UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, | ||
OR | ||
o | 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 | 13-1673581 | |
State or | I.R.S. Employer Identification No. | |
3190 Fairview Park Drive Falls Church, Virginia Address of principal executive offices | 22042-4523 Zip |
Registrant’s telephone number, including area codecode:
Securities registered pursuant to Section 12(b) of the Act:
Title of | Name of | |
Common | New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. Yes þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes þ No o
The aggregate market value of the voting common stockequity held by non-affiliatesnonaffiliates of the registrant was $21,471,168,789$13,094,497,759 as of June 28, 2002.29, 2003 (based on the closing price of the shares on the New York Stock Exchange).
217,537,097198,200,263 shares of the registrant’s common stock were outstanding at March 14, 2003.January 31, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts I and II incorporate information from certain portions of the registrant’s Annual Report to security holders for the fiscal year ended December 31, 2002 (the 2002 Annual Report).
Part III incorporates information from certain portions of the registrant’s definitive proxy statement for the 20032004 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.
Certain sections of this
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K containcontains forward-looking statements whichthat are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements, which include but are not limited to projections of revenues, earnings, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog stability. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation: the company’s successful execution of internal performance plans; general
2 | General Dynamics 2003 Annual Report |
PART I
ItemITEM 1. BusinessBUSINESS
Business Overview
BUSINESS OVERVIEW
General Dynamics is a market leader in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. Incorporated in Delaware, corporation formedthe company employs approximately 67,600 people and has a presence worldwide.
Formed in 1952 as successor tothrough the combination of Electric Boat Company. In the mid 1990’s,Company, Consolidated Vultee and other entities, the company begangrew through internal development and acquisitions but was largely dismantled in the early 1990s through the sale of all of its divisions except Electric Boat and Land Systems. The company’s present composition is the result of a series of acquisitions begun in 1995. At that expandedtime, General Dynamics began an expansion of its two core defense businesses, broadening its product lines through the acquisition of other shipyards and combat vehicle-related entities. The company also added information technology products and services, particularly in the defense industry, broadened its expertise in systems integration and C4ISR (command and control,command-and-control, communications, computers,computing, intelligence, surveillance and reconnaissance) systems,reconnaissance (C4ISR) area, and added businessbusiness-jet aircraft and aviation support services to its offerings. Since 1995, General Dynamics has acquired more than 30 businesses, including seven during 2003.
General Dynamics’ management focus is creating shareholder value while providing the best products and services possible to the company’s offerings. Since 1995,its customers, both military and commercial. The company emphasizes excellence in program management through continuous operational improvements and ethical business practices. This culture is evident in how the company has acquired 26 businesses, including three acquisitions during 2002. In the fourth quarter of 2002, the company entereddeals with shareholders, employees, customers, partners and communities.
General Dynamics is organized into a definitive agreement to acquire General Motors Defense of London, Ontario (GM Defense), a business unit of General Motors Corporation. The transaction closed on March 1, 2003. The company’s businesses include mission-critical information technology and communications, land and amphibious combat systems, shipbuilding and marine systems, and business aviation. These are leading-edge technology businesses that provide the highest quality products and capabilities to the company’s customers.
The company operates in four primary business groups —groups: Information Systems and Technology, Combat Systems, Marine Systems and Aerospace —Aerospace. These groups design, develop, manufacture and a smaller Resources group. Informationsupport leading-edge technology, products and services for use across the spectrum of military operations. From nuclear submarines to Stryker armored infantry carriers, ammunition to targeting systems, tactical Personal Digital Assistants to combat search-and-rescue radios, General Dynamics supports the combat warrior on revenues, operating profitland, at sea, in the air and identifiable assets attributableon the network. The company’s Gulfstream business-jet aircraft serve business travelers around the world, as well as government customers as special mission platforms for intelligence, surveillance, reconnaissance and transport.
In addition to each of the company’s reportablefour principal business groups, is included in Note S to the Consolidated Financial Statements on page 54 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002,a small Resources group provides construction aggregates and incorporated herein by reference.
The company’s principal customers are the U.S. military, other government organizations, the armed forces of allied nations, and a diverse base of corporate and industrial buyers. The company’s government-source revenues are significantly linked to trends in the U.S. defense industry, and to a lesser extent, the defense industries of foreign countries. Its business aviation revenues are affected by global economic conditions in general and the market for capital goods in particular.
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Since taking office in 2001, the Bush administration has increased the U.S. defense budget to levels not seen since the Reagan administration. For fiscal year 2003, Congress appropriated $366 billion to the Department of Defense, an increase of 12 percent from the fiscal year 2002 appropriation, to strengthen the U.S. military as it confronts current threats and transforms to meet future ones. Of this amount, $59 billion was allocated for research and development programs, and $72 billion for procurement — increases of 21 percent and 17 percent over the prior year’s funding levels, respectively. For fiscal year 2004, President Bush has requested that Congress appropriate $380 billion for the Department of Defense, including almost $62 billion for research and development and almost $73 billion for procurement. These two categories of spending drive over 60 percent of the company’s sales, and the fact that these increases have come in spite of increasing budget deficits reflects the Bush administration’s commitment to the military. While Congress will ultimately decide how much to appropriate for the military in 2004, the company expects continued support of its key programs.
The company’s business aviation segment is subject to overall economic conditions in the United States and has been affected by the economic slowdown in the capital goods sector. However, as a result of aggressive management initiatives, the company is well-positioned to gain market share when the economy improves. The company also markets its aircraft to the U.S. government and international governments for special missions, expanding the reach of this business beyond the individual and corporate customer base.
operates coal mines.
Following is a description of the company’s products and services by business group, competition and other related information.
Products and ServicesPRODUCTS AND SERVICES
INFORMATION SYSTEMS AND TECHNOLOGY
The Information Systems and Technology group is a leading integrator of secure communicationcommunications systems and networks, andnetworks; command, control and intelligence systems; special purpose computing; and surveillance and reconnaissance systems for the U.S. military, the U.S. intelligence community and allied nations. The group supplies products, infrastructure and integration services that are used to gather, process and disseminate information rapidly and accurately. The group provides a full spectrum of information and communications technologies, including:
General Dynamics 2003 Annual Report | 3 |
customer base.
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Communications systems | $ | 1,235 | $ | 701 | $ | 658 | ||||||
Command, control and intelligence systems | 943 | 708 | 622 | |||||||||
Special purpose computing, surveillance and reconnaissance systems | 822 | 723 | 659 | |||||||||
Network infrastructure systems | 681 | 559 | 398 | |||||||||
$ | 3,681 | $ | 2,691 | $ | 2,337 | |||||||
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Communications systems | $ | 1,556 | $ | 1,201 | $ | 687 | ||||||
Command-and-control and intelligence systems | 1,360 | 939 | 705 | |||||||||
Special-purpose computing, surveillance and reconnaissance systems | 1,059 | 821 | 727 | |||||||||
Network infrastructure systems | 1,003 | 720 | 572 | |||||||||
$ | 4,978 | $ | 3,681 | $ | 2,691 | |||||||
The Information Systems and Technology group provides defense and commercial customers with infrastructure and systems integration capabilities required to process, communicate and manage information effectively. The group has leading market positions in the design and development, integration, deployment, and maintenance of wireline and wireless voice and data networks; C4ISR systems; encryption; ruggedized computing; advanced software and electronics systems development; and lifecycle management and support.
The group’s expertise in technology, systems design and integration, and key platform subsystems helps the company’s other business groups improve their products. This expertise has also positioned the company as a lead systems integrator, delivering solutions that create decisive communication and information-management advantages for military, government and commercial customers around the world. In pursuit of this vision, the company realigned the group by common expertise and customer groups effective January 1, 2002. This resulted in the creation of five business units: Advanced Information Systems, C4 Systems, Decision Systems, Network Systems and General Dynamics United Kingdom Limited.
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COMBAT SYSTEMS
The
As a leading provider of tracked and wheeled armored combat vehicles, armament systems and ammunition in North America, Europe and the South Pacific, and the only producer of America’s main battle tanks, the Combat Systems group provides systems integration, design,delivers key products and technologies to U.S. and allied military forces.
The group is one of the preferred suppliers of land and expeditionary combat system development, production and support for armored vehicles, armaments, munitionsaround the world. Combat Systems conceives, engineers, manufactures and components. Itssupports product lines that include a full spectrum of armored vehicles, turretstrucks and turret drive systems; unmanned systems;light wheeled vehicles, bridges, suspensions, engines, transmissions, guns and transmissions; medium-caliber guns; ammunition handling systems; medium-and large-caliber ammunition;systems, turret and turret-drive systems, reactive armor;armor, chemical and ordnance.
Net sales forbiohazard detection products, ammunition and ordnance, and composite manufacturing.
During 2003, the Combat Systems group were 21 percent ofenhanced its product offerings and engineering and production capabilities through three acquisitions, expanding the company’s consolidated net sales in 2002, 19 percent in 2001group’s customer base and 12 percent in 2000. Net sales (in millions) by major products and services were as follows:
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Main battle tanks and related products | $ | 732 | $ | 624 | $ | 515 | ||||||
Engineering and development | 590 | 406 | 303 | |||||||||
Medium armored vehicles and related products | 561 | 336 | 108 | |||||||||
Munitions and propellant | 383 | 339 | 28 | |||||||||
Rockets and missile components | 254 | 278 | 144 | |||||||||
Armament systems | 103 | 97 | 75 | |||||||||
Aerospace components and other | 300 | 130 | 100 | |||||||||
$ | 2,923 | $ | 2,210 | $ | 1,273 | |||||||
The acquisition of GM Defense establishes
4 | General Dynamics 2003 Annual Report |
The company is under contract tolatest technologies, and manufactures Pizarro Advanced Infantry Fighting Vehicles for the Spanish army.
The company expectsCombat Systems group is a major rolekey participant in the development of manned ground vehicles and emerging robotic technologies for the Army’s Future Combat Systems (FCS) basedprogram. In 2003, it successfully demonstrated the initial capability of a new guided rocket for tactical aircraft applications, and it leads the development program for technology that will make the future land soldier more lethal and survivable.
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Medium armored vehicles and related products | $ | 1,227 | $ | 413 | $ | 236 | ||||||
Main battle tanks and related products | 858 | 802 | 619 | |||||||||
Engineering and development | 646 | 655 | 445 | |||||||||
Munitions and propellant | 462 | 382 | 295 | |||||||||
Rockets and missile components | 278 | 264 | 280 | |||||||||
Armament systems | 145 | 116 | 84 | |||||||||
Aerospace components and other | 550 | 291 | 251 | |||||||||
$ | 4,166 | $ | 2,923 | $ | 2,210 | |||||||
MARINE SYSTEMS
The Marine Systems group has three shipyards with a long, proud history of providing the Navy with ships and submarines used to project the United States’ presence around the globe. Electric Boat manufactured the Navy’s first submarine more than 100 years ago. The company’s two other shipyards have demonstrated decades of innovation in developing destroyers and auxiliary ships for the Navy. Today, the group is on the cutting edge of shipbuilding as it participates in the design, development, manufacture and integration of the complex platforms that are central to Seapower 21, the Navy’s transformation intovision.
With its next-generation fighting force. The agreement forms an integrated design team forexperience and expertise in the development of surface, sub-surface and support platforms, Marine Systems is a key partner with the Navy. Marine Systems is leading the development of the manned ground vehicle elementsnew Virginia-class submarines, for which it received the largest submarine order in U.S. history. Construction work on the Virginia-class submarine is shared equally with the company’s teaming partner. The Virginia Class will provide the Navy a key platform with stealth, firepower and endurance, networked for communication with strategic and surface forces, in its pursuit of undersea superiority. Complementing this platform will be the Trident SSGN submarines, which the group is developing through the conversion of four Trident ballistic-missile submarines. The Trident SSGNs will be multi-mission submarines optimized for tactical strike and special operations support, key capabilities for future engagements around the world.
The group is the lead designer and producer of Arleigh Burke-class guided-missile destroyers, one of the FCS.
In Spain,most advanced surface combatants in the company has a contract to provide to the Spanish army 235 Leopard main battle tanks, built under license from a German company. The companyworld. It is also scheduled to produce 181 Pizarro tracked infantry fighting vehicles, including 176 vehiclesone of three competitors developing preliminary designs for the Navy’s Littoral Combat Ship (LCS). The LCS platform is intended for defense against terrorist swarm boats, mines and submarine threats in Phase IIcoastal areas.
General Dynamics 2003 Annual Report | 5 |
The company provides a total rangeNavy with its auxiliary and support ships, facilitating the efficient delivery of armament system capabilities including design, development, production and lifecycle management. Products include a wide rangecrucial supplies to U.S. forces around the world. It is leading the innovation of medium- and large-caliber ammunition and propellant products. The company provides systems management and produces rockets, warheads and motors forat-sea replenishment with the Army’s 2.75-inch Hydra-70 rocket system. The companyT-AKE program. T-AKE is the gun system integrator for the F-35 Joint Strike Fighter (JSF)first new Navy combat logistics ship design in almost 20 years, using integrated electric-drive propulsion to deliver high performance and the systems integrator of the Advanced Precision Kill Weapon System program, the successor to the Hydra-70 rocket system. The company contributes advanced composite structures to numerous aerospace platforms, including the F-16, F-18, F-22, C-17, JSF, and unmanned aerial vehicles such as the Global
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MARINE SYSTEMS
The Marine Systems group provides the U.S. Navy with combat vessels, including nuclear submarines, surface combatants and auxiliary ships.lower cost. The group also provides commercial ships, designing and manufacturing two roll-on/roll-off trailerships for cargo shipping and four double-hull oil tankers.
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Nuclear submarines | $ | 2,030 | $ | 1,852 | $ | 1,741 | ||||||
Surface combatants | 843 | 927 | 923 | |||||||||
Auxiliary and commercial ships | 325 | 394 | 364 | |||||||||
Repair and other services | 452 | 439 | 385 | |||||||||
$ | 3,650 | $ | 3,612 | $ | 3,413 | |||||||
The company designs, builds and supports nuclear submarines for the Navy. The company has construction contracts for the first four ships of the Virginia-class submarine program and the third of three Seawolf-class attack submarines. Construction work on the Virginia-class submarine is shared equally with Northrop Grumman Newport News (NGNN).
The company also has design, engineering and construction management responsibilities for the conversion of four Trident-class SSBN nuclear ballistic missile submarines to cruise missile SSGN configuration. As SSGNs, these submarines will be delivery platforms for cruise missiles, special operations forces and advanced payloads and sensors.
In addition to nuclear submarine design and construction, the company performs a broad range of engineering work, including advanced research and technology development, systems and component design evaluation, prototype development, and logistics support for the operating fleet. The company also serves as ship integrator for certain components and subassemblies of the submarines, such as electronic equipment.
The company has been awarded contracts to date for the construction of 27 Arleigh Burke-class destroyers (DDG-51) and plays a lead role in providing design, engineering and ongoing lifecycle support services for these ships. The company was also a member of a three-contractor team led by Northrop Grumman Ship Systems (NGSS) that was awarded a contract to design and build the Navy’s new San Antonio-class of amphibious assault ships (LPD). In 2002, the company, the Navy and NGSS agreed to transfer construction of four LPDs from the company to NGSS in exchange for construction of up to four DDGs. As a result of this swap arrangement and a multiyear agreement awarded shortly thereafter, the company received contracts to construct a total of seven DDGs with a total value of $3.7 billion.
The company was one of six contractors that received a contract from the Navy to explore advanced concepts for a Littoral Combat Ship (LCS). The LCS is an integrated surface combatant capable of operating in coastal areas against terrorist threats, high-speed swarm boats, mines and diesel submarines. The LCS program envisions ship construction beginning in 2005.
DD(X) is the Navy’s next generation family of surface combatants. The company is a major subcontractor on the design phase of the DD(X) program.
The company designs and builds ships for the Navy and commercial customers. The company currently has contracts for the design and construction of three dry-cargo combat logistics ships, with options for up to nine additional ships, and has recently completed the last of eight strategic sealift ships for the Navy. Contracts with
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Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Nuclear submarines | $ | 2,256 | $ | 2,030 | $ | 1,852 | ||||||
Surface combatants | 973 | 852 | 935 | |||||||||
Auxiliary and commercial ships | 421 | 325 | 394 | |||||||||
Repair and other services | 621 | 443 | 431 | |||||||||
$ | 4,271 | $ | 3,650 | $ | 3,612 | |||||||
The company provides ship repair and other services to the Navy and commercial customers. The company also manages 23 ready-reserve, fast sealift and prepositioning ships for the U.S. government.
AEROSPACE
The Aerospace group is composed of Gulfstream Aerospace Corporation and General Dynamics Aviation Services.
The Aerospace group designs, develops, manufactures, markets and supports a fleet of world-renowned business-jet aircraft, and provides maintenance and supportaviation services for technologically advanced business jets.business-jet aircraft. The group was created in 1999 when the company acquired Gulfstream Aerospace Corporation. In 2001, the group added mid-size aircraft to its product offerings with the acquisition of Galaxy Aerospace Company, and formed a separate aviation services unit. Gulfstream has produced more than 1,400 aircraft for customers around the world since 1958.
In 2003, the group broadened its offering of business-jet aircraft by introducing a new aircraft and completing regulatory requirements for production of other airframes. In addition, the group expanded its aviation services operations to include the first Gulfstream-owned service center outside the United States through an acquisition at the London Luton Airport in the United Kingdom.
The new large-cabin, long-range Gulfstream G450, introduced in 2003, is an entire aircraft upgrade of the best-selling business jet in its class — the Gulfstream GIV/GIV-SP/G400. The G450 incorporates the most advanced avionics, cockpit displays, aircraft systems, aerodynamic enhancements and flight safety features, and retains the aesthetic design and signature windows that set Gulfstream aircraft apart from competing models. The new G450, which is expected to receive certification later this year, was designed for safety, performance, reliability, and passenger comfort and productivity.
The group received Federal Aviation Administration (FAA) type and production certification for the Gulfstream G550 model on August 14, 2003. The large-cabin, ultra-long-range G550 can fly as high as 51,000 feet and can travel at speeds up to Mach .885 and distances up to 6,750 nautical miles — the longest range available in a business jet. In February 2004, the National Aeronautic Association awarded its Collier Trophy to the G550, naming it “the greatest achievement in aeronautics in the United States with respect to improving performance, efficiency or safety of air or space vehicles” in 2003.
The Aerospace group also sellsreceived type certification for its state-of-the-art PlaneView® cockpit, as well as the first production certification for the Gulfstream Enhanced Vision System (EVS). The Gulfstream EVS significantly improves pilot situational awareness during conditions of reduced visibility, both in flight and on the ground.
Additionally, in February 2004, the company further expanded its product line by introducing the Gulfstream G350 model. Very similar in design to the G450, the new aircraft delivers the same spacious cabin, advanced avionics and cockpit systems, exceptional performance and reliability, but with a slightly reduced range and a lower price.
Looking beyond the commercial market, the group continued efforts to offer its aircraft as platforms for ISR and other special mission applications by U.S. and allied governments. It sold four G550 aircraft to governmentsthe Israeli Ministry of Defense for use as Compact Airborne Early Warning (CAEW) platforms, which will take full advantage of the G550’s capabilities, endurance, reliability and low operating cost. Additionally, the G450 was designated the platform of choice by one of the two competitors in a pending U.S. military procurement for special mission ISR applications.
The company formed General Dynamics Aviation Services in February 2001 to better meet the maintenance needs of a variety of the most popular business-jet aircraft available around the world. Gulfstream has delivered nearly 1,400 aircraftIt serves a broad range of business-aircraft owners through maintenance centers in Minneapolis, Minnesota; Westfield, Massachusetts; West Palm Beach, Florida; Dallas, Texas; and Las Vegas, Nevada.
With an expanded product line, the company believes the Aerospace group is well positioned to customers since 1958, the year operations began.take advantage of an encouraging market.
6 | General Dynamics 2003 Annual Report |
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
New aircraft | $ | 2,470 | $ | 2,694 | $ | 2,353 | ||||||
Aircraft services | 384 | 394 | 421 | |||||||||
Pre-owned aircraft | 435 | 177 | 255 | |||||||||
$ | 3,289 | $ | 3,265 | $ | 3,029 | |||||||
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
New aircraft | $ | 2,081 | $ | 2,470 | $ | 2,694 | ||||||
Aircraft services | 408 | 384 | 394 | |||||||||
Pre-owned aircraft | 457 | 435 | 177 | |||||||||
$ | 2,946 | $ | 3,289 | $ | 3,265 | |||||||
During 2002, the company increased its product offering from four aircraft models to seven, priced from $12 million to $46 million. In addition to the G100 and G200 products, added in 2001, the AerospaceRESOURCES
The Resources group introduced the G150, G300, G400, G500 and G550 in 2002. The Gulfstream GIV-SP, GV and GV-SP brand names will no longer be used for future models. The company increased its product offering to compete vigorously in market segments in which it did not previously participate.
The Gulfstream G550 and the Gulfstream G500 serve the large-cabin ultra-long-range market. The company believes the G550 and G500 offer the best combination of large cabin size, fast cruising speed and advanced avionics of any large business jet in the ultra-long-range market segment. The Gulfstream G550 received a Provisional Type Certificate from the Federal Aviation Administration in 2002. Initial entry into service for the G550 is scheduled for the third quarter of 2003 and for the G500, the first quarter of 2004. The G400 large-cabin business jet serves the long-range market. The company believes the G400’s large cabin, advanced technology and five-year service and training package make it the leader in its market segment. The G400 is scheduled to enter service in 2003. The company believes the G300 serves an emerging market segment: business travelers seeking an affordable large-cabin business jet with international flight capability. The G300 is also scheduled for entry into service in 2003. The G150, a wide-cabin high-speed aircraft, will replace the G100 when it enters into service in 2005. The company believes the G150 will offer the best range and speed of any aircraft in its market segment.
This expanded product offering reduced the company’s product pricing separation from a $10 million average to a $5 million average between each aircraft model. This created a new buying opportunity for customers by offering greater value compared with competitors’ products.
Gulfstream Product Support provides an integrated worldwide network of company-owned service centers, parts depots, and field and technical representatives able to meet customer needs at any time. Gulfstream Airborne Product Support is an industry-exclusive customer service provided to support warranty aircraft. Additional Gulfstream authorized third party service centers provide customers extended product support coverage. General Dynamics Aviation Services provides aircraft maintenance services, spares and technical support for Challengers, Falcons, Gulfstreams, Hawkers and other business jet aircraft. In an effort to grow the service business, five strategically located facilities service and support both Gulfstream aircraft and competitors’ aircraft.
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The Aerospace group routinely accepts pre-owned aircraft in trade to facilitate the sale of new Gulfstream aircraft. These aircraft are then resold by the company in the pre-owned market.
RESOURCES
The company’s Resources businesses consist ofincludes two businesses: a coal mining operation and an aggregates operation that mines sand, stone and a leasing operationgravel for liquefied natural gas tankers.use in highway and building construction. Net sales for these businesses represented approximately 21 percent of the company’s consolidated net sales in 2003 and 2 percent in 2002 and 2001 and 3 percent of consolidated sales in 2000.2001. Net sales (in millions) were $256 in 2003, $286 in 2002 and $276 in 2001 and $253 in 2000.
Competition2001.
Virtually all of the products produced and sold by the company are highly engineered and require sophisticated manufacturing and system integration techniques and capabilities. Additionally, the product and program needsFor additional discussion of the company’s governmentbusiness groups, including significant program wins in 2003, see Management’s Discussion and commercial customers regularly changeAnalysis of Financial Condition and evolve. Results of Operations contained in Part II, Item 7 of this Annual Report on Form 10-K. For information on the revenues, operating earnings and identifiable assets attributable to each of the company’s business groups, see Note R to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K.
COMPETITION
The company’s ability to compete successfully compete is highly dependentdepends on the technical excellence and reliability of its products and services, its reputation for integrating complex systems, the ability of its leadership team to successfully manageteam’s successful management of the company’s businesses and respond to the changing needs of its customers,customer relationships, and the cost competitiveness of its products and services. The company competes in two separate markets: defense and business-jet aircraft.
DEFENSE CONTRACTS
MARKET
The company’s defense businesses are subject to substantial competition frommarket is served by numerous domestic and foreign entities ranging from large defense contractors to smaller companies. A varietycompanies that offer a range of products and services and compete with the company for many of its contracts. On occasion, the company is involved in subcontracting relationships with some of these competitors. The key competitive factors determine the results of different competitions including, price,in this market are technological capabilities, pastinnovation, low-cost production, performance and customer confidence.market knowledge.
The company also is frequently a partner with, or subcontractor to, a defense supplier on one project, with which it is competing for another award. These strategic partnerships and relationships improve the company’s ability to obtain new business, but also make it crucial for the company to distinguish itself from its competitors.
With respect to the market in which the Information Systems and Technology group participates, the company competes with a broad range of entities, ranging in size from large defense industry participantscompanies to smaller niche competitors that havewith specialized technologies. In the market it serves, theThe Combat Systems group facescompetes in a varietymarket composed primarily of majorlarge domestic and foreign competitorsentities. The company partners with some of these entities from time to time, and currently is in each of its operating units. Additionally, the company is partnereda teaming arrangement with two largeanother U.S. defense contractorscontractor on the manned vehicle portion of the Future Combat SystemsFCS program. The Marine Systems group hasoperates in a market with only one other primary competitor, with whichNorthrop Grumman Corporation; the company is also teamed with that competitor on several programs, including the Virginia-class submarine construction contract. The Navy’s LCS program has increased competition to now include other large aerospace companies seeking opportunities as shipbuilding prime contractors.
BUSINESSBUSINESS-JET AIRCRAFT
The business MARKET
Competition in the business-jet aircraft market generally is divided into segments based on the cabin size, range and rangeprice of the aircraft. The Aerospace group offers a total of sevennine products in the following market segments: mid-cabin high speed; wide-cabin high-speed; large-cabin mid-range; large-cabin long-range; and large-cabin ultra-long-range.
The G100 mid-cabin high-speed business jet and the G150 wide-cabin high-speed business jet compete in the $12 million to $14 million pricing segment. The G150 will offer many of the same performance and range features as the G100, but will have a wider and longer cabin. It is scheduled
Model | Market Segment | Range (a) | ||||||||
G550 | Large-cabin, Ultra-long-range | 6,750 | ||||||||
G500 (b) | Large-cabin, Ultra-long-range | 5,800 | ||||||||
G450 (c) | Large-cabin, Long-range | 4,350 | ||||||||
G400 | Large-cabin, Long-range | 4,100 | ||||||||
G350 (c) | Large-cabin, Mid-range | 3,800 | ||||||||
G300 | Large-cabin, Mid-range | 3,600 | ||||||||
G200 | Large-cabin, Mid-range | 3,400 | ||||||||
G150 (d) | Wide-cabin, High-speed | 2,700 | ||||||||
G100 | Mid-cabin, High-speed | 2,700 | ||||||||
The G300 large-cabin mid-range business jet, another new entry in the Gulfstream fleet, competes in the $21 million to $27 million pricing segment. The G300 is expected2004.
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The company believeshas at least one competitor in each market segment in which it competes favorablycompetes. The number of competitors increases in its markets on the basis ofsegments that offer shorter ranges. The key competitive factors in the business-jet market are the performance characteristics of itsthe aircraft, the quality and timeliness of the service it provides, its advancedprovided, the advances in technology offered, and its innovative marketing programs.programs, including price. The company believes it competes favorably on these criteria.
CustomersCUSTOMERS
Historically,The company’s primary customer is the majority of the company’s sales have been to U.S. government, agencies.particularly the Department of Defense. In 2002, 642003, 66 percent of the company’s net sales were to the U.S. government, either as a prime contractor or as a subcontractor; 23government; 18 percent were to U.S. commercial customers; 6 percent were to international commercial customers; and the remaining 711 percent were directly to international defense customers; and the remaining 5 percent were to international commercial customers.
General Dynamics 2003 Annual Report | 7 |
U.S. GOVERNMENT
Net
The company’s net sales to the U.S. government include Foreign Military Sales (FMS), which are sales to foreign governments through the U.S. government, whereby the company contracts with and receives payment from the U.S. government and the U.S. government assumes the risk of collection from the customer. U.S. government sales (in millions) were as follows:
Year Ended December 31 | |||||||||||||
2002 | 2001 | 2000 | |||||||||||
Domestic | $ | 8,385 | $ | 7,138 | $ | 6,056 | |||||||
FMS | 421 | 181 | 124 | ||||||||||
Total U.S. government | $ | 8,806 | $ | 7,319 | $ | 6,180 | |||||||
Percent of net sales | 64 | % | 61 | % | 60 | % |
Year Ended December 31 | 2003 | 2002 | 2001 | ||||||||||
Direct | $ | 10,525 | $ | 8,385 | $ | 7,138 | |||||||
Foreign Military Sales (a) | 502 | 421 | 181 | ||||||||||
Total U.S. government | $ | 11,027 | $ | 8,806 | $ | 7,319 | |||||||
Percent of total net sales | 66 | % | 64 | % | 61 | % | |||||||
(a) | In addition to its international sales, the company sells to foreign governments through the Foreign Military Sales (FMS) program. Under the FMS program, the company contracts with and is paid by the U.S. government, and the U.S. government assumes the risk of collection from the foreign government customer. |
In addition, U.S. government defense contracts typically involve long lead times for design and development, and are subject to significant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though a program may continue for several years. Consequently, programs are often only partially funded initially, and additional funds are committed only as Congress makes further appropriations, therefore making U.S. government programs subject to uncertain future funding levels.
managers.
8
U.S. COMMERCIAL
Commercial
The company’s commercial sales (in millions) to domestic customers were $3,009 in 2003, $3,235 in 2002 and $3,555 in 2001 and $3,158 in 2000.2001. These sales represented approximately 2318 percent of the company’s consolidated net sales in 2003, 23 percent in 2002 and 29 percent in 2001, and 31 percent in 2000.2001. The majority of the company’s commercialthese sales were for Gulfstream aircraft, primarily to national and multinational corporations. These sales are to many of the Fortune 500 public® companies and large, privately held companies and wealthy individuals.companies. The aircraft are operated by customers in a wide spectrumrange of industries, including pharmaceuticals, consumer goods, high technology, energy, industrial manufacturing, finance, insurance, real estate, mining, transportation, communications, public utilities and retail.industries.
INTERNATIONAL
The company has an agreement with an unaffiliated customer, NetJets Inc. (NetJets), a unit of Berkshire Hathaway and the leader in the fractional market, for the sale of aircraft for use in its fractional ownership program. Salescompany’s direct (non-Foreign Military Sales) sales to NetJets were approximately 6 percent of the Aerospace group’s sales in 2002 and approximately 9 percent of the group’s sales in both 2001 and 2000.
INTERNATIONAL
Direct international sales (in millions) to both defense and commercial customers outside the United States were $2,581 in 2003, $1,788 in 2002 and $1,180 in 2001 and $967 in 2000.2001. These sales represented approximately 1316 percent of the company’s consolidated net sales in 2003, 13 percent in 2002 and 10 percent in 2001, and 9 percent in 2000.2001. International defense sales were derived primarily from the company’s subsidiaries located abroad. Internationalabroad; international commercial sales were related primarily to the exportexports of businessbusiness-jet aircraft.
The company ownshas operations located in Australia, Austria, Canada, Germany, Spain, Switzerland and the U.K., Spain and Germany. For the year ended December 31, 2002, sales and operating earningsUnited Kingdom. Sales from these international operations were 7 percent$2,175 in 2003, $970 in 2002 and 6 percent of consolidated sales and operating earnings, respectively. Identifiable$421 in 2001. The long-lived assets of operations domiciledlocated outside the U.S.United States were 816 percent of the company’s total identifiable assetsas of December 31, 2003, 6 percent as of December 31, 2002, 7and 5 percent as of December 31, 2001, and 4 percent as of December 31, 2000. At December 31, 2002, these assets consisted primarily of cash and intangible assets, including goodwill.
2001.
For information regarding sales by geographic region, see Note SR to the Consolidated Financial Statements on page 54contained in Part II, Item 8 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for10-K.
SUPPLIERS
In some cases, the year ended December 31, 2002, and incorporated herein by reference.
Suppliers
The company is dependent upon suppliers and subcontractors for raw materials and a large number of components used in the production of its products. In some instances, the company is dependentrelies on only one or a few two
8 | General Dynamics 2003 Annual Report |
Research and DevelopmentRESEARCH AND DEVELOPMENT
The company’s defense and business aviation operations conductcompany conducts independent research and development activities, which include bid and proposal work.(R&D) activities. The company’s defense businessescompany also conduct research and developmentconducts R&D activities under U.S. government contracts. These research efforts have been and continuecontracts to be concerned with developingdevelop products for large systems development programssystems-development and performing work under research and development technology contracts.
Research and development activities of the company’s defense businesses represented theprograms.
The majority of company-sponsored R&D expenditures in each of the past three years. Ayears was in the company’s defense business. The company recovers a significant portion of these expenditures is recovered through overhead charges pursuant to U.S. government contracts. Research and developmentThe R&D activities
9
Research and development expenditures (in millions) were as follows:
Year Ended December 31 | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Company-sponsored | $ | 253 | $ | 203 | $ | 143 | ||||||
Customer-sponsored | 134 | 83 | 87 | |||||||||
$ | 387 | $ | 286 | $ | 230 | |||||||
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Company-sponsored | $ | 282 | $ | 253 | $ | 203 | ||||||
Customer-sponsored | 229 | 134 | 83 | |||||||||
$ | 511 | $ | 387 | $ | 286 | |||||||
BacklogBACKLOG
Summary backlog information (in millions) for each business group is as follows:
December 31 | ||||||||||||||||||||||||||||
2002 Total | ||||||||||||||||||||||||||||
2002 | 2001 | Backlog Not | ||||||||||||||||||||||||||
Expected to be | ||||||||||||||||||||||||||||
Funded | Unfunded | Total | Funded | Unfunded | Total | Filled in 2003 | ||||||||||||||||||||||
Information Systems and Technology | $ | 5,105 | $ | 202 | $ | 5,307 | $ | 4,729 | $ | 226 | $ | 4,955 | $ | 2,757 | ||||||||||||||
Combat Systems | 4,233 | 733 | 4,966 | 3,434 | 1,760 | 5,194 | 3,670 | |||||||||||||||||||||
Marine Systems | 7,262 | 4,351 | 11,613 | 6,702 | 3,358 | 10,060 | 8,522 | |||||||||||||||||||||
Aerospace | 4,498 | 2,283 | 6,781 | 4,198 | 2,075 | 6,273 | 4,945 | |||||||||||||||||||||
Resources | 240 | 64 | 304 | 305 | 29 | 334 | 157 | |||||||||||||||||||||
$ | 21,338 | $ | 7,633 | $ | 28,971 | $ | 19,368 | $ | 7,448 | $ | 26,816 | $ | 20,051 | |||||||||||||||
For further discussion of backlog, see Management’s Discussion and Analysis of the Results of Operations and Financial Condition on pages 21 through 35 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.
DEFENSE BUSINESSES
The company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. Thecontracts and includes funded and unfunded portions. For further discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of this Annual Report on Form 10-K.
Summary backlog information for governmenteach business group follows:
2003 Total | ||||||||||||||||||||||||||||
Backlog Not | ||||||||||||||||||||||||||||
Expected to be | ||||||||||||||||||||||||||||
Completed | ||||||||||||||||||||||||||||
December 31 | 2003 | 2002 | in 2004 | |||||||||||||||||||||||||
Funded | Unfunded | Total | Funded | Unfunded | Total | |||||||||||||||||||||||
Information Systems and Technology | $ | 6,164 | $ | 1,529 | $ | 7,693 | $ | 5,105 | $ | 202 | $ | 5,307 | $ | 2,832 | ||||||||||||||
Combat Systems | 6,029 | 2,447 | 8,476 | 4,233 | 733 | 4,966 | 4,900 | |||||||||||||||||||||
Marine Systems | 8,775 | 9,388 | 18,163 | 7,262 | 4,351 | 11,613 | 14,452 | |||||||||||||||||||||
Aerospace | 4,127 | 2,397 | 6,524 | 4,498 | 2,283 | 6,781 | 4,486 | |||||||||||||||||||||
Resources | 163 | 57 | 220 | 240 | 64 | 304 | 95 | |||||||||||||||||||||
$ | 25,258 | $ | 15,818 | $ | 41,076 | $ | 21,338 | $ | 7,633 | $ | 28,971 | $ | 26,765 | |||||||||||||||
DEFENSE BUSINESS
For defense programs, the funded backlog represents those items that have been authorized and appropriated by Congress and funded by the procuring agency.customer. The unfunded backlog represents firm orders for which funding has not been appropriated. To the extent the backlog has not been funded, there is no assurance that congressional appropriations or agency allotmentsfunding will be forthcoming.forthcoming; however, management believes it is highly likely.
AEROSPACE
The Aerospace funded backlog represents orders for which the company has entered into definitive purchase contracts and has received deposits from the customers.a customer. The unfunded Aerospace unfunded backlog includesconsists of options to purchase new aircraft and agreements to provide future aircraft maintenance and support services. Forty-three percent of the Aerospace funded backlog is with commercial customers other than NetJets. The backlog with NetJets represents 53 percent of the Aerospace funded backlog. The remaining 4 percent of the Aerospace funded backlog is with government customers. NetJets represents substantially all of Aerospace option backlog. Deliveries of aircraft to NetJets are scheduled from 2003 through 2010 and represent approximately 7 percent to 15 percent of projected annual new aircraft sales during that period.
10REGULATORY MATTERS
Regulatory Matters
U.S. GOVERNMENT DEFENSE CONTRACTS
In 2002, over 60 percent of the company’s net sales were to the
Generally, U.S. government, either as a prime contractor or as a subcontractor. Generally, government contracts are subject to oversight auditsseveral procurement laws and regulations. In particular, contracts are governed by the Federal Acquisition Regulation (FAR), which lays out uniform policies and procedures for the acquisition of goods and services by the U.S. government, representatives and contain provisions permitting termination,agency-specific acquisition regulations that implement or supplement the FAR. For example, the Department of Defense implements the FAR through the Defense Federal Acquisition Regulation (DFAR). The FAR regulates all phases of the acquisition of products and services, including:
General Dynamics 2003 Annual Report | 9 |
terminated, in whole or in part, at the government’s convenience or for default. If a contract is terminated at thefor convenience of the U.S. government, a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. Contracts that areIf a contract is terminated for default, generally provide that the government onlygenerally pays for only the work it has accepted and may require the contractor to pay for the incremental cost of reprocurement and may hold the contractor liable for damages.
The company’s government businesses areaccepted. These regulations also subject the company to a numberfinancial audits and other reviews by the government of procurement lawsits costs, performance, accounting and regulations. Failuregeneral business practices relating to its contracts, which may result in adjustment of the company’s contract-related costs and fees.
In addition, failure by the company to comply with theseprocurement laws or regulations and requirements can result in civil, criminal or administrative proceedings involving fines, penalties, suspension of payments andor suspension or debarmentdisbarment from government contracting or subcontracting for a period of time.
BUSINESSINTERNATIONAL
The company’s international sales are subject to U.S. and foreign government regulations and procurement policies and practices, including regulations relating to import-export control, investments, exchange controls and repatriation of earnings. International sales are also subject to varying currency, political and economic risks.
BUSINESS-JET AIRCRAFT
The Aerospace group is subject to FAA regulation by the Federal Aviation Administration in the United States and other similar aviation regulatory authorities throughout the world. For an aircraft to be manufactured and sold, the model must have received a Type Certificatetype certificate from the appropriate aviation authority, and each individual aircraft must have also received a Certificatecertificate of Airworthiness. Maintenance facilities are also required to be licensed by aviation authorities.airworthiness. Aviation authorities have the power to require changes to aircraft if deemed necessary for safety purposes. Maintenance facilities are also required to be licensed by aviation authorities.
ENVIRONMENTAL
The company’s operations are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations relating to the discharge, treatment, storage, disposal, investigation and remediation of certain materials, substances and wastes. The company continually assesses its compliance status and management of other environmental matters. The companymatters and believes that its operations are in substantial compliance with all applicable environmental laws and regulations.
Operating and maintenance costs associated with environmental compliance and management of contaminated sites are a normal, recurring part of the company’s operations. These costs are not significant relative to total operating costs or cash flows, and often are allowable costs under the company’s contracts with the U.S. government. These costs have not been material in the past and, basedpast. Based on information presentlycurrently available to the company and current U.S. government policies relating to allowable costs, in effect at this time, all of which are subject to change, the company does not expect continued compliance to have a material impact on the company’sits results of operations, financial condition or cash flows.
11
Under
A Potentially Responsible Party (PRP) has joint and several liability under existing U.S. environmental laws, “Potentially Responsible Parties” (PRP) are jointly and severally liable, and therefore,laws. Where the company has been designated a PRP by the Environmental Protection Agency or a state environmental agency, it is potentially liable to the government or third parties for the full cost of remediating contamination at the company’s facilities or former facilities or at third-party sites where the company has been designated a PRP by the Environmental Protection Agency or a state environmental agency.sites. In the unlikely event that the company is required to fully fund the remediation of a site, the statutory framework would allow the company to pursue rights to contribution from other PRPs. AdditionalFor additional information relating to the impact of environmental controls, is includedsee Note O to the Consolidated Financial Statements contained in Part II, Item 3, “Legal Proceedings — Environmental” on page 208 of this Annual Report on Form 10-K for the year ended December 31, 2002.10-K.
Intellectual PropertyINTELLECTUAL PROPERTY
The company is an establisheda leader in the development of innovative products, manufacturing technologies and systems integrationsystems-integration practices. In addition to owning a large portfolio of proprietary intellectual property, the company also licenses certain intellectual property rights of third parties, including the U.S. government. Additionally, in many cases, the U.S. government licenses many of the company’s patents, pursuant to which the government may use or authorize others to use the inventions covered by the patents. Although these intellectual property rights are important to the operation of the company’s business, no existing patent, license or other intellectual property right is of such importance that its loss or termination would, in the opinion of management, have a material impact on the company’s business.
EmployeesAVAILABLE INFORMATION
As of December 31, 2002, the company had approximately 54,000 employees, of whom 32 percent were covered by collective bargaining agreements with various unions, the most significant of which are the International Association of Machinists and Aerospace Workers, the Marine Draftsmen’s Association, the Metal Trades Council of New London, Connecticut, and the United Auto Workers Union. Agreements covering less than 1 percent of total employees are due to expire during 2003.
Available Information
The company files with the Securities and Exchange Commission (SEC) and makes available freeseveral types of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,amended. These reports include an annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Free copies of these reports are made available as soon as reasonably practicable after the filing has been made with the SEC. Reports may be obtained throughon the company’s website at GeneralDynamics.com(http://www.generaldynamics.com) or by calling investor relations at (703) 876-3000.
These reports may also be obtained at the SEC’s Public Reference Room at 450 Fifth Street, NW,N.W., Washington, D.C. 20599.DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (SEC.gov)(http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
12
Executive Officers of The Registrant
All executive officers of the company are elected annually. No executive officer of the company was selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions held for the last five years of the company’s executive officers as of March 14, 2003 were as follows:
2003 Annual Report |
13
14
15
Item 2. Properties
Principal Business Groups.The company believes its main facilities are adequate for its present needs and, as supplemented by planned improvements and construction, expects them to remain adequate for the foreseeable future. A summary of floor space (square feet in millions) at the main facilities of the Information Systems and Technology, Combat Systems, Marine Systems and Aerospace business groups as of December 31, 2002, follows:
Company | Government | ||||||||||||||||
Owned | Leased | Owned | |||||||||||||||
Facilities | Facilities | Facilities | Total | ||||||||||||||
Information Systems and Technology: | |||||||||||||||||
General Dynamics Advanced Information Systems | |||||||||||||||||
Pittsfield, MA (Labs) | — | — | 0.9 | 0.9 | |||||||||||||
Bloomington, MN (Office) | — | 0.5 | — | 0.5 | |||||||||||||
Mountain View, CA (Office/ Factory) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Greensboro, NC (Factory/ Office) | — | 0.2 | — | 0.2 | |||||||||||||
Annapolis Junction, MD (Office/ Lab) | — | 0.1 | — | 0.1 | |||||||||||||
Arlington, VA (Office/ Lab) | — | 0.1 | — | 0.1 | |||||||||||||
Florham Park, NJ (Office/ Lab) | — | 0.1 | — | 0.1 | |||||||||||||
General Dynamics C4 Systems | |||||||||||||||||
Taunton, MA (Office/ Factory) | 0.1 | 0.4 | — | 0.5 | |||||||||||||
Needham, MA (Office/ Lab) | 0.4 | — | — | 0.4 | |||||||||||||
Ottawa, Ontario (Office/ Plant) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Calgary, Alberta (Office) | — | 0.2 | — | 0.2 | |||||||||||||
General Dynamics Decision Systems | |||||||||||||||||
Scottsdale, AZ (Office/ Lab/ Factory/ Warehouse) | 1.5 | — | — | 1.5 | |||||||||||||
General Dynamics Network Systems | |||||||||||||||||
Needham, MA (Office/ Lab) | 0.1 | — | — | 0.1 | |||||||||||||
General Dynamics United Kingdom Limited | |||||||||||||||||
East Sussex, U.K. (Office) | 0.1 | — | — | 0.1 | |||||||||||||
South Wales, U.K. (Office) | 0.1 | — | — | 0.1 | |||||||||||||
Total Information Systems and Technology | 2.7 | 1.8 | 0.9 | 5.4 | |||||||||||||
Combat Systems: | |||||||||||||||||
General Dynamics Armament and Technical Products | |||||||||||||||||
Marion, IL (Plant/ Office) | 0.9 | — | — | 0.9 | |||||||||||||
Camden, AK (Plant/ Office) | 0.2 | 0.3 | — | 0.5 | |||||||||||||
Saco, ME (Plant/ Office) | 0.5 | — | — | 0.5 | |||||||||||||
DeLand, FL (Plant/ Office) | 0.4 | — | — | 0.4 | |||||||||||||
Lincoln, NE (Plant/ Office) | 0.2 | 0.2 | — | 0.4 | |||||||||||||
Burlington, VT (Plant/ Office) | — | 0.2 | — | 0.2 | |||||||||||||
General Dynamics Land Systems | |||||||||||||||||
Lima, OH (Plant) | — | — | 1.6 | 1.6 | |||||||||||||
Muskegon, MI (Plant) | 1.0 | 0.1 | — | 1.1 | |||||||||||||
Sterling Heights, MI (Office/ Warehouse) | 0.6 | — | — | 0.6 | |||||||||||||
Scranton, PA (Plant) | — | 0.3 | — | 0.3 | |||||||||||||
Anniston, AL (Plant/ Warehouse) | — | — | 0.2 | 0.2 | |||||||||||||
Woodbridge, VA (Office) | 0.1 | 0.1 | — | 0.2 | |||||||||||||
Imperial, CA (Plant/ Warehouse) | — | 0.1 | — | 0.1 | |||||||||||||
Shelby Township, MI (Plant/ Office) | — | 0.1 | — | 0.1 | |||||||||||||
Tallahassee, FL (Plant/ Office) | — | 0.1 | — | 0.1 | |||||||||||||
Westminster, MD (Plant/ Office) | — | 0.1 | — | 0.1 |
Company- | Government- | ||||||||||||||||
owned | Leased | owned | |||||||||||||||
Facilities | Facilities | Facilities | Total | ||||||||||||||
Information Systems and Technology: | |||||||||||||||||
Scottsdale, AZ (Office/Lab/Factory/Warehouse) | 1.5 | — | — | 1.5 | |||||||||||||
Pittsfield, MA (Lab) | — | — | 0.9 | 0.9 | |||||||||||||
Bloomington, MN (Office) | — | 0.5 | — | 0.5 | |||||||||||||
Needham, MA (Office/Lab) | 0.5 | — | — | 0.5 | |||||||||||||
Northern VA (Office/Lab) | — | 0.5 | — | 0.5 | |||||||||||||
Taunton, MA (Office/Factory) | 0.1 | 0.4 | — | 0.5 | |||||||||||||
Ann Arbor, MI (Office) | — | 0.4 | — | 0.4 | |||||||||||||
Buffalo, NY (Office) | — | 0.4 | — | 0.4 | |||||||||||||
Mountain View, CA (Office/Factory) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Ontario, Canada (Office/Plant) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Alberta, Canada (Office) | — | 0.2 | — | 0.2 | |||||||||||||
East Sussex, U.K. (Office) | 0.1 | 0.1 | — | 0.2 | |||||||||||||
Greensboro, NC (Office/Factory) | — | 0.2 | — | 0.2 | |||||||||||||
South Wales, U.K. (Office) | — | 0.1 | — | 0.1 | |||||||||||||
Combat Systems: | |||||||||||||||||
Vienna, Austria (Office/Plant) | 0.3 | 1.4 | 1.6 | 3.3 | |||||||||||||
Lima, OH (Plant) | — | — | 1.6 | 1.6 | |||||||||||||
Burglen, Switzerland (Office/Plant) | 1.1 | — | — | 1.1 | |||||||||||||
Muskegon, MI (Plant) | 1.0 | 0.1 | — | 1.1 | |||||||||||||
Murcia, Spain (Plant) | — | — | 1.0 | 1.0 | |||||||||||||
Trubia, Spain (Plant) | — | — | 1.0 | 1.0 | |||||||||||||
Kreuzlingen, Switzerland (Office/Plant) | 0.9 | — | — | 0.9 | |||||||||||||
Marion, VA (Office/Plant) | 0.9 | — | — | 0.9 | |||||||||||||
Palencia, Spain (Plant) | — | — | 0.9 | 0.9 | |||||||||||||
Marion, IL (Office/Plant) | — | 0.8 | — | 0.8 | |||||||||||||
Ontario, Canada (Office/Plant) | — | 0.8 | — | 0.8 | |||||||||||||
Granada, Spain (Plant) | — | — | 0.7 | 0.7 | |||||||||||||
Kaiserslautern, Germany (Office/Plant) | — | — | 0.6 | 0.6 | |||||||||||||
Sterling Heights, MI (Office/Warehouse) | 0.6 | — | — | 0.6 | |||||||||||||
Garland, TX (Office/Plant) | 0.5 | — | — | 0.5 | |||||||||||||
Oviedo, Spain (Plant) | — | — | 0.5 | 0.5 | |||||||||||||
Saco, ME (Office/Plant) | 0.5 | — | — | 0.5 | |||||||||||||
Camden, AR (Office/Plant) | 0.1 | 0.3 | — | 0.4 | |||||||||||||
DeLand, FL (Office/Plant) | 0.4 | — | — | 0.4 | |||||||||||||
Sevilla, Spain (Office/Plant) | — | — | 0.4 | 0.4 |
16
(a) | The Resources group operates two underground coal mines and one surface coal mine in Illinois and several stone quarries, as well as sand and gravel pits and yards for its aggregates business in Chicago, Illinois, and Indiana. Coal preparation facilities and rail loading facilities are located at each mine sufficient for its output. The company owns approximately 170 acres of property in Rancho Cucamonga, California, of which approximately five acres are undeveloped. |
General Dynamics 2003 Annual Report | 11 |
Company | Government | ||||||||||||||||
Owned | Leased | Owned | |||||||||||||||
Facilities | Facilities | Facilities | Total | ||||||||||||||
General Dynamics Ordnance and Tactical Systems | |||||||||||||||||
Marion, IL (Plant/ Office) | — | 0.8 | — | 0.8 | |||||||||||||
Red Lion, PA (Plant/ Office) | 0.3 | — | — | 0.3 | |||||||||||||
St. Marks, FL (Plant/ Office) | 0.3 | — | — | 0.3 | |||||||||||||
Anniston, AL (Plant/ Office) | — | 0.1 | — | 0.1 | |||||||||||||
St. Petersburg, FL (Office) | — | 0.1 | — | 0.1 | |||||||||||||
Santa Barbara Sistemas, S.A. | |||||||||||||||||
Murcia, Spain (Plant) | — | — | 1.0 | 1.0 | |||||||||||||
Trubia, Spain (Plant) | — | — | 1.0 | 1.0 | |||||||||||||
Palencia, Spain (Plant) | — | — | 0.9 | 0.9 | |||||||||||||
Granada, Spain (Plant) | — | — | 0.7 | 0.7 | |||||||||||||
Oviedo, Spain (Plant) | — | — | 0.5 | 0.5 | |||||||||||||
Sevilla, Spain (Office/ Plant) | — | — | 0.4 | 0.4 | |||||||||||||
La Coruna, Spain (Plant) | — | — | 0.2 | 0.2 | |||||||||||||
Santa Barbara Sistemas GmbH | |||||||||||||||||
Kaiserslautern, Germany (Office/ Plant) | — | — | 0.6 | 0.6 | |||||||||||||
Total Combat Systems | 4.5 | 2.6 | 7.1 | 14.2 | |||||||||||||
Marine Systems: | |||||||||||||||||
Bath Iron Works Corporation | |||||||||||||||||
Brunswick, ME (Plant/ Warehouse/Office) | 1.1 | 0.2 | — | 1.3 | |||||||||||||
Bath, ME (Shipyard) | 1.1 | — | — | 1.1 | |||||||||||||
Electric Boat Corporation | |||||||||||||||||
Groton, CT (Shipyard) | 2.8 | 0.1 | — | 2.9 | |||||||||||||
Quonset Point, RI (Plant/ Warehouse) | 0.4 | 1.1 | — | 1.5 | |||||||||||||
National Steel and Shipbuilding Company | |||||||||||||||||
San Diego, CA (Shipyard) | 0.3 | 0.1 | — | 0.4 | |||||||||||||
Total Marine Systems | 5.7 | 1.5 | — | 7.2 | |||||||||||||
Aerospace: | |||||||||||||||||
Gulfstream Aerospace Corporation | |||||||||||||||||
Savannah, GA (Factory/ Office) | 1.4 | 0.1 | — | 1.5 | |||||||||||||
Long Beach, CA (Service/ Completion Center) | 0.3 | 0.1 | — | 0.4 | |||||||||||||
Dallas, TX (Service/ Completion Center) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Appleton, WI (Service/ Completion Center) | 0.1 | 0.1 | — | 0.2 | |||||||||||||
Fort Worth, TX (Completion Center) | — | 0.2 | — | 0.2 | |||||||||||||
Mexicali, Mexico (Factory) | — | 0.2 | — | 0.2 | |||||||||||||
Brunswick, GA (Service/ Completion Center) | — | 0.1 | — | 0.1 | |||||||||||||
General Dynamics Aviation Systems | |||||||||||||||||
Las Vegas, NV (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
Minneapolis, MN (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
West Palm Beach, FL (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
Westfield, MA (Service Center) | 0.1 | — | — | 0.1 | |||||||||||||
Total Aerospace | 2.1 | 1.2 | — | 3.3 | |||||||||||||
Other Properties.Freeman Energy operates two underground coal mines and one surface coal mine in Illinois. Coal preparation facilities and rail loading facilities are located at each mine sufficient for its output.
17
Company- | Government- | ||||||||||||||||
owned | Leased | owned | |||||||||||||||
Facilities | Facilities | Facilities | Total | ||||||||||||||
Combat Systems (continued): | |||||||||||||||||
Lincoln, NE (Office/Plant) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Red Lion, PA (Office/Plant) | 0.3 | — | — | 0.3 | |||||||||||||
Scranton, PA (Plant) | — | 0.3 | — | 0.3 | |||||||||||||
St. Marks, FL (Office/Plant) | 0.3 | — | — | 0.3 | |||||||||||||
Woodbridge, VA (Office) | 0.1 | 0.2 | — | 0.3 | |||||||||||||
Anniston, AL (Plant/Warehouse) | — | — | 0.2 | 0.2 | |||||||||||||
Burlington, VT (Office/Plant) | — | 0.2 | — | 0.2 | |||||||||||||
Charlotte, NC (Office/Plant) | — | 0.2 | — | 0.2 | |||||||||||||
La Coruna, Spain (Plant) | — | — | 0.2 | 0.2 | |||||||||||||
Pooraka, Australia (Office/Plant) | — | 0.1 | — | 0.1 | |||||||||||||
St. Petersburg, FL (Office) | — | 0.1 | — | 0.1 | |||||||||||||
Westminster, MD (Office/Plant) | — | 0.1 | — | 0.1 | |||||||||||||
Marine Systems: | |||||||||||||||||
Groton, CT (Shipyard) | 2.8 | 0.2 | — | 3.0 | |||||||||||||
Quonset Point, RI (Plant/Warehouse) | 0.4 | 1.1 | — | 1.5 | |||||||||||||
Brunswick, ME (Office/Plant/Warehouse) | 1.1 | 0.2 | — | 1.3 | |||||||||||||
Bath, ME (Shipyard) | 1.1 | — | — | 1.1 | |||||||||||||
San Diego, CA (Shipyard) | 0.8 | 0.3 | — | 1.1 | |||||||||||||
Aerospace: | |||||||||||||||||
Savannah, GA (Office/Factory) | 1.4 | 0.1 | — | 1.5 | |||||||||||||
Long Beach, CA (Service/Completion Center) | 0.3 | 0.1 | — | 0.4 | |||||||||||||
Dallas, TX (Service/Completion Center) | 0.2 | 0.1 | — | 0.3 | |||||||||||||
Appleton, WI (Service/Completion Center) | 0.1 | 0.1 | — | 0.2 | |||||||||||||
Mexicali, Mexico (Factory) | — | 0.2 | — | 0.2 | |||||||||||||
Brunswick, GA (Service/Completion Center) | — | 0.1 | — | 0.1 | |||||||||||||
London, England (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
Las Vegas, NV (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
Minneapolis, MN (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
West Palm Beach, FL (Service Center) | — | 0.1 | — | 0.1 | |||||||||||||
Westfield, MA (Service Center) | 0.1 | — | — | 0.1 | |||||||||||||
12 | General Dynamics 2003 Annual Report |
ITEM 3. LEGAL PROCEEDINGS
For information relating to legal proceedings, see Note O to the Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the company’s security holders during the fourth quarter of the year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The company’s common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange.
The high and low sales prices of the company’s common stock and the cash dividends declared with respect to the company’s common stock for each quarterly period during the two most recent fiscal years are included in the Supplementary Data contained in Part II, Item 8 of this Annual Report on Form 10-K.
The number of holders of the company’s common stock as of January 31, 2004, was approximately 117,800.
The company made no repurchases of its common stock during the quarter ended December 31, 2003.
General Dynamics 2003 Annual Report | 13 |
ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)
The following table presents summary selected historical financial data derived from the audited Consolidated Financial Statements and other company information for each of the five years presented. The following information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited Consolidated Financial Statements and the Notes thereto.
(Dollars and shares in millions, except per share and employee amounts) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Summary of Operations | ||||||||||||||||||||||
Net sales | $ | 16,617 | $ | 13,829 | $ | 12,054 | $ | 10,305 | $ | 8,948 | ||||||||||||
Operating earnings | 1,467 | 1,582 | 1,486 | 1,325 | 1,203 | |||||||||||||||||
Interest expense, net | (98 | ) | (45 | ) | (56 | ) | (60 | ) | (34 | ) | ||||||||||||
Provision for income taxes, net | 375 | 533 | 482 | 359 | 246 | |||||||||||||||||
Earnings from continuing operations | 997 | 1,051 | 943 | 899 | 880 | |||||||||||||||||
Discontinued operations, net of tax | 7 | (134 | ) | — | 2 | — | ||||||||||||||||
Net earnings | 1,004 | 917 | 943 | 901 | 880 | |||||||||||||||||
Earnings per share: | ||||||||||||||||||||||
Basic: | ||||||||||||||||||||||
Continuing operations | 5.04 | 5.22 | 4.69 | 4.50 | 4.40 | |||||||||||||||||
Discontinued operations | 0.04 | (0.67 | ) | — | 0.01 | — | ||||||||||||||||
Net earnings | 5.08 | 4.55 | 4.69 | 4.51 | 4.40 | |||||||||||||||||
Diluted: | ||||||||||||||||||||||
Continuing operations | 5.00 | 5.18 | 4.65 | 4.47 | 4.36 | |||||||||||||||||
Discontinued operations | 0.04 | (0.66 | ) | — | 0.01 | — | ||||||||||||||||
Net earnings | 5.04 | 4.52 | 4.65 | 4.48 | 4.36 | |||||||||||||||||
Cash dividends per common share | 1.28 | 1.20 | 1.12 | 1.04 | 0.96 | |||||||||||||||||
Sales per employee | 274,900 | 261,400 | 249,800 | 236,200 | 221,700 | |||||||||||||||||
Financial Position | ||||||||||||||||||||||
Cash and equivalents | $ | 860 | $ | 328 | $ | 439 | $ | 175 | $ | 270 | ||||||||||||
Total assets | 16,183 | 11,731 | 11,069 | 7,987 | 7,744 | |||||||||||||||||
Short- and long-term debt | 4,043 | 1,471 | 1,978 | 575 | 1,103 | |||||||||||||||||
Shareholders’ equity | 5,921 | 5,199 | 4,528 | 3,820 | 3,170 | |||||||||||||||||
Book value per share | 29.91 | 25.87 | 22.56 | 19.05 | 15.77 | |||||||||||||||||
Other Information | ||||||||||||||||||||||
Funded backlog | $ | 25,258 | $ | 21,338 | $ | 19,368 | $ | 14,366 | $ | 11,949 | ||||||||||||
Total backlog | 41,076 | 28,971 | 26,816 | 19,666 | 19,914 | |||||||||||||||||
Shares outstanding | 198.0 | 201.0 | 200.7 | 200.5 | 201.0 | |||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||
Basic | 197.8 | 201.4 | 201.1 | 199.8 | 200.0 | |||||||||||||||||
Diluted | 199.2 | 202.9 | 202.9 | 201.3 | 202.1 | |||||||||||||||||
Active employees | 67,600 | 53,900 | 51,500 | 43,300 | 43,400 | |||||||||||||||||
14 | General Dynamics 2003 Annual Report |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(For an overview of the company’s business groups, including a discussion of products and services provided, see the Business discussion contained in Part I, Item 1 of this Annual Report on Form 10-K.)
MANAGEMENT OVERVIEW
General Dynamics designs, develops, manufactures and supports leading-edge technology products and services for mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company’s primary customers are the U.S. military, other government organizations, the armed forces of allied nations and a diverse base of corporate and industrial buyers. It operates several stone quarries,through four primary business groups — Information Systems and Technology, Combat Systems, Marine Systems and Aerospace — and a smaller Resources group.
The company has two primary business markets — defense and business aviation. The majority of the company’s revenues derive from contracts with the U.S. military. The Global War on Terrorism, Operation Iraqi Freedom and homeland defense concerns have focused the U.S. government’s efforts on ensuring that U.S. armed forces are equipped and trained to prevail in small- and large-scale conflicts around the world. At the same time, the president and the Department of Defense have indicated that they are committed to transforming the military into a more agile, responsive, lethal and survivable force for future engagements. These endeavors have driven steady funding increases for the Department of Defense since 2001.
For fiscal year 2004, Congress appropriated $375 billion for the Department of Defense, a 21 percent increase in funding since 2001. This amount includes $140 billion for weapons and equipment procurement and research and development activities, an increase of 36 percent since 2001. These two funding areas deliver the majority of the company’s revenues, and their sustained increases demonstrate solid administration and congressional support for the U.S. military. Congress provided additional funding for Operation Iraqi Freedom, bringing the Department of Defense’s total funding to over $440 billion for fiscal year 2004. For fiscal year 2005, the president has requested that Congress appropriate $402 billion for the Department of Defense, a 7 percent increase over 2004, including $144 billion for procurement and research and development. While Department of Defense funding levels may change over time, levels of funding available for the company’s programs are expected to remain consistent for 2004 and 2005.
The global defense market is shaped largely by the demands of the U.S. military. Many foreign governments remain committed to funding weapons and equipment modernization in the pursuit of interoperability with U.S. and allied forces and flexible capabilities for peacekeeping and regional operations. The company continues to focus on the needs of these customers and expects growing international sales as it expands its market presence in Europe.
General Dynamics 2003 Annual Report | 15 |
CONSOLIDATED OVERVIEW
Results of Operations
The company’s net sales were $16.6 billion in 2003, up 20 percent over 2002. Acquisitions in Information Systems and Technology and Combat Systems and strong organic growth in the company’s defense businesses contributed to the sales growth, offset in part by reduced sales of new aircraft in Aerospace. The overall organic growth in 2003 was 8 percent, led by 20 percent organic growth in Information Systems and Technology. Growth from acquisitions in 2003 was 12 percent. In 2002, net sales increased by 15 percent over 2001 on strong volume in Information Systems and Technology and Combat Systems, as well as sandcontributions from acquired businesses. About half of the sales growth in 2002 was organic.
Net earnings grew more than 9 percent from 2002, to just over $1 billion in 2003. This increase resulted from both organic growth and gravel pitsacquisitions in Information Systems and yardsTechnology and Combat Systems, but was offset partially by decreased earnings in Marine Systems and Aerospace. The downward pressure on 2003 earnings from Marine Systems was driven by performance problems on commercial shipbuilding contracts. Aerospace 2003 earnings were lower because of reduced sales of new aircraft and market pricing pressures, particularly in the Chicago, Illinoisfirst half of the year; however, management is cautiously optimistic that the business-aviation market has stabilized. For 2002, the company’s net earnings were essentially flat compared with 2001 because of an after-tax charge of $134, reported as discontinued operations, that was associated with the company’s exit from its undersea fiber-optic cable-laying business.
The company generated significant cash flow from operating activities in 2003 through strong operating results and Indianadiligent management of working capital, including sharply reduced levels of pre-owned aircraft inventory. Net cash provided by operating activities was $1.7 billion in 2003 compared with $1.1 billion in 2002 and 2001. The company used its cash to pay down debt, as reflected in an increase in net debt of only $2.1 billion during the year, despite making acquisitions in excess of $3 billion. The company also used the funds to repurchase its common shares, pay dividends and fund capital expenditures. In 2002 and 2001, cash from operating activities approximated net income.
General and administrative (G&A) expenses as a percentage of sales have remained consistent year over year at around 6.5 percent. G&A was $1.1 billion in 2003, $903 in 2002 and $808 in 2001.
Income from non-operating items was $3 in 2003 compared with $47 in 2002, which included a $36 gain from the sale of some assets of the Space Propulsion operation within Combat Systems. In 2001, expense
16 | General Dynamics 2003 Annual Report |
Backlog
The company’s total backlog increased 42 percent over 2002 to $41.1 billion at year-end 2003. This growth resulted from substantial new order activity in all business groups and acquisitions in Information Systems and Technology and Combat Systems. New orders received during 2003 totaled $25 billion, including an $8.4 billion submarine order in the Marine Systems group. The company’s funded backlog grew 18 percent over 2002 to $25.3 billion at the end of 2003.
The company’s defense businesses contributed $34.3 billion to the 2003 year-end total backlog, an increase of 57 percent over 2002. This portion of the total backlog represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog increased to $21 billion in 2003 and includes items that have been authorized and appropriated by Congress and funded by the customer. The unfunded backlog represents firm orders for which funding has not been appropriated. The backlog does not include work awarded under indefinite delivery, indefinite quantity (IDIQ) contracts. The total potential value of these contracts was approximately $6.7 billion as of December 31, 2003, up from $3 billion at the end of 2002, and may be realized over the next 10 years.
The Aerospace group’s total backlog of $6.5 billion remained steady in 2003 despite adverse economic conditions in the business-jet market in late 2002 and the first half of 2003. The Aerospace funded backlog was $4.1 billion at the end of 2003 and includes orders for which the company has definitive purchase contracts and deposits from the customer. The unfunded backlog, which consists of options to purchase new aircraft and agreements to provide future aircraft maintenance and support services, was $2.4 billion at year-end 2003, up slightly from 2002.
The Resources group’s backlog was $220 as of year-end 2003, of which $163 was funded.
REVIEW OF OPERATING SEGMENTS
INFORMATION SYSTEMS AND TECHNOLOGY
Results of Operations and Outlook
Year Ended December 31 | 2003 | 2002 | Variance | |||||||||||||
Net sales | $ | 4,978 | $ | 3,681 | $ | 1,297 | 35 | % | ||||||||
Operating earnings | 538 | 436 | 102 | 23 | % | |||||||||||
Operating margin | 10.8 | % | 11.8 | % | ||||||||||||
General Dynamics 2003 Annual Report | 17 |
Year Ended December 31 | 2002 | 2001 | Variance | |||||||||||||
Net sales | $ | 3,681 | $ | 2,691 | $ | 990 | 37 | % | ||||||||
Operating earnings | 436 | 261 | 175 | 67 | % | |||||||||||
Operating margin | 11.8 | % | 9.7 | % | ||||||||||||
Backlog
The Information Systems and Technology group’s backlog increased $2.4 billion in 2003 to $7.7 billion at year end, from both acquisitions and new order activity. Over 80 percent of the group’s backlog at year end was funded. In contrast with the company’s other defense businesses, Information Systems and Technology’s backlog consists of a large number of relatively small dollar-value contracts and programs. These include programs that support the U.S. government’s military transformation, homeland security initiatives and overseas programs that underscore the growing international market for the company’s products and services.
The group’s backlog does not include approximately $6.5 billion of potential contract value awarded under IDIQ contracts. A significant portion of this IDIQ value represents contracts for which the company has been designated as the sole-source supplier over several years to design, develop, produce and integrate complex products and systems for the military or other government agencies. Management believes that the customers intend to fully implement these systems. However, because the value of these arrangements is subject to the customer’s future exercise of an indeterminate quantity of delivery orders, the company recognizes these contracts in backlog only when they are funded.
In 2003, the company received two significant awards that extend two of the group’s longest-running programs. The Army awarded the company the Common Hardware/Software III (CHS-3) contract to provide continually updated commercial and ruggedized computers, network hardware equipment, power subsystems, peripheral devices and commercial software to the Army, Marine Corps, Air Force and other federal agencies worldwide. This IDIQ contract, which has a potential value of $2 billion over its 10-year life, is a follow-on to the company’s CHS-2 contract, now entering its tenth year. In addition, the Air Force selected the company for an IDIQ contract, called Intelligence Information, Command-and-Control Equipment and Enhancements (ICE2), to support and maintain critical intelligence and command-and-control systems and networks for U.S. defense and intelligence operations worldwide. The contract, which extends a program that
18 | General Dynamics 2003 Annual Report |
COMBAT SYSTEMS
Results of Operations and Outlook
Year Ended December 31 | 2003 | 2002 | Variance | |||||||||||||
Net sales | $ | 4,166 | $ | 2,923 | $ | 1,243 | 43 | % | ||||||||
Operating earnings | 463 | 323 | 140 | 43 | % | |||||||||||
Operating margin | 11.1 | % | 11.1 | % | ||||||||||||
Year Ended December 31 | 2002 | 2001 | Variance | |||||||||||||
Net sales | $ | 2,923 | $ | 2,210 | $ | 713 | 32 | % | ||||||||
Operating earnings | 323 | 238 | 85 | 36 | % | |||||||||||
Operating margin | 11.1 | % | 10.8 | % | ||||||||||||
General Dynamics 2003 Annual Report | 19 |
Backlog
The Combat Systems group’s total backlog rose 71 percent in 2003 to $8.5 billion at year end because of acquisitions and new order activity, including several significant contract awards. The group’s funded backlog also grew significantly, from $4.2 billion in 2002 to $6 billion at the end of 2003. The group’s backlog consists primarily of long-term production contracts with scheduled deliveries through 2012.
During 2003, Combat Systems won several contracts to partner with the U.S. military as it transforms its forces for the future. The company received an order from the Army for the third of six brigades of Stryker wheeled combat vehicles, a key component of the Army’s transformation to a lighter, more mobile force. The order, for 267 vehicles, is valued at $384 and is scheduled for delivery in 2004. The year-end backlog included $566 for the production of Stryker vehicles. Congress appropriated funding in 2004 for the fourth brigade, and the 2005 budget request includes funding for the fifth brigade. The first brigade of Stryker vehicles is deployed in Operation Iraqi Freedom. With the acquisition of GM Defense, the company has consolidated its lead role on the $4 billion Stryker program, which calls for a total of 2,096 vehicles for six planned brigades. The company believes there is significant potential for international sales of these vehicles.
In addition, the group and its teaming partner were selected to develop and demonstrate portions of the Army’s FCS program. The contracts awarded to the Combat Systems group in 2003 have a value of $2.2 billion and include engineering development and demonstration of a family of eight manned ground vehicles, as well as the development of the autonomous navigation systems for unmanned and manned ground vehicles. These ground vehicles are intended to be the new generation of Army combat vehicles.
The Army also awarded Combat Systems the lead technology integration contract for the second phase of its Future Force Warrior (FFW) advanced technology demonstration program. The $100 award is for completion of detailed designs of the FFW network-centric soldier system, part of the Army’s plan to create a highly networked, lethal, survivable soldier of the future. The system development and demonstration phase of this program has a potential value of $1 to $3 billion over a 10-year period.
The Combat Systems backlog also included approximately $380 for the continued design and development of the Marine Corps’ EFV program. Seven out of nine new infantry carrier prototypes, as well as a command-and-control prototype, have been completed as of year-end 2003. Initial production of more than 1,000 vehicles is scheduled to begin in 2006.
The company received additional funding to upgrade M1A2 Abrams battle tanks to the M1A2 System Enhancement Package (SEP) configuration. Through this program, the company retrofits M1A2 tanks with improved electronics, command-and-control capabilities and armor enhancements that improve the tank’s effectiveness. The administration’s 2005 budget request includes funding for more M1A2 SEP upgrades. In addition, the company was awarded a contract modification in 2003 to provide 125 M1A1 hardware kits for the Egyptian tank co-production program, bringing the total program, which began in 1992, to 880 M1A1 tank kits.
The Combat Systems group’s Leopard program is a long-term battle tank manufacturing contract for the Spanish army under license from a German company. The year-end backlog included $1.4 billion for the production of 232 Leopard tanks, with deliveries scheduled through 2008. The company also produces Pizarro Advanced Infantry Fighting Vehicles for the Spanish army. The Spanish government awarded the company a contract valued at $640 for the second phase of the Pizarro program, bringing the total program value to almost $900, with deliveries of 212 vehicles scheduled through 2012.
Combat Systems’ backlog at year-end 2003 included approximately $1.2 billion in armament, munitions and composite structures programs, such as reactive armor for the Bradley fighting vehicle and various trainable gun-mount systems. The ammunition programs include a $200 order from the Army in 2003 for rockets, motors and warheads for the Hydra-70 (70mm) rocket system, which raised the program value to date to over $800 and extended deliveries through 2006. The Army also awarded the company a contract to add a precision guidance system to the 70mm rocket family as part of the development of the next-generation Advanced Precision Kill Weapon System (APKWS). The composite structures programs include work on numerous aerospace platforms, including the F-16, F-18, F-22, C-17, Joint Strike Fighter and unmanned aerial vehicles such as the Global Hawk and the Predator.
20 | General Dynamics 2003 Annual Report |
MARINE SYSTEMS
Results of Operations and Outlook
Year Ended December 31 | 2003 | 2002 | Variance | |||||||||||||
Net sales | $ | 4,271 | $ | 3,650 | $ | 621 | 17 | % | ||||||||
Operating earnings | 216 | 287 | (71 | ) | (25 | )% | ||||||||||
Operating margin | 5.1 | % | 7.9 | % | ||||||||||||
Year Ended December 31 | 2002 | 2001 | Variance | |||||||||||||
Net sales | $ | 3,650 | $ | 3,612 | $ | 38 | 1 | % | ||||||||
Operating earnings | 287 | 310 | (23 | ) | (7 | )% | ||||||||||
Operating margin | 7.9 | % | 8.6 | % | ||||||||||||
Backlog
The Marine Systems group’s backlog grew remarkably in 2003 as a result of several significant contract awards. At the end of 2003, the group’s backlog reached an all-time high of $18.2 billion, a 56 percent increase over 2002. The backlog consists of numerous long-term submarine and ship construction programs, as well as repair and engineering contracts. The Navy’s shipbuilding plan will continue to have a significant influence on Marine Systems’ backlog.
In 2003, the Navy awarded the company an $8.7 billion contract for the construction of the next six Virginia-class submarines, the largest submarine order in U.S. history. The contract authorizes construction of one ship per year from 2003 through 2008. In January 2004, the five ships planned for construction from 2004 through 2008 became part of a multiyear agreement, saving the customer approximately $300 and shifting $1.5 billion from unfunded to funded backlog. In 1998, the Navy had awarded the company a contract to build the first four Virginia-class submarines of this potential 30-ship program. The Marine Systems group’s backlog at year end included $1.7 billion associated with these first four submarines, with one submarine scheduled to be delivered each year from 2004 through 2007. The lead ship in the class, theVirginia, was christened in August 2003. The company is the prime contractor on this program, and construction is shared equally with its teaming partner.
General Dynamics 2003 Annual Report | 21 |
AEROSPACE
Results of Operations and Outlook
Year Ended December 31 | 2003 | 2002 | Variance | |||||||||||||
Net sales | $ | 2,946 | $ | 3,289 | $ | (343 | ) | (10 | )% | |||||||
Operating earnings | 218 | 447 | (229 | ) | (51 | )% | ||||||||||
Operating margin | 7.4 | % | 13.6 | % | ||||||||||||
Aircraft Deliveries (in units): | ||||||||||||||||
Green | 74 | 85 | ||||||||||||||
Completion | 74 | 94 | ||||||||||||||
Year Ended December 31 | 2002 | 2001 | Variance | |||||||||||||
Net sales | $ | 3,289 | $ | 3,265 | $ | 24 | 1 | % | ||||||||
Operating earnings | 447 | 625 | (178 | ) | (28 | )% | ||||||||||
Operating margin | 13.6 | % | 19.1 | % | ||||||||||||
Aircraft Deliveries (in units): | ||||||||||||||||
Green | 85 | 84 | ||||||||||||||
Completion | 94 | 98 | ||||||||||||||
22 | General Dynamics 2003 Annual Report |
Summary of Aircraft Statistical Information
Sales contracts for new aircraft usually have two major milestones: the manufacture of the green aircraft and the aircraft’s completion, which includes exterior painting and installation of customer-selected interiors and optional avionics. The company records revenues when green aircraft are delivered to and accepted by the customer, and when the customer accepts final delivery of the fully outfitted aircraft.
The following table summarizes key unit data for the Aerospace group’s orders and backlog:
Year Ended December 31 | 2003 | 2002 | 2001 | ||||||||||
New orders | 75 | 76 | 71 | ||||||||||
Options exercised | 3 | 2 | 2 | ||||||||||
Firm orders (a) | 78 | 78 | 73 | ||||||||||
Cancellations (a) | (12 | ) | (6 | ) | — | ||||||||
Total orders (a) | 66 | 72 | 73 | ||||||||||
New options (a) | 3 | — | 4 | ||||||||||
Firm contracts in backlog | 158 | 173 | 131 | ||||||||||
Options in backlog | 103 | 103 | 63 | ||||||||||
Total aircraft in backlog | 261 | 276 | 194 | ||||||||||
Completions in backlog (b) | 38 | 38 | 49 | ||||||||||
(a) | Excludes fractional activity. The company received orders for 50 aircraft and 50 options in 2001, orders for 55 aircraft and 50 options in 2002 and cancellations for seven aircraft in 2003 from fractional customers. |
(b) | Represents aircraft that have moved from green production to the completion process as of year end. Backlog includes only the value of the completion effort on these aircraft. |
Backlog
The Aerospace group’s backlog remained steady in 2003 despite the difficult market conditions, ending the year at $6.5 billion, of which $4.1 billion was funded. The backlog includes aircraft deliveries scheduled through 2010. Approximately $2.1 billion, or 51 percent, of the group’s funded backlog is with NetJets Inc. (NetJets), a unit of Berkshire Hathaway and the leader in the fractional aircraft market, representing firm contracts for 114 aircraft. The unfunded backlog includes $1.4 billion for 100 aircraft options from NetJets, constituting 90 percent of the options in backlog. NetJets also represents almost 70 percent of the maintenance and support services in unfunded backlog. Deliveries of aircraft to NetJets are scheduled from 2004 through 2010 and represent as little as 4 percent and as much as 17 percent of projected new aircraft sales in those years.
The group’s remaining $2 billion of funded backlog at year-end 2003 consists of contracts with a broad range of customers from a variety of industries and approximately $440 of contracts with government customers.
The company continues to pursue opportunities to provide special mission aircraft to military customers around the world. In 2003, the company was awarded a contract to provide four Gulfstream G550 aircraft to the Israeli Ministry of Defense. The contract has an option for two additional G550 aircraft, for a total potential value of approximately $470. In addition, the company’s Gulfstream G450 aircraft was designated the platform of choice by one of the two competitors in a pending U.S. military procurement for special mission ISR applications.
General Dynamics 2003 Annual Report | 23 |
RESOURCES
The company’s Resources group principally consists of two businesses: a coal mining company and an aggregates business.company that supplies the construction industry.
Results of Operations
Year Ended December 31 | 2003 | 2002 | Variance | |||||||||||||
Net sales | $ | 256 | $ | 286 | $ | (30 | ) | (10 | )% | |||||||
Operating earnings | 32 | 89 | (57 | ) | (64 | )% | ||||||||||
Year Ended December 31 | 2002 | 2001 | Variance | |||||||||||||
Net sales | $ | 286 | $ | 276 | $ | 10 | 4 | % | ||||||||
Operating earnings | 89 | 52 | 37 | 71 | % | |||||||||||
Net sales and earnings in 2002 improved over 2001 because of increased volume and improved cost performance in the aggregates business. In addition, as noted above, earnings increased as a result of the reversal of contingency reserves.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
In the mid-1990s, the company embarked on a strategy of disciplined capital deployment through strategic and tactical acquisitions designed to grow the company beyond its core platform businesses. These acquisitions incorporated new products and technologies and expanded the company’s customer base. Since 1995, the company has acquired more than 30 businesses at a total cost of approximately $13.2 billion. This has resulted in a larger, more diversified company while preserving a strong balance sheet and sustained financial flexibility.
In terms of overall capital deployment for 2003, the company consummated over $3 billion of acquisitions, repurchased approximately 4.7 million of its outstanding common shares at an average price of $64 per share and continued its trend of consecutive annual dividend increases. Meanwhile, and in spite of the $3 billion in acquisitions, net debt (total debt less cash and equivalents) increased only $2.1 billion — to $3.2 billion at December 31, 2003. At the same time, the company converted a significant portion of its commercial paper to fixed-rate debt to take advantage of attractive borrowing rates available to the company. The company ownsended the year with a cash balance of $860, total debt of $4 billion and a debt-to-capital ratio of 41 percent.
Cash generation continues to be one of management’s key areas of focus, and 2003 was a particularly strong year in this regard. Free cash flow from operations for the year totaled $1.5 billion, compared with $861 in 2002 and $745 in 2001. Management defines free cash flow from operations as cash flow from operating activities less capital expenditures. Management believes free cash flow from operations is a useful measure for investors, because it portrays the company’s ability to generate cash from its core businesses for such purposes as repaying maturing debt, funding business acquisitions and paying dividends. The following table reconciles the free cash flow from operations with the cash flow from operating activities, as classified on the Consolidated Statement of Cash Flows:
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Cash flow from operating activities | $ | 1,723 | $ | 1,125 | $ | 1,101 | ||||||
Capital expenditures | (224 | ) | (264 | ) | (356 | ) | ||||||
Free cash flow from operations | $ | 1,499 | $ | 861 | $ | 745 | ||||||
24 | General Dynamics 2003 Annual Report |
that the company has adequate funds on hand and sufficient borrowing capacity to execute its financial and operating strategy. Going forward in 2004, management anticipates focusing on operations and the integration of recently acquired businesses.
The following is a discussion of the company’s major operating, investing and financing activities for each of the three years in the period ended December 31, 2003, as classified on the Consolidated Statement of Cash Flows.
Operating Activities
Net cash provided by operating activities was $1.7 billion in 2003, compared with $1.1 billion in both 2002 and 2001. The increase in cash flows in 2003 was due to substantial reductions in both new and pre-owned aircraft inventories in the Aerospace group and an influx of customer advances and deposits near the end of the year. In 2002 and 2001, cash provided by operating activities approximated net income.
Termination of A-12 Program.As discussed further in Note O to the Consolidated Financial Statements, litigation on the A-12 program termination has been ongoing since 1991. If, contrary to the company’s expectations, the default termination is ultimately sustained, the company and The Boeing Company could collectively be required to repay the U.S. government as much as $1.4 billion for progress payments received for the A-12 contract, plus interest, which was approximately 225 acres of property in Rancho Cucamonga, California, of which$1.1 billion at December 31, 2003. In this outcome, the government contends the company’s liability would be approximately 60 acres is undeveloped.
General.$1.2 billion pretax, or $700 after-tax. The company believes that it has sufficient resources to pay such an obligation, if required, while still retaining ample liquidity.
Investing Activities
Cash used in investing activities was $3.2 billion in 2003, $400 in 2002 and $1.7 billion in 2001. The primary uses of cash in investing activities were business acquisitions and capital expenditures, offset slightly by cash received from the sale of assets.
Business Acquisitions.On August 11, 2003, the company completed its main facilities are adequateacquisition of Veridian Corporation, headquartered in Arlington, Virginia, for approximately $1.5 billion in cash. On March 1, 2003, the present needscompany acquired GM Defense of London, Ontario, a business unit of General Motors Corporation, for approximately $1.1 billion in cash.
On June 14, 2002, the company acquired the outstanding stock of Advanced Technical Products, Inc., for $214 in cash, plus the assumption of $43 in outstanding debt, which was repaid at the time of the acquisition.
On September 28, 2001, the company acquired IISG from Motorola, Inc., for $825 in cash. On June 5, 2001, the company acquired substantially all of the assets of Galaxy Aerospace Company LP, for $330 in cash, after a purchase price adjustment received during the first quarter of 2002. The company may be required to make additional payments to the selling parties, up to a maximum of approximately $300 through 2006, contingent on the achievement of specific revenue targets. On January 26, 2001, the company acquired Primex Technologies, Inc., for $334 in cash plus the assumption of $204 in outstanding debt, $149 of which was repaid at the time of the acquisition.
The company completed several other business acquisitions in the Information Systems and Technology, Combat Systems and Aerospace groups during the last three years at a total cost of $515.
The company financed these acquisitions by issuing commercial paper. The company refinanced a significant portion of this debt during 2003, as discussed in Financing Activities.
Capital Expenditures.Capital expenditures in 2003 were $224, down approximately 15 percent from $264 in 2002. In 2002, capital expenditures decreased approximately 25 percent from the $356 spent in 2001 as a result of the completion of a facility modernization project at the company’s Bath Iron Works shipyard in 2001. The company expects capital expenditures in 2004 to remain consistent with 2003. The company had no material commitments for capital expenditures as of December 31, 2003.
Sale of Assets.On October 2, 2002, the company sold certain assets of its Space Propulsion operation for $90. The remainder of the Space Propulsion operation is included in the Combat Systems group.
On February 15, 2001, the Aerospace group sold its engine overhaul business for $55.
The company received approximately $60 in cash during the three-year period ended December 31, 2003, from the sale of real estate in southern California.
Financing Activities
In 2003, cash provided by financing activities was $2 billion as a result of the issuance of fixed-rate notes, offset in part by repayment of outstanding debt, repurchases of common stock and payment of dividends. In 2002, cash used by financing activities was $836, and cash provided was $908 in 2001.
Debt Proceeds, Net.On April 3, 2003, the company filed a Form S-3 Registration Statement (the Registration Statement) with the Securities and Exchange Commission to register $3 billion of debt securities under the Securities Act of 1933, as amended (the Securities Act). On May 15, 2003, the company issued $2 billion of medium-term fixed-rate debt pursuant to the Registration Statement. On August 14, 2003, the company extended the debt registered to $3.1 billion and issued an additional $1.1 billion of medium-term fixed-rate debt pursuant to the Registration Statement. The proceeds were used to repay a substantial portion of the company’s outstanding commercial paper. This had the effect of fixing interest rates on debt that previously carried variable rates.
General Dynamics 2003 Annual Report | 25 |
ADDITIONAL FINANCIAL INFORMATION
Off-Balance Sheet Arrangements
As of December 31, 2003, the company had no material off-balance sheet arrangements, other than operating leases. This includes guarantees; retained or contingent interests in assets transferred to unconsolidated entities; derivative instruments indexed to the company’s stock and classified in shareholders’ equity on the Consolidated Balance Sheet; and variable interests in entities that provide financing, liquidity, market risk or credit risk support to the company or engage in leasing, hedging or research and development services with the company.
Contractual Obligations
The following table presents information about the company’s contractual obligations as of December 31, 2003:
Payment Due by Period | ||||||||||||||||||||
Contractual obligations | Total Amount Committed | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Long-term debt (a) | $ | 5,077 | $ | 888 | $ | 775 | $ | 911 | $ | 2,503 | ||||||||||
Capital lease obligations | 13 | 2 | 4 | 4 | 3 | |||||||||||||||
Operating leases | 684 | 112 | 200 | 124 | 248 | |||||||||||||||
Purchase obligations (b) | 4,434 | 1,099 | 1,545 | 1,148 | 642 | |||||||||||||||
Other long-term liabilities (c) | 2,554 | 1,074 | 480 | 362 | 638 | |||||||||||||||
$ | 12,762 | $ | 3,175 | $ | 3,004 | $ | 2,549 | $ | 4,034 | |||||||||||
(a) | Includes scheduled interest payments. |
(b) | Includes amounts committed under legally enforceable agreements for goods and services with defined terms as to quantity, price and timing of delivery. Excludes purchase orders for products and services to be delivered under firm government contracts under which the company has full recourse under normal contract termination clauses. In addition, as disclosed in Note Q to the Consolidated Financial Statements, the company expects to make approximately $74 of contributions to its retirement plans in 2004, which has been excluded from the above amount. |
(c) | Represents other long-term liabilities on the company’s Consolidated Balance Sheet, including the current portion of long-term liabilities. The projected timing of cash flows associated with these obligations is based on management’s estimates, which are largely based on historical experience. |
26 | General Dynamics 2003 Annual Report |
Commercial Commitments
The following table presents information about the company’s commercial commitments as of December 31, 2003:
Amount of Commitment Expiration by Period | ||||||||||||||||||||
Commercial commitments | Total Amount Committed | Less Than 1 Year | 1-3 Years | 4-5 Years | After 5 Years | |||||||||||||||
Letters of credit (a) | $ | 921 | $ | 786 | $ | 114 | $ | — | $ | 21 | ||||||||||
Trade-in options (a) | 229 | 129 | 100 | — | — | |||||||||||||||
$ | 1,150 | $ | 915 | $ | 214 | $ | — | $ | 21 | |||||||||||
(a) | See Note O to the Consolidated Financial Statements for discussion of letters of credit and aircraft trade-in options. |
Application of Critical Accounting Policies
Management’s Discussion and Analysis of the company’s Financial Condition and Results of Operations is based on the company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to long-term contracts and programs, goodwill and other intangible assets, income taxes, pensions and other postretirement benefits, workers’ compensation, warranty obligations, pre-owned aircraft inventory, and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following policies are critical and require the use of significant business judgment in their application:Revenue Recognition —Government Contracts.The company accounts for sales and earnings under long-term defense contracts and programs using the percentage-of-completion method of accounting. The company follows the guidelines of American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” except that revisions of estimated profits on contracts are included in earnings under the reallocation method, in accordance with Accounting Principles Board Opinion No. 20, “Accounting Changes,” rather than the cumulative catch-up method. Under the reallocation method, the impact of revisions in estimates is recognized prospectively over the remaining life of the contract, while under the cumulative catch-up method such impact would be recognized immediately. If a revised estimate of contract profitability reveals an anticipated loss on the contract, the company recognizes the loss in the period it is identified.
The company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes that profit evenly over the remaining life of the contract based on either input (e.g., costs incurred) or output (e.g., units delivered) measures, as appropriate to the circumstances. The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion, and in some cases includes estimates of recoveries asserted against the customer for changes in specifications. These estimates involve various assumptions and projections relative to the outcome of future events over a period of several years, including future labor productivity and availability, the nature and complexity of the work to be performed, availability of materials, the impact of delayed performance, availability and timing of funding from the customer, and the timing of product deliveries. These estimates require the use of judgment. A significant change in one or more of these estimates could affect the profitability of one or more of the company’s contracts. The company reviews its contract estimates periodically to assess revisions in contract values and estimated costs at completion and reflects changes in estimates in the current and future periods under the reallocation method.
Business Aircraft.The company accounts for contracts for aircraft certified by the FAA in accordance with Statement of Position 81-1. These contracts usually provide for two major milestones: the manufacture of the “green” aircraft (i.e., before exterior painting and installation of customer-selected interiors and optional avionics) and its subsidiariescompletion. The company records revenues at two points: when green aircraft are delivered to and as supplementedaccepted by planned improvementsthe customer and construction, arewhen the customer accepts final delivery of the fully outfitted aircraft.
The company does not recognize revenue at green delivery unless (1) a contract has been executed with the customer and (2) the customer can be expected to remain adequatesatisfy its obligations under the contract, as evidenced by the receipt of deposits from the customer.
General Dynamics 2003 Annual Report | 27 |
company routinely offers customers trade-in options. Under these options, if exercised, the company will accept trade-in aircraft at a predetermined price based on estimated fair value. Once acquired in connection with a sale of new aircraft, the company records pre-owned aircraft at the lower of trade-in value or estimated net realizable value. The company treats any excess of the trade-in price above the net realizable value as a reduction of revenue upon the recording of the new aircraft sales transaction. The company also regularly assesses the carrying value of pre-owned aircraft in inventory and adjusts the carrying value to net realizable value when appropriate. The company determines net realizable value by using both internal and external aircraft valuation information. These valuations involve estimates and assumptions about many factors, including current market conditions, future market conditions, the age and condition of the aircraft and the availability of the aircraft in the market. These estimates require the use of judgment. Gross margins on sales of pre-owned aircraft can vary from quarter to quarter depending on the mix of aircraft sold and current market conditions.
The company is subject to litigation and other legal proceedings arising out of the ordinary course of its business or arising under provisions relating to the protection of the environment.
Estimating liabilities and costs associated with these matters requires the judgment of both management and legal counsel. When it is probable that the company has incurred a liability associated with claims or pending or threatened litigation matters and the company’s exposure is reasonably estimable, the company records a charge against earnings. The ultimate resolution of any exposure to the company may change as further facts and circumstances become known.
Management believes that its judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented.
New Accounting Standards
The Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” in January 2003. The FASB revised FIN 46 in December 2003 to clarify certain provisions and amend the effective date. FIN 46 provides guidance on the consolidation of certain entities. The interpretation requires a variable interest entity to be consolidated if the equity interest at risk is not sufficient to permit that entity to finance its activities without support from other parties or if the equity investors lack certain specified characteristics. FIN 46 is effective December 31, 2003, for special-purpose entities created before February 1, 2003, and is effective in the first quarter of 2004 for all other variable interest entities. The company does not believe thatexpect the outcomeadoption of any such government investigations willFIN 46 to have a material impacteffect on the company’sits results of operations, financial condition or cash flows.
28 | General Dynamics 2003 Annual Report |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk, primarily related to interest rates and foreign currency exchange rates. Financial instruments subject to interest rate risk include fixed-rate and variable-rate long-term debt obligations, variable-rate commercial paper and short-term investments. As of December 31, 2003, the company had no short-term investments. Fixed-rate debt obligations issued by the company are generally not putable until maturity and are not actively traded by the company in the market. Therefore, exposure to interest rate risk is not believed to be material for the company’s fixed-rate debt. A hypothetical 100 basis-point increase in market rates of interest applicable to the company’s commercial paper balances and floating-rate notes would not have a material effect on its results of operations, financial condition or cash flows.
The company may enter into interest rate swap agreements to manage its exposure to interest rate fluctuations. At December 31, 2003, no interest rate swap agreements were in effect.
The company also is subject to foreign currency exchange rate risk relating to receipts from customers, payments to suppliers and certain inter-company transactions in foreign currencies. The company principally uses foreign currency forward contracts from time to time to hedge the price risk associated with firmly committed and forecasted foreign-denominated payments, receipts and inter-company transactions related to its ongoing business and operational financing activities. Foreign currency contracts are sensitive to changes in foreign currency exchange rates. At December 31, 2003, a 10 percent unfavorable exchange rate movement in the company’s portfolio of foreign currency forward contracts would have resulted in an incremental realized loss of $28 (pretax) and an incremental unrealized loss of $22 million (pretax). Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such realized and unrealized losses would be offset by corresponding gains, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these forward contracts and the offsetting underlying commitments do not create material market risk.
General Dynamics 2003 Annual Report | 29 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Statement of Earnings
Year Ended December 31 | ||||||||||||||
(Dollars in millions, except per share amounts) | 2003 | 2002 | 2001 | |||||||||||
Net Sales | $ | 16,617 | $ | 13,829 | $ | 12,054 | ||||||||
Operating costs and expenses | 15,150 | 12,247 | 10,568 | |||||||||||
Operating Earnings | 1,467 | 1,582 | 1,486 | |||||||||||
Interest expense, net | (98 | ) | (45 | ) | (56 | ) | ||||||||
Other income (expense), net | 3 | 47 | (5 | ) | ||||||||||
Earnings from Continuing Operations before Income Taxes | 1,372 | 1,584 | 1,425 | |||||||||||
Provision for income taxes, net | 375 | 533 | 482 | |||||||||||
Earnings from Continuing Operations | 997 | 1,051 | 943 | |||||||||||
Discontinued operations, net of tax | 7 | (134 | ) | — | ||||||||||
Net Earnings | $ | 1,004 | $ | 917 | $ | 943 | ||||||||
Earnings per share | ||||||||||||||
Basic: | ||||||||||||||
Continuing operations | $ | 5.04 | $ | 5.22 | $ | 4.69 | ||||||||
Discontinued operations | 0.04 | (0.67 | ) | — | ||||||||||
Net earnings | $ | 5.08 | $ | 4.55 | $ | 4.69 | ||||||||
Diluted: | ||||||||||||||
Continuing operations | $ | 5.00 | $ | 5.18 | $ | 4.65 | ||||||||
Discontinued operations | 0.04 | (0.66 | ) | — | ||||||||||
Net earnings | $ | 5.04 | $ | 4.52 | $ | 4.65 | ||||||||
30 | General Dynamics 2003 Annual Report |
Consolidated Balance Sheet
December 31 | ||||||||
(Dollars in millions) | 2003 | 2002 | ||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and equivalents | $ | 860 | $ | 328 | ||||
Accounts receivable | 1,378 | 1,074 | ||||||
Contracts in process | 2,548 | 1,914 | ||||||
Inventories | 1,160 | 1,405 | ||||||
Other current assets | 448 | 377 | ||||||
Total Current Assets | 6,394 | 5,098 | ||||||
Noncurrent Assets: | ||||||||
Property, plant and equipment, net | 2,085 | 1,856 | ||||||
Intangible assets, net | 1,030 | 560 | ||||||
Goodwill, net | 6,083 | 3,510 | ||||||
Other assets | 591 | 707 | ||||||
Total Noncurrent Assets | 9,789 | 6,633 | ||||||
$ | 16,183 | $ | 11,731 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Short-term debt and current portion of long-term debt | $ | 747 | $ | 750 | ||||
Accounts payable | 1,317 | 1,056 | ||||||
Other current liabilities | 3,552 | 2,776 | ||||||
Total Current Liabilities | 5,616 | 4,582 | ||||||
Noncurrent Liabilities: | ||||||||
Long-term debt | 3,296 | 721 | ||||||
Other liabilities | 1,350 | 1,229 | ||||||
Commitments and contingencies (see Note O) | ||||||||
Total Noncurrent Liabilities | 4,646 | 1,950 | ||||||
Shareholders’ Equity: | ||||||||
Common stock, including surplus | 838 | 757 | ||||||
Retained earnings | 6,206 | 5,455 | ||||||
Treasury stock | (1,279 | ) | (1,016 | ) | ||||
Accumulated other comprehensive income | 156 | 3 | ||||||
Total Shareholders’ Equity | 5,921 | 5,199 | ||||||
$ | 16,183 | $ | 11,731 | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
General Dynamics 2003 Annual Report | 31 |
Consolidated Statement of Cash Flows
Year Ended December 31 | |||||||||||||
(Dollars in millions) | 2003 | 2002 | 2001 | ||||||||||
Cash Flows from Operating Activities: | |||||||||||||
Earnings from continuing operations | $ | 997 | $ | 1,051 | $ | 943 | |||||||
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities— | |||||||||||||
Depreciation, depletion and amortization of property, plant and equipment | 207 | 179 | 164 | ||||||||||
Amortization of intangible assets and goodwill | 70 | 34 | 100 | ||||||||||
Deferred income tax provision | 134 | 179 | 114 | ||||||||||
(Increase) decrease in assets, net of effects of business acquisitions— | |||||||||||||
Accounts receivable | 48 | (90 | ) | (25 | ) | ||||||||
Contracts in process | (437 | ) | (202 | ) | (225 | ) | |||||||
Inventories | 188 | (141 | ) | (223 | ) | ||||||||
Increase (decrease) in liabilities, net of effects of business acquisitions— | |||||||||||||
Accounts payable | 58 | 137 | 53 | ||||||||||
Billings in excess of costs and estimated profits | 276 | 109 | 256 | ||||||||||
Income taxes payable | 93 | (19 | ) | 27 | |||||||||
Other current liabilities | 111 | (41 | ) | (140 | ) | ||||||||
Other, net | (13 | ) | (70 | ) | 55 | ||||||||
Net Cash Provided by Operating Activities from Continuing Operations | 1,732 | 1,126 | 1,099 | ||||||||||
Net Cash (Used) Provided by Discontinued Operations | (9 | ) | (1 | ) | 2 | ||||||||
Net Cash Provided by Operating Activities | 1,723 | 1,125 | 1,101 | ||||||||||
Cash Flows from Investing Activities: | |||||||||||||
Business acquisitions, net of cash acquired | (3,044 | ) | (275 | ) | (1,451 | ) | |||||||
Purchases of available-for-sale securities | (30 | ) | (41 | ) | (45 | ) | |||||||
Sales/maturities of available-for-sale securities | 31 | 39 | 42 | ||||||||||
Capital expenditures | (224 | ) | (264 | ) | (356 | ) | |||||||
Proceeds from sale of assets | 34 | 133 | 96 | ||||||||||
Other, net | 1 | 8 | (32 | ) | |||||||||
Net Cash Used by Investing Activities | (3,232 | ) | (400 | ) | (1,746 | ) | |||||||
Cash Flows from Financing Activities: | |||||||||||||
Proceeds from issuance of fixed-rate notes, net | 3,094 | — | — | ||||||||||
Net (repayments of) proceeds from commercial paper | (529 | ) | (451 | ) | 825 | ||||||||
Proceeds from issuance of floating-rate notes | — | — | 500 | ||||||||||
Repayment of finance operations debt | (18 | ) | (22 | ) | (20 | ) | |||||||
Net repayments of other debt | (22 | ) | (76 | ) | (133 | ) | |||||||
Dividends paid | (249 | ) | (236 | ) | (219 | ) | |||||||
Purchases of common stock | (300 | ) | (100 | ) | (113 | ) | |||||||
Proceeds from option exercises | 65 | 49 | 68 | ||||||||||
Net Cash Provided (Used) by Financing Activities | 2,041 | (836 | ) | 908 | |||||||||
Net Increase (Decrease) in Cash and Equivalents | 532 | (111 | ) | 263 | |||||||||
Cash and Equivalents at Beginning of Year | 328 | 439 | 176 | ||||||||||
Cash and Equivalents at End of Year | $ | 860 | $ | 328 | $ | 439 | |||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. |
32 | General Dynamics 2003 Annual Report |
Consolidated Statement of Shareholders’ Equity
Common Stock | Accumulated Other | Total | |||||||||||||||||||||||||||
Retained | Treasury | Comprehensive | Shareholders' | Comprehensive | |||||||||||||||||||||||||
(Dollars in millions) | Par | Surplus | Earnings | Stock | Income/(Loss) | Equity | Income | ||||||||||||||||||||||
Balance, December 31, 2000 | $ | 241 | $ | 378 | $ | 4,059 | $ | (833 | ) | $ | (25 | ) | $ | 3,820 | |||||||||||||||
Net earnings | — | — | 943 | — | — | 943 | $ | 943 | |||||||||||||||||||||
Cash dividends declared | — | — | (224 | ) | — | — | (224 | ) | — | ||||||||||||||||||||
Shares issued under compensation plans | — | 54 | — | 16 | — | 70 | — | ||||||||||||||||||||||
Tax benefit of exercised stock options | — | 21 | — | — | — | 21 | — | ||||||||||||||||||||||
Shares purchased | — | — | — | (113 | ) | — | (113 | ) | — | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 11 | 11 | 11 | ||||||||||||||||||||||
Balance, December 31, 2001 | 241 | 453 | 4,778 | (930 | ) | (14 | ) | 4,528 | $ | 954 | |||||||||||||||||||
Net earnings | — | — | 917 | — | — | 917 | $ | 917 | |||||||||||||||||||||
Cash dividends declared | — | — | (240 | ) | — | — | (240 | ) | — | ||||||||||||||||||||
Shares issued under compensation plans | — | 38 | — | 14 | — | 52 | — | ||||||||||||||||||||||
Tax benefit of exercised stock options | — | 25 | — | — | — | 25 | — | ||||||||||||||||||||||
Shares purchased | — | — | — | (100 | ) | — | (100 | ) | — | ||||||||||||||||||||
Gain on cash flow hedge | — | — | — | — | 7 | 7 | 7 | ||||||||||||||||||||||
Unrealized gains on securities | — | — | — | — | 1 | 1 | 1 | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 9 | 9 | 9 | ||||||||||||||||||||||
Balance, December 31, 2002 | 241 | 516 | 5,455 | (1,016 | ) | 3 | 5,199 | $ | 934 | ||||||||||||||||||||
Net earnings | — | — | 1,004 | — | — | 1,004 | $ | 1,004 | |||||||||||||||||||||
Cash dividends declared | — | — | (253 | ) | — | — | (253 | ) | — | ||||||||||||||||||||
Shares issued under compensation plans | — | 69 | — | 37 | — | 106 | — | ||||||||||||||||||||||
Tax benefit of exercised stock options | — | 12 | — | — | — | 12 | — | ||||||||||||||||||||||
Shares purchased | — | — | — | (300 | ) | — | (300 | ) | — | ||||||||||||||||||||
Net loss on cash flow hedges | — | — | — | — | (14 | ) | (14 | ) | (14 | ) | |||||||||||||||||||
Unrealized gains on securities | — | — | — | — | 3 | 3 | 3 | ||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | 164 | 164 | 164 | ||||||||||||||||||||||
Balance, December 31, 2003 | $ | 241 | $ | 597 | $ | 6,206 | $ | (1,279 | ) | $ | 156 | $ | 5,921 | $ | 1,157 | ||||||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement. |
General Dynamics 2003 Annual Report | 33 |
(Dollars in millions, except per share amounts or unless otherwise noted)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization.The company’s businesses include mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company also owns a coal mining operation and an aggregates operation. The company’s primary customers are the U.S. military, other government organizations, the armed forces of allied nations and a diverse base of corporate and industrial buyers.
Basis of Consolidation and Use of Estimates.The Consolidated Financial Statements include the accounts of all wholly owned and majority-owned subsidiaries. Inter-company balances and transactions have been eliminated in consolidation. The financial statements for all periods presented have been restated to reflect the results of operations of the company’s undersea fiber-optic cable-laying business in discontinued operations, as discussed in Note C. Accounting principles generally accepted in the United States of America (GAAP) require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Revenue Recognition.The company accounts for sales and earnings under long-term defense contracts and programs using the percentage-of-completion method of accounting in accordance with AICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” The company applies earnings rates to all contract costs, including general and administrative (G&A) expenses, to determine sales and operating earnings. The company reviews earnings rates periodically to assess revisions in contract values and estimated costs at completion. Based on these assessments, any changes in earnings rates are made prospectively.
The company charges any anticipated losses on contracts and programs to earnings when identified. Such losses encompass all costs allocable to the contracts, including G&A expenses on government contracts. The company recognizes revenue arising from a claims process either as income or as an offset against a potential loss only when the claim can be reliably estimated and its realization is probable.
The company accounts for contracts for aircraft certified by the Federal Aviation Administration in accordance with Statement of Position 81-1. These contracts usually provide for two major milestones: the manufacture of the “green” aircraft and its completion. Completion includes exterior painting and installation of customer-selected interiors and optional avionics. The company records revenue at two points: when green aircraft are delivered to and accepted by the customer and when the customer accepts final delivery of the fully outfitted aircraft. The company recognizes sales of all other aircraft products and services when the product is delivered or the service is performed.
General and Administrative Expenses.G&A expenses were $1.1 billion in 2003, $903 in 2002 and $808 in 2001, and are included in operating costs and expenses on the Consolidated Statement of Earnings.
Interest Expense, Net.Interest expense was $108 in 2003, $58 in 2002 and $68 in 2001. Interest payments were $79 in 2003, $55 in 2002 and $70 in 2001.
Other Income (Expense), Net.Net other income in 2002 included a $36 pretax gain on the sale of some assets of the company’s Space Propulsion operations that were sold during the fourth quarter of 2002.
Cash and Equivalents and Investments in Debt and Equity Securities.The company classifies its securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The company considers securities with a maturity of three months or less to be cash equivalents. The company adjusts all investments in debt and equity securities to fair value. The company recognizes market adjustments in the statement of earnings for trading securities and as a component of accumulated other comprehensive income for available-for-sale securities. The company had available-for-sale investments of $43 at December 31, 2003, and $50 at December 31, 2002. The company had no investments classified as trading securities at the end of either period.
Accounts Receivable and Contracts in Process.Accounts receivable represent only amounts billed and currently due from customers. Recoverable costs and accrued profit related to long-term defense contracts and programs on which revenue has been recognized, but billings have not yet been presented to the customer (unbilled receivables) are included in contracts in process.
Inventories.Work-in-process inventories represent aircraft components and are stated at the lower of cost (based on estimated average unit cost of the number of units in a production lot, or specific identification) or market. Raw materials are stated at the lower of cost (first-in, first-out method) or market. The company records pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value (determined at the time of trade and based on estimated fair value) or estimated net realizable value.
34 | General Dynamics 2003 Annual Report |
Property, Plant and Equipment, Net.Property, plant and equipment are carried at historical cost, net of accumulated depreciation, depletion and amortization. Most of the company’s assets are depreciated using the straight-line method, with the remainder using accelerated methods. Buildings and improvements are depreciated over periods up to 50 years. Machinery and equipment are depreciated over periods up to 39 years. Depletion of mineral reserves is computed using the units-of-production method.
Impairment of Long-Lived Assets.The company reviews long-lived assets, including intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The company assesses the recoverability of the cost of the asset based on a review of projected undiscounted cash flows. In the event an impairment loss is identified, it is recognized based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset. If an asset is held for sale, the company reviews its estimated fair value less cost to sell.
Environmental Liabilities.The company accrues environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. The company recorded cleanup and other environmental exit costs related to sold businesses at the time of disposal. Recorded liabilities have not been discounted. To the extent the U.S. government has specifically agreed to pay the ongoing maintenance and monitoring costs at sites currently used in the conduct of the company’s government contracting business, the company treats these costs as contract costs and recognizes the costs as paid.
Fair Value of Financial Instruments.The company’s financial instruments include cash and equivalents, accounts receivable, accounts payable, short- and long-term debt and derivative financial instruments. The company estimates the fair value of these financial instruments as follows:
• | Cash and equivalents, accounts receivable and accounts payable:fair value approximates carrying value due to the short-term nature of these instruments. |
• | Short- and long-term debt:fair value is generally based on quoted market prices. |
• | Derivative financial instruments:fair value is based on valuation models that use observable market quotes. |
The differences between the estimated fair value and carrying value of the company’s financial instruments were not material as of December 31, 2003 and 2002.
Stock-Based Compensation.The company accounts for its incentive compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The company measures compensation expense for stock options as the excess, if any, of the quoted market price of the company’s stock at the measurement date over the exercise price. The company records stock awards at fair value at the date of the award. See Note P for a description of the company’s equity compensation plans.
Had compensation expense for stock options been determined based on the fair value at the grant dates for awards under the company’s equity compensation plans, the company’s net earnings and net earnings per share would have been reduced to the pro forma amounts indicated as follows:
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||||||
Net earnings, as reported | $ | 1,004 | $ | 917 | $ | 943 | ||||||||||
Add: Stock-based compensation expense included in reported net earnings, net of tax (a) | 14 | 15 | 31 | |||||||||||||
Deduct: Total fair value-based compensation expense, net of tax | 42 | 43 | 53 | |||||||||||||
Pro forma | $ | 976 | $ | 889 | $ | 921 | ||||||||||
Net earnings | ||||||||||||||||
Per share—basic: | As reported | $ | 5.08 | $ | 4.55 | $ | 4.69 | |||||||||
Pro forma | $ | 4.93 | $ | 4.41 | $ | 4.58 | ||||||||||
Net earnings | ||||||||||||||||
Per share—diluted: | As reported | $ | 5.04 | $ | 4.52 | $ | 4.65 | |||||||||
Pro forma | $ | 4.90 | $ | 4.38 | $ | 4.54 | ||||||||||
Weighted average fair value of options granted | $ | 10.95 | $ | 21.31 | $ | 17.67 | ||||||||||
(a) | Represents restricted stock grants under the company’s 1997 Incentive Compensation Plan. |
The compensation cost calculated under the fair value approach shown above is recognized over the vesting period of the stock options. Fair value of options is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2003, 2002 and 2001, respectively:
General Dynamics 2003 Annual Report | 35 |
Translation of Foreign Currencies.The functional currencies for the company’s international operations are the respective local currencies. The company translates foreign currency balance sheets at the end-of-period exchange rates and earnings statements at the average exchange rates for each period. The company includes the resulting foreign currency translation adjustments in the calculation of accumulated other comprehensive income, which is included in shareholders’ equity on the Consolidated Balance Sheet.
Classification.Consistent with defense industry practice, the company classifies assets and liabilities related to long-term production contracts as current, even though a portion of these amounts is not expected to be realized within one year. In addition, certain prior-year amounts have been reclassified to conform to the current-year presentation.
B. ACQUISITIONS, INTANGIBLE ASSETS AND GOODWILL, NET
In 2003, the company completed the following acquisitions for a total cost of approximately $3 billion, which was paid in cash:
Information Systems and Technology
Combat Systems
In 2002, the company acquired the following businesses for a total cost of $275, which was paid in cash:
Information Systems and Technology
Combat Systems
In 2001, the company acquired the following businesses for a total cost of approximately $1.4 billion, which was paid in cash:
Information Systems and Technology
Combat Systems
Aerospace
36 | General Dynamics 2003 Annual Report |
The operating results of these businesses have been included with those of the company from their respective closing dates. The purchase prices of these businesses have been allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess recorded as goodwill. Certain of the estimates related to the Veridian, IMCO, DSR and Steyr acquisitions are still preliminary at December 31, 2003. The company is awaiting the completion of the identification and valuation of intangible assets acquired. The company expects these analyses to be completed during the first quarter of 2004.
Intangible assets consisted of the following:
December 31 | 2003 | ||||||||||||
Gross | Net | ||||||||||||
Carrying | Accumulated | Carrying | |||||||||||
Amount | Amortization | Amount | |||||||||||
Amortized intangible assets: | |||||||||||||
Contract and program intangible assets | $ | 991 | $ | (157 | ) | $ | 834 | ||||||
Other intangible assets | 282 | (105 | ) | 177 | |||||||||
$ | 1,273 | $ | (262 | ) | $ | 1,011 | |||||||
Unamortized intangible assets: | |||||||||||||
Trademarks | $ | 19 | $ | — | $ | 19 | |||||||
December 31 | 2002 | ||||||||||||
Gross | Net | ||||||||||||
Carrying | Accumulated | Carrying | |||||||||||
Amount | Amortization | Amount | |||||||||||
Amortized intangible assets: | |||||||||||||
Contract and program intangible assets | $ | 481 | $ | (104 | ) | $ | 377 | ||||||
Other intangible assets | 252 | (88 | ) | 164 | |||||||||
$ | 733 | $ | (192 | ) | $ | 541 | |||||||
Unamortized intangible assets: | |||||||||||||
Trademarks | $ | 19 | $ | — | $ | 19 | |||||||
The company amortizes contract and program intangible assets on a straight-line basis over periods ranging from 5 to 40 years. Other intangible assets consist primarily of aircraft product design, customer lists, software and licenses, which are amortized over periods ranging from 5 to 15 years.
Amortization expense was $70 in 2003, $34 in 2002 and $100 (including $70 of goodwill amortization) in 2001. The company expects to record annual amortization expense over the next five years as follows:
2004 | $ | 91 | ||||||||||
2005 | $ | 89 | ||||||||||
2006 | $ | 89 | ||||||||||
2007 | $ | 88 | ||||||||||
2008 | $ | 85 | ||||||||||
The company adopted SFAS 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. The provisions of SFAS 142 eliminate amortization of goodwill and identifiable intangible assets with indefinite lives. Intangible assets with a finite life continue to be amortized over their useful life. The standard also requires an impairment assessment of goodwill and indefinite-lived intangible assets at least annually by applying a fair-value-based test. The company completed the required annual impairment test during the fourth quarter of 2003 and did not identify any impairment.
The following table presents comparative earnings data as if SFAS 142 had been adopted January 1, 2001:
Year Ended December 31 | 2003 | 2002 | 2001 (Adjusted) | ||||||||||
Reported net earnings | $ | 1,004 | $ | 917 | $ | 943 | |||||||
Add back: Amortization, net of tax effect | — | — | 45 | ||||||||||
Adjusted net earnings | $ | 1,004 | $ | 917 | $ | 988 | |||||||
Basic earnings per share: | |||||||||||||
Reported basic net earnings per share | $ | 5.08 | $ | 4.55 | $ | 4.69 | |||||||
Adjusted for amortization | — | — | 0.22 | ||||||||||
Adjusted basic net earnings per share | $ | 5.08 | $ | 4.55 | $ | 4.91 | |||||||
Diluted earnings per share: | |||||||||||||
Reported diluted net earnings per share | $ | 5.04 | $ | 4.52 | $ | 4.65 | |||||||
Adjusted for amortization | — | — | 0.22 | ||||||||||
Adjusted diluted net earnings per share | $ | 5.04 | $ | 4.52 | $ | 4.87 | |||||||
General Dynamics 2003 Annual Report | 37 |
The changes in the carrying amount of goodwill by business group for the year ended December 31, 2003, were as follows:
December 31, 2002 | Acquisitions (a) | Other (b) | December 31, 2003 | |||||||||||||
Information Systems and Technology | $ | 2,213 | $ | 1,375 | $ | (7 | ) | $ | 3,581 | |||||||
Combat Systems | 756 | 1,091 | 113 | 1,960 | ||||||||||||
Marine Systems | 193 | — | — | 193 | ||||||||||||
Aerospace | 347 | 1 | — | 348 | ||||||||||||
Resources | 1 | — | — | 1 | ||||||||||||
$ | 3,510 | $ | 2,467 | $ | 106 | $ | 6,083 | |||||||||
(a) | Includes adjustments to preliminary assignment of fair value to net assets acquired. | |
(b) | Consists of adjustments for currency translation. |
C. DISCONTINUED OPERATIONS
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Net sales | $ | — | $ | 34 | $ | 109 | ||||||
Operating expenses | — | 72 | 110 | |||||||||
Operating income (loss) | — | (38 | ) | (1 | ) | |||||||
Loss on disposal | 10 | (167 | ) | — | ||||||||
Income (loss) before taxes | 10 | (205 | ) | (1 | ) | |||||||
Tax (provision) benefit | (3 | ) | 71 | 1 | ||||||||
Income (loss) from discontinued operations | $ | 7 | $ | (134 | ) | $ | — | |||||
Assets and liabilities of discontinued operations are recorded in other current assets and other current liabilities, respectively, on the Consolidated Balance Sheet and consisted of the following:
December 31 | 2003 | 2002 | |||||||
Current assets | $ | 29 | $ | 68 | |||||
Noncurrent assets | — | 1 | |||||||
Assets of discontinued operations | $ | 29 | $ | 69 | |||||
Current liabilities | 70 | 125 | |||||||
Liabilities of discontinued operations | $ | 70 | $ | 125 | |||||
D. EARNINGS PER SHARE
Basic earnings per share for all periods presented is computed using net earnings for the respective periods and the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the incremental shares issuable upon the assumed exercise of stock options and the issuance of contingently issuable shares.
Basic and diluted weighted average shares outstanding were as follows (in thousands):
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Basic weighted average shares outstanding | 197,790 | 201,357 | 201,142 | |||||||||
Assumed exercise of stock options (a) | 1,237 | 1,467 | 1,608 | |||||||||
Contingently issuable shares | 125 | 28 | 157 | |||||||||
Diluted weighted average shares outstanding | 199,152 | 202,852 | 202,907 | |||||||||
(a) | Excludes the following outstanding options to purchase shares of common stock because the options’ exercise price was greater than the average market price for the shares: year ended December 31, 2003-3,337; year ended December 31, 2002-2,195; year ended December 31, 2001-422. |
38 | General Dynamics 2003 Annual Report |
E. INCOME TAXES
The net provision for income taxes for continuing operations is summarized as follows:
Year Ended December 31 | 2003 | 2002 | 2001 | ||||||||||
Current: | |||||||||||||
U.S. federal | $ | 250 | $ | 369 | $ | 378 | |||||||
State (a) | 1 | 3 | 16 | ||||||||||
Foreign | 58 | (18 | ) | 2 | |||||||||
Total current | 309 | 354 | 396 | ||||||||||
Deferred: | |||||||||||||
U.S. federal | 126 | 164 | 115 | ||||||||||
State (a) | 3 | 2 | (1 | ) | |||||||||
Foreign | 5 | 13 | — | ||||||||||
Total deferred | 134 | 179 | 114 | ||||||||||
Tax adjustments | (68 | ) | — | (28 | ) | ||||||||
$ | 375 | $ | 533 | $ | 482 | ||||||||
(a) | The provision for state and local income taxes that is allocable to U.S. government contracts is included in operating costs and expenses on the Consolidated Statement of Earnings and, therefore, not included in the provision above. |
The reconciliation from the statutory federal income tax rate to the company’s effective income tax rate follows:
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Statutory federal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
Tax adjustments | (5.0 | ) | — | (2.0 | ) | |||||||
State tax on commercial operations, net of federal benefits | 0.2 | 0.3 | 1.1 | |||||||||
Qualified export sales exemption | (0.7 | ) | (0.9 | ) | (0.6 | ) | ||||||
Tax credits | (1.5 | ) | (0.4 | ) | (0.4 | ) | ||||||
Other, net | (0.7 | ) | (0.4 | ) | 0.7 | |||||||
Effective income tax rate | 27.3 | % | 33.6 | % | 33.8 | % | ||||||
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities consisted of the following:
December 31 | 2003 | 2002 | |||||||
Postretirement and postemployment liabilities | $ | 127 | $ | 127 | |||||
A-12 termination | 93 | 90 | |||||||
Tax loss carryforwards | 63 | 33 | |||||||
Other | 507 | 385 | |||||||
Deferred assets | $ | 790 | $ | 635 | |||||
Intangible assets | 243 | 123 | |||||||
Property basis differences | 128 | 71 | |||||||
Commercial pension asset | 118 | 112 | |||||||
Capital Construction Fund | 112 | 131 | |||||||
Long-term contract costing methods | 102 | 56 | |||||||
Lease income | 40 | 47 | |||||||
Other | 47 | 38 | |||||||
Deferred liabilities | $ | 790 | $ | 578 | |||||
Net deferred tax asset | $ | — | $ | 57 | |||||
The current portion of the net deferred tax asset was $333 at December 31, 2003, and $194 at December 31, 2002, and is included in other current assets on the Consolidated Balance Sheet. As of December 31, 2003, the company had U.S. and foreign operating loss carryforwards of $43, the majority of which begin to expire in 2017. The company had foreign investment tax credit carryforwards of $16 that begin to expire in 2011, and U.S. capital loss carryforwards of $4 that begin to expire in 2009. The company provided a valuation allowance totaling $56 as of December 31, 2003, and $48 as of December 31, 2002, on certain of its deferred tax assets, the recovery of which is uncertain.
General Dynamics 2003 Annual Report | 39 |
company’s consolidated federal income tax returns have been examined by the IRS through 1998. Based on the results of those examinations, the company reduced its liabilities for tax contingencies, recognizing a non-cash benefit of $49, or $.25 per share. The company settled various other outstanding state tax disputes during the year, resulting in a net non-cash benefit of $19, or $.10 per share.
F. CONTRACTS IN PROCESS
December 31 | 2003 | 2002 | ||||||||||
Contract costs and estimated profits | $ | 17,700 | $ | 15,301 | ||||||||
Other contract costs | 749 | 711 | ||||||||||
18,449 | 16,012 | |||||||||||
Less advances and progress payments | 15,901 | 14,098 | ||||||||||
$ | 2,548 | $ | 1,914 | |||||||||
Contract costs include production costs and related overhead, such as G&A expenses, as well as contract recoveries for such matters as contract changes, negotiated settlements and claims for unanticipated contract costs, which totaled $21 as of December 31, 2003, and $29 as of December 31, 2002. The company records revenue associated with these matters as either income or as an offset against a potential loss only when recovery can be reliably estimated and realization is probable. Other contract costs represent amounts required to be recorded under GAAP that are not currently allocable to contracts, such as a portion of the company’s estimated workers’ compensation, other insurance-related assessments, retirement benefits and environmental expenses. These costs will become allocable to contracts when they are paid. The company expects to recover these costs through ongoing business, including both existing backlog and probable follow-on contracts. This business base includes numerous contracts for which the company is the sole source or one of two suppliers on long-term defense programs. If the level of backlog in the future does not support the continued deferral of these costs, the profitability of the company’s remaining contracts could be adversely affected.
G. INVENTORIES
December 31 | 2003 | 2002 | ||||||||||
Work in process | $ | 614 | $ | 750 | ||||||||
Raw materials | 389 | 396 | ||||||||||
Pre-owned aircraft | 103 | 230 | ||||||||||
Other (a) | 54 | 29 | ||||||||||
$ | 1,160 | $ | 1,405 | |||||||||
(a) | Consists primarily of coal and aggregates. |
H. PROPERTY, PLANT AND EQUIPMENT, NET
December 31 | 2003 | 2002 | ||||||||||
Machinery and equipment | $ | 2,303 | $ | 2,013 | ||||||||
Buildings and improvements | 1,188 | 1,096 | ||||||||||
Land and improvements | 205 | 192 | ||||||||||
Construction in process | 131 | 91 | ||||||||||
Mineral reserves | 76 | 77 | ||||||||||
3,903 | (a) | 3,469 | (a) | |||||||||
Less accumulated depreciation, depletion and amortization | 1,818 | 1,613 | ||||||||||
$ | 2,085 | $ | 1,856 | |||||||||
(a) | The U.S. government provides certain of the company’s plant facilities; the company does not include these facilities above. |
40 | General Dynamics 2003 Annual Report |
I. DEBT
December 31 | Maturity Dates | Range of Interest Rates | 2003 | 2002 | ||||||||
Fixed-rate notes | 2006–2015 | 2.125%–5.375% | $ | 3,094 | $ | — | ||||||
Floating-rate notes | 2004 | 1.50% | 500 | 500 | ||||||||
Commercial paper, net of unamortized discount | 2004 | 1.10% | 183 | 714 | ||||||||
Senior notes | 2008 | 6.32% | 150 | 150 | ||||||||
Term debt | 2008 | 7.50% | 40 | 45 | ||||||||
Other | Various | Various | 76 | 62 | ||||||||
4,043 | 1,471 | |||||||||||
Less current portion | 747 | 750 | ||||||||||
$ | 3,296 | $ | 721 | |||||||||
On April 3, 2003, the company filed a Form S-3 Registration Statement (the Registration Statement) with the Securities and Exchange Commission to register $3 billion of debt securities under the Securities Act of 1933, as amended (the Securities Act). On May 15, 2003, the company issued $2 billion of fixed-rate notes pursuant to the Registration Statement, consisting of the following:
On August 14, 2003, the company extended the debt registered to $3.1 billion and issued an additional $1.1 billion of fixed-rate notes pursuant to the Registration Statement, consisting of the following:
The proceeds were used to repay a substantial portion of the company’s outstanding commercial paper.
General Dynamics 2003 Annual Report | 41 |
$20 payable in December 2008. Interest is payable in June and December at the rate of 7.5 percent annually.
J. OTHER CURRENT LIABILITIES
December 31 | 2003 | 2002 | ||||||
Billings in excess of costs and estimated profits | $ | 792 | $ | 516 | ||||
Workers’ compensation | 548 | 509 | ||||||
Customer deposits on commercial contracts | 465 | 384 | ||||||
Salaries and wages | 371 | 222 | ||||||
Retirement benefits | 306 | 274 | ||||||
Liabilities of discontinued operations | 70 | 125 | ||||||
Other (a) | 1,000 | 746 | ||||||
$ | 3,552 | $ | 2,776 | |||||
(a) | Consists primarily of contract-related costs assumed in business acquisitions, dividends payable, environmental remediation reserves and warranty reserves. |
K. OTHER LIABILITIES
December 31 | 2003 | 2002 | ||||||
Deferred U.S. federal income taxes | $ | 351 | $ | 197 | ||||
Retirement benefits | 340 | 350 | ||||||
Customer deposits on commercial contracts | 77 | 87 | ||||||
Accrued costs of disposed businesses (a) | 63 | 67 | ||||||
Other (b) | 519 | 528 | ||||||
$ | 1,350 | $ | 1,229 | |||||
(a) | Consists primarily of liabilities for postretirement benefits, environmental and legal costs. |
(b) | Consists primarily of liabilities for tax contingencies for open years, warranty reserves and workers’ compensation. |
L. SHAREHOLDERS’ EQUITY
M. FINANCE OPERATION
December 31 | 2003 | 2002 | ||||||
Aggregate future minimum lease payments | $ | 133 | $ | 164 | ||||
Unguaranteed residual value | 38 | 38 | ||||||
Unearned interest income | (51 | ) | (64 | ) | ||||
$ | 120 | $ | 138 | |||||
The company is scheduled to receive minimum lease payments of $24 in 2004 and $21 in 2005, 2006, 2007 and 2008.
42 | General Dynamics 2003 Annual Report |
N. FOREIGN EXCHANGE RISK MANAGEMENT
O. COMMITMENTS AND CONTINGENCIES
Litigation
Program.In January 1991, the Navy terminated the company’s A-12 aircraft contract for default. The A-12 contract was a fixed-price incentive contract for the full-scale development and initial production of the Navy’s carrier-based Advanced Tactical Aircraft. Both the company and McDonnell Douglas, now owned by The Boeing Company, (the contractors), were parties to the contract with the Navy; each had full responsibility to the Navy for performance under the contract; and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1.4 billion in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors’ challenge to the termination for default, or a negotiated settlement.
The contractors filed a complaint on June 7, 1991, in
18
The contractors filed post-trial motions seeking reconsideration by the Trial Court of its opinion and judgment. On October 4, 2001, the Trial Court denied the contractors’ post-trial motions.
Following the August 31, 2001, decision of the Trial Court, the Navy and the contractors discussed the continued deferral of the payment of the $1.4 billion in unliquidated progress payments, plus interest, by an extension of the deferment agreement between the parties pursuant to which the Navy had deferred collection since 1991. No agreement was reached concerning this issue, though the contractors do not believe that the Trial Court’s decision triggers their obligation to make payment to the Navy. The Navy took no action to collect this amount from the contractors and settlement negotiations were conducted by the parties. On August 30, 2002, the Navy notified the contractors in writing that unless they paid, within 30 days, these unliquidated progress payments plus interest (approximately $2.3 billion), it would turn the matter over to the Defense Finance and Accounting Service for collection. The contractors have advised the Navy that they would resist collection as improper. In light of the Navy’s collection demand, the contractors requested the Trial Court to enter a stay of its judgment pending the outcome of the appeal. On December 13, 2002, the Trial Court agreed and entered a stay of its judgment pending appeal.
On March 17, 2003, the Court of Appeals vacated the Trial Court’s judgment and remanded the case to the Trial Court for further proceedings. The Court of Appeals found that the Trial Court misapplied the controlling legal standard in concluding that the termination for default could be sustained solely on the basis of the contractors’ inability to complete the first flight of the first test aircraft by December 1991. Rather, the Court of Appeals held that in order to uphold a termination for default athe Trial Court would have to determine that there was no reasonable likelihood that the contractors could perform the entire contract effort within the time remaining for performance. This is a determination the company does not believe is supported by the evidence.
General Dynamics 2003 Annual Report | 43 |
evidence. A government petition for rehearing in the Court of Appeals was denied on August 27, 2003, and the case was again remanded to the Trial Court for further proceedings.
False Claims Act
Avolar
Following UAL Corporation’s announcement on March 22, 2002, that it was closing its Avolar subsidiary, which was to engage in a business jet aircraft fractional ownership program, the company terminated its agreements with Avolar. The company retained deposits totaling $50 million related to this transaction.$500, plus punitive damages. On May 28, 2002, United BizJet Holdings, Inc., a subsidiary of UAL Corporation, filed a claim against the company
19
Environmental
Minimum Lease Payments
2004 | $ | 112 | ||
2005 | 109 | |||
2006 | 91 | |||
2007 | 71 | |||
2008 | 53 | |||
2009 and thereafter | 248 | |||
$ | 684 | |||
Other
Various claims and other legal proceedings generally incidental to
44 | General Dynamics 2003 Annual Report |
As a government contractor, the company is from time to time subject to U.S. government investigations relating to its operations, including claims for fines, penalties and compensatory and treble damages. The company believes, based on current available information, that the outcome of these matters, the company believes its potential liabilities in these proceedings, individually or in the aggregate,such ongoing government disputes and investigations will not have a material impacteffect on the company’sits results of operations, financial condition or cash flows.
Gulfstream G550 aircraft models. The Item 4. SubmissionMattersthe assets of Galaxy Aerospace Company LP. The selling parties may receive additional payments, up to a Votemaximum of Security Holders No matters were submitted toapproximately $300 through 2006, contingent on the achievement of specific revenue targets.votepredetermined minimum trade-in price as partial consideration in the new aircraft transaction. Any excess of the company’s security holders duringtrade-in price above the fourth quarterfair market value is treated as a reduction of revenue upon recording of the year endednew aircraft sales transaction. These option commitments last through 2005 and totaled $229 as of December 31, 2003, down from $551 at December 31, 2002.20PART IIItem 5. Market Beyond these commitments, additional aircraft trade-ins are likely to be accepted throughout the year in connection with future orders for new aircraft.Company’s Common Equitystandard product warranties on Gulfstream G200, Gulfstream G400 and Related Stockholder Matterscompany’s common stockcompany records estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is listedbased on the New York Stock Exchange, Chicago Stock Exchange and Pacific Stock Exchange. The high and low sales pricesestimated number of the company’s common stockmonths of warranty coverage remaining for products delivered and the cash dividends declared with respect to the company’s common stock for each quarterly period during the two most recent fiscal years areaverage historical monthly warranty payments, and is included in Note T toother current liabilities and other liabilities on the Consolidated Financial Statements appearing on page 55Balance Sheet.the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-Kwarranty liabilities for the year ended December 31, 2002, and incorporated herein by reference.2003, were as follows: December 31, 2002 Warranty Expense Payments Adjustments (a) December 31, 2003 Warranty liabilities $ 137 $ 86 $ (60 ) $ 51 $ 214
Item 6. Selected Financial Data
(a) | Includes warranty liabilities assumed in connection with acquisitions. |
The “Selected Financial Data” appearing on page 60P. EQUITY COMPENSATION PLANS
Under the Incentive Compensation Plan, awards may be granted to employees in cash, common stock, options to purchase common stock, restricted shares of common stock or any combination of these. Awards of stock options and restricted stock are intended to qualify as Exhibit 13deductible, performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code). Incentive Compensation Plan awards of cash and unrestricted stock are not designed to this Annual Reportbe deductible by the company under Section 162(m).
45 |
The “Management’s Discussion and Analysis of the Results of Operations and Financial Condition” appearing on pages 21 through 35 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference in response to this item.
Item 7A. Quantitative and Qualitative Information about Market Risk
The information appearing under the caption “Market Risk” on page 33 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, is incorporated herein by reference in response to this item.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Auditors’ Report appearing on pages 36 through 59 of the 2002 Annual Report, filed as Exhibit 13 to this Annual Report on Form 10-K for the year ended December 31, 2002, are incorporated herein by reference in response to this item.
21
the restricted shares and to retain cash dividends paid thereon. Awards of restricted shares may be granted pursuant to a performance formula whereby the number of shares initially granted increases or decreases based on the increase or decrease in the price of the common stock over a performance period.
On June 4, 2002 Arthur Andersen LLP informedMarch 3, 2004, the company’s board of directors adopted the General Dynamics Corporation Equity Compensation Plan (the Equity Compensation Plan) and recommended submission to shareholders for their approval at the annual meeting of shareholders to be held on May 5, 2004. The purpose of the Equity Compensation Plan is to provide the company with an effective means of attracting, retaining and motivating officers, key employees and non-employee directors, and to provide them with incentives to enhance the growth and profitability of the company.
Year Ended December 31 | 2003 | 2002 | 2001 | |||||||||
Number of shares awarded | 408,064 | 375,043 | 340,888 | |||||||||
Weighted average grant price | $ | 58.54 | $ | 88.23 | $ | 71.39 | ||||||
At December 31, 2003, in addition to the shares reserved for issuance on the exercise of options outstanding, 3,609,413 shares have been authorized for options and restricted stock that may be granted in the future. Information with respect to stock options follows:
Weighted-Average | Weighted-Average | |||||||||||||||
Shares Under Option | Exercise Prices | Shares Exercisable | Exercise Prices | |||||||||||||
Outstanding at December 31, 2000 | 6,573,599 | $ | 44.57 | 3,023,399 | $ | 42.45 | ||||||||||
Granted | 2,418,080 | 72.18 | ||||||||||||||
Exercised | (1,766,787 | ) | 42.61 | |||||||||||||
Canceled | (158,779 | ) | 53.29 | |||||||||||||
Outstanding at December 31, 2001 | 7,066,113 | 54.31 | 3,237,568 | 46.02 | ||||||||||||
Granted | 2,254,000 | 93.89 | ||||||||||||||
Exercised | (1,505,046 | ) | 43.56 | |||||||||||||
Canceled | (152,542 | ) | 72.13 | |||||||||||||
Outstanding at December 31, 2002 | 7,662,525 | 67.64 | 4,119,791 | 52.87 | ||||||||||||
Granted | 3,591,482 | 57.17 | ||||||||||||||
Exercised | (1,475,604 | ) | 50.49 | |||||||||||||
Canceled | (109,784 | ) | 66.14 | |||||||||||||
Outstanding at December 31, 2003 | 9,668,619 | $ | 66.35 | 4,679,212 | $ | 66.17 | ||||||||||
46 | General Dynamics 2003 Annual Report |
Information with respect to stock options outstanding and exercisable at December 31, 2003, is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Number Outstanding at | Weighted-Average | Weighted-Average | Number Exercisable at | Weighted-Average | ||||||||||||||||
Range of Exercise Prices | 12/31/03 | Remaining Contractual Life | Exercise Price | 12/31/03 | Exercise Price | |||||||||||||||
$4.10 | 17,375 | 0.85 | $ | 4.10 | 17,375 | $ | 4.10 | |||||||||||||
42.72-56.81 | 1,575,113 | 1.30 | 43.32 | 1,486,592 | 43.19 | |||||||||||||||
56.85-63.03 | 3,779,895 | 3.84 | 57.14 | 323,711 | 59.08 | |||||||||||||||
63.41-73.59 | 1,735,758 | 2.13 | 70.70 | 1,666,845 | 70.75 | |||||||||||||||
76.02-104.48 | 2,560,478 | 3.05 | 91.59 | 1,184,689 | 91.44 | |||||||||||||||
9,668,619 | 4,679,212 | |||||||||||||||||||
Q. RETIREMENT PLANS
Pension Benefits | Other Postretirement Benefits | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Change in Benefit Obligation | ||||||||||||||||
Benefit obligation at beginning of year | $ | (5,599 | ) | $ | (5,162 | ) | $ | (1,163 | ) | $ | (984 | ) | ||||
Service cost | (178 | ) | (157 | ) | (15 | ) | (13 | ) | ||||||||
Interest cost | (384 | ) | (366 | ) | (78 | ) | (69 | ) | ||||||||
Amendments | 38 | (25 | ) | 80 | (5 | ) | ||||||||||
Actuarial loss | (593 | ) | (177 | ) | (88 | ) | (173 | ) | ||||||||
Acquisitions/other | (105 | ) | (5 | ) | (18 | ) | 7 | |||||||||
Foreign currency exchange rate changes | (23 | ) | 1 | — | — | |||||||||||
Benefits paid | 286 | 292 | 82 | 74 | ||||||||||||
Benefit obligation at end of year | $ | (6,558 | ) | $ | (5,599 | ) | $ | (1,200 | ) | $ | (1,163 | ) | ||||
Change in Plan/Trust Assets | ||||||||||||||||
Fair value of assets at beginning of year | $ | 5,329 | $ | 6,107 | $ | 295 | $ | 324 | ||||||||
Actual return on plan/trust assets | 1,152 | (486 | ) | 55 | (16 | ) | ||||||||||
Acquisitions | 107 | 3 | 2 | — | ||||||||||||
Employer contributions | 61 | 15 | 43 | 32 | ||||||||||||
Curtailment/settlement/other | (8 | ) | (17 | ) | — | — | ||||||||||
Foreign currency exchange rate changes | 23 | (1 | ) | — | — | |||||||||||
Benefits paid | (286 | ) | (292 | ) | (51 | ) | (45 | ) | ||||||||
Fair value of assets at end of year | $ | 6,378 | $ | 5,329 | $ | 344 | $ | 295 | ||||||||
Funded Status Reconciliation | ||||||||||||||||
Funded status | $ | (180 | ) | $ | (270 | ) | $ | (856 | ) | $ | (868 | ) | ||||
Unrecognized net actuarial loss | 496 | 525 | 299 | 247 | ||||||||||||
Unrecognized prior service cost | 160 | 232 | (34 | ) | 49 | |||||||||||
Unrecognized transition obligation | — | — | 12 | 23 | ||||||||||||
Prepaid (accrued) benefit cost | $ | 476 | $ | 487 | $ | (579 | ) | $ | (549 | ) | ||||||
The accumulated benefit obligation for the year endedall defined benefit pension plans was $5,821 at December 31, 2003, and $4,919 at December 31, 2002. The changeaccumulated benefit obligation is the actuarial present value of benefits attributed to employee services rendered to date excluding assumptions about future compensation levels.
General Dynamics 2003 Annual Report | 47 |
Net periodic pension and other postretirement benefit costs consisted of the following:
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | |||||||||||||||||||
Service cost | $ | 178 | $ | 157 | $ | 130 | $ | 15 | $ | 13 | $ | 11 | ||||||||||||
Interest cost | 384 | 366 | 338 | 77 | 69 | 62 | ||||||||||||||||||
Expected return on plan assets | (522 | ) | (520 | ) | (486 | ) | (26 | ) | (26 | ) | (25 | ) | ||||||||||||
Recognized net actuarial gain | (4 | ) | (25 | ) | (41 | ) | 7 | (2 | ) | (3 | ) | |||||||||||||
Amortization of unrecognized transition (asset) obligation | — | (2 | ) | (7 | ) | 11 | 11 | 11 | ||||||||||||||||
Amortization of prior service cost | 35 | 36 | 33 | 2 | 3 | (1 | ) | |||||||||||||||||
Net periodic cost (income) | $ | 71 | $ | 12 | $ | (33 | ) | $ | 86 | $ | 68 | $ | 55 | |||||||||||
The following table presents the assumptions used to determine the company’s benefit obligations and net periodic pension and other postretirement benefit costs.
Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
Assumptions at December 31 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||||||
Weighted average used to determine benefit obligations | ||||||||||||||||||||||||
Discount rate | 6.25 | % | 7.00 | % | 7.25 | % | 6.25 | % | 7.00 | % | 7.25 | % | ||||||||||||
Varying rates of increase in compensation levels based on age | 4.00-11.00 | % | 4.00-11.00 | % | 4.00-11.00 | % | ||||||||||||||||||
Weighted average used to determine net cost for the year ended | ||||||||||||||||||||||||
Discount rate | 7.00 | % | 7.25 | % | 7.50 | % | 7.00 | % | 7.25 | % | 7.50 | % | ||||||||||||
Expected weighted average long-term rate of return on assets | 8.26 | % | 8.34 | % | 8.16 | % | 8.00 | % | 8.00 | % | 8.00 | % | ||||||||||||
Varying rates of increase in compensation levels based on age | 4.00-11.00 | % | 4.00-11.00 | % | 4.00-11.00 | % | ||||||||||||||||||
Assumed health care cost trend rate for next year: | ||||||||||||||||||||||||
Post-65 claim groups | 10.75 | % | 11.75 | % | 4.75 | % | ||||||||||||||||||
Pre-65 claim groups | 10.75 | % | 11.75 | % | 4.75 | % | ||||||||||||||||||
The company relies on historical long-term rates of return by asset class, the current long-term U.S. Treasury bond rate, and the current and expected asset allocation strategy to determine its expected long-term rate of return assumptions.
December 31 | 2003 | 2002 | ||||||||||
U.S. common stocks | 61 | % | 53 | % | ||||||||
U.S. common stocks with risk-mitigating hedges | 35 | % | 13 | % | ||||||||
Fixed income | 4 | % | 34 | % | ||||||||
100 | % | 100 | % | |||||||||
48 | General Dynamics 2003 Annual Report |
Arthur Andersen’s reports
The company amortizes changes in prior service cost resulting from plan amendments on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.
Other Postretirement Benefits.The company maintains plans providing postretirement health care coverage for many of its current and former employees and postretirement life insurance benefits for certain retirees. These benefits vary by employment status, age, service and salary level at retirement. The coverage provided and the extent to which the retirees share in the cost of the program vary throughout the company. Both health and life insurance benefits are provided only to those employees who retire directly from the service of the company and not to those who terminate service/seniority prior to eligibility for retirement.
General Dynamics 2003 Annual Report | 49 |
R. BUSINESS GROUP INFORMATION
Net Sales | Operating Earnings | Sales to U.S. Government | ||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||||||
Information Systems and Technology | $ | 4,978 | $ | 3,681 | $ | 2,691 | $ | 538 | $ | 436 | $ | 261 | $ | 3,982 | $ | 2,801 | $ | 1,991 | ||||||||||||||||||
Combat Systems | 4,166 | 2,923 | 2,210 | 463 | 323 | 238 | 2,921 | 2,321 | 1,785 | |||||||||||||||||||||||||||
Marine Systems | 4,271 | 3,650 | 3,612 | 216 | 287 | 310 | 3,966 | 3,435 | 3,403 | |||||||||||||||||||||||||||
Aerospace | 2,946 | 3,289 | 3,265 | 218 | 447 | 625 | 158 | 249 | 140 | |||||||||||||||||||||||||||
Resources (a) | 256 | 286 | 276 | 32 | 89 | 52 | — | — | — | |||||||||||||||||||||||||||
$ | 16,617 | $ | 13,829 | $ | 12,054 | $ | 1,467 | $ | 1,582 | $ | 1,486 | $ | 11,027 | $ | 8,806 | $ | 7,319 | |||||||||||||||||||
Identifiable Assets | Capital Expenditures | Depreciation, Depletion and Amortization | ||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||||||||||||||||||
Information Systems and Technology | $ | 5,800 | $ | 3,613 | $ | 3,374 | $ | 52 | $ | 81 | $ | 54 | $ | 75 | $ | 51 | $ | 87 | ||||||||||||||||||
Combat Systems | 4,682 | 2,439 | 2,118 | 94 | 49 | 43 | 80 | 43 | 56 | |||||||||||||||||||||||||||
Marine Systems | 2,171 | 1,933 | 1,731 | 38 | 81 | 119 | 61 | 60 | 55 | |||||||||||||||||||||||||||
Aerospace | 2,592 | 2,505 | 2,360 | 17 | 32 | 28 | 38 | 36 | 44 | |||||||||||||||||||||||||||
Resources (a) | 165 | 293 | 313 | 18 | 15 | 20 | 17 | 16 | 16 | |||||||||||||||||||||||||||
Corporate (b) | 773 | 948 | 1,173 | 5 | 6 | 92 | 6 | 7 | 6 | |||||||||||||||||||||||||||
$ | 16,183 | $ | 11,731 | $ | 11,069 | $ | 224 | $ | 264 | $ | 356 | $ | 277 | $ | 213 | $ | 264 | |||||||||||||||||||
(a) | Resources includes the results of the company’s coal and aggregates operations, as well as a portion of the operating results of the company’s commercial pension plans. |
(b) | Corporate identifiable assets include cash and equivalents from domestic operations, deferred taxes, real estate held for development and a portion of the net prepaid pension cost related to the company’s commercial pension plans. |
The following table presents revenues by geographic area (based on the location of the company’s customers):
Year Ended December 31 | 2003 | 2002 | 2001 | ||||||||||
North America: | |||||||||||||
United States | $ | 14,036 | $ | 12,041 | $ | 10,757 | |||||||
Canada | 151 | 104 | 115 | ||||||||||
Other | 151 | 85 | 29 | ||||||||||
Total North America | 14,338 | 12,230 | 10,901 | ||||||||||
Europe | 1,405 | 1,199 | 555 | ||||||||||
Africa/Middle East | 324 | 202 | 426 | ||||||||||
Asia/Pacific | 442 | 144 | 153 | ||||||||||
South America | 108 | 54 | 19 | ||||||||||
$ | 16,617 | $ | 13,829 | $ | 12,054 | ||||||||
50 | General Dynamics 2003 Annual Report |
S. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The fixed-rate notes and the floating-rate notes described in Note I are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain 100-percent-owned subsidiaries of General Dynamics Corporation (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 as of December 31, 2003 and 2002, for the balance sheet, as well as the statements of earnings and cash flows for each of the three years in the period ended December 31, 2003.
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
Guarantors on a | Other Subsidiaries | Consolidating | Total | |||||||||||||||||
Year Ended December 31, 2003 | Parent | Combined Basis | on a Combined Basis | Adjustments | Consolidated | |||||||||||||||
Net Sales | $ | — | $ | 13,652 | $ | 2,965 | $ | — | $ | 16,617 | ||||||||||
Cost of sales | (6 | ) | 11,621 | 2,444 | — | 14,059 | ||||||||||||||
General and administrative expenses | — | 883 | 208 | — | 1,091 | |||||||||||||||
Operating Earnings | 6 | 1,148 | 313 | — | 1,467 | |||||||||||||||
Interest expense | (88 | ) | (3 | ) | (17 | ) | — | (108 | ) | |||||||||||
Interest income | — | 1 | 9 | — | 10 | |||||||||||||||
Other income, net | (4 | ) | — | 7 | — | 3 | ||||||||||||||
Earnings from Continuing Operations before Income Taxes | (86 | ) | 1,146 | 312 | — | 1,372 | ||||||||||||||
Provision for income taxes | (47 | ) | 359 | 63 | — | 375 | ||||||||||||||
Discontinued operations, net of tax | — | 7 | — | — | 7 | |||||||||||||||
Equity in net earnings of subsidiaries | 1,043 | — | — | (1,043 | ) | — | ||||||||||||||
Net Earnings | $ | 1,004 | $ | 794 | $ | 249 | $ | (1,043 | ) | $ | 1,004 | |||||||||
Guarantors on a | Other Subsidiaries | Consolidating | Total | |||||||||||||||||
Year Ended December 31, 2002 | Parent | Combined Basis | on a Combined Basis | Adjustments | Consolidated | |||||||||||||||
Net Sales | $ | — | $ | 12,187 | $ | 1,642 | $ | — | $ | 13,829 | ||||||||||
Cost of sales | (31 | ) | 10,039 | 1,336 | — | 11,344 | ||||||||||||||
General and administrative expenses | — | 798 | 105 | — | 903 | |||||||||||||||
Operating Earnings | 31 | 1,350 | 201 | — | 1,582 | |||||||||||||||
Interest expense | (37 | ) | (5 | ) | (16 | ) | — | (58 | ) | |||||||||||
Interest income | 2 | 2 | 9 | — | 13 | |||||||||||||||
Other income, net | (4 | ) | 37 | 14 | — | 47 | ||||||||||||||
Earnings from Continuing Operations before Income Taxes | (8 | ) | 1,384 | 208 | — | 1,584 | ||||||||||||||
Provision for income taxes | 7 | 467 | 59 | — | 533 | |||||||||||||||
Discontinued operations, net of tax | — | (134 | ) | — | — | (134 | ) | |||||||||||||
Equity in net earnings of subsidiaries | 932 | — | — | (932 | ) | — | ||||||||||||||
Net Earnings | $ | 917 | $ | 783 | $ | 149 | $ | (932 | ) | $ | 917 | |||||||||
Guarantors on a | Other Subsidiaries | Consolidating | Total | |||||||||||||||||
Year Ended December 31, 2001 | Parent | Combined Basis | on a Combined Basis | Adjustments | Consolidated | |||||||||||||||
Net Sales | $ | — | $ | 11,454 | $ | 600 | $ | — | $ | 12,054 | ||||||||||
Cost of sales | (24 | ) | 9,285 | 499 | — | 9,760 | ||||||||||||||
General and administrative expenses | — | 767 | 41 | — | 808 | |||||||||||||||
Operating Earnings | 24 | 1,402 | 60 | — | 1,486 | |||||||||||||||
Interest expense | (52 | ) | (4 | ) | (12 | ) | — | (68 | ) | |||||||||||
Interest income | 4 | 4 | 4 | — | 12 | |||||||||||||||
Other expense, net | (34 | ) | (32 | ) | 61 | — | (5 | ) | ||||||||||||
Earnings from Continuing Operations before Income Taxes | (58 | ) | 1,370 | 113 | — | 1,425 | ||||||||||||||
Provision for income taxes | (40 | ) | 499 | 23 | — | 482 | ||||||||||||||
Discontinued operations, net of tax | — | — | — | — | — | |||||||||||||||
Equity in net earnings of subsidiaries | 961 | — | — | (961 | ) | — | ||||||||||||||
Net Earnings | $ | 943 | $ | 871 | $ | 90 | $ | (961 | ) | $ | 943 | |||||||||
General Dynamics 2003 Annual Report | 51 |
CONDENSED CONSOLIDATING BALANCE SHEET
Guarantors on a | Other Subsidiaries | Consolidating | Total | ||||||||||||||||||
December 31, 2003 | Parent | Combined Basis | on a Combined Basis | Adjustments | Consolidated | ||||||||||||||||
ASSETS | |||||||||||||||||||||
Current Assets: | |||||||||||||||||||||
Cash and equivalents | $ | 179 | $ | — | $ | 681 | $ | — | $ | 860 | |||||||||||
Accounts receivable | 3 | 1,013 | 362 | — | 1,378 | ||||||||||||||||
Contracts in process | 46 | 2,069 | 433 | — | 2,548 | ||||||||||||||||
Inventories | |||||||||||||||||||||
Work in process | — | 606 | 8 | — | 614 | ||||||||||||||||
Raw materials | — | 365 | 24 | — | 389 | ||||||||||||||||
Pre-owned aircraft | — | 103 | — | — | 103 | ||||||||||||||||
Other | — | 43 | 11 | — | 54 | ||||||||||||||||
Assets of discontinued operations | — | 29 | — | — | 29 | ||||||||||||||||
Other current assets | 124 | 161 | 134 | — | 419 | ||||||||||||||||
Total Current Assets | 352 | 4,389 | 1,653 | — | 6,394 | ||||||||||||||||
Noncurrent Assets: | |||||||||||||||||||||
Property, plant and equipment | 150 | 3,188 | 565 | — | 3,903 | ||||||||||||||||
Accumulated depreciation, depletion & amortization of PP&E | (30 | ) | (1,593 | ) | (195 | ) | — | (1,818 | ) | ||||||||||||
Intangible assets and goodwill | — | 5,527 | 2,063 | — | 7,590 | ||||||||||||||||
Accumulated amortization of intangible assets | — | (430 | ) | (47 | ) | — | (477 | ) | |||||||||||||
Other assets | (28 | ) | 517 | 102 | — | 591 | |||||||||||||||
Investment in subsidiaries | 13,672 | — | — | (13,672 | ) | — | |||||||||||||||
Total Noncurrent Assets | 13,764 | 7,209 | 2,488 | (13,672 | ) | 9,789 | |||||||||||||||
$ | 14,116 | $ | 11,598 | $ | 4,141 | $ | (13,672 | ) | $ | 16,183 | |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||
Current Liabilities: | |||||||||||||||||||||
Short-term debt | $ | 683 | $ | 6 | $ | 58 | $ | — | $ | 747 | |||||||||||
Liabilities of discontinued operations | — | 70 | — | — | 70 | ||||||||||||||||
Other current liabilities | 203 | 3,301 | 1,295 | — | 4,799 | ||||||||||||||||
Total Current Liabilities | 886 | 3,377 | 1,353 | — | 5,616 | ||||||||||||||||
Noncurrent Liabilities: | |||||||||||||||||||||
Long-term debt | 3,094 | 44 | 158 | — | 3,296 | ||||||||||||||||
Other liabilities | 364 | 846 | 140 | — | 1,350 | ||||||||||||||||
Total Noncurrent Liabilities | 3,458 | 890 | 298 | — | 4,646 | ||||||||||||||||
Shareholders’ Equity: | |||||||||||||||||||||
Common stock, including surplus | 838 | 5,315 | 2,268 | (7,583 | ) | 838 | |||||||||||||||
Other shareholders’ equity | 8,934 | 2,016 | 222 | (6,089 | ) | 5,083 | |||||||||||||||
Total Shareholders’ Equity | 9,772 | 7,331 | 2,490 | (13,672 | ) | 5,921 | |||||||||||||||
$ | 14,116 | $ | 11,598 | $ | 4,141 | $ | (13,672 | ) | $ | 16,183 | |||||||||||
52 | General Dynamics 2003 Annual Report |
CONDENSED CONSOLIDATING BALANCE SHEET
Guarantors on a | Other Subsidiaries | Consolidating | Total | ||||||||||||||||||
December 31, 2002 | Parent | Combined Basis | on a Combined Basis | Adjustments | Consolidated | ||||||||||||||||
ASSETS | |||||||||||||||||||||
Current Assets: | |||||||||||||||||||||
Cash and equivalents | $ | 55 | $ | — | $ | 273 | $ | — | $ | 328 | |||||||||||
Accounts receivable | — | 867 | 207 | — | 1,074 | ||||||||||||||||
Contracts in process | 19 | 1,653 | 242 | — | 1,914 | ||||||||||||||||
Inventories | |||||||||||||||||||||
Work in process | — | 745 | 5 | — | 750 | ||||||||||||||||
Raw materials | — | 391 | 5 | — | 396 | ||||||||||||||||
Pre-owned aircraft | — | 230 | — | — | 230 | ||||||||||||||||
Other | — | 28 | 1 | — | 29 | ||||||||||||||||
Assets of discontinued operations | — | 69 | — | — | 69 | ||||||||||||||||
Other current assets | 122 | 139 | 47 | — | 308 | ||||||||||||||||
Total Current Assets | 196 | 4,122 | 780 | — | 5,098 | ||||||||||||||||
Noncurrent Assets: | |||||||||||||||||||||
Property, plant and equipment | 145 | 2,928 | 396 | — | 3,469 | ||||||||||||||||
Accumulated depreciation, depletion & amortization of PP&E | (24 | ) | (1,432 | ) | (157 | ) | — | (1,613 | ) | ||||||||||||
Intangible assets and goodwill | — | 3,473 | 1,004 | — | 4,477 | ||||||||||||||||
Accumulated amortization of intangible assets | — | (377 | ) | (30 | ) | — | (407 | ) | |||||||||||||
Other assets | 263 | 214 | 230 | — | 707 | ||||||||||||||||
Investment in subsidiaries | 10,020 | — | — | (10,020 | ) | — | |||||||||||||||
Total Noncurrent Assets | 10,404 | 4,806 | 1,443 | (10,020 | ) | 6,633 | |||||||||||||||
$ | 10,600 | $ | 8,928 | $ | 2,223 | $ | (10,020 | ) | $ | 11,731 | |||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||||||||
Current Liabilities: | |||||||||||||||||||||
Short-term debt | $ | 714 | $ | 6 | $ | 30 | $ | — | $ | 750 | |||||||||||
Liabilities of discontinued operations | — | 125 | — | — | 125 | ||||||||||||||||
Other current liabilities | 83 | 2,836 | 788 | — | 3,707 | ||||||||||||||||
Total Current Liabilities | 797 | 2,967 | 818 | — | 4,582 | ||||||||||||||||
Noncurrent Liabilities: | |||||||||||||||||||||
Long-term debt | 500 | 65 | 156 | — | 721 | ||||||||||||||||
Other liabilities | 362 | 738 | 129 | — | 1,229 | ||||||||||||||||
Total Noncurrent Liabilities | 862 | 803 | 285 | — | 1,950 | ||||||||||||||||
Shareholders’ Equity: | |||||||||||||||||||||
Common stock, including surplus | 757 | 3,746 | 1,120 | (4,866 | ) | 757 | |||||||||||||||
Other shareholders’ equity | 8,184 | 1,412 | — | (5,154 | ) | 4,442 | |||||||||||||||
Total Shareholders’ Equity | 8,941 | 5,158 | 1,120 | (10,020 | ) | 5,199 | |||||||||||||||
$ | 10,600 | $ | 8,928 | $ | 2,223 | $ | (10,020 | ) | $ | 11,731 | |||||||||||
General Dynamics 2003 Annual Report | 53 |
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Guarantors on a | Other Subsidiaries | Consolidating | Total | |||||||||||||||||
Year Ended December 31 , 2003 | Parent | Combined Basis | on a Combined Basis | Adjustments | Consolidated | |||||||||||||||
Net Cash Provided by Operating Activities From Continuing Operations | $ | (211 | ) | $ | 1,648 | $ | 295 | $ | — | $ | 1,732 | |||||||||
Net Cash Used by Discontinued Operations | — | (9 | ) | — | — | (9 | ) | |||||||||||||
Net Cash Provided by Operating Activities | (211 | ) | 1,639 | 295 | — | 1,723 | ||||||||||||||
Cash Flows From Investing Activities: | ||||||||||||||||||||
Business acquisitions, net of cash acquired | (2,676 | ) | (368 | ) | — | — | (3,044 | ) | ||||||||||||
Capital expenditures | (5 | ) | (158 | ) | (61 | ) | — | (224 | ) | |||||||||||
Other, net | — | 12 | 24 | — | 36 | |||||||||||||||
Net Cash Used by Investing Activities | (2,681 | ) | (514 | ) | (37 | ) | — | (3,232 | ) | |||||||||||
Cash Flows From Financing Activities: | ||||||||||||||||||||
Issuance of fixed-rate notes | 3,094 | — | — | — | 3,094 | |||||||||||||||
Net repayments of commercial paper | (529 | ) | — | — | — | (529 | ) | |||||||||||||
Purchases of common stock | (300 | ) | — | — | — | (300 | ) | |||||||||||||
Dividends paid | (249 | ) | — | — | — | (249 | ) | |||||||||||||
Other, net | 57 | 2 | (34 | ) | — | 25 | ||||||||||||||
Net Cash Provided by Financing Activities | 2,073 | 2 | (34 | ) | — | 2,041 | ||||||||||||||
Cash sweep by parent | 943 | (1,127 | ) | 184 | — | — | ||||||||||||||
Net Increase in Cash and Equivalents | 124 | — | 408 | — | 532 | |||||||||||||||
Cash and Equivalents at Beginning of Year | 55 | — | 273 | — | 328 | |||||||||||||||
Cash and Equivalents at End of Year | $ | 179 | $ | — | $ | 681 | $ | — | $ | 860 | ||||||||||
Year Ended December 31, 2002 | ||||||||||||||||||||
Net Cash Provided by Operating Activities From Continuing Operations | $ | (46 | ) | $ | 1,031 | $ | 141 | $ | — | $ | 1,126 | |||||||||
Net Cash Used by Discontinued Operations | — | (1 | ) | — | — | (1 | ) | |||||||||||||
Net Cash Provided by Operating Activities | (46 | ) | 1,030 | 141 | — | 1,125 | ||||||||||||||
Cash Flows From Investing Activities: | ||||||||||||||||||||
Business acquisitions, net of cash acquired | (2 | ) | (268 | ) | (5 | ) | — | (275 | ) | |||||||||||
Capital expenditures | (6 | ) | (205 | ) | (53 | ) | — | (264 | ) | |||||||||||
Proceeds from sale of assets | 15 | 108 | 10 | — | 133 | |||||||||||||||
Other, net | (5 | ) | 11 | — | — | 6 | ||||||||||||||
Net Cash Used by Investing Activities | 2 | (354 | ) | (48 | ) | — | (400 | ) | ||||||||||||
Cash Flows From Financing Activities: | ||||||||||||||||||||
Net repayments of commercial paper | (451 | ) | — | — | — | (451 | ) | |||||||||||||
Net repayments of other debt | (5 | ) | (58 | ) | (35 | ) | — | (98 | ) | |||||||||||
Dividends paid | (236 | ) | — | — | — | (236 | ) | |||||||||||||
Other, net | (90 | ) | — | 39 | — | (51 | ) | |||||||||||||
Net Cash Used by Financing Activities | (782 | ) | (58 | ) | 4 | — | (836 | ) | ||||||||||||
Cash sweep by parent | 707 | (618 | ) | (89 | ) | — | — | |||||||||||||
Net Decrease in Cash and Equivalents | (119 | ) | — | 8 | — | (111 | ) | |||||||||||||
Cash and Equivalents at Beginning of Year | 174 | — | 265 | — | 439 | |||||||||||||||
Cash and Equivalents at End of Year | $ | 55 | $ | — | $ | 273 | $ | — | $ | 328 | ||||||||||
Year Ended December 31, 2001 | ||||||||||||||||||||
Net Cash Provided by Operating Activities From Continuing Operations | $ | 86 | $ | 810 | $ | 203 | $ | — | $ | 1,099 | ||||||||||
Net Cash Provided by Discontinued Operations | — | 2 | — | — | 2 | |||||||||||||||
Net Cash Provided by Operating Activities | 86 | 812 | 203 | — | 1,101 | |||||||||||||||
Cash Flows From Investing Activities: | ||||||||||||||||||||
Business acquisitions, net of cash acquired | (1,162 | ) | (374 | ) | 85 | — | (1,451 | ) | ||||||||||||
Capital expenditures | (92 | ) | (244 | ) | (20 | ) | — | (356 | ) | |||||||||||
Other, net | (19 | ) | 54 | 26 | — | 61 | ||||||||||||||
Net Cash Used by Investing Activities | (1,273 | ) | (564 | ) | 91 | — | (1,746 | ) | ||||||||||||
Cash Flows From Financing Activities: | ||||||||||||||||||||
Net proceeds from commercial paper issuances | 825 | — | — | — | 825 | |||||||||||||||
Net proceeds from floating-rate notes | 500 | — | — | — | 500 | |||||||||||||||
Net repayments of other debt | (149 | ) | (5 | ) | 1 | — | (153 | ) | ||||||||||||
Dividends paid | (219 | ) | — | — | — | (219 | ) | |||||||||||||
Other, net | (72 | ) | 14 | 13 | — | (45 | ) | |||||||||||||
Net Cash Provided by Financing Activities | 885 | 9 | 14 | — | 908 | |||||||||||||||
Cash sweep by parent | 323 | (257 | ) | (66 | ) | — | — | |||||||||||||
Net Increase in Cash and Equivalents | 21 | — | 242 | — | 263 | |||||||||||||||
Cash and Equivalents at Beginning of Year | 153 | — | 23 | — | 176 | |||||||||||||||
Cash and Equivalents at End of Year | $ | 174 | $ | — | $ | 265 | $ | — | $ | 439 | ||||||||||
54 | General Dynamics 2003 Annual Report |
STATEMENT OF FINANCIAL RESPONSIBILITY
To the Shareholders of General Dynamics Corporation:
The management of General Dynamics Corporation is responsible for the consolidated financial statements and all related financial information contained in this report. The financial statements, which include amounts based on estimates and judgments, have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis.
Michael J. Mancuso | John W. Schwartz | |
Senior Vice President and Chief Financial Officer | Vice President and Controller |
INDEPENDENT AUDITORS’ REPORT
To General Dynamics Corporation:
We have audited the accompanying Consolidated Balance Sheets of General Dynamics Corporation (a Delaware corporation) and subsidiaries as of December 31, 2003 and 2002, and the related Consolidated Statements of Earnings, Shareholders’ Equity and Cash Flows for each of the years in connection with its report on the company’sthree-year period ended December 31, 2003. 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.
KPMG LLP |
McLean, Virginia
January 20, 2004
General Dynamics 2003 Annual Report | 55 |
SUPPLEMENTARY DATA (Unaudited)
2003 | 2002 | ||||||||||||||||||||||||||||||||
4Q | 3Q | 2Q | 1Q | 4Q | 3Q | 2Q | 1Q | ||||||||||||||||||||||||||
Net sales | $ | 4,834 | $ | 4,427 | $ | 3,935 | $ | 3,421 | $ | 3,937 | $ | 3,284 | $ | 3,506 | $ | 3,102 | |||||||||||||||||
Operating earnings | 414 | 357 | 378 | 318 | 366 | 424 | 423 | 369 | |||||||||||||||||||||||||
Net earnings from continuing operations | 279 | 255 | 242 | 221 | 269 | 278 | 272 | 232 | |||||||||||||||||||||||||
Net earnings from discontinued operations | — | 7 | — | — | (112 | ) | (10 | ) | (9 | ) | (3 | ) | |||||||||||||||||||||
Net earnings | 279 | 262 | 242 | 221 | 157 | 268 | 263 | 229 | |||||||||||||||||||||||||
Earnings per share: | |||||||||||||||||||||||||||||||||
Basic (a): | |||||||||||||||||||||||||||||||||
Continuing operations | $ | 1.41 | $ | 1.29 | $ | 1.23 | $ | 1.11 | $ | 1.34 | $ | 1.38 | $ | 1.35 | $ | 1.15 | |||||||||||||||||
Discontinued operations | — | 0.04 | — | — | (0.56 | ) | (0.05 | ) | (0.05 | ) | (0.01 | ) | |||||||||||||||||||||
Net earnings | 1.41 | 1.33 | 1.23 | 1.11 | 0.78 | 1.33 | 1.30 | 1.14 | |||||||||||||||||||||||||
Diluted (a): | |||||||||||||||||||||||||||||||||
Continuing operations | $ | 1.40 | $ | 1.28 | $ | 1.22 | $ | 1.11 | $ | 1.33 | $ | 1.37 | $ | 1.34 | $ | 1.14 | |||||||||||||||||
Discontinued operations | — | 0.04 | — | — | (0.55 | ) | (0.05 | ) | (0.05 | ) | (0.01 | ) | |||||||||||||||||||||
Net earnings | 1.40 | 1.32 | 1.22 | 1.11 | 0.78 | 1.32 | 1.29 | 1.13 | |||||||||||||||||||||||||
Market price range: | |||||||||||||||||||||||||||||||||
High | $ | 90.80 | $ | 87.45 | $ | 77.52 | $ | 81.80 | $ | 85.40 | $ | 108.80 | $ | 111.18 | $ | 96.80 | |||||||||||||||||
Low | 77.94 | 72.20 | 52.20 | 50.00 | 74.08 | 73.25 | 91.01 | 75.00 | |||||||||||||||||||||||||
Dividends declared | $ | 0.32 | $ | 0.32 | $ | 0.32 | $ | 0.32 | $ | 0.30 | $ | 0.30 | $ | 0.30 | $ | 0.30 | |||||||||||||||||
Quarterly data is based on a 13-week period.
(a) | 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
ITEM 9A. CONTROLS AND PROCEDURES
The company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the company’s disclosure controls and procedures (as such term is defined in the regulations to the Securities Act of 1933, as amended, andRules 13a-15(e) under the Securities Exchange Act of 1934, as amended).
During 2000 as of December 31, 2003. Based on this evaluation, the Chief Executive Officer and 2001 and through the dateChief Financial Officer concluded that, as of Arthur Andersen’s resignation, the company did not consult KPMG with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered onDecember 31, 2003, the company’s consolidated financial statements, or any matter or reportable event.
disclosure controls and procedures were effective.
There were no disagreements with KPMG on accounting and financial disclosure forsignificant changes in the company’s consolidatedinternal controls over financial statements forreporting that occurred during the yearquarter ended December 31, 2002.
222003, that have materially affected, or are reasonably likely to materially affect, the company’s internal controls over financial reporting.
56 | General Dynamics 2003 Annual Report |
PART III
ItemITEM 10. Directors and Executive Officers of the Registrant
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ItemExecutive Officers of the Registrant
All executive officers of the company are elected annually. No executive officer of the company was selected pursuant to any arrangement or understanding between the officer and any other person. The name, age, offices and positions held for the last five years of the company’s executive officers as of March 5, 2004, were as follows:
Name, Position and Office | Age | |||
John P. Casey — Vice President of the company and President of Electric Boat Corporation since October 2003; Vice President of Electric Boat Corporation, October 1996 — October 2003 | 49 | |||
Nicholas D. Chabraja — Chairman of the Board of Directors of the company and Chief Executive Officer since June 1997 | 61 | |||
Gerard J. DeMuro — Executive Vice President and Group Executive, Information Systems and Technology, since October 2003; Vice President of the company, February 2000 — October 2003; President of General Dynamics C4 Systems, August 2001 — October 2003; President of General Dynamics Communications Systems, September 1999 — August 2001; Vice President and General Manager, GTE Government Systems Communication Systems Division, October 1997 — September 1999 | 48 | |||
Mark A. Fried — Vice President of the company since October 2001; President of General Dynamics C4 Systems since November 2003; President of General Dynamics Decision Systems, October 2001 — November 2003; Vice President and General Manager of the Integrated Information Systems Group of Motorola, Inc., January 1997 — October 2001 | 57 | |||
Charles M. Hall — Vice President of the company and President of General Dynamics Land Systems since September 1999; Vice President, Production and Delivery, General Dynamics Land Systems, March 1997 — September 1999 | 52 | |||
David K. Heebner — Senior Vice President, Planning and Development, since October 2002; Vice President, Strategic Planning, January 2000 — October 2002; Lieutenant General and Assistant Vice Chief of Staff, U.S. Army, July 1997 — November 1999 | 59 | |||
Michael J. Mancuso — Senior Vice President and Chief Financial Officer since March 1997 | 61 | |||
Bryan T. Moss — Executive Vice President and Group Executive, Aerospace, since December 2003; President of Gulfstream Aerospace Corporation since April 2003; Vice President of the company, May 2002 — December 2003; Vice Chairman and Director of Gulfstream Aerospace Corporation, March 1995 — April 2003 | 64 | |||
Walter M. Oliver — Senior Vice President, Human Resources and Administration, since March 2002; Vice President, Human Resources and Administration, January 2001 — March 2002; Senior Vice President, Human Resources, Ameritech Corp., April 1994 — December 2000 | 58 | |||
David A. Savner — Senior Vice President, General Counsel and Secretary since May 1999; Senior Vice President, Law, and Secretary, April 1998 — May 1999 | 59 | |||
John W. Schwartz — Vice President and Controller since March 1998 | 47 | |||
John F. Stewart — Vice President of the company since February 2000; President of General Dynamics Advanced Information Systems since August 2001; President of General Dynamics Electronics Systems, September 1999 — August 2001; Vice President and General Manager, GTE Government Systems Electronic Systems Division, November 1997 — September 1999 | 63 | |||
Michael W. Toner — Executive Vice President and Group Executive, Marine Systems, since March 2003; Vice President of the company and President of Electric Boat Corporation, January 2000 — March 2003; Senior Vice President of Electric Boat Corporation, June 1998 — January 2000 | 60 | |||
Arthur J. Veitch — Executive Vice President and Group Executive, Combat Systems, since March 2002; Senior Vice President and Group Executive, Combat Systems, September 1999 — March 2002; Vice President of the company and President of General Dynamics Land Systems, February 1997 — September 1999 | 58 |
General Dynamics 2003 Annual Report | 57 |
Code of Ethics
The company has adopted a Code of Ethics for Financial Professionals that applies to the company’s chief executive officer, chief financial officer, controller and any person performing similar functions for the company. The company has also adopted a Code of Conduct for members of the Board of Directors and a handbook of Standards of Business Ethics and Conduct that is applicable to all employees of the company. Copies of the foregoing, as well as the company’s Corporate Governance Guidelines and charters for each of the standing committees of the Board of Directors (including the Audit, Nominating and Corporate Governance, and Compensation Committees) are available on the company’s website (http://www.generaldynamics.com), and are also available in print to any shareholder upon request by calling investor relations at (703) 876-3000. The company intends to disclose on its website any amendments to, or waivers from, its Code of Ethics, Code of Conduct or Standards of Business Ethics and Conduct on behalf of any financial professional, director or executive officer of the company. The information contained on or connected to the company’s website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this or any other report filed with the SEC.
ITEM 11. Executive Compensation
EXECUTIVE COMPENSATION
ItemITEM 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ItemITEM 13. Certain Relationships and Related Transactions
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ItemITEM 14. ControlsPRINCIPAL ACCOUNTANT FEES AND SERVICESProcedures The company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). This evaluation was made within 90 days prior to the filing of this Annual Report (the Evaluation Date). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the company’s disclosure controls and procedures are adequate and effective and designed to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to them by others within these entities. There were no significant changesNon-Audit Fees” in the company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. As no significant deficiencies or material weaknesses were found, no corrective actions were taken.23Item 15. Exhibits, FinancialProxy Statement, Schedules, and Reports on Form 8-K(a) 1. Financial Statements The Independent Auditors’ Report and Consolidated Financial Statements appearing in the 2002 Annual Report on the pages listed in the following index are included in this Annual Report on Form 10-K for the year ended December 31, 2002, as Exhibit 13, and areincluding Appendix B thereto, which section is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. | Consolidated Financial Statements |
Consolidated Statement of Earnings | |||
Consolidated Balance Sheet | |||
Consolidated Statement of Cash Flows | |||
Consolidated Statement of Shareholders’ Equity | |||
Notes to Consolidated Financial Statements (A to |
2. |
2. Financial Statement Schedules
No schedules are submitted because they are either not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto. |
No schedules are submitted because they are either not applicable or not required, or because the required information is included in the Consolidated Financial Statements or the Notes thereto.
3. | Exhibits |
3. Exhibits
See Index on pages 60 through 63 of this Annual Report on Form 10-K for the year ended December 31, 2003. |
See Index on pages 28 through 29 of this Annual Report on Form 10-K for the year ended 2002.
(b) | Reports on Form 8-K |
(b) Reports on
On October 21, 2003, the company furnished a Form 8-K under Item 9, Regulation FD Disclosure, announcing that anticipated 2003 revenues were updated to approximately $16.1 billion during the company’s October 15, 2003, webcast teleconference. |
On December 19, 2002, the company reported to the Securities and Exchange Commission under Item 5, Other Events, that the company had entered into a definitive agreement to acquire General Motors Defense for $1.1 billion in cash. The consummation of the transaction was effective March 1, 2003.
On December 3, 2002, the company reported to the Securities and Exchange Commission under Item 5, Other Events, that on December 2, 2002, the Department of Defense informed the company and The Boeing Company that it intended to deduct approximately $2.3 billion from payments due the companies for work on various military programs. This payment represents the amount the Department of Defense claims the companies owe in the A-12 aircraft case. The company was granted a stay of that collection effort through the courts.
24
On October 15, 2003, the company furnished a Form 8-K under Item 9, Regulation FD Disclosure, and Item 12, Results of Operations and Financial Condition, announcing the company’s financial results for the quarter ended September 28, 2003. |
58 | General Dynamics 2003 Annual Report |
SIGNATURES
GENERAL DYNAMICS CORPORATION | ||||
By: | /s/ John W. Schwartz | |||
John W. Schwartz | ||||
Vice President and Controller |
March 24, 20035, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below on March 24, 2003,5, 2004, by the following persons on behalf of the Registrant and in the capacities indicated, including a majority of the directors.
/s/ Chabraja Nicholas D. Chabraja | Chairman, Chief Executive Officer and Director (Principal Executive Officer) | |
/s/ Mancuso Michael J. Mancuso | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
/s/ Schwartz John W. Schwartz | Vice President and Controller (Principal Accounting Officer) | |
* | ||
James S. Crown | Director | |
* | ||
Lester Crown | Director | |
* | ||
William P. Fricks | Director | |
* | ||
Charles H. Goodman | Director | |
* | ||
Jay L. Johnson | Director | |
* | ||
George A. Joulwan | Director | |
* | ||
Paul G. Kaminski | Director | |
* | ||
John M. Keane | Director | |
* | ||
Lester L. Lyles | Director | |
* | ||
Carl E. Mundy, Jr. | Director |
*By David A. Savner 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.
/s/ David A. Savner David A. Savner Secretary |
25
CERTIFICATIONS PURSUANT TO SECTION 302
I, Nicholas D. Chabraja, certify that:
Date: March 24, 2003
26
I, Michael J. Mancuso, certify that:
Date: March 24, 2003
27
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 | Certificate of Amendment of the Restated Certificate of Incorporation (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended March 31, 2002, filed with the Commission May 15, 2002) | |||
3.2 | Restated Certificate of Incorporation (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission August 11, 1999) | |||
3.3 | Amended and Restated By-Laws of the company (as amended effective June 5, 2002) (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002, filed with the Commission November 12, 2002) | |||
4.1 | Indenture dated as of August 27, 2001, among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-4 (No. 333-77024), filed with the Commission January 18, 2002) | |||
4.2 | First Supplemental Indenture dated as of August 27, 2001, among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s registration statement on Form S-4 (No. 333-77024), filed with the Commission January 18, 2002) | |||
4.3 | Second Supplemental Indenture dated as of May 15, 2003, among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission May 16, 2003) | |||
4.4 | Third Supplemental Indenture dated as of August 14, 2003, among the company, the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated herein by reference from the company’s current report on Form 8-K, filed with the Commission August 14, 2003) |
60 | General Dynamics 2003 Annual Report |
INDEX TO EXHIBITS — GENERAL DYNAMICS CORPORATION
COMMISSION FILE NO. 1-3671
Exhibit | ||||
Number | Description | |||
10.1* | Employment Agreement between the company and Nicholas D. Chabraja dated August 7, 2002 (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002) | |||
10.2* | Employment Agreement between the company and Kenneth C. Dahlberg dated February 13, 2001 (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) | |||
10.3* | Retirement Benefit Agreement between the company and Michael J. Mancuso dated March 6, 1998 (incorporated herein by reference from the company’s annual report on Form 10-K (No. 001-03671) for the year ended December 31, 1997, filed with the Commission March 18, 1998) | |||
10.4* | Retirement Benefit Agreement between the company and David A. Savner dated March 4, 1998 (incorporated herein by reference from the company’s annual report on Form 10-K (No. 001-03671) for the year ended December 31, 1998, filed with the Commission March 18, 1999) | |||
10.5* | General Dynamics Equity Compensation Plan** | |||
10.6* | 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) | |||
10.7* | ||||
10.8* | General Dynamics United Kingdom Share Save | |||
10.9* | ||||
General Dynamics 2003 Annual Report | 61 |
INDEX TO EXHIBITS — GENERAL DYNAMICS CORPORATION
COMMISSION FILE NO. 1-3671
Exhibit | ||
Number | Description | |
10.10* | General Dynamics Corporation Second Amended and Restated 1997 Incentive Compensation Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002, filed with the Commission November 12, 2002) | |
10.11* | Form of Severance Protection Agreement entered into by substantially all executive officers (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended September 29, 2002, filed with the Commission November 12, 2002) | |
10.12* | General Dynamics Supplemental Executive Retirement Plan (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002) |
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Executive Life Insurance Policy provided by Aetna Life Insurance Company (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002) | ||||
10.14* | Excess Liability Policy provided by CNA Insurance Company (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002) | |||
10.15* | Accidental Death & Dismemberment Policy provided by Lloyd’s, London (incorporated herein by reference from the company’s quarterly report on Form 10-Q for the quarterly period ended June 30, 2002, filed with the Commission August 14, 2002) | |||
Subsidiaries** | ||||
23 | Consent of KPMG LLP** | |||
24 | Power of Attorney of the Board of Directors** | |||
31.1 | Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** | |||
31.2 | Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002** |
62 | General Dynamics 2003 Annual Report |
INDEX TO EXHIBITS — GENERAL DYNAMICS CORPORATION
COMMISSION FILE NO. 1-3671
Exhibit | ||||
Number | Description | |||
32.1 | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** | |||
32.2 | Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** | |||
99.1 | 2000 Annual Report on Form 11-K for the General Dynamics Corporation Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 10-K/A for the year ended December 31, 2000, filed with the Commission June 29, 2001) | |||
99.2 | 2000 Annual Report on Form 11-K for the General Dynamics Corporation Hourly Employees’ Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 10-K/A for the year ended December 31, 2000, filed with the Commission June 29, 2001) | |||
99.3 | 2001 Annual Report on Form 11-K for the General Dynamics Corporation Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 11-K for the year ended December 31, 2001, filed with the Commission June | |||
99.4 | 2001 Annual Report on Form 11-K for the General Dynamics Corporation Hourly Employees’ Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 11-K for the year ended December 31, 2001, filed with the Commission June 28, 2002) | |||
99.5 | 2002 Annual Report on Form 11-K for the General Dynamics Corporation Savings and Stock Investment Plan (incorporated herein by reference from the company’s annual report on Form 11-K for the year ended December 31, 2002, filed with the Commission June 27, 2003) | |||
99.6 |
* | |
Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(c) of Form 10-K. |
** | Filed herewith. |
General Dynamics 2003 Annual Report | 63 |
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