General Dynamics

Annual Report 2015

Dear Fellow Shareholder:

results. Our

In 2015, General Dynamics had a year of solid growth, operating
focus on
excellence and record-setting financial
continuous improvement
throughout our operations and the wise
deployment of capital yielded the highest operating earnings, operating
margin,
return on sales and earnings per diluted share in the
company’s history. Revenue increased 2 percent in 2015 over the prior
year with growth in both the aerospace and defense businesses. In
addition to delivering strong financial results, we booked new orders
across our portfolio, adding to the already robust backlog and providing
additional growth for the future.

Operating earnings increased 7.4 percent in 2015 to $4.2 billion on
sales of $31.5 billion. Our operating margin of 13.3 percent was 70
basis points higher than 2014. We earned a return on sales of
9.4 percent, a return on invested capital of 17.4 percent, a return on
assets of 8.8 percent and a return on equity of 26.4 percent, all up
from the prior year. Our earnings per diluted share of $9.08 increased
by 16 percent from 2014. As you can see in our financial statements,
2015 was a very strong year for General Dynamics.

company

Net cash in 2015 from operating activities totaled $2.5 billion, and
free cash flow, defined as net cash provided by operating activities
from continuing operations less capital expenditures, was $1.9 billion.
Your
investments where
appropriate for future growth, including support for new programs in
the Aerospace and Marine Systems groups. We also paid $873 million
in dividends and repurchased 22.8 million shares of common stock for
$3.2 billion.

continued making

internal

At Combat Systems, earnings were up 2.3 percent, a 60 basis point
improvement in operating margin. Revenue was down modestly from the
prior year due to foreign currency translation from the strong U.S. dollar.
Marine Systems had very strong revenue growth of 9.6 percent
compared to 2014, which in turn was a significant growth year. Marine
Systems operating earnings increased by 3.6 percent, resulting in a
9.1 percent margin for
the year. The Information Systems and
Technology group improved its margin 150 basis points on a 15 percent
increase in operating earnings on slightly lower revenue.

Throughout

the year, we experienced continued demand for our
products and services, adding new wins to our backlog across the
portfolio. The actions we have taken to right-size and restructure our
defense businesses over the past several years lowered our expenses
and increased our competitive advantage. Considering the 58 percent
increase in backlog in 2014, our current competitive structure and the
continued interest and need for our aerospace offerings, we are very well
positioned in our markets. This robust backlog provides stability into the
future and we expect to execute on it in 2016 and beyond with the same
operational focus and diligence we have demonstrated over the past
three years.

In closing, our commitment to improving margins, generating cash
and increasing return on invested capital, resulted in strong financial
results. For 2016, we will remain committed to this proven strategy; we
will deliver on our durable backlog while maintaining focus on operational
excellence and continue disciplined capital deployment. As we look to
the future, in 2017 and beyond, we expect to achieve meaningful growth
and higher earnings for our businesses and shareholders.

Overall, 2015 was a year of outstanding operational execution with
contributions from each of our business segments. Aerospace
increased revenue by 2.3 percent, earnings by 5.9 percent and
operating margin by 70 basis points. The group demonstrated strong
operating leverage and also had good order intake for Gulfstream
aircraft across the portfolio of new and in-production models.

Phebe N. Novakovic
Chairman and Chief Executive Officer

March 14, 2016

[THIS PAGE INTENTIONALLY LEFT BLANK]

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, 2015

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 $41,198,779,978 as of July 5, 2015 (based
on the closing price of the shares on the New York Stock Exchange).
311,161,810 shares of the registrant’s common stock, $1 par value per share, were outstanding on January 31, 2016.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates by reference information from certain portions of the registrant’s definitive proxy statement for the 2016 annual meeting of
shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

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
15
15
15
15

17
18

19
35
36

68
68
71

71
71

71

71
71

72
73
74

2

General Dynamics Annual Report 2015

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

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

General Dynamics is a global aerospace and defense company that
offers a broad portfolio of products and services in business aviation;
combat vehicles, weapons systems and munitions; C4ISR (command,
control, communications, computers,
intelligence, surveillance and
reconnaissance) solutions and information technology (IT) services; and
shipbuilding.

Incorporated in Delaware in 1952, General Dynamics grew organically
and through acquisitions until the early 1990s when we sold nearly all of
In the mid-1990s, we began expanding again by
our businesses.
acquiring combat vehicle-related businesses,
IT product and service
companies, additional shipyards and Gulfstream Aerospace Corporation. In
the 2000s, we continued to grow organically and acquired companies
throughout the portfolio. Today, we are focused on delivering superior
products and services to our customers, improving operations, generating
cash and increasing return on invested capital.

We operate through four business groups, and each group has several
business units. Each of our businesses has responsibility for strategy and
execution, providing the flexibility they need to stay close to their
customers, perform on programs and remain agile. Our corporate
the
headquarters is responsible for setting the overall direction of
company, the allocation of capital and promoting a culture of ethics and
integrity that defines how we operate. Our management team delivers on
our commitments to shareholders through disciplined execution of
backlog, efficient cash-flow conversion and prudent capital deployment.
We manage costs, undertake continuous improvement
initiatives and
collaborate across our businesses to achieve our goals of maximizing
earnings and cash and creating value for our shareholders.

Following is additional information on each of our business groups:
Aerospace, Combat Systems, Information Systems and Technology and
Marine Systems. For selected financial information, see Note Q to the
Consolidated Financial Statements in Item 8.

AEROSPACE
Our Aerospace group is at the forefront of the business-jet industry.
We deliver a family of Gulfstream aircraft, provide aircraft services and
perform completions for aircraft produced by other original equipment
manufacturers (OEMs). With more than 50 years of experience, 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.

Gulfstream Aerospace Corporation designs, develops, manufactures,
services and supports the world’s most
technologically advanced
business-jet aircraft. Our 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 for the needs of a diverse and global customer base.

In 2015, Gulfstream was awarded the Collier Trophy for the design and
development of the G650 business-jet family. This is Gulfstream’s third
time receiving the National Aeronautic Association’s annual award, which
recognizes the greatest achievement in U.S. aeronautics or astronautics
with respect to improving performance, efficiency and safety. The G650
family includes the G650 and the extended-range G650ER. The ultra-
long-range G650ER flies farther at faster speeds than any other business
jet on the market, and can travel 7,500 nautical miles at Mach 0.85. The
G650 entered into service in 2012, and the G650ER was introduced and
delivered in 2014.
two city-pair
records while flying around the world with one stop. Together, the G650
and G650ER hold more than 50 world speed records.

In February 2015,

the G650ER set

that

choice,

improve

broaden customer

We are committed to research and development (R&D) activities to
ensure we continue to introduce new products and first-to-market
enhancements
aircraft
performance and set new standards for customer safety, comfort and in-
flight productivity. In 2014, we also introduced two new large-cabin
business jets, the G500 and G600. These clean-sheet next-generation
business jets optimize the speed, wide-cabin comfort, efficiency and
advanced safety technology of the aircraft. At Mach 0.85, the G500 can
fly 5,000 nautical miles, and the G600 can fly 6,200 nautical miles. The
G500 completed its first flight in May 2015 and has since completed
hundreds of test flight hours at speeds up to Mach 0.995 and altitude
over 50,000 feet. The G500 and G600 are expected to enter into service
in 2018 and 2019, respectively. These new aircraft demonstrate our
consistent and disciplined investment in Gulfstream.

renewable fuels,

Our product enhancement and development efforts include initiatives
in advanced avionics, composites,
flight-control
systems, acoustics, cabin technologies and vision systems. A recent
example is the Symmetry Flight Deck introduced with the G500 and
G600, which includes 10 touchscreens and active control sidesticks. The
touchscreens improve how pilots interact with onboard systems, and the
sidesticks are digitally linked to allow both pilots to see and feel each
inputs, enhancing situational awareness and further
other’s control
improving safety of the flight.

Gulfstream has an ongoing environmental sustainability program,
including the use of renewable fuels. In 2015, we finalized an industry-
first, three-year agreement that provides Gulfstream with a consistent
supply of renewable fuels for daily flight operations from its headquarters
in Savannah, Georgia. Each gallon of renewable fuel burned is expected

General Dynamics Annual Report 2015

3

to achieve a more than 50-percent reduction in greenhouse gas
emissions on a lifecycle basis, relative to petroleum-based jet fuel.
Gulfstream designs, develops and manufactures aircraft

in
large-cabin models. The mid-
Savannah, including manufacturing all
cabin models are constructed by a non-U.S. partner. All models are
outfitted in the group’s U.S.
In support of Gulfstream’s
facilities.
growing aircraft portfolio and international customer base, we have
invested in multi-year facilities projects at our Savannah campus,
which are scheduled to continue through 2017. This expansion
consists of constructing new facilities,
including the completed
purpose-built G500 and G600 manufacturing facilities, and renovating
existing infrastructure. This effort follows earlier projects including a
purpose-built G650 manufacturing facility, increased aircraft-service
capacity, an improved customer sales and design center and a state-
of-the-art paint facility.

The group offers extensive support for the over 2,500 Gulfstream
aircraft in service with the largest factory-owned service network in the
business aviation industry, including professionals located around the
globe. The service network for Gulfstream aircraft continues to evolve
to address the demands of the group’s growing international customer
base. We operate 11 company-owned service centers worldwide and
have more than 20 factory-authorized service centers and authorized
warranty facilities on six continents. We also operate a 24-hour-per-
day/365-day-per-year Customer Contact Center 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 13th consecutive year in the annual
Aviation International News Product Support Survey.

Jet Aviation expands our Aerospace portfolio as a global leader in
business aviation services, providing comprehensive services and a
network of facilities to aircraft owners and operators. With employees
across more than 25 airport facilities throughout Europe, the Middle
East, Asia and North America, our
include
maintenance,
fixed-base
aircraft management,
operations (FBO) and staffing services. We recently expanded our
service network in Europe and the Bahamas, began construction on a
major FBO expansion in Bedford, Massachusetts, and are on schedule
to have a new maintenance facility in Macau operational in 2016.

service offerings

charter,

repair,

In addition to these capabilities, Jet Aviation has nearly 40 years of
experience offering custom complex completions for business-jet and
single- and double-aisle aircraft from its Basel, Switzerland, and St.
the increasing demand for
Louis, Missouri, operations. To support
corporate and VIP aircraft
interiors and our growing backlog, we
recently expanded our production capacity at the Basel facility.

4

General Dynamics Annual Report 2015

As a market leader in the business-aviation industry, the Aerospace
group is 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.

Revenue for the Aerospace group was 28 percent of our consolidated
revenue in 2015 and 2014 and 26 percent in 2013. Revenue by major
products and services was as follows:

Year Ended December 31

2015

2014

2013

Aircraft manufacturing, outfitting

and completions

Aircraft services

Pre-owned aircraft

Total Aerospace

$ 7,156

1,584

111

$ 6,983

1,599

67

$ 6,378

1,530

210

$ 8,851

$ 8,649

$ 8,118

deliver market-leading

COMBAT SYSTEMS
Our Combat Systems group offers a full-spectrum of combat vehicles,
weapons systems and munitions for the United States and its allies
around the world. We take a disciplined systems engineering approach
to
production,
design,
modernization and sustainment services. Our extensive, diverse and
proven product lines give us the agility to deliver tailored solutions that
meet a wide array of customer mission needs. Comprised of
three
business units, European Land Systems, Land Systems and Ordnance
and Tactical Systems, the group’s product lines include:

development,

(cid:129) wheeled combat and tactical vehicles;
(cid:129) main battle tanks and tracked combat vehicles;
(cid:129) weapons systems, armament and munitions; and
(cid:129) maintenance and logistics support and sustainment services.

Wheeled combat and tactical vehicles: The eight-wheeled, medium-
weight Stryker combat vehicle, which has 10 variants, has proven itself
as one of the most versatile vehicles in the U.S. Army’s fleet, combining
survivability and maneuverability into a deployable and responsive
combat support vehicle. The Army is planning to convert all nine of its
Stryker Brigade Combat Teams to the double-V-hulled configuration,
which significantly improves protection for soldiers from threats such as
improvised explosive devices (IEDs).
In response to customer needs
driven by a dynamic threat environment, we are working with the Army to
increase the lethality of the Stryker vehicle with the addition of a 30-
millimeter gun system.

The group has a market-leading position in light armored vehicles
(LAVs) with more than 10,000 vehicles delivered around the world. We
offer advanced technologies combined with combat-proven survivability.
We currently have a $10 billion contract to provide wheeled armored
vehicles along with associated logistics support to a Middle Eastern
customer through 2028.

We have delivered numerous high-mobility, versatile Pandur and
Piranha armored vehicles. The Pandur family of vehicles serves as a
common platform for various armament and equipment configurations,
and the Piranha is a multi-role vehicle well-suited for a variety of
combat operations. In 2015, the Danish Ministry of Defence selected
the Piranha as its new armored personnel carrier, and we signed an
agreement with the Spanish Ministry of Defense for extensive
technological trials of the Piranha 5 vehicle for the Spanish Army’s
future 8x8 armored infantry fighting vehicle.

Tactical vehicles offered by the group include the lightweight Flyer
family of vehicles, a modular vehicle built for speed and mobility that
allows access to previously denied terrain in demanding environments.
We are delivering the Flyer 60 and Flyer 72 to U.S. Special Operations
Command for the Internally Transportable Vehicle (ITV) and Ground
Mobility Vehicle (GMV) programs. Outside the United States, the Duro
and Eagle tactical vehicle families offer a range of options in the 6- to
15-ton weight class.

The group’s family of route clearance vehicles, including the Buffalo,
Cougar and RG-31 vehicles, is at the forefront of blast- and ballistic-
protected technologies. These vehicles are designed specifically to
protect occupants from land mines, hostile fire and IEDs.

Tanks and tracked combat vehicles: Combat Systems’ powerful
tracked vehicles provide key capabilities to customers around the
world. The Abrams main battle tank offers a proven, decisive edge in
combat for the U.S. Army, National Guard and Marine Corps. We are
upgrading the Army’s Abrams tanks with the System Enhancement
Package (SEP), which provides a digital platform that
includes an
enhanced command-and-control system, new power generation and
distribution systems, second-generation thermal sights and improved
armor. Internationally, the group provides Abrams tanks to several U.S.
allies. In 2015, the group received an award to refurbish and upgrade
tanks for the Kingdom of Morocco and announced resumed production
of M1A1 tank kits for the Egyptian Land Forces.

The ASCOD is a highly versatile tracked combat vehicle with multiple
versions, including the Spanish Pizarro and the Austrian Ulan. Currently
the group is producing the British Army’s next-generation AJAX
armoured fighting vehicle, a version of the ASCOD formerly known as
the Scout Specialist Vehicle. With six variants, AJAX offers advanced
electronic architecture and proven technology for an unparalleled
balance of protection, survivability and reliability for a vehicle in its
weight class. In addition to production, the group will provide in-service
support for the AJAX vehicle fleet through 2024.

With our large installed base of wheeled and tracked vehicles
around the world and the expertise gained from our engineering and
production programs, we are well-positioned for vehicle modernization
programs, support and sustainment services, and future development
programs.

Weapons systems, armament and munitions: Complementing these
military-vehicle offerings,
the group designs, develops and produces a
comprehensive array of sophisticated weapons systems. For ground forces,
we manufacture M2/M2-A1 heavy machine guns and MK19/MK47 grenade
launchers. The group also produces legacy and next-generation weapons
systems for shipboard applications, including the Navy’s Phalanx Close-In
Weapon System (CIWS), multiple subsystems for the Littoral Combat Ship
(LCS) and Zumwalt-class (DDG-1000) guided-missile destroyer firepower
mission modules. For airborne platforms, we produce weapons for U.S. and
non-U.S. fighter aircraft, including high-speed Gatling guns for all U.S. fixed-
wing military aircraft. The group is also a significant supplier of composite
structures and aircraft components.

Our munitions portfolio covers the full breadth of naval, air and ground
forces applications across all calibers and weapons platforms for the
U.S. government and its allies. In North America, the group maintains a
market-leading position in the supply of Hydra-70 rockets, large-caliber
tank ammunition, medium-caliber ammunition, mortar and artillery
tactical missile aerostructures, and high-performance
projectiles,
warheads, military propellants and conventional bombs and bomb cases.
The Combat Systems group emphasizes operational execution and
continuous process improvements to enhance our productivity.
In an
environment of uncertain threats and evolving customer needs, the group
is focused on innovation, affordability and speed-to-market to deliver
increased performance and survivable, mission-effective products.

Revenue for the Combat Systems group was 18 percent of our
in 2013.

consolidated revenue in 2015 and 2014 and 19 percent
Revenue by major products and services was as follows:

Year Ended December 31

2015

2014

2013

Wheeled combat vehicles

Weapons systems and munitions

Tanks and tracked vehicles

Engineering and other services

$ 2,599

1,496

816

729

$ 2,852

1,635

526

719

$ 2,709

1,761

595

767

Total Combat Systems

$ 5,640

$ 5,732

$ 5,832

INFORMATION SYSTEMS AND TECHNOLOGY
Our Information Systems and Technology group provides technologies,
products and services in support of hundreds of programs for a wide
range of military, federal/civilian, state, local and commercial customers.
leadership results from decades of domain
The group’s market
expertise,
incumbency on high-priority programs and continuous
innovation to meet the ever-changing information-systems and mission
support needs of our customers. The group’s diverse portfolio includes:

(cid:129) IT solutions and mission support services, and
(cid:129) mobile communication, command-and-control mission systems, and

intelligence, surveillance and reconnaissance (ISR) solutions.

General Dynamics Annual Report 2015

5

IT solutions and mission support services: We design, build and
operate large-scale, secure IT networks and systems and provide
professional and technical services. The group has been a trusted
systems integrator for more than 50 years.

We support

the full enterprise IT lifecycle from designing and
integrating to operating and maintaining complex data, voice and
multimedia networks. Working closely with our customers, we ensure
their network infrastructures are secure, efficient, scalable and cost-
effective. We have extensive experience consolidating, building and
operating data centers. The group’s expertise in building IT and
communications networks extends beyond government customers. We
engineer, design and install networks for several major commercial
fiber-to-the-home providers and wireless carriers.

We are also at the forefront of cloud and virtualization technologies
and services. For example, the group is implementing the Department
of Defense’s (DoD) largest enterprise-wide email infrastructure and a
virtual desktop environment for the intelligence community.

As a leading provider in the U.S. healthcare IT market, we support
government civilian and military health systems, providing critical
services in support of healthcare reform and medical benefits
programs. Our offerings include cyber security services, big data
analytics, fraud prevention and detection software, process automation
and program management solutions for public and commercial health
systems. Our Information Technology business unit operates several
customer contact centers for the Centers for Medicare & Medicaid
Services, responding to consumer inquiries about key Medicare and
Affordable Care Act programs.

The group’s technical support personnel and domain specialists help
customers meet critical planning, staffing, technology and operational
needs. We also offer advanced training in military operations, range
support, technology-based simulation and professional development.

Mobile communication, command-and-control mission systems and
integrate, deploy and support
ISR solutions: We design, build,
communications,
computer mission
systems; imagery, signals- and multi-intelligence systems; and cyber
security systems for customers in the U.S. defense, intelligence and
homeland security communities, and U.S. allies.

command-and-control

and

The group is a leading integrator and manufacturer of secure
communications systems that
improve our customers’ ability to
communicate, collaborate and access vital information, including fixed
and mobile ground, radio and satellite communications systems and
antenna technologies. For example, we are the prime contractor for
(WIN-T), the Army’s mobile
Warfighter Information Network-Tactical
communications
data
voice,
delivering
communications to soldiers anywhere on the battlefield. In 2015, we
received approval to move forward with full-rate production of the
WIN-T Increment 2 system.

network

video

and

6

General Dynamics Annual Report 2015

We are also developing and deploying the Mobile User Objective
System (MUOS) communication waveform and integrated ground
segments, which will help provide the satellite link to soldiers on the
ground so they can access cell phone-like communications in the most
remote locations. We are leading the deployment of the MUOS ground
system, which includes four ground stations positioned around the world.
Our Manpack radio is the first military radio to successfully connect with
the MUOS network.

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

In command-and-control systems, we have a 50-year legacy of
providing advanced fire-control systems for U.S. Navy submarine
programs, and we are developing and integrating commercial off-the-
shelf software and hardware upgrades to improve the tactical control
capabilities for several submarine classes. The group’s combat and
seaframe control systems serve as the technology backbone for some of
the Navy’s next-generation surface ships, including the Independence-
variant LCS and the Joint High Speed Vessel (JHSV). Our aircraft mission
computers are on the Navy’s F/A-18 Super Hornet strike fighter and the
Marine Corps’ AV-8B Harrier II aircraft, giving pilots advanced situational
awareness and combat systems control.

The Information Systems and Technology group provides ISR solutions
for classified programs. Our expertise includes multi-intelligence ground
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.

Cyber security solutions are embedded throughout the group’s IT and
systems engineering programs. We deliver comprehensive, agile cyber
security-related products and services to help customers defend and
protect their networks from the persistent and growing cyber threat. For
example, we continue to evolve our TACLANE family of network
encryptors, the most widely-deployed NSA-certified Type 1 encryption
device. We deliver technologies that provide access to information at
various security levels, accommodating the increased demand for cloud
computing and mobility. We offer extensive cyber services to help defend
mission-critical national and large-enterprise tactical networks.

Information Systems and Technology’s market is competitive, diverse
and dynamic. We are focused on maintaining our market-leading
position by optimizing the performance and size of the business and
developing innovative solutions to meet customer requirements. In 2015,

we consolidated two businesses in the group to form General
Dynamics Mission Systems to be more efficient and responsive to our
customers. The group is well-positioned to continue meeting the needs
of our broad customer base.

Revenue for the Information Systems and Technology group was 29
percent of our consolidated revenue in 2015, 30 percent in 2014 and
33 percent in 2013. Revenue by major products and services was as
follows:

Year Ended December 31

2015

2014

2013

C4ISR solutions

IT services

$ 4,571

$ 4,610

$

5,534

4,394

4,549

4,734

Total Information Systems and

Technology

$ 8,965

$ 9,159

$ 10,268

MARINE SYSTEMS
Our Marine Systems group is a market-leading designer and builder of
nuclear-powered submarines, surface combatants and auxiliary and
combat-logistics ships for the U.S. Navy, and Jones Act ships for
commercial customers. We provide high-value-added engineering,
construction and assembly work, as well as lifecycle support. The
group’s portfolio of platforms and diverse capabilities includes:

(cid:129) nuclear-powered submarines;
(cid:129) surface combatants;
(cid:129) auxiliary and combat-logistics ships;
(cid:129) commercial product carriers and containerships;
(cid:129) design and engineering support services; and
(cid:129) overhaul, repair and lifecycle support services.

We have a long history as one of the primary shipbuilders for the
U.S. Navy. We construct and deliver new ships and design and develop
the next-generation of platforms for the Navy. More than 90 percent of
the group’s revenue is for major Navy ship-construction, engineering
and lifecycle support programs awarded under
large, multi-ship
contracts that span several years. These programs include Virginia-
class nuclear-powered submarines built by Electric Boat, Arleigh
Burke-class (DDG-51) and DDG-1000 guided-missile destroyers
manufactured by Bath Iron Works and Expeditionary Mobile Base (ESB)
auxiliary support ships produced by NASSCO.

for

We are the prime contractor

the Virginia-class submarine
program. Designed for the full range of global mission requirements,
including intelligence gathering, special-operations missions and sea-
based missile launch, these stealthy boats excel in littoral and open-
ocean environments. We have delivered 12 submarines in conjunction
with an industry partner that shares in the construction. In 2015, we
completed the ramp-up in construction from one to two Virginia-class

submarines per year. The remaining 16 submarines under contract are
scheduled for delivery through 2023. We are also developing the Virginia
Payload Module (VPM) for the next block of Virginia-class submarines
that is expected to start construction in 2019. The VPM is an 80-foot hull
section that will add four additional payload tubes, boosting strike
capacity by 230 percent and preserving the United States’ critical
undersea capabilities.

the
The group is currently performing development work for
replacement of the Navy’s Ohio-class ballistic missile submarine fleet,
which will reach the end of its service life starting in 2027. These Ohio-
class replacement submarines will provide strategic deterrent capabilities
for decades to come. The lead ship is slated to start construction in
2021, with delivery to the Navy in 2027. We are preparing our workforce
and facilities for the start of construction for the Ohio-class replacement
program. This includes a new 113,000-square-foot automated frame
and cylinder facility that we recently built in Quonset Point, Rhode Island,
to support
joint
development for the U.S. Navy and the U.K. Royal Navy.

the Common Missile Compartment work under

We are the lead designer and builder of DDG-51 destroyers, managing
the design, modernization and lifecycle support of these ships. These
highly capable, multi-mission ships provide offensive and defensive
capabilities and are capable of simultaneously fighting air, surface and
subsurface battles. They can operate independently or as part of carrier
strike groups, surface action groups, amphibious ready groups and
underway replenishment groups. We currently have construction contracts
for seven DDG-51s scheduled for delivery through 2022.

Bath Iron Works is one of the Navy’s contractors involved in the
development and construction of the DDG-1000 platform, the Navy’s
next-generation guided-missile destroyer. These ships are equipped with
numerous technological enhancements, including a low radar profile, an
integrated power system and a software environment that ties together
nearly every system on the ship. DDG-1000s will provide independent
forward presence and deterrence, support special operations forces, and
operate as an integral part of joint and combined expeditionary forces.
Deliveries of the three ships in the program are scheduled through 2019.
In December 2015, the first ship successfully completed its first set of
at-sea builders tests and trials.

We are delivering ESB auxiliary support ships, a second variant of the
original Expeditionary Support Dock (ESD) ships, which serve as floating
transfer stations that improve the Navy’s ability to deliver large-scale
equipment to areas without adequate port access. The ESBs, equipped
with a 52,000-square-foot flight deck and accommodations for up to
250 personnel, are capable of supporting a variety of missions, including
airborne mine countermeasure, maritime security operations and
disaster relief missions. The group has delivered the first three ships in
the program, and construction is underway on the fourth ship, scheduled
for delivery in 2018.

General Dynamics Annual Report 2015

7

Our Marine Systems group provides comprehensive ship and
submarine overhaul, repair and lifecycle support services to extend the
these ships. We conduct
service life and maximize the value of
locations with full-service
surface-ship repair operations in four
maintenance and repair shipyards on both U.S. coasts. We also provide
extensive submarine repair services in a variety of U.S. locations and
are converting two decommissioned submarines to moored training
In support of allied navies, we offer program management,
ships.
planning, engineering and design support for submarine and surface-
ship construction programs.

Beyond its work for the Navy,

the Marine Systems group has
extensive experience in all phases of ship construction for commercial
customers, designing and building oil tankers and dry cargo carriers for
commercial markets since the 1970s. Our ships help our commercial
customers satisfy the Jones Act requirement that ships carrying cargo
between U.S. ports be built in U.S. shipyards. The group has advanced
commercial shipbuilding technology with NASSCO’s design and
liquefied natural gas (LNG)-powered
delivery of
containership, using green ship technology to dramatically decrease
emissions while increasing fuel efficiency. We are also designing and
producing LNG-conversion-ready ships for commercial customers.
Currently, we have construction contracts for eight ships scheduled for
delivery through 2017. With the age of
fleet and
environmental regulations that impose more stringent emission control
limits, we anticipate additional commercial shipbuilding opportunities.

the world’s first

the Jones Act

To further the group’s goals of operating efficiency, innovation and
affordability for the customer, we make strategic investments in our
business, often in cooperation with the Navy. In addition, the Marine
Systems group 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.

Revenue for the Marine Systems group was 25 percent of our
consolidated revenue in 2015, 24 percent in 2014 and 22 percent in
2013. Revenue by major products and services was as follows:

Year Ended December 31

2015

2014

2013

Nuclear-powered submarines

$ 5,003

$ 4,310

$ 3,697

Surface combatants

Auxiliary and commercial ships

Repair and other services

1,049

692

1,269

1,084

640

1,278

1,139

499

1,377

Total Marine Systems

$ 8,013

$ 7,312

$ 6,712

8

General Dynamics Annual Report 2015

CUSTOMERS

In 2015, 57 percent of our revenue was from the U.S. government, 17
percent was from U.S. commercial customers, 13 percent was from
non-U.S. commercial customers and the remaining 13 percent was from
non-U.S. government customers.

U.S. GOVERNMENT
Our primary customer is the DoD. We also contract with other U.S.
government customers,
the
Departments of Homeland Security and Health and Human Services and
first-responder agencies. Our revenue from the U.S. government was as
follows:

including the intelligence community,

Year Ended December 31

2015

2014

2013

DoD

Non-DoD

Foreign Military Sales (FMS)*

$ 14,699

$ 14,516

$ 15,441

2,830

452

2,750

689

2,790

1,032

Total U.S. government

Percent of total revenue

$ 17,981

$ 17,955

$ 19,263

57%

58%

62%

*

In addition to our direct non-U.S. sales, we sell to non-U.S. 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 non-U.S. government customer.

cost-reimbursement

Our U.S. government businesses operate under fixed-price, cost-
reimbursement and time-and-materials contracts. Our production
contracts are primarily fixed-price. Under these contracts, we agree to
perform a specific scope of work for a fixed amount. Contracts for
research, engineering, repair and maintenance, and other services are
typically
cost-
reimbursement contracts, the customer reimburses contract costs and
pays a fixed, 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 generally
reimburses us for the cost of materials.

time-and-materials. Under

or

In our U.S. government business, fixed-price contracts accounted for
54 percent in 2015, 53 percent in 2014 and 54 percent in 2013; cost-
reimbursement contracts accounted for 42 percent in 2015, 43 percent
in 2014 and 42 percent in 2013; and time-and-materials contracts
accounted for 4 percent in 2015, 2014 and 2013.

Each of these contract types presents advantages and disadvantages.
Typically, we assume more risk with fixed-price contracts. However,
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 associated fees are
usually lower than fees earned on fixed-price contracts. Additionally,

some costs are unallowable 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 margin rates.

(cid:129) successful program execution and on-time delivery of complex,

integrated systems;

(cid:129) our global footprint and accessibility to customers;
(cid:129) the reputation and customer confidence derived from past performance; and
(cid:129) the successful management of customer relationships.

U.S. COMMERCIAL
Our U.S. commercial revenue was $5.3 billion in 2015 and 2014 and
$5.4 billion in 2013. This represented approximately 17 percent of our
consolidated revenue in 2015 and 2014 and 18 percent in 2013. The
majority of this revenue is for business-jet aircraft and related services
where our customer base consists of
individuals and public and
privately held companies across a wide range of industries.

NON-U.S.
Our revenue from non-U.S. government and commercial customers
was $8.2 billion in 2015, $7.6 billion in 2014 and $6.3 billion in 2013.
This represented approximately 26 percent of our consolidated revenue
in 2015, 25 percent in 2014 and 20 percent in 2013.

We conduct business with customers around the world, providing a
broad portfolio of products and services. Our non-U.S. defense
subsidiaries are committed to maintaining long-term relationships with
their respective governments and have established themselves as
principal regional suppliers and employers.

Our non-U.S. 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 base of
aircraft
is concentrated in North America, orders from non-U.S.
customers represent a significant segment of our aircraft business with
approximately 55 percent of the Aerospace group’s total backlog on
December 31, 2015.

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, safety 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;

DEFENSE MARKET COMPETITION
The U.S. government contracts with numerous domestic and non-U.S.
companies for products and services. We compete against other large
platform- and system-integration contractors as well as smaller
companies that specialize in a particular technology or capability. Outside
the United States, we compete with global defense contractors’ exports
and the offerings of private and state-owned defense manufacturers. Our
Combat Systems group competes with a large number of domestic and
non-U.S. businesses. Our Information Systems and Technology group
competes with many companies, from large defense companies to small
niche competitors with specialized technologies or expertise. Our Marine
Systems group has one primary competitor with which it also partners on
the Virginia-class submarine program. 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 a spectrum of
requirements. Opportunities
capabilities
associated with these programs include roles as the program’s
integrator, overseeing and coordinating the efforts of all participants on a
team, or as a provider of a specific component or subsystem.

the customer’s

to meet

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 the business-jet aircraft
services market primarily on the basis of price, quality and timeliness. In
our maintenance, repair and FBO businesses, the group competes with
large companies as well as a number of smaller
several other
companies, particularly in the maintenance business. In our completions
business, the group competes with other OEMs, as well as several third-
party providers.

General Dynamics Annual Report 2015

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

Information Systems and Technology

Marine Systems

Total backlog

Funded

2015

Unfunded

$ 13,292

$

18,398

6,827

13,266

106

597

1,755

11,879

Total

Funded

2014

Unfunded

Total

2015 Total
Backlog Not
Expected to Be
Completed in
2016

$ 13,398

$ 13,115

$

18,995

8,582

25,145

19,292

7,070

13,452

117

506

1,539

17,319

$ 13,232

$

7,851

19,798

8,609

30,771

14,221

2,071

17,855

$ 51,783

$ 14,337

$ 66,120

$ 52,929

$ 19,481

$ 72,410

$ 41,998

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, investing in technologies and capabilities that provide
solutions
In accordance with government
regulations, we recover a 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.

customers.

for our

INTELLECTUAL PROPERTY

We develop technology, manufacturing processes and systems-
In addition to owning a large portfolio of
integration practices.
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 2015

On December 31, 2015, our subsidiaries had 99,900 employees,
approximately one-fifth of whom work under collective agreements with
various labor unions and worker representatives. Agreements covering
approximately 6 percent of total employees are due to expire in 2016.
Historically, we have renegotiated these 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. Our U.S. government customer is a
supplier on some of our programs. 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
foresee, significant difficulties in obtaining the materials,
do not
components or supplies necessary for our business operations.

Our business is not seasonal

in nature. The receipt of contract
awards, the availability of funding from the customer, the incurrence of
contract costs and unit deliveries are all factors that influence the
timing of our revenue. In the United States, these factors are influenced
by the federal government’s budget cycle based on its October-to-
September fiscal year.

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 should be allocated to contracts. The
FAR subjects us to audits and other government reviews covering
issues such as cost, performance, internal controls and accounting
practices relating to our contracts.

NON-U.S. REGULATORY
Our non-U.S. revenue is 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.

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

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 materials, substances and wastes identified in the laws
and regulations. 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
the U.S.
Environmental Protection Agency or a state environmental agency. As a
PRP, we are potentially liable to the government or third parties for the
cost of
In cases where we have been
designated a PRP, generally we seek to mitigate these environmental
liabilities through available insurance coverage and by pursuing
appropriate cost-recovery actions. In the unlikely event we are required
to fully fund the remediation of a site, the current statutory framework
would allow us to pursue contributions from other PRPs. We regularly
assess our compliance status and management of environmental
matters.

remediating contamination.

(PRP) by

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 reports and other information with the Securities and Exchange
Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended. These reports and information
include an annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy statements. Free copies of these
items are made available on our website (www.generaldynamics.com) as
soon as practicable and through the General Dynamics investor relations
office at (703) 876-3583. The SEC maintains a website (www.sec.gov)
that contains reports, proxy and information statements and other
information. These items also can be read and copied at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, DC 20549.
Information on the operation of the Public Reference Room is available by
calling the SEC at (800) SEC-0330.

General Dynamics Annual Report 2015

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

revenue is concentrated with the U.S. government. This
customer relationship involves some specific risks. In addition, our
sales to non-U.S. customers expose us to different financial and legal
risks. Despite the varying nature of our U.S. and non-U.S. 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
revenue. Approximately 55 percent of our revenue is from the U.S.
government. Levels of U.S. defense spending are driven by threats to
national security. Competing demands for
funds pressure
various areas of spending, and defense investment accounts (budgets
remain under
for procurement and research and development)
pressure. Decreases in U.S. government defense spending, including
investment accounts, or changes in spending allocation or priorities
could result in one or more of our programs being reduced, delayed or
terminated, which could impact our financial performance.

federal

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 revenue is funded by agency budgets that operate on an
October-to-September fiscal year. Early each calendar year, the President
of the United States presents to the Congress the budget for the upcoming
fiscal year. This budget proposes funding levels for every federal agency
and is the result of months of policy and program reviews throughout the
Executive branch. For the remainder of the year, the appropriations and
authorization committees of the Congress review the President’s budget
proposals and establish the funding levels for the upcoming fiscal year.
Once these levels are enacted into law, the Executive Office of the
President administers the funds to the agencies.

There are two primary risks associated with the U.S. government
budget cycle. First, the annual process may be delayed or disrupted,
which has occurred in recent years. For example, changes in

12

General Dynamics Annual Report 2015

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
revenue under existing multi-year contracts is 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 incurred
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 revenue and earnings.

Government contractors are subject

to audit by the U.S.
government. Numerous 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 compliance with, internal control systems and policies,
including the contractor’s purchasing, property, estimating, material,
earned value management and accounting systems.
In some cases,
audits may result in delayed payments or 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.
if
allegations of impropriety were made. In some cases, audits may result
in disputes with the respective government agency that can result in
negotiated settlements, arbitration or litigation.

In addition, reputational harm could result

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
Aerospace group’s results also depend on other factors, including general

economic conditions, the availability of credit, pricing pressures and trends
in capital goods markets. In addition, if customers default on existing
contracts and the contracts are not replaced, the group’s anticipated
revenue and profitability could be reduced materially as a result.

Earnings and margin depend on our ability to perform on our
contracts. When agreeing to contractual
terms, our management
team makes assumptions and projections about future conditions and
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, estimates or assumptions, or if the risks under our
contracts are not managed adequately, the profitability of contracts
could be adversely affected. This could affect earnings and margin
materially.

for

our

and

subsystems

components

Earnings and margin 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 and applicable law. Misconduct by subcontractors, such
as a failure to comply with procurement regulations or engaging in
unauthorized activities, may harm our future revenue and earnings. We
manage our supplier base carefully to avoid customer issues. 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 materially
adversely affected if one or more of these suppliers is unable to provide
the agreed-upon supplies, perform the agreed-upon services in a
timely and cost-effective manner or engages in misconduct or other
improper activities.

Sales and operations outside the United States 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 non-U.S. business may be sensitive to changes in a
foreign government’s budgets, leadership and national priorities, which
may occur suddenly. Non-U.S.
transactions can involve increased
financial and legal risks arising from foreign exchange-rate variability

transfers,

technology

and differing legal systems. Our non-U.S. business is subject to U.S. and
foreign laws and regulations, including laws and regulations relating to
import-export controls,
the Foreign Corrupt
Practices Act and 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
including
suspension or debarment from government contracts or suspension of
our export privileges and could materially adversely affect revenue and
earnings associated with our non-U.S. business.

in administrative, civil or criminal

liabilities,

In addition, some non-U.S. 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 investment or other requirements or face penalties.
Offset requirements may extend over several years and could require us
to team with local companies to fulfill these requirements. If we do not
satisfy these financial or offset requirements, our future revenue 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. Some new products, particularly in our Aerospace group, must
meet extensive and time-consuming regulatory requirements that are
often outside our control. Additionally, due to 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 were unable to develop new products that meet customers’
changing needs and satisfy regulatory requirements in a timely manner
or successfully attract and retain qualified personnel, our future revenue
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 acquisitions and joint
ventures, we make judgments regarding the value of business
opportunities, technologies, and other assets and the risks and costs of
potential liabilities based on information available to us at the time of the
transaction. Whether we realize the anticipated benefits from these
transactions depends on multiple factors, including our integration of the
the underlying products,
businesses involved,

the performance of

General Dynamics Annual Report 2015

13

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 government customers, as
well as impact our
insurance
coverage may not be adequate to cover all the costs related to cyber
security attacks or disruptions resulting from such events.

results of operations materially. Our

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements
that are based on management’s expectations, estimates, projections
and assumptions. Words such as “expects,” “anticipates,” “plans,”
“believes,” “scheduled,” “outlook,” “estimates,” “should” and variations
of these words and similar expressions are intended to identify forward-
looking statements. Examples include projections of revenue, earnings,
operating margin, segment performance, cash flows, contract awards,
aircraft production, deliveries and backlog. In making these statements
we rely on assumptions and analyses based on our experience and
perception of historical trends, current conditions and expected future
developments as well as other factors we consider appropriate under the
circumstances. We believe our estimates and judgments are reasonable
the time. Forward-looking
based on information available to us at
statements are made pursuant
the
Private Securities Litigation Reform Act of 1995, as amended. These
statements are not guarantees of future performance and involve risks
and uncertainties that are difficult to predict. Therefore, actual future
results and trends may differ materially from what is forecast in forward-
including, without
looking statements due to a variety of
limitation, the risk factors discussed in this Form 10-K.

to the safe harbor provisions of

factors,

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. These factors may
be revised or supplemented in subsequent reports on SEC Forms 10-Q
and 8-K.

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.

to an impairment

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
intangible assets acquired in a business combination. Goodwill is not
amortized and remains on our balance sheet indefinitely unless there is
an impairment or a sale of a portion of the business. Goodwill
is
test on an annual basis and when
subject
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 business groups or a decision to
dispose of a business group or a significant portion of a business
group. 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
amount of the recorded goodwill and intangible assets. Future write-
offs of goodwill or other intangible assets as a result of an impairment
results of
in the business could materially adversely affect our
operations and financial condition.

Our business could be negatively impacted by cyber security
events and other disruptions. 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 and products that
contain information technology systems for various customers. We
generally face the same security threats for these systems as for our
own. In addition, we face cyber threats from entities that may seek to
target us through our customers, vendors and subcontractors.
Accordingly, we maintain information security policies and procedures
for managing all systems and conduct employee training on cyber
security. We have experienced cyber security threats to our information
technology infrastructure and attempts to gain access to our sensitive
including viruses and attacks by hackers. Such prior
information,

14

General Dynamics Annual Report 2015

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, 2015, 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; Vienna, Austria; Sorocaba, Brazil; Beijing and Hong
Kong, China; Berlin, Dusseldorf and Munich, 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; Crawfordsville, St. Petersburg and Tallahassee, Florida;
Marion, Illinois; Saco, Maine; Shelby Township and Sterling Heights,
Michigan; Joplin, Missouri; Lincoln, Nebraska; Lima and Springboro,
Ohio; Eynon, Red Lion and Scranton, Pennsylvania; Ladson, South
Carolina; Garland, Texas; Williston, Vermont; Marion, Virginia; Auburn
and Sumner, Washington; Vienna, Austria; Edmonton, La Gardeur,
London, St. Augustin and Valleyfield, Canada; Kaiserslautern, Germany;
Granada, Madrid, Sevilla and Trubia, Spain; Kreuzlingen, Switzerland;
Oakdale and Merthyr Tydfil, United Kingdom.

(cid:129) Information Systems and Technology – Cullman, Alabama;
Phoenix and Scottsdale, Arizona; Santa Clara, California; Lynn Haven
and Riverview, Florida; Coralville and West Des Moines,
Iowa;
Lawrence, Kansas; Annapolis Junction and Towson, Maryland;
and Westwood, Massachusetts;
Dedham, Pittsfield,
Bloomington, Minnesota;
Conover,
Greensboro and Newton, North Carolina; Kilgore and Wortham, Texas;
Sandy, Utah; Chantilly, Chesapeake, Chester, Fairfax, Herndon,
Springfield and Sterling, Virginia; Spokane Valley, Washington;
Calgary and Ottawa, Canada; Tallinn, Estonia; Oakdale and St.
Leonards, United Kingdom.

Hattiesburg, Mississippi;

Taunton

(cid:129) Marine Systems – San Diego, California; Groton and New London,
Connecticut; Jacksonville, Florida; Bath and Brunswick, Maine; North
Kingstown, Rhode
and Portsmouth, Virginia;
Bremerton, Washington; Mexicali, Mexico.

Island; Norfolk

A summary of floor space by business group on December 31, 2015,

follows:

(Square feet in millions)

Aerospace

Combat Systems

Information Systems and

Technology

Marine Systems

Company-
owned
Facilities

Leased
Facilities

Government-
owned
Facilities

5.9

7.7

2.6

8.1

6.8

3.4

8.8

2.5

Total

12.7

16.7

12.3

10.6

52.3

–

5.6

0.9

–

6.5

Total

24.3

21.5

ITEM 3. LEGAL PROCEEDINGS

information relating to legal proceedings, see Note N to the

For
Consolidated Financial Statements in Item 8.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

General Dynamics Annual Report 2015

15

EXECUTIVE OFFICERS OF THE COMPANY
All of our executive officers are appointed annually. None of our executive officers were 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 8,
2016, were as follows (references are to positions with General Dynamics Corporation, unless otherwise noted):

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, April
2010 – August 2011; Staff Vice President, Accounting, July 2006 – March 2010

Age
43

Mark L. Burns – Vice President of the company and President of Gulfstream Aerospace Corporation since July 2015; Vice President
of the company since February 2014; President, Product Support of Gulfstream Aerospace Corporation, June 2008 – June 2015

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

Gregory S. Gallopoulos – Senior Vice President, General Counsel and Secretary since January 2010; Vice President and Deputy
General Counsel, 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 Corporation, March 2008 – March 2009

M. Amy Gilliland – Senior Vice President, Human Resources and Administration since April 2015; Vice President, Human Resources,
February 2014 – March 2015; Staff Vice President, Strategic Planning, March 2013 – February 2014; Staff Vice President, Investor
Relations, June 2008 – March 2013

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

S. Daniel Johnson – Executive Vice President, Information Systems and Technology, and President of General Dynamics Information
Technology since January 2015; Vice President of the company and President of General Dynamics Information Technology, April
2008 – December 2014; Executive Vice President of General Dynamics Information Technology, July 2006 – March 2008

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

Christopher Marzilli – Vice President of the company and President of General Dynamics Mission Systems since January 2015; Vice
President of the company and President of General Dynamics C4 Systems, January 2006 – December 2014; Senior Vice President
and Deputy General Manager of General Dynamics C4 Systems, November 2003 – January 2006

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

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

56

61

56

54

41

64

68

48

56

58

57

55

16

General Dynamics Annual Report 2015

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 2014 and
2015 are included in the Supplementary Data contained in Item 8.

On January 31, 2016, there were approximately 13,000 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

2015.

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

Period

Pursuant to Share

Buyback Program

10/5/15-11/1/15

305,000

$ 148.91

305,000 2,806,468

11/2/15-11/29/15

2,002,000

$ 144.90

2,002,000

804,468

11/30/15-12/31/15

1,200,000

$ 140.56

1,200,000 9,604,468

Total

3,507,000

$ 143.76

* On December 2, 2015,

the board of directors authorized management

to repurchase

10 million additional shares of common stock.

For additional

information relating to our repurchases of common
stock during the past three years, see Financial Condition, Liquidity and
Capital Resources – Financing Activities – Share Repurchases contained
in Item 7.

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, 2010
(Assumes Reinvestment of Dividends)

$240

$220

$200

$180

$160

$140

$120

$100

 $80

2010

2011

2012

2013

2014

2015

General Dynamics

S&P Aerospace & Defense

S&P 500

General Dynamics Annual Report 2015

17

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)

2015

2014

2013

2012

2011

Summary of Operations
Revenue
Operating earnings
Operating margin
Interest, net
Provision for income tax, 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 provided (used) by investing activities
Net cash used by financing activities
Net cash (used) provided 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)

Other Information
Free cash flow from operations (e)
Return on invested capital (f)
Funded backlog
Total backlog
Shares outstanding
Weighted average shares outstanding:

Basic
Diluted
Employees

$ 31,469

$ 30,852

$ 30,930

$ 30,992

$ 32,122

4,178

13.3%

(83)

1,137

2,965

9.4%
–

2,965

9.08

9.08

3,889

12.6%

(86)

1,129

2,673

8.7%
(140)

2,533

7.83

7.42

3,689

11.9%

(86)

1,125

2,486

8.0%
(129)

2,357

7.03

6.67

765

2.5%

(156)

854

(381)

(1.2)%
49

(332)

(1.08)

(0.94)

3,747

11.7%

(141)

1,139

2,500

7.8%
26

2,526

6.80

6.87

$ 2,499

$ 3,728

$ 3,111

$ 2,606

$ 3,150

200

(4,259)

(43)

2.76

(1,102)

(3,575)

36

2.48

(363)

(725)

(18)

2.24

(642)

(1,382)

65

2.04

(1,961)

(1,201)

48

1.88

$ 2,785

$ 4,388

$ 5,301

$ 3,296

$ 2,649

31,997

3,399

10,738

31.7%

34.31

$ 1,930
17.4%

51,783

66,120

313.0

321.3

326.7

99,900

35,337

3,893

11,829

32.9%

35.61

$ 3,207
15.1%

52,929

72,410

332.2

335.2

341.3

99,500

35,473

3,888

14,501

26.8%

41.03

$ 2,675
14.1%

38,284

45,885

353.4

350.7

353.5

96,000

34,285

3,884

11,390

34.1%

32.20

$ 2,170
8.4%

44,376

51,132

353.7

353.3

353.3

92,200

34,954

3,921

13,232

29.6%

37.12

$ 2,705
14.7%

44,420

57,131

356.4

364.1

367.5

95,100

Note: Prior period information has been restated to reflect the reclassification of debt issuance costs from other assets to debt as discussed in Note J to the Consolidated Financial Statements in Item 8.
(a) Return on sales is calculated as earnings (loss) from continuing operations divided by revenue.
(b) 2012 amounts exclude the 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) 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,

a non-GAAP management metric.

(f) See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the calculation of return on invested capital (ROIC), a non-GAAP management metric. 2012

ROIC was adjusted for a $2 billion goodwill impairment and associated $199 tax benefit.

18

General Dynamics Annual Report 2015

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

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

For an overview of our business groups, including a discussion of
products and services provided, see the Business discussion contained
in Item 1. The following discussion should be read in conjunction with
our Consolidated Financial Statements included in Item 8.

In navigating the current business environment, we continue to focus
on improving operating earnings, expanding margin and the efficient
conversion of earnings into cash. We emphasize effective program
execution, anticipate trends and react to changing circumstances in our
business environment, and drive cost-reduction activities across our
business.

RESULTS OF OPERATIONS

BUSINESS ENVIRONMENT

INTRODUCTION

revenue from the U.S.
With approximately 55 percent of our
government, 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 as mandated by the
Budget Control Act of 2011 (BCA) and its related sequester
mechanism. The BCA restricts discretionary spending over a ten-year
period through 2021 by establishing spending caps.

In 2015,

the Bipartisan Budget Act of 2015 (BBA) raised the
spending cap for government fiscal year (FY) 2016 and FY 2017 by
$25 billion and $15 billion, respectively. In accordance with the BBA,
the Congress appropriated $514 billion in FY 2016 for the Department
of Defense (DoD), including approximately $188 billion for procurement
and research and development
(R&D) budgets, also known as
investment accounts. These investment accounts are the source of the
majority of our U.S. government revenue. An additional $59 billion
appropriated for overseas contingency operations brings the total
defense spending bill passed by the Congress in December 2015 to
$573 billion, a 2 percent increase over FY 2015.

The long-term outlook for our U.S. defense business is influenced by
the relevance of our programs to the U.S. military’s funding priorities, the
diversity of our programs and customers, our insight
into customer
requirements stemming from our incumbency on core programs, our
ability to evolve our products to address a fast-changing threat
environment and our proven track record of successful contract execution.
We continue to pursue international opportunities presented by
demand for military equipment and information technologies from our
non-U.S. operations and through exports from our North American
businesses. While the revenue potential can be significant,
these
to changing budget priorities and overall
opportunities are subject
spending pressures unique to each country.

In our Aerospace group, business-jet orders were strong in 2015
and reflected demand across our product portfolio. We expect our
continued investment in the development of new aircraft products and
technologies to support
the Aerospace group’s long-term growth.
Similarly, we believe the aircraft services business will continue to be a
strong source of revenue as the global business-jet fleet grows.

An understanding of our accounting practices is important to evaluate
our financial statements and operating results. We recognize the majority
of our
revenue using the percentage-of-completion method of
accounting. The following paragraphs explain how this method is applied
in recognizing revenue and operating costs in our business 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 revenue 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. 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. Revenue associated with the group’s completions of other
original equipment manufacturers’
(OEMs) aircraft and the group’s
services businesses are recognized as work progresses or upon delivery
of services. Fluctuations in revenue from period to period 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 relate to new
aircraft production on firm orders and consist of
labor, material,
subcontractor and overhead costs. The costs are accumulated in
production lots, recorded in inventory 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
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 recognized generally as
incurred.

the level of operating costs,

impact

For new aircraft, operating earnings and margin are a function of the
prices of our aircraft, our operational efficiency in manufacturing and
outfitting the aircraft and the mix of higher-margin large-cabin and
lower-margin mid-cabin aircraft deliveries. Additional factors affecting

General Dynamics Annual Report 2015

19

the group’s earnings and margin include the volume, mix and
profitability of completions and services work performed, the volume of
and market
for pre-owned aircraft and the level of general and
administrative (G&A) and net R&D costs incurred by the group.

In the three defense groups, revenue on long-term government
contracts is recognized as work progresses, as either products are
produced or services are rendered. As a result, variations in revenue
are discussed generally in terms of volume, typically measured by the
level of activity on individual contracts or programs. Year-over-year
variances attributed to volume are due to changes in production or
service levels and delivery schedules.

Operating costs for the defense groups consist of labor, material,
subcontractor, 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 revenue.

Operating earnings and margin 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 contract value 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

2015 IN REVIEW

(cid:129) Outstanding operating performance:

▪ Revenue increased $617, or 2 percent, to $31.5 billion, with

growth in our Aerospace and defense groups.

▪ Record-high operating earnings of $4.2 billion and operating
margin of 13.3 percent increased 7.4 percent and 70 basis
points, respectively, from 2014.

▪ Return on sales increased 70 basis points from 2014 to 9.4

percent.

▪ $9.08 of earnings from continuing operations per diluted share
in our

from 2014 to the highest level

increased 16 percent
history.

20

General Dynamics Annual Report 2015

(cid:129) Robust backlog providing stability well

into the future,

including

increased Aerospace backlog from year-end 2014.

(cid:129) 22.8 million outstanding shares repurchased for $3.2 billion and
$873 paid in cash dividends, returning over 200 percent of our free
cash from operations to shareholders.

(cid:129) Return on invested capital (ROIC) of 17.4 percent, 230 basis points

higher than 2014.

REVIEW OF 2015 VS. 2014

Year Ended December 31

2015

2014

Variance

Revenue
Operating costs and expenses
Operating earnings
Operating margin

$ 31,469
27,291
4,178
13.3%

$ 30,852
26,963
3,889
12.6%

$ 617
(328)
289

2.0%
(1.2)%
7.4%

We realized top-line revenue growth in 2015, driven primarily by higher
ship construction and engineering activity in our Marine Systems group
in our Aerospace group.
and additional deliveries of G650 aircraft
Revenue was down slightly in our Combat Systems and Information
Systems and Technology groups. Operating costs and expenses
increased less than revenue in 2015, resulting in robust
levels of
operating earnings and margin. Consolidated operating margin expanded
70 basis points, due largely to improved performance and continued
cost-reduction efforts
in the Aerospace, Combat Systems and
Information Systems and Technology groups.

REVIEW OF 2014 VS. 2013

Year Ended December 31

2014

2013

Variance

Revenue

$ 30,852

$ 30,930

$ (78)

(0.3)%

Operating costs and expenses
Operating earnings
Operating margin

26,963
3,889
12.6%

27,241
3,689
11.9%

278
200

1.0%
5.4%

While our revenue was essentially flat in 2014 compared with 2013,
operating earnings and margin increased in 2014. Decreased U.S. Army
spending affected our Information Systems and Technology and Combat
Systems groups. This was essentially offset by higher Aerospace and
Marine Systems revenue due to increased aircraft deliveries and higher
ship construction activity, respectively. We reduced our operating costs
and expenses more than our revenue declined in 2014, resulting in
positive operating leverage. The primary drivers of
the decrease in
operating costs and expenses were improved performance in aircraft
manufacturing and outfitting activities in the Aerospace group and
significant cost reductions in the Information Systems and Technology
group. The resulting consolidated operating margin of 12.6 percent was
up 70 basis points over 2013.

REVIEW OF BUSINESS GROUPS

Year Ended December 31

2015

2014

2013

Aerospace

Combat Systems

Information Systems and Technology

Marine Systems

Corporate

Total

Revenue

Operating Earnings

Revenue

Operating Earnings

Revenue

Operating Earnings

$ 8,851

$ 1,706

$ 8,649

$ 1,611

$ 8,118

$ 1,416

5,640

8,965

8,013

–

882

903

728

(41)

5,732

9,159

7,312

–

862

785

703

(72)

5,832

10,268

6,712

–

908

795

666

(96)

$ 31,469

$ 4,178

$ 30,852

$ 3,889

$ 30,930

$ 3,689

Following is a discussion of operating results and outlook for each of
our business groups. For the Aerospace group, results are analyzed for
specific types of products and services, consistent with how the group
is managed. For the defense groups, the discussion is based on the
lines of products and services each group offers with a supplemental
discussion of specific contracts and programs when significant to the
group’s results. Additional information regarding our business groups
can be found in Note Q to the Consolidated Financial Statements in
Item 8.

Mid-cabin aircraft deliveries were also up slightly. We had seven pre-
owned aircraft sales in 2015 compared with three sales in 2014.

The increase in the group’s operating earnings in 2015 consisted of

the following:

Aircraft manufacturing, outfitting and completions
Aircraft services
Pre-owned aircraft
G&A/other expenses

Total increase

$ 100
9
(7)
(7)

$ 95

AEROSPACE

Review of 2015 vs. 2014

Year Ended December 31

2015

2014

Variance

Revenue
Operating earnings
Operating margin

$ 8,851
1,706
19.3%

$ 8,649
1,611
18.6%

$ 202
95

2.3%
5.9%

Gulfstream aircraft deliveries

(in units):
Green
Outfitted

147
154

144
150

3
4

2.1%
2.7%

Aircraft manufacturing, outfitting and completions earnings grew in
2015 due to an increase in higher-priced G650 aircraft deliveries.
Operating earnings in 2015 were also favorably affected by a first-
quarter 2015 supplier settlement associated with aircraft component
design and delivery delays. The group’s services performance reflected
the
a favorable mix of work. Partially offsetting these increases,
group’s performance was impacted by slightly higher net R&D
expenses (included in G&A/other expenses above) associated with
ongoing product-development efforts. Overall, the Aerospace group’s
operating margin increased 70 basis points to 19.3 percent in 2015.

The increase in the Aerospace group’s revenue in 2015 consisted of
the following:

Review of 2014 vs. 2013

Aircraft manufacturing, outfitting and completions
Pre-owned aircraft
Aircraft services

Total increase

$173
44
(15)

$202

Aircraft manufacturing, outfitting and completions revenue increased
in 2015 due primarily to additional deliveries of the G650 aircraft.

Year Ended December 31

2014

2013

Variance

Revenue
Operating earnings
Operating margin

$ 8,649
1,611
18.6%

$ 8,118
1,416
17.4%

$ 531
195

6.5%
13.8%

Gulfstream aircraft deliveries

(in units):
Green
Outfitted

144
150

139
144

5
6

3.6%
4.2%

General Dynamics Annual Report 2015

21

The Aerospace group’s revenue and earnings increased in 2014 due
primarily to additional deliveries of
large-cabin aircraft. Operating
earnings also increased in 2014 due to improved operating
performance on our large- and mid-cabin aircraft production, offset
partially by higher net R&D expenses.

2016 Outlook
We expect
margin somewhat lower compared with 2015.

the group’s 2016 revenue to be modestly higher and

COMBAT SYSTEMS

Review of 2015 vs. 2014

Year Ended December 31

2015

2014

Variance

Revenue

Operating earnings

Operating margin

$ 5,640

$ 5,732

882

15.6%

862

15.0%

$ (92)

20

(1.6)%

2.3%

The slight decrease in the Combat Systems group’s revenue in 2015
consisted of the following:

U.S. military vehicles

Weapons systems and munitions

International military vehicles

Total decrease

$ (44)

(38)

(10)

$ (92)

In 2015, revenue from U.S. military vehicles declined as a result of
the completion of
the Ground Combat Vehicle (GCV) design and
development program. This decrease was offset partially by a ramp-up
in work on the Stryker Engineering Change Proposal (ECP) upgrade
program. Weapons systems and munitions revenue decreased in 2015
due primarily to lower volume of Hydra-70 rockets and decreased
ammunition production for U.S. allies. Revenue from international
military vehicles decreased slightly in 2015 due to lower revenue on
several mature international contracts that are nearing completion,
largely by growth on new international programs that are
offset
ramping up for customers in the United Kingdom and the Middle East.

Translation of our international businesses’ revenue into U.S. dollars
in 2015 has been affected negatively by foreign currency exchange
rate fluctuations, due primarily to the strengthening of the U.S. dollar
against
the Canadian dollar and the euro. Had foreign currency
exchange rates in 2015 held constant from 2014, 2015 revenue would
have grown by 6 percent over 2014.

The Combat Systems group’s operating margin increased 60 basis
points in 2015. The operating results reflect the group’s strong operating
performance and cost cutting across the business, including reduced
overhead costs following restructuring activities completed in 2014.

22

General Dynamics Annual Report 2015

REVIEW OF 2014 VS. 2013

Year Ended December 31

2014

2013

Variance

Revenue

Operating earnings

Operating margin

$ 5,732

$ 5,832

$ (100)

862

15.0%

908

15.6%

(46)

(1.7)%

(5.1)%

In 2014, lower U.S. military vehicles revenue was offset largely by higher
revenue associated with international military vehicles. U.S. military
vehicle revenue was down in 2014 due to a decrease in U.S. Army
spending as the U.S. involvement in the Iraqi and Afghan conflicts wound
including
down. This impacted our primary U.S. vehicle programs,
Stryker, Abrams, Buffalo, and Mine Resistant, Ambush Protected (MRAP)
vehicles. Revenue also decreased on the completed GCV design and
development program. Revenue for international military vehicles was up
significantly in 2014 as work commenced on a major international order
received in the first quarter of 2014.

The Combat Systems group’s operating margin decreased 60 basis
points in 2014 due primarily to a mix shift from more mature programs
nearing completion to the start up of new programs. Somewhat
offsetting this shift in contract mix, operating margin was up in our
European and weapons systems businesses as a result of reduced
overhead costs following restructuring activities completed in 2013 and
early 2014.

2016 Outlook
We expect the Combat Systems group’s revenue to increase slightly in
2016. Operating margin is expected to remain strong in the mid-15
percent range consistent with 2015.

INFORMATION SYSTEMS AND TECHNOLOGY

Review of 2015 vs. 2014

Year Ended December 31

2015

2014

Variance

Revenue

Operating earnings

Operating margin

$ 8,965

$ 9,159

$ (194)

(2.1)%

903

10.1%

785

8.6%

118

15.0%

The Information Systems and Technology group’s revenue in 2015 was
slightly lower than 2014. The decrease from the prior year consisted of
the following:

Information technology (IT) services

C4ISR solutions*

Total decrease

$ (155)

(39)

$ (194)

* Command,

control,

communication,

computing

(C4),

intelligence,

surveillance

and

reconnaissance (ISR) solutions

IT services revenue decreased in 2015 due to lower volume on
several programs,
including our commercial wireless work. These
decreases were offset partially by revenue from the late 2014
acquisition of a provider of IT support to U.S. special operations forces.
Revenue decreased slightly in our C4ISR solutions business due in part
to lower volume on the Handheld, Manpack and Small Form Fit (HMS)
radio program.

The group’s operating margin increased 150 basis points in 2015.
This margin expansion was driven primarily by improved program
performance and rightsizing across the group, including the favorable
impact from the early 2015 consolidation of two of our businesses to
form General Dynamics Mission Systems. Operating earnings in 2015
also included a gain of $23 on the sale of a commercial cyber security
product business, a 30 basis-point impact.

Review of 2014 vs. 2013

Year Ended December 31

2014

2013

Variance

Revenue

$ 9,159

$ 10,268

$ (1,109)

(10.8)%

Operating earnings

Operating margin

785

8.6%

795

7.7%

(10)

(1.3)%

In 2014, revenue was down across the Information Systems and
Technology group. Revenue decreased in the C4ISR solutions business
in 2014 primarily as a result of lower U.S. Army spending on several
programs. Revenue decreased in 2014 in our IT services business due
to lower volume on multiple programs,
including our commercial
wireless work, offset partially by increased contact-center services
work under our contract with the Centers for Medicare & Medicaid
Services. Despite the revenue decline, the group’s operating margin
increased 90 basis points in 2014,
the result of solid operating
performance and ongoing cost-reduction efforts across our businesses.

2016 Outlook
We expect 2016 revenue in the Information Systems and Technology
group to be consistent with 2015. Operating margins are expected to
approach double-digits.

MARINE SYSTEMS

Review of 2015 vs. 2014

Year Ended December 31

2015

2014

Variance

Revenue

Operating earnings

Operating margin

$ 8,013

$ 7,312

728

9.1%

703

9.6%

$ 701

25

9.6%

3.6%

The increase in the Marine Systems group’s revenue in 2015 consisted
of the following:

U.S. Navy ship construction

U.S. Navy ship engineering, repair and other services

Commercial ship construction

Total increase

$ 327

210

164

$ 701

The increase in U.S. Navy ship construction revenue in 2015 is due to
higher volume on the Virginia-class submarine program. In 2015, we
completed the ramp-up in construction from one to two Virginia-class
submarines per year. This increase was offset partially by lower volume
on the Expeditionary Mobile Base (ESB) program. Revenue from U.S.
Navy ship engineering, repair and other services increased in 2015 due
primarily to development work on the Ohio-class submarine replacement
program. Commercial ship construction revenue increased in 2015 as
work ramped up on the group’s construction of Jones Act ships.

Operating margin decreased 50 basis points in 2015 due primarily to
a shift in contract mix, including a gap in production on the mature ESB
program that was replaced by Jones Act commercial ship contracts and
the transition from Block III to Block IV of the Virginia-class submarine
program. The group’s operating margin was also affected unfavorably by
cost growth on the Navy’s DDG-1000 program and the restart of the
DDG-51 program.

Review of 2014 vs. 2013

Year Ended December 31

2014

2013

Variance

Revenue

Operating earnings

Operating margin

$ 7,312

$ 6,712

703

9.6%

666

9.9%

$ 600

37

8.9%

5.6%

The Marine Systems group’s revenue increased in 2014 due primarily to
higher volume on the Virginia-class submarine program, including long-
lead materials for the Block IV contract, and increased work on the
group’s construction of Jones Act ships. Revenue for Navy engineering,
repair and other services decreased in 2014 caused by lower spending
by the Navy on submarine-related overhaul and repair services.
Operating margin decreased 30 basis points in 2014 due primarily to a
shift in contract mix as work on the Block IV Virginia-class and Jones Act
commercial ship contracts ramped up and volume decreased on mature
contracts,
the Virginia-class
program. In addition, construction progressed on the first of the three
DDG-1000 ships and two of the DDG-51 ships in the Navy’s restart of
the program.

including ESB and Blocks II and III of

General Dynamics Annual Report 2015

23

2016 Outlook
We expect the Marine Systems group’s 2016 revenue to be consistent
with 2015. Operating margin is expected to improve to the mid-9
percent range.

Ship engineering, repair and other services

IT services

Military vehicle services

Other, net

Total decrease

$ 224

(176)

(65)

(82)

$ (99)

CORPORATE
Corporate results consist primarily of compensation expense for stock
options. Corporate costs totaled $41 in 2015, $72 in 2014 and $96 in
2013. The decrease in 2015 is due primarily to lower compensation
expense for stock options, as options granted beginning in 2015 have
a three-year vesting period versus a two-year vesting period for prior
option grants. See Note O to the Consolidated Financial Statements in
Item 8 for additional
information regarding our equity compensation
plans, including changes made to our equity compensation plans in
2015. We expect Corporate operating costs in 2016 of approximately
$45.

OTHER INFORMATION

PRODUCT AND SERVICE REVENUE AND OPERATING COSTS

Review of 2015 vs. 2014

Year Ended December 31

2015

2014

Variance

Ship engineering, repair and other services revenue was up in 2015
due to increased development work on the Ohio-class submarine
replacement program. IT services revenue decreased in 2015 due to
lower volume on several programs. Military vehicle services revenue
decreased in 2015 due primarily to the completion of the GCV design
and development program.

Service operating costs decreased in 2015 due primarily to lower
volume on the programs described above, as well as cost-reduction
efforts in the Information Systems and Technology group.

Review of 2014 vs. 2013

Year Ended December 31

2014

2013

Variance

Revenue:

Products

Services

Operating Costs:

Products

Services

$ 19,564

$ 19,100

$ 464

2.4%

11,288

11,830

(542)

(4.6)%

$ 15,335

$ 15,065

$ 270

1.8%

9,644

10,137

(493)

(4.9)%

Revenue:
Products
Services

Operating Costs:
Products
Services

$ 20,280
11,189

$ 19,564
11,288

$ 716
(99)

3.7%
(0.9)%

The increase in product revenue in 2014 consisted of the following:

$ 15,871
9,468

$ 15,335
9,644

$ 536
(176)

3.5%
(1.8)%

Ship construction

Aircraft manufacturing, outfitting and completions

The increase in product revenue in 2015 consisted of the following:

Ship construction

Aircraft manufacturing, outfitting and completions

Other, net

Total increase

$ 476

200

40

$ 716

Ship construction revenue increased in 2015 due to higher volume
on the Virginia-class submarine program and commercial Jones Act
ships. Aircraft manufacturing, outfitting and completions revenue
increased in 2015 due to additional deliveries of G650 aircraft.

Product operating costs increased in 2015 due primarily to higher

volume on the programs described above.

The decrease in service revenue in 2015 consisted of the following:

24

General Dynamics Annual Report 2015

C4ISR products

Pre-owned aircraft

Other, net

Total increase

$ 626

619

(541)

(143)

(97)

$ 464

Ship construction revenue increased in 2014 due to higher volume on
the Virginia-class submarine program and commercial Jones Act ships.
Aircraft manufacturing, outfitting and completions revenue increased due
to additional deliveries of large-cabin aircraft. Offsetting these increases,
lower U.S. Army spending negatively impacted revenue from C4ISR
products. Pre-owned aircraft sales were down as there were fewer
aircraft trade-ins and resulting sales in 2014.

Product operating costs increased in 2014 due primarily to higher
volume on the programs described above. Costs in 2014 were also
affected by higher net R&D expenses in the Aerospace group associated
with ongoing product development efforts.

The decrease in service revenue in 2014 consisted of the following:

BACKLOG AND ESTIMATED POTENTIAL
CONTRACT VALUE

Military vehicle services

$ (194)

$100,000

C4ISR services

IT services

Other, net

Total decrease

(224)

(155)

31

$ (542)

C4ISR services and military vehicle services revenue was lower due
to decreased U.S. Army spending, while IT services revenue decreased
due to reduced commercial wireless work.

Service operating costs decreased in 2014 due primarily to lower

volume on the programs described above.

G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.2 percent in 2015,
6.4 percent in 2014 and 6.6 percent in 2013. G&A expenses in 2014
included $29 of severance-related charges in our European military
vehicles business in the Combat Systems group. We expect G&A
expenses in 2016 to be generally consistent with 2015.

INTEREST, NET
Net interest expense was $83 in 2015 and $86 in 2014 and 2013. We
expect full-year 2016 net interest expense to be approximately $95, up
from 2015 due to less interest
income on lower cash balances
expected in 2016.

PROVISION FOR INCOME TAX, NET
Our effective tax rate was 27.7 percent in 2015, 29.7 percent in 2014
and 31.2 percent in 2013. The decrease in the effective tax rate in
2015 was due primarily to the favorable impact of contract close-outs
in 2015. For 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 the full-year effective tax
rate to be in the mid-29 percent range in 2016.

DISCONTINUED OPERATIONS, NET OF TAX
In 2014, we entered into an agreement to sell our axle business in the
Combat Systems group and recognized a $146 loss, net of tax (the
sale was completed in January 2015). In 2013, we recognized a $129
loss, net of tax, from the settlement of our litigation with the U.S. Navy
related to the terminated A-12 contract in the company’s discontinued
tactical military aircraft business. See Note A to the Consolidated
Financial Statements in Item 8 for
these
transactions.

further discussion of

$75,000

$50,000

$25,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2013

2014

2015

Our total backlog, including funded and unfunded portions, was $66.1
billion at the end of 2015, compared with $72.4 billion on December 31,
2014. Our total estimated contract value, which combines total backlog
value, was $90.6 billion on
with estimated potential
December 31, 2015.

contract

Estimated potential contract value includes work awarded on
unfunded indefinite delivery,
indefinite quantity (IDIQ) contracts or
unexercised options associated with existing firm contracts. Contract
options in our defense business 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. We recognize options
in backlog when the customer exercises the option and establishes a
firm order.

AEROSPACE

$20,000

15,000

10,000

5,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2013

2014

2015

General Dynamics Annual Report 2015

25

COMBAT SYSTEMS

$30,000

20,000

10,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2013

2014

2015

After tripling in 2014, Combat Systems’ total backlog was $19 billion at
the end of 2015, down slightly from $19.8 billion at year-end 2014. The
group’s backlog includes two major contracts awarded in 2014:

(cid:129) $8.1 billion remaining on a $10 billion contract to provide wheeled
armored vehicles and logistics support to a Middle Eastern customer
through 2028, plus an additional potential $2.5 billion of vehicles and
services; and

(cid:129) $5.5 billion from the U.K. Ministry of Defence to produce AJAX
armoured fighting vehicles scheduled for delivery to the British Army
between 2017 and 2024 and related in-service support. We received
a $610 award for the in-service support in 2015.

The Combat Systems group also has several additional international

military vehicle production contracts in backlog, notably:

(cid:129) $600 to produce over 300 armored personnel carriers (APCs) for the

Danish Defence Acquisition and Logistics Organization; and

(cid:129) $495 for

light armored vehicles (LAVs)

for various international
customers, including $250 for the upgrade and modernization of LAV
III combat vehicles for the Canadian Army.

Aerospace funded backlog represents aircraft and custom completion
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
ended 2015 with backlog of $13.4 billion, up from $13.2 billion at
year-end 2014.

Orders in 2015 reflected strong demand across our product
portfolio. We continued to build our backlog with additional orders for
the new family of business jets introduced in 2014, the G500 and
G600 aircraft, which are expected to enter into service in 2018 and
2019, respectively, as well as orders for all models of in-production
aircraft. In addition, we received several orders in 2015 for custom
completions of narrow- and wide-body aircraft
in our Jet Aviation
business.

Estimated potential contract value in the Aerospace group primarily
represents options to purchase new aircraft and long-term agreements
with fleet customers. Estimated potential contract value was $2.4
billion on December 31, 2015, down slightly from $2.7 billion at year-
end 2014.

Demand for Gulfstream aircraft remains strong across customer
types and geographic regions, generating orders from public and
individuals and governments around the world.
private companies,
Geographically, U.S. customers represented approximately 45 percent
of the group’s backlog on December 31, 2015, up from year-end 2014
given strong domestic demand.

DEFENSE GROUPS

The total backlog in our three 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. We have included
in total backlog firm contracts at the amounts that we believe are likely
to receive funding, but there is no guarantee that future budgets and
appropriations will provide the funding necessary for a given program.

Total backlog in our defense groups was $52.7 billion on
December 31, 2015, down from $59.2 billion at the end of 2014.
Estimated potential contract value was $22 billion on December 31,
2015, compared with $23.9 billion at year-end 2014.

26

General Dynamics Annual Report 2015

The U.S. Army’s Stryker wheeled combat

vehicle program
represented $670 of the group’s backlog on December 31, 2015, with
vehicles scheduled for delivery through 2017. The group received
$590 of Stryker orders in 2015, including awards for double-V-hulled
vehicles, contractor logistics support and engineering services. The
group’s backlog on December 31, 2015, included $780 for Abrams
main battle tank modernization and upgrade programs for the Army
and U.S. allies around the world, including $275 to refurbish and
upgrade 150 Abrams main battle tanks to the situational awareness
configuration for the Kingdom of Morocco.

The Combat Systems group’s backlog on December 31, 2015, also
included $2.3 billion for multiple weapons systems and munitions
programs,
including $125 received in 2015 from the Army for
production of Hydra-70 rockets.

Combat Systems’ estimated potential contract value was $5.1 billion
on December 31, 2015, down slightly from $5.5 billion at year-end
2014.

INFORMATION SYSTEMS AND TECHNOLOGY

$40,000

30,000

20,000

10,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2013

2014

2015

Unlike our other defense businesses, the Information Systems and
Technology group’s backlog consists of thousands of contracts and is
reconstituted each year with new programs and task order awards. The
group’s total backlog was $8.6 billion at the end of 2015, unchanged
from year-end 2014. This amount does not include $14.7 billion of
estimated potential contract value associated with its anticipated share
of IDIQ contracts and unexercised options. In 2015, funding under IDIQ
contracts and options contributed over $4 billion to the group’s orders.
The group received a number of significant contract awards in

2015, including the following:

(cid:129) $425 from the U.S. Army for ruggedized computing equipment
under the CHS-4 program. $735 of estimated potential contract
value remains under this IDIQ contract;

(cid:129) $295 from the U.S. Department of State to provide supply chain

management services;

(cid:129) $270 from the U.S. Navy to provide fire control system modifications
for ballistic-missile (SSBN) and guided-missile (SSGN) submarines;
(cid:129) $180 from the Canadian Department of National Defence for the
procurement of components for a fleet of CP140 aircraft and the
upgrade of data management software for the aircraft; and

(cid:129) $155 for combat and seaframe control systems on two U.S. Navy

Littoral Combat Ships (LCS).

Backlog at year-end 2015 also included the following key programs:

(cid:129) $815 for the Canadian Maritime Helicopter Project (MHP) to provide
integrated mission systems, training and support for 28 Canadian
marine helicopters;

(cid:129) $425 for the WIN-T mobile communications network program. The
group has an additional $100 of estimated potential contract value
associated with this IDIQ contract;

(cid:129) $285 for contact-center services for the Centers for Medicare &

Medicaid Services;

(cid:129) $510 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 Enterprise
Transport infrastructure programs; and

(cid:129) $190 for long-term support and capability upgrades for the U.K.’s

Bowman tactical communication system.

MARINE SYSTEMS

$40,000

30,000

20,000

10,000

0

Estimated Potential
Contract Value

Unfunded

Funded

2013

2014

2015

The Marine Systems group’s backlog consists of long-term submarine
and ship construction programs, as well as numerous engineering and
repair contracts. The group periodically receives large contract awards
that provide backlog for several years. This backlog then decreases over
subsequent years as the group performs on these contracts. Consistent
with this pattern, backlog decreased to $25.1 billion on December 31,
2015, compared with $30.8 billion at the end of 2014.

General Dynamics Annual Report 2015

27

The Virginia-class submarine program was the company’s largest
program in 2015 and the largest contract in the company’s backlog. In
2014, we received a contract for the construction of 10 submarines in
the program. The group’s backlog at year-end 2015
Block IV of
included $17.4 billion for 16 Virginia-class submarines scheduled for
delivery through 2023.

Navy destroyer programs represented $3.9 billion of the group’s
backlog at year-end 2015. We have construction contracts for seven
DDG-51 destroyers scheduled for delivery through 2022. Backlog at
year end 2015 also included three ships under the DDG-1000 program
scheduled for delivery through 2019.

The Marine Systems group’s backlog on December 31, 2015,
included $420 for construction of ESB auxiliary support ships. The
group has delivered the first
three ships in the program, and
construction is underway on the fourth ship, scheduled for delivery in
2018.

The year-end backlog also included $350 for one liquefied natural
gas (LNG)-powered and seven LNG-conversion-ready Jones Act ships
for commercial customers scheduled for delivery through 2017.

Complementing these ship construction programs, engineering
services represented approximately $1.8 billion of the Marine Systems
group’s backlog on December 31, 2015, including $1.2 billion for
design and development efforts on the Ohio-class submarine
replacement program. Additionally, year-end backlog for maintenance,
repair and other services totaled $1.4 billion.

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. Cash generated
three years was deployed to
by operating activities over the past
repurchase our common stock, pay dividends and fund capital
expenditures.

Our cash balances are invested primarily in time deposits from
highly rated banks and commercial paper rated A1/P1 or higher. On
December 31, 2015, $1.1 billion of our cash was held by non-U.S.
operations. Should this cash be repatriated,
it generally would be
subject to U.S. federal income tax but would generate offsetting foreign
tax credits.

Year Ended December 31

2015

2014

2013

Net cash provided by operating activities

$ 2,499

$ 3,728

$ 3,111

Net cash provided (used) by investing

activities

Net cash used by financing activities

Net cash (used) provided by discontinued

200

(4,259)

(1,102)

(3,575)

(363)

(725)

operations

(43)

36

(18)

Net (decrease) increase in cash and

equivalents

(1,603)

(913)

2,005

Cash and equivalents at beginning of

year

Cash and equivalents at end of year

Marketable securities

Short- and long-term debt

Net (debt) cash

Debt-to-equity (a)

Debt-to-capital (b)

4,388

2,785

–

5,301

4,388

500

3,296

5,301

–

(3,399)

(3,893)

(3,888)

$ (614)

$

995

$ 1,413

31.7%

24.0%

32.9%

24.8%

26.8%

21.1%

Note: Prior period information has been restated to reflect the reclassification of debt issuance
costs from other assets to debt as discussed in Note J to the Consolidated Financial Statements in
Item 8.
(a) Debt-to-equity ratio is calculated as total debt divided by total equity.
(b) 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 in Item 8.

OPERATING ACTIVITIES

We generated cash from operating activities of $2.5 billion in 2015, $3.7
billion in 2014 and $3.1 billion in 2013. In all three years, the primary
driver of cash flows was net earnings. Operating cash flows in 2013
benefited from deposits received in the Marine Systems group for
commercial ship orders.
In 2014, operating cash flows included
significant customer deposits related to a large contract for a Middle
Eastern customer awarded in our Combat Systems group.
In 2015,
operating cash flows were negatively affected by the utilization of these
deposits coupled with growth in operating working capital
in our
Aerospace group consistent with building test aircraft for the G500 and
G600 programs.

28

General Dynamics Annual Report 2015

increase. Previously,

Dividends. On March 4, 2015, our board of directors declared an
increased quarterly dividend of $0.69 per share, the 18th consecutive
annual
the board had increased the quarterly
dividend to $0.62 per share in March 2014 and $0.56 per share in
March 2013. Cash dividends paid were $873 in 2015, $822 in 2014
and $591 in 2013. We did not pay any dividends in the first three
months of 2013 because we accelerated our first-quarter dividend
payment to December 2012.

Debt Repayments. In January 2015, we repaid $500 of fixed-rate
notes on their scheduled maturity date with the proceeds from the
maturing marketable securities discussed above. We have no additional
material repayments of long-term debt scheduled until $500 of fixed-rate
notes mature in July 2016. As we approach the maturity date of this
debt, we will determine whether to repay these notes with cash on hand
or refinance the obligation. See Note J to the Consolidated Financial
Statements in Item 8 for additional
information regarding our debt
obligations, including scheduled debt maturities and interest rates.

We ended 2015 with no commercial paper outstanding. We have $2
billion in bank credit facilities that remain available, including a $1 billion
facility expiring in July 2018 and a $1 billion facility expiring in November
2020. These facilities are for general corporate purposes and working
capital needs and are required by rating agencies to support our
commercial paper issuances. We also have an effective shelf registration
on file with the Securities and Exchange Commission that allows us to
access the debt markets.

INVESTING ACTIVITIES

Cash provided by investing activities was $200 in 2015 compared with
a use of cash for investing activities of $1.1 billion in 2014 and $363
in 2013. Our primary investing activities were capital expenditures and
purchases, sales and maturities of marketable securities.

Capital Expenditures. Capital expenditures were $569 in 2015,
$521 in 2014 and $436 in 2013. We expect capital expenditures of
approximately 2 percent of revenue in 2016.

Marketable Securities. In 2015, we received $500 of proceeds
from maturing held-to-maturity securities purchased in 2014. Other
net purchases, sales and maturities of marketable securities in all three
years were not material.

Other, Net. Investing activities also include proceeds from the sale
In 2015, we
of assets and cash paid for business acquisitions.
completed the sale of our axle business in the Combat Systems group
and a commercial cyber security business in our Information Systems
and Technology group. In 2014, we completed an acquisition in our
Information Systems and Technology group.

FINANCING ACTIVITIES

We used $4.3 billion in 2015, $3.6 billion in 2014 and $725 in 2013
for financing activities. Our financing activities included repurchases of
common stock, payment of dividends and debt repayments. Net cash
from financing activities also included proceeds received from stock
option exercises.

Share Repurchases. We repurchased 22.8 million of our
outstanding shares in 2015 for $3.2 billion, 29 million shares in 2014
for $3.4 billion and 9.4 million shares in 2013 for $740. As a result,
we have reduced our shares outstanding by approximately 12 percent
since the end of 2012. On December 31, 2015, 9.6 million shares
remained authorized by our board of directors for
repurchase,
approximately 3 percent of our total shares outstanding.

General Dynamics Annual Report 2015

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 ROIC to measure our performance in these areas. While we believe these metrics provide useful information, they
are not defined operating measures under U.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use.
Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the
method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures.

Free Cash Flow. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free
cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as
repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations
to assess the quality of our earnings and as a performance measure in evaluating management. The following table reconciles the free cash flow from
operations with net cash provided by operating activities, as classified on the Consolidated Statements of Cash Flows:

Year Ended December 31

Net cash provided by operating activities

Capital expenditures

Free cash flow from operations

Cash flow as a percentage of earnings from continuing operations:

Net cash provided by operating activities

Free cash flow from operations

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

2015

2014

2013

2012

2011

$ 2,499

$ 3,728

$ 3,111

$ 2,606

$ 3,150

(569)

(521)

(436)

(436)

(445)

$ 1,930

$ 3,207

$ 2,675

$ 2,170

$ 2,705

84%

65%

139%

120%

125%

108%

NM*

NM*

126%

108%

As discussed previously, the decrease in free cash flow from operations in 2015 is due primarily to the utilization of customer deposits and growth

in operating working capital in our Aerospace group.

Return on Invested Capital. We believe ROIC is a useful measure for investors because it reflects our ability to generate returns from the capital
we have deployed in our operations. We use ROIC to evaluate investment decisions and as a performance measure in evaluating management. We
define ROIC as net operating profit after taxes divided by average invested capital. Net operating profit after taxes is defined as earnings from
is defined as the sum of the average debt and
continuing operations plus after-tax interest and amortization expense. Average invested capital
impairments and non-economic accounting
shareholders’ equity for the year. ROIC excludes accumulated other comprehensive loss, goodwill
changes as they are not reflective of our operating performance.

ROIC is calculated as follows:

Year Ended December 31

Earnings from continuing operations

After-tax interest expense

After-tax amortization expense

Net operating profit after taxes

Average invested capital

Return on invested capital

2015

2014

2013

2012*

2011

$ 2,965

$ 2,673

$ 2,486

$ 1,414

$ 2,500

64

75

67

79

67

93

109

139

101

141

$ 3,104

$ 17,858

$ 2,819

$ 18,673

$ 2,646

$ 18,741

$ 1,662

$ 19,887

$ 2,742

$ 18,601

17.4%

15.1%

14.1%

8.4%

14.7%

* 2012 loss from continuing operations of ($381) has been adjusted for a $2 billion goodwill impairment and associated $199 tax benefit. 2012 shareholders’ equity, a component of average invested

capital, has been similarly adjusted.

30

General Dynamics Annual Report 2015

ADDITIONAL FINANCIAL INFORMATION

OFF-BALANCE SHEET ARRANGEMENTS

On December 31, 2015, 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, 2015:

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

$ 4,200

$

581

$ 1,033

$

122

$ 2,464

32

1,037

28,902

18,240

2

220

12,401

3,477

4

315

9,152

2,268

4

180

4,443

1,745

22

322

2,906

10,750

$ 52,411

$ 16,681

$ 12,772

$ 6,494

$ 16,464

(a) Includes scheduled interest payments. See Note J to the Consolidated Financial Statements in Item 8 for a 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 $21.1 billion of

purchase obligations for products and services to be delivered under firm government contracts under which we expect 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

$ 1,002

66

$ 1,068

$ 699

66

$ 765

$ 140

–

$ 140

$ 134

–

$ 134

More Than
5 Years

$ 29

–

$ 29

* See Note N to the Consolidated Financial Statements in Item 8 for a 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 revenue and expenses during the
period. On an ongoing basis, we evaluate our estimates, including
most pervasively those related to various assumptions and projections
for our long-term contracts and programs. Other significant estimates
include those related to goodwill and other intangible assets, income
benefits, workers’
taxes,

post-retirement

pension

other

and

and

and

litigation

obligations

other
compensation, warranty
contingencies. We employ judgment in making our estimates but they
are based on historical experience, currently available information and
various other assumptions that we believe to be reasonable under the
these estimates form the basis for
circumstances. The results of
making judgments about the carrying values of assets and liabilities
that are not readily available from other sources. Actual results may
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.

In our opinion, the following policies are critical and require the use

of significant judgment in their application:

Revenue Recognition. We account for revenue and earnings using
the percentage-of-completion method. Under this method, contract
costs and revenue are recognized as the work progresses, either as

General Dynamics Annual Report 2015

31

the 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 expected 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.

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 (input measure). For our
the manufacture of business-jet aircraft, we record
contracts for
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 revenue and costs.
Contract estimates are based on various assumptions to project the
future events that often span several years. These
outcome of
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
revenue 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
least annually and often
update our contract-related estimates at
quarterly, as well as when required by specific events and
circumstances.

We recognize changes in the estimated profit on contracts under the
reallocation method. Under the reallocation method, the impact of a

32

General Dynamics Annual Report 2015

revision in estimate 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 impact of revisions in contract estimates on our operating
earnings (and on a diluted per-share basis) totaled favorable changes of
$222 ($0.44) in 2015, $184 ($0.35) in 2014 and $351 ($0.65) in 2013.
No revisions on any one contract were material to our Consolidated
Financial Statements in 2015, 2014 or 2013.

Consistent with defense industry practice, we classify assets and
liabilities related to long-term contracts as current, even though some of
these amounts may not be realized within one year. All contracts are
reported on the Consolidated Balance Sheets in a net asset (contracts in
process) or liability (customer advances and deposits) position on a
contract-by-contract basis at the end of each reporting period. Our U.S.
government customer generally asserts title to, or a security interest in,
inventoried costs related to such contracts as a result of advances and
progress payments. We reflect these advances and progress payments
as an offset to the related inventoried costs.

In the second quarter of 2014, the Financial Accounting Standards
issued Accounting Standards Update (ASU) 2014-09,
Board (FASB)
Revenue from Contracts with Customers. ASU 2014-09 prescribes a
single, common revenue standard that replaces most existing revenue
recognition guidance in GAAP. The standard outlines a five-step model,
whereby revenue is recognized as performance obligations within a
contract are satisfied. The standard also requires new, expanded
disclosures regarding revenue recognition. Several updates have been
proposed since the issuance of ASU 2014-09. These updates are
intended to allow for a more consistent interpretation and application of
the principles outlined in the standard. Once these updates are issued by
the FASB in 2016, the standard will be final.

ASU 2014-09 is effective in the first quarter of 2018 for public
companies. However, entities can elect to adopt one year earlier in the
first quarter of 2017. The standard permits the use of either the
retrospective or cumulative effect transition method.

We are utilizing a bottom-up approach to analyze the standard’s
impact on our contract portfolio,
taking a fresh look at historical
accounting policies and practices and identifying potential differences
from applying the requirements of the new standard to our contracts.

our Consolidated

While this assessment continues, we have not yet selected a transition
date or method nor have we yet determined the effect of the standard
on
this
determination will near completion in the second half of 2016. Because
the new standard will
impact our business processes, systems and
controls, we have developed a comprehensive change management
project plan to guide the implementation.

Financial Statements. We

expect

The required adoption of

the ASU will preclude our use of

the
reallocation method of recognizing revisions in estimated profit on
contracts discussed above. As changes in estimated profit will be
recognized in the period they are identified (cumulative catch-up
method), rather than prospectively over the remaining contract term,
we expect the impact of revisions of contract estimates may be larger
and potentially more variable from period to period. Anticipated losses
on contracts will continue to be recognized in the quarter they are
identified.

Goodwill and Intangible Assets. 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
test on an annual basis and when circumstances
an impairment
indicate that an impairment
than not. Such
is more likely
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 based primarily on the discounted
the underlying operations. This requires
projected cash flows of
numerous assumptions, including the timing of work embedded in our
backlog, our performance and profitability under our contracts, our
success in securing future business,
the appropriate risk-adjusted
interest rate used to discount the projected cash flows, and terminal
value growth and earnings rates applied to the final year of projected
cash flows. Due to the variables inherent in our estimates of fair value,
differences in assumptions may have a material effect on the result of
our
impairment analysis. To assess the reasonableness of our
discounted projected cash flows, we compare the sum of our reporting
units’ fair value to our market capitalization and calculate an implied
control premium (the excess of the sum of the reporting units’ fair
values over the market capitalization). Additionally, we evaluate the
reasonableness of each reporting unit’s fair value by comparing the fair
value to comparable peer companies and recent comparable market
transactions.

We completed the required annual goodwill

impairment test as of
December 31, 2015. The first step of the goodwill
impairment test
compares the fair values of our reporting units to their carrying values.

reporting units are consistent with our business groups. The
Our
estimated fair values for each of our reporting units were in excess of
their respective carrying values as of December 31, 2015.

We review intangible assets subject to amortization for impairment
whenever events or changes in circumstances indicate that the carrying
value 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
projected undiscounted cash flows. Impairment losses, where identified,
are determined as the excess of the carrying value over the estimated
fair value of the long-lived asset.

Commitments and Contingencies. We are subject to litigation and
other legal proceedings arising either from the ordinary course of our
business or under provisions relating to the protection of
the
environment. Estimating liabilities and costs associated with these
judgment. We record a charge against
matters requires the use of
earnings when a liability associated with claims or pending or threatened
litigation is probable and when our exposure is reasonably estimable.
The ultimate resolution of our exposure related to these matters may
change as further facts and circumstances become known.

and

pension

benefits,

post-retirement

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
including
existing backlog and probable follow-on contracts. We regularly assess
the probability of recovery of these costs. 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
profitability of our remaining contracts could be adversely affected.

these costs through ongoing business,

the continued deferral of

these costs,

to recover

Retirement Plans. Our defined-benefit pension and other post-
retirement benefit costs and obligations depend on several assumptions
and estimates. The key assumptions include interest rates used to
discount estimated future liabilities and projected long-term rates of
return on plan assets. 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. We base the
discount rate on a current yield curve developed for a portfolio of high-
quality fixed-income investments with maturities consistent with the
projected benefit payout period.

Beginning in 2016, we refined the method used to determine the
service and interest cost components of our net periodic benefit cost.

General Dynamics Annual Report 2015

33

Income

(cid:129) ASU 2015-17,

(cid:129) ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory. ASU 2015-11 changes the measurement principle for
certain inventory methods from the lower of cost or market to the
lower of cost and net realizable value (NRV). The ASU also eliminates
the requirement to consider replacement cost or NRV less a normal
profit margin when measuring inventory. We intend to adopt
the
standard prospectively on the effective date of January 1, 2017. We
do not expect the adoption of ASU 2015-11 to have a material effect
on our results of operations, financial condition or cash flows.
Taxes

(Topic 740): Balance Sheet
Classification of Deferred Taxes. ASU 2015-17 requires that deferred
tax assets and liabilities be classified as noncurrent on the
Consolidated Balance Sheets. ASU 2015-17 is effective on January 1,
2017, with early adoption permitted, and may be applied either
prospectively or retrospectively. We have not yet selected a transition
date or method nor have we determined the effect of the ASU on our
Consolidated Balance Sheets. See Note E to the Consolidated
Financial Statements in Item 8 for further discussion of our net
deferred tax assets.
(cid:129) ASU 2016-01, Financial

Instruments – Overall

(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities. ASU 2016-01 addresses certain aspects of recognition,
measurement, presentation and disclosure of financial
instruments.
Specific to our business, ASU 2016-01 requires equity investments to
be measured at fair value with changes in fair value recognized in net
income. The ASU eliminates the available-for-sale classification for
equity investments that recognized changes in the fair value as a
component of other comprehensive income. We intend to adopt the
standard on the effective date with a cumulative-effect adjustment to
the Consolidated Balance Sheets as of January 1, 2018. We do not
expect the adoption of ASU 2016-01 to have a material effect on our
results of operations, financial condition or cash flows.

Other ASUs issued by the FASB but not yet effective are not expected

to have a material effect on our Consolidated Financial Statements.

Previously, the cost was determined using a single weighted-average
discount rate derived from the yield curve. Under the refined method,
known as the spot rate approach, we will use individual spot rates
along the yield curve that correspond with the timing of each benefit
payment. We believe this
change provides a more precise
measurement of service and interest costs by improving the correlation
between projected cash outflows and corresponding spot rates on the
yield curve. Compared to the previous method, the spot rate approach
will decrease the service and interest components of our benefit costs
slightly in 2016. There is no impact on the total benefit obligation. We
will account for this change prospectively as a change in accounting
estimate.

These retirement plan estimates are based on our best judgment,
including consideration of current and future market conditions. In the
event any of the assumptions change, pension and post-retirement
benefit cost could increase or decrease. For
further discussion,
including the impact of hypothetical changes in the discount rate and
expected long-term rate of return on plan assets, see Note P to the
Consolidated Financial Statements in Item 8.

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 revenue 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.

New Accounting Standards. There are several new accounting
standards that have been issued by the FASB, but are not yet effective.

(cid:129) ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03
requires debt issuance costs to be presented on the balance sheet
as a deduction from the carrying amount of the related debt liability,
consistent with the presentation of debt discounts. Previously, debt
issuance costs were presented as a deferred asset, separate from
the related debt
the
recognition and measurement guidance for debt issuance costs.
While ASU 2015-03 was not effective until January 1, 2016, we
elected to early adopt the standard. See Notes A and J to the
Consolidated Financial Statements in Item 8 for further discussion of
ASU 2015-03.

liability. ASU 2015-03 does not affect

34

General Dynamics Annual Report 2015

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 quantifies the market risk
exposure arising from hypothetical changes in foreign currency
exchange rates and interest rates.

Foreign Currency. We had notional

forward foreign exchange
contracts outstanding of $7.2 billion on December 31, 2015, and $9.1
billion on December 31, 2014. A 10 percent unfavorable exchange
rate movement in our portfolio of foreign currency forward contracts
would have resulted in the following hypothetical, incremental pretax
losses:

Recognized

Unrecognized

2015

2014

$

(8)

(652)

$ (25)

(823)

This exchange-rate sensitivity relates primarily to changes in the
U.S. dollar/Canadian dollar, euro/Canadian dollar and euro/British
pound exchange rates. These losses would be offset by corresponding
the underlying transactions being
gains in the remeasurement of
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, 2015, we had $3.4 billion par
value of fixed-rate debt and no commercial paper outstanding. Our
fixed-rate debt obligations are not putable, and we do not trade these
securities in the market. A 10 percent unfavorable interest
rate
movement would not have a material impact on the fair value of our
debt obligations.

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, 2015, we
held $2.8 billion in cash and equivalents, but held no marketable
securities.

General Dynamics Annual Report 2015

35

Year Ended December 31
2014

2013

2015

$20,280

11,189

$19,564

11,288

$19,100

11,830

31,469

30,852

30,930

15,871

9,468

1,952

27,291

4,178

(83)

7

4,102

1,137

2,965

–

15,335

9,644

1,984

26,963

3,889

(86)

(1)

3,802

1,129

2,673

(140)

15,065

10,137

2,039

27,241

3,689

(86)

8

3,611

1,125

2,486

(129)

$ 2,965

$ 2,533

$ 2,357

$

9.23

$

7.97

$

7.09

–

(0.41)

(0.37)

$

9.23

$

7.56

$

6.72

$

9.08

$

7.83

$

7.03

–

(0.41)

(0.36)

$

9.08

$

7.42

$

6.67

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars in millions, except per-share amounts)

Revenue:

Products

Services

Operating costs and expenses:

Products

Services

General and administrative (G&A)

Operating earnings

Interest, net

Other, net

Earnings from continuing operations before income tax

Provision for income tax, net

Earnings from continuing operations

Discontinued operations, net of tax benefit of $7 in 2015, $16 in 2014 and $73 in 2013

Net earnings

Earnings per share

Basic:

Continuing operations

Discontinued operations

Net earnings

Diluted:

Continuing operations

Discontinued operations

Net earnings

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

36

General Dynamics Annual Report 2015

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in millions)

Net earnings

(Losses) gains on cash flow hedges

Unrealized (losses) gains on securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

Other comprehensive (loss) income, pretax

Provision (benefit) for income tax, net

Other comprehensive (loss) income, net of tax

Comprehensive income

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

Year Ended December 31
2014

2015

2013

$ 2,965

$ 2,533

$2,357

(394)

(2)

(374)

500

(270)

84

(354)

(279)

10

(436)

(1,745)

(2,450)

(703)

(1,747)

3

12

(118)

2,595

2,492

902

1,590

$ 2,611

$

786

$3,947

General Dynamics Annual Report 2015

37

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:

Short-term debt and current portion of long-term debt

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.

38

General Dynamics Annual Report 2015

December 31

2015

2014

$ 2,785

$ 4,388

3,446

4,357

3,366

617

4,050

4,591

3,221

1,157

14,571

17,407

3,466

763

11,443

1,754

17,426

3,329

912

11,731

1,958

17,930

$ 31,997

$ 35,337

$

501

$

501

1,964

5,674

4,306

2,057

7,335

3,858

12,445

13,751

2,898

5,916

3,392

6,365

8,814

9,757

482

2,730

23,204

(12,392)

(3,286)

10,738

482

2,548

21,127

(9,396)

(2,932)

11,829

$ 31,997

$ 35,337

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

Cash flows from operating activities – continuing operations:

Net earnings

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation of property, plant and equipment

Amortization of intangible assets

Equity-based compensation expense

Excess tax benefit from equity-based compensation

Deferred income tax 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

Maturities of held-to-maturity securities

Purchases of held-to-maturity securities

Proceeds from sales of assets

Purchases of available-for-sale securities

Sales of available-for-sale securities

Maturities of available-for-sale securities

Other, net

Net cash provided (used) by investing activities

Cash flows from financing activities:

Purchases of common stock

Dividends paid

Repayment of fixed-rate notes

Proceeds from stock option exercises

Other, net

Net cash used by financing activities

Net cash (used) provided by discontinued operations

Net (decrease) 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.

Year Ended December 31
2014

2015

2013

$ 2,965

$ 2,533

$2,357

366

116

110

(77)

167

–

604

231

(156)

(89)

(1,756)

(83)

101

375

121

128

(83)

136

140

330

281

(303)

(161)

691

(246)

(214)

382

143

120

(23)

115

129

(223)

177

(200)

(204)

330

(118)

126

2,499

3,728

3,111

(521)

–

(500)

102

(136)

135

4

(186)

(436)

–

–

104

(135)

99

14

(9)

(1,102)

(363)

(569)

500

–

291

(123)

122

6

(27)

200

(3,233)

(873)

(500)

268

79

(3,382)

(822)

–

547

82

(4,259)

(3,575)

(43)

(1,603)

4,388

36

(913)

5,301

(740)

(591)

–

583

23

(725)

(18)

2,005

3,296

$ 2,785

$ 4,388

$5,301

General Dynamics Annual Report 2015

39

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Dollars in millions)

December 31, 2012

Net earnings

Cash dividends declared

Equity-based awards

Shares purchased

Other comprehensive income

December 31, 2013

Net earnings

Cash dividends declared

Equity-based awards

Shares purchased

Other comprehensive loss

December 31, 2014

Net earnings

Cash dividends declared

Equity-based awards

Shares purchased

Other comprehensive loss

December 31, 2015

Common Stock

Par

Surplus

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
Loss

Total
Shareholders’
Equity

$482

$ 1,988

$ 17,860

$ (6,165)

$ (2,775)

$ 11,390

–

–

–

–

–

–

–

238

–

–

2,357

(789)

–

–

–

–

–

455

(740)

–

482

2,226

19,428

(6,450)

–

–

–

–

–

–

–

322

–

–

2,533

(834)

–

–

–

–

–

436

(3,382)

–

482

2,548

21,127

(9,396)

–

–

–

–

–

–

–

182

–

–

2,965

(888)

–

–

–

–

–

237

(3,233)

–

–

–

–

–

1,590

(1,185)

–

–

–

–

(1,747)

(2,932)

–

–

–

–

(354)

2,357

(789)

693

(740)

1,590

14,501

2,533

(834)

758

(3,382)

(1,747)

11,829

2,965

(888)

419

(3,233)

(354)

$482

$ 2,730

$ 23,204

$(12,392)

$ (3,286)

$ 10,738

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

40

General Dynamics Annual Report 2015

(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;
provides C4ISR
Information Systems
(command,
intelligence,
control,
surveillance and reconnaissance) solutions and information technology
(IT) services; and Marine Systems, which designs, constructs and
repairs surface ships and submarines. 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.

and
communication,

Technology, which

computing,

Basis of Consolidation and Classification. The Consolidated
Financial Statements include the accounts of General Dynamics
Corporation and our wholly owned and majority-owned subsidiaries.
inter-company balances and transactions in the
We eliminate all
Consolidated Financial Statements. Some prior-year amounts have
been reclassified among financial statement accounts or disclosures to
conform to the current-year presentation.

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 revenue and
expenses during the reporting period. We base our estimates on
historical experience, currently available information and various other
assumptions that we believe are reasonable under the circumstances.
Actual results could differ from these estimates.

Revenue Recognition. We account for revenue and earnings using
the percentage-of-completion method. Under this method, contract
costs and revenue 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 expected 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.

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-related 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 recognized prospectively over the remaining contract term.
The net
impact of revisions in contract estimates on our operating
earnings (and on a diluted per-share basis) totaled favorable changes of
$222 ($0.44) in 2015, $184 ($0.35) in 2014 and $351 ($0.65) in 2013.
No revisions on any one contract were material to our Consolidated
Financial Statements in 2015, 2014 or 2013.

Consistent with defense industry practice, we classify assets and
liabilities related to long-term contracts as current, even though some of
these amounts may not be realized within one year. All contracts are
reported on the Consolidated Balance Sheets in a net asset (contracts in
process) or liability (customer advances and deposits) position on a
contract-by-contract basis at the end of each reporting period. Our U.S.
government customer generally asserts title to, or a security interest in,
inventoried costs related to such contracts as a result of advances and
progress payments. We reflect these advances and progress payments
as an offset to the related inventoried costs as shown in Note G.

In the second quarter of 2014, the Financial Accounting Standards
Board (FASB)
issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers. ASU 2014-09 prescribes a
single, common revenue standard that replaces most existing revenue
recognition guidance in GAAP. The standard outlines a five-step model,
whereby revenue is recognized as performance obligations within a
contract are satisfied. The standard also requires new, expanded
disclosures regarding revenue recognition. Several updates have been
proposed since the issuance of ASU 2014-09. These updates are
intended to allow for a more consistent interpretation and application of
the principles outlined in the standard. Once these updates are issued by
the FASB in 2016, the standard will be final.

ASU 2014-09 is effective in the first quarter of 2018 for public
companies. However, entities can elect to adopt one year earlier in the
first quarter of 2017. The standard permits the use of either the
retrospective or cumulative effect transition method.

We are utilizing a bottom-up approach to analyze the standard’s
impact on our contract portfolio,
taking a fresh look at historical
accounting policies and practices and identifying potential differences
from applying the requirements of the new standard to our contracts.
While this assessment continues, we have not yet selected a transition
date or method nor have we yet determined the effect of the standard on
our Consolidated Financial Statements. We expect this determination will
near completion in the second half of 2016. Because the new standard

General Dynamics Annual Report 2015

41

impact our business processes, systems and controls, we have
will
developed a comprehensive change management project plan to guide
the implementation.

on milestones and are recognized as received. Our policy is to defer
payments in excess of the costs we have incurred.

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

The required adoption of

the ASU will preclude our use of

the
reallocation method of recognizing revisions in estimated profit on
contracts discussed above. As changes in estimated profit will be
recognized in the period they are identified (cumulative catch-up
method), rather than prospectively over the remaining contract term,
we expect the impact of revisions of contract estimates may be larger
and potentially more variable from period to period. Anticipated losses
on contracts will continue to be recognized in the quarter they are
identified.

Discontinued Operations. In 2014, we entered into an agreement
to sell our axle business in the Combat Systems group and recognized
a $146 loss, net of tax (the sale was completed in January 2015). The
financial statements have been restated to reflect
the results of
operations of this business in discontinued operations with the revenue
of the business eliminated, and the net loss reported separately below
earnings from continuing operations.

In 2013, we recognized a $129 loss, net of tax, from the settlement
of our litigation with the U.S. Navy related to the terminated A-12
in the company’s discontinued tactical military aircraft
contract
business. Under the terms of
the Navy
received a $198 credit that will be utilized over several years as we
render design and construction services on the DDG-1000 program.
Net cash from discontinued operations on the Consolidated Statements
of Cash Flows primarily represents related work on the DDG-1000
program.

the settlement agreement,

(R&D) expenses,

Research and Development Expenses. Company-sponsored
research and development
including product
development costs, were $395 in 2015, $358 in 2014 and $310 in
2013. R&D expenses are included in operating costs and expenses in
the Consolidated Statements of Earnings in the period in which they
are incurred. Customer-sponsored R&D expenses are charged directly
to the related contracts.

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 reimbursements of costs we incur in the
development of new aircraft models and technologies, and we retain
substantial rights in the products developed under these arrangements.
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 agreements regardless of the outcome of
the development efforts. Under the typical terms of an agreement,
payments received from suppliers for their share of the costs are based

42

General Dynamics Annual Report 2015

Year Ended December 31

Interest expense

Interest income

Interest expense, net

2015

2014

2013

$ 98

(15)

$ 83

$ 103

$ 103

(17)

(17)

$ 86

$ 86

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. Our investments in other securities (see Note
D) are included in other current and noncurrent assets on the
Consolidated Balance Sheets. We report our held-to-maturity securities
fair
at amortized cost. We report our available-for-sale securities at
value. Changes in the fair value of available-for-sale securities are
recognized as a component of other comprehensive income (loss) in the
Consolidated Statements of Comprehensive Income. We had no trading
securities on December 31, 2015 or 2014.

Cash flows from operating activities in 2013 and 2014 included
customer deposits related to commercial ship orders in the Marine
for a Middle Eastern customer
Systems group and a large contract
awarded in our Combat Systems group, respectively. In 2015, these
deposits were utilized to fund supplier commitments on the program,
which negatively affected operating cash flows.

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

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
impairment is a two-
intangible assets acquired. The test for goodwill
for each
step process to first
impairment
identify potential goodwill
reporting unit and then,
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.

if necessary, measure the amount of

New Accounting Standards. There are several new accounting

standards that have been issued by the FASB, but are not yet effective.

(cid:129) ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03

requires debt issuance costs to be presented on the balance sheet
as a deduction from the carrying amount of the related debt liability,
consistent with the presentation of debt discounts. Previously, debt
issuance costs were presented as a deferred asset, separate from
the related debt
the
recognition and measurement guidance for debt issuance costs.
While ASU 2015-03 was not effective until January 1, 2016, we
further
elected to early adopt
discussion of the impact of ASU 2015-03.

liability. ASU 2015-03 does not affect

the standard. See Note J for

(cid:129) ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory. ASU 2015-11 changes the measurement principle for
certain inventory methods from the lower of cost or market to the lower
of cost and net realizable value (NRV). The ASU also eliminates the
requirement to consider replacement cost or NRV less a normal profit
margin when measuring inventory. We intend to adopt the standard
prospectively after the effective date of January 1, 2017. We do not
expect the adoption of ASU 2015-11 to have a material effect on our
results of operations, financial condition or cash flows.
Income Taxes

(Topic 740): Balance Sheet
Classification of Deferred Taxes. ASU 2015-17 requires that
deferred tax assets and liabilities be classified as noncurrent on the
Consolidated Balance Sheets. ASU 2015-17 is effective on
January 1, 2017, with early adoption permitted, and may be applied
either prospectively or retrospectively. We have not yet selected a
transition date or method nor have we determined the effect of the
ASU on our Consolidated Balance Sheets. See Note E for further
discussion of our net deferred tax assets.

(cid:129) ASU 2015-17,

(cid:129) ASU 2016-01, Financial

Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial
Liabilities. ASU 2016-01 addresses certain aspects of recognition,
measurement, presentation and disclosure of financial instruments.
Specific to our business, ASU 2016-01 requires equity investments

to be measured at fair value with changes in fair value recognized in
net income. The ASU eliminates the available-for-sale classification
for equity investments that recognized changes in the fair value as a
component of other comprehensive income. We intend to adopt the
standard on the effective date with a cumulative-effect adjustment
to the Consolidated Balance Sheets as of January 1, 2018. We do
not expect the adoption of ASU 2016-01 to have a material effect
on our results of operations, financial condition or cash flows.

Other ASUs issued by the FASB but not yet effective are not expected

to have a material effect on our Consolidated Financial Statements.

Subsequent Events. We have evaluated material events and
transactions that have occurred after December 31, 2015, and
concluded that none have occurred that require an adjustment to or
disclosure in the Consolidated Financial Statements.

B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND
INTANGIBLE ASSETS

Acquisitions and Divestitures
We did not acquire any businesses in 2015. In 2014, our Information
Systems and Technology group acquired a provider of IT support to
U.S. special operations forces. The operating results of this acquisition
have been included with our reported results since the closing date.
this acquisition has been allocated to the
The purchase price of
estimated fair value of net tangible and intangible assets acquired, with
any excess purchase price recorded as goodwill. We did not acquire
any businesses in 2013.

In 2015, we completed the sale of our axle business in the Combat
Systems group and a commercial cyber security business in our
Information Systems and Technology group.

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

December 31, 2013 (a)

Acquisitions (b)

Other (c)

December 31, 2014

Acquisitions/divestitures (b)

Other (c)

December 31, 2015

Aerospace

Combat
Systems

Information
Systems
and
Technology

Marine
Systems

Total
Goodwill

$ 2,741

$ 2,849

$ 6,053

$ 289

$ 11,932

–

(186)

–

(99)

127

(43)

–

–

127

(328)

2,555

2,750

6,137

289

11,731

–

(13)

–

(159)

(76)

(40)

–

–

(76)

(212)

$ 2,542

$ 2,591

$ 6,021

$ 289

$ 11,443

(a) Goodwill on December 31, 2013, in the Information Systems and Technology reporting unit is net of a $2 billion of accumulated impairment losses.
(b) Includes adjustments during the purchase price allocation period and an allocation of goodwill associated with the sale of a commercial cyber security business discussed above.
(c) Consists primarily of adjustments for foreign currency translation.

General Dynamics Annual Report 2015

43

We completed the required annual goodwill impairment test as of December 31, 2015. The first step of the goodwill impairment test compares the
fair values of our reporting units to their carrying values. We estimate the fair values of our reporting units based primarily on the discounted projected
cash flows of the underlying operations. The estimated fair values for each of our reporting units were in excess of their respective carrying values as
of December 31, 2015.

Intangible Assets
Intangible assets consisted of the following:

Contract and program intangible assets (b)

Trade names and trademarks

Technology and software

Other intangible assets

Total intangible assets

Gross
Carrying
Amount (a)

Accumulated
Amortization
December 31, 2015

$ 1,626

$ (1,214)

455

119

154

(127)

(96)

(154)

Net
Carrying
Amount

Gross
Carrying
Amount (a)

Accumulated
Amortization
December 31, 2014

$ 412

328

23

—

$ 1,652

$ (1,123)

462

130

154

(113)

(97)

(153)

Net
Carrying
Amount

$ 529

349

33

1

$ 2,354

$ (1,591)

$ 763

$ 2,398

$ (1,486)

$ 912

(a) Change in gross carrying amounts consists primarily of adjustments for foreign currency translation.
(b) Consists of acquired backlog and probable follow-on work and associated customer relationships.

We did not recognize any impairments of our intangible assets in

C. EARNINGS PER SHARE

2015, 2014 or 2013.

The amortization lives (in years) of our

intangible assets on

December 31, 2015, were as follows:

Contract and program intangible assets

Trade names and trademarks

Technology and software

Range of
Amortization Life

7-30

30

7-15

Amortization expense was $116 in 2015, $121 in 2014 and $143
in 2013. We expect to record annual amortization expense over the
next five years as follows:

2016

2017

2018

2019

2020

$ 90

75

65

52

48

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. Basic weighted average shares
outstanding have decreased throughout 2015 and 2014 due to share
repurchases. See Note L for additional details of our share
repurchases. Diluted EPS incorporates the additional shares issuable
upon the assumed exercise of stock options and the release of
restricted stock and restricted stock units (RSUs).

Basic and diluted weighted average shares outstanding were as

follows (in thousands):

Year Ended December 31

2015

2014

2013

Basic weighted average shares

outstanding

321,313

335,192

350,714

Dilutive effect of stock options
and restricted stock/RSUs*

Diluted weighted average shares

5,339

6,139

2,785

outstanding

326,652

341,331

353,499

*

Excludes outstanding options to purchase shares of common stock because these options
had exercise prices in excess of the average market price of our common stock during the
year and therefore the effect of including these options would be antidilutive. These options
totaled 1,706 in 2015, 3,683 in 2014 and 8,246 in 2013.

44

General Dynamics Annual Report 2015

D. FAIR VALUE

E. INCOME TAXES

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;

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:

Year Ended December 31

2015

2014

2013

(cid:129) Level 2 – inputs, other

than quoted prices, observable by a

Current:

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, 2015 or 2014, except for the
assets of our axle business that were classified as held for sale on
December 31, 2014, and were measured at fair value using Level 3
inputs. See Note A for further discussion.

Our financial

instruments include cash and equivalents, marketable
securities and other investments; accounts receivable and accounts
payable; short- and long-term debt; and derivative 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 present the fair values
of our other financial assets and liabilities on December 31, 2015 and
2014, 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, 2015

Available-for-sale securities
Derivatives
Long-term debt, including

186 $
(673)

186
(673)

$ 124
–

$

62
(673)

current portion

(3,425)

(3,381)

–

(3,381)

Held-to-maturity marketable

securities (c)

Available-for-sale securities
Derivatives
Long-term debt, including

December 31, 2014

$

500 $
188
(276)

500
188
(276)

$ 10
123
–

$

490
65
(276)

current portion

(3,925)

(3,911)

–

(3,911)

(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, 2015 or 2014.
(c) Included in other current assets on the December 31, 2014, Consolidated Balance Sheet.

U.S. federal

State

International

Total current

Deferred:

U.S. federal

State

International

Total deferred

$

841

$

856

$

850

31

98

970

116

5

46

167

31

106

993

110

(3)

29

136

28

132

1,010

119

1

(5)

115

Provision for income taxes, net

$ 1,137

$ 1,129

$ 1,125

Net income tax payments

$

871

$ 1,019

$

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 and, therefore, not included in the provision
above.

The reconciliation from the statutory federal

income tax rate to our

effective income tax rate follows:

Year Ended December 31

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

federal benefits

Impact of international operations
Domestic production deduction
Domestic tax credits
Contract close-outs
Other, net

2015

2014

2013

35.0%

35.0%

35.0%

0.6
(1.4)
(1.6)
(1.1)
(2.9)
(0.9)

0.5
(2.6)
(1.9)
(0.7)
–
(0.6)

0.7
–
(2.2)
(0.8)
–
(1.5)

Effective income tax rate

27.7%

29.7%

31.2%

The decrease in the effective tax rate in 2015 from 2014 was due
primarily to the favorable impact of contract close-outs, largely resulting
from interest from the completion of a long-term contract triggered by
the prior settlement of litigation. The decrease in the effective tax rate in
2014 from 2013 was due primarily to increased income from non-U.S.

General Dynamics Annual Report 2015

45

federal and state income taxes on earnings derived from eligible
programs as long as the proceeds are deposited in the fund and
withdrawals are used for qualified activities. We had U.S. government
accounts receivable pledged (and thereby deposited) to the CCF of $42
on December 31, 2015, and $100 on December 31, 2014.

On December 31, 2015, we had net operating loss carryforwards of
$972 that begin to expire in 2018, a capital loss carryforward of $229
that expires in 2020 and tax credit carryforwards of $151 that begin to
expire in 2021.

Earnings from continuing operations before income taxes included
non-U.S. income of $573 in 2015, $507 in 2014 and $361 in 2013. We
intend to reinvest indefinitely the undistributed earnings of some of our
non-U.S. subsidiaries. On December 31, 2015, we had approximately $2
billion of undistributed earnings from these non-U.S. subsidiaries. In
general, should these earnings be distributed, a portion would be treated
as dividends under U.S.
federal
corporate income tax at the statutory rate of 35 percent, but would
generate offsetting foreign tax credits.

tax law and thus subject

to U.S.

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.

income tax returns through 2014. We do not expect

We participate in the Internal Revenue Service (IRS) Compliance
Assurance Process (CAP), a real-time audit of our consolidated federal
corporate income tax return. The IRS has examined our consolidated
federal
the
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.
Based on all known facts and circumstances and current tax law, we
believe the total amount of any unrecognized tax benefits on
December 31, 2015, is not material to our results of operations, financial
condition or cash flows, and if recognized, would not have a material
impact on our effective tax rate. In addition, there are no tax positions for
which it is reasonably possible that 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.

operations that is taxed at lower rates and utilization of foreign tax
credits.

Net Deferred Tax Assets. The tax effects of temporary differences
the

between reported earnings and taxable income consisted of
following:

December 31

Retirement benefits

Tax loss and credit carryforwards

Salaries and wages

Workers’ compensation

Other

Deferred assets

Valuation allowances

Net deferred assets

Intangible assets

Contract accounting methods

Property, plant and equipment

Capital Construction Fund qualified ships

Other

Deferred liabilities

Net deferred tax asset

2015

2014

$ 1,347

$ 1,403

522

275

248

406

2,798

(425)

701

301

257

363

3,025

(494)

$ 2,373

$ 2,531

$ (1,013)

$

(973)

(261)

(285)

(240)

(203)

(227)

(280)

(240)

(167)

$ (2,002)

$ (1,887)

$

371

$

644

Our net deferred tax asset was included on the Consolidated

Balance Sheets in other assets and liabilities as follows:

December 31

Current deferred tax asset

Current deferred tax liability

Noncurrent deferred tax asset

Noncurrent deferred tax liability

Net deferred tax asset

2015

2014

$

3

$

16

(829)

1,272

(75)

(729)

1,439

(82)

$

371

$

644

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 the valuation allowances recognized.

Our retirement benefits deferred tax amount includes a deferred tax
asset of $1.6 billion on December 31, 2015, and $1.8 billion on
December 31, 2014, 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.

One of our deferred tax liabilities results from our participation in the
Capital Construction Fund (CCF), a program established by the U.S.
government and administered by the Maritime Administration that
supports the acquisition, construction, reconstruction or operation of
U.S. flag merchant marine vessels. The program allows us to defer

46

General Dynamics Annual Report 2015

F. ACCOUNTS RECEIVABLE

Accounts receivable represent amounts billed and currently due from
customers. Payment is typically received from our customers either at
periodic intervals (e.g., biweekly or monthly) or upon achievement of
contract milestones. Accounts receivable consisted of the following:

December 31

Non-U.S. government

U.S. government

Commercial

Total accounts receivable

2015

2014

$ 2,144

$ 2,529

683

619

822

699

$ 3,446

$ 4,050

Receivables from non-U.S. government customers include amounts
related to long-term production programs for the Spanish Ministry of
Defence of $2 billion on December 31, 2015. 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
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, 2015, is an
advance payment of $109. With respect to our other receivables, we
expect to collect substantially all of the December 31, 2015, balance
during 2016.

G. CONTRACTS IN PROCESS

represent

in process

related to long-term contracts

recoverable costs and, where
Contracts
applicable, accrued profit
less
associated advances and progress payments. These amounts have
been inventoried until the customer is billed, generally in accordance
with the agreed-upon billing terms or upon shipment of products or
rendering of services. Contracts in process consisted of the following:

Contract costs primarily include labor, material, overhead and, when
appropriate, G&A expenses. The amount of G&A costs remaining in
contracts in process on December 31, 2015 and 2014, were $211 and
$176, respectively.

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.
Other contract costs represent amounts that are not currently
allocable to government contracts, such as a portion of our estimated
insurance-related
obligations,
workers’
assessments,
and
other
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.

other
post-retirement

compensation
pension

benefits

and

Excluding our other contract costs, we expect

to bill all but
approximately 15 percent of our year-end 2015 contracts-in-process
balance in the normal course of business during 2016. Of the amount
not expected to be billed in 2016, approximately $150 relates to a single
contract, the Canadian Maritime Helicopter Project (MHP). This MHP-
related balance declined by approximately $70 during 2015.

H. INVENTORIES

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
in the manufacturing process and is based primarily on the
aircraft
the units in a production lot. Raw
estimated average unit cost of
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.

December 31

2015

2014

Inventories consisted of the following:

Contract costs and estimated profits

$ 20,742

$ 18,691

Other contract costs

965

1,064

December 31

Advances and progress payments

21,707

(17,350)

19,755

(15,164)

Total contracts in process

$ 4,357

$ 4,591

Work in process

Raw materials

Finished goods

Pre-owned aircraft

Total inventories

2015

2014

$ 1,889

1,376

$ 1,828

1,290

28

73

28

75

$ 3,366

$ 3,221

General Dynamics Annual Report 2015

47

I. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment (PP&E) is carried at historical cost, net
of accumulated depreciation. The major classes of PP&E were as
follows:

December 31

2015

2014

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

Total PP&E
Accumulated depreciation

$ 4,394
2,666
328
288

7,676
(4,210)

$ 4,182
2,518
331
261

7,292
(3,963)

PP&E, net

$ 3,466

$ 3,329

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
equipment for our use that are not included above.

J. DEBT

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–principal
Less unamortized debt
issuance costs and
discounts

Total debt
Less current portion

Long-term debt

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

2015

2014

$

–
500
900
500
1,000
500
25

3,425

26

3,399
501

$

500
500
900
500
1,000
500
25

3,925

32

3,893
501

$ 2,898

$ 3,392

Interest payments associated with our debt were $90 in 2015 and

$94 in 2014 and 2013.

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

48

General Dynamics Annual Report 2015

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. In January 2015, we repaid $500 of fixed-rate notes on their
scheduled maturity date.

In 2015,

the FASB issued ASU 2015-03,

Interest–Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs. See Note A for further discussion of ASU 2015-03. We elected to
early adopt ASU 2015-03, and in accordance with the transition
requirements, have applied the new guidance retrospectively, resulting in
the reclassification of $18 of unamortized debt issuance costs from other
assets to long-term debt on December 31, 2014. The reclassified
amount was included in the $32 of unamortized debt issuance costs and
discounts on December 31, 2014, in the table above.

The aggregate amounts of scheduled principal maturities of our debt

for the next five years are as follows:

Year Ended December 31

2016
2017
2018
2019
2020
Thereafter

Total debt–principal

$

501
903
1
1
1
2,018

$ 3,425

$500 of fixed-rate notes mature in July 2016. As we approach the
maturity date of this debt, we will determine whether to repay these
notes with cash on hand or refinance the obligation.

On December 31, 2015, we had no commercial paper outstanding,
but we maintain the ability to access the commercial paper market in the
future. We have $2 billion in committed bank credit facilities for general
corporate purposes and working capital needs. These credit facilities
include a $1 billion multi-year facility expiring in July 2018 and a $1
billion multi-year facility expiring in November 2020. 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 bank credit facilities are guaranteed by
several of our 100-percent-owned subsidiaries. In addition, we have
approximately $115 in committed bank credit facilities to provide backup
liquidity to our European businesses. We also have an effective shelf
registration on file with the SEC that allows us to access the debt
markets.
Our

financing arrangements contain a number of customary
covenants and restrictions. We were in compliance with all material
covenants on December 31, 2015.

K. OTHER LIABILITIES

L. SHAREHOLDERS’ EQUITY

A summary of significant other liabilities by balance sheet caption
follows:

December 31

Deferred income taxes
Fair value of cash flow hedges
Salaries and wages

Workers’ compensation

Retirement benefits

Other (a)

Total other current liabilities

Retirement benefits
Customer deposits on commercial contracts

Deferred income taxes

Other (b)

Total other liabilities

2015

2014

$

829
780

648

369

304

$

729
292

718

420

309

1,376

1,390

$ 4,306

$ 3,858

$ 4,251
506

$ 4,596
617

75

82

1,084

1,070

$ 5,916

$ 6,365

(a) Consists primarily of dividends payable, taxes payable, environmental remediation reserves,
warranty reserves, deferred revenue and supplier contributions in the Aerospace group,
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 fair value of our cash flow hedge liabilities from
December 31, 2014, to December 31, 2015, largely corresponds to
the unrecognized losses on cash flow hedges deferred in AOCL. These
losses will be deferred in AOCL until the underlying transaction is
reflected in earnings, at which time we believe the losses will be offset
by corresponding gains in the remeasurement of
the underlying
transactions being hedged.

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, 2015, we had
481,880,634 shares of common stock issued and 312,987,277 shares
of common stock outstanding,
including unvested restricted stock of
1,391,275 shares. On December 31, 2014, we had 481,880,634 shares
of common stock issued and 332,164,097 shares of common stock
outstanding. No shares of our preferred stock were outstanding on either
date. The only changes in our shares outstanding during 2015 and 2014
resulted from shares repurchased in the open market and share activity
under our equity compensation plans (see Note O for further discussion).

of

board

directors

Share Repurchases. Our

authorizes
management’s repurchase of shares of common stock on the open
market from time to time. In 2015, the board of directors authorized
management
to repurchase an aggregate of 30 million shares.
Accordingly, we repurchased 22.8 million of our outstanding shares for
$3.2 billion in 2015. On December 31, 2015, 9.6 million shares
remained authorized by our board of directors for
repurchase,
approximately 3 percent of our
total shares outstanding. We
repurchased 29 million shares for a total of $3.4 billion in 2014 and
9.4 million shares for a total of $740 in 2013.

Dividends per Share. Dividends declared per share were $2.76 in
2015, $2.48 in 2014 and $2.24 in 2013. Cash dividends paid were
$873 in 2015, $822 in 2014 and $591 in 2013. We did not pay any
dividends in the first three months of 2013 because we accelerated
our first-quarter dividend payment to December 2012.

General Dynamics Annual Report 2015

49

Accumulated Other Comprehensive Loss. The changes, pretax and net of tax, in each component of AOCL consisted of the following:

December 31, 2012

Other comprehensive income, pretax
Provision for income tax, net

Other comprehensive income, net of tax

December 31, 2013

Other comprehensive loss, pretax
Benefit for income tax, net

Other comprehensive loss, net of tax

December 31, 2014

Other comprehensive loss, pretax
Provision for income tax, net

Other comprehensive loss, net of tax

December 31, 2015

Amounts reclassified out of AOCL related primarily to changes in
retirement plans’ funded status and consisted of pretax recognized net
actuarial losses of $423 in 2015 and $329 in 2014. This was offset
partially by pretax amortization of prior service credit of $72 in 2015
and $69 in 2014. 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 and Hedging Activities. 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 us from this risk. Otherwise, we
enter into derivative financial instruments, principally foreign currency
forward purchase and sale contracts, designed to offset and minimize
our
these instruments
generally matches the duration of the activities that are at risk.

risk. The three-year average maturity of

We had $7.2 billion in notional

forward exchange contracts
outstanding on December 31, 2015, and $9.1 billion on December 31,

50

General Dynamics Annual Report 2015

Gains (Losses)
on Cash Flow
Hedges

Unrealized
Gains on
Securities

Foreign
Currency
Translation
Adjustments

Changes in
Retirement
Plans’ Funded
Status

AOCL

$

6

3
–

3

9

(279)
(97)

(182)

(173)

(394)
(80)

(314)

$ 7

$ 1,092

$ (3,880)

$ (2,775)

12
4

8

15

10
3

7

22

(2)
–

(2)

(118)
–

(118)

974

(436)
(3)

(433)

541

(374)
(11)

(363)

2,595
898

1,697

2,492
902

1,590

(2,183)

(1,185)

(1,745)
(606)

(2,450)
(703)

(1,139)

(1,747)

(3,322)

(2,932)

500
175

325

(270)
84

(354)

$ (487)

$ 20

$

178

$ (2,997)

$ (3,286)

2014. We
Consolidated Balance Sheets at fair value (see Note D).

recognize derivative

financial

instruments

on the

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

Net gains and losses recognized in earnings, including gains and
losses related to hedge ineffectiveness, were not material to our results
of operations in any of the past three years. Net gains and losses
reclassified to earnings from OCL were not material to our results of
operations in any of the past three years, and we do not expect the
amount of these gains and losses that will be reclassified to earnings in
2016 to be material.

We had no material derivative financial instruments designated as

fair value or net investment hedges on December 31, 2015 or 2014.

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 rising labor and
commodity price risk, primarily on long-term fixed-price contracts. To
the extent possible, we include terms in our contracts that are
designed to protect us from these risks. 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.

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, 2015, we
held $2.8 billion in cash and equivalents, but held no marketable
securities.

functional currency

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

We do not hedge the fluctuation in reported revenue and earnings
resulting from the translation of these international operations’ results
into U.S. dollars. Although negative, the impact of translating our non-
U.S. operations’
revenue and earnings into U.S. dollars was not
material to our results of operations in any of the past three years. The
impact in 2015 was most pronounced in our Combat Systems group.
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.

N. COMMITMENTS AND CONTINGENCIES

Litigation
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
protection of the environment, asbestos-related claims and employee-
related matters. The nature of litigation is such that we cannot predict
the outcome of these matters. However, based on information currently
available, we believe any potential
liabilities in these 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
foreign environmental laws and regulations. We are directly or indirectly
investigations or remediation at some of our
involved in environmental
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 that a significant
percentage of the total remediation and compliance costs associated
with these facilities will continue to be allowable contract costs and,
therefore, recoverable under U.S. government contracts.

As required, we provide financial assurance for certain sites
undergoing or subject
remediation. We accrue
to investigation or
environmental costs when it is probable that a liability has been incurred
and the amount can be reasonably estimated. Where applicable, we
seek insurance recovery for costs 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
loss beyond what has been recorded
reasonably possible additional
would be material to our results of operations, financial condition or cash
flows.

Minimum Lease Payments
Total expense under operating leases was $283 in 2015, $297 in 2014
and $309 in 2013. Operating leases are primarily for facilities and
equipment. Future minimum lease payments are as follows:

Year Ended December 31

2016

2017

2018

2019

2020

Thereafter

Total minimum lease payments

$

220

179

136

90

90

322

$ 1,037

Other
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 audits
and investigations will not have a material
impact on our results of
operations, financial condition or cash flows.

General Dynamics Annual Report 2015

51

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 the
scope of work. While we are entitled to recovery of these costs under
our contracts, the administrative process with our customer may be
protracted. Based upon the circumstances, we periodically file requests
for equitable adjustment (REAs) that are sometimes converted into
claims. In some cases, these requests are disputed by our customer.
We believe our outstanding modifications, REAs and other claims will
be resolved without material
to our results of operations,
impact
financial condition or cash flows.

Letters of Credit and Guarantees.

In the ordinary course of
business, we have entered into letters of credit, bank guarantees,
surety bonds and other similar arrangements with financial institutions
totaling approximately $1.1 billion on
and insurance carriers
December 31, 2015. In addition, 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.

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

subsidiaries work under

collectively-bargained terms

Labor Agreements. Approximately one-fifth of the employees of
our
and
conditions, including 53 collective agreements that we have negotiated
directly with unions and works councils. A number of these agreements
expire within any given year. Historically, we have been successful at
renegotiating these labor agreements without any material disruption of
operating activities. In 2016, we expect to negotiate the terms of 18
agreements covering approximately 6,400 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
the products delivered and the average historical monthly warranty

52

General Dynamics Annual Report 2015

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

2015

2014

2013

$ 428

$ 354

$ 316

158

(120)

(1)

146

(78)

6

125

(82)

(5)

$ 465

$ 428

$ 354

O. EQUITY COMPENSATION PLANS

Equity Compensation Overview. We have equity compensation plans
for employees, as well as for non-employee members of our board of
directors. The equity compensation plans seek to provide an effective
means of attracting, retaining and motivating directors, officers and key
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.

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. We may make limited ad hoc grants at other times
during the year for new hires or promotions. Stock 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.

In 2015, we made several changes to the equity compensation
program, including an increase in the term of the stock options from
seven to ten years and a change to a three-year vesting period versus a
two-year vesting period for prior option grants. Stock options now vest
over three years, with 50 percent of the options vesting after two years
and the remaining 50 percent vesting the following year.

Outstanding stock options granted prior to 2015 vest over two years,
with 50 percent of the options vesting in one year and the remaining 50
percent vesting the following year, and expire seven years after the grant
date.

Grants of restricted stock are awards of shares of common stock that
vest approximately four years after the grant date. During the restriction
period, recipients may not sell, transfer, pledge, assign or otherwise

convey their restricted shares to another party. During this period, the
recipient is entitled to vote the restricted shares and receive cash
dividends on those shares.

Participation units represent obligations that have a value derived
from or related to the value of our common stock. These include stock
appreciation rights, phantom stock units and RSUs, and are payable in
cash or common stock. In 2012, we started granting RSUs with a
performance measure derived from a non-GAAP-based 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 subject to a payout range. The performance period for the
ROIC metric was extended from one to three years in 2015. For a
definition of ROIC, see Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in Item 7.

Participation units vest approximately three years after the grant
date with recipients prohibited from certain activities during the
restriction period. During this period, the recipient receives dividend-
equivalent units rather than cash dividends, and is not entitled to vote
the participation units or the dividend-equivalent units. Participation
units granted prior to 2015 vest over four years with the same
conditions and limitations described above.

We issue common stock under our equity compensation plans from
treasury stock. On December 31, 2015, in addition to the shares
reserved for issuance upon the exercise of outstanding stock options,
approximately 11 million shares have been authorized for awards that
may be granted in the future.

Equity-based

Compensation

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

Expense.

Year Ended December 31

Stock options

Restricted stock

2015

$ 32

40

2014

$ 38

45

2013

$ 48

30

Total equity-based compensation expense,

net of tax

$ 72

$ 83

$ 78

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

Expected volatility

Weighted average expected volatility

Expected term (in months)

Risk-free interest rate

Expected dividend yield

2015

2014

2013

20.1-24.1% 19.4-20.8% 21.6-27.3%

24.0%

74

20.2%

23.5%

43/53

43/53

1.7-1.9%

1.1-1.4%

0.5-1.0%

2.0%

2.5%

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) In 2015, expected term is based on assumptions used by a set of
comparable peer companies as sufficient entity-specific information is
not available. In 2014 and 2013, using historical option exercise data,
we 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.

The resulting weighted average fair value per stock option granted
was $27.54 in 2015, $13.99 in 2014 and $8.90 in 2013. Stock option
expense reduced pretax operating earnings (and on a diluted per-share
basis) by $49 ($0.10) in 2015, $59 ($0.11) in 2014 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, 2015, we had $46 of unrecognized compensation cost
related to stock options, which is expected to be recognized over a
weighted average period of two years.

A summary of stock option activity during 2015 follows:

Shares Under Option

Weighted Average
Exercise Price Per Share

Outstanding on December 31, 2014
Granted
Exercised
Forfeited/canceled

14,026,526
2,125,970
(3,620,295)
(356,540)

Outstanding on December 31, 2015

12,175,661

Vested and expected to vest on

December 31, 2015

12,058,610

Exercisable on December 31, 2015

8,153,380

$ 83.40
136.90
75.42
115.56

$ 94.17

$ 93.78

$ 79.09

General Dynamics Annual Report 2015

53

Summary information with respect to our stock options’ intrinsic
value and remaining contractual term on December 31, 2015, follows:

Weighted Average Remaining
Contractual Term (in years)

Aggregate Intrinsic
Value

Outstanding

Vested and expected to vest

Exercisable

4.8

4.8

3.7

$ 526

526

475

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 stock 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 stock options exercised was $238 in 2015, $340 in 2014 and $154
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.

Compensation expense related to restricted stock and RSUs reduced
pretax operating earnings (and on a diluted per-share basis) by $61
($0.12) in 2015, $69 ($0.13) in 2014 and $46 ($0.09) in 2013. On
December 31, 2015, we had $45 of unrecognized compensation cost
related to restricted stock and RSUs, which is expected to be
recognized over a weighted average period of 1.9 years.

A summary of restricted stock and RSU activity during 2015 follows:

Shares/
Share-Equivalent
Units

Weighted Average
Grant-Date
Fair Value Per
Share

Nonvested at December 31, 2014

2,740,177

$ 78.83

Granted

Vested

Forfeited

708,700

(547,736)

(41,970)

136.89

74.69

107.03

Nonvested at December 31, 2015

2,859,171

$ 91.03

The total fair value of vesting shares was $76 in 2015, $47 in 2014

and $63 in 2013.

P. RETIREMENT PLANS

We provide defined-contribution benefits to eligible employees, as well
as some remaining defined-benefit pension and other post-retirement
benefits. Substantially all of our plans use a December 31
measurement date, consistent with our fiscal year.

54

General Dynamics Annual Report 2015

to

participate

Retirement Plan Summary Information
Defined-contribution Benefits. We provide eligible employees the
opportunity
in defined-contribution savings plans
(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 $240 in 2015, $238 in 2014 and $204 in 2013. The
defined-contribution plans held approximately 24 million and 25 million
shares of our common stock, representing approximately 8 percent and
7 percent of our outstanding shares on December 31, 2015, and 2014,
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. We
made similar changes to our primary commercial pension plan in 2015.

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
employees and retirees. These benefits vary by employment status, age,
service and salary level at retirement. The coverage provided and the
extent
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.

to which the retirees share in the cost of

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
considered within our capital deployment framework. Therefore, we may
make discretionary contributions in addition to the required contributions
determined in accordance with IRS regulations. We contributed $187 to
our pension plans in 2015 and expect to contribute approximately $200
in 2016.

We maintain several tax-advantaged accounts, primarily Voluntary
Employees’ Beneficiary Association (VEBA)
to fund the
obligations for some of our post-retirement benefit plans. For non-
funded plans, claims are paid as received. Contributions to our other
post-retirement plans were not material in 2015 and are not expected
to be material in 2016.

trusts,

We expect the following benefits to be paid from our retirement

plans over the next 10 years:

2016

2017

2018

2019

2020

2021-2025

Pension
Benefits

Other Post-
retirement
Benefits

$ 566

$ 65

589

616

643

675

64

64

64

63

3,797

310

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 the cost is allocable to contracts. See Note G for discussion of our
the amount allocated to
deferred contract costs. For other plans,
contracts and included in revenue has exceeded the plans’ cumulative
benefit cost. We have deferred recognition of these excess earnings to
provide a better matching of revenue and expenses. These deferrals
have been classified against
the plan assets on the Consolidated
Balance Sheets.

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
the interest rate used to discount
rate of return on plan assets,
projected benefit payments, healthcare cost trend rates and future
salary increases. Given the long-term nature of the assumptions being
made, actual outcomes can and often do 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 deferred in OCL 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

2015

2014

2013

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss

Amortization of prior service credit

$ 210

$ 186

$ 298

529

(693)

417

(67)

532

(655)

320

(67)

492

(590)

409

(67)

Annual benefit cost

$ 396

$ 316

$ 542

Year Ended December 31

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss

Amortization of prior service (credit) cost

Other Post-retirement Benefits

2015

$ 11

44

(32)

6

(5)

2014

2013

$ 12

52

(31)

9

(2)

$ 15

53

(29)

26

7

Annual benefit cost

$ 24

$ 40

$ 72

General Dynamics Annual Report 2015

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

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 (gain)

Prior service credit

Total amount recognized in AOCL, pretax

Pension Benefits

Other Post-retirement Benefits

2015

2014

2015

2014

$ (13,236)
(210)
(529)

$ (11,013)
(186)
(532)

$ (1,130)
(11)
(44)

$ (1,183)
(12)
(52)

6
685
195
535

(1)
(2,083)
64
515

(10)
104
35
65

55
(30)
15
77

$ (12,554)

$ (13,236)

$

(991)

$ (1,130)

$ 9,084
(85)
187
(54)
(524)

$ 8,476
664
513
(65)
(504)

$ 8,608

$ 9,084

$ (3,946)

$ (4,152)

$

$

$

553
13
–
–
(39)

527

(464)

$

$

$

519
68
6
(1)
(39)

553

(577)

Pension Benefits

Other Post-retirement Benefits

2015

2014

2015

2014

$

145

(125)

(3,966)

$

176

(128)

(4,200)

$

–

$

–

(179)

(285)

(181)

(396)

$ (3,946)

$ (4,152)

$

(464)

$

(577)

Pension Benefits

Other Post-retirement Benefits

2015

2014

2015

2014

$ 4,887

$ 5,364

(258)

(320)

$ 4,629

$ 5,044

$

$

(9)

(25)

(34)

$

$

89

(38)

51

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 (credit) cost

Amortization of:

Net actuarial loss from prior years

Prior service credit

Other*

Change in AOCL, pretax

*

Includes foreign exchange translation and curtailment adjustments.

56

General Dynamics Annual Report 2015

Pension Benefits

Other Post-retirement Benefits

2015

2014

2015

2014

$

93

(6)

(417)

67

(152)

$ 2,074

$

1

(320)

67

(9)

(85)

10

(6)

5

(9)

$

(7)

(55)

(9)

2

1

$ (415)

$ 1,813

$

(85)

$

(68)

The following table represents amounts deferred in AOCL on the
Consolidated Balance Sheets on December 31, 2015, that we expect
to recognize in our retirement benefit cost in 2016:

Net actuarial loss (gain)

Prior service credit

Pension Benefits

$336

(68)

Other Post-
retirement
Benefits

$(3)

(6)

A pension plan’s funded status is the difference between the plan’s
assets and its projected benefit obligation (PBO). The PBO is the
present value of
future benefits attributed to employee services
rendered to date, including assumptions about future compensation
levels. A pension plan’s accumulated benefit obligation (ABO) is the
future benefits attributed to employee services
present value of
rendered to date, excluding assumptions about future compensation
levels. The ABO for all defined-benefit pension plans was $12.2 billion
and $12.8 billion on December 31, 2015 and 2014, respectively. On
December 31, 2015 and 2014, 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

2015

2014

$(12,368)

$(12,797)

(12,082)

8,360

(12,363)

8,578

Retirement Plan Assumptions
We calculate the plan assets and liabilities for a given year and the net
periodic benefit cost
the subsequent year using assumptions
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:

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

2015

2014

4.46%

3.40%

4.10%

3.43%

4.35%

4.03%

7.00%

5.00%

7.00%

5.00%

2024

2024

The following table summarizes the weighted average assumptions

used to determine our net periodic benefit costs:

Assumptions for Year Ended December 31

2015

2014

2013

Pension Benefits
Discount rate
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

4.10%
8.15%
3.43%

4.95%
8.16%
3.78%

4.22%
8.14%
3.79%

4.03%
8.03%

4.74%
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.

Beginning in 2016, we refined the method used to determine the
service and interest cost components of our net periodic benefit cost.
Previously, the cost was determined using a single weighted-average
discount rate derived from the yield curve. Under the refined method,
known as the spot rate approach, we will use individual spot rates along
the yield curve that correspond with the timing of each benefit payment.
We believe this change provides a more precise measurement of service
and interest costs by improving the correlation between projected cash
outflows and corresponding spot rates on the yield curve. Compared to
the previous method, the spot rate approach will decrease the service
and interest components of our benefit costs slightly in 2016. There is
no impact on the total benefit obligation. We will account for this change
prospectively as a change in accounting estimate.

Retirement plan assumptions are based on our best

judgment,
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
revenue and expenses.
reporting
the impact of annual changes in financial
Therefore,
assumptions on the cost for these plans does not affect our operating
results. 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 2015:

Increase
25 Basis
Points

Decrease
25 Basis
Points

Increase (decrease) to net pension cost from:

Change in discount rate
Change in long-term rate of return on plan assets

$ (34)
(19)

$ 35
19

General Dynamics Annual Report 2015

57

Our investments in fixed-income assets include U.S. Treasury and U.S.
agency securities, corporate bonds, mortgage-backed securities, futures
contracts and international securities. Our 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.

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

We hold assets in VEBA trusts for some of our other post-retirement
plans. These assets are managed by a third-party investment manager
with oversight by management and 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
tax
deduction limits on contributions and the regulatory environment.

the taxable nature of certain VEBA trusts,

liability,

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
low-volume market quotes and
such as interest rates, bond yields,
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)
that is based on the underlying investments of the fund. Our Level 3
assets include real estate and hedge funds, insurance deposit contracts
and direct private equity investments.

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 2015. For our healthcare plans, the effect of a 1
percentage point increase or decrease in the assumed healthcare cost
trend rate on the 2015 net periodic benefit cost
is $6 and ($5),
respectively, and the effect on the December 31, 2015, accumulated
post-retirement benefit obligation is $82 and ($65), 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 develops investment policies and strategies, provides
oversight of a third-party investment manager and reports to the
committee on a regular basis. An outsourced third-party investment
manager makes all day-to-day investment decisions related to defined-
benefit retirement plan assets in accordance with our investment policy
and target allocation percentages.

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
consistent with our assumed long-term rate of
return used to
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 2015, our asset allocation policy ranges were:

Equities

Fixed income

Cash

Other asset classes

48 - 68%

20 - 48%

0 - 5%

0 - 16%

More than 90 percent of our pension plan assets are held in a single
trust for our primary U.S. government and commercial pension plans.
On December 31, 2015, 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 indices.

58

General Dynamics Annual Report 2015

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 and equivalents
Equity securities:
U.S. companies (a)
Non-U.S. companies
Private equity investments

Fixed-income securities:

Treasury securities
Corporate bonds (b)

Commingled funds:

Equity funds
Fixed-income funds
Real estate funds
Commodity funds
Hedge funds

Other investments:

Insurance deposit agreements

Fair
Value

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2015

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, 2014

Significant
Unobservable
Inputs
(Level 3)

$

116

$ 12

$

104

$

–

$

94

$ 15

$

79

$

675
64
12

261
1,986

4,006
560
380
–
445

103

675
64
–

–
–

–
–
–
–
–

–

–
–
–

261
1,986

4,006
560
–
–
–

–

–
–
12

–
–

–
–
380
–
445

103

775
90
9

292
2,188

4,272
606
139
6
510

103

775
90
–

–
–

–
–
–
–
–

–

–
–
–

292
2,188

4,272
606
–
6
–

–

–

–
–
9

–
–

–
–
139
–
510

103

Total pension plan assets

$ 8,608

$ 751

$ 6,917

$ 940

$ 9,084

$ 880

$ 7,443

$ 761

(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, 2015, and A- on December 31, 2014.

General Dynamics Annual Report 2015

59

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 and equivalents

Equity securities

Fixed-income securities

Commingled funds:

Equity funds

Fixed-income funds

Real estate funds

Hedge funds

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2015

$

–

77

–

–

–

2

–

$

79

–

21

246

99

–

–

$

Fair
Value

79

77

21

246

99

3

2

Total other post-retirement plan assets

$

527

$

79

$

445

$

Changes in our Level 3 retirement plan assets during 2015 and 2014 were as follows:

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

$ –

$

3

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2014

Significant
Unobservable
Inputs
(Level 3)

$

–

164

$

–

5

6

3

–

$

3

–

10

309

51

–

–

164

10

314

57

3

2

$ 553

$ 178

$ 373

$

–

–

–

–

–

–

2

2

–

–

–

–

1

2

3

Private Equity
Investments

Real Estate
Funds

Hedge Funds

Insurance
Deposits
Agreements

Total Level
3 Assets

$ 10

$ 34

$ 473

$ 115

$ 632

(2)

1

9

1

–

2

9

96

139

15

–

227

39

–

512

14

6

(85)

(12)

–

103

2

–

(2)

34

97

763

32

6

142

$ 12

$ 381

$ 447

$ 103

$ 943

December 31, 2013

Actual return on plan assets:

Unrealized gains, net

Purchases, sales, and settlements, net

December 31, 2014

Actual return on plan assets:

Unrealized gains, net

Realized gains, net

Purchases, sales, and settlements, net

December 31, 2015

60

General Dynamics Annual Report 2015

Q. BUSINESS GROUP INFORMATION

We operate in four business groups: Aerospace, Combat Systems, Information Systems and Technology and Marine Systems. We organize our
business groups in accordance with the nature of products and services offered. We measure each group’s profitability 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
Information Systems and Technology
Marine Systems
Corporate*

2015

$ 8,851
5,640
8,965
8,013
–

Revenue

2014

$ 8,649
5,732
9,159
7,312
–

Operating Earnings

Revenue from U.S. Government

2013

2015

2014

2013

2015

2014

2013

$ 8,118
5,832
10,268
6,712
–

$ 1,706
882
903
728
(41)

$ 1,611
862
785
703
(72)

$ 1,416
908
795
666
(96)

$

104
2,583
7,856
7,438
–

$

99
2,970
7,985
6,901
–

$

98
4,057
8,572
6,536
–

Total

$ 31,469

$ 30,852

$ 30,930

$ 4,178

$ 3,889

$ 3,689

$ 17,981

$ 17,955

$ 19,263

Year Ended December 31

2015

2014

2013

2015

2014

2013

2015

2014

2013

Identifiable Assets

Capital Expenditures

Depreciation and Amortization

Aerospace
Combat Systems
Information Systems and Technology
Marine Systems
Corporate*

$ 8,358
8,800
8,577
2,970
3,292

$ 8,245
9,487
9,064
3,110
5,431

$ 8,005
9,002
9,432
3,088
5,946

$

210
79
73
166
41

$

227
46
54
124
70

$

250
50
52
83
1

$

Total

$ 31,997

$ 35,337

$ 35,473

$

569

$

521

$

436

$

147
91
131
106
7

482

$

$

137
100
146
106
7

496

$

$

123
113
178
103
8

525

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

The following table presents our revenue by geographic area based on the location of our customers:

Year Ended December 31

North America:
United States
Other

Total North America

Europe
Asia/Pacific
Africa/Middle East
South America

Total revenue

2015

2014

2013

$ 23,257
1,080

$ 23,222
1,174

$ 24,646
959

24,337

24,396

25,605

2,485
1,678
2,508
461

2,410
1,608
2,163
275

2,795
1,466
736
328

$ 31,469

$ 30,852

$ 30,930

Our revenue from non-U.S. operations was $3.7 billion in 2015, $3.6 billion in 2014 and $3.3 billion in 2013. The long-lived assets associated

with these operations were 5 percent of our total long-lived assets on December 31, 2015, and 6 percent on December 31, 2014.

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.

General Dynamics Annual Report 2015

61

R. CONDENSED CONSOLIDATING STATEMENTS OF EARNINGS

Year Ended December 31, 2015

Revenue

Cost of sales

G&A

Operating earnings

Interest, net

Other, net

Earnings before income tax

Provision for income tax, net

Equity in net earnings of subsidiaries

Net earnings

Comprehensive income

Year Ended December 31, 2014

Revenue

Cost of sales

G&A

Operating earnings

Interest, net

Other, net

Earnings before income tax

Provision for income tax, net

Discontinued operations, net of tax

Equity in net earnings of subsidiaries

Net earnings

Comprehensive income

Year Ended December 31, 2013

Revenue

Cost of sales

G&A

Operating earnings

Interest, net

Other, net

Earnings before income tax

Provision for income tax, net

Discontinued operations, net of tax

Equity in net earnings of subsidiaries

Net earnings

Comprehensive income

62

General Dynamics Annual Report 2015

Parent

Guarantors on a
Combined Basis

Other Subsidiaries
on a Combined Basis

Consolidating
Adjustments

Total
Consolidated

$

–

(6)

46

(40)

(89)

4

(125)

(151)

2,939

$ 2,965

$ 2,611

$

–

9

62

(71)

(93)

–

(164)

(54)

(140)

2,783

$ 2,533

$

786

$

–

20

74

(94)

(93)

1

(186)

(51)

(129)

2,621

$ 2,357

$ 3,947

$ 27,398

22,191

1,609

3,598

(1)

2

3,599

1,154

–

$ 2,445

$ 2,653

$ 26,819

21,792

1,633

3,394

–

(2)

3,392

1,099

–

–

$ 4,071

3,154

$

297

620

7

1

628

134

–

–

–

–

–

–

–

–

–

(2,939)

$ 31,469

25,339

1,952

4,178

(83)

7

4,102

1,137

–

$

494

$ (178)

$ (2,939)

$ 2,965

$ (2,475)

$ 2,611

$ 4,033

3,178

$

289

566

7

1

574

84

–

–

–

–

–

–

–

–

–

–

–

(2,783)

$ 30,852

24,979

1,984

3,889

(86)

(1)

3,802

1,129

(140)

–

$ 2,293

$ 2,147

$

490

$ (125)

$ (2,783)

$ 2,533

$ (2,022)

$

786

$ 27,272

22,175

1,664

3,433

1

6

3,440

1,058

–

–

$ 2,382

$ 2,820

$ 3,658

3,007

$

301

350

6

1

357

118

–

–

–

–

–

–

–

–

–

–

–

(2,621)

$ 30,930

25,202

2,039

3,689

(86)

8

3,611

1,125

(129)

–

$

$

239

196

$ (2,621)

$ 2,357

$ (3,016)

$ 3,947

R. CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2015

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:

Property, plant and equipment

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:

Short-term debt

Customer advances and deposits

Other current liabilities

Total current liabilities

Noncurrent liabilities:

Long-term debt

Other liabilities

Total noncurrent liabilities

Intercompany

Shareholders’ equity:

Common stock

Other shareholders’ equity

Total shareholders’ equity

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ 1,732

$

–

$ 1,053

$

–

514

–

–

–

–

140

2,386

189

(59)

–

–

–

1,379

40,062

41,571

1,181

2,795

1,882

1,344

23

73

213

7,511

6,386

(3,462)

1,445

(1,122)

8,040

207

–

11,494

2,265

1,048

7

32

5

–

264

4,674

1,101

(689)

909

(469)

3,403

168

–

4,423

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(40,062)

(40,062)

$ 2,785

3,446

4,357

1,889

1,376

28

73

617

14,571

7,676

(4,210)

2,354

(1,591)

11,443

1,754

–

17,426

$ 43,957

$ 19,005

$ 9,097

$ (40,062)

$ 31,997

$

500

$

1

$

–

$

–

1,331

1,831

2,874

3,417

6,291

3,038

3,309

6,348

24

2,021

2,045

2,636

1,630

4,266

–

478

478

25,097

(23,816)

(1,281)

–

–

–

–

–

–

–

–

482

10,256

10,738

6

34,422

34,428

2,354

3,280

5,634

(2,360)

(37,702)

(40,062)

$

501

5,674

6,270

12,445

2,898

5,916

8,814

–

482

10,256

10,738

Total liabilities and shareholders’ equity

$ 43,957

$ 19,005

$ 9,097

$ (40,062)

$ 31,997

General Dynamics Annual Report 2015

63

R. CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2014

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:

Property, plant and equipment

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:

Short-term debt

Customer advances and deposits

Other current liabilities

Total current liabilities

Noncurrent liabilities:

Long-term debt

Other liabilities

Total noncurrent liabilities

Intercompany

Shareholders’ equity:

Common stock

Other shareholders’ equity

Total shareholders’ equity

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ 2,536

$

–

$ 1,852

$

–

542

–

–

–

–

781

3,859

148

(52)

–

–

–

1,461

37,449

39,006

1,379

2,966

1,818

1,260

20

75

215

7,733

6,035

(3,246)

1,484

(1,042)

8,095

213

–

11,539

2,671

1,083

10

30

8

–

161

5,815

1,109

(665)

914

(444)

3,636

284

–

4,834

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(37,449)

(37,449)

$ 4,388

4,050

4,591

1,828

1,290

28

75

1,157

17,407

7,292

(3,963)

2,398

(1,486)

11,731

1,958

–

17,930

$ 42,865

$ 19,272

$ 10,649

$ (37,449)

$ 35,337

$

500

$

1

$

–

$

–

1,298

1,798

3,368

3,514

6,882

3,529

3,511

7,041

24

2,369

2,393

22,356

(22,557)

482

11,347

11,829

6

32,389

32,395

3,806

1,106

4,912

–

482

482

201

2,043

3,011

5,054

–

–

–

–

–

–

–

–

(2,049)

(35,400)

(37,449)

$

501

7,335

5,915

13,751

3,392

6,365

9,757

–

482

11,347

11,829

Total liabilities and shareholders’ equity

$ 42,865

$ 19,272

$ 10,649

$ (37,449)

$ 35,337

64

General Dynamics Annual Report 2015

R. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Year Ended December 31, 2015

Net cash provided by operating activities*

Cash flows from investing activities:
Capital expenditures
Maturities of held-to-maturity securities
Proceeds from sales of assets
Other, net

Net cash provided by investing activities

Cash flows from financing activities:

Purchases of common stock
Dividends paid
Repayment of fixed-rate notes
Proceeds from stock option exercises
Other, net

Net cash used by financing activities

Net cash used by discontinued operations

Cash sweep/funding by parent

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

Year Ended December 31, 2014

Net cash provided by operating activities*

Cash flows from investing activities:
Capital expenditures
Purchases 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 stock option exercises
Other, net

Net cash used by financing activities

Net cash provided by discontinued operations

Cash sweep/funding by parent

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

Cash and equivalents at end of year

$ 1,732

$

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

$

(58)

$ 2,202

$

355

$ –

Total
Consolidated

$ 2,499

$ (296)

$ 2,798

$ 1,226

$ –

$ 3,728

(42)
500
162
4

624

(3,233)
(873)
(500)
268
77

(4,261)

(43)

2,934

(804)
2,536

(71)
(500)
3

(568)

(3,382)
(822)
547
83

(3,574)

36

2,759

(1,643)
4,179

(475)
–
129
(26)

(372)

–
–
–
–
2

2

–

(1,832)

–
–

–

(52)
–
–
–

(52)

–
–
–
–
–

–

–

(1,102)

(799)
1,852

–
–
–
–

–

–
–
–
–
–

–

–

–

–
–

(569)
500
291
(22)

200

(3,233)
(873)
(500)
268
79

(4,259)

(43)

–

(1,603)
4,388

$ 1,053

$ –

$ 2,785

(409)
–
(74)

(483)

–
–
–
(1)

(1)

–

(2,314)

–
–

–

(41)
–
(10)

(51)

–
–
–
–

–

–

(445)

730
1,122

–
–
–

–

–
–
–
–

–

–

–

–
–

(521)
(500)
(81)

(1,102)

(3,382)
(822)
547
82

(3,575)

36

–

(913)
5,301

$ 1,852

$ –

$ 4,388

General Dynamics Annual Report 2015

65

Cash and equivalents at end of year

$ 2,536

$

* Continuing operations only.

R. CONDENSED CONSOLIDATING STATEMENT 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 stock 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

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ (454)

$ 2,810

$

755

$ –

$ 3,111

(1)
3

2

(740)
(591)
583
23

(725)

(18)

3,074

1,879
2,300

(381)
59

(322)

–
–
–
–

–

–

(2,488)

–
–

–

(54)
11

(43)

–
–
–
–

–

–

(586)

126
996

–
–

–

–
–
–
–

–

–

–

–
–

(436)
73

(363)

(740)
(591)
583
23

(725)

(18)

–

2,005
3,296

$ 1,122

$ –

$ 5,301

Cash and equivalents at end of year

$ 4,179

$

* Continuing operations only.

66

General Dynamics Annual Report 2015

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, 2015 and 2014, and the related Consolidated Statements of Earnings, Comprehensive Income, Cash Flows, and Shareholders’ Equity
for each of the years in the three-year period ended December 31, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2015, 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, 2015, based on the criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 8,
2016, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

McLean, Virginia

February 8, 2016

General Dynamics Annual Report 2015

67

SUPPLEMENTARY DATA
(UNAUDITED)

(Dollars in millions, except per-share amounts)

2014

2015

1Q

2Q (a)

3Q

4Q (b)

1Q

2Q

3Q

4Q

Revenue

Operating earnings

Earnings from continuing operations

Discontinued operations

$ 7,265

$ 7,474

$ 7,751

$ 8,362

$ 7,784

$ 7,882

$ 7,994

$ 7,809

874

596

(1)

949

646

(105)

999

694

2

1,067

737

(36)

1,027

716

–

1,081

752

–

1,034

733

–

1,036

764

–

Net earnings

$

595

$

541

$

696

$

701

$

716

$

752

$

733

$

764

Earnings per share – basic (c):

Continuing operations

Discontinued operations

$

1.74

$

1.92

$

–

(0.31)

2.09

0.01

$

2.23

$

2.18

$

2.31

$

2.31

$

2.44

(0.11)

–

–

–

–

Net earnings

$

1.74

$

1.61

$

2.10

$

2.12

$

2.18

$

2.31

$

2.31

$

2.44

Earnings per share – diluted (c):

Continuing operations

Discontinued operations

Net earnings

Market price range:

High

Low

$

1.71

$

1.88

$

–

(0.30)

2.05

0.01

$

2.19

$

2.14

$

2.27

$

2.28

$

2.40

(0.10)

–

–

–

–

$

1.71

$

1.58

$

2.06

$

2.09

$

2.14

$

2.27

$

2.28

$

2.40

$113.57

93.85

$121.68

104.22

$130.17

114.04

$146.13

114.73

$142.55

131.33

$147.03

130.91

$153.76

132.02

$152.51

136.08

Dividends declared

$

0.62

$

0.62

$

0.62

$

0.62

$

0.69

$

0.69

$

0.69

$

0.69

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) Second-quarter 2014 includes $105 loss, net of tax, in discontinued operations primarily to write down the net assets of our held-for-sale axle business to their estimated fair value.
(b) Fourth-quarter 2014 includes $36 loss, net of tax, in discontinued operations primarily to record an additional loss on the sale of the axle business completed in January 2015.
(c) 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.

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, 2015 (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, on December 31, 2015, 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.

68

General Dynamics Annual Report 2015

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, 2015. 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 (2013). Based on our evaluation we believe that, as of December 31, 2015, 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

General Dynamics Annual Report 2015

69

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, 2015, based on the criteria established
in Internal Control – Integrated Framework (2013) 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, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) 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, 2015 and 2014, and the related Consolidated Statements of Earnings,
Comprehensive Income, Cash Flows and Shareholders’ Equity for each of the years in the three-year period ended December 31, 2015, and our
report dated February 8, 2016, expressed an unqualified opinion on those Consolidated Financial Statements.

McLean, Virginia
February 8, 2016

70

General Dynamics Annual Report 2015

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, 2015, 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 in Part I, 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 2016 annual
shareholders meeting (the Proxy Statement), which sections are incorporated herein by reference.

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 2015

71

PART IV

ITEM 15. EXHIBITS

1. Consolidated Financial Statements

Consolidated Statements of Earnings

Consolidated Statements of Comprehensive Income

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 76 of this Annual Report on Form 10-K for the year ended December 31, 2015.

72

General Dynamics Annual Report 2015

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 8, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on February 8, 2016, by the
following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors.

Phebe N. Novakovic

(Principal Executive Officer)

Chairman, Chief Executive Officer and Director

Jason W. Aiken

(Principal Financial Officer)

Senior Vice President and Chief Financial Officer

Kimberly A. Kuryea

*

Mary T. Barra

*
Nicholas D. Chabraja
*

James S. Crown

*

Rudy F. deLeon

*

William P. Fricks

*

John M. Keane

*

Lester L. Lyles

*

Mark M. Malcolm

*

James N. Mattis

*

William A. Osborn

*
Laura J. Schumacher

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 2015

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

4.4

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

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 December 2, 2015) (incorporated herein
by reference from the company’s current report on Form 8-K, filed with the Commission December 3, 2015)

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)

Indenture dated as of March 24, 2015, 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 registration statement on Form S-3, filed with the
Commission March 24, 2015)

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)

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 Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(for certain executive officers who are subject to the company’s Compensation Recoupment Policy) (incorporated herein by
reference from the company’s quarterly report on Form 10-Q for the period ended March 30, 2014, filed with the Commission
April 23, 2014)

Form of Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(for grants beginning March 4, 2015, and including, as indicated therein, provisions for certain executive officers who are
subject to the company’s Compensation Recoupment Policy) (incorporated herein by reference from the company’s quarterly
report on Form 10-Q for the period ended April 5, 2015, filed with the Commission April 29, 2015)

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)

74

General Dynamics Annual Report 2015

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

Exhibit
Number

10.9*

10.10*

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

10.20*

10.21*

10.22*

Description

Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan (for
certain executive officers who are subject to the company’s Compensation Recoupment Policy) (incorporated herein by reference
from the company’s quarterly report on Form 10-Q for the period ended March 30, 2014, filed with the Commission April 23,
2014)

Form of Restricted Stock Award Agreement pursuant to the General Dynamics 2012 Equity Compensation Plan (for grants
beginning March 4, 2015, and including, as indicated therein, provisions for certain executive officers who are subject to the
company’s Compensation Recoupment Policy) (incorporated herein by reference from the company’s quarterly report on Form
10-Q for the period ended April 5, 2015, filed with the Commission April 29, 2015)

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)

Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics 2012 Equity Compensation Plan (for grants
beginning March 4, 2015) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period
ended April 5, 2015, filed with the Commission April 29, 2015)

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)

Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity
Compensation Plan (for certain executive officers who are subject to the company’s Compensation Recoupment Policy)
(incorporated herein by reference from the company’s quarterly report on Form 10-Q for the period ended March 30, 2014, filed
with the Commission April 23, 2014)

Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics 2012 Equity Compensation
Plan (for grants beginning March 4, 2015, and including, as indicated therein, provisions for certain executive officers who are
subject to the company’s Compensation Recoupment Policy) (incorporated herein by reference from the company’s quarterly
report on Form 10-Q for the period ended April 5, 2015, filed with the Commission April 29, 2015)

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 Corporation Supplemental Savings Plan, amended and restated effective as of January 1, 2014 (incorporated
herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2013, filed with the
Commission on February 7, 2014)

Amendment to General Dynamics Corporation Supplemental Savings Plan, effective January 5, 2015 (incorporated herein by
reference from the company’s annual report on Form 10-K for the year ended December 31, 2014, filed with the Commission
on February 9, 2015)

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)

Amendment to General Dynamics Corporation Supplemental Retirement Plan, effective January 5, 2015 (incorporated herein by
reference from the company’s annual report on Form 10-K for the year ended December 31, 2014, filed with the Commission
on February 9, 2015)

General Dynamics Annual Report 2015

75

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

Exhibit
Number

21

23

24

31.1

31.2

32.1

32.2

Description

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.

76

General Dynamics Annual Report 2015

Board of Directors

Phebe N. Novakovic
Chairman and
Chief Executive Officer

James S. Crown
President
Henry Crown
and Company

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

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

Mary T. Barra
Chairman and
Chief Executive Officer
General Motors Company

Rudy F. deLeon
Senior Fellow
Center for American Progress

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

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

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

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

Mark M. Malcolm
President and
Chief Executive Officer
Tower International, Inc.

Laura J. Schumacher
Executive Vice President
AbbVie Inc.

General Dynamics Annual Report 2015

77

Corporate Officers

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

M. Amy Gilliland
Senior Vice President
Human Resources and
Administration

Robert W. Helm
Senior Vice President
Planning and
Development

David H. Fogg
Vice President
Treasurer

Kenneth R. Hayduk
Vice President
Tax

Thomas W. Kirchmaier
Vice President
Special Projects

Kimberly A. Kuryea
Vice President
Controller

Business Groups
Aerospace

Mark L. Burns
Vice President
President
Gulfstream Aerospace

Robert E. Smith
Vice President
President
Jet Aviation

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

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

Information Systems
and Technology

S. Daniel Johnson
Executive Vice President
President
Information Technology

Christopher Marzilli
Vice President
President
Mission Systems

Combat Systems

Marine Systems

Mark C. Roualet
Executive Vice President

John P. Casey
Executive Vice President

Alfonso J. Ramonet
Vice President
President
European Land Systems

Jeffrey S. Geiger
Vice President
President
Electric Boat

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

Gary L. Whited
Vice President
President
Land Systems

Michael S. Wilson
Vice President
President
Ordnance and
Tactical Systems

78

General Dynamics Annual Report 2015

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

The annual meeting of General Dynamics’ shareholders will be
held on Wednesday, May 4, 2016, at the company’s headquarters
in Falls Church, Virginia. A formal notice and proxy will be distributed
before the meeting to shareholders entitled to vote.

Shares Listed

New York Stock Exchange
Ticker symbol: GD

General Dynamics Annual Report 2015

79

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