# TEXTRON INC (TXT) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TEXTRON INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/217346/000021734622000005/txt-20220101.htm
Accession: 0000217346-22-000005
Filing date: 2022-02-17
Report date: 2022-01-01
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TXT/
All MD&A years: /company/TXT/mda/
Next year: /company/TXT/mda/fy2022/ (FY 2022)

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2021","2020","2019","2021","2020"],["Revenues","$","12,382","$","11,651","$","13,630","6%","(15)%"],["Cost of sales","10,297","10,094","11,406","2%","(12)%"],["Gross margin as a percentage of Manufacturing revenues","16.5%","13.0%","15.9%"],["Selling and administrative expense","1,221","1,045","1,152","17%","(9)%"],["Interest expense","142","166","171","(14)%","(3)%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","2021","2020","2019"],["Effective tax rate","14.4%","(9.6%)","13.5%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2021","2020","2019","2021","2020"],["Revenues:"],["Aircraft","$","3,116","$","2,714","$","3,592","15%","(24)%"],["Aftermarket parts and services","1,450","1,260","1,595","15%","(21)%"],["Total revenues","4,566","3,974","5,187","15%","(23)%"],["Operating expenses","4,188","3,958","4,738","6%","(16)%"],["Segment profit","378","16","449","2,263%","(96)%"],["Profit margin","8.3%","0.4%","8.7%"],["Backlog","$","4,120","$","1,603","$","1,714","157%","(6)%"]]
[[/GREPCENT_TABLE]]

Textron Aviation Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Volume and mix","$","519"],["Pricing","73"],["Total change","$","592"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Volume and mix","$","231"],["Performance","74"],["Pricing, net of inflation","57"],["Total change","$","362"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2021","2020","2019","2021","2020"],["Revenues:"],["Military aircraft and support programs","$","2,073","$","2,213","$","1,988","(6)%","11%"],["Commercial helicopters, parts and services","1,291","1,096","1,266","18%","(13)%"],["Total revenues","3,364","3,309","3,254","2%","2%"],["Operating expenses","2,956","2,847","2,819","4%","1%"],["Segment profit","408","462","435","(12)%","6%"],["Profit margin","12.1%","14.0%","13.4%"],["Backlog","$","3,871","$","5,342","$","6,902","(28)%","(23)%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Pricing","$","28"],["Volume and mix","27"],["Total change","$","55"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Performance","$","(36)"],["Volume and mix","(31)"],["Pricing, net of inflation","13"],["Total change","$","(54)"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2021","2020","2019","2021","2020"],["Revenues","$","1,273","$","1,313","$","1,325","(3)%","(1)%"],["Operating expenses","1,084","1,161","1,184","(7)%","(2)%"],["Segment profit","189","152","141","24%","8%"],["Profit margin","14.8%","11.6%","10.6%"],["Backlog","$","2,144","$","2,556","$","1,211","(16)%","111%"]]
[[/GREPCENT_TABLE]]

Textron Systems Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Volume","$","(16)"],["Other","(24)"],["Total change","$","(40)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Performance and other","$","52"],["Volume and mix","(15)"],["Total change","$","37"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2021","2020","2019","2021","2020"],["Revenues:"],["Fuel Systems and Functional Components","$","1,735","$","1,751","$","2,237","(1)%","(22)%"],["Specialized Vehicles","1,395","1,249","1,561","12%","(20)%"],["Total revenues","3,130","3,000","3,798","4%","(21)%"],["Operating expenses","2,990","2,889","3,581","3%","(19)%"],["Segment profit","140","111","217","26%","(49)%"],["Profit margin","4.5%","3.7%","5.7%"]]
[[/GREPCENT_TABLE]]

Industrial Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Pricing","$","142"],["Foreign exchange","50"],["Volume and mix","(62)"],["Total change","$","130"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021 versus 2020"],["Pricing, net of inflation","$","37"],["Performance","10"],["Volume and mix","(14)"],["Foreign exchange","(4)"],["Total change","$","29"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(In millions)","2021","2020","2019"],["Revenues","$","49","","$","55","","$","66"],["Segment profit","19","","10","","28"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["(Dollars in millions)","January 1, 2022","January 2, 2021"],["Finance receivables","$","630","$","779"],["Allowance for credit losses","25","35"],["Ratio of allowance for credit losses to finance receivables","3.97%","4.49%"],["Nonaccrual finance receivables","94","93"],["Ratio of nonaccrual finance receivables to finance receivables","14.92%","11.94%"],["60+ days contractual delinquency","1","29"],["60+ days contractual delinquency as a percentage of finance receivables","0.16%","3.72%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(Dollars in millions)","January 1, 2022","January 2, 2021"],["Manufacturing group"],["Cash and equivalents","$","1,922","$","2,146"],["Debt","3,185","3,707"],["Shareholders\u2019 equity","6,815","5,845"],["Capital (debt plus shareholders\u2019 equity)","10,000","9,552"],["Net debt (net of cash and equivalents) to capital","16%","21%"],["Debt to capital","32%","39%"],["Finance group"],["Cash and equivalents","$","195","$","108"],["Debt","582","662"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021","2020","2019"],["Operating activities","$","1,469","","$","833","","$","960"],["Investing activities","(335)","","(277)","","(329)"],["Financing activities","(1,349)","","393","","(439)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021","2020","2019"],["Operating activities","$","(1)","","$","13","","$","34"],["Investing activities","185","","(48)","","135"],["Financing activities","(97)","","(33)","","(113)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021","2020","2019"],["Operating activities","$","1,599","","$","769","","$","1,016"],["Investing activities","(281)","","(248)","","(266)"],["Financing activities","(1,446)","","360","","(502)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021","2020","2019"],["Reclassification adjustments from investing activities:"],["Cash received from customers","$","231","","$","106","","$","229"],["Finance receivable originations for Manufacturing group inventory sales","(100)","","(195)","","(184)"],["Other","\u2014","","12","","27"],["Total reclassification adjustments from investing activities","131","","(77)","","72"],["Reclassification adjustments from financing activities:"],["Dividends received by Manufacturing group from Finance group","\u2014","","\u2014","","(50)"],["Total reclassification adjustments to cash flow from operating activities","$","131","","$","(77)","","$","22"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2021","2020","2019"],["Gross favorable","$","154","","$","148","","$","173"],["Gross unfavorable","(73)","","(76)","","(82)"],["Net adjustments","$","81","","$","72","","$","91"]]
[[/GREPCENT_TABLE]]

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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