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Annual Report 2013

Table of contents

  • Page 1
    Annual Report 2013

  • Page 2

  • Page 3
    ... attention to strategic naval assets, Marine Systems is well positioned to deliver ships, maintenance, overhaul and repair services to support our U.S. fleet. The group ended the year with $16.9 billion in backlog, which we will increase dramatically in 2014 when we sign the Virginia Class Submarine...

  • Page 4
    ... across a diverse group of products and services. Long-term demand for tactical communications, complex IT services and integration, as well as ISR, cyber security and mission systems, has not diminished and the operational changes implemented in 2013 position IS&T to execute on these opportunities...

  • Page 5
    ... fiscal year ended December 31, 2013 [ OR ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-3671 GENERAL DYNAMICS CORPORATION (Exact name of registrant as specified in its charter) Delaware State...

  • Page 6
    ... Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 15 17 18 34 35 67 67 70 Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Directors, Executive Officers and Corporate Governance Executive Compensation Security...

  • 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 communication and information technology systems and solutions. Our management team delivers shareholder...

  • Page 8
    ... manufacture and support of tracked and wheeled military vehicles, weapons systems and munitions for the United States and its allies. The group's product lines include: • wheeled combat and tactical vehicles, • main battle tanks and tracked combat vehicles, 4 General Dynamics Annual Report 2013

  • Page 9
    ...to secure new opportunities. Revenues for the Combat Systems group were 27 percent of our consolidated revenues in 2011, 25 percent in 2012 and 20 percent in 2013. Revenues by major products and services were as follows: Year Ended December 31 2011 2012 2013 Wheeled combat vehicles Munitions and...

  • Page 10
    ... the Marine Systems group were 20 percent of our consolidated revenues in 2011 and 21 percent in 2012 and 2013. Revenues by major products and services were as follows: Year Ended December 31 2011 2012 2013 Nuclear-powered submarines Surface combatants Auxiliary and commercial ships Repair and...

  • Page 11
    ...-sharing benefits to federal/civilian customers, including air traffic controller radios to the Federal Aviation Administration (FAA). Information Systems and Technology also provides many of these capabilities to non-U.S. public agencies and commercial customers. For the Canadian Department...

  • Page 12
    ... contract with other U.S. government customers, including the intelligence community, the Departments of Homeland Security and Health and Human Services and first-responder agencies. Our revenues from the U.S. government were as follows: Year Ended December 31 2011 2012 2013 DoD Non-DoD Foreign...

  • Page 13
    ...develop new products and technologies that improve mission performance and adapt to dynamic threats; • successful program execution and on-time delivery of complex, integrated systems; The Aerospace group has several competitors for each of its Gulfstream products. Key competitive factors include...

  • Page 14
    ...recognition. In the United States, these factors are influenced by the federal government's budget cycle based on its October-to-September fiscal year. Internationally, work for many of our government customers is weighted toward the end of the calendar year. 10 General Dynamics Annual Report 2013

  • Page 15
    ... can require changes to a specific aircraft or model type before granting approval. Maintenance facilities and charter operations must be licensed by aviation authorities as well. We file several types of reports and other information with the Securities and Exchange Commission (SEC) pursuant to...

  • Page 16
    ...standards. The U.S. government also reviews the adequacy of, and a contractor's compliance with, its internal control systems and policies, including the contractor's purchasing, property, estimating, labor, accounting and information systems. In some cases, audits may result in contractor costs not...

  • Page 17
    ... These factors could materially adversely affect our financial results. Changes in business conditions may cause goodwill and other intangible assets to become impaired. Goodwill represents the purchase price paid in excess of the fair value of net tangible and General Dynamics Annual Report 2013 13

  • Page 18
    ... forward-looking statements. These include but are not limited to projections of revenues, earnings, operating margins, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog. Forward-looking statements are made pursuant 14 General Dynamics Annual Report 2013

  • Page 19
    ... THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 common stock for each quarter of 2012 and 2013 are...

  • Page 20
    ...Cumulative Total Return Based on Investments of $100 Beginning December 31, 2008 (Assumes Reinvestment of Dividends) $ 300 250 200 150 100 50 0 200 8 2009 G e n e r a l Dyn a mics 2010 2011 2012 2013 S& P 500 S& P 500 A e rosp a c e & D e f e ns e 16 General Dynamics Annual Report 2013

  • Page 21
    ... equity divided by total outstanding shares as of year end. Operating working capital is calculated as accounts receivable, contracts in process (excluding "other contract costs"- see Note G to the Consolidated Financial Statements in Item 8) and inventories less accounts payable, customer advances...

  • Page 22
    ... well as timing of contract awards. In our Aerospace group, business-jet market conditions were strong in 2013. The group benefited from improved order interest across the group's range of customers and lower customer contract defaults. We expect our continued investment in new aircraft products to...

  • Page 23
    ... lower operating earnings and margins. REVIEW OF BUSINESS GROUPS Year Ended December 31 2011 Revenues Operating Earnings Revenues 2012 Operating Earnings Revenues 2013 Operating Earnings Aerospace Combat Systems Marine Systems Information Systems and Technology Corporate $ 5,998 8,827 6,631 11...

  • Page 24
    ... 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 in Item 8. AEROSPACE Review of 2012 vs. 2013 Year Ended December 31 Aircraft manufacturing, outfitting and...

  • Page 25
    ... Navy ship construction Navy ship engineering, repair and other services Commercial ship construction Total increase $ (150) 178 92 $ 120 The Combat Systems group's revenues decreased in 2012 compared with 2011 due to lower volume in the group's European military vehicles and weapons systems and...

  • Page 26
    ... program, operating margins improved in 2013. Review of 2011 vs. 2012 Year Ended December 31 The increase in the Information Systems and Technology group's revenues in 2013 consisted of the following: Mobile communication systems Information technology (IT) solutions and mission support services...

  • Page 27
    ... vehicle production Weapons systems and munitions production Aircraft manufacturing and outfitting $ (1,180) (358) 864 (674) 2012 discrete charges Other changes, net (289) 31 $ (932) We expect 2014 revenues in the Information Systems and Technology group to decrease nearly 20 percent from 2013...

  • Page 28
    ... asset impairment Other changes, net Total increase 191 26 $ 591 GOODWILL IMPAIRMENT In 2012, we recorded a $2 billion goodwill impairment in the Information Systems and Technology group discussed in conjunction with the business group's operating results. 24 General Dynamics Annual Report 2013

  • Page 29
    ... FOR INCOME TAXES, NET Our effective tax rate was 31.4 percent in 2011, 161.4 percent in 2012 and 31.1 percent in 2013. The significant increase in 2012 was primarily due to the largely non-deductible goodwill impairment of $2 billion recorded in the Information Systems and Technology group and...

  • Page 30
    ... Funded 0 2011 2012 2013 5,000 Combat Systems' total backlog was $6.7 billion at the end of 2013 compared with $8.7 billion at year-end 2012 due to delays in international orders and slowed U.S. Army spending. The group's backlog on December 31, 2013, included $1.2 billion for M1 Abrams main...

  • Page 31
    ...0 2011 2012 2013 The Marine Systems group's backlog consists of long-term submarine and ship construction programs, as well as numerous engineering and repair contracts. Backlog has decreased slightly to $16.9 billion at year-end 2013 compared to $17.1 billion at the end of 2012. The Virginia-class...

  • Page 32
    ... naval control systems for four additional ships will be reported in backlog when they are exercised. • $145 from the U.S. Department of State to provide supply chain management services. The program has a maximum potential value of $1.2 billion over five years. • $140 for production and support...

  • Page 33
    ... authorized management to repurchase 20 million additional shares of common stock on the open market, approximately 6 percent of our total shares outstanding. Dividends. On March 6, 2013, our board of directors declared an increased quarterly dividend of $0.56 per share - the 16th consecutive annual...

  • Page 34
    ... measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the Consolidated Statements of Cash Flows: Year Ended December 31 2009 2010 2011 2012 2013 Net cash provided by operating...

  • Page 35
    ... Financial Statements for discussion of long-term debt. (b) Includes amounts committed under legally enforceable agreements for goods and services with defined terms as to quantity, price and timing of delivery. This amount includes $11.1 billion of purchase obligations for products and services...

  • Page 36
    ...the time. As a significant change in one or more of these estimates could affect the profitability of our contracts, we review our performance monthly and 32 General Dynamics Annual Report 2013 update our contract estimates at least annually and often quarterly, as well as when required by specific...

  • Page 37
    ... the projected cash flows have not changed materially from 2012, the book value of the reporting unit has increased, largely due to improvement in the funded status of the unit's defined-benefit retirement plans. The reporting unit remains at risk for a future goodwill impairment should there be...

  • Page 38
    ... debt obligations. 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, 2013, we held $5.3 billion in cash and equivalents, but no marketable securities. 34 General Dynamics Annual Report...

  • Page 39
    ...8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (Dollars in millions, except per-share amounts) 2011 Year Ended December 31 2012 2013 Revenues: Products Services $ 21,440 11,237 32,677 Operating costs and expenses: Products Services Goodwill impairment...

  • Page 40
    ...) 2011 Year Ended December 31 2012 2013 Net earnings (loss) Gains (losses) on cash flow hedges Unrealized gains (losses) on securities Foreign currency translation adjustments Change in retirement plans' funded status Other comprehensive income (loss) before tax Provision (benefit) for income tax...

  • Page 41
    ...' EQUITY Current liabilities: Accounts payable Customer advances and deposits Other current liabilities Total current liabilities Noncurrent liabilities: Long-term debt Other liabilities Commitments and contingencies (see Note N) Total noncurrent liabilities Shareholders' equity: Common stock...

  • Page 42
    ...discontinued operations Net increase in cash and equivalents Cash and equivalents at beginning of year Cash and equivalents at end of year The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 38 General Dynamics Annual Report 2013 $ 2,526 354 238 111...

  • Page 43
    ...Total Shareholders' Equity 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...

  • Page 44
    ... efforts. These arrangements explicitly state that supplier contributions are for reimbursements of costs we incur in the development of new aircraft models and technologies, and we retain substantial rights in the products developed under these arrangements. 40 General Dynamics Annual Report 2013

  • Page 45
    ...for public safety and military customers (on June 8). • Open Kernel Labs, Inc., a provider of virtualization software for securing wireless communications, applications and content for mobile devices and automotive in-vehicle infotainment systems (on August 17). General Dynamics Annual Report 2013...

  • Page 46
    ... U.S. Department of Defense (on July 15). Goodwill The changes in the carrying amount of goodwill by reporting unit during 2012 and 2013 were as follows: Combat Systems Marine Systems Information Systems and Technology Total Goodwill Aerospace December 31, 2011 Impairment Acquisitions (a) Other...

  • Page 47
    ...segments. In the Aerospace group, lower demand in our maintenance business at Jet Aviation caused by an increasingly competitive marketplace resulted in a review of the long-lived assets of the business. In the Information Systems and Technology group, 2012 competitive losses and award delays in our...

  • Page 48
    ... of cash and equivalents, accounts receivable and payable, and short-term debt on the Consolidated Balance Sheets approximate their fair value. The following tables 44 General Dynamics Annual Report 2013 Total current Deferred: U.S. federal State International Total deferred Provision for income...

  • Page 49
    ... at our European Land Systems business in the fourth quarter of 2012 (see deferred tax assets table below). Deferred Tax Assets. The tax effects of temporary differences between reported earnings and taxable earnings consisted of the following: December 31 2012 2013 Retirement benefits Tax loss...

  • Page 50
    ... 31 2012 2013 Non-U.S. government U.S. government Commercial Total accounts receivable $ 2,728 778 698 $ 4,204 $ 2,767 951 684 $ 4,402 Receivables from non-U.S. government customers include amounts related to long-term production programs for the Spanish Ministry of Defence of $2.5 billion on...

  • Page 51
    ... the manufacturing process and is based primarily on the estimated average unit cost of the units in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in...

  • Page 52
    ... stock were 48 General Dynamics Annual Report 2013 $ (1,025) $ 562 Year Ended December 31, 2013 Gross Amount Benefit (Provision) for Income Tax Net Amount Gains on cash flow hedges Unrealized gains on securities Foreign currency translation adjustments Change in retirement plans' funded...

  • Page 53
    ... from AOCL Consolidated Statements of Earnings (Loss) Line Item Losses on cash flow hedges of foreign exchange contracts $ (12) 4 (8) Operating costs and expenses Tax benefit Changes in retirement plans' funded status Recognized net actuarial loss Amortization of prior service credit 435 (60...

  • Page 54
    ...past three years. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in each of the past three years. 50 General Dynamics Annual Report 2013 N. COMMITMENTS AND CONTINGENCIES Litigation Termination of A-12 Program. The A-12 aircraft contract was...

  • Page 55
    ...of operations, financial condition or cash flows. Aircraft Trade-ins. In connection with orders for new aircraft in funded contract backlog, our Aerospace group has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in...

  • Page 56
    ... 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 (U.K. Plan). The Equity Compensation Plans seek...

  • Page 57
    ... on a straight-line basis over the period during which the restriction lapses, which is generally four years. Compensation expense related to restricted stock and RSUs reduced pretax operating earnings (and on a per-share basis) by $38 ($0.07) in 2011, $26 ($0.05) in 2012 and $46 ($0.09) in 2013. On...

  • Page 58
    ... share in the cost of the program vary throughout the company. The plans provide health and life insurance benefits only to those employees who retire directly from our service and not to those who terminate service prior to eligibility for retirement. It is our policy to fund our defined-benefit...

  • Page 59
    ... 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 2011 2012 2013 Service cost Interest cost...

  • Page 60
    ... Ended December 31 Other Post-retirement Benefits 2012 2013 2012 2013 Change in Benefit Obligation Benefit obligation at beginning of year Service cost Interest cost Amendments Actuarial gain (loss) Settlement/curtailment/other Benefits paid Benefit obligation at end of year Change in Plan/Trust...

  • Page 61
    ... increase in compensation levels Other Post-retirement Benefits Discount rate Healthcare cost trend rate: Trend rate for next year Ultimate trend rate Year rate reaches ultimate trend rate 8.00% 5.00% 2019 8.00% 5.00% 2019 3.97% 4.74% 4.22% 3.77% 4.95% 3.70% General Dynamics Annual Report 2013 57

  • Page 62
    ... board of directors is responsible for the strategic oversight of our defined-benefit retirement plan assets held in trust. Management reports to the committee on a regular basis and is responsible for making all investment decisions related to retirement plan assets in compliance with the company...

  • Page 63
    ... 31, 2012 December 31, 2013 Cash Equity securities U.S. companies (a) International companies Private equity investments Fixed-income securities Treasury securities Corporate bonds (b) Commingled funds Equity funds Money market funds Fixed-income funds Real estate funds Commodity funds Hedge funds...

  • Page 64
    ... groups. Summary financial information for each of our business groups follows: Revenues Year Ended December 31 Operating Earnings 2013 2011 2012 2013 2011 Revenues from U.S. Government 2012 2013 2011 2012 Aerospace Combat Systems Marine Systems Information Systems and Technology Corporate...

  • Page 65
    ...CONSOLIDATING STATEMENTS OF EARNINGS (LOSS) Year Ended December 31, 2011 Parent Guarantors on a Combined Basis Other Subsidiaries on a Combined Basis Consolidating Adjustments Total Consolidated Revenues Cost of sales G&A Operating earnings Interest, net Other, net Earnings before income taxes...

  • Page 66
    ...' EQUITY Current liabilities: Customer advances and deposits Other current liabilities Total current liabilities Noncurrent liabilities: Long-term debt Other liabilities Total noncurrent liabilities Intercompany Shareholders' equity: Common stock Other shareholders' equity Total shareholders' equity...

  • Page 67
    ...' EQUITY Current liabilities: Customer advances and deposits Other current liabilities Total current liabilities Noncurrent liabilities: Long-term debt Other liabilities Total noncurrent liabilities Intercompany Shareholders' equity: Common stock Other shareholders' equity Total shareholders' equity...

  • Page 68
    ...Year Ended December 31, 2011 Parent Consolidating Adjustments Total Consolidated Net cash provided by operating activities Cash flows from investing activities: Business acquisitions, net of cash acquired Purchases of held-to-maturity securities... $ 3,296 64 General Dynamics Annual Report 2013

  • Page 69
    ... of year $ (454) $ 2,810 $ 750 $- $ 3,106 (1) 3 2 (381) 59 (322) (58) 11 (47) - - - (440) 73 (367) (740) (591) 583 23 (725) (9) 3,113 1,927 2,248 $ 4,175 $ 2,488) - - - 625) 78 1,048 $ 1,126 (740) (591) 583 23 (725) (9) - 2,005 3,296 $ 5,301 General Dynamics Annual Report 2013...

  • Page 70
    ...-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. 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...

  • Page 71
    ...slightly from year to year. (a) First quarter of 2012 includes $67 of out-of-period adjustments at one of our European subsidiaries. (b) Fourth quarter of 2012 includes $2.3 billion of goodwill and intangible asset impairment charges in our Aerospace and Information Systems and Technology groups and...

  • Page 72
    ... an 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 Jason W. Aiken Senior Vice President and Chief Financial Officer 68 General Dynamics Annual Report 2013

  • Page 73
    ... Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2012 and 2013, and the related Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), Cash Flows, and Shareholders' Equity...

  • Page 74
    ... and Chief Financial Officer of Gulfstream Aerospace Corporation, September 2011 - December 2013; Vice President and Controller of the company, April 2010 - August 2011; Staff Vice President, Accounting of the company, July 2006 - March 2010 John P. Casey - Executive Vice President, Marine Systems...

  • Page 75
    ... - March 2013; Vice President and Chief Financial Officer of General Dynamics Land Systems, June 2006 - September 2011 ITEM 11. EXECUTIVE COMPENSATION 46 66 54 56 68 55 53 The information required to be set forth herein is included in the sections entitled "Governance of the Company - Director...

  • Page 76
    ... Consolidated Statements of Cash Flows Consolidated Statements of Shareholders' Equity Notes to Consolidated Financial Statements (A to R) 2. Exhibits See Index on pages 74 through 75 of this Annual Report on Form 10-K for the year ended December 31, 2013. 72 General Dynamics Annual Report 2013

  • Page 77
    ... 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 General Dynamics Annual Report 2013 73

  • Page 78
    ... Bank of New York Mellon, as Trustee (incorporated herein by reference from the company's current report on Form 8-K, filed with the Commission November 6, 2012) General Dynamics Corporation 2009 Equity Compensation Plan (incorporated herein by reference from the company's registration statement on...

  • Page 79
    ... all executive officers elected on or after April 23, 2009 (incorporated herein by reference from the company's annual report on Form 10-K for the year ended December 31, 2009, filed with the Commission February 19, 2010) General Dynamics Corporation Supplemental Retirement Plan, restated...

  • Page 80
    ... and Chief Executive Officer Northern Trust Corporation William P. Fricks Former Chairman and Chief Executive Officer Newport News Shipbuilding Inc. Lester L. Lyles General U.S. Air Force (Retired) Laura J. Schumacher Executive Vice President AbbVie Inc. 76 General Dynamics Annual Report 2013

  • Page 81
    ... and Tactical Systems John P. Casey Executive Vice President Jeffrey S. Geiger Vice President President Electric Boat Frederick J. Harris Vice President President Bath Iron Works and NASSCO Michael J. Mulligan Vice President General Manager Bath Iron Works General Dynamics Annual Report 2013 77

  • Page 82
    ... www.computershare.com Auditors KPMG LLP 1676 International Drive McLean, VA 22102 (703) 286-8000 Annual Meeting The annual meeting of General Dynamics' shareholders will be held on Wednesday, May 7, 2014, at the company's headquarters in Falls Church, Virginia. A formal notice and proxy will be...

  • Page 83

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