# TEXTRON INC (TXT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TEXTRON INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/217346/000021734624000017/txt-20231230.htm
Accession: 0000217346-24-000017
Filing date: 2024-02-12
Report date: 2023-12-30
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/
Previous year: /company/TXT/mda/fy2022/ (FY 2022)
Next year: /company/TXT/mda/fy2024/ (FY 2024)

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2023","2022","2021","2023","2022"],["Revenues","$","13,683","$","12,869","$","12,382","6%","4%"],["Cost of sales","11,405","10,800","10,297","6%","5%"],["Gross margin as a percentage of Manufacturing revenues","16.3%","15.7%","16.5%"],["Selling and administrative expense","1,225","1,186","1,221","3%","(3)%"],["Interest expense, net","77","107","142","(28)%","(25)%"],["Special charges","126","\u2014","25","\u2014","\u2014"],["Non-service components of pension and postretirement income, net","237","240","159","(1)%","51%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","2023","2022","2021"],["Effective tax rate","15.2%","15.2%","14.4%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2023","2022","2021","2023","2022"],["Revenues:"],["Aircraft","$","3,577","$","3,387","$","3,116","6%","9%"],["Aftermarket parts and services","1,796","1,686","1,450","7%","16%"],["Total revenues","5,373","5,073","4,566","6%","11%"],["Operating expenses","4,724","4,513","4,217","5%","7%"],["Segment profit","$","649","$","560","$","349","16%","60%"],["Profit margin","12.1%","11.0%","7.6%"],["Backlog","$","7,169","$","6,387","$","4,120","12%","55%"]]
[[/GREPCENT_TABLE]]

Textron Aviation Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Pricing","$","335"],["Volume and mix","(35)"],["Total change","$","300"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Pricing, net of inflation","$","159"],["Volume and mix","9"],["Performance","(79)"],["Total change","$","89"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2023","2022","2021","2023","2022"],["Revenues:"],["Military aircraft and support programs","$","1,701","$","1,740","$","2,073","(2)%","(16)%"],["Commercial helicopters, parts and services","1,446","1,351","1,291","7%","5%"],["Total revenues","3,147","3,091","3,364","2%","(8)%"],["Operating expenses","2,827","2,809","2,965","1%","(5)%"],["Segment profit","$","320","$","282","$","399","13%","(29)%"],["Profit margin","10.2%","9.1%","11.9%"],["Backlog","$","4,780","$","4,781","$","3,871","0%","24%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Pricing","$","68"],["Volume and mix","(12)"],["Total change","$","56"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Performance","$","74"],["Pricing, net of inflation","13"],["Volume and mix","(49)"],["Total change","$","38"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2023","2022","2021","2023","2022"],["Revenues","$","1,235","$","1,172","$","1,273","5%","(8)%"],["Operating expenses","1,088","1,040","1,095","5%","(5)%"],["Segment profit","$","147","$","132","$","178","11%","(26)%"],["Profit margin","11.9%","11.3%","14.0%"],["Backlog","$","1,950","$","2,098","$","2,144","(7)%","(2)%"]]
[[/GREPCENT_TABLE]]

Textron Systems Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Volume and mix","$","44"],["Pricing","19"],["Total change","$","63"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Performance","$","10"],["Pricing, net of inflation","10"],["Volume and mix","(5)"],["Total change","$","15"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2023","2022","2021","2023","2022"],["Revenues:"],["Kautex","$","1,954","$","1,771","$","1,735","10%","2%"],["Specialized Vehicles","1,887","1,694","1,395","11%","21%"],["Total revenues","3,841","3,465","3,130","11%","11%"],["Operating expenses","3,613","3,310","3,010","9%","10%"],["Segment profit","$","228","$","155","$","120","47%","29%"],["Profit margin","5.9%","4.5%","3.8%"]]
[[/GREPCENT_TABLE]]

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Industrial Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Volume and mix","$","280"],["Pricing","99"],["Foreign exchange","(3)"],["Total change","$","376"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Pricing, net of inflation","$","58"],["Volume and mix","54"],["Foreign exchange","1"],["Performance","(40)"],["Total change","$","73"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","","% Change"],["(Dollars in millions)","2023","2022","2021","2023","2022"],["Revenues","$","32","$","16","$","\u2014","100%","\u2014"],["Operating expenses","95","40","\u2014","138%","\u2014"],["Segment loss","$","(63)","$","(24)","$","\u2014","163%","\u2014"]]
[[/GREPCENT_TABLE]]

Textron eAviation Revenues and Operating Expenses

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

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Volume and mix","$","9"],["Acquisition","4"],["Other","3"],["Total change","$","16"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023 versus 2022"],["Performance and other","$","(43)"],["Volume and mix","4"],["Total change","$","(39)"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(In millions)","2023","2022","2021"],["Revenues","$","55","","$","52","","$","49"],["Segment profit","46","","31","","18"]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["(Dollars in millions)","December 30, 2023","December 31, 2022"],["Finance receivables","$","609","$","587"],["Allowance for credit losses","24","24"],["Ratio of allowance for credit losses to finance receivables","3.94%","4.09%"],["Nonaccrual finance receivables","15","46"],["Ratio of nonaccrual finance receivables to finance receivables","2.46%","7.84%"],["60+ days contractual delinquency","4","1"],["60+ days contractual delinquency as a percentage of finance receivables","0.66%","0.17%"]]
[[/GREPCENT_TABLE]]

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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:

[[GREPCENT_TABLE]]
[["(Dollars in millions)","December 30, 2023","December 31, 2022"],["Manufacturing group"],["Cash and equivalents","$","2,121","$","1,963"],["Debt","3,526","3,182"],["Shareholders\u2019 equity","6,987","7,113"],["Capital (debt plus shareholders\u2019 equity)","10,513","10,295"],["Net debt (net of cash and equivalents) to capital","17%","15%"],["Debt to capital","34%","31%"],["Finance group"],["Cash and equivalents","$","60","$","72"],["Debt","348","375"]]
[[/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.

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023","2022","2021"],["Operating activities","$","1,270","","$","1,461","","$","1,469"],["Investing activities","(345)","","(511)","","(335)"],["Financing activities","(776)","","(875)","","(1,349)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023","2022","2021"],["Operating activities","$","14","","$","(7)","","$","(1)"],["Investing activities","11","","100","","185"],["Financing activities","(37)","","(216)","","(97)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023","2022","2021"],["Operating activities","$","1,267","","$","1,490","","$","1,599"],["Investing activities","(317)","","(447)","","(281)"],["Financing activities","(813)","","(1,091)","","(1,446)"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["(In millions)","2023","2022","2021"],["Reclassification adjustments from investing activities to operating activities:"],["Finance receivable originations for Manufacturing group inventory sales","$","(160)","","$","(92)","","$","(100)"],["Cash received from customers","143","","127","","231"],["Other","\u2014","","1","","\u2014"],["Total reclassification adjustments from investing activities to operating activities","$","(17)","","$","36","","$","131"]]
[[/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 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:

[[GREPCENT_TABLE]]
[["(In millions)","2023","2022","2021"],["Gross favorable","$","106","","$","101","","$","154"],["Gross unfavorable","(62)","","(117)","","(73)"],["Net adjustments","$","44","","$","(16)","","$","81"]]
[[/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.

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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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