TEXTRON INC (TXT)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2024, our operating results were adversely impacted by a strike at the Textron Aviation segment. On September 21, 2024, the International Association of Machinists and Aerospace Workers (IAM) District 70, Local Lodge 774 called a strike against Textron Aviation. On October 20, 2024, an agreement was reached on a new five-year labor contract. As a result, our revenues and profit were unfavorably impacted in the second half of 2024 due to delayed aircraft deliveries and manufacturing inefficiencies associated with the labor disruption and the recovery of operating activities. At the Industrial segment, we experienced lower revenues and profit in 2024, largely resulting from a decline in demand in our end markets for Textron Specialized Vehicles products. We are in the process of conducting a strategic review of our powersports product line, as discussed in Note 15 to the Consolidated Financial Statements on page 62.

At our Bell segment, the ramp up of the FLRAA program contributed to a 14% growth in its revenues for the year. In August, the U.S. Army announced approval of Milestone B for the FLRAA program, establishing it as a program of record and transitioning it to the Engineering and Manufacturing Development phase. In the second half of the year, Bell was awarded contracts totaling approximately $3.0 billion for this phase of the program that contributed to a total company backlog increase of $4.0 billion, 29%, to $17.9 billion at the end of 2024. This backlog increase included growth of $676 million at the Textron Aviation segment, reflecting steady customer demand supported by new products, and $644 million at the Textron Systems segment, which included new contract awards for the Ship-to-Shore Connector program.

Financial highlights for 2024 also include:

•Generated $1.0 billion of net cash from operating activities from our manufacturing businesses.

•Invested $491 million in research and development projects and $364 million in capital expenditures.

•Returned $1.1 billion to our shareholders through the repurchase of 12.9 million shares of our common stock.

For an overview of our business segments, including a discussion of our major products and services, refer to Item 1. Business. A discussion of our financial condition and operating results for 2024 compared with 2023 is provided below, while a discussion of 2023 compared with 2022 can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 30, 2023.

In November 2023, the Financial Accounting Standards Board issued Accounting Standard Update (ASU) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires a public entity to disclose, on an annual and interim basis, significant segment expenses and other segment items that are regularly provided to the Chief Operating Decision Maker. The new standard is effective for fiscal years beginning after December 15, 2023. We adopted ASU 2023-07 in the fourth quarter of 2024 and have recast management’s discussion and analysis of the results of operations of our company to include a discussion of the additional expense categories. In connection with the adoption of this standard, research and development costs previously included within Cost of products sold are now reported on a separate line in our Consolidated Statements of Operations. Prior period amounts have been recast to conform to the new presentation.

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. Financial Statements and Supplementary Data.

Consolidated Results of Operations

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Revenues

Revenues increased $19 million in 2024, compared with 2023, largely due to the following factors:

•Higher Bell revenues of $432 million, largely reflecting higher military aircraft and support revenues of $347 million, primarily due to higher volume on the FLRAA program, partially offset by lower volume on the V-22 program.

•Lower Industrial revenues of $326 million, due to lower revenues of $263 million at Textron Specialized Vehicles, principally in the powersports and personal transportation vehicles product lines due to reduced demand in their end markets, and lower revenues of $63 million at Kautex.

•Lower Textron Aviation revenues of $89 million, reflecting lower volume and mix of $270 million, principally a result of the strike discussed in the Segment Analysis section below, partially offset by higher pricing of $181 million in both the aircraft and aftermarket parts and services product lines.

Cost of Sales

Cost of sales includes cost of products and services sold for the Manufacturing group. In 2024, cost of sales increased $365 million, 3%, compared with 2023. The increase in cost was largely due to a $299 million impact from inflation and higher LIFO inventory provision and a $38 million inventory valuation charge to write down inventory to its net realizable value at Textron Specialized Vehicles as discussed in Note 15 to the Consolidated Financial Statements on page 62.

Consolidated gross margin as a percentage of Manufacturing revenues decreased 250 basis points in 2024, compared with 2023, primarily due to lower gross margin at the Bell segment, largely due to the mix of contracts discussed above, and at the Textron Aviation segment, reflecting the mix of aircraft sold and manufacturing inefficiencies, largely due to the strike. In addition, higher LIFO inventory provision and the inventory valuation charge noted above accounted for 80 basis points of the decrease.

Research and Development Costs

Research and development costs decreased $79 million, 14%, in 2024, compared with 2023, largely reflecting the winddown of the Future Attack Reconnaissance Aircraft Program at the Bell segment, partially offset by a $17 million increase at the Textron eAviation segment, largely due to development efforts on hybrid and electric propulsion aircraft.

Selling and Administrative Expense

Selling and administrative expense decreased $69 million, 6%, in 2024, compared with 2023, primarily reflecting lower compensation expense, which included lower shared-based and incentive compensation and savings from restructuring activities.

Interest Expense, Net

Interest expense, net includes interest expense for both the Finance and Manufacturing borrowing groups, with interest on intercompany borrowings eliminated, and interest income earned on cash and equivalents for the Manufacturing borrowing group. In 2024, interest expense, net increased $20 million, 26%, compared with 2023, primarily due to an increase in the weighted-average interest rate of our debt and $7 million in lower interest income. For 2024, 2023 and 2022, gross interest expense totaled $146 million, $133 million and $129 million, respectively.

Special Charges

Special charges of $78 million and $126 million in 2024 and 2023, respectively, include restructuring activities and asset impairment charges as described in Note 15 to the Consolidated Financial Statements on page 62.

Non-service Components of Pension and Postretirement Income, Net

Non-service components of pension and postretirement income, net increased by $26 million, 11%, in 2024, compared with 2023. The increase is based on our annual valuation at the end of 2023 and is primarily driven by the impact of actual pension asset returns that exceeded our expected return on plan assets.

Income Taxes

In 2024, the effective tax rate of 12.5% was lower than the U.S. federal statutory tax rate of 21%, largely due to the favorable impact of research and development credits and the effective settlement of certain tax positions in the fourth quarter of 2024, which is discussed in Note 16 to the Consolidated Financial Statements on page 63. In 2023, the effective tax rate of 15.2% was lower than the U.S. federal statutory tax rate of 21%, largely due to the favorable impact of research and development credits and tax deductions for foreign-derived intangible income.

For a full reconciliation of our effective tax rate to the U.S. federal statutory tax rate, see Note 16 to the Consolidated Financial Statements on page 63.

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Segment Analysis

We operate in, and report financial information for, the following six operating segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes the non-service components of pension and postretirement income, net; LIFO inventory provision; intangible asset amortization; interest expense, net for Manufacturing group; certain corporate expenses; gains/losses on major business dispositions; special charges and the inventory valuation charge to write down production-related powersports inventory. The operating costs used to derive segment profit for our manufacturing segments includes cost of sales, research and development costs and selling and administrative expense. The cost of sales discussed in this Segment Analysis section excludes the LIFO inventory provision, intangible asset amortization and the inventory valuation charge discussed above that are reported within Cost of products sold or Cost of services sold on the Consolidated Statement of Operations. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.

In our discussion of comparative results for the Manufacturing group, material changes in revenues and segment profit for our commercial businesses typically are expressed in terms of product line revenues, including volume and mix and pricing; foreign exchange; acquisitions and dispositions; inflation; manufacturing efficiency; and changes in research and development costs and selling and administrative expense. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold. For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. Inflation represents higher material, wages, benefits, pension service cost or other costs. Manufacturing efficiency includes changes in material, labor and overhead variances to standards, typically due to scrap rates, labor efficiency or inefficiencies, facility usage and other manufacturing productivity inputs.

Approximately 25% of our 2024 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program. For our segments that contract with the U.S. Government, material changes in revenues related to these contracts are expressed in terms of volume. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and contract performance, which includes cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.

Textron Aviation

Textron Aviation’s revenues decreased $89 million, 2%, in 2024, compared with 2023, reflecting lower volume and mix of $270 million, which was principally a result of the strike discussed below, partially offset by higher pricing of $181 million. Aircraft revenues decreased $203 million, 6%, due to lower volume and mix, largely from Citation jet and commercial turboprop deliveries, partially offset by higher pricing. We delivered 151 Citation jets and 127 commercial turboprops in 2024, compared with 168 Citation jets and 153 commercial turboprops in 2023. Aftermarket parts and services revenues increased $114 million, 6%, due to higher pricing and volume.

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On September 21, 2024, the IAM District 70, Local Lodge 774 called a strike against Textron Aviation. The strike impacted approximately 5,000 of Textron Aviation’s employees at the manufacturing, parts and distribution and service center facilities in Wichita. On October 20, 2024, Textron Aviation and the IAM reached an agreement on a new five-year labor contract. The strike had a significant adverse impact on Textron Aviation’s ability to meet its production and delivery schedules in the third quarter and continuing into the fourth quarter of 2024. As a result, our revenues and profit were unfavorably impacted in the second half of 2024 by delayed aircraft deliveries and manufacturing inefficiencies associated with the labor disruption and the recovery of operating activities.

Textron Aviation’s cost of sales decreased $14 million in 2024, compared with 2023. The impact of lower volume and mix on our cost of sales was offset by $127 million of inflation and $43 million in manufacturing inefficiencies, largely reflecting idle facilities costs resulting from the strike discussed above.

Textron Aviation’s segment profit decreased $83 million, 13%, in 2024, compared with 2023, primarily due to lower volume and mix and the manufacturing inefficiencies discussed above, partially offset by higher pricing, net of inflation.

Textron Aviation’s backlog increased $676 million, 9%, in 2024, reflecting orders in excess of deliveries.

Bell

Bell’s military aircraft and support programs include a development contract for the U.S. Army's FLRAA program, as well as production, upgrade, and support contracts for the V-22 tiltrotor aircraft and H-1 helicopters. The FLRAA program represents an increasing portion of Bell’s revenues as development activities have ramped. In August 2024, the U.S. Army announced approval of Milestone B for the FLRAA program, establishing it as a program of record and transitioning it to the Engineering and Manufacturing Development phase. In the second half of 2024, Bell was awarded contracts totaling approximately $3.0 billion for this phase of the program.

Bell’s military and support programs revenues increased $347 million, 20%, in 2024, compared with 2023, primarily due to higher volume on the FLRAA program, partially offset by lower volume on the V-22 program. Commercial helicopters, parts and services increased $85 million, 6%. We delivered 172 commercial helicopters in 2024, compared with 171 commercial helicopters in 2023.

Bell's cost of sales increased $507 million, 21%, in 2024, compared with 2023, primarily due to the higher volume and mix discussed above.

Bell's research and development costs decreased $95 million, 49%, in 2024, compared with 2023, largely due to the winddown of the Future Attack Reconnaissance Aircraft Program.

Selling and administrative expense decreased at Bell by $30 million, 12%, in 2024, compared with 2023, primarily due to a gain on a legal settlement recorded in the first quarter of 2024 and lower bid and proposal costs.

Bell’s segment profit increased $50 million, 16%, in 2024, compared with 2023, primarily due to lower research and development costs, as described above, partially offset by an unfavorable impact from mix as volume increased on lower margin FLRAA development activities while volume decreased on higher margin V-22 program revenues.

Backlog increased $2.7 billion, 56%, at Bell due to orders in excess of revenues recognized and deliveries, largely related to the FLRAA program discussed above.

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Textron Systems

Textron Systems revenues and segment profit increased $6 million and $7 million, respectively, in 2024, compared with 2023. The impact on volume related to the cancellation of the Shadow program in the first quarter of 2024 was largely offset by higher volume on the Ship-to-Shore Connector program.

Textron Systems’ backlog increased $644 million, 33%, in 2024, compared with 2023, reflecting orders in excess of revenues recognized and deliveries, which included new contract awards for the Ship-to-Shore Connector program.

Industrial

Industrial segment revenues decreased $326 million, 8%, in 2024, compared with 2023, largely due to lower volume and mix. Textron Specialized Vehicles' revenues decreased $263 million, 14%, reflecting lower volume, principally in the powersports and personal transportation vehicles products due to reduced demand in their end markets. Kautex revenues decreased $63 million, 3%, largely due to lower volume.

Industrial's cost of sales decreased $228 million, 7%, in 2024 compared with 2023, primarily reflecting the impact of lower volume and mix.

Segment profit for the Industrial segment decreased $77 million, 34%, in 2024, compared with 2023, largely due to a $105 million impact from lower volume and mix, partially offset by $22 million in manufacturing efficiencies and $21 million in lower selling and administrative expense and research and development costs, largely due to cost reduction activities.

Textron eAviation

Textron eAviation segment revenues increased $1 million, 3%, in 2024, compared with 2023. Research and development costs increased $17 million, 37%, largely due to the ramp up of development efforts on hybrid and electric propulsion aircraft. Segment loss increased $13 million in 2024, compared with 2023, primarily reflecting the higher research and development costs.

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Finance

Finance segment revenues decreased $5 million and segment profit decreased $11 million in 2024, compared with 2023. Selling and administrative expense included recoveries of $10 million and $18 million in 2024 and 2023, respectively. The decrease in segment profit was primarily due to $8 million in lower recoveries of credit losses.

Liquidity and Capital Resources

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems, Industrial and Textron eAviation segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible products and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

Assessment of Liquidity and Significant Future Cash Requirements

Key information that is utilized in assessing our liquidity is summarized below:

We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of our capacity to add further leverage.

We expect to have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility. In addition to our manufacturing operating cash requirements, future material cash outlays include our contractual combined debt and interest payments for the Manufacturing group of $473 million in 2025, $457 million in 2026, $444 million in 2027 and $2.5 billion thereafter, and for the Finance group of $46 million in 2025, $20 million in 2026, $69 million in 2027 and $507 million thereafter.

For the Manufacturing group, we also have purchase obligations that require material future cash outlays totaling $2.7 billion in 2025, $501 million in 2026 and $355 million thereafter. Purchase obligations include undiscounted amounts committed under contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates, as well as property, plant and equipment. Approximately 28% of our purchase obligations represent purchase orders issued for goods and services to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses.

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Credit Facilities and Other Sources of Capital

Textron has a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2027 and provides for two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. At December 28, 2024 and December 30, 2023, there were no amounts borrowed against the facility and there were $9 million of outstanding letters of credit issued under the facility.

We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities. On March 1, 2024, we repaid our $350 million 4.30% Notes due March 2024.

Manufacturing Group Cash Flows

Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:

Cash flows from operating activities were $1.0 billion in 2024, compared with $1.3 billion in 2023. The $262 million decrease in cash flows was largely due to changes in working capital and lower earnings, partially offset by $157 million in lower net tax payments. Net income tax payments were $181 million and $338 million in 2024 and 2023, respectively. Pension contributions were $44 million and $45 million in 2024 and 2023, respectively.

In 2024 and 2023, investing cash flows included capital expenditures of $364 million and $402 million, respectively, partially offset by net proceeds from corporate-owned life insurance policies of $85 million and $40 million, respectively.

Cash flows used by financing activities in 2024 included $1.1 billion of cash paid to repurchase an aggregate of 12.9 million shares of our common stock under the 2023 share repurchase plan described below and payments on long-term debt of $361 million. In 2023, cash flows used by financing activities included $1.2 billion of cash paid to repurchase an aggregate of 16.2 million shares of our common stock, partially offset by $348 million of net proceeds from the issuance of long-term debt.

In July 2023, Textron's Board of Directors approved a program for the repurchase of up to 35 million shares of our common stock. This share repurchase program allows us to continue our practice of repurchasing shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. The repurchase program has no expiration date and there were 15.6 million shares remaining under the program at December 28, 2024.

Dividend payments to shareholders totaled $12 million and $16 million in 2024 and 2023, respectively. Due to the timing of our fiscal year-end, we made three dividend payments in 2024, compared with four dividend payments in 2023.

Finance Group Cash Flows

The cash flows from continuing operations for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:

The Finance group’s cash flows from investing activities primarily included collections on finance receivables totaling $133 million and $169 million in 2024 and 2023, respectively, partially offset by finance receivable originations of $130 million and $160 million, respectively. Cash flows used in financing activities included payments on long-term and nonrecourse debt of $16 million and $37 million in 2024 and 2023, respectively.

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Consolidated Cash Flows

The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below:

Consolidated cash flows from operating activities were $1.0 billion in 2024, compared with $1.3 billion in 2023. The decrease of $252 million in cash flows was largely due to changes in working capital and lower earnings, partially offset by $161 million in lower net tax payments. Net income tax payments were $191 million and $352 million in 2024 and 2023, respectively. Pension contributions were $44 million and $45 million in 2024 and 2023, respectively.

In 2024 and 2023, investing cash flows included capital expenditures of $364 million and $402 million, respectively, partially offset by net proceeds from corporate-owned life insurance policies of $85 million and $40 million, respectively.

Cash flows used by financing activities in 2024 included $1.1 billion of share repurchases and payments on long-term debt of $377 million. In 2023, cash flows used by financing activities included $1.2 billion of share repurchases, partially offset by $348 million of net proceeds from the issuance of long-term debt.

Captive Financing and Other Intercompany Transactions

The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.

Reclassification adjustments included in the Consolidated Statements of Cash Flows on page 36 are summarized below:

Under a Support Agreement between Textron and TFC, Textron is required to maintain a controlling interest in TFC. The agreement, as amended in December 2015, also requires Textron to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholders' equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2024 and 2023 to maintain compliance with the support agreement.

Critical Accounting Estimates

To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated Financial Statements on page 38, which includes other significant accounting policies.

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Revenue Recognition

A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. We generally use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.  Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

Due to the number of years it may take to complete these contracts and the scope and nature of the work required to be performed on the contracts, the estimation of total transaction price and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. In estimating total costs at completion, we are required to make numerous assumptions related to the complexity of design and related development work to be performed; engineering requirements; product performance; subcontractor performance; availability and cost of materials; labor productivity, availability and cost; overhead and capital costs; manufacturing efficiencies; the length of time to complete the contract (to estimate increases in wages and prices for materials); and costs of satisfying offset obligations, among other variables. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our cost projections quarterly or more frequently when circumstances significantly change. When our estimate of the total costs to be incurred on a contract exceeds the estimated total transaction price, a provision for the entire loss is recorded in the period in which the loss is determined.

At the outset of each contract, we estimate an initial profit booking rate considering the risks surrounding our ability to achieve the technical requirements (e.g., a newly developed product versus a mature product), schedule (e.g., the number and type of milestone events), and costs by contract requirements in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract. Conversely, the profit booking rate may decrease if we are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate.

Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on segment profit recognized in prior periods is presented below:

Due to the significance of judgment in the estimation process described above, it is likely that materially different revenues and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones.

Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate a potential impairment of a reporting unit. We calculate the fair value of each reporting unit using discounted cash flows. These cash flows incorporate assumptions for revenue growth rates and operating margins that are based on our strategic plans and long-range planning forecasts, which include our best estimates of current and forecasted market conditions, cost structure and anticipated net cost reductions. The long-term revenue growth rate we use to determine the terminal value of the business is based on our assessment of its minimum expected terminal growth rate, as well as its past historical growth and broader economic considerations such as gross domestic product, inflation and the maturity of the markets we serve. The discount rates utilized in this analysis are based on each reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor or market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.

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Based on our annual impairment review, the fair value calculated using the estimates discussed above exceeded the carrying value by an adequate amount for each reporting group. Accordingly, we do not believe that there is a reasonable possibility that any units might fail the impairment test in the foreseeable future.

Retirement Benefits

We sponsor funded and unfunded domestic and international pension plans for certain of our employees. Beginning on January 1, 2010, we initiated actions to commence the closure of the pension plans to new entrants. We provide employees hired subsequent to these closures with defined contribution benefits. Our pension benefit obligations are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses or benefits include the expected long-term rates of return on plan assets and discount rates. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We evaluate and update these assumptions annually.

To determine the weighted-average expected long-term rate of return on plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class.  A lower expected rate of return on plan assets will decrease pension income.  For 2024 and 2023, the assumed expected long-term rate of return on plan assets used in calculating pension income was 7.16% and 7.14%, respectively. For 2024, the assumed rate of return for our domestic plans, which represent approximately 90% of our total pension assets, was 7.25%. Net periodic benefit income is sensitive to changes in the expected long-term rate of return on plan assets.

The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present value of the benefit obligations and generally decreases pension income.  In 2024, the weighted-average discount rate used in calculating pension income was 5.19%, compared with 5.51% in 2023.  For our domestic plans, the assumed discount rate was 5.25% in 2024, compared with 5.55% in 2023. A change of 50 basis-points higher or lower, with all other assumptions held constant, in this weighted-average discount rate in 2024 would have changed our pension income for our domestic plans by approximately $10 million.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2023, Textron’s revenues increased 6%, compared with 2022, reflecting the impact of higher pricing, principally at the Textron Aviation, Industrial and Bell segments, and higher volume and mix at the Industrial segment. Segment profit increased 17%, compared with 2022, largely due to higher pricing, net of inflation at the Textron Aviation and Industrial segments. Our backlog increased 5% in 2023 to $13.9 billion, which included a $782 million increase at the Textron Aviation segment. During 2023, we continued to manage through the impacts of ongoing global supply chain shortages/delays and labor shortages to deliver products to our customers. Financial highlights for 2023 also include:

•Generated $1.3 billion of net cash from operating activities from our manufacturing businesses.

•Invested $570 million in research and development projects and $402 million in capital expenditures.

•Returned $1.2 billion to our shareholders through the repurchase of 16.2 million shares of our common stock.

For an overview of our business segments, including a discussion of our major products and services, refer to Item 1. Business. A discussion of our financial condition and operating results for 2023 compared with 2022 is provided below, while a discussion of 2022 compared with 2021 can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2022.

Beginning in 2023, we changed how we measure our segment profit for the manufacturing segments, as discussed in the Segment Analysis section below. As a result of this change, the prior periods have been recast to conform to this presentation. The impact of the change in the segment profit measure on the narrative discussion of fluctuations in segment profit provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2022 was insignificant.

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. Financial Statements and Supplementary Data.

Consolidated Results of Operations

Revenues

Revenues increased $814 million, 6%, in 2023, compared with 2022. The revenue increase primarily included the following factors:

•Higher Industrial revenues of $376 million due to higher volume and mix of $280 million across both product lines and a favorable impact from pricing of $99 million.

•Higher Textron Aviation revenues of $300 million, reflecting higher pricing of $335 million, partially offset by lower volume and mix of $35 million.

•Higher Textron Systems revenues of $63 million, primarily due to higher volume of $44 million.

•Higher Bell revenues of $56 million, reflecting higher pricing of $68 million, partially offset by lower volume and mix of $12 million.

Cost of Sales and Selling and Administrative Expense

Cost of sales includes cost of products and services sold for the Manufacturing group. In 2023, cost of sales increased $605 million, 6%, compared with 2022, largely due to the impact of higher net volume and mix described above, and $257 million of inflation. Gross margin as a percentage of Manufacturing revenues increased 60 basis points in 2023, compared with 2022, largely due to higher margins at the Industrial, Bell and Textron Aviation segments.

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Selling and administrative expense increased $39 million, 3%, in 2023, compared with 2022, primarily reflecting higher share-based compensation expense and $27 million of inflation, largely in labor costs, partially offset by a $17 million recovery of amounts that were previously written off related to one customer relationship at the Finance segment.

Interest Expense, Net

Interest expense, net includes interest expense for both the Finance and Manufacturing borrowing groups, with interest on intercompany borrowings eliminated, and interest income earned on cash and equivalents for the Manufacturing borrowing group. In 2023, interest expense, net decreased $30 million, 28%, compared with 2022, primarily due to an increase in interest income of $34 million. For 2023, 2022 and 2021, gross interest expense totaled $133 million, $129 million and $142 million, respectively.

Special Charges

Special charges include restructuring activities and asset impairment charges as described in Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Non-service Components of Pension and Postretirement Income, Net

Non-service components of pension and postretirement income, net decreased by $3 million, 1%, in 2023, compared with 2022.

Income Taxes

In 2023 and 2022, the effective tax rate of 15.2% was lower than the U.S. federal statutory tax rate of 21%, largely due to the favorable impact of research and development credits and tax deductions for foreign-derived intangible income.

For a full reconciliation of our effective tax rate to the U.S. federal statutory tax rate, see Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Segment Analysis

We conduct our business through six operating segments: Textron Aviation, Bell, Textron Systems, Industrial, Textron eAviation and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Beginning in 2023, we changed how we measure our segment profit for the manufacturing segments to exclude the non-service components of pension and postretirement income, net; LIFO inventory provision; and intangible asset amortization. This measure also continues to exclude interest expense, net for Manufacturing group; certain corporate expenses; gains/losses on major business dispositions; and special charges. The prior periods have been recast to conform to this presentation. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense. Operating expenses for the Manufacturing segments include cost of sales and selling and administrative expense, while excluding certain corporate expenses, LIFO inventory provision, intangible asset amortization and special charges.

In our discussion of comparative results for the Manufacturing group, changes in revenues and segment profit for our commercial businesses typically are expressed in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, inflation and performance. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold. For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. Inflation represents higher material, wages, benefits, pension service cost or other costs. Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

Approximately 21% of our 2023 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program.  For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume. Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.

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Textron Aviation

Textron Aviation Revenues and Operating Expenses

Factors contributing to the 2023 year-over-year revenue change are provided below:

Textron Aviation’s revenues increased $300 million, 6%, in 2023, compared with 2022, reflecting higher pricing of $335 million, partially offset by lower volume and mix of $35 million. Volume and mix included lower Citation jet and pre-owned volume, partially offset by higher defense, aftermarket, commercial turboprop and other aircraft volume. We delivered 168 Citation jets and 153 commercial turboprops in 2023, compared with 178 Citation jets and 146 commercial turboprops in 2022.

Textron Aviation’s operating expenses increased $211 million, 5%, in 2023, compared with 2022, largely reflecting inflation of $176 million.

Textron Aviation Segment Profit

Factors contributing to 2023 year-over-year segment profit change are provided below:

Textron Aviation’s segment profit increased $89 million, 16%, in 2023, compared with 2022, due to favorable pricing, net of inflation of $159 million and a favorable impact from the mix of products and services sold, partially offset by an unfavorable impact from performance of $79 million, largely related to supply chain and labor inefficiencies.

Textron Aviation Backlog

Textron Aviation’s backlog increased $782 million in 2023, reflecting orders in excess of deliveries.

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Bell

A significant portion of Bell’s military aircraft and support program revenues has been from the U.S. Government for the V-22 tiltrotor aircraft and the H-1 helicopter platforms. Under current contracts, production of the V-22 tiltrotor aircraft is expected to end with final deliveries in the next two years after which this program will transition to the support stage. For the H-1 helicopter, final deliveries under the current contract are expected to be completed in early 2024, fully transitioning this platform to the support stage. In December 2022, Bell was awarded the development contract for the U.S. Army's FLRAA program, which has begun to represent an increasing portion of Bell’s military aircraft and support program revenues.

Bell Revenues and Operating Expenses

Factors contributing to the 2023 year-over-year revenue change are provided below:

Bell’s revenues increased $56 million, 2%, in 2023, compared with 2022, reflecting higher pricing of $68 million, partially offset by lower volume and mix of $12 million. Volume and mix included lower military volume of $39 million, as higher volume from the FLRAA program was more than offset by lower volume on the V-22 and H-1 programs. Commercial volume and mix increased $27 million, reflecting a favorable mix as we delivered 171 commercial helicopters in 2023, compared with 179 commercial helicopters in 2022.

Bell’s operating expenses increased $18 million, 1%, in 2023, compared with 2022, primarily due to inflation of $55 million and higher operating expenses due to the mix of products and services sold, partially offset by lower research and development costs described below.

Bell Segment Profit

Factors contributing to 2023 year-over-year segment profit change are provided below:

Bell’s segment profit increased $38 million, 13%, in 2023, compared with 2022, largely reflecting a favorable impact from performance of $74 million, which included $84 million of lower research and development costs, partially offset by lower volume and mix described above.

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Textron Systems

Textron Systems Revenues and Operating Expenses

Factors contributing to the 2023 year-over-year revenue change are provided below:

Revenues at Textron Systems increased $63 million, 5%, in 2023, compared with 2022, primarily due to higher volume and mix, which was principally related to weapons products.

Textron Systems’ operating expenses increased $48 million, 5%, in 2023, compared with 2022, largely related to higher volume and mix described above.

Textron Systems Segment Profit

Factors contributing to 2023 year-over-year segment profit change are provided below:

Textron Systems’ segment profit increased $15 million, 11%, in 2023, compared with 2022, due to a favorable impact from performance of $10 million and higher pricing, net of inflation of $10 million, partially offset by an unfavorable impact from the mix of products and services sold.

Industrial

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Industrial Revenues and Operating Expenses

Factors contributing to the 2023 year-over-year revenue change are provided below:

Industrial segment revenues increased $376 million, 11%, in 2023, compared with 2022, largely due to higher volume and mix of $280 million across both product lines and a favorable impact of $99 million from pricing, principally in the Specialized Vehicles product line.

Operating expenses for the Industrial segment increased $303 million, 9%, in 2023 compared with 2022, primarily reflecting the impact of higher volume and mix described above.

Industrial Segment Profit

Factors contributing to 2023 year-over-year segment profit change are provided below:

Segment profit for the Industrial segment increased $73 million, 47%, in 2023, compared with 2022, largely due to a favorable impact from pricing, net of inflation of $58 million, principally in the Specialized Vehicles product line, and higher volume and mix of $54 million as described above, partially offset by an unfavorable impact of $40 million from performance.

Textron eAviation

Textron eAviation Revenues and Operating Expenses

Factors contributing to the 2023 year-over-year revenue change are provided below:

Textron eAviation segment revenues increased $16 million in 2023, compared with 2022, primarily reflecting higher volume and mix.

Textron eAviation's operating expenses increased $55 million in 2023, compared with 2022, primarily related to higher research and development costs.

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Textron eAviation Segment Loss

Factors contributing to 2023 year-over-year segment loss change are provided below:

Textron eAviation's segment loss increased $39 million in 2023, compared with 2022, largely due to an unfavorable impact from performance and other, primarily reflecting higher research and development costs.

Finance

Finance segment revenues increased $3 million and segment profit increased $15 million in 2023, compared with 2022. The increase in segment profit was largely due to a $17 million recovery of amounts that were previously written off related to one customer relationship. The following table reflects information about the Finance segment’s credit performance related to finance receivables.

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Liquidity and Capital Resources

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems, Industrial and Textron eAviation segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible products and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

Assessment of Liquidity and Significant Future Cash Requirements

Key information that is utilized in assessing our liquidity is summarized below:

We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of our capacity to add further leverage.

We expect to have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility. In addition to our manufacturing operating cash requirements, future material cash outlays include our contractual combined debt and interest payments for the Manufacturing group of $483 million in 2024, $467 million in 2025, $452 million in 2026 and $2.8 billion thereafter, and for the Finance Group of $32 million in 2024, $49 million in 2025, $22 million in 2026 and $613 million thereafter.

For the Manufacturing Group, we also have purchase obligations that require material future cash outlays totaling $2.9 billion in 2024, $445 million in 2025 and $107 million thereafter. Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates, as well as property, plant and equipment. Approximately 14% of our purchase obligations represent purchase orders issued for goods and services to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses.

Credit Facilities and Other Sources of Capital

Textron has a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2027 and provides for two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. At December 30, 2023 and December 31, 2022, there were no amounts borrowed against the facility and there were $9 million of outstanding letters of credit issued under the facility.

We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities. In November 2023, we issued $350 million in SEC-registered fixed-rate notes due in November 2033 with an annual interest rate of 6.10%. The proceeds will be used for general corporate purposes, including the redemption or repayment of certain of our debt, including the $350 million outstanding amount of our 4.30% notes due in March 2024.

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Manufacturing Group Cash Flows

Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:

Cash flows from operating activities were $1,270 million in 2023, compared with $1,461 million from 2022, as higher earnings were more than offset by changes in working capital, reflecting an increase in inventories and lower accounts payable, partially offset by a decrease in other assets. Net income tax payments were $338 million and $332 million in 2023 and 2022, respectively. Pension contributions were $45 million and $49 million in 2023 and 2022, respectively.

In 2023, investing cash flows included capital expenditures of $402 million, partially offset by $40 million of net proceeds from corporate-owned life insurance policies. Investing cash flows in 2022 included capital expenditures of $354 million and $202 million of net cash paid for business acquisitions, largely related to the Pipistrel acquisition.

Cash flows used by financing activities in 2023 included $1,168 million of cash paid to repurchase an aggregate of 16.2 million shares of our common stock under the 2023 share repurchase plan described below, partially offset by $348 million of net proceeds from the issuance of long-term debt. In 2022, cash flows used by financing activities included $867 million of cash paid to repurchase an aggregate of 13.1 million shares of our common stock under a 2022 share repurchase plan.

On July 24, 2023, Textron's Board of Directors approved a new program for the repurchase of up to 35 million shares of our common stock. This share repurchase program allows us to continue our practice of repurchasing shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. The new program has no expiration date and replaced the prior 2022 share repurchase program, which was utilized in 2022 for repurchases.

Dividend payments to shareholders totaled $16 million and $17 million in 2023 and 2022, respectively.

Finance Group Cash Flows

The cash flows from continuing operations for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:

In 2023, cash flows from operating activities were $14 million, compared with cash outflows of $7 million in 2022. The $21 million increase in cash flows was primarily due to higher earnings and $10 million in lower income tax payments.

The Finance group’s cash flows from investing activities primarily included collections on finance receivables totaling $169 million and $147 million in 2023 and 2022, respectively, partially offset by finance receivable originations of $160 million and $92 million, respectively. Cash flows provided by investing activities in 2022 also included $45 million of other investing activities, largely related to proceeds from the sale of operating lease assets. Cash flows used in financing activities included payments on long-term and nonrecourse debt of $37 million and $216 million in 2023 and 2022, respectively.

Consolidated Cash Flows

The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below:

Consolidated cash flows from operating activities were $1,267 million in 2023, compared with $1,490 million in 2022 as higher earnings were more than offset by changes in working capital and a net cash outflow from captive finance receivables of $52 million. Working capital changes between the periods primarily reflected an increase in inventories and lower accounts payable,

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partially offset by a decrease in other assets. Net income tax payments were $352 million and $356 million in 2023 and 2022, respectively. Pension contributions were $45 million and $49 million in 2023 and 2022, respectively.

In 2023, investing cash flows included capital expenditures of $402 million, partially offset by $40 million of net proceeds from corporate-owned life insurance policies. Investing cash flows in 2022 included capital expenditures of $354 million and $202 million of net cash paid for business acquisitions, largely related to the Pipistrel acquisition.

Cash flows used by financing activities in 2023 included $1,168 million of share repurchases, partially offset by $348 million of net proceeds from the issuance of long-term debt. In 2022, cash flows used by financing activities included $867 million of share repurchases and $234 million of payments on long-term debt.

Captive Financing and Other Intercompany Transactions

The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.

Reclassification adjustments included in the Consolidated Statements of Cash Flows on page 38 are summarized below:

Under a Support Agreement between Textron and TFC, Textron is required to maintain a controlling interest in TFC. The agreement, as amended in December 2015, also requires Textron to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholders' equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2023 and 2022 to maintain compliance with the support agreement.

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Critical Accounting Estimates

To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, which includes other significant accounting policies.

Revenue Recognition

A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. We generally use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.  Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

Due to the number of years it may take to complete these contracts and the scope and nature of the work required to be performed on the contracts, the estimation of total transaction price and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. In estimating total costs at completion, we are required to make numerous assumptions related to the complexity of design and related development work to be performed; engineering requirements; product performance; subcontractor performance; availability and cost of materials; labor productivity, availability and cost; overhead and capital costs; manufacturing efficiencies; the length of time to complete the contract (to estimate increases in wages and prices for materials); and costs of satisfying offset obligations, among other variables. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our cost projections quarterly or more frequently when circumstances significantly change. When our estimate of the total costs to be incurred on a contract exceeds the estimated total transaction price, a provision for the entire loss is recorded in the period in which the loss is determined.

At the outset of each contract, we estimate an initial profit booking rate considering the risks surrounding our ability to achieve the technical requirements (e.g., a newly developed product versus a mature product), schedule (e.g., the number and type of milestone events), and costs by contract requirements in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract. Conversely, the profit booking rate may decrease if we are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate.

Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on segment profit recognized in prior periods is presented below:

Due to the significance of judgment in the estimation process described above, it is likely that materially different revenues and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones.

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Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate a potential impairment of a reporting unit. We calculate the fair value of each reporting unit using discounted cash flows. These cash flows incorporate assumptions for revenue growth rates and operating margins that are based on our strategic plans and long-range planning forecasts, which include our best estimates of current and forecasted market conditions, cost structure and anticipated net cost reductions. The long-term revenue growth rate we use to determine the terminal value of the business is based on our assessment of its minimum expected terminal growth rate, as well as its past historical growth and broader economic considerations such as gross domestic product, inflation and the maturity of the markets we serve. The discount rates utilized in this analysis are based on each reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor or market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.

Based on our annual impairment review, the fair value calculated using the estimates discussed above exceeded the carrying value by an adequate amount for each reporting group. Accordingly, we do not believe that there is a reasonable possibility that any units might fail the impairment test in the foreseeable future.

Retirement Benefits

We sponsor funded and unfunded domestic and international pension plans for certain of our employees. Beginning on January 1, 2010, we initiated actions to commence the closure of the pension plans to new entrants. We provide employees hired subsequent to these closures with defined contribution benefits. Our pension benefit obligations are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses or benefits include the expected long-term rates of return on plan assets and discount rates. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We evaluate and update these assumptions annually.

To determine the weighted-average expected long-term rate of return on plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class.  A lower expected rate of return on plan assets will decrease pension income.  For 2023 and 2022, the assumed expected long-term rate of return on plan assets used in calculating pension income was 7.14% and 7.10%, respectively. For 2023, the assumed rate of return for our domestic plans, which represent approximately 90% of our total pension assets, was 7.25%.

The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present value of the benefit obligations and generally decreases pension income.  In 2023, the weighted-average discount rate used in calculating pension income was 5.51%, compared with 2.99% in 2022.  For our domestic plans, the assumed discount rate was 5.55% in 2023, compared with 3.05% in 2022. A change of 50 basis-points higher or lower, with all other assumptions held constant, in this weighted-average discount rate in 2023 would have changed our pension income for our domestic plans by approximately $10 million.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2022, Textron’s revenues increased 4% and segment profit increased 8%, compared with 2021, reflecting the impact of higher pricing and higher volume and mix at both the Textron Aviation and Industrial segments, partially offset by lower volume and mix at the Bell and Textron Systems segments. Our backlog increased 31%, to $13.3 billion by the end of 2022, reflecting increased demand in many of our businesses, including a 55% increase in backlog at the Textron Aviation segment. During 2022, we continued to manage through the impacts of ongoing global supply chain shortages/delays and labor shortages, in order to meet customer demand. In December 2022, Bell was awarded the development contract for the U.S. Army’s Future Long-Range Assault Aircraft (FLRAA) program as discussed in Item 1. Business. Financial highlights for 2022 also include:

•Generated $1.5 billion of net cash from operating activities from our manufacturing businesses.

•Invested $601 million in research and development projects and $354 million in capital expenditures.

•Returned $867 million to our shareholders through the repurchase of 13.1 million shares of our common stock.

For an overview of our business segments, including a discussion of our major products and services, refer to Item 1. Business. A discussion of our financial condition and operating results for 2022 compared with 2021 is provided below, while a discussion of 2021 compared with 2020 can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended January 1, 2022. The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. Financial Statements and Supplementary Data.

Consolidated Results of Operations

Revenues

Revenues increased $487 million, 4%, in 2022, compared with 2021. The revenue increase primarily included the following factors:

•Higher Textron Aviation revenues of $507 million, reflecting higher volume and mix of $302 million and higher pricing of $205 million.

•Higher Industrial revenues of $335 million due to a favorable impact from pricing of $227 million, principally in the Specialized Vehicles product line, and higher volume and mix of $203 million in both product lines, partially offset by an unfavorable impact from exchange rate fluctuations of $95 million.

•Lower Bell revenues of $273 million due to lower military revenues of $333 million, primarily in the H-1 program due to lower aircraft and spares production volume reflecting lower demand, partially offset by higher commercial revenues of $60 million, largely due to higher pricing.

•Lower Textron Systems revenues of $101 million, largely due to lower volume of $121 million, which included an $88 million decrease from our Afghanistan fee-for-service and aircraft support contracts.

Cost of Sales and Selling and Administrative Expense

Cost of sales includes cost of products and services sold for the Manufacturing group. In 2022, cost of sales increased $503 million, 5%, compared with 2021, largely due to an unfavorable impact from inflation of $385 million, principally reflecting higher material costs in the Industrial and Textron Aviation segments. Gross margin as a percentage of Manufacturing revenues decreased 80 basis points in 2022, compared with 2021, as higher margin at the Textron Aviation segment, reflecting higher volume and mix and pricing, was more than offset by lower margin at the other Manufacturing segments, primarily at the Bell segment due to lower volume and mix.

Selling and administrative expense decreased $35 million, 3%, in 2022, compared with 2021, primarily reflecting lower share-based compensation expense.

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Interest Expense, Net

Interest expense, net includes interest expense for both the Finance and Manufacturing borrowing groups, with interest on intercompany borrowings eliminated, and interest income earned on cash and equivalents. In 2022, interest expense, net decreased $35 million, 25%, compared with 2021, primarily due to an increase in interest income of $22 million and lower average debt outstanding. For 2022, 2021 and 2020, gross interest expense totaled $129 million, $142 million and $166 million, respectively.

Non-service Components of Pension and Postretirement Income, Net

Non-service components of pension and postretirement income, net increased by $81 million, 51%, in 2022, compared with 2021. The increase is based on our annual valuation at the end of 2021 and is primarily driven by an increase in the discount rate utilized for our domestic qualified pension plans and the impact of actual pension asset returns that exceeded our expected return on plan assets.

Special Charges

Special charges of $25 million in 2021, primarily include restructuring activities as described in Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. There were no special charges recorded in 2022.

Income Taxes

In 2022, the effective tax rate of 15.2% was lower than the U.S. federal statutory tax rate of 21%, largely due to the favorable impact of research and development credits and tax deductions for foreign-derived intangible income. In 2021, the effective tax rate of 14.4% was lower than the U.S. federal statutory tax rate of 21%, largely due to the favorable impact of research and development credits, which included a $12 million benefit recognized for additional credits related to prior years.

For a full reconciliation of our effective tax rate to the U.S. federal statutory tax rate, see Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Segment Analysis

We conduct our business through six operating segments: Textron Aviation, Bell, Textron Systems, Industrial and Textron eAviation, which represent our manufacturing businesses, and Finance, which represents our captive finance business. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments includes non-service components of net periodic benefit cost/(income) and excludes interest expense, net; certain corporate expenses; gains/losses on major business dispositions; special charges; and an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.  Operating expenses for the Manufacturing segments include cost of sales, selling and administrative expense and other non-service components of net periodic benefit cost/(income), and exclude certain corporate expenses and special charges.

In our discussion of comparative results for the Manufacturing group, changes in revenues and segment profit for our commercial businesses typically are expressed in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, inflation and performance. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold.  For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. Inflation represents higher material, wages, benefits, pension service cost or other costs.  Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, non-service pension cost/(income), product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

Approximately 22% of our 2022 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program.  For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume.  Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other

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variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.

Textron Aviation

Textron Aviation Revenues and Operating Expenses

Factors contributing to the 2022 year-over-year revenue change are provided below:

Textron Aviation’s revenues increased $507 million, 11%, in 2022, compared with 2021, reflecting higher volume and mix of $302 million and higher pricing of $205 million. The increase in volume and mix was largely due to higher Citation jet and aftermarket volume, partially offset by lower pre-owned volume. The higher aftermarket volume reflected increased aircraft utilization. We delivered 178 Citation jets and 146 commercial turboprops in 2022, compared with 167 Citation jets and 125 commercial turboprops in 2021.

Textron Aviation’s operating expenses increased $301 million, 7%, in 2022, compared with 2021, largely due to higher volume and mix described above and inflation of $114 million.

Textron Aviation Segment Profit

Factors contributing to 2022 year-over-year segment profit change are provided below:

Textron Aviation’s segment profit increased $206 million, 54%, in 2022, compared with 2021, primarily due to the impact from higher volume and mix described above and favorable pricing, net of inflation of $91 million.

Textron Aviation Backlog

Textron Aviation’s backlog increased $2.3 billion in 2022 as a result of orders in excess of deliveries.

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Bell

A significant portion of Bell’s military aircraft and support program revenues is from the U.S. Government for the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are transitioning from production to the support stage over the next few years. Under the current contracts, production is expected to end by 2023 for the H-1 helicopter and 2025 for the V-22 tiltrotor. In December 2022, Bell was awarded the development contract for the next stage of the FLRAA program, as discussed in Item 1 Business.

Bell Revenues and Operating Expenses

Factors contributing to the 2022 year-over-year revenue change are provided below:

Bell’s revenues decreased $273 million, 8%, in 2022, compared with 2021, largely due to lower military revenues of $333 million, primarily in the H-1 program due to lower aircraft and spares production volume reflecting lower demand. Commercial revenues increased $60 million, largely due to higher pricing. We delivered 179 commercial helicopters in 2022, compared with 156 commercial helicopters in 2021.

Bell’s operating expenses decreased $182 million, 6%, in 2022, compared with 2021, primarily due to lower net volume and mix described above.

Bell Segment Profit

Factors contributing to 2022 year-over-year segment profit change are provided below:

Bell’s segment profit decreased $91 million, 22%, in 2022, compared with 2021, largely reflecting lower volume and mix described above, partially offset by a favorable impact from performance of $45 million. Performance included lower research and development costs, pension costs and selling and administrative expense of $113 million, partially offset by an unfavorable change in net program adjustments.

Bell Backlog

Bell’s backlog increased $910 million, 24%, in 2022, largely due to new orders in excess of deliveries and revenues recognized. Bell was awarded a $1.4 billion 5-year contract with the U.S. Government for spares and logistic support for the V-22 tiltrotor aircraft in the first quarter of 2022.

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Textron Systems

Textron Systems Revenues and Operating Expenses

Factors contributing to the 2022 year-over-year revenue change are provided below:

Revenues at Textron Systems decreased $101 million, 8%, in 2022, compared with 2021. Lower volume of $121 million included an $88 million decrease from our Afghanistan fee-for-service and aircraft support contracts, primarily reflecting the impact from the U.S. Army’s withdrawal from Afghanistan.

Textron Systems’ operating expenses decreased $64 million, 6%, in 2022, compared with 2021, primarily related to lower volume described above.

Textron Systems Segment Profit

Factors contributing to 2022 year-over-year segment profit change are provided below:

Textron Systems’ segment profit decreased $37 million, 20%, in 2022, compared with 2021, due to lower volume and mix of $25 million described above and an unfavorable impact from performance of $20 million, partially offset by favorable pricing, net of inflation of $8 million.

Industrial

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Industrial Revenues and Operating Expenses

Factors contributing to the 2022 year-over-year revenue change are provided below:

Industrial segment revenues increased $335 million, 11%, in 2022, compared with 2021, due to a favorable impact of $227 million from pricing, principally in the Specialized Vehicles product line, and higher volume and mix of $203 million in both product lines, partially offset by an unfavorable impact of $95 million from foreign exchange rate fluctuations.

Operating expenses for the Industrial segment increased $310 million, 10%, in 2022 compared with 2021, primarily reflecting inflation of $226 million, largely in material costs, and higher volume and mix described above, partially offset by a favorable impact of $85 million from foreign exchange rate fluctuations.

Industrial Segment Profit

Factors contributing to 2022 year-over-year segment profit change are provided below:

Segment profit for the Industrial segment increased $25 million, 18%, in 2022, compared with 2021, primarily due to higher volume and mix of $44 million as described above, partially offset by an unfavorable impact from foreign exchange rate fluctuations of $10 million and performance of $10 million.

Textron eAviation

Textron eAviation was formed upon the acquisition of Pipistrel, a manufacturer of electrically powered aircraft, on April 15, 2022, as discussed in Note 2 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. This segment includes the operating results of Pipistrel, along with research and development costs for initiatives related to the development of sustainable aviation solutions. In 2022, Textron eAviation segment revenues totaled $16 million and segment loss totaled $26 million.

Finance

Finance segment revenues increased $3 million and segment profit increased $12 million in 2022, compared with 2021. The following table reflects information about the Finance segment’s credit performance related to finance receivables.

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Liquidity and Capital Resources

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems, Industrial and Textron eAviation segments. The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible products and services, while our Finance group provides financial services. Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

Assessment of Liquidity and Significant Future Cash Requirements

Key information that is utilized in assessing our liquidity is summarized below:

We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of our capacity to add further leverage.

We expect to have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility. In addition to our manufacturing operating cash requirements, future material cash outlays include our contractual combined debt and interest payments for the Manufacturing group of $119 million in 2023, $461 million in 2024, $446 million in 2025 and $2.7 billion thereafter, and for the Finance Group of $35 million in 2023, $32 million in 2024, $49 million in 2025 and $611 million thereafter.

For the Manufacturing Group, we also have purchase obligations that require material future cash outlays totaling $2.9 billion in 2023, $383 million in 2024 and $149 million thereafter. Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates, as well as property, plant and equipment. Approximately 18% of our purchase obligations represent purchase orders issued for goods and services to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses.

Effective at the beginning of 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. Without the option to deduct these expenses in the year incurred, our tax payments increased by $284 million in 2022. Under the assumption that this legislation is not modified or repealed, the impact will continue over the five-year amortization period, but will decrease each year.

Credit Facilities and Other Sources of Capital

On October 21, 2022, Textron entered into a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2027 and provides for two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. This new facility replaces the existing 5-year facility, which was scheduled to expire in October 2024. At December 31, 2022 and January 1, 2022, there were no amounts borrowed against either facility. At December 31, 2022, there were $9 million of outstanding letters of credit issued under the new facility, and at January 1, 2022, there were $9 million of outstanding letters of credit issued under the prior facility.

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We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities.

Manufacturing Group Cash Flows

Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:

Cash flows from operating activities in 2022 were essentially unchanged from 2021 as an increase in net income tax payments of $260 million, largely resulting from a change in tax legislation discussed above, was mostly offset by changes in working capital and higher earnings. Net income tax payments were $332 million and $72 million in 2022 and 2021, respectively. Pension contributions were $49 million and $52 million in 2022 and 2021, respectively.

In 2022 and 2021, investing cash flows primarily included capital expenditures of $354 million and $375 million, respectively. Investing cash flows in 2022 also included $202 million of net cash paid for business acquisitions, largely related to the Pipistrel acquisition discussed in Note 2 to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

Cash flows used by financing activities in 2022 included $867 million of cash paid to repurchase an aggregate of 13.1 million shares of our common stock under the 2022 share repurchase plan described below. In 2021, cash flows used by financing activities included $921 million of cash paid to repurchase an aggregate of 13.5 million shares of our common stock under a 2020 share repurchase plan, and $524 million of payments on long-term debt.

On January 25, 2022, we announced the authorization of the repurchase of up to 25 million shares of our common stock. This plan allows us to continue our practice of repurchasing shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. The 2022 plan has no expiration date and replaced the prior 2020 share repurchase authorization, which was utilized in 2021 for repurchases.

Dividend payments to shareholders totaled $17 million and $18 million in 2022 and 2021, respectively.

Finance Group Cash Flows

The cash flows from continuing operations for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:

The Finance group’s cash flows from investing activities primarily included collections on finance receivables totaling $147 million and $250 million in 2022 and 2021, respectively, partially offset by finance receivable originations of $92 million and $100 million, respectively. Cash flows provided by investing activities in 2022 also included $45 million of other investing activities, largely related to proceeds from the sale of operating lease assets. Cash flows used in financing activities included payments on long-term and nonrecourse debt of $216 million and $97 million in 2022 and 2021, respectively.

Consolidated Cash Flows

The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below:

Consolidated cash flows from operating activities were $1,490 million in 2022, compared with $1,599 million in 2021. The $109 million year-over-year decrease in net cash inflow was primarily due to an increase in net income tax payments of $263 million,

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largely resulting from a change in tax legislation discussed above, and a decrease in cash inflows from captive finance receivables of $96 million, partially offset changes in working capital and higher earnings. Net income tax payments were $356 million and $93 million in 2022 and 2021, respectively. Pension contributions were $49 million and $52 million in 2022 and 2021, respectively.

In 2022 and 2021, investing cash flows included capital expenditures of $354 million and $375 million, respectively. Investing cash flows in 2022 also included $202 million of net cash paid for business acquisitions, largely related to the Pipistrel acquisition.

Cash flows used by financing activities in 2022 primarily included $867 million of share repurchases and $234 million of payments on long-term debt. In 2021, cash flows used by financing activities included $921 million of share repurchases and $621 million of payments on long-term debt.

Captive Financing and Other Intercompany Transactions

The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.

Reclassification adjustments included in the Consolidated Statements of Cash Flows are summarized below:

Under a Support Agreement between Textron and TFC, Textron is required to maintain a controlling interest in TFC. The agreement, as amended in December 2015, also requires Textron to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholders' equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2022 and 2021 to maintain compliance with the support agreement.

Critical Accounting Estimates

To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, which includes other significant accounting policies.

Revenue Recognition

A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related services. We generally use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.  Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

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Due to the number of years it may take to complete these contracts and the scope and nature of the work required to be performed on the contracts, the estimation of total transaction price and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. In estimating total costs at completion, we are required to make numerous assumptions related to the complexity of design and related development work to be performed; engineering requirements; product performance; subcontractor performance; availability and cost of materials; labor productivity, availability and cost; overhead and capital costs; manufacturing efficiencies; the length of time to complete the contract (to estimate increases in wages and prices for materials); and costs of satisfying offset obligations, among other variables. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our cost projections quarterly or more frequently when circumstances significantly change. When our estimate of the total costs to be incurred on a contract exceeds the estimated total transaction price, a provision for the entire loss is recorded in the period in which the loss is determined.

At the outset of each contract, we estimate an initial profit booking rate considering the risks surrounding our ability to achieve the technical requirements (e.g., a newly developed product versus a mature product), schedule (e.g., the number and type of milestone events), and costs by contract requirements in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract. Conversely, the profit booking rate may decrease if we are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate.

Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on segment profit recognized in prior periods is presented below:

Due to the significance of judgment in the estimation process described above, it is likely that materially different revenues and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones.

Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate a potential impairment of a reporting unit. We calculate the fair value of each reporting unit using discounted cash flows. These cash flows incorporate assumptions for revenue growth rates and operating margins that are based on our strategic plans and long-range planning forecasts, which include our best estimates of current and forecasted market conditions, cost structure and anticipated net cost reductions. The long-term revenue growth rate we use to determine the terminal value of the business is based on our assessment of its minimum expected terminal growth rate, as well as its past historical growth and broader economic considerations such as gross domestic product, inflation and the maturity of the markets we serve. The discount rates utilized in this analysis are based on each reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor or market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.

Based on our annual impairment review, the fair value calculated using the estimates discussed above exceeded the carrying value by an adequate amount for each reporting group. Accordingly, we do not believe that there is a reasonable possibility that any units might fail the impairment test in the foreseeable future.

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Retirement Benefits

We sponsor funded and unfunded domestic and international pension plans for certain of our employees. Beginning on January 1, 2010, we initiated actions to commence the closure of the pension plans to new entrants. We provide employees hired subsequent to these closures with defined contribution benefits. Our pension benefit obligations are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses or benefits include the expected long-term rates of return on plan assets and discount rates. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We evaluate and update these assumptions annually.

To determine the weighted-average expected long-term rate of return on plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class.  A lower expected rate of return on plan assets will decrease pension income.  For both 2022 and 2021, the assumed expected long-term rate of return on plan assets used in calculating pension income was 7.10%. For 2022, the assumed rate of return for our domestic plans, which represent approximately 91% of our total pension assets, was 7.25%.

The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present value of the benefit obligations and decreases pension income.  In 2022, the weighted-average discount rate used in calculating pension income was 2.99%, compared with 2.62% in 2021.  For our domestic plans, the assumed discount rate was 3.05% in 2022, compared with 2.70% in 2021. A decrease of 50 basis-points in this weighted-average discount rate in 2022 would have decreased pension income for our domestic plans by approximately $20 million.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2021, Textron’s revenues increased 6% and segment profit increased 51%, compared with 2020, reflecting higher volume and pricing, along with performance improvements. Higher earnings and working capital improvements during the year resulted in a year-over-year increase of $636 million in net cash flows from operating activities from our manufacturing businesses. While most of our commercial businesses have not yet returned to 2019 pre-pandemic levels, we experienced a rebound in customer demand in these businesses during 2021. Customer demand for our Textron Aviation aircraft products, in particular, increased throughout the year, enabling the business to return to a more normalized and efficient manufacturing cadence and resulted in a $2.5 billion, 157%, increase in backlog. During the year, we have been impacted by ongoing pandemic-related global supply chain shortages and delays, as well as inflation, primarily in the Industrial segment, and we continue to manage through these challenges.

Key financial highlights for 2021 include:

•Generated $1.5 billion of net cash from operating activities from our manufacturing businesses.

•Improved our ratio of debt, net of cash and equivalents, to capital to 16%, from 21% in 2020.

•Invested $619 million in research and development projects and $375 million in capital expenditures.

•Returned $921 million to our shareholders through repurchasing 13.5 million shares of our common stock.

For an overview of our business segments, including a discussion of our major products and services, refer to Item 1. Business. A discussion of our financial condition and operating results for 2021 compared with 2020 is provided below, while a discussion of 2020 compared with 2019 can be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended January 2, 2021. The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes included in Item 8. Financial Statements and Supplementary Data.

Consolidated Results of Operations

Revenues

Revenues increased $731 million, 6%, in 2021, compared with 2020, primarily at the Textron Aviation and Industrial segments. Textron Aviation revenues were higher by $592 million, largely due to higher Citation jet volume of $330 million, and higher aftermarket volume of $204 million. Revenues at Industrial were higher by $130 million, largely due to a favorable impact of $142 million from pricing, principally in the Specialized Vehicles product line.

Cost of Sales and Selling and Administrative Expense

Cost of sales includes cost of products and services sold for the Manufacturing group. In 2021, cost of sales increased $203 million, 2%, compared with 2020, largely due to higher net volume and mix described above and an unfavorable impact from inflation of $117 million, principally reflecting higher material costs in the Industrial segment. These increases were partially offset by the impact of costs incurred in 2020, including idle facility costs of $142 million, primarily at the Textron Aviation segment, and a $55 million inventory charge related to the TRU Canada business discussed in Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Gross margin as a percentage of Manufacturing revenues increased 350 basis points in 2021, compared with 2020, primarily due to higher margin at the Textron Aviation segment reflecting the impact of higher product sales.

Selling and administrative expense increased $176 million, 17%, in 2021, compared with 2020, primarily at the Textron Aviation and Industrial segments as more normalized operating activities resumed during 2021 compared to 2020, which included temporary cost reduction activities related to the pandemic, and higher share-based compensation expense due to stock appreciation.

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Interest Expense

Interest expense on the Consolidated Statements of Operations includes interest for both the Finance and Manufacturing borrowing groups with interest related to intercompany borrowings eliminated. Interest expense for the Finance segment is included within segment profit and includes intercompany interest. Consolidated interest expense decreased $24 million, 14%, in 2021, compared with 2020, primarily due to lower average debt outstanding.

Special Charges

Special charges of $25 million and $147 million in 2021 and 2020, respectively, primarily include restructuring activities and 2020 intangible asset impairment charges as described in Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Income Taxes

In 2021, the effective tax rate of 14.4% was lower than the U.S. federal statutory tax rate of 21%, largely due to the favorable impact of research and development credits, which included a $12 million benefit recognized for additional credits related to prior years. In 2020, the effective tax rate of (9.6)% was lower than the U.S. federal statutory tax rate of 21%, primarily due to an audit settlement with respect to certain state income tax returns that resulted in a $52 million benefit and the favorable impact of research and development credits.

For a full reconciliation of our effective tax rate to the U.S. federal statutory tax rate, see Note 17 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Segment Analysis

We operate in, and report financial information for, the following five business segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. Segment profit is an important measure used for evaluating performance and for decision-making purposes. Segment profit for the manufacturing segments excludes interest expense, certain corporate expenses, gains/losses on major business dispositions, special charges and an inventory charge related to the 2020 COVID-19 restructuring plan, as discussed in Note 16 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. The measurement for the Finance segment includes interest income and expense along with intercompany interest income and expense.  Operating expenses for the Manufacturing segments include cost of sales, selling and administrative expense and other non-service components of net periodic benefit cost/(income), and exclude certain corporate expenses and special charges.

In our discussion of comparative results for the Manufacturing group, changes in revenues and segment profit for our commercial businesses typically are expressed in terms of volume and mix, pricing, foreign exchange, acquisitions and dispositions, inflation and performance. For revenues, volume and mix represents changes in revenues from increases or decreases in the number of units delivered or services provided and the composition of products and/or services sold.  For segment profit, volume and mix represents a change due to the number of units delivered or services provided and the composition of products and/or services sold at different profit margins. Pricing represents changes in unit pricing. Foreign exchange is the change resulting from translating foreign-denominated amounts into U.S. dollars at exchange rates that are different from the prior period. Revenues generated by acquired businesses are reflected in Acquisitions for a twelve-month period, while reductions in revenues and segment profit from the sale of businesses are reflected as Dispositions. Inflation represents higher material, wages, benefits, pension service cost or other costs.  Performance reflects an increase or decrease in research and development, depreciation, selling and administrative costs, warranty, product liability, quality/scrap, labor efficiency, overhead, non-service pension cost/(income), product line profitability, start-up, ramp up and cost-reduction initiatives or other manufacturing inputs.

Approximately 26% of our 2021 revenues were derived from contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program.  For our segments that contract with the U.S. Government, changes in revenues related to these contracts are expressed in terms of volume.  Changes in segment profit for these contracts are typically expressed in terms of volume and mix and performance; these include cumulative catch-up adjustments associated with a) revisions to the transaction price that may reflect contract modifications or changes in assumptions related to award fees and other variable consideration or b) changes in the total estimated costs at completion due to improved or deteriorated operating performance.

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Textron Aviation

Textron Aviation Revenues and Operating Expenses

Factors contributing to the 2021 year-over-year revenue change are provided below:

Textron Aviation’s revenues increased $592 million, 15%, in 2021, compared with 2020, largely due to higher Citation jet volume of $330 million and higher aftermarket volume of $204 million, reflecting higher aircraft utilization. We delivered 167 Citation jets and 125 commercial turboprops in 2021, compared with 132 Citation jets and 113 commercial turboprops in 2020.

Textron Aviation’s operating expenses increased $230 million, 6%, in 2021, compared with 2020, largely due to higher volume and mix described above. Operating expenses in 2020 were also negatively impacted by idle facility costs of $115 million and inventory valuation charges, largely resulting from the pandemic, partially offset by cost reduction activities, including employee furloughs instituted during the first half of 2020.

Textron Aviation Segment Profit

Factors contributing to 2021 year-over-year segment profit change are provided below:

Textron Aviation’s segment profit increased $362 million in 2021, compared with 2020, due to the impact from higher volume and mix described above, a favorable impact from performance of $74 million and favorable pricing, net of inflation of $57 million. Performance included the impact of idle facility costs of $115 million in 2020 and lower inventory charges of $59 million, partially offset by higher selling and administrative costs as more normalized operating activities resumed during 2021 compared to 2020, which included temporary cost reduction activities related to the pandemic.

Textron Aviation Backlog

Textron Aviation’s backlog increased $2.5 billion in 2021 as a result of orders in excess of deliveries.

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Bell

Bell’s major U.S. Government programs at this time are the V-22 tiltrotor aircraft and the H-1 helicopter platforms, which are both in the production and support stage and represent a significant portion of Bell’s revenues from the U.S. Government. Over the next several years, the H-1 helicopter program with the U.S. Government will be transitioning from the production stage to the support stage.

Bell Revenues and Operating Expenses

Factors contributing to the 2021 year-over-year revenue change are provided below:

Bell’s revenues increased $55 million, 2%, in 2021, compared with 2020, reflecting higher commercial revenues of $195 million, primarily due to higher volume, partially offset by lower military revenues of $140 million, reflecting lower spares and support volume and the winddown of the H-1 production program. We delivered 156 commercial helicopters in 2021, compared with 140 commercial helicopters in 2020.

Bell’s operating expenses increased $109 million, 4%, in 2021, compared with 2020, primarily due to higher net volume and mix described above and higher research and development costs, largely related to the future vertical lift programs.

Bell Segment Profit

Factors contributing to 2021 year-over-year segment profit change are provided below:

Bell’s segment profit decreased $54 million, 12%, in 2021, compared with 2020, largely reflecting an unfavorable impact of $36 million from performance, which included higher research and development costs discussed above and higher selling and administrative costs. The increase in revenues attributed to volume and mix above had an unfavorable impact on segment profit due to the mix of military and commercial products sold.

Bell Backlog

Bell’s backlog decreased $1.5 billion, 28%, in 2021, primarily as a result of revenues recognized on our U.S. Government contracts in excess of new contracts received.

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Textron Systems

Textron Systems Revenues and Operating Expenses

Factors contributing to the 2021 year-over-year revenue change are provided below:

Revenues at Textron Systems decreased $40 million, 3%, in 2021, compared with 2020. Lower volume of $16 million included a $79 million decrease from our fee-for-service contracts, primarily reflecting the impact from the U.S. Army’s withdrawal from Afghanistan, partially offset by higher volume at ATAC of $69 million, primarily from increased demand for its military tactical air services. The other decrease of $24 million in the table above included the impact of a $28 million reduction in revenues as a result of the cessation of manufacturing at the TRU Simulation + Training Canada Inc. (TRU Canada) facility which occurred in the second quarter of 2020 related to the impact of the pandemic on that business. In January 2021, we sold TRU Canada as discussed in Note 2 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Textron Systems’ operating expenses decreased $77 million, 7%, in 2021, compared with 2020, primarily related to the cessation of manufacturing at TRU Canada and lower net volume described above.

Textron Systems Segment Profit

Factors contributing to 2021 year-over-year segment profit change are provided below:

Textron Systems’ segment profit increased $37 million, 24%, in 2021, compared with 2020, due to a favorable impact from performance and other, which included a $19 million impact from TRU Canada related to unfavorable performance and other in 2020.

Textron Systems Backlog

Backlog at Textron Systems’ decreased $412 million in 2021, primarily due to revenues recognized in excess of new contracts received.

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Industrial

Industrial Revenues and Operating Expenses

Factors contributing to the 2021 year-over-year revenue change are provided below:

Industrial segment revenues increased $130 million, 4%, in 2021, compared with 2020, due to a favorable impact of $142 million from pricing, principally in the Specialized Vehicles product line, and $50 million from foreign exchange rate fluctuations, largely related to the Euro and the Chinese Yuan in the Fuel Systems and Functional Components product line. These increases were partially offset by lower volume and mix of $62 million, largely in the Fuel Systems and Functional Components product line due to the impact of global supply chain shortages on our original equipment manufacturer customers.

Operating expenses for the Industrial segment increased $101 million, 3%, in 2021 compared with 2020, primarily reflecting inflation of $105 million, largely in material costs, and an unfavorable impact of $54 million from foreign exchange rate fluctuations, partially offset by the impact of lower volume and mix described above.

Industrial Segment Profit

Factors contributing to 2021 year-over-year segment profit change are provided below:

Segment profit for the Industrial segment increased $29 million, 26%, in 2021, compared with 2020, primarily due to a favorable impact of $37 million, from pricing, net of inflation, largely in the Specialized Vehicles product line, and a favorable impact of $10 million from performance, partially offset by lower volume and mix as described above.

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Finance

Finance segment revenues decreased $6 million in 2021, compared with 2020, and segment profit increased $9 million in 2021, compared with 2020, primarily due to lower provision for loan losses. The following table reflects information about the Finance segment’s credit performance related to finance receivables.

Since the first quarter of 2020, the Finance segment has worked with certain customers impacted by the pandemic to provide payment relief through loan modifications. The majority of loans modified have returned to paying principal and interest. We believe our allowance for credit losses adequately covers our exposure on these loans as our estimated collateral values largely exceed the outstanding loan amounts. Loan modifications and key portfolio quality indicators are discussed in Note 4 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data.

Liquidity and Capital Resources

Our financings are conducted through two separate borrowing groups.  The Manufacturing group consists of Textron consolidated with its majority-owned subsidiaries that operate in the Textron Aviation, Bell, Textron Systems and Industrial segments.  The Finance group, which also is the Finance segment, consists of Textron Financial Corporation and its consolidated subsidiaries. We designed this framework to enhance our borrowing power by separating the Finance group. Our Manufacturing group operations include the development, production and delivery of tangible products and services, while our Finance group provides financial services.  Due to the fundamental differences between each borrowing group’s activities, investors, rating agencies and analysts use different measures to evaluate each group’s performance. To support those evaluations, we present balance sheet and cash flow information for each borrowing group within the Consolidated Financial Statements.

Assessment of Liquidity and Significant Future Cash Requirements

Key information that is utilized in assessing our liquidity is summarized below:

We believe that our calculations of debt to capital and net debt to capital are useful measures as they provide a summary indication of the level of debt financing (i.e., leverage) that is in place to support our capital structure, as well as to provide an indication of our capacity to add further leverage.

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We expect to have sufficient cash to meet our needs based on our existing cash balances, the cash we expect to generate from our manufacturing operations and the availability of our existing credit facility. In addition to our manufacturing operating cash requirements, future material cash outlays include our contractual combined debt and interest payments for the Manufacturing group of $117 million in 2022, $119 million in 2023, $461 million in 2024 and $3.2 billion thereafter, and for the Finance Group of $274 million in 2022, $20 million in 2023, $16 million in 2024 and $390 million thereafter.

For the Manufacturing Group, we also have purchase obligations that require material future cash outlays totaling $2.5 billion in 2022, $392 million in 2023 and $86 million thereafter. Purchase obligations include undiscounted amounts committed under legally enforceable contracts or purchase orders for goods and services with defined terms as to price, quantity and delivery dates, as well as property, plant and equipment. Approximately 29% of our purchase obligations represent purchase orders issued for goods and services to be delivered under firm contracts with the U.S. Government for which we have full recourse under customary contract termination clauses.

Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years. Without the option to deduct these expenses in the year incurred, we estimate that our tax payments will increase by approximately $300 million in 2022, depending on the final amount of research and development expenses incurred during the year. Under the assumption that this legislation is not modified or repealed, the impact will continue over the five-year amortization period, but will decrease each year.

Credit Facilities and Other Sources of Capital

Textron has a senior unsecured revolving credit facility for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. We may elect to increase the aggregate amount of commitments under the facility to up to $1.3 billion by designating an additional lender or by an existing lender agreeing to increase its commitment. The facility expires in October 2024, subject to up to two one-year extensions at our option with the consent of lenders representing a majority of the commitments under the facility. There were no amounts borrowed against the facility and there were $9 million of outstanding letters of credit issued under the facility at both January 1, 2022 and January 2, 2021.

We also maintain an effective shelf registration statement filed with the Securities and Exchange Commission that allows us to issue an unlimited amount of public debt and other securities.

In August 2021, we repaid $50 million of the Finance Group’s $150 million variable-rate loan due September 2021. On September 20, 2021, the loan was amended to extend the maturity date to September 2022 for the remaining $100 million principal amount. The annual interest rate was unchanged at LIBOR plus 1.55%, which is an annual interest rate of 1.65% at January 1, 2022.

Manufacturing Group Cash Flows

Cash flows from continuing operations for the Manufacturing group as presented in our Consolidated Statements of Cash Flows are summarized below:

Cash flows from operating activities were $1.5 billion in 2021 compared with $833 million in 2020. The $636 million year-over-year increase in net cash inflow was primarily due to higher earnings and working capital improvements. The working capital improvements reflected the impact of lower payments to settle accounts payable in 2021, compared with 2020, which had a $613 million cash outflow, and a $253 million year-over-year increase in contract liabilities, largely reflecting higher customer deposits at the Textron Aviation segment, partially offset by year-over-year changes in inventories and accounts receivable. Net tax payments were $72 million and $34 million in 2021 and 2020, respectively. Pension contributions were $52 million and $47 million in 2021 and 2020, respectively.

In 2021 and 2020, investing cash flows primarily included capital expenditures of $375 million and $317 million, respectively. Cash flows used by financing activities in 2021 included $921 million of cash paid to repurchase an aggregate of 13.5 million shares of our common stock under a 2020 share repurchase plan, and $524 million of payments on long-term debt. In 2020, cash flows provided by financing activities included $1.1 billion of net proceeds from the issuance of long-term debt and $377 million of proceeds from borrowings against corporate-owned life insurance policies, partially offset by $548 million of payments on long-term debt, $377 million of payments on borrowings against corporate-owned life insurance policies, and $183 million of cash paid to repurchase an aggregate of 4.1 million shares of our common stock.

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On January 25, 2022, we announced the authorization of the repurchase of up to 25 million shares of our common stock. This new plan allows us to continue our practice of repurchasing shares to offset the impact of dilution from stock-based compensation and benefit plans and for opportunistic capital management purposes. The 2022 plan has no expiration date and replaced the prior 2020 share repurchase authorization, which was utilized in 2021 and 2020 for repurchases.

Dividend payments to shareholders totaled $18 million in both 2021 and 2020.

Finance Group Cash Flows

The cash flows from continuing operations for the Finance group as presented in our Consolidated Statements of Cash Flows are summarized below:

The Finance group’s cash flows from investing activities primarily included collections on finance receivables totaling $250 million and $128 million in 2021 and 2020, respectively, and finance receivable originations of $100 million and $195 million, respectively. Cash flows used in financing activities included payments on long-term and nonrecourse debt of $97 million and $45 million in 2021 and 2020, respectively.

Consolidated Cash Flows

The consolidated cash flows from continuing operations, after elimination of activity between the borrowing groups, are summarized below:

Consolidated cash flows from operating activities were $1.6 billion in 2021, compared with $769 million in 2020. The $830 million year-over-year increase in net cash inflow was primarily due to higher earnings and working capital improvements. The working capital improvements reflected the impact of lower payments to settle accounts payable in 2021, compared with 2020, which had a $613 million cash outflow, a $253 million year-over-year increase in contract liabilities, largely reflecting higher customer deposits at the Textron Aviation segment, and a year-over-year cash inflow of $220 million from captive finance receivables, partially offset by year-over-year changes in inventories and accounts receivable. Net tax payments were $93 million and $42 million in 2021 and 2020, respectively. Pension contributions were $52 million and $47 million in 2021 and 2020, respectively.

In 2021 and 2020, investing cash flows included capital expenditures of $375 million and $317 million, respectively. Cash flows used by financing activities in 2021 primarily included $921 million of share repurchases and $621 million of payments on outstanding debt. In 2020, cash flows provided by financing activities included $1.1 billion of net proceeds from the issuance of long-term debt and $377 million from borrowings against corporate-owned life insurance policies, partially offset by $593 million of payments on outstanding debt, $377 million of payments on borrowings against corporate-owned life insurance policies, and $183 million of share repurchases.

Captive Financing and Other Intercompany Transactions

The Finance group provides financing primarily to purchasers of new and pre-owned Textron Aviation aircraft and Bell helicopters manufactured by our Manufacturing group, otherwise known as captive financing. In the Consolidated Statements of Cash Flows, cash received from customers is reflected as operating activities when received from third parties. However, in the cash flow information provided for the separate borrowing groups, cash flows related to captive financing activities are reflected based on the operations of each group. For example, when product is sold by our Manufacturing group to a customer and is financed by the Finance group, the origination of the finance receivable is recorded within investing activities as a cash outflow in the Finance group’s statement of cash flows. Meanwhile, in the Manufacturing group’s statement of cash flows, the cash received from the Finance group on the customer’s behalf is recorded within operating cash flows as a cash inflow. Although cash is transferred between the two borrowing groups, there is no cash transaction reported in the consolidated cash flows at the time of the original financing. These captive financing activities, along with all significant intercompany transactions, are reclassified or eliminated from the Consolidated Statements of Cash Flows.

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Reclassification adjustments included in the Consolidated Statements of Cash Flows are summarized below:

Under a Support Agreement between Textron and TFC, Textron is required to maintain a controlling interest in TFC. The agreement, as amended in December 2015, also requires Textron to ensure that TFC maintains fixed charge coverage of no less than 125% and consolidated shareholders' equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2021 and 2020 to maintain compliance with the support agreement.

Critical Accounting Estimates

To prepare our Consolidated Financial Statements to be in conformity with generally accepted accounting principles, we must make complex and subjective judgments in the selection and application of accounting policies. The accounting policies that we believe are most critical to the portrayal of our financial condition and results of operations are listed below. We believe these policies require our most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data, which includes other significant accounting policies.

Revenue Recognition

A substantial portion of our revenues is related to long-term contracts with the U.S. Government, including those under the U.S. Government-sponsored foreign military sales program, for the design, development, manufacture or modification of aerospace and defense products as well as related parts and services. We generally use the cost-to-cost method to measure progress for these contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred.

Due to the number of years it may take to complete these contracts and the scope and nature of the work required to be performed on the contracts, the estimation of total transaction price and costs at completion is complicated and subject to many variables and, accordingly, is subject to change. In estimating total costs at completion, we are required to make numerous assumptions related to the complexity of design and related development work to be performed; engineering requirements; product performance; subcontractor performance; availability and cost of materials; labor productivity, availability and cost; overhead and capital costs; manufacturing efficiencies; the length of time to complete the contract (to estimate increases in wages and prices for materials); and costs of satisfying offset obligations, among other variables. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our cost projections quarterly or more frequently when circumstances significantly change. When our estimate of the total costs to be incurred on a contract exceeds the estimated total transaction price, a provision for the entire loss is recorded in the period in which the loss is determined.

At the outset of each contract, we estimate an initial profit booking rate considering the risks surrounding our ability to achieve the technical requirements (e.g., a newly-developed product versus a mature product), schedule (e.g., the number and type of milestone events), and costs by contract requirements in the initial estimated costs at completion. Profit booking rates may increase during the performance of the contract if we successfully retire risks surrounding the technical, schedule and cost aspects of the contract. Conversely, the profit booking rate may decrease if we are not successful in retiring the risks; and, as a result, our estimated costs at completion increase. All estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate.

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Changes in our estimate of the total expected cost or in the transaction price for a contract typically impact our profit booking rate. We utilize the cumulative catch-up method of accounting to recognize the impact of these changes on our profit booking rate for a contract. Under this method, the inception-to-date impact of a profit adjustment on a contract is recognized in the period the adjustment is identified. The impact of our cumulative catch-up adjustments on segment profit recognized in prior periods is presented below:

Due to the significance of judgment in the estimation process described above, it is likely that materially different revenues and/or cost of sales amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Our earnings could be reduced by a material amount resulting in a charge to earnings if (a) total estimated contract costs are significantly higher than expected due to changes in customer specifications prior to contract amendment, (b) total estimated contract costs are significantly higher than previously estimated due to cost overruns or inflation, (c) there is a change in engineering efforts required during the development stage of the contract or (d) we are unable to meet contract milestones.

Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances indicate a potential impairment of a reporting unit. We calculate the fair value of each reporting unit using discounted cash flows. These cash flows incorporate assumptions for revenue growth rates and operating margins that are based on our strategic plans and long-range planning forecasts, which include our best estimates of current and forecasted market conditions, cost structure and anticipated net cost reductions. The long-term revenue growth rate we use to determine the terminal value of the business is based on our assessment of its minimum expected terminal growth rate, as well as its past historical growth and broader economic considerations such as gross domestic product, inflation and the maturity of the markets we serve. The discount rates utilized in this analysis are based on each reporting unit’s weighted average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the respective reporting unit. We believe this approach yields a discount rate that is consistent with an implied rate of return that an independent investor or market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed.

Based on our annual impairment review, the fair value calculated using the estimates discussed above exceeded the carrying value by an adequate amount for each reporting group. Accordingly, we do not believe that there is a reasonable possibility that any units might fail the impairment test in the foreseeable future.

Retirement Benefits

We sponsor funded and unfunded domestic and international pension plans for certain of our employees. Beginning on January 1, 2010, we initiated actions to commence the closure of the pension plans to new entrants. We provide employees hired subsequent to these closures with defined contribution benefits. Our pension benefit obligations are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses or benefits include the expected long-term rates of return on plan assets and discount rates. We also make assumptions regarding employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increases. We evaluate and update these assumptions annually.

To determine the weighted-average expected long-term rate of return on plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class.  A lower expected rate of return on plan assets will increase pension expense.  For 2021 and 2020, the assumed expected long-term rate of return on plan assets used in calculating pension expense was 7.10% and 7.55%, respectively. For 2021, the assumed rate of return for our domestic plans, which represent approximately 90% of our total pension assets, was 7.25%.

The discount rate enables us to state expected future benefit payments as a present value on the measurement date, reflecting the current rate at which the pension liabilities could be effectively settled. This rate should be in line with rates for high-quality fixed income investments available for the period to maturity of the pension benefits, which fluctuate as long-term interest rates change. A lower discount rate increases the present value of the benefit obligations and increases pension expense.  In 2021, the weighted-average discount rate used in calculating pension expense was 2.62%, compared with 3.36% in 2020.  For our domestic plans, the assumed discount rate was 2.70% in 2021, compared with 3.45% in 2020. A decrease of 50 basis-points in this weighted-average discount rate in 2021 would have increased pension cost for our domestic plans by approximately $20 million.

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