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GENERAL DYNAMICS
Annual Report 2011

Table of contents

  • Page 1
    GENERAL DYNAMICS Annual Report 2011

  • Page 2
    Contents 1 3 8 10 12 14 16 19 Inside back cover Inside back cover Financial Highlights Letter to Shareholders Company Overview Performance Strength Relevance Innovation Annual Report on Form 10-K Directors and Officers Corporate Information

  • Page 3
    ...Earnings Net Cash Provided by Operating Activities Capital Expenditures Free Cash Flow from Operations (b) Cash Conversion (c) Return on Invested Capital (b) At Year End Total Backlog Total Assets Shareholders' Equity Outstanding Shares of Common Stock Number of Employees Sales Per Employee (d) $65...

  • Page 4
    ...of our products for our customers, improve the profitability of our business for our shareholders and strengthen our competitive positioning for the long-term benefit of our company and our employees. Report on Operations Company revenues were $32.7 billion in 2011, a modest increase from 2010, as...

  • Page 5
    ...new aircraft, introduce enhanced products to the market and leverage the growing global installed base of business jets requiring maintenance and aircraft services. Combat Systems The Combat Systems group performed very well in 2011, once again leading the company in operating earnings. For the year...

  • Page 6
    ... affordable, highquality ships and repair services. The group is well positioned to compete for a number of opportunities on the horizon, including the next block of Virginiaclass submarines, additional DDG-51s, the SSBN replacement program, and new commercial work. Notably, the value of our Navy...

  • Page 7
    ... our customers and shareholders. We remain committed to innovative product development and disciplined program execution to drive the growth of General Dynamics. AEROSPACE The Aerospace group, comprising Gulfstream Aerospace and Jet Aviation, has a global reputation for superior business-jet design...

  • Page 8
    ... is a hallmark of General Dynamics, setting new standards of excellence in the markets we serve. The new Gulfstream G650 aircraft, for example, ï¬,ies faster and farther than any other business jet and is among the most technologically advanced, with an innovative cabin management system and next...

  • Page 9
    ... timeline to meet the U.S. Army's mission of increasing soldier survivability. These vehicles are saving soldiers' lives in Afghanistan. In addition, in 2011 we fast-tracked our delivery of Prophet Enhanced signals-intelligence systems to the Army in response to its urgent operational requirements...

  • Page 10
    ... by adding new capabilities to these proven multi-mission ships, preserving their status as a critical component of the Navy's global surface ï¬,eet. We are also supporting the Army's communications strategy by developing tactical networks and radios to provide Internet-like connectivity to troops...

  • Page 11
    ... we do to modernize the Abrams tank ï¬,eet with enhanced command-and-control, communications and survivability systems. From cyber security to vehicle manufacturing, shipbuilding to business-jet aircraft, General Dynamics has earned its place as an innovative leader that delivers what it promises...

  • Page 12
    ... Gulfstream Aerospace Jet Aviation Combat Systems Armament and Technical Products European Land Systems Land Systems Ordnance and Tactical Systems Marine Systems Bath Iron Works Electric Boat NASSCO Information Systems and Technology Advanced Information Systems C4 Systems Information Technology...

  • Page 13
    ...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 on which registered New York...

  • Page 14
    ... with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 17 18 19 35 36 66 66 69 Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial...

  • Page 15
    ...and repair work, fixed-based operations (FBO) and aircraft management services) and performs aircraft completions for aircraft produced by other original equipment manufacturers (OEMs). With more than 50 years of experience at the forefront of the business-jet aviation market, the Aerospace group is...

  • Page 16
    ... investing in innovative first-to-market technologies and products, •฀ providing exemplary and timely service support to customers globally, and •฀ driving efficiencies and reducing costs in the aircraft production, outfitting and service processes. 4 General Dynamics Annual Report 2011

  • Page 17
    ... aftermarket parts, and support and sustainment services. We have a mature and diverse portfolio of franchise products that deliver core capabilities to domestic and international customers across the military-vehicle, weapons-system and munitions markets. These long-term production programs enable...

  • Page 18
    ...) program, which is intended to replace a portion of the U.S. fleet of High Mobility Multi-purpose Wheeled Vehicles (HMMWV). Additionally, the group's Robotic Systems business is a leader in tactical autonomous robotics and the command and control technology that manages autonomous systems. Combat...

  • Page 19
    ... program execution and generate cost savings. This knowledge sharing enables the group to use resources more efficiently and drive process improvements. We are well-positioned to fulfill the ship-construction and support requirements of our Navy and commercial customers. General Dynamics Annual...

  • Page 20
    ...-operations simulation and training systems and services, • large-scale data center consolidation and modernization, • health information technology solutions and services, and • secure wireless and wire-line networks and enterprise infrastructure. 8 General Dynamics Annual Report 2011

  • Page 21
    ... open-architecture mission systems; • signals and information collection, processing and distribution systems; • imagery solutions, sensors and cameras; and • special-purpose computing. in a market-leading position in cyber security. We are the principal support contractor for the Department...

  • Page 22
    .... The majority of these revenues are for business-jet aircraft where our customer base consists of individuals and public and privately held companies representing a wide range of industries. Other commercial products include drivetrain components and aftermarket parts in our Combat Systems group...

  • Page 23
    ... delivery orders. The IDIQ contracting model is most common among our Information Systems and Technology group's customers but also is being used in programs for which our Combat Systems group competes. BUSINESS-JET AIRCRAFT MARKET Gulfstream has several competitors for each of its products, with...

  • Page 24
    ... as part of our normal business operations. In the commercial sector, most of our Aerospace group's R&D activities support Gulfstream's product enhancement and development programs. In our defense businesses, we conduct customer-sponsored R&D activities under U.S. government contracts and company...

  • Page 25
    ...F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at (800) SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information. General Dynamics Annual Report...

  • Page 26
    .... Our Aerospace group's 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 group's future results also depend on other factors, including general economic conditions...

  • Page 27
    ... exchange-rate variability and differing legal systems. In addition, some international government customers require contractors to agree to specific in-country purchases, manufacturing agreements or financial support arrangements, known as offsets, as a condition for a contract award. The contracts...

  • Page 28
    ... Aerospace Combat Systems Marine Systems Information Systems and Technology Total Company-owned Facilities Leased Government-owned Facilities Facilities Total 4.4 8.1 8.0 3.2 23.7 4.1 5.8 2.3 8.6 20.8 - 7.4 - 0.9 8.3 8.5 21.3 10.3 12.7 52.8 We operate in a number of offices, manufacturing...

  • Page 29
    ... 2007 General Dynamics 2008 2009 S&P Aerospace & Defense 2010 2011 S&P 500 l General Dynamics Annual Report 2011 t n t l n t 17 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...

  • Page 30
    ... as total debt divided by total equity as of year end. (c) Book value per share is calculated as total equity divided by total outstanding shares as of year end. (d) Operating working capital is calculated as accounts receivable, contracts in process (excluding "other contract costs" - see Note...

  • Page 31
    ... Aerospace group, business-jet market conditions showed further improvement in 2011, particularly in the large-cabin market. The group benefitted from increased flying hours across the installed base, improved new-aircraft order interest and declining customer contract defaults. Continued investment...

  • Page 32
    ... in the contract type (e.g., fixedprice/cost-reimbursable) or type of work (e.g., development/production). 2010 2011 2009 Revenues Operating Earnings Revenues Operating Earnings Revenues Operating Earnings Aerospace Combat Systems Marine Systems Information Systems and Technology Corporate...

  • Page 33
    ...operating costs were up slightly in 2011 compared with 2010. Revenues increased in the Aerospace group, primarily driven by initial green deliveries of the new G650 aircraft. This increase was partially offset by lower revenues in the Information Systems and Technology group's tactical communication...

  • Page 34
    ... Operating Costs Year Ended December 31 2009 2010 Variance In 2010, our revenues and operating costs were up due to higher volume on aircraft services in our Aerospace group, U.S. Navy ship programs in our Marine Systems group and tactical communication systems and IT services in our Information...

  • Page 35
    ... and repair work, fixed-base operations and aircraft management services, increased 15 percent in 2011, reflecting the growing global installed base and increased flying hours of business-jet aircraft. Revenues from sales of pre-owned aircraft were down slightly from 2010, and the group ended 2011...

  • Page 36
    ... 2009. Aircraft services earnings increased consistent with the higher volume. Operating earnings in 2010 were also favorably impacted 24 General Dynamics Annual Report 2011 In the group's U.S. military vehicle business, volume was down due to less refurbishment and upgrade work for the Abrams main...

  • Page 37
    ... planning yard services. The group's repair work increased in 2011 following significant growth in 2010, particularly on surface-ship repair programs. This growth was aided by the 2011 acquisition of Metro Machine Corp., a surface-ship repair operation located in Norfolk, Virginia. This addition...

  • Page 38
    ... to the timing of several ship-construction programs, with operating margins approximating 2011 in the low- to mid-10 percent range. INfORMATION SYSTEMS AND TECHNOLOGY Review of 2010 vs. 2011 Year Ended December 31 Revenues in the tactical communication systems business were impacted unfavorably by...

  • Page 39
    ... maintenance and support services. The Aerospace group finished 2011 with a total backlog of $17.9 billion, up slightly from $17.8 billion at year-end 2010. In 2011, the group booked the highest number of orders for new aircraft since the introduction of the G650 in 2008. Customer defaults were...

  • Page 40
    ...-end 2010. The group's backlog primarily consists of long-term production contracts. The Army's Stryker wheeled combat vehicle program represented $1.5 billion of the group's backlog at year end with vehicles scheduled for delivery through 2014. The group received over $1.4 billion of Stryker orders...

  • Page 41
    ...two additional ships. INfORMATION SYSTEMS AND TECHNOLOGY The Marine Systems group's backlog consists of long-term submarine and ship construction programs, as well as numerous engineering and repair contracts. The group generally receives large contract awards that provide backlog for several years...

  • Page 42
    ... and long-term support and enhancement activities for the program. The group's backlog at year-end 2011 included approximately $330 for the Army's WIN-T program. Information Systems and Technology is the prime contractor on this battlefield communications network. In 2011, the group received...

  • Page 43
    ...Net. Investing activities also included proceeds from the sale of a satellite facility in our Information Systems and Technology group in 2010 and the detection systems portion of the weapons systems business in the Combat Systems group in 2011. fINANCING ACTIVITIES We generated cash from operating...

  • Page 44
    ... 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. Over the past five years, we have generated free cash flow from operations...

  • Page 45
    ... projections for our long-term contracts and programs. Other significant estimates include those related to goodwill and other intangible assets, income taxes, pensions and other post-retirement benefits, workers' compensation, warranty obligations, pre-owned aircraft inventory, and commitments and...

  • Page 46
    ... factors. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenues and costs. Contract estimates are based on various assumptions that utilize the professional knowledge and experience of our engineers, program and operations managers...

  • Page 47
    ... on the fair value of our 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, 2011, we held $2.9 billion in cash and equivalents and marketable securities, which had an...

  • Page 48
    ... 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENT OF EARNINGS Y e a r E n d e d D e ce m b e r 3 1 (Dollars in millions, except per-share amounts) 2009 2010 2011 Revenues: Products Services Operating costs and expenses: Products Services General and administrative Operating...

  • Page 49
    ...Total noncurrent liabilities Shareholders' equity: Common stock Surplus Retained earnings Treasury stock Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity The accompanying Notes to Consolidated Financial Statements are an integral part of this...

  • Page 50
    ...-for-sale securities Other, net Net cash used by investing activities Cash flows from financing activities: Proceeds from fixed-rate notes Purchases of common stock Repayment of fixed-rate notes Dividends paid Proceeds from option exercises Repayment of commercial paper Other, net Net cash used by...

  • Page 51
    ... Loss Total Shareholders' Equity Comprehensive Income Balance, December 31, 2008 Net earnings Cash dividends declared Stock-based awards Shares purchased Net gain on cash flow hedges Unrealized gains on securities Foreign currency translation adjustments Change in retirement plans' funded status...

  • Page 52
    .... General Dynamics is organized into four business groups: Aerospace, which produces Gulfstream aircraft, provides aircraft services and performs aircraft completions for other original equipment manufacturers (OEMs); Combat Systems, which designs and manufactures combat vehicles, weapons systems...

  • Page 53
    ... the U.S. military and other government customers (on July 22). • A provider of information assurance and security software (on August 12). • A provider of health information technology services and business systems to federal agencies (on September 30). General Dynamics Annual Report 2011 41

  • Page 54
    ... of software for military mission planning and execution (on January 8). •฀ A company that designs and manufactures sensor and optical surveillance systems for military and security applications (on June 22). In 2009, we acquired two businesses in the Information Systems and Technology group for...

  • Page 55
    ... amount of goodwill by reporting unit during 2010 and 2011 were as follows: Aerospace Combat Systems Marine Systems Information Systems and Technology Total Goodwill December 31, 2009 Acquisitions Other* December 31, 2010 Acquisitions Other* December 31, 2011 $ 2,480 - 170 2,650 - (6) $ 2,644...

  • Page 56
    ... periods for financial reporting purposes than for income tax purposes. The following is a summary of our net provision for income taxes for continuing operations: Year Ended December 31 2010 2011 Retirement benefits* Tax loss and credit carryforwards Salaries and wages Workers' compensation A-12...

  • Page 57
    ... of Industry, has funded work on these programs in advance of costs incurred by the company. The cash advances are reported on the Consolidated Balance Sheet in current customer advances and deposits and will be repaid to the Ministry of Industry as we collect on the outstanding receivables from the...

  • Page 58
    ...December 31, 2010 or 2011. Other contract costs represent amounts that are not currently allocable to government contracts, such as a portion of our estimated workers' compensation obligations, other insurance-related assessments, pension and other post-retirement benefits and environmental expenses...

  • Page 59
    ... balance sheet caption follows: December 31 2010 2011 Salaries and wages Workers' compensation Retirement benefits Deferred income taxes Other (a) Total other current liabilities Retirement benefits Customer deposits on commercial contracts Deferred income taxes Other (b) Total other liabilities...

  • Page 60
    ... sheet for the full funded status of our defined-benefit retirement plans. The difference between the cumulative benefit cost recognized and the full funded status of these plans is recorded directly to AOCI, net of tax. See Note P for further discussion. 48 General Dynamics Annual Report 2011

  • Page 61
    ... Termination of A-12 Program. The A-12 aircraft contract was a fixedprice incentive contract for the full-scale development and initial production of the carrier-based Advanced Tactical Aircraft with the U.S. Navy and a team composed of contractors General Dynamics and McDonnell Douglas (now...

  • Page 62
    ... 2012 2013 2014 2015 2016 Thereafter Total minimum lease payments $ 234 193 149 115 91 355 $ 1,137 Other Securities and Exchange Commission (SEC) Request. On September 23, 2011, the SEC's Division of Enforcement requested that we provide certain information, documents and records relating to...

  • Page 63
    ...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 64
    ... the fair market value of the common stock. The options may be exercised three or five years after the date of grant, depending on the terms of the specific award. We issue common stock under our equity compensation plans from treasury stock. On December 31, 2011, in addition to the shares reserved...

  • Page 65
    ... of our international operations. The primary factors affecting the benefits earned by participants in our pension plans are employees' years of service and compensation levels. Our primary government pension plan, which comprises the majority of our unfunded obligation, was closed to new salaried...

  • Page 66
    ...necessarily representative 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 2009 2010 2011 Service cost...

  • Page 67
    ...Other Post-retirement Benefits 2011 2010 2011 2010 Change in Benefit Obligation Benefit obligation at beginning of year Service cost Interest cost Amendments Actuarial loss Settlement/curtailment/other Benefits paid Benefit obligation at end of year Change in Plan/Trust Assets Fair value of assets...

  • Page 68
    ... 31, 2010 and 2011, some of our pension plans had an ABO that exceeded the plans' assets. Summary information for those plans follows: Pension Benefits Discount rate Expected long-term rate of return on assets Rate of increase in compensation levels Other Post-retirement Benefits Discount rate...

  • Page 69
    ...and direct private equity investments. Over 90 percent of our pension plan assets are held in a single trust for our primary domestic government and commercial pension plans. On December 31, 2011, the trust was invested largely in publicly traded equities and fixed-income securities, but may invest...

  • Page 70
    ... Value Significant Unobservable Inputs (Level 3) December 31, 2010 December 31, 2011 Cash Equity securities U.S. companies (a) International companies Private equity investments Fixed-income securities Treasury securities Corporate bonds (b) Asset-backed securities Commingled funds Equity funds...

  • Page 71
    ... groups. Summary financial information for each of our business groups follows: Revenues Year Ended December 31 Operating Earnings 2011 2009 2010 2011 Revenues from U.S. Government 2009 2010 2011 2009 2010 Aerospace Combat Systems Marine Systems Information Systems and Technology Corporate...

  • Page 72
    ... with its majority owned subsidiaries) and all other subsidiaries on a combined basis on December 31, 2010 and 2011, for the balance sheet, as well as the statements of earnings and cash flows for each of the three years in the period ended December 31, 2011. CONDENSED CONSOLIDATING STATEMENT OF...

  • Page 73
    ...: Short-term debt 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 Total...

  • Page 74
    ...: Short-term debt 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 Total...

  • Page 75
    ...held-to-maturity securities Purchases of held-to-maturity securities Capital expenditures Business acquisitions, net of cash acquired Other, net Net cash used by investing activities Cash flows from financing activities: Purchases of common stock Repayment of fixed-rate notes Dividends paid Proceeds...

  • Page 76
    ... Purchases of common stock Repayment of fixed-rate notes Dividends paid Other, net Net cash used by financing activities Net cash used by discontinued operations Cash sweep/funding by parent Net increase in cash and equivalents Cash and equivalents at beginning of year Cash and equivalents at end...

  • Page 77
    ..., 2010 and 2011, and the related Consolidated Statements of Earnings, Shareholders' Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited financial statement Schedule...

  • Page 78
    ...company's disclosure controls and procedures were effective. The certifications of the company's Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report. 66 General Dynamics Annual Report 2011

  • Page 79
    ...issued an audit report on the effectiveness of our internal control over financial reporting. The KPMG report immediately follows this report. Jay L. Johnson Chairman and Chief Executive Officer L. Hugh Redd Senior Vice President and Chief Financial Officer General Dynamics Annual Report 2011 67

  • Page 80
    ... the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2010 and 2011, and the related Consolidated Statements of Earnings, Shareholders' Equity, and Cash Flows for each of...

  • Page 81
    ...Information Technology, July 2006 - March 2008; Executive Vice President and Chief Operating Officer of Anteon Corporation, August 2003 - June 2006 Kimberly A. Kuryea - Vice President and Controller of the company since September 2011; Chief Financial Officer of General Dynamics Advanced Information...

  • Page 82
    ... to securities authorized for issuance under our equity compensation plans is included in the section entitled "Equity Compensation Plan Information" in our Proxy Statement, which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR...

  • Page 83
    ... behalf by the undersigned, thereunto duly authorized. GENERAL DYNAMICS CORPORATION By: Kimberly A. Kuryea Vice President and Controller February 17, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on February 17, 2012, by the...

  • Page 84
    ... 12, 2011, among the company, the Guarantors (as defined therein) and The 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 July 12, 2011) General Dynamics Corporation Equity Compensation Plan (incorporated...

  • Page 85
    ...Stock Unit Award Agreement pursuant to the General Dynamics Corporation Equity Compensation Plan (incorporated herein by reference from the company's annual report on Form 10-K for the year ended December 31, 2008, filed with the Commission February 20, 2009) General Dynamics Corporation 2009 Equity...

  • Page 86
    ... 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. 74 General Dynamics Annual Report 2011

  • Page 87
    ... Technology Christopher Marzilli Vice President President C4 Systems Lewis F. Von Thaer Vice President President Advanced Information Systems Corporate Information Corporate Headquarters General Dynamics 2941 Fairview Park Drive Suite 100 Falls Church, VA 22042 (703) 876-3000 Annual Meeting...

  • Page 88
    GENERAL DYNAMICS 2941 Fairview Park Drive Suite 100 Falls Church, Virginia 22042-4513 www.generaldynamics.com