Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 1-3671

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     Yes þ          No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.     Yes þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
     Yes þ          No o

The aggregate market value of the voting common equity held by nonaffiliates of the registrant was $13,094,497,759 as of June 29, 2003 (based on the closing price of the shares on the New York Stock Exchange).

198,200,263 shares of the registrant’s common stock were outstanding at January 31, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III incorporates information from certain portions of the registrant’s definitive proxy statement for the 2004 annual meeting of shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

Table of Contents

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that are based on management’s expectations, estimates, projections and assumptions. Words such as “expects,” “anticipates,” “plans,” “believes,” “scheduled,” “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements, which include but are not limited to projections of revenues, earnings, segment performance, cash flows, contract awards, aircraft production, deliveries and backlog stability. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including, without limitation:

•

General U.S. and international political and economic conditions;

•

Changing priorities in the U.S. government’s defense budget;

•

Termination of government contracts due to unilateral government action;

•

Differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts within estimated costs, and performance issues with key suppliers and subcontractors;

•

Changing customer demand or preferences for business aircraft, including the effects of economic conditions on the business–aircraft market;

•

Reliance on a large fleet customer for a significant portion of the firm aircraft contracts backlog and the majority of the options backlog; 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.

Table of Contents

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

General Dynamics is a market leader in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. Incorporated in Delaware, the company employs approximately 67,600 people and has a presence worldwide.
     Formed in 1952 through the combination of Electric Boat Company, Consolidated Vultee and other entities, the company grew through internal development and acquisitions but was largely dismantled in the early 1990s through the sale of all of its divisions except Electric Boat and Land Systems. The company’s present composition is the result of a series of acquisitions begun in 1995. At that time, General Dynamics began an expansion of its two core defense businesses, broadening its product lines through the acquisition of other shipyards and combat vehicle-related entities. The company also added information technology products and services, particularly in the command-and-control, communications, computing, intelligence, surveillance and reconnaissance (C4ISR) area, and business-jet aircraft and aviation support services to its offerings. Since 1995, General Dynamics has acquired more than 30 businesses, including seven during 2003.
     General Dynamics’ management focus is creating shareholder value while providing the best products and services possible to its customers, both military and commercial. The company emphasizes excellence in program management through continuous operational improvements and ethical business practices. This culture is evident in how the company deals with shareholders, employees, customers, partners and communities.
     General Dynamics is organized into four primary business groups: Information Systems and Technology, Combat Systems, Marine Systems and Aerospace. These groups design, develop, manufacture and support leading-edge technology, products and services for use across the spectrum of military operations. From nuclear submarines to Stryker armored infantry carriers, ammunition to targeting systems, tactical Personal Digital Assistants to combat search-and-rescue radios, General Dynamics supports the combat warrior on land, at sea, in the air and on the network. The company’s Gulfstream business-jet aircraft serve business travelers around the world, as well as government customers as special mission platforms for intelligence, surveillance, reconnaissance and transport.
     In addition to the four principal business groups, a small Resources group provides construction aggregates and operates coal mines.
     Following is a description of the company’s products and services by business group, competition and other related information.

PRODUCTS AND SERVICES

INFORMATION SYSTEMS AND TECHNOLOGY
The Information Systems and Technology group is a leading integrator of secure communications systems and networks; command, control and intelligence systems; special purpose computing; and surveillance and reconnaissance systems for the U.S. military, the U.S. intelligence community and allied nations. The group supplies products, infrastructure and integration services that are used to gather, process and disseminate information rapidly and accurately. The group provides a full spectrum of information and communications technologies, including:

•

Ruggedized computing and communications systems to support battlefield command-and-control and information processing;

•

Specialized radio technologies that enable communication among strategic, theater and tactical assets;

•

A variety of intelligence, surveillance and reconnaissance (ISR) products, systems and support services for defense and intelligence agencies;

•

Networking capabilities;

•

Processors, communications devices and ground support for space operations; and

•

Highly skilled technical personnel who frequently are embedded in military and intelligence operations around the world to support sophisticated national security systems.

     The group is a key participant in transformational initiatives that use digital information technologies to provide defense assets with secure, on-demand access to mission-critical information, assisting warfighters to prevail on today’s battlefields as well as the battlefields of the future.
     The Information Systems and Technology group was created through acquisitions starting in 1997. It has grown to become the company’s largest segment, contributing 30 percent of the company’s revenues in 2003. This growth reflects the increasing importance of digital, network-centric C4ISR and information-sharing technologies in the defense and intelligence communities. As the armed services seek information superiority to improve the agility, responsiveness, lethality and survivability of their forces, there are significant opportunities for companies that can provide robust combat platforms integrated with mission-critical information systems.

Table of Contents

•

In March, the company acquired Creative Technology Incorporated, whose employees support the intelligence community and the Department of Defense by delivering systems and network engineering, integration, software development, and operations and technical consulting.

•

In August, the company acquired Veridian Corporation, a provider of network security and enterprise protection; ISR systems development and integration; decision support; information systems development and integration; chemical, biological and nuclear detection capabilities; network and enterprise management services; and large-scale systems engineering to the Department of Defense, the Department of Homeland Security and the intelligence community.

•

In September, the company acquired Digital System Resources, Inc., a provider of surveillance and combat systems for submarines and surface ships.

     The group also combined two existing business units into a single C4 Systems organization to achieve the critical mass necessary to fully meet the growing demand for secure, mobile military communications systems, networks and products. The company’s command-and-control systems assist its customers in assessing the battlefield, planning missions, deploying people and equipment and communicating.
     Information Systems and Technology’s contract portfolio includes over 2,000 contracts. While no one of these individually has a significant impact on the group’s overall performance, some of its notable programs and offerings include the continued development and deployment of the Rescue 21 search-and-rescue and command-and-control communications system for the U.S. Coast Guard; additional fielding of the BOWMAN tactical communications system to the United Kingdom’s defense forces; upgrades to the Trident ballistic-missile fire-control system for Ohio-class submarines; and deliveries of additional high-speed, high-level encryption products to defense and national security customers.
     The future battlefield requires speed, accuracy, reliability and security of information transmitted to the warfighter and decision makers. The company believes that the Information Systems and Technology group is well positioned, with both the U.S. and allied militaries, to continue to expand its product and service offerings and its customer base.
     Net sales for the Information Systems and Technology group were 30 percent of the company’s consolidated net sales in 2003, 27 percent in 2002 and 22 percent in 2001. Net sales by major products and services were as follows:

COMBAT SYSTEMS
As a leading provider of tracked and wheeled armored combat vehicles, armament systems and ammunition in North America, Europe and the South Pacific, and the only producer of America’s main battle tanks, the Combat Systems group delivers key products and technologies to U.S. and allied military forces.
     The group is one of the preferred suppliers of land and expeditionary combat system development, production and support around the world. Combat Systems conceives, engineers, manufactures and supports product lines that include a full spectrum of armored vehicles, trucks and light wheeled vehicles, bridges, suspensions, engines, transmissions, guns and ammunition handling systems, turret and turret-drive systems, reactive armor, chemical and biohazard detection products, ammunition and ordnance, and composite manufacturing.
     During 2003, the Combat Systems group enhanced its product offerings and engineering and production capabilities through three acquisitions, expanding the group’s customer base and its relationships with existing customers:

•

In March, the company acquired General Motors Defense (GM Defense), a manufacturer of wheeled armored vehicles and turrets. Prior to the acquisition, General Dynamics and GM Defense were partners in a joint venture for the transformational Stryker family of wheeled combat vehicles for the U.S. Army. The unit also manufactures and supplies the Light Armored Vehicle (LAV) to Australia, Canada, New Zealand and Saudi Arabia. Its MOWAG subsidiary produces the Piranha combat vehicle for a number of international customers.

Table of Contents

•

In September, the company acquired substantially all of the assets of Intercontinental Manufacturing Company (IMCO), a division of Datron, Inc., and an industry leader in the development and manufacture of aircraft bomb bodies for the U.S. armed services, including almost all current series of 500-, 1,000- and 2,000-pound bombs used by the U.S. Navy and U.S. Air Force.

•

In October, the company acquired Steyr Daimler Puch Spezialfahrzeug Aktiengesellschaft & Company KG (Steyr), the developer of the Pandur family of wheeled combat vehicles and the Ulan tracked infantry fighting vehicle. The company already owned 25 percent of the common shares of Steyr as a result of an investment made in 1999.

     Upon completion of the Steyr acquisition, the group streamlined the reporting relationships of its European land combat companies — Santa Bárbara Sistemas, Steyr and MOWAG — into a single European Land Combat Systems unit, with a central office in Vienna, Austria.
     Combat Systems’ key programs include the continued manufacturing of Stryker vehicles for the Army, as well as development of Mobile Gun System and Nuclear, Biological and Chemical (NBC) Reconnaissance variants for the Stryker family of vehicles. Importantly, the first Army Stryker Brigade Combat Team achieved full operational readiness in 2003 and successfully deployed for action in Operation Iraqi Freedom. The group also upgrades M1 Abrams tanks to incorporate the latest technologies, and manufactures Pizarro Advanced Infantry Fighting Vehicles for the Spanish army.
     For the U.S. Marine Corps, Combat Systems is completing the development and testing of the new Expeditionary Fighting Vehicle (EFV), formerly the Advanced Amphibious Assault Vehicle. The EFV is designed to provide the Marines with an expeditionary vehicle that enables quick deployment from the sea to an inland objective with greater survivability and lethality. Initial production of over 1,000 vehicles is scheduled to begin in 2006 and continue to the end of the next decade.
     In addition, the Combat Systems group is a key participant in the development of manned ground vehicles and emerging robotic technologies for the Army’s Future Combat Systems (FCS) program. In 2003, it successfully demonstrated the initial capability of a new guided rocket for tactical aircraft applications, and it leads the development program for technology that will make the future land soldier more lethal and survivable.
     Each of these programs represents an important role for the Combat Systems group in the future armed forces of the United States and its allies. In many cases, the company is on the leading edge of the technology, engineering, manufacturing or production capabilities that meet those customers’ requirements.
     Net sales for the Combat Systems group were 25 percent of the company’s consolidated net sales in 2003, 21 percent in 2002 and 19 percent in 2001. Net sales by major products and services were as follows:

MARINE SYSTEMS
The Marine Systems group has three shipyards with a long, proud history of providing the Navy with ships and submarines used to project the United States’ presence around the globe. Electric Boat manufactured the Navy’s first submarine more than 100 years ago. The company’s two other shipyards have demonstrated decades of innovation in developing destroyers and auxiliary ships for the Navy. Today, the group is on the cutting edge of shipbuilding as it participates in the design, development, manufacture and integration of the complex platforms that are central to Seapower 21, the Navy’s transformation vision.
     With its experience and expertise in the development of surface, sub-surface and support platforms, Marine Systems is a key partner with the Navy. Marine Systems is leading the development of the new Virginia-class submarines, for which it received the largest submarine order in U.S. history. Construction work on the Virginia-class submarine is shared equally with the company’s teaming partner. The Virginia Class will provide the Navy a key platform with stealth, firepower and endurance, networked for communication with strategic and surface forces, in its pursuit of undersea superiority. Complementing this platform will be the Trident SSGN submarines, which the group is developing through the conversion of four Trident ballistic-missile submarines. The Trident SSGNs will be multi-mission submarines optimized for tactical strike and special operations support, key capabilities for future engagements around the world.
     The group is the lead designer and producer of Arleigh Burke-class guided-missile destroyers, one of the most advanced surface combatants in the world. It is also one of three competitors developing preliminary designs for the Navy’s Littoral Combat Ship (LCS). The LCS platform is intended for defense against terrorist swarm boats, mines and submarine threats in coastal areas.

Table of Contents

AEROSPACE
The Aerospace group designs, develops, manufactures, markets and supports a fleet of world-renowned business-jet aircraft, and provides aviation services for business-jet aircraft. The group was created in 1999 when the company acquired Gulfstream Aerospace Corporation. In 2001, the group added mid-size aircraft to its product offerings with the acquisition of Galaxy Aerospace Company, and formed a separate aviation services unit. Gulfstream has produced more than 1,400 aircraft for customers around the world since 1958.
     In 2003, the group broadened its offering of business-jet aircraft by introducing a new aircraft and completing regulatory requirements for production of other airframes. In addition, the group expanded its aviation services operations to include the first Gulfstream-owned service center outside the United States through an acquisition at the London Luton Airport in the United Kingdom.
     The new large-cabin, long-range Gulfstream G450, introduced in 2003, is an entire aircraft upgrade of the best-selling business jet in its class — the Gulfstream GIV/GIV-SP/G400. The G450 incorporates the most advanced avionics, cockpit displays, aircraft systems, aerodynamic enhancements and flight safety features, and retains the aesthetic design and signature windows that set Gulfstream aircraft apart from competing models. The new G450, which is expected to receive certification later this year, was designed for safety, performance, reliability, and passenger comfort and productivity.
     The group received Federal Aviation Administration (FAA) type and production certification for the Gulfstream G550 model on August 14, 2003. The large-cabin, ultra-long-range G550 can fly as high as 51,000 feet and can travel at speeds up to Mach .885 and distances up to 6,750 nautical miles — the longest range available in a business jet. In February 2004, the National Aeronautic Association awarded its Collier Trophy to the G550, naming it “the greatest achievement in aeronautics in the United States with respect to improving performance, efficiency or safety of air or space vehicles” in 2003.
     The Aerospace group also received type certification for its state-of-the-art PlaneView^® cockpit, as well as the first production certification for the Gulfstream Enhanced Vision System (EVS). The Gulfstream EVS significantly improves pilot situational awareness during conditions of reduced visibility, both in flight and on the ground.
     Additionally, in February 2004, the company further expanded its product line by introducing the Gulfstream G350 model. Very similar in design to the G450, the new aircraft delivers the same spacious cabin, advanced avionics and cockpit systems, exceptional performance and reliability, but with a slightly reduced range and a lower price.
     Looking beyond the commercial market, the group continued efforts to offer its aircraft as platforms for ISR and other special mission applications by U.S. and allied governments. It sold four G550 aircraft to the Israeli Ministry of Defense for use as Compact Airborne Early Warning (CAEW) platforms, which will take full advantage of the G550’s capabilities, endurance, reliability and low operating cost. Additionally, the G450 was designated the platform of choice by one of the two competitors in a pending U.S. military procurement for special mission ISR applications.
     The company formed General Dynamics Aviation Services in February 2001 to better meet the maintenance needs of a variety of the most popular business-jet aircraft available around the world. It serves a broad range of business-aircraft owners through maintenance centers in Minneapolis, Minnesota; Westfield, Massachusetts; West Palm Beach, Florida; Dallas, Texas; and Las Vegas, Nevada.
     With an expanded product line, the company believes the Aerospace group is well positioned to take advantage of an encouraging market.

Table of Contents

RESOURCES
The Resources group includes two businesses: a coal mining operation and an aggregates operation that mines sand, stone and gravel for use in highway and building construction. Net sales for these businesses represented approximately 1 percent of the company’s consolidated net sales in 2003 and 2 percent in 2002 and 2001. Net sales were $256 in 2003, $286 in 2002 and $276 in 2001.

     For additional discussion of the company’s business groups, including significant program wins in 2003, 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.

COMPETITION

The company’s ability to compete successfully depends on the technical excellence and reliability of its products and services, its reputation for integrating complex systems, its leadership team’s successful management of the company’s businesses and customer relationships, and the cost competitiveness of its products and services. The company competes in two separate markets: defense and business-jet aircraft.

DEFENSE MARKET
The defense market is served by numerous domestic and foreign companies that offer a range of products and services and compete with the company for many of its contracts. On occasion, the company is involved in subcontracting relationships with some of these competitors. The key competitive factors in this market are technological innovation, low-cost production, performance and market knowledge.
     The Information Systems and Technology group competes with a broad range of entities, from large defense companies to smaller niche competitors with specialized technologies. The Combat Systems group competes in a market composed primarily of large domestic and foreign entities. The company partners with some of these entities from time to time, and currently is in a teaming arrangement with another U.S. defense contractor on the manned vehicle portion of the FCS program. The Marine Systems group operates in a market with only one other primary competitor, Northrop Grumman Corporation; the company is also teamed with that competitor on several programs, including the Virginia-class submarine construction contract. The Navy’s LCS program has increased competition to now include other large aerospace companies seeking opportunities as shipbuilding prime contractors.

BUSINESS-JET AIRCRAFT MARKET
Competition in the business-jet aircraft market generally is divided into segments based on the cabin size, range and price of the aircraft. Aerospace offers a total of nine products in the following market segments:

     The company has at least one competitor in each market segment in which it competes. The number of competitors increases in the segments that offer shorter ranges. The key competitive factors in the business-jet market are the performance characteristics of the aircraft, the quality and timeliness of the service provided, the advances in technology offered, and innovative marketing programs, including price. The company believes it competes favorably on these criteria.

CUSTOMERS

The company’s primary customer is the U.S. government, particularly the Department of Defense. In 2003, 66 percent of the company’s net sales were to the U.S. government; 18 percent were to U.S. commercial customers; 11 percent were directly to international defense customers; and the remaining 5 percent were to international commercial customers.

Table of Contents

U.S. GOVERNMENT
The company’s net sales to the U.S. government were as follows:

U.S. COMMERCIAL
The company’s commercial sales were $3,009 in 2003, $3,235 in 2002 and $3,555 in 2001. These sales represented approximately 18 percent of the company’s consolidated net sales in 2003, 23 percent in 2002 and 29 percent in 2001. The majority of these sales were for Gulfstream aircraft, primarily to Fortune 500^® companies and large, privately held companies. The aircraft are operated by customers in a wide range of industries.

INTERNATIONAL
The company’s direct (non-Foreign Military Sales) sales to defense and commercial customers outside the United States were $2,581 in 2003, $1,788 in 2002 and $1,180 in 2001. These sales represented approximately 16 percent of the company’s consolidated net sales in 2003, 13 percent in 2002 and 10 percent in 2001. International defense sales were primarily from the company’s subsidiaries located abroad; international commercial sales were primarily exports of business-jet aircraft.
     The company has operations in Australia, Austria, Canada, Germany, Spain, Switzerland and the United Kingdom. Sales from these international operations were $2,175 in 2003, $970 in 2002 and $421 in 2001. The long-lived assets of operations located outside the United States were 16 percent of the company’s total as of December 31, 2003, 6 percent as of December 31, 2002, and 5 percent as of December 31, 2001.
     For information regarding sales 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.

SUPPLIERS

In some cases, the company is dependent upon suppliers and subcontractors for raw materials and components used in the production of its products. In some instances, the company relies on only one or two

Table of Contents

RESEARCH AND DEVELOPMENT

The company conducts independent research and development (R&D) activities. The company also conducts R&D activities under U.S. government contracts to develop products for large systems-development and technology programs.
     The majority of company-sponsored R&D expenditures in each of the past three years was in the company’s defense business. The company recovers a significant portion of these expenditures through overhead charges pursuant to U.S. government contracts. The R&D activities of the Aerospace group consist primarily of internally funded product enhancement and development programs for Gulfstream aircraft.
     Research and development expenditures were as follows:

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 further discussion of backlog, see Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of this Annual Report on Form 10-K.
     Summary backlog information for each business group follows: