General Dynamics 2014 Annual Report Download

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Annual Report 2014

Table of contents

  • Page 1
    Annual Report 2014

  • Page 2
    ..., Combat Systems is poised for growth. Marine Systems revenues grew by 8.9 percent to $7.3 billion, and margins were a solid 9.6 percent. Navy construction work at each shipyard increased as we executed on the Virginia-class submarine, Mobile Landing Platform and destroyer programs. Commercial ship...

  • Page 3
    ... Park Drive, 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...

  • Page 4
    ... Accounting and Financial Disclosure Controls and Procedures Other Information 16 17 18 34 35 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 Owners and Management...

  • Page 5
    ... portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; communications and information technology systems and solutions; and shipbuilding. Our management team delivers shareholder returns through disciplined execution of backlog, efficient cash-flow...

  • Page 6
    ... tracked combat vehicles, weapons systems and munitions, and maintenance and logistics support and sustainment services. The group's backlog, which reached a historic high in 2014, includes a diverse mix of products supporting domestic and non-U.S. 4 General Dynamics Annual Report 2014 customers...

  • Page 7
    ... in 2014, 19 percent in 2013 and 24 percent in 2012. Revenues by major products and services were as follows: Year Ended December 31 group's leadership in this market results from decades expertise, incumbency on high-priority programs and innovation to deliver solutions that meet our customers...

  • Page 8
    ... January 2015. Revenues for the Information Systems and Technology group were 30 percent of our consolidated revenues in 2014 and 33 percent in 2013 and 2012. Revenues by major products and services were as follows: Year Ended December 31 2014 2013 2012 Mobile communication systems IT solutions...

  • Page 9
    ... Defense (DoD). We also contract with other U.S. government customers, including the intelligence community, the Departments of Homeland Security and Health and Human Services and first-responder agencies. Our revenues from the U.S. government were as follows: General Dynamics Annual Report 2014 7

  • Page 10
    ..., such as cost, quality, schedule and performance. Under time-and-materials contracts, the customer pays a fixed hourly rate for direct labor and generally reimburses us for the cost of materials. In our U.S. government business, fixed-price contracts accounted for 53 percent in 2014, 54 percent in...

  • Page 11
    ... 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 U.S. defense businesses, we conduct customer-sponsored R&D activities under government contracts and company...

  • Page 12
    ... (DFARS). For all federal government entities, the FAR regulates the phases of any product or service acquisition, including: • acquisition planning, • competition requirements, 10 General Dynamics Annual Report 2014 We are subject to a variety of federal, state, local and foreign environmental...

  • Page 13
    ... of operations, financial condition or cash flows. For additional information relating to the impact of environmental matters, see Note N to the Consolidated Financial Statements in Item 8. AVAILABLE INFORMATION We file reports and other information with the Securities and Exchange Commission (SEC...

  • Page 14
    ... 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 economic conditions, the availability...

  • Page 15
    ... or classified information, denial of service attacks, as well as threats to the physical security of our facilities and employees, and threats from terrorist acts. We also design and manage information technology systems for various customers. We generally face the same security threats for...

  • Page 16
    .... • Marine Systems - San Diego, California; Groton and New London, Connecticut; Jacksonville, Florida; Bath and Brunswick, Maine; North Kingstown, Rhode Island; Norfolk, Virginia; Bremerton, Washington; Mexicali, Mexico. A summary of floor space by business group on December 31, 2014, follows...

  • Page 17
    ... Information Technology, April 2008 - December 2014; Executive Vice President of General Dynamics Information Technology, July 2006 - March 2008 Kimberly A. Kuryea - Vice President and Controller of the company since September 2011; Chief Financial Officer of General Dynamics Advanced Information...

  • Page 18
    ... 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 2013 and 2014 are...

  • Page 19
    ... information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto. (Dollars and shares in millions, except per-share and employee amounts) 2014 2013 2012 2011 2010...

  • Page 20
    ... contract defaults. We expect our continued 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 revenues as the global business-jet...

  • Page 21
    ... type of work (e.g., development/production). CONSOLIDATED OVERVIEW REVIEW OF 2014 VS. 2013 Year Ended December 31 Our revenues were virtually flat in 2014 compared with 2013. Decreased U.S. Army spending continued to affect somewhat our Information Systems and Technology and Combat Systems groups...

  • Page 22
    REVIEW OF BUSINESS GROUPS Year Ended December 31 2014 Revenues Operating Earnings Revenues 2013 Operating Earnings Revenues 2012 Operating Earnings Aerospace Combat Systems Information Systems and Technology Marine Systems Corporate $ 8,649 5,732 9,159 7,312 - $ 30,852 $ 1,611 862 785 703 (72)...

  • Page 23
    ...the Combat Systems group's revenues and margins in 2015 to be consistent with 2014 as growth on our international military vehicle contracts offsets some scheduled reductions in spending on a few U.S. military production programs. INFORMATION SYSTEMS AND TECHNOLOGY Review of 2014 vs. 2013 Year Ended...

  • Page 24
    ... customers' accelerated schedules and commenced work on the contact-center services contract discussed above. Revenues decreased in 2013 across the ISR business driven by lower U.S. defense spending and a slower-than-expected transition to related follow-on work. 22 General Dynamics Annual Report...

  • Page 25
    ... program and commercial Jones Act ships. Offsetting these increases, lower U.S. Army spending negatively impacted revenues from mobile communication products. Pre-owned aircraft sales were down as there were fewer aircraft trade-ins and resulting sales in 2014. General Dynamics Annual Report 2014...

  • Page 26
    ... (289) (160) $ (765) The increase in service revenues in 2013 consisted of the following: Ship engineering and repair Other, net Total increase $ 178 (76) $ 102 Ship engineering and repair revenues increased in 2013 due to submarine overhaul and repair work. 24 General Dynamics Annual Report 2014

  • Page 27
    ... effective tax rate in 2014 was primarily due to increased income from international operations and utilization of foreign tax credits. The atypically high tax rate in 2012 was driven by the largely non-deductible goodwill impairment recorded in the Information Systems and Technology group and, to...

  • Page 28
    ... we have definitive purchase contracts and deposits from customers. Unfunded backlog consists of agreements to provide future aircraft maintenance and support services. The Aerospace group ended 2014 with backlog of $13.2 billion, compared with $13.9 billion at year-end 2013. Orders were up more...

  • Page 29
    ... naval control systems for two additional ships will be reported in backlog when they are exercised; and • $180 from the U.S. Department of State to provide supply chain management services. Backlog at year-end 2014 also included the following key programs: • $495 for contact-center services for...

  • Page 30
    ... cash for investing activities were capital expenditures and purchases of marketable securities. Capital Expenditures. Capital expenditures were $521 in 2014, $436 in 2013 and 2012. We expect capital expenditures of approximately 2 percent of revenues in 2015. 28 General Dynamics Annual Report 2014

  • Page 31
    ...securities in all three years were not material. Other, Net. Investing activities also include proceeds from the sale of assets and cash paid for business acquisitions. We completed one acquisition in 2014, no acquisitions in 2013 and seven acquisitions in 2012 for $444. We used cash on hand to fund...

  • Page 32
    ...109 135 $ 2,811 $ 17,844 15.8% * 2012 loss from continuing operations of ($381) has been adjusted for $1,994 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 2014

  • Page 33
    ... percentage-of-completion method. Under this method, contract revenue and profit are recognized as work progresses, either as products are produced or as services are rendered. We determine progress using either input measures (e.g., costs incurred) or output General Dynamics Annual Report 2014 31

  • Page 34
    ... the Combat Systems group. No revisions on any one contract were material to our Consolidated Financial Statements in 2014. In the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014...

  • Page 35
    ... costs that cannot currently be allocated to contracts to provide a better matching of revenues and expenses. Accordingly, the impact on the retirement benefit cost for these plans that results from annual changes in assumptions does not impact our earnings. General Dynamics Annual Report 2014 33

  • Page 36
    ... allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On December 31, 2014, we held $4.4 billion in cash and equivalents and $500 of marketable securities reported in other current assets. 34 General Dynamics Annual Report 2014

  • Page 37
    ... STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (Dollars in millions, except per-share amounts) 2014 Year Ended December 31 2013 2012 Revenues: Products Services $ 19,564 11,288 30,852 Operating costs and expenses: Products Services Goodwill impairment General...

  • Page 38
    ... in millions) 2014 Year Ended December 31 2013 2012 Net earnings (loss) (Losses) gains on cash flow hedges Unrealized gains on securities Foreign currency translation adjustments Change in retirement plans' funded status Other comprehensive (loss) income, pretax (Benefit) provision for income tax...

  • Page 39
    ... 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 these statements. $ 4,388 4,050 4,591 3,221 1,157 17,407 $ 5,301 4,370 4,780...

  • Page 40
    ... acquisitions: Accounts payable Customer advances and deposits Other current liabilities Other, net Net cash provided by operating activities Cash flows from investing activities - continuing operations: Capital expenditures Purchases of held-to-maturity securities Purchases of available-for-sale...

  • Page 41
    ... Shareholders' Equity Balance, December 31, 2011 Net loss Cash dividends declared Stock-based awards Shares purchased Other comprehensive loss Balance, December 31, 2012 Net earnings Cash dividends declared Stock-based awards Shares purchased Other comprehensive income Balance, December 31, 2013...

  • Page 42
    ... combat vehicles, weapons systems and munitions; Information Systems and Technology, which provides communications and information technology systems and solutions; and Marine Systems, which designs, constructs and repairs surface ships and submarines. Our primary customer is the U.S. government...

  • Page 43
    ... networking support in our Information Systems and Technology group. We did not acquire any businesses in 2013. In 2012, we acquired seven businesses across our business groups for a total of $444. These amounts are included in other investing activities on the Consolidated Statements of Cash Flows...

  • Page 44
    ... and Technology group. 42 General Dynamics Annual Report 2014 We did not recognize any impairments of our intangible assets in 2014 or 2013. In 2012, we recognized impairments in our Aerospace and Information Systems and Technology groups of $191 and $110, respectively, on contract and program, and...

  • Page 45
    ... and diluted weighted average shares outstanding were as follows (in thousands): Year Ended December 31 Carrying Value Financial assets (liabilities) (b) Fair Value December 31, 2014 2014 2013 2012 Held-to-maturity marketable securities Available-for-sale securities Derivatives Long-term debt...

  • Page 46
    ... in different time periods for financial reporting than for income tax purposes. The following is a summary of our net provision for income taxes for continuing operations: Year Ended December 31 portion of our goodwill, for which there was a limited tax benefit recognized on the impairment. In...

  • Page 47
    ... government customers include amounts related to long-term production programs for the Spanish Ministry of Defence of $2.3 billion on December 31, 2014. 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 48
    ...December 31, 2014 or 2013. 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 49
    ... $2 billion. On December 31, 2014, 2.4 million shares remained authorized by our board of directors for repurchase, less than 1 percent of our total shares outstanding. Dividends per Share. Dividends declared per share were $2.48 in 2014, $2.24 in 2013 and $2.04 in 2012. Cash dividends paid were...

  • Page 50
    ...forward purchase and sale contracts, designed to offset and minimize our risk. The two-year average maturity of these instruments matches the duration of the activities that are at risk. 48 General Dynamics Annual Report 2014 We had $9.1 billion in notional forward exchange contracts outstanding on...

  • Page 51
    ... or cash flows. Investment 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, 2014, we held $4.4 billion in cash and equivalents and $500 of marketable securities reported in...

  • Page 52
    ...at the time the new outfitted aircraft is delivered is treated as a reduction of revenue in the newaircraft sales transaction. 50 General Dynamics Annual Report 2014 Labor Agreements. Approximately one-fifth of the employees of our subsidiaries work under collectively-bargained terms and conditions...

  • Page 53
    ...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. We may make limited ad hoc grants at other times during the year for new hires...

  • Page 54
    ... shares was $47 in 2014, $63 in 2013 and $28 in 2012. P. RETIREMENT PLANS We provide defined-contribution benefits to eligible employees, as well as some remaining defined-benefit pension and other post-retirement benefits. 52 General Dynamics Annual Report 2014 It is our policy to fund our defined...

  • Page 55
    ...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 2014 2013 2012 Service cost...

  • Page 56
    ...defined-benefit retirement plans: Pension Benefits Year Ended December 31 Other Post-retirement Benefits 2014 2013 2014 2013 Change in Benefit Obligation Benefit obligation at beginning of year Service cost Interest cost Amendments Actuarial gain (loss) Settlement/curtailment/other Benefits paid...

  • Page 57
    ...the weighted average assumptions used to determine our net periodic benefit costs: Assumptions for Year Ended December 31 2014 2013 2012 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 58
    ...and market conditions. At the end of 2014, our asset allocation policy ranges were: Equities Fixed income Cash Other asset classes 48 - 68% 20 - 48% 0 - 5% 0 - 16% More than 90 percent of our pension plan assets are held in a single trust for our primary U.S. government and commercial pension plans...

  • Page 59
    ...31, 2014 December 31, 2013 Cash Equity securities U.S. companies (a) Non-U.S. companies Private equity investments Fixed-income securities Treasury securities Corporate bonds (b) Commingled funds Equity funds Money market funds Fixed-income funds Real estate funds Commodity funds Hedge funds Other...

  • Page 60
    ... services offered. These business groups derive their revenues from business aviation; combat vehicles, weapons systems and munitions; communications and information technology systems and solutions; and military and commercial shipbuilding and services, respectively. We measure each group's profit...

  • Page 61
    ...presents our revenues by geographic area based on the location of our customers: Year Ended December 31 2014 2013 2012 North America: United States Other Total North America Europe Asia/Pacific Africa/Middle East South America... $ 786 $ (2,783) $ (2,022) General Dynamics Annual Report 2014 59

  • Page 62
    ... CONSOLIDATING STATEMENTS OF EARNINGS (LOSS) Guarantors on a Combined Basis Other Subsidiaries on a Combined Basis Consolidating Adjustments Total Consolidated Year Ended December 31, 2013 Parent Revenues Cost of sales G&A Operating earnings Interest, net Other, net Earnings before income tax...

  • Page 63
    ... a Combined Basis December 31, 2014 Parent Guarantors on a Combined Basis Consolidating Adjustments Total Consolidated ASSETS Current assets: Cash and equivalents Accounts receivable Contracts in process Inventories Work in process Raw materials Finished goods Pre-owned aircraft Other current...

  • Page 64
    ...2013 Parent Guarantors on a Combined Basis Consolidating Adjustments Total Consolidated ASSETS Current assets: Cash and equivalents Accounts receivable Contracts in process Inventories Work in process Raw materials Finished goods...- - - $ 5,301 4,370 4,780 62 General Dynamics Annual Report 2014

  • Page 65
    ...: Purchases of common stock Dividends paid Proceeds from option exercises 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 66
    ... Business acquisitions, net of cash acquired Other, net Net cash used by investing activities Cash flows from financing activities: Repayment of fixed-rate notes Proceeds from fixed-rate notes Dividends paid Purchases of common stock Other, net Net cash used by financing activities Net cash provided...

  • Page 67
    ...-year period ended December 31, 2014, 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 68
    ...2014, our 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 2014

  • Page 69
    ... an audit report on the effectiveness of our internal control over financial reporting. The KPMG report immediately follows this report. Phebe N. Novakovic Chairman and Chief Executive Officer Jason W. Aiken Senior Vice President and Chief Financial Officer General Dynamics Annual Report 2014 67

  • Page 70
    ... Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2014 and 2013, and the related Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), Cash Flows and Shareholders' Equity...

  • Page 71
    ... the quarter ended December 31, 2014, 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 72
    ... Consolidated Statements of Cash Flows Consolidated Statements of Shareholders' Equity Notes to Consolidated Financial Statements (A to R) 2. Exhibits See Index on pages 72 through 73 of this Annual Report on Form 10-K for the year ended December 31, 2014. 70 General Dynamics Annual Report 2014

  • Page 73
    ... Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENERAL DYNAMICS CORPORATION by Kimberly A. Kuryea Vice President and Controller Dated: February 9, 2015 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended...

  • Page 74
    ...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) Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for certain executive officers who are subject...

  • Page 75
    ...annual report on Form 10-K for the year ended December 31, 2013, filed with the Commission on February 7, 2014) Amendment to General Dynamics Corporation Supplemental Savings Plan, effective January 5, 2015** Form of Severance Protection Agreement entered into by substantially all executive officers...

  • Page 76
    ...) William A. Osborn Former Chairman and Chief Executive Officer Northern Trust Corporation Rudy F. deLeon Senior Fellow Center for American Progress Lester L. Lyles General U.S. Air Force (Retired) Laura J. Schumacher Executive Vice President AbbVie Inc. 74 General Dynamics Annual Report 2014

  • Page 77
    ...President Product Support Gulfstream Aerospace Daniel G. Clare Vice President Senior Vice President Chief Financial Officer Gulfstream Aerospace Larry R. Flynn Vice President President Gulfstream Aerospace Robert E. Smith Vice President President Jet Aviation Combat Systems Mark C. Roualet Executive...

  • Page 78
    ... will be held on Wednesday, May 6, 2015, 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 76 General Dynamics Annual Report 2014

  • Page 79
    2941 Fairview Park Drive Suite 100 Falls Church, VA 22042 www.generaldynamics.com