This document is General Dynamics' annual report for 2007. It discusses the company's strong financial performance in 2007, with record sales, earnings, cash flow, orders, and backlog. Specifically, net sales increased 13% to $27.24 billion. Earnings from continuing operations grew 21% to $2.08 billion. Cash from continuing operations was $2.95 billion, up 37%. The annual report provides an overview of each of General Dynamics' business segments and their performance in 2007, noting growth across Aerospace, Combat Systems, and Marine Systems.
2. GDGDG
GD
DD
D2007 Financial Highlights
Letter to Shareholders
Company Overview
Aerospace
Combat Systems
Marine Systems
Information Systems and Technology
Annual Report on Form 10-K
Directors and Officers
Corporate Information
1
3
6
8
10
12
14
inside back cover
inside back cover
Contents
3. D
(Dollars in millions, except per share and employee amounts) 2 0 0 7 2 0 0 6 2 0 0 5
This Annual Report contains forward-looking statements that are
based on management’s expectations, estimates, projections
and assumptions. Words such as “expects,” “anticipates,”
“plans,” “believes,” “scheduled,” “estimates” and variations of
these words and similar expressions are intended to identify
forward-looking statements. These include but are not limited to
projections of revenues, earnings, segment performance, cash
flows, contract awards, aircraft production, deliveries and back-
log stability. Forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended. These statements are not
guarantees of future performance and involve certain risks and
uncertainties that are difficult to predict. Therefore, actual future
results and trends may differ materially from what is forecast in
forward-looking statements due to a variety of factors, including,
without limitation, general U.S. and international political and
economic conditions; changing priorities in the U.S. govern-
ment’s defense budget (including the outcome of supplemental
defense spending measures; and changes in priorities in
response to terrorist threats, continuing operations in Afghanistan
and Iraq, and improved homeland security); termination or
restructuring of government contracts due to unilateral govern-
ment 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 recov-
ery 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 company’s behalf are qualified by the cautionary
statements in this section. The company does 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.
SUMMARYSUMMARY OFOF OPERATIONSOPERATIONS
Net Sales $ 27,240 $ 24,063 $ 20,975
Operating Earnings 3,113 2,625 2,179
Operating Margin 11.4% 10.9% 10.4%
Earnings from Continuing Operations 2,080 1,710 1,448
Return on Sales (a) 7.6% 7.1% 6.9%
Discontinued Operations (8) 146 13
Net Earnings 2,072 1,856 1,461
Diluted Earnings Per Share
Continuing Operations 5.10 4.20 3.58
Discontinued Operations (0.02) 0.36 0.03
Net Earnings 5.08 4.56 3.61
Net Cash Provided by Continuing Operations 2,952 2,156 2,033
Capital Expenditures (474) (334) (262)
Free Cash Flow from Operations (b) 2,478 1,822 1,771
Cash Conversion (c) 119% 107% 122%
Return on Invested Capital (b) 16.9% 15.6% 14.9%
AT YEAR END
Total Backlog $ 46,832 $ 43,667 $ 40,754
Total Assets 25,733 22,376 19,700
Shareholders' Equity 11,768 9,827 8,145
Outstanding Shares of Common Stock 403,979,572 405,792,438 400,363,054
Number of Employees 83,500 81,000 70,900
Sales Per Employee (d) $ 329,400 $ 309,300 $ 300,700
(a) Return on sales is calculated as earnings from continuing operations divided by net sales.
(b) See definitions and reconciliations of non-GAAP financial measures in Management's Discussion and Analysis in this Annual Report.
(c) Cash conversion is calculated as free cash flow from operations divided by earnings from continuing operations.
(d) Sales per employee is calculated as net sales for the past 12 months divided by the average number of employees for the period.
FINANCIALFINANCIAL HIGHLIGHTSHIGHLIGHTS
5. General Dynamics 2007 Annual Report 3
(left to right) Gerard J. DeMuro, Executive Vice President – Information Systems and Technology;
Michael W. Toner, Executive Vice President – Marine Systems; Charles M. Hall, Executive Vice President –
Combat Systems; Nicholas D. Chabraja, Chairman and Chief Executive Officer; Joseph T. Lombardo,
Executive Vice President – Aerospace, and President, Gulfstream Aerospace.
Dear Fellow Shareholder,
Your company enjoyed a terrific 2007. Sales, operating
earnings, net earnings, cash flow from operations,
orders and backlog surpassed any previous year in the
company’s history. The market responded accordingly.
Shareholders received a share price increase of 19.7
percent and a total return of 21.3 percent.
Revenues were $27.2 billion, a 13 percent increase
over 2006. Each of our business groups contributed to
this year’s strong top-line performance, led by 30
percent sales growth at Combat Systems and 17
percent growth at Aerospace.
Operating earnings outpaced sales growth, generating
earnings from continuing operations and fully diluted
earnings per share growth in excess of 21 percent.
Growth in the company’s operating earnings resulted
from significant operating leverage in three of the com-
pany’s four business groups. The company’s sustained
focus on continuous operational improvements has
generated four consecutive years of operating margin
expansion and a total 260-basis-point improvement in
margins during the past five years.
Cash from continuing operations totaled $3 billion for
the year, an increase of 37 percent over 2006. Free
cash flow, defined as net cash provided by operating
activities from continuing operations less capital
expenditures, was $2.5 billion, which represents 119
percent of earnings from continuing operations. As a
result of strong cash generation, the company ended
the year with cash and short-term investments
modestly in excess of our total debt.
■ Aerospace
Gulfstream enjoyed a blockbuster year in 2007.
Revenues grew by $712 million to $4.8 billion.
Operating earnings reached $810 million with 16.8
percent margins. Pricing improvements and manufac-
turing efficiencies combined to generate 120 basis
points of margin improvement.
Robust demand for Gulfstream aircraft continued in
2007. Gulfstream booked orders for 257 aircraft, a 62
percent increase over 2006. Order growth of more
than 30 percent year-over-year in North America was
outpaced by powerful demand across an increasingly
broad global customer base. For the first time in the
company’s history, international orders were more than
50 percent of total orders.
Despite a 22 percent increase in aircraft deliveries in
2007, backlog grew to an historic high of $12.3 billion.
This sizeable backlog now extends the entry-into-
service date of our larger aircraft to 2011-2012. Based
on the strength of this backlog and the group’s proven
ability to increase production efficiently, deliveries will
again increase in 2008.
We remain committed to investing in product develop-
ment at Gulfstream. As part of this commitment, the
company is building additional facilities to enable
Gulfstream to efficiently design, build and service our
next-generation aircraft. Last year we broke ground on
a new manufacturing facility that is now complete. We
also opened the first half of a new service facility,
doubling the Georgia-based capacity of Gulfstream’s
aircraft service business.
Earlier this month, we announced Gulfstream’s
next-generation ultra-large-cabin, ultra-long-range
aircraft, the G650, which will enter service in 2012.
Gulfstream aircraft will continue to set the standard for
innovative business aircraft with the announcement of
yet another product offering later this year.
■ Combat Systems
Combat Systems experienced powerful growth in
sales and operating earnings in 2007. Revenues
increased 30 percent to $4.8 billion, while operating
earnings grew 35 percent to $916 million.
Sales growth was driven largely by demand for the
group’s combat vehicles, particularly M1 Abrams
tanks, Stryker wheeled combat vehicles, Light
Armored Vehicles (LAVs) and Mine-Resistant,
Ambush-Protected (MRAP) vehicles.
Our European business also enjoyed a successful year.
Military vehicle sales in Europe were up over 40 per-
cent, with notable volume increases on the Pandur
and Piranha wheeled-vehicle contracts for several
European governments. Additionally, management
continued to make great strides in the integration of
GD07
Letter to Shareholders
6. our Spanish, Swiss, German and Austrian-based
businesses, significantly improving operating efficiency.
The Combat Systems backlog grew almost 8 percent
in 2007, totaling $12.9 billion at year end. This backlog
contains many of our core programs including $2.8 billion
for the M1 Abrams main battle tank, $1 billion for Stryker,
$2.3 billion for weapons systems, munitions and
detection systems and $1.2 billion for Leopard tanks and
Pizarro infantry fighting vehicles for the Spanish
government.
Looking forward, there are broad-based growth
opportunities in the group’s core markets, including U.S.
military reset, replenishment and modernization and
sales to allied nations.
■ Marine Systems
General Dynamics’ shipyards had a very productive
2007. The group generated better-than-expected
earnings growth of 12 percent, reaching $421 million on
revenue of nearly $5 billion. Operating margins grew 80
basis points to 8.4 percent, driven by improved perform-
ance on several of the group’s key programs, including
the Virginia-class submarine, the Arleigh Burke-class
destroyer and the T-AKE combat-logistics ship.
Marine Systems passed several milestones this year
critical to achieving strong future growth. Working closely
with our Navy customer, we settled the company’s
request for equitable adjustment (REA) on the T-AKE
contract, solidifying our continued work on the program
and enabling our NASSCO shipyard to begin recognizing
profit on T-AKE. NASSCO also began construction on a
$1 billion, nine-ship commercial product-carrier contract.
This new work broadens our customer base and
provides additional opportunities in the U.S.-based
commercial shipbuilding market.
The Navy and the Congress remain committed to
shipbuilding as evidenced by the $13.6 billion
appropriated for the Navy’s ship programs in Fiscal Year
2008. This funding includes the first DDG-1000
destroyer, the 10th Virginia-class submarine and the 10th
T-AKE ship. Notably, the Congress also added money to
accelerate two-per-year submarine production and to
fund advanced procurement for an additional three
T-AKE ships.
Given the group’s order intake during 2008, both already
received and anticipated, I believe that Marine Systems
has the potential to lead the company in sales growth
over the next four years.
■ Information Systems and Technology
Information Systems and Technology revenues this year
totaled $9.6 billion, a 6.6 percent increase over 2006.
Operating earnings grew 5.2 percent and surpassed $1
billion for the first time. Performance initiatives throughout
the group enabled Information Systems and Technology
to achieve margins of 10.7 percent, only a 10 basis-point
decline from 2006, despite my early concerns that
margin compression would be more significant as a result
of the increasing service profile of the group’s portfolio.
The group’s 2007 performance was marked by above-
market growth in our core markets, including 13 percent
growth in our North American tactical communications
business and 10 percent growth in our defense
information technology services business. The group’s
performance is particularly notable in light of several
distinct headwinds for the year, including an expected
decline in the United Kingdom BOWMAN tactical com-
munications program, a sluggish commercial wireless
infrastructure business and a prolonged procurement
pause in our classified intelligence market.
The group received a record-breaking $9.5 billion in
orders this year, illustrative of the continued market
demand for the group’s products and services. At year
end, the group’s backlog totaled $9.6 billion, down
slightly from year-end 2006. This backlog includes $900
million for Warfighter Information Network-Tactical
(WIN-T), $430 million for the Canadian Maritime
Helicopter Project and $300 million for the Intelligence
Information, Command-and-Control, Equipment and
General Dynamics 2007 Annual Report4
0
5
10
15
20
25
$ 30
2003 2004 2005 2006 2007
$ 16.1
$ 18.9
$ 21.0
$ 24.1
$ 27.2
Revenue by Group
(in billions)
Aerospace Combat Marine IS&T
Net Cash Provided by Continuing Operations
(in billions)
0
0.5
1.0
1.5
$ 3.5
2.0
2003 2004 2005 2006 2007
2.5
3.0
$ 1.7
$ 2.0
$ 2.2
$ 1.8
$ 3.0
7. Enhancements (ICE2) program. Reported backlog does
not include approximately $8.7 billion of potential contract
value associated with indefinite delivery, indefinite
quantity awards.
I believe that continued customer demand for our core
market programs and the group’s ability to identify and
win new opportunities position us well for future growth.
■ The Future
We anticipate another year of solid growth in 2008,
supported by a Fiscal Year 2008 defense budget of $480
billion. This budget includes $176 billion in investment
spending for procurement and research and develop-
ment programs, a 10 percent increase over 2007 funding.
The President’s proposed 2009 budget request totals
$515 billion, including $184 billion in investment
spending, an increase of 5 percent from the 2008 level.
These funding accounts provide the majority of the
company’s revenues.
The President has also requested $189 billion in
Fiscal Year 2008 supplemental funding. This funding is
incremental to the base budget and supports the
government’s efforts in the Global War on Terror. The
Congress has already approved $87 billion in 2008
supplemental spending and is likely to consider the
remaining request sometime this year. The Defense
Department has also indicated the need for additional
supplemental funding in Fiscal Year 2009.
We continue to believe that defense spending is driven by
customer requirements and perceived threat. When our
country feels threatened, the government spends on
defense programs. In the years ahead, we expect the
continued uncertainty in our global security environment
to sustain support for the needs of our military services.
Beyond the defense environment, we follow closely the
larger macroeconomic environment. In light of the econ-
omy’s recent uncertainty, we continually review order
activity and backlog strength at Gulfstream. Having
enjoyed seven consecutive quarters of book-to-bill in
excess of one, I believe our Aerospace business remains
well positioned to enjoy continued growth and profitability
over the next several years notwithstanding the apparent
slowdown of the American economy.
■ Capital Deployment
Management remains focused on deploying cash to
create value for our long-term shareholders. In 2007, we
took advantage of market weakness from time to time to
repurchase 6.5 million outstanding shares for a total of
$505 million. Shareholders also received $445 million in
dividend payments last year. Earlier this month, the Board
increased the quarterly dividend for the 11th consecutive
year to $0.35 per share, an increase of nearly 21 percent.
We also continued to invest in our businesses in 2007,
including spending $330 million on four acquisitions and
$474 million on capital investments across the enterprise.
At year end, our strong cash generation leaves us with
the balance sheet strength and flexibility to maximize
shareholder value through further prudent deployment
of capital.
■ In Closing
2008 is shaping up to be another productive year.
Management remains focused on the fundamentals that
have driven our company’s success over the years:
earnings, free cash flow, disciplined capital deployment
and return on invested capital. Our strong balance sheet,
enduring backlog and seasoned management team
position us well for the opportunities that lie ahead.
Nicholas D. Chabraja
Chairman and Chief Executive Officer
March 21, 2008
General Dynamics 2007 Annual Report 5
Backlog
(in billions)
0
10
20
30
40
$ 50
2003 2004 2005 2006 2007
$ 38.8
$ 40.3 $ 40.8
$ 43.7
$ 46.8
Net Earnings
(in billions)
0
0.5
1.0
1.5
2.0
$ 2.5
2003 2004 2005 2006 2007
$ 1.0
$ 1.2
$ 1.5
$ 1.9
$ 2.1
Funded Unfunded
8. General Dynamics 2007 Annual Report6
General Dynamics is a market leader in the aerospace and defense industry,
creating shareholder value by providing products and services designed to
meet the needs of the most demanding customers. With a global employee
base of more than 83,500 workers, the company operates in four segments:
Aerospace, Combat Systems, Marine Systems and Information Systems
and Technology. Across the breadth of its offerings, the company is committed
to fulfilling the mission-critical requirements of its customers: the U.S. and allied
national security, defense and intelligence communities, and select
commercial organizations.
GENERAL DYNAMICS
9. D
G
DD
General Dynamics 2007 Annual Report 7
Information Systems
and Technology
The Information Systems
and Technology group
provides technologies and
service capabilities that
support a wide range of
government and commercial
needs for digital, network-
centric information systems.
The group’s key customers
rely on its offerings to
continuously meet critical
command, control, commu-
nications, computing,
intelligence, surveillance and
reconnaissance (C4ISR)
needs at home and abroad.
Marine Systems
The Marine Systems group
designs, builds and supports
submarines and a variety
of surface ships for the
U.S. Navy and commercial
customers. Among the
sophisticated platforms and
capabilities it delivers are
Virginia-class nuclear-
powered attack submarines;
surface-combatant, auxiliary
and combat-logistics ships;
commercial tankers;
engineering design support;
and overhaul, repair and
lifecycle support services.
Combat Systems
The Combat Systems
group is a world leader
in producing, supporting
and sustaining land and
expeditionary combat
systems for the U.S. military
and its allies. Products
include a full spectrum of
wheeled armored combat
and tactical vehicles,
tracked main battle tanks,
infantry fighting vehicles,
weapons systems, ammuni-
tion and composites, as well
as new combat systems for
the future.
Aerospace
The Aerospace group,
comprising Gulfstream
Aerospace Corporation and
General Dynamics Aviation
Services, has a global
reputation for superior
aircraft design, quality, safety
and reliability; technologically
advanced onboard systems;
and industry-leading, award-
winning product support.
Together these companies
design, manufacture and
service a comprehensive
fleet of advanced business-
jet aircraft.
11. General Dynamics 2007 Annual Report 9
Dummy text while still not meeting our
expectations, the Marine Systems group’s
performance improved significantly in 2004.
Revenues increased 11 percent to $4.7 bil-
lion, while operating income rose 35 percent
to $292 million. Likewise, operating margins
increased to 6.2 percent from 5.1 percent
in 2003. This margin improvement reflects
continued increases in efficiency at Bath Iron
Works, good performance at Electric Boat
and a reduction in charges on a commercial
shipbuilding project at NASSCO.
The group’s funded backlog increased to
almost $10 billion in 2004 from $8.8 billion
in 2003. Total backlog decreased to
$16.8 billion from $18.2 billion – but
improved again as a result of orders received
this January. This backlog represents work-
load across our three shipyards into the next
decade. Despite near-term reductions in the
U.S. Navy’s shipbuilding budget, this backlog
provides us with a stable, long-term source
of revenue. Moreover, as we continue to
move down the learning curve at both Bath
and NASSCO, we anticipate improved per-
formance and profitability against this back-
log.
The Marine group passed several significant
milestones in 2004 with the delivery at
Electric Boat of the last ship in the Seawolf
Class of nuclear-powered attack submarines,
and the delivery of the first ship in the suc-
cessor Virginia Class. In addition, Bath Iron
Works delivered two Arleigh Burke-class
guided missile destroyers and NASSCO deliv-
ered the first of four state-of-the-art double-
hull oil tankers.
D
G
DD
Gulfstream is one of the world’s leading
designers and manufacturers of business-
jet aircraft and, with General Dynamics
Aviation Services, is a leading provider of
business-jet support services. The group’s
diverse aircraft models – with varying
ranges, speeds and cabin dimensions –
are well suited to meet the needs of an
increasingly global base of corporate,
government and private customers.
In 2007, the group demonstrated its
continued commitment to meeting
customers’ needs through a variety of
technology and service enhancements.
In an aviation first, Gulfstream flew an
experimental business jet using synthetic
vision and an enhanced vision system
together, establishing a new standard
for flight safety and technology in
business aviation. The company intro-
duced upgrades to its PlaneView® flight
deck including PlaneConnect®, a wireless
data link that can automatically
transmit service-related information
to reduce the schedule impact of
maintenance procedures, as well as
enhancements to its flight-management
and ground-safety systems. In addition,
Gulfstream doubled its service capacity in
Savannah, Georgia, as part of a facility
growth plan that also includes expanded
manufacturing and research and develop-
ment capabilities.
Aerospace
Gulfstream’s G550 (facing page), the flagship of the Gulfstream fleet, flies higher and faster than any other
aircraft in its class. The new G650 (rendering above), announced in spring 2008, will be produced in
Gulfstream’s new Savannah manufacturing center. The mid-size G150 (above, left) has been well received
since its entry into service in 2006. Distinctive aircraft design (second photo), standard-setting technologies
like the PlaneView® cockpit (third photo) and superior customer service (right) contribute to the popularity of
Aerospace’s products.
13. D
G
DD
General Dynamics 2007 Annual Report 11
Abrams tanks (facing page) will play a vital role in the U.S. Army’s force structure for many years to come.
The Stryker vehicle (mortar variant show in action, above) has also been proven effective in combat since its
first deployment in 2003. The USMC Expeditionary Fighting Vehicle (above, left) is a next-generation combat
vehicle currently under development. Along with machine guns (second photo), ammunition (third photo) and
tactical vehicles (right), these products are representative of Combat Systems’ broad offerings to customers
around the world.
General Dynamics Combat Systems is a
market-leading integrator of tracked and
wheeled combat and tactical vehicle
systems, weapons systems, ammunition
and ordnance, mobile bridge systems,
performance composite products and
chemical, biological and explosive
detection systems.
Among Combat Systems’ accomplish-
ments in 2007 was record production of
Mine-Resistant, Ambush-Protected (MRAP)
vehicles, through joint ventures and
organic capacity, designed to protect U.S.
and allied troops against the threats of
improvised explosive devices. Ongoing
contracts for manufacture, delivery,
upgrade and repair of Stryker infantry
combat vehicles and Abrams main battle
tanks underscored these vehicles’ critical
roles as mainstays of the American
combat force. In addition, customer
support continued for development of
future combat and expeditionary fight-
ing vehicles. The group was also
awarded significant orders for mobile
bridging systems, weapons systems,
rockets and bomb bodies, demonstrating
widespread demand for the breadth of
Combat Systems’ products and capabili-
ties both in the U.S. and abroad.
Combat Systems
15. D
G
DD
General Dynamics 2007 Annual Report 13
Zumwalt-class DDG-1000 destroyers (facing page) draw on lessons learned from the 34 Arleigh Burke
destroyers (above, left) built in Maine. USS Virginia (photo above) is the first of a 30-ship class that the
Navy plans to procure. The Navy’s new T-AKE ships (second photo) use commercial technologies to
improve performance and reduce lifecycle costs. USS Hawaii (third photo), a Virginia-class submarine, was
commissioned in May 2007. The Littoral Combat Ship (right) is a new class of surface combatants.
Marine Systems
General Dynamics Marine Systems
designs, develops, manufactures and
integrates complex maritime platforms
that are essential to the U.S. Navy’s ability
to project power around the world. In
three shipyards, the group produces
state-of-the-art submarines, surface
combatants, supply ships and commercial
product carriers, each capable of meet-
ing demanding mission requirements
today and into the future.
In 2007, Marine Systems delivered three
modern T-AKE combat logistics ships,
launched a third and achieved significant
shipbuilding milestones on three others.
Construction of new Virginia-class
nuclear-powered attack submarines
continued, and significant orders for
maintenance and repair of existing
submarines were received. Shipbuilding
and engineering support of the Navy’s
current class of surface combatant, the
Arleigh Burke guided missile destroyer,
continued at the group’s northernmost
shipyard, as did detail design work on the
next-generation Zumwalt Class (DDG-
1000). In addition, Marine Systems
continued construction of its innovative
new Littoral Combat Ship (LCS), the first
of a new category of small, fast, network-
centric surface combatants designed to
overcome emerging asymmetric threats
around the world.
17. General Dynamics 2007 Annual Report 15
Force-multiplying technologies like the Land Warrior soldier system (facing page) and the USMC Combat
Operations Center (above) deliver enhanced tactical-communications capabilities to deployed forces.
Through high-quality integration services (above, left), direct support to customers (second photo) and new
products including WIN-T’s mobile satellite communications (third photo) and the small, lightweight MR-1
rugged notebook computer (right), General Dynamics continues to expand its relationships with customers.
D
G
DD
Information Systems and Technology
General Dynamics Information Systems
and Technology delivers key digital,
network-centric capabilities to the U.S.
and allied national security, defense and
intelligence communities and select
commercial customers. The group’s
expertise and track record of innovation
span all aspects of the decisive technolo-
gies that enable design, development,
deployment, technology insertion and
support of tactical and strategic mission
systems, information technology (IT) and
mission services, and intelligence
mission systems.
Representative programs include the
Warfighter Information Network-Tactical
(WIN-T), the U.S. Army’s current and future
tactical battlefield broadband communi-
cation system; the U.S. Army Reserve
(USAR) Enterprise Data Center program,
for which the company provides
operations and maintenance, consolida-
tion and enterprise desktop management
services for 55,000 users at 900 sites; and
development of the open-architecture
core mission system for the Littoral
Combat Ship, which will provide greater
mission flexibility while requiring fewer
sailors than current combatant ships.
The group is well positioned to
support growing requirements as
customers extend their reliance on
information technology, systems and
services to achieve their business and
mission objectives.
18. GDGG
GD
DD
General Dynamics 2007 Annual Report16
2007 Financial Highlights
Letter to Shareholders
Company Overview
Aerospace
Combat Systems
Marine Systems
Information Systems and Technology
Annual Report on Form 10-K
Business Overview
Selected Financial Data
Management’s Discussion and Analysis
Consolidated Statement of Earnings
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders’ Equity
Notes to Consolidated Financial Statements
Statement of Financial Responsibility
Report of Independent Registered Public Accounting Firm
Supplementary Data
Directors and Officers
Corporate Information
1
3
18
19
36
37
38
39
40
63
64
65
inside back cover
inside back cover
Contents
19. UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-3671
GENERAL DYNAMICS CORPORATION
Registrant’s telephone number, including area code:
(703) 876-3000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes √ No __
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No √
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes √ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment of this Form 10-K. __
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer √ Accelerated Filer __ Non-Accelerated Filer __ Smaller Reporting Company __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No √
The aggregate market value of the voting common equity held by non-affiliates of the registrant was
$30,234,885,439 as of June 29, 2007 (based on the closing price of the shares on the New York Stock Exchange).
402,225,356 shares of the registrant’s common stock were outstanding at January 27, 2008.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates information from certain portions of the registrant's definitive proxy statement for the 2008 annual meeting of
shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.
Delaware
State or other jurisdiction of
incorporation or organization
2941 Fairview Park Drive, Suite 100,
Falls Church, Virginia
Address of principal executive offices
22042-4513
Zip code
13-1673581
IRS Employer
Identification No.
Name of exchange
on which registered
New York Stock Exchange
Title of each class
Common stock, par value $1 per share
(Exact name of registrant as specified in its charter)
20. INDEX
PART I Page
Item 1. Business 3
Item 1A. Risk Factors 14
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Company’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 35
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 65
Item 9A. Controls and Procedures 65
Item 9B. Other Information 68
PART III
Item 10. Directors, Executive Officers and Corporate Governance 68
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 69
Item 13. Certain Relationships and Related Transactions, and
Director Independence 69
Item 14. Principal Accountant Fees and Services 69
PART IV
Item 15. Exhibits and Financial Statement Schedules 69
Signatures 70
Schedule II – Valuation and Qualifying Accounts 71
Index to Exhibits 71
General Dynamics 2007 Annual Report2
21. PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
General Dynamics offers a broad portfolio of products and services in
business aviation; combat vehicles, weapons systems and munitions;
shipbuilding design and construction; and information systems, tech-
nologies and services. Incorporated in Delaware, the company employs
approximately 83,500 people and has a global presence.
General Dynamics is a company dedicated to consistently delivering
superior shareholder returns. Shareholder value is created by a strategy
that emphasizes excellence in program execution, sustained organic
growth, continuous margin improvement, efficient cash-flow conversion
and disciplined capital deployment. To perpetuate growth, management
is dedicated to identifying the fast currents in the company’s core markets,
seeking opportunities in adjacent markets and broadening the company’s
portfolio to encompass a variety of military, federal government, com-
mercial and international customers.The company deploys capital through
internal investment, acquisitions, dividends and, when appropriate, the
repurchase of company shares on the open market.
In addition to creating shareholder value and delivering the highest
quality products and services, the company’s management fosters a
corporate culture centered on continuous improvement, innovation,
ethical behavior and integrity. This culture is evident in how the company
interacts with shareholders, employees, customers, partners and the
communities in which it operates.
Formed in 1952 through the combination of Electric Boat Company,
Consolidated Vultee (CONVAIR) and other companies, General Dynamics
grew internally and through acquisitions until the early 1990s, when it
sold nearly all of its divisions except Electric Boat and Land Systems.
Beginning in 1995, the company expanded those two core defense
businesses by acquiring additional shipyards and combat vehicle-related
businesses. In 1997, to reach a new, expanding market, General
Dynamics began acquiring companies with expertise in information
technology products and services. In 1999, the company purchased
Gulfstream Aerospace Corporation, a business-jet aircraft and aviation
support-services company. Since 1995, General Dynamics has acquired
and successfully integrated 47 businesses, including four in 2007.
General Dynamics operates through four business groups –
Aerospace, Combat Systems, Marine Systems and Information Systems
and Technology.
AEROSPACE
The Aerospace group designs, manufactures and services a comprehensive
offering of mid-size and large-cabin business-jet aircraft. With nearly
50 years of experience in the aerospace market, the group is noted for:
• superior aircraft design, quality, safety and reliability;
• technologically advanced onboard systems; and
• industry-leading product support.
To address the wide-ranging requirements of corporate, government
and individual customers, the Aerospace group offers a portfolio of six
Gulfstream aircraft across a spectrum of price and performance options.
The varying ranges, speeds and cabin dimensions are well suited to the
diverse needs of an increasingly global customer base.
(Dollars in millions, unless otherwise noted)
General Dynamics 2007 Annual Report 3
2,950 NM WITH 4 PASSENGERS
4,350 NM WITH 8 PASSENGERS
5,800 NM WITH 8 PASSENGERS
3,800 NM WITH 8 PASSENGERS
6,750 NM WITH 8 PASSENGERS LARGE-CABIN, ULTRA-LONG-RANGE
G550
MID-SIZE, HIGH-SPEED
G150
LARGE-CABIN, MID-RANGE
G200
LARGE-CABIN, MID-RANGE
G350
LARGE-CABIN, LONG-RANGE
G450
LARGE-CABIN, ULTRA-LONG-RANGE
G500
3,400 NM WITH 4 PASSENGERS
22. General Dynamics 2007 Annual Report4
For the past several years, the Aerospace group has seen a steady
increase in demand for its products around the world, particularly in
Europe, the Middle East, India and the Asia-Pacific region. Notably, while
experiencing record growth in North American demand, international
orders surpassed North American orders in 2007 for the first time in the
group’s history. Gulfstream also remains a leading provider of aircraft
for government and military service around the world, with aircraft at
work in 34 nations. These government aircraft are used for a variety of
special-mission applications, including head-of-state/executive trans-
portation, aerial reconnaissance, maritime surveillance, weather
research and astronaut training.
To respond to this robust worldwide demand, and to perpetuate that
demand going forward, the group has steadily increased annual aircraft
production in each of the past four years, has invested in innovative
product development and significant facility improvements, and has
enhanced its global service network. Aircraft production increases have
included both large aircraft, assembled at Aerospace’s headquarters in
Savannah, Georgia, and completed at one of four large-cabin completion
facilities; and mid-size aircraft, assembled at a supplier’s facility and com-
pleted in the group’s Texas facilities.To ensure that increases in production
maintain profitability, the Aerospace group works closely with suppliers
and invests in manufacturing productivity and efficiency improvements.
The group continuously invests in research and development (R&D)
over the course of each aircraft’s lifecycle to introduce new products and
first-to-market enhancements that broaden customer choice, improve
aircraft performance and set new standards for customer safety, comfort
and in-flight productivity. The latest Gulfstream to enter service, the mid-
size Gulfstream G150, demonstrates this innovation. The G150 replaced
the G100 model with an entirely new cabin design that incorporates a
wider fuselage to improve passenger comfort. The G150 has been well
received in both North American and international markets since its entry
into service in 2006.
In addition to meeting customers’ demand for the latest in performance,
technology and safety, Gulfstream’s new and upgraded aircraft models are
designed to minimize lifecycle costs while maximizing parts
commonality among the various Gulfstream models. Four of the group’s
aircraft – the Gulfstream G350, G450, G500 and G550 – as well as the
out-of-production GV, share the same pilot-type rating. For multiple-
aircraft fleet operators, this uniformity reduces training and maintenance
costs and enhances safety in the operation of the aircraft.
Current product-enhancement and development efforts include initia-
tives in advanced avionics, flight-control systems, cabin technologies and
enhanced vision systems. In 2007 and early 2008, the Federal Aviation
Administration (FAA) certified two of Gulfstream’s safety-enhancing
products – the second-generation Enhanced Vision System (EVS II) and
the new Synthetic Vision-Primary Flight Display (SV-PFD). EVS II is a
specially designed, forward-looking infrared (FLIR) camera that projects a
real-world infrared image on the pilot's head-up display (HUD), while
Synthetic Vision provides three-dimensional terrain images overlaid onto
the EVS II images. The products work in tandem to provide pilots
with unparalleled situational awareness regardless of weather, terrain or
landing-field conditions.
In March 2006, General Dynamics embarked on a $400, multiyear
facilities project designed to create additional R&D offices, improve the
customer sales and design center, increase aircraft service capacity and
create facilities to build next-generation aircraft in Savannah. Key 2007
developments include:
• the ground breaking in April for a new manufacturing facility, with ini-
tial phase construction scheduled for completion in spring 2008;
• a lease signing in May for expanded R&D facilities;
• the opening in June of a new Sales and Design Center, a unique facility
to help guide customers through the aircraft purchase and interior-
design selection process; and
• the opening in August of Phase One of the new South Service Center,
which more than doubled the indoor capacity of the Savannah service
operation.
In addition to the increased service capacity in Savannah, the
Aerospace group continues to enhance service support capabilities to
address the needs of a growing global fleet of installed aircraft.The group
remains committed to providing high-quality technical support 24 hours
a day for customers in the United States and around the world.The group
is building on its extensive network of service centers, warranty facilities,
field-service representatives and parts inventory locations. In March
2007, the group acquired WECO Aerospace Systems, Inc. (WECO), of
Lincoln, California. WECO is an aviation-component overhaul company
specializing in electronics and flight-instrument services.
Aerospace’s commitment to superior customer service continues to
garner top industry awards for exemplary product service and support.The
group’s unique Airborne Product Support aircraft program, in operation
since 2002, exemplifies this award-winning service.This program provides
a specially modified G100 to move technicians and parts rapidly to
customers when commercial transportation methods would prevent the
timely return to service of customer aircraft.
As a market leader, Gulfstream remains focused on:
• profitably increasing aircraft production to capitalize on increased
global demand;
• driving efficiencies into the aircraft production and service processes;
and
• continuously investing in innovative first-to-market technologies and
products.
23. General Dynamics 2007 Annual Report 5
Net sales for the Aerospace group were 18 percent of the company’s
consolidated net sales in 2007, 17 percent in 2006 and 16 percent in
2005. Net sales by major products and services were as follows:
COMBAT SYSTEMS
The Combat Systems group is a global leader in the design, development,
production, support and enhancement of tracked and wheeled military
vehicles, weapons systems and munitions for the United States and its allies.
The group’s product lines include:
• wheeled armored combat and tactical vehicles;
• tracked main battle tanks and infantry fighting vehicles;
• guns and ammunition-handling systems;
• ammunition and ordnance;
• mobile bridge systems;
• passive, active and reactive armor;
• chemical, biological and explosive detection systems;
• electronic counter-measures; and
• high-performance composite products.
Combat Systems has established a strong foundation of key products
that have become core platforms for customers across the combat
vehicle, armaments and munitions product lines. These long-term
production programs provide the group’s management the opportunity
to pursue continuous process and productivity improvements to
increase customer satisfaction, reduce product lifecycle costs and
improve the group’s financial performance. At the same time, the group
applies its design and engineering expertise to develop product
improvements that advance the utility and performance of these systems,
while identifying and positioning itself for opportunities in emerging and
adjacent markets.
At the heart of Combat Systems’ core programs are the Stryker
wheeled combat vehicle and the Abrams main battle tank. The group is
the sole provider of these vehicles – two of the key ground-force assets
for the group’s primary customer, the U.S. Army. Both of these vehicles
have proven highly effective in operations in Iraq, securing their place in
the Army’s force structure for some time to come.
Combat Systems produces Strykers under a contract awarded in 2001,
with nearly 2,400 units delivered to date and another 425 remaining
through 2009. The Stryker supports numerous missions with 10
variants: infantry carrier, command and control, medical evacuation, fire
support, engineering, anti-tank, mortar carrier, reconnaissance, mobile
gun system (MGS), and nuclear, biological and chemical reconnaissance
vehicle (NBCRV).
Although Combat Systems has not produced new Abrams tanks since
1996, it continues to support the Army’s evolving needs with technological
upgrades, including the System Enhancement Package (SEP) and the Tank
Urban Survivability Kit (TUSK).The SEP-configured tank is a digital platform
with an enhanced command-and-control system, second-generation
thermal sights and improved armor. The TUSK increases the tank’s
utility and crew survivability in modern urban warfare scenarios. In
addition, through an innovative partnership with the Anniston Army
Depot, the group’s Abrams Integrated Management (AIM) program
refurbishes the oldest M1A1 Abrams tanks to a like-new condition.
Complementing these combat-vehicle programs are Combat Systems’
munitions and weapons-system programs. The group holds leading or
sole-source munitions supply positions for products such as:
• the 120mm mortar and the 155mm and 105mm artillery projectile for
the U.S. government;
• conventional bomb structures for the U.S. government;
• all mortar systems and large-caliber requirements for the Canadian
Department of National Defence; and
• military propellant requirements in the North American market.
In addition, Combat Systems has been designated the principal second
source for the U.S. military’s small-caliber ammunition needs.
The acquisition of Canadian corporation SNC-Lavalin Group’s munitions
business in January 2007 enhanced these offerings and expanded
Combat Systems’ international customer profile.
Combat Systems is also a long-standing leader in the field of high-
performance weapons systems. The group manufactures the M2 heavy
machine gun and the MK19 and MK47 grenade launchers, as well as
weapons for most U.S. fighter aircraft, including all high-speed Gatling
guns for fixed-wing aircraft and the Hydra-70 family of rockets.
In addition to supporting these long-term platform and supply
programs, Combat Systems has been active in supporting the United
States’ ongoing operations in Iraq and Afghanistan. Beyond providing
armor kits, ammunition and logistics support for forces deployed over-
seas, the group has identified new technologies to respond to its customers’
evolving requirements. Among these are innovative solutions to detect
current and emerging threats, including chemical, biological and
explosive detection systems, as well as systems to protect U.S. forces
against improvised explosive devices (IEDs).
Year Ended December 31 2007 2006 2005
New aircraft $ 4,081 $ 3,341 $ 2,730
Aircraft services 669 558 484
Pre-owned aircraft 78 217 219
Total Aerospace $ 4,828 $ 4,116 $ 3,433
24. General Dynamics 2007 Annual Report6
To provide U.S. soldiers with improved protection from mines, IEDs
and other threats, Combat Systems has established teaming relation-
ships and has leveraged its available capacity and vehicle-integration
expertise to participate in the Defense Department’s high-priority mine-
resistant, ambush-protected (MRAP) vehicle program. The group offers
two separate vehicles under this program, the RG-31 and the Cougar,
which it produces as part of a joint venture. In total, these vehicles
constituted approximately 3,500 of the nearly 12,000 vehicles awarded
under this program in 2007.
The group is also beginning to see the effects of the high operational
tempo of five years of warfare on U.S. military assets, which will require the
refurbishment of battle-damaged vehicles, the replacement of equipment
that has reached the end of its service life and the replenishment of
ammunition and other supplies for the U.S. armed forces. As the principal
contractor for the maintenance, repair and reset of Abrams tanks and
Stryker vehicles, Combat Systems expects the sustaining and upgrading of
U.S. forces to become an increasing share of its contract mix.
The Combat Systems group is also focused on innovative technologies
and is well positioned to participate in future development programs. For
the U.S. Marine Corps, the group continues the design and testing of the
Expeditionary Fighting Vehicle (EFV), a new expeditionary combat
platform designed to replace the service’s current craft. The EFV has a
breakthrough design that provides sea maneuverability at speeds up to
25 knots and ground mobility equaling that of the Abrams tank. The
company expects the Marine Corps to authorize production of up to 573
vehicles starting in 2012.
Combat Systems is a key team member in the Army’s Future Combat
Systems (FCS) program and leads the system development of the FCS
manned ground vehicle program. Combat Systems is also involved in the
development and production of precision munitions systems, including
the Army’s Guided Multiple-Launch Rocket System (GMLRS) and the
Excalibur artillery system – both currently in use in Iraq and Afghanistan.
In addition, the group is involved in the competition for the Joint Light
Tactical Vehicle (JLTV) program to replace the Army’s fleet of Humvees®
,
as well as the competition for the Future Rapid Effects System (FRES)
in the United Kingdom. Through these and other efforts, the group is
developing new technologies, such as hybrid-electric drive for combat
vehicles, autonomous navigation systems for robotic platforms and
advanced systems for high-speed amphibious applications.
To expand access to new markets and diversify its customer base
beyond the U.S. government, General Dynamics has established a signif-
icant presence internationally. The Combat Systems group has become a
recognized military-vehicle integrator and leading defense-materiel
provider worldwide. It has manufacturing facilities in Australia, Austria,
Canada, Germany, Spain and Switzerland, and has customers in more
than 30 countries.The group’s European business offers a broad range of
products, including light- and medium-weight tracked and wheeled
tactical vehicles, amphibious bridge systems, artillery systems, light
weapons, ammunition and propellants. Like the group’s U.S. market, many
of these systems constitute key platforms employed by its customers’
military forces.These include the Leopard 2E tank and the Pizarro tracked
infantry combat vehicle, produced for the Spanish army; the Pandur II
armored combat vehicle, produced for the Portuguese army and navy; and
the Piranha wheeled armored vehicle, which the group has sold to
several European countries.
Beyond the European market, Combat Systems is experiencing
increased international demand as a result of the demonstrated success
of its fielded products. In particular, the group has opportunities to provide
Abrams tanks to Egypt, Strykers to Israel, and light armored vehicles (LAVs)
and Abrams tank upgrades to Saudi Arabia.
The Combat Systems group will continue to seek opportunities to
improve performance across the business as it delivers on its substantial
backlog. In an environment of continuously expanding threats and evolving
customer needs, including an increased emphasis on speed to market,
the group remains focused on its customers’ requirements and the
opportunities they present.
Net sales for the Combat Systems group were 29 percent of the
company’s net sales in 2007, 25 percent in 2006 and 24 percent in
2005. Net sales by major products and services were as follows:
MARINE SYSTEMS
The Marine Systems group designs, builds and supports submarines and
surface ships for the U.S. Navy and commercial ships for Jones Act
customers. The group operates three of the six shipyards in the United
States that perform large-ship construction for the Navy, including one of
the country’s two nuclear submarine yards and the only yard that services
deep-draft surface ships on the West Coast. The group’s diverse portfolio
of platforms and capabilities includes:
• nuclear-powered submarines (Virginia Class);
• surface combatants (DDG-51, DDG-1000, LCS);
• auxiliary and combat-logistics ships (T-AKE);
• commercial ships;
• engineering design support; and
• overhaul, repair and lifecycle support services.
Year Ended December 31 2007 2006 2005
Medium armored vehicles $ 3,265 $ 2,204 $ 1,610
Main battle tanks 1,430 1,181 931
Munitions and propellant 1,276 806 616
Armament and detection systems 761 491 274
Engineering and development 598 582 810
Rockets and missile components 294 317 324
Aerospace components and other 173 402 456
Total Combat Systems $ 7,797 $ 5,983 $ 5,021
25. General Dynamics 2007 Annual Report 7
The substantial majority of Marine Systems’ workload supports the
U.S. Navy through the construction of new ships and the design and
development of next-generation platforms to help the customer face
evolving missions and maintain its desired fleet size, as well as mainte-
nance and repair services to maximize the life of in-service ships. This
business consists of major ship-construction programs awarded under
large, multi-ship contracts that span several years. The group’s mature
construction programs currently consist of the fast-attack Virginia-
class submarine, the Arleigh Burke-class (DDG-51) guided-missile
destroyer and the Lewis and Clark-class (T-AKE) dry cargo/ammunition
combat-logistics ship.
The Virginia-class submarine is the first U.S. submarine designed to
address post-Cold War threats, including capabilities tailored for both
open-ocean and near-shore area missions. These stealthy ships are well
suited for a variety of global assignments, including clandestine intelligence
gathering, special-operations missions and sea-based missile launch.
The Navy’s Virginia-class program of record includes 30 submarines,
which the customer is procuring in multi-ship blocks. In late 2007,
Marine Systems commenced sea trials for the fourth and final ship under
the group’s cost-reimbursable Block I contract. The group, in conjunction
with an industry partner that shares in the construction of these vessels,
is working on five of the next six ships under the fixed-price Block II
contract. Deliveries of these ships are scheduled through 2013. General
Dynamics expects to sign a Block III contract in 2008 for eight additional
ships for delivery through 2018. As a result of strong Navy and congres-
sional support, innovative cost-saving design and production efforts,
and successful program execution, the group expects to begin building
two submarines per year as early as 2011, one year earlier than
previously planned.
Marine Systems is the lead designer and producer of Arleigh Burke
destroyers, a sophisticated class of surface combatants and the only
active destroyer in the Navy’s global surface fleet. During 2007, the
group delivered USS Sampson, the 28th of 34 DDG-51 ships the Navy
has contracted with the company to build. The six remaining ships are
scheduled for delivery between 2008 and 2011.
The group’s T-AKE is the Navy’s first new combat-logistics ship design
in almost 20 years and the first Navy ship to incorporate proven commer-
cial marine technologies, such as integrated electric-drive propulsion.
These technologies are designed to minimize T-AKE operations and
maintenance costs over an expected 40-year life. The T-AKE ships
support the Navy’s Sea Basing vision by delivering ammunition, food,
fuel, parts and other supplies to U.S. and NATO operating forces around
the world. Following the delivery of the first T-AKE in 2006, the Navy
deployed the ship to the Arabian Gulf. In 2007, the group delivered the
next three ships, and work is underway on four of the remaining six ships
currently under contract, with deliveries scheduled through 2010.
With one ship currently deployed overseas and three other ships in service,
the T-AKE class is already contributing to the Navy’s forward presence
posture. The T-AKE contract was restructured in 2007 to include five
additional option ships, which could bring the total number of ships in
the program to 14. The Navy exercised the option for the 10th ship and
authorized procurement of long-lead materials for the 11th ship in
January 2008.
In 2007, the group completed the conversion of four Trident ballistic-
missile submarines to guided-missile submarines, or SSGNs. Through
close collaboration with the Navy’s public shipyards, the group success-
fully delivered the four ships on schedule and under budget. The SSGNs
are multi-mission submarines optimized for conventional tactical-strike
and special-operations support. They allow the United States to engage
targets quickly, with surprise and from close-in positions. The first of the
four boats, USS Ohio, successfully completed all post-conversion testing
in 2007 and recently departed on an inaugural 300-day deployment.
The Marine Systems group is also participating in the development of
technologies and naval platforms for the future.
With DDG-51 construction nearing completion, the group is focused
on the design of the next-generation guided-missile destroyer, the
DDG-1000 Zumwalt Class. The company has one of two contracts for the
detail design of this multi-mission destroyer under a congressionally
directed dual-lead-ship strategy, which requires that the vessels be
procured from two separate shipyards. In February 2008, the Navy
awarded the company a construction contract for the first DDG-1000.
Marine Systems leads one of two industry teams awarded contracts
for the design and construction of the Littoral Combat Ship (LCS), a new
high-speed surface warship designed to address emerging coastal-water
threats. The LCS is a multi-mission warship that can be configured to
combat a variety of threats in near-shore waters, including small boats,
mines and submarines. Marine Systems’ LCS is derived from a proven
commercial trimaran design and is well suited to accommodate the
speed, draft and cargo capacity requirements of this new combatant
class of warships. The group’s first ship is under construction at a team-
mate’s Alabama facility and is scheduled to be launched in 2008. The
Navy cancelled the contract for the group’s second ship in 2007 and
continues to assess future LCS construction requirements.
In 2007, the group continued to apply its design expertise on a joint
Defense Advanced Research Projects Agency (DARPA)-Navy initiative to
identify and overcome technological barriers to reducing the cost of
future submarines. The group is developing technologies to propel
submarines with external electric motors and to reduce the ship’s
infrastructure and improve its sensors.
In addition to these design and construction programs, the Marine
Systems group provides comprehensive ship and submarine overhaul,
repair and lifecycle support services to extend the service life of these
vessels and maximize the value of these ships to the customer.The group
also provides international allies with program management, planning
and engineering design support for submarine and surface-ship
construction programs.
26. Beyond its Navy programs, the group designs and produces ships for
commercial customers to meet the Jones Act requirement that ships carrying
cargo between U.S. ports be built in U.S. shipyards. In 2006, General
Dynamics signed a contract with U.S. Shipping Partners to build up to nine
product-carrier ships. These product carriers are based on a design the
company obtained through a strategic partnership with a well-established
international commercial shipyard.The partnership allows Marine Systems
to offer proven commercial ship designs to Jones Act customers, to learn
best practices that improve efficiency and throughput, and to achieve cost
savings on materials procured through the partnership. The group laid the
keel of the first ship in late 2007, and delivery is expected in the first
quarter of 2009.
To further the group’s goals of efficiency and continuous program
improvement, General Dynamics is committed to strategic investments
in its shipyards in partnership with the Navy and local governments. In
2007, capital improvement projects included the refurbishment of a
submarine dry dock, construction of a facility to enable significant
modular construction efficiencies for current and next-generation
destroyers, and development of a material staging area to facilitate
construction of the commercial product carriers. In addition to these
investments, the Marine Systems group continues to leverage its design
and engineering expertise across its shipyards to improve program
execution and generate cost savings. This knowledge sharing enables
the group to use resources more efficiently and promote process improve-
ments throughout the business. The group is well positioned to effectively
fulfill the long-term ship-construction and support requirements of its
Navy and commercial customers.
Net sales for the Marine Systems group were 18 percent of the company’s
consolidated net sales in 2007, 21 percent in 2006 and 23 percent in
2005. Net sales by major products and services were as follows:
INFORMATION SYSTEMS AND TECHNOLOGY
The Information Systems and Technology group offers technologies,
products and services that support a wide range of government and
commercial needs. General Dynamics created the group in 1998, and it
has grown significantly in response to the expanded markets for digital
network-centric command, control, communications, computing, intelli-
gence, surveillance and reconnaissance (C4ISR) and information-sharing
technologies in the U.S. and allied national-security, defense and intelli-
gence communities. Information Systems and Technology has evolved
through acquisitions and by expanding the capabilities, products and
customers of the three-part portfolio that the company established in creating
the group – tactical and strategic mission systems, information technology
and mission services, and intelligence mission systems. Over the past 10
years, through 25 acquisitions and organic growth, the group has become
General Dynamics’ largest segment. The group today operates in three
principal markets, described below.
Tactical and strategic mission systems – The group designs, manu-
factures and delivers trusted and secure communications network systems,
ruggedized computers, command-and-control systems and operational
hardware to Department of Defense, intelligence, federal civilian agency
and international customers.
This market is characterized by programs such as the U.S. Army’s
Joint Network Node (JNN)/Warfighter Information Network-Tactical (WIN-T)
battlefield communications networks, which the Army restructured into a
single program in 2007. As the prime contractor, the group is responsible
for the design, engineering, integration, production, program management
and support of the Army’s primary current and future battlefield commu-
nications network. This network uses ground and satellite communications
links to provide commanders with the digital telecommunications services
they need to access intelligence information, initiate battle plans,
collaborate with other military elements, issue orders and monitor the
status of their forces.
The group also provides many of these capabilities to non-U.S.
customers, through programs such as the BOWMAN digital voice and
data communication system for the United Kingdom’s Ministry of
Defence, the New Integrated Marines Communications and Information
System (NIMCIS) for the Royal Netherlands Marine Corps, and the IRIS
Tactical Command, Control and Communications System program for the
Canadian Department of National Defence.
The Information Systems and Technology group’s leadership in this
market has been developed through decades of experience in designing,
building and supporting previous generations of communications technologies.
With roots in commercial markets, the group’s expertise and record of
innovation encompass all of the decisive technologies that enable design
and deployment of tactical networking systems. These include:
• ruggedized mobile computing solutions with embedded wireless
capability;
General Dynamics 2007 Annual Report8
Year Ended December 31 2007 2006 2005
Nuclear-powered submarines $ 2,355 $ 2,427 $ 2,396
Surface combatants 1,112 1,088 1,008
Auxiliary and commercial ships 953 807 598
Repair and other services 573 618 693
Total Marine Systems $ 4,993 $ 4,940 $ 4,695
27. • information assurance technologies, products, systems and services that
ensure the security and integrity of digital communications worldwide;
• broadband networking and automated network management;
• digital switching;
• encryption technologies;
• very-high and ultra-high-frequency radio communications; and
• fixed and mobile satellite communications systems and antenna
technologies.
In addition to the work it does for the defense and intelligence com-
munities, Information Systems and Technology has increased its business
in the Department of Homeland Security and federal civilian markets
through programs such as Rescue 21 and the Integrated Wireless
Network (IWN) contract. Rescue 21 is a state-of-the-art search-and-rescue
system that the U.S. Coast Guard uses to locate distressed mariners and
deploy rescue assets. The IWN program is a joint effort by the Departments
of Justice, Homeland Security and the Treasury to provide a nationwide,
interoperable wireless communications service in support of federal law
enforcement, homeland security and first-responder operations.
Information technology and mission services –The group provides mission-
critical information technology (IT) and skilled mission-support services to
U.S. defense and national-security customers as well as select federal
civilian agencies and commercial customers. The group also specializes in:
• the design, development and integration of wireline and wireless voice,
video and data networks;
• mission simulation and training services; and
• secure identification and credentialing capabilities.
In this market, Information Systems and Technology has a longstanding
reputation for excellence in providing technical-support personnel and
domain specialists that enable customers to execute their missions
effectively. For many customers, Information Systems and Technology
employees are the on-call staff who provide technical support for both
desktop technology and mission-specific hardware. For others, they
are skilled in the tools and techniques of specific mission systems,
providing the personnel to conceive, install and operate systems on a
day-to-day basis.
In Fort Huachuca, Arizona, for example, Information Systems and
Technology employees provide training and IT support services for
critical Army intelligence missions, merging live data with network-
centric computer-based simulations. The group also has provided
enterprise-wide IT and information management services to Naval Air
Systems Command for more than 10 years as the customer’s primary
logistics-support contractor. In Iraq, the group supports the Army’s mili-
tary health-care IT mission, helping ensure continuity of care for injured
soldiers by providing accurate, timely information to medical staff both in
the field and at treatment facilities.
Information Systems and Technology also is a principal supplier of
network modernization and IT infrastructure services to U.S. government
customers. As one of the U.S. Air Force’s leading partners for network
modernization, the group has provided IT support services to more than
75 Air Force bases, and it currently supports all Air Force main operating
bases. The group has earned 100 percent award fees for performance
excellence over the past five years on the Pentagon Renovation program,
where it provides network-infrastructure services ranging from system
architecture and design to build-out, maintenance and operations. The
group also has provided continuous enterprise-wide IT services and
support to the U.S. Senate for more than five years.
Intelligence mission systems – The group provides the U.S. and allied
intelligence communities with highly specialized intelligence, surveillance
and reconnaissance (ISR) capabilities. These include:
• signals and information collection, processing and distribution systems;
• special-purpose computing;
• multi-level security;
• data mining and fusion;
• open-architecture mission systems and service-oriented architecture;
• special-mission satellites and payloads; and
• information operations services.
For example, one of the group’s businesses has a 50-year legacy of
providing advanced fire control systems for Navy submarine programs.
This includes more than 30 years of providing payloads and sensors,
ground mission processing and intelligence analysis for critical national
defense programs. With the development of the core mission system for
the Navy’s LCS, the group has established an open architecture that pro-
vides greater mission flexibility and requires fewer sailors than current
combatants. The group continues to extend its market presence in Navy
strategic programs with a recent award for onboard computing upgrades
to the Trident D5 missile.
Information Systems and Technology also is a leading provider of
personnel with mission-specific experience in executing programs in the
intelligence field. In partnership with the U.S. Joint Forces Command,
for example, the group integrates collaborative C4ISR environments in
support of worldwide training exercises.
In addition, the group continues to extend its legacy of providing
special payloads and communications capabilities to spacecraft. The
group is part of a team that was recently selected to provide the next-
generation ground-control segment for the nation’s Global Positioning
System (GPS) Block II and future Block III satellites.This program includes
satellite command and control, mission planning, constellation management,
monitoring stations and ground antennas.
The group’s contracts in securing and protecting the Internet have
resulted in a leading market position in computer forensics, countering
identity theft and preventing credit card fraud. In addition, based on
General Dynamics 2007 Annual Report 9
28. strong capabilities in information operations, computer network defense,
and the certification and accreditation of multi-level secure C4ISR sys-
tems, the group is well positioned to meet the emerging requirements of
the Air Force Cyber Command.
General Dynamics purchased two companies in 2007 that expand-
ed the group’s capabilities in the intelligence market. On October 24,
the company acquired Monteria, LLC, of Mount Airy, Maryland, which
designs and manufactures technologies and systems dedicated
exclusively to supporting the signals intelligence (SIGINT) community.
On November 13, the company acquired Mediaware International Pty
Ltd. of Australia, which develops real-time full-motion compressed
digital video processing software and systems for defense, intelligence
and commercial customers.
Although diversion of funding to high-priority war requirements has
slowed the growth in some areas of the Information Systems and
Technology group’s broad portfolio, the group’s increasingly diversified
customer base has stimulated new opportunities in each of these
principal markets.As the group continues to grow, it is positioned to take
advantage of:
• the Defense Department’s increasing use of multiyear indefinite
delivery, indefinite quantity (IDIQ) contract vehicles;
• the federal government’s continued use of outsourced IT solutions; and
• the growing requirements among homeland security and intelligence
customers faced with asymmetric threats.
Net sales for the Information Systems and Technology group were
35 percent of the company’s consolidated net sales in 2007 and 37 percent
in each of 2006 and 2005. Net sales by major products and services
were as follows:
For additional discussion of General Dynamics’ businesses, including
significant program wins in 2007, see Management’s Discussion and
Analysis of Financial Condition and Results of Operations contained in
Part II, Item 7, of this Annual Report on Form 10-K. For information on the
revenues, operating earnings and identifiable assets attributable to each
of the company’s business groups, see Note R to the Consolidated
Financial Statements contained in Part II, Item 8, of this Annual Report on
Form 10-K.
CUSTOMERS
In 2007,69 percent of the company’s net sales were to the U.S.government;
14 percent were to U.S. commercial customers; 10 percent were directly
to international defense customers; and the remaining 7 percent were to
international commercial customers.
U.S. GOVERNMENT
General Dynamics’ primary customers are the U.S. Department of
Defense and intelligence community. The company has recently expanded
its relationships with other U.S. government customers throughout the
national-security community, including the Department of Homeland
Security and first-responder agencies at federal and state levels. The
company’s net sales to the U.S. government were as follows:
The company performs its U.S. government business under cost-
reimbursement, time-and-materials and fixed-price contracts. Contracts
for research, engineering, prototypes, repair and maintenance are typically
cost-reimbursement or time-and-materials. Under cost-reimbursement
contracts, the customer reimburses the company for allowable costs and
pays a fixed fee and/or an incentive- or award-based fee. These fees are
determined by the company’s ability to achieve targets set in the
contract, such as cost, quality, schedule and performance. Under time-
and-materials contracts, the customer pays a fixed hourly rate for direct
labor and reimburses the company for materials costs. The company’s
production contracts are primarily fixed-price. Under these contracts, the
company agrees to perform a specific scope of work for a fixed amount.
Cost-reimbursement contracts accounted for approximately 40 per-
cent of the company’s U.S. government business in 2007 and 41 percent
in 2006; time-and-materials contracts accounted for approximately 7 per-
cent in each of 2007 and 2006; and fixed-price contracts accounted
for approximately 53 percent in 2007 and 52 percent in 2006.
General Dynamics 2007 Annual Report10
Year Ended December 31 2007 2006 2005
Direct $ 18,447 $ 15,948 $ 13,801
Foreign Military Sales* 310 456 409
Total U.S. government $ 18,757 $ 16,404 $ 14,210
Percent of total net sales 69% 68% 68%
* In addition to its direct international sales, the company sells to foreign governments through
the Foreign Military Sales (FMS) program. Under the FMS program, the company contracts with
and is paid by the U.S. government, and the U.S. government assumes the risk of collection
from the foreign government customer.
Year Ended December 31 2007 2006 2005
Tactical and strategic mission systems $ 4,008 $ 4,063 $ 3,912
IT and mission services 3,584 2,894 1,804
Intelligence mission systems 2,030 2,067 2,110
Total Information Systems and
Technology $ 9,622 $ 9,024 $ 7,826
29. Each of these contract types presents advantages and disadvantages.
Cost-reimbursement contracts generally involve lower risk for the
company. They also can include fee schedules that allow the customer to
make additional payments when the company satisfies certain performance
criteria. However, not all costs are reimbursed under these types of
contracts, and the government can challenge the costs charged by the
company. In addition, the negotiated base fees are generally lower, con-
sistent with the company’s lower risk. Under time-and-materials
contracts, the company’s targeted profit may vary if actual labor hour
costs vary significantly from the negotiated rates. In addition, the
company generally charges materials costs with little or no fee, which
can dilute the profit margins associated with these contracts. Fixed-price
contracts typically have higher negotiated fees in recognition of the
higher risk and offer the company additional profits if it can complete the
work for less than the contract amount. However, fixed-price contracts
require that the company absorb cost overruns.
U.S. COMMERCIAL
The company’s U.S. commercial sales were $3,732 in 2007, $3,831 in
2006 and $3,396 in 2005. These sales represented approximately 14
percent of the company’s consolidated net sales in 2007 and 16 percent
in each of 2006 and 2005.The majority of these sales are for Gulfstream
aircraft, primarily to FORTUNE 500®
corporations and large, privately
held companies. Customers from a wide range of industries operate
the aircraft.
INTERNATIONAL
The company’s direct (non-FMS) sales to government and commercial
customers outside the United States were $4,751 in 2007, $3,828 in
2006 and $3,369 in 2005. These sales represented approximately
17 percent of the company’s consolidated net sales in 2007 and 16 percent
in each of 2006 and 2005.
General Dynamics’ non-U.S. subsidiaries conduct most of its direct
international government sales. The company has an operating presence
around the world, including subsidiary operations in Australia, Austria,
Canada, Germany, Italy, Mexico, Spain, Switzerland and the United
Kingdom. General Dynamics’ non-U.S. subsidiaries are committed to
developing long-term relationships in their respective countries and have
distinguished themselves as principal regional suppliers.
In the commercial sector, most of the company’s exports are
business-jet aircraft. The market for business-jet aircraft outside North
America has expanded rapidly in recent years, particularly in Europe, the
Middle East, India and the Asia-Pacific region. While the United States
continues to be the company’s largest market for business aircraft,
orders from customers outside North America represent a growing
segment of the company’s aircraft business, exceeding 50 percent of
total orders in 2007.
For a discussion of the risks associated with conducting business in
international locations, see Risk Factors contained in Part I, Item 1A, of this
Annual Report on Form 10-K. For information regarding sales and assets
by geographic region, see Note R to the Consolidated Financial Statements
contained in Part II, Item 8, of this Annual Report on Form 10-K.
COMPETITION
Several factors determine General Dynamics’ ability to compete successfully
in both the defense and business-jet aircraft markets. While customers’
evaluation criteria vary from competition to competition, the principal
competitive elements include:
• the technical excellence, reliability and cost competitiveness of the
company’s products and services;
• the company’s ability to develop and integrate complex systems and
deliver them on schedule;
• the reputation and customer confidence derived from the company’s
past performance; and
• the successful management of the company’s businesses and
customer relationships.
General Dynamics 2007 Annual Report 11
Aerospace 2004–2007 Orders (in Units) by Geographic Region
270
240
210
180
150
120
90
60
30
0
2004 2005 2006 2007
Asia
Middle East/Africa
Latin America
Europe
North America
30. DEFENSE MARKET
The U.S. government contracts with numerous domestic and foreign
companies for defense products and services. General Dynamics
competes against other large platform and system-integration
contractors, as well as smaller companies that specialize in a particular
technology or capability. Internationally, the company competes with global
defense contractors’ exports and the offerings of private and state-
owned defense manufacturers operating in the local countries. The
Combat Systems group competes with a large number of domestic and
foreign businesses. The Marine Systems group has only one primary
competitor, Northrop Grumman Corporation, with which it also part-
ners or subcontracts on several programs, including the Virginia-class
submarine and DDG-1000 Zumwalt-class destroyer. The Information
Systems and Technology group competes with many companies, from
large defense companies to small niche competitors with specialized
technologies. The defense market’s contract-based procurement
environment and the long-term operating cycle of many of the company’s
major platform programs can result in sustained periods of program
continuity when the company performs successfully.
At times, the company is involved in teaming and subcontracting
relationships with some of its competitors. Competitions for major
defense programs often require companies to form teams to bring
together broad capabilities to meet the customer’s requirements.
In these situations, the company may have multiple opportunities to
participate. These include roles as the program’s system integrator,
overseeing and coordinating the efforts of all participants in the team,
or as a provider of a specific hardware or subsystem element, such as
military vehicles provided by Combat Systems or core mission systems
provided by Information Systems and Technology.
Another competitive factor in the defense market is the U.S. govern-
ment’s increasing use of multiple-award IDIQ contracts to maximize the
customer’s procurement options. IDIQ contracts have been more common
in recent years. They allow the government to select a group of eligible
contractors for a program and establish an overall spending limit. Under
IDIQ contracts, General Dynamics must compete to be selected as a
participant in the program and subsequently compete for individual
delivery orders.This contracting model is most common in the Information
Systems and Technology group’s competitions and recently has been used
more in programs for which the Combat Systems group competes.
BUSINESS-JET AIRCRAFT MARKET
The business-jet aircraft market is divided into segments based on
aircraft range, price and cabin size. Gulfstream has at least one
competitor for each of its products, with more competitors for the shorter-
range aircraft. Key competitive factors include aircraft safety,
reliability and performance; service quality and timeliness; technological
and new-product innovation; and price.The company believes it competes
effectively in all these areas.
RESEARCH AND DEVELOPMENT
General Dynamics conducts independent R&D activities as part of its
normal business operations. Over the past three years, the majority of
company-sponsored R&D expenditures was in the defense business.
In accordance with government regulations, the company recovers a
significant portion of these expenditures through overhead charges to
U.S. government contracts. In the commercial sector, most of the
Aerospace group’s R&D activities support Gulfstream’s product
enhancement and development programs. The company also conducts
customer-sponsored R&D activities under U.S. government contracts.
Research and development expenditures were as follows:
EMPLOYEES
As of December 31, 2007, the company had approximately 83,500
employees, 25 percent of whom were covered by collective bargaining
agreements with various unions. Agreements covering approximately
12 percent of total employees are due to expire during 2008. Historically,
the company has renegotiated agreements without any significant
disruption of operating activities.
RAW MATERIALS, SUPPLIERS AND
SEASONALITY
The company depends on suppliers and subcontractors for raw materials
and components. These supply networks can experience price fluctua-
tions and capacity constraints, which can put pressure on pricing.
Effective management and oversight of suppliers and subcontractors is
an important element of the company’s successful performance.
The company attempts to mitigate these risks by entering long-term
agreements with its suppliers or negotiating flexible pricing terms in its
customer contracts. The company has not experienced, and does not
foresee, significant difficulties in obtaining the materials, components
or supplies necessary for its business operations.
The company’s business is not seasonal in nature. The timing of
contract awards, the availability of funding from the customer, the
incurrence of contract costs and unit deliveries are the primary drivers
of the company’s revenue recognition.
General Dynamics 2007 Annual Report12
Year Ended December 31 2007 2006 2005
Company-sponsored $ 430 $ 377 $ 344
Customer-sponsored 192 398 343
Total research and development $ 622 $ 775 $ 687
31. INTELLECTUAL PROPERTY
General Dynamics is a leader in the development of innovative products,
manufacturing technologies and systems-integration practices. In addition
to owning a large portfolio of proprietary intellectual property, the company
licenses some intellectual property rights to, and from, others. The U.S.
government holds licenses to the company’s patents developed in the
performance of government contracts, and it may use or authorize others
to use the inventions covered by the company’s patents. Although these
intellectual property rights are important to the operation of the company’s
business, no existing patent, license or other intellectual property right is
of such importance that its loss or termination would, in the opinion of man-
agement, have a material impact on the company’s business.
REGULATORY MATTERS
U.S. GOVERNMENT CONTRACTS
U.S. government contracts are subject to procurement laws and regulations.
The Federal Acquisition Regulation (FAR) governs the majority of General
Dynamics’ contracts. The FAR mandates uniform policies and procedures
for U.S. government acquisitions and purchased services. Also, individual
agencies can have acquisition regulations that provide implementing
language for the FAR, or that supplement the FAR. For example, the
Department of Defense implements the FAR through the Defense
Federal Acquisition Regulation supplement (DFARs). For all federal
government entities, the FAR regulates the phases of any product or
service acquisition, including:
• acquisition planning,
• competition requirements,
• contractor qualifications,
• protection of source selection and vendor information and
• acquisition procedures.
In addition, the FAR addresses the allowability of a contractor’s costs
and how those costs can be allocated to contracts. The FAR also subjects
the company to audits and other government reviews. These reviews
cover issues such as cost, performance and accounting practices relating
to the company’s contracts. The government may use information from
these reviews to challenge the company’s contract-related costs and fees.
Failure to comply with procurement laws or regulations can result in
civil, criminal or administrative proceedings. These might involve fines,
penalties, suspension of payments, or suspension or debarment from
government contracting or subcontracting for a period of time.
INTERNATIONAL
General Dynamics’ international sales are subject to the applicable foreign
government regulations and procurement policies and practices, as well
as certain U.S. policies and regulations, including the Foreign Corrupt
Practices Act (FCPA). They are also subject to regulations governing
investments, exchange controls, repatriation of earnings and import-export
control, including the International Traffic in Arms Regulations (ITAR).
Other factors that can affect international sales include currency exchange
fluctuations and political and economic risks.
BUSINESS-JET AIRCRAFT
The Aerospace group is subject to FAA regulation in the United States
and other similar aviation regulatory authorities internationally. For an
aircraft to be manufactured and sold, the model must receive a type
certificate from the appropriate aviation authority, and each individual
aircraft must receive a certificate of airworthiness. Aviation authorities
can require changes to a specific aircraft or model type for safety reasons
if they believe the aircraft does not meet their standards. Maintenance
facilities must be licensed by aviation authorities as well.
General Dynamics 2007 Annual Report 13
BACKLOG
The company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts and includes funded and unfunded
portions. For additional discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II,
Item 7, of this Annual Report on Form 10-K.
Summary backlog information for each business group follows:
December 31 2007 2006
Funded Unfunded Total Funded Unfunded Total
Aerospace $ 11,591 $ 665 $ 12,256 $ 6,941 $ 752 $ 7,693 $ 7,822
Combat Systems 10,824 2,077 12,901 10,086 1,883 11,969 6,105
Marine Systems 7,621 4,439 12,060 9,449 4,576 14,025 7,851
Information Systems and Technology 7,158 2,457 9,615 7,548 2,432 9,980 3,181
Total backlog $ 37,194 $ 9,638 $ 46,832 $ 34,024 $ 9,643 $ 43,667 $ 24,959
2007 Total
Backlog Not
Expected to be
Completed in
2008
32. ENVIRONMENTAL
General Dynamics is subject to a variety of federal, state, local and foreign
environmental laws and regulations. These cover the discharge, treat-
ment, storage, disposal, investigation and remediation of some materials,
substances and wastes. Under existing U.S. environmental laws, a
company may be designated a Potentially Responsible Party (PRP) by the
U.S. Environmental Protection Agency or a state environmental agency. If
a company is designated a PRP, it potentially is liable to the government
or third parties for the full cost of remediating contamination at a relevant
site. In cases where a company has been designated a PRP, generally
it seeks to mitigate these environmental liabilities through available
insurance coverage and by pursuing appropriate cost-recovery actions. In
the unlikely event a company is required to fully fund the remediation of a
site, the current statutory framework would allow the company to pursue
contributions from other PRPs. General Dynamics regularly assesses its
compliance status and management of environmental matters.
Operating and maintenance costs associated with environmental
compliance and management of contaminated sites are a normal, recurring
part of the company’s operations. Historically, these costs have not been
material. Environmental costs often are allowable and recoverable under
the company’s contracts with the U.S. government. Based on information
currently available to the company and current U.S. government policies
relating to allowable costs, the company does not expect continued com-
pliance with environmental regulations to have a material impact on its
results of operations, financial condition or cash flows. For additional
information relating to the impact of environmental controls, see Note
O to the Consolidated Financial Statements contained in Part II, Item 8,
of this Annual Report on Form 10-K.
AVAILABLE INFORMATION
The company files several types of reports with the Securities and
Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended. These reports include an
annual report on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. Free copies of these reports are made
available as soon as reasonably practicable on the company’s website
(www.generaldynamics.com) and through the General Dynamics investor
relations office at (703) 876-3195.
These reports also can be read and copied at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, DC 20549.
Information on the operation of the Public Reference Room is available by
calling the SEC at (800) SEC-0330. The SEC maintains a website
(www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with
the SEC.
ITEM 1A. RISK FACTORS
An investment in General Dynamics’ common stock or debt securities is
subject to risks and uncertainties. Investors should consider the following
factors, in addition to the other information contained in this Annual Report
on Form 10-K, before deciding to purchase the company’s securities.
Investment risks can be market-wide, as well as unique to a specific
industry or company. The market risks faced by an investor in General
Dynamics’ stock are similar to the uncertainties faced by investors in a
broad range of industries.There are, however, some risks that apply more
specifically to General Dynamics based on its type of business. Of course,
these risks and uncertainties are not the only ones that General
Dynamics or any company faces. Additional risks and uncertainties
currently considered immaterial could also impact the company’s business,
results of operations or financial condition.
Because three of General Dynamics’ four business groups serve the
defense market, the company’s sales are concentrated with the U.S.
government. This customer relationship involves certain unique risks. In
addition, the company has expanded sales to international customers in
recent years, exposing the company to different financial and legal risks.
In the Aerospace group’s market, there are risks tied to U.S. and global
economic conditions. Despite the varying nature of the company’s U.S.
and international defense and business-aviation operations and the
markets they serve, each shares some common risks, such as the ongoing
development of high-technology products and the price, availability and
quality of commodities and subsystems.
The company depends on the U.S. government for a significant
portion of its sales. In each of the past three years, approximately
two-thirds of the company’s net sales were to the U.S. government. U.S.
defense spending historically has been cyclical.Though it is not clear that
future defense spending will be equally cyclical, defense budgets rise
when perceived threats to national security increase the level of concern
over the country’s safety. At other times, spending on the military can
decrease. While Department of Defense funding has grown rapidly over
the past few years, there is no assurance this trend will continue.
Competing demands for federal funds can put pressure on all areas of
spending, which could impact the defense budget.
A decrease in U.S. government defense spending or changes in
spending allocation could result in one or more of the company’s
programs being reduced, delayed or terminated. Reductions in the company’s
existing programs, unless offset by other programs and opportunities,
could adversely affect the company’s ability to sustain and grow future
sales and earnings.
General Dynamics 2007 Annual Report14