General Dynamics

ANNUAL REPORT 2018

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Dear Fellow Shareholder

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in 2018, and the company is poised to generate strong 
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deployment.

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(cid:81)(cid:88)(cid:71)(cid:84)(cid:2)(cid:21)(cid:7)(cid:16)(cid:2)(cid:43)(cid:80)(cid:2)(cid:47)(cid:67)(cid:84)(cid:69)(cid:74)(cid:2)(cid:81)(cid:72)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)(cid:14)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:36)(cid:81)(cid:67)(cid:84)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:38)(cid:75)(cid:84)(cid:71)(cid:69)(cid:86)(cid:81)(cid:84)(cid:85)(cid:2)
(cid:84)(cid:67)(cid:75)(cid:85)(cid:71)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:2)(cid:68)(cid:91)(cid:2)(cid:27)(cid:16)(cid:25)(cid:7)(cid:2)(cid:86)(cid:81)(cid:2)(cid:67)(cid:2)(cid:83)(cid:87)(cid:67)(cid:84)(cid:86)(cid:71)(cid:84)(cid:78)(cid:91)(cid:2)(cid:84)(cid:67)(cid:86)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:6)(cid:19)(cid:16)(cid:18)(cid:20)(cid:2)(cid:82)(cid:71)(cid:84)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:16)(cid:2)(cid:54)(cid:74)(cid:75)(cid:85)(cid:2)(cid:84)(cid:71)(cid:666)(cid:71)(cid:69)(cid:86)(cid:85)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:20)(cid:20)(cid:80)(cid:70)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)
(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:70)(cid:75)(cid:88)(cid:75)(cid:70)(cid:71)(cid:80)(cid:70)(cid:2)(cid:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:85)(cid:71)(cid:88)(cid:71)(cid:80)(cid:86)(cid:74)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)
(cid:67)(cid:84)(cid:81)(cid:87)(cid:80)(cid:70)(cid:2)(cid:67)(cid:124)(cid:19)(cid:18)(cid:7)(cid:2)(cid:67)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:16)

(cid:35)(cid:85)(cid:2)(cid:89)(cid:71)(cid:2)(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)(cid:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:87)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:85)(cid:71)(cid:71)(cid:2)(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:2)
(cid:73)(cid:84)(cid:81)(cid:89)(cid:86)(cid:74)(cid:124)(cid:67)(cid:69)(cid:84)(cid:81)(cid:85)(cid:85)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:82)(cid:81)(cid:84)(cid:86)(cid:72)(cid:81)(cid:78)(cid:75)(cid:81)(cid:2)(cid:69)(cid:81)(cid:87)(cid:82)(cid:78)(cid:71)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:85)(cid:81)(cid:78)(cid:75)(cid:70)(cid:2)
(cid:71)(cid:67)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:85)(cid:2)(cid:73)(cid:84)(cid:81)(cid:89)(cid:86)(cid:74)(cid:16)(cid:2)(cid:39)(cid:67)(cid:69)(cid:74)(cid:2)(cid:81)(cid:72)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:71)(cid:85)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:67)(cid:2)
(cid:78)(cid:67)(cid:84)(cid:73)(cid:71)(cid:124)(cid:68)(cid:67)(cid:69)(cid:77)(cid:78)(cid:81)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:84)(cid:81)(cid:68)(cid:87)(cid:85)(cid:86)(cid:2)(cid:72)(cid:87)(cid:80)(cid:80)(cid:71)(cid:78)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:86)(cid:74)(cid:75)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:72)(cid:87)(cid:86)(cid:87)(cid:84)(cid:71)(cid:124)(cid:73)(cid:84)(cid:81)(cid:89)(cid:86)(cid:74)(cid:16)(cid:2)(cid:35)(cid:85)(cid:2)(cid:72)(cid:71)(cid:78)(cid:78)(cid:81)(cid:89)(cid:2)(cid:85)(cid:74)(cid:67)(cid:84)(cid:71)(cid:74)(cid:81)(cid:78)(cid:70)(cid:71)(cid:84)(cid:85)(cid:14)(cid:2)(cid:75)(cid:86)(cid:2)(cid:75)(cid:85)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:76)(cid:81)(cid:68)(cid:2)(cid:86)(cid:81)(cid:2)
(cid:71)(cid:80)(cid:85)(cid:87)(cid:84)(cid:71)(cid:124)(cid:89)(cid:71)(cid:2)(cid:69)(cid:84)(cid:71)(cid:67)(cid:86)(cid:71)(cid:2)(cid:88)(cid:67)(cid:78)(cid:87)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:74)(cid:81)(cid:89)(cid:2)(cid:89)(cid:71)(cid:2)(cid:85)(cid:74)(cid:67)(cid:82)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:73)(cid:84)(cid:81)(cid:89)(cid:2)
(cid:81)(cid:87)(cid:84)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:67)(cid:80)(cid:91)(cid:124)(cid:67)(cid:80)(cid:70)(cid:2)(cid:89)(cid:71)(cid:2)(cid:67)(cid:84)(cid:71)(cid:2)(cid:70)(cid:71)(cid:70)(cid:75)(cid:69)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)(cid:70)(cid:81)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:81)(cid:16)

PHEBE N. NOVAKOVIC  
(cid:37)(cid:74)(cid:67)(cid:75)(cid:84)(cid:79)(cid:67)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:37)(cid:39)(cid:49)(cid:2) 
(cid:47)(cid:67)(cid:84)(cid:69)(cid:74)(cid:2)(cid:26)(cid:14)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)

(cid:43)(cid:80)(cid:2)(cid:44)(cid:87)(cid:78)(cid:91)(cid:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:84)(cid:71)(cid:69)(cid:71)(cid:75)(cid:88)(cid:71)(cid:70)(cid:2)(cid:86)(cid:91)(cid:82)(cid:71)(cid:2)(cid:69)(cid:71)(cid:84)(cid:86)(cid:75)(cid:665)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:55)(cid:16)(cid:53)(cid:16)(cid:2)
(cid:40)(cid:71)(cid:70)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:35)(cid:88)(cid:75)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:35)(cid:70)(cid:79)(cid:75)(cid:80)(cid:75)(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:87)(cid:78)(cid:72)(cid:85)(cid:86)(cid:84)(cid:71)(cid:67)(cid:79)(cid:2)
(cid:41)(cid:23)(cid:18)(cid:18)(cid:14)(cid:2)(cid:67)(cid:2)(cid:69)(cid:78)(cid:71)(cid:67)(cid:80)(cid:15)(cid:85)(cid:74)(cid:71)(cid:71)(cid:86)(cid:2)(cid:70)(cid:71)(cid:85)(cid:75)(cid:73)(cid:80)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)(cid:86)(cid:74)(cid:67)(cid:86)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:85)(cid:2)
(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:665)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)(cid:67)(cid:70)(cid:88)(cid:67)(cid:80)(cid:69)(cid:71)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:85)(cid:82)(cid:71)(cid:71)(cid:70)(cid:14)(cid:2)(cid:84)(cid:67)(cid:80)(cid:73)(cid:71)(cid:14)(cid:2)(cid:69)(cid:81)(cid:79)(cid:72)(cid:81)(cid:84)(cid:86)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:85)(cid:67)(cid:72)(cid:71)(cid:86)(cid:91)(cid:2)(cid:67)(cid:85)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:87)(cid:84)(cid:84)(cid:71)(cid:80)(cid:86)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)(cid:75)(cid:86)(cid:2)
(cid:75)(cid:85)(cid:124)(cid:84)(cid:71)(cid:82)(cid:78)(cid:67)(cid:69)(cid:75)(cid:80)(cid:73)(cid:16)(cid:2)(cid:57)(cid:71)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:19)(cid:18)(cid:2)(cid:41)(cid:23)(cid:18)(cid:18)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)(cid:75)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)(cid:16)(cid:2)
(cid:57)(cid:71)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:87)(cid:71)(cid:2)(cid:86)(cid:81)(cid:2)(cid:82)(cid:84)(cid:81)(cid:73)(cid:84)(cid:71)(cid:85)(cid:85)(cid:2)(cid:86)(cid:81)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:69)(cid:71)(cid:84)(cid:86)(cid:75)(cid:665)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)
(cid:41)(cid:24)(cid:18)(cid:18)(cid:14)(cid:2)(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:75)(cid:85)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:69)(cid:86)(cid:71)(cid:70)(cid:2)(cid:70)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:665)(cid:84)(cid:85)(cid:86)(cid:2)(cid:74)(cid:67)(cid:78)(cid:72)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:75)(cid:85)(cid:2)
(cid:91)(cid:71)(cid:67)(cid:84)(cid:16)(cid:2)(cid:57)(cid:71)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:71)(cid:70)(cid:2)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:21)(cid:20)(cid:23)(cid:2)(cid:41)(cid:24)(cid:23)(cid:18)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)
(cid:86)(cid:81)(cid:2)(cid:70)(cid:67)(cid:86)(cid:71)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:80)(cid:71)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:73)(cid:84)(cid:81)(cid:89)(cid:75)(cid:80)(cid:73)(cid:2)(cid:666)(cid:71)(cid:71)(cid:86)(cid:2)
(cid:81)(cid:72)(cid:124)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)(cid:74)(cid:67)(cid:85)(cid:2)(cid:70)(cid:84)(cid:75)(cid:88)(cid:71)(cid:80)(cid:2)(cid:87)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:71)(cid:90)(cid:82)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)
(cid:75)(cid:80)(cid:70)(cid:87)(cid:85)(cid:86)(cid:84)(cid:91)(cid:15)(cid:78)(cid:71)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:80)(cid:71)(cid:86)(cid:89)(cid:81)(cid:84)(cid:77)(cid:16)(cid:2)(cid:49)(cid:87)(cid:84)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)
(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)(cid:68)(cid:87)(cid:85)(cid:75)(cid:80)(cid:71)(cid:85)(cid:85)(cid:2)(cid:73)(cid:84)(cid:71)(cid:89)(cid:2)(cid:86)(cid:81)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:2)(cid:6)(cid:20)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)
(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)(cid:124)(cid:70)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:14)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:81)(cid:84)(cid:73)(cid:67)(cid:80)(cid:75)(cid:69)(cid:2)(cid:73)(cid:84)(cid:81)(cid:89)(cid:86)(cid:74)(cid:2)
(cid:82)(cid:84)(cid:81)(cid:70)(cid:87)(cid:69)(cid:75)(cid:80)(cid:73)(cid:2)(cid:80)(cid:71)(cid:67)(cid:84)(cid:78)(cid:91)(cid:2)(cid:74)(cid:67)(cid:78)(cid:72)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:20)(cid:18)(cid:7)(cid:2)(cid:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)
(cid:88)(cid:81)(cid:78)(cid:87)(cid:79)(cid:71)(cid:124)(cid:89)(cid:74)(cid:71)(cid:80)(cid:2)(cid:69)(cid:81)(cid:79)(cid:82)(cid:67)(cid:84)(cid:71)(cid:70)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:20)(cid:18)(cid:19)(cid:25)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:85)(cid:16)

(cid:54)(cid:81)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:35)(cid:84)(cid:79)(cid:91)(cid:2)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:69)(cid:67)(cid:82)(cid:86)(cid:87)(cid:84)(cid:71)(cid:70)(cid:2)
(cid:6)(cid:19)(cid:16)(cid:22)(cid:124)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:35)(cid:68)(cid:84)(cid:67)(cid:79)(cid:85)(cid:2)(cid:79)(cid:67)(cid:75)(cid:80)(cid:2)(cid:68)(cid:67)(cid:86)(cid:86)(cid:78)(cid:71)(cid:2)(cid:86)(cid:67)(cid:80)(cid:77)(cid:2)
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(cid:84)(cid:71)(cid:69)(cid:81)(cid:73)(cid:80)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:84)(cid:71)(cid:80)(cid:81)(cid:89)(cid:80)(cid:71)(cid:70)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:68)(cid:71)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:72)(cid:81)(cid:84)(cid:71)(cid:72)(cid:84)(cid:81)(cid:80)(cid:86)(cid:2)
(cid:81)(cid:72)(cid:124)(cid:86)(cid:74)(cid:71)(cid:2)(cid:75)(cid:80)(cid:70)(cid:87)(cid:85)(cid:86)(cid:84)(cid:91)(cid:14)(cid:124)(cid:84)(cid:71)(cid:78)(cid:71)(cid:80)(cid:86)(cid:78)(cid:71)(cid:85)(cid:85)(cid:78)(cid:91)(cid:2)(cid:70)(cid:71)(cid:88)(cid:81)(cid:86)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)(cid:79)(cid:71)(cid:71)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:124)(cid:80)(cid:71)(cid:71)(cid:70)(cid:85)(cid:2)(cid:81)(cid:72)(cid:124)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:124)(cid:81)(cid:89)(cid:80)(cid:71)(cid:84)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:81)(cid:84)(cid:85)(cid:2)
(cid:67)(cid:84)(cid:81)(cid:87)(cid:80)(cid:70)(cid:124)(cid:86)(cid:74)(cid:71)(cid:2)(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)(cid:16)(cid:2)(cid:49)(cid:87)(cid:84)(cid:124)(cid:75)(cid:80)(cid:88)(cid:71)(cid:85)(cid:86)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:75)(cid:80)(cid:2)(cid:84)(cid:71)(cid:85)(cid:71)(cid:67)(cid:84)(cid:69)(cid:74)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:124)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:75)(cid:85)(cid:86)(cid:71)(cid:80)(cid:86)(cid:78)(cid:91)(cid:2)(cid:68)(cid:84)(cid:81)(cid:67)(cid:70)(cid:71)(cid:80)(cid:85)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)
(cid:81)(cid:664)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:85)(cid:124)(cid:89)(cid:74)(cid:75)(cid:78)(cid:71)(cid:2)(cid:84)(cid:67)(cid:75)(cid:85)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:68)(cid:67)(cid:84)(cid:2)(cid:81)(cid:80)(cid:2)(cid:85)(cid:67)(cid:72)(cid:71)(cid:86)(cid:91)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:124)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:16)(cid:2)

(cid:54)(cid:74)(cid:71)(cid:2)(cid:35)(cid:71)(cid:84)(cid:81)(cid:85)(cid:82)(cid:67)(cid:69)(cid:71)(cid:2)(cid:73)(cid:84)(cid:81)(cid:87)(cid:82)(cid:2)(cid:74)(cid:67)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:81)(cid:80)(cid:73)(cid:2)(cid:82)(cid:71)(cid:84)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)
(cid:20)(cid:18)(cid:19)(cid:26)(cid:14)(cid:2)(cid:79)(cid:67)(cid:75)(cid:80)(cid:86)(cid:67)(cid:75)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:2)(cid:75)(cid:79)(cid:82)(cid:84)(cid:71)(cid:85)(cid:85)(cid:75)(cid:88)(cid:71)(cid:2)(cid:79)(cid:67)(cid:84)(cid:73)(cid:75)(cid:80)(cid:2)(cid:71)(cid:88)(cid:71)(cid:80)(cid:2)(cid:89)(cid:74)(cid:75)(cid:78)(cid:71)(cid:2)
(cid:86)(cid:84)(cid:67)(cid:80)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:81)(cid:2)(cid:80)(cid:71)(cid:89)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)(cid:79)(cid:81)(cid:70)(cid:71)(cid:78)(cid:85)(cid:16)(cid:2)(cid:53)(cid:75)(cid:73)(cid:80)(cid:75)(cid:665)(cid:69)(cid:67)(cid:80)(cid:86)(cid:2)
(cid:79)(cid:75)(cid:78)(cid:71)(cid:85)(cid:86)(cid:81)(cid:80)(cid:71)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:70)(cid:28)

•  (cid:40)(cid:71)(cid:70)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:35)(cid:88)(cid:75)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:35)(cid:70)(cid:79)(cid:75)(cid:80)(cid:75)(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:69)(cid:71)(cid:84)(cid:86)(cid:75)(cid:665)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:124)(cid:665)(cid:84)(cid:85)(cid:86)(cid:2)(cid:19)(cid:18)(cid:2)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:75)(cid:71)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:23)(cid:18)(cid:18)(cid:14)(cid:2)
(cid:81)(cid:87)(cid:84)(cid:124)(cid:80)(cid:71)(cid:90)(cid:86)(cid:15)(cid:73)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:14)(cid:2)(cid:69)(cid:78)(cid:71)(cid:67)(cid:80)(cid:15)(cid:85)(cid:74)(cid:71)(cid:71)(cid:86)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)

•  (cid:43)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:84)(cid:67)(cid:80)(cid:73)(cid:71)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:24)(cid:18)(cid:18)(cid:14)(cid:2)(cid:71)(cid:90)(cid:82)(cid:71)(cid:69)(cid:86)(cid:71)(cid:70)(cid:2)(cid:86)(cid:81)(cid:2)

(cid:71)(cid:80)(cid:86)(cid:71)(cid:84)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:2)(cid:75)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:27)(cid:14)(cid:2)(cid:86)(cid:81)(cid:2)(cid:23)(cid:14)(cid:23)(cid:18)(cid:18)(cid:2)(cid:80)(cid:67)(cid:87)(cid:86)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:79)(cid:75)(cid:78)(cid:71)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)
(cid:47)(cid:67)(cid:69)(cid:74)(cid:2)(cid:18)(cid:16)(cid:27)(cid:14)(cid:2)(cid:67)(cid:2)(cid:25)(cid:18)(cid:18)(cid:15)(cid:80)(cid:67)(cid:87)(cid:86)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:79)(cid:75)(cid:78)(cid:71)(cid:2)(cid:75)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:71)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:2)
(cid:81)(cid:84)(cid:75)(cid:73)(cid:75)(cid:80)(cid:67)(cid:78)(cid:2)(cid:82)(cid:84)(cid:81)(cid:76)(cid:71)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)

•  (cid:54)(cid:74)(cid:71)(cid:2)(cid:84)(cid:71)(cid:69)(cid:81)(cid:84)(cid:70)(cid:15)(cid:85)(cid:71)(cid:86)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:24)(cid:14)(cid:19)(cid:22)(cid:20)(cid:15)(cid:80)(cid:67)(cid:87)(cid:86)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:79)(cid:75)(cid:78)(cid:71)(cid:2)(cid:666)(cid:75)(cid:73)(cid:74)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:67)(cid:2)
(cid:41)(cid:24)(cid:23)(cid:18)(cid:39)(cid:52)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:54)(cid:71)(cid:86)(cid:71)(cid:84)(cid:68)(cid:81)(cid:84)(cid:81)(cid:2)(cid:86)(cid:81)(cid:2)(cid:38)(cid:87)(cid:68)(cid:67)(cid:75)(cid:2)(cid:75)(cid:80)(cid:2)(cid:76)(cid:87)(cid:85)(cid:86)(cid:2)(cid:19)(cid:19)(cid:2)(cid:74)(cid:81)(cid:87)(cid:84)(cid:85)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:89)(cid:81)(cid:2)(cid:79)(cid:75)(cid:80)(cid:87)(cid:86)(cid:71)(cid:85)(cid:2)(cid:67)(cid:86)(cid:2)(cid:47)(cid:67)(cid:69)(cid:74)(cid:2)(cid:18)(cid:16)(cid:27)

•  (cid:49)(cid:88)(cid:71)(cid:84)(cid:2)(cid:6)(cid:20)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)(cid:67)(cid:75)(cid:84)(cid:69)(cid:84)(cid:67)(cid:72)(cid:86)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:15)(cid:84)(cid:71)(cid:78)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:84)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)

•  (cid:43)(cid:80)(cid:69)(cid:84)(cid:71)(cid:67)(cid:85)(cid:75)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:41)(cid:24)(cid:23)(cid:18)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:41)(cid:24)(cid:23)(cid:18)(cid:39)(cid:52)(cid:2)(cid:75)(cid:80)(cid:85)(cid:86)(cid:67)(cid:78)(cid:78)(cid:71)(cid:70)(cid:2)(cid:68)(cid:67)(cid:85)(cid:71)(cid:2)

(cid:86)(cid:81)(cid:124)(cid:79)(cid:81)(cid:84)(cid:71)(cid:2)(cid:86)(cid:74)(cid:67)(cid:80)(cid:2)(cid:21)(cid:20)(cid:23)(cid:2)(cid:75)(cid:80)(cid:15)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:2)(cid:67)(cid:75)(cid:84)(cid:82)(cid:78)(cid:67)(cid:80)(cid:71)(cid:85)

•  (cid:49)(cid:87)(cid:84)(cid:2)(cid:67)(cid:69)(cid:83)(cid:87)(cid:75)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:81)(cid:72)(cid:2)(cid:42)(cid:67)(cid:89)(cid:77)(cid:71)(cid:84)(cid:2)(cid:50)(cid:67)(cid:69)(cid:75)(cid:665)(cid:69)(cid:14)(cid:2)(cid:67)(cid:2)(cid:78)(cid:71)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:84)(cid:2)(cid:81)(cid:72)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:73)(cid:84)(cid:67)(cid:86)(cid:71)(cid:70)(cid:2)(cid:67)(cid:88)(cid:75)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:85)(cid:81)(cid:78)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)
(cid:67)(cid:69)(cid:84)(cid:81)(cid:85)(cid:85)(cid:124)(cid:35)(cid:85)(cid:75)(cid:67)(cid:2)(cid:50)(cid:67)(cid:69)(cid:75)(cid:665)(cid:69)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:47)(cid:75)(cid:70)(cid:70)(cid:78)(cid:71)(cid:2)(cid:39)(cid:67)(cid:85)(cid:86)(cid:14)(cid:2)
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(cid:35)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)

(cid:21)

(cid:37)(cid:81)(cid:79)(cid:68)(cid:67)(cid:86)(cid:2)(cid:53)(cid:91)(cid:85)(cid:86)(cid:71)(cid:79)(cid:85)

(cid:38)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:15)(cid:78)(cid:71)(cid:67)(cid:70)(cid:75)(cid:80)(cid:73)(cid:2)
(cid:70)(cid:71)(cid:85)(cid:75)(cid:73)(cid:80)(cid:14)(cid:2)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86)(cid:14)(cid:2)
(cid:79)(cid:67)(cid:80)(cid:87)(cid:72)(cid:67)(cid:69)(cid:86)(cid:87)(cid:84)(cid:75)(cid:80)(cid:73)(cid:14)(cid:2)(cid:79)(cid:81)(cid:70)(cid:71)(cid:84)(cid:80)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)
(cid:67)(cid:80)(cid:70)(cid:124)(cid:85)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:79)(cid:71)(cid:80)(cid:86)(cid:124)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)

(cid:57)(cid:71)(cid:2)(cid:70)(cid:71)(cid:85)(cid:75)(cid:73)(cid:80)(cid:14)(cid:2)(cid:79)(cid:67)(cid:80)(cid:87)(cid:72)(cid:67)(cid:69)(cid:86)(cid:87)(cid:84)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:85)(cid:86)(cid:67)(cid:75)(cid:80)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)
(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)(cid:111)(cid:85)(cid:124)(cid:79)(cid:81)(cid:85)(cid:86)(cid:2)(cid:78)(cid:71)(cid:86)(cid:74)(cid:67)(cid:78)(cid:14)(cid:2)(cid:79)(cid:81)(cid:68)(cid:75)(cid:78)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:85)(cid:87)(cid:84)(cid:88)(cid:75)(cid:88)(cid:67)(cid:68)(cid:78)(cid:71)(cid:2)(cid:78)(cid:67)(cid:80)(cid:70)(cid:2)
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(cid:23)

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(cid:86)(cid:71)(cid:69)(cid:74)(cid:80)(cid:81)(cid:78)(cid:81)(cid:73)(cid:75)(cid:69)(cid:67)(cid:78)(cid:2)(cid:69)(cid:67)(cid:82)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:71)(cid:80)(cid:74)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:81)(cid:664)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:85)(cid:14)(cid:2)
(cid:89)(cid:74)(cid:75)(cid:69)(cid:74)(cid:2)(cid:75)(cid:80)(cid:69)(cid:78)(cid:87)(cid:70)(cid:71)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:78)(cid:67)(cid:86)(cid:71)(cid:85)(cid:86)(cid:2)(cid:75)(cid:80)(cid:80)(cid:81)(cid:88)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:75)(cid:80)(cid:2)(cid:69)(cid:78)(cid:81)(cid:87)(cid:70)(cid:14)(cid:2)(cid:69)(cid:91)(cid:68)(cid:71)(cid:84)(cid:14)(cid:2)
(cid:85)(cid:81)(cid:72)(cid:86)(cid:89)(cid:67)(cid:84)(cid:71)(cid:2)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86)(cid:14)(cid:2)(cid:67)(cid:84)(cid:86)(cid:75)(cid:665)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:75)(cid:80)(cid:86)(cid:71)(cid:78)(cid:78)(cid:75)(cid:73)(cid:71)(cid:80)(cid:69)(cid:71)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:70)(cid:67)(cid:86)(cid:67)(cid:124)(cid:67)(cid:80)(cid:67)(cid:78)(cid:91)(cid:86)(cid:75)(cid:69)(cid:85)(cid:16)

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(cid:86)(cid:84)(cid:67)(cid:80)(cid:85)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:16)(cid:2)(cid:35)(cid:79)(cid:81)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:91)(cid:71)(cid:67)(cid:84)(cid:111)(cid:85)(cid:2)(cid:74)(cid:75)(cid:73)(cid:74)(cid:78)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)(cid:2)(cid:89)(cid:71)(cid:84)(cid:71)(cid:28)

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(cid:67)(cid:69)(cid:83)(cid:87)(cid:75)(cid:85)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)(cid:41)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:38)(cid:91)(cid:80)(cid:67)(cid:79)(cid:75)(cid:69)(cid:85)(cid:111)(cid:2)(cid:74)(cid:75)(cid:85)(cid:86)(cid:81)(cid:84)(cid:91)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
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(cid:82)(cid:67)(cid:84)(cid:86)(cid:80)(cid:71)(cid:84)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:2)(cid:89)(cid:75)(cid:86)(cid:74)(cid:2)(cid:85)(cid:86)(cid:84)(cid:67)(cid:86)(cid:71)(cid:73)(cid:75)(cid:69)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:71)(cid:79)(cid:71)(cid:84)(cid:73)(cid:75)(cid:80)(cid:73)(cid:2)
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(cid:25)

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(cid:49)(cid:664)(cid:71)(cid:84)(cid:75)(cid:80)(cid:73)(cid:2)(cid:85)(cid:91)(cid:85)(cid:86)(cid:71)(cid:79)(cid:85)(cid:2)(cid:67)(cid:69)(cid:84)(cid:81)(cid:85)(cid:85)(cid:2)(cid:67)(cid:78)(cid:78)(cid:2)
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(cid:72)(cid:81)(cid:84)(cid:2)(cid:69)(cid:81)(cid:79)(cid:79)(cid:71)(cid:84)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:69)(cid:87)(cid:85)(cid:86)(cid:81)(cid:79)(cid:71)(cid:84)(cid:85)(cid:16)(cid:2)(cid:57)(cid:75)(cid:86)(cid:74)(cid:2)(cid:85)(cid:74)(cid:75)(cid:82)(cid:91)(cid:67)(cid:84)(cid:70)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:68)(cid:81)(cid:86)(cid:74)(cid:2)
(cid:55)(cid:16)(cid:53)(cid:16)(cid:2)(cid:69)(cid:81)(cid:67)(cid:85)(cid:86)(cid:85)(cid:14)(cid:2)(cid:89)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:71)(cid:2)(cid:84)(cid:71)(cid:82)(cid:67)(cid:75)(cid:84)(cid:2)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:80)(cid:71)(cid:67)(cid:84)(cid:78)(cid:91)(cid:2)(cid:67)(cid:78)(cid:78)(cid:2)
(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:2)(cid:81)(cid:72)(cid:2)(cid:48)(cid:67)(cid:88)(cid:91)(cid:2)(cid:85)(cid:74)(cid:75)(cid:82)(cid:85)(cid:16)(cid:2)(cid:57)(cid:71)(cid:2)(cid:74)(cid:67)(cid:88)(cid:71)(cid:2)(cid:67)(cid:2)(cid:78)(cid:81)(cid:80)(cid:73)(cid:2)(cid:74)(cid:75)(cid:85)(cid:86)(cid:81)(cid:84)(cid:91)(cid:2)(cid:67)(cid:85)(cid:2)(cid:81)(cid:80)(cid:71)(cid:2)
(cid:81)(cid:72)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:80)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:111)(cid:85)(cid:2)(cid:82)(cid:84)(cid:75)(cid:79)(cid:67)(cid:84)(cid:91)(cid:2)(cid:85)(cid:74)(cid:75)(cid:82)(cid:68)(cid:87)(cid:75)(cid:78)(cid:70)(cid:71)(cid:84)(cid:85)(cid:14)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:89)(cid:71)(cid:2)(cid:71)(cid:80)(cid:85)(cid:87)(cid:84)(cid:71)(cid:2)
(cid:86)(cid:74)(cid:71)(cid:2)(cid:48)(cid:67)(cid:88)(cid:91)(cid:2)(cid:84)(cid:71)(cid:86)(cid:67)(cid:75)(cid:80)(cid:85)(cid:2)(cid:75)(cid:86)(cid:85)(cid:2)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:2)(cid:82)(cid:84)(cid:75)(cid:79)(cid:67)(cid:69)(cid:91)(cid:2)(cid:68)(cid:91)(cid:2)(cid:70)(cid:71)(cid:85)(cid:75)(cid:73)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
(cid:86)(cid:71)(cid:85)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:69)(cid:81)(cid:80)(cid:69)(cid:71)(cid:82)(cid:86)(cid:85)(cid:2)(cid:86)(cid:81)(cid:2)(cid:85)(cid:87)(cid:82)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:72)(cid:87)(cid:86)(cid:87)(cid:84)(cid:71)(cid:124)(cid:69)(cid:67)(cid:82)(cid:67)(cid:68)(cid:75)(cid:78)(cid:75)(cid:86)(cid:75)(cid:71)(cid:85)(cid:16)(cid:2)

•  (cid:54)(cid:74)(cid:71)(cid:2)(cid:67)(cid:89)(cid:67)(cid:84)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:2)(cid:79)(cid:81)(cid:70)(cid:75)(cid:665)(cid:69)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:75)(cid:80)(cid:73)(cid:2)(cid:81)(cid:88)(cid:71)(cid:84)(cid:2)
(cid:6)(cid:23)(cid:18)(cid:18)(cid:2)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:67)(cid:70)(cid:88)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:69)(cid:87)(cid:84)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:14)(cid:2)(cid:67)(cid:70)(cid:88)(cid:67)(cid:80)(cid:69)(cid:71)(cid:2)
(cid:69)(cid:81)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:78)(cid:81)(cid:80)(cid:73)(cid:2)(cid:78)(cid:71)(cid:67)(cid:70)(cid:15)(cid:86)(cid:75)(cid:79)(cid:71)(cid:2)(cid:79)(cid:67)(cid:86)(cid:71)(cid:84)(cid:75)(cid:67)(cid:78)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)
(cid:37)(cid:81)(cid:78)(cid:87)(cid:79)(cid:68)(cid:75)(cid:67)(cid:15)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:2)(cid:85)(cid:87)(cid:68)(cid:79)(cid:67)(cid:84)(cid:75)(cid:80)(cid:71)(cid:2)(cid:82)(cid:84)(cid:81)(cid:73)(cid:84)(cid:67)(cid:79)

•  (cid:37)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:87)(cid:71)(cid:70)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)(cid:56)(cid:75)(cid:84)(cid:73)(cid:75)(cid:80)(cid:75)(cid:67)(cid:15)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:2)(cid:85)(cid:87)(cid:68)(cid:79)(cid:67)(cid:84)(cid:75)(cid:80)(cid:71)(cid:85)(cid:2)
(cid:87)(cid:80)(cid:70)(cid:71)(cid:84)(cid:2)(cid:36)(cid:78)(cid:81)(cid:69)(cid:77)(cid:2)(cid:43)(cid:43)(cid:43)(cid:14)(cid:2)(cid:70)(cid:71)(cid:88)(cid:71)(cid:78)(cid:81)(cid:82)(cid:79)(cid:71)(cid:80)(cid:86)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:56)(cid:75)(cid:84)(cid:73)(cid:75)(cid:80)(cid:75)(cid:67)(cid:2)
(cid:50)(cid:67)(cid:91)(cid:78)(cid:81)(cid:67)(cid:70)(cid:2)(cid:47)(cid:81)(cid:70)(cid:87)(cid:78)(cid:71)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:36)(cid:78)(cid:81)(cid:69)(cid:77)(cid:2)(cid:56)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:6)(cid:26)(cid:16)(cid:26)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:75)(cid:80)(cid:2)
(cid:68)(cid:67)(cid:69)(cid:77)(cid:78)(cid:81)(cid:73)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:19)(cid:19)(cid:2)(cid:56)(cid:75)(cid:84)(cid:73)(cid:75)(cid:80)(cid:75)(cid:67)(cid:15)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:2)(cid:85)(cid:87)(cid:68)(cid:79)(cid:67)(cid:84)(cid:75)(cid:80)(cid:71)(cid:85)(cid:2)
(cid:85)(cid:69)(cid:74)(cid:71)(cid:70)(cid:87)(cid:78)(cid:71)(cid:70)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:91)(cid:2)(cid:86)(cid:74)(cid:84)(cid:81)(cid:87)(cid:73)(cid:74)(cid:2)(cid:20)(cid:18)(cid:20)(cid:21)

(cid:43)(cid:80)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)(cid:14)(cid:2)(cid:81)(cid:87)(cid:84)(cid:2)(cid:72)(cid:81)(cid:69)(cid:87)(cid:85)(cid:2)(cid:81)(cid:80)(cid:2)(cid:81)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:70)(cid:75)(cid:85)(cid:69)(cid:75)(cid:82)(cid:78)(cid:75)(cid:80)(cid:71)(cid:70)(cid:2)
(cid:82)(cid:78)(cid:67)(cid:80)(cid:80)(cid:75)(cid:80)(cid:73)(cid:2)(cid:82)(cid:84)(cid:81)(cid:70)(cid:87)(cid:69)(cid:71)(cid:70)(cid:2)(cid:85)(cid:86)(cid:84)(cid:81)(cid:80)(cid:73)(cid:2)(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:85)(cid:16)(cid:2)(cid:35)(cid:79)(cid:81)(cid:80)(cid:73)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)
(cid:74)(cid:75)(cid:73)(cid:74)(cid:78)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)(cid:2)(cid:89)(cid:71)(cid:84)(cid:71)(cid:28)

•  (cid:54)(cid:74)(cid:71)(cid:2)(cid:70)(cid:71)(cid:78)(cid:75)(cid:88)(cid:71)(cid:84)(cid:91)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:85)(cid:71)(cid:69)(cid:81)(cid:80)(cid:70)(cid:2)(cid:81)(cid:72)(cid:2)(cid:86)(cid:74)(cid:84)(cid:71)(cid:71)(cid:2)(cid:60)(cid:87)(cid:79)(cid:89)(cid:67)(cid:78)(cid:86)(cid:15)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:2)

(cid:10)(cid:38)(cid:38)(cid:41)(cid:15)(cid:19)(cid:18)(cid:18)(cid:18)(cid:11)(cid:2)(cid:70)(cid:71)(cid:85)(cid:86)(cid:84)(cid:81)(cid:91)(cid:71)(cid:84)(cid:85)

•  (cid:37)(cid:81)(cid:80)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:85)(cid:2)(cid:86)(cid:81)(cid:86)(cid:67)(cid:78)(cid:75)(cid:80)(cid:73)(cid:2)(cid:6)(cid:22)(cid:16)(cid:26)(cid:2)(cid:68)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:86)(cid:74)(cid:71)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)

(cid:81)(cid:72)(cid:2)(cid:665)(cid:88)(cid:71)(cid:2)(cid:35)(cid:84)(cid:78)(cid:71)(cid:75)(cid:73)(cid:74)(cid:2)(cid:36)(cid:87)(cid:84)(cid:77)(cid:71)(cid:15)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:2)(cid:10)(cid:38)(cid:38)(cid:41)(cid:15)(cid:23)(cid:19)(cid:11)(cid:2)(cid:73)(cid:87)(cid:75)(cid:70)(cid:71)(cid:70)(cid:15)
(cid:79)(cid:75)(cid:85)(cid:85)(cid:75)(cid:78)(cid:71)(cid:124)(cid:70)(cid:71)(cid:85)(cid:86)(cid:84)(cid:81)(cid:91)(cid:71)(cid:84)(cid:85)

•  (cid:35)(cid:2)(cid:69)(cid:81)(cid:80)(cid:85)(cid:86)(cid:84)(cid:87)(cid:69)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)(cid:69)(cid:81)(cid:80)(cid:86)(cid:84)(cid:67)(cid:69)(cid:86)(cid:2)(cid:72)(cid:81)(cid:84)(cid:2)(cid:67)(cid:80)(cid:2)(cid:67)(cid:70)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)

(cid:39)(cid:90)(cid:82)(cid:71)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:84)(cid:91)(cid:2)(cid:53)(cid:71)(cid:67)(cid:2)(cid:36)(cid:67)(cid:85)(cid:71)(cid:2)(cid:10)(cid:39)(cid:53)(cid:36)(cid:2)(cid:24)(cid:11)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:81)(cid:84)(cid:70)(cid:71)(cid:84)(cid:85)(cid:124)(cid:72)(cid:81)(cid:84)(cid:2)
(cid:86)(cid:74)(cid:84)(cid:71)(cid:71)(cid:2)(cid:67)(cid:70)(cid:70)(cid:75)(cid:86)(cid:75)(cid:81)(cid:80)(cid:67)(cid:78)(cid:2)(cid:48)(cid:67)(cid:88)(cid:91)(cid:2)(cid:54)(cid:15)(cid:35)(cid:49)(cid:15)(cid:20)(cid:18)(cid:23)(cid:2)
(cid:666)(cid:71)(cid:71)(cid:86)(cid:124)(cid:84)(cid:71)(cid:82)(cid:78)(cid:71)(cid:80)(cid:75)(cid:85)(cid:74)(cid:79)(cid:71)(cid:80)(cid:86)(cid:124)(cid:81)(cid:75)(cid:78)(cid:71)(cid:84)(cid:85)

(cid:35)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)

(cid:19)(cid:19)

(cid:20)(cid:18)(cid:19)(cid:26)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:42)(cid:75)(cid:73)(cid:74)(cid:78)(cid:75)(cid:73)(cid:74)(cid:86)(cid:85)

EPS from Continuing 
Operations

Operating 
Earnings

Return on Equity

(cid:6)(cid:22)(cid:14)(cid:22)(cid:23)(cid:25)

(cid:6)(cid:19)(cid:19)(cid:16)(cid:20)(cid:20)

(cid:20)(cid:26)(cid:16)(cid:19)(cid:7)

(cid:20)(cid:18)(cid:19)(cid:24)

(cid:20)(cid:18)(cid:19)(cid:25)

(cid:20)(cid:18)(cid:19)(cid:26)

(cid:20)(cid:18)(cid:19)(cid:24)

(cid:20)(cid:18)(cid:19)(cid:25)

(cid:20)(cid:18)(cid:19)(cid:26)

(cid:20)(cid:18)(cid:19)(cid:24)

(cid:20)(cid:18)(cid:19)(cid:25)

(cid:20)(cid:18)(cid:19)(cid:26)

Years Ended December 31

(cid:20)(cid:18)(cid:19)(cid:24)

(cid:20)(cid:18)(cid:19)(cid:25)

2018

(cid:52)(cid:71)(cid:88)(cid:71)(cid:80)(cid:87)(cid:71)

(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:39)(cid:67)(cid:84)(cid:80)(cid:75)(cid:80)(cid:73)(cid:85)

(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:80)(cid:73)(cid:2)(cid:47)(cid:67)(cid:84)(cid:73)(cid:75)(cid:80)

(cid:2)(cid:6)(cid:21)(cid:18)(cid:14)(cid:23)(cid:24)(cid:19)(cid:2)

(cid:2)(cid:6)(cid:21)(cid:18)(cid:14)(cid:27)(cid:25)(cid:21)(cid:2)

 $36,193 

(cid:2)(cid:21)(cid:14)(cid:25)(cid:22)(cid:22)(cid:2)

(cid:2)(cid:22)(cid:14)(cid:20)(cid:21)(cid:24)(cid:2)

 4,457 

(cid:19)(cid:20)(cid:16)(cid:21)(cid:7)

(cid:19)(cid:21)(cid:16)(cid:25)(cid:7)

12.3%

(cid:39)(cid:50)(cid:53)(cid:2)(cid:72)(cid:84)(cid:81)(cid:79)(cid:2)(cid:37)(cid:81)(cid:80)(cid:86)(cid:75)(cid:80)(cid:87)(cid:75)(cid:80)(cid:73)(cid:2)(cid:49)(cid:82)(cid:71)(cid:84)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:85)

(cid:2)(cid:26)(cid:16)(cid:24)(cid:22)(cid:2)

(cid:2)(cid:27)(cid:16)(cid:23)(cid:24)(cid:2)

 11.22 

(cid:54)(cid:81)(cid:86)(cid:67)(cid:78)(cid:2)(cid:36)(cid:67)(cid:69)(cid:77)(cid:78)(cid:81)(cid:73)

(cid:52)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:53)(cid:67)(cid:78)(cid:71)(cid:85)

(cid:52)(cid:71)(cid:86)(cid:87)(cid:84)(cid:80)(cid:2)(cid:81)(cid:80)(cid:2)(cid:39)(cid:83)(cid:87)(cid:75)(cid:86)(cid:91)

Dollars in millions, except per-share amounts

(cid:2)(cid:24)(cid:20)(cid:14)(cid:20)(cid:18)(cid:24)(cid:2)

(cid:2)(cid:24)(cid:21)(cid:14)(cid:19)(cid:25)(cid:23)(cid:2)

 67,871 

(cid:26)(cid:16)(cid:26)(cid:7)

(cid:27)(cid:16)(cid:22)(cid:7)

9.3%

(cid:20)(cid:23)(cid:16)(cid:24)(cid:7)

(cid:20)(cid:24)(cid:16)(cid:24)(cid:7)

28.1%

(cid:19)(cid:20)

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, 2018

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 every Interactive Data File required to be
submitted 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 such files). Yes ✓ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
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 to this Form 10-K. ✓

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

Large accelerated filer ✓ Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with

any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 $48,890,306,362 as of July 1, 2018 (based
on the closing price of the shares on the New York Stock Exchange).

288,235,928 shares of the registrant’s common stock, $1 par value per share, were outstanding on January 27, 2019.

Part III incorporates by reference information from certain portions of the registrant’s definitive proxy statement for the 2019 annual meeting of
shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

DOCUMENTS INCORPORATED BY REFERENCE:

I N D E X

PART I

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

PART II

Item 5.

Item 6.
Item 7.

Item 7A.
Item 8.
Item 9.

Item 9A.
Item 9B.

PART III

Item 10.
Item 11.
Item 12.

Item 13.

Item 14.

PART IV

Item 15.
Item 16.

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Company

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

Index to Exhibits
Form 10-K Summary
Signatures

PAGE

3
14
17
17
18
18
19

20
21

22
39
40

81
81
84

84
84

84

84
84

85
87
88

2

General Dynamics Annual Report 2018

PART I

ITEM 1. BUSINESS

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

BUSINESS OVERVIEW

vehicles, weapons systems and munitions;

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

General Dynamics was incorporated in Delaware in 1952. Long
periods of growth, organic and inorganic, defined our early history
leading up to the early 1990s, when we shed most elements of our
portfolio with the exception of military vehicles and submarines. We
took subsequent actions beginning in the mid-1990s that laid the
including acquiring
foundation for modern-day General Dynamics,
Gulfstream Aerospace Corporation, combat-vehicle businesses,
IT
services and C4ISR solutions companies, and additional shipyards.

During 2018, we continued to position our company for future
growth and superior profitability. On April 3, 2018, we completed the
largest acquisition to date.
(CSRA), our
acquisition of CSRA Inc.
Combining CSRA with our General Dynamics Information Technology
(GDIT) business unit created a premier provider of IT solutions to the
defense, intelligence and federal civilian markets.

into two separate segments:

Concurrent with the acquisition, for segment reporting purposes, we
Information Systems and Technology operating
reorganized our
segment
Information Technology and
Mission Systems. Our company now has five operating segments:
Aerospace, Combat Systems,
Information Technology, Mission
Systems and Marine Systems. The latter four segments we collectively
refer to as our defense segments. Prior-period segment information
has been restated for this change.

is

its

responsible for

Some of our segments consist of multiple business units. Each
business unit
strategy and operational
performance, emphasizing the importance of flexibility and agility for
those closest to the customer. Our corporate headquarters sets the
overall strategy and governance for the company and is responsible for
allocating and deploying capital. Our Ethos—based upon honesty,
trust and alignment—undergirds our culture, our
transparency,
business model and our decision-making.

We are focused on delivering superior shareholder

returns by
exceeding our customers’ expectations and committing to operational
excellence. Our priorities are executing on backlog; managing costs;

implementing continuous improvement; and maximizing earnings, cash
and return on invested capital.

Following is additional information on each of our operating segments.

AEROSPACE
Our Aerospace segment is at the forefront of the business-jet industry.
The segment consists of our Gulfstream and Jet Aviation business units.
We offer a family of Gulfstream aircraft and provide a full range of
services for business aircraft produced by Gulfstream and other original
equipment manufacturers (OEMs). We have earned our
reputation
through:

• superior aircraft design, quality, performance, safety and reliability;
• technologically advanced flight deck and cabin systems; and
• industry-leading customer support.

Gulfstream designs, manufactures and supports the world’s most
technologically advanced business-jet aircraft. Our product
line
encompasses aircraft across a variety of price and performance options
for mid- to ultra-large-cabin business jets. The many combinations of
range, speed, size and cabin customization generate aircraft best suited
for each customer’s unique requirements.

Our disciplined and proven approach to new product development
allows us to repeatedly introduce first-to-market capabilities that set
industry standards for performance, quality, speed and comfort. Our
continual investment in research and development leads to new aircraft
that consistently broaden customer offerings while raising the bar on
safety and performance. Product enhancement and development efforts
include initiatives in advanced avionics, composites, renewable fuels,
flight-control systems, acoustics, cabin technologies and vision systems.
In 2018, our next-generation, clean-sheet aircraft—the G500—
received certification from the U.S. Federal Aviation Administration (FAA).
The first G500 customer delivery took place in the third quarter of 2018.
The G600 is making progress towards its certification, and the first G600
is slated for delivery in 2019. These aircraft are the latest examples of
our commitment to performance, safety, efficiency and innovation. Both
aircraft exceeded original performance projections during their rigorous
flight test programs, demonstrating their industry-leading capabilities. At
Mach 0.85, the G500 can fly 5,200 nautical miles, and the G600 can fly
6,500 nautical miles.

The ultra-long-range, ultra-large-cabin G650 created a new market
when it entered service in 2012. The fastest non-supersonic aircraft to
circumnavigate the globe,
the G650 has flown around the world in
record-setting time. Together, the G650 and G650ER have claimed more
than 85 world speed records. The G650 was the distinguished recipient
of the National Aeronautic Association’s Robert J. Collier Trophy, an
annual award recognizing the greatest achievement in U.S. aeronautics

General Dynamics Annual Report 2018

3

or astronautics for performance, efficiency and safety. In 2018, the
G650 demonstrated steep approach capabilities at London City Airport,
unlocking even greater customer utility. Today, there are more than
325 G650 and G650ER aircraft operating in more than 40 countries.
Interest in the G650 remains strong; its capabilities, reliability and
installed base make it the business-jet standard around the globe.

Gulfstream continued its history of innovation in 2018, becoming the
first civil aircraft manufacturer to offer electronically linked active
control sidesticks that allow pilots to feel each other’s input as well as
those from the auto pilot,
increasing situational awareness and
enhancing safety. Gulfstream also followed up on its history-making
certification of the enhanced vision system by becoming the first OEM
to certify use of the system to touchdown and rollout.

Gulfstream designs, develops and manufactures aircraft

in
large-cabin models.
Savannah, Georgia, including manufacturing all
The mid-cabin G280 is assembled by a non-U.S. partner. All models
are outfitted in Gulfstream’s U.S. facilities. In support of Gulfstream’s
growing aircraft portfolio and customer base, we continue to invest in
our facilities. At our Savannah campus, we have constructed facilities,
including purpose-built G500, G600 and G650 manufacturing facilities;
increased aircraft service capacity; and opened a new customer
support distribution center and dedicated research and development
centers.

We offer comprehensive support

for our more than 2,700
Gulfstream aircraft in service around the world and operate the largest
factory-owned service network in the industry. We operate a
24-hour-per-day/365-day-per-year Customer Support Center and offer
technicians ready to deploy around the
on-call Gulfstream aircraft
world for customer-service requirements.
In 2018, we opened a
in midtown Manhattan,
state-of-the-art Sales and Design Center
elevating the customer experience to enhance our position in one of
the world’s largest business-aviation markets.

We are always evolving our Customer Support business along with
our growing customer base, and 2018 was no exception. We
announced the construction of new service centers in Appleton,
Wisconsin; West Palm Beach, Florida; Farnborough, United Kingdom;
and Savannah. We also announced the creation of a center dedicated
to the resolution of customer issues by a co-located team of technical
experts and multidisciplinary personnel from across the organization,
providing Gulfstream operators with an unprecedented level of
integrated support and ensuring faster return to service of customer
aircraft. Resources include multiple field and airborne support teams
(FAST) aircraft to deliver mission-critical parts, tools and technicians;
more than 150 field service representatives and FAST-dedicated
technicians,
including over 12 mobile repair teams with specially-
equipped vehicles; approximately $2 billion in spares at over 20

4

General Dynamics Annual Report 2018

locations; and a network of more than 30 company-owned and factory-
authorized service centers and authorized warranty facilities.

of

locations

Jet Aviation has been a global leader in business-aviation services for
over 50 years, providing comprehensive services and an extensive
network
owners and operators. With
approximately 50 airport facilities throughout North America, Europe, the
Middle East and Asia Pacific, our service offerings include maintenance,
services, aircraft
(FBO), government
fixed-base operations
management, charter and staffing services.

aircraft

fleet

for

In 2018, we acquired Hawker Pacific, a leading provider of integrated
aviation solutions across Asia Pacific and the Middle East. Hawker Pacific
added 19 locations, including 7 FBOs and 14 maintenance, repair and
overhaul (MRO) facilities to our global footprint. In separate transactions,
we expanded our FBO presence in St. Louis, Missouri; and Amsterdam
and Rotterdam, the Netherlands.

In addition to these capabilities, Jet Aviation offers custom
completions for narrow- and wide-body aircraft. In 2018, Jet Aviation
in Basel,
opened a new 94,000 square foot wide-body hangar
Switzerland, constructed to meet
increased demand for wide-body
completions and refurbishments. The new state-of-the-art hangar can
accommodate several wide- and narrow-body projects simultaneously.

As a market leader in the business-aviation industry, the Aerospace
segment is focused on developing innovative first-to-market technologies
and products; providing exemplary service to customers globally; and
driving efficiencies in aircraft production, completions and services.

Revenue for the Aerospace segment was 23% of our consolidated
revenue in 2018 and 26% in 2017 and 2016. Revenue by major
products and services was as follows:

Year Ended December 31

2018

2017

2016

Aircraft manufacturing and

completions

Aircraft services

Pre-owned aircraft

Total Aerospace

$ 6,226

$ 6,320

$ 6,074

2,096

133

1,743

66

1,625

116

$ 8,455

$ 8,129

$ 7,815

platform solutions

COMBAT SYSTEMS
Our Combat Systems segment offers combat vehicles, weapons systems
and munitions for the U.S. government and its non-U.S. partners. We are
design,
a
development, production, modernization and sustainment services. With
extensive and proven product lines, we deliver tailored solutions for
diverse customer mission needs. Our Combat Systems segment consists
of three business units: European Land Systems, Land Systems, and
Ordnance and Tactical Systems. The segment’s product lines include:

offering market-leading

provider,

• wheeled combat and tactical vehicles;
• main battle tanks and tracked combat vehicles;
• weapons systems, armament and munitions; and
• maintenance, logistics support and sustainment services.

Wheeled combat and tactical vehicles: The segment provides a full

range of vehicles to our global customer base.

The Stryker is an eight-wheeled, medium-weight combat vehicle
that combines mobility and survivability. There are 11 Stryker variants
with 85% commonality across the fleet. We continue to innovate and
demonstrate ways in which the Stryker can be modified to address the
U.S. Army’s urgent operational needs. In 2015, the Army identified a
requirement to increase Stryker lethality, and through internal research
and development (R&D) and accelerated acquisition, we developed a
30-millimeter, remotely operated cannon option. We delivered the first
prototype in 2016, 15 months after the initial contract award. The first
production vehicle was sent
to the Germany-based 2nd Cavalry
Regiment in December 2017; production and delivery is now complete.
The Army is expected to make a decision in 2019 to extend this
capability to the other Stryker brigades.

In 2018, the Army made the decision to upgrade all nine Stryker
brigades to the Stryker A1 configuration. We are currently under
contract for two of the brigades, with estimated completion in 2021.
The Stryker A1 builds upon the combat-proven double-V-hull (DVH)
configuration, providing significantly higher rates of survivability against
In addition to the DVH
mines and improvised explosive devices.
the Stryker A1 provides a 450-horsepower engine,
survivability,
60,000-pound
in-vehicle
suspension, 910-amp alternator
network. It is among the most versatile, mobile and safest personnel
carriers in the entire Army inventory.

and

The Stryker Maneuver Short-Range Air Defense

Launcher
(M-SHORAD) program integrates an air defense mission package onto
a reconfigured Stryker A1 vehicle. The M-SHORAD vehicle is another
variation we quickly developed to address the Army’s directed
requirement to counter closer-in air and missile defense threats. In
to integrate five Strykers into the
2018, we received an order
M-SHORAD configuration for delivery in 2019. We continue to work on
high-energy laser and mobile command post options. We expect the
Stryker platform to continue to demonstrate its versatility well into the
future.

The segment also has a market-leading position in light armored
vehicles (LAVs) with more than 13,000 vehicles in service around the
world. Our LAVs combine advanced technologies and combat-proven
survivability. We are upgrading the Canadian Army’s fleet of LAVs to
increase mobility, survivability and lethality, as well as enhancing the
vehicle’s surveillance suite. We also provide, under a contract with the
Canadian government, wheeled armored vehicles for export and

associated logistics through 2024.

We deliver high-mobility, versatile Pandur and Piranha armored
vehicles to non-U.S. customers. The Pandur family of vehicles serves as
a common platform for various armament and equipment configurations.
The Piranha is a multi-role vehicle well-suited for a variety of combat
operations. We are supplying Pandur 6x6 vehicles to the Austrian Army.
In 2018, we received a contract for over $1 billion to deliver up to 227
Piranha vehicles in six variants to the Romanian Armed Forces. We are
delivering more than 300 Piranha vehicles, also in six variants, to the
Danish Ministry of Defence for its armored personnel carrier program.
The Spanish Army selected the Piranha as its 8x8 armored fighting
vehicle, and we are now performing extensive technological trials in
anticipation of a production contract. We are also producing Piranha
vehicles for Ireland and Switzerland. There are over 11,000 Piranhas in
service worldwide.

The segment also offers a range of light tactical vehicles to global
customers. The Flyer is a lightweight, modular vehicle built for speed and
mobility that grants access to previously unreachable terrain in
demanding environments. We are delivering this family of vehicles to the
U.S. Special Operations Command and the Army. In 2018, we delivered
the first Army-Ground Mobility Vehicle (A-GMV) 1.1. Outside the United
States, the Duro and Eagle vehicles offer a range of options and weight
classes. We are upgrading Duro tactical vehicles for the Swiss Army
through 2022 and began delivering Eagle armored patrol vehicles to the
Danish Army in 2018.

In 2018, we acquired FWW Fahrzeugwerk GmbH, a maintenance and
service provider for the German army and other non-U.S. customers, and
formed General Dynamics European Land Systems – Deutschland,
enhancing our presence in the country.

Main battle tanks and tracked combat vehicles: The segment’s
powerful tracked vehicles provide key combat capabilities to customers
around the world. The Abrams main battle tank offers a proven, decisive
edge in combat. We are maximizing the effectiveness and lethality of the
U.S. Army’s M1A2 Abrams tank fleet with the System Enhancement
Package Version 3 (SEPv3), which provides technological advancements
In
in communications, power generation,
2018, we received orders to upgrade 274 Abrams tanks to the SEPv3
configuration. Additionally, the segment is upgrading Abrams tanks for
several non-U.S. partners. We are currently under contract to develop
further upgrades for the SEPv4 configuration.

fuel efficiency and armor.

In 2018, we were selected to deliver 12 medium-weight, large caliber
prototype vehicles for
the U.S. Army’s Mobile Protected Firepower
program, providing a new opportunity to field vehicles in Infantry Brigade
Combat Team (IBCT) formations. The vehicles are required to be highly
lethal, survivable and mobile.

We are producing the British Army’s AJAX armoured fighting vehicle,
a next-generation medium-weight tracked combat vehicle. The segment

General Dynamics Annual Report 2018

5

will also provide in-service support for the AJAX vehicle fleet. With six
variants,
the AJAX family of vehicles offers advanced electronic
architecture and proven technology for an unparalleled balance of
lethality and mobility, along with high reliability for a
survivability,
vehicle in its weight class. In 2017 and 2018, the AJAX vehicles
underwent extensive testing trials in preparation for delivery to the
British Army, including successful manned live firing trials. The vehicle
is scheduled to enter service in 2020.

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

Weapons systems, armament and munitions: Complementing these
military-vehicle offerings, the segment 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 segment also produces legacy
and next-generation weapons systems for shipboard applications. For
airborne platforms, we produce weapons for fighter aircraft, including
high-speed Gatling guns for all U.S. fixed-wing military aircraft.

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 segment
maintains a market-leading position in the supply of Hydra-70 rockets,
large-caliber tank ammunition, medium-caliber ammunition, mortar
and artillery projectiles,
tactical missile aerostructures, and high-
performance warheads; military propellants; and conventional bombs
and bomb cases.

The Combat Systems segment emphasizes operational excellence
and continuous improvement in a dynamic threat environment with
ever-evolving customer needs. One of the U.S. Army’s top priorities is
its platform products through critical modernization
readiness of
efforts, including upgrades for both the Abrams main battle tank and
Stryker wheeled combat-vehicle programs. We are focused on
increased
innovation, affordability and speed-to-market
performance, survivability and mission-effective products.

to deliver

Revenue for

the Combat Systems segment was 17% of our
consolidated revenue in 2018, 19% in 2017 and 18% in 2016.
Revenue by major products and services was as follows:

Year Ended December 31

2018

2017

2016

Military vehicles

$ 4,027

$ 3,731

$ 3,378

Weapons systems, armament and

munitions

Engineering and other services

1,798

416

1,633

585

1,517

635

Total Combat Systems

$ 6,241

$ 5,949

$ 5,530

6

General Dynamics Annual Report 2018

Information

Technology

and Mission Systems.

INFORMATION TECHNOLOGY
Our Information Technology segment was formed in 2018 concurrent
with our acquisition of CSRA and the reorganization of our legacy
into two separate
Information Systems and Technology segment
segments:
The
combination of GDIT and CSRA created a premier provider of technology
solutions and mission services to help customers across defense,
intelligence and federal civilian markets advance mission performance
Integrating these two businesses has
and transform operations.
enhanced our
develop cost-effective, next-generation
to
technology solutions, leverage our expanded and deep experience across
multiple agencies and pursue large-scale enterprise solutions for our
customers.

ability

We partner with our customers to provide critical services and
solutions that draw upon multiple technological capabilities, deliver value
and solve our customers’ complex challenges, including cloud, cyber,
software development, systems engineering, IT modernization and data
analytics. Additionally, we advance our customers’ missions through
innovative delivery models, including outcome-based contracts and a
relentless focus on execution. Our portfolio includes thousands of
individual contracts that predominantly align to three broad capability
categories:

• IT services;
• IT infrastructure modernization; and
• professional services.

IT services: IT services include technology consulting, solution design,
system integration, operations and maintenance, cloud services,
applications development, and cyber defense of enterprise systems.

The Information Technology segment manages global

IT enterprise
operations for its customers, including in the classified domain, providing
IT support, operations and maintenance, applications development, and
cloud and cyber services. For the Centers for Medicare & Medicaid
Services, we provide IT hosting and operations and maintenance services
in support of claims processing for more than 49 million Medicare
beneficiaries. At the Pentagon, we provide cybersecurity services that
include end-point security, network security and incident handling.

In 2018, we were awarded a multi-year, large-scale contract with the
FAA to develop a Data Visualization, Analysis, and Reporting System.
This system enables the FAA to modernize and provide updated flight
reporting, visualization, modeling and analysis capabilities for FAA air
traffic management analysts and engineers. Our IT services work in the
intelligence and national security domain also expanded in 2018
following a large multi-year contract award from a classified customer.
Under
the new program, we will provide IT service operations,
maintenance support and critical mission services for the customer.

IT infrastructure modernization:

system development

includes
consolidation; and cloud strategy, migration and operations.

engineering;

and

IT infrastructure modernization
center

data

data

center

The Information Technology segment provides managed data center
services to the Department of Homeland Security, migrating and
consolidating
new
technologies to improve security and mission performance. We also
provide IT modernization services for our defense and national security
customers,
including designing, building and operating global
enterprise IT infrastructures.

operations while

introducing

In 2018, we were awarded a multi-year contract by the U.S.
Environmental Protection Agency (EPA)
implement and
operate an enterprise approach to the agency’s local area networks at
the EPA’s headquarters and more than 100 offices nationwide.

to develop,

Professional services: Our professional services portfolio includes
logistics and supply chain management; training and simulation; and
life sciences, medical
research and specialized mission support
services.

The Information Technology segment provides comprehensive
supply chain management for the Department of State’s Bureau of
Diplomatic Security. We procure, warehouse, package, transport and
deliver a variety of security-related products, including more than six
million items to support the customer’s worldwide missions. In our
defense portfolio, we provide turnkey training and simulation services
for the U.S. Army’s Aviation Center of Excellence in Fort Rucker,
Alabama, the largest helicopter flight training program in the world.

In 2018, we were also awarded a large-scale, multi-year contract to
provide communication specialists and personnel for mission support,
planning, logistics and security services for a classified customer.

We continue to assess and refine our key capabilities in the
Information Technology segment’s portfolio. Subsequent to the CSRA
acquisition, we completed additional portfolio shaping, divesting
non-core work operating public-facing contact centers.

As a segment that focuses exclusively on providing services, our
highly skilled workforce is central
to our success. Their technical
expertise, deep knowledge of our customers’ missions and needs, and
constant drive to improve performance differentiate our services.

Revenue for the Information Technology segment was $8.3 billion in
2018 and $4.4 billion in 2017 and 2016, which represented 23%,
14% and 15% of our consolidated revenue in each of the respective
years.

MISSION SYSTEMS
Our Mission Systems segment was formed in 2018 upon the
legacy Information Systems and Technology
reorganization of our
segment
Information Technology and
Mission Systems.

into two separate segments:

Our Mission Systems segment is a global provider of mission-critical
C4ISR products and systems. We offer solutions across all domains, and
we embrace agility to improve the speed of capability to mission. In
2018, we introduced increasingly sophisticated offerings in areas
including high-end encryption, and we acquired a provider of specialized
transmitters and receivers.

The Mission Systems segment has more than 100 locations
worldwide and employs more than 13,000 engineering and technical
professionals dedicated to solving the toughest security and technology
challenges facing the United States and its partners. The segment’s
portfolio includes prime contract programs in which we deliver high-end
defense-electronics hardware and integrated systems, as well as
subcontract efforts in support of large-scale land, air, sea and space
platforms. The segment is organized into three core capabilities:

Space, intelligence and cyber systems;

•
• Ground systems and products; and
• Naval, air and electronic systems.

Space, intelligence and cyber systems: Our Mission Systems segment
engineers space payloads for advanced missions, builds and manages
spaceborne and ground-based communications systems, and provides
mission-data tracking equipment and processing capabilities for our
customers. Additionally, we design and develop high-performance
sensors to gather intelligence data from across the land, air, sea, space
intelligence products and
and cyber domains, and provide geospatial
services to meet the needs of our customers in the global defense,
civilian and commercial markets.

We also offer a variety of cyber products and software, including our
family of encryption products, to protect and defend our customers’
critical information. We continually evolve our TACLANE family of network
encryptors,
the most widely deployed NSA-certified Type 1 in-line
network encryptors, and our NSA-certified ProtecD@R family of
In 2018, we introduced the TACLANE-Nano
data-at-rest encryptors.
compact Type 1 encryptor
for mobile users, designed to protect
information classified up to top secret/sensitive compartmented
information (TS/SCI), pending NSA certification.

and

deploy

support

Ground systems and products: Our Mission Systems segment is a
leading manufacturer and integrator of tactical, secure communications
systems for a diverse customer base, both U.S. and non-U.S. We design,
build,
(SATCOM)
satellite
equipment; mission command applications; assured position, navigation
and timing components; and other communications equipment and
networking solutions for the U.S. defense community and U.S. partners.
We also provide communications equipment, sensors and software for
public safety applications and to the federal government. Additionally, we

communications

General Dynamics Annual Report 2018

7

provide data collection and processing products, command and control
applications, and computing and communications equipment.

computing systems, displays and data management, for both U.S. and
non-U.S. customers.

for

In 2018, we were awarded the contract

the U.S. Army’s
Common Hardware Systems-5 (CHS-5) program. CHS is a “one-stop
IT hardware solutions supporting more than 120
shop” for tactical
Army and other Department of Defense programs for
the rapid
acquisition and delivery of commercial off-the-shelf IT hardware and
services.

We support the Army’s readiness priorities through our contract for
the Army Life Cycle Product Line Management
(LCPM) program,
awarded jointly in 2018 to our Mission Systems and Information
Technology segments. The LCPM program provides soldiers a realistic
live training experience and adds hardware product line management
to our existing software product line management for the Army. We
focus primarily on the extensive Live Training Transformation (LT2)
family of training systems, including force-on-force and force-on-target
systems, and training and instrumentation.
We are also the prime contractor

the Army’s mobile
communications backbone, which provides a secure and resilient
network, on-the-move capabilities, and the ability to rapidly insert new
technologies into the system. We continue to work closely with our
Army customer to evolve its next-generation combat network to meet
the threats of the future.

for

With a 50-year legacy in radio frequency communications and
networks,
radio
the Mission Systems segment offers a range of
products and systems for military, government and commercial
customers, as well as long-term evolution broadband communications
networks for first responders. We provide CM-300/350 V2 digital
radios to the FAA, used by air traffic control centers, commercial
airports, military air stations and range installations for
reliable
ground-to-air communications.

We also provide many capabilities to non-U.S. agencies and
commercial customers. We have developed, deployed, and continue to
modernize and support fully integrated, secure combat voice and data
networks for Canada and the U.K. These efforts, which we have
supported for over 27 years, are ongoing on the Morpheus program,
which aims to modernize the U.K.’s communications and command-
and-control systems across three armed services by evolving the
Bowman network into a more open, agile architecture.

In Canada, our public-safety-focused communication system, the
SHIELD Ecosystem, allows first responders to gather and exchange
information quickly using digital applications on secure systems,
providing the availability and location of in-field personnel at all times.

Naval, air and electronic systems: We provide platform integration
services for maritime and aviation platforms, as well as strategic
including
systems and advanced electronic systems,
weapons

8

General Dynamics Annual Report 2018

We have a 50-year legacy of providing advanced fire-control systems
the Navy’s submarine programs, both attack and ballistic
for all of
missile. We are developing and integrating commercial off-the-shelf
software and hardware upgrades to improve the tactical control
capabilities for several submarine classes. The segment’s combat and
seaframe control systems serve as the technology backbone for the
Navy’s Independence-variant Littoral Combat Ship (LCS) and the
Expeditionary Fast Transport (EPF) ships.

We also manufacture unmanned undersea vehicles for

the U.S.
military and commercial customers. We offer a range of systems and
configurations, including more than 70 different sensors on 80 vehicles
that can operate in the open ocean and constrained waterways.

Our Digital Modular Radio (DMR) is the first software-defined radio to
become a communications system standard for the U.S. Navy. The DMR
is a four-channel radio that serves as the Navy’s communications hub for
surface ships, submarines and shore-site communications. As a multi-
channel radio, it simultaneously communicates with a wide spectrum of
tactical radios and can communicate information at different security
levels. In 2018, we released an updated Mobile User Objective System
improving secure
(MUOS) WFv3.1.5 waveform for the Navy’s DMR,
voice, video and data communications across the MUOS SATCOM
network. The network was approved by the U.S. Strategic Command in
2018 for expanded operational use.

For airborne platforms, we offer high-assurance mission and display
systems, signal and sensor processing, and command-and-control
solutions. Our mission computers provide pilots with advanced situational
awareness and combat systems control. Our avionics, radomes, or
encrypted communication systems are present on nearly every U.S.
military aircraft in service today, including the F-35, F-16, F/A-18, F-22,
P-3, P-8 and AV-8B.

Revenue for the Mission Systems segment was $4.7 billion in 2018,
$4.5 billion in 2017 and $4.7 billion in 2016, which represented 13% of
our consolidated revenue in 2018 and 15% in 2017 and 2016.

MARINE SYSTEMS
Our Marine Systems segment 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 repair services for nearly all classes
of Navy ships. With shipyards on both U.S. coasts, our Marine Systems
segment consists of three business units: Bath Iron Works, Electric Boat
and NASSCO. The segment’s platforms and capabilities include:

• nuclear-powered submarines;
• surface combatants;

• auxiliary and combat-logistics ships;
• commercial product carriers and containerships;
• design and engineering support services; and
• maintenance, modernization and lifecycle support services.

We have a long history as one of the Navy’s primary shipbuilders,
constructing the ships of today’s fleet and designing and developing
next-generation platforms. More than 90% of our segment’s revenue is
for Navy engineering, construction and lifecycle support awarded under
large, multi-year contracts. We maintain the most sophisticated marine
engineering center in the world, designing and testing concepts to
support future capabilities. Our ability to design, build, and maintain
our nation’s most technologically sophisticated warships are a critical
element of the U.S. defense industrial base.

The largest business unit in our Marine Systems segment is Electric
Boat,
the lead shipyard on all Navy nuclear-powered submarine
programs, including both the Virginia-class attack submarine and the
future Columbia-class ballistic missile submarine.

We are the lead contractor on the Virginia-class submarine
program. Designed to meet diverse global mission requirements, these
submarines operate with highly advanced capabilities and stealth in
both littoral and open-ocean environments. Since delivering the lead
Virginia-class submarine, we have reduced the cost and time to deliver
follow-on ships from 84 months to 66 months, while also improving
mission capability and ship quality. The Navy procures Virginia-class
submarines in multi-boat blocks at a two submarines-per-year
construction rate. We have delivered 17 Virginia-class submarines
from the first three blocks in conjunction with an industry partner that
shares in the construction, and the remaining 11 submarines from the
third and fourth blocks are under contract and scheduled for delivery
through 2023.

We are developing the Virginia Payload Module (VPM) for the fifth
block of Virginia-class submarines, which is scheduled to begin
construction in 2019 in support of the Navy’s fleet plans. This block of
submarines will provide significant upgrades in size and performance.
The VPM is an 84-foot hull section that adds four additional payload
tubes, more than tripling the strike capacity of these submarines and
providing unique capabilities to support special missions.

We are the lead contractor for the design and construction of the
Navy’s Columbia-class ballistic missile submarine, a 12-boat program
the Navy considers its top priority. These submarines will provide
strategic deterrent capabilities for decades and are scheduled to come
online when the current Ohio-class fleet reaches its end of service life
beginning in 2027. We are slated to begin construction on the lead
boat in 2021 and deliver it to the Navy in support of the Ohio-class
retirements. In 2018, the Navy awarded us a contract modification for
advance procurement, advance construction and long-lead materials.

We have developed a comprehensive resource master plan to ensure
that we will have a fully trained workforce in place to support
the
increased demand for skilled trades for the Columbia program. We
facilities, optimizing the timing between
continue to invest
investments and returns, while coordinating closely with the Navy on a
$1.7 billion investment in our submarine yard to support construction.

in our

are

Bath Iron Works builds the Arleigh Burke-class (DDG-51) guided-
missile destroyers and manages modernization and lifecycle support.
These high-utility, multi-mission ships
fighting
simultaneous air, surface and subsurface battles. The Navy restarted the
program in 2010 after a four-year break in construction. Bath Iron Works
delivered the first ship in the restart program to the Navy in 2017. In
2018, we were awarded contracts for the construction of five additional
DDG-51s, for a total of 11 ships in backlog, scheduled for delivery
through 2027.

capable

of

Bath Iron Works is one of the Navy’s contractors involved in the
the Zumwalt-class (DDG-1000)
development and construction of
the Navy’s next-generation guided-missile destroyer. These
platform,
ships are equipped with numerous technological enhancements,
including a low radar profile, an integrated power system and a software
tying together nearly every system on the ship. The
environment
forward presence and deterrence,
DDG-1000 provides independent
supports special operations forces, and operates as an integral part of
joint expeditionary forces. We delivered the first ship in 2016 and the
second ship in 2018. We continue to build the final ship, scheduled for
delivery in 2020.

NASSCO is building Expeditionary Sea Base (ESB) auxiliary support
ships, a second variant of the Expeditionary Support Dock (ESD) ships.
ESBs serve as floating forward staging bases, improving the Navy and
Marine Corps’ ability to deliver large-scale equipment and expeditionary
forces to areas without adequate port access. Equipped with a
52,000-square-foot
flight deck and accommodations for up to 250
personnel, they are capable of supporting diverse missions, including
airborne mine countermeasure, maritime security operations and
disaster relief missions.
In 2018, we delivered the fourth ESB and
secured long-lead materials funding for a sixth ship. We expect to deliver
the fifth ESB in 2019.

NASSCO was competitively awarded an exclusive design and
construction contract in 2016 for the lead ship in the Navy’s new class of
fleet replenishment oilers, the John Lewis class (T-AO-205), along with
options for five additional ships. Designed to transfer fuel to Navy surface
ships operating at sea, the oilers can carry 157,000 barrels of fuel and
In
also offer significant dry cargo capacity and aviation capabilities.
2018, we began construction on the first ship, the future USNS John
Lewis.

Our Marine Systems segment provides comprehensive ship and
submarine maintenance, modernization and lifecycle support services to

General Dynamics Annual Report 2018

9

commercial

extend the service life of these ships. NASSCO conducts full-service
maintenance and surface-ship repair operations in Navy
fleet
concentration areas in San Diego, Norfolk, Mayport, and Puget Sound.
Electric Boat provides submarine maintenance and modernization
services in a variety of U.S. locations, and Bath Iron Works provides
lifecycle support services for Navy surface ships. In support of allied
navies, we offer program management, planning, engineering and
design support for submarine and surface-ship construction programs.
In addition to our work for the Navy, the Marine Systems segment
has extensive experience in all phases of
ship
construction. We have designed and built oil and product tankers and
container and cargo ships for commercial customers since the 1970s.
These ships satisfy our commercial customers’ Jones Act requirement
that ships carrying cargo between U.S. ports be built in U.S. shipyards.
shipbuilding technology as
demonstrated by NASSCO’s design and delivery of the world’s first
liquefied natural gas (LNG)-powered containerships. Using green ship
technology, we have decreased emissions dramatically while
increasing fuel efficiency. From 2014 to 2017, NASSCO constructed
and delivered eight LNG-conversion-ready product
for
commercial customers. In 2018, we began construction on the second
ship in a two-ship series of Kanaloa-class containerships. The two new
LNG-capable containerships with roll-on,
roll-off capability are
scheduled for delivery in 2019 and 2020.

advanced commercial

tankers

offer

We

To promote operating efficiency, innovation and affordability for our
customers, we make strategic investments in our business, often in
cooperation with the Navy. We leverage our design and engineering
expertise across shipyards to improve program execution and generate
cost savings. This knowledge sharing enables us to use resources
more efficiently and drive process improvements. Through robust and
disciplined planning, we are positioned to support our customers well
into the future.
Revenue for

the Marine Systems segment was 24% of our
consolidated revenue in 2018 and 26% in 2017 and 2016. Revenue
by major products and services was as follows:

Year Ended December 31

2018

2017

2016

Nuclear-powered submarines

$ 5,712

$ 5,175

$ 5,264

Surface ships

Repair and other services

1,872

918

1,607

1,222

1,648

1,160

Total Marine Systems

$ 8,502

$ 8,004

$ 8,072

CUSTOMERS

In 2018, 65% of our consolidated revenue was from the U.S.
government, 14% was from U.S. commercial customers, 10% was

10

General Dynamics Annual Report 2018

from non-U.S. commercial customers and the remaining 11% was from
non-U.S. government customers.

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

Year Ended December 31

2018

2017

2016

DoD

Non-DoD

Foreign Military Sales (FMS)*

$ 17,752

$ 15,441

$ 15,080

5,228

626

2,904

676

2,883

713

Total U.S. government

% of total revenue

$ 23,606

$ 19,021

$ 18,676

65%

61%

61%

*

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

revenue is derived from fixed-price, cost-
reimbursement and time-and-materials contracts. Our production
contracts are primarily fixed-price. Under these contracts, we agree to
perform a specific scope of work for a fixed amount. Contracts for
research, engineering, repair and maintenance, and other services are
cost-
typically
reimbursement contracts,
reimburses contract costs
the customer
incurred 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
time-and-materials
cost, quality, schedule and performance. Under
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

Of our U.S. government revenue, fixed-price contracts accounted for
56% in 2018, 54% in 2017 and 53% in 2016; cost-reimbursement
contracts accounted for 38% in 2018, 42% in 2017 and 43% in 2016;
and time-and-materials contracts accounted for 6% in 2018 and 4% in
2017 and 2016.

For information on the advantages and disadvantages of each of these
contract types, see Note C to the Consolidated Financial Statements in
Item 8.

U.S. COMMERCIAL
Our U.S. commercial revenue was $5 billion in 2018 and $4.5 billion in
2017 and 2016. This represented 14% of our consolidated revenue in
2018 and 15% in 2017 and 2016. 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.

Outside the United States, we compete with global defense contractors’
exports and the offerings of private and state-owned defense
manufacturers. Our Combat Systems segment competes with a large
number of U.S. and non-U.S. businesses. Our Information Technology
and Mission Systems segments compete with many companies, from
large defense companies to small niche competitors with specialized
technologies or expertise. Our Marine Systems segment 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
the customer’s requirements. Opportunities
capabilities to meet
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.

BUSINESS-JET AIRCRAFT MARKET COMPETITION
The Aerospace segment 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
technological and
innovation; and price. We believe that Gulfstream
new-product
competes effectively in all of these areas.

footprint and responsiveness;

In our maintenance,

The Aerospace segment competes worldwide in the business-jet
aircraft services market primarily on the basis of price, quality and
the
timeliness.
segment competes with several other large companies as well as a
number of smaller companies, particularly in the maintenance business.
In our completions business,
the segment competes with several
service providers.

repair and FBO businesses,

NON-U.S.
Our revenue from non-U.S. government and commercial customers was
$7.6 billion in 2018, $7.5 billion in 2017 and $7.4 billion in 2016. This
represented 21% of our consolidated revenue in 2018 and 24% in
2017 and 2016.

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

Our non-U.S. commercial revenue 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
is concentrated in North America, orders from customers
aircraft
outside North America represent a significant portion of our aircraft
business with approximately 45% of the Aerospace segment’s total
backlog on December 31, 2018.

COMPETITION

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

• the technical excellence, reliability, safety and cost competitiveness

of our products and services;

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

integrated systems;

• our global footprint and accessibility to customers;
• the reputation and customer confidence derived from past

performance; and

• the successful management of customer relationships.

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
technology or capability.
companies that specialize in a particular

General Dynamics Annual Report 2018

11

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 segments follows:

December 31

2018

2017

Funded

Unfunded

Total

Funded

Unfunded

Total

$11,208

16,174

4,717

4,890

18,837

$

167

424

3,248

445

7,761

$11,375

16,598

7,965

5,335

26,598

$12,319

17,158

2,140

4,542

15,872

$

147

458

1,471

721

8,347

$12,466

17,616

3,611

5,263

24,219

$55,826

$12,045

$67,871

$52,031

$11,144

$63,175

$38,641

2018 Total
Backlog Not
Expected to Be
Completed in
2019

$ 5,079

10,822

1,770

2,126

18,844

Aerospace

Combat Systems

Information Technology

Mission Systems

Marine Systems

Total backlog

RESEARCH AND DEVELOPMENT

EMPLOYEES

To foster innovative product development and evolution, we conduct
sustained R&D activities as part of our normal business operations.
Most of our Aerospace segment’s R&D activities support Gulfstream’s
product enhancement and development programs. In our U.S. defense
operations, we conduct customer-sponsored R&D activities under
government contracts and company-sponsored R&D activities, investing
in technologies and capabilities that provide innovative solutions for our
customers. 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.

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.

12

General Dynamics Annual Report 2018

On December 31, 2018, our subsidiaries had 105,600 employees,
approximately one-fifth of whom work under collective agreements with
various labor unions and worker representatives. Agreements covering
total employees are due to expire in 2019.
approximately 5% of
Historically, we have renegotiated these labor agreements without any
significant disruption to operating activities.

RAW MATERIALS, SUPPLIERS AND
SEASONALITY

raw materials,
We depend on suppliers and subcontractors for
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 sometimes rely on only one or two sources of supply
if disrupted, could impact our ability to meet our customer
that,
commitments. We attempt
to mitigate risks with our suppliers by
entering into long-term agreements and leveraging company-wide
agreements to achieve economies of scale, and by negotiating flexible
pricing terms in our customer contracts. We have not experienced, and
do not
foresee, significant difficulties in obtaining the materials,
components or supplies necessary for our business operations.

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:

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

In addition, the FAR addresses the allowability of our costs, while
the CAS addresses the allocation of those costs to contracts. The FAR
and CAS subject 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
to the applicable government
Our non-U.S. operations are subject
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
The Aerospace segment is subject to FAA regulation in the United
States and other similar aviation regulatory authorities internationally,
including the Civil Aviation Administration of Israel (CAAI), the European
Aviation Safety Agency (EASA) and the Civil Aviation Administration of
China (CAAC). For an aircraft to be manufactured and sold, the model
must receive a type certificate from the appropriate aviation authority,
and each aircraft must receive a certificate of airworthiness. Aircraft
outfitting and completions also require approval by the appropriate
aviation authority, which often is accomplished through a supplemental
type certificate. Aviation authorities can require changes to a specific
aircraft or model type before granting approval. Maintenance facilities
and charter operations must be licensed by aviation authorities as well.

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
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
that we are
appropriate cost-recovery actions.
required to fully fund the remediation of a site, the current statutory
framework would allow us to pursue contributions from other PRPs. We
regularly
of
our
environmental matters.

remediating contamination.

In the unlikely event

and management

responsible party

compliance

(PRP) by

assess

status

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 O 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. The SEC maintains a website (www.sec.gov) that
reports, proxy and information statements, and other
contains
information.

In addition to the information contained in this Form 10-K, information
the company can be found on our website and our Investor
about
Relations website (investorrelations.gd.com). Our
Investor Relations
website contains a significant amount of information about the company,
including financial information, our corporate governance principles and
practices, and other information for investors. We encourage investors to

General Dynamics Annual Report 2018

13

visit our website, as we frequently update and post new information
about our company on our website, and it
this
information could be deemed to be material information.

is possible that

References to our website and the SEC’s website in this Form 10-K
do not constitute, and should not be viewed as,
incorporation by
reference of the information contained on, or available through, the
websites. The information should not be considered a part of this Form
10-K, unless otherwise expressly incorporated by reference.

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
segment
the ongoing
development of high-technology products and the price, availability and
quality of commodities and subsystems.

some common risks,

such as

shares

The U.S. government provides a significant portion of our
revenue. In 2018, approximately 65% of our consolidated revenue
was from the U.S. government. Levels of U.S. defense spending are
driven by threats to national security. Competing demands for federal
funds can pressure various areas of spending. Decreases in U.S.
government defense spending 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.

The Budget Control Act of 2011 (BCA) establishes caps for defense
spending over a 10-year period through 2021, including a sequester
mechanism that would impose additional defense cuts. In February
2018, the Congress approved increases to the BCA spending caps
through fiscal year (FY) 2019. However, the BCA’s spending limits for
FY 2020 and FY 2021 have not been increased or otherwise modified.
The President’s defense budget estimates for FY 2020 and beyond
exceed the spending limits established by the BCA. As a result,
continued budget uncertainty and the risk of future sequestration cuts
remain unless the BCA is repealed or significantly modified.

14

General Dynamics Annual Report 2018

While it is impossible to predict the exact impact on our programs or
financial outlook in light of the inherent uncertainty attendant to the
sequestration process, the magnitude of potential funding reductions
imposed by the sequester mechanism as written, could in the aggregate
have material
consequences,
depending on how the cuts are allocated across the budget.

and financial

operational

adverse

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. 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 operate in a highly regulated
environment and 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,
forfeiture of profits,
fines and suspension or prohibition from
suspension of payments,
doing business with the U.S. government.
In addition, reputational
harm could result 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. Moreover, new laws, regulations or standards, or changes to
existing ones, can increase our performance and compliance costs and
reduce our profitability.

including termination of contracts,

Our Aerospace segment 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 corporate,
individual and government customers in the United States and around
the world. The Aerospace segment’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 segment’s anticipated revenue and profitability could be
reduced materially.

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:

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

If

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.

Earnings and margin depend in part on subcontractor and
vendor performance. We rely on other companies to provide materials,
components and subsystems for our products. Subcontractors also
perform some of the services that we provide to our customers. We
depend on these subcontractors and vendors to meet our contractual
obligations in full compliance with customer requirements 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 materials, 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. operations may be sensitive to and impacted by changes in
a foreign government’s national policies and priorities, political
leadership, and budgets, which may be influenced by changes in threat
environments, geopolitical uncertainties, volatility in economic conditions
and other economic and political factors. Changes and developments in
any of these matters or factors may occur suddenly and could impact
funding for programs or delay purchasing decisions or customer
transactions can involve increased financial and
payments. Non-U.S.
legal risks arising from foreign exchange-rate variability and differing
legal systems. Our non-U.S. operations are subject to U.S. and foreign
laws and regulations, including laws and regulations relating to import-
export controls, technology transfers, the Foreign Corrupt Practices Act
and other anti-corruption laws, and the International Traffic in Arms
Regulations (ITAR). An unfavorable event or trend in any one or more of
these factors or a failure to comply with U.S. or foreign laws could result
in administrative, civil or criminal
including suspension or
liabilities,
debarment
from government contracts or suspension of our export
privileges, and could materially adversely affect revenue and earnings
associated with our non-U.S. operations.

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

General Dynamics Annual Report 2018

15

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
segment, 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. To the extent that the demand for skilled
personnel exceeds supply, we could experience higher labor, recruiting
or training costs in order to attract and retain such employees. 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 businesses involved; the performance of the underlying products,
capabilities
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.

technologies; market

conditions

following

or

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
is
an impairment or a sale of a portion of the business. Goodwill
subject
test on an annual basis or when
circumstances indicate that the likelihood of an impairment is greater
than 50%. Such circumstances include a significant adverse change in
the business climate for one of our reporting units or a decision to

to an impairment

16

General Dynamics Annual Report 2018

dispose of a reporting unit or a significant portion of a reporting unit. We
face some uncertainty in our business environment due to a variety of
challenges, including changes in defense spending. We may experience
unforeseen circumstances that adversely affect the value of our goodwill or
intangible assets and trigger an evaluation of the amount of the recorded
goodwill and intangible assets. Future write-offs of goodwill or other
intangible assets as a result of an impairment
in the business could
materially adversely affect our results of 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 (IT) 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 IT systems and products that contain IT systems for
various customers. We generally face the same security threats for these
systems as for our own internal systems. In addition, we face cyber
threats from entities that may seek to target us through our customers,
vendors, subcontractors and other
third parties with whom we do
business. Accordingly, we maintain information security staff, policies
and procedures for managing risk to our information systems, and
conduct employee training on cyber security to mitigate persistent and
continuously evolving cyber security threats. However, there can be no
assurance that any such actions will be sufficient
to prevent
cybersecurity breaches, disruptions, unauthorized release of sensitive
information or corruption of data.

We have experienced cyber security threats such as viruses and
attacks targeting our IT systems. Such prior events have not had a
impact on our financial condition, results of operations or
material
liquidity. However, future threats could, among other things, cause harm
to our business and our reputation; disrupt our operations; expose us to
potential liability, regulatory actions and loss of business; challenge our
future work on sensitive or classified systems for
eligibility for
government customers; and impact our results of operations materially.
Due to the evolving nature of these security threats, the potential impact
of any future incident cannot be predicted. Our insurance coverage may
not be adequate to cover all the costs related to cyber security attacks or
disruptions resulting from such events.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements
that are based on management’s expectations, estimates, projections
and assumptions. Words such as “expects,” “anticipates,” “plans,”
“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 based on information available to us at the time. Forward-
looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, as amended.
These statements are not guarantees of future performance and involve
risks and uncertainties that are difficult to predict. Therefore, actual
future results and trends may differ materially from what is forecast in
forward-looking statements due to a variety of
including,
without limitation, the risk factors discussed in this Form 10-K.

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.

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, 2018, our segments had primary operations at the

following locations:

• Aerospace – Burbank, Lincoln, Long Beach and Van Nuys,
California; West Palm Beach, Florida; Brunswick, Pooler and
Savannah, Georgia; Cahokia,
Illinois; Bedford and Westfield,
Massachusetts; Las Vegas, Nevada; Teterboro, New Jersey; New
York, New York; Tulsa, Oklahoma; San Juan, Puerto Rico; Dallas and
Houston, Texas; Dulles, Virginia; Appleton, Wisconsin; Brisbane,
Cairns, Darwin, Perth and Sydney, Australia; Vienna, Austria;

Sorocaba, Brazil; Beijing, Hong Kong and Shanghai, China; Berlin,
Dusseldorf and Munich, Germany; Jakarta, Indonesia; Kuala Lumpur,
Malaysia; Valetta, Malta; Mexicali, Mexico; Amsterdam and
Rotterdam, the Netherlands; Manila, Philippines; Moscow, Russia;
Singapore; Basel, Geneva and Zurich, Switzerland; Bangkok,
Thailand; Dubai and Fujairah, United Arab Emirates; Luton and
Stansted, United Kingdom.

• Combat Systems – Anniston, Alabama; East Camden and
Hampton, Arkansas; Crawfordsville, St. Petersburg and Tallahassee,
Florida; Marion,
Illinois; Saco, Maine; Sterling Heights, Michigan;
Joplin, Missouri; Lincoln, Nebraska; Lima, Ohio; Eynon, Red Lion and
Scranton, Pennsylvania; Ladson, South Carolina; Garland, Texas;
Williston, Vermont; Auburn and Sumner, Washington; Vienna,
Austria; La Gardeur, London, St. Augustin and Valleyfield, Canada;
Kaiserslautern, Neubrandenburg and Woldegk, Germany; Granada,
Madrid, Sevilla and Trubia, Spain; Kreuzlingen, Switzerland; Merthyr
Tydfil and Oakdale, United Kingdom.

• Information Technology – Daleville, Alabama; Pawcatuck,
Connecticut; Bossier City, Louisiana; Annapolis Junction, Columbia
and Towson, Maryland; Westwood, Massachusetts; Rensselaer, New
York; Fayetteville, North Carolina; Arlington, Chesapeake, Sterling
and several locations in Fairfax County, Virginia.

• Mission Systems – Cullman, Alabama; Scottsdale, Arizona; San
Jose, California; Annapolis Junction, Maryland; Dedham, Pittsfield
and Taunton, Massachusetts; Bloomington, Minnesota; Florham
Park, New Jersey; Catawba, Conover and Greensboro, North
Carolina; Kilgore, Plano and Wortham, Texas; Fairfax and Marion,
Virginia; Calgary and Ottawa, Canada; Tallinn, Estonia; Merthyr
Tydfil, Oakdale and St. Leonards, United Kingdom.

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

A summary of floor space by segment on December 31, 2018,

follows:

(Square feet in millions)

Aerospace

Combat Systems

Information Technology

Mission Systems

Marine Systems

Total square feet

Company-
owned
Facilities

Leased
Facilities

Government-
owned
Facilities

6.2

6.3

0.2

3.8

8.3

8.1

4.4

5.2

3.6

3.4

24.8

24.7

–

5.5

–

0.9

–

6.4

Total

14.3

16.2

5.4

8.3

11.7

55.9

General Dynamics Annual Report 2018

17

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

18

General Dynamics Annual Report 2018

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 13, 2019, 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
46

Christopher J. Brady – Vice President of the company and President of General Dynamics Mission Systems since January 2019; Vice
President, Engineering of General Dynamics Mission Systems, January 2015 – December 2018; Vice President, Engineering of General
Dynamics C4 Systems, May 2013 – December 2014; Vice President, Assured Communications Systems of General Dynamics C4
Systems, August 2004 – May 2013

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 of the company since April 2015; President of General Dynamics Information Technology since
September 2017; Deputy for Operations of General Dynamics Information Technology, April 2017 – September 2017; Senior Vice
President, Human Resources and Administration, April 2015 – March 2017; Vice President, Human Resources, February 2014 –March
2015; Staff Vice President, Strategic Planning, January 2013 – February 2014; Staff Vice President, Investor Relations, June
2008 – January 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

Kimberly A. Kuryea – Senior Vice President, Human Resources and Administration since April 2017; Vice President and Controller,
September 2011 – March 2017; Chief Financial Officer of General Dynamics Advanced Information Systems, November 2007 – August
2011; Staff Vice President, Internal Audit, March 2004 – October 2007

Christopher Marzilli – Executive Vice President, IT & Mission Systems Segments since January 2019; Vice President of the company
and President of General Dynamics Mission Systems, January 2015 – December 2018; 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

William A. Moss – Vice President and Controller since April 2017; Staff Vice President, Internal Audit, May 2015 – March 2017; Staff
Vice President, Accounting, August 2010 – May 2015

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

59

64

59

57

44

67

51

59

55

61

60

58

General Dynamics Annual Report 2018

19

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 under the
trading symbol “GD.”

On January 27, 2019, there were approximately 11,000 holders of

record of our common stock.

For information regarding securities authorized for issuance under
our equity compensation plans, see Note P to the Consolidated
Financial Statements contained in Item 8.

We did not make any unregistered sales of equity securities in

2018.

The following table provides information about our fourth-quarter
to

purchases 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 (a)

Maximum
Number of
Shares That
May Yet Be
Purchased
Under the
Program (a)

Total
Number of
Shares
Purchased

Average
Price Paid
per Share

For additional information relating to our purchases 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, 2013
(Assumes Reinvestment of Dividends)

$250

$200

$150

$100

 $50

300,000
2,630,000
4,650,000

$169.65
178.28
164.27

300,000
2,630,000
4,650,000

4,760,168
2,130,168
7,480,168

2013

2014

2015

2016

2017

2018

General Dynamics

S&P 500 Aerospace & Defense

S&P 500

250
—
521

194.28
—
193.41

7,580,771

$169.35

Period

Pursuant to Share

Buyback Program

10/1/18-10/28/18
10/29/18-11/25/18
11/26/18-12/31/18

Shares Delivered or

Withheld Pursuant to
Restricted Stock
Vesting (b)

10/1/18-10/28/18
10/29/18-11/25/18
11/26/18-12/31/18

(a) On December 5, 2018,

the board of directors authorized management

to repurchase

10 million additional shares of common stock.

(b) Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with
recipients of restricted stock granted under our equity compensation plans that allow us to
withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the
statutory tax withholding due upon vesting of the restricted shares.

20

General Dynamics Annual Report 2018

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 in Item 7 and the Consolidated Financial Statements and the Notes thereto in Item 8.

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

2018

2017

2016

2015

2014

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

Cash Flows
Net cash provided by operating activities
Net cash (used) provided by investing activities
Net cash provided (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 (b)
Book value per share (c)

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

Basic
Diluted
Employees

$ 36,193

$30,973

4,457

12.3%

(356)

(727)

3,358
9.3%
(13)

3,345

11.22

11.18

4,236

13.7%

(103)

(1,165)

2,912
9.4%
–

2,912

9.56

9.56

$30,561

3,744

12.3%

(91)

(977)

2,679
8.8%
(107)

2,572

8.64

8.29

$31,781

$30,852

4,494

14.1%

(83)

(1,183)

3,036
9.6%
–

3,036

9.29

9.29

4,047

13.1%

(86)

(1,129)

2,673
8.7%
(140)

2,533

7.83

7.42

$

3,148

$ 3,876

$ 2,163

$ 2,607

$ 3,830

(10,234)

5,086

(20)

3.72

(788)

(2,399)

(40)

3.36

(391)

(2,169)

(54)

3.04

200

(4,367)

(43)

2.76

(1,103)

(3,676)

36

2.48

$

963

$ 2,983

$ 2,334

$ 2,785

$ 4,388

45,408

12,417

11,732

105.8%

40.64

$

2,458
15.2%

55,826

67,871

288.7

295.3

299.2

105,600

35,046

3,982

11,435

34.8%

38.52

$ 3,448
16.8%

52,031

63,175

296.9

299.2

304.6

98,600

33,172

3,888

10,301

37.7%

34.06

$ 1,771
16.3%

51,783

62,206

302.4

304.7

310.4

98,800

32,538

3,399

10,440

32.6%

33.36

$ 2,038
18.1%

53,449

67,786

313.0

321.3

326.7

99,900

34,648

3,893

11,829

32.9%

35.61

$ 3,309
15.1%

52,929

72,410

332.2

335.2

341.3

99,500

Note: All prior-period information has been restated for the adoption of Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments, and ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost. For further discussion of these two standards, see Note A to the Consolidated Financial Statements in Item 8. 2014 information has not been
restated for the adoption of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, and is, therefore, not comparable to the 2018, 2017,
2016 and 2015 information.
(a) Return on sales is calculated as earnings from continuing operations divided by revenue.
(b) Debt-to-equity ratio is calculated as total debt divided by total equity as of year end.
(c) Book value per share is calculated as total equity divided by total outstanding shares as of year end.
(d) 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

and the calculation of return on invested capital (ROIC), both of which are non-GAAP management metrics.

General Dynamics Annual Report 2018

21

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

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

For an overview of our operating segments, including a discussion of
our major products and services, 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.

BUSINESS ENVIRONMENT

With approximately 65% of our revenue from the U.S. government,
government spending levels, particularly defense spending, influence
our financial performance. Over the past several years, U.S. defense
spending has been mandated by the Budget Control Act of 2011
(BCA). The BCA establishes spending caps over a 10-year period
through 2021, including a sequester mechanism that would impose
additional defense cuts if an annual defense appropriations bill
is
enacted above the spending cap.

year

fiscal

On February 9, 2018, the Congress approved increases to the BCA
spending caps and a budget
(FY) 2019. On
for
September 28, 2018, the FY 2019 defense appropriations bill was
signed into law. It totaled $671 billion and included $602 billion in the
base budget in compliance with the modified BCA spending caps and
$69 billion for overseas contingency operations. However, as of the
filing of
this Form 10-K on February 13, 2019, seven other
appropriations bills funding multiple federal civilian agencies have not
been enacted. These federal agencies had been operating since the
beginning of the government’s fiscal year under a series of continuing
resolutions (CRs), which funded the agencies at FY 2018 spending
levels. The last in this series of CRs expired on December 21, 2018,
resulting in a partial government shutdown for these agencies. On
January 25, 2019, a new CR was approved, providing funding for
these federal agencies through February 15, 2019.

Our greatest concentration of work for the impacted agencies is in
our Information Technology segment, where this work represents less
than 5% of
the segment’s revenue. Additionally, our Aerospace
segment was affected by the shutdown of the U.S. Federal Aviation
Administration (FAA), which impacted the type certification process for
the new G600 aircraft. The partial government shutdown did not have
impact on our results of operations, financial condition or
a material
the current CR, or
cash flows, and we do not anticipate that
if
impact. However,
subsequent extensions, will have a material
another partial government shutdown occurred,
the
the longer
shutdown continued, the risk of a material impact would increase.

22

General Dynamics Annual Report 2018

The long-term outlook for our U.S. defense business is influenced by
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.

International demand for military

equipment and information
technologies presents opportunities for our non-U.S. operations and
exports from our North American businesses. While the revenue potential
can be significant, there are risks to doing business in foreign countries,
including changing budget priorities and overall spending pressures
unique to each country.

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

RESULTS OF OPERATIONS

INTRODUCTION

An understanding of our accounting practices is necessary in the
financial statements and operating results. The
evaluation of our
following paragraphs explain how we recognize revenue and operating
costs in our operating segments. We account for revenue in accordance
with Accounting Standards Codification (ASC) Topic 606, Revenue from
Contracts with Customers.

In the Aerospace segment, we record revenue on contracts for new
aircraft when the customer obtains control of the asset, which is generally
the fully outfitted
upon delivery and acceptance by the customer of
aircraft. Revenue associated with the segment’s custom completions of
narrow-body and wide-body aircraft and the segment’s services
businesses is 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, progress on aircraft completions, and the
level and type of aircraft services performed during the period.

The majority of the Aerospace segment’s operating costs relates to
new aircraft production on firm orders and consists of labor, material,
subcontractor and overhead costs. The costs are accumulated in
production lots, recorded in inventory and recognized as operating costs
in a
at aircraft delivery based on the estimated average unit cost
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

the level of operating costs,

impact

and type of aircraft delivered. Operating costs in the Aerospace
segment’s completions and services businesses are recognized
generally as incurred.

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 ultra-large-cabin, large-cabin and
mid-cabin aircraft deliveries. Additional factors affecting the segment’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 research and development (R&D) costs incurred by the
segment.

In the defense segments,

revenue on long-term government
contracts is recognized generally over time as the work progresses,
either as products are produced or as services are rendered. Typically,
revenue is recognized over time using costs incurred to date relative to
total estimated costs at completion to measure progress toward
satisfying our performance obligations. Incurred cost represents work
performed, which corresponds with, and thereby best depicts,
the
transfer of control
to the customer. Contract costs include labor,
material, overhead and, when appropriate, G&A expenses. Variances in
costs recognized from period to period reflect primarily increases and
decreases in production or activity levels on individual contracts.
Because costs are used as a measure of progress, year-over-year
variances in cost result in corresponding variances in revenue, which
we generally refer to as volume.

Operating earnings and margin in the defense segments are driven
by changes in volume, performance or contract mix. Performance
refers to changes in profitability based on adjustments to estimates at
completion on individual contracts. These adjustments result
from
increases or decreases to the estimated value of the contract, the
estimated costs to complete the contract 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-
versus lower-margin work. Higher or lower margins can result from a
number of
fixed-price/cost-
including contract
reimbursable) and type of work (e.g., development/production).

type (e.g.,

factors,

CONSOLIDATED OVERVIEW

2018 IN REVIEW

• Outstanding operating performance:

▪ Record-high revenue of $36.2 billion with growth in all of our

segments.

▪ Operating earnings of $4.5 billion increased 5.2% from 2017.
▪ Record-high earnings from continuing operations per diluted share

of $11.22, an increase of 17.4% from 2017.

• 10.1 million outstanding shares repurchased for $1.8 billion and
$1.1 billion paid in cash dividends, returning over 115% of our free
cash flow from operations to shareholders.

• Robust backlog of $67.9 billion increased $4.7 billion, or 7.4%, from

2017, supporting our long-term growth expectations.
▪ Several significant contract awards received in 2018 in our

defense segments.

REVIEW OF 2018 VS. 2017

Year Ended December 31

2018

2017

Variance

Revenue
Operating costs and expenses

$ 36,193
(31,736)

$ 30,973
(26,737)

$ 5,220
(4,999)

16.9%
18.7%

Operating earnings
Operating margin

4,457
12.3%

4,236
13.7%

221

5.2%

the increase was the acquisition of CSRA in our

Our consolidated revenue increased 16.9% in 2018. The largest driver
of
Information
Technology segment. Excluding CSRA, revenue increased by 5% driven
by growth in all of our segments.

Operating costs and expenses increased in 2018 due primarily to the
CSRA acquisition, including the impact of intangible asset amortization
expense and one-time transaction-related charges associated with costs
to complete the acquisition, resulting in a lower margin compared with
2017. The 2018 operating margin was also impacted by a less favorable
aircraft delivery mix in our Aerospace segment consistent with our
expectation as we transition to the new G500 and G600 aircraft.

REVIEW OF 2017 VS. 2016

Year Ended December 31

2017

2016

Variance

Revenue
Operating costs and expenses

$ 30,973
(26,737)

$ 30,561
(26,817)

$ 412
80

1.3%
(0.3)%

Operating earnings
Operating margin

4,236
13.7%

3,744
12.3%

492

13.1%

We realized top-line growth in 2017 driven by higher volume across our
Combat Systems segment and increased revenue from aircraft deliveries
and aircraft services in our Aerospace segment. These increases were
offset partially by lower revenue in our Mission Systems segment driven
by funding delays caused by the extended FY 2017 CR. While revenue
increased, operating costs and expenses decreased, resulting in a 13.1%
increase in operating earnings and margin growth of 140 basis points.
Operating earnings and margin grew at each of our segments in 2017.

General Dynamics Annual Report 2018

23

REVIEW OF OPERATING SEGMENTS

Year Ended December 31

2018

2017

2016

Aerospace

Combat Systems

Information Technology

Mission Systems

Marine Systems

Corporate

Total

Revenue

Operating Earnings

Revenue

Operating Earnings

Revenue

Operating Earnings

$ 8,455

$ 1,490

$ 8,129

$ 1,577

$ 7,815

$ 1,394

6,241

8,269

4,726

8,502

–

962

608

659

761

(23)

5,949

4,410

4,481

8,004

–

937

373

638

685

26

5,530

4,428

4,716

8,072

–

831

340

601

595

(17)

$36,193

$ 4,457

$30,973

$ 4,236

$30,561

$ 3,744

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

The change in the segment’s operating earnings in 2018 consisted

of the following:

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

Total decrease

$(206)
64
2
53

$ (87)

AEROSPACE

Review of 2018 vs. 2017

Year Ended December 31

Revenue
Operating earnings
Operating margin

Gulfstream aircraft deliveries

2018

2017

Variance

$ 8,455
1,490
17.6%

$ 8,129
1,577
19.4%

$ 326
(87)

4.0%
(5.5)%

(in units)

121

120

1

0.8%

The increase in the Aerospace segment’s revenue in 2018 consisted of
the following:

Aircraft manufacturing and completions operating earnings were down
due to a shift in the mix of Gulfstream aircraft deliveries and the typical
lower margin associated with the initial units of a new aircraft model, as
well as a performance challenge in the wide-body aircraft custom
services operating earnings were
completions business. Aircraft
particularly strong due to favorable cost performance and the mix of
In addition, operating earnings were impacted
services provided.
including reduced R&D
favorably by lower G&A/other expenses,
expenses as we completed the G500 development and certification
program. Overall, the Aerospace segment’s operating margin decreased
180 basis points to 17.6%.

Review of 2017 vs. 2016

Aircraft services
Aircraft manufacturing and completions
Pre-owned aircraft

Total increase

$ 353
(94)
67

$ 326

Year Ended December 31

Revenue
Operating earnings
Operating margin

2017

2016

Variance

$ 8,129
1,577
19.4%

$ 7,815
1,394
17.8%

$ 314
183

4.0%
13.1%

Aircraft services revenue increased due to higher demand for
maintenance work and the acquisition in the second quarter of 2018 of
Hawker Pacific, a leading provider of integrated aviation solutions across
Asia Pacific and the Middle East. Additionally, we had seven pre-owned
aircraft sales in 2018 compared with five in 2017. These increases
were offset partially by a lower volume of custom completions of
narrow-body and wide-body aircraft.

24

General Dynamics Annual Report 2018

Gulfstream aircraft deliveries

(in units)

120

121

(1)

(0.8)%

The Aerospace segment’s revenue increased in 2017 due primarily to
additional deliveries of the ultra-large-cabin G650 and mid-cabin G280
aircraft, offset partially by a decrease in the number of G450 and G550
large-cabin aircraft deliveries. Aircraft services revenue increased, driven
by higher demand for maintenance work and the acquisition of a fixed
base operation (FBO) in 2017.

Operating earnings increased in 2017 due to favorable cost
performance and the mix of ultra-large- and large-cabin aircraft
deliveries. G&A/other expenses were higher in 2017 due primarily to
increased R&D expenses associated with product-development efforts
as the segment progressed with the certification of the G500 and
G600 aircraft. Overall,
the Aerospace segment’s operating margin
increased 160 basis points to 19.4%.

2019 Outlook
We expect
the Aerospace segment’s 2019 revenue to be around
$9.7 billion. Operating margin is expected to be approximately 15.5%,
down from 2018 as a result of mix shift as the segment continues its
transition to the new G500 and G600 aircraft as well as higher
anticipated pre-owned aircraft sales, which typically carry no margin.

COMBAT SYSTEMS

Review of 2018 vs. 2017

Year Ended December 31

2018

2017

Variance

Revenue

Operating earnings

Operating margin

$ 6,241

$ 5,949

962

15.4%

937

15.8%

$ 292

25

4.9%

2.7%

Review of 2017 vs. 2016

Year Ended December 31

2017

2016

Variance

Revenue

Operating earnings

Operating margin

$ 5,949

$ 5,530

937

15.8%

831

15.0%

$ 419

106

7.6%

12.8%

The Combat Systems segment’s revenue increased in 2017 due
primarily to higher volume on the U.S. Army’s Abrams and Stryker
programs. Additionally, revenue was up due to increased production of
several products, including bombs and Hydra-70 rockets for the U.S.
government. Revenue from international military vehicles increased due
to the ramp up in production on the British AJAX armoured fighting
vehicle program and several
light armored vehicle (LAV)
international
programs, offset largely by lower revenue on a large contract to produce
wheeled armored vehicles for an international customer as the segment
transitioned from engineering to production.

The Combat Systems segment’s operating margin increased 80 basis
points in 2017 driven by improved operating performance across the
segment’s portfolio. Operating earnings in 2016 included the impact of a
loss on the design and development phase of the British AJAX armoured
fighting vehicle program.

The increase in the Combat Systems segment’s revenue in 2018
consisted of the following:

2019 Outlook
We expect the Combat Systems segment’s 2019 revenue to be between
$6.5 and $6.6 billion with operating earnings of $965 to $975.

U.S. military vehicles

International military vehicles

Weapons systems and munitions

Total increase

$ 130

99

63

$ 292

INFORMATION TECHNOLOGY

Review of 2018 vs. 2017

Revenue was up across all areas of the Combat Systems segment in
2018. Revenue from U.S. military vehicles increased due to higher
volume on the Army’s Abrams tank programs,
including work to
produce Abrams M1A2 System Enhancement Package Version 3
(SEPv3) tanks, offset partially by lower volume on Stryker wheeled
combat-vehicle programs as we completed delivery of
the Stryker
30-millimeter cannon upgrade vehicles. Revenue from international
military vehicles increased due to the production ramp up of Piranha
wheeled armored vehicles, offset partially by lower revenue on a large
contract
to produce wheeled armored vehicles for an international
customer. Weapons systems and munitions revenue was up due
including
primarily to increased production of several products,
medium-caliber and tank ammunition programs.

The Combat Systems segment’s operating margin decreased 40
basis points compared with 2017 driven by contract mix in our combat
vehicles business.

Year Ended December 31

2018

2017

Variance

Revenue

Operating earnings

Operating margin

$ 8,269

$ 4,410

$ 3,859

608

7.4%

373

8.5%

235

87.5%

63.0%

The Information Technology segment’s revenue increased due primarily
to the CSRA acquisition in the second quarter of 2018. Operating margin
decreased 110 basis points compared with 2017 due to intangible asset
amortization expense from the CSRA acquisition. Excluding the impact of
this amortization,
the segment’s margin would have been 9.6%,
reflecting the favorable impact of CSRA’s mix of higher-margin, fixed-
In the fourth quarter of 2018, we sold the Information
price work.
Technology segment’s contact-center business, which had a small
unfavorable impact on revenue.

General Dynamics Annual Report 2018

25

Review of 2017 vs. 2016

Year Ended December 31

2017

2016

Variance

Revenue

Operating earnings

Operating margin

$ 4,410

$ 4,428

$ (18)

(0.4)%

373

8.5%

340

7.7%

33

9.7%

United Kingdom. Revenue from naval, air and electronic systems
increased due primarily to higher volume on our U.S. Navy program for
combat and seaframe control systems on Independence-variant Littoral
Combat Ships.

The Mission Systems segment’s operating margin decreased 30 basis

points in 2018 due to variations in program performance and mix.

Revenue in the Information Technology segment was essentially flat in
2017 as delays in procurement activities across a number of
programs, particularly in our federal civilian business, offset growth in
the segment’s intelligence business and the acquisition in late 2017 of
a provider of mission-critical support services.

Despite the lower

revenue, operating earnings increased, and
operating margin expanded 80 basis points. The margin growth was
driven primarily by strong program performance and favorable contract
mix across the portfolio.

2019 Outlook
We expect the Information Technology segment’s 2019 revenue to be
approximately $8.3 billion, a slight increase from 2018, reflecting a full
year of CSRA’s results, offset partially by divestiture activities. We
expect the segment’s operating margin to be around 7.5%.

MISSION SYSTEMS

Review of 2018 vs. 2017

Year Ended December 31

2018

2017

Variance

Revenue

Operating earnings

Operating margin

$ 4,726

$ 4,481

659

13.9%

638

14.2%

$ 245

21

5.5%

3.3%

Review of 2017 vs. 2016

Year Ended December 31

2017

2016

Variance

Revenue

Operating earnings

Operating margin

$ 4,481

$ 4,716

$ (235)

(5.0)%

638

14.2%

601

12.7%

37

6.2%

funding delays across a number of programs,
and
communications

The Mission Systems segment’s revenue decreased in 2017 as a result
including the U.S.
of
Army’s mobile
and
communications equipment programs, caused by the seven-month FY
2017 CR.

computing

network

Despite the lower

revenue, operating earnings increased, and
operating margin expanded 150 basis points. The margin growth was
driven primarily by strong program performance and favorable contract
mix.

2019 Outlook
We expect the Mission Systems segment’s 2019 revenue to be between
$4.8 and $4.9 billion, an increase of between 2 and 3% over 2018, with
operating margin in the mid- to high-13% range.

MARINE SYSTEMS

The increase in the Mission Systems segment’s revenue in 2018
consisted of the following:

Review of 2018 vs. 2017

Space, intelligence and cyber systems

Ground systems and products

Naval, air and electronic systems

Total increase

Year Ended December 31

2018

2017

Variance

Revenue

Operating earnings

Operating margin

$ 8,502

$ 8,004

$ 498

6.2%

761

9.0%

685

8.6%

76

11.1%

$ 118

69

58

$ 245

Revenue was up across the Mission Systems segment in 2018.
Revenue from space, intelligence and cyber systems increased due
primarily to demand for our portfolio of encryption products. The
growth in ground systems and products revenue was driven by
increased activity on U.S. Army mobile communications networking
programs and the ramp up of a program to design and develop the
next-generation tactical communication and information system for the

26

General Dynamics Annual Report 2018

The increase in the Marine Systems segment’s revenue in 2018
consisted of the following:

U.S. Navy ship construction

Commercial ship construction

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

Total increase

$ 424

171

(97)

$ 498

Revenue from U.S. Navy ship construction increased with higher
volume on the Virginia-class submarine program, Arleigh Burke-class
(DDG-51) destroyer program and John Lewis class (T-AO-205) fleet
replenishment oiler contract, offset partially by lower volume on the
Navy’s Expeditionary Sea Base (ESB) program. Commercial ship
construction revenue increased as work ramped up on a contract for
two container ships. Revenue from U.S. Navy ship engineering, repair
and other services decreased driven by a lower volume of submarine
repair work and the timing of surface ship repair work, offset partially
by increased work on the Columbia-class submarine development
program and Virginia-class submarine design enhancements.

The Marine Systems segment’s operating margin increased 40
basis points in 2018 reflecting solid operating performance across all
of our shipyards.

Review of 2017 vs. 2016

Year Ended December 31

2017

2016

Variance

Revenue

$ 8,004

$ 8,072

Operating earnings

Operating margin

685

8.6%

595

7.4%

$ (68)

90

(0.8)%

15.1%

Corporate operating results in 2018 included one-time transaction-
related charges of approximately $45 associated with the costs to
complete the CSRA acquisition. Excluding these charges, Corporate
operating results have two primary components: pension and other post-
retirement benefit income, and stock option expense.

As discussed in Note A to the Consolidated Financial Statements in
Item 8, Corporate operating results are impacted by Accounting
the
Standards Update (ASU) 2017-07. ASU 2017-07 requires
non-service cost components of pension and other post-retirement
benefit cost (e.g., interest cost) to be reported in other income (expense)
in the Consolidated Statement of Earnings. In our defense segments,
pension and other post-retirement benefit costs are allocable contract
costs. For these segments, we report the offset for the non-service cost
components in Corporate operating results. This amount exceeded our
stock option expense in 2018 and 2017.

We expect Corporate operating costs of approximately $20 in 2019,
reflecting projected stock option expense in excess of the projected
offset of non-service cost components of pension and other post-
retirement benefit cost for our defense segments.

OTHER INFORMATION

Revenue in 2017 was down from Jones Act commercial construction
following the delivery of six ships in 2016 and two ships in 2017.
Additionally, revenue decreased due to timing on the Virginia-class
submarine program, offset partially by higher volume on the ESB
program. These decreases were offset partially by additional work
related to the Columbia-class submarine development program and
Virginia-class submarine design enhancements, and a higher-volume
of submarine repair work.

Operating margin increased 120 basis points due primarily to the
2016 impact of cost growth associated with the restart of the Navy’s
DDG-51 program. The segment’s operating margin in 2017 was also
affected favorably by a decrease in lower-margin commercial ship
work.

PRODUCT AND SERVICE REVENUE AND OPERATING COSTS

Review of 2018 vs. 2017

Year Ended December 31

2018

2017

Variance

Revenue:

Products

Services

Operating Costs:

Products

Services

$ 20,149

$ 19,016

$ 1,133

16,044

11,957

4,087

6.0%

34.2%

$ (15,894)

$ (14,773)

$ (1,121)

7.6%

(13,584)

(9,958)

(3,626)

36.4%

The increase in product revenue in 2018 consisted of the following:

2019 Outlook
We expect
the Marine Systems segment’s 2019 revenue to be
approximately $9 billion, an increase of 6% from 2018. Operating
margin is expected to be around 8.5%.

Ship construction

Military vehicle production

Other, net

Total increase

$

598

307

228

$ 1,133

CORPORATE
Corporate operating results consisted of the following:

Year Ended December 31

2018

2017

2016

Operating (expense) income

$ (23)

$ 26

$ (17)

Ship construction revenue increased due to higher volume on the
Virginia-class submarine program, the DDG-51 destroyer program, the
T-AO-205 fleet replenishment oiler contract and commercial container
ship construction. Military vehicle production revenue increased due to
higher volume on the U.S. Army’s Abrams tank programs and the ramp
up of production on Piranha vehicles for international customers. The

General Dynamics Annual Report 2018

27

primary drivers of the increase in product operating costs were the
changes in volume on the programs described above.

The increase in service revenue in 2018 consisted of the following:

IT services
Aircraft services
Other, net

Total increase

$ 3,859
353
(125)

$ 4,087

IT services revenue increased due primarily to the CSRA acquisition
in the second quarter of 2018. The aircraft services revenue increase
was due to higher demand for maintenance work and the acquisition of
Hawker Pacific in the second quarter of 2018. Service operating costs
increased at a higher rate than revenue due primarily to intangible
asset amortization expense from the CSRA acquisition.

Review of 2017 vs. 2016

Year Ended December 31

2017

2016

Variance

Revenue:

Products

Services

Operating Costs:

Products

Services

$ 19,016

$ 19,010

$

6

11,957

11,551

406

$ (14,773)

$ (15,155)

$ 382

(9,958)

(9,741)

(217)

—%

3.5%

(2.5)%

2.2%

The increase in product revenue in 2017 consisted of the following:

Military vehicle production

Aircraft manufacturing and completions

Ship construction

C4ISR products*

Other, net

Total increase

$ 261

246

(310)

(173)

(18)

$

6

* C4ISR (command, control, communications, computers,
reconnaissance) solutions in our Mission Systems segment

intelligence, surveillance and

Military vehicle production revenue increased due to higher volume
on the U.S. Army’s Abrams and Stryker programs and the ramp up in
international LAV
production on the AJAX program and several
contracts. Aircraft manufacturing and completions revenue increased
the ultra-large-cabin G650 and
due to additional deliveries of
largely by
mid-cabin G280 aircraft. These increases were offset
decreased ship construction revenue driven by timing on the Virginia-
class submarine program and reduced Jones Act commercial ship
construction volume, and decreased revenue from C4ISR products
driven by funding delays caused by the extended FY 2017 CR.

28

General Dynamics Annual Report 2018

While product revenue was steady in 2017, product operating costs
decreased due to strong operating performance in our Aerospace and
Mission Systems segments and the impact of DDG-51 program cost
growth in 2016 in our Marine Systems segment.

The increase in service revenue in 2017 consisted of the following:

Ship engineering, repair and other services

Aircraft services

Other, net

Total increase

$ 243

118

45

$ 406

Revenue from ship engineering, repair and other services increased
due to additional work related to the Columbia-class submarine
development
design
enhancements, and a higher volume of submarine repair work. Aircraft
services revenue increased driven by higher demand for maintenance
work and the acquisition of an FBO in 2017.

program and

Virginia-class

submarine

Service operating costs increased in 2017 at a lower rate than
revenue due primarily to strong operating performance in our Information
Technology segment.

G&A EXPENSES
As a percentage of revenue, G&A expenses were 6.2% in 2018, 6.5% in
2017 and 6.3% in 2016. We expect G&A expenses as a percentage of
revenue in 2019 to be generally consistent with 2018.

INTEREST, NET
Net interest expense was $356 in 2018, $103 in 2017 and $91 in
2016. The increase in 2018 was due primarily to the impact of financing
the CSRA acquisition, including the issuance of $7.5 billion of fixed- and
floating-rate notes in the second quarter of 2018. The increase in 2017
was due primarily to a $500 net increase in long-term debt beginning in
the third quarter of 2016. See Note K to the Consolidated Financial
information regarding our debt
Statements in Item 8 for additional
obligations,
interest
expense to be approximately $430, an increase from 2018, reflecting a
full year of financing for the CSRA acquisition.

rates. We expect 2019 net

including interest

OTHER, NET
Net other expense was $16 in 2018 and $56 in 2017, and net other
income was $3 in 2016. Net other expense/income represents primarily
the non-service cost components of pension and other post-retirement
benefit cost, including amounts from legacy CSRA plans assumed as of
the acquisition date. The 2018 expense also includes approximately $30
of transaction costs associated with the CSRA acquisition. In 2019, we
expect net other income to be approximately $60 due primarily to the
investment income from our commercial pension plans.

PROVISION FOR INCOME TAX, NET
Our effective tax rate was 17.8% in 2018, 28.6% in 2017 and 26.7%
in 2016. The decrease in our effective tax rate in 2018 is due primarily
to the reduction of the U.S. corporate statutory tax rate from 35% to
21% beginning on January 1, 2018, resulting from the enactment of
the Tax Cuts and Jobs Act (tax reform) on December 22, 2017. The
effective tax rate in 2018 also includes the impact of tax benefits
associated with equity-based compensation and a discretionary
pension plan contribution. The effective tax rate in 2017 included a
$119 unfavorable impact, or 290 basis points, resulting from tax
reform. For further discussion, including a reconciliation of our effective
tax rate from the statutory federal rate, see Note F to the Consolidated
Financial Statements in Item 8. For 2019, we anticipate a full-year
effective tax rate between 18 and 18.5%.

DISCONTINUED OPERATIONS, NET OF TAX
Concurrent with the acquisition of CSRA, we were required by a
government customer to dispose of certain CSRA operations to address
an organizational conflict of interest with respect to services provided
to the customer. In 2018, we sold these operations. In accordance with
U.S. generally accepted accounting principles (GAAP), the sale did not
result in a gain for financial reporting purposes. However, the sale
generated a taxable gain, resulting in tax expense of $13.

In 2013, we settled litigation with the U.S. Navy related to the
terminated A-12 aircraft contract
in the company’s former tactical
In connection with the settlement, we
military aircraft business.
released some rights to reimbursement of costs on ships under
contract at our Bath, Maine, shipyard. As we progressed through the
shipbuilding process, we determined that the cost associated with this
settlement was greater
in 2016, we
recognized an $84 loss, net of tax, to adjust the previously recognized
settlement value. In addition, we recognized $23 of losses, net of tax,
in 2016 related to other former operations of the company.

than anticipated. Therefore,

BACKLOG AND ESTIMATED POTENTIAL
CONTRACT VALUE

$125,000

$100,000

$75,000

$50,000

$25,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2016

2017

2018

total backlog,

including funded and unfunded portions, was
Our
$67.9 billion on December 31, 2018, up 7.4% from $63.2 billion at the
end of 2017. Our total backlog is equal to our remaining performance
obligations under contracts that meet the criteria in ASC Topic 606 as
discussed in Note C to the Consolidated Financial Statements in Item 8.
Our total estimated contract value, which combines total backlog with
estimated potential contract value, was $103.4 billion on December 31,
2018, up 17.5% from $88 billion at the end of 2017.

AEROSPACE

$20,000

$15,000

$10,000

$5,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2016

2017

2018

Aerospace funded backlog represents new 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
segment ended 2018 with backlog of $11.4 billion compared with
$12.5 billion at year-end 2017.

Orders in 2018 reflected solid demand across our product and
services portfolio. We received orders for all models of in-production
Gulfstream aircraft, including additional orders for the G500 and G600
aircraft.

Beyond total backlog, estimated potential contract value represents
primarily options and other agreements with existing customers to
purchase new aircraft and aircraft services. On December 31, 2018,
estimated potential contract value in the Aerospace segment was
$3.1 billion, up 60.1% from $2 billion at year-end 2017. This increase
was due largely to a multi-aircraft, multi-year agreement entered into
with an existing corporate customer in the fourth quarter of 2018.

Demand for Gulfstream aircraft remains strong across customer types
and geographic regions, generating orders from public and privately held
companies,
the world.
Geographically, U.S. customers represented approximately 65% of the
segment’s orders in 2018 and 55% of
the segment’s backlog on
December 31, 2018, demonstrating continued strong domestic demand.

governments

individuals,

around

and

General Dynamics Annual Report 2018

29

DEFENSE SEGMENTS
The total backlog in our defense segments represents the estimated
remaining sales value of work to be performed under firm contracts.
this backlog includes items that have been
The funded portion of
authorized and appropriated by the U.S. Congress and funded by
customers, as well as commitments by international customers that are
approved and funded similarly by their governments. The unfunded
portion includes the amounts that we believe are likely to be funded,
but there is no guarantee that future budgets and appropriations will
provide the same funding level currently anticipated for a given
program.

Estimated potential contract value in our defense segments includes
unexercised options associated with existing firm contracts and work
awarded on unfunded indefinite delivery,
indefinite quantity (IDIQ)
contracts. Contract options in our defense business represent
agreements to perform additional work under existing contracts at the
election of the customer. We recognize options in backlog when the
customer exercises the option and establishes a firm order. For IDIQ
contracts, we evaluate the amount of funding we expect to receive and
include this amount in our estimated potential contract value. This
amount is often less than the total
IDIQ contract value, particularly
when the contract has multiple awardees. The actual amount of
funding received in the future may be higher or lower than our estimate
of potential contract value.

Total backlog in our defense segments was $56.5 billion on
December 31, 2018, up 11.4% from $50.7 billion at the end of 2017.
The most significant drivers of the growth in 2018 were the CSRA
acquisition in our
Information Technology segment and contracts
totaling $4.8 billion awarded by the U.S. Navy for the construction of
five Arleigh Burke-class (DDG-51) guided-missile destroyers. Each of
our segments achieved an organic book-to-bill ratio equal to or greater
than 1-to-1 in 2018.

Estimated potential contract value in our defense segments was
$32.4 billion on December 31, 2018, up 41.7% from $22.8 billion at
year-end 2017 due in large part
to the CSRA acquisition and a
IDIQ contract awarded by the U.S. Army for
multibillion-dollar
computing and communications equipment under
the Common
Hardware Systems-5 (CHS-5) program.

30

General Dynamics Annual Report 2018

COMBAT SYSTEMS

$30,000

$20,000

$10,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2016

2017

2018

The Combat Systems segment’s total backlog was $16.6 billion at the
end of 2018, compared with $17.6 billion at year-end 2017. The
segment’s backlog includes the work remaining on two significant multi-
year contracts awarded in 2014:

• $4.5 billion to provide wheeled armored vehicles and logistics support

to an international customer through 2024.

• $3.4 billion from the U.K Ministry of Defence to produce AJAX
armoured fighting vehicles scheduled for delivery to the British Army
through 2024 and related in-service support.

The segment has a variety of additional international military vehicle

production programs in backlog, notably:

• $940 to produce Piranha armored vehicles for several non-U.S.
including $365 to produce more than 300 armored
customers,
personnel carriers for the Danish Defense Acquisition and Logistics
Organization and $255 to deliver up to 227 Piranha vehicles in six
variants to the Romanian Armed Forces.

• $380 for LAVs for several non-U.S. customers, including $200 for the
upgrade and modernization of LAV III combat vehicles for
the
Canadian Army.

• $270 to upgrade Duro tactical vehicles for the Swiss government

through 2022.

One of the U.S. Army’s top priorities is readiness of its platform
products through critical modernization efforts, including upgrades for
both the Abrams main battle tank and Stryker wheeled combat-vehicle
programs.

The segment received $1.4 billion of orders for Abrams main battle
tank modernization and upgrade programs for the U.S. Army and U.S.
partners in 2018, ending the year with backlog of $2.7 billion. For the

Army, backlog included $1.5 billion to produce M1A2 SEPv3 tanks,
deliver M1A2 SEP components, and provide associated program
support, and $300 to design and develop SEPv4 prototypes with
upgraded sensors. Backlog included $640 to modernize Abrams main
battle tanks for U.S. partners. An additional $395 for Abrams tank
programs is included in our estimated potential contract value at year
end.

The Army’s Stryker wheeled combat-vehicle program represented
$820 of the segment’s backlog on December 31, 2018, with vehicles
scheduled for delivery through 2021. The segment received $1 billion
of Stryker orders in 2018, including awards to produce double-V-hull
vehicles, upgrade vehicles with integrated short-range air defense
capabilities, and provide support and engineering services.

The backlog at year end also included $325 to develop and deliver
(MPF)
the Mobile Protected Firepower
increase the firepower for the Army’s Infantry

12 prototype vehicles for
program, which will
Brigade Combat Teams (IBCTs).

The Combat Systems segment’s backlog on December 31, 2018,
also included $2.5 billion for multiple weapons systems and munitions
programs, including $415 to produce Hydra-70 rockets for the Army.

The segment’s estimated potential contract value was $4.2 billion
on December 31, 2018, up 32.8% from $3.2 billion at year-end 2017.
Estimated potential contract value increased in 2018 driven by
unexercised options associated with 2018 awards to develop and
deliver prototype vehicles for the MPF program, to produce Piranha
vehicles for the Romanian Armed Forces and to deliver various rounds
of medium-caliber ammunition to the U.S. Air Force.

INFORMATION TECHNOLOGY

$30,000

$20,000

$10,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2016

2017

2018

The Information Technology segment’s backlog consists of thousands
of contracts and task orders, and approximately 15-20% of its portfolio
is recompeted each year. The segment’s total backlog was $8 billion at
the end of 2018, up 120.6% from $3.6 billion at year-end 2017 due to

the CSRA acquisition in the second quarter of 2018. This amount does
not include $17.1 billion of estimated potential contract value associated
with its anticipated share of IDIQ contracts and unexercised options on
December 31, 2018. Funding from IDIQ contracts added $4.2 billion to
the segment’s backlog in 2018, over 50% of the segment’s orders.

In 2018, the segment achieved a book-to-bill ratio of 1-to-1 for the
fourth consecutive year driven by several significant contract awards
during the year, including the following:

• $375 from the New York State Department of Health to provide
engineering and technical improvements to the state’s health benefits
exchange.

• $195 from the U.S. Air Force for the Battlefield Information Collection
and Exploitation System (BICES) program to provide information
sharing support to coalition operations.

• $145 to provide operations and maintenance support services for a

Department of Homeland Security (DHS) data center.

• $110 from the U.S. Naval Air Warfare Center for design, development

and support of shipboard and airborne platforms.

The segment’s backlog at year-end 2018 also included the following

key programs:

• $1.1 billion to provide classified IT infrastructure services to an
the DoD with an additional $1.1 billion of estimated

agency of
potential contract value remaining under the contract.

• $210 to provide supply chain management services to the U.S.

Department of State (DoS).

• $170 from the New York State Department of Health to manage the
state’s Medicaid Management Information System. $120 of estimated
potential contract value remains under the contract.

• $160 to provide turnkey training and simulation services for the U.S.
Army’s Aviation Center of Excellence in Fort Rucker, Alabama. An
additional $495 of estimated potential contract value remains under
the contract.

General Dynamics Annual Report 2018

31

MISSION SYSTEMS

• $630 for combat and seaframe control systems for

the Navy

Independence-variant LCSs.

$15,000

$10,000

$5,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2016

2017

2018

Similar to the Information Technology segment, the Mission Systems
segment’s backlog consists of thousands of contracts and task orders.
The segment’s total backlog remained steady at $5.3 billion at the end
of 2018 compared with year-end 2017. This amount does not include
$7.4 billion of estimated potential contract value associated with its
anticipated share of
IDIQ contracts and unexercised options on
December 31, 2018. Estimated potential contract value increased
55.6% from year-end 2017 driven by a multibillion-dollar IDIQ contract
awarded by the U.S. Army for computing and communications
equipment under the CHS-5 program. Funding of IDIQ contracts and
options added $2.6 billion to the segment’s backlog in 2018, over
50% of the segment’s orders.

In 2018, the segment achieved a book-to-bill ratio of 1-to-1 or
higher for the fourth consecutive year driven by several significant
contract awards during the year, including the following:

• $400 from the Army for computing and communications equipment

under the CHS-4 and CHS-5 programs.

• $395 from the U.S. Navy for combat and seaframe control systems

on Independence-variant Littoral Combat Ships (LCSs).

• $210 from the Army for its mobile communications network.
• $205 from the National Aeronautics and Space Administration
(NASA) for the Space Network Ground Segment Sustainment (SGSS)
program to modernize NASA’s ground infrastructure systems for its
satellite network.

The segment’s backlog at year-end 2018 also included the following

key programs:

• $780 for the Canadian Maritime Helicopter Project (MHP) to provide
for Canadian

training and support

integrated mission systems,
marine helicopters.

32

General Dynamics Annual Report 2018

• $260 to

and

design

tactical
communication and information system in the initial phase of the
U.K.’s Morpheus program.

next-generation

develop

the

• $235 to provide fire control system modifications for ballistic-missile

(SSBN) submarines.

MARINE SYSTEMS

$40,000

$30,000

$20,000

$10,000

$0

Estimated Potential
Contract Value

Unfunded

Funded

2016

2017

2018

The Marine Systems segment’s backlog consists of long-term submarine
and surface ship construction programs, as well as numerous
engineering and repair contracts. The segment’s book-to-bill
ratio
exceeded 1-to-1 in 2018, resulting in backlog growth of 9.8% from
$24.2 billion at year-end 2017 to $26.6 billion at the end of 2018.

The Virginia-class submarine program was the company’s largest
program in 2018 and the largest contract in the company’s backlog. The
segment’s backlog at year-end 2018 included $8.8 billion for 11
Virginia-class submarines scheduled for delivery through 2023.

Navy destroyer programs represented $8.2 billion of the segment’s
backlog at year-end 2018, an increase of 106.9% driven by contracts
totaling $4.8 billion awarded by the Navy for the construction of five
DDG-51 guided-missile destroyers. As of year end, we had construction
contracts for 11 DDG-51 destroyers scheduled for delivery through
2027. Backlog at year-end 2018 also included one ship under the
DDG-1000 program scheduled for delivery in 2020.

The Marine Systems segment’s backlog on December 31, 2018,
included $95 for construction of ESB auxiliary support ships. The
segment has delivered four ships in the program, and construction is
underway on the fifth ship, scheduled for delivery in 2019. During 2018,
the segment received funding for long-lead materials for a sixth ship.

In 2016, we were awarded a design and construction contract for the
lead ship in the Navy’s new class of T-AO-205 fleet replenishment oilers,
the Navy
along with options for five additional ships. During 2018,

exercised the options for three additional ships. Backlog at year-end
2018 was $1.8 billion for
the program, and estimated potential
contract value totaled $1 billion for the program.

Our net debt position, defined as debt less cash and equivalents and
marketable securities increased in 2018 due primarily to financing the
CSRA acquisition.

The year-end backlog also included a contract from a commercial
customer for two liquefied natural gas (LNG)-capable Jones Act ships
scheduled for delivery through 2020.

Complementing these ship construction programs, engineering
services represented approximately $6.2 billion of the Marine Systems
segment’s backlog on December 31, 2018. Design and prototype
development efforts on the Columbia-class submarine program
represented $5.1 billion of this amount.

Year-end backlog for ship and submarine maintenance, repair and
other services totaled $1.2 billion, including $955 for surface-ship
repair operations.

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

We expect to continue to generate funds in excess of our short- and
long-term liquidity needs. We believe we have adequate funds on hand
and sufficient borrowing capacity to execute our financial and operating
strategy. The following is a discussion of our major operating, investing
and financing activities for each of the past three years, as classified on
the Consolidated Statement of Cash Flows in Item 8.

OPERATING ACTIVITIES

We generated cash from operating activities of $3.1 billion in 2018,
$3.9 billion in 2017 and $2.2 billion in 2016. The primary driver of cash
inflows in all three years was net earnings. However, cash flows in all
three years were affected negatively by growth in operating working
capital, particularly on an international wheeled armored vehicle contract
in our Combat Systems segment (for further discussion, see Note H to
the Consolidated Financial Statements in Item 8). Additionally, cash flows
in 2018 reflected a discretionary pension plan contribution of $255. In
2017 and 2016, the build-up of inventory related to the new G500 and
G600 aircraft programs in our Aerospace segment also negatively
affected operating cash flows. However, the 2017 growth in operating
working capital was offset by lower income tax payments.

Year Ended December 31

2018

2017

2016

INVESTING ACTIVITIES

Net cash provided by operating

activities

$ 3,148

$ 3,876

$ 2,163

Net cash used by investing activities

(10,234)

(788)

(391)

Net cash provided (used) by

financing activities

5,086

(2,399)

(2,169)

Net cash used by discontinued

operations

(20)

(40)

(54)

Net (decrease) increase in cash and

equivalents

(2,020)

649

(451)

Cash and equivalents at beginning

of year

Cash and equivalents at end of year

2,983

963

2,334

2,983

2,785

2,334

Short- and long-term debt

(12,417)

(3,982)

(3,888)

Net debt

Debt-to-equity (a)

Debt-to-capital (b)

$ (11,454)

$ (999)

$ (1,554)

105.8%

51.4%

34.8%

25.8%

37.7%

27.4%

(a) Debt-to-equity ratio is calculated as total debt divided by total equity as of year end.
(b) Debt-to-capital ratio is calculated as total debt divided by the sum of total debt plus total

equity as of year end.

Cash used for investing activities was $10.2 billion in 2018, $788 in
2017 and $391 in 2016. Our investing activities include cash paid for
business acquisitions and capital expenditures; proceeds from asset
sales; and purchases, sales and maturities of marketable securities.
Business Acquisitions. The primary use of cash for

investing
activities in 2018 was business acquisitions. In 2018, we acquired six
businesses for an aggregate of $10.1 billion, including $9.7 billion for
CSRA. In 2017, we acquired four businesses for an aggregate of $399.
In 2016, we acquired two businesses for an aggregate of $58.

Capital Expenditures. Capital expenditures were $690 in 2018,
$428 in 2017 and $392 in 2016. Capital expenditures increased in
2018 to support growth at Gulfstream and our shipyards. We expect
capital expenditures to be approximately 3% of revenue in 2019.

Other, Net.

In 2018, we completed the sale of

Investing activities also include proceeds from asset
three businesses in our
sales.
Information Technology
segment: a commercial health products
business, certain CSRA operations we were required by a government
customer to dispose of to address an organizational conflict of interest
with respect to services provided to the customer, and a public-facing
contact-center business.

General Dynamics Annual Report 2018

33

Debt and Commercial Paper Issuances and Repayments. In
2018, we issued $7.5 billion of fixed- and floating-rate notes to finance
the acquisition of CSRA. Additionally, in 2018, we paid $450 to satisfy
obligations under CSRA’s accounts receivable purchase agreement. In
the third quarter of 2017, we issued $1 billion of fixed-rate notes that
were used to repay $900 of fixed-rate notes that matured in the fourth
quarter of 2017 and for general corporate purposes. In 2016, we repaid
$500 of fixed-rate notes on their maturity date with cash on hand and
issued $1 billion of fixed-rate notes for general corporate purposes.

We have no material repayments of long-term debt scheduled in
2019. See Note K to the Consolidated Financial Statements in Item 8 for
additional
including
scheduled debt maturities and interest rates.

information regarding our debt

obligations,

issuances. These credit

On December 31, 2018, we had $850 of commercial paper
outstanding. We have $5 billion in committed bank credit facilities for
general corporate purposes and working capital needs and to support
our commercial paper
facilities include a
$2 billion 364-day facility expiring in March 2019, a $1 billion multi-year
facility expiring in November 2020 and a $2 billion multi-year facility
expiring in March 2023. We may renew or replace these credit facilities
in whole or in part at or prior to their expiration dates. Our credit facilities
are guaranteed by several of our 100%-owned subsidiaries. We also
have an effective shelf registration on file with the Securities and
Exchange Commission that allows us to access the debt markets.

FINANCING ACTIVITIES

Cash provided by financing activities was $5.1 billion in 2018
compared with cash used by financing activities of $2.4 billion in 2017
and $2.2 billion in 2016. Net cash from financing activities includes
proceeds received from debt and commercial paper issuances and
employee stock option exercises. Our financing activities also include
repurchases of common stock, payment of dividends and debt
repayments.

Share Repurchases. Our board of directors from time to time
authorizes management’s repurchase of outstanding shares of our
common stock on the open market. We repurchased 10.1 million of
our outstanding shares for $1.8 billion in 2018, 7.8 million shares for
$1.5 billion in 2017 and 14.2 million shares for $2 billion in 2016. As
a result, we have reduced our shares outstanding by approximately 8%
since the end of 2015. On December 31, 2018, 7.5 million shares
remained authorized by our board of directors for
repurchase,
approximately 3% of our total shares outstanding.

Dividends. On March 7, 2018, our board of directors declared an
increased quarterly dividend of $0.93 per share, the 21st consecutive
annual
increase. Previously, the board had increased the quarterly
dividend to $0.84 per share in March 2017 and $0.76 per share in
March 2016. Cash dividends paid were $1.1 billion in 2018, $986 in
2017 and $911 in 2016.

34

General Dynamics Annual Report 2018

NON-GAAP FINANCIAL MEASURES

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 from operations and return on invested capital (ROIC) to measure our performance in these areas. While we believe
these metrics provide useful information, they are not defined operating measures under 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 key 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 Statement of Cash Flows in Item 8:

Year Ended December 31

Net cash provided by operating activities

Capital expenditures

Free cash flow from operations

Cash flows as a percentage of earnings from continuing operations:

Net cash provided by operating activities

Free cash flow from operations

2018

2017

2016

2015

2014*

$3,148

$3,876

$2,163

$2,607

$3,830

(690)

(428)

(392)

(569)

(521)

$2,458

$3,448

$1,771

$2,038

$3,309

94%

73%

133%

118%

81%

66%

86%

67%

143%

124%

* 2014 information has not been restated for ASC Topic 606 and is, therefore, not comparable to the 2018, 2017, 2016 and 2015 information.

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
continuing operations plus after-tax interest and amortization expense, calculated using the statutory federal income tax rate. Average invested capital
is defined as the sum of the average debt and shareholders’ equity excluding accumulated other comprehensive loss. ROIC excludes goodwill
impairments and non-economic accounting changes as they are not reflective of company 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

2018

2017

2016

2015

2014*

$ 3,358

$ 2,912

$ 2,679

$ 3,036

$ 2,673

295

213

76

51

64

57

64

75

67

79

$ 3,866

$25,367

$ 3,039

$18,099

$ 2,800

$17,168

$ 3,175

$17,579

$ 2,819

$18,673

15.2%

16.8%

16.3%

18.1%

15.1%

* 2014 information has not been restated for ASC Topic 606 and is, therefore, not comparable to the 2018, 2017, 2016 and 2015 information.

General Dynamics Annual Report 2018

35

ADDITIONAL FINANCIAL INFORMATION

OFF-BALANCE SHEET ARRANGEMENTS

On December 31, 2018, 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, 2018:

Contractual Obligations

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

$ 14,361

$ 1,318

$ 6,040

$ 2,569

$ 4,434

433

1,689

26,799

23,842

92

297

14,703

5,468

162

430

8,918

3,215

109

264

2,495

2,356

70

698

683

12,803

$ 67,124

$ 21,878

$ 18,765

$ 7,793

$ 18,688

(a) Includes scheduled interest payments. See Note K 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 $17.7 billion of

purchase obligations for products and services to be delivered under firm government contracts under which we would expect full recourse under normal contract termination clauses.

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

Aircraft trade-in options*

Amount of Commitment Expiration by Period

Total Amount
Committed

Less Than
1 Year

1-3 Years

4-5 Years

$1,658

98

$1,756

$1,173

98

$1,271

$195

–

$195

$165

–

$165

More Than
5 Years

$125

–

$125

* See Note O 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 GAAP. The
preparation of financial statements in accordance with GAAP requires
the reported
that we make estimates and assumptions that affect
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.
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 intangible assets, income taxes, pension
and other post-retirement benefits, workers’ compensation, warranty
obligations and litigation 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

36

General Dynamics Annual Report 2018

be reasonable under the circumstances. These estimates form the basis
for making judgments about the carrying values of assets and liabilities
that are not readily available from other sources. Actual results may
is applied
judgment
differ
consistently and produces financial
information that fairly depicts the
results of operations for all periods presented.

from these estimates. We believe our

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

of significant judgment in their application:

Revenue. The majority of our revenue is derived from long-term
contracts and programs that can span several years. We account for
revenue in accordance with ASC Topic 606, Revenue from Contracts
with Customers. The unit of account in ASC Topic 606 is a performance
obligation. A contract’s transaction price is allocated to each distinct
performance obligation within that contract and recognized as revenue
when, or as, the performance obligation is satisfied. Our performance
obligations are satisfied over time as work progresses or at a point in
time.

Substantially all of our

revenue in the defense segments is
recognized over time, because control
is transferred continuously to
our customers. Typically, revenue is recognized over time using costs
incurred to date relative to total estimated costs at completion to
measure progress toward satisfying our performance obligations.
Incurred cost represents work performed, which corresponds with, and
thereby best depicts, the transfer of control to the customer. Contract
costs include labor, material, overhead and, when appropriate, G&A
expenses.

The majority of our revenue recognized at a point in time is for the
in our Aerospace segment.
manufacture of business-jet aircraft
Revenue on these contracts is recognized when the customer obtains
control of the asset, which is generally upon delivery and acceptance
by the customer of the fully outfitted aircraft.

Accounting for long-term contracts and programs involves the use
of various techniques to estimate total contract revenue and costs. For
long-term contracts, 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.

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.

The nature of our contracts gives rise to several types of variable
consideration,
including claims and award and incentive fees. We
include in our contract estimates additional revenue for submitted
contract modifications or claims against the customer when we believe
we have an enforceable right to the modification or claim, 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 transaction price when
there is a basis to reasonably estimate the amount of the fee. These
estimates are based on historical award experience, anticipated
the time. Because of our
performance and our best
judgment at
they are included in the
certainty in estimating these amounts,
transaction price of our contracts and the associated remaining
performance obligations.

As a significant change in one or more of these estimates could
affect
the profitability of our contracts, we review and update our
contract-related estimates regularly. We recognize adjustments in
estimated profit on contracts under the cumulative catch-up method.
Under this method, the impact of the adjustment on profit recorded to

is recognized in the period the adjustment

is
date on a contract
identified. Revenue and profit in future periods of contract performance
are recognized using the adjusted estimate. The aggregate impact of
adjustments in contract estimates increased our operating earnings (and
diluted earnings per share) by $345 ($0.91) in 2018, $323 ($0.69) in
2017 and $16 ($0.03)
in 2016. While no adjustment on any one
contract was material to our Consolidated Financial Statements in 2018,
2017 or 2016, the amount in 2016 was negatively impacted by a loss
on the design and development phase of the AJAX program in our
Combat Systems segment and cost growth associated with the restart of
the Navy’s DDG-51 program in our Marine Systems segment.

Consistent with 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. The timing of revenue
recognition, billings and cash collections results in billed accounts
receivable, unbilled receivables
(contract assets), and customer
advances and deposits (contract liabilities) on the Consolidated Balance
Sheet. These assets and liabilities are reported on the Consolidated
Balance Sheet on a contract-by-contract basis at
the end of each
reporting period.

CSRA Acquisition. We are required to estimate the fair value of the
assets acquired and liabilities assumed in business combinations as of
the acquisition date, including identified intangible assets. The amount of
purchase price paid in excess of the net assets acquired is recorded as
goodwill. The fair values are estimated in accordance with the principles
of ASC 820, Fair Value Measurement, which defines fair value as the
price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. The fair values of
the net assets acquired are determined primarily using Level 3 inputs
(inputs that are unobservable to the marketplace participant).

The most significant of the fair value estimates is related to long-lived
assets, specifically intangible assets subject to amortization. We have
valued $2.1 billion of acquired intangible assets in connection with the
CSRA acquisition. This amount was determined based primarily on
CSRA’s projected cash flows. The projected cash flows include various
assumptions, including the timing of work embedded in backlog, success
in securing future business, profitability of work, and the appropriate
risk-adjusted interest rate used to discount the projected cash flows.

We are in various phases of valuing the assets acquired and liabilities
assumed, and our estimate of these values was still preliminary on
December 31, 2018. Therefore, these provisional amounts are subject to
change as we continue to evaluate information required to complete the
valuations throughout the measurement period, which will extend into
the second quarter of 2019.

Reorganization of Operating Segments and Composition of
Reporting Units. Concurrent with the acquisition of CSRA in April 2018,
Information Systems and Technology operating
we reorganized our

General Dynamics Annual Report 2018

37

segment in accordance with the nature of the segment’s products and
services into the Information Technology and Mission Systems
segments.

reasonableness of each reporting unit’s fair value by comparing the fair
value to comparable peer companies and recent comparable market
transactions.

This reorganization similarly changed the composition of our
reporting units. Accordingly, goodwill of the Information Systems and
Technology
reassigned to the Information
Technology and Mission Systems reporting units using a relative fair
value allocation approach as of the date of the reorganization.

reporting unit was

to amortization,

Long-lived Assets and Goodwill. We review long-lived assets,
for impairment
including intangible assets subject
the
whenever events or changes in circumstances indicate that
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 undiscounted projected cash flows. Impairment losses, where
identified, are measured as the excess of the carrying value of the
long-lived asset over
its estimated fair value as determined by
discounted projected cash flows.

Goodwill represents the purchase price paid in excess of the fair
value of net tangible and intangible assets acquired in a business
combination. We review goodwill
for impairment annually or when
circumstances indicate that the likelihood of an impairment is greater
than 50%. Such circumstances include a significant adverse change in
the business climate for one of our reporting units or a decision to
dispose of a reporting unit or a significant portion of a reporting unit.
The test for goodwill impairment is a two-step process to first identify
potential goodwill impairment for each reporting unit by comparing the
fair value of each of our reporting units to its respective carrying value
and then, if necessary, measure the amount of the impairment loss.
level of estimation and use of
The process requires a significant
judgment by management, particularly the estimate of the fair value of
our
reporting units are consistent with our
operating segments in Note R to the Consolidated Financial Statements
in Item 8.

reporting units. Our

We estimate the fair value of our reporting units based primarily on
the discounted projected cash flows of the underlying operations. This
including the timing of work
requires numerous assumptions,
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 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
impairment analysis. To assess the reasonableness of our
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 market capitalization over the sum
fair values). Additionally, we evaluate the
of

the reporting units’

38

General Dynamics Annual Report 2018

We completed the required annual goodwill

impairment test as of
December 31, 2018. The first step of the goodwill
impairment test
compares the fair value of each of our reporting units to its carrying
value. The results of the first-step test indicated that, for each of our
reporting units, no impairment existed. The estimated fair value of each
of our reporting units was substantially in excess of
its respective
carrying value as of December 31, 2018, with the exception of our
Information Technology reporting unit for which the excess was slightly
more than 5%. This is due to the significant size of the CSRA acquisition
relative to the newly formed Information Technology reporting unit and its
recent acquisition date. Given that the net book value of this business
was recorded at its fair value during the current reporting period, the
reporting unit’s carrying value, by default, closely approximates its fair
value at year end. As the carrying value and fair value of the Information
Technology reporting unit are closely aligned, a material change in the
fair value or carrying value would put the reporting unit at risk of goodwill
impairment. For example, our ability to realize synergies from the
acquisition of CSRA and the level of funding in the U.S. government
for contracts in our portfolio are key assumptions in our
budget
projections of revenue, earnings and cash flows. If our actual experience
in future years falls significantly below our current projections, the fair
value of the reporting unit could be negatively impacted. Similarly, an
increase in interest rates would lower our discounted cash flows and
negatively impact the fair value of the reporting unit. We believe our
projections and assumptions are reasonable, but it is possible they could
change, impacting our fair value estimate, or the carrying value could
change.

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

Other Contract Costs. Other contract costs represent amounts that
are not currently allocable to government contracts, such as a portion of
our estimated workers’ compensation obligations, other
insurance-
related assessments, pension and other post-retirement benefits, and
environmental expenses. These costs will become allocable to contracts
generally after they are paid. We have elected to defer these costs in
other current assets on the Consolidated Balance Sheet until they can be
allocated to contracts. We expect to recover these costs through ongoing

business, including existing backlog and probable follow-on contracts.
We regularly assess the probability of recovery of these costs. This
assessment requires that we make assumptions about future contract
costs, the extent of cost recovery under our contracts and the amount
of future contract activity. These estimates are based on our best
judgment. If the backlog in the future does not support the continued
deferral of these costs, the profitability of our remaining contracts could
be adversely affected.

and

costs

benefit

obligations

depend on

Retirement Plans. Our defined-benefit pension and other post-
retirement
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 base the discount rates 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 use the spot rate approach to identify individual spot
rates along the yield curve that correspond with the timing of each
projected service cost and discounted benefit obligation payment.

We determine the long-term rates of return on assets based on
consideration of historical and forward-looking returns and the current
and expected asset allocation strategy. In 2017, we decreased the
expected long-term rate of return on assets in our primary U.S.
government and commercial pension plans by 75 basis points following
an assessment of the historical and expected long-term returns of our
various asset classes. Beginning in 2019, we will decrease the
expected long-term rates of return on assets in our primary U.S. other
post-retirement benefit plans by 100 basis points,
following an
assessment of the historical and expected long-term returns of our
various asset classes. This decrease is not expected to have a material
impact on our 2019 benefit costs.

These retirement plan assumptions are based on our best judgment,
including consideration of current and future market conditions. In the
the assumptions change, pension and other post-
event any of
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 Q to the Consolidated Financial Statements in Item 8.

As discussed under Other 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 until such costs can be allocated
to contracts. Therefore,
the impact of annual changes in financial
reporting assumptions on the retirement benefit cost for these plans
does not immediately affect our operating results.

Accounting Standards Updates. See Note A to the Consolidated
Financial Statements in Item 8 for information regarding accounting
standards we adopted in 2018 and other new accounting standards

that have been issued by the Financial Accounting Standards Board
(FASB) but are not effective until after December 31, 2018.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

We are exposed to market risk, primarily from foreign currency exchange
rates, interest rates, commodity prices and investments. See Note N 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.

We had notional forward exchange and interest rate swap contracts
outstanding of $5.8 billion and $4.3 billion on December 31, 2018 and
2017, respectively. A 10% unfavorable rate movement in our portfolio of
forward exchange and interest rate swap contracts would have resulted
in the following hypothetical, incremental pretax gains (losses):

(Dollars in millions)

Recognized

Unrecognized

2018

$ 61

(135)

2017

$(29)

33

Foreign Currency Risk. Our exchange-rate sensitivity relates
primarily to changes in the Canadian dollar, euro, Swiss franc and British
pound exchange rates. These losses and gains would be offset by
corresponding gains and losses in the remeasurement of the underlying
transactions being hedged. We believe these foreign currency forward
exchange 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 variable-rate commercial paper and fixed- and floating-rate
long-term debt obligations. On December 31, 2018, we had
$10.5 billion par value of fixed-rate debt, $1 billion of floating-rate notes
and $850 of commercial paper outstanding. Our
fixed-rate debt
obligations are not putable, and we do not trade these securities in the
market. A 10% unfavorable interest rate movement would not have a
material impact on the fair value of our fixed-rate debt. As described in
Note K to the Consolidated Financial Statements in Item 8, we entered
into derivative financial
rate swap
contracts, to eliminate our floating-rate interest rate risk.

instruments, specifically interest

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, 2018, we held $963 in
cash and equivalents, but held no marketable securities other than those
to meet some of our obligations under workers’
held in trust
compensation and non-qualified supplemental executive retirement
plans. On December 31, 2018, these marketable securities totaled $202
and were reflected at fair value on the Consolidated Balance Sheet in
other current and noncurrent assets.

General Dynamics Annual Report 2018

39

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENT 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 provision of $13 in 2018 and tax benefit of $51 in 2016

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 financial statements.

Year Ended December 31
2017

2016

2018

$ 20,149

$ 19,016

$ 19,010

16,044

36,193

(15,894)

(13,584)

(2,258)

11,957

30,973

11,551

30,561

(14,773)

(15,155)

(9,958)

(2,006)

(9,741)

(1,921)

(31,736)

(26,737)

(26,817)

4,457

(356)

(16)

4,085

(727)

3,358

(13)

4,236

(103)

(56)

4,077

(1,165)

2,912

–

3,744

(91)

3

3,656

(977)

2,679

(107)

$ 3,345

$ 2,912

$ 2,572

$ 11.37

$

9.73

$

8.79

(0.04)

–

(0.35)

$ 11.33

$

9.73

$

8.44

$ 11.22

$

9.56

$

8.64

(0.04)

–

(0.35)

$ 11.18

$

9.56

$

8.29

40

General Dynamics Annual Report 2018

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollars in millions)

Net earnings

Gains on cash flow hedges

Unrealized gains (losses) on marketable securities

Foreign currency translation adjustments

Change in retirement plans’ funded status

Other comprehensive (loss) income, pretax

Benefit (provision) 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 financial statements.

Year Ended December 31
2017

2016

2018

$ 3,345

$ 2,912

$ 2,572

36

–

(300)

(61)

(325)

5

(320)

341

9

348

20

718

(151)

567

191

(9)

(112)

(192)

(122)

18

(104)

$ 3,025

$ 3,479

$ 2,468

General Dynamics Annual Report 2018

41

CONSOLIDATED BALANCE SHEET

(Dollars in millions)

ASSETS

Current assets:

Cash and equivalents

Accounts receivable

Unbilled receivables

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 O)

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 financial statements.

42

General Dynamics Annual Report 2018

December 31

2018

2017

$

963

$ 2,983

3,759

6,576

5,977

914

3,617

5,240

5,303

1,185

18,189

18,328

4,348

2,585

19,594

692

27,219

3,517

702

11,914

585

16,718

$ 45,408

$ 35,046

$

973

$

2

3,179

7,270

3,317

3,207

6,992

2,898

14,739

13,099

11,444

7,493

3,980

6,532

18,937

10,512

482

2,946

29,326

(17,244)

(3,778)

482

2,872

26,444

(15,543)

(2,820)

11,732

11,435

$ 45,408

$ 35,046

CONSOLIDATED STATEMENT 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

Deferred income tax (benefit) provision

Discontinued operations, net of tax

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

Accounts receivable

Unbilled receivables

Inventories

Other current assets

Increase (decrease) in liabilities, net of effects of business acquisitions:

Accounts payable

Customer advances and deposits

Other, net

Net cash provided by operating activities

Cash flows from investing activities:

Business acquisitions, net of cash acquired

Capital expenditures

Proceeds from sales of assets

Other, net

Net cash used by investing activities

Cash flows from financing activities:

Proceeds from fixed-rate notes

Purchases of common stock

Dividends paid

Proceeds from floating-rate notes

Proceeds from commercial paper, net

Repayment of CSRA accounts receivable purchase agreement

Proceeds from stock option exercises

Repayment of fixed-rate notes

Other, net

Net cash provided (used) by financing activities

Net cash used 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 financial statements.

Year Ended December 31
2017

2018

2016

$ 3,345

$ 2,912

$ 2,572

493

270

140

(3)

13

417

(800)

(591)

310

(197)

36

(285)

362

79

123

401

–

(195)

(987)

(182)

207

657

264

235

365

88

95

184

107

(122)

(1,048)

(377)

315

567

(305)

(278)

3,148

3,876

2,163

(10,099)

(690)

562

(7)

(10,234)

6,461

(1,769)

(1,075)

1,000

851

(450)

136

–

(68)

(399)

(428)

50

(11)

(788)

985

(1,558)

(986)

–

–

–

163

(900)

(103)

(58)

(392)

9

50

(391)

992

(1,996)

(911)

–

–

–

292

(500)

(46)

5,086

(2,399)

(2,169)

(20)

(40)

(2,020)

2,983

649

2,334

(54)

(451)

2,785

$

963

$ 2,983

$ 2,334

General Dynamics Annual Report 2018

43

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollars in millions)

December 31, 2015

Net earnings

Cash dividends declared

Equity-based awards

Shares purchased

Other comprehensive loss

December 31, 2016

Cumulative-effect adjustment*

Net earnings

Cash dividends declared

Equity-based awards

Shares purchased

Other comprehensive income

December 31, 2017

Cumulative-effects adjustments (See Note A)

Net earnings

Cash dividends declared

Equity-based awards

Shares purchased

Other comprehensive loss

December 31, 2018

Common Stock

Par

Surplus

Retained
Earnings

Treasury
Stock

Accumulated
Other
Comprehensive
Loss

Total
Shareholders’
Equity

$ 482

$ 2,730

$ 22,903

$ (12,392)

$ (3,283)

$ 10,440

–

–

–

–

–

–

–

89

–

–

2,572

(932)

–

–

–

–

–

267

(2,031)

–

482

2,819

24,543

(14,156)

–

–

–

–

–

–

–

–

–

53

–

–

(3)

2,912

(1,008)

–

–

–

–

–

–

146

(1,533)

–

482

2,872

26,444

(15,543)

–

–

–

–

–

–

–

–

–

74

–

–

638

3,345

(1,101)

–

–

–

–

–

–

105

(1,806)

–

–

–

–

–

(104)

(3,387)

–

–

–

–

–

567

(2,820)

(638)

–

–

–

–

(320)

2,572

(932)

356

(2,031)

(104)

10,301

(3)

2,912

(1,008)

199

(1,533)

567

11,435

–

3,345

(1,101)

179

(1,806)

(320)

$ 482

$ 2,946

$ 29,326

$ (17,244)

$ (3,778)

$ 11,732

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

* Reflects the cumulative effect of Accounting Standards Update (ASU) 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which we adopted on January 1,

2017.

44

General Dynamics Annual Report 2018

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

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

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization. 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;
(IT) services; C4ISR (command, control,
information technology
communications,
and
reconnaissance) solutions; and shipbuilding and ship repair.

intelligence,

surveillance

computers,

On April 3, 2018, we completed our acquisition of CSRA Inc.
(CSRA). See Note B for further discussion of the acquisition. Concurrent
with the acquisition, for segment reporting purposes, we reorganized
our Information Systems and Technology operating segment into two
separate segments: Information Technology and Mission Systems. Our
company now has five operating segments: Aerospace, Combat
Systems,
Information Technology, Mission Systems and Marine
Systems. The latter four segments we collectively refer to as our
defense segments. Prior-period segment information has been restated
for this change.

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

Consistent with 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.

Further discussion of our significant accounting policies is contained

in the other notes to these financial statements.

estimates

(GAAP). These

Use of Estimates. The nature of our business requires that we
make estimates and assumptions in accordance with U.S. generally
accepted accounting principles
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.

dispose of certain CSRA operations to address an organizational conflict
of interest with respect to services provided to the customer. In 2018,
we sold these operations. In accordance with GAAP, the sale did not
the sale
result
generated a taxable gain, resulting in tax expense of $13.

in a gain for financial reporting purposes. However,

in the company’s former

In 2013, we settled litigation with the U.S. Navy related to the
terminated A-12 aircraft contract
tactical
military aircraft business. In connection with the settlement, we released
some rights to reimbursement of costs on ships under contract at our
Bath, Maine, shipyard. As we progressed through the shipbuilding
process, we determined that the cost associated with this settlement
was greater than anticipated. Therefore, in 2016, we recognized an $84
loss, net of tax, to adjust the previously recognized settlement value. In
addition, we recognized $23 of losses, net of tax, in 2016 related to
other former operations of the company.

and

including

expenses,

development

Research and Development Expenses. Company-sponsored
research
product
(R&D)
development costs, were $502 in 2018, $521 in 2017 and $418 in
2016. The R&D expenses in 2018 and 2017 reflected ongoing product-
development efforts in the Aerospace segment as we progressed with
the certification of our two newest Gulfstream aircraft models, the G500
and G600. R&D expenses are included in operating costs and expenses
in the Consolidated Statement of Earnings in the period in which they are
incurred. Customer-sponsored R&D expenses are charged directly to the
related contracts.

suppliers

that enhance the segment’s

The Aerospace segment has cost-sharing arrangements with some of
its
internal development
capabilities and offset a portion of the financial cost associated with the
segment’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
terms of an
the development efforts. Under the typical
outcome of
agreement, payments received from suppliers for their share of the costs
are based 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:

Year Ended December 31

Interest expense

Interest income

Interest expense, net

2018

2017

2016

$ 99

(8)

$ 117

(14)

$ 103

$ 91

$ 374

(18)

$ 356

Discontinued Operations, Net of Tax. Concurrent with the
acquisition of CSRA, we were required by a government customer to

General Dynamics Annual Report 2018

45

The increase in 2018 is due primarily to the impact of financing the
CSRA acquisition, including the issuance of $7.5 billion of fixed- and
floating-rate notes in the second quarter of 2018. See Note K for
additional information regarding our debt obligations, including interest
rates.

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 cash balances are invested primarily in
time deposits rated A-/A3 or higher. Our
investments in other
securities are included in other current and noncurrent assets on the
(see Note E). We report our equity
Consolidated Balance Sheet
securities at
fair value with subsequent changes in fair value
recognized in net earnings. We report our available-for-sale debt
securities at fair value with unrealized gains and losses recognized as a
component of other comprehensive income in the Consolidated
Statement of Comprehensive Income. We had no trading or
held-to-maturity debt securities on December 31, 2018 or 2017.

Other Contract Costs. Other contract costs represent amounts
that are not currently allocable to government contracts, such as a
portion of our estimated workers’ compensation obligations, other
insurance-related assessments, pension and other post-retirement
benefits, and environmental expenses. These costs will become
allocable to contracts generally after they are paid. We expect
to
recover
including existing
backlog and probable follow-on contracts. If the backlog in the future
does not support the continued deferral of these costs, the profitability
of our remaining contracts could be adversely affected. Other contract
costs on December 31, 2018 and 2017, were $135 and $448,
respectively, and are included in other current assets on the
Consolidated Balance Sheet.

these costs through ongoing business,

to amortization,

Long-lived Assets and Goodwill. We review long-lived assets,
including intangible assets subject
for impairment
the
whenever events or changes in circumstances indicate that
carrying 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 undiscounted projected cash flows. Impairment losses, where
identified, are measured as the excess of the carrying value of the
long-lived asset over
its estimated fair value as determined by
discounted projected cash flows.

Concurrent with the acquisition of CSRA in April 2018, we
reorganized our
Information Systems and Technology operating
segment in accordance with the nature of the segment’s products and
services into the Information Technology and Mission Systems
segments. This reorganization similarly changed the composition of our
reporting units. Accordingly, goodwill of the Information Systems and
reassigned to the Information
Technology

reporting unit was

46

General Dynamics Annual Report 2018

Technology and Mission Systems reporting units using a relative fair
value allocation approach as of the date of the reorganization.

the likelihood of an impairment

We review goodwill for impairment annually or when circumstances
is greater than 50%.
indicate that
Goodwill represents the purchase price paid in excess of the fair value of
net tangible and intangible assets acquired in a business combination.
The test for goodwill
impairment is a two-step process to first identify
potential goodwill impairment for each reporting unit by comparing the
fair value of each of our reporting units to its respective carrying value
and then, if necessary, measure the amount of the impairment loss. Our
reporting units are consistent with our operating segments in Note R. We
estimate the fair value of our reporting units based primarily on the
discounted projected cash flows of the underlying operations.

We completed the required annual goodwill

impairment test as of
December 31, 2018. The results of the first-step test indicated that, for
each of our reporting units, no impairment existed. The estimated fair
value of each of our reporting units was substantially in excess of its
respective carrying value as of December 31, 2018, with the exception
of our Information Technology reporting unit.

The estimated fair value of the Information Technology reporting unit
exceeded its carrying value as of December 31, 2018, by slightly more
than 5%. This is due to the significant size of the CSRA acquisition
relative to the newly formed Information Technology reporting unit and its
recent acquisition date. Given that the net book value of this business
was recorded at its fair value during the current reporting period, the
reporting unit’s carrying value, by default, closely approximates its fair
value at year end. As the carrying value and fair value of the Information
Technology reporting unit are closely aligned, a material change in the
fair value or carrying value would put the reporting unit at risk of goodwill
impairment. For example, our ability to realize synergies from the
acquisition of CSRA and the level of funding in the U.S. government
budget
for contracts in our portfolio are key assumptions in our
projections of revenue, earnings and cash flows. If our actual experience
in future years falls significantly below our current projections, the fair
value of the reporting unit could be negatively impacted. Similarly, an
increase in interest rates would lower our discounted cash flows and
negatively impact the fair value of the reporting unit. We believe the
projections and assumptions we used in estimating fair value are
reasonable, but it is possible they could change, impacting our fair value
estimate, or the carrying value could change.

For a summary of our goodwill by reporting unit, see Note B.
Accounting Standards Updates. On January 1, 2018, we adopted
the following accounting standards issued by the Financial Accounting
Standards Board (FASB):

• ASU 2016-01, Financial

(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial

Instruments - Overall

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 fair value as a
component of other comprehensive income. We adopted the
standard on a modified retrospective basis on January 1, 2018, and
recognized the cumulative effect as a $24 increase to retained
earnings on the date of adoption.

• ASU 2016-15, Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments. ASU 2016-15 is
intended to reduce diversity in practice in how certain cash receipts
and cash payments are presented and classified in the Consolidated
Statement of Cash Flows by providing guidance on eight specific
cash flow issues. We adopted the standard retrospectively on
January 1, 2018. The adoption of the ASU did not have a material
effect on our cash flows in 2017 and 2016.

• ASU 2017-07, Compensation - Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost. ASU 2017-07 requires the
service cost component of net retirement benefit cost to be reported
separately from the other components of net retirement benefit cost
in the Consolidated Statement of Earnings. We adopted the
standard retrospectively on January 1, 2018. Our restated operating
earnings increased $59 and $10 in 2017 and 2016, respectively,
due to the reclassification of the non-service cost components of
net benefit cost. Other income decreased by the same amount, with
no impact to net earnings.

• ASU 2018-02,

Income Statement - Reporting Comprehensive
Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income. ASU 2018-02 allows
the reclassification from accumulated other comprehensive income
to retained earnings of stranded tax effects resulting from the
implementation of the Tax Cuts and Jobs Act (tax reform) enacted
on December 22, 2017. We adopted the standard on January 1,
2018, and recognized a $614 increase to retained earnings on the
date of adoption.

There are several other accounting standards that have been issued
by the FASB but are not effective until after December 31, 2018,
including the following:

• ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires the
recognition of lease rights and obligations as assets and liabilities on
the balance sheet. Previously,
required to
recognize on the balance sheet assets and liabilities arising from

lessees were not

forms of

reviewing all

operating leases. The ASU also requires disclosure of key information
about leasing arrangements. ASU 2016-02 is effective on January 1,
2019, using a modified retrospective method of adoption as of
January 1, 2017. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements, which provides an
alternative transition method of adoption, permitting the recognition of
a cumulative-effect adjustment to retained earnings on the date of
retrospective adoption. We are adopting the
adoption in lieu of
standard effective January 1, 2019, using the alternative transition
method provided by ASU 2018-11.
In order to adopt the new standard, we developed a comprehensive
project plan and established cross-functional project teams to guide
the implementation. The project plan included implementing a third-
party software solution to facilitate the consolidation of our leases for
leases, performing a
reporting purposes,
completeness assessment of our lease population, analyzing the
optional practical expedients available in the new standard, and
updating our business processes, systems and controls to meet the
requirements of the new standard.
The new standard provides several optional practical expedients for
use in transition. We have elected to use what the FASB has deemed
to
the “package of practical expedients,” which allows us not
reassess our previous conclusions about lease identification, lease
classification and the accounting treatment for initial direct costs. We
have not elected the practical expedients pertaining to the use of
hindsight and land easements. The ASU also provides several optional
practical expedients for the ongoing accounting for leases. We have
elected the short-term lease recognition exemption for all leases that
recognize
qualify, meaning that
right-of-use (ROU) assets or lease liabilities on our Consolidated
Balance Sheet. Additionally, we have elected to use the practical
expedient to not separate lease and non-lease components for leases
the non-lease
for
of
components are included in the associated ROU asset and lease
liability balances on our Consolidated Balance Sheet.
the standard on our Consolidated
The most significant effects of
Financial Statements are (1) the recognition of new ROU assets and
lease liabilities on our Consolidated Balance Sheet for our operating
leases, and (2) significant new disclosures about our leasing activities.
We expect to recognize operating lease liabilities ranging from $1.2 to
$1.6 billion, with corresponding ROU assets of the same amount
based on the present value of the remaining lease payments over the
lease term. The new standard is not expected to have a material
impact on our results of operations or cash flows.

these leases, we will not

real estate, meaning that

these leases,

for

General Dynamics Annual Report 2018

47

for

hedging

reporting

relationships with

• ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities. ASU 2017-12 is
intended to simplify hedge accounting by better aligning an entity’s
risk
financial
its
management activities through the expansion of
the types of
financial and nonfinancial hedging strategies that are eligible for
hedge accounting. The ASU also simplifies the application of the
hedge accounting guidance, including eliminating the requirement
to separately measure and report hedge ineffectiveness. For cash
flow hedges existing at the adoption date, the standard requires
adoption on a modified retrospective basis with a cumulative-effect
adjustment to the Consolidated Balance Sheet as of the beginning of
the year of adoption. The amendments to presentation guidance and
disclosure requirements are required to be adopted prospectively.
We adopted the standard on January 1, 2019. The adoption of the
ASU did not have a material effect on our results of operations,
financial condition or cash flows.

B. ACQUISITIONS AND DIVESTITURES, GOODWILL, AND
INTANGIBLE ASSETS

CSRA Acquisition
On April 3, 2018, we acquired 100% of the outstanding shares of
CSRA for $41.25 per share in cash plus the assumption of outstanding
net debt. CSRA has been combined with General Dynamics Information
Technology (GDIT) to create a premier provider of IT solutions to the
defense,
intelligence and federal civilian markets. Except where
otherwise noted in the Notes to the Consolidated Financial Statements,
changes in balances and activity were generally driven by the CSRA
acquisition.

Purchase Price and Fair Value of Net Assets Acquired. The
cash purchase price totaled $9.7 billion and consisted of the following:

CSRA shares outstanding (in millions)

Cash consideration per CSRA share

Cash paid to purchase outstanding CSRA shares

Cash paid to extinguish CSRA debt

Cash settlement of outstanding CSRA stock options and

restricted stock units

Total purchase price

165.4

$ 41.25

$ 6,825

2,846

78

$ 9,749

the
The following table summarizes the preliminary allocation of
purchase price to the estimated fair values of the assets acquired and
liabilities assumed on the acquisition date, with the excess recorded as
goodwill:

Cash and equivalents

Accounts receivable

Unbilled receivables

Other current assets

Property, plant and equipment, net

Intangible assets, net

Goodwill

Other noncurrent assets

Total assets

Accounts payable

Customer advances and deposits

Current capital lease obligation

Other current liabilities

Noncurrent capital lease obligation

Noncurrent deferred tax liability

Other noncurrent liabilities

Total liabilities

Net assets acquired

$

45

154

510

301

673

2,066

7,859

20

$ 11,628

$

(139)

(151)

(51)

(404)

(207)

(376)

(551)

$ (1,879)

$ 9,749

We have continued to obtain information to refine the estimated fair
values. The additional
information obtained during the quarter did not
result in any material adjustments. However, these provisional amounts
are subject to change as we continue to evaluate information required to
complete the valuations throughout the measurement period, which will
extend into the second quarter of 2019.

We have valued $2.1 billion of acquired intangible assets, which
consist of acquired backlog and probable follow-on work and associated
customer relationships (contract and program intangible assets), with a
weighted-average life of 17 years. The intangible assets will be
amortized using an accelerated method, which approximates the pattern
of how the economic benefit is expected to be used. Under this method,
approximately 50% of the aggregate value of the intangible assets will be
amortized within six years.

Goodwill represents the purchase price paid in excess of the fair value
tangible and intangible assets acquired, and is attributable
of net
primarily to expected synergies, economies of scale and the assembled
workforce
is
pre-acquisition goodwill deductible for income tax purposes over its
remaining tax life.

of CSRA. Approximately $490 of

goodwill

this

48

General Dynamics Annual Report 2018

CSRA’s operating results have been included with our reported results
since the acquisition date. As we immediately began integrating CSRA
with GDIT following the acquisition, it is becoming increasingly difficult to

separate the results of legacy CSRA from those of the combined entity.
Approximately $3.7 billion of revenue, $400 of operating earnings and
$430 of pretax earnings from legacy CSRA were included in our
Consolidated Statement of Earnings in 2018. These amounts exclude
amortization of intangible assets and acquisition financing.

In addition, we have recognized approximately $75 of one-time,
acquisition-related costs, reported in operating costs and expenses and
other income (expense) in the Consolidated Statement of Earnings.

Pro Forma Information (Unaudited). The following pro forma
information presents our consolidated revenue and earnings from
continuing operations as if the acquisition of CSRA and the related
financing transactions had occurred on January 1, 2017:

Year Ended December 31

Revenue

Earnings from continuing operations

Diluted earnings per share from continuing

2018

2017

$ 37,534

$ 35,828

3,390

2,982

Other Acquisitions and Divestitures
In addition to the acquisition of CSRA, we acquired five businesses in
2018 for an aggregate of approximately $400:

• Hawker Pacific, a leading provider of integrated aviation solutions
across Asia Pacific and the Middle East, and two fixed-base operation
(FBO) businesses in our Aerospace segment;

• a maintenance and service provider for the German Army and other

international customers in our Combat Systems segment; and

• a provider of specialized transmitters and receivers in our Mission

Systems segment.

In 2017, we acquired four businesses for an aggregate of

approximately $400:

• an FBO in our Aerospace segment;
• a provider of mission-critical support services in our Information

operations

$ 11.33

$

9.79

Technology segment; and

results with the historical

The pro forma information was prepared by combining our reported
historical
the
pre-acquisition periods. In addition, the reported historical amounts
were adjusted for the following items, net of associated tax effects:

results of CSRA for

• The impact of acquisition financing.
• The removal of certain CSRA operations we were required by a
government customer to dispose of to address an organizational
conflict of interest with respect to services provided to the customer.
We completed the sale of these operations in 2018.

• The removal of CSRA’s historical pre-acquisition intangible asset

amortization expense and debt-related interest expense.

• The impact of intangible asset amortization expense assuming our

current estimate of fair value was applied on January 1, 2017.

• The payment of acquisition-related costs assuming they were

incurred on January 1, 2017.

The pro forma information is based on the preliminary amounts
allocated to the estimated fair value of net assets acquired and may be
revised as the provisional amounts change. The pro forma information
does not reflect the realization of expected cost savings or synergies
from the acquisition, and does not reflect what our combined results of
operations would have been had the acquisition occurred on January 1,
2017.

• a manufacturer of electronics and communications products and a
manufacturer of signal distribution products in our Mission Systems
segment.

In 2016, we acquired two businesses for an aggregate of

approximately $60:

• an aircraft management and charter services provider

in our

Aerospace segment; and

• a manufacturer of unmanned underwater vehicles in our Mission

Systems segment.

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

In 2018, we completed the sale of three businesses in our Information

Technology segment:

• a commercial health products business;
• certain CSRA operations we were required by a government customer
to dispose of to address an organizational conflict of interest with
respect to services provided to the customer; and

• a public-facing contact-center business.

General Dynamics Annual Report 2018

49

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

December 31, 2016 (a)

Acquisitions/divestitures (b)

Other (c)

December 31, 2017 (a)

Acquisitions/divestitures (b)

Other (c)

April 1, 2018 (a)

Change in reporting unit composition (d)

Acquisitions/divestitures (b)

Other (c)

December 31, 2018 (e)

Aerospace

Combat
Systems

Information
Systems
and
Technology

Information
Technology

Mission
Systems

Marine
Systems

Total
Goodwill

$ 2,537

$ 2,598

$ 6,013

$

28

73

–

79

268

21

2,638

2,677

6,302

–

40

–

(14)

16

(1)

2,678

2,663

6,317

$

–

–

–

–

–

–

–

–

–

–

–

–

–

–

$ 297

$ 11,445

–

–

296

173

297

11,914

–

–

16

25

297

11,955

–

183

(48)

–

30

(60)

$ 2,813

$ 2,633

$

(6,317)

–

–

–

2,076

7,601

(55)

4,241

7

(19)

–

–

–

–

7,821

(182)

$ 9,622

$ 4,229

$ 297

$ 19,594

(a) Goodwill in the Information Systems and Technology reporting unit is net of $1.9 billion of accumulated impairment losses.
(b) Includes adjustments during the purchase price allocation period. Activity in the first quarter of 2018 and the nine-month period ended December 31, 2018, also includes an allocation of goodwill
associated with the sale of the commercial health products business and an allocation of goodwill associated with the sale of a public-facing contact-center business, respectively, as discussed
above.

(c) Consists primarily of adjustments for foreign currency translation. Activity in the nine-month period ended December 31, 2018, also includes an allocation of goodwill in our Information Technology

reporting unit associated with certain operations classified as held for sale on the Consolidated Balance Sheet on December 31, 2018.

(d) Concurrent with the acquisition of CSRA, we reorganized our Information Systems and Technology operating segment into the Information Technology and Mission Systems segments. See Note A for
further discussion of the segment reorganization. This reorganization similarly changed the composition of our reporting units. Accordingly, goodwill of the Information Systems and Technology
reporting unit was reassigned to the Information Technology and Mission Systems reporting units using a relative fair value allocation approach as of the date of the reorganization.

(e) Goodwill in the Information Technology and Mission Systems reporting units is net of $536 and $1.3 billion of accumulated impairment losses, respectively.

Intangible Assets
Intangible assets consisted of the following:

December 31

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
2018

Net
Carrying
Amount

Gross
Carrying
Amount (a)

Accumulated
Amortization
2017

$3,771

$(1,531)

$2,240

$1,684

$(1,320)

469

165

159

(177)

(116)

(155)

292

49

4

465

137

155

(160)

(105)

(154)

Net
Carrying
Amount

$364

305

32

1

$4,564

$(1,979)

$2,585

$2,441

$(1,739)

$702

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

50

General Dynamics Annual Report 2018

We did not recognize any impairments of our intangible assets in
2018, 2017 or 2016. The amortization lives (in years) of our intangible
assets on December 31, 2018, were as follows:

Intangible Asset

Contract and program intangible assets

Trade names and trademarks

Technology and software

Other intangible assets

Range of
Amortization Life

7-30

30

5-20

2-7

Amortization expense is included in operating costs and expenses in
the Consolidated Statement of Earnings. Amortization expense was
$270 in 2018, $79 in 2017 and $88 in 2016. We expect to record
annual amortization expense over the next five years as follows:

Year Ended December 31

2019

2020

2021

2022

2023

C. REVENUE

Amortization
Expense

$ 280

265

217

192

175

The majority of our revenue is derived from long-term contracts and
programs that can span several years. We account for revenue in
accordance with Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with Customers.

Performance Obligations. A performance obligation is a promise
in a contract to transfer a distinct good or service to the customer, and
is the unit of account in ASC Topic 606. A contract’s transaction price
is allocated to each distinct performance obligation within that contract
and recognized as revenue when, or as, the performance obligation is
satisfied. The majority of our contracts have a single performance
obligation as the promise to transfer the individual goods or services is
not separately identifiable from other promises in the contracts and is,
therefore, not distinct. Some of our contracts have multiple
performance obligations, most commonly due to the contract covering
multiple phases of
lifecycle (development, production,
maintenance and support). For contracts with multiple performance
obligations, we allocate the contract’s transaction price to each
performance obligation using our best estimate of
the standalone
selling price of each distinct good or service in the contract. The
primary method used to estimate standalone selling price is the
expected cost plus a margin approach, under which we forecast our
expected costs of satisfying a performance obligation and then add an
appropriate margin for that distinct good or service.

the product

In most

Contract modifications are routine in the performance of our
for changes in
contracts. Contracts are often modified to account
contract specifications or requirements.
instances, contract
modifications are for goods or services that are not distinct and,
therefore, are accounted for as part of the existing contract.
Our performance obligations are satisfied over

time as work
progresses or at a point in time. Revenue from products and services
transferred to customers over time accounted for 74% of our revenue in
2018, 71% in 2017 and 72% in 2016. Substantially all of our revenue in
is
the defense segments is recognized over time, because control
revenue is
transferred continuously
recognized over time using costs incurred to date relative to total
estimated costs at completion to measure progress toward satisfying our
performance obligations.
represents work performed,
which corresponds with, and thereby best depicts, the transfer of control
to the customer. Contract costs include labor, material, overhead and,
when appropriate, G&A expenses.

to our customers. Typically,

Incurred cost

Revenue from goods and services transferred to customers at a point
in time accounted for 26% of our revenue in 2018, 29% in 2017 and
28% in 2016. The majority of our revenue recognized at a point in time
is for the manufacture of business-jet aircraft in our Aerospace segment.
Revenue on these contracts is recognized when the customer obtains
control of the asset, which is generally upon delivery and acceptance by
the customer of the fully outfitted aircraft.

On December 31, 2018, we had $67.9 billion of

remaining
performance obligations, which we also refer to as total backlog. We
expect to recognize approximately 45% of our remaining performance
obligations as revenue in 2019, an additional 35% by 2021 and the
balance thereafter. On December 31, 2017, we had $63.2 billion of
remaining performance obligations, at which time we expected to
recognize
remaining performance
obligations as revenue in 2018, an additional 40% by year-end 2020
and the balance thereafter.

approximately 40% of

these

Contract Estimates. Accounting for

long-term contracts and
programs involves the use of various techniques to estimate total
contract revenue and costs. For long-term contracts, 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.

Contract estimates are based on various assumptions to project the
outcome of
future events that often span several years. These
assumptions include labor productivity and availability; the complexity of
the work to be performed; the cost and availability of materials; the
performance of subcontractors; and the availability and timing of funding
from the customer.

The nature of our contracts gives rise to several types of variable
consideration, including claims and award and incentive fees. We include

General Dynamics Annual Report 2018

51

in our contract estimates additional revenue for submitted contract
modifications or claims against the customer when we believe we have
an enforceable right to the modification or claim, 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 transaction price when there is a
basis to reasonably estimate the amount of the fee. These estimates are
based on historical award experience, anticipated performance and our
best judgment at the time. Because of our certainty in estimating these
amounts, they are included in the transaction price of our contracts and
the associated remaining performance obligations.

As a significant change in one or more of these estimates could
the profitability of our contracts, we review and update our
affect
contract-related estimates regularly. We recognize adjustments in
estimated profit on contracts under the cumulative catch-up method.
Under this method, the impact of the adjustment on profit recorded to
date on a contract
is
identified. Revenue and profit in future periods of contract performance
are recognized using the adjusted estimate. If at any time the estimate

is recognized in the period the adjustment

of contract profitability indicates an anticipated loss on the contract, we
recognize the total loss in the period it is identified.

The impact of adjustments in contract estimates on our operating
earnings can be reflected in either operating costs and expenses or
revenue. The aggregate impact of adjustments in contract estimates
increased our revenue, operating earnings and diluted earnings per
share as follows:

Year Ended December 31

Revenue

Operating earnings

Diluted earnings per share

2018

2017

2016

$ 377

345

$0.91

$ 292

323

$0.69

$ 95

16

$0.03

While no adjustment on any one contract was material

to our
Consolidated Financial Statements in 2018, 2017 or 2016, the amount
in 2016 was negatively impacted by a loss on the design and
development phase of
the AJAX program in our Combat Systems
segment and cost growth associated with the restart of the Navy’s
DDG-51 program in our Marine Systems segment.

Revenue by Category. Our portfolio of products and services
consists of approximately 11,000 active contracts. The following series
of tables presents our revenue disaggregated by several categories.

Revenue by major products and services was as follows:

Year Ended December 31

Aircraft manufacturing and completions

Aircraft services

Pre-owned aircraft

Total Aerospace

Military vehicles

Weapons systems, armament and munitions

Engineering and other services

Total Combat Systems

IT services

Total Information Technology

C4ISR solutions

Total Mission Systems

Nuclear-powered submarines

Surface ships

Repair and other services

Total Marine Systems

Total revenue

52

General Dynamics Annual Report 2018

2018

2017

2016

$ 6,226

$ 6,320

$ 6,074

2,096

133

8,455

4,027

1,798

416

6,241

8,269

8,269

4,726

4,726

5,712

1,872

918

8,502

1,743

66

8,129

3,731

1,633

585

5,949

4,410

4,410

4,481

4,481

5,175

1,607

1,222

8,004

1,625

116

7,815

3,378

1,517

635

5,530

4,428

4,428

4,716

4,716

5,264

1,648

1,160

8,072

$36,193

$30,973

$30,561

Revenue by contract type was as follows:

Year Ended December 31, 2018

Fixed-price

Cost-reimbursement

Time-and-materials

Total revenue

Year Ended December 31, 2017

Fixed-price

Cost-reimbursement

Time-and-materials

Total revenue

Year Ended December 31, 2016

Fixed-price

Cost-reimbursement

Time-and-materials

Total revenue

Our segments 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
or
the
time-and-materials. Under cost-reimbursement contracts,
customer reimburses contract costs incurred 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.

Aerospace

Combat
Systems

Information
Technology

Mission
Systems

Marine
Systems

Total
Revenue

$7,600

$5,406

$3,396

$2,711

$5,493

$24,606

–

855

800

35

3,422

1,451

1,861

3,004

154

5

9,087

2,500

$8,455

$6,241

$8,269

$4,726

$8,502

$36,193

$7,479

$5,090

$1,465

$2,478

$4,808

$21,320

–

650

823

36

2,305

640

1,838

3,186

165

10

8,152

1,501

$8,129

$5,949

$4,410

$4,481

$8,004

$30,973

$7,208

$4,629

$1,514

$2,737

$4,857

$20,945

–

607

865

36

2,262

652

1,822

3,204

157

11

8,153

1,463

$7,815

$5,530

$4,428

$4,716

$8,072

$30,561

of

Each

these

contract

presents

advantages

and
types
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 originally estimated. Cost-
reimbursement contracts generally subject us to lower risk. Accordingly,
the associated base fees are usually lower than fees earned on fixed-
price contracts. Under time-and-materials contracts, our profit may vary
labor-hour rates vary significantly from the negotiated rates.
if actual
Also, because these contracts can provide little or no fee for managing
material costs, the content mix can impact profitability.

General Dynamics Annual Report 2018

53

Revenue by customer was as follows:

Year Ended December 31, 2018

U.S. government:

Department of Defense (DoD)

Non-DoD

Foreign Military Sales (FMS)

Total U.S. government

U.S. commercial

Non-U.S. government

Non-U.S. commercial

Total revenue

Year Ended December 31, 2017

U.S. government:

DoD

Non-DoD

FMS

Total U.S. government

U.S. commercial

Non-U.S. government

Non-U.S. commercial

Total revenue

Year Ended December 31, 2016

U.S. government:

DoD

Non-DoD

FMS

Total U.S. government

U.S. commercial

Non-U.S. government

Non-U.S. commercial

Total revenue

Aerospace

Combat
Systems

Information
Technology

Mission
Systems

Marine
Systems

Total
Revenue

$ 236

$ 2,903

$ 3,291

$ 3,224

$ 8,098

$ 17,752

–

98

334

4,175

551

3,395

8

317

3,228

251

2,698

64

4,712

22

8,025

163

81

–

506

44

3,774

138

662

152

2

145

8,245

245

10

2

5,228

626

23,606

4,972

4,002

3,613

$8,455

$ 6,241

$ 8,269

$ 4,726

$ 8,502

$ 36,193

$ 189

$ 2,702

$ 1,802

$ 3,027

$ 7,721

$ 15,441

–

42

231

3,885

210

3,803

8

374

3,084

220

2,580

65

2,340

22

4,164

214

32

–

556

46

–

192

2,904

676

3,629

7,913

19,021

108

607

137

71

13

7

4,498

3,442

4,012

$8,129

$ 5,949

$ 4,410

$ 4,481

$ 8,004

$ 30,973

$ 231

$ 2,274

$ 1,781

$ 3,287

$ 7,507

$ 15,080

–

130

361

3,501

496

3,457

7

333

2,614

287

2,520

109

2,343

23

4,147

259

8

14

525

25

3,837

108

613

158

8

202

7,717

329

26

–

2,883

713

18,676

4,484

3,663

3,738

$7,815

$ 5,530

$ 4,428

$ 4,716

$ 8,072

$ 30,561

results

Contract Balances. The timing of revenue recognition, billings and
cash collections
receivable, unbilled
in billed accounts
receivables (contract assets), and customer advances and deposits
(contract liabilities) on the Consolidated Balance Sheet. In our defense
segments, amounts are billed as work progresses in accordance with
agreed-upon contractual
terms, either at periodic intervals (e.g.,
biweekly or monthly) or upon achievement of contractual milestones.
Generally, billing occurs subsequent to revenue recognition, resulting in
contract assets. However, we sometimes receive advances or deposits
from our customers, particularly on our international contracts, before
revenue is recognized, resulting in contract liabilities. These assets and

liabilities are reported on the Consolidated Balance Sheet on a
contract-by-contract basis at the end of each reporting period. In our
Aerospace segment, we generally receive deposits from customers
upon contract execution and upon achievement of contractual
milestones. These deposits are liquidated when revenue is recognized.
Changes in the contract asset and liability balances during the year
ended December 31, 2018, were not materially impacted by any other
factors except for the acquisition of CSRA in our Information Technology
segment as further discussed in Note B and the delays in payment on
an international wheeled armored vehicle contract
in our Combat
Systems segment as further discussed in Note H.

54

General Dynamics Annual Report 2018

E. FAIR VALUE

Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in the principal or most advantageous market
in an orderly transaction between marketplace participants. Various
valuation approaches can be used to determine fair value, each requiring
different valuation inputs. The following hierarchy classifies the inputs
used to determine fair value into three levels:

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

liabilities;

• Level 2 – inputs, other

than quoted prices, observable by a

marketplace participant either directly or indirectly; and

• 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, 2018 or 2017.

Revenue recognized in 2018, 2017 and 2016 that was included in
the contract
the beginning of each year was
$4.3 billion, $4.3 billion and $4.2 billion, respectively. This revenue
represented primarily the sale of business-jet aircraft.

liability balance at

D. EARNINGS PER SHARE

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 in 2018 and 2017 due to share
repurchases. See Note M for
further discussion 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

2018

2017

2016

Basic weighted average shares

outstanding

295,262

299,172

304,707

Dilutive effect of stock options
and restricted stock/RSUs*

Diluted weighted average shares

3,898

5,465

5,680

outstanding

299,160

304,637

310,387

*

Excludes outstanding options to purchase shares of common stock that 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 3,143 in
2018, 1,547 in 2017 and 4,201 in 2016.

General Dynamics Annual Report 2018

55

Our financial

instruments include cash and equivalents, accounts receivable and payable, marketable securities held in trust and other
investments, short- and long-term debt, and derivative financial instruments. The carrying values of cash and equivalents and accounts receivable
and payable on the Consolidated Balance Sheet approximate their fair value. The following tables present the fair values of our other financial assets
and liabilities on December 31, 2018 and 2017, and the basis for determining their fair values:

Financial Assets (Liabilities)

Measured at fair value:

Marketable securities held in trust:

Cash and equivalents

Available-for-sale debt securities

Equity securities

Other investments

Cash flow hedges

Measured at amortized cost:

Short- and long-term debt principal

Measured at fair value:

Marketable securities held in trust:

Cash and equivalents

Available-for-sale debt securities

Equity securities

Other investments

Cash flow hedges

Measured at amortized cost:

Short- and long-term debt principal

Carrying
Value

Fair
Value

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

December 31, 2018

$

29 $

121

52

4

(69)

29

121

52

4

(69)

(12,518)

(12,346)

$23

–

52

–

–

–

December 31, 2017

$

20 $

117

54

4

20

117

54

4

(105)

(105)

(4,032)

(3,974)

$15

–

54

–

–

–

$

$

6

121

–

–

(69)

(12,346)

5

117

–

–

(105)

(3,974)

$–

–

–

4

–

–

$–

–

–

4

–

–

Our Level 1 assets include investments in publicly traded equity
securities valued using quoted prices from the market exchanges. The
fair value of our Level 2 assets and liabilities is determined under a
market approach using valuation models that incorporate observable
inputs such as interest rates, bond yields and quoted prices for similar
assets. Our Level 3 assets include direct private equity investments that
are measured using inputs unobservable to a marketplace participant.

F. INCOME TAXES

Income Tax Provision. We calculate our provision for federal, state
and international income taxes based on current tax law. U.S. federal

tax reform was enacted on December 22, 2017, and has several key
provisions impacting the accounting for and reporting of income taxes.
The most significant provision reduced the U.S. corporate statutory tax
rate from 35% to 21% beginning on January 1, 2018. We recorded the
effect of the change in tax law in the fourth quarter of 2017.

The provision for income taxes and effective tax rate in 2017
included a $119 unfavorable impact from the change in tax law. The
impact was due primarily to the remeasurement of our U.S. federal
deferred tax assets and liabilities at the tax rate expected to apply when
the temporary differences are realized/settled (remeasured at a rate of
21% versus 35% for the majority of our deferred tax assets and
liabilities).

56

General Dynamics Annual Report 2018

The following is a summary of our net provision for income taxes for

continuing operations:

Year Ended December 31

2018

2017

2016

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

between reported earnings and taxable income consisted of
following:

Current:

U.S. federal

State

International

Total current

Deferred:

U.S. federal

State

International

Adjustment for enacted change in

U.S. tax law

Total deferred

$ 587

$

656

$ 698

48

95

730

(37)

8

26

–

(3)

31

77

764

215

7

60

119

401

24

71

793

140

7

37

–

184

Provision for income taxes, net

Net income tax payments

$ 727

$ 532

$ 1,165

$

617

$ 977

$ 959

The reported tax provision differs from the amounts paid because
some income and expense items are recognized in different
time
periods for financial reporting than for income tax purposes. State and
local income taxes allocable to U.S. government contracts are included
in operating costs and expenses in the Consolidated Statement of
Earnings and, therefore, are not included in the provision above.

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 liability

2018

2017

$ 1,055

$ 935

393

160

138

351

437

137

139

335

2,097

(336)

1,983

(402)

$ 1,761

$ 1,581

$(1,061)

$ (688)

(530)

(265)

(160)

(284)

(500)

(182)

(159)

(221)

$(2,300)

$(1,750)

$ (539)

$ (169)

Our deferred tax assets and liabilities are included in other noncurrent
assets and liabilities on the Consolidated Balance Sheet. Our net
deferred tax liability consisted of the following:

The reconciliation from the statutory federal income tax rate to our

December 31

effective income tax rate follows:

Year Ended December 31

2018

2017

2016

Deferred tax asset

Deferred tax liability

21.0%

35.0%

35.0%

Net deferred tax liability

2018

2017

$ 38

(577)

$ 75

(244)

$(539)

$(169)

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

federal benefits

Impact of international operations
Domestic production deduction
Foreign derived intangible income
Equity-based compensation
Domestic tax credits
Contract close-outs
Adoption impact of enacted change in U.S.

tax law
Other, net

1.1
0.6
–
(1.2)
(1.1)
(1.1)
(0.5)

–
(1.0)

0.6
(4.5)
(1.5)
–
(2.6)
(0.8)
–

2.9
(0.5)

0.6
(4.0)
(1.5)
–
(2.3)
(0.9)
–

–
(0.2)

Effective income tax rate

17.8%

28.6%

26.7%

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 deferred tax balance associated with our retirement benefits
includes a deferred tax asset of $1 billion on December 31, 2018 and
recorded in accumulated other
2017,
comprehensive loss (AOCL)
to recognize the funded status of our
retirement plans. See Notes M and Q for additional details.

related to the amounts

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 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

General Dynamics Annual Report 2018

57

pledged (and thereby deposited) to the CCF of $483 and $692 on
December 31, 2018 and 2017, respectively.

On December 31, 2018, we had net operating loss carryforwards of
$1 billion that begin to expire in 2019 and tax credit carryforwards of
$135 that begin to expire in 2019.

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% 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. The total amount of these tax liabilities on December 31,
2018, was not material to our results of operations, financial condition
or cash flows.

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.

income tax returns through 2017. We do not expect

Based on all known facts and circumstances and current tax law,
we believe the total amount of any unrecognized tax benefits on
December 31, 2018, was 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 vary significantly over the next 12 months, producing,
individually or in the aggregate, a material effect on our results of
operations, financial condition or cash flows.

G. 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
contractual milestones. Accounts receivable consisted of the following:

December 31

Non-U.S. government

U.S. government

Commercial

Total accounts receivable

2018

2017

$2,035

$2,228

1,189

535

971

418

$3,759

$3,617

Receivables from non-U.S. government customers included amounts
related to long-term production programs for the Spanish Ministry of

58

General Dynamics Annual Report 2018

Defence of $1.9 billion and $2.1 billion on December 31, 2018 and
2017, respectively. 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
Sheet in current customer advances and deposits and will be repaid to
the Ministry of Industry as we collect on the outstanding receivables from
the Ministry of Defence. The net amounts for
these programs on
December 31, 2018 and 2017, were advance payments of $338 and
$284, respectively. With respect to our other receivables, we expect to
collect substantially all of the year-end 2018 balance during 2019.

H. UNBILLED RECEIVABLES

represent

revenue recognized on long-term
Unbilled receivables
contracts (contract costs and estimated profits) less associated advances
and progress billings. These amounts will be billed in accordance with
the agreed-upon contractual terms. Unbilled receivables consisted of the
following:

December 31

Unbilled revenue

Advances and progress billings

Net unbilled receivables

2018

2017

$ 27,908

$ 21,845

(21,332)

(16,605)

$ 6,576

$ 5,240

Excluding the acquisition of CSRA,

the increase in net unbilled
receivables in 2018 was primarily on an international wheeled armored
vehicle contract in our Combat Systems segment. At December 31,
2018,
the net unbilled receivable related to this contract was
is with the Canadian government, who is
$1.9 billion. Our contract
selling the vehicles to an international customer. We have experienced
delays in payment under
the contract. We continue to meet our
obligations under the contract and are entitled to payment for work
performed. Therefore, we expect to collect the full amount currently
outstanding.

G&A costs in unbilled revenue on December 31, 2018 and 2017,
were $381 and $282, 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.

We expect to bill substantially all of our year-end 2018 net unbilled
receivables balance during 2019. The amount not expected to be billed
in 2019 results primarily from the agreed-upon contractual billing terms.

I. INVENTORIES

The majority of our
inventories are for business-jet aircraft. Our
inventories are stated at the lower of cost or net realizable value. Work
in process represents largely labor, material and overhead costs
associated with aircraft in the manufacturing process and is based
primarily on the estimated average unit cost in a production lot. Raw
materials are valued primarily on the first-in, first-out method. We
record pre-owned aircraft acquired in connection with the sale of new
aircraft at the lower of the trade-in value or the estimated net realizable
value.

Inventories consisted of the following:

December 31

Work in process

Raw materials

Finished goods

Pre-owned aircraft

Total inventories

2018

2017

$ 4,357

1,504

$ 3,872

1,357

33

83

51

23

$ 5,977

$ 5,303

The increase in total inventories was due primarily to the ramp-up in
the new G500 and G600 aircraft programs in our
production of
Aerospace segment. Customer deposits associated with these aircraft,
which are reflected in customer advances and deposits and other
noncurrent liabilities on the Consolidated Balance Sheet, have also
increased.

We received type certification from the U.S. Federal Aviation
Administration (FAA) and delivered the first G500 aircraft in the third
quarter of 2018. Additionally, we are anticipating FAA type certification
and entry into service in 2019 of the new G600 aircraft.

J. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment (PP&E) is carried at historical cost, net
of accumulated depreciation. PP&E by major asset class consisted of
the following:

December 31

2018

2017

Machinery and equipment

Buildings and improvements

Land and improvements

Construction in process

Total PP&E

Accumulated depreciation

$ 5,534

3,011

386

472

9,403

(5,055)

$ 4,736

2,837

357

307

8,237

(4,720)

PP&E, net

$ 4,348

$ 3,517

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.

K. DEBT

Debt consisted of the following:

December 31

Fixed-rate notes

due:

May 2020

May 2021

July 2021

November 2022

May 2023

August 2023

November 2024

May 2025

August 2026

November 2027

May 2028

November 2042

Floating-rate notes

due:

May 2020

May 2021

Commercial paper

Other

Total debt principal

Less unamortized

debt issuance

costs and

discounts

Total debt

Less current portion

Long-term debt

Interest rate:

2.875%

3.000%

3.875%

2.250%

3.375%

1.875%

2.375%

3.500%

2.125%

2.625%

3.750%

3.600%

3-month LIBOR + 0.29%

3-month LIBOR + 0.38%

2.568%

Various

2018

2017

$ 2,000

$

2,000

500

1,000

750

500

500

750

500

500

1,000

500

500

500

850

168

–

–

500

1,000

–

500

500

–

500

500

–

500

–

–

–

32

12,518

4,032

101

12,417

973

50

3,982

2

$ 11,444

$ 3,980

this facility. We entered into interest

In April 2018, we borrowed $7.5 billion under a short-term credit
facility to finance, in part, the acquisition of CSRA. In May 2018, we
fixed- and floating-rate notes to repay the
issued $7.5 billion of
borrowings under
rate swap
contracts that exchange the floating interest rates on the $500 notes due
in May 2020 and May 2021 for fixed rates. The result of the interest rate
swap contracts is effective interest rates on the floating-rate notes that
are the same as the rates on the fixed-rate notes due in May 2020 and
May 2021. See Note N for further discussion of our derivative financial

General Dynamics Annual Report 2018

59

The aggregate amounts of scheduled principal maturities of our debt

Fair value of cash flow hedges

instruments. Interest payments associated with our debt were $312 in
2018, $93 in 2017 and $83 in 2016.

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

are as follows:

Year Ended December 31

2019
2020
2021
2022
2023
Thereafter

Total debt principal

Debt
Principal

$

973
2,501
3,002
1,002
1,252
3,788

$ 12,518

On December 31, 2018, we had $850 of commercial paper
outstanding with a dollar-weighted average interest rate of 2.568%.
We have $5 billion in committed bank credit
facilities for general
corporate purposes and working capital needs and to support our
commercial paper issuances. These credit facilities include a $2 billion
364-day facility expiring in March 2019, a $1 billion multi-year facility
expiring in November 2020 and a $2 billion multi-year facility expiring
in March 2023. We may renew or replace these credit facilities in
whole or in part at or prior to their expiration dates. Our credit facilities
are guaranteed by several of our 100%-owned subsidiaries. We also
have an effective shelf registration on file with the Securities and
Exchange Commission 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 covenants
and restrictions on December 31, 2018.

60

General Dynamics Annual Report 2018

L. OTHER LIABILITIES

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

December 31

Salaries and wages

Retirement benefits

Workers’ compensation

Other (a)

Total other current liabilities

Retirement benefits

Customer deposits on commercial contracts

Deferred income taxes

Other (b)

Total other liabilities

2018

2017

$

952

272

244

141

$

786

295

320

180

1,708

1,317

$ 3,317

$ 2,898

$ 4,422

$ 4,408

726

577

1,768

814

244

1,066

$ 7,493

$ 6,532

(a) Consists primarily of dividends payable, taxes payable, capital lease obligations, environmental
remediation reserves, warranty reserves, deferred revenue and supplier contributions in the
Aerospace segment, liabilities of discontinued operations, and insurance-related costs.

(b) Consists primarily of capital

lease obligations, warranty reserves, workers’ compensation

liabilities and liabilities of discontinued operations.

M. SHAREHOLDERS’ EQUITY

Authorized Stock. Our authorized capital stock 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.

Shares Issued and Outstanding. On December 31, 2018, we had
481,880,634 shares of common stock issued and 288,698,149 shares
of common stock outstanding, including unvested restricted stock of
686,921 shares. On December 31, 2017, we had 481,880,634 shares
of common stock issued and 296,895,608 shares of common stock
outstanding. No shares of our preferred stock were outstanding on either
date. The only changes in our shares outstanding during 2018 and 2017
resulted from shares repurchased in the open market and share activity
under our equity compensation plans. See Note P for additional details.

Share Repurchases. Our board of directors from time to time
authorizes management’s repurchase of outstanding shares of our
common stock on the open market. On December 5, 2018, the board of
to repurchase up to 10 million
directors authorized management
additional shares of
In 2018, we
repurchased 10.1 million of our outstanding shares for $1.8 billion. On
December 31, 2018, 7.5 million shares remained authorized by our
board of directors for repurchase, approximately 3% of our total shares
outstanding. We repurchased 7.8 million shares for $1.5 billion in 2017
and 14.2 million shares for $2 billion in 2016.

the company’s outstanding stock.

Dividends per Share. Our board of directors declared dividends per share of $3.72 in 2018, $3.36 in 2017 and $3.04 in 2016. We paid cash

dividends of $1.1 billion in 2018, $986 in 2017 and $911 in 2016.

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

December 31, 2015

Other comprehensive loss, pretax
Benefit from income tax, net

Other comprehensive loss, net of tax

December 31, 2016

Other comprehensive income, pretax
Provision for income tax, net

Other comprehensive income, net of tax

December 31, 2017

Cumulative effect adjustments (see Note A)

Other comprehensive loss, pretax
Benefit from income tax, net

Other comprehensive loss, net of tax

December 31, 2018

Current-period amounts reclassified out of AOCL related primarily to
changes in our retirement plans’ funded status and consisted of pretax
losses of $355 in 2018, $358 in 2017 and
recognized net actuarial
$340 in 2016. This was offset partially by pretax amortization of prior
service credit of $50 in 2018, $69 in 2017 and $74 in 2016. These
AOCL components are included in our net periodic pension and other
post-retirement benefit cost. See Note Q for additional details.

N. DERIVATIVE FINANCIAL 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 derivative financial instruments for
trading or speculative purposes.

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

Losses on
Cash Flow
Hedges

$ (487)

Unrealized
Gains on
Marketable
Securities

Foreign
Currency
Translation
Adjustments

Changes in
Retirement
Plans’ Funded
Status

AOCL

$ 20

$ 181

$ (2,997)

$ (3,283)

191
(49)

142

(345)

341
(90)

251

(94)

(4)

36
(9)

27

(9)
3

(6)

14

9
(4)

5

19

(19)

–
–

–

(112)
–

(112)

69

348
(15)

333

402

–

(300)
–

(300)

(192)
64

(128)

(122)
18

(104)

(3,125)

(3,387)

20
(42)

(22)

(3,147)

(615)

(61)
14

(47)

718
(151)

567

(2,820)

(638)

(325)
5

(320)

$ (71)

$ –

$ 102

$ (3,809)

$ (3,778)

two-year average maturity of these instruments generally matches the
duration of the activities that are at risk.
Interest Rate Risk. Our financial

instruments subject to interest
rate risk include variable-rate commercial paper and fixed- and floating-
rate long-term debt obligations. As described in Note K, we entered into
derivative financial instruments, specifically interest rate swap contracts,
to eliminate our floating-rate interest rate risk. The interest rate risk
associated with our financial 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 derivative financial instruments 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, 2018, we held
$963 in cash and equivalents, but held no marketable securities other
than those held in trust to meet some of our obligations under workers’
compensation and non-qualified supplemental executive retirement

General Dynamics Annual Report 2018

61

plans. On December 31, 2018, these marketable securities totaled
$202 and were reflected at fair value on the Consolidated Balance
Sheet in other current and noncurrent assets. See Note E for additional
details.

Hedging Activities. We had notional

forward exchange and
interest rate swap contracts outstanding of $5.8 billion and $4.3 billion
on December 31, 2018 and 2017, respectively. These derivative
instruments are cash flow hedges, and are reflected at fair
financial
value on the Consolidated Balance Sheet in other current assets and
liabilities. See Note E for additional details.

Changes in fair value (gains and losses)

related to derivative
financial instruments that qualify as cash flow hedges are deferred in
AOCL until the underlying transaction is reflected in earnings. Gains
and losses on derivative financial
instruments that do not qualify for
hedge accounting are recorded each period in the Consolidated
Statement of Earnings in operating costs and expenses or interest
expense. The gains and losses on derivative financial instruments that
do not qualify for hedge accounting generally offset losses and gains
on the assets and liabilities being hedged. Gains and losses resulting
from hedge ineffectiveness are recognized in the Consolidated
Statement of Earnings
instruments,
regardless of designation.

for all derivative financial

gains

losses

including

earnings,

Net gains and losses on derivative financial instruments recognized
in
hedge
and
ineffectiveness, were not material to our results of operations in any of
the past three years. Net gains and losses reclassified to earnings from
AOCL 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 2019 to be material.

related

to

We had no material derivative financial instruments designated as

fair value or net investment hedges on December 31, 2018 or 2017.

functional currency

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

(generally

We do not hedge the fluctuation in reported revenue and earnings
resulting from the translation of these international operations’ results
into U.S. dollars. The impact of translating our non-U.S. operations’
revenue into U.S. dollars was not material to our results of operations
in any of the past three years. In addition, the effect of changes in
foreign exchange rates on non-U.S. cash balances was not material in
any of the past three years.

62

General Dynamics Annual Report 2018

O. COMMITMENTS AND CONTINGENCIES

received a Civil

Litigation
In 2015, Electric Boat Corporation, a subsidiary of General Dynamics
Corporation,
Investigative Demand from the U.S.
Department of Justice regarding an investigation of potential False
Claims Act violations relating to alleged failures of Electric Boat’s quality
system with respect to allegedly non-conforming parts purchased from a
supplier. In 2016, Electric Boat was made aware that it is a defendant in
a lawsuit related to this matter filed under seal in U.S. district court. Also
in 2016, the Suspending and Debarring Official for the U.S. Department
of the Navy issued a Show Cause Letter to Electric Boat requesting that
Electric Boat respond to the official’s concerns regarding Electric Boat’s
oversight and management with respect to its quality assurance systems
for subcontractors and suppliers. Electric Boat responded to the Show
Cause Letter and has been engaged in discussions with the U.S.
government. Given the current status of these matters, we are unable to
express a view regarding the ultimate outcome or, if the outcome is
adverse, to estimate an amount or range of reasonably possible loss.
Depending on the outcome of these matters, there could be a material
impact on our results of operations, financial condition and cash flows.

Additionally, various other claims and legal proceedings incidental to
the normal course of business are pending or threatened against us.
These other 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 other matters. However, based on
information currently available, we believe any potential liabilities in these
individually or in the aggregate, will not have a
other proceedings,
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

liabilities.
seek insurance recovery for costs related to environmental
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
results of
operations, financial condition or cash flows. We also do not believe
that the range of reasonably possible additional loss beyond what has
been recorded would be material to our results of operations, financial
condition or cash flows.

to our

Minimum Lease Payments
Total expense under operating leases was $380 in 2018, $309 in
2017 and $307 in 2016. Operating leases are primarily for facilities
and equipment. Future minimum lease payments are as follows:

Year Ended December 31

2019

2020

2021

2022

2023

Thereafter

Future Minimum
Lease Payments

$

297

234

196

154

110

698

Total future minimum lease payments

$ 1,689

Other
Government Contracts. As a government contractor, we are subject
to U.S. government audits and investigations relating to our operations,
including claims for fines, penalties, and compensatory and treble
damages. We believe the outcome of such ongoing government audits
and investigations will not have a material
impact on our results of
operations, financial condition or cash flows.

In the performance of our contracts, we routinely request contract
modifications that require additional funding from the customer. Most
often, these requests are due to customer-directed changes in 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 on 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 $1.7 billion on
and insurance carriers

December 31, 2018. In addition, from time to time and in the ordinary
course of business, we contractually guarantee the payment or
performance of our subsidiaries arising under certain contracts.

Aircraft Trade-ins. In connection with orders for new aircraft in
contract backlog, our Aerospace segment has outstanding options with
some customers to trade in aircraft as partial consideration in their
new-aircraft
transaction. These trade-in commitments are generally
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. Additionally, certain trade-in
commitments are structured to guarantee a pre-determined trade-in
value. In either case, any excess of the pre-established trade-in price
above the fair market value at the time the new aircraft is delivered is
treated as a reduction of revenue in the new-aircraft sales transaction.

Labor Agreements. On December 31, 2018, approximately one-fifth
of the employees of our subsidiaries were working under collectively
bargained terms and conditions, including 94 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
to
material disruption of operating activities.
negotiate the terms of 21 agreements covering approximately 5,500
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.

In 2019, we expect

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 based generally
on the number of months of warranty coverage remaining for the
products delivered and the average historical monthly warranty
payments. Warranty obligations incurred in connection with long-term
production contracts are accounted for within the contract estimates at
completion. Our other warranty obligations, primarily for business-jet
aircraft, are included in other current and noncurrent liabilities on the
Consolidated Balance Sheet.

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

2018

2017

2016

$ 467

$ 474

$ 434

129

(102)

(14)

146

(123)

(30)

155

(100)

(15)

$ 480

$ 467

$ 474

General Dynamics Annual Report 2018

63

Capital Leases. Capital

lease liabilities represent obligations due
under capital leases for the use of buildings and improvements, and
machinery and equipment. The gross amount of assets recorded under
leases was $485 and $19 with accumulated amortization of
capital
$61 and $3 as of December 31, 2018 and 2017, respectively.
lease assets is included within depreciation
Amortization of capital
expense. The increase in capital
lease liabilities in 2018 was due
primarily to the acquisition of CSRA.

The future minimum lease payments are as follows:

Year Ended December 31

2019

2020

2021

2022

2023

Thereafter

Total future minimum lease payments

Less amount representing interest

Less amount representing executory costs

Present value of net minimum lease payments

Less current maturities of capital lease liability

Future Minimum
Lease Payments

$ 92

84

78

79

30

70

433

95

19

319

64

table details the components of equity-based compensation expense
recognized in net earnings in each of the past three years:

Year Ended December 31

Stock options

Restricted stock/RSUs

2018

$ 45

65

2017

$ 34

46

2016

$ 25

36

Total equity-based compensation expense,

net of tax

$ 110

$ 80

$ 61

Stock Options. Stock options granted under our equity compensation
plans are issued with an exercise price at the fair value of our common
stock determined by the average of the high and low stock prices as
listed on the New York Stock Exchange on the date of grant. The majority
of our outstanding stock options vest over three years, with 50% of the
options vesting after two years and the remaining 50% vesting the
following year, and expire 10 years after the grant date.

We recognize compensation expense related to stock options on a
straight-line basis over the vesting period of the awards, net of estimated
forfeitures. Estimated forfeitures are based on our historical forfeiture
experience. 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

2018

2017

2016

Non-current capital lease liability

$ 255

Expected volatility

17.6-18.2%

17.3-19.4%

19.1-20.0%

P. 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 and retaining 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
restricted shares of
stock, options to purchase common stock,
common stock, participation units or any combination of these.

Annually, we grant awards of stock options, restricted stock and
RSUs to participants in our equity compensation plans in early March.
Additionally, we may make limited ad hoc grants on a quarterly basis
for new hires or promotions. We issue common stock under our equity
compensation plans from treasury stock. On December 31, 2018, in
addition to the shares reserved for issuance upon the exercise of
outstanding stock options, approximately 28 million shares have been
authorized for awards that may be granted in the future.

Equity-based

Equity-based
compensation expense is included in G&A expenses. The following

Compensation

Expense.

64

General Dynamics Annual Report 2018

Weighted average expected

volatility

Expected term (in months)

Risk-free interest rate

Expected dividend yield

17.6%

68

19.4%

68

20.0%

70

2.6-2.9%

2.0-2.2%

1.5-1.6%

1.8%

1.8%

2.0%

We determine the above assumptions based on the following:

• Expected volatility is based on the historical volatility of our common

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

• Expected term is based on assumptions used by a set of comparable

peer companies.

• 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.

• Expected dividend yield is based on our historical dividend yield.

The resulting weighted average fair value per stock option granted (in
dollars) was $37.42 in 2018, $33.09 in 2017 and $22.11 in 2016.
Stock option expense reduced pretax operating earnings (and on a
diluted per-share basis) by $57 ($0.15) in 2018, $53 ($0.11) in 2017
and $39 ($0.08) in 2016. Compensation expense for stock options is
reported as a Corporate expense for segment reporting purposes (see
Note R). On December 31, 2018, we had $73 of unrecognized

compensation cost related to stock options, which is expected to be
recognized over a weighted average period of 1.9 years.

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.

A summary of stock option activity during 2018 follows:

In Shares and Dollars

Shares Under Option

Weighted Average
Exercise Price Per Share

Outstanding on December 31, 2017
Granted
Exercised
Forfeited/canceled

10,620,389
1,730,430
(1,388,110)
(197,514)

Outstanding on December 31, 2018

10,765,195

Vested and expected to vest on

December 31, 2018

10,595,953

Exercisable on December 31, 2018

6,119,560

$126.08
223.06
104.48
182.08

$143.43

$142.32

$109.19

Summary information with respect to our stock options’ intrinsic
value and remaining contractual term on December 31, 2018, follows:

We generally recognize compensation expense related to restricted
stock and RSUs on a straight-line basis over the vesting period of the
awards. Compensation expense related to restricted stock and RSUs
reduced pretax operating earnings (and on a diluted per-share basis) by
$83 ($0.22) in 2018, $70 ($0.15) in 2017 and $56 ($0.12) in 2016.
Compensation expense for restricted stock and RSUs is reported as an
operating expense for segment reporting purposes (see Note R). On
December 31, 2018, we had $53 of unrecognized compensation cost
related to restricted stock and RSUs, which is expected to be recognized
over a weighted average period of 1.6 years.

A summary of restricted stock and RSU activity during 2018 follows:

In Shares and Dollars

Shares/
Share-Equivalent
Units

Weighted Average
Grant-Date
Fair Value Per
Share

Weighted Average Remaining
Contractual Term (in years)

Aggregate Intrinsic
Value

Nonvested at December 31, 2017

1,983,173

$135.38

Outstanding
Vested and expected to vest
Exercisable

5.5
5.4
3.4

$ 320
319
294

Granted

Vested

Forfeited

482,700

(1,163,702)

(39,895)

204.97

122.59

195.99

In the table above, intrinsic value is calculated as the excess, if any,
of the market price of our stock on the last trading day of the year over
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 $147 in 2018, $215 in 2017 and $263 in
2016.

Restricted Stock/RSUs. The fair value of restricted stock and
RSUs equals the average of the high and low market prices of our
common stock as listed on the New York Stock Exchange on the date
of grant. Grants of restricted stock are awards of shares of common
stock. 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.

Restricted stock and RSUs generally vest over a three-year
restriction period after the grant date, during which recipients may not
sell, transfer, pledge, assign or otherwise convey their restricted shares
to another party. During this period, restricted stock recipients receive
cash dividends on their restricted shares and are entitled to vote those
shares, while RSU recipients receive dividend-equivalent units instead
of cash dividends and are not entitled to vote their RSUs or dividend-
equivalent units.

We grant 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

Nonvested at December 31, 2018

1,262,276

$171.62

The total fair value of vesting shares was $242 in 2018, $200 in

2017 and $68 in 2016.

Q. 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. The following discussion reflects the
legacy CSRA plans assumed in connection with the
inclusion of
acquisition as of the acquisition date.

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. Employees may contribute to various
investment alternatives. In most of these plans, we match a portion of
the employees’ contributions. Our contributions to these plans totaled
$302 in 2018, $274 in 2017 and $261 in 2016. The defined-
contribution plans held approximately 21 million shares of our common
stock, representing approximately 7% of our outstanding shares on
December 31, 2018 and 2017.

General Dynamics Annual Report 2018

65

covering eligible

contributory plans

Pension Benefits. We have ten noncontributory and five
contributory trusteed, qualified defined-benefit pension plans covering
eligible government business employees, and two noncontributory and
commercial business
four
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 plans, which comprise the
majority of our unfunded obligation, were closed to new salaried
participants on January 1, 2007. Additionally, we made changes to
these plans 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 retirement 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 to which the retirees share in the cost of the program vary
throughout the company. The plans provide health and life insurance
benefits only to those employees who retire directly from our service
and not to those who terminate service prior to eligibility for retirement.

the tax deductibility and contract

Contributions and Benefit Payments
It is our policy to fund our defined-benefit retirement plans in a manner
recovery of
that optimizes
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.
In 2018, in addition to our required contributions of approximately
$315, we made a discretionary contribution of $255, resulting in total
pension plan contributions of approximately $570 in 2018. The
in
additional contribution was considered to be a significant event
accordance with ASC Topic 715 and,
triggered a
remeasurement of the 2018 net periodic defined-benefit pension cost.
In 2019, our required contributions are approximately $190.

therefore,

We maintain several tax-advantaged accounts, primarily Voluntary
Employees’ Beneficiary Association (VEBA)
to fund the
obligations for some of our other post-retirement benefit plans. For
non-funded plans, claims are paid as received. Contributions to our
other post-retirement benefit plans were not material in 2018 and are
not expected to be material in 2019.

trusts,

66

General Dynamics Annual Report 2018

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

over the next 10 years:

2019

2020

2021

2022

2023

2024-2028

Pension
Benefits

Other Post-
retirement
Benefits

$ 816

$ 68

846

873

899

927

67

66

65

64

4,947

296

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 segments. 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 other post-retirement benefit
cost exceeds the amount currently allocable to contracts. To the extent
we consider recovery of the cost to be probable based on our backlog
and probable follow-on contracts, we defer the excess in other contract
costs in other current assets on the Consolidated Balance Sheet until the
cost is allocable to contracts. See Note A for a discussion of our other
contract costs. For other plans, the amount allocated to contracts and
included in revenue has exceeded the plans’ cumulative benefit cost. We
these excess earnings on the
have similarly deferred recognition of
Consolidated Balance Sheet.

Defined-benefit Retirement Plan Summary Financial Information
liabilities and costs requires the
Estimating retirement plan assets,
extensive use of actuarial assumptions. These include the long-term rate
of return on plan assets, the interest rates used to discount projected
trend rates and future salary
benefit payments, healthcare cost
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 Sheet
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 AOCL 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. If all of a plan’s participants are
inactive or are not accruing additional benefits, we amortize these
differences over the average remaining life expectancy of
the plan
participants. 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
from year-to-year changes in the
cost
assumptions or
that are not necessarily
results
representative of the long-term financial position of these plans. We
recognize differences under nonqualified plans immediately.

that can result either
from actual

Net annual defined-benefit pension and other post-retirement benefit

cost (credit) consisted of the following:

Pension Benefits

Year Ended December 31

2018

2017

2016

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial loss

Amortization of prior service credit

$ 180

$ 168

$ 173

532

(856)

359

(46)

453

(679)

362

(66)

456

(713)

343

(68)

Net annual benefit cost

$ 169

$ 238

$ 191

Year Ended December 31

Service cost

Interest cost

Expected return on plan assets

Recognized net actuarial gain

Amortization of prior service credit

Other Post-retirement Benefits

2018

$ 10

33

(40)

(4)

(4)

2017

$ 9

30

(34)

(4)

(3)

2016

$ 10

34

(33)

(3)

(6)

Net annual benefit (credit) cost

$ (5)

$ (2)

$ 2

As discussed in Note A, the service cost component of net annual
benefit cost (credit) is reported separately from the other components of
net annual benefit cost (credit) in accordance with ASU 2017-07.

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

Acquisitions

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

Acquisitions

Employer contributions

Settlement/curtailment/other

Benefits paid

Fair value of assets at end of year

Funded status at end of year

Pension Benefits

Other Post-retirement Benefits

2018

2017

2018

2017

$ (14,212)

$ (13,022)

$ (996)

$ (1,005)

(180)

(532)

(2,758)

15

1,183

23

741

(168)

(453)

–

1

(1,098)

(58)

586

(10)

(33)

(62)

–

78

21

67

(9)

(30)

–

–

(42)

27

63

$ (15,720)

$ (14,212)

$ (935)

$

(996)

$ 10,130

$ 8,980

$ 541

$

499

(749)

2,328

571

(26)

(722)

1,469

–

199

56

(574)

(4)

77

1

–

(45)

$ 11,532

$ 10,130

$ 570

$ (4,188)

$ (4,082)

$ (365)

82

–

3

–

(43)

541

(455)

$

$

General Dynamics Annual Report 2018

67

Amounts recognized on the Consolidated Balance Sheet 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) cost

Total amount recognized in AOCL, pretax

Pension Benefits

Other Post-retirement Benefits

2018

2017

2018

2017

$

67

(131)

(4,124)

$

133

(145)

(4,070)

$

74

$

33

(141)

(298)

(150)

(338)

$ (4,188)

$ (4,082)

$ (365)

$ (455)

Pension Benefits

Other Post-retirement Benefits

2018

2017

2018

$ 4,959

$ 4,899

$ (37)

(95)

(124)

1

$ 4,864

$ 4,775

$ (36)

2017

$ (5)

(3)

$ (8)

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

Year Ended December 31

Net actuarial loss (gain)

Prior service cost

Amortization of:

Net actuarial (loss) gain from prior years

Prior service credit

Other*

Change in AOCL, pretax

Pension Benefits

Other Post-retirement Benefits

2018

$ 422

(15)

(359)

46

(5)

2017

$ 308

(1)

(362)

66

7

2018

$(34)

–

4

4

(2)

$ 89

$ 18

$(28)

2017

$ (6)

–

4

3

(39)

$(38)

*

Includes foreign exchange translation, curtailment and other adjustments.

The following table represents amounts deferred in AOCL on the
Consolidated Balance Sheet on December 31, 2018, that we expect to
recognize in our retirement benefit cost in 2019:

Net actuarial loss (gain)

Prior service credit

Pension
Benefits

$280

(18)

Other
Post-retirement
Benefits

$(8)

(4)

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,
future compensation levels. A
pension plan’s accumulated benefit obligation (ABO) is the present value
of future benefits attributed to employee services rendered to date,

including assumptions about

excluding assumptions about future compensation levels. The ABO for
all defined-benefit pension plans was $15.5 billion and $13.9 billion on
December 31, 2018 and 2017, respectively. On December 31, 2018
and 2017, 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

2018

2017

$ (15,067)

$ (13,660)

(14,856)

10,832

(13,398)

9,526

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

for

68

General Dynamics Annual Report 2018

The following table summarizes the weighted average assumptions

used to determine our benefit obligations:

Assumptions on December 31

Pension Benefits

Benefit obligation discount rate

Rate of increase in compensation levels

Other Post-retirement Benefits

2018

2017

4.28%

2.79%

3.62%

2.82%

Benefit obligation discount rate

4.24%

3.64%

Healthcare cost trend rate:

Trend rate for next year

Ultimate trend rate

Year rate reaches ultimate trend rate

6.50%

5.00%

6.50%

5.00%

2024

2024

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 other post-retirement
benefit cost. As discussed above, we defer recognition of the cumulative
benefit cost for our government plans in excess of costs allocated to
contracts and included in revenue. Therefore,
the impact of annual
changes in financial reporting assumptions on the cost for these plans
does not immediately affect our operating results. For our U.S. pension
plans that represent the majority of our total obligation, the following
hypothetical changes in the discount rates and expected long-term rates
of return on plan assets would have had the following impact in 2018:

The following table summarizes the weighted average assumptions

used to determine our net annual benefit cost:

Assumptions for Year Ended December 31

2018

2017

2016

Increase (decrease) to net pension cost from:

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

Increase
25 Basis
Points

Decrease
25 Basis
Points

$ (24)
(27)

$ 25
27

Pension Benefits

Discount rates:

Benefit obligation

Service cost

Interest cost

Expected long-term rate of return on assets

Rate of increase in compensation levels

Other Post-retirement Benefits

Discount rates:

Benefit obligation

Service cost

Interest cost

Expected long-term rate of return on assets

3.69%

3.51%

3.34%

7.45%

2.79%

3.64%

3.79%

3.27%

7.75%

4.19%

4.13%

3.56%

7.43%

2.90%

4.11%

4.34%

3.43%

7.76%

4.46%

4.42%

3.71%

8.14%

3.39%

4.35%

4.52%

3.53%

7.81%

We base the discount rates 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 use the spot
rate approach to identify individual spot rates along the yield curve that
correspond with the timing of each projected service cost and
discounted benefit obligation payment.

We determine the long-term rates of return on assets based on
consideration of historical and forward-looking returns and the current
and expected asset allocation strategy. In 2017, we decreased the
expected long-term rate of return on assets in our primary U.S.
government and commercial pension plans by 75 basis points following
an assessment of the historical and expected long-term returns of our
various asset classes. Beginning in 2019, we will decrease the
expected long-term rates of return on assets in our primary U.S. other
post-retirement benefit plans by 100 basis points,
following an
assessment of the historical and expected long-term returns of our
various asset classes. This decrease is not expected to have a material
impact on our 2019 benefit costs.

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
benefit plans in 2018. For our healthcare plans, the effect of a 1%
increase or decrease in the assumed healthcare cost trend rate on the
2018 net annual benefit cost is $4 and ($3), respectively, and the effect
on the December 31, 2018, accumulated other post-retirement benefit
obligation is $65 and ($52), 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 provides oversight of a
third-party investment manager who reports to the committee on a
regular basis. The outsourced third-party investment manager develops
investment strategies and 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
income. The
among capital preservation, asset growth and current
objective of our investment policy is to generate future returns consistent
with our assumed long-term rates of return used to determine our
benefit obligations and net annual benefit cost. 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
2018, our asset allocation policy ranges were:

Equities

Fixed income

Cash

Other asset classes

48-68%

20-48%

0-5%

0-16%

General Dynamics Annual Report 2018

69

Approximately 75% of our pension plan assets are held in a single
trust for our primary U.S. government and commercial pension plans. On
December 31, 2018, the trust was invested largely in publicly traded
equities, fixed-income securities and commingled funds comprised of
equity securities. The trust also invests in other asset classes consistent
with our investment policy. Our investments in equity assets include U.S.
and international securities and equity funds. Our investments in fixed-
income assets include U.S. Treasury and U.S. agency securities,
corporate bonds, mortgage-backed securities and other asset-backed
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 invested
primarily in commingled funds comprised of equity and fixed-income
securities.

We hold assets in VEBA trusts for some of our other post-retirement
benefit plans. These assets are managed by a third-party investment
manager with oversight by management and are generally invested in
equities, fixed-income securities and commingled funds comprised of
equity and fixed-income securities. Our asset allocation strategy for the
VEBA trusts considers potential fluctuations in our other post-retirement

benefit obligation,
deduction limits on contributions and the regulatory environment.

the taxable nature of certain VEBA trusts,

tax

Our retirement plan assets are reported at fair value. See Note E for a
the hierarchy for determining fair value. Our Level 1
discussion of
assets include investments in publicly traded equity securities. These
securities are actively traded and valued using quoted prices for
identical securities from the market exchanges. Our Level 2 assets
fixed-income securities and commingled funds whose
consist of
underlying investments are valued using observable marketplace inputs.
The fair value of plan assets invested in fixed-income securities is
generally determined under a market approach using valuation models
that incorporate observable inputs such as interest rates, bond yields
and quoted prices for similar assets. Our plan assets that are invested
in commingled funds are valued using a unit price or net asset value
(NAV) that is based on the underlying investments of the fund. Our
Level 3 assets include real estate funds, insurance deposit contracts
and direct private equity investments.

Certain investments valued using NAV as a practical expedient are
excluded from the fair value hierarchy. These investments are
redeemable at NAV on a monthly or quarterly basis and have
redemption notice periods of up to 90 days. The unfunded
commitments related to these investments were not material on
December 31, 2018, and we had no unfunded commitments related to
these investments on December 31, 2017.

70

General Dynamics Annual Report 2018

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 (a):
U.S. companies
Non-U.S. companies
Private equity investments

Fixed-income securities:
Corporate bonds (b)
Treasury securities

Commingled funds:
Equity funds
Fixed-income funds
Real estate funds
Other investments:

Insurance deposit contracts

Total plan assets in fair value hierarchy
Plan assets measured using NAV as a practical expedient (c):

Hedge funds
Real estate funds
Fixed-income funds
Equity funds

Total pension plan assets

Fair
Value

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2018

Significant
Unobservable
Inputs
(Level 3)

$

73

$

–

$

73

$

–

732
117
20

1,600
1,410

5,243
624
68

128

732
117
–

–
–

–
–
–

–

–
–
–

1,600
1,410

5,243
624
–

–
–
20

–
–

–
–
68

–

128

$ 10,015

$ 849

$ 8,950

$ 216

910
420
101
86

$ 11,532

(a) No single equity holding amounted to more than 1% of the total fair value.
(b) Our corporate bond investments had an average rating of A+.
(c) Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to

permit reconciliation of the fair value hierarchy to the total plan assets.

Asset Category

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

Fixed-income securities:
Corporate bonds (b)
Treasury securities

Commingled funds:
Equity funds
Fixed-income funds
Real estate funds
Other investments:

Insurance deposit contracts

Total plan assets in fair value hierarchy
Plan assets measured using NAV as a practical expedient (c):

Real estate funds
Hedge funds

Total pension plan assets

Fair
Value

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2017

Significant
Unobservable
Inputs
(Level 3)

$

48

$

–

$

48

$

–

770
97
18

1,604
1,361

5,018
325
51

120

770
97
–

–
–

–
–
–

–

–
–
–

1,604
1,361

5,018
325
–

–
–
18

–
–

–
–
51

–

120

$ 9,412

$ 867

$ 8,356

$ 189

390
328

$ 10,130

(a) No single equity holding amounted to more than 1% of the total fair value.
(b) Our corporate bond investments had an average rating of A+.
(c) Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to

permit reconciliation of the fair value hierarchy to the total plan assets.

General Dynamics Annual Report 2018

71

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

follows:

Asset Category (a)

Cash and equivalents
Equity securities
Fixed-income securities
Commingled funds:
Equity funds
Fixed-income funds
Real estate funds

Total plan assets in fair value hierarchy
Plan assets measured using NAV as a practical expedient (b):

Hedge funds
Equity funds
Fixed-income funds
Real estate funds

Total other post-retirement benefit plan assets

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2018

$ –
80
–

–
–
2

$ 23
–
87

237
111
–

Fair
Value

$ 23
80
87

237
111
2

$ 540

$ 82

$ 458

22
3
3
2

$ 570

(a) We had no Level 3 investments on December 31, 2018.
(b) Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to

permit reconciliation of the fair value hierarchy to the total plan assets.

Asset Category (a)

Cash and equivalents
Equity securities
Fixed-income securities
Commingled funds:
Equity funds
Fixed-income funds
Real estate funds

Total plan assets in fair value hierarchy
Plan assets measured using NAV as a practical expedient (b):

Real estate funds
Hedge funds

Total other post-retirement benefit plan assets

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

Significant
Other
Observable
Inputs
(Level 2)

December 31, 2017

$ –
70
–

–
–
2

$ 18
–
89

260
99
–

Fair
Value

$ 18
70
89

260
99
2

$ 538

$ 72

$ 466

2
1

$ 541

(a) We had no Level 3 investments on December 31, 2017.
(b) Investments measured at fair value using NAV as a practical expedient are not classified in the fair value hierarchy. The fair value amounts presented in this table for these investments are included to

permit reconciliation of the fair value hierarchy to the total plan assets.

72

General Dynamics Annual Report 2018

Changes in our Level 3 retirement plan assets during 2018 and 2017 were as follows:

December 31, 2016

Actual return on plan assets:

Unrealized gains, net

Realized gains, net

Purchases, sales and settlements, net

December 31, 2017

Actual return on plan assets:

Unrealized losses, net

Realized gains, net

Purchases, sales and settlements, net

December 31, 2018

R. SEGMENT INFORMATION

Private
Equity
Investments

$ 13

Real
Estate
Funds

$ 42

Insurance
Deposits
Contracts

$ 109

Total
Level 3
Assets

$ 164

1

–

4

18

–

–

2

4

–

5

51

(1)

–

18

4

2

5

120

–

3

5

9

2

14

189

(1)

3

25

$ 20

$ 68

$ 128

$ 216

We have five operating segments: Aerospace, Combat Systems, Information Technology, Mission Systems, and Marine Systems. We organize our
segments in accordance with the nature of products and services offered. We measure each segment’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 segments.

Summary financial information for each of our segments follows:

Year Ended December 31

Aerospace

Combat Systems

Information Technology

Mission Systems

Marine Systems

Corporate

Total

2018

Revenue

2017

Operating Earnings

Revenue from U.S. Government

2016

2018

2017

2016

2018

2017

2016

$ 8,455

$ 8,129

$ 7,815

$ 1,490

$ 1,577

$ 1,394

$

334

$

231

$

361

6,241

8,269

4,726

8,502

–

5,949

4,410

4,481

8,004

–

5,530

4,428

4,716

8,072

–

962

608

659

761

(23)

937

373

638

685

26

831

340

601

595

(17)

3,228

8,025

3,774

8,245

–

3,084

4,164

3,629

7,913

–

2,614

4,147

3,837

7,717

–

$ 36,193

$ 30,973

$ 30,561

$ 4,457

$ 4,236

$ 3,744

$ 23,606

$ 19,021

$ 18,676

Corporate operating results have two primary components: pension and other post-retirement benefit income, and stock option expense. ASU
2017-07 requires the non-service cost components of pension and other post-retirement benefit cost (e.g., interest cost) to be reported in other
income (expense) in the Consolidated Statement of Earnings. In our defense segments, as described in Note Q, pension and other post-retirement
benefit costs are allocable contract costs. For these segments, we report the offset for the non-service cost components in Corporate operating
results. Corporate operating results in 2018 also included one-time charges of approximately $45 associated with the costs to complete the CSRA
acquisition.

General Dynamics Annual Report 2018

73

The following is additional summary financial information for each of our segments:

Year Ended December 31

Aerospace

Combat Systems

Information Technology

Mission Systems

Marine Systems

Corporate*

Total

Identifiable Assets

Capital Expenditures

Depreciation and Amortization

2018

2017

2016

2018

2017

2016

2018

2017

2016

$ 11,220

$ 10,126

$ 9,792

$ 194

$ 132

$ 125

$ 154

$ 147

$ 153

9,853

14,159

5,984

3,130

1,062

9,846

3,021

5,856

2,906

3,291

8,885

2,778

5,667

3,063

2,987

91

62

49

243

51

84

16

47

123

26

71

10

87

92

7

87

333

65

116

8

86

32

60

109

7

86

42

61

105

6

$ 45,408

$ 35,046

$ 33,172

$ 690

$ 428

$ 392

$ 763

$ 441

$ 453

* Corporate identifiable assets are primarily cash and equivalents.

See Note C for additional revenue information by segment.

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

2018

2017

2016

$ 28,578

$ 23,519

$ 23,160

755

915

709

29,333

24,434

23,869

2,772

2,252

1,565

271

2,558

2,011

1,655

315

2,152

1,650

2,617

273

$ 36,193

$ 30,973

$ 30,561

Our revenue from non-U.S. operations was $4.2 billion in 2018 and $3.7 billion in 2017 and 2016, and earnings from continuing operations
before income taxes from non-U.S. operations were $578 in 2018, $550 in 2017 and $530 in 2016. The long-lived assets associated with these
operations were 3% of our total long-lived assets on December 31, 2018, and 5% for December 31, 2017 and 2016.

S. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The fixed- and floating-rate notes described in Note K are fully and unconditionally guaranteed on an unsecured, joint and several basis by several of
our 100%-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.

74

General Dynamics Annual Report 2018

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

Year Ended December 31, 2018

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, 2017

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, 2016

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

Parent

Guarantors on a
Combined Basis

Other Subsidiaries
on a Combined Basis

Consolidating
Adjustments

Total
Consolidated

$

–

67

(90)

(23)

(326)

(81)

(430)

116

(13)

3,672

$ 3,345

$ 3,025

$

–

76

(48)

28

(97)

(72)

(141)

154

2,899

$ 2,912

$ 3,479

$

–

21

(37)

(16)

(91)

(11)

(118)

121

(107)

2,676

$ 2,572

$ 2,468

$ 28,132

(22,841)

(1,638)

3,653

–

12

3,665

(677)

–

–

$ 2,988

$ 2,992

$ 26,933

(21,695)

(1,643)

3,595

1

12

3,608

(1,262)

–

$ 2,346

$ 2,336

$ 26,573

(21,811)

(1,568)

3,194

(2)

5

3,197

(1,055)

–

–

$ 2,142

$ 2,112

$ 8,061

(6,704)

(530)

827

(30)

53

850

(166)

–

–

$

$

684

305

$ 4,040

(3,112)

(315)

613

(7)

4

610

(57)

–

$

553

$ 1,158

$ 3,988

(3,106)

(316)

566

2

9

577

(43)

–

–

$

–

–

–

–

–

–

–

–

–

(3,672)

$ 36,193

(29,478)

(2,258)

4,457

(356)

(16)

4,085

(727)

(13)

–

$ (3,672)

$ 3,345

$ (3,297)

$ 3,025

$

–

–

–

–

–

–

–

–

(2,899)

$ 30,973

(24,731)

(2,006)

4,236

(103)

(56)

4,077

(1,165)

–

$ (2,899)

$ 2,912

$ (3,494)

$ 3,479

$

–

–

–

–

–

–

–

–

–

(2,676)

$ 30,561

(24,896)

(1,921)

3,744

(91)

3

3,656

(977)

(107)

–

$

$

534

543

$ (2,676)

$ 2,572

$ (2,655)

$ 2,468

General Dynamics Annual Report 2018

75

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2018

ASSETS

Current assets:

Cash and equivalents

Accounts receivable

Unbilled receivables

Inventories

Other current assets

Total current assets

Noncurrent assets:

PP&E

Accumulated depreciation of PP&E

Intangible assets, net

Goodwill

Other assets

Net investment in subsidiaries

Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$

460

$

–

$

503

$

–

–

–

(45)

415

273

(83)

–

–

195

25,313

25,698

1,171

2,758

5,855

441

10,225

7,197

(4,075)

251

8,031

258

–

2,588

3,818

122

518

7,549

1,933

(897)

2,334

11,563

239

–

11,662

15,172

–

–

–

–

–

–

–

–

–

–

–

(25,313)

(25,313)

$

963

3,759

6,576

5,977

914

18,189

9,403

(5,055)

2,585

19,594

692

–

27,219

$ 26,113

$ 21,887

$ 22,721

$ (25,313)

$ 45,408

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

$

850

$

–

$

123

$

Customer advances and deposits

Other current liabilities

Total current liabilities

Noncurrent liabilities:

Long-term debt

Other liabilities

Total noncurrent liabilities

Total shareholders’ equity

–

552

1,402

11,398

1,581

12,979

11,732

4,541

3,944

8,485

39

4,073

4,112

9,290

2,729

2,000

4,852

7

1,839

1,846

16,023

(25,313)

–

–

–

–

–

–

–

$

973

7,270

6,496

14,739

11,444

7,493

18,937

11,732

Total liabilities and shareholders’ equity

$ 26,113

$ 21,887

$ 22,721

$ (25,313)

$ 45,408

76

General Dynamics Annual Report 2018

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2017

ASSETS

Current assets:

Cash and equivalents

Accounts receivable

Unbilled receivables

Inventories

Other current assets

Total current assets

Noncurrent assets:

PP&E

Accumulated depreciation of PP&E

Intangible assets, net

Goodwill

Other assets

Net investment in subsidiaries

Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

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

Customer advances and deposits

Other current liabilities

Total current liabilities

Noncurrent liabilities:

Long-term debt

Other liabilities

Total noncurrent liabilities

Total shareholders’ equity

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ 1,930

$

–

$ 1,053

$

–

–

–

351

2,281

221

(75)

–

–

199

15,771

16,116

1,259

2,547

5,216

461

9,483

6,779

(3,869)

287

8,320

232

–

11,749

2,358

2,693

87

373

6,564

1,237

(776)

415

3,594

154

–

4,624

–

–

–

–

–

–

–

–

–

–

–

(15,771)

(15,771)

$ 2,983

3,617

5,240

5,303

1,185

18,328

8,237

(4,720)

702

11,914

585

–

16,718

$ 18,397

$ 21,232

$ 11,188

$ (15,771)

$ 35,046

$

–

–

561

561

3,950

2,451

6,401

11,435

$

1

$

1

$

2,812

1,786

4,599

9

608

617

4,180

3,758

7,939

21

3,473

3,494

9,799

–

–

–

–

–

–

–

$

2

6,992

6,105

13,099

3,980

6,532

10,512

11,435

5,972

(15,771)

Total liabilities and shareholders’ equity

$ 18,397

$ 21,232

$ 11,188

$ (15,771)

$ 35,046

General Dynamics Annual Report 2018

77

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2018

Net cash provided by operating activities*

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

Net cash used by investing activities

Cash flows from financing activities:
Proceeds from fixed-rate notes
Purchases of common stock
Dividends paid
Proceeds from floating-rate notes
Proceeds from commercial paper, net
Repayment of CSRA accounts receivable purchase agreement
Other, net

Net cash provided 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, 2017

Net cash provided by operating activities*

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

Net cash used by investing activities

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

$ (579)

$ 2,954

$

773

$ –

Total
Consolidated

$ 3,148

(10,099)
(690)
562
(7)

(10,234)

6,461
(1,769)
(1,075)
1,000
851
(450)
68

5,086

(20)

–

(2,020)
2,983

(74)
(513)
472
(12)

(127)

–
–
–
–
–
–
35

35

–

(2,862)

–
–

–

(276)
(126)
–
1

(401)

–
–
–
–
–
(450)
31

(419)

–

(503)

(550)
1,053

–
–
–
–

–

–
–
–
–
–
–
–

–

–

–

–
–

$ 312

$ 2,371

$ 1,193

$ –

$ 3,876

(330)
(350)
31

(649)

–
–
–
–
(3)

(3)

–

(1,719)

–
–

–

(72)
(49)
(2)

(123)

–
–
–
–
–

–

–

(1,097)

(27)
1,080

–
–
–

–

–
–
–
–
–

–

–

–

–
–

(428)
(399)
39

(788)

(1,558)
(986)
985
(900)
60

(2,399)

(40)

–

649
2,334

$ 1,053

$ –

$ 2,983

(9,749)
(51)
90
4

(9,706)

6,461
(1,769)
(1,075)
1,000
851
–
2

5,470

(20)

3,365

(1,470)
1,930

(26)
–
10

(16)

(1,558)
(986)
985
(900)
63

(2,396)

(40)

2,816

676
1,254

Cash and equivalents at end of year

$ 460

$

$

503

$ –

$

963

Cash and equivalents at end of year

$ 1,930

$

* Continuing operations only.

78

General Dynamics Annual Report 2018

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Year Ended December 31, 2016

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

Proceeds from fixed-rate notes

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

Cash and equivalents at end of year

$ 1,254

$

* Continuing operations only.

Guarantors
on a
Combined
Basis

Other
Subsidiaries
on a
Combined
Basis

Parent

Consolidating
Adjustments

Total
Consolidated

$ 217

$ 1,881

$

65

$–

$ 2,163

(8)

7

(1)

(1,996)

992

(911)

(500)

292

(45)

(2,168)

(54)

1,528

(478)

1,732

(336)

32

(304)

–

–

–

–

–

(1)

(1)

–

(1,576)

–

–

–

(48)

(38)

(86)

–

–

–

–

–

–

–

–

48

27

1,053

$1,080

–

–

–

–

–

–

–

–

–

–

–

–

–

–

(392)

1

(391)

(1,996)

992

(911)

(500)

292

(46)

(2,169)

(54)

–

(451)

2,785

$–

$ 2,334

General Dynamics Annual Report 2018

79

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of General Dynamics Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying Consolidated Balance Sheets of General Dynamics Corporation and subsidiaries (the Company) as of
December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the Consolidated Financial Statements). In
our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company as of December 31,
2018 and 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2018, 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) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 13, 2019, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the Consolidated Financial Statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the Consolidated Financial Statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that our audits provide a
reasonable basis for our opinion.

We have served as the Company’s auditor since 2002.

McLean, Virginia

February 13, 2019

80

General Dynamics Annual Report 2018

SUPPLEMENTARY DATA (UNAUDITED)

(Dollars in millions, except per-share amounts)

2017

2018

Revenue

Operating earnings

Earnings from continuing operations

Discontinued operations, net of tax

1Q

2Q

3Q

4Q (a)

1Q

2Q

3Q

4Q

$ 7,441

$ 7,675

$ 7,580

$ 8,277

$ 7,535

$ 9,186

$ 9,094

$ 10,378

1,046

763

–

1,067

749

–

1,063

764

–

1,060

636

–

1,008

799

–

1,088

786

–

1,135

864

(13)

Net earnings

$

763

$

749

$

764

$

636

$

799

$

786

$

851

Earnings per share - basic (b):

Continuing operations

Discontinued operations

$

2.53

$

2.50

$

2.56

$

2.14

$

2.70

$

2.65

$

2.92

–

–

–

–

–

–

(0.04)

Net earnings

$

2.53

$

2.50

$

2.56

$

2.14

$

2.70

$

2.65

$

2.88

Earnings per share - diluted (b):

Continuing operations

Discontinued operations

$

2.48

$

2.45

$

2.52

$

2.10

$

2.65

$

2.62

$

2.89

–

–

–

–

–

–

(0.04)

Net earnings

$

2.48

$

2.45

$

2.52

$

2.10

$

2.65

$

2.62

$

2.85

1,226

909

–

909

3.10

–

3.10

3.07

–

3.07

$

$

$

$

$

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) Fourth-quarter 2017 includes a $119 unfavorable one-time, non-cash impact resulting from the December 2017 change in tax law further discussed in Note F to the Consolidated Financial

Statements in Item 8.

(b) 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, 2018, (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on
December 31, 2018, our disclosure controls and procedures were effective.

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

been filed as Exhibits 31.1 and 31.2 to this report.

General Dynamics Annual Report 2018

81

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, 2018. In making this evaluation, we
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework
(2013). Based on our evaluation we believe that, as of December 31, 2018, 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

82

General Dynamics Annual Report 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of General Dynamics Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited General Dynamics Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated
Balance Sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the
Consolidated Financial Statements), and our report dated February 13, 2019, expressed an unqualified opinion on those Consolidated Financial
Statements.

Basis for Opinion

is responsible for maintaining effective internal control over financial reporting and for its assessment of

the
The Company’s management
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 are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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 of internal
control over financial reporting 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

McLean, Virginia
February 13, 2019

General Dynamics Annual Report 2018

83

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018, 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 2019 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.

84

General Dynamics Annual Report 2018

PART IV

ITEM 15. EXHIBITS

1. Consolidated Financial Statements

Consolidated Statement of Earnings

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement of Cash Flows

Consolidated Statement of Shareholders’ Equity

Notes to Consolidated Financial Statements (A to S)

2. 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

4.5

4.6

4.7

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 (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

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)

First Supplemental Indenture dated as of August 12, 2016, 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 August 12, 2016)

Second Supplemental Indenture dated as of September 14, 2017, 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 September 14, 2017)

Indenture dated as of March 22, 2018, 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 22, 2018)

General Dynamics Annual Report 2018

85

Exhibit
Number

4.8

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

10.10*

10.11*

10.12*

10.13*

Description

First Supplemental Indenture dated as of May 11, 2018, 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 May 11, 2018)

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 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 Amended and Restated 2012 Equity Compensation Plan (incorporated herein by reference from
the company’s registration statement on Form S-8 (No. 333-217656) filed with the Commission May 4, 2017)

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 made March 4, 2015, through March 1, 2016, 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 Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(for grants beginning March 2, 2016, 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 3, 2016, filed with the Commission April 27, 2016)

Form of Restricted Stock Award 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 Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity Compensation Plan
(for grants made March 4, 2015, through March 1, 2016) (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
(for grants beginning March 2, 2016) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for
the period ended April 3, 2016, filed with the Commission April 27, 2016)

Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2012 Equity
Compensation Plan (for grants beginning March 2, 2016, 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 3, 2016, filed with the Commission April 27, 2016)

Form of Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012
Equity Compensation Plan (for grants beginning May 3, 2017, 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 July 2, 2017, filed with the Commission July 26, 2017)

Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012 Equity
Compensation Plan (for grants beginning May 3, 2017, 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 July 2, 2017, filed with the Commission July 26, 2017)

86

General Dynamics Annual Report 2018

Exhibit
Number

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

10.20*

10.21*

Description

Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation Amended and Restated 2012
Equity Compensation Plan (for grants beginning May 3, 2017) (incorporated herein by reference from the company’s quarterly
report on Form 10-Q for the period ended July 2, 2017, filed with the Commission July 26, 2017)

Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation Amended and
Restated 2012 Equity Compensation Plan (for grants beginning May 3, 2017, 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 July 2, 2017, filed with the Commission July 26, 2017)

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, 2001, filed with the Commission March 29, 2002)

General Dynamics Corporation Supplemental Savings Plan, amended and restated effective as of January 1, 2017 (incorporated
herein by reference from the company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the
Commission February 6, 2017)

Form of Severance Protection Agreement for executive officers (incorporated herein by reference from the company’s annual
report on Form 10-K for the year ended December 31, 2016, filed with the Commission February 6, 2017)

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 the 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 February 9, 2015)

Amendment to the General Dynamics Corporation Supplemental Retirement Plan, effective January 1, 2016 (incorporated herein
by reference from the company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the
Commission February 6, 2017)

10.22*

Amendment to the General Dynamics Corporation Supplemental Retirement Plan, effective January 1, 2019**

21

23

24

31.1

31.2

32.1

32.2

101

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**

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 or furnished herewith.

In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, copies of certain instruments defining the rights of holders of long-term debt of the
company are not filed herewith. Pursuant to this regulation, we hereby agree to furnish a copy of any such instrument to the SEC upon request.

ITEM 16. FORM 10-K SUMMARY

None.

General Dynamics Annual Report 2018

87

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

GENERAL DYNAMICS CORPORATION

by

William A. Moss
Vice President and Controller

Dated: February 13, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 13, 2019, 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

William A. Moss

*

James S. Crown

*

Rudy F. deLeon

*

Lester L. Lyles

*

Mark M. Malcolm

*

C. Howard Nye

*

William A. Osborn

*
Catherine B. Reynolds
*
Laura J. Schumacher
*
Peter A. Wall

Vice President and Controller

(Principal Accounting Officer)

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

88

General Dynamics Annual Report 2018

Leadership

(cid:36)(cid:49)(cid:35)(cid:52)(cid:38)

Phebe N. Novakovic

James S. Crown

Rudy F. deLeon

Mark M. Malcolm 

Catherine B. Reynolds 

(cid:37)(cid:74)(cid:67)(cid:75)(cid:84)(cid:79)(cid:67)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:37)(cid:74)(cid:75)(cid:71)(cid:72) 
(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:49)(cid:667)(cid:69)(cid:71)(cid:84)

Lead Director

Cecil D. Haney

C. Howard Nye

Laura J. Schumacher

Lester L. Lyles

William A. Osborn

Peter A. Wall

(cid:37)(cid:49)(cid:52)(cid:50) (cid:49)(cid:52) (cid:35)(cid:54)(cid:39)(cid:2)(cid:46)(cid:39) (cid:35)(cid:38)(cid:39)(cid:52)(cid:53)(cid:42)(cid:43)(cid:50)

Phebe N. Novakovic

(cid:37)(cid:74)(cid:67)(cid:75)(cid:84)(cid:79)(cid:67)(cid:80)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:49)(cid:667)(cid:69)(cid:71)(cid:84)

Jason W. Aiken

Gregory S. Gallopoulos

Robert W. Helm

Kimberly A. Kuryea

(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2) 
(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:49)(cid:667)(cid:69)(cid:71)(cid:84)

(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
(cid:41)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:37)(cid:81)(cid:87)(cid:80)(cid:85)(cid:71)(cid:78)(cid:2)(cid:67)(cid:80)(cid:70)(cid:2)
Secretary

(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2) 
Planning and 
Development

(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
(cid:42)(cid:87)(cid:79)(cid:67)(cid:80)(cid:2)(cid:52)(cid:71)(cid:85)(cid:81)(cid:87)(cid:84)(cid:69)(cid:71)(cid:85)(cid:2)
and Administration

David H. Fogg

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
(cid:54)(cid:84)(cid:71)(cid:67)(cid:85)(cid:87)(cid:84)(cid:71)(cid:84)

Kenneth R. Hayduk

Thomas W. Kirchmaier

William A. Moss

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2) 
(cid:54)(cid:67)(cid:90)

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2) 
Strategic Initiatives

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2) 
Controller

Howard A. Rubel

Elizabeth L. Schmid

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)
Investor Relations

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)
Government Relations

(cid:36)(cid:55)(cid:53)(cid:43)(cid:48)(cid:39)(cid:53)(cid:53)(cid:2)(cid:41)(cid:52)(cid:49)(cid:55)(cid:50)(cid:2)(cid:46)(cid:39) (cid:35)(cid:38)(cid:39)(cid:52)(cid:53)(cid:42)(cid:43)(cid:50)

Aerospace

Combat Systems

Information 
Technology

Mission Systems

Marine Systems

Mark L. Burns

Mark C. Roualet

Christopher Marzilli

Christopher Marzilli

John P. Casey

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
(cid:41)(cid:87)(cid:78)(cid:72)(cid:85)(cid:86)(cid:84)(cid:71)(cid:67)(cid:79)(cid:2)(cid:35)(cid:71)(cid:84)(cid:81)(cid:85)(cid:82)(cid:67)(cid:69)(cid:71)

Robert E. Smith

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President 
Jet Aviation

(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)
President

Firat H. Gezen

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
Ordinance and 
Tactical Systems

(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)
President

(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)
President

(cid:39)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:88)(cid:71)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)
President

M. Amy Gilliland 

(cid:37)(cid:74)(cid:84)(cid:75)(cid:85)(cid:86)(cid:81)(cid:82)(cid:74)(cid:71)(cid:84)(cid:2)(cid:44)(cid:16)(cid:124)(cid:36)(cid:84)(cid:67)(cid:70)(cid:91)

(cid:44)(cid:71)(cid:664)(cid:84)(cid:71)(cid:91)(cid:2)(cid:53)(cid:16)(cid:2)(cid:41)(cid:71)(cid:75)(cid:73)(cid:71)(cid:84)

(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President
(cid:43)(cid:80)(cid:72)(cid:81)(cid:84)(cid:79)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:2)
Technology

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
Mission Systems

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
(cid:39)(cid:78)(cid:71)(cid:69)(cid:86)(cid:84)(cid:75)(cid:69)(cid:2)(cid:36)(cid:81)(cid:67)(cid:86)

Ira P. Berman

Alfonso J. Ramonet

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86)(cid:2)
Administration and 
(cid:41)(cid:71)(cid:80)(cid:71)(cid:84)(cid:67)(cid:78)(cid:2)(cid:37)(cid:81)(cid:87)(cid:80)(cid:85)(cid:71)(cid:78)(cid:2)
(cid:41)(cid:87)(cid:78)(cid:72)(cid:85)(cid:86)(cid:84)(cid:71)(cid:67)(cid:79)(cid:2)(cid:35)(cid:71)(cid:84)(cid:81)(cid:85)(cid:82)(cid:67)(cid:69)(cid:71)

Daniel G. Clare

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
(cid:53)(cid:71)(cid:80)(cid:75)(cid:81)(cid:84)(cid:2)(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
(cid:37)(cid:74)(cid:75)(cid:71)(cid:72)(cid:2)(cid:40)(cid:75)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:2)(cid:49)(cid:667)(cid:69)(cid:71)(cid:84) 
(cid:41)(cid:87)(cid:78)(cid:72)(cid:85)(cid:86)(cid:84)(cid:71)(cid:67)(cid:79)(cid:2)(cid:35)(cid:71)(cid:84)(cid:81)(cid:85)(cid:82)(cid:67)(cid:69)(cid:71)

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
(cid:39)(cid:87)(cid:84)(cid:81)(cid:82)(cid:71)(cid:67)(cid:80)(cid:2)(cid:46)(cid:67)(cid:80)(cid:70)(cid:2)
Systems

Gary L. Whited

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
Land Systems

(cid:35)(cid:80)(cid:80)(cid:87)(cid:67)(cid:78)(cid:2)(cid:52)(cid:71)(cid:82)(cid:81)(cid:84)(cid:86)(cid:2)(cid:20)(cid:18)(cid:19)(cid:26)

Kevin M. Graney

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
NASSCO

Dirk A. Lesko

(cid:56)(cid:75)(cid:69)(cid:71)(cid:2)(cid:50)(cid:84)(cid:71)(cid:85)(cid:75)(cid:70)(cid:71)(cid:80)(cid:86) 
President  
(cid:36)(cid:67)(cid:86)(cid:74)(cid:2)(cid:43)(cid:84)(cid:81)(cid:80)(cid:2)(cid:57)(cid:81)(cid:84)(cid:77)(cid:85)

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