General Dynamics 2013 Annual Report Download - page 55

Environmental
We are subject to and affected by a variety of federal, state, local and
foreign environmental laws and regulations. We are directly or
indirectly involved in environmental investigations or remediation at
some of our current and former facilities and third-party sites that we
do not own but where we have been designated a Potentially
Responsible Party (PRP) by the U.S. Environmental Protection Agency
or a state environmental agency. Based on historical experience, we
expect that a significant percentage of the total remediation and
compliance costs associated with these facilities will continue to be
allowable contract costs and, therefore, recoverable under U.S.
government contracts.
As required, we provide financial assurance for certain sites
undergoing or subject to investigation or remediation. We accrue
environmental costs when it is probable that a liability has been
incurred and the amount can be reasonably estimated. Where
applicable, we seek insurance recovery for costs related to
environmental liabilities. We do not record insurance recoveries before
collection is considered probable. Based on all known facts and
analyses, we do not believe that our liability at any individual site, or in
the aggregate, arising from such environmental conditions, will be
material to our results of operations, financial condition or cash flows.
We also do not believe that the range of reasonably possible additional
loss beyond what has been recorded would be material to our results
of operations, financial condition or cash flows.
Minimum Lease Payments
Total expense under operating leases was $274 in 2011, $301 in
2012 and $311 in 2013. Operating leases are primarily for facilities
and equipment. Future minimum lease payments due are as follows:
Year Ended December 31
2014 $ 216
2015 177
2016 139
2017 106
2018 85
Thereafter 373
Total minimum lease payments $ 1,096
Other
Portugal Program. In 2012, the Portuguese Ministry of National
Defense notified our Combat Systems group’s European Land Systems
business that it was terminating a contract to provide 260 Pandur
vehicles based on an alleged breach of contract. Subsequently, the
customer drew $75 from bank guarantees for the contract. We have
asserted that we are not in breach of the contract and that the
termination of the contract was invalid, and we are currently in arbitration
with the customer. Given the uncertainty of receiving further payments,
we reserved in 2012 the receivables and contracts in process balances
and accrued an estimate of the remaining costs related to the close-out
of the contract, totaling $258. As of December 31, 2013, we had
approximately $145 outstanding under a bank guarantee for the
program’s offset requirements. The bank guarantee could be drawn
upon by the customer through 2014.
Letters of Credit and Guarantees. In the ordinary course of
business, we have entered into letters of credit, bank guarantees, surety
bonds and other similar arrangements with financial institutions and
insurance carriers totaling approximately $1.8 billion on December 31,
2013. In addition, from time to time and in the ordinary course of
business, we contractually guarantee the payment or performance
obligations of our subsidiaries arising under certain contracts.
Government Contracts. As a government contractor, we are subject
to U.S. government audits and investigations relating to our operations,
including claims for fines, penalties, and compensatory and treble
damages. We believe the outcome of such ongoing government disputes
and investigations will not have a material impact on our results of
operations, financial condition or cash flows.
In the performance of our contracts, we routinely request contract
modifications that require additional funding from the customer. Most
often, these requests are due to customer-directed changes in scope of
work. While we are entitled to recovery of these costs under our
contracts, the administrative process with our customer may be
protracted. Based upon the circumstances, we periodically file claims or
requests for equitable adjustment (REAs). In some cases, these requests
are disputed by our customer. We believe our outstanding modifications
and other claims will be resolved without material impact to our results
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 commitments are structured to
establish the fair market value of the trade-in aircraft at a date generally
120 or fewer days preceding delivery of the new aircraft to the customer.
At that time, the customer is required to either exercise the option or
allow its expiration. Any excess of the pre-established trade-in price
above the fair market value at the time the new aircraft is delivered is
treated as a reduction of revenue in the new-aircraft sales transaction.
Labor Agreements. Approximately one-fifth of our employees and
our subsidiaries’ employees are represented by labor organizations and
work under local works council agreements and 56 company-negotiated
agreements. A number of these agreements expire within any given year.
Historically, we have been successful at renegotiating successor
agreements without any material disruption of operating activities. We
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