Photo of Phebe N. Novakovic
In 2017, General Dynamics delivered strong operating results, demonstrating the power of our business portfolio.

Dear Fellow Shareholder

General Dynamics demonstrated strong operating and financial performance in 2017. Diluted earnings per share (EPS) from continuing operations rose 10.6 percent to $9.56, driven by a 130 basis point expansion in operating margin to 13.5 percent. Revenue rose 1.3 percent to $31 billion. Net cash from operating activities was $3.9 billion and free cash flow from operations reached nearly $3.5 billion. Total backlog advanced by nearly $1 billion to $63.2 billion.

In addition, return on sales of 9.4 percent was up 60 basis points from 2016, return on equity of 26.6 percent was 100 basis points higher and return on invested capital of 16.8 percent was up 50 basis points. All in all, a very good year.

We also delivered strong operating results, demonstrating the power of our business portfolio. Aerospace profits increased 13.2 percent on a 4 percent rise in revenue. Combat Systems had solid gains in revenue and profits, with tanks and tracked vehicles generating more than two-thirds of the revenue increase. Marine Systems earnings grew 15 percent to $685 million. Finally, in our Information Systems and Technology group, we delivered higher margins on lower volume from strong cost control, and operating earnings advanced 7.4 percent.

Each of our operating groups captured notable new business during the year. For example, orders for Gulfstream aircraft rose 20 percent in 2017. In the fourth quarter, the G650 and G650ER enjoyed the second best order quarter since the 2008 launch. Combat Systems signed a key contract with the U.S. Army to modernize the M1 Abrams tank for the Army and U.S. allies. The U.S. Navy awarded Electric Boat a $5.1 billion contract to complete the design and prototype development of the Columbia-class submarine. Our Information Systems and Technology group achieved a book-to-bill ratio of one-to-one or higher for the fourth consecutive year, with awards for the modernization of customers’ information systems and next-generation communications networks.

Your management team continues on a course of prudent capital allocation to enhance shareholder returns. The company’s quarterly dividend increased for the 20th consecutive year in 2017 to $0.84. In March 2018, the Board of Directors raised the dividend by 10.7 percent to a quarterly rate of $0.93. During the year, we also repurchased 7.8 million shares of common stock for $1.5 billion, reducing shares outstanding by about 2 percent.

To enhance innovation and bring new products to market, 2017 company-sponsored research and development rose to $521 million from $418 million, the fourth consecutive annual increase. Capital expenditures rose to $428 million from $392 million. We completed four accretive acquisitions for approximately $400 million, up from just under $60 million in 2016. In February 2018, we announced the planned acquisition of CSRA and expect to close the transaction in the first half of 2018. The combined GDIT and CSRA business will be a premier provider of integrated IT systems to the government market, with approximately $9.9 billion in annual revenue and double-digit EBITDA margins.

Adoption of the 2017 Tax Cuts and Jobs Act resulted in a one-time non-cash decrement to earnings of $119 million. Excluding the impact of tax reform, diluted EPS was $9.95, up 15.2 percent. The new lower tax rate enables the company to fund incremental capital spending. We expect to invest $3 billion over the next four years to enhance productivity and capacity at our businesses.

Your management team continues to demonstrate the value of focusing on operations, managing the business for cash and earnings, and growing return on your capital. We are confident in our outlook for the future, built on a large defense backlog and strong demand for our Aerospace products and services.


Phebe N. Novakovic

Chairman and CEO
March 12, 2018