UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3671
(Exact name of registrant as specified in its charter)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No .
201,699,846 shares of the registrant’s common stock, $1 par value per share, were outstanding at April 28, 2002.
GENERAL DYNAMICS CORPORATION
INDEX
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PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
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CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED
(Dollars in millions, except per share amounts)
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GENERAL DYNAMICS CORPORATIONCONSOLIDATED STATEMENT OF CASH FLOWS(UNAUDITED)(Dollars in millions)
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A) Basis of Preparation
The term “company” refers to General Dynamics Corporation and all of its wholly-owned and majority-owned subsidiaries. The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, the company believes that the disclosures included herein are adequate to make the information presented not misleading. Operating results for the three-month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2001. Certain prior year amounts have been reclassified to conform to the current year presentation.
In the opinion of the company, the unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods ended March 31, 2002 and April 1, 2001.
(B) Comprehensive Income
Comprehensive income was $223 and $257 for the three-month periods ended March 31, 2002 and April 1, 2001, respectively. Comprehensive income consists primarily of net earnings ($229 and $240 for the three-month periods ended March 31, 2002 and April 1, 2001, respectively), foreign currency translation adjustments, and fair value adjustments for both a currency swap (see Note H) and available-for-sale securities.
(C) Acquisitions
On September 28, 2001, the company acquired Integrated Information Systems Group from Motorola, Inc. for $825 in cash. The company financed the acquisition by issuing commercial paper. Renamed General Dynamics Decision Systems (Decision Systems), this business provides technologies, products and systems for information assurance, communications and situational awareness markets in the U.S. and abroad. Decision Systems is part of the Information Systems and Technology business group.
On July 25, 2001, the company acquired Empresa Nacional Santa Bárbara de Industrias Militares, S.A., of Madrid, Spain, and Santa Bárbara Blindados, S.A., of Seville. The new combined entity, renamed Santa Bárbara Sistemas, S.A., produces combat vehicles and munitions. Santa Bárbara Sistemas is part of the Combat Systems business group.
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On June 5, 2001, the company acquired substantially all of the assets of Galaxy Aerospace Company LP for $330 in cash, after a purchase price adjustment received during the first quarter of 2002. The company financed the acquisition by issuing commercial paper. The selling parties may receive additional payments, up to a maximum of approximately $300 through 2006, contingent on the achievement of specific revenue targets. The acquired operation designs and manufactures the mid-size Gulfstream 100 and the super mid-size Gulfstream 200.
On January 26, 2001, the company acquired Primex Technologies, Inc. for $334 in cash, plus the assumption of $204 in outstanding debt, $149 of which was repaid at the time of the acquisition. The company financed the acquisition by issuing commercial paper. Renamed General Dynamics Ordnance and Tactical Systems, Inc., this business provides medium- and large-caliber ammunition, propellants, satellite propulsion systems and electronics products to the U.S. and its allies, as well as domestic and international industrial customers. Ordnance and Tactical Systems is part of the Combat Systems business group.
The purchase prices of the above acquisitions have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess recorded as goodwill (see Note G). Certain of the estimates related to Decision Systems, Santa Bárbara Sistemas and the Galaxy Aerospace acquisition are still preliminary at March 31, 2002, but will be finalized within one year from their respective dates of acquisition. The operating results of the acquired businesses have been included with those of the company from their respective closing dates.
(D) Earnings Per Share
Basic and diluted weighted average shares outstanding were as follows (in thousands) for the three-month periods ended:
(E) Contracts in Process
Contracts in process primarily represent costs and accrued profit related to defense contracts and programs, and consisted of the following:
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Contract costs are net of advances and progress payments and include production costs and related overhead, such as general and administrative expenses. Other contract costs primarily represent amounts required to be recorded under accounting principles generally accepted in the United States that are not currently allocable to contracts, such as a portion of the company’s estimated workers’ compensation, other insurance-related assessments, retirement benefits and environmental expenses. Recovery of these costs under contracts is considered probable based on the company’s backlog. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company’s remaining contracts could be affected.
(F) Inventories
Inventories consisted primarily of commercial aircraft components, as follows:
Other inventories consisted primarily of coal and aggregates, which are stated at the lower of average cost or estimated net realizable value.
(G) Intangible Assets and Goodwill, Net
The company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” on January 1, 2002. The provisions of SFAS 142 eliminate amortization of goodwill and identifiable intangible assets with indefinite lives, and require an impairment assessment at least annually by applying a fair-value-based test. Intangible assets with a finite life will continue to be amortized over their useful life. Upon adoption of SFAS 142, the company reclassified certain previously recognized intangible assets to goodwill in accordance with the definitions provided in the statement. In addition, the company completed the required transitional goodwill impairment test and no impairment of goodwill was identified.
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The following table presents comparative earnings data as if SFAS 142 had been adopted January 1, 2001:
Intangible assets consisted of the following:
Contract and program intangibles are amortized on a straight-line basis over periods ranging from 8 to 40 years. Other intangible assets consisted primarily of aircraft product design, customer lists, software and licenses, which are amortized over periods ranging from 3 to 21 years.
Amortization expense was $7 and $24 for the three-month periods ended March 31, 2002 and April 1, 2001, respectively. The company expects to record annual amortization expense of approximately $33 in each of the next five years related to these intangible assets.
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(H) Debt
Debt (excluding finance operations) consisted of the following:
As of March 31, 2002, the company had $1,246 par value discounted commercial paper outstanding at an average yield of approximately 1.92 percent with an average term of approximately 84 days. The company’s lines of credit totaling $2 billion, split evenly between a 364-day and a 5-year term facility, back the commercial paper program.
On August 27, 2001, the company issued $500 of three-year floating rate notes due September 1, 2004. On March 11, 2002, pursuant to an exchange offer, the company exchanged the original floating rate notes for an equal principal amount of floating rate notes that are registered under the Securities Act of 1933, as amended. Interest on the notes resets quarterly at three-month LIBOR plus 0.22 percent, and is payable each March, June, September and December. The notes had an average interest rate of 2.24 percent for the three months ended March 31, 2002. The notes are redeemable in whole or in part at any time after September 1, 2002, and prior to their maturity at 100 percent of the principal amount of the notes to be redeemed plus any accrued but unpaid interest on the date the notes are redeemed. These floating rate notes are guaranteed by certain of the company’s subsidiaries. See Note N for condensed consolidating financial statements.
The senior notes are privately placed U.S. dollar denominated notes held by one of the company’s Canadian subsidiaries. Interest is payable semi-annually at an annual rate of 6.32 percent, until maturity in September 2008. The subsidiary has a currency swap, which fixes its foreign currency variability on both the principal and interest components of these notes. As of March 31, 2002, the fair value of this currency swap was a $12 asset, which offset the effect of changes in the currency exchange rate on the related debt.
The term debt was assumed in connection with the company’s acquisition of Primex Technologies, Inc. Sinking fund payments of $5 are required in December of each of the years 2002 through 2007, with the remaining $20 payable in December 2008. Interest is payable in June and December at the rate of 7.5 percent annually.
The industrial development bonds were fully retired on April 12, 2002.
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Other consisted of $30 drawn under line of credit, a $16 note payable to a Spanish government entity and three capital lease arrangements totaling $15.
(I) Liabilities
A summary of significant liabilities, by balance sheet caption, follows:
(J) Income Taxes
The company had a net deferred tax asset of $ 100 and $143 at March 31, 2002, and December 31, 2001, respectively. The current portion of the net deferred tax asset was $309 and $331 at March 31, 2002 and December 31, 2001, respectively, and was included in other current assets on the Consolidated Balance Sheet. Based on the level of projected earnings and current backlog, no material valuation allowance was required for the company’s deferred tax assets at March 31, 2002, and December 31, 2001.
During the first quarter of 2001, the company reduced its liabilities for tax contingencies. The company recognized a non-cash benefit of $28, or $.14 per share, as a result of this adjustment.
The Internal Revenue Service (IRS) has completed its examination of the company’s 1994 and 1995 income tax returns. The company has protested certain issues raised during the 1994 and 1995 examination to the IRS Appeals Division. The IRS has commenced its examination of the company’s 1996 through 1998 income tax returns. On November 27, 2001, the company filed a refund suit, titled General Dynamics v. United States, for the years 1991 to 1993 in the U.S. Court of Federal Claims. The suit seeks recovery of refund claims that were disallowed by the IRS at the administrative level. If the court awards a full recovery to the company, the refund could exceed $100 (including after-tax interest). The litigation is expected to take several years to resolve. The company has recognized no income from this matter.
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The company has recorded liabilities for tax contingencies for open years. Resolution of tax matters for these years is not expected to have a material impact on the company’s results of operations or financial condition.
(K) Commitments and Contingencies
Litigation
The company is subject to litigation and other legal proceedings arising out of the ordinary course of its business or arising under provisions relating to the protection of the environment. Claims made by and against the company regarding the development of the Navy’s A-12 aircraft are discussed in Note L.
On May 7, 1999, a whistleblower suit was filed under seal against the company in the United States Bankruptcy Court for the District of South Carolina. The plaintiff alleges that the company violated the False Claims Act, by omitting certain facts when it testified before Congress in 1995 concerning funding for the third Seawolf-attack submarine. The plaintiff seeks damages in the amount of the contract award for the third Seawolf, subject to trebling under the False Claims Act. The Department of Justice declined to intervene in the case on the plaintiff’s behalf and the suit was unsealed in December 2000. The complaint has been removed to the United States District Court for the District of South Carolina.
The Court directed discovery on the issue of whether the alleged omissions by the company were material to the government’s decision to award the thirdSeawolf to the company. The parties filed motions on this issue on March 15, 2002. A trial date has been set for November 4, 2002. The company believes that it has substantial legal and factual arguments that will result in either the dismissal of the case or a judgment in the company’s favor.
Various claims and other legal proceedings generally incidental to the normal course of business are pending or threatened against the company. While the company cannot predict the outcome of these matters, the company believes its potential liabilities in these proceedings, individually or in the aggregate, will not have a material impact on the company’s results of operations or financial condition.
Environmental
The company’s operations are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. The company is directly or indirectly involved in environmental responses at some of the company’s current and former facilities, and at third-party sites not owned by the company but where the company has been designated a “Potentially Responsible Party” (PRP) by the EPA or a state environmental agency. The company is also involved in the investigation, cleanup and remediation of various conditions at sites it currently owns and operates or formerly owned or operated where the release of hazardous materials may have occurred. Based on historical experience, the company expects that a significant percentage of the total remediation and compliance costs associated with the company’s facilities or former facilities will continue to be allowable costs, and therefore reimbursed by the U.S. government. Based on a site by site analysis, the company believes it has
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adequate accruals for any liability it may incur arising from such sites at which there is a known environmental condition, or Superfund or other multi-party sites at which the company is a PRP.
Other
In the ordinary course of business, the company has entered into letters of credit and other similar arrangements with financial institutions and insurance carriers aggregating approximately $705 at March 31, 2002.
As of March 31, 2002, in connection with orders for fourteen Gulfstream V-SP, three Gulfstream V, and two Gulfstream 200 aircraft in firm contracts backlog, the company had offered customers trade-in options, which may or may not be exercised by the customers. Under these options, if exercised, the company will accept trade-in aircraft, primarily Gulfstream IVs/IV-SPs and Gulfstream Vs, at a guaranteed minimum trade-in price. Management believes that the fair market value of all such aircraft equals or exceeds the specified trade-in values.
(L) Termination of A-12 Program
In January 1991, the Navy terminated the company’s A-12 aircraft contract for default. The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy’s new carrier-based Advanced Tactical Aircraft. Both the company and McDonnell Douglas, now owned by the Boeing Company, (the contractors) were parties to the contract with the Navy, each had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors’ challenge to the termination for default, or a negotiated settlement.
The contractors filed a complaint on June 7, 1991, in the U.S. Court of Federal Claims contesting the default termination. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following further proceedings, the court issued an order converting the termination for default to a termination for convenience. On March 31, 1998, a final judgment was entered in favor of the contractors for $1,200 plus interest.
On July 1, 1999, the Court of Appeals found that the Trial Court erred in converting the termination for default to a termination for convenience without first determining whether a default existed. The Court of Appeals remanded the case for determination of whether the government’s default termination was justified. On August 31, 2001, following the trial on remand, the Trial Court issued an opinion upholding the default termination of the A-12 contract. In its opinion, the Trial Court rejected all of the government’s arguments to sustain the default termination except for one, schedule. With respect to the government’s schedule arguments, the Trial Court held that the schedule the government unilaterally imposed was reasonable and enforceable, and that the government had not waived that schedule. On the sole ground that the contractors were not going to deliver the first aircraft on the date provided in the unilateral schedule, the Trial Court upheld the default termination and entered judgment for the government.
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The contractors filed post-trial motions seeking reconsideration by the Trial Court of its opinion and judgment. On October 4, 2001, the Trial Court denied the contractors’ post-trial motions. On November 30, 2001, the company filed its notice of appeal and has since filed its appellate brief.
The company continues to believe strongly in the merits of its case. The company believes that in concluding to the contrary on remand, the Trial Court applied incorrect legal standards and otherwise erred as a matter of law. The company believes that it has substantial arguments on appeal to persuade the Court of Appeals to reverse the Trial Court’s judgment. The contractors have asked the Navy to confirm the deferral of payment through the pendency of the appeal. The contractors and the Navy have not yet reached an agreement with respect to this request.
If, contrary to the company’s expectations, the default termination is sustained on appeal, the contractors could be required to repay the government as much as $1,352 for progress payments received for the A-12 contract plus interest (approximately $990 at March 31, 2002). In this outcome, the government contends the company’s liability would be approximately $1.2 billion pretax, $630 after-tax to be taken as a charge against discontinued operations. The company has sufficient resources to pay such an obligation if required.
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(M) Business Group Information
The company organizes and measures its business groups in accordance with the nature of products and services offered. The company measures each group’s profit based on operating earnings. As a result, net interest, other income and expense items and income taxes have not been allocated to the company’s business groups.
Summary financial information for each of the company’s business groups follows:
* Other includes the results of the company’s coal, aggregates and finance operations, as well as the operating results of the company’s commercial pension plans.
** Corporate identifiable assets include cash and equivalents from domestic operations, deferred taxes, real estate held for development and net prepaid pension cost related to the company’s commercial pension plans.
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(N) Condensed Consolidating Financial Statements
The floating rate notes are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain wholly-owned subsidiaries of General Dynamics Corporation (the Guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the Guarantors on a combined basis (each Guarantor together with its majority-owned subsidiaries) and all other subsidiaries on a combined basis as of March 31, 2002 and December 31, 2001 for the balance sheet, as well as the statement of earnings and cash flows for the three-month periods ended March 31, 2002 and April 1, 2001.
Condensed Consolidating Statement of Earnings
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Condensed Consolidating Balance Sheet
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Condensed Consolidating Statement of Cash Flows
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 2002
Forward-Looking Statements
Management’s Discussion and Analysis of the Results of Operations and Financial Condition contains forward-looking statements, which are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog stability. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: the company’s successful execution of internal performance plans; general U.S. and international political and economic conditions; changing priorities or reductions in the U.S. government defense budget; termination of government contracts due to unilateral government action; program performance, including the ability to perform fixed-price contracts within estimated costs and performance issues with key suppliers and subcontractors; changing customer demand or preferences for business aircraft; reliance on a large fleet customer for a significant portion of the firm aircraft contracts backlog and the majority of the options backlog; the status or outcome of legal and/or regulatory proceedings; and the timing and occurrence (or non-occurrence) of circumstances beyond the company’s control. All forward-looking statements speak only as of the date of this report. All subsequent written and oral forward-looking statements attributable to the company or any person acting on the company’s behalf are qualified by the cautionary statements in this section. The company does not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.
Business Overview
The company’s businesses include information and communications technology, land and amphibious combat systems, naval and commercial shipbuilding, and business aviation. These are high technology businesses that use design, manufacturing and program management expertise together with advanced technology and the integration of complex systems as part of their everyday operations. The company’s primary customers are the U.S. military, other government organizations, the armed forces of allied nations, and a diverse base of corporate and industrial buyers. The following discussion should be
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read in conjunction with the company’s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission, and with the unaudited consolidated financial statements included herein.
Results of Operations
Overview
Net sales increased 17 percent to $3.1 billion for the three-month period ended March 31, 2002. Operating earnings for the same period grew by 9 percent, driven largely by revenue growth and business acquisitions in the Information Systems and Technology and Combat Systems business groups. General and administrative expenses increased over the prior year amount due to growth in the company’s business through acquisitions. General and administrative expenses as a percentage of net sales have remained consistent for the comparative periods. Quarter over quarter earnings per share before favorable tax adjustments rose almost eight percent.
The company ended the first quarter of 2002 with a total backlog of $26.5 billion, over 75 percent of which is funded. The company received new orders during the quarter totaling approximately $3 billion.
Business Groups
The company operates in four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems and Aerospace. The company also owns certain commercial operations, which are identified for reporting purposes as Other. The following table sets forth the net sales and operating earnings by business group for the three-month periods ended:
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Information Systems and Technology
Net sales increased $259 and operating earnings increased $27 during the three-month period ended March 31, 2002 versus the comparative period a year ago, due in part to the acquisition of Decision Systems at the end of September 2001. Excluding Decision Systems results, net sales and operating earnings grew 18 percent and 13 percent, respectively, driven largely by initiation of work on the Bowman program, which was awarded to the company by the U.K. Ministry of Defence in July 2001.
Combat Systems
Net sales increased $135 and operating earnings remained essentially flat during the three-month period ended March 31, 2002 as compared to the prior year. Organic sales growth, stemming from production work on the new Stryker program, volume on munitions programs and additional research and development on the Advanced Amphibious Assault Vehicle program, represented approximately 75 percent of the group’s growth. Operating margins are lower than the prior year period largely because of increased work on newer programs with lower earnings rates and lower program margin rates at Santa Barbara Sistemas, S.A. acquired at the end of July 2001.
Marine Systems
Net sales were essentially unchanged and operating earnings decreased during the three-month period ended March 31, 2002 versus the prior year, due to increased work on early-stage design and cost-plus production programs which typically carry lower margins, including the Virginia-class submarine, LPD amphibious ship and commercial ship contracts.
In February 2002, a team led by the company submitted a proposal to the Navy to be the prime contractor for the design phase of the DD(X), the next generation family of surface combatants. On April 29, 2002, the Navy notified the company that it had selected another company for the award of the DD(X) design contract. On May 9, 2002, the company filed a “bid protest” before the U.S. General Accounting Office (GAO) challenging the fairness of the Navy’s DD(X) evaluation process. The Navy’s formal response to the protest is due within 30 days of its filing. The GAO must hear and decide the protest within 100 calendar days of its filing, unless extended by the filing of a supplemental protest.
Aerospace
Net sales increased $51 during the three-month period ended March 31, 2002 versus the prior year period, due primarily to deliveries of G100 and G200 aircraft. Operating earnings are consistent with the prior year period. Gulfstream delivered 27 green aircraft and 25 completions during the current three-month period, compared with 18 green aircraft and 15 completions in the comparable period of 2001.
As previously discussed in the 2001 Annual Report, following UAL Corporation’s announcement on March 22, 2002 that it was closing its Avolar subsidiary, the company terminated its agreements with Avolar. During the quarter the company retained deposits totaling approximately $50 related to this transaction.
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Backlog
The following table details the backlog of each business group as calculated at March 31, 2002, and December 31, 2001:
Defense Businesses
Total backlog represents the estimated remaining sales value of work to be performed under firm contracts. Funded backlog for government programs represents the portion of total backlog that has been appropriated by Congress and funded by the procuring agency.
Aerospace funded aircraft backlog represents orders for which the company has entered into definitive purchase contracts and has received non-refundable deposits from the customers. Unfunded aircraft backlog includes options to purchase new aircraft and agreements to provide future aircraft maintenance and support services. The majority of unfunded backlog is with Executive Jet International, a unit of Berkshire Hathaway and the leader in the fractional aircraft market.
Financial Condition, Liquidity and Capital Resources
Net cash from operating activities decreased from the prior year due primarily to the timing of aircraft payments in the Aerospace group. The company expects to continue to generate funds from operations in excess of its short- and long-term liquidity needs.
Net cash used by investing activities was $15 and $340, and net cash provided by financing activities was $36 and $364 for the three-month periods ended March 31, 2002 and April 1, 2001, respectively. Cash flow from both investing and financing activities decreased from the prior year primarily due to the acquisitions that occurred in the first quarter of 2001. There were no acquisitions in the first quarter of 2002.
On May 2, 2002, the company entered into a definitive agreement to acquire Advanced Technical Products, Inc. (ATP) for approximately $214 in cash, plus the assumption of approximately $36 of debt.
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The company expects to finance the purchase through the issuance of commercial paper. ATP manufactures advanced composite-based products and develops and produces portable biological and chemical detection systems, tactical deception equipment and mobile shelter systems. Consummation of the merger is subject to shareholder and regulatory approval and customary closing conditions.
Also included in financing activities are the company’s stock repurchases. On March 7, 2000, the company’s board of directors authorized management to repurchase in the open market up to 10 million shares of the company’s issued and outstanding common stock. During the first quarter of 2002, the company repurchased approximately 130,000 shares for $10. During the first quarter of 2001, the company repurchased approximately 288,000 shares for $20. From the date of authorization through the first quarter of 2002, the company has repurchased approximately 5.7 million shares for approximately $330.
As discussed further in Note L to the Consolidated Financial Statements, litigation on the A-12 program termination has been in progress since 1991. In the event the company is ultimately found to have been in default on the contract, the government contends the company’s liability for principal and interest would be approximately $1.2 billion pretax, or $630 after-tax. The company has sufficient resources to pay such an obligation, if required, and retain ample liquidity through internally generated cash flow from operations, additional borrowing capacity, as well as the ability to raise capital in the equity markets.
Additional Financial Information
Critical Accounting Policies
The policies that management believes are critical and require the use of significant business judgment in their application are the company’s revenue recognition policies. Estimating is an integral part of a contractor’s business activities, and it is necessary to revise estimates on contracts continually as the work progresses. Such changes in estimates may necessitate revision of earnings rates and, accordingly, earnings reported in the future. The company’s revenue recognition policies are summarized in Note A of the Notes to Consolidated Financial Statements contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2001.
New Accounting Standard
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There were no material changes with respect to this item from the disclosure included in the company’s Annual Report on Form 10-K for the year ended December 31, 2001.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note K, Commitments and Contingencies, and Note L, Termination of A-12 Program, to the Consolidated Financial Statements in Part I, which is incorporated herein by reference, for statements relevant to activities during the period covering certain litigation to which the company is a party.
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 15, 2002
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