General Dynamics

Annual Report 2013

Dear Fellow Shareholder:

the beginning of 2013, your

At
leadership team committed to
improving operating performance and engaging in wise capital
deployment. We delivered on our promise of strong performance. We
managed your company prudently, adjusting our business to reflect the
realities of the current defense spending environment and retiring risk
throughout the company. Our focus on expanding margins and the
efficient conversion of earnings into cash was successful, resulting in
increases to return on sales, return on invested capital, return on
assets, and return on equity. We begin 2014 with a commitment to
hold steadfast to this course and to continue to drive excellence across
your company.

In 2013, operating earnings from continuing operations were $2.5
billion on sales of $31.2 billion, an operating margin of 11.8 percent.
This resulted in a return on sales of 8 percent, return on invested
capital of 16.6 percent, return on assets of 7.1 percent and return on
equity of 20.1 percent. Net cash provided by operating activities totaled
$3.1 billion, an increase of 15.6 percent over 2012. Free cash flow,
defined as net cash provided by operating activities from continuing
operations less capital expenditures, was $2.7 billion, which represents
107 percent of earnings from continuing operations. As a result of
strong cash generation, the company ended the year with cash and
short-term investments well in excess of our long-term debt.

Our strong and sustainable cash flows, and the strength of General
Dynamics’ balance sheet, allow us to return capital to shareholders. In
2013, we declared $789 million in dividends and repurchased more
than 9.4 million shares on the open market. In January 2014, we
entered into an accelerated share repurchase plan for 11.4 million
shares and in February, the Board of Directors gave management the
authority to purchase an additional 20 million shares. In March 2014,
the Board increased the dividend by 10.7 percent from $0.56 per
share to $0.62 per share, the 17th consecutive annual increase. These
actions demonstrate our commitment to return value to investors, while
still maintaining our strategic agility, ample liquidity and strong credit
ratings, all supported by a solid balance sheet.

the newest Gulfstream aircraft models,

Each of our businesses contributed to a successful and productive
year. Our Aerospace group had an especially strong year with revenue
growth of 17.4 percent and operating margins of 17.4 percent.
the
Increased deliveries of
G650 and G280, helped support the growth in revenue. Operational
improvements throughout
the segment, combined with excellent
execution on new aircraft programs, generated more than 500 basis
points of margin expansion in 2013. Jet Aviation became cash positive
and returned to profitability this year. Demand for new aircraft,
continued interest in our mature models, and new outfitting projects for
Jet Aviation resulted in a well-diversified backlog. Gulfstream’s and Jet

Aviation’s service businesses both performed well, reducing expenses
and supporting a growing global customer base. Overall, 2013 was a
very good year for our Aerospace group.

Combat Systems’ results were a story of declining revenue and
outstanding operational cost and margin performance. The revenue
decline we experienced throughout the year was due to the impact of
sequestration, budget uncertainty and the government shutdown, which
slowed U.S. Army spending. Nonetheless, operating performance across
each of our three Combat businesses was extremely strong. Productivity
improvements along with restructuring our European Land Systems
business, consolidating the Armaments and Technical Products business
into the Ordnance and Tactical Systems business, and rightsizing the
Land Systems business all contributed to strong operating leverage. As
we go forward, we will continue to adapt our businesses to any changes
in the market.

We signed an order with the government of Canada in February for
$10 billion and up to $13 billion if all options are exercised, for the
supply of armored vehicles and other products to an international
customer. This order offers improved revenue stability in Combat
Systems, even beyond 2017 when the U.S. Army plans to begin
recapitalizing its forces. This award capitalizes on the expertise of several
three businesses in
of General Dynamics’ businesses including all
Combat Systems and our C4 Systems business, demonstrating
continued global demand for our core ground combat products,
munitions and services.

In Marine Systems, revenue increased 2 percent to $6.7 billion and
margins were an industry leading 9.9 percent. The group delivered
consistent results throughout the year as all of the shipyards performed
well. The group added seven new Jones Act ships to backlog in 2013,
bringing the total commercial orders to $1.2 billion. This business is a
nice complement to our Navy shipbuilding and a growth opportunity for
the group. As the Pentagon shifts attention to strategic naval assets,
Marine Systems is well positioned to deliver ships, maintenance,
overhaul and repair services to support our U.S. fleet. The group ended
the year with $16.9 billion in backlog, which we will
increase
dramatically in 2014 when we sign the Virginia Class Submarine Block IV
contract anticipated to be almost $18 billion.

revenue contributed by our

Our Information Systems and Technology (IS&T) business performed
very well in a difficult environment. Revenue was $10.3 billion, up 2.5
percent with margins of 7.7 percent. The overall margin rate reflects the
increasing proportion of
lower-margin
services business. Revenue for 2014 is likely to be down about 20
percent as we reported in our 2013 fourth-quarter earnings call. Almost
all of the projected revenue is in our backlog and we expect margins to
continue to improve, as all of our businesses drive costs lower. Even with
potential top-line compression in the short-term, IS&T remains a solid
for our overall portfolio, generating significant cash with
producer

scalable overhead across a diverse group of products and services.
Long-term demand for tactical communications, complex IT services
and integration, as well as ISR, cyber security and mission systems,
has not diminished and the operational changes implemented in 2013
position IS&T to execute on these opportunities in the future.

In closing, your company delivered a year of improved and strong
operational performance in 2013. 2014 is shaping up to be another
remain dedicated to continued expense
productive year. We will
management, improving earnings, expanding margins and managing
for cash. Your leadership team remains focused on the fundamentals
that have driven our company’s success over the years: earnings, free
cash flow, disciplined capital deployment and return on invested
capital. The actions we took this year to right-size our business, across
the organization and at corporate headquarters, will support your
company’s ability to navigate the opportunities and challenges ahead.
We will also continue our relentless focus on creating value for our
shareholders, by improving operations and wisely deploying our capital.

Phebe N. Novakovic
Chairman and Chief Executive Officer

March 17, 2014

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, 2013

OR

[

] 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

IRS 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 ✓ 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 ✓

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 ✓ 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 ✓ 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 ✓

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 ✓ 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 ✓

The aggregate market value of the voting common equity held by non-affiliates of the registrant was $25,984,413,270 as of June 30, 2013
(based on the closing price of the shares on the New York Stock Exchange).
342,250,398 shares of the registrant’s common stock, $1 par value per share, were outstanding on January 26, 2014.

Part III incorporates by reference information from certain portions of the registrant’s definitive proxy statement for the 2014 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:

I N D E X

PART I

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

Item 10.
Item 11.
Item 12.

Item 13.

Item 14.

PART IV

Item 15.

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

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

Exhibits
Signatures
Index to Exhibits

PAGE

3
12
14
14
15
15

15
17

18
34
35

67
67
70

70
71

71

71
71

72
73
74

2

General Dynamics Annual Report 2013

(Dollars in millions, unless otherwise noted)

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

systems

shipbuilding;

and munitions;

General Dynamics is an aerospace and defense company that offers a
broad portfolio of products and services in business aviation; combat
vehicles, weapons
and
communication and information technology systems and solutions. Our
team delivers shareholder returns through disciplined
management
execution of backlog, efficient cash-flow conversion and prudent
capital deployment. We manage costs, undertake continuous-
initiatives and collaborate across our businesses to
improvement
achieve our goals of maximizing earnings and cash and returning value
to our shareholders.

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 began expanding by acquiring combat
vehicle-related
information
technology product and service companies and Gulfstream Aerospace
Corporation. Since 1995, we have acquired and integrated more than
65 businesses to strengthen and complement our business portfolio.

businesses,

shipyards,

additional

We operate globally 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
in Item 8.

and

group

outfits

designs, manufactures

AEROSPACE
a
Our Aerospace
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:

(cid:129) superior aircraft design, quality, performance, safety and reliability;
(cid:129) technologically advanced cockpit and cabin systems; and
(cid:129) 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 needs of a 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

in the Gulfstream family, the ultra-large-
cabin, ultra-high-speed G650 and the super-mid-size G280, have
exceeded original performance expectations since their entry into service
in 2012. The G650 has the longest range, fastest speed, largest cabin
in the Gulfstream fleet and defines a
and most advanced cockpit
completely new segment at the top of the business-jet market. The
National Aeronautic Association recognized the G650 for setting a new
record for the fastest west-bound around-the-world flight in the civilian
non-supersonic class of aircraft. The G650 has also set more than 35
city-pair speed records. The G280 offers the longest range at the fastest
speed in its class and has set more than 30 city-pair speed records.

Demand for Gulfstream aircraft remains strong across geographic
regions and customer
types with orders from public and private
companies as well as individuals. Additionally, Gulfstream remains a
leading provider of aircraft for governments and militaries around the
world, with aircraft operated by approximately 40 nations. These
government
and executive
transportation and a variety of special-mission applications, including
aerial reconnaissance, maritime surveillance and weather research.

are used for head-of-state

aircraft

We are committed to returns-based investment

in research and
development
(R&D) activities that enable the introduction of new
products and first-to-market enhancements that broaden customer
improve aircraft performance and set new standards for
choice,
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 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 his
temperature and entertainment
own environment,
equipment. We also offer several service and support applications
including the PlaneBook application, which provides pilots easy and
immediate digital access to critical flight information and aircraft-specific
documents.

including lighting,

A multi-year facilities project at our Savannah campus is scheduled to
continue through 2017. This expansion includes constructing new
follows a
facilities and renovating existing infrastructure. This effort

General Dynamics Annual Report 2013

3

multi-year project 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.

(cid:129) munitions and armaments,
(cid:129) axle and drivetrain components and aftermarket parts, and
(cid:129) support and sustainment services.

Gulfstream offers an extensive company-owned product support
organization with service professionals located around the globe. The
service network for Gulfstream aircraft continues to evolve to address
the demands of the growing international customer base. We operate
10 company-owned service centers, maintain 14 authorized warranty
centers and maintenance facilities on six continents, and offer on-call
Gulfstream aircraft technicians ready to deploy for urgent customer-
service requirements in the Americas. This commitment to superior
product support continues to receive industry recognition, including the
number-one ranking for the 11th 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 custom,
complex completions of single- and double-aisle aircraft that require
advanced engineering, design and manufacturing capabilities. Jet
Aviation also provides completions for business-jet customers.
In
addition, Jet Aviation provides superior maintenance, repair, aircraft
management and FBO services to a broad global customer base. We
operate more than 25 facilities worldwide and continue to enhance our
service network and capabilities.

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 to
customers globally; and driving efficiencies and reducing costs in the
aircraft production, outfitting and service processes.

Revenues for

the Aerospace group were 19 percent of our
consolidated revenues in 2011, 22 percent in 2012 and 26 percent in
2013. Revenues by major products and services were as follows:

Year Ended December 31

2011

2012

2013

Aircraft manufacturing, outfitting

and completions

Aircraft services

Pre-owned aircraft

Total Aerospace

$ 4,400

1,521

77

$ 5,317

$ 6,378

1,491

104

1,530

210

$ 5,998

$ 6,912

$ 8,118

COMBAT SYSTEMS
Our Combat Systems group is a global leader in systems engineering,
spanning design, development, manufacture and support of tracked
and wheeled military vehicles, weapons systems and munitions for the
United States and its allies. The group’s product lines include:

(cid:129) wheeled combat and tactical vehicles,
(cid:129) main battle tanks and tracked combat vehicles,

4

General Dynamics Annual Report 2013

We have a mature and diverse portfolio of franchise products that
deliver core capabilities to domestic and international customers. We
pursue continuous process improvements and other cost-reduction
initiatives to improve our productivity and operating performance. We
apply our design and engineering expertise to develop improvements that
advance the utility, safety and effectiveness of our products.

The portfolio of platforms in our U.S. military vehicles business
includes the Stryker wheeled combat vehicle, the Abrams main battle
tank and the Buffalo route clearance vehicle. These vehicles are
to military warfighting capabilities and offer continuing
fundamental
for upgrades and modernization to meet evolving
opportunities
requirements.

The Stryker has proven itself a versatile combat vehicle, supporting
numerous missions for more than 10 years. The group developed a
double-V-hulled Stryker
improve soldier protection from
improvised explosive devices (IEDs). Nearly 780 double-V-hulled vehicles
representing two Stryker brigades have been delivered to the U.S. Army
since 2011. In late 2013, the group received a contract to field the first
96 of 341 vehicles in a third Stryker brigade by 2017.

to further

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), which provides a digital platform with an
enhanced command-and-control system, second-generation thermal
sights and improved armor.
In September 2013, we conducted a
preliminary design review with the Army under a five-year development
contract that provides opportunities for fleet-wide vehicle modernization.
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. The Buffalo vehicle is a
recognized leader in route clearance missions and has been fielded to
several North American and European countries. We have delivered
approximately 5,600 RG-31 and Cougar vehicles to the U.S. military
under the Mine-Resistant, Ambush Protected (MRAP) vehicle program.
This installed base has led to subsequent modernization programs, as
well as support and sustainment services. Further, the group entered the
light mobility vehicle market with two key U.S. Special Operations
Command vehicle awards in 2013 for the Ground Mobility Vehicle (GMV)
and the Internally-Transportable Vehicle (ITV) programs.

Beyond these long-term 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 and Buffalo vehicles, Combat Systems is the
primary contractor for the maintenance, repair and reset of these vehicles.

By leveraging the expertise gained from our incumbency on current
engineering and production programs, we are well-positioned to
participate in next-generation 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 new infantry fighting vehicle, the Ground Combat Vehicle (GCV).
The group is also positioning itself for future work on 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. For the U.K. Ministry of Defence
(MoD), we are producing the Foxhound armored vehicle and developing
the Specialist Vehicle (SV). Under the SV program, the U.K. MoD plans
to acquire 589 vehicles with four variants. We have also generated
significant opportunities in countries where we have operations. 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. The group’s European operations offer a broad
range of products,
including military vehicles, amphibious bridge
systems and artillery systems for customers at home and abroad. Key
platforms include the Leopard tank, the Pizarro and ASCOD tracked
infantry vehicles, the Duro and Eagle wheeled vehicles, and the Piranha
and Pandur wheeled armored vehicles.

offerings

Complementing these

are Combat
combat-vehicle
Systems’ weapons systems and munitions programs. For ground
forces,
the group manufactures reactive vehicle armor, M2 heavy
machine guns, and MK19 and MK47 grenade launchers. For airborne
platforms, the group produces weapons for U.S. and foreign fighter
fixed-wing
including high-speed Gatling guns for all U.S.
aircraft,
military aircraft. 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 weapons platforms
the U.S. government and its allies. The group holds leading
for
munitions supply positions for products such as Hydra-70 rockets,
large-caliber tank ammunition, medium-caliber ammunition, mortar
tactical missile aerostructures and high-
and artillery projectiles,
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. In response to decreased customer
spending, the group has undertaken restructuring activities to ensure we
remain competitively positioned for the future.
In an environment of
dynamic threats and evolving customer needs, the group remains agile
and 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 2011, 25 percent in 2012 and 20 percent in
2013. Revenues by major products and services were as follows:

Year Ended December 31

2011

2012

2013

Wheeled combat vehicles

Munitions and armaments

Tanks and tracked vehicles

Engineering and development

Drivetrain components and other

$ 4,220

2,054

1,159

397

997

$ 3,930

1,950

$ 2,709

1,761

792

516

804

595

553

502

Total Combat Systems

$ 8,827

$ 7,992

$ 6,120

MARINE SYSTEMS
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:

(cid:129) nuclear-powered submarines,
(cid:129) surface combatants,
(cid:129) auxiliary and combat-logistics ships,
(cid:129) commercial Jones Act ships,
(cid:129) design and engineering support, and
(cid:129) 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. More than 95 percent
of the group’s revenues are for major Navy ship-construction programs
awarded under large, multi-ship contracts that span several years. These
programs include Virginia-class nuclear-powered submarines, Arleigh
Burke-class (DDG-51) and Zumwalt-class (DDG-1000) guided-missile
destroyers, and Mobile Landing Platform (MLP) auxiliary support ships.

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-boat
blocks. The group has delivered 10 of 18 boats under contract
in
conjunction with an industry partner that shares in the construction. The

General Dynamics Annual Report 2013

5

remaining eight boats under contract are scheduled for delivery
through 2018. We received advanced funding in 2013 for long-lead
materials for submarines in the next block of
the program and
anticipate being awarded a construction contract in 2014.

We are the lead designer and producer of DDG-51s, managing the
design, modernization and lifecycle support of these ships. As the only
active destroyer in the Navy’s global surface fleet, DDG-51s are multi-
mission combatants that offer defense against a wide range of threats,
including ballistic missiles. We currently have construction contracts for
six DDG-51s, including four awarded in 2013, scheduled for delivery
through 2022, as well as an option for an additional ship.

The group is also building the three ships planned for the DDG-1000
destroyer program. These ships are equipped with numerous
technological enhancements,
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.
Deliveries of the ships are scheduled for 2015, 2016 and 2018. The
first ship in the program is nearly 90 percent complete.

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 2013, the group delivered the
first ship in the program, and construction is underway on the
remaining two ships, scheduled for delivery in 2014 and 2015. The
Navy’s long-term shipbuilding plan includes procurement of a fourth
ship in 2014. The third and fourth ships will be configured as Afloat
Forward Staging Bases (AFSB), designed to facilitate a variety of
missions in support of special operations, providing significant new
capabilities to the customer.

We are also developing new technologies and naval platforms in
conjunction with our customers. These design and engineering efforts
include the development of
the next-generation ballistic-missile
submarine to replace the Ohio class of ballistic-missile submarines. In
conjunction with these efforts, the group is leading the design of the
Common Missile Compartment under joint development for the U.S.
Navy and the U.K. Royal Navy.

In addition, 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. Our surface-ship
repair operations include a full-service maintenance and repair
shipyard on the West Coast and repair shipyards on the East Coast. We
also provide extensive submarine repair services in a variety of U.S.
locations. In support of allied navies, we offer program management,
planning, engineering and design support for submarine and surface-
ship construction programs. We also operate ships for the U.S. Military
Sealift Command and commercial customers.

6

General Dynamics Annual Report 2013

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. We
currently have construction contracts for nine ships, including seven
secured in 2013, scheduled for delivery through 2017. We anticipate
that the age of the Jones Act fleet and environmental regulations that
impose more stringent emission control
limits will continue to provide
additional commercial shipbuilding opportunities.

To further the group’s goals of operating 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 customers.

Revenues for the Marine Systems group were 20 percent of our
consolidated revenues in 2011 and 21 percent in 2012 and 2013.
Revenues by major products and services were as follows:

Year Ended December 31

2011

2012

2013

Nuclear-powered submarines

Surface combatants

Auxiliary and commercial ships

Repair and other services

$ 3,696

1,191

930

814

$ 3,601

$ 3,697

1,152

746

1,093

1,139

499

1,377

Total Marine Systems

$ 6,631

$ 6,592

$ 6,712

INFORMATION SYSTEMS AND TECHNOLOGY
Our Information Systems and Technology group is a three-part portfolio
providing technologies, products and services that address a wide range
information-system needs.
of military, federal/civilian and commercial
We provide full-spectrum support
for product design, development,
integration, production and sustainment in:

(cid:129) secure mobile communication systems;
(cid:129) information technology (IT) solutions and mission support services; and
(cid:129) intelligence, surveillance and reconnaissance (ISR), naval control

systems and cyber security solutions.

Secure mobile communication systems – We design, integrate and
manufacture secure communication and command-and-control systems
and operational hardware for customers in the U.S. Department of
Defense (DoD), the intelligence community, federal/civilian and public
safety agencies, and for international customers. Our leadership in this

incumbency on
market results from decades of domain expertise,
priority programs and continuous innovation to deliver technologies that
meet our customers’ needs. These solutions include:

(cid:129) fixed and mobile radio and satellite communication systems and

antenna technologies;

(cid:129) information assurance and encryption, products, systems and

services;

(cid:129) command-and-control systems; and
(cid:129) broadband networking.

We improve our customers’ ability to communicate, collaborate and
access vital information. For example, we are the prime contractor for
the Army’s top modernization priority,
Information
Network-Tactical (WIN-T), a mobile battlefield communication network
that provides soldiers secure, high-speed, high-capacity voice, data
and video communications. We are responsible for
the design,
integration, production, program management and
engineering,
support of this network.

the Warfighter

We are also the prime contractor on many of the Army’s core
tactical radio programs, including the AN/PRC-154A Rifleman and AN/
PRC-155 two-channel Manpack radios. These products give soldiers
secure mobile voice, video and data communications capabilities,
similar to those available through commercial cellular networks. The
Army has purchased more than 26,000 of these radios from us and
plans to competitively procure more than 240,000. We deliver similar
communications and information-sharing benefits to federal/civilian
customers, including air traffic controller radios to the Federal Aviation
Administration (FAA).

Information Systems and Technology also provides many of these
capabilities to non-U.S. public agencies and commercial customers.
For the Canadian Department of National Defence, we developed,
deployed and continue to support the Canadian Army’s fully integrated,
secure combat voice and data network. We leveraged this experience
to deliver the U.K. MoD’s Bowman tactical communication system for
which we provide ongoing support and capability upgrades.

IT solutions and mission support services – We design, build and
operate large-scale secure IT networks and systems and provide
professional and technical services and solutions to the U.S. defense
to the Departments of Homeland
and intelligence communities;
Security and Health and Human Services, and other federal/civilian
agencies; and to commercial and international customers. We
specialize in:

(cid:129) secure wireless and wire-line networks, enterprise infrastructure,

network operations and maintenance;

(cid:129) health IT solutions and services;
(cid:129) large-scale data center optimization and modernization; and
(cid:129) mission operations, simulation and training systems and services.

Information Systems and Technology provides technical-support
personnel and domain specialists to help customers execute their
missions. Our employees develop, install and operate mission systems
on a daily basis. We also supply network-modernization 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 their network
infrastructures are secure, efficient, scalable and cost-effective. We are
at the forefront of cloud technologies and services.

The group is a leading provider

in the healthcare IT market,
supporting military and other U.S. government health systems with
critical citizen services for healthcare reform and medical benefits
programs. Our offerings include data management, analytics,
fraud
prevention and detection software, process automation and program
management solutions for public and commercial health systems. For
example, we are operating approximately 15 customer contact centers
for
responding to
consumer
inquiries about key programs and providing call center
services for the Patient Protection and Affordable Care Act program.

the Centers for Medicare & Medicaid Services,

Intelligence, surveillance and reconnaissance systems – We design,
build, deploy and support ISR, naval control systems and cyber security
solutions for customers in the U.S. defense, intelligence and homeland
security communities, and to U.S. allies. Our offerings include:

(cid:129) signals and information collection, processing and distribution

systems and imagery sensors;

(cid:129) cyber security solutions and products; and
(cid:129) open-architecture surface and undersea naval control systems.

Information Systems and Technology provides solutions for classified
programs. Our expertise includes multi-intelligence ground systems,
command-and-control and reconnaissance systems and large-scale,
high-performance data and signal processing. We deliver high-reliability,
long-life sensors and payloads designed to perform in the most extreme
environments, including space payloads and undersea sensor and power
systems.

General Dynamics Annual Report 2013

7

In addition, our experience in securing and protecting organizations
from network attacks has resulted in a market-leading position in cyber
security. The group offers comprehensive services and products to help
customers protect their networks from internal and external threats and
prevent data breaches. For example, we are supporting the DoD’s
Cyber Crime Center and the Department of Homeland Security’s
National Cybersecurity Protection System. We leverage this expertise to
forensic and network remediation services to
provide investigative,
commercial victims of cyber attacks,
including retail and financial
services firms.

Information Systems and Technology also has a 50-year legacy of
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. Capitalizing on this expertise, we developed
the combat and seaframe control systems and are the lead systems
integrator for the Navy’s Independence-variant Littoral Combat Ship
(LCS) and the electronic systems for the Navy’s Joint High Speed
Vessel (JHSV).

The group is well-positioned to continue meeting the needs of our
diverse customer base. We are continuing to improve performance
the business while
across the portfolio by optimizing the size of
developing
customer
evolving
requirements.

innovative

to meet

solutions

Revenues for the Information Systems and Technology group were
34 percent of our consolidated revenues in 2011, 32 percent in 2012
and 33 percent in 2013. Revenues by major products and services
were as follows:

Year Ended December 31

2011

2012

2013

Mobile communication

systems

$ 4,511

$ 3,425

$ 3,657

IT solutions and mission

support services

4,601

4,545

4,734

Intelligence, surveillance and

reconnaissance systems

2,109

2,047

1,877

Total Information Systems and

Technology

$ 11,221

$ 10,017

$ 10,268

CUSTOMERS

In 2013, 62 percent of our revenues were from the U.S. government,
18 percent were from U.S. commercial customers, 7 percent were
from international defense customers and the remaining 13 percent
were from international commercial customers.

8

General Dynamics Annual Report 2013

U.S. GOVERNMENT
Our primary customer is the U.S. Department of Defense (DoD). We also
contract with other U.S. government
including the
customers,
the Departments of Homeland Security and
intelligence community,
Health and Human Services and first-responder agencies. Our revenues
from the U.S. government were as follows:

Year Ended December 31

2011

2012

2013

DoD

Non-DoD

Foreign Military Sales (FMS)*

$ 19,221

$ 17,217

$ 15,441

2,212

1,170

2,382

1,206

2,790

1,032

Total U.S. government

$ 22,603

$ 20,805

$ 19,263

Percent of total revenues

69%

66%

62%

*

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.

cost-reimbursement

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
cost-
typically
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.

time-and-materials. Under

or

Fixed-price contracts accounted for 56 percent of our U.S.
government business in 2012 and 54 percent
in 2013; cost-
reimbursement contracts accounted for 39 percent in 2012 and 42
percent
in 2013; and time-and-materials contracts accounted for 5
percent in 2012 and 4 percent in 2013.

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 fees earned on
fixed-price contracts. Cost-reimbursement contracts also can include fee
provisions that can require 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 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. Also,
because these contracts can provide little or no fee for managing material
costs, the content mix can impact profit margins.

U.S. COMMERCIAL
Our U.S. commercial revenues were $3.8 billion in 2011, $4.2 billion
in 2012 and $5.6 billion in 2013. This represented approximately 12
percent of our consolidated revenues in 2011, 13 percent in 2012 and
18 percent in 2013. 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.

INTERNATIONAL
revenues from non-U.S. government and commercial
Our direct
customers were $6.3 billion in 2011, $6.5 billion in 2012 and $6.4
billion in 2013. This represented approximately 19 percent of our
consolidated revenues in 2011, 21 percent in 2012 and 20 percent in
2013.

We conduct business with government customers around the world
with operations in Australia, Brazil, Canada, France, Germany, 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. While the installed
is concentrated in North America, orders from
base of aircraft
international customers represent a significant segment of our aircraft
business with approximately 65 percent of
total backlog on
December 31, 2013.

For a discussion of the risks associated with conducting business in
international
locations, see Risk Factors contained herein. For
information regarding revenues and assets by geographic region, see
Note Q to the Consolidated Financial Statements in Item 8.

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:

(cid:129) the technical excellence, reliability and cost competitiveness of our

products and services;

(cid:129) our ability to innovate and develop new products and technologies
that improve mission performance and adapt to dynamic threats;
(cid:129) successful program execution and on-time delivery of complex,

integrated systems;

(cid:129) our global footprint and accessibility to customers;
(cid:129) our presence in the countries of several key customers;
(cid:129) the reputation and customer confidence derived from our past

performance; and

(cid:129) the successful management of customer relationships.

DEFENSE MARKET COMPETITION
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
technology or capability.
companies that specialize in a particular
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 or
expertise. 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 component or subsystem.

BUSINESS-JET AIRCRAFT MARKET COMPETITION
The Aerospace group has several competitors for each of its Gulfstream
products. 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 several third-
party providers.

General Dynamics Annual Report 2013

9

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 in Item 7.

Summary backlog information for each of our business groups follows:

December 31

Aerospace

Combat Systems

Marine Systems

Information Systems and Technology

Funded

2012

Unfunded

Total

Funded

2013

Unfunded

Total

2013 Total
Backlog Not
Expected to Be
Completed in
2014

$ 15,458

$

209

$ 15,667

$ 13,785

$

158

$ 13,943

$ 7,442

7,442

13,495

8,130

1,298

3,606

1,643

8,740

17,101

9,773

5,571

11,795

7,253

1,113

5,063

1,267

6,684

16,858

8,520

2,611

11,573

1,864

Total backlog

$ 44,525

$ 6,756

$ 51,281

$ 38,404

$ 7,601

$ 46,005

$ 23,490

RESEARCH AND DEVELOPMENT

EMPLOYEES

and

product

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
development
enhancement
programs.
In our U.S. defense businesses, we conduct customer-
sponsored R&D activities under government contracts and company-
sponsored R&D.
regulations, we
In accordance with government
recover a significant portion of company-sponsored R&D expenditures
through overhead charges to U.S. government contracts. For more
information on our company-sponsored R&D activities, including our
expenditures for the past three years, see Note A to the Consolidated
Financial Statements in Item 8.

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.

10

General Dynamics Annual Report 2013

On December 31, 2013, we and our subsidiaries had 96,000
employees, approximately one-fifth of whom work under collective
representatives.
agreements with various labor unions and worker
Agreements covering approximately 5 percent of total employees are due
to expire in 2014. Historically, we have renegotiated labor agreements
without any significant disruption to operating activities.

RAW MATERIALS, SUPPLIERS AND
SEASONALITY

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
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.

the availability of

funding from the customer,

Our business is not generally seasonal

in nature. The timing of
contract awards,
the
incurrence of contract costs and unit deliveries are the primary drivers of
our
these factors are
influenced by the federal government’s budget cycle based on its
October-to-September fiscal year. Internationally, work for many of our
government customers is weighted toward the end of the calendar year.

In the United States,

revenue recognition.

REGULATORY MATTERS

to procurement

U.S. GOVERNMENT CONTRACTS
laws and
U.S. government contracts are subject
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
individual agencies can
acquisitions and purchased services. Also,
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:

(cid:129) acquisition planning,
(cid:129) competition requirements,
(cid:129) contractor qualifications,
(cid:129) protection of source selection and vendor information, and
(cid:129) 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.

INTERNATIONAL
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.

similar aviation regulatory authorities

BUSINESS-JET AIRCRAFT
The Aerospace group is subject to FAA regulation in the United States
internationally,
and other
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.

disposal,

treatment,

discharge,

investigation

to a variety of

ENVIRONMENTAL
local and foreign
federal, state,
We are subject
laws and regulations. These laws and regulations cover
environmental
and
storage,
the
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. In
cases where we have been designated a PRP, generally we seek to
liabilities through available insurance
mitigate these environmental
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 in Item 8.

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
our website
are made
(www.generaldynamics.com) as soon as practicable and through the
General Dynamics investor relations office at (703) 876-3583.

available

these

items

on

of

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
(800) SEC-0330. The SEC maintains a website
calling the SEC at
(www.sec.gov) that contains reports, proxy and information statements,
and other information.

General Dynamics Annual Report 2013

11

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.

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 are pressuring various areas of spending. Defense
investment accounts (budgets for procurement and research and
development) remain under pressure. Decreases in U.S. government
defense spending,
including investment accounts, or changes in
spending allocation could result in one or more of our programs being
reduced, delayed or terminated, which could impact our financial
performance.

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 in Item 7.

U.S. government contracts are not always fully funded at
inception and any funding is subject to disruption or delay. 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.

12

General Dynamics Annual Report 2013

There are two primary risks associated with the U.S. government
budget cycle. First, the annual process may be delayed or disrupted,
which has occurred during the past few years. 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
continuing resolution 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 part,

in whole or

to terminate a contract,

Our U.S. government contracts are subject to termination
rights by the customer. U.S. government contracts generally permit
the government
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
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
its internal control systems and policies,
contractor’s compliance with,
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. The business-jet market is driven by the demand
for business-aviation products and services by business, individual and
government customers in the United States and around the world. The
factors,
also
Aerospace

group’s

depend

results

other

on

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.

Earnings and margins depend on our ability to perform on
our contracts. When agreeing to contractual terms, our management
team makes assumptions and projections about future conditions or
events. The accounting for our contracts and programs requires
assumptions and estimates about these conditions and events. These
projections and estimates assess:

(cid:129) the productivity and availability of labor,
(cid:129) the complexity of the work to be performed,
(cid:129) the cost and availability of materials and components, and
(cid:129) schedule requirements.

If

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

for

our

and

subsystems

components

Earnings and margins depend in part on subcontractor and
vendor performance. We rely on other companies to provide
materials,
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 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
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. International
transactions can involve increased financial and legal risks arising from
foreign exchange-rate variability and differing legal systems. Our
international business is subject
to U.S. and foreign laws and
regulations, including laws and regulations relating to import-export
controls, technology transfers, the Foreign Corrupt Practices Act and
certain other anti-corruption laws, and the International Traffic in Arms

Regulations (ITAR). An unfavorable event or trend in any one or more of
these factors or a failure to comply with U.S. or foreign laws could result
in administrative, civil or criminal
including suspension or
liabilities,
from government contracts or suspension of our export
debarment
privileges and 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 financial arrangements. We may also
be required to agree to specific in-country purchases, manufacturing
agreements or financial support arrangements, known as offsets, that
require us to satisfy certain requirements or face penalties. Offset
requirements may extend over several years and require us to establish
joint ventures with local companies. If we do not satisfy these financial or
offset requirements, our future revenues and earnings may be materially
adversely affected.

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
transaction. Whether we realize the anticipated benefits from these
transactions depends on multiple factors, including our integration of the
the underlying products,
businesses involved,
capabilities or technologies, market conditions following the acquisition
and acquired liabilities, including some that may not have been identified
prior to the acquisition. These factors could materially adversely affect
our financial results.

the performance of

the time of

Changes in business conditions may cause goodwill and other
intangible assets to become impaired. Goodwill represents the
purchase price paid in excess of the fair value of net tangible and

General Dynamics Annual Report 2013

13

intangible assets acquired. Goodwill 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. We face some uncertainty in our business environment
due to a variety of challenges, including changes in defense spending.
We may experience unforeseen circumstances that adversely affect the
value of our goodwill or intangible assets and trigger an evaluation of
the recoverability of the recorded goodwill and intangible assets. Future
write-offs of goodwill or other intangible assets as a result of an
impairment test or any accelerated amortization of other intangible
assets could have a negative impact on our results of operations and
financial condition.

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, denial of service attacks, as well
as threats to the physical security of our facilities and employees, and
threats from terrorist acts. We also design and manage information
technology systems for various customers. We generally face the same
security threats for these systems as for our own. Accordingly, we
maintain information security policies and procedures for managing all
systems. We have experienced cyber security
threats to our
information technology infrastructure and attempts to gain access to
our sensitive information. Such prior events have not had a material
impact on our financial condition, results of operations or liquidity.
However, future threats 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. Our insurance
coverage may not be adequate to cover all the costs related to cyber
security attacks or disruptions resulting from such events.

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,”
“scheduled,”
“believes,”
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

“estimates,”

“outlook,”

“should”

14

General Dynamics Annual Report 2013

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, 2013, our business groups had primary operations

at the following locations:

(cid:129) 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.
(cid:129) 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; Lima, Ohio; Eynon, Red
Lion and Scranton, Pennsylvania; Edgefield and Ladson, South
Carolina; Garland, Texas; Williston, Vermont; Marion, Virginia; Auburn,
Washington; Oshkosh, Wisconsin; Vienna, Austria; Edmonton,
London, La Gardeur, St. Augustin and Valleyfield, Canada; St. Etienne,

France; Kaiserslautern, Germany; Granada, Sevilla and Trubia,
Spain; Kreuzlingen, Switzerland.

(cid:129) 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.

(cid:129) Information Systems and Technology – Cullman, Alabama;
Phoenix and Scottsdale, Arizona; San Diego and Santa Clara,
California; Colorado Springs, Colorado; Lynn Haven and Orlando,
Florida; Coralville, Iowa; Lawrence, Kansas; Annapolis Junction and
Taunton,
Towson, Maryland;
Massachusetts; Ypsilanti, Michigan; Bloomington, Minnesota;
Nashua, New Hampshire; Florham Park, New Jersey; Greensboro
and Newton, North Carolina; Houston and Kilgore, Texas; Sandy,
Utah; Arlington, Chantilly, Chesapeake, Fairfax, Herndon, Richmond
and Springfield, Virginia; Calgary and Ottawa, Canada; Tallinn,
Estonia; Oakdale, St. Leonards and Throckmorton, United Kingdom.

Needham,

Pittsfield

and

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

2013, follows:

(Square feet in millions)

Aerospace

Combat Systems

Marine Systems

Information Systems and

Technology

Total

Company-
owned
Facilities

Leased
Facilities

Government-
owned
Facilities

6.1

8.3

8.3

3.2

25.9

4.6

5.2

2.2

9.0

21.0

–

5.7

–

0.9

6.6

Total

10.7

19.2

10.5

13.1

53.5

ITEM 3. LEGAL PROCEEDINGS

For information relating to legal proceedings, see Note N to the
Consolidated Financial Statements in Item 8.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR THE COMPANY’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange.

The high and low sales prices of our common stock and the cash
dividends declared on our common stock for each quarter of 2012 and
2013 are included in the Supplementary Data contained in Item 8.

On January 26, 2014, 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 Item 8.

We did not make any unregistered sales of equity securities in 2013.
The following table provides information about our fourth quarter
to

repurchases of equity securities that are registered pursuant
Section 12 of the Securities Exchange Act of 1934, as amended:

Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Program*

Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Program*

Total
Number of
Shares
Purchased

Average
Price
Paid per
Share

244,980

$ 87.67

244,980

11,436,352

–

–

$

$

–

–

–

–

11,436,352

11,436,352

Period

Pursuant to Share Buyback

Program

9/30/13-10/27/13

10/28/13-11/24/13

11/25/13-12/31/13

Total

244,980

$ 87.67

* On October 2, 2013, with 1.4 million shares remaining under a prior authorization, the board of

directors authorized management to repurchase 10 million shares of common stock.

For additional

information relating to our repurchases of common
stock during the past three years, as well as the subsequent repurchase
of 11.4 million shares in January 2014, see Financial Condition, Liquidity
and Capital Resources – Financing Activities – Share Repurchases
contained in Item 7.

General Dynamics Annual Report 2013

15

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.

Cumulative Total Return
Based on Investments of $100 Beginning December 31, 2008
(Assumes Reinvestment of Dividends)

$  300

250

200

150

100

50

 0

2008

2009

2010

2011

2012

2013

General Dynamics 

S&P 500 Aerospace & Defense

S&P 500

16

General Dynamics Annual Report 2013

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.

(Dollars and shares in millions, except per-share and employee amounts)

2009

2010

2011

2012

2013

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)

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

$

$

$

6.20
6.17

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

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

2,470
18.0%
45,856
65,545
385.7

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

$

$

$

6.82
6.81

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

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

2,616
17.4%
43,379
59,561
372.1

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

$

$

$

6.94
6.87

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
16.4%
44,699
57,410
356.4

$ 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

385.5
387.9
91,700
346,500

381.2
385.2
90,000
358,100

364.1
367.5
95,100
358,600

353.3
353.3
92,200
337,300

$ 31,218
3,685
11.8%
(86)
1,121
2,486
8.0%
(129)
2,357

$

$

$

7.03
6.67

3,106
(367)
(725)
(9)
2.24

5,301
35,448
3,909
14,501
27.0%
41.03
714

2,666
16.6%
38,404
46,005
353.4

350.7
353.5
96,000
337,600

(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 was 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 2013

17

(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

Aerospace’s long-term growth. Similarly, we believe aircraft-service
revenues provide the group diversified exposure to aftermarket sales
fueled by the global installed business-jet fleet.

For an overview of our business groups, including a discussion of products
and services provided, see the Business discussion contained in Item 1.

RESULTS OF OPERATIONS

BUSINESS ENVIRONMENT

INTRODUCTION

More than 60 percent of our revenues are from the U.S. government.
Accordingly, our financial performance is impacted by U.S. government
spending levels, particularly defense spending. Over the past several
years, U.S. defense spending has been reduced, due in part to the
country’s fiscal shortfall. To address this shortfall, the Budget Control
Act of 2011 (BCA) mandated a $487 billion, or 8 percent, reduction to
previously-planned defense funding over 10 years. The BCA also
included a mechanism, referred to as the sequester, that can impose
additional defense cuts of up to $500 billion, or 9 percent, over nine
years starting in fiscal year (FY) 2013.

The Bipartisan Budget Act of 2013 (BBA) prescribed defense top-
line funding for FY 2014 and 2015 at levels generally consistent with
FY 2013,
reducing budget uncertainties and providing near-term
stability. The BBA also included sequester reductions of approximately
$30 billion in FY 2014 and $43 billion in FY 2015, less than the
amounts imposed by the BCA.

In adherence to the BBA, Congress appropriated $497 billion in FY
2014 for the Department of Defense (DoD), including approximately
$156 billion for procurement and research and development (R&D)
budgets, also known as investment accounts, relatively consistent with
FY 2013. These investment accounts are the source of the majority of
our U.S. government revenues.

The long-term outlook for our U.S. defense business is buoyed by the
relevance of our programs to the U.S. military’s funding priorities, the
into customer
diversity of our programs and customers, our insight
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 outside the U.S. presented by
demand for military equipment and information technologies from our
international operations and through exports from our North American
businesses. While the revenue potential can be significant, our work for
these customers is subject to changing budget priorities and overall
spending pressures, as well as timing of contract awards.

In our Aerospace group, business-jet market conditions were strong
in 2013. The group benefited from improved order interest across the
group’s range of customers and lower customer contract defaults. We
expect our continued investment in new aircraft products to support

18

General Dynamics Annual Report 2013

An understanding of our accounting practices is important to evaluate
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 groups.

the manufacture of

In the Aerospace group, contracts for new aircraft have two major
phases:
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
aircraft.
higher-margin
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 R&D costs incurred by the group.

lower-margin mid-cabin

large-cabin

and

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
variances
attributed to volume are due to changes in production or service levels
and delivery schedules.

contracts or programs. Year-over-year

Operating costs for the defense groups consist of labor, material,
subcontractor, overhead and G&A costs and are recognized generally
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 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 compared
with prior periods do not necessarily impact profitability. It is only when
total estimated costs at completion on a given contract change without a
corresponding change in the value of that contract that the profitability
of that contract may be impacted. Contract mix refers to changes in the
volume of higher-vs. lower-margin work. Additionally, 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).

CONSOLIDATED OVERVIEW

REVIEW OF 2012 VS. 2013

Year Ended December 31

2012

2013

Variance

Revenues
Operating costs and

expenses

Operating earnings
Operating margins

$ 31,513

$ 31,218

$ (295)

(0.9)%

30,680
833
2.6%

27,533
3,685
11.8%

3,147
2,852

10.3%
342.4%

REVIEW OF BUSINESS GROUPS

Our revenues were essentially flat in 2013 compared with 2012 despite
a challenging business environment that included a 16-day partial U.S.
government shutdown. We experienced lower volume in our Combat
Systems business as a result of decreased U.S. Army spending and
delays in international orders. This was largely offset by higher revenues
in our Aerospace group from increased deliveries of G650 and G280
aircraft. Revenues increased slightly in our Marine Systems and
Information Systems and Technology groups in 2013. Operating costs
were lower in 2013 due to several discrete charges in 2012, most
significantly a $2 billion goodwill impairment recorded in the Information
Systems and Technology group. These charges are discussed below in
conjunction with our business groups’ operating results. Operating
earnings and margins increased significantly in 2013 due to improved
operating performance.

REVIEW OF 2011 VS. 2012

Year Ended December 31

2011

2012

Variance

Revenues

$ 32,677

$ 31,513

$ (1,164)

(3.6)%

Operating costs and

expenses

Operating earnings

Operating margins

28,851

3,826

11.7%

30,680

833

2.6%

(1,829)

(2,993)

(6.3)%

(78.2)%

Our revenues decreased in 2012 compared with 2011 due to lower
volume in the Information Systems and Technology group’s mobile
communication systems business and on several European 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 the discrete charges referenced above,
resulting in lower
operating earnings and margins.

Year Ended December 31

2011

2012

2013

Aerospace

Combat Systems

Marine Systems

Information Systems and Technology

Corporate

Revenues

Operating Earnings

Revenues

Operating Earnings

Revenues

Operating Earnings

$ 5,998

$

729

$ 6,912

$ 858

$ 8,118

$ 1,416

8,827

6,631

11,221

–

1,283

691

1,200

(77)

7,992

6,592

10,017

–

663

750

(1,369)

(69)

6,120

6,712

10,268

–

904

666

795

(96)

$ 32,677

$ 3,826

$ 31,513

$ 833

$ 31,218

$ 3,685

General Dynamics Annual Report 2013

19

Following is a discussion of 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 in Item 8.

AEROSPACE

Review of 2012 vs. 2013

Aircraft manufacturing, outfitting and completions earnings increased
in 2013 primarily due to the increase in aircraft deliveries discussed
above. In addition to improved performance, aircraft services earnings
increased in 2013 primarily due to the impairment charge taken in 2012
discussed below. In the completions and maintenance businesses, Jet
Aviation made positive contributions throughout 2013 following actions
to reduce costs and improve operational processes.

Review of 2011 vs. 2012

Year Ended December 31

2011

2012

Variance

Revenues

Operating earnings

Operating margins

$ 5,998

$ 6,912

729

12.2%

858

12.4%

$ 914

129

15.2%

17.7%

Year Ended December 31

2012

2013

Variance

Gulfstream aircraft deliveries (in units):

Green

Outfitted

107

99

121

94

14

(5)

13.1%

(5.1)%

The Aerospace group’s revenues and operating earnings increased in
2012 primarily due to increased green deliveries of G650 aircraft, which
began in the fourth quarter of 2011. Losses in Jet Aviation’s completions
the completions
business in 2011 included a $111 impairment of
business intangible asset and $78 of project losses, while 2012 was
negatively impacted by a $191 impairment of the maintenance business
intangible assets. During 2011 and 2012, Jet Aviation’s completions and
maintenance businesses suffered from an increasingly competitive
marketplace and performance issues.

2014 Outlook
With continued growth in deliveries of newer Gulfstream aircraft models,
we expect an increase of approximately 11 percent
in the group’s
revenues in 2014 compared with 2013. Operating margins are expected
to be around 17 percent.

COMBAT SYSTEMS

Review of 2012 vs. 2013

Year Ended December 31

2012

2013

Variance

Revenues

$ 7,992

$ 6,120

$ (1,872)

Operating earnings

Operating margins

663

8.3%

904

14.8%

241

(23.4)%

36.3%

Revenues

Operating earnings

Operating margins

$ 6,912

$ 8,118

$ 1,206

858

12.4%

1,416

17.4%

558

17.4%

65.0%

Gulfstream aircraft deliveries (in units):

Green

Outfitted

121

94

139

144

18

50

14.9%

53.2%

The increase in the Aerospace group’s revenues in 2013 consisted of
the following:

Aircraft manufacturing, outfitting and completions

Aircraft services

Pre-owned aircraft

Total increase

$ 1,061

39

106

$ 1,206

and

completions

Aircraft manufacturing,

revenues
outfitting
increased in 2013 primarily due to additional deliveries of G650 and
G280 aircraft. Production rates for these aircraft have been ramping up
since their initial green deliveries in 2011 and 2012, respectively. Pre-
owned aircraft sales increased as we sold 11 aircraft in 2013 as
compared to three in 2012. The group had one pre-owned aircraft
available for sale on December 31, 2013.

The increase in the group’s operating earnings in 2013 consisted of

the following:

Aircraft manufacturing, outfitting and completions

Aircraft services

Pre-owned aircraft

G&A/other expenses

Total increase

$ 376

222

(9)

(31)

$ 558

20

General Dynamics Annual Report 2013

The decrease in the Combat Systems group’s revenues in 2013
consisted of the following:

U.S. military vehicles

Weapons systems and munitions

European military vehicles

Total decrease

$ (1,389)

(439)

(44)

$ (1,872)

In 2013, revenues were down as a result of decreased U.S. Army
spending, in part due to sequestration and the government shutdown.
including Stryker,
This impacted U.S. military vehicle programs,
Abrams and Mine-Resistant, Ambush-Protected (MRAP), and weapons
systems and munitions, including axles, Hydra-70 rockets, guns and
ammunition. In addition, revenues in the group’s European military
vehicles business were down slightly due to final vehicle deliveries in
2012 on Duro and Eagle wheeled vehicle contracts for the Swiss and
German governments, respectively.

In response to decreased customer spending and to align our
business with anticipated future demand, we implemented cost
reduction initiatives in 2013 throughout
the group. We reduced
headcount by more than 25 percent in our U.S. and European military
vehicles businesses. Additionally, we consolidated our weapons
systems and munitions businesses. Our actions are intended to help us
remain competitively positioned for
the future while creating
opportunities for margin improvement.

The Combat Systems group’s operating earnings and margins
increased in 2013 primarily due to the 2012 discrete charges in our
European military vehicles business discussed below that reduced the
group’s operating margins approximately 530 basis points. Operating
earnings and margins also increased 120 basis points in 2013 due to
strong performance across our U.S. businesses and the favorable
impact of cost savings associated with restructuring activities in our
European military vehicles business.

Review of 2011 vs. 2012

Year Ended December 31

2011

2012

Variance

Revenues

Operating earnings

Operating margins

$ 8,827

1,283

14.5%

$ 7,992

663

8.3%

$ (835)

(620)

(9.5)%

(48.3)%

vehicles. Volume was down across several U.S. armament and munitions
programs in 2012 due to slowed defense spending, including vehicle
armor, MK47 grenade launchers and Hydra-70 rockets. The sale of the
detection systems business in the second quarter of 2011 also resulted
in lower revenues in the weapons systems and munitions business in
2012.

The Combat Systems group’s operating earnings and margins
decreased significantly in 2012 due to the negative impact of three
discrete charges in our European military vehicles business:

(cid:129) $292 for contract dispute 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);

(cid:129) $98 of

restructuring-related charges, primarily severance,

for

activities associated with eliminating excess capacity; and

(cid:129) $67 of out-of-period adjustments recorded in the first quarter of 2012

($48 of this amount was recorded as a reduction of revenues).

2014 Outlook
We expect the Combat Systems group’s revenues in 2014 to decrease 4
to 4.5 percent from 2013 with operating margins approximating 14
percent. Our outlook assumes approximately $1.2 billion in revenues
from an international order expected in the first quarter of 2014.

MARINE SYSTEMS

Review of 2012 vs. 2013

Year Ended December 31

2012

2013

Variance

Revenues

Operating earnings

Operating margins

$ 6,592

$ 6,712

$ 120

1.8%

750

11.4%

666

9.9%

(84)

(11.2)%

The increase in the Marine Systems group’s revenues in 2013 consisted
of the following:

Navy ship construction

Navy ship engineering, repair and other services

Commercial ship construction

Total increase

$ (150)

178

92

$ 120

The Combat Systems group’s revenues decreased in 2012 compared
with 2011 due to lower volume in the group’s European military
vehicles and weapons systems and munitions businesses.
In the
group’s European military vehicles business, revenues were down in
2012 on contracts with various international customers that were
nearing completion, including contracts for Piranha, Duro and Eagle

The group’s U.S. Navy ship-construction programs include Virginia-
class submarines, DDG-1000 and DDG-51 destroyers, and Mobile
Landing Platform (MLP) auxiliary support ships. The decrease in 2013
construction revenues is due to the completion of the T-AKE combat-
logistics ship program in late 2012. Partially offsetting this decrease,

General Dynamics Annual Report 2013

21

revenues increased on the Virginia-class program, primarily due to
long-lead material for the initial boats on the next block of submarines.
Revenues were higher on engineering and repair programs for the Navy
in 2013 due to increased submarine overhaul and repair work.
Commercial ship construction revenues increased as work commenced
on contracts for Jones Act ships secured in late 2012 and 2013.

Operating earnings and margins decreased in 2013 due to the
the mature, higher-margin T-AKE program in 2012.
completion of
Excluding the impact of this program, operating margins improved in
2013.

Review of 2011 vs. 2012

Year Ended December 31

2011

2012

Variance

Revenues

Operating earnings

Operating margins

$ 6,631

$ 6,592

691

10.4%

750

11.4%

$ (39)

59

(0.6)%

8.5%

Revenues in the Marine Systems group decreased slightly in 2012 as
lower Navy ship construction revenues were largely offset by higher
revenues on engineering and repair programs for the Navy. Decreased
Navy ship construction revenues on the Virginia-class and the T-AKE
programs were partially offset by an increase on the MLP and DDG
programs. Higher revenues on Navy engineering and repair programs
were driven by the acquisition 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. Increases in the T-AKE profit
rate contributed $53 to the operating earnings growth, approximately
70 basis points of margin expansion, as the program continued to
experience favorable cost performance through construction and
delivery of the final ship.

2014 Outlook
We expect the Marine Systems group’s 2014 revenues to increase 2.5
percent from 2013 with operating margins approximating 9.5 percent.

INFORMATION SYSTEMS AND TECHNOLOGY

Review of 2012 vs. 2013

Year Ended December 31

2012

2013

Variance

Revenues

$ 10,017

$ 10,268

$

251

2.5%

Operating earnings (loss)

(1,369)

Operating margins

(13.7)%

795

7.7%

2,164

158.1%

22

General Dynamics Annual Report 2013

The increase in the Information Systems and Technology group’s
revenues in 2013 consisted of the following:

Mobile communication systems

Information technology (IT) solutions and mission support services

Intelligence, surveillance and reconnaissance (ISR) systems

Total increase

$ 232

189

(170)

$ 251

Revenues increased in 2013 in the mobile communication systems
business due to higher volume on key programs that received significant
including the Warfighter
production awards in late 2012 or 2013,
Information Network-Tactical
(WIN-T), Handheld, Manpack and Small
Form-Fit (HMS) and Common Hardware Systems-4 (CHS-4) programs.
The IT services business added more than 8,000 employees throughout
the year to meet commercial wireless customers’ accelerated schedules
for IT infrastructure services and to start work on a contract to provide
contact-center services for
the Centers for Medicare & Medicaid
Services, resulting in increased revenues in 2013. Revenues decreased
in 2013 across the ISR business driven by lower U.S. defense spending
and a slower-than-expected transition to related follow-on work.

The Information Systems and Technology group’s operating earnings
and margins increased in 2013 due to several discrete charges taken in
2012 discussed below. Excluding these charges, operating margins
decreased slightly in 2013 primarily due to growth in the lower-margin IT
services business and performance challenges in the group’s U.K.
business. The U.K. business was consolidated into our North American
mobile communication systems business in 2013.

Review of 2011 vs. 2012

Year Ended December 31

2011

2012

Variance

Revenues

Operating earnings

Operating margins

$ 11,221

$ 10,017

$ (1,204)

(10.7)%

1,200

(1,369)

(2,569)

(214.1)%

10.7%

(13.7)%

The Information Systems and Technology group’s revenues were down in
2012 compared with 2011, driven primarily by lower revenues in the
mobile communication systems business. Revenues in this business
were impacted unfavorably by slowed defense spending and protracted
U.S. customer acquisition cycles. This resulted in lower revenues in
2012 on key programs including WIN-T and CHS, and in encryption and
ruggedized hardware products. In addition, more than 10 percent of the
decline in the group’s revenues was due to lower volume on the U.K.-
based Bowman communication system program, which was fielded
successfully and moved into maintenance and long-term support.

Operating earnings and margins decreased significantly in 2012
compared with 2011 driven by the negative impact of four discrete
charges:

(cid:129) $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, coupled
with margin compression due to a shift in the group’s contract mix
impacting projected cash flows;

(cid:129) $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 2012 indicative of lower overall demand caused by the
economic downturn;

(cid:129) $58 write-down of substantially all of the remaining ruggedized
hardware inventory based on anticipated remaining demand for
products that ceased production in 2012; and

(cid:129) $26 for cost growth associated with the demonstration phase of the

U.K. Specialist Vehicle (SV) program.

2014 Outlook
We expect 2014 revenues in the Information Systems and Technology
group to decrease nearly 20 percent from 2013, largely due to award
delays and slowed defense spending on major production programs in
the mobile communication systems business. Operating margins are
expected to be in the low-8 percent range.

CORPORATE
Corporate results consist primarily of compensation expense for stock
options. Corporate operating costs totaled $77 in 2011, $69 in 2012
and $96 in 2013. We expect 2014 Corporate operating costs of
approximately $85.

OTHER INFORMATION

PRODUCT AND SERVICE REVENUES AND OPERATING COSTS

Review of 2012 vs. 2013

Year Ended December 31

2012

2013

Variance

$ 19,784
11,729

$ 19,371
11,847

$ (413)
118

(2.1)%
1.0%

Revenues:
Products
Services

Operating Costs:
Products
Services

The decrease in product revenues in 2013 consisted of the following:

Military vehicle production

Weapons systems and munitions production

Aircraft manufacturing and outfitting

Other, net

Total decrease

$ (1,218)

(430)

1,123

112

$

(413)

In 2013, military vehicle production revenues decreased on several
programs, including the Stryker, Abrams and MRAP programs. Weapons
systems and munitions production revenues decreased due to lower U.S.
Army spending on axles, Hydra-70 rockets, guns and ammunition.
Offsetting these decreases, aircraft manufacturing and outfitting
revenues increased due to additional deliveries of the new G650 and
G280 aircraft.

Product operating costs were lower in 2013 compared with 2012.
Discrete charges in 2012 are discussed below. Excluding these charges,
the decrease in product operating costs was primarily due to lower
volume. No other changes were individually significant.

Primary changes due to volume:

Military vehicle production

Weapons systems and munitions production

Aircraft manufacturing and outfitting

2012 discrete charges

Other changes, net

Total decrease

$ (1,180)

(358)

864

(674)

(289)

31

$

(932)

The increase in service revenues in 2013 consisted of the following:

Ship engineering and repair

Other, net

Total increase

$ 178

(60)

$ 118

Ship engineering and repair revenues increased in 2013 due to

increased submarine overhaul and repair work.

Service operating costs were lower in 2013 compared with 2012 due
to the intangible asset impairment in 2012 discussed below. Excluding
this impairment, service operating costs increased primarily due to
higher volume. No other changes were individually significant.

$ 16,228
10,182

$ 15,296
10,158

$ (932)
(24)

(5.7)%
(0.2)%

Other changes, net

Total decrease

Ship engineering and repair volume

2012 intangible asset impairment

$ 163

(191)

4

$ (24)

General Dynamics Annual Report 2013

23

Review of 2011 vs. 2012

Year Ended December 31

2011

2012

Variance

Primary changes due to volume:

Mobile communication products

European vehicle production

Ship construction

Revenues:

Products

Services

Operating Costs:

Products

Services

$ 21,440

$ 19,784

$ (1,656)

(7.7)%

Aircraft manufacturing and outfitting

11,237

11,729

492

4.4%

$ 17,230

$ 16,228

$ (1,002)

9,591

10,182

591

(5.8)%

6.2%

Other changes, net

Total decrease

2012 discrete charges

2011 intangible asset impairment

$

(850)

(377)

(422)

585

(1,064)

289

(111)

(116)

$ (1,002)

The decrease in product revenues in 2012 consisted of the following:

The increase in service revenues in 2012 consisted of the following:

Mobile communication products

European vehicle production

Ship construction

Aircraft manufacturing and outfitting

Other, net

Total decrease

Ship engineering and repair

Mobile communication support

Other, net

Total increase

$ (1,177)

(636)

(404)

791

(230)

$ (1,656)

$ 358

91

43

$ 492

In 2012, mobile communication products revenues decreased due
to slowed defense spending and protracted U.S. customer acquisition
cycles. Lower European vehicle production revenues were largely due
to several contracts nearing completion and the revenue impact of the
to provide Pandur vehicles to the
termination of
Portuguese government. Ship construction revenues decreased due to
the completion of the T-AKE combat-logistics ship program and timing
of
submarine program. Aircraft
manufacturing and outfitting revenues were higher due to increased
deliveries of G650 aircraft.

activity on the Virginia-class

the contract

Product operating costs were lower in 2012 compared with 2011.
As shown below, the decrease in product operating costs was primarily
due to lower volume. Discrete charges discussed in conjunction with
the Combat Systems and Information Systems and Technology 2012
business groups’ operating results included $110 of intangible asset
impairments on several assets in our optical products business, $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 SV
program for the U.K. Ministry of Defence. The 2011 intangible asset
impairment
in Jet Aviation’s completions business is discussed in
conjunction with the Aerospace business group’s operating results. No
other changes were individually significant.

24

General Dynamics Annual Report 2013

In 2012, the increase in ship engineering and repair revenues was
driven by the acquisition of two East Coast surface-ship repair operations
and higher volume on the 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 communication system program.

Service operating costs were higher in 2012 compared with 2011. As
shown below, the increase in service operating costs was primarily due
to higher volume. The 2012 intangible asset impairment in Jet Aviation’s
maintenance business is discussed in conjunction with the Aerospace
business group’s operating results. No other changes were individually
significant.

Primary changes due to volume:

Ship engineering and repair

Mobile communication support

2012 intangible asset impairment

Other changes, net

Total increase

$ 298

76

374

191

26

$ 591

GOODWILL IMPAIRMENT
In 2012, we recorded a $2 billion goodwill impairment in the Information
Systems and Technology group discussed in conjunction with the
business group’s operating results.

G&A EXPENSES
As a percentage of revenues, G&A expenses were 6.2 percent in
2011, 7.2 percent in 2012 and 6.7 percent in 2013. G&A expenses in
2012 and 2013 were negatively impacted by restructuring-related
charges in our European military vehicles business. We expect G&A
expenses in 2014 to be approximately 6.5 percent of revenues.

refinancing completed in December 2012 that

INTEREST, NET
Net interest expense was $141 in 2011, $156 in 2012 and $86 in
2013. The decrease in interest expense from 2012 results from our
lowered the
debt
weighted-average interest rate on our outstanding debt
from 3.9
to 2.2 percent. See Note J to the Consolidated Financial
percent
information regarding our debt
Statements in Item 8 for additional
interest expense to be
obligations. We expect
approximately $90.

full-year 2014 net

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.

PROVISION FOR INCOME TAXES, NET
Our effective tax rate was 31.4 percent in 2011, 161.4 percent in
2012 and 31.1 percent in 2013. 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
further
discussion and a reconciliation of our effective tax rate from the
statutory federal
rate, see Note E to the Consolidated Financial
Statements in Item 8. We anticipate an effective tax rate in the range
of 30.5 to 31 percent in 2014.

international operations. For

DISCONTINUED OPERATIONS
In 2013, we recognized a $129 loss, net of taxes, from the settlement
of the A-12 litigation with the U.S. Navy. See Note N to the Consolidated
the A-12
Financial Statements in Item 8 for further discussion of
in
taxes,
In 2011, we recognized a $13 loss, net of
settlement.
discontinued operations from the settlement of an environmental matter
associated with a former operation of the company. We also increased
our estimate of the legal costs associated with the A-12 litigation as a
result of the U.S. Supreme Court’s decision in that year that extended
the timeline associated with the litigation, resulting in a $13 loss, net of
taxes, for a combined loss in discontinued operations of $26 in 2011.

BACKLOG AND ESTIMATED POTENTIAL
CONTRACT VALUE

$100,000 

 75,000

 50,000

25,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2011

2012

2013

in our defense business

Our total backlog, including funded and unfunded portions, was $46
billion at the end of 2013 compared with $51.3 billion at year-end 2012.
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. Contract options in the Aerospace group represent options to
purchase new aircraft and long-term agreements with fleet customers.
We recognize options in backlog when the customer exercises the option
and establishes a firm order. On December 31, 2013, estimated
potential contract value associated with IDIQ contracts and contract
options was approximately $27.6 billion, up 3 percent from $26.9 billion
at the end of 2012. We expect to realize this value over the next several
years.

General Dynamics Annual Report 2013

25

AEROSPACE

DEFENSE GROUPS

$20,000

15,000

10,000

5,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2011

2012

2013

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 2013 with a total
backlog of $13.9 billion, down from $15.7 billion at year-end 2012.
The group’s backlog has declined in recent years as we ramped up
G650 production to work off the substantial orders we received upon
introduction of the aircraft in 2008.

Orders were up significantly compared to 2012 and included strong
demand across our product portfolio. Estimated potential contract value
increased $1.7 billion associated with international orders received in
2013.

The group’s customer base is diverse across customer types and
geographic regions. At year-end 2013, private companies and
individuals collectively represented approximately 60 percent of the
group’s backlog. Geographically, 65 percent of the group’s backlog
was comprised of international customers on December 31, 2013.

We balance aircraft production rates with customer demand to
maximize profitability and stabilize delivery levels over time. This has
enabled us to maintain an appropriate window between customer order
and delivery for our G450 and G550 large-cabin aircraft. We have
approximately four years of backlog for the G650. Backlog will likely
decrease over the next several years as the time period between
customer order and delivery of the G650 aircraft normalizes. At that
time, we expect order activity to more closely match deliveries.

The total backlog in our defense groups represents the estimated
remaining sales value of work to be performed under firm contracts. The
funded portion of this backlog includes items 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 $32.1 billion on December 31, 2013, compared with $35.6 billion
at the end of 2012.

COMBAT SYSTEMS

$20,000

15,000

10,000

5,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2011

2012

2013

Combat Systems’ total backlog was $6.7 billion at the end of 2013
compared with $8.7 billion at year-end 2012 due to delays in
international orders and slowed U.S. Army spending.

The group’s backlog on December 31, 2013, included $1.2 billion for
M1 Abrams main battle tank modernization and upgrade programs for
the Army and U.S. allies around the world. In 2013, the group received
awards totaling $435 for all Abrams-related programs.

The Army’s Stryker wheeled combat vehicle program represented $1
billion of
the group’s backlog at December 31, 2013, with vehicles
scheduled for delivery through 2015. The group received $620 of Stryker
orders in 2013,
including awards for 96 double-V-hulled vehicles,
contractor logistics support and engineering services. The group received
a $230 order in 2013 for research, development and testing in preparation
for the Stryker Engineering Change Proposal (ECP) upgrade program.

26

General Dynamics Annual Report 2013

The Combat Systems group has several significant

international
military vehicle production contracts in backlog. The backlog at the end
of the year included:

(cid:129) $950 for LAVs for various international customers, including $570
for the upgrade and modernization of approximately 600 LAV III
combat vehicles for the Canadian Army;

(cid:129) $345 for the design, integration and production of seven prototypes

under the U.K.’s SV program;

(cid:129) $320 for Pizarro Advanced Infantry Fighting Vehicles scheduled for

delivery to the Spanish Army through 2016; and

(cid:129) $190 for the production of additional Eagle vehicles for Germany
and Duro vehicles for Switzerland, with an option for 76 additional
vehicles.

The Combat Systems group’s backlog at year end also included

$2.2 billion for weapons systems and munitions programs.

Combat Systems’ estimated potential contract value of $3.7 billion
increased approximately 30 percent since year-end 2012 primarily due
to an IDIQ award for the new Ground Mobility Vehicle (GMV).

Navy destroyer programs represented $4.9 billion of

the group’s
backlog at year-end 2013. We currently have construction contracts for
six DDG-51 destroyers, including four awarded in 2013, scheduled for
delivery through 2022. Backlog at year end also includes three ships
under the DDG-1000 program scheduled for delivery through 2018.

The Marine Systems group’s backlog at December 31, 2013, included
$250 for the MLP program. In 2013, the group delivered the first ship in
the program, and construction is underway on the remaining two ships,
scheduled for delivery in 2014 and 2015. The Navy’s shipbuilding plan
includes procurement of a fourth ship in 2014. The third and fourth ships
will be configured as Afloat Forward Staging Bases (AFSB).

The year-end backlog also included $1.1 billion for nine Jones Act
ships for commercial customers, including contracts for seven ships
secured in 2013, scheduled for delivery through 2017.
In addition to these construction programs,

the Marine Systems
group’s backlog at December 31, 2013, included approximately $3.7
billion for engineering, repair, overhaul and other services. Design and
replacement
development
engineering program totaled $1.7 billion. Year-end backlog for
maintenance and repair services totaled $1.2 billion.

on the Ohio-class

submarine

efforts

MARINE SYSTEMS

INFORMATION SYSTEMS AND TECHNOLOGY

$30,000

20,000

10,000

0

$40,000

30,000

20,000

10,000

0

Estimated Potential
Contract Value

Unfunded

Funded

Estimated Potential
Contract Value

Unfunded

Funded

2011

2012

2013

2011

2012

2013

The Marine Systems group’s backlog consists of long-term submarine
and ship construction programs, as well as numerous engineering and
repair contracts. Backlog has decreased slightly to $16.9 billion at
year-end 2013 compared to $17.1 billion at the end of 2012.

The Virginia-class submarine program was the company’s largest
program in 2013 and is the largest contract in the company’s backlog.
The group’s backlog at year end included $6.9 billion for eight Virginia-
class submarines scheduled for delivery through 2018. We received
$330 of advanced funding in 2013 for
long-lead materials for
submarines in the next block of the program and anticipate being
awarded a contract for construction in 2014.

the Information Systems and
Unlike our other defense businesses,
Technology group’s backlog consists of thousands of contracts and is
reconstituted each year with new program and task order awards. The
Information Systems and Technology group’s total backlog was $8.5
billion at the end of 2013 compared to $9.8 billion at year-end 2012.
The group’s backlog does not include approximately $19.1 billion of
estimated potential contract value associated with its anticipated share
of IDIQ contracts and unexercised options. In 2013, funding under IDIQ
contracts and options contributed over $4.1 billion to the group’s orders.

General Dynamics Annual Report 2013

27

(656)

(1,382)

(2)

647

2,649

3,296

–

(367)

(725)

(9)

2,005

3,296

5,301

–

2,649

248

(3,930)

(3,909)

(3,909)

$ (1,033)

$ (613)

$ 1,392

29.7%

22.9%

34.3%

25.6%

27.0%

21.2%

The group received a number of significant contract awards in

2013, including the following:

(cid:129) $250 from the Army for ruggedized computing equipment under the
CHS-4 program. $990 of estimated potential contract value remains
under this IDIQ contract.

(cid:129) $235 for commercial wireless network systems and support.
(cid:129) $160 from Austal USA for combat and seaframe control systems for
two Littoral Combat Ships, bringing the value in backlog to $325.
Options to provide these naval control systems for four additional
ships will be reported in backlog when they are exercised.

(cid:129) $145 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.

Our cash balances are invested primarily in time deposits from highly
rated banks and commercial paper
rated A1/P1 or higher. On
December 31, 2013, $1.1 billion of our cash was held by international
intend to do so, should this cash be
operations. While we do not
repatriated, it would be subject to U.S. federal
income tax but would
generate offsetting foreign tax credits.

Year Ended December 31

2011

2012

2013

Net cash provided by operating activities

$ 3,238

$ 2,687

$ 3,106

Net cash used by investing activities

Net cash used by financing activities

Net cash used by discontinued operations

Net increase in cash and equivalents

(1,974)

(1,201)

(27)

36

Cash and equivalents at beginning of year

2,613

(cid:129) $140 for production and support of U.S. and U.K. Trident

II

Cash and equivalents at end of year

submarine weapons systems.

(cid:129) $135 for the Warfighter Field Operations Customer Support (FOCUS)
the Army’s live, virtual and
for

program to provide support
constructive training operations.

Backlog at year-end 2013 also included the following key programs:

Marketable securities

Short- and long-term debt

Net cash (debt) (a)

Debt-to-equity (b)

Debt-to-capital (c)

(cid:129) $490 of support and modernization work for

the intelligence
community, the DoD and the Department of Homeland Security,
including the St. Elizabeths campus, New Campus East and
NETCENTS infrastructure programs.

(cid:129) $450 for WIN-T and an additional $755 of estimated potential

contract value awarded as an IDIQ contract.

(cid:129) $315 for contact-center services for the Centers for Medicare &

Medicaid Services, including the 1-800-MEDICARE program.

(cid:129) $190 for the Rifleman and Manpack tactical radios. In 2013, the
group received orders from the Army for production of 1,500 radios
and 500 accessory kits.

FINANCIAL CONDITION, LIQUIDITY AND
CAPITAL RESOURCES

We place a strong emphasis on cash flow generation. This focus gives
us the flexibility for capital deployment while preserving a strong
balance sheet to position us for future opportunities. The $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 and pay dividends. Our net cash, defined as cash and
equivalents less debt, was $1.4 billion at year-end 2013, up $2 billion
from the end of 2012.

28

General Dynamics Annual Report 2013

(a) Net cash is calculated as cash and equivalents and marketable securities less debt.
(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.

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 Statements of Cash Flows.

OPERATING ACTIVITIES

We generated cash from operating activities of $3.2 billion in 2011, $2.7
billion in 2012 and $3.1 billion in 2013. In all three years, the primary
driver of cash flows was net earnings (loss) after removing the impact of
non-cash charges. Operating cash flows in 2013 were favorably
impacted by reductions in operating working capital (OWC), primarily in
our Marine Systems business group from deposits associated with
orders received in 2013 for commercial ships. Cash from operating
activities includes contributions to our pension plans, which have grown
from $350 in 2011 to $600 in 2013, with contributions of approximately
$550 expected in 2014.

INVESTING ACTIVITIES

We used $2 billion in 2011, $656 in 2012 and $367 in 2013 for
investing activities. The primary uses of cash for investing activities
were capital expenditures and acquisitions.

Capital Expenditures. Capital expenditures were $458 in 2011,
$450 in 2012 and $440 in 2013. We expect capital expenditures of
approximately 2 percent of anticipated revenues in 2014, including
ongoing work on Gulfstream’s Savannah, Georgia,
facilities project
announced in 2010.

Business Acquisitions. We did not complete any acquisitions in
2013. We completed 13 acquisitions in 2011 and 2012 totaling $2
billion. We used cash on hand to fund these acquisitions. See Note B to
the Consolidated Financial Statements in Item 8 for further discussion
of acquisition activity.

In 2012,

Marketable Securities. We held no marketable securities on
December 31, 2013.
to bolster liquidity in an uncertain
business environment, we received cash of $219 from the net sales
and maturity of marketable securities, including $211 from the sale of
held-to-maturity securities.

Other, Net. Investing activities also included proceeds from the sale
of the detection systems business in our Combat Systems group in
2011.

FINANCING ACTIVITIES

We used $1.2 billion in 2011, $1.4 billion in 2012 and $725 in 2013
for
financing activities. Our primary financing activities included
repurchases of common stock, payment of dividends, and issuances
and repayments of debt. Net cash from financing activities also
included proceeds received from stock option exercises.

Share Repurchases. We repurchased 20 million shares on the open
market in 2011, 9.1 million shares in 2012 and 9.4 million shares in
2013. As a result, we have reduced our shares outstanding by
approximately 5 percent since 2010.

On January 24, 2014, we repurchased 11.4 million shares of our
common stock for $1.2 billion under an accelerated share repurchase
(ASR) agreement with a financial institution. On February 5, 2014, with
shares from the prior authorization exhausted by the ASR program, the
board of directors authorized management
to repurchase 20 million
additional shares of common stock on the open market, approximately 6
percent of our total shares outstanding.

increase. Previously,

Dividends. On March 6, 2013, our board of directors declared an
increased quarterly dividend of $0.56 per share – the 16th consecutive
annual
the board had increased the quarterly
dividend to $0.51 per share in March 2012 and $0.47 per share in
March 2011. We did not pay any dividends in the first three months of
2013 because we made our first quarter 2013 dividend payment in
December 2012.

Debt Proceeds, Net. 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 scheduled until 2015. See Note J to the Consolidated
Financial Statements in Item 8 for additional
information regarding our
debt obligations, including scheduled debt maturities.

We ended 2013 with no commercial paper outstanding. We have $2
billion in bank credit facilities that remain available, including a $1 billion
facility expiring in July 2016 and a $1 billion facility expiring in July
2018. These facilities provide backup liquidity to our commercial paper
program. We also have an effective shelf registration statement on file
with the Securities and Exchange Commission that allows us to access
the capital markets.

General Dynamics Annual Report 2013

29

NON-GAAP MANAGEMENT METRICS

We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described
below, we use free cash flow and return on invested capital (ROIC) to measure our performance in these areas. While we believe 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 core businesses for purposes
such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from
operations to assess the quality of our earnings and as a performance measure in evaluating management. The following table reconciles the free
cash flow from operations with net cash provided by operating activities, as classified on the Consolidated Statements of Cash Flows:

Year Ended December 31

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.

2009

2010

2011

2012

2013

$ 2,855

$ 2,986

$ 3,238

$ 2,687

$ 3,106

(385)

(370)

(458)

(450)

(440)

$ 2,470

$ 2,616

$ 2,780

$ 2,237

$ 2,666

119%

103%

114%

100%

127%

109%

NM*

NM*

125%

107%

Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital
we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We
define ROIC as net operating profit after taxes divided by average invested capital (the sum of the average debt and shareholders’ equity for the year
excluding any change in accumulated other comprehensive loss). 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:

Year Ended December 31

2009

2010

2011

2012

2013

Earnings (loss) from continuing operations

$ 2,407

$ 2,628

$ 2,552

$

(332)

$ 2,486

After-tax interest expense

After-tax amortization expense

Net operating profit (loss) after taxes

Average invested capital

Return on invested capital

117

149

116

155

106

163

109

152

67

106

$ 2,673

$ 14,870

$ 2,899

$ 16,634

$ 2,821

$ 17,168

$

(71)

$ 17,223

$ 2,659

$ 15,989

18.0%

17.4%

16.4%

(0.4)%

16.6%

30

General Dynamics Annual Report 2013

ADDITIONAL FINANCIAL INFORMATION

OFF-BALANCE SHEET ARRANGEMENTS

On December 31, 2013, other than operating leases, we had no material off-balance sheet arrangements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following tables present information about our contractual obligations and commercial commitments on December 31, 2013:

Contractual Obligations

Long-term debt (a)

Capital lease obligations

Operating leases

Purchase obligations (b)

Other long-term liabilities (c)

Payments Due by Period

Total Amount
Committed

Less Than 1
Year

1-3 Years

4-5 Years

More Than 5
Years

$ 4,857

$

34

1,096

17,023

17,334

89

3

216

10,027

3,375

$ 1,167

$ 1,028

$ 2,573

4

316

5,153

2,267

4

191

1,446

1,691

23

373

397

10,001

$ 40,344

$ 13,710

$ 8,907

$ 4,360

$ 13,367

(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 $11.1 billion of

purchase obligations 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 Sheets, 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 to the Consolidated
Financial Statements in Item 8 for information regarding these liabilities and the plan assets available to satisfy them.

Commercial Commitments

Letters of credit and guarantees*

Trade-in options*

Amount of Commitment Expiration by Period

Total Amount
Committed

Less Than 1
Year

1-3 Years

4-5 Years

$ 1,824

71

$ 1,895

$ 774

71

$ 845

$ 72

–

$ 72

$ 715

–

$ 715

More Than 5
Years

$ 263

–

$ 263

* See Note N to the Consolidated Financial Statements for discussion of letters of credit and aircraft trade-in options.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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.
financial statements in accordance with GAAP
The preparation of
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

and

and

other

litigation

obligations,

post-retirement

include those related to goodwill and other intangible assets, income
benefits, workers’
taxes,
pensions
compensation, warranty
other
and
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.

General Dynamics Annual Report 2013

31

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

32

General Dynamics Annual Report 2013

update our contract estimates at least annually and often quarterly, as
well as when required by specific events and circumstances.

We recognize changes in the estimated profit on contracts under the
the impact of revisions in
reallocation method. Under this method,
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 $356 ($0.63) in 2011, $180 ($0.33) in 2012 and
$351 ($0.65) in 2013. While no revisions on any one contract were
material to our Consolidated Financial Statements in 2013, the amount
increased from 2012 largely due to improved performance in the Combat
Systems group.

Goodwill and Intangible Assets. Since 1995, we have acquired
more than 65 businesses at a total cost of approximately $23 billion. We
have recognized goodwill and intangible assets as a result of these
acquisitions.

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
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

in our estimates of

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 completed the required annual goodwill

impairment test as of
December 31, 2013. The first step of the goodwill
impairment test
compares the fair value of our reporting units to their carrying values.
Our reporting units are consistent with our business groups. For our
Aerospace, Combat Systems and Marine Systems reporting units, the
estimated fair values were at least double their respective carrying
values. The fair value of our Information Systems and Technology
reporting unit, for which we recorded a $2 billion goodwill impairment in
2012, exceeded its carrying value by a margin of approximately 15
percent. While the projected cash flows have not changed materially
from 2012, the book value of the reporting unit has increased, largely
due to improvement in the funded status of the unit’s defined-benefit
retirement plans. The reporting unit remains at risk for a future goodwill
impairment should there be further significant increases in the carrying
value of the reporting unit or deterioration in the projected cash flows.
Uncertainties in future defense spending remain in the current business
environment and could impact projected cash flows for the reporting
unit.

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. As a result of
lower revenues
throughout 2013, we reviewed the long-lived assets of our axle
business in the Combat Systems group for recoverability. The margin by
which the expected cash flows of the business exceeded its carrying
value was approximately 10 percent. If future cash flows do not support
the recovery of the business’ assets, we will be required to impair some
or all of the long-lived assets, including specifically identified intangible
assets of $175.

Commitments and Contingencies. We are subject to litigation
and other legal proceedings arising either from the ordinary course of
the
our business or under provisions relating to the protection of
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

and

pension

benefits,

post-retirement

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,
and
other
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 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.

General Dynamics Annual Report 2013

33

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

risk, primarily from foreign currency
We are exposed to market
exchange rates, interest rates, commodity prices and investments. See
Note M to the Consolidated Financial Statements in Item 8 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 $2.5 billion on December 31, 2012, and $1.7
billion on December 31, 2013. A 10 percent unfavorable exchange
rate movement in our portfolio of foreign currency forward contracts
would have resulted in the following incremental pretax losses:

Recognized

Unrecognized

2012

2013

$ (61)

$ (51)

(71)

(40)

This exchange-rate sensitivity relates primarily to changes in the U.S.
dollar/Canadian dollar, euro/Swiss franc and euro/Canadian dollar
exchange rates. We believe these hypothetical
recognized and
unrecognized losses would be offset by corresponding 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, 2013, we had $3.9 billion par
value of fixed-rate debt and no commercial paper outstanding. Our fixed-
trade these
rate debt obligations are not putable, and we do not
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, 2013, we held $5.3 billion in cash and
equivalents, but no marketable securities.

34

General Dynamics Annual Report 2013

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
2012

2011

2013

$ 21,440

$ 19,784

$ 19,371

11,237

32,677

17,230

9,591

–

2,030

28,851

3,826

(141)

33

3,718

1,166

2,552

(26)

11,729

31,513

16,228

10,182

1,994

2,276

30,680

833

(156)

(136)

541

873

(332)

–

11,847

31,218

15,296

10,158

–

2,079

27,533

3,685

(86)

8

3,607

1,121

2,486

(129)

$ 2,526

$

(332)

$ 2,357

$

7.01

$

(0.94)

$

7.09

(0.07)

–

(0.37)

$

6.94

$

(0.94)

$

6.72

$

6.94

$

(0.94)

$

7.03

(0.07)

–

(0.36)

$

6.87

$

(0.94)

$

6.67

General Dynamics Annual Report 2013

35

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

Net earnings (loss)

Gains (losses) on cash flow hedges

Unrealized gains (losses) on securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

Other comprehensive income (loss) before tax

Provision (benefit) for income tax, net

Other comprehensive income (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
2012

2011

2013

$ 2,526

$ (332)

$ 2,357

(81)

(1)

(89)

(1,129)

(1,300)

(424)

(876)

(23)

6

141

(1,149)

(1,025)

(562)

(463)

3

12

(118)

2,595

2,492

902

1,590

$ 1,650

$ (795)

$ 3,947

36

General Dynamics Annual Report 2013

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

Total liabilities and shareholders’ equity

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

December 31

2012

2013

$ 3,296

$ 5,301

4,204

4,964

2,776

504

4,402

4,780

2,968

435

15,744

17,886

3,403

1,383

12,048

1,731

18,565

3,415

1,217

11,977

953

17,562

$ 34,309

$ 35,448

$ 2,469

$ 2,248

6,042

3,109

6,584

3,362

11,620

12,194

3,908

7,391

3,908

4,845

11,299

8,753

482

1,988

17,860

(6,165)

(2,775)

11,390

482

2,226

19,428

(6,450)

(1,185)

14,501

$ 34,309

$ 35,448

General Dynamics Annual Report 2013

37

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

Purchases of available-for-sale securities

Sales of available-for-sale securities

Maturities of available-for-sale securities

Business acquisitions, net of cash acquired

Purchases of held-to-maturity securities

Maturities of held-to-maturity securities

Sales of held-to-maturity securities

Other, net

Net cash used by investing activities

Cash flows from financing activities:

Purchases of common stock

Dividends paid

Proceeds from option exercises

Repayment of fixed-rate notes

Proceeds from fixed-rate notes

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.

38

General Dynamics Annual Report 2013

Year Ended December 31
2012

2011

2013

$ 2,526

$

(332)

$ 2,357

354

238

111

128

(24)

14

26

(397)

(62)

(186)

17

629

86

(222)

386

234

2,295

114

(29)

(148)

–

240

149

(478)

(441)

730

22

(55)

393

163

–

120

(23)

104

129

(205)

177

(200)

(223)

330

(126)

110

3,238

2,687

3,106

(458)

(373)

107

235

(1,560)

(459)

441

–

93

(1,974)

(1,468)

(673)

198

(750)

1,497

(5)

(1,201)

(27)

36

2,613

(450)

(252)

186

110

(444)

(260)

224

211

19

(656)

(602)

(893)

146

(2,400)

2,382

(15)

(1,382)

(2)

647

2,649

(440)

(135)

99

14

(1)

–

–

–

96

(367)

(740)

(591)

583

–

–

23

(725)

(9)

2,005

3,296

$ 2,649

$ 3,296

$ 5,301

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, 2010

$ 482

$ 1,729

$ 17,076

$ (4,535)

$ (1,436)

$ 13,316

Net earnings

Cash dividends declared

Stock-based awards

Shares purchased

Other comprehensive loss

–

–

–

–

–

–

–

159

–

–

2,526

(685)

–

–

–

–

–

181

(1,389)

–

Balance, December 31, 2011

482

1,888

18,917

(5,743)

Net loss

Cash dividends declared

Stock-based awards

Shares purchased

Other comprehensive loss

–

–

–

–

–

–

–

100

–

–

(332)

(725)

–

–

–

–

–

180

(602)

–

Balance, December 31, 2012

482

1,988

17,860

(6,165)

Net earnings

Cash dividends declared

Stock-based awards

Shares purchased

Other comprehensive income

Balance, December 31, 2013

–

–

–

–

–

–

–

238

–

–

2,357

(789)

–

–

–

–

–

455

(740)

–

–

–

–

–

(876)

(2,312)

–

–

–

–

(463)

(2,775)

–

–

–

–

1,590

2,526

(685)

340

(1,389)

(876)

13,232

(332)

(725)

280

(602)

(463)

11,390

2,357

(789)

693

(740)

1,590

$ 482

$ 2,226

$ 19,428

$ (6,450)

$ (1,185)

$ 14,501

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

General Dynamics Annual Report 2013

39

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

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. General Dynamics is organized into four business
groups: Aerospace, which produces Gulfstream aircraft, provides
aircraft services and performs aircraft completions for other original
equipment manufacturers (OEMs); Combat Systems, which designs
and manufactures combat vehicles, weapons systems and munitions;
Marine Systems, which designs, constructs and repairs surface ships
and submarines; and Information Systems and Technology, which
provides communication and information technology systems and
solutions. Our primary customer is the U.S. government. We also do
significant business with non-U.S. governments and a diverse base of
corporate and individual buyers of business aircraft.

Basis of Consolidation and Classification. The Consolidated
Financial Statements include the accounts of General Dynamics
Corporation and our wholly owned and majority-owned subsidiaries.
We eliminate all
inter-company balances and transactions in the
Consolidated Financial Statements.

Consistent with defense industry practice, we classify assets and
liabilities related to long-term production contracts as current, even
though some of these amounts may not be realized within one year. In
addition, some prior-year amounts have been reclassified among
financial
to conform to the current-year
presentation.

statement accounts

Use of Estimates. The nature of our business requires that we
make a number of estimates and assumptions in accordance with U.S.
generally accepted accounting principles (GAAP). These estimates 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
the
other assumptions that we believe are reasonable under
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,
contract costs and revenues are recognized as the work progresses,
either as the products are produced or as services are rendered. We
estimate the profit on a contract as the difference between the total
estimated revenue and costs to complete a contract and recognize that
profit over the life of the contract. If at any time the estimate of
contract profitability indicates an anticipated loss on the contract, we
recognize the loss in the quarter it is identified.

40

General Dynamics Annual Report 2013

We generally measure progress toward completion on contracts in our
defense business based on the proportion of costs incurred to date
relative to total estimated costs at completion. For our contracts for the
two
manufacture of business-jet aircraft, we record revenue at
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.

We review and update our contract estimates regularly. We recognize
changes in estimated profit on contracts under the reallocation method.
Under the reallocation method, the impact of a revision in estimate is
term. The net
recognized prospectively over the remaining contract
increase in our operating earnings (and on a per-share basis) from the
favorable impact of revisions in contract estimates totaled $356 ($0.63)
in 2011, $180 ($0.33) in 2012 and $351 ($0.65) in 2013. No revisions
on any one contract were material in 2013.

Discontinued Operations. In 2013, we recognized a $129 loss, net
of taxes, from the settlement of the A-12 litigation with the U.S. Navy.
The litigation was related to a terminated contract in the company’s
former tactical military aircraft business. The $198 credit due the Navy
under the terms of the settlement agreement is reported in other current
and noncurrent liabilities on the Consolidated Balance Sheets and will be
utilized over several years as the company renders services on the DDG-
1000 program. This activity, including an estimated $57 expected in
2014, will be reported in net cash used by discontinued operations on
the Consolidated Statements of Cash Flows. See Note N for further
discussion of the A-12 settlement.

In 2011, we recognized losses of $26 from the settlement of an
environmental matter associated with a former operation of the company
and our estimate of legal costs associated with the A-12 litigation as a
result of the U.S. Supreme Court’s decision in that year that extended the
expected timeline associated with the litigation. Net cash used by
discontinued operations in 2011 consists primarily of cash associated
with the environmental settlement.

and

expenses,

development

Research and Development Expenses. Company-sponsored
research
product
(R&D)
development costs, were $372 in 2011, $374 in 2012 and $310 in
2013. R&D expenses are included in operating costs and expenses in
the Consolidated Statements of Earnings (Loss) in the period in which
they are incurred. Customer-sponsored R&D expenses are charged
directly to the related contracts.

including

The Aerospace group has cost-sharing arrangements with some of its
suppliers that enhance the group’s internal development capabilities and
offset a portion of the financial cost associated with the group’s product
development efforts. These arrangements explicitly state that supplier
contributions are for
in the
development of new aircraft models and technologies, and we retain
substantial rights in the products developed under these arrangements.

reimbursements of costs we incur

We record amounts received from these cost-sharing arrangements as
a reduction of R&D expenses. We have no obligation to refund any
amounts received under the agreement regardless of the outcome of
the development effort. Under the terms of each agreement, payments
received from suppliers for their share of the costs are based typically
on milestones and are generally recognized as received.

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

Year Ended December 31

Interest expense

Interest income

Interest expense, net

Interest payments

2011

2012

2013

$ 155

$ 168

$ 103

(14)

(12)

(17)

$ 141

$ 133

$ 156

$ 186

$ 86

$ 94

The decrease in interest expense 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.

Cash and Equivalents and Investments in Debt and Equity
Securities. We consider securities with a maturity of three months or
less to be cash equivalents. We report our investments in available-for-
sale securities at fair value. Changes in the fair value of available-for-
sale securities are recognized as a component of other comprehensive
in the Consolidated Statements of Comprehensive
income (loss)
Income (Loss). The interest income on these securities is a component
of our net interest expense in the Consolidated Statements of Earnings
(Loss). These investments are included in other current and noncurrent
assets on the Consolidated Balance Sheets (see Note D). We had no
trading or held-to-maturity securities on December 31, 2012 or 2013.
Long-lived Assets and Goodwill. We review long-lived assets,
including intangible assets subject
for impairment
the
whenever events or changes in circumstances indicate that
carrying amount of the asset may not be recoverable. We assess the
recoverability of the carrying value of assets held for use based on a
review of undiscounted projected cash flows. Impairment losses, where
identified, are measured as the excess of the carrying value of the
long-lived asset over
its fair value as determined by discounted
projected cash flows.

to amortization,

We review goodwill for impairment annually or when circumstances
indicate that an impairment is more likely than not. Goodwill represents
the purchase price paid in excess of the fair value of net tangible and
intangible assets acquired. The test for goodwill impairment is a two-step
process to first identify potential goodwill impairment for each reporting
unit and then, if necessary, measure the amount of the impairment loss.
Our reporting units are consistent with our business groups in Note Q. For
a summary of our goodwill by reporting unit, see Note B.

Subsequent Events.

In January 2014, we entered into an
accelerated share repurchase (ASR) agreement with a financial
institution. Under the ASR program, we repurchased 11.4 million shares
of our common stock for $1.2 billion on January 24, 2014, funded by
cash on hand. Our final cost will be determined based on the volume-
weighted average daily market price of our stock during the term of the
agreement, which expires later in 2014. On February 5, 2014, with
shares from the prior authorization exhausted by the ASR program, the
board of directors authorized management
to repurchase 20 million
additional shares of common stock on the open market, approximately 6
percent of our total shares outstanding as of December 31, 2013.

We have evaluated other material events and transactions that have
occurred after December 31, 2013, and concluded that none have
occurred that require adjustment to or disclosure in the Consolidated
Financial Statements.

B. ACQUISITIONS, DIVESTITURES, GOODWILL AND INTANGIBLE
ASSETS

Acquisitions and Divestitures
We did not acquire any businesses in 2013. In 2012, we acquired seven
businesses for an aggregate of $444, funded by cash on hand:

Aerospace
(cid:129) A fixed-base operator at Houston Hobby Airport that provides fuel,
catering, maintenance, repair and overhaul services to private aircraft
(on February 29).

Combat Systems
(cid:129) The defense operations of Gayston Corporation, a business that
supplies precision metal components used in several munitions
programs (on August 27).

Marine Systems
(cid:129) The Ship Repair and Coatings Division of Earl

Industries, an East
in

Coast ship-repair company that supports the U.S. Navy fleet
Norfolk, Virginia, and Mayport, Florida (on July 31).

(cid:129) Applied Physical Sciences Corp., a provider of applied submarine

research and development services (on December 21).

Information Systems and Technology
(cid:129) IPWireless, Inc., a provider of 3G and 4G Long Term Evolution (LTE)
wireless broadband network equipment and solutions for public safety
and military customers (on June 8).

(cid:129) Open Kernel Labs,

Inc., a provider of virtualization software for
securing wireless communications, applications and content
for
mobile devices and automotive in-vehicle infotainment systems (on
August 17).

General Dynamics Annual Report 2013

41

(cid:129) Fidelis Security Systems,

Inc., a company that provides cyber
security tools that offer real-time network visibility and analysis (on
August 27).

(cid:129) A provider of secure wireless networking equipment
military and other government customers (on July 22).

for the U.S.

(cid:129) A provider of
August 12).

information assurance and security software (on

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

(cid:129) Vangent, Inc., a provider of health information technology services

billion, funded by cash on hand:

and business systems to federal agencies (on September 30).

Combat Systems
(cid:129) Force Protection, Inc., a provider of wheeled vehicles, survivability
solutions and vehicle sustainment services for the armed forces of
the United States and its allies (on December 19).

Marine Systems
(cid:129) Metro Machine Corp., a surface-ship repair business in Norfolk,

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

Information Systems and Technology
(cid:129) A provider of enterprise services and cloud computing to the U.S.

Department of Defense (on July 15).

The operating results of these acquisitions have been included with
our reported results since their respective closing dates. The purchase
prices of these acquisitions have been allocated to the estimated fair
value of net tangible and intangible assets acquired, with any excess
purchase price recorded as goodwill.

In 2011, we sold a business in our Combat Systems group. The
pretax gain of $38 on the sale was reported in other income in the
Consolidated Statements of Earnings (Loss). The proceeds from the sale
are included in other investing activities on the Consolidated Statements
of Cash Flows.

Goodwill
The changes in the carrying amount of goodwill by reporting unit during 2012 and 2013 were as follows:

December 31, 2011

Impairment

Acquisitions (a)

Other (b)

December 31, 2012

Acquisitions (a)

Other (b)

December 31, 2013

Aerospace

Combat
Systems

Marine
Systems

Information
Systems and
Technology

Total
Goodwill

$ 2,644

$ 2,839

$ 229

$ 7,864

$ 13,576

–

11

42

–

86

36

–

61

–

(1,994)

(1,994)

221

9

379

87

$ 2,697

$ 2,961

$ 290

$ 6,100

$ 12,048

–

44

2

(69)

(1)

–

1

(48)

2

(73)

$ 2,741

$ 2,894

$ 289

$ 6,053

$ 11,977

(a) Includes adjustments during the purchase price allocation period.
(b) Consists primarily of adjustments for foreign currency translation and allocations of goodwill associated with asset sales.

We completed the required annual goodwill

impairment test as of
December 31, 2013. The first step of the goodwill
impairment test
compares the fair values of our reporting units to their carrying values.
Our
reporting units are consistent with our business groups. We
estimate the fair values of our reporting units primarily based on the
discounted projected cash flows of the underlying operations. For our
Aerospace, Combat Systems and Marine Systems reporting units, the
estimated fair values were at least double their respective carrying
values as of December 31, 2013. The fair value of our Information
for which we recorded a
Systems and Technology reporting unit,

42

General Dynamics Annual Report 2013

goodwill impairment in 2012 discussed below, exceeded its carrying value
by a smaller margin of approximately 15 percent. While the projected
cash flows have not changed materially from 2012, the carrying value of
the reporting unit has increased, largely due to improvement in the funded
status of the unit’s defined-benefit retirement plans (see Note P for a
discussion of our defined-benefit retirement plans). The reporting unit
remains at risk for a future goodwill impairment should there be further
significant
the reporting unit or
deterioration in the projected cash flows.

increases in the carrying value of

impairment

In 2012, we recorded a $2 billion goodwill

in the
Information Systems and Technology reporting unit. Revenue pressure
from slowed defense spending and the threat of sequestration and
margin compression due to mix shift impacted operating results and
tempered the projected cash flows of
the reporting unit, which
negatively impacted our estimate of its fair value. Because step one of
the impairment test concluded that the carrying value of the reporting
unit exceeded its estimated fair value, we performed the second step

of the test to measure the amount of the impairment loss, if any. The
second step 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
the
difference is recorded as an impairment loss. Prior to December 31,
2012, we had no accumulated impairment losses.

is less than the carrying value,

Intangible Assets
Intangible assets consisted of the following:

Gross
Carrying
Amount

Accumulated
Amortization
December 31, 2012

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization
December 31, 2013

Net
Carrying
Amount

Contract and program intangible assets*

$ 2,066

$ (1,165)

$

Trade names and trademarks

Technology and software

Other intangible assets

Total intangible assets

494

180

175

(87)

(108)

(172)

901

407

72

3

$ 2,042

$ (1,273)

$

507

140

155

(103)

(97)

(154)

769

404

43

1

$ 2,915

$ (1,532)

$ 1,383

$ 2,844

$ (1,627)

$ 1,217

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

We did not recognize any impairments of our intangible assets in
2013. As a result of lower revenues throughout 2013, we reviewed the
long-lived assets of our axle business in the Combat Systems group for
recoverability in 2013 prior to conducting step one of our goodwill
impairment test. The margin by which the expected cash flows of the
business exceeded its carrying value was approximately 10 percent. If
future cash flows do not support the recovery of the business’ assets,
we will be required to impair some or all of the long-lived assets,
including specifically identified intangible assets of $175.

In 2012, we recognized impairments in our Aerospace and
Information Systems and Technology groups of $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 in the respective segments. In
the Aerospace group, lower demand in our maintenance business at Jet
Aviation caused by an increasingly competitive marketplace resulted in a
review of
In the Information
Systems and Technology group, 2012 competitive losses and award
delays in our optical products business indicative of
lower overall
demand resulted in a review of the long-lived assets.

the long-lived assets of

the business.

In 2011,

losses on narrow- and wide-body commercial aircraft
contracts and lower volume for business-jet aircraft manufactured by
other OEMs triggered a review of
the
completions business in the Aerospace group, resulting in a $111
impairment of the contract and program intangible asset.

the long-lived assets of

The amortization lives (in years) of our

intangible assets on

December 31, 2013, were as follows:

Contract and program intangible assets

Trade names and trademarks

Technology and software

Other intangible assets

Range of
Amortization Life

7-30

30

7-15

5

Amortization expense was $238 in 2011, $234 in 2012 and $163 in
2013. We expect to record annual amortization expense over the next
five years as follows:

2014

2015

2016

2017

2018

C. EARNINGS PER SHARE

$ 141

137

110

96

86

We compute basic earnings per share (EPS) using net earnings for the
period and the weighted average number of common shares outstanding
during the period. Diluted EPS generally incorporates the additional

General Dynamics Annual Report 2013

43

shares issuable upon the assumed exercise of stock options and the
release of restricted shares and restricted stock units (RSUs). In 2012,
because of the net loss, diluted EPS was calculated using only the
basic weighted average shares outstanding as the inclusion of stock
options, restricted stock and RSUs would be antidilutive. Basic and
diluted weighted average shares outstanding were as follows (in
thousands):

present the fair values of our other financial assets and liabilities on
December 31, 2012 and 2013, and the basis for determining their fair
values:

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, 2012

Year Ended December 31

2011

2012

2013

Other investments

$

150

$

150

$ 96

$

Basic weighted average shares

outstanding

364,147

353,346

350,714

Dilutive effect of stock options

and restricted stock/RSUs*

3,377

–

2,785

Diluted weighted average shares

outstanding

367,524

353,346

353,499

*

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: 2011 – 23,079 and 2013 – 8,246.

Derivatives

22

22

Long-term debt, including

current portion

(3,909)

(3,966)

–

–

December 31, 2013

Other investments

$

183

$

183

$ 134

$

Derivatives

10

10

Long-term debt, including

current portion

(3,909)

(3,758)

–

–

54

22

(3,966)

49

10

(3,758)

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:

(cid:129) Level 1 – quoted prices in active markets for identical assets or

liabilities;

(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, 2012 or 2013.

E. INCOME TAXES

Income Tax Provision. We calculate our provision for federal, state
and international income taxes based on current tax law. The reported
tax provision differs from the amounts currently receivable or payable
because some income and expense items are recognized in different
time periods for financial reporting than for income tax purposes. The
following is a summary of our net provision for income taxes for
continuing operations:

(cid:129) Level 2 – inputs, other

than quoted prices, observable by a

Year Ended December 31

2011

2012

2013

marketplace participant either directly or indirectly; and

(cid:129) Level 3 – unobservable inputs significant

to the fair value

measurement.

We did not have any significant non-financial assets or liabilities
measured at fair value on December 31, 2012 or 2013, except for
long-lived assets that were impaired in 2012. We estimated the fair
value of these assets primarily based on the discounted projected cash
flows of the underlying operations, a Level 3 fair value measure.

short-

Our financial instruments include cash and equivalents, marketable
securities and other investments; accounts receivable and accounts
payable;
financial
instruments. The carrying values of cash and equivalents, accounts
receivable and payable, and short-term debt on the Consolidated
Balance Sheets approximate their fair value. The following tables

and long-term debt;

and derivative

44

General Dynamics Annual Report 2013

Current:

U.S. federal

State

International

Total current

Deferred:

U.S. federal

State

International

Total deferred

$

951

$

892

$

857

20

181

(9)

138

28

132

1,152

1,021

1,017

87

–

(73)

14

(172)

(5)

29

(148)

108

1

(5)

104

Provision for income taxes, net

$ 1,166

$

873

$ 1,121

Net income tax payments

$ 1,083

$ 1,155

$

888

State and local income taxes allocable to U.S. government contracts
are included in operating costs and expenses in the Consolidated
Statements of Earnings (Loss) and,
included in the
provision above.

therefore, not

The reconciliation from the statutory federal income tax rate to our

effective income tax rate follows:

Year Ended December 31

2011

2012

2013

Statutory federal income tax rate
State tax on commercial operations, net of

35.0%

35.0%

35.0%

federal benefits

Impact of international operations
Domestic production deduction
Domestic tax credits
Goodwill impairment
Other, net

0.4
(1.0)
(1.8)
(0.6)
–
(0.6)

(1.6)
53.8
(11.2)
(1.4)
92.1
(5.3)

0.7
–
(2.2)
(0.8)
–
(1.6)

Effective income tax rate

31.4%

161.4%

31.1%

In 2013, other, net primarily represents a tax benefit

from the
shutdown of the ruggedized hardware product line in our Information
Systems and Technology business group.

Our 2012 effective tax rate was unfavorably impacted by two items.
Due to the non-deductible nature of a substantial portion of our
goodwill, there was a limited tax benefit recognized on the impairment.
In addition, due to the unfavorable market conditions impacting certain
of our international subsidiaries, a valuation allowance was established
including the operating losses
for
resulting from the charges at our European Land Systems business in
the fourth quarter of 2012 (see deferred tax assets table below).

their net deferred tax assets,

Deferred Tax Assets. The tax effects of temporary differences between

reported earnings and taxable earnings consisted of the following:

December 31

2012

2013

Retirement benefits
Tax loss and credit carryforwards
Salaries and wages
Workers’ compensation
A-12 contract termination
Other

Deferred assets
Valuation allowance

Net deferred assets

Intangible assets
Contract accounting methods
Property, plant and equipment (PP&E)
Capital Construction Fund
Other

Deferred liabilities

Net deferred tax asset

$ 1,746
561
261
260
94
331

3,253
(335)

$

783
581
249
272
163
311

2,359
(383)

$ 2,918

$ 1,976

$

(950)
(367)
(231)
(239)
(153)

$

(995)
(322)
(269)
(240)
(133)

$ (1,940)

$ (1,959)

$

978

$

17

Our net deferred tax asset was included on the Consolidated Balance

Sheets in other assets and liabilities as follows:

December 31

2012

2013

Current deferred tax asset
Current deferred tax liability
Noncurrent deferred tax asset
Noncurrent deferred tax liability

Net deferred tax asset

$

44
(173)
1,251
(144)

$

978

$ 36
(298)
416
(137)

$ 17

We believe it is more likely than not that we will generate sufficient
taxable income in future periods to realize our deferred tax assets,
subject to valuation allowances recognized.

Our retirement benefits deferred tax amount includes a deferred tax
asset of $2.1 billion on December 31, 2012, and $1.2 billion on
December 31, 2013, related to the amounts recorded in accumulated
other comprehensive loss (AOCL) to recognize the funded status of our
retirement plans. See Notes L and P for further discussion. The decrease
is due to
in the December 31, 2013, deferred tax asset amount
improvement in the funded status of our defined-benefit retirement plans
during the year.

With the settlement of the A-12 litigation, we expect to receive in
2014 the tax benefits from the contract termination. Further, we believe
we are entitled to interest in accordance with the Internal Revenue Code
that will be recognized when the amount is determined to be realizable.
further
See Note N to the Consolidated Financial Statements for
discussion of the A-12 settlement.

One of our deferred tax liabilities results from our participation in the
Capital Construction Fund (CCF). The CCF is a program, established by
the U.S. government and administered by the Maritime Administration,
that affects the timing of a portion of our tax payments. The program
supports the acquisition, construction, reconstruction or operation of U.S.
flag merchant marine vessels. It allows us to defer federal and state
income taxes on earnings derived from eligible programs as long as the
funds are deposited and used for qualified activities. Unqualified
to taxation plus interest. The CCF is
withdrawals are subject
the Maritime
collateralized by qualified assets
Administration. We had U.S. government accounts receivable invested in
the CCF of $684 on December 31, 2012, and $459 on December 31,
2013.

as defined by

On December 31, 2013, we had net operating loss carryforwards of
$1.5 billion that begin to expire in 2016 and R&D and investment tax
credit carryforwards of $181 that begin to expire in 2014.

Earnings from continuing operations before income taxes included
international income (loss) of $473 in 2011, ($194) in 2012 and $360 in
2013. We intend to reinvest indefinitely the undistributed earnings of
some of our non-U.S. subsidiaries. On December 31, 2013, we had
approximately $1.7 billion of undistributed earnings from these non-U.S.

General Dynamics Annual Report 2013

45

subsidiaries. In general, should these earnings be distributed, a portion
would be treated as dividends under U.S. tax law and thus subject to
U.S. federal income tax at the statutory rate of 35 percent, but would
generate offsetting foreign tax credits.

Tax Uncertainties. For all periods open to examination by tax
authorities, we periodically assess our liabilities and contingencies
based on the latest available information. Where we believe there is
more than a 50 percent chance that our tax position will not be
sustained, we record our best estimate of the resulting tax liability,
including interest,
in the Consolidated Financial Statements. We
include any interest or penalties incurred in connection with income
taxes as part of income tax expense.

We participate in the Internal Revenue Service (IRS) Compliance
Assurance Process, a real-time audit of our consolidated corporate
income tax return. The IRS has examined our consolidated
federal
federal
the
income tax returns through 2011. We do not expect
resolution of tax matters for open years to have a material impact on
our results of operations, financial condition, cash flows or effective tax
rate.

is not material

Based on all known facts and circumstances and current tax law,
we believe the total amount of unrecognized tax benefits on
to our results of operations,
December 31, 2013,
financial condition or cash flows, and if recognized, would not have a
material impact on our effective tax rate. We further believe that there
are no tax positions for which it
the
unrecognized tax benefits will significantly vary over the next 12
months, producing, individually or in the aggregate, a material effect on
our results of operations, financial condition or cash flows.

is reasonably possible that

F. ACCOUNTS RECEIVABLE

Accounts receivable represent amounts billed and currently due from
customers and consisted of the following:

December 31

Non-U.S. government

U.S. government

Commercial

Total accounts receivable

2012

2013

$ 2,728

$ 2,767

778

698

951

684

$ 4,204

$ 4,402

Receivables from non-U.S. government customers include amounts
related to long-term production programs for the Spanish Ministry of
Defence of $2.5 billion on December 31, 2013. A different ministry,
the Spanish Ministry of Industry, has funded work on these programs in
advance of costs incurred by the company. The cash advances are

46

General Dynamics Annual Report 2013

reported on the Consolidated Balance Sheets in current customer
advances and deposits and will be repaid to the Ministry of Industry as
we collect on the outstanding receivables from the Ministry of Defence.
The net amount for these programs on December 31, 2013, is an
advance payment of $102. With respect to our other receivables, we
expect to collect substantially all of the December 31, 2013, balance
during 2014.

G. CONTRACTS IN PROCESS

Contracts in process represent recoverable costs and, where applicable,
accrued profit related to long-term contracts that have been inventoried
until the customer is billed, and consisted of the following:

December 31

2012

2013

Contract costs and estimated profits

$ 8,162

$ 7,961

Other contract costs

Advances and progress payments

1,089

9,251

(4,287)

1,178

9,139

(4,359)

Total contracts in process

$ 4,964

$ 4,780

Contract costs consist primarily of labor, material, overhead and G&A
expenses. 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 process
were not material on December 31, 2012 or 2013.

and

compensation
pension

other
post-retirement

Other contract costs represent amounts that are not currently
allocable to government contracts, such as a portion of our estimated
insurance-related
obligations,
workers’
and
other
assessments,
environmental expenses. These costs will become allocable to contracts
generally after they are paid. We expect to recover these costs through
including existing backlog and probable follow-on
ongoing business,
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.

benefits

Excluding our other contract costs, we expect

to bill all but
approximately 15 percent of our year-end 2013 contracts-in-process
balance during 2014. Of the amount not expected to be billed in 2014,
approximately $315 relates to a single contract, the Canadian Maritime
is behind schedule.
(MHP), as the prime contract
Helicopter Project
Ultimately, we believe these delays will be resolved and the balance will
be billed and collected.

H. INVENTORIES

J. DEBT

Our inventories represent primarily business-jet components and are
stated at the lower of cost or net realizable value. Work-in-process
represents largely labor, material and overhead costs associated with
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.

Inventories consisted of the following:

December 31

Work in process
Raw materials
Finished goods
Pre-owned aircraft

Total inventories

2012

2013

$ 1,518
1,109
69
80

$ 1,635
1,258
57
18

$ 2,776

$ 2,968

I. PROPERTY, PLANT AND EQUIPMENT, NET

Debt consisted of the following:

December 31

Fixed-rate notes due:
January 2015
July 2016
November 2017
July 2021
November 2022
November 2042

Other

Total debt
Less current portion

Long-term debt

Interest Rate
1.375%
2.250%
1.000%
3.875%
2.250%
3.600%
Various

2012

2013

$

500
500
895
499
990
498
27

$

500
500
896
499
991
498
25

3,909
1

3,909
1

$ 3,908

$ 3,908

Our fixed-rate notes are fully and unconditionally guaranteed by several
of our 100-percent-owned subsidiaries (see Note R for condensed
consolidating financial statements). We have the option to redeem the
notes prior to their maturity in whole or part for the principal plus any
accrued but unpaid interest and applicable make-whole amounts.

The aggregate amounts of scheduled maturities of our debt for the

PP&E is carried at historical cost, net of accumulated depreciation. The
major classes of PP&E were as follows:

next five years are as follows:

December 31

2012

2013

Machinery and equipment
Buildings and improvements
Land and improvements
Construction in process

Total PP&E
Accumulated depreciation

$ 3,966
2,442
340
255

7,003
(3,600)

$ 4,156
2,508
337
247

7,248
(3,833)

PP&E, net

$ 3,403

$ 3,415

Year Ended December 31

2014
2015
2016
2017
2018
Thereafter

Total debt

$

1
500
500
897
1
2,010

$ 3,909

We depreciate most of our assets using the straight-line method
and the remainder using accelerated methods. Buildings and
improvements are depreciated over periods of up to 50 years.
Machinery and equipment are depreciated over periods of up to 30
years. Our government customers provide certain facilities and as
such, we do not include these facilities above.

While we had no commercial paper outstanding on December 31,
2013, we issued, and subsequently repaid, $500 of commercial paper in
the fourth quarter of 2013. We maintain the ability to access the
commercial paper market in the future. We have $2 billion in committed
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 2016 and a $1 billion multi-year facility expiring in
July 2018. These facilities are required by rating agencies to support our
commercial paper issuances. We may renew or replace, in whole or part,
these credit facilities at or prior to their expiration dates. Our commercial
paper issuances and the bank credit facilities are guaranteed by several
of
In addition, we have
approximately $280 in committed bank credit facilities to provide backup
liquidity to our European businesses.

our 100-percent-owned subsidiaries.

General Dynamics Annual Report 2013

47

Our

financing arrangements contain a number of customary
covenants and restrictions. We were in compliance with all material
covenants on December 31, 2013.

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)

2012

2013

$

835
578
318
173
1,205

$

807
497
303
298
1,457

Total other current liabilities

$ 3,109

$ 3,362

Retirement benefits
Customer deposits on commercial contracts
Deferred income taxes
Other (b)

$ 5,671
849
144
727

$ 3,076
677
137
955

Total other liabilities

$ 7,391

$ 4,845

(a) Consists primarily of dividend payable, taxes payable, environmental remediation reserves,

warranty reserves, liabilities of discontinued operations and insurance-related costs.

(b) Consists primarily of

liabilities for warranty reserves and workers’ compensation and

liabilities of discontinued operations.

The increase in the December 31, 2013, other current liabilities
amount is primarily due to $198 of dividends payable. We did not have
any dividends payable on December 31, 2012, because we paid our
first quarter 2013 dividend in December 2012. The decrease in the
December 31, 2013, noncurrent retirement benefits amount is due to
improvement in the funded status of our defined-benefit retirement
plans. See Note E for further discussion of deferred tax balances and
Note P for further discussion of retirement benefits.

L. SHAREHOLDERS’ EQUITY

Authorized Stock. Our authorized capital
consists of
500 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.

stock

Shares Issued and Outstanding. On December 31, 2012, we
had 481,880,634 shares of common stock issued and 353,674,248
shares of common stock outstanding. On December 31, 2013, we had
481,880,634 shares of common stock issued and 353,402,794
shares of common stock outstanding, including unvested restricted
stock of 1,947,273 shares. No shares of our preferred stock were

48

General Dynamics Annual Report 2013

outstanding on either date. The only changes in our shares outstanding
during 2013 resulted from share activity under our equity compensation
plans (see Note O for further discussion) and shares repurchased in the
open market. In 2013, we repurchased 9.4 million shares at an average
price of $78 per share.

the board of directors authorized management

On October 2, 2013, with 1.4 million shares remaining under a prior
authorization,
to
repurchase an additional 10 million shares. On December 31, 2013,
approximately 11.4 million shares remained authorized for repurchase,
about 3 percent of our total shares outstanding. All of these shares were
subsequently repurchased in January 2014 through an ASR agreement
with a financial institution. See Note A for further discussion of the ASR
and the subsequent authorization by the board of directors to repurchase
20 million additional shares of common stock on the open market.

Dividends per Share. Dividends declared per share were $1.88 in
2011, $2.04 in 2012 and $2.24 in 2013. Cash dividends paid were
$673 in 2011, $893 in 2012 and $591 in 2013. In advance of possible
tax increases in 2013, we accelerated our first quarter 2013 dividend
payment to December 2012.

Other Comprehensive Income (Loss). The tax effect

for each
component of other comprehensive income (loss) (OCL) consisted of the
following:

Year Ended December 31, 2011

Losses on cash flow hedges

Unrealized losses on securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

(1,129)

Other comprehensive loss

$ (1,300)

$ 424

$ (876)

Gross
Amount

Benefit
(Provision) for
Income Tax

Net
Amount

$

(81)

(1)

(89)

$ 22

$ (59)

–

18

384

(1)

(71)

(745)

Gross
Amount

Benefit
(Provision) for
Income Tax

$

(23)

$

6

141

3

(2)

130

431

Net
Amount

$ (20)

4

271

(718)

Year Ended December 31, 2012

Losses on cash flow hedges

Unrealized gains on securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

(1,149)

Other comprehensive loss

$ (1,025)

$ 562

$ (463)

Year Ended December 31, 2013

Gains on cash flow hedges

Unrealized gains on securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

Gross
Amount

$

3

12

(118)

2,595

Benefit
(Provision) for
Income Tax

Net
Amount

$

–

(4)

–

(898)

$

3

8

(118)

1,697

Other comprehensive income

$ 2,492

$ (902)

$ 1,590

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

Balance, December 31, 2010

2011 other comprehensive loss

Balance, December 31, 2011

2012 other comprehensive loss

Balance, December 31, 2012

OCL before reclassifications

Amounts reclassified from AOCL

2013 other comprehensive income

Balance, December 31, 2013

Gains (Losses)
on Cash Flow
Hedges

Unrealized
Gains (Losses)
on Securities

Foreign
Currency
Translation
Adjustments

Changes in
Retirement
Plans’ Funded
Status

AOCL

$ 85

(59)

26

(20)

6

11

(8)

3

$ 4

(1)

3

4

7

8

–

8

$ 892

$ (2,417)

$ (1,436)

(71)

821

271

1,092

(118)

–

(118)

(745)

(3,162)

(718)

(3,880)

1,453

244

1,697

(876)

(2,312)

(463)

(2,775)

1,354

236

1,590

$ 9

$ 15

$ 974

$ (2,183)

$ (1,185)

Significant amounts reclassified out of each component of AOCL in 2013 consisted of the following:

Losses on cash flow hedges of foreign exchange contracts

$ (12)

Operating costs and expenses

Amount
Reclassified
from AOCL

Consolidated Statements of Earnings (Loss) Line Item

Changes in retirement plans’ funded status

Recognized net actuarial loss

Amortization of prior service credit

Total reclassifications, net of tax

Tax benefit

*

*

Tax expense

4

(8)

435

(60)

(131)

244

$ 236

*

These AOCL components are included in our net periodic pension and other post-retirement benefit cost. See Note P for additional details.

M. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market
risk, primarily from foreign currency
exchange rates, interest rates, commodity prices and investments. We
may use derivative financial instruments to hedge some of these risks
as described below. We do not use derivatives for
trading or
speculative purposes.

Foreign Currency Risk. Our foreign currency exchange rate risk
relates to receipts from customers, payments to suppliers and inter-
company transactions denominated in foreign currencies. To the extent
possible, we include terms in our contracts that are designed to protect
into derivative financial
us from this risk. Otherwise, we enter
instruments, principally foreign currency forward purchase and sale
contracts, designed to offset and minimize our risk. The one-year

average maturity of these instruments matches the duration of the
activities that are at risk.

Interest Rate Risk. Our financial

instruments subject to interest
rate risk include fixed-rate long-term debt obligations and variable-rate
commercial paper. However, the risk associated with these instruments
is not material.

Commodity Price Risk. We are subject to risk of rising labor and
commodity prices, primarily on long-term fixed-price contracts. To the extent
possible, we include terms in our contracts that are designed to protect us
from this risk. Some of the protective terms included in our contracts are
considered derivatives but are not accounted for separately because they are
clearly and closely related to the host contract. We have not entered into any
material commodity hedging contracts but may do so as circumstances
warrant. We do not believe that changes in labor or commodity prices will
have a material impact on our results of operations or cash flows.

General Dynamics Annual Report 2013

49

Investment Risk. Our investment policy allows for purchases of
fixed-income securities with an investment-grade rating and a
maximum maturity of up to five years. On December 31, 2013, we
held $5.3 billion in cash and equivalents, but held no marketable
securities.

Hedging Activities. We had $2.5 billion in notional

forward
exchange contracts outstanding on December 31, 2012, and $1.7
billion on December 31, 2013. We recognize derivative financial
instruments on the Consolidated Balance Sheets at fair value (see
Note D).

We record changes in the fair value of derivative financial
instruments in operating costs and expenses in the Consolidated
Statements of Earnings (Loss) or in OCL within the Consolidated
Statements of Comprehensive Income (Loss) depending on whether the
derivative is designated and qualifies for hedge accounting. Gains and
losses related to derivatives that qualify as cash flow hedges are
deferred in OCL until the underlying transaction is reflected in earnings.
We adjust derivative financial instruments not designated as cash flow
hedges to market value each period and record the gain or loss in the
Consolidated Statements of Earnings (Loss). The gains and losses on
these instruments generally offset losses and gains on the assets,
transactions being hedged. Gains and losses
liabilities and other
resulting from hedge ineffectiveness are recognized in the Consolidated
Statements of Earnings (Loss) for all derivative financial
instruments,
regardless of designation.

Net gains and losses recognized in earnings and OCL, including
gains and losses related to hedge ineffectiveness, were not material to
our results of operations in any of the past three years. We do not
expect the amount of gains and losses in OCL that will be reclassified
to earnings in 2014 to be material.

We had no material derivative financial instruments designated as
investment hedges on December 31, 2012, or

fair value or net
December 31, 2013.

functional currency

Foreign Currency Financial Statement Translation. We
international
translate foreign currency balance sheets from our
the respective local
businesses’
currency) to U.S. dollars at the end-of-period exchange rates, and
statements of earnings at the average exchange rates for each period.
The resulting foreign currency translation adjustments are a component
of OCL.

(generally

We do not hedge the fluctuation in reported revenues and earnings
resulting from the translation of these international operations’ results
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.

50

General Dynamics Annual Report 2013

N. COMMITMENTS AND CONTINGENCIES

Litigation
Termination of A-12 Program. The A-12 aircraft contract was a fixed-
price incentive contract between the U.S. Navy and a team composed of
contractors General Dynamics and McDonnell Douglas (now a subsidiary
of The Boeing Company)
the full-scale development and initial
for
In January
production of a carrier-based Advanced Tactical Aircraft.
1991, the Navy terminated the contract for default and demanded the
contractors repay $1.4 billion in unliquidated progress payments.
Following the termination, the Navy agreed to defer the collection of that
amount pending a negotiated settlement or other
resolution. Both
contractors had full responsibility to the Navy for performance under the
contract, and both were jointly and severally liable for potential liabilities
arising from the termination.

Over 20 years of litigation, the trial court (the U.S. Court of Federal
Claims), appeals court (the Court of Appeals for the Federal Circuit) and
the U.S. Supreme Court have issued various rulings, some in favor of the
government and others in favor of the contractors.

the case. Under

In the third quarter of 2013, the Navy and the contractors signed a
written settlement agreement that provided for in-kind consideration by
the
the contractors in exchange for dismissal of
settlement agreement we agreed to provide a credit to the Navy in the
amount of $198 toward the design, construction and delivery of portions
of a ship in the DDG-1000 program. The settlement agreement was
contingent largely upon approval by Congress of legislation that would
authorize the Navy to receive and retain payment
the
settlement. In December 2013, President Obama signed the National
Defense Authorization Act, which contained a provision authorizing the
A-12 settlement. Accordingly, we recognized a $198 loss ($129, net of
taxes)
in discontinued operations in the fourth quarter of 2013. The
settlement agreement provided that within a specified time of enactment
of the authorizing legislation the parties would file with the Court of
Federal Claims a stipulation of the dismissal of the A-12 litigation with
prejudice. The parties filed the stipulation in early 2014 and the Court
dismissed the A-12 litigation on January 23, 2014.

in-kind for

Other. Various claims and other legal proceedings incidental to the
normal course of business are pending or threatened against us. These
matters relate to such issues as government investigations and claims,
the environment, asbestos-related claims and
the protection of
employee-related matters. The nature of litigation is such that we cannot
predict the outcome of these matters. However, based on information
liabilities in these
currently available, we believe any potential
proceedings, individually or in the aggregate, will not have a material
impact on our results of operations, financial condition or cash flows.

Environmental
We are subject to and affected by a variety of federal, state, local and
laws and regulations. We are directly or
foreign environmental
investigations or remediation at
indirectly involved in environmental
some of our current and former facilities and 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. Based on historical experience, we
expect
the total remediation and
compliance costs associated with these facilities will continue to be
recoverable under U.S.
allowable contract costs and,
government contracts.

that a significant percentage of

therefore,

for costs

As required, we provide financial assurance for certain sites
to investigation or remediation. We accrue
undergoing or subject
is probable that a liability has been
environmental costs when it
incurred and the amount can be reasonably estimated. Where
applicable, we seek insurance recovery
related to
environmental liabilities. We do not record insurance recoveries before
collection is considered probable. Based on all known facts and
analyses, we do not believe that our liability at any individual site, or in
the aggregate, arising from such environmental conditions, will be
material to our results of operations, financial condition or cash flows.
We also do not believe that the range of reasonably possible additional
loss beyond what has been recorded would be material to our results
of operations, financial condition or cash flows.

Minimum Lease Payments
Total expense under operating leases was $274 in 2011, $301 in
2012 and $311 in 2013. Operating leases are primarily for facilities
and equipment. Future minimum lease payments due are as follows:

Year Ended December 31

2014

2015

2016

2017

2018

Thereafter

Total minimum lease payments

$

216

177

139

106

85

373

$ 1,096

In 2012,

Other
Portugal Program.
the Portuguese Ministry of National
Defense notified our Combat Systems group’s European Land Systems
business that it was terminating a contract to provide 260 Pandur
vehicles based on an alleged breach of contract. Subsequently, the
customer drew $75 from bank guarantees for the contract. We have
the
in breach of
asserted that we are not

the contract and that

termination of the contract was invalid, and we are currently in arbitration
with the customer. Given the uncertainty of receiving further payments,
we reserved in 2012 the receivables and contracts in process balances
and accrued an estimate of the remaining costs related to the close-out
totaling $258. As of December 31, 2013, we had
of
approximately $145 outstanding under a bank guarantee for
the
program’s offset requirements. The bank guarantee could be drawn
upon by the customer through 2014.

the contract,

Letters of Credit and Guarantees.

In the ordinary course of
business, we have entered into letters of credit, bank guarantees, surety
institutions and
bonds and other similar arrangements with financial
insurance carriers totaling approximately $1.8 billion on December 31,
2013.
from time to time and in the ordinary course of
business, we contractually guarantee the payment or performance
obligations of our subsidiaries arising under certain contracts.

In addition,

Government Contracts. As a government contractor, we are subject
to U.S. government audits and investigations relating to our operations,
fines, penalties, and compensatory and treble
including claims for
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
modifications that require additional funding from the customer. Most
often, these requests are due to customer-directed changes in scope of
work. While we are entitled to recovery of
these costs under our
the administrative process with our customer may be
contracts,
protracted. Based upon the circumstances, we periodically file claims or
requests for equitable adjustment (REAs). In some cases, these requests
are disputed by our customer. We believe our outstanding modifications
and other claims will be resolved without material impact to our results
of operations, financial condition or cash flows.

Aircraft Trade-ins. In connection with orders for new aircraft in
funded contract backlog, our Aerospace group has outstanding options
with some customers to trade in aircraft as partial consideration in their
new-aircraft transaction. These trade-in commitments are structured to
establish the fair market value of the trade-in aircraft at a date generally
120 or fewer days preceding delivery of the new aircraft to the customer.
At that time, the customer is required to either exercise the option or
allow its expiration. Any excess of the pre-established trade-in price
above the fair market value at the time the new aircraft is delivered is
treated as a reduction of revenue in the new-aircraft sales transaction.

Labor Agreements. Approximately one-fifth of our employees and
our subsidiaries’ employees are represented by labor organizations and
work under local works council agreements and 56 company-negotiated
agreements. A number of these agreements expire within any given year.
Historically, we have been successful at
renegotiating successor
agreements without any material disruption of operating activities. We

General Dynamics Annual Report 2013

51

Internal Revenue Code (the Code), or as options not qualified under the
Code. As a matter of practice, we do not currently grant incentive stock
options. All options granted under the Equity Compensation Plans are
issued with an exercise price at the fair market value of the common
stock on the date of grant. Awards of stock options vest over two years,
with 50 percent of the options vesting in one year and the remaining 50
percent vesting the following year. Stock options that have been awarded
under the Equity Compensation Plans expire five or seven years after the
grant date. We grant annual stock option awards to participants in the
Equity Compensation Plans on the first Wednesday of March based on
the average of the high and low stock prices on that day as listed on the
New York Stock Exchange. On occasion, we may also make limited ad
hoc grants at other times during the year for new hires or promotions.

Grants of restricted stock are awards of shares of common stock that
are released approximately four years after the grant date. During that
restriction period, recipients may not sell, transfer, pledge, assign or
otherwise convey their restricted shares to another party. However,
during the restriction period, the recipient is entitled to vote the restricted
shares and receive 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 RSUs and are payable in
cash or common stock. Beginning in 2012, we granted RSUs with a
performance measure based on a management metric,
return on
invested capital (ROIC). Depending on the company’s performance with
respect to this metric, the number of RSUs earned may be less than,
equal to or greater than the original number of RSUs awarded.

We issue common stock under our equity compensation plans from
in addition to the shares
treasury stock. On December 31, 2013,
reserved for
issuance upon the exercise of outstanding options,
approximately 18 million shares have been authorized for options and
restricted stock that may be granted in the future.

Stock-based Compensation Expense. Stock-based compensation
expense is included in G&A expenses. The following table details the
components of stock-based compensation expense recognized in net
earnings in each of the past three years:

Year Ended December 31

Stock options

Restricted stock

2011

$ 58

25

2012

$ 57

17

2013

$ 48

30

Total stock-based compensation expense, net

of tax

$ 83

$ 74

$ 78

expect to renegotiate the terms of 11 collective agreements in 2014,
covering approximately 4,300 employees. We do not expect
the
renegotiations will, either individually or in the aggregate, have a
material impact on our results of operations, financial condition or cash
flows.

Product Warranties. We provide warranties to our customers
associated with certain product sales. We record estimated warranty
costs in the period in which the related products are delivered. The
warranty liability recorded at each balance sheet date is generally
based on the number of months of warranty coverage remaining for
products delivered and the average historical monthly warranty
payments. Warranty obligations incurred in connection with long-term
production contracts are accounted for within the contract estimates at
completion. Our other warranty obligations, primarily for business-jet
aircraft, are included in other current and noncurrent liabilities on the
Consolidated Balance Sheets.

The changes in the carrying amount of warranty liabilities for each of

the past three years were as follows:

Year Ended December 31

Beginning balance

Warranty expense

Payments

Adjustments

Ending balance

2011

2012

2013

$ 260

$ 293

$ 319

88

(56)

1

91

(58)

(7)

125

(83)

(5)

$ 293

$ 319

$ 356

O. EQUITY COMPENSATION PLANS

have

various

equity
Equity Compensation Overview. We
compensation plans for employees, as well as for non-employee
members of our board of directors. These include the General
Dynamics Corporation 2009 Equity Compensation Plan and the 2012
Equity Compensation Plan (Equity Compensation Plans) and the 2009
General Dynamics United Kingdom Share Save Plan (U.K. Plan).

The Equity Compensation Plans seek to provide an effective means
retaining and motivating directors, officers and key
of attracting,
employees, and to provide them with incentives to enhance our growth
and profitability. Under the Equity Compensation Plans, awards may be
granted to officers, employees or non-employee directors in common
stock, options to purchase common stock,
restricted shares of
common stock, participation units or any combination of these.

Stock options may be granted either as incentive stock options,
intended to qualify for capital gain treatment under Section 422 of the

52

General Dynamics Annual Report 2013

Stock Options. We recognize compensation expense related to
stock options on a straight-line basis over the vesting period of the
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:

Year Ended December 31

2011

2012

2013

Expected volatility
Weighted average expected volatility
Expected term (in months)
Risk-free interest rate
Expected dividend yield

28.4-31.5% 27.9-31.3% 21.6-27.3%
23.5%

30.1%

30.7%

43-53

43-53
1.2-1.9% 0.6-0.8%
2.7%

2.0%

43-53
0.5-1.0%
3.0%

We determine the above assumptions based on the following:

(cid:129) Expected volatility is based on the historical volatility of our common

stock over a period equal to the expected term of the option.

(cid:129) Expected term is based on historical option exercise data used to
determine the expected employee exercise behavior. Based on
historical option exercise data, we have estimated different expected
terms and determined a separate fair value for options granted for
two employee populations.

(cid:129) Risk-free interest rate is the yield on a U.S. Treasury zero-coupon
issue with a remaining term equal to the expected term of the
option at the grant date.

(cid:129) Expected dividend yield is based on our historical dividend yield level.

The resulting weighted average fair value per option granted was
$15.63 in 2011, $13.23 in 2012 and $8.90 in 2013. Stock option
expense reduced pretax operating earnings (and on a per-share basis)
by $90 ($0.16) in 2011, $88 ($0.16) in 2012 and $74 ($0.14) in
2013. Compensation expense for stock options is reported as a
Corporate expense for segment reporting purposes (see Note Q). On
December 31, 2013, we had $46 of unrecognized compensation cost
related to stock options, which is expected to be recognized over a
weighted average period of one year.

A summary of option activity during 2013 follows:

Summary information with respect to our stock options’ intrinsic value

and remaining contractual term on December 31, 2013, follows:

Weighted Average Remaining
Contractual Term (in years)

Aggregate Intrinsic
Value

Outstanding

Vested and expected to vest

Exercisable

4.8

4.8

3.4

$ 451

441

179

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 the year
and the exercise price of the options. For options exercised, intrinsic
value is calculated as the difference between the market price on the
date of exercise and the exercise price. The total
intrinsic value of
options exercised was $113 in 2011, $112 in 2012 and $154 in 2013.
We received cash from the exercise of stock options of $198 in 2011,
$146 in 2012 and $583 in 2013.

Restricted Stock/Restricted Stock Units. We determine the fair
value of restricted stock and RSUs as the average of the high and low
market prices of our stock on the date of grant. We generally recognize
compensation expense related to restricted stock and RSUs on a
straight-line basis over the period during which the restriction lapses,
which is generally four years.

Compensation expense related to restricted stock and RSUs reduced
pretax operating earnings (and on a per-share basis) by $38 ($0.07) in
2011, $26 ($0.05) in 2012 and $46 ($0.09) in 2013. On December 31,
2013, we had $48 of unrecognized compensation cost
related to
restricted stock and RSUs, which is expected to be recognized over a
weighted average period of 2.3 years.

A summary of restricted stock and RSU activity during 2013 follows:

Nonvested at December 31, 2012

Granted

Vested

Forfeited

Shares/
Share-Equivalent Units

Weighted Average
Grant-Date Fair Value
Per Share

2,493,449

1,000,541

(903,731)

(82,862)

$ 61.23

67.99

40.46

70.33

Shares
Under Option

Weighted Average
Exercise Price Per Share

Nonvested at December 31, 2013

2,507,397

$ 71.11

Outstanding on December 31, 2012
Granted
Exercised
Forfeited/cancelled

26,124,759
7,566,031
(9,079,434)
(6,973,245)

Outstanding on December 31, 2013

17,638,111

Vested and expected to vest on

December 31, 2013

17,314,425

Exercisable on December 31, 2013

7,550,972

$ 72.19
67.77
65.55
81.62

$ 69.99

$ 70.03

$ 71.85

The total fair value of shares vested was $28 in 2011, $28 in 2012

and $63 in 2013.

General Dynamics Annual Report 2013

53

P. RETIREMENT PLANS

We provide defined-contribution benefits, as well as defined-benefit
pension and other post-retirement benefits, to eligible employees.

Retirement Plan Summary Information
Defined-contribution Benefits. We provide eligible employees the
to participate in defined-contribution savings plans
opportunity
(commonly known as 401(k) plans), which permit contributions on a
before-tax and after-tax basis. Generally, salaried employees and
certain hourly employees are eligible to participate in the plans. Under
most plans,
the employee may contribute to various investment
alternatives, including investment in our common stock. In some of
these plans, we match a portion of the employees’ contributions. Our
contributions to these plans totaled $203 in 2011, $201 in 2012 and
$204 in 2013. The defined-contribution plans held approximately
31 million and 27 million shares of our common stock, representing
approximately 9 percent and 8 percent of our outstanding shares, on
December 31, 2012 and 2013, respectively.

Pension Benefits. We have six noncontributory and six contributory
trusteed, qualified defined-benefit pension plans covering eligible
government business employees, and two noncontributory and four
contributory plans covering eligible commercial business employees,
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 made changes to this plan for certain participants
effective in 2014 that limit or cease the benefits that accrue for future
service. As a result of these modifications, the plan’s projected benefit
obligation (PBO) was reduced by approximately $205.

We also sponsor one funded and several unfunded non-qualified
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 and life insurance coverage for certain of
our employees and 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 company. The plans provide health and life insurance
benefits only to those employees who retire directly from our service
and not to those who terminate service prior to eligibility for retirement.

54

General Dynamics Annual Report 2013

Contributions and Benefit Payments
It is our policy to fund our defined-benefit retirement plans in a manner
that optimizes the tax deductibility and contract recovery of contributions,
framework. We make
considered within our capital deployment
discretionary and required contributions to our pension plans to provide
for benefits attributed to service to date and to be earned in the future.
Our
required contributions are determined in accordance with IRS
regulations. The contributions to our pension plans depend on a variety
of
including discount rates and annual returns on our plan
assets. We contributed $601 to our pension plans in 2013, including
approximately $250 of voluntary contributions. We expect to contribute
approximately $550 to our pension plans in 2014.

factors,

We maintain several

tax-advantaged accounts, primarily Voluntary
Employees’ Beneficiary Association (VEBA) trusts, to fund the obligations
for some of our post-retirement benefit plans. For non-funded plans,
claims are paid as received. We contributed $25 to our other post-
retirement plans in 2013 and expect to contribute a similar amount in
2014.

We expect the following benefits to be paid from our retirement plans

over the next 10 years:

2014

2015

2016

2017

2018

2019-2023

Pension
Benefits

Other Post-retirement
Benefits

$

496

520

543

569

596

3,427

$ 82

83

83

82

82

397

Government Contract Considerations
Our contractual arrangements with the U.S. government provide for the
recovery of contributions to our pension and other post-retirement
benefit plans covering employees working in our defense business
groups. For non-funded plans, our government contracts allow us to
recover claims paid. Following payment, these recoverable amounts are
allocated to contracts and billed to the customer in accordance with the
Cost Accounting Standards (CAS) and specific contractual terms. For
some of these plans, the cumulative pension and post-retirement benefit
cost exceeds the amount currently allocable to contracts. To the extent
recovery of the cost is considered probable based on our backlog and
probable follow-on contracts, we defer the excess in contracts in process
on the Consolidated Balance Sheets until
is allocable to
contracts. See Note G for discussion of our deferred contract costs. For
other plans, the amount allocated to contracts and included in revenues
has exceeded the plans’ cumulative benefit cost. We have deferred
recognition of these excess earnings to provide a better matching of
revenues and expenses. These deferrals have been classified against the
plan assets on the Consolidated Balance Sheets.

the cost

In 2011, changes were made to the CAS to harmonize the
regulations with the Pension Protection Act of 2006 (PPA). For certain
contracts awarded prior to February 27, 2012, we are entitled to
recover additional pension costs from our customers resulting from the
CAS harmonization with the PPA. We submitted REAs of approximately
$165 for these contracts in 2012. These REAs remain outstanding on
December 31, 2013, and are subject to negotiation with our customer,
the U.S. Department of Defense.

Defined-benefit Retirement Plan Summary Financial Information
Estimating retirement plan assets, liabilities and costs requires the
extensive use of actuarial assumptions. These include the long-term
rate of return on plan assets,
the interest rate used to discount
projected benefit payments, healthcare cost trend rates and future
salary increases. Given the long-term nature of the assumptions being
made, actual outcomes 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 from changes in actuarial assumptions, differences between
the actual and assumed long-term rate of return on assets and gains
and losses resulting from changes we make to plan benefit terms.

We recognize an asset or liability on the Consolidated Balance Sheets
equal to the funded status of each of our defined-benefit retirement
plans. The funded status is the difference between the fair value of the
plan’s assets and its benefit obligation. Changes in plan assets and
liabilities due to differences between actuarial assumptions and the
actual results of the plan are recorded directly to AOCL in shareholders’
equity on the Consolidated Balance Sheets rather than charged to

earnings. These differences are then amortized over future years as a
component of our annual benefit cost. We amortize actuarial differences
under qualified plans on a straight-line basis over the average remaining
service period of eligible employees. We recognize the difference
between the actual and expected return on plan assets for qualified
plans over five years. The deferral of these differences reduces the
volatility of our annual benefit cost that can result either from year-to-
year changes in the assumptions or from actual results that are not
necessarily representative of the long-term financial position of these
plans. We recognize differences under nonqualified plans immediately.

Our annual pension and other post-retirement benefit costs

consisted of the following:

Pension Benefits

Year Ended December 31

2011

2012

2013

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss

Amortization of prior service credit

$ 245

$ 266

$ 298

517

(599)

173

(43)

523

(588)

287

(42)

492

(590)

409

(67)

Annual benefit cost

$ 293

$ 446

$ 542

Year Ended December 31

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss

Amortization of prior service cost

Other Post-retirement Benefits

2011

$ 13

62

(31)

4

6

2012

$ 12

59

(30)

10

7

2013

$ 15

53

(29)

26

7

Annual benefit cost

$ 54

$ 58

$ 72

General Dynamics Annual Report 2013

55

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 gain (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

2012

2013

2012

2013

$ (10,242)
(266)
(523)
–
(1,527)
(7)
451

$ (12,114)
(298)
(492)
234
1,094
2
561

$ (1,179)
(12)
(59)
–
(211)
(5)
82

$ (1,384)
(15)
(53)
–
177
11
81

$ (12,114)

$ (11,013)

$ (1,384)

$ (1,183)

$ 6,250
874
532
12
(441)

$ 7,227
1,200
601
(3)
(549)

$ 7,227

$ 8,476

$ (4,887)

$ (2,537)

$

$

$

379
64
32
–
(49)

426

(958)

$

$

$

426
116
25
–
(48)

519

(664)

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 AOCL consisted of the following:

December 31

Net actuarial loss

Prior service (credit) cost

Total amount recognized in AOCL, pretax

The following is a reconciliation of the change in AOCL for our defined-benefit retirement plans:

Year Ended December 31

Net actuarial loss (gain)

Prior service cost

Amortization of:

Net actuarial loss from prior years

Prior service credit (cost)

Other*

Change in AOCL, pretax

*

Includes foreign exchange translation and curtailment adjustments.

56

General Dynamics Annual Report 2013

Pension Benefits

Other Post-retirement Benefits

2012

2013

2012

2013

$

144

$

178

$

–

$

–

(114)

(4,917)

(104)

(2,611)

(204)

(754)

(199)

(465)

$ (4,887)

$ (2,537)

$ (958)

$ (664)

Pension Benefits

Other Post-retirement Benefits

2012

2013

$ 5,737

$ 3,618

(214)

(387)

$ 5,523

$ 3,231

2012

$ 401

21

$ 422

2013

$ 109

10

$ 119

Pension Benefits

Other Post-retirement Benefits

2012

2013

2012

2013

$ 1,241

$ (1,704)

$ 177

$ (264)

–

(287)

42

(5)

(234)

(409)

67

(12)

–

(10)

(7)

(2)

–

(26)

(7)

(6)

$

991

$ (2,292)

$ 158

$ (303)

The following table represents amounts deferred in AOCL on the
Consolidated Balance Sheets on December 31, 2013, that we expect
to recognize in our retirement benefit cost in 2014:

The following table summarizes the weighted average assumptions

used to determine our net periodic benefit costs:

Assumptions for Year Ended December 31

2011

2012

2013

Pension Benefits

Other Post-
retirement
Benefits

Pension Benefits

Discount rate

Prior service (credit) cost

Net actuarial loss

$ (67)

294

$ 5

9

to

services

employee

rendered to date,

A pension plan’s funded status is the difference between the plan’s
assets and its PBO. The PBO is the present value of future benefits
attributed
including
future compensation levels. A pension plan’s
assumptions about
accumulated benefit obligation (ABO)
is the present value of future
benefits attributed to employee services rendered to date, excluding
assumptions about
future compensation levels. The ABO for all
defined-benefit pension plans was $11.5 billion and $10.6 billion on
December 31, 2012 and 2013, respectively. On December 31, 2012
and 2013, some of our pension plans had an ABO that exceeded the
plans’ assets. Summary information for those plans follows:

December 31

PBO

ABO

Fair value of plan assets

2012

2013

$ (11,956)

$ (10,627)

(11,323)

7,028

(10,275)

7,988

Retirement Plan Assumptions
We calculate the plan assets and liabilities for a given year and the net
the subsequent year using assumptions
periodic benefit cost
determined as of December 31 of the year in question.

for

The following table summarizes the weighted average assumptions

used to determine our benefit obligations:

Expected long-term rate of return on assets

Rate of increase in compensation levels

Other Post-retirement Benefits

Discount rate

Expected long-term rate of return on assets

5.73%

8.37%

3.86%

5.22%

8.24%

3.77%

4.22%

8.14%

3.79%

5.54%

8.03%

5.13%

8.03%

3.97%

8.03%

We base the discount rate on a current yield curve developed from a
portfolio of high-quality fixed-income investments with maturities
consistent with the projected benefit payout period. We determine the
long-term rate of return on assets based on consideration of historical
and forward-looking returns and the current and expected asset
allocation strategy.

judgment,

These assumptions are based on our best

including
consideration of current and future market conditions. Changes in these
estimates impact future pension and post-retirement benefit costs. As
discussed above, we defer recognition of the cumulative benefit cost for
our government plans in excess of costs allocable to contracts to provide
a better matching of revenues and expenses. Therefore, the impact of
annual changes in financial reporting assumptions on the cost for these
plans does not affect our operating results either positively or negatively.
For our domestic pension plans that represent the majority of our total
obligation, the following hypothetical changes in the discount rate and
expected long-term rate of return on plan assets would have had the
following impact in 2013:

Increase
25 basis
points

Decrease
25 basis
points

Assumptions on December 31

Pension Benefits

Discount rate

Rate of increase in compensation levels

Other Post-retirement Benefits

Discount rate

Healthcare cost trend rate:

Trend rate for next year

Ultimate trend rate

Year rate reaches ultimate trend rate

2012

2013

Increase (decrease) to net pension cost from:

Change in discount rate

Change in long-term rate of return on plan assets

$ (37)

(16)

$ 31

16

4.22%

3.77%

4.95%

3.70%

3.97%

4.74%

8.00%

5.00%

8.00%

5.00%

2019

2019

General Dynamics Annual Report 2013

57

indices. Our investments in fixed-income assets include U.S. Treasury
and U.S. agency securities, corporate bonds, mortgage-backed
securities,
securities. Our
and
investment policy allows the use of derivative instruments when
appropriate to reduce anticipated asset volatility, to gain exposure to an
asset class or to adjust the duration of fixed-income assets.

international

contracts

futures

Assets for our international pension plans are held in trusts in the
countries in which the related operations reside. Our international
operations maintain investment policies for their individual plans based
on country-specific regulations. The international plan assets are
primarily invested in commingled funds comprised of international and
U.S. equities and fixed-income securities.

We hold assets in VEBA trusts for some of our other post-retirement
plans. These assets are generally invested in equities, corporate bonds
and equity-based mutual funds. Our asset allocation strategy for the
VEBA trusts considers potential
fluctuations in our post-retirement
liability, the taxable nature of certain VEBA trusts, tax deduction limits
on contributions and the regulatory environment.

Our retirement plan assets are reported at fair value. See Note D for
a discussion of the hierarchy for determining fair value. Our Level 1
assets include investments in publicly traded equity securities and
commingled funds. These securities (and the underlying investments of
the funds) are actively traded and valued using quoted prices for
identical securities from the market exchanges. Our Level 2 assets
consist of fixed-income securities and commingled funds that are not
actively traded or whose underlying investments are valued using
observable marketplace inputs. The fair value of plan assets invested in
fixed-income securities is generally determined using valuation models
that use observable inputs such as interest rates, bond yields, low-
volume market quotes and quoted prices for similar assets. Our plan
assets that are invested in commingled funds are valued using a unit
price or net asset value (NAV)
is based on the underlying
the fund. We had minimal Level 3 plan assets on
investments of
December 31, 2013. These investments include real estate and hedge
funds, insurance deposit contracts and direct private equity investments.

that

A 25-basis-point change in these assumed rates would not have
had a measurable impact on the benefit cost
for our other post-
retirement plans in 2013. For our healthcare plans, the effect of a 1
percentage point increase or decrease in the assumed healthcare cost
trend rate on the net periodic benefit cost is $8 and ($6), respectively,
and the effect on the accumulated post-retirement benefit obligation is
$102 and ($83), respectively.

Plan Assets
A committee of our board of directors is responsible for the strategic
oversight of our defined-benefit retirement plan assets held in trust.
Management reports to the committee on a regular basis and is
responsible for making all
investment decisions related to retirement
plan assets in compliance with the company’s policies.

Our investment policy endeavors to strike the appropriate balance
among capital preservation, asset growth and current income. The
investment policy is to generate future returns
objective of our
return used to
consistent with our assumed long-term rate of
determine our benefit obligations and net periodic benefit costs. Target
allocation percentages vary over time depending on the perceived risk
and return potential of various asset classes and market conditions. At
the end of 2013, our asset allocation policy ranges were:

Equities

Fixed income

Cash

Other asset classes

25 - 75%

10 - 50%

0 - 15%

0 - 20%

More than 90 percent of our pension plan assets are held in a single
trust for our primary domestic government and commercial pension
plans. On December 31, 2013,
the trust was invested largely in
publicly traded equities and fixed-income securities, but may invest in
other asset classes in the future consistent with our investment policy.
Our
investments in equity assets include U.S. and international
securities and equity funds as well as futures contracts on U.S. equity

58

General Dynamics Annual Report 2013

The fair value of our pension plan assets by investment category and the corresponding level within the fair value hierarchy were as follows:

Asset Category

Cash
Equity securities
U.S. companies (a)
International companies
Private equity investments
Fixed-income securities
Treasury securities
Corporate bonds (b)
Commingled funds
Equity funds
Money market funds
Fixed-income funds
Real estate funds
Commodity funds
Hedge funds
Other investments
Insurance deposit agreements

Total pension plan assets

Fair
Value

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2012

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2013

$

43

$

43

$

500
85
8

141
1,805

3,791
240
165
32
8
301

108

500
85
–

141
–

303
–
–
–
–
–

–

–

–
–
–

–
1,805

3,488
240
165
–
8
201

–

$

–

–
–
8

–
–

–
–
–
32
–
100

108

$

35

$

35

$

685
128
10

428
2,227

3,935
97
303
34
8
471

115

685
128
–

428
–

286
–
–
–
–
–

–

–

–
–
–

–
2,227

3,649
97
303
–
8
288

–

Significant
Unobservable
Inputs
(Level 3)

$

–

–
–
10

–
–

–
–
–
34
–
183

115

$ 7,227

$ 1,072

$ 5,907

$ 248

$ 8,476

$ 1,562

$ 6,572

$ 342

(a) No single equity holding amounted to more than 1 percent of the total fair value.
(b) Our corporate bond investments had an average rating of BBB+ on December 31, 2012, and A- on December 31, 2013.

The fair value of our other post-retirement plan assets by category and the corresponding level within the fair value hierarchy were as follows:

Asset Category

Cash

Equity securities

Fixed-income securities

Commingled funds

Equity funds

Fixed-income funds

Hedge funds

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2012

$ 18

120

1

4

6

–

$

–

–

55

221

–

1

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

$ –

$

6

–

–

–

–

–

154

55

296

6

2

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2013

Significant
Unobservable
Inputs
(Level 3)

$

6

154

2

5

6

–

$

–

–

53

291

–

1

$ –

–

–

–

–

1

Fair
Value

$ 18

120

56

225

6

1

Total other post-retirement plan assets

$ 426

$ 149

$ 277

$ –

$ 519

$ 173

$ 345

$ 1

The changes in our Level 3 retirement plan assets during 2012 and 2013 were not material.

General Dynamics Annual Report 2013

59

Q. BUSINESS GROUP INFORMATION

We operate in four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. We organize our
business groups in accordance with the nature of products and services offered. These business groups derive their revenues from business aviation;
combat vehicles, weapons systems and munitions; military and commercial shipbuilding and services; and communication and information technology
systems and solutions, respectively. We measure each group’s profit based on operating earnings. As a result, we do not allocate net interest, other
income and expense items, and income taxes to our business groups.

Summary financial information for each of our business groups follows:

Year Ended December 31

Aerospace
Combat Systems
Marine Systems
Information Systems and Technology
Corporate*

2011

$ 5,998
8,827
6,631
11,221
–

Revenues

2012

$ 6,912
7,992
6,592
10,017
–

Operating Earnings

Revenues from U.S.
Government

2013

2011

2012

2013

2011

2012

2013

$ 8,118
6,120
6,712
10,268
–

$

729
1,283
691
1,200
(77)

$

858
663
750
(1,369)
(69)

$ 1,416
904
666
795
(96)

$

171
6,343
6,582
9,507
–

$

160
5,699
6,504
8,442
–

$

98
4,057
6,536
8,572
–

$ 32,677

$ 31,513

$ 31,218

$ 3,826

$

833

$ 3,685

$ 22,603

$ 20,805

$ 19,263

Identifiable Assets

Capital Expenditures

Depreciation and Amortization

Year Ended December 31

2011

2012

2013

Aerospace
Combat Systems
Marine Systems
Information Systems and Technology
Corporate*

$ 7,132
9,967
2,858
11,934
2,992

$ 7,524
9,619
3,032
9,701
4,433

$ 8,005
9,393
3,088
9,432
5,530

$ 34,883

$ 34,309

$ 35,448

2011

$ 153
90
116
93
6

$ 458

2012

$ 204
87
85
72
2

$ 450

2013

$ 250
54
83
52
1

$ 440

2011

$ 142
173
74
196
7

$ 592

2012

$ 125
173
95
220
7

$ 620

2013

$ 123
144
103
178
8

$ 556

* Corporate operating results primarily consist of stock option expense. Corporate identifiable assets are primarily cash and equivalents.

Our revenues from international operations were $5.7 billion in
2011, $4.5 billion in 2012 and $3.4 billion in 2013. The long-lived
assets of operations located outside the United States were 6 percent
of our total long-lived assets on December 31, 2012 and 2013.

The following table presents our revenues by geographic area based

on the location of our customers:

Year Ended December 31

2011

2012

2013

North America:
United States
Canada
Other

$ 26,401
806
39

$ 25,004
878
165

$ 24,845
923
40

Total North America

27,246

26,047

25,808

Europe:

United Kingdom
Switzerland
Russia
Spain
Other

Total Europe

Asia/Pacific:
China
Other

Total Asia/Pacific

Africa/Middle East
South America

857
582
287
405
826

2,957

929
555

1,484

672
318

1,027
679
548
288
534

3,076

876
541

1,417

713
260

881
541
244
201
974

2,841

987
499

1,486

748
335

$ 32,677

$ 31,513

$ 31,218

60

General Dynamics Annual Report 2013

R. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The fixed-rate notes described in Note J are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain of our 100-
percent-owned subsidiaries (the guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the
guarantors on a combined basis (each guarantor together with its majority owned subsidiaries) and all other subsidiaries on a combined basis.

R. CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS (LOSS)

Year Ended December 31, 2011

Revenues
Cost of sales
G&A

Operating earnings
Interest, net
Other, net

Earnings before income taxes
Provision for income taxes
Discontinued operations, net of tax
Equity in net earnings of subsidiaries

Net earnings

Comprehensive income

Year Ended December 31, 2012

Revenues
Cost of sales
G&A

Operating earnings
Interest, net
Other, net

Earnings before income taxes
Provision for income taxes
Equity in net earnings of subsidiaries

Net loss

Comprehensive loss

Year Ended December 31, 2013

Revenues
Cost of sales
G&A

Operating earnings
Interest, net
Other, net

Earnings before income taxes
Provision for income taxes
Discontinued operations, net of tax
Equity in net earnings of subsidiaries

Net earnings

Comprehensive income

Guarantors on a
Combined Basis

Other Subsidiaries
on a Combined Basis

Consolidating
Adjustments

Total
Consolidated

$

$ 6,424
5,498
441

$ 26,253
21,336
1,499

3,418
–
27

3,445
1,097
–
–

$

Parent

–
(13)
90

(77)
(143)
5

(215)
(43)
(26)
2,724

$ 2,526

$ 1,650

$ 2,348

$ 2,228

$

$

–
–
–

–
–
–

–
–
–
(2,724)

$ 32,677
26,821
2,030

3,826
(141)
33

3,718
1,166
(26)
–

$ (2,724)

$ 2,526

$ (2,411)

$ 1,650

Parent

Guarantors on a
Combined Basis

Other Subsidiaries
on a Combined Basis

Consolidating
Adjustments

Total
Consolidated

$

–
(20)
89

(69)
(158)
(126)

(353)
(137)
(116)

$ 26,349
23,614
1,618

1,117
(3)
(4)

1,110
854
–

$ (332)

$ (795)

$

$

256

21

$ 5,164
4,810
569

(215)
5
(6)

(216)
156
–

$ (372)

$

(90)

$

–
–
–

–
–
–

–
–
116

$ 116

$ 69

$ 31,513
28,404
2,276

833
(156)
(136)

541
873
–

(332)

(795)

$

$

Parent

Guarantors on a
Combined Basis

Other Subsidiaries
on a Combined Basis

Consolidating
Adjustments

Total
Consolidated

$ 27,272
22,175
1,664

3,433
1
6

3,440
1,058
–
–

$

–
20
74

(94)
(93)
1

(186)
(56)
(129)
2,616

$ 2,357

$ 3,947

$

$ 3,946
3,259
341

–
–
–

–
–
–

–
–
–
(2,616)

$ 31,218
25,454
2,079

3,685
(86)
8

3,607
1,121
(129)
–

$ 2,382

$ 2,820

$

$

$ (2,616)

$ 2,357

$ (3,011)

$ 3,947

General Dynamics Annual Report 2013

61

485
2
1

488
112
–
–

376

183

346
6
1

353
119
–
–

234

191

R. CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2012

ASSETS

Current assets:

Cash and equivalents

Accounts receivable

Contracts in process

Inventories

Work in process

Raw materials

Finished goods

Pre-owned aircraft

Other current assets

Total current assets

Noncurrent assets:

PP&E

Accumulated depreciation of PP&E

Intangible assets

Accumulated amortization of intangible assets

Goodwill

Other assets

Investment in subsidiaries

Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Customer advances and deposits

Other current liabilities

Total current liabilities

Noncurrent liabilities:

Long-term debt

Other liabilities

Total noncurrent liabilities

Intercompany

Shareholders’ equity:

Common stock

Other shareholders’ equity

Total shareholders’ equity

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ 2,248

$

–

$ 1,048

$

–

439

–

–

–

–

45

1,254

3,199

1,507

1,020

32

80

249

2,732

7,341

155

(56)

–

–

–

700

33,324

34,123

5,556

(2,850)

1,693

(1,068)

7,661

738

–

11,730

2,950

1,326

11

89

37

–

210

5,671

1,292

(694)

1,222

(464)

4,387

328

–

6,071

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(35)

(33,324)

(33,359)

$ 3,296

4,204

4,964

1,518

1,109

69

80

504

15,744

7,003

(3,600)

2,915

(1,532)

12,048

1,731

–

18,565

$ 36,855

$ 19,071

$ 11,742

$ (33,359)

$ 34,309

$ 3,052

$ 2,990

$

$

–

394

394

3,881

4,121

8,002

3,743

6,795

27

2,704

2,731

17,069

(17,388)

482

10,908

11,390

6

26,927

26,933

1,441

4,431

–

566

566

319

44

6,382

6,426

–

–

–

–

–

–

–

(50)

(33,309)

(33,359)

$ 6,042

5,578

11,620

3,908

7,391

11,299

–

482

10,908

11,390

Total liabilities and shareholders’ equity

$ 36,855

$ 19,071

$ 11,742

$ (33,359)

$ 34,309

62

General Dynamics Annual Report 2013

R. CONDENSED CONSOLIDATING BALANCE SHEETS

December 31, 2013

ASSETS

Current assets:

Cash and equivalents

Accounts receivable

Contracts in process

Inventories

Work in process

Raw materials

Finished goods

Pre-owned aircraft

Other current assets

Total current assets

Noncurrent assets:

PP&E

Accumulated depreciation of PP&E

Intangible assets

Accumulated amortization of intangible assets

Goodwill

Other assets

Investment in subsidiaries

Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Customer advances and deposits

Other current liabilities

Total current liabilities

Noncurrent liabilities:

Long-term debt

Other liabilities

Total noncurrent liabilities

Intercompany

Shareholders’ equity:

Common stock

Other shareholders’ equity

Total shareholders’ equity

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ 4,175

$

–

$ 1,126

$

–

571

–

–

–

–

35

1,451

3,124

1,623

1,172

24

18

202

4,781

7,614

156

(64)

–

–

–

558

36,067

36,717

5,827

(3,062)

1,614

(1,111)

7,631

483

–

11,382

2,951

1,085

12

86

33

–

198

5,491

1,265

(707)

1,230

(516)

4,346

398

–

6,016

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(486)

(36,067)

(36,553)

$ 5,301

4,402

4,780

1,635

1,258

57

18

435

17,886

7,248

(3,833)

2,844

(1,627)

11,977

953

–

17,562

$ 41,498

$ 18,996

$ 11,507

$ (36,553)

$ 35,448

$ 3,493

$ 3,091

$

$

–

763

763

3,883

2,335

6,218

3,643

7,136

25

2,008

2,033

20,016

(20,108)

482

14,019

14,501

6

29,929

29,935

1,204

4,295

–

502

502

92

3,570

3,048

6,618

–

–

–

–

–

–

–

(3,576)

(32,977)

(36,553)

$ 6,584

5,610

12,194

3,908

4,845

8,753

–

482

14,019

14,501

Total liabilities and shareholders’ equity

$ 41,498

$ 18,996

$ 11,507

$ (36,553)

$ 35,448

General Dynamics Annual Report 2013

63

R. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2011

Net cash provided by operating activities

Cash flows from investing activities:
Business acquisitions, net of cash acquired
Purchases of held-to-maturity securities
Maturities of held-to-maturity securities
Capital expenditures
Purchases of available-for-sale securities
Other, net

Net cash used by investing activities

Cash flows from financing activities:
Proceeds from fixed-rate notes
Purchases of common stock
Repayment of fixed-rate notes
Dividends paid
Other, net

Net cash used by financing activities

Net cash used by discontinued operations

Cash sweep/funding by parent

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

Year Ended December 31, 2012

Net cash provided by operating activities

Cash flows from investing activities:
Capital expenditures
Business acquisitions, net of cash acquired
Other, net

Net cash used by investing activities

Cash flows from financing activities:
Repayment of fixed-rate notes
Proceeds from fixed-rate notes
Dividends paid
Purchases of common stock
Other, net

Net cash used by financing activities

Net cash used by discontinued operations

Cash sweep/funding by parent

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

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

$

(359)

$ 3,524

$

73

$ –

Total
Consolidated

$ 3,238

(233)
(459)
334
(6)
(274)
246

(392)

1,497
(1,468)
(750)
(673)
216

(1,178)

(27)

1,878

(78)
1,608

(2)
(121)
221

98

(2,400)
2,382
(893)
(602)
154

(1,359)

(2)

2,522

718
1,530

(1,327)
–
–
(381)
(99)
192

(1,615)

–
–
–
–
(20)

(20)

–

(1,889)

–
–

–

–
–
107
(71)
–
(3)

33

–
–
–
–
(3)

(3)

–

11

114
1,005

–
–
–
–
–
–

–

–
–
–
–
–

–

–

–

–
–

(1,560)
(459)
441
(458)
(373)
435

(1,974)

1,497
(1,468)
(750)
(673)
193

(1,201)

(27)

–

36
2,613

$ 1,119

$ –

$ 2,649

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

$

(541)

$ 2,850

$

378

$ –

Total
Consolidated

$ 2,687

(390)
(297)
(1)

(688)

–
–
–
–
(21)

(21)

–

(2,141)

–
–

–

(58)
(26)
18

(66)

–
–
–
–
(2)

(2)

–

(381)

(71)
1,119

–
–
–

–

–
–
–
–
–

–

–

–

–
–

(450)
(444)
238

(656)

(2,400)
2,382
(893)
(602)
131

(1,382)

(2)

–

647
2,649

$ 1,048

$ –

$ 3,296

Cash and equivalents at end of year

$ 1,530

$

Cash and equivalents at end of year

$ 2,248

$

64

General Dynamics Annual Report 2013

R. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2013

Net cash provided by operating activities

Cash flows from investing activities:

Capital expenditures

Other, net

Net cash used by investing activities

Cash flows from financing activities:

Purchases of common stock

Dividends paid

Proceeds from option exercises

Other, net

Net cash used by financing activities

Net cash used by discontinued operations

Cash sweep/funding by parent

Net increase in cash and equivalents

Cash and equivalents at beginning of year

(1)

3

2

(740)

(591)

583

23

(725)

(9)

3,113

1,927

2,248

Cash and equivalents at end of year

$ 4,175

$

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ (454)

$ 2,810

$

750

$ –

$ 3,106

(381)

59

(322)

–

–

–

–

–

–

(2,488)

–

–

–

(58)

11

(47)

–

–

–

–

–

–

(625)

78

1,048

–

–

–

–

–

–

–

–

–

–

–

–

(440)

73

(367)

(740)

(591)

583

23

(725)

(9)

–

2,005

3,296

$ 1,126

$ –

$ 5,301

General Dynamics Annual Report 2013

65

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of General Dynamics Corporation:

We have audited the accompanying Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries (the Company) as of
December 31, 2012 and 2013, and the related Consolidated Statements of Earnings (Loss), Comprehensive Income (Loss), Cash Flows, and
Shareholders’ Equity for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of General
Dynamics Corporation and subsidiaries as of December 31, 2012 and 2013, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), General Dynamics
Corporation’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 7,
2014, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

McLean, Virginia
February 7, 2014

KPMG LLP

66

General Dynamics Annual Report 2013

SUPPLEMENTARY DATA
(UNAUDITED)

(Dollars in millions, except per-share amounts)

2012

2013

Revenues

Operating earnings (loss)

Earnings (loss) from continuing operations

Discontinued operations

Net earnings (loss)

Earnings (loss) per share – Basic (d):

Continuing operations

Discontinued operations

Net earnings (loss)

Earnings (loss) per share – Diluted (d):

Continuing operations

Discontinued operations

Net earnings (loss)

Market price range:

High

Low

1Q (a)

2Q

3Q

4Q (b)

1Q

2Q

3Q

4Q (c)

$ 7,579

$ 7,922

$ 7,934

$ 8,078

$ 7,404

$ 7,911

$ 7,796

$ 8,107

860

564

–

564

970

634

–

634

905

600

–

600

(1,902)

(2,130)

–

(2,130)

847

571

–

571

960

640

–

640

957

651

–

651

921

624

(129)

495

$ 1.58

$ 1.79

$ 1.71

$ (6.07)

$ 1.62

$ 1.82

$ 1.86

$ 1.78

–

1.58

–

1.79

–

1.71

–

(6.07)

–

1.62

–

1.82

–

1.86

(0.37)

1.41

$ 1.57

$ 1.77

$ 1.70

$ (6.07)

$ 1.62

$ 1.81

$ 1.84

$ 1.76

–

1.57

–

1.77

–

1.70

–

(6.07)

–

1.62

–

1.81

–

1.84

(0.36)

1.40

$ 74.15

66.76

$ 74.54

61.54

$ 67.29

61.09

$ 70.59

61.70

$ 72.01

64.47

$ 79.48

65.37

$ 89.94

77.40

$ 95.76

83.61

Dividends declared

$ 0.51

$ 0.51

$ 0.51

$ 0.51

$ 0.56

$ 0.56

$ 0.56

$ 0.56

Quarterly data are based on a 13-week period. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year.
(a) First quarter of 2012 includes $67 of out-of-period adjustments at one of our European subsidiaries.
(b) Fourth quarter of 2012 includes $2.3 billion of goodwill and intangible asset impairment charges in our Aerospace and Information Systems and Technology groups and $546 of other discrete

charges.

(c) Fourth quarter of 2013 includes $129 loss, net of taxes, in discontinued operations from the settlement of the A-12 litigation.
(d) The sum of the basic and diluted earnings per share for the four quarters of the year may differ from the annual basic and diluted earnings per share due to the required method of computing the

weighted average number of shares in interim periods. Fourth quarter of 2012 amounts exclude the dilutive effect of stock options and restricted stock as it would be antidilutive.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2013 (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended (Exchange Act)). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2013, our disclosure controls and procedures were effective.

The certifications of the company’s Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have

been filed as Exhibits 31.1 and 31.2 to this report.

General Dynamics Annual Report 2013

67

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Shareholders of General Dynamics Corporation:

The management of General Dynamics Corporation is responsible for establishing and maintaining adequate internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation
and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this evaluation, we
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated
Framework (1992). Based on our evaluation we believe that, as of December 31, 2013, our internal control over financial reporting is effective based
on those criteria.

KPMG LLP has issued an audit report on the effectiveness of our internal control over financial reporting. The KPMG report immediately follows this
report.

Phebe N. Novakovic
Chairman and Chief Executive Officer

Jason W. Aiken
Senior Vice President and Chief Financial Officer

68

General Dynamics Annual Report 2013

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of General Dynamics Corporation:

We have audited General Dynamics Corporation’s internal control over financial reporting as of December 31, 2013, based on the criteria established
in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
General Dynamics Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, General Dynamics Corporation maintained,
December 31, 2013, based on the criteria established in Internal Control – Integrated Framework (1992) issued by the COSO.

in all material respects, effective internal control over financial reporting as of

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance
Sheets of General Dynamics Corporation and subsidiaries as of December 31, 2012 and 2013, and the related Consolidated Statements of Earnings
(Loss), Comprehensive Income (Loss), Cash Flows, and Shareholders’ Equity for each of the years in the three-year period ended December 31,
2013, and our report dated February 7, 2014, expressed an unqualified opinion on those consolidated financial statements.

McLean, Virginia
February 7, 2014

KPMG LLP

General Dynamics Annual Report 2013

69

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no significant changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013, that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required to be set forth herein, except for the information included under Executive Officers of the Company, is included in the
sections entitled “Election of the Board of Directors of the Company,” “Governance of the Company – Our Culture of Ethics,” “Audit Committee
Report” and “Other Information – Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our 2014 annual
shareholders meeting (the Proxy Statement), which sections are incorporated herein by reference.

Executive Officers of the Company
All of our executive officers are appointed annually. None of our executive officers was selected pursuant to any arrangement or understanding
between the officer and any other person. The name, age, offices and positions of our executives held for at least the past five years as of February 7,
2014, were as follows:

Name, Position and Office
Jason W. Aiken – Senior Vice President and Chief Financial Officer since January 2014; Vice President of the company and Chief
Financial Officer of Gulfstream Aerospace Corporation, September 2011 – December 2013; Vice President and Controller of the
company, April 2010 – August 2011; Staff Vice President, Accounting of the company, July 2006 – March 2010

John P. Casey – Executive Vice President, Marine Systems, since May 2012; Vice President of the company and President of Electric
Boat Corporation, October 2003 – May 2012; Vice President of Electric Boat Corporation, October 1996 – October 2003

Larry R. Flynn – Vice President of the company and President of Gulfstream Aerospace Corporation since September 2011; Vice
President of the company and Senior Vice President, Marketing and Sales of Gulfstream Aerospace Corporation, July 2008 –
September 2011; President, Product Support of Gulfstream Aerospace Corporation, May 2002 – June 2008

Gregory S. Gallopoulos – Senior Vice President, General Counsel and Secretary of the company since January 2010; Vice President and
Deputy General Counsel of the company, July 2008 – January 2010; Managing Partner of Jenner & Block LLP, January 2005 – June
2008

Jeffrey S. Geiger – Vice President of the company and President of Electric Boat Corporation since November 2013; Vice President of
the company and President of Bath Iron Works Corporation, April 2009 – November 2013; Senior Vice President, Operations and
Engineering of Bath Iron Works, March 2008 – March 2009

David K. Heebner – Executive Vice President, Information Systems and Technology, since March 2013; Executive Vice President,
Combat Systems, May 2010 – March 2013; Executive Vice President, Marine Systems, January 2009 – May 2010; Senior Vice
President of the company, May 2002 – January 2009; President of General Dynamics Land Systems, July 2005 – October 2008;
Senior Vice President, Planning and Development of the company, May 2002 – July 2005; Vice President, Strategic Planning of the
company, January 2000 – May 2002

Robert W. Helm – Senior Vice President, Planning and Development of the company since May 2010; Vice President, Government
Relations of Northrop Grumman Corporation, August 1989 – April 2010

S. Daniel Johnson – Vice President of the company and President of General Dynamics Information Technology since April 2008;
Executive Vice President of General Dynamics Information Technology, July 2006 – March 2008

Age
41

59

61

54

52

68

62

66

70

General Dynamics Annual Report 2013

Name, Position and Office
Kimberly A. Kuryea – Vice President and Controller of the company since September 2011; Chief Financial Officer of General Dynamics
Advanced Information Systems, November 2007 – August 2011; Staff Vice President, Internal Audit of the company, March 2004 –
October 2007

Age
46

Joseph T. Lombardo – Executive Vice President, Aerospace, since April 2007; President of Gulfstream Aerospace Corporation, April
2007 – September 2011; Vice President of the company and Chief Operating Officer of Gulfstream Aerospace Corporation, May
2002 – April 2007

Christopher Marzilli – Vice President of the company and President of General Dynamics C4 Systems since January 2006; Senior Vice
President and Deputy General Manager of General Dynamics C4 Systems, November 2003 – January 2006

Phebe N. Novakovic – Chairman and Chief Executive Officer of the company since January 2013; President and Chief Operating Officer
of the company, May 2012 – December 2012; Executive Vice President, Marine Systems, May 2010 – May 2012; Senior Vice
President, Planning and Development of the company, July 2005 – May 2010; Vice President, Strategic Planning of the company,
October 2002 – July 2005

Walter M. Oliver – Senior Vice President, Human Resources and Administration of the company since March 2002; Vice President,
Human Resources and Administration of the company, January 2001 – March 2002

Mark C. Roualet – Executive Vice President, Combat Systems, since March 2013; Vice President of the company and President of
General Dynamics Land Systems, October 2008 – March 2013; Senior Vice President and Chief Operating Officer of General Dynamics
Land Systems, July 2007 – October 2008

Gary L. Whited – Vice President of the company and President of General Dynamics Land Systems since March 2013; Senior Vice
President of General Dynamics Land Systems, September 2011 – March 2013; Vice President and Chief Financial Officer of General
Dynamics Land Systems, June 2006 – September 2011

66

54

56

68

55

53

ITEM 11. EXECUTIVE COMPENSATION

The information required to be set forth herein is included in the sections entitled “Governance of the Company – Director Compensation,”
“Compensation Discussion and Analysis,” “Executive Compensation” and “Compensation Committee Report” in our Proxy Statement, which sections
are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required to be set forth herein is included in the sections entitled “Security Ownership of Management” and “Security Ownership of
Certain Beneficial Owners” in our Proxy Statement, which sections are incorporated herein by reference.

The information required to be set forth herein with respect to securities authorized for issuance under our equity compensation plans is included

in the section entitled “Equity Compensation Plan Information” in our Proxy Statement, which section is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required to be set forth herein is included in the sections entitled “Governance of the Company – Related Person Transactions Policy”
and “Governance of the Company – Director Independence” in our Proxy Statement, which sections are incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required to be set forth herein is included in the section entitled “Selection of Independent Auditors – Audit and Non-Audit Fees” in
our Proxy Statement, which section is incorporated herein by reference.

General Dynamics Annual Report 2013

71

PART IV

ITEM 15. EXHIBITS

1. Consolidated Financial Statements

Consolidated Statements of Earnings (Loss)

Consolidated Statements of Comprehensive Income (Loss)

Consolidated Balance Sheets

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders’ Equity

Notes to Consolidated Financial Statements (A to R)

2. Exhibits

See Index on pages 74 through 75 of this Annual Report on Form 10-K for the year ended December 31, 2013.

72

General Dynamics Annual Report 2013

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

GENERAL DYNAMICS CORPORATION

by

Kimberly A. Kuryea
Vice President and Controller

Dated: February 7, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on February 7, 2014, by the
following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors.

Phebe N. Novakovic

Chairman, Chief Executive Officer and Director
(Principal Executive Officer)

Jason W. Aiken

Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

Kimberly A. Kuryea

*

Mary T. Barra

*
Nicholas D. Chabraja
*

James S. Crown

*

William P. Fricks

*

Paul G. Kaminski

*

John M. Keane

*

Lester L. Lyles

*

James N. Mattis

*

William A. Osborn

*
Laura J. Schumacher
*

Robert Walmsley

Vice President and Controller
(Principal Accounting Officer)

Director

Director

Director

Director

Director

Director

Director

Director

Director

Director

Director

* By Gregory S. Gallopoulos pursuant to a Power of Attorney executed by the directors listed above, which Power of Attorney has been filed as an

exhibit hereto and incorporated herein by reference thereto.

Gregory S. Gallopoulos
Senior Vice President, General Counsel and Secretary

General Dynamics Annual Report 2013

73

INDEX TO EXHIBITS – GENERAL DYNAMICS CORPORATION
COMMISSION FILE NO. 1-3671
Exhibits listed below, which have been filed with the Commission pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, and which were filed as noted below, are hereby incorporated by reference and made a part of this report with the same effect
as if filed herewith.

Exhibit
Number

Description

3.1

3.2

4.1

4.2

4.3

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

Restated Certificate of Incorporation of the company (incorporated herein by reference from the company’s current report on
Form 8-K, filed with the Commission October 7, 2004)

Amended and Restated Bylaws of General Dynamics Corporation (as amended effective February 4, 2009) (incorporated herein
by reference from the company’s current report on Form 8-K, filed with the Commission February 5, 2009)

Indenture dated as of August 27, 2001, among the company, the Guarantors (as defined therein) and The Bank of New York, as
Trustee (incorporated herein by reference from the company’s registration statement on Form S-4, filed with the Commission
January 18, 2002)

Sixth Supplemental Indenture dated as of July 12, 2011, among the company, the Guarantors (as defined therein) and The Bank
of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the
Commission July 12, 2011)

Seventh Supplemental Indenture dated as of November 6, 2012, among the company, the Guarantors (as defined therein) and
The Bank of New York Mellon, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed
with the Commission November 6, 2012)

General Dynamics Corporation 2009 Equity Compensation Plan (incorporated herein by reference from the company’s registration
statement on Form S-8 (No. 333-159038) filed with the Commission May 7, 2009)

Form of Incentive Stock Option Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 5, 2009, filed
with the Commission August 4, 2009)

Form of Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 5, 2009, filed
with the Commission August 4, 2009)

Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 5, 2009, filed
with the Commission August 4, 2009)

Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 5, 2009, filed
with the Commission August 4, 2009)

General Dynamics Corporation 2012 Equity Compensation Plan (incorporated herein by reference from the company’s registration
statement on Form S-8 (No. 333-181124) filed with the Commission May 3, 2012)

Form of Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed
with the Commission August 1, 2012)

Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed
with the Commission August 1, 2012)

Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended July 1, 2012, filed
with the Commission August 1, 2012)

10.10*

Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity
Compensation Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarter ended
July 1, 2012, filed with the Commission August 1, 2012)

74

General Dynamics Annual Report 2013

INDEX TO EXHIBITS – GENERAL DYNAMICS CORPORATION
COMMISSION FILE NO. 1-3671

Exhibit
Number

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

21

23

24

31.1

31.2

32.1

32.2

Description

Successor Retirement Plan for Directors (incorporated herein by reference from the company’s annual report on Form 10-K for
the year ended December 31, 2003, filed with the Commission March 5, 2004)

General Dynamics United Kingdom Share Save Plan (incorporated herein by reference from the company’s annual report on
Form 10-K for the year ended December 31, 2002, filed with the Commission March 24, 2003)

2009 General Dynamics United Kingdom Share Save Plan (incorporated herein by reference from the company’s registration
statement on Form S-8 (No. 333-159045) filed with the Commission May 7, 2009)

General Dynamics Corporation Supplemental Savings Plan, amended and restated effective as of January 1, 2014**

Form of Severance Protection Agreement entered into by substantially all executive officers elected prior to April 23, 2009
(incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2008, filed
with the Commission February 20, 2009)

Form of Severance Protection Agreement entered into by substantially all executive officers elected on or after April 23, 2009
(incorporated herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2009, filed
with the Commission February 19, 2010)

General Dynamics Corporation Supplemental Retirement Plan, restated effective January 1, 2010 (incorporating amendments
through March 31, 2011) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly
period ended April 3, 2011, filed with the Commission May 3, 2011)

2013 Compensation Arrangements for Named Executive Officers (incorporated herein by reference from the company’s current
report on Form 8-K, filed with the Commission March 11, 2013)

Retirement Agreement between L. Hugh Redd and General Dynamics Corporation dated December 20, 2013 (incorporated herein
by reference from the company’s current report on Form 8-K, filed with the Commission on December 23, 2013)

Subsidiaries**

Consent of Independent Registered Public Accounting Firm**

Power of Attorney**

Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**

Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002**

101

Interactive Data File**

Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of Form 10-K.

*
** Filed herewith.

General Dynamics Annual Report 2013

75

Board of Directors

Phebe N. Novakovic
Chairman and
Chief Executive Officer

Mary T. Barra
Chief Executive Officer
General Motors Company

James S. Crown
President
Henry Crown
and Company

John M. Keane
General
U.S. Army
(Retired)

William A. Osborn
Former Chairman and
Chief Executive Officer
Northern Trust Corporation

William P. Fricks
Former Chairman and
Chief Executive Officer
Newport News Shipbuilding Inc.

Lester L. Lyles
General
U.S. Air Force
(Retired)

Laura J. Schumacher
Executive Vice President
AbbVie Inc.

Nicholas D. Chabraja
Former Chairman and
Chief Executive Officer
General Dynamics

Paul G. Kaminski
Chairman and
Chief Executive Officer
Technovation, Inc.

James N. Mattis
General
U.S. Marine Corps
(Retired)

Sir Robert Walmsley
Former U.K. Chief of
Defence Procurement

76

General Dynamics Annual Report 2013

Officers

Corporate Office

Phebe N. Novakovic
Chairman and
Chief Executive Officer

Jason W. Aiken
Senior Vice President
and Chief Financial
Officer

Gregory S. Gallopoulos
Senior Vice President
General Counsel and
Secretary

Robert W. Helm
Senior Vice President
Planning and
Development

Walter M. Oliver
Senior Vice President
Human Resources
and Administration

Henry C. Eickelberg
Vice President
Human Resources and
Shared Services

Business Groups
Aerospace

David H. Fogg
Vice President
Treasurer

M. Amy Gilliland
Vice President
Human Resources

Kenneth R. Hayduk
Vice President
Tax

Kimberly A. Kuryea
Vice President
Controller

Combat Systems

Marine Systems

Information Systems
and Technology

Joseph T. Lombardo
Executive Vice President

Mark C. Roualet
Executive Vice President

John P. Casey
Executive Vice President

David K. Heebner
Executive Vice President

Alfonso J. Ramonet
Vice President
President
European Land Systems

Jeffrey S. Geiger
Vice President
President
Electric Boat

Gary L. Whited
Vice President
President
Land Systems

Michael S. Wilson
Vice President
President
Ordnance and Tactical
Systems

Frederick J. Harris
Vice President
President
Bath Iron Works and
NASSCO

Michael J. Mulligan
Vice President
General Manager
Bath Iron Works

S. Daniel Johnson
Vice President
President
Information Technology

Thomas W. Kirchmaier
Vice President
President
Advanced Information
Systems

Christopher Marzilli
Vice President
President
C4 Systems

Ira P. Berman
Vice President
Senior Vice President
Administration and
General Counsel
Gulfstream Aerospace

Mark L. Burns
Vice President
President
Product Support
Gulfstream Aerospace

Daniel G. Clare
Vice President
Senior Vice President
Chief Financial Officer
Gulfstream Aerospace

Larry R. Flynn
Vice President
President Gulfstream
Aerospace

General Dynamics Annual Report 2013

77

Corporate
Information

Corporate
Headquarters

General Dynamics
2941 Fairview Park Drive
Suite 100
Falls Church, VA 22042
(703) 876-3000

Annual Meeting

Transfer Agent, Registrar and
Dividend Disbursing Agent

Auditors

Computershare Investor Services
P.O. BOX 30170
College Station, TX 77842-3170
(800) 519-3111
www.computershare.com

KPMG LLP
1676 International Drive
McLean, VA 22102
(703) 286-8000

Shares Listed

New York Stock Exchange
Ticker symbol: GD

The annual meeting of General Dynamics’ shareholders will be
held on Wednesday, May 7, 2014, at the company’s headquarters
in Falls Church, Virginia. A formal notice and proxy will be distributed
before the meeting to shareholders entitled to vote.

78

General Dynamics Annual Report 2013

2941 Fairview Park Drive
Suite 100
Falls Church, VA 22042-4513
www.generaldynamics.com