GENERAL DYNAMICS CORPORATION BUSINESS OVERVIEWGeneral Dynamics is a global aerospace and defense company that offers a broad portfolio of products and services in business aviation; ship construction and repair; land combat vehicles, weapons systems and munitions; and technology products and services. Our company is organized into four operating segments: Aerospace, Marine Systems, Combat Systems and Technologies. We refer to the latter three collectively as our defense segments. Our primary customer is theU.S. government, including theDepartment of Defense (DoD ), the intelligence community and otherU.S. government customers. We also have significant business with non-U.S. governments and a diverse base of corporate and individual buyers of business jet aircraft and related services. The following discussion should be read in conjunction with our 2020 Annual Report on Form 10-K and with the unaudited Consolidated Financial Statements included in this Form 10-Q. BUSINESS ENVIRONMENT GLOBAL PANDEMIC UPDATE The Coronavirus (COVID-19) pandemic has caused significant disruptions to national and global economies and government activities sinceMarch 2020 . During this time, we have continued to conduct our operations while responding to the pandemic with actions to mitigate adverse consequences to our employees, business, supply chain and customers. While we expect this situation to be temporary, any longer-term impact to our business is currently unknown due to the uncertainty around the pandemic's duration and its broader impact. For additional information, see the Risk Factors in Part I, Item 1A, and the Business Environment in Part II, Item 7, in our most recent Form 10-K filing.The United States and other governments have taken several steps to respond to the pandemic. Most recently, onSeptember 9, 2021 , the president signed Executive Order 14042, initiating a process whereby covered federal contractors and subcontractors must implement federally required vaccine mandates. This federal contract requirement may affect various business units differently. We are working closely with our customer to ensure that we minimize disruptions and potential employee attrition at the site level as contract modifications are received that could trigger implementation. However, to the extent that we or our subcontractors experience employee attrition and/or work stoppages, our costs could increase, schedules could slip on affected programs and our ability to perform under some contracts could be negatively affected, particularly in those instances where we cannot receive cost reimbursement. Our Aerospace segment's operating results have experienced the most significant impact from the pandemic. New aircraft deliveries in the first half of 2021 reflect last year's decision to reduce production rates to accommodate supply chain challenges and reduced demand due to the pandemic. However, aircraft orders have been strong in the first nine months of 2021, and deliveries are increasing in the second half of the year. As air travel has increased, demand for aircraft services has improved, but remains below pre-pandemic levels in some regions of the world. OurU.S. government business continues to experience some disruption from the COVID-19 pandemic, such as supply chain shortages, 27 -------------------------------------------------------------------------------- particularly in our Technologies segment. The Review of Operating Segments includes additional information on the third-quarter results for each of our segments.U.S. GOVERNMENT BUDGET With approximately 70% of our revenue from theU.S. government, government spending levels - particularly defense spending - influence our financial performance. TheCongress has not yet passed a defense appropriations bill for the government's fiscal year (FY) 2022 despite the fact that the new year began onOctober 1, 2021 . However, onSeptember 30, 2021 , a continuing resolution (CR) was signed into law, providing funding for federal agencies throughDecember 3, 2021 . When the government operates under a CR, all programs of record are funded at the prior year's appropriated levels, and theDoD is prohibited from starting new programs. While this could result in delayed revenue growth as programs that were expected to have increased funding levels continue to operate at the prior-year levels until the current-year appropriations bill is passed, we do not anticipate that the current CR, or any subsequent extensions, will have a material impact on our results of operations, financial condition or cash flows. OTHER LEGISLATIVE ACTIVITY InSeptember 2021 , legislation was introduced in theU.S. House of Representatives that provides for significant changes toU.S. corporate income taxation, including an increase in the top corporate income tax rate from 21% to 26.5% and material changes toU.S. taxation of international activity. The legislation would also delay a requirement to capitalize and amortize over five years certain research and experimental expenditures beginning in 2022 that currently are deductible immediately. We cannot determine whether some or all of these or other proposals will be enacted into law or what, if any, change may be made to such proposals prior to being enacted into law. IfU.S. tax laws change in a manner that increases our tax obligations, our financial position and results of operations would be adversely impacted. RESULTS OF OPERATIONS INTRODUCTION An understanding of our accounting practices is necessary in the evaluation of our financial statements and operating results. The following paragraphs explain how we recognize revenue and operating costs in our operating segments and the terminology we use to describe our operating results. In the Aerospace segment, we record revenue on contracts for new aircraft when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. Revenue associated with the segment's custom completions of narrow-body and wide-body aircraft and the segment's services businesses is recognized as work progresses or upon delivery of services. Fluctuations in revenue from period to period result from the number and mix of new aircraft deliveries, progress on aircraft completions, and the level and type of aircraft services performed during the period. 28 -------------------------------------------------------------------------------- The majority of the Aerospace segment's operating costs relates to new aircraft production on firm orders and consists of labor, material, subcontractor and overhead costs. The costs are accumulated in production lots, recorded in inventory and recognized as operating costs at aircraft delivery based on the estimated average unit cost in a production lot. While changes in the estimated average unit cost for a production lot impact the level of operating costs, the amount of operating costs reported in a given period is based largely on the number and type of aircraft delivered. Operating costs in the Aerospace segment's completions and services businesses are recognized generally as incurred. For new aircraft, operating earnings and margin are a function of the prices of our aircraft, our operational efficiency in manufacturing and outfitting the aircraft, and the mix of ultra-large-cabin, large-cabin and mid-cabin aircraft deliveries. Aircraft mix can also refer to the stage of program maturity for our aircraft models. A new aircraft model typically has lower margins in its initial production lots, and then margins generally increase as we realize efficiencies in the production process. Additional factors affecting the segment's earnings and margin include the volume, mix and profitability of completions and services work performed, the market for pre-owned aircraft, and the level of general and administrative (G&A) and net research and development (R&D) costs incurred by the segment. In the defense segments, revenue on long-term government contracts is recognized generally over time as the work progresses, either as products are produced or as services are rendered. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. Variances in costs recognized from period to period reflect primarily increases and decreases in production or activity levels on individual contracts. Because costs are used as a measure of progress, year-over-year variances in cost result in corresponding variances in revenue, which we generally refer to as volume. Operating earnings and margin in the defense segments are driven by changes in volume, performance or contract mix. Performance refers to changes in profitability based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract or both. Therefore, changes in costs incurred in the period compared with prior periods do not necessarily impact profitability. It is only when total estimated costs at completion on a given contract change without a corresponding change in the contract value (or vice versa) that the profitability of that contract may be impacted. Contract mix refers to changes in the volume of higher- versus lower-margin work. Higher or lower margins can result from a number of factors, including contract type (e.g., fixed-price/cost-reimbursable) and type of work (e.g., development/production). Contract mix can also refer to the stage of program maturity for our long-term production contracts. New long-term production contracts typically have lower margins initially, and then margins generally increase as we achieve learning curve improvements or realize other cost reductions. 29 --------------------------------------------------------------------------------
CONSOLIDATED OVERVIEW Three Months Ended October 3, 2021 September 27, 2020 Variance Revenue$ 9,568 $ 9,431$ 137 1.5 % Operating costs and expenses (8,488) (8,359) (129) 1.5 % Operating earnings 1,080 1,072 8 0.7 % Operating margin 11.3 % 11.4 % Nine Months Ended October 3, 2021 September 27, 2020 Variance Revenue$ 28,177 $ 27,444$ 733 2.7 % Operating costs and expenses (25,200) (24,604) (596) 2.4 % Operating earnings 2,977 2,840 137 4.8 % Operating margin 10.6 % 10.3 % Our consolidated revenue increased in the first nine months of 2021 driven by growth in each of our defense segments, including increases inU.S. Navy ship construction in our Marine Systems segment, international military vehicle programs in our Combat Systems segment and IT services in our Technologies segment. These increases were offset partially by fewer aircraft deliveries in our Aerospace segment reflecting last year's decision to lower aircraft production rates in response to the COVID-19 pandemic. On a quarter-over-quarter basis, the increase inU.S. Navy ship construction in our Marine Systems segment was offset partially by lower C4ISR solutions revenue in our Technologies segment. Operating margin decreased slightly in the third quarter of 2021 but was up 30 basis points in the first nine months of 2021 on strong operating results at our Technologies and Combat Systems segments. REVIEW OF OPERATING SEGMENTS Following is a discussion of operating results for each of our operating segments. For the Aerospace segment, results are analyzed by specific types of products and services, consistent with how the segment is managed. For the defense segments, the discussion is based on markets and the lines of products and services offered with a supplemental discussion of specific contracts and programs when significant to the results. Additional information regarding our segments can be found in Note O to the unaudited Consolidated Financial Statements in Part I, Item 1. AEROSPACE Three Months Ended October 3, 2021 September 27, 2020 Variance Revenue$ 2,066 $ 1,975$ 91 4.6 % Operating earnings 262 283 (21) (7.4) % Operating margin 12.7 % 14.3 % Gulfstream aircraft deliveries (in units) 31 32 (1) (3.1) % Nine Months Ended October 3, 2021 September 27, 2020 Variance Revenue$ 5,575 $ 5,640$ (65) (1.2) % Operating earnings 677 682 (5) (0.7) % Operating margin 12.1 % 12.1 % Gulfstream aircraft deliveries (in units) 80 87 (7) (8.0) % 30
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Operating Results
The change in the Aerospace segment's revenue in the third quarter and first
nine months of 2021 consisted of the following:
Third Quarter Nine Months
Aircraft manufacturing $ (45) $ (298)
Aircraft services and completions 136 233
Total increase (decrease) $ 91 $ (65)
Aircraft manufacturing revenue decreased in the first nine months of 2021 due to
fewer aircraft deliveries reflecting the full impact of last year's decision to
reduce aircraft production rates in response to the COVID-19 pandemic. Aircraft
services and completions revenue was higher in the third quarter and first nine
months of 2021 due to increased air travel driving additional demand for
maintenance work and activity at our fixed-base operator (FBO) facilities.
The change in the segment's operating earnings in the third quarter and first
nine months of 2021 consisted of the following:
Third Quarter Nine Months
Aircraft manufacturing $ (38) $ (157)
Aircraft services and completions 45 116
Impact of 2020 restructuring charge - 42
G&A/other expenses (28) (6)
Total decrease $ (21) $ (5)
Aircraft manufacturing operating earnings were down in the first nine months of
2021 due to the planned reduced aircraft production and delivery rates, a less
favorable mix of aircraft deliveries and sales of G500 flight-test aircraft,
which typically sell at less than new plane prices. In the third quarter of
2021, aircraft manufacturing operating earnings were impacted negatively by the
settlement of claims with a supplier related to the assignment of warranties
following the end of G550 production. These decreases were offset by increased
aircraft services and completions operating earnings due to higher volume and a
favorable mix of aircraft services. Operating earnings in the first nine months
of 2021 were also up due to a restructuring charge taken in the second quarter
of 2020 to adjust the workforce size to the revised production levels. Operating
earnings in the third quarter and first nine months of 2021 reflected higher
G&A/other expenses due primarily to increased net R&D expenses associated with
ongoing product development efforts, including flight test activities for the
G700, which is scheduled to enter service in the fourth quarter of 2022. In
total, the Aerospace segment's operating margin decreased 160 basis points in
the third quarter of 2021 and remained steady in the first nine months of 2021
compared with the prior-year periods.
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MARINE SYSTEMS
Three Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 2,637 $ 2,405 $ 232 9.6 %
Operating earnings 229 223 6 2.7 %
Operating margin 8.7 % 9.3 %
Nine Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 7,656 $ 7,122 $ 534 7.5 %
Operating earnings 639 607 32 5.3 %
Operating margin 8.3 % 8.5 %
Operating Results
The increase in the Marine Systems segment's revenue in the third quarter and
first nine months of 2021 consisted of the following:
Third Quarter Nine Months
U.S. Navy ship construction $ 228 $ 612
Commercial ship construction (15) (69)
U.S. Navy ship engineering, repair and other services 19 (9)
Total increase $ 232 $ 534
Revenue from U.S. Navy ship construction was up across our shipyards in the
third quarter and first nine months of 2021 due to increased volume on the
Columbia-class submarine program, the Arleigh Burke-class (DDG-51) destroyer
program and the John Lewis-class (T-AO-205) fleet replenishment oiler program.
These increases were offset partially by lower commercial ship construction.
Overall, the Marine Systems segment's operating margin decreased 60 basis points
in the third quarter of 2021 and 20 basis points in the first nine months of
2021, reflecting the shift in mix to early work on new submarine programs with
typical lower initial profit rates.
COMBAT SYSTEMS
Three Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 1,745 $ 1,801 $ (56) (3.1) %
Operating earnings 276 270 6 2.2 %
Operating margin 15.8 % 15.0 %
Nine Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 5,464 $ 5,263 $ 201 3.8 %
Operating earnings 786 732 54 7.4 %
Operating margin 14.4 % 13.9 %
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Operating Results The change in the Combat Systems segment's revenue in the third quarter and first nine months of 2021 consisted of the following:
Third Quarter Nine Months
International military vehicles $ (27) $ 214
Weapons systems and munitions (16) 20
U.S. military vehicles (13) (33)
Total (decrease) increase $ (56) $ 201
Revenue from international military vehicles increased in the first nine months
of 2021 due to higher volume on wheeled armored vehicle programs, including
contracts to produce armored combat support vehicles (ACSVs) and light armored
vehicles (LAVs) for the Canadian government. In the third quarter of 2021,
revenue was down due primarily to timing on several programs. The Combat Systems
segment's operating margin increased 80 basis points in the third quarter of
2021 and 50 basis points in the first nine months of 2021 on strong program
performance, favorable product mix and continued cost reduction efforts.
TECHNOLOGIES
Three Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 3,120 $ 3,250 $ (130) (4.0) %
Operating earnings 327 314 13 4.1 %
Operating margin 10.5 % 9.7 %
Nine Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 9,482 $ 9,419 $ 63 0.7 %
Operating earnings 941 859 82 9.5 %
Operating margin 9.9 % 9.1 %
Operating Results
The change in the Technologies segment's revenue in the third quarter and first
nine months of 2021 consisted of the following:
Third Quarter Nine Months
IT services $ 28 $ 313
C4ISR* solutions (158) (250)
Total (decrease) increase $ (130) $ 63
*Command, control, communications, computers, intelligence, surveillance and
reconnaissance
IT services revenue increased due to the ramp up of several new programs and the
reopening of, and increased access to, customer sites. The decrease in C4ISR
solutions revenue was due to timing on several programs driven, in part, by
impacts to customer acquisition cycles, chip shortages and other supply chain
impacts resulting from the COVID-19 pandemic, which may extend into the fourth
quarter. C4ISR solutions revenue also decreased due to approximately $115 of
revenue in the prior-year period from a satellite communications business that
was sold in the second quarter of 2020. Year-over-year growth for the segment
was 1.9% excluding the impact of the sale.
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Overall, the Technologies segment's operating margin increased 80 basis points
in the third quarter and first nine months of 2021 due to favorable contract mix
and reduced COVID-related impacts in our IT services business, particularly
customer reimbursement of idle workforce cost at zero fee in 2020 and early
2021. Additionally, operating results in the first nine months of 2020 included
an approximate $40 loss on a contract with a non-U.S. customer from schedule
delays caused by COVID-related travel restrictions, offset partially by a gain
on the sale of the satellite communications business.
CORPORATE
Corporate operating results consisted primarily of equity-based compensation
expense and totaled $14 in the third quarter and $66 in the first nine months of
2021 compared with $18 and $40 in the prior-year periods, respectively.
OTHER INFORMATION
PRODUCT REVENUE AND OPERATING COSTS
Three Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 5,518 $ 5,454 $ 64 1.2 %
Operating costs (4,552) (4,459) (93) 2.1 %
Nine Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 16,033 $ 15,849 $ 184 1.2 %
Operating costs (13,249) (13,052) (197) 1.5 %
The increase in product revenue in the third quarter and first nine months of 2021 consisted of the following:
Third Quarter Nine Months
Ship construction $ 213 $ 543
Aircraft manufacturing (45) (298)
C4ISR products (113) (228)
Other, net 9 167
Total increase $ 64 $ 184
Ship construction revenue increased in the third quarter and first nine months
of 2021 driven by higher U.S. Navy ship construction volume across our
shipyards. This increase was offset partially by lower aircraft manufacturing
revenue due to fewer aircraft deliveries and decreased C4ISR products revenue
driven by timing on several programs and supply chain shortages. In the third
quarter and first nine months of 2021, the primary drivers of the changes in
product operating costs were the changes in volume on the programs described
above.
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SERVICE REVENUE AND OPERATING COSTS
Three Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 4,050 $ 3,977 $ 73 1.8 %
Operating costs (3,386) (3,388) 2 (0.1) %
Nine Months Ended October 3, 2021 September 27, 2020 Variance
Revenue $ 12,144 $ 11,595 $ 549 4.7 %
Operating costs (10,286) (9,941) (345) 3.5 %
The increase in service revenue in the third quarter and first nine months of 2021 consisted of the following:
Third Quarter Nine Months
IT services $ 28 $ 313
Aircraft services and completions 136 233
Other, net (91) 3
Total increase $ 73 $ 549
Services revenue increased in the third quarter and first nine months of 2021
due to the ramp up of several new IT services programs and the reopening of, and
increased access to, customer sites, and higher aircraft services and
completions revenue driven by additional maintenance work and FBO activity.
Service operating costs decreased on increased revenue in the third quarter of
2021, and increased at a lower rate than revenue in the first nine months of
2021, due primarily to favorable contract mix and reduced COVID-related impacts
in our IT services business.
G&A EXPENSES
As a percentage of revenue, G&A expenses were 5.9% in the first nine months of
2021 and 2020.
OTHER, NET
Net other income was $95 in the first nine months of 2021 compared with $70 in
the first nine months of 2020. Other represents primarily the non-service
components of pension and other post-retirement benefits, which were income in
both periods.
INTEREST, NET
Net interest expense was $331 in the first nine months of 2021 compared with
$357 in the prior-year period. See Note I to the unaudited Consolidated
Financial Statements in Part I, Item 1, for additional information regarding our
debt obligations, including interest rates.
PROVISION FOR INCOME TAX, NET
Our effective tax rate was 15.9% in the first nine months of 2021 compared with
15.2% in the prior-year period.
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BACKLOG AND ESTIMATED POTENTIAL CONTRACT VALUE
Our total backlog, including funded and unfunded portions, was $88.1 billion at
the end of the third quarter of 2021 compared with $89.2 billion on July 4,
2021 . Our total backlog is equal to our remaining performance obligations under
contracts with customers as discussed in Note B to the unaudited Consolidated
Financial Statements in Part I, Item 1. Our total estimated contract value,
which combines total backlog with estimated potential contract value, was $129.6
billion on October 3, 2021 .
The following table details the backlog and estimated potential contract value
of each segment at the end of the third and second quarters of 2021:
Estimated Total
Potential Estimated
Funded Unfunded Total Backlog Contract Value Contract Value
October 3, 2021
Aerospace $ 14,312 $ 378 $ 14,690 $ 1,974 $ 16,664
Marine Systems 24,639 21,684 46,323 5,127 51,450
Combat Systems 13,040 308 13,348 7,594 20,942
Technologies 9,619 4,118 13,737 26,784 40,521
Total $ 61,610 $ 26,488 $ 88,098 $ 41,479 $ 129,577
July 4, 2021
Aerospace $ 13,155 $ 366 $ 13,521 $ 2,099 $ 15,620
Marine Systems 26,435 21,095 47,530 4,689 52,219
Combat Systems 14,157 271 14,428 7,711 22,139
Technologies 9,769 3,999 13,768 26,594 40,362
Total $ 63,516 $ 25,731 $ 89,247 $ 41,093 $ 130,340
AEROSPACE
Aerospace funded backlog represents new aircraft and custom completion orders
for which we have definitive purchase contracts and deposits from customers.
Unfunded backlog consists of agreements to provide future aircraft maintenance
and support services. The Aerospace segment ended the third quarter of 2021 with
backlog of $14.7 billion , up 8.6% from $13.5 billion on July 4, 2021 , following
growth of 13.3% in the second quarter of 2021.
Reflecting strong demand across our aircraft portfolio, unit orders in the third
quarter of 2021 were the second highest of any quarter in more than five years.
The segment's book-to-bill ratio (orders divided by revenue) was 1.6-to-1 in the
third quarter of 2021, resulting in a book-to-bill of 1.4-to-1 over the trailing
12 months. Our October 3, 2021 , backlog included orders for the recently
announced G400 and G800 aircraft.
Beyond total backlog, estimated potential contract value represents primarily
options and other agreements with existing customers to purchase new aircraft
and long-term aircraft services agreements. On October 3, 2021 , estimated
potential contract value in the Aerospace segment was $2 billion .
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DEFENSE SEGMENTS
The total backlog in our defense segments represents the estimated remaining
sales value of work to be performed under firm contracts. The funded portion of
total backlog includes items that have been authorized and appropriated by the
U.S. Congress and funded by customers, as well as commitments by international
customers that are approved and funded similarly by their governments. The
unfunded portion of total backlog includes the amounts we believe are likely to
be funded, but there is no guarantee that future budgets and appropriations will
provide the same funding level currently anticipated for a given program.
Estimated potential contract value in our defense segments includes unexercised
options associated with existing firm contracts and unfunded work on indefinite
delivery, indefinite quantity (IDIQ) contracts. Contract options represent
agreements to perform additional work under existing contracts at the election
of the customer. We recognize options in backlog when the customer exercises the
option and establishes a firm order. For IDIQ contracts, we evaluate the amount
of funding we expect to receive and include this amount in our estimated
potential contract value. This amount is often less than the total IDIQ contract
value, particularly when the contract has multiple awardees. The actual amount
of funding received in the future may be higher or lower than our estimate of
potential contract value.
Total backlog in our defense segments was $73.4 billion on October 3, 2021 . In
the third quarter of 2021, the Technologies segment achieved a book-to-bill
ratio of 1-to1, and overall, the defense segments achieved a book-to-bill ratio
of 1.1-to-1 over the trailing 12 months. Estimated potential contract value in
our defense segments was $39.5 billion on October 3, 2021 . We received the
following significant contract awards during the third quarter of 2021:
MARINE SYSTEMS
•$475 from the U.S. Navy to provide ongoing lead yard services for the
Columbia-class submarine program.
•$195 from the Navy to provide engineering, technical, design and planning yard
support services for operational strategic and attack submarines.
•$160 from the Navy to provide maintenance and repair services for the Arleigh
Burke-class destroyer, Nimitz-class aircraft carrier, San Antonio-class
amphibious transport dock and Whidbey Island -class dock landing ship programs.
•$150 from the Navy for Advanced Nuclear Plant Studies (ANPS) in support of the
Columbia-class submarine program and options totaling $570 of additional
potential value.
COMBAT SYSTEMS
•$165 to produce various munitions, ordnance and missile subcomponents for the
U.S. Army .
•$125 for Abrams main battle tank upgrades, mission control units and systems
technical support.
•$60 from the Army for the concept design phase of the Optionally Manned
Fighting Vehicle (OMFV) acquisition program.
•$30 from the Army for the production of Hydra-70 rockets.
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•$540 for several key contracts for classified customers and additional classified IDIQ awards with a maximum potential value of$4.2 billion among multiple awardees. •A contract to provide cloud support services to theU.S. Patent and Trademark Office (USPTO). The contract has a maximum potential value of$190 . •A contract to modernize and consolidate existing information technology (IT) help desks for theNavy . The contract has a maximum potential value of$135 . •$85 from the Army for computing and communications equipment under the Common Hardware Systems-5 (CHS-5) program. •$75 to provide logistics, sustainment and maintenance support services for the Army. •$70 to provide command, control and communications capabilities for theDoD . •$65 from theU.S. Department of State (DoS) to provide overseas consular services to support visa application and issuance atU.S. embassies and consulates throughout the world under the Global Support Strategy (GSS) program. •$50 to provide simulation and training support for the Army. •$45 from theCenters for Medicare and Medicaid Services (CMS) to provide cloud services and software tools. •$45 to provide service desk; endpoint support and maintenance; and account, asset and security management services to the DoS. •$45 from theU.S. Department of Veterans Affairs under the Veterans Intake, Conversion and Communications Services (VICCS) program to modernize benefits and claim processing. •$40 to provide communications technical support for theU.S. Air Force . •$35 to provide design, development, testing, installation, maintenance, logistics support and modernization forNavy airborne and shipboard platforms. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES We ended the third quarter of 2021 with a cash and equivalents balance of$3.1 billion compared with$2.8 billion at the end of 2020. We expect to continue to generate funds in excess of our short- and long-term liquidity needs. We believe we have adequate funds on hand and sufficient borrowing capacity to execute our financial and operating strategy. The following is a discussion of our major operating, investing and financing activities in the first nine months of 2021 and 2020, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1. 38 -------------------------------------------------------------------------------- OPERATING ACTIVITIES Cash provided by operating activities was$2.6 billion in the first nine months of 2021 compared with$1.3 billion in the same period in 2020. The primary driver of cash inflows in both periods was net earnings. However, cash flows in both periods were affected negatively by growth in operating working capital (OWC), which is defined as current assets, excluding cash and equivalents, less current liabilities, excluding short-term debt and current portion of long-term debt. Throughout 2020, we experienced growth in OWC in our Aerospace segment due to our position in the development and production cycles of our Gulfstream aircraft models. While Aerospace OWC has decreased in the first nine months of 2021, the timing of billings and payments in our defense segments resulted in net OWC growth. INVESTING ACTIVITIES Cash used by investing activities was$501 in the first nine months of 2021 compared with$589 in the same period in 2020. Our investing activities include cash paid for capital expenditures and business acquisitions; purchases, sales and maturities of marketable securities; and proceeds from asset sales. The primary use of cash for investing activities in both periods was capital expenditures. Capital expenditures were$502 in the first nine months of 2021 compared with$622 in the same period in 2020. FINANCING ACTIVITIES Cash used by financing activities was$1.8 billion in the first nine months of 2021 compared with$100 in the same period in 2020. Net cash from financing activities includes proceeds received from debt and commercial paper issuances and employee stock option exercises. Our financing activities also include the use of cash for repurchases of common stock, payment of dividends and debt repayments. Our board of directors from time to time authorizes management to repurchase outstanding shares of our common stock on the open market. We paid$1.5 billion and$501 in the first nine months of 2021 and 2020, respectively, to repurchase our outstanding shares. OnOctober 3, 2021 , 13.8 million shares remained authorized by our board of directors for repurchase, representing 5% of our total shares outstanding. OnMarch 3, 2021 , our board of directors declared an increased quarterly dividend of$1.19 per share, the 24th consecutive annual increase. Previously, the board had increased the quarterly dividend to$1.10 per share inMarch 2020 . Cash dividends paid were$983 in the first nine months of 2021 compared with$925 in the same period in 2020. InMay 2021 , we issued$1.5 billion of fixed-rate notes. The proceeds, together with cash on hand and commercial paper issuances, were used to repay fixed- and floating-rate notes totaling$2.5 billion that matured inMay 2021 and for general corporate purposes. InJuly 2021 , we repaid an additional$500 of fixed-rate notes at the scheduled maturity. For additional information regarding our debt obligations, including scheduled debt maturities and interest rates, see Note I to the unaudited Consolidated Financial Statements in Part 1, Item 1. In the first nine months of 2021, we received net proceeds of$2 billion from the issuance of commercial paper, which remained outstanding onOctober 3, 2021 . Separately, we have$5 billion in committed bank credit facilities for general corporate purposes and working capital needs and to support 39
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our commercial paper issuances. We also have an effective shelf registration on file with theSecurities and Exchange Commission (SEC) that allows us to access the debt markets. NON-GAAP FINANCIAL MEASURES We emphasize the efficient conversion of net earnings into cash and the deployment of that cash to maximize shareholder returns. As described below, we use free cash flow from operations and net debt to measure our performance in these areas. While we believe these metrics provide useful information, they are not defined operating measures underU.S. generally accepted accounting principles (GAAP), and there are limitations associated with their use. Our calculation of these metrics may not be completely comparable to similarly titled measures of other companies due to potential differences in the method of calculation. As a result, the use of these metrics should not be considered in isolation from, or as a substitute for, other GAAP measures. Free Cash Flow. We define free cash flow from operations as net cash provided by operating activities less capital expenditures. We believe free cash flow from operations is a useful measure for investors because it portrays our ability to generate cash from our businesses for purposes such as repaying maturing debt, funding business acquisitions, repurchasing our common stock and paying dividends. We use free cash flow from operations to assess the quality of our earnings and as a key performance measure in evaluating management. The following table reconciles the free cash flow from operations with net cash provided by operating activities, as classified on the unaudited Consolidated Statement of Cash Flows in Part I, Item 1:
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