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GENERAL DYNAMICS
Annual Report 2012

Table of contents

  • Page 1
    GENERAL DYNAMICS Annual Report 2012

  • Page 2

  • Page 3
    ... new aircraft models to the market in 2012, the G280 and G650. We have a high degree of confidence that these aircraft will be major contributors to the company's performance for many years to come. Similarly, within the Combat Systems group, Land Systems, our North America-based vehicle business...

  • Page 4

  • Page 5
    ... INCORPORATED BY REFERENCE: Part III incorporates by reference information from certain portions of the registrant's definitive proxy statement for the 2013 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

  • Page 6
    ...Accounting and Financial Disclosure Controls and Procedures Other Information 16 17 18 33 34 67 67 70 PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management...

  • Page 7
    ... General Dynamics is an aerospace and defense company that offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding; and communications and information technology. Our experienced management team delivers shareholder...

  • Page 8
    ...aircraft technicians to deploy for urgent customer-service requirements in the Americas and Europe. This commitment to superior product support continues to receive industry recognition, including the number-one ranking for the tenth consecutive year in the annual Aviation International News Product...

  • Page 9
    ... programs and to secure new opportunities. Revenues for the Combat Systems group were 27 percent of our consolidated revenues in 2010 and 2011 and 25 percent in 2012. Revenues by major products and services were as follows: Year Ended December 31 2010 2011 2012 Wheeled combat vehicles Munitions...

  • Page 10
    ... and support requirements of our Navy and commercial customers. Revenues for the Marine Systems group were 21 percent of our consolidated revenues in 2010, 20 percent in 2011 and 21 percent in 2012. Revenues by major products and services were as follows: Year Ended December 31 2010 2011 2012...

  • Page 11
    ... group provides critical technologies, products and services that support a wide range of government and commercial communication and information sharing and security needs. The group consists of a three-part portfolio centered on secure mobile communication systems, information technology solutions...

  • Page 12
    ... Information Systems and Technology group were 36 percent of our consolidated revenues in 2010, 34 percent in 2011 and 32 percent in 2012. Revenues by major products and services were as follows: Year Ended December 31 2010 2011 2012 Mobile communication systems IT solutions and mission support...

  • Page 13
    ...฀program฀execution฀and฀on-time฀delivery฀of฀complex,฀ integrated systems; •฀ our฀global฀footprint฀and฀accessibility฀to฀customers; General Dynamics Annual Report 2012 Our U.S. commercial revenues were $3.2 billion in 2010, $3.8 billion in 2011 and $4.2 billion in 2012...

  • Page 14
    ... in Part II, Item 7, of this Annual Report on Form 10-K. Summary backlog information for each of our business groups follows: 2012 Total Backlog Not Expected to Be Completed in 2013 December 31 2011 2012 Funded Unfunded Total Funded Unfunded Total Aerospace Combat Systems Marine Systems...

  • Page 15
    .... Internationally, work for many of our government customers is weighted toward the end of the calendar year, generally resulting in increasing revenues and earnings over the course of the year. REGULATORY MATTERS U.S. GOVERNMENT CONTRACTS We develop technology, manufacturing processes and systems...

  • Page 16
    ... condition or cash flows. For additional information relating to the impact of environmental matters, see Note N to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K. We file several types of reports and other information with the Securities...

  • Page 17
    ...may occur. For additional information relating to the U.S. defense budget, see the Business Environment section of Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7, of this Annual Report on Form 10-K. U.S. government contracts are not...

  • Page 18
    ...contracting process. Our international business may be sensitive to changes in a foreign government's budgets, leadership and national priorities, including the current European fiscal condition. International transactions can involve increased financial and legal risks arising from foreign exchange...

  • Page 19
    ....3 10.4 12.7 52.9 ITEM 3. LEGAL PROCEEDINGS For information relating to legal proceedings, see Note N to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. General Dynamics Annual Report 2012 15

  • Page 20
    ...40 20 0 2007 2008 General Dynamics 2009 2010 S&P Aerospace & Defense 2011 2012 S&P 500 l 16 General Dynamics Annual Report 2012 t n t t l t t Our common stock is listed on the New York Stock Exchange. The high and low sales prices of our common stock and the cash dividends declared on our...

  • Page 21
    ... Management's Discussion and Analysis of Financial Condition and Results of Operations, for the calculation of return on invested capital. (h) Sales per employee is calculated as revenues for the past 12 months divided by the average number of employees for the period. General Dynamics Annual Report...

  • Page 22
    ...fiscal year (FY) 2012 levels through March 2013. A CR does not generally fund new program starts or new multi-year contracts. A series of CRs over the past several years has negatively impacted the flow of contract awards, particularly in our shorter-cycle Information Systems and Technology business...

  • Page 23
    ... of work (e.g., development/production). C O N S O L I D AT E D O V E R V I E W Year Ended December 31 2010 2011 2012 Revenues Operating Earnings Revenues Operating Earnings Revenues Operating Earnings Aerospace Combat Systems Marine Systems Information Systems and Technology Corporate...

  • Page 24
    ... our business groups' operating results, most significantly the $2 billion goodwill impairment recorded in the Information Systems and Technology group. As a result, operating earnings and margins decreased in 2012. Product Revenues and Operating Costs Year Ended December 31 Ship construction 2011...

  • Page 25
    ... and margins declined in 2011. Product Revenues and Operating Costs Year Ended December 31 Goodwill Impairment In 2012, we recorded a $2 billion goodwill impairment in the Information Systems and Technology group discussed below in conjunction with the business group's operating results and in the...

  • Page 26
    ... of specific contracts and programs when significant to the group's results. Information regarding our business groups also can be found in Note Q to the Consolidated Financial Statements. AEROSPACE Review of 2011 vs. 2012 Year Ended December 31 2011 2012 Variance Revenues Operating earnings...

  • Page 27
    ... group's revenues in 2013 compared with 2012, led by Gulfstream, and operating margins in the mid-15 percent range. COMBAT SYSTEMS Review of 2011 vs. 2012 Year Ended December 31 our European military vehicles business: •฀ $292฀for฀contract฀disputes฀accruals,฀primarily฀related฀to...

  • Page 28
    ...the Marine Systems group decreased slightly in 2011 due to lower volume on the DDG programs, the completion of a five-ship commercial product-carrier construction program in 2010 and the wind down of the T-AKE program. These decreases were partially offset 24 General Dynamics Annual Report 2012 The...

  • Page 29
    ... by the Combat Systems group's European military vehicles business). For further discussion of the impairment charges, see Note B to the Consolidated Financial Statements and the Application of Critical Accounting Policies later in this section. Review of 2010 vs. 2011 Year Ended December 31...

  • Page 30
    ... orders in 2012, including awards for production of 62 new vehicles, the conversion of previously delivered vehicles to the double-V-hull configuration, contractor logistics support and engineering services. The group's backlog at year end also included $195 for the Technology Development phase of...

  • Page 31
    ...class replacement engineering program, including $1.8 billion awarded in the fourth quarter of 2012. Year-end backlog for maintenance and repair services totaled $1.4 billion. INFORMATION SYSTEMS AND TECHNOLOGY $40,000 20,000 30,000 10,000 Estimated Potential Contract Value Unfunded Backlog 0 2010...

  • Page 32
    ... cash generated by operating activities over the past three years was deployed to fund acquisitions and capital expenditures, repurchase our common stock, pay dividends and repay maturing debt. Our net debt was $613 at year-end 2012, down by $420 from the end of 2011. Our cash balances are invested...

  • Page 33
    ... for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a performance measure in evaluating management. General Dynamics Annual Report 2012 29

  • Page 34
    ... and shareholders' equity for the year. Net operating profit after taxes is defined฀as฀earnings฀(loss)฀from฀continuing฀operations฀plus฀after-tax฀interest฀and฀amortization฀expense.฀ROIC฀is฀calculated฀as฀follows: Year Ended December 31 2008 2009 2010 2011 2012...

  • Page 35
    ... in contract estimates totaled $350 ($0.60) in 2010, $356 ($0.63) in 2011 and $180 ($0.33) in 2012. Other than revisions discussed in the Marine Systems and Information Systems and Technology business groups' results of operations, no revisions on any one contract were material in 2012. Goodwill and...

  • Page 36
    ... it relates to the test, our reporting units are consistent with our business groups. Slowed defense spending, the threat of sequestration and margin compression due to mix shift have impacted operating results and tempered the projected cash flows of the Information Systems and Technology reporting...

  • Page 37
    .... Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On December 31, 2012, we held $3.3 billion in cash and equivalents, but held no marketable securities. General Dynamics Annual Report 2012 33

  • Page 38
    ... 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) Y e a r E n d e d D e ce m b e r 3 1 (Dollars in millions, except per-share amounts) 2010 2011 2012 Revenues: Products Services Operating costs and expenses: Products Services Goodwill impairment General...

  • Page 39
    ... b e r 3 1 (Dollars in millions) 2010 2011 2012 Net earnings (loss) Net gain (loss) on cash flow hedges Unrealized gains (losses) on securities Foreign currency translation adjustments Change in retirement plans' funded status Other comprehensive loss before tax Benefit for income tax, net Other...

  • Page 40
    ...3 1 (Dollars in millions) 2011 2012 ASSETS Current assets: Cash and equivalents Accounts receivable Contracts in process Inventories Other current assets Total current assets Noncurrent assets: Property, plant and equipment, net Intangible assets, net Goodwill Other assets Total noncurrent assets...

  • Page 41
    ... impairments Stock-based compensation expense Excess tax benefit from stock-based compensation Deferred income tax (benefit) provision Discontinued operations, net of tax (Increase) decrease in assets, net of effects of business acquisitions - Accounts receivable Contracts in process Inventories...

  • Page 42
    ... loss Balance, December 31, 2010 Net earnings Cash dividends declared Stock-based awards Shares purchased Other comprehensive loss Balance, December 31, 2011 Net loss Cash dividends declared Stock-based awards Shares purchased Other comprehensive loss Balance, December 31, 2012 $ 482 - - - - - 482...

  • Page 43
    ... are charged directly to the related contract. The Aerospace group has cost-sharing arrangements with some of its suppliers that enhance the group's internal development capabilities and offset a portion of the financial cost associated with the group's General Dynamics Annual Report 2012 39

  • Page 44
    ... repair and overhaul services to private aircraft (on February 29). Combat Systems •฀฀The฀defense฀operations฀of฀Gayston฀Corporation,฀a฀business฀that฀฀ supplies precision metal components used in several munitions programs (on August 27). Marine Systems •฀฀The฀Ship...

  • Page 45
    ... of Cash Flows. Goodwill The changes in the carrying amount of goodwill by reporting unit during 2011 and 2012 were as follows: Aerospace Combat Systems Marine Systems Information Systems and Technology Total Goodwill December 31, 2010 Acquisitions (a) Other (b) December 31, 2011 Impairment...

  • Page 46
    ... Systems and Technology group, fourth-quarter 2012 competitive losses and award delays in our optical products business indicative of lower overall demand resulted in a review of the long-lived assets. In the fourth quarter of 2011, losses on narrow- and wide-body commercial aircraft contracts...

  • Page 47
    C. EARNINGS PER SHARE We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2011 or 2012, except for long-lived assets that were impaired in 2012, including goodwill in our Information Systems and Technology business group. We estimated the fair ...

  • Page 48
    ...Balance Year Ended December 31 2010 2011 2012 Sheets in other assets and liabilities as follows: 2011 2012 Statutory federal income tax rate State tax on commercial operations, net of federal benefits Impact of international operations Domestic production deduction Domestic tax credits Goodwill...

  • Page 49
    ... results of operations, financial condition or cash flows. F. ACCOUNTS RECEIVABLE Accounts receivable represent amounts billed and currently due from customers and consisted of the following: December 31 2011 2012 Non-U.S. government U.S. government Commercial Total accounts receivable $ 2,536...

  • Page 50
    ... represent primarily business-jet components and are stated at the lower of cost or net realizable value. Work-in-process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the 2011 2012 estimated average unit cost...

  • Page 51
    ... of scheduled maturities of our debt for the next five years are as follows: Year Ended December 31 2011 2012 Salaries and wages Workers' compensation Retirement benefits Deferred income taxes Other (a) Total other current liabilities Retirement benefits Customer deposits on commercial contracts...

  • Page 52
    ...share were $1.68 in 2010, $1.88 in 2011 and $2.04 in 2012. Cash dividends paid were $631 in 2010, $673 in 2011 and $893 in 2012. In advance of possible tax increases in 2013, we accelerated our first quarter 2013 dividend payment to December 2012. Year Ended December 31, 2010 Gross Amount Benefit...

  • Page 53
    ... of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On December 31, 2012, we held $3.3 billion in cash and equivalents, but held no marketable securities. Hedging Activities. We had $4 billion in notional forward exchange contracts outstanding on...

  • Page 54
    ... A-12 aircraft contract was a fixed-price incentive contract for the full-scale development and initial production of the carrier-based Advanced Tactical Aircraft with the U.S. Navy and a team composed of contractors General Dynamics and McDonnell Douglas (now a subsidiary of The Boeing Company). In...

  • Page 55
    ... of operations, financial condition or cash flows. $ 1,099 Other Portugal Program. In the fourth quarter of 2012, the Portuguese Ministry of National Defense notified our Combat Systems group's European Land Systems business that it was terminating the contract to provide 260 Pandur vehicles based...

  • Page 56
    ...compensation plans for employees, as well as for non-employee members of our board of directors. These include the General Dynamics Corporation 2009 Equity Compensation Plan and the 2012 Equity Compensation Plan (Equity Compensation Plans) and the 2009 General Dynamics United Kingdom Share Save Plan...

  • Page 57
    ... years. Compensation expense related to restricted stock and restricted stock units reduced operating earnings (and on a per-share basis) by $36 ($0.06) in 2010, $38 ($0.07) in 2011 and $26 ($0.05) in 2012. On December 31, 2012, we had $52 of unrecognized compensation cost General Dynamics Annual...

  • Page 58
    ... factors affecting the benefits earned by participants in our pension plans are employees' years of service and compensation levels. Our primary government pension plan, which comprises the majority of our unfunded obligation, was closed to new salaried participants on January 1, 2007. Additionally...

  • Page 59
    ...necessarily representative of the long-term financial position of these plans. We recognize differences under nonqualified plans immediately. Our annual pension and other post-retirement benefit costs consisted of the following: Pension Benefits Year Ended December 31 2010 2011 2012 Service cost...

  • Page 60
    ... and plan/trust assets, and the resulting funded status, of our defined-benefit retirement plans: Pension Benefits Year Ended December 31 Other Post-retirement Benefits 2012 2011 2012 2011 Change in Benefit Obligation Benefit obligation at beginning of year Service cost Interest cost Amendments...

  • Page 61
    ... rate Year rate reaches ultimate trend rate 5.22% 3.77% 4.22% 3.77% 5.13% 8.00% 5.00% 2019 3.97% 8.00% 5.00% 2019 Increase (decrease) to net pension cost from: Change in discount rate Change in long-term rate of return on plan assets $ (31) (16) $ 32 16 General Dynamics Annual Report 2012...

  • Page 62
    ...-income securities, but may invest in other asset classes in the future consistent with our investment policy. Our investments in equity assets include U.S. and international securities and equity funds as well as futures contracts on U.S. equity indices. 58 General Dynamics Annual Report 2012

  • Page 63
    ... December 31, 2011 December 31, 2012 Cash Equity securities U.S. companies (a) International companies Private equity investments Fixed-income securities Treasury securities Corporate bonds (b) Asset-backed securities Commingled funds Equity funds Money market funds Fixed-income funds Real estate...

  • Page 64
    ... groups. Summary financial information for each of our business groups follows: Revenues Year Ended December 31 Operating Earnings 2012 2010 2011 2012 Revenues from U.S. Government 2010 2011 2012 2010 2011 Aerospace Combat Systems Marine Systems Information Systems and Technology Corporate...

  • Page 65
    ... (2,789) (2,958) Year Ended December 31, 2011 Parent Other Subsidiaries on a Combined Basis Consolidating Adjustments Revenues Cost of sales G&A Operating earnings Interest, net Other, net Earnings before income taxes Provision for income taxes Discontinued operations, net of tax Equity in net...

  • Page 66
    ...Goodwill Other assets Investment in subsidiaries Total noncurrent assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Customer advances and deposits Other current liabilities Total current liabilities Noncurrent liabilities: Long-term debt...General Dynamics Annual Report 2012

  • Page 67
    ... assets Goodwill Other assets Investment in subsidiaries Total noncurrent assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Customer advances and deposits Other current liabilities Total current liabilities Noncurrent liabilities: Long-term debt Other liabilities...

  • Page 68
    ...$ - Year Ended December 31, 2011 Parent Guarantors on a Combined Basis Other Subsidiaries on a Combined Basis Consolidating Adjustments Total Consolidated Net cash provided by operating activities Cash flows from investing activities: Business acquisitions, net of cash acquired Purchases of...

  • Page 69
    ... Cash flows from investing activities: Capital expenditures Business acquisitions, net of cash acquired Other, net Net cash used by investing activities Cash flows from financing activities: Repayment of fixed-rate notes Proceeds from fixed-rate notes Dividends paid Purchases of common stock...

  • Page 70
    ... all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), General Dynamics Corporation's internal control over financial reporting as of December 31, 2012, based on the criteria...

  • Page 71
    ...2012, the company's disclosure controls and procedures were effective. The certifications of the company's Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report. General Dynamics Annual Report...

  • Page 72
    ... audit report on the effectiveness of our internal control over financial reporting. The KPMG report immediately follows this report. Phebe N. Novakovic Chairman and Chief Executive Officer L.฀Hugh฀Redd Senior Vice President and Chief Financial Officer 68 General Dynamics Annual Report 2012

  • Page 73
    ... Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2011 and 2012, and the related Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), Cash Flows, and Shareholders' Equity...

  • Page 74
    ... Technology, July 2006 - March 2008; Executive Vice President and Chief Operating Officer of Anteon Corporation, August 2003 - June 2006 Kimberly A. Kuryea - Vice President and Controller of the company since September 2011; Chief Financial Officer of General Dynamics Advanced Information Systems...

  • Page 75
    ...not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto. 3. Exhibits See Index on pages 73 through 75 of this Annual Report on Form 10-K for the year ended December 31, 2012. General Dynamics Annual Report 2012 71

  • Page 76
    ... pursuant to a Power of Attorney executed by the directors listed above, which Power of Attorney has been filed as an exhibit hereto and incorporated herein by reference thereto. Gregory S. Gallopoulos Senior Vice President, General Counsel and Secretary 72 General Dynamics Annual Report 2012

  • Page 77
    ... 31, 2004, filed with the Commission March 4, 2005) Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation Equity Compensation Plan (incorporated herein by reference from the company's annual report on Form 10-K for the year ended December 31, 2008, filed with the...

  • Page 78
    ... Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (incorporated herein by reference from the company's quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed with the Commission August 1, 2012) Successor Retirement Plan for Directors...

  • Page 79
    10.23* 2012 Compensation Arrangements for Named Executive Officers (incorporated herein by reference from the company's current report on Form 8-K filed with the Commission March 13, 2012) Subsidiaries** Consent of Independent Registered Public Accounting Firm** Power of Attorney** Certification by...

  • Page 80
    ... and Company John M. Keane General U.S. Army (Retired) Sir Robert Walmsley Former U.K. Chief of Defence Procurement William P. Fricks Former Chairman and Chief Executive Officer Newport News Shipbuilding Inc. Lester L. Lyles General U.S. Air Force (Retired) 76 General Dynamics Annual Report 2012

  • Page 81
    ... Vice President President Jet Aviation Larry R. Flynn Vice President President Gulfstream Aerospace Mark C. Roualet Executive Vice President Michael J. Mulligan Vice President President Armament and Technical Products Alfonso J. Ramonet Vice President President European Land Systems Gary L. Whited...

  • Page 82
    ... will be held on Wednesday, May 1, 2013, at the company's headquarters in Falls Church, Virginia. A formal notice and proxy will be distributed before the meeting to shareholders entitled to vote. Shares Listed New York Stock Exchange Ticker symbol: GD 78 General Dynamics Annual Report 2012

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    GENERAL DYNAMICS 2941 Fairview Park Drive Suite 100 Falls Church, VA 22042-4513 www.generaldynamics.com