General Dynamics Annual Report 2012

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GENERAL DYNAMICS

Annual Report 2012

Dear Fellow Shareholder:

It imposes stringent operating goals throughout the organization,

and I will hold our leadership accountable for meeting those

General Dynamics begins 2013 with a renewed focus on

objectives. Our managers must keep overhead, plant equipment

operations. Our company has a long history of excellent operating

and working capital at the absolute minimum level necessary to

performance and, following disappointing financial results in

support volume. We are going to manage our business by focusing

2012, we will deliver on our promise of superior performance

on return on invested capital and driving margins program by

moving forward.

program, business unit by business unit.

The company’s key financial metrics – operating earnings,

As part of the plan to build value for shareholders, we will

operating margins, free cash flow and return on invested capital

allocate and deploy our capital wisely. We are particularly mindful

(ROIC) – declined in 2012, even after adjusting for non-recurring

of the importance of liquidity given the significant uncertainty

charges. In part, this is because of difficult market conditions,
particularly in Europe, and operational challenges in some of our

across the global economic landscape and defense spending
environment. In light of this and in keeping with our focus on

shorter-cycle defense businesses. Several acquisitions made in

operations, acquisitions are not a near-term priority. We will

recent years have not met expectations and also contributed to

pursue only those transactions which are realistically valued and

lackluster performance. We are taking rapid and decisive action

which represent a good fit within the framework and underlying

to remedy underlying performance issues and to address new

business strategies of our business units.

market realities by restructuring some businesses and relentlessly

The strength of General Dynamics’ balance sheet and our

reducing costs across the company, including our corporate

expectation for strong and sustainable cash flows provide ample

headquarters.

opportunity to reward shareholders. On March 6, 2013, the

Despite the challenges faced in 2012, our core platform

Board of Directors increased the dividend 9.8 percent from

businesses performed extremely well and generated significant

$0.51 to $0.56, the 16th consecutive annual increase. Share

earnings and free cash flow. The Aerospace group had particularly

repurchases may also provide a basis for improving shareholder

strong growth. Sales and earnings expanded by double digits

value if judiciously employed when the market presents

as Gulfstream’s revenue grew over $800 million and earnings

appropriate opportunities.

increased $110 million. Gulfstream delivered two new aircraft

Our experienced operational leadership, agile business

models to the market in 2012, the G280 and G650. We have

model, diversified portfolio, ability to convert earnings into cash

a high degree of confidence that these aircraft will be major

and robust balance sheet position your company well for both

contributors to the company’s performance for many years to

the challenges and opportunities ahead. General Dynamics’

come. Similarly, within the Combat Systems group, Land Systems,

customers rely upon this company to provide the most affordable

our North America-based vehicle business, delivered improved

and capable products. Our shareholders expect consistent value

sales, earnings and margins, a particularly good result given its

creation. We remain committed to fulfilling our obligations to our

exposure to reduced supplemental spending related to the wars

customers and shareholders alike through superb execution and

in Iraq and Afghanistan. At Marine Systems, earnings were up

prudent capital stewardship.

8.5 percent from solid performance across all three of our

shipyards. We expect strong performance from these businesses

again in 2013.

Your management team is focused on reducing costs,

improving margins and driving earnings and free cash flow.
The 2013 operating plan re-baselines each of our businesses to
better reflect operational realities and changing market dynamics.

Phebe N. Novakovic
Chairman and Chief Executive Officer
March 6, 2013

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-3671

GENERAL DYNAMICS CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
State or other jurisdiction of
incorporation or organization

2941 Fairview Park Drive, Suite 100,
Falls Church, Virginia
Address of principal executive offices

Title of each class
Common stock, par value $1 per share

Registrant’s telephone number, including area code:
(703) 876-3000

Securities registered pursuant to Section 12(b) of the Act:

13-1673581
I.R.S. Employer
Identification No.

22042-4513
Zip code

Name of exchange
on which registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 3 No __
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No 3

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 3 No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 3 No __

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment of this Form 10-K. 3

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.

Large Accelerated Filer 3 Accelerated Filer __ Non-Accelerated Filer __ Smaller Reporting Company ___
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No 3

The aggregate market value of the voting common equity held by non-affiliates of the registrant was $22,029,273,687 as of July 1, 2012
(based on the closing price of the shares on the New York Stock Exchange).
353,442,904 shares of the registrant’s common stock, $1 par value per share, were outstanding on January 27, 2013.

Part III incorporates by reference information from certain portions of the registrant’s definitive proxy statement for the 2013 annual
meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

DOCUMENTS INCORPORATED BY REFERENCE:

INDEX

PART I

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures

Market for the Company’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Controls and Procedures
Other Information

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

PART II

Item 5.

Item 6.
Item 7.

Item 7A.
Item 8.
Item 9.

Item 9A.
Item 9B.

PART III

Page

3
12
15
15
15
15

16
17

18
33
34

67
67
70

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
71
Certain Relationships and Related Transactions, and Director Independence 71
71
Principal Accountant Fees and Services

70
71

PART IV

Item 15.

Exhibits and Financial Statement Schedules
Signatures
Schedule II – Valuation and Qualifying Accounts
Index to Exhibits

71
72
73
73

General Dynamics Annual Report 2012

(Dollars in millions, unless otherwise noted)

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

General Dynamics is an aerospace and defense company that offers
a broad portfolio of products and services in business aviation;
combat vehicles, weapons systems and munitions; shipbuilding;
and communications and information technology. Our experienced
management team delivers shareholder returns through disciplined
execution on backlog, efficient cash-flow conversion and prudent
capital deployment. We manage overhead costs, undertake continuous-
improvement initiatives and collaborate across our businesses to
maximize earnings and cash. Our disciplined capital deployment
approach includes internal investment, acquisitions and divestitures,
dividends and the repurchase of company shares on the open market.

Incorporated in Delaware in 1952, General Dynamics grew organically

and through acquisitions until the early 1990s when we sold nearly all
of our divisions except Electric Boat and Land Systems. Starting in the
mid-1990s, we again began expanding by acquiring combat vehicle-
related businesses, additional shipyards, information technology product
and service companies and Gulfstream Aerospace Corporation. Since
1995, we have acquired and integrated more than 65 businesses to
further strengthen and complement our business portfolio. We and our
subsidiaries have 92,200 employees globally.

We operate through four business groups: Aerospace, Combat
Systems, Marine Systems and Information Systems and Technology.
For selected financial information regarding each of our business
groups, see Note Q to the Consolidated Financial Statements contained
in Part II, Item 8, of this Annual Report on Form 10-K.

A E R O S PA C E
Our Aerospace group designs, manufactures and outfits a comprehensive
family of Gulfstream business-jet aircraft, provides aircraft services
(including maintenance 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 market, the Aerospace group is known for:

• superior aircraft design, quality, performance, safety and reliability;
• technologically advanced cockpit and cabin systems; and
• industry-leading product service and support.

The Gulfstream product line includes aircraft across a spectrum
of price and performance options in the large- and mid-cabin business-
jet market. The varying ranges, speeds and cabin dimensions are

well-suited to the transportation needs of an increasingly diverse and
global customer base. The large-cabin models are manufactured at
Gulfstream’s headquarters in Savannah, Georgia, while the mid-cabin
models are constructed by an international partner. All models are
outfitted in the group’s U.S. facilities.
The two newest aircraft to join the Gulfstream family, the ultra-
large-cabin, ultra-high-speed G650 and the super-mid-size G280,
each earned Federal Aviation Administration (FAA) type certification and
entered into service in 2012. The G650 has the longest range, fastest
speed, largest cabin and most advanced cockpit in the Gulfstream fleet
and defines a completely new segment at the top of the business-
jet market. The G280, which has replaced the G200, offers a larger
cabin and the longest range at the fastest speed in its class. During
flight testing, both of these aircraft exceeded original performance
expectations and set city-pair speed records.
Demand for Gulfstream aircraft remains strong across geographic
regions and customer types. While North American corporate customer
demand has increased recently, international orders comprise
approximately 60 percent of the group’s backlog, representing demand
from several emerging markets including the Asia-Pacific region.
Private companies and individuals collectively represent approximately
60 percent of the group’s backlog. Gulfstream also remains a leading
provider of aircraft for governments and militaries around the world,
with aircraft operated by nearly 40 nations. These government aircraft
are used for head-of-state/executive transportation and a variety of
special-mission applications, including aerial reconnaissance, maritime
surveillance and weather research.
We are committed to continuous investment in research and
development (R&D) activities that enable us to introduce new
products and first-to-market enhancements that broaden customer
choice, improve aircraft performance and set new standards for
customer safety, comfort and in-flight productivity. Gulfstream’s
aircraft are designed to minimize lifecycle costs while maximizing the
commonality of parts among the various models. Current product-
enhancement and development efforts include initiatives in advanced
avionics, composites, biofuels, flight-control systems, acoustics, cabin
technologies and enhanced vision systems. Recent innovations include
a state-of-the-art cabin management system designed for the G650,
and now available on several other Gulfstream aircraft. This system
gives passengers control of the aircraft cabin systems through a
handheld device synched to a particular seat on the aircraft. Each
passenger can easily control their own environment, including lighting,
temperature and entertainment equipment. We also offer the PlaneBook
application, which provides pilots easy and immediate digital access to
critical flight information and aircraft-specific documents.
A multi-year facilities project at our Savannah campus is scheduled
to continue through 2017. This expansion includes constructing new
facilities, renovating existing infrastructure and expanding the group’s

General Dynamics Annual Report 2012

R&D center. This investment is intended to position the group to meet
future demand for business-jet aircraft. This effort follows a recently
completed multi-year project in Savannah that established a purpose-
built G650 manufacturing facility, increased aircraft-service capacity,
improved the group’s customer sales and design center and created a
state-of-the-art paint facility.

In addition to the increased service capacity in Savannah, the service

network for Gulfstream aircraft is evolving to address the demands
of the growing international customer base. In 2012, for example,
we added Gulfstream service centers in emerging markets such as
Brazil and China and expanded our facility in Luton, United Kingdom.
We also have a team of Gulfstream aircraft technicians to deploy for
urgent customer-service requirements in the Americas and Europe. This
commitment to superior product support continues to receive industry
recognition, including the number-one ranking for the tenth consecutive
year in the annual Aviation International News Product Support Survey,
as well as the top ranking in the annual Professional Pilot Survey.

Jet Aviation augments our Aerospace portfolio by providing best-
in-class maintenance, repair, aircraft management and FBO services
to a broad global customer base. The Aerospace group also performs
aircraft completions for business jets and narrow- and wide-body
commercial aircraft produced by other OEMs at locations in Europe and
the United States.
A market leader in the business-aviation industry, the Aerospace
group remains focused on developing 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.
Revenues for the Aerospace group were 16 percent of our
consolidated revenues in 2010, 19 percent in 2011 and 22 percent in
2012. Revenues by major products and services were as follows:

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

2012

Aircraft manufacturing, outfitting

and completions

Aircraft services

Pre-owned aircraft

Total Aerospace

$ 3,869

$ 4,400 $ 5,317

1,323

107

1,521

1,491
104

$ 5,299

$ 5,998

$ 6,912

C O M B AT S Y S T E M S
Our Combat Systems group is a global leader in the design,
development, production, support and enhancement of tracked and
wheeled military vehicles, weapons systems and munitions for the
United States and its allies. The group’s product lines include:

• wheeled combat and tactical vehicles,
• main battle tanks and tracked combat vehicles,

General Dynamics Annual Report 2012

• munitions and propellant,
• rockets and gun systems,
• axle and drivetrain components and 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 systems and munitions markets.
These long-term production programs position us to pursue continuous
process improvements and other cost reduction initiatives that drive the
group’s financial performance. We apply our design and engineering
expertise to develop product enhancements that advance the utility,
safety and effectiveness of our products.

Our portfolio of vehicle platforms in our U.S. military vehicles
business consists of wheeled combat vehicles and main battle tanks
for the U.S. military, including the Stryker wheeled combat vehicle and
the Abrams main battle tank. These vehicles are fundamental to the
military’s warfighting capabilities and offer continuing opportunities for
upgrades and modernization to meet evolving requirements.

The Stryker has proven itself as a versatile combat vehicle, supporting
numerous missions over the past 10 years. To meet evolving customer
requirements, the group developed a double-V-hulled Stryker to further
enhance soldier protection from improvised explosive devices (IEDs).
Over the last two years, nearly 750 double-V-hulled vehicles have been
delivered to the U.S. Army. In 2012, the group secured contracts to
perform hull exchanges to convert previously delivered Stryker vehicles
to the double-V-hull configuration.

We continue to support the Army’s evolving needs for main battle
tanks with technology upgrades to the Abrams, such as the System
Enhancement Package (SEP). The SEP-configured tank is a digital
platform with an enhanced command-and-control system, second-
generation thermal sights and improved armor. In September 2012, we
received a multi-year contract from the Army to conduct development
efforts for additional upgrade opportunities designed to increase the
efficiency and capability of the Abrams tank.

Beyond these long-term platform programs, we have opportunities
associated with the refurbishment of battle-damaged vehicles and the
replacement of equipment that has reached the end of its service life.
As the sole provider of Abrams tanks and Stryker vehicles, Combat
Systems is the primary contractor for the maintenance, repair and reset
of these vehicles.
The group’s portfolio of tactical vehicles is at the forefront of
blast- and ballistic-protected technologies, designed to protect vehicle
occupants from landmines, hostile fire and IEDs. We have delivered
more than 4,500 RG-31 and Cougar vehicles to the U.S. military under
the Mine-Resistant, Ambush Protected (MRAP) vehicle program. This
large installed base has led to subsequent modernization programs, as
well as support and sustainment services.

General Dynamics Annual Report 2012

By leveraging the expertise gained from our incumbency on

current production programs, we are well-positioned to participate in
future U.S. combat vehicle development programs. In addition to the
Abrams and Stryker modernization efforts, we have a contract for the
design and development phase of the Army’s next-generation infantry
fighting vehicle, the Ground Combat Vehicle (GCV). The group is also
positioning itself for the upcoming competitions for new contracts for
the Amphibious Combat Vehicle (ACV), the cornerstone of the U.S.
Marine Corps’ future amphibious-assault requirements, and the Army’s
Armored Multi-Purpose Vehicle (AMPV) program, a replacement for the
M113 family of vehicles.

As a result of the demonstrated success of our U.S. military vehicles,

we have cultivated continued international demand. The group’s U.S.
exports include Abrams tanks and Light Armored Vehicles (LAVs) for
U.S. allies around the world. The international operations of our U.S.
military vehicles business also have generated significant indigenous
opportunities. We are modernizing approximately 600 LAV III combat
vehicles for the Canadian government, as well as providing long-term
support to all Canadian LAV vehicles. For the U.K. Ministry of Defence,
we are producing the Foxhound armored vehicle and will co-produce
the Specialist Vehicle with the U.K. operations of our Information
Systems and Technology group.

Combat Systems has also benefited from customer relationships
developed through its in-country operations including manufacturing
sites in Austria, France, Germany, Spain and Switzerland where we
are a key part of the defense industrial base. The group’s European
operations offer a broad range of products, including military vehicles,
amphibious bridge systems, artillery systems, ammunition and
propellants. Key platforms include the Leopard tank, the Pizarro and
Ulan tracked infantry vehicles, the Eagle wheeled vehicle, and the
Piranha and Pandur wheeled armored vehicles.

Complementing these combat-vehicle offerings are Combat
Systems’ weapons systems and munitions programs. For ground
forces, the group manufactures vehicle armor, M2 heavy machine
guns and MK19 and MK47 grenade launchers. For airborne platforms,
the group produces weapons for many foreign customers and all U.S.
fighter aircraft, including high-speed Gatling guns for fixed-wing aircraft
and the Hydra-70 family of rockets. We are also a global manufacturer
and supplier of composite aircraft and ground equipment components
and highly engineered axles, suspensions, brakes and aftermarket parts
for a variety of military and commercial customers.

Our munitions portfolio covers the full breadth of naval, air and

ground forces applications across all calibers and weapon platforms for
the U.S. government and its allies. The group holds leading munitions
supply positions for products such as large caliber tank ammunition,
medium caliber ammunition, mortar and artillery projectiles, tactical
missile aerostructures and high-performance warheads, military
propellants and conventional bombs and bomb cases.

The Combat Systems group continues to emphasize operational
execution and business optimization initiatives to drive cost reductions
as the group delivers on its backlog. As an example, we are aligning
our European business for anticipated lower demand, ensuring that
we are competitively positioned for the future. In an environment of
dynamic threats and evolving customer needs, the group remains
focused on innovation, affordability and speed-to-market to deliver on
our current programs and to secure new opportunities.

Revenues for the Combat Systems group were 27 percent of our
consolidated revenues in 2010 and 2011 and 25 percent in 2012.
Revenues by major products and services were as follows:

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

2012

Wheeled combat vehicles

$ 3,961

$ 4,220

$ 3,930

Munitions and propellant

Tanks and tracked vehicles

Rockets and gun systems

Engineering and development

Drivetrain components and other

1,359

1,567

1,314

1,159

728

408

855

740

397

997

1,252

792

698

516

804

Total Combat Systems

$ 8,878

$ 8,827

$ 7,992

M A R I N E S Y S T E M S
Our Marine Systems group designs, builds and supports submarines
and surface ships. We are one of two primary shipbuilders for the
U.S. Navy. The group’s diverse portfolio of platforms and capabilities
includes:

• nuclear-powered submarines (Virginia class and Ohio-class

replacement),

• surface combatants (DDG-51 and DDG-1000),
• auxiliary and combat-logistics ships (MLP and T-AKE),
• commercial ships (Jones Act ships),
• design and engineering support, and
• overhaul, repair and lifecycle support services.

Our work for the Navy includes the construction of new ships and

the design and development of next-generation platforms to help
meet evolving missions and maintain desired fleet size. The group
also provides maintenance, repair and modernization services to help
maximize the life and effectiveness of in-service ships and maintain
their relevance to the Navy’s current requirements. This business
consists primarily of major ship-construction programs awarded under
large, multi-ship contracts that span several years. The group’s current
Navy construction programs are the Virginia-class nuclear-powered
submarine, the Arleigh Burke-class (DDG-51) and Zumwalt-class
(DDG-1000) guided-missile destroyers, and the Mobile Landing
Platform (MLP) auxiliary support ship.

General Dynamics Annual Report 2012

The Virginia-class submarine includes capabilities for open-ocean and
littoral missions. These stealthy boats are well-suited for a variety of global
assignments, including intelligence gathering, special-operations missions
and sea-based missile launch. The Virginia-class program includes 30
submarines, which the customer is procuring in multi-ship blocks. The
group has delivered nine of 18 boats under contract in conjunction with
an industry partner that shares in the construction of these vessels. The
remaining nine boats under contract extend deliveries through 2018. We
have submitted a proposal for the next block of submarines under the
program expected to be awarded near the end of 2013.

We are the lead designer and producer of DDG-51s, the only active

destroyer in the Navy’s global surface fleet, managing the design,
modernization and lifecycle support of these ships. DDG-51s are multi-
mission combatants that offer defense against a wide range of threats,
including ballistic missiles. In 2012, we delivered the final DDG-51 ship
under the prior multi-ship contract. In connection with the Navy’s restart
of the DDG-51 program, we have been awarded construction contracts
for two destroyers. Delivery of these ships is scheduled for 2016 and
2017. We have submitted a competitive bid for a multi-ship construction
contract that is expected to be awarded in the first half of 2013.

The group is also currently building the three ships planned under the
DDG-1000 destroyer program, the Navy’s next-generation, guided-missile
naval destroyer. These ships are equipped with numerous advanced
technology and survivability systems, including a low radar profile, an
integrated power system and advanced gun systems that provide a three-
fold increase in range over current naval surface weapons. Construction
and delivery of the destroyer requires integration of components
manufactured by others and supplied as government-furnished material.
Deliveries of the ships are scheduled for 2015, 2016 and 2018.

The group’s MLP auxiliary support ship serves as a floating transfer
station, improving the Navy’s ability to deliver equipment and cargo to
areas without adequate port access. In 2012, the group was awarded
a construction contract for the third ship in the program. Construction
of the first two ships is underway, with delivery of one ship per year
beginning in 2013. The Navy’s long-term shipbuilding plan includes
procurement of a fourth ship in 2014.

In 2012, the group delivered the final ship under the 14-ship T-AKE

program, marking the completion of a shipbuilding program that
spanned more than a decade. T-AKE ships support multiple missions
for the Navy and incorporate marine technologies and commercial ship-
design features to minimize operating and maintenance costs over the
ships’ service life. Throughout the course of the program, the group
reduced the hours required to build a single ship by nearly 80 percent.

We are also developing new technologies and naval platforms. These

design and engineering efforts include initial concept studies for the
development of the next-generation ballistic-missile submarine, which
is expected to replace the Ohio class of ballistic missile submarines.
We received an award in the fourth quarter of 2012 for the design

of the submarine. In conjunction with these efforts, the group is
participating in the design of the Common Missile Compartment under
joint development for the U.S. Navy and the U.K. Royal Navy.

In addition to these design and construction programs, Marine Systems
provides comprehensive ship and submarine overhaul, repair and lifecycle
support services to extend the service life and maximize the value of
these ships to the customer. We operate the only full-service maintenance
and repair shipyard on the West Coast. With the recent acquisition of
two repair operations, we have extended the reach of our surface-ship
repair capabilities in several major Navy ports on the East Coast. We also
provide extensive submarine repair services in a variety of U.S. locations.
Recently, we were awarded a contract for advance planning and preliminary
execution of restoration efforts on USS Miami, which was badly damaged
in a fire. We also provide allied navies with program management,
planning, engineering and design support for submarine and surface-ship
construction programs. In addition, we are a leading operator of ships for
the U.S. Military Sealift Command and commercial customers.

Marine Systems has the proven capability to design and produce
ships for commercial customers to meet the Jones Act requirement that
ships carrying cargo between U.S. ports be built in U.S. shipyards. In the
fourth quarter of 2012, we were awarded a contract for the construction
of two liquefied natural gas (LNG)-powered containerships. Construction
is scheduled to begin in 2014 with deliveries in 2015 and 2016. When
complete, the containerships are expected to be the largest ships of any
type in the world primarily powered by LNG. We anticipate that the age
of the Jones Act fleet and environmental regulations that require double-
hull tankers and impose emission control limits will provide additional
commercial shipbuilding opportunities.

To further the group’s goals of efficiency, technological innovation,
affordability for the customer and continuous improvement, we make
strategic investments in our business, often in cooperation with the Navy
and local governments. In addition, Marine Systems leverages its design
and engineering expertise across its shipyards to improve 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 continue to fulfill the ship-construction and
support requirements of our Navy and commercial customers.

Revenues for the Marine Systems group were 21 percent of our
consolidated revenues in 2010, 20 percent in 2011 and 21 percent in
2012. Revenues by major products and services were as follows:

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

2012

Nuclear-powered submarines

$ 3,587 $ 3,696

$ 3,601

Surface combatants

1,360

1,191

Auxiliary and commercial ships

Repair and other services

961

769

930

814

Total Marine Systems

$ 6,677

$ 6,631

1,152

746

1,093
$ 6,592

General Dynamics Annual Report 2012

I N F O R M AT I O N S Y S T E M S A N D T E C H N O L O G Y
Our Information Systems and Technology group provides critical
technologies, products and services that support a wide range of
government and commercial communication and information sharing
and security needs. The group consists of a three-part portfolio centered
on secure mobile communication systems, information technology
solutions and mission support services, and intelligence, surveillance
and reconnaissance systems.
Secure mobile communication systems – We design, manufacture
and deliver secure communication systems, command-and-control
systems and operational hardware to customers in the U.S. Department
of Defense (DoD), the intelligence community and federal civilian and
public safety agencies, and to international customers. Our leadership
in this market results from decades of domain expertise with legacy
systems, incumbency on today’s programs and continuous innovation
that encompasses key technologies at the center of our customers’
missions. The group’s solutions include:

• fixed and mobile radio and satellite communications systems and

antenna technologies;

• information assurance and encryption technologies, products,

systems and services that ensure the security and integrity of fixed
and mobile digital communications;

• battlespace command-and-control systems; and
• broadband networking.

This market is characterized by programs that enhance the
customer’s ability to communicate, collaborate and access vital
information through high-bandwidth, on-the-move Internet-like
battlefield networks. Key programs include the U.S. Army’s Warfighter
Information Network-Tactical (WIN-T) and the Handheld Manpack
Small Form Fit (HMS) family of radios, which includes the AN/PRC-154
Rifleman and AN/PRC-155 Manpack radios and several other small
networking radios.

WIN-T is the Army’s primary mobile battlefield communications
network which provides soldiers secure, high-speed, high-capacity
voice, data and video communications. As the prime contractor, we
are responsible for the design, engineering, integration, production,
program management and support of the network. The first increment
of WIN-T is now fully deployed. The second increment, which adds
on-the-move command and control and other capabilities, completed
operational tests in May and began fielding in October of 2012. The
third increment, which is in the development and testing phase, will
provide enhanced network reliability, increased capacity and smaller,
more-tightly integrated communications and networking gear.

We are the prime contractor for the HMS program, which provides

networking radios that give soldiers secure, mobile voice, video and
data communications capabilities, similar to those available through

commercial cellular networks. The Rifleman radio has been deployed in
Afghanistan with the Army’s 75th Ranger Regiment and 10th Mountain
Division. The Manpack radio has demonstrated its capabilities through
extensive government tests and the Army has announced plans to field
it to five brigade combat teams in 2013. The Army has purchased more
than 26,000 HMS radios from us and plans to procure competitively
more than 240,000 over the life of the program.

Information Systems and Technology delivers similar communications

and information-sharing benefits to many federal civilian customers.
Since 2001, we have delivered more than 13,500 radios to the FAA,
allowing air traffic controllers to communicate with commercial and
military aircraft throughout the nation’s airspace, and we were recently
awarded a contract to provide the FAA updated radios using the latest
in communications technology.

We also provide many of these tactical communications capabilities
to non-U.S. customers, including the Canadian Department of National
Defence, the U.K. Ministry of Defence and public agencies and private
companies in Europe and the Middle East. For example, we designed,
procured, integrated and installed the telecommunications, security and
control systems for the newly operating Khalifa Port in the United Arab
Emirates, helping to make it among the most technologically advanced
ports in the world.

Information technology solutions and mission support services –

We provide mission-critical information technology (IT) and highly
specialized mission-support services to the U.S. defense and
intelligence communities; the Departments of Homeland Security and
Health and Human Services and other federal civilian agencies; and
commercial and international customers. We support the IT lifecycle
from design and integration to operation and maintenance. We
specialize in:

• mission-operations simulation and training systems and

services,

• large-scale data center optimization and modernization,
• network operations and maintenance,
• health information technology solutions and services, and
• secure wireless and wire-line networks and enterprise infrastructure.

In this market, Information Systems and Technology has a long-

standing reputation for excellence in providing technical-support
personnel and domain specialists, many of whom possess high-level
clearances, to help customers execute their missions effectively.
Frequently, our employees are the on-call staff that provides technical
support for commercial desktop technology and mission-specific
hardware. For example, we operate approximately 20 security
operations centers and 15 critical incident response teams. Our
employees also develop, install and operate mission systems on a daily
basis. We are also at the forefront of cloud technologies and services.

General Dynamics Annual Report 2012

Information Systems and Technology supplies network-modernization

Information Systems and Technology has a 50-year legacy of

and IT infrastructure services to U.S. government customers,
commercial wireless network providers and federal, state and local
public safety agencies. We work closely with our customers to ensure
these network infrastructures are secure, efficient, scalable and cost-
effective. We are currently providing full enterprise support in the
relocation of the Department of Homeland Security’s headquarters to
the St. Elizabeths campus in Washington, D.C., including establishing a
state-of-the-art IT infrastructure.

The group is also a leading provider of IT solutions in the fast-

growing market for government and commercial healthcare technology
modernization. Our offerings include data management, analytics,
fraud prevention and detection software, decision support, process
automation solutions and program management solutions for deployed
IT military health systems. For the Centers for Medicare & Medicaid
Services, we are supporting the government’s implementation of
healthcare reform and medical benefits programs by delivering an
automated Medicare claim adjudication system that efficiently manages
the large volume of medical and healthcare claims. We also provide
critical citizen services, including support for Medicare claims, contact
center services, and student loan processing and administration for the
Department of Education.

Intelligence, surveillance and reconnaissance systems – We provide

mission systems development, integration and operations support to
customers in the U.S. defense, intelligence and homeland security
communities, and to U.S. allies. These offerings include:

• cyber security services and products;
• open-architecture mission systems;
• signals and information collection, processing and

distribution systems;

• imagery solutions, sensors and cameras; and
• special-purpose computing.

Information Systems and Technology’s experience in securing and
protecting government organizations from network attacks has resulted
in a market-leading position in cyber security. The group offers a
range of cyber security services and products that help government
and commercial customers protect their networks and prevent data
breaches by providing real-time network visibility. For example, we are a
principal support contractor for the Department of Homeland Security’s
U.S. Computer Emergency Readiness Team, which provides defense
against and response to cyber attacks for U.S. executive branch
agencies. We also leverage our expertise to provide investigative,
forensic and network remediation services to commercial victims of
cyber attacks, including retail and financial services firms.

providing advanced fire control systems for Navy submarine programs
and is developing and integrating commercial off-the-shelf software
and hardware upgrades to improve the tactical control capabilities for
several submarine classes. This initiative leads the implementation of
the Navy’s open-architecture approach on submarines with a design
that emphasizes shared standards, providing greater interoperability,
scalability and supplier independence. Capitalizing on this expertise and
open-architecture approach, we developed the combat and seaframe
control systems and are the lead systems integrator for the Navy’s
Independence-class Littoral Combat Ship (LCS). We are also designing,
integrating and testing the electronic systems for the Navy’s 10-ship
Joint High Speed Vessel program.

The group’s three principal markets continue to be driven by the
expanding needs of our diverse customer base, including improved
mobile communications and real-time intelligence, IT network and
business system consolidation and modernization, cyber security
services and emergency response systems and services.

Revenues for the Information Systems and Technology group were
36 percent of our consolidated revenues in 2010, 34 percent in 2011
and 32 percent in 2012. Revenues by major products and services
were as follows:

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

2012

Mobile communication systems

$ 5,134 $ 4,511

$ 3,425

IT solutions and mission support
services

Intelligence, surveillance and
reconnaissance systems

Total Information Systems and
Technology

4,262

4,601

4,545

2,216

2,109

2,047

$ 11,612

$ 11,221

$ 10,017

CUSTOMERS

In 2012, 66 percent of our revenues were from the U.S. government,
13 percent were from U.S. commercial customers, 8 percent were from
international defense customers, and the remaining 13 percent were
from international commercial customers.

U . S . G O V E R N M E N T
Our primary customers are the U.S. Department of Defense (DoD) and
intelligence community. We also contract with other U.S. government
customers, including the Department of Homeland Security, Department
of Health and Human Services, Centers for Medicare & Medicaid
Services and several first-responder agencies.

General Dynamics Annual Report 2012

Our revenues from the U.S. government were as follows:

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

2012

DoD

Non-DoD

Foreign Military Sales (FMS)*

Total U.S. government
Percent of total revenues

$ 20,446

$ 19,221

1,941

876

2,212

1,170

$ 17,217
2,382

1,206

$ 23,263

$ 22,603

$ 20,805

72%

69%

66%

* In addition to our direct international sales, we sell to foreign governments through the FMS

program. Under the FMS program, we contract with and are paid by the U.S. government and
the U.S. government assumes the risk of collection from the foreign government customer.

We perform our U.S. government business under fixed-price, cost-

reimbursement and time-and-materials contracts. Our production
contracts are primarily fixed-price. Under these contracts, we agree
to perform a specific scope of work for a fixed amount. Contracts for
research, engineering, repair and maintenance and other services
are typically cost-reimbursement or time-and-materials. Under cost-
reimbursement contracts, the customer reimburses contract costs and
pays a fixed fee or an incentive- or award-based fee. These fees are
determined by our ability to achieve targets set in the contract, such
as cost, quality, schedule and performance. Under time-and-materials
contracts, the customer pays a fixed hourly rate for direct labor and
reimburses us for material costs.

Fixed-price contracts accounted for approximately 55 percent of
our U.S. government business in 2011 and 56 percent in 2012; cost-
reimbursement contracts accounted for approximately 38 percent
in 2011 and 39 percent in 2012; and time-and-materials contracts
accounted for approximately 7 percent in 2011 and 5 percent in 2012.
Each of these contract types presents advantages and disadvantages.

Fixed-price contracts typically have higher fee levels as we assume
more risks, such as any cost overruns under our control. These types of
contracts offer additional profits when we complete the work for less than
the contract amount. Cost-reimbursement contracts generally subject us
to lower risk. Accordingly, the negotiated base fees are usually lower than
on fixed-price contracts. Cost-reimbursement contracts also can include
fee provisions that allow the customer to make additional payments when
we satisfy specific performance criteria. Additionally, not all costs are
allowable under these types of contracts and the government carefully
reviews the costs we charge. Under time-and-materials contracts, our profit
may vary if actual labor-hour costs vary significantly from the negotiated
rates. Additionally, because these contracts can provide little or no fee for
managing material costs, the content mix can impact the profit margins.

U . S . C O M M E R C I A L
Our U.S. commercial revenues were $3.2 billion in 2010, $3.8 billion
in 2011 and $4.2 billion in 2012. This represented approximately 10
percent of our consolidated revenues in 2010, 12 percent in 2011 and

13 percent in 2012. The majority of these revenues are for business-jet
aircraft and services 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, Jones Act ships in
our Marine Systems group and a variety of products and services in our
Information Systems and Technology group.

I N T E R N AT I O N A L
Our direct revenues from government and commercial customers
outside the United States were $6 billion in 2010, $6.3 billion in 2011
and $6.5 billion in 2012. This represented approximately 18 percent of
our consolidated revenues in 2010, 19 percent in 2011 and 21 percent
in 2012.

We conduct business with government customers around the world
with primary subsidiary operations in Australia, Brazil, Canada, France,
Germany, Italy, Mexico, Spain, Switzerland and the United Kingdom. Our
non-U.S. defense subsidiaries are committed to maintaining long-term
relationships with their respective governments and have distinguished
themselves as principal regional suppliers and employers.

Our international commercial business consists primarily of
business-jet aircraft exports and worldwide aircraft services. The
market for business-jet aircraft and related services outside North
America has expanded significantly in recent years, particularly in
emerging markets. While the installed base of aircraft is concentrated
in North America, orders from international customers represent
a growing segment of our aircraft business with approximately
60 percent of total backlog in 2012.

For a discussion of the risks associated with conducting business in
international locations, see Risk Factors contained in Part I, Item 1A, of
this Annual Report on Form 10-K. For information regarding revenues
and assets by geographic region, see Note Q to the Consolidated
Financial Statements contained in Part II, Item 8, of this Annual Report
on Form 10-K.

COMPETITION

Several factors determine our ability to compete successfully in the
defense and business-aviation markets. While customers’ evaluation
criteria vary, the principal competitive elements include:

• the technical excellence, reliability and cost competitiveness of our

products and services;

• our ability to innovate and develop new products and technology that

improve mission performance and adapt to dynamic threats;
• successful program execution and on-time delivery of complex,

integrated systems;

• our global footprint and accessibility to customers;

General Dynamics Annual Report 2012

• our indigenous presence in the countries of several key customers;
• the reputation and customer confidence derived from our past

performance; and

• the successful management of customer relationships.

D E F E N S E M A R K E T C O M P E T I T I O N
The U.S. government contracts with numerous domestic and foreign
companies for products and services. We compete against other
large platform and system-integration contractors as well as smaller
companies that specialize in a particular technology or capability.
Internationally, we compete with global defense contractors’ exports
and the offerings of private and state-owned defense manufacturers
based in the countries where we operate. Our Combat Systems group
competes with a large number of domestic and foreign businesses.
Our Marine Systems group has one primary competitor with which it
also partners on the Virginia-class submarine program. Our Information
Systems and Technology group competes with many companies, from
large defense companies to small niche competitors with specialized
technologies. The operating cycle of many of our major platform
programs can result in sustained periods of program continuity when
we perform successfully.

We are involved in teaming and subcontracting relationships with
some of our competitors. Competitions for major defense programs often
require companies to form teams to bring together broad capabilities to
meet the customer’s requirements. Opportunities associated with these
programs include roles as the program’s integrator, overseeing and
coordinating the efforts of all participants on the team, or as a provider
of a specific program component or subsystem element.

B U S I N E S S - J E T A I R C R A F T M A R K E T C O M P E T I T I O N
The Aerospace group has several competitors for each of its Gulfstream
products, with more competitors for the shorter-range aircraft. Key
competitive factors include aircraft safety, reliability and performance;
comfort and in-flight productivity; service quality, global footprint and
responsiveness; technological and new-product innovation; and price.
We believe that Gulfstream competes effectively in all of these areas.
The Aerospace group competes worldwide in its business-jet aircraft
services business primarily on the basis of price, quality and timeliness.
In its maintenance, repair and FBO businesses, the group competes with
several other large companies as well as a number of smaller companies,
particularly in the maintenance business. In its completions business, the
group competes with other OEMs, as well as third-party providers.

BACKLOG

Our total backlog represents the estimated remaining value of work to be performed under firm contracts and includes funded and unfunded portions.
For additional discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II,
Item 7, of this Annual Report on Form 10-K.
Summary backlog information for each of our business groups follows:

D e c e m b e r 3 1

Aerospace

Combat Systems

Marine Systems

Information Systems and Technology

2011

Funded

Unfunded

Total

$ 17,618

$ 289

$ 17,907

10,283

9,364

7,434

1,137

9,140

2,145

11,420

18,504

9,579

Funded

$ 15,458

7,442

13,495

8,130

2012

Unfunded

$ 209

1,298

3,606

1,643

Total backlog

$ 44,699

$ 12,711

$ 57,410

$ 44,525

$ 6,756

2012 Total
Backlog Not
Expected to Be
Completed in
2013

$ 9,886

3,221

11,323

2,799

$ 27,229

Total
$ 15,667
8,740
17,101
9,773

$ 51,281

General Dynamics Annual Report 2012

RESEARCH AND DEVELOPMENT

To foster innovative product development and evolution, we conduct
sustained R&D activities 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-sponsored R&D.
In accordance with government regulations, we recover a significant
portion of company-sponsored R&D expenditures through overhead
charges to U.S. government contracts. For more information on our
R&D activities, including our expenditures for the past three years, see
Note A to the Consolidated Financial Statements contained in Part II,
Item 8, of this Annual Report on Form 10-K.

INTELLECTUAL PROPERTY

We develop technology, manufacturing processes and systems-integration
practices. In addition to owning a large portfolio of proprietary intellectual
property, we license some intellectual property rights to and from others.
The U.S. government holds licenses to many of our patents developed in
the performance of U.S. government contracts, and it may use or authorize
others to use the inventions covered by these patents. Although these
intellectual property rights are important to the operation of our business,
no existing patent, license or other intellectual property right is of such
importance that its loss or termination would have a material impact on
our business.

EMPLOYEES

On December 31, 2012, we and our subsidiaries had 92,200
employees, approximately one-fifth of whom work under collective
agreements with various labor unions and worker representatives.
Agreements covering approximately 6 percent of total employees
are due to expire in 2013. Historically, we have renegotiated labor
agreements without any significant disruption to operating activities.

RAW MATERIALS, SUPPLIERS AND

SEASONALITY

long-term agreements and leveraging company-wide agreements to
achieve economies of scale, and by negotiating flexible pricing terms in
our customer contracts. We have not experienced, and do not foresee,
significant difficulties in obtaining the materials, components or supplies
necessary for our business operations.

Our business is not generally seasonal in nature. The timing of
contract awards, the availability of funding from the customer, the
incurrence of contract costs and unit deliveries are the primary drivers
of our revenue recognition. In the United States, these factors are
influenced by the federal government’s budget cycle. Internationally,
work for many of our government customers is weighted toward the
end of the calendar year, generally resulting in increasing revenues and
earnings over the course of the year.

REGULATORY MATTERS

U . S . G O V E R N M E N T C O N T R A C T S
U.S. government contracts are subject to procurement laws and
regulations. The Federal Acquisition Regulation (FAR) and the Cost
Accounting Standards (CAS) govern the majority of our contracts. The
FAR mandates uniform policies and procedures for U.S. government
acquisitions and purchased services. Also, individual agencies can have
acquisition regulations that provide implementing language for the FAR
or that supplement the FAR. For example, the DoD implements the
FAR through the Defense Federal Acquisition Regulation supplement
(DFARs). For all federal government entities, the FAR regulates the
phases of any product or service acquisition, including:

• acquisition planning,
• competition requirements,
• contractor qualifications,
• protection of source selection and vendor information, and
• acquisition procedures.

In addition, the FAR addresses the allowability of our costs, while the

CAS address how those costs can be allocated to contracts. The FAR
subjects us to audits and other government reviews covering issues
such as cost, performance and accounting practices relating to our
contracts.

We depend on suppliers and subcontractors for raw materials,
components and subsystems. These supply networks can experience
price fluctuations and capacity constraints, which can put pressure
on our costs. Effective management and oversight of suppliers and
subcontractors is an important element of our successful performance.
We attempt to mitigate these risks with our suppliers by entering into

I N T E R N AT I O N A L
Our international sales are subject to the applicable foreign government
regulations and procurement policies and practices, as well as U.S.
policies and regulations. We are also subject to regulations governing
investments, exchange controls, repatriation of earnings and import-
export control.

General Dynamics Annual Report 2012

B U S I N E S S - J E T A I R C R A F T
The Aerospace group is subject to FAA regulation in the United
States and other similar aviation regulatory authorities internationally,
including the Civil Aviation Administration of Israel (CAAI), the European
Aviation Safety Agency (EASA) and the Civil Aviation Administration of
China (CAAC). For an aircraft to be manufactured and sold, the model
must receive a type certificate from the appropriate aviation authority
and each aircraft must receive a certificate of airworthiness. Aircraft
outfitting and completions also require approval by the appropriate
aviation authority, which often is accomplished through a supplemental
type certificate. Aviation authorities can require changes to a specific
aircraft or model type before granting approval. Maintenance facilities
and charter operations must be licensed by aviation authorities as well.

E N V I R O N M E N TA L
We are subject to a variety of federal, state, local and foreign
environmental laws and regulations. These laws and regulations
cover the discharge, treatment, storage, disposal, investigation and
remediation of certain materials, substances and wastes. We are directly
or indirectly involved in environmental investigations or remediation
at some of our current and former facilities and at third-party sites
that we do not own but where we have been designated a Potentially
Responsible Party (PRP) by the U.S. Environmental Protection Agency or
a state environmental agency. As a PRP, we potentially are liable to the
government or third parties for the cost of remediating contamination
at a relevant site. In cases where we have been designated a PRP,
generally we seek to mitigate these environmental liabilities through
available insurance coverage and by pursuing appropriate cost-
recovery actions. In the unlikely event we are required to fully fund
the remediation of a site, the current statutory framework would allow
us to pursue contributions from other PRPs. We regularly assess our
compliance status and management of environmental matters.

Operating and maintenance costs associated with environmental

compliance and management of contaminated sites are a normal,
recurring part of our operations. Historically, these costs have not been
material. Environmental costs often are recoverable under our contracts
with the U.S. government. Based on information currently available and
current U.S. government policies relating to cost recovery, we do not
expect continued compliance with environmental regulations to have a
material impact on our results 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 contained
in Part II, Item 8, of this Annual Report on Form 10-K.

AVAILABLE INFORMATION

We file several types of reports and other information with the
Securities and Exchange Commission (SEC) pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended. These
reports and information include an annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and
proxy statements. Free copies of these items are made available
on our website (www.generaldynamics.com) as soon as practicable
and through the General Dynamics investor relations office at
(703) 876-3583.
These items also can be read and copied at the SEC’s Public
Reference Room at 100 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.

ITEM 1A. RISK FACTORS

An investment in our common stock or debt securities is subject to risks
and uncertainties. Investors should consider the following factors, in
addition to the other information contained in this Annual Report on Form
10-K, before deciding whether to purchase our securities.

Investment risks can be market-wide as well as unique to a specific
industry or company. The market risks faced by an investor in our stock
are similar to the uncertainties faced by investors in a broad range
of industries. There are some risks that apply more specifically to our
business.

Because three of our four business groups serve the defense market,
our revenues are concentrated with the U.S. government. This customer
relationship involves some specific risks. In addition, our sales to
international customers expose us to different financial and legal risks.
Despite the varying nature of our U.S. and international defense and
business-aviation operations and the markets they serve, each group
shares some common risks, such as the ongoing development of high-
technology products and the price, availability and quality of commodities
and subsystems.
The U.S. government provides a significant portion of our
revenues. In each of the past three years, approximately two-thirds of
our revenues were from the U.S. government. U.S. defense spending
is driven by threats to national security. While the country has been
under an elevated threat level for more than a decade, competing
demands for federal funds could pressure all areas of spending.
A decrease in U.S. government defense spending or changes in
spending allocation could result in one or more of our programs being
reduced, delayed or terminated, which could have some impact on our
financial performance.

General Dynamics Annual Report 2012

Several factors are currently affecting U.S. defense spending,
including:

• the fact that the Congress has not passed a fiscal year (FY) 2013
budget, resulting in the U.S. government, including the DoD,
operating under a continuing resolution (CR) that provides funding
at FY 2012 levels through March 2013;
• a $487 billion, or approximately 8 percent, reduction to previously-
planned defense funding over the next decade as mandated by the
Budget Control Act of 2011 (BCA). These cuts were incorporated

into the FY 2013 proposed defense budget; and

• a sequester mechanism, also part of the BCA, that would impose
an additional $500 billion of defense cuts over nine years starting
in FY 2013, which represents approximately 9 percent of planned

defense funding over the period.

While we are unable to predict the exact impact on our programs
or financial outlook, these factors, particularly the funding reductions
of the magnitude imposed by the sequester mechanism as written,
could in the aggregate have material adverse operational and financial
consequences, depending on how the cuts are allocated across the
budget. Due to its shorter-cycle businesses, the Information Systems
and Technology outlook is more sensitive than our other defense
groups to any additional budget cuts that may occur. For additional
information relating to the U.S. defense budget, see the Business
Environment section of Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in Part II,
Item 7, of this Annual Report on Form 10-K.

U.S. government contracts are not always fully funded at
inception and are subject to termination. Our U.S. government
revenues are funded by agency budgets that operate on an October-
to-September fiscal year. Early each calendar year, the President of the
United States presents to the Congress the budget for the upcoming
fiscal year. This budget proposes funding levels for every federal agency
and is the result of months of policy and program reviews throughout
the Executive branch. For the remainder of the year, the appropriations
and authorization committees of the Congress review the President’s
budget proposals and establish the funding levels for the upcoming
fiscal year. Once these levels are enacted into law, the Executive Office
of the President administers the funds to the agencies.
There are two primary risks associated with the U.S. government
budget cycle. First, the annual process may be delayed or disrupted.
For example, changes in congressional schedules due to elections
or other legislative priorities, or negotiations for program funding
levels can interrupt the process. If the annual budget is not approved
by the beginning of the government fiscal year, portions of the U.S.
government can shut down or operate under a CR that maintains

spending at prior year levels, which can impact funding for our
programs and timing of new awards. Second, the Congress typically
appropriates funds on a fiscal-year basis, even though contract
performance may extend over many years. Future revenues under
existing multi-year contracts are conditioned on the continuing
availability of congressional appropriations. Changes in appropriations
in subsequent years may impact the funding available for these
programs. Delays or changes in funding can impact the timing of
available funds or lead to changes in program content.

In addition, U.S. government contracts generally permit the

government to terminate a contract, in whole or in part, for convenience.
If a contract is terminated for convenience, a contractor usually
is entitled to receive payments for its allowable costs and the
proportionate share of fees or earnings for the work performed. The
government may also terminate a contract for default in the event of
a breach by the contractor. If a contract is terminated for default, the
government in most cases pays only for the work it has accepted.
The loss of anticipated funding or the termination of multiple or large
programs could have a material adverse effect on our future revenues
and earnings.

Government contractors are subject to audit by the U.S.
government. U.S. government agencies routinely audit and review
government contractors. These agencies review a contractor’s
performance under its contracts and compliance with applicable laws,
regulations and standards. The U.S. government also reviews the
adequacy of, and a contractor’s compliance with, its internal control
systems and policies, including the contractor’s purchasing, property,
estimating, labor, accounting and information systems. In some
cases, audits may result in contractor costs not being reimbursed
or subject to repayment. If an audit or investigation were to result in
allegations against a contractor of improper or illegal activities, civil or
criminal penalties and administrative sanctions could result, including
termination of contracts, forfeiture of profits, suspension of payments,
fines, and suspension or prohibition from doing business with the U.S.
government. In addition, reputational harm could result if allegations of
impropriety were made.

Our Aerospace group is subject to changing customer
demand for business aircraft. 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 results also depend
on other factors, including general economic conditions, the availability
of credit and trends in capital goods markets. In addition, if customers
default on existing contracts and the contracts are not replaced, the
group’s anticipated revenues and profitability could be materially
reduced as a result.

General Dynamics Annual Report 2012

Earnings and margins depend on our ability to perform
under our contracts. When agreeing to contractual terms, our
management team makes assumptions and projections about future
conditions or events. These projections assess:

in-country purchases, manufacturing agreements or financial support
arrangements, known as offsets, that require us to satisfy certain
requirements. If we do not satisfy these requirements, our future
revenues and earnings may be materially adversely affected.

• the productivity and availability of labor,
• the complexity of the work to be performed,
• the cost and availability of materials and components, and
• schedule requirements.

If there is a significant change in one or more of these
circumstances or estimates, or if the risks under our contracts
are not managed adequately, the profitability of our contracts may
be adversely affected. This could affect our earnings and margins
materially.

Our earnings and margins depend in part on subcontractor
and vendor performance. We rely on other companies to
provide materials, components and subsystems for our products.
Subcontractors also perform some of the services that we provide
to our customers. We depend on these subcontractors and vendors
to meet our contractual obligations in full compliance with customer
requirements. We manage our supplier base carefully to avoid
customer problems. However, we sometimes rely on only one or two
sources of supply that, if disrupted, could have an adverse effect on
our ability to meet our customer commitments. Our ability to perform
our obligations as a prime contractor may be adversely affected if
one or more of these suppliers is unable to provide the agreed-upon
supplies or perform the agreed-upon services in a timely and cost-
effective manner.

International sales and operations are subject to different,

and sometimes greater, risks that may be associated with
doing business in foreign countries. In some countries there
is increased chance for economic, legal or political changes, and
procurement procedures may be less robust or mature, which may
complicate the contracting process. Our international business
may be sensitive to changes in a foreign government’s budgets,
leadership and national priorities, including the current European
fiscal condition. International transactions can involve increased
financial and legal risks arising from foreign exchange-rate variability
and differing legal systems. An unfavorable event or trend in any one
or more of these factors could materially adversely affect revenues
and earnings associated with our international business. In addition,
some international government customers require contractors to
enter into letters of credit, performance or surety bonds, bank
guarantees and other similar arrangements or to agree to specific

Our future success depends, in part, on our ability to
develop new products and technologies and maintain a
qualified workforce to meet the needs of our customers.
Many of the products and services we provide involve sophisticated
technologies and engineering, with related complex manufacturing and
system integration processes. Our customers’ requirements change
and evolve regularly. Accordingly, our future performance depends, in
part, on our ability to continue to develop, manufacture and provide
innovative products and services and bring those offerings to market
quickly at cost-effective prices. Because of the highly specialized
nature of our business, we must hire and retain the skilled and
qualified personnel necessary to perform the services required by
our customers. If we are unable to develop new products that meet
customers’ changing needs or successfully attract and retain qualified
personnel, our future revenues and earnings may be materially
adversely affected.

We have made and expect to continue to make investments,
including acquisitions and joint ventures, that involve risks and
uncertainties. When evaluating potential mergers and acquisitions,
we make judgments regarding the value of business opportunities,
technologies and other assets and the risks and costs of potential
liabilities based on information available to us at the time of the
transaction. Whether we realize the anticipated benefits from these
transactions depends on multiple factors, including our integration of
the businesses involved, the performance of the underlying products,
capabilities or technologies, market conditions following the acquisition
and acquired liabilities. These factors could materially adversely affect
our financial results, including future impairment charges.

Our business could be negatively impacted by cyber
security events and other disruptions. As a defense contractor,
we face various cyber security threats, including threats to our
information technology infrastructure and attempts to gain access to
our proprietary or classified information, as well as threats to physical
security. We also design and manage information technology systems
for various customers. We generally face the same security threats for
these systems as for our own. Accordingly, we maintain information
security policies and procedures for managing all systems. If any of
these threats were to materialize, the event could cause harm to our
business and our reputation and challenge our eligibility for future
work on sensitive or classified systems for U.S. government customers,
as well as negatively impact our results of operations materially.

General Dynamics Annual Report 2012

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements
that are based on management’s expectations, estimates, projections
and assumptions. Words such as “expects,” “anticipates,” “plans,”
“believes,” “scheduled,” “outlook,” “estimates,” “should” and variations
of these words and similar expressions are intended to identify forward-
looking statements. These include but are not limited to projections of
revenues, earnings, operating margins, segment performance, cash
flows, contract awards, aircraft production, deliveries and backlog.
Forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, as
amended. These statements are not guarantees of future performance
and involve certain risks and uncertainties that are difficult to predict.
Therefore, actual future results and trends may differ materially from
what is forecast in forward-looking statements due to a variety of factors,
including, without limitation, the risk factors discussed in this section.
All forward-looking statements speak only as of the date of this
report or, in the case of any document incorporated by reference, the
date of that document. All subsequent written and oral forward-looking
statements attributable to General Dynamics or any person acting on
our behalf are qualified by the cautionary statements in this section.
We do not undertake any obligation to update or publicly release any
revisions to forward-looking statements to reflect events, circumstances
or changes in expectations after the date of this report.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We operate in a number of offices, manufacturing plants, laboratories,
warehouses and other facilities in the United States and abroad. We
believe our facilities are adequate for our present needs and, given
planned improvements and construction, expect them to remain
adequate for the foreseeable future.
On December 31, 2012, our business groups had primary operations
at the following locations:

• Aerospace – Lincoln and Long Beach, California; West Palm Beach,
Florida; Brunswick and Savannah, Georgia; Cahokia, Illinois; Bedford
and Westfield, Massachusetts; Las Vegas, Nevada; Teterboro, New
Jersey; Dallas and Houston, Texas; Appleton, Wisconsin; Sorocaba,
Brazil; Beijing and Hong Kong, China; Dusseldorf, Germany; Mexicali,
Mexico; Moscow, Russia; Singapore; Basel, Geneva and Zurich,
Switzerland; Dubai, United Arab Emirates; Luton, United Kingdom.

• Combat Systems – Anniston, Alabama; East Camden and Hampton,
Arkansas; Healdsburg, California; Crawfordsville, St. Petersburg
and Tallahassee, Florida; Chicago and Marion, Illinois; Saco, Maine;
Westminster, Maryland; Shelby Township, Sterling Heights and Troy,
Michigan; Joplin, Missouri; Lincoln, Nebraska; Charlotte, North
Carolina; Lima, Ohio; Eynon, Red Lion and Scranton, Pennsylvania;
Edgefield and Ladson, South Carolina; Garland, Texas; Burlington
and Williston, Vermont; Marion and Woodbridge, Virginia; Auburn,
Washington; Oshkosh, Wisconsin; Vienna, Austria; Edmonton, London,
La Gardeur, St. Augustin and Valleyfield, Canada; St. Etienne, France;
Kaiserslautern, Germany; Granada, La Coruna, Oviedo, Sevilla and
Trubia, Spain; Kreuzlingen, Switzerland.

• Marine Systems – San Diego, California; Groton and New London,
Connecticut; Jacksonville, Florida; Bath and Brunswick, Maine;
North Kingstown, Rhode Island; Chesapeake and Norfolk, Virginia;
Mexicali, Mexico.

• Information Systems and Technology – Cullman, Alabama;
Phoenix and Scottsdale, Arizona; San Diego and Santa Clara,
California; Colorado Springs, Colorado; Orlando and Tampa, Florida;
Coralville, Iowa; Lawrence, Kansas; Annapolis Junction and Towson,
Maryland; Needham, Pittsfield and Taunton, Massachusetts; Ypsilanti,
Michigan; Bloomington, Minnesota; Nashua, New Hampshire;
Florham Park, New Jersey; Greensboro and Newton, North Carolina;
Kilgore, Texas; Arlington, Chantilly, Chesapeake, Fairfax, Herndon and
Richmond, Virginia; Calgary and Ottawa, Canada; Tallinn, Estonia;
Oakdale, St. Leonards, Tewkesbury and Throckmorton, United Kingdom.

A summary of floor space by business group on December 31,
2012, follows:

( S q u a r e f e e t i n m i l l i o n s )

Company-owned
Facilities

Leased Government-owned
Facilities

Facilities

Aerospace

Combat Systems

Marine Systems

Information Systems
and Technology

Total

4.3

8.3

8.2

3.2

24.0

4.2

5.3

2.2

8.6

20.3

–

7.7

–

0.9

8.6

Total

8.5

21.3

10.4

12.7

52.9

ITEM 3. LEGAL PROCEEDINGS

For information relating to legal proceedings, see Note N to the
Consolidated Financial Statements contained in Part II, Item 8, of this
Annual Report on Form 10-K.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

General Dynamics Annual Report 2012

PART II

ITEM 5. MARKET FOR THE COMPANY’S COMMON

EQUITY, RELATED STOCKHOLDER MATTERS AND

ISSUER PURCHASES OF EQUITY SECURITIES

$ 140

Cumulative Total Return
Based on Investment of $100 Beginning December 31, 2007
(Assumes Reinvestment of Dividends)

nt
l

t
nl

n
t

2007

2008

2009

2010

2011

2012

General Dynamics

S&P Aerospace & Defense

S&P 500

120

100

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 2011
and 2012 are included in the Supplementary Data contained in Part II,
Item 8, of this Annual Report on Form 10-K.

On January 27, 2013, there were approximately 14,000 holders of

record of our common stock.

For information regarding securities authorized for issuance under

our equity compensation plans, see Note O to the Consolidated
Financial Statements contained in Part II, Item 8, of this Annual Report
on Form 10-K.

We did not make any unregistered sales of equity securities in 2012.
On June 7, 2012, with 2.4 million shares remaining under a prior

authorization, the board of directors authorized management to
repurchase 10 million shares of common stock on the open market. We
did not repurchase any shares in the fourth quarter and approximately
10.9 million shares remain authorized for repurchase. Unless
terminated or extended earlier by resolution of the board of directors,
the program will expire when the number of authorized shares has been
repurchased.

For additional information relating to our repurchases of common
stock during the past three years, see Financial Condition, Liquidity and
Capital Resources – Financing Activities – Share Repurchases contained
in Part II, Item 7, of this Annual Report on Form 10-K.

The following performance graph compares the cumulative total
return to shareholders on our common stock, assuming reinvestment
of dividends, with similar returns for the Standard & Poor’s® 500 Index
and the Standard & Poor’s® Aerospace & Defense Index, both of which
include General Dynamics.

General Dynamics Annual Report 2012

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial data derived from the Consolidated Financial Statements and other company information for each
of the five years presented. This 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.

( D o l l a r s a n d s h a r e s i n m i l l i o n s , e x c e p t p e r - s h a r e a n d e m p l o y e e a m o u n t s )

2008

2009

2010

2011

2012

Summary of Operations
Revenues
Operating earnings
Operating margin
Interest, net
Provision for income taxes, net
Earnings (loss) from continuing operations
Return on sales (a)
Discontinued operations, net of tax
Net earnings (loss)
Diluted earnings (loss) per share:
Continuing operations (b)
Net earnings (loss) (b)

Cash Flows
Net cash provided by operating activities
Net cash used by investing activities
Net cash used by financing activities
Net cash used by discontinued operations
Cash dividends declared per common share

Financial Position
Cash and equivalents
Total assets
Short- and long-term debt
Shareholders’ equity
Debt-to-equity (c)
Book value per share (d)
Operating working capital (e)

Other Information
Free cash flow from operations (f)
Return on invested capital (g)
Funded backlog
Total backlog
Shares outstanding
Weighted average shares outstanding:
Basic
Diluted
Employees
Sales per employee (h)

$ 29,300
3,653
12.5%
(66)
1,126
2,478
8.5%
(19)
2,459

6.22
6.17

$ 3,124
(3,663)
(718)
(13)
1.40

$ 1,621
28,373
4,024
10,053
40.0%
26.00
624

$ 2,634
18.5%
51,712
74,127
386.7

396.2
398.7
92,300
342,600

$ 31,981
3,675
11.5%
(160)
1,106
2,407
7.5%
(13)
2,394

$ 32,466
3,945
12.2%
(157)
1,162
2,628
8.1%
(4)
2,624

$ 32,677
3,826
11.7%
(141)
1,166
2,552
7.8%
(26)
2,526

6.20
6.17

6.82
6.81

6.94
6.87

$ 2,855
(1,392)
(806)
(15)
1.52

$ 2,263
31,077
3,864
12,423
31.1%
32.21
948

$ 2,470
17.8%
45,856
65,545
385.7

385.5
387.9
91,700
346,500

$ 2,986
(408)
(2,226)
(2)
1.68

$ 2,613
32,545
3,203
13,316
24.1%
35.79
1,104

$ 2,616
17.5%
43,379
59,561
372.1

381.2
385.2
90,000
358,100

$ 3,238
(1,974)
(1,201)
(27)
1.88

$ 2,649
34,883
3,930
13,232
29.7%
37.12
1,195

$ 2,780
16.5%
44,699
57,410
356.4

364.1
367.5
95,100
358,600

$ 31,513
833
2.6%
(156)
873
(332)
(1.1)%
—
(332)

(0.94)
(0.94)

$ 2,687
(656)
(1,382)
(2)
2.04

$ 3,296
34,309
3,909
11,390
34.3%
32.20
746

$ 2,237
(0.4)%
44,525
51,281
353.7

353.3
353.3
92,200
337,300

(a) Return on sales is calculated as earnings (loss) from continuing operations divided by revenues.
(b) 2012 amounts exclude dilutive effect of stock options and restricted stock as it would be antidilutive.
(c) Debt-to-equity ratio is calculated as total debt divided by total equity as of year end.
(d) Book value per share is calculated as total equity divided by total outstanding shares as of year end.
(e) Operating working capital is calculated as accounts receivable, contracts in process (excluding “other contract costs” – see Note G to the Consolidated Financial Statements in Item 8)

and inventories less accounts payable, customer advances and deposits, and liabilities for salaries and wages.

(f) See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a reconciliation of net cash provided by operating activities to free cash flow from

operations.

(g) See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the calculation of return on invested capital.
(h) Sales per employee is calculated as revenues for the past 12 months divided by the average number of employees for the period.

General Dynamics Annual Report 2012

(Dollars in millions, except per-share amounts or unless otherwise noted)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

For an overview of our business groups, including a discussion of
products and services provided, see the Business discussion contained
in Part I, Item 1, of this Annual Report on Form 10-K.

BUSINESS ENVIRONMENT

As approximately two-thirds of our revenues are from the U.S.
government, our financial performance is impacted by the level of
U.S. defense spending. Currently, the U.S. government, including the
Department of Defense (DoD), is operating under a continuing resolution
(CR) that provides funding at fiscal year (FY) 2012 levels through
March 2013. A CR does not generally fund new program starts or new
multi-year contracts. A series of CRs over the past several years has
negatively impacted the flow of contract awards, particularly in our
shorter-cycle Information Systems and Technology business group.
While U.S. military budgets are generally driven by national security
requirements, the country’s current fiscal shortfall is negatively
influencing defense spending. The Budget Control Act of 2011 (BCA)
mandated a $487 billion, or approximately 8 percent, reduction to
previously-planned defense funding over the next decade. These cuts
were incorporated into the FY 2013 proposed defense budget. In
addition, the BCA included a sequester mechanism that would impose
an additional $500 billion of defense cuts over nine years starting in FY
2013, which represents approximately 9 percent of planned defense
funding over the period. If sequestration is triggered, the FY 2013
defense budget could be lowered by as much as $40 to $50 billion,
or approximately 9 percent. However, how these reductions would be
implemented has not been defined. Congress recently extended the
deadline for resolving sequestration to March 1, 2013. As of February 7,
2013, a solution has not been identified.
For FY 2013, the President requested total defense funding of
$525 billion, which is down from FY 2012 funding of $531 billion. We
anticipate that Congress will consider the FY 2013 defense spending bill
in conjunction with the expiration of the current CR at the end of March.
At that time, the CR will either be extended through the government’s
year end, thereby keeping FY 2013 spending at FY 2012 levels, or the
FY 2013 funding bill will be passed. The President has not yet published
the FY 2014 budget request, although the FY 2014 topline mandated
by budget reduction legislation is $527 billion. Because budget
expenditures lag congressional funding, our associated revenues and
earnings in a given year do not correspond directly with the current year
budgeted amounts.

In addition to the impact of U.S. budget deficit reduction negotiations,

defense spending decisions over the next several years may also be
shaped by the ongoing Quadrennial Defense Review (QDR), an analysis
of military priorities and requirements commissioned every four years.
We expect defense funding requirements to continue to be influenced
by the following:

• the imperative to provide support for the warfighter in the face of

threats posed by an uncertain global security environment, including
the DoD’s increased emphasis on the Asia-Pacific region;

• the number of troops deployed globally, coupled with the overall size
of the U.S. military;
• the need to reset and replenish equipment and supplies damaged
and consumed in Iraq and Afghanistan since 2001; and
• the need to modernize defense infrastructure to address the evolving
requirements of modern-day warfare, including an emphasis on
soldier survivability, enhanced battlefield communications and new
technologies in the intelligence, surveillance and reconnaissance,

unmanned systems and cyberspace arenas.

Despite these budget uncertainties, the long-term outlook for our
U.S. defense business is buoyed by the relevance of our programs
to the military’s funding priorities, the diversity of our programs and
customers within the budget, our insight into customer requirements
stemming from our incumbency on core programs, our ability to evolve
our products to address a fast-changing threat environment and our
proven track record of successful contract execution.
We continue to pursue opportunities presented by international
demand for military equipment and information technologies from our
indigenous international operations and through exports from our U.S.
businesses. While the revenue potential can be significant, international
defense budgets, much like U.S. budgets, are subject to unpredictable
issues of contract award timing, changing priorities and overall spending
pressures. As a result of the demonstrated success of our products and
services, we would expect our international sales and exports to grow
subject to overall economic conditions.

In our Aerospace group, business-jet market conditions were steady

in 2012. The group benefited from robust flying hours across the
installed base of Gulfstream aircraft, improved large-cabin order interest
from North American corporate customers and lower customer contract
defaults. We expect our continued investment in new aircraft products
to support Aerospace’s long-term growth, as evidenced by the group’s
newest aircraft offerings, the G280 and the G650. Similarly, we believe
that aircraft-service revenues provide the group diversified exposure
to aftermarket sales fueled by continued growth in the global installed
business-jet fleet.

General Dynamics Annual Report 2012

RESULTS OF OPERATIONS

I N T R O D U C T I O N

An understanding of our accounting practices is important to an
evaluation of our operating results. We recognize the majority of our
revenues using the percentage-of-completion method of accounting.
The following paragraphs explain how this method is applied in
recognizing revenues and operating costs in our Aerospace and
defense business groups.

In the Aerospace group, contracts for new aircraft have two
major phases: the manufacture of the “green” aircraft and the
aircraft’s outfitting, which includes exterior painting and installation
of customer-selected interiors. We record revenues on these
contracts at the completion of these two phases: when green aircraft
are delivered to and accepted by the customer, and when the
customer accepts final delivery of the outfitted aircraft. Revenues
in the Aerospace group’s other original equipment manufacturers
(OEMs) completions and services businesses are recognized as
work progresses or upon delivery of services. Changes in revenues
result from the number and mix of new aircraft deliveries (green and
outfitted), progress on aircraft completions and the level of aircraft
service activity during the period.
The majority of the Aerospace group’s operating costs relates to
new aircraft production for firm orders and consists of labor, material
and overhead costs. The costs are accumulated in production lots
and recognized as operating costs at green aircraft delivery based on
the estimated average unit cost in a production lot. While changes in
the estimated average unit cost for a production lot impact the level
of operating costs, the amount of operating costs reported in a given
period is based largely on the number and type of aircraft delivered.
Operating costs in the Aerospace group’s completions and services
businesses are generally recognized as incurred.

For new aircraft, operating earnings and margins are a function of
the prices of our aircraft, our operational efficiency in manufacturing
and outfitting the aircraft and the mix of aircraft deliveries between
the higher-margin large-cabin and lower-margin mid-cabin aircraft.
Additional factors affecting the group’s earnings and margins include
the volume, mix and profitability of completions and services work
performed, the market for pre-owned aircraft and the level of general
and administrative (G&A) and net research and development (R&D)
costs incurred by the group.

In the defense groups, revenue on long-term government contracts
is recognized as work progresses, either as products are produced or
services are rendered. As a result, changes in revenues are discussed
generally in terms of volume, typically measured by the level of
activity on individual contracts or programs. Year-over-year variances
attributed to volume are due to changes in production or service levels
and delivery schedules.
Operating costs for the defense groups consist of labor, material,
subcontractor and overhead costs and are generally recognized as
incurred. Variances in costs recognized from period to period primarily
reflect increases and decreases in production or activity levels on
individual contracts and, therefore, result largely from the same factors
that drive variances in revenues.
Operating earnings and margins in the defense groups are driven by
changes in volume, performance or contract mix. Performance refers
to changes in profitability based on revisions to estimates at completion
on individual contracts. These revisions may result from increases or
decreases to the estimated value of the contract, the estimated costs to
complete or both. Therefore, changes in costs incurred in the period do
not necessarily impact profitability. It is only when total estimated costs
at completion change that profitability may be impacted. Contract mix
refers to changes in the volume of higher- vs. lower-margin work. Higher
or lower margins can be inherent in the contract type (e.g., fixed-price/
cost-reimbursable) or type of work (e.g., development/production).

C O N S O L I D AT E D O V E R V I E W

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

Aerospace

Combat Systems

Marine Systems

Information Systems and Technology

11,612

Corporate

–

Revenues

Operating Earnings

Revenues

Operating Earnings

$ 5,299

$ 860

$ 5,998

$ 729

8,878

6,677

1,275

674

1,219

(83)

8,827

6,631

11,221

–

1,283

691

1,200

(77)

Revenues
$ 6,912
7,992
6,592
10,017
–

2012

Operating Earnings
$ 858
663

750

(1,369)

(69)

General Dynamics Annual Report 2012

$ 32,466

$ 3,945

$ 32,677

$ 3,826

$ 31,513

$ 833

REVIEW OF 2011 VS. 2012
Y e a r E n d e d D e c e m b e r 3 1

Revenues

Operating costs and expenses

2011

2012 Variance

$ 32,677 $ 31,513 $ (1,164)
1,829

28,851

(3.6)%

6.3%

30,680
833
2.6%

Operating earnings

Operating margins

3,826

11.7%

(2,993) (78.2)%

Primary changes due to volume:

Aircraft manufacturing and outfitting

$ 585

Product operating costs were lower in 2012 compared with 2011.
The change in product operating costs primarily due to volume
consisted of the following:

Our revenues decreased in 2012 compared with 2011. Revenues
decreased in the Information Systems and Technology’s mobile
communication systems business and on several international wheeled
vehicle contracts in the Combat Systems group. These decreases
were partially offset by higher revenues in the Aerospace group due to
increased deliveries of G650 aircraft. Operating costs increased in 2012
due to several discrete charges discussed below in conjunction with
our business groups’ operating results, most significantly the $2 billion
goodwill impairment recorded in the Information Systems and Technology
group. As a result, operating earnings and margins decreased in 2012.

Product Revenues and Operating Costs
Y e a r E n d e d D e c e m b e r 3 1

2011

2012 Variance

Revenues

Operating costs

$ 21,440

17,230

$ 19,784 $ (1,656)
(1,002)

16,228

(7.7)%

(5.8)%

Product revenues were lower in 2012 compared with 2011. The
decrease in product revenues consisted of the following:

Aircraft manufacturing and outfitting

Mobile communication products

European vehicle production

Ship construction

Other, net

Total decrease

791

(1,177)

(636)

(404)

(230)

$ (1,656)

In 2012, aircraft manufacturing and outfitting revenues increased due to
green deliveries of G650 aircraft, which began in the fourth quarter of 2011.
More than offsetting this increase, mobile communication products revenues
decreased due to protracted customer acquisition cycles and a slower than
expected transition to follow-on work on several programs. Lower European
vehicle production revenues were largely due to several contracts nearing
completion and the revenue impact of the termination of the contract to
provide Pandur vehicles to the Portuguese government. Ship construction
revenues decreased due to the completion of the T-AKE combat-logistics
ship program and timing of activity on the Virginia-class submarine program
as the group transitions from the Block II to the Block III contract.

Mobile communication products

European vehicle production

Ship construction

Discrete charges

Other changes, net

Total decrease

(850)

(377)

(422)

(1,064)

179

(117)

$ (1,002)

Discrete charges discussed in conjunction with the Combat Systems
and Information Systems and Technology business groups’ operating
results include $89 related to the termination of the contract to provide
Pandur vehicles to the Portuguese government, $58 of ruggedized
hardware inventory write-downs for products that ceased production
in 2012 and $32 for cost growth associated with the demonstration
phase of the Specialist Vehicle (SV) program for the U.K. Ministry of
Defence. No other changes were material.

Service Revenues and Operating Costs
Y e a r E n d e d D e c e m b e r 3 1

2011

2012 Variance

Revenues

Operating costs

$ 11,237

9,591

$ 11,729
10,182

$ 492

4.4%

591

6.2%

Service revenues increased in 2012 compared with 2011. The increase
in service revenues consisted of the following:

Ship engineering and repair

Mobile communication support

Other, net

Total increase

$ 358

$ 492

In 2012, the increase in ship engineering and repair revenues was
driven by the recent acquisition of two East Coast surface-ship repair
operations and higher volume on the U.S. Navy’s Ohio-class replacement
engineering program. Mobile communication support revenues increased
in 2012 primarily due to higher maintenance and long-term support
activity on the U.K.-based Bowman communications systems program.
Service operating costs increased in 2012 compared with 2011.
The increase in service operating costs primarily due to volume consisted
of the following:

General Dynamics Annual Report 2012

Primary changes due to volume:

Ship engineering and repair

Mobile communication support

Intangible asset impairment

Other changes, net

Total increase

Service revenues increased in 2011 compared with 2010 as growth on
IT support and modernization programs for the DoD and the intelligence
community, coupled with the acquisition of Vangent, Inc., resulted in
higher IT services revenues. Additionally, the growing global installed base
of business-jet aircraft and increased flying hours across the installed
base resulted in higher aircraft services revenues. Service operating costs
increased in 2011 compared with 2010 primarily due to volume.

$ 298

374

191

$ 591

OTHER INFORMATION

The intangible asset impairment is in Jet Aviation’s maintenance business
and discussed in conjunction with the Aerospace business group’s operating
results. No other changes were material.

REVIEW OF 2010 VS. 2011
Y e a r E n d e d D e c e m b e r 3 1

2010

2011 Variance

Revenues

$ 32,466

Operating costs and expenses

28,521

Operating earnings

Operating margin

3,945

12.2%

$ 32,677
28,851
3,826
11.7%

$ 211

330

0.6%

1.2%

(119)

(3.0)%

Our revenues and 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 mobile communication systems business. Operating costs also
increased due to the impairment of an intangible asset in our Aerospace
group. As a result, operating earnings and margins declined in 2011.

Product Revenues and Operating Costs
Y e a r E n d e d D e c e m b e r 3 1

2010

2011 Variance

Revenues

Operating costs

$ 21,723

17,359

$ 21,440
17,230

$ (283)

(1.3)%

(129)

(0.7)%

Product revenues were lower in 2011 compared with 2010 due to
lower revenues on mobile communication products and on several ship
construction programs, most significantly on the DDG-1000 and DDG-51
destroyers and commercial product-carrier programs. These decreases
were partially offset by higher aircraft manufacturing, outfitting and
completions revenues due to initial green deliveries of the G650 aircraft.
Product operating costs were lower in 2011 compared with 2010 primarily
due to volume. However, the decrease in volume was partially offset by
an impairment of an intangible asset in the completions business in our
Aerospace group.

Service Revenues and Operating Costs
Y e a r E n d e d D e c e m b e r 3 1

2010

2011 Variance

Revenues

Operating costs

$ 10,743

9,198

$ 11,237
9,591

$ 494

4.6%

393

4.3%

Goodwill Impairment
In 2012, we recorded a $2 billion goodwill impairment in the Information
Systems and Technology group discussed below in conjunction with
the business group’s operating results and in the Application of Critical
Accounting Policies.

G&A Expenses
As a percentage of revenues, G&A expenses were 6 percent in 2010,
6.2 percent in 2011 and 7.2 percent in 2012. The increase in 2012 is
due, in part, to restructuring-related charges in our European military
vehicles business discussed below in conjunction with the Combat
Systems business group’s operating results. We expect G&A expenses
in 2013 to be approximately 6.5 percent of revenues.

Interest, Net
Net interest expense was $157 in 2010, $141 in 2011 and $156 in
2012. The 2012 increase in interest expense is due to the $750 net
increase in long-term debt beginning in July 2011. We expect full-year
2013 net interest expense to be approximately $90. The significant
expected decrease from 2012 results from our debt refinancing
completed in December 2012 that lowered the weighted-average
interest rate on our outstanding debt from 3.9 percent to 2.2 percent.
See Note J to the Consolidated Financial Statements for additional
information regarding our debt obligations.

Other, Net
In 2012, other expense included a $123 loss on the redemption of debt
associated with the refinancing discussed above. In 2011, other income
consisted primarily of a $38 gain from the sale of a business in our
Combat Systems group.

Effective Tax Rate
Our effective tax rate was 30.7 percent in 2010, 31.4 percent in 2011 and
161.4 percent in 2012. The significant increase in 2012 was primarily due
to the largely non-deductible goodwill impairment of $2 billion recorded
in the Information Systems and Technology group and, to a lesser
extent, the establishment of valuation allowances related to deferred
tax assets in our international operations. For further discussion and a
reconciliation of our effective tax rate from the statutory federal rate,
see Note E to the Consolidated Financial Statements. We anticipate an
effective tax rate of approximately 32 percent in 2013.

General Dynamics Annual Report 2012

Discontinued Operations
In 2011, we recognized a $13 loss, net of taxes, in discontinued
operations from the settlement of an environmental matter associated
with a former operation of the company. We also increased our estimate
of the continued legal costs associated with the A-12 litigation as a
result of the U.S. Supreme Court’s decision that extended the timeline
associated with the litigation, resulting in a $13 loss, net of taxes. See
Note N to the Consolidated Financial Statements for further discussion
of the A-12 litigation.

R E V I E W O F B U S I N E S S G R O U P S

Following is a discussion of the operating results and outlook for each of
our business groups. For the Aerospace group, results are analyzed with
respect to specific lines of products and services, consistent with how the
group is managed. For the defense groups, the discussion is based on
the types of products and services each group offers with a supplemental
discussion of specific contracts and programs when significant to the
group’s results. Information regarding our business groups also can be
found in Note Q to the Consolidated Financial Statements.

AEROSPACE

Review of 2011 vs. 2012
Y e a r E n d e d D e c e m b e r 3 1

Revenues

Operating earnings

Operating margin

2011

2012 Variance

$ 5,998

729

12.2%

$ 6,912
858

12.4%

$ 914 15.2%

129 17.7%

Aircraft manufacturing, outfitting and completions

Aircraft services

Pre-owned aircraft

G&A/other expenses

Total increase

$ 333

(198)

(1)

(5)

$ 129

Earnings from the manufacture and outfitting of Gulfstream aircraft
increased $136, or over 10 percent, in 2012 compared with 2011
primarily due to green deliveries of the G650 aircraft. Earnings from other
OEM completions were up $197 in 2012 as operational performance
improved. Operating earnings in 2011 were negatively impacted by $78
of losses on several completions projects and a $111 impairment of the
completions business contract and program intangible asset as a result of
these losses and lower revenues.
Aircraft services earnings decreased in 2012 primarily due to a $191
impairment charge on intangible assets in Jet Aviation’s maintenance
business, which has been negatively impacted by an increasingly competitive
marketplace, particularly in Europe. Most significantly, certain OEMs are
performing maintenance work that historically was performed by third-party
service providers, including Jet Aviation. As a result of these market trends,
we reviewed the long-lived assets of Jet Aviation’s maintenance business in
the fourth quarter of 2012 and eliminated the remaining value of the contract
and program and related technology intangible assets. We are aligning
our Jet Aviation maintenance business with anticipated future demand,
and as a result sold three European-based maintenance facilities in
December 2012. We believe that we have right-sized Jet Aviation’s
maintenance business to remain profitable, albeit smaller, in the future.

Gulfstream aircraft deliveries (in units):

Green

Outfitted

107

121
94

14 13.1%

(5)

(5.1)%

Review of 2010 vs. 2011
Y e a r E n d e d D e c e m b e r 3 1

2010

2011 Variance

The Aerospace group’s revenues increased in 2012 compared to 2011.
The increase consisted of the following:

Aircraft manufacturing, outfitting and completions

Aircraft services

Pre-owned aircraft

Total increase

$ 917

(30)

$ 914

Aircraft manufacturing, outfitting and completions revenues include
the manufacture and outfitting of Gulfstream business-jet aircraft
as well as completions of aircraft produced by other OEMs. Aircraft
manufacturing, outfitting and completions revenues increased in 2012
primarily due to increased deliveries of the G650 aircraft.
The group’s operating earnings increased in 2012. The increase
consisted of the following:

Revenues

Operating earnings

Operating margin

$ 5,299

860

16.2%

$ 5,998
729

12.2%

$ 699 13.2%

(131) (15.2)%

Gulfstream aircraft deliveries (in units):

Green

Outfitted

107
99

8.1%

10 11.2%

The Aerospace group’s revenues increased in 2011 primarily due to
additional Gulfstream large-cabin green and outfitted deliveries, including
initial green deliveries of the new G650 aircraft. Higher aircraft services
revenues in 2011, reflecting the growing global installed base and
increased flying hours of business-jet aircraft, were offset by lower
completions revenues as a result of manufacturing delays and lower
volume. The group’s operating earnings decreased in 2011 compared
with 2010 due to the contract losses and intangible asset impairment
in our completions business discussed above and from higher R&D and
selling expenses.

General Dynamics Annual Report 2012

2013 Outlook
We expect an increase of approximately 16 percent in the group’s
revenues in 2013 compared with 2012, led by Gulfstream, and
operating margins in the mid-15 percent range.

COMBAT SYSTEMS

Review of 2011 vs. 2012
Y e a r E n d e d D e c e m b e r 3 1

2011

2012 Variance

Revenues

Operating earnings

Operating margins

$ 8,827

1,283

14.5%

$ 7,992
663
8.3%

$ (835) (9.5)%

(620) (48.3)%

The Combat Systems group’s revenues decreased in 2012 compared
with 2011. The decrease consisted of the following:

our European military vehicles business:

• $292 for contract disputes accruals, primarily related to the

termination of the contract to provide Pandur vehicles for Portugal
($169 of this amount was recorded as a reduction of revenues);

• $98 of restructuring-related charges, primarily severance, for
activities associated with eliminating excess capacity and aligning
our European military vehicles business for anticipated lower
demand; and
• $67 of out-of-period adjustments recorded in the first quarter of
2012 ($48 of this amount was recorded as a reduction of revenues).

For further discussion of the status of the Portugal program and
the restructuring costs, see Note N to the Consolidated Financial
Statements. The impact on the group’s operating margins from the
charges was approximately 530 basis points.

U.S. military vehicles

Weapons systems and munitions

European military vehicles

Total decrease

$ 12

(212)

(635)

$ (835)

Review of 2010 vs. 2011
Y e a r E n d e d D e c e m b e r 3 1

2010

2011 Variance

Revenues

Operating earnings

Operating margins

$ 8,878

1,275

14.4%

$ 8,827
1,283
14.5%

$ (51) (0.6)%

8 0.6%

In 2012, revenues were up slightly in the group’s U.S. military
vehicles business. Revenues increased due to the December 2011
acquisition of Force Protection, Inc., higher volume on several
international light armored vehicle (LAV) programs and the start of the
Technology Development phase of the Army’s Ground Combat Vehicle
(GCV) program. These increases were largely offset by lower volume on
the domestic Stryker, Abrams and Mine-Resistant, Ambush-Protected
(MRAP) vehicle programs.
Lower volume across several U.S. armament and munitions
programs, including vehicle armor, MK47 grenade launchers and Hydra
rockets, due to slowed defense spending, combined with the sale of
the detection systems business in the second quarter of 2011, resulted
in the decrease in revenues in the weapons systems and munitions
business.

In the group’s European military vehicle business, revenues were

down in 2012 due to lower volume on multiple wheeled vehicle
contracts for various international customers that are nearing
completion. In 2012, final deliveries occurred under several of these
contracts, including Piranha vehicles for the Belgian Army, Duro
vehicles for the Swiss government and Eagle vehicles for the German
government.
The Combat Systems group’s operating earnings and margins
decreased in 2012. In addition to lower volume, operating results
in 2012 include the negative impact of three discrete charges in

The Combat Systems group’s revenues were down slightly in 2011
compared with 2010 due to reduced volume in the group’s U.S. military
vehicles business. Volume was down due to less refurbishment and
upgrade work for the Abrams tank, fewer survivability kits for the Stryker
vehicle and a decline in activity on the Expeditionary Fighting Vehicle
program as the system design and development neared completion.
Increased volume to provide LAVs for several international customers
partially offset these decreases. Partially offsetting the decrease in the
group’s U.S. military vehicles business, revenues were higher in the
group’s European military vehicles business due to increased volume on
Duro and Eagle wheeled vehicles for a variety of European customers.
The group’s operating earnings and margins were up slightly in 2011
due to higher profitability on several major programs in our U.S. military
vehicle business.

2013 Outlook
We expect the Combat Systems group’s revenues in 2013 to be
down approximately 6 percent from 2012 with operating margins in
the mid-13 percent range. The expected decline in revenues is due
to anticipated lower services revenues in our U.S. military vehicles
business and lower overall revenues in our weapons systems business.
Our 2013 outlook assumes the U.S. government operates under a CR
in FY 2013 and there are no significant reductions to the proposed
defense budget.

General Dynamics Annual Report 2012

MARINE SYSTEMS

Review of 2011 vs. 2012
Y e a r E n d e d D e c e m b e r 3 1

2011

2012 Variance

Revenues

Operating earnings

Operating margins

$ 6,631

691

10.4%

$ 6,592
750
11.4%

$ (39) (0.6)%

59 8.5%

Operating Results
The Marine Systems group’s revenues decreased in 2012 compared
with 2011. The decrease consisted of the following:

Ship construction

Ship engineering, repair and other services

Total decrease

$ (336)

297

$ (39)

The group’s U.S. Navy ship-construction programs include Virginia-
class submarines, DDG-1000 and DDG-51 destroyers, and T-AKE
combat-logistics and Mobile Landing Platform (MLP) auxiliary support
ships. Decreased revenues in 2012 of $580 on the Virginia-class and the
remainder of the ships in the T-AKE programs were partially offset by an
increase of $244 on the MLP and DDG destroyer programs. Revenues
were lower on the Virginia-class program in 2012 due to timing as the
group transitions from the Block II to the Block III contract. In 2012, the
group delivered the final ship under the T-AKE program, resulting in a
decrease in revenues. Revenues increased in 2012 on the MLP and DDG-
51 programs as two ships are now under construction on both programs.
Revenues were higher on engineering and repair programs for the Navy
in 2012. The increase in revenues was driven by recent acquisitions of two
East Coast surface-ship repair operations and higher volume on the Ohio-
class replacement engineering program.
Despite the decline in revenues, the Marine Systems group’s operating
earnings increased in 2012, resulting in a 100 basis-point increase in
operating margin compared with 2011. Increases in the T-AKE profit rate
contributed $53 of operating earnings, approximately 70 basis points of
margin expansion, as the program continued to experience favorable cost
performance through construction of the final ship.

Review of 2010 vs. 2011
Y e a r E n d e d D e c e m b e r 3 1

2010

2011 Variance

Revenues

Operating earnings

Operating margin

$ 6,677

674

10.1%

$ 6,631
691
10.4%

$ (46) (0.7)%

17 2.5%

Revenues in the Marine Systems group decreased slightly in 2011 due
to lower volume on the DDG programs, the completion of a five-ship
commercial product-carrier construction program in 2010 and the
wind down of the T-AKE program. These decreases were partially offset

General Dynamics Annual Report 2012

by higher volume on the MLP ship construction program, the Ohio-
class replacement program and surface-ship repair work. The group’s
operating earnings and margins increased in 2011 due to favorable cost
performance on the mature T-AKE program.

2013 Outlook
We expect the Marine Systems group’s 2013 revenues to increase
approximately 2 percent from 2012. With the completion of the T-AKE
program, operating margins are expected to decline to the low- to mid-9
percent range in 2013. Our 2013 outlook assumes the U.S. government
operates under a CR in FY 2013 and there are no significant reductions to
the proposed defense budget.

INFORMATION SYSTEMS AND TECHNOLOGY

Review of 2011 vs. 2012
Y e a r E n d e d D e c e m b e r 3 1

2011

2012 Variance

Revenues

$ 11,221

Operating earnings (loss)

1,200

$ 10,017
(1,369)

$ (1,204) (10.7)%

(2,569) (214.1)%

Operating margins

10.7%

(13.7)%

Operating Results
The Information Systems and Technology group’s revenues decreased in
2012 compared with 2011. The decrease consisted of the following:

Mobile communication systems

Information technology (IT) solutions and mission support services

Intelligence, surveillance and reconnaissance (ISR) systems

Total decrease

$ (1,086)

(56)

(62)

$ (1,204)

The decrease in revenues in the mobile communication systems
business was driven by slowed defense spending, protracted U.S. customer
acquisition cycles and a slower than expected transition to follow-on work on
several contracts. This resulted in lower revenues in 2012 on key programs,
including the Warfighter Information Network – Tactical (WIN-T) and Common
Hardware Systems (CHS), and for encryption and ruggedized hardware
products. In addition, over 10 percent of the decline in the group’s revenues
was due to lower volume on the U.K.-based Bowman communications
system program, which has been successfully fielded and has now moved
into maintenance and long-term support.

In the group’s IT solutions and services business, decreased volume
in 2012 due to the completion of several large-scale IT infrastructure and
support programs for the intelligence community and the DoD, including the
New Campus East, Mark Center and Walter Reed National Military Medical
Center programs, was largely offset by revenues from the 2011 acquisition
of Vangent, Inc.
Revenues were down in 2012 compared with 2011 in the group’s ISR
business primarily due to lower optical products revenues as demand
was impacted negatively by pressured defense budgets and the broader

General Dynamics Annual Report 2012

economic environment. Actions taken in 2012 to align the business with
anticipated future demand are expected to stabilize performance in 2013.
Operating earnings and margins decreased significantly in 2012
compared with 2011. This decrease was driven by the negative impact of
four discrete charges:

• $2 billion goodwill impairment resulting from a decline in the

estimated fair value of the group caused by topline pressure from
slowed defense spending and the threat of sequestration, and margin
compression due to mix shift impacting the projected cash flows of
the group;

• $110 of intangible asset impairments on several assets in our optical

products business, most significantly the contract and program
intangible asset, as a result of competitive losses and delays in the
fourth quarter of 2012 indicative of lower overall demand caused by
the economic downturn;

• $58 write-down of substantially all of the remaining ruggedized
hardware inventory, including $25 in the third quarter, based on
anticipated remaining demand for products that ceased production
in 2012; and

• $26 for cost growth associated with the demonstration phase of the
SV program (an additional $6 was recorded by the Combat Systems
group’s European military vehicles business).

For further discussion of the impairment charges, see Note B to the
Consolidated Financial Statements and the Application of Critical
Accounting Policies later in this section.

Review of 2010 vs. 2011
Y e a r E n d e d D e c e m b e r 3 1

2010 2011 Variance

Revenues

Operating earnings

Operating margins

$ 11,612

1,219

10.5%

$ 11,221
1,200
10.7%

$ (391) (3.4)%

(19) (1.6)%

The Information Systems and Technology group’s revenues were down
in 2011 compared with 2010. Revenues in the mobile communication
systems business were impacted unfavorably by CRs and protracted
U.S. customer acquisition cycles that slowed orders, resulting in lower
revenues on ruggedized hardware products, including CHS, and other
products with shorter-term delivery timeframes. Additionally, revenues on
the Canadian Maritime Helicopter Project (MHP) were down in 2011 as
the group transitioned from production to the training and support phase
of the program. Lower revenues in the group’s ISR business resulted from
the sale of a satellite facility in 2010 and lower optical products volume.
Offsetting these decreases were increased revenues in the IT solutions and
services business due to the 2011 acquisition of Vangent, Inc., and higher
volume on the group’s large-scale IT infrastructure and support programs.
Operating earnings decreased at a lower rate than revenues, resulting in
a 20-basis-point increase in operating margins. Higher margins in our
mobile communication systems business were in part due to $95

of overhead reduction initiatives, but were largely offset by growth in our
lower-margin IT solutions and services business.

2013 Outlook
We expect 2013 revenues in the Information Systems and Technology group
to be down approximately 5 percent from 2012 with operating margins in
the low-8 percent range. Our 2013 outlook assumes the U.S. government
operates under a CR in FY 2013 and there are no significant reductions
to the proposed defense budget. Due to its shorter-cycle businesses, the
Information Systems and Technology outlook is more sensitive than our other
defense groups to any additional budget reductions that may occur.

CORPORATE

Corporate results consist primarily of compensation expense for stock
options. Corporate operating costs totaled $83 in 2010, $77 in 2011
and $69 in 2012. We expect 2013 full-year Corporate operating costs of
approximately $90, an increase from 2012 due to less income from the
advanced funding of our primary pension plan.

BACKLOG AND ESTIMATED POTENTIAL

CONTRACT VALUE

$100,000

75,000

50,000

25,000

Estimated Potential
Contract Value

Unfunded Backlog
Funded Backlog

2010

2011

2012

Our total backlog, including funded and unfunded portions, was $51.3 billion
at the end of 2012 compared with $57.4 billion at year-end 2011.
Our backlog does not include work awarded on unfunded indefinite
delivery, indefinite quantity (IDIQ) contracts or unexercised options
associated with existing firm contracts, which we refer to collectively
as estimated potential contract value. IDIQ contracts provide customers
with flexibility when they have not defined the exact timing and quantity
of deliveries or services that will be required at the time the contract is
executed. Contract options represent agreements to perform additional
work under existing contracts at the election of the customer. The actual
amount of funding received in the future may be higher or lower than our
estimate of potential contract value. On December 31, 2012, estimated
potential contract value associated with IDIQ contracts and contract options
was approximately $26.9 billion, down 4 percent from $28 billion at the
end of 2011. We expect to realize this value over the next several years.

General Dynamics Annual Report 2012

A E R O S P A C E

COMBAT SYSTEMS

Aerospace funded backlog represents aircraft orders for which 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 finished 2012 with a total backlog of $15.7
billion, down from $17.9 billion at year-end 2011. Order activity included
demand for products across our portfolio, although orders were lower
than in 2011 as we have experienced an elongated order cycle. Weaker
order activity in the first half of 2012 improved somewhat in the second
half of the year, including several North American Fortune 500 multi-
aircraft orders. Customer defaults were down significantly from 2011 to
the lowest level in five years.
We balance aircraft production rates with customer demand to
maximize profitability and stabilize production over time. This has
enabled us to maintain an appropriate window between customer order
and delivery for our G450 and G550 large-cabin aircraft, but we have
accumulated approximately five years of backlog for the G650. Backlog
will likely decrease over the next several years as we deliver on our G650
backlog and the time period between customer order and delivery of that
aircraft normalizes.

The group’s customer base is diverse across customer types and
geographic regions. Approximately 60 percent of the group’s year-end
backlog was composed of private companies and individual buyers.
While the installed base of aircraft is predominately in North America,
international customers represent nearly 60 percent of the group’s
backlog. Over 55 percent of the group’s orders in 2012 were from North
American customers, as Fortune 500 companies took steps in 2012 to
re-capitalize their fleets.

D E F E N S E G R O U P S

The total backlog for our defense groups represents the estimated
remaining value of work to be performed under firm contracts. The
funded portion of this backlog includes amounts that have been
authorized and appropriated by the Congress and funded by the
customer, as well as commitments by international customers that are
similarly approved and funded by their governments. While there is no
guarantee that future budgets and appropriations will provide funding for
a given program, we have included in total backlog only firm contracts at
the amounts we believe are likely to receive funding.
Total backlog in our defense groups was $35.6 billion on December
31, 2012, down 10 percent from $39.5 billion at the end of 2011. The
decrease occurred in our Combat Systems and Marine Systems groups
as work continued on large, multi-year contracts awarded in prior
periods.

$20,000

15,000

10,000

5,000

Estimated Potential
Contract Value

Unfunded Backlog
Funded Backlog

2010

2011

2012

Combat Systems’ total backlog was $8.7 billion at the end of 2012,
down from $11.4 billion at year-end 2011. The group’s backlog
primarily consists of long-term production contracts.
The group’s backlog on December 31, 2012, included $1.6 billion for M1
Abrams main battle tank modernization and upgrade programs for the Army
and U.S. allies around the world. In 2012, the group received awards totaling
$1 billion for all Abrams-related programs, including a $395 multi-year
contract to conduct development efforts for additional upgrade opportunities
designed to increase the efficiency and capability of the tank. The group was
also awarded $170 to continue work on a multi-year contract awarded in
2008 to upgrade M1A1 tanks to the M1A2 System Enhancement Package
(SEP) configuration. Abrams backlog also included $225 for production
of M1A1 tank kits for the Egyptian Land Forces under an Egyptian tank
co-production program, $315 for Merkava Armored Personnel Carrier
hulls and material kits for the Israeli Ministry of Defense and $160 for the
production of an M1A2 variant for the Kingdom of Saudi Arabia.
The Army’s Stryker wheeled combat vehicle program represented
$1.2 billion of the group’s backlog at year end with vehicles scheduled
for delivery through 2014. The group received over $1.1 billion of Stryker
orders in 2012, including awards for production of 62 new vehicles,
the conversion of previously delivered vehicles to the double-V-hull
configuration, contractor logistics support and engineering services.
The group’s backlog at year end also included $195 for the
Technology Development phase of the Army’s GCV program, $140 for
the Buffalo mine clearance vehicle and $80 under the MRAP program,
largely for upgrade kits for previously-delivered vehicles.
The Combat Systems group has several significant international
military vehicle production contracts in backlog. The backlog at the end
of the year included:

• $870 for the upgrade and modernization of LAV III combat vehicles
for the Canadian Army, including a $135 contract modification
awarded in 2012 to upgrade an additional 66 vehicles bringing the

total to approximately 600 vehicles;

• $800 for LAVs under several foreign military sales (FMS) contracts;
• $115 for 151 Foxhound armored vehicles for the U.K. Ministry of
Defence;

General Dynamics Annual Report 2012

• $150 for Pizarro Advanced Infantry Fighting Vehicles scheduled for
delivery to the Spanish Army through 2016; and
• $110 for the design, integration and production of seven prototypes
under the U.K.’s SV program, in addition to the integration work
being performed by the Information Systems and Technology group.

The Combat Systems group’s backlog at year end also included
$2.4 billion in weapons systems and munitions programs. In 2012,
the group received awards totaling $390 for axles in the military and
commercial markets and $265 for the production of Hydra-70 rockets.
The group also received awards worth $180 from the Canadian
government to supply various calibers of ammunition.
Combat Systems’ estimated potential contract value of $2.8 billion
decreased approximately 20 percent since year-end 2011 due to the
funding of IDIQ contracts and options that were then transferred to
backlog, such as for the Hydra-70 rocket program.

MARINE SYSTEMS

$30,000

20,000

10,000

Estimated Potential
Contract Value

Unfunded Backlog
Funded Backlog

2010

2011

2012

The Marine Systems group’s total backlog consists of long-term
submarine and ship construction programs, as well as numerous
engineering and repair contracts. The group periodically receives large
contract awards that provide backlog for several years. As the group
performs on the contracts, backlog decreases. Consistent with this
historical pattern, the backlog has decreased to $17.1 billion at year-
end 2012, compared to $18.5 billion at the end of 2011.
The Virginia-class submarine program was the company’s largest program
in 2012 and is the largest contract in the group’s and company’s backlog.
The group’s backlog at year end included $9 billion for nine Virginia-class
submarines scheduled for delivery through 2018. As the prime contractor
on the Virginia-class program, we report the entire backlog and revenues
associated with the program but share the construction activity and the
earnings with our teaming partner. We have submitted a proposal for the
next block of submarines under the program expected to be awarded near
the end of 2013. In 2012, we received $385 of awards for long-lead
materials for the first three boats under the next block of submarines.
Navy destroyer programs represented $2.4 billion of the group’s
backlog at year-end 2012. Under the Navy’s restart of the DDG-51
program, we have construction contracts for two destroyers scheduled

for deliveries in 2016 and 2017. We have submitted a bid for a multi-
ship construction contract that is expected to be awarded in the first
half of 2013. Backlog at year end also includes three ships under the
DDG-1000 program scheduled for deliveries in 2015, 2016 and 2018.
The Marine Systems group’s backlog at year end included $605
for the MLP program. In 2012, the group was awarded a construction
contract for the third ship in the program. Delivery of one ship per year
is scheduled beginning in 2013, and the Navy’s long-term shipbuilding
plan includes procurement of a fourth ship in 2014. The year-end
backlog also included $335 for two liquefied natural gas (LNG)-powered
containerships. Construction of these ships is scheduled to begin in
2014 with deliveries in 2015 and 2016.

In addition, the Marine Systems group’s backlog at year end

included approximately $4.7 billion for engineering, repair, overhaul and
other services. This includes $1.9 billion for design and development
efforts on the Ohio-class replacement engineering program, including
$1.8 billion awarded in the fourth quarter of 2012. Year-end backlog for
maintenance and repair services totaled $1.4 billion.

INFORMATION SYSTEMS AND TECHNOLOGY

$40,000

30,000

20,000

10,000

Estimated Potential
Contract Value

Unfunded Backlog
Funded Backlog

2010

2011

2012

The Information Systems and Technology group’s total backlog was $9.8
billion at the end of 2012, up from $9.6 billion at year-end 2011. The
group’s backlog does not include approximately $21 billion of estimated
potential contract value associated with its anticipated share of IDIQ
contracts and unexercised options. In 2012, funding under IDIQ contracts
and options contributed over $5.1 billion to the group’s backlog, over
half of the group’s orders, resulting in a slight decrease in the estimated
potential contract value from year-end 2011. When combined, the group’s
backlog and estimated potential contract value totaled $30.8 billion.
Unlike our other defense businesses, the Information Systems and
Technology group’s backlog consists of thousands of contracts and
must be reconstituted each year with new program and task order
awards. Nonetheless, there are several significant contracts that provide
a solid foundation for the business.
The group’s backlog at year-end 2012 included approximately $645
for the Army’s WIN-T program. The backlog does not include over $300
of estimated potential contract value for the WIN-T program awarded as
an IDIQ contract.

General Dynamics Annual Report 2012

The Information Systems and Technology group’s backlog at year
end also included $370 for the Handheld, Manpack and Small Form-Fit
(HMS) program. In 2012, the group received $315 in orders from the
Army for production of nearly 17,000 Rifleman and Manpack radios
and accessory kits.
The group’s backlog at the end of 2012 included approximately
$520 for a number of support and modernization programs for the
intelligence community and the DoD and Department of Homeland
Security, including the St. Elizabeths campus, New Campus East and
NETCENTS infrastructure programs.
Programs for the U.K. Ministry of Defence comprised $495 of the
group’s backlog at the end of 2012. Work continued in 2012 on the
demonstration phase of the SV program. In this phase, the group
manages the design, integration and production of seven prototype
vehicles. Work and the backlog under the contract are shared with the
Combat Systems group. The group also has successfully fielded the
Bowman communications system and is now performing maintenance
and long-term support and enhancement activities for the program.
In addition to these programs, the group received a number of

significant contract awards in 2012, including the following:

• $155 from Austal USA for combat and seaframe control systems
for two Littoral Combat Ships, bringing the value in backlog to
$295. Options to provide these systems for six additional ships will
be recognized as orders as they are exercised.
• $150 from the U.S. Department of State to provide supply chain
management services. The program has a maximum potential value
of $1.2 billion over five years.
• $125 for production and support of U.S. and U.K. Trident II

submarine weapons systems.

• $95 from the Army for ruggedized computing equipment under the
Common Hardware Systems-4 (CHS-4) program, bringing the

value in backlog to $155. The backlog does not include $3.5 billion
of estimated potential contract value awarded under an IDIQ contract.
• $80 for support of the Trident missile D5 life-extension program,
which extends the life of existing missiles by replacing and
upgrading obsolete components.
• $65 for the Warfighter Field Operations Customer Support (FOCUS)
program to provide support for the Army’s live, virtual and constructive

training operations, bringing the value in backlog to $145.

• An award from the Centers for Medicare & Medicaid Services to

combine the Coordination of Benefits and the Medicare Secondary

Payer systems. The program has a maximum potential value of
$100 over five years.

FINANCIAL CONDITION, LIQUIDITY AND

CAPITAL RESOURCES

We place a strong emphasis on cash flow generation. This focus
has afforded us the financial flexibility to deploy our cash resources
while preserving a strong balance sheet to position us for future
opportunities. The $8.9 billion of cash generated by operating activities
over the past three years was deployed to fund acquisitions and capital
expenditures, repurchase our common stock, pay dividends and repay
maturing debt. Our net debt was $613 at year-end 2012, down by
$420 from the end of 2011.
Our cash balances are invested primarily in time deposits from
highly rated banks and commercial paper rated A1/P1 or higher. On
December 31, 2012, $1 billion of our cash was held by international
operations and therefore, not immediately available to fund domestic
operations unless repatriated. While we do not intend to do so, should
this cash be repatriated, it would be subject to U.S. federal income tax
but would generate partially offsetting foreign tax credits.

Y e a r E n d e d D e c e m b e r 3 1

2010

2011

2012

Net cash provided by
operating activities

$ 2,986

$ 3,238

Net cash used by investing activities

(408)

(1,974)

Net cash used by financing activities

(2,226)

(1,201)

$ 2,687
(656)
(1,382)

Net cash used by discontinued

operations

Net increase in cash
and equivalents

Cash and equivalents

at beginning of year

(2)

(27)

(2)

350

647

2,263

2,613

2,649

3,296
—

Cash and equivalents at end of year

2,613

Marketable securities

212

2,649

248

Short- and long-term debt

(3,203)

(3,930)

(3,909)

Net debt (a)

Debt-to-equity (b)

Debt-to-capital (c)

$ (378) $ (1,033)

$ (613)

24.1%

19.4%

29.7%

22.9%

34.3%
25.6%

Information Systems and Technology was awarded several significant

IDIQ contracts during 2012, including the following:

(a) Net debt is calculated as total debt less cash and equivalents and marketable securities.
(b) Debt-to-equity ratio is calculated as total debt divided by total equity.
(c) Debt-to-capital ratio is calculated as total debt divided by the sum of total debt plus total equity.

• An award from the Federal Aviation Administration to deliver radios
that allow air traffic control personnel to communicate with aircraft.
The program has a maximum potential value of $365 over 10 years.
• An award from the U.S. Department of Energy to provide

cybersecurity and cloud-computing support services. The program

has a maximum potential value of $140 over four years.

We expect to continue to generate funds in excess of our short- and
long-term liquidity needs. We believe we have adequate funds on hand
and sufficient borrowing capacity to execute our financial and operating
strategy. The following is a discussion of our major operating, investing
and financing activities for each of the past three years, as classified on
the Consolidated Statement of Cash Flows.

General Dynamics Annual Report 2012

O P E R AT I N G A C T I V I T I E S

We generated cash from operating activities of $3 billion in 2010, $3.2
billion in 2011 and $2.7 billion in 2012. In all three years, the primary
driver of cash flows was net earnings (loss) after removing the impact of
non-cash charges. Operating cash flow is also impacted by contributions to
our pension plans, which have grown from $300 in 2010 to $530 in 2012,
with contributions of $600 expected in 2013.
Termination of A-12 Program. As discussed further in Note N to
the Consolidated Financial Statements, litigation on the A-12 program
termination has been ongoing since 1991. If, contrary to our expectations,
the default termination ultimately is sustained and the government
prevails on its recovery theories, we, along with The Boeing Company,
could collectively be required to repay the U.S. government as much as
$1.4 billion for progress payments received for the A-12 contract, plus
interest, which was approximately $1.6 billion on December 31, 2012. If
this were the outcome, we would owe half of the total, or approximately
$1.5 billion pretax. Our after-tax cash obligation would be approximately
$740. We believe we have sufficient resources, including access to
capital markets, to pay such an obligation if required.

I N V E S T I N G A C T I V I T I E S

We used $408 in 2010, $2 billion in 2011 and $656 in 2012 for
investing activities. The primary uses of cash for investing activities
were acquisitions and capital expenditures.
Business Acquisitions. We completed 16 acquisitions over the
last three years totaling $2.3 billion. We used cash on hand to fund
these acquisitions. See Note B to the Consolidated Financial Statements
for further discussion of acquisition activity.
Capital Expenditures. Capital expenditures were $370 in
2010, $458 in 2011 and $450 in 2012. The increase in 2011 and
2012 compared with 2010 is largely due to Gulfstream’s Savannah,
Georgia, facilities expansion project announced in 2010. We expect
capital expenditures of approximately $640 in 2013, or 2 percent
of anticipated revenues, as work on Gulfstream’s facilities project
continues. On December 31, 2012, the project was approximately
35 percent complete.
Marketable Securities. To bolster liquidity in an uncertain business
environment, we received cash of $219 from the net sales and maturity
of marketable securities in 2012, including $211 from the sale of held-to-
maturity securities. We held no marketable securities on December 31, 2012.
Other, 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 business in our Combat Systems
group in 2011.

F I N A N C I N G A C T I V I T I E S

We used $2.2 billion in 2010, $1.2 billion in 2011 and $1.4 billion in
2012 for financing activities including issuances and repayments of

debt, payment of dividends and repurchases of common stock.
Debt Proceeds, Net. In August 2010, we repaid $700 of maturing
fixed-rate notes. In 2011, we issued $1.5 billion of fixed-rate notes
and used the proceeds to repay $750 of maturing fixed-rate notes. In
2012, we issued $2.4 billion of fixed-rate notes and used the proceeds
to redeem, prior to maturity, an equal amount of fixed-rate notes with
higher interest rates. We have no material repayments of long-term
debt expected until 2015. See Note J to the Consolidated Financial
Statements for additional information regarding our debt obligations,
including scheduled debt maturities.
We ended 2012 with no commercial paper outstanding. We have
$2 billion in bank credit facilities that remain available. These facilities
provide backup liquidity to our commercial paper program. We also
have an effective shelf registration on file with the Securities and
Exchange Commission.
Dividends. On March 7, 2012, our board of directors declared an
increased quarterly dividend of $0.51 per share – the 15th consecutive
annual increase. The board had previously increased the quarterly
dividend to $0.47 per share in March 2011 and $0.42 per share
in March 2010. In advance of possible tax increases in 2013, we
accelerated our first quarter 2013 dividend payment to December 2012.
Share Repurchases. Our board of directors typically authorizes
repurchases in 10 million-share increments. We repurchased 18.9 million
shares on the open market in 2010, 20 million shares in 2011 and 9.1
million shares in 2012. As a result, we reduced our shares outstanding
by over 8 percent since 2009. On December 31, 2012, approximately
10.9 million shares remained authorized by our board of directors for
repurchase, approximately 3 percent of our total shares outstanding.

N O N - G A A P M A N A G E M E N T M E T R I C S

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 return on invested capital
(ROIC) to measure our performance in these areas. While we believe
that these metrics provide useful information, they are not 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 operations 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.

General Dynamics Annual Report 2012

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:

Y e a r E n d e d D e c e m b e r 3 1

Net cash provided by operating activities

Capital expenditures

Free cash flow from operations

Cash flow as a percentage of earnings (loss) from continuing operations:

Net cash provided by operating activities

Free cash flow from operations

* Not meaningful (NM) due to net loss in 2012.

2008

2009

2010

2011

2012

$ 3,124

$ 2,855

$ 2,986

$ 3,238

(490)

(385)

(370)

(458)

$ 2,687
(450)

$ 2,634

$ 2,470

$ 2,616

$ 2,780

$ 2,237

126%

106%

119%

103%

114%

100%

127%

109%

NM*
NM*

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 the sum of the average debt and shareholders’ equity for the year. Net operating profit after taxes is
defined as earnings (loss) from continuing operations plus after-tax interest and amortization expense. ROIC is calculated as follows:

Y e a r E n d e d D e c e m b e r 3 1

2008

2009

2010

2011

2012

Earnings (loss) from continuing operations

$ 2,478

$ 2,407

$ 2,628

$ 2,552

After-tax interest expense

After-tax amortization expense

Net operating profit (loss) after taxes

Average debt and equity

Return on invested capital

100

117

149

116

155

106

163

$ 2,669 $ 2,673 $ 2,899 $ 2,821

$ 14,390 $ 15,003

$ 16,587

$ 17,123

$ (332)
109
152

$ (71)
$ 17,203

18.5%

17.8%

17.5%

16.5%

(0.4)%

ADDITIONAL FINANCIAL INFORMATION

O F F - B A L A N C E S H E E T A R R A N G E M E N T S

On December 31, 2012, other than operating leases, we had no material off-balance sheet arrangements.

C O N T R A C T U A L O B L I G AT I O N S A N D C O M M E R C I A L C O M M I T M E N T S

The following tables present information about our contractual obligations and commercial commitments on December 31, 2012:

Payments Due by Period

Contractual Obligations

Total Amount Committed
2003

Less Than 1 Year

1-3 Years

4-5 Years

More Than 5 Years

Long-term debt (a)

Capital lease obligations

Operating leases

Purchase obligations (b)

Other long-term liabilities (c)

$ 4,923

$ 89

$ 673

$ 1,546

$ 2,615

1,099

19,841

18,331

239

11,440

3,259

341

5,385

2,035

188

1,659

1,790

331

1,357

11,247

$ 44,228

$ 15,030

$ 8,438

$ 5,187

$ 15,573

(a) Includes scheduled interest payments. See Note J to the Consolidated Financial Statements for discussion of long-term debt.
(b) Includes amounts committed under legally enforceable agreements for goods and services with defined terms as to quantity, price and timing of delivery. This amount includes $13.5 billion of purchase

orders for products and services to be delivered under firm government contracts under which we have full recourse under normal contract termination clauses.

(c) Represents other long-term liabilities on our Consolidated Balance Sheet, including the current portion of these liabilities. The projected timing of cash flows associated with these obligations is based
on management’s estimates, which are based largely on historical experience. This amount also includes all liabilities under our defined-benefit retirement plans. See Note P for information regarding
these liabilities and the plan assets available to satisfy them.

Commercial Commitments

Total Amount Committed

2003

Less Than 1 Year

1-3 Years

4-5 Years

More Than 5 Years

Letters of credit and guarantees*

$ 1,895

$ 1,193

$ 409

$ 6

$ 287

Amount of Commitment Expiration by Period

* See Note N to the Consolidated Financial Statements.

General Dynamics Annual Report 2012

A P P L I C AT I O N O F C R I T I C A L A C C O U N T I N G P O L I C I E S

Management’s Discussion and Analysis of Financial Condition
and Results of Operations is based on our Consolidated Financial
Statements, which have been prepared in accordance with U.S.
GAAP. The preparation of financial statements in accordance with
GAAP requires that we make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
as well as the reported amounts of revenues and expenses during
the period. On an ongoing basis, we evaluate our estimates, including
most pervasively those related to various assumptions and 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, and litigation and
other contingencies. We employ judgment in making our estimates
but they are based on historical experience and currently available
information and various other assumptions that we believe to be
reasonable under the circumstances. The results of these estimates
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily available from other sources.
Actual results could differ from these estimates. We believe that our
judgment is applied consistently and produces financial information
that fairly depicts the results of operations for all periods presented.
We believe the following policies are critical and require the use of
significant judgment in their application:
Revenue Recognition. We account for revenues and earnings
using the 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
measures (e.g., contract milestones or units delivered), as appropriate
to the circumstances. An input measure is used in most cases unless
an output measure is identified that is reliably determinable and
representative of progress toward completion. We estimate the profit
on a contract as the difference between the total estimated revenue
and the total estimated costs of a contract and recognize that profit
over the life of the contract. If at any time the estimate of contract
profitability reveals an anticipated loss on the contract, we recognize
the loss in the quarter it is identified.
We generally measure progress toward completion on contracts
in our defense businesses based on the proportion of costs incurred
to date relative to total estimated costs at completion (input measure).
For our contracts for the manufacture of business-jet aircraft, we
record revenue at two contractual milestones: when green aircraft
are delivered to, and accepted by, the customer and when the
customer accepts final delivery of the fully outfitted aircraft (output
measure). We do not recognize revenue at green delivery unless (1)
a contract has been executed with the customer and (2) the customer
can be expected to satisfy its obligations under the contract, as

evidenced by the receipt of significant deposits from the customer
and other 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 and finance and accounting personnel to
project the outcome of future events that often span several years.
These assumptions include labor productivity and availability; the
complexity of the work to be performed; the cost and availability of
materials; the performance of subcontractors; and the availability
and timing of funding from the customer. We include in our contract
estimates additional revenues for submitted contract modifications
or claims against the customer when the amount can be estimated
reliably and its realization is probable. In evaluating these criteria,
we consider the contractual/legal basis for the claim, the cause of
any additional costs incurred, the reasonableness of those costs and
the objective evidence available to support the claim. We include
award or incentive fees in the estimated contract value when there
is a basis to reasonably estimate the amount of the fee. Estimates
of award or incentive fees are based on historical award experience
and anticipated performance. These estimates are based on our best
judgment at the time. As a significant change in one or more of these
estimates could affect the profitability of our contracts, we review
our performance monthly and update our contract estimates at least
annually and often quarterly, as well as when required by specific
events or circumstances.
We recognize changes in the estimated profit on contracts
under the reallocation method. Under this method, the impact of
revisions in estimates 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 the change is identified
and future periods. These changes generally reflect our current
expectations as to future performance and, therefore, the reallocation
method is the method that best matches our profits to the periods
in which they are earned. Most government contractors recognize
the impact of a change in estimated profit immediately under the
cumulative catch-up method. The impact on operating earnings
in the period the change is identified is generally lower under the
reallocation method as compared to the cumulative catch-up method.
The net increase in our operating earnings (and on a per-share basis)
from the quarterly impact of revisions in contract estimates totaled
$350 ($0.60) in 2010, $356 ($0.63) in 2011 and $180 ($0.33) in
2012. Other than revisions discussed in the Marine Systems and
Information Systems and Technology business groups’ results of
operations, no revisions on any one contract were material in 2012.
Goodwill and Intangible Assets. Since 1995, we have acquired
more than 65 businesses at a total cost of approximately $23 billion,
including seven in 2012. We have recognized goodwill and intangible
assets as a result of these acquisitions.

General Dynamics Annual Report 2012

Goodwill represents the purchase price paid in excess of the fair
value of net tangible and intangible assets acquired. Goodwill is not
amortized but is subject to an impairment test on an annual basis
and when circumstances indicate that an impairment is more likely
than not. Such circumstances include a significant adverse change
in the business climate for one of our reporting units or a decision to
dispose of a reporting unit or a significant portion of a reporting unit.
The test for goodwill impairment is a two-step process that requires
a significant level of estimation and use of judgment by management,
particularly the estimate of the fair value of our reporting units. We
estimate the fair value of our reporting units primarily based on
the discounted projected cash flows of the underlying operations.
This requires numerous assumptions, including the timing of work
embedded in our backlog, our performance and profitability under our
contracts, our success in securing future business, the appropriate
risk-adjusted interest rate used to discount the projected cash
flows, and terminal value growth and earnings rates applied to the
final year of projected cash flows. Due to the variables inherent in
our estimate of fair value, differences in assumptions may have a
material effect on the result of our impairment analysis. To assess the
reasonableness of our discounted projected cash flows, we compare
the sum of our reporting units’ fair value to our market capitalization
and calculate an implied control premium (the excess of the sum of
the reporting units’ fair values over the market capitalization). We
evaluate the reasonableness of this control premium by comparing it
to control premiums for recent comparable market transactions. We
also review market multiples of earnings from comparable publicly-
traded companies with similar operating characteristics to ensure the
reasonableness of our discounted projected cash flows.
We conducted and completed the required goodwill impairment
test as of December 31, 2012. Step one of the goodwill impairment
test compares the fair value of our reporting units to their carrying
values. As it relates to the test, our reporting units are consistent
with our business groups. Slowed defense spending, the threat
of sequestration and margin compression due to mix shift have
impacted operating results and tempered the projected cash flows
of the Information Systems and Technology reporting unit, negatively
impacting our estimate of its fair value. Step one of the impairment
test concluded that the book value of our Information Systems and
Technology reporting unit exceeded its estimated fair value. For our
remaining three reporting units, the estimated fair values were at
least double their respective book values.
For the Information Systems and Technology reporting unit,
we performed the second step of the goodwill impairment test to
measure the amount of the impairment loss, if any. The second step
of the test requires the allocation of the reporting unit’s fair value
to its assets and liabilities, including any unrecognized intangible
assets, in a hypothetical analysis that calculates the implied fair value
of goodwill as if the reporting unit was being acquired in a business
combination. If the implied fair value of goodwill is less than the
carrying value, the difference is recorded as an impairment loss.

General Dynamics Annual Report 2012

Based on the results of the step two analysis, we recorded a $2 billion
goodwill impairment in 2012.
We review intangible assets subject to amortization for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Impairment
losses, where identified, are determined as the excess of the carrying
value over the estimated fair value of the long-lived asset. We assess
the recoverability of the carrying value of assets held for use based
on a review of projected undiscounted cash flows. Prior to conducting
step one of our 2012 goodwill impairment test, we reviewed certain
of our long-lived assets for recoverability and recorded intangible
asset impairment losses of $191 and $110 in our Aerospace
and Information Systems and Technology groups, respectively, as
discussed in the business groups’ results of operations.
Commitments and Contingencies. We are subject to litigation
and other legal proceedings arising either from the ordinary course
of our business or under provisions relating to the protection of the
environment. Estimating liabilities and costs associated with these
matters requires the use of judgment. We record a charge against
earnings when a liability associated with claims or pending or
threatened litigation is probable and when our exposure is
reasonably estimable. The ultimate resolution of our exposure related
to these matters may change as further facts and circumstances
become known.
Deferred Contract Costs. Certain costs incurred in the
performance of our government contracts are recorded under GAAP
but are not allocable currently to contracts. Such costs include a
portion of our estimated workers’ compensation obligations, other
insurance-related assessments, pension and other post-retirement
benefits, and environmental expenses. These costs will become
allocable to contracts generally after they are paid. We have elected
to defer (or inventory) these costs in contracts in process until they
can be allocated to contracts. We expect to recover these costs
through ongoing business, including existing backlog and probable
follow-on contracts. We regularly assess the probability of recovery of
these costs under our current and probable follow-on contracts. This
assessment requires that we make assumptions about future contract
costs, the extent of cost recovery under our contracts and the amount
of future contract activity. These estimates are based on our best
judgment. If the backlog in the future does not support the continued
deferral of these costs, the profitability of our remaining contracts
could be adversely affected.
Retirement Plans. Our defined-benefit pension and other
post-retirement benefit costs and obligations depend on a series
of assumptions and estimates. The key assumptions relate to the
interest rates used to discount estimated future liabilities and
projected long-term rates of return on plan assets. We determine the
discount rate used each year based on the rate of return currently
available on a portfolio of high-quality fixed-income investments
with a maturity that is consistent with the projected benefit payout
period. We determine the long-term rate of return on assets based on

General Dynamics Annual Report 2012

consideration of historical and forward-looking returns and the current
and expected asset allocation strategy. These estimates are based
on our best judgment, including consideration of current and future
market conditions. In the event a change in any of the assumptions is
warranted, pension and post-retirement benefit cost could increase or
decrease. For the impact of hypothetical changes in the discount rate
and expected long-term rate of return on plan assets for our pension
and post-retirement benefit plans, see Note P to the Consolidated
Financial Statements.
As discussed under Deferred Contract Costs, our contractual
arrangements with the U.S. government provide for the recovery of
benefit costs for our government retirement plans. We have elected
to defer recognition of the benefit 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 either positively or negatively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

We are exposed to market risk, primarily from foreign currency exchange
rates, interest rates, commodity prices and investments. See Note M to
the Consolidated Financial Statements contained in Part II, Item 8, of this
Annual Report on Form 10-K for a discussion of these risks. The following
discussion quantifies the market risk exposure arising from hypothetical
changes in foreign currency exchange rates and interest rates.
Foreign Currency Risk. We had notional forward foreign exchange
contracts outstanding of $4 billion on December 31, 2011, and $2.5

billion on December 31, 2012. A 10 percent unfavorable exchange rate
movement in our portfolio of foreign currency forward contracts would have
resulted in the following incremental pretax losses:

Gain (loss)

Recognized

Unrecognized

2011

2012

$ (57) $ (61)
(71)

(176)

This exchange-rate sensitivity relates primarily to changes in the
U.S. dollar/Canadian dollar, euro/Canadian dollar and Swiss franc/
euro exchange rates. We believe these hypothetical recognized and
unrecognized gains and losses would be offset by corresponding
losses and gains in the remeasurement of the underlying transactions
being hedged. We believe these forward contracts and the offsetting
underlying commitments, when taken together, do not create material
market risk.

Interest Rate Risk. Our financial instruments subject to interest

rate risk include fixed-rate long-term debt obligations and variable-
rate commercial paper. On December 31, 2012, we had $3.9 billion
par value of fixed-rate debt and no commercial paper outstanding.
Our fixed-rate debt obligations are not putable, and we do not trade
these securities in the market. A 10 percent unfavorable interest rate
movement would not have a material impact 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, 2012, we held $3.3 billion in cash
and equivalents, but held no marketable securities.

General Dynamics Annual Report 2012

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(Dollars in millions, except per-share amounts)

Revenues:
Products
Services

Operating costs and expenses:
Products
Services
Goodwill impairment
General and administrative (G&A)

Operating earnings
Interest, net
Other, net

Earnings from continuing operations before income taxes
Provision for income taxes, net

Earnings (loss) from continuing operations
Discontinued operations, net of tax

Net earnings (loss)

Earnings (loss) per share
Basic:
Continuing operations
Discontinued operations

Net earnings (loss)

Diluted:

Continuing operations
Discontinued operations

Net earnings (loss)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

Year Ended December 31

2010

2011

2012

$ 21,723
10,743

32,466

$ 21,440
11,237

32,677

$ 19,784
11,729

31,513

17,359
9,198
—
1,964

28,521

3,945
(157)
2

3,790
1,162

2,628
(4)

17,230
9,591
—
2,030

28,851

3,826
(141)
33

3,718
1,166

2,552
(26)

16,228
10,182
1,994
2,276

30,680

833
(156)
(136)

541
873

(332)
—

$ 2,624

$ 2,526

$ (332)

$ 6.89
(0.01)

$ 6.88

$ 6.82
(0.01)

$ 6.81

$ 7.01
(0.07)

$ 6.94

$ 6.94
(0.07)

$ 6.87

$ (0.94)
—

$ (0.94)

$ (0.94)
—

$ (0.94)

General Dynamics Annual Report 2012

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

Net earnings (loss)

Net gain (loss) on cash flow hedges

Unrealized gains (losses) on securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

Other comprehensive loss before tax

Benefit for income tax, net

Other comprehensive loss, net of tax

Comprehensive income (loss)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

Year Ended December 31

2010

$ 2,624

2011

2012

$ 2,526

$ (332)

308

(878)

(480)

(251)

(229)

(81)

(1)

(89)

(1,129)

(1,300)

(424)

(876)

(23)

141

(1,149)

(1,025)

(562)

(463)

$ 2,395

$ 1,650

$ (795)

General Dynamics Annual Report 2012

CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

ASSETS
Current assets:
Cash and equivalents
Accounts receivable
Contracts in process
Inventories
Other current assets

Total current assets

Noncurrent assets:
Property, plant and equipment, net
Intangible assets, net
Goodwill
Other assets

Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
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 earnings
Treasury stock
Accumulated other comprehensive loss

Total shareholders’ equity

December 31

2011 2012

$ 2,649
4,429
5,168
2,310
812

15,368

3,284
1,813
13,576
842

19,515

$ 3,296
4,204
4,964
2,776
504

15,744

3,403
1,383
12,048
1,731

18,565

$ 34,883

$ 34,309

$ 2,895
5,011
3,239

11,145

$ 2,469
6,042
3,109

11,620

3,907
6,599

3,908
7,391

10,506

11,299

482
1,888
18,917
(5,743)
(2,312)

13,232

482
1,988
17,860
(6,165)
(2,775)

11,390

Total liabilities and shareholders’ equity

$ 34,883

$ 34,309

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

General Dynamics Annual Report 2012

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to net cash provided
by operating activities –

Depreciation of property, plant and equipment
Amortization of intangible assets
Goodwill and intangible asset impairments
Stock-based compensation expense
Excess tax benefit from stock-based compensation
Deferred income tax (benefit) provision
Discontinued operations, net of tax

(Increase) decrease in assets, net of effects of business acquisitions –

Accounts 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 expenditures
Business acquisitions, net of cash acquired
Purchases of held-to-maturity securities
Maturities of held-to-maturity securities
Sales of held-to-maturity securities
Purchases of available-for-sale securities
Sales of available-for-sale securities
Maturities of available-for-sale securities
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
Proceeds from option exercises
Other, net
Net cash used by financing activities
Net cash used by discontinued operations

Net increase in cash and equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

Y e a r E n d e d D e c e m b e r 3 1

2010 2011 2012

$ 2,624

$ 2,526

$ (332)

345
224
–
118
(18)
56
4

(152)
(334)
(23)

366
30
(285)
31
2,986

(370)
(233)
(468)
605
–
(226)
78
126
80
(408)

(700)
–
(631)
(1,185)
277
13
(2,226)
(2)

350
2,263
$ 2,613

354
238
111
128
(24)
14
26

(397)
(62)
(186)

17
629
86
(222)
3,238

(458)
(1,560)
(459)
441
–
(373)
107
235
93
(1,974)

(750)
1,497
(673)
(1,468)
198
(5)
(1,201)
(27)

386
234
2,295
114
(29)
(148)
–

240
149
(478)

(441)
730
22
(55)
2,687

(450)
(444)
(260)
224
211
(252)
186
110
19
(656)

(2,400)
2,382
(893)
(602)
146
(15)
(1,382)
(2)

36
2,613
$ 2,649

647
2,649
$ 3,296

General Dynamics Annual Report 2012

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in millions)

Common Stock

Par

Surplus

Retained
Earnings

Treasury

Stock

Accumulated
Other Comprehensive
Loss

Total
Shareholders’
Equity

Balance, December 31, 2009

$ 482

$ 1,518

$ 15,093

$ (3,463) $ (1,207) $ 12,423

Net earnings

Cash dividends declared

Stock-based awards

Shares purchased

Other comprehensive loss

—

211

—

Balance, December 31, 2010

482

1,729

Net earnings

Cash dividends declared

Stock-based awards

Shares purchased

Other comprehensive loss

—

159

—

2,624

(641)

—

17,076

2,526

(685)

—

191

(1,263)

—

(229)

(4,535)

(1,436)

—

181

(1,389)

—

(876)

Balance, December 31, 2011

482

1,888

18,917

(5,743)

(2,312)

Net loss

Cash dividends declared

Stock-based awards

Shares purchased

Other comprehensive loss

—

100

—

(332)

(725)

—

180

(602)

—

(463)

2,624

(641)

402

(1,263)

(229)

13,316

2,526

(685)

340

(1,389)

(876)

13,232

(332)

(725)

280

(602)

(463)

Balance, December 31, 2012

$ 482

$ 1,988

$ 17,860

$ (6,165) $ (2,775)

$ 11,390

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

General Dynamics Annual Report 2012

(Dollars in millions, except per-share amounts or unless otherwise noted)

NOTES TO CONSOLIDATED FINANCIAL

We generally measure progress toward completion on contracts in

STATEMENTS

our defense business based on the proportion of costs incurred to date

relative to total estimated costs at completion. For our contracts for

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

the manufacture of business-jet aircraft, we record revenue at two

Organization. General Dynamics is organized into four business

contractual milestones: when green aircraft are delivered to, and

groups: Aerospace, which produces Gulfstream aircraft, provides

accepted by, the customer and when the customer accepts final

aircraft services and performs aircraft completions for other original

delivery of the fully outfitted aircraft.

equipment manufacturers (OEMs); Combat Systems, which designs

We review and update our contract estimates regularly. We recognize

and manufactures combat vehicles, weapons systems and munitions;

changes in estimated profit on contracts under the reallocation method.

Marine Systems, which designs, constructs and repairs surface ships

Under the reallocation method, the impact of a revision in estimate

and submarines; and Information Systems and Technology, which

is recognized prospectively over the remaining contract term. The net

provides communications and information technology products and

increase in our operating earnings (and on a per-share basis) from the

services. Our primary customer is the U.S. government. We also do

favorable impact of revisions in contract estimates totaled $350 ($0.60)

significant business with international governments and a diverse base

in 2010, $356 ($0.63) in 2011 and $180 ($0.33) in 2012. Other than

of corporate and individual buyers of business aircraft.

revisions on the T-AKE combat-logistics ship and Specialist Vehicle

Basis of Consolidation and Classification. The Consolidated

programs of $53 and ($32), respectively, no revisions on any one

Financial Statements include the accounts of General Dynamics

contract were material in 2012.

Corporation and our wholly-owned and majority-owned subsidiaries.

Discontinued Operations. In 2011, we recognized losses from

We eliminate all inter-company balances and transactions in the

the settlement of an environmental matter associated with a former

Consolidated Financial Statements.

operation of the company and our estimate of continued legal costs

Consistent with defense industry practice, we classify assets and

associated with the A-12 litigation as a result of the U.S. Supreme

liabilities related to long-term production contracts as current, even

Court’s decision that extended the expected timeline associated with

though some of these amounts may not be realized within one year.

the litigation. Net cash used by discontinued operations in 2011

In addition, some prior-year amounts have been reclassified among

consists primarily of cash associated with the environmental settlement

financial statement accounts to conform to the current-year presentation.

and A-12 litigation costs. See Note N to the Consolidated

Use of Estimates. The nature of our business requires that we

Financial Statements for further discussion of the A-12 litigation.

make a number of estimates and assumptions in accordance with

Research and Development Expenses. Research and development

U.S. generally accepted accounting principles (GAAP). These estimates

(R&D) expenses consisted of the following:

and assumptions affect the reported amounts of assets and liabilities

and the disclosure of contingent assets and liabilities at the date of

the financial statements, as well as the reported amounts of revenues

and expenses during the reporting period. We base our estimates

on historical experience and currently available information and on

various other assumptions that we believe are reasonable under the

circumstances. Actual results could differ from these estimates.

Revenue Recognition. We account for revenues and earnings

using the percentage-of-completion method. Under this method,

Year Ended December 31

2010

2011

2012

Company-sponsored R&D, including
product development costs

Bid and proposal costs

Total company-sponsored R&D

Customer-sponsored R&D

$ 325

$ 372

$ 374

183

508

696

173

545

994

170

544

1,063

Total R&D

$ 1,204

$ 1,539

$ 1,607

contract costs and revenues are recognized as the work progresses,

R&D expenses are included in operating costs and expenses in the

either as the products are produced or as services are rendered. We

Consolidated Statements of Earnings (Loss) in the period in which they

estimate the profit on a contract as the difference between the total

are incurred. Customer-sponsored R&D expenses are charged directly

estimated revenue and costs to complete a contract and recognize that

to the related contract.

profit over the life of the contract. If at any time the estimate of contract

The Aerospace group has cost-sharing arrangements with some of

profitability indicates an anticipated loss on the contract, we recognize

its suppliers that enhance the group’s internal development capabilities

the loss in the quarter it is identified.

and offset a portion of the financial cost associated with the group’s

General Dynamics Annual Report 2012

product development efforts. These arrangements explicitly state that

We review goodwill for impairment annually or when circumstances

supplier contributions are for reimbursements of costs we incur in the

indicate that an impairment is more likely than not. Goodwill represents

development of new aircraft models and technologies, and we retain

the purchase price paid in excess of the fair value of net tangible

substantial rights in the products developed under these arrangements.

and intangible assets acquired. The test for goodwill impairment is

We record amounts received from these cost-sharing arrangements

a two-step process to first identify potential goodwill impairment for

as a reduction of R&D expenses. We have no obligation to refund any

each reporting unit and then, if necessary, measure the amount of the

amounts received under the agreement regardless of the outcome of

impairment loss. Our reporting units are consistent with our business

the development effort. Under the terms of each agreement, payments

groups in Note R.

received from suppliers for their share of the costs are based typically on

See Note B for a discussion of the impairments of our long-lived

milestones and are recognized as earned when we achieve a milestone.

assets in 2012, including goodwill.

Interest, Net. Net interest expense consisted of the following:

Subsequent Events. We have evaluated material events and

Year Ended December 31

2010

2011

2012

Interest expense

Interest income

$ 167

$ 155

$ 168

(10)

(14)

(12)

transactions that have occurred after December 31, 2012, and

concluded that no subsequent events have occurred that require

adjustment to or disclosure in the Consolidated Financial Statements.

Interest expense, net

$ 157

$ 141

$ 156

B. ACQUISITIONS, DIVESTITURES, GOODWILL AND INTANGIBLE ASSETS

Interest payments

$ 168

$ 133

$ 186

Acquisitions and Divestitures

In 2012, we acquired seven businesses for an aggregate of $444, funded

Cash and Equivalents and Investments in Debt and Equity

by cash on hand:

Securities. We consider securities with a maturity of three months or

Aerospace

less to be cash equivalents. We report our investments in available-for-

• A fixed-base operator at Houston Hobby Airport that provides fuel,

sale securities at fair value. Changes in the fair value of available-for-

catering, maintenance, repair and overhaul services to private

sale securities are recognized as a component of other comprehensive

aircraft (on February 29).

income (loss) in the Consolidated Statements of Comprehensive

Income (Loss). We report our held-to-maturity securities at amortized

Combat Systems

cost. The interest income on these securities is a component of our

• The defense operations of Gayston Corporation, a business that

net interest expense in the Consolidated Statements of Earnings

supplies precision metal components used in several munitions

(Loss). These investments are included in other current and noncurrent

programs (on August 27).

assets on the Consolidated Balance Sheets (see Note D). We had no

trading securities on December 31, 2011 or 2012.

Marine Systems

The contractual arrangements with certain international customers

• The Ship Repair and Coatings Division of Earl Industries, an

require us to maintain cash received from advance payments until

East Coast ship-repair company that supports the U.S. Navy fleet

applied to our activities associated with these contracts. These

in Norfolk, Virginia, and Mayport, Florida (on July 31).

advances totaled approximately $170 on December 31, 2011, and

• Applied Physical Sciences Corp., a provider of applied submarine

$35 on December 31, 2012.

research and development services (on December 21).

Long-lived Assets and Goodwill. We review long-lived assets,

including intangible assets subject to amortization, for impairment

Information Systems and Technology

whenever events or changes in circumstances indicate that the

• IPWireless, Inc., a provider of 3G and 4G Long Term Evolution (LTE)

carrying amount of the asset may not be recoverable. We assess the

wireless broadband network equipment and solutions for public

recoverability of the carrying value of assets held for use based on

safety and military customers (on June 8).

a review of undiscounted projected cash flows. Impairment losses,

• Open Kernel Labs, Inc., a provider of virtualization software for

where identified, are measured as the excess of the carrying value of

securing wireless communications, applications and content for

the long-lived asset over its fair value as determined by discounted

mobile devices and automotive in-vehicle infotainment systems

projected cash flows.

(on August 17).

General Dynamics Annual Report 2012

• Fidelis Security Systems, Inc., a company that provides cyber

In 2010, we acquired three businesses for an aggregate of $233,

security tools that offer real-time network visibility and analysis (on

funded by cash on hand:

August 27).

Combat Systems

In 2011, we acquired six businesses for an aggregate of $1.6 billion,

• A business that demilitarizes, incinerates and disposes of

funded by cash on hand:

munitions, explosives and explosive wastes in an environmentally

safe and efficient manner (on May 12).

Combat Systems

• Force Protection, Inc., a provider of wheeled vehicles, survivability

Information Systems and Technology

solutions and vehicle sustainment services for the armed forces of

• A provider of software for military mission planning and

the United States and its allies (on December 19).

execution (on January 8).

Marine Systems

• A company that designs and manufactures sensor and optical

surveillance systems for military and security applications (on

• Metro Machine Corp., a surface-ship repair business in Norfolk,

June 22).

Virginia, that supports the U.S. Navy fleet (on October 31).

The operating results of these acquisitions have been included with

Information Systems and Technology

our reported results since their respective closing dates. The purchase

• A provider of enterprise services and cloud computing to the

prices of these acquisitions have been allocated to the estimated fair

U.S. Department of Defense (on July 15).

value of net tangible and intangible assets acquired, with any excess

• A provider of secure wireless networking equipment for the

purchase price recorded as goodwill.

U.S. military and other government customers (on July 22).

In 2011, we sold a business in our Combat Systems group. The

• A provider of information assurance and security software

pretax gain of $38 on the sale was reported in other income in the

(on August 12).

Consolidated Statements of Earnings (Loss). The proceeds from the sale

• Vangent, Inc., a provider of health information technology

are included in other investing activities on the Consolidated Statements

services and business systems to federal agencies (on

of Cash Flows.

September 30).

Goodwill

The changes in the carrying amount of goodwill by reporting unit during 2011 and 2012 were as follows:

December 31, 2010

Acquisitions (a)

Other (b)

December 31, 2011

Impairment

Acquisitions (a)

Other (b)

Aerospace

$ 2,650

–

(6)

Combat Systems

Marine Systems

Information Systems
and Technology

$ 2,828

$ 198

$ 6,973

(49)

–

2,644

2,839

229

–

Total Goodwill

$ 12,649
988

(61)

13,576

(1,994)

379

897

(6)

7,864

(1,994)

221

December 31, 2012

$ 2,697

$ 2,961

$ 290

$ 6,100

$ 12,048

(a) Includes adjustments during the purchase price allocation period.
(b) Consists primarily of adjustments for foreign currency translation.

General Dynamics Annual Report 2012

We completed our annual goodwill impairment test as of December 31, 2012. The first step of the goodwill impairment test compares the fair value of

our reporting units to their carrying values. We estimate the fair value of our reporting units primarily based on the discounted projected cash flows of the

underlying operations. Revenue pressure from slowed defense spending and the threat of sequestration and margin compression due to mix shift have

impacted operating results and tempered the projected cash flows of the Information Systems and Technology reporting unit, negatively impacting our

estimate of its fair value. Step one of the impairment test concluded that the book value of our Information Systems and Technology reporting unit exceeded its

estimated fair value. For our remaining three reporting units, the estimated fair values were at least double their respective book values.

For the Information Systems and Technology reporting unit, we performed the second step of the goodwill impairment test to measure the amount of

the impairment loss, if any. The second step of the test requires the allocation of the reporting unit’s fair value to its assets and liabilities, including any

unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit was being acquired in a

business combination. If the implied fair value of goodwill is less than the carrying value, the difference is recorded as an impairment loss. Based on the step

two analysis, we recorded a $2 billion goodwill impairment in the fourth quarter of 2012. We had no accumulated impairment losses prior to December 31, 2012.

Intangible Assets

Intangible assets consisted of the following:

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount

December 31, 2011

December 31, 2012

Contract and program intangible assets*

$ 2,393

$ (1,060)

$ 1,333

$ 2,066

$ (1,165)

$ 901

Trade names and trademarks

Technology and software

Other intangible assets

Total intangible assets

477

175

174

(70)

(110)

(166)

407

494

180

175

(87)

(108)

(172)

407

$ 3,219

$ (1,406)

$ 1,813

$ 2,915

$ (1,532)

$ 1,383

* Consists of acquired backlog and probable follow-on work and related customer relationships.

In the fourth quarter of 2012, we recognized impairments in

The amortization lives (in years) of our intangible assets on

our Aerospace and Information Systems and Technology groups of

December 31, 2012, were as follows:

$191 and $110, respectively, on contract and program, and related

technology, intangible assets for substantially all of their remaining

values. These losses were reported in operating costs and expenses

Contract and program intangible assets

Trade names and trademarks

in the respective segments. In the Aerospace group, lower demand in

Technology and software

our maintenance business at Jet Aviation caused by an increasingly

Other intangible assets

competitive marketplace resulted in a review of the long-lived

Range of Amortization Life

7-30

7-15

3-7

assets of the business. In the Information Systems and Technology

Amortization expense was $224 in 2010, $238 in 2011 and $234

group, fourth-quarter 2012 competitive losses and award delays in our

in 2012. We expect to record annual amortization expense over the next

optical products business indicative of lower overall demand

five years as follows:

resulted in a review of the long-lived assets.

In the fourth quarter of 2011, losses on narrow- and wide-body

commercial aircraft contracts and lower volume in business-jet aircraft

manufactured by other OEMs triggered a review of the long-lived

assets of the completions business in the Aerospace group, resulting in

a $111 impairment of the contract and program intangible asset.

2013
2014
2015
2016
2017

$ 167
142
139
110
99

General Dynamics Annual Report 2012

C. EARNINGS PER SHARE

We did not have any significant non-financial assets or liabilities

We compute basic earnings per share (EPS) using net earnings for

measured at fair value on December 31, 2011 or 2012, except for

the period and the weighted average number of common shares

long-lived assets that were impaired in 2012, including goodwill in our

outstanding during the period. Diluted EPS generally incorporates the

Information Systems and Technology business group. We estimated the

additional shares issuable upon the assumed exercise of stock options

fair value of these assets primarily based on the discounted projected

and the release of restricted shares and restricted stock units (RSUs).

cash flows of the underlying operations, a Level 3 fair value measure.

In 2012, because of the net loss, diluted EPS was calculated using

See Note B for a further discussion of the long-lived asset impairments.

only the basic weighted average shares outstanding as the inclusion

Our financial instruments include cash and equivalents, marketable

of stock options, restricted stock and RSUs would be antidilutive. Basic

securities and other investments; accounts receivable and accounts

and diluted weighted average shares outstanding were as follows

payable; short- and long-term debt; and derivative financial instruments.

(in thousands):

The carrying values of cash and equivalents, accounts receivable and

payable, and short-term debt on the Consolidated Balance Sheets

Year Ended December 31

2010

2011

2012

approximate their fair value. The following tables present the fair values

Basic weighted average

shares outstanding

Dilutive effect of stock options and

381,240

364,147

353,346

2012, and the basis for determining their fair values:

of our other financial assets and liabilities on December 31, 2011 and

restricted stock/RSUs*

3,996

3,377

—

Diluted weighted average

shares outstanding

385,236

367,524

353,346

* Excludes the following outstanding options to purchase shares of common stock and nonvested
restricted stock because the effect of including these options and restricted shares would be
antidilutive: 2010 – 17,867 and 2011 – 23,079.

D. FAIR VALUE

Fair value is defined as the price that would be received to sell an

asset or paid to transfer a liability in the principal or most advantageous

market in an orderly transaction between marketplace participants.

Various valuation approaches can be used to determine fair value, each

requiring different valuation inputs. The following hierarchy classifies the

inputs used to determine fair value into three levels:

• Level 1 – quoted prices in active markets for identical assets

or liabilities;

• Level 2 – inputs, other than quoted prices, observable by a market

place participant either directly or indirectly; and

• Level 3 – unobservable inputs significant to the fair value

measurement.

Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)

Significant

Other
Observable
Inputs

(Level 2) (a)

Carrying
Value

Fair
Value

Financial assets (liabilities) (b)

December 31, 2011

Marketable securities:

Available-for-sale
Held-to-maturity
Other investments
Derivatives
Long-term debt,

$ 70

178
145
34

175
145
34

$ 8
–
89
–

$ 62
175
56
34

including current portion

(3,930)

(4,199)

–

(4,199)

December 31, 2012

Marketable securities:

Available-for-sale

$ –

Held-to-maturity (c)
Other investments
Derivatives
Long-term debt,

–
150
22

–
96
–

–
54
22

including current portion

(3,909)

(3,966)

–

(3,966)

(a) Determined under a market approach using valuation models that incorporate observable
inputs such as interest rates, bond yields and quoted prices for similar assets and liabilities.

(b) We had no Level 3 financial instruments on December 31, 2011 or 2012.
(c) We sold $211 of held-to-maturity securities in 2012. The net carrying amount of these
securities on the date of sale was $210.

General Dynamics Annual Report 2012

E. INCOME TAXES

Our 2012 effective tax rate was unfavorably impacted by two

Income Tax Provision. We calculate our provision for federal, state

items. Due to the non-deductible nature of a substantial portion of our

and international income taxes based on current tax law. The reported

goodwill, there was a limited tax benefit recognized on the impairment.

tax provision differs from the amounts currently receivable or payable

In addition, due to the unfavorable market conditions impacting

because some income and expense items are recognized in different

certain of our international subsidiaries, a valuation allowance was

time periods for financial reporting purposes than for income tax

established for their net deferred tax assets, including the operating

purposes. The following is a summary of our net provision for income

losses resulting from the charges discussed in Note N at our European

taxes for continuing operations:

Land Systems business in the fourth quarter of 2012 (see deferred tax

Year Ended December 31

2010

2011

2012

Current:
U.S. federal
State

International

Total current

Deferred:
U.S. federal
State

International

Total deferred

$ 951
7
148

$ 951
20
181

$ 892
(9)
138

1,106

1,152

1,021

60
3
(7)

87
–

(73)

(172)
(5)

(148)

Provision for income taxes, net

$ 1,162

$ 1,166

$ 873

Net income tax payments

$ 1,060

$ 1,083

$ 1,155

The provision for state and local income taxes that is allocable to

U.S. government contracts is included in operating costs and expenses

in the Consolidated Statements of Earnings (Loss) and, therefore, not

included in the provision above.

The reconciliation from the statutory federal income tax rate to our

effective income tax rate follows:

assets table below).

Deferred Tax Assets. The tax effects of temporary differences

between reported earnings and taxable earnings consisted of the

following:

December 31

Retirement benefits

Tax loss and credit carryforwards

Salaries and wages

Workers’ compensation

A-12 termination

Other

Deferred assets

Valuation allowance

Net deferred assets

Intangible assets

Contract accounting methods

Capital Construction Fund

Other

Deferred liabilities

Net deferred tax asset

2011

2012

$ 1,398

$ 1,746

410

258

222

521

561

261

260

536

2,904

(102)

3,458

(335)

$ 2,802

$ 3,123

$ (1,137)

$ (950)

(626)

(239)

(522)

(566)

(239)
(390)

$ (2,524)

$ (2,145)

$ 278

$ 978

Year Ended December 31

2010

2011

2012

Sheets in other assets and liabilities as follows:

Our net deferred tax asset was included on the Consolidated Balance

Statutory federal income tax rate

35.0%

State tax on commercial operations,

net of federal benefits

Impact of international operations

Domestic production deduction

Domestic tax credits

Goodwill impairment

Other, net

0.2

(2.4)

(1.6)

(0.6)

—

0.1

0.4

(1.0)

(1.8)

(0.6)

—

(0.6)

(1.6)

53.8

(11.2)

(1.4)

92.1

(5.3)

Effective income tax rate

30.7%

31.4%

161.4%

December 31

Current deferred tax asset

Current deferred tax liability

Noncurrent deferred tax asset

Noncurrent deferred tax liability

Net deferred tax asset

2011

2012

$ 269

(131)

310

(170)

$ 44
(173)
1,251

(144)

$ 278

$ 978

General Dynamics Annual Report 2012

We believe it is more likely than not that we will generate sufficient

any interest or penalties incurred in connection with income taxes as part

taxable income in future periods to realize our deferred tax assets,

of income tax expense. The Internal Revenue Service (IRS) has examined

subject to valuation allowances recognized.

all of our consolidated federal income tax returns through 2010.

Our retirement benefits deferred tax amount includes a deferred

We participate in the IRS’s Compliance Assurance Process, a real-

tax asset of $1.6 billion on December 31, 2011, and $2.1 billion on

time audit of our consolidated corporate federal income tax return. We

December 31, 2012, related to the amounts recorded in accumulated

have recorded liabilities for tax uncertainties for the years that remain

other comprehensive loss (AOCI) to recognize the funded status of our

open to review. We do not expect the resolution of tax matters for these

retirement plans. See Notes L and P for further discussion.

years to have a material impact on our results of operations, financial

One of our deferred tax liabilities results from our participation in the

condition, cash flows or effective tax rate.

Capital Construction Fund (CCF). The CCF is a program, established by

Based on all known facts and circumstances and current tax law, we

the U.S. government and administered by the Maritime Administration,

believe the total amount of unrecognized tax benefits on December 31,

that affects the timing of a portion of our tax payments. The program

2012, is not material to our results of operations, financial condition or

supports the acquisition, construction, reconstruction or operation

cash flows, and if recognized, would not have a material impact on our

of U.S. flag merchant marine vessels. It allows us to defer federal and

effective tax rate. We further believe that there are no tax positions for

state income taxes on earnings derived from eligible programs as long

which it is reasonably possible that the unrecognized tax benefits will

as the funds are deposited and used for qualified activities. Unqualified

significantly vary over the next 12 months, producing, individually or in

withdrawals are subject to taxation plus interest. The CCF is collateralized

the aggregate, a material effect on our results of operations, financial

by qualified assets as defined by the Maritime Administration. We had

condition or cash flows.

U.S. government accounts receivable invested in the CCF of $683 on

December 31, 2011, and $684 on December 31, 2012.

F. ACCOUNTS RECEIVABLE

On December 31, 2012, we had net operating loss carryforwards of

Accounts receivable represent amounts billed and currently due from

$1.4 billion and R&D and investment tax credit carryforwards of $204,

customers and consisted of the following:

both of which begin to expire in 2013.

Earnings from continuing operations before income taxes included

foreign income (loss) of $640 in 2010, $473 in 2011 and ($194) in

2012. We intend to reinvest indefinitely the undistributed earnings of

most of our non-U.S. subsidiaries. On December 31, 2012, we had

December 31

Non-U.S. government

U.S. government

Commercial

2011

2012

$ 2,536

$ 2,728

1,039

854

778
698

approximately $1.6 billion of earnings from these non-U.S. subsidiaries

Total accounts receivable

$ 4,429

$ 4,204

that had not been remitted to the United States. In general, should

these earnings be distributed, a portion would be treated as dividends

Receivables from non-U.S. government customers include amounts

under U.S. tax law and thus subject to U.S. federal income tax at the

related to long-term production programs for the Spanish Ministry of

statutory rate of 35 percent, but would generate partially offsetting

Defence of $2.5 billion on December 31, 2012. A different ministry,

foreign tax credits. However, it is not practicable to estimate the

the Spanish Ministry of Industry, has funded work on these programs

additional amount of taxes payable.

in advance of costs incurred by the company. The cash advances are

Tax Uncertainties. For all periods open to examination by tax

reported on the Consolidated Balance Sheets in current customer

authorities, we periodically assess our liabilities and contingencies

advances and deposits and will be repaid to the Ministry of Industry as

based on the latest available information. Where we believe there

we collect on the outstanding receivables from the Ministry of Defence,

is more than a 50 percent chance that our tax position will not be

leaving a net receivable of $28 on December 31, 2012. With respect

sustained, we record our best estimate of the resulting tax liability,

to our other receivables, we expect to collect substantially all of the

including interest, in the Consolidated Financial Statements. We include

December 31, 2012, balance during 2013.

General Dynamics Annual Report 2012

G. CONTRACTS IN PROCESS

H. INVENTORIES

Contracts in process represent recoverable costs and, where applicable,

Our inventories represent primarily business-jet components and are

accrued profit related to long-term contracts that have been inventoried

stated at the lower of cost or net realizable value. Work-in-process

until the customer is billed, and consisted of the following:

represents largely labor, material and overhead costs associated with

December 31

Contract costs and estimated profits

Other contract costs

Advances and progress payments

2011

2012

$ 18,807 $ 8,162
1,089

959

19,766

(14,598)

9,251

(4,287)

aircraft in the manufacturing process and is based primarily on the

estimated average unit cost of the units in a production lot. Raw

materials are valued primarily on the first-in, first-out method. We

record pre-owned aircraft acquired in connection with the sale of new

aircraft at the lower of the trade-in value or the estimated net realizable

value. In 2012, we announced that we would cease production of

Total contracts in process

$ 5,168 $ 4,964

several ruggedized hardware products in our Information Systems and

Technology business group. As a result, a $58 loss was recognized to

Contract costs consist primarily of labor, material, overhead and

write the related inventory down to net realizable value.

G&A expenses. The decrease in the December 31, 2012, contract

Inventories consisted of the following:

costs and estimated profits, and associated advances and progress

payments, amounts is primarily due to the completion of the T-AKE

combat-logistics ship contract.

Contract costs also may include estimated contract recoveries

for matters such as contract changes and claims for unanticipated

contract costs. We record revenue associated with these matters only

when the amount of recovery can be estimated reliably and realization

is probable. Assumed recoveries for claims included in contracts in

December 31

Work in process

Raw materials

Finished goods

Pre-owned aircraft

Total inventories

2011

2012

$ 1,202 $ 1,518
1,109

1,031

—

69
80

$ 2,310

$ 2,776

process were not material on December 31, 2011 or 2012.

I. PROPERTY, PLANT AND EQUIPMENT, NET

Other contract costs represent amounts that are not currently

Property, plant and equipment (PP&E) are carried at historical cost, net

allocable to government contracts, such as a portion of our

of accumulated depreciation. The major classes of property, plant and

estimated workers’ compensation obligations, other insurance-

equipment were as follows:

related assessments, pension and other post-retirement benefits

and environmental expenses. These costs will become allocable to

contracts generally after they are paid. We expect to recover these

costs through ongoing business, including existing backlog and

probable follow-on contracts. If the backlog in the future does not

support the continued deferral of these costs, the profitability of our

remaining contracts could be adversely affected.

Excluding our other contract costs, we expect to bill all but

approximately 15 percent of our year-end 2012 contracts-in-process

balance during 2013. Of the amount not expected to be billed in

December 31

Machinery and equipment

Buildings and improvements

Land and improvements

Construction in process

Total property, plant and equipment

Accumulated depreciation

2011

2012

$ 3,712 $ 3,966
2,442

2,172

321

313

340
255

6,518

(3,234)

7,003
(3,600)

Property, plant and equipment, net

$ 3,284 $ 3,403

2013, $365 relates to a single contract, the Canadian Maritime

We depreciate most of our assets using the straight-line method and

Helicopter Project (MHP), as the prime contract is behind schedule.

the remainder using accelerated methods. Buildings and improvements

Ultimately, we believe these delays will be resolved and the balance

are depreciated over periods up to 50 years. Machinery and equipment

will be billed and collected.

are depreciated over periods up to 30 years. Our government

customers provide certain facilities and as such, we do not include

these facilities above.

General Dynamics Annual Report 2012

J. DEBT

Debt consisted of the following:

December 31

2011

2012

Fixed-rate notes due: Interest Rate

4.250%

5.250%

1.375%

5.375%

2.250%

1.000%

3.875%

2.250%

3.600%

Various

May 2013

February 2014

January 2015

August 2015

July 2016

November 2017

July 2021

November 2022

November 2042

Other

Total debt

Less current portion

Long-term debt

$ 1,000

$ –

998

499

400

499

–

499

–

500

–

500

895

499

990

498
27

3,930

3,909
1

$ 3,907

$ 3,908

On November 6, 2012, we issued $2.4 billion of fixed-rate notes

payable in increments of $900, $1 billion and $500 in November 2017,

2022 and 2042, respectively. In December 2012, we used the proceeds

from these notes, together with cash on hand, to redeem an equal

amount of previously-issued fixed-rate notes with a higher interest rate,

lowering the weighted-average interest rate on our outstanding debt

from 3.9 percent to 2.2 percent while extending the weighted-average

maturity from 2.6 to 9.5 years. The loss of $123 on the redemption,

largely representing make-whole amounts, was reported in other

expense in the Consolidated Statements of Earnings (Loss).

The 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

On December 31, 2012, we had no commercial paper outstanding,

but we maintain the ability to access the market. We have $2 billion

in bank credit facilities that provide backup liquidity to our commercial

paper program. These credit facilities include a $1 billion multi-year

facility expiring in July 2013 and a $1 billion multi-year facility expiring

in July 2016. These facilities are required by rating agencies to

support our commercial paper issuances. We may renew or replace,

in whole or in part, these credit facilities at or prior to their expiration.

Our commercial paper issuances and the bank credit facilities are

guaranteed by several of our 100-percent-owned subsidiaries.

Our financing arrangements contain a number of customary

covenants and restrictions. We were in compliance with all material

covenants on December 31, 2012.

K. OTHER LIABILITIES

A summary of significant other liabilities by balance sheet caption

follows:

December 31

Salaries and wages

Workers’ compensation

Retirement benefits

Deferred income taxes

Other (a)

2011

2012

$ 845

$ 835

575

275

131

1,413

578
318

173

1,205

Total other current liabilities

$ 3,239 $ 3,109

Retirement benefits

Customer deposits on commercial contracts

Deferred income taxes

Other (b)

Total other liabilities

1,132

$ 4,627 $ 5,671
849
144
727

170

670

$ 6,599

$ 7,391

(a) Consists primarily of environmental remediation reserves, warranty reserves, liabilities of

discontinued operations and insurance-related costs.

redeem the notes prior to their maturity in whole or part for the principal

(b) Consists primarily of liabilities for warranty reserves and workers’ compensation.

plus any accrued but unpaid interest and applicable make-whole

amounts.

See Note E for further discussion of deferred tax balances and Note P

The aggregate amounts of scheduled maturities of our debt for the

for further discussion of retirement benefits.

next five years are as follows:

Year Ended December 31

2006

2013

2014

2015

2016

2017

Thereafter

Total debt

$ 1

–

500

896

2,012

$ 3,909

General Dynamics Annual Report 2012

L. SHAREHOLDERS’ EQUITY

Other Comprehensive Loss. The tax effect for each component of

Authorized Stock. Our authorized capital stock consists of 500

other comprehensive loss consisted of the following:

million shares of $1 per share par value common stock and 50 million

shares of $1 per share par value preferred stock. The preferred stock

is issuable in series, with the rights, preferences and limitations of each

series to be determined by our board of directors.

Shares Issued and Outstanding. On December 31, 2011, we

had 481,880,634 shares of common stock issued and 356,437,880

shares of common stock outstanding. On December 31, 2012, we

had 481,880,634 shares of common stock issued and 353,674,248

shares of common stock outstanding, including unvested restricted

stock of 2,377,354 shares. No shares of our preferred stock were

Year Ended December 31, 2010

Gross
Amount

Benefit
(Provision) for
Income Tax

Net
Amount

Gain on cash flow hedges

$ 89

$ (23)

$ 66

Unrealized gains on securities

–

Foreign currency translation adjustments

Change in retirement plans’ funded status

308

(878)

(29)

279

303

(575)

Other comprehensive loss

$ (480)

$ 251

$ (229)

outstanding on either date. The only changes in our shares outstanding

during 2012 resulted from share activity under our equity compensation

Year Ended December 31, 2011

Gross
Amount

Benefit
(Provision) for
Income Tax

Net
Amount

plans (see Note O for further discussion) and shares repurchased in

the open market. In 2012, we repurchased 9.1 million shares at an

average price of $66 per share. On June 7, 2012, with 2.4 million

shares remaining under a prior authorization, the board of directors

authorized management to repurchase an additional 10 million

shares. On December 31, 2012, approximately 10.9 million shares

remained authorized for repurchase, about 3 percent of our total shares

outstanding.

Dividends per Share. Dividends declared per share were $1.68

in 2010, $1.88 in 2011 and $2.04 in 2012. Cash dividends paid

were $631 in 2010, $673 in 2011 and $893 in 2012. In advance of

possible tax increases in 2013, we accelerated our first quarter 2013

dividend payment to December 2012.

Loss on cash flow hedges

$ (81) $ 22 $ (59)

Unrealized losses on securities

(1)

–

(1)

Foreign currency translation adjustments

(89)

(71)

Change in retirement plans’ funded status

(1,129)

384

(745)

Other comprehensive loss

$ (1,300)

$ 424

$ (876)

Year Ended December 31, 2012

Gross
Amount

Benefit
(Provision) for
Income Tax

Net
Amount

Loss on cash flow hedges

$ (23) $ 3

$ (20)

Unrealized gains on securities

(2)

Foreign currency translation adjustments

141

130

271

Change in retirement plans’ funded status

(1,149)

431

(718)

Other comprehensive loss

$ (1,025)

$ 562

$ (463)

The changes, net of tax, in each component of AOCI consisted of the following:

Gains (Losses) on
Cash Flow Hedges

Unrealized Gains
(Losses) on Securities

Foreign Currency

Translation
Adjustments

Changes in Retirement
Plans’ Funded Status

AOCI

Balance, December 31, 2009
2010 other comprehensive loss

Balance, December 31, 2010
2011 other comprehensive loss

Balance, December 31, 2011
2012 other comprehensive loss

(59)

(20)

Balance, December 31, 2012

(1)

613

279

892

(71)

821

271

$ (1,842)

(1,207)

(575)

(2,417)

(745)

(3,162)

(718)

(229)

(1,436)

(876)

(2,312)

(463)

$ 1,092

$ (3,880)

(2,775)

General Dynamics Annual Report 2012

M. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

December 31

2011

2012

We are exposed to market risk, primarily from foreign currency exchange

Other current assets:

rates, interest rates, commodity prices and investments. We may

Designated as cash flow hedges

$ 64

$ 26

use derivative financial instruments to hedge some of these risks as

Not designated as cash flow hedges

described below. We do not use derivatives for trading or speculative

Other current liabilities:

purposes.

Foreign Currency Risk. Our foreign currency exchange rate

Designated as cash flow hedges

Not designated as cash flow hedges

risk relates to receipts from customers, payments to suppliers and

Total

inter-company transactions denominated in foreign currencies. To the

(33)

(17)

(18)

(7)

$ 34

$ 22

extent possible, we include terms in our contracts that are designed to

We had no material derivative financial instruments designated as fair

protect us from this risk. Otherwise, we enter into derivative financial

value or net investment hedges on December 31, 2011, or December

instruments, principally foreign currency forward purchase and sale

31, 2012.

contracts, designed to offset and minimize our risk. The one-year

We record changes in the fair value of derivative financial instruments

average maturity of these instruments matches the duration of the

in operating costs and expenses in the Consolidated Statements

activities that are at risk.

of Earnings (Loss) or in other comprehensive loss (OCI) within the

Interest Rate Risk. Our financial instruments subject to interest

Consolidated Statements of Comprehensive Income (Loss) depending on

rate risk include fixed-rate long-term debt obligations and variable-rate

whether the derivative is designated and qualifies for hedge accounting.

commercial paper. However, the risk associated with these instruments

Gains and losses related to derivatives that qualify as cash flow hedges

is not material.

are deferred in OCI until the underlying transaction is reflected in

Commodity Price Risk. We are subject to risk of rising labor and

earnings. We adjust derivative financial instruments not designated as

commodity prices, primarily on long-term fixed-price contracts. To the

cash flow hedges to market value each period and record the gain or

extent possible, we include terms in our contracts that are designed to

loss in the Consolidated Statements of Earnings (Loss). The gains and

protect us from this risk. Some of the protective terms included in our

losses on these instruments generally offset losses and gains on the

contracts are considered derivatives but are not accounted for separately

assets, liabilities and other transactions being hedged. Gains and losses

because they are clearly and closely related to the host contract. We

resulting from hedge ineffectiveness are recognized in the Consolidated

have not entered into any material commodity hedging contracts but

Statements of Earnings (Loss) for all derivative financial instruments,

may do so as circumstances warrant. We do not believe that changes in

regardless of designation.

labor or commodity prices will have a material impact on our results of

Net gains and losses recognized in earnings and OCI, including gains

operations or cash flows.

and losses related to hedge ineffectiveness, were not material to our

Investment Risk. Our investment policy allows for purchases of

results of operations in any of the past three years. We do not expect the

fixed-income securities with an investment-grade rating and a maximum

amount of gains and losses in OCI that will be reclassified to earnings in

maturity of up to five years. On December 31, 2012, we held $3.3 billion

2013 to be material.

in cash and equivalents, but held no marketable securities.

Foreign Currency Financial Statement Translation. We translate

Hedging Activities. We had $4 billion in notional forward exchange

foreign-currency balance sheets from our international businesses’

contracts outstanding on December 31, 2011, and $2.5 billion on

functional currency (generally the respective local currency) to U.S.

December 31, 2012. We recognize derivative financial instruments on

dollars at the end-of-period exchange rates, and statements of earnings

the Consolidated Balance Sheets at fair value (see Note D). The fair value

at the average exchange rates for each period. The resulting foreign

of these derivative contracts consisted of the following:

currency translation adjustments are a component of OCI.

We do not hedge the fluctuation in reported revenues and earnings

resulting from the translation of these international operations into

U.S. dollars. The impact of translating our international operations’

revenues and earnings into U.S. dollars was not material to our results

of operations in any of the past three years. In addition, the effect of

changes in foreign exchange rates on non-U.S. cash balances was not

material in each of the past three years.

General Dynamics Annual Report 2012

N. COMMITMENTS AND CONTINGENCIES

all parties where they stood prior to the contracting officer’s declaration

Litigation

of default, meaning that no money would be due from one party to

Termination of A-12 Program. The A-12 aircraft contract was a

another. Additionally, even if the lower courts were to ultimately sustain

fixed-price incentive contract for the full-scale development and initial

the government’s default claim, we continue to believe that there are

production of the carrier-based Advanced Tactical Aircraft with the

significant legal obstacles to the government’s ability to collect any

U.S. Navy and a team composed of contractors General Dynamics

amount from the contractors given that no court has ever awarded a

and McDonnell Douglas (now a subsidiary of The Boeing Company).

money judgment to the government. For these reasons, we have not

In January 1991, the U.S. Navy terminated the contract for default and

recorded an accrual for this matter.

demanded the contractors repay $1.4 billion in unliquidated progress

If, contrary to our expectations, the government prevails on its default

payments. Following the termination, the Navy agreed to defer the

claim and its recovery theories, the contractors could collectively be

collection of that amount pending a negotiated settlement or other

required to repay the government, on a joint and several basis, as much

resolution. Both contractors had full responsibility to the Navy for

as $1.4 billion for progress payments received for the A-12 contract,

performance under the contract, and both are jointly and severally

plus interest, which was approximately $1.6 billion on December 31,

liable for potential liabilities arising from the termination.

2012. This would result in a liability to us of half of the total (based upon

Over 20 years of litigation, the trial court (the U.S. Court of Federal

The Boeing Company satisfying McDonnell Douglas’ obligations under

Claims), appeals court (the Court of Appeals for the Federal Circuit)

the contract), or approximately $1.5 billion pretax. Our after-tax charge

and the U.S. Supreme Court have issued various rulings, some in favor

would be approximately $835, or $2.36 per share, which would be

of the government and others in favor of the contractors.

recorded in discontinued operations. Our after-tax cash cost would be

On May 3, 2007, the trial court issued a decision upholding the

approximately $740. We believe we have sufficient resources to satisfy

government’s determination of default. This decision was affirmed

our obligation if required.

by a three-judge panel of the appeals court on June 2, 2009, and

Other. Various claims and other legal proceedings incidental to

on November 24, 2009, the court of appeals denied the contractors’

the normal course of business are pending or threatened against us.

petitions for rehearing. On September 28, 2010, the U.S. Supreme

These matters relate to such issues as government investigations and

Court granted the contractors’ petitions for review as to whether the

claims, the protection of the environment, asbestos-related claims

government could maintain its default claim against the contractors

and employee-related matters. The nature of litigation is such that

while invoking the state-secrets privilege to deny the contractors a

we cannot predict the outcome of these matters. However, based on

defense to that claim.

information currently available, we believe any potential liabilities in

On May 23, 2011, the U.S. Supreme Court vacated the judgment of

these proceedings, individually or in the aggregate, will not have

the court of appeals, stating that the contractors had a plausible superior

a material impact on our results of operations, financial condition or

knowledge defense that had been stripped from them as a consequence

cash flows.

of the government’s assertion of the state-secrets privilege. In particular,

the U.S. Supreme Court held that, in that circumstance, neither party can

Environmental

obtain judicial relief.

We are subject to and affected by a variety of federal, state, local and

In addition, the U.S. Supreme Court remanded the case to the court

foreign environmental laws and regulations. We are directly or indirectly

of appeals for further proceedings on whether the government has

involved in environmental investigations or remediation at some of our

an obligation to share its superior knowledge with respect to highly

current and former facilities and third-party sites that we do not own but

classified information, whether the government has such an obligation

where we have been designated a Potentially Responsible Party (PRP)

when the agreement specifies information that must be shared (as

by the U.S. Environmental Protection Agency or a state environmental

was the case with respect to the A-12 contract), and whether these

agency. Based on historical experience, we expect that a significant

questions can safely be litigated by the courts without endangering state

percentage of the total remediation and compliance costs associated

secrets. On July 7, 2011, the appeals court remanded these issues to

with these facilities will continue to be allowable contract costs and,

the trial court for further proceedings consistent with the U.S. Supreme

therefore, recoverable under U.S. government contracts.

Court’s opinion. These issues remain to be resolved on remand.

As required, we provide financial assurance for certain sites

We believe that the lower courts will ultimately rule in the contractors’

undergoing or subject to investigation or remediation. We accrue

favor on the remaining issues in the case. We expect this would leave

environmental costs when it is probable that a liability has been incurred

General Dynamics Annual Report 2012

and the amount can be reasonably estimated. Where applicable, we

eliminate excess capacity and align our Combat Systems group’s

seek insurance recovery for costs related to environmental liabilities.

European Land Systems business with expected demand given the

We do not record insurance recoveries before collection is considered

European fiscal condition. The charge, which is reported in G&A

probable. Based on all known facts and analyses, we do not believe that

expenses on our Consolidated Statement of Earnings (Loss), primarily

our liability at any individual site, or in the aggregate, arising from such

represents our estimate of severance costs as determined based on

environmental conditions, will be material to our results of operations,

local laws. However, the local administrative process, which involves

financial condition or cash flows. We also do not believe that the range

management, the government and labor representatives, could yield

of reasonably possible additional loss beyond what has been recorded

severance terms that are in excess of the statutory amount. As a result,

would be material to our results of operations, financial condition or

it is reasonably possible that our actual severance costs could be $30 to

cash flows.

Minimum Lease Payments

$40 higher than our liability recorded on December 31, 2012.

Letters of Credit and Guarantees. In the ordinary course of

business, we have entered into letters of credit, performance or surety

Total expense under operating leases was $258 in 2010, $274 in 2011

bonds, bank guarantees and other similar arrangements with financial

and $301 in 2012. Operating leases are primarily for facilities and

institutions and insurance carriers totaling approximately $1.9 billion on

equipment. Future minimum lease payments due are as follows:

December 31, 2012. These include arrangements for our international

Year Ended December 31

2013

2014

2015

2016

2017

Thereafter

Total minimum lease payments

$ 1,099

Other

subsidiaries, which are backed by available local bank credit facilities

aggregating approximately $850. In addition, from time to time and in the

$ 239

ordinary course of business, we contractually guarantee the payment or

193

148

111

331

performance obligations of our subsidiaries arising under specific contracts.

Government Contracts. As a government contractor, we are subject

to U.S. government audits and investigations relating to our operations,

including claims for fines, penalties, and compensatory and treble

damages. We believe the outcome of such ongoing government disputes

and investigations will not have a material impact on our results of

operations, financial condition or cash flows.

In the performance of our contracts, we routinely request contract

Portugal Program. In the fourth quarter of 2012, the Portuguese

modifications that require additional funding from the customer.

Ministry of National Defense notified our Combat Systems group’s

Most often, these requests are due to customer-directed changes in

European Land Systems business that it was terminating the contract to

scope of work. While we are entitled to recovery of these costs under

provide 260 Pandur vehicles based on an alleged breach of the contract.

our contracts, the administrative process with our customer may be

Subsequently, the customer has drawn approximately $75 from bank

protracted. Based upon the circumstances, we periodically file claims or

guarantees for the contract. We have asserted that we are not in breach

requests for equitable adjustment (REAs). In some cases, these requests

of the contract and that the termination of the contract was invalid, and

are disputed by our customer. We believe our outstanding modifications

we have filed a demand for arbitration to protect our rights under the

and other claims will be resolved without material impact to our results

contract and Portuguese law. Given the uncertainty of receiving further

of operations, financial condition or cash flows.

payments from the customer, we have written off the receivables and

Aircraft Trade-ins. In connection with orders for new aircraft in

contracts in process balances and accrued an estimate of the remaining

funded contract backlog, our Aerospace group has outstanding options

costs related to the close-out of the contract, totaling $258. On

with some customers to trade in aircraft as partial consideration in their

December 31, 2012, approximately $195 of bank guarantees relating to

new-aircraft transaction. These trade-in commitments are structured

the program and its related offset requirements remained outstanding.

to establish the fair market value of the trade-in aircraft at a date

The bank guarantees could be drawn upon by the customer through

generally 120 or fewer days preceding delivery of the new aircraft to the

2014 and, therefore, have a possible impact on our future operating

customer. At that time, the customer is required to either exercise the

results and cash flows.

option or allow its expiration. Any excess of the pre-established trade-in

Restructuring Costs. In the fourth quarter of 2012, the company

price above the fair market value at the time the new aircraft is delivered

recorded a $98 restructuring charge for plans being carried out to

is treated as a reduction of revenue in the new-aircraft sales transaction.

General Dynamics Annual Report 2012

Labor Agreements. Approximately one-fifth of our employees and

employees, and to provide them with incentives to enhance our growth

our subsidiaries’ employees are represented by labor organizations and

and profitability. Under the Equity Compensation Plans, awards may be

work under local works council agreements and 56 company-negotiated

granted to officers, employees or non-employee directors in common

agreements. A number of these agreements expire within any given

stock, options to purchase common stock, restricted shares of common

year. Historically, we have been successful at renegotiating successor

stock, participation units or any combination of these.

agreements without any material disruption of operating activities.

Stock options may be granted either as incentive stock options,

We expect to renegotiate the terms of 18 collective agreements in

intended to qualify for capital gain treatment under Section 422 of the

2013, covering approximately 5,600 employees. We do not expect the

Internal Revenue Code (the Code), or as options not qualified under the

renegotiations will, either individually or in the aggregate, have a material

Code. As a matter of practice, we do not currently grant incentive stock

impact on our results of operations, financial condition or cash flows.

options. All options granted under the Equity Compensation Plans are

Product Warranties. We provide warranties to our customers

issued with an exercise price at the fair market value of the common

associated with certain product sales. We record estimated warranty

stock on the date of grant. Awards of stock options vest over two years,

costs in the period in which the related products are delivered. The

with 50 percent of the options vesting in one year and the remaining

warranty liability recorded at each balance sheet date is generally

50 percent vesting the following year. Stock options that have been

based on the number of months of warranty coverage remaining

awarded under the Equity Compensation Plans expire five or seven

for products delivered and the average historical monthly warranty

years after the grant date. We grant annual stock option awards to

payments. Warranty obligations incurred in connection with long-term

participants in the Equity Compensation Plans on the first Wednesday

production contracts are accounted for within the contract estimates at

of March based on the average of the high and low stock prices on that

completion. Our other warranty obligations, primarily for business-jet

day as listed on the New York Stock Exchange. On occasion, we may

aircraft, are included in other current liabilities and other liabilities on the

also make ad hoc grants at other times during the year for new hires

Consolidated Balance Sheets.

or promotions.

The changes in the carrying amount of warranty liabilities for each of

Grants of restricted stock are awards of shares of common stock

the past three years were as follows:

that are released approximately four years after the grant date. During

Year Ended December 31

2010

2011

2012

or otherwise convey their restricted shares to another party. However,

that restriction period, recipients may not sell, transfer, pledge, assign

Beginning balance

Warranty expense

Payments

Adjustments*

Ending balance

* Includes reclassifications.

$ 239

(51)

$ 260

(56)

$ 260

$ 293

$ 293
91
(58)

(7)
$ 319

during the restriction period, the recipient is entitled to vote the restricted

shares and receive cash 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 restricted stock units

(RSUs) and are payable in cash or common stock. Beginning in March

2012, we granted RSUs with a performance measure based on a

O. EQUITY COMPENSATION PLANS

management metric, return on invested capital (ROIC). Depending on the

Equity Compensation Overview. We have various equity

company’s performance with respect to this metric, the number of RSUs

compensation plans for employees, as well as for non-employee

earned may be less than, equal to, or greater than the original number

members of our board of directors. These include the General Dynamics

of RSUs awarded.

Corporation 2009 Equity Compensation Plan and the 2012 Equity

We issue common stock under our equity compensation plans

Compensation Plan (Equity Compensation Plans) and the 2009 General

from treasury stock. On December 31, 2012, in addition to the shares

Dynamics United Kingdom Share Save Plan (U.K. Plan).

reserved for issuance upon the exercise of outstanding options,

The Equity Compensation Plans seek to provide an effective means

approximately 19 million shares have been authorized for options and

of attracting, retaining and motivating directors, officers and key

restricted stock that may be granted in the future.

General Dynamics Annual Report 2012

Stock-based Compensation Expense. Stock-based compensation

expense for segment reporting purposes (see Note Q). On December 31,

expense is included in G&A expenses. The following table details the

2012, we had $56 of unrecognized compensation cost related to stock

components of stock-based compensation expense recognized in net

options, which is expected to be recognized over a weighted average

earnings in each of the past three years:

period of one year.

Year Ended December 31

2010

2011

2012

Stock options

Restricted stock

Total stock-based compensation

$ 53

$ 58

$ 57
17

expense, net of tax

$ 77

$ 83

$ 74

A summary of option activity during 2012 follows:

Shares
Under Option

Weighted Average
Exercise Price Per Share

Outstanding on December 31, 2011

29,304,653

$ 69.19

Granted

Exercised

Forfeited/cancelled

5,650,767

(3,722,749)

(5,107,912)

70.81

40.57

76.52

Stock Options. We recognize compensation expense related to

Outstanding on December 31, 2012

26,124,759

$ 72.19

stock options on a straight-line basis over the vesting period of the

Vested and expected to vest

awards, which is generally two years. We estimate the fair value of

options on the date of grant using the Black-Scholes option pricing

model with the following assumptions for each of the past three years:

on December 31, 2012

25,811,443

Exercisable on December 31, 2012

17,004,811

$ 72.19

$ 72.30

Year Ended December 31

2010

2011

2012

and remaining contractual term on December 31, 2012, follows:

Expected volatility

27.0-31.9%

28.4-31.5%

27.9-31.3%

Summary information with respect to our stock options’ intrinsic value

Weighted average expected

volatility

Expected term (in months)

Risk-free interest rate

Expected dividend yield

29.8%

40-50

30.1%

30.7%

1.0-2.2%

1.2-1.9%

43-53

43-53
0.6-0.8%

Outstanding

2.0%

2.7%

Vested and expected to vest

Exercisable

Weighted Average
Remaining Contractual
Term (in years)

Aggregate Intrinsic
Value (in millions)

3.2

3.1

1.8

$ 76

We determine the above assumptions based on the following:

In the table above, intrinsic value is calculated as the excess, if

any, between the market price of our stock on the last trading day of

• Expected volatility is based on the historical volatility of our

the year and the exercise price of the options. For options exercised,

common stock over a period equal to the expected term of

intrinsic value is calculated as the difference between the market price

the option.

on the date of exercise and the exercise price. The total intrinsic value of

• Expected term is based on historical option exercise data used to

options exercised was $109 in 2010, $113 in 2011 and $112 in 2012.

determine the expected employee exercise behavior. Based on

We received cash from the exercise of stock options of $277 in

historical option exercise data, we have estimated different

2010, $198 in 2011 and $146 in 2012. The excess tax benefit resulting

expected terms and determined a separate fair value for options

from stock option exercises was $18 in 2010, $24 in 2011 and $29

granted for two employee populations.

in 2012.

• The risk-free interest rate is the yield on a U.S. Treasury zero-

Restricted Stock/Restricted Stock Units. We determine the fair

coupon issue with a remaining term equal to the expected term

value of restricted stock and restricted stock units as the average of

of the option at the grant date.

the high and low market prices of our stock on the date of grant. We

• The dividend yield is based on our historical dividend yield level.

generally recognize compensation expense related to restricted stock

and restricted stock units on a straight-line basis over the period during

The resulting weighted average fair value per option granted was

which the restriction lapses, which is generally four years.

$15.00 in 2010, $15.63 in 2011 and $13.23 in 2012. Stock option

Compensation expense related to restricted stock and restricted stock

expense reduced operating earnings (and on a per-share basis) by

units reduced operating earnings (and on a per-share basis) by $36

$82 ($0.14) in 2010, $90 ($0.16) in 2011 and $88 ($0.16) in 2012.

($0.06) in 2010, $38 ($0.07) in 2011 and $26 ($0.05) in 2012. On

Compensation expense for stock options is reported as a Corporate

December 31, 2012, we had $52 of unrecognized compensation cost

General Dynamics Annual Report 2012

related to restricted stock and restricted stock units, which is expected

future service. As a result of this modification, the plan’s projected benefit

to be recognized over a weighted average period of 2.3 years.

obligation (PBO) is expected to be reduced by approximately $155.

A summary of restricted stock and restricted stock unit activity during

We also sponsor one funded and several unfunded non-qualified

2012 follows:

Nonvested at December 31, 2011

Granted

Vested

Forfeited

Nonvested at December 31, 2012

Shares/Share-
Equivalent Units

2,421,033

532,354

(421,834)

(38,104)

2,493,449

Weighted Average
Grant-Date Fair Value
Per Share

$ 63.01

70.86

83.03

67.53

$ 61.23

supplemental executive plans, which provide participants with additional

benefits, including excess benefits over limits imposed on qualified

plans by federal tax law.

Other Post-retirement Benefits. We maintain plans that provide

post-retirement healthcare coverage for many of our current and former

employees and post-retirement life insurance benefits for certain

retirees. These benefits vary by employment status, age, service and

salary level at retirement. The coverage provided and the extent to

which the retirees share in the cost of the program vary throughout the

The total fair value of shares vested was $30 in 2010, $28 in 2011

company. The plans provide health and life insurance benefits only to

and $28 in 2012.

P. RETIREMENT PLANS

those employees who retire directly from our service and not to those

who terminate service prior to eligibility for retirement.

We provide defined-contribution benefits, as well as defined-benefit

Contributions and Benefit Payments

pension and other post-retirement benefits, to eligible employees.

It is our policy to fund our defined-benefit retirement plans in a

Retirement Plan Summary Information

manner that optimizes the tax deductibility and contract recovery of

contributions, considered within our capital deployment framework.

Defined-contribution Benefits. We provide eligible employees

We make discretionary and required contributions to our pension plans

the opportunity to participate in defined-contribution savings plans

to provide not only for benefits attributed to service to date, but also

(commonly known as 401(k) plans), which permit contributions on a

for benefits to be earned in the future. Our required contributions are

before-tax and after-tax basis. Generally, salaried employees and certain

determined in accordance with IRS regulations.

hourly employees are eligible to participate in the plans. Under most

The contributions to our pension plans depend on a variety of

plans, the employee may contribute to various investment alternatives,

factors, including discount rates and annual returns on our plan

including investment in our common stock. In some of these plans, we

assets. We contributed $532 to our pension plans in 2012, including

match a portion of the employees’ contributions. Our contributions to

approximately $100 of voluntary contributions. We are subject to the

these plans totaled $198 in 2010, $203 in 2011 and $201 in 2012.

Pension Protection Act of 2006 (PPA). We expect higher contributions in

The defined-contribution plans held approximately 33 million and 31

future years under the PPA, with an increase to $600 in 2013.

million shares of our common stock, representing approximately 10

We maintain several tax-advantaged accounts, primarily Voluntary

percent and 9 percent of our outstanding shares, on December 31,

Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations

2011 and 2012, respectively.

for some of our post-retirement benefit plans. For non-funded plans,

Pension Benefits. We have six noncontributory and six contributory

claims are paid as received. We contributed $32 to our other post-

trusteed, qualified defined-benefit pension plans covering eligible

retirement plans in 2012 and expect to contribute $29 in 2013.

government business employees, and two noncontributory and four

We expect the following benefits to be paid from our retirement

contributory plans covering eligible commercial business employees,

plans over the next 10 years:

including some employees 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 participants on January 1, 2007.

Additionally, we have made changes to this plan for certain participants

effective January 1, 2014, that limit or cease the benefits that accrue for

2013
2014
2015
2016
2017
2018-2022

Pension
Benefits

$ 475
495
519
545
574
3,362

Other Post-retirement Benefits

healthcare cost trend rates and future salary increases. Given the long-term

Year Ended December 31

2010

2011

nature of the assumptions being made, actual outcomes typically differ from

these estimates.

Our annual benefit cost consists of three primary elements: the cost of

benefits earned by employees for services rendered during the year, an

interest charge on our plan liabilities and an assumed return on our plan

assets for the year. The annual cost also includes gains and losses resulting

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss (gain)

Amortization of prior service cost

$ 10

$ 13

(32)

(5)

(31)

Annual benefit cost

$ 34

$ 54

$ 58

$ 266

523

(588)
287
(42)
$ 446

2012

$ 12

59
(30)

General Dynamics Annual Report 2012

The following is a reconciliation of the benefit obligations and plan/trust assets, and the resulting funded status, of our defined-benefit

retirement plans:

Year Ended December 31

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 at beginning of year
Actual return on plan assets
Employer contributions
Settlement/curtailment/other
Benefits paid
Fair value of assets at end of year

Funded status at end of year

Pension Benefits

Other Post-retirement Benefits

2011

2012

2011

2012

$ (9,238)
(245)
(517)
(16)
(670)
(2)
446

$ (10,242)

$ 6,250
80
351
4
(435)
$ 6,250

$ (3,992)

$ (10,242)
(266)
(523)
—
(1,527)
(7)
451

$ (12,114)

$ 6,250
874
532
12
(441)
$ 7,227

$ (4,887)

$ (1,145)
(13)
(62)
(3)
(40)
3
81

$ (1,179)

$ 389
10
31
—
(51)
$ 379

$ (800)

$ (1,179)
(12)
(59)
—
(211)
(5)
82

$ (1,384)

$ 379
64
32
—
(49)
$ 426

$ (958)

Amounts recognized on our Consolidated Balance Sheets consisted of the following:

December 31

Noncurrent assets
Current liabilities
Noncurrent liabilities

Net liability recognized

Amounts deferred in AOCI consisted of the following:

December 31

Net actuarial loss
Prior service (credit) cost

Pension Benefits

Other Post-retirement Benefits

2011

2012

2011

2012

$ 110
(90)
(4,012)

$ (3,992)

$ 144
(114)
(4,917)

$ (4,887)

$ –
(185)
(615)

$ (800)

$ –
(204)
(754)

$ (958)

Pension Benefits

Other Post-retirement Benefits

2011

2012

2011

2012

$ 4,790
(258)

$ 5,737
(214)

$ 234
30

$ 264

$ 401
21

$ 422

Total amount recognized in AOCI, pretax

$ 4,532

$ 5,523

The following is a reconciliation of the change in AOCI for our defined-benefit retirement plans:

Year Ended December 31

Net actuarial loss
Prior service cost
Amortization of:
Net actuarial loss from prior years
Prior service credit (cost)
Other*

Pension Benefits

Other Post-retirement Benefits

2011

2012

2011

2012

$ 1,189
16

$ 1,241
–

$ 61
3

$ 177
–

(173)
40
3

(287)
42
(5)

(4)
(6)
–

(10)
(7)
(2)

Change in AOCI, pretax

$ 1,075

$ 991

$ 54

$ 158

* Includes foreign exchange translation adjustments.

General Dynamics Annual Report 2012

The following table represents amounts deferred in AOCI on the

The following table summarizes the weighted average assumptions

Consolidated Balance Sheet on December 31, 2012, that we expect to

used to determine our net periodic benefit costs:

recognize in our retirement benefit cost in 2013:

Pension Benefits