Fitch Affirms General Dynamics at 'A'; Outlook Stable

  Fitch Affirms General Dynamics at 'A'; Outlook Stable

Business Wire

NEW YORK -- October 26, 2012

Fitch Ratings has affirmed the 'A' long-term and 'F1' short-term Issuer
Default Rating (IDR) and debt ratings for General Dynamics Corporation (GD).
The Rating Outlook is Stable. Approximately $3.9 billion of outstanding debt
is covered by these ratings. See the full rating list at the end of this
release.

Key factors that support the ratings include GD's solid credit metrics, strong
free cash flow (FCF; cash from operations less capex less dividends),
financial flexibility and liquidity position, high defense spending levels,
competitive position in business jets and defense, and large backlog. Other
positive factors include the high level of diversity in GD's portfolio of
products and services, both domestically and internationally, including
marine, ground combat systems and business jet businesses.

GD's conservative financial profile and effective operating strategy helped
the company maintain a strong credit profile through the economic downturn,
and GD outperformed many of its peers, particularly in the business aviation
sector.

Fitch's concerns include:

--Risks to core defense spending and the overhang of potential automatic cuts
beginning in early 2013 related to the 'sequestration' situation.

--GD's cash deployment strategy, which includes a focus on acquisitions,
dividends and share repurchases, mitigated by management's recent comments
regarding a cautious cash deployment strategy ahead of the sequestration
deadline.

--Cyclical weakness in parts of the business jet market.

--The sizable pension deficit (60% funded at the end of 2011), somewhat
mitigated by GD's strong cash generation and the recently enacted MAP-21 Act,
which may have a positive short term impact on minimum cash contributions to
the pension plan if GD decides to take advantage of it.

Fitch expects the company to maintain solid credit metrics with liquidity
above $4 billion and leverage (debt to EBITDA) of approximately 0.9 times (x).
In 2011, GD increased its debt level by $750 million ($1.5 billion debt
issuance net of $750 million debt retirement). Despite the additional debt, GD
has a strong financial position for the rating. Fitch expects GD to refinance
its $1 billion 4.25% senior unsecured notes maturing in May 2013.

GD acquired five businesses during the first three quarters of 2012 and six
businesses in 2011 for approximately $2 billion (approximately $1.6 billion of
which was in 2011). Fitch expects GD will continue its bolt-on acquisition
strategy, however, Fitch does not expect a major acquisition which would
require debt financing. Fitch's financial projections incorporate significant
spending for acquisitions and share repurchases, but this spending should be
satisfied with FCF.

GD's FCF (cash from operations less capital expenditures and dividends) has
historically been strong due to solid operating performance and working
capital management. In the last 12 months (LTM), ending in the second quarter
of 2012, the company generated $2.1 billion of FCF. FCF totaled approximately
$2.1 billion in 2011 and $2 billion in 2010. Fitch expects GD to generate
approximately $1.5 billion to $2 billion of FCF annually.

At the end of 2011, GD's pension plans were $4 billion underfunded, or
approximately 60% funded. GD contributed approximately $350 million to its
pension plans in 2011 and $300 million in 2010. The company contributed
approximately $430 million to its plans during the three quarter of 2012 and
expects to contribute approximately $70 million in the fourth quarter. The
large pension deficit is mitigated by GD's strong cash generation and
liquidity position. Fitch believes future cash contributions will not have
significant effect on the company's cash deployment strategy.

Industry Overview:

GD participates in two key market channels: defense and business jets. Even
though GD's revenues are heavily weighted towards defense, the Aerospace
segment typically has the company's highest operating margin.

U.S. government spending trends are key drivers of GD's financial performance
given that the company generates most of its revenues from the U.S.
government, particularly from the Department of Defense (DoD).

U.S. defense spending has been on an upward trend for more than a decade, but
the fiscal 2012 and fiscal 2013 budgets represent a turning point, with
spending beginning to turn down in fiscal 2013, even excluding war spending,
albeit from very high levels. The fiscal 2012 DoD base budget is up less than
1% compared to fiscal 2011, and the requested base budget for fiscal 2013 is
down 1% to $525 billion. Fiscal 2013 Modernization Spending (procurement plus
research and development [R&D]), the most relevant part of the budget for
defense contractors, is down 4%, the third consecutive annual decline by
Fitch's calculations.

The overhang of potential automatic cuts beginning in early 2013 related to
the 'sequestration' situation, as well as the presidential election, add to
the uncertainty faced by defense contractors in the current environment. The
U.S. defense outlook will be uncertain and volatile over the next one to two
years, and program details will be needed to evaluate the full effect on GD's
credit profile.

On Sept. 14, 2012, the Office of Management and Budget issued a Sequestration
Transparency Act report detailing the potential impact of sequestration on
funding reductions for both defense and nondefense budget accounts. The report
assessed that unless the sequestration law is changed, the DoD budget will be
cut by approximately $52 billion in fiscal year (FY) 2013. Budget cuts to
Modernization Spending would be expected to account for approximately $23
billion or nearly 44% of the cuts despite comprising only 29% of the total DoD
budget. The majority of the remaining cuts will be in the Operations and
Maintenance account. Should sequestration occur, the cuts in Modernization
Spending could be partly mitigated by low outlay rates during the first year
for the majority of Procurement and R&D programs.

The business jet sector remains weak overall, and Fitch expects only a modest
recovery in 2012 from the depressed levels in 2011. This segment is at risk in
the event of an economic downturn, and small jets would be most affected.
Business jet deliveries fell 10.7% in 2011, bringing deliveries to 48.1% below
2008 shipments. While overall deliveries were down in 2011, the large and
midsize segments did better, as most of the weakness was driven by the lower
end of the market. Billings reflect this mix, and Fitch expects the segment's
revenues and profits will decline less than the top line.

According to General Aviation Manufacturers Association, worldwide business
jet deliveries increased by 13.1% during the first half of 2012. The increase
in deliveries was driven by a strong second quarter, during which deliveries
totaled 171 units, up from 132 units delivered in the second quarter of 2011,
a nearly 30% increase. The strong second quarter performance offset first
quarter's weak results during which total deliveries fell by 4.7% compared to
the same period of the prior year. Fitch expects deliveries in 2012 will
increase approximately 5%, and revenues should rise 5%-10% as the large
segment will continue to outperform the overall market.

During the first nine months of 2012, GD's outfitted deliveries fell from 72
units to 57 units compared to the same period in 2011; however, its Aerospace
revenues were up 22% due to increased green deliveries, including for the new
G650 aircraft, which began in the fourth quarter of 2011. GD's overall green
deliveries rose to 88 aircraft from 72 through September. GD recently
completed the final stages of obtaining the certifications for the G650 and
the G280 aircraft. Both planes are expected to be ready to enter into service
later in 2012.

Fitch affirms GD's ratings as follows:

-- Issuer Default Rating (IDR) at 'A';

-- Senior unsecured debt at 'A';

-- Credit facilities at 'A';

-- Short-term IDR at 'F1';

-- Commercial paper at 'F1'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 8, 2012.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

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Contact:

Fitch Ratings
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Director
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New York, NY 10004
or
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