General Dynamics 2010 Annual Report Download - page 71

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LaborAgreements. Approximately one-fifthofour employees are
representedbylaborunionsorwork councilsunder55 company-negotiated
agreements. Anumberofthese agreements expirewithin any givenyear.
Historically,wehavebeensuccessful atrenegotiating successoragreements
withoutany material disruptionofoperating activities. We expectto
renegotiate thetermsofninecollectiveagreements in 2011,covering
approximately 2,400 employees. We donot expectthattherenegotiations
will,either individually orintheaggregate, haveamaterial impactonour
results ofoperations, financial conditionorcashflows.
Product Warranties. We providewarranties to our customers
associatedwithcertain productsales. We record estimatedwarranty
costs in theperiodinwhich therelatedproducts aredelivered.Thewarranty
liabilityrecordedateach balancesheet date isgenerally basedonthe
numberofmonthsofwarrantycoverageremaining forproducts delivered
and theaveragehistorical monthly warrantypayments. Warrantyobligations
incurredinconnectionwithlong-term productioncontracts areaccounted
forwithin thecontractestimates atcompletion(EACs). Our otherwarranty
obligations, primarily forbusiness-jet aircraft, areincludedinother current
liabilities and other liabilities ontheConsolidatedBalanceSheet.
Thechanges in thecarrying amountofwarranty liabilities foreach of
thepast three yearswereasfollows:
O. EQUITY COMPENSATIONPLANS
EquityCompensationOverview
We havevariousequitycompensationplansforemployees, aswell asfor
non-employee membersoftheboard ofdirectors. These includethe
General DynamicsCorporation2009 EquityCompensationPlan(Equity
Compensation Plan)and the 2009 General DynamicsUnitedKingdom
ShareSavePlan (U.K. Plan).
Thepurpose oftheEquityCompensationPlanistoprovidean effective
meansofa
ttracting,retaining and motivating directors, officersand key
employees, and to providethemwithincentives to enhanceour growth
and profitability.UndertheEquityCompensationPlan,awardsmay be
grantedto officers, employees ornon-employee directorsin common
stock,optionstopurchase commonstock,restrictedshares ofcommon
stock,participationunits oranycombinationofthese.
Stock optionsmay begrantedeitherasincentivestock options,
intendedto qualify forcapital gain treatmentunderSection422 ofthe
Internal RevenueCode(theCode), orasoptionsnot qualifiedunderthe
Code. All optionsgrantedundertheEquityCompensationPlanareissued
withanexercise priceatthefair market valueofthecommonstock on
thedate of grant. Awardsofstock optionsvest overtwo years, with50
percentoftheoptionsvesting in oneyear and theremaining 50 percent
vesting thefollowing year. Stock optionsthathavebeenawardedunder
theEquityCompensationPlanexpirefiveyearsafterthegrantdate. We
grantstock optionstoparticipants in theEquityCompensationPlanon
thefirst Wednesday ofMarch basedontheaverageofthehigh and low
stock prices onthatday aslistedontheNewYork Stock Exchange.
Grants ofrestrictedstock areawardsofshares ofcommonstock that
arereleased approximately four yearsafterthegrantdate. During that
restrictionperiod,recipients may not sell,transfer,pledge, assign or
otherwise conveytheir restrictedshares to another party.However,during
therestrictionperiod,therecipientisentitledto vote therestrictedshares
and to retain cash dividendspaid onthose shares.
Participation units representobligationsthathaveavaluederivedfrom
orrelatedto thevalueofour commonstock.These includestock
appreciationrights, phantomstock units, and restrictedstock units and
arepayablein cashorcommonstock.
UndertheU.K. Plan,our employees locatedintheUnitedKingdom
may invest designatedamounts in a savingsaccounttobeusedto
purchase aspecified numberofshares ofcommonstock,basedon
option grants thattheemployee may receive, atan exercise priceofnot
less than 80 percentofthefair market valueofthecommonstock.The
optionsmay beexercisedthree orfiveyearsafterthedate ofgrant,
depending onthetermsofthespecific award.
We issuecommonstock underour equitycompensationplansfrom
treasury stock.OnDecember31,2010, in additionto theshares reserved
forissuanceupontheexercise ofoutstanding options, approximately
26 millionshares havebeenauthorizedforoptionsand restrictedstock
thatmay begrantedinthefuture.
Stock-basedCompensationExpense
Thefollowing tabledetailsthecomponents ofstock-basedcompensation
expense recognizedinnet earningsin each ofthepast three years:
General Dynamics Annual Report • 201051
Year EndedDecember312008 2009 2010
Beginning balance$237$221$239
Warrantyexpense 69 71 70
Payments (52) (60) (51)
Adjustments*(33) 72
Ending balance$221$239 $260
* Includes warranty liabilities assumedinconnectionwith acquisitions, foreign exchange
translationadjustments and reclassifications.
Year EndedDecember312008 2009 2010
Stock options$49$54$53
Restrictedstock 192224
Total stock-basedcompensation
expense, net oftax* $ 68 $76$77
*Stock-basedcompensationexpense (pretax)isincludedinG&Aexpenses.