General Dynamics 2013 Annual Report Download - page 56

expect to renegotiate the terms of 11 collective agreements in 2014,
covering approximately 4,300 employees. We do not expect the
renegotiations will, either individually or in the aggregate, have a
material impact on our results of operations, financial condition or cash
flows.
Product Warranties. We provide warranties to our customers
associated with certain product sales. We record estimated warranty
costs in the period in which the related products are delivered. The
warranty liability recorded at each balance sheet date is generally
based on the number of months of warranty coverage remaining for
products delivered and the average historical monthly warranty
payments. Warranty obligations incurred in connection with long-term
production contracts are accounted for within the contract estimates at
completion. Our other warranty obligations, primarily for business-jet
aircraft, are included in other current and noncurrent liabilities on the
Consolidated Balance Sheets.
The changes in the carrying amount of warranty liabilities for each of
the past three years were as follows:
Year Ended December 31 2011 2012 2013
Beginning balance $ 260 $ 293 $ 319
Warranty expense 88 91 125
Payments (56) (58) (83)
Adjustments 1 (7) (5)
Ending balance $ 293 $ 319 $ 356
O. EQUITY COMPENSATION PLANS
Equity Compensation Overview. We have various equity
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 (U.K. Plan).
The Equity Compensation Plans seek to provide an effective means
of attracting, retaining and motivating directors, officers and key
employees, and to provide them with incentives to enhance our growth
and profitability. Under the Equity Compensation Plans, awards may be
granted to officers, employees or non-employee directors in common
stock, options to purchase common stock, restricted shares of
common stock, participation units or any combination of these.
Stock options may be granted either as incentive stock options,
intended to qualify for capital gain treatment under Section 422 of the
Internal Revenue Code (the Code), or as options not qualified under the
Code. As a matter of practice, we do not currently grant incentive stock
options. All options granted under the Equity Compensation Plans are
issued with an exercise price at the fair market value of the common
stock on the date of grant. Awards of stock options vest over two years,
with 50 percent of the options vesting in one year and the remaining 50
percent vesting the following year. Stock options that have been awarded
under the Equity Compensation Plans expire five or seven years after the
grant date. We grant annual stock option awards to participants in the
Equity Compensation Plans on the first Wednesday of March based on
the average of the high and low stock prices on that day as listed on the
New York Stock Exchange. On occasion, we may also make limited ad
hoc grants at other times during the year for new hires or promotions.
Grants of restricted stock are awards of shares of common stock that
are released approximately four years after the grant date. During that
restriction period, recipients may not sell, transfer, pledge, assign or
otherwise convey their restricted shares to another party. However,
during the restriction period, the recipient is entitled to vote the restricted
shares and receive dividends on those shares.
Participation units represent obligations that have a value derived from
or related to the value of our common stock. These include stock
appreciation rights, phantom stock units and RSUs and are payable in
cash or common stock. Beginning in 2012, we granted RSUs with a
performance measure based on a management metric, return on
invested capital (ROIC). Depending on the company’s performance with
respect to this metric, the number of RSUs earned may be less than,
equal to or greater than the original number of RSUs awarded.
We issue common stock under our equity compensation plans from
treasury stock. On December 31, 2013, in addition to the shares
reserved for issuance upon the exercise of outstanding options,
approximately 18 million shares have been authorized for options and
restricted stock that may be granted in the future.
Stock-based Compensation Expense. Stock-based compensation
expense is included in G&A expenses. The following table details the
components of stock-based compensation expense recognized in net
earnings in each of the past three years:
Year Ended December 31 2011 2012 2013
Stock options $ 58 $ 57 $ 48
Restricted stock 25 17 30
Total stock-based compensation expense, net
of tax $ 83 $ 74 $ 78
52 General Dynamics Annual Report 2013