UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3671
GENERAL DYNAMICS CORPORATION | ||||
(Exact name of registrant as specified in its charter) |
Delaware | 13-1673581 | |||
State or other jurisdiction of incorporation or organization |
I.R.S. employer identification no. |
2941 Fairview Park Drive, Suite 100 Falls Church, Virginia |
22042-4513 | |||
Address of principal executive offices | Zip code |
(703) 876-3000 | ||||
Registrants telephone number, including area code |
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 and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
360,606,640 shares of the registrants common stock, $1 par value per share, were outstanding on April 1, 2012.
PAGE | ||||||
Item 1 - | Unaudited Consolidated Financial Statements | |||||
Consolidated Statements of Earnings | 3 | |||||
Consolidated Statements of Comprehensive Income | 4 | |||||
Consolidated Balance Sheets | 5 | |||||
Consolidated Statements of Cash Flows | 6 | |||||
Notes to Unaudited Consolidated Financial Statements | 7 | |||||
Item 2 - | Managements Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||||
Item 3 - | Quantitative and Qualitative Disclosures About Market Risk | 40 | ||||
Item 4 - | Controls and Procedures | 40 | ||||
40 | ||||||
Item 1 - | Legal Proceedings | 41 | ||||
Item 1A - | Risk Factors | 41 | ||||
Item 2 - | Unregistered Sales of Equity Securities and Use of Proceeds | 41 | ||||
Item 4 - | Mine Safety Disclosures | 41 | ||||
Item 6 - | Exhibits | 42 | ||||
43 |
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended | ||||||||
(Dollars in millions, except per-share amounts) | April 3, 2011 |
April 1, 2012 |
||||||
Revenues: |
||||||||
Products |
$ | 5,061 | $ | 4,718 | ||||
Services |
2,737 | 2,861 | ||||||
7,798 | 7,579 | |||||||
Operating costs and expenses: |
||||||||
Products |
4,009 | 3,764 | ||||||
Services |
2,351 | 2,420 | ||||||
General and administrative |
509 | 535 | ||||||
6,869 | 6,719 | |||||||
Operating earnings |
929 | 860 | ||||||
Interest, net |
(34 | ) | (39 | ) | ||||
Other, net |
1 | | ||||||
Earnings before income taxes |
896 | 821 | ||||||
Provision for income taxes, net |
278 | 257 | ||||||
Net earnings |
$ | 618 | $ | 564 | ||||
Earnings per share |
||||||||
Basic |
$ | 1.66 | $ | 1.58 | ||||
Diluted |
$ | 1.64 | $ | 1.57 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended | ||||||||
(Dollars in millions, except per-share amounts) | April 3, 2011 |
April 1, 2012 |
||||||
Net earnings |
$ | 618 | $ | 564 | ||||
Net gain on cash flow hedges |
57 | 14 | ||||||
Unrealized gains on securities |
| 5 | ||||||
Foreign currency translation adjustments |
153 | 169 | ||||||
Change in retirement plans funded status |
23 | 57 | ||||||
Other comprehensive income before tax |
233 | 245 | ||||||
Provision for income tax, net |
54 | 45 | ||||||
Other comprehensive income, net of tax |
179 | 200 | ||||||
Comprehensive income |
$ | 797 | $ | 764 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
4
(Dollars in millions) | December 31, 2011 |
(Unaudited) April 1, 2012 |
||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and equivalents |
$ | 2,649 | $ | 2,632 | ||||
Accounts receivable |
4,452 | 4,686 | ||||||
Contracts in process |
5,168 | 4,929 | ||||||
Inventories |
2,310 | 2,444 | ||||||
Other current assets |
789 | 819 | ||||||
Total current assets |
15,368 | 15,510 | ||||||
Noncurrent assets: |
||||||||
Property, plant and equipment, net |
3,284 | 3,290 | ||||||
Intangible assets, net |
1,813 | 1,783 | ||||||
Goodwill |
13,576 | 13,759 | ||||||
Other assets |
842 | 967 | ||||||
Total noncurrent assets |
19,515 | 19,799 | ||||||
Total assets |
$ | 34,883 | $ | 35,309 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Short-term debt and current portion of long-term debt |
$ | 23 | $ | 3 | ||||
Accounts payable |
2,895 | 2,509 | ||||||
Customer advances and deposits |
5,011 | 5,299 | ||||||
Other current liabilities |
3,216 | 3,142 | ||||||
Total current liabilities |
11,145 | 10,953 | ||||||
Noncurrent liabilities: |
||||||||
Long-term debt |
3,907 | 3,905 | ||||||
Other liabilities |
6,599 | 6,597 | ||||||
Commitments and contingencies (See Note K) |
||||||||
Total noncurrent liabilities |
10,506 | 10,502 | ||||||
Shareholders equity: |
||||||||
Common stock |
482 | 482 | ||||||
Surplus |
1,888 | 1,897 | ||||||
Retained earnings |
18,917 | 19,297 | ||||||
Treasury stock |
(5,743 | ) | (5,710 | ) | ||||
Accumulated other comprehensive loss |
(2,312 | ) | (2,112 | ) | ||||
Total shareholders equity |
13,232 | 13,854 | ||||||
Total liabilities and shareholders equity |
$ | 34,883 | $ | 35,309 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended | ||||||||
(Dollars in millions) | April 3, 2011 |
April 1, 2012 |
||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 618 | $ | 564 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities |
||||||||
Depreciation of property, plant and equipment |
85 | 97 | ||||||
Amortization of intangible assets |
58 | 57 | ||||||
Stock-based compensation expense |
32 | 35 | ||||||
Excess tax benefit from stock-based compensation |
(15 | ) | (21 | ) | ||||
Deferred income tax provision |
19 | 3 | ||||||
(Increase) decrease in assets, net of effects of business acquisitions |
||||||||
Accounts receivable |
(389 | ) | (233 | ) | ||||
Contracts in process |
(14 | ) | 162 | |||||
Inventories |
(154 | ) | (114 | ) | ||||
Increase (decrease) in liabilities, net of effects of business acquisitions |
||||||||
Accounts payable |
(226 | ) | (387 | ) | ||||
Customer advances and deposits |
198 | 205 | ||||||
Income taxes payable |
215 | 188 | ||||||
Other current liabilities |
(120 | ) | (269 | ) | ||||
Other, net |
21 | 127 | ||||||
Net cash provided by operating activities |
328 | 414 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of held-to-maturity securities |
(78 | ) | (126 | ) | ||||
Capital expenditures |
(61 | ) | (90 | ) | ||||
Purchases of available-for-sale securities |
(174 | ) | (65 | ) | ||||
Business acquisitions, net of cash acquired |
| (26 | ) | |||||
Maturities of held-to-maturity securities |
116 | 3 | ||||||
Other, net |
59 | 40 | ||||||
Net cash used by investing activities |
(138 | ) | (264 | ) | ||||
Cash flows from financing activities: |
||||||||
Dividends paid |
(157 | ) | (169 | ) | ||||
Proceeds from option exercises |
138 | 78 | ||||||
Purchases of common stock |
(314 | ) | (76 | ) | ||||
Other, net |
15 | 1 | ||||||
Net cash used by financing activities |
(318 | ) | (166 | ) | ||||
Net cash used by discontinued operations |
(1 | ) | (1 | ) | ||||
Net decrease in cash and equivalents |
(129 | ) | (17 | ) | ||||
Cash and equivalents at beginning of period |
2,613 | 2,649 | ||||||
Cash and equivalents at end of period |
$ | 2,484 | $ | 2,632 | ||||
Supplemental cash flow information: |
||||||||
Cash payments for: |
||||||||
Income taxes |
$ | 55 | $ | 82 | ||||
Interest |
$ | 44 | $ | 57 |
The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of these statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per-share amounts or unless otherwise noted)
A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Consolidation and Classification
The unaudited Consolidated Financial Statements include the accounts of General Dynamics Corporation and our wholly owned and majority-owned subsidiaries. We eliminate all inter-company balances and transactions in the Consolidated Financial Statements.
Consistent with defense industry practice, we classify assets and liabilities related to long-term production contracts as current, even though some of these amounts may not be realized within one year. In addition, some prior-year amounts have been reclassified among financial statement accounts to conform to the current-year presentation.
Interim Financial Statements
The unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. These rules and regulations permit some of the information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) to be condensed or omitted.
Our fiscal quarters are 13 weeks in length. Because our fiscal year ends on December 31, the number of days in our first and fourth quarters varies slightly from year to year. Operating results for the three-month period ended April 1, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
In our opinion, the unaudited Consolidated Financial Statements contain all adjustments, that are of a normal recurring nature, necessary for a fair presentation of our results of operations and financial condition for the three-month periods ended April 3, 2011, and April 1, 2012.
These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Revenue Recognition
We account for revenues and earnings using the percentage-of-completion method. Under this method, contract revenue and profit are recognized as the work progresses, either as the products are produced or as services are rendered. We estimate the profit on a contract as the difference between the total estimated revenue and costs to complete a contract and recognize that profit over the life of the contract. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the loss in the quarter it is identified.
We review and update our contract estimates regularly. We recognize changes in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of a revision in estimate is recognized prospectively over the remaining contract term. The net increase in our operating earnings (and earnings per share) from the quarterly impact of revisions in contract estimates totaled $90 ($0.16) and $68 ($0.13) for the three-months periods ended April 3, 2011, and April 1, 2012, respectively. No revisions on any one contract were material to our Consolidated Financial Statements.
7
Out of Period Adjustments
In the first quarter of 2012, we recorded adjustments impacting revenues, operating costs and contracts in process that reduced earnings before income taxes by $67. These adjustments were made after completing an analysis at one of our European subsidiaries related to recognition of contract receivables and relief of inventories that determined certain transactions were not recorded properly in prior periods. After evaluating the quantitative and qualitative effects of these adjustments, individually and in the aggregate, we have concluded that their impacts on the Companys prior periods and current period Consolidated Financial Statements were not material.
Subsequent Events
We have evaluated material events and transactions that have occurred after the balance sheet date and concluded that no subsequent events have occurred that require adjustment to or disclosure in this Form 10-Q.
B. | ACQUISITIONS, INTANGIBLE ASSETS AND GOODWILL |
In the first quarter of 2012, we acquired a fixed-base operation at Houston Hobby Airport that provides fuel, catering, maintenance, repair and overhaul services to private aircraft.
In 2011, we acquired six businesses for an aggregate of $1.6 billion, funded by cash on hand:
Combat Systems
| A provider of wheeled vehicles, survivability solutions and vehicle sustainment services for the armed forces of the United States and its allies (on December 19). |
Marine Systems
| A surface-ship repair business in Norfolk, Virginia, that supports the U.S. Navy fleet (on October 31). |
Information Systems and Technology
| A provider of enterprise services and cloud computing to the U.S. Department of Defense (on July 15). |
| A provider of secure wireless networking equipment for the U.S. military and other government customers (on July 22). |
| A provider of information assurance and security software (on August 12). |
| A provider of health information technology services and business systems to federal agencies (on September 30). |
The operating results of these acquisitions have been included with our reported results since their respective closing dates. The purchase prices of these acquisitions have been allocated preliminarily to the estimated fair value of net tangible and intangible assets acquired, with any excess purchase price recorded as goodwill.
8
Intangible assets consisted of the following:
December 31, 2011 | April 1, 2012 | |||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
Contract and program intangible assets* |
$ | 2,393 | $ | (1,060 | ) | $ | 1,333 | $ | 2,401 | $ | (1,105 | ) | $ | 1,296 | ||||||||||
Trade names and trademarks |
477 | (70 | ) | 407 | 495 | (77 | ) | 418 | ||||||||||||||||
Technology and software |
175 | (110 | ) | 65 | 176 | (115 | ) | 61 | ||||||||||||||||
Other intangible assets |
174 | (166 | ) | 8 | 174 | (166 | ) | 8 | ||||||||||||||||
Total intangible assets |
$ | 3,219 | $ | (1,406 | ) | $ | 1,813 | $ | 3,246 | $ | (1,463 | ) | $ | 1,783 |
* Consists of acquired backlog and probable follow-on work and related customer relationships.
The amortization lives (in years) of our intangible assets on April 1, 2012, were as follows:
Range of Amortization Life |
Weighted Average Amortization Life |
|||||||
Contract and program intangible assets |
7-30 | 17 | ||||||
Trade names and trademarks |
30 | 30 | ||||||
Technology and software |
7-13 | 11 | ||||||
Other intangible assets |
7-15 | 11 | ||||||
Total intangible assets |
20 |
We amortize intangible assets on a straight-line basis unless the pattern of usage of the benefits indicates an alternate method is more representative of the usage of the asset. Amortization expense was $58 and $57 for the three-month periods ended April 3, 2011, and April 1, 2012, respectively. We expect to record amortization expense of $225 in 2012 and over the next five years as follows:
2013 |
$ | 183 | ||
2014 |
162 | |||
2015 |
156 | |||
2016 |
127 | |||
2017 |
114 |
9
The changes in the carrying amount of goodwill by reporting unit for the three months ended April 1, 2012, were as follows:
Aerospace | Combat Systems |
Marine Systems |
Information Systems and Technology |
Total Goodwill |
||||||||||||||||
December 31, 2011 |
$ | 2,644 | $ | 2,839 | $ | 229 | $ | 7,864 | $ | 13,576 | ||||||||||
Acquisitions (a) |
13 | 57 | | 7 | 77 | |||||||||||||||
Other (b) |
65 | 32 | | 9 | 106 | |||||||||||||||
April 1, 2012 |
$ | 2,722 | $ | 2,928 | $ | 229 | $ | 7,880 | $ | 13,759 |
(a) Includes adjustments during the purchase price allocation period.
(b) Consists primarily of adjustments for foreign currency translation.
C. | EARNINGS AND DIVIDENDS PER SHARE |
Earnings per Share
We compute basic earnings per share using net earnings for the period and the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporates the additional shares issuable upon the assumed exercise of stock options and the release of restricted shares. Basic and diluted weighted average shares outstanding were as follows (in thousands):
Three Months Ended | ||||||||
April 3, 2011 |
April 1, 2012 |
|||||||
Basic weighted average shares outstanding |
372,680 | 356,987 | ||||||
Dilutive effect of stock options and restricted stock |
3,683 | 2,373 | ||||||
Diluted weighted average shares outstanding |
376,363 | 359,360 |
Dividends
Dividends declared per share were $0.47 and $0.51 and cash dividends paid were $157 and $169 for the three-month periods ended April 3, 2011, and April 1, 2012, respectively.
D. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Our financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; short- and long-term debt; and derivative financial instruments. We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2011, or April 1, 2012.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
| Level 1 quoted prices in active markets for identical assets or liabilities; |
| Level 2 inputs, other than quoted prices, observable by a marketplace participant either directly or indirectly; and |
| Level 3 unobservable inputs significant to the fair value measurement. |
10
The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt (commercial paper) on the Consolidated Balance Sheets approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on December 31, 2011, and April 1, 2012, and the basis for determining their fair values:
Financial assets (liabilities) (a) | Carrying Value |
Fair Value |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) (b) |
||||||||||||
December 31, 2011 | ||||||||||||||||
Marketable securities: |
||||||||||||||||
Available-for-sale |
$ | 70 | $ | 70 | $ | 8 | $ | 62 | ||||||||
Held-to-maturity |
178 | 175 | | 175 | ||||||||||||
Other investments |
145 | 145 | 89 | 56 | ||||||||||||
Derivatives |
34 | 34 | | 34 | ||||||||||||
Long-term debt, including current portion |
(3,930 | ) | (4,199 | ) | | (4,199 | ) | |||||||||
April 1, 2012 | ||||||||||||||||
Marketable securities: |
||||||||||||||||
Available-for-sale |
$ | 70 | $ | 70 | $ | 14 | $ | 56 | ||||||||
Held-to-maturity |
299 | 299 | | 299 | ||||||||||||
Other investments |
148 | 148 | 86 | 62 | ||||||||||||
Derivatives |
65 | 65 | | 65 | ||||||||||||
Long-term debt, including current portion |
(3,908 | ) | (4,153 | ) | | (4,153 | ) |
(a) | We had no Level 3 financial instruments on December 31, 2011, or April 1, 2012. |
(b) | Determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields and quoted prices for similar assets and liabilities. |
E. | CONTRACTS IN PROCESS |
Contracts in process represent recoverable costs and, where applicable, accrued profit related to long-term contracts that have been inventoried until the customer is billed, and consisted of the following:
December 31, 2011 |
April 1, 2012 |
|||||||
Contract costs and estimated profits |
$ | 18,807 | $ | 19,010 | ||||
Other contract costs |
959 | 990 | ||||||
19,766 | 20,000 | |||||||
Advances and progress payments |
(14,598 | ) | (15,071 | ) | ||||
Total contracts in process |
$ | 5,168 | $ | 4,929 |
11
Contract costs consist primarily of labor, material, overhead and general and administrative (G&A) expenses. Contract costs also may include estimated contract recoveries for matters such as contract changes, negotiated settlements and claims for unanticipated contract costs. We record revenue associated with these matters only when the amount of recovery can be estimated reliably and realization is probable. Assumed recoveries for these items were not material on December 31, 2011, or April 1, 2012.
Other contract costs represent amounts that are not currently allocable to government contracts, such as a portion of our estimated workers compensation obligations, other insurance-related assessments, pension and other post-retirement benefits and environmental expenses. These costs will become allocable to contracts generally after they are paid. We expect to recover these costs through ongoing business, including existing backlog and probable follow-on contracts. If the backlog in the future does not support the continued deferral of these costs, the profitability of our remaining contracts could be adversely affected. We expect to bill substantially all of our contracts-in-process balance as of April 1, 2012, during the next 12 months, with the exception of these other contract costs.
F. | INVENTORIES |
Our inventories represent primarily business-jet components and are stated at the lower of cost or net realizable value. Work-in-process represents largely labor, material and overhead costs associated with aircraft in the manufacturing process and is based primarily on the estimated average unit cost of the units in a production lot. Raw materials are valued primarily on the first-in, first-out method. We record pre-owned aircraft acquired in connection with the sale of new aircraft at the lower of the trade-in value or the estimated net realizable value. Inventories consisted of the following:
December 31, 2011 |
April 1, 2012 |
|||||||
Work in process |
$ | 1,202 | $ | 1,310 | ||||
Raw materials |
1,031 | 1,041 | ||||||
Finished goods |
77 | 84 | ||||||
Pre-owned aircraft |
| 9 | ||||||
Total inventories |
$ | 2,310 | $ | 2,444 |
12
G. | DEBT |
Debt consisted of the following:
December 31, 2011 |
April 1, 2012 |
|||||||||||
Fixed-rate notes due: |
Interest Rate | |||||||||||
May 2013 |
4.250% | $ | 1,000 | $ | 1,000 | |||||||
February 2014 |
5.250% | 998 | 998 | |||||||||
January 2015 |
1.375% | 499 | 499 | |||||||||
August 2015 |
5.375% | 400 | 400 | |||||||||
July 2016 |
2.250% | 499 | 499 | |||||||||
July 2021 |
3.875% | 499 | 499 | |||||||||
Other |
Various | 35 | 13 | |||||||||
Total debt |
3,930 | 3,908 | ||||||||||
Less current portion |
23 | 3 | ||||||||||
Long-term debt |
$ | 3,907 | $ | 3,905 |
Fixed-rate Notes
On April 1, 2012, we had outstanding $3.9 billion aggregate principal amount of fixed-rate notes. The fixed-rate notes are fully and unconditionally guaranteed by several of our 100-percent-owned subsidiaries. See Note N for condensed consolidating financial statements. We have the option to redeem the notes prior to their maturity in whole or part for the principal plus any accrued but unpaid interest and applicable make-whole amounts.
Commercial Paper
On April 1, 2012, we had no commercial paper outstanding, but we maintain the ability to access the market. We have $2 billion in bank credit facilities that provide backup liquidity to our commercial paper program. These credit facilities include a $1 billion multi-year facility expiring in July 2013 and a $1 billion multi-year facility expiring in July 2016. These facilities are required by rating agencies to support our commercial paper issuances. We may renew or replace, in whole or in part, these credit facilities prior to their expiration. Our commercial paper issuances and the bank credit facilities are guaranteed by several of our 100-percent-owned subsidiaries.
Our financing arrangements contain a number of customary covenants and restrictions. We were in compliance with all material covenants on April 1, 2012.
13
H. | OTHER LIABILITIES |
A summary of significant other liabilities by balance sheet caption follows:
December 31, 2011 |
April 1, 2012 |
|||||||
Salaries and wages |
$ | 845 | $ | 679 | ||||
Workers compensation |
575 | 565 | ||||||
Retirement benefits |
275 | 282 | ||||||
Federal income tax payable |
46 | 214 | ||||||
Deferred income taxes |
131 | 95 | ||||||
Other (a) |
1,344 | 1,307 | ||||||
Total other current liabilities |
$ | 3,216 | $ | 3,142 | ||||
Retirement benefits |
$ | 4,627 | $ | 4,677 | ||||
Customer deposits on commercial contracts |
1,132 | 1,049 | ||||||
Deferred income taxes |
170 | 201 | ||||||
Other (b) |
670 | 670 | ||||||
Total other liabilities |
$ | 6,599 | $ | 6,597 |
(a) | Consists primarily of dividends payable, environmental remediation reserves, warranty reserves, liabilities of discontinued operations and insurance-related costs. |
(b) | Consists primarily of liabilities for warranty reserves and workers compensation. |
I. | INCOME TAXES |
Deferred Tax Assets
Our net deferred tax asset was included on the Consolidated Balance Sheets as follows:
December 31, 2011 |
April 1, 2012 |
|||||||
Current deferred tax asset |
$ | 269 | $ | 163 | ||||
Current deferred tax liability |
(131 | ) | (95 | ) | ||||
Noncurrent deferred tax asset |
310 | 358 | ||||||
Noncurrent deferred tax liability |
(170 | ) | (201 | ) | ||||
Net deferred tax asset |
$ | 278 | $ | 225 |
Tax Uncertainties
We periodically assess our liabilities and contingencies for all periods open to examination by tax authorities based on the latest available information. Where we believe there is more than a 50 percent chance that our tax position will not be sustained, we record our best estimate of the resulting tax liability, including interest, in the Consolidated Financial Statements. We include any interest or penalties incurred in connection with income taxes as part of income tax expense.
In the first quarter of 2012, we reached agreement with the Internal Revenue Service (IRS) on the examination of our federal income tax return for 2010. The resolution of this audit had no material impact on our results of operations, financial condition, cash flows or effective tax rate. With the completion of this audit, the IRS has examined all of our consolidated federal income tax returns through 2010.
14
We participate in the IRSs Compliance Assurance Process, a real-time audit of our tax return. We have recorded liabilities for tax uncertainties for the years that remain open to review. We do not expect the resolution of tax matters for these years to have a material impact on our results of operations, financial condition, cash flows or effective tax rate.
Based on all known facts and circumstances and current tax law, we believe the total amount of unrecognized tax benefits on April 1, 2012, is not material to our results of operations, financial condition or cash flows, and if recognized, would not have a material impact on our effective tax rate. We further believe that there are no tax positions for which it is reasonably possible that the unrecognized tax benefits will significantly vary over the next 12 months, producing, individually or in the aggregate, a material effect on our results of operations, financial condition or cash flows.
J. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
We are exposed to market risk, primarily from foreign currency exchange rates, interest rates, commodity prices and investments. We may use derivative financial instruments to hedge some of these risks as described below. We do not use derivatives for trading or speculative purposes.
Foreign Currency Risk
Our foreign currency exchange rate risk relates to receipts from customers, payments to suppliers and inter-company transactions denominated in foreign currencies. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Otherwise, we enter into derivative financial instruments, principally foreign currency forward purchase and sale contracts, designed to offset and minimize our risk. The one-year average maturity of these instruments matches the duration of the activities that are at risk.
Interest Rate Risk
Our financial instruments subject to interest rate risk include fixed-rate long-term debt obligations and variable-rate commercial paper. However, the risk associated with these instruments is not material.
Commodity Price Risk
We are subject to risk of rising labor and commodity prices, primarily on long-term fixed-price contracts. To the extent possible, we include terms in our contracts that are designed to protect us from this risk. Some of the protective terms included in our contracts are considered derivatives but are not accounted for separately because they are clearly and closely related to the host contract. We have not entered into any material commodity hedging contracts but may do so as circumstances warrant. We do not believe that changes in labor or commodity prices will have a material impact on our results of operations or cash flows.
Investment Risk
Our investment policy allows for purchases of fixed-income securities with an investment-grade rating and a maximum maturity of up to five years. On April 1, 2012, we held $3 billion in cash and equivalents and marketable securities. Our marketable securities had an average duration of one year and an average credit rating of AA-. Historically, we have not experienced material gains or losses on these instruments due to changes in interest rates or market values.
15
Hedging Activities
We had notional forward exchange contracts outstanding of $4 billion on December 31, 2011, and April 1, 2012. We recognize derivative financial instruments on the Consolidated Balance Sheets at fair value (see Note D). The fair value of these derivative contracts consisted of the following:
December 31, 2011 |
April 1, 2012 |
|||||||
Other current assets: |
||||||||
Designated as cash flow hedges |
$ | 64 | $ | 68 | ||||
Not designated as cash flow hedges |
20 | 32 | ||||||
Other current liabilities: |
||||||||
Designated as cash flow hedges |
(33 | ) | (23 | ) | ||||
Not designated as cash flow hedges |
(17 | ) | (12 | ) | ||||
Total |
$ | 34 | $ | 65 |
We had no material derivative financial instruments designated as fair value or net investment hedges on December 31, 2011, or April 1, 2012.
We record changes in the fair value of derivative financial instruments in operating costs and expenses in the Consolidated Statements of Earnings or in other comprehensive income (OCI) within the Consolidated Statements of Comprehensive Income depending on whether the derivative is designated and qualifies for hedge accounting. Gains and losses related to derivatives that qualify as cash flow hedges are deferred in OCI until the underlying transaction is reflected in earnings. We adjust derivative financial instruments not designated as cash flow hedges to market value each period and record the gain or loss in the Consolidated Statements of Earnings. The gains and losses on these instruments generally offset losses and gains on the assets, liabilities and other transactions being hedged. Gains and losses resulting from hedge ineffectiveness are recognized in the Consolidated Statements of Earnings for all derivative financial instruments, regardless of designation.
Net gains and losses recognized in earnings and OCI, including gains and losses related to hedge ineffectiveness, were not material to our results of operations for the three-month periods ended April 3, 2011, and April 1, 2012. We do not expect the amount of gains and losses in OCI that will be reclassified to earnings during the next 12 months to be material.
Foreign Currency Financial Statement Translation
We translate foreign-currency balance sheets from our international business units functional currency (generally the respective local currency) to U.S. dollars at the end-of-period exchange rates, and earnings statements at the average exchange rates for each period. The resulting foreign currency translation adjustments are a component of OCI.
We do not hedge the fluctuation in reported revenues and earnings resulting from the translation of these international operations income statements into U.S. dollars. The impact of translating our international operations revenues and earnings into U.S. dollars was not material to our results of operations for the three-month periods ended April 3, 2011, or April 1, 2012. In addition, the effect of changes in foreign exchange rates on non-U.S. cash balances was not material in the first three months of either 2011 or 2012.
16
K. | COMMITMENTS AND CONTINGENCIES |
Litigation
Termination of A-12 Program. The A-12 aircraft contract was a fixed-price incentive contract for the full-scale development and initial production of the carrier-based Advanced Tactical Aircraft with the U.S. Navy and a team composed of contractors General Dynamics and McDonnell Douglas (now a subsidiary of The Boeing Company). In January 1991, the U.S. Navy terminated the contract for default and demanded the contractors repay $1.4 billion in unliquidated progress payments. Following the termination, the Navy agreed to defer the collection of that amount pending a negotiated settlement or other resolution. Both contractors had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination.
Over 20 years of litigation, the trial court (the U.S. Court of Federal Claims), appeals court (the Court of Appeals for the Federal Circuit), and the U.S. Supreme Court have issued various rulings, some in favor of the government and others in favor of the contractors.
On May 3, 2007, the trial court issued a decision upholding the governments determination of default. This decision was affirmed by a three-judge panel of the appeals court on June 2, 2009, and on November 24, 2009, the court of appeals denied the contractors petitions for rehearing. On September 28, 2010, the U.S. Supreme Court granted the contractors petitions for review as to whether the government could maintain its default claim against the contractors while invoking the state-secrets privilege to deny the contractors a defense to that claim.
On May 23, 2011, the U.S. Supreme Court vacated the judgment of the court of appeals, stating that the contractors had a plausible superior knowledge defense that had been stripped from them as a consequence of the governments assertion of the state-secrets privilege. In particular, the U.S. Supreme Court held that, in that circumstance, neither party can obtain judicial relief.
In addition, the U.S. Supreme Court remanded the case to the court of appeals for further proceedings on whether the government has an obligation to share its superior knowledge with respect to highly classified information, whether the government has such an obligation when the agreement specifies information that must be shared (as was the case with respect to the A-12 contract), and whether these questions can safely be litigated by the courts without endangering state secrets. On July 7, 2011, the appeals court remanded these issues to the trial court for further proceedings consistent with the U.S. Supreme Courts opinion. These issues remain to be resolved on remand.
We believe that the lower courts will ultimately rule in the contractors favor on the remaining issues in the case. We expect this would leave all parties where they stood prior to the contracting officers declaration of default, meaning that no money would be due from one party to another. Additionally, even if the lower courts were to ultimately sustain the governments default claim, we continue to believe that there are significant legal obstacles to the governments ability to collect any amount from the contractors given that no court has ever awarded a money judgment to the government. For these reasons, we have not recorded an accrual for this matter.
If, contrary to our expectations, the government prevails on its default claim and its recovery theories, the contractors could collectively be required to repay the government, on a joint and several basis, as much as $1.4 billion for progress payments received for the A-12 contract, plus interest, which was approximately $1.6 billion on April 1, 2012. This would result in a liability to us of half of the total (based upon The Boeing Company satisfying McDonnell Douglas obligations under the contract), or
17
approximately $1.5 billion pretax. Our after-tax charge would be approximately $830, or $2.31 per share, which would be recorded in discontinued operations. Our after-tax cash cost would be approximately $735. We believe we have sufficient resources to satisfy our obligation if required.
Other. Various claims and other legal proceedings incidental to the normal course of business are pending or threatened against us. These matters relate to such issues as government investigations and claims, the protection of the environment, asbestos-related claims and employee-related matters. The nature of litigation is such that we cannot predict the outcome of these matters. However, based on information currently available, we believe any potential liabilities in these proceedings, individually or in the aggregate, will not have a material impact on our results of operations, financial condition or cash flows.
Environmental
We are subject to and affected by a variety of federal, state, local and foreign environmental laws and regulations. We are directly or indirectly involved in environmental investigations or remediation at some of our current and former facilities and third-party sites that we do not own but where we have been designated a Potentially Responsible Party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency. Based on historical experience, we expect that a significant percentage of the total remediation and compliance costs associated with these facilities will continue to be allowable contract costs and, therefore, recoverable under U.S. government contracts.
As required, we provide financial assurance for certain sites undergoing or subject to investigation or remediation. We accrue environmental costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. Where applicable, we seek insurance recovery for costs related to environmental liability. We do not record insurance recoveries before collection is considered probable. Based on all known facts and analyses, we do not believe that our liability at any individual site, or in the aggregate, arising from such environmental conditions, will be material to our results of operations, financial condition or cash flows. We also do not believe that the range of reasonably possible additional loss beyond what has been recorded would be material to our results of operations, financial condition or cash flows.
Other
Portugal Contract. Our European Land Systems subsidiary has a contract with the Portuguese Ministry of Defense to provide 260 Pandur vehicles over the course of seven years. As a result of the economic environment impacting Portugal, we believe it is likely that our contract will be restructured, and we have begun engaging with the customer on this point. At this time, we cannot predict either the timing of a potential contract restructuring or the outcome upon our operating results or cash flows. As of April 1, 2012, we had a balance of approximately $125 in contracts in process related to this contract. Management will continue to work with the Portuguese Ministry of Defense to arrive at an acceptable resolution.
Securities and Exchange Commission (SEC) Request. On September 23, 2011, the SECs Division of Enforcement requested that we provide certain information, documents and records relating to accounting practices for revisions of estimates on contracts accounted for using the percentage-of-completion method. We are cooperating with the SEC staff. We cannot predict the outcome of this request.
Letters of Credit and Guarantees. In the ordinary course of business, we have entered into letters of credit and other similar arrangements with financial institutions and insurance carriers totaling
18
approximately $1.4 billion on April 1, 2012. These include letters of credit for our international subsidiaries, which are backed by available local bank credit facilities aggregating approximately $1.1 billion. From time to time in the ordinary course of business, we guarantee the payment or performance obligations of our subsidiaries arising under certain contracts. We are aware of no event of default that would require us to satisfy these guarantees.
Government Contracts. As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties, and compensatory and treble damages. Based on currently available information, we believe the outcome of such ongoing government disputes and investigations will not have a material impact on our results of operations, financial condition or cash flows.
In the performance of our contracts, we routinely request contract modifications that require additional funding and administrative involvement from the customer. Most often, these requests are due to customer-directed changes in scope of work. While we believe we are entitled to recovery of these costs, the resolution process with our customer may be protracted. In some cases, our request may be disputed and we are required to file a claim with the customer. Based on currently available information, we believe our outstanding modifications and other claims will be resolved without material impact to our results of operations, financial condition or cash flows.
Aircraft Trade-ins. In connection with orders for new aircraft in funded contract backlog, our Aerospace group has outstanding options with some customers to trade in aircraft as partial consideration in their new-aircraft transaction. These trade-in commitments are structured to establish the fair market value of the trade-in aircraft at a date generally 120 or fewer days preceding delivery of the new aircraft to the customer. At that time, the customer is required to either exercise the option or allow its expiration. Any excess of the pre-established trade-in price above the fair market value at the time the new aircraft is delivered is treated as a reduction of revenue in the new-aircraft sales transaction.
Product Warranties. We provide warranties to our customers associated with certain product sales. We record estimated warranty costs in the period in which the related products are delivered. The warranty liability recorded at each balance sheet date is generally based on the number of months of warranty coverage remaining for products delivered and the average historical monthly warranty payments. Warranty obligations incurred in connection with long-term production contracts are accounted for within the contract estimates at completion (EACs). Our other warranty obligations, primarily for business-jet aircraft, are included in other current liabilities and other liabilities on the Consolidated Balance Sheets.
The changes in the carrying amount of warranty liabilities for the three-month periods ended April 3, 2011, and April 1, 2012, were as follows:
Three Months Ended | April 3, 2011 |
April 1, 2012 |
||||||
Beginning balance |
$ | 260 | $ | 293 | ||||
Warranty expense |
12 | 19 | ||||||
Payments |
(13 | ) | (15 | ) | ||||
Adjustments* |
(1 | ) | (5 | ) | ||||
Ending balance |
$ | 258 | $ | 292 |
* Includes reclassifications and foreign exchange translation adjustments.
19
L. | RETIREMENT PLANS |
We provide defined-contribution benefits, as well as defined-benefit pension and other post-retirement benefits, to eligible employees.
Net periodic cost associated with our defined-benefit pension and other post-retirement benefit plans for the three-month periods ended April 3, 2011, and April 1, 2012, consisted of the following:
Pension Benefits | Other Post-retirement Benefits |
|||||||||||||||
Three Months Ended | April 3, 2011 |
April 1, 2012 |
April 3, 2011 |
April 1, 2012 |
||||||||||||
Service cost |
$ | 64 | $ | 71 | $ | 4 | $ | 3 | ||||||||
Interest cost |
129 | 131 | 15 | 14 | ||||||||||||
Expected return on plan assets |
(150 | ) | (147 | ) | (8 | ) | (7 | ) | ||||||||
Recognized net actuarial loss |
40 | 66 | 1 | 2 | ||||||||||||
Amortization of prior service (credit) cost |
(11 | ) | (11 | ) | 1 | 2 | ||||||||||
Net periodic cost |
$ | 72 | $ | 110 | $ | 13 | $ | 14 |
Our contractual arrangements with the U.S. government provide for the recovery of contributions to our pension and other post-retirement benefit plans covering employees working in our defense business groups. For non-funded plans, our government contracts allow us to recover claims paid. Following payment, these recoverable amounts are allocated to contracts and billed to the customer in accordance with the Cost Accounting Standards (CAS) and specific contractual terms. For some of these plans, the cumulative pension and post-retirement benefit cost exceeds the amount currently allocable to contracts. To the extent recovery of the cost is considered probable based on our backlog, we defer the excess in contracts in process on the Consolidated Balance Sheets until the cost is allocable to contracts. See Note E for discussion of our deferred contract costs. For other plans, the amount allocated to contracts and included in revenues has exceeded the plans cumulative benefit cost. We have deferred recognition of these excess earnings to provide a better matching of revenues and expenses. These deferrals have been classified against the plan assets on the Consolidated Balance Sheets.
In late 2011, changes were made to the CAS to harmonize the regulations with the Pension Protection Act of 2006 (PPA). As a result, pension costs allocable to our contracts are expected to increase beginning in 2014 when the impact of the CAS regulations begins to take effect.
20
M. | BUSINESS GROUP INFORMATION |
We operate in four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. We organize and measure our business groups in accordance with the nature of products and services offered. These business groups derive their revenues from business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding; and communications and information technology, respectively. We measure each groups profit based on operating earnings. As a result, we do not allocate net interest, other income and expense items, and income taxes to our business groups.
Summary financial information for each of our business groups follows:
Revenues | Operating Earnings | |||||||||||||||
Three Months Ended | April 3, 2011 |
April 1, 2012 |
April 3, 2011 |
April 1, 2012 |
||||||||||||
Aerospace |
$ | 1,353 | $ | 1,623 | $ | 230 | $ | 271 | ||||||||
Combat Systems |
1,955 | 1,911 | 277 | 203 | ||||||||||||
Marine Systems |
1,676 | 1,605 | 167 | 185 | ||||||||||||
Information Systems and Technology |
2,814 | 2,440 | 276 | 218 | ||||||||||||
Corporate* |
| | (21 | ) | (17 | ) | ||||||||||
$ | 7,798 | $ | 7,579 | $ | 929 | $ | 860 |
* Corporate operating results primarily consists of our stock option expense.
21
N. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
The fixed-rate notes described in Note G are fully and unconditionally guaranteed on an unsecured, joint and several basis by certain of our 100-percent-owned subsidiaries (the guarantors). The following condensed consolidating financial statements illustrate the composition of the parent, the guarantors on a combined basis (each guarantor together with its majority owned subsidiaries) and all other subsidiaries on a combined basis.
Condensed Consolidating Statements of Earnings
Three Months Ended April 3, 2011 | Parent | Guarantors on a Combined Basis |
Other Subsidiaries on a Combined Basis |
Consolidating Adjustments |
Total Consolidated |
|||||||||||||||
Revenues |
$ | | $ | 6,383 | $ | 1,415 | $ | | $ | 7,798 | ||||||||||
Cost of sales |
(3 | ) | 5,192 | 1,171 | | 6,360 | ||||||||||||||
General and administrative expenses |
22 | 375 | 112 | | 509 | |||||||||||||||
Operating earnings |
(19 | ) | 816 | 132 | | 929 | ||||||||||||||
Interest expense |
(36 | ) | | | | (36 | ) | |||||||||||||
Interest income |
2 | | | | 2 | |||||||||||||||
Other, net |
1 | (1 | ) | 1 | | 1 | ||||||||||||||
Earnings before income taxes |
(52 | ) | 815 | 133 | | 896 | ||||||||||||||
Provision for income taxes |
(15 | ) | 259 | 34 | | 278 | ||||||||||||||
Equity in net earnings of subsidiaries |
655 | | | (655 | ) | | ||||||||||||||
Net earnings |
$ | 618 | $ | 556 | $ | 99 | $ | (655 | ) | $ | 618 | |||||||||
Comprehensive income |
$ | 797 | $ | 583 | $ | 232 | $ | (815 | ) | $ | 797 | |||||||||
Three Months Ended April 1, 2012 | ||||||||||||||||||||
Revenues |
$ | | $ | 6,297 | $ | 1,282 | $ | | $ | 7,579 | ||||||||||
Cost of sales |
(5 | ) | 5,084 | 1,105 | | 6,184 | ||||||||||||||
General and administrative expenses |
22 | 412 | 101 | | 535 | |||||||||||||||
Operating earnings |
(17 | ) | 801 | 76 | | 860 | ||||||||||||||
Interest expense |
(42 | ) | | | | (42 | ) | |||||||||||||
Interest income |
2 | 1 | | | 3 | |||||||||||||||
Other, net |
| | | | | |||||||||||||||
Earnings before income taxes |
(57 | ) | 802 | 76 | | 821 | ||||||||||||||
Provision for income taxes |
(18 | ) | 238 | 37 | | 257 | ||||||||||||||
Equity in net earnings of subsidiaries |
603 | | | (603 | ) | | ||||||||||||||
Net earnings |
$ | 564 | $ | 564 | $ | 39 | $ | (603 | ) | $ | 564 | |||||||||
Comprehensive income |
$ | 764 | $ | 561 | $ | 201 | $ | (762 | ) | $ | 764 |
22
Condensed Consolidating Balance Sheet
December 31, 2011 | Parent | Guarantors on a Combined Basis |
Other Subsidiaries on a Combined Basis |
Consolidating Adjustments |
Total Consolidated |
|||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and equivalents |
$ | 1,530 | $ | | $ | 1,119 | $ | | $ | 2,649 | ||||||||||
Accounts receivable |
| 1,659 | 2,793 | | 4,452 | |||||||||||||||
Contracts in process |
292 | 3,182 | 1,694 | | 5,168 | |||||||||||||||
Inventories |
||||||||||||||||||||
Work in process |
| 1,168 | 34 | | 1,202 | |||||||||||||||
Raw materials |
| 898 | 133 | | 1,031 | |||||||||||||||
Finished goods |
| 36 | 41 | | 77 | |||||||||||||||
Other current assets |
319 | 247 | 223 | | 789 | |||||||||||||||
Total current assets |
2,141 | 7,190 | 6,037 | | 15,368 | |||||||||||||||
Noncurrent assets: |
||||||||||||||||||||
Property, plant and equipment |
153 | 5,181 | 1,184 | | 6,518 | |||||||||||||||
Accumulated depreciation of PP&E |
(49 | ) | (2,604 | ) | (581 | ) | | (3,234 | ) | |||||||||||
Intangible assets |
| 1,767 | 1,452 | | 3,219 | |||||||||||||||
Accumulated amortization of intangible assets |
| (976 | ) | (430 | ) | | (1,406 | ) | ||||||||||||
Goodwill |
| 9,287 | 4,289 | | 13,576 | |||||||||||||||
Other assets |
265 | 247 | 330 | | 842 | |||||||||||||||
Investment in subsidiaries |
33,192 | | | (33,192 | ) | | ||||||||||||||
Total noncurrent assets |
33,561 | 12,902 | 6,244 | (33,192 | ) | 19,515 | ||||||||||||||
Total assets |
$ | 35,702 | $ | 20,092 | $ | 12,281 | $ | (33,192 | ) | $ | 34,883 | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
| |||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Short-term debt |
$ | | $ | 21 | $ | 2 | $ | | $ | 23 | ||||||||||
Customer advances and deposits |
| 2,483 | 2,528 | | 5,011 | |||||||||||||||
Other current liabilities |
463 | 3,729 | 1,919 | | 6,111 | |||||||||||||||
Total current liabilities |
463 | 6,233 | 4,449 | | 11,145 | |||||||||||||||
Noncurrent liabilities: |
||||||||||||||||||||
Long-term debt |
3,895 | 9 | 3 | | 3,907 | |||||||||||||||
Other liabilities |
3,443 | 2,541 | 615 | | 6,599 | |||||||||||||||
Total noncurrent liabilities |
7,338 | 2,550 | 618 | | 10,506 | |||||||||||||||
Intercompany |
14,669 | (15,240 | ) | 571 | | | ||||||||||||||
Shareholders equity: |
||||||||||||||||||||
Common stock |
482 | 6 | 44 | (50 | ) | 482 | ||||||||||||||
Other shareholders equity |
12,750 | 26,543 | 6,599 | (33,142 | ) | 12,750 | ||||||||||||||
Total shareholders equity |
13,232 | 26,549 | 6,643 | (33,192 | ) | 13,232 | ||||||||||||||
Total liabilities and shareholders equity |
$ | 35,702 | $ | 20,092 | $ | 12,281 | $ | (33,192 | ) | $ | 34,883 |
23
Condensed Consolidating Balance Sheet
April 1, 2012 | Parent | Guarantors on a Combined Basis |
Other Subsidiaries on a Combined Basis |
Consolidating Adjustments |
Total Consolidated |
|||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and equivalents |
$ | 1,800 | $ | | $ | 832 | $ | | $ | 2,632 | ||||||||||
Accounts receivable |
| 1,718 | 2,968 | | 4,686 | |||||||||||||||
Contracts in process |
330 | 3,088 | 1,511 | | 4,929 | |||||||||||||||
Inventories |
||||||||||||||||||||
Work in process |
| 1,296 | 14 | | 1,310 | |||||||||||||||
Raw materials |
| 904 | 137 | | 1,041 | |||||||||||||||
Finished goods |
| 40 | 44 | | 84 | |||||||||||||||
Pre-owned aircraft |
| 9 | | | 9 | |||||||||||||||
Other current assets |
317 | 253 | 249 | | 819 | |||||||||||||||
Total current assets |
2,447 | 7,308 | 5,755 | | 15,510 | |||||||||||||||
Noncurrent assets: |
||||||||||||||||||||
Property, plant and equipment |
153 | 5,243 | 1,266 | | 6,662 | |||||||||||||||
Accumulated depreciation of PP&E |
(50 | ) | (2,675 | ) | (647 | ) | | (3,372 | ) | |||||||||||
Intangible assets |
| 1,767 | 1,479 | | 3,246 | |||||||||||||||
Accumulated amortization of intangible assets |
| (1,011 | ) | (452 | ) | | (1,463 | ) | ||||||||||||
Goodwill |
| 9,353 | 4,406 | | 13,759 | |||||||||||||||
Other assets |
360 | 274 | 333 | | 967 | |||||||||||||||
Investment in subsidiaries |
34,227 | | | (34,227 | ) | | ||||||||||||||
Total noncurrent assets |
34,690 | 12,951 | 6,385 | (34,227 | ) | 19,799 | ||||||||||||||
Total assets |
$ | 37,137 | $ | 20,259 | $ | 12,140 | $ | (34,227 | ) | $ | 35,309 | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Short-term debt |
$ | | $ | | $ | 3 | $ | | $ | 3 | ||||||||||
Customer advances and deposits |
| 2,637 | 2,662 | | 5,299 | |||||||||||||||
Other current liabilities |
652 | 3,479 | 1,520 | | 5,651 | |||||||||||||||
Total current liabilities |
652 | 6,116 | 4,185 | | 10,953 | |||||||||||||||
Noncurrent liabilities: |
||||||||||||||||||||
Long-term debt |
3,896 | 8 | 1 | | 3,905 | |||||||||||||||
Other liabilities |
3,487 | 2,494 | 616 | | 6,597 | |||||||||||||||
Total noncurrent liabilities |
7,383 | 2,502 | 617 | | 10,502 | |||||||||||||||
Intercompany |
15,248 | (15,703 | ) | 455 | | | ||||||||||||||
Shareholders equity: |
||||||||||||||||||||
Common stock |
482 | 6 | 44 | (50 | ) | 482 | ||||||||||||||
Other shareholders equity |
13,372 | 27,338 | 6,839 | (34,177 | ) | 13,372 | ||||||||||||||
Total shareholders equity |
13,854 | 27,344 | 6,883 | (34,227 | ) | 13,854 | ||||||||||||||
Total liabilities and shareholders equity |
$ | 37,137 | $ | 20,259 | $ | 12,140 | $ | (34,227 | ) | $ | 35,309 |
24
Condensed Consolidating Statements of Cash Flows
Three Months Ended April 3, 2011 | Parent | Guarantors on a Combined Basis |
Other Subsidiaries on a Combined Basis |
Consolidating Adjustments |
Total Consolidated |
|||||||||||||||
Net cash provided by operating activities |
$ | (71 | ) | $ | 636 | $ | (237 | ) | $ | | $ | 328 | ||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of available-for-sale securities |
(142 | ) | (32 | ) | | | (174 | ) | ||||||||||||
Maturities of held-to-maturity securities |
9 | | 107 | | 116 | |||||||||||||||
Other, net |
(50 | ) | (17 | ) | (13 | ) | | (80 | ) | |||||||||||
Net cash used by investing activities |
(183 | ) | (49 | ) | 94 | | (138 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Purchases of common stock |
(314 | ) | | | | (314 | ) | |||||||||||||
Dividends paid |
(157 | ) | | | | (157 | ) | |||||||||||||
Proceeds from option exercises |
138 | | | | 138 | |||||||||||||||
Other, net |
15 | | | | 15 | |||||||||||||||
Net cash used by financing activities |
(318 | ) | | | | (318 | ) | |||||||||||||
Net cash used by discontinued operations |
| | (1 | ) | | (1 | ) | |||||||||||||
Cash sweep/funding by parent |
477 | (587 | ) | 110 | | | ||||||||||||||
Net decrease in cash and equivalents |
(95 | ) | | (34 | ) | | (129 | ) | ||||||||||||
Cash and equivalents at beginning of period |
1,608 | | 1,005 | | 2,613 | |||||||||||||||
Cash and equivalents at end of period |
$ | 1,513 | $ | | $ | 971 | $ | | $ | 2,484 | ||||||||||
Three Months Ended April 1, 2012 | ||||||||||||||||||||
Net cash provided by operating activities |
$ | (72 | ) | $ | 607 | $ | (121 | ) | $ | | $ | 414 | ||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of held-to-maturity securities |
(126 | ) | | | | (126 | ) | |||||||||||||
Capital expenditures |
| (75 | ) | (15 | ) | | (90 | ) | ||||||||||||
Purchases of available-for-sale securities |
(45 | ) | (20 | ) | | | (65 | ) | ||||||||||||
Other, net |
23 | 20 | (26 | ) | | 17 | ||||||||||||||
Net cash used by investing activities |
(148 | ) | (75 | ) | (41 | ) | | (264 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Dividends paid |
(169 | ) | | | | (169 | ) | |||||||||||||
Proceeds from option exercises |
78 | | | | 78 | |||||||||||||||
Purchases of common stock |
(76 | ) | | | | (76 | ) | |||||||||||||
Other, net |
21 | (20 | ) | | | 1 | ||||||||||||||
Net cash used by financing activities |
(146 | ) | (20 | ) | | | (166 | ) | ||||||||||||
Net cash used by discontinued operations |
| | (1 | ) | | (1 | ) | |||||||||||||
Cash sweep/funding by parent |
636 | (512 | ) | (124 | ) | | | |||||||||||||
Net decrease in cash and equivalents |
270 | | (287 | ) | | (17 | ) | |||||||||||||
Cash and equivalents at beginning of period |
1,530 | | 1,119 | | 2,649 | |||||||||||||||
Cash and equivalents at end of period |
$ | 1,800 | $ | | $ | 832 | $ | | $ | 2,632 |
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share amounts or unless otherwise noted)
BUSINESS OVERVIEW
General Dynamics offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding; and communications and information technology. We operate through four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. Our primary customers are the U.S. government, largely the Department of Defense; international governments around the world; and a diverse base of corporate and individual buyers of business jets. We operate in two primary markets: defense and business aviation with the majority of our revenues from contracts with the U.S. government. The following discussion should be read in conjunction with our 2011 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q.
Defense Business Environment
As a defense contractor, our financial performance is impacted by the allocation and prioritization of U.S. defense spending. The Budget Control Act of 2011 has two primary parts that may affect future defense spending. The first part mandates a $487 billion reduction to previously-planned defense spending over the next decade. These cuts are incorporated in the fiscal year (FY) 2013 proposed defense budget. The second part is a sequester mechanism that would impose an additional $500 billion of cuts on defense spending between FY 2013 and FY 2021 if the Congress does not identify a means to reduce the U.S. deficit by $1.2 trillion. By law, these cuts take effect at the beginning of calendar year 2013. Because these reductions are not currently part of the Defense Departments budget, we are unable to predict exactly how they might impact funding for our programs.
RESULTS OF OPERATIONS
Introduction
We recognize the majority of our revenues using the percentage-of-completion method of accounting. The following paragraphs explain how this method is applied in recognizing revenues and operating costs in our Aerospace and defense business groups. An understanding of our practices is important to an evaluation of our operating results.
In the Aerospace group, contracts for new aircraft have two major phases: the manufacture of the green aircraft and the aircrafts outfitting, which includes exterior painting and installation of customer-selected interiors. We record revenues on these contracts at two milestones: when green aircraft are delivered to and accepted by the customer, and when the customer accepts final delivery of the outfitted aircraft. Revenues in the Aerospace groups other original equipment manufacturers (OEMs) completions and services businesses are recognized as work progresses or upon delivery of the service. Changes in revenues result from the number and mix of new aircraft deliveries (green and outfitted), progress on aircraft completions and the level of service activity during the period.
The majority of the Aerospace groups operating costs relates to new aircraft production for firm orders and consists of labor, material and overhead costs. The costs are accumulated in production lots
26
and recognized as operating costs at green aircraft delivery based on the estimated average unit cost in a production lot. Thus, the level of operating costs reported in a given period is based largely on the number and type of aircraft delivered. To a lesser extent, the level of operating costs is impacted by changes in the estimated average unit cost for a production lot. Operating costs in the Aerospace groups other OEMs completions and services businesses are generally recognized as incurred.
For new aircraft, operating earnings and margins in the Aerospace group are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft and the mix of aircraft deliveries between the higher-margin large-cabin and lower-margin mid-cabin aircraft. Additional factors affecting the groups earnings and margins include the volume and profitability of completions and services work performed, the amount and type of pre-owned aircraft sold and the level of general and administrative (G&A) costs incurred by the group, which also include selling expenses and research and development (R&D) costs.
In the defense groups, revenue on long-term government contracts is recognized as work progresses, either as products are produced or services are rendered. As a result, changes in revenues are discussed generally in terms of volume, typically measured by the level of activity on individual contracts. Year-over-year variances attributed to volume indicate increases or decreases in revenues due to changes in production or service levels and delivery schedules.
Operating costs for the defense groups consist of labor, material, subcontractor and overhead costs and are generally recognized as incurred. Variances in costs recognized from period to period primarily reflect increases and decreases in production or activity levels on individual contracts and, therefore, result largely from the same factors that drive variances in revenues.
Operating earnings and margins in the defense groups are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on revisions to estimates at completion on individual contracts. These revisions result from increases or decreases to the estimated value of the contract or the estimated costs to complete. Therefore, changes in costs incurred in the period do not necessarily impact profitability. It is only when total estimated costs at completion change that profitability may be impacted. Contract mix refers to changes in the volume of higher- vs. lower-margin work on individual contracts and when aggregated across the contract portfolio. On an individual contract, higher or lower margins can be inherent in the contract type (e.g., fixed-price/cost-reimbursable) or type of work (e.g., development/production).
Consolidated Overview
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 7,798 | $ | 7,579 | $ | (219 | ) | (2.8 | )% | |||||||||
Operating costs and expenses |
6,869 | 6,719 | (150 | ) | (2.2 | )% | ||||||||||||
Operating earnings |
929 | 860 | (69 | ) | (7.4 | )% | ||||||||||||
Operating margins |
11.9 | % | 11.3 | % |
Our revenues and operating costs were down in the first quarter of 2012 compared with the prior-year period driven primarily by lower volume in the Information Systems and Technologys tactical communications systems business. These decreases were partially offset by the Aerospace groups green deliveries of G650 aircraft, which began in the fourth quarter of 2011. Operating earnings and margins for the first quarter of 2012 were down due to the lower volume in Information Systems and Technology
27
and the related shift in revenues from higher margin tactical communication products to lower margin information technology services.
Product Revenues and Operating Costs
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 5,061 | $ | 4,718 | $ | (343 | ) | (6.8 | )% | |||||||||
Operating costs |
4,009 | 3,764 | (245 | ) | (6.1 | )% |
Product revenues were lower in the first quarter of 2012 compared with the prior-year period. The decrease in product revenues consisted of the following:
Tactical communication products |
$ | (346 | ) | |
Ship construction |
(122 | ) | ||
Aircraft manufacturing, outfitting and completions |
245 | |||
Other, net |
(120 | ) | ||
Total decrease |
$ | (343 | ) |
In the first quarter of 2012, tactical communication products revenues decreased driven by protracted customer acquisition cycles and a slower than expected transition to follow-on work on programs such as Common Hardware Systems-4 (CHS-4) and the Warfighter Information Network Tactical (WIN-T). Revenues were also down in ship construction as the T-AKE combat-logistics ship program nears completion and the Virginia-class submarine program transitions to Block III. Offsetting these decreases were higher aircraft manufacturing, outfitting and completions revenues due to first quarter deliveries of G650 aircraft, which began in the fourth quarter of 2011.
Product operating costs were lower in the first quarter of 2012 compared with the prior-year period. The decrease in product operating costs consisted of the following:
Tactical communication products volume |
$ | (280 | ) | |
Ship construction volume |
(142 | ) | ||
Aircraft manufacturing, outfitting and completions volume |
170 | |||
Other changes, net |
7 | |||
Total decrease |
$ | (245 | ) |
As demonstrated above, the primary driver of the change in product operating costs in the first quarter of 2012 was volume. No other changes were material.
Service Revenues and Operating Costs
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 2,737 | $ | 2,861 | $ | 124 | 4.5 | % | ||||||||||
Operating costs and expenses |
2,351 | 2,420 | 69 | 2.9 | % |
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Service revenues increased in the first quarter of 2012 compared with the prior-year period. The increase in service revenues consisted of the following:
Ship engineering and repair |
$ | 78 | ||
Other, net |
46 | |||
Total increase |
$ | 124 |
In the first quarter of 2012, the increase in ship engineering and repair revenues was driven by the fourth quarter 2011 acquisition of Metro Machine Corp.
Service operating costs increased in the first quarter of 2012 compared with the prior-year period. The increase in service operating costs consisted of the following:
Ship engineering and repair volume |
$ | 66 | ||
Other changes, net |
3 | |||
Total increase |
$ | 69 |
The primary driver of the change in service operating costs in the first quarter of 2012 was volume. No other changes were material.
Other Information
G&A Expenses
As a percentage of revenues, G&A expenses were 7.1 percent in the first quarter of 2012, up from 6.5 percent in the prior-year period.
Interest Expense
Net interest expense in the first three months of 2012 was $39 compared with $34 in the same period in 2011. The increase in interest expense is largely due to the $750 million net increase in fixed-rate notes in July 2011. We expect full-year 2012 net interest expense to be approximately $155 to $160, subject to capital deployment activities during the year.
Effective Tax Rate
Our effective tax rate for the first three months of 2012 was 31.3 percent compared with 31 percent in the same period in 2011. We anticipate a full-year 2012 effective tax rate of approximately 32 percent, compared with 31.4 percent in 2011, an increase primarily due to the expiration of the R&D tax credit that Congress has not yet extended for 2012. For additional discussion of tax matters, see Note I to the unaudited Consolidated Financial Statements.
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Review of Business Groups
Following is a discussion of operating results and outlook for each of our business groups. For the Aerospace group, results are analyzed with respect to specific lines of products and services, consistent with how the group is managed. For the defense groups, the discussion is based on the types of products and services each group offers with a supplemental discussion of specific contracts and programs when significant to the groups results. Information regarding our business groups also can be found in Note M to the unaudited Consolidated Financial Statements.
Aerospace
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 1,353 | $ | 1,623 | $ | 270 | 20.0 | % | ||||||||||
Operating earnings |
230 | 271 | 41 | 17.8 | % | |||||||||||||
Operating margins |
17.0 | % | 16.7 | % | ||||||||||||||
Gulfstream aircraft deliveries (in units): |
||||||||||||||||||
Green |
24 | 28 | 4 | 16.7 | % | |||||||||||||
Outfitted |
24 | 19 | (5 | ) | (20.8 | )% |
Operating Results
The Aerospace groups revenues increased in the first quarter of 2012 compared to the prior-year period. The increase consisted of the following:
Aircraft manufacturing, outfitting and completions |
$ | 245 | ||
Aircraft services |
25 | |||
Total increase |
$ | 270 |
Aircraft manufacturing, outfitting and completions revenues include Gulfstream business-jet aircraft as well as completions of aircraft produced by other OEMs. Aircraft manufacturing, outfitting and completions revenues increased in the first quarter primarily due to green deliveries of the new G650 aircraft, which began in the fourth quarter of 2011.
The growing global installed base and increased flying hours of business-jet aircraft resulted in growth in aircraft services revenues in the first quarter of 2012.
The groups operating earnings increased in the first quarter of 2012 compared with 2011. The increase consisted of the following:
Aircraft manufacturing, outfitting and completions |
$ | 68 | ||
Aircraft services |
6 | |||
Selling, general and administrative/other |
(33 | ) | ||
Total increase |
$ | 41 |
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Aircraft manufacturing, outfitting and completions earnings increased in the first quarter of 2012 compared with 2011 primarily due to the additional G650 green deliveries discussed above. Earnings from Jet Aviations completions business also increased in the first quarter as operational performance improved on narrow-and wide-body completion contracts.
Aircraft services earnings increased in the first quarter primarily due to a favorable mix of work.
Selling, general and administrative expenses were higher in the first quarter of 2012 due to the timing of supplier payments associated with Gulfstreams R&D efforts.
The groups operating margins decreased 30 basis points compared with the same prior-year period as higher R&D expenses offset the growth in the groups higher-margin aircraft manufacturing business.
Outlook
We expect an increase of approximately 15 percent in the groups revenues in 2012 compared with 2011. The increase is due to additional green deliveries and initial outfitted deliveries of the G650. We expect the Aerospace groups margins to be in the mid-15 percent range, up from 2011 due to improved performance in Jet Aviations completions business and the strong first quarter performance at Gulfstream.
Combat Systems
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 1,955 | $ | 1,911 | $ | (44 | ) | (2.3 | )% | |||||||||
Operating earnings |
277 | 203 | (74 | ) | (26.7 | )% | ||||||||||||
Operating margins |
14.2 | % | 10.6 | % |
Operating Results
The Combat Systems groups revenues were down in the first quarter of 2012 compared with the same period in 2011. The decrease consisted of the following:
U.S. military vehicles |
$ | 61 | ||
Weapon systems and munitions |
(31 | ) | ||
European military vehicles |
(74 | ) | ||
Total decrease |
$ | (44 | ) |
Revenues were up in the groups U.S. military vehicles business due to the December 2011 acquisition of Force Protection, Inc. Revenues were also up due to increased volume on international Abrams main battle tank and light armored vehicle (LAV) programs. These revenues were partially offset by lower volume on the domestic Stryker wheeled combat vehicle and Abrams programs consistent with our expectations.
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Revenues were down in the first quarter of 2012 in the munitions business due to lower volume across several programs. The decrease in munitions revenues was partially offset by increased sales of axles in the military and commercial markets.
Revenues in the European military vehicle business decreased as work completes on the Piranha vehicle contract with the Belgian Army.
The Combat Systems groups operating margins for the first quarter of 2012 were impacted negatively by $67 of prior period adjustments recorded at one of our subsidiaries in the European military vehicles business. For further discussion, see Note A to the unaudited Consolidated Financial Statements. Over two thirds of these adjustments contributed to lower first quarter 2012 revenues in the European military vehicles business.
Outlook
We expect the Combat Systems groups revenues to approximate $8.5 billion in 2012. A reduction in our U.S. military vehicles business primarily due to lower volume on the Stryker, Abrams and MRAP programs will be offset partially by growth in international vehicle exports and revenues from the acquisition of Force Protection Inc. Given the impact of the first quarter operating results, we expect the groups full-year operating margin to be in the high-13 percent range.
Marine Systems
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 1,676 | $ | 1,605 | $ | (71 | ) | (4.2 | )% | |||||||||
Operating earnings |
167 | 185 | 18 | 10.8 | % | |||||||||||||
Operating margins |
10.0 | % | 11.5 | % |
Operating Results
The Marine Systems groups revenues decreased in the first quarter of 2012 compared with the same prior-year period. The decrease consisted of the following:
Navy ship construction |
$ | (122 | ) | |
Navy ship engineering, repair and other services |
51 | |||
Total decrease |
$ | (71 | ) |
The groups U.S. Navy ship-construction programs include Virginia-class submarines, DDG-1000 and DDG-51 destroyers, and T-AKE combat-logistics and Mobile Landing Platform (MLP) auxiliary support ships. Navy ship construction revenues were down in the first quarter of 2012 primarily on lower Virginia-class submarine volume as we transition from the Block II to the Block III contract. Deliveries of the remaining 10 Virginia-class submarines under contract are scheduled through 2018, and plans published by the Navy include a request for proposals in 2012 for the next nine submarines under the program.
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Volume was steady on the DDG-1000 and DDG-51 programs in the first quarter of 2012. Deliveries of the three DDG-1000 ships under contract are scheduled for 2014, 2015 and 2018. The remaining destroyer scheduled for delivery under the legacy DDG-51 multi-ship contract is scheduled for delivery in the second quarter of 2012. The two destroyers awarded under the Navys restart of the DDG-51 program, including one awarded in the first quarter of 2012, are scheduled for delivery in 2016 and 2017, respectively.
Volume increased on the MLP program in the first quarter of 2012 as the group continued construction on the first ship. Construction of the second ship is scheduled to begin in the second quarter of 2012. In the first quarter, the group was awarded a construction contract for the third ship in the program. Delivery of one ship per year is scheduled beginning in 2013. A fourth MLP ship was requested in the FY 2013 budget request. Activity on the groups T-AKE program was down in 2012 as the group neared completion of the remaining two ships.
While ship-construction revenues were down from the first quarter of 2011, revenues were up on engineering and repair programs for the Navy in the first quarter of 2012. The increase in revenues was driven by the 2011 acquisition of Metro Machine Corp., a surface-ship repair operation located in Norfolk, Virginia, that, coupled with our existing capabilities, enables us to deliver maintenance and repair services to the Atlantic and Pacific fleets.
Despite the decrease in revenues, the groups operating earnings were up in the first quarter of 2012, resulting in a 150-basis-point increase in operating margins. This margin increase was primarily due to the increase in the T-AKE profit rate as the mature program continued to experience favorable cost performance.
Outlook
We expect the Marine Systems groups 2012 revenues to decrease slightly from 2011 because of the timing of several ship-construction programs, with operating margins expected in the high-10 percent range.
Information Systems and Technology
Three Months Ended | April 3, 2011 |
April 1, 2012 |
Variance | |||||||||||||||
Revenues |
$ | 2,814 | $ | 2,440 | $ | (374 | ) | (13.3 | )% | |||||||||
Operating earnings |
276 | 218 | (58 | ) | (21.0 | )% | ||||||||||||
Operating margins |
9.8 | % | 8.9 | % |
33
Operating Results
The Information Systems and Technology groups revenues decreased in the first quarter of 2012 compared with the same period in 2011. The decrease consisted of the following:
Tactical communication systems |
$ | (329 | ) | |
Information technology (IT) services |
(1 | ) | ||
Intelligence, surveillance and reconnaissance (ISR) systems |
(44 | ) | ||
Total decrease |
$ | (374 | ) |
The decrease in revenues in the tactical communication systems business was driven by protracted customer acquisition cycles and slower than expected transition to related follow-on work in the U.S. This resulted in lower revenues in the first quarter of 2012 in key products, including encryption hardware, CHS-4 and WIN-T. In addition, over 10% of the decline in revenues was due to lower volume on the U.K.-based Bowman communications system program, which has moved into the maintenance and long-term support phase.
In the groups IT services business, decreased volume on several large-scale IT infrastructure and support programs for the intelligence community and the Department of Defense, including the New Campus East program, was offset by increased revenues from the 2011 acquisition of Vangent, Inc.
Revenues were down in the first quarter of 2012 compared with the prior-year period in the groups ISR business due to lower volume of optical products and on several mission integration programs.
The decrease in the groups first quarter 2012 operating earnings resulted in a 90-basis-point decrease in operating margins. This decrease was driven by a shift in the mix of the groups revenues to lower-margin IT services, which increased from 40 to 45 percent of the groups total revenues. Additionally, margins were down in the tactical communications systems business in the first quarter of 2012 as a result of lower encryption products sales.
Outlook
We expect 2012 revenues in the Information Systems and Technology group to be down approximately 5 percent from 2011 due to continued award delays in our tactical communication systems business. Given the mix shift to lower-margin IT services business discussed above, the groups operating margins are expected to decline to the mid-9 percent range in 2012.
Corporate
Corporate results consist primarily of compensation expense for stock options. Corporate operating costs totaled $17 in the first quarter of 2012 compared with $21 in the first quarter of 2011. We expect 2012 full-year Corporate operating costs of approximately $70.
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BACKLOG
Our total backlog, including funded and unfunded portions, was $55.2 billion on April 1, 2012 compared with $57.4 billion at year-end 2011. Our backlog does not include work awarded under unfunded indefinite delivery, indefinite quantity (IDIQ) contracts or unexercised options associated with existing firm contracts, which we refer to collectively as estimated potential contract value. The estimated potential contract value represents our estimate of the ultimate value we expect to receive under these arrangements. At the end of the first quarter of 2012, our estimate of this potential contract value was $27 billion, down 4 percent from year-end 2011.
The following table details the backlog and the total estimated contract value of each business group at the end of the fourth quarter of 2011 and first quarter of 2012:
December 31, 2011 | Funded | Unfunded | Total Backlog |
Estimated Potential Contract Value |
Total Estimated Contract Value |
|||||||||||||||
Aerospace |
$ | 17,618 | $ | 289 | $ | 17,907 | $ | | $ | 17,907 | ||||||||||
Combat Systems |
10,283 | 1,137 | 11,420 | 3,453 | 14,873 | |||||||||||||||
Marine Systems |
9,364 | 9,140 | 18,504 | 2,163 | 20,667 | |||||||||||||||
Information Systems and Technology |
7,434 | 2,145 | 9,579 | 22,384 | 31,963 | |||||||||||||||
Total |
$ | 44,699 | $ | 12,711 | $ | 57,410 | $ | 28,000 | $ | 85,410 | ||||||||||
April 1, 2012 | ||||||||||||||||||||
Aerospace |
$ | 16,718 | $ | 266 | $ | 16,984 | $ | | $ | 16,984 | ||||||||||
Combat Systems |
9,623 | 1,042 | 10,665 | 3,473 | 14,138 | |||||||||||||||
Marine Systems |
12,261 | 5,754 | 18,015 | 1,199 | 19,214 | |||||||||||||||
Information Systems and Technology |
7,649 | 1,913 | 9,562 | 22,256 | 31,818 | |||||||||||||||
Total |
$ | 46,251 | $ | 8,975 | $ | 55,226 | $ | 26,928 | $ | 82,154 |
Aerospace
Aerospace funded backlog represents aircraft orders for which we have definitive purchase contracts and deposits from customers. Funded backlog includes the groups newest aircraft models, the G650 and the G280, which have received provisional type certification from the Federal Aviation Administration (FAA). Full type certification is expected for both aircraft around mid-2012. In the groups large-cabin segment, backlog remains well-positioned, with an 18- to 24-month period between customer order and delivery of in-service aircraft and approximately five years of backlog for the G650. Aerospace unfunded backlog consists of agreements to provide future aircraft maintenance and support services.
The group ended the first quarter of 2012 with $17 billion of backlog, down from $17.9 billion at year-end 2011 as we continue to deliver on our G650 backlog. Order activity in the first quarter of 2012 was solid, but lower than the fourth quarter. Customer defaults in the quarter were down nearly 50 percent from the fourth quarter of 2011. Approximately 60 percent of the groups orders in the first quarter of 2012 were from North American customers, with increased demand from Fortune 500
35
companies. In the international market, the group continued to see strong interest from customers in the Asia-Pacific region. While the installed base of aircraft is predominately in North America, international customers represented over 60 percent of the groups backlog at the end of the first quarter.
Defense Groups
The total backlog for our defense groups represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog includes items that have been authorized and appropriated by the Congress and funded by the customer, as well as commitments by international customers that are similarly approved and funded by their governments. While there is no guarantee that future budgets and appropriations will provide funding for a given program, we have included only firm contracts we believe are likely to receive funding.
Total backlog in our defense groups was $38.2 billion on April 1, 2012, down 3 percent from the fourth quarter of 2011. Total backlog decreased primarily in the Combat Systems group following significant Stryker and LAV orders in the fourth quarter of 2011. Funded backlog increased significantly during the quarter in our Marine Systems group with the funding of two Virginia-class submarines, which were previously reported in unfunded backlog. Our defense groups each received notable contract awards in the first quarter.
Combat Systems awards included the following:
| $130 from the U.K. Ministry of Defence for the production of 100 Ocelot light patrol vehicles. |
| $40 from the U.S. Army for the production of 258 Stryker Mine Rollers. |
| $35 from the Army for munitions demilitarization. |
Marine Systems awards included the following:
| $665 from the U.S. Navy for construction of a second DDG-51 destroyer under the destroyer construction continuation program. |
| $360 from the Navy for construction of the third MLP auxiliary support ship. |
Information Systems and Technology awards included the following:
| $155 for combat and seaframe control systems on two Navy Littoral Combat Ships (LCS); options remain for six additional shipsets of equipment. |
| $80 from the U.S. Department of Education to assist in the implementation and operation of the Federal Student Aid Information Center. |
| $75 from the U.S. Air Force for networking and computing products and support under the Network-Centric Solutions (NETCENTS) program. |
| $70 from the Canadian government to provide engineering and support services. |
| An award from the U.S. Department of Energy to provide cybersecurity and cloud-computing support services. The program has a maximum potential value of $140 over four years. |
36
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We ended the first quarter of 2012 with a cash balance of $2.6 billion, unchanged from the end of 2011. Our net debt, defined as debt less cash and equivalents and marketable securities, was $900 at the end of the first quarter of 2012, down $100 from $1 billion at the end of 2011. Following is a discussion of the major components of our operating, investing and financing activities, as classified on the Consolidated Statement of Cash Flows, in the first three months of 2011 and 2012.
Operating Activities
We generated cash from operating activities of $414 in the first three months of 2012 compared with $328 in the same period in 2011. The primary driver of cash flows in both periods was net earnings, offset in part by growth in operating working capital (OWC). The increase in OWC in the first three months of 2012 is largely due to timing of contract payments and, consistent with historical experience, expected to largely reverse by the end of the year.
As discussed further in Note K to the unaudited Consolidated Financial Statements, litigation on the A-12 program termination has been ongoing since 1991. If, contrary to our expectations, the default termination ultimately is sustained and the government prevails on its recovery theories, we, along with The Boeing Company, could collectively be required to repay the U.S. government as much as $1.4 billion for progress payments received for the A-12 contract, plus interest, which was approximately $1.6 billion on April 1, 2012. If this were the outcome, we would owe half of the total, or approximately $1.5 billion pretax. Our after-tax cash obligation would be approximately $735. We believe we have sufficient resources, including access to capital markets, to pay such an obligation, if required.
Investing Activities
We used $264 for investing activities in the first three months of 2012 compared with $138 in the same period in 2011. The primary uses of cash for investing activities were capital expenditures and purchases of marketable securities.
We also completed one acquisition for $26 in the first three months of 2012. We did not complete any acquisitions in the first quarter of 2011. We used cash on hand to fund this acquisition. See Note B to the unaudited Consolidated Financial Statements for further discussion of acquisition activity.
We expect full-year capital expenditures to be approximately 2 percent of revenues, up slightly from 2011 largely due to Gulfstreams $500 seven-year Savannah, Georgia, facilities expansion project started in 2010.
As a result of lower market interest rates, we have increased our investment in available-for-sale and held-to-maturity securities to take advantage of the additional return. We had net purchases of $148 in the first three months of 2012 compared with $77 in the first three months of 2011.
Financing Activities
Net cash used for financing activities was $166 in the three-month period ended April 1, 2012, compared with $318 in the same period in 2011. Our financing activities include payment of dividends
37
and repurchases of common stock. Net cash from financing activities also includes proceeds received from stock options exercises.
We had no commercial paper outstanding on April 1, 2012. We have $2 billion in bank credit facilities that remain available. These facilities provide backup liquidity to our commercial paper program. We also have an effective shelf registration on file with the Securities and Exchange Commission. We have no material repayments of long-term debt expected until 2013.
On March 7, 2012, our board of directors declared an increased quarterly dividend of $0.51 per share the 15th consecutive annual increase. The board had increased the quarterly dividend to $0.47 per share in March 2011.
In the first three months of 2012, we repurchased 1.4 million of our outstanding shares on the open market at an average price of $72 per share. In the first three months of 2011, we repurchased 3.1 million shares at an average price of $75 per share. On April 1, 2012, approximately 8.6 million shares remain authorized by our board of directors for repurchase about 2 percent of our total shares outstanding.
Non-GAAP Management Metrics Free Cash Flow
Our free cash flow from operations for the first three months of 2012 was $324, or 57 percent of earnings from continuing operations, compared with $267 and 43 percent for the same period in 2011. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors, because it portrays our ability to generate cash from our core businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a performance measure in evaluating management of the business.
The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the unaudited Consolidated Statement of Cash Flows:
Three Months Ended | April 3, 2011 |
April 1, 2012 |
||||||
Net cash provided by operating activities |
$ | 328 | $ | 414 | ||||
Capital expenditures |
(61 | ) | (90 | ) | ||||
Free cash flow from operations |
$ | 267 | $ | 324 | ||||
Cash flows as a percentage of earnings from continuing operations: |
||||||||
Net cash provided by operating activities |
53 | % | 73 | % | ||||
Free cash flow from operations |
43 | % | 57 | % |
We expect to continue to generate funds in excess of our short- and long-term liquidity needs. We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy.
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ADDITIONAL FINANCIAL INFORMATION
Environmental Matters and Other Contingencies
For a discussion of environmental matters and other contingencies, see Note K to the unaudited Consolidated Financial Statements. We do not expect our aggregate liability with respect to these matters to have a material impact on our results of operations, financial condition or cash flows.
Application of Critical Accounting Policies
Managements Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenues and costs. Contract estimates are based on various assumptions that project the outcome of future events that often span several years. We review our performance monthly and update our contract estimates at least annually and often quarterly as well as when required by specific events and circumstances. We recognize changes in estimated profit on contracts under the reallocation method. Under this method, the impact of revisions in estimates is recognized prospectively over the remaining contract term. The net increase in our operating earnings from the quarterly impact of revisions in contract estimates totaled $90 and $68 for the three-months periods ended April 3, 2011, and April 1, 2012, respectively. No revisions on any one contract were material to our unaudited Consolidated Financial Statements.
Other significant estimates include those related to goodwill and other intangible assets, income taxes, pensions and other post-retirement benefits, workers compensation, warranty obligations and contingencies and litigation. We make our best estimates based on historical and current experience and on various assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. We believe that our judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented. For a full discussion of our critical accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2011.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) on April 1, 2012. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, on April 1, 2012, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting that occurred during the quarter ended April 1, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This quarterly report on Form 10-Q contains forward-looking statements that are based on managements expectations, estimates, projections and assumptions. Words such as expects, anticipates, plans, believes, scheduled, outlook, should, estimates and variations of these words and similar expressions are intended to identify forward-looking statements. These include but are not limited to projections of revenues, earnings, operating margins, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including the risk factors discussed in Item 1A of our Annual Report on Form 10-K. These factors include, without limitation:
| general U.S. and international political and economic conditions; |
| changing priorities in the U.S. governments defense budget; |
| termination or restructuring of government contracts due to unilateral government action; |
| differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts within estimated costs, and performance issues with key suppliers and subcontractors; |
| expected recovery on contract claims and requests for equitable adjustment; |
| changing customer demand or preferences for business aircraft, including the effects of economic conditions on the business-aircraft market; |
| potential for changing prices for energy and raw materials; and |
| the status or outcome of legal and/or regulatory proceedings. |
All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the company or any person acting on the companys behalf are qualified by the cautionary statements in this section. We do not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report except as expressly required to do so by law.
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For information relating to legal proceedings, see Note K to the unaudited Consolidated Financial Statements contained in Part I, Item 1 of this quarterly report on Form 10-Q.
There have been no material changes with respect to this item from the disclosure included in our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about our first quarter repurchases of equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program(a) |
Maximum Number of Shares that May Yet Be Purchased Under the Program(a) |
||||||||||||
Pursuant to Share Buyback Program |
| |||||||||||||||
1/1/12-1/29/12 |
| $ | | | 10,000,000 | |||||||||||
1/30/12-2/26/12 |
376,460 | $ | 69.72 | 376,460 | 9,623,540 | |||||||||||
2/27/12-4/1/12 |
988,517 | $ | 72.54 | 988,517 | 8,635,023 | |||||||||||
Shares Delivered or Withheld Pursuant to |
| |||||||||||||||
1/1/12-1/29/12 |
148,886 | $ | 68.21 | |||||||||||||
1/30/12-2/26/12 |
| $ | | |||||||||||||
2/27/12-4/1/12 |
| $ | | |||||||||||||
|
|
|
|
|||||||||||||
Total |
1,513,863 | $ | 71.41 | |||||||||||||
|
|
|
|
(a) | On October 5, 2011, with no shares remaining under a prior authorization, the board of directors authorized management to repurchase up to 10 million shares of common stock on the open market. Unless terminated or extended earlier by resolution of the board of directors, the program will expire when the number of authorized shares has been repurchased. |
(b) | Represents shares withheld by, or delivered to, us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold, or the recipient to deliver to us, the number of shares with a fair value equal to the minimum statutory tax withholding due upon vesting of the restricted shares. |
We did not make any unregistered sales of equity securities in the first quarter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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10.1 | Form of Non-Statutory Stock Option Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan* | |
10.2 | Form of Restricted Stock Award Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan* | |
10.3 | Form of Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan* | |
10.4 | Form of Performance Restricted Stock Unit Award Agreement pursuant to the General Dynamics Corporation 2009 Equity Compensation Plan* | |
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* | |
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* | |
101 | Interactive Data File* |
* | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
GENERAL DYNAMICS CORPORATION | ||
by | /s/ Kimberly A. Kuryea | |
Kimberly A. Kuryea | ||
Vice President and Controller | ||
(Authorized Officer and Chief Accounting Officer) |
Dated: May 1, 2012
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Exhibit 10.1
NON-STATUTORY STOCK OPTION AGREEMENT
PURSUANT TO THE GENERAL DYNAMICS CORPORATION
2009 EQUITY COMPENSATION PLAN
THIS OPTION AGREEMENT (the Agreement) dated as of [DATE] (the Grant Date) is made between General Dynamics Corporation (the Company) and [NAME] (the Optionee).
WHEREAS, the Company sponsors the General Dynamics Corporation 2009 Equity Compensation Plan (the Plan), pursuant to which the Company may grant Options to purchase shares of Common Stock;
WHEREAS, the Company desires to grant the Optionee a Non-Statutory Stock Option to purchase the number of shares of Common Stock provided for herein; and
WHEREAS, the Company may also grant other Options to the Optionee on the Grant Date (such other Options, together with this Option, being hereinafter referred to as the Total Option Grant).
NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein contained, the parties hereto agree as follows:
1. Grant of Option.
(a) Number of Shares; Type of Option. The Company hereby grants to the Optionee an Option to purchase [NUMBER] shares of Common Stock (the Option Shares and, together with the shares of Common Stock subject to the Total Option Grant, the Total Option Shares) on the terms and conditions set forth in this Agreement. The Option is intended to be a Non-Statutory Stock Option.
(b) Incorporation of Plan by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement will be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement will have the definitions set forth in the Plan. The Committee will have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decisions will be binding and conclusive upon the Optionee and the Optionees legal representative in respect of any questions arising under the Plan or this Agreement. If there exists any inconsistency between the terms of this Agreement and the Plan, the terms contained in the Plan will govern. If there exists any inconsistency between the terms of the Option as provided for herein (including, but not limited to, terms relating to the number of Option Shares, the Stated Expiration Date, the exercise price and the exercisability of the Option) and the terms as indicated in the records maintained by Company, the terms as indicated in the records of the Company will govern.
2. Terms and Conditions.
(a) Exercise Price. The exercise price for the purchase of Option Shares upon the exercise of all or any portion of the Option will be $[PRICE] per share of Common Stock.
(b) Expiration Date. Subject to earlier expiration as provided in Section 2(f) below, the Option will expire at the close of business on the business day immediately preceding the [NUMBER] anniversary of the date hereof (the Stated Expiration Date).
(c) Exercisability of Option.
(i) General. Except as provided in Section 2(c)(ii) below, the Total Option Grant will become vested and exercisable with respect to one-half (1/2) of the Total Option Shares on the first anniversary of the Grant Date and with respect to the remaining Total Option Shares on the second anniversary of the Grant Date, in each case, only if the Optionee is employed as an employee of the Company or any of its Subsidiaries or serves as a director of the Company as of the applicable vesting date or dies prior to the applicable vesting date while employed by the Company or any of its Subsidiaries or serving as a director of the Company.
(ii) Certain Terminations. If, the Optionees employment or service as a director is terminated due to total and permanent disability, Retirement (as defined in Section 2(f)(i) below) or as a result of a divestiture or discontinued operation of a division or a Subsidiary with which the Optionee was associated, then the Total Option Grant will become vested and exercisable on the anniversary of the Grant Date next following such termination with respect to a number of Total Option Shares equal to the excess of (i) product of (A) the number of Total Option Shares and (B) a fraction, the numerator of which will be the number of days from January 1 of the year in which the Grant Date occurs to the last day of the month in which such termination occurs and the denominator of which will be 730, such product to be rounded down to the nearest whole share over (ii) the number of Total Option Shares, if any, with respect to which the Total Option Grant had become vested and exercisable prior to such termination (the Pro Rated Option Shares). To the extent that the Total Option Grant includes Options that are intended to be ISOs (the ISO Option Shares), then, to the extent not inconsistent with Section 422 of the Code, the number of Pro Rated Option Shares that will be ISO Option Shares will be equal to the lesser of (i) the number of Pro Rated Option Shares or (ii) the number of ISO Option Shares that have not become vested and exercisable as of the date on which the Optionees employment or service as a director terminates (the Pro Rated ISO Shares). The number of Pro Rated Option Shares that will be Total Option Shares subject to a Non-Statutory Stock Option will be equal to the excess, if any, of (i) the number of Pro Rated Option Shares over (ii) the number of Pro Rated ISO Shares.
(d) Change in Control. Notwithstanding the foregoing, in the event that within two (2) years following a Change in Control, the Optionees service with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Optionee for Good Reason, then the Total Option Grant, to the extent then outstanding, will become immediately vested and exercisable.
(e) Method of Exercise; Tax Withholding. The exercise price for any shares purchased pursuant to the exercise of all or part of the Option will be paid in accordance with
2
Section 10(d) of the Plan. The Company is authorized to withhold from any payment relating to the Option, including from a distribution of Common Stock, or any payroll or other payment to the Optionee, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving the Option, and to take such other action as the Committee may deem advisable to enable the Company and the Optionee to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the Option. This authority shall include authority to withhold or receive Common Stock or other property and to make cash payments in respect thereof in satisfaction of the Optionees tax obligations, either on a mandatory or elective basis in the discretion of the Committee.
(f) Exercise Following Termination. Notwithstanding anything in this Agreement to the contrary, the Option will expire upon the Optionees termination of employment or service as a director; provided, however that to the extent that the Option is exercisable at the time of the Optionees termination of employment or service as a director, or becomes exercisable following such termination pursuant to Section 2(c) or Section (d) above, the Option will expire as follows:
(i) Death; Disability; Retirement; Divestiture. Three (3) years (but in no event later than the Stated Expiration Date) following the Optionees termination of employment or service as a director due to death, total and permanent disability, Retirement or as a result of a divestiture or discontinued operation of a division or a Subsidiary with which the Optionee was associated. For purposes of this Agreement, Retirement means, (A) with respect to an employee who is not an elected officer of the Company on the date on which the employees employment with the Company or any of its Subsidiaries terminates, the termination of employment after the attainment of age 55 with at least five (5) or more years of continuous service and (B) with respect to an employee who is an elected officer of the Company on the date on which the employees employment with the Company or any of its Subsidiaries terminates, termination of employment after attaining age 55 with the consent of the Chief Executive Officer of the Company (or in the case of the Chief Executive Officer, with the consent of the Committee).
(ii) Lay-Off. One (1) year (but in no event later than the Stated Expiration Date) following the Optionees termination of employment if the Optionees employment terminates due to lay-off (other than as a result of a divestiture or discontinued operation of a division or a Subsidiary with which the Optionee was associated).
(iii) Other than Death; Disability; Retirement; Divestiture; Lay-Off. Ninety (90) days (but in no event later than the Stated Expiration Date) following the Optionees termination of employment or service as a director for any reason (other than those set forth in clauses (i) and (ii) above).
(g) Nontransferability. The Option granted hereunder is not transferable by the Optionee otherwise than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionees guardian or legal representative. The terms of the Option will be binding upon the beneficiaries, executors, administrators, heirs and successors of the Optionee.
3
3. Nature of Grant. In accepting this Option, the Optionee acknowledges that:
(a) the Plan is discretionary in nature and established voluntarily by the Company and may be modified, amended, suspended or terminated by the Company at any time, as provided in the Plan, and the award of the Option is at the sole discretion of the Company and does not create any contractual or other right to receive future awards of Options, or benefits in lieu of Options even if Options have been awarded repeatedly in the past;
(b) the Option is not part of normal or expected compensation or salary for any purposes, including calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; and
(c) nothing in the Plan or in this Agreement will confer upon the Optionee any right to continue in the employ of the Company or any of its Subsidiaries nor interfere with or restrict in any way the right of the Company or any of its Subsidiaries, which is hereby expressly reserved, to remove, terminate or discharge the Optionee at any time for any reason whatsoever, with or without cause.
4. Data Privacy. The Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this document by and among, as applicable, the Parent and its Subsidiaries, for the exclusive purpose of implementing, administering and managing the Optionees participation in the Plan.
The Optionee understands that the Company may hold certain personal information about the Optionee, including his or her name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Optionees favor, for the purpose of implementing, administering and managing the Plan (Data). Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Optionees country or elsewhere and that the recipients country may have different data privacy laws and protections than the Optionees country. The Optionee may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. The Optionee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Optionee may elect to deposit any shares acquired upon exercise of the Option. Data will be held only as long as is necessary to implement, administer and manage the Optionees participation in the Plan. The Optionee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. Refusing or withdrawing his or her consent may affect the Optionees ability to participate in the Plan. For more information on the consequences of a refusal to consent or withdrawal of consent, the Optionee may contact his or her local human resources representative.
4
5. Miscellaneous.
(a) Modification; Entire Agreement; Waiver. No change, modification or waiver of any provision of this Agreement will be valid unless the same is agreed to in writing by the parties hereto. This Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supercede all prior communications, representations and negotiations in respect thereof. The failure of the Company to enforce, at any time, any provision of this Agreement will in no way be construed to be a waiver of such provision or of any other provision hereof.
(b) Bound by Plan and Other Related Documents. By accepting this Option, the Optionee acknowledges that the Optionee has received a copy of the Plan and the General Dynamics Corporate Policy regarding insider trading compliance (the Trading Policy) and has had an opportunity to review the Plan and the Trading Policy and agrees to be bound by all the terms and provisions of the Plan and the Trading Policy.
(c) Successors. The terms of this Agreement will be binding upon and inure to the benefit of the Company, its successors and assigns, and of the beneficiaries, executors, administrators, heirs and successors of the Optionee.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. For purposes of litigating any dispute that arises under this Award or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Virginia, and agree that such litigation shall be conducted exclusively in the courts of Virginia or the federal courts for the Eastern District of Virginia.
(e) Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of this Agreement, and this Agreement shall be construed and enforced as if such illegal or invalid provision had not been included.
(f) Language. If the Optionee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different that the English version, the English version will control.
5
Exhibit 10.2
RESTRICTED STOCK AWARD AGREEMENT
PURSUANT TO THE GENERAL DYNAMICS CORPORATION
2009 EQUITY COMPENSATION PLAN
This Restricted Stock Award Agreement (the Agreement) is entered into as of [DATE], (the Grant Date), by and between General Dynamics Corporation (the Company) and [NAME] (the Grantee).
WHEREAS, the Company sponsors the General Dynamics Corporation 2009 Equity Compensation Plan (the Plan), pursuant to which the Company may grant shares of Restricted Stock; and
WHEREAS, the Company desires to grant the Grantee a Restricted Stock award.
NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein contained, the parties hereto agree as follows:
1. Number of Shares. The Grantee is hereby granted [NUMBER] shares of Restricted Stock, subject to the restrictions set forth herein.
2. Terms of Restricted Stock. The grant of Restricted Stock provided in Section 1 hereof will be subject to the following terms, conditions and restrictions:
(a) Incidents of Ownership. Subject to the restrictions set forth in the Plan and this Agreement, the Grantee will possess all incidents of ownership of the Restricted Stock granted hereunder, including the right to receive dividends with respect to such shares and the right to vote such shares.
(b) Restricted Period. Except as may otherwise be provided herein, the restrictions on transfer of the Restricted Stock will lapse on the first day of January on which the New York Stock Exchange is open for business of the fourth calendar year following the calendar year in which the Grant Date occurs (the Restricted Period) provided that the Grantee is employed by the Company or any of its Subsidiaries or is serving as a director of the Company on such date or dies prior to such date while employed by the Company or any of its Subsidiaries or serving as a director of the Company. Upon the lapse of restrictions relating to the Restricted Stock, the Company, in its sole discretion, may either issue to the Grantee or the Grantees personal representative a stock certificate representing, or deposit in such Grantees or the Grantees personal representatives brokerage account via electronic transfer, one share of Common Stock, free of the restrictive legend described in Section 3 hereof, in exchange for each whole share of Restricted Stock with respect to which such restrictions have lapsed. If certificates representing such Restricted Stock have previously been delivered to the Grantee or shares have previously been deposited in such Grantees brokerage account, the Grantee will return such certificates or shares to the Company, complete with any necessary signatures or instruments of transfer, prior to the issuance by the Company of such unlegended shares of Common Stock.
(c) Transfer Restrictions. Shares of Restricted Stock, and any interest therein, may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, prior to the lapse of restrictions set forth in the Plan and this Agreement applicable thereto.
(d) Incorporation of Plan by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement will be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement will have the definitions set forth in the Plan. The Committee will have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decisions will be binding and conclusive upon the Grantee and the Grantees legal representative in respect of any questions arising under the Plan or this Agreement. If there exists any inconsistency between the terms of this Agreement and the Plan, the terms contained in the Plan will govern. If there exists any inconsistency between the terms of the Restricted Stock as provided for herein (including, but not limited to, terms relating to the number of shares of Restricted Stock or the termination of the Restricted Period) and the terms as indicated in the records maintained by Company, the terms as indicated in the records of the Company will govern.
3. Certificate; Restrictive Legend. The Grantee agrees that any certificate issued for Restricted Stock prior to the lapse of any outstanding restrictions relating thereto will be inscribed with the following legend:
This certificate and the shares of stock represented hereby are subject to the terms and conditions, including forfeiture provisions and restrictions against transfer (the Restrictions), contained in the General Dynamics Corporation Equity Compensation Plan and an agreement entered into between the registered owner and the Company. Any attempt to dispose of these shares in contravention of the Restrictions, including by way of sale, assignment, transfer, pledge, hypothecation or otherwise, will be null and void and without effect.
4. Termination of Employment or Service as a Director.
(a) General. In the event that (i) the Grantee ceases to be employed by the Company or any of its Subsidiaries or ceases to be a director of the Company for any reason (other than due to death, total and permanent disability, Retirement (as defined below), divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, or lay-off), prior to the end of the Restricted Period or (ii) the Grantee ceases to be employed by the Company or any of its Subsidiaries on account of lay-off prior to December 31st of the calendar year in which the Grant Date occurs (the Determination Date), the Restricted Stock will be automatically forfeited by the Grantee on the date of such termination. For purposes of this Agreement, Retirement means, (A) with respect to an employee who is not an elected officer of the Company on the date on which the employees employment with the Company or any of its Subsidiaries terminates, the termination of employment after the attainment of age 55 with at least five (5) or more years of continuous service and (B) with respect to an employee who is an elected officer of the Company on the date on which the employees employment with the Company or any of its Subsidiaries terminates, termination of employment after attaining age 55 with the consent of the Chief Executive Officer of the Company (or in the case of the Chief Executive Officer, with the consent of the Committee).
2
(b) Certain Terminations.
(i) Prior to the Determination Date. In the event that the Grantee ceases to be employed by the Company or any of its Subsidiaries or ceases to be a director of the Company due to total and permanent disability, Retirement, divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, prior to the Determination Date, then the restrictions on transfer will lapse on the last day of the Restricted Period with respect to a number of shares of Restricted Stock equal to product of (i) the total number of shares of Restricted Stock granted hereunder and (ii) a fraction, the numerator of which will be the number of days from January 1 of the year in which the Grant Date occurs to the last day of the month in which such termination occurs and the denominator of which will be 365, such product to be rounded down to the nearest whole share (the Pro Rated Restricted Stock), and the remaining shares of Restricted Stock will be automatically forfeited by the Grantee as of the date of such termination.
(ii) On or After the Determination Date. In the event that the Grantee ceases to be employed by the Company or any of its Subsidiaries or ceases to serve as a director of the Company due to total and permanent disability, Retirement, divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, or lay-off, in each case, on or after the Determination Date, then the restrictions on transfer will lapse on the last day of the Restricted Period with respect to all of the shares of Restricted Stock granted hereunder.
(iii) Death. In the event of the Grantees death on or prior to the last day of the Restricted Period, the restrictions on transfer will lapse on the last day of the Restricted Period with respect to all of the shares of Restricted Stock granted hereunder.
(iv) Change in Control. Notwithstanding the foregoing, in the event that within two (2) years following a Change in Control, the Grantees service with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, any shares of Restricted Stock outstanding as of such date, will become immediately vested.
(c) Harm. Notwithstanding the foregoing, all of the shares of Restricted Stock will be automatically forfeited by the Grantee if the Grantee causes Harm (as defined below) to the Company or any of its Subsidiaries during the Restricted Period. For purposes of this Agreement, Harm includes, but is not limited to, any actions that adversely affect the financial standing, reputation, or products of the Company or any of its Subsidiaries, or any actions involving personal dishonesty, a felony conviction related to the Company or any of its Subsidiaries, or any material violation of any confidentiality or non-competition agreement with the Company or any of its Subsidiaries.
5. Tax Withholding. Prior to the delivery of shares of unrestricted Common Stock upon vesting of this award of Restricted Stock, the Grantee shall pay, or make adequate arrangements satisfactory to the Company in its discretion to satisfy all applicable tax withholding
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obligations in respect of such shares. Alternatively, or in addition, the Company may in its sole discretion withhold from the shares of Common Stock otherwise deliverable hereunder such number of shares as it will determine is necessary to satisfy all applicable withholding tax obligations in respect of such shares. Regardless of any action the Company takes with respect to any withholding tax obligations, the Grantee acknowledges and agrees that the ultimate liability for all such obligations legally due by the Grantee is and remains the Grantees responsibility.
6. Nature of Grant. In accepting this award of Restricted Stock, the Grantee acknowledges that:
(a) the Plan is discretionary in nature and established voluntarily by the Company and may be modified, amended, suspended or terminated by the Company at any time, as provided in the Plan, and the award of the Restricted Stock is at the sole discretion of the Company and does not create any contractual or other right to receive future awards of Restricted Stock, or benefits in lieu of Restricted Stock even if Restricted Stock has been awarded repeatedly in the past;
(b) the Restricted Stock is not part of normal or expected compensation or salary for any purposes, including calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments; and
(c) nothing in the Plan or in this Agreement will confer upon the Grantee any right to continue in the employ of the Company nor interfere with or restrict in any way the right of the Company, which is hereby expressly reserved, to remove, terminate or discharge the Grantee at any time for any reason whatsoever, with or without cause.
7. Data Privacy. The Grantee hereby explicitly and unambiguously consents to the collection, holding, use and transfer, in electronic or other form, of his or her personal data as described in this document by and among, as applicable, the Parent and its Subsidiaries, for the exclusive purpose of implementing, administering and managing the Grantees participation in the Plan.
The Grantee understands that the Company may hold certain personal information about the Grantee, including his or her name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantees favor, for the purpose of implementing, administering and managing the Plan (Data). Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantees country or elsewhere and that the recipients country may have different data privacy laws and protections than the Grantees country. The Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party
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with whom the Grantee may elect to deposit any shares acquired upon release of the Restricted Stock. Data will be held only as long as is necessary to implement, administer and manage the Grantees participation in the Plan. The Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. Refusing or withdrawing his or her consent may affect the Grantees ability to participate in the Plan. For more information on the consequences of a refusal to consent or withdrawal of consent, the Grantee may contact his or her local human resources representative.
8. Miscellaneous.
(a) Modification; Entire Agreement; Waiver. No change, modification or waiver of any provision of this Agreement will be valid unless the same is agreed to in writing by the parties hereto. This Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supercede all prior communications, representations and negotiations in respect thereof. The failure of the Company to enforce, at any time, any provision of this Agreement will in no way be construed to be a waiver of such provision or of any other provision hereof.
(b) Bound by Plan and Other Related Documents. By accepting the award of Restricted Stock, the Grantee acknowledges that the Grantee has received a copy of the Plan and the General Dynamics Corporate Policy regarding insider trading compliance (the Trading Policy) and has had an opportunity to review the Plan and the Trading Policy and agrees to be bound by all the terms and provisions of the Plan and the Trading Policy.
(c) Successors. The terms of this Agreement will be binding upon and inure to the benefit of the Company, its successors and assigns, and of the beneficiaries, executors, administrators, heirs and successors of the Grantee.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. For purposes of litigating any dispute that arises under this Award or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Virginia, and agree that such litigation shall be conducted exclusively in the courts of Virginia or the federal courts for the Eastern District of Virginia.
(e) Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of this Agreement, and this Agreement shall be construed and enforced as if such illegal or invalid provision had not been included.
(f) Language. If the Grantee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different that the English version, the English version will control.
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Exhibit 10.3
RESTRICTED STOCK UNIT AWARD AGREEMENT
PURSUANT TO THE GENERAL DYNAMICS CORPORATION
2009 EQUITY COMPENSATION PLAN
This Restricted Stock Unit Award Agreement (the Agreement) is entered into as of [DATE], (the Grant Date), by and between General Dynamics Corporation (the Company) and [NAME] (the Grantee).
WHEREAS, the Company sponsors the General Dynamics Corporation 2009 Equity Compensation Plan, as amended April 23, 2009 (the Plan), pursuant to which the Company may grant Restricted Stock Units; and
WHEREAS, the Company desires to grant to the Grantee an award of Restricted Stock Units.
NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein contained, the parties hereto agree as follows:
1. Number of RSUs. The Grantee is hereby granted [NUMBER] Restricted Stock Units (the RSUs), subject to the restrictions set forth herein. Each RSU represents an unfunded, unsecured promise by the Company to deliver one share of the Companys common stock (Common Stock), subject to certain restrictions and the terms and conditions contained in this Agreement.
2. Terms of RSUs. The RSUs will be subject to the following terms, conditions and restrictions:
(a) No Shareholder Rights. The RSUs do not entitle the Grantee to any rights of a shareholder of Common Stock, including dividends or voting rights.
(b) Scheduled Vesting Date. Except as may otherwise be provided in Section 3 below, the RSUs and the Dividend Equivalent RSUs (as defined below) that have been credited to the Grantee will vest on the first day of January on which the New York Stock Exchange is open for business of the fourth calendar year following the calendar year in which the Grant Date occurs (the Scheduled Vesting Date) but only if the Grantees Termination Date (as defined below) has not occurred, and does not occur, prior to or on the Scheduled Vesting Date.
(c) Settlement of Awards. Settlement of the vested RSUs and Dividend Equivalent RSUs shall occur on, or no later than ninety (90) days following, the Scheduled Vesting Date; provided, however, that if within two (2) years following a Change in Control the Grantees service with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, then settlement of vested RSUs and Dividend Equivalent RSUs shall occur on, or no later than thirty (30) days following, the Termination Date. (The actual date of settlement is hereinafter referred to as the Settlement Date). The Company, in its sole discretion, may settle the vested RSUs and Dividend Equivalent RSUs by either (i) issuing to the Grantee or the Grantees personal representative a stock certificate representing one share of Common Stock for each RSU that has vested and one
share of Common Stock for each Dividend Equivalent RSU that has vested or (ii) depositing in such Grantees or the Grantees personal representatives brokerage account via electronic transfer, one share of Common Stock for each RSU that has vested and one share of Common Stock for each Dividend Equivalent RSU that has vested.
(d) Dividend Equivalents. Dividend equivalents will accrue on the RSUs during the period beginning on the Grant Date and ending on the Scheduled Vesting Date (the Vesting Period) and will be notionally credited in the form of additional RSUs (Dividend Equivalent RSUs) to the Grantees bookkeeping account. Dividend equivalents will also accrue on the Dividend Equivalent RSUs during the Vesting Period. The Company will round down to the nearest whole share in settling any Dividend Equivalent RSUs and no fractional shares will be issued. Dividend Equivalent RSUs will in all cases be subject to the same terms and conditions, including but not limited to those related to vesting, transferability, and payment, that apply to the RSUs.
(e) Transfer Restrictions. Neither the RSUs, the Dividend Equivalent RSUs, nor any interest therein may be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of by the Grantee, except by will or the laws of descent and distribution, and any such purported sale, assignment, transfer, pledge, hypothecation or other disposition shall be void and unenforceable against the Company.
(f) Incorporation of Plan by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this Agreement will be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement will have the definitions set forth in the Plan. The Committee will have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decisions will be binding and conclusive upon the Grantee and the Grantees legal representative in respect of any questions arising under the Plan or this Agreement. If there exists any inconsistency between the terms of this Agreement and the Plan, the terms contained in the Plan will govern. If there exists any inconsistency between the terms of the RSUs and Dividend Equivalent RSUs as provided for herein (including terms relating to the number of RSUs or Dividend Equivalent RSUs) and the terms as indicated in the records maintained by Company, the terms as indicated in the records of the Company will govern.
3. Termination of Employment or Service as a Director.
(a) General. In the event that (i) the Grantee ceases to be employed by the Company or ceases to be a director of the Company for any reason (the date of such cessation, the Termination Date) other than due to death, total and permanent disability, Retirement (as defined below), divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, or lay-off, in each case prior to the Scheduled Vesting Date or (ii) the Grantee ceases to be employed by the Company on account of lay-off prior to December 31st of the calendar year in which the Grant Date occurs (the Determination Date), the RSUs and any Dividend Equivalent RSUs credited as of the Termination Date will be automatically forfeited by the Grantee as of the Termination Date. For purposes of this Agreement, the Termination Date will in all cases without exception (notwithstanding, for example, any failure under local labor laws) be deemed to occur as of the date that the Grantee is no longer actively employed and will
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not be extended by any notice period mandated under local law (e.g., active employment would not include a period of garden leave or similar period pursuant to local law). For purposes of this Agreement, Retirement means, (A) with respect to an employee who is not an elected officer of the Company on the Termination Date, the termination of employment after the attainment of age 55 with at least five (5) or more years of continuous service and (B) with respect to an employee who is an elected officer of the Company on the Termination Date, termination of employment after attaining age 55 with the consent of the Chief Executive Officer of the Company (or for the Chief Executive Officer, with the consent of the Committee).
(b) Certain Terminations. This Section 3(b) provides for special vesting rules in certain circumstances. For the avoidance of doubt, regardless of when the vesting event occurs, all RSUs and Dividend Equivalent RSUs that vest under this Section 3(b) will be settled in accordance with Section 2(c) on, or no later than ninety (90) days following, the Scheduled Vesting Date; provided, however, that if within two (2) years following a Change in Control the Grantees service with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, then the RSUs and Dividend Equivalent RSUs that vest under this Section 3(b) will be settled on, or no later than thirty (30) days following, the Termination Date.
(i) Prior to the Determination Date. In the event that the Grantee ceases to be employed by the Company or ceases to be a director of the Company due to total and permanent disability, Retirement, divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, in each case prior to the Determination Date, then the award of RSUs will vest on the Termination Date with respect to a number of RSUs equal to the product of (A) the sum of (x) the total number of RSUs and (y) the total number of Dividend Equivalent RSUs that have been credited to the Grantee as of the Termination Date and (B) a fraction, the numerator of which will be the number of days from January 1 of the year in which the Grant Date occurs to the last day of the month in which the Termination Date occurs and the denominator of which will be 365, such product to be rounded down to the nearest whole share, and the remaining RSUs and Dividend Equivalent RSUs will be automatically forfeited by the Grantee as of the Termination Date.
(ii) On or After the Determination Date. In the event that the Grantee ceases to be employed by the Company or ceases to serve as a director of the Company due to total and permanent disability, Retirement, divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, or lay-off, in each case, on or after the Determination Date and on or prior to the Scheduled Vesting Date, then RSUs and the Dividend Equivalent RSUs that have been credited as of the Termination Date will become immediately vested.
(c) Death. In the event of the Grantees death on or prior to the Scheduled Vesting Date, the RSUs and the Dividend Equivalent RSUs that have been credited as of the date of the Grantees death will become immediately vested.
(d) Change in Control. Notwithstanding the foregoing, in the event that within two (2) years following a Change in Control, the Grantees service with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, then the RSUs and the Dividend Equivalent RSUs that have been credited as of the Termination Date will become immediately vested.
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(e) Harm. Notwithstanding anything to the contrary herein, all of the RSUs and Dividend Equivalent RSUs will be automatically forfeited by the Grantee if the Grantee causes Harm (as defined below) to the Company prior to the Settlement Date. For purposes of this Agreement, Harm includes, any actions that adversely affect the Companys financial standing, reputation, or products, or any actions involving personal dishonesty, a felony conviction related to the Company, or any material violation of any confidentiality or non-competition agreement with the Company.
4. Tax Withholding. Regardless of any action the Company or the Grantees actual employer (the Employer) takes with respect to any or all income tax (including federal, state and local taxes), social insurance, payroll tax, payment on account or other tax-related withholding (Tax-Related Items), the Grantee acknowledges that the ultimate liability for all Tax-Related Items legally due by the Grantee is and remains the Grantees responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs and the Dividend Equivalent RSUs, including the grant of the RSUs and crediting of the Dividend Equivalent RSUs, the vesting of the RSUs and Dividend Equivalent RSUs, the settlement of the RSUs and Dividend Equivalent RSUs, and the subsequent sale of any shares acquired at settlement; and (ii) do not commit to structure the terms of the grant or any aspect of the RSUs and Dividend Equivalent RSUs to reduce or eliminate the Grantees liability for Tax-Related Items.
Prior to the issuance of shares pursuant to this award of RSUs, the Grantee shall pay, or make adequate arrangements satisfactory to the Company or to the Employer (in their sole discretion) to satisfy all withholding and payment on account obligations of the Company and/or Employer. In this regard, the Grantee authorizes the Company or the Employer to withhold all applicable Tax-Related Items legally payable by the Grantee from the Grantees wages or other cash compensation payable to the Grantee by the Company or the Employer. Alternatively, or in addition, if permissible under local law, the Company or the Employer may, in their sole discretion, (i) sell or arrange for the sale of shares of Common Stock to be issued on the settlement of the RSUs and/or the Dividend Equivalent RSUs to satisfy the withholding or payment on account obligation, and/or (ii) withhold from the shares to be delivered upon settlement of the RSUs and/or the Dividend Equivalent RSUs the amount of shares necessary to satisfy the minimum withholding amount (or such other rate that will not result in a negative accounting impact). The Grantee shall pay to the Company or to the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of the Grantees receipt of this award, the vesting of the RSUs and the Dividend Equivalent RSUs, or the settlement of the RSUs and the Dividend Equivalent RSUs that cannot be satisfied by the means previously described. The Company may refuse to deliver shares pursuant to the RSUs and the Dividend Equivalent RSUs to the Grantee if the Grantee fails to comply with the Grantees obligation in connection with the Tax-Related Items as described herein. If the Grantee fails to pay or make satisfactory arrangements to satisfy all withholding and payment on account obligations by the Settlement Date, then the RSUs and the Dividend Equivalent RSUs shall be forfeited.
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5. Nature of Grant. In accepting the award of RSUs, the Grantee acknowledges that:
(a) the Plan is discretionary in nature and established voluntarily by the Company and may be modified, amended, suspended or terminated by the Company at any time, as provided in the Plan, and the award of RSUs is at the sole discretion of the Company and does not create any contractual or other right to receive future awards of RSUs, or benefits in lieu of RSUs even if RSUs have been awarded repeatedly in the past;
(b) the RSUs and the Dividend Equivalent RSUs are not part of normal or expected compensation or salary for any purposes, including, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;
(c) nothing in the Plan or in this Agreement will confer upon the Grantee any right to continue in the employ of the Company nor interfere with or restrict in any way the right of the Company, which is hereby expressly reserved, to remove, terminate or discharge the Grantee at any time for any reason whatsoever, with or without cause; and
(d) no claim or entitlement to compensation or damages arises from termination of the RSUs or Dividend Equivalent RSUs, and no claim or entitlement to compensation or damages shall arise from any diminution in value of the RSUs, Dividend Equivalent RSUs, or shares received upon settlement of the RSUs or Dividend Equivalent RSUs resulting from termination of the Grantees employment by the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Grantee irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.
6. Data Privacy. The Grantee hereby explicitly and unambiguously consents to the collection, use, holding and transfer, in electronic or other form, of his or her personal data as described in this document by and among, as applicable, the Employer, and the Parent and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Grantees participation in the Plan.
The Grantee understands that the Company and the Employer may hold certain personal information about the Grantee, including his or her name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantees favor, for the purpose of implementing, administering and managing the Plan (Data). Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantees country or elsewhere and that the recipients country may have different data privacy laws and protections than the Grantees country. The Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources
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representative. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee may elect to deposit any shares acquired upon settlement of the RSUs and Dividend Equivalent RSUs. Data will be held only as long as is necessary to implement, administer and manage the Grantees participation in the Plan. The Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. Refusing or withdrawing his or her consent may affect the Grantees ability to participate in the Plan. For more information on the consequences of a refusal to consent or withdrawal of consent, the Grantee may contact his or her local human resources representative.
7. Miscellaneous.
(a) Modification; Entire Agreement; Waiver. No change, modification or waiver of any provision of this Agreement will be valid unless the same is agreed to in writing by the parties hereto. This Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supercede all prior communications, representations and negotiations in respect thereof. The failure of the Company to enforce at any time any provision of this Agreement will in no way be construed to be a waiver of such provision or of any other provision hereof. The Company reserves the right, however, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally alter or modify the awards to ensure all RSUs, Dividend Equivalent RSUs and the Agreements provided to Grantees are made in such a manner that either qualifies for exemption from or complies with Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A); provided, however, that the Company makes no representations that the RSUs and Dividend Equivalent RSUs will be exempt from or will comply with Section 409A and makes no undertaking to preclude Section 409A from applying to the RSUs and Dividend Equivalent RSUs.
(b) Bound by Plan and Other Related Documents. By accepting the award of RSUs, the Grantee acknowledges that the Grantee has received a copy of the Plan and the General Dynamics Corporate Policy regarding insider trading compliance (the Trading Policy) and has had an opportunity to review the Plan and the Trading Policy and agrees to be bound by all the terms and provisions of the Plan and the Trading Policy.
(c) Successors. The terms of this Agreement will be binding upon and inure to the benefit of the Company, its successors and assigns, and of the beneficiaries, executors, administrators, heirs and successors of the Grantee.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. For purposes of litigating any dispute that arises under this Award or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Virginia, and agree that such litigation shall be conducted exclusively in the courts of Virginia or the federal courts for the Eastern District of Virginia.
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(e) Section 409A Compliance. To the extent applicable, it is intended that the Plan and the Agreement comply with the requirements of Section 409A and any related regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service. Accordingly, to the maximum extent permitted, this Agreement shall be interpreted and administered to be in compliance therewith. Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, Grantee shall not be considered to have terminated employment with the Company for purposes of this Agreement until Grantee would be considered to have incurred a separation from service from the Company within the meaning of Section 409A. For purposes of this Agreement, each amount to be paid or benefit to be provided shall be construed as a separate identified payment for purposes of Section 409A. To the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following Grantees separation from service shall instead be paid on the first business day after the date that is six months following Grantees separation from service (or death, if earlier).
(f) Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of this Agreement, and this Agreement shall be construed and enforced as if such illegal or invalid provision had not been included.
(g) Language. If the Grantee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different that the English version, the English version will control.
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Exhibit 10.4
PERFORMANCE RESTRICTED STOCK UNIT AWARD AGREEMENT
PURSUANT TO THE GENERAL DYNAMICS CORPORATION
2009 EQUITY COMPENSATION PLAN
This Performance Restricted Stock Unit Award Agreement (the Agreement) is entered into as of [DATE], (the Grant Date), by and between General Dynamics Corporation (the Company) and [NAME] (the Grantee).
WHEREAS, the Company sponsors the General Dynamics Corporation 2009 Equity Compensation Plan, as amended April 23, 2009 (the Plan) and pursuant to Section 7 of the Plan the Company may grant performance-based restricted stock units (Performance RSUs); and
WHEREAS, the Company desires to grant to the Grantee an award of Performance RSUs.
NOW, THEREFORE, in consideration of the recitals and the mutual agreements herein contained, the parties hereto agree as follows:
1. Number of Performance RSUs. The Grantee is hereby granted [NUMBER] Performance RSUs (the Target Performance RSUs). Each Performance RSU represents an unfunded, unsecured promise by the Company to deliver one share of the Companys common stock (Common Stock), subject to certain restrictions, terms and conditions. The number of shares of Common Stock actually required to be delivered to the Grantee (the Earned Performance RSUs) may vary from the number represented by the Target Performance RSUs, based on performance as described in Section 2(b) hereof.
2. Terms of Performance RSUs. The Performance RSUs will be subject to the following terms, conditions and restrictions:
(a) No Shareholder Rights. The grant of Performance RSUs does not entitle the Grantee to any rights of a shareholder of Common Stock, including dividends or voting rights.
(b) Performance Feature. The number of Earned Performance RSUs will range from 0% to 200% of the number of Target Performance RSUs, as determined by the extent to which the Performance Goals set forth on Schedule A to this Agreement are achieved in accordance with the formula described on Schedule A; provided that the Committee may, in its sole and absolute discretion, reduce the number of Earned Performance RSUs, based on such factors as the Committee may deem relevant.
(c) Performance Period and Vesting. Attainment of the Performance Goals shall be measured over [INSERT CALENDAR YEAR IN WHICH THE GRANT DATE OCCURS] (the Performance Period), and the number of Earned Performance RSUs shall be fixed as of the end of the Performance Period. Except as may otherwise be provided in Section 3 below, the Earned Performance RSUs and the Total Dividend Equivalent RSUs (as defined below) will vest on the first day of January on which the New York Stock Exchange is open for business of the fourth calendar year following the calendar year in which the Grant Date occurs (the Scheduled Vesting Date) but only if the Grantees Termination Date (as defined below) has not occurred, and does not occur, prior to or on the Scheduled Vesting Date.
(d) Settlement of Awards. Settlement of vested Earned Performance RSUs and Total Dividend Equivalent RSUs shall occur on, or no later than ninety (90) days following, the Scheduled Vesting Date; provided, however, that if the Grantees employment with the Company and its affiliates is terminated within two (2) years following a Change in Control (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, then settlement of vested Earned Performance RSUs and Total Dividend Equivalent RSUs shall occur within two and one half (2.5) months after the January 1 following the Termination Date (as defined below). (The actual date of settlement is hereinafter referred to as the Settlement Date). The Company, in its sole discretion, may settle the vested Performance RSUs and Dividend Equivalent RSUs by either (i) issuing to the Grantee or the Grantees personal representative a stock certificate representing one share of Common Stock for each Earned Performance RSU that has vested and one share of Common Stock for each Dividend Equivalent RSU that has vested or (ii) depositing in such Grantees or the Grantees personal representatives brokerage account via electronic transfer one share of Common Stock for each Earned Performance RSU that has vested and one share of Common Stock for each Dividend Equivalent RSU that has vested.
(e) Dividend Equivalents. Dividend equivalents will accrue on the Performance RSUs and will be notionally credited in the form of additional Performance RSUs (Dividend Equivalent RSUs) to the Grantees bookkeeping account. During the Performance Period, dividend equivalents will accrue on the Target Performance RSUs and on the Dividend Equivalent RSUs outstanding on each dividend equivalent determination date. At the end of the Performance Period the number of outstanding Dividend Equivalent RSUs will be adjusted to reflect the attainment of the Performance Goals in the same manner as the Target Performance RSUs (such adjusted number, the Earned Dividend Equivalent RSUs). During the period beginning on the day after the Performance Period ends and ending on the Scheduled Vesting Date (the Service Vesting Period), Dividened Equivalent RSUs will accrue on the Earned Performance RSUs and on the Earned Dividend Equivalent RSUs (the Earned Dividend Equivalent RSUs together with any additional Dividend Equivalent RSUs credited thereon and credited on the Earned Performance RSUs during the Service Vesting Period being referred to herein as the Total Dividend Equivalent RSUs). The Company will round down to the nearest whole share in settling any Dividend Equivalent RSUs and no fractional shares will be issued. Dividend Equivalent RSUs will in all cases be subject to the same terms and conditions, including but not limited to those related to vesting, transferability, and payment, that apply to the Performance RSUs.
(f) Transfer Restrictions. Neither the Performance RSUs, the Dividend Equivalent RSUs, nor any interest therein may be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of by the Grantee, except by will or the laws of descent and distribution, and any such purported sale, assignment, transfer, pledge, hypothecation or other disposition shall be void and unenforceable against the Company.
(g) Incorporation of Plan by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise expressly set forth herein, this
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Agreement will be construed in accordance with the provisions of the Plan and any capitalized terms not otherwise defined in this Agreement will have the definitions set forth in the Plan. The Committee will have final authority to interpret and construe the Plan and this Agreement and to make any and all determinations under them, and its decisions will be binding and conclusive upon the Grantee and the Grantees legal representative in respect of any questions arising under the Plan or this Agreement. If there exists any inconsistency between the terms of this Agreement and the Plan, the terms contained in the Plan will govern. If there exists any inconsistency between the terms of the Performance RSUs and Dividend Equivalent RSUs as provided for herein (including terms relating to the number of Performance RSUs or Dividend Equivalent RSUs) and the terms as indicated in the records maintained by Company, the terms as indicated in the records of the Company will govern.
3. Termination of Employment or Service as a Director.
(a) General. In the event that (i) the Grantee ceases to be employed by the Company or ceases to be a director of the Company for any reason (the date of such cessation, the Termination Date) other than due to death, total and permanent disability, or, in the case of Grantees who are employed by the Company, Retirement (as defined below), divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, or lay-off, on or prior to the Scheduled Vesting Date or (ii) the Grantee ceases to be employed by the Company on account of lay-off prior to the last day of the Performance Period, the Performance RSUs and any Dividend Equivalent RSUs credited as of the Termination Date will be automatically forfeited by the Grantee as of the Termination Date. For purposes of this Agreement, the Termination Date will in all cases without exception (notwithstanding, for example, any failure under local labor laws) be deemed to occur as of the date that the Grantee is no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of garden leave or similar period pursuant to local law). For purposes of this Agreement, Retirement means, (A) with respect to an employee who is not an elected officer of the Company on the Termination Date, the termination of employment after the attainment of age 55 with at least five (5) or more years of continuous service and (B) with respect to an employee who is an elected officer of the Company on the Termination Date, termination of employment after attaining age 55 with the consent of the Chief Executive Officer of the Company (or for the the Chief Executive Officer, with the consent of the Committee).
(b) Certain Terminations. This Section 3(b) provides for special vesting rules in certain circumstances. For the avoidance of doubt, with respect to each such circumstance, without regard to when the vesting event (i.e the Termination Date or the Grantees death) occurs in relation to the Performance Period, the number of Performance RSUs and Dividend Equivalents that vest under this Section 3(b) will be based on the number of Earned Performance RSUs and the number of Earned Dividend Equivalents, each of which is determined based on the provisions of Sections 2(b) and 2(e). In addition, regardless of when the vesting event occurs, all Performance RSUs and Dividend Equivalents that vest under this Section 3(b) will be settled in accordance with Section 2(d) on, or no later than ninety (90) days following, the Scheduled Vesting Date; provided, however, that if the Grantees employment with the Company and its affiliates is terminated within two (2) years following a Change in Control (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, then the Performance RSUs and Dividend Equivalents that vest under this Section 3(b) will be settled within two and one half (2.5) months after the January 1 following the Termination Date.
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(i) Prior to the Last Day of the Performance Period. In the event that the Grantee ceases to be employed by the Company due to total and permanent disability, Retirement, divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated or ceases to be a director of the Company due to total and permanent disability, in each case prior to the last day of the Performance Period, then the award of Performance RSUs will vest on the Termination Date with respect to a number of Performance RSUs equal to the product of (A) the sum of (x) the total number of Earned Performance RSUs and (y) the total number of Earned Dividend Equivalent RSUs and (B) a fraction, the numerator of which will be the number of days from January 1 of the year in which the Grant Date occurs to the last day of the month in which the Termination Date occurs and the denominator of which will be 365, such product to be rounded down to the nearest whole share, and the remaining Earned Performance RSUs and Earned Dividend Equivalent RSUs will be automatically forfeited by the Grantee as of the Termination Date.
(ii) On or After the Last Day of the Performance Period. In the event that the Grantee ceases to be employed by the Company due to total and permanent disability, Retirement, divestiture or discontinued operation of a Subsidiary or division with which the Grantee was associated, or lay-off, or ceases to be a director of the Company due to total and permanent disability, in each case on or after the last day of the Performance Period and on or prior to the Scheduled Vesting Date, then the Earned Performance RSUs and the Total Dividend Equivalent RSUs that have been credited as of the Termination Date will become immediately vested.
(iii) Death. In the event of the Grantees death on or prior to the Scheduled Vesting Date, the Earned Performance RSUs and the Total Dividend Equivalent RSUs that have been credited as of the date of the Grantees death will become immediately vested.
(iv) Change in Control. Notwithstanding the foregoing, in the event that within two (2) years following a Change in Control, the Grantees employment with the Company and its affiliates is terminated (i) by the Company or any of its affiliates for any reason other than for Cause or (ii) by the Grantee for Good Reason, then the Earned Performance RSUs and the Total Dividend Equivalent RSUs that have been credited as of the Termination Date will become immediately vested.
(c) Harm. Notwithstanding anything to the contrary herein, all of the Performance RSUs and Dividend Equivalent RSUs will be automatically forfeited by the Grantee if the Grantee causes Harm (as defined below) to the Company prior to the Settlement Date. For purposes of this Agreement, Harm includes, any actions that adversely affect the Companys financial standing, reputation, or products, or any actions involving personal dishonesty, a felony conviction related to the Company, or any material violation of any confidentiality or non-competition agreement with the Company.
4. Tax Withholding. Regardless of any action the Company or the Grantees actual employer (the Employer) takes with respect to any or all income tax (including federal,
4
state and local taxes), social insurance, payroll tax, payment on account or other tax-related withholding (Tax-Related Items), the Grantee acknowledges that the ultimate liability for all Tax-Related Items legally due by the Grantee is and remains the Grantees responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Performance RSUs and the Dividend Equivalent RSUs, including the grant of the Performance RSUs and crediting of the Dividend Equivalent RSUs, the vesting of the Performance RSUs and Dividend Equivalent RSUs, the settlement of the Performance RSUs and Dividend Equivalent RSUs, and the subsequent sale of any shares acquired at settlement; and (ii) do not commit to structure the terms of the grant or any aspect of the Performance RSUs and Dividend Equivalent RSUs to reduce or eliminate the Grantees liability for Tax-Related Items.
Prior to the issuance of shares pursuant to this award of Performance RSUs, the Grantee shall pay, or make adequate arrangements satisfactory to the Company or to the Employer (in their sole discretion) to satisfy all withholding and payment on account obligations of the Company and/or Employer. In this regard, the Grantee authorizes the Company or the Employer to withhold all applicable Tax-Related Items legally payable by the Grantee from the Grantees wages or other cash compensation payable to the Grantee by the Company or the Employer. Alternatively, or in addition, if permissible under local law, the Company or the Employer may, in their sole discretion, (i) sell or arrange for the sale of shares of Common Stock to be issued on the settlement of the Performance RSUs and/or the Dividend Equivalent RSUs to satisfy the withholding or payment on account obligation, and/or (ii) withhold from the shares to be delivered upon settlement of the Performance RSUs and/or the Dividend Equivalent RSUs the amount of shares necessary to satisfy the minimum withholding amount (or such other rate that will not result in a negative accounting impact). The Grantee shall pay to the Company or to the Employer any amount of Tax-Related Items that the Company or the Employer may be required to withhold as a result of the Grantees receipt of this award, the vesting of the Performance RSUs and the Dividend Equivalent RSUs, or the settlement of the Performance RSUs and the Dividend Equivalent RSUs that cannot be satisfied by the means previously described. The Company may refuse to deliver shares pursuant to the Performance RSUs and the Dividened Equivalent RSUs to the Grantee if the Grantee fails to comply with the Grantees obligation in connection with the Tax-Related Items as described herein. If the Grantee fails to pay or make satisfactory arrangements to satisfy all withholding and payment on account obligations by the Settlement Date, then the Performance RSUs and the Dividend Equivalent RSUs shall be forfeited.
5. Nature of Grant. In accepting the award of Performance RSUs, the Grantee acknowledges that:
(a) the Plan is discretionary in nature and established voluntarily by the Company and may be modified, amended, suspended or terminated by the Company at any time, as provided in the Plan, and the award of Performance RSUs is at the sole discretion of the Company and does not create any contractual or other right to receive future awards of Performance RSUs, or benefits in lieu of Performance RSUs even if Performance RSUs have been awarded repeatedly in the past;
(b) the award of Performance RSUs is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to the Company or to the Employer, and the Performance RSUs are outside the scope of the Grantees employment contract, if any;
5
(c) the Performance RSUs and the Dividend Equivalent RSUs are not part of normal or expected compensation or salary for any purposes, including, calculation of any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;
(d) neither the award of Performance RSUs nor any provision of this Agreement nor the Plan confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of the Company, the Performance RSUs shall not be interpreted to form an employment contract or relationship with the Company; and
(e) no claim or entitlement to compensation or damages arises from termination of the Performance RSUs or Dividend Equivalent RSUs, and no claim or entitlement to compensation or damages shall arise from any diminution in value of the Performance RSUs, Dividend Equivalent RSUs, or shares received upon settlement of the Performance RSUs or Dividend Equivalent RSUs resulting from termination of the Grantees employment by the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Grantee irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Grantee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.
6. Data Privacy. The Grantee hereby explicitly and unambiguously consents to the collection, holding, use and transfer, in electronic or other form, of his or her personal data as described in this document by and among, as applicable, the Employer, and the Parent and its Subsidiaries for the exclusive purpose of implementing, administering and managing the Grantees participation in the Plan.
The Grantee understands that the Company and the Employer may hold certain personal information about the Grantee, including his or her name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantees favor, for the purpose of implementing, administering and managing the Plan (Data). Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Grantees country or elsewhere and that the recipients country may have different data privacy laws and protections than the Grantees country. The Grantee may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. The Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the sole purpose of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee may elect to deposit any shares acquired upon settlement of the Performance RSUs and Dividend Equivalent RSUs. Data will be
6
held only as long as is necessary to implement, administer and manage the Grantees participation in the Plan. The Grantee may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. Refusing or withdrawing his or her consent may affect the Grantees ability to participate in the Plan. For more information on the consequences of a refusal to consent or withdrawal of consent, the Grantee may contact his or her local human resources representative.
7. Miscellaneous.
(a) Modification; Entire Agreement; Waiver. No change or modification to any provision of this Agreement will be valid unless the same is agreed to in writing by the parties hereto; provided, however, that the Committee may unilaterally waive any condition set forth in this Agreement at any time in its sole discretion. This Agreement and the Plan contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supercede all prior communications, representations and negotiations in respect thereof. The failure of the Company to enforce at any time any provision of this Agreement will in no way be construed to be a waiver of such provision or of any other provision hereof. The Company reserves the right, however, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally alter or modify the awards to ensure all Performance RSUs, Dividend Equivalent RSUs and the Agreements provided to Grantees are made in such a manner that either qualifies for exemption from or complies with Section 409A (Section 409A) of the Internal Revenue Code of 1986, as amended; provided, however that the Company makes no representations that the Performance RSUs and Dividend Equivalent RSUs will be exempt from or will comply with Section 409A and makes no undertaking to preclude Section 409A from applying to the Performance RSUs and Dividend Equivalent RSUs.
(b) Bound by Plan and Other Related Documents. By accepting the award of Performance RSUs, the Grantee acknowledges that the Grantee has received a copy of the Plan and General Dynamics Corporate Policy regarding insider trading compliance (the Trading Policy) and has had an opportunity to review the Plan and the Trading Policy and agrees to be bound by all the terms and provisions of the Plan and the Trading Policy.
(c) Successors. The terms of this Agreement will be binding upon and inure to the benefit of the Company, its successors and assigns, and of the beneficiaries, executors, administrators, heirs and successors of the Grantee.
(d) Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. For purposes of litigating any dispute that arises under this Award or this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Virginia, and agree that such litigation shall be conducted exclusively in the courts of Virginia or the federal courts for the Eastern District of Virginia.
(e) Section 409A Compliance. To the extent applicable, it is intended that the Plan and the Agreement comply with the requirements of Section 409A and any related
7
regulations or other guidance promulgated with respect to such Section by the U.S. Department of the Treasury or the Internal Revenue Service. Accordingly, to the maximum extent permitted, this Agreement shall be interpreted and administered to be in compliance therewith. Notwithstanding anything contained herein to the contrary, to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, Grantee shall not be considered to have terminated employment with the Company for purposes of this Agreement until Grantee would be considered to have incurred a separation from service from the Company within the meaning of Section 409A. For purposes of this Agreement, each amount to be paid or benefit to be provided shall be construed as a separate identified payment for purposes of Section 409A. To the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following Grantees separation from service shall instead be paid on the first business day after the date that is six months following Grantees separation from service (or death, if earlier).
(f) Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of this Agreement, and this Agreement shall be construed and enforced as if such illegal or invalid provision had not been included.
(g) Language. If the Grantee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different that the English version, the English version will control.
8
Exhibit 31.1
CERTIFICATION BY CEO PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jay L. Johnson, certify that:
1) | I have reviewed this quarterly report on Form 10-Q of General Dynamics Corporation; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ Jay L. Johnson |
Jay L. Johnson Chairman and Chief Executive Officer |
May 1, 2012
Exhibit 31.2
CERTIFICATION BY CFO PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, L. Hugh Redd, certify that:
1) | I have reviewed this quarterly report on Form 10-Q of General Dynamics Corporation; |
2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
1
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ L. Hugh Redd |
L. Hugh Redd Senior Vice President and Chief Financial Officer |
May 1, 2012
2
Exhibit 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
In connection with the quarterly report of General Dynamics Corporation (the Company) on Form 10-Q for the quarter ended April 1, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Jay L. Johnson, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Jay L. Johnson |
Jay L. Johnson Chairman and Chief Executive Officer |
May 1, 2012
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION BY CEO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of General Dynamics Corporation (the Company) on Form 10-Q for the quarter ended April 1, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, L. Hugh Redd, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ L. Hugh Redd |
L. Hugh Redd Senior Vice President and Chief Financial Officer |
May 1, 2012
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Acquisitions, Intangible Assets And Goodwill (Schedule Of Annual Amortization Expense Over The Next Five Years) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended |
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Apr. 01, 2012
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Acquisitions, Intangible Assets And Goodwill [Abstract] | |
2013 | $ 183 |
2014 | 162 |
2015 | 156 |
2016 | 127 |
2017 | $ 114 |
Business Group Information (Summary Of Financial Information For Each Of Our Business Groups) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |||||
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Apr. 01, 2012
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Apr. 03, 2011
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Business Group Information [Line Items] | ||||||
Revenues | $ 7,579 | $ 7,798 | ||||
Operating Earnings | 860 | 929 | ||||
Aerospace [Member]
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||||||
Business Group Information [Line Items] | ||||||
Revenues | 1,623 | 1,353 | ||||
Operating Earnings | 271 | 230 | ||||
Combat Systems [Member]
|
||||||
Business Group Information [Line Items] | ||||||
Revenues | 1,911 | 1,955 | ||||
Operating Earnings | 203 | 277 | ||||
Marine Systems [Member]
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Business Group Information [Line Items] | ||||||
Revenues | 1,605 | 1,676 | ||||
Operating Earnings | 185 | 167 | ||||
Information Systems And Technology [Member]
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Business Group Information [Line Items] | ||||||
Revenues | 2,440 | 2,814 | ||||
Operating Earnings | 218 | 276 | ||||
Corporate [Member]
|
||||||
Business Group Information [Line Items] | ||||||
Operating Earnings | $ (17) | [1] | $ (21) | [1] | ||
|
Income Taxes (Net Deferred Tax Asset (Liability)) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
---|---|---|
Apr. 01, 2012
|
Dec. 31, 2011
|
|
Income Taxes [Abstract] | ||
Current deferred tax asset | $ 163 | $ 269 |
Current deferred tax liability | (95) | (131) |
Noncurrent deferred tax asset | 358 | 310 |
Noncurrent deferred tax liability | (201) | (170) |
Net deferred tax asset | $ 225 | $ 278 |
Possible chance of tax position sustained, percentage | 50.00% |
Debt (Schedule Of Debt) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |
---|---|---|
Apr. 01, 2012
|
Dec. 31, 2011
|
|
Debt Instrument [Line Items] | ||
Total debt | $ 3,908 | $ 3,930 |
Less current portion | 3 | 23 |
Long-term debt | 3,905 | 3,907 |
Fixed-Rate Notes Due May 2013 [Member]
|
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Debt Instrument [Line Items] | ||
Debt instrument, due date | May 2013 | |
Total debt | 1,000 | 1,000 |
Interest Rate | 4.25% | |
Fixed-Rate Notes Due February 2014 [Member]
|
||
Debt Instrument [Line Items] | ||
Debt instrument, due date | February 2014 | |
Total debt | 998 | 998 |
Interest Rate | 5.25% | |
Fixed-Rate Notes Due January 2015 [Member]
|
||
Debt Instrument [Line Items] | ||
Debt instrument, due date | January 2015 | |
Total debt | 499 | 499 |
Interest Rate | 1.375% | |
Fixed-Rate Notes Due August 2015 [Member]
|
||
Debt Instrument [Line Items] | ||
Debt instrument, due date | August 2015 | |
Total debt | 400 | 400 |
Interest Rate | 5.375% | |
Fixed-Rate Notes Due July 2016 [Member]
|
||
Debt Instrument [Line Items] | ||
Debt instrument, due date | July 2016 | |
Total debt | 499 | 499 |
Interest Rate | 2.25% | |
Fixed-Rate Notes Due July 2021 [Member]
|
||
Debt Instrument [Line Items] | ||
Debt instrument, due date | July 2021 | |
Total debt | 499 | 499 |
Interest Rate | 3.875% | |
Other [Member]
|
||
Debt Instrument [Line Items] | ||
Total debt | $ 13 | $ 35 |
Interest Rate | Various |
Business Group Information (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Apr. 01, 2012
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Business Group Information [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary Of Financial Information For Each Of Our Business Groups |
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Contracts In Process (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Apr. 01, 2012
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Contracts In Process [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule Of Contracts In Process |
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Derivative Instruments And Hedging Activities (Derivative Financial Instruments At Fair Value) (Details) (USD $)
In Millions, unless otherwise specified |
Apr. 01, 2012
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Dec. 31, 2011
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Derivative Instruments And Hedging Activities [Line Items] | ||
Total | $ 65 | $ 34 |
Designated As Hedging Instrument [Member] | Derivative Assets Included Other Current Assets [Member]
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Derivative Instruments And Hedging Activities [Line Items] | ||
Derivative assets | 68 | 64 |
Designated As Hedging Instrument [Member] | Derivative Liabilities Included Other Current Liabilities [Member]
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Derivative Instruments And Hedging Activities [Line Items] | ||
Derivative liabilities | (23) | (33) |
Not Designated As Hedging Instrument [Member] | Derivative Assets Included Other Current Assets [Member]
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Derivative Instruments And Hedging Activities [Line Items] | ||
Derivative assets | 32 | 20 |
Not Designated As Hedging Instrument [Member] | Derivative Liabilities Included Other Current Liabilities [Member]
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Derivative Instruments And Hedging Activities [Line Items] | ||
Derivative liabilities | $ (12) | $ (17) |
Fair Value Of Financial Instruments (Schedule Of Carrying And Fair Values Of Other Financial Assets And Liabilities) (Details) (USD $)
In Millions, unless otherwise specified |
Apr. 01, 2012
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Dec. 31, 2011
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Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||||||||
Long-term debt, including current portion | $ (3,908) | $ (3,930) | ||||||
Carrying Value [Member]
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Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||||||||
Available-for-sale | 70 | [1] | 70 | [1] | ||||
Held-to-maturity | 299 | [1] | 178 | [1] | ||||
Other investments | 148 | [1] | 145 | [1] | ||||
Derivatives | 65 | [1] | 34 | [1] | ||||
Long-term debt, including current portion | (3,908) | [1] | (3,930) | [1] | ||||
Fair Value [Member]
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Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||||||||
Available-for-sale | 70 | [1] | 70 | [1] | ||||
Held-to-maturity | 299 | [1] | 175 | [1] | ||||
Other investments | 148 | [1] | 145 | [1] | ||||
Derivatives | 65 | [1] | 34 | [1] | ||||
Long-term debt, including current portion | (4,153) | [1] | (4,199) | [1] | ||||
Quoted Prices In Active Markets For Identical Assets (Level 1) [Member]
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Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||||||||
Available-for-sale | 14 | [1] | 8 | [1] | ||||
Other investments | 86 | [1] | 89 | [1] | ||||
Significant Other Observable Inputs (Level 2) [Member]
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Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||||||||
Available-for-sale | 56 | [1],[2] | 62 | [1],[2] | ||||
Held-to-maturity | 299 | [1],[2] | 175 | [1],[2] | ||||
Other investments | 62 | [1],[2] | 56 | [1],[2] | ||||
Derivatives | 65 | [1],[2] | 34 | [1],[2] | ||||
Long-term debt, including current portion | $ (4,153) | [1],[2] | $ (4,199) | [1],[2] | ||||
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Acquisitions, Intangible Assets And Goodwill (Schedule Of Intangible Assets) (Details) (USD $)
In Millions, unless otherwise specified |
Apr. 01, 2012
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Dec. 31, 2011
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Finite-Lived Intangible Assets [Line Items] | ||||||
Gross Carrying Amount | $ 3,246 | $ 3,219 | ||||
Accumulated Amortization | (1,463) | (1,406) | ||||
Net Carrying Amount | 1,783 | 1,813 | ||||
Contract And Program Intangible Assets [Member]
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Finite-Lived Intangible Assets [Line Items] | ||||||
Gross Carrying Amount | 2,401 | [1] | 2,393 | [1] | ||
Accumulated Amortization | (1,105) | [1] | (1,060) | [1] | ||
Net Carrying Amount | 1,296 | [1] | 1,333 | [1] | ||
Trade Names And Trademarks [Member]
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Finite-Lived Intangible Assets [Line Items] | ||||||
Gross Carrying Amount | 495 | 477 | ||||
Accumulated Amortization | (77) | (70) | ||||
Net Carrying Amount | 418 | 407 | ||||
Technology And Software [Member]
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Finite-Lived Intangible Assets [Line Items] | ||||||
Gross Carrying Amount | 176 | 175 | ||||
Accumulated Amortization | (115) | (110) | ||||
Net Carrying Amount | 61 | 65 | ||||
Other Intangible Assets [Member]
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Finite-Lived Intangible Assets [Line Items] | ||||||
Gross Carrying Amount | 174 | 174 | ||||
Accumulated Amortization | (166) | (166) | ||||
Net Carrying Amount | $ 8 | $ 8 | ||||
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Commitments And Contingencies (Schedule Of Changes In Carrying Amount Of Warranty Liabilities) (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | |||||
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Apr. 01, 2012
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Apr. 03, 2011
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Commitments And Contingencies [Abstract] | ||||||
Beginning balance | $ 293 | $ 260 | ||||
Warranty expense | 19 | 12 | ||||
Payments | (15) | (13) | ||||
Adjustments | (5) | [1] | (1) | [1] | ||
Ending balance | $ 292 | $ 258 | ||||
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Other Liabilities (Summary Of Significant Other Liabilities By Balance Sheet Caption) (Details) (USD $)
In Millions, unless otherwise specified |
Apr. 01, 2012
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Dec. 31, 2011
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Other Liabilities [Abstract] | ||||||||
Salaries and wages | $ 679 | $ 845 | ||||||
Workers' compensation | 565 | 575 | ||||||
Retirement benefits | 282 | 275 | ||||||
Federal income tax payable | 214 | 46 | ||||||
Deferred income taxes | 95 | 131 | ||||||
Other | 1,307 | [1] | 1,344 | [1] | ||||
Total other current liabilities | 3,142 | 3,216 | ||||||
Retirement benefits | 4,677 | 4,627 | ||||||
Customer deposits on commercial contracts | 1,049 | 1,132 | ||||||
Deferred income taxes | 201 | 170 | ||||||
Other | 670 | [2] | 670 | [2] | ||||
Total other liabilities | $ 6,597 | $ 6,599 | ||||||
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Fair Value Of Financial Instruments
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Apr. 01, 2012
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Fair Value Of Financial Instruments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Of Financial Instruments | D. FAIR VALUE OF FINANCIAL INSTRUMENTS Our financial instruments include cash and equivalents, marketable securities and other investments; accounts receivable and accounts payable; short- and long-term debt; and derivative financial instruments. We did not have any significant non-financial assets or liabilities measured at fair value on December 31, 2011, or April 1, 2012. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
The carrying values of cash and equivalents, accounts receivable and payable, and short-term debt (commercial paper) on the Consolidated Balance Sheets approximate their fair value. The following tables present the fair values of our other financial assets and liabilities on December 31, 2011, and April 1, 2012, and the basis for determining their fair values:
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