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

Overview and Consolidated Results of Operations

During 2017, we maintained focus on investing in our businesses through continued development of new products and services. We also completed the strategic acquisition of Arctic Cat, a platform to expand and grow our Textron Specialized Vehicles business. In addition, we continued to take cost reduction actions through the execution of our restructuring plans and integration activities in order to realign our businesses, improve overall operating efficiency and better position our businesses for the future. All of these activities support our overall strategy of long-term growth and expansion of our product portfolio and the creation of long-term shareholder value. Financial highlights of 2017 include the following:

· Generated $947 million in cash from operating activities of our manufacturing businesses, net of a $300 million discretionary contribution to fund a U.S. pension plan.

· Invested $634 million in research and development activities, $423 million in capital expenditures and $316 million for the acquisition of Arctic Cat.

· Returned $603 million to our shareholders through share repurchases and dividend payments.

· Continued execution of our 2016 restructuring plan and the restructuring and integration of the Arctic Cat acquisition, resulting in special charges of $130 million.

An analysis of our consolidated operating results is set forth below. A more detailed analysis of our segments’ operating results is provided in the Segment Analysis section on pages 21 to 28.

Revenues

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Revenues	$	14,198	$	13,788	$	13,423		3%		3%

Revenues increased $410 million, 3%, in 2017, compared with 2016, largely driven by increases in the Industrial, Textron Systems and Bell segments, partially offset by lower revenues at the Textron Aviation segment. The net revenue increase included the following factors:

· Higher Industrial revenues of $492 million, primarily due to the impact from the acquisition of Arctic Cat described in the Segment Analysis section below.

· Higher Textron Systems revenues of $84 million, primarily due to higher volume of $176 million in the Marine and Land Systems product line, partially offset by lower volume in the other products lines.

· Higher Bell revenues of $78 million, primarily due to an increase in commercial revenues of $89 million, largely reflecting higher commercial aircraft deliveries.

· Lower Textron Aviation revenues of $235 million, primarily due to lower volume and mix of $307 million, largely the result of lower military and commercial turboprop volume.

Revenues increased $365 million, 3%, in 2016, compared with 2015, largely driven by increases in the Industrial, Textron Systems and Textron Aviation segments, partially offset by lower revenues at the Bell segment. The net revenue increase included the following factors:

· Higher Industrial revenues of $250 million, primarily due to higher volume of $168 million, largely in the Fuel Systems and Functional Components product line, and the impact from acquired businesses of $121 million.

· Higher Textron Systems revenues of $236 million, primarily due to higher volume of $106 million in the Marine and Land Systems product line and $77 million in the Unmanned Systems product line.

· Higher Textron Aviation revenues of $99 million, primarily due to the impact from an acquired business of $66 million and higher volume and mix of $42 million, largely the result of higher Citation jet volume of $165 million, partially offset by lower commercial turboprop volume.

· Lower Bell revenues of $215 million, primarily due to a decrease in commercial revenues of $269 million, largely reflecting lower commercial aircraft deliveries.

Cost of Sales and Selling and Administrative Expense

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Cost of sales	$	11,795	$	11,311	$	10,979		4%		3%
Gross margin as a percentage of Manufacturing revenues		16.5%		17.5%		17.7%
Selling and administrative expense	$	1,337	$	1,304	$	1,304		3%		—

In 2017, cost of sales increased $484 million, 4%, and selling and administrative expense increased $33 million, 3%, compared with 2016, primarily due to an increase from acquired businesses, largely Arctic Cat. Gross margin as a percentage of Manufacturing revenues decreased 100 basis points from 2016, primarily due to lower margins at the Textron Systems segment, largely reflecting an unfavorable impact from net program adjustments, and the Industrial segment, which included the impact from the Arctic Cat acquisition.

Cost of sales increased $332 million, 3%, in 2016, compared with 2015, largely due to higher volume at the Textron Systems, Industrial and Textron Aviation segments, and an increase from acquired businesses. These increases were partially offset by lower volume at the Bell segment and favorable cost performance across all of our manufacturing segments.

Interest Expense

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Interest expense	$	174	$	174	$	169		—		3%

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 increased $5 million in 2016, compared with 2015, primarily due to higher average debt outstanding.

Special Charges

In 2016, we initiated a plan to restructure and realign our businesses by implementing headcount reductions, facility consolidations and other actions in order to improve overall operating efficiency across Textron. Under this plan, Textron Systems discontinued production of its sensor-fuzed weapon product within its Weapons and Sensors operating unit, we combined our Jacobsen business with the Textron Specialized Vehicles business by consolidating facilities and general and administrative functions, and we reduced headcount at Textron Aviation, as well as other businesses and corporate functions. In December 2017, we decided to take additional restructuring actions to further consolidate operating facilities and streamline product lines, primarily within the Bell, Textron Systems and Industrial segments, which resulted in additional special charges of $45 million in the fourth quarter of 2017. We recorded total special charges of $213 million since the inception of the 2016 plan, which included $97 million of severance costs, $84 million of asset impairments and $32 million in contract terminations and other costs. Of these amounts, $83 million was incurred at Textron Systems, $63 million at Textron Aviation, $38 million at Industrial, $28 million at Bell and $1 million at Corporate. The total headcount reduction under this plan is expected to be approximately 2,100 positions, representing 5% of our workforce.

In connection with the acquisition of Arctic Cat, as discussed in Note 2 to the Consolidated Financial Statements, we initiated a restructuring plan in the first quarter of 2017 to integrate this business into our Textron Specialized Vehicles business within the Industrial segment and reduce operating redundancies and maximize efficiencies. Under the Arctic Cat plan, we recorded restructuring charges of $28 million in 2017, which included $19 million of severance costs, largely related to change-of-control provisions, and $9 million of contract termination and other costs. In addition, we recorded $12 million of acquisition-related integration and transaction costs in 2017.

Special charges recorded for these plans are as follows:

(In millions)		Severance Costs		Asset Impairments		Contract Terminations and Other		Acquisition Integration/ Transaction Costs		Total Special Charges
2017
Industrial	$	26	$	1	$	19	$	12	$	58
Textron Aviation		11		17		—		—		28
Bell		3		12		8		—		23
Textron Systems		6		16		(1)		—		21
Total	$	46	$	46	$	26	$	12	$	130
2016
Industrial	$	17	$	2	$	1	$	—	$	20
Textron Aviation		33		1		1		—		35
Bell		4		1		—		—		5
Textron Systems		15		34		13		—		62
Corporate		1		—		—		—		1
Total	$	70	$	38	$	15	$	—	$	123

Income Taxes

				2017		2016		2015
Effective tax rate				59.8%		3.8%		28.1%

In 2017, our effective tax rate was significantly higher than the U.S. federal statutory tax rate of 35%, largely due to the impact from the Tax Cuts and Jobs Act (the “Act”). In the fourth quarter of 2017, we recorded a provisional estimate of $266 million for one-time adjustments resulting from the Act. Approximately $154 million of this provisional estimate represents a charge resulting from the remeasurement of our U.S. federal deferred tax assets and liabilities, and the remainder represents a provision for the transition tax on post-1986 earnings and profits previously deferred from U.S. income taxes. In addition, the Act reduces the U.S. federal corporate tax rate from 35% to 21%, which is expected to lower our effective tax rate for 2018 and future years.

In 2016, our effective tax rate was significantly lower than the U.S. federal statutory tax rate of 35%, largely due to a settlement with the U.S. Internal Revenue Service Office of Appeals for our 1998 to 2008 tax years. This settlement resulted in a $206 million benefit recognized in continuing operations and a $113 million benefit in discontinued operations.

For a full reconciliation of our effective tax rate to the U.S. federal statutory tax rate of 35% see Note 13 to the Consolidated Financial Statements.

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 and special charges. 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, changes in revenues and segment profit typically are expressed for our commercial business in terms of volume, pricing, foreign exchange and acquisitions. Additionally, changes in segment profit may be expressed in terms of mix, inflation and cost performance. Volume changes in revenues represent increases/decreases in the number of units delivered or services provided. 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. For segment profit, mix represents a change due to the composition of products and/or services sold at different profit margins. Inflation represents higher material, wages, benefits, pension 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 22% of our 2017 revenues were derived from contracts with the U.S. Government. For our segments that have significant contracts with the U.S. Government, we typically express changes in segment profit related to the government business in terms of volume, changes in program performance or changes in contract mix. Changes in volume that are described in net sales typically drive corresponding changes in our segment profit based on the profit rate for a particular contract. Changes in program performance typically relate to profit recognition associated with revisions to total estimated costs at completion that reflect improved or deteriorated operating performance or award fee rates. Changes in contract mix refers to changes in operating margin due to a change in the relative volume of contracts with higher or lower fee rates such that the overall average margin rate for the segment changes.

Textron Aviation

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Revenues	$	4,686	$	4,921	$	4,822		(5)%		2%
Operating expenses		4,383		4,532		4,422		(3)%		2%
Segment profit		303		389		400		(22)%		(3)%
Profit margin		6.5%		7.9%		8.3%
Backlog	$	1,180	$	1,041	$	1,074		13%		(3)%

Textron Aviation Revenues and Operating Expenses

Factors contributing to the 2017 year-over-year revenue change are provided below:

(In millions)								2017 versus 2016
Volume and mix							$	(307)
Other								72
Total change							$	(235)

Textron Aviation’s revenues decreased $235 million, 5%, in 2017, compared with 2016, primarily due to lower volume and mix of $307 million, largely the result of lower military and commercial turboprop volume. We delivered 180 Citation jets, 86 King Air turboprops and 13 Beechcraft T-6 trainers in 2017, compared with 178 Citation jets, 106 King Air turboprops and 38 Beechcraft T-6 trainers in 2016. The portion of the segment’s revenues derived from aftermarket sales and services represented 34% of its total revenues in 2017, compared with 31% in 2016.

Textron Aviation’s operating expenses decreased $149 million, 3%, in 2017, compared with 2016, largely due to lower net volume as described above.

Factors contributing to the 2016 year-over-year revenue change are provided below:

(In millions)								2016 versus 2015
Acquisitions							$	66
Volume and mix								42
Other								(9)
Total change							$	99

Textron Aviation’s revenues increased $99 million, 2%, in 2016, compared with 2015, primarily due to the impact from an acquisition of a repair and overhaul business in the first quarter of 2016, and higher volume and mix of $42 million. The increase in volume and mix was largely due to higher Citation jet volume of $165 million, partially offset by lower commercial turboprop volume. We delivered 178 Citation jets and 106 King Air turboprops in 2016, compared with 166 Citation jets and 117 King Air turboprops in 2015. The portion of the segment’s revenues derived from aftermarket sales and services represented 31% of its total revenues in 2016, compared with 29% in 2015, largely resulting from the acquisition.

Textron Aviation’s operating expenses increased $110 million, 2%, in 2016, compared with 2015, largely due to higher net volume as described above and additional operating expenses resulting from the acquisition. These increases were partially offset by improved cost performance of $64 million, largely attributable to lower research and development costs and lower compensation expense.

Textron Aviation Segment Profit

Factors contributing to 2017 year-over-year segment profit change are provided below:

(In millions)								2017 versus 2016
Volume and mix							$	(99)
Pricing, net of inflation								56
Performance and other								(43)
Total change							$	(86)

Segment profit at Textron Aviation decreased $86 million, 22%, in 2017, compared with 2016, primarily as a result of lower net volume and mix as described above. The favorable impact of $56 million from pricing, net of inflation, was largely offset by an unfavorable impact of $43 million from performance and other, largely reflecting higher research, development and engineering costs, which included costs related to the Scorpion program in 2017.

Factors contributing to 2016 year-over-year segment profit change are provided below:

(In millions)								2016 versus 2015
Performance and other							$	65
Volume and mix								(49)
Inflation and pricing								(27)
Total change							$	(11)

Segment profit at Textron Aviation decreased $11 million, 3%, in 2016, compared with 2015, primarily as a result of the mix of products sold and the unfavorable impact from inflation and pricing of $27 million. These decreases were partially offset by favorable performance and other of $65 million, largely attributable to lower research and development costs and lower compensation expense.

Bell

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Revenues:
V-22 Program	$	1,129	$	1,151	$	1,194		(2)%		(4)%
Other Military		947		936		839		1%		12%
Commercial		1,241		1,152		1,421		8%		(19)%
Total revenues		3,317		3,239		3,454		2%		(6)%
Operating expenses		2,902		2,853		3,054		2%		(7)%
Segment profit		415		386		400		8%		(4)%
Profit margin		12.5%		11.9%		11.6%
Backlog	$	4,598	$	5,360	$	5,224		(14)%		3%

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 stage and represent a significant portion of Bell’s revenues from the U.S. Government.

Bell Revenues and Operating Expenses

Factors contributing to the 2017 year-over-year revenue change are provided below:

(In millions)								2017 versus 2016
Volume and mix							$	57
Other								21
Total change							$	78

Bell’s revenues increased $78 million, 2%, in 2017, compared with 2016, primarily due to an $89 million increase in commercial revenues, largely due to higher deliveries as Bell delivered 132 commercial aircraft in 2017, compared with 114 aircraft in 2016. Military deliveries were largely unchanged in 2017 compared with 2016, as we delivered 22 V-22 aircraft in both years and 38 H-1 aircraft in 2017, compared with 35 H-1 aircraft in 2016.

Bell’s operating expenses increased $49 million, 2%, in 2017, compared with 2016, primarily due to higher volume as described above.

Factors contributing to the 2016 year-over-year revenue change are provided below:

(In millions)								2016 versus 2015
Volume and mix							$	(225)
Other								10
Total change							$	(215)

Bell’s revenues decreased $215 million, 6%, in 2016, compared with 2015, primarily due to the following factors:

· $269 million decrease in commercial revenues, primarily due to lower aircraft deliveries, as we delivered 114 commercial aircraft in 2016, compared with 175 aircraft in 2015.

· $43 million decrease in V-22 program revenues, primarily due to lower aircraft deliveries, as we delivered 22 V-22 aircraft in 2016, compared with 24 V-22 aircraft in 2015.

· $97 million increase in other military revenues, primarily reflecting higher H-1 program revenues, as we delivered 35 H-1 aircraft in 2016, compared with 24 H-1 aircraft in 2015.

Bell’s operating expenses decreased $201 million, 7%, in 2016, compared with 2015, primarily due to lower net sales volume as described above.

Bell Segment Profit

Factors contributing to 2017 year-over-year segment profit change are provided below:

(In millions)								2017 versus 2016
Performance and other							$	66
Volume and mix								(37)
Total change							$	29

Bell’s segment profit increased $29 million, 8%, in 2017, compared with 2016, reflecting a favorable impact from performance and other of $66 million, largely the result of improved manufacturing performance and lower research and development costs, partially offset by an unfavorable impact from volume and mix of $37 million.

Factors contributing to 2016 year-over-year segment profit change are provided below:

(In millions)								2016 versus 2015
Volume and mix							$	(46)
Performance and other								32
Total change							$	(14)

Bell’s segment profit decreased $14 million, 4%, in 2016, compared with 2015. The unfavorable impact from volume and mix was primarily due to lower commercial aircraft deliveries, while the favorable performance and other was largely the result of lower research and development costs.

Bell Backlog

Bell’s backlog decreased $762 million, 14%, in 2017, and increased $136 million, 3%, in 2016. The decrease in 2017 was primarily due to deliveries on the V-22 and H-1 programs in excess of orders.

Textron Systems

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Revenues	$	1,840	$	1,756	$	1,520		5%		16%
Operating expenses		1,701		1,570		1,391		8%		13%
Segment profit		139		186		129		(25)%		44%
Profit margin		7.6%		10.6%		8.5%
Backlog	$	1,406	$	1,841	$	2,328		(24)%		(21)%

Textron Systems Revenues and Operating Expenses

Factors contributing to the 2017 year-over-year revenue change are provided below:

(In millions)								2017 versus 2016
Volume							$	67
Acquisitions								10
Other								7
Total change							$	84

Revenues at Textron Systems increased $84 million, 5%, in 2017, compared with 2016, primarily due to higher volume of $176 million in the Marine and Land Systems product line, partially offset by lower volume in the other product lines, largely due to the final deliveries of our discontinued sensor-fuzed weapon product in the first half of 2017.

Textron Systems’ operating expenses increased $131 million, 8%, in 2017, compared with 2016, primarily due to higher volume as described above and the unfavorable impact from net program adjustments described below.

Factors contributing to the 2016 year-over-year revenue change are provided below:

(In millions)						2016 versus 2015
Volume					$	200
Acquisitions						32
Other						4
Total change					$	236

Revenues at Textron Systems increased $236 million, 16%, in 2016, compared with 2015, primarily due to higher volume of $106 million in the Marine and Land Systems product line and $77 million in the Unmanned Systems product line, and the impact from an acquisition of $32 million.

Textron Systems’ operating expenses increased $179 million, 13%, in 2016, compared with 2015, primarily due to higher volume as described above.

Textron Systems Segment Profit

Factors contributing to 2017 year-over-year segment profit change are provided below:

(In millions)								2017 versus 2016
Performance							$	(28)
Volume and mix								(13)
Other								(6)
Total change							$	(47)

Textron Systems’ segment profit decreased $47 million, 25%, in 2017, compared with 2016, primarily due to unfavorable performance. Performance reflects an unfavorable impact from net program adjustments compared with 2016, largely due to $44 million of adjustments recorded in 2017 related to the Tactical Armoured Patrol Vehicle program (TAPV). In 2017, this program experienced inefficiencies resulting from various production issues during the ramp up and subsequent production.

Factors contributing to 2016 year-over-year segment profit change are provided below:

(In millions)								2016 versus 2015
Performance							$	43
Volume and mix								13
Other								1
Total change							$	57

Textron Systems’ segment profit increased $57 million, 44%, in 2016, compared with 2015, primarily due to improved cost performance and higher volume as described above.

Textron Systems Backlog

Backlog at Textron Systems decreased $435 million, 24%, in 2017, primarily due to deliveries in excess of orders in the Marine and Land Systems product line as TAPV deliveries near completion, and final deliveries of our discontinued sensor-fuzed weapon product in 2017. In 2016, backlog decreased by $487 million, 21%, primarily due to deliveries in excess of orders in the Weapons and Sensors business and Unmanned Systems product line.

Industrial

							% Change
(Dollars in millions)		2017		2016		2015		2017		2016
Revenues:
Fuel Systems and Functional Components	$	2,330	$	2,273	$	2,078		3%		9%
Other Industrial		1,956		1,521		1,466		29%		4%
Total revenues		4,286		3,794		3,544		13%		7%
Operating expenses		3,996		3,465		3,242		15%		7%
Segment profit		290		329		302		(12)%		9%
Profit margin		6.8%		8.7%		8.5%

Industrial Revenues and Operating Expenses

Factors contributing to the 2017 year-over-year revenue change are provided below:

(In millions)								2017 versus 2016
Acquisitions							$	393
Volume								77
Foreign exchange								27
Other								(5)
Total change							$	492

Industrial segment revenues increased $492 million, 13%, in 2017, compared with 2016, primarily due to the impact from acquired businesses of $393 million, largely related to the acquisition of Arctic Cat as described below. Revenues were also impacted by higher volume of $77 million, primarily related to the Fuel Systems and Functional Components product line and a favorable impact of $27 million from foreign exchange, primarily related to the Euro.

On March 6, 2017, we acquired Arctic Cat, a manufacturer of all-terrain vehicles, side-by-sides and snowmobiles, in addition to related parts, garments and accessories. Arctic Cat provides a platform to expand our product portfolio and increase our distribution channel to support growth within our Textron Specialized Vehicles business. The operating results of Arctic Cat have been included in our financial results only for the period subsequent to the completion of the acquisition. See Note 2 to the Consolidated Financial Statements for additional information regarding this acquisition.

Operating expenses for the Industrial segment increased $531 million, 15%, in 2017, compared with 2016, primarily due to additional operating expenses from acquired businesses. The increase in operating expenses was also due to higher volume as described above.

Factors contributing to the 2016 year-over-year revenue change are provided below:

(In millions)								2016 versus 2015
Volume							$	168
Acquisitions								121
Foreign exchange								(35)
Other								(4)
Total change							$	250

Industrial segment revenues increased $250 million, 7%, in 2016, compared with 2015, primarily due to higher volume of $168 million and the impact from acquired businesses of $121 million. The increase in volume was primarily related to the Fuel Systems and Functional Components product line, largely reflecting automotive industry demand in Europe.

Operating expenses for the Industrial segment increased $223 million, 7%, in 2016, compared with 2015, primarily due to the impact from higher volume as described above and additional operating expenses from acquired businesses.

Industrial Segment Profit

Factors contributing to 2017 year-over-year segment profit change are provided below:

(In millions)								2017 versus 2016
Pricing and inflation							$	(23)
Performance and other								(10)
Volume and mix								(6)
Total change							$	(39)

Industrial’s segment profit decreased $39 million, 12%, in 2017, compared with 2016, largely due to an unfavorable impact from pricing and inflation of $23 million, primarily in the Fuel Systems and Functional Components product line, and unfavorable performance and other of $10 million. Performance and other primarily included the operating results of Arctic Cat, partially offset by favorable performance in the Fuel Systems and Functional Components product line.

Factors contributing to 2016 year-over-year segment profit change are provided below:

(In millions)								2016 versus 2015
Inflation, net of pricing							$	19
Foreign exchange								(12)
Volume								11
Performance and other								9
Total change							$	27

Segment profit for the Industrial segment increased $27 million, 9%, in 2016, compared with 2015, largely due to a $19 million favorable impact from inflation, net of pricing, primarily in our Specialized Vehicles product line, and higher volume as described above, partially offset by an unfavorable impact of $12 million from changes in foreign currency exchange rates.

Finance

(In millions)				2017		2016		2015
Revenues			$	69	$	78	$	83
Segment profit				22		19		24

Finance segment revenues decreased in both 2017 and 2016, primarily attributable to lower average finance receivables. Finance segment profit increased in 2017, compared with 2016, primarily due to lower provision for loan losses, partially offset by lower average finance receivables. Finance segment profit decreased in 2016, compared with 2015, primarily due to lower average finance receivables.

Finance Portfolio Quality

The following table reflects information about the Finance segment’s credit performance related to finance receivables.

(Dollars in millions)						December 30, 2017		**December 31, **2016
Finance receivables*					$	850	$	946
Nonaccrual finance receivables						61		87
Ratio of nonaccrual finance receivables to finance receivables						7.18%		9.20%
60+ days contractual delinquency					$	34	$	40
60+ days contractual delinquency as a percentage of finance receivables						4.00%		4.23%

* Excludes finance receivables held for sale of $30 million at December 31, 2016.

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 goods 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.

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

(Dollars in millions)						December 30, 2017		December 31, 2016
Manufacturing group
Cash and equivalents					$	1,079	$	1,137
Debt						3,088		2,777
Shareholders’ equity						5,647		5,574
Capital (debt plus shareholders’ equity)						8,735		8,351
Net debt (net of cash and equivalents) to capital						26%		23%
Debt to capital						35%		33%
Finance group
Cash and equivalents					$	183	$	161
Debt						824		903

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 the capacity to add further leverage. We believe that we will have sufficient cash to meet our future needs, based on our existing cash balances, the cash we expect to generate from our manufacturing operations and other available funding alternatives, as appropriate.

Textron has a senior unsecured revolving credit facility that expires in September 2021 for an aggregate principal amount of $1.0 billion, of which up to $100 million is available for the issuance of letters of credit. At December 30, 2017, there were no amounts borrowed against the facility and there were $11 million of letters of credit issued against it.

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. During 2017, we issued $1.0 billion of public debt under this registration statement, which consisted of $350 million in 3.65% Notes due March 2027, $300 million in 3.375% Notes due March 2028, and $350 million of Floating Rate Notes due November 2020.

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:

(In millions)				2017		2016		2015
Operating activities			$	947	$	988	$	1,038
Investing activities				(745)		(621)		(496)
Financing activities				(266)		(146)		(308)

In 2017, cash flows provided by operating activities was $947 million, compared with $988 million in 2016, a 4% decrease, as higher pension contributions of $308 million and lower earnings were largely offset by improvements in working capital. Significant factors contributing to the favorable change in working capital included an increase in cash flows of $769 million related to changes in inventory between the periods, principally in the Textron Aviation and Textron Systems segments, $333 million related to changes in customer deposits and $179 million from changes in net taxes paid/received, partially offset by changes in accounts payable and accounts receivable. The increase in cash flows from customer deposits between the periods is primarily related to lower performance-based payments received on certain military contracts in the Bell segment in 2016.

Cash flows provided by operating activities was $988 million in 2016, compared with $1,038 million in 2015, a 5% decrease. This decrease was primarily the result of changes in working capital, which included lower customer deposits of $257 million largely related to performance-based payments on certain military contracts in the Bell segment, along with a $34 million reduction in dividends received from the Finance group. These decreases were partially offset by a $75 million increase in cash proceeds from the settlements of corporate-owned life insurance policies and $42 million in lower payments for taxes and pension contributions as disclosed below.

Net tax (receipts)/payments were $(16) million, $163 million and $187 million in 2017, 2016 and 2015, respectively. Pension contributions were $358 million, $50 million and $68 million in 2017, 2016 and 2015, respectively. In 2017, pension contributions included a $300 million discretionary contribution to fund a U.S. pension plan.

Investing cash flows included capital expenditures of $423 million, $446 million and $420 million in 2017, 2016 and 2015, respectively. In 2017, cash flows from investing activities included a $316 million aggregate cash payment, including the repayment of debt and net of cash acquired, for the acquisition of Arctic Cat. Investing cash flows also included cash used for acquisitions of $186 million and $81 million in 2016 and 2015, respectively.

Total financing cash flows included proceeds from long-term debt of $992 million and $345 million in 2017 and 2016, respectively. In 2017, 2016 and 2015, financing activities also included the repayment of outstanding debt of $704 million, $254 million and $100 million, respectively.

Share Repurchases

On January 25, 2017, we announced the adoption of a plan authorizing the repurchase of up to 25 million shares of Textron common stock to offset the impact of dilution from share-based compensation and benefit plans and for opportunistic capital management purposes. This plan has no expiration date and replaced the previous plan adopted in 2013 that had 4.0 million remaining shares available for repurchase. During 2017, we repurchased an aggregate of 11.9 million shares of our outstanding common stock for $582 million under this plan. Under the 2013 share repurchase authorization, we repurchased an aggregate of 6.9 million and 5.2 million shares of our outstanding common stock in 2016 and 2015, respectively, for $241 million and $219 million, respectively.

Dividends

Dividend payments to shareholders totaled $21 million, $22 million and $22 million in 2017, 2016 and 2015, respectively.

Dividends received from the Finance group, which totaled $29 million and $63 million in 2016 and 2015, respectively, are included within cash flows from operating activities for the Manufacturing group as they represent a return on investment.

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 millions)				2017		2016		2015
Operating activities			$	(24)	$	11	$	30
Investing activities				140		142		197
Financing activities				(94)		(51)		(259)

The Finance group’s cash flows from operating activities included net tax payments of $48 million, $11 million and $11 million in 2017, 2016 and 2015, respectively. Cash flows from investing activities primarily included collections on finance receivables totaling $273 million, $292 million and $351 million in 2017, 2016 and 2015, respectively, partially offset by finance receivable originations of $174 million, $173 million and $194 million, respectively.

Cash flows used in financing activities included payments on long-term and nonrecourse debt of $137 million, $203 million and $256 million in 2017, 2016 and 2015, respectively, which were partially offset by proceeds from long-term debt of $44 million, $180 million and $61 million, respectively. In 2016 and 2015, dividend payments to the Manufacturing group totaled $29 million and $63 million, respectively.

Consolidated Cash Flows

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

(In millions)				2017		2016		2015
Operating activities			$	980	$	1,014	$	1,094
Investing activities				(662)		(523)		(388)
Financing activities				(360)		(168)		(504)

Consolidated cash flows provided by operating activities was $980 million in 2017, compared with $1,014 million in 2016, a 3% decrease, as higher pension contributions of $308 million and lower earnings were largely offset by improvements in working capital. Significant factors contributing to the favorable change in working capital included an increase in cash flows of $764 million related to changes in inventory between the periods, principally in the Textron Aviation and Textron Systems segments, $333 million related to changes in customer deposits and $142 million of lower net tax payments, partially offset by changes in accounts payable and accounts receivable. The increase in cash flows from customer deposits between the periods is primarily related to lower performance-based payments received on certain military contracts in the Bell segment in 2016.

Cash flows provided by operating activities was $1,014 million in 2016, compared with $1,094 million in 2015, a 7% decrease. This decrease was primarily the result of changes in working capital, which included lower customer deposits of $257 million largely related to performance-based payments on certain military contracts in the Bell segment. These decreases were partially offset by a $75 million increase in cash proceeds from the settlements of corporate-owned life insurance policies and $42 million in lower payments for taxes and pension contributions as disclosed below.

Net tax payments were $32 million, $174 million and $198 million in 2017, 2016 and 2015, respectively. Pension contributions were $358 million, $50 million and $68 million in 2017, 2016 and 2015, respectively. In 2017, pension contributions included a $300 million discretionary contribution to fund a U.S. pension plan.

Investing cash flows included capital expenditures of $423 million, $446 million and $420 million in 2017, 2016 and 2015, respectively. In 2017, cash flows from investing activities included a $316 million aggregate cash payment, including the repayment of debt and net of cash acquired, for the acquisition of Arctic Cat. Investing cash flows also included cash used for acquisitions of $186 million and $81 million in 2016 and 2015, respectively.

In 2017, 2016 and 2015, cash used in financing activities included the repayment of outstanding debt of $841 million, $457 million and $356 million, respectively, and share repurchases of $582 million, $241 million and $219 million, respectively, partially offset by proceeds from long-term debt of $1.0 billion, $525 million and $61 million, respectively.

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:

(In millions)				2017		2016		2015
Reclassification adjustments from investing activities:
Cash received from customers			$	241	$	248	$	284
Finance receivable originations for Manufacturing group inventory sales				(174)		(173)		(194)
Other				(10)		(31)		(1)
Total reclassification adjustments from investing activities				57		44		89
Reclassification adjustments from financing activities:
Dividends received by Manufacturing group from Finance group				—		(29)		(63)
Total reclassification adjustments to cash flow from operating activities			$	57	$	15	$	26

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 shareholder’s equity of no less than $125 million. There were no cash contributions required to be paid to TFC in 2017, 2016 and 2015 to maintain compliance with the support agreement.

Contractual Obligations

Manufacturing Group

The following table summarizes the known contractual obligations, as defined by reporting regulations, of our Manufacturing group as of December 30, 2017:

			Payments Due by Period
(In millions)		Total		Year 1		Years 2-3		Years 4-5		More Than 5 Years
Debt	$	3,108	$	14	$	820	$	514	$	1,760
Purchase obligations not reflected in balance sheet		2,360		2,111		232		17		—
Interest on borrowings		775		133		252		156		234
Pension benefits for unfunded plans		404		27		51		47		279
Postretirement benefits other than pensions		289		31		55		46		157
Other long-term liabilities		476		111		125		72		168
Operating leases		397		80		115		65		137
Total Manufacturing group	$	7,809	$	2,507	$	1,650	$	917	$	2,735

Pension and Postretirement Benefits

We maintain defined benefit pension plans and postretirement benefit plans other than pensions as described in Note 11 to the Consolidated Financial Statements. Included in the above table are discounted estimated benefit payments we expect to make related to unfunded pension and other postretirement benefit plans. Actual benefit payments are dependent on a number of factors, including mortality assumptions, expected retirement age, rate of compensation increases and medical trend rates, which are subject to change in future years. Our policy for funding pension plans is to make contributions annually, consistent with applicable laws and regulations; however, future contributions to our pension plans are not included in the above table. In 2018, we expect to make approximately $27 million of contributions to our funded pension plans and the Retirement Account Plan. Based on our current assumptions, which may change with changes in market conditions, our current contribution for each of the years from 2019 through 2022 are estimated to be in the range of approximately $50 million to $55 million under the plan provisions in place at this time.

Other Long-Term Liabilities

Other long-term liabilities consist of undiscounted amounts in the Consolidated Balance Sheets that primarily include obligations under deferred compensation arrangements, estimated environmental remediation costs, and a one-time transition tax, as disclosed in Note 13 to the Consolidated Financial Statements, that will be paid over an eight-year period. Payments under deferred compensation arrangements have been estimated based on management’s assumptions of expected retirement age, mortality, stock price and rates of return on participant deferrals. The timing of cash flows associated with environmental remediation costs is largely based on historical experience. Certain other long-term liabilities, such as deferred taxes, unrecognized tax benefits and product liability, warranty and litigation reserves, have been excluded from the table due to the uncertainty of the timing of payments combined with the absence of historical trends to be used as a predictor for such payments.

Purchase Obligations

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. Approximately 33% of the purchase obligations we disclose 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.

Finance Group

The following table summarizes the known contractual obligations, as defined by reporting regulations, of our Finance group as of December 30, 2017:

			Payments Due by Period
(In millions)		Total		Year 1		Years 2-3		Years 4-5		More Than 5 Years
Term debt	$	525	$	22	$	401	$	50	$	52
Subordinated debt		299		—		—		—		299
Interest on borrowings		182		23		34		24		101
Total Finance group	$	1,006	$	45	$	435	$	74	$	452

At December 30, 2017, the Finance group also had $38 million in other liabilities that are payable within the next 12 months.

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, which includes other significant accounting policies.

Long-Term Contracts

We make a substantial portion of our sales to government customers pursuant to long-term contracts. These contracts require development and delivery of products over multiple years and may contain fixed-price purchase options for additional products. We account for these long-term contracts under the percentage-of-completion method of accounting. Under this method, we estimate profit as the difference between total estimated revenues and cost of a contract. The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion and, in some cases, includes estimates of recoveries asserted against the customer for changes in specifications. Due to the size, length of time and nature of many of our contracts, the estimation of total contract costs and revenues through completion is complicated and subject to many variables relative to the outcome of future events over a period of several years. We are required to make numerous assumptions and estimates relating to items such as expected engineering requirements, complexity of design and related development costs, product performance, performance of subcontractors, availability and cost of materials, labor productivity and cost, overhead and capital costs, manufacturing efficiencies and the achievement of contract milestones, including product deliveries, technical requirements, or schedule.

Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We update our projections of costs at least semiannually or when circumstances significantly change. Adjustments to projected costs are recognized in earnings when determinable. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable. 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.

At the outset of each contract, we estimate the initial profit booking rate. The initial profit booking rate of each contract considers risks surrounding the ability to achieve the technical requirements (for example, a newly-developed product versus a mature product), schedule (for example, 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 costs aspects of the contract. Likewise, 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 of the estimates are subject to change during the performance of the contract and, therefore, may affect the profit booking rate. When adjustments are required, any changes from prior estimates are recognized using the cumulative catch-up method with the impact of the change from inception-to-date recorded in the current period.

The following table sets forth the aggregate gross amount of all program profit adjustments that are included within segment profit for the three years ended December 30, 2017:

(In millions)				2017		2016		2015
Gross favorable			$	92	$	106	$	111
Gross unfavorable				(87)		(23)		(33)
Net adjustments			$	5	$	83	$	78

Goodwill

We evaluate the recoverability of goodwill annually in the fourth quarter or more frequently if events or changes in circumstances, such as declines in sales, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying value of a reporting unit might be impaired. The reporting unit represents the operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment, in which case such component is the reporting unit. In certain instances, we have aggregated components of an operating segment into a single reporting unit based on similar economic characteristics.

We calculate the fair value of each reporting unit, primarily using discounted cash flows. These cash flows incorporate assumptions for short- and long-term revenue growth rates, operating margins and discount rates that represent our best estimates of current and forecasted market conditions, cost structure, anticipated net cost reductions, and the implied rate of return that we believe a market participant would require for an investment in a business having similar risks and business characteristics to the reporting unit being assessed. The revenue growth rates and operating margins used in our discounted cash flow analysis are based on our strategic plans and long-range planning forecasts. The long-term 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. We utilize a weighted-average cost of capital in our impairment analysis that makes assumptions about the capital structure that we believe a market participant would make and include a risk premium based on an assessment of risks related to the projected cash flows of each 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.

If the reporting unit’s estimated fair value exceeds its carrying value, there is no impairment, and no further analysis is performed. Otherwise, the amount of the impairment is determined by comparing the carrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. The implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination. If the carrying amount of the goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

Based on our annual impairment review, the fair value of all of our reporting units exceeded their carrying values, and we do not believe that there is a reasonable possibility that any units might fail the initial step of the impairment test in the foreseeable future.

Retirement Benefits

We maintain various pension and postretirement plans for our employees globally. These plans include significant pension and postretirement benefit obligations, which are calculated based on actuarial valuations. Key assumptions used in determining these obligations and related expenses include expected long-term rates of return on plan assets, discount rates and healthcare cost projections. 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 2017, the assumed expected long-term rate of return on plan assets used in calculating pension expense was 7.57%, compared with 7.58% in 2016. For the last six years, the assumed rate of return for our domestic plans, which represent approximately 91% of our total pension assets, was 7.75%. A 50 basis-point decrease in this long-term rate of return in 2017 would have increased pension cost for our domestic plans by approximately $30 million.

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 2017, the weighted-average discount rate used in calculating pension expense was 4.13%, compared with 4.66% in 2016. For our domestic plans, the assumed discount rate was 4.25% in 2017, compared with 4.75% in 2016. A 50 basis-point decrease in the weighted-average discount rate would have increased pension cost for our domestic plans by approximately $37 million in 2017.

The trend in healthcare costs is difficult to estimate and has an important effect on postretirement liabilities. The 2017 medical and prescription drug healthcare cost trend rates represent the weighted-average annual projected rate of increase in the per capita cost of covered benefits. In 2017, we assumed a trend rate of 7.25% for both medical and prescription drug healthcare rates and assumed this rate would gradually decline to 5% by 2024 and then remain at that level. See Note 11 to the Consolidated Financial Statements for the impact of a one-percentage-point change in the cost trend rate.