY2001

GENERAL DYNAMICS CORP Quarterly Report for Q3 Ended Jul 1, 2001

Filed August 14, 2001For Securities:GD

Summary

General Dynamics Corporation (GD) reported strong top-line growth and improved profitability for the second quarter and first half of 2001. Net sales increased by 13% for the quarter and 9% for the six-month period, driven by robust performance across all business segments, particularly Marine Systems, Information Systems & Technology, and Combat Systems. The company also saw a significant increase in its order backlog, up 23% to $24.3 billion, primarily due to new orders in the Aerospace and Combat Systems segments, highlighting strong demand for its products and services. The company continued its aggressive acquisition strategy, announcing a significant agreement to acquire Motorola's Integrated Information Systems Group for $825 million and completing the acquisition of Galaxy Aerospace for $355 million. These strategic moves are expected to expand GD's market presence and product offerings. Despite substantial investments in acquisitions and increased short-term debt to finance these activities, the company's liquidity remains strong, supported by new credit facilities totaling $5 billion and consistent cash flow generation from operations. Investors should note the positive outlook driven by increased sales, backlog, and strategic acquisitions, alongside prudent financial management.

Key Highlights

  • 1Net sales increased 13% year-over-year for the three months ended July 1, 2001, reaching $2.96 billion, indicating strong demand across business segments.
  • 2Total backlog grew by 23% to $24.3 billion by July 1, 2001, with significant contributions from new orders in Aerospace and Combat Systems.
  • 3The company announced a definitive agreement to acquire Motorola's Integrated Information Systems Group for $825 million, signaling continued strategic expansion.
  • 4Acquisition of Galaxy Aerospace for $355 million was completed, adding new aircraft to its product line and bolstering the Aerospace segment.
  • 5Operating earnings increased 11% for the quarter to $371 million, driven by revenue growth and margin improvement, particularly in Aerospace.
  • 6Earnings per share (EPS) on a diluted basis grew 11% to $1.12 for the quarter, demonstrating improved profitability.
  • 7New credit facilities totaling $5 billion were secured to support ongoing and future acquisitions, ensuring robust liquidity.

Frequently Asked Questions

Revenue growth was driven by strong performance across all business segments, including Marine Systems, Aerospace, Information Systems & Technology, and Combat Systems. This growth was supported by increased volume in existing programs and the impact of recent acquisitions, such as Ordnance and Tactical Systems (OTS).

The company is financing its acquisitions through a combination of commercial paper issuances and new credit facilities. Notably, GD secured a $3 billion credit facility and additional $2 billion in credit lines, totaling $5 billion, to support strategic acquisitions like Newport News Shipbuilding and the Motorola acquisition.

The company is required to adopt SFAS 142 on January 1, 2002. This standard eliminates the amortization of goodwill and identifiable intangible assets with indefinite lives. GD anticipates an annual increase to net earnings of approximately $45 million, or $0.22 per diluted share, from the elimination of goodwill amortization. SFAS 141 requires all business combinations initiated after June 30, 2001, to use the purchase method.

The A-12 program litigation is ongoing. While a final judgment was previously entered in favor of the contractors, the Court of Appeals remanded the case for determination of whether the default termination was justified. A trial on remand concluded in June 2001, with a decision expected later in the year. Management believes the government's default termination was improper and that the company will ultimately prevail, although the potential loss if found in default remains substantial, estimated at approximately $675 million plus interest.