General Dynamics 2015 Annual Report Download - page 34

NON-GAAP MANAGEMENT METRICS
We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described
below, we use free cash flow and ROIC to measure our performance in these areas. While we believe these metrics provide useful information, they
are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use.
Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the
method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures.
Free Cash Flow. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free
cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as
repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations
to assess the quality of our earnings and as a performance 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 2015 2014 2013 2012 2011
Net cash provided by operating activities $ 2,499 $ 3,728 $ 3,111 $ 2,606 $ 3,150
Capital expenditures (569) (521) (436) (436) (445)
Free cash flow from operations $ 1,930 $ 3,207 $ 2,675 $ 2,170 $ 2,705
Cash flow as a percentage of earnings from continuing operations:
Net cash provided by operating activities 84% 139% 125% NM* 126%
Free cash flow from operations 65% 120% 108% NM* 108%
* Not meaningful (NM) due to net loss in 2012.
As discussed previously, the decrease in free cash flow from operations in 2015 is due primarily to the utilization of customer deposits and growth
in operating working capital in our Aerospace group.
Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital
we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We
define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as earnings from
continuing operations plus after-tax interest and amortization expense. Average invested capital is defined as the sum of the average debt and
shareholders’ equity for the year. ROIC excludes accumulated other comprehensive loss, goodwill impairments and non-economic accounting
changes as they are not reflective of our operating performance.
ROIC is calculated as follows:
Year Ended December 31 2015 2014 2013 2012* 2011
Earnings from continuing operations $ 2,965 $ 2,673 $ 2,486 $ 1,414 $ 2,500
After-tax interest expense 64 67 67 109 101
After-tax amortization expense 75 79 93 139 141
Net operating profit after taxes $ 3,104 $ 2,819 $ 2,646 $ 1,662 $ 2,742
Average invested capital $ 17,858 $ 18,673 $ 18,741 $ 19,887 $ 18,601
Return on invested capital 17.4% 15.1% 14.1% 8.4% 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