Corporate_Annual_Report_Workbook1

INTRODUCTION INTRODUCTION TO THE CORPORATE ANNUAL REPORT:

A BUSINESS APPLICATION cd

2

edition

Complete the following before you submit your assignment. This step is required to validate your compliance with sections 107 or 108 of the 1976 United States Copyright Act.

1. Remove the front cover of the workbook and identify: o

Name:

Josh Simmons

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o

Term:

Fall 2 2009

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o

Comp Compan any: y:

Gene Ge nera rall Dyna Dynami mics cs Corp Corpor orat atio ion n

.

o

Inst Instru ruct ctor or::

Dr. Dr. Donn Donny y Bagw Bagwel elll

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2. Print Print out your your comp complete leted d electro electronic nic templ template. ate.

3. Attach the following:

• • •

This front cover (completed) Electronic solution template Company annual report

CHAPTER 1 - INTRODUCTION Chapter 1: Select a Company and Gather Documents—Question 1

Fill in the page numbers on the annual report where the following are located. Required information for this Page Required information for this Page workbook project. No. workbook project. No. Financial Highlights (Not absolutely I-1 Statement ent of Cash ash Flows 38 necessary, but very common in annual reports.)

Chairman’s Message (President’s,

I-3 I-3

Notes otes to Fina Financ nciial Stat Statem emen ents ts

40

Management’s Discussion and Analysis (MD&A)

19

Report of In Independent Accountants or Independent Auditors’ Report

64

Income Statement

36

Fiveve- or Ten-Year ear Sum Summary of Operating Results

40

37

Management’s Report (Responsibility) on Internal Control over Financial Reporting

63

CEO’s or other top official’s message or letter to the shareholders)

(Statement of Earnings)

Balance Sheet (Statement of Financial Position)

(Item 9A. Control and Procedures in SEC 10K)

Statement of Change in Stockholder’s Equity

39

Investor and Company Information or Shareholder Information

69

Chapter 1: Identify Why You Selected This Company—Question 1

A) What is/are is/are your motivation(s) motivation(s) or interest(s) in selecting this company? [See above for examples.]

B) What questi question(s) on(s) are are you seeking seeking to to answer? answer? [For example, is the company profitable? profitable? Can the company change and develop new products products and services to be competitive? competitive? Would I invest in this company? company? Will the company provide rewarding career opportunities? opportunities? In chapter 5 you will have pulled together together the financial and nonfinancial information to answer these question(s).]

A) I work in the defense industry and think GD will have a big contract win.

2

• • •

This front cover (completed) Electronic solution template Company annual report

CHAPTER 1 - INTRODUCTION Chapter 1: Select a Company and Gather Documents—Question 1

Fill in the page numbers on the annual report where the following are located. Required information for this Page Required information for this Page workbook project. No. workbook project. No. Financial Highlights (Not absolutely I-1 Statement ent of Cash ash Flows 38 necessary, but very common in annual reports.)

Chairman’s Message (President’s,

I-3 I-3

Notes otes to Fina Financ nciial Stat Statem emen ents ts

40

Management’s Discussion and Analysis (MD&A)

19

Report of In Independent Accountants or Independent Auditors’ Report

64

Income Statement

36

Fiveve- or Ten-Year ear Sum Summary of Operating Results

40

37

Management’s Report (Responsibility) on Internal Control over Financial Reporting

63

CEO’s or other top official’s message or letter to the shareholders)

(Statement of Earnings)

Balance Sheet (Statement of Financial Position)

(Item 9A. Control and Procedures in SEC 10K)

Statement of Change in Stockholder’s Equity

39

Investor and Company Information or Shareholder Information

69

Chapter 1: Identify Why You Selected This Company—Question 1

A) What is/are is/are your motivation(s) motivation(s) or interest(s) in selecting this company? [See above for examples.]

B) What questi question(s) on(s) are are you seeking seeking to to answer? answer? [For example, is the company profitable? profitable? Can the company change and develop new products products and services to be competitive? competitive? Would I invest in this company? company? Will the company provide rewarding career opportunities? opportunities? In chapter 5 you will have pulled together together the financial and nonfinancial information to answer these question(s).]

A) I work in the defense industry and think GD will have a big contract win.

2

3

B) How big of an impact will the win the LCS fly off have on GD?

Company and Annual Report Essentials Chapter 1: Company and Annual Report Essentials—Question 1

What is the company’s complete name?

GENERAL DYNAMICS CORPORATION

Chapter 1: Company and Annual Report Essentials—Question 2

What is the address of your company’s corporate headquarters?

2941 Fairview Park Drive, Suite 100, Falls Church, Virginia 22042-4513


Identify the company’s Internet site. www.generaldynamics.com


Identify the telephone number and e-mail address of the company’s Investor Relations Department. Telephone number: (703) 876-3000 E-mail address: [email protected]

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Which stock exchange lists your company? NYSE Chapter 1: Company and Annual Report Essentials—Question 6

What is your company’s stock exchange trading symbol? GD Chapter 1: Company and Annual Report Essentials—Question 7

What is your company’s Standard Industrial Classification (SIC) and code? You can identify this information by searching SEC Form 10-K. Recall that you saved this in an electronic format. Run a search on “Standard Industrial Classification,” and the classification and code will be identified. Your company may list more than one SIC code numbers. The first listed is considered the primary SIC for the company. For example: The Home Depot: Standard Industrial Classification: Retail-Lumber & Other Building Materials Dealers [5211]

Not found in report? Chapter 1: Company and Annual Report Essentials—Question 8

Locate the board of directors listing. How many board members does your company have? There are 13 board members. Chapter 1: Company and Annual Report Essentials—Question 9

How many of the directors are company employees, labeled inside directors? And how many are non-company directors, labeled outside directors? Why does a company want and need outside directors? (Inside and outside directors are typically identified as such by their title and company.)

GD has 2 inside and 11 outside directors. Companies have outside directors to have independent thought, because these board members do not directly depend on the company financially. It also gives the board more influence because of the outside ties of these members.

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Leadership addresses the stockholders, typically, once a year at the annual stockholders meeting. Identify where and when this occurred, as reported in your annual report.

The annual meeting of General Dynamics shareholders will be held on Wednesday, May 6, 2009, at the General Dynamics Corporation headquarters, 2941 Fairview Park Drive, Falls Church, Va.

Company Strategy and Business Environment Chapter 1: Company Strategy and Business Environment—Question 1

Review the chairman’s message of your company’s annual report. Does it appear to be uplifting or somewhat apologetic? Identify phrases that support your position. The chairman’s message was very uplifting. It included statements such as: “strong order intake”, “unprecedented year-end backlog”, “superb result is consistent with company’s track record”, “improving what was already a very good yield”,

Chapter 1: Company Strategy and Business Environment—Question 2

Check below the one primary company strategy identified in the chairman’s message. Support your answer with phrases found in the chairman’s message that pointed you to the identified corporate strategy.

Growth: Vertical Stability

Horizontal Retrenchment

X

Concentric

Conglomerate

.

.

Phrases to support your conclusion: “Improvements to the groups business model”, “fight its way through this downturn”,


Briefly summarize the company’s discussion found in Item 1 of SEC Fo rm 10-K. Type of business:

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Aerospace and Defense Major business segments: Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology Primary customers: US Government Primary products and/or services: Aircraft, armored vehicles, weapon systems, ships, submarines, communications equipment Other:


Identify broad-based social, political, economic, and technological concerns that may affect your company. Put N/A if one of the categories does not apply. Social: People are against the war and may adversely affect military orders. Political: Obama may cut military spending. Economic: The economic downturn makes it hard to borrow money Technological: Success depends on ability to develop new technology that meets customer needs. Other:

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Wrap-up Chapter 1: Wrap-up—Question 1

After further review of additional information you should now be confident in identifying the one primary company strategy, beyond the insight provided by the chairman’s message? Check below the one primary company strategy identified in the chairman’s message and all other supporting documents. Support your answer with phrases.

Growth: Vertical Stability

Horizontal Retrenchment X

Concentric

Conglomerate

.

.

Phrases to support your conclusion from information gathered from the chairman’s message, Item 1 of the 10K and other insight gained from completing chapter 1.

“Survive economic downturn”, “gains coming from process improvements”, “decline in contacts”, “discontinue non-profitable operations”; “disciplined capital deployment”; “focusing on our core platforms”

CHAPTER 2 - ANNUAL REPORT STRUCTURE Chapter 2: Financial Highlights—Question 1

Review the financial highlights of your company’s annual report. Identify net sales or revenues, net income, basic earnings per share (BEPS), and total assets for the current and preceding years. These are the most common values included in financial highlights. If your company reports something different, simply cross out an item here and recap what is reported.

Example:

Net sales or revenues Net income Basic EPS Total Assets

Current Year

One Year Prior

Two Years Prior

2007

2006

2005

29,300

27,240

24,063

6.17

5.08

4.56

6.26

5.17

4.24

28,373

25,733

22,376

Based on your preliminary review, is your company performing better than, e qual to, or

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less favorably than in the prior year? Briefly explain.

General Dynamics is doing better than in the prior year. General Dynamics consistently raised all fundamental indicators of financial status.

General Company and Marketing Information Chapter 2: General Company and Marketing Information—Question 1

Identify other types of general information found within the annual report. Look for pictures of product and people that are colorful and send a positive signal to the reader. Exclude the specific components identified in Chapter 1: Select a Company and Gather Documents—Question 1.

Category

Message

Example: Volunteer Activities

Ongoing and contributing to the success of the community

Company Overview

Shows each business segment and major their accomplishments for the year

Customers

Shows that the company is not dependant on one customer base

Research and Development

Shows the company is reinvesting for future success

Backlog

Shows that the company has future work and revenue

What is the broader message from this information? General Dynamics is a large diverse company with many sources of revenue and should be able to generate profits in a variety of economic conditions.

Management’s Discussion and Analysis Chapter 2: Management’s Discussion and Analysis—Question 1

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Results of Operations: Identify the primary drivers/issues that explain current and future results of operations discussed in the MD&A. For example, the gross profit percentage increased because of improved buyer/supplier relations resulting in greater overall operating performance. Or an increase in operating expenses because of increased fuel costs reduced profits. List the six major drivers/issues of performance you find in the MD&A section o f the annual report. 1. The nation’s engagement in the global war on terror, coupled with the need to modernize U.S. military forces, has driven steady Department of Defense funding increases since 2001.

2. Our future growth potential in the U.S. defense market is driven by the size of the defense budget, the allocation of that budget to investment accounts, the diversity of our exposure to different programs and customers within the budget, and our successful execution of the contracts we are awarded.

3. continued support for the warfighter from the administration and the Congress in the face of threats posed by an uncertain global security environment;

4. the number of troops deployed in Afghanistan and Iraq, coupled with the increase in the overall size of the U.S. military;

5. the need to reset and replenish equipment and supplies damaged and consumed during the war; 6. the need to modernize that infrastructure to address the evolving requirements of modern-day warfare.

Liquidity: Recap what you find about your company’s liquidity in the MD&A section of the annual report. Look for information about the ability of the company to satisfy short-term cash needs and the ability to generate operating cash flows, for example. Over the past five years, General Dynamics has generated free cash flow from operations well in excess of their earnings from continuing operations during the period, an average 115 percent conversion rate. General Dynamics expects to continue to generate funds in excess of our short- and long-term liquidity needs. General Dynamics has adequate funds on hand and sufficient borrowing capacity to execute their financial and operating strategy.

Capital Resources: Recap what you find about your company’s capital resources in the MD&A section of the annual report. Look for information about cash reserves and credit availability. For example, your company’s MD&A section may have a disclosure about an established lined of credit to fund future growth. GD has approximately $1.6 billion in cash and $2 billion in bank credit facilities that have not been drawn upon.

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Reports by Management Chapter 2: Reports by Management—Question 1

Review the Management’s Report (Responsibility) on Internal Control over Financial Reporting in your company’s annual report. Answer the following questions. Who is responsible for maintaining the internal controls designed to provide reasonable assurance that the books and records reflect the transactions of the company?

GD maintains a system of internal accounting controls

Record the statement that identifies management’s conclusion about internal controls.

We maintain and monitor an environment that establishes an appropriate level of control consciousness.

Who audited management’s assessment of the effectiveness of your company’s internal control over financial reporting?

Management’s assessment is audited by an internal audit program and an independent audit firm, KPMG LLP

Independent Auditors’ Report Chapter 2: Independent Auditors’ Report—Question 1

Review the Independent Auditors’ Report of your company’s annual report and answer the following questions. Who was the company’s auditor and where is it located?

KPMG LLP

McLean, Virginia

What is the responsibility of the auditor?

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Who is responsible for the preparation of and information within the company’s financial statement?

These consolidated financial statements and financial statement schedule are the responsibility of the company’s management.

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The audit was conducted in accordance with what?

the Public Company Accounting Oversight Board (United States).

What was the opinion of the auditor?

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General Dynamics Corporation and subsidiaries

Financial Statements and the Related Notes Chapter 2: Five- or Ten-Year Summary of Operating Results—Question 1

Identify the major components provided in the five- or ten-year summary. Summarize the insight provided by each. Look for stable, increasing or decreasing trends. Consistent, slightly improving performance signals management has control of the business. Inconsistent performance signals management does not have control of the business. Component

Summary of Insight

Example: The Home Depot Statement of Earnings Data

Sales and earnings have grown significantly over time. Operating expenses are growing at an increasing rate.

Summary of Operations

GD has steadily had positive improvements in all indicators over the last 5 years. These indicators are net sales, net earning, ROS, EPS, and operating margins.

Cash Flow

GD has increased its cash flow and has raised its dividends every year for the last 5 years.

Financial Position

GD has consistently increased assets, paid down debt, and increased book value.

Other Info

GD has increased free cash flow, ROI, and backlog.

Summary

GD’s management has very tight control over the company. They grow the company at a consistent pace and get good returns on the capital resources.

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CHAPTER 3 - FINANCIAL STATEMENTS The Balance Sheet Chapter 3: Balance Sheet—Question 1

Identify the date shown at the top of your selected company’s balance sheet. Current Year

2008

Prior Year

2007

Does the company’s fiscal year follow the calendar year? Yes __X__ No ___ If not, why do you think it is different?

Chapter 3: Balance Sheet—Question 2

Review the current asset section of your selected company’s balance sheet. Explain why the order of individual items begins with cash. In your opinion, would it be more or less appropriate to order these items according to dollar magnitude? Explain. On the balance sheets of US companies, assets are listed in order of liquidity. Since cash is the most liquid (or immediate) financial resources it is listed first. The current credit crisis is a good example of why assets are listed in liquidity order. If a company can not covert the assets to cash in time to meet obligations the company goes out of business no matter how many long term assets it holds.


Review your company’s balance sheet (or SEC Form 10-K) and compare accumulated depreciation to the historical cost of Plant and Equipment (PE) using the following ratio.

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Compute the following:

Percentage of Asset Life Remaining

Accumulated depreciation / Plant and Equipment

High percentage means older assets •

Low percentage means newer assets •

Is the investment in fixed assets, on average, relatively recent? If not, can we assume that these assets will be replaced shortly? Total Property Plant and Equipment = 5340 Accumulated Depreciation of property plant and equipment = 2468 PE= 2468/5340= 46.2% The items are at about half their useful life.


Since property, plant, and equipment (PPE) and long-term investments in stock represent a company’s investment, why do we distinguish between them in the balance sheet? PPE items depreciate, while investments in stock hopefully appreciate. Also, PPE is directly used in the revenue generation of a company, while stock is not.


Review the noncurrent asset section of your company’s b alance sheet. Are any intangible assets listed? If so, identify the types of intangible assets and the percent of total assets that the intangible assets represent. Intangible Asset 1: Contract and program = 967 Intangible Asset 2: Other intangible assets = 650 Intangible Asset 3: Total Intangible Assets ÷ Total Assets = 1617 / 28373 = 5.7% If this company were to be acquired by another company, would the intangible assets influence the purchase price? Explain your answer.

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The 5.7% intangible amount is mostly due to a backlog of contracted work which speaks to the strength of the company, but as a relative portion of assets would not greatly affect the purchase price.


Now review your company’s total assets for the most recent year. What percentage of total assets is current? Noncurrent? Current

Noncurrent

11,950

16,423

Should companies have a greater investment in current assets or noncurrent assets, or does it depend on the nature of their business? Explain your answer. It really depends on the nature of their business. Companies that sell product will have higher current asset ratios, while service companies will have almost all non-current assets.

Chapter 3: Balance Sheet— Question 7

Review your company’s balance sheet. Does it report a deferred tax asset? A deferred tax liability? If so, are the deferred tax assets and/or liabilities reported as current or noncurrent? Deferred tax asset? Yes or No

Current or Noncurrent*

Deferred tax liability? Yes or No

Current or Noncurrent*

*Note: If your company reports a current deferred tax asset (liability), it will realize an income tax benefit (obligation) in the next accounting period because of a previously reported event. If your company reports a noncurrent deferred tax asset (liability), it will realize an income tax benefit (obligation) in future accounting periods (beyond the next) because of a previously reported event.


Identify the information that relates to the stockholders’ equity section of your company’s balance sheet. Par value per share of common stock? Number of common shares authorized? Number of common shares issued?

$1 500 million 481,880,634 15

Number of common shares outstanding?

386,710,589

Number of treasury shares held by the company?

95,170,045


Answer the following questions relative to the stockholders’ equity section of the balance sheet. By what amount did retained earnings increase or decrease from the prior year? Was the increase or decrease in retained earnings equal to the company’s current year net income or net loss?

1908

Yes or No*

* If No, then dividends were paid (or declared) by your selected company or certain events took place during the year where the accounting for the events directly affected the retained earnings account.


List (write-in) each financial statement element as shown in your company’s balance sheet. Assets

Liabilities

Stockholders’ Equity

Cash and equivalents

Short and current long debt

Common stock

Accounts receivable

Accounts payable

Surplus

Contracts in process

Customer advances

Retained earnings

Inventories

Other current liabilities

Treasury stock

Other current assets

Long-term debt

Accumulated other

PPE, net

Other liabilities

Intangible assets, net

Commitments and conting.

Goodwill Other assets


Identify the combined carrying values (dollar amounts) of the following selected account groups taken from your company’s balance sheet:

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Account Groups

Current Year

Prior Year

Increase or Decrease (in dollars)

Current Assets

11950

Net Fixed Assets

2872

12298 2472

(348) 400

Intangible and Other Noncurrent Assets

13551

10963

2588

Current Liabilities

10360

9164

1196

Long-term Liabilities

7960

4801

3159

Common Stock

1346

1141

205

Additional Paid in Capital

-

-

-

Retained Earnings

13287

11379

1908

Other Equity Components

(5062)

(1234)

(3828)


Identify the three major balance sheet accounts , for example accounts receivable, accounts payable, inventory, etc. that changed the most from the prior year. What events might explain these changes? Working to explain why these changes occurred contributes to a greater understanding about a company. Account

Explanation

Example:

Example:

Account Receivable

An increase in accounts receivable should coincide with an increase in sales, i.e., a 10% increase in sales would explain a 10% increase in accounts receivable. If accounts receivable are increasing and sales decreasing, the signal is unfavorable.

Long Term Liabilities

The company nearly doubled its long term liabilities. The biggest factor is an increase in the cost of retirement benefits.

Net fixed assets

GD had an increase in net assets while having a decrease in current assets, which suggests the company invested in PPE.


This was due to losses from stocks from the global d ownturn in the stock market.


Prepare a common-sized balance sheet (expressed in percentages) using the following account groups shown in your selected company’s balance sheet.

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Account Group

Current Year

Prior Year

Increase or Decrease (current year percent minus prior year percent)

Current Assets

42.1

Net Fixed Assets

10.1

Intangible and Other Noncurrent Assets

47.8 9.5

(5.7) .5

47.8

42.6

5.2

100%

100%

-

Current Liabilities

36.5

35.6

.9

Long-term Liabilities

28.1

18.7

9.4

4.7

4.4

.3

0

0

0

46.8

44.2

2.6


(17.8)

(4.8)

(13.0)

Total Liabilities and Stockholders’ Equity

100%

100%

-

Total Assets

Common Stock Additional Paid in Capital Retained Earnings


Identify the three balance sheet groups from question 13 above that changed most significantly. Within each of these groups, identify the primary balance sheet element that drove this change. What events might explain these changes? Group Name:

Explanation:

Current Assets

(Example – sales increased by 22%, thus accounts receivable increased by approximately 22%.)


Treasury stock losses and other accumulated losses drive this.

Long Term Liabilities

Retirement benefits accounted for this change

Current Assets

This was driven by an increase in inventory due to slowing sales.


Did your company become more or less liquid when comparing this year to last year? Current Year:

Prior Year:

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Current Assets minus Current Liabilities =

Current Assets minus Current Liabilities =

11950-10360=1590

12298-9164= 3134

Explain why? The company became less liquid because of a decrease in currents assets and increase in current liabilities.


Did your company increase or decrease its financial leverage when comparing total debt to total stockholders’ equity from this year to last? Current Year:

Prior Year:

Total debt ÷ Total stockholders’ equity =

Total debt ÷ Total stockholders’ equity =

28373/10053=2.82

25733/11768= 2.19

Explain why:

The company increased its financial leverage. The owners’ equity will cover less percentage of the total liability.

The Income Statement or Statement of Earnings Chapter 3: Income Statement—Question 1

Review the heading of your company’s income statement. Does the company’s income statement provide two or three years of co mparative information? (Insert number to the right.)

_3_ yrs.

Why do you think the SEC requires that balance sheets provide two years of comparative financial information and income statements provide three years of comparative financial information? The SEC requires more years on the income statement because it changes faster than the balance sheet, but both require multiple years to help display trends in the data.

Chapter 3: Income Statement—Question 2

Review the middle section of your company’s income statement. Did operating income (loss) increase or decrease from the prior year and by h ow much? You may have to compute operating income (loss). Increased by $ ___540__________

Decreased by $ ______________

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Does the middle section of your company’s income statement show a nonoperating income (loss) increase or decrease from the prior year and by how much? You may have to compute nonoperating income (loss). Increased by $ ___142___________

Decreased by $ ______________


In reference to why you are studying this company, is it important to know the different sources of income—operating or nonoperating? Yes since most of this companies revenue is highly coupled to operations.


If any of the irregular events are shown on your company’s income statement, describe the nature and the amount. Select the most current year affected by the event if multiple years are affected. Irregular Event

Amount

Restructuring charge? Discontinued operation?

Nature of the Change

0 (19) Discontinued operations, net of tax

Extraordinary event?

0

Importance of the Income Statement Creditors, employees, suppliers, investors, and others use the income statement. The report serves as a measuring stick of how a company has performed, where it appears to be heading, and what future cash flows are likely to be. The first question most users want answered is what is net income? Next, they want to know how that figure compares to the prior years. Chapter 3: Income Statement—Question 6

Review the lower section of your selected company’s income statement. Did net income (loss) increase or decrease from the prior year and by h ow much? Increased by $ ____387M_________

Decreased by $ ______________


Prepare a common-sized income statement for the categories below.

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Account/Category

Current Year

Prior Year

Increase or Decrease (current year percent minus prior year percent)

Net Sales (revenues)

100%

100%

Cost of Goods/Services (if applicable) Gross Profit Operating Expenses Operating Income (Loss) Nonoperating Income (Loss)

2653

3113

1

25647

24127

-1

3604

3047

.8

(49)

Income Tax Expense

1126

Net Income

2459

(66)

.1

967 2072

-.3 .8


Identify the three income statement accounts/categories that changed the most in Question 7. What events might explain these changes? Account or Category:

Gross Profits Operating Exp

Explanation :

(Hint – the MD&A section will provide good information to answer this question.) All three of these are tied together. GD experienced an 1% increase in Gross Profits through a 1% decrease in operating expenses, which translated into an 0.8% increase in Net Income.

Net Income


Identify your company’s Basic and Diluted EPS amounts. Place a N/A in Diluted EPS if not reported. Basic EPS

Diluted EPS

Current year

6.21

6.17

Preceding year 1

5.12

5.08

Preceding year 2

4.60

4.56

Why is diluted EPS always equal to or less than basic EPS?

Diluted EPS is always equal to or less than basic EPS because diluted EPS is a worst

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case if everyone who could receive shares without directly purchasing them did so. This includes employee stock options, retirement accounts, etc. The refore there will always be a higher number of diluted shares then basic shares in the EPS calculation.

Statement of Cash Flows (SCF) Chapter 3: SCF—Question 1

Is the SCF dated in the title for a period of time similar to the income statement or for a point in time similar to the balance sheet? Why? The SCF is dated similar to the income statement since the numbers from income statement and the SCF are heavily dependant on each other. The SCF affects the balance sheet, but the balance sheet includes more long-term assets.

Chapter 3: SCF—Question 2

Identify the following sections of the SCF and record the amounts. Check the math by summing to the cash balance at end of year . Verify that the ending cash balance reported on the SCF is the same as reported on the balance sheet. Section

Current Year

Prior Year

Second Prior Year

Net operating cash flows

3110

2925

2128

Net investing cash flows

(3662)

(852)

(2316)

Net financing cash flows

(718)

(786)

(539)

Net increase (decrease) in cash flows

(1270)

1287

(727)

Cash balance at beginning of year

2891

1604

2331

Cash balance at end of year

1621

2891

1604

Does the total match balance sheet cash?

Not available

Yes / No

Yes / No


Record net sales, net income and net operating cash flows below. All three should be trending in approximately the same direction. If so, this is a sign of a well-run business. If one or more are going in a different direction, or random, then you must keep an eye open for an explanation why. Item

Net Sales

Current Year

Prior Year

2459

Second Prior Year

2072

1856

22

Net Income

3124

Net Operating Cash Flows

3110

2952

2156

2925

2128

Explain why net sales, net income and net operating cash flows are trending together or differently. (Hint: Look at depreciation expense and substantial changes in inventory, accounts receivable and accounts payable balances. Explaining why is a key learning point.) All three indicators are smoothly trending upward together. This means that GD suggests that GD is managing cash very well. The SCF is where an investor or auditor can catch the legal cash flow manipulation techniques used by firms to either sandbag or inflate the financial data for a specific purpose.


Identify the primary cash outflows and inflows from investing activities. Description of Activity

Cash outflow: Business acquisitions, purchase of securities, and capital expenditures

Amount

(5180)

Cash inflow: Sales of securities

1423

Consider three key issues at this point. Is the company adding assets? This is a sign of growth. Is the company replacing assets? This is a sign of growth and stability. Is the company only selling assets? This is a sign of retrenchment.

GD is acquiring businesses and purchasing securities. This indicates growth and a strong financial position.

Chapter 3: SCF—Question 5 Identify the primary cash inflow and outflow from financing activities. Description of Activity

Cash inflow: Proceeds from fixed-rate notes and commercial paper Cash outflow: (Note: cash dividends paid are reported here.) Purchase of common stock, dividends paid, repayment of fixedrate notes

Amount

1899 (2555)

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Consider two key issues at this point. How is the co mpany being financed, through debt or equity? Can you determine which is growing faster and why? A sound corporate strategy is to finance a company with debt during stable times, because this demands regular payment of principal and interest, and to finance a company with equity during unstable times, because leadership can elect to pay or not pay dividends.

GD is purchasing stock and has relatively little debt, but the financing that it is doing is through debt.

The Statement of Stockholders’ Equity (SSE) Chapter 3: SSE—Question 1

Identify the elements that comprise the statement of stockholders’ equity section of your company. Hint: These items are generally illustrated across the top of the page using a columnar format. (Example. Common stock – shares and dollar amount.)

Common Stock, Retained Earnings, Treasury Stock, Accumulated Other Comprehensive (Loss) Income, Total Shareholders’ Equity Chapter 3: SSE—Question 2

Identify the cash dividends per share.

$1.40

Determine the dividend payout percentage. A company’s 22.7% dividend payout percentage is computed by dividing dividend per common share by net income or earnings per common share. (Hint: If your company reported a net loss for the year, the answer lacks meaning.) Compute dividend yield. A company’s dividend yield is 2.1% computed by dividing dividend per common share by market price per common share. (Hint: Use the current per share price for your selected company.) Is your company’s dividend yield a reasonable return given current market conditions?

Yes in this current market condition and dividend is a good.

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Notes to the Financial Statements Chapter 3: Notes to the Financial Statements—Question 1

How does your company define “cash and cash equivalents”? GD classifies securities in accordance with Statement of Financial Accou nting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. GD considers securities with a maturity of three months or less to be cash equivalents. GD adjusts all investments in debt and equity securities to fair value.

Chapter 3: Notes to the Financial Statements—Question 2

How does your company value its “inventories”? Explain the meaning of the inventory valuation method. Are domestic and international inventories valued the same? Service companies will typically not have inventory. Inventories are stated at the lower of cost or net realizable value. Cost for work-in-process inventories, representing principally aircraft in the manufacturing process, is based on the estimated average unit cost of the units in a production lot, or specific identification. Cost for aircraft parts and components is based on the first in, first out method, or specific identification. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in v alue or the estimated net realizable value.


Does your company report any investments in marketable securities? Identify the respective amount(s) invested. Category

Current Year Amount

Trading Securities

143

Available-for-Sale Securities

241

Held-to-Maturity Debt Securities

20


Note 1 and a separate note on income taxes should provide the information to answer this question. What was your company’s income tax expense for the current year?

965

How much cash was paid for income taxes in the current year? (Hint: Review the SCF. The difference generally relates to the accrual basis of accounting.)

841

25

Identify the three major elements, such as depreciation or other post employment benefits, that gave rise to deferred tax assets or d eferred tax liabilities: Deferred Tax Assets

Deferred Tax Liabilities

Retirement plan liabilities

Intangible Assets

Other

Long-term Contracts Capital Construction Fund

What is this year’s effective tax rate for your company? What is the current year statutory rate?

Effective Tax Rate: __31.2____% Statutory Tax Rate: __35.0____%


Reviewing note #1, any related supporting notes, and/or the 10-K, identify the fixed asset group(s), depreciation methods used, and the estimated useful lives of these fixed assets. Fixed Asset Group

Depreciation Method

Estimated Lives (range)

Building and Improvements

Straight-line

50

Machinery and equipment

Staight-line

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Review the balance sheet, note #1, and any related notes and identify the amount of goodwill reported in the current year. Amount reported in current year.

$ __11,413_________

Identify the amount of any significant write-down of goodwill that occurred during the current year.

$ ____(93)_______

How does management describe how it accounts for goodwill as disclosed in the note(s) to the financial statements? We review goodwill and indefinite-lived intangible assets for impairment annually by applying a fairvalue-based test. Goodwill represents the purchase price paid in excess of the fair value of identifiable net tangible and intangible assets acquired in a business combination. We apply a two-step impairment test to first identify potential goodwill impairment for each reporting unit and then measure the amount of goodwill impairment loss, if necessary. We completed the required annual goodwill impairment test during the fourth quarter of 2008 and did not identify any impairment.

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Given present executive compensation packages, why would the user of financial information prefer a company follow SFAS #123 instead of APBO #25? Explain. SFAS #123 requires that companies expense stock option during the vesting period not just when the option is exercised. This keeps companies from being able to hide large executive compensation.


Review your company’s lease note (and related balance sheet information), then identify the following amounts: Minimum lease payments under operating leases

230

Minimum lease payments under capital leases

1

Ratio of operating lease payments to capital lease payments

1:230

As a user of reported financial information, would you be concerned about a significant amount of operating leases that are not reported in the balance sheet? Explain.

Yes because this is unrealized liabilities and the companies debt could be much higher than the balance sheet indicates. Chapter 3: Notes to the Financial Statements—Question 9

Review your company’s long-term debt note and identify the following (consider the three most significant liabilities only): Instrument

Maturity Date

Rate

Amount Due

Fixed-Rate Note

May 2013

4.250%

999

Fixed-Rate Note

Feb 2014

5.250%

995

Commercial Paper

None

0.850%

905

How much interest expense was recognized in the current year? How much cash was paid for interest in the current year? (Hint: Look in the SCF.*)

133 66

*The difference between interest expense and cash paid for interest is due to the accrual basis of accounting (and in some cases, the capitalization of interest).

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Review your company’s pension and OPEB note (if applicable) and answer the following questions. Pensions

OPEB

How much is the Projected Benefit Obligation (PBO) and Accumulated Postretirement Benefit Obligation (APBO) for your company at the end of the current year?

(7579)

(972)

What was the amount of pension or OPEB benefits paid to plan participants during the current year?

395

86

What amount of cash did the company contribute to the respective funds during the current year? This is known as “employer contributions.”

17

95

What is the value of the plan assets at the end of the current year?

4823

332

Based on your review of the plan assets and the projected benefit obligation (or accumulated postretirement benefit obligation), has your company sufficiently funded its employee benefit plans (this is known as funded status)? Due to the recent downturn in the stock market and the project rise in health care costs, GD is $2,922 underfunded.

An expected average return on invested plan assets is used to reduce the volatility in the reporting of pension or OPEB expense. Higher expected average returns reduce pension or OPEB expense, and lower expected returns increase pension expense. What rate of return on plan assets does your company use to compute pension or OPEB expense? Does this appear reasonable, given present market conditions? Rate employed? 8%

Response: This is reasonable rate given market conditions.


Based on your review of the contingencies note, briefly identify specific events that have led to the accrual of contingent liabilities in your selected company’s the balance sheet. Litigation concerning Termination of A-12 Program, EPA and other environmental considerations,

28

minimum lease payments, Letters of Credit, Government Contracts, Aircraft Trade-ins, Labor Agreements, and Product Warranties


Based on your review of the segment-reporting note to the financials, identify the reported operating segments, their related revenues, and operating income. Identify the largest three if more than three are disclosed. Reportable Operating Segments

Net Sales Revenue

Info Systems and Tech

Net Operating Income

10038

1075

Combat Systems

8194

1111

Aerospace

5512

1021


Based on your review of the segment-reporting note to the financials, identify the geographical segments and their related revenues. Identify the largest three if more than three are disclosed. Country

North America Europe Asia

Net Sales Revenue

25163 2958 545


Based on your review of the notes to the financials or the statement of stockholders’ equity, identify the components (no more than four) that comprise Other Comprehensive Income for your company. Component

Pension

Amount

(3026)

Foreign Currency Translation Adjustment

356

Cash Flow Hedges

(55)

Other Post Retirement

(53)

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CHAPTER 4 - FINANCIAL ANALYSIS Summary Financial Analysis Report Profit Margin % Answers how well the business performed. Gross Margin Pre-Tax Margin Net Profit Margin Sales

Operating Income Operating Cash Flows

Gross Profit / Total Revenue Operating Income / Total Revenue Net Income / Total Revenue Financial Statement Financial Statement

Company Two Years Prior

Company One Year Prior

Company

Industry

S&P 500

10.9

11.4

17.3

20.0

38.5

10.5

11.2

11.1

9.4

9.9

*7.7

*7.6

7.6

6.3

6.9

24063

27240

29300

Not required

Not required

2625

3113

3653

Not required

Not required

1856

2072

2459

Not required

Not required

Financial Statement

Evaluate Profitability (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing performance, above or below industry average. For a company with a stability strategic focus you will likely find stable performance, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor performance, below industry average with efforts to improve and approach industry average. Note: Sales, operating income and operating cash flows should trend in approximately the same direction. This signals a stable operating business environment. If the three measures are not trending together, this signals lack of control by management.)

In every case all three numbers trend upward together. GD is implementing a growth strategy and is performing it very well. The fact that GD’s gross margins are below industry average, but their pre-tax and net profit margins are above is a testament to GD’s above average management. Also, the reason they are below average for gross margins is due to the US government sets a 8% margin cap on military contracts.

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Financial Condition Signals ability to take on additional debt and liquidity. Debt/ Equity Ratio Current Ratio

Quick Ratio

Interest Coverage

(Total Liabilities – Current Liabilities) / Total equity


*0.28


*0.24

Current assets / Current liabilities (Cash and Short Term Investments + Short Term Investments + Total Receivables, Net) / Current Liabilities Data not readily available

Company

Industry

S&P 500

0.33

0.72

1.11

1.2

1.7

1.5

0.5

0.6

0.6

1.1

1.2

* Not provided

* Not provided

20.3

19.9

26.7

in report

in report

Evaluate Financial Condition (often labeled liquidity and solvency analysis) (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find stable or slightly decreasing liquidity, above or below industry average. Debt to equity often is increasing in a growing company. For a company with a stability strategic focus you will likely find stable liquidity, above or below industry average. Debt to equity often is stable as well. For a company with a retrenchment strategic focus you will likely find poor liquidity, below industry average with efforts to improve and approach industry liquidity. Debt to equity often is decreasing in a company during retrenchment.)

GD’s number highly correlate with a growth strategy. The have increased their debt to equity ratio, but have also increased the Current Ratio. The Quick Ratio is staying relatively the same. GD has low debt compared to the industry and S&P 500, and therefore maintains lower current and quick ratios compared to the industry. In effect keeps less cash on hand.

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Investment Return % Company One Year Prior

Company

Industry

S&P 500

*18.9

*17.6%

20.3

22.3

14.7

*8.3

*8.1%

8.7%

6.5

5.6

Return On Equity (5-Year Avg.)

Not required

Not required

19.8

19.6

19.4

Return On Assets (5-Year Avg.)

Not required

Not required

8.3

6.5

8.0

Signals performance for managers and owners. Return On Equity Return On Assets

Net Income / Total Equity Net Income / Total Assets


Evaluate Investment Return (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find increasing returns. For a company with a stability strategic focus you will likely find stable investment returns. For a company in a retrenchment strategic focus you will likely find poor and stable investment solvency, below industry average.)

GD’s investment returns are about average for the industry and slightly better than S&P 500. This is really good for a company the size of GD. GD’s returns on equity and assets are both increasing. GD is achieving its growth strategy. Both ROE and ROA are higher then the 5 year averages showing strong returns on a comparative basis.

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Management Efficiency Signals how well the company was run by management.



Company

Industry

S&P 500

Income/ Employee

Not required

Not required

26,208

18,660

42,458

Revenue/ Employee

Not required

Not required

345,991

291,682

774,043

10.3

9.5

9.2

7.6

13.7

12.9

8.9

Receivable Turnover

Total Revenue / Average Accounts Receivable Trade, Net

Average is defined: (beginning of the year + end of the year) / 2

Inventory Turnover Asset Turnover

Cost of Revenue, Total / Average Total Inventory Total Revenue / Average Total Assets

3.6

3.8

4.2

1.1

1.1

1.1

1.1

0.8

Evaluate Management Efficiency (Think about the corporate strategy in providing a response. Following are general guidelines, yet each company situation is unique. For a company with a growth strategic focus you will likely find improving efficiency, above or below industry average. For a company with a stability strategic focus you will likely find stable efficiency, above or below industry average. For a company in a retrenchment strategic focus you will likely find poor efficiency, below industry average with efforts to improve and approach industry average.)

Again all numbers are trending together. Receivable Turnover is improving year over year and the other indicators are all remaining strong. This shows that GD is very efficiently executing its growth strategy. These numbers are highly correlated to the fact the GD works on many very large dollar multi-year long term contracts and that the US government pays on time.

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CHAPTER 5 - DECISION-MAKING PROCESS N ow you must make two decisions.

Chapter 5: Decision-making Process—Question 1

Based upon your review, do the numbers support the company’s explicit strategic focus: a growth, stability or retrenchment focus? Why or why not? After review, the numbers strongly support that General Dynamics is achieving its stated growth strategy. By almost every measure GD’s numbers are trending with a growth strategy. They are increasing revenue year after year. GD relies on the US government for a large portion of revenue and it does not look like the US is going to dramatically lower orders to GD anytime soon.

34

Chapter 5: Decision-making Process—Question 2

Return to the first question in this project. Chapter 1: Identify Why You Selected This Company—Question 1

A) What is/are your motivation(s) or interest(s) in selecting this company? B) What question(s) are you seeking to answer?

You were asked to explain why you were investigating this company’s annual report. You have likely uncovered numerous pieces of information, some with con flicting insight. This may involve both financial and nonfinancial information. In addition, you may have found certain information to be incomplete for decision-making purposes. This is real wo rld analysis. Most business decisions are made with as much reliable information as possible, yet common to the decision-maker is a desire for more information. Prepare a thorough, yet concise answer to your original questions A and B above. For example, would you work for this company, why or why not? Support your response with the information gathered throughout your annual report study. After careful review, it does appear that a win of the LCS contract will have a significant impact on General Dynamics. With the current US political climate, of Democrats cutting future defense spending a very large contract like the LCS will continue the growth of this extremely well managed company. With that being said the world is increasingly becoming a dangerous place and this could increase GD’s non-US revenue streams. Also, as the economy recovers GD’s aerospace business should pick back up. GD is a well positioned company with multiple revenue streams and seems to do well in any business climate.

35

Chapter 5: Validate Your Conclusion—Question 1

The Altman Z-score is a predictive model created by Edward Altman in the 1960’s. The score combines and weights five financial ratios to estimate the likelihood of a company going bankrupt. The lower the Altman Z-score the higher the odds of bankruptcy. Research findings suggest the Z-score predicts 72 - 80% of corporate bankruptcies two years prior to the actual filing. •

Z-score > than 3 = considered healthy

•

Z-score between 1.8 and 3 = considered a warning sign

•

Z-score < than 1.8 = could be headed for bankruptcy

Computing the Z-score for your company is very simple. Go to one of the Web sites listed below and compute the Z-scores for the respective years identified below. Print out your results and turn them in with this workbook. •

www.creditguru.com/, select ‘Insolvency', ‘Altman Z-score’

•

www.jaxworks.com/calc2a.htm

Two Years Prior

Z-score 2.64

One Year Prior

2.72

Current Year

2.5

Z-score interpretation compared to the financial analysis. Does the Z-score agree or disagree with your analysis? The Z-scores disagree with my analysis. The main drivers of the low z-score are GD’s low liquidity and really high Total Assets. GD is very large company that d oes a lot of its business with the US government. Government contractors usually have lower then average Z-scores because they tend to have high Total Assets versus income. A lot of this has to do with max profit margins allowed on government. In order to compensate for this fact government contractors tend to spend a high percentage of revenue on Assets and Operating Expenses.

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Corporate_Annual_Report_Workbook1

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