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Annual Report 2015

Table of contents

  • Page 1
    Annual Report 2015

  • Page 2

  • Page 3
    ...Your company continued making internal investments where appropriate for future growth, including support for new programs in the Aerospace and Marine Systems groups. We also paid $873 million in dividends and repurchased 22.8 million shares of common stock for $3.2 billion. Overall, 2015 was a year...

  • Page 4
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 5
    ..., Suite 100 Falls Church, Virginia Address of principal executive offices 22042-4513 Zip code Registrant's telephone number, including area code: (703) 876-3000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, par value $1 per share Name of exchange...

  • Page 6
    ... Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 17 18 19 35 36 68 68 71 Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Directors, Executive Officers and Corporate Governance Executive Compensation Security...

  • Page 7
    ... services in business aviation; combat vehicles, weapons systems and munitions; C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) solutions and information technology (IT) services; and shipbuilding. Incorporated in Delaware in 1952, General Dynamics...

  • Page 8
    ... the number-one ranking for the 13th consecutive year in the annual Aviation International News Product Support Survey. Jet Aviation expands our Aerospace portfolio as a global leader in business aviation services, providing comprehensive services and a network of facilities to aircraft owners...

  • Page 9
    ... mission support needs of our customers. The group's diverse portfolio includes: • IT solutions and mission support services, and • mobile communication, command-and-control mission systems, and intelligence, surveillance and reconnaissance (ISR) solutions. General Dynamics Annual Report 2015 5

  • Page 10
    ...solutions for public and commercial health systems. Our Information Technology business unit operates several customer contact centers for the Centers for Medicare & Medicaid Services, responding to consumer inquiries about key Medicare and Affordable Care Act programs. The group's technical support...

  • Page 11
    ... group's revenue is for major Navy ship-construction, engineering and lifecycle support programs awarded under large, multi-ship contracts that span several years. These programs include Virginiaclass nuclear-powered submarines built by Electric Boat, Arleigh Burke-class (DDG-51) and DDG-1000 guided...

  • Page 12
    ... U.S. government customers, including the intelligence community, the Departments of Homeland Security and Health and Human Services and first-responder agencies. Our revenue from the U.S. government was as follows: Year Ended December 31 2015 2014 2013 DoD Non-DoD Foreign Military Sales (FMS...

  • Page 13
    ... revenue is for business-jet aircraft and related services where our customer base consists of individuals and public and privately held companies across a wide range of industries. NON-U.S. Our revenue from non-U.S. government and commercial customers was $8.2 billion in 2015, $7.6 billion in 2014...

  • Page 14
    ... customer, the incurrence of contract costs and unit deliveries are all factors that influence the timing of our revenue. In the United States, these factors are influenced by the federal government's budget cycle based on its October-toSeptember fiscal year. 10 General Dynamics Annual Report 2015

  • Page 15
    ... the General Dynamics investor relations office at (703) 876-3583. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information. These items also can be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington...

  • Page 16
    ...customer demand for business aircraft. The business-jet market is driven by the demand for business-aviation products and services by business, individual and government customers in the United States and around the world. The Aerospace group's results also depend on other factors, including general

  • Page 17
    ...services and bring those offerings to market quickly at cost-effective prices. Some new products, particularly in our Aerospace group, must meet extensive and time-consuming regulatory requirements that are often outside our control. Additionally, due to the highly specialized nature of our business...

  • Page 18
    ... 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 intangible assets acquired in a business combination. Goodwill is not...

  • Page 19
    ... and Sterling, Virginia; Spokane Valley, Washington; Calgary and Ottawa, Canada; Tallinn, Estonia; Oakdale and St. Leonards, United Kingdom. • Marine Systems - San Diego, California; Groton and New London, Connecticut; Jacksonville, Florida; Bath and Brunswick, Maine; North Kingstown, Rhode Island...

  • Page 20
    ... 2010; Vice President, Strategic Planning, October 2002 - July 2005 Mark C. Roualet - Executive Vice President, Combat Systems, since March 2013; Vice President of the company and President of General Dynamics Land Systems, October 2008 - March 2013; Senior Vice President and Chief Operating Officer...

  • Page 21
    ... 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 2014 and 2015 are...

  • Page 22
    ... Short- and long-term debt Shareholders' equity Debt-to-equity (c) Book value per share (d) Other Information Free cash flow from operations (e) Return on invested capital (f) Funded backlog Total backlog Shares outstanding Weighted average shares outstanding: Basic Diluted Employees $ 31,469 4,178...

  • Page 23
    ... investment in the development of new aircraft products and technologies to support the Aerospace group's long-term growth. Similarly, we believe the aircraft services business will continue to be a strong source of revenue as the global business-jet fleet grows. An understanding of our accounting...

  • Page 24
    ... highest level in our history. 20 General Dynamics Annual Report 2015 While our revenue was essentially flat in 2014 compared with 2013, operating earnings and margin increased in 2014. Decreased U.S. Army spending affected our Information Systems and Technology and Combat Systems groups. This was...

  • Page 25
    REVIEW OF BUSINESS GROUPS Year Ended December 31 2015 Revenue Operating Earnings Revenue 2014 Operating Earnings Revenue 2013 Operating Earnings Aerospace Combat Systems Information Systems and Technology Marine Systems Corporate Total $ 8,851 5,640 8,965 8,013 - $ 31,469 $ 1,706 882 903 728 (...

  • Page 26
    ... Systems and Technology group's revenue in 2015 was slightly lower than 2014. The decrease from the prior year consisted of the following: Information technology (IT) services C4ISR solutions* Total decrease $ (155) (39) $ (194) * Command, control, communication, computing (C4), intelligence...

  • Page 27
    ...the sale of a commercial cyber security product business, a 30 basis-point impact. Review of 2014 vs. 2013 Year Ended December 31 The increase in the Marine Systems group's revenue in 2015 consisted of the following: U.S. Navy ship construction U.S. Navy ship engineering, repair and other services...

  • Page 28
    .... The decrease in service revenue in 2015 consisted of the following: 24 General Dynamics Annual Report 2015 Ship construction revenue increased in 2014 due to higher volume on the Virginia-class submarine program and commercial Jones Act ships. Aircraft manufacturing, outfitting and completions...

  • Page 29
    ... of our litigation with the U.S. Navy related to the terminated A-12 contract in the company's discontinued tactical military aircraft business. See Note A to the Consolidated Financial Statements in Item 8 for further discussion of these transactions. General Dynamics Annual Report 2015 25

  • Page 30
    ... of in-production aircraft. In addition, we received several orders in 2015 for custom completions of narrow- and wide-body aircraft in our Jet Aviation business. Estimated potential contract value in the Aerospace group primarily represents options to purchase new aircraft and long-term agreements...

  • Page 31
    ... Potential Contract Value Unfunded Funded 0 2013 2014 2015 30,000 10,000 $40,000 Unlike our other defense businesses, the Information Systems and Technology group's backlog consists of thousands of contracts and is reconstituted each year with new programs and task order awards. The group's total...

  • Page 32
    ... cash flows in 2013 benefited from deposits received in the Marine Systems group for commercial ship orders. In 2014, operating cash flows included significant customer deposits related to a large contract for a Middle Eastern customer awarded in our Combat Systems group. In 2015, operating cash...

  • Page 33
    ..., Net. Investing activities also include proceeds from the sale of assets and cash paid for business acquisitions. In 2015, we completed the sale of our axle business in the Combat Systems group and a commercial cyber security business in our Information Systems and Technology group. In 2014, we...

  • Page 34
    ... $ 2,742 $ 18,601 14.7% * 2012 loss from continuing operations of ($381) has been adjusted for a $2 billion goodwill impairment and associated $199 tax benefit. 2012 shareholders' equity, a component of average invested capital, has been similarly adjusted. 30 General Dynamics Annual Report 2015

  • Page 35
    ... require the use of significant judgment in their application: Revenue Recognition. We account for revenue and earnings using the percentage-of-completion method. Under this method, contract costs and revenue are recognized as the work progresses, either as General Dynamics Annual Report 2015 31

  • Page 36
    ...the impact of a 32 General Dynamics Annual Report 2015 revision in estimate is recognized prospectively over the remaining contract term. We use this method because we believe the majority of factors that typically result in changes in estimates on our long-term contracts affect the period in which...

  • Page 37
    ..., the profitability of our remaining contracts could be adversely affected. Retirement Plans. Our defined-benefit pension and other postretirement benefit costs and obligations depend on several assumptions and estimates. The key assumptions include interest rates used to discount estimated future...

  • Page 38
    ... hypothetical changes in the discount rate and expected long-term rate of return on plan assets, see Note P to the Consolidated Financial Statements in Item 8. As discussed under Deferred Contract Costs, our contractual arrangements with the U.S. government provide for the recovery of benefit costs...

  • Page 39
    ... Risk. 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, 2015, we held $2.8 billion in cash and equivalents, but held no marketable securities. General Dynamics Annual Report 2015 35

  • Page 40
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in millions, except per-share amounts) 2015 Year Ended December 31 2014 2013 Revenue: Products Services $20,280 11,189 31,469 Operating costs and expenses: Products Services General and ...

  • Page 41
    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in millions) 2015 Year Ended December 31 2014 2013 Net earnings (Losses) gains on cash flow hedges Unrealized (losses) gains on securities Foreign currency translation adjustments Change in retirement plans' funded status Other ...

  • Page 42
    ... of long-term debt 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 Surplus Retained...

  • Page 43
    ... receivable Contracts in process Inventories Increase (decrease) in liabilities, net of effects of business acquisitions: Accounts payable Customer advances and deposits Other current liabilities Other, net Net cash provided by operating activities Cash flows from investing activities: Capital...

  • Page 44
    ... Treasury Stock Accumulated Other Comprehensive Loss Total Shareholders' Equity December 31, 2012 Net earnings Cash dividends declared Equity-based awards Shares purchased Other comprehensive income December 31, 2013 Net earnings Cash dividends declared Equity-based awards Shares purchased Other...

  • Page 45
    ... provides C4ISR (command, control, communication, computing, intelligence, surveillance and reconnaissance) solutions and information technology (IT) services; and Marine Systems, which designs, constructs and repairs surface ships and submarines. Our primary customer is the U.S. government. We also...

  • Page 46
    ... in 2013 and 2014 included customer deposits related to commercial ship orders in the Marine Systems group and a large contract for a Middle Eastern customer awarded in our Combat Systems group, respectively. In 2015, these deposits were utilized to fund supplier commitments on the program, which...

  • Page 47
    ... assets acquired, with any excess purchase price recorded as goodwill. We did not acquire any businesses in 2013. In 2015, we completed the sale of our axle business in the Combat Systems group and a commercial cyber security business in our Information Systems and Technology group. The changes in...

  • Page 48
    ... restricted stock units (RSUs). Basic and diluted weighted average shares outstanding were as follows (in thousands): Year Ended December 31 Contract and program intangible assets Trade names and trademarks Technology and software 7-30 30 7-15 Amortization expense was $116 in 2015, $121 in 2014...

  • Page 49
    ... from the statutory federal income tax rate to our effective income tax rate follows: Year Ended December 31 Carrying Value Financial Assets (liabilities) (b) Fair Value 2015 2014 2013 December 31, 2015 Available-for-sale securities Derivatives Long-term debt, including current portion 186...

  • Page 50
    ... Construction Fund (CCF), a program established by the U.S. government and administered by the Maritime Administration that supports the acquisition, construction, reconstruction or operation of U.S. flag merchant marine vessels. The program allows us to defer 46 General Dynamics Annual Report 2015...

  • Page 51
    ...-U.S. government customers include amounts related to long-term production programs for the Spanish Ministry of Defence of $2 billion on December 31, 2015. A different ministry, the Spanish Ministry of Industry, has funded work on these programs in advance of costs incurred by the company. The cash...

  • Page 52
    ... debt were $90 in 2015 and $94 in 2014 and 2013. Our fixed-rate notes are fully and unconditionally guaranteed by several of our 100-percent-owned subsidiaries (see Note R for condensed consolidating financial statements). We have the option to 48 General Dynamics Annual Report 2015 $500 of fixed...

  • Page 53
    ...in our shares outstanding during 2015 and 2014 resulted from shares repurchased in the open market and share activity under our equity compensation plans (see Note O for further discussion). Share Repurchases. Our board of directors authorizes management's repurchase of shares of common stock on the...

  • Page 54
    ... years, and we do not expect the amount of these gains and losses that will be reclassified to earnings in 2016 to be material. We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2015 or 2014. 50 General Dynamics Annual Report 2015

  • Page 55
    ... 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, 2015, we held $2.8 billion in cash and equivalents, but held no marketable securities. Foreign Currency Financial Statement Translation. We translate...

  • Page 56
    ...the average historical monthly warranty 52 General Dynamics Annual Report 2015 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...

  • Page 57
    ... in 2013. Compensation expense for stock options is reported as a Corporate expense for segment reporting purposes (see Note Q). On December 31, 2015, we had $46 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of two years...

  • Page 58
    ... in 2016. We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits. Substantially all of our plans use a December 31 measurement date, consistent with our fiscal year. 54 General Dynamics Annual Report 2015

  • Page 59
    ... on plan assets, the interest rate used to discount projected benefit payments, healthcare cost trend rates and future salary increases. Given the long-term nature of the assumptions being made, actual outcomes can and often do differ from these estimates. General Dynamics Annual Report 2015 55

  • Page 60
    ... Benefits 2015 2014 2015 2014 Net actuarial loss (gain) Prior service (credit) cost Amortization of: Net actuarial loss from prior years Prior service credit Other* Change in AOCL, pretax * Includes foreign exchange translation and curtailment adjustments. 56 General Dynamics Annual Report 2015...

  • Page 61
    ... summarizes the weighted average assumptions used to determine our net periodic benefit costs: Assumptions for Year Ended December 31 2015 2014 2013 Pension Benefits Net actuarial loss (gain) Prior service credit $336 (68) $(3) (6) Pension Benefits Discount rate Expected long-term rate of...

  • Page 62
    ... plans. On December 31, 2015, the trust was invested largely in publicly traded equities and fixed-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...

  • Page 63
    ... 9 - - - - 139 - 510 103 $ 940 $ 9,084 $ 7,443 $ 761 (a) No single equity holding amounted to more than 1 percent of the total fair value. (b) Our corporate bond investments had an average rating of BBB+ on December 31, 2015, and A- on December 31, 2014. General Dynamics Annual Report 2015 59

  • Page 64
    ...2) Significant Unobservable Inputs (Level 3) December 31, 2015 December 31, 2014 Cash and equivalents Equity securities Fixed-income securities Commingled funds: Equity funds Fixed-income funds Real estate funds Hedge funds Total other post-retirement plan assets $ 79 77 21 246 99 3 2 $ - 77...

  • Page 65
    ...and income taxes to our business groups. Summary financial information for each of our business groups follows: Revenue Year Ended December 31 Operating Earnings 2013 2015 2014 2013 Revenue from U.S. Government 2015 2014 2013 2015 2014 Aerospace Combat Systems Information Systems and Technology...

  • Page 66
    ... Total Consolidated Year Ended December 31, 2015 Parent Revenue Cost of sales G&A Operating earnings Interest, net Other, net Earnings before income tax Provision for income tax, net Equity in net earnings of subsidiaries Net earnings Comprehensive income Year Ended December 31, 2014 $ - (6) 46...

  • Page 67
    ...Goodwill Other assets Investment in subsidiaries Total noncurrent assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt Customer advances...,571 $ 1,732 - 514 $ - 1,181 2,795 $ 1,053 2,265 1,048 $ - - - $ 2,785 3,446 4,357 General Dynamics Annual Report 2015 63

  • Page 68
    ...Goodwill Other assets Investment in subsidiaries Total noncurrent assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt Customer advances...,407 $ 2,536 - 542 $ - 1,379 2,966 $ 1,852 2,671 1,083 $ - - - $ 4,388 4,050 4,591 64 General Dynamics Annual Report 2015

  • Page 69
    ...securities Proceeds from sales of assets Other, net Net cash provided by investing activities Cash flows from financing activities: Purchases of common stock Dividends paid Repayment of fixed-rate notes Proceeds from stock... 82 (3,575) 36 - (913) 5,301 $ 4,388 General Dynamics Annual Report 2015 65

  • Page 70
    ... $ 2,810 (381) 59 (322 2,488) - - $ - $ 755 (54) 11 (43 586) 126 996 $ 1,122 $ 3,111 (436) 73 (363) (740) (591) 583 23 (725) (18) - 2,005 3,296 $ 5,301 66 General Dynamics Annual Report 2015

  • Page 71
    ...-year period ended December 31, 2015, 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 72
    ... the sale of the axle business completed in January 2015. (c) The sum of the basic and diluted earnings per share for the four quarters of the year may differ from the annual basic and diluted earnings per share due to the required method of computing the weighted average number of shares in interim...

  • Page 73
    ... control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements...

  • Page 74
    ... Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2015 and 2014, and the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows and Shareholders' Equity for each of the years...

  • Page 75
    ... the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required...

  • 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 76 of this Annual Report on Form 10-K for the year ended December 31, 2015. 72 General Dynamics Annual Report 2015

  • 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 2015 73

  • Page 78
    ... Stock 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) General Dynamics Annual Report 2015...

  • Page 79
    ... from the company's quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed with the Commission August 1, 2012) Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for certain executive officers who are...

  • Page 80
    ... Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** Interactive Data File** * Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K. ** Filed herewith. 76 General Dynamics Annual Report 2015

  • Page 81
    ... Henry Crown and Company John M. Keane General U.S. Army (Retired) James N. Mattis General U.S. Marine Corps (Retired) Lester L. Lyles General U.S. Air Force (Retired) William A. Osborn Former Chairman and Chief Executive Officer Northern Trust Corporation General Dynamics Annual Report 2015 77

  • Page 82
    ... Electric Boat Frederick J. Harris Vice President President Bath Iron Works and NASSCO Information Systems and Technology S. Daniel Johnson Executive Vice President President Information Technology Christopher Marzilli Vice President President Mission Systems 78 General Dynamics Annual Report 2015

  • Page 83
    ... will be held on Wednesday, May 4, 2016, 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 General Dynamics Annual Report 2015 79

  • Page 84
    2941 Fairview Park Drive Suite 100 Falls Church, VA 22042 www.generaldynamics.com